Beijing’s Emerging Assessment of De-risking
Beijing sees little to like in a “de-risk, not decouple” framework. For a short period after European Commission president Ursula Von der Leyen deployed the phrase in March, Chinese experts greeted the rhetorical shift with cautious optimism. Framings such as the “four highs”—high tariffs, controls on access to high technology, high-quality coordination with allies, and high industrial subsidies—captured the targeted nature of U.S. and partner efforts to adjust economic and technological relations with China. And the explicit rejection of decoupling by Brussels, some surmised, suggested European member states were intentionally distancing from alignment with Washington. After all, the speech was quickly followed by a trip to Beijing by von der Leyen and French president Emmanuel Macron, complete with a spate large business deals signed between French and Chinese businesses.
Optimism faded amid a busy de-risking agenda over the summer: the G7 jointly backed de-risking at its Hiroshima summit in May, the European Commission launched an economic security strategy in June, and the Biden administration announced long-awaited outbound investment controls in August. Chinese experts now strike a more dour tone. “The fundamental objective is still de-Chinaization,” (author’s translation) argue researchers at the Chinese Academy of Social Sciences. Beijing is certainly not registering any nuance. Former foreign minister Qin Gang suggested to his German counterpart that advanced economies are seeking to “decouple from China in the name of ‘de-risking.’” Jian Junbo, Deputy Director of the Center for Sino-European Relations at Fudan University, suggests the phrase usefully frames policies as responses to threats or risks, and in its conceptual vagueness is much more palatable to a wide set of stakeholders that otherwise might not agree on China policy or the scope and scale of controls. “It is not as mild as we imagine, and it is quite deceptive and dangerous,” Jian asserts.
The idea that this rhetorical shift is a golden key unlocking European and transatlantic unity on foreign economic policy toward China misses a lot. It greatly underestimates the challenges that will confront policymakers on both sides of the Atlantic in designing and implementing policies to selectively reduce interdependence with China. The dimensions of the yard in a “small yard, high fence” approach will remain inherently unstable in the years to come, under pressure from a variety of corners.
For one, Washington and partner capitals will face tough decisions about trade-offs with other key priorities—Brussels, for example, is actively reconciling the advancement of its digital and green transitions with its near-term dependence on China for a range of critical raw materials vital to these transitions. Moreover, many technological innovations are fundamentally applicable in both commercial and military contexts, complicating decisions around which to control. More broadly, the balance between national security risk avoidance and economic exchange will be continuously conditioned by geopolitical trends. It is far from clear that U.S.-China tensions, or EU-China tensions for that matter, have bottomed out. And while Western businesses are reducing exposure to China on their own, it remains a particularly important consumer base and innovation partner for some. Beijing is sure to leverage the lure of its market (what Peking University professor Lu Feng terms its “nuclear weapon”) to incentivize specific firms to double down on exposure.
Finally, relevant stakeholders hold very different preferences for the scale and scope of a de-risking agenda. Take outbound investment screening, for example. U.S. business groups are lobbying to make new U.S. measures more multilateral, including through coordination with partners in Europe. Across the Atlantic, the European Commission is pushing to explore this policy tool but encountering pushback from key member states, including Germany and France. Yet within these member states, the debate is not settled. In Berlin, for example, the Greens-led economy ministry supports an outbound investment screening tool while the SPD-led chancellery and FDP-led finance ministry remain more skeptical. Despite basic agreement on the direction of travel, such differences are not automatically bridged with conceptual ambiguity.
The politics of de-risking have slowed its pace before. During debates about updates to inbound investment screening in 2017–18, divergences were evident at the firm level, within Congress, and within the Trump administration. The Foreign Investment Risk Review Modernization Act (FIRRMA), proposed to strengthen the Committee on Foreign Investment in the United States (CFIUS), was supported by a bipartisan group in the House and Senate. Yet some in Congress, particularly within the House Financial Services Committee, worked vigorously to pare it down, fearing unintended consequences for commerce and the implications of further empowering the executive branch. Meanwhile, certain technology firms, like IBM and GE, opposed the idea of CFIUS reviewing overseas joint ventures, while others—such as Oracle and Ericsson—endorsed the bill outright. And even within the administration, ideas varied for how comprehensive new CFIUS authorities should be. As a result of these debates, FIRRMA, as signed into law by President Trump in August 2018, looked very different from the effort proposed roughly a year earlier.
While there is no doubt that de-risking approaches in Washington and partner capitals will be a dynamic and rocky road, Beijing appears to be overlooking the ways in which its own actions are paving the way. This is evident in the counterstrategies it has deployed so far, which generally fall into three categories.
