By Kenneth Rapoza, Industry Analyst, CPA
The latest Chinese company additions to the Commerce Department's Entity List shows the growing influence of national security in the fight with China.
The Chinese company that was made famous for its 2017 “X-6 Skywalker” drone was put on the Commerce Department’s Entity List on Wednesday along with 23 other companies, all of them doing business with the Chinese government’s work in building military installments in the South China Sea.
The Commerce Department’s Entity List effectively bans US exports of products to the listed companies. With the exception of Skywalker drone maker China Electronics Technology Group, most of the names on this newest list are small players – with one company -- Beijing Huanjia Telecommunication Co. -- only having 22 employees.
However, this is merely the latest Commerce Department installment in a longer course of action adding more and more Chinese companies to the sanctions list over the last two years. Some 57 Chinese companies were added to the list this year alone.
A senior Commerce official told reporters on Wednesday that “there’s been a relatively small amount” of US companies doing business with the 24 newcomers. Only $5 million worth of US exports to those companies was reported over the last five years. However, the export ban can be very effective as it interferes with foreign companies’ ability to access US technology, equipment or service parts necessary to run their businesses.
Major Chinese corporations are on the Entity List.
Last October, when Hikvision was put on the list, United Technologies closed their camera security division because they were buying everything from Hikvision. United Technologies had slowly changed from being an original equipment manufacturer to sourcing Chinese-made products and selling them with the UT name on it, one industry insider told us. Instead of returning to an American supplier, it closed its entire optical security camera business.
What yesterday’s update to the Entity List tells us, however, is that national security interests are now at the forefront of the multi-pronged trade war with China.
The Treasury, State and Commerce Departments, rather than the US Trade Representative, determine which companies get targeted.
In its press release from Wednesday, the Commerce Department explained the reasons behind targeting those companies. It’s all South China Sea related. The Department said that “despite protests from the United States and other countries, the government of China has been “rapidly building the artificial islands since 2013…undermining the sovereign rights of US partners in the region.”
The South China Sea is considered an international trade route. Southeast Asian countries have been complaining about China taking over parts of the area for years, including Japan and Vietnam, which has been banned from fishing in parts of those waters. Secretary of State Mike Pompeo recently rejected China’s expansive claims stating that: "Beijing uses intimidation to undermine the sovereign rights of Southeast Asian coastal states in the South China Sea, bully them out of offshore resources, assert unilateral dominion, and replace international law with 'might makes right'."
The Entity List is run by the Bureau of Industry and Security (BIS) inside the Department of Commerce, but the determination of which companies to sanction includes input from other cabinet-level agencies including Treasury and State. The list prohibits US companies from exporting to foreign companies on the list without a license. The Entity List is just one way the US government can target foreign companies and individuals on national security grounds.
The other two official means of sanctioning individuals and companies come through the Treasury Department’s Office of Foreign Assets Control and the State Department, which can impose restrictions on defense exports.
Unlike other sanctions, the Entity List does not impact whether non-US companies can sell to the US. But for Americans, if someone asks their lawyer if they can sell to someone on the BIS Entity List, they’ll likely be advised against it, or will have to get BIS approval.
The biggest Chinese names on the Entity List at this time are Hikvision and Huawei. The BIS keeps tightening the screws on Huawei, with new rules released on August 17.
The Final Rule further tightened the Export Administration Regulations’ (EAR) Foreign Direct Product Rule, a rule that was first amended in May to prevent Huawei from loopholes. Huawei and its global affiliates are now counted in a way that makes a much broader set of items -- whether commodities, software, or technology – subject to the Entity List licensing requirements. For Huawei suppliers and contractors, that means the scope of items that will now trigger a BIS licensing requirement when a Huawei global subsidiary is involved has expanded. In addition, Final Rule clarifies that the Entity List licensing requirement applies to any company that is part of a transaction with Huawei, not just the ultimate purchaser or end-user. This further broadens the scope of a potential licensing requirement of doing business with them and is the type of “screw tightening” we can expect for bigger Chinese corporate names deemed to have grown in prowess thanks to IP theft, or seen as a threat to US national security and – as in the case of the South China Sea – foreign policy interests.
Still, many Defense Department acquisitions are currently temporarily exempt from the government-wide ban on contractors purchasing or owning goods or services from Huawei, ZTE, and other Chinese telecom manufacturers.
Ellen Lord, the Pentagon's chief buyer, said that the DoD supports the "intention" of the Entity List restrictions, but that it would need at least two-months to comply and address contractors' confusion over the rule's implementation, reporting, and requirements guidance for Section 889 of the 2018 National Defense Authorization Act. DoD issued initial guidance on the matter in July.
"We fully support the intent of the prohibition and we are working to ensure the prohibition results in the removal of these products from our supply chain," Lord said during an August 20 media briefing.
The trade war has numerous fronts – the commercial front, which uses tariffs; the foreign policy front, which uses the South China Sea and the detention of Uighur Muslim minorities to go after Beijing for both security and human rights matters; finance, which threatens to delist Chinese companies from US stock exchanges if not in compliance with the Sarbanes Oxley Act for financial audits and finally – the tech war, of which Huawei was in the starring role until President Trump gave TikTok about a month to sell its US unit.
Put in a broader context, the latest additions to the Entity List point in the direction of an increased interest in decoupling from China.
China is a strategic competitor more than it is a trade partner. The Trump administration began by responding to China’s 30-year trade war against America through Section 301 tariffs predicated on state-sponsored theft of American technology. Lobbyists for multinational corporations and foreign interests tried to protect the status quo through intense lobbying. But the President has consistently stated that economic security is national security. Now, however, the US-China relationship has shifted to core national security concerns, something the US Chamber has little chance of sidelining. As a result, the US Trade Representative is no longer the primary driver of the China relationship as much as the Defense, Commerce, State and Treasury departments.