Understanding De-Risking: G7’s Redefining of Economic Relations with China

On May 20, the Group of Seven (G7), a political group consisting of Canada, France, Germany, Japan, Italy, the UK, and the USA, issued a joint statement during a meeting in Hiroshima, Japan. The statement declared a strategy of “diversifying and deepening partnerships and de-risking, not decoupling” when it came to the group’s economic approach to China. 

The De-Risking Strategy and its Historical Background

De-risking, according to the State Department, is the “phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk.” Indeed, the deteriorating bilateral relations between China and the USA in recent years set the background for G7’s strategy of de-risking. Then-US President Donald Trump began setting restrictions on bilateral trade with Beijing in 2018 over alleged unfair trade practices and intellectual property theft. Trump advocated for decoupling, in all aspects, of relations with China. He argued that the United States’ trade relationship with China ‘stole’ jobs away from Americans and China was ‘one of the greatest thefts in world history.’ The outbreak of the COVID-19 pandemic in 2020 and China’s strict zero-covid policy validated the concerns of decoupling, as China-based supply chains were disrupted by the impacts of the pandemic. 

While US President Joe Biden, Trump’s successor, has not expressed a similarly aggressive approach towards China rhetorically, he has maintained all trade restrictions set by Trump. Meanwhile, Washington DC has been persuading its allies to align on a singular approach toward China. While Canada, Japan, and the UK have also individually faced a downturn in relations with China over recent years, the EU has maintained overall cordial terms. That said, the war in Ukraine has likely influenced the EU to reevaluate its ties with China to prevent dependence on any potentially aggressive states as had been the case with Europe’s reliance on Russian energy. Indeed, all G7 countries have talked about reducing dependence on China. Recently, the phrase “de-risking” had been in vogue for a couple of months before the announcement, with US business executives and EU leaders calling for a more balanced approach.

The reasoning behind the EU’s de-risking approach to China

Given that each G7 member has a different approach toward China, a common de-risking strategy will need to be comprehensive. Decoupling as a strategy was simple in its connotation. On the one hand, it meant that the US will completely sever ties with China in all aspects. On the other hand, de-risking is ambiguous. It does not etymologically define itself and seems open to interpretation. As such, de-risking allows the West to agree on an approach without defining what it entails. It will let G7 members individually determine the practical scope of their relations as long they can justify it as being under the theoretical umbrella of de-risking. De-risking reflects the possibility for a more nuanced approach within the G7 towards China and the willingness of American allies to align with its foreign policy outlook.

Additionally, decoupling is so radical in its approach that not even the USA can adhere to it without leading to wide-ranging negative consequences on its economy. However, it also allows the West to address its fundamental concerns in economic relations with China, i.e. concerns regarding Beijing’s use of unfair trade practices and its dependence on Chinese supplies. 

Future Prospects of G7’s De-risking Strategy

Although the method and degree of decoupling will differ within the G7, they are all likely to diversify their supply chains from China in relation to critical and strategic material. With the EU already relying on China for more than 90 percent of its rare-earth, magnesium, and lithium supply, the bloc has stated that it will reduce dependence on China for “critical raw materials, semiconductors, health, digital technologies, and food”. Additionally, as reflected by Trump’s “America First” strategy, de-risking could also involve protectionist policies in order to make domestic industries more competitive with Chinese ones. 

For Europe and the US, protecting their intellectual property will also be a concern. This is reflected in the EU’s plans, as announced on June 20, to prohibit EU companies from making sensitive technologies, including advanced microchips, artificial intelligence, and supercomputers, available in countries like China. Additionally, they are likely to further scrutinize Chinese investments in high-technological sectors. 

Such barriers and security processes when investing in or working with Chinese companies are likely to hinder business operations in critical and technological sectors. However, de-risking will also likely offer companies the leeway to adjust their supply chains in the long term rather than be disrupted by obtruding decoupling policies. Meanwhile, the G7’s de-risking approach is likely to open up opportunities for China’s neighbours, especially in South and Southeast Asia, to attract Western investment. 

Conclusion

De-risking reflects the strategy of a liberal West that fears the geopolitical implications of the rise of China on its supply chains but still wants to maintain open economic relations. Its ambiguity allows consensus in theory and divergence in practice. However, as the West’s relations with China are likely to worsen in the long term, the G7’s de-risking strategy could harden in scope and even set the ground for decoupling.