Commerce's Plans to Further Restrict Foreign Sales to Huawei Could Have 'Dramatic' Implications, Former Commerce Official Says

BOSTON -- If the Commerce Department follows through on plans to expand the limits of the Export Administration Regulations to further control foreign shipments to Huawei, it will have a “dramatic” impact on international supply chains, said Kevin Wolf, a trade lawyer with Akin Gump and Commerce’s former assistant secretary for export administration. The measures, which Commerce confirmed it was considering earlier this month (see 1912100033), include expanding the Direct Product Rule and broadening the de minimis rule to make more foreign-made goods subject to the EAR.

“This is a really, really big deal,” Wolf said, speaking during a Dec. 13 panel hosted by the Massachusetts Export Center. “The collateral, psychological effect of this, I fear, is really going to be quite dramatic.”

The potential changes would apply to foreign-made items that contain U.S.-origin content not controlled for national security reasons. Specifically, the rule would not apply to dual-use goods and sensitive technologies, but instead to consumer goods, Wolf said. The rule may apply to “wholly formed made items that no other country controls, creating a jurisdictional rule for foreign companies” when selling to Huawei that would likely be difficult to comply with, Wolf said.

If implemented, the rule would make dealing with foreign-made U.S. content and technology “very frustrating and difficult for foreign companies,” Wolf said, which may have a ripple effect for U.S. manufacturers with foreign customers. While Commerce has not announced a timeline for introducing these rules, Wolf suggested companies should be preparing for the change now.

“If you’re a compliance professional, you should start paying attention to your jurisdictional analysis to the extent that directly or indirectly Huawei -- or one of its affiliates -- is a customer,” he said.

The changes being considered by Commerce arose out of concerns that merely placing Huawei on the Entity List has not done enough to restrict sales to the Chinese tech giant. The Treasury Department briefly considered placing Huawei on the Specially Designated Nationals List, Wolf said, but that idea was likely shot down because of the significant “ripple effects” such a move would have on the global economy. Designating Huawei as an SDN would block all U.S. and foreign transactions with the company with a U.S. nexus.

“If Huawei were added to the SDN list, my guess is it would probably shut down 40 percent of the world's telecommunications infrastructure and bring about not only a global technological collapse … but it would have a global economic implication with chaos that we’ve never seen before,” Wolf said. “I don’t think the odds of Huawei being added to SDN list are all that good.”

When the U.S. was first considering adding Huawei to the Entity List earlier this year, China warned U.S. officials against the action during trade negotiations, said Clete Willems, a lawyer with Akin Gump and former deputy assistant to the president for international economics. Willems, who left the White House in April and said he was involved in U.S.-China negotiations, said the U.S. never made Huawei part of the talks.

“China knew we were working on [Huawei’s entity listing] and they kept trying to bring them into the talks,” he said during the panel. “We said, ‘we don’t know what you’re talking about, that's not relevant.’” Trade experts have said the ban on Huawei will likely be lifted in any trade deal (see 1907180033), but Willems suggested that may not be a requirement. “We were never talking about Huawei,” he said. “We were never talking about those actions in the trade talks.”

The U.S. only decided to place Huawei on the Entity List after trade talks broke down in May, Willems said. But Huawei was not added to the list because President Donald Trump was frustrated with China’s role in the stalled talks, Willems said, but more so because of a push from the National Security Council. “When it was clear the deal wasn’t going to happen in May ... the NSC did what it wanted to do the whole time, which was go after Huawei,” he said.

Willems also said that while the U.S.-China trade deal will address agricultural trade, it will not be solely focused on Chinese agricultural purchases. “Let me be clear, it’s not just sales,” he said. “I think that’s gotten overblown.” The trade deal will include more “systemic agricultural market access” issues instead of direct purchases, Willems said. He pointed to China’s recent decision to lift the ban on U.S. poultry imports as an example (see 1911140019).

Wolf also briefly touched on Commerce’s plans to restrict sales of emerging and foundational technologies, saying they caused a “great deal of anxiety” as U.S. industries suspected the Trump administration was attempting to control broad categories of technology (see 1911070014). Wolf said the anxiety came from a “logical” place. “This administration really expanded the definition of national security … and there’s this underlying anxiety about China becoming economically competitive,” he said.

But Wolf also said he is “confident” Bureau of Industry and Security officials will closely follow the Export Control Reform Act and introduce only specific controls. “Anything is possible,” he said, “but I do believe what you will see is a series of rules that are narrowly tailored.” Wolf said to expect the first series of proposed controls “over the course of this month and next year.”