How Blacklisting Companies Became a Trade War Weapon

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Tariffs aren’t the only weapon in a trade war. Countries are also turning to blacklists to restrict the economic activities of certain foreign companies. While such measures are often described as necessary to preserve national security, they’re increasingly being deployed as policy tools to gain leverage in trade negotiations. In the case of the U.S. and China, disputes over human rights or geopolitics also can play a role.

1. Who is using blacklists?

President Donald Trump has placed dozens of Chinese companies on the U.S. Commerce Department’s “entity list” -- a classification that restricts their ability to purchase U.S. software and components. China’s government has said it’s developing a blacklist of its own, targeting foreign companies, organizations and people it calls “unreliable entities.” Export powerhouses Japan and South Korea also have deployed trade restrictions in a renewal of a long feud dating back to Japan’s colonization of the Korean peninsula in the early 20th century.

2. Who is on the U.S. list?

The most prominent among those blacklisted, primarily on national security grounds, is Huawei Technologies Co., the telecommunications giant at the forefront of fifth-generation, or 5G, mobile technology. Another 28 Chinese companies were blacklisted for alleged human rights violations against Uighur Muslims in China’s far west Xinjiang province. Those companies include two of the world’s largest manufacturers of video surveillance products, Hangzhou Hikvision Digital Technology Co. and Zhejiang Dahua Technology Co., and a pair of artificial-intelligence companies, SenseTime Group Ltd. and Megvii Technology Ltd.

3. What does it mean to be blacklisted by the U.S.?

Those on the U.S. entity list are prohibited from doing business with American companies without first obtaining a U.S. government license. The list was created in 1997 as a way to sanction companies that helped build weapons of mass destruction. It’s since been expanded to cover activities considered “contrary to the national security or foreign policy interests of the United States.” Targets can be “businesses, research institutions, government and private organizations, individuals, and other types of legal persons,” according to the Commerce Department’s Bureau of Industry and Security, which administers the list as part of U.S. Export Administration Regulations.

4. How is China responding?

By developing its own list of “unreliable entities,” which are countries, companies or people defined as having “severely damaged the legitimate interests” of Chinese firms by failing to obey market rules, violating contracts or blocking or cutting off supply for noncommercial reasons. Those on the list may be subject to penalties such as trade restrictions, investment bans, visa restrictions and fines. They can apply to be removed from the list. Those targeted for the list may be given a grace period to rectify their alleged transgressions.

5. Who is on China’s list?

China hasn’t named anyone yet, but there are plenty of possible targets. HSBC Holdings Plc could make the list because of its participation in the U.S. investigation of Huawei. FedEx Corp. has been under scrutiny after China accused it of mis-routing some parcels sent by Huawei. Chinese state media has raised the specter of backlash against U.S. companies including General Dynamics Corp. and Honeywell International Inc. in connection with a proposed $2 billion U.S. arms sale to Taiwan. China also vowed retaliation against U.S. companies participating in a proposed $8 billion U.S. sale of Lockheed Martin Corp. F-16 fighter jets to Taiwan. China also has pledged to retaliate against Trump’s sanctions related to human rights violations.

6. What explains the increased use of blacklists?

It’s part of what trade hawks in China and the U.S. see as a generational fight for technological and economic supremacy of the 21st century. The Chinese government has leveraged its massive state resources to support industrial policies like “Made in China 2025,” and a 2017 development strategy that aims to make China the world’s primary artificial intelligence innovation center by 2030. The Trump administration, backed by many in Congress, views this as a threat to America’s economic and national security and has actively sought to curb China’s technological ambitions.

The Reference Shelf

• More on China’s unreliable entities and its planned punishments for those that make its list.
• Frequently asked questions about the U.S. entity list, answered by the Commerce Department’s Bureau of Industry and Security.
• QuickTake explainers “Made in China 2025” and U.S.-China flashpoints.

©2020 Bloomberg L.P.