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Except for a handful of advanced economies in Asia and Oceania—namely in Japan, South Korea, Taiwan, Singapore, Australia, and New Zealand—the economies in the region belong to low- and middle-income countries, all with the same economic and social objective: to grow (moderately) rich before their societies grow older. Political and social elites in these developing economies are charged with providing a path toward prosperity. Strategic relationships for these countries are designed not just to enhance national security but also to guarantee and strengthen that presumed pathway.
If there is widespread loss of faith, and the pathway to prosperity seems to be failing, then the disruption to current political economic models will be significant. There may be serious and even existential consequences for ruling political institutions, and implications for the strategic relations these countries have forged with other powers. In short, the long-awaited Asian Century—the collective rise of Asia to become the center of material power in the world—is less assured than once expected.
Countries in the region see a war between the United States and China as the most likely catastrophic threat to prosperity in the region. It is why many countries prefer gradual Chinese hegemony to US-led attempts to prevent Chinese regional hegemony if such countering of China involves conflict—including the defense of Taiwan. To these countries, war eliminates the possibility of collective prosperity.
Putting potential war to one side, there are less violent but hugely consequential structural factors that are being largely ignored. We do so at our peril. These factors are already gathering pace and challenging the settled assumptions and approaches that almost all regional economies are following. Put simply, they are closing off assumed pathways to prosperity for many Asian countries. In a region still dangerously reliant on growing prosperity to maintain domestic and external stability, the next decade seems far more precarious than the previous few.
This article looks at the major structural disruption already occurring and the role of technology in accelerating and deepening such disruption in Asia. It ends with suggesting some critical choices facing the United States and its allies over the next twelve to eighteen months as a result.
Obstacles to prosperity
Since the Second World War, rapidly developing Asian economies—Japan, South Korea, Taiwan, Singapore, Malaysia, Thailand and, most recently, China—have all relied upon a remarkably similar export-manufacturing model. They seek to grow by making exported products for consumers in advanced economies cheaper, faster, and more reliably than can be done in other countries or regions. Those predicting the “Asian Century” assume that what worked in the past will continue to work for low-income but populous countries such as Indonesia, Vietnam, Bangladesh, and India.
At the heart of the so-called East Asian model of rapid economic development and industrialization is the emphasis on developing a strong export-manufacturing domestic sector that is bolted onto a highly protected domestic consumption market. In addition to the natural advantage of being able to offer a cheap and plentiful supply of low-cost labor, state interventionist policies were implemented to attract foreign firms and capital into the export-manufacturing sectors. These include tax concessions and subsidies given to domestic and foreign firms to locate manufacturing plants in various East Asian countries.
Export-enhancing policies also include currency regimes that artificially suppress the value of the domestic currency relative to currencies from richer countries, making it cheaper for advanced economy firms to inject capital and for richer consumers to purchase the exported goods.
This model or pathway is rapidly closing off for developing Asian economies for several reasons.
First, regional production is far outpacing the growth in consumer markets and is structurally irreversible. The last quarter of the previous century was a period when tens of millions of workers in rising Asian economies were producing low-cost goods for hundreds of millions of consumers in richer advanced economies. This ratio has been flipped by China. China remains an economy geared toward (over) production rather than increasing household income and therefore consumption. The upshot is that there are too many products chasing too few consumers.
Moreover, China is increasingly capturing more of the value-added in production processes from the rest of Asia and is driving entire supply chains (in a horizontal and vertical sense) within itself. In addition to the structural problem of too much production and too few consumers, it means that the prospects for export-driven growth in much of developing Asia becomes ever more unlikely.
Second, technological advances such as embodied AI, robotics, and automation are wreaking what the economist Joseph Schumpeter called creative destruction in the fundamental nature and structure of production. These technologies are changing how products are made, how value is added, and how profit is earned.
In particular, firms in technologically advanced economies (such as China, the United States, the EU, and Japan) are adjusting production networks at the expense of Asia’s low- and middle-income countries. The latter countries, with their hundreds of millions of workers needing employment, are already being forced to find ways of stimulating rapid growth.
