The Drama Around Huawei: Can U.S. Companies Do Business with the Chinese Chipmaker?

President Donald Trump's remarks during the G20 Summit in Japan in late June were the most recent installment in the drama surrounding Huawei Technologies Co. Ltd. (Huawei), a Chinese tech giant, in the U.S.-China trade war. To quote Trump:

"One of the things I will allow, however, is, a lot of people are surprised we send and we sell to Huawei a tremendous amount of product that goes into the various things that they make. And I said that that's okay, that we will keep selling that product. These are American companies ... that make product and that's very complex, by the way, and highly scientific. And in some cases we're the ones that do it, we're the only ones that do it. What we've done in Silicon Valley is incredible, actually, and nobody has been able to compete with it, and I've agreed and pretty easily, I've agreed to allow them to continue to sell that product. So American companies will continue and they were having a problem, the companies were not exactly happy that they couldn't sell because they had nothing to do with whatever it was potentially happening with respect to Huawei, so I did do that."¹

The immediate reaction in the media was that U.S. companies can now sell their products to Huawei, channeling the wishes of many U.S. businesses. A couple of days later, Reuters reported that "In an email to enforcement staff on [July 1] that was seen by Reuters, John Sonderman, Deputy Director of the Office of Export Enforcement, in the Commerce Department's Bureau of Industry and Security (BIS), sought to clarify how agents should approach license requests by firms seeking approval to sell to Huawei. All such applications should be considered on merit and flagged with language noting that 'This party is on the Entity List. Evaluate the associated license review policy under part 744,' he wrote, citing regulations that include the Entity List and the 'presumption of denial' licensing policy that is applied to blacklisted companies."² Tellingly, the official statement from the Chinese government following the G20 Summit failed to mention the Chinese telecommunications manufacturer.³

Almost two weeks after that report, we haven't seen any official action by BIS regarding removing Huawei from the Entity List or issuing additional guidance on the Temporary General License allowing certain exports to Huawei to continue until Aug. 19, 2019. Secretary Steven Mnuchin at the U.S. Department of the Treasury, which doesn't have jurisdiction over the Entity List or actions by the Commerce Department, has been rumored to urge U.S. companies to apply for licenses to BIS.⁴ However, it appears that Secretary of Commerce Wilbur Ross echoed Trump's pledge at a Commerce conference on July 9, telling participants that licenses will be issued "where there is no threat to U.S. national security."⁵

It is expected that Trump will use Huawei as a bargaining chip in his negotiations with China and will not remove it from the Entity List for a while, instead, authorizing U.S. exports to Huawei through the Temporary General License, which many anticipate will be extended, a series of additional licenses and guidance by BIS, and possibly specific licenses issued to U.S. companies. This Holland & Knight alert reviews the developments of the past two months and offers practical advice to companies affected by the Huawei confusion.

Review of U.S. Government Actions Affecting Trading with Huawei

On May 15, 2019, Trump signed Executive Order 13873, declaring that threats to the information and communications technology and services supply chain by "foreign adversaries" are a national emergency. Shortly after the issuance of the Executive Order, BIS announced its plan to list Huawei on its Entity List, effective May 16.

Although these moves were closely related, there are notable differences. Executive Order 13873 targets U.S. firms' transactions to source information and communication technologies and services from abroad. The Order did not designate any "foreign adversary," but only authorizes Commerce to make regulations within 150 days of the publication of the Executive Order, including designating which countries or entities are to be deemed foreign adversaries. If and when Commerce designates "foreign adversaries," it is assumed that Huawei will be one of the designated entities. Unlike the Executive Order, the BIS action designating Huawei on the Entity List had an immediate effect and restricts the ability of Huawei and its 68 affiliates to purchase components from the United States. In other words, under the Executive Order, Huawei's ability to sell its products to U.S. companies might come under attack in the future; under the BIS action, U.S. companies were no longer able to sell their products to Huawei.

