The recent decision of the US Court of Appeals for the District of Columbia in the TikTok case confirms the validity of the law mandating the forced sale of the US subsidiary of the Chinese social networking giant, sets an important precedent in the relationship between rights and national security, and provides a fairly precise idea of how state control over foreign companies, not only Chinese, will evolve by Andrea Monti – Initially published in Italian by Formiche.net
The ruling of the United States Court of Appeals for the District of Columbia Circuit in the TikTok case on 6 December 2024 sets a precedent with far-reaching implications for high-tech companies, not only Chinese, that fall into the category of entities ‘controlled by a foreign adversary’ created by the Protecting Americans from Foreign Adversary Controlled Application Act of 2024
The dismantling of a company or the forced sale of certain strategic assets is neither new nor inconceivable in the US legal system. It is enough to recall, for example, the court action that led to the break-up of Standard Oil into 39 different companies in 1911 or, to remain in the more recent technological sphere, the action of the American Antitrust Authority aimed at forcing Google to divest itself of the rights to the Chrome browser.
However, the Court of Appeals’ confirmation of the legal validity of the law permitting forced sales for reasons of national security has further value because it is part of a generalised trend that uses law as an instrument to implement foreign policy choices according to the canons of lawfare. Specifically, the decision demonstrates how lawfare is an approach that can be exploited both in a defensive projection (such as the various laws mentioned above) and in an offensive phase, as in the case, precisely, of the exploitation by foreign actors of the possibilities offered by fiscal, financial and commercial regulations to insinuate themselves into the economic and productive fabric of another country to attack it from within
In such a context, then, the US Court of Appeals’ ruling is an example of how a judicial system can become a complementary, if not integral, part of the political process directed at using laws and rulings for foreign policy purposes. The EU has already done this, for instance, by challenging the autonomy of US national security management through the Court of Justice rulings known as Schrems I and Schrems II, which annulled the agreement between the EU Commission and the US for the export of European personal data on the basis of the lack of guarantees on their inaccessibility by US authorities.
This confirms three facts: the first is that control over data (an element common to all legislations dealing with the subject) is crucial for the survival of a state as demonstrated by the EU regulation on fair access to and use of data, Russia with its obligation to locate the data of its citizens within the jurisdiction of the Federation, and China with its National Security Act; the second is that legal control over software is explicitly declared as a geopolitical lever, while the third is that the technicalities of managing international relations are essentially the same regardless of the latitudes and different levels of democracy of each state
Having said this, it is possible to analyse the potential impact of the judicial decision on various aspects of the foreign operations of Chinese companies operating in high-tech and other critical sectors.
Increased legislative and regulatory scrutiny
It is reasonable to think that starting from today it will be easier to enforce the Foreign Adversary Act because the ruling shows the authorities the path to follow. This limits the possibility of challenging the actions of the executive because the judicial precedent allows national security concerns to be invoked with minimal evidentiary support, as the public dissemination of the information that prompted the administration’s action is also limited: ‘We also reject,’ reads page 41 of the ruling, “TikTok’s argument that the Government’s data-related concerns are speculative. The Government “need not wait for a risk to materialize” before acting; its national security decisions often must be “based on informed judgment.”
Some possible consequences of increased monitoring activities – not dissimilar to what will happen in the EU due to the implementation of the ponderous cybersecurity legislation – could be an increase in the frequency of inspections and audits, the need to deal with costly compliance requirements, and the creation of an atmosphere of perpetual uncertainty for Chinese companies operating in the US, working with US-based companies, or supplying non-US multinationals that have subsidiaries in the US and may not want to diversify their suppliers depending on geopolitical balances.
Economic impact of increased compliance burdens
Another consequence colud be that, the companies targeted by the executive might have to manage themselves, for instance, to locate data in the US, undergo third-party audits, and achieve operational separation from their parent entities. If these became standard conditions for maintaining market access in the US, there would be far-reaching operational and financial consequences because it would become more difficult to distribute the technology infrastructure across multiple countries.
