After World War I broke out in Europe in 1914, President Woodrow Wilson issued a declaration of U.S. neutrality. Soon thereafter, two U.S. radio stations owned by German companies were accused of violating that proclamation by communicating with German navy vessels to coordinate military activities in the Atlantic. The U.S. Navy dispatched censors to the radio stations to review their communications to try to prevent them from assisting Germany.
After the sinking of passenger liners in the North Atlantic and rising fears that radio would be used for both military communications and spreading propaganda to the U.S. population, the Navy decided to take direct control over the radio stations. And they didn’t stop there; when the United States entered the war in 1917, the Navy began operating all of the country’s radio stations to ensure that radio broadcasts could not be used to aid the enemy or undermine domestic support for the war effort.
After the Great War ended, political leaders had to decide whether to return the stations to private ownership. They had two major worries: that the recent national security issues might replay themselves, and that privatization would likely transfer control over American radio stations to another foreign entity — the British-owned Marconi company. Instead of risking foreign control over radio, the Navy got General Electric to buy out the American subsidiary of the British company, establishing the Radio Corporation of America (RCA). RCA’s officers and directors had to be American citizens, foreign stock ownership was limited to 20 percent, and one member of the Navy sat on the board.
The legal history of restrictions on foreign ownership of radio stations might seem obscure more than a century later, but in fact, it has direct relevance to our current debate over social media, and the push to ban Chinese-owned TikTok in particular.
The truth is that debates over foreign ownership of the means of communication is part of an important history and tradition in American law. In the Radio Act of 1927, Congress created the Federal Radio Commission and authorized it to license and regulate radio companies, including with restrictions on foreign ownership. With the 1934 Communications Act, Congress once again acted. Instead of delegating expansive powers to the president to seize radio stations in times of war or emergency, it instead restricted foreign ownership by law. The new Federal Communications Commission was banned from giving radio licenses to foreigners, foreign governments and foreign corporations, and the law also closed loopholes regarding indirect ownership.
In fact, since the very first Congress, the United States government has frequently placed restrictions on foreign ownership, control and influence on companies providing network, platform and utility services in the communications, banking, transportation and energy sectors.
In each of these areas, restrictions were part of comprehensive legislation that recognized that companies providing network, platform and utility services were not like ordinary businesses. They tended to be more like basic infrastructure. Banking, communications, transportation and energy are critical to commerce and communication, and therefore to national security and economic resilience. Policymakers recognized that these businesses had to be regulated more like public utilities — corporations that receive benefits from the public but also have duties to the public. In these sectors, stability and reliability are critical. And in each sector, it was Congress that set the rules. Congress did not delegate power to the president to pick and choose which companies were problematic.
Importantly, these laws also didn’t single out one firm, or try to tailor the rules on a firm-by-firm basis. Instead, they placed restrictions on every enterprise within the sector.
This idea is what I have called the “platform-utilities” approach to regulation, and it dates from the very founding of the country. Restrictions on foreign control in the banking sector, for example, go back to Alexander Hamilton, when the newly independent United States needed capital from European countries. In proposing to create a national bank, Hamilton recommended that only U.S. citizens be eligible to be directors of the bank, so as to “guard against a foreign influence insinuating itself in the Direction of the Bank.” Congress obliged and included such a provision in the charter for the First Bank of the United States and expanded the provision in the charter for the Second Bank of the United States to permit only U.S. shareholders to vote for directors of the Bank.
During the 19th century, both populist Democrats and liberal Republicans raised similar concerns in the banking sector. During the “Bank War” of the 1830s, Andrew Jackson vetoed the continuation of a national bank in part due to worries of foreign influence. He observed in his veto message that Bank directors would be responsive to the interests of major shareholders — even if they could not vote for directors. In a time of war, he thought this would be problematic. The bank’s operations “would be in aid of the hostile fleets and armies without; controlling our currency, receiving our public monies, and holding thousands of our citizens in dependance, it would be more formidable and dangerous than the naval and military power of the enemy.” During the Civil War, no less than Republican Rep. Thaddeus Stevens, one of the great defenders of liberty and freedom of that era, supported a provision in the National Bank Act requiring U.S. citizenship for directors of national banks. He asked, in the debates over the bill, “why should [a noncitizen] come here with his large capital and govern the whole monetary interests of the country?”
