When global companies started looking for alternatives to China, Southeast Asia seemed like the obvious answer. It was close, cost-competitive, and ready. The region is now producing more, exporting more, and hosting more of the world’s supply chains than ever. But producing more and capturing value from what you produce are different things — and that gap defines SEA’s real challenge

This is the tension at the center of the so-called “China Plus One” strategy, the practice among multinational corporations of maintaining operations in China while establishing a presence elsewhere to reduce geopolitical exposure. SEA has become the “elsewhere”. But becoming the “elsewhere” is not the same as transformation.

The uneven windfall

Southeast Asia did not suddenly become a prime destination. The region had spent years building conditions that made it an attractive alternative to China. So when MNCs started looking for alternatives, the infrastructure, trade agreements, and geography were already in place. In a 2025 investment report by the Association of Southeast-Asian Nations (ASEAN), it was noted that investments have surged $226 billion annually.

In 2022, ASEAN created the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement among all member states and dialogue partners, including mainland China, Japan, South Korea, Australia, and New Zealand. RCEP reduced costs for companies to establish production in the region by standardizing rules of origin, eliminating tariffs on most products, and liberalizing trade rules.

Moreover, RCEP deepened the integration between Chinese manufacturing and Southeast Asian production in ways that made the region more complementary to China than competitive with it. Much of the investment that followed arrived with Chinese inputs, Chinese capital, and Chinese supply chain logic embedded in it. SEA became a more efficient node in a China-centered network rather than an independent one. This matters for the value capture question because the terms of participation were largely set elsewhere.

Vietnam, in particular, has emerged as a major beneficiary in this expansion as it has captured investments amid economic transitions and disruptions in China. In 2025, the country recorded 8.2 percent GDP growth, the highest quarterly performance since 2011, excluding the post-pandemic rebound. According to investment consulting firm Dezan Shira & Associates, manufacturing drove the expansion, attracting over US$72.83 billion in newly registered foreign investment across 6,783 projects between 2019 and 2025.

“We are witnessing a clear strategic shift as global companies increasingly view Vietnam as a regional hub. We see more businesses relocating their supply chain focal points to Vietnam from other markets to handle export manufacturing and regional distribution services,” says Remco Enders, managing director of logistics company DSV Solutions.

Much of Vietnam’s expansion has concentrated on export-oriented assembly such as electronics, garments, and footwear. This is where the margins are thin, and the value flows back to the brand owners, the chip designers, and the IP holders elsewhere. Vietnam’s growth is also heavily tied to a handful of large anchor investors; Samsung alone accounts for a substantial share of Vietnamese exports, over 13% - 25%, which means the headline numbers may be masking concentration risk as much as they are reflecting broad industrial development.

Malaysia’s economy, on the other hand, accelerated to 5.2 percent growth in the third quarter of 2025 due to a strong performance in electronics. Investments, however, increased with data centers, advanced manufacturing, and semiconductors attracting more MNCs. Combined with Thailand, the two countries recorded approximately US$43.9 billion in reported investments, though Thailand’s economic picture was considerably less encouraging, growing at just 1.2 percent in the third quarter, its slowest rate in four years, as manufacturing contracted and export growth decelerated despite investments.

The Philippines is a stark contrast. In the same quarter, the Philippine economy expanded by just 4 percent, its slowest growth since the COVID-19 lockdowns. Foreign investment approvals fell by 48.7 percent year on year, extending a sharp decline that had run through all three quarters of 2025.

This was not for lack of trying. Philippine Economic Zone Authority Director General Tereso Panga reported fruitful investment meetings in Xiamen, Chongqing, Shenzhen, and Dongguan, pointing to concrete wins

”The Aoxing group, based in Dongguan, an OEM for projector equipment, projector screen, and audio-visual products for global brands like HP, Epson, and Skyworth, has chosen the Philippines for its redundant manufacturing facility intended for the US export market,” Panga said.

The causes were compounding as corruption scandals involving public infrastructure projects damaged investor confidence at precisely the moment the country needed to project stability, while a succession of typhoons disrupted harvests, consumer spending, and economic activity more broadly.

The limits of relocation

When a factory moves from Shenzhen to Ho Chi Minh City, the production moves. The next question is what follows after?

The honest answer, so far, is not much of the value. Much of the investment redirected into Southeast Asia remains concentrated in mid-level segments of global value chains such as assembly, component manufacturing, and testing. These are not trivial roles as they employ millions of people and generate real economic activity. But they are also the segments where the margins are thinnest. The segments where the highest returns are, such as research and development, remain elsewhere.

For example, Malaysia has carved out a genuinely significant position in the global chip industry, commanding 13% of the global market share and ranking as the 6th largest exporter. Yet the founder market, where chips are actually designed and fabricated at the highest levels of precision, remains dominated by the United States, Taiwan, South Korea, and Japan, with over 63% of global market share. This is because semiconductor manufacturing has a distinct value hierarchy: design and IP at the top, fabrication in the middle, and assembly, testing, and packaging at the bottom. The firms that own chip designs, such as Nvidia, Qualcomm, and AMD, capture the largest margins because intellectual property is infinitely replicable at near-zero marginal cost.

Moreover, when it comes to who captures the revenue from semiconductor sales, the United States accounts for 46 percent of the global market, South Korea 21 percent, Japan 9 percent, Taiwan 8 percent, and China 7 percent. The rest of the world, Southeast Asia included, shares the remaining 9 percent.

This middle layer position offers opportunity but also limits, as it attracts capital, creates employment, and capacity that can serve as a base for upgrading. Economies that stabilize as assembly and intermediate manufacturing hubs without developing deeper technological capabilities can find themselves locked into roles that are difficult to escape.

Infrastructure has also compounded this constraint. Research on Vietnam and Malaysia’s seaports has noted that while there has been increased demand even during the pandemic, bottlenecks have stalled recovery due to inadequate infrastructure, equipment, and low loading/unloading productivity. Cat Lai in Ho Chi Minh City has faced severe congestion due to a 30% surge in cargo volumes.

