Once Again Shooting Ourselves in the Foot: Banning Trade With WeChat Parent Tencent Only Hurts the U.S. Economy

August 7, 2020

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The Trump administration’s recent bans of Chinese-owned apps TikTok and WeChat are based on vague, unspecified cybersecurity and privacy grounds. But the possible prohibition on U.S. companies selling to Tencent, owner of WeChat, or using its services to sell their own products in China does nothing to protect the security or privacy of Americans. It only harms U.S. companies and jobs.

President Trump signed executive orders on August 6 that essentially prohibit U.S. entities (45 days after the orders’ signing) from conducting transactions with TikTok owner ByteDance or WeChat and its owner Tencent. The orders are based—without any evidence—on the vague notion that the spread of mobile applications developed and owned by Chinese companies threatens U.S. privacy and cybersecurity. Alongside Secretary of State Mike Pompeo’s expansion of the “Clean Network” initiative on August 5, it points toward an escalation of the administration’s efforts to disconnect from China, even cutting off exports to China.

WeChat is the product of Chinese innovation, but also of state-directed support and protection, thus there are concerns about its relationship with the Chinese Communist Party (CCP). WeChat is a super app, with payment and other functions, that has come to define and lead China’s walled digital economy, free from foreign competition. Yet, aside from its chat service, it has had limited success outside of China.

TikTok is different. It is a video sharing app that was developed within China’s restrictive Internet regulatory environment, including its cooperation with authorities on surveillance, and has developed global operations outside of China (including hosting U.S. user data outside China). TikTok has taken the unprecedented step of releasing code related to its algorithm in an effort to improve transparency, so as to refute other unspecified and unsubstantiated concerns about Chinese government manipulation of its platform. TikTok is also exploring a potential sale of its U.S. subsidiary to Microsoft. Both moves represent constructive steps to the build trust and transparency. Yet, they are clearly not enough to allay the administration’s concerns.  

The most concerning aspect of the executive order on WeChat is its prohibition on “any transaction that is related to WeChat by any person, or with respect to any property, subject to the jurisdiction of the United States, with Tencent Holdings.” It is not exactly clear what this means, nor is it clear how the Commerce Department, charged with implementing this order, will interpret it. But it certainly could be interpreted to mean that no U.S. company or affiliate would be allowed to sell any goods or services to WeChat, or to its owner Tencent, or buy any of their services (such as advertising on the WeChat platform in China).

From Secretary Pompeo’s recent statement about the State Department’s Clean Path Initiative, one can presume that one of the motivations for this ban was to pressure China on human rights. But banning U.S. firms from selling to or buying from Tencent will do nothing to change China’s abhorrent approach to human rights and free speech. As ITIF argued in recent testimony to the U.S. Senate, telling companies to stay out China might allow advocates to assert moral authority, but it will have no actual beneficial effect on free speech or human rights. The CCP will hardly be swayed from its core actions if it becomes harder for American firms to sell in China.

What the order could do, however, is give U.S. companies even less access to the vast Chinese market, which would have negative repercussions on the U.S. economy. Indeed, the economic evidence shows the importance of foreign operations and sales to the U.S. economy. Dartmouth University Professor Matt Slaughter found that “investment at U.S. parents and foreign affiliates also tend to complement each other.” He cites research that finds that “a 10 percent increase in foreign-affiliate employee compensation causes an average response of a 3.7 percent increases in that affiliate’s U.S. parent employee compensation. Growth in affiliates tends to bring growth in parents as well.” In other words, preventing American companies in China from using Chinese apps or Internet platforms to gain access to Chinese customers will directly hurt U.S. workers back home. 

And obviously banning U.S. companies from selling to companies like Tencent will have direct negative effects, since many technology sales to China are direct U.S exports. There should be no doubt that it is in America’s long-term economic and security interests that U.S. companies sell as many goods and services to China as possible (obviously excluding military and legitimate national security–related products). Every dollar’s worth of digital and physical exports from the United States to China is a dollar that Chinese firms do not make—and it is a dollar American firms can use to reinvest in R&D and support employment in the United States.

It might be one thing if the lost exports were soybeans or wastepaper, where the loss of sales at home and the gain of Chinese sales would have little effect on technological capabilities. But banning sales of hardware and software to Chinese firms like Tencent will have immediate and long-term negative impacts on U.S. firms, hurting their ability to continue to invest in research and new product development. 

At the same time, it will either hand market share to competitors in Europe or other Asian nations not subject to the ban, or it will spur Chinese firms to ramp up their own technological capabilities. Indeed, this is a policy that Chinese President Xi Jinping is likely quietly applauding, as it only accelerates progress toward “Made in China 2025” goals. Just as the U.S. government should be encouraging rather than berating U.S. firms to engage in the Chinese market, the U.S. government should not be arbitrarily banning sales in China unless there are clear and detailed grounds that they are a threat to national security.

China is a world leader in digital protectionism. It bans Google, Facebook, and many other firms, so the desire for reciprocity is understandable, but banning U.S. firms from engaging with Chinese ones is not the way to go about achieving this. Banning TikTok domestically might be, although this will come at a high cost to U.S. content creators and businesses that have invested in building a presence on this platform, as well as the company’s more than one thousand U.S. employees. Moreover, this is what Phase 2 negotiations were supposed to be about. It’s also closely tied into broader U.S. trade policy strategy in Asia, Europe, and at the World Trade Organization. U.S. policy should be about building the digital frameworks that allow U.S. firms and others from open, rule-abiding trading partners to prosper in the global digital economy.

Arbitrarily forcing firms to stay out of the China market and banning trade with Chinese firms only gives China a leg up in that competition, while setting a precedent that other countries can use to ban U.S. apps, thus perversely spreading China’s digital protectionism model. It is time that the U.S. policy vis-à-vis U.S. trade and economic engagement with China be based on national interest, not national moralizing or well-intentioned, but ill-advised steps that only shoot itself in the foot. As President Trump rightly said in the 2016 election campaign, it’s time to “put America first.” Banning sales to China, as it appears this executive order might do, puts American last, and is clearly not in the country’s economic interest.