The Legal Backroom

Executive Summary

For roughly three decades after the Cold War, international economic policy largely moved toward liberalization. This took the form of lower trade barriers, free movement of capital between states, greater comfort with goods and services owned by entities abroad, and globally integrated supply chains.

Today, that direction has begun to reverse. Tariffs have returned as mainstream economic instruments, governments screen both inbound and outbound investments, while subsidies and local-production requirements are used to redirect investment.

The biggest difference between the trade regime of the pre-liberalization era and the present, however, are the tight geopolitical export controls on advanced technologies, national security screening requirements of transactions, and even transactions involving allies shaped by quid pro quo arrangements on production, employment, and governance standards.

However, this new international economic reality does not amount to a total rejection of capitalism or a repudiation of globalization, no matter how it may seem. Instead, it represents a series of progressive conditions a trade arrangement must satisfy to be implemented.

Conditional capitalism is therefore a system where markets continue to allocate private capital, while states increasingly determine the strategic terms on which international and even domestic competition may occur.

The question for the next decade is therefore not whether free competition can survive, but how much political conditionality can be attached to it before managed markets replace liberalized ones as the new norm.

The New Trade and Geopolitical Landscape

The shift toward conditional capitalism is already underway, and its visibility in recent events, particularly between traditional allies, as well as geopolitical rivals, is among the most conclusive evidence supporting this architecture.

For example, the July 2025 US-Japan Strategic Trade and Investment Agreement established a 15% tariff floor on nearly all Japanese imports while coupling market access with expanded Japanese purchases of US goods and a US$550 billion investment commitment in strategic US sectors.[1] Then, the August 2025 US-European Commission Agreement on Reciprocal, Fair, and Balanced Trade[2] similarly conditions market access on a broader package of commercial and strategic commitments. The US agreed to apply the higher of its existing MFN tariff or a 15% tariff to most originating EU goods, while the European Union committed to eliminating tariffs on US industrial goods and expanding preferential access for selected agricultural products. The framework also links the trading relationship to planned European purchases of American energy and AI chips, additional European investment in strategic US sectors, negotiations over rules of origin, and regulatory concessions on measures such as CBAM (Carbon Border Adjustment Mechanism) and CSDDD (Corporate Sustainability Due Diligence Directive). Additionally, the parties agreed to cooperate on technology security, investment screening, export controls, and third-country critical mineral restrictions, extending the agreement beyond reciprocal tariff-setting into the strategic conditions governing trade, investment, regulation, and technology access.

These terms may muddy the presumption of what still seems like progressively reduced trade barriers, with the WTO recording a 3.4% simple average and 2.1% trade-weighted US MFN tariff for 2025.[3]

Moreover, capital itself is also becoming conditional. Since January 2025, the US Outbound Investment Security Program has prohibited or required notification of certain American investments involving China in semiconductors, quantum technology, and artificial intelligence.[4] The Treasury’s rationale extends beyond financing and includes non-capital benefits of investment, such as managerial assistance, building talent networks, and broadening market access in the receiving nation.

Inbound capital faces similar scrutiny. The EU’s revised Foreign Direct Investment (FDI) Screening regulation, adopted in June 2026, makes national security screening mechanisms mandatory across Member States and covers critical minerals, strategic state infrastructure, and advanced technology capabilities.[5] This stringency builds on the Union’s already established scrutiny of inbound investments in industries like defense, semiconductors, and aerospace, which covered 37%, 21%, and 16% of the Commission’s Fifth Annual Report on the Screening of FDI security assessments in 2025, respectively.[6]

The clearest case study of this new regime is the Nippon Steel acquisition of US Steel in June 2025.[7] Following CFIUS (the Committee on Foreign Investment in the United States) review, the Biden administration had initially prohibited the transaction on national security grounds. The Trump administration later affirmed that the acquisition might threaten US national security but determined those risks could be mitigated through trade conditions, permitting the transaction subject to continued compliance with a National Security Agreement. The conditions extend substantially into the acquired company’s governance and operations. The NSA requires approximately US$11 billion in new investment by 2028, the maintenance of US steel production capacity, a Pittsburgh headquarters for the American division, and a majority American board.[8] A government-held “Golden Share” also gives the United States the right to appoint an independent director and consent rights over reductions in committed investments, plant closures, production relocation, sourcing, and other strategic decisions. Nippon Steel acquired 100% of US Steel’s common stock and gained private control of the company, but the US government determined the strategic conditions under which private foreign ownership could occur.

