Deep Dive: 2024

A casual understanding of foreign policy would suggest that retail is facing a point of concurrency, where three influences intersect at once.

The intersection of commerce and national security has emerged as a complex and multifaceted challenge for retailers and marketplaces navigating the pressures of pricing, shipping, supply chain, and forecasting demand. This essay explores three key dimensions of this confluence: cybersecurity (as told through Shein), shipping vulnerabilities (as told through the Suez Canal conundrum), and concerns in the Indo-Pacific (as told through the Taiwan conflict). Each of these areas underscores the need for a comprehensive and strategic approach to safeguarding national and corporate interests while maintaining a thriving global economy.

A telling example of this phenomenon arises from the world of e-commerce and data collection. While this issue was explored in-depth in a previous report titled “Where NATSEC Meets Commerce”, it bears revisiting due to its profound implications.

The rise of Chinese tech companies, such as TikTok, Shein, and Temu, has significantly influenced the global commerce landscape. These companies have leveraged their direct-to-consumer models to rival and even surpass American competitors. What’s noteworthy is the symbiotic relationship between Chinese commerce giants and tax incentives. Packages worth less than $800 have long been allowed to enter the United States duty-free, incentivizing Chinese firms to sell their products in the American market while bypassing warehousing them stateside (until very recently). Furthermore, the Chinese Communist Party (CCP) has waived export taxes on these products, facilitating market share expansion in the United States.

China’s expertise in data collection predates that of the United States, with a relentless focus on first-party data. The Chinese tech ecosystem has harnessed first-party data to refine search algorithms, assess creditworthiness, and enhance its digital finance industry. This extensive data collection raises concerns about privacy and data security, given the potential for misuse and abuse.

It becomes increasingly evident that national security and commerce experts should converge. Understanding the depth of knowledge possessed by both sides is paramount, as the ancient wisdom of Sun Tzu’s “Art of War” suggests: “If you know the enemy and know yourself, you need not fear the result of a hundred battles.” While government officials may raise alarms about tangible tools required for battle, such as warships, the modern battleground also encompasses data and the vast knowledge it represents.

It becomes increasingly evident that national security and commerce experts should converge.

The implications of this confluence of commerce and national security are far-reaching, affecting not only the global economy but also the sovereignty of nations and the privacy of individuals. As we delve deeper into the complexities of this interplay, the need for a nuanced and strategic approach becomes evident.

Shein vs. The American Stock Market

Shein has risen to prominence, particularly among a younger demographic that craves affordable, trendy clothing delivered promptly to their doorsteps. Shein’s unboxing videos, showcasing $5 shirts and $10 bikinis, have become a hallmark of its marketing strategy.

The company made waves in the retail industry by adopting a unique approach. Unlike traditional retailers that produce large quantities of a single item for a season, Shein opted for small-batch production, often making only 200 pieces of a particular item initially. This strategy minimized excess inventory, reduced costs, and maximized the likelihood of selling each piece—a feat made possible by Shein’s adept use of data-mining and AI to gauge consumer demand and preferences.

Founded in China in 2008, Shein’s appeal extended to a broader audience during the pandemic, as even parents began exploring the brand’s affordable options. By every available measure, Shein has climbed the ranks to become one of the most popular brands among teenagers, rivaling the likes of even Nike. For now, Shein remains a privately held company, making it challenging to pinpoint its exact market share. But that is about to change.

Shein has taken steps toward becoming a publicly traded company, with reports indicating that it has filed for an IPO. The company has started addressing concerns such as sustainability, issues related to the treatment of independent designers, and transparency about its influencer partnerships — efforts seen as necessary when entering the public market in the United States. However, the most important issue remains: data security concerns.

Despite being a private entity, estimates of Shein’s value have ranged from $100 billion to $66 billion, outpacing the annual revenue of established retailers like Macy’s. However, the company faces significant controversies that could impact its IPO journey. One critical concern centers on allegations of forced labor in its supply chain. Reports have suggested that Shein may have sourced cotton from Xinjiang, a region in China associated with forced labor, raising questions about its compliance with US law.

Another issue relates to customs duties, where Shein benefits from the de minimis trade rule, exempting imports under $800 from fees. Critics argue that this provision was intended for personal items, not as a loophole for corporations relying on low-cost, high-volume shipping.

