On September 28, 2023, EPA released a long-anticipated final rule aimed at gathering information on products in commerce that contain PFAS chemicals.  As defined in the regulation, the term “PFAS” includes a group of materials known as fluoropolymers, which are widely used in gaskets, tubing, electrical wiring, composite materials, printed circuit boards, membranes and many other manufactured articles.  Under EPA’s new regulation, any company that has imported any of these types of articles containing fluoropolymers (or any other PFAS chemical) at any time since 2011 will be required to submit extensive information to EPA regarding those products and activities.  The pre-publication version of the final rule can be found here.

Who is Covered

EPA’s new regulation, which was promulgated under Section 8(a)(7) of the Toxic Substances Control Act (TSCA), applies to any company that, at any time since 2011, manufactured or imported any PFAS chemical, including PFAS chemicals imported as part of manufactured articles.  For purposes of the rule, the term PFAS is defined broadly, to include thousands of different compounds with vastly different properties.  Because the definition of PFAS includes fluoropolymers, and because fluoropolymers are prevalent in many types of complex articles, including automotive, aerospace, electronics, and manufacturing equipment, a broad swath of industry is likely to be impacted by this rule.

Importantly, the new PFAS reporting regulation does not include many of the exemptions that are typically found in regulations issued under TSCA.  For example, there is no exemption for substances manufactured or imported as impurities or byproducts and no broad exemption for materials manufactured or imported only for research and development (R&D) purposes.  In addition, there is no minimum production (or import) threshold that triggers reporting and no “de minimis” level of PFAS content below which reporting is not required.  Thus, a company will be subject to the reporting requirements of the rule if, at any time since January 1, 2011, the company imported a piece of equipment containing one or more PFAS compounds, regardless of number of pieces of equipment imported (i.e., the quantity of PFAS imported) and regardless of the level or concentration of PFAS in each piece of equipment.

What Information Must be Reported

Companies that are subject to the new rule will be required to provide EPA with the information listed below, at a minimum, for each facility that imported an article containing components with one or more PFAS compounds: 

    • The identities of the PFAS substances in the article;
    • The categories of use of the PFAS substances in the article;
    • The specific functions of the PFAS substances in the article;
    • The estimated maximum concentrations of the PFAS substances in the article; and
    • The annual import volume of the article containing the PFAS substance(s).

Importantly, this information must be reported for each year, starting in 2011, that articles with PFAS-containing components were imported by the facility.  In addition, the information must be reported using EPA’s Central Data Exchange (CDX) web portal.  The regulations also specify detailed requirements that must be followed to protect confidential business information (CBI) that may be included in the facility’s report.

Finally, the items of information listed above must be reported to EPA to the extent that such information is “known to or reasonably ascertainable by” the submitter.  The regulations define this to mean “all information in the person’s possession or control, plus all information that a reasonable person similarly situated might be expected to possess, control, or know.”  EPA further explains in the preamble to the final rule that the “known to or reasonably ascertainable” standard requires submitters to conduct a reasonable inquiry within the full scope of their organization and may also require:

inquiries outside the organization to fill gaps in the submitter’s knowledge. Such activities may include phone calls or email inquiries to upstream suppliers or downstream users or employees or other agents of the manufacturer, including persons involved in the research and development, import or production, or marketing

Submitters must also maintain records documenting the information submitted to EPA under this rule for at least five years.

Timeline for Compliance

Under the final rule, companies will have one year to collect the information required to be reported, followed by a six month period during which reports must be submitted to EPA.  Thus, the required information must be submitted no later than 18 months following publication of the final rule.  Companies that qualify as “small manufacturers” and that only import articles containing PFAS compounds are provided with an extra six months for submitting their reports. 

Conclusions

EPA’s new PFAS reporting rule will impact companies in a wide range of industries, including companies that import machinery and equipment containing gaskets, tubing, electrical wiring, composite materials, printed circuit boards, membranes and other types of components that are frequently made with fluoropolymers.

To ascertain the information required to be reported under this rule, companies may be required to navigate multi-tiered global supply chains to identify which components of a manufactured article contain PFAS compounds, the specific identities those PFAS compounds, and the quantities of those compounds that might be present in an article.  This is a highly complicated and time-consuming process, and the obligation to collect this information for every year since 2011 makes this task even more complex. 

Therefore, affected companies should act without delay to understand their obligations and initiate the investigations that will be needed to assure compliance with this new rule.

From September 30, 2023, new EU and UK sanctions will come into effect targeting the imports of specified iron and steel products which are processed in third countries and incorporate Russian-origin iron and steel inputs. Importers will need to declare upon import whether the imported goods are compliant (and be prepared to provide evidence demonstrating compliance if checked by customs).

The new measures tighten existing primary Russian iron and steel import restrictions (which were introduced in 2022) and aim to target circumvention by limiting the ability for Russian-origin iron and steel to be concealed through third country processing into downstream steel products.

Establishing the non-Russian origin of inputs in a range of iron and steel products, especially those that have undergone numerous processing stages in multiple countries, is likely to be a complex and time-consuming task.  With the implementation deadline fast approaching, importers and their suppliers will need to work at pace to ensure they can collect the requisite information and demonstrate compliance.

UK prohibition

From September 30, 2023, UK persons will be prohibited from importing an iron and steel product into the UK, where it:

  • is listed in Schedule 3B of the UK’s Russia (Sanctions)(EU Exit) Regulations 2019 (the UK Regulations);
  • has been “altered, transformed in any way; or subjected to any type of operation or process” in a third country; and
  • incorporates one or more Schedule 3B iron and steel products of Russian origin.

Schedule 3B contains a list of products with HTS / CN codes falling within Chapter 72 (predominantly primary metals) and Chapter 73 (predominantly basic tubes / shapes).

Associated prohibitions will also apply with respect to the provision of technical assistance, financial services and funds, and brokering services in relation the prohibited goods.

The UK Government has stated in guidance that, since the measure was first published in April 2023, there will be no exceptions or transitional period. There is the ability for traders to apply for a license, with the UK Government indicating that the import of iron and steel that left Russia before 21 April 2023 may be eligible.

The UK Government has further stated that traders should be prepared to have documentation available to demonstrate their compliance with the new prohibitions, which may include, but is not limited to, a Mill Test Certificate (MTC) or Mill Test Certificates (MTCs) where the relevant information cannot be summarized in a single document.

EU prohibition

The EU is similarly introducing a prohibition on the direct or indirect import or purchase, from September 30, 2023, of iron and steel products listed in Annex XVII to Regulation (EC) 833/2014 (Regulation 833) when processed in a third country incorporating iron and steel products originating in Russia as listed in Annex XVII.  Annex XVII similarly contains products with HTS / CN codes falling within Chapters 72 and 73.

Associated prohibitions on the provision of technical assistance, brokering services, financing or financial assistance, and insurance and re-insurance will also apply with respect to the prohibited goods.

Unlike the UK, the EU has implemented a staggered implementation period, with longer implementation windows for products with certain Russian-origin inputs (as per the table below). 

CN CodesImplementation Time Period
Chapters 72 and 73 generallySeptember 30, 2022
7207.11April 1, 2024
7207.12.10 7224.90October 1, 2024

Further, the EU has prescribed in Regulation 833 that, at the moment of importation, importers shall provide evidence of the country of origin of the iron and steel inputs used for the processing of the product in a third country.  In guidance, the European Commission has stated that MTCs may be considered as sufficient evidence of the inputs’ origin.  However, customs authorities may require any additional evidence for the different transformation steps which the product has gone under. 

