EU Policy Update

By Sebastian Vos on Posted in EU Law and Regulatory

The annual G 20 summit took place on July 7 and 8 under the presidency of Angela Merkel in the city of Hamburg, which had been put under siege by violent anti-globalization demonstrations.

Tensions on trade issues and the rejection of the Paris agreement on climate change by the U.S. President, Donald Trump, made it particularly difficult for the international community to present a united front.  The U.S. remained isolated in renouncing the climate change agreement, whilst the 19 others reconfirmed their commitment.  On trade, the 20 leaders stressed that they would “continue to fight protectionism including all unfair trade practices and recognize the role of legitimate trade defense instruments in this regard”, a compromise language designed to accommodate the American position.  On both issues, the EU representatives took the lead, the free trade agreement just concluded with Japan (see here) having symbolically confirmed the strong EU commitment to free trade.

The second round of the Brexit negotiations, from 17 to 20 July, did not make much progress, as the British side did not present its position on what was supposed to be the main topic on the agenda, the financial settlement.  However, constructive discussions allowed the two sides’ positions on citizens’ rights to get closer (see a jointly agreed “technical note” outlining the UK and EU’s positions on citizens’ rights here).  The negotiators also started to discuss the complex issue of quotas in the existing trade agreements between the EU and third countries, as well as an agreement on a joint UK-EU proposal on WTO “schedules”.  The next round will start on August 28.  It was suggested by some on both sides to add a round in between, but deep divisions inside the UK government discouraged such zeal.  The main divergence expressed publicly at the end of the month centered on the transition period and whether the Norway model might be used during that period, as recommended by the business community.  On July 31, Prime Minister Theresa May put an end to the speculations by having her spokesperson confirm that “free movement will end in March 2019”, which will require that the UK leave the internal market by that date.

In mid July, in Poland, the ruling Law and Justice party (“PIS”) rushed three laws through parliament aiming at increasing the political control over the judiciary: one would give the Parliament control over the body that appoints judges (the “KRS”); the second would force all Supreme Court judges to step down unless asked to stay by the Justice Minister (who is also the Attorney General); the third would allow the Justice Minister to dismiss and nominate the heads of lower courts.  Mass protests erupted in Warsaw and other cities.  Surprisingly, the Polish President, Andrzej Duda – who had so far followed PIS positions – announced he would veto the first two laws, signing only the third.  The European Commission immediately sent Poland a third “recommendation” under a EU procedure monitoring breaches to the rule of law (see here).  Following the publication of the new Law on the lower courts, it also launched an “infringement procedure” which may result in the filing of a lawsuit against Poland at the Court of Justice of the EU, seeking financial penalties for alleged breaches of EU law, including on the equal treatment of male and female judges (see Commission press releases here and here).  Commission Vice President Timmermans hinted also that Article 7 of the Union Treaty (which would suspend Polish voting rights in the Council of the EU) might be triggered if the new version of the two other laws president Duda promised to present “as soon as possible” continue to be in “systemic” violation of the rule of law.  However, Hungarian Prime Minister Orbán has stated he would veto any action under Article 7, which requires the unanimous agreement of all other EU Member States.

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The Trump Administration’s First African Growth and Opportunity Act Forum

By Worku Gachou on Posted in Africa

Next week, some 40 African finance and trade ministers, along with a large contingent of senior U.S. government officials will descend upon the coastal city of Lomé, Togo for the annual African Growth and Opportunity Act (AGOA) Forum.

There will be more eyes on this year’s Forum. Aside from Secretary Ross’ brief address at the Corporate Council on Africa’s Annual Summit earlier in the summer, this will be the first opportunity to hear the Trump Administration substantively outline their approach to economic and trade relations with the continent.Leading the U.S. delegation to the Forum will be U.S. Trade Representative (USTR) Ambassador Robert Lighthizer and he will be joined by representatives from the State Department, Treasury Department, USAID, Department of Agriculture, among other agencies.AGOA, first approved in May 2000 and subsequently reauthorized, provides duty-free access for more than 6,000 items exported from eligible sub-Saharan African countries. The program is intended to stimulate economic growth through a market based approach that will help Africa integrate into the global economy.Uniquely, the Administration is mandated by the legislation to organize the Forum annually, for the purpose of “discuss[ing] expanding trade and investment relations between the United States and sub-Saharan Africa and…encouraging joint ventures between small and large businesses.” By all accounts, the AGOA Forum continues to be the primary mechanism, and opportunity, for  discussing policy matters that impact the commercial relationship between the U.S. and Africa. Since the private sector and civil society are integral to these discussions they also have a seat at the table at the Forum.It is expected that the American delegation will emphasize the importance of adhering to the eligibility criteria of AGOA, particularly on issues related to “the elimination of barriers to United States trade and investment.” AGOA and its cyclical (and off-cycle) review process gives the Administration a significant, and flexible, tool to push African governments on their priority issue – ensuring American companies can fairly compete on the world stage.

A recent example is the successful March 2017 petition for an off-cycle review by the Secondary Materials and Recycled Textiles Association (SMART) claiming that the East African Community’s recent decision to ban imports of used clothing and footwear is a violation of the AGOA eligibility criteria. Last month, the Trade Policy Staff Subcommittee of USTR held an open hearing on the matter and is currently reviewing public comment and testimony with a decision expected by the end of the year.  At stake is the full or partial duty free benefits of Rwanda, Tanzania, and Uganda.

Africans are rightly concerned about the future of AGOA and its associated benefits. Some expect it will be difficult to continue justifying the one-way trade preference when AGOA expires in eight years. Discussions should be begin now on what the U.S. – Africa trade relationship will consist of in a post-AGOA world. As private industry begins making strategic and commercial decisions like future supply chains routes, it would give them some confidence to know that both sides are thinking about next steps.

The U.S. Congress, specifically the House Foreign Affairs Committee, is considering ways to improve and strengthen AGOA. Last week, Chairman Ed Royce and a group of bipartisan committee leaders introduced the AGOA and MCA Modernization Act (H.R. 3445). This legislation encourages policies that promote trade and cooperation, while providing much-needed technical assistance to help eligible partners fully utilize AGOA. Given the recent economic trends of embracing regional trade, this legislation also importantly grants the Millennium Challenge Corporation increased flexibility to support regional integration by allowing up to two simultaneous compacts with an eligible country.

