Scenario 2 now has country C1 with 100 tech workers, and they got their pick of the 50 best workers from (lower paying) country 2.

Country 1 is now a better place to start a new company or expand your existing company because all the best workers in the field work in country 1. Starting the same business in country 2 will almost certainly fail.

This is literally why the Bay Area became the world’s most important tech hub and isolationism will allow (and is allowing) Chinese tech to jump ahead of the US. The government doesn’t care about losing a literal arms race, largely to reduce the political power of California. By no longer educating and welcoming the world’s brightest engineers the USA is going to be reduced to support and manufacturing roles where its large workforce will have to compete with everyone else and salaries will tumble.