China-U.S. Trade Law : International Trade Lawyer & Attorney : Baker Hostetler Law Firm : Trade Remedies, Customs & Export Controls

This text is based on presentations on this subject made recently by Mr. Burke to the American Chamber of Commerce in Beijing and the American Chamber of Commerce in Shanghai.

Export Controls And The China-U.S. Trade Relationship

One of the leading Chinese complaints about the trade relationship between China and the United States is that U.S. export controls, according to China, unnecessarily limit what China can buy from the United States. The Obama Administration, apparently seeing some merit in China’s complaint, is seeking substantial reform of U.S. export controls as part of the President’s initiative to double U.S. exports in five years. This blog will report on those reform efforts in a future article. This article discusses the impact those export controls have on foreign investment in the United States, including Chinese, and the current state of U.S. export controls.

Export Controls Impact Investment

Export controls impact foreign investment in the United States both directly and indirectly. They impact investment directly because export control considerations are incorporated into national security reviews of foreign investment by the Committee on Foreign Investment in the United States. This issue is discussed in greater detail in National Security And Chinese Investment In The United States, which we published on this blog in May 2011.

Export controls indirectly affect foreign investment because they may limit the ability of the foreign parent to manage and obtain the full economic benefit from its newly acquired U.S. business. If the to–be-acquired U.S. company is registered with the State Department as a manufacturer or exporter of defense articles or supplier of defense services, that company must notify the State Department 60 days before ownership of the company can be transferred to a foreign person. The State Department could revoke the company’s registration and outstanding export licenses should it disapprove of the new foreign owner. Also, depending upon the company’s technology, export licenses may be needed from either the State Department or the Commerce Department in order for the company to disclose that technology to non-U.S. persons, even non-U.S. management personnel installed by the new owners. Similarly, export licenses may be needed to export the company’s products and technology to its new foreign affiliates, reducing the economic value of the deal to the new parent.

None of these requirements is peculiar to Chinese buyers of a registered American company. They apply to all foreign persons, regardless of nationality.

The U.S. Export Control Regime

The primary export control agencies are the State Department’s Directorate of Defense Trade Controls (“DDTC”) and the Commerce Department’s Bureau of Industry and Security (“BIS”). DDTC is responsible for the International Traffic in Arms Regulations (“ITAR”), which control exports of military items and satellites. BIS is responsible for the Export Administration Regulations (“EAR”), which control exports of civilian items.

The ITAR covers items specifically designed, developed, configured, adapted, or modified for a military application. It also covers firearms and commercial satellites. Many items, originally designed for military purposes, now have widespread commercial uses, but remain subject to the ITAR even when they will be used in commercial applications. Such items remain subject to the ITAR until such time as DDTC makes a commodity jurisdiction determination that they can be released from the ITAR.

Companies that manufacture or export items subject to the ITAR must be registered with DDTC and the export of such items almost always requires a license or other written authorization from DDTC. These requirements impair U.S. export trade with China, in particular, because the United States has an arms embargo against China. As a result, items controlled under the ITAR may not be exported to China and ITAR-controlled technical data may not be disclosed to Chinese nationals even in the United States. This restriction is one of the most contentious in Chinese-U.S. relations.

The EAR, in contrast to the ITAR, has a much more limited impact on U.S. exports to China. The EAR covers exports and re-exports of almost all civilian items. However, no licenses are required for most products to most destinations, including China. Although licenses are needed for some products to some destinations or for certain end-uses or end-users, these requirements cover an extremely small percentage of U.S. exports.

EAR Export Licensing Steps

There are four basic questions to ask in determining whether an export license from BIS is needed for a particular transaction. Those questions are:

1. Is the transaction subject to the EAR?
2. How is the product classified?
3. Is the product controlled to the planned destination?
4. Can a license exception be used?

Transactions are subject to the EAR when they involve products or technical data not controlled by other U.S. agencies, such as DDTC, that are being exported from the United States, or are U.S.-origin products or technology being re-exported from one foreign country to another. The EAR also covers deemed exports and re-exports, which occur when technical data controlled by the EAR is disclosed to a foreign national in the United States or a third country national in the original country of export. The EAR does not cover the transfer or disclosure of information in the public domain.

Companies classify their products for export control purposes by determining which entry on the Commerce Control List matches their product. The Commerce Control List contains several hundred Export Commodity Classification Numbers (“ECCN”). Each ECCN contains detailed technical parameters describing the items covered. When the product does not fit within any of the ECCNs listed, it is classified as “EAR99.”

