China export control law, licencing and legal compliance

Foreign investors present in the People´s Republic of China have found themselves during the recent year between a rock and a hard place when trying to cope with USA’s and – China’s ever-increasing trade sanctions and restrictions which have affected their performance in Chinese domestic and export markets.

The United States has slammed onto China multiple export restrictions and bans to American markets, with the latest restrictions announced on December 22nd 2020. Even with the new Biden administration, neither side looks ready to negotiate with China banning 28 trump officials from doing business in China on Biden’s inauguration on January 20th, 2021.

Some of these export restrictions include prohibitions to companies like the semiconductor chip maker SMIC and the world’s largest drone producer DJI. This has huge implications in China as SMIC has large international deals in US tech companies, and China is pushing to be a key global manufacturer of such technology.

China, however, has not taken a spectator approach, and in typical trade-war fashion has introduced its own export controls, the most recent legal action being China’s Export Control Law, in effect from December 1st, 2020 onwards.

This blog analyses the recently introduced export control restriction regulations, which apply to sensitive Chinese technology, products, and material exports outside China.

These rules add a new dimension for legal compliance of foreign investors in China

I. CHINA EXPORT CONTROL LAW DECEMBER 1^ST, 2020

Newly enacted legislation policy specifying China’s Export Control Law (ECL) applies to both Chinese and foreign invested legal entities established in China who are exporting product abroad. Under the new legal regime, products classified as sensitive and included in the export control lists are subject to government control policies, monitoring, and subsequently approval of deliveries to export markets.

Companies not in compliance with the set ECL rules are subject to strict penalties and fines. However, it is interesting to note that foreign customers and even end-users abroad, come under the same jurisdiction as China-based legal entities and individuals.

In fact, China’s Export Control Law clarifies the restriction which are placed in a variety of existing regulations, rules, measures and enactment which clarify the legal regime in force before December 1st, 2020, these are targeted to safeguard national security interests for items listed as sensitive.

Clarification of items under the export control will be given by State Export Control Administrative Departments which operate under the State Council or the Central Military Commission.

II. CONTROLLED ITEMS, LICENSES, AND EXPORT APPROVALS

The China Export Control Law is similar to what is currently in
place in most Western countries. Restricted technologies, products, and information concerning dual- use products, military and nuclear technologies, and items related to national security and national interests are all under export control classification on which items can
be added at any suitable time by administrative authorities.

Prohibitions for exports might also be given to items which are proposed to be under such classification making legal compliance work rather challenging for companies operating in related industries, especially if you are producing a product with many components exporting to many different countries.

Foreign invested enterprises must after December 1st, 2020 seriously consider whether their products can be considered as endangering Chinese national security and national interests and if any doubt, an export license application shall be made
to relevant authorities. Whether or not such approval will be issued depends on issues such as national security, national interests, international obligations, sensitivity of products in question, destination, and end-user profile.

An approved license will specify in detail the specific conditions for allowed export transactions including end-users and end- use profiles, transportation logistics and restrictions of third-party transfer.

III. LEGAL ENTITIES, INVESTIGATIONS AND PENALTIES

The China Export Control Law presents a wide scope of applications, referring to Chinese and foreign organizations, legal entities, exporters, and individuals domiciled in China, however, the rules are apply to foreign importers and end-users in their home countries or regions. Moreover, ECL rules apply to all entities in special economic areas, zones, and logistics centres and their transshipments via Chinese territory.

Extraterritorial application explains that ECL rules apply to organizations, legal entities or individuals outside Chinese territory, who violate ECL regulations and in case of non-compliance such entities will be subject to investigations and legal liabilities.

China´s Export Control Law grants relevant authorities wide-ranging powers to investigate non-compliance, seize transport and confiscate suspected items, examine bank transfers and close bank accounts. Serious violations can lead to heavy fines with confiscation involved and other negative outcomes.

IV. EUROPEAN FREE TRADE AGREEMENT IN THE PIPELINE?

While the United States has been working effortlessly to insulate against China and exclude the country from global trade and investment, the European Union has entered into a mutual trade and investment agreement with China called The Comprehensive Agreement on Investment (CAI). Clearly, Europe sees the futility in a trade war and recognizes the economic benefits that come with free trade, It is one of the first things taught in an introduction to economics course, barriers to trade are bad for all parties.

