US Export Controls: Business as Usual?

US Export Controls: Business as Usual?

The Trump Administration has used export controls as part of its aggressive anti-China policy, notably by expanding the military end-use/user rules, revoking license exceptions, and by placing Chinese tech company Huawei and its affiliates and many more Chinese companies on the US Department of Commerce, Bureau of Industry and Security’s (BIS) Entity List. This prohibits most exports and reexports to those entities without a license. While a dramatic policy change is not expected, the Biden Administration is likely to work more closely with allies to pursue its foreign policy goals vis-à-vis China.

Export Control Issues to Watch

• In June 2020, BIS announced the suspension of certain license exceptions for exports, reexports, and transfers (in-country) to and within Hong Kong that treated Hong Kong differently than the People’s Republic of China.
• In November 2020, BIS proposed another control on a so-called emerging technology: software that is capable of being used to operate nucleic acid assemblers and synthesizers due to concerns the software could be used to create pathogens and toxins as biological weapons.
• In 2019, BIS added Huawei and several of its affiliates to the Entity List, effectively prohibiting all exports to those entities without a license. In May and August 2020, BIS expanded the scope of items subject to the EAR for export, reexport or transfer where a Huawei listed entity was a party to the transaction.
• Effective December 18, 2020, BIS also added, among others, Semiconductor Manufacturing International Corporation Incorporated (SMIC) and Chinese drone manufacturer SZ DJI Technology Co to the Entity List.
• We expect the Biden Administration to continue to employ export controls as a critical part of its foreign policy and to take a firm stance against China.
• The Biden Administration is likely to take a more multilateral approach with respect to China and Huawei in particular. In addition, his trade officials may attempt to get key allies on board with a single multilateral approach as opposed to going it alone.
• The Biden Administration may well roll back or rein in the highly extraterritorial Foreign Direct Product Rule (FDPR) applicable to Huawei transactions as this approach has the potential to damage the US defense industrial base.  
• It is not expected that the Biden Administration will reverse course with respect to its treatment of Hong Kong vis-à-vis China.
• We expect the Biden Administration to leave in place the expanded Military End-Use/User rules for China, Russia, and Venezuela, but to provide a greater deal of clarity regarding who is a Military End-User, an effort begun under the Trump Administration.

How We Can Help

To discuss whether your company is in compliance with recently announced export control changes such as the new entity listings, and to investigate how changes by the Biden Administration may impact your business, please contact a member of the Arent Fox team.

Economic Sanctions: Reversal or a New Way?

Under the Trump Administration, sanctions were used as a part of a unilateral “America First” approach to take aim at foreign adversaries and address humanitarian concerns. We are expecting a more measured multi-lateral approach under the Biden Administration, but not necessarily a decline in sanctions activity.

Sanctions Issues to Watch

• Iran. The Trump Administration withdrew the US from the Joint Comprehensive Plan of Action (JCPOA), re-imposed sanctions that had been removed, and continued to increase sanctions pressure on Iran throughout the Administration.
  • We expect the Biden Administration to continue to impose targeted sanctions against human rights abuses and support for terrorism both in Iran and worldwide, but perhaps to take a step back from the threats of “secondary sanctions” against third-country companies doing business with sectors of Iran’s economy outside the military and oil sectors.
• China. China has been a frequent target of sanctions actions as a part of a “Whole of Government” approach that includes actions by other Federal Agencies. Sanctions actions were taken due to the People’s Republic of China’s increasing assertion of control over Hong Kong, forced labor and human rights issues related to the Xinjiang Uyghur Autonomous Region, and the increasing role of government military companies.
  • The Biden Administration is expected to review the Trump Administration’s China actions and be deliberate in its changes to current sanctions actions. Sanctions will remain a critical tool but are likely to be recalibrated to have maximum impact through multilateral cooperation.
• Cuba. While leaving a good portion of the Obama loosening intact, the Trump Administration made major changes towards Cuba including the addition of the State Cuba Restricted List, which greatly restricted the use of many existing authorizations by making an expanding set of key Cuban Government entities mostly off-limits. The Trump Administration also removed many travel and remittance authorizations and allowed suits to be brought against third-country companies doing business in Cuba under the Helms Burton statute.
  • The Biden Administration is likely to reverse some travel and remittance rules early on, especially ones that benefit Cuban Americans supporting their families in Cuba, but with the President-elect Biden losing the Florida vote in the Presidential election, he may take a careful approach to relaxing other sanctions on Cuba
• Venezuela.  Venezuelan Government and President Nicolás Maduro were also targeted by the Trump Administration through sanctions including secondary sanctions on shipping lines that carried petroleum products to/from Venezuela.
  • It is not clear whether President-elect Biden will continue to pressure the Maduro regime through secondary sanctions.
• Russia. The Trump Administration targeted the construction of Russian energy export pipelines and designated Russian entities under Cyber sanctions and for interference in US elections.
  • The Biden Administration is likely to take an even tougher approach to Russia but may well back off threats of Nordstream II sanctions given the reality that these would alienate European allies.
• Turkey. The Trump Administration delayed but finally imposed sanctions on Turkey under the CAATSA statute for its purchase of missile systems from Russia.
  • President-elect Biden has had very harsh words for Turkey’s President, so we expect continued and perhaps increasing pressure on Turkey to disincentivize its relations with Russia and its “go it alone” approach to regional issues.
• International Criminal Court. Perhaps most surprising of the Trump Administration’s sanctions actions was the declaration of a national emergency and imposition of sanctions related to investigations of the International Criminal Court (ICC).
  • We think the Biden Administration is likely to either terminate this emergency early on or allow it to lapse when it comes up for its annual renewal in June.
• Human rights abuse and corruption. The Trump Administration also imposed increasing sanctions under the Global Magnitsky (GLOMAG) Sanctions regime, which targets companies and individuals involved with the parties that may be engaged in human rights violations or corrupt activities.
  • We expect the Biden Administration to continue with GLOMAG sanctions due to its focus on human rights and corruption and possibly seek a multilateral approach with similarly minded countries. 