Additionally, Shein’s rapid and inexpensive production model aligns with the fast fashion industry’s negative environmental impact. While the company has made some efforts to introduce sustainable materials, critics view these steps as insufficient to counteract the disposable nature of ultrafast fashion. Concerns persist about the extent of data access the Chinese government may have to Shein’s customer information, given the company’s origin and current headquarters in Singapore. I wrote this in October 2023 with little understanding of its significance in 2024:

The combination of China’s global espionage campaign, Russia’s invasion of Ukraine, and the Middle East crisis has raised doubts about the intelligence community’s ability to effectively address these challenges and confront what seems to be an insignificant eCommerce problem. Driven by China’s autocratic government and advanced technology, that “insignificant problem” undermines the rule of law and poses a major threat not only to the United States but also to its allies. The situation calls for increased vigilance and coordinated efforts to counter this multifaceted threat.

Shein faces growing scrutiny not only for its business practices but also for its potential implications on national security. The intricate web of challenges and opportunities surrounding Shein’s ascent underscores the complex landscape of modern retail and its broader societal and geopolitical implications.

The Symbolism of The Suez Gulf

As we delve further into the complex web of global events poised to shape 2024, one cannot overlook the growing tension surrounding the Suez Canal. The strategic significance of this historic waterway, connecting the Indian Ocean to the Mediterranean Sea via the Red Sea, cannot be overstated. Approximately 12 percent of global trade and a staggering 30 percent of the world’s container shipping traverse this maritime corridor, serving as the quickest route between Asia and Europe.

In recent weeks, the Suez Canal has faced severe disruptions due to attacks on shipping traffic, precipitating ripple effects throughout the global supply chain. This ominous development arised from the actions of Iranian-backed Houthi rebels, primarily based in northern Yemen. These rebels, citing support for the Palestinian cause amid the Israel-Hamas conflict, initiated a campaign targeting commercial vessels in the Bab al-Mandab Strait. This waterway connects the southern end of the Red Sea to the Indian Ocean, making it a vital access point for maritime trade.

The Houthi rebels’ audacious first target was the Galaxy Leader, a Japanese-operated cargo ship reportedly partially owned by an Israeli investor. Their actions raised concerns about the safety and stability of shipping routes in the region. In response to these escalating threats, Secretary of Defense Lloyd Austin recently announced a 20-country coalition, with the United States at the forefront, to safeguard the Suez route. China is not a part of said coalition, raising concerns that could be perceived as adversarial.

The initial plan involves deploying warships close to the Yemeni coast to deter and defend against potential Houthi attacks. However, the severity of the situation may necessitate more comprehensive actions by the US military, including naval escorts for vulnerable ships and potential air strikes against Houthi military infrastructure.

The implications of these events are profound and far-reaching. With the vital flow of global trade hanging in the balance, past missile attacks have already led shipping companies to divert over 100 vessels from the Suez route, re-routing them around the treacherous Cape of Good Hope, situated at the southern tip of Africa. This drastic measure adds approximately 6,000 nautical miles and potentially three to four weeks to the journey, causing considerable delays and disruptions in shipping operations worldwide.

History reminds us that disruptions in the Suez Canal, such as the extended closure following the 1967 Six-Day War and the high-profile grounding of a massive vessel in 2021, are costly and risky endeavors for global shippers. The maritime industry’s ability to adapt to such challenges underscores the vulnerability of this vital route.

The ongoing mission to secure shipping traffic through the Suez Canal, aptly named Operation Prosperity Guardian, raises questions about the use of military force to protect economic interests. However, framing this mission as a defense of global commerce is a prudent approach. Ensuring the safety and stability of this maritime artery is not only essential for countries less affluent and powerful than the U.S., but it is also an investment in long-term global security. Until industry stakeholders are convinced that the Suez route is fully secure (Maersk has resumed operations), the retail world will continue to bear the brunt of disruptions.

The Suez Canal conflict stands as a stark reminder of how the intertwined spheres of geopolitics, commerce, and national security can converge in unexpected ways, shaping the world’s outlook in the year 2024 and beyond.