Products classified as EAR99 require export licenses only when the destination is a comprehensively embargoed country, such as Iran, or the specific end-use or end-user is prohibited for purposes of non-proliferation of chemical, biological or nuclear weapons. For other products, the exporter must match the destination and the reason for control on the Commerce Country Chart to determine whether the product is controlled to the planned destination. The following is an illustrative excerpt from the Commerce Country Chart:

 

The ECCN that covers the product will state the reason or reasons for control. When the only reason listed is National Security 2 (NS2), then, by looking at the Commerce Country Chart, the exporter can determine that the product is not controlled for export to Australia, but is to China and Sudan. In most cases the answer to the third question, as determined from the Commerce Country Chart, is “no” (the item is not controlled to the destination) and the transaction can go forward without an export license.

When the answer to the third question is “yes,” the exporter must move on to the fourth question and determine whether it can use an exception to the license requirements. There are 16 license exceptions listed in the EAR – were any to apply, the product could be exported to that destination without a license. One of the most popular exceptions used for exports to China is License Exception CIV, which allows exports to civilian end-users in China where the ECCN listing for product contains the legend “CIV – Yes.”

When the answer to the fourth question is “no” (no license exceptions are available), the company must apply to BIS for an export license. In most cases, BIS issues a license. Out of the 21,660 applications in Fiscal 2010, BIS approved 18,020, returned 3,513 without action (usually when the application was incomplete or no license was needed) and denied only 127. The average processing time was 29 days.

Conclusion

The export controls under the EAR have not been a major impediment to U.S. exports, including exports to China. By contrast, the export controls under the ITAR are a significant impediment to increasing U.S. exports to China. It is unlikely that the arms embargo against China would be lifted soon. However, there are numerous products currently subject to the ITAR that could be exported for commercial end-uses in China with no negative impact on U.S. national security. Reforms of the export control regime that move as many of these products as possible from control under the ITAR to control under the EAR, could pave the way for substantially increasing U.S. exports to China.
 

        本文根据Burke 先生在中国美国商会演讲成文。

出口控制及美中关系

        在美中贸易领域，美国的出口控制备受中方指责，中国认为美国的这一政策不必要地限制中国从美国进口商品。奥巴马政府认为中国的抱怨有一定依据，因此正全力着手改革美国的出口控制体系以实现总统先前提出的五年内出口翻一番的目标。本搏客将追踪分析这些改革措施。本文旨在讨论出口控制对国外资金投资美国造成的影响。

出口控制影响投资

        出口控制对国外资金投资美国造成直接以及间接影响。直接影响：当国外投资委员会对外资进行国家安全审查时，出口控制始终是重要考虑因素之一。本搏客今年五月刊登的《国家安全以及中国在美投资》对此已经展开详尽论述。

        出口控制对外资造成间接影响：因为它将阻碍国外母公司从新并购的美国产业全面受益。若即将被收购的美国公司是美国国务院注册的国防设备生产商、出口商或是国防服务提供者，则这一美国公司必须在所有权转移前60天内通知美国国务院。美国国务院审核后发现新的国外所有者不符合条件，则可注销该公司的注册及尚未使用的出口许可。同时，根据该美国公司的技术水准及出口许可证，该公司可能需要美国国防部或是美国商务部批准，以便向外籍员工（包括外籍管理人员）披露该技术。同理，向新母公司的海外分公司出口产品和设备也需获得出口许可证。这一切都将减低母公司的利润。

        这些要求并非针对有意购买美国企业的中国企业而设，而是适用于所有外国企业和个人。

        英文全文请点击这里　
 

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This blog posted an article titled “Setting The Record Straight: The U.S. Is Open For Chinese Business; Don't Worry Too Much About National Security Reviews” on December 12, 2009. Two weeks later Northwest Non Ferrous International Investment Co., Ltd. (“Northwest”) dropped its plans to acquire a Nevada mining company because a national security review under the Foreign Investment National Security Act “FINSA” was coming to an unfavorable conclusion. We do not stand corrected.

The rejection of the Northwest acquisition was based on unique facts and not because of opposition to Chinese investment generally. Chinese companies should not let this case dissuade them from acquiring companies and otherwise investing in the United States.

Northwest proposed to acquire control over a mining company, Firstgold Corp., all of whose operations are adjacent to Naval Air Station Fallon, the U.S. Navy’s premier tactical air warfare training center. The Navy opposed a company owned by the Chinese Government having control of property from which its most sensitive training activities might be monitored. Also in that area are other security and military assets so sensitive that the U.S. Government treats even their identities as classified information.

