It is expected that the upcoming “unreliable entity list” and “national security management list” will include license requirements similar to the United States’ Entity List rules, in which any sensitive products of foreign origin, or technologies traded with companies on the lists, require a separate license in advance. It is also possible that, in addition to the normal requirements, restrictions may be imposed on the Chinese companies that do business with the foreign companies put on either list. Because China does not already have statutes for these types of additional restrictions, it is likely that a new statute would need to be enacted, or that current statutes would need amending, before the lists would become enforceable.

Unreliable entity list

China’s Ministry of Commerce (MOC) announced in late May that it will soon introduce an “unreliable entity list” regime. While the MOC confirmed that the unreliable entity list regime is not targeted at any particular industry, enterprise, or individual, MOC spokesman Gao Feng also stated that the proposed unreliable entity list system was designed “in reaction to” practices distorting the market for “noncommercial purposes.” Many  have interpreted this to mean that the list was created in response to President Donald Trump’s Executive Order 13873 that declared the exploitation of vulnerabilities in information and communications technology to be an “unusual and extraordinary threat,” as well as the subsequent addition of Huawei and its affiliates to the United States’ Entity List, a move that cuts the Chinese telecom giant out of the US market.

While the specific measures are yet to be released, an MOC official said that the Chinese government would consider the circumstances holistically when determining whether to blacklist any foreign entities or individuals, including:

  • Discriminatory actions taken against Chinese companies, such as boycotting or cutting off supplies;
  • Whether these measures are taken for noncommercial purposes against market rules;
  • Material damage caused to Chinese companies; and
  • Potential threat to China’s national security.

National security management list

In addition to the establishment of the unreliable entity list regime, Xinhua announced in early June that the National Development and Reform Commission, together with a team from different state ministries, is in the process of enacting its own national security management list regime. The report states that the national security management list regime will focus on “preventing and resolving the risks to [China’s] national security more efficiently,” and will be released soon.

An article in The People’s Daily  explains that the establishment of the list regime does not mean that China will close its door to foreign countries, but that China will “never allow certain countries to use Chinese technology to curb China’s development and suppress Chinese enterprises.” It describes the national security management list regime as an essential mechanism for China to better protect technological breakthroughs, control technology exports, and strengthen economic security protections to better safeguard national security.

Who is really at risk?

Both list schemes are completely new concepts in Chinese economic management. While specifics are yet to be released, the MOC highlighted that the measures taken against the listed foreign entities will be determined under the framework of existing laws and regulations, including the Foreign Trade Law, the Anti-Monopoly Law, and the National Security Law.

Dominance is a vulnerability

The Anti-Monopoly Law only prohibits a business operator with a “dominant market position” to abuse its market position by refusing to trade with a trading party without any “justifiable cause,” or by requiring a trading party to trade exclusively with itself or its designated person without any “justifiable cause.” If this is used as the legal authority for the enactment of the unreliable entity list, then an entity can be put on the list only if it has the capacity to control the price, quantity, or other trading conditions of commodities in relevant market, or to hinder or affect any other business operator to enter the relevant market.

If an entity claims that it refuses to trade with a business partner because it is forced to comply with the law in other jurisdictions, does it, and should it, constitute as “justifiable cause?”

This question is especially relevant as businesses put on the lists will likely claim that they were forced to stop trade with certain Chinese entities, particularly with Huawei and its affiliates, because they were legally obligated to comply with the US Huawei ban.

On the one hand, if compliance with US domestic law or executive order does not constitute “justifiable cause” under this new regime, foreign businesses will be put into a very difficult position and may be forced to pick a side. Their options would be to comply with US domestic law, but risk being put on the unreliable entity list in China, or to ignore US domestic law and continue to do business with Chinese entities, including Huawei, but risk potential sanctions by the US government. This would create a difficult situation for foreign businesses, casting doubt on whether China’s unreliable entity list system is a reasonable countermeasure.

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What does this mean for trade talks?

Now that the United States and China have unexpectedly dropped the temporary ceasefire agreed upon by Presidents Trump and Xi at June’s G-20 Summit, follow-through on the unreliable entity list and national security management list might be one tool in China’s toolbox to retaliate. Given the recent escalations, it is expected that the lists will continue to be published as originally announced, if not sooner, as preventative measures to any failed negotiation.

With President Trump simultaneously relaxing his position against Huawei, companies doing business in China should review their existing practices in light of the new directives, as foreign companies will be less likely to have justifiable cause for any measures taken against Chinese companies that are deemed discriminatory and remain at risk of being put on the lists.

 

Yuanyou “Sunny” Yang’s practice includes negotiating and structuring business transactions and overseeing the legal operations for Chinese companies doing business in the United States, as well as assisting US companies in pursuing investment opportunities in China. She is admitted to practice in the United States (Pennsylvania and New York) and the People’s Republic of ChinaRead her full bio here.

Posted by Yuanyou Yang