What to Know

• Under the Trump Administration, sanctions actions were often unilateral. With the Biden Administration we expect a return to a more measured and coordinated approach.
• We expect the Biden Administration to continue to employ sanctions as a critical part of its foreign policy and, outside of the Iran JCPOA, Cuba, and ICC areas, not immediately move to reverse course on Trump economic sanctions actions.

How We Can Help

Arent Fox has a team of sanctions lawyers, including a recent Deputy Chief Counsel of the Office of Foreign Assets Control (OFAC), to evaluate whether your company is in compliance with current sanctions measures and how changes by the Biden Administration will impact your business.

Foreign Investment Screening: More Scrutiny, More Reviews

The Trump Administration completed the last major step in the implementation of the 2018 Foreign Investment Risk Review Modernization Act (FIRRMA), in which Congress expanded the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS). This will allow a continued increase in the number of reviews of US acquisitions involving foreign investors.

Export Control & CFIUS Review

• FIRRMA expanded CFIUS jurisdiction to include non-passive minority-position investments in U.S. businesses involving critical technologies, critical infrastructure, and sensitive personal data of U.S. citizens. It also gave CFIUS jurisdiction over certain purchases or leases of U.S. real estate near sensitive facilities.
• For technology-related transactions to fall under CFIUS jurisdiction depends upon 1) whether the technology is considered “critical” based on the CFIUS definition and 2) whether transferring the US business’s critical technology to either the relevant foreign investor or parties holding significant interests in the foreign investor would require an export authorization

What to Know

• Increasing screening of foreign investment in US companies was a key component of the Trump Administration’s approach to China, particularly in the technology area. Due in part to the bipartisan nature of US policymakers’ concerns regarding China, we do not anticipate any big changes in approach at CFIUS under the Biden Administration.
• We expect relative stability in the CFIUS process for the foreseeable future, including how it looks at modern-day national security risks.
• In light of the COVID-19 pandemic, going forward CFIUS is likely to consider public health to be a part of national security.

How We Can Help

Arent Fox’s team of CFIUS lawyers includes David Hanke, the former Counsel for National Security Affairs to Senator John Cornyn. David was the chief strategist behind the FIRRMA’s enactment. David would be delighted to discuss with you whether an investment in a U.S. business is subject to CFIUS review and how the regulations might apply.

Telecommunication Equipment: A Continued Legacy With China

The bipartisan support in Congress that resulted in the restrictions on US government purchasing of equipment and services from Huawei and other Chinese-owned telecommunications companies, as demonstrated in Section 889 of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 and its implementing regulations, is likely to outlive the Trump Administration’s broader emphasis on China and continue in the Biden Administration under a more multi-lateral approach.  No major changes are expected, but there is much to watch going forward.

