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As reported in the Wall Street Journal today (and also widely in other publications), the Biden administration is now demanding that, due to security concerns, the owner of TikTok, Beijing-headquartered Bytedance, either sell their stakes in the video-sharing app or face a U.S. ban. The question of sanctions or a ban against Bytedance have been rumbling in the background since August 2020, when Trump elevated the issue in the lead-up to the November election. Since that time, the Biden Administration has generally kept in place tough-line Trump-era policies vis-a-vis China, but has replaced Trump’s go-it-alone, chaotic style with a coherent approach well coordinated with U.S. traditional allies. From the outside looking in, the Bytedance issue was neither shelved nor resolved by the Biden Administration. It was in limbo. However, yesterday’s report suggests that the Treasury Department’s Committee on Foreign Investment in the United States — charged with making determinations about the admissability of (usually prospective) investments into the U.S. — has now come to a fully-vetted, interagency-coordinated determination. Bytedance either needs to fish (sell their stake in Tiktok) or cut bait (lose access to the U.S. market).
It’s a complicated and convoluted path that brought us to this point. What are the eight key facts to know to make sense of where we are and where this likely leads:
- IT AIN’T OVER UNTIL IT’S OVER: Yesterday’s report is reliable but neither CFIUS nor the Biden Administration have released any specifics officially. Even were that to happen today, the outcome is still subject to a process whereby Bytedance and its lawyers will have an opportunity to respond to the official demand.
- THE TOP-LEVEL SECURITY CONCERN: Data, data, data. Specifically, data about the 66 million Tiktok users in the U.S. which could fall into the hands of an adversarial government. To take a single example, think of facial recognition. Because privacy protections for individual citizens in China are de minimus and, more to the point, because the PRC government runs a globally-unrivalled surveillance apparatus to control its citizenry, facial-recognition technology is more advanced in China than in the U.S. or elsewhere. Combining China’s facial-recognition technologies with Bytedance’s trove of images of U.S. citizens could open a Pandora’s box of risk, both known and unknown.
- THE BEDROCK SECURITY CONCERN: Chinese hacking into the personnel records of 4 million current and former U.S. government workers in 2015 shows clearly that the PRC values, and will run risks to procure, data on U.S. citizens. The bedrock security concern in the U.S. is that as long as Beijing-headquartered Bytedance owns the video-sharing Tiktok app, the Chinese government can force Bytedance to turn over that data at any time. Unlike the U.S. or most other markets, there would be no meaningful legal mechanisms to protect Bytedance against a demand of this sort. And, as Xi and the CCP showed last year with its treatment of Alibaba, there is scant concern for damage inflicted on a technology-innovating market giant if it is deemed to serve the greater good (as defined by Xi Jinping).
- HURRY UP AND WAIT: It’s important to note that the first burst of attention to Tiktok came in the lead-up to the 2020 election and this apparent new burst of attention is happening as we approach primary season for the 2024 election. While there is broad and bipartisan support in governmental circles for the tough line on China which has been taking shape over the last five years, the Tiktok issue has recently been showing signs of developing a red vs blue fissure. Specifically, governors have been banning Tiktok on the devices of employees in their respective states. As of last month, 27 states had instituted such bans, including Florida and Texas. With a few notable exceptions such as Maryland and New Hampshire, the other states tend to be ruby-red. The Biden Administration was at risk of having its superb CHIPS Act front-line against China outflanked by a Republican rear-guard using Tiktok as a political cudgel.
- BETWEEN THE HAMMER AND THE ANVIL: Bytedance and Tiktok have tried various maneuvers to extricate their video-sharing app from its unenviable position caught between Beijing and Washington. For starters, Bytedance has tried to make itself invisible in the U.S. debate because of its obvious proximity to Zhongnanhai. Secondly, Bytedance and Tiktok have pushed Tiktok’s CEO, Singaporean Show Zi Chew, as the public face for Tiktok and pointed to its globally-distributed headquarters (in Singapore, in California and Texas-based offices in the U.S., and in Paris and Berlin and elsewhere) as reason not to fear the PRC’s control. And as recently as last week, Tiktok has publicly committed $1.3 billion to expand its Project Texas datacenters initiative in the U.S. and Europe to provide greater public transparency (into its data collection, algorithms, etc.) and to allow Oracle to scrutinize its internal data collection processes. These are all impressive dance moves but are not enough to stop the curtain being brought down on Tiktok’s U.S. show.
