New Articles

Biden Administration Issues Executive Order to Restrict U.S. Investment in Chinese Technology Sectors

OSRA investment

Biden Administration Issues Executive Order to Restrict U.S. Investment in Chinese Technology Sectors

Last week, President Biden issued an Executive Order outlining the long-anticipated proposed restrictions on outbound U.S. investments in entities located in China or otherwise subject to China’s jurisdiction. The Executive Order would establish a new national security program to be implemented by the U.S. Department of the Treasury, and according to the Biden administration, the program would target “countries of concern” that seek to develop sensitive or advanced technologies and products critical for military, intelligence, surveillance, or cyber-enabled capabilities. The Treasury Department has already established a website for this outbound investment program, which provides copies of a press release and a fact sheet discussing the proposed restrictions in further detail.  

Importantly, the Executive Order does not implement any regulations, nor does it contain any draft regulations. Instead, the Treasury Department has used the authority provided under the Executive Order to issue an Advance Notice of Proposed Rulemaking (ANPRM) which outlines the intended scope of the program and starts a 45-day comment period in which the Treasury Department will seek feedback from the public on the restrictions. The Treasury is expected to issue its proposed draft regulations sometime next year.

The ANPRM generally envisions implementing regulations which will outright prohibit persons subject to U.S. jurisdiction from making certain extremely sensitive investments related to China and then require them to provide prior notification to Treasury before making other less sensitive investments related to China. Key aspects of the ANPRM include (but are not limited to):

  • The proposed restrictions and reporting requirements will cover any “countries of concern” as identified by the president. Thus far, the only designated “country of concern” is China, which also includes the Special Administrative Regions of Hong Kong and Macau.
  • The ANPRM proposes to target U.S. investments in companies subject to China’s jurisdiction which are engaged in activities related to the following advanced technologies and products:

(i) Semiconductors and microelectronics. Proposed prohibited investments would include investments in entities engaged in the development of electronic design automation software or semiconductor manufacturing equipment; the design, fabrication, or packaging of advanced integrated circuits which meet or exceed certain performance capabilities; and the installation or sale of supercomputers. Proposed notification requirements would cover investments in entities engaged in the design, fabrication, and packaging of integrated circuits with performance capabilities below the investment prohibition threshold.

(ii) Quantum information technologies. Proposed prohibited investments would include investments in entities engaged in the production of quantum computers and certain related cooling components; the development of certain quantum sensing platforms to be exclusively used for military end uses, government intelligence, or mass-surveillance; and the development of a quantum network or communication system designed to be exclusively used for secure communications. Treasury stated it is not currently considering a separate notification requirement for this category.

(iii) Artificial intelligence systems. Proposed prohibited investments would include investments in entities engaged in the development of software that incorporates an AI system and is designed to be either “exclusively used” (the Treasury Department indicated that the term “primarily used” is also under consideration) for military, government intelligence, or mass-surveillance end uses. Proposed notification requirements would cover investments in entities engaged in the development of software that incorporates an AI system and is designed to be either “exclusively used” (or possibly “primarily used”) for certain uses related to cybersecurity, robotic controls, surreptitious listening, non-cooperative location tracking, or facial recognition.

  • The ANPRM anticipates the prohibitions and/or notification requirements will apply to U.S. investments in companies that are engaged in the above activities and that are legally organized and/or headquartered in China or owned by Chinese citizens or the Chinese government, in addition to companies located outside of China that are at least 50% owned, individually or in the aggregate, directly or indirectly, by Chinese citizens, Chinese parent companies, or the Chinese government.
  • The ANPRM also proposes prohibiting or requiring notice for certain transactions, including greenfield investments in certain industries in China. From a practical standpoint, this could restrict certain companies from forming subsidiaries in China if they do business in any of the industries subject to the ANPRM’s prohibitions or notice requirements.
  • The ANPRM technically only applies to U.S. persons, which it defines as any U.S. citizen, lawful permanent resident, entity organized under U.S. law (including foreign branches), and any person in the U.S. However, Treasury is considering imposing requirements which could effectively extend the ANPRM’s restrictions to subsidiaries legally organized outside the U.S. by prohibiting U.S. persons from “directing” any action by a non-U.S. person that would violate the ANPRM’s restrictions if performed by a U.S. person. The ANPRM also contemplates requiring U.S. persons to take appropriate action to cause foreign-organized subsidiaries under their control to comply with its restrictions.
  • When the Treasury Department does eventually enact implementing regulations under the Executive Order and the ANPRM, it does not appear that the Treasury Department will seek to retroactively impose those regulations’ prohibitions and notification requirements on transactions conducted before the forthcoming regulations’ eventual effective date. However, once the Treasury Department does implement these regulations, the ANPRM explicitly states that Treasury is “not considering granting retroactive waivers or exemptions (i.e., waivers or exemptions after a prohibited transaction has been completed).” Therefore, once the new rules take effect, companies will need to avoid prohibited transactions and proactively disclose reportable transactions to avoid violating the new rules.
  • Comments to the ANPRM must be submitted within 45 days after the ANPRM is published in the Federal Register. The ANPRM was published on August 14, 2023, and therefore comments must be received by September 28, 2023, to be considered. If you are interested in submitting a comment, please reach out to HB’s export controls and economic sanctions team or your HB contact for additional guidance.