With the attention and manpower that the Trump Administration is dedicating to the AGOA Forum and sustained congressional interest in promoting U.S. – Africa trade, there appears to be an understanding across the U.S. government that sub-Saharan Africa remains an important market for U.S. businesses and the global economy.

This post can also be found on CovAfrica<http://www.covafrica.com/>, the firm’s blog on legal, regulatory, political and economic developments in Africa.

What is a Robot under EU Law?

By Cándido García Molyneux and Rosa Oyarzabal on Posted in EU Law and Regulatory

EU institutions are increasingly focusing on the legal challenges posed by the robotics and artificial intelligence sector. On May 16, 2017, the European Commission published a paper announcing a series of regulatory and policy initiatives in response to the European Parliament’s resolution on European civil law rules on robotics of February 2017.   These initiatives may shape the development of the sector in Europe as they will affect the EU’s rules on product liability and product safety, develop certification and insurance schemes for autonomous cars, and provide significant funding for research innovation. 

The Robolaw Project

The European Parliament’s resolution on European Civil Law Rules on Robotics is based on a series of reports prepared by the Robolaw project. The latter was a two year projected funded under the European Commission’s 7th Framework Programme for Research and Technological Development (“FP7”) intended to review the regulatory challenges posed by the emerging robotics technology.

The main objective of the Robolaw project was to assess whether existing EU regulations are sufficient to address the various legal problems posed by robotics technology, and ensuring that they provide sufficient conditions to incentivize European innovation in the robotics sector. Over the years, the Robolaw project has published numerous studies, and has markedly advanced the conversation on robotics globally. 

Robotics Regulation in the European Union 

The EU does not yet have specific legislation on robotics. Nevertheless, as products, robotics are regulated by a variety of legislative framework, including horizontal legislation, such as the Directive on Liability for Defective Products and the Product Safety Directive. Industrial robots are regulated by the Machinery Directive; whereas professional service robots and consumer robots may be regulated by the Medical Devices Regulation (e.g., for surgical robots) or the Low Voltage Directive (e.g., for vacuum cleaners), respectively. Additionally, the Electromagnetic Compatibility and Radio Equipment Directives may also apply to robots -for example, in the case of autonomous cars that incorporate a GPS.

Manufacturers may also follow existing ISO and CEN standards on robotic devices. In particular, the European Commission has published several harmonized standards to show compliance with the Machinery Directive.[1]

However, the reality is that existing legislation and standards are not sufficient to address the challenges posed by upcoming innovation in robotics.

An Emerging EU Definition of Robot? 

The EU’s current and future regulation of robotics is complicated by the fact that there is no common understanding on what a robot is. The Robolaw project acknowledged this. Rather than trying to agree on a definition, it reviewed four categories where the application of existing EU legislation is likely to prove most problematic. Those are: driverless vehicles, robotic prostheses (and exoskeletons), surgical robots, and robot companions. It then compared the divergences and similarities of these four applications, finally proposing five main features to categorize robots -namely: autonomy, human-robot interaction, nature, environment, and task.

On the basis of these five features, the European Parliament agreed on the following characteristics of a “smart robot”:

  1. the acquisition of autonomy through sensors or by exchanging data with its environment (inter-connectivity) and the trading and analyzing of that data;
  2. self-learning from experience and by interaction (an optional criterion);
  3. at least a minor physical support (as opposed to virtual robots, e.g., software);
  4. the adaptation of its behavior and actions to the environment; and
  5. the absence of life in the biological sense.

In its resolution, the Parliament also asked the Commission to propose several common definitions for new categories of robotics based on the five agreed characteristics of a “smart robot”. The Commission now intends to further analyze the criteria, and decide whether elaborating these definitions is truly necessary for regulatory purposes. In particular, the Commission will consider creating definitions for three different “smart robot” types: cyber physical systems, autonomous systems, and smart autonomous robots (as well as their subcategories).

Upcoming Legal and Policy Initiatives 

The European Commission is also expected to implement the following regulatory and policy initiatives:

  • Civil Law Liability: The European Parliament asked the Commission to consider legal questions related to the development and use of robotics and artificial intelligence foreseeable in the next 10 to 15 years. The Commission has already launched an evaluation of the Directive on Liability for Defective Products. This will assess the extent to which the Directive can apply to new technological developments, including advanced robots and autonomous systems. Besides this Directive, the Commission will also assess the potential to devise risk-based liability regimes, based risk-opening or a risk-management approaches.
  • Product Safety: The Commission is currently evaluating the Machinery Directive in line with better regulation principles. This may lead to a revision that would adapt the Directive’s health and safety requirements to autonomous robots. 
  • Autonomous cars and testing: The Commission has also launched several initiatives on autonomous cars, including a Strategy towards cooperative, connected and automated mobility (C-TIS). To facilitate the development of adequate safety standards for connected and automated driving, the Commission intends to establish cross-border testing corridors for these systems.
  • Harmonization of technical standards: The Commission has a number of ongoing research activities aimed at developing testing protocols for cooperative and collaborative systems (e.g., industrial robots that share the workspace with humans). The research will also lead to the creation of safety certification standards specific to these robots.
  • Safety standards on the health sector: The development of medical and assistive technologies is a priority for the Commission, which is increasingly funding research on devices that, for example, promote healthy ageing or help personalize medicines. Both the Parliament and the Commission agree that future medical robots will have to face stringent safety standards. Whilst surgical robots and robotic prostheses are regulated under EU law, care robots (e.g., a robot that takes care of the elderly) may not always be considered a medical device. For example, care robots whose task is to fetch items around the house would be excluded from the medical device regulation. This uncertainty may in some cases pose a problem. As robots become more common, the Commission plans to address these issues and increase regulatory monitoring for medical and care robots, in the line of the new Medical Devices Regulation.
  • An Advisory Body for Robotics and Artificial Intelligence: Although the Parliament explicitly called for the designation of such an Agency in order to provide the technical, ethical and regulatory expertise needed to support the relevant public actors in this space, the Commission does not consider this necessary. Instead, the Commission proposes to create a high-level advisory body on robotics to advise the Commission.
  • Research and innovation: The Commission has announced its intent to increase the financial support for the “SPARC” program, a public-private partnership research program in robotics that already receives 700 million Euros from the EU. 

