ILMA Compoundings - January 2020 - 12

INDUSTRY RUNDOWN

International Insight
The U.S.-China Trade War, Part 3: China's
New Legal Environment
By James Eggenschwiler
As 2019 came to a close, U.S. manufacturers and suppliers of China-sourced goods, materials and products containing them faced a year-end with no sign of an end to
the wrangling between both governments. The trade war
wanes on without any apparent change, or so it might
seem. Although President Donald Trump and President
Xi Jinping have respectively softened their comments, no
signs have yet appeared by either that suggest a more
reasonable path forward might be at hand.
However, the trade war dynamics have been anything but
stable. As the relief to U.S. retailers concerning the most
recent tranche of sweeping penalty tariffs came to an end in
December 2019, China quietly doubled down on its position
by implementing new laws that compromise the intellectual
property of U.S. businesses in China and the intellectual
property of foreign-located related companies, thereby
increasing the potential peril to U.S. businesses worldwide.
CHINA'S NEW REQUIREMENTS IN A NUTSHELL
Understanding this very new Chinese business environment
requires a brief outline of significant legal changes that have been
quietly afoot and are now enforced. First, on Dec. 1, the China
Cyber Security Law took effect, making all computer servers
in China open to the Chinese government. In addition, on
Jan. 1, the new Chinese Foreign Vested Entities Law went into
effect, making all U.S.- and other foreign-owned companies
(including subsidiaries and joint ventures) subject to the same
requirements as Chinese-owned companies. This change categorically ended any legal differences between Chinese-owned
and foreign-owned companies in China, including all the special
privileges previously enjoyed by foreign-owned companies in
China, and extended full Chinese government (Chinese Communist Party) controls and access to all companies alike.
The impact of this status change is very significant. For
instance, the Chinese Communist Party is now entitled to
have a cell of representation inside all foreign-invested companies, enabling the government to attend board meetings and
access all confidential information of that business entity. Foreign computer servers must now be set up by China Telecom
or other similar state-owned enterprise, and all virtual private
networks (VPNs) must be routed through the China Telecom

12

JANUARY 2020

| COMPOUNDINGS | ILMA.ORG

system. In addition, all external communication servers must
now be located in China, with Chinese-owned and -controlled ISPS. By doing so, this new Cyber Security Law forces
all foreign business servers to be subject to unrestricted access
by the Chinese government. This includes servers owned by
the business (whether inside or outside the business premises)
as well as server space leased or used by the business elsewhere,
including the cloud system.
This same new access requirement applies to the leadership
of the business as well. Chinese authorities are empowered
to attend meetings (including confidential board of directors meetings) and obtain any information they desire. The
company leadership is now legally required to provide the
requested information with complete disclosure. Importantly,
this new requirement even extends to any and all information
concerning the entity's non-Chinese-related entities.
Before we move on, let's explore some of the collateral
importance of that last statement. China now requires access
to all related entity (non-China) information. Naturally, this
applies to general business information and technology information, including formulary information. It also applies to
other sensitive information like business planning, customer
information, supplier information, financial information,
employee records and board of directors information, meeting
minutes and information presented in meetings. To the extent
that the information systems of related entities are connected
to (even transnationally) to those of other related entities -
or even unrelated entities, like customers or suppliers - a risk
of unauthorized access by the Chinese government exists.
COLLISION COURSE WITH U.S. SANCTIONS
The new Chinese government requirements on foreign-invested businesses are chilling on their own. The permutations
of new risk exposure seem endless. Greater still is the risk
that is now shouldered by U.S. entities and individuals with
respect to U.S. law - U.S. sanctions law in particular.
The U.S. currently maintains several sanctions against China,
substantially all of which are directed at sharing (intentionally
or unintentionally) U.S. technology and other information
with China. More recent versions broadly focus not only
on intentional or inadvertent conduct, but also extend to


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ILMA Compoundings - January 2020

Table of Contents for the Digital Edition of ILMA Compoundings - January 2020

LETTER FROM THE CEO
INSIDE ILMA
WHAT'S COMING UP
NEW MEMBERS
INDUSTRY RUNDOWN
COUNSEL COMPOUND
WASHINGTON LANDSCAPE
IN NETWORK
PORTRAIT
ILMA Compoundings - January 2020 - Cover1
ILMA Compoundings - January 2020 - Cover2
ILMA Compoundings - January 2020 - 1
ILMA Compoundings - January 2020 - 2
ILMA Compoundings - January 2020 - LETTER FROM THE CEO
ILMA Compoundings - January 2020 - INSIDE ILMA
ILMA Compoundings - January 2020 - 5
ILMA Compoundings - January 2020 - 6
ILMA Compoundings - January 2020 - 7
ILMA Compoundings - January 2020 - WHAT'S COMING UP
ILMA Compoundings - January 2020 - NEW MEMBERS
ILMA Compoundings - January 2020 - INDUSTRY RUNDOWN
ILMA Compoundings - January 2020 - 11
ILMA Compoundings - January 2020 - 12
ILMA Compoundings - January 2020 - 13
ILMA Compoundings - January 2020 - 14
ILMA Compoundings - January 2020 - 15
ILMA Compoundings - January 2020 - 16
ILMA Compoundings - January 2020 - 17
ILMA Compoundings - January 2020 - 18
ILMA Compoundings - January 2020 - 19
ILMA Compoundings - January 2020 - 20
ILMA Compoundings - January 2020 - 21
ILMA Compoundings - January 2020 - 22
ILMA Compoundings - January 2020 - 23
ILMA Compoundings - January 2020 - 24
ILMA Compoundings - January 2020 - 25
ILMA Compoundings - January 2020 - 26
ILMA Compoundings - January 2020 - 27
ILMA Compoundings - January 2020 - 28
ILMA Compoundings - January 2020 - 29
ILMA Compoundings - January 2020 - COUNSEL COMPOUND
ILMA Compoundings - January 2020 - 31
ILMA Compoundings - January 2020 - WASHINGTON LANDSCAPE
ILMA Compoundings - January 2020 - 33
ILMA Compoundings - January 2020 - IN NETWORK
ILMA Compoundings - January 2020 - 35
ILMA Compoundings - January 2020 - PORTRAIT
ILMA Compoundings - January 2020 - Cover3
ILMA Compoundings - January 2020 - Cover4
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