1、 Background of TikTok US Blockade Act

On April 24, 2024, US President Biden signed a package of bills related to aid to Ukraine and Israel, including the Division H Protecting Americans from Foreign Adversarial Controlled Applications Act (H.R.7521), which defines TikTok as "applications controlled by foreign hostile forces.".

At the end of the Trump administration, the United States tried to ban TikTok on the grounds of national security, requiring its parent company to sell its American business within 45 days of ByteDance. TikTok filed a lawsuit claiming that the ban is unconstitutional. A judge subsequently suspended the injunction, stating that there was insufficient government evidence. ByteDance has reached an agreement with Oracle and Wal Mart to let these two US companies participate in TikTok's global business and manage their US user data. But before the completion of the transaction, Trump's term ended, and after the Biden administration came to power, relevant lawsuits and injunctions were temporarily suspended. This provides TikTok with a reference and precedent for legal litigation.

2、 Introduction and Operational Model of the Application Act to Protect Americans from Foreign Hostile Control

1. Effective time

The bill is scheduled to officially come into effect on June 23, 2024, sixty days after the date of signature and approval by the President (April 24, 2024). After the bill takes effect, a 180 day period is reserved, and law enforcement can be initiated after the expiration date (i.e. December 22, 2024), which coincides highly with the 2024 US presidential election cycle; Voters will vote on November 5th of the same year, while the Electoral College will vote on December 17th. The election results for the new president are expected to be announced on January 6th, 2025.

2. Targeting objects

The bill is clearly targeted, aiming at ByteDance and its popular application TikTok, as well as any other application judged by the President of the United States or the Attorney General to be controlled by hostile countries such as China (including North Korea, China, Russia and Iran). This means that once the bill takes effect, these flagged platforms will face strict regulation and potential restrictive measures in the United States, as an important measure to protect US national security and user data privacy.

3. Prohibit suppliers from providing services to TikTok

180 days after the effective date of the bill, starting from December 22, 2024 at the earliest, any entity is prohibited from distributing, maintaining, or updating (or making distribution, maintenance, or updating possible) foreign hostile control applications within the United States. Illegal suppliers may face civil penalties of up to USD 850 billion (USD 5000 * assuming TikTok has 170 million US users), and the bill does not provide for criminal or other administrative liability. This also includes providing services through markets (such as online mobile app stores), as well as providing Internet hosting services. (For example, the prohibited objects may involve Apple, Google, Amazon Cloud, Microsoft Cloud, Oracle, Wal Mart, and other TikTok suppliers)

4. User data returned to the user

180 days after the effective date of the bill, starting from December 22, 2024 at the earliest, the entity that owns or controls the application shall request all available data related to the user's account in the United States or coastal areas, including content (posts, photos, videos) and other account information, and the data shall be provided in machine readable format. The maximum civil penalty for illegal activities is USD500 * number of users (assuming TikTok has 170 million US users)=USD85 billion, which TikTok will bear directly; The bill does not specify criminal or other administrative responsibilities.

5. Exemption

180 days after the effective date of the bill, i.e. before or after December 22, 2024 at the earliest, if TikTok performs a qualified divestment, the supplier can provide services to TikTok; But TikTok still needs to return user data to the user.

Qualified Divestment is defined in the bill as a divestment or similar transaction, through which the President determines through cross departmental procedures, with the following standards:

(1) TikTok is no longer under hostile foreign control (less than 20%);

(2) And this divestment process prevents TikTok from establishing or maintaining any operational relationship between the United States and any foreign hostile controlled entity, including cooperation on content recommendation algorithms or agreements related to data sharing.

6. Enforcement

180 days after the effective date of the bill, starting from December 22, 2024 at the earliest, the Attorney General of the United States has the authority to investigate the aforementioned two violations; If it is confirmed that TikTok or TikTok suppliers are illegal, they have the right to sue the United States District Court and demand that TikTok or TikTok suppliers bear civil liability. The investigation and prosecution time is uncertain, and theoretically, the punishment will not take effect until the court judgment takes effect.

