Building walls: national security and trade

The era of globalisation where supply chain executives were focused almost exclusively on increased efficiency, comparative advantage and cost reduction seems to have come to an end. They now have to contend with a host of other factors, particularly risk and resilience. One concern that features near the top of the list for most executives is geopolitical risk. Indeed, in the Trade in Transition survey conducted by Economist Impact in October-November last year, 96% of executives stated they are making changes to their supply chains because of geopolitical events.

Risk experts rank geopolitical confrontation in the top three risks for the next two years.¹ Economist Impact’s sister organisation, The Economist Intelligence Unit, has highlighted numerous geopolitical threats that could develop in 2023: a direct conflict between China and Taiwan forcing US intervention; an inter-state cyberwar crippling state infrastructure in major economies; the Russia-Ukraine conflict turning into a global war; a nuclear arms race; and a rupture in China's ties with the West forcing a rapid decoupling of the global economy.²

Such developments are prompting governments to review their dependence on other states, particularly in sectors deemed of “national importance”. Many emerging powers are also not completely subscribed to the institutions that were set up post-1990 that allowed for the free flowing of trade across borders. Now, in an era of fast-paced technological development, those emerging countries want to set new rules and standards that better reflect their national interests.³ A multipolar world needs to account for different interests and is likely to result in supply-chain shifts that reflect this.

Government intervention in supply chains is notable

Policies focused on increasing national security are becoming more common. These include government mandates or financial incentives to reshore or nearshore the production of critical goods. Twenty-two percent of respondents from the Economist Impact survey cited government financial incentives or support as the most important driver of their approach to supply chain management. A further 15% stated the predominant driver was local content government requirements. These results indicate that government intervention in supply chains is becoming increasingly common but there are dissenting voices.

“Reducing free and fair competition through domestic incentives, under the auspices of national security, from a global point of view is very harmful,” comments Stuart Harbinson, independent trade policy adviser and former senior official at the World Trade Organisation.

A critical component: semiconductors

Semiconductors seem to be the poster child for reshoring, particularly in the context of geopolitical tensions between the US and China. There is a distinct national security argument that governments are making to ensure that the development and manufacture of higher-end semiconductor chips are produced in ‘home’ countries. Recently the US signed into law the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (CHIPS Act) to drive this reshoring.⁴

More recently, in response to the US government’s attempt to limit China’s importation of high-end chips, China has conducted a review of Micron, a US semiconductor manufacturing company, in an effort to “safeguard the security of the infrastructure supply chain”.⁵ The US subsequently asked South Korea not to fill any shortfall in China if Micron is banned from operating there.⁶ All this increases uncertainty for businesses and impacts the free flow of semiconductors which will have ramifications for a variety of other industries.

Beyond semiconductors

National security is increasingly being used as a justification for reshoring the production of a range of goods and services. Sectors that are deemed of national importance now include pharmaceuticals, food, energy, among others (see Table 2). This list could expand in the coming years as critical products face supply shortages.

The impact of national security on businesses

Increasing government involvement across many sectors will lead to more uncertainty for businesses. With heightened geopolitical tensions and by association, national security concerns, risk mitigation and resilience need to become a mainstay in supply chain management in order for businesses not to fall foul of evolving regulations and disruptions. When navigating this new world business executives need to be cognisant of where national security policy increasingly encroaches on industries of “national importance”.

How governments choose to define national security is also important. William Reinsch, senior adviser and Scholl Chair in international business at the Centre for Strategic and International Studies, states that even between two US administrations - President Biden and President Trump - there is a clear difference, with Mr Biden choosing to define it in a much “narrower and clearer” way.

An understanding of these shifting interpretations along with the impact of national security decisions and changing geopolitical events is essential for businesses if they are to survive and prosper. They must navigate this complex environment adroitly, at the same time balancing resilience, security and costs.