- THE NEAR UNSTOPPABLE DRIVER: Politics, politics, politics. Tencent’s WeChat has been proven to be a more nefarious platform for siphoning data from U.S. citizens and delivering it to PRC security minders. However, WeChat (and its Chinese language Weixin) is not widely-used in the U.S. among non-Chinese speakers. It’s therefor mostly invisible to U.S. government politicians and regulators. Tiktok, on the other hand, is virtually ubiquitous among young users, the generation which includes the children of those politicians and regulators. As attitudes toward China continue to darken in response to the last five-plus years of Xi Jinping’s overreach, the “Tiktok threat” has become the simplest and most potent storyline to channel fear of China.
- THE BOTTOM LINE: Plaintively but quite accurately, Tiktok’s official spokesperson, Brooke Oberwetter, responded to news of the Biden Administration demand yesterday by saying, “If protecting national security is the objective, divestment doesn’t solve the problem: a change in ownershiop would not impose any new restrictions on data flows or access.” In fact, much of the data which U.S. government officials and regulators are seeking to protect through this policy toward Tiktok could be procured — albeit very laboriously and expensively for Chinese spy agencies — through commercial transactions on the darkweb. The ultimate solution to guard against the risks associated with Tiktok and other Chinese social media platforms is for the U.S. to institute stronger consumer privacy protections across the board affecting all social media platforms — Chinese, U.S. and other. Obviously, U.S. Big Tech doesn’t want to see this and, equally obviously, this is a bridge too far for the U.S. Congress to consider as we head to the 2024 electoral primary season.
- THE FINAL OUTCOME: Those with reason to know the final outcome won’t be talking and those who are talking don’t likely know. I am squarely in the second camp but I will hazard a guess. The threat to force Bytedance/Tiktok to sell off its U.S. Tiktok holding was made earlier in the Trump Administration. Characteristically, it was delivered mostly as top-of-his head muttering by Trump himself and didn’t carry the institutional heft of the Biden Administration’s lengthy CIFIUS review. But then, just as now, the demand does not bring about an immediate outcome. It initiates what is effectively a high-stakes business and legal negotiation between the U.S. Government and Bytedance/Tiktok leadership. While unlikely at this point, the either/or could even morph into some third-way which would take time for both sides to explore thoroughly. It’s now a more coherent and higher-stakes ultimatum, but it’s the same ultimatum Bytedance/Tiktok was given two and a half years ago. Biden now has his political flank reasonably well protected from Republican China-bashers. I expect the final resolution of all this to take some time. But the clock is ticking. Tick tock …
“We are in competition with China and other countries to win the 21st century,” Biden said on April 28th. “We are at a great inflection point in history. We have to do more than just build back better. … We have to compete more strenuously.”
The question we are examining today is what does “compete more strenuously mean.” I’ll be identifying four distinct fields in which heightened competition is likely to come to the fore but first some context and disclaimers.
The first point to note is that, in President Biden’s own words, some partial answers are already clear. Biden has made clear that he sees this 21st century competition as one between the US and its democratic allies on the one side versus Xi, Putin and other autocratic leaders on the other side. in other words, the heart of the competition is democracy versus autocracy. What Biden has also made clear involves timing, that the competition will not be joined in earnest until the U.S. has emerged from the worst of the COVID-19 pandemic and largely revitalized the performance of the U.S. domestic economy.
Two caveats are also in order. The analysis provided below is strictly my own. The Biden administration – under Kurt Campbell, deputy assistant to the President and coordinator for Indo-Pacific Affairs at the National Security Council — is currently directing an assessment under which cabinet-level departments and some agencies are re-viewing their policies and procedures as they relate to China. These departments and agencies will be reporting their findings to the White House later this year at which point Kurt Campell, his senior director for China Laura Rosenberger, and their staff will be synthesizing these inputs and articulating an updated “whole of government” policy towards China. (This process is consistent with the ‘get our house in order now’ before focusing on generational competition with China, as referenced above.) Clear answers to the question we’re examining today likely won’t be rolled out by the Administration until that process is complete.
In the meantime, the single best open-source for a quasi-authoritative readout of Biden’s thinking on what heightened US- China technology competition will look like may be the Penn Biden Center. While I am affiliated with Fox Leadership International under the School of Arts and Sciences at Penn, I want to make clear that this blog post does not draw on any information from that source. This is my analysis and I bear sole responsibility for any deficiencies.
So, on to the substance …
At the broadest level, the U.S. needs to up its game in four areas of traditional strength to respond more effectively to the 21st century tech challenge from China:
Field 1: Industry Sector Focus
NASA’s manned mission to the moon and DARPA’s role in the creation of the internet are the most storied examples of U.S. Government success in mid-wiving new high technology industries. What has changed since those early post-war successes is the subsequently accelerated pace of technology innovation and development in the Fourth Industrial Age. In fields as diverse as semiconductor design and fabrication, 5G telecommunications, artificial intelligence and robotics, quantum computing, EV batteries and biotechnology, U.S. government policy is currently nowhere near as focused in positioning its support role as is China. What is called for is not a return to 20th century “industrial policy” (and its poor record of picking company-level winners and losers) but a new, 21st century approach to policy support to better prepare eco-system support for the emergence of entire new industries.