Decreased investor confidence
Reasoning in purely formal terms, when the ruling finds it acceptable – essentially – to ‘take at face value’ what the government says (‘The Court can neither fault nor second guess the Government on these crucial points,’ reads page 40 of the ruling) without a full public analysis of the evidence supporting its position, it creates a legally unpredictable environment for Chinese companies. This may discourage investments and partnerships, as some companies may be considered to be at high financial risk due to the possibility of sudden regulatory actions or bans based on risks that are not publicly documented and therefore cannot be assessed in financial terms. Consequently, this perception of instability could lead to divestments and reduced capitalisation valuations of those involved.
Knock-on effect on the global supply chain
Logistics is a key factor in the supply chain management of goods and services and is, by definition, a highly globalised sector that is extremely dependent on the use of software and platforms, including predictive ones. Therefore, the TikTok ruling may also have consequences for supply chains involving China. US-based companies may find themselves having to sever ties with Chinese suppliers or partners to avoid becoming embroiled in legal issues; this could create problems for established logistics management processes, increasing costs, causing inefficiencies and disincentivising the use of Chinese technologies.
Applicability to emerging sectors
The precedent set by the ruling also extends to all those emerging sectors such as bio- and neurotechnology, green energy, quantum computing and, in general, to all those industries for which data and software are indispensable and fundamental elements. Although focused on TikTok, the law passed by Congress is also applicable to other fields and could have a disincentive effect on access to the US market.
This antagonistic stance is part of the ongoing trade war between the two countries, which a few days ago saw China impose a ban on the export of important minerals to the US and which could fuel retaliatory measures by the PRC, such as increased scrutiny of US technology companies operating in China. Moreover, other signs, such as Huawei’s telco strategies hint at a possible further bifurcation of global technology markets along geopolitical lines.
Escalation of US-China rivalry
The ruling amplifies the US-China rivalry, increasing the relevance of high-tech companies’ connection to PRC interests, regardless of their formal operational independence or compliance efforts. In fact, a very interesting passage of the ruling highlights how the use of corporate engineering techniques allows for the creation of an apparent independence that, in fact, would not be so.
Adoption of similar choices by third countries
This scenario would, on the one hand, strengthen the technological leadership of US actors in the West. The ruling could, in fact, encourage other nations, particularly those allied to the US in their geopolitical rivalry with China, to adopt similar measures. This spillover effect could lead to coordinated restrictions in regions such as Europe, South-East Asia and Australia.
On the other hand, however, such a hypothesis would radicalise the process of building a technological Iron Curtain, the first bricks of which have already been laid and which continues unabated, as demonstrated by the creation of the Sparklink Alliance, promoted by Huawei and set up to support the diffusion of the Nearlink standard, a possible successor to the obsolete Bluetooth capable of extremely higher performance, and thus of being used in all those areas, such as automated traffic control and smart-cities.
Conclusions
The ruling in the TikTok case may have effects that go far beyond the mere interruption of operations in US territory of a company under the control of the Chinese authorities.
This judicial precedent, in fact, has removed from the possible strategies of judicial attack by companies subject to similar measures a very powerful argument: that of the violation of freedom of expression which, in the United States, has an almost divine and certainly sacred value. The impossibility of invoking the violation of free speech leaves in the field only very technical arguments, of little general appeal, more subject to the subtleties of legal interpretation and therefore more easily oriented towards outcomes functional to the needs of the moment.
At the same time, the judges of the Court of Appeal established the legitimacy of the precautionary principle applied to national security: this means that the executive does not necessarily have to prove the existence of a real threat in order to activate the containment measures that can go as far as, as in the TikTok case, the forced sale of the company concerned or, in less drastic cases, a pervasive control of company operations.
The combination of these principles of law allows the US executive to exercise direct leverage against any foreign entity that is identified as a potential danger to national interests, i.e. on the basis of very early preventive assessments and therefore not necessarily based on a high level of alarm, but at the same time justifying the limitation of constitutional rights that would otherwise be difficult to curtail.
It will be interesting to see whether this approach will also find acceptance in other jurisdictions and what the industrial, economic and financial impacts will be in sectors that are crucial to the geopolitical positioning of the states concerned, and in particular the emerging ones.