The ANPRM’s prohibitions appear to apply to a very narrow segment of industries and therefore may only impact a very small number of U.S. investors (if any). However, even if their transactions will not implicate any of the ANPRM’s prohibitions or notice requirements, persons subject to U.S. jurisdiction and seeking to invest in China should be aware that various other existing U.S. laws and regulations could still severely restrict their ability to invest in China. For example, export controls imposed under the U.S. International Traffic in Arms Regulations (ITAR) and U.S. Export Administration Regulations (EAR) will potentially restrict any exports of U.S. origin “technical data” or “technology” to China made in connection with otherwise permissible foreign investments. If Chinese companies do receive U.S. origin software or technology in connection with any U.S. investment, then products manufactured in China through the use of such software or technology could become subject to the EAR’s export controls pursuant to the EAR’s existing foreign-produced direct product rules. Additionally, sanctions imposed by the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) will prohibit U.S. persons from purchasing any publicly traded securities issued by certain companies listed on the Non-SDN Chinese Military Industrial Complex List.


The Amended Order

President Biden Issues Executive Order Modifying, but Mostly Retaining, the Trump Era Chinese Military Company Securities Ban

On June 3, 2021, in one of his first major China-related actions, President Biden issued an Executive Order that amends, but keeps intact the core elements of, previous orders issued by President Trump prohibiting US Persons from investing in the publicly traded securities of certain Chinese Military Companies designated on the Department of Treasury’s Non-SDN-Communist Chinese Military Company (NS-CCMC) List (Amended Order).

While the details of the Amended Order and addition of other named Chinese companies are discussed below, one major takeaway is that the Biden Administration does not plan a wholesale pullback from this type of trading ban. In fact, reports indicate that the Biden Administration is actively considering adding more companies to the list in the future. According to the White House, the Amended Order “allows the United States to prohibit—in a targeted and scoped manner—US investments in Chinese companies that undermine the security or democratic values of the United States and [its] allies.”

Further, the Amended Order also extends the trading ban to additional Chinese companies with capabilities in defense, surveillance and related areas in a new Annex that supersedes the Annex from the original order. These newly covered companies include aerospace technology and electronics companies Shaanxi Zhongtian Rocket Technology Company and China Satellite Communications Co., and telecommunications companies, including China Telecom Corporation and China Unicom (Hong Kong). Also, the Amended Order removes a handful of Chinese companies, including Chinese chemical company Sinochem Group.

The Biden Administration’s application of the securities trading ban to new Chinese companies, some of which do not appear to be state-owned, comes on the heels of recent court actions by companies who have sought and obtained their removal from the list on the grounds that their ties to the Chinese military are too tenuous. In particular, two Chinese companies, Xiaomi Corporation and Luokung Technology Corp., have since been removed from the list after filing successful suits in the US District Court for the District of Columbia. The Amended Order appears to attempt to address this issue by expressly covering entities that, in part, “operate or have operated in the defense and related materiel [sic] sector or the surveillance technology sector of the economy” of China, as detailed more fully below.

The prohibition and impacted Chinese Companies

Similar to the original, under the Amended Order US persons are prohibited from purchasing or selling any publicly traded securities, or any publicly traded securities that are derivative of such securities or are designed to provide investment exposure to such securities, of any entity listed in the Annex. The Amended Order also changes the name of the list from the NS-CCMC List to the Non-SDN Chinese Military-Industrial Complex Companies (NS-CMIC) List.

However, the Amended Order clarifies which entities will be subject to possible future designation, providing that the prohibition is extended to entities determined by the Secretary of the Treasury, in consultation with the Secretary of State and the Secretary of Defense to: (1) operate or have operated in the defense and related material sector or the surveillance technology sector of the Chinese economy; or (2) own or control, or to be owned or controlled by, directly or indirectly, a person who operates or has operated in the defense and related material sector or surveillance technology sector.

The Amended Order establishes a new effective date of August 2, 2021 at 12:01 am for the entities listed in the Annex. Going forward, for companies not on the Annex today that are later designated by the Secretary of the Treasury, the effective date will be 60 days after the Treasury designation.

Exceptions and other provisions

The Amended Order allows the purchase or sale of such securities solely for purposes of divestment by US persons, which must occur by June 3, 2022 for entities listed in yesterday’s Annex, or within one year from the date an entity is subsequently designated by the Secretary of the Treasury.

