When does 'de-risking' pile on the risk?
When does 'de-risking' pile on the risk?
Thoughts on the auto industry side of things, h/t Adam Tooze
Since the Biden administration adopted the term “de-risking” to describe its stance toward China, I’ve been thinking about what it would look like for a strategy under that banner to succeed. There are many ways to frame the question, depending on whether one measures success on the Biden team’s own terms or against other metrics.
Whatever one’s yardstick, if a narrow class of risks decrease but broader risks greatly increase, success is flimsy. In a more concrete caricature, if the goal is to reduce the risk of supply chain disruption in the event of conflagration around Taiwan, but the chosen measures drastically increase the probability of highly disruptive war, it would be pretty narrow-minded to claim victory. In short, one has to consider whether one is increasing risks in the name of de-risking.
The perceived risks, however, are all disputable estimates of actually unknowable probabilities. De-risking is more of a rallying cry than an empirically driven exercise in harm reduction. That risk-unknowability factor is what kept an earlier draft essay of mine from moving forward. But in the mean time, Adam Tooze has a part of the picture in today’s
—looking at German automakers and their China trajectory—and I wanted to share and add some thoughts.Risk of dependence vs. risk of losing the plot
Tooze notes that China’s auto market is the world’s largest, and not by a small margin. Therefore, while German Chancellor Olaf Scholz and European Commission President Ursula von der Leyen talk about de-risking from the China market, a German auto executive tells Tooze, “If we are in the business of making cars we have to be in China. If we aren’t here, we aren’t in the business.” Tooze continues:
To put the same point another way, rebalancing from China may reduce your risks in the event of a war over Taiwan. But car firms are car firms. They don’t organize their strategy around the war-games of military think tanks. Exiting China, if you are a car-maker, doesn’t derisk your business. It substantially increases the risk that you do not stay on pace with the trends in the world’s leading market. It increases the risk that you get blindsided by competition you did not see coming.
Tooze isn’t arguing that there’s no China risk for big foreign automakers. Indeed, they are losing market share dramatically as China’s market shifts to EVs, a market hugely dominated by domestic brands. Arguably, this was the risk the likes of VW and GM, and maybe their governments, should have been attuned to: the rise of an EV production ecosystem—lifted by industrial strategy, consumer incentives, supply chains, and innovation—that could devastate their position not just in China’s market but globally. More from Tooze:
[T]he gearshift in the industry is dramatic and, right now, non-Western firms are at risk of losing touch with the technological frontier being defined by China’s EV ecosystem. That is a far more serious scenario for German and other Western decision-makers to worry about, than wartime interruptions to the supply of scandium and yttrium. The shift in the balance of the global automotive market isn’t a hypothetical tail-risk scenario. It is happening before our eyes on a huge scale. We really don’t need to add drama to the global economic scenery. Reality is dramatic enough.
At the firm level, I think Tooze’s argument makes good sense. Where things get a bit more complicated is in a frame where “what’s good for GM is good for America,” VW for Germany, Toyota for Japan. Clearly, if corporate and national interests are fused, these countries should have seen China’s EV takeoff coming and raced to keep pace or overtake. That’s clearly not how it worked—and those firms were all very much in China. Whether strategists were truly blindsided or they calculated that the battery and EV ecosystem growing in China could also fuel their global efforts, it was also not realistic to imagine fielding an industrial strategy able to compete with the China-scale effort.
Firms then must indeed keep their attention to China, and hopefully make some money there, to know where the leading edge even is. The Washington mantra of “maintaining leadership” is often a bit rich, but it would clearly be misplaced here. At least in 2024, strategists recognize the competitive task for US firms is to catch up, if they can. And if US firms lose the ability to learn from competing in China, or to build with technologies licensed from Chinese firms, they may well be piling on the risk.
The risks not on the ledger
There is another kind of risk not always considered here, specifically for EVs and other decarbonization technologies. If the US goal is to reduce the use of Chinese products, either to reduce the risk of supply chain disruption or sabotage in the event of some contingency, or to channel domestic consumption toward domestic jobs and capital accumulation, this comes at a cost of making the products more expensive or less available.
In May, the Biden administration announced tariffs on Chinese EVs would rise from 25% to 100%. Potential bans on Chinese software in certain classes of connected or autonomous vehicles could fully ban many Chinese EVs in the name of national security. With US EV offerings few, (in my view) oversized, and expensive, this inevitably slows EV adoption here. Price is not the only factor in faltering US EV demand, but it’s surely part of the picture. This may be an acceptable tradeoff in terms of short-term costs, but it’s hard to estimate the climate effect of slowing the electrification of US mobility, especially because we don’t know whether US- and ally-sourced EVs will take off in short order. Similarly, it’s hard to estimate the effect of anti-dumping duties on Chinese solar panels that, while perhaps justified under an aging trade regime, slow solar installation. Domestic production in solar is unlikely to hit the scale and lower price point available from China any time soon.
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There are trade-offs. Not every cost is worth it in the energy transition, and it’s not news that the US government is unwilling and unable to simply flip a switch to a Green New Deal–style economy. What is unclear to me, however, is whether a potential cost in terms of slowed decarbonization truly enters the US government’s decision making on China “de-risking.”
The urgency of decreasing greenhouse gas emissions is well established, to say the least. The urgency of de-risking from Chinese supply chains (one logic for the actions that may act as barriers to energy transition) is hugely debatable, even if the need is accepted. And de-risking is not the only goal on the table, with domestic jobs very much part of the politics, even if duties on Chinese products are far short of the scale of intervention that would change the economics of domestic production. I don’t have the answers, but from the outside, there is little evidence these questions are even being asked in the decision-making process. Certainly they are far from the mainstream public debate, and my modest hope is that these trade-offs will be more explicitly in mind. ###
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About Here It Comes
Here it Comes is written by me, Graham Webster, a research scholar and editor-in-chief of the DigiChina Project at the Stanford Program on Geopolitics, Technology, and Governance. It is the successor to my earlier newsletter efforts U.S.–China Week and Transpacifica. Here It Comes is an exploration of the onslaught of interactions between US-China relations, technology, and climate change. The opinions expressed here are my own, and I reserve the right to change my mind.