Export Controls And Investing In The United States 出口控制以及对美投资

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 
 

National Security And Chinese Investment In The United States

This text is based on presentations on this subject made recently by Mr. Burke to the American Chamber of Commerce in Beijing, the American Chamber of Commece in Shanghai, and the CCH/Wolters Kluwer conference for in-house legal counsel in Beijing.

 Some Chinese Mistakenly Think They Are Unwelcome

Chinese direct investment in the United States is increasing. Last year Chinese companies doubled the amount of money they invested in the United States compared to 2009.

There are many reasons why Chinese companies would want to acquire or set up operations in the United States. Most costs of doing business in the United States, other than labor, are now cheaper than in areas of China with the advanced infrastructure that modern industrial operations need. Production in the United States often provides better access to customers; allows companies to take advantage of Buy American provisions when selling to government agencies; and enables companies to avoid trade barriers, such as antidumping or countervailing duties assessed on imports from China.

Notwithstanding these reasons for investing in the United States, many Chinese companies are hesitant to do so because of media reports on national security reviews of foreign investment that have given the impression the United States is hostile to foreign investment, or at least investment from China. The media have created the impression that Chinese companies are forced to abandon acquisitions in the United States because of political opposition and national security reviews by the Committee on Foreign Investment in the United States (“CFIUS”).

The reality is that the United States welcomes most Chinese investment. The United States has no restrictions on greenfield investment by foreigners, except for some state (non-federal) laws that limit the ability of foreign persons to purchase farmland. Thus, foreigners may create new U.S. businesses on the same basis as Americans. Recent examples of Chinese greenfield investments in the United States include Tianjin Pipe’s steel pipe mill in Texas; Suntech Power’s solar panel assembly plant in Arizona; and American Yuncheng’s gravure cylinder plant in South Carolina.

CFIUS national security reviews apply only to the acquisition of existing U.S. businesses. Even in those circumstances, only three to seven percent of foreign acquisitions each year go through the CFIUS process. Blocked acquisitions are rare; projects blocked presented unique challenges.

Chinese Transactional Failures Have Been Exceptions

A handful of Chinese acquisitions have been abandoned as a result of CFIUS review, or political opposition. However, circumstances unique to each transaction, not general hostility to Chinese investment, caused those deals to fail.

One failure was Northwest Non Ferrous International Investment Co. Ltd.’s attempted acquisition of Firstgold Corp., a gold mining company in Nevada. That acquisition was abandoned just before the end of a CFIUS review due to the expectation of an unfavorable CFIUS recommendation. Questions had been raised because of sensitive military and intelligence installations adjacent to the mines. Had those mines been located elsewhere, the acquisition likely would have sailed through the national security review.

The failed acquisitions receiving the most press attention recently include Huawei Technologies Co. Ltd.’s attempt to acquire 3Com and, more recently, assets from 3Leaf Systems. Huawei bought intellectual property rights from 3Leaf Systems, a developer of cloud computing, without filing a notification with CFIUS. CFIUS learned about the transaction and self-initiated a national security review that resulted in a recommendation that Huawei be ordered to divest.

There were several reasons why the 3Leaf transaction ended badly for Huawei. The Pentagon had serious concerns about the technology that were magnified by a lingering mistrust of Huawei following the 3Com transaction and its mishandling of the CFIUS process in the 3Leaf case. The more important reason, however, was a more general mistrust of Huawei in the U.S. Government due to allegations of close corporate connections to the People’s Liberation Army, espionage, intellectual property theft, and support for terrorist regimes (Iran, Iraq and the Taliban). These circumstances were peculiar to Huawei. The Huawei transactional failure does not indicate any general hostility to Chinese investment.

The Legal Framework And Its Operation: CFIUS And FINSA

Congress enacted the Foreign Investment National Security Act Of 2007 (“FINSA”) on July 26, 2007 in reaction to Dubai Ports World and other controversies to improve accountability and transparency in the CFIUS process. FINSA provides that the President may “suspend or prohibit any covered transaction” whenever the President finds credible evidence “that the foreign interest exercising control might take action that threatens to impair the national security.” However, the purpose of FINSA set out in the preamble to the legislation is “[t]o ensure national security while promoting foreign investment ....” Thus, FINSA reinforces that, notwithstanding the need to protect national security, promoting foreign investment in the United States remains the policy of the U.S. Government. The following statistics on CFIUS reviews in the three years (2008 to 2010) since FINSA became law demonstrates that this law is not an impediment to the vast majority of foreign acquisitions of U.S. business:

  •      National security reviews                                                                                313
  •      Extended investigations                                                                                    83
  •      Voluntary withdrawals (most re-filed and subsequently cleared)             42
  •      Cases submitted to the President                                                                    0

To be governed by FINSA a transaction must be a covered transaction, which means that the transaction must involve a foreign person obtaining control over an existing US business. A covered transaction can be blocked only if it would impair national security and that impairment cannot be remedied through some other means.

