ASEAN-4 -China FDI and Vertical Intra-Industry Trade Links Amid the US-China Trade War—A Spatial Panel Analysis

The global trade landscape has been reshaped by complex production networks, leading to the international fragmentation of manufacturing, where countries specialize in different production stages and rely heavily on foreign inputs. This fragmentation makes economic shocks capable of rippling across regions. As a leading player in regional production networks, China has accelerated this process, particularly through trade with ASEAN countries. However, the US-China trade war has disrupted these networks, creating economic uncertainties. This study goes beyond country-level analysis to examine how the trade war and the relocation of Chinese FDI to ASEAN-4 affect vertical intra-industry trade (VIIT) between ASEAN-4 and the US, employing spatial econometric techniques to address a gap in the literature. The findings indicate that Chinese FDI significantly boosts VIIT, suggesting that relocating FDI to ASEAN-4 can help mitigate the trade war’s impact on China. Moreover, there is a positive and significant spatial VIIT, implying that trade expansion in one ASEAN-4 member country generates spillover effects across the region, underscoring the importance of resilient and diversified supply chains. However, the negative impacts of spatial FDI and GDP reveal ongoing competition within ASEAN-4, indicating that China and ASEAN-4 should carefully strategize to avoid adverse spillovers and promote deeper regional integration. Accordingly, ASEAN policymakers, particularly guiding initiatives like the ASEAN Economic Community Blueprint 2025, should revise strategies to ensure comprehensive integration among member countries rather than fostering competition, supporting mutual benefits from shared participation in regional supply chains. JEL Classification Codes: C21, F14.