Chinese tech in Washington’s cross hairs

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On May 29, the Trump Administration announced that the United States (US) will: (i) “impose a 25 percent tariff on $50 billion of goods imported from China containing industrially significant technology, including those related to the ‘Made in China 2025′ program,” and (ii) “implement specific investment restrictions and enhanced export controls for Chinese persons and entities related to the acquisition of industrially significant technology.”

Meanwhile, both the House and Senate versions of the National Defense Authorization Act for Fiscal Year 2019 (NDAA), Congress’ over $700 billion annual defense policy bill, include provisions targeting Chinese technology companies.

$50 billion in tariffs on Chinese technology sector /  Investment restrictions and enhanced export controls targeting Chinese acquisition of US technology

The White House’s announcement of these measures to “defend America’s intellectual property and proprietary technology from theft and other threats” comes less than a week before a US delegation led by Secretary of Commerce Wilbur Ross is scheduled to return to China for another round of trade talks from June 2-4.  The final list of covered Chinese imports containing advanced technologies that will be subject to the tariffs will be announced by June 15, and the list of investment restrictions and enhanced export controls will be announced by June 30.  However, there is no guarantee that the US will implement these measures.  Today’s announcement may be viewed as an attempt to create negotiating leverage in advance of the upcoming US-China trade talks.  It may also be a response to bipartisan pressure from Capitol Hill arising from President Trump’s announcement on May 25 about a deal that would lift severe sanctions imposed on Chinese telecom company ZTE in exchange for a $1.3 billion fine, oversight by American compliance officers, and the replacement of certain members of ZTE’s executive/management team.

Of course, President Trump has established a consistent track record of following through on proposed trade and related actions.  Therefore, companies that would be impacted by the imposition of the 25 percent tariffs on $50 billion worth of Chinese goods containing advanced technologies, and the imposition of new investment restrictions and enhanced export controls related to the acquisition of US technology, should monitor all forthcoming developments related to today’s announcement closely and prepare for the Administration’s corresponding follow-up announcements on or before June 15 and June 30, respectively.

House and Senate versions of NDAA include provisions prohibiting US Government procurement of certain Chinese technologies

Capitol Hill has become an increasingly hostile environment for Chinese technology companies.  The wave of opposition in Congress against Chinese technology companies is not limited to members of one party or a select few in both parties.  Widespread, bipartisan concern exists about the real and potential threats to US national security resulting from the use by federal employees and appointees, and in particular — military and intelligence community personnel — of Chinese technology / devices.

The US House of Representatives passed its version of the NDAA by a vote of 351-66 on May 24.  The Senate’s version of the annual defense policy bill was approved by the Senate Armed Services Committee (SASC) on May 23 and could be considered on the Senate floor as early as during the week of June 4.  The House-passed version of the NDAA “directs a whole-of-government strategy to confront the People’s Republic of China” and prohibits all US Government agencies from acquiring or using technology developed by Huawei or ZTE.  The House bill also includes a provision that would prohibit federal agencies from acquiring or using certain Chinese-made surveillance equipment.

Although the SASC-approved version of the NDAA that is on its way to the Senate floor has not been released by the Committee, it contains provisions that adhere to a core tenet of the US Department of Defense’s (DOD’s) National Defense Strategy, which classifies China as a “revisionist power” and “strategic competitor” that “seek[s] to shape the world toward [its] authoritarian model through destabilizing activities that threaten the security of the United States and its allies.”  The current Senate version of the NDAA contains a provision that would prohibit DOD from acquiring or using technology developed by Huawei or ZTE (as compared to the House version of the bill that prohibits all US Government agencies from such acquisition or use).  The Senate bill also includes a provision that would require all companies doing business with DOD to disclose whether they allow foreign government access to sensitive company information, including their software source code.  This provision is said to be a direct response to Russian and Chinese government contracting processes that at times require companies pursuing government business to submit to source code reviews.  Additionally, Committee on Foreign Investment in the United States (CFIUS) reform legislation — the Foreign Investment Risk Review Modernization Act (FIRRMA or S. 2098) — which would impose heightened restrictions on Chinese investment in the US, is included in the Senate version of the NDAA.  An effort to add FIRRMA to the House NDAA via amendment failed.  The unsuccessful action in the House and successful action in the Senate are a direct acknowledgment of Secretary of Defense Jim Mattis’ requests in separate letters on May 4 to House Armed Services Committee (HASC) and SASC leadership to include FIRRMA in this year’s NDAA.

Once the Senate has passed its version of the bill, the NDAA will be conferenced, during which time HASC and SASC staff will work to resolve the minor disparities between the two versions of the bill, HASC and SASC members and staff will resolve some of the more challenging disparities, and the Big Four (the Chairmen and Ranking Members of the two committees) will resolve the most contentious disparities.

Congress has passed the NDAA for 57 straight years.  It is one of but a few remaining must-pass annual bills on Capitol Hill.  Companies that could be impacted by these provisions in the two versions of the NDAA moving through Congress should monitor the NDAA consideration process closely in anticipation of the bill’s enactment later this year.