Aubrie Pagano is a general partner at Alpaca VC investing in consumer and next-gen commerce.
TikTok poses an existential threat to the U.S. But it’s not the rancid Pink Sauce shipping to unsuspecting consumers, nor is it the proverbial poisoning of the youth’s minds that we should fear from the platform. Rather, it’s this: Quickly, quietly, TikTok is handing China the economic checkmate it needs to sunset the idea of American Dynamism for good.
Until now, the controversy over TikTok, the social app with 150 million active users, or two-thirds of all U.S. teenagers, has largely revolved around information privacy, disinformation by a foreign power and national security. Yet the rollout of TikTok Shops last week underscores a less obvious, yet potentially more deleterious, issue jeopardizing U.S. economic sovereignty: cross-border commerce.
To put it plainly, in Shops, TikTok is sitting on a fourteen-cylinder commerce engine to rival our largest global marketplaces — marketplaces that have, until now, been products of the United States. The Shops arrival comes after a series of unsuccessful attempts to limit the power of the platform, arguably the most influential media publisher today. Among its triumphs: ushering in a pivot to video across other social media platforms and becoming the search platform Gen Z uses more than any other. It is this reach and influence that seems to have the Biden administration on its heels. The U.S. government has warned TikTok of a possible ban if it does not divest from ByteDance, and cited national security concerns over the platform being owned by a Beijing-based company subject to Chinese laws and potential government requests for customer information. To date, both attempts by The White House to ban TikTok have failed.
But the danger to U.S. privacy posed by the platform pales in comparison to the rocket fuel it bestows upon China, the single country producing the majority of the world’s goods since the eighties. With access to cheaper labor, government-backed infrastructure and VAT easements, China has emerged over the last 30 years as a global superpower supplying the world its stuff.
It’s like this: Imagine you have a lemonade stand and you make the best lemonade in the whole neighborhood. But there are other kids who also have lemonade stands, and some of them make pretty good lemonade, too. So, in order to get more people to buy your lemonade, you might offer a discount — like buy one, get one free — or maybe you give them a sticker or a toy with their drink. Well, that’s kind of what China is doing with rebates and subsidies. They want to sell their products to people in other countries, but there are other countries that make similar products, too. So, to make their products more attractive to buyers, China offers 13% rebates on all goods and subsidizes shipping costs for high-volume companies. China has also built very good roads, ports and other transportation systems that make it easy to move things from one place to another. They have lots of factories that can make things quickly and efficiently. This makes the products cheaper for buyers, so they are more likely to choose Chinese products over products from other countries.
One of the largest beneficiaries of this: Amazon, whose existence currently rests on selling Chinese goods cheaply to global customers. As much as 90% of goods on Amazon are Chinese-made, and as of January 2020, sellers based in China represented 47% of new sellers on the platform. You could consider Chinese goods the rocket fuel that catapulted Amazon to its status as the largest global marketplace.
In the last decade, though, the world’s fastest-growing marketplaces have cropped out of this China-laid groundwork. In the fiscal year 2021 (ending March 31, 2021), Alibaba Group’s revenue was RMB 717.3 billion (approximately $109.5 billion), according to the company’s annual report, growing at a 31% CAGR over the last three years. Shein, the largest global fast fashion company, exploded over the last three years, outpacing Zara, Forever21 and H&M, raking in $15.7 billion in revenues in 2021 and growing at a CAGR of 49% over the last three years. And lastly, PinDuoDuo just launched its cross-border marketplace, Temu, and did $14.7 billion top line, growing at a CAGR of 131% over the last five years, from $300 million to $18 billion.
So what’s changed? American tech companies’ ability to capture attention. Until now, platforms like Google, Facebook, Instagram and Amazon maintained status as the world’s most trafficked websites. And as the most trafficked websites, filled with social media and products, these companies have controlled discovery and captured a cut of the transaction of slinging largely Chinese goods.
But the rise of TikTok and other Chinese marketplaces is changing this, and rapidly. The American economy may get cut out of the action as these marketplaces attract the attention of Gen Z and Gen Alpha, poised to soon have as much buying power as any other generation. If a Chinese marketplace or social network like TikTok parent ByteDance controls the virtual trade routes across which largely Chinese manufactured products are merchandised — namely, commands the most attention and traffic for product discovery and search — America’s advantage will erode. Controlling a social platform is one thing, and controlling the production of goods is another. But controlling both? That’s the economic checkmate.
This scenario is already underway. TikTok turned on commerce in 2022 and relaunched Shops just this month. While it has been slow out of the gate to attract brands to its Shops product, many brands are finding early success at a pace that is unparalleled. I spoke to a friend’s mom and TikTok Shops beta user, Shannon Russo, who said that, in just six weeks, TikTok has come to comprise 30% of her 8-figure revenues. She now is pouring all resources into Shops. “They are trying to go after the Amazon shopper. They are going after people who want a fast, quick, inexpensive way to shop,” she said. Given the influx of demand and the speed with which she is selling — she sold over 1,500 sweatshirts in an hour — TikTok has offered its TFS fulfillment center up to her brand. That allows her vendors — mostly Chinese — to ship directly to TikTok’s U.S. warehouse, and they fulfill on her behalf. Sound like Amazon’s FBA? Well, it should.
When I’m up late at night worrying, it’s true that I worry about lots of things: America’s housing crisis, our excess inventory problems, the reasons people gate-keep restaurants. Wading through these thoughts, it’s easy to continue to worry. But I prefer to shift to thinking about what’s next. And that brings me back to the idea of American Dynamism, a phrase thrown around venture capital currently like a Balenciaga bag on a private jet. In its simplest terms, it is the idea of investing in America’s economic infrastructure using technology, including nearshoring, commerce, manufacturing and transportation. These infrastructures will fail without proper government support; and so will our largest tech companies.