In the wake of multiple rounds of increasing restrictions by the U.S. government on trade with the Chinese telecommunications giant Huawei and its subsidiaries, your company may be led to believe that any transaction with Huawei or participation in the Huawei supply chain is now prohibited. In fact, that is not so. Indeed, the United States government regards Huawei as a serious geopolitical and national security threat to U.S. interests and severely restricts the ability of U.S. businesses to deal with Huawei. Moreover, there appears to be a bipartisan consensus on this policy direction in Washington, which means the United States is unlikely to back off this policy any time soon. Nevertheless, the restrictions on dealing with Huawei at this time are not all-encompassing. It is important for industry actors to understand that certain activities are still permitted.
So what is restricted, and what is still permitted in dealing with Huawei? Reader, please bear with me.
Buying Huawei equipment
Strictly speaking, pursuant to the Federal Acquisition Regulations rule published on August 13, 2019, the ban on buying Huawei telecommunications equipment (as well as the equipment of ZTE, Hytera Communications Corporation, Hangzhou Hikvision Digital Technology Company, and Dahua Technology Company), applies only in connection with the performance of U.S. government contracts. U.S. government agencies may grant waivers from this prohibition where network security is not at issue through August 13, 2021.
Does this mean that private sector companies remain free to buy Huawei equipment for installations not related to U.S. government contracts? (This is quite pertinent, since the Rural Wireless Association estimates that about 25 percent of rural wireless carriers use Huawei equipment).
Not so fast. In May 2019 President Trump signed Executive Order 13873, which prohibits “any acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service (transaction) by any person . . . subject to the jurisdiction of the United States” if such a transaction involves telecommunications technology developed by a foreign person subject to the jurisdiction of a “foreign adversary.” On November 27, 2019, the U.S. Department of Commerce published a proposed rule on “Securing the Information and Communications Technology and Services Supply Chain” to implement Executive Order 13873. The regulation, if it is adopted in its current form (which seems likely), will give the Secretary of Commerce sweeping powers to prohibit or require mitigation of transactions involving the acquisition, installation, and even “use” of telecommunications equipment and services provided by a company subject to the jurisdiction of a “foreign adversary.” The official designation of a “foreign adversary” has not been made as of yet, but there is little doubt that this regulation aims squarely at China and at Huawei.
In addition, on March 12, 2020, President Trump signed into law the bipartisan Secured and Trusted Communications Networks Act of 2019, which prohibits the use of federal subsidies in connection with the acquisition, rent or lease of telecommunications products and services from companies that present an unacceptable risk to the national security of the United States (again, read “Huawei”).
Thus, while, technically speaking, acquisition, installation, and use of Huawei telecommunications equipment and services by the private sector currently is not prohibited, there is a high risk that such transactions postdating May 15, 2019 will be determined to be prohibited by the Department of Commerce when its regulation comes into force. Buying from Huawei is also becoming impracticable for suppliers of rural telecommunications due to the prohibition on federal subsidies to finance such purchases.
Providing U.S. items to Huawei
The main thrust of the U.S. offensive against Huawei’s ambitions to dominate the global telecommunications market originally consisted of the listing of Huawei and its subsidiaries worldwide on the Entity List on May 16, 2019. As a result of this listing, “items subject to the EAR,” including any commodity, technology, or software, may not be provided to Huawei without an export license from the Bureau of Industry and Security (“BIS”). This includes not only items within the possession or control of U.S. persons, but any items “subject to the EAR,” wherever located.
The rub, of course, is in what items are “subject to the EAR,” or what items are within the jurisdiction of the BIS under the Export Administration Regulations. This clearly includes any item that has ever been exported from the U.S. territory. In addition, under the BIS regulations it includes foreign-produced items that contain 25 percent or more of export-controlled U.S. content.
The term “items subject to the EAR,” however, does not include foreign-produced items (that is, items that undergo a substantial transformation through a manufacturing process such that they acquire origin of a foreign country) that contain less than 25 percent of controlled U.S. content. In theory, a foreign-produced item may contain even more than 25 percent of of U.S. content, and still not become “subject to the EAR,” if that U.S. content is not export-controlled.
Thus, providing items to Huawei without a BIS export license (which would be denied) is clearly prohibited if those items were exported from the U.S. However, it is not necessarily prohibited to supply to Huawei foreign-manufactured items that contain some U.S. content.
Providing foreign items made with U.S. technology
Historically, under the Foreign Direct Product rule, section 736.2(b)(3) of the EAR (General Prohibition Three), the term “item subject to the EAR” also included foreign-produced items that would be exported to certain higher-risk countries, and were the direct product of a U.S. technology or software controlled for national security reasons and requiring written assurances to support the license application. This was a fairly limited basis for extending BIS jurisdiction over foreign-produced items, because technology or software controlled for national security reasons and requiring written assurances were but a small subset of export controlled technology and software, and most manufacturing technology and software are not controlled.
Recently, however, BIS significantly expanded General Prohibition Three to include a wider swath of U.S. technology and software that would create BIS jurisdiction for the purposes of dealing with Huawei and its affiliates. The Amendments to General Prohibition Three (Foreign-Produced Direct Product Rule), published on May 15, 2020, will have significant and lasting impacts on semiconductor supply chains.
