To outside observers, the fact that Southeast Asia is not up in arms about China’s rise seems like a paradox. Despite active, militaristic encroachments into Vietnam, Philippines, Indonesia, Malaysia and Brunei’s territorial waters and, sometimes, airspace, all these countries are welcoming Chinese investment, including into sensitive sectors such as transportation, technology, and ports.Footnote 1 Similarly, China’s building of massive dams and limited data sharing along its part of the Mekong RiverFootnote 2—the lifeblood and source of food for millions in Thailand, Cambodia, and Vietnam, and which is seeing dangerously low flows due to over-development —has not led to any major geopolitical repercussions. How can China get away with this?

The reason? The economy. Despite China’s growing security threats, Southeast Asian nations are willing to accept Chinese investment because, with the exception of Japan, there is not a viable alternative to meet growing energy and infrastructure needs. Moreover, the threat of Chinese economic coercion, as recently experienced by Australia, leaves countries reticent to risk losing not only investments, but a key export market for palm oil, coal, natural gas, agricultural goods, and other commodities.

In short, Southeast Asia is, at this point, unable or unwilling to take an active role in protecting the rules-based liberal international order (LIO) from China-led threats. This has the effect of allowing China to weaken the rules, norms, and institutions that underpin the LIO, including the Association of Southeast Asian Nations (ASEAN), which is increasingly unable to address issues like maritime security, owing to stonewalling by members like CambodiaFootnote 3 which has blocked joint-ASEAN action on China’s maritime incursions.Footnote 4 This is worrying due to Southeast Asia’s position at the center of the Indo-Pacific and numerous key trading routes. Creating mechanisms to counter Chinese corrosive capital, including the Belt & Road Initiative (BRI), will be key in countering Chinese influence in the region, and the threat this holds for the LIO.

The BRI and Corrosive Capital

The rise of China has transformed Southeast Asia in ways that few could have imagined at the turn of the millennium. In less than two decades, China has grown to become the main trading partner and investor in Southeast Asia, through efforts such as the BRI.Footnote 5 It’s a major shift for the region—made of more than 600 million people living in countries that range from highly developed Singapore to undeveloped Laos—which, since the advent of colonialism in the sixteenth century, has been dependent on Europe, America, and Japan.

In fact, it was only in the 1980s and 90 s that Southeast Asia was finally making progress, albeit uneven, around democratization, human rights, and economic growth. Moreover, the main regional organization—ASEAN, the Association of Southeast Asian Nations, initially formed by the region’s capitalist countries as a counter to Chinese-led Communist influence, expanded and began to take a more active role in trade, economic, and even maritime policy. There were hopes that it could do for Southeast Asia what the European Union (EU) had done for Europe, linking the region together economically and allowing it to become a more active global player.Footnote 6 In fact, according to John J. Mearsheimer, the post-Cold War LIO relied on spreading democracy around the world, leading to the risk of competing U.S. and China-led “bounding orders.”Footnote 7 Southeast Asia is, in many ways, a key space of contestation between these competing orders.

The link between economic growth, trade, and democratization even made Southeast Asia seem like a potential case study for liberalism theory—the idea that economic development would lead to less conflict, increased democratization and more civil and political rights.Footnote 8 This theory was also used to argue in favor of China’s ascension to the World Trade Organization and other global institutions, or countries like the United States offering preferred trade status to authoritarian countries.

Since then, however, that optimism has faded, and democratic progress has stalled.Footnote 9 While this started, perhaps, with the Asian Financial Crisis of 1997–1999, which impacted the region heavily and led to decreased trust of global institutions like the World Bank and International Monetary Fund, the key factor has been the rise of China and the growth of Chinese-led corrosive capital into the region.

According to the Center for International Private Enterprise,Footnote 10 “corrosive capital” is “state-backed financing that lacks transparency and accountability flowing from authoritarian states into new and fragile democracies.” For Southeast Asia, China is the preeminent source of corrosive capital, which often flows through opaque channels, and increases “political and economic distortions which often do more harm than good in the recipient country.”

While there are many venues and pathways for Chinese corrosive capital to reach Southeast Asia, the one that gets the most attention is the BRI. It was launched in 2013, and from its inception, Southeast Asia has been a focus, and the Maritime Silk Road component was announced by a speech by Premier Xi Jinping in Indonesia.Footnote 11 The BRI has funded rail lines in Laos and Malaysia, power plants in Vietnam and Indonesia, ports in Myanmar, roads in Papua New Guinea and East Timor, and much, much more. For the most part, the financing of these projects is mostly secretive, likely by design, with the best estimates putting the total BRI figure in Southeast Asia at $740 million in 2018. The BRI is rife with concerns. It prioritizes the use of Chinese contractors, imported Chinese labor, and may include onerous terms that could put the country’s finances, or patrimonial assets, at risk.

Europe and America Missing—But Not Japan

Alongside China’s rise, the past two decades have seen Europe and America mostly withdrawn from investing in infrastructure and energy projects in Southeast Asia. Japan, notably, has not, and Japanese institutions are working on a wide range of energy, rail, and road projects across the region, often competing with, and sometimes beating, rival Chinese-led projects. But while Japan has offered Southeast Asia an alternative choice to China’s BRI, it hasn’t offered an alternative model.

