This could lead to growing fragmentation and instability in the global financial system. It would also expand, even if in a limited way, the regional role of the RMB and China’s influence. This is in line with the findings of an International Monetary Fund (IMF) working paper released in March 2022, “The Stealth Erosion of the Dollar Dominance: Diversifiers and the Rise of Nontraditional Reserve Currencies”.
Weaponization of supply chains
An even clearer signal of the central role of geo-economics for the US is Secretary of the Treasury Janet Yellen’s call for “friendshoring” to guide American firms’ strategies as they restructure supply chains. This weaponization of supply chains is anchored in concern with China, gaining currency with Russia’s invasion of Ukraine and the resulting sanctions regime.
The basic concept sounds simple enough. Do business with like-minded friends, in particular liberal democracies with similar values. Avoid existing or potential adversaries, primarily states that are organized or that behave in what are deemed unacceptable ways. But the devil is in the details, along with a great deal of uncertainty for firms and governments, not least the US.
The Covid-19 pandemic accelerated movement toward a “geo-economics of supply chains” to ensure the domestic availability of critical medical supplies. Then on October 7, 2022, the US Department of Commerce introduced export controls on advanced computing and semiconductors to China. It also signaled wider unilateral US protectionist approach towards technology trade.
The assumptions of this strategy are twofold. First, that non-US firms are unlikely to fill the technology gaps over the longer term, while China will not be able to develop an advanced semiconductor industry on its own. Second, that the US will be able to forge and maintain the needed coalition of “like-minded” partners, particularly in Asia and Europe.
These assumptions are questionable. Consider the global complexity of the semiconductor industry. It is estimated that each segment of the chip-making value chain involves firms in an average of 25 countries in direct manufacturing-related activities, as well as firms in approximately 23 countries in supporting roles. In wafer fabrication, firms in 39 countries are involved, with firms in 35 countries providing market support. A product such as an automobile, which will contain semiconductors, can cross an international border more than 70 times before reaching the end customer.
It is not clear how effective US export controls are likely to be in constraining China’s advanced computing and semiconductor development over the longer term. There is indeed a view that these controls may end up strengthening China’s chip industry, accelerating its development over the longer term.