Issues to Watch

• In August 2019, an interim rule went into effect that prohibited contractors from providing covered telecommunications equipment and services to the government.  This restriction was required to flow down to any contractor in the supply chain.
• In August 2020, an interim rule went into effect that implemented the second part of the restriction on covered telecommunications equipment and services that precludes the government from entering into a contract with contractors that “use” such equipment or services. 
• Effectively, the August 2020 rule precludes prime contractors from using such equipment or services anywhere in their business, even if unrelated to government contracts. 
• In October 2020, a separate interim rule went into effect that requires contractors to represent annually in the System for Award Management (SAM) whether they use covered telecommunications equipment or services or any equipment, system, or service that uses covered telecommunications equipment or services. This rule provided further clarity for contractors, however, by providing that parties subject to the restrictions would be listed as excluded in SAM. 

What to Know

• Contractors throughout both government and non-government supply chains have been bombarded with requests for certification of compliance, and it is expected that this trend will continue.
• A number of agencies, including the Department of Defense (DoD), sought waivers and delayed implementation of the Section 889 restrictions.  As we grow further removed from the implementation deadlines, broader implementation and enforcement is expected in the coming months and years.
• Recent DoD activity in adding parties to a list of “Communist Chinese military companies” pursuant to Section 1237 of the Strom Thurmond National Defense Authorization Act for Fiscal Year 1999 suggests these entities may be added to the covered telecommunications equipment and services excluded entity list in the future based on the overlapping designation process that mirrors that under Section 889. 
• The Biden Administration is not expected to depart from these restrictions but may work more closely with European and NATO allies in crafting specifics of implementation. 

How We Can Help

To discuss whether your company is in compliance with the Section 889 restrictions, how you may accurately represent compliance, and how changes by the Biden Administration may impact your business, please contact a member of the Arent Fox team.

Personal Data & Technology: New Frontiers in Global Competition

President Trump issued a 2019 Executive Order (EO) on Information and Communications Technology and Services (ICTS) supply chain, established a brand new interagency framework for technology supply chain screening and took actions against Chinese investment in some US technology companies that handle personal data.

Supply Chain & Personal Data Related Actions

• The Department of Commerce (DOC) issued vague and far-reaching proposed rules in November 2019 to implement the ICTS supply chain EO. When they are adopted, the rules could result in the imposition of what are essentially national security import controls, covering a wide array of hardware, software and associated services. As of the time of this writing, no interim or final rule has been issued.
• President Trump prohibited a Chinese company’s investment in US-based TikTok, ordered the Chinese company to divest from TikTok and prohibited unspecified transactions related to the TikTok and WeChat apps.
• The DOC identified transactions that would be prohibited under the WeChat and TikTok EOs and were promptly enjoined by federal courts from implementing the restrictions. Appeals from these decisions are outstanding in the Third, Ninth, and DC Circuits.
• The Biden Administration will have the opportunity either to defend these appeals, not to defend them, and thereby ensure the death of the DOC’s implementation of the TikTok and WeChat EOs, or reverse Trump’s EOs.

What to Know

• The ICTS supply chain EO is a part of the legislative and administrative measures the US Government has taken to limit (and perhaps end altogether) the proliferation of Chinese-origin telecommunications technology in US infrastructure. We expect that the Biden Administration will review the draft regulation and will ultimately publish a final rule that may look different from the latest Trump Administration draft.
• We expect the Biden Administration will cease aggressively defending the TikTok and WeChat appeals and reevaluate what to do with the DOC prohibitions, and possibly also the TikTok and WeChat EOs, in light of judicial concerns expressed to date.
• Phasing out of domestic US deployment of Chinese telecom technology has bipartisan support in Congress and is expected to continue under the Biden Administration.
• The Committee on Foreign Investment in the United States will continue to review investment in US companies that collect personal data.

How We Can Help

To discuss what impact the ICTS supply chain and the actions against TikTok and WeChat will have on your business, please contact a member of the Arent Fox team.

Arent Fox’s Advance Look at Hot Button Trade Issues For 2021

Our Trade Team Analyzes What Happens Next in Six Critical Areas

Looking towards 2021 and a new Administration, Arent Fox’s International Trade & Investment group has prepared a series of primers on six key areas that can impact your business: The Biden Transition, Special Tariffs, Customs, Trade Litigation, Export Controls, and Trade Policy. Each section contains short overviews of the critical trends in those areas. Click the links below to access each section.

To download a PDF copy of our complete analysis, click here