[Vol. 16
The Trading With the Enemy Act: The Impact of the
Amended Foreign Assets Control Regulations On
Canadian Corporations Owned by Americans
James I. W. Corcoran *
In 1968, in these pages,1 there appeared a lengthy study of the
impact of the Trading With the Enemy Act 2 and the Foreign Assets
Control Regulations3 promulgated thereunder. The scope of the
study was, broadly described, an examination of the limitations
imposed by the United States with respect to the right of foreign
business organizations to engage in the export trade with the People’s
Republic of China, North Korea, and North Viet Nam.4 At that time,
the United States purported to interdict all trade with these na-
tions by such foreign business organizations if they were “owned
or controlled” 5 by “persons subject to the jurisdiction of the United
* Of the Bars of the State of Ohio and the Commonwealth of Massachussetts.
‘Corcoran, The Trading With the Enemy Act and the Controlled Canadian
Corporation, (1968), 14 McGill L. J. 174.
250 U.S.C. app. 1-39, 41-44(1964).
331 C.F.R. 500.001-.809(1969), as amended 31 C.F.R. 500.001 -.809(1970).
4The regulations, in their pre-amendment and post-amendment forms,
prohibit all trade with “designated foreign countries” or nationals thereof.
(31 C.F.R. 500.201(a)(1970)). The “designated foreign countries” and the dates
of their designation as such are: (1) China: December 17, 1950; (2) North
Korea, i.e., Korea north of the 38th parallel of north latitude: December 17,
1950; (3) North Viet Nam, i.e., Viet Nam north of the 17th parallel of north
latitude: May 5, 1964.
5 Substantial uncertainty exists with respect to the definition of the terms
“owned or controlled”. (See Corcoran, op. cit., n. 1, at p. 179). While these terms
clearly cover the 100% owned foreign subsidiary of a United States corporation,
they may also include foreign corporations of which less than 50% of the
voting shares are owned by United States persons but which are in fact
controlled by such persons. The United States Treasury is reported to have
taken the view that less than 50% ownership may constitute sufficient control
for purposes of the regulations where 40% of the shares of a foreign corpora-
tion are owned by a United States corporation and the remaining shares are
widely held by foreigners. (Flynn, Trading With Communists: Use of Foreign
Trade for Policy Objectives, (1963), 41 A.B.A.I. 1092, at p. 1094, n. 24). Also
included in the definition of “owned or controlled” may be such foreign
corporations as Alcan Aluminum Ltd., more than 50% of the shares of which
are widely held by citizens and residents of the United States.
For purposes of convenience, the term “controlled foreign (Canadian)
corporation” will be used in this article as a shorthand for business entities
No. 3]
THE TRADING WITH THE ENEMY ACT
States”.6 Although the impact of the act and regulations extends
far beyond Canada, the scope of our study was more narrowly
focused on the Canadian scene and upon Canadian business or-
ganizations. Because of the substantial number of Canadian business
organizations which were subject to the Act and regulations by
virtue of United States ownership or control, it is probable that
no other nation has felt the impact of the Act and regulations on
its sovereignty and economic well-being to the same extent as
Canada.
The Trading With the Enemy Act and the regulations thereunder
unilaterally impose a total embargo on trade with China by “per-
sons subject to the jurisdiction of the United States” which far
surpasses the multi-lateral restraints on trade with communist bloc
countries in strategic goods imposed by the Consultative Committee
(COCOM) Canada trades freely with China subject to the COCOM
list. The United States embargoes all trade with China. Domesti-
cally, in the United States, the embargo is now imposed under the
recently enacted Export Administration Act of 1969.8 The embargo
incorporated or organized under the laws of a jurisdiction other than the
United States and “owned or controlled” by “persons subject to the jurisdiction
of the United States” (n. 6 below). It should be bourne in mind that foreign
partnerships, associations, trusts, and other foreign business entities are
likewise subject to the act and regulations and are subsumed in our definition
of “controlled foreign corporations.”
OThe Foreign Assets Control Regulations in the pre-amendment and post-
amendment forms prohibit transactions by “persons subject to the jurisdiction
of the United States” with “designated foreign countries” (n. 4 supra) or
nationals thereof. “Persons subject to the jurisdiction of the United States”
include:
(1) Any person, wherever located, who is a citizen or resident of the United
States;
(2) Any person actually within the United States;
(3) Any corporation organized under the laws of the United States or of any
state, territory, possession or district of the United States; and
(4) Any partnership, association, corporation, or other organization, where-
soever organized or doing business, which is owned or controlled by
persons specified in subparagraph
(2), or (3) of this paragraph.
(31 C.F.R. 500.329(1970)).
(1),
7 The Consultative Committee includes all members of NATO except Iceland
and, in addition, Japan.
8. The Export Administration Act of 1969, 50 U.S.C. app. 2401 -2413,
took
effect upon the expiration of the Export Control Act of 1949, 50 U.S.C. app.
2021-2032, which expired on December 31, 1969. An indication of the liberal-
ized nature of the 1969 legislation can be inferred from the shift from the
word “control” in the title of the 1949 act to the word “administration” in the
title of the 1969 act.
McGILL LAW JOURNAL
[Vol. 16
is imposed on foreign business organizations owned or controlled
by United States persons under the Trading With the Enemy Act
and the Foreign Assets Control Regulations issued thereunder. One
cannot quarrel with the jurisdictional right of the United States
to impose further restrictions on its own nationals and domestic
corporations beyond those authorized by COCOM; this right is based
on the clearly accepted principle of territoriality, a principle which
is subject to an exception generally recognized in international law
to permit a country to exercise extraterritorial jurisdiction over
its own nationals, whether they be individuals or legal entities
organized under its laws.
It is, however, dubious that the United States should, as a matter
of international law, or as a matter of policy, attempt to regulate
the export policies of business entities organized under the laws
of foreign countries and having no permanent establishment or
other substantial contact with the United States apart from the
fact that shareholder control resides in United States nationals or
residents. Corporations or other business entities organized under
the laws of a foreign country are not, as a matter of United States
law, generally considered to be nationals or residents of the United
States.9 Yet it seems clear that the assertion of jurisdiction over
controlled foreign corporations in the Act and regulations is based
upon the assertion that determination of country of incorporation or
organization of a business entity does not finally determine the
nationality of such an entity, so that a business entity organized
under the laws of a foreign country may be deemed to be a national
of the United States merely because United States nationals own
or control the business entity.
The fact that the United States and Canada are both members
of the Consultative Committee which established the multi-national
COCOM limitations on trade with communist bloc nations leads to
the unfortunate inference that, when the United States is unable
to achieve its international policy objectives on the basis of multi-
lateral negotiation, it will resort to unilateral measures with dubi-
ous basis in generally recognized principles of international law
to achieve those objectives.
9 Compare with Craig, Application of the Trading With the Enemy Act to
Controlled Foreign Corporations Owned by Americans: Reflections on Freuhauf
v. Massardy, (1970), 83 Harv. L. Rev. 579, at pp. 586 et seq., which contains
a thorough analysis of the legal basis in United States and international law
for the assertion of extraterritorial jurisdiction on the basis of ownership or
control of a foreign business entity.
No. 3]
THE TRADING WITH THE ENEMY ACT
In Canada, the offense to sovereignity inherent in the assertion
of extraterritorial control under the Act and regulations has been
heightened by the significant impact which the Act and regulations
have apparently had on the Canadian economy for more than two
decades. Our 1968 study set forth in some detail a number of cases
in which the Act resulted in the frustration of substantial export
transactions to China by Canadian corporations. We shall now
examine the 1969 amendments to the Foreign Assets Control Regu-
lations to determine their probable impact on exports by controlled
Canadian corporations to China.
