China-US tech disagreements could damage investment environment

As China continues to ramp up its protectionist measures against US tech companies, entry into the Chinese market for US digital firms looks increasing complicated. With the USA threatening to respond in kind, acquisitions and venture capital investments between the two countries are set to come under pressure. However, this scenario could potentially offer London corporate finance a strong position as an intermediary between the two superpowers.

The Chinese government has long limited the reach of US digital majors to its citizens, blocking Google, Facebook and Skype intermittently. This has certainly helped local technology companies to grow, especially the likes of Tencent and Baidu that built empires on similar offerings of social media and Internet search. However, Beijing continues to expand this list with a focus on state apparatus, adding Symantec’s anti-malware and Microsoft Windows 8, among others, to banned products for use among any Chinese government agency in late 2014. Qualcomm, the US chip maker, was fined almost $1.0 billion by the Chinese state in an anti-monopoly suit in February 2014 and IBM agreed to share its technology with Chinese firms in March 2015 to mitigate a potential ban.

Furthermore, the growing dispute threatens to undermine mutual import-export of over $600 billion, which is the most valuable two-country trade route in the world. So why is China undermining this lucrative relationship?

The causes are multiple.

The USA continues to use a “non-market economy methodology” when deciding whether Chinese goods are being dumped onto its shores at unfairly low prices, which is a form of protectionism against China in itself.

The NSA scandal of 2013 placed Chinese authorities on alert and initiated a policy of digital import substitution, aimed at replacing foreign tech components in strategically important segments such as space, military and industry. Meanwhile, US lawmakers have condemned and tried to block China’s telecom equipment vendors such as Huawei and ZTE from entering the US market on security fears, which has motivated similar responses from Beijing.

The key question is who can better withstand the worsening relations in technology between the two economic giants. For China, the US is not a key technology market, with most local companies resigned to face defeat against the established Silicon Valley brands. Expanding into the huge and undertapped Asian and African markets is of greater priority for China’s tech majors, many of which focus on budget products. Yet for US firms, which are chasing the next growth spurt as advanced economies reach digital saturation, China has always been the holy grail of markets, explaining why the likes of IBM and Qualcomm remain there despite mounting pressures.

Unless US companies threaten to shift their large-scale manufacturing operations from China to elsewhere, Beijing can largely dictate its own technology terms unimpeded.

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