Clash of the Titans: How the U.S.-China Trade War Affects Your Startup

The U.S.-China trade war is no zero-sum game for the global startup community.

As the U.S.-China trade war rages on, showing no signs of abating, the business world has been inevitably caught in the crossfire, changing the landscape considerably for startups as well.

The US$3 trillion global startup economy has been singed by the trade war as tensions between the two giant economies have escalated, and particularly as the current U.S. administration increases the pressure on Chinese apps.

While a series of sanctions by the Trump administration against Huawei starting from mid-2019 were one of the most significant ways that Chinese businesses had been impacted so far, this year saw a spectacular pushback against Bytedance’s TikTok, and Tencent-developed apps PUBG and WeChat.

Silicon Valley and Beijing have found themselves directly in the line of fire, but the global startup economy is likely to take a hit from the debris as the two superpowers clash. Here is what the trade war means for your startup and why it should matter.

The Clean Network program and greater concerns over data localization and privacy

Data is the backbone of nearly the entire spectrum of decision-making within organizations today, and much like the use of cloud computing, startups today are highly likely to be born native in data infrastructure.

Though app technology has taken center-stage in how startups connect with users and address consumer pain points, it has raised additional concerns over the privacy debate and how companies should be using data.

One of the ways the Trump administration has taken up the data issue is with its Clean Network program. The program is aimed at protecting individual and corporate information from “aggressive intrusions by malign actors, such as the Chinese Communist Party,” the U.S. Department of State website notes.

In fact, the program, which covers mobile apps and app stores, telecom networks including 5G, and undersea cables and cloud systems, is purpose-built to prevent any kind of collaboration or intervention from the Chinese state or Chinese companies, per the information on its website.

If this wasn’t enough for China, over 30 countries have committed support to the program, including Japan and Vietnam, both of which are China’s major trade partners.

Condemning these key U.S. moves as “blatant acts of bullying” against Chinese tech, China launched its Initiative on Global Data Security as a blueprint for international policy on digital security.

Even as the two economic superpowers gear up for a policy-level spat, the use of data continues to be one of the biggest challenges faced by startups, as they figure out what data they should be allowed to use, and the ethical ways in which to use it.

This is because data is a competitive conundrum. While it gives startups a highly competitive edge, they may also have to face the music – and abruptly stop relying on it – if it global sentiments on use of data shift in a conservative direction.

Not only does this leave startups in a precariously uncertain position, it also detracts significantly from the global conversation on policy-level directives for data protection.

Considering this, the back-and-forth between the U.S. and China shows that the data debate is steeped in a political quagmire, unlikely to see a resolution anytime soon.

The Tariff Man and ASEAN’s win

The Trump administration is known to be pursuing an aggressive tariff policy­ (Trump has even referred to himself as the “Tariff Man”) against China in a bid to bring down its trade deficit, which stood at $345 billion in 2019. Tariffs are at the very heart of the U.S.-China trade war, and Trump’s 2016 election campaign the origin point.

The U.S. trade deficit with China have been climbing steadily since China joined the World Trade Organization in 2001, and it became a talking point for the 2016 Trump campaign, where Mr Trump called China out for unfair trade practices and theft of intellectual property.

At the time of writing, the U.S. has imposed tariffs on over $550 billion worth of Chinese goods, and Xi Jinping’s government has also hit back with tariffs on US goods worth of $185 billion.

One way companies are responding to the increasing tariffs is by moving out of China. 40% of companies in a recent survey reported to have already done so, relocating mostly in Southeast Asia.

Needless to say, ASEAN countries are reaping the benefits. For instance, Vietnam has benefited considerably, with 46% of U.S. imports worth $31 billion shifting out of China and into Vietnam this year, subsequently adding an additional $14 billion in exports to the U.S.

Big tech companies are also looking to move their China bases, looking to Indonesia, Vietnam, and Thailand as alternatives. Naturally, the Trump administration is fully supportive of this.

Earlier this month, U.S. Secretary of State Mike Pompeo asked ASEAN nations to “reconsider business dealing with the very state-owned companies that bully ASEAN coastal states,” referring to a territorial dispute between four ASEAN member nations and China over the South China Sea.

While Singapore has already built a reputation as a startup powerhouse in Southeast Asia, the sheer market potential and burgeoning digital economy of ASEAN countries have led to a wave of innovation driven by the region’s startups.

While tariffs pose a threat to companies manufacturing in the Chinese manufacturing hub of Shenzhen, as many are, the spillover effects of the trade war have still thus nevertheless presented a unique opportunity for startups in the region.

The battle for 5G

In 2019, Huawei and its affiliate companies were added to the U.S. Entity List on the basis of national security and foreign policy interest.

The addition is effectively an immovable bottleneck for business between U.S. firms and Huawei.

For instance, the blacklisting has resulted in Huawei, which uses an Android operating system, being barred from apps that come under the Google Mobile Services (GMS). Some of Google’s flagship apps, such as Play Store, Search, Chrome, and Maps, fall under the GMS gamut.

The blacklisting one of the top three biggest smartphone manufacturers in the world also has implications for the race to 5G.

