The US De-Risking Strategy Dynamics | Daily Writeup | Opinions
The following article, “How will the US De-Risking Strategy Bring Economic Security to The Country And Reshape Geopolitics? How Will China And Russia React to It?”, is written by Laiba Shahbaz, a student of Sir Syed Kazim Ali. Moreover, the article is written on the same pattern, taught by Sir to his students, scoring the highest marks in compulsory subjects for years. Sir Kazim has uploaded his students’ solved past paper questions so other thousands of aspirants can understand how to crack a topic or question, how to write relevantly, what coherence is, and how to include and connect ideas, opinions, and suggestions to score the maximum.
Outline
1- Introduction
2- Understanding the term ‘De-risking’
- ✓According to the US Department, “De-risking is a process in which financial institutions withhold or limit their business relationships with their clients to avoid rather than manage risk.”
- ✓According to the World Bank, “International financial institutions are frequently ending or limiting their business relationships with remittance companies and small local banks in certain regions around the world.”
3- What is the US de-risking strategy?
- ✓Reduce the risk in trade associated with specific international customers to avoid risk
- Case in Point: In 2022, the US Chips Act funded 52 billion dollars to amplify chip manufacturing in the state.
- ✓Shifting of trade from major competitors, especially China, to other states
- Case in Point: Trade of rare earth materials from Australia as compared to China
4- How does the US de-risking strategy bring economic security to the state?
- ✓Dependence on Chinese trade items would decrease owing to its biggest competitors
- Case in Point: In the initial six months of 2023, American imports from China decreased to 25% owing to its de-risking strategy.
- ✓ The US will be able to be self-sufficient in several trade items, and any conflict will threaten it in future
- Case in Point: The US Inflation Reduction Act (IRA) has subsidized local car production companies. Also, conflicts, such as the US-China trade war, would not affect American markets.
- ✓China will not be able to buy chips and won’t be able to use it against America
- Case in Point: US policymakers have been blaming China for stealing American companies’ IP addresses and technologies as a condition of doing business in China. US officials seem worried that China is strengthening its military and industry by acquiring sensitive American technology.
5-How will it reshape the geopolitics?
- ✓Adoption of the policy of limited trade and interaction with certain trade partners in other regions
- Case in Point: The European Union depends upon China for 97% of its lithium needs, and de-risking can change the present case scenario by making Europe independent and self-sufficient in contrast to its needs or requirements.
- ✓Growth of domestic industries on the cost of global markets
- Case in Point: The Net Zero Industry Act (NZIA) seeks to produce 40% of the EU’s clean tech deployment needs domestically by 2030.
- ✓The clash between the interests of companies and states
- Case in Point: The head of Nvidia, a semiconductor group located in California, warned that American companies would suffer significant damage if they were stopped from selling their products to China.
6-How will China react to it?
- ✓A change in words does not mean a difference in action
- Case in Point: The official Xinhua News Agency said, “De-risking is just decoupling in disguise”
- ✓Strict opposition to the de-risking policy of the US
- Case in Point: Fu Cong said, “If de-risking means abstracting China from essential areas such as the industrial and technological production and supply chains, China strongly disagree with that.”
7-How will Russia react to it?
- ✓Search for other trade partners and markets, for example, Kazakhstan, Belarus, China or Pakistan
- Case in Point: In October 2023, Pakistan received its first shipment of 100000 metric tons of Crude oil from Russia. Russia sold oil for 60 dollars per barrel, which Pakistan used to buy for 84 dollars from the Gulf States.
- ✓Overall Russian trade would be impacted because America is one of its largest exporters
- Case in Point: USA primarily imports Refined Petroleum of 13.2 billion dollars and Crude petroleum of 3.77 billion dollars.
8-Critical Analysis
9-Conclusion
Answer to the Question
Introduction
The de-risking strategy has been a proactive way to eliminate and regulate potential uncertainties and safeguard the stability and security of economic initiatives. For example, during the era of Jokowi in Indonesia, the government issued funds that ensured infrastructure guarantees to protect large projects from risk. Similarly, the USA, too, is adopting de-risking policies to manage trade-related risks for economic and national security. US’s endeavours would impact geopolitical structures, limiting trade, increasing conflicts between the interests of companies and states, and securing domestic products. Major economies, particularly China and Russia, would be affected by such policies. As a result, they are opposing the USA and taking practical steps, such as changing trade partners and reducing dependence on the Western products. Thus, this question would examine the impact of the USA’s de-risking strategy on the state’s economy and globally.
