Friends in high places

A number of experts on technology have expressed concern about the national security implications of allowing Chinese companies/products like Huawei, TikTok and WeChat to have access to the US market. I’ve been skeptical of their arguments, although I concede that I am not well informed on technology issues. On the other hand, I wonder if tech experts have sufficient awareness of the “public choice” aspects of giving the government the power to run an industrial policy.

Previously I noted that the US government’s original intention to protect US consumers from possible spying by Huawei has morphed into a crusade to destroy the Chinese company. Political considerations also seem to be showing up in the TikTok case. Oracle has offered to purchase a portion of TikTok and insure that user data is safe, but some Trump administration officials remain unconvinced:

Several people said such a plan could satisfy career officials at Cfius. But some cautioned that the situation was not analogous to any previous case.

“We have a president who is running a campaign against China and any indication of giving in to Beijing over TikTok will be seen as weakness,” said a person involved in the negotiations, who was concerned about the deal receiving approval from the Trump administration. . . .

A veteran Cfius lawyer said any deal with ByteDance that let the Chinese company retain a majority ownership of the app in the US would be hard for the Trump administration to swallow.

I get worried whenever I see news reports of economic policymakers wanting to avoid perceptions of “weakness”, or outcomes being “hard to swallow”.  Does this address national security issues, or doesn’t it?

In the end, I expect the deal will likely go through, but I am not entirely reassured by the reasons why:

Oracle was originally brought into the negotiations to provide an alternative to Microsoft Corp., MSFT +1.69% a rival bidder with Walmart as a partner, said one person familiar with the talks. The U.S. investment firms Sequoia Capital and General Atlantic, which are existing investors in ByteDance, went in search of a tech company with close ties to the administration and settled on Oracle, the person said.

Oracle co-founder Larry Ellison hosted a fundraiser for Mr. Trump this year at his house, and Chief Executive Safra Catz also worked on the executive committee for the Trump transition team in 2016.

It seems that the Chinese believe that US economic policy decisions are made based on personal connections with the administration.  I’m not sure if that’s true, but the perception is enough to distort the market.  Would a takeover attempt led by a Trump critic have had an equal chance of success?  I have my doubts.

However you feel about this specific issue, it’s important to recognize that we are a long way from national security decisions being made by philosopher kings.  Once you grant the government the power to enact an industrial policy, don’t expect the decisions to be free of political/personal considerations.  On balance, I trust the market more than I trust any government.

PS.  My wife traveled to China last week and I’ve started using WeChat.  I’m willing to accept the risk that the Chinese government is spying on my calls.  For years I’ve assumed that the NSA knows whatever they want to know about my digital communications.


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Henderson and Horton on Whether China is an Economic Threat

Scott Horton is a well-informed foreign policy analyst who interviews people mainly about foreign policy. Because of the potential foreign-policy implications of my recent Defining Ideas article on China, Scott interviewed me last week. His interview is titled, “David Henderson on the Supposed Economic Threat from China.” It goes about 42 minutes.

There are two things I like consistently about being interviewed by Scott: (1) his energy and (2) the fact that I always learn something from him.

Here are the highlights with approximate times:

2:47: Gains from trade don’t stop at the border.

4:00: The asymmetry in the gains and losses from trade and what that means for the discussion on economic policy.

9:45: Tariffs fell gradually after the war.

10:15: The Box bought down costs of international trade across oceans more than small reductions in tariffs did.

11:30: The role of improvements in technology in losses of U.S. manufacturing jobs.

14:45: Obama economist Jason Furman’s comment about the gains for the average U.S. family from Walmart.

16:50: The role (or not) of regulation in moving jobs to China.

17:40: The Economic Report of the President under Trump and its analysis of where the U.S. stands in degree of regulation relative to Western Europe and other advanced economies.

19:50: China’s economy and why it has done so well. [HINT: It’s not mainly slave or prison labor.]

21:15: TikTok.

22:40: “You didn’t dance well?”

23:30: How the U.S. feds made it easier for the Chinese government to blackmail federal employees.

24:40: Much of intellectual property is handed over to Chinese firms contractually.

26:25: Are “we” in competition with “them?”

27:40: One thing that Trump is most sincere about and most wrong about.

28:30: Increase in size of Chinese military.

31:30: The Blob: They make a good living by stirring the pot.

32:30: Scott teaches me something about Colin Powell and his role in getting George W. Bush to respond moderately to China after the Chinese government forced a U.S. Navy EP-3 airplane to land on Hainan Island.

34:00: The report of one of my students who was on that airplane.

About 4 or 5 minutes in which we discuss nuclear war.

41:00: Are there interest groups in U.S. business that want the U.S. government to restrain its hawkish actions toward China?








