1. The evolution of De-Risking
Managing the risk of doing business
Risk management is an essential task for all companies. So it should be for national governments.
Since, as every entrepreneur knows, risks and opportunities go hand in hand, it is not a question of simply minimising risks. There is rarely a risk-free business.
Rather, it is a question of determining one's own risk appetite and then deciding which risks to take. This is a completely natural ongoing task.
The merchants of Hamburg, to whom I feel a certain kinship, have been daring seafarers over the last few centuries, some of whom have made fortunes by taking risks, not just by avoiding them.
So why have the highest European authorities suddenly decided to reduce risk? Is there perhaps more to it than meets the eye? Is there perhaps a powerful undercurrent guiding our path that we do not have the strength or even the will to oppose?
So, let's take a step back and answer the questions:
- How did we get here?
- What do we need to do now?
- And how could this all develop further?
How De-risking Went Viral
If diplomats were on TikTok, “de-risk” would be trending. The word has suddenly become popular among officials trying to loosen China’s grip on global supply chains but not cut ties entirely, with the joint communiqué from this weekend’s Group of 7 (G7) meeting making clear that the world’s largest democratic economies will now focus on “de-risking, not decoupling.”
The former is meant to sound more moderate, more surgical. It reflects an evolution in the discussion over how to deal with a rising, assertive China. But the word also has a vexing history in financial policy — and since the debate over de-risking will continue, we all might as well get up to speed.
“De-risking” relations with China caught on after a speech by the European Commission president, Ursula von der Leyen on March 30, when she explained why she’d be traveling to Beijing with President Emmanuel Macron of France, and why Europe would not follow the calls for decoupling that began under President Trump.
“I believe it is neither viable — nor in Europe’s interest — to decouple from China,” she said. “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.”
German and French diplomats later pressed for the term in international settings. Countries in Asia have also been telling American officials that decoupling would go too far in trying to unravel decades of successful economic integration.
In an interview, David Koh, Singapore’s cybersecurity commissioner, explained that the goal should be safety, with separation in some domains and cooperation in others.
“I think we derive a huge amount of economic, social and safety value when systems are interoperable,” he said. “I want my plane to take off from Singapore and land safely in Beijing.”
What worries globalized economies, he added, is “bifurcation,” with Chinese markets and manufacturing on one side, and American-approved supply chains on the other.
These arguments appear to have worked in de-risking’s Favour. On April 27, the U.S. national security adviser, Jake Sullivan, used the word in a major policy speech.
“We are for de-risking, not for decoupling,” he said. “De-risking fundamentally means having resilient, effective supply chains and ensuring we cannot be subjected to the coercion of any other country.”
On May 17, S. Jaishankar, the Indian foreign minister, added his voice, saying it was “important to de-risk the global economy and yet to ensure that there is very responsible growth.”
What does the concept of "de-risking" contain?
The concept of "de-risking" includes:
- Diversification of supply chains:
To avoid over-reliance on Chinese supplies, particularly highlighted by the disruptions caused by the COVID-19 pandemic. - Investment screening:
The EU has been strengthening its mechanisms to screen foreign investments that could pose a risk to security or public order, including from China. - Promotion of European values:
Asserting the importance of human rights, labour standards, and environmental sustainability in its relations with China. - Research and technological sovereignty:
Encouraging the development of key technologies within the EU to reduce dependency on Chinese tech. - Regulatory frameworks:
Strengthening data protection laws and other regulations to safeguard against potential economic coercion or espionage.
While the term "de-coupling" suggests a separation, "de-risking" suggests making the relationship more robust and less vulnerable to external pressures. It's a nuanced shift that allows the EU to continue engaging with China economically, while also protecting and promoting its own strategic interests. The content of EU policy has indeed evolved to address the complex relationship with China, moving from a purely opportunity-focused engagement to one that also accounts for strategic competition and systemic differences.
De-risking’s Sordid History
Before it entered diplo-speak, de-risking had a long life in the response to American government sanctions against terrorism and money laundering, where it’s associated with overreaching.
According to the Treasury Department, “de-risking refers to financial institutions terminating or restricting business relationships indiscriminately with broad categories of customers rather than analysing and managing the specific risks associated with those customers.”
In other words, de-risking — in its common usage, pre-April — carries negative connotations of unnecessary exclusion.
Human rights groups, for example, have condemned how banks de-risk by denying service to aid agencies that work in places like Syria, fearing fines if an organization strays into a grey zone of providing aid to nations under sanction.
A 2015 report from the Council of Europe offered an additional critique: “De-risking can introduce further risk and opacity into the global financial system, as the termination of account relationships has the potential to force entities and persons into less regulated or unregulated channels.”
That means de-risking leads to enforcement challenges: Dubious and legitimate actors move into darker corners and innovate, making their actions harder to manage.
What the world thinks
Countries in Asia have been telling American officials that decoupling would go too far in trying to unravel decades of successful economic integration.
To the Chinese government, unsurprisingly, “de-risking” isn’t much of an improvement.
“There is a sense that ‘de-risking’ might be ‘decoupling’ in disguise,” the state-run Global Times wrote in a recent editorial . It argued that Washington’s approach had not strayed from “its unhealthy obsession with maintaining its dominant position in the world.”
Some commentators in the region are also de-risk sceptics. “A substantial change in policy? “asked, a columnist for The South China Morning Post. “I doubt it. It just sounds less belligerent; the underlying hostility remains.”
To the Chinese government, unsurprisingly, “de-risking “isn’t much of an improvement.
So, …
De-risking requires tough, in-the-weeds decisions and solutions. Which semiconductors must be kept out of China’s hands? Do all medical devices need to be produced somewhere other than China? What could TikTok do to firewall the risks of being owned by a Chinese company?
De-risking may feel more diplomatic than decoupling. “Who doesn’t like reducing risk?” said Bates Gill, director of the Asia Society’s Centre for China Analysis. “It’s just rhetorically a much smarter way of thinking about what needs to be done.”
To make it work, the United States and its allies will need to do more thinking and regulation writing for some businesses, while allowing others to stay in China, which is navigating its own push.
In the sanction’s world, sifting risk from fair treatment and economic benefit is an imperfect, evolving challenge — so will it be with China.
2. History of the China − US - relationship
What are the different phases in the politics of the US towards China during the last 5 decades?
Which were the major events or acting players influencing the relationship between the 2 powers?
