Extra-territorialism is protectionism and threatens global value chains

May 18, 2020

COVID-19 pandemic has jolted the global economy & politics. We have seen a sharp rise in protectionist trade barriers especially in relation to the export of medical goods but this is not the only area trade barriers are impacting global value chains. Extra-territoriality put simply is the application of national rules to companies in foreign jurisdictions and a form of protecting national economies at the cost of others. It is a way for governments to gain national advantage but doing so threatens other economies who rely on globalised supply chains and open borders.

The rule change announced by US policy makers aimed at controlling the use of any US parts in foreign semiconductor manufacturing equipment is a good case in point. It is like the mayor of a town making door handles for bread ovens controlling who can buy the bread made in them in a foreign land. Unilateral restrictions targeting one country are not just felt there. Restrictions targeting China are not just felt in China but also here in the UK where foreign made chips and components are in imports vital to the UK.

Semiconductors feature in advanced medical equipment, and enable products and services for telework, remote learning, telemedicine, and so many other aspects of our daily life, including the economic recovery after the pandemic is controlled. The US are not alone in exerting national laws overseas but the impacts can be felt at home as much as overseas. According to a report by Boston Consulting Group (BCG), restrictions imposed by the US will likely lead to South Korea overtaking the US as world semiconductor leader with China potentially becoming global leader in the long term.

As experience in communications network equipment and other tech sectors has shown, once the US loses its global leadership position, this dynamic effectively reverses the ability of US companies to innovate and throws US companies into a downward spiral of rapidly declining competitiveness and shrinking market share. Lower R&D investment would inhibit the US semiconductor industry’s ability to deliver the breakthroughs that US technology and defence sectors rely on to maintain global leadership, and ultimately could force them to depend on foreign chip suppliers.

COVID-19 has further highlighted fault lines in today’s world order exposing international companies and consumers to risks that were previously not there. Extraterritorial activity can be seen more and more applied to digital environment as it has been seen for some time in other areas like trade finance.

In today’s world we are inter-dependant and rely on each other to keep borders open and trade to flow. In this context, extra-territoriality undermines our common goal to share prosperity, tackle disparity and make trade work for everyone and, we all lose.

Written by Chris Southworth, Secretary General of ICC United Kingdom

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