5G, the fifth-gen cellular network, is expected to revolutionize the interaction between technologies by powering Internet of Things technology with its superior speeds and lower latency. The arrival of 5G led to a fork in the road for global governments.

While the Trump administration views 5G as a trade issue, atypically hinting that they may be willing to negotiate with China for economic concessions, the U.K. and Australia have bristled over the question of allowing Huawei to participate in 5G deployment trials (the U.K eventually barred Huawei from its 5G network trials).

One of the main draws of 5G is its industrial applications, such as in manufacturing or energy, or even gaming. Startups in these network-heavy industries are likely to inadvertently find themselves polarized by the battle once global 5G rollouts expand.

For startups who are at the cusp of innovation based on technologies such as 5G, it is too early to say yet whether the 5G battle will prove to be an asset or liability. But eventually, whether they like it or not, pick a side they must.

Shifting investor sentiments

The dry spell in venture investment started in early 2019, and has only been aggravated by the COVID-19 pandemic. The banning of mobile apps and Huawei’s blacklisting has exacerbated this problem.

This does not mean that the movement of investments has frozen entirely, but that some startups may end up running on fumes purely on the basis of their location, and who funds them.

While the number of Chinese venture deals in the U.S. showed a drop after the 2016 U.S. Presidential Elections, total deal value slipped only slightly before rising sharply in 2018.

In the same year, however, the Trump administration stepped up scrutiny of Chinese venture investments and acquisitions in the U.S.

By 2019, Chinese investments in the U.S. had hit a five-year low, dropping to $6.5 million through 163 deals from $10.8 billion through 236 deals in 2018.

Chinese startups have also paid a steep price. In 2018, both countries were nearly on par in terms of total deal value, with U.S. venture capital investments totaling $102 billion, and Chinese VC deals at $107 billion.

As the economic fallout between the two superpowers picked up, the slowing Chinese economy subsequently saw only $49 billion in VC investments in 2019, compared to $105 billion in the U.S.

The U.S.-China trade war also affects prospects for startups outside of these two countries. Take, for instance, its impact on Israeli startups. A close U.S. ally, the country’s startups have had to carefully consider the repercussions of accepting Chinese money.

“As economic relations between the U.S. and China worsen, so the complex impositions will increase on Israeli companies that receive money that originates in China,” Pearl Cohen High Tech Group Partner Guy Lachmann said at a conference last year, as reported by CTech.

“This complexity currently poses a difficult dilemma for companies, to the point where if they raise Chinese capital that is followed by severe damage to their ability to work in the U.S. market or even the complete closing of the door,” Lachmann reportedly added.

Moreover, political issues that are seemingly separate from the nexus of the trade war, such as China’s controversial National Security Law in Hong Kong, are also compelling startups to reconsider their game plan.

With the move damaging China’s international reputation and strong backlash from global governments including the U.S., investors, whose sentiments were already soured by the trade war, see higher risks in investing in the special administrative region.

Subsequently, coupled with a rocky global startup ecosystem due to events such as the WeWork fiasco and COVID-19, the U.S-China trade war not only further tightens the purse strings for startups across the world, but also exposes them to the possibility of devaluations.

Reshaping the tech playing field

The U.S.-China trade war has become a turning point for the global tech community, and startups ecosystems are seeing its ripple effects. China is currently the only real competition for the U.S. in terms of investments and innovation.

Over a third of the world’s unicorns are based in China, and Beijing has displaced California as the city with the most startups across the world. Moreover, of the top nine startup ecosystems in Asia, four are in China alone.

The two countries had also previously shared a loop of tech knowledge and capabilities.

“82% of venture capital goes to the U.S. and China, these two countries have to work together in areas like AI,” Founding Partner at Qiming Venture Partners Gary Rieschel said in a BloombergQuint report.

However, while the U.S.-China trade war has disrupted operations for startups located at either end of the stick, it has also affected supply chains and collaboration over frontier technologies.

At the same time, there have been some wins as well. Vietnam’s startup landscape, for instance, has benefited considerably from the fallout of the trade war.

While its growth is a result of several changes that were years in the making, the country continues to see investments from both Chinese and American investors, and increasing attention from large tech companies and Asian investors as a direct result of the trade war.

In one such significant boost for the country, for instance, Google announced in late 2019 that manufacturing operations for its Pixel phones would be moved from China to Vietnam.

Further, relationships between Chinese and non-American actors have also gained momentum, as German chancellor Angela Merkel’s commitment to the German-Chinese relationship has demonstrated. Chinese investments in Europe since the start of the trade war outweigh North American investments by nine times.

As both countries move toward reducing their reliance on each other, prioritizing homegrown innovation, and diversifying supply chains, it remains to be seen how this unfolding ‘technological cold war’ will shape the dynamics in global tech.

Clearly, the U.S.-China trade war has so far afflicted startups with a kind of butterfly effect that is highly sensitive to geopolitical volatility. If there is anything that mounting tensions between the two superpowers conclusively point to, it is that startups must now brace themselves for impending tectonic shifts within the startup ecosystem, potentially for years to come.

Header image by Morning Brew on Unsplash

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