The Amended Order keeps some provisions and language the same, including those that prohibit transactions that evade or avoid, or are meant to evade or avoid, causes a violation of, or attempt to violate the prohibitions of the Amended Order. Similarly, the Amended Order remains broadly applicable not only to direct purchases of publicly traded securities, but also purchases by US persons of shares in investment funds that hold public securities in such companies. Like the original Order, the Amended Order applies to transactions by US persons involving public securities traded on foreign as well as US exchanges.

However, as alluded to by the White House in its statement, the Amended Order is more targeted than the original order issued by President Trump, specifically referencing certain sectors of concern, such as the surveillance technology sector. The specific addition of surveillance in the Amended Order demonstrates a more targeted approach while also signaling that this is an area where the Biden Administration would like to expand the coverage of the securities-trading prohibitions in light of the recent focus on potential human rights abuses in China.

Indeed, the newly-issued Office of Foreign Assets Control (OFAC) FAQ 900 states that OFAC expects to use its discretion to target those whose operations include or support, or have included or supported: (1) surveillance of persons by Chinese technology companies that occurs outside of China; or (2) the development, marketing, sale, or export of Chinese surveillance technology that is, was, or can be used for surveillance of religious or ethnic minorities or to otherwise facilitate repression or serious human rights abuse.

Other new notable OFAC FAQs

OFAC published a handful of other new FAQs that help further clarify some of the Amended Order’s provisions. For instance, FAQ 902 provides that US persons are not prohibited from providing investment advisory, investment management, or similar services to a non-US person, including a foreign entity or foreign fund, in connection with the non-US person’s purchase or sale of a covered security, provided that the underlying purchase or sale would not otherwise violate the Amended Order.

Similarly, FAQ 903 makes clear that US persons employed by non-US entities are not prohibited from being involved in, or otherwise facilitating, purchases or sales related to a covered security on behalf of their non-US employer, provided that such activity is in the ordinary course of their employment and the underlying purchase or sale would not otherwise violate the Amended Order.

Lastly, FAQ 905 expressly provides that the Amended Order does not prohibit activity with entities designated on the list that is unrelated to the purchase and sale of publicly traded securities, such as the purchase or sale of goods or services.


By Jeffrey P. Bialos, Ginger T. Faulk, Mark D. Herlach, Sarah E. Paul, and Nicholas T. Hillman at Eversheds Sutherland (US) LLP

export controls


This is the fourth in a series of articles by Eversheds Sutherland partners Jeff Bialos and Ginger Faulk explaining the legal and regulatory impacts of certain recent US sanctions and export control actions targeting various Chinese entities. Each article explains the regulatory context of the recent rules.

Our previous articles have discussed recent developments in US sanctions and export controls affecting trade with China, including US export controls on software and semiconductor technology, the Department of Defense list of Chinese military companies, the Commerce Department’s “Military End User” rule, and the use of the US “Entity List” to target various concerns from export control to human rights to Iran sanctions. The last month has also seen efforts to restrict foreign investments in publicly traded securities of companies associated with the Chinese military.

The purpose of this article is to provide a framework and practical guidance for complying with existing and emerging US-China export controls and sanctions. In other words, how does a company establish an effective compliance program that appropriately manages risk, limits potential liability exposure, and, at the same time, if things go wrong, confirms to regulators and prosecutors that the company took compliance seriously, thereby mitigating penalties and avoiding a criminal referral?

The best approach to trade compliance is a multidisciplinary approach

As a starting point, if recent developments in US-China trade policies have taught us anything, it’s that US trade restrictions can apply to everything from technical exchanges (internal and external) and product shipments to intracompany shipments and financial transactions and investments. As such, a company’s approach to compliance with US-China trade rules and well as the broader range of other sanctions regimes should be multidisciplinary and capable of responding to emerging requirements in any and all of these areas.

Recent US-China trade policies have targeted certain products, technology, and software; third parties; financial flows and financial institutions; inbound foreign investment; imports and tariffs; and even access to capital market financing. As a result, in considering your multinational company’s compliance obligations and risk exposure, you should consider the implications across business units and functions, including:

-Research and Development

-Sales and Marketing


-Shipping and Logistics

-Finance and Accounting

-Banking and Insurance

-Customer Service

-IT Systems, and others.

These rules can apply to intra-company, as well as external, activities. Even if one segment of your business has a particular type of heightened risk exposure, it does not mean that is the only segment of your business that may be exposed.

Ensure accountability and support for trade compliance

Overall, an effective compliance program requires a number of core elements: 1) leadership commitment and the allocation of resources to the compliance function; 2) robust procedures and processes integrated into the company’s business; 3) internal controls that can test the efficacy of the procedures on an ongoing basis; and 4) training that ensures that the company’s personnel understand their compliance obligations and internalize them in their work routines.