The Amended Foreign Assets Control Regulations
Regardless of the actual economic impact of the Act and
regulations, which defies quantification, and regardless of the
theoretical justification in international law for the assertion of
extraterritorial jurisdiction in the Act, the promulgation by the
Director of the Office of Foreign Assets Control of a series of
amendments to the Foreign Assets Control Regulations on Decem-
ber 24, 1969 11 was properly heralded as ar significant and desirable
change in United States policy. 2 Following quickly on the heels of
the new regulations, President Nixon signed into law the Export
Administration Act of 1969 a few days later. 3 The Export Admi-
nistration Act evidences a reversal in the policy considerations un-
derlying control of exports to communist bloc nations. 4 It is gen-
erally conceded that both the amendments to the Foreign Assets
10 Corcoran, op. cit., n. 1, at pp. 189 et seq.
11 34 Fed. Reg. 20189 et seq. (1969).
12E.g., New York Times, 2 January 1970, at p. 40, col. 3.
‘3 December 30, 1969.
14The findings, set forth in section 2 of the Act, read as follows: “The
Congress makes the following findings:
(1) The availability of certain materials at home and abroad varies so that
the quantity and composition of United States exports and their distribu-
tion among importing countries may affect the welfare of the domestic
economy and may have an important bearing upon fulfillment of the
foreign policy of the United States.
(2) The unrestricted export of materials, information, and technology without
regards to whether they make a significant contribution to the military
potential of any other nation or nations may adversely affect the national
security of the United States.
(3) The unwarranted restriction of exports from the United States has a
serious adverse effect on our balance of payments.
(4) The uncertainty of policy toward certain categories of exports has curtailed
the efforts of American business in those categories to the detriment of
the overall attempt to improve the trade balance of the United States.”
McGILL LAW JOURNAL
[Vol. 16
Control Regulations and the Export Control Act of 1969 are part
of a concerted effort by the United States government to ameliorate
the political and diplomatic climate between the United States and
the People’s Republic of China.’
It is, perhaps, ironic justice, that
Canada, whose long standing efforts to establish normal diplomatic
relations with China have recently been crowned with success,”
should become an incidental beneficiary of a shift in United States
policy aimed at achieving better relations with China.
The amended Foreign Assets Control Regulations were heralded
in the press as a carte blanche for controlled foreign corporations
to trade with China, subject to the COCOM list and other applicable
foreign restraints, if any.’7 . An examination of the amendments re-
veals that the emendations are neither so sweeping nor so precise
as suggested in the press. Nonetheless, they represent, on their face,
a substantial reversal of previous policy, and contingent upon fur-
ther clarification and interpretation, may result in the development
of significant export trade with China in non-strategic items by
controlled foreign corporations.
The Structure of the Amendments
The amendments do not substantially alter any of the existing
regulatory language. Instead, a new section covering certain trans-
actions by persons in foreign countries is added to the existing
regulatory framework.’8 One significant fact about this method of
amendment is that it does not alter the claim by the United States
to extraterritorial jurisdiction over controlled foreign corporations,
but instead licenses certain transactions with China; although this
difficulty may be theoretical, in view of the fact that the United
States apparently has not yet attempted to exercise the claimed
extraterritorial jurisdiction directly over controlled foreign corpo-
rations, preferring to act against United States shareholders, it does
indicate that the amendment reflects an adjustment deemed ex-
pedient for political or diplomatic reasons and not a retreat from
the philosophy of extraterritorial jurisdiction which has always
15 New York Times, 11 January 1970, at 4, p. 6, col. 7.
16 Canada reached an accord with the People’s Republic of China on October
10, 1970 with respect to the opening of diplomatic relations; the accord was
announced on October 13, 1970. (New York Times, 25 October 1970, at p. 29,
col. 1).
17E.g., New York Times, 19 April 1970, at 3, p. 1, col. 1.
1831 C.F.R. 500.541(1970).
No. 3]
THE TRADING WITH THE ENEMY ACT
been a troublesome aspect of the regulations. New section 500.541
reads as follows:
500.541 Certain transactions by persons in foreign countries.
(a) Except as provided in paragraphs (b), (c), (d), (e) and (f) of this
section, all transactions incident to the conduct of business activities
abroad engaged in by any individual ordinarily resident in a foreign
country in the authorized trade territory, or by any partnership, asso-
ciation, corporation or other organization which is organized and doing
business under the laws of any foreign country in the authorized trade
territory, are hereby authorized.
(b) This section does not authorize any transaction involving U. S.
dollar accounts or any other property subject to the jurisdiction of the
United States.
(c) This section does not authorize any transaction involving the
purchase or sale or other transfer of:
(1) Any merchandise of U. S. origin, except as authorized by 500.533;
(2) Any merchandise regardless of origin of a type included in the
Commodity Control List of the U. S. Department of Commerce set forth
in 15 CFR Part 399 and followed on that list by the letter “A” in the column
headed “Special Provisions List” or of a type the unauthorized exportation
of which from the United States is prohibited by any of the several
regulations referred to in 15 CFR 370.10; or
(3) Any technical data, as that term is defined in 500.543, except
to the extent authorized by that section.
(d) This section does not authorize the transportation aboard any
vessel which is owned or controlled by any person described in paragraph
(a) of this section of any merchandise directly to or from mainland China
except when export of such merchandise is authorized by 500.533.
(e) This section does not authorize the supply of petroleum products
to any vessel.
(f) This section does not authorize any transaction involving North
Korea or North Viet Nam or their nationals, or merchandise the country
of origin of which is North Korea or North Viet Nam.
This new section, with the exceptions contained therein, broadly
describes the scope of transactions in which controlled foreign
corporations can now engage with China.
The other amendments which may have direct
impact on
controlled foreign corporations are section 500.538,19 dealing with
transportation and insurance of certain merchandise, and section
500.543 20 governing technical data. Additional amendments in sec-
tions 500.544 21 and 500.545 22 have been added to permit persons
19 31 C.F.R. 500.538(1970).
2031 C.F.R. 500.543(1970).
2131 C.F.R. 500.544(1970).
2231 C.F.R. 500.545(1970).
McGILL LAW JOURNAL
[Vol. 16
bearing United States passports to make necessary expenditures
incident to travel in China and to authorize United States persons
to acquire for personal and household use or gift, personal and
household goods of Chinese origin; a specific provision that
organizations exempt from United States income tax pursuant
to section 503(c)(3) of the Internal Revenue Code of 1954, as
amended, may acquire Chinese merchandise for their own use
was clearly designed to permit the acquisition of Chinese objet
d’art, printed materials and the like, by museums, eductional insti-
tutions and similar non-profit organizations in the United States.
The amended regulations specifically maintain the general em-
bargo on all transactions with North Korea and North Viet Nam,2 3
a fact consistent with the apparent policy decision underlying the
amended regulations and the Export Administration Act of 1969
to expand economic contacts with China.
A paragraph by paragraph examination of the core section of
the amendments, section 500.541, yields some interesting results.
The class of persons authorized to engage in “transactions incident
to the conduct of business activities abroad” in section 500.541(a)
includes not only any partnership, association, corporation or other
organization organized and doing business under the laws of any
foreign country in the authorized trade territory,24 but also any
individual ordinarily resident in a foreign country in the authorized
trade territory.25 The class of persons authorized under this para-
graph is broader than the class of persons which the regulations
purport to regulate, since it extends to all individuals ordinarily
resident in a foreign country in the authorized trade territory (and
not merely United States citizens) and to all foreign corporations,
partnerships, associations, or business organizations organized and
doing business under the laws of a foreign country in the author-
ized trade territory, without regard to control or ownership thereof
2331 C.F.R. 500.541(f)(1970).
24 The “authorized trade territory” is virtually global in scope; notable
exclusions are Cuba, the Soviet Union, China, the socialist republics of eastern
Europe (except Yugoslavia), North Korea and North Viet Nam. (31 C.F.R.
