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China Firmly Rejects US Accusations of Trade Barriers, Calls for Compliance with WTO Rules

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Global Trade Daily, International Trade, News, United states news

China Firmly Rejects US Accusations of Trade Barriers, Calls for Compliance with WTO Rules

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China’s Ministry of Commerce (MOFCOM) issued a strong rebuttal on Tuesday against the US’ National Trade Estimate Report on Foreign Trade Barriers, vehemently rejecting its classification of China as a country of “primary concern.” The ministry urged the US to adhere fully to WTO rules instead of levying unsubstantiated accusations against other nations.

MOFCOM emphasized that the assessment of countries’ trade policies should be based on whether they violate WTO regulations, noting the absence of any evidence in the US report to support claims of Chinese non-compliance. The report’s arbitrary allegations regarding China’s purported “non-market policies and practices,” as well as barriers in agricultural products and data policies, were strongly opposed by China.

Since joining the WTO, China, as the largest developing nation globally, has consistently upheld the multilateral trading system while expanding its high-quality opening-up efforts. It has continuously refined its socialist market economy system and legal framework, emphasizing the pivotal role of the market in resource allocation. These efforts have garnered widespread recognition and appreciation from the international community, according to MOFCOM.

In contrast, the US has pursued an “America first” strategy, disregarding multilateral trade norms by unilaterally imposing tariffs, formulating discriminatory industrial policies, and imposing export controls and investment restrictions under the guise of national security. These actions have raised concerns among WTO members, including China, about fair competition, MOFCOM stressed.

China urged the US to cease its baseless criticism of other nations, abide by WTO regulations, and uphold a just and equitable international trade order, MOFCOM stated.

The annual report released by the US Trade Representative’s office on Monday alleged that China has erected trade barriers related to food safety requirements, advanced manufacturing industrial policies, and data regulations.

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Global Trade Daily, International Trade, United states news

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

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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.

 

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Archives, Global Trade Daily, In The News

New Foreign Investment Restriction Regulations Cement CFIUS Reform

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One of the emerging focal points of the U.S.-China trade war involves the implementation of updated foreign investment restrictions in key U.S. industries. 

On September 17, 2019, the Department of the Treasury issued proposed regulations to implement the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), legislation that sought to reform and expand the scope of foreign investment reviews conducted by the Committee on Foreign Investment in the United States (CFIUS). CFIUS, an inter-agency committee chaired by the Treasury Department with the authority to review, modify and potentially reject certain types of foreign investment that could adversely affect U.S. national security, has undergone a significant overhaul during the past year in the wake of FIRRMA becoming law in August 2018. It is now more vital than ever that companies understand how their business can be affected by the updated CFIUS regulations when they are seeking or negotiating a merger, acquisition, real estate investment or even a non-controlling investment from a foreign investor.

Typically, CFIUS reviews are voluntary and are conducted for merger or acquisition transactions where a non-U.S. company or a foreign government-controlled entity obtain a controlling interest in a U.S. company. If CFIUS determines that a covered transaction presents a national security risk, it has the authority to impose certain mitigating conditions before allowing the deal to proceed and can refer the transaction to the President for an ultimate decision. 

However, FIRRMA updated and expanded the scope of CFIUS jurisdiction to authorize reviews of additional types of non-controlling foreign investments based on the type of U.S. company involved. The implementing regulations proposed in September 2019 are set to take effect February 13, 2020, and while the CFIUS reform regulations are motivated by concerns directly related to China, the impact of FIRRMA will be felt globally and the new rules will not be tied to or affected by impending trade negotiations. U.S. businesses, particularly those involved in critical technologies, real estate, infrastructure and data collection or maintenance, must take heed of how the updated rules will affect their global business decisions moving forward.

New Regulations for TID Companies Effective February 2020

Effective February 13, 2020, CFIUS will be authorized to review “covered control transactions,” (all foreign acquisitions resulting in direct control in a U.S. business, which CFIUS already had jurisdiction over), as well as non-controlling “covered investments” by a foreign person in a U.S. critical technology, critical infrastructure or sensitive personal data company. The new rules refer to these as “TID U.S. Businesses” (Technology, Infrastructure and Data), or to be more specific, a company that engages in one of the following categories of activity: 

-produces, designs, tests, manufactures, fabricates or develops one or more critical technologies;

-owns, operates, manufactures, supplies or services critical infrastructure; or

-maintains or collects sensitive personal data of U.S. citizens that may be exploited in a manner that threatens national security.

“Critical technologies” include defense articles or defense services under the International Traffic in Arms Regulations, certain nuclear-related products regulated by the Nuclear Regulatory Commission Controls and certain technologies on the Commerce Control List under the Export Administration Regulations. In addition, “critical technologies” will include certain “emerging technologies” that are yet to be defined, and the Commerce Department’s Bureau of Industry and Security is currently reviewing at least 17 technology areas that are anticipated to result in new controls (including bio-tech, artificial intelligence, microprocessors, positional navigation and timing technology, quantum computing and additive manufacturing (3D printing)). 