Under the convoluted new rules, which entered force immediately on May 15, a foreign-produced item is now also “subject to the EAR” if it is controlled by the newly-created footnote 1 to the Entity List, and there is knowledge that the item is destined to an entity with a footnote 1 designation (Huawei entities). The new footnote 1 to the Entity List controls the following:
(a) Direct products of technology or software
(i) Foreign-produced item is produced or developed by Huawei or its affiliates,
(ii) Is a direct product of ‘‘technology’’ or ‘‘software’’ subject to the EAR and specified in ECCN 3E001, 3E002, 3E003, 4E001, 5E001, 3D001, 4D001, or 5D001; of ‘‘technology’’ subject to the EAR and specified in ECCN 3E991, 4E992, 4E993, or 5E991; or of ‘‘software’’ subject to the EAR and specified in ECCN 3D991, 4D993, 4D994, or 5D991 (“designated technology”)
(b) Direct product of a plant or major component of a plant
(i) The foreign-produced item is produced by a plant or a major component (which means equipment essential for the production) of a non-U.S. plant, where the plant or its major component itself is a direct product of U.S.-origin designated technology;
(ii) The foreign-produced item is a direct product of software or technology produced or developed by Huawei or its affiliates.
The new rules are designed to target Huawei production that depends on sensitive U.S. technologies, and production of components by third parties for Huawei with the use of equipment that is based on sensitive U.S. technologies. They may have a much more disruptive impact on the Huawei supply chain than the original designation of Huawei and its affiliates on the Entity List.
Selling into the supply chains that feed Huawei
Nevertheless, for many players in the electronics and semiconductor industry, it still may be possible to sell their products into the supply chains that ultimately feed Huawei. These supply chains can be very complex and include many tiers of production.
Consider the following scenario: A U.S. Company A is selling its product X to a non-U.S. manufacturer B. B uses X to make a new product, Y, which it sells to a non-U.S. manufacturer C. C conducts further manufacturing on Y, creating a new product Z. Z is sold to multiple original equipment manufacturers (“OEMs”), including Huawei, which uses it to make the finished product. If products X, Y, and Z do not have controlled U.S. content, if they are are not direct products of designated controlled U.S. technologies or software, and if manufacturers B and C do not use equipment that is a direct products of designed controlled U.S. technologies or software, then Z is unlikely to be subject to the EAR. U.S. Company A cannot be charged with exporting product X to Huawei, considering that X undergoes multiple substantial transformations before some of it ends up in Huawei’s finished product.
Of course, it is necessary to carefully analyze each case of a product that is supplied into the supply chain connected to Huawei. Among other considerations, legal counsel should review whether U.S. products would be exported abroad for genuine substantial transformations, or in an effort to evade or circumvent U.S. Entity List restrictions. Yet, as things currently stand, in many cases it will still be possible to conclude that the fact that downstream items that include U.S. content reach Huawei, does not mean that the export of U.S. items violates U.S. law.
Important exceptions from restrictions
Considering the global scale and market position of Huawei, and the level of integration between certain Huawei products and U.S.-origin products, technology, and software, cutting off Huawei from its U.S. suppliers is a very disruptive and difficult process. And when it comes to sharing of U.S. technology with Huawei in the context of the work of international standard-setting bodies, it would be folly to completely cut off technology sharing, because it would force U.S. technology companies to cede international standard-setting to Huawei. With some recognition of that, the U.S. government has allowed for certain exceptions from its rules prohibiting provision of U.S. items to Huawei.
First, soon after designating Huawei and its affiliates on the Entity List, BIS published a Temporary General License authorizing the continuation of certain transfers to Huawei in derogation of the Entity List. This Temporary General License is found in Supplement No. 7 to Part 744 of the EAR. It authorizes:
(1) certain transactions necessary to maintain and support existing and current fully ‘operational network’ and equipment,
(2) Support to existing ‘personal consumer electronic devices’ and ‘Customer Premises Equipment (CPE)’, and
(3) Disclosures for cybersecurity research and vulnerabilities
Using this TGL requires fulfilling certain certification requirements, including obtaining certifications from Huawei or its affiliated companies. Recently, the date of expiration of the TGL was extended from May 15, 2020, to August 13, 2020.
Second, last week BIS revised the Entity List designations for Huawei and its affiliates once again, to permit sharing of technical information for “technology subject to the EAR that is designated as EAR99, or controlled on the Commerce Control List for anti-terrorism reasons only, when released to members of a ‘standards organization’ (see § 772.1) for the purpose of contributing to the revision or development of a ‘standard’ (see § 772.1).” This revision is intended to allow U.S. companies and persons to share technology in the context of international standard-setting organizations in which Huawei participates. Given that Huawei has become a key and often the dominant player in the development of 5G network technology and associated standards, this concession will help U.S. companies to keep their seats at the table of standard-setting, rather than help Huawei.
Huawei and certain other Chinese telecommunications and high tech companies are seen as geopolitical, industrial, and national security threats by many in the U.S. government and in other governments around the world. Accordingly, U.S. policymakers are tightening restrictions, and continuing trade and technology transactions entails substantial risk. Nevertheless, it is a fact of life that Huawei plays a key and sometimes dominant role in the development of modern telecommunications networks, and dealing with Huawei is sometimes unavoidable for many market players. In many cases, it is still possible and legal. Even for activities that are subject to restrictions, certain exceptions and phaseout periods exist.
The United States government could make restrictions on dealing with Huawei more comprehensive by designating it as a restricted person subject to Office of Foreign Assets Control (“OFAC”) sanctions. If that happens, virtually every transaction by a U.S. person ultimately destined to benefit Huawei, directly or indirectly, would likely be prohibited. There are signs that many in the U.S. government wish to move in this direction. But we are not there yet, and there are many in the industry who would oppose such comprehensive sanctions on Huawei.