Derisking

Derisking aims to reduce specific vulnerabilities in supply chains and dependencies, while decoupling seeks a complete economic separation.

Derisking addresses the vulnerabilities exposed by over-reliance on specific countries or suppliers for critical goods. Unlike standard trade diversification, derisking is driven by geopolitical and national security concerns, aiming to ensure access to essential resources even during crises. For example, many countries realized during the COVID-19 pandemic that their dependence on China for pharmaceuticals was a major vulnerability, which derisking aims to prevent in the future.

Derisking does not guarantee complete self-sufficiency or eliminate all risks. It focuses on reducing *critical* dependencies, not all dependencies. Critics argue that derisking can lead to increased costs for consumers due to less efficient supply chains, and that it can be used as a protectionist measure under the guise of national security. For example, if a country heavily subsidizes its domestic semiconductor industry under the banner of derisking, it might face accusations of unfair trade practices.

In practice, derisking involves a combination of policies. A real-world example is the European Union's strategy to reduce reliance on Russian gas after the invasion of Ukraine. This involved diversifying gas suppliers (e.g., increasing imports from Norway and the US), investing in renewable energy sources to reduce overall gas demand, and implementing energy efficiency measures. This wasn't about completely cutting off Russian gas immediately (decoupling), but about reducing the EU's vulnerability to Russian energy blackmail.

The most common trap is confusing derisking with protectionism or autarky (economic self-sufficiency). Examiners will present statements that make derisking sound like a complete rejection of international trade or an attempt to create a closed economy. Remember that derisking is about *reducing* vulnerabilities, not eliminating all foreign interaction.

Students confuse the two because both involve finding alternative sources. However, trade diversification is primarily driven by economic efficiency (finding cheaper or better suppliers), while diversification of supply chains within derisking is driven by national security and resilience concerns, even if it means higher costs. For example, a country might choose a slightly more expensive domestic supplier for critical components to reduce reliance on a potentially hostile foreign nation.

Critics argue that derisking can lead to economic inefficiency and higher costs for consumers because it distorts free trade and prevents countries from specializing in what they do best. It can also provoke retaliatory measures from other countries, leading to trade wars. In response, one could argue that national security and resilience are legitimate concerns that sometimes outweigh pure economic efficiency. A balanced approach is needed, focusing on targeted derisking in strategic sectors rather than broad-based protectionism.

India should focus on: (1) Identifying its most critical dependencies (e.g., certain raw materials, technologies). (2) Investing in domestic manufacturing capacity through schemes like Production Linked Incentive (PLI). (3) Diversifying import sources through strategic partnerships with like-minded countries. (4) Strengthening cybersecurity to protect critical infrastructure. (5) Promoting R&D to reduce technological dependence. A key challenge is balancing derisking with maintaining competitiveness and attracting foreign investment.

• •Identify critical dependencies
• •Invest in domestic manufacturing
• •Diversify import sources
• •Strengthen cybersecurity
• •Promote R&D

The TTC serves as a forum for the US and EU to coordinate policies on trade, technology, and supply chain security. It aims to develop common approaches to address challenges posed by non-market economies (often referring to China), promote transatlantic trade and investment, and foster technological innovation. In the context of derisking, the TTC focuses on identifying vulnerabilities in supply chains, developing common standards for critical technologies, and coordinating export controls.

This visit highlights the tension inherent in derisking. While Germany seeks to reduce its economic dependence on China, it also recognizes the importance of maintaining trade relations. The Chancellor's visit aimed to negotiate fairer market access for German companies and address concerns about unfair trade practices, which are seen as contributing to the trade imbalance. This is an example of trying to 'derisk' without completely 'decoupling'.

While both the US and EU aim to reduce vulnerabilities, the US approach tends to be more assertive and focused on containing China's rise, often through export controls and investment restrictions. The EU, while sharing concerns about China, emphasizes a more nuanced approach that balances security with maintaining economic ties and promoting multilateralism. The EU often frames derisking as enhancing its 'strategic autonomy'.

'Strategic autonomy' means a country's ability to act independently and pursue its interests without being unduly constrained by external dependencies. In the context of derisking, it means ensuring a country has access to essential goods, technologies, and resources, even in times of crisis or geopolitical tension. This reduces vulnerability to coercion or disruption by other nations.