Doing business with China – navigating the ‘entity lists’
China has experienced a manufacturing boom reminiscent of the ‘Asian Tiger’ period, when the nation first emerged as an economic power, since the relaxation of COVID-19 restrictions in late 2022. The purchasing managers’ index (PMI), a gauge of manufacturing activity, increased in China to 52.6 from 50.1 in January, the highest level since April 2012.
More goods, lower prices
Consumers should benefit from increased manufacturing activity in the “world’s factory,” as increased supply will drive down prices for manufactured goods globally and help alleviate the West’s affordability crisis.
Due in large part to China’s abundant supply of skilled labor and its highly connected manufacturing bases in cities like Shenzhen, the “Made in China” label has long been associated with good value and lower prices. Companies can take advantage of effective supply chains and favorable tax and customs regulations, which helps exporters.
However, not all nations are eager to benefit from the lower prices of Chinese goods. It is becoming more challenging to conduct business with Chinese companies as a result of rising geopolitical tensions between the US and China. These tensions have resulted in new trade barriers.
Alan Beattie, writing in the Financial Times, emphasizes how trade relations between South Korea and its neighbor in the region are severely hampered by tensions between the US and China. Beattie mentions Seoul’s annoyance at being asked to “take economic hits for geopolitical gains” as the US insists that Korea limit semiconductor chip exports to China. “Korea must decide how much it is prepared to override its commercial interests in favor of maintaining relations with the US, its longtime military and foreign policy ally,” he writes in his conclusion.
A range of trade-reducing measures
The Trump administration started putting tariffs on Chinese imports in 2018, starting a trade war that many analysts claim hurt both countries’ economies. But in addition to tariffs, successive administrations have pursued policies that have the net effect of raising trade barriers, both inside and outside the US.
Several national security-related laws passed during the Trump administration specifically prohibited trade with a number of Chinese firms, ostensibly to safeguard US security interests. In actuality, the laws restrict trade between the world’s largest consumer market and its strongest manufacturing sector, which lowers economic output overall.
The National Defense Authorization Act of 2019 specifically forbids government contractors from buying goods and services from a number of Chinese businesses. The 2020 Holding Foreign Companies Accountable Act effectively prevents listed companies with operations in China from going public in the US by requiring them to report their financial auditing procedures to US regulators.
Joe Biden’s inauguration in 2021 offered a chance for a restart, but three years later, the trajectory is largely unchanged. Biden has maintained and, in many instances, increased trade restrictions with China, ranging from import tariffs to subsidies intended to strengthen the comparative advantage of US businesses, such as the CHIPS Act.
In order to limit trade with specific Chinese companies, the Biden administration has increased the use of so-called blacklists, frequently for reasons of national security. A list of “military-linked companies” that, in the eyes of the Pentagon, are a part of China’s “military-civil fusion” was included in the National Defense Authorization Act 2021. The list does not forbid or blacklist these businesses from the US market, but it does make trade more challenging by requiring the Department of Defense to disclose any transactions with entities on the list.
Why are companies listed?
Over the years, a number of “entity lists” with various memberships and outcomes have emerged as a result of Congress and succeeding administrations’ piecemeal approach. Each of the lists has several businesses on it that sell goods or services to the US market and compete with US businesses. These businesses are frequently completely independent and privately owned.
The companies covered by the various lists include technological firms like Hikvision and Dahua, as well as scientific organizations like BGI and Huawei and ZTE. Some are on the list because they have supplied the Chinese government, while others are there because they pose a potential risk to US cyber security.
But in each instance, the US DoD has provided scant, if any, justification or explanation for the inclusion of a specific company. Companies have been quick to point out that they have safeguards against the issues mentioned by lawmakers after the publication of each list.
What does this mean outside the US?
In the end, although they partially impede trade, lists like the NDAA list and the list of Chinese military-affiliated enterprises cause friction. Despite the listings, US businesses and consumers who want to benefit from the goods and services provided by these companies may still be able to maintain profitable trading relationships.
It is becoming increasingly obvious that the US’s designated circle of allies is not following Washington blindly into whatever confrontational and coercive policy it chooses against China, Beattie writes in his FT column. US allies have resisted attempts by the US to apply this strategy outside of its own borders. In addition, Beattie notes that “The UK, despite perpetually harping on about its Anglospheric relationship with the US, has similarly distanced itself from the US’s hardline Chinese decoupling strategy,” which was recently an attempt by the US to extend a total ban on exports to Russia to the entire G7.
Listings like the NDAA, the Military End-User List, or other entity lists have no effect in Europe, the UK, or any other nations outside of the US, and other nations have chosen not to follow the US’s example. It has been made clear by national governments, such as the UK, that they “believe in a positive trade and investment relationship” with China and that it would be “wrong” to “isolate” the nation. James Cleverly, MP, the Foreign Secretary, described a “constructive but robust” relationship with China and stated that “we want British companies to do business with China,” unless doing so would be detrimental to the interests of the country.
Customers who rely on Chinese goods and services may be alarmed by US entity lists and restrictions that cite national security concerns, which inevitably raises questions for customers and suppliers. It is reasonable to wonder if their main goal is to defend US businesses from foreign competition in light of rising geopolitical tensions and economic pressure in the US.
The US has been successful in creating significant trade friction with China, but it hasn’t been able to persuade its allies to follow suit. Washington may discover that its plethora of entity lists primarily serves to drive prices up when compared to other friendly nations where such lists do not apply, as its allies in the UK, Europe, and the Asia-Pacific region continue to be open for business with China. The US runs the risk of furthering its own isolation and increasing costs for its own citizens by attempting to isolate China through trade.