Article by Janav Singh
Global pandemics and heightened geopolitical tensions have shed the spotlight on the vulnerabilities of our interdependent global economy. From the shortages of N95 masks and other medical equipment to other commodities such as oil, wheat, and coal, all have exposed the fragility of supply chains that span continents and rely on an optimistic view of constant smooth functionality. This vulnerability has become increasingly pronounced in the ongoing US-China semiconductor standoff, reigniting conversations about the potential decoupling between the East and West.
“Decoupling” refers to the act of deliberately reducing the economic and technological interdependence between countries to safeguard national economies by minimising the influence and reliance on foreign resources. In the context of the US-China semiconductor conflict, decoupling is tied to export control and strategic competition in AI and defence.
For China, decoupling limits its dependence on foreign countries for their advanced technologies, facilitates the dominance of indigenous companies, and strengthens its dominance in global competition. In response to the US and other Western countries limiting China’s ability to procure AI chips, among other things, China launched the “Made in China 2025” (MIC25) initiative. This initiative saw over $500 billion pledged to various funds to support its technological growth and also led the government to implement export controls over various critical materials. As part of this aggressive strategy, China has recently implemented further export controls on gallium and germanium – two materials essential for producing semiconductors.
If China continues its export restrictions, it will lead to severe disruptions in the global semiconductor market. One can already witness the impact of the restrictions, as Europe saw the price of gallium and germanium double in the past year. Additionally, those looking to export the materials would require a license. This has caused further uncertainty, as it is expected that each shipment will be approved anywhere between 30 and 80 days, which has made long-term supply chain contracts unviable.
This suggests that companies using semiconductors should expect severe production delays and will see the cost of production increase, impacting not only customers looking to purchase new technologies but also the military.
The current situation highlights the need for countries to stop their dependence on China for raw materials as well as its highly skilled and cheap labour force. Companies such as Apple have already begun their efforts to reduce the importance of their China supply chain and have diversified to other countries such as Vietnam and India. This approach will lead to a bifurcation in the tech industry and other supply chains.
As the decoupling effects increase on both the US and Chinese sides, there is potential for the development of parallel economies with different supply chains and technology ecosystems. This may have massive implications for global trade and economic stability and will also transform the competition in the tech industry. Law firms will play a massive role in embracing these efforts by advising clients on navigating these new regulatory regimes and settling contract disputes and IP and technological issues.
Sources
https://hbr.org/2021/05/the-strategic-challenges-of-decoupling
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