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August 19, 2020

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Worrying signs of knee-jerk reaction to COVID-19

There are worrying signs of a knee-jerk reaction to the coronavirus pandemic, a spasm toward protectionism, nationalism and the abandonment of international cooperation. This is clearly the wrong approach.

Turning inward would cripple manufacturing efficiency. The prices consumers pay would rise. Innovation and productivity growth, already under threat, would slow down. In short, people’s lives would suffer.

The reality is that our globally interconnected economy has helped in dealing with the pandemic. Vital raw materials such as testing reagents have moved across borders to where they are in short supply. Personal protective equipment and even ventilators from across the globe are now helping to alleviate shortages in many of the worst-hit countries. Contrary to dire predictions, global supply chains including food have held up pretty well.

Yet despite what history tells us of the dangers of protectionism, the United States in particular seems intent on undermining the supply side of the global economy. The semiconductor industry underlines the dangers of such an approach at a time when mobile phones and the semiconductors they use are the very devices we’re now relying on to maintain our safety, sanity, and some vestige of normality in our lives.

Rules proposed by the US administration would disrupt the global semiconductor innovation and supply chain by stipulating that a chip designed and manufactured outside the US could be sold in the US only with the approval of the US government and so long as any piece of US-origin equipment was used in its production.

The motivation of such a move to unwind the global semiconductor supply chain can be explained by a desire to cripple Chinese companies and industries that use semiconductors, in particular, Huawei.

But the repercussions would harm the entire global industry, including major American firms.

These negative effects of deglobalizing the semiconductor industry are laid out in a March 2020 report by The Boston Consulting Group, commissioned by the US Semiconductor Industry Association, “How Trade Restrictions with China Could End US Leadership in Semiconductors.”

It estimated that US companies would lose 18 percentage points of global share and 37 percent of their global revenue if the US completely banned semiconductor companies from selling to Chinese customers.

The report concluded that this would inevitably result in severe cuts in R&D and capital expenditures, and the loss of 15,000 to 40,000 highly skilled direct jobs in the US semiconductor industry.

Deglobalization hurts

It would also cripple innovation, which relies on in-depth, long-term collaboration between chip designers in the US, China, Europe and other parts of the world, while creating uncertainty for supply chains that are the foundation of products and services critical to fighting the COVID-19 pandemic.

Longer term, if it prompts the Chinese government to introduce retaliatory measures and promotes a move toward self-sufficiency, deglobalization could split today’s common standards. Balkanising semiconductor design would be catastrophic for the pace of technological progress and impose new costs and rigidities on the growing number of industries that are embedding chips into the core of their products.

Semiconductors are hardly alone. Apparel firms Kenneth Cole and Ralph Lauren have both warned that cutting their firms off from Chinese suppliers would drive up prices for global consumers and hinder economic recovery, while electrical goods retailer Best Buy pointed out that unwinding its global supply chain would dramatically increase economic inefficiency.

Commenting on the challenge of the novel coronavirus, German President Frank-Walter Steinmeier summed up the new reality perfectly: “No single entity covers the medical, economic and political elements required to produce a vaccine for all.”

As with vaccines, as with semi-conductors.

While questions do need to be asked about improving the resilience of our supply chains and the fragility that comes with “just in time” manufacturing networks, protectionism is not the answer. Any headlong rush to roll back globalization, localize and re-shore threatens only to make any problem worse.

Peter Williamson is honorary professor of International Management Fellow and director of Studies in Management at Jesus College, University of Cambridge.


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