The role of neutral countries in global trade

Pragmatic and materially-oriented, neutral countries can benefit greatly from geoeconomic fragmentation, but not without also facing challenges.

As fault lines between the US, China and Russia deepen, ‘neutral’ countries—those that steer across the divides without aligning with any side—are gaining a weightier role in global trade. These countries, characterised by their economic pragmatism rather than geopolitical affiliations, are leveraging their non-alignment to maximise the benefits of trade amid geoeconomic fragmentation.¹ Maintaining transactional relationships in an increasingly complex trade environment allows neutral countries to attract investment and diversify their economic partnerships. However, as geopolitical fault lines deepen, staying neutral will become increasingly hard.

Trade multipolarity

The economies of neutral countries differ vastly. For example, India’s is highly dependent on services and has a GDP per capita of US$2,410, whereas Qatar’s is oil-driven and supports a GDP per capita of US$87,661.^2,3,4 Yet these diverse economies have a commonality: their trade patterns are multipolar. These countries engage with multiple, if not all, trading blocs that emerge across geopolitical divides, with the aim of optimising economic benefits. According to modelling by Economist Impact, the material returns are clear. Under a scenario of industrial goods decoupling due to increasing geopolitical tensions between a hypothetical ‘western’ trading bloc, led by the US, and an ‘eastern’ bloc, led by China and Russia, the bloc of neutral countries benefits.⁵ We estimate that while Western economies might see a GDP decrease of 0.35% and China might face a more drastic drop of 4.48%, neutral countries may observe a GDP increase of 0.66%. The results are magnified in the (unlikely) scenario of a full decoupling, where the western and eastern blocs cease all trade between one another. In this scenario, while Western economies experience a GDP decrease of 4.34% and the eastern bloc sees a significant decline of 7.04%, neutral countries incur only a minimal GDP decrease of 0.04%, accentuating their relative gain from extreme trade fragmentation.

Neutral gains: trade opportunities beyond alignment

As trade relations between adversarial country groupings deteriorate, neutral countries benefit in two primary ways. First, geopolitically non-aligned countries are perceived, and will increasingly be seen, as stable havens for foreign direct investment (FDI), attracting multinationals seeking less contentious operational bases. This not only diversifies and expands non-aligned countries’ trade flows with both the Western and Sino-Russian blocs but also bolsters their economies by enhancing their infrastructure and industrial capabilities—crucial for long-term economic development.

Vietnam, one country that is lukewarm in accepting strategic support from the US while confronting the influence and territorial assertiveness of China, is a good example of adept geopolitical balancing for economic gains. Over the past decade, it has observed a significant surge in net FDI flows, aimed largely at its manufacturing and infrastructure sectors, which have swelled from US$8.37bn in 2012 to US$17.9bn in 2022.⁶ One main reason is that as major Western companies, such as Apple, seek to diversify their supply chains away from China, they have invested heavily in Vietnam, where both labour costs and geopolitical tensions remain low.⁷ In turn, the construction of new factories and expansion of infrastructure, such as ports, has bolstered Vietnam’s export capacity, integrating it more deeply into global supply chains.

Another way in which neutral countries can benefit from geoeconomic fragmentation is by acting as intermediaries or alternative trade partners. In particular, non-aligned countries can capitalise on the gaps left by erstwhile economic partners. At the height of the US-China trade war, for example, tariffs imposed by China on US agricultural products, such as soybeans, created a supply gap that needed filling. Brazil, a neutral country, quickly stepped in to meet China’s demand, significantly increasing its soybean exports. This adaptation not only benefitted Brazil’s agricultural sector but also strengthened its trade relations with China.⁸ And, notably, Brazil’s transnational approach to trade has seemingly not affected its warm relationship with the US: the non-aligned country is still considered a “major non-NATO ally”, granting it significant benefits and privileges in security cooperation with the US.⁹

Neutral balancing: the perils of non-alignment

Although neutral countries may reap some economic benefits, their position between adversarial blocs remains fraught with difficulties. The inherent challenge in trading as a non-aligned country is in needing to manage trade relationships without the foundational trust typical for deeper economic partnerships. A trust deficit hampers regulatory cooperation and harmonisation—an essential element for the smooth flow of goods and services between countries and regions. It also limits market expansion for businesses on either side, meaning that there will be inherent limits to the scale of transnational trade that non-aligned countries could reach.

Moreover, as geopolitical tensions mount, maintaining a neutral stance will only become harder. As tensions between geopolitical blocs increase, the margin for non-alignment will simultaneously decrease. Aligning too closely with one side might result in economic or diplomatic retribution from another, putting at risk established economic ties and inviting sanctions or tariffs. The opposite approach is not favourable either. If countries stray too far from major bloc alignment, they might veer into isolation, further diminishing the already restricted economic benefits from non-alignment. In short, maintaining a neutral status remains a high-wire act fraught with both opportunity and peril.