Next steps  

The European Commission is currently deliberating its next move in this field. During the course of the discussions, it is likely that the Commission will plan additional stakeholder consultations, such as sector specific workshops and bilateral meetings.

Although much remains to be decided, it is clear that future steps from the Commission will significantly affect the development of robotics and artificial intelligence research and development in the EU. In the mid to long term, the Commission’s plans will likely also have a significant impact on the wider global robotics industry, as the EU is a leader of regulatory advances in this sector.

Rosa is a Covington summer legal trainee from the Universidad Autónoma de Madrid.

[1] These standards are EN ISO 12100, Safety of machinery – General principles for design – Risk assessment and risk reduction; EN ISO 10218-1:2011 Robots and robotic devices – Safety requirements for industrial robots – Part 1: Robots; EN ISO 10218-2:2011 Robots and robotic devices – Safety requirements for industrial robots – Part 2: Safety of Robot integration; EN ISO 13482:2014 Robots and robotic devices – Safety requirements for personal care robots.

U.K. Government takes further steps towards increased regulation of human rights for business

By Helena Milner-Smith and Hannah Edmonds on Posted in EU Law and Regulatory

We recently reported on the global trend towards improved business “non-financial reporting” of human rights and environmental practices.   The latest U.K. developments in this area are the Modern Slavery (Transparency in Supply Chains) Bill 2017 (the “Bill“) and a report on labour market enforcement strategy published by David Metcalf, the U.K. Labour Market Enforcement Director, last week.

  1. Modern Slavery (Transparency in Supply Chains) Bill 2017

If enacted in its current form, the Bill will amend existing U.K. legislation, including section 54 of the Modern Slavery Act 2015 (which we previously reported on here), to make further provision for transparency in supply chains in respect of slavery and human trafficking.

If the Bill is enacted, the key changes for businesses to be aware of are as follows:

  • Section 54 of the Modern Slavery Act, which requires certain companies to publish an annual statement on action taken to eradicate slavery and human trafficking from their business and suppliers (a “MSA Statement“), will be amended so that:
    • certain content of the MSA Statement will be mandatory, rather than voluntary;
    • if an organisation makes a MSA Statement that it has taken no steps to eradicate slavery and human trafficking from its supply chain and business, it must explain the reasons for this;
    • public authorities will be required to make MSA Statements, in addition to commercial organisations; and
    • the Secretary of State must publish a list of all commercial organisations that are required to publish a MSA Statement, in a place and format that is easily accessible.
  • Regulation 57 of the Public Contracts Regulations 2015 shall be amended so that a bidder will be prevented from participating in a public procurement procedure unless it has complied with the obligation to publish a MSA Statement (provided it meets the threshold to comply).  This gives commercial organisations seeking to compete for public contracts further incentive to comply with the Modern Slavery Act.

The Bill had its first reading in the House of Lords on 12 July 2017 and we are awaiting the announcement of the date of the second reading.

  1. Report by David Metcalf: ‘Informing Labour Market Enforcement Strategy 2018/19’

Following his appointment in January 2017, David Metcalf – the U.K.’s first Labour Market Enforcement Director – has published his introductory report (the “Report“). The Director plans to consult in the coming months ahead of publishing the first strategic plan in early 2018. The Report outlines the main functions of the Director, which include:

  • addressing issues surrounding national minimum/living wage enforcement, licensing of labour providers, the operation of recruitment agencies and tackling modern slavery; and
  • reviewing the performance of the three principal labour market enforcement bodies; the National Minimum/Living Wage Enforcement Teams in HM Revenues & Customs, the Gangmasters and Labour Abuse Authority (GLAA) and the Employment Agency Standards (EAS) Inspectora

The Director comments in the Report that: “The flexible labour market should be buttressed by thorough and sustained enforcement of minimum labour standards”.

Last week, the U.K. Supreme Court ruled unanimously that the Government’s introduction of Employment Tribunal fees in 2013 was unlawful and unconstitutional because of their impact on access to justice.  The Report acknowledges that, until recently, the enforcement of statutory employment protection provisions was mainly via Employment Tribunals enforcing individual rights. The Director emphasises the increasingly important work of statutory enforcement bodies in tackling labour market exploitation and understanding the U.K.’s “hidden economy”.

The above developments are further examples of the U.K. Government’s increased focus on preventing human rights abuses in both commercial and public sector organisations.  In light of the Report, further activity in this area is expected and we will continue to track and report on developments.

 

The Congressional Agenda for August

By Richard A. Hertling and Kaitlyn McClure on Posted in Congressional Action

A brief column for a brief work period.  The House left at the end of last week for its annual August break.  The Senate had been scheduled to join the House too, but in the run-up to the debate on the failed healthcare-reform bill, Senate Majority Leader Mitch McConnell announced the Senate would remain in session for the first two weeks of August.  The Senate is expected to spend floor time processing executive and judicial nominations stalled by Senate Democrats during the Republican effort to repeal and replace the Affordable Care Act.  The minority party, upset with the speed at which Republicans were drafting the healthcare legislation and decrying a lack of public input, has been forcing procedural votes on nominees and refusing to yield back debate time on the floor, requiring the maximum amount of time, up to three days, for consideration for each nomination.  With the repeal-and-replace debate shelved at least for now, Republicans are now hoping to move through the confirmation process at a more rapid pace, starting with a cloture vote for a U.S. Circuit Court nominee.  Other pending nominations include Deputy and Under Secretary positions at various federal agencies, ambassadors to foreign nations, and the nominee to serve as FBI Director, Christopher Wray.  Several Senate committees are also scheduled to hold confirmation hearings this month.  Reports continue to circulate that Senator McConnell and Minority Leader Chuck Schumer are close to negotiating a package deal to clear many nominees.  If that deal is finalized, look for the Senate to start its August recess prior to the now-scheduled August 11 date.

