CSIS - Center for Strategic and International Studies Inc.
10/24/2025 | Press release | Distributed by Public on 10/24/2025 14:08
Aligning APEC Beyond Trade Turmoil
Aligning APEC Beyond Trade Turmoil
Photo: JUNG YEON-JE/AFP via Getty Images
Commentary by Philip Luck and Richard Gray
Published October 24, 2025
Introduction
On October 31, world leaders will convene in Gyeongju, South Korea, for the Asia-Pacific Economic Cooperation (APEC) forum at a critical moment for the global economy. Across the region, countries are grappling with the challenge of sustaining growth amid a tumultuous global environment increasingly divided by rivalry between the world's two largest markets. Connectivity, innovation, and prosperity now sit uneasily alongside trade disruptions, retaliatory tariffs, and fractured supply chains.
APEC economies face growing strategic vulnerabilities due to their dependence on both the U.S. and Chinese markets-vulnerabilities laid bare by policy whiplashes between the first and second Trump administrations. Under the first Trump administration, the U.S.-China trade war reshaped supply chains and remade industries, which are being further altered following the Liberation Day tariffs and the threat of U.S. withdrawal from multilateral trade agreements. For Asia-Pacific economies integrated with both powers, the question is whether they can withstand the pressure from the superpowers without sacrificing resilience.
Yet even as the United States looks to disengage from the Indo-Pacific Economic Framework and U.S.-China economic tensions escalate, APEC can serve as a vital platform to build regional consensus on economic resilience, supply chain diversification, and rules-based economic cooperation.
The First Trade War
During President Trump's first term, the U.S.-China trade war tariffs triggered significant supply chain restructuring. Tariffs imposed on Chinese goods led many companies to rethink their supply chains, with Southeast Asian countries receiving substantial capital reallocation as firms adopted "China plus one" strategies-maintaining Chinese suppliers while diversifying to alternative production bases. Similarly, Chinese companies expanded manufacturing in Southeast Asia to access low-cost, nearby labor and circumvent tariffs. As these firms adopted "China plus one" strategies-maintaining yet diversifying from Chinese suppliers-alternate markets began to boom.
This was the most acute in Vietnam, Thailand, and Taiwan. Vietnam nearly tripled U.S. exports, while Taiwan and Thailand more than doubled exports. These shifts reflected deliberate policy responses to first-term tariff structures that penalized Chinese production while leaving alternative markets accessible.
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Philip Luck
Director, Economics Program and Scholl Chair in International Business
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Richard Gray
Program Coordinator and Research Assistant, Economics Program and Scholl Chair in International Business
Programs & Projects
- Economics Program and Scholl Chair in International Business
- Economic Security and Technology
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Country-by-Country Breakdown
Breaking down trade flows by country reveals deeper concentration. Countries are closely integrated into the U.S. and Chinese markets, though the majority of trade still flows to and from diverse third-party markets.
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This trend crosscuts the Pacific Rim. In Japan, the United States and China together accounted for 37.6 percent of exports and 33.9 percent of imports in 2023. China alone accounted for 29.6 percent of Australia's total trade and 23.8 percent of New Zealand's. The Association of Southeast Asian Nations (ASEAN) is also intertwined with both the U.S. and Chinese economies. In Vietnam, China alone supplied 34 percent of total imports in 2023, while Indonesia sourced 31.1 percent of its imports from China. Across ASEAN, 78 percent of trade in 2023 occurred outside the bloc-up slightly from 75 percent in 2003-and roughly 31 percent was conducted with either the United States or China.
