Asia walking a tightrope in the 'G2' world: becoming more reliant on China’s supply chains while still being pulled by the US financial system and tariff policy

Overview

This report discusses Asia’s position within the US-China 'G2' competition and the broader 'G3' economic configuration (the US, the EU, and China). It argues that the post-Cold War unipolar order led by the US is shifting toward a more unstable and competitive multipolar system. For Asia, which is highly trade-dependent, this means trade, investment, supply chains, finance, and technological soft power all need to be reassessed. Asia is becoming increasingly reliant on mainland China as a trading partner, a supplier of components, and a source of incremental FDI, but the US still retains advantages in global finance, education and research, and institutional influence.

Core views

The core views are fourfold. First, Asian economies’ trade and value-chain exposure is increasingly tilted toward mainland China, especially in imported intermediate goods and high-value-added components. Second, the US and the EU still retain structural advantages in existing FDI stock, global financing, the dollar’s reserve-currency status, and influence through research and education. Third, a temporary easing in US-China relations helps stabilize supply chains, but it erodes the tariff advantage some Asian exporters have relative to mainland China, and future US pressure on Japan, South Korea, Taiwan, or specific industries cannot be ruled out. Fourth, ASEAN middle powers such as Singapore, Malaysia, and Vietnam can continue to benefit in semiconductors, data centers, and advanced electronics by pragmatically hedging, arranging free trade, and attracting diversified FDI.

Analysis framework

The report analyzes Asia’s exposure to major economies from several dimensions: international relations theory, trade flows, value-added export measures, FDI flows and stocks, integration into global finance, research and education soft power, and policy risks. Rather than making a single market forecast, it compares each economy’s relative dependence on the US, mainland China, and the EU, and assesses what that structure means for tariffs, supply-chain relocation, investment flows, and geopolitics.

Methodology notes

• International RelationsRealism vs. Liberalism

  A shift away from the liberal 'G1' era toward a more realist-appropriate multipolar competitive environment.

  The report uses realist, liberal, and constructivist frameworks to explain changes in the global order: in the past, economic interdependence, democratic diffusion, and international institutions were seen as sources of stability, but now tariffs, export controls, and economic coercion have made interdependence itself a source of risk.

• Trade ExposureNominal Exports vs. Value-Added Exports

  Look at both the final export destination and the portion absorbed by final demand along the value chain.

  The report points out that nominal exports alone are insufficient to describe dependence; on a value-added basis, economies such as Taiwan, Singapore, Malaysia, Australia, South Korea, and Indonesia are more exposed to mainland China.

• Investment ExposureFDI Flows vs. FDI Stock

  Distinguish between new investment momentum and the accumulated historical capital base.

  Mainland China is becoming an important source of incremental FDI for markets such as Vietnam, Thailand, and Indonesia, but the US and the EU still account for larger FDI stocks in most Asian economies.

• Financial InfluenceForeign Debt Holdings and Reserve Currency Status

  Measure the degree of financial-system embeddedness using foreign holdings of public debt and the currency composition of foreign-exchange reserves.

  The report argues that the US still enjoys a significant advantage thanks to the dollar’s reserve-currency status, low financing costs, and demand for Treasuries; financial influence has not shifted in step with trade structure.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Asian macro assets

  Driven jointly by US-China competition, trade policy, and capital flows

  Strengths

  The regional supply chain is complete, and several economies can gain investment opportunities through hedging and free-trade arrangements.

  Weaknesses

  Highly sensitive to external demand, imported intermediate goods, and policy changes in major powers.

  Comparison

  Compared with the US and the EU, Asia is more directly exposed to US-China trade and supply-chain restructuring.

  Risks

  Tariff escalation, the spread of protectionism, slower global trade growth, and geopolitical miscalculation.

• ASEAN manufacturing

  The main recipient of mainland China FDI and global supply-chain restructuring

  Strengths

  Attractive labor costs, industrial absorption capacity, and regional trade networks.

  Weaknesses

  Some markets still rely on Chinese components, and local firms may face pricing pressure.

  Comparison

  Vietnam, Thailand, Indonesia, and Malaysia are more affected by incremental mainland China FDI.

  Risks

  Margin pressure from China’s exports being diverted to third markets, or a US re-examination of rules of origin and investment commitments.

• Semiconductors and advanced electronics

  Identified by the report as a key area attracting FDI to Singapore, Malaysia, and Vietnam

  Strengths

  Supported by the AI cycle, data-center construction, and demand for supply-chain diversification.

