US expands export blacklist in crackdown on Chinese subsidiaries

The Commerce Department issued a new rule expanding its restricted export list, known as the Entity List, to automatically include subsidiaries owned 50% or more by a company on the list, according to posting in the U.S. Federal Register. The action greatly increases the number of companies that require licenses to receive American goods and services.

The rule is likely to disrupt supply chains. It also makes it more difficult for companies to determine whether exports to a customer or supplier are restricted, and places more of a burden on the exporter to figure out ownership before moving forward. According to the rule, certain transactions may be allowed during a 60 day grace period.

China's Commerce Ministry strongly criticized the rule.

"This move by the U.S. is extremely egregious in nature," the ministry said in a statement. "It seriously infringes upon the legitimate rights and interests of the affected enterprises, severely disrupts international economic and trade order and gravely undermines the security and stability of global industrial and supply chains."

The Commerce Department said the rule "closes a significant loophole."

The timing of the rule's release is somewhat surprising, given that the U.S. and China are in the midst of trade talks. The action strengthens export controls on China, a contrast to Washington's recent loosening of controls on AI chips to China like Nvidia's H20.

If a company is at least 50% owned by an entity on the list, licenses will be required for U.S. exporters to ship goods or technology to the subsidiary, as is the case with listed entities, with many licenses likely to be denied.

The affiliates rule is similar to the "50% rule" for entities sanctioned by the Treasury Department's Office of Foreign Assets Control.

AIRCRAFT, CHIP, MEDICAL EQUIPMENT SECTORS MAY BE AFFECTED

Though companies around the world are on the Entity List, the change will most significantly impact Chinese entities, experts said. Factories that produce older, less sophisticated chips may be affected, as well as other sectors, including aircraft and medical equipment.

Chinese tech giant Huawei, video surveillance company Hikvision and drone manufacturer DJI are three examples of companies that may be impacted, one expert said. Many Huawei subsidiaries are already on the list, but not all.

The companies did not immediately respond to requests for comment.

An analysis by Kharon, a Los Angeles-based data and analytics company, found the expected rule could pull thousands of hidden subsidiaries in nearly 100 destinations around the world into "export-control crosshairs."

"While Russia and China account for the majority of subsidiaries tied to already-listed entities, Kharon's analysis uncovered that hundreds more are located in major trade and finance hubs - including the EU, the United States, the UK, Singapore, Switzerland, Japan, Canada, Australia and India," the company said in a June brief in anticipation of the rule.

The U.S. puts companies on the Entity List that it has determined pose risks to U.S. national security or foreign policy. There are now about 1,100 Chinese entities on the list, according to think tank the Center for a New American Security. Overall, there are about 3,400 parties on the list, according to Kharon.

Since the Entity List was first published in 1997, restrictions applied only to the company or organization named.

The Commerce Department "is concerned that the old approach can enable diversionary schemes, such as the creation of new foreign companies to evade Entity List restrictions," the rule said. It will also apply to the Military End-User list.

The change is not a "wonder drug that cures all ills," said Dan Fisher-Owens, a California-based trade lawyer. Entity List companies may restructure, just as OFAC targets have done, he said.

"The game of whack-a-mole will continue."