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1. How to de-risk: European economic security in a world of interdependence

Author:
Jean Pisani-Ferry, Beatrice Weder di Mauro, and Jeromin Zettelmeyer
Publication Date:
05-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Pandemic-related supply disruptions, the energy crisis provoked by Russia’s invasion of Ukraine and economic coercion by China have put economic security high on the European Union policy agenda. The question is how exactly the EU should ‘de-risk’ its external economic relationships without foregoing the benefits of trade. The standard answer is that it should identify product-level trade dependencies, mainly on the import side, and reduce them, mainly through diversification of suppliers, while otherwise maintaining maximum trade integration. This Policy Brief argues that this answer falls short. First, product-level dependencies cannot be identified reliably even with sophisticated analysis and data. As a result, both ‘missed dependencies’ and ‘false positives’ are inevitable. Second, external shocks and coercion could be propagated through exports, productive assets held abroad and financial channels as much as through imports. The analysis has five main implications Import de-risking should focus on a few product categories for which the costs of supply interruptions would be unquestionably large. This reduces false positives. De-risking and/or buffers to deal with exports and financial coercion require more attention. De-risking must be complemented by raising resilience against all shocks, whatever theirorigin. This requires a deeper and broader European single market. De-risking and resilience must be complemented by deterrence. A sufficiently high probability of chronic trade conflict – or one very large conflict – may justify reducing overall integration with a large trading partner, on both the export andimport sides. EU economic security policies have been right to emphasise the reduction of import dependence on chips and critical raw materials, and the creation of a powerful legal instrument to deter coercion (the Anti-Coercion Instrument). In most other respects, there is room for improvement.
Topic:
European Union, Risk, Trade, Imports, Economic Security, and Interdependence
Political Geography:
China and Europe

2. Updating the EU strategy on China: co-existence while derisking through partnerships

Author:
Alicia Garcia-Herrero and Abigaël Vasselier
Publication Date:
10-2024
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
The European Union-China relationship has deteriorated markedly since the EU introduced a three-part strategy in 2019 based on partnership, competition and systemic rivalry. Th e relationship has been undermined by China’s support for Russia’s aggression in Ukraine and its increasingly anti-Western foreign policy that aims to alter the international rules-based system. Meanwhile, the economic relationship is changing because of China’s structural deceleration and increasing self-reliance, coupled with the EU’s growing critical dependence on China, especially for digitalisation and decarbonisation. Europe must accept that relations with China will not return to their pre-pandemic state. While there is no need to change the overall strategy, the EU should seek co-existence with China while preserving EU values and interests. Cooperation is still needed to address global problems, including climate change, in which China plays an important role in finding solutions, but on which the EU cannot accept Chinese cooperation at any price. In terms of co-existence, the EU must continue to pursue de-risking – or reducing its exposure to China – especially for its energy and digital transitions. De-risking has started but more needs to be done to understand how it can be continued while not creating conflict. The EU should pursue a three-part approach: increase coherence and coordination with all European stakeholders, refi ne the EU economic-security strategy while accepting trade-offs, and seek partnerships as the best offensive tool. The 2024-2029 European Commission should foster discussion of China and coordination of strategic issues within a larger constituency. EU countries, with Commission coordination, need to be more involved in building a comprehensive approach, including by conducting national risk assessments and by shaping and implementing de-risking measures. On economic security, full implementation of current defensive instruments is needed, along with new protections, such as better coordination of export controls and a new outbound-investment screening mechanism. The trade-offs stemming from pursuing more security will need to be made explicit in order to mitigate them. On partnerships, the EU must look beyond the United States, working within the G7 and with other like-minded countries, such as Australia and South Korea, which have valuable experience of de-risking. Mutually beneficial and strategic cooperation agreements need to be brokered with relevant emerging and developing economies.
Topic:
Bilateral Relations, European Union, Partnerships, Economy, Risk, Trade, and Coexistence
Political Geography:
China, Europe, and Asia

3. Cyber Crossover and Its Escalatory Risks for Europe

Author:
Lora Saalman, Fei Su, and Larisa Saveleva Dovgal
Publication Date:
09-2023
Content Type:
Commentary and Analysis
Institution:
Stockholm International Peace Research Institute (SIPRI)
Abstract:
The crossover between cybercrime and cyberwarfare has intensified in recent years, particularly against the backdrop of the ongoing conflict in Ukraine and mounting tensions between China, Russia and the United States. This paper delves into specific cyber incidents that employ cybercrime tactics with cyberwarfare objectives, allegedly involving Chinese, Russian or US actors. It examines responses within and among the private sector, the public sector and international forums. Although not directly involved in all of the cases, the European Union (EU) was impacted in a variety of ways, including as a result of spillover effects and intentional targeting. Drawing on an examination of cyber incidents, this paper highlights how emerging trends in actors, means and responses present escalatory risks for the EU and emphasizes the pressing need to bolster cybersecurity measures.
Topic:
European Union, Cybersecurity, Conflict, Risk, and Russia-Ukraine War
Political Geography:
Russia, China, Europe, Asia, and United States of America

