Sinotech

Senators Ask FTC to Investigate TikTok for Deceptive Conduct Regarding Chinese Access to U.S. User Data

By Raquel Leslie, Brian Liu
Thursday, July 14, 2022, 10:01 AM

TikTok has come under renewed congressional scrutiny for allegedly deceptive data privacy practices. Despite TikTok’s repeated promises to safeguard U.S. user data from access by its Chinese parent company, a BuzzFeed report broke that TikTok employees in China had repeatedly accessed American user data. The allegations have spurred congressional inquiries and calls for a Federal Trade Commission (FTC) investigation into TikTok, raising pressure against the platform to justify its data practices amid growing concerns over Beijing’s influence on American social media users. 

The latest round of scrutiny into TikTok began after BuzzFeed published a report based on leaked audio from 80 internal TikTok meetings that purport to show the company’s Chinese employees discussing access to American user data. The report undercut TikTok’s announcement—made on the same day—that it had started routing American user data to U.S.-based servers owned by Oracle. According to the report, top engineers and company executives from TikTok claimed in meetings that “[e]verything is seen in China” and made references to Beijing-based employees who “ha[ve] access to everything.” TikTok responded by saying that the recordings were made in furtherance of “Project Texas,” a TikTok initiative aimed at bolstering data security for U.S. based users. 

TikTok’s response clearly failed to assuage congressional concerns. On July 5, Senate Intelligence Committee Chair Mark Warner and Vice Chair Marco Rubio urged the FTC to initiate an investigation into the app over these allegations. The investigation could ultimately result in an enforcement order punishable by civil penalties, or a settlement like one agreed to between TikTok and the FTC in 2019 over TikTok’s illegal collection of personal data from children. 

TikTok has long responded to data privacy concerns by promising that information about U.S. users would be stored within the United States instead of China. In 2020, after the Commerce Department under the Trump administration threatened to ban TikTok from the United States over data privacy concerns, TikTok’s parent company, ByteDance, agreed to create a standalone U.S. entity for TikTok. ByteDance also entered discussions to sell TikTok’s American operations to Oracle and Walmart. In an October 2021 Senate hearing, a TikTok executive testified that a “world-renowned, U.S.-based security team” decides who gets access to U.S. user data. TikTok’s assurances helped avert a wholesale ban of TikTok’s operations in the United States, which generated $2.1 billion in ad revenue in 2021, constituting approximately half of TikTok’s global ad revenue for that year. 

The increased scrutiny into TikTok’s data practices comes as TikTok attracts a larger market share of American users, who have come to rely on the app both as a traditional social media platform as well as a news source. According to market research company Insider Intelligence, TikTok commanded a 20 percent market share in 2022, which is expected to rise to 25 percent by 2024. A quarter of American users reported that they considered TikTok to be a news source, with that proportion rising to as high as 50 percent in countries with weaker mainstream media. Commentators have argued that such influence aggravates the risk of misinformation, specifically in the context of election misinformation. With TikTok’s market share poised to grow, concerns over TikTok’s malign influence on American voters and social media users generally may become a prominent issue in the midterm elections in November. 

U.S. Pursues Curbs on Outbound Investment and Chip Technology Sales to China

U.S. lawmakers and the Biden administration are looking to expand their arsenal of tools to boost U.S. competitiveness vis-a-vis China as the broader chips bill remains in limbo. On June 11, a bipartisan group of U.S. lawmakers announced that they had agreed on a proposed expansion of the U.S. government’s economic powers to review and potentially deny billions of dollars in U.S. investments into China and other countries. The mechanism has been described as a reverse version of the Committee on Foreign Investment in the United States, an interagency body that reviews inbound investments and can recommend that the president block transactions seen as potential security threats. The new federal oversight panel could be included in a broader bill aimed at bolstering U.S. competitiveness with China that is now working its way through Congress. 

The bill would require advance notice of plans to transfer production or development to countries or entities “of concern,” such as China or Russia. And it would force American investors and firms to disclose new investments in certain sensitive sectors such as semiconductors, batteries, and pharmaceuticals. While the Biden administration has backed the concept of outbound investment reviews, others are skeptical of awarding new powers to the government to review American investments in the world’s second largest economy. The proposal is facing strong opposition from the American business community for fear that it would create new barriers to overseas investments. According to the U.S.-based Rhodium Group, of the $243 billion in foreign direct investments in China by American companies from 2000 to 2019, 45 percent was in industries that could be subject to review. News of the provision also drew opposition from China, which said it would only deprive the United States of business opportunities.

