The Trump Administration and Congress are tightening investment restrictions and export controls to address technology transfer concerns. These measures initially focus on China, but will have broader effects on investments in the United States and transfers of emerging technologies.
The White House issued a statement on 29 May 2018 indicating that the Trump Administration intends to proceed with new investment restrictions and “enhanced export controls” targeting China. In response to an investigation conducted by U.S. Trade Representative Robert Lighthizer of Chinese technology transfer practices, the President in March directed Amb. Lighthizer to prepare tariffs on USD 50 billion in Chinese imports into the United States, and directed Treasury Secretary Steve Mnuchin to report to the President in May on the preparation of restrictions on Chinese investment in the United States. The White House statement of last week indicates that the investment and export control measures are to be announced by 30 June 2018, and “implemented shortly thereafter.” The Administration is apparently considering restricting a broader range of technology transfers than that related to defense or “dual-use” items, the traditional focus of US export controls. The White House statement speaks of “enhanced” controls for transfers of “industrially significant” technology. Such technologies could include areas in the “Made in China 2025” plan, such as information technology, robotics, aerospace, high-tech vessel and rail manufacturing, electric vehicles, agricultural machinery, biopharmaceuticals and medical devices.
The Administration will likely use the International Emergency Economic Powers Act of 1977, which is the statutory basis for most US sanctions programs. Rather than relying on transaction-specific approvals as with the existing system administered by the Committee on Foreign Investment in the United States (“CFIUS”), the Administration appears to be contemplating using the model of sanctions. In that case, persons subject to US jurisdiction would likely be prohibited from involvement in targeted China-related investments into the United States. Without an opportunity for CFIUS clearance, such an approach would shift much of the compliance risk to private parties.
Meanwhile, motivated by the same China technology concerns and supported by the Administration, Congress is finalizing legislation, the Foreign Investment Risk Review Modernization Act (“FIRRMA”), that would (1) expand the scope of national security reviews of foreign investments in the United States and make mandatory for the first time declarations for some foreign investments, and (2) require the Administration to assess and regulate “emerging” and “foundational” technologies under existing export controls. Although details are still being ironed out among legislators, Congress will likely pass legislation this summer requiring the Administration, led by the Commerce Department and assisted by the Defense Department, to assess emerging/foundational technologies to determine whether they should be subject to US export-control restrictions. The Commerce Department would also report to CFIUS every six months about its actions to control emerging/foundational technologies. At the moment, the Commerce Department imposes export controls on new technologies on an ad-hoc basis. As with current US export controls, FIRRMA-mandated technology controls are likely to vary depending on the countries involved, with those subject to US arms embargoes or economic sanctions being subject to more stringent restrictions than others. Once this process is implemented, some transfers of US technology to certain countries such as China that currently do not require an authorization from the Commerce Department may require an authorization (e.g., license exception; export license).
In light of the broader application of and the heightened scrutiny under the new legislation and other announced measures, companies should consider the following steps. First, companies should internally assess their intellectual property to determine and identify the assets potentially affected by the new laws. This assessment should identify registered technology such as patents and copyrights, but companies should also identify intellectual property represented by trade secrets, know how, licensing arrangements, employee agreements, joint ventures and other cooperative relationships. Second, as part of that identification, companies should take adequate steps to ensure the protection of these assets and that technology transfers are authorized under the strengthened regulatory regimes. In parallel, companies should stay current on developments in Congress and from executive departments such as Treasury and Commerce. FIRRMA may undergo further amendments before passage, and Treasury and Commerce will have to issue proposed rules for comment before finalization. There will be ongoing opportunities for companies to potentially impact these developments on a company specific or broader basis.
In short, while many eyes are currently on the tariff issues, companies with offshore business partners should be alert to the vigorous efforts being made in Congress and the Administration to restrict certain technology transfers. These US efforts are currently focused on China, but their scope will be broader once the new legislation from Congress is enacted and implemented.