US regulatory agencies expect a company to assign responsibility to a person or function within a company for ensuring trade compliance and to provide that function sufficient access to, and support from, senior management. Often, this means designating a compliance officer who reports to the board of directors. Regulators will look not only at a company’s “culture of compliance,” but also assess whether the company provided adequate compliance resources commensurate with the size and nature of its operations. Recognizing that a corporate parent may be held liable for its subsidiaries’ trade control violations resulting from inadequate supervision, companies are advised to establish centralized policies and procedures for ensuring and monitoring compliance by each of their subsidiaries. Compliance integration under these policies should be part of every post-acquisition integration effort.

Know Thyself: Assessing your own business risks

A centerpiece of modern regulatory compliance is prudent risk management. In many regulatory areas, including sanctions, it is challenging for firms to achieve 100% compliance at all times.  Rather, the goal is to establish a program to appropriately manage and mitigate compliance risk.

US foreign trade and investment regulatory and enforcement agencies emphasize the importance of conducting a risk assessment in order to identify compliance risks that are particular to your business. OFAC’s Framework for Compliance Commitments advises companies in developing compliance measures to consider the risk profiles of the company’s “customers, supply chain, intermediaries, and counter-parties; (ii) the products and services it offers, including how and where such items fit into other financial or commercial products, services, networks, or systems; and (iii) the geographic locations of the organization, as well as its customers, supply chain, intermediaries, and counter-parties.” [1]

You should also understand how sanctions laws may apply in the context of your company’s multinational structure and operations. It is a mistake to believe that companies operating outside of the US cannot be touched by US sanctions and export controls. Many times violations arise from US person “facilitation” of sanctioned activities and interactions by non-US companies with the US financial system, e.g., through US dollar-denominated financial transactions. For this reason, some US-based multinationals have elected to apply sanctions and export control compliance throughout not only their US, but also foreign, operations – even in areas where the controls are not fully extraterritorial. The application of corporate liability rules in a multinational enterprise where US persons have some level of involvement around the globe otherwise makes compliance more challenging than it needs to be.

In assessing its exposure to US trade controls, a company must look not only at the location of management and administrative support personnel, but also the geographic footprint of its entire product and R&D supply chains, i.e., the location of internal technology and software development and the location of manufacturing of products, parts, components and materials and the development of software and technology on which they are based. Consider not only software and technology shared with third parties but also internal (intracompany) cross-border or domestic transfers of software and technology and establish effective internal controls.

Implement a program to manage identified risks effectively, including Know Your Counterparty (KYC) controls

As impressive as a compliance program may appear on paper, the only worthwhile compliance program is one that is effective. To be effective, a compliance program should work with company’s existing structures and information flows and be integrated with day to day internal work instructions. It needs to be able to incorporate and screen in real-time existing third-party information and implement stop-hold procedures for transactions that trigger risk. This usually calls for a customized screening and software solution.

In developing a trade compliance program, US regulators and enforcement agencies encourage companies to build around certain basic core elements

Management Commitment – As discussed above, demonstrate and document senior management approval of the compliance program and foster a “culture of compliance” with a positive “tone from the top.”

(2) Risk Assessment – Again, a compliance program must be responsive to identified risks, and there is no “one-size-fits-all” approach.

(3) Internal Controls – Per OFAC, this refers to “policies and procedures, in order to identify, interdict, escalate, report (as appropriate), and keep records pertaining to activity that may be prohibited by the regulations and laws.” These internal policies should be clearly set out in writing and consistently implemented and enforced. Heightened review is recommended for transfers of dual-use and military items and dealings with high-risk destinations or counter-parties.

Beyond day-to-day KYC screening, numerous companies have recognized that their foreign collaborative engagements can involve significant risk, which can vary depending on the country, industry, and the particular party involved. Thus, firms often establish a special committee to vet engagements with third parties, whether agents, distributors, or joint venture partners. Individual business units may propose these engagements, and the company will evaluate them on an enterprise-wide basis after due diligence and the assessment of risks, advising also on the structuring of legal arrangements to mitigate such risks.

(4) Testing and Auditing – Regular monitoring of trade compliance is encouraged and, in some cases, expected. Regular auditing can occur at a global level or may rotate to focus on certain business units, functions, or procedures. Testing and auditing may be conducted by internal audit or external subject matter experts.

(5) Compliance training – Much of trade compliance depends on employees knowing how to spot and address “red flags” of sanctions and export control issues. Compliance training should provide information that is readily useable and easily accessible, risk-focused, and tailored to the duties and responsibilities of the participants.

To summarize, in today’s global business, complying with US-China trade policies requires a holistic review of a company’s external and internal operations. The best compliance programs are developed on the basis of a realistic review of a company’s compliance risk exposure; designed to be able to respond to ever-changing targets and regulations; and implemented effectively to work with a company’s existing systems and structures.


Ginger T. Faulk, partner at Eversheds Sutherland, represents multinational companies in matters involving US government regulation of foreign trade and investment. She has extensive experience advising and representing global companies, counseling clients in matters arising under US sanctions, export controls, import and other national security and foreign policy trade-related regulations.

