LawFlash

Gearing Up for the Impact of Section 301 Trade Remedies

March 24, 2018

The imposition of trade remedies against China requires both importers and exporters to prepare for the potential impact of tariffs and expanded foreign investment review.

President Donald Trump published a Presidential Memorandum on March 22 addressing actions by the United States pursuant to the Section 301 investigation initiated in August 2017. The investigation directed the US Trade Representative (USTR) to conduct an assessment of China’s policies and practices related to technology transfer and intellectual property thefts. The March 22 memorandum highlights the USTR’s findings and directed the USTR to “take all appropriate actions” to “address the acts, policies, and practices of China that are unreasonable or discriminatory and that burden or restrict U.S. Commerce.”

Section 301 (19 USC § 2411) provides the president broad discretion in the remedies he can implement to address any USTR findings. Remedies include tariffs, pursuit of World Trade Organization (WTO) actions, and the implementation of restrictions under other laws and regulations that relate directly to the findings made. Remedies also include “investment restrictions” administered by the secretary of the US Department of the Treasury (Secretary) “using any available statutory authority,” which would include, but not be limited to, the Defense Production Act (DPA), the Foreign Investment and National Security Act of 2007 (FINSA), and the International Emergency Economic Powers Act (IEEPA), authorities which govern cross-border transactions subject to review by the Committee on Foreign Investment in the United States (CFIUS or the Committee). The USTR and the Secretary are empowered to implement any remedies recommended to and approved by the president.

What Does this Mean?

  1. The president’s authorities extend beyond just those remedies listed in Section 301 because that statute permits the implementation of remedies under a variety of other trade-related statutes—e.g., the DPA, FINSA, and IEEPA. Collectively, this affords the president broad powers to affect financial and other transactions, sanctions administered by the Office of Foreign Assets Control (OFAC) regulations and activity subject to US export laws (such as the Export Administration Regulations (EAR)).
  2. As of March 23, no remedies have actually been implemented under the memorandum or USTR investigation report. The memorandum sets forth timelines for further action by the USTR and other agencies involved in the process.
  3. Within 15 days of the date of the memorandum (April 6, 2018), the USTR must publish a list of proposed products that will be subject to tariff increases, and the proposed increased tariffs, on goods imported into the United States from China. That list will likely target some or all of the products or technology that were the subject of the 301 hearings and investigation, such as technology that affects semiconductors, electronics and microelectronics, robotics, artificial intelligence, quantum computing, quantum encryption, biotechnology, engines, aircraft, and data analytics. The list will be published in proposed form, allowing parties to comment on the recommended products and tariffs. Notice and comment periods generally run between 30 and 90 days. As the administration is eager to move on these remedies, we expect that the comment period will be appropriately circumscribed.
  4. As with other trade remedy statutes, the tariffs may be imposed in a “catch and release” manner, i.e., broad measures may be initially imposed, but exemptions and exclusions will be considered in response to public comments. We expect that the USTR and the Secretary’s measures will remain consistent with recent approaches in the trade remedy actions taken with respect to the solar, steel, and aluminum industries.
  5. Other trade remedies—such as the ability to affect any preferences granted to China for the provision of goods, services, or technology to US parties or the US Government—were not expressly mentioned in the memorandum, although the president granted the Secretary broad authority to impose “investment restrictions” pursuant to the powers vested across the “executive branch.” This means that Treasury could survey the laws and regulations available in other contexts—such as under export controls, government procurement, cyber requirements, as well as OFAC and CFIUS—and recommend further action to the president.
  6. “Investment restrictions” will likely come in the form of “enhancements” to the CFIUS national security review process. These enhancements could include directing CFIUS to review more transactions using its current statutory authority and process.
  7. The memorandum and USTR report identify Chinese government policies, and practices by Chinese organizations, whether governmental, quasi-governmental or non-governmental, that raise “concerns about investment in the United States directed or facilitated by China in industries or technologies deemed important to the United States.” Several US government agencies and private organizations have also identified certain critical technologies that raise US national security issues where Chinese investment is concerned. These include big data, data analytics, quantum computing and encryption, robotics, genomics, portable energy, artificial intelligence, hypersonics, and biologics. Absent the establishment of a new review apparatus, any enhancements to CFIUS will need to be consistent with FINSA.
  8. The USTR report references seven non-exclusive industry sectors that must be addressed and provides examples of specific acquisitions by Chinese companies in those industries that contributed to the administration’s concerns:
    1. Aviation
    2. Integrated circuits
    3. Information technology and electronics
    4. Biotechnology
    5. Industrial machinery and robotics
    6. Renewable energy
    7. Automotive.

