On August 6, 2020, President Trump issued a pair of executive orders targeting China’s Tencent Holdings Ltd. (Tencent) and its mobile application WeChat and ByteDance Ltd. (ByteDance) and its mobile application TikTok. The orders instructed the U.S. Commerce Department to prohibit the following within 45 days from their issuance (by September 20, 2020), to the extent permitted by law:
- Any transaction by any person, or with respect to any property, subject to the jurisdiction of the United States, with ByteDance, or its subsidiaries, in which any such company has any interest; and
- Any transaction that is related to WeChat by any person, or with respect to any property, subject to the jurisdiction of the United States, with Tencent, or any subsidiary of that entity.
Both executive orders direct the Secretary of Commerce to identify transactions that will be prohibited, leaving substantial discretion in implementation.
The orders are intended to address the perceived threat posed by payment and communications app WeChat (owned by Tencent) and the video social media app TikTok (owned by ByteDance). Notably, the prohibitions concerning Tencent appear limited to transactions “related to WeChat,” while the order concerning ByteDance is not expressly limited to transactions related to TikTok. The ByteDance order is presumably linked to the ongoing review by the Committee on Foreign Investment in the United States (CFIUS) of the company’s prior acquisition of Musical.ly.
Separately, the U.S. House of Representatives’ current draft of the National Defense Authorization Act for Fiscal Year 2021 prohibits TikTok or any other successor app developed by ByteDance from being downloaded on U.S. government-issued devices. A similar bill was recently unanimously approved by the U.S. Senate Committee on Homeland Security and Government Affairs.
Legal Authorization
The orders are in furtherance of the national emergency declared in E.O. 13873 issued by President Trump on May 15, 2019 on Securing the Information and Communications Technology and Services Supply Chain. E.O. 13873 grants the Commerce Department the authority to prohibit any “acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service” (a “transaction”) subject to United States’ jurisdiction where the Commerce Department determines that the transaction:
- Involves property in which a foreign country or national has an interest;
- Includes information and communications technology or services designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary; and
- Poses certain undue risks to critical infrastructure or the digital economy in the United States or certain unacceptable risks to U.S. national security or U.S. persons.
In November 2019, the Commerce Department issued a proposed rule that would create an open-ended, case-by-case review framework by which it will be able to evaluate such “transactions” and determine if they are prohibited or must be mitigated due to national security concerns. Reviews would be undertaken by the Commerce Department on its own initiative or via referrals from other U.S. Government agencies or private parties. We previously summarized the proposed rule when it was announced. To date, no final rule has been issued.
Uncertainty for U.S. Companies
The executive orders create several areas of uncertainty for U.S. companies pending implementation of the regulations. The Commerce Department does not have an existing regime of economic sanctions or blocking similar to those implemented by the Treasury Department’s Office of Foreign Assets Control (OFAC) and it is unclear whether the new ByteDance and Tencent executive orders will use the same definition of “transactions” as E.O. 13873. The intent of the August 6 orders appears to be limited to banning both TikTok and WeChat software apps themselves, rather than a complete blocking of all property and property interests in ByteDance and Tencent. This is supported by a statement from a White House official clarifying that the order concerning Tencent only blocks transactions related to WeChat, and not those involving other Tencent holdings. Moreover, a broader order that prohibits all property transactions (i.e., essentially a sanctions designation) would result in an enormous financial fallout as Tencent is one of the world’s largest corporations with billions of dollars in assets, including significant interests in several video games that are popular in the U.S. market. However, the reference to “property” of such companies would seem to contradict this clarification.
If the focus is indeed on banning both apps, it is not clear what the Commerce Department will do to implement this prohibition. As mentioned, a proposed rule was issued by the Commerce Department in November 2019 implementing E.O. 13873. However, this rule would set up a review framework pursuant to which the Commerce Department would notify parties to a specific transaction that the transaction is being reviewed, further providing the parties an ability to provide information and mitigation options. Thus, the Commerce Department could issue specific regulations that implement a “ban.”
The Commerce Department’s Bureau of Industry and Security (BIS) could conceivably prohibit exports of software. However, BIS does not have the authority to prohibit imports, and it would seem to be practically impossible to monitor and enforce a prohibition on individual software downloads. One approach would be to prohibit app store providers like Apple and Google from making the apps available. However, the underlying authority is unclear, and TikTok and WeChat could conceivably make the apps available for free download on their websites.
A separate issue is whether the executive orders and implementing regulations could ban informational content. The Berman Amendment to the International Emergency Economic Powers Act (IEEPA) stipulates that transactions involving “information and informational materials” are generally exempt from the purview of sanctions imposed under IEEPA. As both of these orders are issued pursuant to the President’s authority under IEEPA, and are applicable to the extent permitted by law, the underlying pre-existing messaging content provided by WeChat and TikTok may be exempt from regulation.
We anticipate that the Commerce Department will promulgate regulations or provide guidance that offers additional clarity on the nature and scope of the transactions that are prohibited under the executive orders in the near future.
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