Jeffrey P.  Bialos, partner at Eversheds Sutherland, assists clients in making multi-faceted business decisions, structuring transactions and complying with complex regulatory requirements. A former Deputy Under Secretary of Defense for Industrial Affairs, he brings deep experience in defense, homeland security and national security matters, including antitrust, export controls, foreign investment, industrial security, the Foreign Corrupt Practices Act, and mergers and acquisitions, and procurement.


[1] OFAC Framework for Compliance Commitments, at; see also BIS Elements of an Effective Compliance Program, available at at; see also US Department of Justice, National Security Division, “Export Control and Sanctions Enforcement Policy for Business Organizations,” Dec. 14, 2019, available at


Congress Passes Bipartisan Legislation Requiring Chinese and Other Firms Listed on US exchanges to meet US Audit Standards

In near lightning speed, Congress now has passed, and the President is expected to imminently sign into law, the Holding Foreign Companies Accountable Act (HFCAA), a bipartisan piece of legislation that, while applicable more broadly, is directed at the audit practices of Chinese companies, especially those owned or controlled by the Chinese government, and establishes a process to delist from US exchanges those companies that do not meet certain US audit standards.

This legislation follows on the heels of the Trump Administration’s action last week to bar US persons from investing in publicly traded securities of Chinese firms determined by the US government to be owned or controlled by the Chinese military. Unlike this more limited investment prohibition, which was established by Executive Order and can be revoked by the new Administration by executive action, the HFCAA is binding legislation that President-elect Biden would have no authority to waive.

Thus, the legislation mandates the process for delisting and directs the US Securities and Exchange Commission (SEC), an independent agency, to implement the listing ban.

HFCAA requirements

The HFCAA, which was first introduced in the Senate in May 2020, passed the Senate by unanimous consent that same month and was just passed in the US House of Representatives by voice vote on December 2, 2020. It now goes to President Trump’s desk to be signed into law.

Specifically, by its terms, the HFCAA establishes that an issuer’s securities will be banned from trading on US national securities exchanges in the event that, for three consecutive years, the issuer utilized a registered public accounting firm that has a branch or office located in a foreign jurisdiction that the US Public Company Accounting Oversight Board (PCAOB) is unable to inspect or investigate completely because of a position taken by an authority in the foreign jurisdiction. Each year in which this occurs is referred to a “non-inspection” year.

The SEC has the authority to eliminate an initial ban if the issuer certifies that it has retained a registered public accounting firm that the PCAOB has inspected, but the SEC may also reinstitute the ban in the event the issuer experiences a subsequent non-inspection year. A reinstituted ban lasts for at least five years, after which the SEC may end the ban if the issuer certifies that it will retain a registered public accounting firm that the PCAOB is able to inspect.

The HFCAA also has important disclosure obligations for issuers that experience non-inspection years. Specifically, among other things, in each non-inspection year the foreign issuer would be required to disclose to the SEC:

-The percentage of the shares of the issuer owned by governmental entities in the foreign jurisdiction in which in the issuer is incorporated or organized;

-Whether governmental entities in the applicable foreign jurisdiction with respect to that registered public accounting firm have a controlling financial interest with respect to the issuer;

-The name of each official of the Chinese Communist Party who is a member of the board of directors of (1) the issuer, or (2) the operating entity with respect to the issuer; and

-Whether the issuer’s articles of incorporation (or equivalent organizing document) contains any charter of the Chinese Communist Party, including the text of any such charter.

The SEC is required to promulgate regulations implementing the HFCAA within 90 days of enactment.

The HFCAA in context

The HFCAA has enjoyed bipartisan support and little organized opposition since it was introduced in the Senate in May 2020. Its passage and impending enactment is the culmination of ongoing public debate in the United States on whether to delist from US exchanges Chinese companies—especially those owned or controlled by the Chinese government—with audit practices that do not meet US standards.

In December 2018, the SEC and the PCAOB, which oversees the auditing of public companies, issued a joint warning to investors about the challenges US regulators face when seeking to conduct oversight of US-listed companies whose operations are based in China and Hong Kong. Chinese law requires that records remain in China, and the Communist Party restricts access to typical accounting information on the grounds of national security and state secrecy.1 In February 2020, the SEC released a statement regarding the difficulties that US regulators face when auditing US-listed companies based in China, and said that US investors and the US capital markets have become generally more exposed to companies with significant operations in China.2

Thereafter, in February 2019, the US-China Economic and Security Review Commission identified 156 Chinese companies—including 11 state-owned enterprises—listed on three of the largest US exchanges with a combined market capitalization of $1.2 trillion.

