A messy, ongoing tech breakup between the US and China is forcing a rethink about what the industry might look like for consumers in a decoupled world. On Monday, the Pentagon blacklisted internet and gaming giant Tencent Holdings Ltd. for alleged links to the People’s Liberation Army. On Friday, TikTok will make its final arguments to the US Supreme Court as it faces an unprecedented ban due to national security concerns.
The news greeted attendees this week at one of the industry’s biggest extravaganzas in Las Vegas, where companies typically convene to lay out their dreams of a techno-utopian future filled with laundry-folding robots, flying cars and other idealistic visions. And despite the tensions, more than 1,200 Chinese firms at the CES trade show are vying to enter the US market, the largest foreign representation and more than a quarter of the about 4,500 exhibitors.
Nvidia Corp. Chief Executive Officer Jensen Huang headlined opening night with an impassioned speech and a wide range of product updates. Last month, China’s market regulators opened a probe into the US chipmaker amid the recent escalations. I wondered what companies might get caught in the middle next as Huang laid out his vision for a robot and autonomous vehicle-filled future — or how these machines would be built without supply chains and materials from China.
Washington’s latest move to include Shenzhen-based Tencent on its blacklist of Chinese military companies doesn’t come with any sanctions or penalties. But it still sent shares falling and deals a major reputational blow to the world’s largest game publisher that has invested in major American startups from Reddit to Epic Games.
The decision will draw further ire, and it would be surprising if Beijing doesn’t retaliate against more consumer-facing American tech firms. Another unintended consequence is that China could end up rolling out more support for its own companies that it feels are being unjustly attacked, doubling down on closing the lead that the US is trying to maintain. We’ve seen Beijing prop up Huawei Technologies Co. and homegrown chipmakers after they’ve come under fire from Washington.
Tencent’s blacklisting also risks backfiring in other ways. The US has been throwing around perceived national security risks as reason to come after Chinese tech companies, but leaders haven’t always been very forthcoming about what exactly that means. Lawmakers voted to ban TikTok after classified briefings supposedly identified it as a major threat due to its parent company ByteDance Ltd., but have heavily redacted the smoking-gun evidence.
The Department of Defense also hasn’t offered any public receipts that Tencent works with the Chinese military (it doesn’t have to). But it has become harder to understand how national security intersects with consumer technology. Back in 2021, Xiaomi Corp. reached an agreement with the US government to remove it from the same blacklist after the company filed a lawsuit.
Before reaching the accord, a US judge described the reasoning behind the smartphone maker’s designation as “deeply flawed.” Xiaomi was added to the list because of its investment in 5G and AI, which could have potential military applications, even though everyone was doing that at the time. The other supposed risk was a government-linked award for the company’s founder — one that had also been given to hundreds of entrepreneurs, including makers of a chili sauce.
Tencent said that its inclusion on the list was “clearly a mistake.” And it will likely sue or reach its own deal with the government for removal. Either the US will end up sharing more information about why it sees China’s most valuable tech firm as a threat, or it will amount to a legal headache and temporarily hit the stock while really ticking off Beijing.
Washington has made clear that it doesn’t want its adversary to get ahead in innovation, but its whack-a-mole approach to holding China’s tech sector back is spurring a race to the bottom. Policymakers should be much more strategic, especially when pulling out the national security defense.
There’s another irony on display at CES right now. Chinese companies are flocking to the show as a display of might, and state-backed media has forcefully fought for them to attend amid reported visa issues. But they’re also eager to come due to mounting woes at home that have nothing to do with Washington’s curbs. A government crackdown on the internet sector and fresh macroeconomic headwinds have been devastating for startups. And incentives for entrepreneurs don’t seem to be advancing, especially amid consumer belt-tightening.
America was already on the way to showing the world its free market tech ecosystem is the superior innovation engine. Opaque, porous attacks on Chinese tech under the increasingly broad banner of national security undermines that.
The incoming administration should assess what they’re hoping to achieve before making matters worse with tariffs and finger-pointing at China for the country’s working-class woes. A messier, America First-focused breakup will only embolden Beijing while inhibiting its own consumer-tech industry.
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