Huawei Technologies and ZTE Corporation may both soon garner a new title – “Foreign Adversary”. For those unfamiliar with the title in the context of business and trade, “Foreign adversary” means any foreign government or foreign non-government person engaged in a long-term pattern or serious instance of conduct significantly adverse to the national security of the United States or security and safety of United States persons.
What is the genesis? In a previous blog “President Trump Targets U.S. IT Security with Executive Order”, I spoke of an executive order signed on May 15, 2019 titled "Securing the Information and Communications Technology and Services Supply Chain." The Executive Order declared a national emergency to “deal with the threat posed by the unrestricted acquisition or use in the United States of 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 foreign adversaries.” Transactions covered by the Executive Order include any acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service.
Although the rules implementing the Executive Order are overdue (the Secretary of Commerce was scheduled to publish the rules no later than October 12, 2019), the Executive Order stated it will cover transactions initiated, pending, or to be completed after the date of the Executive Order.
The Federal Communication Commission (“FCC”) has taken the first action. The FCC announced that it plans to vote in November to designate Huawei Technologies and ZTE Corporation as posing national security risks. The effect will be to bar the use of funds from an US$8.5 billion government program (“Universal Service Fund”) to purchase equipment or services from Huawei Technologies and ZTE Corporation. The Universal Service Fund is an FCC program which brings affordable, nationwide telephone service to include, among other things, rural health care providers and eligible schools and libraries.
A second facet of the FCC proposal would be to require U.S. telecom companies currently using Huawei Technologies and ZTE Corporation products to remove and replace that equipment. The establishment of a $1bn fund to reimburse telecom companies is being contemplated for the removal and replacement. The effect of the “removal and replacement” will not be as far reaching as it sounds. Apparently, none of the big four mobile providers (AT&T, Verizon, Sprint, and T-Mobile) or two of the larger internet providers (Comcast or Charter) use Huawei Technologies equipment, but there are number of smaller, mostly rural carriers that are customers.
The FCC will vote on the proposal on November 19, 2019, which coincidently is the date that Huawei Technologies is scheduled to be formally added to Commerce Department’s “entity list,” officially making it ineligible to receive any item subject to the Export Administration Regulations without a license. Although Huawei Technologies was added to the list in May, the rule was extended to allow U.S. companies more time to comply.
If the FCC decides to proceed, Huawei Technologies and ZTE Corporation would have 30 days to contest the FCC’s national security risk designation. If rejected, the final order ordering the removal of equipment will likely be signed in early 2020.
The actions of the FCC are “Round Two” of US efforts to secure its Information and Communications Technology and Services Supply Chain from prying eyes and ears. In August 2019, as part of the National Defense Authorization Act, US Government agencies were prohibited from purchasing telecommunications and video surveillance equipment and services from five Chinese companies, including Huawei Technologies and ZTE Corporation (see my blog “Additional Actions against Chinese Companies”).
In formalizing the process for securing our Information and Communications Technology and Services Supply Chain, FCC chairman stated: “We need to make sure our networks won’t harm our national security, threaten our economic security or undermine our values… The Chinese government has shown repeatedly that it is willing to go to extraordinary lengths to do just that.”
For more information on how these changes may affect your company, please contact Export Solutions for a free consultation.
Jim McShane is a Sr. Consultant, Trade Compliance for Export Solutions -- a full-service consulting firm specializing in ITAR and EAR regulations.