Business environment Exam

TikTok vs the President of the United States of America

A Case Study and Your Exam 2

Written by: Aaron McDonald, PhD

Introduction:

On August 6, 2020, President Donald J. Trump issued an executive order declaring a national emergency around risks to America from the social media platform, TikTok. How can a social media platform, where the most popular videos include teenagers Charli D’amelio and Addison Rae dancing to pop music, be considered a threat to American national security and the economy? At the core of this question lies the confluence of global political and economic environmental factors crashing against the novel strategies of modern tech companies.

Case Overview:

This case provides a series of news articles and videos that cover various aspects of the TikTok vs Trump confrontation that started in August 2020. This confrontation came to prominence when President Trump issued the previously mentioned executive order. After weeks of wild speculation and potential market-based solutions, a deal where Oracle and Walmart will become partial owners of TikTok was announced. While this deal appeared to satisfy Trump, Bytedance, the Chinese firm that owns TikTok, disputed some of the details of the deal and sued the Trump administration for their actions.

Throughout the fall of 2020, speculation about the deal, TikTok’s legal case, and what further actions Trump would take were high. Yet, while this confrontation between Trump and TikTok rose with fury, its conclusion occurred with barely a whisper. After Trump lost the presidential location in November, neither he nor his administration took any further actions against TikTok. As such, all parties accepted the Oracle and Walmart deal concluding the ordeal.

These events present an incredible opportunity for you to analyze how changes in the external environment provide threats and opportunities for powerful firms. What follows are instructions on how to complete the case study, the questions you are to answer, and a series of news articles and videos that give further detail on the case.

Instructions:

Read the articles outlined in the reading section that describe different aspects of the case. Then answer each of the questions below and turn in response once it is completed. Note, you are free to bring in outside sources to answer the questions, just please cite your sources (APA).

Questions:

1. What factors in the external environment led to Trump assessing TikTok as a threat to America? Describe each factor and how it influenced Trump’s decision. Be sure to label which part of the PESTELE model the factor belongs to. Hint 1, TikTok being owned by a Chinese company, Bytedance, is a big part of this. Hint 2, all factors in the PESTELE model except ecological factors are relevant to this case. (40%)

2. How does Oracle’s partial ownership of TikTok and agreement to host data of American TikTok users in the US satisfy Trump’s national security concerns? What opportunities and threats does this present for Oracle? (17.5%)

3. How does Walmart’s partial ownership of TikTok represent a strategic opportunity for Walmart? What advice would have for Walmart on how to make the most of this opportunity? (17.5%)

4. How does the Oracle, Walmart, and TikTok deal potentially impact US based tech companies such as Facebook and Google that also have generate their revenue from individual consumer data? (17.5%)

5. Do you agree that TikTok was a threat to America (prior to Oracle and Walmart becoming part owners)? Do you agree that Walmart and Oracle partial acquisition makes TikTok not a threat to America? There is no wrong answer here, just give justifications for your reasoning. (7.5%)

Readings:

This case is presented through a series of news articles and videos. To understand this case, read the articles and watch the videos in the order provided below. Note that most articles are linked to the publisher’s website. However, for articles that require a subscription, I have obtained the pdfs of the articles from the library and included the article for you to read in the Appendix at the end of the case study.

1. History & Rise of TikTok

This video gives the brief history of TikTok and explains its meteoric rise in the social media platform industry.

https://www.youtube.com/watch?v=9SIvxaxWHms

2. TikTok & US Data Privacy Concerns

This video outlines the data privacy concerns about TikTok operating in America.

https://www.youtube.com/watch?v=fwRVasd-QPY

3. Trump’s Executive Order and Analysis

3a. Here is the actual executive order Trump released about the national security threat from TikTok. See Appendix part 1

3b. This article from the New York Times discusses the details of the executive order. The text for this article is included in the Appendix part 2.

3c. This article from NPR discusses Bytedance’s response to Trump’s executive order and their lawsuit against the Trump administration.

https://www.npr.org/2020/08/24/901776584/tiktok-sues-trump-to-block-u-s-ban

4. The Solution: Oracle and Walmart Partial Acquisition of TikTok

A deal was announced in September that Oracle and Walmart will acquire 20% of TikTok from Bytedance. This deal satisfied Trump, for now, and he has thus far stopped his pursuit of banning TikTok in America.

