The Standing Committee of China's National People's Congress published the Draft Export Control Law 《中华人民共和国出口管制法(草案)》(Draft ECL) on December 28, 2019,1 with comments due by January 26, 2020. The Draft ECL, if enacted in its current form, would be China's first omnibus national legislation regulating export controls. It appears to be drafted at least in part to give China statutory authority to counter US export control measures targeting China.
The ECL, together with the US export control regime, would profoundly affect international trade involving China by domestic (including foreign-invested) and overseas companies.
The US export control regime has recently been revised to provide new mechanisms for US regulators to restrict exports, including exports to China, of items that are deemed to have national security significance.2 In particular, the new Export Control Reform Act 2018 directed the US Department of Commerce to formulate new controls for "emerging" and "foundational" technologies, which would impose increased licensing requirements for exports of such items to China. In May 2019, the US Department of Commerce's Bureau of Industry and Security placed Huawei and its affiliated entities on its Entity List, which restricted the export, re-export and transfer of US-regulated goods, software and technology to these entities. In addition, a US Executive Order issued in May 2019 authorized a still-emerging government review procedure for assessing and potentially blocking commercial transactions involving information and communications technology or services that are deemed to present an undue risk to US infrastructure or economy or an unacceptable security risk.
In response to the US measures, and in the name of protecting its national security and interests, China has put forward a draft ECL for the first time since 2017 when an earlier draft was issued by the Ministry of Commerce (MOFCOM). The latest Draft ECL, with 48 articles across six chapters is substantially shorter and more focused than the 2017 MOFCOM version, which consisted of 70 articles.
The most important features of the Draft ECL are as follows:
I. The first omnibus national export control law
China's current export control legal regime is not set out in unified national legislation, but rather is spread across several different laws, especially, the Foreign Trade Law (rev. 2016) and Customs Law (2017), and administrative regulations, including the Regulations on Arms Export (2002), Regulations on Control of Nuclear Export (2006), and Regulations on Control of Nuclear Dual-Use Items and Related Technologies (2007), as well the Administrative Measures for the General Licensing for Export of Dual-Use Items and Technologies (2009). Administrative authority is divided among several Chinese government agencies: MOFCOM, the State Administration of Science, Technology and Industry for National Defense (SASTIND), the Ministry of Science and Technology (MST), the Central Military Commission and the General Administration of Customs.
The new draft ECL would mark the first omnibus and comprehensive national export control legislation and would create clear legal authority and investigative powers for enforcement of China's export controls.
In particular, Article 1 of the draft ECL would make the performance of international non-proliferation obligations part of the ECL's purpose, consistent with China's commitments under the Nuclear Non-Proliferation Treaty, Chemical Weapons Convention and Biological Weapons Convention to which China is a member. China is currently a member of only one plurilateral export control regime, namely, the Nuclear Suppliers Group. China has not joined any of the other international export control regimes, including the Australia Group, the Zangger Committee, the Missile Technology Control Regime, or the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Technologies. It is unclear whether China is prepared to comply with other international control regimes, but the Draft ECL indicates a greater willingness to do so.
II. Export control list
Items (goods, technologies and services) characterized as (i) dual-use; (ii) military; (iii) nuclear; or (iv) otherwise related to the performance of international obligations and protection of national security would be designated on export control lists (regular or temporary) and subject to export licensing requirements. Exporters would need to apply for licenses to export from China the items described on the control lists.
Under current law, relevant agencies in China publish control lists for categories (i)-(iii), subject to revision from time to time. Current lists are as follows:
- List of Dual-Use Items and Technologies Import and Export Subject to License Management (MOFCOM and SASTIND, 2019); and
- List of Nuclear Dual-Use Items and Relevant Technologies Subject to Export Control (MOFCOM and SASTIND, 2017).
For controlled items not on the above-mentioned control lists, i.e., category (iv), including especially sensitive technologies, China would also be able to (a) impose an embargo; (ii) prohibit exports to specified destinations, individuals or entities; and (iii) apply temporary controls for up to two-years. Current and prospective lists are as follows:
- List of Additional Dual-Use Items and Technology Subject to Export Prohibition to North Korea (MOFCOM with other agencies, 2018);
- List of Technologies Prohibited or Restricted from Export (MOFCOM, MST, 2008, Draft Amendments, 2018). This comprehensive list covers different technologies across more than 80 industrial sectors that are subject to Chinese export controls including, for example, some rare earths refining technology and integrated circuit manufacturing technology prohibited from export; and some wire and cable manufacturing technology and semiconductor manufacturing technology subject to export restrictions. The amended list is still in draft form.