China, Supply Chain, and the Third Proxy War

As we explore the final globo-retail challenge that will define the commerce landscape in 2024, one issue looms large and unprecedented: the prospect of a proxy war involving the United States and China. This scenario, more likely today than at any point since World War II, stems from the highly contentious issue of Taiwan. Chinese President Xi Jinping’s unwavering stance on unifying Taiwan with mainland China poses a significant risk, one that could ignite a major conflict in the Indo-Pacific region.

The strategic significance of Taiwan extends beyond its geographical boundaries. A successful Chinese invasion of Taiwan would undermine the U.S. and allied defenses in the region, thereby weakening America’s strategic foothold in the Western Pacific. Moreover, such an invasion could disrupt the global supply chain, cutting off the United States’ access to crucial components like semiconductors produced on the island nation. In response, President Joe Biden has emphasized his commitment to defending Taiwan against external aggression.

However, the risks associated with this geopolitical flashpoint go far beyond the military dimensions. While U.S. citizens have grown accustomed to wars fought on distant shores, China represents a fundamentally different adversary, capable of exerting its influence in unprecedented ways, including within the American homeland.

The military aspects alone paint a grim picture. China’s hypothetical strategy for capturing Taiwan would likely involve a rapid and overwhelming assault through air, sea, and cyber means, targeting key strategic locations before the U.S. and its allies can mount an effective response. The relative size of Taiwan, comparable to the state of Maryland, underscores the speed at which such an operation could unfold.

Adding to the complexity, China possesses an arsenal of over 1,350 ballistic and cruise missiles aimed at U.S. and allied forces in the region, further complicating the defense scenario. The United States would find itself waging a war across the vast expanse of the Pacific, confronting an adversary boasting the world’s largest navy and Asia’s most substantial air force.

Beyond conventional military operations, China has cultivated an array of political and cyber warfare capabilities designed to penetrate, manipulate, and disrupt American society. This multifaceted campaign would involve disinformation campaigns, cyber-attacks, and potentially, attacks on critical infrastructure like satellites.

In addition to these challenges, China could leverage its control over global supply chains and shipping routes to inflict severe economic consequences on the United States. The U.S. economy’s reliance on Chinese resources and manufactured goods, including those with military applications, is substantial. A war would disrupt this intricate web of trade, leading to potential shortages, inflation, unemployment, and economic uncertainty.

China’s ascendancy as the dominant global industrial power has transformed the strategic landscape. It has outpaced the United States in manufacturing output and production capacity for essential military components. The recent Ukrainian conflict highlighted America’s inability to meet the demands of even a smaller-scale war, depleting critical military supplies. As this story plays out, the signs of this inability are omni-present:

The U.S. on Wednesday announced what officials say could be the final package of military aid to Ukraine unless Congress approves supplemental funding legislation that is stalled on Capitol Hill.

The general public, retail world, and greater United States must begin to consider the economic uncertainty facing consumers in 2024. This includes fortifying domestic defenses against disinformation campaigns, reconfiguring supply chains for critical goods, and pursuing a long-term strategy to regain dominance in global manufacturing. Until then, it is imperative for Washington to exercise caution, avoiding provocations, and engaging in constructive dialogue with adversarial nations.

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In a world where the stakes have never been higher, the challenge posed by a potential conflict with China is unparalleled. The events unfolding on the global stage in 2024 will undoubtedly be shaped by the intricate dynamics of this emerging geopolitical landscape.

In the complex tapestry of commerce, national security, and the digital age, the concerns outlined in this essay reverberate far beyond geopolitical borders. As we seek to safeguard national interests and protect the integrity of our economies, we must also consider the impact on consumers and their welfare. Disruptions in supply chains, cyberattacks, and threats to maritime trade can have direct consequences on consumer prices and accessibility to essential goods. Striking a balance between security and affordability is paramount, as our interconnected world relies on the uninterrupted flow of commerce.

The flow of commerce faces further disruption.

By Web Smith

Member Brief: De Minimis and The Bi-Partisan Effort

As 2023 marches forward, one can hardly shake off the feeling of being perched on the edge of a new economic epoch, where modern norms, rules, and notions are put under political scrutiny. The pulsating digital economies, spearheaded by China’s behemoth direct-to-consumer (DTC) brands and tech giants like Shein, Temu, and TikTok, are waging a battle of economic influence and cybersecurity.