On May 20, just days after adding Huawei to the Entity List, BIS issued a Temporary General License allowing U.S. firms to engage in certain exports to Huawei until Aug. 19, 2019. In the context of the past two months, the Temporary General License was an attempt to alleviate some of the disruptions to U.S. business and everyday life caused by the Huawei designation. We see this in Trump's statement at the G20 Summit, almost as if he realized for the first time the effect the designation has had on U.S. companies, particularly in Silicon Valley.

As an aside, the Executive Order and BIS actions were preceded by a provision in the John S. McCain National Defense Authorization Act for 2019 (NDAA), P.L. 115-232 (enacted Aug. 13, 2018). The NDAA, at Section 889, prohibited the use of federal funds to acquire "covered telecommunications equipment or services," including equipment produced by Huawei and its subsidiaries or any other entities that the Secretary of Defense determined "to be an entity owned or controlled by, or otherwise connected to, the government of a covered foreign country" (including China), effective Aug. 13, 2020. The NDAA also prohibited agency heads from awarding or renewing contracts for any equipment, system or service that uses "covered telecommunications or services as a substantial or essential component of any system or as a critical technology as part of any system," effective Aug. 13, 2019. Section 889 includes exceptions for entities that provide services that connect to the facility of a third party (e.g., backhaul, roaming or interconnection agreements), as well as for one-time waivers if approved by a federal agency.

Executive Order 13873

Prohibited Actions

Executive Order 13873 restricts inbound transactions with "foreign adversaries" involving information and communications technologies and services. Specifically, the Executive 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 that are subject to the U.S. jurisdiction, if
• the Transaction involves property in which any foreign country or national has any interest (including through an interest in a contract for the provision of the technology or service)
• the Transaction was initiated, is pending or will be completed after the date of the Executive Order, and
• the Secretary of Commerce determines 1) that the technology or services are "designed, developed, manufactured, or supplied by persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary" and 2) that such a transaction would pose a threat to national security

Effects

As it stands, the Executive Order itself has not affected Huawei or any other company, it only authorized Commerce to act and designated "foreign adversaries." Furthermore, it does not target a particular entity or a country; but establishes a broad principle under which the administration would handle this area of commerce when it involves what the administration deems a "foreign adversary." The Executive Order leaves the "how to" question to Commerce by empowering the Secretary of Commerce to provide, in consultation with other agencies, regulations within 150 days of the issuance of the Executive Order that would establish procedures for reviewing such transactions.

The Executive Order defines the term "foreign adversary" as "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." The regulations to be issued are expected to determine, or provide guidance to determine, what particular countries or entities are "foreign adversaries" under the Order.

Listing of Huawei on the BIS Entity List

Effective May 16, 2019, the Department of Commerce added Huawei and its 68 entities to the Entity List.⁶ The Entity List designation was based on the determination that Huawei and its affiliates have been involved in activities contrary to the national security or foreign policy interests of the United States. The primary example cited was the 13-count indictment against Huawei, accusing Huawei of knowingly or willfully entering transactions with the government of Iran without obtaining a license from the Office of Foreign Assets Control (OFAC) in violation of U.S. sanctions law.

Prohibited Actions

By adding Huawei and its affiliates to the Entity List, BIS is effectively prohibiting U.S. companies from engaging in the exports, reexports and in-country transfer of any item subject to the Export Administration Regulations (EAR) to Huawei or any of its designated affiliates. Items produced in the United States or deemed to be of U.S. origin because they incorporate U.S. technology⁷, wherever located, as well as foreign origin items physically present in the U.S., may not be supplied to the Huawei entities without a license. License applications will be reviewed on the policy of a presumption of denial, and license exceptions otherwise available are not applicable.

The BIS final rule contains a Savings Clause, which permits shipments already en route to a port of export or reexport as of May 16, 2019, if the delivery was in accordance with actual orders and otherwise conforms to the applicable regulations.

