De-risking trade with China is a risky business

The Word of the Year contest is already over. In the geopolitical category, the winner is “de-risking”.

This D-word has gone from obscurity to ubiquity in less than two months. it was the centerpiece of a speech Made about China in late March by European Commission President Ursula von der Leyen. De-risking was then seized upon by the Biden administration. Then, last week, it was Supported by the G7 summit.

One of the reasons Western leaders are so readily adopting risk-aversion is that it leaves them in the grip of rhetoric. The previous talk of “delinking” Western economies from China was often criticized as impossible and extreme. D-risk seems to be more prudent and targeted. Western businesses are being told that they can still do business with China – there just need to be some safeguards.

The kinds of risks that the US and the EU are concerned about fall into two broad categories: what the West gets from China; and goods that China receives from the West.

In the “stuff they get from us” category, advanced technology with potential military use tops the list. sanctions on semiconductor exports were announced by the US and — last week, by japan – fall into this category.

At the same time that the G7 nations are restricting China’s access to critical technologies, they are also trying to rid themselves of what appear to be dangerous dependencies on China. Rare earths and critical minerals that are vital to battery technology and the green transition top the list. As von der Leyen noted in his speech, the European Union imports 97 percent of its lithium — crucial in the production of batteries — from China.

Another dependency the West is trying to reduce is that more than 90 percent of advanced semiconductors come from Taiwan, the island most vulnerable to invasion by China. The US CHIPS Act of 2022 provides $52 billion in funding to boost the manufacturing of chips in the US.

The principle behind de-risk is now reasonably clear. However, the practice is much more nebulous.

Three major difficulties are already emerging. First, conflicts of interest between companies and countries. Second, the difficulty and cost of reducing dependence on China. Third, a lingering ambiguity about the nature of the risk. Are we worried about political pressure by China, or are we really worried about war?

In normal times, supporting domestic companies that wish to export is a major goal of Western governments. But in the world of de-risking, this is no longer always the case.

Last week, Jensen Huang, CEO of California-based semiconductor group Nvidia, warned of “huge losses” to US companies if they were barred from selling advanced chips to China. But US officials are unconcerned. They point out that Nvidia chips are vital to the development of AI.

They also say that China could easily use advanced AI for all kinds of nefarious purposes, from the production of bio-weapons (a special Chinese interest, apparently) to political propaganda through “deep fake” news. Up to manipulation Further tightening of restrictions on outbound investment in China by both the EU and the US will mean that more Western companies will experience Nvidia-style controls in the future.

But restrictions on exports and critical technologies are clearly a game two people can play. Therefore, the West is also trying to urgently reduce its dependence on China in important areas.

Opinions differ on how easy this would be. The Dutch trade minister, Lesje Schreinmacher, warned this week that Europe’s green transition would be impossible without China, by far the biggest global producer of solar panels, batteries and the vital minerals that go into them. One Western intelligence official argues: “It has taken 30 years to build up our dependence on China for vital minerals and rare earths, and it will take the same amount of time to open up.”

But Jason Matheny, president of the RAND Corporation who works on technology and national security in Joe Biden’s White House, is more optimistic. He points out that “rare earths are not really rare”. China’s real lock down is on processing vital minerals, which is often a very dirty business. But some countries with relatively low population densities, such as Australia, are willing to take it.

The emerging Western approach to de-risking rests on three broad pillars: reduce dependence on China, restrict technology exports, but at the same time continue to encourage Western companies to do business with the vast Chinese market. This is a more or less consistent policy, as long as the risk being hedged against is political pressure. But it starts to break down if the risk is an actual war between the US and China, perhaps over Taiwan. Unsurprisingly, some US officials now estimate the likelihood of a military conflict at 50 percent or more.

If this happens, Western companies will be under immediate pressure to get out of China. For a firm like Apple, whose products are mainly produced in southern China, or Volkswagen, which makes at least half its profits in China, that could spell corporate death. On the other hand, as one Western security official puts it: “If there is a war with China, the impact on the world car market will be the least of our problems.”

gideon.rachman@ft.com