On August 6, 2020, President Trump signed a pair of Executive Orders (EO) aimed at Chinese social media services WeChat and TikTok. According to the EOs, data collected by these applications “threatens to allow the Chinese Communist Party access to Americans’ personal and proprietary information,” threatens U.S. national security through surreptitious monitoring and collection of data and other activities, and has been used to track Chinese dissidents overseas and limit speech in the United States on topics that are sensitive to the current Chinese regime. To address these threats, the EOs direct the U.S. Commerce Department to prohibit certain transactions with ByteDance and Tencent, the Chinese companies that own, respectively, TikTok and WeChat. The Commerce Department is expected to come out with these prohibitions within 45 days, or by September 20, 2020.
The EOs are the latest in a series of actions by the administration — which have included suspending preferential trade treatment for Hong Kong, imposing trade sanctions in response to alleged human rights abuses, restricting transactions with military end users and uses in China, and adding Chinese institutions to its prohibited “Entity List” — targeting perceived threats to U.S. national security from Chinese government actions. As previously discussed, the administration’s actions reflect a coordinated, whole-of-government approach that includes export control, sanctions, trade and other regulatory tools.
It remains to be seen whether the EOs will in fact be implemented, as it is possible that ByteDance and Tencent could work out a mitigation plan or possibly sell off part or all of TikTok and WeChat before September 20. If they are implemented, the Commerce Department orders could take several forms, from very targeted to broader actions against the apps and their owners.
For example, the Commerce Department could choose to implement the EOs through a “denial order.” A denial order would prohibit U.S. persons as well as companies that engage in transactions subject to U.S. jurisdiction (such as sales of U.S. goods or services) from providing certain goods or services to the Chinese companies. It could also prohibit persons subject to U.S. jurisdiction from providing services or otherwise facilitating prohibited transactions. This was an option that the Commerce Department applied to transactions with Chinese telecom company ZTE for a brief period in 2018.
Another option would be to list ByteDance or Tencent (or certain of their business operations, subsidiaries, or affiliates) on the Commerce Department “Entity List.” Under this option, certain cross-border transactions that involve goods, software or technology subject to U.S. jurisdiction could be prohibited. But an Entity List designation would likely stop short of a total ban on all transactions (such as purely services transactions) with these entities.
Finally, in predicting the likely scope of any ban or other action against ByteDance and Tencent under the EOs, it is important to emphasize a key difference of the two EOs. Specifically, the EO on ByteDance broadly applies to “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.” By contrast, the EO on Tencent is limited to “any transaction that is related to WeChat” but stops short of permitting a total ban on all transactions with Tencent. Thus, any Commerce Department ban on activities involving Tencent is unlikely at this time to extend beyond transactions that have a nexus to the WeChat app or Tencent’s operations connected with that app.
If the EOs are implemented, U.S. persons and all companies engaging in transactions subject to U.S. jurisdiction would need to immediately cease all covered transactions. There is unlikely to be any wind-down or grace period offered. While we may see a general license or other exemption for contracts and activities that pre-date the ban, ordinarily such actions apply to all transactions regardless of when they were entered into — as was the case for the past Commerce Department denial order against ZTE.
The EOs were issued under the authority of the International Emergency Economic Powers Act (IEEPA). IEEPA provides for civil penalties per transaction of up to $307,922 or twice the value of the transaction (whichever is higher). Willful violations can also result in criminal penalties of up to $1 million and 20 years imprisonment.
How precisely the Commerce Department will implement the EOs remains to be seen. However, given the risks involved and the prevalence of transactions with ByteDance and TikTok across many industries and users, companies and users of the apps should act now to ensure that they understand the risks and touchpoints to their own operations and take steps to have a mitigation plan in place if and when the EOs are implemented.