Navigating the complexities under a new US administration
Companies active in mainland China and the United States watched with anticipation whether the new US administration Biden would deviate from aggressive policy stances towards mainland China taken by the previous Trump administration. However, despite more cautious rhetoric, the Biden administration has indicated that it intends to pursue several trade policies towards mainland China established under the Trump administration. In response, mainland China has passed several laws to counter the impact of US trade policies.
US trade control measures targeting mainland China
Despite hopes that the Biden administration may change course on U.S.-Sino trade policy, measures taken in 2021 largely continued – and in some cases intensified – the previous administration’s approach to mainland China.
Trump-era executive orders reissued
Although the Biden administration amended or revoked three Trump administration executive decrees (OEs) relating to mainland China, namely OEs targeting “Communist military enterprises,” WeChat, and TikTok, it immediately replaced them with new ones. OE covering the same issues. A new order replaced and clarified the previous OE regarding “Communist military enterprises” and added additional prohibitions regarding US involvement in the development of Chinese surveillance technology.1 Likewise, a new EO replaced the WeChat and TikTok EOs that have been the subject of legal challenges in US courts.2 The new OE reaffirmed the national emergency and the Trump administration’s determination that mainland China is a foreign adversary, and called on the Commerce Secretary to recommend further measures to protect information and technology technologies and services. communication from the United States by October 7, 2021.
Continued use of feature list designations
The US Department of Commerce continued to use entity list designations to advance its foreign policy objectives, committing to several rounds of Chinese entity designations in 2021. Rationale provided for concern designations national security and foreign policy issues, including alleged involvement in laser and surveillance programs, activities involving the Mainland Chinese military, and involvement in the Xinjiang region.3, 4
Escalating sanctions and trade pressure on Hong Kong
The U.S. government continued to impose sanctions on officials in Hong Kong, as of July 16, 2021.5 In addition to the sanctions, the US government issued a “Hong Kong Business Advisory” “to warn US companies of emerging risks to their operations and activities in Hong Kong”, although the advisory neither prohibits nor does prevents US entities from carrying out activities involving Hong Kong.6
Growing use of trade controls linked to the Xinjiang region
The Biden administration continued to increase its pressure on Xinjiang-related trade controls. As noted above, the Bureau of Industry and Security of the US Department of Commerce added 14 Chinese entities to its list of entities related to activity in the Xinjiang region in July 2021.7 In addition to export control restrictions, the United States has also started to implement import controls on certain silicon products needed for solar inputs produced in the Xinjiang region. The U.S. Customs and Border Protection Agency maintains withholding tax orders (WROs) 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 United States.
The Biden administration also reissued the Trump administration’s Xinjiang Supply Chain Advisory, highlighting information on the due diligence required for companies investing in the region.9 The updated advice provides expanded guidance on due diligence strategies; discusses recent enforcement actions, including visa requirements, sanctioned entities and WROs; deals specifically with risks for investors; and warns US businesses and individuals to withdraw from Xinjiang-related supply chains, businesses and / or investments if mitigation is not possible – or face serious legal risks.
US pressure on export controls maintained
In addition to the above measures, the United States has continued to take a strong position on license applications to Entity List parties, continuing the approach taken at the end of the last administration. In particular, the United States has taken a strong stance against license applications that could provide Huawei with 5G (or near 5G) technologies, including components of such systems.
In addition, US export controls are now considered a key component in foreign direct investment reviews by the Committee on Foreign Investment in the United States (CFIUS). Although the CFIUS has always considered export controls applicable to a US business, the issue of export controls has become critical in determining whether deposits can be mandatory under a relatively recent law, the Foreign Investment Risk Review Modernization Act (FIRRMA).
