On Monday (September 29), the US Department of Commerce announced a significant upgrade in its sanctions regulations, aimed at preventing Chinese entities under sanctions from using their subsidiaries or foreign branches to access restricted US goods. Experts say the new rules mark a shift in US export control from targeted strikes to a more networked blockade, with far-reaching implications.
According to the Federal Register issued by the Bureau of Industry and Security (BIS) on that day, any entity listed on the Entity List that holds at least 50% ownership in a subsidiary will automatically be subject to Entity List restrictions.
The Federal Register stated that the new rules apply to both the Entity List and the Military End-User List (MEU). The new rules significantly improve upon current regulations by automatically covering subsidiaries based on a 50% ownership standard, aiming to align with long-standing practices of the US Treasury Department’s Office of Foreign Assets Control (OFAC).
The US Department of Commerce stated that the new rules “plug a significant loophole.”
The new rules also provide a 60-day grace period.
The Financial Times quoted a former US government official as saying that the new rules mean “the era of limited due diligence and plausible deniability for American companies has ended.” Companies will have to delve deeper into complex ownership structures and indirect control measures, including shared board members, shared offices, and relationships with the Chinese Communist Party.
The latest regulations apply globally without targeting any specific country but have immediately provoked dissatisfaction from the Chinese authorities. The Chinese Ministry of Commerce accused the US’s new rules of being “extremely malicious” and being “another typical example of abusing export controls.”
Since the Biden administration imposed a chip ban on the Chinese Communist Party in October 2023, the US has had several major upgrades in sanctions on Chinese tech companies, including key restrictions on chip manufacturing equipment exports and the introduction of a global control concept.
This latest upgrade is another significant development. Los Angeles data analysis company Kharon found that this new rule could bring thousands of hidden subsidiaries from nearly 100 destinations worldwide into the “export control scope.”
Xie Tian, a professor at the University of South Carolina’s Moore School of Business, stated that this latest US sanction is a significant upgrade and is essentially consistent with the overall decoupling between the US and China.
Taiwanese financial expert Huang Shicong told Dajiyuan that before it was a point-to-point attack, but now it’s a broader impact.
“This administration’s Department of Commerce clearly understands the actual situation better than previous administrations, which is certainly not good news for the Chinese Communist Party.”
Davy J. Wong, an economic scholar based in the United States, told Dajiyuan that the new rules mark a shift in US export control from targeted strikes to a more networked blockade, with far-reaching and complex implications. He analyzed it from three aspects:
First, the traditional Entity List requires specific listings case by case, which is time-consuming and easily circumvented. The new rules automatically cover subsidiaries based on a 50% ownership criterion, similar to OFAC’s financial sanctions logic, significantly enhancing efficiency and coverage while reducing enforcement difficulty.
Second, the new rules not only apply to the Entity List but also expand to the Military End-User List, targeting Chinese military-civil fusion enterprises more precisely. Compared to the 2022 chip ban, its scope is broader, including mature processes below 28 nanometers, affecting the consumer electronics industry.
Third, by imposing sanctions on exporting companies, the new rules outsource compliance pressure to businesses, creating a self-examination chilling effect that goes far beyond the previous precise targeting of individual entities, with broader implications.
It is noteworthy that the timing of the release of this rule coincides with US-China trade negotiations. Not long ago, the US relaxed control over Chinese AI chips, while a month later, it is expected that President Trump will meet with Chinese Communist Party leader Xi Jinping at the Asia-Pacific Economic Cooperation Forum in South Korea.
Huang Shicong believes that the US expanding the scope of sanctions is also part of the US-China trade negotiations. US-China negotiations involve both confrontation and dialogue. He pointed out that earlier the US used chips, aircraft components while China used rare earths, applying pressure to each other.
Xie Tian stated that this may become a bargaining chip for US trade negotiations. In reality, the US has been advancing investigations into Chinese tech and defense companies and their subsidiaries, and now these efforts may be coinciding.
Davy Wong pointed out that the latest sanctions from the US Department of Commerce are not meant to disrupt negotiations but to leverage the negotiation attention window to amplify the psychological and economic effects of sanctions.
He believes that logically, US national security takes precedence over economic compromises, balancing short-term trade negotiations with long-term technological suppression goals is a carefully considered strategic layout by the US.