In the meantime, these technological advances are disproportionately increasing the economic opportunities and wealth of firms in technologically advanced economies. For example, the leading AI, robotics, and automation firms are headquartered in China, the United States, the European Union, Japan, and South Korea. Capital markets needed to drive growth in these sectors are similarly dominated by these countries.
The upshot is that much of Asia has become more dependent on advanced economies rather than less.
One must therefore place in proper context the optimistic assessments that places such as Southeast Asia are emerging as significant global industrial hubs. This is occurring: but with Western capital and know-how. The question remains: where will these developing countries find possible pathways toward an across-the-board rise in household incomes and wealth which they need to preserve stability?
The emergence of Western-financed industrial and technological hubs achieves some level of technological and know-how transfer to or absorption by these developing economies, although not to the same extent that export-manufacturing-based investment and know-how achieved for developing economies in previous decades. Additionally, the emergence of Western-financed industrial hubs in these economies does not generate the same level of well-paid employment for millions that export manufacturing achieved. Developing Asian economies do not have the contemporary capacity to generate such jobs for low- and semiskilled workers that export manufacturing did in the past. The rise in low-skilled services jobs cannot take up the slack—economies and policies are still geared toward production rather than consumption.
This is reflected in youth unemployment. For example, in East Asia, job creation has not kept pace with demographics. In developing economies in this region, youth unemployment rates (eighteen to twenty-four years old) hover around 16 percent to 20 percent. China’s figure for youth unemployment is similar. In China’s case, it is being hit by a combination of overproduction (as described earlier) and the end of the residential property boom, which was the only way households were able to increase wealth significantly across the board. In both China and Southeast Asia, one is seeing the troubling phenomenon of parents increasingly supporting their adult children rather than the other way around.
The broad point is that the structure of the global economy and technological trends are increasingly working against an across-the-board rise in prosperity in Asia. Southeast Asia is suffering from the loss of value creation and productive capacity to China, but has not yet taken a more significant hit from technology replacing people. However, the latter phenomenon is fast approaching.
Unexpected implications
The authority, standing, and legitimacy of political, economic, and military elites in much of Asia are based on performance. Key Performance Indicators (KPIs) have been built around assumptions that the environment of the past few decades will persist indefinitely, with similar opportunities for current and future generations. When the conditions are removed as discussed, KPIs become difficult to fulfill.
Existing policies and institutions are likely to be slow to adapt to a changing environment; there also may no longer be agreement or consensus on new KPIs. For example, if it became a baked-in expectation in Indonesia or Vietnam that growth would remain permanently low and unemployment stubbornly high, the difficulties and consequences for elites would be unpredictable.
Moreover, in most of the developing Southeast Asian countries, institutions are not designed to facilitate an orderly contest and change in either the constitution of elites or changes in KPIs for elites. In democratic, semi-democratic, and authoritarian systems throughout Southeast Asia, legitimacy is based not on process or procedural fairness (i.e., where elections of leaders are “free and fair” or nominations of other elites are open to new contenders in a transparent and predictable manner) but on material performance. The Philippines might be the exception.
If performance legitimization becomes impossible or retarded, newer notions of good governance, policy, and legitimate authority will become more contested. This could lead to domestic instability and lack of policy clarity in many of these Southeast Asian states—something few of them have had to confront for at least several decades.
Amid deepening disruption and incapacity to fulfill KPIs, strategic decisions are likely to be increasingly influenced and defined by governing elites that seek immediate and guaranteed gains, if need be, at the expense of each other. Note that militaries in many developing countries in Asia not only are part of the governing and social elites but exist largely to maintain regime survival. Therefore, military elites in many countries share the same anxieties as governing elites and would prioritize survival the same way should prosperity begin to falter.