Although EU Member States have the ability to grant trade licenses to authorize otherwise prohibited imports, these are on more targeted grounds, namely for civil nuclear and medical applications.

Implications for businesses

The new prohibitions, and associated evidentiary requirements to demonstrate compliance, are likely to be time-consuming and challenging not only for importers who face the direct compliance obligation but also their suppliers from whom they would need to obtain the relevant evidence of origin. This will be a particular challenge for finished products which have undergone multiple stages of processing in one or more third countries. 

Although neither the EU or the UK have legally prescribed the type of evidence required to demonstrate origin, both the European Commission and UK Government have made clear that MTCs are the preferred source of evidence.  This could cause challenges for importers if this information is not readily available from their suppliers, and cause supply chain backlogs if importers do not have the requisite evidence. 

It still remains to be seen whether customs authorities will be more flexible in their requirements, and accept other types of evidence.  For example, the German customs authority has stated that invoices, delivery bills, quality certificates, long-term supplier declarations, calculation and production documents, customs documents of the exporting country, business correspondence, production descriptions, declarations of the manufacturer or exclusion clauses in purchase contracts, which show the non-Russian origin of the primary products, can also be recognized as suitable proof documents. French customs have also indicated that they may accept other admissible evidence. Accordingly, we suggest that importers are attune to the specific requirements of individual member states. 

In the meantime, we recommend that businesses work at pace to assess whether any of their goods are likely to be caught by the new prohibitions, and to work closely with their suppliers to source sound evidence of origin to ensure minimal impact on supply chains. 

Update:

By way of update, on October, 2, 2023, the European Commission published 11 new FAQs about the processed iron and steel prohibition (please see here).  Some key takeaways include:

  • Only capturing goods manufactured/produced after 23 June 2023: FAQ 6 provides that “the [Article 3g(1)(d)] prohibition applies to imports of iron and steel products incorporating inputs originating from Russia that enter the Union as of 30 September 2023, provided that they were manufactured or produced after 23 June 2023. That is the date when the obligation for the importer to demonstrate the country of origin of the iron and steel inputs used for the processing of the product in a third country was introduced in EU law.”
    • This FAQ is an interesting gloss on the plain wording of the prohibition.  Although FAQs are non-binding, they do provide a statement of the Commission’s intended operation of the prohibition and are persuasive. 
    • The UK has not released any updated guidance on this point, so we would recommend continuing to treat the UK prohibition as capturing all iron and steel inputs imported from 30 September 2023 (regardless of when they were manufactured / produced). 
  • Evidence requirements: The FAQs also clarify that mill test certificates are only an example that can be regarded as sufficient evidence, and that it is for the relevant national competent authorities to establish which other documentation can be considered as evidence of country of origin. For instance, the FAQs provided that:

“The origin of the inputs may be established through other means, such as a statement or declaration by the exporter or manufacturer confirming that, after exercising due diligence, the imported product does not contain any Russian steel or iron. Other documents may be invoices, delivery notes, supplier’s declarations, including supplier’s declarations covering several consignments (long term supplier’s declarations) business correspondence, production descriptions, quality certificates and clauses in implemented purchase orders or contracts, provided that they include information of the origin of goods, etc. The type of document(s) may also vary depending on the nature of the product, in particular for finished products (e.g. sewing needles, tubes, etc.).”

  • Import timing:  The FAQs confirm that compliance with the restrictive measure needs to be ensured for each import, even if only temporarily out of the EU or were imported in several batches.  For the case of several consignments of identical goods, national competent authorities can nevertheless consider and accept the provision of one evidence, i.e. when the products supplied by the same supplier during a period of time are similar and national competent authorities have no reason to suspect possible circumvention; or when the same batch of products is imported in various transports for logistic or other legitimate reasons. National authorities need to exercise due care to avoid a breach or circumvention of the measures as a consequence.

These clarifications, especially with respect of the carve-out for the goods manufactured or produced prior to June 23, 2023, may provide some useful relief for customers grappling with the new compliance obligations. 

What You Need to Know

  • Key takeaway #1 Specific Guardrails Subject to Negotiation: The Final Rule indicates that more of the national security guardrails will be negotiated with the recipient, creating the opportunity for project specific agreements.
  • Key takeaway #2 Broader than the EAR: The CHIPS Act national security guardrails have some overlap with U.S. export controls, but are still distinct and meant to be broader and more expansive. Compliance with both will be required.
  • Key takeaway #3 Final Rule Narrows Application to Fewer Affiliates Under Common Control: Commerce removed a prior requirement that these controls apply to all affiliates under common control with the funding recipient. The new Expansion Clawback standard is narrower, but still wide-ranging, while the Technology Clawback standard is amorphous. Parent entities should take stock to determine if any of their subsidiaries or branches are accepting funding and how it might impact sister companies.

After publishing a proposed rule in March 2023 on how it will implement the national security guardrails for the CHIPS and Science Act of 2022 (“CHIPS Act”) (the “Proposed Rule”), which all funding recipients are required to follow, the U.S. Department of Commerce (“Commerce”) published the corresponding final rule, (the “Final Rule”). The Final Rule will come into effect on November 24, 2023.

Overview of the CHIPS Act

Background

The CHIPS Act authorizes the provision of nearly $39 billion in direct funding and $75 billion in loans and loan guarantees to (1) support the construction, expansion, or modernization of a domestic semiconductor manufacturing facility, or equipment for that facility; (2) support workforce development for a domestic semiconductor manufacturing facility; or (3) pay reasonable operating expenses for a domestic semiconductor manufacturing facility. Commerce began accepting applications on a rolling basis on March 31, 2023 for leading-edge manufacturing facilities, and on June 26, 2023 for current-generation, mature-node, or back-end manufacturing facilities. Commerce will begin to accept applications on a rolling basis, beginning October 23, 2023, for semiconductor materials and manufacturing equipment facilities.

The Clawbacks

The CHIPS Act imposes two main national security restrictions on any funding recipients: the “Expansion Clawback” and the “Technology Clawback.”

  • Expansion Clawback: Recipients are restricted from engaging in transactions involving the “material expansion” of “semiconductor manufacturing capacity” in a “foreign country of concern” (e.China, Russia, Iran, or North Korea) for 10 years, once the funding agreement is finalized, except for:
    • “Existing facilities” for producing “legacy semiconductors”; and,
    • Facilities for producing legacy semiconductors that “predominantly serve the domestic market” of the foreign country of concern.
  • Technology Clawback: Recipients may not engage in “joint research” or “technology licensing” efforts with a “foreign entity of concern” related to a “technology or product that raises national security concerns.” 

If funding recipients violate either of these prohibitions, they are subject to a “clawback” of the full funding amount (plus interest).

Commerce issued the Proposed Rule in March 2023, which provided greater specificity on the details and key definitions for these national security guardrails, which were only outlined in the CHIPS Act. Commerce received 27 comments from industry in response. In addition to publishing the Final Rule, Commerce explains why it took (or decided not to take) these comments into account (some of which, we describe below). 

Changes in the Final Rule

The Final Rule made a handful of notable changes to the Expansion and Technology Clawbacks, including:  

Removal of the term “Affiliates”: Previously, the Expansion and Technology Clawbacks could apply if either an entity accepting funding (“covered entity”) or any “affiliate” (i.e., a parent, subsidiary, or an entity under common control based on a 50% voting ownership threshold) engaged in prohibited behavior. Commerce has now removed the reference to “affiliates.”

