|As part of its larger battle with PRC, the Trump Administration continues to press Huawei|
Late last week, the Administration took two steps that will continue to place Huawei’s ability to access U.S. markets and products in jeopardy. President Donald Trump extended an executive order to secure the U.S.’ information and communications technology manufactured or supplied by foreign adversaries, namely the People’s Republic of China (PRC). In May 2019, the President issued Executive Order (EO) 13873, “Securing the Information and Communications Technology and Services Supply Chain,” that declared a national emergency on the basis that
the unrestricted acquisition or use in the United States of information and communications technology or services designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of foreign adversaries augments the ability of foreign adversaries to create and exploit vulnerabilities in information and communications technology or services, with potentially catastrophic effects, and thereby constitutes an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States.
In the continuation of the EO, Trump stated that “[t]his threat continues to pose an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States…[and] [f]or this reason, the national emergency declared on May 15, 2019, must continue in effect beyond May 15, 2020.” He added that “[t]herefore, in accordance with section 202(d) of the National Emergencies Act (50 U.S.C. 1622(d)), I am continuing for 1 year the national emergency declared in Executive Order 13873 with respect to securing the information and communications technology and services supply chain.”
This is the latest development with this EO. In November 2019, Commerce released its long awaited draft regulations as required by the EO that would implement a case-by-case review process for information and communications technology and services (ICTS) that pose unacceptable risks to U.S. national security or the safety of Americans. While the executive order provided Commerce with the authority to exempt classes of ICTS, it has chosen not to do so at this point. In the same vein, Commerce could have found that a class of technology or services posed undue risks and, per the EO, could have summarily barred the import and sale of these items. And yet, Commerce has not chosen to do that either even though it would have likely pleased many in Congress if Commerce had barred Huawei, ZTE, and other Chinese services and products. Nonetheless, a final rule has not been issued, amid reports of stakeholders inside and outside the Administration pushing to change or spike the rule.
Per the direction in the EO, Commerce “proposes to implement regulations that would govern the process and procedures that the Secretary of Commerce (Secretary) will use to identify, assess, and address certain information and communications technology and services transactions that pose an undue risk to critical infrastructure or the digital economy in the United States, or an unacceptable risk to U.S. national security or the safety of United States persons.” Specifically, the EO “grants the [Commerce] the authority to prohibit any acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service (a “transaction”) subject to United States’ jurisdiction where the Secretary, in consultation with other relevant agency heads, determines that the transaction:
(i) Involves property in which a foreign country or national has an interest;
(ii) includes information and communications technology or services designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary; and
(iii) poses certain undue risks to critical infrastructure or the digital economy in the United States or certain unacceptable risk to U.S. national security or U.S. persons.
Commerce is proposing “a process by which the Secretary will determine whether a particular transaction should be prohibited.” Commerce stated that “[a] transaction that meets the following conditions will be subject to review by the Secretary and may require mitigation, prohibition, or an unwinding of the transaction if determined to be prohibited:
(1) The transaction is conducted by any person subject to the jurisdiction of the United States or involves property subject to the jurisdiction of the United States;
(2) the transaction involves any property in which any foreign country or a national thereof has an interest (including through an interest in a contract for the provision of the technology or service); and
(3) the transaction was initiated, pending, or completed after May 15, 2019, regardless of when any contract applicable to the transaction was entered into, dated or signed, or when any license, permit, or authorization applicable to such transaction was granted. Transactions involving certain ongoing activities, including but not limited to managed services, software updates, or repairs, would constitute transactions that was completed on or after May 15, 2019 even if a contract was entered into prior to May 15, 2019.
Commerce is therefore proposing “a case-by-case, fact-specific approach to determine those transactions that meet the requirements set forth in the Executive order and are therefore prohibited or must be mitigated…[that] allows for the deliberative application of the authority granted to the Secretary by the President in the EO as the Secretary seeks to calibrate properly the application of this new authority.” Commerce contended that “[a] case-by-case application of this authority would allow the Secretary to target and prohibit transactions that meet the EO criteria, without unintentionally prohibiting other transactions involving similar ICTS that may not rise to the level of presenting an undue risk to critical infrastructure or the digital economy in the United States or an unacceptable risk to national security or the safety of U.S. persons.” Commerce asserted that “[t]his approach would also ensure that the Department does not inadvertently preclude innovation or access to technology in the United States.”