The geopolitical relationship between the United States and China has undergone several phases over the past 50 years, a pivotal period in Sino-American relations, shifting from rapprochement, via strategic cooperation to competition and rivalry. Here's an overview of the evolving dynamics:
1970s: Rapprochement
President Nixon’s visit to China in 1972 marked the beginning of rapprochement between the two nations after decades of estrangement during the Cold War. Influential Players during this period were President Richard Nixon and his Secretary of State, Henry Kissinger, on the U.S. side; Chairman Mao Zedong and Premier Zhou Enlai on the Chinese side. This led to the normalization of diplomatic relations and set the stage for increased economic and cultural exchanges.
1980s: Engagement and Cooperation
Following the normalization of diplomatic relations in 1979, the 1980s saw a period of increasing engagement and cooperation. China's reform and opening-up policies under Deng Xiaoping and the country's entry into the global economy were viewed positively by the U.S., which supported China's modernization as a counterbalance to Soviet influence guided by the principle “my enemy’s, enemy is my friend”. The U.S. granted Most Favoured Nation trade status to China, and bilateral trade began to grow.
1990s: Tension and Conditional Engagement
Still in 1989 The Tiananmen Square incident significantly strained relations, leading to U.S. sanctions and a global outcry over human rights. But driving geo-political forces dictated that despite tensions, the U.S. continued to engage with China, especially on economic fronts, with the claimed but unfounded belief that trade and investment would eventually lead to political liberalization– or the country’s economic ascent would stall and the country would fail. This firm assumption finally led to China's accession to the World Trade Organization (WTO) in 2001, with strong U.S. backing, believing it would integrate China into the “rules-based international order”.
2000s: Integration and Growing Rivalry
As China's economy grew rapidly, its global influence expanded. The U.S. began to see China as a potential competitor but continued to deepen economic ties. China's military modernization also started to concern U.S. policymakers. The Hainan Island incident in 2001 created military tensions; however, post-9/11, counter-terrorism efforts saw some cooperation.
2010s: Strategic Pivot and Competition
The Obama administration's "Pivot to Asia" was an effort to rebalance U.S. foreign policy towards the Asia-Pacific region, which was seen as a response to China's rising influence. China was increasingly perceived as challenging the US as a world hegemon. Tensions arose with Cybersecurity issues and the South China Sea territorial disputes becoming major points of contention. As a risk mitigating measure the establishment of the annual Strategic and Economic Dialogue can be seen.
Late 2010s to Early 2020s: Confrontation and Decoupling
Then came President Donald Trump. Under his watch the U.S. took a more confrontational stance, initiating a trade war, challenging China on multiple fronts including technology, trade practices, human rights, and regional security. The trade war initiated in 2018, was leading to tariffs on hundreds of billions of dollars' worth of goods. The U.S. targeting Chinese tech companies like Huawei, citing national security concerns. China responded with counter
2020s: Strategic Competition
The Biden administration has continued a tough stance on China, seeing the relationship as one of "strategic competition". The U.S. has sought to work with allies and dependent states to counterbalance China's growing influence and has emphasized the need for the US-rules-based international order. Thus, tensions in trade, technology are continuing. Human rights, particularly the situation in Xinjiang and Hong Kong, and military posturing in the Indo-Pacific region became hot topics again.
The geopolitical nature of most of these points of conflict can be aptly demonstrated by the example of the alleged human rights violations against the Central Asian Uyghur people in Xinjiang. According to reports, members of the Uyghur people have historically been among the toughest and most brutal fighters for the Islamic State, also known as ISIS or Daesh. However, this image in the western press has changed, with the same people being portrayed merely as victims of "cultural genocide" by the Chinese authorities through imprisonment and forced labour.
Hence, over the past five decades the relationship has been influenced by geo-political considerations, global events, domestic politics in both countries, and the personalities of the leaders. It is characterized by a complex interdependency, particularly in the economic realm, which both sides are navigating amid rising tensions, caused by an emerging great power competition.
Among those driving forces three dominating root causes can be identified, which will likely continue to have profound implications for the future trajectory of the relationship in terms of global politics and economics.
First however let’s have a short look at the situation which let to the surprising formation of that unlikely alliance
3. Geopolitical landscapes during the Cold War
During the first years of engagement by Henry Kissinger and Richard Nixon on the US side and Zhou Enlai and Chairman Mao Zedong on the side of China there was a certain geo-political constellation, which drew both sides together and encouraged them to cooperate.
The rapprochement between the United States and China in the early 1970s was a significant shift in the geopolitical landscape during the Cold War. This shift was driven by a complex interplay of strategic interests and realpolitik calculations on both sides.
Here are the key elements of the geopolitical constellation that facilitated this historic engagement:
Strategic Triangulation:
- Soviet Threat:
The growing rift between China and the Soviet Union, known as the Sino-Soviet split, had reached a point where border conflicts were occurring. Both the U.S. and China saw the Soviet Union as a significant threat—China on its northern border and the U.S. globally. By engaging with China, the U.S. aimed to exploit this rift and create a strategic triangle where it could play China against the Soviet Union, thus gaining leverage in its Cold War strategy.
Major Players:
- United States:
President Richard Nixon, who was known for his anti-communist stance, and his National Security Advisor Henry Kissinger, were the key architects of the U.S. policy of detente with China. They recognized the opportunity to reshape the balance of power against the Soviets. - China:
Premier Zhou Enlai and Chairman Mao Zedong were the leading Chinese figures in this engagement. Mao's ideological rift with the Soviets and Zhou's diplomatic acumen were pivotal in opening China to the U.S.
Mutual Interests:
- Containment of Soviet Expansion:
Both countries were interested in containing Soviet geopolitical ambitions. For the U.S., having China as a counterweight in Asia could help check Soviet influence. For China, a détente with the U.S. could provide a security buffer against the threat from its erstwhile ally.
- Economic and Technological Incentives:
China was seeking modernization and economic development. The U.S. could provide access to technology, capital, and markets that China needed for its economic reforms.
Normalization as a Logical Consequence:
- Realpolitik:
The geopolitical landscape of the time was dominated by realpolitik—a system of politics based on practical rather than moral or ideological considerations. The mutual benefit of balancing against the Soviet Union made the rapprochement a logical step. - Global Recognition:
For the U.S., recognizing the People's Republic of China (PRC) as the legitimate government of China (over the Republic of China in Taiwan) was an acknowledgment of the political reality that China could not be isolated indefinitely.