Mainland China’s response to U.S. trade controls
Mainland China has implemented its own trade control measures since 2021.ten
Sanctions and statutes blocking export control
Mainland China issued a blocking law in January 2021, which provides a legal framework for the Chinese government to counter laws and regulations of other countries deemed to affect China’s interests. For example, the law requires Chinese companies to report any trade restrictions or sanctions, creating a system that notifies the Chinese government of new economic regulations as soon as possible. In addition, the law contains a provision stating that companies may be prohibited from complying with non-Chinese trade restrictions and may be subject to prosecution if they comply with those restrictions. Mainland China followed through on this law with a June 2021 anti-foreign sanctions law that included provisions allowing the deportation of certain people doing business in mainland China as well as other counter-sanctions, such as visa restrictions and blockages of assets and transactions in mainland China.11
Data Security Act and Privacy Act
Mainland China recently passed several laws and regulations on cybersecurity and data privacy. Its Data Security Law, which focuses on data important to China’s national security,12 will enter into force in September 2021. In August 2021, the Standing Committee of the National People’s Congress, mainland China’s main legislative body, adopted the Personal Information Protection Law (PIPL)13 which will take effect on November 1, 2021. The Data Security Law, PIPL and Cyber Security Law (CSL) all aim 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 disclosure requirements for companies operating in mainland China, and penalties for violations.
A practical approach to managing concurrent restrictions
Due to the above regulatory changes, companies involved in US-China trade should continue to maintain a cautious approach.
- Exercise enhanced due diligence—Businesses need to have a good understanding of their products, supply chains and transactional counterparties in order to successfully assess possible risks.
- Analyze whether a proposed transaction presents risks—After gathering all the relevant information, companies should conduct a comprehensive analysis of the potential risks triggered by the proposed transaction. For example, does the transaction involve restricted parties? Are there any limitations on products that may be sourced from certain regions?
- Mitigate risks, where possible– Even if a proposed transaction appears to trigger risks, there may be ways to mitigate the risks. For example, if a transaction involves parties from the list of entities, a company may still be able to obtain a U.S. export license that overcomes the usual restrictions on exporting items from the United States to those entities. parts. Some companies have successfully obtained export licenses to continue supplying electronic components to companies such as Huawei. Note that even with export licenses, there may be obstacles due to US political positions (e.g. limitations on exports to Huawei in relation to 5G items.)
Global and regional businesses should take all of these steps, while carefully considering their risk profiles and how best to balance competing trade restrictions between the United States and China well in advance before embarking on transactions that could create costly dilemmas in the future.
1 See https://www.whitehouse.gov/briefing-room/presidential-actions/2021/06/03/executive-order-on-addressing-the-threat-from-securities-investments-that-finance-certain- companies-of-the-people’s-republic-of-china /.
2 See https://www.whitehouse.gov/briefing-room/presidential-actions/2021/06/09/executive-order-on-protecting-americans-sensible-data-from-foreign-adversaries/.
3 See https://www.govinfo.gov/content/pkg/FR-2021-04-09/pdf/2021-07400.pdf.
4 See https://www.commerce.gov/news/press-releases/2021/07/commerce-department-adds-34-entities-entity-list-target-enablers-chinas.
5 See https://www.state.gov/marking-one-year-of-hong-kongs-national-security-law/.
6 See https://www.state.gov/issuance-of-a-hong-kong-business-advisory/.
7 See https://www.commerce.gov/news/press-releases/2021/07/commerce-department-adds-34-entities-entity-list-target-enablers-chinas.
8 See https://www.cbp.gov/trade/programs-administration/forced-labor/withhold-release-orders-and-findings.
9 See https://www.state.gov/xinjiang-supply-chain-business-advisory/.
10 See MOFCOM Order No. 1 of 2021 on Rules for Counteracting Unjustified Extraterritorial Application of Foreign Law and Other Measures.
11 See Law on Anti-Foreign Sanctions of the People’s Republic of China.
12 See the Data Security Law of the People’s Republic of China.
13 See the Personal Information Protection Law of the People’s Republic of China.
* Katherine Schroeder contributed to the creation of this article.