In terms of implementation, Commerce will decide whether the particular circumstances of a potentially prohibited transaction may meet” [the above three-part criteria]. Commerce may initiate this process, or at the behest of another federal agency, including the the Federal Acquisition Security Council (FASC). In either case, Commerce will determine whether the identified transaction should be prohibited or mitigated in consultation with other agencies as necessary. Commerce would notify the parties involved in the flagged transaction once a preliminary decision has been made and the bases for the determination. Commerce “would assess, for example, whether a party to a transaction is owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary, and whether the use of a certain class of ICTS or transactions by particular classes of users present an undue or unacceptable risk.” Within 30 days after being notified of a determination, a party may submit its opposition and information arguing against the agency’s finding. 30 days after receiving such a submission, Commerce must issue its final decision to either prohibit the transaction; not prohibit the transaction; or “require measures and specific timeframes to mitigate risks identified during an evaluation as a precondition of approving a transaction that may otherwise be prohibited.” In any event, this determination must be in writing and an unclassified version would be released, and Commerce would safeguard and not release any classified information involving the transaction or the deliberative process.
Finally, as noted, Commerce opted against excluding or exempting any classes of ICTS at this time:
The EO also authorizes the Secretary to exempt certain classes of transactions from the EO’s restrictions if the Secretary determines (for example, because of the nature or capabilities of the ICTS involved or the characteristics of the purchaser or ultimate user) that such transactions do not present an undue or unacceptable risk or are outside the scope of the EO. The EO also authorizes the Secretary to prohibit transactions as a class if the Secretary determines that such class of transactions pose an undue or unacceptable risk. The proposed rule does not recognize particular technologies or particular participants in the market for ICTS as categorically included or excluded from the prohibitions established by the EO. If, in the future, the Secretary determines that it is appropriate to designate classes of transactions for categorical inclusion or exclusion, further guidance will be issued at that time.
In the other related action, the Department of Commerce (Commerce) stated that its Bureau of Industry and Security (BIS) “announced plans to protect U.S. national security by restricting Huawei’s ability to use U.S. technology and software to design and manufacture its semiconductors abroad” per the agency’s press release. BIS released an interim final rule that takes effect as of 15 May, but the agency is accepting comments through 14 July, meaning there will be a final rule issued at some point in the future once the comments have been analyzed and addressed. Nevertheless, Commerce claimed the BIS interim final rule “cuts off Huawei’s efforts to undermine U.S. export controls.”
- BIS is amending its longstanding foreign-produced direct product rule and the Entity List to narrowly and strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.
- Since 2019 when BIS added Huawei Technologies and 114 of its overseas-related affiliates to the Entity List, companies wishing to export U.S. items were required to obtain a license. However, Huawei has continued to use U.S. software and technology to design semiconductors, undermining the national security and foreign policy purposes of the Entity List by commissioning their production in overseas foundries using U.S. equipment.
- Specifically, this targeted rule change will make the following foreign-produced items subject to the Export Administration Regulations (EAR):
- Items, such as semiconductor designs, when produced by Huawei and its affiliates on the Entity List (e.g., HiSilicon), that are the direct product of certain U.S. Commerce Control List (CCL) software and technology; and
- Items, such as chipsets, when produced from the design specifications of Huawei or an affiliate on the Entity List (e.g., HiSilicon), that are the direct product of certain CCL semiconductor manufacturing equipment located outside the United States. Such foreign-produced items will only require a license when there is knowledge that they are destined for reexport, export from abroad, or transfer (in-country) to Huawei or any of its affiliates on the Entity List.
Commerce added that “[t]o prevent immediate adverse economic impacts on foreign foundries utilizing U.S. semiconductor manufacturing equipment that have initiated any production step for items based on Huawei design specifications as of May 15, 2020, such foreign-produced items are not subject to these new licensing requirements so long as they are reexported, exported from abroad, or transferred (in-country) by 120 days from the effective date.”
The PRC’s Commerce Ministry posted a statement, arguing “[t]he U.S. uses state power, under the so-called excuse of national security, and abuses export control measures to continuously oppress and contain specific enterprises of other countries.” The Ministry vowed the PRC will “take all necessary measures to resolutely safeguard the legitimate rights and interests of Chinese enterprises.”
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