Driving Forces:
- Vietnam War:
The U.S. was embroiled in the Vietnam War and seeking a way to extricate itself. Improved relations with China could potentially facilitate this process and reduce the risk of further escalation in Southeast Asia. - Domestic Politics:
For Nixon, the move was also politically astute; opening relations with China was an achievement that could bolster his foreign policy credentials.
Symbolic Gestures:
- Ping-Pong Diplomacy:
The exchange of table tennis players between the U.S. and China in 1971 was a symbolic gesture that helped thaw relations and paved the way for more formal diplomatic engagement. - Nixon's Visit:
Nixon's visit to China in 1972 was a watershed moment in international diplomacy, signalling to the world that a new chapter in international relations had begun.
Although in principle being ideological antipodes, the geopolitical constellation of the time made the U.S.-China rapprochement a matter of strategic necessity and opportunity for both countries, altering the Cold War dynamics significantly. This initial engagement laid the groundwork for the eventual normalization of relations and China's opening up to the world. This bold strategic move represents a prime example of the dominance of realpolitik over value driven approaches, which nevertheless dominate the official narratives.
4. American dissonance between rhetoric and action
John Mearsheimer is a prominent realist scholar in the field of international relations, and his analysis is grounded in the realist theory of international politics, which emphasizes power and security competition among states. According to realist theory, the international system is anarchic, which means there is no overarching authority to regulate the actions of states. This condition leads states to seek power, either to defend themselves or to assert dominance.
Mearsheimer, in particular, subscribes to an offshoot of realism called "offensive realism," which suggests that great powers are inherently driven by an insatiable desire for more power, leading them to seek regional or even global hegemony.
He argues that U.S. foreign policy can often be understood through a dualistic lens where …
- the 'real' motivations—grounded in power politics and national interest—are sometimes masked by
- an 'ideological' layer aimed at garnering public and international support.
This perspective is rooted in the realist school of international relations, which sees the pursuit of power and security as the central drivers of state behaviour. There is some evidence supporting this view:
Historical Precedents
Throughout history, nations, including the U.S., have often used idealistic rhetoric to justify actions that are fundamentally about national interests. For example, the Monroe Doctrine was framed as a policy of resisting European colonialism in the Americas. But it also served the U.S.'s strategic interest in preventing other powers from gaining a foothold near its borders.
Vietnam and Cold War Interventions
The U.S. justified its involvement in Vietnam as a stand against communism in service of global democracy, but realists argue that it was fundamentally about containing Soviet and Chinese influence. Similarly, interventions in Latin America and other regions during the Cold War were often framed as supporting democracy, though they sometimes supported authoritarian regimes that were aligned with U.S. strategic interests.
Iraq War
The 2003 invasion of Iraq was justified on the grounds of promoting democracy and eliminating weapons of mass destruction, but critics argue that strategic considerations, such as controlling oil resources and maintaining regional hegemony, were the real motivations.
Balancing China
The pivot to Asia and the subsequent framing of competition with China are often couched in terms of values, such as promoting a "free and open Indo-Pacific," but from a realist perspective, these policies are about balancing the rise of a new great power.
Rhetoric vs. Action
There are often discrepancies between U.S. rhetoric on human rights and democracy and its foreign policy actions, where strategic interests have led to alliances with non-democratic states or inattention to human rights abuses when it suits national interests.
Public Opinion and Moral Framing
Studies in political communication suggest that moral framing is more effective in garnering public support for foreign policy. Thus, presenting policy in terms of values can be a way to align the public with the realpolitik moves of the state.
Mearsheimer’s realist interpretation provides one lens through which to view U.S. foreign policy. But although it delivers compelling explanations of several international activities in U.S. foreign politics, it is not universally accepted. Other scholars, particularly those from the liberal or constructivist schools of international relations, argue that ideals and values do play a genuine role in shaping foreign policy. Moreover, some policymakers and analysts contend that values and interests are not always mutually exclusive and can often reinforce one another.
While realist critiques like Mearsheimer’s may emphasize the dissonance between rhetoric and action, this doesn’t necessarily imply that the ideological layer is entirely cynical or without genuine belief. It's also plausible that many policymakers and diplomats are sincere in their desire to promote values like human rights and democracy, even as strategic interests also play a key role in decision-making processes. Nevertheless the intellectual framework of offensive realisms gives us a good guidance to decrypt the different stages, the Sino-US-relations were in, like outlined in the following chapter.
5. Root causes – 1st offensive realism
Some experts, of which not surprisingly the American scholar John Mearsheimer quoted before is a prominent representative of, don't buy the accusations, brought forward by the US Administration like Human rights violations, border disputes or general higher Chinese assertiveness. They but point to the underlying pattern of great power politics. According to these alleged underlying mechanisms a major conflict between China and the US would be unavoidable, just like the situation prior to WWI, when Germany was rising and Great Britain felt threatened.
Here are some points that align with Mearsheimer's worldview and the current Sino-American relationship:
Thucydides Trap
This is a term coined by American political scientist Graham Allison, referencing the Peloponnesian War between Athens and Sparta. It describes a situation where a rising power causes fear in an established power, leading to a possible escalation to war. The parallel here is the dynamic between a rising China and an established United States, with some analysts fearing inevitable conflict.
Historical Patterns
Mearsheimer and other realists often point to historical patterns to justify their views. The lead-up to WWI, with a rising Germany challenging Great Britain's dominance, is sometimes cited as an analogy to current US-China tensions. This historical parallel supports the argument that major powers inevitably clash as the balance of power shifts.
Military Build-Up
The expansion of China’s military capabilities, particularly in the South China Sea and the development of its blue-water navy, is seen by realists as evidence of its intentions to assert greater regional control and challenge U.S. military dominance.
Economic Power and Influence
China's Belt and Road Initiative and its increasing economic clout are perceived as tools for expanding its influence and reshaping the global order in its favour, which can be seen as a strategic move in great power competition.
Technological and Ideological Competition
The race for technological supremacy, especially in areas like 5G, AI, and cybersecurity, along with ideological competition between China's authoritarian model and the U.S. democratic model, are contemporary battlegrounds reminiscent of past great power rivalries.
Rival Alliances and Partnerships
The forming of rival economic and military alliances (e.g., AUKUS, Quad, Belt and Road Initiative) is reminiscent of the alliance systems that were a significant factor in the escalation of WWI.
