Managing the China Risk

CommentaryPolicymakers and analysts worldwide are grappling with how to address the China challenge. Even many people who acknowledge the broad threat posed by the Chinese regime across a variety of domains struggle to formulate clear plans to address these threats. So how should the world respond to the threats posed by the regime?When discussing the China risk, we need to define what we mean by the term specifically. For our purposes, we will focus on the risk to foreign countries and companies of trade and financial links with China and Chinese firms, whether those firms are physically located in China or third countries.However, we need to consider additional layers of risk. For most of our use, we will rely on two specific ideas of risk.First, is there a national security risk? Unfortunately, national security in the digital age comprises a much larger swath of sectors and products than most admit, but we must consider these risks.Second, if there is no national security risk, what is the risk of excessive dependence on China for that product? Can that product easily and rapidly be purchased elsewhere at necessary volumes should China exercise its market power, which it has done regularly?Related StoriesChina has established a dominant position in a few sectors that pose very real risks—for instance, basic electronic manufacturing such as televisions, mobile devices, telecommunications networking gear, and durable goods, as well as moving upmarket into automobiles, both foreign and domestic branded for export. The problem with these goods is they present clear and documented risks to unauthorized data collection and surveillance.The initial approach to national security risks from surveillance and data collection has been piecemeal, blocking specific firms. However, for every individual firm blocked, other Chinese state-supported firms spring up, or the worrisome components are exported for assembly into a final product in another country. A more comprehensive approach is needed to tackle the surveillance and national security threat from embedded Chinese electronics across products.The fundamental problem is that China has poured enormous resources into dominating key sectors, specifically manufacturing and primary inputs. For instance, there are many industries where they control 90 percent of global capacity. This is most notable in key input areas such as rare earth metals used in most electronic components but extends even into manufacturing sectors. No strategy to address the China threat can even be considered credible unless it addresses Beijing’s complete control of many sectors and how to diversify supply.There are a few ways to address the underlying problems. First, the United States needs to craft clean technology regulations with audits for global supply chains of electronic firms to meet. Currently, there are minimal regulations on the digital protection of goods. Given the concerns about Chinese firms like Huawei and TikTok, the threats they pose apply equally to many other Chinese and other firms. Rather than trying to tackle the problem firm by firm, it would be better to apply data protection and data privacy standards to all products.Second, the United States needs to “friendshore” a lot of manufacturing to break China’s dominant hold on many industries and help shift not just final assembly but basic manufacturing. In reality, a lot of manufacturing will not return from China to the United States. Still, the United States can be more comfortable with Mexican, Japanese, Ghanaian, or British manufacturing than Chinese. Accomplishing this will require incentivizing firms in different ways and signing long-term trade agreements with partner countries to demonstrate American commitment. Neither firms nor other countries will risk communist China’s wrath unless the United States has a clear long-term commitment to change how trade flows and allocate resources to change global trade patterns.Whether called decoupling or derisking, countries are actively seeking ways to lessen their dependence on China. To date, the approaches taken by U.S. administrations and other countries, even those that recognize the problems, have been haphazard and piecemeal.If the world wants to address the China risk, it needs to address the entire threat, not company by company.Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.

Managing the China Risk

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Commentary

Policymakers and analysts worldwide are grappling with how to address the China challenge. Even many people who acknowledge the broad threat posed by the Chinese regime across a variety of domains struggle to formulate clear plans to address these threats. So how should the world respond to the threats posed by the regime?

When discussing the China risk, we need to define what we mean by the term specifically. For our purposes, we will focus on the risk to foreign countries and companies of trade and financial links with China and Chinese firms, whether those firms are physically located in China or third countries.

However, we need to consider additional layers of risk. For most of our use, we will rely on two specific ideas of risk.

First, is there a national security risk? Unfortunately, national security in the digital age comprises a much larger swath of sectors and products than most admit, but we must consider these risks.

Second, if there is no national security risk, what is the risk of excessive dependence on China for that product? Can that product easily and rapidly be purchased elsewhere at necessary volumes should China exercise its market power, which it has done regularly?

China has established a dominant position in a few sectors that pose very real risks—for instance, basic electronic manufacturing such as televisions, mobile devices, telecommunications networking gear, and durable goods, as well as moving upmarket into automobiles, both foreign and domestic branded for export. The problem with these goods is they present clear and documented risks to unauthorized data collection and surveillance.

The initial approach to national security risks from surveillance and data collection has been piecemeal, blocking specific firms. However, for every individual firm blocked, other Chinese state-supported firms spring up, or the worrisome components are exported for assembly into a final product in another country. A more comprehensive approach is needed to tackle the surveillance and national security threat from embedded Chinese electronics across products.

The fundamental problem is that China has poured enormous resources into dominating key sectors, specifically manufacturing and primary inputs. For instance, there are many industries where they control 90 percent of global capacity. This is most notable in key input areas such as rare earth metals used in most electronic components but extends even into manufacturing sectors. No strategy to address the China threat can even be considered credible unless it addresses Beijing’s complete control of many sectors and how to diversify supply.

There are a few ways to address the underlying problems. First, the United States needs to craft clean technology regulations with audits for global supply chains of electronic firms to meet. Currently, there are minimal regulations on the digital protection of goods. Given the concerns about Chinese firms like Huawei and TikTok, the threats they pose apply equally to many other Chinese and other firms. Rather than trying to tackle the problem firm by firm, it would be better to apply data protection and data privacy standards to all products.

Second, the United States needs to “friendshore” a lot of manufacturing to break China’s dominant hold on many industries and help shift not just final assembly but basic manufacturing. In reality, a lot of manufacturing will not return from China to the United States. Still, the United States can be more comfortable with Mexican, Japanese, Ghanaian, or British manufacturing than Chinese. Accomplishing this will require incentivizing firms in different ways and signing long-term trade agreements with partner countries to demonstrate American commitment. Neither firms nor other countries will risk communist China’s wrath unless the United States has a clear long-term commitment to change how trade flows and allocate resources to change global trade patterns.

Whether called decoupling or derisking, countries are actively seeking ways to lessen their dependence on China. To date, the approaches taken by U.S. administrations and other countries, even those that recognize the problems, have been haphazard and piecemeal.

If the world wants to address the China risk, it needs to address the entire threat, not company by company.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.

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