On April 1, 2015, the Office of the U.S. Trade Representative (USTR) issued its annual telecommunications report (the “1377 Review” or the “report”) providing an overview of the operation and effectiveness of telecommunications trade agreements under Section 1377 of the Omnibus Trade and Competitiveness Act of 1988. The 1377 Review traditionally highlights long-standing and emerging barriers to U.S. telecommunications services and equipment exports. Among the issues addressed in this year’s report, USTR highlighted concerns with two controversial Chinese regulations strongly opposed by U.S. information and communications technology (ICT) companies—the Guiding Opinions Regarding Application of Secure and Controllable Information Technologies to Strengthen Network Security and Information of the Banking Section (the “Banking Opinions”) and the draft Counterterrorism Law. Specifically, USTR indicated that the two regulations raise substantive concerns with respect to China’s obligations under several trade agreements.

China’s Banking Opinions

The Banking Opinions, along with recently published guidelines, appear to require with respect to certain ICT products, that (i) suppliers disclose to Chinese authorities the source code for such products; (ii) the intellectual property rights (IPR) attached to such products be “indigenous IPR” (i.e., owned or controlled by a Chinese person or entity) (iii) suppliers source from “controllable” supply chains (which may mean greater localization of vendors) and (iv) suppliers establish their own service centers in China and conduct research and development in China. Additionally, the Banking Opinions call for 75 percent of ICT products, services and technologies used by financial institutions in China to be “secure and controllable” by 2019.

In the 1377 Review, USTR noted that these rules may raise substantive concerns with respect to China’s obligations under the Agreement on Technical Barriers to Trade (the “TBT Agreement”), the General Agreement on Tariffs and Trade, the General Agreement on Trade in Services and the Agreement on Trade-Related Investment Measures.

China’s Draft Counterterrorism Law

Under the draft Counterterrorism Law, all telecommunications and Internet service providers operating in China would be required to (i) provide the Chinese government with “backdoors” and a copy of the encryption systems they use (ii) assist with decryption and (iii) store user data within China’s borders. Providers that do not comply with these requirements would not be allowed to operate in China. In the 1377 Review, USTR indicated that these provisions raise questions with respect to China’s obligations under the TBT Agreement. 

In mid-March 2015, it was announced that the National People’s Congress had suspended a third reading of the draft law. Senior Obama administration officials have raised concerns with their Chinese counterparts regarding both regulations.

Additional Information

USTR: 2015 Section 1377 Review on Compliance with Telecommunications Trade Agreements  

Ministry of Industry and Information Technology: The Guiding Opinions Regarding Application of Secure and Controllable Information Technologies to Strengthen Network Security and Information of the Banking Section

National People’s Congress: The Counterterrorism Law of the People’s Republic of China (Draft)