Harm From ‘De-Risking’ Strategies Would Reverberate Beyond China

IMF Blog, October 18, 2023

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Canonical URL: Harm From ‘De-Risking’ Strategies Would Reverberate Beyond China

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Bibliographic details

Authors: Diego Cerdeiro, Siddharth Kothari, Dirk Muir
Published: October 18, 2023

Summary findings

The negative impact of ‘de-risking’ strategies by major economies would be felt beyond China.
De-risking strategies considered include reshoring production domestically and friend-shoring away from one another.
Reshoring would be particularly painful to everyone.
Friend-shoring does not generate net benefits for third countries in the long term because the benefits from trade diversion are offset by the effects of the contractions in both China and the OECD.
The negative effects are especially pronounced in Asia.

Drivers shaping China’s medium-term growth and spillovers

Key forces: convergence to advanced economies’ income levels and demographics.
Key structural policy drivers: domestic reform momentum.
External factors: geoeconomic fragmentation.

Scenario analysis and implications

A downside scenario from ‘de-risking’ between China and Organisation for Economic Co-operation and Development economies produces a significant drag on growth around the world even assuming no new trade restrictions with third countries—especially in Asia.
For third countries, friend-shoring should not be viewed as a passive source of gains; they should actively pursue reforms to further integrate into global supply chains.
For systemic economies, there is an urgent need for constructive dialogue to resolve underlying sources of tensions and resist costly fragmentation outcomes.

Policy recommendations for China

Undertake comprehensive structural reforms to help income levels converge more rapidly with those in advanced economies.
Specific reform priorities include closing productivity gaps between state-owned and private firms and further opening up sectors to competition.
Achieving these reforms would generate significant positive spillovers for other economies in Asia.

References

Continues to Fuel Global Growth, but Economic Momentum is Slowing](https://www.imf.org/en/Blogs/Articles/2023/10/13/asia-continues-to-fuel-global-growth-but-economic-momentum-is-slowing)