How Silicon Valley Became a Flashpoint in the U.S.-China Trade War

Ever since 1988, when then-Prime Minister Deng Xiaoping endorsed science and technology as “primary productive forces,” China has embraced these fields as drivers of national prosperity. China’s economy has grown forty-two times over since 1980, and its large and cheap labor force allowed it to become the world’s largest manufacturer and exporter of goods. But realizing that China’s economy must evolve in order for the country to become a true global power, its leaders have focused on technological development to overhaul its industries and move China’s position up the global value chain. This has become a major facet of President Xi Jinping’s “Made in China 2025” plan, which aims to transform China into a global high-tech leader.

China faces major challenges in its quest to fulfill the lofty goals of “Made in China 2025”. Namely, China lacks the type of entrepreneurial infrastructure and scientific communities that spur innovation and are characteristic of today’s high-tech leaders. While China’s primary and secondary education systems are upheld as exemplary by many, its higher education system is literally centuries behind many developed countries; University of Kansas education professor Yong Zhao wrote that it wasn’t until 1982 that China awarded its first doctoral degrees to six individuals (Zhao, 97). While the number of PhDs in China has since skyrocketed, still only a small fraction of faculty members in Chinese universities hold a doctoral degree. Thus, the level of homegrown scientific and technological expertise in China pales in comparison to that in aspirational peers such as the U.S., U.K., and Japan (Zhao, 98). And as a result, China has turned to the West as it seeks to fulfill Xi’s vision.

Vox Magazine has described Silicon Valley as “a playground for foreign countries eager to fulfill their grand strategies.” And among foreign countries, China has established an outsize presence in the famous innovation hub, with Chinese involvement occurring in up to 15% of deals in recent years, by some accounts. Firms with ties to China have demonstrated particular interest in startups that may have defense applications, such as artificial intelligence, autonomous driving, and robotics. For example, the e-commerce giant Alibaba and software developer Enjoyor Group each contributed millions of dollars in 2016 to Magic Leap, an augmented reality startup that has competed in the past for Department of Defense contracts.

As tensions and distrust between the U.S. and China escalate, Chinese interest in sensitive American technologies has set off alarm bells within the U.S. government. In 2018, U.S. legislation expanded the powers of a government regulatory body called the Committee on Foreign Investment in the United States, or CFIUS. According to Reuters, CFIUS now has “the ability to probe transactions previously excluded from its purview, including attempts by foreigners to purchase minority stakes in U.S. startups.

The new legislation had an instantaneous chilling effect on Chinese venture capital activity in Silicon Valley. As early as January of this year, “Deals involving Chinese companies and Chinese buyers and Chinese investors have virtually stopped,” according to a U.S. tech lawyer. Many Chinese investors have been driven away by the unwanted scrutiny, and some startup operators have chosen to decline offers from investors with Chinese ties in order to avoid the CFIUS process. Some operators have even reported being approached by the FBI, who warned them not to pursue deals with certain investors linked to China.

All in all, Chinese investors and American entrepreneurs alike are dissatisfied with the new climate in Silicon Valley. China can no longer count on the world’s most fertile tech innovation hub as a source of new technology. And American entrepreneurs and operators, who in the past had been widely indifferent to the sources of capital, now have to worry about the geopolitical implications of accepting foreign investments. Many, especially those running startups that have stayed afloat thanks to Chinese backing, have found expansion to be difficult.

The “trade war” that we are currently witnessing is less about a trade imbalance between the U.S. and China than it is about Chinese intellectual property theft, coerced technology transfer, and market protectionism. As a result, it is fitting that Silicon Valley has become ground-zero for U.S.-China tensions, ultimately  a result of China’s heavy reliance on foreign investment as a means of acquiring technology. This reliance can be directly tied to the disparity between China’s ambitions as a global high-tech giant and the ability of its scientific communities to generate their own cutting-edge technology. Until China begins to create and innovate on par with its aspirational peers, we will likely see continued strife between the U.S. and China over sensitive technology and intellectual property.

-Henry Marrion