This member brief is designed exclusively for Executive Members, to make membership easy, you can click below and gain access to hundreds of reports, our DTC Power List, and other tools to help you make high level decisions.

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Memo: Where NatSec Meets Commerce

Editor’s Note: this essay was re-published in Newsweek.

There’s one balloon that can’t and won’t be shot down; we are far too reliant on it.

In previous explainers and reports on first-party data, I mostly focused on its advertising benefits. It wasn’t until Amazon began acquisition talks with Roomba, the autonomous robot vacuum, that I began considering data collection for purposes beyond the narrow path of ethics. Here is a snippet from an August 2022 report – keep this in mind while I explain what I believe to be a consequential perspective on the intersection of online retail and national security.

Amazon doesn’t rely on many of the data collection practices prohibited by Apple’s privacy initiatives (ATT). This acquisition means more first-party data collection. […] Amazon now has a presence in the following categories: laptops, streaming television, in-home assistants, smart speakers, Door cameras, fitness monitors, and now vacuum cleaners. Collectively, Amazon knows more about its consumers than any other company on earth.

With the iRobot acquisition, Amazon knows more about its consumers demographics and psychographics. It knows the size of your home, its layout, the location of your home, and its surfaces. From there, Amazon can deduce median income, product preferences, and more.

By the measure explored in this report, Amazon (and Apple) know more about its consumers than any domestic corporation, but Americans tend to trust Amazon enough to avoid revolt and public demonstration. And by the measure explored here, China knows more about Americans than any sovereign nation, perhaps including our own.

First-party data is collected directly from users or customers, typically through their interactions with a company’s website, app, or other digital channels. This data can include information such as browsing behavior, search history, purchase history, and demographic information. First-party data is highly valuable to companies and its ownership because it is directly linked to their customers or users, allowing them to gain insights into their behavior, preferences, and needs.

The debate around the surveillance of Americans by way of a large balloon is a distraction from a more significant form of potential surveillance. We may be overlooking the growing advantage that many outside of the commerce industry have yet to fully grasp.

As of writing this report, four of the top six mobile apps available to iPhone users are owned by Chinese companies. Of them, Temu, Shein, and Bytedance-owned TikTok have developed eCommerce strategies that rival (or exceed) the vast majority of American companies in volume.

The average American lacks an understanding of China’s general strengths beyond manufacturing capacity and low costs. That would be a deep dive in and of itself. For the sake of brevity, this will focus on business-to-business trade and direct-to-consumer commerce. Chinese factories manufacture almost every major technical product that Americans seek. The Executive Branch of the U.S. Government is quite selective in the goods that it chooses to tariff. Originally levied by the Trump administration in March 2018, President Biden maintained the tariffs covering the near-trillion dollars in Chinese goods on the list. But many products without American equivalents were excluded.

While U.S. tariffs cover a long list of Chinese products, they left many popular products untouched. That made it possible for U.S. imports of items such as cellphones, laptops and video game consoles to surge during the pandemic.

For decades, Chinese raw materials and finished goods supplied American retailers. Today, thanks to an executive order, China’s direct-to-consumer business will one day rival B2B sales to American retailers. To understand the impact of that March 2018 decision, consider that direct-to-consumer companies were not only excluded from tariffs – they were actually incentivized to sell to Americans. There still exists an $800 exemption that allows DTC companies like Shein, Temu, Alibaba, and TikTok to ship here without taxation. Instituted in 2016, packages worth less than $800 have been able to enter duty-free. Since Shein and others ship most orders from Chinese warehouses, and since most orders fall under that cost threshold, those companies receive tax benefits.

This alone incentivizes Chinese companies to sell in America, but it doesn’t end there. Additionally, the Chinese Communist Party (CCP) waived export taxes on those same products. Much like TikTok is an altogether different app (with far greater restriction on content and usage time), Shein doesn’t sell goods inside of China. In effect, the CCP traded tax revenue for American market share. Shein has now been in the number one spot on the 2PM Power List for more than 50 weeks.

As China’s DTC businesses continue to maintain top positions in the app store and on power lists, expect U.S.’s trade deficit with China to grow.

But while deficit is a visible marker of retail imbalance, there are other key measures that can indicate dependency on Chinese products. Two short months after the report was written on Amazon’s acquisition of Roomba, this report on TikTok’s eCommerce job listing speculated on the potential power of a TikTok eCommerce operation.