There is a possibility the Senate may take up legislation to reauthorize the Food and Drug Administration’s user fees that are set to expire at the end of September.  H.R. 2430, the FDA Reauthorization Act of 2017, would renew and enhance the FDA drug, medical-device, biosimilar, and generic-drug user-fee provisions.  The legislation, which passed the House of Representatives on July 12 and is currently pending on the Senate calendar, is similar to S. 934, which was reported on a bipartisan basis by the Senate Health, Education, Labor and Pensions Committee in May.  One obstacle to Senate passage is a threat from Senator Ron Johnson (R-WI) to hold up the bill unless the Senate adds “right-to-try” language to the House bill.  Such an amendment would provide terminally ill patients access to experimental drugs and treatments outside of clinical trials.  Further complicating the prospects for enactment are the Administration’s views on FDA user fees.  The Trump White House issued a Statement of Administration Policy following House passage of H.R. 2430, citing the President’s Fiscal Year (FY) 2018 budget proposal to increase user fees in order to make up for a proposed decrease in the FDA’s budget.

Senators are also expected to vote on S. 114, the VA Choice and Quality Employment Act, legislation that will provide over $2 billion in supplementary funding over six months to the Choice Program administered by the Department of Veterans Affairs (VA).  The program, created in 2014 in a response to allegations of manipulation of patient wait times at VA facilities, allows veterans to seek private or community health care, but has been more popular than anticipated resulting in a shortage of funds. The legislation passed the House 414-0 last Friday.  The bill reflects a bipartisan consensus to avert a shutdown of the program in August.  The bill includes a provision authorizing the leasing of 28 new VA facilities in 17 states, allowing the VA to increase the number of facilities at which it provides medical services. In addition to the $2 billion in additional funds for the Choice Program, the bill provides funding for workforce improvements and new health care specialist hires.

Finally, Leader McConnell has expressed a desire for the Senate to pass a clean increase in the debt ceiling before the Senate leaves for its August recess.  Whether he is able to bring such a bill to the floor and get it passed prior to members heading out of town is uncertain.  If the Senate does not tackle the bill in August, it is likely to become fodder for the substantial fiscal debates that are likely to consume Congress when both chambers return in September, the final month of the current fiscal year, with but few legislative days to reach broad deals to avert a government shutdown at the end of the month.

 

China’s New Foreign Investment Catalogue Reduces Restrictions, Furthers Nationwide Negative List Approach

By Ashwin Kaja and Timothy P. Stratford on Posted in China

An updated version of China’s Catalogue of Industries for Guiding Foreign Investment (“Foreign Investment Catalogue,” or “Catalogue”) went into effect on July 28. The Catalogue has been a key tool used by Chinese policymakers to coordinate foreign investment with the country’s economic development plans and industrial policies. Its categorizations are an important factor in determining the approvals, restrictions, and incentives that might apply to various types of foreign investment projects. In addition to offering some market openings, the July 28 update is of particular significance as it builds on the government’s efforts to implement a “negative list” approach to foreign investment.

Nationwide Negative List

Under a negative list approach, types of foreign investment not mentioned on a negative list are to be given “national treatment”—equal or, in practice, similar treatment to the same type of investment if made by domestic entities (note that this includes both market access openings and restrictions applicable to domestic entities). Last fall, the Chinese government amended four core laws governing foreign-invested enterprises, formally establishing a national negative list approach and thereby rolling out on a nationwide basis an economic reform which had, until then, only been tested in China’s pilot free-trade zones (“FTZs”). According to these amendments and subsequent regulations, types of investments not included on a nationwide negative list may bypass the Ministry of Commerce’s (“MOFCOM’s”) foreign investment approval process and, instead, simply file for the record.

Rather than issuing a separate negative list as originally anticipated, the government soon signaled that the Foreign Investment Catalogue itself would be, at least for the time being, restructured to play that role. The Catalogue is generally divided into three lists which, respectively, place types of investments into the following categories: (1) “encouraged” industry sectors for which the government is actively seeking foreign investment and will therefore provide special advantages to foreign investors (e.g., preferential tax treatment, easier government approval), (2) “restricted” industry sectors for which special restrictions such as a relatively more onerous and time-consuming approval process apply, and (3) “prohibited” industry sectors in which foreign investment is banned altogether. Sectors not specifically listed are considered “permitted.” (Note that items listed in the encouraged category may also have certain restrictions placed on them in the negative list—e.g., investment in the construction and operation of nuclear power plants is encouraged so long as the entity is controlled by Chinese shareholders.) The 2017 Catalogue, for the first time, explicitly refers to the restricted and prohibited categories, collectively, as a negative list.

Market Openings

The new 2017 version of the Catalogue, published on June 28, contains 35 restricted and 28 prohibited line items. These 63 items make up the new negative list, and constitute a reduction of 30 items as compared to the 2015 version of the Catalogue (which we wrote about here). Further, the category of encouraged investments has been expanded, and now contains 348 line items. Even types of investments that remain on the list may be subject to less onerous restrictions (e.g., the lifting of a requirement that investments be in the form of a joint venture with a Chinese partner).

While the overall statistics indicate a trend of liberalization, some of the eliminated restrictions may only represent the restructuring of the Catalogue to better serve its new function as a negative list that exclusively presents deviations from national treatment (i.e., restrictions on foreign investment beyond those already applicable to domestic investment), rather than actual market openings. For example, the government has deleted restrictions on ivory carving and large-scale theme park construction and management that are already applicable to domestic (and foreign) investment under concurrent laws and regulations. Determining which of the changes reflect restructuring and which represent true liberalization will require a case-by-case analysis.

To illustrate the changes to the Catalogue, we describe here their impact on three sectors:

  • Energy. The new Catalogue expands the scope of encouraged foreign investment into oil, certain types of natural gas exploration, and mine gas utilization by striking language limiting the category only to joint ventures with Chinese partners.
  • High-Value Technology. Through additions to the encouraged list, the new Catalogue demonstrates a greater commitment toward attracting investment in a number of high-value technology sectors. The updated Catalogue adds new line items encouraging investment in smart medical emergency response equipment and water-testing sensors. It also adds line items encouraging investment in virtual and augmented reality research and development, as well as 3D printing equipment.
  • Agriculture. The Catalogue removes a number of restrictions on agricultural product processing, including restrictions on edible oil processing; rice, flour, and raw sugar processing; and corn deep processing. It also adds in new restrictions on the wholesale and acquisition of wheat, corn, and rice.

