INSIGHTS | Trump’s app bans and what they mean for China tech

Last week, US President Donald Trump took aim at two of the most internationally successful apps ever made by Chinese companies. After preaching about the national security risks posed by Chinese-made apps for months, he signed two executive orders on Aug. 7 that ban transactions with the owner of Tiktok and Wechat starting from Sept. 20. It looks like the US is now in the app bans game.

No one knows how the ban will be interpreted. It’s not clear if users who have already downloaded the apps would be prevented from using them, or if the bans will have effects beyond the borders of the US. But as the US continues to pursue its “clean network” policy, more bans may be coming soon.

The executive orders: The orders ban “any transaction”with Bytedance by a person or company under US jurisdiction, and any transactions with Tencent that relate to Wechat. The Secretary of Commerce will be tasked with identifying these transactions when the bans come into effect on Sept. 20.

What’s banned? Critics say the orders are “incredibly broad and vague” with little clarity on the  “transactions” that are banned until Sept. 20. But lawyers told TechNode that it’s possible to guess based on the law behind the order. 

• The key policy precedents are the 1977 International Emergency Economic Powers Act (IEEPA) and a May 15, 2019 executive order declaring a “national emergency” (the precondition for trading bans under IEEPA). 
• Clay Zhu, an attorney at Deheng Law Offices in California, told TechNode in an interview that the May 15 order, viewed broadly as targeting Chinese telecommunications equipment maker Huawei, defined transactions as “acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service.” If this definition is applied to Wechat, Zhu said, it would effectively be a total ban of the app. 
• A White House document, reported by Reuters, lists as banned “transactions” actions that include putting Tiktok on an app store, buying an ad on Tiktok, or accepting the app’s terms of service as a user.
• “We should assume companies have 45 days, and any further dealing with Wechat or Tiktok will require a license, which presumably will be denied,” Alex Capri, visiting senior fellow at the National University of Singapore Business School, told TechNode.

Best case: Greg Pilarowski, founder of tech-focused boutique law firm Pillar Legal, told TechNode that IEEPA may limit the president to blocking financial transactions—so it could be that Wechat Pay and perhaps Tiktok ads are blocked, while the apps survive.

More likely: The White House is aiming for a total ban on the apps in the US, Pilarowski said. Even if the law is disputable, the Commerce Department will likely order the apps removed from app stores, which would put pressure on Apple and Google to comply.

Jump the wall? In the event that apps stores are forced to de-list the apps, would users be blocked from using them? The US probably can’t block the apps the way China blocks many foreign apps—but the apps could block themselves.

• Tiktok already blocks users in Hong Kong, China, and India based on SIM card nationality as well as IP address, meaning a VPN alone doesn’t allow users to access the app. 
• Wechat has also begun blocking users in India in response to that country’s app ban.

Worst case: The US tries to enforce these app bans beyond its borders, as it is doing with the ban on exports to Huawei. In such a scenario, the ban could prevent Starbucks from accepting Wechat Pay in China—or force the Apple App Store and Google Play to de-list globally.

• Experts think these scenarios are unlikely, as they would hurt US businesses more than they hurt China.
• Pilarowski wrote in an Aug. 12 paper that a ban on US retailers accepting Wechat is very unlikely. The Wall Street Journal reports that major US retailers are lobbying the president against such a ban.
• If forced to de-list the apps globally, Apple would have no future in the Chinese market. Apple is a beloved brand in China—but Wechat is as essential as oxygen for digital life. Analysts argue this makes de-listing in China very unlikely.
• Since Google Play is already blocked in the country in favor of domestic app stores, this scenario would have much less effect on Google phones.

What options do Tiktok and Tencent have?

1. Sell: Bytedance is in talks with American companies to sell Tiktok. This would save the company from more losses, though it might not be a good deal for the company. There is no sign that Tencent is going to sell any part of Wechat. The company may just give up the US market, where it has roughly 19 million daily active users.
   
   Bytedance has until Sep. 15  to make a deal with an American company. Microsoft already confirmed that it had held talks with Bytedance to buy the American, Canadian, Australian and New Zealand operations of Tiktok. CNBC reported that the deal could costspend Microsoft between $10 billion and $30 billion.
    
2. Sue: Bytedance is also seeking to challenge the executive order in court. The company said it would argue that the executive order is unconstitutional because it did not give the company a chance to respond. Tencent hasn’t yet taken legal action, but a group of American Chinese Wechat users said they would file lawsuits against Trump’s executive order involving Wechat, arguing that the executive order goes against provisions of the US Constitution and the Administrative Procedure Act.

But the courts move slowly, and the chance of rulings before the Nov. 3 election are close to nil. Even if the companies eventually win, Pilarowski said, the bans will accomplish their political goals for the president. “It doesn’t matter if he has the authority to do this, or he doesn’t have the authority to do it, he’s got what he wanted. It’s one more data point in this administration being tougher on China than any previous administration in the United States.”

For Bytedance, the executive order means more than just losing Tiktok.