The move to agree on the CAI, coming shortly after Beijing’s push to finalize the Regional Comprehensive Economic Agreement (RCEP) in Asia covering some 15 countries and 2.2 billion people, shows that China is looking to do business outside of the US. This is a good thing for Europe.

The recently signed Comprehensive Agreement on Investment is reportedly more than just an investment pact, it is paving the way for Chinese companies to move into Europe and enabling easier access to the China market for European companies. A full-scale free-trade agreement is the expected next probable step; however, a number of hurdles have to be solved between the parties before such talks can be commenced.

The current deal, agreed upon in principle on December 30th, 2020, promises to continue the opening up of China to the world. The difference here being that this will now be mandated by an international agreement which provides more incentive for change, rather than simply on the initiative of China. Some notable improvements for EU-based firms will be fairer treatment, like transparency on subsidies provided to local businesses, and a promise to prohibit forced technology transfers. Other changes will be to sign on a sustainable development agreement – the first of its kind between China and a foreign power – which will prohibit China from treating labourers or the environment unfairly in order to make an investment more attractive. The agreement will also seek to make changes to fight forced labour in China and will ratify into effect four International Labour Organization conventions, and accede to the international covenant of civil and political rights. Other changes may be present in the deal, however, they have not yet been announced as the EU has previously jumped the gun on providing details which have then jeopardized previous deals.

This agreement does have significance for EU companies operating In China and perhaps even more so as more information is provided, especially considering 50% of EU investment is in Chinese manufacturing. Changes in labour laws may affect costs for some firms, especially those engaging in unmonitored subcontracting. The changes to the transparency of subsidies may also make a large impact on EU firms in China.

However, despite being an important first step, most of this regulation is self-governing, so while incentivizing, it does not necessarily mean there will be changes. Furthermore, China already had bilateral trade agreements with every EU country except for Ireland. There are also exceptions for security law, which may prohibit many Chinese technologies, Huawei being a notable example. Besides which, it may take until 2022 or later for all 26 previous investment policies with China to be updated and EU members will need to ratify the policy. The more time goes by, the more likely that a party may seek to back-out or change the terms of the deal. Furthermore, German Chancellor Angela Merkel was a major driver of this deal, and Merkel will be retiring at the end of 2021.

Nevertheless, it is an important tying of EU and China economics and signals that China is willing to open-up and negotiate further in the future.

SUMMARY

Despite trade agreements and the opening-up of China, there are still many things to carefully follow when exporting.

Foreign-invested companies operating inside the Chinese territory must consider these strict Chinese export control rules and, in case of any doubt, perform in-depth due diligence on possible application of such rules. Failure to comply may cause numerous sanctions including business suspension, revocation of export licenses together with up to RMB 5 Million in fines or penalties of 10 times the revenues from such unlicensed operations. In addition, criminal liabilities may arise in cases of forgery of export documents and other violations of the Chinese criminal code.

The China’s Export Control Law provides authorities rights to issue reciprocal measures against countries and regions acting against Chinese national security and security interests. Regulations fall short of specifying or naming any such country, however, it is easy to understand that these
measures are targeted towards the United States in response to American prohibition against Chinese entities such as Huawei Technologies Ltd, TikTok and DJI.

If you would like to learn more, these blogs are published each week in a five blog series leading up to our MIF China Excellence training Webinar on Tuesday April 20th. The webinar will train companies in China business to provide a platform of knowledge to be able to launch in China, and also to avoid costly mistakes for already established businesses. The first two blogs can be found from the MIF blogs page. Or individually below.

Business closures, deregistration and termination in China and Hong Kong (21.01.2021) »

Legal Compliance, Fraud, and Risk Management (15.01.2021) »

Stay tuned to learn more and grow your China business knowledge.

Jari E. Vepsäläinen

CHAIRMAN FINTRADE-MERCER GROUP. THE PEOPLE´S UNIVERSITY OF CHINA, BEIJING