The coronavirus (Covid-19)-induced uptick in protectionism has prompted governments to reassess their approach to globalisation, including by calling for supply-chain reshoring. Calls for trade diversification, amid recognition of overreliance on China, will gain further traction in the coming years. We neither expect a mass corporate exodus from China, nor significant reshoring to expensive Western economies in the near term. However, discussions on “nearshoring”—with supply chains becoming more regionalised—will prove more pronounced. Amid calls for a US “decoupling” from China, many countries will find that they increasingly need to choose sides between the US and China.

In Europe, co-operation with China will continue in areas of mutual interest

Across Europe, the spread of the coronavirus and the crackdown on civil liberties in Hong Kong have led to a hardening of attitudes towards China. European concerns have risen recently over supply-chain vulnerabilities, market access for European companies and the potential security risks linked to the participation of Chinese companies in building 5G infrastructure. Rising tensions between the US and China also contributed to the EU adopting a tougher stance on China from 2017. Negotiations over an EU-China bilateral investment pact are therefore unlikely to progress substantially this year. Nonetheless, while the US aims to “decouple” from China, the EU is targeting “diversification”. As a result, we expect that co-operation with China will continue in areas of mutual interest, on a transactional basis.

In Asia, diplomatic confrontations between US allies and China are likely

Worsening ties between the US and China will put strain on geopolitical relations across Asia, where countries were already feeling increasing pressure from the two nations. The US, for example, has rolled out an Indo-Pacific Strategy as an apparent rival to China’s Belt and Road Initiative (BRI), which is focused on Asia. As strategic divergence between the US and China becomes more apparent, it seems likely that the US will make demands of its allies that will force them into diplomatic confrontations with China. Countries that will be particularly affected include South Korea, Australia, New Zealand, Singapore, Taiwan and the Philippines. Those countries that fail to signal their support for the US will risk economic retaliation (in the form of tariff barriers on major exports) or the withdrawal of military support. China may demand its own commitments from countries, promising trade and investment opportunities for those that align with it, and economic punishments for those that do not.

Latin America will be caught between a rock and a hard place

Latin American governments will also have to navigate an increasingly challenging geopolitical landscape as the US-China rift deepens. Most regional governments are deepening co-operation with the US on matters of migration and security. On the economic front, however, US influence is unlikely to grow substantially. In recent years the US has shown little interest in strengthening collaborative economic efforts with its Latin American partners, and has offered little in the way of financial support. This has allowed China to expand its economic influence significantly in Latin America, where its growing importance is evident in the trade data; the country has already traded places with the US to become the region’s main trading partner, if Mexico is excluded from the figures. China is also a major source of investment and finance for the region, partly through its BRI, which currently encompasses 18 Latin American countries. In this context, regional governments will seek a middle ground between the world’s foremost superpowers. An important test for the region will be how it approaches 5G development; although most governments are unlikely to block Chinese participation in the rollout, they may encourage greater participation from other global players than would otherwise be the case.

The Middle East will mostly side with the US, and Sub-Saharan Africa with China

In the Middle East region, the US will remain the main strategic ally of the Sunni Arab monarchies, Egypt and Israel throughout the forecast period. The US will exert growing pressure on these countries to reduce their economic exposure to China. Israel has already followed the US in refusing Chinese investment in controversial high-technology areas. Saudi Arabia and the UAE, which have important commercial ties with China, will try to maintain these links, but they would relent to any pressure from the US to block Chinese involvement in certain sectors. However, China will continue to be an important investor in construction and industrial projects in countries such as Egypt, and in more closed markets or those that are in any way hostile towards the US, such as Algeria or Iran. In Sub-Saharan Africa, China is by far the largest creditor to most countries (mainly owing to BRI-related loans), and therefore many economies there will have no choice but to side with China if they must choose between the two.

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