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Home»Finance»More Chinese Companies Sanctioned by the US Over Russia Trade
Finance

More Chinese Companies Sanctioned by the US Over Russia Trade

August 31, 2024No Comments6 Mins Read
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More Chinese Companies Sanctioned by the US Over Russia Trade
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China was hit last week with what must now be an all-too-familiar set of sanctions from the United States. On August 23, 42 more Chinese and Hong Kong companies were put on the “Entity List” of the United States Bureau of Industry and Security (BIS) for violating regulations that prevent dual-use technologies from reaching Russia as it prosecutes its war against Ukraine. 

The Entity List prevents listed entities from selling sensitive U.S. technology to countries, persons, and organizations deemed harmful to the national security and interests of the United States without having met rigorous licensing requirements. Listed entities may not export, reexport, or transfer the designated technological items under consideration without the license.

The Entity List first came into being in 1997. Originally, the list was specifically intended to make public any entities – be they companies, individuals, or organizations – that might be engaging in activities that could assist in the development of weapons of mass destruction. Over time, the scope of the list has broadened, and it now covers entities that are involved in activities that more broadly go against U.S. national security and U.S. foreign policy. In turn, the number of China- and Hong Kong-based companies on the Entity List has skyrocketed – the Biden administration alone has added almost 400 Chinese companies to the list.

In recent years, the Entity List has had the curious effect of demonstrating the ever-increasing degree to which China now uses Hong Kong not only as a base of company registration but also as a platform for exporting goods made on the mainland. Hong Kong is generally perceived as a safer business environment than mainland China. It has its own customs border separate from the mainland, and even where those two borders meet, it is treated as an international border, despite Hong Kong being under Chinese sovereignty.

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For those who know Hong Kong, many of the addresses and districts of these sanctioned companies are familiar, and feel benign. As one of the most densely populated cities in the world, Hong Kong business, commercial, residential, and government facilities sit on top of one another, exuding a feeling much like Manhattan.

Take the case of Midas Lighting Company in Hong Kong. Its offices and a warehouse are in Kowloon, across Victoria Bay from Hong Kong Island. A 500 meter walk away sits the largest taxpayer in Hong Kong, the prestigious Hong Kong Jockey Club, a bastion of former British colonialism if ever there was one. Its fame, though, rests on its philanthropy, both in Hong Kong and abroad; its Charities Trust is one of the world’s ten top charity donors. Yet just down the street, Midas Lighting is purportedly engaged in the sale or transfer of key U.S. technology which may be being used by the Russian Army in its invasion of Ukraine.  

Although the odds of two such vastly different entities sharing a neighborhood might seem low, in fact many of the companies on the Entities List are small businesses with just a few employees. This makes them vulnerable to unintentionally transferring technology to bad actors. Several of the new batch of companies are distributors, not manufacturers themselves. Many sell online.  

The BIS, however, does not necessarily take this into account. The most pervasive aspect of the Entity List lies in its jurisdictional scope. The designated entity may have only unintentionally sold or transferred a product in a way that jeopardizes U.S. security and interests, but nonetheless still ends up on the list. In other words, the BIS’s determination is not concerned with intent nearly as much as it is with practice. This approach puts the burden on a company such as Midas Lighting to ensure that nothing leaving its warehouses in Hong Kong or mainland China ends up supporting the Russian war effort. The entire supply chain is therefore vulnerable.

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The efforts to which BIS and other enforcement agencies go to protect U.S. technology from being used by adversaries against the United States’ overall interests raises a number of other issues, as well.

First, through the Bureau’s efforts – and budget, some $223.4 million for fiscal year 2025 – American manufacturers of sensitive technology are getting U.S. taxpayers to bail them out of the liability of having, for example, a U.S.-made integrated circuit ending up in a Russian weapon being used against Ukraine and Ukrainian citizens. 

Isn’t that due diligence the responsibility of the manufacturer? If a technology can be used for bad purposes as well as for good, shouldn’t the company, not the government, ensure that what it has designed, built, and sold ends up in the right hands and applications? 

The argument can be made that the backbone of any business is due diligence on every aspect of one’s business, meaning not only on the vendors from which one buys (and their vendors, and so on), but also on the customers to whom one sells (and their customers, and so on). It can also be argued that risk management begins and ends primarily with the manufacturer, not with its downstream buyers.

But, of course, in a global world with a supply chain spanning multiple nations just to produce a laptop, it becomes nearly impossible to stop the proliferation of good technologies into the hands of bad actors. And that, really, is the rub, and the irony.

It was in large part the technology companies themselves, primarily American, European, Japanese, and Taiwanese, that broke down the barriers to the Chinese market, in a concerted effort to sell technology to the vast market, and later, to use its labor and low costs to manufacture technologies to be sold to the world. It was companies like Motorola (the first foreign brand in post-1949 China to have nearly universal name recognition throughout the country) and Alcatel that lobbied the Chinese government for the right to sell, and then to form joint ventures and manufacture. 

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Technology companies in the United States in particular clamored for this market, yet now want to protect what they so eagerly gave away two and three decades ago. The U.S. government seems not only happy but downright eager to help them do so, judging by the rate at which restrictions on Chinese companies’ access to technology have multiplied. But whether the returns justify this substantial enforcement investment very much remains to be seen.

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