Stay Compliant in Light of John McCain Legacy and China’s Self-initiated New Opening Up with Socialist Characters
Posted by Wang, Yi on February 11, 2020
On and by December 24, 2019, China announced a number of significant market liberalization and trade barrier removal measures (below) after the joint announcement of “Phase-1” US-China Trade Agreement on December 14, 2019. China also stresses the unequivocal policy priorities to strengthen and deepen Chinese Communist Party (CPC) leadership to steer and materialize these regulatory reform and changes.
While companies should strictly respect and comply with Chinese law to ensure legitimacy and success here, diverging regulatory changes in U.S., with historical echoes disengaging China, would create uncertainty ahead for international businesses, especially for those whose revenue benefits from access to US federal procurement in information communication technology (ICT) and associated sensitive sectors.
Companies should stay vigilant with effective trade compliance programs to avoid becoming potential collateral damages, take advantage of new market access opportunities in China, and engage in active advocacy to safeguard their businesses, assets, and personnel.
1. Analysis
Below is our perliminary analysis from trade compliance and corporate counsel perspectives.
1.1 Context.
On December 14, 2019, US-China announced (but yet executed) a “Phase-1” US-China Trade Agreement; the details remains non-public; it presents a partial tariff war moratorium, with a bilateral dispute mechanism (allegedly “enforceable”), which, however, could equal to pre-2001 annual market access review unilaterally. Historically, those opposing to China’s WTO accession in 2001, insisted but failed to block the grant of Permanent Normal Trade Relations (PNTR) status removing the annual market access review over China. Nevertheless, the new US-China Trade Agreement may open up such outcome, albeit in varied form (because bilateral dispute resolution mechanism, under a weakened WTO, virtually allows retaliation first and talks later).
1.2. Deregulation and Uniform Foreign Investment Regulations.
On December 24, 2019 (today), China’s State Council announces the Implementation Regulation of the Foreign Investment Law. The Foreign Investment Law will become effective on January 1, 2020. It revamps the pre-existing foreign investment law to further remove certain “structural” market barriers from joint venture requirements, forced technology transfers to disincentives to public procurement. Meanwhile,article 40 of the Foreign Investment Law reiterates and empowers unilateral trade retaliatory action against discriminatory measures by any foreign government restricting or prohibiting investment from China.
Vigorous, continuous enforcement will be critical to realize the intention of these important market-opening laws and regulations.
1.3. Self-initiated Market Barriers Review and Removal Campaign.
On December 22, 2019, the CPC (Chinese Communist Party) and State Council jointly announced the Guideline to Better Business Environment for Private Enterprises Development and Reform. Overall, it mandates identifying and removal of trade barriers in major infrastructure and regulated sectors.
Specifically, it requires all levels of governments to “fully implement policies and measures to liberalize market access for private enterprises, continuously track and regularly assess the implementation …. conduct comprehensive checks and systematically clean up all kinds of explicit and hidden barriers….…in key sectors such as power, telecommunications, railways, oil and natural gas, …. basic telecommunications (in the form of equity participation)…. power generation distribution and sales (holding or equity participation) … oil and gas exploration and development, refining and sales, … crude oil, natural gas, refined oil storage and transportation and pipeline transportation … crude oil imports and refined oil exports. This presents significant liberalization of market access in infrastructure, public utilities and financial services for “qualified enterprises.”
Implementation measures are expected to follow with respect to the thresholds and criteria for “qualified enterprises.”
1.4. Party Leadership & Presence Reinforced.
Meanwhile, in these waves of market liberalization, China has demonstrated a clear socialist direction by reinforcing the Party leadership, a constitutional requirement. Under the Chinese Constitution (amended on 11 March 2018), “the state encourages, supports, and guides the development of the private sectors of the (socialist) economy,”and the CPC leadership is the “defining feature of socialism with Chinese characteristics.”
The aforesaid Guideline to Better Business Environment for Private Enterprises Development and Reform also stresses “establishing Chinese Communist Party committee” within private sector and strengthening CPC leadership. It remains to be seen the interaction between this mandatory requirement and WFOEs (wholly foreign owned enterprises) and Sino-foreign JVs (joint ventures) in industrial and service sectors.
1.5. Impacts of Local Law Compliance in Light of John McCain NDAA.
These market-opening efforts appear to be substantial market opportunities for foreign investors and market players. Nevertheless, it also presents significant challenges for those involved in global supply chain. To the U.S. parents or affiliates of international companies, a critical question arises – if and to what extent the affiliation with CPC or Chinese government (alone or along with what circumstances,de jure or de facto), would mean a connection with Chinese government that triggers debarment from U.S. federal procurement-related/driven businesses. This is because the John McCain National Defense Authorization Act (“NDAA”) prohibits “covered entities” or “covered telecommunication equipment or services” from U.S. federal government use or procurement (or use of federal grant or loan) unless a waiver obtained upon compelling justification.
Other than Huawei (banned pursuant to § 889(f)(3)(A), (C), (D) of NDAA), NDAA itself also bans an “entity connected with the Chinese Government” (§ 889(f)(3)(B) of NDAA). What means an “entity connected with the Chinese government” (or its instrumentality) under NDAA’slegislative debarment is an open question casting business uncertainty globally, especially for those who seek to faithfully comply with both US and Chinese regimes.
On August 13, 2019, the U.S. government effectuated the Interim Rule (attached) to implement §889(a)(1)(A) of the NDAA. This regulatory development represents the gradually aligning “whole-of-government” approach to confront China under §1261 of the NDAA. It follows the May 15 2019 Executive Order declaring “national emergency” over “acquisition, importation, transfer, installation, dealing in, or use of any information and communication technology or services” by “persons owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary.”
2. Outlook
The eligibility to procurement by the world’s biggest customer – United States with respect to those “entities connected with the Chinese Government” is outside of the ongoing constitutional challenges by Huawei. Should such constitutional challenge turn out to be unsuccessful, for whatever reasons, would Huawei, or any major Chinese companies or stakeholders petition the Chinese government to evoke the “dispute mechanism” claimed to be “enforceable” under the US-China Phase 1 Trade Agreement, rather than through the WTO? Would that lead to “unilateral measures” by China to retaliate any foreseeable federal procurement debarment, which would then lead to the rolling-back of Section 301 tariff currently suspended in a partial manner?
International companies must stay vigilant with effective trade compliance programs to avoid becoming potential collateral damages, and engage in active advocacy to safeguard their businesses, assets and personnel.