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In keeping with a recent Trump administration trend of issuing draft regulations on foreign trade and investment with scant notice, the U.S. Department of Commerce published on the day before Thanksgiving proposed rules that would give the department sweeping new powers to review information technology and communications transactions involving "foreign adversaries" of the United States.

International trade and national security lawyers said the regulation's broad scope introduces significant uncertainty for clients about which supply chain transactions might be affected.

The period for written public comments on the draft regulation ends in days, on Dec. 27. The rules would apply to transactions that started, were pending or completed after May 15, which is when President Donald Trump issued an executive order titled "Securing the Information and Communications Technology and Services Supply Chain."

The order didn't name China, but those familiar with the matter believe China and telecommunications giants Huawei Technologies Company Ltd. and ZTE Corp. are the primary targets, and perhaps Russia as well. Telecom, digital and internet service providers and their vendors and equipment manufacturers, including software manufacturers, that support them are all potentially affected, trade lawyers said.

The proposed rule would allow the Commerce Dept. to halt or even unwind deals tied to foreign countries or entities that the department, in consultation with other agencies, deem too risky to U.S. national security or the security of its economic infrastructure. But unlike CFIUS reviews at the Treasury Dept., the draft regulation contains no process for preclearing transactions.

Kevin Wolf, international trade partner at Akin Gump Strauss Hauer & Feld in Washington, D.C., said the draft rule, "if implemented, would essentially be a standard-less delegation of broad 'case-by-case' authority that would impose a cloud over most international trade transactions."   

Wolf said "there would be no way for a U.S. or foreign person to know which countries, companies, individuals, products, technologies, software, or services could lead to a unilateral decision by the Secretary of Commerce" to stop or alter the transaction at any time after it is completed.

"It is a very short amount of time to prepare comments on something that significant and broad in scope," he added.

Charles Capito, of counsel in Morrison & Foerster's national security practice in D.C., said the draft regulation "is the latest in the string of congressional and executive measures to address security threats the U.S. government has detected in this area." 

It gives the Commerce Secretary the authority to stop any deal where the agency, in consultation with others, "determines the transaction poses certain undue risks to critical infrastructure of the digital economy in the United States" or "certain unacceptable risk to U.S. national security or security of U.S. persons," according to the executive order.

Some international trade and national security lawyers said they believe the proposed new rule is meant to give the U.S. government broad authority to shut down specific transactions it finds problematic, rather than to regulate an entire industry's international trade. But its breadth nonetheless introduces a great deal of uncertainty into supply chain transactions with companies based in foreign countries that could be regarded as adversaries of the United States, and particularly for big U.S. telecom and IT companies that source components from abroad.

The draft rule specifies three ways the Commerce Department could start the evaluation process: on its own; by referral from the U.S. Department of Homeland Security, Director of National Intelligence or agency secretaries; or by a private company or citizen who believes a transaction poses an undue risk to national security or a U.S. person. 

But as now written, "the proposed rule doesn't require any notice to the parties of the transaction" until the Commerce Dept. reaches a preliminary determination, which concerns international trade lawyers and their clients, said Claudia Hartleben, an international trade and dispute resolution associate at Arent Fox in Washington, D.C., and doesn't have to give any notice at all if it thinks it is necessary for national security. "As the proposed regulation is written, the average company will have no idea if they are embarking on a transaction with a company that the U.S. would consider a foreign adversary," she said. 

Also, "as written, this means that Commerce can be snooping around and investigating a pending or even consummated transaction for an indefinite period of time without knowledge of the parties involved. This is one area that we think may not fully withstand due process and other litigation down the road" if the rule is enacted as currently drafted, Hartleben said because of the lack of notice.

The final regulation should be tailored for greater clarity, several lawyers agreed. "Commerce should publish in a second proposed rule an unclassified version of the threat to the information, communications, and technology supply chain, so that a final rule can be tailored to address that threat and without creating significant uncertainty in the international trade system," said Wolf.

Capito said his firm is telling clients that "if you have strong feelings about this and many people do, you should submit comments yourself or check in with your industry association."

As of Thursday afternoon, however, no public comments had yet been posted on the Federal Register about the proposed regulation.

"A lot of people will be hitting the submit button while they are eating Christmas leftovers," Capito suggested.

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