Southeast Asia's AI Boom May Be Short-Lived, Economists Warn

Export surge masks deeper vulnerabilities

Asia's technology economies are posting extraordinary numbers. Taiwan is heading toward its first double-digit GDP growth year since 2010, driven by AI hardware demand. South Korea's exports jumped more than 60% in July, while Japan, Malaysia, Singapore, and China all reported over 20% export growth the same month. Equity markets have followed suit—Japan's Nikkei 225 and Thailand's SET index are both up roughly 25% year-to-date.

But economists studying the region see a troubling divide emerging. While advanced manufacturing hubs capture the lion's share of AI's economic value, Southeast Asian nations may be experiencing what one expert calls a "short-term blip" rather than sustainable transformation.

Why it matters

The AI boom is creating a two-tier system in Asia that could widen economic gaps for decades. Southeast Asian countries risk being locked into commodifiable, low-margin activities—semiconductor packaging, data center hosting, basic assembly—while higher-value AI development concentrates in the U.S., China, Taiwan, and South Korea. This pattern threatens the region's long-term competitiveness and could undermine efforts to escape the middle-income trap.

The commodification trap

"The sugar rush economic boom that Southeast Asia is experiencing is from providing the supporting—not leading-edge—semiconductors, and the power and resources to drive data centers," Danny Quah, an economist at Singapore's Lee Kuan Yew School of Public Policy, told Fortune. "But these are commodifiable, and no one will have a sustained comparative advantage in them."

Singapore raised its 2026 growth forecast to 4.5-5.5% on August 11, citing AI-related sectors. Malaysia is leveraging its position in chip assembly and packaging, while Thailand and Vietnam have attracted data center investments. Yet the region's competitive edge—abundant low-cost labor—may actually trap it at the bottom of the AI technology ladder.

Structural constraints compound the challenge. Grid reliability issues and water shortages limit data center expansion. Malaysia faces both brain drain to Singapore and the West, and a demographic cliff—the country is projected to become an "aged nation" by 2048. Energy dependence on Middle Eastern imports creates additional vulnerability, particularly as supply disruptions from the U.S.-Iran conflict ripple through the region.

Forced to choose sides

Geopolitical pressure is intensifying. Last week, Reuters reported that the U.S. State Department is preparing to tell dozens of countries to choose between competing AI frameworks: the U.S.-led Pax Silica and China's World Artificial Intelligence Cooperation Organization (WAICO). A draft letter reviewed by Reuters stated bluntly: "To be part of everything is to be part of nothing."

The ultimatum came after Kazakhstan joined both initiatives, alarming Washington. For Southeast Asian nations whose economic model depends on openness and investments from multiple sources, such binary choices pose an existential threat.

"The concern is that competing frameworks could increasingly link access to technology, investments and markets to participation in one ecosystem or the other," Denis Hew, a senior research fellow at the Lee Kuan Yew School, told Fortune. "Smaller economies with limited technological capabilities and bargaining power may have little choice but to pick a side."

The ASEAN Digital Economy Framework Agreement, set for signing in November, may offer some protection by creating unified rules for digital trade across Southeast Asia. But as one economist noted, demands for exclusivity from either superpower "will narrow their room for maneuver."

These details were first reported by Fortune.