It is widely acknowledged that Asia is the most dynamic region in the Global South, with East Asia serving as the economic, technological, and geopolitical hub of the continent. As global trade undergoes a profound transformation, how will the still-rising East Asian economies respond to these seismic shifts?
According to the World Bank’s classification, East Asian economies include China, Hong Kong SAR, Macau SAR, Japan, South Korea, Mongolia, Taiwan, and North Korea. However, in discussions of regional economics, the Association of Southeast Asian Nations (ASEAN), comprising ten Southeast Asian countries, is often included. This broader region has seen successive economic rises, with Japan, South Korea, Taiwan, Singapore, Hong Kong, and Macau achieving per capita GDPs exceeding $30,000, while other economies in the region are experiencing rapid per capita GDP growth.
China is undoubtedly the center of East Asia, and although it followed the economic rise of Japan, Korea, Taiwan, and Singapore, the sheer size of its population has made it the central economy driving the region’s economy since 2010, when it surpassed Japan in terms of GDP.
For the first two decades of the 21st century, economic growth in East Asia was driven by Western markets – essentially ‘working for Western consumers’ to industrialize. However, since around 2020, driven by technological advances in China, the region has entered the early stages of economic growth driven by Chinese technology, while at the same time China is trying to mature its own markets. As a result, the importance of Western markets is declining, while the importance of Chinese markets is steadily increasing.
The West, particularly the United States, needs time to adapt to the global economic transformation driven by Chinese technology. We are currently in the middle of this adaptation period, akin to the psychological “five stages of grief.” The initial stage was “denial and isolation,” followed by the “anger” phase during Trump’s second term.
The United States and China are in the midst of a painful decoupling of trade and technology, with implications for the global economic and trade landscape, as well as possible technological decoupling. Therefore, when we discuss the transformation of global trade – including the regionalization of supply chains, the rise of digitization and trade in services, green trade, geopolitics and regional security – supply chain restructuring and geopolitics are the core issues.
Challenges and Roles of East Asian Free Trade Agreements
Globalization driven by free trade has not ended, only that the structure is “morphing” . Prior to the disruptions in global trade, East Asia had already taken preparatory steps, specifically by promoting free trade agreements (FTAs) to leverage market forces and maintain existing trade structures.
East Asia’s current FTAs include the ASEAN Free Trade Area (AFTA), ASEAN and Dialogue Partners (CAFTA), the Regional Comprehensive Economic Partnership (RCEP), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the China-Japan-South Korea Free Trade Agreement (China-Japan-ROK FTA).
AFTA consists of the ten ASEAN countries. CAFTA involves ASEAN’s cooperation with other regional economies, including China (the primary partner), Japan, South Korea, India, Australia, and New Zealand, led by ASEAN. RCEP includes the same members as CAFTA but is led by China. CPTPP, originally spearheaded by the U.S., is now led by Japan and includes 12 economies from East Asia, North America, the Pacific, Europe, and South America. The China-Japan-ROK FTA involves China, Japan, and South Korea.
Of these five FTAs, only the China-Japan-ROK FTA has not yet been finalized, while the others are operational and may continue to attract new members. However, East Asia has not formed a single-currency market like the European Union. Due to significant differences in culture, language, administrative regulations, and economic structures, the region is highly complex for external investors. Consequently, during supply chain reconfiguration, the relocation costs for multinational corporations are high. While FTAs help reduce costs for businesses, their impact is limited.
East Asian FTAs face two main challenges:
First, differing rules across FTAs. For instance, RCEP and CAFTA have inconsistent rules of origin, with ASEAN countries preferring CAFTA. This is not the only issue, contributing to RCEP’s low utilization rate. Despite the proliferation of FTAs in East Asia, the varying stages of economic development among economies pose integration challenges.
Among the four operational FTAs, CAFTA has the highest utilization rate, averaging 40%-50%.
Second, geopolitical tensions. Political issues often arise from historical friction between Japan and South Korea or conflicts between China and its Southeast Asian neighbors. Compared to the EU’s free trade zone, East Asia struggles to act in unison. For example, the current Philippine government is strongly anti-China, and ASEAN cannot leverage economic incentives to reduce Manila’s confrontational stance.