“The 60-day buffer period indicates that the US hopes to avoid immediately severing all supply chain and economic ties, while retaining negotiation leverage, and also adjusting supply chain design restrictions for companies, aiming to force the Chinese side to make more concessions and compromises in trade.”
Previously, the US generally allowed subsidiaries of Chinese companies on the Entity List to purchase controlled technology, provided these subsidiaries themselves were not on the list, but this rule was being abused.
For example, after the Chinese company Inspur Group was blacklisted by the Biden administration on March 2, 2023, its subsidiaries could still purchase US technology. It wasn’t until March 25 of this year that the Trump administration put 6 Inspur subsidiaries on the list, closing the loophole left by the Biden administration.
In January this year, Changxin Storage was found to be making faster progress in chip manufacturing technology than expected, despite US restrictions on exporting advanced technology to China.
This practice has since become more common and a priority for the US government.
Landon Heid, a nominee for a senior position in the Department of Commerce nominated by President Trump, proposed this idea during a confirmation hearing in early April. The House Foreign Affairs Committee also recommended this approach in a report at the end of 2023, describing the existing Entity List system as “ineffective” and in need of reform.
US officials have been planning this new policy for months. Bloomberg revealed earlier that the new rules could have been announced as early as June.
Although the new rules do not specifically target China, according to data from the new US National Security Center, there are currently about 3,400 entities on the Entity List, with approximately 1,100 Chinese entities. This includes companies like Huawei and SMIC; subsidiaries of these Chinese companies will also face sanctions.
A preliminary analysis by the Chinese business analysis institution WireScreen indicates that the new rules could affect thousands of subsidiaries of Chinese state-owned enterprises and other companies.
Reuters analysis suggests that while companies worldwide are included on the Entity List, the impact on Chinese entities is most significant. Factories producing outdated and less sophisticated chips may be affected, as will other industries such as aircraft and medical equipment.
An expert indicated that Chinese tech giants like Huawei, Hikvision, and drone manufacturer DJI are three companies that may be affected.
Huang Shicong stated that the main force driving China’s technological development is these few companies, which evade US sanctions through subsidiaries or grandchild companies, becoming overlooked. Many subsidiaries of companies like Huawei have been sanctioned before, and DJI is no exception, so expanding this scope is essentially enlarging the net.
“Any US sanctions against (communist) China must be both deterrent and have real impact to close off all possible avenues and opportunities to prevent (communist) China from acquiring crucial components.”
Davy Wong said that these three companies are primary targets due to their critical positions in the global tech chain and their attributes that highly overlap with military-civil fusion and intelligence agencies.
He said that Huawei was already on the Entity List in 2019, and the new rules may restrict the 200 new subsidiaries set up by Huawei, cutting off its channels to obtain US technology through Southeast Asia. As a result, the production costs of 5G and 6G equipment will rise, and overseas markets will be under pressure.
“However, this will weaken its breakthrough speed in the AI field.” He warned that Huawei may find alternatives through other channels, as Huawei is highly integrated with intelligence agencies and has insider help in Asia and Africa.
Davy Wong mentioned that Hikvision’s optical software relies heavily on the US. The new rules will impact its subsidiaries in India, Brazil, etc., hindering global smart city projects, leading to revenue and operations decline, with permit application difficulty increasing significantly, potentially weakening its technical iteration and updates.
He continued, saying that DJI drones account for over 80% globally and its enterprise drones heavily rely on US sensors and some embedded devices and systems. The new rules will restrict DJI’s frontline in Southeast Asia, affecting export efficiency. Combining with the Federal Communications Commission ban, DJI’s market share in the US may be greatly affected, giving other companies a chance to seize the high-end market globally.
“These three companies won’t take a fatal blow, but the new rules will force them to strategically shrink, focusing on markets in Asia, Africa, and Latin America.” He concluded.
Davy Wong also discussed the short, medium, and long-term impacts of the new rules on Chinese tech companies.
“In the short term, supply chains will be disrupted, leading to rapid cost increases, especially small and medium enterprises relying on US components, which may face production halts; in the medium term, it will force Chinese companies to accelerate de-Americanization, but domestic alternatives still significantly lag behind, with high research and development costs, meanwhile, exacerbating the risk of foreign capital withdrawal; in the long term, the new rules will compress the competitiveness of Chinese companies in the global market, especially in the 5G, AI, and drone fields, forcing Chinese companies to rely on domestic circulation or turn to countries in Asia, Africa, and Latin America.”