500.322(1970)).
25 This broad licence does not, however, extend to individuals (whether or
not they are United States citizens) who are ordinarily resident in the United
States; such individuals may be officers or directors of controlled foreign
corporations, and may be liable to prosecution under the act. This problem
is explored in greater detail in the section of this article which compares
the amended Foreign Assets Control Regulations with the Cuban Assets
Control Regulations.
No. 3]
THE TRADING WITH THE ENEMY ACT
by United States persons. We see in this authorizing language an
assertion of extraterritorial jurisdiction even broader than that
previously contained in the regulations. It should be noted that
the regulations (in both their amended and unamended forms)
purported to regulate only “persons subject to the jurisdiction
of the United States”.26 In view of this fact, the language in this
paragraph of section 500.541 seems, at very least, a curious approach
to draftsmanship.
Section 500.541(b) specifically provides that the transactions
authorized in section 500.541(a) may not be made in U.S. dollars,
U.S. dollar accounts, or in other “property subject to the jurisdic-
tion of the United States”. 27 These limitations should not impose
any substantial burden upon the development of trade with China.
Section 500.541(c) excludes from the authorization two impor-
tant categories of goods: (1) any merchandise of U.S. origin, except
as authorized in section 500.533,28 and (2) merchandise regardless
of origin of a type included on the Commodity Control List of the
United States Department of Commerce set forth in 15 C.F.R. Part
399 and followed by the letter “A”, or merchandise described in
15 C.F.R. 370.10.29 The exclusion of items on the Commodity Con-
trol List should not raise significant difficulties or substantially
limit the development of trade with China. The categories of mer-
chandise included on the Commodity Control List and followed by
an “A” thereon closely conforms to the COCOM list 3 to which
Canada adheres. The items described in 15 C.F.R. 370.10 include
arms, ammunitions, impliments of war (all generally included on
the COCOM list), gold, coins containing silver, narcotics, commodi-
ties subject to the Atomic Energy Act (likewise apparently included
on the COCOM list), watercraft, natural gas and electricity, and
tobacco seeds and plants.
However, serious difficulty arises with respect to the exclusion
of “merchandise of U.S. origin”. The Office of Foreign Assets Con-
trol has not, as yet, further clarified the interpretation of this
language. In its present form, it could result in the interdiction
20 See n. 6, supra.
2731 C.F.R. 500.313(1970).
2 8 Merchandise of U.S. origin may be licensed for export to China in the
discretion of the Department of Commerce under the Export Administration
Act of 1969. (31 C.F.R. 500.533 (1970)).
29 15 C.F.R. 370.10(1970).
30 Berman and Garson, United States Export Controls – Past, Present, and
Future, (1967), 67 Colum. L. Rev. 791, at p. 839.
McGILL LAW JOURNAL
[Vol. 16
of trade in merchandise manufactured by a controlled foreign
corporation of which a raw material or minor component part
originated in the United States, even if the cost of the raw ma-
terial or component of U.S. origin was only an insignificant portion
of the cost of the finished merchandise. Thus, for example, the
use of chemicals manufactured in the United States by a controlled
Canadian corporation in the production of newsprint from wood
pulp could result in the interdiction of newsprint exports by such
a controlled Canadian corporation to China. A more serious problem
arises with respect to motor vehicles produced in Canada by con-
trolled foreign corporations pursuant to the terms of the United
States-Canadian Automotive Products Agreement of 1965,81 despite
the fact that one of the earliest and most celebrated cases of appli-
cation of the Act and regulations to a controlled foreign corporation
in Canada was the refusal to permit sales of 1,000 motor vehicles
to China.
Substantially all of the motor vehicles manufactured in Canada
are manufactured by Canadian corporations owned or controlled
by United States persons; it seems likely, as a result of the United
States-Canadian Automotive Products Agreement of 1965, that
every motor vehicle manufactured in Canada by these corporations
contains at least some parts manufactured in the United States. 2
In view of the fact that the regulations contain approximately
ten pages of material defining material of Chinese, North Korean,
and North Viet Namese origin,33 the purchase, transport, importa-
tion or other dealing which is prohibited, the laconic character
of section 500.541(c)(1) seems to have been deliberate; in the light
of section 500.204, the Office of Foreign Assets Control cannot plau-
sibly argue that they were unaware of the definitional problem
in section 500.541, or that they were not able to provide reasonably
precise clarification of their intent. Section 500.204 includes ex-
haustive, detailed lists of merchandise and goods, requires certifi-
cates of origin for certain kinds of merchandise, and specifically
includes lists of raw materials of Chinese origin notwithstanding
the fact that such materials may have been substantially trans-
formed or processed in a country other than China, North Korea,
or North Viet Nam. Since the export from a United States parent
company to its foreign subsidiary of components or manufacturing
31 [1965] 17 U.S.T. 1372, T.IA.S. No. 6093.
32 See New York Times, 2 January 1970, at p. 42, col. 1. We do not counsel
reliance on the de minimis principle.
3331 C.F.R. 500.204(1970).
No. 3]
THE TRADING WITH THE ENEMY ACT
supplies is a common aspect of the manufacturing operations of
controlled foreign corporations, the failure to provide some fur-
ther definitional guidelines is a serious deficiency. Without further
clarification of the scope of the term “merchandise of U.S. origin”
the practical significance of the amendments to the regulations
may be virtually nil, especially with respect to controlled foreign
corporations in Canada. At present, the only means whereby a
product containing any “merchandise of U.S. origin” can be shipped
to China is pursuant to a validated license issued by the United
States Department of Commerce. The inhibitory effect on trade
of such case-by-case licensing is substantial.
In the search for a workable solution, one relevant analogy in
United States law can be found in sub-part F of the Internal Revenue
Code of 1954, as amended. The regulations under Section 954 of
the Code set out two alternative tests for determining when raw
materials or components shall be deemed to have lost their charac-
ter as such and be deemed to be merchandise manufactured by
the foreign corporation 4 These tests are: (1) a 20% of value test
which provides that when at least 20% of the value of the fully
manufactured end product results from foreign manufacture or
processing, the goods will be deemed to have been manufactured
abroad; and (2) a “substantial transformation test” which provides
that when the nature or character of the raw material or com-
ponent is substantially altered, the merchandise so altered will be
deemed to have been manufactured abroad. Examples of “sub-
stantial transformation” in the regulations include:
Controlled foreign corporation B, incorporated under the laws of foreign
country X, purchases steel rods from a related person which produces
the steel in foreign country Y. Corporation B operates a machining plant
in country X in which it utilizes the purchased steel rods to make screws
and bolts. The transformation of steel rods to screws and bolts constitutes
the manufacture of production of property for purposes of this sub-
paragraph.35
Controlled foreign corporation C, incorporated under the laws of
foreign country X, purchases tuna fish from unrelated persons who own
fishing boats which catch such fish on the high seas. Corporation C
receives such fish in country X in the condition in which taken from the
fishing boats and in such country processes, cans, and sells the fish to
related person D, incorporated under the laws of foreign country Y, for
consumption in foreign country Z. The transformation of such fish into
34 Treas. Reg. 1.954-3(a) (4) (1970).
35 Treas. Reg. 1.954-3(a)(4)(ii) Ex. 2 (1970).
McGILL LAW JOURNAL
[Vol. 16
canned fish constitutes the manufacture or production of property for
purposes of this subparagraph36
Although it is conceded that the policy considerations underlying
sub-part F and those underlying the Trading With the Enemy Act
may differ substantially, and that this divergence in policy goals
may support a different test or tests for purposes of clarifying the
term “merchandise of U.S. origin”, the need for adequate definition
of this term remains clear. A failure to relieve the patent uncer-
tainty will effectively emasculate the amended regulations in many
cases. A failure to clarify by providing a reasonable and practical
test will go far to undermine the credibility of the United States
and the economic impact of its asserted change in policy. (It
is,
of course, assumed that the embargo would remain on all COCOM
list items.)