Of course, history does not inevitably repeat itself, and there are many mechanisms and institutions in the modern era that can prevent conflict, such as nuclear deterrence, economic interdependence, and international organizations designed to facilitate cooperation and resolve disputes. Furthermore, many scholars and policymakers advocate for engagement, diplomacy, and confidence-building measures as ways to manage and mitigate great power tensions.
While Mearsheimer's perspective is one influential lens through which to view international relations, there are alternative theories, such as liberal internationalism or constructivism, that emphasize different aspects of the international system, such as institutions, democracy, and norms. As such, whether conflict between the US and China is inevitable is a subject of considerable debate, and there is evidence and argumentation on both sides of the issue.
6. Root causes – 2nd economic & political delusion
There are two very influential books that were once recommended by the last Governor of Hong Kong, Chris Patten (Christopher Francis Patten, Baron Patten of Barnes):
- "Mr. China" by Tim Clissold (Autor) and
- "The China Dream: The Quest for the Last Great Untapped Market on Earth" written by Joe Studwell.
Both books lay out in detail how many western multinationals, driven by a mix of optimism, misunderstanding, and sometimes hubris or even outspoken greed and unrealistic expectations, poured about 100 billion USD of Foreign Direct Investment (FDI) into China, only to see many of their pipe dreams not becoming reality. Deeply disappointed several of them retreated thereafter.
The narratives in these books highlight a common pattern where Western businesses and governments underestimated the complexities of the Chinese market and the political environment, leading to both business failures and unmet political expectations.
One of those unmet political expectations was, that an economically developing China would either turn into a western-style liberal democracy or simply fail to develop. However, China failed to fail, meaning China developed economically without turning in a western-style democracy.
There is evidence that these dual disappointments contributed to the current Sino-American estrangement.
Economic Disillusionment
The stories of lost investments and failed joint ventures detailed in books like "Mr. China" showcase the harsh realities that many Western companies faced when they entered the Chinese market with high hopes and little understanding of the local business culture, regulatory environment, and political context. As these companies retreated, it may have led to a sense of disillusionment and scepticism about the prospects of engaging with China economically.
Political Disappointment
Western policymakers and some parts of the business community hoped that economic liberalization would inevitably lead to political liberalization in China. As China's economy grew, however, the Chinese Communist Party (CCP) maintained and even tightened its grip on power. The fact that China "failed to fail" in this regard has certainly caused frustration and a re-evaluation of strategies among Western democracies, contributing to a more confrontational stance in recent years.
Intellectual Property and Trade Practices
Western businesses often complain of unfair trade practices, forced technology transfers, and inadequate protection of intellectual property rights in China. These grievances have fuelled trade tensions and have been a significant factor in the rethinking of the Sino-American economic relationship.
Strategic Rethink
The economic development of China without the anticipated political liberalization has led Western countries, particularly the United States, to reconsider their approach toward China. The view of China as a "strategic competitor" rather than a "strategic partner" in official U.S. policy documents reflects this shift.
Human Rights and Ideological Divergence
Human rights issues, such as the treatment of ethnic minorities in China, have further driven a wedge between Western expectations and Chinese actions, exacerbating tensions.
Global Ambitions
As China has grown stronger, it has become more assertive in its foreign policy and global ambitions, leading to strategic competition in various domains, from the South China Sea to global institutions, which is a source of concern for the U.S. and its allies.
Shift in the Balance of Power
As China has risen economically and militarily, there has been a corresponding shift in the global balance of power. The United States, in response to what it sees as China's challenge to the existing international order, has adjusted its foreign policy accordingly.
In essence, the disillusionment stemming from unmet economic expectations and the dashed hopes of China’s political liberalization have played a decisive role in the evolving Sino-American relationship. These elements, combined with the geopolitical shifts and the broader strategic recalculations, have contributed to the current state of estrangement.
The narrative that China has not followed the path that many in the West anticipated has prompted a reassessment of how China is viewed and engaged with on the world stage.
7. Root causes − 3rd geo-political shifts
The current geopolitical situation meanwhile is a far cry from the era of U.S.-China rapprochement that marked the Nixon era. Many things have changed politically: the Soviet Union has collapsed, there was a unipolar moment, China grew economically and politically and is meanwhile rather seen as a strategic competitor, if not worse.
On October 7thas 2023 even a law was issued by the US administration which could well be understood as a declaration of (economic) war on China.
Let's look at how things have evolved:
Post-Cold War and Unipolar Moment:
- After the collapse of the Soviet Union, the United States emerged as the sole superpower, leading to what political scientist Charles Krauthammer termed the "unipolar moment." The U.S. enjoyed unmatched global influence politically, economically, and militarily.
China's Economic and Political Ascendancy:
- China capitalized on the post-Mao economic reforms initiated by Deng Xiaoping, leading to unprecedented economic growth. The country became the "world's factory," an economic powerhouse, and a significant player on the global stage.
- Politically, China's governance model remained authoritarian, with the Communist Party of China (CPC) maintaining tight control over the state and society.
Strategic Competition:
- As China grew, so did its ambitions. The "peaceful rise" narrative gave way to more assertive policies, particularly in the South China Sea, along with initiatives like the Belt and Road Initiative (BRI) that expanded China's global influence.
- The United States began to see China not just as a strategic competitor but also as a potential threat to its interests and values, leading to a bipartisan consensus on taking a harder stance against China.
Technological Rivalry:
- The competition extended to technology, with both countries vying for leadership in areas like artificial intelligence, quantum computing, and 5G telecommunications.
- Concerns over intellectual property theft, cybersecurity, and the role of Chinese tech companies like Huawei and Tencent in global markets became points of contention.
Economic Decoupling:
- The concept of economic "decoupling" gained traction in Washington, with calls to reduce dependence on China for critical supply chains and to restrict Chinese access to American technology and investment.
- The October 7th, 2023 law could be seen as an extension of this policy, likely imposing stringent controls on trade, investment, and technological exchanges with China.
Current Situation and Possible Future:
- The current situation is marked by heightened tensions and the potential for conflict, not just in trade but also in areas like Taiwan, where U.S. commitments to the island's defence clash with China's territorial claims.
- Militarization and regional alliances are being strengthened, as seen with the Quad (U.S., India, Japan, Australia) and AUKUS (Australia, U.K., U.S.) pacts, which are seen as counters to Chinese influence.
