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Trump’s ban on TikTok and WeChat leaves more questions than answers

The lack of details in the recent executive orders has caused a swell of uncertainty among business communities in both China and the US that are vulnerable to continued decoupling.

On August 6, when President Donald Trump issued executive orders to ban transactions in the US related to ByteDance and Tencent (HKG: 0700), alarm bells sounded on both sides of the pacific. As two of China’s most prominent tech products, TikTok and WeChat, come under the scrutiny of the US government, the proposed ban is decidedly broad and vague, leaving many interested stakeholders uncertain of what the fallout would look like.

An unprecedented process

TikTok has been under the scrutiny of the US government since November 2019, when the Committee on Foreign Investment in the United States (CFIUS) launched an investigation into ByteDance’s USD 1 billion acquisition of musical.ly in November 2017.

Such an investigation, and even forced divestment, is not without precedent. In May 2019, a CFIUS investigation forced Bejing Kunlun Technology (SZ:300418) to divest its ownership of popular gay dating app Grindr, which it had acquired in 2016, citing concerns about the data security and privacy of the app’s many American users. Kunlun eventually sold Grindr to San Vincente Acquisition Partners in May of 2020 for USD 608 million.

For ByteDance’s purchase of musical.ly, CFIUS estimated its investigation would be completed in 90 days, which has long since passed. So why hasn’t ByteDance’s acquisition of musical.ly followed a similar protocol?

According to Derek Scissors, a resident scholar at the American Enterprise Institute (AEI) and chief economist at China Beige Book, it should have. “This should’ve been handled by the CFIUS investigation, but the deal took too long, and should’ve been wrapped up against ByteDance earlier. We don’t know what the results are, and now the president says you have to sell this company by executive order.”

Scissors continued, “That’s not what you’re supposed to do. You are supposed to accept or reject a CFIUS recommendation.”

President Trump’s executive order was tinged with a tone of national emergency, perplexingly complemented by a 45-day deadline for ByteDance to sell TikTok’s US operations, contradicting the emergency order suggesting Americans are in imminent danger.

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Read this: Selling TikTok in the US is a pivotal moment for ByteDance, but a deal is easier said than done

Martin Chorzempa, a research fellow at the Peterson Institute for International Economics, explained, “What we have is an ad hoc approach which is based on the declaration of national emergency, and so far I haven’t seen any convincing evidence that there are any urgent threats to national security.”

According to an analysis conducted by French security researcher Baptiste Robert, TikTok’s data collection is benign. As he explained, “As far as we can see, in its current state, TikTok doesn’t have a suspicious behavior and is not exfiltrating unusual data. Getting data about the user device is quite common in the mobile world and we would obtain similar results with Facebook, Snapchat, Instagram, and others.”

Regardless, the use of executive orders in place of a CFIUS review is irregular, with President Trump even going so far as to name Microsoft as a potential buyer of TikTok, even ludicrously suggesting that the US Treasury should receive a portion of the proceeds from the TikTok sale.

Scissors explained, “The US government should not be in the business of naming companies that should be making acquisitions. The whole thing was botched for political reasons. This is not the following of our law, it’s a shakedown. It could’ve followed the law.”

Considering the timeline imposed by the US government, ByteDance has a right to feel aggrieved, according to Scissors. “Maybe there will be a lawsuit and ByteDance will demand compensation for the process.” Meanwhile, ByteDance’s TikTok plans to sue the US government over its handling of the situation.

Extraterritorial implications?

When assessing the logistical implementation of these proposed bans, the obvious targets are Apple’s iOS App Store and the Google Play store.

Chorzempa explained, “I think the executive orders are mainly designed to get TikTok and WeChat delisted from app stores in the United States.” However, the scope of the ban is still unclear and may not just be limited to the US.

“One of the key ambiguities right now is whether Apple and Google would be required to remove the app from app stores globally. There’s no clear answer to that,” said Samm Sacks, a cybersecurity policy and China digital economy fellow at New America.

India’s IT Ministry has already asked Apple and Google to ban TikTok and WeChat among more than 50 other Chinese apps, and France’s cybersecurity bureau has also launched a probe into TikTok’s data security practices.

Because the world’s two largest app stores worldwide are run by American companies, the potential damage for this ban ranges significantly. Chorzempa explained, “The possibility of losing WeChat in the app stores in China would be catastrophic.”

If that happens, Chinese smartphone users would choose Weixin, the domestic version of WeChat, over iPhones. A poll on Chinese Twitter-like Weibo revealed that 95% of the 1.2 million respondents would choose WeChat over Apple’s flagship product. Tencent was keen to point out during its latest earnings call last week that WeChat and Weixin are separate products.

