China vs. USA – TikTok War II

ByteDance is back in the crosshairs.

• The fuss over TikTok which seemed to have died down following the change of administration in 2021 is back on but simply divesting TikTok is not going to be simple because the company uses Chinese technology that the CCP does not want in foreign hands.
• China is the one thing that both sides of the aisle (and it seems the electorate) agree on with the view that China’s rise as a technological and economic power must be contained.
• This means that there is a pretty good chance that a bill that gives “foreign adversary controlled” apps like TikTok six months to sever those ties or be closed down will pass into law.
• ByteDance is explicitly mentioned in the bill and so if it passes and the president signs it (which he has said he will) there will be no ambiguity over whether TikTok is included.
• The likelihood of its passage is rising as it passed the House Energy and Commerce Committee with a 50 to 0 vote once again emphasising that is the one unifying issue in USA politics today.
• This will give ByteDance 180 days to divest its interest in TikTok or face having it blocked on all platforms or be fined up to $850bn.
• It is important to remember that at this stage, it is only TikTok USA that is being targeted (as it was before) and so a spin-off to US investors or the public markets is a possible outcome.
• Furthermore, with valuations where they are now, ByteDance would probably get a good price given how popular TikTok is and how much revenue it generates.
• However, as always, the devil is in the details and the detail that is going to cause the most problems is the algorithm that runs TikTok.
• TikTok is a popular app because the algorithm that ByteDance created is the best in the world at characterising videos and then matching those characteristics to users who will enjoy watching them.
• This algorithm is Chinese home-grown technology, and the Chinese state has said on multiple occasions that considers technology like this to be important for its national security.
• Hence, it will not allow Chinese technology of this nature to leave its shores or to be in the hands of countries which it considers unfriendly.
• This makes a severing of ties between ByteDance and TikTok USA highly problematic as TikTok USA needs the algorithm to function, but this will contravene the wishes of the Chinese government and the laws it has put in place.
• Furthermore, a fudge like running the algorithm on servers in China won’t work because the whole point of this bill is supposed to be about preventing data on US citizens from finding its way into Chinese territory and into the hands of the CCP.
• The net result is that the stage is set for a classic impasse between the USA and China with ByteDance stuck in the middle and at risk of seeing its most 2^nd valuable asset decline in value by 90% or more.
• TikTok’s response has been to reach out to its base of users to get them to lobby their representatives to prevent the bill from passing.
• At a high level, this is a pretty disingenuous move because the bill doesn’t close TikTok down but is supposed to force it out of Chinese hands and to do so at a fair market price.
• Furthermore, I don’t think this campaign will have much effect and so the fate of TikTok rests on someone figuring out how TikTok can be sold but somehow still have access to the algorithm that it needs to function.
• This is yet another sign that despite the talk and the high-level meetings, the relationship continues to deteriorate which will accelerate the decoupling of the two economies.
• This goes hand in hand with a balkanisation of the technology sector where in the future there will be two standards a global one and another one for China.
• This is good for no one because if the global network shrinks then the value creation for everyone will be significantly less with lower long-term growth for all.