US Closing Loophole in Exports to Blacklisted Companies

The Department of Commerce’s Bureau of Industry and Security said on Sept. 29 it is changing export control rules to automatically cover subsidiaries of companies on the Entity List that are at least 50 percent owned by the listed company.

The change, which goes into effect 60 days after the rule is published in the Federal Register on Sept. 30, tightens a significant loophole that lawmakers and experts have flagged over the past several years.

As strategic competition between the United States and the Chinese communist regime heightened over the past two administrations, both the Trump and Biden administrations have increasingly made use of and expanded export controls on advanced technologies to China, especially those with military applications. Export controls previously only excluded entities that were specifically listed.

Over the years, regulators and policymakers have noted that blacklisted companies often circumvent export controls in various ways, including through middleman shell companies and subsidiaries, particularly in relation to China.

These shell companies are sometimes dissolved once listed, while new ones emerge, resulting in what experts have described as a “Whac-a-Mole” situation.

“In other words, instead of fixating on whom to bar from the game, authorities should shift their focus toward who gets to play. By so doing, regulators can more effectively limit the avenues available for smuggling,” the Center for Strategic and International Studies said in October 2024.

The new rule automatically includes subsidiaries that are majority-owned by the listed entity, while subsidiaries that have significant minority ownership will be considered a red flag requiring due diligence assessments from exporters.

“For too long, loopholes have enabled exports that undermine American national security and foreign policy interests,” Undersecretary of Commerce for Industry and Security Jeffrey Kessler said on Sept. 29. “Under this Administration, BIS is closing the loopholes and ensuring that export controls work as intended.”

Rep. John Moolenaar (R-Mich.), Chair of the House Select Committee on the Chinese Communist Party (CCP), is among the lawmakers who most recently flagged the loophole with the administration and commended the rule change.

“President Trump is putting America first and preventing CCP-tied entities from accessing U.S. technology through hiding their ownership in foreign front companies. As the Chairman of the Select Committee on China, I’ll continue working to ensure Chinese firms cannot manipulate our export controls and undermine our national security interests,” he said in a statement to The Epoch Times.

Rep. Brian Mast (R-Fla.), chair of the House Foreign Affairs Committee, also supported the move.

“We are in a must-win, generation-defining battle shaping the future of technology. This critical measure bolsters U.S. national security and safeguards American technological leadership by closing loopholes that allow bad actors to evade restrictions and preventing them from accessing our sensitive technology,” he said in a statement.

“As adversaries like China and Russia attempt to exploit vulnerabilities, this is more important now than ever.”

BIS recently closed another loophole aimed at Chinese chip companies by requiring foreign firms to obtain licenses to export to China any technology that involves U.S.-made or designed components, including software.

The department noted that, as U.S. companies are already required to obtain such licenses, foreign companies using U.S. technology should not be exempt.

In 2023, key chip companies were given the ability to sell to China license-free.

The rule change covers the Taiwan Semiconductor Manufacturing Co. (TSMC) plant in Nanjing, China, and South Korean Samsung Electronics and SK Hynix facilities in China.

BIS noted that it does not intend to grant licenses that support expanding capacity or upgrading technology at China-based chip manufacturing companies.

The blacklist rule change also follows the Commerce Department’s expanded review of Chinese imports subject to tariffs.

The United States currently exempts a good deal of made-in-China medical supplies and equipment, chemical materials, solar manufacturing components, and other items from tariffs to alleviate burdens on U.S. businesses. The exemptions are subject to regular review.

The department is now considering tariffs on medical items, robotics, industrial machinery, and other items under a national security statute.