Trade War Threatens Tech Sectors in China and Silicon Valley

By Ritu,

Capital Sands

While the U.S-China trade war rages on, the tensions are exposing growing rifts between China and Silicon Valley.

Leading venture capitalists and startup founders expressed concern over their governments’ fierce differences and the potential fallout. Among the dangers are a decline in cross-border investment, disruption in the supply chain and decreased collaboration in fields like artificial intelligence, wireless technology and cancer research.

Signs of trouble are emerging in everything from venture capital to movie-making. Fundraising for dollar-based venture capital funds in China is down 75%, estimates Qiming Venture Partners’ founding partner Gary Rieschel. Olivia Hao, an executive at Beijing-based film production startup Baozou, said it is increasingly hard to make investments or buy other companies in the U.S.

China and the U.S. are edging closer to a trade deal but the deteriorating situation in Hong Kong and the U.S. bill on the city’s special status threaten to stall negotiations.

The fight to rule the technology sector is at the heart of China-U.S. tensions. Over the last few decades, the two countries have woven together a world-spanning supply chain that helped create innovation like Apple Inc (NASDAQ:AAPL).’s iPhone and propel industries like AI and robotics.

American money has flowed into China, lending the capital essential in creating many of the countries’ top technology companies like Alibaba (NYSE:BABA) Group Holding Ltd. and Tencent Holdings Ltd. Chinese and American engineers have traversed both countries, driving innovation at startups and large companies alike. All of that is under the microscope now that the U.S. is clamping down on Chinese investment in the U.S. and scrutinizing the capital flows between the two countries.

“Foreign capital remains the primary provider of early stage risk capital in China,” Rieschel said, adding that “82% of venture capital goes to the U.S. and China, these two countries have to work together in areas like AI.”

Increasingly, American tech companies, venture capitalists and startups face a narrow choice on how to deal with China: Either take the country at face value and decide that as a rational business, profits matter more than any kind of moral high ground, or make a conscious decision to stop pursuing business in a country that will require you to adhere to its viewpoints inside — and outside — its borders.