More Chinese companies are being sanctioned by the US over Russian trade

China was hit last week with what must now be an all-too-familiar series of sanctions from the United States. On August 23, there were 42 Chinese and Hong Kong companies on the “Entity List”. from the U.S. Bureau of Industry and Security (BIS) for violating regulations that prevent dual-use technologies from reaching Russia as it continues its war against Ukraine.

The Entity List prevents publicly traded entities from selling sensitive U.S. technology to countries, individuals and organizations deemed harmful to the national security and interests of the United States without meeting strict licensing requirements. Designated entities may not export, re-export or transfer the designated technology products in question without the license.

The Entity List was first established in 1997. Originally, the list was specifically intended to disclose all entities – whether companies, individuals or organizations – that may be engaged in activities that could assist in the development of weapons of mass destruction. Over time, the scope of the list has expanded to include entities engaged in activities that are more broadly contrary to U.S. national security and foreign policy. In turn, the number of China- and Hong Kong-based companies on the Entity List has skyrocketed – with the Biden administration alone adding almost 400 Chinese companies to the list.

In recent years, the Entity List has had the curious effect of demonstrating the ever-increasing extent to which China is now using Hong Kong not only as a base for company registration, but also as a platform for exporting goods made in the mainland. Hong Kong is generally seen as a safer business environment than mainland China. It has its own customs border, separated from the mainland, and even where these two borders meet it is treated as an international border, despite Hong Kong being under Chinese sovereignty.

For those who know Hong Kong, many of the addresses and districts of these sanctioned companies are familiar and feel good. As one of the most densely populated cities in the world, Hong Kong’s business, commercial, residential and government facilities are stacked one above the other and exude a feeling much like Manhattan.

Take the case of Midas Lighting Company in Hong Kong. The offices and a warehouse are located in Kowloon, across Victoria Bay from Hong Kong Island. A 500-metre walk away is Hong Kong’s largest taxpayer, the prestigious Hong Kong Jockey Club, a bastion of former British colonialism if ever there was one. However, his fame rests on his philanthropy, both in Hong Kong and abroad; its Charities Trust is one of the top ten charity donors in the world. But down the street, Midas Lighting is said to be engaged in the sale or transfer of key U.S. technology that could be used by the Russian military in its invasion of Ukraine.

While the likelihood of two such completely different entities sharing a neighborhood may seem slim, many of the businesses on the Entity List are in fact small businesses with only a few employees. This makes them vulnerable to inadvertent transfer of technology to bad actors. Some of the new crop of companies are distributors and not manufacturers themselves. Many sell online.

However, the BIS does not necessarily take this into account. The most profound aspect of the Entity List lies in its scope. The designated entity may have merely inadvertently sold or transferred a product in a way that endangers U.S. security and interests, but still ends up on the list. In other words, the BIS’s determination is not nearly as much about intention as it is about practice. This approach puts the burden on a company like Midas Lighting to ensure that nothing leaving its warehouses in Hong Kong or mainland China ends up supporting the Russian war effort. The entire supply chain is therefore vulnerable.

The efforts of the BIS and other enforcement agencies to protect U.S. technology from use by adversaries that harm the overall interests of the United States also raise a number of other issues.

First, the Bureau’s efforts—and a budget of approximately $223.4 million for fiscal year 2025—ensure that U.S. manufacturers of sensitive technology can shield U.S. taxpayers from the liability of, for example, a U.S.-made integrated circuit installed in a Russian weapon is used against Ukraine and Ukrainian citizens.

Isn’t that due diligence the responsibility of the manufacturer? If a technology can be used for bad or good purposes, shouldn’t the company, not the government, ensure that what it designed, built and sold ends up in the right hands and applications?

The argument can be made that the backbone of any business is due diligence on every aspect of one’s business, and that means not just the vendors one buys from (and their suppliers, and so on), but also the customers one sells to. (and their customers, and so on). It can also be argued that risk management primarily begins and ends with the manufacturer, and not with its downstream purchasers.

But of course, in a globalized world with a supply chain that spans multiple countries just to produce a laptop, it becomes almost impossible to stop the spread of good technologies into the hands of bad actors. And that’s really the problem and the irony.

To a large extent, it was the technology companies themselves, mainly American, European, Japanese and Taiwanese, that broke down the barriers to the Chinese market, in a concerted effort to sell technology to the mass market, and later to provide labor and low costs for manufacturing technologies that can be sold to the world. It was companies like Motorola (the first foreign brand in post-1949 China to have near-universal brand recognition across the country) and Alcatel that lobbied the Chinese government for the right to sell and then form joint ventures and production.

Technology companies in the United States in particular were clamoring for this market, but now want to protect what they so eagerly gave away thirty-two years ago. The US government seems not only happy, but downright eager to help them, given the speed at which restrictions on Chinese companies’ access to technology have increased. But whether the returns largely justify these substantial enforcement investments remains to be seen.