Moreover, Japan has been willing to invest in countries that have been actively enabling China’s weakening of the LIO, such as Cambodia. The most egregious example is Myanmar, where, since the 2021 coup, many Japanese companies continue to operate as if business is normal, even as the U.S. and many European nations sanction and limit economic cooperation with the junta government.

Japan cannot be the sole alternative to China, lacking, as it does, the capital and capacity to meet Southeast Asia’s infrastructure and investments needs on its own. Europe and America, however, could. Combining Japan’s local knowledge and expertise with added capital and technology could provide a far more viable alternative to the BRI. There is momentum here as understanding of the BRI’s geopolitical implications grows, including the announcement of the U.S.-led Build Back Better World’ (B3W) initiative in 2021, shortly after the European Union unveiled its own effort, Globally Connected Europe. How they integrate and are designed will be critical in determining whether they can counter the BRI’s corrosive impact.

There is an opportunity here because, while the BRI has been appealing, particularly to authoritarian-minded governments,Footnote 12 it has been beset with political and logistical challenges. The use of Chinese labor versus local workers has become a point of contention in Indonesia and the Philippines.Footnote 13 One of the premier projects in the region, the Jakarta-Bandung High Speed Rail line, has been beset with delays due to faulty land acquisition, flooding, and cost overruns. And in Malaysia, concerns about unfair financing became a political issue during the 2018 election, which resulted in the new government canceling a railway project and re-negotiating its terms.Footnote 14

A joint, U.S.-Europe-Japan-led BRI alternative can avoid these issues by creating new standards for transparency, along with clear mechanisms for fair arbitration, debt financing, and judicial processes. They should be multilateral and build on existing international institutions and frameworks, such as the Paris Club, created in 1956, a platform for coordinated and sustainable solutions to the payment difficulties experienced by debtor countries. The U.S., most of the EU, and Japan are members; China is not, and China’s BRI deals, in stark contrast, are mostly secretive, and the few that have been public have worrying clauses, including ones that force recipient countries to conduct arbitration in Chinese courts.Footnote 15

Trade could also be used as a tool. According to data from the Organisation for Economic Cooperation (OECD) China is the largest trading partner with several Southeast Asian nations. But if you combine the U.S, Japan and Europe, together they dwarf China. The key difference is that, unlike other countries, China has shown a willingness to use trade as an economic tool, violating the spirit if not the clauses of the trade agreements and institutions it is a member of.

Southeast Asia watched closely when China blocked imports of Australian coal, wine, and other goods in response to its call for an independent inquiry into the origins of the COVID-19 pandemic.Footnote 16 In many cases this benefited countries in the region, like Indonesia, who saw coal exports to China rise. It was also notable how Australia’s allies in Europe and America were only willing to call China out politically, but were happy to meet Chinese demand for banned Australian agricultural exports such as wood and wine.Footnote 17

In this case, fighting fire with fire—threatening economic coercion—is not the right option. Instead, the U.S., Japan, and Europe should work to strengthen the ability of the rules-based LIO so as to counter the threat of Chinese economic coercion. There are many ways this could be done. Reforming the World Trade Organization, which has not been able to adequately respond to China’s tactics, is one option, while new trade agreements that better recognize and account for this threat are another.

Creating trade mechanisms that reduce the risk of economic coercion could be appealing to Southeast Asian economies, which are, for the most part, unable to risk being cut off from Chinese markets like Australia was. Responses to Chinese coercion need to be stronger and more effective. The U.S. or Japan should not be benefiting from China’s unfair trade barriers against Australia; instead, they need to respond with shows of solidarity. This will be even more important if and when a Southeast Asian nation is threatened by economic coercion. Only by reducing this threat can space be made for broader cooperation on security or geopolitical issues, including in the Indo-Pacific.

Geoeconomics Before Security

When considering the turmoil and conflict cause by western and Japanese influence in the region, such as the Vietnam War, or the United States-supported 1965 Indonesia coup, it is hard to argue that Southeast Asia has benefited or really been an active participant in either the Cold War or post-Cold War rules-based liberal international order.

Part of this is just a reflection of the region, and the fact that different countries have differing goals, particularly when it comes to security or geopolitics. But if there is one thing that the 10 member nations of ASEAN, with their diverse ethnic, religious, development, and political make-up, have in common, it is this. They prioritize economic growth, trade, and the creation of wealth, over security or geopolitical concerns, and they are not willing to take positions that put their economy at risk. This applies to China, but also Russia, as, besides Singapore, no ASEAN nation has joined the western-backed sanctions regime over the invasion of Ukraine.

This is why the focus on security issues around China’s expanded military presence in the South China Sea has been limited because, to most Southeast Asia nations, economic security is often of greater importance. Providing a way to counter the threat of Chinese economic coercion and providing an investment alternative to the BRI would give more space for security cooperation in the region as well.

To do this, there needs to be a greater understanding that trade and investment alone does not necessarily lead to democratization, a stronger liberal international order, or a more effective ASEAN. There needs to be a direct connection between the rules and institutions that underpin the LIO and the combat against the risk of Chinese corrosive capital in the region. That means better cooperation between Europe, the U.S., and Japan on creating not just an alternative choice to the BRI, but an alternative model that can help rebuild the relationship between economic growth and liberalism, and allow Southeast Asia the choice not to be trapped in China’s growing shadow, in perpetual fear of economic coercion.