Another example is Japan, which remains wary of China and has so far blocked China’s accession to CPTPP, limiting the agreement’s economic scale.
Nevertheless, East Asian FTAs have significant positive implications. All members, including both developed and developing economies, support the free trade framework and oppose protectionism. This provides substantial resistance to U.S. trade protectionism, as members can strengthen FTAs to stabilize their economies during global trade crises.
Can East Asian Economies Abandon the U.S. Market?
Amid the current global trade transformation, the central question is whether East Asian economies can abandon the U.S. market. The answer is no.
To some extent, East Asian economies—including China—still primarily function as wage earners catering to Western markets, as the West comprises mature, predominantly developed markets. Of the 17 East Asian economies (including Hong Kong and Macau), only China, Japan, the Philippines, and Indonesia have export dependency ratios below 20%. The others are export-oriented economies, with the West as their primary destination.
China plays a dual role as both a supplier of raw materials for East Asian manufacturing and a major consumer market. However, following the U.S.-initiated trade and tech wars, Southeast Asian economies have emerged as Western alternatives, replacing some of China’s production capacity for Western markets. In essence, Southeast Asia’s rise is largely due to its role as a “proxy” for the world’s factory, with many Chinese companies also relocating factories to Southeast Asia.
From 2017, when the U.S.-China trade war began, to 2024, China-ASEAN bilateral trade grew by 77%, reaching a total of $911.7 billion, approaching the scale of U.S.-EU trade. Meanwhile, U.S.-ASEAN trade doubled, illustrating the “morphing” of global supply chains.
It’s worth noting that bilateral trade between the US and China has only shrunk by 17% from 2017 to 2024, which means that the US would be hard-pressed to find options to completely replace Chinese factories. However, the Chinese market is also not enough of a substitute for the US market for East Asian economies.
Although China is the second largest consumer market in the world, the savings rate in the US is only 4.6% (2023) while China is 44.3%, which means that Chinese consumers are far more conservative than the US because China has not yet fully shed its role as a “wage earner”, so the countries in the East Asian region are not yet in a position to decouple from the US market.
Another challenge for Beijing is that China is not yet a unified single market. It must redouble efforts to eliminate local protectionism across provinces. Compared to the EU, which comprises sovereign states, China faces more severe barriers to business integration, hindering its development into a mature consumer market.
This gives President Trump leverage to wage a trade war with Beijing, as U.S. consumers remain indispensable.
East Asian Economies Will Not Choose Sides in U.S.-China Tensions
Amid the U.S.-China trade war, no East Asian economy will explicitly choose sides, though Northeast Asia and Southeast Asia differ slightly.
As developed economies with high industrialization, Japan and South Korea maintain a competitive yet cooperative relationship with China—competing in production but cooperating in markets. In contrast, Southeast Asian economies, with lower industrialization, act more as intermediaries or a strategic intermediary of supply chain, sourcing raw materials from China and targeting the U.S. market. Thus, Southeast Asia’s relationship with China is far more cooperative than competitive.
In the context of tariff wars, East Asian economies face higher U.S. tariffs and pressure to impose tariffs on China, signaling Washington’s intent to sever China’s economic ties with its neighbors. However, given the commitment of China’s neighbors to free trade, even U.S. treaty allies like Japan and South Korea are unlikely to isolate China, let alone Southeast Asian economies with closer ties to China.
Japan and South Korea, like the U.S., rely on Chinese goods to curb domestic inflation, with RCEP and CPTPP playing a stabilizing role. Southeast Asian economies depend on China for industrialization and market access, with CAFTA and RCEP contributing positively to price stability.
Despite the loose integration structure of East Asian economies, their interdependent trade relationships are strengthening. Consequently, Trump’s tariff war on East Asia is likely to accelerate regional economic integration rather than weaken it.
