BR ANALYSIS. Gauging the effects of the US-China trade war on Romania’s startup industry

Ovidiu Posirca 13/12/2019 | 14:42

As the United States and China, the world’s two largest economies, are still negotiating a trade agreement, investors in startups are becoming more cautious and are asking founders to focus on profits. In Romania, the effects of the ongoing trade tensions have had a limited impact on the entrepreneurial scene, mainly due to the relatively small size of the market.

On the back of tariffs levied so far between the two countries, US imports of Chinese products fell by USD 35 billion in the first half of 2019, according to a United Nations report, which added that the majority of costs resulting from the tariffs have been passed down to American households.

Meanwhile, the Chinese startup scene is starting to lose steam over the trade restrictions imposed by the US. Just seven unicorns (startups with a valuation topping USD 1 billion) appeared in China in the first half of 2019, compared to 30 in 2018.

“The speculative investment mentality that’s dominated China for the past few years has cooled right off this year,” said Michael Norris, a Shanghai-based research and strategy analyst at consultancy AgencyChina, quoted by Bloomberg.

 

Crucial link to US tech sector

The US and China each have more than 200 unicorn startups. While in China, digital payments giant Ant Financial is valued at USD 150 billion, in the US, the most valuable startup is software company Infor, whose valuation is estimated at around USD 60 billion.

Startups in greater China had raised over USD 32 billion from venture capital funds by September, compared to around USD 112 billion in the same period of 2018, according to Preqin. Meanwhile, US VC-backed companies raised USD 82.6 billion in the first three quarters of 2019, according to CB Insights data.

In Romania, the effects of the ongoing trade tensions have remained limited, with investors expecting the flow of funding deals on the startup market to maintain a steady growth path in 2020.

“We believe that the US-China trade war will not have a significant adverse impact on the Romanian entrepreneurial environment in 2020. Of course, in case of extensive trade war, there will be some adverse effects on the world economy so Romania could be impacted by the negative domino effect, but the magnitude thereof is difficult to estimate,” Sergiu Gidei, partner at law firm CEE Attorneys/Boanta, Gidei si Asociatii, told BR.

The connection between the local tech industry and the Chinese one is rather limited. As the rest of Europe, Romania is more connected to the US tech market, says Bogdan Iordache, founder and chairman of the How to Web conference.

“The impact of the ongoing trade war on both the funding environment and the ecosystem at large will probably be minimal, unless it significantly affects the US economy,” Iordache told BR.

While the US-China trade negotiations are progressing slowly, the European Union has been moving swiftly to ink new trade deals with Singapore, Japan, Vietnam, Argentina, Brazil, Paraguay, and Uruguay. Sebastian Pauna, investment analyst Morphosis Capital, suggested that this move would open more opportunities for European companies.

“With a growing funding environment and an increasing number of deals, the outlook for the Romanian entrepreneurial ecosystem remains very healthy as we approach 2020,” Pauna told BR.

 

Pressure on supply chains could hurt startups

Last summer, US President Donald Trump ordered American companies to “immediately start looking for an alternative to China,” claiming they should boost their manufacturing facilities in the US. The situation is particularly difficult for hardware-building startups that outsource specific parts to Chinese production facilities.

Eric Klein, a partner at venture capital firm Lemnos, which invests in hardware startups, says that shifting production from China would entail months of re-engineering production facilities. This means that companies would have to dramatically slow down or stop production for several months – a very challenging scenario, from a financial perspective, for a startup.

“The smaller the company, the more fragile their economic state, and changes like this are massively disruptive,” Klein told the Wall Street Journal.

 

EU hit by US-China trade spat

The EU economy is being impacted by the slowdown in global trade, according to fresh data from Paris-based Organization for Economic Cooperation and Development (OECD).

Arancha Gonzalez, the executive director of the International Trade Centre (ITC), part of the UN, has warned that the continued trade war could generate a “major recession.”

“All of this is pointing in one direction. If we keep digging into that same hole, we will be looking into a major recession,” Gonzales told CNBC, referring to a potential trade war between the US and the EU.

Both imports and exports fell in some of the largest economies in the EU. For instance, Germany’s exports fell by 0.4 percent in the third quarter, while imports were down 1.8 percent. Exports from the EU fell by 1.8 percent in Q3 compared with Q2, while imports declined by 0.4 percent.

The overall drop in exports across the G20 group stood at 0.7 percent. The economies in the group account for about 85 percent of the world’s output.

“European merchandise trade has been impacted significantly by uncertainty surrounding the trade war and Brexit,” said Timme Spakman, an economist at ING, quoted by the Financial Times. He added that “the slowdown of German industry had an impact on European trade, as German producers ran down inventories rather than importing new intermediates”.

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