Sanctions as a Source of Conflict

The dueling "entity lists" of the US and China have become an increasingly worrisome source of conflict escalation

The United States has its “entity list.”  China has its “unreliable entities list.” Both sets of tools are intended to put targeted pressure on companies and individuals that are alleged to be at odds with broadly defined national interests.  The problem is that both lists are now being applied to situations well beyond their original intent.  As a result, they have become increasingly powerful mechanisms of conflict escalation between the United States and China from which there may be no easy way out,

The US Entity List was established in 1997 as an effort to protect America from the potential proliferation of weapons of mass destruction. Since its inception, it has been administered thorough the Bureau of Industry in the US Department of Commerce. It is not a formal “blacklist” that imposes an outright ban on foreign companies from engaging in US commerce. The Entity List  works primarily through the imposition of an additional layer of export-licensing restrictions that raise “red flag” warnings regarding potential purchases by US companies of products made by designated foreign entities. 

In recent years, applications of the US Entity List have expanded well beyond the scope of its initial intent.  Beginning in 2008, targeting broadened to include most aspects of national security, trade, and tangential foreign policy concerns such as human rights and broadly defined military preparedness. Starting in 2017, China became the principal target  of such expanded designations.  By late 2022, some  600 Chinese companies were on the US Entity List, as both the Trump and the Biden Administrations used this mechanism to address the US-China tech war, human rights concerns in Xinjiang, Tibet, and Hong Kong, and geostrategic tensions in Taiwan and the South China Sea. Just this past week, an additional 42 companies were added to the US Entity List in order to “… further constrain Russia’s ability to arm its military” by drawing on assistance from its so-called unlimited Chinese partner to continue to prosecute an illegal war in Ukraine. 

China, as has been its knack since the onset of the trade war in 2018, has responded with a tit-for-tat retaliation of its own.  In 2019, the Chinese Ministry of Commerce (MOFCOM) established an Unreliable Entities List (UEL) targeting foreign companies or individuals who inflict serious damage on Chinese companies for “non-commercial” purposes that purportedly endanger China’s national sovereignty, security, or development interests. China’s UEL also has a retaliation trigger, designed to counter those nations who have imposed sanctions on Chinese companies.  Those foreign companies receiving UEL designation by MOFCOM may be subjected to any one of a number of penalties, ranging from fines and restrictions on employees’ work permits to outright limits on engaging in Chinese import, export, and investment activities.

Unsurprisingly, China’s UEL has mainly been directed at the United States.  Initially, in February 2023 China put its UEL into action by designating Lockheed Martin and Raytheon following US actions to shoot down the notorious Chinese surveillance balloon off the coast of South Carolina earlier that month.  More recently, China made aggressive use of its UEL to counter US support for Taiwan, naming General Atomics, General Dynamics, Boeing, and Caplugs to its list of targeted US companies.  A companion mechanism, China’s Anti-Foreign Sanctions Law, has also been used to target foreign individuals deemed responsible for anti-China actions that allegedly meddle in internal affairs; this includes many pro-Taiwan members of the US Congress — i.e., Nancy Pelosi, Michael McCaul, Mike Gallagher — and cabinet-level officials including former US Secretary of Commerce, Wilbur Ross, and a senior China-related policy advisor (Miles Yu Maochun) to former US Secretary of State, Mike Pompeo.

Entity lists and other forms of sanctions clearly have their place in shaping US foreign policy. A targeted application of this tool to penalize China for supporting patently illegal Russian military actions in Ukraine seems perfectly appropriate. Complications arise in the broad application of the entity list to address tangential objectives, such as technology transfer, human rights, and geostrategic tensions. The risk in these cases is that the evidence supporting such alleged transgressions can be very contentious.  Moreover, there is the distinct possibility that such sanctions can do more harm than good is resolving national conflicts, resulting in unintended consequences that may ultimately be self-defeating.

Huawei is a glaring case in point of how company-specific sanctions can backfire. In 2019, it was singled out for special treatment under the US entity list. Fearful of the lethal threat that China’s leading technology company and dominant player in the 5G telecommunications business posed to the United States, the Trump Administration took aggressive actions to squeeze Huawei and its supply-chain network. The immediate impacts were devastating — a plunge in its once market-leading smartphone business and a nearly 30% drop in Huawei’s overall revenues in 2021.  Suddenly, China’s leading champion of indigenous innovation was fighting for its very survival.

Huawei met this challenge head on. Denied access to Taiwan’s advanced semiconductor chips, it turned to Chinese companies, including its HiSilicon subsidiary, to fill the void.  It also restructured its smartphone business and shifted the strategic focus of its telecommunications sales to Southeast Asia and Africa, while sharply increasing its domestic market share.  And it moved into the sophisticated high-end market of AI chips. As Liza Lin (a former teaching assistant of mine at Yale) and her colleagues at The Wall Street Journal recently wrote, Huawei has “…come roaring back.” The company’s profit more than doubled last year last year and has continued to surge in the first half of 2024 on the heels of strength in its smartphone and car businesses. Had it not been for the intense pressures of the US Entity List, Huawei’s successes on the road to self-sufficiency might not have materialized — an outcome clearly at odds with Washington’s intentions.

Sanctions can often lead to a slippery slope. As Edward Fishman (a former student) has argued, there is an art to “smart sanctions.” The dueling entity lists of the US and China are especially problematic from that perspective.  In keeping with Fishman’s warning, they have been expanded capriciously by the US as part of a bilateral trade war with China.  Those actions have encouraged  adversarial retaliation in kind by China. Such tit-for-tat counter responses decrease the willingness of both nations to engage in cooperative strategies of re-engagement.

That is consistent with my take on the US-China conflict which continues to stress the relationship diagnosis, underscoring the shared culpability of both nations to embrace politically expedient false narratives about each other. In light of increasingly venomous politics in both countries — Sinophobia in America and containment paranoia in China —  I remain very concerned about the mounting perils of a conflict-escalation cycle. Overuse of the entity list by both nations reinforces my worries.

While the entity list once had its time and place, its increasingly aggressive expansion has been at cross purposes with the imperatives of conflict resolution.  In addition to sparking unintended consequences (i.e., Huawei), pinning blame on specific companies or individuals has triggered the wounded personalization of a “name and shame” animosity syndrome.  That, in turn, risks undermining the spirit of people-to-people engagement, one of the most important buffers against conflict escalation, without which US-China conflict resolution will be all but impossible to achieve.