“Critical infrastructure” includes key industry subsectors such as telecommunications, utilities, energy and transportation. “Sensitive personal data” is defined to include ten categories of data maintained or collected by U.S. businesses that (i) target products or services to sensitive populations (including U.S. military members and federal national security employees); (ii) collect or maintain such data on at least one million individuals; or (iii) have a business objective to collect such data on greater than 1 million individuals and such data is an integrated part of the U.S. business’s primary product or service. The categories of data include types of financial, geolocation and health data. 

Non-Controlling Covered Investments

Under the new regulations, CFIUS will be authorized to review non-controlling covered investment in TID U.S. Businesses. A “covered investment” includes scenarios where a foreign investor obtains:

-access to material non-public technical information;

-membership or observer rights on the board of directors or an equivalent governing body of the business or the right to nominate an individual to a position on that body; or

-any involvement, other than through voting of shares, in substantive decision making regarding sensitive personal data of U.S. citizens, critical technologies, or critical infrastructure.

Filing a CFIUS declaration for a non-controlling covered investment will remain a largely voluntary process, and parties will be able to file a notice or submit a short-form declaration notifying CFIUS of a covered investment in order to receive a potential “safe harbor” letter (after which CFIUS in most scenarios will not initiate a review of a transaction). 

However, if a foreign government holds a “substantial interest” in the foreign investor that obtains a “substantial interest” in a TID U.S. Business, a CFIUS filing will be mandatory. The updated regulations provide that a foreign government is considered to have a substantial interest in the foreign investor if it holds a 49% direct or indirect interest, whereas a foreign person will obtain a substantial interest in a TID U.S. Business if it obtains at least a 25% direct or indirect interest. CFIUS is also authorized to mandate declarations for transactions involving certain types of critical technology companies. 

The proposed rules also include a “white list” provision providing CFIUS the authority to designate certain “excepted investors” and “excepted foreign states” that may be eligible for an exclusion in connection with non-controlling covered investments. 

Global Impact: How Does This Affect My Business? 

The most important practical effect of the updated regulations is the breadth of U.S. companies standing to be impacted or affected by new foreign investment restrictions. U.S. businesses and industries that have previously never had to consider filing a CFIUS declaration, including healthcare companies, tech start-ups, related infrastructure industries, venture capital funds, emerging technology companies and manufacturers, and any company with access to sensitive consumer data, will now have to contemplate the implications of a CFIUS review when considering even passive foreign investment. Robust due diligence on potential investors will be more important than ever to ensure compliance with both mandatory and voluntary CFIUS declaration filings. Cross-border deals will be a costlier and more time-consuming process that will require acute attention to detail when drafting the contractual rights afforded to foreign investors. 

If you have any questions about the impact of the updated CFIUS regulations or how they may affect your company, please contact a member of Baker Donelson’s Global Business Team for additional information.

___________________________________________________________________

Joe D. Whitley is a shareholder at Baker Donelson, chair of the Firm’s Government Enforcement and Investigations Group and former General Counsel at the Department of Homeland Security. He can be reached at jwhitley@bakerdonelson.com. 

Alan Enslen is a shareholder with Baker Donelson and leads the International Trade and National Security Practice and is a member of the Global Business Team. He can be reached at aenslen@bakerdonelson.com. 

Julius Bodie is an associate with Baker Donelson who assists U.S. and foreign companies across multiple industries with international trade regulatory issues. He can be reached at jbodie@bakerdonelson.com. 

 

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Archives, Global Trade Daily, International Trade

Economic Espionage and the U.S.-China Trade War

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Combatting Chinese theft of U.S. intellectual property (IP) has been a principal policy focus of the Trump Administration, including through the utilization of the Section 301 investigation process, the subsequent imposition of tariffs on Chinese-origin goods, via challenges in international regulatory bodies such as the World Trade Organization, updated foreign investment restrictions and through targeted legal designations of entities such as the leading Chinese telecommunications and consumer electronics company Huawei. IP and trade secret theft are to this day some of the largest economic and national security threats facing the U.S. and American businesses. Apart from the international trade remedies implemented by the Administration, the U.S. legal system has been another critical theatre for countering theft of IP and trade secrets from American businesses, and prosecutions have ramped up over the last half decade using civil and criminal enforcement mechanisms. 

The Economic Espionage Act of 1996 (“EEA”), 18 U.S.C. § 1831 et seq., is an act that makes theft or the misappropriation of trade secrets, especially through acts of industrial espionage, a federal crime. Such trade secret theft can lead to both civil and criminal enforcement actions. The EEA currently defines “trade secrets” broadly to include “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes.”1

Penalties under the EEA can be severe. In 2012, Congress revised the EEA to increase the penalties for organizations and individuals, and sentencing guidelines were increased for trade secret theft that seeks to benefit a foreign government or agent. A violation of the EEA can result in an individual being fined up to $500,000 and facing up to 10 years in prison, and a corporation found guilty can be fined up to $5,000,000. These penalties increase greatly if the trade secret theft or misappropriation benefits a foreign country or foreign agent. 

