The European Union (EU), China and the United States (US) have all been engaged in varying degrees of risk management and efforts to strengthen economic security for several years. However, it is misleading to use ‘de-risking’ as a catch-all term to describe their respective approaches. While sharing some common roots, the measures being adopted, the desired outcomes and the length of time each actor has been engaged in such activities, are distinct. Robbie Jarvis of the European Chamber takes a look at the different approaches and how companies are responding.

The latest report published by the European Chamber in partnership with the China Macro Group, Riskful Thinking: Navigating the Politics of Economic Security, examines the different approaches that the EU, China and the US are taking to manage economic risks, as well as the strategies Chamber members are taking to build resilience and shore up their operations.[1]

The term ‘de-risking’ did not gain traction in political discourse in March 2023, when it was referred to in a speech delivered by European Commission President Ursula von der Leyen, in which she outlined the EU’s new approach to mitigating a growing number of risks to its economy.[2] The understanding that threats have become more prevalent to both the EU’s overall economic security and its companies overseas has been embedded in European policy thinking for some time. However, the perceived level of risk to the EU increased significantly following two black swan events, which catalysed the European Commission’s approach to managing risk.

First, the COVID-19 pandemic laid bare several critical vulnerabilities. Challenges to Europe’s food security and the sudden inability to access essential medical supplies, brought home the extent to which the EU has become overdependent on certain third countries, and raised doubts over the EU’s long-term economic and social security. Second, Russia’s invasion of Ukraine led to an acceleration of EU de-risking efforts, with a consensus among European Commission officials that the bloc could never again allow itself to be held hostage to critical resources.

The EU has so far been careful to develop its de-risking toolkit in a way that minimises the impact that it could have on its engagement with trade and investment partners. For example, the approach it has taken to identifying what constitutes a critical dependency and to what extent they should be de-risked, has been forensic. Despite this, von der Leyen’s March 2023 speech, in which she explained some of the key principles of de-risking, was not well received in China, with officials warning of the “risk of linking trade with ideology and national security and creating bloc confrontation”.[3]

Just two months later, when the term ‘de-risking’ appeared in the joint communiqué issued by the Group of Seven (G7), following its May 2023 meeting in Japan, Chinese state media further claimed that “de-risking is just decoupling in disguise”, and that “de-risking is just another pretext fabricated by Washington to contain China”.[4]

However, this is something of a misinterpretation. For one, it overlooks that the term ‘de-risking’ originated in Europe, in order to distinguish the bloc’s objective of taking a precise approach to economic security, risk management and diversification from broader decoupling, something that has been more associated with the US. Second, it obfuscates why the EU has found itself compelled to develop a de-risking toolkit, namely to defend itself from an increasing number of challenges to its own security, due to distortions and other threats emanating from third markets. Finally, such statements overlook the fact that China has been pursuing its own far more comprehensive form of risk management that predates EU de-risking by quite some time.

China’s approach was initially informed by a recognition of the need to build domestic industrial capabilities, predicated on the desire to develop its economy. Starting around the mid-2000s, the drive for indigenous innovation was strengthened with industrial policies that were designed to enable China to catch up in both core technologies and industries identified as strategic. These industrial policies were gradually tweaked, both in terms of scope and ambition, to increase China’s global competitiveness, with domestic and global market share targets being added. In parallel, China’s five-year plans increasingly amplified security components alongside those related to development.

China’s security and development concerns eventually converged, culminating in the emergence of the concept of ‘coordinated development and security’, a top-level policy priority under the umbrella of the 14^th Five-year Plan. During the 20^th Party Congress in 2022, this need to enhance national security and social stability was further emphasised, as was Beijing’s desire to intensify its technological self-reliance. As a consequence, China’s approach to risk management and strengthening economic security today goes far beyond the EU’s desire to eliminate critical dependencies and potential distortions in its own market while remaining as open as possible.

For its part, the US has moved away from its rhetoric of ‘decoupling’, as advocated by some in the Trump administration (2017–2021), in favour of de-risking, creating a perception that its approach is more closely aligned with the EU’s than it actually is. However, while similar to the EU, with the US aiming to build domestic industrial capabilities and bolster its competitiveness in certain industries, there are also key differences. Perhaps the most striking difference is that a significant part of the US’ strategy also involves taking pre-emptive measures aimed at impeding China’s development to maintain America’s dominant position in the global economy, something which is not a characteristic of EU de-risking efforts.

