Businesses that source dual-use or military items need to worry about ensuring compliance with Chinese Export Controls to avoid delays and fines, argues Arne Mielken of Customs Manager Ltd.
On December 1, 2020, China's Export Control Law ("ECL") took effect after the Chinese National People’s Congress (NPC) voted in favour of the law, after a series of amendments that took years in the making.
The ECL creates a comprehensive and unified framework for export control to a series of separate administrative regulations on export controls issued prior to the law’s enactment.
The earliest draft first published by the Chinese Ministry of Commerce (MOFCOM) took place on June 16, 2017 (2017 Draft).
On December 28, 2019, China’s Standing Committee of the National People’s Congress (NPC) published the draft Export Control Law of the People’s Republic of China (2019 Draft)
On July 3, 2020, the NPC published a further revised draft Export Control Law of the People’s Republic of China (2020 Draft).
The resultant set of draft legislation is China’s first step towards a comprehensive and unified export control regime.
The 2020 ‘Export Control Law’ (ECL) has entered into force after the NCP voted in favour of the law, after a series of amendments that took years in the making.
The new consolidated, principal Export Control Law
Prior to the ECL, China's export control regime was scattered across multiple laws, regulations, and guidelines enforced by an array of government ministries.
The Export Control Law appears to fill in and add to the foundation of China's export control legal framework, rather than entirely replace that framework.
The law re-affirms some of the existing features of China's export control system, while at the same time introducing several new ones, including
the possibility of controls on extraterritorial re-exports,
and trade with listed entities and countries.
The legislation also expanded upon both export control enforcement powers of the Chinese government agencies (including increased criminal penalties and connecting a trader's export control record with the China social and business credit systems) and incentives for traders who demonstrate higher levels of export compliance.
The ECL is often seen as Chinas first piece of legislation regulating all the country’s export controls in one place.
A reaction? Until 2021, China felt the full force of US legislation
First ZTE, then Huawei and TikTok. During the Trump administration (2016-2020), the US had introduced the following to limit the trade between its businesses and China:
denial of export privileges
continued listing of entities and individuals on US restricted party lists
unfavourable Executive Orders by the US President
an amendment to the US Export Administration Regulations to restrict Chinese products designed and produced with US technologies
No wonder, commentators believe China had been singled out by the US. During this time, Chinese companies were repeatedly at the receiving end of the full force of US export control legislation, which could potentially impact China’s economic prosperity.
Who is in charge?
China's export control law was not set out in uniform national legislation but was divided into more than five different laws:
The Ministry of Commerce (MOFCOM),
the State Administration of Science, Technology and Industry for National Defence (SASTIND),
the China Atomic Energy Authority (CAEA),
the Central Military Commission (CMC) and the
Chinese Cryptography Administration (SCA)
were all responsible for different aspects of these laws.
In addition, the General Administration of Customs (GAC) checked the paperwork and enforced the laws. The new law can streamline and harmonise procedures, but will also introduce new requirements.
Does China now have extraterritorial controls like the US?
As proposed in the first version of the law, China had originally intended to extend the extraterritorial jurisdiction of its law to cover foreign-made products with Chinese content.
This is known as the ‘re-export control provision’ in the US and currently requires overseas businesses – including the UK or the EU – to attain American export licences, even if their products are not expected to enter, transit through or exit the US.
Could we even contemplate having to seek licence authorisations from China’s Ministry of Commerce every time a product containing controlled components from China crosses borders?
Luckily, the rules for the re-export of items incorporating controlled content exceeding the de minimis level that appeared in the 2017 draft appear to have been largely removed from the final version.
So, what's in the law - in a nutshell?
Central to these controls is the status of ‘Export Business Operators’ (EBO). This can hit all “citizens, legal persons or other organizations exporting controlled items according to laws and administrative regulations” are EBOs.
What's an export?
An export would be defined as a transfer of controlled items from the territory of China – including Macau, Taiwan and, of course, Hong Kong. The executing parties can be either Chinese nationals or foreigners.
As in the US, an export can take many forms, including cross-border product sales, service delivery, technology transfer, overseas exhibition, repair, and donation. EBOs fall under this law and are subject to administrative and criminal fines for export violations.
It appears that the law increases the penalty for violations compared with the 2017 draft. The range of fine amounts to five to ten times the value of the illegal turnover.
Furthermore, for transacting with blacklisted entities, the fine can be as high as ten to twenty times the illegal turnover. In a serious case, the business operation will be suspended, and the relevant exporting certificate could even be revoked.
The ECL blacklist
The law introduces a blacklist and a temporary control mechanism, which together appear to fulfil a similar function as various lists in the US export control regime, such as the Entity List or Denied Persons List.
Similar to the US, China’s Minister of Commerce will maintain a blacklist of exporters or end-users who are likely to endanger national security or who use the controlled items for terrorism. Also, similar to the US, what constitutes ‘national security is up for interpretation and could very quickly lead to listings.
Entities on the blacklist are prohibited or restricted from being involved in any transactions related to the controlled items. This is problematic for US businesses that could get caught up in a ‘listing war’.
Implications for non-Chinese firms
Can Chinese subsidiaries of UK companies still export if they are aware that their products may, directly or indirectly, end up with a US blacklisted company?
The export control considerations for UK businesses do not end here. Other aspects of the law – which could be enacted very quickly if approved – that could affect UK firms include new goods control lists, catch-all provisions and end-user to end-user controls.
UK firms will need to have robust export control processes in place to be able to adapt to any sudden change in Chinese legislation.
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About the author
Arne Mielken is the managing director of Customs Manager Ltd.
An accredited customs and export control practitioner, Arne is a member of the Export Control Profession Board. He has advised and trained clients across many sectors on dual-use and military export controls and sanctions, as well as advising on EU, UK, US and Chinese export controls He holds a BA (Hons) in International Business and Modern Languages, a Euromasters Degree, a Diploma in World Customs Compliance and Regulations, and has an Executive MBA. Mielken speaks English, German, French & Spanish and can be reached via LinkedIn.