According to research from the Universiti Teknologi in Malaysia, identified port congestion, hinterland connectivity, and uneven FDI distribution as systemic threats to the region’s competitiveness. The ASEAN secretariat separately noted that the member states have varying customs procedures and standards for warehousing, making cross-border logistics difficult.

Infrastructure matters because these constraints act as a ceiling on how much value the region can capture from the investment flowing in. A factory can relocate, but if goods cannot move efficiently, cost competitiveness can prove to be difficult. More critically, moving up the value chain requires attracting more sophisticated industries, and those industries are more sensitive to logistics reliability than low-cost assembly is.

Then there are the tariffs. Despite producing more, Southeast Asia has not been exempt from the US reciprocal tariffs. Major trading partners such as Malaysia, Indonesia, the Philippines, and Thailand have had tariffs set at 19 percent, and Singapore has 10 percent. Other products from the region, such as coffee and bananas, have been exempted because the US does not grow them.

“Southeast Asia’s tariff advantage over China persists for now, but depends on shifting US–China dynamics. Pending US Supreme Court rulings on tariff authority may further entrench uncertainty, leaving businesses to brace for continued trade volatility in 2026,” says John Goyer, Vice President for Southeast Asia and Oceania, at the U.S. Chamber of Commerce.

What would a real benefit look like?

The middle position is not a permanent sentence. One could argue that it is a starting position, and a few states in the region have already decided they do not intend to stay there.

For example, Indonesia, being the world’s largest producer of nickel, had for years exported raw ore at low prices while the value-added processing happened outside the country. In 2020, the government made a deliberate and costly decision to ban the export of unprocessed nickel ore entirely, forcing companies to process domestically if they wanted access to Indonesian nickel.

Vietnam is taking a different path towards the same destination. Hanoi has aggressively been investing in workforce development to transition its electronics industry from low-cost assembly to higher-value-added activities, targeting a significant role in the global semiconductor and tech supply chain by 2030. In 2024, the Vietnamese government issued Decision No. 1017/QĐ-TTg, which outlines the Program on Semiconductor Industry Workforce Development to 2030, with a vision to 2050 to train between 30,000 and 50,000 engineers by 2030.

These are not guarantees. Indonesia’s downstream strategy depends on sustained political will and global commodity demand that can shift. Vietnam’s engineering pipeline will take years to produce results, and the gap between training engineers and building a domestic semiconductor design industry is significant.

Both countries are making bets. But the bets matter, because they mean that Indonesia and Vietnam are making active choices about what kind of economy they want to be on the other side of this disruption, rather than simply receiving whatever the disruption sends their way.

The rest of the region faces the same choice, with less time than it might appear. The tariff environment is volatile, and infrastructure gaps are becoming wider. And the window in which Southeast Asia can leverage its current strategic relevance to move up the value chain, rather than simply consolidate its position within it, will not stay open indefinitely.

This article reflects reporting and analysis made by The Southeast Asia Pacific Frontier. If you have additional context, a different take, or a perspective we’ve missed — whether you’re a researcher, a policy practitioner, or someone living with these realities on the ground — this is an evolving story and we’d like to hear from you. Drop a comment below or get in touch.

About Matthew Parra

Matthew is a student at the University of Santo Tomas and the founder and Executive Director of The Southeast Asia Pacific Frontier — an independent analytical platform dedicated to rigorous, evidence-grounded analysis of Southeast Asia and the Pacific across economics, society, and geopolitics.

On April 21, Coins.ph announced that Filipinos could pay for Jollibee using USDT. The Bangko Sentral ng Pilipinas had authorized the move, allowing the local cryptocurrency exchange to route dollar-pegged stablecoins through QRPh, the national QR payment system it created and manages. At checkout, stablecoins convert automatically to pesos. Merchants receive pesos. The transaction completes on the domestic payment infrastructure.

Coins.ph described it as “game-changing,” noting how 700,000 QRPh-enabled merchants are now reachable via USDT and USDC. The framing was correct as far as it went, but it missed the structural question underneath the announcement: what happens when foreign-currency instruments operate inside its own sovereign payment infrastructure?

Why the Philippines?

Overseas Filipino workers remit approximately $37 billion each year, accounting for about 8 percent of the country’s GDP. This sizable group regularly manages dollar transactions, compares transfer costs, and responds to fluctuations in the peso’s value. These conditions have made dollar-linked instruments practical for Filipinos, even before Coins.ph integrated with QRPh.

The announcement met an audience already familiar with digital finance. GCash and Maya have introduced many Filipinos to mobile-first payments, making them comfortable transacting outside traditional banks. Between 7 and 12 million Filipinos now use cryptocurrency, with stablecoins gaining popularity among families receiving remittances, freelancers paid in dollars, and traders moving funds between crypto investments. According to Coins.ph, families of overseas workers have begun using USDT to protect against peso depreciation and avoid high bank transfer fees.

When the peso reached a record low of PHP 61.72 to the dollar on May 15, its second consecutive record low, the incentive to retain dollars rather than convert to pesos increased significantly. These factors are not merely background conditions but active mechanisms. The integration did not create demand for stablecoins in the Philippines; instead, it provided an entry point into the formal payment economy.

The dollar question

The BSP has been operating under an explicit policy of non-internationalization of the peso. Without control over domestic currency circulation, a central bank’s ability to set monetary conditions and manage inflation is diminished. BSP Circular 922 (2016), which regulates cross-border currency transfers under the Manual of Regulations on Foreign Exchange Transactions, states that outward transfers of legal tender exceeding PHP 50,000 require prior BSP authorization to safeguard “control of liquidity and overall monetary conditions.”

Dollar use has always existed informally in the Philippines. But the BSP could tolerate informal dollar exposure because it was fragmented, structurally outside the official payment system, and therefore outside the liquidity dynamics it was actively managing. For example, In practice, traders use stablecoins to park funds between crypto positions.

