Articles Tagged with China

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There are several legislative proposals pending in Congress targeting trade and investment involving China. If enacted, the proposals would prevent Chinese entities from acquiring certain U.S. technologies, prohibit U.S. government procurement from ZTE and Huawei, and limit U.S. issuers from receiving investments from Chinese parties.

Fair Trade with China Enforcement Act

Sen. Marco Rubio (R-FL) has introduced the Fair Trade with China Enforcement Act (Fair Trade Act), which would impose significant restrictions on Chinese investment in U.S. companies producing certain categories of products as well as prohibit the outbound transfer of intellectual property (IP) and sensitive technologies to China. The bill would further institute a U.S. Government procurement ban on products/services from both Huawei and ZTE.

The Fair Trade Act focuses on the ten strategic sectors cited by China’s Made in 2025 initiative. The bill would require the U.S. Trade Representative (USTR) to create a list of products that receive support from the Chinese government pursuant to the Made in China 2025 policy, as well as any product receiving Chinese government support that has displaced U.S. exports of like products. At a minimum, the list would include products in the following industries:

(1) Civil aircraft; (2) Motor car and vehicle; (3) Advanced medical equipment; (4) Advanced construction equipment; (5) Agricultural machinery; (6) Railway equipment; (7) Diesel locomotive; (8) Moving freight; (9) Semiconductor; (10) Lithium battery manufacturing; (11) Artificial intelligence; (12) High-capacity computing; (13) Quantum computing; (14) Robotics; and (15) Biotechnology.

The Fair Trade Act would amend Section 13(d) of the Securities Exchange Act of 1934 to prohibit issuers participating in the above sectors from being majority-owned by a Chinese investor. In addition, the law would create a presumption that imports from China of products included in USTR’s list benefit from countervailable subsidies under the U.S. trade remedy law.

The legislation would also call for the U.S. Commerce Department to impose a blanket prohibition on the export of any sensitive technology or intellectual property to China. This likely would restrict licensing agreements with Chinese companies and could have significant effects on U.S. companies with Chinese subsidiaries or affiliates.

Finally, the Fair Trade Act would target ZTE and Huawei by prohibiting the U.S. Government from entering into any contract with an entity that uses, or contracts with any other entity that uses, any telecommunications equipment or services provided by ZTE or Huawei.

Foreign Investment Risk Review Modernization Act

The proposed Foreign Investment Risk Review Modernization Act (FIRRMA) would alter the Committee on Foreign Investment in the United States (CFIUS) review process. See our prior posting on FIRRMA here.

The Senate Banking Committee will mark up a FIRRMA draft on May 22, though the discussion draft does not include prior language that would have authorized CFIUS to review outbound investments for technology transfers that could harm U.S. national security. The discussion draft would still define a covered transaction to include any “non-passive” investment by a foreign person in critical technology or a critical infrastructure company, among other types of transactions.

Trade Authority Protection Act

The Trade Authority Protection (TAP) Act would require the President to submit a report to Congress prior to taking any “congressionally delegated trade action,” which is a defined list of actions under certain provisions of law (e.g., Section 232 of the 1962 Trade Expansion Act, Section 301 of the Trade Act of 1974, the International Emergency Economic Powers Act (IEEPA), etc.). The list is as follows:

  • A prohibition on importation of the article.
  • The imposition of or an increase in a duty applicable to the article.
  • The imposition or tightening of a tariff-rate quota applicable to the article.
  • The imposition or tightening of a quantitative restriction on the importation of the article.
  • The suspension, withdrawal, or prevention of the application of trade agreement concessions with respect to the article.
  • Any other restriction on importation of the article.

Congress would then be able to pass a joint resolution prohibiting the action.  The prospects for enactment of any of these proposed laws remains uncertain.

