By Devin Sefton, Senior Associate Attorney, Braumiller Law Group
Although 2020 is not over yet (unfortunately), the Bureau of Industry and Security (“BIS”) has had a busy year by any measure. A review of this year’s key export controls developments shows that China, above all, has dominated BIS’s attention. These changes are no doubt motivated by concerns over China’s “Belt and Road Initiative,” the close relationship between China’s civil and military sectors, and the breakdown of trade talks between China and the U.S. This article provides a summary of key changes to U.S. export controls in 2020 vis-à-vis China. Among the key changes in 2020 are the following:
- Military End-User/Use Restrictions with respect to China, Russia, and Venezuela.
- Expansion of the Foreign-Produced Direct Product Rule and removal of the Temporary General License (“TGL”) for Huawei.
- Removal of differential treatment of Hong Kong under the Export Administration Regulations (“EAR”).
- Publication of Advanced Notice of Proposed Rulemaking (“ANPRM”) for “foundational technologies.”
In addition to the above developments, BIS has added a number of prominent Chinese entities to the Entity List in connection with concerns over China’s activities in the South China Sea, human right abuses in the Xingjiang Uyghur Autonomous region (“XUAR”), and in connection with Huawei.
Changes to Military End-User/Use Restrictions with respect to China, Russia, and Venezuela
Perhaps the most dramatic measure taken by BIS in 2020 was the expansion of restrictions on exports/reexports to military end-users/uses to China via a Final Rule published on April 28, 2020, which became effective on June 29, 2020. Prior to June 29, the EAR imposed restrictions on exports/reexports of certain items to military end-users and end-uses in Russia and Venezuela. Under the new rule, these restrictions were expanded to apply to exports/reexports to military end-users and for military end-uses in China as well. Furthermore, BIS expanded the list of items subject to the military end-user/use restrictions to include a broad array of items that are otherwise subject to minor levels of controls, including numerous items controlled only for Anti-Terrorism (“AT”), a number of commodities commonly used in semiconductor manufacturing and telecommunications, as well as mass market software controlled under 5D992.
The new rules also expand the definition of “military end use” to include any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, “development,” or “production” of military items, and requires exporters to submit Electronic Export Information (“EEI”) in the Automated Export System (“AES”) for any item controlled on the CCL that are to China, Russia, or Venezuela, regardless of the export’s value.
Given the strong formal and informal ties between China’s civil and military sectors, the new restrictions have, and will, continue to disrupt exports to China and increase exposure for those who export to China.
Expansion of the Foreign-Produced Direct Product Rule and removal of the Temporary General License (“TGL”) for Huawei.
On May 19, 2020 and August 17, 2020, BIS issued Final Rules expanding General Prohibition Three’s controls on foreign-produced items that are the direct product of certain U.S. technology or software. Under the new restrictions, it is prohibited to reexport, export from abroad, or transfer certain foreign-produced items when there is “knowledge” (including “reason to know”) that the foreign-produced item is destined for certain designated entities on the Entity List. Currently, the only entities to which the new restrictions apply are Huawei and its affiliates that are listed on the Entity List.
The new restrictions apply to foreign-produced items that are the direct product of: 1) certain designated technology or software subject to the EAR; or 2) a plant or major component of a plant outside of the U.S., when the plant or major component of the plant is the direct product of certain designated U.S technology or software. The designated ECCNs include a broad range of commodities in Categories 3, 4, and 5 of the CCL.
The new rules also expand restrictions on Huawei by prohibiting exports/reexports when the exporter/reexporter knows, or has reason to know, that the foreign-produced item will be incorporated into, or used in the production or development of a part, components, or equipment produced, purchased, or ordered by Huawei, or a listed Huawei affiliate. Furthermore, although not specific to Huawei, the new rule “clarifies” that the Entity List licensing requirements applies when an entity on the Entity List is involved in the transaction as a “purchaser,” “intermediate consignee,” “ultimate consignee,” or “end user.”
In sum, the new rules are designed to address certain gaps in the export restrictions that were previously in force with respect to Huawei. Namely, the new rules target Huawei’s ability to contract with foreign manufacturers that use U.S.-origin software, technology, or equipment. Additionally, the new rules prevent Huawei, or any other listed entity, from structuring transactions in such a way that a third party serves as the consignee on behalf of Huawei or the listed entity.
Finally, the rule issued on August 17, 2020 removed the Temporary General License (“TGL”) for exports/reexports to Huawei, while maintaining the TGL for cybersecurity research and vulnerability disclosure authorization.
Removal of differential treatment of Hong Kong under the EAR
On July 31, 2020, BIS suspended all License Exception for Hong Kong that provide special treatment to Hong Kong relative to mainland People’s Republic of China (“PRC”). As a result, numerous License Exceptions are no longer applicable to exports to Hong Kong, including Shipments of Limited Value (“LVS”), Technology and Software under Restrictions (“TSR”), Temporary Imports, Exports, Reexports, and Transfers (in-country) (“TMP”), Baggage (“BAG”), and Additional Permissive Reexports (“APR”), among others.
Publication of ANPRM for “foundational technologies”
Section 1758 of the Export Control Reform Act of 2018 (“ECRA”) requires the establishment of a multi-agency process to “identify emerging and foundational technologies that are essential to the national security of the United States.” Under the ECRA, BIS is required to “establish appropriate controls “ for any identified foundational technologies. On August 27, 2020, BIS published an ANPRM seeking public comment on criteria for identifying “foundation technologies,” which are to be used by BIS to help develop appropriate controls. The identified items may be subject to minimal controls under existing U.S export controls. After extending the comment period, the comment period was closed on November 9, 2020.
Addition of Chinese Entities to the Entity List
This year, BIS added scores of Chinese companies to the BIS Entity List under various authorities, including:
- On June 5 and July 22, BIS added a total of 20 Chinese entities to the Entity List in connection with human rights violations and abuses in the XUAR region, including a number of governmental entities. Among the listed entities is the Ministry of Public Security’s Institute of Forensic Science of China.
- On June 5, BIS added 24 entities associated with the Chinese military to the Entity List.
- On August 17, BIS added 28 non-US affiliates of Huawei to the Entity List.
- On August 27, BIS designated 25 Chinese state-owned entities to the Entity List, including a number of subsidiaries of the China Communications Construction Company (“CCCC”), for their activities in connection with the South China Sea.
A review of BIS’s activities in 2020 show a strong focus on China. While some may anticipate that a new administration will usher in a loosening of restrictions on China, we would not bet on it. Export restrictions on China is a rare area of bi-partisan agreement. If anything, the Trump Administration subverted BIS’s role, in lieu of trade negotiations with China. With the deterioration of these trade negotiations, we have witnessed BIS adopt an increasingly aggressive posture, in line with the concerns of Congress and career national security officials. At the moment, we see no reason to believe that BIS’s trajectory will change in the coming year.