Export controls also increasingly target productive capability rather than individual goods. For instance, China has imposed licensing controls on several medium and heavy rare-earth products, citing national security interests along with non-proliferation obligations. In the MOFCOM’s 18th announcement of 2025 in April, China specified samarium, gadolinium, dysprosium, lutetium, scandium, and yttrium-related items for export licensing.[9] The 2025 IEA Global Critical Minerals Outlook projects that China will remain responsible for around 80% of refined battery-grade graphite and magnet rare earths in 2035. Without China as the largest supplier, the IEA suggests the remaining graphite and rare-earth supply would meet only 35%-40% of the remaining demand by that same year.[10]

Recent industrial policy enacted by the US and EU also highlights the conditional nature of production geography. The American CHIPS Act provides US$39 billion in manufacturing incentives intended to complement private investment in US semiconductor capacity.[11] Samsung alone received up to US$4.745 billion, supporting more than US$37 billion of investment in Texas.[12] Other recipients, including fabricators like TSMC and Intel and wafer and materials suppliers like Vulcan Elements and USA Rare Earth, also received incentives to enter domestic advanced packaging and production. Separately, the One Big Beautiful Bill Act (OBBBA)[13] has provided financial incentives for production through property deductibles for physical R&D, write-offs for hardware procurement, and phased-out clean energy tax credits and other preferences. This has had tremendous effects on American industry, including the ability to supply the energy required to power the AI buildout.

Europe’s Net-Zero Industry Act[14] likewise sets domestic manufacturing benchmarks to reduce strategic dependence in its own way. The Commission has explicitly designed the legislation to ensure Europe’s green energy transition is not hampered by strategic dependencies. The EU Chips Act also goes further in semiconductors, seeking to double Europe’s global market share to 20% while mobilizing more than €43 billion worth of policy-driven investment to reinforce domestic research, manufacturing, and supply-chain resilience. [15]

On the frontier, the European Commission’s ‘InvestAI’ initiative has planned to set aside €200 billion for gigafactory and AI development overhauls, with the funds largely a repackaging of existing budget programs.[16] Meanwhile, the American hyperscaler buildout has already hit US$400 billion in CapEx by 2025, dwarfing the EU’s multi-year public-private expense shuffle target with immediate, entirely private capital.[17] Regardless, both programs represent an effort to create conditionality in production capacity, this time in the digital sphere.

However, incentives have not only sought to bolster existing domestic production, but also aim to shift supply-chain dependencies and re-establish previously lost manufacturing capabilities. Since 2022, the US “friend-shoring” policy has explicitly encouraged supply-chain diversification toward trusted partners rather than indiscriminate reshoring.[18] The policy was articulated then as a response to broader supply-chain resilience concerns and a need to diversify toward trusted partners rather than pursue complete autarky.

Taken as a whole, these instruments do not abolish comparative advantage but deliberately alter the incentives through which it develops. Private firms still determine investment and compete for customers, but the government increasingly shifts the economic calculus until domestic or politically preferred production arrangements are commercially viable.

One interesting feature of conditional capitalism outside economics is the declining usefulness of traditional ideological labels in describing geopolitical economic competition. During the Cold War, the American and Soviet blocs could be distinguished not only geopolitically, but also by fundamentally different systems of economic ownership and allocation, whether capitalist or communist. The contemporary competition between the United States and China is different. Its economic poles might be more accurately characterized as market-driven and state-direction-driven models of capitalism, differing not simply in the degree of state intervention, but in their forms, objectives, and relationships to private enterprise.

This distinction remains one to which much of the world is still adjusting. Greater government intervention in markets has traditionally been associated in Western political discourse with the economic left. Yet many of the defining interventions of the emerging regime, in tariffs, investment screening, export controls, industrial subsidies, domestic-content requirements, and restrictions justified by national security, do not map comfortably onto that ideological spectrum. State intervention can expand without displacing capitalism in that regard.

