Geopolitics of Technology

“De-risking” beyond China: Prescriptive Diversification & Allied Engagement

By Katherine Schmidt on June 8, 2023

On May 20, 2023, the Leaders of the Group of Seven released their G7 Hiroshima Leaders’ Communique, a statement that summarized the leaders’ agreement across policy topics and notably included the newer D.C. and EU rhetoric on “de-risking” with China – an apparent shift from earlier “decoupling.” Although this shift in rhetoric sits within the context of states’ relationships with China, there is significance beyond China policy. 

Recent analysis of the shift from decoupling to de-risking highlights how investors have been de-risking their China portfolios for years, discusses the types of associated risk, and shows Beijing’s pushback against the shift in rhetoric. Analysis such as Gideon Rachman’s piece examines how this shift in China policy interacts with the Biden administration’s international and domestic goals. This blog adds additional nuance and contextualization to the discussion: namely, that de-risking and this conversation over semantics is a step towards defining end states – end states that are constantly shifting. 

As IST’s Strategic Balancing Initiative engages with technology experts in Silicon Valley and policymakers in Washington, D.C., the project’s goal is to iterate on potential solutions to incentivize American technological leadership within the greater context of competition with China, and to help ensure that competition doesn’t boil over into open conflict. One challenge to developing coherent policy – in addition to the fact that the inputs (the technologies and bilateral tensions, as two examples) change as well – is that technologists and policymakers are negotiating the ideal end states. For example, how should AI technologies across industries be regulated? What does a comprehensive data governance regime in the United States look like? How should industry deal with Chinese venture capital? How should U.S. policymakers deal with outbound U.S. capital that develops dual use technologies abroad? In answering these questions, policymakers are in turn crafting the United States’ China and techno-industrial strategies, as high-level policy shifts are substantiated by their translation to lower-level implementation.

De-risking as Prescriptive Diversification

Although the term de-risking does not answer the questions posed above, it does suggest a more tangible direction for the solution. The G7 Leaders Communique, for example, explicitly links de-risking to diversification, saying “we recognize that economic resilience requires de-risking and diversifying.” Statements like these indicate that supply chain de-risking differs from decoupling in that, instead of suggesting a complete shift outside of a territory, it suggests a strategic diversification. At the corporate level, diversification in this manner is already the norm in managing risk across financial, reputational, and operational domains. An investment portfolio manager, for example, may seek out diversification of stocks, bonds, and other assets to limit risk, or a brand may source from different textile suppliers or diversify its location of factories to limit risk. At the sector level, however, there are few mechanisms for establishing diversification in an industry’s supply chains. This is why government-led efforts and analysis of risk – such as the White House Supply Chain Review – are important: they fill the gap through their assessment of risk at the national economic level.

And economic and national security are inextricably linked. The Biden administration’s “promote” and “protect” policies for managing China’s economic coercion, non-market practices, and the interdependencies between the American private sector and stakeholders in China reveal how policymakers employ various tools – export controls, subsidies, etc. – to address these risks. All amid a continuously-developing China and industrial policy strategy. 

Among this contextualization, the apparent shift from decoupling to de-risking is not solely a strategic shift of language to hopefully de-escalate tensions in the U.S.-China relationship, but also a prescriptive term that suggests positive actions (i.e. “to diversify investment” or “to diversify supply chains” instead of “don’t invest” or “don’t do business”). This shift is a step towards defining end states for industry. It’s also a step towards defining an end state with respect to the U.S.-China relationship, as much as that end state is a moving target.

A Path for Allied Engagement

On the flip side of this rhetoric shift are the “not-China” implications of de-risking. China’s push for increased trade and investment with other countries (i.e. “Belt and Road Initiative”-esque projects) coupled with a U.S. re-engagement with allies on strengthening trade and technology development means that de-risking has implications for wider U.S. allied engagement. Namely, de-risking suggests implicit alignment between China policy and cooperative efforts with foreign partners on technology innovation, supply chain resiliency, infrastructure development, and capacity building. Such notable and recent U.S. engagement with foreign partners includes large cooperative efforts such as those with the EU under the Trade and Technology Council on emerging technologies, AI, standards development, and semiconductors and cooperation with both traditional and nontraditional partners across the globe on infrastructure development and technology capacity building under the G7’s Partnership for Global Infrastructure and Investment, as well as bilateral engagement such as cooperation with India on semiconductor innovation and critical technologies. These are just some examples of collaborative efforts across technologies that implicitly serve to offer alternatives to Chinese technology or infrastructure, or explicitly serve to diversify risks to critical supply chains, such as those initiatives in the semiconductor industry.

My language on “implicit alignment” is intentional. Although traditional and nontraditional partners are aware of U.S.-China tensions, diplomatic engagement often requires contextualizing the specific effort within the history of the bilateral or regional relationship. It’s a balancing act to hold these multiple concepts as true: that it’s important to respect intricacies on the ground in each country; that right now, U.S.-China tensions impact other diplomatic efforts; and that the United States and China may end up in competition in these third countries – such as instances of Chinese and U.S. competition for contracts or service agreements.

This brings me to my last point: the private sector is the implementer for so much of this cooperation – just look at the companies and organizations mentioned in the White House’s Partnership for Global Infrastructure and Investment Fact Sheet. Different yet similar to China’s champions or State-Owned Enterprises, American-led private companies play a role in advancing bilateral agreements abroad. In this context, increased alignment between the public and private sectors is key; private companies and their partnerships abroad impact U.S. techno-industrial diplomacy and vice-versa.

Looking Ahead

The swell of analysis that has come out of this change in rhetoric is part of the reality-creation process of policy shifts. As the United States works to establish what a sustainable, constructive protocol for engagement with China looks like, it is simultaneously working to respond to a rapidly developing technology landscape and its associated national security risks. On one hand, U.S.-China tensions dominate much of the current international dynamics. On the other hand, there is a world beyond the bilateral relationship that affects the two countries as well. These are interdependencies within interdependencies – some of which feature prominently in the work our Strategic Balancing Initiative team is leading in conjunction with our partners across Silicon Valley and Washington, D.C.

Photo credit: Republic of Korea, Office of the President
Official Photographer: Kim Yong Wii
May 21, 2023, Grand Prince Hotel Hiroshima, Hiroshima, Japan