Global Trends in Trade Controls 2022
As 2022 begins, we see the sanctions and export control landscape becoming increasingly complex.
Heightened geopolitical tensions mean trade controls (sanctions, export control, FDI screening) will be ever more enticing weapons in great powers’ foreign policy arsenals. The United States and the European Union are threatening crippling sanctions on Russia to deter it from launching an attack on Ukraine, while also seeking to coordinate efforts to limit advanced technology trade with China. Looking forward, the long-term battles over control of advanced technologies portend the uneasy adaptation of trade controls in preparing for the conflicts of tomorrow.
What industry and investors should expect in the short term is a more volatile system of trade and investment restrictions; all of which foreshadow a comprehensive effort at technology control in the years ahead.
Heightened Geopolitical Tensions Drive Trade Control Complexity
The great power tensions of today have risen to a level not seen since the 20th century. In our increasingly multipolar world, policies of economic statecraft (trade controls) are seen as “tools of first resort.” Tensions with Russia and China have both demonstrated this pattern.
In comparison to war, trade controls ostensibly seem low-cost and low risk. Absent the desire for outright military conflict with Russia, Western states have turned to significant economic threats during the ongoing Ukraine crisis. Personal sanctions on senior Russian leadership (including Putin), sanctions on major projects like Nord Stream 2 that risk alienating EU allies, or the possibility of outright removal of Russia from the SWIFT system are all potential responses to a Russian invasion of Ukraine. US officials have also weighed imposing the Foreign Direct Product Rule on a countrywide basis, blocking exports of any item derived from or produced using US-origin technology, including most semiconductors. While these trade controls appear less disruptive than war, the further burning of economic bridges is not without costs. Trade controls can produce serious blowback to Western economies and the industries that comprise them.
Likewise, for China and its growing military capacity, the United States has sought to leverage its export controls to dam the flow of technology – directly and indirectly – to the People’s Liberation Army (PLA) and to thwart the rise of key Chinese companies aspiring to lead in emerging technologies. The Entity List, as well as expanded rules on Military End Users, Military Intelligence End-Use, and Foreign-Produced Direct Products, combine in a concerted and proactive effort to cut capability growth at its root. Notably, the West has refrained from more provocative use of sanctions on China, if only because of economic interdependence. But the underpinnings of that economic interdependence are increasingly shaky.
Russia and China understand the economic stakes at play here. They are looking to blunt and counter these sanctions and threats of further sanctions. Similarly, the European Union wants to chart its own course and has weighed measures such as the Anti-Coercion Instrument (ACI) to retain its independence. Multipolarity means that friction between great powers and the trade controls that inevitably follow will only become more commonplace and more challenging for global companies to navigate safely.
US and Europe Launch New Human Rights Controls
Framing the application of trade controls is critical to the management of these heightened geopolitical tensions. Western states have recently returned to one mainstay – human rights – as a rationale for such controls.
For export control, this means surveillance and cybersecurity trade garner newfound attention by licensing authorities. The European Union’s revision of its export control statute (Regulation 2021/821) homed in on these technologies under a human rights framework. While Regulation 2021/821 did not add new controls, it did give member states the latitude to control these technologies beyond what was previously possible.
For sanctions, the proliferation of so-called Global Magnitsky (GLOMAG) sanctions is a notable new trend in the same vein. In 2021, the EU, United Kingdom, Canada, Australia all followed suit to adopt or issue new GLOMAG sanctions. The European Union, under its human rights framework, adopted its first sanctions on Chinese entities since 1989.
Human rights sanctions may remain in place for extended periods of time and will likely expand. If sanctions targeting entities operating in Xinjiang are removed, for example, there will be hard questions asked as to what has changed on the ground to warrant such a reversal. This means Western states will be reluctant to roll back human rights sanctions until actual progress is demonstrated by affected parties, which given the mounting tensions will be unlikely.
The shift to human rights trade controls allows the West to lean on a critical pressure point to further isolate Russia and China, but it also means that the regimes built to address human rights can quickly grow and become entrenched with unforeseen impacts on trade.
Unorthodox Solutions to Controlling Emerging Tech
Human rights, nevertheless, are not the long-term fight great powers foresee. That fight is over the emerging technologies that will define the decades ahead.
