US Seen as Unlikely to Use BIS 50% Rule as 'Poker Chip' in China Trade Talks

“I'd never say never,” Axelrod said, “but I would be surprised if Commerce did an about-face and removed this rule anytime soon.”

During a webinar Oct. 27 hosted by data analytics firm Kharon, Axelrod noted that BIS said it issued the rule to address what it called a long-standing export control “loophole” that undermined U.S. national security (see 2509290017). He also noted that the rule took effect as soon as it was released, which could make it challenging to “get traded away” weeks later in a trade deal with China.

“I don't think BIS would have done this and done it in the way they did it -- as an interim final rule -- if the intention of the administration was to use it as a poker chip,” said Axelrod, now a lawyer with Gibson Dunn.

A former State Department official during the Biden administration said last week that BIS may reverse the rule due to significant pushback from industry, which has voiced concerns about its compliance challenges (see 2510230039). Axelrod said he believes it’s "highly unlikely” that industry feedback will cause BIS to rescind the rule, but he noted that the agency is accepting public comments, which could lead to some revisions.

It's "not uncommon" for BIS to publish a rule and for there to be "some sort of consequences they didn't foresee or that are unintended, and then they can issue what they call a cleanup rule," he said. "That's what I think is the most likely scenario going forward."

He added that if the rule were to be rescinded -- even if that's unlikely -- "it would be part of some sort of negotiation between the Chinese and U.S. governments related to a bigger overall trade picture,” he said. “I guess we'll have to see what happens with China later this week.”

The Trump administration offered to roll back certain export controls earlier this year in exchange for Beijing easing curbs on its rare earth exports, a departure from the long-standing U.S. policy of keeping national-security-related restrictions off the negotiating table during trade talks (see 2506120061).

Asked about how BIS might enforce the new restrictions, Axelrod said he believes it will be an “enforcement priority” for the agency. He and other industry advisers have said BIS is likely first looking for intentional, egregious violators as opposed to exporters who made good-faith efforts to comply (see 2510030041).

If an exporter “blows off this new rule and keeps selling to a company they've been selling to for years without doing any additional due diligence, any additional checks, and it's clear” their customer is majority-owned by a party on the Entity List, “I don't think there's going to be a lot of sympathy from the BIS enforcement team,” Axelrod said. “If anything, I think the BIS enforcement team may want to use that example as a way to convince the world that, ‘Hey, we really mean it.’”

Axelrod and fellow Gibson Dunn lawyer Audi Syarief said the due diligence challenges posed by the rule could cause companies to over-comply. Determining the ownership percentage of a customer -- especially if those ownership structures are opaque -- can be “difficult and can be expensive,” Axelrod said. BIS has specifically said exporters must carry out extra due diligence and apply for a license if they can’t determine the full ownership percentage of a customer that they suspect could be tied to an Entity Listed party or is minority owned by that party.

“We see a real likelihood of overcompliance,” Axelrod said. “It's likely that many companies may exit relationships where exit isn't actually required. Especially if a customer is only a small part of a company's business, the company may make the determination that it's easier to exit the business than running the BIS licensing gauntlet.”

Due diligence is made even more challenging by the fact that the BIS 50% rule, known as the Affiliates Rule, also applies to parties on the agency’s Military End User List and to certain parties subject to Commerce export controls because of their sanctions designation by the Treasury Department, Syarief said. “It can be very complex trying to figure out” which restrictions apply to which lists, he said.

Even though, for example, the Pentagon’s 1260H List of Chinese military companies imposes only certain government contracting restrictions and no specific export licensing requirements, Syarief said exporters may not want to take the risk of doing business with those companies.

“What we're seeing is some derisking in this space,” he said. “Even if you've got a company that's on the 1260H List, and the restrictions are focused on DOD as opposed to the private sector, we're seeing some reticence to engage.”

He added that “it's a complicated web, and I think that parties are really kicking the tires and assessing what is comfortable for them from a risk perspective, because a company that's on one of these lists could eventually make its way on the other lists.”