Art imitates life, but the ongoing tussle over TikTok’s ownership has begun to resemble the goofy sketches that made TikTok the most downloaded app in history.
A compromise solution reportedly crafted by US Treasury Secretary Steven Mnuchin proposes cross-ownership so complicated that it’s impossible to tell whether China’s ByteDance, TikTok’s inventor, or American investors will control a new holding company.
US President Donald Trump initially blessed the compromise but then declared that he would veto any deal that didn’t include US control—whatever that turns out to mean. Meanwhile, China’s state press indicated that Beijing would veto any deal that imposed American control.
The result might be the end of TikTok’s operations in the United States—and Beijing doesn’t seem to care. That leaves Trump with a choice between shutting down an enormously popular social media app and incurring the wrath of a large swath of voters or signing on to a face-saving deal that gives US investors and corporations notional control, while leaving the core technology in Chinese hands.
Under the Mnuchin deal, Oracle and Walmart will buy a 20% stake in a new entity, “TikTok Global,” that will be 80% owned by China’s ByteDance. Because US venture capitalists own 40% of Bytedance, American ownership will exceed 50%. It’s entirely unclear, though, whether that slim majority would translate into control. It’s also unclear whether Trump will endorse this masquerade, or whether Beijing will allow the deal to emerge.
TikTok looks like a harmless entertainment app, but the presence of two billion downloads gives Bytedance a wealth of data with which to develop artificial intelligence (AI) techniques. The US government has raised concerns about the privacy of American users, a legitimate issue, but the bigger concern is strategic.
If AI is the engine of the Fourth Industrial Revolution, data is the fuel, and China’s command over data gives it a big advantage. That is true in health care AI, digitized health records, sequenced DNA and real-time monitoring of vital signs that is available for hundreds of millions of Chinese. China’s data advantage is remarkable in any number of fields, including educational software.
For example, the developer of an AI system to evaluate student progress told a Chinese partner that AI would have trouble analyzing some kinds of homework, for example, an essay about what children did on their summer vacation. “There are a hundred thousand possibilities,” the developer said. His Chinese counterpart replied, “No problem. We have six million test subjects.”
As Huawei’s Chief Technology Officer Paul Scanlan explained to me in an interview published in my book You Will Be Assimilated, the “control point” in the Fourth Industrial Revolution is the porting and storage of data. Washington’s TikTok attack is a belated, hastily-concocted and ineffectual attempt to slow a Chinese juggernaut that continues to gain momentum.
Washington’s concern about China’s dominance in AI and the significance of consumer apps like TikTok is understandable. But the US needs China more than China needs the US in AI development because the data advantage is already so overwhelming on China’s side.
Under the proposed TikTok compromise, Oracle will safeguard the user data generated by the app in the US. But TikTok will continue to use data from most of the 2 billion global downloads.
It’s a gauge of China’s growing confidence that the Chinese government’s English-language organ Global Times dared Washington to shut down TikTok. Editor Hu Xijin wrote in a September 22 tweet, “There’s no way the Chinese government will accept your demand. You can ruin TikTok’s US business, if US users do not object, but you can’t rob it and turn it into a US baby.”
On August 28, China put TikTok’s source code, the “algorithm” it uses to analyze user activity, on a list of controlled exports.
Tech firms are globally integrated, and China’s internal market is the world’s biggest source of consumption growth. American venture capital firms have invested massively in Chinese apps and technology during the past ten years. There’s no mystery as to the reason.
Personal consumption in the US grew by about US$3 trillion since the end of 2009, while Chinese consumption grew by about $5 trillion. And investment comprises two-fifths of China’s GDP compared to one-fifth in the US. During the next two years, for example, China plans to install six million 5G base stations, at a cost of $132 billion for the hardware alone.
Meanwhile, cracks are appearing in Washington’s tech boycott against Huawei and other Chinese “entity list” companies. Chinese commentators claim that the threat of retaliation against American companies who might turn up on an “unreliable entities list” convinced the Trump Administration to loosen export controls against Huawei and other targeted companies.
On September 22, Intel Corp confirmed that the US Commerce Department had given it a license to export unspecified products to Huawei, months after Washington put the Chinese telecommunications giant on the “entity list” of Chinese firms subject to a comprehensive export ban. Nearly 30% of Intel’s revenues come from China.