4. De-risking and decarbonising: a green tech partnership to reduce reliance on China

Author:
Alicia Garcia-Herrero, Heather Grabbe, and Axel Källenius
Publication Date:
10-2023
Content Type:
Policy Brief
Institution:
Bruegel
Abstract:
Trade in renewable energy goods is a global public good; all countries gain when others cut emissions, and all suffer from climate change if decarbonisation is delayed. Yet this trade depends on China, which controls most of the world’s production of solar panels and electric vehicle batteries, and some of the global trade in wind turbines. These supply chains are vulnerable to disruption, natural disasters and weaponisation by China, which has already exercised its dominant position in some critical raw materials to put pressure on other countries. Part of the European Union and United States response to reduce reliance on China is reshoring production, but this is economically inefficient given their limited access to critical raw materials and high production costs. Moreover, Chinese firms are far ahead of the rest of the world in green tech manufacturing and innovation, and in extraction and processing. To reduce reliance on China, incentive-aligned governments and businesses should form a green tech partnership. This would produce green tech with the aim of decarbonising faster, while ensuring greater diversification of resources and improving security of supply. Each partnership economy would use its comparative advantage within a new green-tech supply chain. The aim is to supplement, not substitute, the Chinese supply chain, since both will be needed to meet rising global demand for green tech, including in China. Although such international coordination is difficult, the partnership would offers benefits to many different countries. Emerging economies that are rich in critical raw materials and/or have moderate wages would gain economic development opportunities. The US and the EU should share technology and provide financing, as they will gain from reduced dependence on China and from sourcing than is still cheaper than reshoring. China would have more room to use its clean tech to meet its own decarbonisation targets. The partnership could be organised through a combination of trade and investment agreements, together with tech transfer and financial agreements, under some form of inter-governmental oversight. The dependence of all countries on China for green tech is so great that non-market incentives might also be needed, such as subsidies or, preferably, a system of carbon pricing within the partnership.
Topic:
Partnerships, Green Technology, Risk, Renewable Energy, Supply, and Decarbonization
Political Geography:
China, Europe, and Asia

5. Preventing War in the Taiwan Strait

Author:
International Crisis Group
Publication Date:
10-2023
Content Type:
Special Report
Institution:
International Crisis Group
Abstract:
The danger of armed confrontation over Taiwan is growing, raising the spectre of a direct conflict between China and the U.S. that would have severe global repercussions. Managing this risk will require the parties to rebuild trust by shoring up decades-old understandings.
Topic:
Conflict Prevention, Territorial Disputes, Risk, and Coercion
Political Geography:
China, Taiwan, Asia, United States of America, and Taiwan Strait

6. Thin Ice in the Himalayas: Handling the India-China Border Dispute

Author:
International Crisis Group
Publication Date:
11-2023
Content Type:
Special Report
Institution:
International Crisis Group
Abstract:
Frictions along the India-China frontier have heated up following a burst of fighting in 2020, the first in decades. The danger of more will lurk as long as the countries disagree over where the line lies. Both should take steps to manage the mounting risks.
Topic:
Conflict Prevention, Territorial Disputes, Borders, and Risk
Political Geography:
China, South Asia, India, Asia, and Himalayas

7. How Malaysian Politics Shaped Chinese Real Estate Deals and Economic Development

Author:
Guanie Lim
Publication Date:
06-2022
Content Type:
Working Paper
Institution:
Carnegie Endowment for International Peace
Abstract:
Iskandar Malaysia is the oldest and by far the most prominent economic corridor in Malaysia. Located in the southernmost state of Johor, the corridor came to host several real estate developments (such as Princess Cove and Forest City) involving multinational corporations (MNCs) from China almost immediately after the Belt and Road Initiative (BRI) was launched in 2013. On one level, the infrastructure-spending spree associated with the BRI helped boost Malaysia’s economy as Chinese real estate MNCs invested in Iskandar Malaysia to grow their overseas portfolios. However, their involvement in the corridor disrupted the existing dynamics between Malaysia’s central and local governments. Although these Chinese projects offered an opening for Johor’s state government to counter Putrajaya’s dominance in the economic corridor, some swiftly became a magnet for divisive electoral campaigning and voter anger. Combined with several socioeconomic issues, the discontent generated by these Chinese real estate projects contributed to the unexpected defeat of the long-ruling United Malays National Organization (UMNO) in Malaysia’s May 2018 general election. Chinese real estate MNCs have sought to adapt to these shifting dynamics, yet it is uncertain to what degree their adaptive strategies will bear fruit amid a looming real estate crisis back in China and other related issues. Ultimately, Chinese real estate investment has been both a tool and an enabler of efforts undertaken by various Malaysian stakeholders, rather than the all-powerful China-imposed juggernaut that some commentators on Malaysia’s development over the last two decades have tended to see. Despite the allure of lucrative real estate deals, it is equally important to recognize the potential pitfalls when local politics go awry. Events in Iskandar Malaysia demonstrate that it is politically unsustainable to push real estate projects that are too expensive for most local residents to afford.
Topic:
Politics, Entrepreneurship, Risk, Economic Development, and Real Estate
Political Geography:
China, Malaysia, and Asia