In fact, during the Biden administration, he already tried the “Friendshoring” strategy aimed at isolating China, namely the Indo-Pacific Economic Framework (IPEF), which lacks market access, and it didn’t work, or to be more correct, it was a complete failure. Perhaps, in Trump’s view, Biden did not make good use of U.S. spending power as a means of punishment, but his strategy of turning incentives into punishments did not work either, and instead exacerbated domestic discontent.
Vietnam, the second-highest East Asian economy in terms of U.S. trade surplus, has benefited significantly from the U.S.-China trade war as a Intermediaries for Chinese goods to the U.S. Trump’s 46% tariff on Vietnam alarmed Hanoi, prompting concessions to the U.S. However, Washington’s demand for Vietnam to impose tariffs on China stalled negotiations. After two weeks of global upheaval, Vietnam’s Prime Minister publicly stated that U.S.-Vietnam trade talks would not affect Vietnam’s trade relations with other countries, clearly rejecting Washington’s proposal to isolate China.
Japan, the fourth largest East Asian economy in terms of surplus to the U.S. As the tariffs hit Japan’s automotive industry and jeopardize its agriculture, Prime Minister Shigeru Ishiba rejected Washington’s negotiating gesture of bundling U.S. debt and security issues with economic and trade issues, and began stalling for time to gain a negotiating advantage.
South Korea, the fifth-highest in U.S. trade surplus, saw Foreign Minister Cho Tae-yul publicly state that no regional country would choose sides between the U.S. and China, emphasizing support for multilateral trade and opposition to zero-sum games.
A special case is Taiwan, the third largest East Asian economy in terms of surplus with the U.S., which is predicted to be the world’s most concessive economy to the U.S. because of the current administration strongly anti-China and pro-U.S. .Taiwan’s growing trade deficit with the U.S. stems from aligning with Biden’s policies, relocating high-tech factories from China to the U.S. However, with over 30% trade dependence on China, Taiwan cannot realistically decouple. The likely outcome is tariff reductions, increased U.S. investment, and expanded arms purchases.
It should be emphasized that Taiwan is excluded from the coverage of the aforementioned FTAs and therefore lacks bargaining chips with the US.
As for the Philippines, despite its government’s highly strained relations with China, it has maintained a trade deficit with China exceeding $30 billion annually over the past three years, reflecting its reliance on Chinese imports. The Philippines aspires to be a gateway for East Asian economies to the U.S. market, but in Washington’s Indo-Pacific strategy, its importance is primarily geopolitical. Trump is unlikely to open markets as before or encourage U.S. capital to invest heavily abroad, making it difficult for the Philippines to use its geopolitical status to improve its trade status.
Technology as the Primary Driver of Trade Transformation
In general, East Asian economies’ response to global trade transformation hinges on China’s “technological push” rather than the U.S.’s “market pull.” China’s technological progress is the primary force driving future regional trade, while the U.S. market, though still critical, is less pivotal. Trump’s ambition to rebuild U.S. manufacturing will prompt East Asian economies to increase U.S. investments, but with uncertain implications for their domestic growth.
Thus, aside from China, most economies will reduce U.S. tariffs. Larger economies like Japan, South Korea, and Taiwan will increase U.S. investments to retain market access. Southeast Asian economies will maintain existing supply chain structures, importing Chinese raw materials, technology, and investment to avoid disruptions to industrialization. Southeast Asian economies lack the capacity to invest in the U.S., as their industries have low profit margins and cannot relocate factories.
As for China, it will accelerate market opening, enhance technological innovation, and expand and consolidate regional trade structures, pursuing regional integration based on free trade to lead the global trade transformation.
Trump’s softening stance toward China before his first 100 days suggests Washington recognizes that past confrontational approaches are no longer viable, necessitating a strategic shift. The U.S. will attract more foreign investment, but as long as China refuses to cooperate with the new order dominated by the United States, the global trade transformation may be far less beneficial to the United States than Trump expected.
Regardless, technological progress is the key to reshaping global trade structures. If the world faces “two systems,” the global trade structure will undergo dramatic changes over the next decade. It is impossible for East Asian economies to decouple from China’s technology, and the region will carve out its own path.
