China's Entity List Intended as Retaliation, Causes Compliance Confusion

The announcement, made by a Chinese Ministry of Commerce spokesperson on May 31, will allow China to target certain foreign companies or people for what it deems unfair business practices, but does little to detail what the penalties will be, when they will be issued and who will be impacted. Chinese experts said the announcement was clearly more political than legislative: a hastily composed retaliatory move meant to send a signal to the Trump administration but which may potentially backfire.

But that does not mean U.S. companies should take the announcement lightly. “The list could have broad and serious implications for American companies that do business in China,” Anna Ashton, director of business advisory services for the U.S.-China Business Council, said in an email.

China said the list -- which it called the “Unreliable Entity List,” according to an unofficial translation of the spokesperson’s remarks -- will target companies and people who don’t abide by market rules, who “deviate” from contracts or “damage the legitimate rights and interests” of Chinese companies. Foreign entities or people who “impose blockades, confiscations or other discriminatory measures” for “non-commercial purposes” cause “substantial damage” to Chinese industries, the spokesperson said, and threaten China’s national security. It created the list to “protect international economic rules,” trade rules, China’s “social public interests” and to “oppose unilateralism and trade protectionism.” China said specific measures, including penalties, will be announced in the “near future.”

The move was clearly a retaliation for the U.S.’s May 16 decision to add Huawei to the Commerce Department's Entity List, two China experts and the U.S.-China Business Council said in interviews with Export Compliance Daily. The same day Huawei was added to the list, China hinted at retaliation, saying it would take “necessary measures to safeguard” its companies (see 1905160063).

But despite China’s announcement, those measures are still unclear. Nick Marro, a China analyst with The Economist Intelligence Unit and a former business advisory services manager with the U.S.-China Business Council, said the vagueness of the announcement is “worrying.” “There's no clarity on how compliance is defined,” he said. “Will U.S. companies, who must comply with the BIS directives on the basis of U.S. law, be hit by this -- even if it’s something they can’t control?”

Before making assumptions, companies should wait for more specific language, said Jude Blanchette, senior adviser and China practice lead for Crumpton Group. He pointed to broad, undefined phrases China used in its announcement, such as it will add companies to the list if they violate “the spirit of the contract” with Chinese entities. “We just don't know much about what this is going to look like,” Blanchette said. Ashton agreed. “There are a lot of unknowns,” she said. “Both governments should get back to the negotiating table. Good faith negotiation is the only way to productively address and resolve our differences.”

Blanchette said the move was intended to be vague: a political statement that was part of China’s broader tit-for-tat trade-war strategy with the U.S. The move may have also been an attempt by China to shift leverage back to Beijing after weeks of escalating moves by the U.S., Blanchette said, including Commerce’s blocking of Huawei and Trump’s tariff hike in early May after trade talks broke down. “You don't treat this as the normal announcement of a draft law,” he said. “It’s intended as a signal to the Trump administration.”

China’s desire to send a strong signal made the announcement fairly newsworthy, Blanchette said -- specifically because Beijing announced a new set of laws simply to send a political message. “This is an entirely newly constructed mechanism,” Blanchette said. “It’s one thing to use existing regulatory measures to bring pain on the United States. It’s another thing to create new regulatory measures in retaliation.” Marro said China’s signal was clear. “China is trying to show the U.S. that it can match them blow for blow as part of the trade war,” he said.

But Marro also said the move was risky. “This could severely undermine foreign investor confidence -- both from U.S. firms, and among non-U.S. foreign companies,” he said. Blanchette said China “rushed out a response to try to send a signal to the U.S.” and, in doing so, could ultimately hurt its own prospects by convincing U.S. companies -- and possibly other foreign entities -- to leave the Chinese market, something Trump would welcome. “This doesn’t land a punch with the Trump administration,” Blanchette said. “In terms of retaliation, this just kind of misses on all fronts.”

Because of that, Blanchette said, the U.S. may not respond. “When you see your opponent shooting themselves in the foot,” he said, “the best thing to do is let them keep going at it.”