On September 15, 2022, the Department of the Treasury issued a Determination pursuant to E.O. 14071 that prohibits the exportation, reexportation, sale, or supply, directly or indirectly, from the United States, or by a U.S. person, wherever located, of quantum computing services to any person located in the Russian Federation. This determination will take effect on October 15, 2022, and excludes: (i) any services provided to an entity located in Russia that is owned or controlled by a U.S. person, or (ii) any services related to the wind-down or divestiture of an entity located in Russia that is not owned or controlled by a Russian person. In conjunction with this determination, the Office of Foreign Assets Control (OFAC) issued a related Determination pursuant to E.O. 14024, which allows for sanctions to be imposed on any individual or entity determined to operate or have operated in this sector of the Russian Federation economy. Any such sanctioned individuals or entities will be placed on one of the OFAC sanctions lists.

In a series of new FAQs, OFAC states that the definition of the quantum computing sector of the Russian economy includes “activities related to products and services in or involving the Russian Federation in research, development, manufacturing, assembling, maintenance, repair, sale, or supply of quantum computing, quantum computers, electronic assemblies thereof, or cryogenic refrigeration systems related to quantum computing.” OFAC interprets this term to include any of the following services when related to quantum computing: infrastructure, web hosting or data processing services; custom computer programming services; computer systems integration design services; computer systems and data processing facilities management services; computing infrastructure, data processing services, web hosting services, and related services; repairing computer, computer peripherals, and communication equipment; other computer-related services; as well as the exportation, reexportation, sale, or supply, directly or indirectly, of quantum computing, quantum computers, electronic assemblies thereof, or cryogenic refrigeration systems related to quantum computing to or from the Russian Federation.

Finally, OFAC has amended several other FAQs which have previously been published regarding earlier Treasury determinations about accounting, trust and corporate formation, and management consulting services in the Russian Federation. These FAQs have been revised to include and be responsive to the new determinations covering quantum computing services.

On September 14, 2022, the plaintiff group in the ongoing China Section 301 tariff refund litigation before the Court of International Trade (CIT) filed its comments in response to the USTR’s remand explanation.  The comments highlight that the CIT offered the USTR a final opportunity to explain its rationale and reasoning as to why it “rejected the 9,000+ comments it received” and that such an explanation could not offer rationales that were not already on or supported by the existing record.  The plaintiff group argued that “USTR’s response to that directive flunks the Court’s test”.  The comments call out (1) the USTR’s focus on immaterial issues that only address why it removed certain products from the list, (2) the impermissible post hoc nature of the remand and/or reliance on Presidential direction, and (3) the USTR’s failure to meaningfully respond to interested parties’ comments during the underlying process that raised fundamental objections to the List 3 and List 4 tariff actions, which rendered those tariff actions arbitrary and capricious and which the USTR cannot rectify now without taking entirely new agency action.  Overall, the plaintiff group’s comments argue that the USTR’s remand explanation offers “zero contemporaneous evidence, from the administrative record or otherwise, that it meaningfully grappled with those substantial comments at the time Lists 3 and 4A were developed.”  For these reasons, the plaintiff group argues, the List 3 and List 4 tariffs should be vacated and the paid duties should be refunded.

See Update of August 2, 2022 for more details on the USTR’s Remand Results explanation, and Update of April 6, 2022 for the CIT’s decision directing such further explanation.  The government defendants now have the opportunity to file a response to the September 14 filing, which is currently due October 28, 2022.  The plaintiff group will then be able to file a final reply, which is currently due November 14, 2022.

On September 9, 2022, the United States and the Indo-Pacific Economic Framework (IPEF) partner countries – Australia, Brunei Darussalam, Fiji, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand and Vietnam – announced they had reached consensus on ministerial statements for each of the four IPEF framework pillars: Trade, Supply Chain, Clean Economy, and Fair Economy.

The IFEP was launched in May 2022 (see Update of May 24, 2022) to “advance resilience, sustainability, inclusiveness, economic growth, fairness, and competitiveness for [the partners’] economies” by adopting “a modern economic arrangement.” At the conclusion of this ministerial meeting, U.S. Trade Representative Katherine Tai stated, “This meeting was a chance to deepen our partnerships and fill in the details about how we will work collectively to address the challenges and opportunities that will define the 21st century.”

