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What China’s new export rules mean for TikTok’s US sale

Chinese regulators last week questioned ByteDance’s planned sale of the U.S. operations of its short-video subsidiary TikTok, expanding the list of controlled exports to include the algorithms that power the viral video app.

Unlike the United States, China has a small and very rarely used set of export controls, which have so far been deployed in particular on the rare earth metals found in consumer electronics like smartphones.

As a result, there is little precedent for understanding how the government could use its new roster to influence the agreements of ByteDance and other tech companies. Is China seriously considering blocking a TikTok sale – or just saving face after a series of hawkish moves by the United States?

Here’s what China-based experts know about the new measures and what they signal politically.

What do the new export rules do?

Last Friday, China’s Ministry of Commerce updated its list of “prohibited and restricted technology exports” to include, among other things, “personalized information recommendation services based on data analysis.”

Part of TikTok’s addictive success is the result of these recommendation algorithms, which deliver new videos to users based on their previous viewing history.

The export of these services is restricted, not prohibited, which means companies like ByteDance may still be able to sell them overseas. But they would have to seek government approval, which can take up to 30 business days, depending on regulations.

Are the new rules targeting ByteDance?

ByteDance is not so strategically important in Beijing like Huawei, so it’s unlikely the new rules were designed purely to help the company.

The rule change is also part of a broader and long-standing overhaul of China’s trade controls, which it has tightened since the start of the US-China trade war.

However, government adviser Cui Fan told the Financial Times that the timing of the publication was due to the “current international situation.” On Saturday, the state-run Xinhua News Agency quoted Cui as calling ByteDance’s sale of TikTok a deal that would require government approval under the new export measures.

According to Feng Chucheng, partner and political risk analyst at consulting firm Plenum, the release of the new export list now serves in part as a government response to the national nationalist anger that has developed over the forced sale of TikTok and corporate compliance.

“The government is monitoring public opinion online and feels it has to respond. But that must be a very delicate answer: they want to tell people that they don’t agree [with the TikTok sale], but they don’t want to trigger further US retaliation, ”Feng said.

Mei Xinyu, a researcher at a think tank affiliated with the Commerce Department, said the rule change also reminded the US government and the companies involved that China can still have a say in the sale.

Does the rule change help or hinder ByteDance?

The effect of the rule change is likely to be complicated, even before Beijing decides whether or not to block the export. On the one hand, it may scare off potential buyers, who are unwilling to engage in negotiations that might be called off by Beijing. However, he can also give ByteDance some leverage by allowing it to expand its negotiations with the United States.

According to Feng, the company could argue to the U.S. Treasury that the Nov. 12 deadline for its TikTok sale should be extended to give China time to approve. Such a delay would be feasible since the executive order of US President Donald Trump gave Cfius, the Treasury committee responsible for overseeing foreign investment, the possibility of adding a 30 day extension.

The new rules have given ByteDance “tools to defend its interests” against “a malicious acquirer” seeking to buy its artificial intelligence algorithms under pressure from the United States, said Shen Yi, director of the Center for Research for Human Rights. governance of global cyberspace at Fudan University in Shanghai.

“Updating the export list at this point plays exactly such a role: ByteDance can at least have a little negotiating room,” Mr. Shen said.

What if Beijing blocks the export of the TikTok algorithm?

While China ultimately chose not to approve the export of TikTok’s algorithm, it’s unclear how ByteDance could create a politically acceptable solution to sell its US operations without sharing its codebase.

In the more limited sales scenario, the company could keep control of the recommendation algorithms that power TikTok and update them while its US buyer was responsible for the policy of moderation of user content and data.

Such a scenario would mean that the American buyer saved costs on the engineers he would have to hire to maintain the code base itself. But it would also mean that ByteDance could be exposed to new accusations of interfering with the recommendations of the US app, going against the original purpose of the sale.

What are the chances that Beijing imposes a blockade?

Mr Mei said the limited scenario, in which ByteDance’s Chinese engineers still exploited the technology, could be cleared by Beijing. “But if this technology is one of the assets included in the deal, I don’t think the Chinese government can approve it,” he said.

However, any action Beijing took to impede the sale would risk provoking further retaliation from the United States.

“China’s top priority is not to save a single company, but to get through the next US election. The theory popular among Chinese policymakers is that Trump wants to push bilateral relations to such a bad position that [Democratic presidential candidate Joe] Biden can’t save it. As a result, China is trying not to take the bait, ”Feng said.

Additional reporting by Sherry Fei Ju in Beijing

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