Assessing Geopolitical Risk in Southeast Asia: Implications for Regional Markets Amid Thai-Cambodian Escalation

Southeast Asia has long been a magnet for foreign direct investment (FDI), driven by its strategic location, youthful demographics, and integration into global supply chains. However, the 2025 Thai-Cambodian border conflict has introduced a new layer of volatility, exposing vulnerabilities in infrastructure, trade corridors, and regional economic integration. As military clashes intensify and diplomatic efforts falter, investors must grapple with the cascading implications for cross-border investments and the broader ASEAN economic architecture.

The Immediate Economic Fallout

The Thai-Cambodia conflict has disrupted critical trade routes and infrastructure, with the closure of the Klong Luek–Poipet border crossing-a vital logistics hub-halting $4.7 billion in annual bilateral trade. Thailand's exports of consumer goods, fuel, and construction materials to Cambodia have been severed, while Cambodia faces shortages of raw materials like cassava and scrap metal, essential for its starch, ethanol, and steel industries. The conflict has also stalled the development of the Overlapping Claims Area in the Gulf of Thailand, a joint energy project valued at over 10 trillion baht.

The human and economic toll extends beyond trade. Over 400,000 civilians have been displaced in Thai border provinces, with schools and hospitals shuttered, compounding the region's fragility. Meanwhile, the exodus of 780,000 Cambodian migrant workers from Thailand has created labor shortages in construction, fishing, and agriculture, driving up wages and further straining supply chains.

Geopolitical Volatility and FDI Dynamics

Despite these challenges, Southeast Asia's FDI inflows rose by 8% year-on-year to $226 billion in 2025, outpacing the global decline of 11%. This resilience reflects the region's enduring appeal, particularly in sectors like semiconductors and electric vehicles (EVs), where Thailand alone approved 517 semiconductor projects and 808 EV-related projects between 2022 and mid-2024. However, the Thai-Cambodia conflict has introduced asymmetries. While Malaysia and Indonesia continue to attract investment through initiatives like the Eastern Economic Corridor and Omnibus Law, Thailand's political instability-including the suspension of Prime Minister Paetongtarn Shinawatra-has created uncertainty.

U.S. tariffs, introduced in April 2025, have further complicated the investment landscape. Threats of 36% tariffs on Thai exports have forced companies to reroute shipments through Vietnam and Laos, increasing costs by 25–40%. These disruptions highlight the fragility of Southeast Asia's export-oriented model, which relies heavily on access to the U.S. market.

Infrastructure Vulnerabilities and Regional Trade Corridors

The conflict has exposed critical weaknesses in Southeast Asia's infrastructure. The Greater Mekong Subregion and other economic corridors, designed to enhance connectivity, now face heightened risks from geopolitical tensions. For instance, the Thai-Cambodia border's instability has disrupted the GMS's logistics networks, which are vital for moving goods between China, Southeast Asia, and the Indian Ocean.

Moreover, the October 2025 ceasefire agreement-brokered by U.S. President Donald Trump and Malaysian Prime Minister Anwar Ibrahim-collapsed within weeks as both sides accused each other of violations. This erosion of trust complicates ASEAN's ability to enforce collective action, leaving regional economies more exposed to unilateral decisions and external pressures.

Resilient Sectors and Risk-Mitigated Strategies

Amid the turmoil, certain sectors demonstrate resilience. The semiconductor and clean energy industries, supported by global demand for decarbonization and digitalization, remain attractive despite geopolitical headwinds. For example, Thailand's Eastern Economic Corridor has drawn investments in EV manufacturing, while Vietnam's growing solar and wind capacity positions it as a clean energy hub.

Investors must adopt strategies that balance exposure to high-growth sectors with diversification across geographies and supply chains. Diversifying production bases beyond Thailand and Cambodia-into countries like Vietnam, Malaysia, or Indonesia-can mitigate risks from localized conflicts. Additionally, leveraging regional economic corridors, such as the Luzon Economic Corridor, can enhance connectivity while reducing dependence on volatile border areas.

Conclusion

The Thai-Cambodia conflict underscores the inextricable link between geopolitical stability and economic prosperity in Southeast Asia. While the region's FDI resilience is commendable, the conflict has revealed vulnerabilities in infrastructure, trade corridors, and ASEAN's institutional capacity. Investors must remain vigilant, prioritizing sectors with long-term growth potential and adopting contingency plans to navigate geopolitical shocks. As the region recalibrates, the ability to adapt to volatility will determine not only the survival of cross-border investments but also the future of Southeast Asia's economic integration.