The formally adopted Ministerial Statements for the four pillars are summarized below, with links available to each statement:

  1. Pillar I (Trade) – IPEF partners will seek high-standard provisions in areas that are foundational to resilient, sustainable, and inclusive economic growth, including labor, environment, digital economy, agriculture, transparency and good regulatory practices, competition, inclusivity, trade facilitation, and technical assistance and economic development. The IPEF partners intend to advance digital trade by building an environment of trust and confidence in the digital economy, by addressing discriminatory practices, and by promoting trusted and secure cross-border data flows. They will also seek to advance food security and sustainable agricultural practices and the benefits of good regulatory practices in supporting good governance while working towards establishing best practices for facilitating trade.
  2. Pillar II (Supply Chain) – IPEF partners will seek to coordinate actions to mitigate and prevent future supply chain disruptions and secure critical sectors and key products for their manufacturers. The countries will work to identify sectors and products critical to national security, economic resilience, and the health and safety of their citizens. Partners will identify sole sources and choke points in critical supply chains, and work to address them by promoting and supporting investments in new physical and digital infrastructure. The countries will use data to improve supply chain logistics and invest in new training and development opportunities to upskill workers, and will seek to ensure labor standards that underpin fair, sustainable, and resilient supply chains.
  3. Pillar III (Clean Economy) – IPEF partners will seek to expand investment opportunities, spur innovation, and improve the livelihoods of citizens as they seek clean energy resources and address substantial carbon sequestration potential. This effort will include climate-friendly technologies, as well as mobilize investment and promote usage of low- and zero-emissions goods and services. This work will be part of a future-oriented effort to enhance energy security and reduce overall greenhouse gas emissions.
  4. Pillar IV (Fair Economy) – IPEF partners will seek to level the playing field for businesses and workers within partner countries by preventing and combatting corruption, curbing tax evasion, and enhancing transparency, recognizing the importance of fairness, inclusiveness, the rule of law, accountability and transparency. By innovating and strengthening shared approaches to implementing anticorruption and tax measures, the countries will seek to improve the investment climate and boost flows of commerce, trade and investments among their economies while advancing a free, open and prosperous Indo-Pacific region.

As expected, India opted out of Pillar I (Trade) for unstated reasons but will participate in further negotiations on the remaining three framework pillars. Ambassador Tai indicated that the negotiations will next focus more specifically on developing initiatives for each pillar and will include seeking input and discussion from stakeholders, trading partners, and the U.S. Congress.

On September 8, 2022, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued a revised Russia-related General License (GL) 13B, “Authorizing Certain Administrative Transactions Prohibited by Directive 4 under Executive Order 14024,” which states that U.S. persons are authorized to pay taxes, fees, or import duties and purchase or receive permits, licenses, registrations, or certifications, to the extent such transactions are prohibited by Directive 4, provided such transactions are ordinarily incident and necessary to such persons’ day-to-day operations in the Russian Federation. Directive 4 prohibits any transaction involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, or the Ministry of Finance of the Russian Federation, including any transfer of assets to such entities or any foreign exchange transaction for or on behalf of such entities.

The only revision to this GL is the extension of time for such authorizations. Originally set to expire on September 30, the effectiveness of this GL has been extended until December 7, 2022. Certain dealings remain unauthorized under this general license and therefore require close analysis.

In the latest effort to address Russia’s invasion of Ukraine, on September 2, 2022, the G7 Finance Ministers issued a statement confirming their intention to finalize and implement a price cap with respect to Russian-origin oil. As described, the plan would implement a comprehensive prohibition of services which enable maritime transportation of Russian-origin crude oil and petroleum products globally – the provision of such services would only be allowed if the oil and petroleum products are purchased at or below a price (“the price cap”) determined by the coalition of countries adhering to and implementing the price cap.

The G7 leaders announced that they intend to seek a broad coalition in order to maximize the effectiveness of any price cap, and reaffirmed their intent to phase out Russian oil from their domestic markets. According to the statement, the initial price cap “will be set at a level based on a range of technical inputs and will be decided by the full coalition in advance of implementation in each jurisdiction.” The price cap will be “publicly communicated in a clear and transparent manner” and its “effectiveness and impact will be closely monitored and the price level revisited as necessary.”

This is an initial announcement and the price caps have not yet been implemented. The Department of the Treasury’s Office of Foreign Assets Control (OFAC) is expected to publish preliminary guidance on the implementation of the price cap later in September 2022. The preliminary guidance will provide a high-level overview of this mechanism, including how U.S. persons can comply, in advance of formal guidance and legal implementation.

On September 2, 2022, the Office of the United States Trade Representative (USTR) confirmed, as part of its statutory four-year review process under the Trade Act of 1974, that (1) domestic industry representatives benefiting from the tariff actions in the Section 301 investigation of China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation have requested continuation of the tariffs and (2) the tariffs will continue and may be subject to further modifications, including any modifications resulting from the review.