Subsequently, in July 2020, the Presidential Working Group (PWG) on Financial Markets, at the direction of President Trump, completed its examination of measures to protect US investors and recommended policies consistent with those contained in the Senate and House versions of the HFCAA.3  The PWG was chaired by the US Secretary of the Treasury Steven Mnuchin, and included the Chairman of the Board of Governors of the Federal Reserve System Jerome Powell, the Chairman of the SEC Jay Clayton, and the Chairman of the US Commodity Futures Trading Commission Heath P. Tarbert. The PWG ultimately recommended Chinese companies be delisted beginning in 2022 unless US regulators can obtain access to their audits.

The American Securities Association, a securities advocacy group, also issued a report in August 2020 recommending that Chinese firms failing to comply with SEC audit requirements be forced to deregister within six months—a considerably shorter time frame than the three years set forth in HFCAA.

Potential impact of the HFCAA and what comes next

Under the HFCAA, as noted above, any foreign issuers would be delisted from US exchanges if, for three consecutive years, it utilizes a registered public accounting firm with an office or branch in its jurisdiction to conduct its audit and the issuer refuses inspection of the audit report based on the law of said jurisdiction. Additionally, for each “non-inspection year” identified by the SEC, the foreign issuer would be required to submit additional disclosures.

While covering all foreign issuers of securities traded on US exchanges, the HFCAA in fact is directed to Chinese companies listed on US exchanges that utilize auditing firms not subject to standards established by the PCAOB.  For example, SEC Chairman Jay Clayton has stated that “[t]he [HFCAA] is a legislative attempt to get China to comply with the oversight requirements” and that “[t]he status quo is not acceptable.” 4

While some might view this measure as spillover into the financial sector of the ongoing US-Chinese economic and trade tensions, other observers have noted that it is hard to argue with the logic that firms listed on major US exchanges, which are afforded access to the most liquid capital markets in the world, should without exception be subject to transparent and robust audit disciplines compliant with western standards.

Implementation issues

The SEC is required to promulgate implementing regulations within 90 days after enactment, and it is possible the SEC will attempt to push out proposed regulations before President Trump leaves office on January 20, 2021. Any such proposed regulations must go through a public comment period before final regulations are issued and implemented, however. Thus, it is also possible that the latter part of the rulemaking process would occur during the incoming Biden Administration.

As noted at the outset, the HFCAA mandates the delisting process and only affords the SEC the authority to establish rules to implement this process and provide the details of obligatory reporting by covered companies. Moreover, the SEC, as an independent agency, is not directly subject to oversight by the new Administration on its implementation of the HFCAA.

Nevertheless, there is the prospect that some greater flexibility can be injected into the delisting process. In this regard, US news outlets have recently reported that the SEC is also working on a separate proposal that would allow Chinese auditors to comply with the US inspection requirement without violating its own jurisdiction’s laws by permitting the companies to get a second review of their books by an accounting firm based in a country where auditors comply with PCAOB oversight.5  Such a rule would take weeks or months to finalize.

Moreover, it is possible that there could be some negotiations between the US and China over applicable accounting standards for Chinese issuers that meet PCAOB standards. Whether such negotiations occur, however, remains to be seen.


By Jeffrey P. Bialos, Ginger T. Faulk, Mark D. Herlach and Nicholas T. Hillman at Eversheds Sutherland. Republished with permission.

free trade


Frédéric Bastiat famously claimed that “if goods don’t cross borders, soldiers will.”

Bastiat argued that free trade between countries could reduce international conflict because trade forges connections between nations and gives each country an incentive to avoid war with its trading partners. If every nation were an economic island, the lack of positive interaction created by trade could leave more room for conflict. Two hundred years after Bastiat, libertarians take this idea as gospel. Unfortunately, not everyone does. But as recent research shows, the historical evidence confirms Bastiat’s famous claim.

To Trade or to Raid

In “Peace through Trade or Free Trade?” professor Patrick J. McDonald, from the University of Texas at Austin, empirically tested whether greater levels of protectionism in a country (tariffs, quotas, etc.) would increase the probability of international conflict in that nation. He used a tool called dyads to analyze every country’s international relations from 1960 until 2000. A dyad is the interaction between one country and another country: German and French relations would be one dyad, German and Russian relations would be a second, French and Australian relations would be a third. He further broke this down into dyad-years; the relations between Germany and France in 1965 would be one dyad-year, the relations between France and Australia in 1973 would be a second, and so on.

Using these dyad-years, McDonald analyzed the behavior of every country in the world for the past 40 years. His analysis showed a negative correlation between free trade and conflict: The more freely a country trades, the fewer wars it engages in. Countries that engage in free trade are less likely to invade and less likely to be invaded.

Trading partners

The Causal Arrow

Of course, this finding might be a matter of confusing correlation for causation. Maybe countries engaging in free trade fight less often for some other reason, like the fact that they tend also to be more democratic. Democratic countries make war less often than empires do. But McDonald controls for these variables. Controlling for a state’s political structure is important, because democracies and republics tend to fight less than authoritarian regimes.