  • Expansion Clawback: The expansion clawback now applies to covered entities and any members of an “affiliated group” that engages in a prohibited activity. The term “affiliated group” still applies to parents, subsidiaries, and entities under a common parent, but the voting ownership threshold is now 80% and companies that are not “includible corporations” are exempt (g., certain non-profits, regulated investment companies).
  • Joint Research and Technology: The technology clawback now only applies to covered entities engaging in a prohibited activity. However, Commerce explained it “may take appropriate remedial measures,” which includes imposing mitigation agreements or recovering the full amount back, if a “related entity” undertakes activity that the covered entity could not itself undertake.

Minor Changes to the List of Semiconductors Critical to National Security: The list of semiconductors “critical to national security” was modified to (i) remove the inclusion of any FD-SOI semiconductors, other than with regard to semiconductor packaging operations with respect to such semiconductors of a 28-nm generation or older; and (ii) allow the Secretary of Commerce to add additional semiconductors as deemed necessary. Semiconductors on this revised list are not considered “legacy semiconductors.”

Expansion Clawback-Specific Changes

  • Manufacturing Expansion Limitation Up to Negotiation: Previously, only “significant transactions” (e., any activity for $100,000 or more) were prohibited. That limit has been removed, and the limit for each agreement will be negotiated and included in the contract, where Commerce will consider the total funding size, among other factors.
  • Legacy Semiconductors: Commerce added another “legacy semiconductor,” specifically a semiconductor that does not use advanced three-dimensional (3D) integration packaging (for the purposes of a semiconductor packaging facility), such as by directly attaching one or more die or wafer, through silicon vias, through mold vias, or other advanced methods.
  • Material Expansion Clarification: Material expansions of semiconductor fabrication facilities can be prohibited under the expansion clawback. Commerce noted this term does not include equipment and efficiency upgrades in existing cleanrooms, only the addition of cleanroom space.

Technology Clawback-Specific Changes

  • Foreign Entity of Concern: Who is considered a foreign entity of concern was slightly modified to note that, with respect to entities that are caught due to ownership by a Chinese, Russian, Iranian, or North Korean national, that national must be located in one of those countries as well. For example, if a Chinese national located in Singapore owned an entity, that entity would not be considered a “foreign entity of concern” solely due to the Chinese national’s ownership (but it could be caught due to another provision, e.g., if the entity is incorporated or has a principle place of business in one of the aforementioned countries).
  • Exemptions from Both Joint Research and Technology Licensing: The Final Rule allowed for exceptions to the definitions of “joint research” and “technology licensing,” even if it involves “technologies or products that raise national security concerns.” This includes any activities related to (i) “standards-related activities” (as defined in the EAR); (ii) research and development between employees of a funding recipient and any related entities; and (iii) any historic activities that occurred prior to publication of the Final Rule (though Commerce can require those activities are halted as a condition of funding).
  • Exemptions from Only Technology Licensing: In addition to the above listed exceptions, the Final Rule excepted “published information” and patent agreements (where only published information, as opposed to proprietary information, is shared) from the definition of “technology licensing.” These exception mirror those in the EAR (and the International Traffic in Arms Regulations (“ITAR”). Neither of these exceptions apply for joint research, and so any joint research involving this type of information or agreement, would still be subject to the Technology Clawback.

What Commerce Decided Not to Change

Technology Clawback Applies to Items Not Subject to the U.S. Export Administration Regulations (“EAR”):

  • Items Not Subject to the EAR Still Caught: Commerce explained that it would not limit its scope to only items subject to the EAR and that these controls were intended to be broader than the jurisdiction of the EAR.
  • Fundamental Research: Additionally, unlike in the EAR and the ITAR, Commerce determined that it would not provide any exception for fundamental research (for the definition of joint research) as Commerce has concerns that any additional advancements in the technology or its use may be made through such research efforts to the benefit of the foreign entity of concern. Interestingly, Commerce did not speak to whether fundamental research is or is not excepted under technology licensing.

Significant Renovations Prohibition in Expansion Clawback Remains: In the Proposed Rule, Commerce explained that if an entity were to engage in “significant renovations” of an “existing facility” for “legacy semiconductors” (i.e., the existing facilities are subject to certain exceptions) that the facility could no longer be considered an existing facility. Commerce declined to remove this prohibition.

No Mitigation Option for Technology Clawback: Commerce rejected a request to create a mitigation process for a potential violation of the joint research and technology licensing prohibition (in lieu of a complete clawback), explaining the statutory language compelled Commerce to engage in a full clawback. Yet, Commerce explained it could require mitigation measures at the outset of the agreement, if they determine a risk exists, but Commerce would still retain the authority to engage in the clawback.

The Office of the United States Trade Representative (“USTR”) announced on September 6, 2023 the further extension of 352 reinstated exclusions and 77 COVID-related exclusions from the Section 301 tariffs on imports from China. These exclusions, which cover a variety of products ranging from machinery components to medical equipment, constitute the only remaining active exclusions following the lapse of all other exclusions back in December 2020.  The remaining active exclusions were originally set to expire on September 30, 2023; however, the new deadline of December 31, 2023 will allow additional time for USTR to complete its statutorily mandated four-year review process.

As part of the four-year review process, USTR solicited public comments on the effectiveness of the Section 301 tariffs to combat unfair trade practices by China as well as how the actions have affected the United States economy, including U.S. workers and consumers. Interested parties submitted comments in an online portal, which included an option for commenting on 8-digit tariff codes.  The portal window closed in January 2023 with around 1,500 comments submitted on more than 115 HTS codes.

After over 4 years of Section 301 duties on imports from China, USTR may determine keeping tariffs in place on certain products may have adverse effects on the U.S. economy without placing pressure on China to change their trade practices. One major reason for eliminating tariffs on certain HTS codes is if it contains products that cannot be sourced from outside China and the burden of the tariff is entirely being passed on to U.S. businesses and consumers. Removing certain HTS codes from the Section 301 Tariffs could also help alleviate the administrative burden from maintaining the current exclusion process.

The timing of the extension suggests that USTR may terminate the current Section 301 exclusion regime and instead seek to remove particular tariff subheadings from the action as a replacement. Since USTR only extended the exclusions for 3-months, this appears to be the perfect amount of time to finish the four-year review which is expected to be completed in October or November of this year. If USTR had intention to keep the exclusions in place long-term then the extension most likely would have been for a longer duration.

Importers will need to closely monitor the news this autumn for the publication of USTR’s four-year review determination. HTS codes removed from the Section 301 tariffs could save importers millions of dollars, while an expiring exclusion without removing the tariff code from the action could significantly increase duties.

On August 28, 2023, the U.S. Commerce Department’s Bureau of Industry and Security (“BIS”) proposed new rules to streamline and strengthen the Section 232 Exclusions Process for Steel and Aluminum imports. The proposed rules will build on the five existing interim final rules and respond to public comments received by BIS since February 2022. BIS is proposing these revisions almost a month after the U.S. Government Accountability Office (“GAO”) released a report calling for increased enforcement on Section 232 Exclusions. The rules seek to make four primary changes: 1) Modifies the existing certification language and introducing new certification requirements for exclusion requests relating to finding alternate suppliers from certain U.S. allies; 2) Requires similar certification language on the objection form to further ensure objectors can supply comparable quality and quantity steel or aluminum; 3) Proposes a more efficient General Approved Exclusions (“GAE”) process by changing the criteria; and 4) Introduces a “General Denied Exclusions” (“GDE”) process to limit further exclusions on products which have consistently been found to be manufactured in the United States. The public can submit comments on these regulations until October 12, 2023.