Although the amendment restricts exports to China by con-
trolled foreign corporations to merchandise not of United States
origin and not on the COCOM list, controlled foreign corporations
may export any other merchandise to China. Further, no restric-
tions of any kind apply to purchases of merchandise of Chinese
origin by controlled foreign corporations. United States persons
are still under a total embargo with respect to such exports or
purchases. This is, perhaps, the most important aspect of the
amended regulations.
Section 500.541 also excludes transactions involving “technical
data” as that term is defined in amended section 500.541, unless
specifically authorized in amended section 500.543. The term “tech-
nical data” is defined in section 500.543(a) by reference to the de-
finition in the regulations under the Export Administration Act of
1969. “Technical data” is defined as follows:
(a) As used in this section and in 500.541, the term “technical data”
means technical data as defined in 379.1 of Part 379 of the Export Control
Regulations of the Department of Commerce
(15 C.F.R. Part 379).37
Section 379.1 of Part 379 of the Export Control Regulations of the
Department of Commerce defines “technical.data” as follows:
(a) Technical data. ‘Technical data’ means information of any kind that
can be used, or adapted for use, in the design, production, manufacture,
utilization, or reconstruction of -rticles or materials. The data may take
a tangible form, such as a model, prototype, blueprint, or an operating
manual; or they may take an intangible form such as technical service.3 8
36Treas. Reg. 1.954-3(a)(4)(ii) Ex. 3 (1970).
3731 C.F.R. 500.543(a)
3815 C.F.R. 379.1(1970).
(1970).
No. 3]
THE TRADING WITH THE ENEMY ACT
For purposes of section 500.543, technical data is divided into two
classes, “technical data of U.S. origin”, and “technical data not of
U.S. origin”. Technical data of United States origin may be ex-
ported to China by a controlled foreign corporation only if the
exportation is authorized under a general or validated license from
the U.S. Department of Commerce 9
Technical data of non-United States origin may be exported
to China by controlled foreign corporations under any one of the
following circumstances:
1. similar technical data of U. S. origin is authorized to be exported to
2.
any destination (data generally available to the public); or
technical data in the form of manuals, instruction sheets, or blueprints,
provided:
a.
they are sent pursuant to a transaction involving a commodity
licensed under section 500.541; and
they are sent no later than one year after the shipment of the
commodity to which related; and
they are of a kind ordinarily delivered with the commodity under
usual business circumstances; and
they are necessary to the installation, maintenance, or repair of
the commodity; and
they are not related to the construction, production or manufacture
of the commodity;
b.
c.
d.
e.
or, if such data is supplied in support of a prospective or actual quotation,
bid or offer to sell, lease, or otherwise supply a commodity licensed under
section 500.541, provided:
a.
b.
that such technical data is customarily provided in connection with
such quotation, bid, offer, etc.; and
that the exportation of such data will not disclose the detailed
design, production, manufacture, or means of reconstruction of
either the quoted commodity or its product.4 o
39A general license is one granted with respect to a class of goods and/or
transactions pursuant to published regulations; a validated license is issued
to an exporter to authorize the export of a particular commodity shipment
to a particular consignee in a particular country for a particular use.
4031 C.F.R. 500.543(c)(1970). A news item highlights the scope and com-
plexity of this section of the regulations. Xerox, the United States company,
announced recently that it was actively exploring the possibility of sales to
China through Rank Xerox Limited. (New York Times, May 21, 1971, p. 53,
col. 2.) Rank Xerox Limited, organized under the laws of the United Kingdom,
is an incorporated joint venture between Xerox and the Rank Organization.
Xerox holds a majority of the voting shares and thus Rank Xerox is a con-
trolled foreign corporation for purposes of the Foreign Assets Control Regula-
tions. Much of Xerox’ interest in Rank Xerox was acquired in exchange for
patents, patent applications, and know how owned by Xerox. In connection
with the proposed sales of merchandise to China, not only must such mer-
McGILL LAW JOURNAL
[Vol. 16
Although the regulations governing the exportation of technical
data of non-United States origin conform rather closely to prudent
business practice, it may be argued that the imposition of any
limitations on controlled foreign corporations with respect to tech-
nical data of non-United States origin is an unwarranted inter-
ference with the economic freedom of foreign business entities;
since their competitors not owned or controlled by United States
persons engage in exportation to China of technical data of non-
United States origin free of any limitation in United States law,
it is not clear what policy objective is achieved. It seems certain
that these regulations will not prevent the Chinese from obtaining
technical data of non-United States origin. It may place controlled
foreign corporations at a disadvantage in developing Chinese exports.
Amended section 500.53841 provides some limited authorization
for transportation and insurance by controlled foreign corporations
of merchandise going to or from China. No authorization is given
for transport of merchandise directly to or from mainland China;
however, transport or insurance of merchandise in transit indirectly
to or from China is permitted, excluding, however, transport or
insurance of merchandise of U.S. origin or items on the Commodity
Control List (followed by an “A” thereon) and items in 15 C.F.R.
370.10. The prior version of section 500.538 42 specifically embargoed
shipments to Hong Kong and Macao in certain cases; it appears
that amended section 500.538 permits shipment and insurance of
shipments by a controlled foreign corporation to or from China
via Hong Kong or Macao of licensed merchandise. Transportation
or insurance of merchandise en route directly or indirectly to or
form North Korea and North Viet Nam by controlled foreign cor-
porations are specifically prohibited in the amended regulations.
chandise not be or contain merchandise of United States origin, but also, the
inevitable transfer of technical data which must accompany such sale must
conform to the provisions of section 500.543 as it applies to technical data
of United States origin. This means, of course, that the export of such data to
China from Rank Xerox must be approved by the United States Department
of Commerce under 15 C.F.R. Part 379. As of this writing, it does not appear
that any general license exists for this purpose; perhaps Xerox has or will
obtain a validated license for the technical data involved in the proposed
transaction.
41 31 C.F.R. 500.538(1970).
4231 C.F.R. 500.538(1969).
N~o. 3]
THE TRADING WITH THE ENEMY ACT
Cuban Assets Control Regulations and
the Amended Regulations: A Brief Comparison
In our earlier study, note was made of the fact that the United
States, unable to secure any COCOM sanctions against Cuba, im-
posed sanctions under the Act. The Cuban Assets Control Regulations
became effective on July 8, 1963 However, the embargo imposed
by these regulations was limited by 515.541,” which provided a
broad authorization for controlled foreign corporations to trade
with Cuba. Section 515.541 of the Cuban Assets Control Regulations
differs only in minor points from section 500.541 of the amended
Foreign Assets Control Regulations. From a drafting standpoint, the
structure of each is identical: controlled foreign corporations are
subject to the jurisdiction of the United States and are specifically
licensed under the regulations to engage in business transactions
with the designted foreign countries. However, it should be noted
in passing that the Cuban Assets Control Regulations do not grant
a license to controlled foreign corporations in the banking business,
while the amended Foreign Assets Control Regulations make no
such distinctions in licensing all controlled foreign corporations.
The prohibition from using United States currency to effect licensed
transactions appears in both sets of regulations. The limitation on
transport by vessels owned by controlled foreign corporations is
likewise equally applicable under both sets of regulations. The
limitation on transfer of merchandise of United States origin is
likewise substantially similar. However, in the Foreign Assets Con-
trol Regulations, as amended, the embargo includes the Commodity
Control List “A” items (substantially corresponding to the COCOM
list of strategic goods) regardless of their origin; the Cuban Assets
Control Regulations do not impose an embargo on non-United States
origin strategic goods trade with Cuba by controlled foreign cor-
porations. COCOM has refused to embargo or restrict trade with
Cuba; apparently, it was felt that an attempt to impose this COCOM
list restriction on controlled foreign corporations on a unilateral
basis where COCOM had rejected any embargo was imprudent –
although at that time, the United States “reinforced” the COCOM
list by imposing a total embargo for controlled foreign corporations
on trade to China, North Korea and North Viet Nam where COCOM
imposed only a partial embargo on strategic goods.
