Navigating China's New Export Control Law
Huan Zhu is a Research Associate based in Washington DC.
Image courtesy of Shutterstock
On December 1, 2020, China’s first Export Control Law took effect. The timing of the new law suggests that it is a response to recent high-profile export restrictions targeting Chinese buyers by the Trump administration (examples here, here and here). This law helps China to align its export control practices with those of the United States, giving it legal grounds to apply similar tactics in their growing technology war. The language of the law is both vague and broad, leaving room for different interpretations. Such uncertainties could disrupt global trade flows and have a significant impact on investment decisions involving Chinese firms.
China’s export control law regime takes shape
Although this is China’s first Export Control Law, it is not the first time China has issued legislation with regard to export controls. In fact, China’s first law related to export controls is the Foreign Trade Law (effective in 1994 and revised in 2004), which authorizes the government to restrict exports for the protection of national security and public morals.
There are a number of implementing regulations related to China’s export control regime, including the Regulation on the Administration of the Import and Export of Technology that deals with technology-related exports. To support its implementation, Beijing issued the first list of controlled items, known as the Catalog of Technologies the Export of Which Is Prohibited or Restricted in 2001 (hereinafter referred to as the “Catalog”). The Catalog includes a wide range of technologies related to software, information processing, telecommunications, and many others. These listed technologies are banned or restricted from export, unless the relevant government agency grants a license for such exports.
However, the large number of different rules on export controls are outdated and loosely connected. In an effort to create an overarching framework for export controls, Beijing started crafting a comprehensive Export Control Law, with a first draft issued in 2017, and the final text passed by the National People’s Congress in October 2020. At approximately the same time, China’s Ministry of Commerce and the Ministry of Science and Technology jointlyissued a second update of the Catalog in August 2020, which resulted in the addition of 23 new items. The passage of the Export Control Law, in conjunction with the revised Catalog, broadens the coverage of Chinese export controls.However, ambiguities in the language of the law make it difficult to navigate these new rules.
Ambiguity in the provisions
China’s Export Control Law is closely modeled after U.S. export control laws: They both serve to protect national security, create multiple levels of export controls based on destination countries, and have a list of end users and a list of controlled items. In particular, China’s Export Control Law is designed to protect “national security and interests” and to implement China’s international obligations, by tightening restrictions on exports of “dual-use items, military products, nuclear, and other goods, technologies, services and others,” as well as relevant technical information (Article 1 and 2). The law creates multiple levels of export controls for destination countries based on their level of associated risk (Article 8.2), however, what distinguishes between the different “levels of associated risk” is undefined. It also provides for the establishment of a controlled list of items that would be subject to export controls (Article 9) and a controlled list of importers and end-users in destination countries (Article 18). Violators of the law may face various penalties varying from warnings, to suspension of their business, to criminal charges (Article 33-44).
Most concerning is the fact that many key provisions of the law are unclear, which raises the question of its exact scope and potential impact. For example, the text states that one of the main goals is to protect “national security and interests,” but it does not provide further clarification as to what this means. An earlier draft of the law stated that the objective was to protect “national security and development interests,” which may indicate that economic interests could be covered, but this phrasing was removed in the final version of the law. The ambiguity in the text leaves many questions unanswered. Therefore, until the law is fully implemented, the exact scope will remain unclear. In the meantime, the vague language gives Chinese authorities more leeway to interpret and implement the law as they see fit.
Similarly, the law authorizes agencies to take reciprocal measures if “any country or region abuses export control measures to endanger the national security and interests” of China (Article 48). This means that Beijing can use export controls as a weapon if it considers that it is being harmed by other countries’ export restrictions. Some Chinese observers have suggested that this provision could also be used as retaliation against U.S. export restrictions or used as negotiating leverage in trade talks. Since the scope of “national security and interests” here is again quite vague, it is difficult to predict how Beijing will invoke this provision.
In addition, the law provides for the establishment of a list of controlled items that would be subject to export controls.Beijing already issued a list of encryption technology that would be subject to export controls, but it is still working on expanding the list.
The law also includes a catch-all provision (Article 12.2), which requires exporters to apply for export permits even when the item they seek to export is not enumerated on the control list. If the exporter knows (or should have known) that the exportation of an item would endanger national security or “be used for the design, development, production or use of weapons of mass destruction and their delivery vehicles,” or “be used for terrorist purposes,” they must apply for a permit. But again, the language here is vague, and could result in an additional burden for exporters if they believe the provision requires them to track down all the end uses of their exports.
Furthermore, the potential extra-territorial jurisdiction of the law is another point of confusion because it applies to re-exports of Chinese goods and technologies, without defining what counts as a re-export. An earlier draft stipulated that foreign products that contain a certain percentage of Chinese-origin controlled items will also be subject to the law (Article 64 of the 2017 draft). However, this language has been taken out in the final text. It is possible that Beijing is hesitant to make the law too broad, which would likely further impede Chinese exports, but still wanted to leave room to do it in the future. That said, how Beijing will enforce the law on foreign firms beyond its border remains an openquestion.
Legal distinctions between the controlled list and the unreliable entity list
The Export Control Law also provides for the establishment of a controlled list for foreign importers and end-users. The controlled list of importers and end-users established by the Export Control Law is often confused with the unreliable entity list that Beijing first announced in 2019. Both lists have not been published, and the final lists may have overlaps, but it is important to distinguish between the two: They each have a different legal basis, different criteria, and listed companies would face different legal consequences.
First of all, the two lists are created by different laws. The unreliable entity list was established by the Provisions on Unreliable Entity List, pursuant to China’s Foreign Trade Law and National Security Law. In comparison, the controlled list for foreign importers and end-users was established by the new Export Control Law. The criteria for listing are also different. The unreliable entity list would include entities and individuals that threaten national sovereignty, security and development, violate market principles and disrupt regular business activities, or take discriminatory measures against Chinese enterprises, entities or individuals (Articles 2.2 and 7). In contrast, the export control list of importers and end-users includes entities that violate the end-use and end-user rules, pose a threat to national security, or use controlled items for terrorist purposes. In this regard, the two lists have some amount of overlap, but may still have distinguishable purposes. Once an entity is placed on the unreliable entity list, the entity could be subject to one or multiple measures related to trade, investment, entry at the border, residency and work permits, or fines, among others. In comparison, entities on the export control list will only be subject to export controls. Entities on the unreliable entity list are thus generally subject to broader restrictions.
In sum, these two lists are created to serve different legal purposes. Because of this, it is possible for a company to be listed on both and subject to multiple levels of trade and other restrictions.
The potential impacts of the law
China’s new Export Control Law will undoubtedly have an impact on international trade. Under the law, if China ends up tightening its exports aggressively, it will reduce Chinese exports in the global market, which could reshape supply chains in the long run, and discourage foreign investment within China or in overseas Chinese firms. If the law is applied narrowly, its vague language and broad provisions creates uncertainties in interpretation, presents challenges for the business community, and increases the compliance burden for companies. China should be mindful of the potentially trade disruptive effects of the law, clarify the ambiguities in the provisions as soon as possible, and exercise caution in implementation.
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