This week, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) imposed significant export restrictions on ZTE Corporation, a major Chinese manufacturer of telecommunications equipment and systems, along with ZTE Kangxun Telecommunications Ltd. (China), Beijing 8-Star International Co. (China), and ZTE Parsian (Iran). The sanctions stem from an alleged scheme by ZTE to violate U.S. export controls by establishing and using “detached” shell or front companies to reexport items subject to the U.S. Export Administration Regulations (EAR) to countries sanctioned by the United States.
The new restrictions prohibit exports, reexports, and transfers (in-country) of any items subject to the EAR to these entities, along with any other transaction in which these entities act as a purchaser, intermediate consignee, ultimate consignee, or end-user of items subject to the EAR, without a BIS license. These prohibitions are causing waves in the United States and China, as they prohibit the provision of even common, off-the-shelf EAR99 and other low-technology electronic components and commercial software to ZTE.
While there is a limited savings clause for shipments that were en route aboard a carrier to the named entities pursuant to actual orders on the effective date of the new rule (March 8, 2016), there is no other safe harbor that would allow a company to fulfill open orders or existing contracts with ZTE. Further, although companies can apply for export licenses to provide goods, services, or technology to ZTE, license applications generally will be subject to a policy of denial, and no EAR license exceptions will apply to transactions with ZTE.
While BIS’s new restrictions have already had a significant immediate impact on exporters’ operations, industry would likely do well to brace itself for still more aftershocks to be felt in the coming weeks and months. We may even see a response from the Government of China, which is certainly no stranger to retaliatory action.