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September 22, 2020

Asia

CHINA: New “unreliable entity” list does not signal massive retaliation

BY Gabriel Wildau

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( 5 mins)
  • Chinese regulators announced details of a new mechanism that could be used to punish foreign companies viewed as acting on behalf of hostile foreign governments.
  • But Beijing’s desire to preserve Chinese companies’ access to key foreign technology and to maintain a welcoming environment for foreign investment will constrain Chinese regulators’ use of the “unreliable entity” list.
  • The Chinese government may choose to target a foreign company whose China operations are modest and whose products and services can be eaily replaced.

China’s Commerce Ministry published details of its “unreliable entity list” on 19 September, more than a year after the agency first announced its intention to create a new mechanism for punishing foreign companies. A previous note analyzed why Beijing has largely refrained from retaliation against US companies in response to various US sanctions against Chinese companies. The Commerce Ministry’s latest announcement suggests that this forbearance may be coming to an end, but the logic behind Beijing’s cautious approach has not changed.

Chinese regulators have not yet named any companies to the unreliable list but could now do so at any time. Though the policy announcement does not mention the US by name, the list is clearly intended as a response to the US Commerce Department’s entity list, which Washington has used to ban exports of advanced technology to Huawei and other Chinese companies.

The timing of Beijing’s announcement appears significant, coming just a day after the US Commerce Department moved to implement a White House executive order banning TikTok and WeChat from the US. But the Commerce Ministry said it had been working on the rules since May 2019 and that the timing of the release was not related to recent US actions. The agency also said that it had no timeline for adding companies to the list.

A tool of retaliation

The new rules lay out potential penalties for companies, organizations, or individuals that endanger China’s “national sovereignty, security, or development interests,” including by enforcing foreign sanctions against China. Foreign entities that suspend “normal transactions” or take “discriminatory measures” that “violate normal market transaction principles” could be added to the list. Penalties can include bans on import and exports, investment, or work visas.

It is possible that Beijing has no plans to deploy the list. The mere existence of the new mechanism serves as a warning to foreign companies not to antagonize Beijing or to act as an agent of coercive policies against China by the US or Europe. In deciding how and whether to use the list, Chinese leaders will carefully weigh the risk that harsh action against a prominent foreign company could backfire, by encouraging the kind of broad-based economic decoupling that US hardliners advocate but which Chinese policymakers hope to avoid. Even as the Commerce Ministry unveiled the new punitive mechanism, the agency repeatedly emphasized that China still welcomes foreign investment and rejects protectionism.

In search of soft targets

A somewhat more likely possibility is that China will choose a US company whose business in China is relatively insignificant and for which substitute products and services are readily available. The goal would be to project a message of toughness while avoiding actions that would alienate the broader foreign business community or compromise China’s access to key foreign technologies.

State media has mentioned Federal Express, which faced criticism in China over allegations that it diverted packages destined for Huawei to the US. Targeting FedEx would impose minimal costs on China’s economy and technological ambitions. Beijing could also target a mid-tier consumer electronics brand like Dell or Hewlett-Packard that is not especially beloved by Chinese consumers and whose products can be easily replaced by domestic competitors.

Beijing’s decision in July to impose sanctions on Lockheed Martin over that company’s Washington-backed sale of arms to Taiwan offers a model for potential Chinese use of the unreliable list. Sanctioning Lockheed sends a message that China will protect its core interests, but given Lockheed’s small presence in mainland China, the practical impact is minimal.

Avoiding self-inflicted wounds

On the other hand, Beijing is unlikely to target major US semiconductor producers, despite Washington’s use of its entity list to block semiconductor sales to Huawei and other Chinese companies. Despite the US export restrictions now in place, US chipmakers continue to sell legally to some Chinese buyers. In recent days, both Intel and AMD received licenses from the US Commerce Department to sell some chips to Huawei, and other license applications are still pending.

Given that US action to block China’s access to advanced semiconductors is a central reason for China’s creation of the new mechanism for retaliation, Beijing is unlikely to take action that would further restrict such access. Similar considerations will likely persuade Beijing to spare US aviation groups with a large China presence, given Beijing’s efforts to leverage imported technology to upgrade its domestic civil aviation industry.

Top-tier consumer or mass-market business technology groups like Apple and Microsoft are also unlikely as targets of the new list. Punishing a popular brand like Apple would risk a backlash by Chinese consumers, while targeting Microsoft would inflict significant disruption on Chinese companies. Moreover, given these companies’ top-tier global profile and their multi-year efforts to build positive government relations in China, the global business community would view Chinese action against Apple or Microsoft as a sign that no foreign company is safe from arbitrary punishment by Beijing.