Controlled Technology Lists by MOFCOM & Business Implications on TikTok/ICT

Posted by Wang, Yi on September 1, 2020

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The latest MOFCOM-driven export control regulation warrants that more robust regulatory clearance at both US and China is the prerequisite and critical to cross-border deals. We alerted the regulatory change whereby China may swiftly vet controllability of technology items and “reciprocate” foreign Sanctions as part of the draft 2020 Export Control Law. Real action is accelerated, before its enactment.

1. Executive Summary

Amid TikTok/WeChat enforcement drama in US, Chinese Ministry of Commerce (MOFCOM) accelerated the release of amendment to the 2008 export control list, the counterpart to the US EAR (Export Administration Regulation) (“China’s Technology Export Control List“) on August 28, 2020.

Approach of official communication of this release demonstrates MOFCOM’s reaching-out culture, especially regarding technically complex and sensitive trade/investment regulations. MOFCOM made the announcement in the morning focusing on cross-board changes, followed with “briefing by authoritative experts” selected from academia, both of which are on official governmental portals. Below we brief the overall changes, and the ICT-specific highlights and business implications.

2. Analysis

The Chinese export control regime emulates from and collaborate with its US counterparts with differing Chinese nuances. Please refer to our earlier briefing. A quick glance of the US counterpart would help international businesses unfamiliar with the Chinese export regime, and as summarized below.

A Glance of the Emulated US Counterpart

The Bureau of Industry & Security (BIS), US Department of Commerce, is one of the primary bodies administering the export control/sanction regimes, with the following key characters:

• Licensing for Dual Use: A regulatory clearance is a must before export, reexport, or transfer (in-country) of certain controlled items, including “dual-use” items (either goods, services or technologies) to end users. Once deemed as a “controlled item,” it triggers a license from BIS, unless an exclusion or exemption applies.
• Enforcement for national security / foreign policy interests: Such export licensing regime aims to ensure US national security interests and foreign policy objectives., including non-proliferation of weapons of mass destruction under multilateral export control regimes.
• Denial for Military End User / End Use: As a rule of thumb, items that are destined to a military end user or for military end use are reviewed with a presumption of denial.
• Parallel Control Lists: BIS administers the Export Administration Regulations (EAR), through the Commerce Control List (CCL). Separate export control requirements include the defense items under the munition list subject to the International Traffic in Arms Regulations (ITAR) administered by the State Department, and the sanctions programs under Office of Foreign Assets Control (OFAC) of the Treasury Department.
• Control Both Physical & Deemed Exports: Exports subject to EAR include both physical activities as well as “deemed exports/reexports” such as emails or technology transactions (licensing, transfers or sales) to foreign nationals in/outside of the United States) subject to the EAR.
• Ensuring Compliance through US-China governmental Collaboration: Inter-government collaboration has been in place since the 1990s and been crucial to ensure export control compliance. For example, US exporter must obtain an End-User Statement from Chinese Ministry of Commerce (MOFCOM) for certain above-threshold or significant transactions triggering BIS license.
• Change Since John McCain NDAA in 2018 and Focus on Emerging/Foundational Technologies: Under the 2018 Export Control Reform Act (as part of John McCain legislation), BIS, through an interagency process and on an on-going basis, will identify and control novel “emerging/foundational” technology not yet on pre-existing export control lists (USML/CCL). Once identified, it will synchronically expand the national security review jurisdiction with respect to either controlling or non-controlling investments concerning such item. (See our previous alert)

Chinese Export Control Regime with the Amended Control List

The Chinese export control regime operates through several control lists primarily administered by Bureau of Industry, Security, Import & Export Control under MOFCOM, with certain evolving features:

• Sensitive-items Export Control List which controls dual-use items either commodities, technologies or software (中国两用物项和技术进出口许可证管理目录) annually updated on subject matters from nuclear, bio weapon, chemical, toxin to missile and related items, and
• Export-Restricted/Prohibited Technology List: under the Catalog of Technologies Prohibited and Restricted for Export (中国禁止出口和限制出口技术目录), which covers technologies in agricultural, coal mining, chemical and pharmaceuticals manufacturing, communications and electronic equipment, traditional Chinese medicine, among others
• Defense items-related control lists: they are under ministerial bodies including Ministry of National Defense and Ministry of Industry and Information Technology (and will likely be consolidated under the auspices of the Central Military Commission under the draft Export Control Law).
• Sanctions Lists: Unlike its US counterparts, China has yet released its end-user control regimes or restricted/blocked entity lists but has indicated so on June 1 2019, and aims at counter economic blockade, “supply cut-off,” and “defend rule-based trading system.”
• Deemed Exports Not Aggressively Enforced Yet: Deemed exports in Chinese context has yet been under aggressive enforcement, but the enactment of the Export Control Law may change the status quo.
• MOFCOM Scrutiny Crucial for Customs Clearance: consultation with MOFCOM for licensing requirements has been crucial in practice, and MOFCOM statement is prerequisite for Customs clearance purposes.
• Licensing May Be Trigger Upon MOFCOM Notice: Other than jurisdiction on “controlled items,” licensing may be triggered once MOFCOM informs an exporter on national security grounds.

What Are Major Changes?

