From Decoupling to De-risking: The U.S. Shift in Approach to China

It was a brisk autumn morning when Lily Zhang, a small business owner from California, received an email that changed everything. Her supplier in China informed her that the cost of goods will increase by 25% due to new tariffs imposed by the Trump administration. As she scrambled to re-work her budget and consider alternative suppliers, Lily realized that her business was heavily dependent on China and that the U.S.-China trade war was hitting closer to home than she thought.

Lily's experience is not unique. In fact, many U.S. businesses have come to realize the risks involved in being too reliant on China as a supplier or market. This realization has fueled a shift in U.S. policy towards China, from one of decoupling to de-risking.

What is Decoupling?

Decoupling refers to the process of reducing economic interdependence between two countries. In the context of the U.S.-China relationship, decoupling has involved restricting Chinese investments in U.S. companies, imposing tariffs on Chinese goods, and limiting Chinese access to U.S. technology. This approach was driven by concerns about China's unfair trade practices, intellectual property theft, espionage, and human rights abuses.

Why the Shift to De-risking?

The decoupling approach had its limitations. For one, it was costly. Tariffs on Chinese goods led to increased prices for American consumers and disrupted global supply chains. The trade war also inflicted significant damage on U.S. businesses, particularly small and medium-sized enterprises, which are more vulnerable to volatility and disruptions in the global economy.

Moreover, decoupling did not address the underlying risk posed by China's ascent as a global power. China's economic and military rise has challenged the U.S.-led world order, raising questions about the security, stability, and values underpinning it.

De-risking, on the other hand, seeks to manage and mitigate the risks associated with China's rise, rather than eliminate them altogether. This approach recognizes that China is a key player in the global economy and that the two countries have interlocking interests in many areas.

Examples of De-risking

De-risking involves a range of measures aimed at reducing the vulnerability of U.S. businesses, investors, and institutions to China's actions. Here are some examples:

• Establishing alternative supply chains: U.S. companies are diversifying their supply chains to reduce their dependence on China. This includes shifting production to other countries or onshoring it to the U.S.
• Strengthening screening and review processes: The U.S. government is tightening its scrutiny of Chinese investments in critical sectors such as technology, infrastructure, and energy. This includes expanding the powers of the Committee on Foreign Investment in the United States (CFIUS) and proposing new regulations to require Chinese companies listed in the U.S. to comply with American auditing standards.
• Building alliances and partnerships: The U.S. is working to strengthen its alliances and partnerships in the Indo-Pacific region to counter China's influence and advance shared interests. This includes engaging with countries such as Japan, Australia, India, and South Korea in areas such as infrastructure development, cybersecurity, and maritime security.

Conclusion

The shift from decoupling to de-risking reflects a recognition that China is a complex and dynamic challenge that cannot be solved through simplistic or unilateral measures. By adopting a more nuanced and strategic approach, the U.S. aims to mitigate the risks of China's rise while preserving the benefits of engagement.

However, de-risking is not without its own challenges. It requires long-term planning, strategic foresight, and effective communication with stakeholders to ensure a smooth transition. The U.S. also needs to be mindful of unintended consequences, such as the potential for isolationism, nationalism, and protectionism.

Ultimately, de-risking is not just about managing China, but about shaping the future of the global order. By working together with like-minded countries and institutions, the U.S. can help shape a more stable, prosperous, and democratic world.