Who Benefits from US-China De-Risking?

The US-China rift is reshaping the global economy, but some savvy states are positioning themselves to win from it.

Although many nations will face economic challenges from global fragmentation, a select few are positioning themselves to benefit from the shifts spurred by the U.S.-China rivalry.

Money in the Middle?

The economies poised to win are those leveraging their geographical location, skilled workforce, and diplomatic relations to become industrial, trade, or technology hubs that bridge East and West.

The rise of these "connector" nations, such as Mexico, Malaysia, and Vietnam, has softened the global economic blow from direct trade decoupling between the U.S. and China. However, the extent to which this has diversified exposures and bolstered supply chain resilience remains debatable.

Contrary to some expectations, supply chains are lengthening, not shortening. Data from the Bank for International Settlements (BIS) shows that many Western businesses continue to buy Chinese-made supplies, but they are increasingly sourcing them through intermediary countries.

This redirection includes trade and investment being funneled through third-party nations, partially mitigating the erosion of direct U.S.-China links. Notably, since 2017, an increased Chinese presence in a country—whether through exports or greenfield investments—has correlated with higher exports from that country to the U.S.

According to the Financial Times:
”During the year to March, at least 41 Chinese manufacturing and logistics projects were announced for Mexico, while at least 39 were scheduled for Vietnam, according to the latest data from Financial Times subsidiary FDI Markets. This represents the highest number of announced projects in either country since FDI Intelligence began tracking foreign investment news and company announcements in 2003, with both Mexico and Vietnam now overtaking the US as the top destinations for Chinese manufacturing and logistics projects”.

A Delicate Balance

China is also diversifying its investments to mitigate risks from the West, with significant rises in Chinese FDI in emerging economies such as Mexico and Hungary. Notable investments include greenfield projects in Mexico and a Chinese battery plant in Hungary.

Generally, countries with vast reserves of critical raw materials or those attracting significant financial investments from both sides stand to gain. However, few emerging economies meet these criteria, suggesting that the IMF’s warnings about economic risks from decoupling scenarios will likely intensify in the coming years.

A complete decoupling of Chinese and Western economies could be immensely costly. The International Monetary Fund (IMF) estimates such a separation could reduce global GDP by about 7 percent in the long term.

This equates to a loss of approximately $7.4 trillion, akin to the combined economies of France and Germany. Developing economies would be hardest hit if Washington and Beijing sever economic ties.

If current trends persist, we may witness a broad retreat from global engagement rules, leading to a significant reversal of the gains achieved through economic integration and growth.

Policymakers face a pivotal decision: they could embrace this rerouting of trade and FDI to sustain some benefits of economic integration, or they could continue erecting barriers, further fracturing both direct and indirect links between geopolitically distant nations.

Malaysia: A Case Study

In Malaysia, the northern state of Penang has attracted over $13.5 billion in foreign direct investment (FDI), surpassing the total sum of such investments from 2013-2020. As a manufacturing hub for legacy semiconductors, Penang provided 20 percent of U.S. chip imports in 2023. U.S.-based Intel recently announced a $7 billion plan to expand production on the island.

The interest from Chinese firms in Malaysia is unsurprising. Unlike China, Malaysia is not subject to U.S. controls on the export of advanced semiconductor technology or machinery, making Penang an ideal base for Chinese firms looking to bypass these restrictions.

Vietnam: A Case Study

Goods from China are often routed through Vietnam on their way to the U.S. This helps explain the booming trade between the U.S. and Vietnam, with the value of Vietnam’s exports to the U.S. nearly tripling since 2017. There is a near-perfect correlation between the growth of Vietnam’s imports from China and its exports to the U.S.

On paper, this appears as a de-risking win for the U.S., which imports less from China and more from Vietnam. Yet, in reality, U.S. reliance on China remains unchanged while supply chains become even more extended.

Mexico: A Case Study

China's export strategy to Mexico focuses on electronics, auto parts, and machinery, which are then re-exported to the US. In 2023, Chinese exports of computer components and electronic equipment to Mexico reached $81.46 billion.

This increase has enabled Mexico to boost its exports to the US, particularly in the automotive and electronics sectors, where vehicles and auto parts often include Chinese components.

Outlook

The surge in new trade restrictions—having more than tripled since 2019—and the expansion of financial sanctions highlight this shift. Trade and investment flows are increasingly being redirected along geopolitical lines.

Effectively, this has segmented the world into three blocs: one aligned with the U.S., one with China, and a group of nonaligned countries. The latter, with the proper conditions, are poised to benefit from US-China de-linking.

However, the stakes are higher now than during the onset of the Cold War, as the ratio of goods trade to GDP has surged from 16 percent to 45 percent. This makes trade fragmentation significantly more costly.

Should Beijing invade Taiwan, it would likely argue that the European Union has every reason to remain neutral to avoid jeopardizing thousands of jobs on European soil. This is the nature of the new geopolitical terrain.