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US Government Punishing Americans Again

Many people must be puzzled. What’s the point of international sanctions? Why should the Chinese owners of TikTok or WeChat obey sanctions imposed by the US government? Chinese nationals are not bound to obey American laws and decrees. Here’s the thing: US government’s sanctions are obeyed because they order AMERICANS to stop dealing with the foreign entities officially targeted. The sanctions are perhaps not officially directed towards Americans but it is only because they indirectly target them that they are obeyed; if anybody is prosecuted and goes to jail, it will be Americans.

I explained that in a previous post: “American Sanctions: Why Foreigners Obey,” Econlog, October 1, 2019). The cases of TkiTok and WeChat provide as clear a confirmation as possible. The Wall Street Journal (“Trump Executive Orders Target TikTok, WeChat Apps,” August 7, 2020) reports:

The orders bar people in the U.S. or subject to U.S. jurisdiction from transactions with the China-based owners of the apps, effective 45 days from Thursday. That raises the possibility that U.S. citizens would be prevented from downloading the apps in the Apple or Google app stores.

TikToc is reported to have more than 37,000,000 American users, mainly young people.

Sanction decrees are a bit like tariffs: they punish the nationals of the government that imposes them.


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A Sword of Damocles for TikTok?

There are indications that the US government might force a sale of the Chinese app “TikTok” to an American firm—perhaps Microsoft. It seems to me that the Australian government has a better solution:

Speaking on Tuesday to this year’s virtual Aspen Security Forum, Australian Prime Minister Scott Morrison disclosed that his government had reviewed the national security risks associated the Chinese app and found there weren’t any. There is “no evidence,” he said, “that there is a misuse of anyone’s data that has occurred, at least from an Australian perspective.”

That’s also true of the US.  But there are numerous technology experts who suggest that there are real risks that TikTok could engage in future mischief, perhaps even trying to influence US politics:

Last year the Guardian reported on leaked documents that detailed how TikTok removed or hid content that mentioned forbidden topics such as the Falun Gong, a spiritual movement banned in China. The result is that some posted videos are not widely available to other users. In effect, TikTok filters out videos that displease the company’s moderators.

TikTok has since said the documents disclosed by the Guardian have been updated and the rules for moderating content vary depending on the country. A Buzzfeed investigation last year found that content about the Hong Kong protests in 2019 was not taken offline, for example.

It’s possible that in its national security review of TikTok, Australia reached a conclusion similar to Buzzfeed’s — that is, there may have been problems before, but the company has taken steps to allow more open use of its product. Even still, there is no guarantee that TikTok won’t change its rules in the future. As Morrison acknowledged, the app’s cord goes back to China.

That’s the risk that the U.S. government is now trying to mitigate. TikTok may conform to Western norms now, as it seeks to expand its market share in places such as the U.S. and Australia. Over time, however, the situation may reverse itself. As TikTok becomes ever more popular among Westerners, their outlook on the world may more closely resemble China’s.

The reason I prefer the Australian approach is that it puts a sword of Damocles over the Chinese firm.  Let’s assume that prior to the 2024 presidential election, TikTok starts intervening in ways that favor the preferred candidate of the Chinese Communist Party?  Or they use TikTok to spy on the US government.  Even though TikTok is owned by a private firm and would probably prefer to stay out of politics, one could imagine the Chinese government forcing some sort of mischief.

In my view, this action would end up being extremely counterproductive, for two reasons.  To see why, recall that the behavior of TikTok will be watched closely by the US government, just as Russia’s interference in the 2016 election has led to increased scrutiny over Russia’s use of platforms such as Facebook.  So the US government would almost certainly discover their actions.  It’s hard to influence 200 million voters in complete secrecy.

Consider what happens if TikTok’s actions are discovered a few weeks before the election:

1. TikTok would be banned from the US, costing Chinese investors many tens of billions of dollars in market capitalization.

2. The scandal would help the most anti-China candidate in the US presidential race.

For these reasons, China would be unlikely to interfere in US politics in such a crude fashion.

Now let’s assume that the US launches a cold war against China, freezing their firms out of the US tech sector.  In that case, the first of the two costs above is no longer operative.  China has much less to lose from interfering in US politics.  But without TikTok would China be able to cause harm to the US?  Yes, look at the Russian actions in 2016.

Indeed it’s probably not a coincidence that it was Russia and not China that engaged in widespread interference in US politics during 2016.  It’s not that the Chinese are too pure to do so—they interfere in Taiwanese politics, and to a lesser extent in other smaller countries.  On the other hand, they have a lot to lose from strong sanctions by the US government, as the US is the largest market for their products.  In contrast, Russia exports very little to the US. (Ironically, Australia is at greater risk than the US.)

So perhaps the best way to keep the Chinese government from misbehaving is to allow them to become deeply enmeshed in the US economy, and then use that close relationship as a sword of Damocles.  Tell TikTok they can stay as long as they don’t engage in any major mischief.

PS.  I say “major mischief”, as every tech company will do a few small things that are objectionable, as when Twitter or Facebook overreact in removing a politically sensitive item.

PPS.  The Australian government has already banned Huawei, so their TikTok decision is not motivated by blindness to the Chinese security risk.




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