A comprehensive analysis of governance, fiscal policy, and urban transformation in South Asia’s most complex megacity

Based on World Bank Diagnostic Report  |  Policy Roadmap 2025–2035  |  $10 Billion Transformation Framework

PART 1: EXECUTIVE SUMMARY & DIAGNOSTIC FRAMEWORK

Karachi is a city in contradiction. The financial capital of the world’s fifth-most populous nation, it contributes between 12 and 15 percent of Pakistan’s entire GDP while remaining home to some of the most acute urban deprivation in South Asia. A landmark World Bank diagnostic, the foundation of this expanded analysis, structures its findings around three interconnected “Pathways” of reform and four operational “Pillars” for transformation. Together, they constitute a $10 billion roadmap to rescue a city that is quietly—but measurably—losing its economic crown.

The Three Pathways: A Diagnostic Overview

Pathway 1 — City Growth & Prosperity

The central paradox driving the entire World Bank report is one that satellite imagery has made impossible to ignore. While Karachi officially generates between 12 and 15 percent of Pakistan’s national GDP—an extraordinary concentration of economic output in a single metropolitan area—the character and location of that wealth is shifting in troubling ways. Nighttime luminosity data, a reliable proxy for economic intensity, shows a measurable dimming of the city’s historic core. High-value enterprises, anchor firms, and knowledge-economy businesses are quietly relocating to the unmanaged periphery, where land is cheaper, regulatory friction is lower, and the absence of coordinated planning perversely functions as a freedom.

This is not simply a real estate story. It is a harbinger of long-term structural decline. When economic activity migrates from dense, serviced urban centers to sprawling, infrastructure-poor peripheries, the fiscal returns per unit of land diminish, commute times lengthen, productivity suffers, and the social fabric of mixed-use neighborhoods frays. Karachi is not alone in this dynamic—it mirrors patterns seen in Lagos, Dhaka, and pre-reform Johannesburg—but the speed and scale of its centrifugal drift are alarming.

Yet the picture is not uniformly bleak. One of the report’s most striking findings is the city’s quiet success in poverty reduction. Between 2005 and 2015, the share of Karachi’s population living in poverty fell from 23 percent to just 9 percent, making it one of the least poor districts anywhere in Pakistan. This achievement, largely the product of informal economic dynamism, remittance flows, and the resilience of its entrepreneurial working class, stands as proof that Karachi’s underlying human capital remains formidable. The governance challenge is not to create prosperity from nothing—it is to stop squandering the prosperity that already exists.

“Karachi’s economy is like a powerful engine running on a broken chassis. The horsepower is there. The infrastructure to harness it is not.”

Pathway 2 — City Livability

By global benchmarks, Karachi is a city in crisis. It consistently ranks in the bottom decile of international livability indices, a fact that reflects not mere inconvenience but a fundamental failure of urban governance to provide the basic services that allow residents to live healthy, productive, and dignified lives.

Water and sanitation constitute the most acute dimension of this failure. The city’s non-revenue water losses—water that enters the distribution system but never reaches a paying consumer due to leakage, illegal connections, and metering failures—are among the highest recorded for any city of comparable size globally. In a megacity of 16 to 20 million people, depending on the methodology used to define its boundaries, these losses translate into hundreds of millions of liters of treated water wasted daily while residents in katchi abadis pay informal vendors a price per liter that is many multiples of what wealthier households in serviced areas pay through formal utilities. This regressive dynamic—where the urban poor subsidize systemic dysfunction—is one of the defining injustices of Karachi’s service delivery crisis.

Green space presents a related but distinct vulnerability. At just 4 percent of total urban area, Karachi’s parks, tree canopy, and public open spaces are a fraction of the 15 to 20 percent benchmarks recommended by urban health organizations. In a coastal city where summer temperatures routinely exceed 40 degrees Celsius and where the Arabian Sea’s humidity compounds heat stress, this deficit is not merely aesthetic. It is a public health emergency waiting to erupt. The urban heat island effect—whereby dense built environments trap and re-radiate solar energy, raising local temperatures by several degrees above surrounding rural areas—disproportionately affects the informal settlements that house half the city’s population and where air conditioning is a luxury few can afford.

Underlying both crises is the governance fragmentation that the report identifies as the structural root cause of virtually every livability failure. Karachi is currently administered by a patchwork of more than 20 federal, provincial, and local agencies. These bodies collectively control approximately 90 percent of the city’s land. They include the Defence Housing Authority, the Karachi Port Trust, the Karachi Development Authority, the Malir Development Authority, and a constellation of cantonment boards, each operating according to its own mandate, budget cycle, and institutional incentive structure. The result is what urban economists call a “tragedy of the commons” applied to governance: because no single entity bears comprehensive responsibility for the city’s functioning, no single entity has the authority—or the accountability—to coordinate a systemic response to its failures.

“In Karachi, everyone owns the problem and no one owns the solution. That is not governance; it is organized irresponsibility.”

Pathway 3 — City Sustainability & Inclusiveness

The fiscal dimension of Karachi’s crisis is perhaps the most analytically tractable, because it is the most directly measurable. Property taxation—the foundational revenue instrument of urban government worldwide, and the mechanism by which cities convert the value of land and improvements into public services—is dramatically underperforming in Sindh relative to every comparable benchmark.

