How to avoid becoming collateral damage in the US-China “tech war”

  • United States
  • 09/19/2019
  • whitecase

Over the past ten years, the United States has increased its focus on the Chinese technology industry as a national security matter and a key issue in trade dealings. Most recently, this focus is evident in the US-China trade negotiations and in the US government’s high-profile actions against ZTE, Huawei and others on China-related issues.

The “weapons” on the US government’s side of this battle include export controls, economic sanctions, foreign investment review and other trade restrictions:

Export controls are licensing requirements for items subject to US export jurisdiction, including certain items made outside the US, based on their destination, end user or end use. New export controls on certain “foundational” and “emerging” technologies are under development
Economic sanctions are prohibitions on dealings with certain targeted persons, countries and regions that have a direct or indirect connection to the US (in some cases, even without a US nexus)
Foreign investment review means the US government can reject or require divestment of foreign investment in US businesses on national security grounds and can impose “mitigation measures” as a condition of approving foreign investments
The US is locked in a protracted “trade war” with China that has resulted in numerous rounds of tariffs on Chinese goods. In addition, the US may restrict imports on telecommunications technology from “foreign adversaries”
With so much at stake, what can Taiwanese businesses do to protect themselves from US export controls, economic sanctions and similar issues?

As the US expands its playbook and takes an increasingly combative approach to trade, you can decrease your company’s risk of becoming collateral damage in the US-China tech war by taking proactive steps to comply with applicable US laws. As an added benefit, it can also increase your marketability as a reliable trade partner.

Here’s where to start:

KNOW WHERE YOU STAND
Companies of all industries, sizes and nationalities have been caught in the crossfire of the US-China tech war. Regardless of your location, to defend against fallout from the US-China conflict, you need to know how it can impact your business.

Start by examining the extent of your exposure to the US and Chinese markets:

Exposure to the US market—Is your supply chain dependent on US technology or components? Are you considering investment (direct or indirect) into the US?
Exposure to the Chinese market—Who are your customers? Do your customers indirectly rely on US-origin goods or technology for their products?
Undertake this evaluation before you become a casualty of the conflict: for example, by suddenly losing access to your US supply chain. A wait-and see approach to compliance with US law can be costly.

EVALUATE YOUR RISKS Once you understand your exposure to the US and Chinese markets, evaluate where you could face risks. Effective protective measures will require a full understanding of your risk profile to calibrate an appropriate compliance response. Most of the US-China tech war’s “weapons” depend on a connection to the US.

Initial risk factors to consider include:

Whether and how you use US-origin goods or technology, including intellectual property
Whether your products contain US-origin components, software or technology
Whether your transactions are denominated in US dollars
Your plans for future investments into the US
The next set of risk factors to evaluate is whether your business involves Chinese counterparties subject to US scrutiny. These include Chinese counterparties that are:

Designated on a US restricted parties list (e.g., Huawei)
Involved in military or defense activities
Involved in drone development or manufacturing
Involved in artificial intelligence or surveillance technology development or manufacturing
And although US restrictions can apply regardless of your industry, consider whether you operate in any “targeted” higher-risk areas, such as:

Semiconductors and integrated circuits—This sector is a flashpoint of the US-China tech war
Telecommunications/5G—The US maintains that 5G network infrastructure poses a national security concern
Emerging and foundational technologies—Technology areas that pursue global research and development in particular face possible US export controls
Artificial intelligence
Quantum computing/Supercomputing
Drones/Unmanned aerial vehicles

SET UP COMPLIANCE PROGRAMS AS DEFENSIVE MEASURES
You can mitigate your risk exposure by implementing a US economic sanctions and export control compliance program. A properly executed compliance program could save you significant costs, such as loss of suppliers or customers, as well as possible civil and criminal penalties.

Robust corporate compliance programs that lead to fewer or less stringent US actions generally contain these key elements:

Management commitment
Policies to comply with applicable laws
Procedures to administer and enforce the policies, acknowledging concepts such as “Know Your Customer” diligence, export classification and licensing, and recordkeeping
Routine audits to identify and correct deficiencies
Ongoing training of relevant personnel
There is no one-size-fits-all program. Rather, you should tailor an effective compliance program to your business and risk profile, including by working with US lawyers to develop and implement appropriate compliance systems.

PROACTIVELY MONITOR
The US-China tech war is developing rapidly, driven by political considerations against the backdrop of a relatively unpredictable US administration.

This means that Taiwanese companies should consider a proactive approach to monitor and, as needed, engage in this shifting landscape. A few tools can provide useful support in these uncertain times:

Media coverage—The media, including social media, widely reports on breaking developments in the US-China tech war
Industry association—Members often receive real-time information and a platform for US government outreach and engagement
Governmental relations consultants (lobbyists)—These consultants often provide insight into US government policies and upcoming actions, as well as formal engagement with policymakers. They may be required to register publicly in the US