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Hua-Wait a Minute: Entity Designation Affects Non-U.S. Manufacturers’ Exports to China Tech Giant

On May 16, 2019, a sweeping U.S. export control rule went into effect that will impact the U.S. tech industry, but may also create an outsized risk for non-U.S. manufacturers. The rule, issued by the U.S. Department of Commerce, Bureau of Industry and Security (BIS) adds Huawei Technologies Co., Ltd. (Huawei) and 68 of its affiliates to the Entity List. That designation effectively prohibits the export, reexport, and retransfer of all U.S.-origin “items subject to the Export Administration Regulations (EAR)” to those entities. The designation arises from a U.S. government finding that the restrictions are warranted on U.S. national security and foreign policy grounds.

The De Minimis Rule

For companies in the United States, the effect of the rule is straightforward: virtually all items manufactured in the United States are “subject to the EAR.” (The biggest exception is military items, which are already subject to a total export prohibition for China under the International Traffic in Arms Regulations.) But the seemingly straightforward Entity List prohibition becomes a little more complicated for manufacturers outside the United States. The source of that complication is the de minimis rule.

Effects on Non-U.S. Manufacturers

Under the de minimis rule, U.S. export controls are applied to certain foreign-made products. The de minimis rule provides that a foreign-made commodity is subject to the EAR if that foreign-made commodity contains more than 25% controlled U.S.-origin content by value. The rule does not count so-called EAR99 items or other items that do not require a license (NLR items) to the final destination. That means that some low-level U.S.-origin software, technology, or commodities do not count in the 25% de minimis threshold.

We won’t delve into the details here, but if you make a product outside the United States that incorporates U.S. parts, components, or technology, or bundles U.S.-origin software, U.S. export controls may apply to the export of your product from outside the United States to Huawei in China. If the relevant controls apply, the foreign manufacturer (and any other person wherever located) is prohibited from exporting the item to Huawei.

Turning the Screws

For now, the application of the de minimis rule is straightforward: foreign made product with 25% or less controlled U.S.-origin content – no EAR, no worry.

Currently, the 25% de minimis threshold does not count U.S.-origin content that does not require a license to the item’s final destination. Consider, however, what would happen if, for exports to Huawei, BIS took into account that all U.S.-origin content would require a license to Huawei. That would mean counting EAR99 and NLR items in the 25%. That would restrict an enormous number of foreign-made goods that use commercial, off-the-shelf U.S. parts and technology, from being sold to Huawei.

BIS has not published guidance or clarification on how the Entity List additions will intersect with the de minimis rule. However, we understand that, in the past, BIS and the Office of Export Enforcement have considered regulations interpretations that would prevent companies from exploiting the de minimis to “laundering” U.S.-origin input items in non-U.S. end-products.

The Takeaway

At this point, non-U.S. manufacturers that sell to Huawei or other designated entities would do well to assess the amount of U.S.-origin content they use in their products. If the value of that content, including U.S.-origin technology and software, approaches 25%, those companies would be well advised to carefully account and record the U.S.-origin value in that product. It is likely that BIS will be looking carefully for U.S. items and technology being re-exported to the newly designated entities.

Copyright © 2019, Sheppard Mullin Richter & Hampton LLP.

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About this Author

Reid Whitten, partner, Sheppard Mullin Law Firm
Partner

Reid Whitten works with clients around the world to plan, prepare, and succeed in global business transactions.

In the areas of U.S. and international sanctions, export and defense export controls, and anti-corruption regulations, he supports clients in detecting and deterring potential compliance issues as well as conducting and defending investigations and enforcements. Mr. Whitten also advises on anti-dumping, anti-money laundering, and anti-boycott regulations.

Mr. Whitten is a thought leader on cross-border business regulations. He teaches a seminar on The Law of...

202-469-4968
J. Scott Maberry, Lawyer, Sheppard Mullin, International Trade, Trade Practice
Partner

Mr. Maberry is an International Trade partner in the Government Contracts, Investigations & International Trade Practice Group in the firm's Washington, D.C. office.

Areas of Practice

Mr. Maberry's expertise includes counseling and litigation in export controls, the Foreign Corrupt Practices Act (FCPA), anti-terrorism, economic sanctions, anti-boycott controls, and Customs.  He also represents clients in negotiations and dispute resolution under the World Trade Organization (WTO), North American Free Trade Agreement (NAFTA), and other multilateral and bilateral agreements.

202-469-4975
Enumale Agada, Sheppard Mullin Law Firm, Washington DC, Trade Law Attorney
Associate

Enumale M. Agada is an associate in the Government Contracts, Investigations and International Trade Practice Group in the firm's Washington, D.C. office.

Areas of Practice

Her practice focuses on compliance counseling and investigations in the areas of export controls, economic sanctions, anti-corruption, and import regulations. 

202-747-2653