FedEx Corp. is suing President Donald Trump's administration to block enforcement of trade restrictions that had placed the company in Beijing's cross hairs.
The federal lawsuit comes after the White House barred U.S. companies from selling technology to Chinese telecommunications giant Huawei Technologies Co. While trying to comply, FedEx employees mistakenly flagged packages involving Huawei in two incidents, and now China is considering adding the courier to a list of so-called unreliable entities.
Meanwhile, a number of the United States' biggest chipmakers have sold millions of dollars in products to Huawei despite the ban, according to four people with knowledge of the sales, The New York Times reported.
While U.S. companies and lawmakers have expressed concern over how Trump's battles with China and other trading partners will affect business, the FedEx litigation represents another new tack. Trump and Chinese President Xi Jinping are scheduled to resume talks this week at the Group of 20 summit, with no signs the impasse will end soon.
"The increasing use of restrictions on exports and imports by the Commerce Department in various geopolitical and trade disputes creates just an impossible burden on FedEx and common carriers," FedEx Chief Executive Officer Fred Smith said on Fox News. "Huawei is just emblematic of this problem."
Chinese authorities have almost completed preparations necessary to blacklist FedEx, people familiar with the matter said. A final decision would be made by senior Chinese leaders, said the people, who asked not to be identified speaking about nonpublic information.
FedEx stock dropped 3% to $155.98 Tuesday in New York, making the stock the worst performer on an S&P 500 index of industrial stocks.
The company's suit, filed Monday in Washington, says that under the Export Control Reform Act of 2018 and other rules, FedEx must choose between operating under the threat of U.S. punishment and facing potential legal trouble from customers and foreign governments. The company moves about 15 million packages a day and many of those are sealed when customers hand them over, according to the lawsuit.
The Memphis-based courier apologized last month for delivery errors on two Huawei packages that were returned to senders, and China's biggest tech company said it's reviewing its relationship with the U.S. courier.
Those packages, which contained documents being shipped to the company in China from Japan, were diverted to the U.S. without authorization. Smith said the decision was an "error" by a 30-year employee, who sent the packages for a compliance audit.
In a separate incident last week, FedEx rejected a package containing a Huawei phone being sent to the U.S. from the U.K. FedEx said the rejection was a mistake.
FedEx said it supports the objectives of U.S. export-control laws and has invested heavily in compliance. But the restrictions create an "unreasonable burden" by holding couriers responsible for unwittingly aiding customers, with harsh criminal and civil penalties for violations.
Violations can lead to fines of $250,000 a package.
The Commerce Department said it would defend its security function.
FedEx rival United Parcel Service Inc., which also is subject to the restrictions, said it wouldn't join the suit.
"UPS has not had any extraordinary issues with following government requirements relating to shipping restrictions," said spokesman Steve Gaut by email.
Meanwhile, FedEx is in danger of being placed on a list that China said in late May would target firms that the government says damage the interests of domestic companies. That followed U.S. curbs on Huawei. The Commerce Ministry didn't respond to a request Tuesday for comment and the Foreign Ministry declined to comment on whether FedEx would be placed on the list.
"We hope we satisfied them that this wasn't any nefarious activity on our part," Smith said in the Fox News interview. "It was just a well-intentioned FedEx teammate that made an error."
FedEx in September said package deliveries between the U.S. and China represent 2% of total sales, which would be about $1.3 billion based on 2018 revenue. The company, which doesn't typically break out sales by country, hasn't given an amount for its entire China business, which also includes moving packages to locations other than the U.S.
Since the Commerce Department enacted the ban in May, U.S. companies including Intel and Micron have found ways to sell technology to Huawei, the Times reported.
The components began to flow to Huawei about three weeks ago, according to the Times sources, who spoke on the condition they not be named because they were not authorized to disclose the sales. Goods produced by U.S. companies overseas are not always considered U.S.-made, and the suppliers are taking advantage of this. The sales will help Huawei continue to sell products such as smartphones and servers.
The Commerce Department's move to block sales to Huawei, by putting it on a so-called entity list, set off confusion within the Chinese company and its many U.S. suppliers, the people said. Many executives lacked deep experience with U.S. trade controls, leading to initial suspensions in shipments to Huawei until lawyers could puzzle out which products could be sent. Decisions about what can and cannot be shipped were also often run by the Commerce Department.
U.S. companies may sell technology supporting current Huawei products until mid-August. But a ban on components for future Huawei products is already in place. It's not clear what percentage of the current sales were for future products. The sales have most likely already totaled hundreds of millions of dollars, the people estimated.
While the Trump administration has been aware of the sales, officials are split about how to respond, the people said. Some officials feel that the sales violate the spirit of the law and undermine government efforts to pressure Huawei, while others are more supportive because it lightens the blow of the ban for U.S. corporations. Huawei has said it buys around $11 billion in technology from U.S. companies each year.
Intel and Micron declined to comment.
The Commerce Department did not immediately respond to requests for comment.
The fate of Huawei, a crown jewel of Chinese innovation and technological prowess, has become a symbol of the economic and security standoff between the United States and China. The Trump administration has warned that Chinese companies like Huawei, which makes telecom networking equipment, could intercept or secretly divert information to China. Huawei has denied those charges.
Information for this article was contributed by Thomas Black, Chris Dolmetsch, Bob Van Voris, Yan Zhang and Miao Han of Bloomberg News and by Paul Mozur and Cecilia Kang of The New York Times.
A Section on 06/26/2019