The Context

We shall try to understand the concept by taking example of China and its economic relations with USA and European countries.

The Trump-era policy in his earlier tenure focused on the U.S. to decouple from China was later phased out by a new concept. The U.S. has been expressing that it is shifting its policy on China from decoupling to de-risking. The EU has already declared that its approach to China will be based on de-risking.

Origin of the Concept of De-risking

At the G7 Hiroshima Summit in May 2023, the G7 announced its commitment to a de-risking approach towards China. The concept of de-risking was originally proposed by the President of the European Commission Ursula von der Leyen, and was later incorporated into the G7 Hiroshima Leaders’ Communiqué with other member states, such as the United States and Japan.

China Differently Viewed by USA & EU

It is interesting to note the differences in how China is viewed by the United States and Europe. In the ‘National Security Strategy’ released in October 2022, Washington identified Beijing as the only competitor to reshape the international order, seeing China’s economic and military rise as a real threat to America’s preeminent position.

Europe, on the other hand, depicts China as a negotiating ‘partner’ for the EU, an ‘economic competitor’ and a ‘systemic rival’.

Derisking

De-risking, a finance concept, refers to a reduction of reliance on China in the economic sphere while not turning inwards or trying to prevent Chinese growth. Decoupling is used here as an alternative to an economic boycott.

The US State Department describes de-risking as the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage risk.

Simply put, de-risking is to move businesses away from areas that are considered risky in terms of the returns they could generate.

In the context of China, de-risking can be interpreted as a reduction of the reliance on China in the economic sphereso that the potential risks to trade and disruption of supply chains are reduced.

For understanding the concept better,it may be stated that the banks de-risk by denying service to aid agencies that work in places like Syria that are under Sanction.Regarding finance, as per experts de-risking can create further risk and opacity into the global financial system, as the termination of account relationships has the potential to force entities and persons into less regulated or unregulated channels.

Decoupling

The objective decoupling is to sever or significantly reduce economic and trade ties with a specific country or region.

Decoupling focuses on reducing economic interdependence for political, security, or strategic reasons. It emphasizes the creation of alternative supply chains, markets, and partnerships outside the targeted country or region.

This may have negative economic consequences for both the target country and the decoupling country. It emphasizes the creation of alternative supply chains, markets, and partnerships outside the targeted country or region.

Major developed Economies prefer De-risking and Not Decoupling with China

After understanding the concepts of decoupling and derisking we can analyze the reasons for the developed economies preferring derisking with China rather than decoupling.

Economic Interdependence

The western developed economiesrecognize the significant economic interdependence between themselves and China. Decoupling would result in major disruptions to global supply chains and trade, potentially causing economic harm to all parties involved.

Market Opportunities

China represents a large and growing market for exports. By pursuing de-risking instead of decoupling, access to the Chinese market could be maintainedfor benefitting from trade and investment opportunities.

Global Economic Stability

Decoupling from China could have adverse effects on global economic stability. The Western countries understand the importance of maintaining stable and predictable economic relations with China to promote global growth and prosperity.

Diplomatic Engagement

It is believedthatengaging with China diplomatically by following de-risking policy, will allow for constructive dialogue and negotiation, which can lead to more favourable outcomes for both sides.