McDonald also controlled for a country’s economic growth, because countries in a recession are more likely to go to war than those in a boom, often in order to distract their people from their economic woes. McDonald even controlled for factors like geographic proximity: It’s easier for Germany and France to fight each other than it is for the United States and China, because troops in the former group only have to cross a shared border.

The takeaway from McDonald’s analysis is that protectionism can actually lead to conflict. McDonald found that a country in the bottom 10 percent for protectionism (meaning it is less protectionist than 90 percent of other countries) is 70 percent less likely to engage in a new conflict (either as invader or as target) than one in the top 10 percent for protectionism.

Trade and Conflict

Protectionism and War

Why does protectionism lead to conflict, and why does free trade help to prevent it? The answers, though well-known to classical liberals, are worth mentioning.

First, trade creates international goodwill. If Chinese and American businessmen trade on a regular basis, both sides benefit. And mutual benefit disposes people to look for the good in each other. Exchange of goods also promotes an exchange of cultures. For decades, Americans saw China as a mysterious country with strange, even hostile values. But in the 21st century, trade between our nations has increased markedly, and both countries know each other a little better now. iPod-wielding Chinese teenagers are like American teenagers, for example. They’re not terribly mysterious. Likewise, the Chinese understand democracy and American consumerism more than they once did. The countries may not find overlap in all of each other’s values, but trade has helped us to at least understand each other.

Trade helps to humanize the people that you trade with. And it’s tougher to want to go to war with your human trading partners than with a country you see only as lines on a map.

Second, trade gives nations an economic incentive to avoid war. If Nation X sells its best steel to Nation Y, and its businessmen reap plenty of profits in exchange, then businessmen on both sides are going to oppose war. This was actually the case with Germany and France right before World War I. Germany sold steel to France, and German businessmen were firmly opposed to war. They only grudgingly came to support it when German ministers told them that the war would only last a few short months. German steel had a strong incentive to oppose war, and if the situation had progressed a little differently—or if the German government had been a little more realistic about the timeline of the war—that incentive might have kept Germany out of World War I.

% reduction in conflict

Third, protectionism promotes hostility. This is why free trade, not just aggregate trade (which could be accompanied by high tariffs and quotas), leads to peace. If the United States imposes a tariff on Japanese automobiles, that tariff hurts Japanese businesses. It creates hostility in Japan toward the United States. Japan might even retaliate with a tariff on U.S. steel, hurting U.S. steel makers and angering our government, which would retaliate with another tariff. Both countries now have an excuse to leverage nationalist feelings to gain support at home; that makes outright war with the other country an easier sell, should it come to that.

In socioeconomic academic circles, this is called the Richardson process of reciprocal and increasing hostilities; the United States harms Japan, which retaliates, causing the United States to retaliate again. History shows that the Richardson process can easily be applied to protectionism. For instance, in the 1930s, industrialized nations raised tariffs and trade barriers; countries eschewed multilateralism and turned inward. These decisions led to rising hostilities, which helped set World War II in motion.

These factors help explain why free trade leads to peace, and protectionism leads to more conflict.

Free Trade and Peace

One final note: McDonald’s analysis shows that taking a country from the top 10 percent for protectionism to the bottom 10 percent will reduce the probability of future conflict by 70 percent. He performed the same analysis for the democracy of a country and showed that taking a country from the top 10 percent (very democratic) to the bottom 10 percent (not democratic) would only reduce conflict by 30 percent.

Democracy is a well-documented deterrent: The more democratic a country becomes, the less likely it is to resort to international conflict. But reducing protectionism, according to McDonald, is more than twice as effective at reducing conflict than becoming more democratic.

Here in the United States, we talk a lot about spreading democracy. We invaded Iraq partly to “spread democracy.” A New York Times op-ed by Professor Dov Ronen of Harvard University claimed that “the United States has been waging an ideological campaign to spread democracy around the world” since 1989. One of the justifications for our international crusade is to make the world a safer place.

Perhaps we should spend a little more time spreading free trade instead. That might really lead to a more peaceful world.

This article was originally published on


Julian Adorney

Julian Adorney is a Young Voices contributor. He’s written for FEE, National Review, The Federalist, and blogs at The Empathetic Libertarian.


Why Washington Shouldn’t see Vietnam as the Next China

In a recent Senate Finance Committee report, U.S. Trade Czar Robert Lighthizer opined that Vietnam must take action to curb its growing trade surplus with the U.S., including removing barriers to market access for U.S. companies.

While it is true that Vietnam’s trade surplus has grown significantly in 2019, much of it is the result of the trade war between the U.S. and China that has prompted importers to source from Vietnam as an alternative to China.

Rather than attempt to stunt Vietnam’s trade surplus through tariffs or other trade actions, Washington should be establishing alliances with countries in Southeast Asia as part of its quest to ensure balanced trade and market stability.

