On August 30 AmCham Shanghai released its latest Viewpoint report on how to reappraise American export controls for a new era of U.S.-China competition. The report will be brought on AmCham Shanghai’s annual Doorknock delegation visit to Washington D.C. in September and presented to the Trump administration and Congress. The key findings are as follows:

Executive Summary

New technologies and shifting market and political forces are leading many countries to reevaluate their export control regimes. In July 2019 AmCham Shanghai spoke with the export and trade compliance managers, executives, consultants and supply chain managers of 16 of our member companies regarding the recent changes to the United States Department of Commerce’s Export Administration Regulations (EAR) and their corresponding negative effects on their respective businesses and industries in China. AmCham Shanghai worked with these companies to identify definitive industry impacts resulting from the recent changes to 1) the Entity List, 2) the Unverified List (UVL), and 3) the proposed rules on emerging and foundational technologies. Our interviewees argued that U.S. export control regulations are confusing and burdensome, and often place U.S. business entities at a competitive disadvantage while not substantially protecting U.S. national security and foreign policy interests. Several major areas of negative impact were identified and are detailed below. 

Loss of Revenue. The companies confirmed significant losses in revenue through canceled orders and lost sales as current customers and future sales prospects were included on either the Entity List or UVL. Specific sectors such as the semiconductor industry were particularly hard hit. 

Reputational Damage. U.S. regulatory restrictions preventing certain U.S. companies from competing in China, or otherwise impeding the ability to do so, result in reputational damage which easily spreads to all U.S. entities operating in China. The American reputation for reliability and trustworthiness is the cornerstone of American commercial competitiveness in China. This reputation is diminished with every blocked contract, sale, or delivery, undermining Chinese consumer confidence in U.S. imports. 

Unilateralism Harms Competitiveness. A unilateral approach to export control is ineffective. Chinese consumers can source many blocked items from non-U.S. sources. Ironically, unilateral control may accelerate China’s development of emerging technologies through nationalization and the strengthening of local industries in mainland China. 

Politicization of National Security Damages Trust. The U.S. actions against Huawei have become overly politicized, causing a widespread perception in China that the U.S. is shrouding its true intentions — to use Huawei as a political cudgel or bargaining chip — behind a veneer of national security. This has resulted in a breakdown of trust between American suppliers and Chinese customers. 

Legal Opacity. The constant revision of Huawei-related restrictions creates a compliance minefield for U.S. companies. U.S. companies must continuously consult legal counsel or outside consultants, often at great expense, to ensure the correct implementation and modification of compliance procedures to ensure adherence with U.S. regulations. Some also expressed growing frustration over a perceived increase in difficulty in obtaining U.S. Commerce export licenses to China for certain sectors such as semiconductors. 

Policy Announcements too Sudden. New export control policies are often announced without warning or substantive guidance, depriving industry of the time necessary to analyze, develop and implement new compliance procedures. This not only exposes industry partners to increased compliance risk, but weakens U.S. national security and policy goals, through the rushed implementation of partial, inadequate, unproven and potentially ineffective procedures and practices. License 

Processing too Long; Review Times too Short. Department of Commerce review times for license applications necessary to continue supplying companies such as Huawei are overly protracted. Onerous documentation requirements and an unrealistically short response window for Bureau of Industry and Security (BIS) to verify the bona fides of certain Chinese entities results in too many Chinese entities being unnecessarily added to the UVL.

 

Recommendations

Preparing New Regulations

• Regulations centered on emerging and foundational technologies should be tailored to avoid unwarranted restrictions. Only truly sensitive technologies should be targeted.
• Partner with industry where possible to build better understanding and consensus regarding potentially targeted technologies and their current availability world-wide.
• Reward companies that have strong compliance programs with certain exceptions to the normal requirements of the EAR, like the ability to use license exceptions or a streamlined export licensing process.  
• Consider rewarding companies with verified strong compliance programs with additional exceptions pursuant to the EAR to conduct business without a license, such as the ability to use license exceptions or a streamlined export licensing process. Due diligence investigations by industry regarding the verification of end-user(s) is often more thorough than similar verification checks performed by BIS.

 

Regulation Implementation

• New regulations on emerging and foundational technologies should not be a standalone endeavor but should involve partnership with allies and signatories to existent multilateral control regimes.  
• Consider industry impact of placing companies on the Entity List and allow a comment period for industry consultation. Targeted Chinese entities are often able to source from other suppliers worldwide, unduly punishing U.S. commercial interests while failing to enforce the desired security or policy concerns.
• Alert industry to major policy changes and allow companies an adequate timeframe to enact the necessary policy changes to ensure effective compliance.

 

Lessening the Compliance Burden  

• Ensure BIS is adequately staffed thus ensuring license applications are processed effectively and in a timely manner.  
• Ensure that both openness and transparency are maintained to the greatest degree possible.
• Invest further in U.S. commercial competitiveness with more funding to critical industries. The Chinese government currently invests far more than the U.S. government does in industries like AI. One of the best ways to safeguard national security is by strengthening U.S. commercial interests abroad.

 

The full report can be downloaded from our publications page.