In late September, Reuters reported that China was preparing an antitrust case against Alphabet Inc., the parent company of Google, over its Android operating system, which has gained a dominant position in China’s mobile phone market. The government’s investigation, the report said, came at the suggestion of Huawei, the country’s giant telecom firm.  

That should tell you everything you need to know. Huawei is suffering under a sustained U.S. effort aimed at restricting the firm’s use of American technology and blocking the sale of its equipment to U.S. allies. One of the U.S.’s many acts against Huawei is to deprive the telecom giant use of the Android operating system, which has thereby made Huawei mobile phones less attractive to buyers outside China. The U.S. ban on exporting goods to Huawei has also forced the company to develop its own, likely less popular, operating system. 

To casual observers this is yet another tit-for-tat act occurring between China and the U.S. over trade and technology. 

Yet, the Chinese antitrust investigation also shows the nuances of this competition and its future path. As the two countries escalate their measures, they are pushing the boundaries of their own laws. It’s a game of chicken to be sure, and one that could end up bloodying companies in both nations. 

But perhaps more relevantly, each side is trying to act under the cloak of law to target specific companies and industries in order to gain a sense of legitimacy in their actions. This will ease the chances of a direct confrontation since each country is looking for at least some legitimacy, and thus will need a legal basis to act. In other words, there are limits to the current game of chicken being played. 

Thus far, the U.S. has sought to act against TikTok and WeChat in this manner utilizing the Exon-Florio Act, which limits foreign acquisitions on national security grounds, and the International Emergency Economic Powers Act, among other authorities. The U.S. government has also acted against the Chinese semiconductor industry, acting under export laws and regulations to deprive these companies of the equipment needed to manufacture the highest quality semiconductors. And more recently, there are reports that the U.S. could place Ant Financial on the U.S. Entity List, a move that might somehow disrupt its upcoming IPO, which is expected to be the largest in history. 

All of this occurred in the background of a trade war that the pandemic has exacerbated. And so the question is what will happen next?

For China to go after Apple would be the equivalent of full-out war, since such an act would likely inflict great harm on China itself by demonstrating that no American company is safe.

This, to some extent, depends on the legal tools available for each power as they look to be seen by the global marketplace and other countries as acting reasonably. 

In some ways China’s legal arsenal is not as effective as the United States. China surely can (and does) privilege access to its markets in order to help its own national champions. China can thus act to penalize U.S. companies, such as Tesla, that are desperate for access to the Chinese market. This can affect some companies in significant ways, like Tesla and other American automakers. China could also appeal to international rules, and has already lodged a complaint with the World Trade Organization over the U.S. attempt to ban TikTok. 

But this tactic only works effectively to the extent that those companies can — or want to — access the Chinese market, something that is of no matter for Google and Facebook, both of which are largely barred from those countries. Apple is a different story. For China to go after Apple would be the equivalent of full-out war, since such an act would likely inflict great harm on China itself by demonstrating that no American company is safe. And so the Apple example shows that China is walking a careful balance here: trying to preserve its leading position in global trade while seeking to retaliate against U.S. actions. And it’s not just the U.S. acting here. Britain recently announced that it would be enhancing its national security review process for takeovers. 

China is thus searching for other ways to leverage its legal reach overseas, to gain power and influence over companies that are not dependent on China’s market. Beijing would like to respond to actions by the U.S. and other nations. If Beijing really is undertaking an antitrust investigation into Google, that’s what it’s about (at least to some extent). 

China’s antitrust laws have broad jurisdiction and pick up most significant multinational acquisitions. In addition, to the extent a global corporation’s actions have an effect in China, Beijing can also try and assert jurisdiction, even if imposing a penalty would be difficult. And China has utilized these laws strategically by, for instance, blocking the American chip firm Qualcomm’s acquisition of NXP in 2018, presumably in retaliation for the U.S.’s brief embargo on ZTE (China’s other telecom giant) buying American equipment. China has also long been rumored to utilize its antitrust review process over significant global transactions to obtain confidential technology for its own state champions.

And so China’s likely next move, if tensions between the two superpowers increases, is to use its antitrust powers to begin regularly blocking U.S. transactions. China won’t act to block all of them, but will do so selectively, so it can claim globally that it is merely enforcing its own laws. This could, and would, be a significant retaliatory action. 

In other ways, though, China has much more latitude to act under the cover of law than the United States. The reason is simple: in the U.S., there is an independent check on government action through the court process (and through due process and other constitutional rights), which simply doesn’t exist in China. China can thus bend and flex its laws in ways unimaginable in the United States. We can see this differential in U.S. efforts to ban TikTok and WeChat. Both companies have thus far been able to halt the ban orders by making appeals in U.S. federal court, at least buying months, if not years, to prepare, as these issues work through the court system. 

U.S. companies have the option of ignoring the Chinese law, if they do not have significant assets or business in China. (DeBeers, for example, avoided contacts with the U.S. for years in order to avoid antitrust prosecution for its diamond cartel.) But in many cases China is too big to ignore. Even Google has sales in China through their licenses of the Android operating system to mobile phone makers like Xiaomi, Vivo and Oppo. 

These tactical moves, under cover of law, will likely further hasten the great separation. Companies will not only continue to set up alternative supply chains to those in China, but they will also take greater steps to separate assets to insulate them from each side’s “legal” acts and authority. The fast-food chain Yum China, for example, is now simply spun off from the U.S.-based Yum; it is now headquartered in Hong Kong, with a Chinese CEO. For all effects, it is a Chinese company, except for a U.S. listing and a similar U.S.-centric shareholder base. This is likely enough to shelter the company from any retaliation by China. Expect to see more companies trying the Yum approach, although this type of separation will be harder to do with automotive and other industrial companies. 

Ultimately, though, the nuanced legal actions thus far show that on both sides of the dispute there is a hesitancy to go nuclear in terms of simply ignoring or side-stepping each country’s legal authority. This includes the tariffs themselves, which will remain a side issue until the election is over. Instead, both China and the U.S. will continue to take action that is not only limited by their own laws but by fears that to go beyond them would be to look as if one side has gone rogue. 

It would also mean a full-out trade and capital war — something both sides want to avoid. It means that the current dispute is more likely to continue to simmer than boil. 

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