Huawei Restrictions 'Only Going to Get Worse,' Industry Official Says

Although the Bureau of Industry and Security last month said it doesn’t have a draft rule in place to increase export licensing requirements for Huawei, exporters would be wise to still expect a tightening of restrictions against the Chinese telecommunications company, industry officials said this week. They also didn’t rule out BIS soon increasing export controls against China in other ways, including by potentially adding more items to the scope of its military end-use and end-user (MEU) rule requirements.

Jeanette Chu, vice president for national security policy at the National Foreign Trade Council and a former BIS official, said the outlook for Huawei from a U.S export control perspective is “dim.” The Biden administration earlier this year was reportedly moving toward a “total ban” on technology shipments to Huawei (see 2301310009), and although no official changes have been announced, Chu doesn’t expect a sudden policy reversal.

“There’s just so much scrutiny and pressure on this,” Chu said during a June 15 webinar hosted by the Massachusetts Export Center. She noted that U.S. concerns about Huawei are “not new,” pointing to the multiple waves of restrictions the U.S. has placed on Huawei and its subsidiaries over the last several years. “I cannot imagine watching that” and walking away “with any optimism that these would then be immediately lifted,” she said. “I don't think we can look for any type of amelioration.”

Kevin Cuddy, a government and regulatory affairs executive at IBM’s export regulation office, also said the Biden administration is likely to continue its current approach toward Huawei, saying it doesn’t want to viewed as “being soft” on China. “When politics and export controls get together, it's never a good outcome,” he said during the event. “I wouldn't expect it to get better, and certainly not going into 2024. It's only going to get worse.”

Both Cuddy and Chu pointed to the backlash the administration has received for appearing to go easy on exports to Huawei. Rep. Michael McCaul, the top Republican on the House Foreign Affairs Committee, released statistics in 2021 that showed BIS approved more than a combined $100 billion worth of export licenses for shipments to Huawei and Chinese top chipmaker SMIC during a six month period from 2020 to 2021, although BIS and export control lawyer said those numbers were misleading and didn’t include proper context (see 2110220037, 2110210073 and 2303060013).

Cuddy made similar points, saying BIS’ license approval rate for Huawei is high because exporters don’t apply for licenses “that they know are going to be denied, because why would you go through the work or go through the effort?” Chu said when she was at BIS, “it was never the people that applied for licenses that would keep me up at night, because typically someone who's a bad actor isn't going to do that.”

Chu and Cuddy also were asked about whether BIS is considering expanding the scope of its MEU rule restrictions (see 2109300061) to include items controlled under the Export Administration Regulations as EAR 99 -- goods that don’t typically require a license. Neither ruled it out. “Nothing's ever off the table,” Chu said.

Cuddy said the idea “makes some sense” if BIS wants to restrict foreign militaries from acquiring certain low-level chips. “There are a lot of things that had been on the control list -- semiconductors -- that were downgraded over the years because the technology advanced, so they rightfully downgraded the controls,” Cuddy said. “So now those items may be EAR99, but [BIS] may still want to control them.”

Cuddy also spoke about export compliance best practices, including due diligence challenges posed by the Entity List. Because the Entity List doesn’t explicitly extend its strict licensing requirements to certain subsidiaries of listed companies, Cuddy said it can be difficult determining whether doing business with those affiliated parties is legal.

For example, U.S. exporters may run into issues, he said, if they’re selling to a company in China, and an affiliated firm within the same “corporate entity” was added to the Entity List for reasons related to human rights concerns. Although the U.S. exporter may want to halt their exports, Cuddy said that isn’t always simple, especially if the exporter and the China company have some type of binding legal agreement.

“Say you have a pending sale, an ongoing warranty, an obligation, whatever it may be. You don't have a legal cause to get out of that contract,” he said. The exporter “can't implement force majeure” -- a contractual clause that allows parties to back out of a deal due to unforeseen circumstances -- “because the person you're doing business with isn't subject to the restrictions.”

“That's a real challenge, and it's something that the government doesn't always think about when they're putting one part of a corporate entity on a list and not everybody else in that same corporate entity,” Cuddy said. “It leaves industry in the lurch.”

In that case, he said the U.S. exporter can try to ask their Chinese client for corporate ownership information to prove they are distinct enough from the Entity Listed party. “And if the customer doesn't want to provide it, then maybe you can implement some kind of force majeure clause to say, look, from a legal legal compliance perspective, I can't make a definitive determination that this other entity is not subject to the restrictions,” Cuddy said. “So I'm going to say my contract with you is void.”

He acknowledged that could lead to some “legal implications and contract disputes.” Trade compliance teams must grapple with this “every time there's new people added to the list,” Cuddy said.