Overview

Companies operating across the Asia Pacific region will face a much more challenging risk outlook in 2025.

Confrontational Sino-American relations promise turbulence, and the security system that has guaranteed regional stability and prosperity will come under greater strain.

Economic pressures are also rising, owing both to the current slowdown in China, and to the prospect of tariffs imposed by the US on Asian goods.

These shifts will threaten companies, not least because businesses can no longer readily separate economic from security concerns.

Despite the challenging climate, there will be winners and losers, and deft handling by boards and executives can both benefit companies, and mitigate risk.

SVA stands ready to advise on how best to respond, and to assist in practical execution.

Sino-American relations

Much in 2025 will depend on dealings between the US and China.

A “détente” in early 2024 briefly halted a decline in ties, but did little to alleviate structural differences, nor to dispel distrust. Now, the deterioration in relations has resumed.

Competition between the US and China has become institutionalised, and is accelerating. An ideological approach is taking hold on both sides, stoked by fear, rather than cold-eyed analysis.

Most Asian states wish to avoid being drawn into a Cold War style contest. Even so, pressures to pick sides are intensifying, and two (admittedly loose and porous) blocs are emerging, with the US and its allies such as South Korea, Japan, Taiwan and the Philippines, on one side, and China, North Korea and Russia, on the other.

This situation means that separating economic and security issues has become extremely hard for companies – as during the Cold War. With regard to high-technology industries, it is perhaps impossible.

The economy

Economic risks are rising. The strategic stability and willingness to cooperate across borders on which Asian economic dynamism has relied for decades is now waning.

In 2025, two core challenges will be of particular importance. The first is the economic slowdown in China, which has resulted in a steep fall in property values and reduced internal consumption.

2025 is unlikely to show a sharp recovery. The Chinese government has promised measures aimed at reviving growth, but has hitherto refrained from a major, “big bang” stimulus. Its reticence, which is ideological in part, suggests that the long grind will continue for some time to come.

A temptation, in the west, will be to claim that “China is over”, but that would be a mistake. China has great depth, and its economic landscape varies enormously.

Insight into activities in third-tier cities is often lacking, and companies should not judge the country on the basis of analysis of activity in Shanghai or Shenzhen alone. China is a huge place.

Even so, China is unlikely to be the region’s engine of growth in 2025.

Tariff wars

A separate risk relates to President-elect Trump’s plans to impose tariffs on goods.

Much will depend on what Trump actually does, which is not yet clear – although the appointment of Jamieson Greer as US Trade Representative raises fears. Greer is a protégé of Robert Lighthizer, a champion of tariffs.

The vulnerability of states also varies. China is obviously at significant risk, both because of the scale of the 60% tariffs promised by Trump, and because of its reliance on exports of goods.

However, China is also in a better position to respond than some, perhaps by limiting exports of rare earths, batteries, or drone components, by acting against US businesses, such as NVIDIA, or by putting more foreign firms on its Unreliable Entity List. Beijing could also increase subsidies for certain industries, or reduce the value of the Chinese yuan, and thereby alleviate the pain.

In fact, President-elect Trump’s plans highlight just how Chinese companies have secured a stranglehold on certain high-end industries, such as electric vehicles, drones and lithium-ion batteries. China accounted for 31% of world manufacturing in 2022, and is increasing its share – notwithstanding its debt and demographic travails.

Whether Trump’s tariffs can succeed in slowing China’s advance is thus uncertain. To do so, Washington would need to convince the European Union, Japan and other major markets themselves to impose tariffs on China, and so create a shared market that excludes Chinese products.

That seems unlikely, not least as Washington’s plans to place 20% tariffs on its allies’ goods may prompt Japan, South Korea and Taiwan to ask searching questions about dealings with the US – possibly to Beijing’s benefit. South Korea’s current political travails make Seoul more likely to consider improving relations with China in response.

A final point is that tariffs often divert trade, resulting in unexpected winners. Hitherto, Vietnam had profited from derisking measures. However, questions as to whether Hanoi has allowed Chinese businesses to circumvent US controls (in some scale) are growing – meaning that those benefits may fade.

Security issues

The regional security framework is also coming under great strain.

Under Joe Biden, the US “hub and spoke” alliance system evolved towards a “lattice”, with the spokes developing ties amongst themselves. The Biden administration also tried to supplement the alliances with the Quadripartite Arrangement between the US, Japan, India and Australia, and the AUKUS nuclear deal.

Now, though, Trump’s scepticism towards the alliance system may affect regional security – although optimists note that the system survived Trump’s first term. Any such development would be troubling, not least because the alliance system is under pressure from China, Russia and North Korea.

For one thing, China has significantly expanded its nuclear weapons capability. Its purpose is not yet clear, but may relate to a desire to establish a nuclear “umbrella” under which Chinese forces could deploy regionally without provoking a broader conflict.

Such a stance would echo Moscow’s use of nuclear threats to curtail US and European military support for Ukraine. Should China adopt such an approach, the strains on the regional security system and the US’ Asian allies will only intensify.

Taiwan

Taiwan is the current fulcrum for regional tensions, because of Beijing’s determination to resolve the “unfinished business” of the Chinese civil war, because of the importance of its semi-conductor industry, and because of US and Japanese support for Taipei, as a bastion in the “first island chain”.

