China and International Trade Controls as the Biden Administration Commences

International Trade & Compliance Alert

中文 : 近期中美出台的贸易管制措施检视

In response to a U.S. government consensus that trade with China involves grave national security risks, the Trump Administration promulgated a broad series of China-directed export controls, economic sanctions and import rules. The flow of trade measures became a torrent in the Trump Administration’s final months. This alert briefly surveys key new trade controls from late in the Trump Administration and Chinese policy responses that the Biden Administration inherits.[1]

It is not clear that the Biden Administration will prioritize a more regularized trading relationship with China. As it moves toward a more traditional governance, the Biden Administration may seek to develop an overall strategic policy toward China before undertaking piecemeal changes. When coupled with strong congressional support for tough measures on China, major modifications in U.S. treatment of China would not appear likely in the near term.

U.S. Trade Control Developments Relating to China

Military-Intelligence End Use/User Controls: On January 15, 2021, the Commerce Department’s Bureau of Industry and Security (“BIS”) announced that, effective March 16, 2021, no U.S. person may, without a license from BIS, “support” any Chinese, Cuban, Russian or Venezuelan “military-intelligence end use” or a “military-intelligence end user.” “Support” is defined broadly to include “shipment, transmission, or transfer (in-country)” or performance of “any contract, service, or employment” that it is known could assist or benefit any Chinese military-intelligence end use or a military-intelligence end user. These controls move the Export Administration Regulations (“EAR”) further in the direction of sanctions applicable to actions by classes of persons rather than traditional export license requirements applicable to classes of items.

In addition, BIS imposed license requirements on exports, reexports and in-country transfers to Chinese military-intelligence end uses and end users that cover all items subject to the EAR.

These actions follow BIS’s April 2020 expansion of U.S. export controls on various items subject to the EAR intended for military end users or military end uses in China and BIS’s December 2020 creation of a non-exhaustive list of military end users. Whereas the “military” end user/use rule is limited to items in specified EAR export control classification numbers, the “military-intelligence” end user/use rule applies to any item that is subject to the EAR.

Additions to the Entity List: BIS recently added prominent Chinese companies, including, among others, China National Offshore Oil Corporation Ltd (“CNOOC”), DJI and Semiconductor Manufacturing International Corporation Incorporated (“SMIC”), to the EAR Entity List. The EAR generally imposes license requirements on all exports, reexports, in-country transfers or sales (permanent or otherwise) of items subject to the EAR to companies on the Entity List. As regards certain designees and classes of items, BIS generally administers a policy of denying requested licenses. For example, for SMIC and its affiliates, BIS has imposed a presumption of denial policy pertaining to items “uniquely required” for production of semiconductors at current technology nodes, with a case-by-case review policy for all other items. Additionally, during 2019 and 2020, BIS added a number of Chinese companies to the Entity List due to their alleged involvement in human rights violations and abuses against Uyghurs and other ethnic minorities in the Xinjiang region.  

Reported Rescission of Export Licenses: On January 15, 2021, the Trump Administration reportedly notified several Huawei suppliers that previously issued licenses allowing certain sales to Huawei were being revoked and that numerous outstanding license applications to supply Huawei would be rejected. This action is consistent with an increasingly restrictive U.S. trade stance toward Huawei that is unlikely to change in the near future.

Securities-Related Sanctions: Executive Order 13959 of November 12, 2020, generally prohibits U.S. persons from engaging in “transactions” (purchases for value, or sale) in publicly traded securities or any securities that are derivative of or designed to provide investment exposure to such securities of any company identified as a “Communist Chinese Military Company.” As amended on January 13, 2021, Executive Order 13974 requires U.S. persons to divest covered securities. Transactions to divest covered securities are permitted during a wind-down period, which continues through November 11, 2021 for securities of initial designees and until 365 days after the date of identification of any subsequently identified designees. The U.S. government recently added major Chinese companies such as CNOOC and Xiaomi to the list of designees covered by these securities-related sanctions.

Telecom Transactions Regulations: On January 19, 2021, the Commerce Department published an interim final rule to implement Executive Order 13873 “Securing the Information and Communications Technology and Services Supply Chain” of May 15, 2019. Unless suspended by the Biden Administration, the rule is to become effective on March 22, 2021. The rule authorizes prohibitions on certain transactions between U.S. persons and foreign persons involving information and communications technology or services (“ICTS”) that are designed, developed, manufactured or supplied by persons owned by, controlled by or subject to the jurisdiction or direction of a “foreign adversary”—which includes China (including Hong Kong)—and pose an undue or unacceptable risk.[2] Public comments may be submitted through March 22, 2021. The rule departs from a previously proposed rule in several ways, including identification of six “foreign adversaries” (China, Russia, Iran, North Korea, Cuba and Nicolás Maduro of Venezuela), and establishment of a process for companies to seek preapproval of ICTS transactions and obtain a license.

Trade Restraints Based on Alleged Human Rights Abuses: Apart from the Entity List additions described above, based on alleged findings of human rights abuses, including forced labor, over the past two years, U.S. Customs and Border Protection instituted several orders that mandate seizure of certain items at U.S. Ports of Entry. These include, among others, certain computer parts and all cotton products and tomatoes from China’s Xinjiang region. An interagency advisory of July 2020 cautions businesses with potential exposure to the Xinjiang region in their supply chains to be aware of the economic, legal and reputational risks of involvement with any entities engaging in human rights abuses. We expect the trend toward human rights-related trade restraints to continue under the Biden Administration.

