Issues needing attention within Export Control Law

After three deliberations, the Export Control Law was passed by the Standing Committee of the National People’s Congress on 17 October, and enters into force on 1 December 2020. This article focuses on the subjects and acts regulated by the Export Control Law, and reminds enterprises to pay attention certain issues.

Double supervision with Regulations on the Administration of Technology Import and Export. Article 2 of the Export Control Law provides that prohibitive or restrictive measures shall be taken for the transfer of controlled items from China to overseas, and “items” include specific technologies. On 28 August, the Ministry of Commerce and the Ministry of Science and Technology adjusted and released the new Catalogue of Technologies Prohibited and Restricted from Export, adding two new nuclear-related technologies that also fall under the scope of nuclear items defined in the Export Control Law.

The announcement in the catalogue states that the dual-use items shall be controlled by the Export Control Law, but the above-mentioned regulations provide that the export of nuclear technology and nuclear dual-use related technologies should be subject to the relevant administrative regulations. In practice, with the development of science and technology, and industrial upgrading, technology nesting is inevitable, and characterisation and classification of technology become extremely complicated. Further measures are required on how to classify and manage exports effectively based on technical attributes, and avoid unnecessary burden brought by double supervision to export operators.

How to identify the transfer act in foreign-invested enterprises and overseas Chinese-funded enterprises. Article 2 of the Export Control Law provides that Chinese citizens, legal persons and unincorporated organisations (Chinese entities) are prohibited or restricted from providing controlled items to foreign organisations and individuals (foreign entities), which includes Chinese entities providing controlled items to foreign entities within and outside China, that is, the commonly referred to “deemed export”.

In China, the recognition of the nationality of legal persons is based on the place of registration. Therefore, the transfer of items between foreign-invested enterprises as Chinese legal persons and Chinese entities should not be regarded as a regulated act under the Export Control Law. However, there may be different understandings on how to characterise the transfer of items from a foreign-invested enterprise or its employees with Chinese nationality to foreign citizens in the enterprise.

Similarly, if an overseas Chinese-funded enterprise is a legal person in the country under the laws of the place of registration, transfer of items to it shall be supervised. However, considering that the items also include technologies and services, whether its employees with Chinese nationality provide services to the enterprise, or transfer items to employees with foreign nationalities in the enterprise, needs supervision and may also lead to disputes. In addition, if an overseas Chinese-funded enterprise is identified as a Chinese enterprise under the law of the place of registration, how should a transfer to or from it be identified?

Qualification for export operators engaged in the export of controlled items. Article 11 of the Export Control Law provides that export operators engaged in the export of controlled items are required to obtain the qualification for export operation of related controlled items. What is regulated by the Export Control Law is not limited to the transfer of technology abroad in the form of “trade, investment, or economic and technical co-operation” under the above-mentioned regulations, but also includes the disclosure of technology and the transfer of items in non-economic activities.

For transfer and disclosure in non-economic activities, we should pay attention to whether they constitute the export of items requiring qualification, as mentioned in this article, and which need to be controlled. In addition, except for the military export monopoly system provided in article 23, the current regulations on the export monopoly of dual-use items and nuclear items are rather vague. Based on this, the specific identification and implementation scale of “not obtaining the qualification for export operation”, or “revoking the qualification for export operation” in chapter IV: Legal liability, is still unclear.

Definition of re-export. Article 45 of the Export Control Law provides that the re-export and transit, transshipment and through shipment of controlled items shall be carried out in accordance with the relevant provisions of the Export Control Law, but the definition of re-export is not clear. In the previous draft for comment, it was provided that controlled items or foreign products containing controlled items of the People’s Republic of China, and with a certain value exported from overseas to other countries (regions), should be subject to this law, and then this provision was deleted because there were objections that it constituted improper extraterritorial jurisdiction.

In the second review draft, re-export and transit, transshipment and through shipment are incorporated in article 45. The authors’ concerns are: (1) whether re-export is applicable to foreign products containing a certain proportion of controlled items of China; and (2) since the items controlled by the Export Control Law are not limited to those of Chinese origin, whether there are origin requirements for the controlled items under “re-export” and “transit, transshipment and through shipment”, and how it is similar to, and different from, the re-export defined in the US Export Administration Regulations.

Whether the principle of universal coverage is applicable to items under ‘transit, transshipment and through shipment’ and re-export. The control list and temporary control basically determine the implementation scope of export licensing and other control measures. However, according to article 12, for the export of items other than those on the control list, or subject to temporary control under certain circumstances, the export operator shall apply for a licence to the State Export Control Administrative Departments, i.e., principle of universal coverage is applicable.

Article 45 provides for the re-export and “transit, transshipment and through shipment” of controlled items, but does not extend the obligations of export operators to the extent required by the principle of universal coverage. However, from the original intent of legislators, this principle should be equally applicable to “transit, transshipment and through shipment” and re-export, as provided in article 45.

As there are dozens of regulations and rules related to export control, relevant enterprises should attach great importance to how the Export Control Law will be harmonised with these existing regulations and rules.

Chen Yuxuan and Li Mingtao are partners at Yuanhe Partners