4a. This article from CNBC explains the deal as the Trump administration explains it. https://www.cnbc.com/2020/09/19/trump-says-he-has-approved-tiktok-oracle-deal-in- concept.html

4b. This article from Reuters explains the Bytedance’s response to the deal, which conflicts with the Trump administration around Bytedance’s continued ownership of TikTok. https://www.reuters.com/article/us-usa-china-tiktok-bytedance/bytedance-oracle-at-loggerheads- over-terms-of-tiktok-agreement-idUSKCN26C021

4c. This video explains the strategic opportunity the TikTok partial acquisition offers Walmart. https://www.youtube.com/watch?v=qtjxnUeAS9Q

5. Additional readings on the relationship between US and China

These two articles from The Economists, China vs America and A New Kind of Cold War, provide additional background information on the tumultuous relationship between the US and China. Note, the text for this article is included in the Appendix part 3.

Appendix

1. Trump Executive Order Against TikTok

8/6/2020 Executive Order on Addressing the Threat Posed by TikTok | The White House

https://www.whitehouse.gov/presidential-actions/executive-order-addressing-threat-posed-tiktok/ 1/4

By the authority vested in me as President by the Constitution and the laws of the United States of

America, including the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.)

(IEEPA), the National Emergencies Act (50 U.S.C. 1601 et seq.), and section 301 of title 3,

United States Code,

I, DONALD J. TRUMP, President of the United States of America, find that additional steps must be

taken to deal with the national emergency with respect to the information and communications

technology and services supply chain declared in Executive Order 13873 of May 15, 2019 (Securing

the Information and Communications Technology and Services Supply Chain).  Specifically, the

spread in the United States of mobile applications developed and owned by companies in the

People’s Republic of China (China) continues to threaten the national security, foreign policy, and

economy of the United States.  At this time, action must be taken to address the threat posed by

one mobile application in particular, TikTok.

TikTok, a video-sharing mobile application owned by the Chinese company ByteDance Ltd., has

reportedly been downloaded over 175 million times in the United States and over one billion times

globally.  TikTok automatically captures vast swaths of information from its users, including

Internet and other network activity information such as location data and browsing and search

histories.  This data collection threatens to allow the Chinese Communist Party access to

Americans’ personal and proprietary information — potentially allowing China to track the

EXECUTIVE ORDERS

Executive Order on Addressing the Threat Posed by TikTok

INFRASTRUCTURE & TECHNOLOGY

Issued on: August 6, 2020

★ ★ ★

8/6/2020 Executive Order on Addressing the Threat Posed by TikTok | The White House

https://www.whitehouse.gov/presidential-actions/executive-order-addressing-threat-posed-tiktok/ 2/4

locations of Federal employees and contractors, build dossiers of personal information for

blackmail, and conduct corporate espionage.

TikTok also reportedly censors content that the Chinese Communist Party deems politically

sensitive, such as content concerning protests in Hong Kong and China’s treatment of Uyghurs and

other Muslim minorities.  This mobile application may also be used for disinformation campaigns

that benefit the Chinese Communist Party, such as when TikTok videos spread debunked

conspiracy theories about the origins of the 2019 Novel Coronavirus.

These risks are real.  The Department of Homeland Security, Transportation Security

Administration, and the United States Armed Forces have already banned the use of TikTok on

Federal Government phones.  The Government of India recently banned the use of TikTok and

other Chinese mobile applications throughout the country; in a statement, India’s Ministry of

Electronics and Information Technology asserted that they were “stealing and surreptitiously

transmitting users’ data in an unauthorized manner to servers which have locations outside India.” 

American companies and organizations have begun banning TikTok on their devices.  The United

States must take aggressive action against the owners of TikTok to protect our national security.

Accordingly, I hereby order:

Section 1.  (a)  The following actions shall be prohibited beginning 45 days a�er the date of this

order, to the extent permitted under applicable law: any transaction by any person, or with respect

to any property, subject to the jurisdiction of the United States, with ByteDance Ltd. (a.k.a. Zìjié

Tiàodòng), Beijing, China, or its subsidiaries, in which any such company has any interest, as

identified by the Secretary of Commerce (Secretary) under section 1(c) of this order.

(b)  The prohibition in subsection (a) of this section applies except to the extent provided by

statutes, or in regulations, orders, directives, or licenses that may be issued pursuant to this order,

and notwithstanding any contract entered into or any license or permit granted before the date of

this order.

(c)  45 days a�er the date of this order, the Secretary shall identify the transactions subject to

subsection (a) of this section.