Ming-Chi Kuo, a seasoned Apple-watcher, warned that a harsh sanction that forces American firms to terminate their business with Tencent could tank global iPhone sales by as much as 25–30%.

In July, Apple opened its new store in Beijing’s downtown Sanlitun which houses more than 185 employees. Source: Apple

While no details have emerged as to how the ban will come into effect, the lack of specificity has caused huge uncertainty in the business community. Tencent is seeking further clarification regarding the extent of the sanctions, as the company mentioned on its second-quarter earnings call.

A host of American firms have also called on President Trump to reverse the executive orders including Apple, Ford, Walmart, Disney, and others.

Interact to transact

In light of the US’ unconventional actions to restrict TikTok and WeChat, implementing these bans comes with an entire host of concerns, which have mostly arisen from the unspecific executive orders that provide no details on what kinds of “transactions” are going to be prohibited.

While TikTok’s functionality is fairly simple and limited to a few simple transactions, Tencent’s WeChat is China’s foremost super app, with transactions ranging from payments to e-commerce and more.

Scissors explained, “They don’t tell you what the transactions they are banning are. Implementation is going to be a real challenge.”

With Tencent’s sprawling ecosystem, the details are key. In fact, although the ban intends to protect American security interests, it’s heavy-handed approach is riddled with potential drawbacks. Tencent’s investment portfolio includes stakes in American companies that are extremely visible to consumers, including electric vehicle firm Tesla (NASDAQ: TSLA), social app Reddit, gaming companies Riot Games and Epic Games, and Universal Music Group.

Tencent owns a 40% stake in Epic Games, the gaming studio responsible for global battle royale sensation Fortnite. Source: Fortnite.

In addition, the American business community is integrated into WeChat’s ecosystem. For any consumer-facing American company operating in China, WeChat Pay is a key payment channel for business. Chorzempa explained how banning certain transactions would be actually counterproductive to US interests. “Stopping KFC from accepting WeChat Pay in China does not do anything for Americans’ data security or privacy.” Meanwhile, the famous Kentucky-based chicken restaurant chain actually generates more business in China than in its home market of the US.

The ties go deeper. New York-based bank JP Morgan offers financial products and client services to Chinese customers through WeChat. Just last year, Tencent inked a deal with major American credit card companies including Visa, Mastercard, and American Express to link foreign cardholders to WeChat Pay.

Chorzempa added, “This is like saying no Chinese companies can advertise on Facebook or Google.” But the fact is that Chinese companies do actively advertise on Facebook and Google.

The American search giant retains offices in Beijing, Shanghai, Guangzhou, and Shenzhen to manage their hardware and ad business despite their service being blocked in the country, while Facebook also has an ad sales office in Shenzhen.

Meanwhile, within’s WeChat’s ecosystem are its burgeoning mini-programs, where brands can set up e-commerce businesses within China’s most popular social app. American brands like Nike, Starbucks, and Walmart use these channels to reach China’s massive consumer market. Restricting their access to vital sales channels in the Chinese market would hamstring a slew of American multinationals in competition against local brands.

The road ahead

As to what will happen next, Derek Scissors forecasted, “I don’t think 45 days is a real deadline [to sell].” He continued to explain the significance of the timing of the proposed ban as the US election in November creeps closer, “If a deal doesn’t go through, they will ask for 30, 60, 90 days more time and crucially, 60 days is after the election.”

Trump has since extended the deadline from 45 days to 90 days, with the deadline now falling on November 12, just after the US presidential election. 

Sacks explained, “In a post-COVID-19 economy, foreign investment is really important to Beijing, I don’t think they want to alienate the US business community right now.”

China even introduced a new Foreign Investment Law in January, which aims to create a friendlier environment for foreign investors and businesses. Sacks continued, “They really need foreign investment and foreign technology.”

Despite the “Made in China 2025” national directive to increase the country’s technological self-sufficiency, China still relies on US components for some key technologies like semiconductors and has nothing to gain from further decoupling.

This January, TikTok opened a new five-story office in Los Angeles, California. Source: TikTok.

As things stand, TikTok is still hiring in the United States, where it plans to add 10,000 jobs over the next three years, having already tripled its US workforce this year.

On August 15, in his latest display of techno-nationalism, President Trump revealed that he is considering pressuring other Chinese companies like Tencent’s arch-rival Alibaba (NYSE:BABA).