In this vein, greater state direction also does not necessarily correspond with less competitive capitalism. For example, Singapore combines extensive international openness with state ownership of about 90% of land[19], personal income tax rates up to 24% in its highest bracket, and a flat corporate tax rate of 17% with potential exemptions.[20] Most interesting, though, are its two major state-owned investment institutions. GIC manages foreign reserves commercially over the long term, while Temasek owns a global portfolio alongside controlling shares in strategically significant Singaporean enterprises such as telecommunications, transportation, and banking. [21] These enterprises, such as Singapore Airlines, SMRT Corporation, and DBS Bank, remain profit-driven companies, but Temasek and the State hold management stakes. This creates both a duty for the public good and private incentives for growth.

The UAE similarly combines an internationally attractive business environment with sovereign investors, including ADIA and Mubadala, the latter explicitly investing across sectors considered important to the country’s economic diversification. [22]

These are not new examples of conditional capitalism, but they demonstrate that substantial state ownership, strategic capital allocation and competitive private markets can coexist.

This complicates the ideological taxonomy often used to describe contemporary economic competition. The relevant distinction is increasingly not simply whether the state or market allocates capital, but where governments draw the boundary between them, and which capabilities they are unwilling to leave entirely to private or foreign allocation.

At the same time, the preceding policies of friend-shoring, investment screening, and technology controls demonstrate that political alignment increasingly influences which foreign dependencies states consider tolerable. Ideology may therefore be becoming less like descriptions of how economies are organized, while remaining increasingly consequential as a proxy for labeling allies in geopolitics.

Is conditional capitalism simply a new label for old tricks?

None of the instruments described in this commentary are individually novel, and the obvious objection is that this new regime is nothing more than a mix of initiatives combined under the overarching objective of geopolitical and economic dominance in specific markets and technologies. What John Mearsheimer calls offensive realism in his 2001 book, ‘The Tragedy of Great Power Politics’, provides a compelling explanation for that underlying objective. Indeed, great powers operating under international anarchy are incentivized to maximize their relative power, including the latent power derived from wealth and technological capability.

However, conditional capitalism does not challenge this explanation and seeks to describe one of its emerging economic consequences. As governments increasingly treat semiconductors, energy, capital, critical minerals, industrial capacity, and advanced technologies as components of relative power, economic interdependence itself becomes strategic.

Moreover, conditional capitalism also differs from traditional protectionism. States have long used tariffs, subsidies, export controls, and restrictions on foreign ownership, but the distinction lies in the breadth and convergence of these tools for economic brinkmanship. Tariffs condition goods by origin, investment controls condition capital by destination, screening conditions ownership by nationality, and export controls manage technology by recipient. Subsidies and procurement have changed commercial incentives for where to produce, while policies increasingly aim to mitigate the risk of geopolitics disrupting stable supply chains, particularly for critical resources and infrastructure.

One piece of evidence for this cohesion is the European Economic Security Strategy, which treats several of these vulnerabilities within a common framework. Conditional capitalism simply describes this emerging institutional settlement, in which private markets continue to allocate capital and organize production, while governments increasingly define the strategic perimeters within which that allocation may occur.

The mistake would be to treat conditional capitalism as efficient as its predecessor free-trade regime. Intervention necessarily distorts the allocation an unconstrained market would otherwise produce. A defensible strategic intervention should therefore meet a demanding test of its necessity, the opportunity cost of inaction, and the degree of concentration risk that may lock out substitutable supply. Poorly disciplined conditionality, after all, risks rent-seeking, retaliation, and permanently protecting uncompetitive industries, while alienating longstanding allies.

Under these circumstances, when a capability is genuinely critical, supply is dangerously concentrated in a geopolitically unpalatable arrangement, realistic substitutes from preferential partners are limited, and replacement would be costly if the capability were destroyed, conditional capitalism occurs.

Ultimately, the term best describes an emerging regime and does not presume that every condition imposed within it is economically justified.

The Future

Globalization is therefore unlikely to simply disappear. It may instead become increasingly differentiated according to political trust, strategic importance, and geography. Companies will consequently optimize not only for efficiency, but for political executability as an incentive in and of itself. If investments, acquisitions, technologies, and supply chains remain viable under tariffs, subsidies, sourcing requirements, investment screenings, and export controls, then market behavior will inevitably be nudged toward the engineered outcome of keeping operations within geopolitically viable arrangements.

