US Entity List Additions Unlikely to Impact Trade Talks, but Could Lead to Retaliation, Trade Experts Say

The Commerce Department’s Oct. 9 blacklisting of several Chinese technology companies may not impact trade negotiations this week but could lead to significant retaliation against U.S. companies, trade experts said. And while the Trump administration insisted the Entity List decisions were unrelated to trade talks with China, the move unnerved U.S. companies impacted by the trade war that fear Commerce’s announcement could expedite the release of China’s so-called "unreliable entity list."

“We take it quite seriously,” Doug Barry, spokesman for the U.S.-China Business Council, said of the list. “We see no floor under the current downward pressure on the relationship.”

White House trade adviser Peter Navarro told Fox Business News on Oct. 8 that Commerce’s decision to restrict U.S. exports to 28 Chinese entities -- including eight technology companies -- was “totally unrelated” to trade talks. But China strongly objected to the announcement, saying it hopes for progress in this week’s negotiations and warned of its own “unreliable entity list” (see 1910080052).

Although U.S. companies have had several months to prepare since China announced the list in June (see 1906100017), little is known about what exactly it will entail.

“I think U.S. companies need to be monitoring this situation closely and potentially prepare for the worst,” said Nick Marro, a Hong Kong-based China analyst with The Economist Intelligence Unit and a former business advisory services manager with the U.S.-China Business Council. “China seems to be hesitating in using it. It recognizes how much of a chill this mechanism would have on the foreign investment environment.”

China has been using the uncertainty surrounding the list to its advantage, said Zack Cooper, a research fellow at the American Enterprise Institute and former special assistant to the Defense Department’s principal deputy undersecretary for policy. By withholding the list, China is giving companies pause, Cooper said -- a tool almost as effective as the list itself.

“I think that's part of the objective here for the Chinese -- for companies to avoid knowing where the red lines are,” Cooper said. “It’s better for Beijing if U.S. companies are so uncertain of what is permissible and what is not permissible that they don’t even try to challenge those red lines.”

Cooper said China does not need to rush to release the list.

“I don't think there's a lot of urgency,” he said. “Even the threat of the list coming out at some point is going to change the behavior of a lot of companies. It’s an escalation that they can hold in their back pocket and use one day.”

But with Commerce adding more Chinese companies to its Entity List, that day could come soon, Marro said. China has not yet retaliated because “it wants to preserve momentum” for trade talks this week, he said. But if the negotiations go poorly, “this restraint could end.” Marro expects China to release its unreliable entity list before the end of the year.

China will be “acutely aware” of Commerce's recent Entity List measures as it heads into negotiations, but they won’t likely impact trade talks, said Robert Holleyman, CEO of Crowell & Morning International and former deputy U.S. trade representative. “Typically in negotiations, they try to be somewhat restrained in their response to another action,” Holleyman said of China. “I think the negotiations will proceed pretty much as anticipated.”

Although “both sides have experienced unsettling developments” since the last set of negotiations, Barry said, the USCBC is optimistic about progress being made. “Even though the heat is being turned up by both sides, there’s still a chance for a modest deal to include potentially large purchases of U.S. ag products,” Barry said.

Holleyman said the two sides are “a long way” from a comprehensive agreement, but also said that in a best-case scenario, the two sides could end the week with an agreement to postpone tariffs, including the U.S. tariffs scheduled to take effect Oct. 15. “China would like the U.S. to roll back some of the existing tariffs,” Holleyman said, “and certainly the business community would like the U.S. to roll back some of the tariffs.”

Cooper agreed, saying Commerce’s additions to the Entity List likely didn’t help trade talks, but the two sides were probably not going to strike a deal this week anyway. “I think a deal is still pretty far away,” he said.

Although Bloomberg reported that China is open to a partial trade deal that would suspend tariff increases, it may be difficult for China to sign even a small deal without addressing the inclusion of its companies on Commerce’s Entity List, Marro said. “I’d be surprised if this doesn't come up at the negotiations,” he said.

Removing its companies from U.S. restrictions is a “top priority” for Beijing, Cooper said, and may be a “last-minute request” that China makes to Trump as opposed to addressing it in earlier, lower-level negotiations. “The Chinese have a history of going to President Trump and asking him to take pressure off these types of companies,” Cooper said. “They’ve been pretty effective in getting Trump to listen to those demands.”

U.S. companies hope a potential deal includes Chinese tech firms being removed from the Entity List, Barry said, partly because export licenses “will not be easy to get" if they remain on the list, but also because of the threat of China’s unreliable entity list.

There is “no schedule for its release,” Barry said, “but given the souring climate, it may appear sooner than later.”