The competition between the U.S. and China has been heating up for years, and leaders of both countries have sparred on matters of trade, technology and even alleged spying. Now, the World Bank is warning that souring U.S.-China relations will hinder the growth in both economies as well as other parts of Asia, and hurt innovation and information sharing around the world.
“Politics, rather than economic fundamentals and predictable rules, are molding trade patterns and the resulting uncertainty could discourage investment in other countries,” the World Bank said in a report released Friday. “Bilateral restrictions on technology flows and collaboration between large countries could reduce the global availability of knowledge.”
The gap between the U.S. and China got wider during the Trump administration, which implemented sweeping tariffs targeting Chinese imports on metals, electronics and more. A lot of those restrictions have been adopted by President Biden, who added additional controls on chip exports last October, weakening relations between the two trade partners.
But what happens between the U.S. and China won’t just stay between the U.S. and China. Around 12 Asian neighbors are affected by the rising tensions between the two superpowers, including Vietnam and Thailand, according to the World Bank, which analyzed patent application trends to measure innovation.
“What happens to both Chinese and US innovation matters for other countries in the region,” the report reads. “While still small compared to the advanced economies like the U.S., China has become an increasingly important source of knowledge for innovation in other East Asia and Pacific countries,” the report said.
The World Bank noted, however, that the import restrictions have translated into incremental gains for other countries in the region as they swoop in to make up for the lost business in China. For instance, China’s share of U.S. imports dropped 4% between 2018 and 2022, while that of its peers in the region has increased over the same period. Those shifts came mainly from the electronics industry, which includes chips and semiconductors. But in the long run, U.S.-China decoupling could disrupt trade and increase the cost of business in the region, making it less attractive for future investments, according to the World Bank.
On the bright side, the reopening of China’s economy is set to boost business in the entire East Asia Pacific region this year. The World Bank projected that growth is expected to of 5.1% in 2023, up from its October forecast of 4.6%. Years of pent-up demand following the COVID-19 pandemic have helped the recovery of services, including tourism, in EAP countries, although they have yet to reach pre-pandemic levels.
“Most major economies of East Asia and the Pacific have come through the difficulties of the pandemic but must now navigate a changed global landscape,” said World Bank’s EAP Vice President Manuela V. Ferro in a statement on Thursday.
Chips and spy balloons spelling doom
The U.S. and China have taken opposite stances on several major world events over the past few years. China has stood by Russia even after it invaded Ukraine, unlike its Western counterparts, and earlier this month Chinese President Xi made a major diplomatic trip to visit Vladimir Putin. The country has also moved to take over Hong Kong, which previously enjoyed political and judicial autonomy from Mainland China under the “one country, two systems” policy. And China has claimed Taiwan as its own under its “One China ” ideology, outraging Taiwan and inflaming tensions with the U.S. For its part, the U.S. has imposed greater tariffs and trade restrictions on technology. President Biden’s CHIPS and Science Act signed in 2022 bolstered America’s chip-making ambitions, an industry that had been dominated by countries in Asia and particularly China. That has threatened to cripple China’s semiconductor industry and forced countries to pick sides between the U.S. and China.
In 2023, the countries’ relations were further impacted after the U.S. shot down a balloon last month that it suspected belonged to China. The U.S. says the balloon was spying on sensitive military sites in North America. The move angered China, which insisted it was an unmanned civilian airship, saying the U.S. used “indiscriminate” force and “violated the spirit of international law and international practice.” China also said it had observed several surveillance balloons sent by the U.S. on its land, which the U.S. denied.