Since 2019, China has created an “unreliable entity list” to penalise companies that undermine national interests, introduced rules to punish firms that comply with US restrictions on Chinese entities, and expanded its export-control laws. The broader reach of these laws enables Beijing to potentially choke global access to critical materials like rare earths and lithium — essential components in everything from smartphones to electric vehicles.
The new tools are part of what one Communist Party publication described as an effort to “provide legal support for countering hegemonism and power politics and safeguarding the interests of the country and the people.”
Collectively, the strategy marks a calculated shift to counter Trump’s expected policies when he takes office. The fallout could significantly disrupt operations for American companies.
The Skydio factory in California. The US company has been hit hard by Chinese sanctions.Credit: NYT
That raises the stakes for businesses and the economy as the new US administration readies its first salvo in what could become a more ruthless second round of trade conflict between the United States and China.
Washington’s relationship with Beijing was already fraught. President Joe Biden has largely continued Trump’s confrontational policies, sanctioning some Chinese companies and restricting others from the US market. This month, the US government announced a ban on 29 Chinese companies over connections to forced labor in the country’s western province of Xinjiang.
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On Monday, Trump went further. The president-elect said he would impose an additional 10 per cent tariff on all products coming into the country from China.
China has given a preview of the lengths it is willing to go to counter US government sanctions.
In September, Chinese authorities accused PVH, the owner of Calvin Klein and Tommy Hilfiger, of “discriminating” against products in Xinjiang, putting it onto its “unreliable entities list.” It was the first time that Beijing punished a foreign company for removing Xinjiang cotton from its supply chain to meet US trade rules.
A few weeks later, a think tank with ties to China’s internet regulatory agency called for a review of Intel, an American chip company, for selling products that “constantly harmed” China’s national security and interests. The last company subject to a cybersecurity review, American chipmaker Micron, was ultimately cut off from supplying chips to a significant portion of the Chinese market.
The Chinese rules leave both PVH and Intel stuck in the tussle between the two global superpowers. Other companies might soon find themselves in a similar position. The conundrum for firms is whether and how to follow US trade restrictions, when doing so could trigger Chinese reprisals.
Forcing companies to question their business practices might be China’s intention, experts say. At the same time, Chinese officials need to strike a balance in their punishments. If they go too far in penalising foreign companies, they could scare away investors when financial markets are worried about China’s economy.
And in some cases, Chinese companies still need what the United States offers, including microchips in electronic devices or soybeans that Chinese farmers feed their cattle. Many of China’s state-owned enterprises still use computers powered by Intel chips.
“They have this dilemma where they want to signal to the US government but they don’t want to scare foreign investors and companies too much,” said Andrew Gilholm, a China expert at Control Risks, a consulting firm. “They want companies to know that there is a cost to being too enthusiastic about complying with US and other regulations.”
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The strategy, he said, is evolving into one that looks more like “supply chain warfare.”
Still, for the many companies that rely more on China than China does on them, Beijing has the ability to exact major pain. Skydio had spent years building a supply chain outside China, but remained reliant on the country for one crucial item: batteries.
After the sanctions by China, there is no quick fix. It can take months to make the necessary design changes and secure new suppliers. In a statement, Skydio said that it would be forced to ration batteries. That means its customers, which include fire departments, can only get one battery per drone, severely limiting how long a craft can fly. The company said it planned to have new supplies by spring.
“If there was ever any doubt, this action makes clear that the Chinese government will use supply chains as a weapon to advance their interests over ours,” Skydio wrote.