The hawkish Chinese news site guancha.cn wrote this week, “On September 19, the Ministry of Commerce of China issued Regulations on the List of Unreliable Entities. On the same day, the chip manufacturer AMD [Advanced Micro Devices] was revealed to have obtained permission to continue to supply Huawei. On the 22nd, Intel also publicly stated that it has obtained a license to supply Huawei.”
No American companies have yet appeared on China’s own “entities list,” but the threat of retaliation is obvious.
The California-based AMD sells 26% of its products to China, according to a Goldman Sachs estimate. A long list of other tech companies, including Taiwan’s Mediatek and China’s chip fabricator SMIC, have also applied for licenses, which are required to sell any product made or designed with US equipment.
Guancha.cn editor Lu Dong interviewed prominent Chinese trade attorney Yang Jie about whether there was a connection between the Chinese announcement and the Commerce Department’s decision to let Intel and AMD sell to Huawei.
According to Yang, China’s “unreliable entities list” is in fact “a legal weapon against the United States. Last year, after Huawei was suddenly put on the entity list subject to sanctions by the United States, China Ministry of Commerce spokesperson Gao Feng announced on May 31 that China was also working to establish its own “list of unreliable entities.”
In the same Guancha.cn interview, Yang Jie dismissed rumors that American giants like Apple would be placed on the “unreliable entities list” in retaliation for US measures against Huawei. But the US controls, Yang added, would prompt a global shift away from US technology.
“In order to suppress Huawei,” Yang said, “the United States this year applied foreign direct product rules to a private company for the first time. They were originally intended only for weapons of mass destruction. Under this rule, any product made with American technology is subject to US export controls.”
“That”, he noted, “affects companies like TSMC and Samsung that may have cooperated with Huawei outside the US because the equipment may contain US technology, they are subject to export controls and are forced to stop supplying Huawei.”
China will use all its resources to close the technology gap with the West in chip design and production.
Meanwhile, Yang added, companies like South Korea’s Samsung “will definitely focus on researching and developing alternative technologies, that is, replacing American technologies. As a result, the know-how of the United States gradually will be overtaken. The United States only considers short-term goals in suppressing Huawei, but it does not consider the globalization of the entire chip industry.”
China is the biggest customer for US chip designers like Qualcomm and NVidia. In 2019, Qualcomm sold $12 billion worth of chips to China, compared to $2.8 billion in the US and $2.4 billion in South Korea.
90% of Qualcomm’s sales in China, in turn, are used to make most of the consumer electronics goods bought in the US. A surge in US demand for computers, tablets and smartphones propelled China’s exports to the US to a 20% year-on-year gain in August.
When the Trump administration first proposed a ban on sales to Huawei in December 2019, American chipmakers warned that exclusion from the Chinese market would cripple their revenues and force them to cut research and development.
The US Defense Department reportedly vetoed the idea, but Trump revived it amid the Covid-19 pandemic, which originated in China. Now it appears that the US is willing to make exceptions, both because US industry would suffer without Chinese sales, and out of fear of Chinese retaliation.
Contrary to official rhetoric, China and the US aren’t decoupling. They are “recoupling”, because the US can’t source consumer electronics in scale anywhere else. China’s industry in high-tech manufacturing is so dominant that US component manufacturers can’t flourish without access to its market.
Intel, the beneficiary of a variance from the Commerce Department, was the world’s top chip fabricator 40 years ago. In July, it announced that it might abandon chip fabrication altogether, after failing to meet production goals for 7-nanometer chips—a generation behind the fastest and most powerful chips now produced in Taiwan and South Korea.
China has not yet put any company on its “unreliable entities list,” but the horrible example of Hong Kong and Shanghai Bank (HSBC), whose shares plumbed 25-year lows this week, shows what might happen to Western companies subject to Beijing’s retaliation.
A Global Times reporter tweeted that HSBC might be put on the list, in retaliation for providing information that led to the arrest of Huawei Chief Financial Officer Meng Wanzhou.
A US government monitor reportedly embedded in HSBC tipped off US authorities to Huawei’s violation of US sanctions against Iran. The US official had remained at the bank after the monitoring program, part of HSBC’s settlement with the US over past infractions, was supposed to have ended.