US expands export blacklist in crackdown on Chinese subsidiaries

WASHINGTON – The US on Sept 29 cracked down on companies in China and other countries that use subsidiaries or other foreign affiliates to get around curbs on chipmaking equipment and other goods and technology.

The Commerce Department issued a new rule expanding its restricted export list, known as the Entity List, to automatically include subsidiaries owned 50 per cent or more by a company on the list, according to a posting in the US Federal Register.

The action greatly increases the number of companies that require licences to receive American goods and services.

The rule is likely to disrupt supply chains. It will also make it more difficult for companies to determine whether exports to a customer or supplier are restricted. According to the rule, certain transactions may be allowed for 60 days.

China’s Commerce Ministry strongly criticised the rule.

“This move by the US is extremely egregious in nature,” the ministry said in a statement.

“It seriously infringes upon the legitimate rights and interests of the affected enterprises, severely disrupts international economic and trade order, and gravely undermines the security and stability of global industrial and supply chains.”

The Commerce Department said the rule “closes a significant loophole”.

The timing of the rule’s release is somewhat surprising, given that the US and China are

in the midst of trade talks

. The action strengthens export controls on China, in contrast to the US’ recent loosening of controls on artificial intelligence chips to China, such as Nvidia’s H20.

If a company is owned 50 per cent or more by an entity on the list, licences will be required for US exporters to ship goods or technology to the subsidiary, just as they are for listed entities, with many licences likely to be denied.

The affiliates rule is similar to the “50 per cent rule” for entities sanctioned by the Treasury Department’s Office of Foreign Assets Control (Ofac).

Aircraft, chip, medical equipment sectors may be affected

Though companies around the world are on the Entity List, the change will most significantly impact Chinese entities, experts said. Factories that produce older, less sophisticated chips may be affected, as well as other sectors, including aircraft and medical equipment.

Chinese tech giant Huawei, video surveillance company Hikvision and drone manufacturer DJI are three examples of companies that may be impacted, one expert said. Many Huawei subsidiaries are already on the list, but not all.

The companies did not immediately respond to requests for comment.

But an analysis by Kharon, a Los Angeles-based data and analytics company, found the expected rule could pull thousands of hidden subsidiaries in nearly 100 destinations around the world into “export-control crosshairs”.

“While Russia and China account for the majority of subsidiaries tied to already-listed entities, Kharon’s analysis uncovered that hundreds more are located in major trade and finance hubs – including the European Union, the United States, the UK, Singapore, Switzerland, Japan, Canada, Australia and India,” the company said in a brief in June in anticipation of the rule. 

The US puts on the Entity List companies that it has determined pose risks to US national security or foreign policy. There are now about 1,100 Chinese entities on the list, according to the Centre for a New American Security think-tank. Overall, there are about 3,400 parties on the list, according to Kharon.

Since the Entity List was first published in 1997, restrictions applied only to the company or organisation named.

The Commerce Department “is concerned that the old approach can enable diversionary schemes, such as the creation of new foreign companies, to evade Entity List restrictions”, the rule said. It will also apply to the Military End-User list.

The change is not a “wonder drug that cures all ills”, said Mr Dan Fisher-Owens, a California-based trade lawyer. Entity List companies that are captured may restructure, just as Ofac targets have done, he said.

“The game of whack-a-mole will continue.” REUTERS