China’s Production Spillover Floods Asian Markets, Threatening Local Supply Chains

As Southeast Asian foreign ministers met in Kuala Lumpur on July 10-11, U.S tariff issues hovered over them like a menace.

With formal letters to several countries including Thailand (36 percent), Cambodia (32 percent), and Malaysia (25 percent) establishing some of the highest tariff rates in the world, the meetings became an opportunity to discuss whether the bloc could negotiate collectively.

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U.S. Secretary of State Marco Rubio’s presence, marking his first trip to Asia, underscored the tension. “It is our strong view, and the reality, that this century and the next—the story of the next 50 years—will largely be written here in this region,” he said.

The irritation was hard to ignore. Malaysian Prime Minister Anwar Ibrahim put it bluntly: “Tools once used to generate growth were now being wielded to pressure, isolate, and contain,” he said. He noted that the trade war was clearly here to stay, calling it the “new weather of our time.”

Anwar addressed what was clearly on the minds of many delegates: the need to “enhance trade among each other in the face of global uncertainty,” and “act with purpose.”

A largely unspoken concern at the meeting (but one casting a long shadow) was: with the tariff wars and the high tariff numbers facing China, where will the flood of Chinese products shift?

With the threat of tariffs looming, regional analysts put it simply: China’s immense production capacity must find a home. This has been made easier via e-commerce platforms like Lazada, Temu, and Shopee, which dominate in Southeast Asia. Regional shifts are apparent, triggering transformative change in both retail marketplaces and manufacturing.

In April, exports from China to ASEAN countries rose sharply—18.3 percent to Vietnam, 29.9 percent to Cambodia, 12 percent to 15 percent to Malaysia and Indonesia, and 8 percent to 12 percent to Thailand.

There is little doubt that consumers in the region benefit from the lower prices offered by the Chinese products, which are substantially lower than those offered by local manufacturer—a double-edged sword cutting deep into local economies.

A recent Citigroup report underlined the phenomenon, showing surging exports from China to Southeast Asia, while China’s exports to the U.S declined in recent months.

The report warned that the influx of more affordable Chinese goods would create greater challenges for local businesses in the region and impact their economies. For instance, Indonesia recently recorded a new monthly high in textile imports from China, adding pressure to its already struggling garment industry, which has laid off thousands of workers.

The trade diversion was more significant in Vietnam, Indonesia and Thailand, the report noted, with the U.S. tariffs disrupting regional trade dynamics

Voices calling for regulation have grown louder in recent months as tariffs turn from threat to reality.

Thailand introduced new import regulations in July last year, including inspecting low-quality goods, seizing counterfeit items worth over 506 million baht ($15.61 million), and applying a 7-percent Value Added Tax (VAT) on cheap imported e-commerce goods. The result was a 20-percent drop in such imports. Further measures, including requiring foreign e-commerce firms to incorporate locally and pay VAT, are under consideration.

Thailand is being further impacted by the high tariffs from the U.S, according to apparel industry leaders.

“Cheaper Chinese fashion e-commerce is beneficial in the short term. Affordable and accessible fashion increases purchasing power and provides a variety of styles and trends,” Nutra Uttamapinant, secretary general of the Textile Industry Club at the Federation of Thai Industries (FTI), told Sourcing Journal.

“However, if left unregulated, it can be harmful in the long term due to loss of local industry competitiveness for the Thai economy. The effects could lead to closures, job losses, and weakening of the domestic textile and apparel industry. The quality and environmental standards of these Chinese e-commerce products are also in question, with little regard for labor practices,” she said.

As in other countries, e-commerce platforms like Temu, Lazada, Shopee, and TikTok Shop have been at the forefront of this trend. The urgency is growing: Chinese goods priced far below local standards are exerting additional downward pressure on domestic manufacturers.

“We must enhance the competitiveness of Thai domestic brands on these platforms through tech tools and digital marketing, helping the local fashion industry adapt, specialize, and thrive in niche or premium segments. Campaigns to ‘Buy Thai’ could promote mindful purchasing and support ethical, environmentally conscious production,” Uttamapinant added.

Overall, analysts said that most ASEAN governments are taking ‘a more cautious approach, balancing domestic pressures with the allure of foreign investment and export-led growth’, and Malaysia and Vietnam are weighing restrictions while exploring bilateral and regional trade agreements.

