The risks of ‘de-risking

STOCKHOLM — We have just witnessed the birth of a new buzzword. Suddenly, policymakers in the United States and across Europe want to “de-risk” the relationship with China.

The term owes its new popularity to the equally sudden turn away from “decoupling”, which made the rounds for a while, until it turned out that almost no one favours a definitive break between China and the West. It is neither desirable nor even feasible to sever all ties with the world’s second-largest economy, so everyone has settled on a much vaguer concept.

While decoupling is quite clear, de-risking is open to many interpretations. Risks are inherent in all economic activity, and in market economies, the willingness to take risks drives innovation, growth, and greater prosperity. If an economy without risk were possible, it would offer no reward, and thus would tend towards sclerosis.

From huge multinational corporations to small family businesses, all economic actors constantly assess opportunities and risks, and seek to maintain a prudent balance between the two. While some risk is unavoidable, most try to manage it responsibly. In this sense, de-risking is a constant, uncontroversial feature of any open economy, and the de-risking of a national economy simply represents the sum of all economic players’ efforts in this regard.

With respect to China, most Western firms’ risk-reward calculus has already shifted in response to the country’s increasingly state-centric and security-oriented economic policies. Now that China’s growth prospects have dimmed, its economy is no longer as alluring as it once was. The latest report from the European Chamber of Commerce in Beijing, long respected for its robust analytical work, paints a bleak picture of diminishing opportunities and greater risks. That conclusion is based wholly on what is happening in China itself, not on any of the political rhetoric emanating from Washington and Brussels. If China pivoted back towards embracing markets and openness, the European Chamber’s assessment would change.

Given recent experience, it is perfectly sensible to focus on making global supply chains, the lifeblood of the global economy, more resilient to shocks and disruptions. Every corporate board worth its salt already has this on the agenda. In these cases, de-risking is just business; it isn’t personal.

But the new political rhetoric takes things further. It implies that trade with China is inherently risky regardless of the domestic business and investment environment. Western leaders increasingly fear that China will use trade or other economic links to apply political pressure against Western companies or countries that it wants to punish. In fact, it has already done this to Australia, though to little effect.

Is the risk of losing trade in the future a good reason to avoid trading now, when the option is still available? One normally does not commit suicide to reduce the fear of death, and one can still hope that Chinese authorities will recognise that most of their attempts at economic coercion have been unsuccessful. The same goes for the government’s return to a more statist economy. History has shown that this approach simply does not work.

But Western countries cannot ignore the fact that China dominates the supply of metals and rare-earth elements necessary for the transition to a low-carbon economy, and that it controls a massive share of the global market for photovoltaic cells and electric vehicles. Like oil, critical raw materials must be sought wherever they are located, and those locations are not always ideal from a geopolitical standpoint. While it is only common sense to mitigate one’s economic vulnerabilities and dependencies through diversification, you cannot conjure critically important deposits where they do not naturally exist.

There is only one way to meet the challenge that China poses as a dominant player in key green technologies: US and European industries must become as competitive as their Chinese counterparts. Until that happens, it makes little sense to forego China-sourced products that are cheaper, better or both. Doing so would make it even more difficult for European and US companies to catch up, ultimately delaying the energy transition.

For their part, Chinese officials have said that they see no meaningful difference between de-risking and decoupling. They have a point. Until Western strategists move beyond simply endorsing a new buzzword to clarifying what it does and does not mean, such rhetoric may do more harm than good.

Heightened tensions do not serve anyone’s interests. Everyone agrees that decoupling should be avoided. The task now is to de-risk the concept of de-risking before we undermine our economic prospects unnecessarily.

Carl Bildt is a former prime minister and foreign minister of Sweden. Copyright: Project Syndicate, 2023. 

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