SinoTech

SinoTech: U.S.-China Tech Conflict Deepens as China Creates ‘Unreliable Entities’ List

By Rachel Brown, Preston Lim
Wednesday, June 5, 2019, 2:41 PM

On Friday, China’s Ministry of Commerce announced the establishment of an “unreliable entities” list. Gao Feng, a ministry spokesman, said that “foreign enterprises, organizations and individuals that do not comply with market rules, violate contracts, block or cut supplies to Chinese firms with non-commercial purposes, and seriously damage the legitimate rights and interests of Chinese enterprises, will be added to the list of unreliable entities.”

If that sort of list sounds familiar, it should. The Ministry of Commerce’s announcement comes after the Trump administration’s recent moves to cut Huawei off from U.S. components and networks. Trump signed an executive order on May 15 that laid the groundwork for the commerce secretary to block U.S. companies from installing foreign telecommunications equipment deemed a national security risk. At the same time, the Commerce Department placed Huawei and 68 affiliated companies on a list of companies to which U.S. firms may not sell components without government approval. Huawei has already felt the pressure from the Trump administration’s restrictions. As the South China Morning Post reported, Huawei has had to publicly reassess its “target to become the world’s top-selling smartphone vendor by 2020.” The Diplomat has cast China’s new list as “eye for an eye” retaliation for the Trump administration’s latest moves against Huawei.

In recent weeks, Chinese officials and media have responded to the breakdown in bilateral trade negotiations with defiance. On June 2, China’s State Council Information Office issued a white paper entitled “China’s Position on the China-U.S. Economic and Trade Consultations.” Xinhua covered the release with a series of articles. The white paper argues that setbacks in the negotiation process have been “the result of a U.S. breach of consensus and commitments, and backtracking.” It warned that “China will not compromise on major issues of principle”—and that “China is not afraid” of a trade war and “will fight one if necessary.” In response, the U.S. trade representative and the Treasury Department issued a joint statement on June 3 accusing China of “misrepresenting the nature and history of trade negotiations” in the document and insisting that Chinese negotiators had backtracked on “previously agreed-upon provisions” of the trade deal.

China’s Ministry of Commerce cast the unreliable entities list as an effort to “uphold the international rules of the economy and trade as well as the multilateral trading system and fight unilateralism and trade protectionism.” The ministry has yet to release guidelines on how or why companies or individuals will be added to the list, commenting only that “detailed measures will be announced soon.” One Chinese analyst has termed the new list a measure of “last resort,” noting that blacklisted companies will be “restricted in terms of sales, investments, and business licenses” and that blacklisted individuals will have “their travel, activities and employment in China … rejected.”

Western companies may soon catch a glimpse into how the Chinese government treats “unreliable entities.” On Saturday, Chinese state media source Xinhua announced that the Chinese government had “decided to file a case for investigation of FedEx on suspicion of undermining the legitimate rights and interests of Chinese clients.” Huawei has accused FedEx of diverting “without detailed explanation” two packages destined for Chinese addresses to the United States and of rerouting two other packages. FedEx apologized for rerouting the packages, which the Wall Street Journal reports happened inadvertently as a result of changes FedEx made to its internal protocols to comply with the new U.S. restrictions on Huawei. CCTV proclaimed that the government investigation into FedEx serves as a warning to foreign organizations and individuals that “violate Chinese laws and regulations.”

Potential Restrictions on Rare Earth Exports Threaten U.S. Technology, Defense Sectors

Pentagon officials expressed concern about the U.S. defense industry’s access to rare earth minerals, a group of 17 elements ubiquitous in many modern technologies, amid fears that the Chinese government may cut off supplies as part of the escalating trade war. Currently, about  80 percent of U.S. imports of rare earths come from China. Such restrictions would hit many technology companies outside the defense sector as well.

Worries about a potential loss of access to rare earth minerals emerged on May 21 when Chinese President Xi Jinping visited a producer in Jiangxi province shortly after trade talks foundered. Recent commentary from Chinese state media has escalated fears, including a Xinhua editorial warning that “[w]aging a trade war against China, the United States risks losing the supply of materials that are vital to sustaining its technological strength,” and a People’s Daily editorial that employed the phrase “don’t say we didn’t warn you,” words previously invoked in advance of conflicts with India and Vietnam. Prices of rare earths have already begun to rise.

Rare earth minerals have a range of important uses for military technologies, including in satellites, missile sensors, night visions systems and jet engines. Many U.S. military suppliers rely on imported rare earth metals for their products, according to a 2016 Commerce Department study. In briefings to Congress, the Pentagon has asked for additional funding to increase domestic production of rare earth metals. Currently, only one facility in the United States mines rare earths, although at least three more are being built. In a September 2018 report on the defense industrial base and the military’s supply chain resiliency, the Pentagon flagged the risk that China could cut off access to rare earths, explaining that “[w]hen China needs to flex its soft power muscles by embargoing rare earths, it does not hesitate.” In 2010, during a dispute with Japan over the Senkaku/Diaoyu Islands, the Chinese government cut off the exports of rare earths to Japan, although some supplies continued to be shipped.