FINSA defines “covered transaction” to mean “mergers, acquisitions, or takeovers . . . by or with foreign persons which could result in foreign control of persons engaged in interstate commerce in the United States.” It only covers transactions involving an existing US business. As noted previously, greenfield investments, such as the Tianjin Pipe project in Texas, are not covered. It covers an acquisition of one foreign company by another if control of a U.S. business were to change.

The regulations implementing FINSA, which the Treasury Department published for CFIUS, define “control” as:

the power, direct or indirect, whether or not exercised, through the ownership of a majority or a dominant minority of the total outstanding voting interest in an entity, board representation, proxy voting, a special share, contractual arrangements, formal or informal arrangements to act in concert, or other means, to determine, direct, or decide important matters affecting an entity . . . .

A ten percent passive investment in a U.S. company generally would not be enough to meet this definition of control. However, contractual arrangements that give a foreigner control of important matters can cause a transaction in which the foreign entity does not obtain any equity to be a “covered transaction.”

CFIUS’s implementing regulations define “foreign person” to be “(a) Any foreign national, foreign government, or foreign entity; or (b) Any entity over which control is exercised or exercisable by a foreign national, foreign government, or foreign entity.” This definition includes US subsidiaries of foreign companies.

Neither FINSA, nor the implementing regulations, defines “national security.” Consequently CFIUS has broad discretion to define national security on a case-by-case basis. Other provisions in FINSA, the implementing regulations, the legislative history and CFIUS’s subsequent actions indicate the following key areas in which national security concerns are likely to arise:

  1. Defense industries, which would include companies that provide “defense articles” or “defense services” that are subject to heightened export controls under the International Traffic in Arms Regulations (“ITAR”) and the defense industrial base, which provides products needed for making military items;
  2. Proximity to critical government facilities, as shown in the Firstgold case;
  3. Critical infrastructure, defined in the implementing regulations as “a system or asset, whether physical or virtual, so vital to the United States that the incapacity or destruction of the particular system or asset . . . would have a debilitating impact on national security.” The company’s system or assets have to be big enough to make a difference under this definition.
  4. Critical technologies, which would include (a) items controlled under the ITAR, (b) items controlled under Export Administration Regulations for national security, chemical and biological weapons proliferation, nuclear proliferation or missile proliferation reasons (probably only if the item needed a license to be exported to the acquiring company’s home country), (c) items controlled under the Export and Import of Nuclear Equipment and Materials Regulations, and (d) items controlled under the Export and Import of Select Agents and Toxins Regulations (threats to plant, animal or human health);
  5. Energy and other critical resources, including essential raw materials for defense industries and critical infrastructure.

FINSA requires heightened review of proposed transactions in which a foreign government would obtain control of a U.S. business. There is a presumption that transactions by foreign governments or entities controlled by foreign governments receive an additional 45-day extended investigation beyond the initial 30-day review under which CFIUS clears most transactions. This presumption can be waived if the Treasury Secretary and the head of the other agency designated as the lead for the particular CFIUS review “jointly determine . . . that the transaction will not impair the national security of the United States.”

When a transaction is considered to be foreign government-controlled, FINSA requires CFIUS to consider the adherence of the country to non-proliferation control regimes, the U.S. relationship with the country, specifically on cooperation with counter-terrorism efforts, and the potential for diversion of technologies with military applications.

Conclusion

The United States is open to investment, but potential investors do need to pay attention to legitimate national security concerns. For the vast majority of foreign investors, including investors from China, the CFIUS review process is not an impediment. Greenfield investments do not require a CFIUS review. Most cross-border mergers and acquisitions do not require a CFIUS review. Most CFIUS reviews clear the transaction within 30 days. Only a handful of transactions have been abandoned as a result of national security concerns.

 

Reform of U.S. Export Controls May Be Coming 美国出口控制改革即将来临

中文请点击这里

Whenever the United States complains about its trade imbalance with China, China responds that it would buy more goods and services from the United States were it not for U.S. export controls that either prevent or restrict those purchases.  Export controls serve important national security and foreign policy goals and the United States will not be eliminating them any time soon.  Nonetheless, there has been a general recognition among U.S. industry and government officials that the present controls are more restrictive and cumbersome than they need to be. 

There have been many attempts at export control reform in the recent past, but those initiatives usually died in inter-agency squabbles.  The Obama Administration is determined to change that pattern through strong support for the reform process from the very top.  President Obama, during his State of the Union address on January 27, linked export control reform to economic recovery, stating:

Third, we need to export more of our goods. Because the more products we make and sell to other countries, the more jobs we support right here in America. So tonight, we set a new goal: We will double our exports over the next five years, an increase that will support two million jobs in America. To help meet this goal, we're launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security.