7. Judicial review

TikTok can file a lawsuit with the U.S. Court of Appeals for the District of Columbia Circuit within 165 days of the effective date of the bill (before December 7, 2024), challenging the effectiveness of the Protection of Americans from Foreign Hostile Control Applications Act (such as violating the constitutional right to freedom of speech);

If an injunction can be successfully applied for, it can temporarily suspend the effectiveness of the bill.

After the bill takes effect, TikTok or suppliers can file a lawsuit to challenge any action, investigation result or decision within 90 days. If an injunction can be applied for, the action or decision can be temporarily suspended.

8. The time when the actual enforcement of the bill has a negative impact on TikTok

According to the bill, judicial review, investigation by the Attorney General, prosecution, injunctions, and other related processes may create uncertainty regarding the actual implementation time of the bill; In addition, there is uncertainty about how the President of the United States will determine that a qualified divestment has been achieved, so the timing at which the bill will actually have negative effects on TikTok cannot be accurately estimated.

3、 Inference of Several Possible Scenarios and Analysis of Their Impact on All Parties

Based on the operational mode of this bill, theoretically TikTok may have several response methods (or combinations of these methods), and the specific impact on TikTok and all parties (including TikTok, suppliers, sellers, influencers, and users) may vary; There is a centralized logical deduction as follows:; The specific deduction may also be influenced by other US laws or precedents, and the superimposed effects may change.

1. Response method one: TikTok executes qualified divestment (selling partial equity) and obtains exemption

(1) Impact on TikTok: May lead to violation of China's regulations prohibiting algorithm exports; After qualified divestment, TikTok's operational strategy will be adjusted.

(2) Impact on suppliers: In the end, there will be no impact, but more business opportunities may be obtained due to the execution of qualified divestitures;

(3) Impact on the seller: No impact in the end; It is possible that some sellers may switch platforms during this period due to uncertainty; There may be adjustments at the operational level, with stricter policies for sellers;

(4) Impact on influencers: ultimately no impact; It is possible that some experts may switch platforms due to uncertainty during this period

(5) Impact on users: Operational strategies may be adjusted, and certain content may be regulated

2. Response method 2: TikTok legal lawsuit, challenging the effectiveness of the bill; Continue lobbying at the same time to gain sympathy from the public and delay the situation until it changes

(1) Impact on TikTok: TikTok's energy may be affected; Due to uncertainty, some users, sellers, influencers, and suppliers may be lost, but staying at TikTok would theoretically be more aligned with the platform.

(2) Impact on suppliers: Currently no impact; Some suppliers will also assist TK in lobbying, or participate in challenging the effectiveness of the bill or making decisions specifically involving the supplier;

(3) Impact on sellers: Currently no impact; It is possible that some sellers may switch platforms during this period due to uncertainty; During this period, there may be a greater demand for emotional value products in the local market;

(4) Impact on influencers: temporarily no impact; It is possible that some experts may switch platforms due to uncertainty during this period

(5) Impact on users: Users may differentiate, some leave, while others stay and identify more with the platform.

3. Response method three: If choosing not to sell, adjust business, data compliance, and operational policies in the United States, readjust the benefit distribution mechanism, and no longer be recognized as "applications under foreign hostile control", or be recognized as meeting the requirements of "qualified divestment"

(1) Impact on TikTok: Not selling equity, but the business model may be adjusted and may be required to comply with the demands of the US government and influential groups; There may be adjustments to the content and product recommendations that are in line with the actual situation of the US side.

(2) Impact on suppliers: may be the beneficiaries after adjusting the distribution of benefits; May be more involved in TikTok operations and gain more influence.

(3) Impact on sellers: No short-term impact; Sellers may be affected by TikTok's operational adjustments; TikTok's costs may be transferred after adjusting the distribution of benefits

(4) Impact on influencers: No short-term impact; Experts may be affected by TikTok's operational adjustments; After adjusting the distribution of benefits, TikTok's costs may be passed on.

