The past decade has seen a pattern shift with how the U.S. views China, and our corresponding actions have changed the U.S.-Sino relationship from competition to adversarial. The U.S. believes China has acted counter to global economic, political and diplomatic norms and the international community has taken notice of how the communist power has utilized its large military, vast technological advancement and invasive surveillance operations to bully its neighbors and infringe on the human rights of its citizens. The United States has taken direct action across multiple administrations and industry sectors to try to rein in its rival international superpower to varying degrees of impact.
With Republicans in control of the House of Representatives, we expect China hawks to shine a light on the Biden administration’s policies related to China. We assess that Republicans will stand up a select committee on China to message and coalesce a coherent Republican China strategy. In this effort we expect collaboration with the Biden administration on important issues, but much more consternation and finger pointing in the months ahead. Before the partisan clash begins in January, let’s take a look at a few of the actions of the Biden administration to date, as it is critical to understand the various sanction tools at the disposal of the U.S. government and how they have been used in recent years.
U.S. SANCTIONS LISTS
According to the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC), the United States has designated 221 Chinese corporate entities worthy of inclusion to the Consolidated Sanctions List (“CSL”) (both SDN and Non-SDN lists). The CSL compiles all persons and entities named on the Specially Designated Nationals (SDN) list along with other sanctions lists. Entities on this list will have their assets blocked and U.S. persons and companies are generally prohibited from dealing with them. Among the notable sanctioned entities are Huawei Technologies Co., ZTE Corp., Hikvision Digital Technology Co. and Dahua Technology Co. These organizations were sanctioned in May of 2019 when President Trump published an executive order banning foreign technology companies (who present a potential national security threat) from engaging in business within the United States. These initial sanctions did not specifically list the most infamous company in this list, Huawei Technology, despite the company being the main target of the directive. However, Huawei would later be the first Chinese technology firm to be added to the U.S. Entity List, another tool of the Biden administration to target malicious foreign actors.
The Entity List is administered by the Bureau of Industry and Security (BIS) within the U.S. Department of Commerce. Once a person or entity is named on the list, they are subject to more rigorous licensing requirements to export or transfer certain items, including U.S. technologies. The list was first created in in 1997 as a way to inform the public about entities that have engaged in activities that could result in increased risk to U.S. national security interests. To date, there are over 200 Chinese entities named on the Entity List, including Huawei Technologies Co. and Shenzhen DJI Innovation Technology Co. Ltd (“DJI”).
CHINESE MILITARY-INDUSTRIAL COMPLEX COMPANIES
On Nov. 12, 2020, President Donald Trump issued an executive order titled “Addressing the Threat From Securities Investments That Finance Communist Chinese Military Companies.” The order prohibited all U.S. investors from purchasing or investing in securities of companies identified by the U.S. as “communist Chinese military companies.” Shortly before leaving office, Trump amended the executive order to require full divestment of such companies by November 2021.
On June 3, 2021, President Biden substantially amended the Trump-era executive order. The new order replaces the old Communist Chinese Military Companies (CCMC) designation with a more encompassing Chinese Military-Industrial Complex Companies (CMIC) designation, which is run through OFAC. The new order gave U.S. persons one year from the date of signing to divest from a CMIC-designated entity. With the swift rise of Chinese technology companies cooperating with Chinese military and intelligence entities, the United States sought to limit the data collection and analysis of American citizens, as well as curb human rights abuses within Chinese boarders. From the U.S. perspective, capture and analysis of U.S.-based data by hostile foreign entities would create a pervasive national security risk.
Most recently, companies like Cloudwalk Technology Co. and SZ DJI Technology Co. have been added to the CMIC List after OFAC found these companies “actively support the biometric surveillance and tracking of ethnic and religious minorities in China.” Specifically with regard to DJI, OFAC stated DJI “operates or has operated in the surveillance technology sector of the economy of the PRC,” and that DJI drones are used to surveil Uyghurs in Xinjiang. The United States continues to aggressively identify Chinese companies that receive substantial funding from the Chinese government or assist their security apparatus in any way.
ICTS SUPPLY CHAIN RULE
On May 15, 2019, President Trump issued Executive Order 13873, which created a new process for the secretary of commerce to review transactions involving information and communications technology services (ICTS). This review is meant to determine whether those transactions present certain national security and economic risks. The rule states that when a transaction, either future or ongoing, in ICTS involves “foreign adversaries” and presents certain “undue or unacceptable risks” to the United States, the Department of Commerce can either block the transaction or negotiate risk-mitigation measures.
So far, the Commerce Department has identified China, Russia, Iran, North Korea, Cuba and Venezuela as adverse nations, and on March 17, 2021, it issued subpoenas to multiple Chinese companies seeking information about their ICTS operations. In conjunction with these efforts, Secretary of Commerce Gina Raimondo released a statement declaring, “The Biden-Harris Administration has been clear that the unrestricted use of untrusted ICTS poses a national security risk. Beijing has engaged in conduct that blunts our technological edge and threatens our alliances. In issuing subpoenas today, we are taking an important step in collecting information that will allow us to make a determination for possible action that best protects the security of American companies, American workers, and U.S. national security.”
