The USA’s misguided decoupling from China

In August 2018, It would have been difficult for the founder and CEO of ByteDance, Zhang Yiming, to imagine that his company’s $1 billion acquisition of popular lip-syncing app Musical.ly, and its subsequent merging of the app with its own TikTok would one day be considered a threat to the national security of the United States. Today it seems perfectly regular, as supposed security threats are leading to increased US hostility to Chinese firms. Attacks on ByteDance tell a microcosmic story of a China which is increasingly being alienated from the USA and, more importantly, the ideals it promotes.

Indeed, Donald Trump’s effective annulment of the Musical.ly acquisition through executive order has enjoyed wide support from Congress – and perhaps rightly so. Worries over TikTok’s security were first raised in a bipartisan letter from senators Chuck Schumer (D, New York) and Tom Cotton (R, Arkansas), and have since been justified by revelations that the app was reading IOS users’  clipboards and censoring content which didn’t fit with Beijing’s narrative. However, it’s worth noting that Tiktok was entirely in step with many other American apps in its poaching of user data. While issues of censorship are extremely troubling, we must ask whether there’s any guarantee that the removal of ByteDance will strengthen the USA’s political or economic position in any way.

While Trump may see him as a foreign agent, some have branded Mr Zhang an American apologist back home. It isn’t hard to see why; the former Microsoft Employee with a decidedly global vision had his first ByteDance app shut down for failing to sufficiently comply with Xi Jinping’s personal doctrine, Xi Thought. As a rising star ByteDance hardly carries the same clout as, for instance, Huawei, nor is it expected to be as obedient to the Chinese government.

In a wider context, the importance of Chinese and other foreign entrepreneurs to the USA’s innovation economy must not be understated. It is an oft cited statistic that over half of the entrepreneurs in Silicon Valley are of immigrant origin, and one can’t help but look to figures such as Sergey Brin (originally Russian), Jeff Bezos (son of Cuban Immigrants) and Elon Musk (South African) as exemplars of this. Historically, international talent has been able to settle, prosper and lead the market in the United States. As recently as 2019 Eric Yuan, a migrant from China who was allowed into the USA after his ninth visa application, became a billionaire after founding Zoom, the video conferencing app that suddenly became indispensable in early 2020. The USA’s ability to benefit from its international talent is, however, currently under threat. Executive orders like Buy American Hire American have served to increase barriers to entry, with H1-B visas (directed at sponsored graduate workers) being specifically targeted. The overall philosophy may be to let in only the most skilled workers, but stories such as Mr Yuan’s prove that reality is not so predictable.

Higher barriers to entry for potentially crucial entrepreneurs is especially important in the context of an increasingly entrepreneurial China. If one takes the number of patents filed per year as representative of a states’ entrepreneurial capacity, then the consistently high number of patents filed in China every year (in 2018 Chinese citizens filed for over 1.5 million patents compared to the USA’s 600,000) should serve as a good indicator of a growing entrepreneurial spirit in the country. Granted, much noise has rightly been made about the “worthless” nature of a majority of Chinese patents, but despite this figures from January 2020 show China is second only to the USA in population of ‘unicorn’ companies (privately owned startups with a valuation of over $1 billion), which are effectively signs of entrepreneurial success. Indeed, China has more unicorns than the next ten countries combined. A ray of hope for the USA is its position as a world leader in international patents, with US citizens filing 1/3 of patents abroad – a global reach unmatched by China’s 4.5%. Research from 2018 also shows that, of the patents filed by US companies, 5% were filed by ethnically Chinese people, who make up only 1.5% of the USA’s population. Given that even the USA’s champion tech companies such as Uber, Amazon and Google have failed to dominate the market in China as they have elsewhere because of an inability to keep up with restless Chinese competitors, it’s clear that if the USA wants to maintain global leadership it must maintain its global composition.

Unfortunately for the US, there’s also a new home emerging for Asian tech giants. China’s STAR market, based in Shanghai and established in only 2019, was reportedly set up at the request of President Xi Jinping, and is already the largest growth market in Asia. The hostility from the Trump administration towards Chinese companies has played into Mr Xi’s hands in this case. Given its international outlook, companies like ByteDance could well have represented a vital bridge between the two superpowers. However, the reality that business in the USA is no longer guaranteed has caused the company has abandoned its plans for a blockbuster IPO listing in New York, instead eyeing up Shanghai or Hong Kong.

ByteDance isn’t alone in fleeing the USA either. Chinese tech champion Ant Group revealed staggering profitability when filling for a joint listing in Shanghai and Hong Kong in August. Similarly, tech staples such as Baidu and Ctrip have reportedly also considered a move to China on account of increasing hostility from the United States. Given their size, influence and market shares, its likely that these firms will all prosper in China as much as they would in the USA – the only difference will be that they have less of a vested interest in the latter’s stability and prosperity.

Just as Chinese firms are leaving the US, so may we witness an exodus of international firms from Chinese soil. This  is especially the case in Hong Kong, where an increasingly tough climate brought about by mainland security reforms is forcing tech companies to reconsider their positions in the city, and rapidly closing the gap between the number of mainland and international bankers on the island. Similarly however, promises from President Trump of tax breaks for firms that leave America, and punishment for those which do not are undoubtedly contributing to this decoupling further.

While China poses an economic and ideological threat to the United States, the decoupling of their industries will serve to weaken the US as much as the PRC. The alienation of Chinese business from the USA will ultimately translate into the alienation of US cultural and economic influence from China. This will mean fewer USA-friendly Chinese entrepreneurs like Mr Zhang, and fewer opportunities to influence and to promote honest, democratic thinking in a state that will soon shape the international system.

Banner image courtesy of Martin Falbisoner via Wikimedia, © 2013, some rights reserved.