Protectionism, Pandemic, War, and the Future of Trade
Risks associated with the Russia-Ukraine war and complications in China-US trade are encouraging a major reorientation toward ASEAN and other developing markets.
A global contest for technological leadership is taking shape among the world’s major economies. Technology-based supply chains are increasingly forced to contend with rising geopolitical friction over national and economic security. Trade, which once shaped geopolitics, is now itself being molded by geopolitics.
The change comes as the world is witnessing a new, tougher business environment, with the COVID-19 pandemic, trade tensions, the war in Ukraine, and other disruptions putting the brakes on a long period of steady globalization. Under growing uncertainty, companies of all kinds must reconfigure global supply chains to improve their resilience. But technology companies face challenges of greater risk and complexity.
Major economies, such as the US, China, the European Union, Japan, and India, are increasingly sensitive to the economic and national-security importance of the most advanced technologies and are moving aggressively with policies to regulate and sometimes reshore technology supply chains.
As a result, companies that produce or rely heavily on strategic technologies must put geopolitical risk at the forefront of their strategic agendas to a degree that has not been necessary until now. To stay competitive, tech companies should not wait for detailed regulations to be rolled out. Instead, they should stay ahead of events by preparing playbooks to shape their intricate supply networks. The question is no longer whether technology supply chains will change, but how much and how fast.
We believe players must prepare for a variety of risks that are likely to arise from government policies and customer behavior, depending on which of three segments the companies fall into. (See Exhibit 1.) To get ready for the new challenges, leaders should assess their companies’ supply chains using a few guiding principles.
The global business environment is moving on from an era when market forces were the primary drivers of corporate planning. Now, national policies designed to incentivize targeted sectors and protect strategic technological advantages are increasingly prevalent. The result is a domino-like escalation where one country’s trade restrictions and industrial policies cause other countries to respond. Consider just a few examples:
While there is plenty of uncertainty about policy specifics in the future, the direction of policy is clear, and companies with exposure need to move quickly to prepare. We believe that government incentives or interventions are likely to continue in three types of technology supply chains:
Traditionally, the technology industry has benefited greatly from open-source software, such as Linux and its global community of open-source innovators. However, geopolitical competition and national-security concerns may threaten the “openness” of open source.
Many of today’s popular AI algorithms and frameworks are available as open-source software. Any data scientist can download software such as TensorFlow—a popular AI framework released by a US technology firm—and build AI models. A similar example is Volcano, open-source AI software released by a Chinese firm with contributions from numerous US firms. However, AI technologies are inherently dual use. An algorithm for spotting manufacturing defects can in theory be trained to help drones strike military targets.
Certain nascent semiconductor technologies (for example, RISC-V) are also open source, and enable developers to design new chips. Entities in the US, China, and the EU have embraced RISC-V to drive innovation across sectors. However, as with AI, chips are also dual-use technologies.
Therefore, it is possible that policymakers will regulate open-source technologies. While open-source software is free, the code is typically hosted on company-owned developer platforms—for example, GitHub, the most popular platform for open-source software. In 2019, GitHub complied with US sanctions that prohibit developers from Iran, Syria, and Crimea from accessing open-source code. Given the current dynamics over semiconductors and AI, the possibility that governments will restrict access to open-source technologies cannot be ignored.
Quantum computing promises to revolutionize industries by solving problems classical computers cannot solve, in such areas as drug discovery and optimizing supply-chain logistics. Quantum computing could create $450 billion to $850 billion in economic value in the coming decades.
On the other hand, quantum computing could potentially overwhelm modern cryptography defenses, posing cybersecurity risks of calamitous proportions. Scientists have already demonstrated that quantum computers could penetrate today’s security technologies. Another risk is that quantum computing will be considered as inherently dual use.
Given this risk, nations can be expected to take precautions by implementing export controls and other regulatory measures. Bloomberg reported that the US is investigating the use of export controls to prevent this technology from going to China. In addition, Axios reported that the White House is considering a ban on US investment in Chinese companies engaged in quantum computing. Today, private, public, and academic organizations often collaborate on this technology. Going forward, however, policy interventions could disrupt collaborative innovation.
Beyond what is commercialized today, governments see advanced technologies in certain emerging sectors as also critical to economic competitiveness and national security; clean energy and biotech are two examples. Governments have begun to consider industrial policy and trade restrictions in these areas. (See Exhibit 2.)
The 2020-to-2050 cumulative market for clean technologies (which enable electric vehicles [EVs], for example) could reach $24 trillion to $75 trillion, depending on the pace and scale of transition. Governments are embracing industrial policy that accelerates the low-carbon transition while rebuilding manufacturing. In 2022, the Inflation Reduction Act took effect in the US, providing a $7,500 tax credit for EVs assembled in North America (including Canada and Mexico) that do not contain batteries or critical minerals produced in or by “foreign entities of concern” (including
Biotechnology is another key sector to watch. Driven by advances in computing, AI, and nanosciences, biotechnology promises to enable progress in sectors such as agriculture, pharmaceuticals, and chemicals. The emerging “bioeconomy” will help generate more than $30 trillion of economic activity over the next 30 years.
Estimates for China’s 2015-2017 government investment in biotechnology are up to $100 billion. Meanwhile, the US aims to foster innovation in biotechnology, with $2 billion in funding. Japan launched its first government investment fund dedicated to economic security, targeting biotech along with AI and quantum technology.
Industry leaders must realize that the need to rebuild technology supply chains could arise suddenly and could profoundly affect their business. As the current mantra goes, “Every company is a technology company,” and every company must be cognizant of the policy issues facing its business. While the semiconductor sector has been the most prominent industry affected thus far, the scope and scale of supply-chain unwinding and rebuilding will soon spread.
To prepare for these developments, private-sector leaders should pursue four strategies:
In a new era of supply-chain dislocation and uncertainty, companies must move rapidly to understand how they will deal with a potential need to unwind and reconstruct their technology supply chains.