Emerging markets thrive amid US-China decoupling

As the economic decoupling between the US and China progresses, some countries are positioning themselves to benefit from the resulting economic fragmentation, according to an article by Foreign Policy magazine.

This separation could potentially cost the global economy around 7 per cent of its GDP, equivalent to $7.4 trillion. While the International Monetary Fund (IMF) warns that developing economies would suffer the most, several emerging markets are finding ways to capitalize on the shifts in global supply chains.

Malaysia, particularly its northern state of Penang, is emerging as a key beneficiary. Penang has seen a surge in foreign direct investment (FDI), attracting $13.5 billion last year alone, as multinational companies shift production away from China. This investment boom has turned Penang into a significant hub for semiconductor production, supplying 20 per cent of US chip imports in 2023. With companies like Intel planning major expansions and Chinese firms also showing interest, Malaysia's role in the global semiconductor industry is poised to grow even further.

Meanwhile, Chinese firms are also adapting to the new economic landscape by redirecting investments to other emerging markets. Mexico has become a favoured destination for Chinese greenfield investments in manufacturing and logistics. Mexican industry experts predict that a significant portion of new businesses in the country's industrial parks will be Chinese, leveraging the US-Mexico-Canada free trade agreement. In Eastern Europe, Hungary has attracted substantial Chinese investment, such as the $8 billion battery plant by CATL, positioning itself strategically within the EU.

Another trend highlighted by Foreign Policy is the role of intermediary countries in extended supply chains. Contrary to expectations that de-risking would shorten supply chains, many Western companies continue to source from China but do so through intermediary countries like Vietnam. Vietnam's trade data reveal a significant increase in imports from China and corresponding exports to the US, indicating that Chinese goods are often re-exported via Vietnam. This arrangement allows the US to seemingly reduce its direct reliance on China while in reality, supply chains become longer and more complex.

Countries rich in critical raw materials, such as Bolivia, Indonesia, the Democratic Republic of Congo, and Türkiye, are also positioning themselves to benefit. Bolivia, for instance, has signed deals with Russia and China to exploit its lithium deposits, crucial for battery production. These countries are leveraging their resources to attract investment from both Western and Chinese companies, ensuring they secure favourable terms, including technology access, trade agreements, and financing.

Emerging markets are also increasingly turning to non-Western financial donors. The BRICS nations' New Development Bank and China's Asian Infrastructure Investment Bank are providing substantial financial support to developing countries. This shift is exemplified by the recent floods in Brazil, where the BRICS bank quickly offered a $1.1 billion aid package, dwarfing the aid from the US and EU. This growing competition among donors allows emerging economies to seek better financial terms and reduce their reliance on traditional Western institutions like the World Bank.

While many will face challenges from the US-China decoupling, a select group of emerging economies is already reaping the benefits. These countries are leveraging their strategic locations, skilled workforces, and diplomatic relations to become key industrial, trade, and technology hubs. Those with abundant critical raw materials or access to diverse financial resources are particularly well-positioned to thrive in the new global economic order. However, the IMF's concerns about the broader economic risks of decoupling remain significant and likely to intensify.