Throughout December 2020, the Trump administration continued its focus on China and Russia and imposed additional export and investment controls. On December 23, 2020, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) published a final rule to amend the Export Administration Regulations (EAR) and create a new Military End User List (MEU List). A license from BIS is required for exports, reexports, or in-country transfers to persons on the MEU List for certain designated items. On December 18, 2020, BIS added 77 entries to the Entity List, most of which are Chinese entities. These actions follow the U.S. Department of Defense’s early December addition of four additional Chinese entities to the list of “Communist Chinese military companies” (CCMCs) subject to a U.S. investment ban. These actions represent the latest moves by the Trump administration to take a hard line against China in the final weeks of the administration. The administration has particularly focused on cutting off major Chinese companies from U.S. technology and finding ways to undermine the expanded Chinese military-industrial complex. By pushing these actions in the interim period before President Biden’s inauguration, the Trump administration hopes to leave a lasting effect on U.S.-China foreign policy. Many of these actions may be politically costly or otherwise difficult for a new administration to roll back.

MEU List Creation

The new MEU List includes 57 Chinese entities and 45 Russian entities. The EAR’s Section 744.21(a) currently contains a licensing requirement for exports, reexports, or in-country transfers of certain designated items to China, Russia, and Venezuela, when the exporter, reexporter, or transferor has knowledge that the item is destined for a military end use or military end user. Additionally, EAR Section 744.21(b) states that BIS may inform persons that a license is required because of an unacceptable risk of use in or diversion to a military end use or end user. The items subject to this export licensing requirement are listed on EAR Part 744, Supplement No. 2.

Under the original rule expanding export restrictions on military end uses and end users in these countries, exporters had to undertake significant due diligence to confirm whether these restrictions may apply. By creating the MEU List, BIS has eliminated the uncertainty surrounding many Chinese and Russian entities and informed the public that all listed entities are subject to the licensing requirement relating to military end users, removing any claim that the exporter did not have sufficient knowledge or was not informed that a listed entity was related to a military end use or end user. The MEU List may contain entities that exporters did not have reason to believe represented military end users when conducting their own due diligence procedures. Previously, exporters had to rely on their own due diligence/know-your-customer procedures to determine whether a potential transaction fell under this licensing requirement. It is important to note that this remains the case. The MEU List is not exhaustive, and exporters should continue to exercise heightened caution when doing business with Chinese, Russian, or Venezuelan entities that do not appear on the MEU List.

Entity List Additions

The vast majority of the 77 entities added to the Entity List are Chinese entities. The additions include affiliates of China State Shipbuilding Corporation (CSSC), Semiconductor Manufacturing International Corporation (SMIC), drone manufacturer DJI, and several Chinese universities. CSSC is one of the largest worldwide shipbuilding entities, and was not itself listed on the Entity List. SMIC is the largest chipmaker based in China, and SMIC itself was added to the Entity List, along with several of its affiliates. A press release by Secretary Ross stated that these designations were in response to human rights abuses, support for the militarization and unlawful maritime claims in the South China Sea, support of the People’s Liberation Army, and theft of U.S. trade secrets. As we previously reported, the Entity List has been an avenue for the Trump administration to apply regulatory pressure in its pursuit of anti-China policy.

Additional Investment Ban Listings

Beginning January 11, 2021, U.S. persons are prohibited from investing in publicly traded Chinese companies that are connected to the Chinese military, following the issuance of Executive Order 13959 in November 2020. The original list of targets for this investment ban included 31 Chinese companies. The U.S. Department of Defense has added the following entities to this list:

• China Construction Technology Co. Ltd. (CCTC)
• China International Engineering Consulting Corp. (CIECC)
• China National Offshore Oil Corp. (CNOOC)
• Semiconductor Manufacturing International Corp. (SMIC)

The press release accompanying these designations stated that these designations were designed to “counter the People’s Republic of China’s (PRC) Military-Civil Fusion development strategy, which supports the modernization goals of the People’s Liberation Army (PLA) by ensuring its access to advanced technologies and expertise acquired and developed by even those PRC companies, universities, and research programs that appear to be civilian entities.”

U.S. persons will be prohibited from investing in these newly designated entities beginning February 1, 2021, and have until December 3, 2021 to divest any securities held in these entities. The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) is expected to promulgate regulations or issue guidance related to these restrictions.

Conclusion

In the final weeks of the Trump administration, it continues to use all tools at its disposal to pursue a trade and investment policy focused on China and Russia. All U.S. companies that conduct business with China, Russia, or Venezuela, as well as foreign companies that deal in items subject to the EAR and export goods to China, Russia, or Venezuela, should review their customer lists to determine if they are affected by the MEU List or Entity List designations. Additionally, businesses should generally be cognizant that the scope of the China, Russia, and Venezuela restrictions continues to broaden and that heightened diligence when dealing with these countries is advisable. President Trump has appointed new personnel to senior positions in the Commerce Department to implement hardline policies on these countries.

This post comes to us from Fried, Frank, Harris, Shriver & Jacobson LLP. It is based on the firm’s memorandum, “Trump Administration Continues Trade Pressure on China and Russia,” dated December 23, 2020, available here.