The International Monetary Fund’s cross-country data confirms that property tax yields in Sindh are significantly below those achieved in Punjab, Pakistan’s other major province, and far below those recorded in comparable Indian metropolitan areas such as Mumbai, Pune, or Hyderabad. The gap is not marginal. Whereas a well-functioning urban property tax system should generate revenues equivalent to 0.5 to 1.0 percent of local GDP, Karachi’s yields fall well short of this range. The consequences are compounding: underfunded maintenance leads to asset deterioration, which reduces the assessed value of the property base, which further constrains tax revenues, which deepens the maintenance deficit. This is a fiscal death spiral, and Karachi is caught within it.

Social exclusion compounds the fiscal crisis in ways that resist easy quantification. Approximately 50 percent of Karachi’s population—somewhere between 8 and 10 million people—lives in katchi abadis, the informal settlements that have grown organically on land not formally designated for residential use, often lacking title, rarely connected to formal utility networks, and perpetually vulnerable to eviction or demolition. The rapid growth of these settlements, driven by both natural population increase and sustained rural-to-urban migration, has increased what sociologists describe as social polarization: the geographic and economic distance between the formal, serviced city and the informal, unserviced one.

This polarization is not merely a social concern. It has direct economic consequences. Informal settlement residents who lack property rights cannot use their homes as collateral for business loans. Children who spend excessive time collecting water or navigating unsafe streets have less time for education. Workers who cannot afford reliable transport face constrained labor market options. The informal city subsidizes the formal one through its labor, while receiving little of the infrastructure investment that makes formal urban life possible.

The Four Transformation Pillars

The World Bank’s $10 billion roadmap does not limit itself to diagnosis. It proposes four operational pillars through which the three pathways of reform can be pursued simultaneously. These pillars are not sequential—they are interdependent, and progress on one without the others is unlikely to prove durable.

Pillar 1 — Accountable Institutions

The first and arguably most foundational pillar concerns governance architecture. The report argues, persuasively, that no amount of infrastructure investment will generate sustainable improvement so long as 20-plus agencies continue to operate in silos across a fragmented land ownership landscape. The solution it proposes is a transition from the current provincial-led, agency-fragmented model to an empowered, elected local government with genuine fiscal authority over the metropolitan area.

This is not a technical recommendation. It is a political one. The devolution of meaningful power to an elected metropolitan authority would require the Sindh provincial government—which has historically resisted any erosion of its control over Karachi’s lucrative land assets—to accept a substantial redistribution of authority. It would require federal agencies to cede operational jurisdiction over land parcels they have controlled for decades. And it would require the creation of new coordination mechanisms: inter-agency land-use committees, joint infrastructure planning bodies, and unified development authorities with the mandate and resources to enforce coherent spatial plans.

International precedents for such transitions are encouraging. Greater Manchester’s devolution deal in the United Kingdom, Metropolitan Seoul’s governance reforms in the 1990s, and the creation of the Greater London Authority all demonstrate that consolidating fragmented metropolitan governance into accountable elected structures can unlock significant improvements in both service delivery and economic performance.

Pillar 2 — Greening for Resilience

The climate dimension of Karachi’s transformation cannot be treated as a luxury add-on to more “practical” infrastructure priorities. A city with 4 percent green space in a warming coastal environment is a city accumulating climate risk at an accelerating rate. The 2015 Karachi heat wave, which killed more than 1,200 people in a single week, was a preview of what routine summers will look like within a decade if the urban heat island effect is not actively countered.

The greening pillar encompasses multiple overlapping interventions: expanding parks and urban forests to absorb heat and manage stormwater; restoring the mangrove ecosystems along Karachi’s coastline that serve as natural buffers against storm surges and coastal erosion; redesigning road networks to incorporate permeable surfaces, street trees, and bioswales; and integrating green infrastructure standards into building codes for new development.

These investments are not merely environmental. They are economic. The World Health Organization estimates that urban green space reduces healthcare costs, increases property values in surrounding areas, and improves labor productivity by reducing heat stress. In a city where informal settlement residents have no access to air conditioning, every degree reduction in ambient temperature achievable through urban greening has a direct, measurable impact on human welfare.

Pillar 3 — Leveraging Assets

Karachi possesses one asset in extraordinary abundance: prime urban land controlled by public agencies. The Defence Housing Authority alone controls thousands of hectares in locations that, by any market measure, represent some of the most valuable real estate on the subcontinent. The Karachi Port Trust, the railways, and various federal ministries hold additional parcels of commercially significant land that are either underdeveloped, misused, or lying fallow.

The asset monetization pillar proposes to unlock this latent value through structured Public-Private Partnerships (PPPs) that use land as the primary input for financing major infrastructure projects. The model is well-established: a government agency contributes land at concessional rates to a joint venture, a private developer finances and constructs mixed-use development on a portion of the parcel, and the revenue generated—whether through commercial rents, residential sales, or transit-adjacent development premiums—is used to cross-subsidize the public infrastructure component of the project.

This model has been successfully deployed for mass transit financing in Hong Kong (through the MTR Corporation’s property development strategy), in Singapore (through integrated transit-oriented development), and more recently in Indian cities like Ahmedabad (through the BRTS land value capture mechanism). Karachi’s $10 billion infrastructure gap—encompassing mass transit, water treatment, wastewater management, and flood resilience—is too large for public budgets alone. Asset monetization is not optional; it is the essential bridge between fiscal reality and infrastructure ambition.

