Trade Compliance Year in Review 2023
The overriding theme of trade compliance in 2023 has been the ongoing transition from controls based on national security to “economic security.”
This change in philosophy may be better understood as the broadening of policymakers’ conception of national security to include economic security. The West understands its comparative advantage in select areas of advanced technologies and seeks to restrict its supply to the rest of the world. The West is highly attentive to the unchecked spread of these technologies and to China’s lead in other strategic areas.
Economic Security Strategy
While this change has been underway for some time, the G7 Leaders’ Statement on Economic Resilience and Economic Security established the rationale for this reorientation in May 2023. The paramount Western economies came together seeking to prevent “the cutting-edge technologies we develop from being used to further military capabilities that threaten international peace and security.” What this means is that the West is seeking closer cooperation and information-sharing on the development and enforcement of new controls.
This strategy is not limited to the G7. In June, the European Union announced its own Economic Security Strategy, which would create a framework to assess economic security, develop a list of technologies critical to economic security, potentially update foreign investment screening, and further the implementation of dual-use export controls. In July, Germany unveiled its first-ever Strategy on China, which in part aims to equip “our toolkit in the area of economic security for the challenges of our age.” Likewise, the United States, Japan and South Korea announced in their August 2023 summit plans for future Trilateral Economic Security Dialogues.
De-Risk but Not De-Couple
The broadening conception of national security as economic security means the West has created a narrowing window for acceptable advanced technology trade. As such, the G7 in its 2023 Summit also articulated a new framework for understanding this window: de-risk but not de-couple. Stating that “G7 countries are not decoupling from China or turning inwards,” but rather that the G7 will “stand up for our core values.” The limits are steadily being drawn on China and other countries as future markets for advanced technologies.
It may be useful to think of the “de-risk but not de-couple” framework in terms of two self-reinforcing factors: political de-risking and voluntary de-risking. Political de-risking is essentially a continuation of current policy trends, whereby countries use export controls to restrict advanced technology trade to what they see as potential adversaries and bolster such trade and manufacturing with allies. This feeds into the second factor of voluntary de-risking, whereby Western companies make the calculation that their efforts are better spent cultivating less sensitive markets. While the trend of “de-risking” does not mean the end of economic interdependence, it does markedly increase the obstacles to its continuation for advanced technologies.
One example is from 7 December when the Wall Street Journal ran an article describing the intentions of major hedge funds and private equity firms to massively reduce their investments in the Chinese economy. While economic headwinds certainly factor into such decisions, major Western companies are also recognizing the signals from lawmakers that such investments and trade will increasingly come under scrutiny or regulation.
A Growing Focus on Human Rights
Due to the focus on economic security and the advancing of “de-risk but not de-couple” as a framework to implement this focus, the West needs a model to determine what trade is acceptable. Human rights have emerged as a growing determinate. In the 2023 G7 Summit Fact Sheet, the G7 put forward human rights as a key example of its “core values.”
Indeed, trade controls on human rights grounds have been given major attention in 2023. The Export Controls and Human Rights Initiative (ECHRI) held its inaugural plenary in September 2023. The ECHRI defines itself as a “multilateral effort intended to counter state and non-state actors’ misuse of goods and technology to commit serious violations or abuses of human rights by using export controls in pursuit of national security interests.” The emphasis on human rights has been built into export control measures, such as the March 2023 amendment which added human rights as a basis for designation to the Entity List of the U.S.
Implementation and Enforcement of Russia Sanctions
Another focal point of sanctions and export control developments has been the ongoing Western campaign against Russia. On 14 December, the U.S. Treasury Department published an overview of the impact of sanctions and other economic measures on Russia. Throughout 2023 sanctions continued apace on Russia, and as a result, Western governments have issued a wide range of advisories for industry on due diligence to highlight Russia’s efforts at sanctions evasion. The U.S. and other partners looked to strengthen coordination on sanctions implementation as part of this campaign.
While the implementation of new sanctions continues, the key to their effectiveness lies in enforcement. Despite having nearly forty countries in the counter-Russia coalition, enforcement has been uneven, and where it has been relatively strong, officials see the need for improvement. As such, there have been several critical developments in 2023. In December, the EU neared finalization of a directive that will enshrine in EU law “criminal offenses and penalties for the violation of EU sanctions” in part to address uneven enforcement by EU Member States. Likewise, the UK in the 2023 Annual Report of its sanctions authority outlined plans to transition to a proactive enforcement model (which relies on international cooperation), change the thresholds for civil liability, and increase staff levels to account for growth in cases of violations (which rose to 473 last year compared to 147 the previous year). The U.S. has already begun ramping up enforcement, as evidenced by the fact that last year the Office of Foreign Assets Control issued over $1.5 billion in penalties compared to $42 million the year before.
Increasingly, pressure will be brought upon third countries who have been accused of aiding Russia’s war aims by facilitating transfers of arms and dual-use goods, such as China, Kazakhstan, Serbia, Turkey, and the United Arab Emirates, among others.
Denying China Advanced Technologies
If Russia’s invasion of Ukraine remained the major short-term trade control priority in 2023, China remained the long-term focus for the United States. The West in general and the United States in particular have pursued efforts to further restrict advanced technology trade with China, including the first-ever foreign direct product rule enforcement action and the then-biggest BIS fine in history against Seagate for continued hard drive sales to Huawei. A trilateral agreement between the United States, Japan and the Netherlands was forged in March 2023 to enact controls on semiconductor manufacturing tools. These three countries represent key chokepoints for such trade with China and they have laid the foundation for additional restrictions.
The United States further tightened its restrictions with the 17 October update of its semiconductor controls, which ran into the hundreds of pages. These complex regulations, aside from being regulatory restrictions, have a chilling effect on the willingness of Western states to pursue such trade in the face of legal hurdles. Indeed, the 17 October Rule represents how political de-risking can feed into the voluntary de-risking of Western companies.
While the U.S. and the West have undertaken measures to control trade, they have also targeted outbound investment, such as via Executive Order 14105 of 9 August 2023 “Addressing United States Investments in Certain National Security Technologies and Products in Countries of Concern.”
Additional Controls Beyond the West
Developments in trade controls in 2023 have not been limited to the West. ASEAN countries are increasingly developing their trade control regimes as their economies strengthen and opportunities for cooperation with the West arise through the further harmonization of controls. Some examples include the Philippines, which inaugurated an e-licensing platform for strategic goods. Laos is in the process of developing an export control law and regulations. Such countries are also wading into enforcement, as when Singapore publicized a recent enforcement action.