China, China, China. Everyone's talking about China É or certainly should be. From a U.S. business perspective, it is the largest potential market and the largest potential threat. Some see the prospect of enormous profits for both U.S. and Chinese operations, while others see a more depressing future of closed U.S. factories and lost American jobs. Whether you are going out to "crack" the Chinese markets through exports or investments or whether your company or your industry are suffering from an onslaught of Chinese imports, U.S. and Chinese trade laws and regulations provide a web of both opportunities and pitfalls.
Many U.S. industries are relying upon U.S. antidumping and safeguard laws to effectively stem the tide of injurious imports from China. New U.S. legislation and shifts in policy may also enable U.S. industries to attack widespread Chinese subsidization that permits significant undercutting of U.S. prices by Chinese imports. China has followed the U.S. lead and is itself now targeting U.S. exports to China with anti-dumping actions. In fact, China is now one of the most active users of antidumping laws, particularly with respect to U.S. exports of chemical and paper products.
While these trade remedy actions provide effective relief for U.S. industries and an additional headache for exporters to China, they are normally limited to select industries. The developments in the area of trade compliance, however, are far wider in scope and could potentially cause greater impact on individual U.S. companies, in particular because violations may result in significant damage to a company's reputation, millions of dollars in civil and criminal penalties, and the denial of export privileges. This article provides a short summary of the relevant trade compliance issues in the area of U.S. export controls and highlights the major developments stemming from the post-9/11 security environment.
Background On U.S. Export Controls
The U.S. Government controls exports and reexports (including from third countries) of items that are considered subject to U.S. jurisdiction. The U.S. Commerce Department's Bureau of Industry and Security ("BIS") administers and enforces the Export Administration Regulations ("EAR"), which control exports and reexports of "dual-use" goods (including raw materials), technology (including data and technical assistance), and software (including source code and object code). "Dual use" items have both commercial and military applications and include products such as computers, metal alloys, semiconductors, etc.
The U.S. State Department's Directorate of Defense Trade Controls ("DDTC") administers and enforces the International Traffic in Arms Regulations ("ITAR"). The ITAR restricts exports and reexports of defense articles (including technical data) and defense services.
Dual-use items subject to the EAR include: (1) U.S.-origin items wherever located, (2) all items located in the United States, (3) foreign-made products that incorporate U.S.-origin components above a de minimis level, and (4) products made outside the United States directly from U.S.-origin technology or software. Licensing requirements generally apply to exports and reexports of items that are controlled on the Commerce Control List ("CCL"), although certain exceptions apply and exports of many dual-use items to China and other countries do not require a license. More generally, U.S. persons may not, without a license from BIS, engage in any transactions in support or furtherance of proliferation of nuclear, chemical, or biological weapons, or missiles that deliver them.
The following scenarios generally require a license from BIS prior to the export or reexport of items subject to the EAR:
1. Export or reexport of an item that is controlled when destined for a particular country. This includes releases of technology to foreign nationals (such as employees or research personnel) located in the United Sates, as the release of U.S. technology to such nationals is deemed to be an export to that individual's home country.
2. Export or reexport of an item that will be used in activities related to proliferation of nuclear, chemical, or biological weapons, or missiles that deliver them. Companies should also be aware that BIS plans to amend the regulations with respect to China to require licenses for dual-use items that may be used in military uses in China. BIS plans to deny most license applications for these exports.
3. Export or reexport of an item to a party listed on one of the restricted parties lists administered by the U.S. government, regardless of the item's classification.
With respect to exports and reexports of U.S. defense articles and defense services to China, the U.S. Government currently maintains an arms embargo against China implemented as a result of the June 1989 actions in Tiananmen Square. As such, U.S. defense services and defense articles may not be exported or reexported to China. This prohibition extends to releases of technical data related to defense articles to Chinese nationals no matter where such nationals are located.
New Policy Developments
In October 2000, the U.S. Congress established the U.S.-China Economic and Security Review Commission ("Commission"). The Commission was created to monitor, investigate, and submit to Congress an annual report on the national security implications of the bilateral trade and economic relationship between the United States and China, as well as to provide recommendations, where appropriate, to Congress for legislative and administrative action. In particular, the Commission focuses its work and study on the following nine areas: proliferation practices, economic reforms and U.S. economic transfers, energy, U.S. capital markets, corporate reporting, regional economic and security impacts, U.S.-China bilateral programs, WTO compliance, and media control by the Chinese government.