8/6/2020 Executive Order on Addressing the Threat Posed by TikTok | The White House

https://www.whitehouse.gov/presidential-actions/executive-order-addressing-threat-posed-tiktok/ 3/4

Sec. 2.  (a)  Any transaction by a United States person or within the United States that evades or

avoids, has the purpose of evading or avoiding, causes a violation of, or attempts to violate the

prohibition set forth in this order is prohibited.

(b)  Any conspiracy formed to violate any of the prohibitions set forth in this order is prohibited.

Sec. 3.  For the purposes of this order:

(a)  the term “person” means an individual or entity;

(b)  the term “entity” means a government or instrumentality of such government, partnership,

association, trust, joint venture, corporation, group, subgroup, or other organization, including an

international organization; and

(c)  the term “United States person” means any United States citizen, permanent resident alien,

entity organized under the laws of the United States or any jurisdiction within the United States

(including foreign branches), or any person in the United States.

Sec. 4.  The Secretary is hereby authorized to take such actions, including adopting rules and

regulations, and to employ all powers granted to me by IEEPA as may be necessary to implement

this order.  The Secretary may, consistent with applicable law, redelegate any of these functions

within the Department of Commerce.  All departments and agencies of the United States shall take

all appropriate measures within their authority to implement this order.

Sec. 5.  General Provisions.  (a)  Nothing in this order shall be construed to impair or otherwise

a�ect:

(i)   the authority granted by law to an executive department, agency, or the head thereof; or

(ii)  the functions of the Director of the O�ice of Management and Budget relating to budgetary,

administrative, or legislative proposals.

(b)  This order shall be implemented consistent with applicable law and subject to the availability

of appropriations.

8/6/2020 Executive Order on Addressing the Threat Posed by TikTok | The White House

https://www.whitehouse.gov/presidential-actions/executive-order-addressing-threat-posed-tiktok/ 4/4

(c)  This order is not intended to, and does not, create any right or benefit, substantive or

procedural, enforceable at law or in equity by any party against the United States, its departments,

agencies, or entities, its o�icers, employees, or agents, or any other person.

DONALD J. TRUMP

THE WHITE HOUSE,

August 6, 2020.

2. New York Times article from section 3b.

Trump Administration to Ban TikTok and WeChat From U.S. App Stores Swanson, Ana; McCabe, David; Nicas, Jack . New York Times , Late Edition (East Coast); New York, N.Y.

[New York, N.Y]18 Sep 2020.

ProQuest document link

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Enlarge this image.

WASHINGTON —The Trump administration said Friday it would bar Chinese-owned mobile apps WeChat and

TikTok from U.S. app stores as of midnight Sunday, a significant escalation in America’s tech fight with China that

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takes aim at two popular services used by more than 100 million people in the United States.

In a series of moves designed to render WeChat essentially useless within the United States, the government will

also ban American companies from processing transactions for WeChat or hosting its internet traffic as of

midnight Sunday.

Similar restrictions will go into effect for TikTok on Nov. 12 unless the company can assuage the administration’s

concerns that the popular social media app poses a threat to U.S. national security. TikTok, which is owned by

China’s ByteDance, is currently in talks to do a deal with American software-maker Oracle. The Commerce

Department said the prohibitions could be lifted if TikTok resolves the administration’s national security concerns

by the November deadline.

“Today’s actions prove once again that President Trump will do everything in his power to guarantee our national

security and protect Americans from the threats of the Chinese Communist Party,” Commerce Secretary Wilbur

Ross said in a statement.

The actions follow an Aug. 6 executive order by President Donald Trump, in which he argued that TikTok and

WeChat collect data from American users that could be accessed by the Chinese government. The administration

has threatened fines of up to $1 million and up to 20 years in prison for violations of the order.

TikTok spokesperson Josh Gartner said in a statement that the company was disappointed in the Commerce

Department’s decision.

“We will continue to challenge the unjust executive order, which was enacted without due process and threatens to

deprive the American people and small businesses across the U.S. of a significant platform for both a voice and

livelihoods,” he said.

Tencent Holdings, which owns WeChat, said in a statement it was reviewing the new rules and had submitted a

proposal to address the government’s national security concerns about the app. It said it would “continue to

discuss with the government and other stakeholders in the U.S. ways to achieve a long-term solution.”

Oracle did not immediately respond to a request for comment.

Ross, in an interview on Fox Business Network on Friday morning, said that the ban would initially have a much

greater impact on WeChat.

