Southeast Asian Regional Stability and FDI: Thailand's Strategic Emphasis on Cambodia Over U.S. Involvement

The 2025 Thailand-Cambodia border crisis has emerged as a pivotal test for Southeast Asian regional stability, with profound implications for foreign direct investment (FDI). Rooted in colonial-era disputes and exacerbated by a leaked phone call between Thai Prime Minister Paetongtarn Shinawatra and Cambodian leader Hun Sen, the conflict escalated into direct armed clashes, disrupting USD 1.2 billion in annual bilateral trade and displacing over 135,000 civilians, according to a BISI report. As the crisis unfolded, Thailand's strategic emphasis on bilateral diplomacy with Cambodia-rather than relying on U.S. mediation-revealed shifting dynamics in regional power structures and investor risk perceptions.

Thailand's Bilateral Focus: Rebuilding Trust Amid Geopolitical Tensions

Thailand's approach to the crisis prioritized direct engagement with Cambodia, signing seven cooperation agreements in 2025 to address trade, security, and labor issues, according to a Global South Forum article. These included pacts to manage the Thailand–Cambodia Friendship Bridge, enhance environmental cooperation, and protect Cambodian workers in Thailand. By framing the resolution as a bilateral effort, Thailand sought to avoid external interference, a stance that contrasted with U.S. and Chinese mediation attempts. For instance, while U.S. President Donald Trump leveraged trade negotiations to pressure both nations into a ceasefire, Thailand publicly expressed skepticism toward foreign intervention, emphasizing "historical skepticism" of external mediation in border disputes, as noted in the BISI report.

This strategy underscores Thailand's broader goal of maintaining autonomy in regional affairs. Despite its long-standing security alliance with the U.S., Thailand has increasingly aligned with China's Belt and Road Initiative (BRI), particularly in infrastructure and economic investments, according to a Daily Mesh report. The crisis thus exposed a recalibration of Thailand's foreign policy, balancing U.S. strategic interests with China's economic influence.

U.S. Mediation: Transactional Diplomacy and Mixed Outcomes

The U.S. response to the crisis centered on transactional diplomacy, with Trump publicly claiming credit for brokering a ceasefire and linking it to trade incentives. The U.S. imposed a 36% tariff on bilateral trade between Thailand and Cambodia, threatening to enforce it if hostilities continued, according to the BISI report. While this approach succeeded in de-escalating violence, it drew criticism for reducing peace-building to a conditional process, undermining local ownership of conflict resolution, as argued in a Diplomat article.

China, meanwhile, adopted a subtler strategy, advocating for legal frameworks and regional restraint while aligning with Cambodia's push to internationalize the dispute via the International Court of Justice, according to the BISI report. This contrast highlights the divergent methods of U.S. and Chinese influence in Southeast Asia, with Thailand navigating both to safeguard its strategic interests.

Implications for FDI: Supply Chain Fragility and Investor Caution

The crisis has exposed vulnerabilities in Southeast Asia's supply chains, with transportation costs rising by 30% and businesses reassessing risk strategies, as detailed in the BISI report. For FDI, the conflict has created a dual challenge:
1. Geopolitical Uncertainty: The U.S.-China rivalry, amplified by their competing mediation roles, has heightened perceptions of the region as a geopolitical battleground. Investors are now prioritizing supply chain diversification, with some shifting operations to avoid areas prone to instability, a trend noted in the Daily Mesh report.
2. ASEAN's Limitations: The crisis revealed ASEAN's inability to enforce conflict resolution, as its non-interference policy and consensus-driven approach failed to address the crisis effectively, according to the Global South Forum article. This has eroded confidence in regional institutions as stabilizing forces for FDI.

Strategic Outlook: Thailand's Path Forward

Thailand's emphasis on bilateral diplomacy with Cambodia reflects a pragmatic approach to regional stability. By prioritizing direct negotiations over external mediation, Thailand aims to reinforce its sovereignty while mitigating the fallout from U.S.-China competition. However, this strategy carries risks: over-reliance on bilateral ties could leave Thailand vulnerable to Cambodia's shifting political landscape, particularly during Hun Sen's leadership transition, as highlighted in the Global South Forum article.

For investors, the crisis underscores the need for contingency planning. While Thailand and Cambodia's recent agreements signal a return to stability, the long-term resilience of FDI will depend on sustained diplomatic efforts and reduced geopolitical interference.

Conclusion

The 2025 Thailand-Cambodia crisis has redefined Southeast Asia's geopolitical and economic landscape. Thailand's strategic emphasis on bilateral relations over U.S. involvement highlights a recalibration of regional power dynamics, with significant implications for FDI. As external actors like the U.S. and China vie for influence, investors must navigate a complex web of political, economic, and security risks. The path to stable FDI in the region will require not only bilateral cooperation but also stronger regional institutions capable of addressing conflicts beyond the reach of great power rivalries.