While the U.S. and Chinese markets are growth engines for the region, putting all eggs in these two baskets comes with a cost. Together, the United States and China account for 43 percent of global GDP, with China's GDP compounding 49-fold from 1990 ($360.86 billion) to 2023 ($17.79 trillion). Through interconnectedness, countries across the Asia-Pacific maintained positive-sum economic relations: In that same period, countries in the region benefited from proximity to China and access to the U.S. market: Vietnam grew 66-fold, Singapore grew 14-fold, Indonesia grew 13-fold, and Malaysia grew 9-fold. This growth established path dependencies. Manufacturing clusters, logistics infrastructure, financial systems, and labor force skills all oriented toward U.S.-China supply chain integration. However, sustaining this growth demands continuous trade flows and stable geopolitical environments, both of which are at risk of unraveling.
Asia-Pacific Trade in Trump 2.0
With President Trump back in the White House, the "China plus one" approach may not hold. Countries that benefited most from first-term trade war diversification are now facing some of the steepest tariffs. The incentives have reversed, effectively punishing the diversification Washington demanded and treating all supply chain relocation as transshipment rather than legitimate commercial policy.
On April 2, President Trump announced reciprocal tariffs, many of which targeted Asia-Pacific states. Several of the region's states most impacted by the tariffs had among the highest trade surpluses with the United States, including Vietnam, Japan, South Korea, Thailand, Malaysia, and Indonesia (see Table 1). For these states, the implications of shrinking export revenues and inflationary pressures loom large. Specific industries like textiles and electronics are particularly vulnerable to these tariffs, threatening significant portions of national GDP growth, employment, and government revenue.
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This reversal carries three implications. First, firms that have invested billions in Southeast Asian production capacity now face prohibitive market access barriers. Reinvestment elsewhere requires additional capital amid tariff uncertainty. Second, the administration has not clearly defined legitimate value-added production versus transshipment, leaving firms unable to ensure compliance. Third, future U.S. requests for supply chain restructuring will face skepticism given the policy reversal's speed and severity.
At the onset of President Trump's second term in office, he signaled that the United States will continue to pressure countries to purchase more American goods and invest in American manufacturing. President Trump has historically preferred working bilaterally as opposed to multilaterally, having threatened the European Union and Canada in March if they coordinated a response to U.S. tariffs. Responding to Xi Jinping's April visit to Hanoi, Trump called it: "a lovely meeting. Meeting like trying to figure out, 'how do we screw the United States of America?'" For the Asia-Pacific, the message is clear: Multilateral coordination, especially with China, risks unilateral retaliation. Such constraints weaken the interoperability of trade agreements, reduce the bargaining power of small and medium states, and erode capacity to coordinate on public goods.
While the details are not yet finalized, Presidents Trump and Xi will likely meet in APEC, marking their first meeting since 2019. Expectations are low for breakthrough agreements, as fundamental economic differences-the U.S. consumer and services-driven economy versus China's export-driven model-create asymmetric incentives. Beyond mutual distrust, the United States focuses on tariffs and export controls to address what it views as China's nontariff barriers and nonmarket practices, while China is more concerned with the United States' extraterritorial sanctions and use of tariffs to achieve economic and noneconomic concessions.
Both countries have enacted punitive industry-specific and across-the-board tariffs during the second Trump administration. China has also investigated U.S. firms and added U.S. entities to its dual-use export control and unreliable entity lists. While the U.S.-China trade relationship has cooled since the imposition of 145 percent tariffs on China, the pathway to a long-term solution remains uncertain. The United States and China symbiotically reinforcing their own export controls on semiconductors and critical minerals, respectively, has significantly raised the stakes. These economic tensions threaten Asia-Pacific states' integration into U.S. and Chinese markets and supply chains, as complex trade networks require the certainty that erratic U.S. trade policies undermine.
The Role of Trade Agreements in Asia-Pacific Economics
Existing multilateral trade agreements in the Asia-Pacific are interoperable by design. U.S.- and China-led arrangements maintain complementary features to accommodate states' interest in economic integration with both the United States and China. However, for Asia-Pacific states, China's market is increasingly more accessible than the U.S. market.