It’s not a new trend,” a Jakarta-based manufacturer said. “This has been increasing for the past few years. But now we’re going to face a further deluge. And are we worried? Very much so. In Indonesia alone, hundreds of factories have closed, leading to widespread job losses and plummeting productivity.”

Imports of Chinese textiles into Indonesia have been growing fast, from $309.7 million between January and April 2024 to $834 million in the same period in 2025. Footwear imports rose from $152.36 million to $199.4 million.

Earlier this month, Trade Minister Zulkifli Hasan addressed reporters about oversupply from China being redirected to Indonesia, once again underscoring the fact that it was “a threat to smaller local businesses, which could collapse.” Indonesia responded to factory closures by slapping 100 percent to 200 percent tariffs on select Chinese imports, including textiles and footwear, which had to be revisited due to the complex nature of supply chains originating in China.

Meanwhile, the economic integration with China in the region remains.

The visit by Chinese Premier Li Qiang to Indonesia last weekend marked the 75th anniversary of Indonesia-China diplomatic relations, a moment ripe for strengthening the strategic partnership.  Accompanied by a business delegation, investment deals were inked, along with agreements to strengthen business ties.

Ian Williams, an award-winning author and former journalist, put it simply: “Chinese President Xi Jinping has seen this coming for a while,” he observed. “A lot of the investment in Southeast Asia has been strategic. Many governments in the region recognize that—which is why they are publicly supportive, but privately quite wary about the double-edged nature of the investment coming in, and the goods being sent out. China has to put those somewhere. It’s facing serious deflation, overproduction, falling prices. The U.S. market is closing, the European market is becoming more difficult. So, where are they going to go?”

He said that while ASEAN countries understood the situation, they were still figuring out how to respond. “I would say that ‘scared’ is not too strong a word for the redirected exports coming their way.”

“Different countries have various cards they can play—I think Vietnam and Thailand are in quite a strong position, and Malaysia to some extent as well. Cambodia and Laos, there’s no way they can say anything to China,” he added.

Shay Wester, Director of Asian Economic Affairs at the Asia Society Policy Institute and co-author of a report entitled “ASEAN Caught Between China’s Export Surge and Global De-Risking,” pointed to shifting geopolitical pressures over the past two years.

“This influx of Chinese goods, including intermediate goods for re-export and consumer goods for ASEAN markets, has widened trade deficits and intensified pressure on local industries,” he noted.

“ASEAN overtook the United States and the EU as China’s largest export market in 2023. In 2024, Chinese exports to the region rose another 12 percent, while ASEAN exports to China increased by only 2 percent. Chinese imports surged by nearly 18 percent to Indonesia and 14 percent to Thailand, even as their exports declined by roughly 4–5 percent,” the report stated.

The pressure to act is intensifying, as is the search for solutions. In Indonesia, President Prabowo Subianto spoke candidly about the situation, including the important issue of textile smuggling issue, even suggesting drastic action. “If it threatens Indonesia’s sovereignty, we sink the ship,” he said in a December speech on Development Planning.

Analysts estimate that 1,000 containers arrive illegally in Indonesia each year, packed with surplus Chinese goods priced so low that local manufacturing becomes unviable. Hundreds of apparel factories have shut down in the past two years, resulting in over 70,000 lost jobs. Even efforts to assist companies like the bankruptcy and resurrection of the prominent Indonesian apparel and textile manufacturer Sritex or PT Sri Rejeki Isman Tbk have been bogged down in bureaucracy.

The crisis is not limited to apparel exports. Spinners, weavers, and the entire fiber industry are also struggling.

“Dozens of factories are at risk of shutting down as they struggle to compete with cheap Chinese-made clothing that has flooded the market in recent years,” said Redma Gita Wirawasta, chairman of the Indonesian Filament Yarn and Fiber Producers Association. “We are facing dual pressure: weakening exports and a flood of cheap imports.”

Among the solutions being listed out are ways of resetting e-commerce agreements to restrict products crossing borders, and carefully balancing the explosive growth planned by online platforms like Lazada, Shopee, Temu and TikTok Shop.

The proposal of a 200-percent import tariff on Chinese goods has resurfaced, aiming to protect more than 60 million small enterprises. An earlier regulation that introduced import quotas faced criticism and revisions for blurring the line between essential supply chain items and surplus imports.

In addition to tariffs, other protection measures, from subsidies to export bans and regulatory shifts, are being considered to preserve millions of jobs across the region.