Consider the ruthlessly transactional approach of virtually every Asian economy after President Trump announced his so-called Liberation Day tariffs in April 2025. While all American trading partners argued vociferously that the American tariffs were unfair, counterproductive, and a violation of trading rules and agreements, the Asian economies immediately began negotiations with the administration to receive a lower tariff rate than neighboring economies to enhance their relative export competitiveness in the US market. There was no prolonged lamenting the end of the so-called trading-rules-based order, nor any nod to the notion of Southeast Asian (and ASEAN) fraternity and civility. There was only a race to secure a better outcome at the expense of others.
Drawn into the China-centric zone
In the context of US-China competition, the pertinent question is: from which great power will most developing Asian economies seek immediate and guaranteed relief?
China is increasingly exercising ownership or control of the productive capabilities of the developing economies at the expense of US and other Western economies. This spans both hard and digital infrastructure. Regarding the latter, China prevails over the United States in the developing economies even if US high-tech companies such as Amazon, Microsoft, Google, and Netflix have the largest footprint in the region’s consumer digital economy. For example, except for Singapore, every Southeast Asian economy has Huawei as its key telecom infrastructure provider.
The increased and more prominent Chinese presence in the manufacturing capacity of Southeast Asia and dependency on inputs from is also relevant. For developing economies relying far more on manufacturing than on services to generate jobs, ownership or control over manufacturing, the inputs required, and merchandise assembly are all important. It is highly significant that Chinese firms are enjoying a greater presence and relevance in booming and productive sectors such as electronics, EVs, solar panels, batteries, and related areas such as energy infrastructure and production and mining. Chinese focus on greenfield investment and construction activities is also creating new commercial facts on the ground that entrench Chinese influence and dependency on Beijing.
As raised earlier, Southeast Asians complain that China is capturing ever more of the added value in regional supply chains while Chinese firms in Southeast Asia tend to bring in Chinese citizens to fill key positions. Knowledge transfer is minimized or slowed, further entrenching Chinese advantages. This increases Southeast Asian dependency on Chinese finance, technology, know-how, and inputs. Southeast Asian partner firms and employees often do not have alternatives and must buy into a production and supply-chain ecosystem that further entrenches Chinese advantages.
In an economic and commercial sense, the evolving East Asian production zone is beginning to resemble a Sinocentric hierarchical (economic) order. This means the Sinocentric hierarchy is not only civilizational, strategic, diplomatic, or military but also economic and commercial. And within this order, China can increase or decrease commercial benefits as largesse or punishment. Given the Southeast Asian definition of statecraft as the ability to extract guaranteed absolute gains or privileges from larger powers, in the economic and commercial context, Southeast Asian elites might increasingly be tempted or compelled to conclude economic and strategic agreements with Chinese entities where there are immediate and guaranteed benefits, even if the fruits of the agreement are heavily in favor of the Chinese entity.
As a senior adviser to Malaysian Prime Minister Anwar Ibrahim said to this author in a conversation in late 2024, “We all have performance anxiety, and 20 percent of something is worth more than 100 percent of nothing.”
Bear in mind that China has the advantage of proximity (through geography); scale of its markets, dominant supply chains, and self-reinforcing clusters (e.g., Chinese-owned foreign invested enterprises tend to have greater vertical integration with firms in the Chinese mainland); manufacturing infrastructure; and transport to and from Southeast Asia production sites compared to the United States. Examples of transport include new highways from China to Southeast Asia that pass through Vietnam’s east coast and Thailand’s west coast; these have slashed transportation costs. There is high-speed rail from China to Malaysia. The first five years of Beijing’s Belt and Road Initiative, from 2013 onward, focused on physical connectivity with economies such as Vietnam, Indonesia, the Philippines, Thailand, and Malaysia.
In summary, and facing shrinking structural economic opportunities, the consequences of a defunct economic growth model and a political economy less fit for purpose are likely to lead these developing economies to make considerable strategic adjustments for elites to preserve their role and influence, and to stabilize institutional pressures—albeit for short-term relief.
