The International Monetary Fund (IMF) projects a steady global growth rate of 3.3% for the coming year. The forecast preceded the conflict with Iran, but assuming it holds close to accurate, the figures suggest resilience.
Yet beneath the headlines, a structural decay is eating away at the manufacturing bases of the Global South. As the Global North pours technology investments into AI and green energy, developing nations across South and Southeast Asia find themselves trapped in a "double squeeze" that threatens their path to middle-income status.
A fragmented trade order is taking shape. On one side, "North-North" trade is increasingly defined by securitised supply chains and AI-driven productivity gains. On the other, China –which recorded a record $1.2 trillion trade surplus in 2025 – is redirecting much of that export surge towards the Asia-Pacific to bypass Western tariffs. In the transition to renewable energy, the influx of "good-enough" green technology leaves nations such as Nepal, Bangladesh, and Indonesia with a bruising choice: capitalise on cheap Chinese industrial inputs that undercut local industry, or adopt expensive Western standards that they cannot afford.
The driver of this pressure is China’s domestic “consumption trap”. Entering 2026, China remains mired in a systemic slump, exacerbated by a looming pension crisis that has sapped household spending. With internal demand weak, Beijing has doubled down on supply-side dominance.
Without genuine technology transfer and support for local midstream manufacturing, the permanent hollowing of the developing world's economic future will become the defining legacy of this new trade war.
The result is “involution” – a cycle of hyper-competitive, profitless production where Chinese zombie firms slash prices to near-zero to capture foreign markets. This predatory pricing is dismantling the midstream manufacturing sectors such as textiles, light machinery, and components that traditionally serve as the “industrial ladder” for developing states. In Nepal, for example, Chinese brands captured more than 75% of the electric vehicle market in 2025. While this accelerates a green transition, it simultaneously hollows out the potential for a domestic industrial ecosystem.
As China pushes from the bottom, the West is imposing a new “regulatory ceiling” from the top. Led by the United States, this charge is manifesting through Agreements on Reciprocal Trade (ART). Recent deals, such as the agreementfinalised with Bangladesh in February and the 19% tariff benchmark set with Indonesia, prioritise market access over developmental assistance. These deals require Asian nations to adopt Western intellectual property and technical standards – such as US Food and Drug Administration protocols and Federal Motor Vehicle Safety Standards – as a non-negotiable prerequisite for trade.
The Western approach remains selective. While Washington continues to squeeze traditional allies such as Japan and South Korea with tariff pressures, it has made concessions elsewhere. The decision to remove Vietnam from export control lists signals a pivot toward “friend-shoring”, even as Hanoi manoeuvres to protect its own infrastructure bygiving the go-ahead to Starlink services. For most of the region, however, the risk is a technology dependency trap, becoming permanent consumers of Western “regulatory software” and Chinese “green hardware” without ever building an independent industrial base. Nations such as Indonesia are attempting to escape this by pivoting toward Web3 in pursuit of “digital sovereignty”, but the fundamental hollowing of industry persists.
Squeezed by Chinese price dumping and Western regulatory barriers, many ASEAN nations are experiencing “premature de-industrialisation” – a phenomenon in which the manufacturing sector’s share of the economy begins to shrink long before the country has reached high-income status.
For example, while industrial powerhouses typically peak at 30% of GDP in manufacturing value added measures, Indonesia’s manufacturing contribution has stagnated at roughly 18-19% in 2026, failing to deliver the middle-income wages promised by its downstreaming policies.
Similarly, in Thailand, the manufacturing production index risks contracting for the fourth consecutive year as local firms struggle to compete with a flood of low-cost imports while simultaneously facing reciprocal tariff hikes of 19% on exports to Western markets. This creates a “stalled ladder” effect where workers are pushed out of factory gates and into low-productivity informal services, cementing a permanent dependency on foreign technology and standards.
Such volatility is forcing even the region's heavyweights to pivot. India is questioning whether it can power the global AI dream amid infrastructure gaps, while South Korea is investigating whether cultural exports can replace manufacturing as its primary growth engine.
Contradictory financial flows further muddy the waters. While leaders pay lip service to green growth, many Asia-Pacific financial institutions continue to invest heavily in climate-damaging industries. This creates a paradox in which Asian states import Chinese hardware while their domestic finance remains locked into carbon-intensive legacy assets.
If the current trajectory holds, the 2026 trade order will prioritise Western regulatory capture and Chinese surpluses over the industrial autonomy of the Asia-Pacific. To stabilise the region, the Global North must move beyond treating emerging Asia as a mere market or a strategic buffer.
The solution lies in a "production-first" trade model. This requires moving beyond simple tariff reciprocity and into shared industrial capacity. The West must offer not only market access but also a seat at the production table. Without genuine technology transfer and support for local midstream manufacturing, the permanent hollowing of the developing world’s economic future will become the defining legacy of this new trade war.