There is no provision for the export of technical data in the
Cuban Assets Control Regulations. This omission may be an over-
4331 C.F.R. 515.101-.809(1970).
44 31 C.F.R. 515.541(1970).
McGILL LAW JOURNAL
EVol. 16
sight. It is also possible that the broad language of the Cuban
Assets Control Regulations 45 is sufficient in itself to permit export
of technical data to Cuba, at least if such technical data is of non.
United States origin. It is a more difficult question whether tech,
nical data of United States origin exported to a controlled foreign
corporation may be, under the Cuban Assets Control Regulations,
exported to Cuba by the controlled foreign corporation incident
to a business transaction with Cuba. It may be United States policy
to prevent such transshipment pursuant to the terms of the initial
license granted for the export of the technical data to the con-
trolled foreign corporation.
The Cuban Assets Control Regulations contain no explicit lim-
itation on the supply of petroleum products to Cuban vessels by
controlled foreign corporations. They do contain one provision which
was especially troublesome and which has been deleted from
s. 500.541 of the amended Foreign Assets Control Regulations. This
limitation states that the authorization to trade with Cuba did not
apply to “any person subject to the jurisdiction of the United States
other than an organization described in paragraph (a)” –
that is,
controlled foreign corporations. This language raised specific prob-
lems concerning the possibility of sanctions for violation of the
embargo with respect to United States citizens who were officers
and/or directors of the controlled foreign corporation. It appears
that the United States Treasury has taken the position that the mere
presence of a United States citizen as a director of a controlled
foreign corporation is sufficient, regardless of his involvement in,
or perhaps even opposition to, sales to Cuba, to result in the im-
position of criminal penalties on such person under the Act.46 As a
matter of law, this position seems doubtful since the Act requires
that violations be “wilful”,47 but the in terrorem effect of such a
position could easily assure that no sales to Cuba would be made.
Since virtually all controlled foreign corporations have one or more
directors and officers who are United States citizens, the practical
effect of the broad license granted for trade with Cuba may have
been nullified by this narrow interpretation of the regulations.
45
… all transactions incident to the conduct of business activities abroad…”
(31 C.F.R. 515.541(a)(1970)).
46 See Craig, op. cit., n. 9, at p. 600, n. 95, indicating that the United States
Treasury has in fact taken the position that mere evidence that a United States
citizen or resident is a director of a controlled foreign corporation trading
with Cuba is sufficient to threaten such director with prosecution.
4750 U.S.C. app. 5(b)(1970); 31 C.F.R. 500.701 (1970).
No. 3]
THE TRADING WITH THE ENEMY ACT
The amended Foreign Assets Control Regulations meet this
problem in two ways. First, there is no language in section 500.
541 which explicitly forbids any United States citizen from en-
gaging in, participating in, or being involved in any licensed trans-
action. Secondly, section 500.541(a) specifically grants a license to
“… any individual ordinarily resident in a foreign country in the
authorized trade territory.. .”. Thus, at least with respect to United
States citizens resident abroad, the ambiguity and uncertainty in the
Cuban Assets Control Regulations has been removed in the amended
Foreign Assets Control Regulations. On the basis of the United States
Treasury Department interpretation of the Cuban Assets Control
Regulations, however, it is still possible that the Treasury will
take the position that where any officer or director of a controlled
foreign corporation is ordinarily resident in the United States, that
such person will incur liability under the Act if the controlled
foreign corporation with which he is associated engages in a li-
censed transaction with China. Since virtually all controlled foreign
corporations have one or more such directors or officers, the re-
maining uncertainty in this regard will certainly have a “chilling
effect” upon the development of trade with China by controlled
foreign corporations.
Although it may appear that the amended Foreign Assets Control
Regulations represent an advance in clarity over the Cuban Assets
Control Regulations, until some further clarification is forthcoming
upon the application of the amended regulations to officers, and
most especially to directors, of controlled foreign corporations, who
are resident in the United States, the amendment may rightly be
viewed as an attempt to mollify foreign concern over extraterri-
torial jurisdiction while, at the same time, achieving the same re-
sult through pressure on persons resident in the United States. In
view of the reluctance of controlled foreign corporations in Canada
and elsewhere to trade with Cuba under the general license, it seems
that the practical impact of the amended Foreign Assets Control
Regulations may be nil, at least until some further clarification of
this problem is obtained.
Rhodesian Sanction Regulations
One other set of regulations under the Trading With the Enemy
Act deserves special notice, involving, as it does, international trade.
The Rhodesian Sanctions Regulations,49 effective July 29, 1968, re-
4831 C.F.R. 530.101-.809(1970).
4931 C.F.R. 530.201(1970).
McGILL LAW JOURNAL
[Vol. 16
placed the earlier Rhodesian Transaction Regulations issued as of
January 5, 1967. The Rhodesian Sanctions Regulations impose pro-
hibitions on transactions in property destined to or exported from
Rhodesia or transfers for the account of Rhodesian nationals.0
The scope of this embargo, similar to that of the Foreign Assets
Control Regulations in their unamended form, applies to all con-
trolled foreign corporations. Although the Rhodesian Sanctions
Regulations can be seen as a temporary regression on the evolu-
tionary path begun with the Cuban Assets Control Regulations in
1963 and continuing now with the amendments to the Foreign
Assets Control Regulations, there may be a qualitative difference
similar to the difference noted above with respect to the inclusion
of the COCOM list “A” goods in the amendment to the Foreign
Assets Control Regulations; that is, both the COCOM list “A” goods
and the Rhodesian sanctions correspond broadly to the guidelines
set forth but a multi-national body as an instrument of interna-
tional policy.51 Although it can be argued that it is, nonetheless,
inappropriate to enforce these multilateral agreements by extend-
ing the jurisdiction of one of the parties thereto beyond its tradi-
tional territorial limits, this argument is solely based on the rather
jealousy guarded field of sovereignty and jurisdiction. Practically
speaking, the economic impact of such regulations must be minimal.
Conclusion
The amended Foreign Assets Control Regulations do represent
an advance over the previous regulations, permitting, as they do,
controlled foreign corporations and U.S. citizens resident abroad,
to engage in many transactions with China which were heretofore
forbidden. However, the new regulations require some substantial
clarification if their impact is not to be severely limited, especially
with respect to controlled Canadian corporations; specifically, some
reasonable and practical definition of the term “merchandise of
U.S. origin” must be forthcoming; the lurking uncertainty with
respect to officers and directors of controlled foreign corporations
who are resident in the United States must also be clarified.
50 The Rhodesian Sanctions Regulations make specific reference to 22 U.S.C.
289, a section of the United Nations Participation Act, and to two Executive
Orders issued with respect to Rhodesian trade: Exec. Order No. 11322, 3 C.F.R.
426 (1970) and Exec. Order No. 11419, 3 C.F.R. 438 (1970).
(31 C.F.R. 530.101(b)
(1970)). These regulations implement the United Nations embargo on trade
with Rhodesia.
51 New York Times, 2 January 1970, at p. 40, col. 3.
No. 3]
THE TRADING WITH THE ENEMY ACT
The amended regulations, like the Cuban Assets Control Regula-
tions before them, do not permit controlled foreign corporations
to trade with China by placing a limit on United States jurisdiction
over controlled foreign corporations or their United States share-
holders, but rather by granting a license for transactions with China,
subject to limitations noted above. Since blanket embargoes still
exist with respect to North Korea, North Viet Nam and Rhodesia,
it seems clear that a blanket retraction of jurisdiction was not
deemed a possible solution by the United States. Limitations on
controlled foreign corporations’ trade with Rhodesia, North Korea
and North Viet Nam may be more palatable to the international
community; certainly the real economic impact of these embargoes
is small.