For states, competitive advantage will increasingly depend upon the inverse capability of intervening selectively enough to preserve strategic capacity without destroying the market incentives that generate innovation, investment, and productive efficiency.

The eventual competition may therefore be less between free-market and state-controlled economies than between institutional models competing to determine how much strategic direction markets can absorb without losing the efficiencies that made them valuable. Conditional capitalism will succeed or fail as an emanation of state capacity, depending on where that boundary is drawn.

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[1] Cathleen D. Cimino-Isaacs & Kyla H. Kitamura, US Tariffs and the 2025 US-Japan Framework Agreement, Cong. Rsch. Serv., IN12608 (Jan. 30, 2026).

[2] Joint Statement on a United States-European Union Framework on an Agreement on Reciprocal, Fair, and Balanced Trade, Eur. Comm’n (Aug. 21, 2025)

[3] United States of America, WTO Tariff & Trade Data, World Trade Org. (last visited Sept. 4, 2026).

[4] Provisions Pertaining to US Investments in Certain National Security Technologies and Products in Countries of Concern, 89 Fed. Reg. 90,398 (Nov. 15, 2024) (codified at 31 C.F.R. pt. 850).

[5] EU Strengthens Its Foreign Investment Screening Framework, Eur. Comm’n (June 26, 2026).

[6] Eur. Comm’n, Fifth Annual Report on the Screening of Foreign Direct Investments into the Union, COM (2025) 632 final (Oct. 14, 2025).

[7] Regarding the Proposed Acquisition of United States Steel Corporation by Nippon Steel Corporation, 90 Fed. Reg. 26,185, 26,185 (June 20, 2025).

[8] Nippon Steel Corp. & United States Steel Corp., Nippon Steel Corporation and US Steel Finalize Historic Partnership (June 18, 2025).

[9] Announcement No. 18 of 2025 of the Ministry of Commerce and the General Administration of Customs of the People’s Republic of China, Ministry of Com. of the People’s Republic of China (Apr. 4, 2025).

[10] Int’l Energy Agency, Global Critical Minerals Outlook 2025 (2025).

[11] CHIPS and Science Act of 2022, Pub. L. No. 117-167, 136 Stat. 1366.

[12] Biden-Harris Administration Announces CHIPS Incentives Award with Samsung Electronics to Solidify US Leadership in Leading-Edge Semiconductor Production, US Dep’t of Com. (Dec. 20, 2024).

[13] One Big Beautiful Bill Act, Pub. L. No. 119-21, 139 Stat. 72 (2025).

[14] Regulation (EU) 2024/1735 of the European Parliament and of the Council of 13 June 2024 on Establishing a Framework of Measures for Strengthening Europe’s Net-Zero Technology Manufacturing Ecosystem and Amending Regulation (EU) 2018/1724, 2024 O.J. (L 1735) 1.

[15] Regulation (EU) 2023/1781 of the European Parliament and of the Council of 13 September 2023 Establishing a Framework of Measures for Strengthening Europe’s Semiconductor Ecosystem and Amending Regulation (EU) 2021/694 (Chips Act), 2023 O.J. (L 229) 1.

[16] EU Launches InvestAI Initiative to Mobilise €200 Billion of Investment in Artificial Intelligence, Eur. Comm’n (Feb. 11, 2025).

[17] Int’l Energy Agency, Key Questions on Energy and AI (2026).

[18] Janet L. Yellen, Sec’y of the Treasury, Remarks at LG Sciencepark, US Dep’t of the Treasury (July 19, 2022).

[19] Abhas Jha, “But What About Singapore?” Lessons from the Best Public Housing Program in the World, World Bank Blogs (Jan. 31, 2018).

[20] Singapore, Dentons, Global Tax Guide to Doing Business in Singapore, Dentons (last visited Sept. 4, 2026).

[21] Our Portfolio, Temasek (last visited Sept. 4, 2026).

[22] Rawi Abdelal, Sovereign Wealth in Abu Dhabi, 14 Geopolitics 317, 317–27 (2009).