However, the Coins.ph integration ends the BSP’s ability to look past informal dollar exposure. Dollar-pegged assets now flow through infrastructure that the BSP created, governs, and explicitly maintains as the mechanism for a “safe, convenient, and interoperable payment system” nationwide. That QRPh converts stablecoins to pesos at the point of sale is technically significant, but it does not resolve the upstream question: households and merchants now have an institutionally sanctioned pathway to hold, transact with, and in periods of peso weakness, prefer dollar-linked instruments within the formal economy.

This is the line the IMF has been tracking. It’s 2025 departmental paper on stablecoins identifies currency substitution facilitated by stablecoins as categorically different from informal dollar use. Traditional dollarization requires physical cash or bank accounts denominated in foreign currency, which entails opening a foreign-currency bank account that requires documentation, minimum balances, institutional access, and often physical proximity to a branch. But foreign currency-denominated stablecoins face none of those constraints as they reside entirely on smartphones and the internet, operate continuously, and settle near-instantly at potentially low cost. The IMF further notes that network effects accelerate the replacement of local currencies once adoption begins. Local alternatives struggle to compete unless they provide similar utility and integration, and if a significant portion of economic activity shifts to foreign-currency-denominated stablecoins, the central bank’s control over domestic liquidity weakens, and seigniorage income declines as demand for the local currency decreases.

BSP’s position

What makes the BSP’s posture particularly difficult to read is that five months before the Coins.ph integration went live, its own leadership was articulating exactly the opposite position. Speaking in Hong Kong in November 2025, BSP Deputy Governor Zeno Abenoja confirmed the central bank was maintaining a “cautious approach” to stablecoin proposals, that regulatory work remained at an “early stage,” and that the BBSP was limiting stablecoin entry to controlled channels, insisting on licensed intermediaries and regulated frameworks before permitting broader integration. Most of the proposals being reviewed, Abenoja noted, involved dollar-backed stablecoins rather than peso-backed alternatives.

The BSP’s regulatory record does complicate the picture somewhat. The BSP’s regulatory record does complicate the picture somewhat. Since Circular 944 in 2017, the BSP has pursued a consistent strategy of bringing digital assets inside the regulatory perimeter rather than pushing them out. Licensing requirements for virtual currency exchanges, expanded oversight of Virtual Asset Service Providers under Circular 1108 in 2021, and a regulatory sandbox for fintech and crypto pilots under Circular 1153 in 2022 all follow the same logic: if an activity is happening regardless, regulate it rather than ignore it. The Coins.ph integration fits that pattern. Stablecoin flows through QRPh are now subject to anti-money laundering (AML) and know your customer (KYC) requirements. The BSP gains visibility over dollar exposure it previously could not measure, which is a policy benefit in a country where informal dollar circulation has always outrun official data.

With 7 to 12 million Filipinos already using crypto and stablecoin adoption accelerating through informal channels, the BSP faced a choice between two forms of dollar exposure: unregulated and invisible, or regulated and observable. Controlled integration, on that logic, is preferable to an offshore ecosystem that grows without generating any domestic data, regulatory handle, or policy leverage.

What visibility does not solve

Visibility is not control, and the distinction matters enormously when the peso is under pressure. The BSP can observe USDT moving through QRPh, but observation ends at the blockchain. Tether makes its reserve decisions from El Salvador, and US monetary policy is set in Washington. And when the peso depreciates, adjusting BSP rates does nothing for the share of retail transactions settling in these financial instruments.

When a currency depreciates, the rational household response is to hold dollar-linked assets rather than convert back. In this context, the QRPh integration does not merely accommodate existing stablecoin holdings - it also creates an institutionally sanctioned mechanism for that holding behavior to persist through the formal payment system. Monetary policy can still affect peso-denominated credit conditions, but its transmission weakens at the margin as more of the retail transaction economy touches instruments that do not respond to BSP rate decisions.

The IMF’s April 2026 working paper on stablecoin stability notes this: when stablecoin issuers hold risky or illiquid reserve assets, confidence shocks can trigger runs originating entirely outside Philippine monetary conditions, on a blockchain in another jurisdiction, with consequences that land on QRPh-connected merchant terminals the next business morning. Moreover, once a sufficient share of retail transactions migrates to foreign-currency instruments, the central bank loses traction on domestic liquidity, interest rate decisions in Manila stop transmitting to the parts of the economy settling on dollar-pegged rails, and seigniorage income falls.

The BSP’s FX Manual grants broad authority over cross-border currency flows, but stablecoin transactions through QRPh convert to pesos at the point of sale, which likely places them outside the Manual’s existing definitional perimeter. This gap between what the BSP can observe and what its existing tools can directly address was always theoretical. Now it can be seen as practical, with the peso at an all-time low and dollar-linked instruments now embedded in the national payment infrastructure.

The harder question

What the Coins.ph integration into QRPh ultimately depends on a question the BSP has not publicly answered. By accepting some short-term monetary friction, the BSP gains long-term regulatory oversight over a trend it realized it could not prevent. Features like peso-at-checkout conversion, KYC requirements, and a traceable ledger give regulators policy tools that peer-to-peer stablecoin use never offered.

However, the IMF’s 2025 paper explains what happens next. Once stablecoins are widely used for domestic payments, local options have a hard time competing because network effects support whatever is already built into the system.

But this integration also brings up a question the BSP has not addressed yet. Can a central bank expand its payment system to include dollar-linked instruments without eventually encouraging dollarization?

This article reflects reporting and analysis made by The Southeast Asia Pacific Frontier. If you have additional context, a different take, or a perspective we’ve missed — whether you’re a researcher, a policy practitioner, or someone living with these realities on the ground — this is an evolving story and we’d like to hear from you. Drop a comment below or get in touch.

About Matthew Parra

Matthew Parra is a student at the University of Santo Tomas and the founder and Executive Director of The Southeast Asia Pacific Frontier — an independent analytical platform dedicated to rigorous, evidence-grounded analysis of Southeast Asia and the Pacific across economics, society, and geopolitics.