The issue with emerging technologies is not the lack of desire to control them, but the difficulty in doing so. Indeed, the United States and others have repeatedly set out the goal of identifying and classifying specific items of emerging technology to control. Despite the effort, the development of clear control parameters on emerging technologies remains elusive. This is due to several factors: industry fears that broad controls might stifle innovation domestically, the government under deploys resources required for such predictive efforts, and in some areas, China has already surpassed the US in the development of certain emerging technologies.
In the interim, one approach aims to circumvent the slog of developing new list-based controls entirely: using the Entity List to target Chinese companies working on cutting-edge and emerging technology. It has been easier for US administrations to identify companies that pose economic or security threats than to identify specific new technologies for control.
The US first used this approach in November 2021 when eight Chinese technology entities were added to the Entity List “to prevent US emerging technologies from being used for the PRC’s quantum computing efforts that support military applications.” These listings effectively block the transfer of US emerging technology to China while forgoing traditional list-based export controls. Whereas the Entity List was in the past viewed as a tool to obstruct entities involved in WMD proliferation, that is no longer exclusively true.
In a preview of the future challenges over emerging technologies, we expect existing export control, sanctions and FDI screening measures to be utilized beyond their original scope to plug gaps in list-based controls. This means industry must be cognizant of multiple facets of trade control systems.
Pursuing Multilateralism and Harmonization
Recognizing the limits of unilateral controls, the Biden administration is actively seeking to partner with the European Union and traditional allies to harmonize export controls and sanctions targeting Russia and China.
Bilateral venues such as the US-EU Trade and Technology Council (TTC), multilateral forums such as the Export Control and Human Rights Initiative, and security/technology admixtures such as the Quad Security Dialogue show the Biden administration reviving international relationships that withered under Trump with an eye towards China. A common thread through these groupings is the harmonization of a common trade and technology control policy.
These nascent groupings have little concrete to show so far beyond pledges, but if their goals are implemented, future tightening of controls could be felt on a much wider scale. Yet the test remains that voluntary pledges in international relations are often not implemented. This is further compounded by the reluctance and lack of resources dedicated to enforcement in US-allied governments.
The challenge for industry will be to navigate where unilateral and multilateral controls converge and diverge.
Curtailment of Chinese Technology Remains Paramount
Beyond present tensions with Russia, Western foreign policymakers see China as the real challenge in the 21st century. The “strategic competitor” whose looming presence undergirds all the above has created an impetus among Western states to build a coalition to stop Chinese technology before it can outpace the West.
The US-China Economic and Security Review Commission’s 2021 Report outlines the necessity of trade controls to accomplish this goal. Notably, it cites the effective implementation of both FIRRMA (for investment controls) and ECRA (for export controls) and the rationalizing of US sanctions on Chinese entities as key recommendations. The sanctions rationalization is particularly notable as it aims to ensure Chinese entities designated under the Entity List, for example, are likewise designated under the Non-SDN Chinese Military-Industrial Complex Companies List (NS-CMIC) or vice versa.
The development of overlapping restrictions on Chinese entities through sanctions, export controls, and FDI screening is the end goal of these US initiatives. In conjunction with multilateralism and harmonization, these overlapping restrictions might be mirrored in a united front of allied countries. The US State Department is actively working to promote the creation of investment controls and technology control regimes more broadly in developing countries to stymie China’s influence.
For industry, however, these efforts carry ramifications for supply chains and overseas markets. Whether or not the West achieves its goal of hamstringing Chinese technology development, the controls that arise in the attempt will alter the existing trade flows and processes upon which businesses rely.
In the short term, trade controls are attractive as checks on Russian aggression in Ukraine or further Chinese pressure on Taiwan. By renewing the pursuit of multilateral imposition of harmonized controls, the West seeks to present a united front that can manage current tensions and buy time to chart a future course focused on next-generation emerging technologies.
However, taking that next step is anything but assured. The profound difficulty of controlling emerging technologies means existing tools such as the Entity List must be used as a stopgap for the lack of list-based controls. The United States and the European Union find themselves in a race against time before Russia and China develop even more advanced technologies.
The West sees trade controls as the indispensable and intermediate solution that will forestall the outbreak of war. But in the interim, it will be this emerging patchwork of trade controls that will drive uncertainty for international business. Whether trade controls are enough to calm tensions remains to be seen, but their perception by governments as low-cost and low risk means their use will only further complicate existing compliance obligations.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials herein are for general informational purposes only.