Escalating trade rhetoric between the US and China has put downward pressure on stocks over much of the past month. While several globally integrated sectors have been affected, technology has more recently become a flash point as the Trump administration announced plans to curtail Chinese investment in “industrially significant” technology companies. In general, we do not expect potential restrictions on Chinese investment in US companies to have major ramifications on technology stocks. In fact, some of the most compelling themes in tech investing today – the transition to the cloud, the Internet of Things (IoT) and artificial intelligence (AI) – are only tangentially connected to global trade.

We consider the potential disruption to global supply chains caused by tariffs a greater risk in comparison to the flow of capital. Trade restrictions could disrupt the flow of goods in the globally integrated production process. Over the past decades, China has positioned its manufacturing base as a location for final assembly of a wide range of goods. While basic subcomponents are often sourced from China’s neighbours, more complex inputs, including semiconductors, originate in the US. Overall, a material portion of Chinese exports are comprised of componentry that was imported into the country. Given this interdependence, we expect to see a mutually beneficial resolution to the current trade spat.

Longer term, persistently heightened trade tensions may influence the behavior of technology players. Supply chains are constructed to ensure the continued flow of goods through the manufacturing process. Companies – either in response to, or in anticipation of trade barriers – will adjust their logistics in order to meet their business needs. In that regard, less trade-friendly participants in the global economy may get left behind. Similarly, threats to the flow of semiconductors and other advance components to China’s factories may cause the country’s authorities to accelerate its “Made in China 2025” initiative. We are sceptical that China can so quickly master an industry as notoriously complex as semiconductors, but any inroads made into advanced manufacturing stands to come at the expense of established global players.

US authorities are likely cognisant that China is an important market of finished US technology goods, including Apple’s iPhone. A deteriorating commercial relationship between the two countries would create headwinds for American companies to maintain and grow market share in China. We believe that rising trade barriers seldom end well. We are also mindful of the remote risk that a more restrictive technology marketplace may place the US’s globally dominant technology firms, such as Facebook, Amazon and Alphabet, on the defensive as Chinese internet giants expand their international footprint.

Global trade continues to create attractive opportunities for technology investors, as do China’s platforms catering to the country’s massive market. Still, some of the most compelling long-duration themes in tech are largely independent of global trade. Salesforce.com, for example, has become a dominant player in Software as a Service, not because of its prowess in global trade, but its ability to drive value to its corporate clients. The same holds true for the value proposition offered by companies leading the way in novel IoT and AI applications.