By Brandon Hughes, Chief Global Strategy Consultant & Founder of FAO Global

Overview

Washington, DC – On August 6, the White House published an executive order on “Addressing the Threat Posed by WeChat.” The executive order directed U.S. government officials to ban the wildly popular social media apps TikTok and WeChat in 45 days citing broadly defined national security issues. In the executive order, U.S. President Donald Trump explains the decision on why these two applications (owned by Chinese tech giants Bytedance and Tencent respectively) are of national security concern. However, details are sparse and the legal path to banning these apps is not clear.

Bottom Line: The executive order is a broad and open-ended directive leaving significant room for interpretation. This can be a blessing or a curse for the two companies depending on their strategy. More importantly, how the government pursues the ban combined with the reactions from the companies will set legal and political precedence for U.S. and Chinese companies in the future.

This article provides an assessment from a geopolitical & business perspective. This is not a legal review, but instead a framework for corporate strategists to understand the issue at hand identify indicators to watch out for.

Why is President Trump Issuing this order? Why now?

This executive order is likely the culmination of many bilateral issues that have come to the forefront of the U.S.-China relationship over the last few years. Added pressure from COVID-19, the upcoming U.S. election on November 4, disputes over Hong Kong and Xinjiang actions, as well as broader domestic and international considerations all play a role.

The executive order is a response to a broader set of issues that addresses the following areas:

1. Concern over Chinese authorities direct access to company data via China’s national security laws.
2. Political pressure to be “tough on China” and the possible assessment by the administration of TikTok and WeChat as being acceptable collateral.
3. Use as a bargaining chip on broader issues such as U.S.-China trade, geopolitical topics, Huawei, etc.
4. To ensure U.S. dominance of social media, and thus, the technology space.
5. A political action to motivate President Trump’s domestic base who may not directly be impacted by the ban.
6. To send a statement to Chinese authorities that the U.S. will crack down on data privacy concerns.
7. And more; an executive order is rarely done to address a singular issue. They are used as a way to make a statement on a certain topic/set of topics.

Why U.S. multinational corporations are worried

The results of these events have significant geopolitical and operational impacts to U.S. companies. Not only is WeChat a dominant form of communication and eCommerce, the unilateral actions through executive order opens to the door to reciprocal action against U.S. companies in China. Additionally, this causes uncertainty which adds risk and increases costs for all involved. U.S. multinationals are not leaving China and this action is likely to add to the on-going struggles rather than protect U.S. interests.

Below are additional concerns from U.S. multinationals in (or planning to be in) China:

1. WeChat is the dominant form of communication in China.
2. Loss of direct access to Chinese markets (customers, suppliers, partners) is a real possibility for U.S. companies.
3. Legal grey areas increases risk levels as uncertainty increases around international operations.
4. The potential for this type of executive action to transfer to other types of commerce activity.
5. The high likelihood of a major U.S. company being targeted directly or indirectly by Chinese government action.
6. Another negative set-back in what was previously positive U.S.-China business relations.

Uncertainty of Terms

What has other experts concerned is the vauge terminology used in the executive order. Words mean things. This use of specific terms leaves much to be interpreted and adds to the level of concern for Chinese and U.S. companies. Below are a few terms that have yet to be clarified and will likely become key sticking points in future legal arguments.

“Transactions” – In the executive order the term “transactions” isn’t clearly defined. Does this mean an innocuous message exchange between a U.S. person with a personal friend in China? Would this transaction mean a business sale follow-up for a import purchase of U.S. products being sent to China? Is this only for financial transactions which, by and large, are not available for U.S. versions of WeChat? Could all users of WeChat in the U.S. technically be in violation? Does this create liability for U.S. persons for prosecution by the U.S. government? Can a U.S. company, through it’s Chinese subsidiary accept a payment through WeChat? This definition can be used both broadly and narrowly which is concerning.

The answer right now is…maybe? We just don’t know and it’s likely this term remains vague to allow the maximum flexibility for potential legal action. The downside is that companies do not know how to operate and have to plan for extremes to prepare to meet this vague requirement.

“to the extent permitted under applicable law” – This phrase is crux. Rather than cite specific law that will be used, this leaves the executive order to a broad range of interpretation, up to and including the point that no action may be taken if there is not a legal basis.

Using this language provides political flexibility. Should the executive order fail to be legally viably, President Trump can place blame against the Democratic controlled House of Representatives for not supporting stronger law that protects the U.S. interests against national security.

“Reportedly” – Anytime you see this phrase take the rest with a bit of skepticism and ensure you verify. The executive order cites a March 2019 report that a researcher “reportedly” discovered a Chinese database containing billions of WeChat messages sent from users in not only China but also the United States, Taiwan, South Korea, and Australia.” The executive order simply cites a likely unverified report. To make this language stronger the administration would have used terminology that would show U.S. officials verified the report or was able to substantiate the claim. Allowing language like “reportedly” to slip into an executive order allows report to be wrong without it being the administration’s fault.

This is not to take away from any basis of the report but it shows the uncertainty of the information being used to justify the executive order.

Lack of Public Evidence

On Monday, Arkasas Senator Tom Cotton (R) shared his thoughts that “..TikTok really is a Trojan horse on your phone.” He also cited reports that TikTok logs keystrokes and emails and was “susceptible to access by the Chinese Communist Party.” See full interview here. Sharing concerns over an application is very different than having evidence to the level that constitutes a crime. Many of these statements come off as political rather than evidence-based which does not support a rule of law approach.

