China Publishes Draft Export Control Law
For the past four years, China has been working on a new omnibus export control law that would bring its system closer in line with international standards. On 28 December 2019, the Standing Committee of China’s National People’s Congress published a second version of the Draft Export Control Law (中华人民共和国出口管制法（草案)). The first draft was released in June 2017 but floundered due to bureaucratic change and worries at the time that it was not responsive to national security concerns.
If passed and implemented, the new law could result in greater Chinese scrutiny of dual-use and high technology exports. This approach recognizes that the United States appears to seek greater decoupling from China in certain areas of strategic technology. Foreign companies operating in China, or dependent upon Chinese high technology or strategic goods, should monitor developments closely and prepare for the eventual implementation of the law.
The law, if passed, would unify a patchwork of regulations (see Figure 1) governing trade in nuclear items, arms, and dual-use goods; and provide for greater interagency coordination amongst the existing licensing bodies for these items (e.g., the Ministry of Commerce (MOFCOM) for dual-use and the State Administration of Science, Technology and Industry for National Defense (SASTIND) for arms). Specifically, the draft law calls for an export control coordination mechanism involving departments under the State Council and the Central Military Commission.
Figure 1. PRC Export Control Legal Architecture
Greater Focus on National Security Objectives and End-User
Although the draft law was originally proposed to help China introduce more comprehensive controls to meet international nonproliferation obligations (even going as far as consulting with the Bureau of Industry and Security during the Obama era) and international standards (e.g., deemed exports and controls over intangible transfers of technology), the latest draft language suggests that the law will also be directed at achieving national security objectives. In particular, the draft law (Article 10) provides for the creation of lists of destinations, specific natural persons, legal persons and other organizations to whom exports of controlled items may be prohibited, and for the temporary restriction of trade of unlisted items to those listed countries or persons. Moreover, among the criteria to be considered in licensing (Article 12) are explicitly “national security” and “destination country.” Clearly, the draft would grant authorities the ability to counter any perceived unilateral or multilateral controls that it deemed unfair. Indeed, the draft law explicitly calls for controls based on “reciprocity.”
Greater Focus on Industry Outreach and Compliance Programs
Consistent with emerging international standards, China is pushing companies engaged in trade of controlled items to adopt internal compliance programs. Even though MOFCOM already published guidelines for such compliance programs in 2007, Chinese authorities have conducted little outreach for implementation outside of some of China’s largest state-owned and private companies where trade compliance programs are few and far between. Over the past two years, MOFCOM has consulted with a handful of Chinese companies about the features of a modern trade compliance program and how to best promote them. The draft law (Article 11) requires the state to provide industry compliance guidelines and outreach. In addition to outreach by MOFCOM and state agencies, the draft law grants authority to trade associations to engage in compliance outreach. The draft law also envisions incentives for companies that introduce compliance systems, in line with other governments who have offered global and general licenses on condition of a compliance program being in place. Incentives for compliance programs would likely be set forth in separate implementing regulations.
Increased Enforcement and Penalties
The draft law provides for significantly enhanced enforcement and heightened penalties. For example, under the draft law, agencies would have broad search and seizure authorities when investigating potential violations. These authorities include the ability to enter business premises, gain access to and copy business records (accounting books, agreements, business correspondence), prevent the loading of suspicious items, order the return by forwarders of items illegally exported, detention of goods, and inquire into bank accounts of operators.
The proposed penalties for violations have also been increased over existing and previously proposed penalties. For example, the penalty for exporting without a license may be a fine from Customs of 500,000 RMB to 5 million RMB. If the case is deemed “severe”, Customs may temporarily shut down the offending company or revoke its ability to export. Customs would also be granted authority to impose monetary penalties on groups who “knowingly” facilitate unlicensed trade in strategic items (e.g. logistics providers, e-commerce platforms).
Foreign companies operating in China should track the export control law closely. The law provides China with authorities to respond to what they perceive as “discriminatory” U.S. and other foreign controls. As such, it is possible, that U.S. companies operating in China, or who are dependent upon Chinese-origin goods, could face controls that limit their ability to export or import critical technologies. It is also possible that Chinese authorities will work to establish controls on “emerging technologies,” especially in areas where China is perceived to have a lead or predominance.
Chinese authorities have become acutely aware of the use of export controls and sanctions by the Trump administration to achieve foreign policy and national economic objectives. Although the original intent of the export control law in China was to meet international nonproliferation obligations that would support integration into additional multilateral export control regimes, the direction of U.S.-Sino relations has prompted a greater focus on countering U.S. export controls.
The direction of the U.S.-China trade war, and more specifically the emerging issues in managing technology trade, is likely to have a profound effect on how the draft law is ultimately implemented. Regardless, multinational companies should be prepared to consider tighter regulations and controls on technologies developed in China over the next two years.
 As noted in Article 10: “As per demands for fulfilling international obligations and maintaining the state security, the State’s administrative authorities of export control in concert with relevant departments may, upon approval by the State Council or the State Council and the Central Military Commission, forbid the export of relevant controlled items or the export of relevant controlled items to specific destination countries and regions or the export to specific natural persons, legal persons and other organizations, or temporarily control goods, technologies and services outside of the control lists.”