A Closer Look at De-risking

With geopolitical tensions on the rise, the escalating economic rivalry between the United States and the People's Republic of China (PRC) is raising alarm over a potential split in the world economy. Indicative of the profound shift underway, in December 2023, the congressional Select Committee on the Strategic Competition between the United States the Chinese Communist Party called for a wholesale “reset” of the U.S.-China economic relationship in a wide-ranging articulation of a new U.S. approach to economic security.

The concept of de-risking was first introduced by European Commission president Ursula von der Leyen in March 2023 and quickly adopted by U.S. officials. This term has since encouraged a greater degree of consensus between the European Union and the United States regarding the perceived security threat posed by the PRC. Increasingly, national security is considered in terms of economic stability, leading to the rise of economic security agendas worldwide. Economic interdependence has rendered countries vulnerable to intentional shocks, which allow countries to weaponize globalization.

The Chinese government has long been accused of economic coercion, weaponizing trade through abrupt imports stoppages, consumer boycotts, export embargoes, and nontariff barriers. De-risking has emerged as a unifying concept to combat these practices, perceived as less confrontational, more strategic, and open to various interpretations. By employing economic instruments intended for strategic diversification and enhanced resilience, the Biden administration aims to reduce national security risks while preserving the benefits of a globally interconnected economy.

Decoupling versus De-risking

Decoupling entails a complete economic disentanglement. The feasibility of achieving a “hard economic break” between the world’s two largest economies is difficult, if not impossible, to envision. Such a division would lead to significant economic costs for the U.S. private and public sectors and might prompt other nations to fill the void left by the United States, seizing trade, investment, and arbitrage opportunities. Moreover, it would require a considerable increase in national resources to halt all ties.

These two nations account for approximately 40 percent of global GDP. The United States is the PRC's primary trading partner, and the PRC ranks just behind Mexico as the second-largest partner of the United States, with U.S. imports from the PRC reaching an unprecedented $563.6 billion in 2022. This economic interdependence extends to the PRC's substantial holdings of U.S. debt, totaling $859.4 billion as of January 2023, making it one of the United States’ major creditors behind the U.S. Federal Reserve. In light of these intricate ties, the United States has shifted its narrative from a decoupling to a de-risking strategy.

On the other hand, de-risking is based on the recognition of a threat. Ultimately, the distinction between de-risking and decoupling lies in scope and end goals, although some actions taken under the banner of de-risking may inadvertently lead to a form of decoupling. Acknowledging the evolving strategic landscape of globalization, the World Trade Organization also advocates for “re-globalization,” envisioning "interdependence without overdependence" through more diversified global markets and increased geoeconomic resilience.

Performance of the Global Economy

Globalization is entering a new phase. Proponents of “slowbalization” suggest that the world is experiencing a deceleration in trade liberalization as nations pull back from endorsing open trade, a trend that may be amplified by the current de-risking narrative and could further deepen geoeconomic divisions. Data from the International Monetary Fund (IMF) indicates that international flows are still on the rise, albeit at a slower pace than in previous years. The IMF’s World Economic Outlook, published in July 2023, forecasts a decline in trade growth.

Some onlookers have raised concerns about the potential effects of de-risking on the global economy. Over the past 15 years, the world’s economic landscape has been reshaped by a series of shocks, including the financial crisis of 2008, the Covid-19 pandemic, and the Russian invasion of Ukraine. An accelerating economic security agenda, coupled with China’s bid to create alternative economic development institutions, could precipitate economic fragmentation and reshape the global order.

U.S.-China Economic Relations

While trade between the United States and China has grown in absolute numbers, the 2016 trade war and China’s retaliatory tariffs restrained the forecasted growth levels. It has not kept pace with the levels that were projected without the onset of the 2016 trade war and China's retaliatory tariffs. Trade between the two countries is also underperforming, with the shortfall widening since 2021, when measured by comparing the growth rate of U.S. exports to China to the growth rate of China’s imports to the rest of the world. Data from the U.S. Department of Commerce’s Bureau of Economic Analysis supports these observations, reporting a decline in the share of U.S. exports and imports from the PRC since 2021, despite a rise in absolute figures. In 2023, U.S.-China bilateral trade declined 15.4 percent compared to the previous year.

Furthermore, the United Nations Conference on Trade and Development in its June 2023 Global Trade report has documented a decline in “trade interdependence” between the United States and China, beginning the first quarter of 2022. Metrics show a consistent downward trend, suggesting a shift in trade away from China. The report supports and notes as an increase in friend-shoring, while nearshoring has remained relatively stable. However, this shift toward friend-shoring could paradoxically lead to less market diversification, with trade clustering among a smaller group of countries.

The Biden’s Administration Economic Security Policies

The Biden administration’s actions remain largely consistent with de-risking and friend-shoring strategies. However, some Biden administration policies point to broader attempts to decouple certain supply chains, particularly in high-tech sectors.

