China Creates an “Unreliable Entities List”

China’s Ministry of Commerce (MOFCOM) recently announced that it is creating an “Unreliable Entities List,” which will name any enterprise, organization, or individual who damages the interests of Chinese companies or threatens China’s national security. The move appears to be in response to the United States’ addition of Chinese company Huawei to the US Entity List in mid-May—which effectively bars Huawei from receiving US goods—and increases tensions between two countries that are already engaged in a trade war. 

While details on implementation of the Unreliable Entities List have yet to emerge, initial takeaways include:

• MOFCOM has not announced which (if any) companies or individuals will appear on the list.
• MOFCOM has not explained the procedure by which entities and individuals will be added to the list, although there may be some form of investigation.
• MOFCOM has not announced what restrictions will apply to entities and individuals included on the list.
• And MOFCOM has not indicated specifically when it will unveil the list or any applicable rules.
• Still, MOFCOM has identified certain actions that may trigger inclusion, including (1) failure to obey market principles and the spirit of contract law; (2) refusing or otherwise ceasing to supply Chinese firms for non-commercial reasons (conduct that might also be pursued as abusive under the Anti-Monopoly Law); (3) seriously harming the rights and interests of Chinese enterprises; and (4) threatening China’s national security interests.
• The creation of China’s Unreliable Entities List may place companies with operations in both the US and China in a difficult position, as they will need to navigate compliance with US export control and trade restrictions as well as China’s requirements of continued supply.

Potential Links Between the US Entity List and China’s Unreliable Entities List

The Unreliable Entities List appears to be a response to the May 16, 2019, addition of Huawei and several affiliates to the US’s so-called “Entity List,” which is maintained by the US Department of Commerce’s Bureau of Industry and Security (BIS). The effect of this designation is dramatic: US and non-US persons that handle US origin goods are prohibited from supplying such goods and any other items that are “subject to the Export Administration Regulation” to Huawei. This measure has had a major impact on suppliers’ ability to continue selling to Huawei or engage in the development of new products and technology for Huawei. 

The stated reason for the BIS measure is that Huawei has been involved in activities determined to be contrary to the national security and foreign policy interests of the US. BIS specifically pointed to an ongoing investigation of alleged sales of US goods to Iran. Similar considerations led BIS to add ZTE, another large Chinese technology company, to the US Entity List in 2016. Unlike in the case of ZTE, however, there is no current indication that a settlement of the pending Huawei enforcement matter (which would presumably include removing Huawei from the list) is imminent.

On May 31, China’s MOFCOM announced the creation of its own Unreliable Entities List aimed at combating “unilateralism,” “trade protectionism,” and discriminatory actions meant to block supplies to Chinese enterprises.

Although MOFCOM did not explain the penalties or procedures governing the list, or which entities and individuals would be included, the Ministry announced that the list will cover foreign entities or individuals “that do not comply with market rules, violate the spirit of contract, block or cut supplies to Chinese firms for non-commercial purposes, and seriously damage the legitimate rights and interests of Chinese enterprises.”

Commentary since the initial announcement suggests that companies included on the list “will be restricted in terms of sales, investments and business licenses,” while “relevant individuals” will see “their travel, activities and employment in China” “rejected.”^[1] At a minimum, MOFCOM will warn the Chinese public against doing business with entities designated as “unreliable.”

The Unreliable Entities List and its attendant polices will be based on principles underlying China’s Foreign Trade Law, the Anti-Monopoly Law, and the National Security Law, among others. MOFCOM seems particularly concerned with national security, including economic development, technological progress, and resource security. MOFCOM also views the list as a means to protect international trade rules, supply chain stability, and the global economy.

Implications

Absent further details about the Unreliable Entities List and the restrictions applicable to those included thereon, it is difficult to predict the precise implications of the list at this stage. Still, certain initial issues exist, including:

• Companies with operations in both the US and China will need to navigate compliance with US export control and trade restrictions as well as China’s requirements of continued supply.
• Failure to comply with China’s requirements of continued supply may result in an inability to conduct business in China and/or action under the Anti-Monopoly Law.
• The Unreliable Entities List could conceivably complicate merger review proceedings by the China State Administration for Market Regulation involving listed (“unreliable”) US corporations—although this is also not a given.
• Individuals associated with or acting on behalf of non-compliant companies could personally be punished with inclusion on the list.
• Failure to comply with US restrictions, where applicable, exposes US and non-US companies to potential criminal or civil fines, the most draconian of which is to suffer the same fate as Huawei—losing export privileges and the ability to procure US goods.
• It would seem that a refusal to supply Huawei so as to comply with a US law obligation is not sufficient grounds for a company not to be added to the Chinese Unreliable Entities List. US and other corporations may therefore find themselves between the proverbial “rock” and a “hard place.”
• The actions by both China and the US could cause further trade tension and threaten to pull apart the supply chains currently linking the two economies.

[1] Sarah Zheng & Wendy Wu, Beijing to blacklist ‘unreliable’ foreign entities that ‘hurt interests of Chinese firms’, South China Morning Post (May 31, 2019), available here.

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