Commerce Reportedly Nearing Publication of Rule to Further Restrict Foreign Sales to Huawei

The Commerce Department is close to publishing a rule that will expand its authority to block shipments of foreign made goods to Huawei, according to a Jan. 14 Reuters report. The rule would lower the U.S.-origin threshold on exports to Huawei to 10 percent, Reuters said, and expand the purview to include “non-technical goods like consumer electronics” and “non-sensitive chips.” Commerce sent the rule to the Office of Management and Budget after an interagency meeting last week, the report said. A top Commerce official recently confirmed the agency was considering a range of expanded restrictions of foreign exports to Huawei, including changes to the Direct Product Rule and a broadened de minimis level (see 1912100033).

The rule would represent a “significant change” to the Export Administration Regulations, said Mac Fadlallah, a trade lawyer with Akin Gump, speaking during a Jan. 16 webinar hosted by the law firm. Fadlallah expects the de minimis rule to publish in the “coming weeks,” adding that Commerce has also considered dropping the threshold for U.S.-origin content for exports to Huawei to zero percent instead of 10 percent. “If the rule is zero, that means that any U.S. content in an otherwise foreign made item will subject that item to U.S. controls,” Fadlallah said.

Commerce will likely drop the threshold to 10 percent, however, because that is the threshold already written into the EAR with respect to “embargoed destinations,” such as Iran and Syria, Fadlallah said. “By referencing the existing 10 percent provision that applies to embargoed countries ... [Commerce] will create a new embargoed destination that is Huawei.”

If the rule is approved by other agencies, it could be issued as a final rule in “a matter of weeks” with no opportunity for public comment, Reuters said. Reuters said Commerce has also drafted a regulation to expand the Direct Product Rule, which subjects certain foreign-made products containing U.S. technology to U.S. regulations. The regulation would broaden the rule to include “low-tech items” made abroad and that are based on U.S. technology and shipped to Huawei.

The Direct Product Rule change would also have wide-ranging implications, Fadlallah said. It would control any foreign item that is based on U.S. technology even if “every single piece, part and component of that item is sourced from” a foreign country, he said. “That's significant.” A former top Commerce official called the upcoming changes “quite dramatic,” saying they will have “collateral” and “psychological” effects on international supply chains (see 1912130052).

Fadlallah also said Commerce is rumored to be considering additional changes to the EAR to place more restrictions on Huawei. “But these are the two that I think are the most likely to occur, particularly the de minimis expansion,” he said. “We are expecting that to happen.” Commerce and OMB did not comment.