Five Geopolitical and International Trade Issues for U.S. Businesses to Watch in 2023

Corporate Counsel

Last year marked an inflection point in the geopolitics of the 21st century, with the Biden administration declaring the post-Cold War era “definitively over” against the backdrop of Russia’s invasion of Ukraine and the U.S.-China strategic competition. That dynamic drove a range of national security and economic statecraft policies in 2022—notably including broad sanctions against Russia and semiconductor export controls regarding China—that will create heightened legal and business risks for companies with international supply and distribution chains. These risks will be particularly acute for companies and investors operating in highly regulated industries, including aerospace, defense, manufacturing, technology, and financial services. We highlight below five key geopolitical and international trade issues to watch in 2023.

1. Trade war becomes tech war.

The U.S. strategic competition with China will continue in 2023 and beyond, with a continued focus on limiting the flow of advanced and emerging technologies. U.S. authorities are expected to build on key China-related measures implemented in 2022, which included sweeping semiconductor export controls, designations of Chinese companies on restricted lists, and FCC equipment bans.

Perhaps counterintuitively, total U.S.-China trade in 2022 reportedly was at or around an all-time high, and the Biden administration has stated that “[w]e do not seek conflict or a new Cold War.” U.S. Secretary of State Antony Blinken’s planned visit to China in 2023, postponed after the U.S. shot down a Chinese high-altitude balloon drifting through U.S. airspace, had been intended to build on dialogue between President Biden and Chinese president Xi Jinping on the sidelines of the G20 summit in Indonesia last November.

Key takeaway: Expect stronger enforcement measures to weigh on China trade for the foreseeable future. Companies should revisit the risk profile of their international supply chains—including whether any of their technology is subject to the new export controls or could be the subject of future controls—and consider enhancements in their supplier diligence and risk management practices.

2. Security alliances will drive global sanctions and export controls, and promote the trade in defense articles between U.S. allies.

Last year, the United States forged a multilateral coalition to impose sanctions and export controls on Russia in response to the invasion of Ukraine, with the United Kingdom, the European Union, Canada, Japan, and Australia enacting significant measures and bolstering institutions for administration and enforcement. This built on broader U.S. efforts at strengthening international alliances, such as through the AUKUS security pact (Australia / UK / U.S.), the “Quad” security dialogue (Australia / India / Japan / U.S.), the U.S.-EU Trade and Technology Council, and the proposed “Chip 4” alliance on semiconductors (Taiwan / Japan / South Korea / U.S.).

This trend is expected to continue this year, as the United States seeks to maintain the multilateral sanctions partnership regarding Russia, propose export controls on emerging technologies through the multilateral Wassenaar Arrangement, and engage with partners (such as, reportedly, Japan and the Netherlands) regarding new China-focused export controls on chipmaking technology.

These burgeoning security partnerships may also increase allied trade in defense articles. For example, it seems reasonably likely that the U.S. Department of State, Directorate of Defense Trade Controls (“DDTC”), will maintain or even expand its “open general licenses” under the International Traffic in Arms Regulations (“ITAR”) authorizing retransfers and re-exports of certain defense articles and services between and among the United States, the United Kingdom, Canada, and Australia, issued in July 2022. Along those lines, there have been proposals for the United States to lift ITAR controls altogether for defense exports to Australia, although a wholesale lifting seems less likely.

Key takeaway: Look beyond the United States. U.S. multilateral relationships are creating both new compliance obligations and business opportunities, particularly in the trade of defense articles.

3. Reports of diversion of U.S. electronics to Russian drone manufacturers will catalyze enforcement.  

Recent media reports mapping the supply chain of electronics from U.S. manufacturers to Russian companies supporting the war in Ukraine likely will attract the interest of U.S. enforcement authorities.

Key takeaway: Companies with supply and distribution chains in microchips, communications, electronics, optics, and navigation should be on heightened guard against the risk of diversion of their products to sanctioned countries and restricted parties. Affected companies should consider risk mitigation measures, such as incorporation of enhanced compliance terms into contracts, obtaining end-user statements from counterparties, and conducting compliance audits.

4. Evolving importance of technology supply chain rules.  

While U.S. regulators remain focused on export control-related concerns regarding the outward flow of technology, increasingly they also are focused on threats and public policies related to the inward flow of technology. Three key domains here are the U.S. Commerce Department’s rules on Securing the Information and Communications Technology and Services (“ICTS”) supply chain; restrictions on certain imports from China under the Uyghur Forced Labor Prevention Act (“UFLPA”); and technology supply chain restrictions specifically applicable to government contractors.

In particular, enforcement activity under the ICTS rules and the UFLPA likely will intensify as the U.S. Department of Commerce and U.S. Customs and Border Protection both invest internal resources to focus on these issues.

Key takeaway: Companies should consider conducting national security audits of their supply chain to assess their risk profile. Companies particularly exposed to ICTS risk include those in the telecommunications, software, home networking, smart home, autonomous technology, drone, and automotive industries, while importers of Chinese goods or items incorporating Chinese content face UFLPA risk—including companies in the apparel, solar, and furniture industries. A national security audit can assess a company’s supply chain, identify exposure to China and other higher-risk countries (e.g., Russia), and develop recommendations to mitigate supply chain risk.

5. Emerging restrictions on investment flows.

Intertwined with concerns related to technology transfer, companies should also expect regulators to take robust action related to both inbound and outbound foreign investment in 2023.

On the inbound side, the Committee on Foreign Investment in the United States (“CFIUS”) will continue to exercise robust reviews, focusing on policy priorities set out in a 2022 Biden executive order and potentially penalizing companies for missed filings and other violations under recently issued enforcement guidelines.

Several U.S. states have proposed or enacted restrictions on foreign investment (mainly focused on real estate), and non-U.S. jurisdictions (including, notably, the United Kingdom) are bolstering reviews. In one notable recent example, Virginia Governor Glenn Youngkin withdrew the state from consideration for an auto battery manufacturing plant on the grounds that a Chinese joint venture partner on the project was a “Trojan horse” for the Chinese Communist Party.

On the outbound side, we anticipate that 2023 will see the implementation of the first-ever “reverse CFIUS” mechanism providing for U.S. government review of U.S. investments overseas, and possibly even offshoring of production, in critical sectors.

Key takeaway: Companies, investors, and private equity sponsors should continue to prioritize the assessment of foreign investment in potential transactions, notably including whether a possible “reverse CFIUS” would be relevant to their existing foreign portfolio and operations, and overall investment and business strategy.

“Five Geopolitical and International Trade Issues for U.S. Businesses to Watch in 2023,” by Anthony Rapa and Justin Chiarodo was published in Corporate Counsel on February 14, 2023.

Reprinted with permission from the February 14, 2023, edition of Corporate Counsel © 2023 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited.