The research has brought attention to the high risk that the Indo-Pacific region will end up in a major conflict in the coming decade involving the two superpowers, the US and China.
"The risk of war stems from the fact there is an arms race in the region," project director Herve Lemahieu told news.com.au.
"It involves the US and China, but it also involves many other players like India, Japan, and smaller southeast Asian countries like Vietnam that have maritime disputes with China."
Lemahieu said there were multiple ways in the region that conflict could break out and because tensions were running so high, just two countries could create a domino effect, bringing in the two superpowers.
"China as a rising power has self-confidence, hubris, whereas the US fears China and China's rise," he said.
"The mix of emotional qualities can result in miscommunication and unintended conflict that leads to war."
A more stable regional order would depend on the two countries' willingness to coexist as superpowers.
"China and the US will have to learn to walk and chew gum at the same time. They'll have to compete and co-operate on sensitive areas and transnational challenges like climate change."
China loses power
China is for the first time declining in comprehensive power, which The Lowy Institute says is of great significance.
"The long term trend over the course of four years has been that China's power has risen and the United States' power has declined, certainly relative to China, but there has been an abrupt change of fortunes between the two superpowers," Lemahieu said.
China, which ranked two of 26 for comprehensive power, had an overall score of 74.6 out of 100.
The country fell one place for diplomatic influence and future resources, but its ranking in all other measures was unchanged.
In terms of points, its only gains were in resilience. It lost the most points in future resources and also lost points in cultural influence, diplomatic influence and economic capability.
Australia was ranked as the third most reliant country on China, with 38.3 per cent of Australia's total trade (AU$179bn) being with China.
Countries that influence China the most – the ones that China does most of its trade with - include the European Union (14.5 per cent or AU$718bn of China's total trade), followed by the US (13.2 per cent) and Japan (7.4 per cent).
The effect of the pandemic
The pandemic has driven down the comprehensive power of almost all countries in 2021, which is said to have far reaching implications for the balance of power in the Indo-Pacific.
"A lot of developing countries are not growing as quickly as we would have expected them to if the pandemic hadn't happened and that really slows the rise of a lot of emerging powers, particularly countries like India or Indonesia," Lemahieu said.
Covid-19 caused not only economic implications but also meant that countries and people were less able to engage with one another.
"Australia's cultural influence in large part is driven by the fact that there are a lot of international students that come and study here, who return to their home country with hopefully a better impression of Australia," he said.
"And these sorts of channels of influence have really been severely limited."
On a more positive note, the pandemic has seen a significant step up in vaccine diplomacy, which has resulted in international reputation gain for smaller countries.
"The countries that have donated most in relation to their population size include smaller countries like New Zealand and Singapore," Lemahieu said.
Australia
Australia ranked sixth of 26 for comprehensive power, with an overall score of 30.8 out of 100.
The nation lost 1.6 points in overall score.
Australia had its only gains in resilience. It lost the most points in economic relationships and also lost points in diplomatic influence, defence networks, military capability, cultural influence, future resources and economic capability.
While China is ranked as the number one country that influences Australia, it is followed by Japan and the EU (both making up 8.8 per cent of Australia's total trade) and the US at 7.8 per cent.
United States
The US kept its top ranking for comprehensive power, with an overall score of 82.2 out of 100.
In 2021, the US had the greatest gains in diplomatic influence. It lost the most points in economic relationships. Elsewhere, it improved in future resources, economic capability, cultural influence and resilience, while trending down in military capability and defence networks.
The countries that influence the US the most are the EU (AU$649bn or 17.2 per cent of the US's total trade), China (15.7 per cent) and Mexico (14.3 per cent).
Countries that rely most on trade with the US are Vietnam (AU$91.2bn or 17 per cent of Vietnam's total trade is with US), Cambodia (15.9 per cent) and Japan (14.6 per cent).