• Hiving off part of Tiktok’s regional operations means there will be two independent versions of the same social media app. In that case, if Microsoft wants American teenagers to be able to view videos uploaded by Japanese or British ones, it would have to seek approval from Bytedance, which may run into conflict with Trump’s executive order, as The Economist noted.
• For Bytedance, if it has to sell the Anglo-Saxon part of Tiktok, it still owns the European, Japanese, and Southeast Asian markets. India just banned Tiktok, and Bytedance is in talks with Indian conglomerate Reliance for a potential investment to save the app’s operation in the country, TechCrunch reported Wednesday. 
• Bytedance also operates Douyin, which is often seen as the domestic version of Tiktok, in China. The app has more than 400 million daily active users.
• Tiktok’s break-up will also put a dent in Bytedance’s valuation, which reached $140 billion earlier this year. Several investors said the company’s price tag is under “tremendous pressure” as it set to lose part of Tiktok.

Tencent, however, seems sanguine. The company publicly downplayed the importance of the US market to its global businesses in an earnings call Wednesday, as it reported robust second-quarter results.

• “The US represents less than 2% of our global revenue. Within that, advertising in the US should be less than 1% of our total advertising revenue,” James Mitchell, Tencent’s Chief Strategy Officer, said during the earnings call. 
• The executive order only covers US jurisdiction, meaning US companies selling to Chinese markets will still be able to advertise on Tencent’s platforms in China, making it even less likely that the ban will weigh on ad revenue, according to Mitchell.
• The company said its operating profit in the second quarter increased 38% year on year to RMB 37.63 billion ($5.32 billion).
• Industrial observers seem to agree with Tencent’s argument. Shenzhen-based broker Guosen Securities on Monday maintained a buy rating on the Tencent stock. A full exit of Wechat from the US market will have little impact on the company’s revenue and social media ecosystem, said Wang Xueheng, analyst at Guosen Securities.
• But nevertheless, shares of the company have dropped by 8.2% since the announcement of the order last Thursday.

A silicon curtain? The executive orders came a day after the US Secretary of State Mike Pompeo escalated the tech war with a new initiative. He promised to purge US networks from Chinese technology under the “Clean Network” program.

• The US will work to stop Chinese cloud providers like China Mobile, China Telecom, Alibaba, Tencent, and Baidu from storing and processing vast amounts of data from US citizens and companies, according to Pompeo. The State Department aims to keep sensitive personal information and key intellectual property, such as Covid-19 vaccine research, away from Chinese companies, he said.
• Capri also warned that the administration’s “Clean Network” program could target cloud computing next. “The big question is, how far is the administration going to go, and is Alibaba next?” he said. 

The setbacks faced by Bytedance and Tencent also came as Chinese President Xi Jinping is promoting a new strategy to speed up China’s shift toward more reliance on its domestic economy. The initiative, translated as “domestic circulation,” encourages companies to prioritize domestic consumption and markets. Chinese officials said the strategy is gaining urgency as Chinese companies such as Huawei and Bytedance face increasing resistance in overseas markets, according to the Wall Street Journal.

• TechNode reporter Chris Udemans wrote that Chinese corporate investors including Alibaba, Baidu, and Tencent already started to retreat from the US even before the August orders.

But experts say this will not be the end of Chinese tech companies’ global expansion, nor does it mean Chinese companies will have to focus only on the domestic market.

• “The recent developments are forcing Chinese tech companies to change directions when expanding into overseas markets. They may go to Southeast Asia, Africa, and Europe,” said TechNode founder and CEO Lu Gang. 
• Lu suggests that companies with apps that can influence users’ thinking, or collect personal or business data, may face more difficulties in the overseas markets. He says that’s why the US targeted companies like social media app Tiktok and telecoms company Huawei and artificial intelligence firm Iflytek.  He added that people in overseas markets may have more concern for Chinese AI firms because of non-technical factors.

The hostility Chinese tech companies are facing in the US may also have an immediate impact on how startups and venture capital firms raise money, said some VC investors.

• “In the short term, Chinese VC might be more skeptical about startups that tend to expand to US or European markets because of tense international situations,” Xu Miaocheng, investment vice president at Beijing-based VC firm Unity Venture, told TechNode.
• US dollar funds have more pressure, and it’s a difficult time for them to raise money from their backers at the moment, said Xu.

A future of ‘splinternets’? The executive orders against Tiktok and Wechat don’t mean the end of Chinese tech companies’ global expansion, but further restrictions are expected to come. With China’s long-standing Great Firewall, and the addition of the US’ new “Clean Network” program, we are now closer than ever to a world with two different internets.

Read more:

• Understand the law: “POTUS bans Wechat” (Pillar Legal)
• The view from the boardroom: “Corporate America worries Wechat ban could be bad for business” (Wall Street Journal)
• Where is this ‘Clean Networks’ stuff going? “The strategic vision behind the Tiktok, Wechat bans” (Lawfare)

Additional contributions by David Cohen