In the spring and summer of 2005, the Commission heard testimony related to issues involving China. On June 23, 2005, Peter Lichtenbaum, Acting Under Secretary at BIS, testified before the Commission with respect to economic and security issues related to U.S. trade with China. He discussed policies promulgated by BIS with respect to exports of dual-use goods and technologies to China and, in particular, highlighted the following points:
While trade with China presents a vast potential from the standpoint of market opportunity, it also presents a risk of diversion of sensitive dual-use items and technology, as the country continues to develop its conventional military capabilities.
BIS seeks to implement policies to ensure that U.S. exports are not diverted to end-uses within China or reexported to foreign governments or terrorist organizations to the detriment of U.S. security interests. As such, BIS does not issue licenses for sales of dual-use items and technology to China if the items or technology will make a direct and significant contribution to China's electronic and anti-submarine warfare, intelligence gathering, power projection, or air superiority. BIS also does not approve licenses for military end-uses within China.
BIS will propose a "catch-all" regulation that will require a license for exports otherwise not controlled to China that could materially assist the Chinese military. BIS will review such license applications under the general policy of denial. This rule is expected to be published by the end of 2005.
BIS will continue to approve licenses involving exports for civil uses in China that contribute to economic growth of the United States and facilitate China's peaceful economic development. For example, there have been significant liberalization in controls for computer hardware, general purpose microprocessors, and certain semiconductor manufacturing equipment.
Sensitive aerospace items and equipment used to manufacture sophisticated semiconductors are controlled for national security reasons and license applications involving such items are subject to a higher level of review. License applications involving such items are, however, generally approved unless there is a risk of diversion.
The above developments in U.S. export control policy demonstrate the heightened U.S. government concerns, including those of the Pentagon, with contributions that U.S. companies may be making to the build-up of China's military. Extending the scope of licensing to goods and technology that previously could be exported without a license may represent a major new challenge for U.S. companies seeking to establish or widen their exports or reexports to China.
New Enforcement Developments
In the wake of 9/11, the U.S. government has also adopted new laws and regulations to better support its increased commitment to homeland security. The effects of these new laws, such as the USA Patriot Act and the Global Terrorism Sanctions Regulations, are broad-reaching and constantly changing as new regulations and policies are implemented. In addition to this ever-changing international trade control landscape, U.S. companies must also contend with the reallocation of government resources to the investigation and prosecution of trade compliance violations, including those relating to U.S. export controls. Examples of this heightened enforcement environment include:
The Federal Bureau of Investigation ("FBI") reiterated in November 2004 its commitment to investigate potential violations of U.S. export control and sanctions laws. The FBI's participation in export control enforcement means that the U.S. Government will be able to bring more resources to bear in investigating and prosecuting trade control violations. Some of these enhanced resources include more agents, greater undercover capabilities, more investigative infrastructure, and forensic computer capability.
In Spring 2004, the U.S. Securities and Exchange Commission created the Office of Global Security Risk ("OGSR") and tasked it with identifying companies whose activities raise concern about global security risks that are material to investors, obtaining appropriate disclosure about such activities, and sharing information with the other key government agencies responsible for tracking terrorist financing.
In 2004, the U.S. Department of Treasury created a new office called the Office of Terrorism and Financial Intelligence. The office is charged with safeguarding the U.S. and international financial systems from abuse by terrorist financing, money laundering, and other financial crime, and to sever the lines of financial support to international terrorists.
In 2002, with the creation of the Department of Homeland Security ("DHS"), the enforcement arms of the former U.S. Customs Service and the Immigration and Naturalization Service were merged into a single office within DHS - Immigration and Customs Enforcement ("ICE"). Although ICE is responsible for traditional Customs enforcement functions, ICE states that its primary mission is " be the nation's preeminent law enforcement agency, dedicated to detecting vulnerabilities and preventing violations that threaten national security."
Federal budgets for enforcement agencies tasked with the investigation and prosecution of international trade control laws have been increased significantly. For example, President Bush's FY 2006 budget requests an additional $10 million for initiatives to enhance activities related to BIS' enforcement of export control laws.
Although these new enforcement initiatives are not targeted specifically to exports and reexports to China, they should be viewed in the context of the stricter policy initiatives discussed above. In short, the U.S. government has determined that greater controls on exports and reexports to China are necessary to protect U.S. interests, and additional resources are now available to enforce these controls. U.S. companies should be aware of these controls and ensure that they are appropriately considered in their compliance programs and in relevant trade and investment decisions.
Published December 1, 2005.