On September 19, 2020, China’s Ministry of Commerce (MOFCOM) promulgated the Provisions on the Unreliable Entities List (the Provisions).1 MOFCOM had announced its intention to establish the Unreliable Entities List regime in May 2019 as a countermeasure against U.S. export control enforcement actions targeting Chinese companies, in particular, Huawei.2
The newly issued Provisions form the legal basis for the actual Unreliable Entities List (Entities List), the initial iteration of which has yet to be released. The Provisions arguably constitute the basis for more comprehensive tit-for-tat retaliation by the Chinese government in response to a series of U.S. Executive Orders and political actions relating to Huawei, TikTok, WeChat, Hong Kong, Xinjiang and Taiwan, as the Unreliable Entities List will include not only foreign companies which boycott or cut off supplies to Chinese businesses, but also organizations, government officials and individuals who are deemed to have challenged China’s conception of its sovereignty or to have harmed China’s national security, which can be interpreted expansively. China may nevertheless move cautiously with respect to releasing and populating the Entities List out of concern that it will depress foreign investment in China.
The key features of the Provisions are as follows:
- Subjects of the Unreliable Entities List
Article 1 of the Provisions provides that the Unreliable Entities List will include enterprises, other organizations and individuals of foreign countries (collectively, Entities) which
- endanger the national sovereignty, national security or development interests of China; and/or
- suspend normal transactions with or discriminate against Chinese Entities in violation of normal market transaction principles and cause serious harm to the legitimate rights and interests of Chinese entities.
Article 7 of the Provisions provides that when determining whether an Entity should be added to the Entities List, the degree of danger to national sovereignty and security, the degree of harm to the interests of Chinese entities, internationally accepted trade rules and other factors shall be considered.
It appears the direct targets of the Entities List may be foreign companies which in compliance with U.S. sanctions, foreign investment review and/or export control regimes terminated business relations with Chinese companies, together with those foreign organizations and individuals (such as government or non-government organizations, and government officials) which are deemed to have challenged China’s sovereignty over Hong Kong, Taiwan, or other frontier regions such as Xinjiang, Tibet and South China Sea. The Entities List may include not only the underlying Entity itself, but also its Chinese and overseas affiliates and subsidiaries, together with their officers.
- What it means to be on the Entities List
Article 10 of the Provisions provides that Entities added to the Unreliable Entities List may be subject to one or more of the following restrictive measures:
- Restriction or prohibition from engaging in China-related import or export activities;
- Restriction or prohibition from investing in China;
- Restriction or prohibition on relevant personnel or transportation from entering China;
- Restriction or revocation of relevant personnel’s work permits, status of stay or residence in China;
- Fine based on the severity of the harm caused; and/or
- Other necessary measures.
Open-ended Article 10(6) would afford the Chinese government more latitude to apply additional restrictions and sanctions on listed Entities such as asset freezes and physical detention in China, or conceivably even extraterritorial enforcement actions.
- The procedures to be added to and removed from the Entities List
A Working Mechanism composed of relevant government agencies likely to be housed within MOFCOM will be established to administer the Entities List.3 The Working Mechanism will have the authority to investigate Entities ex officio or based on suggestions or complaints from other stakeholders,4 including Chinese companies adversely impacted by restrictive measures imposed by a foreign government. The Working Mechanism will issue an announcement if it decides to launch an investigation.5
The Working Mechanism has the authority to make inquiries of the relevant parties, consult or copy relevant documents and materials, and adopt other necessary measures to conduct the investigation.6 These other unspecified measures may give Chinese authorities expansive extraterritorial power to compel information not only from Chinese subsidiaries of Entities but also overseas affiliates of Entities. The Entities have the right to submit statements and defense arguments.7
The Entity in question may be given time to correct its conduct,8 and if the actions have been sufficiently corrected and the harmful consequences eliminated, the Entity may be removed from the Entities List.9 The Working Mechanism may also consider removing the Entity from the Entities List ex officio based on the actual circumstances or upon the Entity’s application. Such removal shall be publicly announced with immediate effect.10Chinese parties may also apply to the Working Mechanism (for a license or exemption) to transact with an Entity on the Entities List in special circumstances. Only when such license or exemption is granted may Chinese entities transact with an Entity on the Entities List.11
MOFCOM in its accompanying press release emphasized that the Provisions will only target an extremely small number of Entities that have broken market rules or violated Chinese law and will not impose burdens on law abiding and trustworthy foreign companies. When asked if the Provisions constitute retaliation in response to the Executive Orders regarding Huawei, WeChat and TikTok, MOFCOM denied that the Provisions are targeted at particular countries or particular Entities, but rather have been issued to optimize the business environment.12
We believe that the Provisions nonetheless afford the Chinese government new and more explicit tools to retaliate against measures adopted by foreign governments against leading Chinese enterprises and challenging China’s sovereignty over its claims to and policies in peripheral regions like Hong Kong, Taiwan and the South China Sea. In this sense the Entities List constitutes a more formal and legal tool to be used in addition to the less formal instruments of “coercive diplomacy”13 like intensified customs inspections and detentions of personnel which China has long used as instruments of foreign and commercial policy.
While the adoption of the Provisions is motivated in response taken to actions by the U.S., China has historically preferred to impose punitive measures on smaller countries which may be more dependent on China’s favor. The Entities List should therefore be viewed of concern to Entities regardless of their nationality. Moreover, the emphasis on China’s sovereignty as a basis for inclusion on the Entities List indicates that Entities may be vulnerable if they do not conform to China’s then-current political practices, e.g., by failure to indicate on maps and packaging that Taiwan is part of China rather than a self-governing jurisdiction or that most of the South China Sea is Chinese territory.
The Entities List is also not restricted to particular industries. Therefore, Entities in education, journalism and other sectors which tend to be more outspoken may be as vulnerable as those in more technologically or capital-intensive sectors.