A trust not trade deficit lies at the core of US-China tech tensions

4 min read
(Image credit: BigStock/Bakhtiar Zein)

It’s been 189 days and we’ve still seen no substantive progress in the so-called trade-war between the US and China.

However, even if a deal is reached, and no matter how satisfying it may be for both sides, it will still not be able to solve a fundamental problem between the two superpowers—or indeed between China and the West. The two countries have assumptions about the world that are fundamentally different, including varying ideas about the role of the state.

Like great tectonic plates, the US and China have been constantly rubbing up against each other and it is only recently that the friction has become enough to be felt. Ultimately, the two sides just do not understand each other well enough to trust each other. For example, look at China’s strong reaction to the arrest of Meng Wanzhou in Canada while “experts” in the US consistently oversimplify China’s economic and political situation.

So while an eventual trade deal may be positive, it won’t address underlying problems, especially those related to technology and investment. Last week we saw a surprising announcement from Apple: they were going to miss their projected revenue targets by a significant margin (8% to be exact). Apple blamed it on the trade war. Apple bears blamed it on the company.

China hawks in the US took it as a sign that trade pressure on Beijing by Washington was working to weaken the overall Chinese economy. And indeed, the economic outlook does not look great for China with pessimistic economists predicting GDP growth as low as 5.9% in 2019.

Heating and cooling cycles are a natural part of any economy and, in China, it’s particularly obvious in the tech sector where regulation is a bit looser and users are hungry for the new and improved. So it’s easy to look at the tech cycles in China and assume rapid die-offs of swathes of startups presage economic doom. That assumption, however, only shows a startling ignorance and neglects the equally rapid growth of whole industries, such as O2O and the entire rental economy, from nothing to mainstream adoption.

Many of these discussions, however, don’t focus enough on the real drivers of economic growth: small and medium-sized businesses, aka startups.

Level playing field for startups?

For startups, though, the situation is still very much the same: a mixture of risks and rewards. Doing business in China has always been a challenge for the smaller players, especially those that are foreign-owned.

It’s harder for non-Chinese founders to raise money from local venture capitalists. Oftentimes, VCs have little confidence that foreign founders understand the market well enough, or are willing to do what it takes to scale at the necessary speed. In addition, opaque regulations and restrictions make it difficult for entrepreneurs to navigate Chinese bureaucracy.

For international startups, the trade war might actually be a boon, however, allowing them to leverage their advantage while avoiding much of the uncertainty local players have to endure.

“Whether they want to or not, foreign startups will have to partner with some kind of Chinese affiliate or partner for marketing purposes,” Sam Mosca, a business development executive with Beijing startup Mass Medical International, told TechNode.

But foreign entities have their own advantages too, Mosca says, such as being able to develop their product nimbly in the Chinese business environment but then use foreign marketing channels and social media to develop overseas markets. “Chinese startups rarely have this flexibility and must struggle and suffer in a stifled and regulated business environment,” he says.

What’s clear, however, is that China and the US have a responsibility to deal with each other. While the lack of clear resolution is certainly painful in the short-term, the fact that both sides are actively talking and seem to take this seriously has positive implications for the future.

China’s Trump wager

It’s going to take real action, however, to improve what is a fundamental lack of trust around technology investment.

“It really annoys people that Tencent or Alibaba can make investments in the United States, but Amazon and Google can’t do the same in China with the same degree of flexibility and freedom,” Matthews Asia investment strategist, Andy Rothman, told TechNode on the sidelines of a recent finance event in Shanghai. “I think the Chinese government is going to have to pay more attention to that.”

Both China and the US have to make practical steps to address the trust gap, including concessions around investment and market access, said Rothman. The key for China, he said, is the country’s lack of transparency on key issues such as technology transfers and intellectual property protection.

While the central government has certainly made a lot of progress with intellectual property, technology transfers remain a grass-roots issue. Local officials are very protective of home-grown players to the detriment of foreign and domestic companies and are reluctant to do anything that makes their champions less competitive.

As always, these proscriptions are easy to say and hard to do. I remain skeptical as to the long-term impact of any deal. China may decide to make concessions now in the belief that in the next presidential election, Donald Trump would be voted out of office. But in the absence of any meaningful change, the US will continue to remain suspicious of companies it perceives to be close to the Chinese government.

With contributions from Colum Murphy.