China's Trade Expansion
China's economic engagement with ASEAN has borne fruit. In 2002, China cofounded the ASEAN-China Free Trade Area (ACFTA), exponentially increasing the volume of trade between China and Southeast Asia. Since the launch of the ACFTA, China's exports to ASEAN have increased 12-fold, and its imports from ASEAN have increased 9-fold (see Figure 3). In May, the merging of the economies accelerated following nine rounds of negotiations and the initiation of the ACFTA's third phase.
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In 2022, China cofounded the Regional Comprehensive Economic Partnership (RCEP), which includes all Indo-Pacific Economic Framework (IPEF) members-along with Cambodia, Laos, and Myanmar-except for India and the United States. While the RCEP has weaker provisions than the Trans-Pacific Partnership, it is the world's largest FTA, totaling 30 percent of global GDP and comprising 15 countries. Participating states include U.S. treaty allies such as New Zealand, Australia, South Korea, Japan, and the Philippines. China has also applied to join the Digital Economy Partnership Agreement, a nascent digital trade framework comprising Chile, New Zealand, South Korea, and Singapore.
The Uncertain Future of the Indo-Pacific Framework
During President Trump's 2024 presidential campaign, he vowed that he would leave IPEF. If the United States formally withdrew from IPEF, one of the most immediate regional impacts would be on supply chain resilience. Without IPEF, Asia-Pacific nations would lose access to the Crisis Response Network and Supply Chain Council, which are intended to manage crises through risk mitigation strategies, supply chain shifts, and information sharing on critical goods shortages and stockpiles.
The United States' withdrawal from IPEF would concentrate trade networks, leaving the region vulnerable to external economic disruptions highlighted during the Covid-19 pandemic and the 2018-2020 U.S.-China trade war. While IPEF has not produced clear deliverables, a shift away from multilateral economic relations reduces the capacity to coordinate supply chains that comprise multiple countries. As a result, the region could face less resilient supply chains, limiting opportunities for economic growth in the longer term.
After the United States left the Trans-Pacific Partnership, IPEF was meant to serve as a balance against China's economic influence and standard setting in Asia. This end was damaged by the delay of the IPEF Trade Pillar, the absence of incentives in the remaining pillars, and by President Trump's threats to withdraw from the framework altogether. In light of China's FTAs in the Asia-Pacific, IPEF has been strategically advantageous for the United States and U.S. partners alike. While IPEF excludes China, the framework does not mandate reduced economic ties to China and is, writ large, complimentary to the RCEP and ACFTA. It provides a modest-if symbolic-platform for information sharing for countries seeking to diversify while strengthening coordination with the United States.
The Landscape Ahead
Amid growing global economic fragmentation, Asia-Pacific nations face a pressing dilemma stemming from their deep trade reliance on both the United States and China. Trade interconnectivity with the United States and China offers significant economic benefits but also introduces strategic vulnerabilities. External shocks-including pandemics, natural disasters, or sudden policy shifts-may destabilize industries and redirect trade toward uncertain markets.
Geopolitical tensions, whether taking the form of tariffs, export controls, or kinetic conflict, may leave countries with limited leverage.
Recommendations for APEC Governments
1. Establish Financial and Supply Chain Crisis Response Mechanisms
With uncertainty surrounding the bounds of U.S. engagement in future Asia-Pacific frameworks, regional governments should form coordinated crisis-response mechanisms for both supply chain resilience and financial stability. A regional coordination channel could standardize reporting, emergency protocols, and collective negotiating capacity.
Establishing an alternative arrangement to the Chiang Mai Initiative-a currency swap between ASEAN, Japan, China, and South Korea-would enhance liquidity during a financial crisis. Today, a stronger yuan, weakened dollar, and growth in cross-border payments create financial variability, requiring inclusive financial guardrails. According to former Indonesian Finance Minister Hasan Wirajuda, China opposed Australia's entry into the Chiang Mai Initiative, reinforcing the need for new mechanisms for currency swaps and crisis response.
