Ahead of this weekend’s pivotal G20 summit, the US Commerce Department has added a further five Chinese tech companies to its “entity list”, which effectively bans them from buying from US companies. The Commerce Department cited national security concerns, saying that the companies were involved with China’s effort to develop supercomputers and that the computers were being developed for military uses, or in cooperation with the Chinese military.

In our view, the escalation of the US-China trade dispute into technology could severely disrupt the tech sector's status quo. More broadly, increased trade barriers, especially tariffs, will have a long-term impact on supply chains, we believe, because their effects grow with each passing layer. This ultimately hurts productivity, output and employment. The implications need to be considered from several perspectives:

* From an entrepreneur's perspective. Global supply chain adjustments would mean increased investment and capital expenditures, especially for companies in industries like autos and technology, in our view. Production shifts would also mean some existing factories will become idle, thus lowering overall utilization rates. Entrepreneurs should also be prepared to invest more in R&D and to move up the value chain.

* From an investment point of view. Supply chain adjustments are likely to create only a few winners, given increased investment costs and greater business uncertainty. The few relative winners will be those which are relatively more advanced in their local sourcing than peers, and companies with relatively less production concentration risks in affected markets like China. Companies that could benefit from the shifts include those that thrive on higher capex, like testing and inspection businesses in the industrials sector. Conversely, companies with high supply chain concentration in affected markets (China) may find themselves in a challenging position.

* From a thematic point of view. The increasing focus on innovation and the greater need to move up the value chain support our "Enabling technologies" Long Term Investment theme. In particular, we see increased investments in areas like artificial intelligence and 5G. Furthermore, companies with high concentration in China may consider automation-related greenfield projects outside China to lower costs and enhance productivity. So our "Automation & robotics" Long Term Investment theme also stands to benefit,in our view. Our Smart Mobility theme is focused on the trend towards vehicle electrification and autonomous driving. Given the potentially politically sensitive nature of the technology and data collection involved, the switchover to Smart Mobility could lead to supply chain reorganization because of increased import/export controls. In this context Smart Mobility needs to be looked at across the value chain through a broadly diversified exposure to minimize company- and technology-specific risks.

While the need to diversify supply chains is acknowledged across industries, we expect only gradual adjustments in the medium to long term given that moves are too difficult, too costly and too time-consuming to execute in a short period of time. However, a further significant increase in tariffs could force companies to accelerate their plans to shift. Read more in our report, How global supply chains are reacting to trade tensions.