In the latest installment of the simmering trade war, the Trump administration reportedly plans to impose restrictions on Chinese investments in US technology companies and American technology exports to China. If implemented as rumored, any company with more than 25 percent Chinese ownership would be barred from investing in US companies that produce “industrially significant technology.” Exports of US-made technology deemed important to national security, ranging from chips and robotics to cryptography, would face restrictions as well.
The news grabbed headlines and roiled financial markets, but like most things Trump, the noise is much greater than the substance. Within hours, White House aides offered conflicting interpretations, leaving little but confusion. Then Treasury Secretary Steven Mnuchin suggested on Wednesday that the restrictions would be, well, less strict, and might apply more broadly to other countries in addition to China. There’s no doubt, though, that new restrictions are being planned, and that these moves would mark a continuation of the confrontational trade policies of the past months.
The cascade of picayune tariffs and aggressive trade rhetoric directed indiscriminately against allies and competitors alike could inflict lasting damage on US companies’ ability to compete globally. For now, though, the effect on day-to-day commerce remains minuscule, with a few notable exceptions—including Harley-Davidson’s plan to relocate some motorcycle production overseas, in response to EU tariffs retaliating against Trump tariffs on steel.
The argument for restricting investment by China is that it has been stealing intellectual property unchallenged for decades, and new technologies could give China sizable economic and military benefits. The problem is that little of that activity involved China buying or appropriating the intellectual property of US startups, or sending products made in America to China. If the concerns over IP have some merit, the moves being considered do almost nothing to address them.
For starters, China’s tech investment footprint in the US is remarkably small. The value of China tech investments was $9.9 in billion 2015. That rose by some estimates to more than $15 billion in 2016, and then dipped to $13 billion in 2017; last year’s number would have been much smaller without an $8 billion investment in Uber by Tencent, in conjunction with Japan’s SoftBank. The number of deals has fallen as well, to 165 last year from 188 in 2015, and has plunged in 2018 so far. The biggest reasons: The Chinese government has clamped down on easy credit that fueled these deals, and Chinese companies have grown wary of investing in industries that might come under the Washington spotlight.
Compare that with more than more than $70 billion in venture funding for US tech startups last year, plus another $150 billion in private equity funding for technology companies. And that doesn’t include many billions in angel investments, nor tens of billions in R&D spent by the likes of Google, Microsoft, and others.
Much as with immigration, the Trump administration is touting aggressive policies on an issue where the trends already have reversed course. Chinese direct investment is, in relative terms, small; limiting it will have minimal impact on US startups and growth companies (though it’s possible that one of those companies would have become a unicorn of the 2020s). Limiting such investment will also have minimal impact on the domestic Chinese economy. It will, however, cast an even greater pall over future economic ties, further propelling China to seek investments elsewhere.
As for restrictions on US technology exports to China, those too are a pinprick. First, the US government has been selectively trying to contain exports of technology it sees as vital or sensitive for many years. Under Obama, chipmakers such as Intel and Nvidia were not allowed to sell certain types of chips with military, supercomputer, or security applications. More to the point, US technology companies don’t export that much to China. Even by a generous definition of technology that includes aircraft parts, US technology exports to China amounted to less than $30 billion in 2017, out of total trade with China in goods and services in excess of $700 billion.
Most of what US tech companies sell to China does not show up as US exports because the products aren’t made in the United States. Hence an iPhone, which is nominally an American product that sells well in China, isn’t actually an American export to China because the phones are mostly assembled in … China.
As a result, restricting what American tech companies can sell to China doesn’t ultimately prevent many of those companies from selling to China, because of their global supply chains. In addition, there’s a good chance the restrictions would lead to unintended consequences: Faced with uncertain crackdowns on their exports from the US, American tech companies could shift more production overseas, rather than risk restrictions on their outbound American-made goods.
So here, as elsewhere, we have what appears to be forceful action designed to punish China and “restore” American competitiveness. The actual dollar amounts, however, are tiny, and the number of companies that will be meaningfully impacted is small. China is spending heavily on AI research, as well as on cybersecurity and robotics. Preventing Chinese companies from investing a few million here and there on American startups might make it harder for said startups to raise money, but it changes the competitive balance going forward hardly at all.
As symbols, though, these moves send a message that the US increasingly is not open for business. They signal to companies around the world that they would be better off looking for alliances and arrangements not subject to unpredictable American tariffs or investment restrictions. Denying foreign firms and countries access to US capital and US markets 20, 30, or 40 years ago would have represented a nearly insurmountable challenge. Faced with such measures, most countries and companies would have and did accommodate American demands. That is not the world we inhabit today.
With limited tools and unlimited words, the Trump administration cannot significantly alter US-China trade today. But it can, and has, soured the climate for future economic bonds. In the short term, the economic harm could be quite limited. It’s the longer-term challenges that should be of greater concern. If Trump’s policies make the US a less desirable place to invest, if they channel ever more global activity away from America, the damage will accrue steadily. Like the frog as the water gets hotter and hotter, it may not feel like much year by year, and when the damage finally hits home, it may be too late. We have time, but it’s not infinite.
UPDATE,: This article has been updated to include Wednesday's comments by Treasury Secretary Steven Mnuchin.