Adversary Supply Chains Targeted in Major Update to U.S. Export Controls

The United States is stepping up its efforts to undermine adversaries’ supply chains. On September 30, the Commerce Department released an interim final rule seeking to expand the Entity List, which imposes export controls on designated firms threatening U.S. national security or foreign policy interests, to automatically include those companies’ majority-owned subsidiaries.

The rule is intended to target major subsidiaries of firms currently on the Entity List by extending restrictions on their capacity to receive U.S. exports without a license from Commerce. Previously, subsidiaries and related companies were considered legally distinct entities, so export restrictions did not apply to them — a loophole that was routinely used by listed foreign firms to circumvent export restrictions and gain access to cutting-edge American technologies.

This move, which aligns Commerce with the Treasury Department’s long-standing practice of sanctioning majority-owned subsidiaries alongside their sanctioned parent companies, marks a step toward harmonizing enforcement of economic restrictions on U.S. adversaries’ supply chains.

New Rule Targets Extended Adversarial Supply Chains

The new rule is operationally identical to the U.S. Treasury Office of Foreign Asset Control’s “50 percent rule,” which extends financial sanctions to any individual or entity that holds 50 percent or more of a sanctioned company. The new policy will also target foreign defense contractors by expanding coverage to any entity 50 percent or more owned by a firm currently listed as a “military end user.” Coupled with Commerce’s Common High Priority List (CHPL), which flags imports that sustain Moscow’s war in Ukraine, this move will further strain Russia’s import-dependent military supply chains by restricting firms’ capacity to purchase both finished and intermediate goods.

Beijing Relies on Military-Civil Fusion To Achieve Its Ambitions

The new rule will affect everything from Russian defense companies trying to acquire American-made machine tools to Iranian drone manufacturers smuggling in computer components for drone production. It will also significantly impact Beijing’s policy of “military-civil fusion” (MCF).

This policy, which began in 2007, compels nominally civilian firms, particularly those within the Chinese high-tech sector, to cooperate with the country’s defense industrial base. While the Commerce Department has long targeted Chinese state-owned defense firms or “state champions” heavily controlled by Beijing with export controls, the People’s Liberation Army (PLA) has continued to rely on domestically based  “little giants,” specialized small- to medium-sized firms, to provide research or manufacturing support. This push has been elevated by Beijing in the wake of the country’s economic slowdown, as the central government has called on local firms and governments to step up their support.

This trend is neatly encapsuled within the PLA’s efforts to weaponize artificial intelligence (AI), particularly given China’s continued reliance on American firms for its supply of advanced semiconductors. While the United States has repeatedly imposed stringent export controls on AI chips, the PLA has partially maintained its access to American technology via a series of unlisted shell companies — advancing its efforts to achieve its ambitions of “intelligentized warfare.”

Commerce Department Should Expand Enforcement Mechanisms

Export controls and sanctions are powerful tools of economic statecraft. Bringing the standards for sanctions designations and export restrictions into alignment across the government will increase the effectiveness of both, bolstering national security by effectively stymieing Beijing’s MCF policy and cutting off adversarial access to American innovations. U.S. allies, including the European Union, United Kingdom, and Japan, that already collaborate on the CHPL, should follow Commerce’s lead and adopt a 50 percent rule for their own export controls.

However, the expansion will only be effective with proper implementation. That will require significant manpower for investigations, enforcement, and private-sector support. As such, the Trump administration should lift the federal hiring freeze and streamline the hiring process for the Bureau of Industry and Security to expand enforcement capacity in a timely manner while safeguarding the efficiency of American and allied supply chains.

Jack Burnham is a research analyst in the China Program at the Foundation for Defense of Democracies (FDD). Susan Soh is a research associate for FDD’s Center on Economic and Financial Power. For more analysis from Jack, Susan, and FDD, please subscribe HERE. Follow Jack on X @JackBurnham802. Follow Susan on X @SusanSoh827. Follow FDD on X @FDD. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.