On 15 May 2019 President Trump signed an Executive Order on Securing the Information and Communications Technology and Services Supply Chain (the “Executive Order”). This is a legal directive issued by the President. The day after the Executive Order, the US Department of Commerce issued a draft notice adding Huawei, and a number of its group companies (60+) to a blacklist for export in the Export Administration Regulations (“EAR”).
What does this mean?
The combined effect of the Executive Order and the EAR prevents the export of products, software or components from the US to Huawei. Many US companies such as Google have stated that they will be unable to supply Huawei. Other companies with a US and UK presence such as RedHat and ARM, have reportedly made plans to halt supply to Huawei too.
In early July 2019, the US Department of Commerce stated that it will issue licenses to allow the supply to Huawei, where there is no threat to US national security. There is no presumption of licenses being granted, this is at the Department’s discretion. This relaxation doesn’t change the Executive Order or EAR terms – Huawei and its subsidiaries, still remain on the blacklist.
The details of the Executive Order
The Executive Order bans transactions by any person or property, subject to US jurisdiction, in which a foreign country or foreign national has any interest (including an interest in a contract for services); and the Secretary of Commerce determines that the transaction:involves technology/services of persons controlled by or subject to the jurisdiction of a foreign adversary; and
- involves technology/services of persons controlled by or subject to the jurisdiction of a foreign adversary; and
- poses an undue risk of sabotage/subversion or catastrophic effects on critical infrastructure or another unacceptable risk. Full details of the Executive Order are here:
The Export “blacklist”
The export control “blacklist” now includes a number of Huawei entities which are located in various jurisdictions.
The “blacklist” covers exports and re-exports, so any distribution arrangement that features the US (even if the products are only temporarily in the US) could be affected. For example, if a distributor takes a product to the US and then re-exports it to Huawei inside/outside of the US it would be caught. It is thought that even the return to Huawei of non-US origin equipment that had been physically located in the US would be banned.
The “blacklist” was followed up by a 90-day licence – as a transitional measure to limit disruption to existing networks and handsets.
How can this restriction apply to UK companies which supply Huawei?
The EAR can apply to UK companies which supply Huawei on the basis of the “follow the part” doctrine. US government authorities have brought enforcement actions against foreign persons for violations of the EAR. For example, in Petrochemical Commercial Co. Ltd, the Bureau of Institute & Security (BIS), a US government authority charged an English company with aiding the solicitation of US origin compressor parts to Iran even though none of the English company’s actions happened in the US.
A de minimis exception applies if the proportion of the US-made components is below a threshold based on the value of the product. This is a complex calculation and specific advice should be sought, but the test involves comparing the value of the US controlled component in relation to the overall value of the UK product being delivered to Huawei. As a rule of thumb, if the US components value is less than 25% of the overall value, then this is likely to be viewed as de minimis. Any US controlled component would require a license for export to the designation for the foreign made product. This component aspect of the ban is actually having a big impact on a number of international technology companies, who despite not necessarily being in the US or supplying to the US, are still being forced to suspend supply of products and services to Huawei due to a higher than minimal percentage of US controlled components.
What does this mean for you?
If you are a business that’s supplying or buying from Huawei or other affected companies you should review your supply chain contracts. Check the warranties, force majeure and termination provisions in any contracts to see if any changes need to be made such as to clarify that supply can be paused if there is a government ban in place prohibiting supply to Huawei. Likewise make sure your template contracts have this flexibility included for future situations.
What happens now?
As we have seen recently, the Secretary of Commerce has exercised its discretion to issue licences to create exceptions to the ban under the Executive Order where there is no threat to US national security. It’s possible further regulations and licensing could be applied as the talks between China and the US continue.
We advise that all relevant businesses monitor developments in this area including whether the US approach is adopted in the UK, EU member states or elsewhere.
How can Steer & Co support your business?
We advise many technology and digital businesses who supply products and services internationally, including those who supply to, or who buy from Huawei. We have given specific advice to various clients on whether the Executive Order applies to their products and/or services and the impact on future sales, contract and supply considerations. This has included advice on supply chain implications and related contractual obligations.
We can help you to assess how the Executive Order applies to your business and products and review and amend contracts to plan for the impact of this and future restrictions.
Please contact Rebecca Steer on Rebecca.firstname.lastname@example.org.
90 Days Licence
Partial relaxation of blacklist