US hits sanctioned firms’ subsidiaries, drawing Chinese rebuke

[HONG KONG] The Trump administration is dramatically expanding US sanctions to capture subsidiaries of blacklisted companies, a crackdown that drew a swift rebuke from China, where key tech giants are already subject to stringent American trade curbs.  

A long-awaited rule published on Monday (Sep 29) by the Commerce Department seeks to prevent sanctioned companies such as Huawei Technologies, China’s AI chip champion, from using affiliates to access restricted US goods.

Subsidiaries that are at least 50 per cent owned by blacklisted companies will now face the same curbs as their sanctioned parents, according to the measure from the agency’s Bureau of Industry and Security (BIS). There are also increased due diligence requirements for shipments to entities with significant minority ownership by a sanctioned company.

“For too long, loopholes have enabled exports that undermine American national security and foreign policy interests,” said Under Secretary of Commerce Jeffrey Kessler, who leads BIS. “Under this Administration, BIS is closing the loopholes and ensuring that export controls work as intended.”

All told, the changes mean that Washington’s permission will be required to export certain goods to a much wider swath of companies, particularly in Russia and China, where the US has ramped up use of trade blacklists to combat Moscow’s war efforts and curtail Beijing’s chipmaking and artificial intelligence (AI) ambitions.

In particular, Commerce’s action affects two key sanctions lists – the entity list, which includes parties believed to act contrary to US national security or foreign policy interests, and the military end user list, identifying parties believed to procure items for foreign militaries. The rule standardises Commerce’s approach with the way the Treasury Department handles sanctions through its Office of Foreign Assets Control.

Washington has for years used the entity list to target individual Chinese tech companies, such as Huawei and Yangtze Memory Technologies, with restrictions that go beyond country-wide curbs. That broader campaign, which controls sales of advanced chips and the tools used to make them, centres on concerns that advanced AI could lend China a military edge.

The latest rules apply globally and do not target any one country, but they nonetheless triggered immediate criticism from China, which has long accused the US of weaponising export controls to advance economic interests under the guise of national security. In a statement about the restrictions, China’s Ministry of Commerce urged the US to “correct its wrongdoings” and stop the “unjustified suppression” of Chinese enterprises, warning that Beijing would take necessary measures to safeguard the interests of firms in the Asian country.

The Trump administration’s use of the entity list has been a sensitive issue in ongoing trade talks between Washington and Beijing. Earlier this month, BIS sanctioned several Chinese companies believed to have helped Semiconductor Manufacturing International Corporation, Huawei’s primary production partner, get restricted manufacturing gear. The move drew protests from China’s Commerce Ministry, which noted that the measures came just as the two sides were set to meet in Spain to continue trade negotiations.

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“Against this backdrop, the US decision to sanction Chinese enterprises raises questions about its true intentions,” the ministry said at the time.

A US official, speaking on condition of anonymity, said they don’t anticipate that on Monday’s regulations will have a major impact on trade flows, given that they are designed to ensure that companies already subject to American export controls aren’t able to use subsidiaries as a workaround.

Still, some industry officials have worried that the change, meant to address what some US policymakers have described as a whack-a-mole problem in export controls enforcement, could create headaches for companies trying to determine whether potential customers are now subject to additional restrictions.

“This dramatically increases the compliance requirements,” Doug Jacobson, international trade attorney at Jacobson Burton Kelley PLLC, said of the challenge companies face while adjusting to the new subsidiary rule. “This will lead to more red flags, more delays while companies try to get certainty as to who their counterparties are.”

Jacobson added that while the industry has been anticipating the new rules, language that encourages companies to apply for an export license in cases when they are unsure about end-user ownership is “helpful to some degree, but it also makes it much more challenging for the agency”. BLOOMBERG