But the platform-utilities approach didn’t apply just to radio broadcasts and banking. In transportation and energy too, policymakers engaged these questions. The very first Congress placed extremely high taxes on foreign ships operating in U.S. coastal trade, a policy that was turned into an outright ban in 1817 and continues today as the Jones Act. Requirements of U.S. ownership still exist for airlines operating within the United States. In the energy sector, the Federal Power Act limits the operation of dams to U.S. citizens, corporations and governments. The Geothermal Steam Act does the same for lessees of geothermal resources. And the Atomic Energy Act prevents foreign individuals, corporations or governments from owning or controlling nuclear facilities.
And taking a platform-utilities approach to TikTok might just provide the right solution to a perplexing problem.
In recent decades, amid a giddiness for both deregulation and globalization, the platform-utilities tradition of regulated capitalism has largely been forgotten. Instead, a different approach to restricting foreign ownership has prevailed, one that relies on case-by-case or technocratic monitoring and regulation through the Committee on Foreign Investment in the United States, a set of federal officials who have the power to review foreign investments, mergers and acquisitions and either ban them or place conditions on them. It’s this approach that has dominated in the debate over TikTok.
The philosophy of the technocratic approach is that the federal government should evaluate foreign investment or ownership on an individual basis, determine whether it presents a national security danger and then create a policy solution — usually some mix of restrictions, conditions, and audits or monitoring — to address the specific dangers at issue. This approach has the benefit of minimizing the number of companies it applies to and tailoring restrictions to their particular risks. With respect to TikTok, this approach might suggest restricting only TikTok, requiring the company adopt a compliance plan to limit national security harms and subject itself to regular audits and government supervision. Indeed, TikTok itself has proposed a solution similar to this approach.
The case-by-case approach, however, suffers from serious drawbacks that have gotten surprisingly little attention. The core problem is that bespoke regulations require heroic efforts by government regulators. Due to both will and resources, regulators have regularly proven unable to rise to the challenge.
In 2020, for example, the Senate Homeland Security and Government Affairs Committee’s permanent subcommittee on investigations released a report concluding that the Department of Justice and the Department of Homeland Security had “exercised minimal oversight to safeguard U.S. telecommunications networks against risks posed by Chinese state-owned carriers.” Those government agencies entered into agreements with two Chinese telecom carriers before 2010, but they conducted only four site visits (two each) over the next decade — and all but one visit took place in 2017-2018. The subcommittee’s report concluded that this failure to monitor “undermined he safety of American communications and endangered our national security.”
This example is, sadly, not an outlier. Consider economic sanctions and money-laundering regulations, which are essential for addressing organized crime, terrorist financing, drug trafficking and corruption. In 2012, the same Senate subcommittee issued a report on HSBC’s involvement in money laundering. The bank admitted that sanctioned countries and drug traffickers had laundered millions of dollars. The Senate report said weak oversight and enforcement by the Office of the Comptroller of the Currency, the bank’s chief regulator, were partly responsible for the bank’s failures. The OCC had determined that HSBC’s failures were not legal violations, but “matter[s] requiring attention.” According to the report, the OCC showed “reluctance” to “make timely use of formal and informal enforcement actions,” and examiners often “muted ... criticisms or weakened recommendations for [anti-money laundering] reforms.” Indeed, in the six years from 2004 to 2010, the OCC “did not take any formal or informal enforcement action” to force the bank to improve its anti-money laundering program.
