The trade dispute between the U.S. and China is disrupting Silicon Valley.

What had been a steady flow of Chinese money into tech firms appears to be slowing. Investors are concerned about the “headline risk” of doing business with Chinese investors.

And in some cases, U.S. startups are shunning Chinese investment.

These changes come after years of investment and collaboration between China and Silicon Valley. But the trade dispute, coupled with U.S. policymakers’ concerns about Chinese investments in sensitive technologies, such as artificial intelligence, have increased scrutiny of cross border deals on all sides.

A drop in investment

In 2018, Chinese firms invested more than $2 billion in U.S. technology firms, but that was a drop of nearly 80 percent from the year before, according to a Forbes report citing S&P Global Market Intelligence.

While Chinese investors took stakes in roughly the same number of U.S. tech deals — 80 compared to 89 in 2017 — that was off from the peak in 2016 when Chinese investors were part of 107 deals. Among the biggest recipients of Chinese investment in 2018 were Farasis Energy, a battery maker, and Epic Games, a gaming company, according to the Rhodium Group.

While deals continue to come together in 2019, the recent indictment of a Huawei executive has added to a new chill between the two regions, according to observers in Silicon Valley.

Acting Attorney General Matt Whitaker, center, wit Acting Attorney General Matt Whitaker, center, with Commerce Secretary Wilbur Ross, left, and FBI Director Christopher Wray speak, Jan. 28, 2019, at the Justice Department in Washington during an announcement of an indictment on violations including bank and wire fraud of Chinese telecommunications companies including Huawei. Acting Attorney General Matt Whitaker, center, with Commerce Secretary Wilbur Ross, left, and FBI Director Christopher Wray speak, Jan. 28, 2019, at the Justice Department in Washington during an announcement of an indictment on violations including bank and wire fraud of Chinese telecommunications companies including Huawei.

?A technology war

In China, the battle is seen as less about Huawei and its alleged wrongdoing and more as a proxy for a “technology war” between countries over technological supremacy.

“The Huawei incident seems like an action against an individual corporation, but it is actually bigger than this,” said Hu Xingdou, a Beijing-based scholar. “This is about one state’s technology war against another state, about which one will occupy the technology high ground in the future.”

One recent change in the U.S. has been the expansion of a government program that reviews foreign investment in areas deemed sensitive.

Despite the expanded U.S. regulatory reviews, Chinese investments in U.S. tech firms are mostly getting through, said Chuck Comey, a partner at Morrison Foerster, a law firm.

As for Chinese companies buying or merging with U.S. tech ones?

“It ain’t happening,” he said.

FILE - Google chief executive Sundar Pichai outlin FILE - Google chief executive Sundar Pichai outlines a future rich with artificial intelligence at the Internet firm's annual developers gathering in the Silicon Valley city of Mountain View, Calif., May 18, 2016. FILE - Google chief executive Sundar Pichai outlines a future rich with artificial intelligence at the Internet firm's annual developers gathering in the Silicon Valley city of Mountain View, Calif., May 18, 2016.

?Saying ‘no’ to Chinese investment

The increased tensions have given investors — and even some potential recipients of investment — some pause. One U.S. company, which had accepted Chinese investment in the past, told Reuters that it declined investment from Chinese investors in its most recent round.

“We decided for optical reasons it just wouldn’t make sense to expose ourselves further to investors coming from a country where there is now so much by way of trade tensions and IP tensions,” said Carson Kahn, CEO of Volley, an artificial intelligence training firm.

At a recent event in Silicon Valley about China and U.S. investments, speakers on a panel discussed how the geopolitical tensions affected their business. While several predicted that in the long run, the current friction between the two countries will have a minimal effect on cross-border business between China and Silicon Valley, there was a sense that an era has ended.

“We’ve kind of taken for granted,” said Kyle Lui, a partner at DCM, a global venture capital firm, “that the prior decade plus there’s been lots of strong collaboration between the U.S. and China.”