As their green-transition efforts are increasingly caught up in the US–China rivalry, Southeast Asian states must find a way to convert potential short-term economic gains into long-lasting ones.
With policymakers focused on global geopolitical flashpoints from the South China Sea to Myanmar and the Middle East, Southeast Asia’s growing emphasis on its green transition has generally been an under-appreciated agenda item. Following the latest Association of Southeast Asian Nations (ASEAN) Foreign Ministers’ Meeting in Vientiane in July 2024, however, the meeting’s 36-page Joint Communique highlighted the importance of ‘green growth’ in advancing sustainable development. Indeed, nine out of ten ASEAN members have pledged to achieve carbon neutrality or net-zero emissions by mid-century.
Besides facing domestic hurdles, Southeast Asian states’ green-transition efforts are becoming increasingly entangled in the US–China strategic competition. Both powers are pursuing green projects via their economic platforms. For example, China’s infrastructure mega-projects under the Belt and Road Initiative claim to have shifted towards green investments, while the United States’ Indo-Pacific Economic Framework for Prosperity has emphasised decarbonisation and supply-chain security. With increased great-power interest comes intensifying scrutiny on Southeast Asia. This includes potential US trade tariffs on Southeast Asian green products, such as solar cells, perceived to be linked to China.
Some Southeast Asian states, such as Indonesia, Malaysia, Thailand and Vietnam, may manage to take advantage of this geopolitical competition. The region has been attracting greater foreign investment, including from the US and China, linked to supply-chain relocations and the race to secure essential resources. Batteries, critical for electric vehicles (EVs) and renewable-energy storage, for instance, saw a 656% increase in investment in 2022. However, in the long term, competing US–China interests in Southeast Asia’s green sector could constrain the potential economic gains. States may get around this by presenting themselves as neutral investment options to complement ‘geopolitically unbiased’ economic policies, and transform short-term economic gains into lasting ones.
Green great-power competition
The US and China recognise that green industries are crucial both for their economic growth and political legitimacy. In China, green exports – especially EVs, lithium-ion batteries, and solar cells – are crucial growth drivers supporting President Xi Jinping’s economic-development agenda. In the US, concerns about a second iteration of the ‘China Shock’, in which an influx of Chinese products led to millions of American job losses, have fuelled protectionist policies for green products, including increasing tariffs to 50% on Chinese solar cells. In 2020, the US imported 89% of solar-panel components from Chinese companies mostly based in Southeast Asia.
For the US, supply-chain dependencies on China for key resources are a national-security concern. China has a near monopoly on the processing of critical minerals – such as lithium, nickel and cobalt – which are used in green products ranging from batteries to wind turbines in the upstream supply chain. US concerns stem from China’s past behaviour of leveraging such control as a coercive tool or bargaining chip. For instance, following a diplomatic incident between Japan and China in the East China Sea in 2010, Beijing placed an embargo on exports of rare-earth elements to Japan, which at the time imported 90% of its supplies from China. China has also exploited supply-chain dependencies to impose domestic political costs on the US, such as by placing retaliatory tariffs targeting goods within the Republican political base during the 2018 US–China trade war.
In the near future, this green competition may intersect with the burgeoning US–China rivalry over critical and emerging technologies. As the development of artificial intelligence, for instance, currently requires substantial energy consumption, energy-supply vulnerabilities have become a critical part of their technological competition. The US has indeed elevated the scrutiny over green technologies, as seen in recent investigations by Washington (as well as Beijing) over the attempt by car manufacturer Ford to license EV-battery technology from Chinese manufacturer CATL.
Southeast Asia’s short-term gains
Southeast Asia’s proximity to China and its vast natural resources (notably nickel) has allowed regional countries to benefit from the US–China green competition. Major companies from Korea, Japan and the US are near-shoring and friend-shoring their supply chains to Southeast Asia to reduce their dependency on China while profiting from the region’s competitive labour and production costs.
Chinese companies are similarly relocating their supply chains to the region, which they consider a ‘buffer zone’ enabling them to minimise their products’ exposure to US protectionist trade tariffs. They sought to benefit, for instance, from Southeast Asia’s two-year solar-tariff exemption from the US, which ended in June 2024. Cambodia, Malaysia, Thailand and Vietnam have received substantial Chinese solar investments, and in 2023 supplied more than 75% of US solar-module imports.
Both the US and China are also investing in critical-mineral-producing countries like Indonesia and the Philippines, which are the two largest global producers of nickel. Washington is seeking to offset China’s nickel-processing dominance in Indonesia and has floated various investment options, from a limited critical-mineral free-trade agreement (possibly modelled on a US–Japan deal) to joining the Mineral Security Partnership, a framework that aims to develop critical-mineral supply chains between the US and its allies. While both the US and China are interested in the Philippines’ nickel reserves, no concrete proposals have yet emerged.
Southeast Asia could become an attractive market for green products if China’s access to American and European markets shrinks under tariff pressures. The various EV-adoption incentives regional governments have provided have already bolstered the region’s market potential. Indonesia and Thailand, for example, have introduced corporate-tax and import-duty exemptions. Both US-based companies such as Tesla and Chinese-based companies such as BYD are seeking to grow their market share in the region.
Green geopolitical challenges
As the US–China green competition heats up, Southeast Asian states are increasingly featuring green-transition interests in their foreign-policy agendas. For instance, the ASEAN leaders’ declaration in May 2023 signalled a coordinated effort to further boost the region as a hub for global EV manufacturing. Subsequent high-level ASEAN meetings and statements have reiterated this ambition. Bilateral agendas between Southeast Asian states and the US and China likewise increasingly stress green-transition plans and commitments.
The US–China rivalry presents two challenges to Southeast Asian states’ green transition. The first hurdle is boosting green growth. For example, with the US concerned that the region is becoming a conduit for Chinese goods, it is scrutinising more closely solar-module supply-chain relocations to the region, prompting Chinese solar companies like Longi to consider withdrawing or delaying production plans.
To overcome this challenge, Southeast Asian states need to preserve their appeal as geopolitically neutral economic partners free from any great-power domination. Some Southeast Asian states may look to ASEAN to convince major powers of the importance of boosting the region’s strategic autonomy, as well as to manage intra-regional competition, such as in the EV market. Others may prefer to focus on welcoming a diversity of investment partners to avoid overdependence on any single player. Indonesia, for one, is seeking to reduce Chinese ownership in its rare-earths-mining and -processing sectors by also engaging countries like Korea.
The second issue facing Southeast Asian countries is how they harness the current wave of foreign investment to create long-term value, particularly around indigenous technological capacity. As green supply-chain relocations are increasingly threatened by geopolitical headwinds, encouraging companies’ long-term localisation in the region is becoming an important part of Southeast Asian states’ geo-economic strategy.
Malaysia’s automobile manufacturer Proton has tried this approach by partnering with China’s Geely Auto, which allowed the latter access to the regional market and the former to enhance its products with new technologies. Indonesia has reinforced its commitment to its nickel-export ban to stimulate downstream investments, such as in nickel intermediary goods and battery manufacturing, with a view to owning a holistic EV production supply chain. China, for its part, seems to have realised the benefits of encouraging EV localisation to alleviate US concerns. Southeast Asian states need to capitalise on this trend and articulate localisation needs beyond the EV sector to other relevant industries, although their lack of strong investment-screening mechanisms could pose risks of exploitation further down the line.