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August 20, 2020

Asia

US/CHINA: Analyzing possible scenarios for the ban on WeChat

BY Gabriel Wildau

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  • The scope of the Trump administration’s ban on TikTok, which is a crucial tool for the China-based affiliates of US companies, remains uncertain.
  • Under a minimalist interpretation, the Chinese affiliates of US companies would be allowed to continue using WeChat to deal with Chinese companies.
  • Under a maximalist interpretation, the ban could affect Tencent’s non-We Chat businesses and block US companies from exporting software and semiconductors to Tencent.

US businesses are facing uncertainty over the impact of US President Donald Trump’s executive order (EO) on 6 August restricting WeChat and TikTok from operating in the US. While TikTok appears likely to avoid a ban by spinning off its US operations from its Chinese parent company, ByteDance, a spinoff is not a viable option for Tencent, WeChat’s parent.

The language of the EO is vague, and given that the order was issued with an eye to the US presidential election, some details may not have been fully decided in advance of the announcement. The order instructs the Commerce Department to issue regulations by 19 September specifying the “significant transactions” that will be subject to a ban. A group of US multinationals with large China operations voiced concerns about the WeChat ban in a call with White House officials last week. This note outlines two theoretical scenarios for implementation of the EO, representing the upper and lower limits in terms of impact and severity. The actual regulations are likely to fall somewhere between these two extremes.

The minimalist scenario

A minimalist interpretation of the ban would block US residents from using WeChat but allow the China operations of US companies to continue using the app to transact with customers in China. This interpretation would also limit the scope of the ban to WeChat, while leaving other Tencent operations – such as video games and live streaming deals with US sports leagues – unaffected.

Though vague, the language of the EO offers some support for the minimalist interpretation. The main problem that the EO seeks to address is that WeChat’s collection of user data “threatens to allow the Chinese Communist Party access to Americans’ personal and proprietary information.” But a ban on US companies using WeChat to transact with customers in China would do nothing to protect the privacy of Americans. The EO’s wording suggests that Commerce has significant latitude to define transactions between the China-based affiliates of US companies and their Chinese customers as permissible.

Beyond the language of the EO, recent history also offers some reason to believe that the Trump administration may eventually settle on a minimalist interpretation. Throughout the series of US-China actions and retaliations over the last three years, both sides have sought to minimize collateral damage to their own economies and national chamption companies from coercive measures targeting the other side. The US offered tariff exemptions for key imports from China and granted licenses authorizing some continued sales to Huawei.

On the other hand, even in the minimalist scenario, US businesses that cater to Chinese tourists by accepting WeChat Pay for purchases within the US may be prohibited from doing so. The EO says that WeChat “captures the personal and proprietary information of Chinese nationals visiting the United States,” allegedly enabling Beijing to surveil Chinese citizens even as they are “enjoying the benefits of a free society for the first time in their lives.” US department stores, big box stores, luxury retailers, and hotels are among the businesses that accept WeChat Pay for US purchases. A ban that affects the usability of WeChat within the US would deal a further blow to Chinese tourism, which has already been decimated by Covid-19 and the broader deterioration of US-China relations.

The maximalist scenario

Under this scenario, US companies would be prohibited from using WeChat even to deal with Chinese nationals through their China-based affiliates. Such a ban would be especially damaging to consumer-focused companies.

In a maximalist scenario, a ban on WeChat could also extend to other Tencent properties, notably video games. The EO seems to leave this possibility open by prohibiting “any transaction that is related to WeChat by any person, or with respect to any property, subject to the jurisdiction of the United States, with Tencent … or any subsidiary of that entity, as identified by the Secretary of Commerce” (emphasis added). Tencent owns stakes in several US game companies, including 100% equity in Riot Games, which makes League of Legends. Beyond gaming, Tencent also has video streaming deals with US professional sports leagues including the National Basketball Association, the National Football League, and Major League Baseball.

Under the most expansive reading of the EO, US companies could be banned from supplying any goods or services (e.g., semiconductors and software) to Tencent. Such authority would derive from the International Emergency Economic Powers Act, which gives the US president broad powers to regulate international trade if he declares a national emergency. Trump already declared such an emergency in May 2019 in his “Executive Order on Securing the Information and Communications Technology and Services Supply Chain.” In this scenario, the impact on Tencent – and its US suppliers – would be substantively similar to the inclusion of Tencent on the Commerce Department’s entity list, which forbids US companies from exporting to listed companies.

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