Navigating a connected yet contested world in Southeast Asia

March 14, 2025The global order remains deeply connected yet increasingly contested. While global trade integration levels remain high, a reconfiguration of supply chains and trade is underway. Amid this reconfiguration, Association of Southeast Asian Nations (ASEAN) member states, whose combined economies constitute the world’s fifth largest economic bloc, have emerged as key connectors.¹ Rising trade volumes with both China and the United States are but one reflection of ASEAN’s unique geo-economic positioning amid the shifting geometry of trade—even as escalating geopolitical uncertainties are casting a shadow on ASEAN’s linkages and prosperity.²

In this blog post, drawing on insights from McKinsey’s Geopolitics Practice, we outline a set of key geo-economic watch points for ASEAN and three approaches for businesses and policymakers to bear in mind going forward.

Key watch points

ASEAN confronts a range of geopolitical “gray rhinos.” These are known risks of high impact, ranging from ones at a global level—namely, China–United States strategic competition, the fallout from Russia’s invasion of Ukraine, and the conflict in the Middle East—to those at a regional level, such as tensions on the Korean peninsula and in the maritime domain, including in the South China Sea and the Taiwan Straits. The new US administration’s approach to the global trading system is further shaping ASEAN’s strategic environment.

Six key geo-economic watch points for ASEAN emerge from policies and pronouncements to date:

• A potential scaling up of direct tariffs based on product type, trade surpluses, and perceived lack of reciprocity and circumvention of existing tariffs
• A redirection of supply chains as multinational companies shift from exposed markets, creating opportunities and risks due to diverted overcapacity affecting local industries
• Expanding export controls around access to and transit of critical and emerging technologies in ASEAN
• Evolving investment screening regimens that will shape the ability of companies in ASEAN to pursue overseas investment opportunities
• Scrutiny of critical infrastructure such as ports in terms of access and ownership
• Regional growth trajectory as escalating trade tensions may more broadly dampen economic prospects for ASEAN economies with high trade dependence

Potential approaches

In response to the increasingly complex geo-economic environment, policymakers and business leaders in ASEAN could consider three strategies: maintaining a trifocal lens, calibrating their responses to economic measures, and investing in geopolitical resilience.

Keeping a trifocal lens

Maintaining a trifocal lens entails executing an affirmative trade and connectivity agenda that starts in ASEAN, extends across Asia, and expands to the rest of the world.

Within ASEAN, a key imperative is to advance both the “software” of trade agreements and the “hardware” of infrastructure investment to catalyze further connectivity and trade.

Software includes upgrades to existing agreements that are already underway, such as the ASEAN Trade in Goods Agreement (ATIGA), which has made strides in eliminating tariffs on intra-ASEAN trade; the conclusion of new agreements, such as the Digital Economy Framework Agreement; and the actualization of agile intra-ASEAN configurations of interest, for instance, the Johor–Singapore Special Economic Zone.³

Hardware entails investment in infrastructure, such as roads, seaports, airports, railroads, and bridges, that is needed to support trade flows with ASEAN. This will require around $60 billion in infrastructure investments, with a particular focus on transport infrastructure.⁴

Extending beyond ASEAN to the rest of Asia, while 90 percent of Southeast Asia exports remain in the Asia–Pacific, more could be done to bolster intraregional connectivity.⁵ India, for example, is a key focal market of opportunity that repeatedly arises for ASEAN member states. Upgrading the ASEAN–India Trade in Goods Agreement, as well as advancing other complementary agreements, such as building out the India–Singapore semiconductor ecosystem partnership, could be important accelerants.⁶ The changing geopolitical landscape could also present opportunities and impetus for traditionally closed economies to diversify and deepen trading ties.

Last, ASEAN policy makers and business leaders could also maintain a lens beyond Asia to build their relationships with countries and markets such as Canada and the European Union, as well as to advocate for strengthening global trade rules in forums such as the World Trade Organization (WTO).

The demand-side signal for diversification is already here. European Commission President Ursula von der Leyen noted in her remarks at the ASEAN Future Forum in Hanoi in February 2025: “You [ASEAN] want to build new industries and the key economic sectors of the future. We [the European Union] want to diversify supply chains and strengthen our economic security. Your companies want better access to the world’s largest single market, while ours want to bring their innovative products and services to a global centre of growth.”⁷

Calibrating an ‘INDRA’ strategy

Amid the global winds of protectionism, policymakers and business leaders in ASEAN could carefully calibrate their strategies and responses while balancing a sometimes contradictory host of factors.

