The economic decoupling between the United States and China is no longer speculative—it is unfolding now, with consequences that will reverberate across the global economy. Driven by trade imbalances, technological competition and national security concerns, the split is accelerating and will shape the 21st century.
Regardless of the outcome of the next US presidential election, the trajectory remains set. Both major parties have adopted a confrontational stance toward China, framing the relationship as one of rivalry. Tools like tariffs, export controls, and supply chain shifts will continue to be deployed. Decoupling is not just possible; it is inevitable.
This growing rupture carries profound implications, particularly for third-party countries. These nations—ranging from major economies like India and Germany to emerging markets such as Vietnam and Mexico—rely heavily on both the US and China for trade, investment, technology, and security partnerships.
As the world’s two largest economies move apart, the question for these countries is not whether they will be affected but how they will navigate the divide.
Together, the US and China account for over 40% of global GDP. Accelerated decoupling could lead to fragmented supply chains, competing technological standards, and separate economic spheres of influence.
For third-party countries, this means higher business costs, reduced global innovation, and altered trade patterns. The pandemic and ongoing trade disputes have already prompted companies to rethink their supply chains; further disruptions are likely in a world divided between the US and China.
This decoupling is unfolding in five distinct and concurrent phases, each presenting challenges and opportunities for third-party nations.
Five decoupling phases to watch
1. Global supply chains
The first phase—already well underway—involves the realignment of global supply chains. US companies are seeking to reduce over-dependence on China, especially in critical sectors like semiconductors, pharmaceuticals, and consumer electronics.
As a result, countries like Vietnam, Mexico, and India are emerging as alternative manufacturing hubs, attracting investment shifting away from China. For example, Vietnam saw a 10.5% increase in foreign direct investment (FDI) in the first half of 2023, while China’s FDI declined by 5.6% during the same period.
This trend underscores Vietnam’s potential as a key player in the diversification strategies of multinational companies.
2. Digital infrastructures
The second phase involves the divergence of digital infrastructures as the US and China build distinct technological ecosystems governed by separate regulatory frameworks and standards. This is evident in the rollout of 5G networks, where US allies have banned Chinese companies like Huawei in favor of non-Chinese alternatives.
In this fragmented environment, countries like South Korea and Japan, with advanced technological capabilities, have the opportunity to become neutral digital hubs. Their neutrality allows them to avoid higher costs faced by non-neutral hubs, such as the US$4-$5 billion increase in US 5G deployment costs due to Huawei’s exclusion.
By balancing technologies from both ecosystems, South Korea and Japan position themselves as critical players in the evolving digital landscape.
3. Data sovereignty and AI innovation
The third phase—data sovereignty and artificial intelligence—deepens the divide as the US and China tighten control over data flows, increasingly viewed as critical to national security and AI development.
In this context, Singapore is emerging as a neutral player, positioning itself as a secure data haven through initiatives like AI Verify, Digital Economy Agreements (DEAs), and its robust Personal Data Protection Act (PDPA).
AI Verify offers a forward-thinking approach to AI governance, enabling companies worldwide to assess the transparency, fairness and ethical compliance of their AI systems.
In 2022, over 60% of the world’s cloud services ran through Singapore’s digital infrastructure, reinforcing its role as a key hub for secure data management. The city’s DEAs facilitate seamless cross-border data transfers, and cross-border data flows contributed $540 billion to the region’s GDP in 2021.
As Singapore enhances its AI governance and data sovereignty, my firm, Temus, contributed insights to the Tony Blair Institute for Global Change’s report, “Greening AI: A Policy Agenda for the Artificial Intelligence and Energy Revolutions.”
Our recommendations, alongside those from other industry and research institutes, focused on how Singapore can leverage its computing power and data center footprint sustainably—ensuring competitiveness in the AI era while maintaining environmental responsibility, a paradox many governments and enterprises strive to resolve.
By fostering collaboration across industries and governments, Singapore offers a balanced approach to AI innovation amid growing concerns over data sovereignty.
4. Financial decoupling
The fourth phase, financial decoupling, is rapidly gaining momentum. Chinese companies are increasingly denied access to US capital markets, and China is accelerating efforts to build alternatives to the Western financial system, including promoting the digital yuan.
For third-party countries, this phase brings risks and opportunities. Financial hubs like Dubai and Zurich could emerge as neutral zones, attracting capital from both the US and China. However, these nations will need to diversify their currency reserves—balancing among the US dollar, euro, and yuan—to hedge against financial shocks.
A key driver of this shift is the “weaponization of the US dollar,” a concept explored by economist Eswar Prasad in his book “The Dollar Trap.” Prasad illustrates how the dollar’s dominance, with nearly 90% of global trade conducted in dollars, allows the US to impose sanctions and exert influence over the global financial system.
Countries like Russia and Iran, cut off from dollar-based networks due to US policy, face severe economic repercussions. This over-reliance forces nations to align with US interests or risk isolation. Consequently, many countries seek alternatives to avoid vulnerability to US sanctions and the need to pick sides in the growing US-China divide.
5. Competing Visions
The final phase is driven by ideological and geopolitical divergence. The US and China are promoting competing visions of the global order: the US emphasizes safeguarding intellectual property, fair competition, and the free flow of information, while China prioritizes technological self-reliance.
For third-party countries, navigating this landscape is increasingly complex. Nations like India and Turkey have shown that maintaining strategic autonomy while engaging with both superpowers is possible, but this balancing act will become more difficult as decoupling deepens.
In this context, former Singaporean diplomat Bilahari Kausikan advocates for a strategy of dynamic multipolarity. This approach encourages third-party countries to engage flexibly with multiple powers rather than aligning with one, maximizing their national interests.
Dynamic multipolarity allows nations to adapt to shifting geopolitical landscapes and avoid being drawn too deeply into either the US or China’s sphere of influence. By diversifying partnerships and engaging pragmatically with major global powers, third-party states can maintain strategic autonomy while securing win-win outcomes.
This enables them to capitalize on opportunities from various players and build stronger, balanced relationships with one another, fostering resilience and growth among other third-party states in an increasingly multipolar world.
Strategic autonomy, cooperation and capacity building
The US-China decoupling is already reshaping the global economy, and its impacts will continue to unfold over the coming decades. Third-party countries are not powerless in this transition.
By strategically navigating the five phases of decoupling—realigning supply chains, adapting to digital fragmentation, asserting data sovereignty, managing financial flows, and positioning themselves geopolitically—they can turn disruption into opportunity.
Agility will be crucial for these nations to avoid becoming permanently tethered to either the US or China. Those that maintain strategic autonomy, strengthen cooperation among themselves, and build their technological capabilities to cement their place in global value chains will thrive in this bifurcating world.
As decoupling accelerates, third-party countries have the opportunity not only to safeguard their economic interests but also to reinforce their relevance in a rapidly evolving global order.
Marcus Loh is a director at Temus, a digital transformation services firm, where he serves as the business head of Step IT Up Singapore and leads public affairs and strategic communication. He is also an executive committee member of the digital transformation chapter of SG Tech, the leading trade association for Singapore’s technology industry.