De-risking makes economies more fragile

The global economy is entering a new phase. For 40 years the dominant objective was efficiency. Capital, production, labor, logistics and technology were organized across borders to reduce costs and maximize output.

Today that model is being challenged by a new objective: resilience. The language used is "de-risking". The assumption is straightforward. Dependence creates vulnerability. Therefore reducing dependence should increase security.

The problem is that the global economy is not simply a collection of isolated national economies. It is an interconnected system. Actions that appear rational at the national level often create systemic risks at the international level. The question is not whether risks exist in globalization. They always have. The question is whether de-risking reduces the risks or simply creates new ones.

Global trade now exceeds $35 trillion annually, equivalent to nearly 30 percent of global GDP. The system is anchored by a handful of major economic centers. The Asia-Pacific accounts for close to 40 percent of global exports and imports, the European Union generates around $10 trillion in combined internal and external trade, and North America contributes about $3 trillion in goods exports. China, the United States and major economies in Europe and Asia continue to anchor global trade within an interconnected system of goods, services and capital flows.

But trade comprises more than the selling of goods. It is a dense network of shipping routes, logistics hubs, supply chains, energy corridors, financial systems and digital infrastructure. Over 80 percent of global trade by volume still moves by sea. Modern products often cross multiple borders before reaching consumers. A smartphone, automobile or pharmaceutical product may contain components from dozens of countries.

This system did not emerge by accident. It was built through decades of optimization. Corporations searched the world for lower costs, larger markets and higher returns. Production moved to locations offering cheaper labor, lower compliance costs, favorable regulation and necessary infrastructure. The developed world gained lower prices, higher margins and greater consumption. The developing world gained factories, investment, jobs, infrastructure and industrial capacity.

The arrangement was imperfect. Manufacturing towns across the US, Europe and Japan were hollowed out as production migrated elsewhere. Shareholders benefited while many communities struggled to adapt.

Yet the system produced enormous global growth. Hundreds of millions entered the global middle class. Developing economies industrialized. Consumer prices fell. Global output expanded.

But what was once viewed as efficiency is now viewed by developed nations as vulnerability. That shift has primarily been driven by the strategic competition between the US and China. Yet despite tariffs, sanctions, export controls and technology restrictions, annual trade between the two countries still exceeds half a trillion dollars. And even though politically the relationship often fluctuates, economic interdependence remains one of the few remaining stabilizing mechanisms between the world's two largest economies.

This is where de-risking enters the picture. Supply chains are being diversified. Manufacturing is being relocated. Critical minerals are being sourced from alternative suppliers. Semiconductor production is being duplicated. Each decision appears rational in isolation. Collectively they represent a fundamental shift away from efficiency toward redundancy.

The assumption behind de-risking is that resilience can be built through duplication. The problem is that duplication is expensive. Factories must be built. Infrastructure must be upgraded. Inventories must be increased. Supply chains must be maintained in parallel. Costs rise throughout the system. These are not temporary adjustments. They are structural costs that will continue creating an economic gap between the efficient and inefficient.

The deeper problem is that de-risking assumes static behavior. In reality, states adapt. Companies adapt. Markets adapt. When one country reduces dependence on a supplier, that supplier finds new customers. When one bloc reorganizes supply chains, others do the same. When multiple countries pursue reshoring simultaneously, investment becomes duplicated rather than shared. The result is a global system that is less efficient.

This creates a form of contagion. Once one major economy defines interdependence as a strategic risk, others are compelled to do the same. No country wants to remain exposed while competitors hedge. The logic spreads. The result is not selective adjustment but competitive insulation.

History offers a warning. The interwar period saw the rise of tariffs, economic blocs, capital controls and protectionism. The objective was security. The result was contraction. Global trade collapsed. Economic shocks intensified. The Great Depression deepened. The modern world is not repeating the 1930s exactly, but the underlying logic is similar.

Fragmentation reduces the ability of the system to absorb shocks. Integrated systems distribute disruption, while fragmented systems concentrate it, as supply chains become more expensive, capital becomes less efficient, and innovation slows as markets become smaller and more isolated.

The evidence already points in this direction. Companies relocating production face higher costs. Governments are spending hundreds of billions of dollars on industrial subsidies. Inventory levels are increasing. Supply chain redundancy is replacing supply chain efficiency. All of this raises costs across the economy.

Supporters of de-risking argue that these costs are justified, as the pandemic exposed vulnerabilities, geopolitical tensions have exposed strategic dependencies, and national security concerns cannot be ignored. Although this argument has some validity, the real issue is not whether resilience matters (it does), but whether policymakers are correctly pricing its costs and pursuing it in the right way.

Globalization delivered lower prices, greater choice, higher productivity and rising living standards. Reducing those benefits imposes costs and those costs are not distributed evenly. The burden falls most heavily on those with the least ability to absorb it. Large companies can absorb relocation expenses. Smaller enterprises cannot. Higher prices are ultimately borne by consumers.

This is the central contradiction of de-risking. It promises security. Yet much of its cost is paid through slower growth, higher prices and reduced efficiency. Risk is not eliminated, it is redistributed to those who can bear it least.

Much of the developing world continues to operate according to a different logic. The objective remains connectivity. Infrastructure development, industrial investment, logistics networks and trade corridors continue to expand across large parts of Asia, Africa, the Middle East and Latin America. The principle is simple: Connectivity creates scale, and scale creates growth.

The digital economy reinforces this reality. Data flows benefit from interoperability. Digital platforms benefit from scale. Technology ecosystems benefit from common standards. Fragmentation reduces many of these advantages just as surely as it does in physical supply chains.

The future is unlikely to be a complete decoupling or return to pure globalization. Instead, the world is entering a hybrid phase: partially integrated, partially regionalized and partially duplicated. Such systems are often more expensive and less predictable than either full integration or full separation.

The challenge for policymakers is to manage risk without destroying efficiency. So far, no major economy has developed a framework that fully accounts for the long-term costs of fragmentation. The danger is that resilience becomes confused with redundancy. A system can appear safer while becoming more fragile.

At the national level, de-risking may reduce exposure to specific vulnerabilities. At the global level, it weakens the mechanisms that have historically absorbed shocks and supported growth. The lesson of the last century remains relevant. Economic insulation does not create economic security.

Interdependence creates vulnerabilities. But it also creates stability, scale, efficiency and shared prosperity. The question facing the global economy is not whether risk can be eliminated. It cannot. The question is whether the pursuit of security will ultimately create a world that is more resilient, or simply one that is more fragmented, more expensive and more fragile.

The author is a senior fellow at the Centre for International Governance Innovation.

The views do not necessarily reflect those of China Daily.