New Law, New Opportunities
China's new Export Control Law came into effect at the end of last year. In this feature, legal experts talk about how their clients have been impacted so far, and also the government's next steps for implementing regulations, as well as updated control lists. They additionally advise companies of short-term and long-term compliance measures to be taken.
China's efforts in building an export control regime date back to the 1990s. However, the new Export Control Law (ECL), which came into force on Dec, 1, 2020, has brought with it substantial regulatory changes. The new law also calls for the enterprises in China to promptly adopt the new concepts of trade compliance, and establish appropriate compliance systems.
”It is important for both Chinese and foreign trading enterprises to gain a sufficient understanding of the changes the new ECL brought to and its implications on the export activities. Further, enterprises may wish to assess the risks of how their business operations are subject to export control regulations.”
—Cheng Yong, Hylands Law Firm
Speaking of the significance of the new ECL, Cheng Yong, a partner at Hylands Law Firm, tells ALB: "Before the ECL came into effect, China had already formulated administrative regulations governing export control of dual-use items, military products, nuclear, etc. The ECL, as a superordinate law, establishes a uniform regulatory regime and legal framework, which is nowadays built on the scattered provisions across various laws and administrative regulations.”
“After the Export Control Law is enforced, this framework has undergone significant changes to—controlled items, regulated targets, covered activities and control steps.”
—Jia Xiaoning, AllBright Law Offices
Jia Xiaoning, a senior partner at AllBright Law Offices, gives a detailed account of the changes in China's export control regime before and after the enactment of the new law. According to Jia, since 1995, China has established a legal framework for export controls built on six administrative regulations covering nuclear, biological materials, chemicals, missiles, military products, and other items. And “after the ECL is enforced, this framework has undergone significant changes to controlled items, regulated targets, covered activities and control steps.”
Jia further adds: "First, the new law extends the scope of controlled items to cover technical materials and other data related to controlled items in addition to goods, technology and services; second, in terms of regulated persons, the new law applies to a broad scope of export activities, including the transfer of controlled items from the territory of China to overseas, as well as the provision of controlled items by Chinese citizens, legal entities or unincorporated organizations to foreign organizations and individuals."
As for activities and steps, that fall under the law Jia states that the new law "also applies to deemed exports, transit, trans-shipment, through transport and re-exports (of controlled items).” Besides, the new law also contains several special provisions, including granting facilitation measures to enterprises that have established a “well-functioning” internal export control compliance system, issuing a restricted list targeting importers and end-users, and taking reciprocal measures against the country or region that abuses export control measures to endanger the national security and national interests of China.
Given that some time has elapsed since China's new Export Control Law was enacted, what are clients’ key concerns?
Cheng tells ALB that clients who came to inquire about the ECL can be categorized into two groups: "Group A clients just started to gain some knowledge about the export control regulations, and they are primarily concerned about the key clauses under the new ECL law, including items subject to control, controlled list, licensing system and the competent supervising authorities, among other things. Group B clients used to engage in trading activities involving export control, and they are more concerned about the specific procedural issues.”
“Export control and trade compliance will become two areas to be soon highlighted among lawyers practicing in foreign-related matters.”
—Ni Jianlin, Dentons China
Ni Jianlin, a senior partner at Dentons Shanghai office who concurrently serves as legal counsel to the Shanghai Municipal Commission of Commerce, tells ALB that the Commission "did receive inquiries, but in rather an informal manner, regarding export controls" and that up to now, Dentons, at the law firm level, have not been consulted as to investigations arising from violations of China's export control regulations. According to him, he has so far "not been able to detect any public reporting of companies being investigated for violating China's export control regulations.”
According to Ni, this is because the absence of supporting regulations makes the ECL “not very implementable,” as it is still newly enacted. Nonetheless, as a rule of thumb, Ni believes that going forward, clients will focus on three areas. The first will be identification of controlled items, “that is, which products are to be subject to export control. For now, China has a variety of controlled lists, which are quite complicated. In the days to come, the government may elaborate on the break-down of lists, or align its practices with those of the U.S. to launch a unified catalog.”
The second area may be the level of difficulty in obtaining export licenses "in the circumstances of being included in the controlled list, it remains unclear that if the enterprise is still qualified for an export license, what documents are required for applying for such a license, and what formalities shall be gone through for that purpose.” The third will be penalties possibly to be imposed against violations of export control regulations.