Pillar 4 — Smart Karachi

The fourth pillar recognizes that technological capacity is both a multiplier of the other three pillars and a reform agenda in its own right. A city that cannot accurately map its land parcels, track its utility consumption, monitor its traffic flows, or measure its air quality in real time is a city flying blind. Karachi’s current data infrastructure is fragmented, inconsistently maintained, and largely inaccessible to the policymakers who most need it.

The Smart Karachi pillar envisions a comprehensive digital layer over the city’s physical fabric: GIS-based land registries that reduce the scope for fraudulent title claims and agency disputes; smart metering for water and electricity that reduces non-revenue losses; integrated traffic management systems that improve the efficiency of Karachi’s chronically congested road network; and citizen-facing digital platforms that allow residents to pay utility bills, register property transactions, and report service failures without navigating physical bureaucracies that historically reward connection over competence.

Beyond service delivery, digital infrastructure enables a new quality of fiscal accountability. When every property transaction is recorded on a unified digital platform, the scope for tax evasion narrows. When utility consumption is metered and billed accurately, the implicit subsidies that currently flow to well-connected large users are exposed and can be redirected to the residents who actually need them.

PART 2: OPINION ARTICLE

The Megacity Paradox: Can Karachi Reclaim Its Crown?

Originally conceived for The Economist / Financial Times  |  Policy & Economics Desk

I. The Lights Are Going Out

There is a satellite image that haunts Pakistan’s urban planners. Taken at night, it shows the Indian subcontinent as a constellation of light—Mumbai’s sprawl blazing across the Arabian Sea coast, Delhi’s agglomeration pulsing outward in every direction, Lahore’s core radiating upward into Punjab’s flat horizon. And then there is Karachi.

Karachi is visible, certainly. It is not a dark city. But look closely at the World Bank’s time-series nighttime luminosity analysis, and something disturbing emerges: the city center—the historic financial district that once justified Karachi’s sobriquet as the “City of Lights”—is getting dimmer, not brighter. The economic heartbeat of Pakistan’s largest city is weakening at its core while its periphery sprawls outward in an unlit, unplanned, ungovernable direction.

This is not poetry. It is data. And the data tells a story that no government in Islamabad or Karachi seems to want to confront directly: Pakistan’s financial capital is slowly but measurably losing the competition for economic intensity. While Karachi still accounts for an extraordinary 12 to 15 percent of national GDP—more than any other Pakistani city by an enormous margin—the character of that contribution is shifting from high-value, knowledge-intensive activity to lower-productivity, sprawl-dependent commerce. The lights are going out in the places that matter most.

“A city that cannot govern its center cannot grow its future. Karachi is learning this lesson the hard way.”

II. The Governance Trap: Twenty Agencies and No Captain

To understand why Karachi is losing its economic edge, it is necessary to understand something about how the city is actually governed—which is to say, how it is catastrophically not governed.

More than 20 federal, provincial, and local agencies currently exercise jurisdiction over some portion of Karachi’s land, infrastructure, or services. The Defence Housing Authority controls some of the most commercially prime real estate on the subcontinent. The Karachi Development Authority nominally plans land use for the broader metropolitan area. The Malir Development Authority manages a separate zone. Cantonment boards exercise authority over military-adjacent districts. The Sindh government retains overarching provincial jurisdiction. The federal government maintains control of the port, the railways, and various strategic assets.

Together, these agencies control roughly 90 percent of Karachi’s total land area. Separately, none of them has the mandate, the resources, or the incentive to coordinate with the others in service of any coherent vision for the city as a whole. The result is what economists call a “tragedy of the commons” applied to urban governance: because the costs of mismanagement are diffused across all agencies and the benefits of good management accrue to whoever happens to govern the relevant parcel, rational self-interest produces collectively irrational outcomes. Roads built by one agency end abruptly at the boundary of another’s jurisdiction. Water mains installed by one utility are torn up months later by another laying telecom cables. Parks planned for one precinct are quietly rezoned for residential development when a connected developer makes the right request to the right official.

This is not corruption in the traditional sense—though corruption is certainly present. It is something more structurally damaging: the institutionalization of irresponsibility. When no single entity is accountable for the city’s performance, no single entity can be held to account for its failures. Karachi’s governance crisis is not a problem of bad actors. It is a problem of a system designed, whether intentionally or through historical accumulation, to ensure that no one is ever truly responsible.

The analogy that comes to mind is that of a vast corporation with twenty co-equal CEOs, each controlling a different business unit, each reporting to a different shareholder group, and none with the authority to overrule the others on decisions that affect the whole enterprise. No serious investor would put money into such a structure. Yet international capital is expected to flow into Karachi’s infrastructure on exactly these terms.

III. The Fiscal Frontier: The Absurdity of Karachi’s Property Tax

Here is a number that should concentrate minds in every finance ministry from Islamabad to Washington: the property tax yield of Sindh province—which means, in practical terms, largely Karachi—is dramatically lower than that of Punjab, Pakistan’s other major province, and an order of magnitude below what comparable cities in India manage to extract from their property bases.

