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The US ban on TikTok and WeChat – a vindication of trade war mutating into tech war

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The US’s latest ban on China’s TikTok (a BiteDance affiliate) and WeChat (a Tencent affiliate) has vindicated my long-held argument that the Sino-US trade war had mutated into a tech war1, which could last for many years. US President Donald Trump issued two executive orders on the 6th of August spearheading the US campaign to drive out Chinese technology and companies.

TikTok is a social networking app for sharing short user-produced video clips, with an estimated 100 million users in the US and many more around the world. WeChat is an even more powerful app which puts messaging, social media, and electronic payment all in one platform within a smartphone. It is extensively used by the Chinese diaspora to connect with families and friends in China.

 

Impact on trade and foreign investment

Trump’s August executive orders are a significant escalation in the ongoing Sino-US tech war2, building on earlier US actions against Huawei and ZTE. While details on what transactions are banned and what are not have yet to be decided at the time of writing, ByteDance already said that it would sue the Trump Administration over the ban. Tencent may follow suit.

The US is already trying to convince other countries to ban Huawei from their 5G infrastructure systems. If it persues similar actions against TikTok and WeChat, this would open a new front in the Sino-US tech war. The executive orders also underline the potential risks of 1) decoupling of the Chinese and US economies and 2) a dichotomised global tech system with one side led by China and the other by the US and where the different internet applications available to users will depend on where they reside and the geopolitical slant of their respective governments.

Trump’s latest move may also deter other foreign, notably Chinese, investors considering investing in the US, especially in the technology sector. Usually, foreign investors are more worried about political risks in developing countries with weak legal institutions than in developed countries with rule of law. But the TikTok and WeChat bans suggest that political risk should also be a core concern for any global company with connection to China trying to operate in the US. Heightened US government reviews on foreign investments in the US is already chilling Chinese investment into Silicon Valley3. Trump’s latest actions against TikTok and WeChat could speed up this trend.

 

A no-win situation

If the US decided that the video-sharing app must be removed from America’s app stores, Apple would be the most vulnerable to Chinese retaliation. The Chinese market makes up 15% of Apple’s revenue, and that share may have increased as COVID-19 has weakened global consumption but boosted tech-related sales.

Apple has built a closed ecosystem where users can only download and install apps through its App Store. So driving WeChat out of the App Store would effectively also drive iPhones out of China as users quit. A recent online poll suggested that over 90% of Chinese surveyed would give up their iPhone if WeChat is removed from the App Store. The market estimated that Apple’s global shipment could drop by 30% because of this. Beijing knows all this, and so will have significant leverage over Apple who might lobby the White House, or even pursue legal action, against the ban.

 

How bad will it get?

Will the prevailing tension speed up economic decoupling or even increase the risk of an armed conflict between China and the US? While anything is possible under Trump’s mercurial policy, Beijing seems to have adjusted to a new foreign policy approach to contain the global damage by 1) scaling back its “wolf warrior” diplomacy and 2) isolating the “stress points” and dealing with the conflict areas separately.

When the trade war began, Beijing hoped to ease tensions with negotiations with and agricultural purchases from the US. This approach might have worked had it not been for COVID-19. But when Trump saw the pandemic might cost his reelection, he started to re-focus on blaming China as the tactic to rally voters’ support.

Instead of clashing with Washington, Beijing has scaled back its abrasive approach since this March and instead engaged in a new three-pronged approach of cooperation, dialogue and dispute management. Its tactics are that other than sovereignty issues, which are not negotiable, it is opened to dialogue and willing to cooperate to manage any disputes. It has reaffirmed repeatedly China’s commitment to implementing the Phase I Deal but asked the US to cooperate.

While the tensions over TikTok and WeChat are still brewing and may escalate, Beijing seems to have formed a consensus over its US policy by engaging in a “protracted war” that calls for flexibility in dealing with external matters and resolve in building internal strength for domestic development. Let’s hope that China and the US would not fall into what Graham Allison (of Harvard University) called the Thucydides Trap (of military conflict).

 

Chi Lo, Senior Economist Greater China

BNP Paribas Asset Management

 

[1] See “Chi Flash: Sino-US Trade War: Truce for Now But Risks Have Mutated”, 3 December 2018, “Chi Flash: Sino-US Trade Negotiations (II): Alternative Scenarios and Implications”, 8 January 2019, “Chi Time: Myths and Realities Behind the Sino-US Tech Competition”, 27 March 2019, “Chi Time: Sino-US Trade War Risk – Reality Check”, 10 October 2019, “Chi Time: China Themes for 2019”, 11 December 2019, “Chi Time: Trade War Pauses, Tech War Escalates (I) – Covid-19 Reignites Trade War”, 13 May 2020 and “Chi Time: Trade War Pauses, Tech War Escalates (II) – The Limits of the Phase–One Deal”, 20 May 2020.

[2] See “A New World War Over Technology”, by Jill Disis, CNN Business, July 11, 2020.

[3] See “Silicon Valley is Awash in Chinese and Saudi Cash and No One is Paying Attention (Except Trump)”, by Theodore Schleifer, Vox, May 1, 2019.

 

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