The China Question

www.worldecr.com 13 ThE ChInAquESTIOn CHINA necessary to secure a transaction in very unusual ways in comparison to anywhere else in the world.’ Fayhee warns that for businesses, ‘the risks are real’ because BIS has been issuing notifications ‘on a far more regular basis than ever before in history.’ Since October last year, BIS has been sending out what have become known as ‘is informed’ letters to US semiconductor manufacturers via a confidential notice. ey are informed that they will require export licences for certain products or technology supplied to Semiconductor Manufacturing International Corporation (‘SMIC’), China’s largest semiconductor manufacturer. e Wall Street Journal , which broke the story about the notices, said that the Commerce Department was concerned about high risks of diversion to a military end-user. SMIC’s customers include US tech giants like Qualcomm, Broadcom and Texas Instruments. ‘Companies are well advised to do their diligence at least on a periodic basis, depending upon the nature of the products and the risks,’ Fayhee says. ‘But they need to be prepared that, in the middle of a supply contract or other obligation, they can receive the “is informed” letter. If they misjudge it and are given this notice, there’s nowhere to go from there.’ Diversify, diversify e landscape for trade with China has changed dramatically in the two decades since President Clinton opened the floodgates of trade with China by championing its entry into the World Trade Organization and granting it most- favoured-nation status, a privilege that was revoked by Trump. Giovanna M. Cinelli, a partner at law firm Morgan Lewis in Washington, DC, and head of the firm’s International Trade and National Security Practice, outlines how the Trump administration used regulations differently to manage what it saw as China’s ‘threat to the world’. ‘e management of key policy and trade issues normally required a focus on the Commerce Department or the State Department, because they handle the majority of activity under US export laws and regulations,’ Cinelli explains. ‘But the Trump administration utilised a “whole of government” approach to move forward with either sanctions or restrictions. You not only have State and Commerce from the export side, you have the Justice Department focus through the agency’s China Initiative, as well as the Federal Communications Commission (‘FCC’) from the national security side with its designations. In addition, the FBI issued inquiries to industry and the Department of Homeland Security stepped in with restrictions on the basis of cyber-related issues,’ she adds. e Biden administration has continued Trump’s policy and recently issued executive orders related to supply chain, protection of personal data, and cyber security. ‘at has been a bit of a wrinkle for industry because it’s expanded the number of stakeholders in the process and increased the level of engagement that’s needed to manage the trading relationship,’ Cinelli says, adding that, among other issues, her firm is advising clients to take a detailed look at their partners and their supply chains. ‘One of the primary objectives that we’re working with clients on is revisiting, updating and re-executing a lot of their commercial documentation. With the review and revision, we’re also working with them to diversify their supply chains,’ Cinelli adds. She points out that under Biden, ‘e type of objectives that the Trump administration was using to justify a tightening of controls is shiing away from national security alone and towards human rights and foreign policy. ‘What we’re seeing now in the Biden administration and the EU is an incredible focus on human rights and more foreign- policy-related concerns. We are why worry if I don’t export? While corporate giants will likely have the expertise to understand what they can and cannot do under the expanded regulations, it is not always easy for small companies to understand the impact. ‘Sometimes clients will ask, “I don’t export, so do I need to worry about these regulations?” says Barbara D. Linney, partner at BakerHostetler in Washington, DC, and the firm’s International Trade and National Security team co-leader. Linney says that ‘the answer to that is “yes”, for a variety of reasons,’ but advises that a good starting point for all companies dealing in some way with China is the Commerce Department’s ‘deemed export’ rule. ‘Under the deemed export concept, a release of controlled information to foreign nationals, even if it occurs in the United States, is considered an export,’ Linney explains, noting that a product does not have to travel across the US border to be considered an export. ‘Just exposing a non-US citizen to export- controlled technology, even on US soil, may be treated as an export,’ she says. Such a disclosure of information, if made without a proper licence, is potentially a violation of federal law that could result in harsh penalties. While the deemed export rule does not apply to China alone, it has a significant impact on transfer of technology to China. ‘Companies who are confronted with a multinational workforce, multinational visitors to their plants and so forth obviously have to be aware of these issues, even if they don't send their products or technology out of the United States to another country,’ she says. Linney adds that various players in the supply chain also have become much more sophisticated in terms of requiring their suppliers to provide information, so that they can themselves comply with export control laws and regulations. ‘In terms of how to approach advising clients on these issues, you have to make sure the client understands that they have to take a somewhat holistic approach to their compliance system,’ Linney says. ‘What I mean is that you can't really have your sanctions compliance over here and your export compliance in another place, because if you try to “stovepipe” or separate these functions and these concepts, you can quickly sort of run afoul of rules. You have to think of the whole regulatory landscape and not just look at export controls or sanctions in isolation. You must understand the potential impact of all of the laws and regulations that could impact whatever transaction you're contemplating.’ Classification ‘is the foundation of the US export control system,’ she says. ‘You obviously have to know whether your transaction is subject to ITAR (International Traffic in Arms Regulations) or subject to the EAR (Export Administration Regulations) or subject to other regulatory programs that impact exports. Once you have determined which agency has jurisdiction under which set of rules you also have to know the specific classification in order to drill down and determine whether a licence is required and, if so, what licence exceptions might be available.’ ‘Without an appropriate export classification effort you simply can't be in compliance with export control laws,’ she warns. Barbara Linney