This week the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) published three Frequently Asked Questions (FAQ) related to Executive Order (E.O.) 13959, “Addressing the Threat from Securities Investments that Finance Communist Chinese Military Companies.”

  • Can U.S. persons custody, offer for sale, serve as a transfer agent, and trade in covered securities?

For purposes of E.O. 13959, activity by U.S. persons related to the following services are considered permissible, to the extent that such support services are not provided to U.S. persons in connection with prohibited transactions:  clearing, execution, settlement, custody, transfer agency, back-end services, as well as other such support services.

  • Does the prohibition in E.O. 13959 apply to transactions in securities of a Communist Chinese military company subsidiary with a name that exactly or closely matches the name of an entity identified in the Annex to E.O. 13959?

Yes.  As stated in FAQ 858, the prohibitions of E.O. 13959 apply with respect to “publicly traded securities (or any publicly traded securities that are derivative of, or are designed to provide investment exposure to, such securities) of an entity with a name that exactly or closely matches the name of an entity identified in the Annex to E.O. 13959 (effectively January 11, 2021).”  OFAC has published and will continue to update a list on its website to aid in the implementation of E.O. 13959, including the names of certain entities that closely match the name of entities identified in the Annex to E.O. 13959.  Among other names, OFAC’s current list includes (1) China Telecommunications Corp. / China Telecommunications; (2) China Mobile Communications Group / China Mobile Communications / China Mobile Communications Group Co Ltd; and (3) China United Network Communications Group Co Ltd / China United Network Communications Ltd.  These names closely match the names of China Telecom Corporation Limited (NYSE: CHA), China Mobile Limited (NYSE: CHL), and China Unicom (Hong Kong) Limited (NYSE: CHU).  Transactions in the securities of any Communist Chinese military company subsidiary (whether expressly listed or not) are prohibited if the subsidiary’s name exactly or closely matches the name of these or any other entities identified in the Annex to E.O. 13959 or the name of any Communist Chinese military company listed by the Departments of the Treasury or Defense.

In addition, as OFAC stated in FAQ 860, the prohibitions in section 1(a)(i) of E.O. 13959 expressly apply to “any securities that are derivative of, or are designed to provide investment exposure to” the publicly traded securities of any Communist Chinese military company, including American depository receipts (ADRs).

The prohibition in section 1(a)(i) of E.O. 13959 takes effect at 9:30 a.m. eastern time on January 11, 2021.  Compliance with this prohibition is measured by trade date, rather than settlement date.

  • May market intermediaries and other participants facilitate divestment from publicly traded securities of Communist Chinese military companies, including divestment by investment fund managers?

Yes.  Market intermediaries and other participants may engage in ancillary or intermediary activities that are necessary to effect divestiture during the relevant wind-down periods or that are otherwise not prohibited under the E.O.  Transactions by U.S. persons (including investors and intermediaries) involving investment funds that are seeking to divest during the relevant wind-down periods to ensure compliance with the E.O. are permitted.

As explained in FAQ 861, under E.O. 13959, any transaction in publicly traded securities, or any securities that are derivative of, or are designed to provide investment exposure to such securities, of any Communist Chinese military company, as defined in E.O. 13959, is prohibited regardless of such securities’ share of the underlying index fund, ETF, or derivative thereof.  FAQ 862 also notes that U.S. funds are not required to divest covered securities of companies identified in the Annex to E.O. 13959 by January 11, 2021.  Divestment must be completed by November 11, 2021.

 

 

On December 28 and 29, the U.S. Trade Representative (USTR) conducted public hearings on Vietnam’s timber imports and currency practices. Participant lists and hearing transcripts are available below. Post-hearing rebuttal comments are due January 6 and 7.

More information on the initiation of the investigations and hearings is available in our October and November posts.

Hearing Schedules:

Date Event
December 10 Due date for filing requests to appear and a summary of expected testimony at both public hearings
December 28 Public Hearing on Vietnam’s Timber Imports

December 29 Public Hearing on Vietnam’s Currency Practices

January 6 Due date for submission of timber post-hearing rebuttal comments (post-hearing rebuttal comments are to be limited to rebutting or supplementing testimony at the hearing)
January 7 Due date for submission of currency post-hearing rebuttal comments (post-hearing rebuttal comments are to be limited to rebutting or supplementing testimony at the hearing)

 

In ruling NY N316065 (December 11, 2020), Customs and Border Protection (CBP) discussed the classification of portable, nonelectric charcoal or wood-fueled outdoor braziers and a grill.  As stated in the ruling, the items at issue are composed of series 6061 aluminum and 304 stainless steel.  In use, they are placed on the ground and are fully collapsible.  All of the items include a canvas carrying bag for storage and portability purposes.

