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  • Alex Tan and Neel Vanvari

Bringing friends onboard? The conundrum of decoupling and de-risking

Updated: Aug 14, 2023

Be it decoupling or a more neutral term like de-risking, there is little incentive for the states in the Indo-Pacific to jump on the American bandwagon.


The Indo-Pacific Economic Framework launch with US President Joe Biden and leaders of the Indo-Pacific states
Image credit: Office of the United States Trade Representative

Since the G7 Summit at the end of May 2023, ‘de-risking’ has entered the jargon in the evolving debates about great power competition and the intensification of the US-China rivalry. Initially used by European Commission president Ursula von der Leyen in March 2023, she stated that “Our relations are not black or white – and our response cannot be either. This is why we need to focus on de-risk, not decouple”. The term has increasingly been used by US officials such as National Security Advisor Jake Sullivan to describe US policy towards China.


Through these statements, the US and its allies have indicated that de-risking is now replacing decoupling as their preferred policy posture towards China. Some argue that this change from decoupling to de-risking is no more than a change of semantics as de-risking is much more moderate in tone and less adversarial. Others note that the policy change has some substance and is not merely superficial as it addresses specific aspects of competition with China such as information technology.


Despite the debate about the similarities and differences of this change from decoupling to de-risking, the US and its G7 allies may still find it difficult to secure a buy-in from the Indo-Pacific, The Global South and beyond. The policy of de-coupling was unfeasible as China’s interconnectedness and embeddedness in the global economy added significant costs and complexity to this notion of moving away from China into a separate economic orbit. Similarly, the idea of de-risking is going to have its own set of inherent challenges.


The US State Department characterizes de-risking as “to avoid, rather than manage, risk”. Despite this official definition, de-risking continues to remain a rather broad term which has several definitions. In the context of finance from where the term is borrowed, de-risking can range from eliminating risk entirely by ceasing operations with a particular entity to managing or reducing the risk and its consequences while continuing to deal with these risk-posing entities. Although the US has begun to use the term, as a constitutional law scholar notes, the scope of the term still remains ambiguous and the extent to which the policy may be implemented remains unspecified.


Given the prevailing uncertainties and uncharted nature of the principles and scope of de-risking, different countries may interpret and implement de-risking measures to different extents. While the US may implement de-risking measures in areas ranging from national security to economic and technological spheres, other countries may be reluctant to follow de-risking measures as broadly as the US. From America’s perspective, these diverging responses from countries will make it more difficult for the US to address the collective action problem and may blunt the effectiveness of de-risking. For instance, there are already diverging views about economic relations with China from within the EU, with France and Germany reportedly adopting different positions concerning the revival of the EU-China Comprehensive Agreement on Investment (CAI).


As the above example highlights, countries will consider the advantages and disadvantages which de-risking from China poses to their own economies in their decision-making calculus. Those countries who are economically more intertwined with China will find it harder to implement de-risking measures and several US partners in the Indo-Pacific are faced with this conundrum. As one observer recently noted, several Indo-Pacific states such as India and ASEAN nations still have China as their largest trading partner and these countries will have to take this reality into account.


This economic and trade dependence on China highlights another factor which may affect the extent to which de-risking is able to secure a ‘buy-in’ from countries in the region. For states in the region such as New Zealand, who have a comparative advantage in limited sectors, finding alternative economic partners to reduce their dependence on China is challenging partly due their own domestic industrial structure. Finding new trade and economic partners may require these states to alter their existing domestic industrial structure and develop a comparative advantage in more diverse sectors of the economy. However, such significant economic transformations do not happen on a whim and are often slow and deliberate processes. Furthermore, economic transformations – no matter how beneficial to the long-term health of an economy – can often be disruptive and therefore have political consequences as it may alter the domestic political, economic, and societal coalitions. In effect, countries in the region may be constrained by their own existing domestic industrial structures and the political cost of altering these structures, limiting their abilities and willingness to ‘de-risk.’


Beyond these considerations, there is another significant hurdle which the US may have to overcome. If the US wants its partners in the Indo-Pacific or the Global South to de-risk from China, what is it offering them as an alternative to China’s huge market? Since the Trump administration pulled out of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the US (even under the Biden administration) has remained absent from any multilateral economic framework in the Indo-Pacific – especially those that provide true market access for goods and services. Although the Biden Administration has proposed the Indo-Pacific Economic Framework (IPEF), so far it does not incorporate the provisions of market access and does not include any tariff reductions. Moreover, IPEF has largely been labelled by many analysts and observers as ‘more symbolic than effective or real policy’ and ‘lacks teeth.’ In addition, IPEF with its four pillars – digital trade, supply chain resilience, clean economy, and fair economy – is blind to the existing industrial structures of the very countries that it wants to court as many of these Indo-Pacific economies are not even advanced industrial economies to begin with.


Domestic political imperatives – with free trade becoming a poison pill for the Democrats and the Republicans alike – make it challenging for the Biden administration to reverse the country’s inward-looking protectionist posture that it inherited from the Trump administration. De-risking is not a cost-free strategy for Indo-Pacific states and without meaningful economic benefits and rewards, countries in the region may be reluctant to take on these significant economic, political, and social costs. As such, the inability of the US to dangle the carrot of substantive economic gains – through free trade, market access, and tariff reduction – it will make it difficult and challenging to convince many countries to de-risk from China. To solve this collective action problem, then, the US must be quick to realise that states in the Indo-Pacific region are looking for more than just a ‘virtual carrot’ provided by IPEF in favour of a ‘real carrot’ that they can chew on such as free trade and market access of goods and services.


DISCLAIMER: All views expressed are those of the writer and do not necessarily represent that of IIPA and this platform.

 
Authors

Alexander C. Tan is principal research fellow at the Institute for Indo-Pacific Affairs, and professor of political science and international relations at the University of Canterbury, Christchurch, New Zealand


Neel Vanvari is research fellow at the Institute for Indo-Pacific Affairs, and PhD candidate in political science at the University of Canterbury, Christchurch, New Zealand

 
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