As Kuala Lumpur prepares to host SEMICON Southeast Asia 2026, Malaysia appears positioned to lead the regional semiconductor industry. However, persistent structural wage challenges and the misconception of a surplus in STEM talent threaten to undermine this ambition. If these foundational issues remain unresolved, Malaysia risks losing the competition for elite talent to established centers such as Singapore and emerging, state-driven competitors like Vietnam.

Malaysia’s wage vulnerability

With Kuala Lumpur hosting SEMICON Southeast Asia 2026, the conference is more than an industry gathering — it is a declaration of Malaysia’s intent to dominate the regional semiconductor boom. The National Semiconductor Strategy (NSS) has already drawn a staggering RM59.85 billion, over USD 15 billion, in realized investments as of late 2025. Coupled with a bold target to cultivate 60,000 highly skilled engineers by 2030, the government is making a calculated push to shift Malaysia from “back-end” assembly to “front-end” high-value activities, such as integrated circuit (IC) design.

But behind the billions in capital influx lies a critical vulnerability: Malaysia is bleeding the very human capital required to execute this transition.

With the global semiconductor race is now about who can retain the smartest minds to run them, Malaysia’s ambition to ascend the technological value chain will fail unless it fundamentally dismantles its structural low-wage economy. By relying on a massive but severely underpaid STEM pipeline, Malaysia is attempting to build a high-tech future using a cheap-labor framework. If it cannot correct this wage mismatch, Malaysia risks losing its regional talent to aggressive, state-subsidized challengers like Vietnam and its heavily funded Strategy 1018.

The Malaysian reality: The illusion of the STEM surplus

On the surface, the national STEM talent appears robust. According to UNESCO Institute for Statistics data, Malaysia remains one of the world’s top STEM producers, with 40.2% of its tertiary graduates holding STEM degrees. This high yield is the legacy of long-term policy measures, most notably the government’s 60:40 initiative, which aims to steer the majority of students toward the sciences.

However, volume does not equal industry readiness, particularly for the rigorous demands of high-value IC design. Malaysia is suffering from the illusion of a STEM surplus. The domestic pipeline produces thousands of graduates annually, yet the semiconductor sector faces a crippling deficit of specialized talent. The shortage is so acute that the then-Investment, Trade, and Industry Minister Datuk Seri Tengku Zafrul Abdul Aziz publicly acknowledged the severity of the gap, going so far as to propose allowing foreign STEM graduates from local universities to work in the country to plug the immediate leaks.

The root of this disconnect is not solely educational; it is also fundamentally economic. While the government frequently highlights that salaries for senior tech and C-suite roles in Malaysia are now rivaling those in Japan, the entry-level landscape—where the talent begins—remains remarkably grim. A sobering metric from the Board of Engineers revealed that 35% of surveyed electrical engineers earned a starting salary of less than RM2,000 per month (roughly $450 USD).

This is an active deterrent. A multibillion-dollar technological pivot cannot be executed while offering top-tier technical minds wages comparable to the local gig economy. Consequently, Malaysia is caught in a persistent cycle of brain drain. Elite graduates either abandon the sector for more lucrative roles in finance and general software, or they simply cross the causeway to Singapore, where starting engineering salaries easily triple those offered in the tech hubs of Penang or Kulim.

A policy error or the “OSAT trap”?

Industry veterans might rightfully push back on this critique. One could argue that the depressed wage ceiling for electrical and electronics (E&E) engineers in Malaysia is not a sudden policy failure, but a deeply entrenched structural reality.

For the past forty years, Malaysia has built its technological empire on Outsourced Semiconductor Assembly and Test (OSAT). This is the “back-end” of the industry—essential, but notorious for its razor-thin profit margins. From an economic standpoint, the argument goes, local tech companies simply do not have the margin to pay Silicon Valley or even Singaporean wages for back-end packaging and testing. The low salaries are a feature of the OSAT economy, not a bug.

While this was true for Malaysia of the 1990s, it is a fatal mindset for Malaysia of 2026. The entire premise of the NSS is a pivot to “front-end” dominance—specifically IC design and advanced wafer fabrication, which carry massive profit margins. The crisis Malaysia faces today is that it is attempting to hire highly specialized, front-end IC design talent using legacy, back-end OSAT salary scales.

A paradigm shift cannot be executed while clinging to the economics of the past. Malaysia’s historic success as an assembly hub has become a trap; the legacy industry structure is cannibalizing the nation’s high-tech future.

The regional challenger: Vietnam’s strategy 1018

Malaysia’s hesitation to aggressively restructure its talent economics is particularly dangerous given the regional landscape. Southeast Asia does not exist in a vacuum, and the “China Plus One” strategy has emboldened aggressive new players—most notably, Vietnam.

In September 2024, Hanoi launched its own master plan, Strategy 1018. Vietnam’s target is nearly identical to Malaysia’s, aiming for 50,000 highly skilled semiconductor personnel by 2030. However, their approach to the quality problem is starkly different.

Malaysia has largely relied on broad-stroke educational policies, like the aforementioned 60:40 ratio, hoping that the free market and incubation initiatives like SemiconStart will naturally absorb and refine this raw talent pool. Vietnam, conversely, is treating semiconductor talent as a state-led infrastructure project. Hanoi is not just hoping students choose technical sciences; the state is actively subsidizing specialized faculties, building state-of-the-art national laboratories, and directly underwriting the training of elite IC designers to jumpstart its ecosystem.

By aggressively bridging the gap between raw graduates and industry-ready specialists, Vietnam is bypassing the free-market wage friction that is currently stalling Malaysia. If a global tech giant is looking to establish a high-value IC design center in 2026, they are weighing Malaysia’s experienced but underpaid (and therefore shrinking) talent pool against Vietnam’s state-funded, hyper-targeted engineering pipeline. In the battle for front-end dominance, Vietnam’s fiscal intervention may prove far more effective than Malaysia’s reliance on historical momentum.