Countries and companies are making moves, for example, in the face of measures announced by the US administration. These can be described by the acronym “INDRA.” Policymakers and business leaders will likely combine a number of these elements in how they navigate and set their INDRA strategy with care (exhibit).

Building geopolitical resilience

A third strategy entails taking a proactive approach to geopolitics and investing in geopolitical resilience in three key domains: insight, oversight, and foresight.⁸

Insight: To navigate a fraught geo-economic landscape, policymakers could not only hone their own sources of insight and early warning systems but also radiate those out to companies in their country that may not have the channel or resources to directly source insights.⁹

Oversight: Companies operating in ASEAN could exercise critical oversight over their strategy and operations, from understanding their supply chains with greater granularity to how their R&D is configured.¹⁰

Foresight: The need to build capabilities around foresight is equally important. The premium on being able to look around the corner and anticipate not just black swans and gray rhinos but also silver linings—opportunities amid volatility—has never been greater.¹¹

Public–private collaboration in the cocreation and review of such scenarios can potentially unlock richer insights as well as foster alignment on precisely where and how to build resilience. Different models exist globally—for example, governments conducting scenario planning internally and providing sanitized high-level briefings to businesses as part of sharing insights and policy guidance, businesses developing their own scenarios and sharing them with their governments, and utilizing Track 1.5 models where industry associations and think tanks take the lead in convening policymakers and leaders from the private sector to run tabletop exercises and discuss key learnings for planning and resilience purposes.¹²

ASEAN confronts a brave new world—one that could test the core of its growth agenda. A wave of global trade reconfiguration in recent years has reaped unique dividends for ASEAN. A second wave, though, may usher in a further reconfiguration and a different set of pressure points. Policymakers and business leaders in ASEAN will need to maintain a laser focus on key watch points that could impact the region and consider a set of strategies that could preserve their geo-economic position to the benefit of ASEAN’s centrality, security, and prosperity.

The authors wish to thank Elaine Ee, Lily Ong, and Vidhya Ganesan for their contributions to this article.

_{¹ “Investing in ASEAN 2023,” ASEAN, accessed February 2025.
² “Geopolitics and the geometry of global trade: 2025 update,” McKinsey Global Institute, January 27, 2025.
³ “ASEAN Trade in Goods Agreement (ATIGA),” ASEAN, December 11, 2020; “Digital Economy Framework Agreement (DEFA): ASEAN to leap forward its digital economy and unlock US$2 tn by 2030,” ASEAN, August 19, 2023; “Agreement between Singapore and Malaysia and the Johor–Singapore Special Economic Zone,” Singapore Economic Development Board, January 8, 2025.
⁴ “Diversifying global supply chains: Opportunities in Southeast Asia,” McKinsey, September 5, 2024.
⁵ “Diversifying global supply chains: Opportunities in Southeast Asia,” McKinsey, September 5, 2024.
⁶ “ASEAN aims to conclude the negotiation of the ASEAN Trade in Goods Agreement (ATIGA) upgrade in 2025,” ASEAN, February 7, 2025.
⁷ “ASEAN–EU bond must be made even stronger in ‘fractured world’: EC President,” Viêt Nam News, February 25, 2025.
⁸ Cindy Levy, Shubham Singhal, and Matt Watters, “A proactive approach to navigating geopolitics is essential to thrive,” McKinsey, November 12, 2024.
⁹ Ziad Haider, “Eye in the sky: Launching a geopolitical risk unit,” McKinsey, May 6, 2024.
¹⁰ Andrew Grant, Michael Birsham, Olivia White, and Ziad Haiden, “Can your company remain global and if so, how?” McKinsey Quarterly, May 17, 2024.
¹¹ Andrew Grant, Ziad Haider, and Anke Raufuss, “Black swans, gray rhinos, and silver linings: Anticipating geopolitical risks (and openings),” McKinsey, February 24, 2023.
¹² “Track 1.5 diplomacy,” The Institute for Regional Security, accessed March 2025.}