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China’s Next Target: Silicon Valley

The Sino-American Trade War is heating up.  As U.S. trade representatives wrapped up high-level trade talks in Beijing last week, all indications are that China rejected two of the United States’ biggest requests: a $100 billion cut in the $375 billion trade deficit; and curbs on China’s strategic investment on advanced technologies in artificial intelligence, semiconductors and electric cars. The Beijing trade talks followed months of protectionist actions from both sides, where the United States has enacted $50 billion in tariffs on Chinese manufactured goods, while China has enacted their own tariffs on U.S. goods like pork and cars. Chinese companies like ZTE and Hauwei remain in the crosshairs of U.S. officials, while American companies like Google routinely face extraordinary regulatory pressure from the Chinese government. There is no indication that follow-on talks will take place, but the negotiations with China will be one of the most important foreign policy events of the Trump presidency and will seek to keep the U.S. tech sector as competitive as possible in light of a swiftly rising Chinese market. In his unique practice of twitter diplomacy, President Trump tweeted before the talks that the “Delegation heading to China to begin talks on the Massive Trade Deficit that has been created with our Country,” and confidently asserting that “Very much like North Korea, this should have been fixed years ago, not now…but it will all get done.”

Image courtesy of Thomas Hawk, © 2007.

Trump’s actions to balance trade could be seen as a critical tactic by the US to counter China’s growing economic influence. It is well known that China has clearly displaced the US in the manufacturing industry and is using the power of its state-run businesses to make inroads into other industries such as auto and financial. However, China’s planned $300 billion investment in emerging technology has made the tech sector the de facto front of the trade war between the world’s great powers.  Using a combination of institutional investment, aggressive venture capital, armies of tech talent, and industrial espionage, China is applying a full-court press on the U.S. monopoly on technological innovation.

Much of the impact of this new front will be felt the most in Silicon Valley, America’s innovation hub and home to Apple, Uber, Facebook, and Google. April’s announcement that startup streaming service TenCent’s upcoming IPO valuation is estimated at $25 billion was the latest sign that China’s tech sector is reaching a maturity level only seen in the US. In 2017, venture capital in China reached 40% of the worldwide $154 billion venture capital investment, rivaling the United States’ 44%. China’s economy in 2016 produced 70 “unicorns” – startups valued at $1 billion or more – while in the US there are 101 in total to date. China’s venture capital investment grew over 15 times since 2013, where in the US it “only” doubled. With companies such as Alibaba reaching the stratosphere of revenue and service offerings that only companies like Amazon have ever reached, China is aiming for direct competition with the titans of Silicon Valley and focusing on developing its own mecca for technology, innovation and entrepreneurship.

The implication of China’s technology surge will be felt throughout the business world and geopolitics. It is only a matter of time before China begins to harvest the fruits of its new startup culture and breaks Silicon Valley’s monopoly on breeding technology with capitalism. The ability for potentially hundreds of millions of Chinese investors to allocate private funds to new businesses and follow up with successful exits will create a multiple that will be hard to rival in the US. This dynamic will take on a completely new level of importance when Chinese “strategic” (government) investment is considered. When you combine the level of China’s venture capital investment with that of the government, all signs point to China emerging as the technology power of the world.

The solution to a rising Chinese digital dominance is to play with them rather than against them. The Trump Administration should push for a free and open flow of US and Chinese capital to reach the businesses and ideas that need it. This in turn will hopefully spur competition and innovation, while also providing the US more funding than it otherwise would have. A move towards free trade includes waiving any protectionist actions that impact private companies in both the US and China. While China may see the larger portion of investment (they will either way), the world will benefit from more companies that create jobs while allowing capital to find its highest return.

The right move for the US to counterbalance the competition from China is to stick to the ideals of freedom, free speech, and the free market.  In the end, companies espousing Western liberalism and American values will ultimately serve as a far more attractive investment to those constricted by censorship and other illiberal restrictions by the Chinese government.  Although free speech allows just about anyone to broadcast their thoughts at 3am to the entire world, this is the U.S. tech industry’s competitive advantage and will position Silicon Valley to prevail in the trade war with China.


Ernesto Garcia

Ernesto is a management and technology consultant to U.S. and international public sector clients. His professional and academic focus is centered on the economic, geopolitical and security environment in Latin America, with particular concentration on Panama, Colombia and Venezuela. A former military officer, Ernesto has extensive international security and collaboration experience in Europe, Central Asia and Latin America. Ernesto holds a M.A. in International Relations from The Fletcher School of Law and Diplomacy at Tufts University and a B.B.A. in Information and Operations Management from The Mays School of Business at Texas A&M University. You can connect with him on Twitter @karlkrockel11.
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