One remaining question is what the impact of the amended
regulations will be on Canadian trade with China. Although some
of this impact must necessarily await a clarification of the terms
“merchandise of U.S. origin”, Canada should be in a favorable posi-
tion to market goods in China in view of her already substantial
sales of grains to China. It seems clear that Canada will face stiff
competition from Japan and Western Europe, especially West Ger-
many with respect to sales of manufactured goods to China. A
study now in preparation by M. Claude E. Forget for the Private
Planning Association will apparently document the feasibility of
such trade on a competitive basis, although the Japanese competi-
tion is apparently acknowledged to be very difficult to beat. The
New York Times indicated that as of January 2, 1970, only a little
more than two weeks after the announcement of the amended
regulations, that there were few signs that Canadian businessmen
were hustling to explore the implications of the newly amended
regulations . 2
It is to be hoped that one problem which arose subsequent to
the promulgation of the Cuban Assets Control Regulations in 1963
will not recur. This problem is the unwillingness of controlled
foreign corporations, whether as the result of actions of United
States citizens who are officers or directors of such corporations,
or as a result of the management structure or pressure from
United States corporate parents, to engage in trade with designated
foreign countries for which no general license exists for United
States corporations. This problem is admittedly not entirely a legal
problem, (although some officers and directors of controlled foreign
corporations might have been subject to criminal prosecution), but
52 Id.
McGILL LAW JOURNAL
[Vol. 16
a problem of management and of the willingness and ability of the
controlled foreign corporation to act as a national of the juris-
diction of its incorporation would act; it is a question of real
integration into the foreign environment where the controlled
corporation is organized and operating. It is a significant problem,
however, in which the Trading With the Enemy Act has played no
inconsequential part. It is to be hoped that further clarification
of the presently existing uncertainties in the amended Foreign As.
sets Control Regulations will be promptly forthcoming, and that
controlled foreign corporations in Canada and elsewhere will not
hesitate to avail themselves of the license exemption which au-
thorizes them to trade with China. Certainly, this objective is
consistent with declared United States policy.
A Postscript
Since the receipt of the galley proofs of this article by the author,
further changes in the Foreign Assets Control Regulations have been
promulgated following the now famous United States-Chinese table
tennis tournament in Peking in April of 1971. In close conjunction
with that tournament, President Nixon announced, on April 14, 1971,
a five point program of relaxation of the United States embargo on
trade with China.53
53 See Statement of President Nixon Announcing Changes in U.S. Trade and
Travel Restrictions, April 14, 1971, 7 Weekly Pres. Docs. 628 (1971); New York
Times, April 15, 1971, at p. 1, col. 8; Wall Street Journal, April 15, 1971, at p. 2,
col. 2. The five points are, in general terms as follows: (1) expediting of visas
for Chinese nationals desiring to travel to the United States, (2) promulgation
of a list of non-strategic goods of United States origin for export to China
and a list of merchandise of Chinese origin which may be purchased and/or
imported by United States persons, (3) relaxation of United States currency
controls to permit the use of United States dollars in transactions with China,
(4) permission for United States flag vessels (which must be owned by United
States persons under applicable United States law) to transport cargoes of
licensed merchandise between non-Chinese ports and permission for foreign
flag vessels owned or controlled by United States persons, controlled foreign
corporations, or persons ordinarily resident abroad to transport certain car-
goes to and from Chinese ports; insurance of such cargoes by United States
persons, controlled foreign corporations and persons ordinarily resident
abroad is also permitted, and (5) permission for the supply of petroleum
products to Chinese owned or operated vessels or aircraft by United States
persons, controlled foreign corporations, and persons ordinarily resident
abroad.
No. 3]
THE TRADING WITH THE ENEMY ACT
On May 8, 1971, amendments to the Foreign Assets Control Reg-
ulations were published in the Federal Register. 54 The amendments
of May eighth implement only three of President Nixon’s five points,
those with respect to currency controls, transport and insurance of
cargoes, and supplying of fuels to Chinese owned or operated vessels.
Subsequently, on June 10, 1971, President Nixon announced the
removal of the embargo on the sale of certain non-strategic goods
of United States origin to China,55 and by further amendment to
the Foreign Assets Control Regulations, the complete removal of the
nearly total embargo on the importation or purchase of merchandise
of Chinese origin by United States persons.” These announcements
implement what appears to be the most significant of President
Nixon’s five points –
the relaxation of the trade embargo. The
impact, however, is greater for United States persons than for con-
trolled foreign corporations and persons ordinarily resident abroad,
since the latter two classes were licensed to purchase or import
into foreign countries, prior to May 7, 1971, merchandise of Chinese
origin.
It should be noted that the first of President Nixon’s five points,
that of expediting visas for Chinese nationals coming to the United
States will not directly involve the Trading with the Enemy Act or
the Foreign Assets Control Regulations.
5436 Fed. Reg. 8584 (1971). These amendments were effective May 7, 1971.
55 Fed. Reg. 11808
(1971). The relaxation of the embargo on the sale of
merchandise of United States origin to China was effected by amendment to
regulations under the Export Administration Act of 1961. As amended, 15
C.F.R. 371.3 provides a general license for sale of enumerated classes of non-
strategic merchandise to China. Sales of such merchandise of United States
origin may be made by United States persons, controlled foreign corporations
or persons ordinarily resident abroad. Although not published in the Federal
Register until June 19, 1971, this amendment was effective as of June 11, 1971.
50 36 Fed. Reg. 11441 (1971), amending the Foreign Assets Control Regulations
by adding section 500.547 thereto. This section, effective June 10, 1971, provides
a general license for United States persons to purchase, deal in, and import
into the United States, merchandise of Chinese origin. As noted (see n. 21 and
n. 22 supra) certain limited non-commercial purchases and/or importation
into the United States of merchandise of Chinese origin were permitted under
the prior regulations; by virtue of the broader license in section 500.547, the
limited license in section 500.544 is deleted as unnecessary. This amendment
has limited impact on the controlled foreign corporation or the person resi-
dent abroad, since they were permitted to purchase, deal in and import into
foreign countries merchandise of Chinese origin prior to June 10, 1971; how-
ever, the controlled foreign corporation and persons ordinarily resident abroad
may now engage in sales of merchandise of Chinese origin to the United States.
McGILL LAW JOURNAL
[Vol. 16
We shall first review the amendments of May 8, 1971, and then
consider the more recent amendments of June 10, 1971. The new
regulations promulgated on May eighth include (1) a revision of
500.538, (2) a revision of 500.541 (which section applies only to
persons ordinarily resident abroad and to controlled foreign cor-
porations), and (3) a new section 500.546. A brief analysis of these
new or revised sections will provide an understanding of the scope
of the relaxation effected by the May eighth amendments.
Amended 500.538 authorizes United States persons, controlled
foreign corporations and persons ordinarily resident abroad to
transport and/or insure cargoes bound directly or indirectly to or
from China, provided, however, that such cargoes destined to China
may not include merchandise of United States origin or COCOM
list items, unless a general or validated license has issued with
respect thereto. (Under the amendments of June 10th, a general
license for sale of certain non-strategic merchandise of United
States origin to China has been issued.) There is no restriction on
the type of merchandise which may be transported from China, but
merchandise in transit directly or indirectly to or from North Korea
or North Viet Nam is excluded from the scope of the amendment
to 500.538. An important caveat is in order, however. United States
flag vessels and aircraft of United States registry (which ships and
aircraft must be owned by United States persons) may not call at
Chinese ports by virture of amended regulations recently issued by
the Commerce Department. 7 Thus, United States persons who desire
to transport merchandise to or from China may do so, subject to
the restrictions set forth above with respect to the classes and
destinations of merchandise, only in foreign flag vessels or aircraft
of foreign registry.