Note that just a few days before the promulgation of the new Foreign Investment Catalogue, the State Council released an updated negative list  for China’s FTZs, which also reduced restrictions on foreign investment. We encourage foreign investors with interests in China to examine changes to both the Foreign Investment Catalogue and FTZ negative list to see how their interests might be affected.

Zhijing Yu of Covington & Burling LLP contributed to the research and drafting of this article.

State Council Trims Negative List in Free Trade Zones

By Ashwin Kaja, Ning Lu and Timothy P. Stratford on Posted in China

China has put into effect an updated “negative list” for foreign investment in the country’s pilot free trade zones (“FTZs”). Officially named the Free Trade Zone (FTZ) Foreign Investment Entry Special Administrative Measures (Negative List) (2017 Version), the FTZ negative list is an important document that lists business sectors in which foreign investment is subject to restrictions (including additional government approvals) and outright prohibitions. This update, published by the State Council on June 16 and effective as of July 10, represents a liberalization of the foreign investment environment in China’s FTZs.

China’s FTZs are seen as a laboratory for potential economic reforms, with successful reforms considered for implementation on a nationwide basis. The negative list approach, in which all investments are considered permitted unless specifically restricted or prohibited according to a negative list, is an example of a reform that has been tested in the FTZs, and is now being rolled out nationally. See our separate post on the release of an updated nationwide Foreign Investment Catalogue  (effective July 28) that, for the first time, is explicitly referred to as a negative list for foreign investment.

Items on the FTZ negative list are either “prohibited” or “restricted.” Restricted items are subject to approval by commerce authorities and, if stated, other requirements or restrictions—e.g., Chinese control requirements. Items not listed need only be filed for the record with the commerce authorities (they may still require approvals or licenses from other agencies). In total, the new negative list eliminates 26 line items across 8 sectors and 19 industries, and narrows an additional line item pertaining to performance brokerage companies, making for a total of 27 line item edits. A majority of the eliminations were in the manufacturing sector, covering industries from aeronautical manufacturing to pharmaceutical manufacturing—e.g., airplane manufacturers no longer need Chinese entities to own a controlling equity interest in their companies.

Overall, the updated negative list is a welcome development for foreign businesses, which saw the 2015 version as unnecessarily restrictive across the board. Foreign investors with current or potential interests in China (especially the FTZs) should review the changes to determine whether they present new opportunities. To assist with that review, the chart below re-articulates in English a list of changes (compared to the existing 2015 version) that was provided by the State Council with the new release. Note that these descriptions should be used for reference purposes only. To fully understand the restrictions and prohibitions, and the changes thereto, one must refer to the full text of the updated negative list and, if needed, to the 2015 version. Additionally, note that while this is called a “negative list,” (and in theory should be an all-encompassing list of restrictions), investors may still need to refer to other laws and regulations to confirm that no other rules apply.

Main Category Field Explanation of Deletions in 2017 Version
Mining Metal Ore and Non-Metallic Ore Mining 1. Precious metals (gold, silver, platinum) mining and mine exploration has been removed from the restricted category.
2. Mining and processing of lithium have been removed from the restricted category.
Manufacturing Aeronautical Manufacturing (See Article 12 for related restrictions.) 3. The requirement that Chinese parties hold a majority share in foreign-invested enterprises (“FIEs”) involved in the manufacture and design of civilian helicopters weighing three tons or more has been removed.
4. The requirement that the design, manufacturing, and maintenance of aircraft weighing less than 6 tons and with fewer than 9 seats be limited to equity or cooperative joint-ventures (with Chinese parties) has been removed.
Shipbuilding (See Article 13 for related restrictions.) 5. The requirement that Chinese parties must own controlling shares in entities engaging in maritime low- and medium-speed diesel engine manufacturing as well as crankshaft manufacturing has been removed.
6. The requirement that maritime engineering equipment (including modules) must be manufactured and repaired by a majority Chinese-held firm has been removed.
Automotive Manufacturing 7. The requirement that enterprises engaged in the manufacture of new, pure electric passenger cars must use their own brand names or own the relevant intellectual property rights or patents has been removed.
Rail Transportation and Equipment Manufacturing 8. The limitation on railway equipment manufacturing (including research and design, design and manufacturing of passenger service facilities and equipment for high-speed railways, design and manufacturing of passenger service facilities and equipment for intercity railways, electric railway equipment and equipment manufacturing, railway passenger car equipment, etc.) to only equity or cooperative joint ventures (with Chinese parties) has been removed.
9. The requirement that the proportion of equipment sourced for urban railway transit projects be at least 70% domestically produced has been removed.
Communications Equipment Manufacturing (See Article 15 for related restrictions.) 10. The requirement of controlling Chinese shareholding for the design and manufacturing of civilian satellites and civilian satellite payloads has been removed.
Mineral Smelting and Pressure Processing (See Articles 16-18 for related restrictions.) 11. Smelting of molybdenum, tin, antimony, and other rare metals has been removed from the restricted category. (However, tungsten smelting remains restricted.)
Pharmaceutical Manufacturing 12. The prohibition on investing in the processing of Chinese herbal medicines included in the “Administrative Rules for the Protection of Wild Medicinal Resources” and “List of Rare and Endangered Plants in China” has been removed.
Transportation Ground Transportation 13. Highway passenger transport has been removed from the restricted category.
Maritime Transport (See Articles 32-34 for related restrictions.) 14. Outbound cargo customs brokerages have been removed from the restricted category and are no longer subject to a requirement of equity or cooperative joint ventures (with a Chinese partner or partners).
Information and Technology Services Internet and Related Services 15. Internet cafes have been removed from the restricted category.
Finance Banking 16. Engagement by branches of foreign banks in acting as agents to issue or redeem government bonds, or to underwrite government bonds, has been removed from the restricted category.
17. The requirement that foreign banks operating RMB services meet minimum opening time requirements has been removed.
18. The requirement that foreign investors investing in financial asset management companies meet certain asset-holding requirements has been removed.
Insurance 19. The requirement that foreign-invested insurance companies obtain approval from Chinese insurance regulatory authorities before engaging in cede-in or cede-out reinsurance activities with their affiliated enterprises has been removed.
Leasing and Business Services Accounting and Auditing 20. The requirement that the chief partner of a special general partnership accounting firm (or other high management positions) be of Chinese nationality has been removed.
Statistical Surveys 21. Text requiring the implementation of a qualification verification system for foreign-related survey institutions and an examination and approval system for foreign-related survey projects has been removed.
22. Rating services have been removed from the restricted category.
Other Business Services 23. The requirement that the legal representative of a travel agency carrying out cross-border travel for personal purposes be a Chinese citizen with permanent domestic residency and full civil capacity has been removed.
Education Education (See Articles 69 and 70 for related restrictions.) 24. The prohibition on organizing educational institutions in special areas, such as military, police, political, or party schools, has been removed.
Culture, Sports, and Entertainment News Publishing, Radio and Television, and Financial Information 25. The prohibition on the import of cultural products, such as art, digital literature databases, and other published cultural products (unless permitted under the terms of China’s WTO accession) has been removed.
Culture and Entertainment (See Article 91 for the updated language.) 26. Performance brokerage companies fall under the restricted category and are required to be controlled by a Chinese company or companies. The exception to such requirement is changed from “providing service within a province or provincial-level municipality in which they are registered” to “providing service in provinces with FTZs”.
27. Construction and operation of large-scale theme parks has been removed from the restricted category.

