US-China decoupling could benefit other countries, China trade war game suggests

A recent study suggests that a complete economic decoupling between the US and China could benefit other countries, despite causing significant losses for both superpowers. Two researchers from Guangdong province in southern China utilized a trade model to simulate the impacts of an extreme scenario where bilateral trade between the two nations is entirely severed.

Their findings indicate that several countries, such as Cambodia, Vietnam, Bangladesh, and Mexico, could experience temporary economic benefits. This is attributed to these nations' capacity to partially take over trade and production activities that were previously carried out through US-China cooperation. However, the study warns that any long-term decoupling of these economies from China could quickly transform the initial welfare gains into losses.

Vietnam, for instance, is projected to benefit significantly due to its lower labor costs and expanding manufacturing base, but it is also deeply integrated into a China-centric East Asian production network, making it vulnerable to supply chain disruptions if it decouples from Beijing. The EU, on the other hand, stands to lose the most from a China-EU decoupling, given the extensive and deep two-way dependence between the two sides in high-end manufacturing, capital goods, and technology-intensive products.

While China could partially mitigate the economic shock of a US-China decoupling by sourcing certain goods from other countries or shifting to domestic production, the study highlights the fragile nature of the potential spillover benefits for other nations.