China’s blocking mechanism: the unreliable entity list

• DOI: https://doi.org/10.1108/JITLP-08-2020-0048
• Published date: 04 November 2020
• Date: 04 November 2020
• Pages: 159-180
• Author: Qingxiu Bu
• Subject Matter: Strategy,International business,International business law,Economics,International economics,International trade

China’s blocking mechanism:

the unreliable entity list

Qingxiu Bu

School of Law, University of Sussex, Brighton, UK

Abstract

Purpose –The purpose of this paperis to seek to break the deadlock of the current confrontations between

the two powers.

Design/methodology/approach –The paper is comparativeand theoretical.

Findings –The findings suggest that multinational corporations would be put between a rock and a

hard place.

Originality/value –Only multi-prongedapproaches could be viable to addressthe issue.

Keywords National security, Entity list, MOFCOM regulation, Unreliable entity list

Paper type Research paper

1. Introduction

As unilateralism and protectionismare on the rise, the multilateral trading system is facing

severe challenges (Gao, 2019). China is developing increased influence in global internet

governance (Cook, 2018). It pushes ambitiously its own version of internet governance

towards becoming an international consensus (Hahm, 2019;Levite and Lyu, 2019). In

accordance with a plausible theory of Thucydides Trap, the two powers between the USA

and China would engage in an inevitable war for global technologicalsuperiority (Roubini,

2019). It is alleged that Huawei is engaged in activities that are contrary to US national

security and foreign policy interest.The US Department of Commerce (DoC) added Huawei

to the “Entity List”on 15 May 2019, banning Huawei from receiving any exports of

technology or software subjectto US jurisdiction (US–China Economic and Security Review

Commission, 2019). In response, China has established an unreliable entity list (UEL) to

target firms that damage the interests of Chinese companies. As the Chinese Ministry of

Commerce (MOFCOM)provided that:

[...] the UEL is used to identify foreign entities which have blockaded, cut offsupplies to, and

discriminated against Chinese entities based on non-commercial considerations and which have

resulted in damage to China’s related industries or have threatened or potentially harmed China’s

national security. (Zhong, 2019).

On 19 September 2020, MOFCOM Regulation was issued one day after the USA sought to

ban Chinese-owned apps WeChat and TikTok (Wei, 2020). The provisions constitute the

basis for more comprehensive tit-for-tat retaliation by the Chinese Government in response

to a series of US executive ordersand statutory sanctions. The Regulation increases tensions

between the two countries that are alreadyengaged in a trade war. It would force US entities

to start navigating an increasinglycomplex minefield to avoid the growing animus between

the two powers (Rudd, 2019).

It seems that foreign companies are aboutto be caught in the crossfire (Gallagher, 2019).

The challenge is to be addressed with four sections below. Part I looks at the blocking

China’s

blocking

mechanism

159

Received8 August 2020

Revised11 October 2020

Accepted13 October 2020

Journalof International Trade

Lawand Policy

Vol.19 No. 3, 2020

pp. 159-180

© Emerald Publishing Limited

1477-0024

DOI 10.1108/JITLP-08-2020-0048

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1477-0024.htm

mechanism via the MOFCOM regulation,China’s version of “Entity List”, which is based on

principles enshrinedprimarily in Anti-Monopoly Law (AML) and the National Security Law

(NSL). Given the current focus of retaliatory government policies on banning the flow of

technology-related goods, Part II analyses a dilemma where a foreign company would face

between a rock and a hard place. The challengingconflict of law issues should be integrated

into those companies’global governance regimes across jurisdictions. Part III explores

viable remedies for an NNC and seeks to ascertain whether a plausible exception of “non-

commercial consideration”constitutes an affirmative defence. It further investigates

whether a remedy is viable via administrative reconsideration or administrative litigation.

Part IV discusses how to break the deadlock from the perspective of targeted companies.A

long-standing ongoing debate is whether it is sustainable for China to achieve its strategic

goals by leveraging the Chinese market access. Arguably, the creation of the blocking

mechanism might be counterproductive during China’s pursuingfor tech supremacy. In the

paper’s concluding remark, it is highlighted that the tension would not end until a multi-

pronged resolutionis reached through far beyond purely legal approaches.

1.1 US Entity List vis-à-vis China’s blocking mechanism

Tech firms whose work with dual-use technology come under the US governmental

scrutinisation (Lofaso, 2019). Entity List is a blacklist of businesses the USA considers a

threat to its strategic interests, which is maintained by the DoC’s Bureau of Industry and

Security (BIS) [1]. Asa result of the Entity Listdesignation under the Export Administration

Regulations (EAR) [2], no supplier may export, re-export or transfer any items subject to

Huawei unless authorised by a BIS licence (BIS, 2019). China’s UEL system is aimed at

combating unilateralism, protectionism and discriminatory actions meant to block supplies

to Chinese enterprises (Wong and Liu, 2019). This represents a tit-for-tat escalation of the

current trade war after the US blacklistedHuawei.

1.1.1 US Entity list. An Entity List requires that a blacklisted Chinesecompany to apply

for special permission to buy American componentsand technology (Stevenson and Mozur,

2019). Likewise, US exporters require the same licence to sell designated components and

technologies to those listedentities. It can be used to block activities contrary to US national

security and foreign policy [3]. The system has been stipulatedby the EAR, which takes its

authority from the Export Control Reform Act of 2018 [4]. Entities that handle US origin

goods are prohibited from supplying such goods and any other items that are subjectto the

EAR to Huawei.

1.1.1.1 Mitigation of national security risks behind the entity list. The creation of the

Entity List has amplified the extraterritorial reach of America’s geo-economic strategy

(Niblett, 2019). It is aimed to prevent US technology from being used by foreign-owned

entities in ways that potentially undermine US national security or foreign policy interests

(Gao, 2019).

While the EAR provides an illustrative, but unexhaustive, list ofactivities that could be

considered contrary to the public interests, [5] any rulingwill be assessed on a case-by-case

basis. The measures are detrimental to the operationsof Chinese firms, some of which have

already been labelled as national security threats by governments around the world. That

Huawei was placed on the Entity List is largely owing to an allegation that the firm has

direct ties to the Chinese Communist Party for espionage (Maizland and Chatzky, 2019). In

principle, an entity can continue to deal with Huawei, so long as they do that without

exceeding de minimis levels of the US components or using technology controlled on the

ground of national security purposes [6]. However, blurring of distinctions between export

controls and sanctions law, the Entity List has had enormous implications on suppliers’

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