Before the pending enactment of the unified Export Control Law, the major change on the latest Catalog of Technologies Prohibited and Restricted for Export include:

• Reduced Prohibited Items in Agricultural / Pharmaceutical: Technologies no longer subject to export prohibition include: microbial fertilizer, caffeine production, nucleonin production process, vitamin fermentation, among other previously prohibited items.

• Reduced Restricted Items in Pharmaceutical / IT / New Materials: Technologies no longer subject to export restriction (licensing) include certain technologies on epidemic vaccine, natural drug production, veterinary drugs, functional polymer material preparation and processing, chemical synthesis and semi-synthetic drug production, information security firewall software, among others.

• Newly Added Export Restrictions Across Sectors: new restrictions apply to artificial breeding of wild plants, gene engineering, cashmere goat breeding, aerospace materials production, large-scale high-speed wind tunnel design and construction, aerospace bearing, laser, oil and gas equipment, foundational technologies in petrochemical equipment, marine engineering equipment, UAV, cyber security, information-confrontation/defense, and other items.

• Change of Control Points on Controlled Technologies: the amendment modifies the control points and technical parameters of 21 technical items, from crop breeding, aquatic breeding, chemical raw material production, bio-pesticide production, spacecraft measurement and control, space data transmission, mapping technology, information processing, to vacuum, among others, e.g.:
  • ‘Casting-to-milling all-in-one’ metal 3D printing technology
  • Remote-controlled telemetry and encryption techniques in Chinese satellites and their radio delivery
  • Topographic products with direct image output scale equal to or exceeding 1:100,000
  • Encryption and decryption technologies in satellite data
  • encryption technology in Beidou satellite navigation system information transmission
  • Vibration reduction and noise reduction and intelligent control of loaders, bulldozers and excavators
  • Critical technologies in power generation and transmission, such as ultra-high voltage power transmission and nuclear power station
  • Speech synthesis technology
  • Artificial intelligence interface technology (including speech recognition technology, microphone array technology, voice wake-up technology, interactive understanding technology, etc.)
  • Speech evaluation technologies
  • Intelligent reading technologies
  • Data-based personalized information push service technology
  • Certain encryption safety technologies, e.g., encryption chips and quantum cryptography
  • Certain cyber security technologies, e.g., acquisition and analysis for unknown attack behavior, threat intelligence generation
  • Certain safety enhancement technology on operating systems

What Concerns TiTok/WeChat as Well as Social Apps

TikTok’s technological infrastructure and services fall within at least or a number of the “controlled items” under the revised Catalog of Technologies Prohibited and Restricted for Export on a couple of newly restricted technologies items:

• Encryption and decryption technologies in satellite data
• Artificial intelligence interface technology
• Speech evaluation technologies
• Intelligent reading technologies
• Data-based personalized information push service technology

As of August 29, 2020, through its trade expert’s Chinese’s briefing on governmental portal, MOFCOM has unofficially expressed explicit concerns that the divestment deal triggers Chinese export control clearance, because its core algorithm constitutes controlled items such as artificial intelligence interactive technology.  MOFCOM’s designated outside expert recommends TikTok’s parent company to “seriously and carefully consider the need to suspend substantive negotiations.”

Business Implications

TikTok swiftly responded its position to strictly comply with the Chinese export control rules on August 30, 2020.

Because export licensing process may be triggered once MOFCOM informs an exporter on its concerns, presumably TikTok’s parent company, ByDance has engaged with the licensing procedure administered by MOFCOM.

ByDance must secure export control clearance for its core algorithm services (either licensing or sale), as its data services constitutes “exports” and the core algorithm services constitutes “controlled items” of the latest export control catalog.

Absence of export control approval in any transactions involving the “controlled” technologies deprives legality of such transaction and invite liabilities under the Chinese export control law.

Contractually, customary regulatory clearance is condition precedent to potential divestment transactions disclosed to the public after the US executive order on August 14, 2020 on national security grounds against TikTok. Absent MOFCOM approval, closing of the pressured deals lacks legality.

3. Outlook

Engagement with outside experts by MOFCOM reflects the proactive use of expert consultation mechanism albeit still under the draft Export Control Law. It represents the professional manner advocated by MOFCOM to address both specific transactions and to ensure awareness and compliance of China’s own export control rules, while keeping opening up.

As we alerted earlier, the upcoming Export Control Law emulates with U.S. “whole-of-government strategy,” with the “safety-and-controllability,” all-nation approach.  

Key risk exposures international companies must closely monitor and mitigate include:

• Greater enforcement and individual-level liability, either administrative or criminal in nature
• Greater instructional/policy alignment prepared to swiftly “reciprocate” foreign sanctions
• More sanction and entities lists to come
• Deeper trade and investment regulation and clearance with MOFCOM-satisfactory mitigation measures for MNCs in cross-border deals

China may vigorously enforce its export control regime, implicitly or explicitly, as “reciprocity” to US-driven sanctions to safeguard its technology leadership and foreign policy interests.

Companies must seek robust regulatory counseling, before, during and post-closing, to navigate through the uncertainty imposed by these increasing conflicting regimes over international businesses.

We continue to closely monitor trade regulation/anti-corruption developments and the impacts to risk management functions of international businesses. Should you have any questions, please do not hesitate to contact us.

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