Decoupling and Alliances: Global Supply Chain Transformation

By Dr. Andrea Little Limbago, Interos VP of Research & Analysis

A global transformation is underway as the world’s two largest economies untangle the complex supply chains that took decades to establish. In an attempt to both limit geographic concentration risk and untrusted technologies, the U.S. has largely relied heavily on economic sticks, including a range of tariffs and an evolving export control regime focused on restricting and prohibiting various investment and trade transactions with Chinese companies. But to make this strategy work, new collaborative mechanisms with allies and the private sector are also required to elevate collective defense and begin shaping the standards, norms, and rules that will govern the digital era.

America has enacted a range of decoupling policies aimed at untangling the economic and technological dependence on China, including new prohibitions and restrictions on over three hundred Chinese companies in the last two years. It is a whole-of-government approach, with the Departments of Energy and Commerce the latest to enact prohibitions, focusing on decoupling Chinese companies from the nation’s electric grid and advanced technologies as well as those linked to human rights abuses and militarization in the South China Sea. For their part, China recently announced new details regarding their ‘unreliable entity list’ — companies deemed to be a danger to China’s national sovereignty, security, or development.

Growing Sanctions & the Great Decoupling

In addition, China’s recent sanctions against three U.S. defense companies is in response to new U.S. arms sales to Taiwan and the growing trade partnerships between the U.S. and Taiwan; a partnership focused on ties among like-minded democracies, with “shared values that will inform how we reinvent the supply chains of the future.” Except this is not a future vision, but rather reflects the nascent signs of a strategy that integrates economic incentives and collaboration.

To avoid the risk of global economic warfare and the inefficiencies of autarky, the U.S. must build upon the foundation established through the prohibitions and restrictions and formulate a broader and consistent economic statecraft strategy in conjunction with the private sector and allies. This not only will strengthen the greater collective defense, but through enhanced agility and diversification, can lead to more trustworthy and resilient global supply chains.

The great decoupling has introduced numerous challenges for the private sector, including compliance and financial burdens. With hundreds of new entities added each year across a variety of federal lists, staying up to date on prohibited and restricted entities requires close scrutiny and awareness as this landscape evolves, as well as more specific information on how to comply. The private sector would benefit greatly from a ‘one-stop-shop’ that details the whole-of-government restrictions in place, serves as the seminal list of companies subject to those restrictions and prohibitions, and is updated daily to facilitate compliance. This may require greater coordination across federal agencies, as well as greater specifications, to facilitate compliance and could prompt enhanced synchronization across the various agency lists as well.

Forming the ‘Democratic Tech Alliance’

Compliance also can be extremely costly. According to one assessment, it will cost U.S. small carriers $1.8 B to ‘rip and replace’ Huawei and ZTE. A German estimate predicts a larger cost, closer to $3.5 B for their largest telecom provider. Non-compliance fines also can be extremely costly. OFAC issued over a billion dollars in violation fines in 2019. Similarly, as U.S. companies become banned from the Chinese market, the U.S. should consider various incentives and support as they reshore or onshore. For instance, Japan has designated over $2 billion to their domestic champions to facilitate decoupling from the Chinese market. Many private sector companies will need government resources – from technical to financial support – to meaningfully comply and extract themselves from China.

Similar outreach should target American allies and like-minded nations as well and build upon the growing momentum for a democratic ‘tech alliance’. The U.S. is weighing a democratic economic alliance that would retaliate in response to Chinese coercive trading policies, such as those used recently against Australia. In addition, trustworthy networks are foundational to these tech alliances and are a growing priority among democracies. The ‘quad allies’ – Australia, India, Japan, and the U.S. – are stepping up tech ties to strengthen their security and coordination in critical supply chain and technology areas. Creating these alliances will take time and are in a very nascent, exploratory phase but are essential to diversification, agility, and security.

The U.S. also must take advantage of the growing movement among democracies to similarly restrict Chinese-affiliated tech companies and create trustworthy networks. Australia, Italy, Sweden, U.K., Germany, and India are among the growing list of countries restricting Huawei from their 5G infrastructure. India has taken additional steps, banning over 100 Chinese apps following military conflict along the Chinese/Indian border. The EU recently introduced details for a US-EU tech alliance, while the U.K. has proposed a 10-country 5G pact of democracies. Coordinating the restrictions and prohibitions across countries would have several advantages, including a unified front against the Chinese companies, incentivized and increased information sharing, as well as the consistency necessary for private sector compliance.

The global order is under enormous transition. Complete decoupling is neither likely nor advantageous, and global trade must continue when mutually advantageous. However, when reimagining new frameworks for collaboration with the private sector and allies in this new global order, America must resist the temptation to attempt to reproduce the standards, norms, and institutions of previous eras. H.T. Goranson and Beth Cardier best detail this risk, noting “The fact that our smartest scientists and political leaders are envisioning a return to “normal” reflects a collective failure of imagination.” Rethinking how America moves forward with the private sector and allies requires creative and imaginative solutions on scope with the range of global risks. A holistic economic statecraft strategy – including both a refined export control regime as well as revamped relations with the private sector and allies – will be essential for America to lead global efforts to preserve democracy in the digital era.

To learn more about how you can better secure your supply chain in the face of a shifting world order, click here. 