“For all practical purposes it will be shut down in the U.S., but only in the U.S., as of midnight Monday,” Ross said.

TikTok would also face some changes but would still be allowed to function until Nov. 12, Ross said, at which point

it would face the same ban as WeChat if there was no deal that satisfied the administration’s concerns.

“As to TikTok, the only real change as of Sunday night will be users won’t have access to improved updated apps,

upgraded apps or maintenance,” he said.

That delay will allow users of the popular social media app —who are primarily young —to continue using the

service before the Nov. 3 election. TikTok has increasingly become a political force, with its users posting in

support of their favored candidates and offering commentary on current events. It has also been utilized as a

political tool —hundreds of teenage TikTok users claimed credit for low turnout at a rally for Trump in Tulsa,

Oklahoma, earlier this year.

Specifically, the U.S. government will ban American companies from transferring funds or processing payments

through WeChat. It will also prohibit companies from offering internet hosting, content delivery networks, internet

transit or peering services to WeChat, or using the app’s code in other software or services in the United States.

Many of the internet services targeted by the government’s order “are like the FedEx for the data business,” said

Charlie Chai, an analyst for 86Research, a research firm focused on Chinese companies. “If no FedEx is willing to

carry the data package for WeChat, then WeChat is dead” in the United States.

The actions take aim at two of China’s most popular and successful tech exports, which knit together nearly 2

billion people worldwide.

TikTok, which does not directly operate in China, has become a wildly popular platform for sharing viral videos in

the United States. WeChat is at the center of digital life in China, functioning as a chat app, a payment platform

and a news source for people in China and the Chinese diaspora around the world. It is also a conduit for Chinese

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propaganda and surveillance.

As of Friday morning, the Chinese government had not issued any statements, and it was not immediately clear if

China would retaliate. China has long blocked access to such American social media as Twitter, Facebook and

WhatsApp that it cannot readily monitor or censor.

Apple and Google did not immediately respond to requests for comment. Both have said in the past that they

comply with the local laws in each country they serve.

Apple is the highest-profile American tech company in China and could have the biggest target on its back if

agrees to carry out the administration’s restrictions. Apple assembles most of its products in China, and the

country is Apple’s biggest sales market after the United States, putting it at risk from any retaliation by Beijing.

Other tech companies responded to the announcement with concerns about potential retaliation that could

hamstring U.S. services. Adam Mosseri, who leads Facebook’s Instagram product, said in a tweet that a TikTok

ban “would be quite bad for Instagram, Facebook, and the internet more broadly.”

Facebook, which does not operate its services in China, has tried to leverage Washington’s fear of Chinese

companies to its advantage, including citing it as a reason not to try to subject the U.S. tech giant to antitrust

actions. But Mosseri said that the cost of other “countries making aggressive demands and banning us over the

next decade outweigh slowing down one competitor today.”

Vanessa Pappas, TikTok’s interim global head, said in a response to Mosseri that Facebook should “publicly join

our challenge and support our litigation” against the ban. TikTok sued the Trump administration over the ban last

month, arguing that the move had denied it of due process.

Tech companies have raised concerns about arbitrarily blocking apps without a clear policy process and have

suggested it infringes on the First Amendment, said Adam Segal, a cybersecurity expert at the Council on Foreign

Relations.

Segal said it was not entirely clear why the administration had chosen to go after these two Chinese services and

not other similar ones.

“A lot of it just feels to me to be improvisational,” he said.

In a call with reporters Friday, a senior official with the Commerce Department pushed back on the idea that a ban

would curtail Americans’ freedom of speech, saying that the administration had chosen to target these apps in

part because they are used to censor speech.

“We are not China. We are not attempting to censor speech. In fact, it’s the exact opposite,” the official said.

The Commerce Department declined to say whether the regulations could be used as a template for other Chinese

companies but noted that the secretary had the ability to prohibit other transactions by the companies in the

future if it was determined to be in the interest of national security.

The administration is already taking a wider scope to review Tencent’s activities in the United States beyond

WeChat. The government has sent letters asking a series of questions about data policies to several companies in

which Tencent has partial ownership, including Epic Games, maker of the popular game “Fortnite”; Riot Games;

and Spotify, according to people familiar with the situation.

Ross portrayed the threat from Chinese apps in stark terms, likening it to a window that allows Beijing to peer into

the everyday lives of Americans.

