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Home»Finance»‘De-risking’ vs. ‘Strategic Decoupling’: Understanding Harris’ and Trump’s Approaches to Economic Security
Finance

‘De-risking’ vs. ‘Strategic Decoupling’: Understanding Harris’ and Trump’s Approaches to Economic Security

October 22, 2024No Comments10 Mins Read
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‘De-risking’ vs. ‘Strategic Decoupling’: Understanding Harris’ and Trump’s Approaches to Economic Security
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The comparison between “strategic decoupling” and “de-risking” provides a framework for analyzing how each candidate of the upcoming U.S. presidential election approaches economic security policies. De-risking, a key concept used by U.S. officials since 2023, characterizes the Biden-Harris administration’s approach to economic security. On the contrary, strategic decoupling is a term favored by Republican policymakers and those close to former President Donald Trump. 

In short, these two terms represent the conceptual foundations of each candidate’s economic security policies. But what do they actually mean?

Distinctive Difference in Approaching Tariffs

The difference between de-risking and strategic decoupling manifests itself most notably in the field of tariffs. While both concepts recognize the necessity of tariffs, the rationale behind policies differ.

The Biden-Harris administration’s de-risking approach has resorted to tariffs, as the administration has upheld most of the tariffs imposed on China during the Trump administration, and they implemented new tariffs “to counter China’s unfair trade practices” in May 2024. It should be noted that de-risking selectively resorts to tariffs only in “carefully targeted strategic sectors.” The primary purpose of these tariffs is to mitigate reliance on China’s “excessive concentration in the market” with a focus on strategically significant sectors. In other words, de-risking-based policies are driven by the recognition of the threat posed by China, and they aim to prepare the United States for China’s potential weaponization of economic dependence.

Tariffs based on strategic decoupling have a completely different focal point. The fundamentals of strategic decoupling are outlined in the publications of Robert Lighthizer, who served as the U.S. Trade Representative under Trump from 2017 to 2021 and is a candidate for senior roles in a potential second Trump administration. Based on his idea that trade policy must prioritize the “common good” for labor over economic efficiency, he seeks to implement strategic decoupling to “achieve balance and fairness” and to “eliminate important dependencies.” Specifically regarding trade policy, he emphasizes the importance of balanced trade with minimized trade deficits. 

Notably, Lighthizer views the trade balance as essential not only for the well-being of U.S. citizens but also for national security. Under the framework of strategic decoupling, if the United States mitigates economic dependencies on China in specific sectors but continues to suffer from a trade deficit, the problem persists. For example, Lighthizer regards as a problem the unbalanced transfer of wealth from the U.S. to adversarial states like China. A fundamental solution, he argues, can only be reached when the U.S. trade balance is free from deficits.

As such, de-risking and strategic decoupling differ in their identification of the problem. The former takes strategic dependencies on China’s excess production capabilities as the issue and seeks to remedy this problem through tariffs. On the other hand, strategic decoupling focuses on addressing the trade deficit itself, particularly with China, which necessitates a more comprehensive approach. While both approaches utilize tariffs, they differ in their objectives.

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Subtle But Significant Differences in Other Policy Tools

The distinction between these concepts becomes less clear when it comes to other economic security policies, such as export controls and inbound/outbound investment restrictions.  

The concept of de-risking shapes policies based on national security concerns, selectively targeting specific sectors. For instance, the Biden-Harris administration’s export controls on advanced semiconductors toward China provides a good case study to understand this point. 

The Biden-Harris administration’s export controls on semiconductors has been based on the principle of a “small yard, high fence.” Specifically, its goal is to restrict the “PRC’s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors” in order to protect U.S. national security. 

As further restrictions were announced in October 2023 and September 2024, there have been criticisms that the “yard” is expanding. However, these restrictions do not go so far as to block all flows of electronic devices. Rather, the Biden-Harris administration acknowledges the importance of the Chinese market for U.S. integrated circuit producers, saying that exports to China support U.S. jobs in this sector. Overall, de-risking-based export control strategically selects targets without aiming to terminate economic ties with China altogether.

Understanding how non-tariff economic security policies are influenced by the idea of strategic decoupling is more complex. There are two issues to consider. First, strategic decoupling is less radical than the general understanding of what decoupling implies. According to Lighthizer, strategic decoupling seeks to “continue our economic relationship to the extent that it is beneficial to America and its workers … and stop it to the extent that it is harmful.” This suggests that the objective of strategic decoupling is more nuanced than commonly understood, as it does not aim to end economic relations outright.

The second issue in understanding how strategic decoupling shapes economic security policy is the similarity between it and de-risking-based policies. The key point is that specific policy recommendations based on strategic decoupling share many commonalities with the Biden-Harris administration’s de-risking policies. Regarding the need to reduce dependencies on China, Lighthizer advocates for policies to strengthen domestic productions of “critical medicines, protective equipment, essential technology” and “materials needed for production.” These sectors have been already addressed by the Biden-Harris administration. In the case of critical medicines and protective equipment, the Biden-Harris administration announced plans to expand the Department of Health and Human Services’ authority, allowing the department to invest in efforts to strengthen domestic production of these medical products. As is commonly known, the onshoring of important products like semiconductors and critical minerals is being carried out through the CHIPS and Science Act and the Inflation Reduction Act.

