China Is Creating Its Own 'Entity List' to Avenge Huawei and Punish Foreign Firms




 

The cracks in Huawei Technologies are starting to show.

Speaking to an audience gathered at the company's headquarters in Shenzhen on Monday, Huawei founder and CEO Ren Zhengfei revealed that action taken against the Chinese telecom manufacturer by the U.S. had forced Huawei to cut its projected annual revenue from $120 billion to $100 billion-pretty much flat with last year. The company's overseas smartphone shipments are facing a 40% drop-off too. As Huawei tailspins-a victim of the U.S.-China trade war-Beijing is gearing up to exact revenge on U.S. companies.

Last month, the U.S. Department of Commerce placed Huawei on its so-called Entity List-a blacklist of businesses Washington considers a threat to America's strategic interests. It was a critical blow. Under U.S. law, companies are required to request government permission before conducting business with a listed "entity." Permission is often denied.

U.S. firms quickly abandoned Huawei, rather than risk falling foul of regulators. Google announced it was withdrawing Android services from the Chinese firm's range of smartphones, Intel announced it would stop delivering chips, and various other Huawei suppliers put relations on hold while they determined whether selling to Huawei would now violate U.S. laws. Last week, Huawei had to cancel the launch of a new laptop line because it can't procure components required to make it.

Matchmaker

But in a trade war marked by tit-for-tat measures, Beijing is working to match Washington's punitive move.

Its Ministry of Commerce (Mofcom) announced it was developing its own 'Unreliable Entities List' to target foreign firms soon after Huawei was designated an entity by the U.S. "I think it's a fair move by Beijing," says Chen Long, an economist at China-based consultancy Gavekal Dragonomics. "Beijing needs non-tariff measures to retaliate too since it is also facing non-tariff restrictions from the US."

Observers suspect U.S. tech companies will be the first entries on Mofcom���s blacklist, in retribution for Huawei's suffering. However, actual details on the Unreliable Entities List are scarce. Speaking at a press conference in late May, Mofcom spokesperson Gao Feng said the blacklist would target entities that "block or cut supplies to Chinese firms for non-commercial reasons." That puts U.S. companies complying with U.S. regulations in a murky gray area.

"American companies aren't going to violate American laws, especially in such a high-profile context where their actions are scrutinized," Scott Kennedy, a senior adviser at the Washington-based Center for Strategic and International Studies who studies Chinese economic policy, told the New York Times. "The companies are between a rock and a hard place, but that hard place will win out."

Painful uncertainty

Jon Cowley, an expert on international trade at Hong Kong-based law firm Baker McKenzie, points out that the concept of an entities blacklist is not entirely new in China. Mofcom first raised the prospect of creating one two years ago when it drafted an Export Control Law to amend China's current piecemeal export control system.

"That draft export control law did introduce the concept of blacklisting and this idea that China could restrict exports to blacklisted foreign parties. In that respect it would have many of the features and characteristics of the U.S. export control regime," Cowley says, but adds that the new Unreliable Entities List is separate from the Export Control Law, which has yet to pass.

"I am not certain whether over time the unreliable entities list and the proposed export control law will be merged into a single comprehensive and coherent regulatory regime…In fact, I honestly do not know where China will take this."

The core uncertainty, Cowley says, is how restrictive the conditions of China's entity list are. Mofcom hasn't yet disclosed what the consequence of being placed on the unreliable entities list will be. If Mofcom presents a moderate set of rules, it could signify that Beijing is still hoping to strike a favorable deal, while a more aggressive regulation would make reaching an agreement even more difficult.

But for now the uncertainty is painful enough. As the trade war drags on, a poll from the American Chamber of Commerce revealed that 40% of surveyed firms were considering moving manufacturing out of China to avoid future fallout. Joerg Wuttke, president of the European Union Chamber of Commerce in China, warns the Unreliable Entities List could hurt China's own interests even more.

"The European Chamber sympathises with China's frustration over the trade war, but the creation of a new tool made exclusively to target foreign companies is counterproductive at a time when China's economy is slowing and foreign investor confidence is deteriorating," Wuttke says.

Last week, Mofcom warned the latest addition to its economic arsenal would be released "soon." Companies will be watching to see if the list is as ominous as it sounds.

More must-read stories from Fortune:

-Manufacturers are leaving China-for reasons beyond the trade war

-Cruises to Cuba are banned, but the ships sail on

-This is the one subject in the U.K. that's as toxic as Brexit

-German security chiefs say Alexa should provide evidence in court

-Listen to our new audio briefing, Fortune 500 Daily

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