Hong Kong Special Status Revocation: On December 23, 2020, BIS amended the EAR to remove provisions according differential and preferential treatment compared to China for exports and reexports to and transfers within Hong Kong. Previous steps by the Trump Administration to eliminate Hong Kong’s special treatment were described in our prior alerts here and here. Today, U.S. export controls do not distinguish between Hong Kong and the balance of China.

Restrictions on Chinese Apps: As noted in our prior alert, on January 5, 2021, President Trump issued Executive Order 13971, which authorizes prohibitions on U.S. persons engaging in transactions with persons affiliated with or involved in the development or control of eight Chinese “connected software applications” or with their subsidiaries: Alipay, CamScanner, QQ Wallet, SHAREit, Tencent QQ, VMate, WeChat Pay and WPS Office.

Chinese Trade Controls Developments

New Chinese Export Control Law: China’s Export Control Law (the “ECL”), effective December 1, 2020, establishes China’s first comprehensive legislative framework for restricting exports of military and dual-use products and technology and has extraterritorial application, citing maintenance of national security, national interests and public policy reasons, among others. Specifically, the ECL combines six current export-control administrative regulations respectively on controlled chemicals, nuclear, military items, nuclear dual-use items and technologies, missile and related items and technologies and biological dual-use items and technologies. As a result of the ECL, China may prohibit or restrict exports subject to licensing requirements based on product features, end users, destinations or end uses. Notably, as mentioned above, the ECL requires that exporters seek licenses for export transactions that may harm China’s national security or national interests. This broad authorization allows China to retaliate against foreign export-control rules and creates new risks and challenges to Chinese exporters and their customers.

Chinese Blocking Measure*: On January 9, 2021, China’s Ministry of Commerce issued Order No. 1 of 2021 on Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures (the “Blocking Statute”) in an effort to limit the impact of the recent extraterritorial application of foreign measures that unfairly prohibit or restrict Chinese parties (including subsidiaries of foreign companies incorporated in China) from engaging in normal economic, trade and related activities with third countries (regions) and their citizens, legal persons or other organizations, which became effective immediately. Similar blocking statutes have previously been enacted by Canada and the EU to counter U.S. sanctions. Under the Blocking Statute, Chinese parties (Chinese citizens, legal persons, other organizations and, arguably, Chinese subsidiaries of multinationals are Chinese legal persons) are obliged to report the prohibitions or restrictions resulting from the foreign legal measures to the Chinese government. The Chinese government may issue bans on recognizing, performing or complying with specific foreign laws or measures, although Chinese parties may apply for exemption from such bans. The Blocking Statute signals the Chinese government’s effort to counteract various sanctions, export controls and other restrictions targeted at China; however, the practical application remains to be seen. The Blocking Statute, unlike the blocking measure enacted by the EU, does not list the specific foreign laws and rules that are covered. Instead, the Blocking Statute sets out a list of open-ended factors for a joint committee composed of multi-ministerial government agencies to consider, such as the potential impact of a foreign law or measure upon China’s “national sovereignty, security and development interests” and “other factors that shall be taken into account.” Multinational corporations with operations in the United States and China (and other countries with blocking statutes) will be faced with the delicate decision on how to best navigate and comply with increasingly divergent laws and regulations.

*More detailed analysis on China’s Blocking Statute will be provided by Orrick’s China practice group soon.

[1] Some developments described in this alert may be affected by the “regulatory freeze” instituted by the Biden Administration on January 20, 2021, with respect to the regulations issued in the final days of the Trump Administration to allow the new administration to review the rules pending as of such date. Under the regulatory freeze, the heads of executive departments and agencies are asked to (a) withdraw any regulations sent for publication in the Federal Register but unpublished as of January 20, 2021, and (b) consider postponing by 60 days the effective date of regulations promulgated but not yet effective as of January 20, 2021, and opening a 30-day public comment period.

[2] Six types of ICTS transactions fall under the scope of this interim rule: transactions involving 1) any sector designated as critical infrastructure by Presidential Policy Directive 21 – Critical Infrastructure Security and Resilience, including any subsectors or subsequently designated sectors; 2) software, hardware or any other product or service integral to wireless local area networks, mobile networks, satellite payloads, satellite operations and control, cable access points, wireline access points, core networking systems or long- and short-haul systems; 3) software, hardware or any other product or service integral to data hosting or computing services that uses, processes or retains, or is expected to use, process or retain, sensitive personal data on greater than one million U.S. persons at any point during the 12 months preceding an ICTS transaction; 4) certain ICTS products of which greater than one million units have been sold to U.S. persons at any point during the 12 months prior to an ICTS transaction; 5) software designed primarily for connecting with and communicating via the Internet that is in use by greater than one million U.S. persons at any point during the 12 months preceding an ICTS transaction; and 6) artificial intelligence and machine learning, quantum key distribution, quantum computing, drones, autonomous systems or advanced robotics that are crucial for ICTS.