Peoples Republic of China flag blowing in the wind

After several rounds of revisions, China finally adopted its first Export Control Law (ECL), which went into force on December 1, 2020.

In general, we consider the ECL general, vague and hard to be implemented in practice without further adopting implementation rules. It incorporates many concepts from the US export control laws, but with few details. Given that the controlled item list and the implementation rules are not yet published, the actual implementation of the law will likely occur next year. Below, we summarize the highlights of the ECL.

Scope of Coverage

The ECL regulates military, nuclear, and dual-use items, as well as other products relating to national security. In this sense, the ECL seems to be a combination of the US International Traffic in Arms Regulations (ITAR), the US Export Administration Regulations (EAR) and laws regulating nuclear and other national security-related products. Given the broad coverage and the need to regulate military and dual-use items differently, the ECL has separate chapters and regimes that apply to military items and dual-use items. For example, only licensed exporters may deal with military items, while dual-use items are not subject to the rule. For the purpose of this article, we focus only on dual-use items.

Controlled Items

The controlled items under the ECL include goods, technologies (including technical materials) and services, which is broader than the EAR, which does not cover services. The controlled items will be specified in a control list yet to be published.

In addition to the items specified on the control list, the ECL authorizes “temporary control” for no more than two years on items that are not listed but the export control administration authority deems necessary to control either generally or to a specific nation or person.

Moreover, the ECL provides that if an exporter knows, or ought to know, that exporting certain items beyond the control lists will endanger national security, or will be used for the purpose of proliferation or terrorism, the exporter should also apply for a license.

Administration Authority and Control Lists

The ECL authorizes the State Council and the Central Military Commission to establish “export control administration authorities” to implement the law, which appear to consist of three authorities, each respectively responsible for military, dual-use and nuclear items. In the case of dual-use items, it is believed that the Ministry of Commerce (MOFCOM) will be the administrative authority. Thus, the list of controlled dual-use items will be drafted by MOFCOM. At this moment, it is unclear when the first controlled list will be published and in what form.

It is worth noting that MOFCOM also publishes and oversees the “catalogue of technologies that are prohibited or restricted from exporting” according to the Regulation on Technology Import and Export. It is expected that the dual-use controlled list may be drafted on the basis of the current “catalogue of technologies that are prohibited or restricted from exporting.”

The ECL provides that the authorities shall evaluate the risk levels of different countries to take applicable control measures. This may refer to something similar to the Country Chart under the EAR.

Export Deemed Export and Re-export

The ECL defines “export” to mean “cross-border transfer of controlled items from the PRC, and provision of controlled items by citizens, legal persons and other organizations of the PRC to foreign natural persons, legal persons or other organizations.” This second part of the definition seems to be parallel to the concept of “deemed export” under the EAR, e.g., the transfer of controlled items to foreign persons even within China.

The ECL further provides that the law also applies to transit transportation, “re-export” or export from a bonded zone in China to overseas. The question is whether the word “re­export” has the similar meaning as that under the EAR, i.e., whether the ECL has extraterritorial jurisdiction and applies to foreign products that contain the controlled items where the de minimus rule or the “direct product rule” under the EAR are relevant.

In a draft Export Control Law published in 2017 (2017 Draft), there existed a provision specifically relating to re-export of controlled items after leaving China, foreign products that contain controlled items and a concept similar to the de minimus rule. This provision was removed completely from the ECL, which seems to suggest that China is refrained from exercising extraterritorial jurisdiction.

Therefore, it is our view that the “re-export” under the ECL probably refers to a straightforward re-export of the controlled items after leaving China, but not foreign products that contain the controlled items. For example, if a controlled item is exported from China to Country A and then without any processing or change, directly re-exported to Country B, that transfer may still be subject to the ECL. However, if the controlled item is processed in Country A and becomes a different product, the export of the finished product to Country B will not be subject to the ECL.

License Requirements

The ECL provides that a license is required for exporting all controlled items. It does not mention concepts like “no license required” or “license exception” as those under the EAR, which was mentioned in the 2017 Draft. When deciding whether to issue a license, the authorities will consider the following factors:

  1. International obligations and commitments
  2. National security
  3. Type of export
  4. Sensitivity levels of items
  5. Destination countries or regions of export
  6. End users and end use
  7. Credit record of export operators
  8. Other factors specified by laws and administrative regulations

End User and End Use Control

There is no definition of “end-user” or “end-use” under the ECL, but for the purpose of applying for the export control license, the exporters are required to submit information about the end use and the end user. The end user must commit not to change the end use or transfer the controlled items to a third party. The export control administration authorities will establish a system to access the risk levels of end use and end users.

The ECL seems to establish a blacklist system that is similar to the “entity list” under the EAR. Importers and end users (not exporters) may be added to the list under the following circumstances. Exporters could be ordered to stop all transactions with the blacklisted parties unless a license is obtained in special circumstances.

  1. Violating the commitment of end user or end use
  2. Potentially endangering national security
  3. Using the controlled items for terrorism purposes

Compared to the recently adopted “unreliable entity list” (UEL) that is also monitored by MOFCOM, the blacklist under the ECL seems to be more similar to the Entity List under the EAR in a sense that the applicable restrictions are limited to export. In the case of the UEL, on the other hand, the prohibitions or actions could be much broader, including importing and exporting, as well as restrictions on investment and visas/immigration.

Third-party Service Provider

The ECL prohibits any person to knowingly provide agency, consignee, delivery, customs clearance, e-commerce, finance or other services to exporters that are engaged in activities against the ECL.

Internal Compliance Program

The ECL requires export operators to establish an internal compliance program to comply with the ECL. Exporters with good records of compliance will be granted with license facilitation.

Penalties and No Appeal

The penalties for violating the ECL include a fine, business suspension, and denial of an export license and export privilege for five years. The maximum fine is 10 times the illegal income or RMB5 million, whichever is higher. The decision of punishment made by the export control administration authorities will be final and cannot be appealed to courts.

Please note that the above penalties apply only to “export operators” and third-party service providers as mentioned above, i.e., Chinese persons or companies, not importers and end users who may be subject to the “blacklist” as explained above.

Please contact us with any questions.