China Containment Through Export Pressure on Allies
by Dan Minutillo, Partner
International Trade Law
Starting in 2022 and continuing through 2023, the US Government pressured many allied countries, particularly Japan and the Netherlands, to minimize the exchange of technology and equipment with China used to enhance or create semiconductors. Minimizing this exchange with China remains an American international trade policy. The US globally promoted this policy, hoping for voluntary compliance, particularly by allies, but determined that an incentive would speed compliance, as discussed in this blog.
The US exerted pressure on Japan and the Netherlands to adopt its no-China policy because these two countries are US allies and, more importantly because companies in these countries develop sophisticated artificial intelligence and encryption hardware and software that could benefit the development of high-performance semiconductors in China. In particular, the US wants to thwart the exchange of technology with China related to machinery used to produce high-speed computer chips, lasers, and adoptable firmware. These restrictions on doing business with China will help the US stay ahead of China regarding computer speed, chip efficiency, and military capability that relies on hardened and high-performing chips.
Many US allies have publicly proclaimed a willingness and have established related policies to align with US export regulations regarding China. These allies have adopted prohibitions on China as specified by US export law and policy directives related to semiconductors. The only stumbling block to date is restricting memory chips to China. Many US allies are unwilling to consider this restriction even though the US prefers including memory chips in its no-China policy.
DE MINIMUS RULES
To promote these restrictions, the US provides preferred status to countries that align their export policies with the US. The US uses “de minimis” content regulations to incentivize its allies to adopt US export policies.
HOW DOES THIS WORK?
Under the US export de minimis rule, a controlled foreign product or component in that product is subject to the Export Administration Regulations (EAR) if that product contains more than a specific percentage of US-origin content (known as the de minimus rule).
Japan, for example, has aligned its export regulations regarding China with the US. Therefore, even if a product exported from Japan is included in one of the restricted categories above mentioned, and that item contains US-origin components, it can be exported from Japan without a US export license, although controlled under the US EAR, normally requiring a US license on re-export from Japan.
On the contrary, if a country does not adopt US export laws applicable to China regarding these categories of products and technology, the US will claim authority and jurisdiction over the export even if the product contains as little as 10 percent US-origin technology or components. In other words, the US will maintain jurisdiction over an exported product (a US export license might be required on re-export) even though there is a small amount of US content in that product for countries that do not adopt US export rules and policies regarding semiconductors and China. For the purpose of this blog, re-export means that a product or technology has been exported from the US to a company in country X and then re-exported to a company in country Y. Enforcement of the US de minimus rule is a big stick considering the long arm of US export enforcement agencies and the potentially severe accompanying penalties for violating US export law.