The digital revolution has proliferated technological innovations improving efficiencies, lowering costs and broadening access. The onslaught of tariffs emanating from the United States, and retaliatory tariffs from other countries, directly challenges these decades-long trends. This politically driven economic crisis is quite unlike previous crises like the COVID epidemic or the Great Recession of the late 2000s, as government impedes economic synergies out of protectionist impulses. Amid these radical changes in international trade, transformation is afoot. But with tariffs only just being implemented — and as questions linger in how long they last and in what form — businesses are navigating through a cloud of uncertainty. Is this moment of economic crisis one that is ripe for innovation? And what might ensuing tariff tech look like?

A Boon or Deterrence to Innovation?

As Harvard Business School professor and technological innovation expert Josh Lerner relates, it took a century after vulcanization was discovered for rapid advancements to be made in commercially producing synthetic rubber on an industrial scale. This only happened during World War II, when Japan cut the U.S. off from 90% of rubber produced naturally in the world. The U.S. government responded by spearheading an effort partnering with industry and academia to figure out how to dramatically increase the production of synthetic rubber.

Such advancements in synthetic rubber — as well as a host of other innovations to spring forth during the extreme conditions of World War II — are prime examples of crises engendering innovation. And in the broadest sense, crises certainly do spur innovation. Aviv Castro, CEO of Sensos, an Israeli supply management technology platform, views Israel’s “Startup Nation” as significantly shaped by the state of crisis the country often finds itself in.

“Crises are always the best engine for innovation. Every time that you have uncertainty in crisis, it's pushed people to be more innovative and to find solutions. This is why Israel is also good in innovation, because we are always in crisis mode.”
Aviv Castro - CEO, Sensos

But the crisis resulting from the tariff regime abruptly imposed by the U.S., the world’s leading economy, threatens to diminish investments, increase costs and diminish trade efficiencies, as many economists worry of an impending recession.

Whether such an economic downturn provides the ingredients for innovation is up for debate. On the one hand, the idea that recessions spur innovation can be traced bank to economist Joseph Schumpeter’s “creative destruction” concept pioneered during World War II, an idea made ever more salient during the COVID pandemic and the massive digital leaps it augured. On the other hand, plenty of research points to R&D as being procyclical, or shifting in accordance to economic swings.

“One thing we do know is that venture capital [investment] certainly is procyclical. But whether innovation is pro-cyclical or counter-cyclical remains a big, open question. You can find papers on either side of the fence.”
Josh Lerner - Professor of Investment Banking, Harvard Business School

The greatest challenge currently in trying to gauge whether the abrupt shifts in global trade and commerce will engender innovation — and in which directions — is the long-term uncertainty of the tariffs regime and resulting economic conditions. Should companies really be making yearslong investments to adapt to the shifting environment without any guarantee what the tariff apparatus will look like in one year, let alone four or five years?

“Certainly, one of the things that I'm hearing from CEOs right now,” said Lerner, “is it's one thing to say, ‘here is a permanent regime change, and react to it.’ It's another thing to say, ‘Here's what the policy is today. We don't know what the policy is going to be tomorrow.’”

From Planning to Preparation

For now, businesses involved in cross-border commerce are focusing on technologies that can boost flexibility and agility. “The world is changing from good planning to good preparation,” said Sensos CEO Aviv Castro.

This reflects the approach Sensos likes to take in its tech-oriented platform. Sensos utilizes sensor technology to track goods being shipped, including for sensitive shipments of medical products. These IoT capabilities provide real-time tracking for customs and add data to predictive analytics that can chart the most efficient and cost-effective shipping routes for any given moment. Sensos further augments client capabilities with its AI-powered logistics agent, which analyzes real-time data to predict disruptions and re-route shipments or adjust delivery schedules. Sensos’ AI capabilities further enable clients to adjust inventories, and their distributions based on real-time demand and capacity, while forecasting various scenarios in shipping corridors and cost changes, and adapting logistics schedules accordingly.

Source: Sensos

Even before the current tariffs, the logistics industry hurdled through a series of crises challenging the slow-paced nature of legacy systems in place, including the COVID pandemic as well as the recent bottlenecks resulting from the closure of Red Sea shipping lanes. Castro sees the supply chain logistics sector as primed for innovation under pressure like how CRMs revolutionized in the past 10 years, with companies like Salesforce innovating to automate workflows and maximize efficiencies.

“By optimizing streamlining and efficiently managing the supply chains, you can cut losses even more than the tariffs themselves.”
Aviv Castro - CEO, Sensos

Castro says it is still too early in the current crisis to see significant innovations in how supply chain logistics are done. The present goal, rather, is to be proactive. Sensos created its smart label technology in China, but it already decided a year ago to duplicate its manufacturing capabilities outside of China. “I think that today any company understands that they need at least a second source outside of China,” said Castro.

