On May 15, 2019, President Trump issued an Executive Order (EO) declaring a national emergency and paving the way for a ban on the use of Huawei equipment and services in U.S. telecommunication networks. On the same day, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued a press release announcing that it would add Huawei and numerous affiliates to its Entity List. The Federal Register notice effectuating this designation is scheduled to be published on Tuesday, May 21, but is drafted to show an effective date of May 16.
The Entity List designation will have a more immediate impact than the EO. The EO establishes a broad framework to address supply chain risk arising from the use of certain information and communications technology and services but will require the Department of Commerce to issue new rules and regulations in the coming days or weeks to define key terms and implement the new prohibitions contemplated by the EO. By contrast, the Entity List designation will become effective immediately and will impose restrictions on exports, reexports, and transfers of U.S.-regulated goods, technology, and software to Huawei and its designated affiliates. The U.S. administration may adjust course in its confrontation with Huawei—either by tightening or loosening new or potential restrictions—in response to developments in broader U.S.-China trade negotiations.
The Executive Order
Although the EO does not expressly refer to Huawei or China, the EO creates a framework for the U.S. to prohibit U.S. companies and others subject to U.S. jurisdiction from purchasing or using telecommunications services or equipment provided or produced by entities that are owned, controlled, or directed by a “foreign adversary” and directs the U.S. Secretary of Commerce to ban transactions that pose an “undue” or “unacceptable” risk to the national security of the United States. The basis for the EO is the widely-reported concern that Huawei equipment and services expose the United States to significant national security, foreign policy, or economic risks. If China and Huawei are identified as targets of these measures, this will be reflected in a future determination issued by the Department of Commerce.
The EO notes that “foreign adversaries are increasingly creating and exploiting vulnerabilities in information and communications technology and services . . . in order to commit malicious cyber-enabled actions, including economic and industrial espionage against the United States and its people.” It further asserts that these “foreign adversaries” will use such access to U.S. telecommunications systems “to create and exploit vulnerabilities in information and technology or services, with potentially catastrophic effects.”
Specifically, the EO provides a legal basis for the government to issue further orders to prohibit “any acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service (transaction) by any person, or with respect to any property” where the Secretary has determined that the transaction (1) involves “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 (2) “poses an undue . . . [or] unacceptable risk to the national security of the United States or the security and safety of United States persons.”
The mandate in the EO is very broad, and it directs the Secretary of Commerce to develop comprehensive rules to implement the measures within the next 150 days.
The EO mandates that the resulting prohibitions may cover any transactions that were initiated or pending or will be completed after the date of the EO, but authorizes the Secretary of Commerce to direct “the timing and manner of the cessation of” the prohibited transactions. Indeed, the Department of Commerce’s rules are necessary to establish any effective prohibition on particular transactions, because the EO does not identify any of the targeted “foreign adversaries” or persons owned by, controlled by, or subject to the jurisdiction or direction of such foreign adversaries, or the technologies warranting particular scrutiny.
In effect, the EO establishes a broad new framework for regulating transactions involving certain information and communications technology and services, but delegates authority to the Department of Commerce to define the scope and regulate the proscribed activity. It is not clear yet whether the National Telecommunications and Information Administration or some other part of the Department of Commerce will administer this new regime.
Released nearly concurrently with the issuance of the EO, a Commerce Department press release stated that BIS would add Huawei and its affiliates to the Entity List. The Entity List is a list of companies, institutions, and organizations to which exports, reexports, and in-country transfers of U.S.-regulated goods, software, and technology are subject U.S. Government licensing that would not otherwise be required. BIS has indicated that Huawei will be added to the Entity List because the Department of Commerce found that it “engaged in activities that are contrary to U.S. national security or foreign policy interest,” including its alleged violations of U.S. sanctions against Iran and alleged obstruction of justice in connection with the U.S. investigation of those alleged violations.
The Federal Register notice will add Huawei and sixty-eight of its non-U.S. affiliates located around the world (including not only in Asia, but also in North and South America, Europe, Africa, and the Middle East) to the Entity List. The new licensing requirements for items destined for Huawei or these affiliates will apply to all items subject to the U.S. Export Administration Regulations (EAR), in other words, to most U.S.-origin goods. Further, BIS will review applications for licenses with a presumption of denial, and no license exemptions will be available. The Savings Clause exempts from the licensing requirement items that were already en route aboard a carrier pursuant to actual orders for export or reexport to a foreign designation on the effective date.
* * *
These actions come at a time of rising U.S.-China tensions. Since January, the two countries have engaged in negotiations to address longstanding trade concerns of the United States, including concerns related to intellectual property theft, forced technology transfers, and government subsidies, among other topics.
WilmerHale continues to monitor these developments closely.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.