China's Proposed Export Control Law—a Major New Weapon in the Sino-US Trade Dispute

The draft Export Control Law introduces four categories of controlled items including:

• dual-use items which may be used for civilian and military purposes,
• military items,
• nuclear items, as well as
• other goods, technologies, services and items that are related to national security.

Items outside these control lists could also be temporarily controlled for up to two years, subject to the approval of the State Council, the Central Military Commission and their designated authorities (Competent Authorities). In addition, a “catch-all” provision extends potential control to items not included on these control lists but that the exporter “knew or should have known may give rise to national security and terrorism concerns.”

These Competent Authorities may also maintain blacklists of foreign importers and end-users that have been found to have violated the Export Control Law, and may have the authority to prohibit the export of controlled items to such entities outside of China.

Significantly, the draft law also provides that if China is subject to any discriminatory export control measures by any country, retaliatory measures against such country may be initiated under the Export Control Law. Furthermore, the controls over the export of any goods, technologies or services may be imposed in order to safeguard security and interests during wartime or urgent situations concerning international relations.

2. Controlled Activities and Licensing

The draft Export Control Law introduces the concepts of deemed export and re-export in China, which will bring China's system closer to the export control regime implemented by the US. Deemed exports may include the provision of controlled items by a citizen, legal person or other organization in China to any foreign person. The item need not be physically exported from China. Re-export controls cover the export of controlled items (i.e. items comprising a prescribed amount of content controlled by China) from one overseas jurisdiction to another. Thereby applying Chinese law extraterritorially as does the U.S. with its export control scheme.

The draft Export Control Law introduces a requirement to obtain licences from the Competent Authorities for carrying out controlled activities. Additionally, exporters may also be subject to recordkeeping and monopoly qualification requirements.

3. End-Use Controls

The Competent Authorities may request exporters to submit end-use certificates or documents issued by the importers or relevant agencies in the countries of import. The exporters are also under a positive obligation to review the end-users and uses of the exported items, and to immediately report to the Competent Authorities of any change in end-users or uses. The Competent Authorities may conduct on-site verifications on the end-users and end uses.

4. Enforcement and Penalties

The draft grants the Competent Authorities significant investigative authority to enter the business premises of parties under investigation for violations of the Export Control Law, conduct interviews with staff and other persons of interest, access and copy relevant documents, inspect shipments as well as seizure of assets and bank account of exporters found to be in violation.

Penalties upon Violation of the Export Control Law

1. An administrative penalty of up to 10 times the illegal business revenue or a fine of up to Rmb500,000 (US$73,660) could be imposed if the illegal business revenue is less than Rmb50,000 (US$7,366); and
2. Any illegal income could be subject to confiscation.

In addition, the draft law includes a provision for personal liability for those directly responsible for any violations that could include fines of up to Rmb300,000 (US$44,196). Finally, businesses also risk suspension or revocation of export privileges and licenses, being negatively marked in China's Enterprise Credit Management System and other non-financial penalties. More serious cases may even bear the risk of criminal charges. Finally, the draft text also incorporates measures to encourage compliance including internal compliance mechanisms, self-policing, and a voluntary self-disclosure provision.

What does all this mean?

In a May 2017 policy paper, MOFCOM noted that China is responsible for 25 percent of global manufacturing output and, anecdotally, more than 700 suppliers of Apple's iPhone in the Shenzhen area alone. Should China decide to exercise export control over content of Chinese origin, such manufacturing intellectual property could well provide China with significant leverage.

The ongoing U.S.-China trade dispute has been slowly brewing since before China's ascension to the World Trade Organization. The deficit in U.S. goods trade with China has long been a pressure point with succeeding US administrations. In recent years, that deficit has grown to unprecedented levels. In the most recent statistics from the U.S. Census Bureau, the trade imbalance in goods imported from China versus goods exported to China has grown by more than a third from 2016 to 2017, the most recent year for which complete statics are available. The 2018 interim statistics are on pace to far exceed even this large growth. For a president who was elected in part on his tough talk surrounding US trade relations with China, this is not a headline number President Donald Trump will be re-tweeting.

It is important to note that China is the largest trading partner of the United States and the U.S. is China's second-largest trading partner. Their relationship is therefore a high-stakes global issue. Under Trump, the U.S. has taken aggressive action to try and enforce what, in its view, should be a more level playing field with China. China, for its part, appears to be implementing a longer-term strategy that recognizes its competitive advantage in manufacturing, while building towards competing for control over the real value in the modern supply chain—the intellectual property.