The commercial impact of the transportation license may have
been broadened considerably by the licensing of sales to China of
5736 Fed. Reg. 8672 (1971). Published on May 11, 1971, this amendment was
effective May 7, 1971. United States flag vessels and aircraft of United States
registry may not call at Chinese ports, nor may they transport merchandise
directly or indirectly to China, except that transport of merchandise consigned
to China between non-Chinese ports by United States flag vessels and United
States aircraft is permitted if a general or validated license has been issued
with respect to such merchandise by the United States Department of Com-
merce. Merchandise of non-United States origin consigned to China may be
transported between non-Chinese ports if of a type for which a general license
has been issued under the Export Administration Act of 1969. Transport of
merchandise of Chinese origin between non-Chinese ports is generally per-
mitted; however, no merchandise of North Korean or North Viet Namese
origin may be transported.
No. 3]
THE TRADING WITH THE ENEMY ACT
non-strategic merchandise of United States origin and the general
license to import into the United States merchandise of Chinese
origin; however, most experts feel that it will be several years
before United States-Chinese trade volumes reach significant levels,
primarily due to China’s shortage of foreign exchange.
Amended section 500.541 broadens the general license granted
to controlled foreign corporations and persons ordinarily resident
abroad under old section 500.541.58 The new regulations grant a
general license authorizing transactions with China and her nationals
in United States dollars and “property subject to the jurisdiction
of the United States.” ” However, Chinese assets “frozen” on or
prior to May 6, 1971 remain “frozen.”
sNew section 500.541 reads as follows:
“Certain transactions by persons in foreign countries:
(a) Except as provided in paragraph (b), (c), (d), (e), and (f) of this section,
all transactions incident to the conduct of business activities abroad en-
gaged in by any individual ordinarily resident in a foreign country in
the authorized trade territory, or by any partnership, association, corpora-
tion, or other organization which is organized and doing business under
the laws of any foreign country in the authorized trade territory, are
hereby authorized.
(b) This section does not authorize any transaction involving property sub-
ject to the jurisdiction of the United States as of May 6, 1971 in which there
existed or had existed at any time on or since the effective date, any
direct or indirect interest of China or nationals thereof.
(c) This section does not authorize any transaction involving the purchase
or sale or other transfer of:
(1) Any merchandise of U.S. origin, except as authorized by 500.533;
(2) Any merchandise regardless of origin of a type included in the Com-
modity Control List of the U.S. Department of Commerce set forth
in 15 C.F.R. Part 399 and followed on that list by the letter “A” in the
column headed “Special Provisions List” or of a type the unauthorized
exportation of which from the United States is prohibited by any of
the several regulations referred to in 15 C.F.R. 370.10; or
(3) Any technical data, as that term is defined in section 500.543, except
to the extent authorized by that section.
(d) (Deleted).
(e) This section does not authorize the supply of petroleum products to any
vessel bound to or from North Korea, North Viet Nam or Cuba.
(f) This section does not authorize any transaction involving North Korea or
North Viet Nam or their nationals, or merchandise the country of origin
of which is North Korea or North Viet Nam.”
59 This term apparently includes all “property” (defined at 31 C.F.R. 500.311
(1970)) of any nature whatsoever which is subject to the jurisdiction of the
United States and includes, without limitation, securities issued by United
States persons or securities issued by any person if the certificate evidencing
the security is located in the United States (31 C.F.R. 500.313 (1970)). It appears
McGILL LAW JOURNAL
[Vol. 16
The principal significance of the permission to effect transactions
with China involving United States currency will be to permit China
to build her currency reserves in United States dollars and to pro-
vide commercial flexibility in export transactions with China. Con-
trolled foreign corporations in the banking business may increase
their involvement with China.
Old 500.541(d) which operated to prohibit the indirect trans-
port to China or insurance of unlicensed merchandise of United
States origin or COCOM list items by controlled foreign corporations
and persons ordinarily resident abroad has been deleted. However,
this prohibition, including a prohibition of direct transportation to
China and/or insurance of such unlicensed merchandise, is now
contained in 500.538(d) and applies to controlled foreign corpo-
rations, persons ordinarily resident abroad, and United States
persons alike.
Section 500.541(e) has been amended to permit supplying of
petroleum products to vessels or aircraft owned by or under charter
to China or her nationals. It appears that such products must be
for use on the vessel or aircraft. The embargo on the supply of
petroleum products to vessels bound to North Korea or North
Viet Nam remains in effect. In the interest of regulatory economy,
new 500.541(e) of the Foreign Assets Control Regulations also
prohibits supply of petroleum products to any vessel bound to or
from Cuba. The absence of such a provision in the Cuban Assets
Control Regulations was noted in the body of this article. By
choosing to include Cuba under this section of the Foreign Assets
Control Regulations instead of under the Cuban Assets Control
Regulations, the Office of Foreign Assets Controls may have laid
a trap for the unwary. This can, of course, be corrected by appro-
priate amendment of the Cuban Assets Control Regulations.
New 500.546 provides a blanket license to United States persons,
controlled foreign corporations, and persons ordinarily resident
abroad for transactions with China and her nationals, excluding
that “property subject to the jurisdiction of the United States” is a generally
broader class of property than “merchandise of United States origin”, although
“merchandise” is defined as “… all goods, wares and chattels of every descrip-
tion without limitation of any kind” at 31 C.F.R. 500.331 (1970). Quaere whether
“merchandise” includes intangible personal property? This seems unlikely,
since otherwise the announced relaxation on currency controls and banking
transactions would not be effected by the amended regulations. Can Chairman
Mao buy shares of IBM?
No. 3]
THE TRADING WITH THE ENEMY ACT
“frozen” assets, exports of COCOM list items and unlicensed mer-
chandise of United States origin, exports of technical data, and
import and/or purchase of Chinese merchandise, except to the
extent that such transactions were already permitted to controlled
foreign corporations or persons ordinarily resident abroad prior
to May 7, 1971. The June 10th amendments license export of certain
classes of merchandise of U.S. origin and provide blanket permission
for import and/or purchase of Chinese merchandise. The impact
of this new section is primarily with respect to United States
persons.
Under new 500.546, United States persons are permitted to sell
to China any merchandise not included on the COCOM list and not
of United States origin; the effect of this is to place United States
persons on a par with controlled foreign corporations and persons
ordinarily resident abroad who were licensed to engage in such
sales to China under 500.541 prior to May 7, 1971. The June 10th
amendments also permit sales to China of certain merchandise of
United States origin.
Section 500.546 also permits United States persons to engage
in transactions with China and her nationals involving United States
dollars and in property subject to the jurisdiction of the United
States to the same extent as permitted to controlled foreign corpo-
rations and persons ordinarily resident abroad under amended
500.541. United States banks and their foreign branches are now
permitted to engage in all varieties of banking transactions with
China and her nationals in United States or foreign currencies,
except transactions involving “frozen” assets, or involving COCOM
list items, merchandise of United States origin, or merchandise of
Chinese origin.
A further effect of new section 500.546 is to permit United States
persons to supply petroleum products to vessels or aircraft owned
or chartered by China or her nationals for use on the vessel or
aircraft, provided, however, that no such supplies can be made to
vessels bound to or from North Korea, North Viet Nam or Cuba.60
The Office of Foreign Assets Controls apparently takes the position
that such supply activities must take place outside the geographic
60 It appears that controlled foreign corporations and persons ordinarily
resident abroad may supply petroleum products to Cuban aircraft, provided
that such products are not of United States origin. However, such action
invites informal sanctions by the Office of Foreign Assets Controls.
