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Foreign Policy

Are You De-risking?

Jun 29, 2023

Redefining trade and economic relationships to achieve balance and prevent excessive dependence in strategic sectors has emerged as a key protectionist policy and geopolitical tool among major global powers. Whether referred to as dumping, dual circulation, security and development, or decoupling and de-risking, these policies all share a common objective, albeit with varying degrees of impact. Nobody should feign surprise, as each major power works on its own mechanisms for course correction. 

Decoupling, a Major Disruptor for Global Challenges 

The trade war between the United States and China began in 2018 when Trump imposed increased tariffs and trade barriers on Chinese goods, prompting Xi to retaliate with Beijing’s own barriers on certain U.S. products. Biden has adopted a more targeted approach framed as ‘decoupling,’ in order to weaken China’s high-tech capabilities. In October 2022, restrictions were implemented on the export of high-end semiconductors and chip-making equipment to China, citing concerns over a potential assistance to Beijing’s military industrial power. The U.S. has successfully convinced key players like Japan and the Netherlands, who possess vital companies within the advanced microchip production chain, to join in these actions. 

However, decoupling from China is challenging because of their continuous upgrade of industries, market size, and production capacities. In fact, in 2022 U.S.-China trade in goods hit a new record. The consequences of decoupling between both had, consequently, a more political impact than expected. It represents a departure from previous ‘engagement’ policies and disrupts the economic ties established over two decades. This has led to intense geopolitical implications, such as China strengthening its strategic partnership with Russia, a cause for concern. Additionally, China has implemented strategies to boost its domestic market, focusing on self-reliance in science and technology. This involves reducing dependence on foreign sources and enhancing technological expertise. China aims to achieve industrial autonomy and create its own innovation ecosystem, free from Western influence. 

Yet, in an interconnected global economy, the enactment of protectionist measures carries consequences. In particular, China has adopted four targeted policies that serve as indicators of an active involvement in de-risking and partial decoupling within specific sectors. Firstly, the dual circulation strategy redirects attention inward, fostering self-reliance and diminishing dependence on the global market in specific sectors. Secondly, substantial subsidies are provided to both traditional and advanced technology industries, with the aim of enhancing growth and competitiveness. Thirdly, China prioritizes “Security and Development” over “Economic Development First,” placing a strong emphasis on safeguarding national security and stability alongside economic growth. Lastly, China continues to actively intervene in its exchange rates on a regular basis. According to Cainey & Prange’s “Xiconomics,” China seeks to leverage global connections to its advantage, avoiding dependence, while striving to make others reliant on China. This is a complex formula to achieve. 

Hence, the escalation of tension, resulting from the continued exclusion of rivals by the U.S., China, and their allies, poses an increased risk of further disruption to global supply chains. This disorder could particularly impact the U.S. in terms of green policies, as it relies on Chinese solar, wind and electric battery technologies, which are vital for clean energies. As highlighted by Alicia Garcia Herrero, we may witness a potential “bifurcation of technologies” and standards. 

In light of these circumstances, a pivotal question arises: do the advantages of decoupling outweigh the accompanying risks? Initially, it seems that collaborating with China in the green energy sector offers global benefits that outweigh potential hazards. Although competition within the green energy industry can bolster the global supply, it is presently dominated by Chinese companies that receive support from inexpensive or even cost-free capital and government incentives, occupying a substantial position in the supply of essential components. A situation which could be better addressed through constructive measures rather than protectionist ones. 

Furthermore, President Biden’s recent significant incentives for clean energy projects primarily focus on benefiting the domestic market, which is potentially disadvantageous to foreign producers. And the U.S. is strengthening coalitions with Indo-Pacific allies to ensure a stable supply of energy technologies, yet this approach has consequences in the global fight against climate change. To put it mildly, decoupling has emerged as a significant disruptor of the global fight against the climate emergency, which should ideally take precedence over major power competition, for the betterment of the entire world. 

Shift from Decoupling to De-risking after the G7 

The concept of ‘de-risking’ was introduced by the President of the European Commission as a response to the EU’s dependence on Chinese strategic resources, serving as a clear statement that the EU would not blindly follow the U.S.’ decoupling policy. 

[CropImg]The U.S: President Joe Biden with European Commission Ursula von der Leyen during the G-7 Summit in Japan. | Photo Credit: ANI

Europe is currently in the process of formulating the approach, which has led to conflicting statements from leaders of member states regarding the scope, definition, and content. However, Europe acknowledges the need to address the existing strategic dependencies in the supply chain with China. 