(5) Impact on users: Users may differentiate, some leave, while others stay and identify more with the platform.

4. Response 4: TikTok chooses to continue operating in the United States, fulfill data compliance obligations, negotiate penalty amounts, compensate suppliers for penalties, and absorb some costs on its own

(1) Impact on TikTok: The cost transferred from the punishment of suppliers will increase TikTok's operating costs; TikTok may adjust its business terms and transfer costs to other relevant parties;

(2) Impact on suppliers: If TikTok continues to serve after law enforcement takes effect, suppliers may be punished, increasing their own operating costs; Some suppliers may no longer serve TikTok; The increased penalty costs may be passed on to TikTok, and TikTok needs to evaluate whether to accept the cost transfer or provide penalty compensation;

(3) Impact on sellers: After TikTok's costs increase, sellers may be transferred costs by TikTok. If TikTok can no longer transfer costs to external parties, the seller's profits will decline; Some sellers may switch to other platforms.

(4) Impact on influencers: After the cost of TikTok increases, influencers may be transferred costs by TikTok; Some influencers may switch to other platforms.

(5) Impact on users: After the cost of TikTok increases, sellers and influencers are shifted towards costs, which may ultimately be passed on to users; Some users may switch to other platforms.

5. Response 5: TikTok chooses to withdraw from the US market, but provides remote services to US users and adapts to a supply chain system operated remotely

(1) Impact on TikTok: Increase operating costs; Need to maintain cross-border operational customer experience; Competitiveness may decrease and result in user loss, but the remaining users may identify more with the platform.

(2) Impact on suppliers: The revenue of suppliers in the US market has decreased; But in other TikTok remote service markets, revenue has increased; The difficulty of achieving the same service standards as local operations has increased;

(3) Impact on sellers: It may be necessary to adjust the operational architecture and supply chain, and increase the physical presence of the remote service market; Possible cost transfer by TikTok; Traffic may be affected;

(4) Impact on influencers: Some may settle on overseas platforms but require cross-border operations, which may result in cost transfer; Some influencers may switch to other platforms;

(5) Impact on users: The user experience may decrease (inability to automatically update in the app store, slow cross-border access network speed, or the need to access websites outside the United States through VPN); Possible cost transfer; Some users may switch to other platforms, but the remaining users will identify more with the platform.

4、 Compliance and risk management recommendations for sellers

1. Stay calm, observe changes in the situation, do a good job in your business, find products that match the emotional value of various groups in the United States, and meet market demand;

2. Maintain operational flexibility, and from the perspective of business and traffic, observe Meta e-commerce, Youtube e-commerce, Wal Mart, Amazon and other new traffic platforms that have absorbed TikTok's lost users, and choose the right time to settle in; Consider independent websites or other platforms to diversify risks.

3. Strengthen awareness and practice of platform policy compliance to avoid account suspension or deduction due to violations of platform policies;

4. Strengthen intellectual property compliance to avoid infringement of third-party rights by goods or content; Actively respond to intellectual property litigation and TRO;

5. Strengthen awareness of preventive protection of intellectual property rights and register trademarks, patents, etc. in the United States;

6. Improve the governance of TikTok corporate stores in the United States, reasonably arrange the relationship between American companies and Chinese operating companies, reduce control rights and weaken risks, and manage ethical risks for American partners;

7. Pay attention to the tax compliance obligations of TikTok's personal and corporate stores, declare and pay income tax in accordance with the law;

8. It is recommended that sellers reserve the cost of risk mitigation in pricing and choose higher quality products to export to the US market accordingly;

9. Purchase export credit insurance or intellectual property TRO insurance from China Export&Credit Insurance Corporation to cope with overseas payment or litigation risks;

10. Reserve a budget to hire professional lawyers or legal advisors to assist in controlling overseas legal compliance and risk management matters.