Zhijing Yu of Covington & Burling LLP contributed to the research and drafting of this article.

EU Policy Update

By Sebastian Vos on Posted in EU Law and Regulatory

Brexit and Elections in the UK and France

The legislative elections in the UK on June 8 resulted in what few observers expected: Theresa May, who was hoping to increase her majority in the house of Commons, instead lost it.  In order to ensure a majority for the confidence vote in her new minority government, she had to secure the support of the Northern Irish Democratic Unionist Party (“DUP”).  This came in exchange for a commitment to over ₤1 billion in public spending in the region (in addition to relaxing spending rules on another ₤500 million committed to by the last government).

Brexit was hardly discussed during the campaign, but the new political context, with the prime minister having lost her majority and much of her popularity, reopened the debate over the new relationship with the Union.

Meanwhile, the formal Brexit negotiations began as planned on June 19, even before the new British government had been confirmed, with a meeting in Brussels of the UK Secretary of State for Exiting the EU, David Davis, and his European Union counterpart, Michel Barnier.  The next session will take place on July 17.

The atmosphere was made easier than anticipated by the acceptance by the British side, soon after the election, the European negotiators’ demand for a phasing of the talks – with the liquidation of the past being addressed before the future relationship.  Indeed, this gives more time for the internal debate in the UK on the future relationship to reach a conclusion.

The first issue discussed was the rights of the EU citizens in the UK and of British citizens in the EU after Brexit about which each side has presented a position paper (here and here).  The UK has not yet presented its position on the financial settlement, which the EU side hoped to discuss at the next meeting.

Meanwhile, the two-round elections for the French National Assembly took place on June 11 and 18.  As foreseen, the audacious strategy of the new president, Emmanuel Macron, succeeded in giving a large majority to the new party he created just a year ago: “La République en Marche” elected 303 parliamentarians on a total of 577.  However, 57.36 % of those allowed to vote abstained, the highest level in the history of the Fifth Republic.  Edouard Philippe, a former supporter of the center right leader Alain Juppé, was confirmed as the prime minister.

The June European Council focused on security and defense, foreign affairs, climate change, economy, trade and migration.  See the Council Conclusions here, and President Tusk’s remarks on the meeting here.

The European Council reaffirmed its commitment to cooperate at EU level to fight online radicalization, prevent and counter violent extremism, tackle terrorism financing, and improve information sharing and the interoperability of security databases.

The leaders also agreed on the need to launch an inclusive and ambitious “permanent structured cooperation” (“PESCO”) to strengthen Europe’s security and defense.  Within three months, member states are supposed to agree a common list of criteria and commitments, together with concrete capability projects, in order to begin this cooperation.  In addition, the European Council welcomed the Commission’s communication on a European Defense Fund and looked forward to its swift operationalization.  It called for rapid agreement on the proposal for a European defense industrial development program.

Tech and Digital Single Market Policies

Therese Comodini Cachia has stepped down as Rapporteur on the proposed Copyright Directive file, as she is leaving her post as an MEP to take up a seat in the national parliament in Malta.  The file has been taken on by Axel Voss (German MEP, center-right EPP), also a member of the lead Committee on Legal Affairs (“JURI”).  He has stated that his aim is to strike a balance in the proposal between the interests of copyright holders and consumers.  A vote in the Committee is tentatively scheduled for October 10, and the full plenary vote is expected by the end of 2017.  Meanwhile, on June 14, 2017, Catherine Stihler MEP published her final opinion on the copyrights directive proposal on behalf of the European Parliament’s Committee on Internal Market and Consumer Protection (“IMCO”) committee ­– see here.

On June 15, 2017, the European Parliament adopted a report calling on EU and national authorities to ensure “fair working conditions and adequate legal and social protection for all workers” in the growing collaborative economy – see here.  The report states that last year’s European Commission guidelines on the so-called “gig economy” did not bring “sufficient clarity” on how to apply EU legislation to this nascent field, which the MEPs found disappointing.

On June 9, the European Parliament’s Committee on Civil Liberties, Justice and Home Affairs (“LIBE”) released a draft report on the proposed ePrivacy Regulation – see here.  The general thrust of the changes proposed by the LIBE Committee was to increase privacy protections, including through a return to the privacy by default requirements.  The deadline for the submission of amendments to this report was July 10, 2017.  The plenary vote in the Parliament is scheduled for October 2017, though many MEPs feel that this timeline is too ambitious, given the complexity of the issues at stake.

On July 7, 2017, the Council formally appointed Mariya Gabriel as the new Commissioner for digital economy and society – see a press release here.  The appointment takes effect immediately.  This followed a June 20, 2017 European Parliament hearing to question the designated Digital Commissioner, Mariya Gabriel.  Her responses to the MEPs’ questions have now been made public – see here.  She outlined her intention to launch new proposals on cybersecurity and data flows.  She also emphasized her focus on the social aspects of digital policy.  The MEPs then voted to approve her appointment on July 4, 2017 – see here.