“What they collect are data on locality, data on what you are streaming toward, what your preferences are, what

you are referencing, every bit of behavior that the American side is indulging in becomes available to whoever is

watching on the other side,” he said. “That’s what we’re trying to squelch.”

In its announcement, the Commerce Department said that both WeChat and TikTok collected information from

their users including location data, network activity and browsing histories. As Chinese companies, they are also

subject to China’s policy of “civil-military fusion” and mandatory cooperation with Chinese intelligence services, it

said.

Cybersecurity experts have debated the extent to which the bans would address national security threats. Many

other Chinese-owned companies gather data from mobile users in the United States, as do Facebook, Google and

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other non-Chinese services.

James Lewis, a senior vice president at the Center for Strategic and International Studies, said the administration’s

moves seemed aimed at pushing ByteDance to give the U.S. more control over TikTok.

“It looks like it’s largely a continuation of the pressure tactics to get ByteDance to make a deal,” Lewis said.

“WeChat is sort of the human sacrifice of this deal. They’ve gone nuclear on them.”

TikTok has been downloaded nearly 200 million times in the U.S., about 9% of the app’s downloads outside of

China, according to Sensor Tower, an app analytics firm. WeChat has been downloaded nearly 22 million times in

the U.S. since 2014, or about 7% of its downloads outside of China, Sensor Tower said.

The ability of the U.S. to enforce the ban remains an open question. As Chinese authorities know, internet bans are

easier declared than enforced. While the U.S. rules block the app from stores within the country, workarounds will

likely materialize. Users could switch their settings to access to an app store outside the U.S. or switch to other

Tencent apps, like a messaging service called QQ.

A Commerce Department official Friday acknowledged that such workarounds were possible and said the

department’s focus would be not on policing individual users but gradually limiting the ability of the apps to

operate in the United States over time.

The official declined to discuss enforcement but said that the administration hoped to work with American tech

companies, noting that “every company that this touches is becoming increasingly aware of the challenges that

these applications pose.”

Apple and Google regularly remove apps from their app stores for a variety of reasons, including security flaws,

violations of the companies’ rules and, in some places, requests from the government.

In China, Apple has appeared to pull thousands of apps from its App Store in the country under orders from the

government, including certain gaming apps and news apps like The New York Times. Last year, Apple removed an

app from its App Store in Hong Kong that helped protesters there track police after it was criticized by Chinese

state media.

And in Russia, messaging app Telegram complained in 2018 that Apple removed it there because of the app’s

dispute with the Russian government.

Because of Apple’s and Google’s dominance of the smartphone market —they make the software that backs nearly

all the world’s smartphones —governments can target the companies to try to roll out such bans, which otherwise

could prove tricky to enforce given the open nature of the internet.

Apple, in particular, has been used as a tool by governments because it only allows apps and software to be

downloaded onto iPhones via its App Store. That means forcing Apple to remove an app would effectively stop any

new user from downloading it.

People who already have the app on their phones can continue to use it. Yet eventually the app will become

obsolete on those phones because the app’s developer will not be able to update it to make it compatible with

updates Apple and Google make to their smartphone software.

On Google’s Android software, users can download apps and software from outside of its official Google Play

Store. That means requiring Google to pull an app from the Play Store would only create a hurdle for some users to

downloading that app on Android devices.

Android underpins most of the world’s smartphones, in part because of its dominance in many developing

countries like India, but Apple and Google roughly split the U.S. market.

Experts said that the bans on providing hosting and other services to WeChat’s American service could quickly

disable the app for users in the United States.

Lewis said that it appeared the app’s payment functions would not work under the rules. Whether users would be

able to message other people would hinge on how effective the administration had been at banning companies

from connecting users in the United States with WeChat’s infrastructure in China.

“And it looks to me like they’re certainly trying,” he said.

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3. The Economist articles titled China vs America and A New Kind of Cold War from section 5.

Leaders 13

For the past quarter century America’s approach to China hasbeen founded on a belief in convergence. Political and eco- nomic integration would not just make China wealthier, they would also make it more liberal, pluralistic and democratic. There were crises, such as a face-off in the Taiwan Strait in 1996 or the downing of a spy-plane in 2001. But America cleaved to the conviction that, with the right incentives, China would eventu- ally join the world order as a “responsible stakeholder”.