- The risk is that economic, political, and military tensions could escalate into a new Cold War or even direct conflict, although both nations have significant incentives to avoid military confrontation.
- Cybersecurity and space are new domains of potential conflict that were not present during the Cold War.
In Conclusion:
- The trajectory of U.S.-China relations will be shaped by the actions and policies of both nations. While competition is likely to remain intense, there are also global challenges like climate change and pandemics that require cooperation.
- The situation is dynamic, with the potential for both positive and negative developments. Diplomacy, strategic patience, and multilateral engagement will be crucial to managing this complex relationship and avoiding a descent into confrontation.
8. A situation similar to the “Great Game”?
The history-conscious among us may be reminded of the geopolitical struggle between the two world powers of the time, Russia and Great Britain, known as "The Great Game". The term "Great Game" originally referred to the strategic rivalry and conflict between the British Empire and the Russian Empire for supremacy in Central Asia in the 19thcentury. It's now sometimes invoked as a metaphor for the current strategic rivalry between the United States and China, particularly as it plays out in Asia but also globally.
Evidence Supporting the Sino-American Tensions as a 'Great Game':
- Geopolitical Rivalry:
Similar to the British and Russian Empires, the US and China are engaged in a broad geopolitical contest spanning various domains, including military, economic, technological, and ideological spheres. - Sphere of Influence:
Both the US and China are seeking to expand their influence in Asia through various means, including diplomatic ties, military alliances, economic investments, and soft power. - Proxy Influence:
Just as the Great Game involved indirect control and influence over third countries, the US and China are vying for relationships and alliances with other nations in Asia and beyond, which could be seen as modern-day proxies. - Infrastructure and Investment:
China's Belt and Road Initiative (BRI) has been compared to the historical efforts to establish trade routes and spheres of influence in Central Asia, evoking similarities with the Great Game's focus on trade and strategic geography.
Aspects Where the Comparison Falls Short:
- Globalization:
Unlike the 19th-century empires, both the US and China are deeply integrated into a globalized economy, making outright conflict more costly and less likely, at least in theory. - Nuclear Deterrence:
The presence of nuclear weapons and the doctrine of mutually assured destruction introduce a level of deterrence that did not exist during the time of the Great Game. - Multilateralism:
International institutions and multilateral agreements now play a significant role in mediating conflicts, unlike the bilateral nature of the Great Game. - Internal Politics:
The internal political situations in both the US and China are more complex and subject to public opinion and economic considerations than were the autocratic systems of the British and Russian Empires. - Technological Interdependence:
The interwoven nature of technology and supply chains, especially in areas like semiconductors, makes the rivalry more complex than the relatively straightforward competition for territory of the Great Game. - Awareness of Global Challenges:
There is an understanding that transnational challenges such as climate change and pandemics require a certain degree of cooperation between the US and China, something that was not a consideration in the 19th century.
Although the Great Game metaphor may provide a useful lens through which to view the strategic rivalry between the US and China, it is nevertheless an imperfect analogy. The global context and the nature of power in the 21stcentury is each vastly different compared to the 19thcentury. The interconnectedness of modern global politics, economics, and environmental issues means that while competition is fierce, there is also a necessity for collaboration that did not exist in the era of the Great Game.
9. Today's politics of the US towards China and vice versa
The politics of the United States toward China, and China's politics toward the United States, can be characterized as a multifaceted strategic competition, which encompasses economic, technological, military, and ideological dimensions:
United States' Politics Toward China:
- Strategic Competition:
The Biden administration officially labelled China as "the most serious competitor" to the United States, indicating a strategic approach to outcompete China across various domains while avoiding direct confrontation. - Collaboration and Pushback:
While competitive in nature, the U.S. has also expressed willingness to collaborate with China on global issues like climate change and pandemic response, where mutual interests align. - Alliance Building:
The U.S. is actively strengthening alliances, particularly with Indo-Pacific nations, NATO, and other global partners, to create a united front on issues concerning China, such as 5G technology and supply chain security. - Human Rights and Democracy Advocacy:
The U.S. has been vocal about human rights concerns in China, particularly regarding Xinjiang and Hong Kong, and has taken measures to demonstrate support for democratic values. - Technology and Trade:
Continuing concerns about trade practices, intellectual property, and technological advancements have led the U.S. to take steps to protect its own technological edge, including restrictions on Chinese tech companies and investments. - Military Posture:
The U.S. military is focusing on readiness and capability development in the Indo-Pacific region to ensure it can counterbalance the People's Liberation Army's growing capabilities.
China's Politics Toward the United States:
- Assertive Diplomacy:
China has become more assertive in its foreign policy, including toward the U.S., advocating for a "new type of international relations" and promoting its governance model as an alternative to Western democracy. - Economic Coercion and Influence:
China utilizes its economic leverage to push back against U.S. influence, implementing counter-tariffs and seeking to reduce dependency on U.S. markets by diversifying trade partners and supply chains. - Technological Self-Reliance:
In response to U.S. restrictions, China has emphasized the need to achieve self-reliance in critical technologies, investing heavily in sectors like semiconductors and artificial intelligence. - Military Modernization:
China continues to modernize its military capabilities, with a focus on areas like anti-access/area denial (A2/AD) strategies, which could counter U.S. military advantages in the event of a regional conflict. - Ideological Campaign:
China is countering Western narratives and criticism by promoting its development model, human rights concept, and handling of events in Hong Kong and Xinjiang, through what it calls a "correct" narrative. - Engagement with U.S. Rivals:
China is engaging with U.S. rivals such as Russia and Iran, building relationships that may serve to balance against U.S. power.
Both countries, while managing their rivalry, until now are still aware of the high stakes involved, especially given the interconnected nature of the global economy and the potential for conflict escalation. As a result, an element of restraint in their bilateral relations can be observed, with both sides avoiding steps that could lead to an uncontrollable spiral into direct conflict. This delicate balance however cannot be taken for granted
10. The role of de-Dollarization
In the 1960s Valéry Giscard d'Estaing, then the French Minister of Finance, coined the term exorbitant privilege (privilège exorbitant in French) referring to the benefits the United States has due to its own currency (the US dollar) being the international reserve currency. For example, the US would not face a balance of payments crisis, because their imports are purchased in their own currency.
