Do more clubbing. How forming partnerships can help tech middle powers survive the escalating US-China tech war

Maximilian Mayer and Gedaliah Afterman ask how middle powers can manage maintain autonomous foreign and technology policies as the rivalry between the United States and China intensifies. This is the third post in a new EGG commentary series exploring how AI’s development is affecting economic, social and political decision-making around the world.

As the rivalry between the United States and China intensifies, with a growing emphasis on technology, middle powers are being increasingly caught between two superpowers. The strategy that these governments choose to adopt could have significant ramifications. Many countries are turning to various forms of hedging strategies. In line with a traditional middle power pattern, countries such as the Philippines, the UK, Singapore, and Vietnam have been forging closer defense ties with the US while maintaining and even strengthening economic cooperation with China.[i] Japan, the UK, and Australia have recently moved closer to a bandwagoning model, aligning their economic and security policies with the US. However, most leaders reject the idea of having to choose between the US and China. As Singapore's Prime Minister Lee Hsien Loong stated, "It is not possible for us to choose one or the other, because we have very intense and extensive ties with both the US and China."

This analysis seeks to highlight some of the current trends in superpower competition and their impact on middle countries. We will ask how middle powers can manage the shrinking room for hedging strategies[ii] and maintain autonomous foreign and technology policies which are becoming ever more entangled due the growing geopolitical pressure to take sides.

Current state of play

The strategies that the US and China employ to compete are the most consequential examples of weaponized economic interdependence, where one party uses interdependence to coerce or deter the other rather than seek to cooperate for mutual gain. What initially was a bilateral issue between the US and China has through laws and presidential decrees regarding tech exports sanctions and further restrictive regulations become an increasingly dominant global phenomenon. Middle powers are struggling with this new era in which powerful governments use technological and economic choke points to exert pressure on rivals and friends alike.[iii] But the reordering process currently underway has wider implications, especially for the ability of international organizations such as the World Trade Organization to shape collective action. The contraction of globalization greatly impacts the economies of small and middle countries and especially their technological development, as the competitiveness of firms depends on market access, the flow of expertise as well as transnationally linked innovation processes.

The US is employing deft economic statecraft for dealing with China. Starting with the Trump administration, Washington has been working to put trade and technology sanctions in place against Beijing. The Biden Administration’s tough policies regarding China are seemingly the only issue that enjoys bipartisan support in a highly polarized US Congress. 5G networks and advanced computer chips are examples of a digital infrastructure and a core technology, respectively, which are becoming the central battleground on which China and the US are competing. Having shifted from viewing China first as a competitor, then as a challenger, and now as a threat, the US has chosen to pursue an aggressive containment strategy, that aims at "slowing down" the speed of Chinese innovation and freezing China's digital tech base at its current level thereby substantially hindering China’s ability to develop in many areas.

While these policies aim at curbing further growth of China’s economic and military might, their effectiveness depends on the cooperation of important US allies. When it comes to cutting edge semiconductors, high-tech companies from key US allies South Korea, Japan, Germany and the Netherlands control some of the most critical technological components.[iv] As their enthusiasm to follow US tech restrictions against China has been lackluster so far, the Biden administration has started to resort to strong measures such as the extraterritorial application of US law to supplement already vigorous diplomatic efforts in order to get allied countries in line.

China, for its part, is striving to develop a more autonomous domestic tech industry and exerting pressure on US allies to stave off further technological isolation. As it reenters the world stage, after three years of COVID-enforced isolation, China is also offering incentives such as the promise of tech cooperation and investments. The most recent examples are proposals for renewable energy investment in the Philippines and space cooperation with Djibouti. When Philippine President Ferdinand Marcos Jr. was in Beijing on January 5, 2023, nine Chinese energy companies pledged to invest $13.76 billion in the Marcos administration’s push for renewable energy. A week later, two private Chinese space companies signed a memorandum of understanding with the government of Djibouti to “build a $1 billion commercial spaceport with seven launch pads and three rocket engine test facilities.”

The rise of minilateralism

For middle powers, it is crucial to develop the skill of anticipating and responding effectively to pressures from larger nations. One example is the provisions in the recent US Inflation Reduction Act (IRA) that favour production in the US, which caught many of the country's allies by surprise. The domestic policies of the US have far-reaching effects, impacting innovation, science, and industrial policies globally. The globalization-based multilateral trading system is at risk of becoming determined by the foreign and security policy priorities of the US and China rivalry.

To that end, several middle countries have added a more flexible strategic approach to their toolbox that complements traditional bandwagoning, balancing and hedging: minilateral connectivity diversification. Minilateralism has been described as bringing “to the table the smallest possible number of countries needed to have the largest possible impact on solving a particular problem”. Empirically, it comprises small and medium-sized countries increasingly cooperating through clubs and other forms of small, flexible groupings, furthering the trend towards multipolarity. New trade and investment agreements, as well as collaborations in technology and research, play a vital role in maintaining integrated markets and protecting against fragmentation in the technology sphere.