8. Investors beware: Europe’s top firms are highly exposed to China

Author:
Ties Dams and Xiaoxue Martin
Publication Date:
04-2022
Content Type:
Special Report
Institution:
Clingendael Netherlands Institute of International Relations
Abstract:
Europe’s top firms are highly exposed to China, and therefore to China-related geopolitical risk. This risk is only set to increase in the coming years, as geopolitical tensions between China, the US and the EU are not expected to decrease. Moreover, case studies of LVMH, HSBC, ASML and BMW show that some of Europe’s biggest listed firms could and should offer investors more transparency on their risk-management strategies. Intelligence on China and geopolitical risk exposure is key for investors, and investors that get ahead of the curve may have the edge in the long term. This report is aimed at investors in Europe’s biggest listed firms. It argues that investors have a growing need for transparency amongst European biggest companies with regard to their strategies in dealing with China-related geopolitical risk. Even investors without direct interests in China are or will be affected by China-related geopolitical risk due to the various forms of exposure of companies in the European home market. This means that investors may be increasingly exposed to the risks linked to great power competition, without having the knowledge necessary to anticipate geopolitical changes. As geopolitical tensions between China, the US and the EU are not expected to decrease, investors would be wise to seek greater transparency about European companies’ exposure to the Chinese market – and indeed get ahead of the curve and gain a competitive advantage by investing in those firms that have forward-looking geopolitical strategies in place. This report aims to put this point on investors’ strategic agenda by making the following three points: Europe’s top firms are highly exposed to China. China-related geopolitical risk is spreading. Case studies suggest that Europe’s top firms may not be sufficiently transparent about geopolitical risk management.
Topic:
Geopolitics, Business, Investment, and Risk
Political Geography:
China and Europe

9. Risky Business: Future Strategy and Force Options for the Defense Department

Author:
Stacie L. Pettyjohn, Becca Wasser, and Jennie Matuschak
Publication Date:
07-2021
Content Type:
Special Report
Institution:
Center for a New American Security (CNAS)
Abstract:
Despite the overarching strategic priorities laid out by the Biden administration and initial indicators provided by the Department of Defense (DoD), it is unclear how the next National Defense Strategy (NDS) will prioritize threats and the primary role of the U.S. military. Will the DoD clearly preference China (and to a lesser extent Russia)? Or will it hedge and try to more equally meet the expanded list of threats detailed in the Interim National Security Strategic Guidance? Is the Pentagon’s priority to compete below the threshold of armed conflict, or is it to prepare to defeat a great-power adversary in a large-scale war to strengthen deterrence? Answering these questions is critical to developing a clear strategy that emphasizes the right priorities, activities, and resources. To consider the next defense strategy and the tradeoffs associated with different options, we developed three possible strategies—high-end deterrence, day-to-day competition, and full-spectrum competition—that alter the factors highlighted above and reflect the Biden administration’s stated priorities. Our analysis of the Fiscal Year (FY) 2022 budget indicates that the DoD is trying to do more than constrained budgets can support over the next few years and is moving toward what we term as a strategy of “full-spectrum competition.” It appears as if the Biden administration is pursuing a strategy that seeks to strike a balance between competing in the near term while still enhancing preparedness for great-power conflict, as well as hedging against a range of threats and mitigating risk over time. The forces and posture that are necessary for this competition are quite different from those that are needed to defend against a conventional fait accompli attack by China on Taiwan or Russia on the Baltics. It is unlikely that the United States can build a force that can achieve both of these objectives with the current topline. Our testing of the budget-constrained force associated with the full-spectrum competition strategy finds that it could not successfully fulfill its two primary aims: defeating sub-conventional aggression and Russian and Chinese gray zone tactics, and building a force capable of defeating a great-power adversary attack on its neighbor. Moreover, this strategy risks significant overstretch, the potential for long-term technological overmatch, and inadvertent escalation. The other two strategies focus on China, but day-to-day competition emphasizes the daily military contest with Beijing and the threat of sub-conventional conflict, while high-end deterrence focuses on defeating conventional aggression and achieving a long-term military technological advantage. The day-to-day competition strategy would lose a high-end conflict in East Asia and Europe; it also would fail to halt or overturn sub-conventional land grabs. The competition strategy bets that a large and visible force that actively contests daily military provocations will deter both sub-conventional and conventional aggression, even if the force is not capable of stopping either type of attack. The risk that this assumption fails grows over time because this strategy forgoes investments in advanced technologies, while China and Russia are rapidly seeking to wrest the military technological advantage from the United States. There are also significant escalatory risks associated with an approach that regularly and assertively contests Chinese and Russian forces. We conclude that it is unlikely that competition can be won by the military, even one optimized to face this challenge. More optimistically, our analysis suggests that it is possible to build a force capable of winning one big conflict and overturning sub-conventional aggression with this topline—but only if the department is willing to accept some near-term risk in competition, against other threats, and in other regions. The high-end deterrence strategy mitigates the temporal risk by making near-term improvements in combat capabilities, including expanding stockpiles of preferred long-range munitions, investments to improve the resiliency of U.S. posture in the Indo-Pacific and Europe, and additional investments in cyber and electronic warfare capabilities. It also relies on frontline allies and partners to be responsible for the daily competition. We assert that the high-end deterrence strategy is the best path forward, but it requires a better delineation and ranking of threats and responsibilities for the joint force and strategic discipline over the long run. Congress must also support this strategy and allow the Defense Department to make the hard choices, such as cutting capacity and retiring weapons systems, that are required to rebalance the force for this mission and to sustain its military technological advantage over the long run. Senior Pentagon leaders will need to partner with Congress to help them understand how specific changes are connected to higher order objectives. It is important to note that the FY22 budget is largely an inherited one and the Biden administration is making some significant investments that align with a high-end deterrence strategy. Nevertheless, the 2022 NDS and the FY23 budget will need to accept more risk and further prioritize to prepare the force for the most challenging and consequential threats. If the Biden administration does not make these hard choices or Congress refuses to support this strategy, the chasm between U.S. strategic and military objectives and the costs of achieving them will only grow significantly. Trying to do too much is a risky business that could result in the United States losing its military technological edge and, ultimately, a war against a great power.
Topic:
Defense Policy, Military Affairs, Risk, and Deterrence
Political Geography:
China, North America, and United States of America

