© Reuters. FILE PHOTO: Xiaomi founder and CEO Lei Jun attends an introductory ceremony of the new flagship phone Xiaomi Mi 9 in Beijing, China on February 20, 2019. REUTERS / Jason Lee
By Karen Freifeld
(Reuters) – President Joe Biden’s order last week to ban U.S. investment in certain Chinese companies is broader than a similar one signed by his predecessor Donald Trump and has a lower bar, making it easier to come back later add more companies.
Legal experts say it can also help the government avoid embarrassing defeat in court after a ban imposed towards the end of the Trump administration failed to withstand legal challenges.
Biden’s order will ban US investments in about 60 companies in China’s defense or surveillance technology sector.[L2N2NL1XR]
“It’s broader and has a much lower standard of listing,” said Washington attorney Kevin Wolf, a former Commerce Department official, adding that it should better stand up to legal scrutiny.
The new regulation prohibits investment in companies that “have operated or been active” in, or are owned or controlled by anyone who does, China’s defense or allied materials sector or surveillance technology. Its goal is to limit the flow of money to companies that undermine US security or “democratic values,” enabling lists of human rights abuses.
The Trump ban was imposed years ago in the National Defense Authorization Act on Chinese military corporations: corporations owned, controlled, or “affiliated” with the People’s Liberation Army, a government department, or the defense industry base of the People’s Republic of China.
The revised regulation removes the requirement for a direct link with the Chinese state, using the vague phrase that a company must “operate” in the defense or surveillance sector.
The Trump order had to be endorsed after three companies went to court to challenge it. In two cases their appointments were suspended and in the third case there was no verdict.
“Courts usually hesitate to overrule the president when he makes a national security decision,” said Bill Reinsch, senior advisor at the Center for Strategic and International Studies (CSIS). “The fact that they did this suggests really bad wording on the part of the Trump people and a bad defense of the decisions made.”
Beijing-based smartphone maker Xiaomi (OTC :), which lost around $ 10 billion in market capitalization the month after it was added to the list of banned companies, was the first to bring a case to expose flaws in Trump’s order .
The judge stopped naming Xiaomi in March due to lack of evidence that it was linked to the People’s Liberation Authority or the People’s Republic of China, calling its listing “arbitrary and capricious”.
Evidence from the government included an award given to the chairman of Xiaomi, which had received more than 500 entrepreneurs since 2004, including the executives of a baby food company. It also cited Xiaomi’s investments in 5G and artificial intelligence technology, but the judge noted that they are fast becoming the standard for consumer devices, not just military modernization.
The judge also found errors in the government’s decision memo, including the incorrect citation of the law at issue, and said the government did not meet the definition of “associated with,” which is “effectively controlled by or with others under common ownership or under.” joint control “. . ”
Last month, the Biden administration agreed to remove the company from the list.
Luokung Technology Corp, a mapping technology company, won a similar initial decision.
Neither Xiaomi, Luokung, or Gowin Semiconductor, the third company to contest its naming, are on the revised list.
Key Chinese companies included in both orders include China National Offshore Oil Corp (CNOOC (NYSE :)), Hangzhou Hikvision Digital Technology Co Ltd, Huawei Technologies Ltd, and Semiconductor Manufacturing International Corp.
Hong Kong-based attorney Wendy Wysong, who was considering taking cases through Trump’s order, said Biden’s listing appeared to be on more solid ground.
“It can be more difficult to challenge the designation because the underlying rationale is probably not that weak and the designation criteria are not as narrow,” said Wysong.
Many more companies could be affected by Biden’s order, depending “how aggressive the US administration wants to be,” said Reinsch of CSIS.
“In theory, it could expand the universe pretty much,” he said.