Property taxation is, as the IMF has repeatedly documented, the bedrock of sustainable urban finance. Unlike income taxes, which are mobile and can be avoided by relocating economic activity, property taxes fall on an asset that cannot move. Land is fixed. Buildings are fixed. The value embedded in a well-located urban parcel—value created not by the owner but by the surrounding city’s infrastructure, connectivity, and economic density—is a legitimate and efficient target for public revenue extraction.

Karachi’s failure to capture this value is not a technical problem. The Sindh government knows where the land is. It knows who owns it, at least formally. The failure is political. Property in Karachi is owned, directly or indirectly, by constituencies that have historically exercised substantial influence over provincial revenue decisions: military-affiliated institutions, politically connected developers, landed families whose wealth is measured in urban plots rather than agricultural hectares, and the 20-plus agencies whose own landholdings are routinely exempt from assessment.

The practical consequence is a city that starves its own maintenance budget. Without adequate property tax revenues, Karachi cannot fund the routine upkeep of its roads, drains, parks, and utility networks. Deferred maintenance becomes structural deterioration. Structural deterioration reduces assessed property values. Reduced assessed values further constrain tax revenues. The spiral tightens. And as the infrastructure degrades, the high-value businesses and residents who might otherwise anchor the formal tax base migrate—precisely to the peri-urban fringe where assessments are even lower and enforcement is even weaker.

The comparison with Mumbai is instructive and humbling. Mumbai’s Brihanmumbai Municipal Corporation, despite its own well-documented dysfunctions, generates property tax revenues sufficient to fund a meaningful share of the city’s operating budget. Karachi’s fiscal capacity is a fraction of Mumbai’s, despite a comparable or larger population. This gap is not destiny. It is policy failure, and policy failure can be reversed.

IV. The Human Cost: Green Space, Public Transport, and Social Exclusion

Behind every percentage point of GDP and every unit of property tax yield, there are people. And in Karachi, roughly half of those people—somewhere between 8 and 10 million human beings—live in katchi abadis: informal settlements without formal property rights, reliable utilities, or legal protection against eviction.

The absence of green space, which stands at a mere 4 percent of Karachi’s urban area against a globally recommended minimum of 15 percent, may seem like a quality-of-life concern rather than a governance emergency. But in a coastal megacity where summer temperatures regularly exceed 40 degrees Celsius, green space is not a luxury. It is a survival infrastructure. The 2015 heat wave that killed more than 1,200 Karachi residents in a single week—the vast majority of them poor, elderly, or engaged in outdoor labor—was a preview of what happens when a city builds itself as a concrete heat trap and then removes the last natural mechanisms for thermal relief.

Public transport amplifies the exclusion dynamic. Karachi has one of the lowest rates of formal public transit use of any megacity its size. The city’s primary mass transit project—the Green Line Bus Rapid Transit corridor—has been in various stages of construction and delay for the better part of a decade. In its absence, millions of residents depend on informal minibuses and rickshaws that are slow, unreliable, expensive relative to informal-sector wages, and environmentally catastrophic. Workers in Karachi’s industrial zones who might otherwise access higher-paying employment in the financial district are effectively priced out of mobility. The labor market is segmented not by skill alone but by geography, and geography in Karachi is determined by whether one happens to live near the remnants of a functional transit connection.

Social polarization—the growing distance, geographic and economic, between those who live in the serviced formal city and those consigned to the informal one—is not merely an equity concern. It is a threat to the social contract that makes metropolitan agglomeration economically productive in the first place. Cities generate wealth through density, through the interactions and spillovers that occur when diverse people with diverse skills and ideas occupy shared space. When half a city’s population is effectively excluded from the spaces where those interactions happen—because they cannot afford the transport, because they lack the addresses required for formal employment, because the green spaces that make urban life bearable do not exist in their neighborhoods—the economic dividend of agglomeration is substantially squandered.

“Karachi’s inequality is not an unfortunate side effect of its growth. It is an active drag on the growth that could otherwise occur.”

V. Radical Empowerment: The Only Path Forward

The World Bank report is, appropriately, diplomatic in its language. It speaks of “institutional reform,” of “transitioning toward empowered local government,” of “Track 1 vision” and “shared commitment.” These are the necessary euphemisms of multilateral diplomacy. But translated into plain language, the report’s core argument is blunt: Karachi will not be saved by better planning documents or more coordinated inter-agency meetings. It will be saved only by radical political devolution.

What Karachi needs—what its scale, complexity, and fiscal situation demand—is an elected metropolitan mayor with genuine executive authority over the city’s land, budget, and infrastructure. Not a mayor who advises the provincial government. Not a mayor who chairs a committee. A mayor who can be voted out of office if the roads are not repaired, the water does not flow, and the city continues to dim.

This is not an untested idea. Greater London’s transformation under Ken Livingstone and Boris Johnson—whatever one thinks of their respective politics—demonstrated that a directly elected executive with transport and planning powers can fundamentally alter the trajectory of a major global city within a single term. Metro Manila’s governance reforms in the 1990s, imperfect as they were, showed that consolidating fragmented metropolitan authority into a more unified structure produces measurable improvements in infrastructure coordination. Even Pakistan’s own history provides precedent: Karachi’s period of most effective urban management arguably occurred under the elected metropolitan mayor system that prevailed briefly in the early 2000s, before provincial interests reasserted control.

