The Great Rewiring: How Global Supply Chains Are Reacting to Today’s Geopolitics
Global supply chains, particularly in technologies of strategic value, are undergoing a remarkable reevaluation as geopolitical events and trends weigh on the minds of decisionmakers across government and industry. The rise of an aggressive and revisionist China, a devastating global pandemic, the disruptive churn of technological advancement, and—most recently—Russia’s invasion of Ukraine, are prompting a dramatic rethinking of the value of lean, globally distributed supply chains. Efficiency is now being recast in terms of reliable and resilient supply chains that are better adapted to emerging geopolitical uncertainties rather than purely on the basis of lowest cost. Given its globalized operations, the semiconductor industry is at the forefront of these challenges. How it responds may well set the tone and pace for economic cooperation and globalization in the twenty-first century.
End of the “Washington Consensus”
To many, the end of the Cold War heralded the triumph of open societies and democratic institutions, allowing for efficiencies that could be realized from the globalization of production. The potential for this globalization was secured through a commitment to common international governance structures and a shared recognition among policymakers in the United States, Europe, East Asia, Latin America and elsewhere on the value of a general liberalization of global trade and the relaxation of state control over national economies. The so-called Washington Consensus emerged as the byword for a new age where economic efficiency and specialization were paramount and supply chains that spanned previously intractable geopolitical fault lines were now searching for lower costs in wage and other inputs across the globe.
To its credit, globalization along the lines of the Washington Consensus ushered in an era of unprecedented economic growth as measured in aggregate and a dramatic reduction in the number of people living in extreme poverty around the world, which fell from 1.9 billion people in 1990 to roughly 650 million in 2018. Meanwhile, for consumers in Western markets, low-cost manufacturing abroad and diminishing tariff rates across borders translated into a steep drop in prices for many everyday manufactured goods.
This globalization, importantly, embraced the change in China’s national economic model of that period to include elements of market capitalism. After significant commitments from the Chinese to expand access, transparency, and fairness in its markets, the United States approved China’s accession to the World Trade Organization (WTO) in 2001. Economic integration across shared platforms was seen as a path to mutual prosperity and even as a democratizing force that would galvanize a growing Chinese middle class to demand greater political freedoms to complement their improving economic circumstances.
While the Chinese economy made historic gains following their accession to the WTO, in recent years the optimism surrounding China’s integration into global economic structures has faded. The Chinese Communist Party enjoyed significant buoyancy from meteoric economic growth, with China’s GDP expanding an average of 9.44 percent annually from 1978 to 2018. But instead of democratizing domestically and conforming to international norms as had been anticipated, Chinese leaders have moved in a different direction with the following measures:
- They have employed new information technologies to assert greater authoritarian control over their population, suppressed minority cultures in Tibet and Xinjiang, and dramatically revised the “one-country, two systems” arrangement with Hong Kong.
- They have sought to assert their dominance throughout Asia, militarizing barren and man-made islands in the South China Sea, challenging long-standing border arrangements with India, and increasingly reiterating their right to reintegrate Taiwan by force.
- Employing a neo-mercantilist economic model, the Chinese government has propped up and sent forth dozens of massive state-backed private enterprises to compete in international markets, bolster Chinese economic soft power, and acquire sensitive proprietary information from competitor countries, primarily the United States.
- They have deployed an aggressive innovation policy, developing “an elaborate, comprehensive system for spotting foreign technologies, acquiring them by every means available, and converting them into weapons and competitive goods.” Dwarfing China’s own legitimate S&T enterprise, this system is meant to reduce Chinese dependence on foreign sources of critical technologies—including semiconductors—as a means of gaining geopolitical leverage over strategic adversaries. Indeed, some argue that the impact of Chinese mercantilism is negatively affecting global innovation through the weakening or elimination of innovative companies.
