Decoupling from China: the only question is how far the West will go

EU leaders may refuse to recognise it, but decoupling from China has already started – the severance of economic ties is a core component of any ‘de-risking’ policy
The ‘de-risking’ debate in Western nations is really about how far to take decoupling before they try to end it

Viking Bohman

Published: 8:30pm, 25 Sep 2023

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European leaders continue to repeat that they do not want to see a decoupling from China. Instead of cutting off trade and investment, they insist they can rid themselves of economic vulnerabilities through a “de-risking” policy.

But the idea that a decoupling process can be avoided is misguided. The severance of economic ties is a necessary component of any de-risking strategy, and decoupling is already happening. The earlier the European Union can come to terms with this reality, the better.

Since European Commission president Ursula von der Leyen launched the term “de-risking” to describe the EU’s policy towards China, the concept has been adopted by both the United States and the G7.

Western governments seem to agree on the goal: they want to reduce their exposure to security risks inherent in economic exchanges with China. How to get there, however, is a different story. There is widespread disagreement about the scope and focus of the policies, including America’s new rules to screen investments into China.

Despite such differences, “de-risking” took root in the West. This was partly because the strategy was framed as a means to prevent decoupling – a scenario that all parties express a desire to steer clear of. But what exactly is decoupling?

Leaders in America and Europe tend to portray decoupling as a disastrous endpoint where economic exchange with China has been cut off completely. But decoupling does not have to signify an absolute end-state, nor does it have to be dramatic.

A sudden, large-scale rupture with China appears highly unlikely (except under warlike circumstances), and it was never supported by any serious Western policymaker. It is more useful to think of decoupling in literal terms: as the word implies, it is a process of separation.

In this light, it quickly becomes clear that a decoupling is well under way. Foreign investments in key industries in China have plummeted and fractures in the US-China trading relationship have widened since 2018. The global semiconductor industry is going through a fundamental reconfiguration away from the Chinese market as a result of US export controls.

And, according to a recent International Monetary Fund study, foreign direct investment is increasingly flowing between geopolitically aligned countries rather than those geographically close.

Decoupling is unlikely to slow. In corporate boardrooms, there is a growing conversation around concepts like reshoring and “friend-shoring”, and numerous multinational companies anticipate a deeper economic separation between China and Western nations.

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Businesses are not only adapting to comply with the West’s carefully calibrated export controls and sanctions, but are also disengaging from broader commercial ties that they perceive as susceptible to disruptions. The decoupling effect of companies bracing for coming restrictions may well come to surpass the direct impact of the rules, going far beyond government intentions.

The trading relationship between the EU and China has remained relatively steady but decoupling looms large here too. Most of Brussels’ de-risking policies will result in some degree of separation from the Chinese economy if successful.

Western ‘de-risking’ from China without decoupling makes little sense

In the case of sanctions, export controls and investment restrictions, the decoupling effect is obvious – legal barriers are drawn up to stop specific flows of goods and capital. Industrial policies, in contrast, like the EU’s Critical Raw Materials Act and the Net-Zero Industry Act, will take longer to come to fruition. They stipulate that, over time, Europe should be able to meet some of its demand for clean technology and strategic raw materials – markets currently dominated by China.

Even friend-shoring, considered a less protectionist alternative, implies decoupling. Instead of bringing supply chains home, cooperative projects like the US-launched Chip 4 alliance and the Minerals Security Partnership are intended to shift trade away from China to trusted allies. But moving supply chains to an exclusive group of friendly states necessarily means that segments of exchange with China will be discontinued.

None of this is not to say that these policies are unjustified. It may well be the case that the EU needs to sever some connections with the Chinese economy to achieve the level of security it desires. But to pretend that de-risking can be achieved without any measure of decoupling only adds confusion to an already complicated subject.

The disagreement in the West is not about whether to decouple from China. This process has already started and is partly driven by American and European policies. The de-risking debate is about determining how far Western countries want decoupling to go before they try to end it.

Viking Bohman is an associate analyst at the Swedish National China Centre