Field 2: Funding for Innovation & Regulation of Foreign Acquisitions
Despite the recent trend-line of falling investment in basic research in the U.S. and increasing levels of basic research investment in China, the fact remains that China is still no match for the U.S. in terms of the breadth, depth and quality of its basic research or of the commercial potential of the developments it spins off. This is readily apparent in cutting-edge fields like advanced semiconductor design and gene therapy. In these fields, China can’t put a home-grown team onto the field but instead tries to snap up foreign talent and fledgling foreign companies in hit-or-miss hopes of leveraging that into a domestic breakthrough. Committee on Foreign Investment in the U.S. (CFIUS) and other related government entities need more focus on the dynamics underpinning tomorrow’s industries and less on yesterday’s. Likewise, less silo-ing between basic research and commercial development is urgently needed.
Level 3: Rule of Law
Perhaps no societal field offers greater contrast between the U.S. and China than the field of law and legal practice. The U.S. system of case law based on precedent stretches back to the time of the Saxon Kings of England (with very occasional admixtures from the Roman system of law more common to Continental Europe). As enshrined in the U.S. constitution, ours is the rule of law, not the rule of men (or women). While the Chinese Communist Party (CCP) has borrowed legal ‘parts’ from a wide variety of sources since 1949, the legal system it has assembled from those parts is principally designed to serve the interests of the governing party rather than to protect inherent rights of its citizens or its private companies. It is rule by law, rather than rule of law, as was vividly demonstrated with the imposition of the new security law in Hong Kong in the summer of 2020. Despite the slowness and costs associated with it, the U.S. legal system provides a level of predictability and protection for investors and businesspeople which can’t be matched in China. We can expect to see the Biden Administration act to shore up the foundations of this legal system following the strains put on it by the previous administration.
Level 4: Wellsprings of Economic Vitality
Two of the deepest sources of support and revitalization for technology innovation in the U.S. are immigration and our capital markets. Immigration brings a steady stream not only of young and eager workers but also on occasion transformational business talent such as Sergey Brin and Elon Musk. Our capital markets spread risk over a broad pool of investors and investment vehicles, incentivize iconoclastic thinking and efficiently channel capital to the points of likely greatest return. While China has through its tax policy been impressively building an investment-led structure for its markets, the efficiency and speed of execution of the U.S. capital markets can’t be matched in China. In broad view, China currently tries to leverage its centralized leadership and ‘command economy’ model to try to neutralize this U.S. advantage as well as hoping to ride the momentum from its high-growth domestic macro-development over the last four decades (and the internationalization of that development model over the last ten years). How China fares in field of competition in the years ahead as it emerges from its fast-growth phase of development and collides with a dire demographic imbalance will be one of the more consequential questions of the early 21st century.
Editorial Note: Upcoming posts in the TEA Collaboratives T-series on technology topics will pick up and expand on some of the topics identified above. Our focus in this Technology Competition sub-series will mostly fall under the industry and innovation topics identified above but we will also have occasional invited guest experts to delve more deeplly the legal and capital markets topics. Also, it’s important to note explicitly that the viewpoint expressed in this post and other future posts in the series are obviously a perspective from the U.S.-side. We will present the ‘emic’ view (as seen through the eyes of Chinese government planners and officials) separately through our A-series (Ambitions) posts which appear on Fridays.
As a final note, the Technology Competition sub-series posts introduced in today’s post will alternate on Mondays with our TECH-tonics sub-series posts (which focuses exclusively on issues associated with the micro-electronic supply chain fault-line between the U.S. and China passing through Taiwan). In any given month, we’ll be producing in alternating fashion two posts in the TECHtonics and and two poss in the Tech Competition sub-series.
President Xi Jinping’s anti-corruption drive — known for its signature vow to target both ‘tigers’ (top-level officials) and ‘flies’ (low-level functionaries) — shows no sign of abating. It may even be gathering momentum with the early April announcement that former Politburo Standing Committee member (and security portfolio chief) Zhou Yongkang will be standing trial in Tianjin on charges of bribery, abusing power and disclosing state secrets, This announcement followed a slow-motion public ensnarement of Zhou as, for almost two years, a tightening noose methodically drew in business associates from Zhou’s time with China National Petroleum Corporation, provincial associates from his time as Party Secretary in Sichuan Province, associates from the security establishment and close family members.
As a member of the PSC for five years from 2007-2012, Zhou Yongkang was one of the seven most powerful people in China. Not since the 1976 arrest and subsequent trial of Jiang Qing and the Gang of Four at the end of the Cultural Revolution has such a high-level Chinese official been brought to public trial by the Chinese Communist Party.
