Over the last thirty years, the global economy has become more intertwined than ever before. Today’s economic great powers – the United States, China and the European Union (EU) – are bound by a web of international value chains. They are dependent on each other for key technologies and critical preliminary inputs such as semiconductors, fossil fuels, critical raw materials and food. As a result, they rely on each other’s good will for the production of end-products in medical, ICT, defence and energy sectors.[1] In fact, all across value chains one finds critical inputs. In the digital realm, they can be end-products or applications (e.g., cloud environments), components (e.g., semiconductors) and materials (e.g., rare earths).
Our vital sectors depend on these inputs. Critical raw materials should be regarded as the skeleton of the modern, digital economy. Semiconductors can be best described as its central nervous systems. Without critical raw materials (CRM) such as silicon, gallium and rare earths, no semiconductors can be produced. Without either CRM or semiconductors, communication networks, datacentres and sotware cannot be created. The German government in September 2023 pinpointed the role that its 5G network plays in similar terms, namely as “the ‘central nervous system’ of Germany as a business location.”[2] The implications of the loss of access to something as frivolous as a nail in the poem For want of a Nail comes to mind. “For want of a nail the shoe was lost; for want of a shoe the horse was lost; for want of a horse the battle was lost. For the failure of the battle the kingdom was lost.”[3] Not having access to a nail (or in today’s world China-supplied materials like gallium and germanium) may have far-reaching effects.
China on one side and the United States and the European Union on the other view each other as rivals again. As a result, the economic great powers have come to heavily rely on parties they distrust for the functioning of their vital sectors and general prosperity. In 2023, these states increasingly leverage chokepoints in the international economy against one another.[4] The Netherlands, Japan and the US reached an agreement to no longer allow lithography equipment manufacturers (i.e. ASML) to sell the second-to-last semiconductor manufacturing systems to Chinese semiconductor manufacturers. In response, China introduced export restrictions for the key materials, gallium, germanium, graphite and rare earths. We learned in 2022 that once tensions reach breaking point, rival-supplied critical economic may become weapons that inflict massive costs. Russia’s 2022 de facto gas export boycott against the EU has long-lasting effects on our business climate.
Fear of overdependence and of losing “technological-edge” led rival great powers –first China, then the US and now the EU– to vastly expand their industrial policies. Their plans to make their economies more geopolitically robust, oftentimes do not sit easily with WTO-rules and international norms.[5] The pursuit of these strategies has contributed to a process of great economic power decoupling and to some extent also bloc formation in specific strategic sectors. EU leaders have argued that decoupling is “neither viable – nor in Europe’s interest”. They call for “de-risking” relations with China instead.[6] Scholars, however, express great scepticism. The self-accelerating dynamic of tit-for-tat economic security policies cannot be guided to a desirable end-point, they argue.[7]
In fact, the separation unleashed by competing industrial policies may not remain gradual or predictable at all. Decoupling in strategic sectors may be followed by a more extreme geoeconomic split. A military crisis in East Asia between the US and its allies on the one hand and China on the other will likely lead trade relations between them to reach breaking point. In 2024, with consequential elections in both Taiwan and the US coming up, HCSS will closely track military competition in the Taiwan Strait and the East and South China Sea for flashing red lights. Similarly, it will keep close tabs on the development of new and more radical innovation and industrial policies by the economic great powers.
Joris Teer, Strategic foresight and China analyst
[1] The Federal Government of Germany, ‘Strategy on China’ (Federal Foreign Office, 2023): 12, https://www.auswaertiges-amt.de/blob/2608580/49d50fecc479304c3da2e2079c55e106/china-strategie-en-data.pdf.
[2] Mathieu Pollet et al., ‘Nordstream Trauma Leads Berlin to Draw up Fresh Huawei Bans’, POLITICO, 19 September 2023, https://www.politico.eu/article/germany-draws-up-partial-ban-on-huawei/.
[3] Variations of this rhyme, attributed to a variety of people, have appeared over the last 1000 years.
[4] States that have “political authority” over chokepoints, or “central nodes in the international networked structures through which money, goods, and information travel,” can use these nodes to coerce adversaries, by either threatening to cut-off or actually cutting off “adversaries from [these] network flows.” Henry Farrell and Abraham L. Newman, ‘Weaponized Interdependence: How Global Economic Networks Shape State Coercion’, International Security 44, no. 1 (1 July 2019): 45, 46, https://doi.org/10.1162/isec_a_00351.
[5] Joris Teer, Mattia Bertolini, and Benedetta Girardi, ‘Competitie Tussen Grootmachten En Maatschappelijke Stabiliteit in Nederland: De Risico’s van Russisch Gas, Chinese Grondstoffen En Taiwanese Chips Voor Vitale Sectoren’ (The Hague: The Hague Centre for Strategic Studies (HCSS), April 2023), II, https://hcss.nl/report/competitie-grootmachten-en-maatschappelijke-stabiliteit-nederland/.
[6] ‘Speech by President von Der Leyen at the College of Europe in Bruges’, Text, European Commission, 4 December 2022, https://ec.europa.eu/commission/presscorner/detail/en/speech_22_7487.
[7] Viking Bohman, ‘The Coming Decoupling from China Consequences for the EU’s Economic Security Strategy’ (Swedish National China Centre, 2023), 3, https://kinacentrum.se/wp-content/uploads/2023/07/decoupling-final.pdf. ; Chris Miller, ‘The West’s de-Risking Strategy towards China Will Fail, Says Chris Miller’, The Economist, 4 August 2023, https://www.economist.com/by-invitation/2023/08/04/the-wests-de-risking-strategy-towards-china-will-fail-says-chris-miller.