July 18, 2020
With more than 165 million downloads and a rabid teen following, short-form video app TikTok has emerged as a rare U.S. success story for a China-based app.
It may be the last.
Amid mounting concerns over the growing influence of Chinese companies and their ties to the communist government, national security experts say Washington is leveraging all of its tools to keep Chinese technology-related investments out of the U.S.
“I think that the door is going to be largely shut to cutting edge Chinese investments,” said Mario Mancuso, Partner at Kirkland & Ellis, and former member of the Committee on Foreign Investments in the U.S. or CFIUS. “U.S. business, whether it’s the tech community or industry as a whole, I think they’re starting to get that picture.”
TikTok, known for its viral dance clips, has emerged as the latest geopolitical flash point in US-China relations. Owned by Chinese company ByteDance, the Trump Administration has repeatedly raised suspicions about the vast amounts of data collected on the platform, and Beijing’s ability to access it.
The company has denied those accusations and gone to great lengths to prove its independence from its Chinese parent company, as both President Trump and Secretary of State Mike Pompeo threaten to clamp down on the popular social media app.
Earlier this year, it hired Formed Disney (DIS) executive Kevin Mayer to become the CEO of TikTok and COO of ByteDance. It is reportedly considering a global headquarters outside of China, and maintains that American user data is only stored on U.S. servers, with a backup in Singapore
No ‘guardrails’ to guide policy
Still, anything short of a spinoff from ByteDance is unlikely to appease lawmakers and regulators suspicious about any Chinese-owned company’s intentions. Theresa Payton, Former White House Chief Information Officer under President George W. Bush says the distrust extends to every Chinese company with ambitions in the U.S.
“Something has to be hammered out at the deal table between China and the United States around protection and honoring intellectual property rights, and the privacy of citizens and their data,” said Paytoo. “Until that international relationship is hammered out, any Chinese hardware, software and social media apps will fall under this level of scrutiny because we don’t have clarity on what the guardrails are.”
CFIUS has emerged as a critical check on Chinese companies looking to expand here. The Inter-agency committee tasked with reviewing national security implications of foreign investments in American companies has used its expanded scope under the Trump Administration to aggressively block transactions. In 2018, the committee blocked Ant Financial’s acquisition of Moneygram over data security concerns. Last year, CFIUS ordered Beijing Kunlun Tech Co to sell popular gay dating app Grindr.
While CFIUS is tasked with reviewing all foreign transactions, Mancuso, who also served as U.S. Under Secretary of Commerce, Industry and Security, says the committee views China as a “category of one.” And it has wide latitude to determine the fate of firms, especially those invested in emerging tech.
“This is not a criminal proceeding, where the government has to prove beyond a reasonable doubt [that a national security risk exists]. In fact, the government doesn’t have to believe that anything went wrong,” Mancuso said. “The government could both force an unwind and believe that no data left servers in the United States.”
The growing move to clamp down on Chinese companies comes as countries around the world increasingly look to build out their digital walls. Following heightened border tensions between India and China last month, the Indian government banned 59 Chinese-owned apps including TikTok, calling them a threat to the country’s sovereignty and security. That cut off access to 200 million TikTok users, a third of the app’s global user base. India, is among roughly 45 countries with data localization requirements in place, mandating tech companies to store domestic user data on local servers.
Samm Sacks, Senior Fellow at Yale Law School’s Paul Tsai China Center, says Washington’s efforts to push out Chinese companies, accelerates the move towards digital protectionism.
“It creates a blueprint to start using national security as a reason to ban market competitors. I think about places like India and Europe that have taken a really strong stance on digital sovereignty and this idea that Silicon Valley has a concentration of power and it’s time to return some of that power,” Sacks said. “We’re sort of showing them the way, if they wanted to make a case against U.S. tech companies.”
Impact to Big Tech in the U.S.
That may prove to be problematic for U.S. tech giants fighting their own regulatory battles both at home and abroad. Matt Perault, Former Director of Public Policy at Facebook (FB), says foreign competition in the market helps quiet antitrust concerns expressed by regulators in the U.S. and Europe.
“Having companies quickly rise to challenge U.S. tech firms, is an important thing in terms of ensuring that U.S. tech firms continue to have the incentive to deliver better products at lower prices, and to continue to be as innovative as possible,” said Perault, Director of Center on Science & Technology Policy at Duke University. “I think it would be a problematic thing if the U.S. market, for no reason other than sort of political concerns…all of a sudden had fewer choices and services you could use.”
Still, Facebook CEO Mark Zuckerberg has singled out TikTok on a number of occasions, suggesting that a crackdown on the American social media platform, would enable Chinese apps to gain in popularity, and dictate the regulatory rules.
“Until recently, the internet in almost every country outside China has been defined by American platforms with strong free expression values. There’s no guarantee these values will win out,” he said, in an address at Georgetown University last fall, pointing to reports of TikTok censoring protestors and activists. “Is that the internet we want?”
Perault says the U.S. crackdown on Chinese companies and lawmaker concerns about American tech companies becoming too powerful, point to the “incoherence of U.S. government policy.”
“Right now, political figures in the US are saying two things that are in conflict with each other. On the one hand, they’re saying, we’re really concerned about the increasing dominance of us tech firms, they have unchecked power, it’s really problematic” he said. “On the other they’re saying, we’re deeply concerned about Chinese products. And so, in a range of different ways we want to have a more protectionist approach to protect U.S. tech firms from competition from Chinese firms.”
Akiko Fujita is an anchor and reporter for Yahoo Finance. Follow her on Twitter @AkikoFujita