THE STRATEGIC IMPERATIVE OF DE-RISKING, ON-SHORING AND FRIEND-SHORING

UNDERSTANDING THE NEW TERMINOLOGY

1. RESHORING: Reshoring is the practice of bringing offshored manufacturing or industrial operations back to the company’s home country. It’s a strategic choice that can often be motivated by aspects like: quality assurance, financial concerns, supply chain resiliency, and market responses.
2. FRIEND-SHORING: Friend-shoring happens when a government pushes businesses to restructure supply chains, shifting production away from geopolitical rivals to friendly powers. The Biden administration’s ban on American investment in Chinese technology is one such example.
3. DE-RISKING: De-risking is an ideological term that the United States uses to describe its trade and investment policies toward China. It involves: 

• • Reducing dependence on China
  • Preventing technologies with security implications from spreading to China
  • Strictly reviewing and restricting outbound investment in China
  • Mitigating the vulnerabilities posed by deep economic ties between the United States and China
  • Cementing the United States’ role as the world’s technological leader
  • Persuading more semiconductor suppliers to move out of China

NOTE: The term “De-Risking” was first used by European Commission President Ursula von der Leyen in March 2023. The Biden administration and G7 have both embraced the term. China insists that the United States’ “de-risking” push is a thinly veiled attempt to decouple and block China’s development. Chinese officials cite US President Joe Biden’s most recent executive order curbing technology investments as the latest evidence of this. However Commerce Secretary Gina Raimondo said that the U.S. doesn’t want to decouple from China. She said Biden’s message was: “We are derisking, we’re investing in America, but we are not decoupling or trying to hold down China’s economy”

THE PROBLEM ACCORDING TO THE IMF

Published at the IMF

Harm From ‘De-Risking’ Strategies Would Reverberate Beyond China

The negative impact of ‘de-risking’ strategies by major economies would be felt beyond China, while comprehensive reforms in China could generate significant positive spillovers

China’s importance in the global economy has increased dramatically in recent decades, and it has been a particularly crucial driver of trade integration in Asia.

China’s medium-term growth prospects, like that of other countries, will be determined in part by major forces such as convergence to advanced economies’ income levels and demographics. Yet key structural policy drivers, including domestic reform momentum, and external factors, including geoeconomic fragmentation, also significantly affect this path.

What would be the potential implications for Asia and beyond from these different growth paths? In our latest Regional Economic Outlook for Asia and the Pacific, we assess the potential effects of a downside scenario from ‘de-risking’ between China and Organisation for Economic Co-operation and Development economies.

As the Chart of the Week shows (ABOVE RIGHT), so-called de-risking strategies by China and the United States and other OECD countries that aim to reshore production domestically or friend-shore away from one another can result in a significant drag on growth around the world even assuming no new trade restrictions with third countries—especially in Asia.

While reshoring would be particularly painful to everyone, it is notable that friend-shoring does not generate net benefits for third countries in the long term. That’s because the benefits from trade diversion are offset by the effects of the contractions in both China and the OECD.

For the region, the results suggest that third countries should not expect to passively benefit from friend-shoring policies, but rather actively pursue reforms that can help them further integrate into global supply chains. For systemic economies around the world, there is an urgent need for constructive dialogue to resolve underlying sources of tensions and resist costly fragmentation outcomes.

In China, the risks that fragmentation poses on medium-term growth underscore the need for comprehensive structural reforms that would help income levels converge more rapidly with those in advanced economies—such as closing productivity gaps between state-owned and private firms and further opening up sectors to competition. Our research shows that achieving this would also have significant positive spillovers for other economies in Asia.

DE-COUPLING v DE-RISKING

Extracted and reformated from Foreign Policy

De-risking is the new buzzword in Washington. This marks a notable shift, because until April, when U.S. National Security Advisor Jake Sullivan gave a speech on the topic, the talk was all about decoupling the U.S. economy from China’s. Decoupling suggests a radical separation, whereas de-risking—a term that initially comes from the financial sector—implies curbing risks while avoiding a clean break.

Decoupling reflected a simple idea: The fewer ties to China—an authoritarian state with little interest in playing by the rules—the better for the United States, both in economic and security terms. The concept of “de-risking,” on the other hand, remains murky and vague. What is de-risking, why does the vocabulary change matter, and how does de-risking work in practice? This brief user’s manual tries to answer these questions.

1. THE BACKGROUND: Why did U.S. policymakers abandon decoupling? Three factors explain why most U.S. policymakers now assume that cutting all economic ties with China is both undesirable and (probably) impossible.

1- The Chinese economy is too big for decoupling to be a realistic prospect. China is the world’s largest manufacturer of goods, with an output equivalent to that of all U.S., German, and Japanese factories combined. Under a decoupling scenario, goods shortages would be likely, and inflation would spike as U.S. firms struggle to source products. In addition, Chinese supremacy in producing dishwashers, computers, or toys does not threaten U.S. interests. Cutting ties to China in such noncritical sectors—as decoupling would —is not needed.

2- A U.S.-China decoupling would accelerate the fragmentation of the global economic landscape. Under a decoupling scenario, all countries around the world would have to pick sides between the United States and China. This could yield unpleasant surprises for Washington. China is the biggest trading partner of the majority of countries, and the citizens of many emerging economies appear to prefer China over the United States. As a result, decoupling could well backfire: It would deepen China’s global influence by forcing countries to shift away from the United States.

