Companies Should Expect Increasing Compliance Challenges Due to Continuing US-China Tensions, Law Firms Say

The U.S. and China saw an uptick in trade restrictions during the first few months of 2021, and companies should expect more compliance challenges as they continue to contend with a variety of export controls and sanctions issues from both countries, law firms said.

The uptick was most apparent among sanctions and counter-sanctions measures, which “intensified significantly” earlier this year, according to an April 9 alert from Freshfields Bruckhaus Deringer. Although the Biden administration is still undergoing a review of its China policies (see 2101250049), the new administration appears to be following the same strict sanctions and export control approach employed by the Trump administration, the firm said, which many officials and experts predicted (see 2011250054 and 2011250019). That has included more sanctions on Chinese officials involved in human rights abuses and restrictions on technology companies with close ties to China’s military (see 2104080011). Commerce Department Secretary Gina Raimondo also recently said she doesn't believe Huawei will be removed from the Entity List (see 2104070039)

Similar moves by U.S. allies, including sanctions imposed against China by the European Union, the United Kingdom and Canada (see 2103220034), have also raised tensions, Freshfields Bruckhaus Deringer said. The firm said increased global scrutiny on transactions involving China has “impacted a large number of companies in multiple sectors” and across international supply chains. “While China’s response to U.S. and other Western trade measures has been muted to date,” the alert said, “recent events signal a potential escalation.”

China could respond by strengthening its own set of blocking measures -- including its own export control law and the regulations for its so-called unreliable entity list -- which are intended to prohibit Chinese companies from complying with U.S. sanctions and export controls (see 2010190033, 2009210017 and 2012170041). But it remains unclear how exactly those Chinese regulations will impact U.S. measures, mostly because the U.S. government has “never recognized foreign blocking statutes,” Masuda Funai said April 6.

“Unlike blocking statutes in Canada and the European Union, which neutralize any efforts to freeze or seize assets of businesses and individuals in those jurisdictions,” the firm said, “the Chinese Blocking Rules cannot stop the U.S. Government from blacklisting foreign companies that violate U.S. export controls.” Masuda Funai said this is presenting third-country companies with an increasingly difficult choice. Some businesses are having to choose between “avoiding possible civil liability to [their] Chinese customer” or risk “being cut off entirely from the supply of U.S. technology items if the U.S. Government determines that the company has violated U.S. export laws.”

Most companies are choosing to abide by U.S. laws, the firm said. “Losing access to U.S. technology will be far more detrimental than civil liability to one or more Chinese customers.”

Those U.S. laws are growing more complex and have “significant ramifications” for U.S. companies doing business with China, Thompson Coburn said in an April 8 post. The firm pointed to the Commerce Department’s 2020 military end-use and end-user rule, which effectively increased due diligence requirements for exporters sending goods to a Chinese customer that may have ties to the Chinese military (see 2004270027).

“This poses significant compliance challenges when doing business with Chinese companies,” the firm said. “[G]iven the continuing overlap between civil and military organizations in China, additional due diligence will likely be required before proceeding with transactions under the new rule to determine whether a license may be needed.” The rule, which was followed by another measure that increased restrictions on foreign military intelligence end-users and end-uses, caused some confusion for exporters (see 2102190042 and 2007090075).

Thompson Coburn also called Commerce’s 2020 expansion of the foreign direct product rule “far-reaching” because it expanded restrictions on foreign-made goods that are sent to Huawei. The rule introduced a footnote 1 designation to the Entity List, which imposes controls on goods that are the direct product of certain technology or software subject to the Export Administration Regulations (see 2008170029 and 2012210044). “Any potential transaction involvement, downstream or upstream, by a Huawei affiliated entity listed in footnote 1 might involve significant investigation on the part of the exporter,” the firm said, adding that companies may have to track “the end use of products being exported to ensure that they are not at any point being incorporated into products for footnote 1 entities.”