Venture Bytes #47 - Trade War Redux but This Time It's Different

Trade War Redux but This Time It’s Different

President Trump imposed fresh levies on $200 billion in Chinese imports, prompting Beijing to respond with tariffs on $60 billion of American goods. Thousands of goods now face border taxes of up to ten percent, including grocery store staples, household objects, and industrial equipment. The rhetoric is heating up, and there is no sign of an amicable settlement yet. If this reminds you of the trade war with Japan in the 1980s, you are not mistaken. At that time unprecedented trade deficits led members of the Reagan Administration to embrace protectionism. The narrative then was that Japan was steadily displacing American firms in all the important industries through unfair trade practices. The United States imposed a wide range of trade restrictions on Japan in the 1980s. Much like Trump’s focus on autos, steel, and emerging technologies, Reagan focused on autos, steel, and new semiconductor technology. The 1980s policy also employed a series of tariffs, quotas, and other import restrictions to give US companies a leg up in the threatened industries.

While the setup this time is essentially similar, there are some critical differences between the impact of tariffs then and now. Japan cooperated with the US to a certain extent rather than engaged in a back-and-forth. By contrast, China has announced retaliatory tariffs on US goods, and, following the Trump crackdown, Chinese officials consistently emphasized that the country is not afraid of a trade war with the US.

Valuable Cross-Border VC Investments at Risk

One unintended consequence of the ongoing tariff skirmish is the potential disruption of the VC funding for startups on both sides. There has been a smooth flow of venture funds between the two countries in the last ten years. According to Rhodium, US investment in Chinese tech companies has taken off in recent years, as has Chinese investment in foreign startups, particularly in American companies. Since the beginning of 2010, Chinese venture capitalists have completed more than 1,000 deals for American companies worth roughly $36 billion, with most occurring between 2014 and 2017. Leading US unicorns have been recipients from major Chinese VCs. Uber, for instance, is backed by Hillhouse Capital Group, a prominent Chinese VC; WeWork by Hony Capital and Legend Holdings; and Airbnb from China Broadband Capital Partners. According to PitchBook, a total of $84.2 billion was invested in US-based startups in 2017. Of that, $3.1 billion, or nearly 4%, came from China.

The biotechnology industry is particularly susceptible to negative consequences as a result of the trade war. American biotechnology firms received nearly $1.4 billion from Chinese venture capitalists during the beginning of 2018, according to The South China Morning Post. This is approximately 40% of the $3.7 billion that these companies raised. Firms like Moderna Therapeutics Inc. and Harmony Biosciences LLC recently received hundreds of millions of dollars in single rounds of funding, much of which came from China. Tariffs and deteriorating relations with China threaten this valuable stream of capital to US biotechnology startups.

Similarly, Chinese companies, including some of the world’s most valuable, have garnered significant backing from American investors. Ant Financial, for example, has raised substantial capital from Sequoia and private equity funds such as The Carlyle Group and General Atlantic. Didi Chuxing is also backed by US firms including 2020 Ventures, Matrix Partners and several others. According to TechInAsia, Chinese startups raked in $58.8 billion in 2017. $5.5 billion, or well over 9% of total investment came from US venture capital firms.

But all this could be changing at a time when China’s private markets were beginning to blossom. In the first half of 2018, Chinese foreign direct investment into the United States totaled only $1.8 billion, down 90% from the comparable period last year and the lowest level in seven years. And money is being rapidly pulled out, with nearly $10 billion in US asset divestiture by Chinese investors in the first five months of 2018. This is against the backdrop of Silicon Valley’s declining dominance in VC investments and China’s growing prominence. According to a Wall Street Journal analysis, US investors enjoyed a 97% share of international venture finance in 1992. In 2017, however, only 44% of worldwide venture finance was led by US-based investors with Chinese investors accounting for 24% of global venture finance.

With elevating tensions, US-based firms may have to expect less flow of capital from China. While this decrease in capital from China may not be detrimental to the US venture capital landscape, firms that are based in the US and that are backed by Chinese investors could suffer. That said, the hope is that this trade impasse is settled amicably, just as the US-Japan trade impasse was settled amicably in the 1980s.

Cashierless Checkouts – Another Shot Across the Bow of Middle-Class Jobs?

On January 22nd, 2018, Amazon opened its first Amazon Go store, featuring cashierless checkout technology. To shop, you simply scan your phone, gather your groceries, and walk out. Amazon records your interactions with its products and sends you a receipt. With its first Amazon Go store being a huge success, Amazon is now considering opening 3,000 of these cashierless stores around the country by 2021.

The cashierless checkout technology is no longer just a possibility. It’s a reality, and it’s happening now. While this technology provides business efficiency for Amazon, it comes with major socio-economic consequences – not all beneficial.

First and foremost, if cashierless technology becomes widespread, nearly 3.5 million full-time cashier jobs will be lost, according to Slate, an online publication. At the current national minimum wage of $7.25 per hour, this would be roughly $51 billion of annual income lost, in theory. This could be $51 billion saved annually for superstore conglomerates like Walmart, Target, and Amazon. However, it would be at the expense of the American middle class.

If no jobs are available for these displaced cashiers, the widespread adoption of cashierless technology will create a socioeconomic rift. While the companies implementing the cashierless technology will become wealthier and more efficient, unemployment will skyrocket, sending many of the displaced cashiers into poverty.

Gianna Perini, an Amazon executive who heads the Amazon Go project, asserts that the displaced cashiers will be absorbed into other parts of the company. Former cashiers could go into stocking, customer assistance, or other similar jobs. However, with these jobs already filled before the cashiers are unemployed, it’s unlikely that the market can absorb the oversaturating effect cashierless technology will have.

Another possibility is that cashierless technology and other similar automation will eliminate low skill, low wage jobs altogether. Hypothetically, former cashiers can learn the skills to become software engineers, manufacturers, and designers to produce these new machines. This switch, though, is not seamless. It requires education, money, and time. The widespread implementation of cashierless technology will undoubtedly result in temporary, frictional unemployment for America’s middle class.

As all of these displaced workers re-enter the workforce after acquiring new skills, though, will companies like Amazon, Walmart, and Target be able to afford the increased wages of all these skilled laborers?

In this scenario, the best outcome would be an equilibrium similar to the cashier’s initial employment. Stores would have to increase their prices in order to afford the more skilled labor force. The increase in prices would reduce the newly skilled laborers’ wages relative to the new cost of living. In other words, because living is more expensive, the new skilled workers’ improved wages are simply an updated minimum wage. They will be no better off, even with their new and enhanced skill set.

In the worst outcome, stores will realize they cannot afford these now skilled displaced cashiers and refuse to hire them. This drives unemployment up, pushing the old cashiers into poverty. This would create a massive rift in the socioeconomic status; those associated with the superstores would be rich, and the displaced cashiers would be impoverished.

While this is a very pessimistic view of the results of cashierless and automated technologies, it is still realistic and feasible. Innovation simply for the sake of innovation could be detrimental to the current American middle class. Who knows, though? Perhaps the outcome will be far better than we can imagine.