The new certification language in the proposed rules both increases the threshold for demonstrating reasonable efforts to source the product elsewhere and requires burden of proof for sourcing efforts. If the proposed changes are implemented, before filing an exclusion request, requesters would also need to certify that they first made reasonable efforts to source their product from the United States and then, if unsuccessful, that they made reasonable efforts to source their product from a country with which the United States has arrived at a satisfactory alternative agreement. The list of countries that meet that requirement includes Argentina, Australia, Brazil, Canada, the European Union, Japan, Mexico, South Korea, and the United Kingdom. Requestors will need to provide documentation demonstrating that an attempt was made to first procure from those partner countries. If the sourcing attempts evidence is not provided simultaneously with the request submission, then the request will be rejected.

These new requirements from BIS would significantly increase the burden on importers of steel and aluminum products from outside the list of approved countries. Reaching out to suppliers in the U.S. will no longer be sufficient and contacting supplies in foreign countries could be difficult without knowledge of those foreign markets. Even if an adequate supplier from another country is found, importers may still need to go through the exclusion process or risk running into issues with a quota. Furthermore, BIS has not yet clarified what documents will be required to prove sourcing attempts were made. At this moment, Crowell recommends keeping email records or notes from phone calls for any sourcing or validation efforts. Should a domestic producer object to a Section 232 exclusion, the best argument for importers is make is to have already tried sourcing from that entity.

In addition to new requirements for importers, BIS is proposing additional certification language on the objection form for domestic producers. Objectors would need to certify that they can supply comparable quality and quantity steel or aluminum and make it “immediately available” to requestors in line with the applicable standards (“immediately available” means within eight weeks). Along with the new certification, objectors would be required to simultaneously file evidence that they have commercially sold the product at issue within the last 12 months, or evidence that it has engaged in sales discussions with this requesting company or another company requesting the same product within the last 12 months. Domestic producers will need to closely review the product in the Section 232 exclusion request to ensure it is the same or substitutable with what they currently offer. Importers should be aware that submitting an exclusion request with too broad or generic of a product description could lead to a greater chance of objection.

In an attempt to reduce the quantity of exclusion requests received, BIS proposes changing the criteria that has generally been used for General Approved Exclusions (“GAE”). BIS currently focuses on whether an HTSUS code has received objections however this is problematic since this accounts for objections regardless of the merits of those objections. According to BIS, this “undermines the effectiveness of the Section 232 exclusions process, creates unnecessary burdens on BIS and industry, and reduces the fairness and efficiency of the process.” New GAEs will instead be decided upon an analysis of objections which most likely signifies that BIS will look closely at whether domestic actually produces products under certain HTSUS codes. In the Federal Register notice, BIS estimates that this change could result in up to a twenty percent reduction in the total number of exclusion requests submitted. Importers should monitor the list of GAEs to save time and money on submitting Section 232 exclusions.

Relatedly, the proposed rules also seek to establish a list of General Denied Exclusions” (“GDE”) to cutdown on the number of exclusions. BIS will use a similar analysis to the GAE to create a list of HTSUS codes where an existence of U.S. industry has been repeatedly proved. GDEs will generally be implemented if the HTSUS codes have very high rates of successful and substantiated objections. Exclusion requests filed with products of HTSUS codes on the GDE will automatically be rejected. If importers believe they have a product on the GDE that cannot be manufactured in the U.S. then the importer will want to submit comments to BIS to have the HTSUS removed from the GDE.

The proposed regulations serve two overall purposes: 1) to create additional burdens of proof on importers for sourcing efforts and manufacturers for production capacities; and 2) reduce the volume of exclusion request through the improvement of the GAE list and creation of a GDE list. Overall, these changes would make a more efficient and equitable Section 232 exclusion process, however the need to document sourcing attempts from third-countries could prove overly burdensome for importers. Comments can be submitted on docket number BIS–2023–0021 or RIN 0694–AJ27, through the Federal eRulemaking website: http://www.regulations.gov.

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On September 7, 2023, the U.S. Department of Commerce released the text of the Indo-Pacific Economic Framework for Prosperity (IPEF) Supply Chain Agreement three days before a U.S. delegation is set to travel to Bangkok, Thailand for the fifth negotiating round. In this round, IPEF partners will focus on Pillars I (Trade), III (Clean Economy), and IV (Fair Economy). The fifth negotiating round comes after previous negotiating rounds in Australia, Indonesia, Singapore, and South Korea, a special negotiating round in India, and a ministerial meeting in Michigan to announce the conclusion of negotiations on Pillar II (Supply Chains).

IPEF is not a traditional trade agreement. As it focuses on providing mechanisms for information sharing, its benefits will be realized as parties utilize them. Parties will have to collaborate with domestic industries to implement IPEF’s goals. In a press release by the U.S. Department of Commerce, U.S. Commerce Secretary Gina Raimondo commented that “[b]y working toward finalization of this monumental Agreement, the United States is taking an important step forward to fortify bonds with our partners throughout the Indo-Pacific. Working in lockstep, we will be prepared to best address our shared economic challenges together.”

In the text, the governments of Australia, Brunei, Fiji, India, Indonesia, Japan, South Korea, Malaysia, Philippines, Singapore, Thailand, the United States, and Viet Nam agree to advance collaboration to strengthen supply chains. This includes undertaking activities that “increase the resilience, efficiency, productivity, sustainability, transparency, diversification, security, fairness, and inclusivity of IPEF supply chains, taking into account the different economic and geographic characteristics and capacity constraints of each Party as well as individual characteristics of different sectors and goods.”[1]

The text also makes clear that IPEF partners will collaborate to form an IPEF Supply Chain Council to oversee collaboration on supply chains, an IPEF Supply Chain Crisis Response Network to facilitate an emergency communication channel that could respond to, mitigate, and recover from supply chain disruptions, and an IPEF Labor Rights Advisory Board with government, workers, and employers to identify labor rights concerns and develop recommendations.

The IPEF Supply Chain Council will also focus on “key goods” and “critical sectors.” The text defines key goods as “raw, in-process, or manufactured materials, articles, or commodities…” and “critical sectors” as “sectors that produce goods and supply any related essential services critical to a Party’s national security, public health and safety, or prevention of significant or widespread economic disruptions….”

Additionally, the facility-specific labor rights provisions in the text echo the Rapid Response Labor Mechanism in the United States-Mexico-Canada Agreement (USMCA) in requiring parties to the IPEF to develop procedures for the receipt and consideration of “allegations of labor rights inconsistencies at subject facilities located in the territory of another Party.”[2] The procedures outlined in these provisions for handling the allegations also broadly parallel those under the USMCA. At this time, the IPEF Agreement has not entered into effect. In June 2023, Crowell & Moring International (CMI) and the Women in International Trade (WIIT) hosted IPEF’s Chief Negotiators in our DC offices. As negotiations move forward, CMI and Crowell & Moring LLP will continue to monitor IPEF and highlight major developments.

[1] IPEF Agreement Relating to Supply Chain Resilience, Article 2

[2] IPEF Agreement Relating to Supply Chain Resilience, Article 9

What You Need to Know

  • Key takeaway #1 As of October 12, 2023, companies active in the EU have to notify foreign financial contributions (FFCs) received from third countries to the Commission, when they engage in large M&A transactions or participate in high-value public procurements. Pending the Commission’s review of such notifications, a standstill obligation applies.
  • Key takeaway #2 While the focus of the Commission’s substantive review will be on those subsidies deemed most likely to distort the internal market, companies need to consider all of the (broadly defined) FFCs they have received to calculate whether they meet the notification thresholds.
  • Key takeaway #3 Companies active in the EU need to assess their notification risks and update their internal reporting and data management systems to continuously identify, track and categorize any FFCs received from third countries.

