America should be wary of singling out TikTok

If you utter the words “TikTok” to middle-aged executives and financiers this Christmas, many will wince.

No wonder. Ever since the short-form video platform emerged in 2016, it has been wildly popular with kids, and is now used by two-thirds of American teens. Which, in turn, sparks baffled irritation from many parents — particularly when it surfaces at family dinners.

But right now grown-up investors have another reason to fret: TikTok is becoming a powerful symbol of the geopolitical pitfalls that await markets in 2023.

On Friday, the US Congress is expected to pass a $1.7tn spending bill. Tucked deep inside its more than 4,100 pages is a measure devised by Republican senator Josh Hawley to ban TikTok from all US federal government devices on the grounds that its parent, ByteDance, was created in China.

Hawley’s initiative is more restrained than another bipartisan bill co-authored by Marco Rubio, the Republican senator. This aims to “ban Beijing-controlled TikTok for good” from America, alleging that the platform is “used to manipulate feeds and influence elections [and] answers to the People’s Republic of China”.

But while Rubio’s bill is unlikely to fly, more than a dozen states have already banned TikTok from government computers. And this has not only created a crunch point for the platform; it also underscores how the political tensions between China and America are producing nasty surprises for asset managers.

For one crucial, but widely overlooked, point about TikTok is that its owner, ByteDance, is not just “Chinese”. Far from it: as company officials recently testified, some 60 per cent of the entity is now owned by western funds such as BlackRock, Fidelity and General Atlantic. Indeed, the latter’s head, Bill Ford, sits on the TikTok board.

Those funds dived in to get exposure to a media and fintech play. ByteDance, after all, has built a wildly successful ecommerce business via the Chinese app Douyin (TikTok’s Chinese counterpart), and is expected to copy this in America.

But while that used to mean that TikTok was viewed as a retail play, not a military asset or sensitive tech arena, it is now becoming necessary to redraw these definitional lines. After all, consumer tech is now so powerful it can be repurposed in novel ways.

Thus what investors need to ponder is not merely what happens to TikTok, but the risks around other Chinese-exposed tech. Will senators such as Rubio start fretting about the Apple supply chain, say? And where does US-China tech decoupling stop?

It is fiendishly hard to judge, since the US-China economic relationship is both defined by economic “codependency” and “false narratives”, as the former Morgan Stanley banker Stephen Roach writes in a powerful new book, Accidental Conflict.

TikTok exemplifies this. The issues that have sparked the current congressional criticism fall into three buckets. One is a concern that social media in general is harming America’s mental health, for example around eating disorders.

A second is a fear that TikTok, in particular, is designed to undermine American teens, by distracting them with addictive celebrity trivia — or digital fentanyl, to cite a term used by Tristan Harris, a former Google employee turned whistleblower. This is different from ByteDance’s offering in China, Harris says, where Douyin offers kids wholesome educational content.

The third issue is surveillance. Congressional critics argue that the Chinese government can use TikTok to get Americans’ personal data. That is because Beijing introduced a law a few years ago that requires all Chinese companies to co-operate with its security forces.

Unsurprisingly, TikTok rejects this. It insists that the content seen by users is selected by automatic algorithms, not humans.

The company also notes that American users’ data is stored on American soil in servers in Virginia, as well as being uploaded to the cloud, via the American company Oracle. And while Chinese engineers in mainland China use small portions of this to develop products, TikTok insists that this is kept out of Beijing’s hands. “We have a US-based security team and we are working with the US government,” says Michael Beckerman, its head of public policy. He promises that the company “has solutions” to all the critics’ concerns.

Maybe so. But the problem that haunts TikTok — and investors — is that it is impossible for outsiders to really know whether the criticism is justified, or not. I suspect that many of these concerns could also be thrown at other American tech entities. Apple devices, say, collect sensitive data, and US tech groups often use Chinese-based product teams.

The real priority for Congress, therefore, should be to create overarching controls, not company-specific bans. (Particularly since the US lacks laws requiring user data to be kept on American shores.)

But don’t bet on this happening soon. So the key point is this: as long as data science is an enigma to most voters (and politicians), tech groups will always risk becoming geopolitical footballs. American kids might not care about that. Their investor parents definitely should.

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