Today convergence is dead. America has come to see China as a strategic rival—a malevolent actor and a rule-breaker (see Briefing). The Trump administration accuses it of interfering in America’s culture and politics, of stealing intellectual property and trading unfairly, and of seeking not just leadership in Asia, but also global dominance. It condemns China’s record on hu- man rights at home and an aggressive expansion abroad. This month Mike Pence, the vice-president, warned that China was engaged in a “whole-of-government” offensive. His speech sounded ominously like an early bugle-call in a new cold war.

Do not presume that Mr Pence and his boss, President Donald Trump, are alone. Democrats and Republicans are vying to outdo each other in bashing China. Not since the late 1940s has the mood among American businessfolk, diplomats and the armed forces swung so rapidly behind the idea that the United States faces a new ideological and strategic rival.

At the same time, China is undergoing its own change of heart. Chinese strategists have long suspected that America has secretly want- ed to block their country’s rise. That is partly why China sought to minimise confrontation by “hiding its strengths and biding its time”. For many Chinese the financial crisis of 2008 swept aside the need for humility. It set America back while China thrived. President Xi Jinping has since promoted his “Chinese Dream” of a nation that stands tall in the world. Many Chinese see America as a hypocrite that commits all the sins it accuses China of. The time to hide and bide is over.

This is deeply alarming. According to thinkers such as Gra- ham Allison of Harvard University, history shows how hege- mons like the United States and rising powers like China can be- come locked into a cycle of belligerent rivalry.

America fears that time is on China’s side. The Chinese econ- omy is growing more than twice as fast as America’s and the state is pouring money into advanced technology, such as artificial in- telligence, quantum computing and biotech. Action that is merely daunting today—to stem the illegal acquisition of intel- lectual property, say, or to challenge China in the South China Sea—may be impossible tomorrow. Like it or not, the new norms governing how the superpowers will treat each other are being established now. Once expectations have been set, changing them again will be hard. For the sake of mankind, China and America need to come to a peaceful understanding. But how?

Mr Trump and his administration have got three things right. The first is that America needs to be strong. It has toughened the rules on takeovers, to give more weight to national security. It has extradited an alleged Chinese intelligence officer from Bel-

gium. It has increased military spending (though the extra mon- ey going to Europe still dwarfs that going to the Pacific). And it has just boosted foreign aid in order to counter lavish Chinese investment abroad (see Middle East and Africa section).

Mr Trump is also right that America needs to reset expecta- tions about Chinese behaviour. Today’s trading system fails to prevent China’s state-backed firms from blurring the line be- tween commercial interests and the national interest. Govern- ment money subsidises and protects companies as they buy up dual-use technology or skew international markets. China has used its state-directed commercial clout in smaller countries to influence foreign policy in, say, the European Union. The West needs transparency about the funding of political parties, think- tanks and university departments.

Third, Mr Trump’s unique ability to signal his disregard for conventional wisdom seems to have been effective. He is not subtle or consistent, but as with Canadian and Mexican trade, American bullying can lead to dealmaking. China will not be so easily pushed around—its economy depends less on exports to America than Canada’s and Mexico’s do and Mr Xi cannot afford meekly to disavow his Chinese Dream in front of his people. Yet Mr Trump’s willingness to disrupt and offend has already wrong- footed China’s leaders, who thought they could count on Ameri-

ca being unwilling to rock the boat. For what comes next, however, Mr Trump

needs a strategy, not just tactics. A starting point must be to promote America’s values. Mr Trump acts as if he believes that might is right. He shows a cynical disdain for the values America enshrined in global institutions after the sec- ond world war. If he follows that course America will be diminished as an idea and as a moral and

political force. When America competes with China as a guard- ian of a rules-based order, it starts from a position of strength. But any Western democracy that enters a ruthless race to the bot- tom with China will—and should—lose.

The strategy should leave room for China to rise peacefully— which inevitably also means allowing China to extend its influ- ence. That is partly because a zero-sum attempt at containment is likely to lead to conflict. But it is also because America and Chi- na need to co-operate despite their rivalry. The two countries are more commercially intertwined than America and the Soviet Union ever were. And they share responsibilities including— even if Mr Trump denies it—the environment and security inter- ests, such as the Korean peninsula.

And America’s strategy must include the asset that separates it most clearly from China: alliances. In trade, for example, Mr Trump should work with the eu and Japan to press China to change. In defence Mr Trump should not only abandon his alli- ance-bashing but bolster old friends, like Japan and Australia, while nurturing new ones, like India and Vietnam. Alliances are America’s best source of protection against the advantage China will reap from its increasing economic and military power.