As from October 2023, companies receiving financial contributions from third countries will have to report these to the European Commission when engaging in M&A transactions or bidding for public contracts above certain thresholds. This alert guides you through the new notification obligations under the EU Foreign Subsidies Regulation (FSR): first, we situate these obligations within the overall set-up of the FSR; then we go into the detail of the notification obligations themselves; before concluding with practical advice on how to meet these new obligations.

I. Recap of the FSR

As we explained in previous alerts (available here and here), the FSR, which was adopted by the EU legislature in December 2022 and entered into force in January 2023, aims to address the potentially distortive effects of subsidies granted by non-EU countries to companies that are active within the EU. Whereas financial support granted to companies by EU Member States has long been subject to State aid controls, subsidies granted by third countries have so far mostly escaped regulatory scrutiny. To close this gap and create a level playing field for all companies active in the EU, the FSR adds three new tools to the regulatory arsenal of the Commission:

  1. a notification-based tool for large M&A transactions,
  2. a notification-based tool for large public procurements, and
  3. a general investigatory tool, empowering the Commission to conduct ex officio (own-initiative) investigations into any market situation involving potentially distortive third-country subsidies.

Since July 12, 2023, the Commission has had the power to conduct ex officio investigations. The notification obligations apply as of October 12, 2023.

The FSR defines a “foreign subsidy” as a financial contribution provided directly or indirectly by a third country (i.e., a non-EU country) which confers a benefit on a company engaging in an economic activity in the EU internal market and which is limited, in law or in fact, to one or more companies or industries. Notwithstanding terminological differences, this definition is similar to that of “aid” under EU State aid law.

Like the concept of “advantage” in State aid law, the concept of “financial contribution” is not limited to “subsidies” in the strict sense (direct grants), but encompasses various forms of government support, such as:

  1. the transfer of funds or liabilities (e.g., capital injections, grants, loans, loan guarantees, fiscal incentives, the setting off of operating losses, compensation for financial burdens imposed by public authorities, debt forgiveness, debt to equity swaps or rescheduling);
  2. the foregoing of revenue that is otherwise due, such as tax exemptions or the granting of special or exclusive rights without adequate remuneration; or
  3. the provision of goods or services or the purchase of goods or services.

FFCs include not only financial contributions from central government and public authorities at all levels, but also financial contributions granted by any foreign public or even private entity whose actions can be attributed to the third country.

As discussed below, the notification thresholds are based on the notion of “FFC” rather than that of “foreign subsidy”, meaning that all FFCs count towards the thresholds, even those provided at normal market conditions (i.e., that do not confer a “selective advantage”). In this respect, the FSR’s approach differs from that under State aid rules, where only measures that confer a selective advantage can trigger a notification obligation.

Certain categories of foreign subsidies are deemed to be “most likely” to distort the internal market (Article 5 Subsidies). These include:

  1. a foreign subsidy granted to an ailing company;
  2. a foreign subsidy in the form of an unlimited guarantee for the debts or liabilities of the company;
  3. an export financing measure that is not in line with the OECD Arrangement on officially supported export credits;
  4. a foreign subsidy directly facilitating a M&A transaction; and
  5. a foreign subsidy enabling a company to submit an unduly advantageous tender for a public procurement contract.

As further discussed below, the Commission will primarily focus on these Article 5 Subsidies when looking at notified M&A transactions and tenders.

Where the Commission finds that a company has benefited from foreign subsidies, it must carry out a “balancing test”, weighing the negative effects of the foreign subsidies in terms of distortion of the market against its positive effects on the development of the subsidized economic activity.

The Commission can impose both behavioral and structural remedies to mitigate any identified market distortion attributable to foreign subsidies. In addition, the Commission can levy fines on companies of up to 1% of their annual turnover for providing incorrect or misleading information or otherwise obstructing investigations; or up to 10% for infringing the notification and/or standstill obligations (so-called gun jumping).

II. M&A Transactions

The FSR introduces a mandatory notification requirement for large M&A transactions fueled, or potentially fueled, by foreign subsidies. The transactions subject to the notification requirement are the same as under the EU Merger Regulation (EUMR), i.e., mergers, acquisitions and full-function joint ventures (collectively referred to as “concentrations”).

The notification is suspensive, i.e., the parties are not allowed to close the transaction prior to having received clearance from the Commission (standstill obligation).

A. Thresholds

As of October 12, 2023, a concentration is notifiable under the FSR, if the relevant agreement was concluded on or after July 12, 2023, was not already implemented on October 12, 2023, and meets both of the following quantitative thresholds:

  1. A turnover-based threshold: at least one of the merging undertakings, the acquired company or the joint venture generates an EU-wide turnover of at least EUR 500 million (approx. USD 526.5 million); and
  2. An FFC value-based threshold: the merging undertakings, or the acquirer(s) and the acquired undertaking, or the undertakings creating the joint venture and the joint venture, have been granted aggregate FFCs of more than EUR 50 million (approx. USD 52.65 million) from third countries in the three years preceding the transaction.

These thresholds relate to group figures, not just to the entities directly involved in the transaction. Therefore, in parallel with the rules under the EUMR, all group companies that are linked by control relations, have to be included in the assessment (except that, in the case of acquisitions, only the turnover of, and contributions to, the target are taken into account with respect to the seller). Consequently, all relevant FFCs received by all group companies during the three years prior to the transaction need to be considered.

The turnover-based threshold is very high, reflecting the aim to capture only the largest M&A transactions. By contrast, the FFC value-based threshold is comparatively low.

Even where the parties to an M&A transaction do not meet the abovementioned thresholds, the Commission may still require them to file an ad hoc notification, if it suspects that the companies received foreign subsidies during the three preceding years.

B. Which FFCs are reportable?

In its Implementing Regulation, the Commission has made efforts to reduce the administrative burden on notifying undertakings by limiting the information that needs to be provided in the notification form. Companies need to provide the following information concerning any received FFCs:

  • FFCs relating to Article 5 Subsidies: Detailed information has to be provided only as regards FFCs of at least EUR 1 million which may constitute Article 5 Subsidies. As mentioned above, the Article 5 Subsidies are those that are deemed “most likely” to distort the market. It should be noted that identifying those FFCs and providing information on all the related questions in the notification form will likely require companies to conduct some substantive assessment, even if the ultimate determination of whether an FFC constitutes an Article 5 Subsidy remains with the Commission.
  • Other FFCs: For all other FFCs, the notifying parties have to provide a general overview identifying the third country that provided the FFC, the type of contribution and a brief description of the purpose of the FFC and the entity granting it. In this overview, only countries for which the estimated aggregate amount of all FFCs granted in the three years prior to the transaction is at least EUR 45 million (USD 47.4 million) have to be included. Individual FFCs below EUR 1 million are not reportable.
  • Reporting exemptions: FFCs relating to deferrals of tax payments, tax amnesties and tax holidays, as well as normal depreciation and loss-carry forward rules that are of general application, and also tax relief for the avoidance of double taxation, do not have to be reported. The same applies to the purchase or provision of goods or services at market terms.

