The U.S. has nailed Chinese companies this year. Why hasn’t Beijing retaliated?

September 17, 2020, 10:22 AM UTC

Huawei sanctions. The Hong Kong Autonomy Act. The Holding Foreign Companies Accountable Act. A demand that TikTok’s U.S. operations be sold and the threat to ban WeChat. These are all regulations the U.S. has imposed on China this year.

Despite that barrage from Washington against Chinese firms, Beijing’s response has “broadly been restrained” against U.S. companies, said Gavekal Research technology analyst Dan Wang, who’s based in Beijing. The reason? There are few U.S. corporations in China that Beijing could target without hurting itself.

“Anything that really hurts these companies also significantly hurts China,” he said, adding that U.S. companies—like Apple, Starbucks and McDonald’s—are big employers in China, and China still depends on American technologies like semiconductors. Since China’s unemployment is still relatively high, Beijing is hesitant to take any action that would cost jobs. There’s less incentive for Beijing to “hit these companies very hard,” Wang said, since the Chinese economy remains “sort of weak and fragile.”

In a Eastworld Spotlight interview with Fortune’s Clay Chandler on Monday, Wang talked more about U.S. sanctions against China, the implications of TikTok’s proposed deal with Oracle, and U.S.-China relations under a possible Biden administration. This interview has been edited for length and clarity.

Fortune: You’ve argued that, all things considered, China’s response to the recent barrage of new sanctions from the United States against Chinese tech companies has been restrained. How so? And why?

Dan Wang: Since the start of the trade war, analysts, my peers, have been wondering, what are good targets for Beijing to hit? And actually, we’ve sort of concluded that there are not a great number of targets that Beijing can hit without hurting China much more broadly. China still needs quite a lot of U.S. technologies, and U.S. firms are very large employers in China. There’s another timing issue in which China has now been very concerned about employment after the COVID outbreak. There have been no growth targets set [in China] this year. Instead, the Premier is targeting more employment. While the economy is sort of weak and fragile, [Beijing] doesn’t really want to hit these companies very hard.

Another factor is that Beijing can see that many of these U.S. companies are doing what Beijing wants them to do, which is to sell as much product as they can to Chinese companies and lobby hard in Washington, D.C., to maintain their access to the Chinese market. 

The last bit I should mention is that in around 50 days, the U.S. [will have] a general election. Right now it seems like Vice President Biden has a fairly commanding lead over President Trump. But so long as there’s a pretty good chance that the administration changes hands, I think Beijing does not need to hit really hard and cut off future room to maneuver. 

TikTok has rejected Microsoft’s acquisition bid, and Oracle emerged as the dark horse partner. How would a partnership, as opposed to a sale, be satisfactory to the Trump administration?

CGTN [China Global Television Network] has also just reported that the sort of deal that ByteDance has struck with Oracle does not even constitute a sale; it’s much more of a hosting arrangement. If it is a partnership, maybe a company like Oracle can guarantee that all the user data is remaining on U.S. soil. And if there are concerns that the video recommendation algorithms are used in nefarious ways, then perhaps [a partnership] might allay national security fears from the Trump administration.

What implications does the TikTok deal have for other Chinese tech companies, particularly Internet companies, who have global aspirations?

The Trump administration seems to be succeeding in limiting the expansion of Chinese companies. We can examine the case of both Huawei and TikTok together. I consider Huawei to be China’s most important hardware company; it’s certainly the hardware leader in actually generating exports. And ByteDance is the undisputed leader in software…[It is] China’s major breakout app.

After the designation to the U.S.’s Entity List in May 2019, Huawei phones overseas do not have access to Google mobile services, which means losing access to a whole host of apps that include Google Maps, the Google Play store, and also a lot of apps that require Google integration to work, like Snapchat and Tinder. Sales [in Western Europe] year over year in the second quarter have halted; it’s fallen by around 50%. In Latin America, sales have fallen by around a third year over year. We can see that Huawei’s handset sales are not succeeding, and it also seems like European governments, and governments all over, are turning against Huawei’s 5G business as well under considerable U.S. pressure.

So on one hand, the hardware company is getting squeezed. And on the other hand it seems like at least TikTok might not necessarily remain in ByteDance’s hands. So both of these companies may lose a lot of their overseas exposure. This will make it more difficult for Chinese companies to stay on the cutting edge of technological trends and have the revenue to really invest more in R&D for the future.

Beijing has been critical of Trump’s action to force a sale of TikTok. The Chinese press has vilified Zhang Yiming for even considering selling out to American owners. Is there a way for ByteDance’s proposed “trust partner” arrangement between TikTok and Oracle to be palatable to both Beijing and the Chinese public?

It is very difficult to reconcile this. The Chinese public would rather not have TikTok sold to any foreign firms, and the U.S. government is demanding a sale. But I think the ByteDance strategy here is to adhere a little bit more closely to the concerns of the Committee on Foreign Investment in the United States and to try to mitigate as many of its issues as it can. And that means probably finding the best deal for itself and then hoping that the outrage domestically cannot bedevil it for a very long time.

If the U.S. elects Joe Biden in November, do you expect these kinds of conflicts to persist? Or are they likely to go away? 

I think they probably will not go away. As far as I can tell, the Democrats and Republicans in Congress are very united on holding China to account; to exact a price on Beijing for doing the various things it does, for example, in Hong Kong. The Congress has proposed an extraordinary number of bills…At least in Congress, there is a united sense that China is now a strategic adversary, as designated by the U.S. Department of Commerce and its national security strategy. 

President Donald Trump designated Huawei to the Entity List after trade talks collapsed in May 2019 and after some nudging from National Security Adviser John Bolton. There was little deliberation on imposing this blacklist of China’s most important technology company, very little consultation with the industry that sells a lot of goods to Huawei. And I think the Biden administration will not be so rash and impulsive in making these designations. But these designations will continue if [a Biden administration] decides China is a bad actor in any sort of way.

Do you see further deterioration in the U.S.-China relationship as we approach the U.S. presidential election in November?

Huawei will no longer receive semiconductors; this is from a rule in May. In a week or so, the Department of Commerce will enforce sanctions and restrictions on WeChat and Tencent. It is possible that Semiconductor Manufacturing International Corp., China’s leading semiconductor maker, ends up also being designated to the Entity List. And as part of the Hong Kong Autonomy Act, Congress is ordering Treasury to determine if any foreign banks are working with sanctioned Chinese or Hong Kong officials, [which would subject banks to secondary sanctions]. So there’s already a lot of regulatory deadlines coming up.

Now, there could still be more. I think what folks are most concerned about is if President Trump loses the election in early November, he still has two more months to push through whatever sort of agenda he wants. And so that might be the most dangerous time. President Trump, with the help of the hawks in the White House, [could] push through a lot more actions on China, because this is sort of their chance.

This story is part of Eastworld Spotlight, a series of conversations on matters of business, tech, and finance with executives, experts, entrepreneurs, and investors in Asia. Subscribe to Fortune’s Eastworld newsletter to get them in your inbox.