All Eyes Back on China's Own Entity List as US-China Battle Heats Up

"They're really extrajudicial… in terms of discrimination against foreign companies for any number of reasons including of course retaliation against export restrictions from the home country or that particular company," Ross said.

In May, Chinese state news outlet Global Times reported that entities on the unreliable list will face "necessary legal and administrative measures and the Chinese public will also be warned against [them] to reduce risks." Kenneth Zhou, a Beijing partner at WilmerHale and a member of AmCham's board of governors, said some of these measures may include restrictions on market access, investment and licensing approvals, as well as punishments through China's social credit system.

China's Ministry of Commerce (MOFCOM) first announced it would establish such a list in May 2019 in response to Huawei being placed on the U.S. Entity List, which effectively barred U.S. companies from doing business with the Chinese company. The announcement at the time raised considerable alarm among foreign companies in China worried about survival in the world's second-biggest economy, but more than one year on, the list remains unpublished.

Tensions between the U.S. and China have significantly escalated since then. In April, the Commerce Department unveiled new rules increasing its scrutiny of technology exports to China. These were followed soon after by greater restrictions on Chinese telecom giant Huawei's global access to chips made with U.S. technology. In late May, the administration blacklisted dozens more Chinese entities through the Entity List on national security grounds.

Then last week, U.S.-China relations fell to a new low when President Trump announced that he will start stripping Hong Kong of its special trade privileges. The move came on the back of new national security legislation that Beijing is imposing on Hong Kong, bypassing the city's own legislature. In response, China has vowed to take "necessary countermeasures" against the U.S., which has been reported by Chinese state media as a reference to the unreliable entity list.

"[Recent U.S. actions] accelerate publication of [China's unreliable entity list] because the tension between the U.S. and China with respect to technology rivalry has grown," WilmerHale's Ross said.

"It's fundamentally technology companies and companies which are really dependent on the Chinese market [that will be targeted by China's unreliable entity list]," he said. "China has already embarked upon a substantial effort… to reduce its dependence on foreign technology. So it can accelerate that movement… and exact punishment upon those companies and the country in which they're incorporated."

The Global Times report suggested that China will launch "rounds of endless investigations" on foreign firms including U.S. technology giants Apple, Qualcomm and Cisco in order to dampen investors' confidence and squeeze the firms' income in the Chinese market. According to Chinese officials, any foreign entities that cut off supplies or adopts discriminatory measures against Chinese companies for non-commercial reasons will be added to the list. Qualcomm used to be a chip supplier to Huawei, while Cisco is considered a major rival to Huawei in the manufacturing of telecom equipment.

Chinese officials have cited three laws as the legal bases for the unreliable entity list: the PRC Foreign Trade Law (中华人民共和国对外贸易法), PRC National Security Law (中华人民共和国国家安全法), and PRC Anti-Monopoly Law (中华人民共和国反垄断法). First, Article 7 of the PRC Foreign Trade Law says that if a foreign country adopts prohibitive measures against China in trade, China may take "corresponding measures" against such country – an "enabling clause" providing the basis for China to implement countermeasures, although the law does not specify what those are nor how they should be determined, according to Zhou Yong and Bill Qin, a Beijing-based counsel and partner respectively at JunHe.

Second, Article 59 of the PRC National Security Law says that China will establish a system to review national security risks in various areas including foreign investment, key technologies and network information products. However, it is not yet clear how this ties in with the unreliable entity list, the two lawyers write in their client alert.

Finally, Article 17 of the PRC Anti-monopoly Law prohibits abuse of market dominance through "refusing to deal with trade counterparties without legitimate reason" or "restricting trade counterparties to dealing exclusively with it or with business operators designated by it without legitimate reason."

Significantly however, the measures imposed on U.S. entities by the Trump administration restricting dealings with Huawei and other Chinese businesses may constitute "legitimate reason" that excuses the U.S. entities' behavior.

"In our opinion, if [a foreign entity] does comply with a domestic order, a foreign entity should not be punished since its action could be argued to be justifiable. Provided the action is justifiable, it would be self-contradictory and legally inconsistent if MOFCOM still added the entity to the Unreliable Entities List," Zhou and Yong wrote.

WilmerHale's Ross agrees, arguing that the list is somewhat "misdirected" as U.S. companies are halting their business with Chinese partners not because they no longer want to do business but because they must comply with the orders of the U.S. government.

"The unreliable entity list is really directed against companies even though those companies are indeed acting in accordance with their home country's laws and they have no powerful way necessarily to get those laws changed," he said.

With officials citing multiple laws that could be the legal bases for the unreliable entity list, China's response to U.S. actions on Huawei and other Chinese companies is likely to pan out differently to how the Trump administration has grounded its actions under U.S. law. Whereas the U.S. Entity List is an export control tool managed by the Commerce Department's Bureau of Industry and Security, part of the country's Export Administration Regulations, China's list could have a scope beyond export controls – especially as China's comprehensive new export control law is still being finalized.

Nonetheless, several lawyers highlight a draft export control law published in December 2019 as one to watch, given that China's list is a direct response to the U.S. Entity List. According to a PricewaterhouseCoopers report, the draft law contains elements resembling hallmarks of the U.S. export control regime, such as the concepts of "deemed export" and re-export, which could lead to Chinese law applying extraterritorially in the same way as U.S. export controls do currently – most recently demonstrated by new restrictions on Huawei's global suppliers imposed by the Commerce Department in May.

Notably, an earlier draft of the law released in 2017 even contained provisions enabling China to retaliate against countries with discriminatory export control measures (Article 9). However, this Article was removed from the latest draft, which some have suggested was due to China's desire to descale tensions with the U.S. in the run-up to the "phase one" trade deal being signed in January. This might also explain the long delay to the implementation of the unreliable entity list, although recent events are likely to have overridden any goodwill between the two countries on the back of the successful trade negotiations.

For many U.S. companies, the Trump administration's restrictions already limit their ability to do business with Chinese partners, and now China's retaliation promises to restrict them even more. Ross, who has raised concerns with the Chinese authorities in his capacity as both a partner and a core member of AmCham China, does not foresee China changing its course.

"Their (the Chinese authorities) point is: look into your own country, and you'll understand why it is we're doing what we're doing," he said.

Click here to listen to the full interviews with WilmerHale's Lester Ross and Kenneth Zhou in the latest episode of the China Law Podcast.