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Being Caught in the Gravity Well of Globalized Markets [A Historical Appendix]

To comprehend the full architecture of the emerging conditional capitalist market regime, it is also vital to trace geopolitical and economic world affairs back to their predecessor. In this light, the current state of international trade may seem straightforward, as globalized markets are weighed down by their own success.

The economic settlement that followed the Cold War was not an accident, and its foundations were laid decades earlier through the General Agreement on Tariffs and Trade (GATT). Policy paper 7649 by the World Bank Group’s developmental research team in April 2016[1] suggests that the GATT, an instrument meant to accelerate economic recovery in the postwar period, largely achieved this measure through the Most-Favored-Nation (MFN) principle, which required member nations to treat each other equally in trade. By the Kennedy Round (1964) of subsequent negotiations, tariffs for Japan, the EEC, the US, and the UK were only 15%, and by the end of the Uruguay Round (1986-1994), tariffs had been reduced by 38%.

The initial agreement, however, not only created more transparency in trade relationships but also laid the groundwork for a more comprehensive, rules-based international system governing trade, reducing other barriers to trade alongside tariffs. This culminated in the establishment of the World Trade Organization (WTO) in 1995 and the birth of a more comprehensive rules-based system governing international trade. The impetus for this transformation was varied but generally stemmed from a need to regulate the new global service economy, reinforce intellectual property protections (which became the TRIPS Agreement), and adjudicate trade disputes more cleanly.

Regardless, the direction of travel seemed to favor gradually reducing political barriers to exchange, while specialization and competition allocated resources more efficiently than nationally protected markets.

Then, the accession of the People’s Republic of China to the WTO in 2001, in hindsight, set off a chain of effects that led to our new market regime of what can only be called conditional capitalism when addressed as a whole.

However, it would be intellectually lazy and disingenuous to claim causation, or even correlation, between these two events. China’s accession to the WTO and its underlying markets should be viewed as an economic success story. Hundreds of millions of people in China were lifted out of poverty[2], but more significantly for the world, these workers became more integrated into international production while multinationals reorganized manufacturing around increasingly complex global value chains. Production no longer needed to occur principally where a product would ultimately be consumed. Components could instead be designed, manufactured, assembled, and distributed across several different jurisdictions according to their respective comparative advantages.[3]

The resulting efficiency gains were substantial. China’s extraordinary manufacturing capacity reduced the cost of manufactured goods internationally, while Western companies gained access to cheaper inputs, enormous new consumer markets, and more specialized supply chains. Specifically, China’s share of world manufacturing exports grew from 2.3% in 1991 to 18.8% in 2013, while its world manufacturing value grew from 4.1% to 24% during that same period.[4]

Consumers consequently enjoyed products whose affordability and availability would have been considerably harder to achieve within a nationally self-sufficient economic scheme.

This proved that industrial scale could transform products once considered expensive into ordinary consumer goods. Globalization therefore did not simply relocate production but increased the productive possibilities available to firms and consumers by allowing capital, labor, and manufacturing capability to interact across borders on an unprecedented scale. It was an overwhelming success on metrics of economic and human development, productive efficiency, and consumer affordability.

The problem that emerged from this arrangement was not that these gains were fictitious. Instead, aggregate efficiency concealed substantial differences in where benefits accumulated, where adjustment costs concentrated, and how readily displaced communities could participate in the new comparative advantages globalization created. Put differently, the economic benefits of trade liberalization were not distributed evenly.  

Greater aggregate efficiency coexisted with substantial losses concentrated in industries, communities, and labor markets. Economic decision-makers moved production, as is natural with a profit-seeking motive, to more efficient locations where economies of scale could reduce production costs. This went beyond price and soon included the concentration of specialized skills in particular regions.

This shift had significant reverberations. Research into what became known as the “China Shock” found that American regions more exposed to Chinese import competition experienced larger and more persistent declines in manufacturing employment, along with weaker labor-force participation and depressed earnings. Autor, Dorn and Hanson conservatively estimated that rising Chinese import competition accounted for approximately one-quarter of the contemporaneous aggregate decline in US manufacturing employment.[5]

These findings were not merely the conclusion that foreign competition displaced some domestic production. Conventional trade theory already anticipates that trade would produce winners and losers.