Lighthizer’scomments were in response to queries from the Committee and echoed previous statements made by White House administration officials who have identified Vietnam as one of several countries to watch with respect to trade activity. And while there hasn’t been a direct threat of imposing tariffs on Vietnamese imports, the recent implementation of a 400% duty on Vietnamese steel imports and the recent rhetoric in Washington regarding transshipment has many businesses nervous that their new safe haven may be the President’s next target for trade action.

Troublesome to United State Trade Representative (USTR) is that the surplus thus far in 2019 is already more than 30% higher than it was at this time last year, making Vietnam the leading nation in terms of percentage increase of import value in 2019.

Hastening trade imbalance

Washington has been at least somewhat complicit in hastening Vietnam’s growing trade surplus. Since the U.S. began imposing tariffs on China-origin goods, many U.S. companies (and some Chinese companies) have been looking to shift production to neighboring markets in Asia. A recent poll of U.S. companies by the U.S. Chamber of Commerce in China showed that more than 40% of American companies with production in China were looking to move to a neighboring country if they hadn’t already done so. These include the likes of Dell, HP, Steve Madden, Brooks and others. Even non-U.S. companies, like Japan’s Nintendo and China’s own electronics giant TCL are looking to shift production out of China and into Vietnam.

Vietnam was an obvious choice for many of these manufacturers looking to circumvent Washington’s onerous tariffs. For years, Vietnam has been investing heavily in improving its roadway and port infrastructure, as well as augmenting its pool of high-skilled laborers so that it can attract large hi-tech giants. The advancements were well-timed to coincide with increasing wages and regulatory restrictions in China that were driving up costs and forcing foreign producers to look elsewhere for low-cost manufacturing alternatives. This was taking place well before the current administration in Washington began cracking down on China’s questionable trade practices.

To be fair, Washington does have some cause for complaint. It’s one of Asia’s worst kept secrets that Vietnam, Malaysia and Thailand have become convenient transshipment hubs for Chinese companies looking to circumvent quotas and, more recently, tariffs by making minor tweaks in neighboring countries to products almost wholly manufactured in China and sending them along to the U.S. as “Vietnamese” or “Malaysian” exports. In the end, there is little monetary gain for Vietnam and much opportunity for reputational damage. Hanoi’s incentive for playing along is purely political; it wants to placate China, its much larger neighbor and regional hegemon.

Hanoi has already said it will crackdown on Chinese transshipments labeled as being of Vietnamese origin. Nikkei Asian Review is reporting the Vietnamese government is considering new rules that would require 30% of a good’s price to be comprised of Vietnamese manufacturing for it to be considered as being of Vietnamese origin. Whether or not this will pacify the USTR remains to be seen.

Yet while Chinese transshipments may have been a catalyst to Vietnam’s soaring trade surplus, the ongoing U.S-China trade war has unquestionably accelerated the development of a trend that was only in its infancy a few short years ago.

If Washington is looking to penalize Vietnam for a trade surplus born out of Washington’s trade war with Beijing, where will the cycle of tariffs end?

Options for low-cost sourcing plentiful

Let’s assume Washington succeeds in quelling the growth of Vietnam’s trade surplus by imposing tariffs in the same manner it has with China, the EU and other entities. The likely outcome will be that U.S. companies then look to Thailand, Myanmar, Bangladesh or Cambodia (as many have already) to replace or supplement their production in China.

Let’s assume that Washington then imposes similar tariffs on imports from those countries. The likely outcome will be that U.S. companies then shift their attention to India, Mexico or any other country that offer lower cost labor and limited regulatory burden. And on and on it goes.

Washington wants to see production repatriated back to the United States, but only six percent of American companies moving production out of China are looking at reshoring their manufacturing facilities. One of the key reasons is that the facilities currently in China are intended to support regional exports and reshoring production to the U.S. would result in unnecessary transport costs and time in transit. In other cases, the cost of moving production to the U.S. could be too onerous to allow companies to compete globally.

A battle worth waging – along with friends and allies

This is not to suggest Washington’s war on China’s unsavory trade practices is unjust or futile. On the contrary, China’s history of misappropriating intellectual property through technology transfer, cybersecurity incidents and other trade violations requires America to act. But tariffs only punish American companies that will continue to shift their production as necessary to reduce their landed costs.

Instead of reprimanding and punishing countries like Vietnam with tariffs in response to growing trade surpluses, Washington should be working with them to forge alliances that will ensure China is forced to play by the rules.

If the U.S. truly wants to stave off bad actors such as China from continuing to abuse the global trade’s rule-based system, it will need the support of friends and allies in the eastern and western hemispheres. Acting alone and imposing unilateral restrictions only throws Washington into a battle of wills for which collateral damage is certain, but the outcome remains unknown.


Cora Di Pietro is vice president of Global Trade Consulting at trade-services firm Livingston International. She is a frequent speaker and lecturer at industry and academic events and is an active member of numerous industry groups and associations. She can be reached at