Washington: China could make it difficult for American internet giants to operate in its vast market as Washington presses ahead with new steps to block Chinese companies from investing in start-ups in Silicon Valley, according to analysts.
With the trade war between the US and China morphing into a tit-for-tat on retaliatory measures from tariffs to investment restrictions, Beijing has already garnered sufficient armoury to hit back at American tech companies.
Already, “the Chinese government has issued close to 300 new national standards related to cybersecurity over the past several years," covering products ranging from software to routers, switches, and firewalls, said Samm Sacks, analyst at the Center for Strategic and International Studies (CSIS), a think tank in Washington.
These standards “contribute to making China an increasingly difficult market for foreign firms to operate," said Sacks.
She argued that “the Chinese government can use standards to pressure companies to undergo invasive product reviews where sensitive intellectual property (IP) and source code (even if not explicitly written) may be required as part of verification and testing." The foreign companies will therefore need to redesign products for the Chinese market because of the standards issued by the government there.
The CSIS analyst said also that “Beijing uses vague language in standards, like in many Chinese laws and regulations, to avoid issues such as World Trade Organization (WTO) challenges, while allowing the government maximum flexibility and discretion to apply onerous provisions when it sees fit."
US President Donald Trump signed on 13 August a $716 billion defence policy Act that includes provisions for strengthening the Committee on Foreign Investments in the United States (CFIUS) that reviews foreign investments with national security implications.
More importantly, the new law includes the controversial Foreign Investment Risk Review Modernization Act to shut the door for China’s venture funds and tech investors from taking minority stakes in American start-ups in areas such as robotics, artificial intelligence (AI), biotechnology and 3D printing.
Without naming China as the principal target, FIRRMA intends to put brakes on foreign companies, particularly from China, from investing in mushrooming start-ups in the Silicon Valley.
FIRRMA will “strengthen CFIUS and enhance the Government’s capacity to protect crucial technology while keeping the US open to investment," the US Treasury Secretary tweeted on Monday.
In a measured response to the FIRRMA, China’s commerce ministry said it would “comprehensively assess the contents", paying close attention to the impact on Chinese firms. “Chinese and US companies have a strong wish to deepen investment cooperation, and the potential is enormous," the Chinese ministry maintained on 13 August.
Beijing emphasized that “the US side should objectively and fairly treat Chinese investors, and avoid CFIUS becoming an obstacle to investment cooperation between Chinese and US firms."
But in the surcharged trade war ecosystem in the US, the new American law will further shut doors for Chinese tech investors. In the run-up to the signing of the FIRRMA, Chinese companies completed deals worth $1.8 billion in the first half of 2018—the lowest level in seven years and down more than 90% from the same period last year, according to the Rhodium Group, a US research firm.
In effect, the festering trade frictions arising from disguised restrictions on the technology front between the world’s two largest economies are going to undermine prospects for implementing global rules on electronic commerce.
The US, for example, floated a proposal earlier this year at the WTO calling for global rules on “cross-border transfer of data," “preventing data localization," “prohibiting web blocking," “duty-free treatment of digital products," “non-discrimination of digital products," “protecting source code," “barring forced technology transfer," barring discriminatory technology requirements," “encryption," and “cybersecurity," among others.