In 2016, the EEA was again amended when Congress passed the Defend Trade Secrets Act (“DTSA”). The DTSA established for the first time a private cause of action for the theft or misappropriation of trade secrets, which prior to its enactment had largely been addressed under individual state laws. 

The EEA and DTSA have been critical enforcement mechanisms for the U.S. government and private businesses in recent years to combat theft of corporate IP and trade secrets, in particular that of Chinese origin. A 2017 report from the independent Commission on the Theft of American Intellectual Property found that the annual cost to the U.S. economy from Chinese IP theft could be as high as $600 billion. More recently, a March 2019 survey found that one in five North American-based corporations on the CNBC Global CFO Council says Chinese companies have stolen their IP within the last year.2 And in April, the Department of Justice proclaimed that since 2011, more than 90 percent of the Department’s economic espionage prosecutions involve China, and more than two-thirds of all federal trade secret theft cases during that period have had at least a geographical nexus to China.3

The largest companies in the U.S. are not immune to such theft, and the EEA has been utilized in several recent high-profile prosecutions, including against a former Chinese national software engineer of IBM for the theft of proprietary source code4, a former Chinese national employee of Apple for the theft of a confidential circuit board schematic drawing designed for autonomous vehicles5 and a Chinese Ministry of State Security intelligence officer for his attempt to steal trade secrets from multiple U.S. aviation and aerospace companies, including GE Aviation.6

Beyond the government’s use of the EEA, the broad reach of the DTSA makes it important for every U.S. business to understand its nuances. The DTSA protects trade secrets if a company has taken reasonable measures to keep such information secret and “the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”7 Trade secret misappropriation and the implications of the DTSA are therefore also prevalent in everyday business matters, including employment contracts and areas such as non-disclosures, non-compete, or confidentiality contractual provisions. The DTSA further provides important civil remedies for victims of trade secret theft, including the possibility of injunctive relief and even seizure of the allegedly stolen trade secrets. 

The EEA and DTSA are significant enforcement mechanisms for both the U.S. government and private businesses, which has been further underscored in recent years in light of ongoing malevolent Chinese industrial espionage activity. Conducting robust due diligence on new employees, foreign investors, and supply chain entities is more important than ever for U.S. businesses and their research and development entities. The effects of the U.S.-China trade war are a global concern, and problems such as securing future U.S. telecommunications networks from supply chain threats, eliminating foreign direct investment calculated to obtain proprietary U.S. trade secrets and technology,  and continuing to fight industrial cyberespionage must remain a top priority for the U.S. moving forward. 

Julius Bodie is an associate with Baker Donelson who assists U.S. and foreign companies across multiple industries with international trade regulatory issues, including identifying import/export licensing strategies, advising on global anti-corruption compliance, and counseling on Office of Foreign Assets Control (OFAC) economic sanctions programs.

Joe Whitley is a shareholder with Baker Donelson who represents national and international clients in various white-collar criminal matters including regulatory enforcement, corporate internal investigations and the Foreign Corrupt Practices Act (FCPA). During the Ronald Reagan and George H.W. Bush administrations, he served as Acting Associate Attorney General, the third-ranking position at Main Justice.

Alan Enslen is a shareholder with Baker Donelson who works with clients in international trade and national security matters, as well as government enforcement and investigations and trade remedy disputes. Enslen represents clients in numerous areas of international trade including economic/trade sanctions programs and global anti-corruption laws.

This article includes the following references:

118 U.S.C. § 1839(3).

2Eric Rosenbaum, 1 in 5 corporations say China has stolen their IP within the last year: CNBC CFO survey, CNBC (March 1, 2019) https://www.cnbc.com/2019/02/28/1-in-5-companies-say-china-stole-their-ip-within-the-last-year-cnbc.html.

3Deputy Assistant Attorney General Adam S. Hickey of the National Security Division Delivers Remarks at the Fifth National Conference on CFIUS and Team Telecom, Department of Justice (April 24, 2019) https://www.justice.gov/opa/speech/deputy-assistant-attorney-general-adam-s-hickey-national-security-division-delivers-0.

4Chinese National Sentenced for Economic Espionage and Theft of a Trade Secret From U.S. Company, Department of Justice Press Release (January 18, 2018)  https://www.justice.gov/opa/pr/chinese-national-sentenced-economic-espionage-and-theft-trade-secret-us-company

5Former Apple Employee Indicted On Theft Of Trade Secrets, Department of Justice Press Release (July 16, 2018) https://www.justice.gov/usao-ndca/pr/former-apple-employee-indicted-theft-trade-secrets.

6Chinese Intelligence Officer Charged with Economic Espionage Involving Theft of Trade Secrets from Leading U.S. Aviation Companies, Department of Justice Press Release (October 10, 2018) https://www.justice.gov/opa/pr/chinese-intelligence-officer-charged-economic-espionage-involving-theft-trade-secrets-leading.

718 U.S.C. § 1839.