In the wake of the latest global financial crisis, a prominent counter position was voiced, decrying the US Dollar as exorbitant burden for the US.
It nevertheless, these internal arguments notwithstanding, the US Dollar is unrivalled as a reserve currency with no challenger in sight. It only took the massive weaponisation of the US Dollar to lift the concept of de-dollarization on the international agenda. The term refers to the process of reducing reliance on the United States dollar in international transactions and reserves. It is a trend that has gained attention in the context of the U.S.-China rivalry, as well as in the broader geopolitical landscape.
Role in U.S.-China Rivalry:
- De-dollarization can be seen as a strategic move by China and other nations to diminish the U.S. influence that comes with the dollar's role as the world's primary reserve currency.
- By promoting the use of their own currencies in trade and investment, countries like China seek to increase their financial autonomy and protect themselves against U.S. sanctions or financial pressures.
- For China, advancing the international use of the renminbi (RMB) is also a part of its broader ambition to reflect its economic might in the global financial system.
Triggering Events:
- The use of economic sanctions by the U.S. has been a key factor that has prompted some countries to consider de-dollarization. Nations targeted by sanctions seek ways to circumvent the U.S. financial system.
- The global financial crisis of 2008 also played a role, as it exposed the vulnerabilities of a dollar-dominated global financial system.
- The ongoing trade tensions between the U.S. and China, along with tariffs and other restrictive measures, have further motivated the push for de-dollarization.
Major Proponents:
- China:
As the second-largest economy in the world, China has been a leading voice in de-dollarization, promoting the use of the RMB in international transactions and as part of central bank reserves. - Russia:
Economic sanctions have pushed Russia to reduce its dollar holdings and engage in de-dollarization efforts, including promoting the use of the rouble and other currencies in trade with its partners. - Other BRICS nations (Brazil, India, South Africa):
These countries have also shown interest in reducing dependency on the dollar, exploring alternative payment systems and reserve currencies.
Current Status:
- While there has been progress in de-dollarization efforts, the U.S. dollar remains dominant in international trade and finance. This is due to its stability, liquidity, and the United States' role in the global economy.
- China has made strides in internationalizing the RMB, including the establishment of RMB clearing banks around the world and the inclusion of the RMB in the IMF's Special Drawing Rights (SDR) basket.
Future Outlook:
- De-dollarization is likely to continue gradually, as countries seek to diversify their foreign exchange reserves and reduce exposure to potential U.S. sanctions.
- The rise of digital currencies and blockchain technology may further facilitate de-dollarization by providing alternative means of international transaction.
- Nonetheless, the process is expected to be slow, given the entrenched position of the dollar and the lack of a ready substitute that can match its liquidity and acceptance.
- The rivalry between the U.S. and China may accelerate this process, particularly if relations deteriorate and lead to more aggressive financial decoupling.
As the international financial system is firmly based on the use of the US dollar, the success of de-dollarization efforts will be limited in short and medium terms. It will depend on numerous factors, including the stability and openness of the economies promoting alternative currencies, the evolution of the international trade and financial systems, and geopolitical shifts. It's an ongoing trend with the potential to reshape international financial relations significantly over the coming decades.
In short term even China will not be able to escape the US dollar as the dominant exchange currency. The country hence for quite a while will have to accept the dangers associated with the potential use of the global reserve currency as a weapon in the international great power competition.
11. The EU’s policy towards China
The European Union's policy towards China is multifaceted, reflecting the complexity of its member states' interests and China's rising global influence. The EU has traditionally aimed for a balanced approach, seeking to engage China as a partner in trade and global governance while also addressing challenges in areas such as human rights, security, and reciprocity in economic relations.
Main Characteristics of EU Policy towards China:
- Comprehensive Strategic Partnership:
The EU has long sought to engage China through what it terms a "Comprehensive Strategic Partnership." This approach aims to deepen cooperation across a range of sectors, including climate change, economic and trade matters, technological research, and global security issues. - Trade and Investment:
The EU is China's largest trading partner, and China is the EU's second-largest. The economic relationship is a significant focus, with the EU pushing for a more balanced and reciprocal trade relationship, as well as addressing concerns over market access and intellectual property rights. - Human Rights and Rule of Law:
The EU often emphasizes human rights, calling for respect for fundamental freedoms and the rule of law in China, including in its dealings with Hong Kong and Xinjiang. - Security Concerns:
The EU is increasingly attentive to the security implications of China's rise, particularly regarding cybersecurity, 5G networks, and China's military activities, especially in the South China Sea. - Multilateralism:
The EU promotes a multilateral approach to global challenges, encouraging China to participate constructively in international institutions and to adhere to international norms.
Differences from the US Approach:
- Confrontation vs. Cooperation:
The US has taken a more confrontational approach towards China, especially regarding trade, technology, and security. The EU, while sharing some of these concerns, typically emphasizes engagement and dialogue over confrontation. - Security Alliances:
The US has security alliances in the Asia-Pacific region and often views China's actions through a security lens. The EU, lacking similar alliances and with a smaller military footprint in the region, tends to prioritize economic and diplomatic tools. - Human Rights Stance:
While both the US and EU are critical of China's human rights record, the EU's critique is often coupled with an emphasis on dialogue and mutual understanding, as opposed to the US's more direct sanctions-based approach.
Commonalities with the US Approach:
- Trade Practices:
Both the EU and the US have criticized China's trade practices, particularly state subsidies for Chinese companies, intellectual property theft, and lack of market access for foreign firms. - Technological Rivalry:
There is a growing concern in both the EU and the US about technological dependencies on China and the need for securing supply chains in critical technologies like 5G, artificial intelligence, and semiconductors. - Global Governance:
Both seek to shape the rules of global governance in ways that reflect liberal democratic values, and they encourage China to adhere to these norms.
Evolution of the Policy:
- The EU's policy has evolved from one of broad engagement to a more nuanced stance that recognizes China simultaneously as a cooperation partner, a negotiating partner, an economic competitor, and a systemic rival.
- Pressed hard by the US to maintain a tougher stance towards China, the EU in 2019 labelled China as a "systemic rival" for the first time, signalling a shift towards a more assertive stance on issues like security, technology, and values.
- The EU is also working on its strategic autonomy to reduce dependencies on China, seeking to diversify partnerships in the Indo-Pacific region.