The Sindh government’s resistance to devolution is understandable in terms of short-term political calculus. Karachi’s land is extraordinarily valuable, and control of that land is the foundation of enormous political and economic power. But the calculus changes when one considers the medium-term consequences of continued governance failure. If Karachi’s economic decline continues—if the businesses flee, the tax base erodes, the informal settlements expand, and the infrastructure deteriorates beyond cost-effective rehabilitation—the Sindh government will find itself governing a fiscal and social catastrophe rather than a golden goose.

The international community—the OECD, the IMF, the World Bank, bilateral development partners—has a role to play in shifting this calculus. The $10 billion investment framework proposed in the World Bank report should not be made available on the existing governance terms. It should be conditioned, explicitly and transparently, on measurable progress toward metropolitan devolution: the passage of legislation establishing an elected metropolitan authority, the transfer of specific land-use planning powers from provincial agencies to the new metropolitan government, and the implementation of a reformed property tax system with independently verified yield targets.

This is not interference in Pakistan’s internal affairs. It is the basic principle of development finance: that large public investments require the governance conditions necessary to make those investments productive. Pouring $10 billion into a city governed by 20 uncoordinated agencies is not development. It is waste on a grand scale.

Karachi was once the most dynamic city in South Asia. In 1947, it was Pakistan’s largest, wealthiest, and most cosmopolitan urban center. The decades of governance failure that followed its initial promise are not irreversible. The city’s underlying assets—its port, its financial markets, its entrepreneurial population, its coastal location—remain extraordinary. The human capital that built Karachi’s original prosperity has not gone anywhere. It is waiting, in informal settlements and gridlocked streets and underperforming schools, for a governance system capable of releasing it.

The question is not whether Karachi can reclaim its crown. The question is whether Pakistan’s political establishment has the will to create the conditions under which it can. The satellite data showing the city’s dimming lights is not a verdict. It is a warning. And warnings, unlike verdicts, can still be heeded.

Key Statistics at a Glance

Economic Contribution: 12–15% of Pakistan’s GDP generated by a single city

Poverty Reduction: From 23% (2005) to 9% (2015) — one of Pakistan’s least poor districts

Governance Fragmentation: 20+ agencies controlling 90% of city land

Green Space Deficit: 4% vs. 15–20% globally recommended

Informal Settlements: 50% of population in katchi abadis without property rights

Infrastructure Investment Gap: $10 billion required over the next decade

Heat Wave Mortality: 1,200+ deaths in the 2015 event alone

Property Tax Yield: Significantly below Punjab, Pakistan and Indian metro benchmarksThis analysis draws on the World Bank Karachi Urban Diagnostic Report, IMF cross-country fiscal data, and global urban governance research. It is intended for policymakers, development finance institutions, and international investors engaged with Pakistan’s urban futur

The atmosphere at the India AI Impact Summit in New Delhi this February 2026 made one reality unavoidably clear: the US China AI race is no longer a straightforward sprint to a singular finish line. Instead, we are witnessing the entrenchment of an asymmetric bipolarity. For global economists, corporate strategists, and policymakers, the AI competition US China has evolved from a theoretical technology battle into a grinding, multipolar war over supply chains, energy grids, and the economic allegiance of the Global South.

To understand the true stakes of US vs China AI supremacy, we must discard the simplistic, moralizing narratives of Cold War 2.0. As an analyst watching the tectonic plates of the global economy shift, the reality is far more nuanced. The question of AI leadership US China is not merely about who builds the smartest chatbot; it is about who controls the underlying thermodynamics of the future economy.

In this comprehensive analysis, we will demystify the geopolitics of AI race dynamics, cutting through the hype to examine the real-time tradeoffs, capital constraints, and data-driven realities defining 2026.

The Illusion of a Single Finish Line in the US China AI Race

Western media often frames the US China AI race as a zero-sum game of frontier models. However, Time’s recent February 2026 analysis correctly notes that there are, in fact, multiple overlapping races. While the United States continues to dominate closed-source, highly capitalized frontier models, China has pivoted toward a radically different theory of value: rapid, low-cost diffusion.

The AI competition US China shifted permanently with the “DeepSeek shock” and the subsequent surge of open-source models. When Alibaba released Qwen 2.5-Max—surpassing 1 billion downloads globally—it proved that Chinese developers could achieve near-parity with US models at a fraction of the computational cost. As CNN reported in February 2026, China’s AI industry is utilizing algorithmic efficiency to circumvent hardware limitations.

This dynamic explains the pragmatic, if politically fraught, decision in January 2026 to loosen US export controls on Nvidia H200 chips. The move was a stark acknowledgment of global interconnectedness: starving China of chips entirely risks accelerating their indigenous semiconductor ecosystem while severely denting the bottom lines of American tech champions. In the battle for US vs China AI supremacy, capital requires market access just as much as it requires compute.

Key Divergences in the AI Competition US China

• US Strategy (Innovation & Capital): High-end chips, hyperscale data centers, closed-source models (OpenAI, Anthropic), and massive capital concentration.
• Chinese Strategy (Diffusion & Application): Open-source models (DeepSeek, Qwen), industrial deployment, legacy chip scale, and aggressive pricing to capture emerging markets.

The Core Battlegrounds: Compute, Chips, and Energy Bottlenecks

You cannot discuss the geopolitics of AI race dynamics without discussing thermodynamics. Artificial intelligence is, fundamentally, electricity transformed into computation. Here, the US vs China AI supremacy narrative takes a politically incorrect but entirely substantiated turn.

