Talk of geopolitics can evoke ideas of slow-moving, bureaucratic beasts using old ideas of hard and soft power to pursue national security outcomes. But in the modern landscape, the truth is anything but.
Modern policymakers, particularly in economic security, are combining national security and industrial policy to shore up their own technological strengths - and make life harder for competitors.
"Developments in advanced technology will of course be positive for businesses and consumers alike, but geopolitical realities will also add immensely to the sensitivity and complexity of the sector.’’
The United States and China are key players in this new world of ‘economic statecraft’. But so too are smaller economies - and companies - seemingly facing a choice between Washington and Beijing.
A clear example can be seen in the passing of the recent CHIPS and Science Act in the US, an innovative piece of legislation combining both grants and guardrails to promote US technological dominance and to hamstring China’s efforts to catch up.
In our own region, Japan’s Economic Security Promotion Act is set to be fully implemented in early 2024 and South Korea is making moves some commentators have called a ‘decoupling’ from China.
Similarly, a growing number of countries are introducing or enhancing inbound and outbound investment-screening mechanisms, export controls, data protection legislation, supply-chain resilience measures and anti-coercion instruments to safeguard economic security.
As one country introduces these measures, others are likely to follow – a recent example is the US introduction of outbound investment screening, with growing interest in the United Kingdom and European Union to follow suit.
The US is also using a novel ‘foreign direct product rule’ to ensure third countries that produce technologies with US intellectual property cannot sell these to US adversaries. Looking ahead, the US Commerce Department’s October 2022 ‘interim final rule’ on the export controls of US origin semiconductor technologies will become a ‘final rule’ in the last quarter of 2023. This may possibly close loopholes discovered over the past year and even be expanded to include cloud-computing.
As bureaucrats continue to innovate the policies designed to promote economic security, proactive businesses can make calculated assessments of which sectors are most susceptible to restrictions – therefore avoiding risks and discovering opportunities in new markets or subsectors of existing ones.
The benefits of nation states like China and the US winning the contest for technological supremacy are clear, although the trend is not necessarily limited to those regions.
I’ve written before about the US and its allies using initiatives to ‘onshore’, ‘nearshore’ and ‘friendshore’ strategic industries. The CHIPS and Science Act is an extension of this policy, offering ‘carrot-and-stick’ incentives to businesses - including non-US ones - to ensure innovation remains localised.
Focussed largely on semiconductor production – a $US600 billion industry in 2022 and forecast to be $US1.9 trillion within a decade – the CHIPS and Science Act consists of unique grants offering $US39 billion in funding for semiconductor manufacturing stateside, as well as guardrails that can be seen to restrict expansion of the sector in China.
The guardrails come in the form of a catch - and isn’t there always one - on the funding. No recipient may add to their presence in China for a decade, without risking losing access to the CHIPS funds. It’s one of the clearest examples of government innovation in the battle for economic security and creating a technological edge over competitors.
China has not sat idly by. The world’s second-largest economy has used its “Thousand Talents” program for several years to attract overseas expertise to China to work on improving the domestic science and technology base.
It has also introduced an Export Control Law (2020), Unreliable Entities List (2020), Anti-Foreign Sanctions Law (2021) and Counter-Espionage Law (2023) to safeguard its own science and technology base and prevent potential adversaries from benefitting.
Earlier in 2023, China announced two US companies were included in the Unreliable Entities List for the first time and it used its Export Control Law to restrict exports of two key semiconductor and advanced optics components, gallium and germanium.
Closer to home the AUKUS Pillar 2 program is another good example of innovation in the economic security space. A lower-profile part of the agreement, Pillar 2 focusses on increased innovation and information sharing around a number of advanced technologies, including artificial intelligence, quantum computing and cyber capabilities.
As technology becomes embedded in almost every aspect of our lives, demand for semiconductors will continue to rise. As nations make the sector a security priority and use innovative legislation to preserve and capture technological advantage, the impact on tech supply chains may be transformative.
Developments in advanced technology will of course be positive for businesses and consumers alike, but geopolitical realities will also add immensely to the sensitivity and complexity of the sector. Consumers may ultimately wear some of the cost.
Despite a recent reduction in the rhetoric around autocracies versus democracies, we should look to the deeds of global leaders rather than their words. With an ideological streak now increasingly apparent in international relations, betting on more bifurcation in the technology sector through more innovative economic security legislation is probably a good one.
Cameron Mitchell is Head of Geopolitical Risk at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
21 Sep 2023
26 Sep 2023