As the US technology competition with China continues to intensify, the Trump Administration has taken another step to tighten the screws on China.
In late June, the US Department of Defense (DoD) made public a list of 20 Chinese companies that have been identified as “Communist Chinese military companies,” complying with a two-decade-old mandate that Congress issued during the Clinton Administration. The takeaway for companies, universities, and individuals is that they should proceed with caution and carefully conduct their due diligence when dealing with China.
The DoD List of “Communist Chinese Military Companies”
A) Under What Authority Was the List Published?
The list was published pursuant to Sec. 1237 of the FY1999 (Strom Thurmond) National Defense Authorization Act (NDAA) (PL 105–261), enacted on October 17, 1998, which required the DoD to publish a list in the Federal Register of “Communist Chinese military companies” that were operating in the United States (directly or indirectly), after consulting with the Department of Justice (DOJ), the Federal Bureau of Investigation (FBI), and the Intelligence Community. Sec. 1237 also required DoD to update the list annually.
The deadline for the initial publication of the list was mid-January of 1998, but DoD ignored this requirement until now. In September 2019, Senators Tom Cotton and Chuck Schumer and Congressmen Mike Gallagher and Ruben Gallego wrote to and requested from Secretary of Defense Mark Esper information on when the list of Communist Chinese military companies operating in the United States was last updated by DoD, and whether the Secretary of Defense would “commit to updating and publicly releasing this list as soon as possible[.]” In an apparent response to this letter, DoD for the first time released the list on June 24.
B) How Does Sec. 1237 Define Communist Chinese Military Company?
Sec. 1237 defines the term Communist Chinese military company as:
- any person identified in the Defense Intelligence Agency publication numbered VP-1920-271-90, dated September 1990, or PC-1921-57-95, dated October 1995, and any update of those publications for the purposes of this section; and
- any other person that: (i) is owned or controlled by the People’s Liberation Army; and (ii) is engaged in providing commercial services, manufacturing, producing, or exporting. Sec. 1237(b)(4).
The term “People’s Liberation Army” means the land, naval, and air military services, the police, and the intelligence services of the People’s Republic of China, and any member of any such service or such police.
This broad definition gives DoD a significant amount of discretion. The operative part of this section authorizes the President, once the list is published, to exercise powers under the International Emergency Economic Powers Act of 1977, 50 USC. § 1701 et seq. (IEEPA) to regulate or prohibit certain commercial activity within the United States involving one or more of the listed entities. So, in theory, the publication of this list could potentially lay the groundwork for the imposition of sanctions that would prohibit US persons from engaging in most US commercial activity with such entities.
C) Which Entities Are “Qualifying Entities?”
Below is a list of some of the “qualifying entities” that DoD designated and notified Congress about (entities marked with an asterisk are also on BIS’s Entity List):
- China Aerospace Science and Technology Corporation (CASC)*
- China Aerospace Science and Industry Corporation (CASIC)*
- China Electronics Technology Group Corporation (CETC)* (note: only the 13th, 14th, 38th, and 55th Research Institutes and CETC 29 are on the Entity List)
- China South Industries Group Corporation (CSGC)
- China Shipbuilding Industry Corporation (CSIC)
- China State Shipbuilding Corporation (CSSC)
- China North Industries Group Corporation (Norinco Group)
- Inspur Group
- Aero Engine Corporation of China
- China Railway Construction Corporation (CRCC)
- CRRC Corp.
- Panda Electronics Group
- Dawning Information Industry Co (Sugon)*
- China Mobile Communications Group
- China General Nuclear Power Corp.*
- China National Nuclear Corp.* (on BIS’s Entity List under “China National Nuclear Group Corporation (CNNC)”)
- China Telecommunications Corp.
D) Which IEEPA Authorities Can the President Exercise?
IEEPA is a federal statute enacted in 1977 that gives the President broad authority to regulate economic transactions after declaring a national emergency. The statute is intended to deal with an unusual and extraordinary threat to the national security, foreign policy, or economy of the United States, which has its source in whole or substantial part outside the United States. See 50 USC. § 1701(a). Once such a national emergency is declared, IEEPA authorizes the President to, among other things, investigate, regulate, nullify, prevent, or prohibit any transfer, withdrawal, transportation, importation or exportation of, dealing in, or other transactions involving any property in which any foreign country or a national thereof has any interest by any person, or with respect to any property, subject to the jurisdiction of the United States. See Id. at § 1702.
Section 1237 of the FY1999 Strom Thurmond NDAA both provides the President with added flexibility to invoke the IEEPA authorities and restricts the breadth of those authorities the President may use. Sec. 1237, in essence, replaces the national emergency declaration requirement and authorizes the President to exercise IEEPA authorities against a listed entity even if a related national emergency has not been declared. However, Sec. 1237 restricts the use of IEEPA powers to commercial activity within the United States (and not, for example, overseas activity of US companies) and also contains an exception for import-related transactions. Accordingly, Sec. 1237 is focused on export-related and other non-import commercial transactions in the United States involving a listed entity.
What Does All This Mean
Parties should continue to proceed with caution when engaging with Chinese entities and should conduct additional significant due diligence in relation to entities on DoD’s list. However, it is noteworthy that despite publishing the list itself, the Administration has not taken any further steps, such as identifying the applicable sanctions or publishing implementing regulations regarding Sec. 1237. Indeed, some additional step providing notice of the relevant sanctions is needed in order for any IEEPA-based restrictions to take effect.
In addition, the Treasury Department usually plays a key role in the imposition of sanctions under IEEPPA authority, even though Sec. 1237 of the FY1999 Strom Thurmond NDAA does not specifically delegate authority to (or even mention) the Treasury Department. Treasury Secretary Steven Mnuchin has reportedly opposed the use of economic sanctions against Chinese entities in most situations, so aggressive sanctions against these listed Chinese entities seem unlikely in the near term. Therefore, for now, the practical effect of the list may be limited to a “naming and shaming” of the listed Chinese entities, aimed at putting other companies on notice that these specific entities are now in the US Government’s crosshairs, thereby discouraging others from conducting business with them.
Of course, tensions between the US and China have continued to build in recent weeks, and the DoD list could become part of the fray. Because the parameters for listing a “Communist Chinese military company” under Sec. 1237 are quite open-ended (including any company “controlled” by the Chinese military and engaged in manufacturing or related activities), it is entirely possible that the Trump Administration could use this tool to cast a shadow on additional Chinese entities in the coming months. At the very least, the updating of this list is supposed to be annual, and Congress is now watching closely to ensure that it happens. So, new Chinese entities may be added to the list each year – or more frequently – potentially setting the stage for adverse action against them at a later date (perhaps under a future Treasury Secretary or in a future Administration).
Moreover, being flagged by the Defense Department as a “Communist Chinese military company” also creates new risks for listed Chinese entities that they could be singled out by Congress for punishing restrictions, as Congress did in Section 889(a)(1)(B) of the FY2019 NDAA, which is now being implemented. This provision prohibits government agencies from entering into a contract (or extending or renewing a contract) with an entity that uses equipment, systems or services from certain covered Chinese entities (which includes Huawei, ZTE, Hytera, Dahua, and other entities reasonably believed to be connected to the government of the People’s Republic of China). The publication of DoD’s list of Communist Chinese military companies may effectively paint a congressional bullseye on these newly listed entities for potentially similar treatment in future legislation.
Due to the potential far-reaching nature of the new DoD list, both US and foreign companies should continue to monitor developments in this area and seek expert advice to avoid pitfalls.