The European Commission has fined Google €2,424,495,000 for breaching EU competition rules – see a Commission press release here, and a factsheet here.  The Commission alleges that Google abused its market dominance as a search engine by giving an illegal advantage to another Google product, its comparison shopping service.  Google must now end the conduct within 90 days or face penalty payments of up to 5% of the average daily worldwide turnover of Alphabet, Google’s parent company.  The Commission is expected to conclude swiftly two other open investigations against Google.

Communication and Media Policies

The lead committee of the European Parliament on the new EU telecoms regulation (the Industry, Research and Energy committee, “ITRE”) has postponed its vote on proposals until September.  This was expected to be ready for a committee vote in July. However, the large number of amendments proposed to the code has resulted in a further delay in the process.  Once adopted by the committee, the code is expected to go up for a vote in the full European Parliament before the end of the year.  The Electronic Communications Code was first proposed last September by the European Commission, following a review of EU telecom regulation – see here.

The Council finalised its position on the Audio Visual Media Services Directive (“AVMSD”) in late May – see the Council position here and a European Commission press release here.  Trilogue negotiations, initially scheduled for June, began on July 10, 2017.

Roaming charges in the European Union no longer apply from June 15, 2017 – see a press release here.  EU citizens traveling within the EU will be able to call, text and connect on their mobile devices at the same price as they pay at home. The three institutions held events to celebrate this change, which they claim as a major policy victory of this Commission’s term.

Energy and Environment Policies

On July 4, the European Parliament adopted a resolution calling for greater longevity and repairability, and raising concerns around planned obsolescence of devices and software.  The Members of the European Parliament (“MEPs”) noted that a balance must be struck between innovation, consumer demand, and environmental protection, but raised concerns at the increasing volume of electronic waste and the perceived short lifespan of current electronic devices.

In its resolution, the Parliament called on the Commission to establish minimum resistance criteria for robustness, repairability and upgradeability for product categories, where this is practically possible.  It recommended that these criteria be supported by standards developed by the European standardization organizations, CEN, CENELEC and ETSI.

In addition, the Parliament highlighted the potential of new business models to promote the overall durability of products – such as usage-based business models that treat “products as services”.  In a parallel to U.S. debates on a “right to repair,” the Parliament cited “the importance of safeguarding the option of going to an independent repairer, for example by discouraging technical, safety or software solutions which prevent repairs from being performed other than by approved firms or bodies.”

Finally, the Parliament also called for the protection of consumers against planned obsolescence, for both devices and software.  MEPs called for the Commission to define planned obsolescence, and consider establishing an independent system to test for in-built obsolescence in products.  They also recommended that software updates be reversible, and for greater compatibility and upgradeability of software necessary for hardware devices to be kept in service.  See the Parliament’s resolution here, and a study commissioned by the Committee on the Internal Market and Consumer Protection that informed the resolution here.

Internal Market and Financial Services Policies

On June 21, the Commission proposed a new Directive containing transparency rules for tax planning intermediaries such as tax advisors, accountants, banks and lawyers.  The rules target schemes that use losses to reduce tax liability, rely on special beneficial tax regimes, or arrangements through countries that do not meet international good governance standards.  Such intermediaries will be required to report the schemes they develop within five days, and before they are used by their clients.  Where the intermediary cannot or will not disclose the advice – either because they are bound by privilege or secrecy rules, or because they are based outside the EU – the duty to report the scheme to the authorities will fall on the company receiving the advice.  Where the advice is developed by in-house counsel, it will be for those implementing it to report it to the tax authorities.  See the Commission’s proposal here, the annex thereto here, a press release here, and Q&A here.

In its meeting of June 16, the Economic and Financial Affairs Council failed to agree a proposal that would allow Member States to lower the VAT rate for e-books, to bring it in line with paper books.  Such agreement was expected, but the file, which must be agreed unanimously under a “special legislative procedure,” was blocked by the Czech Republic, in an attempt to gain leverage over another piece of legislation relating to VAT.  (The Ministers’ disagreement can be seen in the video of the June 16 Council meeting – see here.)  This other legislation ­– the “general reverse charge mechanism” (see that proposal here) – would enable Member States to run a pilot to collect VAT only at the last point of sale, rather than throughout the supply chain.  The Council was prepared to allow a five-year pilot (see the Maltese Presidency’s proposed compromise text here), but the Czech Republic wants this amended to allow a longer, 10-year pilot scheme.  See the proposed Directive on the VAT applied to books, newspapers and periodicals here, and the Council’s proposed General Approach here.

Life Sciences and Healthcare Policies

On June 29, the European Commission published its long awaited Communication on “A European One Health Action Plan against Antimicrobial Resistance”.  The Action Plan outlines multiple initiatives the Commission proposes to foster the fight against antimicrobial resistance (“AMR”).  The Action Plan is structured around three pillars: (i) making the EU the best practice region in terms of fighting AMR growth, (ii) boosting research, development and innovation, and (iii) shaping the global agenda by making the EU more influential on AMR internationally.  The action proposed by the Commission includes: supporting the use of IT solutions in developing tools for diagnosing human and animal infections; supporting research into the development of new diagnostic tools in humans and animals to guide practitioners with regard to the use of antimicrobials; fostering the development of new effective preventive vaccines for both humans and animals; working with the European Medicines Agency (“EMA”) so support SMEs in their R&D efforts towards innovative or alternative therapeutic approaches for the treatment or prevention of bacterial infections; and supporting research into the development and assessment of interventions that prevent the development and growth of AMR in various settings, such as hospitals.  The nature of these initiatives is still unknown, but the Commission’s follow-up to this announcement will create a number of opportunities for the industry to intervene and advocate its position.  See the Communication here, a factsheet here, and the Commission’s press release here.

On the same day, the Commission also published its “EU Guidelines for the use of antimicrobials in human health”.  The document provides guidelines to all healthcare actors, including the pharmaceutical industry.  It recalls that the pharmaceutical industry is a key player in the fight against AMR, and recommends that the industry ensure monitoring of resistance and off-label use after the launch of new compounds in compliance with post-marketing obligations; ensure that financial incentives are compliant with the stewardship principles laid down in the Guidelines; abide by the rules that apply to advertising and marketing to healthcare professionals; and engage with national and international policy makers to support the shaping and development of new policies aimed at ensuring and promoting adequate antimicrobial prescribing and designing new reimbursement systems.  See the Guidelines here.