To further alleviate the administrative burden, the Implementing Regulation also provides for the possibility to request waivers for information that is normally reportable. However, the Commission has indicated that waivers will only be granted in exceptional cases.

It should be noted that all FFCs, irrespective of whether they are reportable or exempted from the reporting obligation, count towards the notification thresholds. Therefore, companies have to keep track of them in any event to determine whether those thresholds are met.

C. The Review Procedure

Procedurally, the Commission’s review of M&A transactions under the FSR is very similar to that under the EU’s merger control regime:

  • Phase I: The Commission has 25 working days to conduct a preliminary review.
  • Phase II: Where the Commission concludes that an in-depth review is required, the Commission then has an additional 90 working days to complete this review.

In cases where companies offer commitments to the Commission to remedy any concerns, this 90-day period may be extended by a further 15 working days to allow the Commission to assess these commitments. The Commission may “stop the clock” if it has sent the parties a request for information, but has not received complete answers by the deadline set in the request. If the Commission does not adopt a decision within the set time limits, the concentration shall be deemed to have been cleared and the parties are allowed to implement it.

III. Public Procurement

In parallel with the notification regime for M&A transactions, the FSR also introduces a new notification regime in relation to public procurement. The notification obligation concerns all procedures covered by the EU public procurement directives, i.e., procedures for the award of supply, works or service contracts (including in the water, energy, transport and postal services sectors) as well as of concession contracts. However, procedures falling within the scope of the EU Defense Procurement Directive are exempted.

As of October 12, 2023, companies participating in public procurements have to submit a notification to the contracting authority (and not directly to the Commission) if the thresholds are met. The regime allows the Commission to assess whether a distortion in the internal market exists and a tender is unduly advantageous in relation to the works, supplies or services concerned.

A. Thresholds

Tender participants have to notify where the following thresholds are met:

  1. A contract value-based threshold: the estimated value of the contract net of VAT amounts to at least EUR 250 million (approx. USD 263.3 million); and
  2. An FFC value-based threshold: the economic operator, including, where applicable, its main subcontractors and suppliers involved in the tender, was granted aggregate FFCs of at least EUR 4 million (approx. USD 4.2 million) per third country in the preceding three years.

Where the procurement is divided into lots, a notification obligation arises where (i) the overall estimated value of the procurement net of VAT exceeds the EUR 250 million threshold and (ii) the value of the lot or the aggregate value of all the lots to which the tenderer applies is equal to or greater than EUR 125 million (approx. USD 131.6 million) and the FFC value-based threshold is also met.

There is an important difference here in terms of the scope of the notification, as compared with the notification regime for M&A transactions. Whereas in the case of M&A transactions, the notification concerns FFCs to all entities belonging to the same “group” as the parties, in the case of public procurements, the notification concerns FFCs to the “economic operator” involved in the public procurement procedure (including its subsidiary companies without commercial autonomy and its holding companies) as well as its “main subcontractors and suppliers.” In other words, the perimeter does not necessarily include all companies belonging to the same “group” (i.e., linked by control relationships), but may include companies that are not part of the same group as the tenderer (“main” subcontractors/suppliers). A subcontractor or supplier is deemed to be “main” where their participation ensures key elements of the contract performance and in any case where the economic share of their contribution exceeds 20% of the value of the submitted tender.

As in the case of M&A transactions, the Commission can also request ad hoc notifications of public procurements that do not meet these thresholds, where it suspects that potentially distortive foreign subsidies are at play.

B. Which FFCs are reportable?

Where the thresholds are met, a notification has to be submitted to the contracting entity using the standard form annexed to the Implementing Regulation (the so-called Form FS-PP). The contracting entity will then forward the notification to the Commission for its assessment, together with all the documents the contracting entity considers crucial for the investigation.

The notifying parties must provide the following information on the FFCs granted to them:

  • FFCs relating to Article 5 Subsidies: As in the case of concentrations, detailed information has to be provided only on FFCs of at least EUR 1 million that belong to one of the Article 5 Subsidies categories.
  • Other FFCs: For other FFCs, a general overview table must be completed, in which information on the granting third country and entity, the type of FFC and the purpose of the FFC must be included. An FFC only has to be included in the list if the estimated aggregate amount in the previous three years per third country equals or exceeds EUR 4 million. Again, individual FFCs below EUR 1 million are not reportable.
  • Reporting exemptions: The same exemptions apply as in the case of concentrations (see above). In exceptional cases, it is also possible to request waivers for information that is normally reportable.

C. The Review Procedure

Similar to the procedure for M&A transactions, the review procedure for public procurements consists of a preliminary review (phase I) and an in-depth investigation (phase II).

  • Phase I: The Commission has 20 working days from receipt of a complete notification for its preliminary review, and this time limit may be extended once, by 10 working days, “in duly justified cases”.
  • Phase II: In case of an in-depth review, the Commission has a further 90 working days, which can be extended by 20 working days in “duly justified exceptional cases” and after consultation with the contracting authority.

Pending the Commission’s review, all procedural steps in the public procurement procedure may continue, except for the award of the contract. Contrary to the review procedure in M&A transactions, the Commission cannot “stop the clock” during a review, meaning that, as a rule and disregarding extensions, the Commission has to take a decision no later than 110 days after receiving a complete notification.

D. Declaration of below-threshold FFCs

Importantly, even where the FFC threshold of EUR 4 million is not met, the participating economic operator must submit a declaration listing all FFCs received during the previous three years, provided that the contract-value threshold is met.

The declaration needs to list all of the received FFCs with the exception of FFCs below the de minimis value of EUR 200,000 per third country over the previous three years. FFCs above the de minimis value but below EUR 1 million only have to be reported in aggregate by third country, with a brief description. Individual amounts only have to be provided upon request by the Commission.  

Declarations do not automatically trigger a review, but the Commission may decide on a case-by-case basis whether such declaration warrants an investigation.

IV. Practical Considerations regarding notifications

In light of the foregoing, we make the following practical recommendations:

  • Assessing notification risks: As a first step, companies should assess the likelihood of being involved in M&A transactions or public procurements that meet the turnover- or the contract-value-based thresholds mentioned above (for instance, by reference to past transactions or tenders).
  • Information gathering: Companies that anticipate being involved in such large transactions or tenders should identify all the FFCs granted over the previous three years with a value of at least EUR 1 million. If the aggregate amount of these FFCs already meets the EUR 50 million threshold for M&A transactions, or the EUR 4 million threshold for government contracts, a notification will be necessary, although detailed information need only be gathered about FFCs relating to Article 5 Subsidies. If the aggregate amount of the FFCs does not meet those thresholds, further analysis might be necessary, unless it is obvious that the thresholds will not be reached.
  • Internal reporting setup: Companies that expect to be caught by the notification obligations will have to introduce new dedicated reporting tools in their data management systems to identify, categorize and track all relevant FFCs. Since the notification thresholds refer to all FFCs received during the three years prior to the transaction or tender, these data management systems not only have to capture contributions received prior to the entry into force of the FSR, but must also be continuously updated for any future transactions. If analysis is only undertaken on an ad hoc basis at the time of a contemplated M&A transaction, there is a serious risk that this could use up substantial resources and cause significant delays in the deal timeline. Therefore, it is not only companies that are regularly involved in transactions that need to invest in their data management systems, but also companies that occasionally have M&A activities or occasionally participate in public tenders.
  • Coordination with other reporting obligations: The notification obligation for concentrations under the FSR is without prejudice to other notification requirements that may be applicable to the same transaction under EU or national merger control rules or under national foreign direct investment (FDI) screening regimes. Consequently, an M&A transaction can potentially be subject to several notification requirements, each with its own procedural timeline and standstill obligation. It is therefore important to conduct a comprehensive filing analysis across all regimes that may be applicable and, if the transaction is subject to several notification obligations, closely coordinate the various procedures. This will be all the more important in cases where the parties anticipate a need to offer remedies.