10. Mitigating the Risk of a China–India Conflict

Author:
Arzan Tarapore
Publication Date:
06-2021
Content Type:
Policy Brief
Institution:
Walter H. Shorenstein Asia-Pacific Research Center
Abstract:
The Ladakh crisis between China and India seems to have settled into a stalemate, marked by somewhat reduced tactical tensions and continuing fruitless talks on disengagement—but its trajectory could again turn suddenly, even flaring into a limited conventional war. Despite a limited disengagement, both sides continue to make military preparations near the Line of Actual Control (LAC) to increase their readiness for potential conflict. While China proved its revisionist intent with its 2020 incursions, its specific goals and plans remain opaque. The broader political context is marked by distrust and hostility, and bilateral relations are at their lowest ebb in decades. War remains unlikely—both sides can ill-afford the distraction from higher national priorities and have demonstrated a recent keenness to step back from the brink. But, with growing capabilities and unclear intent, and with military operations no longer impaired by winter, the Ladakh crisis may still escalate to conflict. The crisis has been full of surprises. Despite observing major military maneuvers in China, India didn’t anticipate the multiple incursions across the LAC in May 2020. For weeks thereafter, the Indian Army leadership insisted the incursions were nothing out of the ordinary. After both sides agreed to an early disengagement plan, the crisis took a shocking turn with a deadly skirmish in June — the first loss of life on the LAC in 45 years. India also mustered its own surprises, deploying troops to occupy tactically valuable heights in late August, to gain some bargaining leverage. And the crisis also abated with a surprise, with the sudden announcement of disengagement from heavily militarised stand-off sites around Pangong Tso Lake in February 2021. Future surprises may yet occur. This paper argues that the risk of China–India conflict is significant because, even if its likelihood is low, its consequences may be considerable. A limited conventional war would be likely to impose significant costs on India, but, depending on the reactions of its partners, it may also reinforce latent Indian suspicions over the utility and reliability of its strategic partnerships. In that way, even a localized limited war on the LAC may have far-reaching implications, if it incidentally drives a wedge between India and its partners in the Quad. Mitigating that risk will require sound policy settings and astute diplomatic and public messaging from Canberra, Washington, Tokyo, and other like-minded capitals. The remainder of this paper is in three parts: first, why a border war is plausible; second, what costs it would impose on India and how it might stir distrust of India’s Quad partners; and, finally, a framework to mitigate those risks.
Topic:
Defense Policy, Military Strategy, Conflict, Risk, and Strategic Interests
Political Geography:
China, India, and Asia