Disputes about global trade practices have reached a tipping point.
The Trump administration has just rolled out new tariffs on $34 billion of Chinese goods, and Beijing has responded, in kind, with retaliatory tariffs. It’s looking more and more like a series of tit-for-tat retaliatory tariffs are going to disrupt global value chains.
But a looming US-China trade war is only a small component in a much larger, more important narrative: Beijing and Washington’s intensifying geopolitical rivalry.
Technological innovation and intellectual property are now at the centre of this competition. The world is witnessing the early stages of a digital arms race — some would even call it a new Cold War.
The inconvenient truth is that policymakers in both Washington and Beijing have linked technological capability directly to matters of national security, and, consequently, companies will need to start preparing to rethink how they do business around the world.
Three key trends are emerging from the Sino-American technology war.
First, there will be an increase in export controls, export licensing and sanctions — aimed at individuals, companies and entire industries. This will cause non-compliant, blacklisted parties to be excluded from business ecosystems and strategic partnerships.
There will be extensive collateral damage throughout supply chains when companies violate any of these rules. There will also be an increase in blocked mergers, acquisitions and licensing deals in the tech sector. This will be disruptive to existing value chains.
Second, global businesses will need to localise operations. Unilateral policy measures and non-tariff barriers focused on “national security” will push enterprises to accelerate the localisation of operations.
This transformation is already underway as businesses leverage automation, robotics, 3D printing and artificial intelligence (AI) to meet consumer demands in specialised and rapidly evolving local markets. Data localisation laws regulations will also influence new operational decisions — especially in emerging markets.
Third, new innovation clusters will emerge – dynamic innovation and production ecosystems will emerge and will be ring-fenced to protect key stakeholders.
Only entities that have been vetted to meet specific requirements, increasingly regulatory, will be allowed to play in these sandboxes.
In Asia, so-called smart-city locations like Singapore – which, among other things, boasts good governance attributes — will become increasingly attractive as new innovation clusters.
The ZTE debacle a microcosm of the kind of business environment facing multinational businesses. ZTE’s violation of US sanctions resulted in massive monetary penalties, a temporary revocation of its US operating licenses and the denial of access to US technology.
There was extensive collateral damage to ZTE’s extended business ecosystems. Qualcomm, Google, Acacia Communications and host of small first and second tier suppliers were adversely impacted by ZTE’s US technology ban.
Sending a simple email, text message or data transmission can be classified as an illegal export, particularly if sent to a denied party or an entity on a sanctions list
The US Commerce Department is currently looking into expanding the list of “strategic trade” items.
“Strategically sensitive” parts, components and technology require businesses to methodically screen buyers and down-stream end-users, as well as trace the movement of thousands of parts, components and widgets throughout value chains. Achieving this kind of supply chain traceability is costly and complicated.
As export licensing requirements and punitive measures increase for US technology, global companies will be confronted to exposure to penalties and catastrophic stoppages of business.
Data is considered a “strategic good.” Sending a simple email, text message or data transmission can be classified as an illegal export, particularly if sent to a denied party or an entity on a sanctions list.
This means that companies working in research and development communities — for example, in partnerships with academic institutions, start-ups and open source networks — could violate export controls by sharing information with specially-designated foreign nationals.
Data privacy is another hot button. Ant Financial, of the Alibaba e-commerce group, was recently blocked from buying MoneyGram, the American remittances company, on the grounds that the private data of millions of US citizens would be compromised in the hands of a Chinese company.
This rationale will lead the Committee on Foreign Investment in the US (CFIUS) to block an increasing number of acquisitions, mergers and license agreements between Chinese and US firms. CFIUS recently blocked Chinese telecom behemoth Huawei from selling equipment to AT&T the US telephone company.
Beyond simple privacy concerns, the National Security Agency, the FBI and other US intelligence agencies have proclaimed that high-tech equipment made by Chinese firms would pose a cyber security and espionage risks to the US government and American consumers.
This puts Beijing’s “Made in China 2025” plan, which is funnelling hundreds of billions in subsidies to high tech firms, directly in Washington’s firing line. Vulnerable sectors include robotics, AI, autonomous vehicles, aerospace and 5G networks technology.
Even as increased tariffs are causing companies to think about moving manufacturing and sourcing operations to new locations, the need to manage non-tariff measures regarding technology controls will leapfrog tariff planning.
Regulatory delays, licensing mishaps and mismanagement of buyer-seller relationships, all from an export controls perspective, are more damaging to global businesses than tariffs.
By shortening supply chains and moving production activities within key markets — many of which are in the growing megacities of Asia — companies are seeking to achieve greater proximity, access and coordination with localised contractors, sub-contractors and strategic partners. This makes regulatory risk management easier and lowers operational costs.
Industry 4.0 and digital innovation is already driving the trend towards localisation. Global firms are responding to demand-driven, highly customised local markets by leveraging new digital technology.
3D printing, e-commerce platforms and new collaborative networks are leading to new business models that favour more agile local supply chains. These new value networks are increasingly replacing traditional offshore global supply chains.
Other non-tariff barriers around technology controls will accelerate the trend towards localised production. In Asia, an increase in data localisation laws are forcing global firms to deal with the fragmentation of data flows and supply chains — Vietnam, Indonesia, Malaysia, Brunei, China, the Philippines and Thailand all have some form of data localisation laws that are in place or are under consideration.
An increase in both American and Chinese tech regulations — such as Beijing’s recent blockage of chip sales by Micron, the American firm — will lead to the emergence of specialised technology clusters around the world.
These clusters will be essential for attracting all the right elements needed in a productive and innovative technology ecosystem, as well as keeping out the wrong, non-compliant elements.
The Singapore Smart-City model provides a compelling example.
The city-state’s policymakers have succeeded in establishing benchmarks in all the key areas: World-class infrastructure and logistics, strong rule of law that seeks to emphasise transparency and good-governance standards, an emphasis on human capital development and skills, open markets and participation multilateral free trade agreements.
These attributes will result in fully ring-fenced business ecosystems, where only firms that have been vetted for, for example, US technology licensing and controls, will participate.
Excluded entities, many of which could be Chinese firms, will seek to form their own clusters, most likely in China. Other firms wishing to escape the long shadow of American sanctions and technology controls may choose to migrate their activities to a Chinese- dominated technology cluster.
The effects of a US-China geopolitical rivalry will be far-reaching. Tariffs will disrupt and re-organise global value chains, but companies need to prepare for the much more pervasive effects of a Sino-US tech war.