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Recent reports suggest that the Administration may declare an emergency under the International Emergency Economic Powers Act (IEEPA) to grant the Committee on Foreign Investment in the United States (CFIUS) authority to review transactions involving the transfer of U.S. technology and intellectual property (IP) to foreign entities, even where there is no transfer of “control” as currently required under existing CFIUS regulations.  This executive action would follow a memorandum issued by President Trump directing the U.S. Government to propose possible restrictions on Chinese investment in U.S. companies due to concerns outlined by the Office of the United States Trade Representative (USTR) in connection with its Section 301 investigation.  The potential CFIUS review of U.S. technology transfers to foreign entities would mirror one aspect of the pending Foreign Investment Risk Review Modernization Act of 2017 (FIRRMA).

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Yesterday, President Trump issued a memorandum (“Memorandum”) directing his Administration to take several actions related to the investigation by the Office of U.S. Trade Representative (“USTR”) into China’s acts, policies, and practices (“APPs”) related to technology transfer, intellectual property, and innovation under Section 301 of the Trade Act of 1974 (“Section 301”). The actions include restrictions on Chinese investment in the United States and the imposition of higher customs duties on imports from China. At the signing ceremony, President Trump called this action “the first of many” against Chinese practices. USTR Ambassador Lighthizer echoed the President at a hearing before the Senate Finance Committee today, noting that the Administration “expects to bring additional [actions] in other areas where the [United States does not] have reciprocal response.”

Below we describe these actions and USTR’s findings in the Section 301 investigation.

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Further to our alert published on November 13, 2017 regarding whether acts, policies, and practices (APPs) of China related to transfer of technology, intellectual property, and innovation are actionable under Section 301(b)(1) of the Trade Act of 1974 (Section 301), it is anticipated that the U.S. Trade Representative (USTR) will make affirmative findings and remedy recommendations well ahead of the August 2018 statutory deadline, potentially as early as January 2018. USTR is authorized to take specified actions (noted below), “subject to the specific direction, if any, of the President regarding such action[s]” and is authorized to take “all other appropriate and feasible action within the power of the President that the President may direct USTR to take.”

According to USTR officials, if the United States makes an affirmative determination, the next steps will likely proceed in two tracks: (1) the United States may elect to initiate a World Trade Organization (WTO) dispute regarding the APPs, if they are considered to be in violation of WTO commitments, and/or (2) the United States may take unilateral retaliatory action.  Below, we comment briefly on both tracks.

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President Trump issued an Executive Order prohibiting the proposed acquisition of Lattice Semiconductor (Lattice) by a Chinese consortium known as Canyon Bridge. Lattice is a semiconductor company primarily manufacturing programmable logic devices.  The Executive Order prohibits the proposed acquisition and any substantially equivalent transaction, and requires the parties to permanently abandon the proposed transaction in 30 days. The Executive Order follows a lengthy review process with the Committee on Foreign Investment in the United States (CFIUS). This is only the fourth time since the enactment of the Exon-Florio Amendment in 1988 that a transaction has been formally blocked.

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Recent public reports indicate Sen. Chuck Schumer (D-NY), the Senate Democratic Leader, has authored a letter to President Trump requesting the President order the Committee on Foreign Investment in the United States (CFIUS) to suspend the approval of all covered transactions by Chinese entities.  Sen. Schumer explains that such action would place severe economic pressure on China and force the country to take more stringent action against North Korea.  While President Trump has publicly expressed “disappointment” with China over its perceived lack of response to recent North Korean missile tests, it is unclear what actions, if any, the President might take to spur action from China.

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On June 29, 2017, the U.S. Treasury Department announced new steps applying pressure on North Korea in relation to its proliferation activities.  Specifically, this involved (1) sanctions designations against Chinese shipping company Dalian Global Unity Shipping Co., Ltd. and two Chinese individuals; and (2) anti-money laundering special measures against China’s Bank of Dandong.  All were involved in business with North Korea according to the Treasury Department’s announcement.

The Special Measures for Bank of Dandong under Section 311 of the USA PATRIOT Act prohibit U.S. financial institutions from maintaining correspondent accounts for, or on behalf of, that bank.  This would prevent access to the U.S. banking system for dollar transactions or wiring services.

None of the sanctioned parties appear to be systemically important companies for China, but the sanctions may be intended, or viewed, as an effort by the Trump Administration to pressure China into doing more to restrain North Korea’s nuclear activities.