The speculative financial decoupling between the United States and China is now occurring, and the effects will have an impact on every aspect of the world market. Driven by business imbalances, modern rivals and national security issues, the split is accelerating and will form the 21st century.
The course of events continues regardless of the outcome of the next US national poll. The relationship is framed as one of rivalry because both main parties have taken a confrontational attitude toward China. Tools like taxes, trade handles, and supply chain swings will continue to be deployed. Decoupling is not just feasible, it is unavoidable.
This growing tear carries tremendous implications, especially for third-party countries. These nations—ranging from big markets like India and Germany to emerging markets such as Vietnam and Mexico—rely heavily on both the US and China for business, investment, systems, and safety partnerships.
The problem for these nations is certainly whether they will be affected by the world’s two largest economy ‘ separation, but how they will bridge the gap.
Collectively, the US and China accounts for over 40 % of global GDP. Increased coupling could lead to scattered supply chains, competing scientific standards, and independent financial spheres of influence.
For third-party nations, this means higher company costs, reduced international development, and changed trade patterns. Firms have already had to reevaluate their supply chains as a result of the pandemic and ongoing business disputes, and US and Chinese economies are likely to experience even greater disruption.
Each phase of this decoupling presents challenges and opportunities for third-party regions, and it is happening in five different and parallel stages.
Five isolating stages to observe
1. Global supply chains
The second phase—already good underway—involves the restructuring of global supply chains. US businesses are seeking to lower over-dependence on China, particularly in important areas like electronics, medicine, and consumer gadgets.
As a result, places like Vietnam, Mexico, and India are emerging as other producing centers, 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 development highlights Vietnam’s ability as a key player in the growth methods of multinational corporations.
2. Digital structures
The US and China build specific technical ecosystems that are governed by different governmental frameworks and standards, which contribute to the divergence of modern infrastructures. This is evident in the development of 5G networks, where US allies have banned Chinese businesses 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.
South Korea and Japan establish themselves as key players in the changing digital landscape by balancing technologies from both ecosystems.
3. Data sovereignty and AI innovation
As the US and China tighten control over data flows, which are increasingly viewed as crucial to national security and AI development, the third phase, which is data sovereignty and artificial intelligence, furthers the divide.
Singapore is emerging as a neutral player in this regard, establishing itself as a secure data haven through initiatives like AI Verify, Digital Economy Agreements ( DEAs ), and Singapore’s 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.
Singapore offers a balanced approach to AI innovation by encouraging collaboration between industries and governments in response to growing concerns over data sovereignty.
4. Financial decoupling
The fourth phase, financial decoupling, is rapidly gaining momentum. Chinese businesses are increasingly denied access to US capital markets, and China is making strides to develop alternatives to the Western financial system, including by encouraging the digital yuan.
For third-party countries, this phase brings risks and opportunities. Financial hubs like Dubai and Zurich might become neutral areas, drawing in both US and Chinese capital. However, these nations will need to diversify their currency reserves—balancing among the US dollar, euro, and yuan—to hedge against financial shocks.
The “weaponization of the US dollar,” a concept that economist Eswar Prasad explored in his book” The Dollar Trap,” is a key driver of this change. 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. Countries are forced to align with US interests or face isolation as a result of this over-reliance. In response, many nations are looking for other ways to combat the growing US-China conflict and the need to take sides.
5. Competing Visions
The final phase is fueled by ideological and political 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. As decoupling gets deeper, nations like India and Turkey have demonstrated that it’s possible to maintain strategic autonomy while engaging with both superpowers. However, this balancing act will get harder as the conflict gets deeper.
In this context, former Singaporean diplomat Bilahari Kausikan advocates for a strategy of dynamic multipolarity. Third-party nations are encouraged to cooperate more flexibly than to acquiesce to one power’s interests, thereby maximizing their own national interests.
Dynamic multipolarity allows countries to adapt to shifting geopolitical landscapes without getting too deeply entangled in either the US or China’s sphere of influence. Third-party states can maintain strategic autonomy while ensuring win-win outcomes by diversifying partnerships and engaging pragmatically with major global powers.
In an increasingly multipolar world, this enables them to capitalize on opportunities from various players and to form stronger, more balanced relationships with one another, fostering resilience and development among other third-party states.
Strategic autonomy, cooperation and capacity building
The US-China decoupling is already changing the world economy, and its effects will continue to grow 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 a must for these countries to keep themselves from being permanently bound up to either the US or China. In this fragmented world, those who maintain strategic autonomy, increase cooperation among themselves, and develop their technological prowess will prosper.
Third-party countries have the opportunity to protect their economic interests as decoupling progresses and to strengthen their relevance in a rapidly changing global order.
Marcus Loh is a director at Temus, a provider of digital transformation services, where he leads public affairs and strategic communication as well as serving as Step IT Up Singapore’s business head. He serves on the executive committee of SG Tech, the largest trade organization for Singapore’s technology sector, for the digital transformation chapter.