On June 22, the Heads of State or Government of the EU 27 agreed on the procedure for the relocation of the EMA and on revised criteria for selecting its new seat.  The EMA is currently based in London, but will have to relocate after Brexit.  The final decision on the EMA’s new location is now likely to be adopted before the General Affairs Council, to be held in November 2017.  EU Member States wishing to host the EMA can apply until July 31, 2017.  See the decision on the revised criteria here.

On June 16, the EMA announced that the Clinical Trials Regulation (Regulation 536/2014, the “CTR”) will not come into force before 2019, instead of October 2018, as previously foreseen.  The CTR establishes a centralized database and entry point for all information relating to the submission of clinical trial applications and data relating to EU clinical trials.  The delay results from difficulties in establishing the IT infrastructure to enable this.  Before coming into force, the proper functioning of the EU portal needs to be audited under the responsibility of the EMA.  The CTR will then come into force six months after the Commission publishes the results of this audit.  See the EMA’s announcement here.

On May 31, the EMA and the European Commission published a Q&A on regulatory guidance for pharmaceutical companies to prepare for Brexit.  The guidance is addressed to both human and veterinary drug companies.  This guidance follows the “Notice to Marketing Authorization Holders of Centrally Authorized Medicinal Products” published by the EMA and the Commission on May 2, 2017.  The EMA stated it will issue further guidance documents to help pharmaceutical companies prepare for the UK’s withdrawal from the EU.  See the Q&A here.

Trade Policy and Sanctions

On July 6, after long negotiations that began in 2013, agreement was reached “in principle” on an EU-Japan free trade deal.  The outline plan was signed in Brussels, in a meeting between the Japanese Prime Minister, Shinzo Abe, and the European Commission president, Jean-Claude Juncker.  It came on the eve of the annual summit of the G20 group of leading economies in Hamburg, on July 7 and 8.

The symbolic meaning of this timing was underlined by both sides: “I believe Japan and the EU are demonstrating our strong political will to fly the flag for free trade against a shift toward protectionism”, Abe told a joint news conference with Jean-Claude Juncker and the President of the European Council, Donald Tusk.

He added that the deal signified the creation of “the world’s largest free, advanced, industrialized economic zone”.  Indeed, the agreement paves the way for trading in goods without tariff barriers between two of the world’s biggest economic areas.  Both sides will also benefit from the removal of non-tariff barriers, such as incompatible product standards.  Two of the most important sectors concerned are Japanese car imports in the EU and, for Europe, EU farming goods exports to Japan.

A full, workable agreement may take some time to conclude, even if officials insist the key snags have been overcome.  President Juncker said he hoped the deal could take effect in early 2019.  However, the agreement as currently envisaged will neither include a dispute settlement mechanism for investors, nor will it cover data flows.

In its meeting of June 22-23, the European Council again considered French proposals for an EU system to screen foreign investments (sometimes dubbed an “EU CIFIUS”, after the equivalent U.S. system).  The leaders fell short of a consensus, calling instead for more reciprocity and better trade defenses.

French President Emmanuel Macron had wanted EU leaders jointly to call on the European Commission to examine “ways to screen investments from third countries in strategic sectors”, but that line did not make it into the final conclusions of the European Council summit.

Instead, the watered-down conclusions state that the leaders welcome an initiative by the Commission “to analyze investments from third countries in strategic sectors”, but leaves out any reference to the screening of acquisitions from abroad.

President Macron’s plan, which in particular is intended to prevent Chinese state-owned companies from buying up high-tech companies in the EU, had faced opposition in Northern and Eastern European countries, as well as inside the European Commission.

China Seeks Public Comments on Draft Regulation on the Protection of Critical Information Infrastructure

By Timothy P. Stratford, Yan Luo, Jennifer Martin and Ted Karch on Posted in China

On July 11, 2017, the Cyberspace Administration of China (CAC) released the draft Regulation for the Protection of the Critical Information Infrastructure (“Draft Regulation”) for public comment (official Chinese version available here). The comment period ends on August 10, 2017.

Aiming to add greater clarification to the Cybersecurity Law, which took effect on June 1, 2017, the Draft Regulation clarifies the scope of Critical Information Infrastructure (“CII”) and elaborates on how CII operators are supposed to protect their networks against cyber threats. The Draft Regulation also sets out additional obligations CII operators face, including allowing officials to perform cybersecurity inspections, among others.

The Draft Regulation may help reduce some of the confusion surrounding the key phrase “critical information infrastructure,” which constitutes a crucial part of China’s fast-evolving cybersecurity regulatory framework. But many important questions remain unanswered in the current draft. Companies that either operate in the sectors identified in the Draft Regulation or that supply operators in those sectors should be mindful of the requirements relating to cybersecurity, especially relating to cybersecurity reviews and procurement of network services and products, and closely monitor the regulatory developments.

Key elements of the Draft Regulation are summarized below.

Classification of CII and CII Operators

The Cybersecurity Law defines CII broadly as “infrastructure that, in the event of damage, loss of function, or data leak, might seriously endanger national security, national welfare or the livelihoods of the people, or the public interest.” Article 31 of the Cybersecurity Law references a number of “key sectors,” including telecommunications, energy, transportation, water conservation, financial services, utility, and e-government.

Article 18 of the Draft Regulation further clarifies the scope of CII, specifying that “critical network infrastructure and information systems” operated or managed by entities in the sectors identified below should be considered CII, if such infrastructure, “in the event of damage, loss of function, or data leak,” may “seriously endanger national security, national welfare or the livelihoods of the people, or the public interest.” The entities that can be identified as operators of CII include:

  • Governmental agencies, and entities in the sectors of energy, finance, transportation, water conservation, healthcare, education, social insurance, environmental protection, utilities and so on;
  • Information network operators such as operators of telecommunication, broadcasting networks, and the Internet, as well as service providers of cloud computing, big data, and other large-scale public information services;
  • “Manufacturing and research and development entities” in sectors such as national defense, large-scale equipment, chemical engineering, and food and drugs;
  •  “News units,” including broadcasting stations, TV stations, and news agencies; and
  •  “Other key sectors.”

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