“The biggest risk stems from non-cooperation, and the biggest hidden security threat is non-development.”
(Chinese Prime Minister)
Understanding the term ‘De-risking’
In the business world or banking sector, de-risking serves as a strategy in which companies or banks restrain themselves from specific areas, activities, or partnerships that could be problematic to save their revenue. It can be illustrated further with the help of definitions provided by the United States and the World Bank. The US Department notes de-risking as a process in which financial institutions withhold or curtail their business ties with their clients to avoid rather than manage risk. Similarly, the World Bank states, “International Financial Institutions (IFIs) are frequently ending or limiting their business relationships with remittance companies and small local banks in certain regions around the world.” Thus, these interpretations help explain de-risking, which involves managing business relationships to avoid risk.
What is the US de-risking strategy?
Delving deep into the understanding of the strategy, the United States adopted a de-risking strategy to reduce the risk in trade associated with specific international customers. For example, in 2022, the US Chips Act allocated 52 billion dollars to amplify chip manufacturing in the state. Due to globalization, events, such as the Covid-19 pandemic and the Russia-Ukraine war, significantly affect international trade. The United States’ de-risking strategy aims to avoid risk in such situations. This would also help support and grow domestic industries. Thus, the US adopted a de-risking strategy to prevent the risks associated with clients.
Next, a significant aspect of the de-risking strategy of the United States is shifting trade from China to other states. For example, the US used to import rare earth materials from China. Following the de-risking strategy, the US now imports raw materials from Australia. As the President of Rand Corporation aptly said, “Rare earth materials are not really that rare.” Such a policy raises voices that support the notion that the downfall of America has started because it seems that the US’s security depends on containing China economically. Thus, under the shadow of the fancy word “De-risk,” the United States is trying to reduce its trade dependence on its competitors.
How does the US de-risking strategy bring economic security to the state?
Before analyzing the strategy’s role in reshaping the geopolitics, it is essential to grasp how this strategy would bring economic security to the state.
Dependence on Chinese trade items would decrease owing to its biggest competitors
First, it would decrease America’s dependence on Chinese trade items. Along with its biggest competitor, China is also the largest trade partner of the US. By applying de-risking, the US would be able to reduce its dependency on China. For instance, in the initial six months of 2023, American imports from China decreased by 25%, owing to its de-risking strategy. The Russia-Ukraine war became the reason for the close relations between Russia and China, which threatened America to de-risk itself. As a result, with the economic rise of China and its partnership with Russia, it has been necessary for America to follow secure policies.
The US will be able to be self-sufficient in several trade items, and any conflict will threaten it in future.
Second, in developing a de-risking strategy, the US aims to address the dependency issue by fostering self-sustaining. For example, The US Inflation Reduction Act (IRA) subsidizes local production companies like car manufacturers. Also, conflicts such as the US-China trade war would not affect American markets. While these steps protect the state from international trade challenges and bolster local companies through subsidies, they deviate from international trade norms. Additionally, the courage of protectionists would be raised, resulting in a long-term race towards restricting the global economy. Therefore, the US strives to acquire a stable and secure future by implementing a de-risking strategy.
China will not be able to buy chips and won’t be able to use it against America
Lastly, one reason behind adopting the de-risking strategy is to prevent China from buying, stealing, or misusing American products. For example, US policymakers have blamed China for stealing IP addresses and technologies of American companies as a condition of doing business in China. US officials appear worried that China is strengthening its military and industry by acquiring sensitive American technology. Also, the USA has restricted companies from using Chinese technology due to espionage fears. Thus, the USA is attempting to secure its technologies from invaders and competitors, especially China.
How will it reshape the geopolitics?
Moving ahead, the policies of the United States related to global politics always influence other states. Therefore, it is pertinent to understand how the de-risking policy will shape geopolitics.
Adoption of the policy of limited trade and interaction with certain trade partners in other regions
First, the United States hopes to develop a more stable and independent economic landscape by encouraging limited trade and corporate ties, distancing itself from China’s profoundly integrated and interdependent global trade strategies. The European Union depends upon China for 97% of its lithium needs, and de-risking can change the present case scenario by making Europe independent and self-sufficient compared to its current reliance on China. Thus, the United States seeks economic autonomy through de-risking, while the European Union reshapes its dependence on China.
