snapshots

China: Beijing's Latest Trade War Salvo Takes Aim at Foreign Firms

5 MINS READMay 31, 2019 | 22:00 GMT
The Big Picture

The trade war between China and the United States is showing no sign of abating. Stung by White House moves to ban U.S. firms from doing business with key Chinese telecom equipment maker Huawei Technologies, China has unveiled a potential new weapon in its battle with Washington. The compilation of a list of "unreliable entities" announced by the Chinese Commerce Ministry has foreign businesses and individuals with operations in China looking nervously over their shoulders.

What Happened

With U.S. tariffs weighing down its economy and hamstringing its major tech companies, China followed the veiled threats it issued earlier in the week to restrict the export of rare-earth elements with the revelation of another retaliatory option in its trade war with the United States. The Chinese Ministry of Commerce on May 31 said China is creating a list of "unreliable entities" that would include foreign companies it considers damaging to the interests of Chinese firms. The list, akin to the U.S. Commerce Department's Entity List that enabled the United States to blacklist Huawei Technologies, would allow Chinese authorities to target foreign companies, organizations and individuals that they find either don't obey market rules or violate contracts, or have blocked or cut off Chinese companies from suppliers for noncommercial reasons. Neither the scope of the list nor specific measures that might be taken against those that land on it were disclosed, but the ministry said details will be announced "soon."

Why It Matters

The vague nature of the ministry's statement leaves open the possibility that the Chinese government will have wide latitude to take action against foreign companies operating in China. Given the implicit connection to the U.S. blacklist of Huawei, the list of unreliable entites would allow Chinese authorities to restrict market access, block business contracts or use other means to hit out at companies following the U.S. directive to no longer supply components and services to Huawei. Huawei's U.S. vendors that could be included on the Chinese list include Alphabet Inc.'s Google, Intel Corp., Qualcomm, Broadcom Inc. and Xilinx Inc., in addition to Japanese and German companies. Still, given China's high reliance on foreign chipmakers as it develops its indigenous tech sector, Beijing would likely take only selective action on a case-by-case basis rather than institute an outright ban on the listed firms. Creating the list and penalizing those on it, meanwhile, would serve to remind foreign companies to think twice before cutting off other Chinese tech firms that may land on a U.S. blacklist. After all, Huawei is not the only Chinese company under the gun. Washington has also considered moving against Chinese dronemaker DJI and surveillance firm Hikvision Digital Technology. Other companies at risk of Chinese retaliation would be those that acquiesce to U.S. pressure to limit or decide to cut their partnerships with Huawei or ZTE on a 5G rollout. This would open the possibility that entities in Japan and Australia would be affected, in addition to those in Europe that could choose to cut ties with Huawei.

Given China's high reliance on foreign chipmakers as it develops its indigenous tech sector, Beijing would likely take only selective action on a case-by-case basis rather than institute an outright ban on the listed firms.

With the announcement that it is compiling the list, Beijing is signaling that it is not willing to sit idly by as the White House takes aim at its most important tech company and makes other moves to undercut China's tech competitiveness. The uncertainty over who will be added to the list, and how it will be used, will rattle foreign businesses, especially tech companies. Meanwhile, the development seems to contradict Beijing's efforts to secure a relatively healthy foreign investment inflow. And as China prepares to possibly take more aggressive measures against foreign companies, those already caught up in the tech Cold War between China and the United States will feel a further squeeze as the clash between the two powers intensifies.

Background

The announcement of the "unreliable entity" list is just the latest escalation of the trade war between the United States and China. Over the past two weeks, China has threatened to restrict its exports of rare-earth elements key to many high-tech applications and has promoted nationalist consumer sentiment in response to increased U.S. tariffs and Washington's actions against Huawei. Combined with the near-breakdown of trade negotiations between the two sides earlier in May, the recent developments dampen any hope for a short-term de-escalation of hostilities and significantly narrow the space for compromise on both sides. Chinese President Xi Jinping and U.S. President Donald Trump appear to be still on track to meet at the G-20 summit in Japan on June 28-29, offering a glimmer of hope for a cease-fire in their countries' trade battle. But as the list shows, there is also plenty of room on both sides for the struggle to intensify.

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