As stated by CBP, the braziers and the grill are composite goods comprised of different materials that are classifiable in different headings. GRI 3(b) of the HTSUS provides, in relevant part, that composite goods, which cannot be classified by reference to GRI 3(a), shall be classified as if they consisted of the material or component, which gives them their essential character. The aluminum accounts for the vast majority of the weight and value for each of the braziers and the grill, therefore, CBP determined that the essential character of the braziers and the grill is the aluminum.

CBP determined that the applicable subheading for the aluminum braziers and the aluminum grill is 7615.10.9100, HTSUS, which provides for “Table, kitchen or other household articles and parts thereof, of aluminum: Other: Other.”  The rate of duty will be 3.1 percent ad valorem.

On December 31, 2020, U.S. Customs and Border Protection (CBP) issued a Withhold Release Order (WRO) for seafood harvested on a Taiwanese fishing vessel named the Lien Yi Hsing No. 12. The order follows a separate decision in August of last year against the Da Wang, another Taiwanese fishing vessel suspected of similar violations. The December 31 WRO was the 13th and final for Fiscal Year 2020.

The Agency’s Press Release included 3 out of the 11 possible forced labor indicators:

  • Deception
  • Withholding of wages
  • Debt bondage

Additional forced labor indicators include: Abuse of vulnerability, restriction of movement, isolation, physical and sexual violence, intimidation and threats, retention of identity documents, abusive working and living conditions, and excessive overtime.

WROs are issued by the U.S. government when information reasonably but not conclusively indicates goods were made in whole or in part using Forced Labor. Merchandise detained under a WRO order must be exported immediately or a substantial submission made that provides specific information showing that the goods were not made with forced labor. To obtain a release of any shipment that has been subjected to a WRO, a certificate of origin along with this detailed statement regarding the merchandise’s production and supply chain origin must be submitted to CBP. CBP makes a determination on a case-by-case basis.

For more information, please contact: Jeffrey Snyder, Frances Hadfield, or Clayton Kaier

On December 23, the Bureau of Industry and Security (BIS) amended the Export Administration Regulations (EAR) to remove the People’s Republic of China (PRC or China) Special Administrative Region of Hong Kong from the list of destinations in the EAR.  The amendment implements Sections 2 and 3 of Executive Order 13936 of July 14, 2020, in response to new security measures imposed on Hong Kong by the government of China.  BIS states that the “new measures [by China] fundamentally undermine Hong Kong’s autonomy increasing the risk sensitive U.S. technology and items will be diverted to unauthorized end uses and end users in China.”

On December 28, BIS amended the EAR to revise the Country Group designations for Ukraine, Mexico and Cyprus.

In this rule, BIS moved Ukraine from Country Group D to Country Group B and added Mexico and Cyprus to Country Group A:6. In both cases, these countries now have access to additional license exceptions available in the EAR.

The EAR designates countries into Country Groups A, B, D, and E which reflect each country’s export control policy, multilateral regime membership, system, and practice. The Country Groups generally serve as a basis for the availability of exceptions from license requirements of the EAR. Country Groups may also be used when describing license review policy and end-user and end-use based controls.

In response to recent action by the European Union in the Large Civil Aircraft (Boeing-Airbus) Dispute in the World Trade Organization (“WTO”), the United States Trade Representative (“USTR”) has announced the inclusion of additional products to the list of EU goods subject to Section 301 tariffs.

Section 301 tariffs will apply to specified additional products of France and Germany, including certain aircraft manufacturing parts, and certain non-sparkling wines, and cognac and other grape brandies.  The USTR’s action targets products of France and Germany, as the agency contends these countries have provided the greatest level of WTO-inconsistent large civil aircraft subsidies.  In a press release issued late on December 30, 2020, the USTR explained that its decision to expand the pool of EU products currently subject to additional tariffs responds to recent retaliatory action taken by the European Union in November 2020, which imposed additional tariffs on certain large civil aircraft of the United States and other U.S. goods.