Perhaps it was inevitable that China and America would end up rivals. It is not inevitable that rivalry must lead to war. 7

China v America

The era of engagement is over. The world’s two superpowers have become rivals

Leaders

Issue Date: 20-10-2018 Zone: UKPB Desk: Leaders Output on: 18-10-2018----09:06 Page: LD1 Revision: 0

The Economist May 18th 2019 3

Since china emerged from the wreckage of Maoism 40 yearsago, the profit motive has become a pillar of stability in its rela- tions with America. Presidential candidates might accuse China of stealing jobs. Spy scandals could simmer. Then corporate bosses and politicians in Beijing and Washington would decide that all sides were making too much money to let relations sour. This fo- cus on mutual self-interest involved queasy compromises. Soon after troops massacred hundreds, possibly thousands, around Tiananmen Square in June 1989, President George H.W. Bush wrote discreetly to Deng Xiaoping to urge joint efforts to prevent “tragic recent events” from harming relations. The financial crash of 2008 revealed a dangerous co-dependency between America the im- porter of cheap goods and China the thrifty exporter. New terms tried to capture this symbiosis: “Chimerica”, or “the g2”.

Suddenly, however, making money is not enough. In the past couple of years, debate about how to get engagement to work has given way to talk of strategic competition and security threats. Rather than catchy neologisms, scholars are reaching for histori- cal analogies. Some talk of 1914, when clashing British and German ambitions swept aside deep bonds of commerce. China analysts obsess over the “Thucydides trap” that supposedly dooms upstart nations to fighting incumbent powers, as the Greek historian wrote of Sparta and Athens.

China’s rise was always going to cause turbulence. The same country is America’s most daunting strategic rival, its biggest eco- nomic challenger and a giant trade partner. That is new. The Japan shock of the 1970s and 1980s triggered demands from politicians

for protectionist barriers, as America’s trade deficit in goods with Japan rose 25-fold in a decade. But it was a lopsided political fight: Japan was a dependent military ally. As for the Soviet Union, it was an ideological but not a commercial rival: in 1987 bilateral trade was worth $2bn a year, or less than 0.25% of America’s total trade with the world. In 2018 two-way trade between America and China hit $2bn a day, or 13% of America’s world trade.

Critics argue that elites should have seen this coming. Western leaders had hoped that joining the global economy would make China more like the West, as a growing middle class demanded free speech and more accountable government. They were wrong. The crash of 2008 and spasms of Western populism emboldened Communist Party leaders, notably President Xi Jinping, to reject those norms and assert the party’s supremacy.

America’s shock is made worse by trade in technologies that blur the lines between commerce and national security. The Trump administration’s opposition to letting Huawei, a Chinese technology firm, build 5g telecommunications networks for America or its allies is a taste of that future. Such debates are, at root, about trust, a commodity that mattered less when China ex- ported tennis shoes and televisions rather than microchips that can keep self-driving cars on the road and planes in the air. Yet clumsy forms of self-defence cause harm. Define sensitive tech- nologies too broadly and, in the words of Henry Paulson, a former secretary of the treasury, an “economic iron curtain” may come to divide China and America, choking flows of goods, capital, people and technology, with grave implications for the rest of the world.

A new kind of cold war

Special report

Trade has long anchored the relationship between China and America, but it is no longer enough. The world should be worried, says David Rennie

China and America

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4 Special report China and America The Economist May 18th 2019

2 China’s growing tech prowess is putting new strains on global- isation, beyond old arguments about stolen jobs. The fact that General Motors sells more cars in China than in America used to help both countries manage ideological differences. Today’s sup- ply chains, carrying semiconductors from China to devices in America, actually raise the political stakes.

Million-dollar American weapons rely on microchips sourced from firms around the globe. Critical infrastructure may contain components from a dozen nations, require software updates from a provider on one continent and send streams of real-time data to another. In April a Pentagon advisory board warned defence chiefs to plan for “zero-trust” commercial internet networks. A growing number of business transactions require a lifetime commitment to distant service-providers. In this world, trade relations cannot be quarantined from hard questions about whether countries are partners, rivals or foes.

China has every right to want to grow stronger. Its success in helping hundreds of millions of people to raise themselves from poverty is admirable. It is the relentlessness of its methods that has turned business from a safe space to a field of contention. Western firms worry that before China truly opens up, they will be thrown out—as soon as Chinese firms have learned, bought or sto- len enough Western knowhow to become self-reliant.

