‘Selective Decoupling’: Phasing Out Domestic US Deployment of Chinese Telecom Technology

While some of the legislation is company-agnostic, Chinese telecom giant Huawei, which remains on the Department of Commerce, Bureau of Industry and Security’s (BIS) Entity List, is a primary target.

1. 5G – Why the hype?

5G promises a significant boost in speeds, a reduction in latency, and improved security over previous generations of wireless technology. Scientists, elected officials, and thought leaders have set high expectations for 5G, with some predicting that it will usher in “a fourth industrial revolution.” With performance comparable to most fiber-optic connections, 5G promises to incorporate everything from our toasters and running shoes to airplanes and farm equipment into the Internet of Things (IoT).

Perhaps most salient to the US Government is that 5G technology will likely provide an expanded surface for cyberattacks against US critical infrastructure. Because 5G can connect more “things” to the IoT, there are many more possibilities for security breaches. The security concerns have largely centered on China, which has made substantial investments in the deployment of its 5G technologies both at home and abroad. Chinese companies hold an estimated 10% of the “5G-essential” intellectual property rights; of these, Huawei holds the most patents of any company.

Chinese companies like Huawei, ZTE, Xiaomi, Vivo, and Oppo have expanded their markets into Europe, Latin America, and Africa, even offering their services to build other individual countries’ 5G networks. Despite significant US pressure for its allies and partners to refrain from buying telecom equipment from Chinese companies, some European countries such as the United Kingdom have not honored those requests.

2. US Legislative and Administrative Action 

Although BIS has targeted Chinese telecom companies since the Obama administration, adding ZTE to the Entity List in 2016, the enactment of federal legislation with strong bipartisan support has not come into play until recently. The summary below outlines US legislative and administrative actions over the past two years that were aimed squarely at Chinese telecoms.

• August 13, 2018. Enactment of the National Defense Authorization Act for Fiscal Year 2019 (NDAA). Effective August 13, 2019, Section 889 of the 2019 NDAA bans federal agencies from procuring or obtaining Chinese-origin “covered telecommunications equipment or services as a substantial or essential component of any system, or as critical technology of any part of any system.” As a second volley against these companies, effective August 13, 2020, US Government contractors will also be restricted from using covered telecom equipment or services in government contracts. This provision defines “covered telecommunications equipment or services” as telecom equipment produced by Huawei or ZTE or any of their affiliates or subsidiaries, as well as video surveillance and telecom equipment produced by Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, or Dahua Technology Company and their subsidiaries and affiliates. 
  • Huawei has already unsuccessfully challenged the validity of this provision in court. On February 18, 2020, the US Eastern District of Texas upheld Section 889 on summary judgment. (Huawei Techs. USA, Inc. v. United States, No. 4:19-CV-159, (E.D. Tex. Feb. 18, 2020).)
• May 15, 2019. Executive Order (EO) 13873 (Securing the Information and Communication Technology and Services Supply Chain). As previously analyzed, in this EO, President Trump declared a national emergency with regards to the creation and exploitation by unnamed “foreign adversaries” of vulnerabilities in information and communication technology and services (ICTS).
• May 16, 2019. BIS published a final rule for public inspection adding Huawei and 68 non-US affiliates in 26 countries to the Entity List, effectively halting exports and reexports of items subject to the Export Administration Regulations (EAR) to Huawei. We previously analyzed the impacts of this Entity List addition here.
• May 20, 2019. BIS issued a temporary general license (TGL) permitting certain transactions with Huawei to continue despite the Entity List designation. On March 12, 2020, BIS published a final rule extending the TGL’s validity from March 10, 2020 through May 15, 2020.
• May 21, 2019. BIS published the Final Rule regarding the Huawei Entity List addition in the Federal Register.
• August 13, 2019. Department of Defense, General Services Administration, and National Aeronautics and Space Administration Interim Rule (Federal Acquisition Regulation: Prohibition on Contracting for Certain Telecommunications and Video Surveillance Services or Equipment). As previously analyzed, this interim rule, which implements the FY19 NDAA provision described above, requires two Federal Acquisition Regulation (FAR) clauses related to covered telecom and video surveillance equipment and services to be included in all solicitations issued on or after the date of the rule (and those for which the contract award itself will occur after that date).[1]
• November 27, 2019. DOC Proposed Rule (Securing the Information and Communications Technology and Services Supply Chain). A detailed review of the DOC’s proposed ICTS rule, which would implement the May 15, 2019, EO, is in our December 2, 2019 alert. The proposed rule provided a broad and vague review process for ICTS transactions involving foreign adversaries, as defined in EO 13873. Like the EO, the proposed rule does not mention any specific country or company. Despite several months having gone by, no interim or final rule has been issued and the outlook for that occurring is unclear. However, whether or not a rule is put into effect, the robust authority conveyed by the EO itself could be exercised anytime by the Commerce Department.
• December 19, 2019. Enactment of the National Defense Authorization Act for Fiscal Year 2020. Section 1260I of the 2020 NDAA lays out very specific criteria that would have to be satisfied before BIS could remove Huawei from the Entity List. 
• January 3, 2020. Federal Communications Commission (FCC) Final Rule (Protecting Against National Security Threats to the Communications Supply Chain Through FCC Programs; Huawei Designation; ZTE Designation). The FCC’s rule prohibits the use of certain agency funds to purchase equipment or services from “covered companies,” and it designates Huawei and ZTE as such. It also requires entities using these funds to remove existing Huawei and ZTE equipment from their networks. 
• March 12, 2020. Enactment of the Secure and Trusted Communications Networks Act of 2019. Commonly known as the “Secure Networks Act” or “Rip and Replace” law, this Act requires the FCC to identify and publish a list of “covered communications equipment and services” not later than March 12, 2021. Further, it prohibits the use of federal subsidies from the FCC for the purchase, rent, lease, other obtainment, or maintenance of covered equipment, effective 60 days after the equipment is added to the FCC list. The Act also establishes a reimbursement program to providers of advanced communications service for the removal and replacement of covered equipment or services, subject to certain conditions, though that program will depend entirely on whether Congress appropriates funding for its implementation. 
• March 23, 2020. Enactment of the Secure 5G and Beyond Act of 2020. The Act requires the President to develop an interagency strategy to ensure the security of 5G and future technologies and infrastructure in concert with strategic allies. The strategy must be followed by an implementation plan that addresses the treatment of 18 specific topics, including a summary of US interests in 5G and a global threat assessment. Critically, the Act prohibits the inclusion in the strategy of nationalization of US mobile telecom infrastructure. 
• April 28, 2020. Three China-Focused Changes to the Export Administration Regulations. As we reported in our recent alerts, BIS announced the broadening of military end-use and military end-user restrictions in section 744.21 of the EAR, as well as the elimination of license exception Civil End-Users (CIV) and proposed revisions to license exception Additional Permissive Re-Exports (APR). These changes require BIS review of a broader range of exports, including electronics and telecommunications items controlled only for anti-terrorism reasons, when shipped for military end-uses or to military end-users. License applications for military end-uses or end-users are subject to a presumption of denial.
• May 5, 2020. FCC Request for Comment on Impact of Secure Networks Act on Existing FCC Initiatives. The FCC issued a Federal Register Notice in which the Wireline Competition Bureau of the FCC sought comment on how the Secure and Trusted Communications Networks Act of 2019, signed into law on March 12, 2020, applied to proposals already under consideration in the FCC’s Protecting Against National Security Threats to the Communications Supply Chain rulemaking and related proceedings, discussed above. Comments are due on or before May 20, 2020, and reply comments are due on or before June 4, 2020. Comments may be filed using the Commission’s Electronic Comment Filing System (ECFS), and can be filed electronically at https://www.fcc.gov/ecfs/ or by paper addressed to the Commission’s Secretary, Office of the Secretary, Federal Communications Commission.
• Future developments. We expect that BIS will soon be announcing amendments to the EAR’s “foreign direct product rule” to limit Huawei’s ability to obtain chips that are the product of US-origin semiconductor manufacturing equipment. BIS has also proposed reducing the de minimis US-controlled content threshold applicable to Huawei and its affiliated companies from 25% to 10%, which would dramatically increase the number of foreign-made products that would be subject to US jurisdiction and therefore require a license. It remains unclear whether this change will, in fact, be pursued.