Pending confirmation in a forthcoming formal Federal Register Notice, the USTR’s revisions will apply to products entered for consumption, or withdrawn from consumption, on or after 12:01 am (Eastern Standard Time) on January 12, 2021.

The ongoing large civil aircraft spat between the United States and the European Union simmered for more than a decade at the WTO and, in recent years, resulted in a tit-for-tat tariff war between the two trade partners.  As importers close the book on 2020, the retaliatory tariffs show no clear signs of slowing.  As no exclusion process has yet been implemented by the USTR in connection with this dispute, importers of impacted products should explore options for duty-savings.

BIS remains busy during the closing days of the year. On December 18 and 21 the Department of Commerce issued several press releases announcing the addition of 77 entities to the Entity List, and for the first time, a Military End User List. The December 18 press releases (here and here) announced the addition of 77 entities to the Entity List, including several high-profile Chinese companies. And while the new additions were not published in the Federal Register until December 22, the additions became effective on the date of the press release, December 18. Continuing a “rulemaking by press release,” exporters who rely on the Federal Register may have missed the additions. The December 21 press release (here) publicized the creation of a new list, the Military End User List (“MEU List”), related to the MEU rule BIS issued earlier this year (see our prior alert here). The MEU List was published in the Federal Register and went into effect on December 23.

Entity List Additions

Under §740.11(b) of the Export Administration Regulations (EAR), Commerce, in consultation with the interagency, can add entities to the Entity List that it reasonably believes to be involved, or to pose a significant risk of becoming involved, in activities contrary to the national security or foreign policy interests of the United States. Among the most significant additions in this tranche, BIS added China’s largest chipmaker, the Semiconductor Manufacturing International Corp., or SMIC, as well as DJI, a leading drone manufacturer. BIS explained that it added SMIC to counteract what BIS describes as “China’s military-civil fusion (MCF) doctrine.” BIS imposed a license requirement (with a policy of denial) for the export, reexport or transfer in country to these entities of all items “subject to the EAR,” including EAR99.

BIS also added more than sixty other entities to the Entity List from Bulgaria, France, Germany, Hong Kong, Italy, Malta, Pakistan, Russia, and the United Arab Emirates (U.A.E.), in addition to China. These companies allegedly: enabled human rights abuses; supported the militarization in the South China Sea; acquired U.S.-origin items in support of the People’s Liberation Army’s programs; and were involved in the theft of U.S. trade secrets.

The New MEU List

Under the authority of another section of the EAR, § 744.21, BIS published a new list, the MEU List. In April 2020, BIS announced a new rule imposing additional licensing requirements for items (listed in Supplement No. 2 to Part 744) destined to a Military End Use or Military End Users in the People’s Republic of China, Russia, or Venezuela (see our summary here). This rule, known as the “MEU Rule,” took effect June 29, 2020.

The MEU List is separate and discrete from the Entity List and while similar in some respects, does not contain the same prohibitions. Two important distinctions limit the scope of the MEU List as compared to the Entity List: 1) the MEU Rule does not apply to all items subject to the EAR, only to items listed in Supplement No. 2 to Part 744 (here) (“Supp. 2”); and 2) the MEU Rule is geographically limited and applies to only end users or end uses in China, Russia, or Venezuela, while the Entity List is not so limited.

The MEU List comprises a positive list to notify the public that a license will be required to export, reexport, or transfer (in-country) any item described in Part 744 Supp. 2 to the 102 “military end users” identified on the new MEU List. Notably, however, the list is not exhaustive and exporters are still required to perform due diligence to determine if an end user in any of the three jurisdictions meets the definition of a “military end user.” BIS states, “Exporters, reexporters, or transferors will still be responsible for ensuring their transactions are in compliance with the license requirements set forth in § 744.21 because BIS cannot list every `military end user’ or party representing a risk of diversion thereto in the MEU List, or identify all situations which could lead to an item being used for a `military end use.’”