In the Federal Register notice, the USTR indicated that it received numerous requests to continue the July 6, 2018 (List 1) and August 23, 2018 (List 2) trade actions. To ensure comprehensive coverage in its review, the USTR also considered the List 3 and List 4A modifications as applicable to both the July 6, 2018 action and the August 23, 2018 action. For the July 6, 2018 action, requests were submitted by a range of domestic industries, including 244 requests from domestic producers and 44 requests from trade associations. For the August 23, 2018 action, requests were also submitted by a range of domestic industries, including 114 requests from domestic producers and 32 requests from trade associations.

With this determination, the USTR will continue its review of the July 6, 2018 and August 23, 2018 tariff actions and will soon publish a separate notice concerning this review process. The process will include a period for interested persons to submit further comments on, among other matters, the effectiveness of the actions in achieving the objectives of the investigation, other actions that could be taken, and the effects of such actions on the U.S. economy. For more details on the initiation of these reviews, see May 3, 2022 Update.

On August 19, 2022, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued two Russia-related General Licenses (GL) authorizing certain limited activities with Russian financial institutions which have been blocked and designated on the Specially Designated Nationals (SDN) List.

Placement on the SDN List results in all property and interests in property of the designated party that are in the United States or in the possession or control of U.S. persons being blocked. In addition, all transactions by U.S. persons or within (or transiting) the United States that involve any property or interests in property of designated or otherwise blocked persons are prohibited unless authorized by a general or specific license issued by OFAC, or exempt. The below GLs authorize certain transactions which would otherwise be prohibited under OFAC sanctions.

OFAC has revised GL 38 which authorizes all transactions ordinarily incident and necessary for the processing of pension payments to U.S. persons via certain OFAC-blocked financial institutions. Revised GL 38A expands the scope of this license and now also authorizes the processing of such payment to non-U.S. persons not located in Russia via OFAC-blocked financial institutions.

OFAC has also issued GL 50 which authorizes all transactions ordinarily incident and necessary to (i) the closing of an account of an individual, wherever located, who is not a designated and blocked person (“the account holder”), held at certain OFAC-blocked financial institutions, and (ii) the unblocking and lump sum transfer of all remaining funds and other assets in the account to the account holder, including to an account of the account holder held at a non-blocked financial institution.

Certain dealings are specifically not authorized under these general licenses, and therefore they require close analysis.

On August 16, 2022, the Department of Commerce’s Bureau of Industry and Security (BIS) issued several new Frequently Asked Questions (FAQ) addressing potential red flags for diversion concerns.

Regarding semiconductor foundries, one FAQ asks if there any special red flags that should be considered with regard to parties (e.g., integrated circuit designers) on the Entity List. The response indicates that the “receipt of new design files from a new customer present a red flag if similar designs have been received from a company on the Entity List in the past. Foundries should consider screening any software design files (e.g., GDSII software files) they receive against their library of previously received design files to determine if any of these software files approximate or match the designs they have on file from a party on the Entity List.” BIS also notes that parties should consider scenarios presented under BIS’s Know Your Customer guidance.

A series of FAQs ask about commodities potentially diverted to restricted Russian or Belarussian companies. In response, BIS states that the following items and Export Control Classification Numbers (ECCNs) are of special concern because of their potential military applications and potential diversion to Russia and Belarus:

  • Aircraft Parts and Equipment – ECCN 9A991
  • Antennas – ECCN 7A994
  • Breathing Systems – ECCN 8A992
  • Cameras – ECCN 6A993
  • GPS Systems – ECCN 7A994
  • Inertial Measurement Units – ECCN 7A994
  • Integrated Circuits – ECCN 3A001, 3A991, 5A991
  • Oil Field Equipment – ECCN EAR99
  • Sonar Systems – ECCN 6A991
  • Spectrophotometers – ECCN 3A999
  • Test Equipment – ECCN 3B992
  • Thrusters (Marine) – ECCN 8A992
  • Underwater Communications – ECCN 5A991
  • Vacuum Pumps – ECCN 2B999
  • Wafer Fabrication Equipment – ECCN 3B001, 3B991
  • Wafer Substrates – ECCN 3C001 through 3C00

These Russia-related FAQs offer examples of potential red flags of attempts to evade Russia/Belarus sanctions by “illicit actors” who will engage “complicit shippers (or customs brokers)” to obscure a shipment to evade U.S. export controls. BIS examples of such red flags include, but are not limited to, transactions involving entities with little to no web presence; transactions associated with atypical shipping routes for a product and destination; export transactions involving non-U.S. parties that have shared owners or addresses with Russian state-owned entities or designated companies; transactions involving freight-forwarding firms that are also listed as the product’s final end customer, especially items going to traditional Russian transshipment hubs; and transactions involving consolidated shipments of luxury goods that previously would have been destined for Russia or Belarus, but are now destined for a transshipment country or a country without restrictions on exports/re-exports to Russia or Belarus.

