Trade wars, like all wars, inevitably inflict collateral damage on unintended targets. This article in the Wall Street Journal provides an interesting run-down of the collateral damage that the ZTE denial order has had on U.S. companies.  These are companies for which ZTE was a significant customer and which have seen significant drops in their stock prices on the heels of the denial order.

Although most of the attention has been focused on the scope of the order’s impact on exports to ZTE from the United States, less attention has been paid to the issue of foreign made products incorporating U.S. content. Consider the dilemma of the company that makes the Gorilla Glass used on ZTE smartphones:

Corning Inc., GLW -0.49% which makes Gorilla Glass screens used in smartphones from ZTE and others, said it was assessing whether the sales ban applies to its products made at its factories in Taiwan, Japan and South Korea. The company said it wasn’t sure whether Gorilla Glass includes content that falls under U.S. export controls.

There could be a number of reasons for this, including not knowing the origin of the raw materials. But more likely, it could be the confusion over how to apply the de minimis rules in the context of the denial order, which only covers items “subject to the Regulations,” i.e. items “subject to the EAR.” Section 734.4(d)(1) notes that the following items are not “subject to the EAR”:

Reexports of a foreign-made commodity incorporating controlled U.S.-origin commodities … valued at 25% or less of the total value of the foreign-made commodity.

The crucial, and confusing, part of this provision is what is meant by “controlled U.S.-origin commodities,” a term that is never defined in the regulations. The only guidance as to the meaning of this phrase is in Supplement 2 to Part 734 which says this:

To identify U.S.-origin controlled content for purposes of the de minimis rules, you must determine the Export Control Classification Number (ECCN) of each U.S.-origin item incorporated into a foreign-made product. Then, you must identify which, if any, of those U.S.-origin items would require a license from BIS if they were to be exported or reexported (in the form in which you received them) to the foreign-made product’s country of destination. In identifying U.S.-origin controlled content, do not take account of commodities, software, or technology that could be exported or reexported to the country of destination without a license (designated as “NLR”) or under License Exception GBS (see part 740 of the EAR).

Reading the above provision literally, “controlled U.S. origin commodities” for purposes of the ZTE Denial Order would not include EAR99 items and many other items that did not require a license to China because whether something is controlled for de minimis computation depends on whether it is controlled for the “country of destination,” not the recipient.

One suspects that BIS means, and would like to cover, all EAR99 or items that were NLR for China in the de minimis computation for foreign made products exported to ZTE on the notion that these exports are controlled to ZTE. But, of course, if wishes were horses, all beggars would ride or, more to the point in this context, if wishes were rules, all agencies would ride roughshod over fairness. I don’t think BIS can cure this by posting some slapdash FAQ on its website instead of going through the procedures required by the APA to amend Supplement 2 to Part 734 to decouple the meaning of controlled from the country of destination.

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