Understanding the Entities Listing in the Context of U.S.-China AI Competition
October 15, 2019
On October 9, the Bureau of Industry and Security (BIS) of the Department of Commerce announced it had added to its entity list 28 Chinese government and commercial organizations that had been implicated in human rights violations against Uighur Muslims in the Xinjiang region of China. Included on the list are eight leading Chinese technology companies, including artificial intelligence (AI) champions Hikvision, iFLYTEK, SenseTime, and Megvii. The Chinese government condemned BIS’s announcement and accused the United States of interfering in China’s internal affairs and supporting terrorist forces.
Q1: What is the entity list?
A1: The entity list is a tool used by BIS to restrict the export of certain sensitive technologies and components to organizations who are involved in activities that threaten the national security or foreign policy interests of the United States. Being added to the list does not automatically bar U.S. companies from doing business with listed organizations. Companies are required to apply for a license from the government before exporting products or software covered by the Export Administration Regulations (EAR) to an organization included on the list. The entity list was created in 1997 to address risks related to the proliferation of weapons of mass destruction but has since been expanded into a general tool for protecting U.S. security interests. The organizations added through this most recent announcement are not the first Chinese actors to find themselves facing licensing requirements. Chinese tech giants Huawei and ZTE have both been added to the entity list for violating U.S. sanctions against Iran.
Q2: What impact will the listing have on these companies?
A2: It remains to be seen what impact the entity listing will have on these firms and on China more broadly. Much depends on how BIS chooses to enforce the listing. The list does not automatically embargo these companies; it just requires companies to obtain licenses before doing business with them. As we saw in the Huawei case, the entity listing in itself is a strong signal, but whether or not it has a significant impact on these companies depends heavily on how BIS chooses to exercise its licensing authority. For Huawei, BIS decided to grant and later extend a general license for several broad categories of transactions, which allowed Huawei to continue much of its business with U.S. companies unimpeded.
The impact will also depend in part on how dependent these companies are on U.S. components and the U.S. market. Software developers like Yitu or Megvii may be impacted less by the ban than hardware manufacturers like Hikvision, who are more reliant on specialty U.S. components for their cameras and servers. In addition, some affected companies like Hikvision had already begun taking preventative measures ahead of the ban by stockpiling supplies and identifying alternate suppliers.
Q3: How important are these firms for China?
A3: These eight firms are major players in the Chinese AI industry and constitute some of the largest and most successful AI companies in the world. Hikvision is the largest global supplier of video surveillance equipment. iFlytek sells its translation products to 200 different countries. And SenseTime recently became the most valuable AI startup in the world. The Chinese government has highlighted the success of some of these companies by naming them as members of China’s AI “national champions,” tasked with spearheading the country’s research and development efforts in fields like computer vision and voice recognition.
These companies are also important partners of the People’s Liberation Army and Chinese intelligence services. The existence of these companies in the top echelon of the global AI innovation ecosystem is a point of pride for China, and defending them against threats to their continued growth will almost certainly be seen as a national priority by policymakers.
Q4: Is this really about Xinjiang, or is this about weakening China’s AI champions?
A4: Though the BIS announcement arrived during a moment of heightened trade tensions between the United States and China, it would be a mistake to view this move as simply motivated by a cynical desire to hamper China’s progress in AI. The human rights concerns behind the BIS announcement are serious (see our colleague Amy Lehr’s piece on the human rights implications of this announcement), and the restrictions announced by BIS have been a long time coming. This is about Xinjiang first and foremost.
That said, this announcement does fit with the Trump administration’s broader goal of protecting U.S. interests in AI. Chinese AI companies have been repeatedly identified as key partners of the Chinese military and intelligence services, and the United States should ensure that technology is not used in ways that threaten U.S. national security. Furthermore, the United States is rightly concerned about the way that Chinese AI companies behave in global markets. Some of the listed companies are suspected of engaging in intellectual property theft and anticompetitive practices and are providing advanced technologies to repressive regimes in China and around the world.
Q5: Will this move backfire, leading China to build a domestic electronics supply chain and break its reliance on U.S. suppliers?
A5: China has been determined to end their dependence on U.S. technology for a long time and has been investing heavily in its domestic capacity for years. China would have continued to pursue this agenda regardless of U.S. action. This will likely cause them to move their timetable forward, but this is not an easy thing to do. The entities list designations do nothing to address significant structural hurdles that have impeded China’s progress. China will likely try to accelerate the development of its domestic supply chain, but it will face significant challenges in doing so.
Today, only 16 percent of semiconductors used in China are produced domestically, and only half of those are made by Chinese firms. Making advanced semiconductors requires a set of skills and know-how that cannot be acquired by simply throwing money at the problem. Even experts within China concede that the United States is two to three generations ahead in semiconductor production, creating a gap that would take at least ten years to close. And while China is investing large amounts of resources developing its memory chip and foundry manufacturing industry, comparatively little effort has been expended to close the gap on replacing the more advanced central processing unit (CPU), graphics processing unit (GPU), and field-programmable gate array (FPGA) chips that U.S. firms currently provide. China has invested tens of billions of dollars in their semiconductor industry for decades but still cannot produce high-end chips. If it was just a question of investment and political will, China would have broken its dependence on U.S. technology years ago.
China’s political and financial commitment to developing its domestic semiconductor industry will eventually bear fruit. The United States cannot assume that its dominant position in high-end semiconductors will remain unchallenged forever or that China’s dependence on U.S. components will remain a powerful source of leverage forever. But the U.S. government’s campaign to cut off Chinese companies’ access to U.S. technology will do nothing to address China’s structural hurdles. China may redouble its efforts to build a domestic supply chain, but the impact on their ultimate timeline will likely be limited.
William A. Carter is a fellow and deputy director of the Technology Policy Program at the Center for Strategic and International Studies in Washington, D.C. William Crumpler is a research assistant with the CSIS Technology Program.
Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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