Escaping the assembly line

The road to becoming a semiconductor superpower requires more than silicon and foreign direct investment; it requires the human capital to design the architecture of tomorrow.

Malaysia possesses the capital, evidenced by the NSS’s early victories, and it possesses the raw numbers, validated by its UNESCO-topping STEM graduation rates. But hardware cannot function without software.

If Malaysia cannot fundamentally restructure the wage ceilings created by its OSAT history and fails to adopt a more targeted approach to elite talent retention, the narrative will shift. SEMICON Southeast Asia 2026 will not be a celebration of Malaysia’s technological ascension, but rather a high-profile showcase of a nation destined to remain the world’s assembly line, while its neighbors design the future.

This is an externally contributed piece. If you have additional context, a different take, or a perspective we’ve missed — whether you’re a researcher, policymaker, or practitioner — this is an evolving story and we’d like to hear from you. Drop a comment below or get in touch.

About Bijaksabara Hikmawan

Bijaksabara Hikmawan is an international human development specialist and regional education strategist with extensive experience across ASEAN’s higher education ecosystem. A former International Affairs Associate at Southeast Asia’s largest university, he currently consults for international development agencies on the intersection of technology, mobility, and inclusive governance.

Pax Silica is an unequal arrangement. The US gets supply chain security, mineral access, and a compliant jurisdiction insulated from the pressures of cross-strait uncertainty. The Philippines gets development infrastructure, foreign expertise, and a seat in the global tech ecosystem. That asymmetry is the architecture of the deal. And the Philippines has been here before.

On April 16, 2026, the US and Philippine governments announced the creation of an Economic Security Zone (ESZ) in New Clark City, Tarlac, centered on the development of Artificial Intelligence (AI). According to the US Embassy fact sheet:

“Under Secretary of State for Economic Affairs Jacob Helberg today announced the United States’ and the Philippines’ plans to establish a 4,000-acre industrial hub to secure inputs vital to American and global supply chains. The site is located in the Luzon Economic Corridor of the Philippines. The site — the first of its kind — is being designated by the Philippines as an Economic Security Zone, a new model for AI-native investment acceleration hubs being developed under the Pax Silica Initiative.”

Current cross-strait tensions have made it vital for the US to look for alternatives in technological development. The Philippines, rich in critical earth minerals like cobalt, nickel, chromite, and copper, and home to a proven semiconductor workforce, fits. Policymakers like Philippine Department of Finance Undersecretary Frederick Go view Pax Silica as an opportunity to leverage domestic resources, secure critical nodes in global supply chains, and pioneer next-generation industries.

Domestic opposition, led by groups like the Makabayan bloc, views the alignment as a strategic liability by contending that tethering Philippine industrial policy to Washington’s defense sector risks Chinese economic or military retaliation, characterizing the move as a capitulation of state interests. The more productive question is: on what terms does the Philippines engage?

What the Philippines stands to gain

The Philippines is no stranger to semiconductors, with the sector making up 63–65% of its merchandise exports. However, because of corruption and insufficient power capacity, the industry has stagnated, focused on assembly, testing, and packaging (ATP) rather than fabrication. Pax Silica, if negotiated well, could be the mechanism that breaks that stagnation.

The ESZ would encourage international companies to establish operations in the Philippines, bringing expertise to advance and propel local industries. The Philippines would not only extract its critical mineral endowments but also process them domestically for semiconductor manufacturing — positioning itself as a vital hub in the global tech ecosystem. This would boost the national economy and expand job markets at a moment of rising unemployment, affecting even college graduates. Investments by the US and corporations could create infrastructure that can be taxed, and a wider job market for graduates in the IT and engineering sectors.

The US Embassy fact sheet notes this ambition:

“The Economic Security Zone is intended to fuse American expertise in institutions and legal regimes – internationally enforceable contracts, transparent regulatory standards, and expert dispute resolution – with enhanced access to the Philippines’ outstanding workforce and talent, mineral endowments, energy resources, and strategic position at the crossroads of Indo-Pacific trade.”

What the critics get right

Progressive and leftist groups, columnists, and everyday people online have raised legitimate concerns. Dan Somera has written that the US would have a two-year free lease of the ESZ, renewable for 99 years, as an “in-kind contribution” from the Philippines. The Makabayan bloc and Kilusang Magbubukid ng Pilipinas, progressive groups, have compared the ESZ to America’s former military bases in Clark and Subic, pointing to its diplomatic immunity provisions and the practice of US common law within its boundaries.

They fear the amplification of unsustainable mining, land grabbing, and militarization within the Luzon Economic Corridor. Critical discussion online has also centered on the power and water consumption demands of AI infrastructure and the environmental costs of expanded mining. Some analysts warn that job creation could be minimal, with American experts filling skilled positions while Filipinos are left with lower-value work.

The precedent that matters

The Clark and Subic bases offer the most instructive and most complicated precedent. For decades, the US military presence generated significant local economic activity: employment, commercial ecosystems, and infrastructure that became structurally embedded in the surrounding communities of Angeles and Olongapo.

At their peak, the bases employed tens of thousands of Filipinos directly, with estimates of total dependent employment, including service industries, running considerably higher. When Mount Pinatubo accelerated the American withdrawal and the Philippine Senate voted against lease renewal in 1992, the economic dislocation was severe enough that both cities faced prolonged depression before reinvention as the Subic Bay Freeport Zone and Clark Freeport Zone eventually took hold.

The infrastructure the Americans left behind, runways, port facilities, and utilities, became the foundation for post-base economic development. The arrangement had been asymmetric throughout: the US got strategic Pacific positioning, the Philippines got an economy built substantially around foreign military expenditure. The harm was real. Documented labor exploitation, environmental damage, and the social costs of base economies are part of the historical record and should not be minimized.

