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September 1, 2020

Asia

CHINA/US: Does Beijing intend to block the sale of TikTok?

BY Gabriel Wildau

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  • New Chinese export-control rules require a license for exporting content-recommendation algorithms, giving Beijing the authority to block a pending sale of TikTok.
  • But Beijing’s intentions are unclear; it is possible that Chinese authorities still intend to let the sale proceed, once they have made a gesture of asserting their sovereignty.
  • Beijing may also intend to use the new rules to generate leverage to pressure the US to loosen restrictions on Huawei.

China’s Commerce Ministry updated its catalog of products subject to export controls on 28 August to include content recommendation algorithms. The new rules will complicate efforts by Chinese technology company ByteDance to sell TikTok’s US operations in response to a US ban on the app, since any sale would presumably require ByteDance to export TikTik’s core algorithm to the app’s US buyer.

The impact of the new rules is not yet clear. Depending on how the Commerce Ministry implements the licensing requirement, the rules could turn out to be a minor bureaucratic hurdle, or they could kill the TikTok sale entirely. Such regulatory uncertainty mirrors the US ban on WeChat, whose impact on Tencent could range from modest to severe, depending on enforcement.

Beyond content algorithms, the new rules also limit exports of other technologies such as speech modeling, voice recognition, and text analysis. But given the timing of the rules, ByteDance and its content algorithm are clearly the primary targets. The Commerce Ministry last updated its export-control catalog in 2008. An article in the official Xinhua News Agency on 29 August quoted a government advisor saying that ByteDance should “seriously and carefully” consider whether to suspend negotiations on the TikTok divestment in order to comply with the new rules. This note outlines three possibilities for how Beijing will enforce those rules.

Sovereignty reflex

One possibility is that the new rules are not intended to block the TikTok sale but are merely a knee-jerk assertion of sovereignty. China’s leaders may dislike the appearance that a sale by a flagship Chinese technology company would occur purely in response to a US order, with no input from Beijing. On this interpretation, Beijing is likely to issue the required license and allow a sale to proceed, once authorities have flexed their muscle. Though TikTok’s content recommendation algorithm is seen as highly sophisticated, it is unlikely that Beijing views the export of an entertainment-focused algorithm as a genuine threat to national security.

One version of this scenario is that Beijing’s rules delay but do not kill the divestment deal. The US executive order requires the US Commerce Department to implement the ban on TikTok by 19 September. Assuming Beijing will not issue the required export license by that date, ByteDance could seek an extension of that deadline. If Washington grants such an extension, Beijing may view this gesture as a concession to China’s sovereignty that would enable a deal to proceed. Alternatively, Beijing may be attempting to delay any TikTok sale to allow more time for the company’s legal challenge against the US executive order to proceed. TikTok filed a complaint against the Trump administration in US federal court on 24 August. If successful, the lawsuit could allow ByteDance to avoid a sale and continue operating TikTok in the US.

National sacrifice

The more pessimistic scenario, from ByteDance’s point of view, is that Beijing refuses to grant the required license, killing the deal. This scenario appears less likely because (assuming the US ban is upheld in court) blocking a sale of TikTok would impose huge losses on ByteDance, a Chinese national champion. Media reports indicate a possible sale price for TikTok’s US, Australia and New Zealand operations of USD 20-30bn, but the asset would become essentially worthless if the app is blocked. Still, the possibility that Beijing would impose losses on ByteDance as a demonstration of sovereignty cannot be completely ruled out. ByteDance purchased Musical.ly, which became TikTok, in 2017 for only USD 1bn, so Beijing may view this figure as the true cost to ByteDance.

Bargaining chip

A third possibility is that Beijing intends to use the new licensing requirement as a bargaining chip to extract other concessions from the US – notably a partial reprieve for Huawei from US export controls. As previously noted, Beijing has refrained from retaliating against US technology companies in response to progressively harsher US controls targeting Huawei’s access to advanced semiconductors. This forbearance appears to be motivated by a perception that such retaliation would ultimately harm China’s interests by alienating US companies that still provide crucial technology and foreign investment.

The new license requirement targeting TikTok offers a possible point of leverage for Beijing. Chinese leaders may calculate that the Trump administration (and a potential Biden administration) does not want to follow through with a TikTok ban, which would anger the app’s roughly 91mn US monthly active users. By threatening to block a TikTok sale, Beijing could persuade the US to issue at least some additional licenses for US exports to Huawei. The US Commerce Department is almost certainly unwilling to allow sales of advanced chips that fuel Huawei’s 5G network infrastructure business. But there is still some possibility that US authorities could loosen the screws on Huawei modestly by allowing the sale of equipment for Huawei’s consumer handset business, whose threat to US national security appears modest.

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