Move over, tech giants – bureaucrats can innovate too

TALK of geopolitics can evoke the image of slow-moving, bureaucratic beasts using old ideas of hard and soft power to pursue national security outcomes. But in today’s landscape, the truth is anything but that.

Modern policymakers are combining national security and industrial policy to shore up their own technological strengths – and make life harder for their competitors.

The United States and China are key players in this new world of “economic statecraft”, but so too are smaller economies that seemingly face a choice between Washington and Beijing.

Innovative laws

One clear example is the Chips and Science Act in the US, an innovative piece of legislation combining both grants and guardrails to promote US technological dominance and hamstring China’s efforts to catch up.

In Asia, Japan’s Economic Security Promotion Act is set to be fully implemented in early 2024, and South Korea is making moves that some commentators have called a “decoupling” from China.

In the name of economic security, 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.

As one country introduces these measures, others are likely to follow. The US introduction of outbound investment screening, for instance, has spurred 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.

Later this year, the US Commerce Department’s October 2022 “interim final rule” on export controls for US-origin semiconductor technologies will become a “final rule” – possibly closing loopholes discovered over the past year and expanding to include cloud computing.

As bureaucrats continue to innovate in designing policies for 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 sub-sectors of existing ones.

Out-innovating

The US and its allies have been using various initiatives to “onshore”, “nearshore” and “friendshore” strategic industries. The Chips and Science Act is an extension of this, offering carrot-and-stick incentives to businesses – including non-US ones – to ensure innovation remains localised.

Focused largely on semiconductor production – a US$600 billion industry in 2022 and forecast to reach US$1.9 trillion within a decade – the Chips and Science Act includes grants offering US$39 billion in funding for semiconductor manufacturing in the US, and guardrails that restrict expansion of the sector in China.

The guardrails come in the form of a catch for funding: No recipient may expand 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.

China has not sat by idly. The world’s second-largest economy has used its Thousand Talents programme to attract overseas expertise to China and improve the domestic science and technology base.

To safeguard its own science and technology base, it has introduced the Export Control Law (2020), Unreliable Entities List (2020), Anti-foreign Sanctions Law (2021) and Counter-espionage Law (2023).

Earlier this year, it publicly announced two US companies that were put on the Unreliable Entities List for the first time, and used the Export Control Law to restrict exports of two key semiconductor and advanced optics components, gallium and germanium.

Pillar 2 of the Australia-UK-US Partnership is another example of innovation in the economic security space. A lower-profile part of the agreement, Pillar 2 focuses on increased innovation and information sharing around advanced technologies such as artificial intelligence, quantum computing and cyber capabilities.

As technology becomes embedded in almost every aspect of our lives, demand for semiconductors will keep rising. As nations make the sector a security priority, and use innovative legislation to preserve and capture technological advantage, tech supply chains may be transformed.

Technological advancements will of course be positive for businesses and consumers alike. But geopolitical realities will add immensely to the sensitivity and complexity of the sector. Consumers may ultimately bear some of the cost.

With an ideological streak now increasingly apparent in international relations, it is probably safe to bet on more bifurcation in the technology sector, through more innovative economic security legislation.

The writer is head of geopolitical risk at ANZ