The speed with which TikTok is able to make products sell out in stores and online has shown that it’s not a complete hurdle for customers. But linking commerce directly into its platform opens a new revenue stream for TikTok that’s all the more critical now that Apple has clamped down on third-party advertising data collection. Like Meta, TikTok has been reported to be using in-app browsers to collect key data points that are against to skirt around Apple’s recent iOS privacy practices, which have made it more difficult to target ads.

And just days after highlighting TikTok’s staffing up of eCommerce industrialists, I introduced Temu’s quick rise with this now-understated comparison to Shein and TikTok. While presumptuous at the time, the company’s Super Bowl 2023 ad catapulted it to number one in the app store. Here, I explained the new direct-to-consumer retail, one that I now understand to be buoyed by both China and America’s tax incentives:

Consider it the new direct-to-consumer retail. Shipping orders directly from their origin factories keeps prices low. Shein, the Chinese ultra-fast-fashion giant, has taken the world by storm and continues to grow in magnitude, dwarfing the SKU counts and volume of sales of competitors like Zara, H&M and Boohoo. The clothes are cheap, disposable, and addicting. Temu could fulfill a similar desire for “cheap yet good-enough” products – especially as America’s historic run of inflation continues to tilt consumer prices upward.

A similar business model is in the works at TikTok, which is currently hiring for eCommerce fulfillment and warehousing and logistics jobs in the US as part of a bigger commerce push. We wrote in October about why TikTok is uniquely positioned to actually bridge the gap between content and commerce when so many apps – even Instagram – have failed to make it stick.

At the core of China’s commerce industry is its focus on the value of the data it collects. In short, China has been vigilant about the collection of first party data far longer than America. The South China Morning Post, an English-first publication that is part-owned by the Alibaba Group, began emphasizing first-party data collection in 2019:

Six months ago, South China Morning Post decided to cut itself off from third-party data and switch to a first-party data platform. […] The first-party data platform will allow South China Morning Post to achieve the next phase of growth. On the editorial side, that means turning its vast scale into a loyal readership. On the commercial side, that means giving advertisers more precise targeting capabilities.

It’s been reported that as recently as March 2021, the Chinese government pressured Alibaba to sell SCMP. That sale would place the media property under the influence of the state; it is unclear if that pressure has continued. Two years into China’s emphasis on first-party data collection and it was still weeks before it was reported, in America, that iOS 14.5 would take on Facebook and Google tracking in April 2021. We began our report on the implications with: “Apple’s intentions appear straightforward at first glance. The company wanted to improve the privacy of its end users. This virtuous effort came with a few additional outcomes. By upgrading its privacy practices, Apple will impair large ad networks that have grown with the help of those end users.” Prior to this now-infamous software update, most advertisers relied on third-party data to reach new customers.

According to Google Trends: December 2021 was the inflection point of interest in America’s commerce industry. First-party data was a niche marketing term until then. It was a phrase used by a select few advertising industrialists to denote a shifting model in collecting consumer data. Ever since, it’s been all the talk for American retailers. It just so happens that the easiest way to collect first-party data, in an efficient and cost-effective manner, is to sell cheap goods. China has mastered this. Forbes asks, is Temu the next Shein?

This isn’t the first time a China-backed start-up has disrupted America’s e-commerce world with cheap items. Online fast fashion outlet Shein got a big break during the pandemic as its competitors were hampered by bricks-and-mortar stores which were forced to shut up shop. Buoyed by backing on TikTok, downloads of the Shein’s app surged to 193 million in 2021, up from 67 million in 2019.

How sensitive is China’s ability to collect consumer data to the U.S. government? In 2021, President Biden signed the Secure Equipment Act, preventing the FCC from authorizing “radio frequency devices” that may pose a national security risk. And the Biden-era FCC expelled China Telecom Americas, noting: “Washington is continuing investigations into Chinese technology that began during the previous administration.” According to the Brookings Institute:

The law’s effect is to prevent U.S. technology platforms from being forced to interoperate with or transfer data to suppliers like Huawei or ZTE that may have ties to the Chinese government.

But in the matter of cheap, direct-to-consumer shopping of the cross-border flavor – there is not a concern at all by most (read: all) American policymakers.