McGILL LAW JOURNAL
[Vol. 16
limits of the United States.61 The regulations do not, on their face,
support such a construction. This position may reflect a rather
broad definition of the term “merchandise of United States origin.” 0 2
It is interesting to note that section 500.541 which applies only
to controlled foreign corporations and persons ordinarily resident
outside the United States has been retained in the May eighth amend-
ments. The historical reason for the promulgation of this section
was to permit the imposition of slightly lesser restraints upon such
persons than were imposed upon United States persons. However,
the thrust of the form and substance of the amendments of May 8,
1971 has been to eliminate most differences between United States
persons on the one hand and controlled foreign corporations and
persons ordinarily resident abroad on the other.
Of the remaining disparities between United States persons and
controlled foreign corporations and persons ordinarily resident
abroad, some result from the interposition of prohibitions on United
States persons by the United States Department of Commerce. How-
ever, controlled foreign corporations and persons ordinarily resident
abroad are permitted to transfer technical data of non-United States
origin to China under the rules in section 500.543 and to import
and/or purchase for resale merchandise of Chinese origin. United
States persons still have no general license for these transactions
under the May eighth amendments.
61 The text of the explanatory note accompanying the amendments of May 8,
1971 states “… removes the controls on … the bunkering by American oil
companies abroad of Chinese vessels…” (36 Fed. Reg. 8584 (1971)). (Emphasis
added).
62 0n May 15, 1971, the United States Department of Commerce published
in the Federal Register revised general licenses with respect to the supply
(i.e. export) from the United States of petroleum products and other stores
for use on ships and aircraft. (36 Fed. Reg. 8932 (1971)). These provisions,
amending 15 C.F.R. 371.9 and C.F.R. 371.10 (1971) were effective as of May 7,
1971.
As amended, these licenses permit the supply of petroleum products and
other ship and plane stores to vessels or aircraft owned or operated by China
or her nationals, excluding vessels or aircraft which have called or will call
at ports of North Korea or North Viet Nam within specified time periods
or which will carry within 120 days any unlicensed commodities destined,
directly or indirectly to North Korea or North Viet Nam. Vessels owned or
operated by North Viet Nam, North Korea or Cuba are excluded. Thus, ship
and plane stores are the first merchandise of United States origin for which
a general license for export to China has been issued. United States persons
are licensed to sell such supplies to Chinese vessels or aircraft within the
United States.
No. 3]
THE TRADING WITH THE ENEMY ACT
In conclusion, the May eighth amendments relax restrictions on
United States persons, controlled foreign corporations, and persons
ordinarily resident abroad with respect to the use of United States
currency, transportation and insurance of merchandise bound to
or from China, and the fueling of Chinese vessels and aircraft.
The Foreign Assets Control Regulations amendment effective on
June 10, 1971 appeared in the Federal Register on June 12, 1971.63
This amendment, adding a new section 500.547, provides a general
license for the purchase of merchandise of Chinese origin; prior to
June tenth, United States persons were prohibited, with limited
exceptions, 64 from purchasing, dealing in, or importing into the
United States any merchandise of Chinese origin as described in
section 500.204 of the regulations. The general license applies to all
transactions in Chinese merchandise after June 10, 1971; however,
merchandise of North Korean or North Viet Namese origin is still
embargoed. Although the amendment is applicable by its terms to
controlled foreign corporations and persons ordinarily resident
abroad, the effect on such corporations or persons is negligible in
view of the license granted to them previously under 500.541 to
purchase, deal in, or import into foreign countries merchandise
of Chinese origin. Some controlled foreign corporations or foreign
residents may take advantage of the license to purchase Chinese
goods for resale to the United States, or to purchase components,
materials, or products of Chinese origin for further manufacture
or processing prior to sale in the United States.
The more significant action taken on June 10, 1971 was the
announcement of the classes of merchandise of United States origin
for which a general license was granted to permit export to China.
This action was taken by amendment to the Export Control
Regulations 35 which are issued under the Export Administration Act
of 1969. The amendment was promulgated by the Export Control
Office of the Commerce Department which has primary authority
to regulate the export policy of the United States.
The scope of the general license is not terribly broad –
although
Schedule 1 under amended Part 371 which lists the licensed merchan-
dise is lengthy and complex. Foodstuffs, medecines, fertilizers and
03 36 Fed. Reg. 11441 (1971).
64 See n. 21 and n. 22 supra; the June amendment deletes section 500.544 as
no longer necessary.
05 36 Fed. Reg. 11808 (1971) amending 15 C.F.R. 371.3 and adding Supplement
No. 1 to Part 371. This amendment, published June 19, 1971 is effective June 11,
1971.
McGILL LAW JOURNAL
[Vol. 16
a host of other non-strategic items are included. Despite speculation
on the scope of the list prior to its appearance,”” one must conclude
that the list was probably prepared prior to the April 14th an-
nouncement by President Nixon. It is, if anything, on the restrictive
side –
narrower than the COCOM list embargo on China, and
narrower than the United States embargo on trade with the Soviet
Union. It
is, however, primarily an embargo on United States
persons; the embargo respects the territorial principal embodied
in private international law. Further, it seems likely that the scope
of the license will be broadened to reflect or induce additional
diplomatic contacts between China and the United States.
The impact of amended Part 371 on controlled foreign corpo-
rations and persons ordinarily resident abroad is indirect, but not
unimportant. The Foreign Assets Control Regulations prohibit sales
of merchandise of United States origin to China unless a general
or validated license therefor has been issued by the Commerce
Department. While this restriction is essentially surplusage with
respect to United States persons, since they are restrained by the
Export Control Regulations, the regulations are effective to limit
the sale of merchandise of United States origin by controlled foreign
corporations and persons ordinarily resident abroad. 7 As indicated
above in the body of this article, this restriction may have played
a significant part in limiting the development of exports by con-
trolled Canadian corporations to China.
While the regulations as amended license the export of a host
of finished products, including agricultural equipment, there is no
good indication whether the license to export a tractor made in
the United States includes a license to export a tractor manufactured
in Canada which contains some parts made in the United States.
Even if we assume that when the completed products are licensed,
the components are licensed a fortiori, it is not clear whether
similar components in a light truck manufactured in Canada would
be licensed. (Light trucks are not licensed). Thus, the amended
regulations provide no real solution to the “merchandise of United
60 See e.g., New York Times, April 15, 1971, at p. 1, col. 8; Wall Street Journal,
April 15, 1971, at p. 2, col. 2 in which Professor Stanley Lubman of the Faculty
of Law of the University of California expresses concern that pressure from
the Department of Defense sought to restrict narrowly the classes of “non-
strategic goods” for which a license was granted.
67 31 C.F.R. 500.533 (1971) licenses all exports of merchandise of United States
origin to China for which a general or validated license has been issued by
the Commerce Department.
No. 3]
THE TRADING WITH THE ENEMY ACT
States origin” problem which we examined in the body of this
article. In part, this is due to the curious nature of the regulatory
framework whereby the Commerce Department licenses exports
from the United States, presumably with little or no consideration
of the impact of these regulations as incorporated by reference
into the Foreign Assets Control Regulations.
The recent amendments to the Foreign Assets Control Regulations
and the Export Control Regulations have reduced the differential
and preferred treatment which was afforded to control foreign
corporations and persons ordinarily resident abroad by broadening
the scope of licensed activities for United States persons. Problems
still remain with the Foreign Assets Control Regulations as they
apply to controlled foreign corporations and foreign residents; for
example, the question of director liability remains a significant
impediment to trade development. Since it seems likely that further
amendments to the Commerce Department list and the Foreign
Assets Control Regulations may be forthcoming, it would appear
appropriate for controlled foreign corporations, persons resident
abroad, and interested foreign governments to make their views
known to the State Department, the Commerce Department, and
the Office of Foreign Assets Controls.