The argument here is narrower. Asymmetric arrangements, even extractive ones, can deposit durable infrastructure and economic capacity that outlasts the arrangement itself. Pax Silica can operate on a similar structural logic. The question for policymakers and civil society is not whether the arrangement is equal, it isn’t, but whether the Philippines can negotiate terms that maximize what remains after the Americans’ strategic interests have been served.

The window that remains open

The ESZ’s legal framework is still a work in progress. According to the US Embassy fact sheet, the Philippine and American governments are still discussing and finalizing the legal and development framework for long-term development. That unfinished status is leverage, not a red flag.

Jurisdiction, local hiring requirements, mineral processing terms, and environmental standards are all still on the table. Civil society groups and policymakers who oppose the ESZ’s current trajectory would do more by engaging that process than by opposing the zone’s existence outright. Outright rejection risks foreclosing the development pathways the Philippines needs. Proactive negotiation for parity, even if it means allowing Washington to claim the political win, could be the more strategically sound position.

The Philippines is at a crossroads. Pax Silica could represent a meaningful step in its economic development, but only if the Philippines enters the arrangement with clear-eyed awareness of what it is, what it is not, and what still remains to be determined. The government and Filipinos just need to pay attention.

This article reflects reporting and analysis made by The Southeast Asia Pacific Frontier. If you have additional context, a different take, or a perspective we’ve missed — whether you’re a researcher, a policy practitioner, or someone living with these realities on the ground — this is an evolving story and we’d like to hear from you. Drop a comment below or get in touch.

About Rocco Carmine B. Paragas Jr.

Rocco Carmine B. Paragas Jr. is a graduating Asian Studies student at UST, specializing in history and geopolitics. A versatile generalist with internship experience spanning HR to Knowledge Management across corporate and NGO sectors, he is currently writing his thesis on intergenerational gaps in Thailand.

When the Strait of Hormuz effectively closed in late February 2026, four ASEAN members - the Philippines, Malaysia, Thailand, and Indonesia - negotiated with Iran for safe passage of their vessels.

The Philippines was the first among these four, negotiating on the 2nd of April with Tehran to be recognized as a non-hostile country and to ensure the safe passage of Philippine-flagged vessels. Malaysia followed five days later, securing safe passage and reiterating its commitment to freedom of navigation and the safety of maritime passages. Indonesia and Thailand are currently in the midst of their own negotiations with Tehran to secure the safe passage of their ships.

While the region seems to be inching toward dialogue, Singapore refused to do so. Singapore’s Foreign Minister, Vivian Balakrishnan, stated, “As a matter of principle, and not because we’re taking sides, I cannot engage in negotiations for safe passage of ships or negotiate on toll rates.” Malaysian politicians were quick to respond to Singapore’s stance. Nurul Izzah Anwar, Deputy President of Parti Keadilan Rakyat (PKR), asserted that Malaysia would not be lectured on its engagement with Iran, defending the country’s preference for dialogue over disengagement.

This exchange was presented as a principled disagreement. But it revealed that during crises, states prioritize the protection of their economic foundations and subsequently invoke principles to justify their actions. The country able to maintain the strongest principled stance did so because neighboring states absorbed costs it did not incur, costs that ultimately became irrelevant when Washington imposed its own blockade on the strait weeks later.

Three economic structures, three responses

The Philippines had the least room to maneuver in this crisis. Importing 98 % of its crude oil from the Middle East, with confirmed fuel reserves of roughly 51 days at the point of crisis, Manila’s negotiation was less a foreign policy decision than a fiscal emergency. Manila had already declared a State of National Energy Emergency on March 24, making negotiating with Tehran paramount.

Malaysia’s situation was also similar. Despite being an oil-producing country, it still imports 70% of its crude oil to meet domestic demand. However, Kuala Lumpur presented the security of safe passage as the outcome of high-level diplomatic engagement, emphasizing its commitment to freedom of navigation in accordance with international law. The underlying circumstances mirrored those of Manila, but the official narrative differed.

Singapore’s refusal was based on fundamentally different considerations. Unlike its neighbors, Singapore’s economy relies on the uninterrupted movement of ships through the Strait of Malacca rather than on oil imports. The maritime sector contributes approximately 7 % of Singapore’s GDP, and its trade-to-GDP ratio is about 320 %, among the highest globally. When Foreign Minister Vivian Balakrishnan stated in Parliament that transit passage “is a right, not a privilege,” he was correct in legal terms and was also safeguarding a critical national asset. For Singapore, the legal framework supporting freedom of navigation is not abstract; it is essential to the port economy.

Thailand and Indonesia are also in negotiations, making Singapore the sole outlier against a near-unanimous regional response. Every country whose economy depended on energy imports reached the same conclusion, and the one whose economy depended on something else reached a different one.

What was actually being paid

Reports of confirmed toll payments for the Philippines or Malaysia were never substantiated, and Manila’s foreign department explicitly denied that any fees were paid to Iran. However, the absence of a financial transaction does not imply that no cost was incurred. Each country implicitly accepted that passage through the strait required negotiation rather than being exercised as a right under international law. Every government that entered negotiations treated access as conditional, a legal position that Singapore refused to validate.

The objection here, of course, is that negotiating under duress, without formally acknowledging Iran’s legal right to condition passage, doesn’t constitute legal precedent in any strict sense. International law requires both state practice and opinio juris, the belief that the behavior is legally required, before a norm shifts. Countries like the Philippines, which are acting in an emergency, don’t necessarily signal legal acceptance.

But of course, legal norms don’t only erode through formal acknowledgment. They can also erode through accumulated behavior. When enough states treat passage as something to be negotiated rather than exercised as a right, the reality shifts regardless of what anyone formally concedes.

Singapore recognized this cost explicitly. The Philippines and Malaysia were unable to do so, not due to flawed reasoning, but because their circumstances precluded long-term considerations. A government facing only 51 days of fuel reserves lacks the capacity to prioritize the erosion of behavioral norms over immediate supply security. And with the Philippines already became the first country globally to declare a State of Emergency, the calculus is inherently asymmetric: the consequences of fuel shortages are immediate, tangible, and politically severe for these states. In such a context, the cost of contributing to a shift in the treatment of maritime passage under international law becomes secondary and is not reflected in any single national account.

