Discussions on the fringes of the G-20 Summit have apparently led to a potential lessening of the restrictions against Huawei and at least some of its affiliates. These sanctions and the ensuing discussions certainly overshadowed the eight themes of the summit (Global Trade, Economy, Investment, Innovation, Environment and Energy, Employment, Women’s Empowerment, Development and Health). As with every summit, there is the official agenda and then the “sidebars.” In this case, the G-20 had significant discussions about Huawei, trade talks, tariffs, sanctions against Turkey’s purchase of the Russian S400 missile system, and China’s disregard for Iranian oil sanctions.
While the fate of Huawei and its placement on the Entity List will sort itself out in the coming weeks, there are other controls – with potentially greater impact – that have been overshadowed by Huawei. On May 15, 2019, President Trump issued an Executive Order titled “Securing the Information and Communications Technology and Services Supply Chain.” This 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.” The president has declared the national emergency under the authority granted by the International Emergency Economic Powers Act (IEEPA) and the National Emergencies Act. Through this order, the White House is delegating to the Secretary of Commerce the authority to prohibit transactions that could adversely affect the national security of the United States.
To understand the Executive Order, it is necessary to understand some of the definitions that provide clarity. Some of these definitions are already familiar, because they exist in exact (or similar) form in export regulations such as the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR). Others do not currently appear in other export control regulations and bear review. For example:
“Foreign adversary means any foreign government or foreign non-government person engaged in a long-term pattern or serious instances of conduct significantly adverse to the national security of the United States or security and safety of United States persons”;
“Information and communications technology or services means any hardware, software, or other product or service primarily intended to fulfill or enable the function of information or data processing, storage, retrieval, or communication by electronic means, including transmission, storage, and display”;
“Entity means a partnership, association, trust, joint venture, corporation, group, subgroup, or other organization;”
The Executive Order delegates authority to the Secretary of Commerce to review and block transactions wherein such transaction would pose a threat to the National Security of the United States. These actions must be taken in consultation with the heads of other certain federal agencies, including: Treasury, State, Defense, the Attorney General, Homeland Security, the United States Trade Representative, the Director of National Intelligence, the Administrator of General Services, the FCC, and other agencies. Specifically the order prohibits: “any acquisition, importation, transfer, installation, dealing in, or use of any information and communications technology or service (transaction) by any person, or with respect to any property, subject to the jurisdiction of the United States, where the transaction involves any property in which any foreign country or a national thereof has any interest (including through an interest in a contract for the provision of the technology or service), where the transaction was initiated, is pending, or will be completed after the date of this order; and where the Secretary of Commerce (in consultation) has determined that:
- The transaction involves 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 a foreign adversary; and
- The transaction:
- poses an undue risk of sabotage to or subversion of the design, integrity, manufacturing, production, distribution, installation, operation, or maintenance of information and communications technology or services in the United States;
- poses an undue risk of catastrophic effects on the security or resiliency of United States critical infrastructure or the digital economy of the United States; or
- otherwise poses an unacceptable risk to the national security of the United States or the security and safety of United States persons.
Pursuant to this Executive Order, one can imagine certain outcomes that are likely to occur. For example:
- The identification and designation of countries or persons as foreign adversaries;
- The identification of persons owned by, controlled by, or subject to the jurisdiction or direction of foreign adversaries;
- The designation of particular technologies or countries with respect to which transactions involving information and communications technology or services requiring “particular scrutiny”;
- The establishment of licensing requirements or prohibitions;
- The establishment of criteria by which certain technologies or particular participants in the market for information and communications technology or services can be identified as included in (or excluded from) the prohibitions;
- The identification of a mechanism and relevant factors for the negotiation of agreements to mitigate concerns related to transactions.
There are reporting requirements in furtherance of this Executive Order. Some are:
- The Secretary of Commerce in consultation with the Secretary of State is authorized to provide recurring and final reports to the Congress on the national emergency that predicated this Executive Order.
- The Director of National Intelligence will continue to assess threats from information and communications technology or services designed, developed, manufactured, or supplied by foreign adversaries or those connected with such adversaries. The first assessment will be due in 40 days.
- The Secretary of Homeland Security will assess and identify entities, hardware, software, and services that pose a threat to National Security.
- An annual report will be presented to the president by the Secretary of Commerce (in consultation) as to whether actions taken pursuant to the Executive Order are “sufficient and continue to be necessary to mitigate the risks identified.”
Obviously, this order represents a concerted effort by the U.S. Government and its many agencies to identify and thwart any impending threat to our National Security. In a message to Congress, President Trump made it clear that this is not merely a trade or economic matter. His message stated that: “Although maintaining an open investment climate in information and communications technology, and in the United States economy more generally, is important for the overall growth and prosperity of the United States, such openness must be balanced by the need to protect our country against critical national security threats.”
For those who still want to believe that this Executive Order is nothing more than a new trade war tool of diplomacy, it should be understood that this initiative actually began under the Obama administration as a response to National Security concerns that a foreign adversary could manipulate or influence/control supply chains to critical infrastructure. The president undeniably has extended the original concepts and strategies of the previous administration and provided the U.S. Government with additional authorities to block or establish conditions to any transaction involving information and communications technology or services which are not in the countries best interest and probably are to its detriment.
Reading between the lines (or with respect to information and communications technology – looking through the “back doors”) the culmination of this Executive Order is understandable considering the threats presented. Further, it is the next step after the strengthening of the authorities of the Committee on Foreign Investment in the United States (CFIUS) and the passage of the Export Control Reform Act of 2018 to place more in-depth reviews and approvals to contain the involvement of foreign adversaries with critical technologies, particularly with respect to information and communications technology or services.
When will all of this happen? The Secretary of Commerce must publish the rules under the Executive Order within 150 days — so, no later than October 12, 2019. Interestingly, even before these rules are finalized, current activities are covered by the order. We will be watching this closely over the coming weeks to see how the Commerce Department implements these new provisions.
Jim McShane is a Sr. Consultant, Trade Compliance for Export Solutions -- a full-service consulting firm specializing in ITAR and EAR regulations.