The summer has been anything but slow in the People’s Republic of China. China is leaning into its regulation of emerging technologies, while attempting to strike a balance with its domestic economic priorities. In just the past few weeks, state authorities have issued a slew of draft measures and announced new initiatives – all with significant ramifications for businesses processing data within the PRC.

Click here to continue reading the full version of this alert.

On August 18, the U.S. Department of Commerce concluded an investigation it launched early last year on solar cells and modules from the People’s Republic of China (PRC). Commerce provided its conclusions in a Federal Register notice, highlighting that five specific Chinese companies are shipping Chinese-origin solar products to certain Southeast Asian countries for minor processing in an attempt to circumvent U.S. Antidumping/Countervailing (AD/CVD) duties on such products. However, duties on these imports will not be collected or assessed until June 2024, when a waiver enacted by the Biden administration is set to expire.

Commerce’s investigation began in March 2022 in response to a complaint filed by Auxin Solar, a U.S. manufacturer which alleged that Chinese manufacturers were evading U.S. tariffs on such products from China by routing manufacturing through Thailand, Cambodia, Vietnam and Malaysia. Nearly three-quarters of solar modules imported into the U.S. originate from these countries. Commerce found that five out of the eight Chinese companies it investigated are engaged in evasion of U.S. AD/CVD duties by producing such products in the five countries from Chinese-origin components.  The Chinese companies are – BYD Hong Kong, New East Solar, Canadian Solar, Trina Solar, and Vina Solar. The other three entities investigated (Boviet Solar, Hanwha Q CELLS, and Jinko Solar) were determined to not be circumventing. The final results reflect those of Commerce’s preliminary report released in December of last year, with the exception of New East Solar, having previously been found not to be circumventing duties, but being added to the list after not cooperating with auditors during the investigation.

The investigation has generated significant controversy among policymakers due to its potential impacts on the Biden Administration’s climate and energy policy agenda – U.S. Energy Secretary Jennifer Granholm stated under congressional testimony that “at stake is the complete smothering of the investment and the jobs and the independence that we would be seeking as a nation to get our fuel from our own generation sources.” Solar industry groups have also voiced their disapproval with the investigation, highlighting that it puts the entire industry at risk. According to the Solar Energy Industries Association, 318 solar projects across the U.S. have been canceled or delayed as a result of Commerce’s investigation, which threatens the Biden Administration’s plan to cut the cost of solar electricity in half by 2030.

In response to these concerns, President Biden issued Proclamation 10414 on June 6, 2022, which temporarily suspends any antidumping or countervailing duties on imports of silicon photovoltaic cells and modules from Thailand, Cambodia, Vietnam and Malaysia and using parts and components manufactured in the PRC for two years up until the “Date of Termination” – June 6, 2024. In its final affirmative ruling issued last Friday, Commerce stated that it will not collect duties pursuant to Biden’s decision “as long as the imports are consumed in the U.S. market within six months of the termination of the President’s Proclamation”, meaning up until December 6, 2024. The ruling also highlights that, in order to be exempt from U.S. duties following the expiration of the waiver, all solar providers in Vietnam, Malaysia, Thailand, and Cambodia (including companies not specifically investigated by Commerce) must self-certify that they are not circumventing the AD/CVD orders and otherwise complying with all findings in this case, with those claims being subject to potential audit.

Both sides are likely to appeal this decision to the Courts.

What You Need to Know

  • Key takeaway #1 Issuance of Executive Order and Rulemaking: On August 9, 2023, President Biden issued a long-anticipated “Executive Order on Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern” (the “Executive Order”). The Executive Order, which the President issued pursuant to the International Emergency Economic Powers Act (“IEEPA”), authorizes the U.S. Department of the Treasury (“Treasury”), in consultation with the U.S. Department of Commerce and other relevant agencies, to establish a new and targeted national security program aimed at certain outbound investments.
  • Key takeaway #2 Opportunity to Influence Regulations: The Executive Order instructs Treasury to promulgate outbound investment regulations, and Treasury simultaneously issued an Advance Notice of Proposed Rulemaking (“ANPRM”) seeking comments, until September 28, 2023, on such key issues as what transactions and technologies should be covered. Treasury will then publish a proposed rule soliciting additional comments before publishing a final rule. Each step provides industry a meaningful opportunity to shape the final set of regulations.
  • Key takeaway #3 No Currently Effective Restrictions: The Executive Order itself does not impose any restrictions; rather, the applicable restrictions will take effect only after Treasury publishes final regulations. Moreover, Treasury’s ANPRM notes that the final regulations will not apply to any historic “covered transactions” (though Treasury has said that it may inquire about transactions completed or agreed to after issuance of the Executive Order for purposes of developing the program).
  • Key takeaway #4 Not a “Reverse CFIUS”, but Prohibitions and Notifications: Some transactions will be outright prohibited, while others will only require a notification to Treasury, both based on the specific technologies involved. Unlike CFIUS, which applies to inbound investments in the U.S., there will not be a case-by-case review process. However, similar to CFIUS, Treasury will have the authority to nullify, void, or otherwise compel the divestment of any prohibited transaction.
  • Key takeaway #5 Third Technology-Focused Legal Regime for China: Currently, the People’s Republic of China (including Hong Kong and Macau) (hereinafter “China”) is the only “country of concern” targeted by the Executive Order. Treasury proposes to control a broad scope of activity related to the following technologies: (1) semiconductors and microelectronics, (2) quantum information technologies, and (3) artificial intelligence (AI) systems. The identified categories of technologies do not mirror those already controlled for China under existing U.S. export controls, or the clawback provisions of the CHIPS Act. Investors and other actors would need to review at least three separate technology-focused legal regimes to ensure compliance.
  • Key takeaway #6 U.S. Person Jurisdictional Hook: The prohibitions and notification requirements will apply to U.S. persons, and employ a similar definition to that used in U.S. economic sanctions. In addition, based on Treasury’s ANPRM, U.S. persons will have certain obligations with respect to non-U.S. entities that they control and in certain scenarios where U.S. persons knowingly direct transactions by non-U.S. persons.
  • Key takeaway #7 Potential Exceptions and an Exemption: Treasury has proposed various carveouts or exceptions for specific types of transactions, such as investments into publicly-traded securities or into exchange-traded funds, as well as a case-by-case “national interest exemption” for otherwise prohibited transactions.

Proposed U.S. Outbound Investment Regulations

The Outbound Investment Program will be implemented through regulations issued by Treasury that will require notification for, or will otherwise prohibit U.S. persons from undertaking, certain transactions involving “covered national security products or technologies” and entities connected to a “country of concern.” Accordingly – concurrent with the Executive Order – Treasury released an Advance Notice of Proposed Rulemaking that provides some potential definitions of these terms, but the exact definitions and the details of the regulations will be developed through public notice and comment that concludes on September 28, 2023. Treasury also published a Fact Sheet that provides additional information on the proposed details and scope of the outbound investment prohibitions and notification requirements, which will likely not be finalized until 2024 sometime after Treasury has published draft regulations and gathered another round of public comments.