Adding to the challenge of exporting to China, the Department of Defense (DOD) has published a separate list naming “Communist Chinese military companies” operating directly or indirectly in the United States, pursuant to the statutory requirements of §1237 of the 1999 National Defense Authorization Act (NDAA). The DOD published its initial list in June of this year and has been updated since. The DOD list has triggered added confusion among exporters because the DOD statutory criteria for identifying parties is not synonymous with the EAR definition of “Military End User.” Meaning, in practice, that a company identified on the DOD list may not necessarily be subject to additional export restrictions or licensing requirements under the EAR. According to BIS, however, entities listed on the DOD list raise a Red Flag for BIS Know Your Customer purposes, prompting companies to perform enhanced due diligence prior to engaging in exports of covered items.

The flurry of lists in 2020 reflects BIS’ continued, enhanced focus on managing China’s access to U.S. technology. The complexity of exporting to China shows no sign of waning in the closing days of 2020.

On December 19, 2020, China’s National Development and Reform Commission (“NDRC”) and Ministry of Commerce (“MOFCOM”) released anticipated “Measures for the Security Review of Foreign Investments” (the “Measures”). These Measures, which implement China’s Foreign Investment Law that went into effect on January 1, 2020, and established the country’s new foreign investment regulatory framework, are effective on January 18, 2021.

For purposes of the Measures, “foreign investment” refers to the investment activities carried out by foreign investors directly or indirectly within China, including the following circumstances:

  • if foreign investors invest, solely or jointly with other investors, in new projects or companies in China;
  • if foreign investors acquire equity or assets of domestic companies through mergers and acquisitions; or
  • if foreign investors make investments in China in any other form.

Given the potential breadth of the third category and the number of sectors deemed important to national security, these Measures could have far-reaching effects on investments and transactions involving companies in China, depending on how “investment” is interpreted. The Measures also make clear that transactions involving investors from Hong Kong, Taiwan, and Macau are subject to national security reviews.

Notably, Article 22 of the Measures states that China’s securities regulatory authority, in conjunction with a newly-established office in the NDRC that will conduct the national security reviews (the “Security Review Office”), will promulgate separate measures governing foreign investors’ purchase of shares of a China-owned company through stock exchanges where that purchase may affect China’s national security.

Targeted Industries

The Measures direct parties to a transaction to notify the Security Review Office of investments in certain industries before the investments are made. Failure to do so may result in an order to file a declaration within a certain time period and potentially an order to divest. Accordingly, investors should consider whether their pending transactions are subject to the national security reviews and, if so, consider suspending the close of the transaction pending review. Other government agencies, companies, and organizations can refer investments or transactions to the Security Review Office for consideration (for example, following an antitrust filing), signaling that the scope of the national security reviews may be broader than the industries noted below. The industries explicitly mentioned in the Measures include the following:

  • investments in the military and military industrial industries and other fields related to the security of the China’s national defense, and in areas near military facilities and military industry facilities; and
  • investments in certain agricultural products, energy and resources, equipment manufacturing, infrastructure, transport services, cultural products and services, information technology and Internet products and services, financial services, key technologies and other fields relating to national security, in which the foreign acquirer obtains a controlling stake in the PRC business.

A “controlling stake” occurs in the following circumstances:

  • if the foreign investor holds more than 50% of the equity of an enterprise;
  • if the foreign investor holds less than 50% of the equity of an enterprise, but the voting rights held by it can have a significant impact on the resolutions of the board of directors, the board of shareholders, or the general meeting of shareholders; or
  • other circumstances in which the foreign investor may have a significant impact on the company’s business decision-making, human resources, finance, and technology.

Established Timelines: Suspensory Review

National security reviews pursuant to the new measures follow a timeline similar to that of the United States Committee on Foreign Investment in the United States (“CFIUS”) and include three stages of review that can culminate in clearance of the transaction, mitigation of national security concerns, or a prohibition of the transaction. The Measures also include a provision for monitoring and enforcement of any mitigation agreement that the parties enter into with the Security Review Office.

  • The Security Review Office (SRO) will make a determination within fifteen (15) days after receipt of the parties’ materials as to whether a national security review is required. Parties are notified in writing of this decision.
  • If a national security review is required, the SRO has thirty (30) days to complete the initial general review. Upon the conclusion of that review, the SRO may approve the transaction, or initiate a second review of the transaction. Parties are notified in writing of this decision.
  • The second stage of review will be completed within sixty (60) days, though the deadline for completion of the review may be extended at the discretion of the SRO (it is unclear under what circumstances the reviews may be extended). Upon the conclusion of the second stage of the review, the SRO may then condition clearance of the transaction on certain mitigation terms, prohibit the transaction, or approve the transaction.