Due to the sensitive nature of the government installations, any acquisition by a foreign company, including companies based in NATO countries, would have raised national security concerns. Whether China created more concern is entirely speculative and ultimately unknowable. However, Chinese companies should not view the CFIUS result in this case as based on an objection focused on China, but rather as based on the serious national security concerns it definitely presented regardless of the foreign country. FINSA requires CFIUS to consider whether the acquiring company is state-owned. However, given the serious national security concerns raised by the location of Firstgold’s facilities, the result likely would have been the same even had the acquirer been a private company.

Northwest’s lawyers have described extraordinary but failed efforts to make the acquisition compatible with national security concerns. Their memorandum to Northwest, published on the New York Times website, reports that the Committee on Foreign Investment in the United States (“CFIUS”) looked closely at all kinds of scenarios to mitigate the national security concerns, but concluded that none of them would be feasible because all four of Firstgold’s properties are located adjacent to Naval Air Station Fallon or other military sensitive locations.

The lawyers’ report demonstrates that CFIUS’ goal is not to block investments. Instead, CFIUS seeks to mitigate national security concerns. The exceptional facts in this case are that all of the operations to be acquired raised concerns. When national security is at issue, it usually affects some part of the deal and can be mitigated. Here, all of the deal was implicated; mitigation (such as spinning off some part of the deal while preserving the essential economic value) apparently was impossible.

Northwest acted wisely in this case, seeking a CFIUS review before investing because of uncertainties about national security. Reportedly, Firstgold did not want to request CFIUS review. Northwest could have invested, only to have CFIUS recommend and the President of the United States undo the deal, not because of animus toward Chinese investment, but because of the serious implications for national security.

It is important not to misinterpret the Northwest case. It proves the utility and wisdom of early CFIUS review, not an objection to Chinese investment. Notwithstanding CFIUS’ rejection of Northwest’s proposed acquisition of Firstgold, the United States remains one of the economies most open in the world to foreign investment, including from China.
 

        2009年12月12日，本博客刊登了《美国向中国企业敞开大门，请勿过分担心国家安全审查》。两周后，Northwest Non Ferrous International Investment Co., Ltd. （简称Northwest）因在根据《外国投资和国家安全法》展开的国家安全审查中面临不利裁决，而被迫放弃并购位于内华达州一矿产公司的计划。

        拒绝Northwest的并购计划有其特殊背景，并非反对所有中国投资。中国企业不应因为这一事件而放弃在美投资、并购企业的计划。

        Northwest提议并购Firstgold Corp.矿产公司，而这一公司的作业地点紧邻海军的Fallon飞行基地，这是美国海军最重要的飞行作战训练中心。不出意料，海军反对中国政府拥有的企业控制这一产业，此处可监控美国海军最敏感的训练活动。此外，这一地区还有其他属于美国政府列为保密信息的军事、安全设施。

         因为这些政府设施非常敏感，所以即使是北约国家的公司并购这一产业也会引发国家安全担忧。中资企业是否引来更多担忧则纯属猜测、无法得知。但是，中国公司不应视这一国家安全审查建立在反对中国基础之上，而是建立在不分国别的国家安全考虑基础之上。《外国投资和国家安全法》要求国家安全审查考虑收购企业是否为国有企业。但是，因为Firstgold处于敏感地点，即使是私营企业试图并购这一公司也会受阻。

        Northwest的律师称为通过国家安全审查他们付出很多努力，最终仍然失败了。《纽约时报》刊登的律师备忘录指出外国投资委员会仔细审查了各个可减轻对美国国家安全威胁的方案的每个细节，但是认为没有一个方案可行，因为Firstgold的四处产业都紧邻海军Fallon基地或是其它敏感军事设施。

         律师的报告显示外国投资委员会的目标不是为了阻碍投资。相反，外国投资委员会寻找减弱对国家安全造成不利影响的措施。此并购的特殊情况在于并购涉及的所有的产业都影响国家安全。通常，如果只有并购的某一部分涉及国家安全，且可减弱其不利影响。但是这一并购却不是这样，减弱不利影响（如除去并购的某一部分、仅保留关键部分）也不可行。

        Northwest采取了明智的处理方式，因为对是否能通过国家安全审查感到不确定，而在投资前就寻求国家安全审查。据报道，Firstgold不想申请国家安全审查。Northwest可以买下Firstgold产业，但最终美国总统在外国投资委员会的建议下还是会否决这一并购。否决不是因为仇视中国，而是因为并购将对国家安全造成负面影响。

        避免错误理解Northwest案件非常重要。它证明了先前的国家安全审查的重要性和明智性，而且这些审查并非反对中国投资。虽然外国投资委员会否决了Northwest并购Firstgold的计划，美国仍是世界上对外资最开放的国家，仍欢迎中国投资。

 （翻译：朱晶）

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