China’s Export Control Law Taking Shape & Readiness for Enforcement
Posted by Wang, Yi on July 29, 2020
China released on June 28, 2020 the “second-reading” version of the draft 2020 Export Control Law, along with the draft Data Security Law. This validates the pre-existing momentum and newly-reinforced policy tools to potentially retaliate / reciprocate ongoing US extra-territorial enforcement against China. (Author’s note: the Export Control Law became law on October 17, 2020.)
1. Executive Summary
The draft Export Control Law has significant ramifications shaking up the entire supply chain for any sensitive commodities caught between conflicting US China sanctions in the months to come. It’s against the backdrop of intensifying US legislation and sanctions that treat China as the “near rival” under the “whole of government” approach led by US, China also paces up her legislation and administration of its own export control regime.
Unsurprisingly, the “safety and controllability” remains the underlying tone for other “companion” legislation such as the National Security Law and Cyber Security Law. Despite vast ideological difference, the architecture of the Chinese counterparts to US export control laws echoes and emulates U.S. “whole-of-government strategy,” with the Chinese-socialist-style, all-nation approach underlying China’s security surveillance and control regime. (See earlier analysis here).
2. Analysis
What’s salient from the US regime in the Chinese draft Export Control Law demonstrates China’s growing confidence and policy choice for greater transparency, and more delicate balance with foreign investment protection and self-driven “structural reform.”
2.1 Greater Enforcement and Individual-level Liability.
The new Export Control Law will empower the Chinese Ministry of Commerce (MOFCOM) with on-site verification and various investigatory powers and extra-territorial jurisdiction. Moreover, any “involved organizations and individuals shall cooperate with rather than refuse or obstruct” the regulatory, inspection, and/or investigatory activities by export control authorities.
Punitive Fines Up to 10 Times of Illegal Gains
Penalties may be up to 10 times of the “illegal gains” from alleged “unauthorized” exports of controlled items, either domestically or overseas.
Covered Persons Include Individuals
The “covered persons” under the new Export Control Law’s jurisdiction extends from “citizens, corporations and other organizations” to “individuals and organizations.”
Aiding & Abetting Prohibited
Such penalties may extend “aiding and abetting” liabilities against those “providing services” to alleged wrongdoers.
Please note this broadly encompasses from those involved in e-commerce services to financing dealers and brokers, as well as the logistics providers, irrespective of contractual agreements otherwise agreed by the parties.
2.2 Greater Policy Alignment Prepared to Swiftly “Reciprocate” foreign Sanctions
It also provides better clarity within the Chinese bureaucracy and commands local authorities or the Customs to escalate for vetting the controllability of any controversial item to the central government.
By centralizing the licensing process, it mitigates local protectionism using export control regime discriminatorily against foreign-invested enterprises.
On the other hand, given the centralization of export control power at State Council and Central Military Commission, coherent action against “export control violations” by parties overseas will be swift once determined.
2.3 More Sanction and Entities Lists to Come
It will unify and consolidate the currently fragmented Chinese counterparts of US EAR (Export Administration Regulation). It will also eliminate policy considerations non-essential to “national security” and foreign policy” justifying sanction lists, such as “industrial competitiveness.” (Author’s note: on August 29, 2020, MOFCOM released the Controlled Technology Catalog. See our follow-up alert – Controlled Technology Lists by MOFCOM & Business Implications on TikTok/ICT)
2.4 Reinforced Embargo Honoring China’s Treaty Obligations.
It reiterates China’s continuous policy for comprehensive embargo already in places to implement resolution reached by the United Nations Security Council, such as those against North Korea, and those against nuclear/bio/chemical-weapon proliferation.
3. Outlook
Listed above are key highlights of the latest Chinese developments on export control reforms. The new Export Control Law validates the pre-existing momentum and newly-reinforced policy tools to potentially retaliate / reciprocate ongoing US extra-territorial enforcement against China. This coincidentally responds what US Attorney General William Barr warned on its “China Initiative” that US will further intensify pressing major European-based MNCs as “market alternative” to Chinese national champions like Huawei to comply with US foreign and national security policy priorities and enforcement with “unity.”
The enactment of a uniformed Export Control Law, counter-intuitively, enhances transparency and business certainty, by deterring local protectionism/corruption taking advantage of opaqueness of old rules. It also opens opportunity to more multilateral cooperation with less misunderstanding, a direction critical against anti-trade headwinds worldwide.
Also, foreign investors in China may safeguard their “made-in-China” know-hows and dual-use items against unauthorized proliferation, a means critical as China evolves from world factory to innovation hubs.
Given the uncertainty imposed by these increasingly complex regimes over international businesses, we will be delighted to provide further analysis, as the Export Control Law evolves and becomes vigorously enforced as “reciprocity” to US-driven sanctions.
Yi Wang, trade and business attorney with public and private sector experience to tackle with regulatory/business challenges. He was one of the two defense counsels to MOFCOM in first Sino-US WTO dispute on semiconductors in 04′, and thereafter, counseled and managed cross-border transactions, regulatory clearance for transactions and trade/FCPA litigation at leading law firms in US/China from 02′ to 14′, and further served with GE Plastics/SABIC from 14′ to 17′. From 17′ to present, he is co-founder of Mind Realizing Law advising international businesses and institutions with robust anti-corruption / trade compliance perspectives.
(This briefing first appeared at China Big Idea founded by Dr. Shirley Yu. For more information or subscription, please visit https://chinabigidea.substack.com/)