How Should Chinese Companies Deal With US’ Targeted Sanctions? – Analysis

On February 7, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) issued a statement adding 33 Chinese entities to the Unverified List (UVL). Being listed does not imply that the said entities pose a specific and clear national security threat or foreign policy concern, but U.S companies must conduct additional due diligence, including the submission of additional documentation, when transacting with them.

Mathew Axelrod, the department’s assistant secretary for export enforcement, said in a statement, “The ability to verify the legitimacy and reliability of foreign parties receiving U.S. exports through the timely completion of end-use checks is a core principle of our export control system”. He added that the addition of 33 parties in the People’s Republic of China to the Unverified List “will assist U.S. exporters in conducting due diligence and assessing transaction risk, and signal to the PRC government the importance of their cooperation in scheduling end-use checks”.

Under the restrictions, the Commerce Department notifies U.S. exporters that they will now need a license if they want to ship products to any of the companies on the list. It informs the flagged companies that to continue receiving shipments, they must certify that they are legitimate and willing to comply with U.S. regulations. The initiative is also intended to inform China that if the companies are to be removed from the list, they must allow U.S. checks and inspections.

The framing of the 33 Chinese companies brings the total number of listed entities to roughly 175. In addition, there are several Chinese companies flagged by the Commerce Department, including those on the so-called Entity List and “military end-user” list.

While most of the 33 Chinese companies are involved in electronics businesses, they also include optics companies, a turbine blade company, state laboratories at universities and other businesses. The 33 companies are listed as below:

AECC South Industry Co., Ltd., Beijing SWT Science, Beijing Zhonghehangxun Technology Co., Ltd., China National Erzhong Group Deyang Wanhang Die Forging Co., Ltd., Chuzhou HKC Optoelectronics Technology Co., Ltd., Dongguan Durun Optical Technology Co., Ltd., Dongguan Huiqun Electronic Co., Ltd., Guangdong Guanghua Sci-Tech Co., Guangxi Intai Technology Co., Ltd., Guangzhou Hymson Laser Technology Co., Ltd., Harbin Xinguang Feitian, Hefei Anxin Reed Precision Co., Ltd., Heshan Deren Electronic Technology Co., Ltd., Hubei Longchang Optical Co., Ltd., Hubei Sinophorus Electronic Materials Co., Ltd., Hunan University, Jinan Bodor CNC Machine Co., Ltd., Jiutian Intelligent Equipment Co., Ltd, Kunshan Heng Rui Cheng Industrial Technology Co., Ltd., Shanghai Fansheng Optoelectronic Science & Technology Co., Ltd., Shanghai Micro Electronics Equipment (Group) Co., Ltd., Shuang Xiang (Fujian) Electronics, Southern University of Science and Technology, Suzhou Chaowei Jingna Optoelectric Co., Ltd., Suzhou Gyz Electronic Technology Co., Ltd., Suzhou Lylap Mould Technology Co., Ltd., Wuxi Biologics Co., Ltd., Wuxi Biologics (Shanghai) Co., Ltd., Wuxi Turbine Blade Co., Ltd., Yunan Fs Optics Co., Ltd., Yunnan Tianhe Optoelectronic Co., Ltd., Zhengzhou Baiwei Intelligent Automation, Zhuzhou CRRC Special Equipment Technology Co.

It should be pointed out the sanctioned Shanghai Micro Electronics Equipment Group (SMEE) is mainly dedicated to semiconductor equipment, pan-semiconductor equipment, high-end intelligent equipment development, design, manufacturing, sales, and technical services. The company’s equipment is widely used in the integrated circuit front, advanced package, FPD panel, MEMS, LED, power devices and others. According to researchers at ANBOUND, SMEE does not possess the fastest process in lithography, and its lithography level is around 90nm. The sanctions imposed by the U.S. this time will, on the one hand, limit the progress of SMEE, but on the other hand, it may stimulate it to accelerate the development of lithography.

In the face of U.S sanctions, researchers at ANBOUND would like to point out a few points in particular:

First, the U.S state apparatus against China in the fields of science, technology and industry is already in continuous operation. This sanction regime, which is based on the U.S domestic legal and political game, will show stronger inertia than changes in the geopolitical environment and will be difficult to stop once it commenced. Simply put, since the U.S. decides to impose sanctions on Chinese enterprises through legislation and congressional votes, even if U.S.-China diplomatic relations see improvement in the future, it will be difficult for the U.S to stop or lift sanctions against Chinese enterprises.

Second, the U.S sanctions against China’s science and technology, as well as business sectors are based on expert research, not on decisions made by politicians. Judging from the advantages of the sanctioned enterprises, the relevant “strikes” are concentrated in the key industrial or technological links, forming a relatively “precise” blow to China’s incomplete industrial chain and technological chain, which will form a systematic suppression to the development of the relevant scientific and technological industrial fields.

Third, with regards to U.S sanctions in the field of science and technology, China needs to make long-term preparations and establish bottom-line thinking. According to the ANBOUND team’s long-term tracking, Chinese industry and some government departments take a chance and practical approach in many key industries and technology areas that may be restricted by the U.S. If the required equipment, materials, or technology can still be purchased through import channels, the relevant industry would be willing to buy rather than conduct self-research and is unable to decide on localization. In this case, if the U.S. is determined to increase restrictions, in the short term, the country may not be able to play well in many areas of science and technology. Chinese companies are likely to do more if they are forced to make a last stand.

Fourth, in the face of U.S sanctions, China must adhere to open and cooperative reasoning. Insisting on openness and cooperation is not contradictory to the bottom-line thinking of establishing independent innovation. Taking semiconductors as an example, it has been analyzed many times in the past that the semiconductor industry is a highly globalized industrial chain, even the U.S. is unable to achieve the development of the entire semiconductor industry chain. This means that achieving independent control of the entire semiconductor industry chain is an impossible task for China. To this end, China should, on the one hand, enhance the degree of autonomy in key areas of research and development, technology and supply chain; on the other hand, adhere to the world of openness and cooperation, making it impossible for the U.S to completely cut off the highly globalized semiconductor industry chain.

Final analysis conclusion:

The U.S. continues to sanction Chinese companies, and such move is a manifestation of its geopolitical strategy in the industrial and technological fields. At the same time, it shows strong policy inertia and will not change easily. The Chinese government and businesses need to take a long-term attitude and establish a bottom-line thinking. That said, they must still adhere to the open and cooperative reasoning under globalization, and strive for greater development space and longer maneuvering time.