G7’s De-risking Strategy [UPSC Notes]

The G7 countries aim to de-risk their economic relationship with China by reducing reliance and diversifying supply chains while avoiding decoupling or harm to China’s economic progress.

Dependency of G7 on China

G7 countries have been dependent on China for a range of specific products, such as consumer electronics, including smartphones, laptops, and televisions.

• China has been a major supplier of textiles and apparel, with G7 countries relying on Chinese manufacturing for clothing and fashion items.
• Many G7 countries have imported a significant amount of machinery and equipment from China, including industrial machinery and components.
• China has been a crucial source of rare earth minerals, which are essential for various high-tech industries, including electronics, renewable energy, and defence.
• The G7 countries have also relied on China for pharmaceutical products, including active pharmaceutical ingredients (APIs) used in the production of medicines.
• Chinese exports of steel and aluminium have been important for G7 countries’ construction and manufacturing sectors.
• G7 countries have imported a substantial amount of consumer goods from China, such as household appliances, furniture, and toys.
• China’s agricultural exports, including fruits, vegetables, and seafood, have contributed to the food supply of G7 countries.
• The G7 countries have seen Chinese investment in their energy sectors, including renewable energy projects and acquisitions of oil and gas assets.
• China’s role as a major tourist destination has led to G7 countries depending on Chinese tourists for their tourism industries.

Difference between De-risking and Decoupling

Why Does G7 Prefer De-risking and Not Decoupling? 

• Economic Interdependence: The G7 countries recognize the significant economic interdependence between themselves and China. Decoupling would result in major disruptions to global supply chains and trade, potentially causing economic harm to all parties involved.
• Market Opportunities: China represents a large and growing market for G7 countries’ exports. By pursuing de-risking instead of decoupling, the G7 aims to maintain access to the Chinese market and continue benefiting from trade and investment opportunities.
• Global Economic Stability: Decoupling from China could have adverse effects on global economic stability. The G7 countries understand the importance of maintaining stable and predictable economic relations to promote global growth and prosperity.
• Diplomatic Engagement: The G7 countries believe in engaging with China diplomatically to address concerns and promote mutually beneficial cooperation. De-risking allows for constructive dialogue and negotiation, which can lead to more favourable outcomes for both sides.
• Mitigating Risks: De-risking strategies aim to reduce vulnerabilities and diversify supply chains, mitigating potential risks without severing all economic ties. This approach allows the G7 countries to manage and minimize risks while maintaining a level of economic engagement.
• Global Interest: The G7 emphasizes that a growing and responsible China, playing by international rules, is in the global interest. They recognize that economic resilience requires a balance between managing risks and fostering economic cooperation with China.

Conclusion:

• The G7 countries have adopted a strategy of de-risking rather than decoupling in their economic relationship with China. They aim to reduce dependencies, diversify supply chains, and mitigate potential risks while maintaining economic engagement. The focus is on achieving economic resilience without harming China’s progress. 
• India, in this context, has also emphasized the need for de-risking its economy amidst global volatility and uncertainty, highlighting its own hedging strategy in an era of evolving geopolitical dynamics.

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