Under the last two U.S. presidents, one tool has emerged as a favorite in Washington’s efforts to get tough on Chinese companies: the sanctions list.
Whether it’s to restrict sensitive exports, slow China’s military modernization, or to combat human rights abuses, Congress and the executive branch have increasingly leaned on sanctions and red-flag lists to take on the U.S.’s primary strategic rival.
Since the start of the Trump administration, more than 1,200 Chinese entities have been added to these lists, with the total increasing by about a third every year on average, according to a calculation by Rhodium Group, a consultancy.
As the lists have grown, so have the challenges of keeping them aligned between key agencies. Coordination gaps can mean long delays between companies getting added to different lists, and inconsistencies in how penalties are applied. Moreover, changes in administration can alter the relative level of influence each agency possesses.
Last week, the House of Representatives passed a bill that seeks to address such problems. The Sanctions List Harmonization Act requires the Treasury, Commerce and Defense departments to notify each other when placing a foreign entity on a sanctions list, and for the other agencies to determine whether to follow suit. Other lawmakers have proposed at least half a dozen other potential solutions.
But the difficulty of disentangling the government’s knot of sanctions reflects a deeper impasse in Washington: namely, a lack of clarity about what, exactly, the U.S. government wants its relationship with China to look like, and how much it should seek to restrict business ties with one of its largest trading partners.
“Eight to ten years ago, Washington’s economic warfare approaches were focused on adversary regimes like Iran and Russia. But China is in a different phase, somewhere between a competitor and an adversary,” says Elaine Dezenski, a senior director at the Foundation for Defense of Democracies, a conservative think tank. “The relationship we have with the Chinese economy calls into question whether the tools we have need to change or be used in more creative ways.”
Before 2016, U.S. administrations tended to use sanctions as a blunt tool for punishing foreign governments and individuals. Both the Trump and Biden teams have tried more targeted approaches.
The result, lawyers and policy makers say, has been a mishmash of procedures and restrictions that confuse the private sector and can leave the sanctions vulnerable to legal challenge.
The Trump administration at first used export controls to restrict the sale of U.S. goods to specific Chinese companies, such as telecoms firms Huawei and ZTE — although the latter was later spared after striking a surprise deal.
In late 2020, the administration began targeting companies it alleged were aiding China’s military modernization efforts, banning them from receiving American investment. But that order created confusion in financial markets, and U.S. courts ruled that the government lacked sufficient justification for designating some of the targets.
The Biden administration has placed more emphasis on controls on sensitive industries, rather than individual entities.
A look at companies on the entity list under ‘People’s Republic of China’. Credit: Code of Federal Regulations
“There’s been a lot of frustration about workarounds that companies can use like changing names and addresses to get around entity listings,” says Reva Goujon, a director at Rhodium Group. “The Biden administration recognized that this was turning into a cat and mouse game, and so… took a much bolder approach of applying expansive controls focused on restricting access to critical technologies themselves.”
At the same time, Congress has pressured the executive branch to continue naming and shaming Chinese companies. Since 2021, it has required the Department of Defense to produce and regularly update a list of Chinese military companies that aid the People’s Liberation Army.
But not all of the companies on the DoD’s so-called 1260H list are subject to investment restrictions, sending a confusing message about why some Chinese military companies are more heavily penalized than others.
Jordan Brunner, a national security attorney who specializes in China and sanctions, says that these inconsistencies create “a Venn diagram situation… which creates a lot of confusion in the C-suites of these companies about how to operate.”
Such confusion can also blunt the federal government’s efforts to encourage American customers to seek non-Chinese suppliers.
For companies to currently keep up with existing sanctions, it’s a compliance nightmare. There are a lot of obligations on companies and U.S. persons to be on top of not only the current state [of sanctions], but also what the future state may look like.
Reva Goujon, a director at Rhodium Group
“Commercially, [the 1260H list] doesn’t seem to go a long way, because industry thinks if there’s a real problem with a company the government would ban it, not just name and shame,” says Nazak Nikakhtar, a partner at law firm Wiley Rein who previously served as under secretary for industry and security in the Trump administration.
A look at the results for a search for China on the sanctions list. Credit: Office of Foreign Assets Control
“For companies to currently keep up with existing sanctions, it’s a compliance nightmare,” says Goujon. “There are a lot of obligations on companies and U.S. persons to be on top of not only the current state [of sanctions], but also what the future state may look like.”
Even when one agency identifies a Chinese company as a potential national security threat, it can take the rest of the government a while to get the message. Long delays are especially common when Commerce and Treasury move against a Chinese company.
FDD’s Dezenski randomly sampled ten sanctioned firms that were added to Commerce’s Entity List and Treasury’s sanctions lists between 2019 and 2021, and found that on average, it took 521 days for the companies to be cross-listed by the two agencies.
“The coordination gap, particularly between [Commerce’s Bureau of Industry and Security, which manages expert controls] and sanctions authorities like [Treasury’s Office of Foreign Assets Control] is probably one of the most meaningful areas that we could enhance,” she says.
How the government resolves such challenges may ultimately depend on who takes the White House in November. Bringing all of the sanctions lists into lockstep could trigger far-reaching financial consequences for Chinese companies. One bill in the House proposes to expand the restrictions on U.S. investment to include every company named on any key sanctions and red-flag lists. Such a measure would expand the investment ban from 68 to 927 companies, with a combined market cap of almost $1 trillion, Rhodium has calculated .
A second Trump administration seems more likely to embrace such a sweeping stance, whereas a future Harris administration would likely continue with the current incremental approach.
Lawsuits brought by aggrieved Chinese companies could also push Congress to strengthen the authority of certain departments. In May, Hesai Group, a manufacturer of LiDAR light sensors for self-driving cars, sued the DoD for adding it to the agency’s Chinese military companies list. The Financial Times reported last month, citing unnamed sources, that the Pentagon is mulling whether to delist Hesai amid doubts that it can win the case.
One way that Congress could bring consistency to the process is by mandating a new inter-agency office in charge of sanctions coordination, similar to the Committee for Foreign Investment in the United States (CFIUS), which brings together departments to review foreign investment deals for national security risks.
“An agency such as the National Security Council would be best placed to balance competing priorities and provide some sort of grand strategy or overall direction,” says Brunner.
Some are more sanguine about the coordination problem.
“Some of it is disagreement, I see it as sort of just a mad rush,” says Rhodium’s Goujon. “Everybody is speaking generally on the same topic, but with a lot of different dialects at play.”
Eliot Chen is a Toronto-based staff writer at The Wire. Previously, he was a researcher at the Center for Strategic and International Studies’ Human Rights Initiative and MacroPolo. @eliotcxchen