In yet another effort to curb China’s rise, Washington is also lobbying its allies to stop the sale of mainstream technology essential for producing a large chunk of the world’s semiconductor chips to China. The United States is reportedly pushing the Netherlands to ban semiconductor manufacturer ASML Holding NV from selling its older deep ultraviolet lithography systems to China. If the Netherlands agrees, the sanctions could potentially deal a serious blow to Chinese chipmakers such as Semiconductor Manufacturing International Corp. and Hua Hong Semiconductor Ltd. The United States is also trying to exert pressure on Japan to stop shipping the same technology to Chinese chipmakers. China accused the United States of “technology terrorism” in response to the news. “This is yet another example of the U.S. practice of coercive diplomacy by abusing state power and wielding technological hegemony,” Chinese Foreign Ministry spokesman Zhao Lijian said during a regular news briefing on July 6 in Beijing. “This will only remind all countries of the risks of technology dependence on the U.S. and prompt them to become independent and self-reliant at a faster pace.”

But President Biden’s campaign to maintain economic pressure on Beijing is increasingly constrained by a competing policy aim: addressing rising inflation. Biden is expected to ease former President Trump’s tariffs on China this month in an effort to boost the U.S. economy. While the details of the administration’s plan are not yet final, they are likely to involve three parts. First, a narrow set of tariffs will be lifted, likely duties on consumer goods such as bicycles. Second, the administration is expected to announce that the U.S. Trade Representative will open a new exclusion process for companies to win exemptions from the tariffs on China. Third, the administration will announce a new tariff investigation under Section 301 of the 1974 Trade Act that will target sectors of the Chinese economy that are heavily subsidized by the Chinese Communist Party, such as semiconductors and batteries. The new tariff investigation will likely result in new duties on those sectors in an effort to level the playing field for American firms. As he weighs a decision, Biden must strike a balance between competing domestic policy concerns: the need to be perceived as fighting inflation and the need to be seen as standing up to China. 

Other News

Chinese Tech Giants Agree to Self-Regulate the NFT Industry

The future of non-fungible tokens (NFTs) in China is taking shape as the country’s tech giants come together to set standards for the nascent industry. Tencent, Ant Group, and Baidu were among 30 firms and institutes to sign a pact to stop the secondary trading of NFTs and “self-regulate” their activities in the market, state media reported on June 30. The companies jointly issued a “self-disciplined development proposal” for the “digital collectible industry,” a rebranded term for NFTs in China to do away with the technology’s financial aspects. The pact asks signatories to hold relevant regulatory permits, ensure the security of underlying blockchain technologies, enforce user real-identity checks, step up intellectual property protection, resolutely ban financial speculations, and promote rational consumption among users.

Though China does not currently have clear rules about NFTs, observers speculated that after the government banned cryptocurrency trading, NFTs would be next on the chopping block. Indeed, China’s bank association proposed in April that NFTs must not be used for securitization or transacted in cryptocurrencies. With the country’s tech giants taking their own stance, China’s NFT industry may be one step closer to regulation. But while 2021 saw an onslaught of measures to rein in the tech sector as a whole, 2022 has been relatively quiet on the regulatory front. Over the past few months, in fact, the Chinese government has repeatedly signaled its intention to ease its tech crackdown and spur economic activity. 

For example, China is concluding a yearlong probe into ride-hailing giant Didi and preparing to lift a ban on adding new users. Chinese regulators also intend to allow Didi’s mobile apps back on domestic app stores one year after they were removed when Chinese authorities opened a data security probe into the company. In addition, Beijing has given tentative approval for Ant Group to revive its initial public offering in Shanghai and Hong Kong, according to a report on June 9. The economic slowdown that followed the tech crackdown waged by the government since late 2020, paired with the toll of recent coronavirus lockdowns, seems to have prompted a shift in messaging from Beijing, spurring optimism among companies that the worst may be over.

U.S. Industry Leaders Urge Passage of Semiconductor Manufacturing Subsidies 

On June 16, the Semiconductor Industry Association (SIA), a trade association and lobbying group for American semiconductor manufacturers, urged members of Congress to pass the CHIPS for America Act. The bill, if enacted, would provide $52 billion in funding for semiconductor manufacturing in the United States. In a letter signed by 123 CEOs and senior executives from Amazon, Microsoft, TSMC, and other major technology companies, SIA urged Congress to come to a bipartisan compromise on the bill, arguing that it would bolster national security and competitiveness with China. 

A version of the CHIPS Act passed the Senate in June 2021, and a separate version passed the House in February 2022. Data for Progress estimated that the CHIPS Act, if enacted, would contribute $287 billion to U.S. gross domestic product and create or preserve around 2.8 million jobs from 2022 through 2027. Despite having bipartisan support, the CHIPS Act has stalled in conference committee, as lawmakers haggle over the thousands of other provisions in the larger U.S. Innovation and Competition Act/America Competes Act that encompasses the CHIPS Act. 

