The People’s Republic of China’s National People’s Congress Standing Committee on October 17, 2020, approved a comprehensive new framework for regulating exports of sensitive products, services, and even data. While the government still needs to provide some additional details, the Export Control Law (the “ECL”) does provide a clear view to the role the Chinese government will play, according to the law, “safeguarding national security and interests, performing nonproliferation and other international obligations, and strengthening export control.” Export control, as defined by the ECL is “prohibitive or restrictive measures taken by the State against the transfer of controlled items from the territory of the People’s Republic of China to overseas, and the provision of controlled items by citizens, legal persons and other non-incorporated organizations of the People’s Republic of China to foreign organizations and individuals.” The law goes into effect on December 1, 2020.
Rationalization and coordination
China has restricted the exportation of sensitive items prior to the passage of this current legislation. However, these regulations were incorporated into a wide range of different laws and enforced by various agencies and departments. The ECL rationalizes these various efforts and creates a unified regime for regulating and enforcing export control issues. The ECL law itself will be implemented by several state agencies. The ECL describes these as, “the departments of the State Council and the Central Military Commission that assume the function of export control (hereinafter collectively referred to as the ‘State's export control authorities’) shall be responsible for export control according to the divisions of duties.” Also, the ECL provides for coordination among every agency touching the exporting of potentially sensitive items—“The State's export control authorities and other relevant departments of the State Council shall cooperate closely and strengthen information sharing.” At the same time, the State’s export control authorities shall, in concert with the relevant departments, establish an expert advisory mechanism for export control, to provide advisory opinions for export control.
Restricted items and destinations
As discussed above, the PRC has previously controlled the exporting of certain products. These products have been enumerated in the past in lists controlled by various agencies. These lists have largely included military, nuclear, biologic, and high-technology products. The ECL provides for these lists to be adjusted by the relevant agencies. The agencies can even put restrictions on un-listed items through a “temporary” hold of no more than two years. It also provides for the agencies to place restrictions regarding export destinations, including “specific countries and regions of destination or specific organizations and individuals.” Some commentators have pointed to this provision as one that could be used to specifically impact the United States in its long simmering trade war with China. The ECL does also directly target “dual-use” items or ones that include “goods, technologies and services that can be used for both civil and military purposes or are conducive to enhancing military potential, especially those that can be used to design, develop, produce or use weapons of mass destruction and the means of delivery thereof.”
The exportation of controlled items is not barred by the ECL. There is, however, a licensing regime requiring exporters to seek permission to export products that are on the controlled lists and other items that could possibly be “(I) endangering national security and interests; (II) being used in the design, development, production or use of weapons of mass destruction and their means of delivery; and (III) being used for terrorist purposes.” The standard for seeking permission is “know or should have known.” Exporters may, if they establish an effective set of internal controls, receive a general license to export their products and may not be required to receive a license for each shipment. A similar license program will be utilized for dual-use products. And, military items will receive additional scrutiny.
Investigations and enforcement
In addition to the licensure requirements, the ECL provides for sweeping authority by the State’s export control authorities to investigate and enforce export control, including searching premises, inspecting records, interrogating witnesses, seizing products, and retrieving bank records. The ECL also provides for a raft of penalties for violating export regulations that include disgorgement of profits, significant fines, seizure of goods, and being banned from exporting for a lifetime. Additionally, violators may also be subject to other national security laws that carry even more significant criminal penalties.
Extraterritoriality and retaliation
Article 44 of the ECL provides extraterritoriality of the law’s investigation and enforcement provisions, providing for violators “outside the territory of the People’s Republic of China” would be “dealt with in accordance with the law and investigated for legal liability.” The final article of the ECL allows the State to target a particular country with “reciprocal measures” if it, “harms the national security and interests of the People’s Republic of China by abusing the export control measures.”
Impact on the global supply chain
While this is not China’s first effort at regulation of sensitive exports, this new law likely will enlarge the scope of products (including dual-use goods) that could potentially require licensure to export. And, while some of the actual regulations and mechanisms for licensure, investigation, and enforcement have not yet been finalized, it is also expected that this new regime will require exporters, especially with globally integrated supply chains, to carefully scrutinize their current arrangements for possible exposure under the enlarged purview. The interaction between these new protocols and the existing and future export control regimes in the United States, Europe, and elsewhere may result in some friction that will require exporters/importers to make some difficult decisions as they navigate through the possible competing regulations.
Nixon Peabody’s China, Export Control, and Global Risks teams will continue to monitor the roll-out of the ECL and are prepared to advise clients as they react to the PRC’s new export control protocols.