At the company level, efforts to eliminate risk from operations and decision-making processes have always been made. However, the volume, complexity and severity of the risks that companies face have all grown exponentially in recent years, as politics has slowly seeped into the business environment.

In the European Chamber’s Business Confidence Survey 2024, a record 68 per cent of respondents reported that doing business in China has become more difficult since 2023.[5] Long-standing challenges, such as market access and regulatory barriers, unequal treatment and burdensome administrative requirements, have been exacerbated by global events, such as the COVID-19 pandemic and Russia’s invasion of Ukraine. This came on top of worries about the Chinese and global economic slowdown, as well as negative impacts resulting from the US-China trade war.

Consequently, business plans are now skewed disproportionately towards risk management and building resilience rather than cost saving, maximising efficiency and increasing market share. Key risks faced by European companies in China include: having to exit the Chinese market — due to the expense of continuing to operate in the market or being unable to satisfy EU or Chinese rules geared to mitigating economic risks; overexposure to the Chinese market; geopolitics; supply chain disruptions; conflicts between the EU’s and China’s respective legal regimes; and non-compliance with China’s cybersecurity legislation.

Yet, there is no ‘one size fits all’ approach to managing such risks, with many different strategies being adopted even among companies of a similar size within the same industry. Strategies may be based on a given company’s risk appetite, its anticipation of China’s future trajectory, or simply in response to market changes and evolving business or customer needs, as well as a company’s past successes and current footprint in China. In some cases, they can even be guided by an individual executive’s general sentiment towards China.

At the same time, some of the approaches that companies are now having to adopt entail a significant loss of efficiency, which further increases operating costs, impacts innovation and will ultimately result in increased costs being passed on to consumers.

While the three respective strategies currently being pursued by the EU, China and the US all represent a retreat to varying degrees from globalisation as we know it, from a business point of view it is important to aim for the ‘least expensive’ solution. In this regard, the EU concept of de-risking, as presently defined, represents the most pragmatic approach in the eyes of business.

Unlike China, the EU is not pursuing policies aimed at attaining self-reliance, but rather diversification that will allow its supply chains to continue with minimal disruption. The EU’s overall aim is also not to decouple but rather to maintain engagement with its partners, while becoming better at identifying and managing risk based on the precise identification of critical dependencies. This should result in new trade opportunities, the adoption of bespoke approaches to risk management and a continued emphasis on remaining highly integrated with the global economy.

Note:

The report, Riskful Thinking: Navigating the Politics of Economic Security, was published by the European Union Chamber of Commerce and China Macro Group on 20^th March 2024. To download a free copy, visit: https://www.europeanchamber.com.cn/en/riskful-thinking-report

[1] Riskful Thinking: Navigating the Politics of Economic Security, European Union Chamber of Commerce, 20^th March 2024, <https://www.europeanchamber.com.cn/documents/download/start/en/pdf/1175>

[2] Brzozowski, A, Von der Leyen wants ‘de-risking’ not ‘de-coupling’ in new China doctrine, Euractiv, 30^th March 2023, viewed 14^th May 2024, <https://www.euractiv.com/section/eu-china/news/von-der-leyen-wants-de-risking-not-de-coupling-in-new-china-doctrine/>

[3] Camut, N, China lashes out at von der Leyen over fiery remarks, Politico, 31^st March 2023, viewed 14^th May 2024, <https://www.politico.eu/article/china-eu-ursula-von-der-leyen-remark-fu-cong-wang-lutong/>

[4] Xinhua Commentary: De-risking is just decoupling in disguise, Xinhua, 26^th May 2023, viewed 14^th May 2024, <https://english.news.cn/20230526/f534dc97c66f43e98b1a7642d07221c8/c.html>

[5] European Business in China Business Confidence Survey 2024, European Union Chamber of Commerce in China, 10^th May 2024, viewed 10^th May 2024, <https://www.europeanchamber.com.cn/en/publications-business-confidence-survey>