- National Technology Security Management List System under consideration by the National Development and Reform Commission based on the National Security Law (2015), timetable not known.
China may blacklist foreign importers and end-users for (1) violating end-user or end-use commitments; (2) endangering national security; or (3) terrorism. The Draft ECL would delete the retaliation provision that would have prohibited exports of controlled items to countries, such as the US, that have imposed restrictions or prohibitions on exports of such items to China.
What constitutes an "export"
- "Export" would include any transfer of controlled items from Mainland China to overseas (including to Hong Kong, Macau and Taiwan). Note that the exporting parties may be either Chinese or foreign persons. An "export" can take many forms, including the cross-border sale of products, provision of services, transfer of technology, overseas exhibition, repair and donation.
- "Deemed export" would include the provision of controlled items (including controlled services or technologies) to foreign persons within China's borders by Chinese citizens, legal entities or organizations. This would be similar to deemed export licensing requirements in the US, which cover the transfer or disclosure of controlled technology and software to foreign nationals within the country.
- "Re-export" would no longer be a defined term and appears only in the supplementary provisions of the Draft ECL, but nonetheless would remain subject to the ECL. This coverage would be similar to the US regime and would likely expand China's extraterritorial reach and subject an overseas company to China's export control licensing requirement when it re-exports Chinese-origin controlled items or foreign-made items that contain Chinese-origin controlled items to a country or region outside China. Note that the 2017 MOFCOM draft imposed a "percentage" test (with detailed percentage thresholds to be specified in separate implementing rules) for determining whether China-origin content contained in a foreign-made product is sufficient to apply the Chinese ECL. This percentage test requirement would have been similar to the "De Minimis Rule" under the US Export Administration Regulations. However, the percentage test was removed in the current Draft ECL.
- "Transfer": Exporters and importers would need to inform the relevant Chinese authorities of any change of end-user or end-use, i.e., any transfer of exported Chinese-origin controlled items by the overseas importer will also be subject to Chinese export controls, and a violation of end-user or end-use commitment could lead to blacklisting.
- "Transit, transshipment and through transportation": The transit, transshipment and through transportation of controlled items or the export thereof from a bonded zone, export processing zone or other special customs zone to an overseas country or region would be subject to the ECL.
Implications and Conclusion
From the Draft ECL, it appears that China intends to strengthen its export control regime in part to provide counterweights to US export controls perceived as targeting China and Chinese companies such as Huawei. After the ECL is promulgated, we expect to see new and consolidated export control lists. Such lists would likely include sensitive and cutting-edge indigenous technologies, likely resulting in a tit-for-tat regulatory response to similar technology export control measures adopted by the US. These control lists may also contain strategic resources such as rare earth metals, a potentially powerful tool for China to disrupt global supply chains. Thus, the Draft ECL reflects a continued movement toward selective "de-coupling" between the two countries in certain sensitive industry sectors.
Multinational companies (MNCs) outside and inside China should be aware of the changes in major export control regimes. When exporting to China, overseas MNCs will need to comply with overseas, especially US or EU, export control requirements, and when exporting from China, MNCs within China will need to comply with the Chinese ECL. Facing tightened technology transfer restrictions from the US, some MNCs doing business in China are considering "In China, For China" strategies by developing indigenous technologies and intellectual property rights (IPR) within China's borders to provide their Chinese customers with increased supply chain security. With the imminent promulgation of the ECL, it is possible that such locally-developed IPR may become subject to export controls from China. This may have significant impact on MNCs with respect to "In China, For China" strategies. In any event, MNCs that engage in exports will need to establish internal export controls compliance mechanisms to satisfy multiple export control regimes, including China's.
2 See our insights on this, please refer to: The US Tightens Export Controls, Targeting China (August 2, 2018), available at https://www.wilmerhale.com/en/insights/client-alerts/20180802-the-us-tightens-export-controls-targeting-china; and The U.S. Administration Targets Huawei in Actions to Curtail its Involvement in U.S. Telecommunications Networks and Access to U.S. Business and Technologies (May 16, 2019), available at https://www.wilmerhale.com/insights/client-alerts/20190516-the-us-administration-targets-huawei-in-actions-to-curtail-its-involvement-in-us-telecommunications-networks-and-access-to-us-business-and-technologies.