U.S. Targets Chinese Telecom Giant Huawei, Possibly Others, for Trade Restrictions

Finding reasonable cause to believe that Huawei has been involved in activities contrary to the national security or foreign policy interests of the United States, the U.S. Department of Commerce announced on May 15, 2019, that its Bureau of Industry and Security (BIS) will be adding Huawei Technologies Co. Ltd. and 68 non-U.S. Huawei affiliates (collectively, Huawei) to the Entity List.

The formal listing is expected on Tuesday, May 21, 2019, at which point the export, re-export, or transfer (in-country) — direct or indirect — to Huawei of any item subject to the U.S. Export Administration Regulations (EAR) will require a BIS license (with license applications subject to a presumption of denial). Items aboard a carrier en route to a port of export or re-export under a contract for sale to Huawei on the date of Huawei’s addition to the Entity List may proceed to that destination.

Because the vast majority of items within the United States, or that are of U.S. origin, are “subject to the EAR” (including software, hardware, and technology) Huawei’s addition to the Entity List will significantly impact many businesses that sell U.S.-origin products to Huawei. But the more challenging compliance burden may fall upon non-U.S. companies selling to Huawei, as foreign-produced items can also be “subject to the EAR” depending on their incorporation of U.S.-origin content and relationship to U.S.-origin technology.   

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In a separate but related development, on May 15, 2019, President Trump signed an Executive Order finding a threat to U.S. national security and a national emergency arising from the acquisition and use in the United States of “information and communications technology and services” supplied by foreign adversaries.

The Order provides a framework within which the Department of Commerce, in consultation with other federal agencies, may determine that certain transactions involving these foreign technologies pose an undue risk of sabotage to the United States, catastrophic effects on the security of U.S. critical infrastructure and its digital economy, or otherwise threaten the national security of the United States or the security of U.S. persons. Such transactions would be prohibited, absent an effective mitigation arrangement negotiated with the Commerce Department. The Executive Order grants additional broad authorities to the Commerce Department to counter these threats and to identify with particularity the foreign countries, persons, technologies, and transactions to be affected.

Although the Executive Order does not mention Huawei by name, it is expected that Commerce Department regulations, to be implemented by October 12, 2019, will prohibit U.S. businesses from acquiring, importing, or dealing in the telecommunications technologies and services of Huawei and possibly others. The ultimate scope and impact of the Executive Order will depend considerably on how Commerce implements these sweeping authorities, leading some to conclude that the move seeks leverage for the United States’ ongoing trade negotiations with China.

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Because the Entity List prohibition will be immediately effective, U.S. companies and others exporting U.S.-origin items to Huawei should quickly assess the impact. Given the mercurial U.S./China trade relationship, the longer-term impact of the Executive Order and its implementation by the Commerce Department is harder to predict, although U.S. companies reliant upon Huawei and other Chinese telecommunications products and services should plan accordingly.

If you would like additional information about the issues addressed in this client alert, please contact Rich Matheny or Jacob Osborn, or the Goodwin attorney with whom you typically consult.