Media attention has generally focused on the prospect of a full-scale Chinese invasion, but SVA’s current view is that this risk is less likely. A successful invasion would be extremely challenging to achieve, particularly if Chinese forces come under attack from land-based missiles and drone systems at an early stage.

Of greater likelihood in 2025 is that China will scale up efforts to limit Taiwan’s freedom of operation. Beijing will thus continue large-scale military deployments, and so demonstrate its ability to “quarantine” the island at will, and may put pressure on Taiwan’s offshore islands. Such measures had already become close to routine, but will probably intensify, nonetheless.

This situation poses real risks. One is that frequent deployments result in pressure on Taiwanese armed forces, degrading equipment and capabilities. Another is that an accident could spiral into a crisis. A third, if less likely, risk is that China uses such exercises to disguise a planned strike on Taiwan, or to seize offshore islands.

At the least, China will use such measures to test Trump’s will on the Taiwan question – and probably early in 2025. Ultimately, Beijing will want to encourage a debate in the US as to whether Washington would trade San Francisco for Taipei.

South China Sea

A separate issue relates to the South China Sea. Frictions between Manila and Beijing have intensified in recent months, with frequent tussles between Philippine and Chinese forces.

The risk of China taking further action is significant, not least as the stakes appear much lower than in the Taiwan Strait. China will ask whether an incident in the South China Sea would merit a US response, and has a sense that its prestige is at stake – perhaps seeing the Philippines as a “domino” that may fall.

However, a crisis in the South China Sea could still spiral out of control. The deployment of US Typhon and HIMARS missiles to the Philippines, the rotation of US marines through the islands, and Japanese support for Manila, all make clear that the South China Sea has now been linked to other regional security challenges – at least from the US and Japanese militaries’ operational perspectives.

The risk in 2025, then, is that a small incident in the South China Sea could escalate into a much bigger crisis, which would disrupt regional shipping, and could even test the US alliance with Manila.

Korea

A third flashpoint in 2025 could be on the Korean peninsula.

Going into the new year, an immediate problem will be the political instability in South Korea in the wake of President Yoon Seok Yeol’s impetuous declaration of martial law on 3 December 2024 and subsequent impeachment process. His action has sparked a political crisis, which will run and run, well after Yoon’s departure.

Yoon’s actions will have strategic consequences. A tussle between (broadly) pro-US and pro-Chinese forces is under way. The opposition Democratic Party is anti-Japanese, favourably inclined to China, and prefers a “soft” approach to North Korea. Yoon’s People Power Party had taken a starkly opposed stance.

This political crisis, then, has most likely derailed efforts to improve relations with the US and Japan (always controversial in Seoul) – and may yet taint the “security establishment” in South Korea, as a whole.

Such political turbulence is doubly troubling, because it comes in the context of the deployment of North Korean troops in support of Russian actions in Ukraine, which has linked developments on the Korean peninsula more closely to those in Europe.

That deployment may yet strengthen Pyongyang, thanks to Russian oil imports, or support for its missile or nuclear programmes. A stronger North Korea may enjoy more autonomy from China, and so become less predictable.

Country specific risks

The above strategic risks are real, but businesses must also take account of “under the radar” risks, which have their own momentum.

In Japan, Prime Minister Shigeru Ishiba is in a weakened position, after losing an election. He will face challenges both from within the governing Liberal Democratic Party, and from outside, which will raise questions as to whether his government can respond deftly to international challenges.

In Thailand, an uneasy ceasefire is in place between the supporters of Prime Minister Paetongtarn Shinawatra, daughter of former Prime Minister Thaksin Shinawatra, and the military and commercial elite. However, that political contest is unresolved, and instability could quickly return.

In Indonesia, President Prabowo Subianto displays authoritarian instincts, which may weaken the post-Suharto democratic settlement. He also advocates protectionist measures, with attention to the nickel sector, and is proving erratic in conducting foreign policy.

The conflict in Myanmar may also worsen, owing to more direct foreign involvement. Chinese military companies may act to protect key interests, such as oil facilities, or take action against rebel armies.

The Philippines is facing a mid-term election in May 2025. An ill-tempered contest between President Marcos and his Vice President Sara Duterte, daughter of former President Rodrigo Duterte, means that much is at stake, and political stability is far from guaranteed.

Other risks

Finally, slowing growth may reduce the availability of capital, with implications for the more indebted Southeast Asian states.

Malaysia is perhaps more at risk; the ringgit has fallen, and debt levels have risen in the wake of the 1MDB scandal.

The outlook

Companies operating in the Asia-Pacific region will face a much more challenging risk outlook in 2025, then.

Sino-American relations seem likely to deteriorate, the security system is under strain, and tariffs and slowing growth are adding to economic pressures. Moreover, businesses will face intensifying difficulties in separating commercial from security matters.

Companies should prepare for this worsening outlook, not only so as to protect interests, but also so as to position themselves to benefit from these changes. SVA can advise on how best to do so.

SVA

SVA (www.stevevickersassociates.com) is a specialist risk mitigation, corporate intelligence and risk consulting company. The firm serves financial institutions, private equity funds, corporations, high net-worth individuals, and insurance companies and underwriters around the world.

SVA has three core lines of business, which are: Business Intelligence and Political Risk; Corporate Investigations; and Special Risk.

SVA also has a dedicated crisis management team which, for our retained clients, stands ready to assist companies during crisis situations.

SVA is based in Hong Kong, Singapore, and London and operates globally.