Incorporating de-risking into the agenda aligns with the EU’s overarching objective of strengthening strategic autonomy, especially as it navigates the competition between China and the U.S. Interestingly, China shares Europe’s aspiration to enhance strategic autonomy, with the underlying goal of reducing EU’s dependence on the U.S. Both superpowers have lastly not prioritized a strong Europe, making the EU’s journey over the past 10-15 years particularly challenging. 

In addition to the aforementioned reasons, the U.S. has recently incorporated the EU’s concept of de-risking. This alignment was highlighted during the G7 summit in Hiroshima, where reducing excessive dependence on China became a prominent goal, signaling a decrease in geopolitical differences among the members. The framing was to coordinate “economic resilience and economic security that is based on diversifying and deepening partnerships.” Paradoxically, despite facing criticism from China, these measures inadvertently bring Beijing closer to the objective of maintaining active trade participation and influence, rather than being sidelined. 

The significance of those factors and the complexities of realpolitik require careful evaluation, going beyond any alleged sudden recognition by the West - often inaccurately perceived in Asia as a unified entity - of “China’s role as a responsible and constructive major country.” The article by Lei & Su (CICIR) may reflect a specific Chinese official perspective, but including questionable remarks such as “the EU has a strategy to suppress China,” misleadingly suggest a EU-led tech war or attacks on China that lack substantiation. 

Trying to Define De-risking 

In fact, to date, a precise definition of the term ‘de-risking’ remains elusive. However, let us attempt to provide a clearer understanding of the concept. It entails mitigating risks, diversifying partnerships, recalibrating trade relationships, and relocating operations to address disproportionate dependencies in key sectors. This distinguishes it from decoupling, which involves a more significant disentanglement. De-risking offers a balanced and feasible approach, garnering political legitimacy and potential support. However, it must avoid unjustified exclusions and discriminatory practices to maintain open collaboration. 

It seeks a more equitable balance, reducing over-reliance in areas such as digital transformation, green energies, or critical raw materials. The goal is to enhance economic security, sustainability, and resilience. Recent events such as the pandemic and the war in Ukraine have highlighted the economic costs and disruptions caused by tensions, emphasizing the need for countries to reevaluate economic and security strategies. There is no other choice. Measures include securing critical raw material stocks, different security toolboxes and revitalizing economic diplomacy with developing nations. 

Europe should adopt a realpolitik approach, minimizing vulnerabilities and strengthening defense policies. It should also design how to combine high-tech engagements with China. Additionally, Europe should diversify trade partners, address discriminatory practices, expand the supplier base, adjust production chains, monitor foreign investments, and counteract coercion. These actions are necessary for Europe to align with the measures taken by other superpowers and achieve a level playing field. 

De-risking and the Impact on Sino-European Relations 

Amid ongoing issues between the U.S. and Europe, the EU now needs to address complications in the relationship with China. The Comprehensive Agreement on Investment (CAI), signed in December 2020, is currently on hold. Then, the pandemic further highlighted pressing concerns for Europe. Firstly, there is a significant trade deficit, with China exporting three times more to the EU than the EU exports to China, damaging the competitiveness of the regional businesses. Secondly, European companies face barriers accessing the Chinese market despite the EU’s openness to Chinese trade. Lastly, Europe recognizes the jeopardies of heavy reliance on strategic products and technology, exposing vulnerabilities. 

Furthermore, while China has the capability to align economic and geopolitical strategies, Europe currently lacks this ability. Consequently, Europe has learned valuable lessons from those experiences, underscoring the significance of diversifying trade partnerships and implementing measures to combat discriminatory practices. 

China has expressed grievances on European de-risking, while also acknowledging that the world is entering a phase of overall regression. Actually, de-risking is not exclusive to Europe, as Chinese companies have reexamined their long-term strategies and reduced their reliance on international cooperation. Notably, prominent Chinese scholar Yan Xuetong suggests that this challenging and regressive environment may persist for another one to two decades. 

As Europe is actively developing the de-risking policy, it becomes vital for China, being a significant trading partner, to comprehend and acknowledge Europe’s initiatives. By understanding Europe’s perspective and efforts to recalibrate trade and economic relations, China has the potential to make valuable contributions toward fostering a more balanced and sustainable global economic landscape, benefiting not only Europe, but also itself.

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