It has been a tough week for China-U.S. relations. Vice President Mike Pence ratcheted up the administration’s rhetoric yesterday, calling the NBA “a wholly owned subsidiary of the authoritarian regime” in China while the league’s commissioner Adam Silver continued to try to tamp down the intensity of criticism over the league’s business, saying in an interview with the Wall Street Journal that “We have no choice but to engage and to attempt to have better understanding of other cultures and try to work through issues.”
The NBA was hardly the only challenge between the U.S. and China. This week saw the intensification of two threads of national security concerns continue to get airtime on Capitol Hill that could have massive ramifications for startups.
The first and potentially most potent thread is swirling around TikTok, the epically popular social video app that also happens to be owned and operated by China-based ByteDance. This week, senate majority leader Chuck Schumer and senator Tom Cotton of Arkansas circulated a bipartisan letter requesting an assessment of TikTok’s national security risks.
TikTok surpassed Facebook, Instagram, Snapchat & YouTube in downloads last month
ByteDance remains the world’s highest-valued unicorn (which, perhaps in the wake of WeWork’s collapse the past two weeks, is not an epithet that any startup wants to actually hold these days). It has received major funding from the likes of Sequoia Capital China, and is currently valued at $75 billion.
Sequoia is clearly preparing for the worst around these national security reviews. Last week, the firm confirmed to The American Lawyer that Donald Vieira, a partner at top law firm Skadden, would be joining the venture firm as chief legal officer. Vieira has spent the last few years working on cases surrounding CFIUS, the Committee on Foreign Investment in the United States (WTF is CFIUS?), and earlier, was chief of staff of none other than the Department of Justice’s national security division.
That expertise will be critical as Sequoia potentially faces a tough reception for ByteDance in the national security circuit on Capitol Hill. Earlier this year, CFIUS required video game publisher Beijing Kunlun to retroactively divest itself of its purchase of gay-dating app Grindr over concerns that the app’s user data could provide Chinese intelligence and law enforcement officials with compromising material that would allow for individual blackmail.
While Grindr’s text messages may be far more compromising than the average TikTok viral video, the app’s small user base is dwarfed by TikTok, which has seen more than 100 million downloads in the U.S. alone. That potentially wide surveillance net is of acute concern for U.S. intelligence officials.
On top of that, of course, is the media’s heightened discussion the past few weeks that ByteDance could carefully calibrate the virality of videos on TikTok to hew toward Beijing’s censorship dictates. That has led to some teens posting various memes about the Hong Kong protests to see how far they can push the platform’s red lines (as teens are wont to do).
Strategically, the China angle has become very useful for Facebook, who faces a viable threat in TikTok’s popularity according to my colleague Josh Constine. Mark Zuckerberg has made China’s potential censorship within TikTok a major speaking point, which he emphasized in a major policy speech at Georgetown:
While our services, like WhatsApp, are used by protesters and activists everywhere due to strong encryption and privacy protections, on TikTok, the Chinese app growing quickly around the world, mentions of these protests are censored, even in the US.
Is that the internet we want?
Facebook’s strategic messaging starts to lead us to the other national security thread happing these days in DC. There have been wide concerns over the past few months on Capitol Hill over bids for subway, rail, bus, and other transit contracts from Chinese companies like state-owned CRRC and electric bus and battery manufacturer BYD . There have been motions to ban federal transit funding for projects that use vehicles from Chinese-subsidized sources.
A new report published this morning by Radarlock, a data-driven research organization, argues that Beijing is using access to these contracts to enhance its ‘civil-military fusion,’ by which China means learning how to manufacture and build leading global supply chains that help it in both private sector competitiveness and in military superiority. As the research leads Emily de La Bruyère and Nathan Picarsic write:
Through both data collection and technology, CRRC contributes to Beijing’s military and military-civil fusion [“MCF”] projects: Explicitly declaring, in its company documents, a role in the military-civil fusion strategy, CRRC has set up an investment fund dedicated to MCF; operates in MCF industry zones; shares technology, resources, and data with military-and MCF-affiliates; and assigns the MCF label to high-profile projects and centers.
Like Facebook though, these results are being highlighted by industry sources, with Politico Pro noting that Securing America’s Future Energy and the Alliance for American Manufacturing have been pushing a previous report on BYD around DC.
And that gets back to the challenges of future economic ties between the two superpowers, notwithstanding the latest developments in the trade war negotiation (which seem as likely to conclude as Brexit is to happen).
National security policy is increasingly being used by incumbent players as a cudgel to stifle competition. Many of those national security concerns are valid — and sometimes acutely so — but we also need to be extraordinarily clear that like any market restriction, there is ultimately a consumer cost to these initiatives as well. The Chinese may go without star-studded basketball as much as Americans will go without working subway cars, and that’s the cost of a relationship that has never been built on a foundation of trust.
