On 13th March 2024, US Congress passed an Act titled, ‘‘Protecting Americans from Foreign Adversary Controlled Applications Act’’. It has yet to be approved by the Senate and signed by the President of the USA before it becomes law.
The preamble to the Act states:
“To protect the national security of the United States from the threat posed by foreign adversary controlled applications, such as TikTok and any successor application or service and any other application or service developed or provided by ByteDance Ltd. or an entity under the control of ByteDance Ltd.”
The Act declares that it shall be unlawful to distribute, host, or provide services to enable the use of TikTok in the USA. Subject to divesture of TikTok to an entity not under the control of a Foreign Adversary within 180 days of the law coming into force.
The US has accused TikTok owner ByteDance of sharing the personal data of US users with the Chinese Govt and trying to influence their behavior against US interests.
TikTok is a short video App whose powerful algorithm determines what the user wants and streams similar content. It is owned by ByteDance Ltd., a Chinese company with over 150 million young users in the USA, spending, on average, 56 minutes a day on the app.
TikTok generated revenues of US$16 billion in the USA out of a total estimated revenues of US$120 billion worldwide. Most TikTok users are based in China, where the application is known as Douyin.
The issue of TikTok being a national security threat has been ongoing since 2020. If the US Govt has conclusive evidence, why was the app allowed to operate for the past four years?
In this article, we will discuss the implications of the Act passed by Congress on US-China relations and TikTok.
TikTok has become a pawn in the escalating trade tensions between the US and China, which could have severe consequences.
TikTok is a social media platform used by approximately 30% of the US population, especially by children and young adults, who spend extended periods on it. The platform has a collection of short videos on various topics, is highly addictive, and is supported by a powerful algorithm that can determine what a user wants to see. It offers a variety of content, including entertainment, education, news, and short videos. Recently, there has been an increase in pro-Palestine and Hamas-related news on the platform. TikTok competes with Instagram’s Reels and YouTube’s Shorts.
US VCs such as Sequoia, General Atlantic, KKR & Co, and Susquehanna International Group have invested billions of dollars in ByteDance, which hopes to be listed on the Hong Kong Stock Exchange. In 2020, Sequoia Capital and KKR & Co led a funding round that valued ByteDance at $180 billion.
The relationship between the US and China thawed about 43 years ago. The US wanted a counterweight to the USSR in Asia, and it helped to be friends with China. The relationship blossomed into a healthy commercial relationship, with increasing trade and the US moving a part of its manufacturing base to China. Both countries benefited. The USA got competitive prices and good quality products while China moved from a predominantly agricultural economy to a hi-tech manufacturing country and has become the second largest economy.
The relationship had its share of friction. The Chinese exposed to the latest Western technology were accused of stealing intellectual property. The US passed sanctions in the past against Huawei and ZTE, Chinese telecom companies, virtually driving them out of the Western market.
China ringfenced access of its citizens to US applications on the internet. Facebook, Instagram, WhatsApp, Twitter – X, Snapchat, Telegram, Google services such as YouTube, Google Maps and Gmail are unavailable in China.
The US and China are chalk and cheese regarding their political constitution. The US is a democracy with free speech and freedom for the individual, while China is under the control of the Chinese Communist Party ( CCP ). There have been issues between both countries relating to human rights regarding the treatment of Uyghur Muslims in Hong Kong and Tibet.
China has tried to up its clout in Asia and other regions in the past few years, challenging US hegemony. It has picked territorial and other issues with South Korea, India, Japan, the Philippines, and Vietnam. China has also claimed rights over Taiwan, threatening to take over the country. The US has pledged defense support to many of these countries.
After the Covid period, the world realized that over dependence on China as a manufacturing hub could be dangerous, and offshoring of manufacturing to other friendly countries has begun. Over dependence on the region for Semiconductors is also being reduced by setting up Fabs in the USA, Germany, and other countries. The USA passed various sanctions prohibiting the sale of high-technology Semiconductor design and manufacturing equipment to China in 2022.
US-China business relationship has been around for 40 years but has been on a downward spiral for the past few years.
The ‘‘Protecting Americans from Foreign Adversary Controlled Applications Act’’ seems to be another shot across the bow from the US on Chinese aspirations using TikTok as an excuse.
The Act presupposes that TikTok and ByteDance pose a National Security Threat to the USA. No evidence has been placed in the public domain. No presentations were made to the US Congress on this issue, no debate was held, and an overwhelming majority vote passed the Act.
If the Act becomes Law, ByteDance shall have to do a qualified divesture of TikTok US business to a company not controlled by a foreign adversary or shut down its US operations within 180 days of the law coming into force.
The actions of the US are not founded on principles of natural justice, which have three cardinal principles: Rule Against Bias, Rule of Fair Hearing, and Reasoned Decision (audi alteram partem). These principles ensure that decision-makers are impartial. They also ensure that all the parties have an opportunity to present their case and that decisions are based on reasoning.
The US is also not following the principles of lassie faire, while free trade has been its anthem.
The US is the most powerful country in the world and the second-largest democracy. Granted, it is not easy to deal with China; however, the US has to set high standards for justice and business practices internationally.
Here are the key issues that emerge:
If TikTok is a national security threat, has spied on US citizens, shared their data with the Chinese Govt, and has the technology were with to influence US citizens to the detriment of US interests. The evidence should be made public, and TikTok should be prosecuted under due process of law and banned.
As per the present Act, guilt has been declared without proof. The US should hold the Act in the Senate until a new President takes over by the end of the year.
Suppose the Act is passed by the Senate and signed by Biden. The Chinese Communist Party may not want ByteDance to sell its US business, including the prized algorithm. The CCP may also retaliate against US business in China in different ways.
ByteDance will, in any case, seek legal remedies in US Courts even if the Law comes into force.
If CCP does allow ByteDance to divest, it would be under duress.
Who would buy TikTok if such a situation arises? Meta, Twitter, and Google are already large players in Social Media, and anti-trust issues will arise. There are reports that Oracle and Walmart may be interested, Microsoft evinced interest in 2020, and Amazon or Apple could be interested. The US market for TikTok is already saturated, and the acquirer may want to get rights to operate in other countries. Options for ByteDance will be limited, impacting fair valuation.
The recently enacted AI Act of the EU has stringent covenants on personal data, surveillance, spying on individuals, and behavior analysis to influence individuals. TikTok has 150 million users in Europe. EU scrutiny of TikTok on these lines will begin if it is not already in place.
The TikTok issue has further exacerbated tensions between China and the US.
The U.S.-China relationship is significant, interdependent, and vital to global political and economic stability, for the two countries to become genuinely hostile.
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