Threading the needle: Competing US-Sino trade control restrictions | JD Supra


Navigating complexities under a new US administration

Companies active in mainland China and the United States watched with anticipation to see whether the new US Biden administration would depart from aggressive policy positions toward mainland China taken by the previous Trump administration. However, despite embracing more cautious rhetoric, the Biden administration has signaled that it intends to continue several trade policies toward mainland China established during the Trump administration. In response, mainland China has pushed through several laws to counteract the impact of US trade policies.

US trade control measures targeting mainland China

Despite hopes that the Biden administration might change direction on US-Sino trade policy, actions taken in 2021 have largely continued—and in some cases, escalated—the prior administration’s approach to mainland China.

Re-issuance of Trump-era executive orders

Although the Biden administration amended or revoked three Trump administration executive orders (EOs) relating to mainland China—namely, EOs targeting “Communist Military Companies,” WeChat and TikTok—it immediately replaced them with new EOs covering the same issues. A new order replaced and clarified the previous EO addressing “Communist Military Companies” and added additional prohibitions on US involvement in developing Chinese surveillance technology.1 Similarly, a new EO replaced the WeChat and TikTok EOs that were the subject of legal challenges in US courts.2 The new EO reaffirmed the national emergency and determination by the Trump administration that mainland China is a foreign adversary, and directed the Secretary of Commerce to recommend new measures to protect US information and communications technology and services by October 7, 2021.

Continued use of entity list designations

The US Department of Commerce has continued to use entity list designations to advance its foreign policy objectives, engaging in several rounds of designations of Chinese entities in 2021. The justifications provided for the designations related to US national security and foreign policy concerns, including alleged participation in laser and surveillance programs, activities involving mainland China’s military, and involvement with the Xinjiang region.3, 4

Escalating sanctions and trade pressure on Hong Kong

The US government has continued to impose sanctions on officials in Hong Kong, as recently as July 16, 2021.5 In addition to the sanctions, the US government issued a “Hong Kong Business Advisory” “to caution US businesses about emerging risks to their operations and activities in Hong Kong,” although the advisory did not prohibit or restrict US entities from conducting any business involving Hong Kong.6

Escalating use of trade controls connected to Xinjiang Region

The Biden administration has continued to increase its pressure on trade controls relating to the Xinjiang. As noted above, the US Department of Commerce’s Bureau of Industry and Security added 14 Chinese entities to its entity list related to activity in the Xinjiang region in July 2021.7 In addition to export control restrictions, the US also began to implement import controls for certain silicon products necessary for solar inputs produced in the Xinjiang region. The US Customs and Border Protection Agency maintains withhold release orders (WRO) against Chinese companies operating in the Xinjiang region, and added a WRO against Hoshine Silicon Industry in June 2021.8 A WRO effectively denies entry of targeted products into the US.

The Biden administration also re-issued the Trump administration’s “Xinjiang Supply Chain Advisory” highlighting information on necessary due diligence for companies investing in the region.9 The updated advisory furnishes expanded guidance on due diligence strategies; addresses recent enforcement actions including visa requirements, sanctioned entities and WROs; specifically addresses risks to investors; and cautions US businesses and individuals to exit supply chains, ventures and/or investments connected to Xinjiang if mitigation is not possible—or face serious legal risks.

Continued US export control pressure

In addition to the measures above, the US has continued to take a firm stance on license applications to entity list parties, continuing the approach taken at the end of the last administration. In particular, the US has taken a firm stance against license applications that could supply Huawei with 5G (or near-5G) technologies, including components of such systems.

Further, US export controls now factor in as a key consideration in reviews of foreign direct investment by the Committee on Foreign Investment in the United States (CFIUS). Though CFIUS always considered export controls applicable to a US business, the question of export controls has become critical in determining whether filings may be mandatory under a relatively recent law, the Foreign Investment Risk Review Modernization Act (FIRRMA).

Mainland China’s response to US trade control measures

Mainland China has implemented its own trade control measures since 2021.10

Sanctions and export control-blocking statutes

Mainland China issued a blocking statute in January 2021, which provides a legal framework for the Chinese government to counter laws and regulations from other countries deemed to affect China’s interests. For example, the statute requires Chinese companies to report any trade restrictions or sanctions, creating a system that informs the Chinese government about new economic regulations as soon as possible. In addition, the statute contains a provision stipulating that companies may be prohibited from complying with non-Chinese trade restrictions and may be subject to lawsuits if they do comply with these restrictions. Mainland China followed up on this statute with a June 2021 Anti-Foreign Sanctions Law that included provisions allowing the deportation of certain individuals doing business in mainland China as well as other countersanctions, such as visa restrictions and asset and transaction blocks within mainland China.11

Data security law and personal information protection law

Mainland China recently passed several cybersecurity and data privacy laws and regulations. Its Data Security Law, which focuses on data that is important to China’s national security,12 will take effect in September 2021. In August 2021, the Standing Committee of the National People’s Congress, the main legislative body in mainland China, passed the Personal Information Protection Law (PIPL)13 which will take effect November 1, 2021. The Data Security Law, the PIPL and the Cybersecurity Law (CSL) are all intended to establish a broad regulatory framework related to cybersecurity and data compliance in mainland China. Among other requirements, these laws set out rules governing data transfers outside of mainland China, data release requirements for companies operating in mainland China and penalties for violations.

A practical approach to managing competing restrictions

Due to the foregoing regulatory changes, businesses involved in US-Sino trade should continue to maintain a cautious approach.

  • Exercise enhanced due diligence—Businesses must fully understand their products, their supply chains and their transactional counterparties in order to successfully evaluate the possible risks.
  • Analyze whether a contemplated transaction poses risks—After gathering all relevant information, businesses must conduct a comprehensive analysis of the potential risks triggered by the proposed transaction. For example, does the transaction involve restricted parties? Are there limitations on products that can be sourced from certain regions?
  • Mitigate risks, where possible—Even if a contemplated transaction appears to trigger risks, there may be ways to mitigate the risks. For example, if a transaction involves entity list parties, a business still may be able to obtain a US export license that overcomes the usual restrictions on exporting items from the US to those parties. Some businesses have successfully obtained export licenses to continue providing electronic components to companies such as Huawei. Note that even with export licensing, there may be barriers due to US policy positions (for example, limitations on exports to Huawei in connection with 5G items.)

Global and regional businesses should take all of these steps, while carefully considering their…


Read More:Threading the needle: Competing US-Sino trade control restrictions
| JD Supra