The Security Review Office may request additional information from the parties during the course of its review, which will stop the clock for purposes of the timeline described above.

National Security Reviews in China

Leading up to the adoption of the 2020 Foreign Investment Law, China initiated several national security review processes, beginning in 2009 with the initial introduction of national security reviews. In 2011, MOFCOM and the NDRC established a ministerial review panel responsible for national security reviews of foreign investments in domestic companies. The scope of these national security reviews was extended from a review of foreign acquisitions to cover all foreign investment transactions in 2015 through the Trial Measures on National Security Review for Foreign Investments in Pilot Free Trade Zones. The latest announcement brings this process to the current Measures.

These Measures come on the heels of recent reforms to China’s export control laws and expanded national security laws, including China’s Export Control Law, which went into effect on December 1, 2020; its “Unreliable Entity List” framework that empowers MOFCOM to launch investigations against foreign companies acting against China’s “national sovereignty, security, and development interests;” and a proposed draft Personal Information Protection Law, which seeks to impose restrictions on entities and individuals, including those operating outside of China, that collect and process personal data and sensitive information on subjects in China.

In ruling HQ H313148 (Dec. 9, 2020), Customs and Border Protection (CBP) discussed the classification of pasta and tomato meal kits. Two of the varieties include: “You Make Me Hot | Spicy Arrabbiata Pasta Kit” (“Arrabbiata Pasta Kit”), “You Make Me Fresh | Classic Italian Pasta Kit” (“Classic Italian Pasta Kit”).  As stated in the ruling, the pasta kits include fresh greenhouse grown tomatoes, uncooked pasta, spice packet and an herb-infused oil packet. The Arrabbiata Pasta Kit contains approx. 67% tomatoes, 29% pasta, 2% herb-infused oil, and 1% Arrabbiata spices. The Classic Italian Pasta Kit contains approx. 67% tomatoes, 29% pasta, 2% herb-infused oil, and 2% Italian spices. The user will boil the pasta, prepare the tomatoes and spices into a sauce, and combine all the components.

General Rules of Interpretation (‘GRI”) 3 (b) states:

“Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to 3(a), shall be classified as if they consisted of the material or component which gives them their essential character, insofar as this criterion is applicable.”

CBP found that the pasta kits meet the criteria for classification as a set, per EN to GRI 3(b).  First, the pasta kits consist of components classifiable in different headings:  Tomatoes are classified in heading 0702, HTSUS, pasta is classified in heading 1902, HTSUS, the spice packets and oil packets are classified in heading 2103, HTSUS. Second, the pasta kits consist of different foods intended to be used together to prepare a pasta and tomato-based meal.  Third, the pasta kits are packaged for retail sale.

CBP stated that the tomatoes impart the essential character to each pasta kit because they comprise the largest portion by weight of each kit.  Additionally, the tomatoes constitute the greatest value and bulk of each kit and the pasta kits are packaged in plastic containers and sold in produce sections, which is consistent with how fresh tomatoes are packaged and sold.

CBP determined that the applicable heading for the four pasta kits is 0702, HTSUS, which provides for, “Tomatoes, fresh or chilled.”  The 10-digit subheading depends on when the subject pasta kits will enter into the U.S.  If entered during the period from March 1 to July 14, inclusive, or the period from September 1 to November 14, inclusive, in any year, will be 0702.00.2010, HTSUS, with a duty of 3.9 cents/kg.  If entered during the period from July 15 to August 31, inclusive, in any year, the applicable subheading will be 0702.00.4010, HTSUS, with a duty of 2.8 cents/kg.  When entered during the period from November 15, in any year, to the last day of the following February, inclusive, the applicable subheading will be 0702.00.6010, HTSUS, with a duty of 2.8 cents/kg.

Global Trade Talks is a podcast that shares brief perspectives on key global issues on international trade, current events, business, law and public policy as they impact our lives. In this podcast, hosts Nicole Simonian and Ambassador Robert Holleyman talk to Shawn Donnan, senior writer for Bloomberg News, who shares his perspective on international trade and the impacts of COVID as a reporter on the frontlines of these timely issues.

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