US-China trade war harming tech innovation, World Bank says

31 March 2023

The trade war between the US and China is creating fragmented supply chains and reducing tech innovation, says the World Bank. 

Describing the tensions in its latest East Asia and the Pacific region economic outlook as a “decoupling” of the two superpowers, the World Bank said the ongoing trade war is reducing collaboration and knowledge sharing in technology innovation. 

The hostile environment, it added, is having an “adverse effect” on Chinese and US firms alike.

“The fragmentation of standards, especially between the world’s two largest markets, can not only constitute additional barriers to trade and investment between the two countries,” it said.

In addition, increased efforts by each country to promote domestic innovation and reduce reliance on foreign technology have led to the development of increased standards and regulations, creating “fragmentation” within supply chains, according to the World Bank.

The report said: “Fragmentation creates additional burdens and diseconomies on exporters and multinational corporations from third countries, as companies need to adjust their products and processes to comply with different regulations.”

The World Bank argued differing standards are creating “additional costs and complexity in sourcing decisions”, which may lead companies to keep more of the production process within one country. 

The report comes as Japan has announced plans to implement export controls on 23 types of semiconductor manufacturing equipment, following similar moves by the US and the Netherlands to curb China’s chip manufacturing capabilities.

A Japanese government official said: “By expanding the regions that will be covered by the measures, we wanted to address a broader range of risks associated with advanced semiconductor technology.

“We are fulfilling our responsibility as a technological nation to contribute to international peace and stability."

Meanwhile, the US government is accepting applications for billions of dollars in subsidies with the aim of coaxing companies to bring semiconductor manufacturing back to America, as part of funding made available through its CHIPS Act. 

However, Massachusetts Institute of Technology professor Yossi Sheffi said trying to localise chip production is a “Herculean task”.

Sheffi said: "The initiative’s objectives are laudable, but from a supply chain perspective the chances of it persuading companies to move their manufacturing operations back home are very low.

“While the funding may underwrite various manufacturing projects, it is unlikely to reduce the dependence of chip manufacturing on other countries – particularly China and Taiwan.

“Recent chip shortages highlight America’s reliance on foreign manufacturers, and provided much of the impetus for the CHIPS legislation. But, reshoring well-established manufacturing supply chains – notably in Asia – is a Herculean task.”

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