In accordance with his predecessor, President Biden issued Executive Order 14034 on June 5, 2021, which expanded upon E.O.13873 to include companies responsible for the development of applications or software used to covertly collect personal and proprietary business information of American citizens. Funding the enforcement for this order was included in the Commerce, Justice, Science, and Related Agencies Appropriations Act of 2022, where the Bureau of Industry and Security (BIS) was charged to use part of their $141 million budget to continue to secure the information and communications technology and services supply chain. It also confirmed that BIS would be the bureau responsible for executing the initiative. There is tens of millions of dollars for the ICTS effort in the FY23 appropriations bills as well.
BIS EXPORT CONTROLS
On Friday, Oct. 7, 2022, BIS announced significant escalation in export control policy with respect to China to curb their ambitions to seek control of the proliferation of technology to specific end users of concern and contain the PRC’s desire to dominate global markets with domestically manufactured and produced advanced semiconductors, AI and supercomputing capability and capacity. Alan Estevez, the undersecretary of BIS, stated concurrent to the release of these rules that “my north star at BIS is to ensure that we are appropriately doing everything in our power to protect our national security and prevent sensitive technologies with military applications from being acquired by the People’s Republic of China’s military, intelligence, and security services.”
These actions include the addition of 31 Chinese entities to the Unverified List, which requires these persons to acquire extra permitting to do business with U.S. exporters, and raises the risk that these groups could be added to the Entity List in the future.
Also, BIS instituted new rules governing the visibility of exports of semiconductor-related technologies to China, especially those related to AI and advanced computing. The rules require advanced tooling equipment produced in the U.S. that support Chinese semiconductor manufacturing or high-end production of memory and logic chips be added to the Commerce Department Control List, which requires a license for U.S. exports; expand foreign direct product rules to target chips that can be used for AI and technology that can be used for supercomputing; and restrict the ability of U.S. persons to work on the development, production or use of integrated circuits.
Please see our full analysis of these changes here.
People’s Republic of China officials have publicly condemned the United States for interfering with China’s internal processes. In response to sanctions added under the Trump administration, China has sought to deploy its own economic and diplomatic sanctions against the U.S. In 2020, Chinese Minister of Commerce Zhong Shan slapped sanctions on individuals involved with the Trump administration including Alex Azar, Peter Navarro and Mike Pompeo. These restrictions prohibit these individuals and their immediate family members from entering mainland China, Hong Kong and Macao as well as restricting business they would like to conduct with China or any companies or institutions associated with them. Furthermore, the National People’s Congress (NPC) approved an Anti-Foreign Sanctions Law in the summer of 2021. This law declares that any person or entity involved in implementing discriminatory measures against Chinese citizens or entities could be put on the Anti-Sanctions List. Individuals on the Anti-Sanctions List are at risk of being denied entry to or being deported from China, having their assets seized and frozen and losing access to participation in Chinese markets. The anti-sanctions sentiment can also be seen in China’s extension of tariff exemptions for several U.S. imports including (but not limited to) shrimp, electric vehicle batteries and medical testing equipment.
More recently, Foreign Minister Wang Yi responded to Secretary of State Blinken’s recent Indo-Pacific strategy speech. He condemned the United States’ involvement in distant regional affairs as an attempt to interfere with China’s right to conduct diplomatic and economic business with neighboring East Asian countries. Vice Foreign Minister in charge of North American and Oceanian affairs Xie Feng said that the region’s cooperation with China has realized solid benefits such as poverty reduction, climate change mitigation infrastructure creation and agricultural development. Xie argued that the United States and its allies have long neglected the Pacific Island nations, while China has aspired to provide aid and extinguish any regional tensions among them. Vice Foreign Minister Xie has also touted the security pact between China and the Solomon Islands, which has caused concern among other international stakeholders due to China’s new naval presence in strategically important waters. Chinese officials have maintained that the alliance was formed with the purpose of maintaining social order and protecting the safety of Chinese citizens and institutions in the Solomon Islands.
If the recent G20 meeting between President Biden and Chinese leader Xi Jinping are any indication, we can and should expect a tense U.S.-Sino relationship to continue as reports suggested the meeting was decidedly blunt. We also assess a steady increase in sanctions actions from the United States toward China and strong wording from both sides moving forward, particularly as Republicans gain control of the House. So long as China continues actions the U.S. deems as infringing on their foreign policy goals and undermining the liberal world order, the U.S. will continue to find different avenues in which to curb these ambitions. That will come through continued defensive actions like sanctions and targeting predatory trade practices, but also through offensive actions like implementing the CHIPS Act and bolstering the manufacturing capability and capacity for critical technologies here at home. Ultimately, delicately navigating this highly complex and consequential relationship will have ramifications for many years to come.
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