These developments have shifted perceptions regarding the implications of China’s growth for global prosperity and international stability. Western business leaders, many of whom have cultivated significant ties with Chinese partners, now see that such ventures, profitable as they may be, are far more risk-laden than originally believed. A January 2022 the Union Bank of Switzerland survey of C-suite executives revealed more than 90 percent were either in the process of pulling production out of China or were planning to in the near future, reflecting a remarkable shift in corporate attitudes from previous decades.
Supply Chain Disruptions
Alongside concern over China’s aggressive intentions, the Covid-19 pandemic exposed the inherent fragility of the long, complex supply chains that depend on undisturbed flows of ideas, designs, and intermediate and final products to function. As borders began to close, national economies across the world discovered a crippling lack of redundancy in supply chains necessary to produce and distribute products essential to their economies, from vaccines to medical supplies, to essential components such as semiconductors and the wide variety of technologies reliant on semiconductors.
The recent Russian invasion of Ukraine is a geopolitical earthquake that has required a rethinking of “geo-economic” strategy among policymakers worldwide. In a matter of weeks following the invasion, many of the world’s largest economies sharply limited economic ties with Russia (although untangling European energy dependency remains a work in progress). As the Russian military continues to batter Ukraine’s southern and eastern regions and blockades its Black Sea ports, significant portions of the world’s wheat, grain, and other foodstuffs are going unharvested, undistributed, or have been outright stolen, causing wheat and cooking oil prices to skyrocket and imperiling millions of food insecure people around the world. Underscoring the industry’s global dependencies, one of the less-anticipated consequences of the war was the impact on the semiconductor industry, which relies on a menu of purified noble gases—of which Ukraine is a major supplier—for chip manufacturing processes.
The war in Ukraine has also ruptured long-standing norms of international relations and revived the specter of conventional interstate warfare. As Russia pursues its revanchist goals in Eastern Europe, it has heightened fears that China may be poised to pursue military action to reintegrate Taiwan. This is cause for concern as the Taiwan Semiconductor Manufacturing Company alone accounts for 90 percent of the chip production for major U.S. tech firms, while many U.S. defense systems are powered by semiconductors sourced from Taiwan.
These disruptions have contributed to a new emerging consensus among the United States, Europe, and other decisionmakers in like-minded countries of the need for more robust and resilient global supply chains—buzzwords of a new era that will be characterized by a “rewiring” (or “reinvention” as The Economist puts it) of global capitalism and the supply chains that undergird it. The paradigm appears to be shifting from “just-in-time” to “just-in-case.”
“Rewiring” Goes Mainstream
With the world entering a period of geopolitical uncertainty, business strategies prioritizing efficiency and cost for the globalization of production now appear much more fragile. The disruptions caused by the pandemic, the erosion of global norms regarding innovation and trade, and the deteriorating geopolitical order have led to calls for a redefinition of globalization.
For example, in the United States, the Biden administration is now promoting resiliency in U.S. supply chains as a matter of national security. In a June 2021 statement, the administration condemned “private sector and public policy prioritization of low-cost labor, just-in-time production, and . . . short-term returns over long-term investment,” which “have hollowed out the U.S. industrial base, siphoned innovation from the United States, and stifled wage and productivity growth.” Onshoring is no longer just a blue-collar jobs issue, but one now grounded in competitiveness and national security considerations.
Responding to these concerns, many U.S. lawmakers are keen to build manufacturing capacity in the United States and reduce their reliance on Taiwan as the global hub of semiconductor fabrication. Despite the former chairman of TSMC Morris Chang calling U.S. efforts to onshore semiconductor manufacturing a “very expensive exercise in futility,” U.S. policymakers increasingly believe it is essential to diversify the supply of this critical input. Through the CHIPS for America Act, lawmakers are seeking to authorize $52 billion to restore U.S. capacity in advanced chip manufacturing, with $39 billion in subsidies for the construction of fabrication facilities, or “fabs,” in the United States and roughly $12 billion for related advanced chip research and development initiatives.