What’s Next For China and First-Party Data

The importance of first-party data in China’s tech economy cannot be overstated; it’s impossible to separate that economy from its political allegiances. That being said, with its fast-growing retail infrastructure, China has become a global leader in DTC exports.

First-party data has become a critical component of China’s economy. For example, in the eCommerce sector, companies like Temu, Shein, TikTok, Alibaba and JD.com use first-party data to improve their search algorithms. By analyzing data on customer behavior and preferences, these groups can understand consumers and their larger communities.

Beyond eCommerce, first-party data is also playing a critical role in China’s digital finance industry. Companies like Ant Group, which operates the popular Alipay platform, use first-party data to assess the creditworthiness of borrowers, enabling them to offer loans and other financial services to individuals and small businesses that might not have access to traditional banking channels. By analyzing data on spending patterns, bill payments, and other factors, Ant Group can make more accurate assessments of credit risk and offer more targeted financial products.

The use of first-party data in China’s tech economy has also raised concerns about privacy and data security. With the massive amounts of data being generated and collected by Chinese tech companies, there is a risk that this data could be misused or abused. There have been reports of companies using data to discriminate against certain users or to manipulate consumer behavior. There have also been concerns about the close relationship between some Chinese tech companies and the government, raising questions about whether user data could be used for surveillance or other purposes. Consider GTCOM, a big-data and artificial intelligence company controlled by the China’s “Central Propaganda Department.” A 2020 report by MIT’s Technology Review on how “China Surveills the World” sheds light on GTCOM’s scope:

One of their products claims to collect 10 terabytes of data a day, or two to three petabytes per year, from web pages, forums, Twitter, Facebook, WeChat, and other sources. In terms of size, that’s the equivalent of 20 billion Facebook photos. The company describes its work as contributing directly to China’s national security, including military intelligence and propaganda. GTCOM’s research and development arm has developed algorithms that look for military keywords in the information it collects, which could for instance come from CVs or patents.

TikTok is widely considered one of the most successful apps in history. Shein was the number one shopping app in the app store, only to be unseated by Temu. And Alibaba’s GMV far exceeds Amazon’s. They all share algorithm-driven eCommerce as a core competency. A recent article by Australia’s Power Retail explains:

This trust in the algorithm, and the ability to complete tasks without leaving the app, makes it an ideal platform for in-app ecommerce sales. Currently, when people tap on TikTok ads or links, the app defaults to a TikTok-made in-app browser. This new shop tab however will offer broader opportunities for the platform to keep more of its operations in-house and directly deliver product listings to customer feeds.

TikTok is fueled by first-party data and algorithms that “read your mind,” according to the New York Times deep dive on the subject. That same report noted that “concern about Chinese consumer technology is bipartisan.” The Trump administration asserted that TikTok’s “data collection threatens to allow the Chinese Communist Party access to Americans’ personal and proprietary information,” and that its government of origin could “build dossiers of personal information for blackmail, and conduct corporate espionage.” This ban was widely unpopular with Americans; it stalled in Congress.

Based on the above, there’s reason to believe that no country knows more about the United States of America than China. And a pandemic-era tax incentive accelerated this data collection.

A CNN article published in February 2023 explained: “US can’t keep up with China’s warship building, Navy Secretary says.” There is simply little to no overlap between the officials who make such assertions and commerce industrialists who observe their reasons to raise alarm. Art of War is an ancient Chinese treatise consumed by many Americans, from prizefighters to athletes and military leaders. But many more who’ve never read the book can identify one of its most popular proverbs: “If you know the enemy and know yourself, you need not fear the result of a hundred battles.” Art of War is authorized to be kept in every Army unit; it is also listed on the Marine Corps Professional Reading Program. It’s considered instructional material at The United States Military Academy at West Point.

There is not a more capable first-party data collection and mining system in the known world. If U.S. government officials are raising alarms about surveillance balloons or tools required for battle (warships and the like), we should also begin to understand the depth of knowledge known of its assumed opposition. That’s if the 5th Century BC book, attributed to the ancient Chinese general Sun Tsu, is as credible to them as precedent suggests.

By Web Smith | Editor: Hilary Milnes | Art: Christina Williams and Alex Remy