3. Where does the United States go from here?

On March 25th, the Administration released its National Strategy to Secure 5G (the “Strategy”) as required by the Secure 5G and Beyond Act. While the Strategy is light on specifics, the overriding theme is to empower the United States’ private sector to roll out, secure, and develop 5G technology and infrastructure. The Strategy comprises four main “Lines of Effort:” 

1. Facilitating the rollout of 5G domestically. The US Government is facilitating a private sector-led domestic rollout of 5G, primarily through the FCC’s Facilitate America’s Superiority in 5G Technology (5G FAST Plan), issuing a National Spectrum Strategy for management of 5G and future generations of networks, and working with allies and the private sector. 
2. Assessing the cybersecurity risks and identifying core security principles of 5G capabilities and infrastructure. The US Government, with the help of state, local and tribal governments and private sector partners will identify economic, national security, and other risks posed by 5G infrastructure. Further, it will work with the private sector to develop security principles for 5G. 
3. Addressing risks to United States economic and national security during the development and deployment of 5G infrastructure worldwide. Perhaps most relevant to Chinese telecoms, the third line of effort focuses on managing supply chain risks in the US Government infrastructure and identifying “high risk” vendors. This section of the Strategy cites the Federal Acquisition Supply Chain Security Act of 2018, EO 13873, and resonates with the proposed DOC rules on securing the ICTS supply chain. 
4. Promoting responsible global development and deployment of secure and reliable 5G infrastructure. The US Government will participate in the development of international 5G standards and promote US leadership in standards development and adoption. Additionally, this line of effort describes collaboration with the private sector, academia, and other governments to adopt policies that “reinforce 5G vendor diversity to foster market competition.”

The strategy checks off one of the Administration’s responsibilities under the Secure 5G and Beyond Act. Next is the Administration’s implementation plan, which is expected by September 21, 2020.

4. What should the private sector be on the lookout for going forward?

The coming months will likely bring more rough sledding for Huawei and other Chinese telecoms, courtesy of both Congress and the Trump Administration. There will also likely be increased attention paid to US Government efforts to support US-led alternatives on 5G. In February, the White House economic advisor indicated that the Trump Administration’s goal is to “have all of the US 5G architecture and infrastructure done by American firms, principally.” Prior to the COVID-19 crisis, both the FCC and the White House had scheduled public events to explore and promote these alternatives, most of which revolve around open virtualized “radio access network” (RAN) technology. Last week, in a significant development, 31 powerhouse IT and telecom companies launched a new initiative to “advocate for government policies supporting the development and adoption of open and interoperable solutions” in the RAN. Arent Fox will continue to monitor policy and regulatory developments in these areas as they unfold.

[1] A second Interim Rule (December 13, 2019) relieves contractors from making offer-by-offer representations if it makes the representation annually that it does not use covered telecom equipment.