  Weaknesses

  Highly dependent on cross-border capital, technology, equipment, and policy stability.

  Comparison

  Compared with traditional manufacturing, advanced electronics is more likely to attract high-quality FDI, but it is also more exposed to technology controls.

  Risks

  Export controls, policy changes in the US or China, capacity mismatches, and demand-cycle volatility.

• Dollar assets and US Treasuries

  The core vehicle of US financial influence

  Strengths

  High reserve-currency share, strong liquidity, and a prominent global safe-asset status.

  Weaknesses

  They can be weaponized through geopolitics and sanctions, increasing the de-risking incentives of some countries.

  Comparison

  The renminbi’s share of international reserves remains far below the dollar’s.

  Risks

  Questions about fiscal sustainability, sanctions risk, and the diversification of reserves in a multipolar world.

• Mainland China export manufacturing chain

  A key source of components and high-value-added parts for Asian supply chains

  Strengths

  Strong advanced-manufacturing competitiveness, with EVs, green energy, and electronic components offering cost and technology advantages.

  Weaknesses

  Faces pressure from tariffs, anti-dumping measures, and protectionism in third markets.

  Comparison

  Even as final assembly shifts to ASEAN, mainland China’s role in upstream components is still strengthening.

  Risks

  Weaker external demand, more anti-dumping actions, and the gradual spread of restrictions in overseas markets.

Key data

• Combined GDP share of the US, the EU, and Chinaabout 60%The report says that by economic size, the world looks more like a 'G3' composed of the US, the EU, and China.
• Share of global foreign exchange reserves held in dollarsnearly 60%By comparison, renminbi claims account for about 2%, showing that the US financial system still has an advantage.
• Vietnam’s imports from mainland China as a share of GDPabout 40%The report uses this figure to illustrate the importance of Chinese components to Vietnam’s export engine.
• Share of China mainland outbound investment going to BRI partnersfrom less than 15% in 2017 to nearly 25% in 2024This reflects China’s expansion of outbound investment using its strengths in green energy and manufacturing technology.
• US Section 122 global uniform tariff10%, for 150 days starting 2026-02-24This policy replaces a more complex bundle of IEEPA tariffs and weakens some Asian economies’ tariff advantage relative to mainland China.
• Forecast change in global trade and services volume growthdown by about 1 percentage point to around 3%The report believes higher US tariffs and weaker US demand will weigh on this year’s global trade outlook.
• Pharmaceutical exports to the US as a share of GDPSingapore about 2.1%, India about 0.4%If the US applies sector-specific tariffs on pharmaceuticals under Section 232, some Asian economies will be affected.

Impact & implications

For investment implications, the report reinforces three main themes: first, Asian supply chains are not simply de-China-fying; instead, ASEAN is taking on assembly and production while becoming more dependent on high-value-added components from mainland China. Second, semiconductors, data centers, advanced electronics, EVs, and high-tech manufacturing may continue to attract investment from capital in China, the US, and elsewhere. Third, tariffs, anti-dumping measures, export controls, and geopolitical alignment risks will continue to affect Asian corporate margins, FDI allocation, and policy choices.

Risks

• The US may launch tariff investigations again in the future, affecting Japan, South Korea, Taiwan, or specific industries.
• The diversion of mainland Chinese exports to third markets may squeeze local manufacturers’ margins and trigger more anti-dumping measures.
• Global trade and services growth may cool as structural high tariffs and weaker US demand weigh on activity.
• If Asian economies rely too heavily on a single trade or investment partner, they may face economic coercion amid geopolitical conflict.
• A broad third-market 'tariff cascade' is unlikely in the short term, but import restrictions may spread gradually.

What to watch

• The Trump-Xi meeting in Beijing on 2026-05-14 to 2026-05-15 and subsequent high-level reciprocal visits.
• Stability in US-China communication around the US APEC Shenzhen summit and the G20 Miami summit.
• Whether the US takes new tariff actions on pharmaceuticals, the Korea trade agreement, Japan, Taiwan, or other economies.
• Whether mainland China PPI, anti-involution policies, and export-price changes can ease third-market margin pressure.
• The sustainability of FDI inflows into semiconductors, data centers, and advanced electronics in Singapore, Malaysia, and Vietnam.
• Progress on free trade agreements, regional cooperation, and supply-chain resilience policies among Asian economies.