3- Cutting all ties to China would diminish those economic interdependences that give Washington leverage over Beijing. Partners have much to lose if relations sour, but adversaries do not. U.S. sanctions on China—for instance, the ones that would be imposed if a conflict were to erupt in Taiwan—would be toothless if Washington and Beijing did not have trade and financial ties anymore. To put things differently, economic interdependences between the United States and China benefit U.S. security; they act as a deterrent against China’s territorial ambitions.

2. THE CONCEPT: What is de-risking, and what are its objectives? U.S. policymakers have never presented a precise definition of de-risking. In a broad sense, it entails mitigating the vulnerabilities posed by deep economic ties between the United States and China. Looking at the end goals of de-risking is probably the best way to define the concept.

The first objective is to cement the United States’ role as the world’s technological leader. One key U.S. assumption is that technology will be an ever-growing determinant of economic might in a digitalized, connected world. The Biden administration believes that Chinese technological firms closing the gap with their U.S. counterparts presents a risk to U.S. superiority. In other words, U.S. policymakers are coming to terms with the idea that despite the current bout of grim economic problems, China will still become the world’s largest economy by 2040. They’re (almost) fine with this, but they want the United States to remain the economy that matters the most.

In practice, de-risking seeks to curb China’s access to top-notch U.S. innovation, thereby preventing Chinese firms from using U.S. know-how to climb the innovation ladder. Unlike decoupling, de-risking does not seek to curb Chinese access to less sophisticated U.S. technology.

The second goal is to slow the progress of the Chinese military. The United States remains the world’s leading military power, but the Chinese army is catching up fast, supporting Beijing’s ambitions to control Taiwan. De-risking seeks to prevent the Chinese army from accessing advanced U.S. technology with military applications—for instance, dual-use microchips that can be deployed in missiles. This second objective highlights how de-risking spans both economics and defense.

The third objective is to reduce overreliance on China for critical goods. The COVID-19 pandemic made the world realize that China is a major producer of medicines, medical equipment, and other crucial goods—presenting a risk to the safety of U.S. supplies in times of crisis. Mitigating risk by relocating the production of critical raw materials and goods to U.S. soil is therefore a key feature of Washington’s de-risking plans.

3. THE PRIORITIES: Where will U.S. policymakers focus their efforts? De-risking is a selective process: In contrast to decoupling, the United States does not seek to cut all ties to China. Instead, Washington will focus its efforts in three areas: information technology, energy, and biotech.

The information technology sector is the first area of focus, notably in semiconductors, artificial intelligence (AI), and quantum computing. The U.S. reasoning is simple: Because these three technologies can be used for both civilian and military purposes, a situation where Chinese firms become the most advanced in these fields presents a security risk. U.S. firms are still the market leaders here, but Chinese institutions are doubling down on efforts to catch up. Two data points say it all: First, Chinese financing for AI at least matches that of the Pentagon. Second, China accounts for half of global public financing for quantum computing—and seven times that of Washington.

The energy sector will be another priority, highlighting how de-risking is linked to the fight against climate change. As Sullivan noted, the United States wants to avoid seeing clean-energy supply chains weaponized like oil was in the 1970s. Although the United States would not suddenly come to a standstill like it did during the Arab oil boycott, a Chinese green tech embargo would put the energy transition at risk. Washington wants to ensure the safety of supplies for critical raw materials (such as lithium), technologies (including electric-vehicle batteries), and equipment (such as solar panels) that will be crucial to a net-zero economy.

Biotech is the third-priority sector for U.S. policymakers. China’s biotech sector has gone through a rough patch lately, but it is still growing fast, and the country wants to become a global leader in the field in the coming decade. To an even greater extent than the IT sector, biotech relies on knowledge and access to data or algorithms that can be transmitted via email or a simple digital storage medium. For U.S. policymakers, this is an additional headache; blocking the transfer of knowledge and data will be far harder than stopping the physical export of sensitive goods.

4. THE TOOLBOX: How will Washington implement de-risking? The de-risking enterprise is prompting a major overhaul of the United States’ economic policy toolkit. Three types of policies, in particular, have been resurrected from the past.

The first resurrection is that of export controls. Such policies were widely used during the Cold War to prevent the former Soviet Union from accessing dual-use technologies (i.e., those that have both civilian and military applications). After roughly two decades of disuse, these policies now form the linchpin of U.S. efforts to slow down China’s technological advances. After semiconductors last year, quantum computing and AI are the likely next targets of sweeping U.S. export controls.

The Second, industrial policy is making a comeback. The $369 billion Inflation Reduction Act, which focuses on energy security and climate policy, marked a U-turn for U.S. economic policy. After decades of relative laissez faire, Washington is seeking to help U.S. companies grow and make de-risking an opportunity for U.S. workers. That the Biden administration is now seeking to control both inbound and outbound investment, which would restrict the ability of U.S. firms to set up production lines in China, is another U-turn. It highlights how Washington will not shy away from imposing policies that would have looked too intrusive only a few years ago.

The third revival has to do with U.S. cooperation with allies and like-minded partners. The G-7 summit, for instance, used to be of little relevance; now it is a key forum for advanced democracies to discuss de-risking and China’s advances. Washington is also doubling down on bilateral initiatives such as the United States-Japan Critical Minerals Agreement and the U.S.-EU Trade and Technology Council—the latter a trans-Atlantic platform where topics for discussion include AI, technology standards, and critical materials.

None of this will be friction-free. U.S. plans to cooperate with allies do not mean that de-risking will work in those allies’ interests. The United States, much of Europe, and some of the Asian democracies are military allies, but they are also economic competitors—and economic interests are often a zero-sum game. Even if the United States and its allies are increasingly on the same page regarding the challenges posed by China, it is a safe bet that U.S. de-risking policies will fuel tensions with Europe and other partners instead of curbing them.