Southeast Asia's Transshipment Dilemma in the China-US Trade War

The Diplomat

4 days ago

The United States' tightening of export controls on advanced technologies, led by the Bureau of Industry and Security (BIS)'s Entity List and Foreign Direct Product Rule, aims to curb Chinese access to sensitive U.S. technologies. Yet these tools are increasingly circumvented through Southeast Asia, where Chinese firms exploit jurisdictional loopholes by routing goods through affiliates in open economies such as Singapore, Malaysia, Vietnam, and Cambodia. In addition, Chinese companies facing higher tariff rates have resorted to routing their goods through countries in Southeast Asia. These transshipments are a topic of increasing concern for Washington, as evidenced by their special mention in trade deals reached with Vietnam and Indonesia.
While these evasion tactics challenge U.S. trade policy enforcement, they pose a deeper risk to Southeast Asia's long-term economic integrity, regulatory autonomy, and strategic positioning between the United States and China, the region's two largest trade partners. Southeast Asia's success relies on the continued openness of trade, but that very openness is now under stress as external regulations collide with free trade norms. Southeast Asian countries must now navigate the complex task of maintaining economic prosperity and neutrality, while preventing their jurisdictions from becoming conduits for regulatory evasion.
Recent events highlight the extent of the challenge. Between April and July of this year, Vietnam intercepted over 2,000 shipments falsely labeled 'Made in Vietnam' but traced to Chinese factories. Vietnamese firms were also cited by BIS for transshipping AI-capable chips from U.S. suppliers to blacklisted Chinese entities. Malaysian tech hubs such as Penang and Johor have been flagged for similar rerouting practices. Meanwhile, in 2024, the U.S. Commerce Department ruled that solar modules assembled in Cambodia, Malaysia, Thailand, and Vietnam with Chinese inputs violated U.S. trade laws.
Policy responses from impacted countries indicate the increasing recognition and concern of effects on regional economies. Singapore, for instance, has introduced stronger disclosure requirements, tightened enforcement against shell companies, and improved cooperation with multilateral initiatives like the Financial Action Task Force. Malaysia has escalated audits under its Strategic Trade Act and is investigating how shell firms enable transshipment schemes. While these moves are not a concession to U.S. pressure, they are a strategic response rooted in the understanding that weak oversight carries long-term risks to sovereignty and reputation. In response to these policies, Chinese leaders have strengthened diplomatic engagement with Southeast Asian countries to deepen economic ties to the region and position China as a champion of free trade.
For Southeast Asian countries, the core issue is not just about complying with external demands but also involves building resilience and frameworks for regulation. If the region becomes a default route for the circumvention of global controls, it could erode trust with major trade partners, provoke unilateral countermeasures, and compromise the predictability that has made Southeast Asian economies attractive to investors. Moreover, such dynamics threaten to reduce the region's autonomy in shaping future trade and technology governance frameworks.
At the same time, Southeast Asian states must carefully navigate their deep and complex economic ties with China. Many regional supply chains are integrated with Chinese production. Any moves perceived as aligned with U.S. restrictions risk provoking economic retaliation. Therefore, the challenge is not to choose sides but to assert a coherent trade strategy that can adapt to external pressure while maintaining credibility. This balancing act is especially critical as broader trends reshape Indo-Pacific trade dynamics. U.S. tariffs on Chinese goods, new industrial policies, and rapidly accelerating free trade agreements are altering what trade integration looks like.
The question is not whether Southeast Asia should align more with U.S. or Chinese policy frameworks. It is whether the region can lead in building a trade architecture that upholds both openness and integrity. That means pushing for export control mechanisms that are not externally imposed but co-developed – ones that reflect Southeast Asian priorities in innovation, data governance, and strategic autonomy.
As the Indo-Pacific enters an era that prioritizes technology and trade, countries like Singapore, Malaysia, Cambodia, and Vietnam are increasingly central to determining the new status quo. Strengthening regulatory clarity, improving cross-border coordination, and safeguarding the region's neutrality are investments in long-term regional strategy. By continuing to address these challenges on their own terms, Southeast Asian nations can help define a new model of trade resilience that resists being a pawn of great power competition and instead reflects the region's own values of openness and balanced diplomacy.