APEC should also expand its Supply Chain Connectivity Framework to include real-time data sharing and digital customs interoperability. An "APEC Supply Chain Data Corridor" would enable members to monitor disruptions, coordinate rerouting, and align certification standards across critical sectors like semiconductors, electric vehicles, and medical devices.
2. Balance Integration and Diversification
Expanding Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) membership to include Thailand, South Korea, and Indonesia-and engaging the European Union on ascension talks-would deepen intra-regional trade and reduce dependence on U.S.-China markets and suppliers
Governments should also strengthen commercial ties across geographies through trade, investment, and joint ventures. Recent momentum demonstrates viable pathways: the European Free Trade Association-Malaysia Economic Partnership Agreement signed in June 2025, Indonesia's joint investment fund with Qatar, and the United Arab Emirates data center investments in Vietnam. These efforts would complement RCEP and could initiate sectoral agreements in digital services and green technology.
3. Multiply Cross-Border Special Economic Zones
Replicating the Johor-Singapore Special Economic Zone could foster regional industrial clusters and synergize complementary economies. Malaysia is targeting investment of $62 billion into the zone by 2030 and reached over 14 percent of that target in the first half of 2025 alone. Cross-border zones offer several advantages, including regulatory harmonization, labor mobility, and the ability to attract capital and sustain integration in an increasingly protectionist global economy.
4. Build Regional Human Capital Networks
To close skills gaps, APEC should launch a regional STEM and technical workforce initiative, linking vocational institutions and universities through exchange programs and common certification frameworks in critical minerals, advanced manufacturing, and clean energy.
Recommendations for the U.S. Government
1. Retain Core IPEF Functions
Before withdrawing from IPEF, the Trump administration should review and preserve its most effective elements-including the Crisis Response Network and Supply Chain Council. Reforming the Fair Economy Agreement could reflect nascent economic priorities of labor mobility, research integration, and the impact of artificial intelligence.
IPEF also catalyzes public-private investment through the Indo-Pacific Partnership for Prosperity (IP3), which is mobilizing $25 billion for energy and infrastructure. The APEC Business Summit offers an opportunity to expand coinvestment facilities and elevate the Development Finance Corporation's role in promoting high-standard infrastructure and diffusing U.S.-oriented standards across the Asia-Pacific.
2. Deepen U.S.-ASEAN-Japan-South Korea R&D Cooperation
Washington should lead joint R&D initiatives in advanced batteries, semiconductors, and mineral recycling, linking CHIPS and Science Act funding with Japan's Japan Organization for Metals and Energy Security (JOGMEC) and South Korea's industrial R&D programs to reduce overdependence on any single supplier, including China.
3. Treat Regional Summits as Complementary, Not Sequential
Ahead of APEC, the administration should treat President Trump's meetings in Tokyo and Kuala Lumpur at the ASEAN summit as distinct events. Rather than framing these summits as a prelude to the sideline meeting between Presidents Trump and Xi, each meeting should be taken on their own merits. Each engagement should pursue tailored cooperation on investment, supply chain resilience, and export control compliance-avoiding zero-sum pressure that risks alienating regional partners.
4. Support APEC's Economic Security Agenda
The United States should endorse and fund APEC-led efforts on resilient infrastructure, digital supply chain monitoring, and workforce development to reinforce shared economic security goals and provide credible alternatives to Chinese financing.
5. Clarify Transshipment Rules
Ambiguity in defining transshipment hampers transparency and penalizes legitimate investment. The United States should adopt sector-specific frameworks based on World Trade Organization and Organisation for Economic Co-operation and Development value-added criteria or manufacturer nationality. Rather than blanket rules, a targeted approach would improve enforcement and facilitate trusted trade certification.
Philip A. Luck is director of the Economics Program and Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Richard Gray is a program coordinator and research assistant for the Economics Program and Scholl Chair in International Business at CSIS.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
© 2025 by the Center for Strategic and International Studies. All rights reserved.
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