U.S. government adds 9 more Chinese companies to military list
The Trump administration has added an additional tranche of companies to its list of “Communist Chinese military companies” (CCMCs). On Jan. 14, the U.S. Department of Defense (DoD) designated nine more Chinese companies as CCMCs, including smartphone giant Xiaomi Corporation, and leading Chinese aircraft manufacturer Commercial Aircraft Corporation of China Ltd. (COMAC). The DoD announcement emphasizes that the identification of CCMCs aims to “highlight and counter” China’s military-civil fusion development strategy.
This latest tranche of companies are now subject to President Trump’s Executive Order 13959, signed on Nov. 12, which prohibits U.S. investments in the securities of Chinese companies with alleged ties to the Chinese military. The DoD identified the first tranche of companies as CCMCs in June 2020, followed by the second and third tranches in August 2020, and the fourth tranche in December. On Jan. 13, President Trump issued an amended Executive Order 13959, updating, among other things, the definition of “transaction” to include the sale of covered securities, and barring the possession of such securities after Nov. 11, 2021. It was unclear previously what the consequences would be for U.S. persons continuing to possess such securities beyond that date.
The Executive Order 13959 provides a one-year wind-down mechanism beginning on the date of identification of the companies, allowing U.S. persons to divest from these companies during that period (i.e. until Nov. 11, 2021, for previous tranches of companies; until Jan. 14, 2022, for the latest tranche). On Jan. 14, the Treasury Department issued General License No. 2 authorizing securities exchanges operated by U.S. persons to engage in transactions involving the securities of CCMCs during the applicable wind-down periods. The Treasury Department also released four new FAQs regarding the executive order, clarifying, among other issues, the compliance obligations of exchanges operated by U.S. persons, and the definition of “transaction.”
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Commerce names China a ”foreign adversary,” paving way for ICTS restrictions
The Trump administration is paving the way for the U.S. government to have expanded powers when it comes to reviewing and rejecting technology transactions. On Jan. 14, the U.S. Department of Commerce issued an interim rule identifying China as a “foreign adversary,” along with Russia, Iran, North Korea, Cuba and Venezuela. The rule seeks to address the “national security, economic security, and public health and safety concerns related to ICTS (information and communications technology and services) Transactions.”
The interim rule was issued pursuant to President Trump’s Executive Order 13873 Securing the Information and Communications Technology and Services (ICTS) Supply Chain, signed May 15, 2019, which directed the Commerce Department to prohibit ICTS transactions involving companies owned by or subject to the jurisdiction of a “foreign adversary.” With the designation of China as one such adversary, the Commerce Department may now promulgate regulations to “identify, assess, and address” China-related transactions. According to the announcement, the interim rule will be effective 60 days from publication, a subsequent final rule will be issued following public comment, and the Commerce Department will implement procedures for a licensing process 120 days from publication.
Also on Jan. 14, the Commerce Department added China National Offshore Oil Corporation to the Entity List and tightened export controls on U.S. technologies that may be exported for military end-use or to military end-users in China.
In Nov. 2019, the Commerce Department published a proposed rule on the back of Executive Order 13873 setting up a review process for ICTS transactions involving foreign adversaries similar to the review process for foreign investment overseen by the Committee on Foreign Investment in the United States (CFIUS). However, the proposed rule was roundly criticized by industry for lacking crucial details surrounding the scope of the proposed regime, such as what type of ICTS transactions will be restricted and which countries fall into the category of “foreign adversaries.” The new interim rule provides some clarity on the latter question, but other questions surrounding the scope of the new regime remain unanswered. U.S. tech giants such as IBM have also criticized the proposed regime as being “massively overbroad” and potentially damaging to the U.S. tech industry. According to the U.S.-China Business Council, the new interim rule paves the way for the Commerce Department to collect interagency referrals for national security reviews of transactions involving China and the other five designated foreign adversaries, and six broad groups of technologies, ranging from artificial intelligence to products used in critical infrastructure and telecoms networks. Elsewhere, on Jan. 13, U.S. Customs and Border Protection issued a Withhold Release Order banning all cotton and tomato products from China’s Xinjiang province over the alleged use of forced labor — the first blanket ban on imports of specific items from Xinjiang over such concerns.
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Tech decoupling the biggest threat to EU companies in China
U.S.-China technology decoupling is expected to have the most detrimental impact on EU companies in China, according to a new report. On Jan. 14, the European Union Chamber of Commerce in China and the Berlin-based think tank Mercator Institute for China Studies published a joint report, which surveyed 120 EU companies in China. Half the respondents reported that China’s “decoupling” with the U.S. and EU has already had a negative impact on their business.
The report, which explores the impact on companies of decoupling in various areas, finds that decoupling in various digital and technology sectors such as data governance, network equipment and telecommunications services, has had the most detrimental impact on EU companies and is of “rapidly growing concern.” For example, the report cites both U.S. and Chinese restrictions on the export of critical tech inputs such as semiconductors and rare earths as a “more pressing concern” for companies operating in China than ”largely manageable” trade war tariffs.
The report suggests that European companies are increasingly being forced to choose one of two strategies to navigate the technology decoupling between China and the U.S. The first strategy of “dual systems” consists of having one supply chain and R&D system to exclusively serve China and another one for the rest of the world. The other strategy of “flexible architecture” involves maintaining supply chains that have, to the furthest extent possible, parts that may be developed and built in a “neutral” manner” for both systems, while developing the other “exposed” parts separately for each market with the capability of being “swapped out.” The report makes several recommendations to European companies in China to navigate further decoupling between the U.S. and the EU, and China. These include developing a corporate taskforce at headquarters to coordinate a global strategy to mitigate the effects of decoupling, as well as auditing their operations as well as their business partners’ to identify “critical bottlenecks” that could be potentially targeted by either the U.S. or China for strategic purposes.
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