These strategies are evident in several government initiatives. In June 2021, the United States and European Union created the Trade and Technology Council to advance transatlantic “technological and industrial leadership.” Grounded in shared democratic values, this initiative exemplifies friend-shoring principles. Subsequently, in August 2022, the Biden administration implemented the CHIPS and Science Act, aligning with de-risking priorities to incentivize domestic production and reduce external dependencies of critical technologies. In October 2022, the Chips 4 Alliance united key industry players with shared views, highlighting a strategic blend of de-risking and friend-shoring strategies. Most recently, in August 2023, President Biden issued an executive order that kickstarted the process of establishing an outbound investment screening mechanism.

The most far-reaching of these strategies centers around the “protect” pillar, emanating from October 7, 2022, export controls on advanced semiconductors and related technologies. The Bureau of Industry and Security recently revamped the controls with an update on October 17. The controls are relatively targeted but represent a narrow decoupling in national security critical items.

Reactions from the Private Sector

The effectiveness of these measures hinges on their enforceability, which increasingly involves the private sector. As economic security becomes the driving force of economic policy, democratic states are tasked with the dual responsibility of protecting their national interests and promoting an environment conducive to innovation and growth. Achieving this goal demands alignment among public and private interests.

Rapidus, a Japanese consortium working with IBM and the European research group IMEC, is advancing two-nanometer semiconductor manufacturing in Japan in a bid to reduce the risks of over-reliance on Taiwanese production of advanced chips. Another example of de-risking in the semiconductor sector includes a recent U.S.-Vietnam partnership under the International Technology Security and Innovation Fund to secure semiconductor supply chains. Simultaneously, many companies, particularly in the technology sector, are increasingly adapting their business strategies. These include reshaping corporate structures, repositioning Chinese operations to focus on local demand, or moving production to other countries.

Key examples of this trend include U.S.-based GlobalFoundries, which has initiated a $4 billion expansion of its manufacturing plant in Singapore to address the growing demand for essential chips. Texas Instruments Inc., another major U.S. player, is investing up to $1 billion in its Philippine facilities, acknowledging the country’s comprehensive efforts to build a high-skilled, competitive workforce. Another example of following a China Plus One strategy is Apple as it increases its investment in India and Vietnam, where it plans to build new production facilities. These companies reflect a broader integration of friend-shoring strategies to increase business resilience and mitigate geopolitical risks.

China’s Response to De-risking

Beijing broadly perceives de-risking as decoupling in disguise. Chinese premier Li Qiang expressed reservations about the de-risking agenda, stating that “governments should not over-reach themselves, still less stretch the concept of risk or turn it into an ideological tool.” He further warned against the “politicization of economic issues.”

To counter U.S. friend-shoring and de-risking measures, China is supporting indigenization efforts and enacting retaliatory sanctions. The PRC seeks to promote their Made in China brand, improving quality and innovation. The Dual Circulation Strategy aims to stimulate domestic consumption and reduce reliance on international markets. Concurrently, international players are beginning to pursue an “in China for China” strategy that creates dual supply chains. Additionally, Beijing is expanding its semiconductor production and accelerating technological progress, pivoting toward the Middle East to secure capital. Similarly, China has been prioritizing its relationships within the Indo-Pacific region and focusing increasingly on groups where the United States is not a member, such as BRICS, the Belt and Road Initiative, and the Shanghai Cooperation Organization.

China has also pursued a diverse set of retaliatory measures. These include banning the use of Micron chips in critical infrastructure and expelling economic intelligence firms. China has also levied additional export license restrictions on critical minerals gallium and germanium, which, if enforced, could disrupt foreign semiconductor supply chains. During the EU-U.S. summit in October, China also announced additional export licensing restrictions on graphite, a critical mineral integral to the production of electric vehicles. These restrictions serve as a warning about the risks associated with an expanded economic security agenda. As partner economies expand the use of economic security instruments, they will need to work closely to minimize the costs of these policies.

Key Takeaways

The United States has been adjusting its approach to economic engagement, a process that predates the concept of de-risking. However, the current focus on de-risking and friend-shoring reflects a more concerted approach to economic security. As President Biden stated in his November 2023 APEC summit remarks, “The questions we must answer today are not about how much we trade, but about how we build resilience, lift up working people, reduce carbon emissions, and set up our economies to succeed over the long run.” This shift prioritizes safeguarding national interests, while minimizing disruptions to global trade. Yet, the long-term effects of these policies remain difficult to predict. As the United States and its partners continue to adapt to these complex challenges, the evolving nature of global economic interdependence and security remains a key area to watch in the coming years.

Emily Benson directs the Project on Trade and Technology at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Gloria Sicilia is an intern with the Project on Trade and Technology at CSIS.