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Strategic decoupling also calls for restricting investment toward and from China, and strengthening export controls. However, how the strategic decoupling approach to those policies differs from the Biden-Harris administration’s de-risking policies remains poorly elaborated. 

There are some hints as to how a hypothetical Trump administration might approach non-tariff economic security policies based on the concept of strategic decoupling. Platforms close to Trump provide more detailed ideas about strategic decoupling. For instance, the America First Policy Institute (AFPI) is closely involved in shaping policy agendas for a potential Trump administration. The activities of the House Select Committee on Strategic Competition between the United States and the Chinese Communist Party, which receives positive evaluations from AFPI, offer insights into the concept of strategic decoupling. Analysis of these platforms reveals two key features of economic security policies based on strategic decoupling.

First, strategic decoupling-based policies are preventive rather than preemptive. The fundamental idea behind the de-risking-based policies, like Biden’s semiconductor export controls, is to preempt Chinese technological development in the most advanced areas, allowing the United States to maintain superiority in critical technologies. In contrast, the strategic decoupling-based approach seeks to undermine Chinese competitiveness more fundamentally. 

This approach is evident in the legislative activities of the House Select Committee on the CCP (e.g., the BIOSECURE ACT and Decoupling from Foreign Adversarial Battery Dependence Act), which frequently emphasize the need to prevent “American tax dollars” and money from supporting China’s efforts for technological dominance. The Committee’s opposition to the U.S.-China Science and Technology Agreement is also significant. In opposing the agreement, the Committee expressed concern over the potential leakage of general technologies, not just advanced ones. These examples show that the strategic decoupling-based approach aims to erode China’s capacity for general technological development with military applications, rather than merely preempting China from surpassing the U.S. in advanced technologies. 

Second, economic security policies based on strategic decoupling place more emphasis on the cost of inaction compared to de-risking-based policies, which seek to balance the costs of actions and inaction. In this context, taking action means implementing restrictive economic security policies, while inaction refers to the absence of such measures. In the case of export control, for example, the cost of inaction is that China could exploit U.S. technology for its military modernization. Conversely, overly restrictive policies also come with costs. The most notable of these is depriving domestic companies of important overseas markets. These potential costs of economic security policies are the costs of action.

De-risking policies under the Biden-Harris administration attempt to balance these costs, whereas strategic decoupling policies focus more on mitigating the cost of inaction.

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This difference is evident in Republican criticism of the Biden-Harris administration’s implementation of the Inflation Reduction Act. When the administration announced rules to exclude items sourced from “foreign entities of concern (FEOC),” the House Select Committee on the CCP criticized the decision as “naive.” This negative evaluation likely stemmed from the rule’s exceptional transition period, allowing certain FEOC-sourced battery materials to be used until December 31, 2026. 

From the Biden-Harris administration’s perspective, this adjustment was necessary to help producers manage the cost of adjusting supply chains. In fact, the Alliance for Automotive Innovation, representing producers, appreciated the rule as an “effort to make the rules workable.” Thus, the Biden-Harris administration’s de-risking approach considers both the cost of inaction (reliance on foreign entities of concern) and the cost of action (the burden placed on producers). 

Critics argued that the transition period allows Chinese entities’ involvement to persist. As such, proponents of strategic decoupling tend to focus more on mitigating the cost of inaction.

Different Approaches Create Different Reactions and Impacts

“De-risking” and “strategic decoupling” are based on different conceptual foundations, leading to different policies. The de-risking strategy emphasizes selective actions targeting critical sectors. It focuses on reducing dependencies on China while balancing the costs of action versus inaction. In contrast, the strategic decoupling approach focuses on preventive measures and the costs of inaction, calling for more comprehensive and decisive actions in economic security policies.

Due to these differences, policies driven by each concept will likely face distinct challenges. For strategic decoupling, a major challenge is potential pushback from multiple actors. Trump’s proposal of a comprehensive 20 percent tariff aligns with strategic decoupling principles. However, such a policy can fuel strong opposition from the majority of trading partners, including allies like Japan and the European Union. 

Moreover, if strategic decoupling policies take overly preventive approaches, focusing too much on the risk of inaction, private companies and partner countries – who try to balance the risks of action and inaction – might be reluctant to collaborate with the United States on economic security policies. Poorly coordinated implementation of such policies is prone to failure.

On the other hand, a de-risking approach would also face criticism. Its tendency to balance the costs of action and inaction may attract criticism from those who focus intensely on the former. In the divided U.S. Congress, a de-risking-based approach can become an easy target for Republican lawmakers. While there is currently general bipartisan cooperation on China-related policies, de-risking could potentially create divisions in legislative activity regarding economic security.

The United States may face significant economic security challenges over the next four years, but there will also be domestic challenges of divided opinions, regardless of the outcome of the presidential election.

Approaches Decoupling derisking Economic Harris security Strategic Trumps Understanding
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