Duplication and redundancies in supply chain logistics would have once been deemed anathema to the praxis of efficiency. But with a WTO now rendered toothless and geopolitical turbulence dictating matters, efficiency has now given way to resilience and adaptability.

Where the Rubber Meets the Road

While currently focused on navigating the instability, businesses engaged in cross-border ecommerce, logistics and cross-border payments are exploring novel ideas and reconfiguring technologies to serve as “tariff tech” in the future. This new environment prioritizes software innovation over hardware transport in an effort to mitigate the impact of tariffs one way or another.

“When I'm talking to key decisionmakers or strategists, they all think about innovative ways to manufacture closer to the customer in the US, not in Asia. And more — avoid transportation, avoid the logistic effort if it's possible.”
Aviv Castro - CEO, Sensos

In this emerging protectionist era, importing goods or parts is made less financially desirable, but the tremendous costs involved in building new domestic facilities and hiring more expensive labor domestically remain. 3D printing, however, makes it possible to deliver blueprints digitally and automate the manufacturing process thereafter. “Now it's better to invest in a 3D printer that can print a sofa in the U.S. than making this furniture in Asia and transporting it,” said Castro. “Maybe like a year ago it was not a consideration. Now, this investment becomes a consideration.”

3D printing, however, still faces challenges in costs and capabilities to produce goods like sofas on an industrial scale. Will the pressure of crisis spur innovation on these fronts, even against broader investment tailwinds? Therein lies the contrasting dynamics at play.

If it’s not remaking fundamental production within the supply chain, better navigating the new tariff hurdles will be the focus. As AI is deployed to optimize trade routes and inventory management, technology will be deployed to cater to shifting compliance requirements and tariffs. Already, Sensos has employed its technology to help companies calculate tariffs when transporting oil from Eastern Europe to Western Europe. Blockchain is also deployed to manage inventory, payments and tariffs along corridor routes.

Source: Existek

Castro envisions IoT technology progressing to PoT — “Payment of Things” — technology under the circumstances. An early instance of such technology is found in Tesla cars, where payments for battery charges are done automatically through the car and corresponding Tesla app. Sensos is already doing research and testing to apply this technology to the supply chain, which Castro believes will be rolled out a few years from now.

“These payments of tariffs and other things can be fully automated. So, when the package is crossing some border, the package itself will pay the tariff based on its value without any human intervention.”
Aviv Castro - CEO, Sensos

As such innovations facilitate compliance and automated payments, accompanying innovations in payment technologies — or at least payment arrangements — will be forthcoming. “You could certainly imagine that there'd be any number of Fintech firms with the potential of allowing firms to adjust their financial management approaches in a way that could be super beneficial as well for increasing flexibility,” postulated Lerner.

Various flexible pricing and payment arrangements are sure to rise in prominence as tariffs dig in. BNPL, tier-based pricing and usage-based pricing are likely options for businesses forced to contend with shifting tariff arrangements and unreliable trade rules. Contract financing is another avenue for businesses that may suddenly deal with unexpected inventory shortages, shipment delays or fees.

The Geopolitics of Innovation

As the WTO era of free trade and diffusion of ideas and technology gives way to state-driven protectionism, Lerner sees a fundamental change in how innovation might be accomplished moving forward. As Trump leverages government funding to dictate research and industrial priorities, Lerner believes the dynamics may take on certain characteristics of the mid-20th century, when the U.S. government held a firmer grip on the mechanisms of innovation to compete against the communist Soviet Union.

“A lot of discussions of innovation in the last 30 years, it's been largely decoupled from geopolitics. And one certainty is that how geopolitics and innovation are linked is likely to be much greater going forward.”
Josh Lerner - Professor of Investment Banking, Harvard Business School

Lerner sees this already happening especially in the arena of technologies like quantum computing. But in contrast to the Cold War era, the current U.S. government is wielding its influence by dramatically shrinking research funding rather than expanding it. From 1953 to 1990, U.S. federal funding for research increased by 700% when accounting for inflation. By contrast, the Trump Administration’s recently released budget blueprint proposes to cut funding for nearly all science research except for the technologies it is prioritizing: AI, quantum computing, fusion energy and critical minerals research, each of which would maintain current 2025 funding levels.

The contradictions and incongruencies of this situation suggest only more turbulent times ahead. As unpredictability becomes the new normal, adjustments will be made, and creative efforts at mitigating or circumventing these economic roadblocks will emerge. Amid shifting goalposts and rules of the game, how much these changes mark long-term innovations and changes in technology and strategies — or mere workarounds for immediate hurdles — remains the open question.

Image courtesy of Markus Winkler
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