If there was substantial evidence of criminal activity that TikTok or WeChat violated law, the Federal Bureau of Investigations (FBI) and a handful of other federal agencies have a wide range of legal tools to stop such actions and prosecute individuals associated with it. The fact that no formal charges or public facing evidence has been presented is an indicator that a U.S. law has not been clearly violated. This is not to say malintent or nefarious action has not occurred but it may not meet the legal standard to press charges through conventional means. This executive order lays out U.S. policy and thus directs how enforcing of legal actions should occur.

On the surface, this still leaves significant room for legal action by both Tencent and Bytedance. Using evidence (versus intelligence) would provide a stronger argument and justification, but without any specifics the executive order is likely to face legal challenges unless the government is prepared to provide evidence to support the claims.

Why citing Indian and Australian examples of WeChat bans are misleading

President Trump’s executive order cites the banning of TikTok and WeChat by India and Australia as further reason to issue the order. However, these examples are not apples-to-apples comparisons.

The Australian defense department banned WeChat in 2018. This is not an outright ban of the app across Australia and instead the removal of the app from any Defense Department devices. Australians still use WeChat to communicate with their friends, business partners, and colleagues in both Australia and China. This is far from a countrywide-ban the executive order makes it seem.

The comparison to India is also not largely applicable. India has long held geographical and political disputes with China and a less developed political system. Additionally, border disputes may have been a driving force behind the recent bans rather than a strong using a strong evidence-based legal procedure. Not to mention political issues with Pakistan and China over the years that have led to a declining U.S.-India relationship. India ranks 80/198 countries on the Corruption Perception Index compared to the U.S. ranking of 23/198. The Indian legal system, cultural elements, historical geopolitics, and attitudes are different than the U.S. and the argument “well they did it so we should too” is not necessarily the strongest argument as the decision-making process to ban the apps were different.

Potential Actions the U.S. may take

Considering the broad language used, U.S. officials have many legal and political actions to meet the objective of the executive orders. We have listed a few below.

The most likely scenarios are:

1. Start a formal investigation and get an injunction/order issued until situation is resolved (this would likely be appealed immediately by legal) and disrupt day to day operations in the U.S. until resolved.
2. Use TikTok and WeChat as bargaining chips for other issues (remember the Huawei CFO is still undergoing extradition hearings, North Korea may play into the upcoming election, a preferential trade deal, or to promote a political agenda).
3. Use the executive order as a threat and not follow through if other objectives are satisfied.
4. Use Committee on Foreign Investment in the United States (CFIUS) to nullify the sale of TikTok and roll-back the acquisition, essentially forcing a shut-down or sale through governmental means. Tiktok is already under CFIUS review.

Potential Actions WeChat and TikTok can Take

Despite the executive order there are plenty of legal and political avenues that WeChat (Tencent) and TikTok (ByteDance) can take. There are pros and cons to each decision and the actions should fall in line with the company’s long-term strategy.

Below we list a few immediate actions that both companies can take:

1. TikTok and Tencent can sue to block any/all legal actions taken. TikTok is already expected to file legal action against the order as soon as Tuesday.
2. Increased lobbying of U.S. companies and subsequent lobbying to allow U.S. companies continued use. Less widely known WeChat (a staple in P2P payments and B2C interaction in China), is a key communication and marketing tool for many consumer-facing U.S. multinational companies. Some major U.S. consumer brands account for over 90% of digital sales through the app alone according to informal discussions with executives last week.
3. TikTok and WeChat can take action to set-up U.S. data centers and offer to keep all U.S. data in the U.S. subject to independent audits by a third party. This is easier said than done and unlikely to sway the Trump administration.
4. Both companies can create U.S. spin-offs and make their U.S. operations separate legal and data entities. We have seen this successfully done in the U.S. defense industry for non-U.S. firms that want to sell critical technology to the U.S. government. It’s unclear if this would have the effect and it would be on the company to prove that no data is being transmitted to China.
5. The companies can give in and find U.S. buyers or become minority & non-controlling investors into their own companies. If the long-term benefits outweigh the short term pain this may be a real option.

U.S. firms should plan alternate work-arounds

Regardless of what happens, businesses should make preparations for a variety of outcomes. This means immediately establishing alternate forms of communication in case direct communication between Chinese subsidiaries/partners and U.S. headquarters is blocked. Additionally, logistics, payment, and a wide range of potential “transactions” should be evaluated and ensure a continuity plan is in place.

Below are some initial work-arounds U.S. firms should be planning:

1. Reassure international partners that business continuity is a priority.
2. Identify & evaluate alternate communication platforms.
3. Develop alternative platforms for digital connectivity.
4. Evaluate scenarios from both a political/public relations, and operations standpoint.
5. Be part of the conversation and establish communication with local representatives (whether they are for or against this, being part of the conversation ensures your voice is heard).
6. Conduct an assessment of exposure to TikTok and WeChat to identify additional areas to address in your sales, marketing, and communication processes.
7. If this negatively or positively impacts you than connect with your Congressional Representative or Senator. (Hint: This has long term effects to your business whether you think so or not.)

The Original Text

See full executive order here: Executive Order on Addressing the Threat Posed by WeChat

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