Discussions on restricting outbound investment have occurred since Committee on Foreign Investment in the United States (“CFIUS”) reform was implemented, and recent actions – like the investment prohibitions in the Office of Foreign Assets Control (“OFAC”)’s Chinese Military Industrial Complex Companies (“CMIC”) Program, the clawback provisions from the CHIPS Act, and the expansion of controls on semiconductor exports to China in October 2022 – previewed some of the U.S. government’s top concerns. Below is a more detailed summary of the ANPRM’s proposals, including: who the regulations cover, the transaction prohibitions and notification requirements, and what technologies and products are covered.

What Transactions Do the New Controls Cover?

U.S. persons are either prohibited from engaging in, or must provide notification to Treasury of, any “covered transaction” related to a “covered foreign person” (that is not an otherwise “excepted transaction”) and that involves a “covered national security technology or product.” In the ANPRM, Treasury proposes including the following definitions and scoping in its final regulations. It seeks input on 83 questions covering a variety of topics, including these definitions of key terms, as well as the scope of covered technology and products, and the anticipated burden of compliance with the proposed regulations.

  • U.S. Person: This term includes U.S. citizens and lawful permanent residents, U.S. entities and their non-U.S. branches, and any person in the United States. This definition, which mirrors the one OFAC uses for its sanctions’ programs, does not include non-U.S. subsidiaries of U.S. entities. That said, the ANPRM contemplates imposing on any U.S. person certain obligations with respect to any non-U.S. entity that the U.S. person “controls,” with “control” defined to mean ownership, directly or indirectly, of 50% or more. Also, in certain scenarios, U.S. persons would be prohibited from “knowingly directing transactions” by non-U.S. person, with “knowingly” and “directing” having their own definitions.
  • Covered Transaction: This term includes:
    • (1) Acquisition of an equity (or contingent equity) interest in a covered foreign person;
    • (2) Certain debt financing transactions that are convertible to equity;
    • (3) Greenfield investment that could result in the establishment of covered foreign person; or
    • (4) Establishment of a joint venture, wherever located, formed with a covered foreign person or could result in the establishment of a covered foreign person.
  • Covered Foreign Person:
    • This term includes any “(1) person of a country of concern that is engaged in, or… that a U.S. person knows or should know will be engaged in, an identified activity with respect to a covered national security technology or product; or (2) a person whose direct or indirect subsidiaries or branches are referenced in item (1) and which, individually or in the aggregate, comprise more than 50 percent of that person’s consolidated revenue, net income, capital expenditure, or operating expenses.” Currently, the only identified “country of concern” is China (which includes Hong Kong and Macao).
    • Moreover, the term “person of a country of concern” mean any non-U.S. person who is also (1) a citizen or permanent resident of China, (2) a Chinese entity due to incorporation or headquarters, (3) the Chinese government (including its agencies and state-owned entities), (4) or any entity owned individually or in the aggregate, directly or indirectly, 50 percent or more by a person in (1)-(3). Notably, this proposed definition of “person of a country of concern” captures non-Chinese entities owned 50% or more, directly or indirectly, by one or more Chinese persons.
  • Covered National Security Technologies or Products: The table above describes the proposed technologies to be covered. Significantly, these proposed technology categories generally do not mirror those in other existing and proposed controls over activities involving China, including under the U.S. Export Administration Regulations end use/end user controls, or those proposed by Commerce to implement the CHIPS Act national security guardrails.
  • Prohibition, Notification, and Enforcement:
      • As depicted in the table above, certain more advanced semiconductors and microelectronics, quantum technologies, and AI systems will be subject to prohibitions, while certain less advanced semiconductors/microelectronics and AI systems (but not quantum technologies) will be subject to a notification requirement. Any required notification would be filed within 30 days of closing and could be filed via Treasury’s online portal.
      • If a prohibited transaction occurs, or a required notification was not filed (or was filed with material misstatements or omissions), then Treasury can impose penalties pursuant to IEEPA, the statute that is the basis for the vast majority of OFAC’s various economic sanctions programs. Currently, penalties are approximately $356,000 per violation or twice the value of the transaction, whichever is greater, and any willful activity can be referred to the U.S. Department of Justice criminal violations (which can be up to $1 million per violation, or twice the value of the transaction).
      • Treasury has the authority to nullify, void, or otherwise compel the divestment of any prohibited transaction entered into after the effective date of the final regulations.
  • Excepted and Exempted Transactions: Treasury is considering a number of exceptions and an exemption. Some of the more notable exceptions include:
      1. Publicly-traded securities, index funds, mutual funds, exchange-traded funds;
      2. Certain investments made as a Limited Partner;
      3. Committed but uncalled capital investments; and
      4. Intracompany transfers of funds.

In addition, the ANPRM proposes a case-by-case exemption for any otherwise prohibited transaction that “(i) provides an extraordinary benefit to U.S. national security; or (ii) provides an extraordinary benefit to the U.S. national interest in a way that overwhelmingly outweighs relevant U.S. national security concerns.”

Now What?

Provide Feedback to Treasury

Interested members of the public have until September 28, 2023 to file comments in response to the ANPRM.

Further U.S. Government Action

Congress has debated the need for legislation concerning certain outbound investments to China since 2018. While Congress has not settled upon a legislative approach, it anticipated the current Executive Order through the Consolidated Appropriations Act of 2023. Signed into law by President Biden in December 2022, the Act required the Departments of Treasury and Commerce to submit reports on the establishment of an outbound investment screening mechanism and associated costs. The reports were submitted to Congress on March 7, 2023.  

The Senate recently approved the Outbound Investment Transparency Act, its own version of outbound investment screening, but this bill only includes notice requirements though across a broader range of technology sectors including satellite-based communications, network laser scanning systems, and other export-controlled technology. Whether the full Congress will pass this legislation remains unclear, but the bill may signal the industries that could be future targets of the Outbound Investment Program.

Look for Reactions from China

While the Executive Order is both long-anticipated and narrower than originally conceived, it has been “resolutely opposed” by China. On August 10, 2023, China’s Ministry of Commerce (MOFCOM) characterized the Executive Order as “decoupling and chainbreaking” in the area of investment under the guise of “de-risking.” MOFCOM’s spokesperson chided the U.S. for deviating “from the market economy and principle of fair competition that the U.S. has been advocating” and that China reserves the right to take countermeasures.

In light of the Executive Order’s singular focus on China as a “country of concern” and the ongoing geopolitical tensions between the U.S. and China, it is possible China may respond with heightened scrutiny on U.S. investors or companies in China (e.g., including through its Anti-Foreign Sanctions Law or AFSL) or new restrictions. U.S. companies and investors assessing the risks of prospective investments in China should take into account not only the imminent U.S. restrictions, but also the potential for a possible Chinese reaction.

In addition to possible Chinese government action, aggrieved Chinese parties involved in current or prospective U.S. investment could sue those investors under the AFSL if such U.S. investment is terminated or withdrawn.

Look for Actions and Reactions from Other Governments

Although outbound investment review regimes have historically been limited to only a few economies (e.g., Republic of Korea, Japan, China, and Chinese Taipei) and differ among these, there is active consideration outside the U.S. of potential restrictions on outbound investments in strategic technology with military capabilities. The European Commission is examining the issue in 2023 and European Commission president Ursula von der Leyen has spoken in favor of the establishment of a targeted outbound investment regime.    

Passage of CFIUS reform in 2018 led the U.S. to work with its allies to strengthen their investment review regimes to better address national security concerns. Investors will want to consider whether this Executive Order may lead to similar consideration of targeted outbound investment reviews in the European Union and elsewhere.