Communist Chinese Military Companies and Section 1237: A Primer

A Xiaomi store in Hangzhou, China. (Photo credit: Open Grid Scheduler / Grid Engine via Flickr https://www.flickr. com/photos/opengridscheduler/43261099712 CC by 1.0 https://creativecommons.org/publicdomain/zero/1.0/) In recent months, two Chinese companies have filed lawsuits contesting their designation as “Communist Chinese military companies” (CCMCs) by the Department of Defense. Xiaomi and Luokung Technology have filed proceedings in the U.S. District Court for the District of Columbia against the Defense and Treasury departments for alleged violations of their due process rights. On March 12, Judge Rudolph Contreras of the D.C. District Court granted Xiaomi a preliminary injunction against their designation.   These companies have been “blacklisted” under Section 1237 of the Strom Thurmond National Defense Authorization Act (NDAA) for fiscal year 1999, as amended. This post provides background on Section 1237, examines the current state of play, and assesses the ongoing legal battle between the U.S. government and the companies over the CCMC label and its accompanying consequences.  Background and Text of Section 1237 NDAA for Fiscal Year 1999 Section 1237 was passed against a backdrop of growing concerns about China in the late 1990s. The theme of the House Committee on National Security report on the 1999 NDAA was the threat of an ascendant China. Congress was considering the bill as the 10th anniversary of the Tiananmen Square massacre approached and President Clinton was renewing engagement with China. Leaning heavily on the 1997 Quadrennial Defense Review , the committee indicated that the bill was designed to help the national security community “prepare now for an uncertain future that may include ‘significant’ future threats from a rising China.”  Then-Sens. Tim Hutchinson and Spencer Abraham introduced Section 1237 as an amendment to a Senate resolution that eventually became the 1999 NDAA. In his remarks on the amendment, Hutchinson indicated that it was designed to address “the growing threat that the People’s Republic of China poses to the citizens of the United States.” The amendment, Hutchinson said, would help stem the tide of Chinese companies “funding [an] arms buildup in China[,]” provide the president with extra authority to act against Chinese entities, and allow Americans to know whether they were “funding the People’s Liberation Army.”   In line with Hutchinson’s stated goals, Section 1237(a)(1) authorizes the president to use his powers under the International Emergency Economic Powers Act (IEEPA)—without declaring a national emergency —against companies falling under subsection (b) of the provision. Subsection (b) seeks to identify companies working for the Chinese military. Specifically, Section 1237(b)(1) instructs the secretary of defense to “make a determination of those persons operating directly or indirectly in the United States or any of its territories and possessions that are Communist Chinese military companies” in the form of a published list.   Originally, entities were designated as CCMCs under Section 1237(b)(4) if they met two criteria:  they were “owned or controlled by the People’s Liberation Army” and  they were “engaged in providing commercial services, manufacturing, producing, or exporting.”  Section 1237(c) confirms that the Chinese intelligence services are encompassed within the meaning of “the People’s Liberation Army” (PLA).  After the House accepted the Senate’s amendments, President Clinton signed the 1999 NDAA into law—but with a signing statement attached. While acknowledging that the bill “as a whole” was “beneficial to the national defense,” Clinton went on to highlight numerous concerns. Though he did not mention Section 1237 by name, Clinton took issue with “several provisions” that “could be interpreted to intrude unconstitutionally on the President’s authority to conduct foreign affairs and to direct the military as Commander-in-Chief” and indicated he would “interpret these provisions in light of [his] constitutional responsibilities.” Given that Section 1237 directed the secretary of defense to designate certain Chinese companies as being “owned or controlled by the People’s Liberation Army[,]” this may have been one of the “several provisions” Clinton was referring to.   NDAAs for Fiscal Years 2001 and 2005 In any case, the Clinton administration never published the called-for list. This stance continued even after the administration received letters in July and September 1999 from members of Congress asking why it had not done so. The administration didn’t publish the list even after then-Secretary of Defense William Cohen assured then-Rep. Christopher Cox in a letter dated Aug. 13, 1999, that the Defense Department would comply (though he also cautioned that such a requirement might be inconsistent with existing law regarding civil liberties protections for U.S. persons).  This led to the revision of Section 1237 through the Floyd D. Spence National Defense Authorization Act for fiscal year 2001. Then-Rep. Tillie Fowler introduced an amendment indicating that it was the “sense of Congress that the Secretary of Defense has not complied with the requirements of section 1237(b)[.]” However, during the conference committee process, this “sense of Congress” was removed and replaced with a Senate amendment that would require the Defense Department to “report” rather than “publish” the list, and to submit the report to the armed services committees of both houses of Congress (along with certain executive branch officials) by March 1, 2001. The amendment also changed the requirement to update the list “regularly” under the original version into a mandate to update the list annually. This version of the amendment became Section 1233 of the 2001 NDAA. Section 1237 was amended a final time through the Ronald W. Reagan National Defense Authorization Act for fiscal year 2005. The revision, which then-House Armed Services Committee Chairman Duncan Hunter introduced as part of the original House draft of the bill, enlarged the number of companies covered by the original version of Section 1237. Specifically, Section 1222 of the 2005 NDAA dramatically expanded the universe of entities that could be designated as CCMCs to include those “affiliated with” not only the PLA but also any ministry of the People’s Republic of China. In addition, it now covered any organization “owned or controlled by any entity affiliated with the defense industrial base” of China.  Letters From 2019 and 2020 Despite the Senate’s publication concession in 2000, the CCMC report never materialized. Indeed, the NDAA provision lay dormant through the Bush and Obama administrations, until it was finally picked up in September 2019 by Sens. Tom Cotton and Chuck Schumer, and Reps. Michael Gallagher and Ruben Gallego. The members of Congress wrote a letter to then-Defense Secretary Mark Esper referencing Section 1237 and asking Esper to release a list that complied with the provision.  While the letter does not explicitly say the Department of Defense never issued a report naming CCMCs, it does allude to this possibility by asking Esper when the list was last updated. Given several factors, it seems unlikely that the members of Congress would have to ask that question unless a report had never before been issued: Section 1237(b) as amended requires the Defense Department to update the list yearly and submit it to the armed services committees, Cotton is a member of the Senate Armed Services Committee, and both Gallagher and Gallego are members of the House Armed Services Committee.  Indeed, in his June 2020 letter of reply , then-acting Deputy Defense Secretary David Norquist provided a list of companies but did not directly answer the question. Instead, he simply noted that, on becoming aware of the requirement set up by the 106th Congress, his staff “produced an initial list of companies that meet the ... criteria in section 1237” (emphasis added), again implying that no such list had been created before 2019.  The CCMC List After its initial response to Cotton, the Defense Department updated its list with four more tranches of company names. The complete list of 44 entities is composed primarily of technology companies, though it also includes aviation, construction, railway and ship
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