Geopolitical Risk Mitigation in Emerging Markets: Strategic Sector Positioning in China and the U.S.

The U.S.-China geopolitical rivalry has reshaped investment strategies in emerging markets, forcing businesses and investors to adopt sector-specific approaches to mitigate risks. As supply chains fragment and regulatory landscapes diverge, strategic positioning in innovation-driven sectors-such as green energy, semiconductors, and advanced manufacturing-has become critical. This analysis explores how China and the U.S. are navigating these challenges and the implications for investors.

China's Dual Circulation Strategy: Resilience Through Domestic Innovation

China's "Dual Circulation" framework, emphasizing domestic demand and technological self-reliance, has emerged as a cornerstone of its risk mitigation strategy. By 2025, the country has prioritized industrial upgrading in sectors like green energy and high-tech manufacturing, supported by state-owned enterprises and industrial guidance funds, according to a WEF analysis. For instance, China's Beautiful China 2025 initiative has allocated over RMB 2.5 trillion to solar power development in 2023 alone, while circular economy models in industries like steel are reducing reliance on imported raw materials, as described in the Beautiful China 2025 report.

Simultaneously, China is leveraging its Belt and Road Initiative (BRI) to export renewable technologies, as seen in projects like the Zhanatas Wind Farm in Kazakhstan and the Gouina Hydropower Station in Mali, per ESG News coverage. These efforts not only advance domestic climate goals but also solidify geopolitical influence. However, regulatory crackdowns and demographic challenges remain headwinds, necessitating cautious optimism for investors, according to a Goldman Sachs analysis.

U.S. Emerging Markets: Onshoring and Sector-Specific Resilience

In the U.S., the focus has shifted to onshoring and friend-shoring to counter Chinese competition. The semiconductor sector exemplifies this trend, with over $750 billion invested in new fabrication facilities since 2023, driven by policies like the CHIPS and Science Act, as noted in an EY insight. Aerospace and automotive firms are also adopting nearshoring strategies, with 78% of EY-Parthenon survey respondents planning to increase in-sourcing to secure supply chains, according to a Riverway Risk guide.

However, retaliatory tariffs-such as Canada's 100% surtax on Chinese electric vehicles-and fragmented global governance in AI and quantum computing create uncertainty, as highlighted in a ScienceDirect study. Businesses are responding with scenario planning, cybersecurity investments, and diversified sourcing. For investors, this underscores the importance of selecting companies with agile supply chains and strong compliance frameworks.

Investment Implications: Decoupling and Diversification

The decoupling of China from broader emerging markets (EM) has redefined investment paradigms. While China's innovation-driven sectors offer long-term growth, EM outside China-particularly India and the Middle East-present opportunities due to favorable demographics and structural reforms, according to a China Briefing analysis. Investors must balance exposure to China's green energy dominance with diversification into resilient EM markets.

For example, India's digital infrastructure and manufacturing reforms have attracted foreign direct investment (FDI), despite U.S.-China tensions dampening cross-border flows, as detailed in a ResearchGate paper. Meanwhile, U.S. trade policies, including tariffs on EM exports, require careful monitoring to avoid overexposure to volatile markets, per an S&P Global report.

Conclusion: Navigating a Fragmented Landscape

Geopolitical risk mitigation in emerging markets demands sector-specific agility. China's focus on domestic innovation and green energy contrasts with the U.S.'s onshoring and friend-shoring strategies, creating divergent opportunities. Investors should prioritize companies with robust compliance systems, diversified supply chains, and exposure to high-growth sectors like AI and renewables. As the global landscape evolves, active portfolio management and scenario planning will be essential to capitalize on emerging market dynamics while mitigating risks.