The core problem is that bespoke systems depend on regulators conducting regular audits, which in turn depends on adequate funding, experienced personnel and a commitment to oversight and independence. Weak monitoring means a higher likelihood of regulatory failure. Success also depends on regulators actually bringing enforcement actions when there are compliance problems. But history shows that regulators are often timid and unwilling to do so — perhaps because they came from the industry themselves and seek to go back, or simply from fear of rocking the boat.
The history of restrictions on foreign ownership, control and influence has important lessons for the TikTok debate. Like radio, banking, transportation and energy, tech platforms are akin to public utilities. They feature network effects and economies of scale that create tendencies to monopoly or oligopoly. They are a critical infrastructure for modern commerce and communication, and for national security and economic resilience. And for all the claims of fast-moving innovation, the tech goliaths are remarkably stable. Many have been dominant in their domains for years, and some like Microsoft and Apple have been for decades. If we start thinking of TikTok and other big tech platforms more like public utilities, the lessons from the history of restrictions on foreign platforms snap into focus.
Most clearly, it suggests that the case-by-case regulatory approach is deeply problematic. Given the track record of federal agencies with analogous supervision and monitoring obligations, it is not clear why we should expect case-by-case compliance plans to work. Unless advocates for such an approach can show how they will design things differently, lawmakers should expect that the bespoke compliance system will not be effective. If falling short is a serious risk, this approach is probably not the right one.
A total ban, but only on TikTok, raises problems as well. It would address the immediate compliance problem, but not the broader issue: what about the next TikTok, or the one after that? Had all the big tech platforms emerged overseas instead of in Silicon Valley, perhaps policymakers would have thought more systematically about foreign ownership from the start. But it is unlikely that TikTok will be the only foreign-owned app that will raise national security concerns. Indeed, TikTok parent company Bytedance is already promoting a new social media app called Lemon8, that is a cross between Instagram and Pinterest. According to TechCrunch, the app is based on a similar Chinese app called Xiaohongshu and is already in the top 10 on mobile app stores.
The platform-utilities approach, by contrast, suggests Congress take a different path. In banking, radio, airlines, maritime shipping and power, federal regulators had to give approval, via a license or charter, to a company before it could operate one of these utility-services in the United States. That approval was conditional on meeting congressionally set regulatory standards that apply across the whole sector. Clear rules on restricting foreign influence reduce the need to come up with complicated compliance plans or monitoring programs. They create a level playing field for businesses, so firms do not have to worry about being singled out for regulation.
For generations, this approach traveled alongside antitrust law. Antitrust generally focuses on competitive markets; the platform-utilities approach recognizes that some markets might not be very competitive, and preventing the abuse of corporate power, therefore, requires regulation. Indeed, both approaches emerged at the federal level at almost the same time. The Sherman Antitrust Act was passed in 1890, only a few years after the Interstate Commerce Act of 1887, which took a platform-utilities approach to regulating the railroads.
In the late 20th century, both fields went through revolutions. Antitrust became dominated by an approach that focused on consumer welfare and efficiency. Deregulatory advocates passed laws abandoning the platform-utilities approach in rail, airlines, maritime shipping, telecommunications and banking. Today, antitrust is in the midst of a renaissance, with policymakers on left and right supporting more aggressive enforcement of competition laws. The platform-utilities approach deserves the same reinvigoration, because it offers useful strategies for addressing current policy challenges.
If lawmakers want to take a lesson from the long American tradition of regulated capitalism, they should advance comprehensive legislation to regulate tech platforms more like public utilities. Such legislation should include restrictions on foreign ownership and control, which could apply to all tech platforms from adversarial countries. Comprehensive legislation should also include sectoral standards that apply to U.S. firms as well — standards not just on data collection, surveillance and privacy, but also against anti-competitive behavior.
Just like radio a century ago, tech platforms are a modern utility, essential for commerce and communication. We should start treating them that way.
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By: Ganesh Sitaraman
Title: A Simple Way to Regulate TikTok
Sourced From: www.politico.com/news/magazine/2023/06/18/a-simple-way-to-regulate-tiktok-00101323
Published Date: Sun, 18 Jun 2023 06:00:00 EST
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