The Risks of De-Risking

A few thoughts on the latest buzzword to describe Sino-Western relations

Photo by Sammie Chaffin on Unsplash

Last Thursday national security advisor Jake Sullivan gave a pretty important speech on U.S. foreign economic policy. Sullivan offered up a new American strategy that would promote economic security and resilience. Promoting economic growth through, in Sullivan’s words, “oversimplified market efficiency,” was not on the table.

The hard-working staff here at Drezner’s World has a lot of critical thoughts about the totality of the speech and the Biden team’s “post-neoliberal” agenda. Some of those thoughts even go beyond four-letter words! That response, however, will take many thousands of words to craft. Best to cogitate further on it before offering a fuller response.

For now, however, I want to focus on a clear effort by Sullivan and Treasury Secretary Janet Yellen to ease off the bipartisan outbidding on hawkishness towards China and reframe what the Biden team is trying to do. Amidst a sea of words about how it would be great to be less reliant on China, Sullivan tried to calibrate what U.S. grand strategy is aiming for with respect to that bilateral relationship:

A word on China more broadly.  As President von der Leyen put it recently, we are for de-risking and diversifying, not decoupling.  We’ll keep investing in our own capacities, and in secure, resilient supply chains.  We’ll keep pushing for a level playing field for our workers and companies and defending against abuses.

Our export controls will remain narrowly focused on technology that could tilt the military balance.  We are simply ensuring that U.S. and allied technology is not used against us.  We are not cutting off trade….

Managing competition responsibly ultimately takes two willing parties.  It requires a degree of strategic maturity to accept that we must maintain open lines of communication even as we take actions to compete.

As Secretary Yellen said last week in her speech on this topic, we can defend our national security interests, have a healthy economic competition, and work together where possible, but China has to be willing to play its part.

In that section, Sullivan referenced similar messaging from European Commission president Ursula von der Leyen and Secretary Yellen. And Sullivan had good reasons to do so: von der Leyen is pushing for an EU strategy based on de-risking and not decoupling. In her speech, Yellen made it clear that radical decoupling was a bad idea: “we do not seek to ‘decouple’ our economy from China’s. A full separation of our economies would be disastrous for both countries. It would be destabilizing for the rest of the world. Rather, we know that the health of the Chinese and U.S. economies is closely linked.”

So on the one hand, contrasting de-risking with decoupling seems like a smart reframing. In theory, this kind of refinement can send a signal to China that the bilateral relationship does not have to get progressively worse, that it’s possible for great power competition to not mean great power rupture.

On the other hand, everyone could be against it, albeit for different reasons. In the Washington Post, Josh Rogin argues that this approach is too dovish: “seeking such dialogue makes political sense, but it risks lifting U.S. pressure on China without achieving real gains in return.” In Foreign Policy, Adam Tooze argues that Yellen’s speech was too hawkish: “her message is intended to clarify and calm the waters of speculation and debate about motives and intentions. In the current situation, however, it is far from clear whether clarity actually contributes to calm.”

The Biden team might respond that these critiques suggest that pivoting to de-risking is the Goldilocks option, neither too hawkish nor too dovish. After all, wo could possibly be against de-risking as a concept?

Those who study economic statecraft, however, are likely to counter that this is not a Goldilocks option at all — Sullivan’s policy porridge is way too hawkish. That’s because in my policy bailiwick, the term de-risking does not mean narrowly tailored restrictions on economic exchange — like, at all. Do not take my word for it — take the U.S. Treasury’s word on it:

De-risking occurs when financial institutions terminate or restrict business relationships indiscriminately with broad categories of customers rather than analyzing and managing the risk of those customers. De-risking undermines several key U.S. government policy objectives by driving financial activity out of the regulated financial system, hampering remittances, preventing low- and middle-income segments of the population from efficiently accessing the financial system, and preventing the unencumbered transfer of humanitarian aid and disaster relief.

De-risking is how targeted financial sanctions wind up wreaking all kinds of economic havoc on the targeted country. It is why modern-day U.S. sanctions pack a larger economic wallop even though their success rate has not necessarily improved.

One could argue that this term is supposed to mean something different in the context of the Sino-American economic relationship — except that I don’t believe it does. Tooze gets at this in his column: “[Yellen insists] that U.S. measures against China will be tightly targeted. But, as everyone knows, those targeted measures have so far included massive efforts to hobble the world leader in 5G technology, Huawei, sanctions against the entire chip supply chain, and the inclusion of most major research universities in China on America’s entities list that strictly limits trade.” As Tooze points out, it is highly likely that U.S. national security interests will expand those targeted measures even more.

This is why, if I were the Chinese, I would be dubious about whether this change in the language is really all that substantive. This might explain why, according to Laura Rozen, China has continued to rebuff U.S. entreaties to reschedule Secretary of State Antony Blinken’s planned visit to China. To paraphrase Inigo Montoya, I don’t think de-risking means what the Biden administration thinks it means.

Look, this is not all on the Biden administration. China has behaved poorly across a wide variety of policy arenas. Both Yellen and Sullivan are correct to point out that it takes two sides to repair a relationship. I am just saying that if the Biden administration really wants to install a floor on the relationship, it needs to think harder about the wordsmithing. The transatlantic policymakers might like the term de-risking. They should realize that dog won’t hunt.