On March 8, 2016, the U.S. Department of Commerce, Bureau of Industry and Security ("BIS") effectively banned all exports, reexports, and transfers of items subject to the Export Administration Regulations ("EAR") to Zhongxing Telecommunications Equipment Corporation, better known as "ZTE," and three of its affiliates (the "Listed Entities") by placing the companies on the Entity List. BIS added these companies to the Entity List after finding that ZTE, a Chinese multinational telecommunications equipment and network solutions company, was involved in, or posed a risk of becoming involved in, activities contrary to the national security or foreign policy interests of the United States. As a result of this listing, no item subject to the EAR may be sold to the Listed Entities without a license from BIS, no license exceptions apply to such transactions, and such license applications will be reviewed under a policy of denial. Importantly, the restriction applies to items subject to the EAR wherever they are located, so foreign parties must also abide by the restrictions.

Listed Entities

In making its decision to list the Listed Entities, BIS cited two ZTE documents that outlined the corporate structure and roles of the affiliates in the conduct flagged by the United States. In addition to ZTE, the other Listed Entities are: (i) ZTE Kangxun Telecommunications Ltd., a Chinese entity; (ii) Beijing 8-Star International Co., a Chinese entity; and (iii) ZTE Parsian, an Iranian company. 

Affected Items

The final rule applies to all commodities, technology, and software ("items") subject to the EAR, which include: (i) items in the United States and U.S.-origin items, wherever located; (ii) foreign-made items that incorporate (or, in the case of software and technology, are commingled with) controlled U.S.-origin content in quantities exceeding certain de minimis levels; and (iii) certain foreign-made direct products of U.S.-origin technology or software and certain commodities produced by a foreign manufacturing plant or major component of a foreign manufacturing plant that is a direct product of U.S.-origin technology or software. Importantly, the final rule applies to both U.S. and non-U.S. companies, making this new prohibition affect non-U.S. companies that export any commodities, software, or technology that fall into the above three categories.

Certain Activities Still Permitted

Although BIS has effectively prohibited exports, reexports, and transfers to the Listed Entities, other business activities may be lawfully conducted with the Listed Entities, provided they are conducted with caution. In addition, the Entity List prohibitions apply only to Listed Entities, so exports, reexports, and transfers to other affiliates and subsidiaries of ZTE are permitted, as long as they are consistent with any other restrictions imposed by law. Significantly, considering ZTE's position as one of the world's largest telecommunications equipment providers, companies may import items from the Listed Entities. 

Possible Future Actions

The EAR provides a process by which ZTE could request removal from the Entity List. However, we believe this designation will not be short-lived. Indeed, U.S. and non-U.S. businesses engaged in the export, reexport, or transfer of goods to China should monitor possible future additions to the Entity List of entities that may have issues similar to ZTE. 

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Given ZTE's sizeable share of the international electronics market, BIS's actions likely will have a profound impact on exporters of electronics and related products, and they will likely greatly affect more specialized markets, such as the international smartphone market. We will continue to follow developments related to the final rule and ZTE.