The US undeniably leads in compute. According to the Federal Reserve’s late-2025 data, the US commands a staggering 74% global share of advanced compute capacity. Furthermore, as Reuters reported, US AI investments are projected to hit $700 billion in 2026. However, American capital advantages face a severe domestic bottleneck: regulatory holdups and grid limitations. Building a hyperscale data center in the US requires navigating localized zoning, environmental reviews, and grid interconnection queues that can take years.

Conversely, China’s state-controlled model enables faster scaling of physical infrastructure. While the Brookings Institution’s January 2026 report highlights the contrasting energy strategies, the raw numbers are sobering. By 2030, China is projected to have 400 GW of spare energy capacity, heavily subsidized by state directives (Bloomberg, Nov 2025).

The Asymmetric Matrix: US vs China Advantages

Strategic Domain	United States Advantage	Chinese Advantage
Silicon & Compute	74% global compute share; unmatched dominance in leading-edge architecture and design.	Overwhelming scale in legacy chip manufacturing; highly optimized algorithmic efficiency to bypass hardware bans.
Model Ecosystem	Dominates closed-source, reasoning-heavy frontier models (e.g., GPT-4o, Gemini).	Dominates lightweight, open-source models (DeepSeek R1, Qwen) tailored for global diffusion.
Energy & Grid	Massive private capital influx ($700B) for next-gen nuclear and SMRs, but hindered by grid regulations.	State-backed grid expansion; projecting 400 GW spare capacity by 2030 to power decentralized industrial AI.
Capital & Scaling	World’s deepest capital markets driving astronomical firm-level valuations.	State industrial policy suppressing tech valuations but rapidly building real, physical productive capacity.

The Geopolitics of AI Race: Courting the Global South

The geopolitics of AI race extends far beyond Silicon Valley and Shenzhen. As highlighted at the New Delhi summit, the Global South is actively refusing to be relegated to mere consumers in the US China AI race.

For middle powers and developing economies, the AI leadership US China paradigm offers a stark choice. US closed-source models are highly capable but computationally expensive and heavily paywalled. In contrast, China is weaponizing open-source AI as a form of geopolitical diplomacy. By flooding the Global South with highly capable, free, or hyper-cheap models like Qwen and DeepSeek, Beijing is embedding its digital architecture into the foundational infrastructure of developing nations.

As Foreign Affairs noted in its February 2026 “The AI Divide” issue, this dynamic creates a new non-aligned movement. Countries like India, Saudi Arabia, and the UAE are hedging their bets. They purchase US hardware where possible but eagerly adopt Chinese open-source models to build “sovereign AI” capabilities. To win the geopolitics of AI race, the US cannot simply sanction its way to the top; it must offer a compelling, cost-effective alternative to Chinese digital infrastructure.

Capital Flow vs. Regulatory Bottlenecks: A Politically Incorrect Reality

To truly understand US vs China AI supremacy, we must look at how each system translates capital into productive capacity. A recent CSIS geoeconomics report provides a sobering multiperspective analysis: the US is optimized for a pathway dependent on high-end chips and continuous model scaling, heavily indexed to stock market expectations.

In the AI competition US China, America’s greatest strength—its free-market capital—is concurrently its Achilles’ heel. Trillions of dollars in market capitalization rely on the promise of Artificial General Intelligence (AGI) and sustained productivity gains. If regulatory holdups prevent the physical building of power plants to support this compute, the capital bubble risks deflating.

Meanwhile, China’s industrial policy suppresses firm-level valuations (to the detriment of its stock market) but excels at embedding AI into its leading industrial sectors, such as robotics and electric vehicles. As the Council on Foreign Relations (CFR) emphasized late last year, China’s approach guarantees that even if its frontier models lag by a few months, its factories will not. The US China AI race is therefore a test of whether America’s financialized innovation can outpace China’s state-directed diffusion.

The Path Forward: Redefining AI Leadership US China

The AI leadership US China debate is ultimately about resilience. The global supply chain is too interconnected to fully de-risk. America relies on TSMC in Taiwan, which relies on ASML in the Netherlands, to produce the chips that fuel the US China AI race.

For the United States to secure long-term AI leadership US China, it must transcend a purely defensive posture of export controls and tariffs. True US vs China AI supremacy will belong to the power that not only innovates at the frontier but scales those innovations globally. As Forbes analysts have routinely pointed out, democratic techno-alliances must move beyond rhetorical agreements and start co-investing in physical compute infrastructure, energy grids, and open-source ecosystems tailored for the Global South.

The AI competition US China will define the economic hierarchy of the 21st century. But victory will not be declared in a single moment of algorithmic breakthrough. It will be won in the trenches of grid interconnections, the boardrooms of middle powers, and the quiet diffusion of productivity across the global economy.

Next Steps for Democratic Alliances: To maintain relevance and leadership, Western coalitions must prioritize “compute diplomacy”—subsidizing energy-efficient AI infrastructure and accessible models for emerging markets, rather than ceding the open-source landscape entirely to Beijing. Would you like me to dive deeper into the specific policy frameworks the US could use to counter China’s open-source diplomacy in the Global South?

