How ‘Decoupling’ From China Became ‘De-risking’

If diplomats were on TikTok, “eliminate risk” would be all the rage. The word has suddenly become popular among officials trying to loosen China’s grip on global supply chains, but without cutting ties entirely, with the joint communiqué from this weekend’s G7 meeting that makes it clear that the world’s largest democratic economies will now focus on “derisking, not disengaging.”

The first is intended to sound more moderate, more surgical. It reflects an evolution in the discussion about how to deal with an assertive and rising China. But the word also has a puzzling history in financial politics, and with the de-risking debate going to continue, we’d better all catch up.

How derisking went viral

“Risk-off” relations with China became popular after a speech by European Commission President Ursula von der Leyen on March 30, when she explained why she would travel to Beijing with President Emmanuel Macron of France and why Europe would not follow calls for disengagement that began under the Trump presidency .

“I think it is not feasible, nor in Europe’s interest, to disengage from China,” he said. “Our relationships are not black and white, and neither can our response. That’s why we need to focus on reducing risk, not disengaging.”

later German and French diplomats pressed for term on international stages. Asian countries have also been telling US officials that decoupling would go too far in trying to undo decades of successful economic integration.

In an interview, David Koh, Singapore’s cybersecurity commissioner, explained that the goal should be security, with separation in some domains and cooperation in others.

“I think we get a lot of economic, social and security value when systems are interoperable,” he said. “I want my plane to take off from Singapore and land safely in Beijing.”

What worries globalized economies, he added, is the “bifurcation,” with Chinese markets and manufacturing on one side and US-approved supply chains on the other.

These arguments appear to have worked in favor of risk elimination. On April 27, US National Security Adviser Jake Sullivan used the word in a major political speech.

“We are in favor of eliminating risks, not disengaging,” he said. “Reducing risk essentially means having resilient and efficient supply chains and ensuring that we cannot be subject to coercion from any other country.”

On May 17, S. Jaishankar, Foreign Minister of India, added his voicesaying that it was “important to de-risk the global economy and yet ensure that there is very responsible growth.”

what china thinks

For the Chinese government, unsurprisingly, “risk removal” is not much of an improvement.

“There is a feeling that ‘derisking’ might be ‘decoupling’ in disguise,” the state-run Global Times wrote in a recent editorial. He argued that Washington’s focus had not strayed from “her sick obsession with him to maintain his dominant position in the world.”

Some commentators in the region are also skeptical of the risk. “A substantial change in policy?” asked alex what, columnist for The South China Morning Post. “I doubt it. It just sounds less belligerent; the underlying hostility remains.”

The sordid history of De-risking

Before it entered diplomatic parlance, derisking had a long life in response to US government sanctions against terrorism and money laundering, where it is associated with overreach.

According to the Treasury Department“Derisking” refers to financial institutions that indiscriminately terminate or restrict business relationships with broad categories of customers instead of analyzing and managing the specific risks associated with those customers.

In other words, reducing risk, in its common usage, before April, has negative connotations of unnecessary exclusion.

Human rights groups, for example, have condemned how banks reduce risk by denying service to aid agencies working in places like Syria, fearing fines if an organization strays into a gray area of ​​providing aid to nations under sanction.

A 2015 report The Council of Europe offered additional criticism: “De-risking may introduce more risk and opacity into the global financial system, as the termination of account relationships has the potential to force entities and individuals into less regulated channels or not regulated”.

That means de-risking leads to compliance challenges: Dodgy and legitimate players move into darker corners and innovate, making their actions harder to manage.

Carry

The De-risking story highlights the challenge facing the world’s democracies: how to disengage from China enough to reduce the threat of coercion, without encouraging paranoia or dishonest behavior that causes unnecessary harm.

Reducing risk requires Decisions and solutions difficult and in the weeds.. Which semiconductors should be kept out of China’s hands? Do all medical devices have to be made somewhere other than China? What could TikTok do to protect against the risks of being owned by a Chinese company?

Removing the risk may seem more diplomatic than disengaging. “Who doesn’t like to reduce risk?” said Bates Gill, director of the Asia Society’s Center for China Analysis. “Rhetorically, it’s a much smarter way of thinking about what needs to be done.”

For it to work, the United States and its allies will need to think harder and write regulations for some companies, while allowing others to remain in China, which is navigating its own accord. push to be self-sufficient.

In the world of sanctions, separating risk from fair treatment and economic benefit is an imperfect and evolving challenge; so it will be with China.