These pressures and strategic dynamics reflect China’s broader advantages and its success in appealing to the Global South at the expense of the United States and other advanced economies.
Three key choices for America (12 to 18 months)
That the United States is seeking to reset and reframe trade and investment with the rest of the world can work to its advantage in terms of strategic options and solutions. In particular, the ending of liberal and non-discriminatory trade and investment without regard to American industrial goals or strategic consequences does free up some options that would have been discounted in the 1990s and 2000s.
Below are key strategic choices for the United States.
1. Will the United States disrupt and reset its trading and economic relations with the world to only pursue better terms for America or to also provide a pathway to prosperity for Asian economies?
Comment: The United States has two enormous sources of geoeconomic leverage: capital markets and access to its consumer market.
America can offer considerable and exclusive privileges to countries that make strategic decisions better aligned with US rather than Chinese interests. In doing so, it is not directly coercing those economies but creating considerable opportunity costs for them if they move in a different strategic direction.
This involves the United States moving away from non-discriminatory economic policies in terms of treating multiple economies in the same way. Trump has effectively begun this with tariff policy, but it needs to be far more strategic and to use levers besides tariffs.
2. Will the United States seek greater self-sufficiency or choose to deepen dependencies of strategically important economies on America?
Comment: Global manufacturing is becoming more regional in that hubs and clusters of production are beginning to become regional. For obvious geographical reasons and because of dominance over regional supply chains, the deepening of regional hubs and clusters within Asia will favor China over the United States.
The United States must disrupt the trend of Asian economies moving as one toward the creation of a deeply integrated East Asian production zone. It needs to decide which handful of regional developing countries are to be offered special privileges as co-production partners that will be deeply integrated with the US and other allied economies. The objective is to deepen dependencies on the US when it comes to countries that matter—not just from the demand side but also the supply side.
This is highly feasible in the high-tech sectors. But it requires the US administration and technology firms to see select Asian economies as trusted co-producers of tech products and solutions rather than largely trusted consumers of American tech products and solutions.
This also applies to co-opting militaries in developing countries. Currently, and beyond conducting training exercises with regional militaries (which is important), there is little further thought given to co-opting military and strategic elites in the region. For militaries in Asian developing countries, there is deep national and professional insecurity and embarrassment in the growing dependency these militaries have on purchasing capabilities and technologies from other countries.
The strategic choices the United States might make on economic co-production could be extended to military co-production of non-technologically-sensitive weapons with the countries that the United States has selected as priorities.
For America, this would be an act of defense diplomacy rather than necessity. The impact on military-to-military connection would be immensely positive. Bear in mind that military elites in many of these countries are also the political and social elites. Co-production (and not only joint training) is a missing element of military co-optation which both China and the US have largely ignored.
More generally, the powerful symbolism of “making things together” in the civilian and military realms is underappreciated by the United States. Military co-production with non-allies is one way of tying the interest and status of regional elites with that of the United States (rather than China.)
3. Will the United States seek only the tactical advantage in making ad hoc agreements and arrangements or will it seek to build an enduring US-led order and ecosystem for willing participants?
Comment: Smaller powers require greater predictability and stability when dealing with great powers. The so-called global-rules-based order, to the extent it existed, is no longer fit for purpose.
However, ad hoc bilateral economic and other deals that the United States has struck with other countries need to be placed within a broader US-led rules-based ecosystem. The United States needs to demonstrate to those in the exclusive order that it will bind or constrain itself voluntarily, even and especially when it is not in its immediate interest to do so. This mindset must be adopted by the current Trump administration. Deals are done to draw smaller countries into one’s ecosystem and order, rather than as short-term agreements.
Failure to do this leads only to a disorder founded on uncertainty. This plays to China’s advantage because Beijing’s system is better suited than America’s to offering ad hoc concessions and delivering sudden punishments.
John Lee is a senior fellow at the Hudson Institute as well as a senior fellow (nonresident) at the United States Studies Centre and an adjunct professor at the University of Sydney.