Analysts Say the Supreme Court Ruling Gives Indonesia Room to Reassess Its Commitments — and Perhaps Demand a Better Deal

The ink on the Indonesia-US reciprocal trade agreement had barely dried when the legal architecture underpinning it collapsed. President Prabowo Subianto signed the landmark deal in Washington on February 19, pledging to open Indonesia’s markets to 99% of American exports in exchange for a reduced US tariff rate of 19% — a hard-won concession from the original 32% levied under President Donald Trump’s “Liberation Day” tariff campaign. Then, just 24 hours later, the United States Supreme Court issued a 6-3 ruling that obliterated the legal basis for those very tariffs.

It is one of the more striking pieces of timing in recent economic diplomacy: a country concedes major market access to escape a tariff that the highest court in the land simultaneously declares unlawful. For Jakarta, the question now is not simply what the deal is worth — but whether it needs to be renegotiated entirely.

Background: The Tariff Threat That Brought Indonesia to the Table

To understand the Indonesia US trade pact uncertainty 2026, one must revisit April 2025, when Trump invoked the International Emergency Economic Powers Act (IEEPA) to impose sweeping “reciprocal tariffs” on imports from nearly every country on earth. Indonesia was hit with a 32% rate — a punishing levy on a nation whose exports, from garments and footwear to palm oil and electronics components, flow heavily into the American market.

Bloomberg reported that the two sides had been negotiating for months, with the final deal announced the same day Prabowo attended Trump’s inaugural Board of Peace summit. Under the White House’s own fact sheet, Indonesia agreed to eliminate tariff barriers on more than 99% of American products — spanning agriculture, health goods, seafood, automotive parts, and chemicals — while addressing longstanding non-tariff barriers such as local content requirements and import certification burdens. Indonesian companies also pledged to purchase around $33 billion in US goods, including soybeans, corn, cotton, and up to five million tons of wheat by 2030.

In exchange, Washington agreed to lower its tariff on most Indonesian exports from 32% to 19% — the same rate set for Cambodia and Malaysia. The agreement was signed by US Trade Representative Jamieson Greer and Indonesia’s Coordinating Minister for Economic Affairs Airlangga Hartarto, who hailed it as the beginning of a “new golden age” in bilateral ties.

The question that lingered, even at the signing ceremony, was straightforward: if Trump’s IEEPA tariffs were struck down by the courts, what exactly was Indonesia buying its way out of?

The Supreme Court’s Ruling: A Constitutional Reset Button

On February 20, 2026, Chief Justice John Roberts delivered the answer with characteristic precision. In Learning Resources, Inc. v. Trump, the Supreme Court held — in a 6-3 decision joined by both conservative and liberal justices — that IEEPA does not authorize the President to impose tariffs. As NBC News reported, the ruling invalidated the “reciprocal tariff” edifice that Trump had spent a year constructing.

The majority’s logic was clean. Tariffs are, constitutionally, a branch of the taxing power — a power explicitly assigned to Congress. IEEPA’s grant of authority to “regulate importation” does not mention tariffs or duties; no previous president had ever read it to confer such power; and invoking the court’s “major questions doctrine,” Roberts found no clear congressional authorization for the extraordinary unilateral authority Trump had claimed.

Justices Thomas, Alito, and Kavanaugh dissented, with Kavanaugh notably warning that the refund process for the estimated $160–175 billion in collected IEEPA duties would likely be a “mess” — a statement Trump later quoted approvingly at a White House press conference, calling the justices who voted against him a “disgrace.”

The ruling is best understood as a reset button on trade leverage — not as a return to the pre-2025 status quo. As WilmerHale’s trade analysis noted, the administration moved within hours to impose a new 10% global surcharge under Section 122 of the 1974 Trade Act — later raised to the statutory maximum of 15% — valid for 150 days. Critically, Section 232 national security tariffs on steel and aluminium remain untouched. For Indonesia, this means the threat of US tariffs has not vanished; it has simply changed shape.

Jakarta’s Immediate Response: Affirm the Deal, Reassess the Terms

The immediate Indonesian government position was to hold firm. Airlangga Hartarto confirmed that the agreement remained valid and that Jakarta intended to implement its commitments. Presidential communications echoed the same line. For a government that had invested enormous political capital — including a controversial $1 billion membership fee to join Trump’s Board of Peace — public retreat was not an option on day one.

But beneath the diplomatic composure, the mathematics have shifted considerably. Indonesia negotiated a 19% tariff rate to escape a 32% rate that is now legally void. Under the new Section 122 blanket tariff, Indonesian goods face a 15% rate — four percentage points lower than what Jakarta’s negotiators secured after months of intensive talks. Put differently: Indonesia locked in concessions calibrated to a threat the courts just nullified, while the US has since imposed a lower universal rate through a completely different legal mechanism.

As Jakarta Globe reported, Indonesian economist Faisal acknowledged the ruling as an opportunity to rethink trade strategy, while cautioning that uncertainty remains elevated given the administration’s stated intention to pursue further tariff action through Section 301 investigations and Section 232 reviews. “That means tariffs can still be maintained, even if at lower levels,” Faisal said, stressing that US trade policy remains fluid.

Analyst Perspectives: The Case for Renegotiation — and Its Limits

The impact of the US Supreme Court tariff ruling on Indonesia’s economy is more nuanced than a binary win-or-lose framing suggests. Analysts identify several dimensions worth parsing.

