(The National Interest) – German chancellor Angela Merkel and France’s President Emmanuel Macron have expressed their commitment to make strategically important products such as medical and pharmaceutical products in France and Germany. In a similar vein, the European Union Chamber of Commerce has asked its members to wean themselves off being reliant on China’s supply chains. Japan and India appear to be following suit.

Strategic decoupling from China is likely to lead to governments to increase national security regulations on foreign investments and expand their definition of strategic sectors from being information technology (IT), telecommunications and dual-use technologies with civil and military applications, to include food security, biotech, and pharmaceuticals. In turn, governments will demand that strategic sectors conduct domestic manufacturing.

The United States, EU, Russian and Chinese governments will have greater oversight and screen foreign direct investment (FDI) in these strategic sectors to prevent foreign investors from accessing sensitive data and technologies in a bid to protect their respective technological bases. As businesses are increasingly vulnerable to buyouts due to the economic downturn, governments are wary of foreign investments of their national companies. In late May, the U.S. Senate passed a bill that would bar foreign companies from U.S. exchanges if they are unable to prove that they are not controlled by a foreign government and refuse greater U.S. oversight of company financials. Similarly, the British government is considering legislation to prevent significant investment and foreign takeovers of UK companies.

Already prior to the pandemic, higher wages and increased shipping costs had led companies to shift supply chains away from China. Yet, the coronavirus has created severe disruptions in a complex web of international supply chains due to quarantines, factory closings, travel restrictions imposed by China and other countries. This increased the momentum of companies seeking to relocate as part of a growing trend of attempting to build resilience into their supply chains and mitigate against future shocks. A recent Bank of America survey of three thousand firms reported that companies in ten out of twelve global industries, including medical equipment along with semiconductors are in the process of shifting part of their supply chains from current locations.

In a bid to accelerate the trend to regionalize supply chains, Western states are likely to increase taxation on goods that were not made onshore or near shore. U.S. Commerce Secretary, Wilbur Ross exclaimed, “Globalization had gotten out of control. It takes two hundred suppliers in forty-three countries on six continents to make an iPhone.” The United States is exploring increasing tariffs on Chinese goods, tax incentives and potential re-shoring subsidies. The United States is also engaging with states across the international community and companies as part of an “Economic Prosperity Network” to standardize an approach towards regionalizing supply chains, trade, energy and infrastructure.

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