SINGAPORE (Apr 30): The Covid-19 pandemic will accelerate growing economic nationalism in the US and China, forcing firms to consider more carefully the geopolitical and security implications of their business decisions when constructing global value chains.
According to NUS Business School Senior Fellow Alex Capri, difficulty in obtaining medical equipment like surgical masks and test kits during the Covid-19 outbreak will prompt policymakers to prioritise the national security implications of value chains. In a 2020 report for the Hinrich Foundation, he anticipated large-scale re-shoring back to local markets following the crisis to ring-fence production processes from external risks.
Such measures come in the context of growing great power rivalry between China and the US. Amid a bitter trade dispute and a contentious technology war, both sides have developed an increased attitude of “techno-nationalism”, adopting protectionist policies to avoid losing technological superiority over their adversary and to weaken perceived threats to national security.
Out of the frying pan?
Capri predicts that value chains may therefore become more fragmented and localised as states seek to maintain greater control of production processes for strategic goods such as technology and medical equipment. The former KPMG partner warns that firms could face extra compliance costs and redundancies as states re-route value chains in the name of national security.
With China likely to emerge from the pandemic in a strong position owing to its headstart in economic recovery, US-China geopolitical tensions are expected to deepen following the pandemic. Potentially able to increase its global influence by supplying the world with essential goods like masks from its re-opened factories and buying up distressed assets, China will likely foster insecurity within Washington, prompting policymakers to double-down on balancing it.
As trade becomes increasingly intertwined with national security, businesses must be scalable, flexible and agile to adapt to future supply-chain disruption.
“Supply chains are organic entities — they live, breathe and evolve. When they are obstructed, they re-grow and adapt. Therein lies new business opportunities. Such change and disruption is part and parcel of ‘creative destruction’,” adds the NUS don.
One way firms can try and adapt is to constantly survey the terrain and undertake “scenario mapping” — an increasingly urgent task, as recent market disruptions caused by geopolitical events have shown.
Much ado about microchips
Perhaps no commodity illustrates this growing technonationalism better than semiconductors (“microchips”). These components are hard to manufacture and are crucial components of nearly all future industries, making them a lucrative and highly strategic commodity.
“In the past few years, growth of the global semiconductor industry has been driven largely by demand from electronics such as smartphones and the proliferation of applications including the Internet of Things and cloud computing,” noted a Deloitte Report in 2019. “Continued enhancements of existing products and the inclusion of emerging technology such as AI in products and 5G networks ... will be some of the market’s key driving forces.”
China’s rapid development has seen it emerge as the world’s largest consumer of semiconductors. Its domestic firms, however, lag behind international competitors in both technology and market share, supplying only 9% of domestic demand in 2016. This is in contrast with the 56.2% of demand fulfilled by the US.
Considering the importance that semiconductors play in manufacturing military devices as well as China’s largest exports (that is, smartphones, laptops and smart televisions), Washington enjoys significant political and economic leverage over Beijing. As US-China relations have soured over the past decades, Beijing appears to view such overreliance as a national security threat.
“China’s dependence on the US and foreign technology is not only an issue of national security, it poses a serious impediment to the Chinese Communist Party’s geopolitical ambitions as a rising power, as virtually all hard and soft power will depend on achieving technology supremacy,” notes Capri.
Semiconductors therefore play a prominent role in Beijing’s Made in China 2025 industrial policy, with China seeking to produce 80% of its chips locally by promoting and subsidising “national champions”. Doing so would not only leave China less reliant on an increasingly hostile US, but also enable it to move up the value chain to create higher-income jobs.
The spectre of decoupling
Washington on its part perceives the Chinese tech industry as a threat to national security and to US manufacturing. The Trump administration seeks to constrain the expansion of Chinese tech firms such as Huawei and ZTE by blocking deals with US companies, as well as by imposing export controls and licensing on “dual use technologies” (technologies that can be used for military purposes) in the name of safeguarding national security.
