Authored by David J. Levine (Washington, DC)
Since the Trump Administration announced its tariffs on Chinese goods, the US-China trade war has continued to escalate and create uncertainty for many US, Chinese and other international companies. The Trump Administration’s move on October 7, 2019, to blacklist eight major Chinese technology companies marks yet another flare-up in the long-running tensions. This move also highlights a critical strategy deployed by both the US and Chinese governments: utilizing administrative powers to “blacklist” companies, create trade barriers and restrict market access. With the escalation of the trade war, US, Chinese, and international companies face new challenges in the market, making it critical to strategize accordingly in order to reduce risks and maximize success.
US-China Trade War Background
The US-China trade war has had global economic impact and has created anxiety for US and international companies operating in China and Chinese companies operating in the United States. Although not prominently reported compared to tariffs, the use of administrative powers and “blacklisting” has been a frequent and powerful tool of the US and Chinese governments.
Since the beginning of the Trump Administration, the US government has implemented several policies to increase pressure on China to open its markets, reduce intellectual property theft and create an even playing field in trade. These policies include tariffs on items such as steel, agriculture and consumer goods as well as use of legal and administrative tools such as congressional, criminal and civil investigations, including enforcement actions under the US export control laws, the US Export Administration Regulations (EAR) and US trade sanctions regulations administered by the US Treasury Department Office of Foreign Assets Control. For example, the US Department of Commerce Bureau of Industry and Security (BIS) has used the Entity List under the EAR to impose very restrictive US export licensing requirements on specified Chinese companies. The Chinese government responded to these policies in kind, enacting its own tariffs, trade and market restrictions, and other measures.
In May 2019, the US government added Huawei and 68 of its subsidiaries to the BIS Entity List. In response, the Chinese government announced the creation of its own entity list, the “Unreliable Entities List,” and placed several companies under investigation in connection with the list. The list takes aim at non-Chinese companies accused of harming the interests of China, and can lead to a range of actions, including government investigations, sanctions and even criminal liability.
The use and impact of these lists continues, with the most recent action being on October 7, 2019, when the Trump Administration added eight Chinese high-tech companies to the BIS Entity List for allegations in connection with matters in China’s Xinjiang province. The Chinese government has stated that it will respond.
War of the Lists
In order to survive the turbulence brought on by the US-China trade war and the so-called “war of the lists,” it is critical to have at least a basic understanding of these two lists.
US BIS Entity List
Under the EAR, BIS administers the Entity List, on which it identifies specified persons (legal and natural), including businesses, individuals, governments, research institutes and private organizations, that have engaged in activities that have been deemed contrary to US national security and/or foreign policy interests. The EAR imposes very restrictive license requirements and limits the availability of most license exceptions for exports, re-exports and transfers to listed persons/entities. Specific license restrictions vary for listed parties but, as a practical matter, a listing on the Entity List greatly restricts a listed party from engaging in any transactions that require the exportation of US goods or technology subject to the EAR. If a listed entity violates these restrictions or a company sells products to a listed entity without proper licensing, it can result in civil and even criminal liability under US law.
China’s Unreliable Entities List
On June 1, 2019, the Chinese Ministry of Commerce (MOFCOM) announced the creation of the Unreliable Entities List. This list is largely perceived as retaliation for the United States’ use of the BIS Entity List. China’s list is designed to identify foreign entities, organizations or individuals that have “harmed the interests of Chinese consumers.” The Chinese government has published four elements that it will consider when determining whether to add a foreign company, organization or individual to the list:
- Whether the entity has blocked, cut off the supply or otherwise engaged in discriminatory behavior towards a Chinese entity
- Whether the entity’s actions are for a non-commercial purpose and violate the rules and principles of the market economy
- Whether the entity has caused serious damage/harm to a Chinese company or related industry
- Whether the entity’s actions have created any real or perceived threat to Chinese national security.
If a foreign company, organization or individual meets one of these elements and is placed on the list (or if MOFCOM is considering placing them on the list), they may be targeted for legal and administrative actions, including investigations; market restrictions; and civil, administrative and criminal liability pursuant to the PRC Foreign Trade Law, Anti-Monopoly Law and National Security Law.
How Your Company May Be Affected
The restrictions and uncertainty created by the US and Chinese lists can have significant impact on Chinese companies doing business in the United States as well as US and international companies doing business in China.
Chinese Companies in the United States
If listed on the BIS Entity List, practical impacts for Chinese companies include market restrictions and prohibition from purchasing US goods, which can significantly affect a company’s supply chain and business operations. These impacts could even go beyond the US market and extend globally, as non-US companies will also need to consider liability and compliance for conducting business with a listed entity where the sale of US-sourced goods is involved. Additionally, since listing is premised on a company’s actions being contrary to US national security or foreign policy interests, being placed on the BIS Entity List, consideration for inclusion into the list, or even reports of prior business dealings with prominent entities on or under consideration for the list might occur concurrently with other investigative actions by the US government. To date, companies listed include high-tech companies such as Huawei and Hikvision, and reasons for listing often include accusations of national security risks or human rights violations. Therefore, companies in the high-tech space, companies that have (or have had) operations in high-risk locations, or companies that have a cooperation history with any of the listed companies may wish to review their operations in the United States and their dealings with listed entities. They should also seek to understand the true reason behind any scrutiny from the US government, and prepare a strategy to address any practical impacts or obligations imposed by the BIS Entity List.
US and International Companies in China
Although no specific public documents have been released detailing the exact impact of inclusion on the Unreliable Entities List, based on public reporting and official statements from MOFCOM, some consequences have come to light. First, as stated by MOFCOM, inclusion on the list can warrant liability under the PRC Foreign Trade Law, Anti-Monopoly Law and National Security Law, which includes fines, revocation of business licenses and even criminal liability.
Second, companies on or considered for inclusion on the list may be targeted for government investigations by various administrative and law enforcement agencies. Companies such as FedEx, Flex and HSBC have been placed under investigation for activities related to inclusion on the Unreliable Entities List, particularly for actions with Chinese companies on the BIS Entity List, such as Huawei.
Third, companies may face extralegal barriers, including increased scrutiny from the Chinese public, social media and government that could cause consequences in the Chinese market. Companies such as Qualcomm, Intel and Google have experienced this when they were summoned by the Chinese government and warned about cutting ties to Chinese companies on the BIS Entity List, in particular Huawei.
For these reasons, companies that have been affected in China generally include high-tech companies or companies that have had dealings with Chinese companies on the BIS Entity List, especially Huawei. In order to minimize risks and impact to a company’s China operations, companies with connections to blacklisted Chinese entities and/or operating in a similar industry may wish to review their activities in China, determine any new compliance obligations with respect to Chinese entities on the BIS Entity List, and ascertain and prepare a preemptive strategy to address a response by the Chinese government.
US, Chinese and other multinational companies have faced significant commercial, regulatory and legal challenges due to the US-China trade war and the “war of the lists.” Navigating this new landscape can be complex, and companies must plan accordingly to survive in the US, Chinese and global markets.