What was especially consequential was how difficult it was for affected workers and regions to adjust.[6] Labor did not seamlessly migrate towards expanding industries, displaced workers could not necessarily convert existing skills into those demanded elsewhere, and new investment did not automatically arrive in the communities from which manufacturing had departed. Comparative advantage thus changed considerably faster than the economic structures of individual places.

This exposed the distinction between aggregate efficiency and adjustment capacity. Cheaper manufactured goods benefitted consumers across an economy, while the costs of producing those gains could remain geographically and socially concentrated. A household might benefit from lower prices as a consumer while simultaneously confronting declining employment opportunities as a producer. Retraining and redistribution could theoretically mitigate these effects, but their success depended upon the capacity of governments and local economies to create credible pathways into alternative employment rather than simply compensating for its disappearance. Adverse effects were prolonged, and greater import competition was associated with a 1.54% reduction in the manufacturing employment-to-population ratio in the United States. Within the study’s commuting-zone framework, the authors also estimate that 86% of the decline in manufacturing employment associated with increased import exposure was absorbed through a reduction in the overall employment rate.[7]

The consequences thus extended beyond economies into persistent regional dislocation that reduced public confidence in institutions and increased the political salience of trade, deindustrialization and economic sovereignty. Liberalization generated substantial aggregate gains, but sustaining political support for this arrangement became difficult when its adjustment costs proved more durable than expected.[8]

The difficulties of adjusting to globalization also coincided with an unusually compressed sequence of economic and geopolitical shocks. Just as the distributional consequences of China’s integration into global manufacturing became increasingly apparent, the 2008 financial crisis pushed governments to stabilize financial systems, employment, and aggregate demand. The subsequent Eurozone crisis further pressured public finances and, particularly in Europe, contributed to a political environment that emphasized fiscal consolidation over more ambitious structural adjustment programs. These pressures did not occur sequentially enough for one challenge to be resolved before another emerged.

Hence, from the late 2010s up till 2020, a widespread program of austerity was implemented across much of Europe and several advanced economies to manage this cascade failure. The United States, however, emerged from the 2008 financial crisis markedly different. Its program of quantitative easing, early budget tightening, aggressive corporate tax cuts, and innovations in the technological and digital space fueled historic stock market gains and robust consumer spending that far outpaced other developed nations. China, meanwhile, resisted traditional International Monetary Fund-style austerity, and used state-directed credit expansion, infrastructure spending, and industrial policy to maintain high growth rates and move from a low-cost manufacturer to a high-tech competitor.

By the time 2020 rolled around, the US and China were solidified as the world’s two premier economic superpowers while economic relations between them, to say nothing of their geopolitical tensions, had deteriorated into an increasingly explicit trade and technological rivalry.

The COVID-19 pandemic then disrupted production and transportation networks worldwide, exposing the vulnerability of supply chains designed principally around cost, specialization, and just-in-time efficiencies. Governments faced shortages of strategically sensitive products, from medical equipment to semiconductors, while firms reassessed the resilience of geographically concentrated production networks. Russia’s most recent military adventurism in Ukraine also exposed a different form of dependency, particularly for energy shocks. Europe’s reliance on Russian energy demonstrated how an economically efficient trading relationship could take on substantially different characteristics after a geopolitical shift. Sanctions, a disrupted commodity market, and rapidly changing energy supplies increasingly forced governments to consider not only the cost of obtaining essential resources, but also the political reliability of their source.

The cumulative effect is greater than any single crisis, and harder to address effectively. The financial crisis demonstrated vulnerabilities within globally integrated financial markets, while the pandemic exposed vulnerabilities in physical supply chains. This initial doubt about unfettered globalization, with a lack of self-sufficient capabilities in a time of crisis, raised concerns about the geopolitical risks of concentrated dependency and sparked a conversation about ‘de-coupling’ and ‘de-risking’ supply chains.

Amid the intensifying US-China tensions, these concerns also extended to advanced technologies and industrial capacity. As a result, economic resilience, national security, and geopolitical alignment began entering decisions previously governed more by price and productive efficiency.

That is the situation as it presently stands. Yet, this timeline does not demonstrate that globalization itself has failed. Rather, successive shocks revealed that an economic system optimized heavily toward efficiency could operate very differently when the political and institutional conditions supporting that efficiency deteriorate.

