02 November 2020

China - Additional Export Control Regime and its Impacts

  • Articles
  • Compliance
  • Trade / Logistics

An Additional Export Control Regime to Follow – China and the Impact of their New Export Control Laws for Swiss Companies

I. Background

The National Congress of China has passed a completely revised Export Control Law (“ECL”) on October 17, 2020, which will take effect on December 1, 2020. This new ECL will restrict not only the export of dual-use and military products, technology and services to support non-proliferation objectives, but will also allow China to restrict the export of technology for national security and public policy reasons. Prohibitions of export or licensing requirement will be based on the items, as well as their end users, end-uses or destinations.

Although China is a member of the United Nations Security Council (UNSC) and the Nuclear Suppliers Group, they are not members of the various multinational trade control regimes, such as the Australia Group, the Missile Technology Control Regime or the Wassenaar Arrangement, which establish measures to prevent the proliferation of dual use, nuclear and biological weapons, arms and other weapons of mass destruction.

As such, China has previously sought to control sensitive imports and exports via a number of specific regulations which approximate international commitments. The new ECL will serve as China’s first comprehensive law on trade controls and will unify existing regulations.

II. What will be controlled?

The ECL seeks to impose export controls over “dual-use items, military items, nuclear items and other goods, technologies, services and items relating to the maintenance of national security and national interests, as well as the performance of anti-proliferation and other international obligations”, together referred to as “Controlled Items” listed on the export control list.

The new law equally introduces the concept of “temporary controls” (article 9), which unlike Controlled Items, are temporary measures required for the “maintenance of national security and national interests and the performance of anti-proliferation and other international obligations”. Temporary controls are enforced for up to two years, after which controls may be extended, cancelled or permanently listed as a Controlled Item.

Controlled Items and items under temporary control are subject to the ECL if they undergo the following activities:

  • Export: a transfer of controlled items from Chinese territory
  • Deemed export: a provision of controlled items, technology or know-how by Chinese citizens, legal persons or other entities to foreign individuals or organizations, whether physically located within China or abroad.
  • Re-Export: The definition of re-export is not fully clear yet. In previous versions of the draft legislation, the re-export of controlled Chinese goods, or foreign-made goods with controlled Chinese content were meant to be subject to licensing. This wording has not been transferred to the final law, but the current version leaves a certain degree of uncertainty whether the re-export of controlled Chinese goods from third countries may be subject to Chinese licensing.
  • Transit or transhipment from or through customs-controlled areas such as free zones, export processing zones or bonded warehouses.

III. National Security and Interests

Besides the inclusion of list-based and temporary controls, the law also spells out a catch-all provision (article 12) that puts any goods under control that may i) endanger national security and interests, (ii) be used to design, develop, produce or use weapons of mass destruction or their transportation vehicles, or (iii) be used for terrorism purposes. The notion of how China will restrict the trade and transfer of goods in the interest of public and national security may open the door to the use of very broad catch-all provisions.

IV. Extraterritoriality

While the licensing of re-export controlled goods is not fully established yet, the law clearly defines extraterritoriality in Article 44, which provides that organizations or individuals outside China that violate the ECL or endanger the national security and national interest of China, or otherwise hinder the performance of non-proliferation and other international obligations, shall be subject to investigation and legal liability in accordance with the law.

V. Retaliation Measures

Article 48 allows reciprocal measures against foreign countries or regions that make use of national export control measures to endanger Chinese security or interests.

VI. Swiss Impact: China’s ECL

Swiss entities with Chinese subsidiaries or foreign entities who engage in trading activities in China and, in doing so declare exports to Chinese customs (e.g. procurement from China under Incoterms EXW), should be aware of their export control licensing obligations. This may likely include a requirement to classify all items subject to export controls, ensure that controlled items are declared at export and license conditions are observed. License management, including applications for trade-facilitating general licenses, will fall under the joint responsibility of the Chinese departments of the State Council and the Central Military Commission, collectively referred to as the “State Export Control Administrative Departments” (SECADs).

To date, there seems to be no clarity on license requirements for the re-export of controlled goods of Chinese origin or foreign assemblies containing controlled Chinese content above a given de minimis level. This however must be closely monitored.

VII. Swiss Impact: Hong Kong and New Sanctions

Along with the observance of China’s new comprehensive export controls, Swiss entities should ensure that counterparty screening activities incorporate updated US and Chinese sanctions, as China may impose unilateral sanctions as a retaliatory measure against US and international sanctions targeting Chinese nationals that “undermined human rights and fundamental freedoms in Hong Kong” by helping to develop or implement the Hong Kong National Security Law.

For commercial activities involving dual-use or military items, goods or technology subject to the US extra-territorial controls, Swiss and other global entities should be aware that US re-export authorisations for transfers from HK to China may be denied. U.S. license exceptions (LVS, GBS, TSR, APP, AVS, GOV…) formerly available for HK have been rescinded by the US Bureau of Industry and Security, owing in part to the perceived risk that US technology (including deemed exports) exported to Hong Kong are at higher risk for diversion to China under new Chinese increased authority.

VIII. Conclusion

Companies are advised to carefully evaluate the commercial, legal and reputational risks of non-compliance with national / unilateral sanctions and export controls in key jurisdictions such as the US and China, as consequences may include supply chain disruptions, market access limitations and costly penalties.

MME Legal | Tax | Compliance can support you with adapting your international compliance program to the new Chinese Export Control Law. Our know-how in customs, trade controls and sanctions management is rooted in years of legal and industry experience.