Another change from prior attempts at export control reform is that, according to statements made by Pentagon Press Secretary Geoff Morrell at a January 27 Pentagon press conference, the leadership of the Defense Department now is committed to working with other agencies and Congress "to make meaningful and lasting changes to our export controls."  Mr. Morrell noted that Defense Secretary Gates "believes that [export control reform] is imperative to keep our nation competitive in this global economy."  He further noted in response to questions that:

[W]hat is required here is not, you know, tinkering around the edges of what is a rather cumbersome, antiquated, outdated, bureaucratic set of rules and regulations governing the export of technology.  [Defense Secretary Gates] believes you need to conduct a wholesale reform of export controls, really starting with a blank sheet of paper. And ...he fully supports and is willing to go to bat for [the initiative of the President].

John Boehner, the Republican party leader in the U.S. House of Representatives, stated in a news conference on January 28 that he believes there could be bipartisan support for legislation to overhaul the export controls.  With the Defense Department and both political parties supporting reform, the chance for meaningful reform of the U.S. export control system may be greater now than it has been in many years.

Chinese companies should not expect a drastic loosening of restrictions on exports to China right away.  As President Obama noted in his State of the Union address, any reform of export controls must be consistent with national security. While administrative agencies and members of Congress are in principle in favor of eliminating unnecessary restrictions on exports, they also are sensitive to concerns that loosening of export controls, particularly with respect to China, might undermine national security.  We expect export control reform to go forward, but only in areas where a consensus is reached that a loosening of controls would not undermine national security.

One of the areas where export control reform may most increase the ability of Chinese companies to buy products from the United States is the commodity jurisdiction process, which determines whether a product or technology should be controlled as a "defense article" by the State Department under the International Traffic in Arms Regulations ("ITAR") or by the Commerce Department under the Export Administration Regulations ("EAR").  This jurisdiction issue is critical to whether a product can be exported to China because Congress has banned all products controlled under the ITAR from being exported to China.  By contrast, products subject to control under the EAR generally can be exported to China, often without the need for an export license. 

The commodity jurisdiction process currently is extremely cumbersome, which means that military controls often remain on technologies that may have been developed originally for the military long after these items have become predominantly commercial.  Reform of the commodity jurisdiction process could mean much greater opportunities for Chinese companies to buy U.S. products.

 

 

         每当美国抱怨对华贸易逆差,中国的回答总是如果美国出口控制没有阻碍、禁止向中国出口,中国将从美国购买更多产品和服务。出口控制是美国国家安全和对外政策的重要组成部分,短期内美国不可能完全取消这些控制。但是,美国产业界和政府都认识到现行出口控制不必要地限制出口、而且过于繁琐。

        近年来已经有多次改革尝试,但是在部门内部讨论中就夭折了。奥巴马政府决心通过给予最高领导层的支持以改变这一状况。奥巴马总统在1月27日的国情咨文演讲中把出口控制和经济复苏联系在一起:“第三,我们需要扩大商品出口。因为随着我们生产和出口的增长,美国人将获得更多就业机会。今晚,我们设立了一个新目标:我们将在未来五年里实现出口增长一倍,这将支持两百万美国就业机会。为达到这一目标,我们将实施全国出口创新计划,增加农业和小企业出口;同时在符合国家安全的前提下改革出口控制。”

         根据五角大楼发言人Geoff Morrell 在1月27日新闻发布会上的发言,与以往的出口控制改革不同,美国国防部领导人此次决心和其他政府部门及国会一起致力于实现“意义深远、效果持久的出口控制改革。”Morrell先生说国防部部长盖茨“相信迫切应当[进行出口控制改革]以确保我国在国际经济中的竞争力。”他在回答问题时进一步指出:“您知道这里需要的不是在繁琐、久远、过时、官僚的控制科技出口条规的外围转来转去。[盖茨部长]相信应当进行全方位改革,从白纸开始。同时,他完全支持并愿意[为总统的创新计划]挥棒。”

         共和党众议员领导人John Boehner在1月28日的新闻发布会上指出全面改革出口控制的提案将获得两党的共同支持。美国国防部和两党的支持使得实现有意义的出口控制改革更有可能。

        但是中国企业不应期待对华出口控制迅速放宽。正如奥巴马总统在国情咨文演讲中指出的那样,出口控制改革必须符合国家安全。虽然政府官员和国会成员原则上支持取消不必要的出口限制,但是他们也充分认可放宽出口控制将削弱国家安全的担忧,尤其是针对中国的担忧。我们预计出口控制改革将继续前进,但只在已就放宽出口控制不会削弱国家安全达成共识的领域。

        通过出口控制改革扩大对华出口的可操作领域之一就是改进商品管辖权过程。商品管辖权过程决定某一商品或技术究竟应当被视为“防卫品”因而应由美国国防部根据《国际武器贸易条例》进行管理,还是应当由美国商务部根据《出口管理条例》进行管理。管辖权问题决定这一商品是否可以出口到中国,因为美国国会禁止受《国际武器贸易条例》管辖的商品出口至中国。然而,受《出口管理条例》管辖的商品一般可出口至中国,而且大都不需要出口许可证。

        商品管辖权过程是非常繁琐的过程,它意味着那些为军事用途设计、但已主要运用于商业领域的技术仍然受武器控制管辖。对商品管辖权过程进行改革可给予中国企业更多购买美国商品的机会。