Nothing to lose but your supply chains Few Americans have better access to Chinese leaders than Mr Paul- son, a longtime proponent of engagement. So it was noticed when in February he declared that, because China has been slow to open its economy since joining the World Trade Organisation in 2001, “the American business community has turned from advocate to sceptic and even opponent of past us policies toward China”. Bosses do not seek a tariff war, he said, but do want a “more con- frontational approach”. Businesses are getting that from the Trump administration.

In part, this is explained by the change in occupant of the Oval Office. President Barack Obama also denounced Chinese trade cheating and pressed China to stop stealing commercial secrets. Belatedly, his Pentagon chiefs grew alarmed as China turned dis- puted reefs in the South China Sea into military outposts. But ulti- mately Mr Obama put more weight on tackling global challenges, from climate change to pandemics to nuclear proliferation, for which he needed Chinese help. Get-tough policies were endlessly discussed, then often dropped. Mr Trump, by contrast, boasts that solving the world’s problems is not his job.

In part, America has become more confrontational because multinational businesses that oppose barriers to trade have lost

clout in a populist age. A new round of export controls for sensitive technologies and still-tougher investment-screening rules loom. That process will not end with a truce in Mr Trump’s trade war.

The American president is as much a symptom as a cause of a change in the way that America thinks about its openness to the world. Voters elected a might-makes-right leader who scorns alli- ances, who is cynical about the rule of law and universal values and who believes that national interests always come first. Amid espionage fears, visa rules for Chinese students of science and technology have tightened. fbi agents have quizzed scholars visit- ing from Chinese state-backed think-tanks about government links, and cancelled the visas of some. Rather than China becom- ing more Western, America is becoming more Chinese.

Meanwhile, officials in Beijing see a sore loser of a superpower, bent on keeping them down. They scoff at the idea that rich, spoiled America really feels threatened, seeing a ploy to extract better terms for American firms to make money. This misses how many people in Washington believe that the China threat is real and matters more than profits or free-market purity. Indeed, offi- cials accuse firms of keeping quiet when Chinese spies steal intel- lectual property, to preserve face and access to Chinese markets.

A senior American official says that China “emphatically” lied when it promised Mr Obama in 2015 that state-backed actors would stop spying on America for commercial gain. The official la- ments that, in the frenzied Washington news cycle, few noticed a Department of Justice indictment in December 2018 accusing Chi- na’s ministry of state security of ties to a long-standing campaign by the apt10 hacking group, stealing secrets from firms in aviation, space, pharmaceuticals, oil and gas, maritime and other technol- ogies. “They basically got the crown jewels of hundreds and hun- dreds of the world’s biggest companies,” he says.

The pendulum risks swinging too far. Some sniggered in March when the Committee on Foreign Investment in the United States (cfius), a government agency that screens foreign deals for securi- ty concerns, asked a Chinese internet firm to sell Grindr, a gay dat- ing app with 3.3m daily users. Actually cfius may have a point. A gay app could be a blackmailer’s trove, and Chinese police routine- ly grab data from social media at home. It is harder to take seriously Senate attempts to ban Washington, dc, from using federal money to buy metro trains made in America by a Chinese state-owned company lest on-board security cameras are used for spying.

Although China lacks the formal alliances that made the Soviet Union a global threat, its rise dominates Pentagon debates about the future of war. Since the 1980s America has pursued a “forward presence” doctrine, meaning that its forces were confident about operating close to enemy defences. China’s growing strength con- fronts Pentagon planners with their hardest decision in years: to find new ways to make combat in the Western Pacific viable, or pull back and force adversaries to fight far from home.

Karl Eikenberry was a China expert in the army who became a lieutenant-general, then ambassador to Afghanistan. Now at Stan- ford University, he describes commanders grappling with the end of overwhelming American superiority: “There is an intense de- bate within the American armed forces about how to counter the pla’s accelerating efforts to control the South China Sea.”

This report will look at clashing views in Washington and Beijing about how to manage the technological, military, eco- nomic and political aspects of a great-pow- er contest so new that the two sides do not even agree on what successful relations might look like. Rules must be found. Mr Eikenberry’s summary of the military chal- lenge applies to the whole: “A new doctrine is required.” 7

Now it gets complicated

Source: UNCTAD

Global merchandise trade, % of total

0

3

6

9

12

15

18

1970 75 80 85 90 95 2000 05 10 15 18

United States

China

Rather than China becoming more Western, America is becoming more Chinese