The first, indicative of how Beijing sees de-risking, is a doubling down on China’s own push to lessen its reliance on foreign technology and components. Lu, for example, suggests that it is more urgent than ever to engender a closed-loop supply chain for mature chip technologies—first cutting down on U.S. equipment and materials, and then cutting down on foreign suppliers altogether. Greater technological self-sufficiency has long been a priority for Chinese policymakers, bred in part from concern that technological dominance gave the United States an unacceptable level of influence over China. Made in China 2025 (2015) and the National Integrated Circuit Strategy (2014), at their core, call for technology substitution. Beijing is clearly doubling down. In February, the CCP Politburo gathered to discuss the importance of strengthening foundational scientific research as part of a bid for greater technological self-reliance, indicative of the importance of this push to senior leadership. And as part of a broader restructuring plan, Beijing overhauled its science and technology policy ecosystem in March, creating a new body to centralize party oversight of the push for “high-level scientific and technological self-reliance and self-improvement.”
In some ways, these efforts have in fact proved a tailwind for de-risking at the firm level. Though it varies by sector, optimism among U.S. and European firms in China is at record lows due in part to an increasingly untransparent and unpredictable regulatory environment, with challenges ranging from data localization to lack of IP enforcement to risks associated with an expansive and opaque national security agenda. The transformation of China’s political economy under Xi Jinping to one in which the state and security play leading roles leaves little optimism for near-term change, which is one reason why many firms in China are themselves pursuing (various) de-risking playbooks—independent of their home governments’ policies.
Second, Beijing is testing the waters with retaliatory moves. In February, Beijing punished two U.S. defense contractors, Lockheed Martin and Raytheon, for arms sales to Taiwan by adding them to the Unreliable Entity List—part of a new toolkit designed to penalize cooperation with foreign economic and technology controls on China. In June, China’s Ministry of Commerce announced controls on the export of germanium and gallium for national security reasons, widely read as a response to U.S. and allied chip controls. A former Chinese vice minister of commerce described the export controls as “just the beginning of China’s countermeasures.” He is right that Beijing has other retaliatory tools at its disposal. Europe, for example, is highly dependent on China for certain active pharmaceuticals (APIs) used in antibiotics, and the dependence of advanced economies on China for critical raw materials is well known.
While Beijing has remained reserved in its retaliatory measures, these warning shots add fuel to the fire of growing conversations about economic security in Washington, Brussels, and other capitals—which have been explicitly motivated by China’s clear willingness to weaponize interdependence toward foreign policy objectives. Indeed, Tokyo took the lead among advanced democracies in thinking about economic security in large part because of Beijing’s decision, back in 2010, to impose a two-month embargo on rare earth element exports as punishment for Japan’s detention of a Chinese fishing boat captain after a collision. The instance prompted greater interest in the diversification of supply chains in critical areas.
And third, Beijing has not given up attempts to shape de-risking approaches through targeted and differentiated engagement with foreign capitals and firms. Chinese experts have begun mining the ways in which U.S. approaches to de-risking differ from those of its allies and partners in search of opportunities for Beijing. And Chinese premier Li Qiang’s June trip to Berlin shows such efforts in action. Speaking to a group of German CEOs—some heading companies with substantial revenue exposure to China, such as BMW, Mercedes, and Volkswagen—Li urged business leaders to push back on efforts by governments to manage risk: “We should return the leadership of risk prevention to enterprises.”
But while divide and conquer strategies are alive, they remain far less “well” due to Beijing’s foreign policy missteps over the past years. As one example, its crackdowns in Hong Kong, mercantilist actions during the Covid-19 pandemic, and decision to retaliate against EU sanctions related to the mass detention Uyghurs in Xinjiang led to the swift downfall of the EU-China Comprehensive Agreement on Investment. And China’s behavior amid Russia’s war in Ukraine is shaping up to be a serious foreign policy blunder with lasting economic consequences. Beijing has failed to play any meaningful role in de-escalation and has in fact reaffirmed ties with Moscow across the conflict. These moves seriously damage European assessments of China—a message Brussels has tried to hammer home for over a year, to little avail. Indicative of this, the EU foreign policy chief Josep Borrell made the case once more on the eve of his trip last week to Beijing. And EU trade chief Valdis Dombrovskis in September warned Chinese policymakers yet again that China’s stance was “affecting the country’s image, not only with European consumers, but also businesses.”
This does not mean China’s bid for greater technological self-sufficiency will not bear fruit or that its efforts to selectively engage with foreign counterparts or firms will fail to slow the tempo or scope of economic and technology controls. Nor does it suggest that Beijing is completely tone deaf. Recent moves to ease onerous data localization requirements, a key complaint of the foreign business community, suggest otherwise. But marginal changes to the business climate in China will only do so much. Without a broader course correction in its foreign policy or political economic trajectory, Beijing is seeking to deter de-risking among foreign capitals and businesses with a hand tied behind its back.
Lily McElwee is a fellow with the Freeman Chair in China Studies at the Center for Strategic and International Studies in Washington, D.C.