The beginning of Zhou Yongkang’s fall is associated with Chongqing, a provincial-level ‘city’ (see Direct Controlled Municipalities) in China’s far west immediately adjoining Sichuan Province and erstwhile power-base for Bo Xilai, Zhou’s protégé. Until the death of British citizen Neil Heywood followed by the failed attempt by Bo’s police chief to seek refuge in the U.S. Consulate in Chengdu (capital of Sichuan Province) followed by the conviction of Bo’s wife on charges of ordering Heywood’s poisoning, it had appeared likely that Zhou would be able to get Bo onto the Standing Committee, thereby protecting his ‘retirement flank’ after stepping down. Bo’s candidacy faltered under the weight of these events just as Xi Jinping was consolidating power and his new Standing Committee taking final shape.
Now that formal charges against Zhou Yongkang have been announced, attention is swinging to Tianjin, another of China’s four Direct Controlled Municipalities (直辖市) and venue for Zhou’s upcoming trial. It is perhaps not surprising that, for months now, the mood in Tianjin — Philadelphia’s Sister City (since original establishment of “Friendship Cities” link in 1980) — has turned decidedly grim. As reported by my friend Tim Weckesser and his fine team of professionals at Sino-Consulting International (SCI):
(begin extract from SCI Report)
The city of Tianjin, our main base in China, recently became a focus in the news media as it fell under scrutiny by Beijing’s powerful anti-graft campaign. This happened not only because of the sudden downfall of Tianjin’s long time police chief, Wu Changshun, based on corruption charges, but also because Tianjin courts have been chosen for the trial Zhou Yongkang, the highest ranking official ever to be charged with corruption. China’s state prosecutors formally charged Zhou, the country’s former top security czar, with accepting large bribes over a long period of time. At the height of his power, Zhou controlled China’s police, spy agencies, court systems, and prosecution offices all across the country. And he wasn’t shy about using these powerful assets to crush dissent in the name of “preserving social stability.”
And now, to add to Tianjin’s notoriety, the city’s former mayor, Dai Xianglong, is “cooperating” in an “investigation”. From 1995 to 2002, before becoming Tianjin’s mayor, Dai was already well-known as the governor of China’s central bank, the People’s Bank of China (PBoC). The investigation, so far, is focused on the vast wealth amassed by Dai’s relatives, not on Dai himself. But this may well be just a tactical move with Dai himself as the real target. This new investigation comes on the heels of the 15 year prison term meted out to Nanjing’s former mayor, Ji Jianye, for corruption. The court found Ji guilty of accepting 11.3m yuan ($1.9m) in bribes between 1999 and 2013, when he was dismissed.
President Xi Jinping’s anti-corruption campaign aims at trying to clean up China’s graft-riddled government at every level, with examples being set at the top. And so far, we have to say it is successful. In our experience, government officials as well as executives in state-owned enterprises (SOEs) are all keeping their heads down. No big banquets, no gifts – given or received – and strictly limited international travel are basically the norm, at least for now. The question is – will this nationwide campaign eventually help China’s economic development? We hope so. Here is some very recent China market news taken from a variety of public sources.
(end extract from SCI Report)
These then are the dangerous riptides which have been tugging at our PHL-TEDA EcoPartnership‘s Chinese partner, TEDA, since the end of 2014. Given the fathoms-deep nature of Chinese political and legal process, many of these currents have been swirling in hidden depths while the surface continued to appear placid. The U.S. side of our PHL-TEDA EcoPartnership has unmistakably felt the power of these currents, though.
While Xi Jinping’s anti-corruption drive remains immensely popular with the general public, there is a growing concern among many close observers of Chinese politics inside and outside China that these hidden forces can as easily become uncontrollable and destructive as they can be purging and restorative. At the heart of all this is the crucial difference between ‘rule of law’ (with due process, standards of proof, checks and balances, etc) versus ‘rule by law’ (political power plays being managed under a thin veneer of legal process). As Liz Economy wrote in an earlier post on this blog (see “Time for Xi to Reform his Reforms” in Feb. 6, 2015 post):
“Certainly, (Xi’s) anti-corruption campaign has hit its target—hundreds of thousands of them to be exact—and shows little sign of slowing down. He has cast a wide net, leaving little doubt that no sector of society—party, military, business, or other—is completely safe. Still, Xi remains vulnerable to accusations that the campaign is at least partially politically motivated, given that almost half of the senior-most officials arrested are tied in some way to his political opponents, and none of his Fujian or Zhejiang associates have been detained. He might want to bring some transparency to the process: uncertainty and fear of running afoul of some regulation or another are driving many officials to avoid making decisions or taking action.”
______Assessing China / The TEA Collaborative______ 