The Changing Economics of State Power

Zooming outwards, the rapid pace of innovation and increased interconnectedness during these years suggest that the economic foundations of state power have become far more technologically demanding. Perhaps today, it is clearer that economic security and state capacity depend not solely on aggregate wealth, but on the range of capabilities required to sustain an advanced economy. Digital infrastructure, cloud computing, critical-minerals processing, and advanced manufacturing increasingly operate as the foundations on which commercial activity and state capability depend. The European Commission’s 2023 European Economic Security Strategy, for example, specified four categories of risk. It included supply chain and energy resource resilience, physical and cyber security of critical infrastructure, technology security, and preventing economic dependency. [9] These factors, however, are just the minimum requirements for a baseline level of functioning state capacity.

When it comes to becoming economically competitive, like a high-value artificial-intelligence industry, for example, it requires considerably more than software expertise. To illustrate, it requires advanced semiconductor manufacturing, fabrication equipment, data centers, electricity generation and transmission, cooling infrastructure, telecommunication networks, high upfront capital investment, and access to highly specialized skills.

The consequence is that the baseline against which state capacity must be measured is itself moving. Maintaining the same institutional or industrial capabilities over time does not necessarily preserve the same degree of economic autonomy. As technologies become more sophisticated and production networks become specialized, states unable to access or reproduce critical parts of these systems can become comparatively more dependent even while their economies continue to grow.

The United Kingdom illustrates this problem. Despite remaining one of the world’s largest advanced economies, decades of comparatively weak capital formation have progressively reduced the productive capital available to British firms and workers. Whole-economy investment amounted to only 18.9% of GDP in 2025, the lowest of any G7 economy.[10] More consequentially, recent estimates place the UK’s capital investment gap with comparable economies at 38%, with capital in British manufacturing alone 47% below the average of the United States, Germany, France, and the Netherlands.[11] While these figures alone do not tell a story of economic decline in absolute terms, put together alongside persistent difficulties in infrastructure delivery and other structural constraints, they illustrate a comparative erosion of state capacity. The United Kingdom can remain a wealthy and sophisticated economy while possessing progressively less of the productive infrastructure and industrial depth required to exercise the same degree of economic autonomy relative to its peers.

Economic power therefore depends not only on possessing capital or a large domestic market, but also on maintaining access to a changing portfolio of technologies, infrastructure, resources, and productive capabilities.

The elephant in the room is that globalization has complicated this problem because many of its greatest efficiencies resulted precisely from specialization. Firms had strong incentives to source from producers possessing the greatest expertise, scale, or cost advantage rather than reproducing every stage of production domestically. Over time, this produced extraordinary concentrations of capability, and semiconductors provide almost the archetypal example.

Advanced production depends upon an internationally distributed ecosystem in which stages of design, fabrication, lithography, manufacturing equipment, materials, and packaging are concentrated among relatively few firms and jurisdictions. For example, ASML supplies the extreme-ultraviolet lithography systems required for leading-edge production while foundries such as TSMC manufacture chips designed elsewhere using equipment, software, materials, and intellectual property sourced across several countries.

The strategic significance of controlling individual nodes is reflected in US semiconductor export controls, which expressly target not only advanced chips but also the equipment, software, and other capabilities a competitor, like China, needs to develop or produce advanced-node semiconductors and advanced AI systems. The resulting vulnerability is not simply dependence upon foreign-made chips, but dependence upon an international production system where losing access to even one ‘difficult-to-substitute’ capability can constrain the whole supply chain.

Consequently, the distinction between economic efficiency and strategic resilience matters more. The cheapest or most capable supplier may also be the hardest to replace, and not every dependency can be addressed simply by purchasing elsewhere. Sophisticated productive capacity incorporates physical infrastructure, intellectual property, specialist labor, accumulated technical knowledge, supplier networks, and economies of scale that may have taken decades to develop. Once lost domestically, such capabilities can become expensive and time-consuming to recreate. So, what appears on a balance sheet as an efficient purchasing decision may look substantially different later when assessed by replacement time, concentration risk, or the consequences of supply becoming unavailable altogether.