More proactively, the US government has worked to limit the global expansion of Chinese tech firms through growing intervention in tech businesses. It has invested in Huawei’s competitors such as Nokia and Ericsson, and allocated US$60 billion ($86.03 billion) to cultivate local alternatives to Huawei and ZTE in markets targeted by China’s Belt and Road Initiative.
Growing tensions have increased the likelihood of US-China “decoupling” taking place, as both sides seek to reduce their economic reliance on one another. Chinese firms have begun to de-Americanise their value chain by reducing the amount of US components in their products and shifting value-added operations outside the US. American universities are increasingly turning down Chinese research funding and technology transfer activities.
This process of decoupling is gradual and still in its very early stages. Still, if technological bifurcation and government restrictions on trade with particular countries become more common, Southeast Asian countries friendly with both Washington and Beijing may face greater barriers to trading with both countries simultaneously.
“While some Southeast Asian countries stand to benefit in the short term from shifts in global supply chains, uncertainty wrought from the trade war ... has on balance damaged Southeast Asia,” said Brian Harding, deputy director of the Southeast Asia Programme at the Centre for Strategic and International Studies. “Southeast Asians simply do not want to be forced to choose between the United States and China.”
Can Singapore thrive between the two giants?
Singapore experienced the backlash of geopolitics in the semiconductor industry back in 2018, when US President Donald Trump used an executive order to block a US$117 billion offer by Broadcom to acquire Qualcomm, which is a key US communications chips player.
With its corporate headquarters in Singapore, the Trump administration saw Broadcom as a foreign company and thus did not wish for it to possess Qualcomm’s intellectual properties. If Qualcomm were to be under foreign ownership, said Trump, the US’s lead in mobile technology would be eroded and China would gain the upper hand.
Broadcom has since moved its corporate headquarters from Singapore to San Jose. Fortunately, the short-lived episode had no further discernible impact on the rest of the semiconductor industry in Singapore.
Nevertheless, such a high-profile deal merely underscores the importance of the semiconductor industry — which accounts for a quarter of Singapore’s GDP — to its manufacturing sector. A whole industry ecosystem has been built up over the decades. Large multinationals like Micron and Texas Instruments have set up significant operations here, with a whole swathe of local suppliers and service providers supporting these big customers. According to Capri’s report, Singapore accounts for a 12% share of the global semiconductor industry’s assembly and testing value chain.
To this end, Singapore’s unique position as an innovation hub with strong ties with both China and the US, can help companies here successfully navigate a less open global economy. Thanks to a dense network of free trade agreements and pro-business policies, companies operating here enjoy some insulation from global geopolitics.
“Singapore is in a place where it can leverage good governance and high-quality multilateral FTAs to balance the US and China against one another. Singapore needs Washington and Beijing to prosper and both to see Singapore as crucial to their value chains because of its innovative and highly-connected economy,” Capri notes.
The best way for smaller countries like Singapore to push back against technological and value chain bifurcation is to push for multilateral technological and trade standards less implicated by the political interests of Washington and Beijing. Despite their comparative weaknesses relative to the US and China, collective action could at least allow them to avoid a zero-sum choice between siding with either power.
“The signing of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) was a strong statement of the agency of smaller states. With the US out of the deal and China unwilling to fill the vacuum, it was the continued willingness of the other states to proceed that was important in getting CPTPP signed,” Capri points out.
Such multilateral initiatives will become more important as the US increasingly abandons its historical hegemonic role in the liberal international order and prioritises its own geoeconomic interests. With China neither willing nor able to exercise regional hegemony in Asia, regional states will have to adapt to this new scenario and double-down on multilateralism to advance common economic interests.
In the tech industry specifically, smaller states can push for open-source software and technological development to prevent any one country or company — state-backed or otherwise — from monopolising the market. Already, tentative steps are being taken to introduce open-source semiconductor development in Silicon Valley, potentially narrowing technology gaps between states.
“The world may become more fragmented and localised for sure, but this does not necessarily mean a zero-sum game between the US and China. Whether this comes in the form of multilateral agreements or bilateral agreements and investment between themselves, states still have options that do not portend to a binary choice,” Capri concludes.