Rare earths are used in a host of commercial products including iPhones, wind turbines, MRI machines and certain batteries. The uses of rare earths in technology products differ based on the two main categories of the minerals, heavy and light. The former are particularly common in magnets, while the latter are used in flat-screen devices as well as in certain medical treatments and lighting. Companies such as Apple could be especially hard hit because they use rare earth metals for a variety of phone components including cameras and speakers. Given the complexity of supply chains, however, it may prove difficult to target U.S. companies and military suppliers with rare earths export restrictions without causing ripple effects in other markets.

In Other News ...

  • Vice President Mike Pence visited Ottawa on May 30 to discuss ratification of the U.S.-Mexico-Canada trade agreement (USMCA) and other issues of bilateral concern with Prime Minister Justin Trudeau. In their press conference, both Pence and Trudeau made several comments about China policy. Pence urged Canada to block Huawei from playing a role in 5G network infrastructure development. He told reporters: “We have been very clear with Canada, and with all of our allies, that we consider Huawei incompatible with the security interests of the United States of America or our allies.” During the press conference and in a joint statement, both Pence and Trudeau called on China to release Michael Kovrig and Michael Spavor, who have remained in Chinese custody since Canada arrested Huawei CFO Meng Wanzhou pursuant to a U.S. extradition request.
  • A South China Morning Post investigative piece details how Yangqiao, a small village in Zhejiang province, is “testing China’s social credit system.” Town officials have posted rankings on a “scale of one to five stars” on “every front door in Yangqiao.” The ranking takes measures such as “courtyard tidiness, observance of laws … and family values” into account. The reporting notes that the Chinese government aims, “by the end of next year, to have established the parameters to eradicate everything from poor driving to government corruption.” Jamie Horsley, writing for Foreign Policy, cautioned in November that the social credit system does not yet exist “as it’s currently portrayed.” She notes that although there are “many things to be worried about in China, a single and all-pervasive ranking system isn’t one of them—yet.” Projects like the one that Yangqiao is pioneering, however, would indicate that the social credit system, though far from monolithic, will only become more robust in the years to come.
  • According to Quartz, Shanghai electric vehicle maker Aiways has plans to offer its flagship car, the U5, in European markets starting next spring. The article notes that due to trade war tensions, “Europe appears to be a more promising destination” for Chinese automobile and electric vehicle companies. Jack Barkenbus, writing for the National Interest, argued that “the electric vehicle revolution is coming” and that “China will be at the forefront.” As Barkenbus notes, Chinese electric car sales had surpassed U.S. levels by 2015 and topped 1.1 million cars in 2018. Nor is Aiways the only Chinese car company looking to expand its European presence. Chinese firm Lynk & Co, which is owned by Zhejiang-based auto behemoth Geely, plans to start offering a car subscription service in Europe by 2020.

Commentary

Several commentators address ways the U.S.-China trade war may backfire for the Trump administration. Kaushik Basu analyzes the favorable trade arithmetic for China in Project Syndicate, and Kevin Rudd suggests in the New York Times that Trump’s belligerent trade rhetoric fuels nationalism in China. Additionally, Benn Steil and Benjamin Della Rocca at the Council on Foreign Relations examine the fiscal effects of the U.S.-China trade war. They find that because of subsidies to farmers hit by tariffs, the trade war is now costing the U.S. government money rather than raising revenue.

In the Washington Post, Eugene Gholz addresses the consequences for the technology industry of a possible disruption in the Chinese supply of rare earth metals. Elsa Kania and Emma Moore in Defense One discuss the People’s Liberation Army’s efforts to recruit officers with greater technical prowess and why the U.S. military must reassess its own recruiting processes.

For Marco Polo, Matt Sheehan presents a new look at the data on where Chinese-born artificial intelligence (AI) researchers work after receiving graduate degrees in the United States. In Foreign Affairs, Michael J. Mazarr argues that it is inaccurate to say the U.S. and China are currently in an era of “great power competition.”

On Lawfare, Garrett Hinck and Tim Maurer argue that the Justice Department’s criminal charges against hacking conducted by foreign nationals have value that goes beyond deterrence. They argue that doing so can also help with the attribution of attacks, coordination of later activities, and disruption of networks of hackers, among other activities. Their article comes in the wake of the indictment of two Chinese nationals in the theft of customer data from Anthem, an American health care company. Ashley Deeks explores how technology companies are beginning to invoke international law to avoid working on government projects to which they object. Finally, Paul Rosenzweig discusses various metrics to quantify improvements in cybersecurity from investments made by governments and companies. On Rational Security, Scott Anderson, Shane Harris, Quinta Jurecic and Margaret Taylor discuss the Trump administration’s Huawei ban (at 2:05). On the Cyberlaw Podcast, Stewart Baker and Paul Rosenzweig consider the prospects for the Chinese government’s “unreliable entities” list.

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