In focusing on China, Europe risks missing true ‘de-risking’ dangers

Risks from China must be put in perspective against tensions in northeast Asia, from Taiwan to the Korean peninsula, and an increasingly isolationist and protectionist US

Brian Y. S. WongandSebastian Contin Trillo-Figueroa

Published: 5:30am, 16 Oct 2023

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“De-risking” has come to dominate European discourse on China and Russia. To its advocates, it reflects a calibrated compromise between European desires for strategic autonomy, the enduring alignment between Washington and Brussels, and the growing convergence in economic interests between Europe and China.

The term is best defined as the recalibrating and diversifying of trade relationships to minimise the downsides of disproportionate dependencies.

Brussels has announced four priority areas in which Europe would seek a critical review and potential reduction of partnerships with China: artificial intelligence, semiconductors, quantum technology and biotechnology. As important as minimising undue dependence may be, the European Union should seize the opportunity to develop a more holistic understanding of risk.

Firstly, the EU can put into perspective the scale and potential repercussions of its growing economic ties with Beijing. The increase in European net imports from China has benefited European consumers while threatening to drive out of business many producers in Germany and France, with competition particularly fierce in electric vehicles.

Much dialogue on reducing exposure to China has focused on allegedly unfair Chinese trade practices and “economic coercion”. The worry is that China would weaponise its investment and ties within strategic sectors in Europe, and its heft in advanced manufacturing to extract geopolitical and strategic favours from the EU.

Yet this need not be a zero-sum game. Ventures between Chinese and German companies, such as BMW Brilliance Automotive, have long flourished to mutual advantage. For European companies in China, building up greater local expertise through employing local staff, advisers and joint venture partners is also vital for competitiveness within China.

Abroad, Chinese renewable energy firms have been crucial in sharing knowledge and technology, such as with their counterparts in Vietnam and Indonesia under the Just Energy Transition Partnership. The concentration of Chinese investment and technology in Europe would risk an asymmetrical leverage only if their domestic partners are wholly excluded from decision-making, profit-sharing and technology transfers.

In any case, teething issues concerning Chinese tech call for better management and the integration of Chinese companies, not their outright exclusion.

Secondly, European states should realise that in an age of increasing interdependence, risk is just as likely to emerge from the actions of a large state as from the interactions between global and regional powers. In overstating the policy risks arising from China, analysts and policymakers may overlook the broader geopolitical hazards in East Asia.

With escalating tensions between China and the US and Japan, concerns over the Taiwan Strait with elections in Taiwan and the US next year, and rancorous relations between Pyongyang and Seoul on the Korean peninsula, it is fair to say that East Asia is likely to see greater volatility and uncertainty for years.

03:15

Taiwan holds nuclear emergency drill as mainland Chinese planes enter island’s air defence zone

Any potential hot war, or even large-scale militarisation and ensuing blockades, could severely disrupt supply chains and cripple consumer markets. Minimising geopolitics-induced destruction to property, disruption of production processes, and legal or financial liabilities owing from military tensions is of vital importance.

To hedge and rebalance their exposure to markets, European companies could diversify investments and ties away from Northeast Asia, into Southeast and South Asia. Shifting supply chain components, such as through a “China plus one” strategy, to manufacturing powerhouses in Indonesia, Vietnam and India, is crucial to insure against great power competition.

03:09

South Korea stages military parade in Seoul as Yoon warns North against nuclear threat

It would be erroneous to attribute to China alone the risks of doing business in East Asia. European companies should also manage workforce expectations and recalibrate ties across Northeast Asia, including Japan and South Korea, to mitigate against a fallout from large-scale military, financial or trade conflict.

“De-risking” also means more closely identifying opportunities in states more welcoming to foreign investment and enterprises, such as Thailand under Prime Minister Srettha Thavisin, who has made digital economy and the transition to renewables a core part of his economic vision.

In Thailand, China’s EV makers have found a refuge from EU subsidy probe

Deepening EU-Asean logistical ties after the comprehensive air transport agreement signed last year, and drawing upon the India-Middle East-Europe Economic Corridor to develop complementary supply chains are thus vital components of Europe’s pivot away from overreliance on Northeast Asia.

Thirdly, a hitherto neglected risk in discussions in Brussels is that of an ascendant America-centric isolationism – perhaps best epitomised by the momentum that Republican front runner and erstwhile president Donald Trump is gaining as he attempts a return to the White House.

Last year’s Inflation Reduction Act was one of the most overt raft of protectionist measures Washington has pushed through in recent decades. The sizeable tax breaks and expansive subsidies on sectors from wind farms to battery manufacturing have tilted the playing field in favour of the US, coming at loggerheads with Europe’s industrial base and interests.

01:56

Biden to introduce new restrictions on US investments in China, declares tech ‘emergency’

Trade is increasingly dubbed a zero-sum game by American parliamentarians, who see restoring domestic employment, redirecting investments towards strategic sectors and guarding against competitors abroad – including in the EU – as pivotal to winning popular support.

Brussels must make clear to Washington that pandering to a domestic audience cannot come at the expense of transatlantic synergy. Short of any concrete concessions from the US, however, the EU can only turn towards deepening internal ties and interdependence across member economies, to weather the storm ahead.

“De-risking” requires the EU to address different levels and forms of risks, encompassing the economic, strategic, geopolitical and political. While Sino-European relations hold much significance, they neither represent the sole nor primary source of such risks for Europe.

Brian Wong is an assistant professor in philosophy at the University of Hong Kong, a Rhodes Scholar and an adviser on strategy for the Oxford Global Society

Sebastian Contin Trillo-Figueroa is a geopolitics analyst with a specialisation in EU-Asia relations