What does China's proposed 'Unreliable' Entity List imply?

ByKong Qingjiang

Editor's note: Kong Qingjiang is the dean of the School of International Law under China University of Political Science and Law. The article reflects the author's opinion, and not necessarily the views of China Plus

According to the spokesperson of the Ministry of Commerce (MOFCOM), China is going to have in place an "Unreliable" Entity List (UEL) on foreign entities that harm the interests of Chinese companies. Amid the escalating trade war that was launched by the United States against China, this is a notable move of China.

While the new move is based on the Foreign Trade Law, Antimonopoly Law, and the National Security Law of the People's Republic of China, it is widely regarded as providing further legal ammunition to fight the antagonist and spiraling U.S. trade measures. U.S. measures range from the imposition of 25 percent tariffs targeting all imports of Chinese goods to the exclusion of Huawei and all its associated subsidiaries from access to U.S. or U.S.-sourced goods, services, technology and software.

The UEL seems to be a counterpart of the U.S. Entity List system. Once a foreign entity – be it an enterprise, an organization or an individual – is added to the UEL, all goods, services, technology, and software covered by MOFCOM will then require a license to be sold to the entity.

People visit the stand of Huawei during the China International Big Data Industry Expo 2019 in Guiyang city, southwest China's Guizhou province, May27,2019. [Photo: IC]

As a result, Chinese companies and non-Chinese companies would need to apply for a license to export, re-export, or transfer covered Chinese items to the entity. License applications would then be reviewed on a case-by-case basis or under a presumption of denial.

It is expected that the UEL system will turn out to be a powerful deterrent for foreign entities that act in disregard of the market rules or contractual commitments and defiance of the legitimate interest of Chinese entities. It will prevent such entities from blocking or stopping the supply of goods, services, technology and software to Chinese entities out of a non-commercial purpose. It may serve as a useful tool in dealing with those entities that easily bow to the pressure of foreign governments hostile to China that could even be eager to please such governments.

Of course, from a legal point of view, the UEL system may also pose restrictions on those Chinese enterprises that deal with the entity thus designated. If improperly applied, the UEL system, which is designed to protect the legitimate interest of Chinese enterprises, may also cause collateral damages to other Chinese companies.

In light of the severe impact that the UEL system might have, MOFCOM is supposed to follow stringent requirements and rigid procedures in determining when an entity shall be added to the list. According to the MOFCOM spokesperson, the following conditions must all be met to allow for the designation of an enterprise, an organization or an individual as an unreliable entity:

The enterprise, organization or individual must have failed to comply with the market rules, derogated from the spirit of contract in blocking or stopping supply (of goods, services, technology and software) to Chinese entities out of non-commercial purpose, thus inflicting severe damage to the legitimate interests of affected Chinese entities.

It remains to be seen how a deterrent yet well-calculated legal instrument will emerge soon. Nevertheless, the decision to inaugurate the UEL system sends a message of China's determination to fight the unjustified unilateralism and protectionism. It is a wish of the many in the trade and legal circle that the system will remain to be a tool never to be used if the trade war could come to an end and the multilateral trade system could restore its order soon.