ALL THE COSTS OF DE-RISKING

Summary: the de-risking strategy is valuable but very expensive, as diversification, selection, and control are complex actions that require a patient and sustained effort.

In times of globalization, actions to avoid breaking ties with an adversary while containing them do exist, but they are costly.

Since globalization began, it has become clear that you cannot completely break ties with certain enemies. It is much better to contain their rise, even at a high cost—although lower than that of a total break.

This is the case with China, from which the West, especially after COVID-19, realized it is not economically and industrially self-sufficient. In fact, during the pandemic years and the scarcity of products and raw materials, the West fully understood its dangerous vulnerability.

Dangerous Vulnerability

In The Titanium Economy (How industrial technology can create a better, faster, stronger America, Hachette Book Group 2022), three well-known managers with McKinsey backgrounds—Asutosh Padhi, Gaurava Batra, and Nick Santhanam—write that “the United States is in a race with many countries to win in the industrial space. China, consequently, invests up to 200 times the level of U.S. funding to provide subsidies and support to an extensive and emerging network of research centers.”

• The vulnerability of the West developed so far is broad and covers:
• The availability of products, raw materials, and energy;
• Industrial production and distribution capacity;
• The presence of strategic economic infrastructure on home soil;
• The ability to create, produce, and assemble technologies.

Trust, but Verify

Over the past 15 years, several geopolitical fault lines have emerged for many Western countries, with economic consequences that clearly highlight this new vulnerability:

• Since COVID-19, dependence on Chinese production has become apparent;
• The Russia-Ukraine conflict has exposed the need for energy, fertilizers, and grain from the Caucasian region;
• Tensions in the South China Sea have revealed Asian (Taiwanese) dominance in semiconductors, microchips, and technology;
• And more will undoubtedly emerge in the years to come...

Thus, the prosperous course of economic globalization has only been taken from the positive side, forgetting the proverb suggested by Russian scholar Suzanne Massie to President Ronald Reagan when nuclear development reduction with the Soviet Union was at stake:

“Доверяй, но проверяй,” or “doveryay, no proveryay,” meaning “trust, but verify.”

Militarization

What kind of trust was granted without verification? The development of China and other countries was allowed, countries that understood they could use globalization not (just) to get rich, but to increase their influence over others.

Wealth was transformed into political power and military strength. So much so that today we talk about weaponization, the militarization of the economy and all its elements, including capital, products, services, and human capital.

Wealth was transformed into political power and military strength. So much so that today we talk about weaponization, the militarization of the economy and all its elements, including capital, products, services, and human capital.

Economic Containment

There is also an important factor confirming this twist in the economy, turning it into a political weapon. The use of economic containment tools, rather than military ones, has increased.

This economic containment is expressed today through:

• Sanctions and embargoes;
• Travel and transportation restrictions;
• Freezing financial assets and restricting trade and investments.

The United States is actively applying 35 sanctions on countries like Iran, Russia, Cuba, North Korea, and Venezuela. And the European Union has sanctions on Russia, Belarus, Iran, North Korea, Syria...

Impossible De-coupling

However, there are countries with which it is impossible to apply a full economic containment (called decoupling a few years ago) made up of a compact set of sanctions and blocks, global restrictive tariffs, and strict limitations.

With China, it is virtually impossible to do this for reasons well outlined by economist Agathe Demarais:

• It is too large an economy;
• The global economic landscape would fragment;
• It would reduce the U.S.’s economic leverage on China itself.

For this reason, the choice has shifted toward de-risking, a much softer version of decoupling, demonstrating how, in certain cases, politics today must inevitably compromise with economics.

Principles of Decoupling

The principles of decoupling are guided by two objectives: limiting China's advancement in certain specific productive, technological, and military areas, while preserving or increasing Western (which translates to American) development in the same fields.

Actions

Here are the actions to practice it:

• Reducing economic relations in certain products or technologies to avoid dependency or giving an advantage to the adversary;
• Constantly monitoring others' development in these specific areas;
• Diversifying suppliers in these sectors.

Some relationships are reduced in volume, others are cut off, and still others are avoided altogether. Diversification, selection, and control are all complex actions that require a patient and consistent deployment of energy.

Decoupling vs. De-risking

While decoupling has a broad scope, de-risking is selective: it monitors, targets, and operates only in critical sectors, leaving open relations and fluid exchanges in others.

Some relationships are reduced in volume, others are cut off, and still others are avoided altogether. Diversification, selection, and control are all complex actions that require a patient and consistent deployment of energy.

Added to this effort is the costly and uncertain use of energy for industrial policy actions, such as:

• Relocating production plants outside the dangerous territory;
• Subsidies, tax incentives, and direct aid for private investments at home;
• Direct public investments domestically.

Among the uncertainties of this selective, long, and delicate containment, two can surely be imagined: the inflation caused by domestic production, which will bear "Western costs," and the range of responses from the affected party.

Because it is certain that China will not sit idly by Changes.

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