This produces an economic problem resembling an insurance premium. Maintaining alternative suppliers, inventories, or domestic capacity can seem inefficient under normal conditions because redundancy duplicates costs. However, that apparent inefficiency buys the ability to keep operating when the cheapest or most sought-after supply chain becomes unavailable. The relevant calculation for governments thus increasingly extends beyond the immediate price of a good towards the expected cost of dependency itself.

This does not mean every internationally concentrated supply chain constitutes a strategic vulnerability. Reproducing all production domestically sacrifices many of the specialization gains that made globalization valuable in the first place. It still offers the lowest price relative to other economic models, locates production where expected returns are highest, sells technologies to the highest-paying customer, and accepts investment from the bidder offering the greatest value.

The only catch in this new era of a ‘small yard and high fence’, is that these decisions now pass through a government filter on production location, capital origins, who controls the underlying technology, how quickly the supply can be substituted or replaced, and what domestic capability would remain if the commercial relationship behind a supply chain were interrupted.

By applying these selection criteria, governments could condition foreign acquisitions based on the purchaser’s nationality and the asset’s strategic importance. They could restrict domestic capital from financing particular technologies abroad or prevent advanced technologies from reaching specified jurisdictions entirely. Production could require domestic content, require stockpiling strategic resources, or use procurement, tariff, and investment incentives like subsidies to influence where companies build productive capacity. Broadly, decisions that might otherwise have been determined principally from expected returns and comparative advantages have thus become increasingly subject to what are broadly called national security screening requirements.

The question is, when do these contemporary interventions begin to differ from conventional protectionism alone? None of these enacted policies are new, and the seasoned analyst would call this a mix of industrial policy, protectionism, and geopolitical containment through economic means.

However, classic protectionism, like a tariff, protects or advantages domestic production at the border. The emerging architecture of these screenings reaches considerably further into the organization of economic activity itself, such as determining not only what may enter a market, but also who may own assets, where capital may travel, which technologies may be transferred, where production should occur, and which capabilities governments are unwilling to leave entirely to international allocation.

The resulting architecture therefore does not necessarily reject comparative advantage or globalization but adds qualifications. Governments may still accept that another jurisdiction can produce something more cheaply, or that foreign capital can deploy resources more efficiently, while admitting that the resulting dependency is politically unacceptable. The economic question of who can produce something most efficiently is no longer dispositive, but the conditions under which a state can afford offshore specialization are new points of tension. Within that distinction, conditional capitalism begins to emerge.

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[1] Chad P. Bown & Douglas A. Irwin, The GATT’s Starting Point: Tariff Levels Circa 1947 [2] (World Bank Grp., Pol’y Rsch. Working Paper No. 7649, 2016).

[2] World Bank et al., Four Decades of Poverty Reduction in China: Drivers, Insights for the World, and the Way Ahead (2022).

[3] World Bank, World Development Report 2020: Trading for Development in the Age of Global Value Chains (2020).

[4] David H. Autor, David Dorn & Gordon H. Hanson, The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade, 8 Ann. Rev. Econ. 205 (2016).

[5] David H. Autor, David Dorn & Gordon H. Hanson, The China Syndrome: Local Labor Market Effects of Import Competition in the United States, 103 Am. Econ. Rev. 2121 (2013).

[6] David H. Autor, David Dorn, Gordon H. Hanson & Jae Song, Trade Adjustment: Worker-Level Evidence, 129 Q.J. Econ. 1799 (2014).

[7] David Autor, David Dorn & Gordon H. Hanson, On the Persistence of the China Shock, Brookings Papers on Economic Activity (2021).

[8] David Autor, David Dorn, Gordon Hanson & Kaveh Majlesi, Importing Political Polarization? The Electoral Consequences of Rising Trade Exposure, 110 Am. Econ. Rev. 3139 (2020)

[9] Eur. Comm’n & High Representative of the Union for Foreign Affs. & Sec. Pol’y, European Economic Security Strategy, JOIN (2023) 20 final (June 20, 2023).

[10] Off. for Nat’l Stat., Business Investment in the UK: October to December 2025 Revised Results (Mar. 31, 2026).

[11] Pranesh Narayanan & Aditi Sriram, Turning Energy Support into Investment Leverage, Inst. for Pub. Pol’y Rsch. (Apr. 1, 2026).