This perspective was available to Balakrishnan, whereas his counterparts in Manila and Kuala Lumpur could not afford such clarity. However, this insight does not equate to moral superiority. The point is not that Singapore acted in bad faith, its position is consistent with decades of historical doctrine, but that consistency is far easier to maintain when the costs are diffuse and borne by others.

Singapore’s position also contains an unacknowledged contingency. Its principled refusal to negotiate with Tehran remained viable because neighboring states adopted pragmatic approaches. Had every ASEAN member maintained the legal position, the regional energy crisis would have intensified, and Singapore’s principle would have entailed significant costs. Singapore benefited from both legal consistency and regional energy stability without incurring the associated costs. Its unblemished stance was, in part, sustained by the compromises of its neighbors.

Then Washington did the same thing

Following the failed negotiations by the United States (US) and Iran in Pakistan, US President Donald Trump announced a naval blockade of the Strait of Hormuz, targeting vessels entering or departing Iranian ports. By April 16, US Central Command confirmed that the blockade was fully implemented and that no vessels had passed in the first 48 hours.

The Philippines maintains that its agreement with Iran remains in effect. Foreign Affairs Secretary Theresa Lazaro publicly confirmed the arrangement, noting that coordination with Iranian authorities continues and that the Iranian ambassador personally contacted her regarding Philippine-flagged vessels scheduled to transit the strait. Manila is thus simultaneously upholding its agreement with Iran while operating under the military protection of the United States, its treaty ally, which is now enforcing a blockade on the same waterway.

Moreover, in the same negotiations, the US and Iran brokered a 10-day ceasefire, with Iran recently announcing that the Strait would be open to commercial vessels for the remainder of the ceasefire.

The blockade rendered the bilateral agreements operationally moot, but the accumulated behavior of states treating passage as conditional rather than inherent will persist beyond this crisis, available as precedent the next time a chokepoint closes (Singapore’s Strait of Malacca, for example). By the time Iran declared the strait open and Washington maintained the blockade, diplomatic assurances secured by the region had become irrelevant in the face of a situation far beyond the influence of any Southeast Asian country.

This was always the deeper truth of the episode: small states do not set the terms of access to global chokepoints. Rather, they negotiate within the margins that great powers leave them - and when those powers act, the margins disappear.

This article reflects reporting and analysis made by The Southeast Asia Pacific Frontier. If you have additional context, a different take, or a perspective we’ve missed — whether you’re a researcher, a policy practitioner, or someone living with these realities on the ground — this is an evolving story and we’d like to hear from you. Drop a comment below or get in touch.

About Matthew Parra

Matthew Parra is a student at the University of Santo Tomas and the founder and Executive Director of The Southeast Asia Pacific Frontier — an independent analytical platform dedicated to rigorous, evidence-grounded analysis of Southeast Asia and the Pacific across economics, society, and geopolitics.

When Philippine President Ferdinand Marcos Jr. announced that the Philippines had approximately 60 days of reserve gasoline, fuel oil, and kerosene following the closure of the Strait of Hormuz, the countdown began - at least in the headlines. The figures have inspired fear, calls to stockpile, and pointed questions about government mismanagement and preparedness.

The Philippines is not alone. Across the region, oil reserves of different countries are suddenly being measured against a number and found wanting at different degrees. Japan has 254 days, while Thailand has 61. China has 200 days, while Indonesia has 25. But reserves were never designed to measure how long a country can survive without energy imports. They exist to stabilize markets while global supply adjusts, specifically to prevent panic, smooth price volatility, and buy governments time. Essentially a strategic buffers against sudden supply chain disruptions such as the US-Iran war.

This is a misreading of the crisis. Focusing on counting down the days to which reserves last displaces the real issue because the crisis does not begin on day 61 when tankers run dry. It begins when prices move - and they already have.

How shock actually travels

When the Strait of Hormuz closed the immediate problem is not that the region ran out of fuel. It was that among the 3000 vessels stuck inside the Persian Gulf, 200 oil tankers are physically trapped with nowhere to go. Iraq has already begun shutting down operations at the Rumalia oil field because tankers cannot leave and onshore storage is reaching its capacity. According to Marine Insight, only three tankers carrying 2.8 million barrels of oil crossed the straight on early March, far below the usual daily average of about 19.8 million. This is an 86% decline.

But markets do not wait for the physical shortage to run out before reacting because of how oil is bought and sold. According to research from the Revenue Watch Institute, two-thirds of all traded oil moves through long term contracts between producers and refineries. These are agreements that give both sides predictability over supply and demand. The remaining third is sold on the spot market, where individual barrels are bought and sold in real time. That small share matters disproportionately because long term contracts don’t have fixed prices. They are rather written with formulas tied to whatever the spot market says oil is worth at delivery. This means spot prices set the benchmark for the entire system.

On top of this is the layer of futures trading. Futures contracts, or the agreement to buy or sell oil at a fixed price on a future date, are traded on exchanges in volumes the exceed physical supply. When traders anticipate a supply disruption, they bid up futures prices immediately, then spot prices follow, and because term contracts are pegged to spot, the reprice cascades across the whole market at once.

While this structure is designed to price risk in advance, it also means that he moment news of the Hormuz closure broke, markets were already repricing every barrel that would need to move through or around that strait in the weeks and months ahead.

On March 6, crude futures rose to their highest level in two and a half years, climbing 12% to $90 a barrel. International Brent crude followed the surge over 28% to above $86 a barrel in the days following the closure. JPMorgan Chase warned that prices could spike to $120 per barrel if disruption in the strait is sustained, estimating that Gulf producers can only sustain normal production for roughly 25 days.