BIS has identified several countries as possible transshipment points in efforts to evade these sanctions. They include, but are not limited to, Armenia, Brazil, China, Georgia, India, Israel, Kazakhstan, Kyrgyzstan, Mexico, Nicaragua, Serbia, Singapore, South Africa, Taiwan, Tajikistan, Turkey, United Arab Emirates (UAE), and Uzbekistan.

On August 17, 2022, the Office the U.S. Trade Representative announced that formal negotiations have commenced with Taiwan on the United States-Taiwan Initiative on 21st Century Trade. This trade initiative was first announced in June 2022 as an effort to “deepen the economic and trade relationship, advance mutual trade priorities based on shared values, and promote innovation and inclusive economic growth for our workers and businesses.” See Update of June 2, 2022.

The United States and Taiwan, under the auspices of the American Institute in Taiwan (AIT) and the Taipei Economic and Cultural Representative Office in the United States (TECRO), have now reached consensus on the negotiating mandate for this trade initiative that establishes the broad objectives for negotiations. The agenda and mandate for negotiations will include discussions on trade facilitation, good regulatory practices, strong anti-corruption standards, enhancing trade between small and medium enterprises (SMEs), deepening agriculture trade, removing discriminatory barriers to trade, digital trade, robust labor and environmental standards, and ways to address distortive practices of state-owned enterprises and non-market policies and practices.

On August 2, 2022, the Treasury Department, as the lead agency of the Committee on Foreign Investment in the United States (CFIUS), released a public version of its annual report to Congress regarding foreign direct investment in the United States.  Assistant Secretary for Investment Security Paul Rosen stated, “This year’s Annual Report demonstrates that CFIUS is reviewing a record number of transactions and taking important and necessary measures to safeguard national security, while also quickly clearing benign investments.”  Key highlights from the 2021 report include:

  • CFIUS reviewed a record number of covered transactions, including 272 full notices and 164 declarations.
    • Regarding full notices, of the 272 filings, 130 moved into the second phase investigation after the initial 30 day review period.  Nine transactions were withdrawn by the parties after CFIUS informed the parties that it could not identify mitigation measures that would resolve its national security concerns, or it proposed mitigation measures that the parties chose not to accept.
    • Regarding the declarations, CFIUS cleared 120 with no action, while the parties to 30 transactions were directed to file full notices; for 12 of the declarations CFIUS was unable to conclude actions, and CFIUS rejected two declarations.
  • CFIUS cleared nearly 60 percent of cases in either the 30-day assessment period for a declaration or the initial 45-day review period for a notice.
  • On average, CFIUS provided comments on draft notices within 6.2 business days and accepted formal notices within 6 business days, down from 9.1 days in 2020.
  • CFIUS continued to complete action on a majority of cases without conditions, and in 2021 only ten percent (26 transactions out of 272 filed) involved mitigation measures.
  • There were no presidential reviews or actions taken on 2021 transactions.
  • Of the filings CFIUS received in 2021, approximately 55% involved the financial, information and services sectors, 28% involved the manufacturing sector, 12% involved the mining, utilizes and construction sector, and the remaining 4% involved wholesale and retail sales and transportation.
  • In 2021, the highest number of files involved Chinese investors accounting for 16.5% (44 notices), followed by Canada at 10.3% (28 filings) and Japan at 9.6% (26 filings).
  • CFIUS reviewed 184 covered transactions involving acquisitions of U.S. critical technology companies in 2021.  Of these critical technology reviews, major allied countries accounted for many of the transactions:  Germany (16); United Kingdom (16); Japan (15); South Korea (13), the Cayman Islands (12); Israel (11); and Canada (10).  China and Russia accounted for 10 and 5 critical technology reviews, respectively.

The report also indicates that in 2021, CFIUS staff identified numerous potential non-notified transactions.  Sources for such information on non-notified transactions were interagency referrals, tips from the public, media reports, commercial databases, and congressional notifications. Ultimately, 135 transactions were identified in this manner; from these transactions, eight resulted in a CFIUS request for filing.