What ‘De-Risking’ Means for the Global South

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The term “de-risking” has lately surged in popularity, catalyzed by a recent statement from G7 countries. On May 20, during the leaders’ summit in Hiroshima, the G7 committed to a strategy of de-risking, diversifying, and deepening partnerships to bolster their economic resilience, explicitly ruling out decoupling. This buzzword was underscored when referring to the G7’s economic posture towards China.

According to the U.S. State Department, de-risking is “the phenomenon of financial institutions terminating or restricting business relationships with clients or categories of clients to avoid, rather than manage, risk.” In the context of China, de-risking could denote a drive to decrease economic reliance on China, thus mitigating potential trade risks and disruptions to supply chains.

China emerged as a central talking point as G7 leaders vowed to jointly counter Chinese “economic coercion,” reducing reliance on everything from silicon chips to minerals. The group announced the “Coordination Platform on Economic Coercion,” aimed at challenging non-market punitive trade practices, thought to target China without explicitly mentioning the country.

While the G7 adopted a diplomatic tone, asserting that they don’t intend to hinder China’s economic progress, many critics equate de-risking with decoupling. This latter term gained traction amid the U.S.-China trade war, when former President Donald Trump threatened to “cut off the whole relationship.” Today, de-risking seems a more nuanced approach, enabling the addressing of the perceived China threat without jeopardizing too much.

Chinese media have branded the G7 summit an ‘anti-China workshop,’ and China’s Ministry of Foreign Affairs accuses the G7 of undermining global peace and regional stability.

However, the overlooked casualty of this economic power play is the Global South. Amidst the struggle for global dominance, it’s the developing nations that bear the brunt.

The Global South, encompassing approximately 100 mostly developing nations, aims to foster strong ties with both Beijing and Washington, prioritizing economic development over political conflict. The recent economic posturing by the G7 towards China threatens significant repercussions for these nations.

The trend toward “de-globalization” is increasingly evident, with geopolitical alliances influencing foreign direct investment flow. This shift could engender a fragmented global economy, with competitive regional blocs, reduced trade and investments, and limited diffusion of ideas, hampering the Global South’s economic progress.

In recent years, trade between China and the Global South has escalated, with China becoming the top trading partner for over 120 developing nations. De-risking China could severely damage these trade relationships, given the Global South’s reliance on China for essential commodities like raw materials, machinery, and advanced technology.

Alarmingly, China has been gradually redirecting its trade and investment from the West to the Global South. Thus, adopting the G7’s de-risking policy could have catastrophic consequences for these countries.

For countries in the Global South, it will be suicidal for them if they decide to go with the de-risking policy of the G7. Notably, Kishore Mahbubani, a prominent former Singaporean diplomat, highlights the dire consequences of such a policy, particularly within the ASEAN region. This region has witnessed substantial growth in trade with China, with figures rising from under $40 billion in 2000 to a remarkable $975 billion in 2022. Therefore, any attempts to decouple from China would be akin to committing economic suicide.

However, it’s unclear how long the Global South can resist pressure from the economically powerful G7 to reduce trade engagements with China. The G7 accounts for approximately 45% of global GDP and 60% of net global wealth, giving them substantial leverage. In addition, G7 countries owe Global South nations a staggering $13.3 trillion, demanding daily debt repayments of $232 million through 2028.

This situation might lead to a diplomatic fallout between the West and the Global South. Further, protectionism in strategically important sectors could hinder the technological advancement of developing nations, exacerbating the technology and knowledge gap between the Global North and Global South.

While the recent G7 summit signaled a shift from decoupling to de-risking, it may reflect China’s influence on G7 markets. Interestingly, the G7’s move to counter Chinese ‘economic coercion’ seems an effort to reassert its diminishing position in the global economy.

The recent policy of de-risking might also alienate India, one of the world’s largest economies, and a significant trading partner with China. However, the most substantial impact will likely be felt by the developing countries of the Global South. As Singapore’s Deputy Prime Minister Lawrence Wong cautioned, overemphasis on de-risking could lead to a fragmented and decoupled world economy.

– Muhammad Estiak Hussain is a Research Assistant at the KRF Center for Bangladesh and Global Affairs (CBGA).

Published in International Policy Digest [Link]