How much de-risking will ever be enough? Kurt Campbell, U.S. President Joe Biden’s lead Asia diplomat, hinted in a recent interview that the United States was nearly done with new rules limiting Chinese access to technology and investment. “We have tried to make clear that there is a difference between a narrow de-risking and a broad decoupling,” he said. “At the end of this effort, the idea is to begin consequential diplomacy with China.” Yet almost by definition, the narrow measures introduced so far only moderately reduce risks related to China, especially in scenarios involving a military conflict with Beijing. As a result, demands in Washington policy circles for more stringent measures targeting China are likely to grow, creating a downward de-risking spiral that was not originally intended.
How much de-risking will ever be enough? Kurt Campbell, U.S. President Joe Biden’s lead Asia diplomat, hinted in a recent interview that the United States was nearly done with new rules limiting Chinese access to technology and investment. “We have tried to make clear that there is a difference between a narrow de-risking and a broad decoupling,” he said. “At the end of this effort, the idea is to begin consequential diplomacy with China.” Yet almost by definition, the narrow measures introduced so far only moderately reduce risks related to China, especially in scenarios involving a military conflict with Beijing. As a result, demands in Washington policy circles for more stringent measures targeting China are likely to grow, creating a downward de-risking spiral that was not originally intended.
The notion that de-risking might have a natural end—a place where risks relating to China come back to manageable levels—is alluring. Biden’s team recently unveiled long-delayed measures limiting U.S. investment in Chinese technology companies. Following intense internal debate, the rules were drawn relatively narrowly, touching only a handful of areas, including artificial intelligence. Elsewhere, there is continued evidence of de-risking in semiconductors. In July, Taiwanese chip maker TSMC announced plans to build a new €10 billion plant in Germany. Part of wider attempts to disperse global production, the move aims in part to curb risks of shortages in the event of a future conflict over Taiwan, where most advanced semiconductors are made.
All this reflects a range of western dilemmas over how far and how fast to cut back connections with China. Many find solace that talk of outright de-coupling has been abandoned. De-risking, a term first popularized earlier this year by European Commission President Ursula von der Leyen, has become widely used instead. This appears to strike a sensible middle ground, avoiding the prospect of a ruinous total economic split from China. De-risking is meant to focus narrowly on a small range of strategic industries, from pharmaceutical supplies to electric vehicle batteries. Typically, new measures aim to reduce vulnerabilities stemming from excessive reliance on Chinese supplies, which could be exploited by Beijing to gain leverage in an international dispute, with those supplies perhaps even cut off entirely in a crisis.
Semiconductors are only the most important example, with a particular focus on TSMC, the world’s largest producer. The chip giant is midway through a push to globalize manufacturing, set off by pressure to diversify production from Taiwan. In addition to its German plans, the company is ploughing $40 billion into new U.S. facilities while building others in Japan. By 2025, TSMC will make about a fifth of its advanced chips outside Taiwan, up from less than a tenth only a few years ago. Other companies are taking similar measures. Intel is also planning a new plant in Germany. UMC, another Taiwanese group, is increasing production in Singapore. The resulting shift is significant. The United States, for example, could control as much as 16 percent of global chips capacity by 2025, up from around 10 percent last year, according to Boston Consulting Group.
All this pleases Western politicians. It suggests de-risking policies are working, reducing reliance on chips made in Taiwan, and protecting against a future conflict. In private, Taiwanese semiconductor executives are less happy. Taiwan remains an ideal place to build advanced chips. TSMC’s gigantic, expensive factories on the island are nestled within a unique ecosystem of suppliers and skilled workers that is hard to replicate elsewhere. In truth, the last thing they want to do is build chips in the United States, where manufacturing is expensive and skilled labor scarce. TSMC has already blamed labor shortages for delaying the start of production at its new facility in Phoenix, Arizona, until 2025.
In truth, TSMC tends to launch these new facilities under various forms of duress. The United States remains Taiwan’s most important diplomatic partner. If U.S. leaders want TSMC to set up a new factory, it is hard for the company to say no, especially when tempted by generous incentives, including the subsidies and tax credits in Biden’s $50 billion CHIPS Act. Just as important is pressure from clients. Large chip customers like Apple are also being pressed to reduce supply chain vulnerabilities. Relying on a handful of factories in Taiwan for most of their high-end chips looks risky. Clients like Apple likely told TSMC to start making their chips closer to home, or risk them buying more from rivals like Intel or Samsung.
The result is a global semiconductor sector that will be somewhat more geographically dispersed, less reliant on Taiwanese production, and less efficient as a result. This might sound like a reasonable bargain. But it does not mean de-risking will succeed if the worst happens. In the event of a Chinese invasion or a blockade of Taiwan, simply having more chip manufacturing located in the United States or Germany will offer minimal protection from supply shortages. Advanced chips might be made in Western factories. But the components that go into them are still sourced globally, many from China. The same is true for the processes of testing and packaging, which will still see chips produced in new Western factories shipped back to Asia.
Put another way, even with current de-risking policies, semiconductor supply chains will remain deeply globally integrated. Much the same is true in other industries, like pharmaceuticals or battery production. The Biden administration is therefore likely to face pressure to take further de-risking steps in the future, for instance by persuading more semiconductor suppliers to move out of China too. The same is likely to be true for less advanced chips. TSMC’s recent investment in Germany is designed in part to supply the automotive sector, which tends to use less advanced chips. China looks set to become a stronger player in these basic products, which could leave Western car companies more reliant on Chinese suppliers, not less, a situation that will be hard for German politicians to accept. There will also be plenty of calls to tighten Biden’s outbound investment rule, which have already been widely criticized as insufficient.
Washington says its intention remains to target a narrow range of technologies, most obviously the advanced chips that power artificial intelligence models, a sector with potentially transformative military implications. U.S. National Security Advisor Jake Sullivan noted in a speech last year that the United States would introduce measures in areas critical to national security. “We are protecting our foundational technologies with a small yard and high fence,” he said. But in the future, new risks will be identified, and loopholes will need to be closed. Political pressure from those anxious about national security threats emanating from China will continue to grow. Existing rules will likely be expanded. The fence will get higher, and the yard wider.
All of this is without taking into account one final factor: China’s response. So far, Beijing’s reaction to the West’s various de-risking measures has been reasonably limited. It did introduce export controls this month on gallium and germanium, two rare earth elements used in semiconductor manufacturing. But Wei Jianguo, a former senior Chinese commerce official, warned that further measures along these lines are likely. “If the high-tech restrictions on China become tougher in the future, China’s countermeasures will also escalate,” he said. China is also sure to press ahead with attempts to develop its own advanced manufacturing and technology sectors, in what it views as its own process of de-risking. All of this will only add pressure to the downward spiral of de-risking: New Chinese restrictions will remind Western leaders of their countries’ vulnerabilities, requiring fresh measures to reduce them once again.
Western leaders are doubtless sincere when they say that they want to avoid such a future. But in an atmosphere of pervasive suspicion, it is hard to see how they can reach that illusive point where enough de-risking measures have been introduced. China, by contrast, has always been skeptical of Western talk of de-risking, viewing it merely as a step in a longer journey towards deeper forms of separation. They may well end up being right.
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