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China to Establish a “Blocking” Mechanism to Counter US Huawei Measures: the New “Unreliable Entities List”

On 31 May 2019, China’s Ministry of Commerce (MOFCOM) announced at a press conference that the country will soon establish an “unreliable entities list” regime. The move comes after the US blacklisted Chinese telecom giant Huawei and threatened to blacklist more Chinese high-tech companies or transactions. We are closely monitoring the latest developments, given the short term and long term implications on international companies doing business with Chinese companies.

What’s the latest development?

The new “unreliable entities list” will include “foreign entities, organizations or individuals” that block or cut off supplies or take other discriminatory measures against Chinese companies “for non-commercial reasons”. This aims to deter foreign companies eager to comply with the US Entity Listing of Huawei, discussed in our previous client briefing.

MOFCOM stated that it would consider the following factors in totality when deciding whether to add a party to the list:

  1. whether the party has imposed blockades, ceased to supply, or resorted to other discriminatory measures against Chinese entities; 
  2. whether the party’s actions are taken for non-commercial reasons and violate market rules and the spirit of any contract entered into by that party;
  3. whether the party's actions have damaged the interests of Chinese entities or related industries; and
  4. whether the party's actions constitute a threat or potential threat to China's national security.

Who will be impacted?

At present, no details have been released on which entities will be added to the list. Instead, MOFCOM announced that the relevant implementing measures for the “unreliable entities list” will be issued in the coming days, although there is no indication if these measures will be accompanied by an actual list of blacklisted companies.

If MOFCOM does publish an initial list of unreliable entities, it is believed that this would target a small number of companies that have chosen to comply with recent US export control, procurement and other trade restrictions against Huawei.

MOFCOM’s officials also stated that there will be an investigation procedure for identifying companies which are “unreliable entities” and that the companies will have the right to defend their position.

What penalties may apply?

There is currently no clarity on the possible consequences for the blacklisted companies or their directors/employees.

MOFCOM is expected to publish more details in the coming days. To date, MOFCOM has cited China’s Foreign Trade Law, Anti-Monopoly Law and National Security Law as the underlying bases for the “unreliable entities list”. Article 7 of China’s Foreign Trade Law provides that “[China] shall have the right to adopt … corresponding measures against any country or region to counter their bans, restrictions or other similar discriminatory measures which are imposed in connection with trade involving [China].”

At a press interview with the Director Generals of both the Bureau of Law and Treaty and the Bureau of Industry, Security, Import and Export Control, two bureaus within MOFCOM, it was stated that dominant entities refusing to deal with Chinese entities for non-commercial reasons may be in violation of the Anti-Monopoly Law and would be penalized for any such breach.

Looking to the future

In the short term, we anticipate an increase in complaints and investigations in China against leading global companies headquartered outside of China, particularly those (i) supplying strategic inputs or raw materials to Chinese companies and (ii) purchasing goods from Chinese companies that incorporate relevant US technology and which decide to cease such supplies or purchases.

Over the longer term, once the new “unreliable entities list” system is created, it may well be here to stay, regardless of whether the US-China trade war cools off. In addition, China has been working in recent years on a new and comprehensive export control law, which has many salient features of the US’ export control regime, including its own blacklisting and licensing programs.

Once the new “unreliable entities list” system and/or China’s export control law come into force, they will raise potentially challenging issues involving extraterritorial operation of conflicting export control laws, which will have to be considered carefully by companies with dealings in both jurisdictions.