Moreover, because oil is priced and settled in US dollars, the exchange rate matters as much as the barrel price for the Philippines and Southeast Asia. According to ING Think, even a brief oil price spike in June 2025 was enough to pull down the Philippine peso, Korean won, Thai baht, and Japanese yen by roughly 1.5 to 3%. The Philippine peso depreciated to around 59 per dollar in early march, a historical low, as risk sentiment deteriorated alongside the conflict. What this means in practice is that the the region pays more for oil in dollars at the exact moment its currency buys fewer dollars.

That double hit then travels through the economy in a chain that reaches ordinary households long before the supply of oil actually runs out. For example, transport costs rise first with fuel surcharges on trucking, fare increases on public transport, higher operating costs for fishing boats and delivery vehicles. According to ING Think Regional Head of Research for Asia Pacific, Deepali Bhargava, inflation in the Philippines could climb up to 0.4% for every 10% increase in oil prices. A price shock of this magnitude, coupled with peso depreciation, could push Philippine inflation to the upper end of the BSP’s 2-4% target range.

The picture is not unique to the Philippines. According to MUFG Research, Thailand, Vietnam, the Philippines, and South Korea are the most sensitive economies in Asia to oil price increases, with CPI inflation projected to rise by between 0.1 and 0.9 percentage points across the region. Under the assumption of a six-week Hormuz closure and oil prices rising from $70 to $85 a barrel, regional inflation across Asia could rise by 0.7 percentage points, with the Philippines and Thailand the most vulnerable.

Who was always going to be exposed?

That vulnerability did not begin with the Hormuz closure. When governments and analysts compare reserve levels across the region, it is easy to read these numbers as a performance table. Simply a ranking of which countries planned well and which didn’t. Japan at 254 days, South Korea at 208, China at 200. Thailand at 61, The Philippines at 60, and Indonesia at 25. The assumption is that these gaps reflects choices and that better choices would have produced better numbers, but that assumption misses something important.

The 90-day reserve standard that serves as the global benchmark was established by the International Energy Agency, whose membership obligation requires countries to hold stocks equivalent to at least 90 days of net oil imports and to be ready to collectively respond to severe supply disruptions.

It is a standard designed by and for IEA member countries, which in the region include Australia, Japan, South Korea, and New Zealand. However, most of the region are only Association countries in the IEA because in part because full membership requires holding oil stocks equivalent to at least 90 days of net imports. But according to the IEA’s Southeast Asia Energy Outlook, mandatory oil stockpile regimes across the region are generally only equivalent to fewer than 40 days of oil use and in some cases as few as six days.

According to an IEA-affiliated study on oil stockpiling options for Southeast Asia, financial constraints are among the most common factors slowing down oil stockpiling across the region. Crude purchases alone account for at least half the total cost of maintaining reserves, with significant capital and operational expenditures layered on top of storing and distribution. For example in Indonesia, the financial burden of oil stockpiling was estimated at over $1.1 billion in 2015 alone.

Storing oil is expensive and it ties up capital that developing economies cannot afford to lock away under normal conditions. According to the IEA’s report on energy security in ASEAN+6, developing emergency oil response capabilities and integrating them into global supply security mechanisms will take time and money, precisely the two things fiscally constrained economies have the least of. The result is a reserve gap that reflects not poor planning in the abstract, but constrained choices made under imitations.

The other constraint is where the oil comes from in the first place. Even if the region’s economies could build larger reserves, they would largely be filling them with Middle Eastern crude. Asia imports 60% of its crude oil from the Middle East, and the Philippines sources 90% of its oil imports from the region. Diversifying away from that dependence is not simply a matter of finding new suppliers, it requires retooling the refineries themselves.

“If you put a new crude into the refinery, you have to change the cutoff points. You have to change gasoline blending. There’s a lot of things you need to change. It’s hard work. This is why diversification has been so poor in a lot of countries,” Adi Imsirovic, director of consultancy at Surrey Clean Energy, explains.

The implication is that even the will to diversify runs into a physical ceiling. Refineries across the region were built and configured around Middle Eastern crude. This includes the specific density, sulfur content, and chemical composition of said crude - a product of decades of infrastructure built around a single supply corridor.

“Simply put, even replacing a modest share of the roughly 16 million barrels a day of Middle Eastern crude that arrives to Asia with Atlantic basin supply is not feasible,” Energy Aspects analyst Richard Jones said.

What energy security actually means here

According to a peer-reviewed study on global energy security, countries including the Philippines, Myanmar, and Cambodia were already in a precarious position before the strait closed, held back by poor energy resource endowments and limited domestic production capacity.

The panic about reserve levels treats that vulnerability as a policy problem, one that better preparation might have prevented. But the region was never fully inside the global energy architecture to begin with. The IEA’s 90-day benchmark, its emergency coordination frameworks are membership obligations, and most of Southeast Asia and the Pacific sits outside full membership precisely because meeting those obligations requires resources the region doesn’t have.

The 60-day countdown obscured all of that. It made a structural problem legible as a planning failure, which is a more comfortable story because planning failures have solutions. Structural ones are harder to sit with.

None of this fully excuses the choices made within those constraints. A 90% import concentration from a single region reflects fiscal limitation, but also decades of institutional inertia. Both are true at the same time, and both are part of what needs to change.

But the harder question, the one the Hormuz crisis leaves sitting with this region, is not simply how to build more reserves or diversify supply lines. It is what energy security actually means for economies that were never fully designed into the system meant to provide it. And whether that system, as currently built, is even capable of answering that question.

This article reflects reporting and analysis made by The Southeast Asia Pacific Frontier. If you have additional context, a different take, or a perspective we’ve missed — whether you’re a researcher, a policy practitioner, or someone living with these realities on the ground — this is an evolving story and we’d like to hear from you. Drop a comment below or get in touch.

About Matthew Parra

Matthew Parra is a student at the University of Santo Tomas and the founder and Executive Director of The Southeast Asia Pacific Frontier — an independent analytical platform dedicated to rigorous, evidence-grounded analysis of Southeast Asia and the Pacific across economics, society, and geopolitics.