- Recently in 2023-07-14 the Government of the Federal Republic of Germany released Strategy on China as part of the joint EU policy on China. This policy declares to be embedded in the aims and principles of the EU’s common policy on China and based on constant close coordination with EU partners. The strategy paper contains a collection of well-known and often publicly stated claims, complaints, wishes, accusations but few principles, goals, success factors, measures. It therefore hardly qualifies for a strategy.
The EU's policy towards China to a certain degree continues to develop in response to internal dynamics within the EU itself, changing global conditions, the actions of China but predominantly to the increasing pressure from the US. The EU aims to defend its interests and promote its values, while also looking for areas where cooperation with China is possible and beneficial for addressing global challenges like climate change, which given the weak geo-political position of the EU appears to be a futile endeavour.
12. Practical implications of Europe’s and the US’s China strategy
The policies and strategies of the EU towards China, very much like those of the US, are more than just rhetorical. They have practical implications and are being implemented with tangible and at time harsh effects on business operations. How they manifest on the ground will be felt only during the next years in an overwhelmingly adverse way.
European Union (EU)
- Investment Screening:
The EU has established a framework to screen foreign direct investments, which became fully operational in October 2020. This is aimed at protecting critical European assets and technology from potentially hostile foreign takeover or influence. - 5G Network Security:
Many EU countries are tightening restrictions on the participation of Chinese companies like Huawei in their 5G networks, citing security concerns. - Research and Innovation Protections:
The EU has introduced measures to protect its technological and intellectual property, including more stringent conditions for participation in research programs like Horizon Europe, especially for entities from non-EU countries. - Trade Defence Instruments:
The EU has been more willing to use anti-dumping measures and other trade defence instruments against unfair trade practices, some of which affect Chinese companies. - Supply Chain Diversification:
The COVID-19 pandemic has accelerated European efforts to diversify supply chains away from over-reliance on China, leading to initiatives to bring some production closer to home or to alternative locations.
United States (US)
- Trade Tariffs:
The US has imposed tariffs on billions of dollars' worth of Chinese goods, which has had a direct effect on trade flows and business decisions regarding sourcing and manufacturing locations. - Entity List:
The US Department of Commerce has placed several Chinese companies on the Entity List, which limits their ability to buy US technology and components without government approval. - Investment Restrictions:
US legislation and executive orders have been put in place that restricts American investment in Chinese companies with military ties or those operating in sectors deemed critical to US security. - Export Controls:
The US has tightened export controls on certain technologies, especially those that can be used in military applications or in the surveillance of minorities within China. - Clean Network Initiative:
This initiative aims to safeguard America's assets, including data and telecommunications, from "aggressors" like the Chinese Communist Party, influencing businesses in how they structure their IT and communication networks.
Implementation and Impact
The implementation of these measures requires companies to find their way in a more complex legal environment. For example, companies with international supply chains must now consider the impact of investment reviews and trade tariffs on their business activities. In practice, this affects decisions about where they manufacture products, how they protect their intellectual property and who they want to do business with.
Both the US and EU have shown a commitment to implementing these strategies, reflecting a shift towards a more belligerent and confrontational approach to economic relations with China. However, this currently does not mean a complete decoupling or disengagement.
Rather, it is a recalibration of relations with China with the aim of maintaining US international leadership under the guise of protecting national and economic security interests, while pursuing trade and co-operation where this is still possible.
13. Chinas response
China on the other hand has responded to the measures taken by the US and the EU with a combination of retaliatory actions, strategic adjustments, and domestic policy reforms:
Retaliatory Tariffs and Sanctions
In response to US tariffs, China imposed its own set of retaliatory tariffs on a range of American products. Beijing has also sanctioned entities and individuals in the EU and US that it perceives as interfering in its internal affairs, particularly those criticizing its actions in regions such as Xinjiang and Hong Kong.
Legal Countermeasures
China passed laws such as the "Anti-Foreign Sanctions Law," which provides a legal basis for counteracting sanctions. It allows China to take legal actions against individuals or entities involved in designing or implementing discriminatory measures against Chinese citizens or entities.
Diversification of Trade
China is actively seeking to reduce its dependence on the US and EU markets by diversifying its trade partnerships. This includes the Belt and Road Initiative to increase infrastructure and trade links primarily with Asia, Africa, and Europe, and the Regional Comprehensive Economic Partnership (RCEP) to deepen economic ties in the Asia-Pacific and BRICS.
Attracting Foreign Investment
China continues to open up sectors of its economy to foreign investment, seeking to counterbalance any divestment resulting from Western policies. It has also passed a new Foreign Investment Law aimed at improving the business environment for foreign investors and addressing concerns such as forced technology transfer.
Strengthening Domestic Market
The "dual circulation" strategy has been introduced to bolster domestic consumption and innovation, making the Chinese economy less vulnerable to external pressures and fluctuations in international trade.
Technological Self-Sufficiency
In response to technology restrictions, China is investing heavily in developing its own technological capabilities, particularly in semiconductors and telecommunications, to achieve self-reliance in critical technologies.
International Alliances
China has been actively working to strengthen ties with countries in other regions, such as engaging more with ASEAN countries, deepening ties with Russia, and building relations in Africa and Latin America, partly to counterbalance the influence of the US and EU.
Public Diplomacy and Influence Campaigns
China conducts public diplomacy efforts to improve its global image and to promote its political and economic model. This includes a significant presence in international media and on global platforms to present its narrative.
Cybersecurity and Information Control
In response to concerns about data and cybersecurity, China has tightened its own data protection regulations and is promoting its vision of "cyber sovereignty," which calls for greater state control over the internet and data flows within its borders.
China's responses reflect a strategy that is both reactive and proactive. While pushing back against the policies of the US and the EU, China is also taking steps to reduce its vulnerabilities and to reshape the global economic and political order in a way that is more favourable to its interests. This includes both strengthening its domestic economy and increasing its influence on the international stage through new partnerships and enhanced diplomatic engagement.
14. Germany’s pronounced vulnerability
Germany in particular does have certain vulnerabilities due to its position within these rising tensions. As the largest economy in the European Union and one that is highly dependent on exports, including a significant trade volume with both China and the United States, Germany could be significantly affected by geopolitical tensions.
Some industry sectors might be most affected:
Automotive Industry
The automotive sector is a cornerstone of the German economy, with China being a major market for German car manufacturers. Tariffs or trade barriers could impact exports significantly. Additionally, the push for electric vehicles (EVs) and China's strong position in the EV market and supply chain for batteries could also present challenges.
