## SPILLOVERS FROM CHINA’S TREND GROWTH: THE IMPACT OF DE-RISKING STRATEGIES (OCTOBER 24, 2023)

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**Canonical URL:** [SPILLOVERS FROM CHINA’S TREND GROWTH: THE IMPACT OF DE-RISKING STRATEGIES (OCTOBER 24, 2023)](https://www.imf.org/-/media/files/oap/oap-home/2023/october-2023-apd-reo-ch3.pdf)

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### Context
- The IMF Asia and Pacific Department Regional Economic Outlook highlights that current WEO projections imply China’s long-running economic overperformance will end, with upside risks from comprehensive reforms and downside risks from de-risking.
- Signs that companies increasingly take de-risking into account are visible in greenfield FDI and mergers (Aiyar, Malacrino and Presbitero, 2023) and in detailed U.S. trade data (Goldberg et al, 2023; Alfaro and Chor, 2023).
- Official policy documents express de-risking without pursuing decoupling: “[…] de-risking is urgently needed. However, we are not pursuing a decoupling of our economies.” (Strategy on China, Government of Germany).
- Proliferating export bans in certain sectors—e.g., the U.S. on semiconductors and bans on some mineral exports (Indonesia, China)—create potential for sharp fragmentation restricting access to high-quality inputs (July G20 surveillance note ¶15).

### De-risking: Definitions and Calibration
- Two dimensions of de-risking:
  - Friend-shoring: change in composition across foreign input sources.
  - Re-shoring: changes between domestic and foreign sourcing.
- Focus of analysis: China-OECD bilateral relations.
- Calibration approach: use non-tariff barriers (NTBs) to reverse integration that occurred since year 2000 along:
  - The re-shoring margin.
  - The friend-shoring margin.

### Model: GIMF with Global Value Chains (GVCs)
- The model is a standard GIMF augmented so tradables can be part of global value chains to produce a GVC good.
- GVC goods are produced using labor and capital and other GVC goods, both imported and domestic.
- GVC goods (domestic and imported) are inputs together with tradable goods and nontradables to produce domestic final goods for consumption and investment.

### Simulation Results and Spillovers
- Trade-diversion benefits from friend-shoring are offset by a global slowdown that results from it, while re-shoring is (outside of China) even more damaging.
- Quantified impacts:
  - “~Equivalently: for each percentage point of re-shoring and friend-shoring, long-term global GDP losses are roughly of 1.5 and ¼ percent, respectively.”

### Export Restrictions and Quality Downgrading
- Recent export restrictions increasingly target access to high-quality inputs; restrictions aimed at curtailing access to higher-end chips result in slower AI models.
- Evaluating effects requires estimating quality differentials at detailed product level using trade data for ~200k products at HS 10 digits over 2002-2018, comparing market shares conditional on price (Khandelwal, 2010).
- Key findings:
  - The quality frontier is highly product-specific, including in sectors where cooperation is critically needed.
  - There are large losses for both sides even after accounting for possible third-country substitution.
  - The median estimated Chinese product quality in semiconductors is ~one-third lower than the median quality for the OECD.

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_Source: https://www.imf.org/-/media/files/oap/oap-home/2023/october-2023-apd-reo-ch3.pdf_