The leverage shift is real, but temporary. As Asia Times reported, the Supreme Court ruling offers ASEAN nations “breathing room — a period in which the asymmetry of bargaining power is somewhat reduced.” Section 122 is capped at 15% for just 150 days. After that, the administration has signaled it will push Section 232 and Section 301 investigations to restore targeted tariff pressure. The window for Indonesia to extract better terms is narrow.

Critical minerals complicate the calculus. A significant element of the February 19 deal was Indonesia’s commitment to lift restrictions on critical mineral exports — particularly nickel, of which Indonesia holds the world’s largest reserves. Washington was explicit that it wants to counter China’s stranglehold on minerals essential for defense manufacturing and the clean energy supply chain. This geostrategic dimension gives Indonesia real leverage that extends beyond any tariff negotiation. But Prabowo’s government has already reaffirmed that it will not reopen raw mineral exports — domestic processing requirements remain a red line — which limits how far any renegotiation can go on that front.

The deal’s non-tariff components may survive intact. Analysts note that Indonesia’s concessions on non-tariff barriers — accepting FDA standards, removing local content requirements for US companies, and addressing IP protections — reflect structural reforms Jakarta had an independent interest in pursuing. These are not hostage to IEEPA’s legal status. A renegotiation, if pursued, would likely focus on the tariff rate and purchase commitments rather than the regulatory framework.

Comparison with India is instructive. India, whose trade negotiators were on their way to Washington when the ruling landed, immediately paused talks and is now weighing options in a lower-tariff environment. The Global Trade Research Institute in New Delhi has explicitly called for a reassessment. Indonesia, having already signed, faces a higher bar — but the precedent from other countries reassessing their positions will not be lost on Jakarta.

Economic Implications: What Indonesian Exporters Actually Face

Indonesia runs a trade surplus with the United States — $17.9 billion in 2024 — and its export profile makes tariff levels acutely sensitive. Garments and footwear, Indonesia’s largest manufactured export categories to the US, face intense price competition and operate on thin margins. A 19% tariff versus a 15% blanket surcharge may seem like a minor variance, but for cost-sensitive supply chains already rerouting away from China, four percentage points can determine whether an order goes to Jakarta or Hanoi.

Textile and apparel producers in particular will be watching the deal’s implementation closely. The agreement included a commitment by the US to establish a mechanism allowing certain textile and apparel goods to receive a 0% tariff rate for a specified volume linked to imports of US cotton and fiber inputs — a provision with significant value for an industry that employs millions of Indonesians. Whether that mechanism survives the current legal uncertainty, or requires fresh congressional action to implement, remains an open question.

More broadly, as the Council on Foreign Relations noted, countries that negotiated IEEPA-based deals face a period of genuine ambiguity: “for US trade partners — including several that negotiated agreements intended to reduce IEEPA tariffs on their exports — the outlook is unclear.”

Broader Global Implications: The End of IEEPA-Era Trade Coercion

The Supreme Court’s decision does more than untangle any single bilateral deal. It closes the chapter on IEEPA as a trade coercion tool — the blunt instrument that drove dozens of countries to Washington’s negotiating table under duress. As Chatham House analysts assessed, the ruling signals “a shift toward slower, more procedurally constrained trade policy.” The administration retains meaningful authorities, but they come with checks: time limits, investigatory requirements, congressional thresholds, and judicial review.

For Southeast Asia as a whole, this recalibration matters. Vietnam is still negotiating. Thailand has not yet concluded an agreement. Both can now do so against a baseline of 15% rather than the threat of 32%–46% IEEPA rates. The competitive dynamic among ASEAN nations in attracting US supply chains — many of which fled China after the first Trump-era tariffs — becomes more level-footed in this new environment, but also more uncertain.

What is certain is that the era of unilateral tariff shock as the primary tool of American trade diplomacy has been judicially constrained. The White House has vowed to reconstruct its leverage through other means. For Indonesia, the coming weeks will determine whether the “new golden age” announced with fanfare on February 19 holds — or whether Jakarta uses the court’s reset button to negotiate terms more befitting a country that no longer faces the tariff it sacrificed so much to escape.

Conclusion: Jakarta’s Strategic Crossroads

The Indonesia-US trade pact, struck with ceremony and high-level symbolism, now enters a period of genuine uncertainty. The deal’s legal validity is not in question — both governments have affirmed its standing — but its economic rationale has been partially undermined by a court ruling that arrived the day after the signatures were affixed.

Indonesia is not without options. Its nickel reserves, its position as Southeast Asia’s largest economy, its role in Trump’s Gaza peace initiative, and the genuine interest of US businesses in accessing its 280-million-strong consumer market all give Jakarta meaningful cards to play. The Supreme Court decision on Trump tariffs and its implications for Indonesia are not necessarily catastrophic — but they do demand a more rigorous accounting of what was given, what was received, and whether the balance still makes sense.

Reassessing Indonesia’s commitments after the Trump tariff blow is not the same as walking away. It may be as simple as opening a quiet conversation with Washington about the zero-tariff textile provisions, or pressing for clarity on critical mineral cooperation terms. Done diplomatically, it is entirely consistent with the spirit of a deal that both sides called a beginning rather than an end.

The real test will come in the weeks ahead, as Trump’s alternative tariff authorities take shape, as refund litigation winds through the courts, and as other ASEAN nations recalibrate their own positions. Jakarta would do well to watch — and act — before that window narrows.