Machinery and Plant Engineering
Germany's machinery and plant engineering sector is another key area of its export economy, with many German companies having significant business interests in China. Disruptions in trade could affect this sector directly.
Chemicals and Pharmaceuticals
The chemicals and pharmaceuticals industries are also key sectors that could be impacted by tensions, particularly if supply chains are disrupted. China is an important supplier of raw materials and also a growing market for German pharmaceutical products.
Technology and Telecommunications
With the global race for technological dominance, especially around 5G technology where Chinese companies like Huawei are key players, German tech companies might find themselves in a difficult position if forced to choose between US and Chinese technologies and standards.
Energy Sector
The energy sector, especially with Germany's phase-out of nuclear and coal energy, could be impacted by tensions, particularly if trade disputes affect the availability or cost of imported energy commodities or technologies.
In terms of vulnerability Germany's strong institutional framework, diversified global trade relationships, and high levels of innovation provide some level of resilience. However, industries that are highly integrated with global supply chains or dependent on foreign markets for sales or raw materials could experience significant stress due to geopolitical tensions.
Additionally, the German government is aware of these vulnerabilities and may seek to implement policies aimed at diversifying trade, strengthening domestic industries, and developing alternative markets to mitigate these risks. The outcome will also be shaped by how the EU, as a whole, navigates these tensions and what common strategies it develops. The results so far however are less than encouraging with Germany being squeezed between the two superpowers becoming the biggest looser of the struggle of others.
15. Benefits of staying in China
Despite rising geopolitical tensions, there are several compelling reasons why companies might choose to remain engaged with the Chinese market:
Market Size and Growth Potential
China's population is over 1.4 billion people, making it the world’s most populous country with a rapidly growing middle class. This presents a significant consumer market for a wide range of products and services. For many businesses, the sheer volume of potential sales and the growth potential are too large to ignore.
Diversification
Operating in the Chinese market can allow companies to diversify their revenue streams. Relying on a single market or a handful of markets for revenue can be risky, especially if those markets face economic downturns. China can offer a hedge against economic cycles in other parts of the world.
Supply Chain Integration
China is deeply integrated into the global supply chain. It is not just a market for finished goods but also a key supplier of raw materials, components, and finished products. Companies often find cost advantages in manufacturing or sourcing from China due to its developed supply chains and economies of scale.
Competitive Presence
Being active in the Chinese market can prevent competitors from taking over the market share. By maintaining a presence, companies can protect their brand recognition and market position, which could be more difficult to regain if they leave and decide to return later.
A German business representative recently described China as the "fitness centre" for German companies. This means that those who can survive in these challenging conditions and fierce competition will succeed anywhere else.
Innovation and Technology
China has become a hub for innovation in areas such as digital payments, e-commerce, telecommunications, and artificial intelligence. Companies operating in China can gain insights into cutting-edge technology and business models, which they can potentially leverage globally.
Strategic Partnerships
Engagement with Chinese businesses can lead to strategic partnerships that are beneficial beyond the Chinese market. These partnerships can enable access to new technologies, investment opportunities, and other markets in Asia through regional trade agreements where China plays a significant role.
Responsiveness to Policy Changes
Companies with a presence in China may be better positioned to quickly adapt to policy changes and navigate the regulatory environment. They can build relationships with Chinese stakeholders and local governments, which can be beneficial for long-term operations.
Cultural and Brand Influence
A strong presence in China can contribute to a global brand's cultural influence. The perception and popularity of a brand in China can have positive effects on its perception in other markets due to the global visibility of Chinese consumers and tourists.
Despite these benefits, companies must balance the advantages with the risks associated with geopolitical uncertainties, intellectual property concerns, and potential ethical considerations. The decision to stay in the Chinese market must be made with a comprehensive understanding of both the market potential and the external risks.
Several Western multinationals have already given up and withdrawn from the Chinese market. Although their failure could be attributed to rising tensions, in many cases a lack of competitiveness is likely to be the real reason. Other large corporations may choose to split into separate entities if they are otherwise at risk of being torn apart by overwhelming geopolitical forces.
16. Conclusion
We Europeans must recognise that our geopolitical position is determined and dominated by the US. Although the growing economic competition from a rapidly developing China is real and increasingly felt by Europe and Germany in particular, the measures taken by the EU reflect US geopolitical rivalry with China and not genuine European needs. Europe is thus basically being assigned the role of a follower of the US at best. The "global South" and other countries, with the exception of Russia, are mere spectators.
US politicians continue to be intransigent with regard to China. Nikki Haley, the former governor of South Carolina and Republican presidential candidate in 2024, announced in September 2023 that she considered China "an enemy".
While the official US tone towards China has been gradually softening recently, measures to vigorously contain China are continuing and even intensifying. In a New York Times Magazine article from12 July 2023 entitled ...
“’An Act of War’: Inside America’s Silicon Blockade Against China,” Alex W Palmer declared: “If the controls are successful, they could handicap China for a generation; if they fail, they may backfire spectacularly, hastening the very future the United States is trying desperately to avoid.”
American Enterprises maintain a more pragmatic approach. They have multiple incentives for staying in China. But in the end, few options for evasion remain and business eventually has to follow politics. For Europe, and Germany in particular, the European de-risking approach harbours its own risks.
As far as the Chinese economy is concerned, it will suffer considerably from the various sanctions, at least in the short and medium term. In addition, the long-term, downright turbulent growth to date is being bought with all kinds of market distortions and bad investments. Even if major geopolitical upheavals are ruled out, China's economy can be expected to remain in the doldrums for another ten to twenty years.
Since, according to the theories of great power politics, both countries are stuck in a geopolitical trap from which there is no easy escape, a major confrontation cannot be ruled out. There is no sign of the tensions easing. All measures short of war are conceivable. Minor miscalculations could well lead to a catastrophic conflict.
None of the pressing problems facing humanity, such as climate change, the sixth extinction of species, dwindling resources, ominously growing inequality or the growing threat of local and not-so-local conflicts, can be solved in this situation.
At the moment, we cannot be sure which country to place more hope in, China or the USA, if either of the two candidates.
However, a truly united Europe, pursuing its own interests without losing sight of the pressing challenges facing humanity as a whole, could play a mediating role.
Will Europe wake up one day and finally find its own way?
