On August 1, 2018, the US Department of Commerce Bureau of Industry and Security (BIS) published a Federal Register notice stating that the US government had identified 44 Chinese companies as acting contrary to US national security and foreign policy interests.1 As a result, BIS has added these companies to the “Entity List” of the Export Administration Regulations (EAR), which already includes approximately 90 other Chinese entities.2 This action means that the export, re-export and transfer of US-origin goods, software and technology to these entities will now be subject to additional licensing requirements and a general policy of denial for any such export license applications. It also means that no license exceptions under the EAR will be available for transactions with these Chinese companies.
The End-User Review Committee (ERC), composed of representatives of the Departments of Commerce (chair), State, Defense, Energy and, at times, the Treasury, determined that there is reasonable cause to believe that 17 of the Chinese companies are involved in illegally procuring commodities and technologies for unauthorized end-use by the Chinese military.3 The ERC also determined with respect to the remaining 27 entities that there is an “unacceptable risk” that US-origin items would be used in, or diverted to, military end uses in China.4
While the addition of entities to the Entity List is not uncommon, yesterday’s action comes at a time when the United States has engaged in various efforts to confront what is viewed as unfair Chinese practices in technology trade, which many US policymakers consider a potential threat to US national security and technological superiority. These efforts involve, among others, measures to limit the export of emerging and critical technologies to Chinese competitors.
In particular, the National Defense Authorization Act for Fiscal Year 2019 (NDAA)5—a bill recently passed by the House of Representatives and the Senate, now awaiting the President’s signature—contains provisions designed to address the transfer of sensitive US-origin technologies to China and the perceived threat of certain Chinese technology in the United States. These include a prohibition against procurement by federal agencies of technology produced by major Chinese telecommunications companies Huawei Technologies and Zhongxing Telecommunications Equipment (ZTE),6 reflecting concerns that Chinese intelligence services could use these companies’ tools to exploit US technological data.7
Export control provisions have also been woven into the NDAA through the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), Title XVII of the NDAA. FIRRMA is designed to modernize the Committee on Foreign Investment in the United States—the interagency committee that reviews the national security implications of foreign investments.
FIRRMA repeals and replaces the Export Administration Act of 19798 with the new Export Control Reform Act of 2018 (Reform Act). The Reform Act requires the Department of Commerce to create new export restrictions on “emerging and foundational” technologies that are important to the defense community and are not otherwise captured under the US export control regime. FIRRMA tasks the Secretary of Commerce and an interagency group with identifying such technologies that are essential to national security and are not currently controlled under the International Traffic in Arms Regulations, multilateral control regimes implemented by the Commerce Control List, or other relevant US regulations.9 These measures appear to be intended to prevent the transfer of US technology through outbound investments such as joint ventures with Chinese companies (which China sometimes requires as a condition for accessing its market).
President Trump has also previously called for investment restrictions and enhanced export controls as one of several remedies to address China’s unfair and discriminatory innovation-related practices, which the US Trade Representative had identified in its report pursuant to Section 301 of the Trade Act of 1974.10 However, the White House indicated on June 27 that the United States would not impose sweeping new export licensing requirements for categories of products and technologies destined for China that may currently be exportable without licensing, because FIRRMA would be sufficient to tackle China’s “predatory investment practices.”11 The President did, however, direct the Secretary of Commerce “to lead an examination of issues related to the transfer and export of critical technologies.”
In light of these actions, firms shipping or transferring US-origin goods and technology to China should review their business and counterparty relationships to ensure they do not involve any of the 44 Chinese companies newly placed on the Entity List, in addition to the dozens of Chinese entities already listed. It is also important to monitor the implementation of the 2019 NDAA bill, as its passage will have far-reaching implications for the export, re-export or transfer of US-origin products and technology to China.
WilmerHale continues to follow and analyze these developments closely.