Europe has followed suit, first drafting, then enacting legislation to mobilize €43 billion in public and private funds with the goal of doubling its share of the global semiconductor manufacturing market by 2030. European Commission president Ursula von der Leyen stressed the need to “keep markets open and . . . connected,” but that Europe must “build partnerships on chips with like-minded partners” such as the United States and Japan to balance the dual priorities of interdependence and reliability. There is a shared understanding between U.S. and European leaders that, despite their inevitable competition in enticing semiconductor manufacturing firms to build on their soil, a more self-sufficient transatlantic neighbor is a more reliable geopolitical partner.
Opportunities and Challenges from the New Emerging Consensus
A key challenge in this effort is that the drive to “rewire” must balance the manifest advantages of globally connected innovation and production with the need for improved national and regional resiliency as well as environmental sustainability.
One part of the strategy adopted is to create trusted networks among U.S. allies and strategic partners—although moving from governmental consensus on strategic necessity to sorting the practical realities of commercial and national competition can, and will be very challenging. Diplomatic initiatives, such as the recently established U.S.-EU Trade and Technology Council (TTC), signal a high-level transatlantic interest in coordination and trust-building on issues related to supply chains. In the TTC’s joint statement following its May 2022 meeting, the two sides committed to “reduce dependencies on unreliable sources of strategic supply” and to “mitigate jointly the negative effects of sudden supply chain ruptures” while lowering a myriad of other trade barriers. The challenge, of course, will be translating this high-level commitment into action.
Another part of the strategy should be to distribute risks of single-point failures, such as those found in the global concentration of semiconductor manufacturing in Asia. Related approaches are needed as the United States and Europe look to lower dependence on Taiwan and South Korea, which currently account for roughly half of global semiconductor fabrication capacity. Alongside, there is a need to reassure strategic partners in East Asia of continuing U.S. commitment through this process. Diplomatic, economic, and security arrangements like the Indo-Pacific Economic Framework for Prosperity (IPEF), the Quad (the United States, Australia, Japan, and India), and the U.S.-Taiwan Initiative on 21st-Century Trade can facilitate this rewiring, as could direct investments in countries like Vietnam, India, and Australia.
The state of geopolitics in 2022 bears little resemblance to the optimism following the end of the Cold War. The increasingly concentrated supply of critical technologies, the brutal reemergence of imperial politics, and the accompanying weaponization of natural resources have shattered the complacency of the last few decades. As the United States rethinks what supply chains must look like to reflect these new realities, incentives—both policy and financial—to encourage the development of more robust and resilient supply chains are needed.
The challenge will be encouraging multinational firms that seek to maintain their global character—and the returns that come with it—to undertake potentially costly changes while carefully navigating thorny geopolitical waters of cooperation and competition. It is clear that global supply chains need a greater level of resiliency—whether generated by redundancy, stronger trust-based relationships, or through the distribution of assets—which of course incurs cost and generates competition. Despite the pitfalls that lie ahead, the continued national economic security of the United States and its allies depends on a successful, cooperative, and steady implementation of this rewiring. Without it, the value chains upon which our prosperity depends will remain vulnerable to single-point failures and disruptions precipitated by unforeseen natural crises and geopolitical conflict. In a more turbulent world where disruptions could jeopardize the livelihoods of billions, the opportunity costs of not rewiring supply chains to make them more resilient are high.
In short, given a more uncertain world, some disaster-proofing is in order. Doing so will require sustained high-level attention to managing the competing interests of disparate public and private partners while avoiding the inevitable enticements of competitors. With good will and the cushion of long-term commitment, the United States can collectively forge a more sustainable and resilient global economy.
Sujai Shivakumar is director and senior fellow of the Renewing American Innovation Project at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Charles W. Wessner is a senior adviser (non-resident) with the CSIS Renewing American Innovation Project. Gregory Arcuri is a research assistant with the CSIS Renewing American Innovation Project.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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