U.S. to Impose Sweeping Rule Aimed at China Technology Threats – The Wall Street Journal

WASHINGTON—The Biden administration plans to allow a sweeping Trump-era rule aimed at combating Chinese technology threats to take effect next month, over objections from U.S. businesses, according to people familiar with the matter.

The rule, initially proposed in November, enables the Commerce Department to ban technology-related business transactions that it determines pose a national security threat, part of an effort to secure U.S. supply chains. Companies in technology, telecommunications, finance and other industries say the rule could stifle innovation and hurt competitiveness, and had expected it to be delayed as the administration undertakes a broad review of U.S. policy on Chinese technology.

Now the administration is planning to go forward with the rule, the people said. Administration officials are concerned that blocking or diluting the rule would send the wrong message about the new administration’s approach to China, potentially fueling criticism that it is taking a weaker approach, according to the people.

One person familiar with the matter said administration officials have signaled to the business community that they won’t enforce the rule aggressively. That could soften the impact, although business representatives say the rule will still subject firms—especially smaller ones—to significant new compliance costs and uncertainty. Another person familiar with the matter said the administration hasn’t said it would hold back in enforcing the rule.

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The rule is “unworkable for U.S. businesses in its current form and should not be considered for final publication without significant revisions,” said the Business Roundtable, a group of CEOs of major companies from Amazon.com Inc. and Citigroup Inc. to Walmart Inc., in a comment filed with the Commerce Department in January. International Business Machines Corp. said the rule as written was “massively overbroad” and would harm the economy while failing to enhance U.S. national security.

A Commerce Department representative said the agency continues to accept public comment on the rule through March 22, adding that the rule becomes final then.

“Trustworthy information and communications technology and services are essential to our national and economic security and remain a top priority for the Biden/Harris administration,” the representative said.

The White House didn’t respond to requests to comment.

The rule could affect as many as 4.5 million American businesses of all sizes, according to a Commerce Department estimate, potentially requiring them to get government clearance for purchases and deals involving sophisticated technology with what the regulation calls a “foreign adversary,” or face potential unwinding of the deals or other enforcement.

The new government oversight would apply to technology transactions involving critical U.S. infrastructure, networks and satellite operations, large data hosting operations, widely used internet connectivity software, and technology used in advanced computing, drones, autonomous systems or advanced robotics, according to a draft rule. It could affect sales or, in some circumstances, use of a technology.

In early January, then-President Donald Trump signed an executive order banning financial transactions with eight Chinese software companies, including Alipay.

Photo: alex plavevski/Shutterstock

The telecommunications and financial-services industries are viewed as particularly affected by the rule because they are heavy users of information-technology services and handle sensitive consumer data, but many other consumer-facing businesses also have a lot at stake.

The rule’s fate is being closely watched as a bellwether of the Biden administration’s policy direction on China. Washington has seen a solidifying consensus about the security and economic risks posed by Chinese tech equipment manufacturers and internet platforms. Republicans in Congress have grilled Biden cabinet nominees about taking a tough line on China.

Asked for comment, the Chinese Embassy in Washington referred to remarks by a Foreign Ministry spokesman in Beijing responding to President Biden’s order this week to review the security of supply chains for critical materials. The spokesman said that “altering economic law with political force is an unrealistic approach” that won’t solve domestic problems or benefit global supply chains.

Beijing has previously accused Washington of unfairly discriminating against Chinese companies and has tried to leverage access to the large Chinese market to pressure foreign businesses to ignore and lobby against U.S. restrictions.

Allowing the rule to go ahead could signal further trouble for U.S. businesses, which find themselves increasingly caught in the middle of Washington’s effort to confront China over its economic policies and Beijing’s retaliation for the U.S. moves.

The Trump administration issued bans on doing business with several Chinese tech giants ranging from telecommunications maker Huawei Technologies Co. to platforms such as WeChat, although some of those measures have been blocked by courts. It also sought to compel the Chinese owner of the short-video app TikTok to sell its U.S. operations to American companies, though that effort stalled and has been shelved for now.

The impending Commerce Department rule was in some respects the most far-reaching of the Trump administration actions against Chinese tech. It would give the department sweeping powers to require licenses for the wide range of technology transactions or to ban them outright.

Huawei, whose business has been crimped by previous U.S. restrictions and which could be hit again by the new rule, questioned the regulation’s legality in its comment, and urged the government to adopt a “holistic risk-management” approach instead of a “bar on specific participants.”

In recent weeks, business leaders have expected the rule to be postponed at least temporarily, as the Biden administration conducts a review of the Trump administration’s targeting of Chinese tech companies, according to several business representatives who are following the issue.

Many business leaders acknowledge the risks posed by technology from China and other adversary nations, and the need to address them. Those include stealing intellectual property, health data and personal financial information, as well as tracking Americans’ locations and conducting corporate espionage from inside the U.S., according to a draft of the rule.

Many business leaders worry that the new rule places too much of the responsibility for mitigating those risks on firms, along with potentially big costs and uncertainty. Some businesses worry they will be required to replace equipment already in use, for instance.

Total compliance costs could reach as much as $52 billion in the first year after implementation, according to the Commerce Department estimate, with annualized costs of as much as $20 billion.

Dozens of business groups, including several leading tech groups, have filed comments urging the administration to scale back or postpone the rule.

“We view the proposed rule as vague and highly problematic because as written, it would provide the department with nearly unlimited authority to intervene in virtually any commercial transaction between U.S. companies and their foreign counterparts that involves technology, with little to no due process, accountability, transparency, or coordination with other government programs that are also designed to protect national security,” one group of more than 30 business associations wrote in a letter in mid-January, just before President Biden took office. That group included major tech and foreign-trade associations as well as the U.S. Chamber of Commerce, retailers, restaurants and electric utilities.

Write to John D. McKinnon at john.mckinnon@wsj.com

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