Growth of domestic industries on the cost of global markets
Furthermore, the US is currently focused on the growth of domestic industries at the expense of the global market hegemony representing the United States’ de-risking approach, prioritizing economic resiliency and self-sufficiency over reliance on international markets. The Net Zero Industry Act (NZIA) seeks to produce 40% of the EU’s clean tech deployment needs domestically by 2030. These aims may be ambitious but risky at the same time. Thus, the US aims to achieve stability for local enterprises that can help to reduce business interdependency in the long run.
The clash between the interests of companies and states
Lastly, as the de-risking trend grows more extensive, the clash between the interests of companies and their state becomes higher. For example, the head of Nvidia, a semiconductor group located in California, warned that American companies would suffer significant damage if they were stopped from selling their products to China. Tech Companies or groups would be met with considerable loss or eventually shut down if they had to detach themselves from other states, especially China, because of the de-risking policy. As a result, these companies are restructuring their trade relationships; for example, companies like Apple and HP have been transforming their electronics and tech production from China to Southeast Asian states. Thus, the de-risking policy could harm the sentiments of trust and cooperation between businesses and states.
How will China react to it?
In the international playground, several states exert different influences, with some being more powerful and can mold the norms and rules of the world. The US, China, and Russia have been essential parts of the geopolitical environment, and any policy from one state would highly affect the others. Similarly, neither China nor Russia can avoid the influence of the US’s de-risking attempt.
A change in words does not mean a difference in action
First, China openly condemns America’s policy. The official Xinhua News Agency said, “De-risking is just decoupling in disguise.” According to them, it is just a fancy new word to achieve their agendas and attempt to hurdle China’s peaceful rise. On the other hand, the Chinese government believes that they will overcome the restrictions. Hence, the US’s policy brought many condemnations to China.
Strict opposition to the de-risking policy of the US
Additionally, China not only condemns but also highly opposes America because of its anti-China policies. For instance, the Chinese ambassador, Fu Cong, said that if de-risking means abstracting China from essential areas such as industrial and technological production and supply chains, China strongly disagrees. Thus, to counter it, the Chinese would adopt a policy to decrease their influence on Western products and make Western states depend on their products, such as electric vehicles or low-end chips.
How will Russia react to it?
Moving towards Russia’s reaction, the country, already encircled by numerous war fronts and aftermaths, will respond in the following ways.
Search for other trade partners and markets, for example, Kazakhstan, Belarus, China or Pakistan
Due to the Russia-Ukraine war, Russia has been facing economic sanctions globally. Under such circumstances, it has been compelled to trade with many states, such as Kazakhstan, Belarus, China, and Pakistan. In October 2023, Pakistan received the first shipment of 100000 metric tons of Crude oil from Russia for 60 dollars per barrel, which Pakistan bought for 84 dollars from the Gulf States. With it, the US’s de-risking strategy would add insult to injury, and Russia could rip economically. Because of war, sanctions and the de-risking strategy of America can compel Russia to show aggression that would have devastating consequences not only for the West but for the world, too.
Overall Russian trade would be impacted because America is one of its largest exporters
Adding more to it, America has been an important trade partner for Russia that is affected because of the ongoing Russia-Ukraine war. For example, the USA imports Refined Petroleum of 13.2 billion dollars and Crude petroleum of 3.77 billion dollars. Russia would lose much of its trade volume after the US attempts to avoid the risks associated with its largest trade partners and competitors. Thus, US policy would influence the international economy worldwide, with Russia at the top.
Critical Analysis
Critically, in the globalized world of the twenty-first century, when the entire global economy is highly interlinked with each other that just a tiny event in the corner of the globe could shackle the whole chains of the System, the US’s policy of de-risking would be of no such use. It could strengthen the domestic industries of the states or secure the state from threats such as terrorism or espionage. But, in the long term, an economy can’t sustain. Furthermore, the USA has adopted this strategy in some industries, such as chips, technology, oil, and petroleum. It seems that America has been targeting a particular state and avoiding risks associated with it that are nothing other than China and America. Lastly, if America is adopting a strategy, its alliances and recipients must embrace it as well, not entirely but to a great extent. Consequently, it would disturb the whole market.
Conclusion
In conclusion, the de-risking strategy, aimed at reducing uncertainties and safeguarding economic stability, shapes global dynamics with diverse impacts on trade relationships and geopolitical alliances. While it addresses specific risks and strengthens domestic industries, its selective application and interruption to international markets raise uncertainties about long-term sustainability. The conflict between national interests and business concerns, particularly involving significant players such as China and Russia, adds intricacies to the global economic landscape. Gaining equilibrium between securing national interests and promoting international cooperation remains an essential challenge in the ever-changing dynamics of the de-risking era.
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