© Reuters. FILE PHOTO: Xiaomi founder and CEO Lei Jun attends the launch 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 banning 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 for more companies to join. go ahead.
Legal experts say it can also help the administration avoid embarrassing losses in court after a ban imposed near 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 sectors.[L2N2NL1XR]
“It has a broader scope and is a much lower standard for listing,” said Washington attorney Kevin Wolf, a former Commerce Department official, adding that it should better withstand legal scrutiny.
The new order prohibits investments in companies that “operate or have operated in” China’s defense or related materials sector, or surveillance technology, or are owned or controlled by someone who does so. Its goal is to limit the flow of money to companies that undermine US security or “democratic values,” allowing for the inclusion of human rights abuses.
Trump’s ban was imposed on Chinese military companies as defined years ago in the National Defense Authorization Act: companies owned or controlled by or “affiliated” with the People’s Liberation Army, a government ministry, or the defense industrial base. of the People’s Republic of China.
The revised order removes the requirement for a direct link to the Chinese state, using the vaguest language that a company must “operate” in the defense or surveillance sectors.
Trump’s order was to be strengthened after three companies went to court to challenge it. Two stopped their appointments and no ruling has been issued in the third case.
“Courts are often reluctant to overrule the president when he makes a national security determination,” said Bill Reinsch, senior adviser at the Center for Strategic and International Studies (CSIS). “The fact that they did suggests really poor writing on the part of Trump’s people and poor defense of the decisions made.”
Beijing-based smartphone maker Xiaomi (OTC :), which lost about $ 10 billion in market capitalization in the month after being listed as banned companies, was the first to file a case to try to expose flaws in Trump’s request.
The judge halted Xiaomi’s appointment in March citing lack of evidence that it was affiliated with the PLA or the People’s Republic of China, calling its listing “arbitrary and capricious.”
The government evidence included an award given to the president of Xiaomi, which more than 500 entrepreneurs had received since 2004, including the leaders of an infant formula company. He also cited Xiaomi’s investments in 5G and artificial intelligence technology, but the judge noted that they are quickly becoming a standard for consumer devices, not just military modernization.
The judge also noted errors in the government’s decision memorandum, including incorrect citation of the statute in question, and said that the government did not meet the definition of “affiliate,” that is, “effectively controlled by another or associated with others under common ownership or 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 ruling.
Neither Xiaomi, Luokung nor Gowin Semiconductor, the third company to challenge its designation, are on the revised list.
Top 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 had been considering filing cases on Trump’s order, said Biden’s rosters appear to be on a more solid footing.
“It may be more difficult to challenge the designation because presumably the underlying rationale will not be as weak, and the designation criteria are not so strictly written,” Wysong said.
Many more companies could be affected by Biden’s order depending on “how aggressive the US administration wants to be,” said Reinsch of CSIS.
“In theory, it could expand the universe quite significantly,” he said.