Temporary General License

On May 20, 2019, shortly after the Entity List designation of Huawei and its affiliates, BIS issued a 90-day Temporary General License, effective from May 20 to Aug. 19, 2019, which permits U.S. firms to engage in the export, reexport and in-country transfer of items subject to the EAR to Huawei and its designated affiliates.

The Temporary General License⁸ authorizes four categories of activity:

1. Continued Operation of Existing Networks and Equipment: transactions necessary to maintain and support existing and currently fully operational networks and equipment, including software updates and patches, subject to legally binding contracts and agreements executed between Huawei and third parties or the 68 non-U.S. Huawei affiliates and third parties on or before May 16, 2019.
2. Support to Existing Handsets: transactions necessary to provide service and support, including software updates or patches, to existing Huawei handsets that were available to the public on or before May 16, 2019.
3. Cybersecurity Research and Vulnerability Disclosure: disclosure to Huawei or the 68 affiliates of information regarding security vulnerabilities in items owned, possessed or controlled by Huawei or any of the 68 affiliates when related to the process of providing ongoing security research critical to maintaining the integrity and reliability of existing and currently operational networks and equipment, as well as handsets.
4. Engagement as Necessary for Development of 5G Standards by a Duly Recognized Standards Body: engagement with Huawei or its 68 affiliates as necessary for the development of 5G standards as part of a duly recognized international standards body.

Some initial media reports interpreted the first category to narrowly concern telecom network and equipment only, which was in line with a statement by Secretary Ross.⁹ Guidance received from the BIS office that issued the Temporary General License suggests that the terms of the Temporary General License was written broadly with the intent to capture any network that could be described by the language of the license.

Trump Statement at the G20 Summit

Trump's comments at the G20 Summit suggest that the president has realized some of the harm caused to U.S. companies by adding Huawei to the Entity List. The idea that U.S. companies will be allowed to sell to Huawei undermines the premise that national security concerns have motivated the designation. It can be more easily explained as a political move in the U.S.-China trade war, and some of the backpedaling suggests that it may not have been carefully thought through. The harm caused to U.S. businesses could easily motivate the extension of the Temporary General License.

It is anticipated that the Commerce Department will issue additional guidance that sets out specific parameters as to what transactions are allowed under the Temporary General License, and what happens after it expires on Aug. 19. It appears plausible that there might be additional general or specific licenses or an expansion of scope and duration of the current license. It is not expected, however, that Huawei will be removed from the Entity List before at least a nominal deal between the U.S. and China in the current trade war. While intricately linked in the global economy, Huawei is a target that can inflict pain to China in the short run, and President Trump is not likely to give it up as a bargaining chip before he's willing to declare victory on his trade war with China.

Notes

¹ "Trump Surprises G20 With Huawei Concession: U.S. Companies Can Sell to Huawei," Forbes, June 29, 2019.

² "U.S. government staff told to treat Huawei as blacklisted," Reuters, July 2, 2019.

³ "Trump's Huawei promise met with silence from China as Beijing plays down prospects of progress," South China Morning Post, July 1, 2019.

⁴ "Mnuchin Said to Advise U.S. Firms to Seek Huawei Exemptions," The Wall Street Journal, July 11, 2019. A Treasury Department spokeswoman refuted such rumors. Id.

⁵ Id.

⁶ These affiliates operate in the following 26 countries: Belgium, Bolivia, Brazil, Burma, Canada, Chile, China, Egypt, Germany, Hong Kong, Jamaica, Japan, Jordan, Lebanon, Madagascar, the Netherlands, Oman, Pakistan, Paraguay, Qatar, Singapore, Sri Lanka, Switzerland, Taiwan, United Kingdom and Vietnam.

⁷ Foreign-made items may also be subject to the EAR if they contain more than 25 percent by value of "controlled U.S. origin content."

⁸ BIS Temporary General License, 84 Fed. Reg. 23468 (May 22, 2019).

⁹ "Department of Commerce Issues Limited Exemptions on Huawei Products," Department of Commerce Press Release, May 20, 2019.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.