Why the Biden Administration Must Prioritize Supply Chain Security

By Dr. Andrea Little Limbago, Interos VP of Research & Analysis

For decades, global supply chains powered globalization, integrating economies and crafting complex co-dependencies across corporations and governments. While the pace of globalization slowed following the 2008 financial crisis, that shock was insignificant compared to the events of 2020. The ongoing COVID pandemic and tectonic geopolitical shifts continue to upend the world order, transforming globalization and the supply chains undergirding it. While presenting significant challenges, the incoming Biden administration has a rare opportunity to define the terms of the post-pandemic world order and the emerging norms, standards, and policies that will define it. A comprehensive and modernized U.S. supply chain strategy must be foundational to this transformation, as supply chains uniquely cut across an array of challenges, including the pandemic, national security, economic growth, and climate change.

Supply chains moved from a niche topic to headline news following the implementation of global lockdowns last March. However, for the last few years, the Trump administration has issued a series of executive orders and policy responses to address the supply chain risks. These include executive orders addressing the information and communications technology, energy, critical minerals, and medical supply chains, as well as an unprecedented use of prohibitions and restrictions aimed at removing national security threats from U.S. federal and commercial supply chains.

Administration Must Continue to Focus on Supply Chains

The new administration must continue this emphasis on securing supply chains while crafting a modernized and comprehensive supply chain strategy on par with the entirety of current and future challenges. There are some initial positive signs of movement in this direction. For instance, the COVID response is the incoming administration’s top priority, including securing supply chains to expedite vaccine distribution. The Biden administration has named a Supply Coordinator that will “coordinate the federal effort focused on securing, strengthening, and ensuring a sustainable pandemic supply chain.”

But an integrated supply chain strategy is not just essential for pandemic responses. The SolarWinds cyber breach is just the latest reminder of the digital interdependencies across the government and private sector and the fundamental role of supply chain security to U.S. national and economic security. While there has been a significant increase in awareness and activity toward creating more trustworthy supply chains, a coordinated, whole-of-government strategy is necessary.

Risk from China – and Beyond

For instance, in December 2020 alone, over one hundred Chinese companies were added to the Department of Commerce’s Entity List, continuing a two-year trend where Commerce added over 350 Chinese companies due to national security concerns and human rights violations. These additions are an extension of the economic conflict between the U.S. and China and are indicative of the broader geopolitical shifts underway that are introducing a range of risks. These risks aren’t limited to China. In December, 45 Russian companies were also added and with renewed focus on Russia likely under the Biden administration, the need for greater coordination of industrial policy and export controls across the federal government and the private sector is only going to increase. There also has recently been the on again/off again stock market delisting. All of this activity would benefit from a more comprehensive and unified supply chain strategy.

In fact, the prohibitions and restrictions are just one of many tools deployed to secure supply chains. There also is great opportunity for collaboration in the shift to building trustworthy and resilient supply chains. A strong, democratic coalition can engrain transparency, security, and human rights into global supply chain policies, working together to overcome the insecurity and fragility of modern supply chains and create greater agility, resilience, and security. Although the recent EU-China investment agreement may introduce some challenges, secure supply chain collaboration offers the Biden administration a chance to rebuild alliances and craft new partnerships relevant for the digital era.

These new partnerships can also halt the tide of rising protectionism. While self-sufficiency in critical areas, such as personal protective equipment and rare minerals, would be beneficial, economic decoupling is neither practical nor desirable. This again is why a coordinated and comprehensive supply chain strategy is so essential. The push for ‘Made in the USA’ is strong; identifying new ways to manufacture locally and boost economic recovery must be part of this strategy. At the same time, protectionism and economic nationalism must not be the path ahead, and therefore collaboration with allies and like-minded nations must equally guide a transformed approach to supply chains.

Addressing Climate Change

Finally, the incoming administration has been very vocal about implementing new policies to address climate change, with ten climate-related executive actions the administration plans to take immediately. Many of these are directly relevant to supply chains, including a requirement for public companies to disclose the climate risks both within their own operations as well as across their supply chain. Given the necessity for private sector collaboration in addressing climate change, embedding climate change regulations within a comprehensive supply chain strategy can create the necessary transparency and private sector incentives to optimize impact.

This broad range of risks – from climate change to economic recovery to the pandemic to national security – all require greater supply chain visibility and a modernized approach to supply chain resilience. Building greater supply chain resilience can be an essential lever in addressing the most imminent challenges of our time, reinforcing democratic values, fostering greater security, and streamlining coordinated efforts to address the pandemic and climate change.

Many have wondered whether the incoming administration will continue to elevate supply chains as a core priority. Given this range of risks, and the events of the last year, it is clear that supply chain security and resilience is an economic, national security, and societal imperative. The global pace of change and the growing range of risks require significant supply chain coordination and transformation. The U.S. must modernize its approach to supply chains through comprehensive and coordinated policy and technological solutions, or risk being left behind and vulnerable to the imminent future shocks of a post-pandemic world order.

To learn more about how you can better secure you supply chain, click here. 

 Dr. Andrea Little Limbago is a senior executive at Interos, an Arlington-Va based software company that maps and monitors global supply-chain risk for government- and private-sector clients. Dr. Limbago serves as a Senior Fellow and Program Director for the Cyber and Emerging Technologies Law and Policy Program at the National Security Institute at George Mason University, as well as a Fellow at the Atlantic Council’s GeoTech Center.