Some of the origins of minilateralism lie within the global system. Governments are moving to establish bespoke intergovernmental cooperation due to the demise of multilateral organizations which suffer from a loss of efficacy – two interlinked trends that are comparable to the blossoming of minilateralism during the final phase of the Bretton Woods system.[v] Yet a second feedback loop is at play too. While the attractiveness of minilateralism partially results from the decline of US economic power and its ordering function,[vi] its effects at the same time render the superpower’s ability to translate power resources into outcomes less effective. Neither the US nor China can completely dominate the agenda. Each superpower tries hard to convince its smaller allies to adopt policy approaches supportive of its own national interest.      Neither of them has been successful in this endeavor so far. Germany is not prepared to give up on the Chinese export markets so crucial to its economic strength. South Korea does not whole-heartedly embrace the economic decoupling strategy against China propagated by the Biden administration. And Israel finds itself trying to maneuver between growing pressure from the United States and its interest to maintain economic cooperation with China, especially on technology cooperation.

What Should Middle Powers Do?

In this situation, small and medium-sized countries should adhere to five guiding principles for shaping future foreign and technology policies.

#1 Form and use minilateral groups to realize your national interest.

The current global system is likely not destined to become polarized as it was during the Cold War. Today’s international environment is more complex, more interconnected and more dynamic. The most critical insight stemming from this perspective is effective collective action does not require a hegemon or a strong institutional framework. The fact that the Transpacific Partnership (TPP) did not collapse but was implemented as a Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) after the US withdrew, is a primary example of the agency of middle powers, and collective leadership in action.

#2 Become a member of many clubs.

Diversification of the portfolio of minilateral partnerships is not only an effective risk insurance but also creates more foreign policy options. Having access to the strengths and knowledge of other countries facing similar problems transcends the Cold War “non-aligned” mentality and is a key to success. Take, for instance, the case of Germany’s energy policy. As Berlin aims to secure Green Hydrogen supplies, it should work to create a group of likeminded countries rather than seeking to conclude bilateral agreements. Germany’s bitter experience with Nord Stream — bilaterally implemented with Russia — illustrates the costs of misplaced bilateralism. Indeed, as the recent example of an Israeli-Egyptian-European gas export partnership shows, when middle powers operate through new and, sometimes unorthodox, groupings, it can give rise to surprising breakthroughs.

#3 Form issue-based and interest-based clubs following the domestic-global gradient.

Creating new clubs that are helpful in achieving foreign policy goals and promoting overlapping domestic priorities can be highly beneficial. Frequently, domestic agendas are tied into global connections and processes. Yet, policymakers who are primarily focused on their own national agenda tend to underappreciate these connections. As a result, many opportunities to realize synergies regarding, for instance, energy transition, digitalization and innovation policies, are missed. The “Climate Club” recently established by the G7 exemplifies how states try to use minilateral formats to better coordinate their climate-related policies outside existing multilateral frameworks. Geography should not limit or determine the composition of such groupings. Transregional clusters are forming to address joint challenges as the growing cooperation between India, Japan and the Republic of Korea with countries in the Middle East in areas such as energy and food security and technology indicates.

#4 Operate minilateral groups pragmatically and informally.

Minilateralist practices tend to be more flexible and less formalized than multilateralism to put aside, as far as possible, strategic differences, hierarchies and formal procedures. This is evident in the I2U2 grouping where, despite different strategic outlooks regarding issues such as China, the war in Ukraine, and the Iran nuclear issue, the four partners (India, Israel, the UAE, and the US) have agreed to mutually beneficial economic and technological cooperation. The cases of BRICS (Brazil, Russia India, China, South Africa), Quad (USA, Japan, Australia, India), ASEAN Plus 3 and Shanghai Cooperation Organization (SCO) show that overlaps across the economic and security fields are possible. Similarly, involving Japan, South Korea and even China into the context of the Abraham Accords between Israel and its regional partners would make sense. In practice, minilateral statecraft is most effective when avoiding the trap of playing “exclusionary” [vii] games directed at the US, China or other actors.

#5 Form or join minilateral clubs to mitigate harmful central control and tech monopolies.

In the digital age, with its monopolies and structurally designed digital dependence regarding payment and data platforms, technological infrastructures create huge global asymmetries. These affect specifically middle power autonomy in radical ways. For instance, in September 2020, Facebook threatened to block Australian users from sharing local and international news in a row with the Australian government over new media legislation. Therefore, it makes sense for middle powers to avoid over dependence on US/China social media, platform giants and infrastructure. In addition, as the example in the European Union has repeatedly demonstrated, tech middle powers often need partners to negotiate successfully with global big-tech firms such as Meta, Google or Apple.

Stabilizing the world for the “rest”

In the aftermath of Russia’s invasion of Ukraine, middle powers are under pressure to respond to the primacy of geopolitics over economic globalization. For middle powers, the sound answer to a world increasingly impacted by weaponized interdependence may seem counterintuitive: create more connectivity, not less, and use it cooperatively for mutual gain. The key to a multipolar world and to avoiding getting caught up in superpower faceoffs is multidirectional diversification rather than decoupling and isolation. Middle powers can influence and shape events in a challenging context by forging new alliances and tech cooperation and resisting succumbing to the alluring siren’s song of self-reliance and autarky.[viii]

Middle powers can collaborate to establish a more stable and interconnected environment, even as Beijing and Washington may be headed towards a collision course. By forming new technology and trade partnerships, middle powers can not only strive to reduce the risks of asymmetric dependencies, but also shift the global discourse away from a focus on systemic competition and the dominance of military power. The rest of the world should not wait for the two major powers to end their dangerous dance, as they must address pressing issues such as managing energy transitions, fostering innovations for sustainability, and addressing social inequality.