The recent warning by Nvidia CEO Jensen Huang that the United States risks “enormous damage” if it continues to escalate the chips war brings into focus yet again the ill-defined approach of “de-risking” without decoupling. The leaders at the recent Group of 7 (G7) summit affirmed this approach but offered few clues as to what they mean.
That has left policymakers and businesses with many questions. What risks do you de-escalate? Given long-running interdependencies, how do you do so? Which carrots and sticks work best? For which goals? When do you start and stop? How does Chinese policy factor in? What measures success?
This thicket of confusion adds to the mess surrounding the tense relations between the world’s largest industrialised democracies and China. Mutual self-interest has been shunted aside as governments act at cross purposes with skirmishes of retaliation, including office raids by Beijing and US trade bans.
Meanwhile, companies are telling China “we’re back”, as the panel discussion featuring JP MorganChase CEO Jamie Dimon did in Shanghai this week. The participation of almost 3,000 attendees at that event underscores how global companies need a strong base in the world’s second-largest economy even as they diversify operations through friendshoring and expansion in emerging markets.
Businesses are eager to exploit opportunities arising from the ambiguities around de-risking. Starbucks is one example with its bold plans to open 9,000 new stores in China by 2025. By some estimates, Apple produces at least 95 per cent of its iPhones, AirPods, Macs and iPads in China while generating about one-fifth of its revenue there.
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Apple fans in China queue up to buy iPhone 14 as new models hit stores
Apple fans in China queue up to buy iPhone 14 as new models hit stores
This paradox – higher profits requiring deeper ties and greater risks – has imperilled de-risking without decoupling ever since the approach became the template for the West’s diplomacy towards China. EU Commission President Ursula von der Leyen was among the first to use the phrase in a speech in January. US National Security Adviser Jake Sullivan did likewise in a major address in April, and the G7 summit in Hiroshima, Japan, late last month institutionalised the doctrine.
Defining de-risking is a messy business. The US Treasury Department defines it as “terminating or restricting business relationships indiscriminately with broad categories of customers”. The agency advises using precision when deciding which ties to sever – advice that should shape the course of relations between the West and China.
In broad terms, de-risking aims to reduce G7 countries’ economic reliance on China without requiring a retreat inward. Sullivan equated the approach to having “effective supply chains” and multiple sources for raw materials, key components or technologies. Its impetus is also entangled in national security priorities. Extreme dependencies on a rival could tempt the adversary to retaliate and force concessions.
Under de-risking, the idea goes, the West and China will still benefit from doing business with each other despite the increased distance in ties. Geopolitical tensions will ease while the status quo around Taiwan under the one-China policy will remain unchanged.
Differences within the G7 are creating incoherence that threatens the de-risking approach in three ways: its ambiguity; the difficulty around its implementation; and – the toughest problem – the lack of more deeply grounded approaches for lessening hostilities in US-China relations that are roiling the international order.
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China’s military simulates precision strikes on Taiwan after island’s leader returns from US visit
China’s military simulates precision strikes on Taiwan after island’s leader returns from US visit
Ambiguity is both a curse and a blessing for diplomacy. It provides flexibility to adapt to ongoing changes. But when rules of engagement aren’t clear, countries feel uneasy and perhaps insecure at home and abroad.
Recent comments by Liesje Schreinemacher, the Netherlands’ trade minister, suggest how quickly the ambiguities are being leveraged. “We need each other when it comes to making our economies more sustainable and the green transition,” she said, referring to tapping China’s prowess to fuel her country’s shift to renewable energy.
The challenges of implementing de-risking are another argument for greater precision and clarity. These difficulties can be seen in the ways the US enforces restraints it imposed on companies last October to prevent China from accelerating advances in its defence capabilities using chips.
A Taiwan Semiconductor Manufacturing Company factory is seen under construction in Phoenix, Arizona, on December 6, 2022. Full-scale operations are expected to begin in 2024. Photo: Kyodo
Taiwan Semiconductor Manufacturing Company and South Korean chip makers SK Hynix and Samsung were granted exemptions from the US trade ban against China. Indeed, around two-thirds of licence requests to do business in China are granted by the US Commerce Department. Although the chips they sell to China are deemed low-tech by the US, they can still enhance defence capabilities.
Left untouched by the de-risking push are US investment banks, pension funds and other investors who could be financing China’s technological advances. But the Biden administration is reported to be considering such restrictions although its two emissaries, Sullivan and Treasury Secretary Janet Yellen, have been vague about the curbs an executive order would authorise.
The gaps, exemptions, and compromises in enforcing de-risking undermine the doctrine’s credibility and do little to thaw relations with China. This policy is being made up on the fly, contributing to the tensions the G7 hoped it would ease.
Above all, de-risking seems like a solution for a problem that cannot be solved. Both sides have converging interests on many pressing matters, but overriding these are their different visions of the world order and their incompatible approaches to safeguarding their national interests.
The pace of China’s economic growth is slowing, with the surge after the zero-Covid policy was lifted proving to be less forceful. The West needs China’s markets, factories and research breakthroughs. Leveraging those mutual interests is the best way to defuse tensions. The focus then should be on finding ways to cooperate on the margins with ample safety valves that defuse tensions before they become deeply entrenched.
James David Spellman, a graduate of Oxford University, is principal of Strategic Communications LLC, a consulting firm based in Washington
