Critical Tech Offers Opportunity Amid Deglobalization Retreat

The trend towards an increasingly globalized world seems to have come to a halt - at least for the time being. Instead, deglobalization is taking place through trade wars and targeted efforts to reduce interdependence. As a result, international trade flows are already declining significantly. Protectionist measures by countries are focused on promoting their own strengths, with the trade war between the USA and China being a prime example. Even the eurozone has recently embarked on this path. And these protectionist tendencies are likely to continue or even intensify after the US election, regardless of the outcome. Both politicians are focusing on strengthening domestic industry and safeguarding national interests.

The trend towards deglobalization brings with it a whole range of challenges - and opportunities - for companies. The impact varies greatly depending on their level of international exposure and geographical presence. Nevertheless, in the current environment, it seems essential for most companies to take at least some steps to prepare strategically for the geopolitical changes that have already occurred or are imminent. The risks arising from the current geopolitical changes are numerous and varied. Companies that position themselves early could gain an advantage.

Deglobalization and the Tech Sector

The power struggle between the USA and China shows how the global battle for influence and supremacy is developing. Neither side is giving in but is trying to gain advantages in all areas. The protectionist race between the USA and China is most intense in the technology sector. In recent years, under President Joe Biden, we have seen a shift away from the trade war instigated by Donald Trump towards a tendency towards demarcation, particularly in technological advances and investments. 

On the American side, there is understandable concern that the United States is no longer playing a pioneering role in the technology sector. According to a study by the Australian think tank ASPI, China was the leader in 37 out of 44 critical technologies in 2023.  The Biden administration has responded with hundreds of billions of dollars in subsidies and incentives for business and science. But there appears to be more to be done.

With a number of important elections taking place around the world this year, there is a risk that protectionist tendencies will increase worldwide. The proliferation of economic borders is a major setback for globalization and free markets. The often-cited security argument undermines the multilateral trading system and the principles of fair trade and hinders cross-border transactions. Because that's what it's all about: security.

DoD's Role in Critical Technolgy

The US Department of Defense (DoD) plays an important role in deciding which areas need special attention and which issues need special support. The DoD divides the technology areas it considers critical into three categories: Emerging Opportunities, Effective Adaptation, and Defense-Specific. Within each of these segments, it identifies 14 technology areas that it believes are critical to maintaining U.S. national security and therefore deserve special support.  And it is this explicit support that should be of great interest to investors. This is especially true if one assumes that targeted support can stimulate innovation and thus growth.

^{Source: U.S. Department of Defense, DWS Investment GmbH as of 2/14/24}

Even if some protectionist measures seem to go too far, it is understandable that countries want to protect themselves against at least a partial reversal of globalization. Nevertheless, international cooperation will remain a necessity in a number of areas. "Lone wolf tendencies would set the world back years, including in terms of national security. However, the current trend towards deglobalization also offers investment opportunities.

Regardless of which presidential candidate wins in November, the United States will continue to pursue a strategy of regaining its independence in the technology sector and, above all, regaining the dominance lost to China. Significant investment is expected to flow into the 14 technology categories identified by the Department of Defense. And the technology sector in general is likely to remain a focus for markets as innovation and the drive for disruptive change through increasing digitalization continues. Companies that can count on special support because they belong to one of the 14 critical technology areas could even benefit twice over.

¹ See ASPI’s Critical Technology Tracker as of 9/22/23

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War, terrorism, sanctions, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and, in the future, may lead to significant disruptions in U.S. and world economies and markets, which may lead to increased market volatility and may have significant adverse effects on the fund and its investments. 
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Critical technologies are technologies that are deemed to be vital to maintaining the national security of the U.S. now and in the future. Companies involved in critical technologies may be subject to a significant amount of governmental regulation, and changes in governmental policies and the need for regulatory approvals may have a material adverse effect on the critical technologies and the companies involved with them. Critical technologies companies are heavily dependent on patent and intellectual property rights which may be difficult to protect. Investing involves risk, including the possible loss of principal. Stocks may decline in value. This fund is non-diversified and can take larger positions in fewer issues, increasing its potential risk. An investment in the fund should be considered only as a supplement to a complete investment program for those investors willing to accept the risks associated with the fund. Please read the prospectus for more information. DWS is not affiliated with Solactive or J.H. Whitney Investment Management, LLC. 
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