    Some of these sectors have not been as prominently reported as presenting national security concerns, and it therefore may come as a surprise to some that they are included here. Moreover, the report does not prohibit the USTR from addressing additional sectors for action.

  9. Even before the president implements any measures in response to the USTR report, we expect some changes to the way in which CFIUS addresses its reviews in response to this expression of administration priorities. These include the following:
    1. Expect a continued deep interest in Chinese transactions in general across all industry sectors. This interest will continue to extend beyond state-owned enterprises to transactions where Chinese entities are indirect participants. The list of industries implicating national security will grow to include those already on the Committee’s radar as well as those enumerated in the report.
    2. Expect a continued expansion of CFIUS’ extraterritorial reach. The Committee will remain interested (and proactive) in transactions that occur overseas, i.e., the Lumileds, Kuka Robotics, and similar transactions. Thus, indirect investments by Chinese parties in US businesses owned by foreign entities will continue to be seen as within CFIUS’ purview and the results of this 301 investigation will likely provide support for those inquiries.
    3. Expect CFIUS to expand its interest in transactions that may be perceived to have minimal ties to the United States. We expect CFIUS to continue to shrink the US nexus needed to assert jurisdiction. Thus, CFIUS will be more likely to assert jurisdiction in cases where a foreign party has a small amount of US assets, whether people, facilities, or interactions, focusing instead on the quality of those assets and the industries involved.
    4. Expect more multilateral engagement regarding cross-border investment. With the United Kingdom, Australia, Germany, Canada, Japan, and the European Union enhancing their foreign direct investment reviews and changing their views of the scope of national security, we anticipate enhanced communications on particular transactions between the United States and these allies. This means that more transactions will likely come to the Committee’s attention, thereby increasing the likelihood of outreach should parties decide not to submit a CFIUS notice.
    5. Resource limitations are being addressed and may be further addressed once the Secretary announces any proposed investment restrictions. Current concerns about stretched resources are beginning to be addressed with the relevant agencies in the current budget. Further, pending legislation—both S 2098 and HR 4311—directly addresses resource limitations and budget allocations are expected to grow to handle the increased workload. Thus, resource limitations within the Committee should be viewed skeptically as grounds for not filing with CFIUS.

What’s Next?

Based on the president’s memorandum, the USTR and the Secretary need to complete the following steps:

  1. Within 15 days of March 22 (by April 6), the USTR will publish the proposed list of products and proposed tariff increases applicable to those products
  2. Once published, the public will have a set period of time—between 30 and 90 days—to comment on the proposed product list and tariff schedule. The proposal may, but need not, include an opportunity to propose exclusions
  3. Within 60 days of the date of the memorandum (by May 21), the USTR and the Secretary must report to the White House on the progress of any remedies being instituted
  4. The Secretary must decide what investment restrictions to implement under the president’s order, and identify the laws and regulations that will be used to implement those restrictions. Expect potential restrictions on Chinese investments in the United States, as well as changes in the way CFIUS reviews such investments (or potentially even a separate review process). Expect potential technology transfer restrictions under IEEPA, OFAC, and the EAR
  5. Expect congressional reaction. Given the number of bills pending on the Hill to reform the CFIUS process (seven bills to date), Congress may move more quickly to pass legislation to modernize the CFIUS process and the scope of its jurisdiction. Two bills—S 2098 and HR 4311—currently have the most traction, although recent proposed revisions by the technology industry to S 2098 make it likely that more coordination will be needed before a bill will be passed. In the alternative, if Congress chooses to focus on any tariffs implemented in response to the 301 investigation, the CFIUS bills may take a back seat to congressional action regarding those tariffs
  6. Expect reaction from China. China has already signaled an intention to respond to the proposed US government actions. China is likely to go beyond posturing in this case, especially when these measures are weighed in conjunction with the various trade or sanctions related measures taken by the United States, the European Union, and other countries or world tribunals. Recent announcements of potential responses by China against US goods and access by US companies to the Chinese market have heightened the concerns both within China (which could find its access to high technology in particular curtailed) and in the United States.

Contacts

Please contact any one of the following members of the CFIUS Working Group if you would like to discuss these issues in greater detail:

Washington, DC
Giovanna M. Cinelli
Stephen Paul Mahinka
Kenneth J. Nunnenkamp
Margaret Gatti
Ulises Pin
Yoshihide Ito

Boston
Carl Valenstein