The CHIPS Act is intended to re-shore semiconductor manufacturing within the United States, a goal that is motivated by both economics and national security. According to McKinsey & Co., while chip demand and revenues have soared, chip fabrication companies have been unable to meet demand, resulting in lag times in production of over six months. American chip manufacturers like Qualcomm, Nvidia, and AMD are “fabless,” meaning that they focus their resources on designing chips, while outsourcing the fabrication to external companies in Europe and Taiwan. Commerce Secretary Gina Raimondo has warned of the national security threat of relying so heavily on a single source of origin: “America buys 70 percent of its most sophisticated chips from Taiwan. Those are the chips in military equipment. There’s like, 250 chips in a javelin launching system. You want to be buying all that from Taiwan? That’s not secure.” 

According to the original deadline set out by House and Senate negotiators, the conference report outlining the final details of the bill was supposed to be completed on June 21. However, negotiations have stalled under threats from Sen. Mitch McConnell to derail the bill if President Biden fails to make concessions on separate tax and climate legislation. 

U.S. Expands Export Bans on Chinese Technology Firms Over Support for Russia 

On June 29, the United States added five Chinese companies to a Commerce Department export black list known as the Entity List for violating sanctions against providing support for Russia’s military. The five companies were electronics and technology companies that the Commerce Department alleged had conducted activities “contrary to U.S. national security and foreign policy interests” by signing recent contracts to continue supplying Russia’s military. While being added to the Entity List does not automatically bar U.S. companies from doing business with listed organizations, it imposes a stringent licensing requirement. 

After Xi Jinping and Vladimir Putin announced a “no limits” partnership in February prior to Russia’s invasion of Ukraine, commentators were concerned that China would provide a lifeline to Russia by continuing to provide crucial technology deliveries. Contrary to those fears, U.S. officials have said that they did not see any “systematic effort” by China to help Russia evade Western sanctions. While overall trade between China and Russia is expected to hit “new records,” according to President Xi, Chinese technology firms in particular have gradually pulled out from Russia for fear of incurring U.S. sanctions. 

Commerce Department sanctions have been a frequent cause for complaint for the Chinese government. In 2021, China imposed sanctions directly against Commerce Secretary Wilbur Ross in retaliation for sanctions imposed on Chinese officials in Hong Kong. In response to this latest Entity List expansion, Chinese state-owned media outlet China Daily argued that the sanctions demonstrated “high-handed long-arm jurisdiction” that is contrary to the norms of international law. 

China has also introduced export bans of its own recently. On July 7, the Cyberspace Administration of China published finalized regulations requiring “important” and massive data transfers from China to destinations outside its borders to be subject to security review. The regulations require security reviews for any firms handling the personal information of more than 1 million Chinese residents and are expected to impose greater compliance costs on multinational businesses seeking to do business in China. 

Commentary

Milton Ezrati of Forbes assesses the failures of the Biden administration—and his predecessors—to deter China’s technology theft.

Akshay Chinchalkar lays out four challenges to a revival in China’s technology stocks after Beijing’s loosening of the regulatory crackdown for Bloomberg.

William Schneider Jr. asserts in the Wall Street Journal that President Biden’s ambition to phase out fossil fuels is at odds with his human rights objectives in China. 

Zeyi Yang for MIT Technology Review describes the rise and fall of China’s biggest online influencers in what appears to be a government crackdown targeting the livestreaming e-commerce industry dating back to late 2021.

Shira Ovide of the New York Times evaluates Congress’s push for taxpayer funding for semiconductor chips amid signs that the shortage is ending.

Shuli Ren argues for Bloomberg that Beijing’s relaxing its grip on tech companies has less to do with appeasing investors and more to do with cutting unemployment. 

FBI Director Christopher Wray calls China the “biggest long-term threat” to both the U.S. and the U.K. at a joint press conference with MI5 Director General Ken McCallum in London.

The Editorial Board of the Wall Street Journal opines that a Senate bill aimed at punishing Big Tech companies would harm consumers and U.S. innovation even as Beijing is backing off its own antitrust assault on China’s tech giants. 

Xin Lijun, CEO of e-commerce firm JD.com, stated in an interview for CNBC that Chinese tech regulation is not loosening but becoming more “stable” and “rational.”

In the New York Times, Li Yuan tells the story of a Chinese tech entrepreneur who dared to criticize the government’s “zero-Covid” policy. 

Shubham Dwivedi and Gregory D. Wischer propose that Congress pass legislation incentivizing mineral extraction and refining in order to remain competitive in the semiconductor industry.

Handel Jones and David P. Goldman discuss tech talent disparities in the U.S.-China artificial intelligence rivalry, explaining that China directs its top talent toward the military while American graduates overwhelmingly choose to join Big Tech.