According to Reuters, after the ECL came into effect, a spokesman for the Chinese Ministry of Commerce stated: "China is actively working on the detailed implementing regulations relating to the ECL, and is endeavoring to finalize the list of commodities under the ECL in due course.” What are legal experts’ predictions as to the contents of the supporting regulations and the list?
As Cheng puts it, "for now, the ECL only sets out top-level provisions for some aspects, and the detailed supporting or implementing rules and regulations are expected to provide more clarifications on (1) definitions of some terms, such as “deemed exports” and “re-exports”; and (2) detailed procedures and measures involved, for instance, how reciprocal measures are implemented in practice, and how enterprises could apply for being removed from the controlled list.”
Ni further points out that whatever kind of supporting rules should aim at "making the ECL more implementable.” According to him, one may find clues in the law itself on the areas in which further clarifications are to follow. For example, Article 5 sets forth the upcoming release of industry-oriented export control guidance; Article 8 provides for the formulation of export control policies, as well as the list of controlled destination countries and regions; Article 9 provides for the establishment and adjustment of a controlled list of items that would be subject to export controls, as well as temporary control list. Article 14 provides for general licenses and other facilitation measures; Article 17 provides for the establishment of a controlled list for foreign importers and end-users; the first paragraph of Article 18 provides for the establishment of a controlled list for importers and end-users.
In the past few years, Ni and his team have advised clients on U.S. export control laws. In his opinion, it is worth learning from the U.S. experience. On the one hand, the U.S. has built a comparatively well-established export control regime; on the other hand, under the Commerce Control List formulated by the U.S. Department of Commerce, a unified Export Control Classification Number mechanism is used to identify controlled items, which makes the queries easy and convenient. It also established a Commerce Country Chart to decide whether the export destination countries are subject to embargo sanctions. Also, it introduces the Entity List mechanism to identify trading counterparties and end-uses subject to export control.
However, Ni admits that the formulation of supporting measures is also subject to factors other than legal ones. In his opinion, at the core of export controls of leading powers is the technology battle, that is, to restrict the export of advanced technology, but currently, China is still a technology-importing country. However, Ni points out that it’s noteworthy that as Chinese internet companies are growing rapidly overseas and as the new law specifically tightens the control over data, it would be interesting to observe how will the new law impact Chinese internet titans.
Meanwhile, in Jia's view, for now as the supporting regulations are pending formulated and duties /responsibilities of the competent authorities are pending defined, enterprises are encouraged to “fully enhance the level of their compliance with export control regulations during this transition period.”
Talking about how enterprises ensure regulatory compliance under the new ECL in the short and long run, Cheng firstly advises enterprises to enhance compliance awareness: ”In a short run, it is important for both Chinese and foreign trading enterprises to gain a sufficient understanding of the changes the new ECL brought to and its implications on the export activities, closely watch the restricted list and controlled list to be released, as well as the supporting rules, regulations and standards to be soon promulgated. Further, enterprises may wish to assess the risks of how their business operations are subject to export control regulations.”
As to how risk assessment is conducted, Ni enumerates the dimensions of such assessment: “Enterprises may conduct self-checks from the dimensions of regulated persons, covered activities, controlled items, destination countries and end-uses to see if it is subject to export controls." According to Ni, enterprises having doubts in the process of self-checks may, in accordance with paragraph 4 Article 12 of the new ECL, actively consult the commerce and customs authorities.
Jia reminds companies that, in the process of self-checks, they should pay particular attention to the Temporary Control List and unlisted items, in addition to the Controlled List. Temporary Control List refers to the list temporarily published by the state "for the protection of national security,” while the unlisted items, although not included in any list, may “1) endanger national security and interests, 2) be used to design, develop, produce, use, transport weapons of mass destruction, or 3) be used for terrorism purposes,” and is therefore still subject to export controls.
In the long run, Cheng believes that well-established policies and procedures are fundamental to risk aversion. He points out that an enterprise should "develop effective and well-functioning internal export compliance mechanisms, including regular assessment of export risks, review of export items and trading counterparties to identify if they are subject to export controls,” and "establish a complete compliance regime for operational activities involving export control, which covers applying for an export license, retaining relevant documents for purpose of investigations (if any), and establishing a tracking system for the review of trading counterparties.”
Speaking of how lawyers practicing in this area could better serve their clients, Ni says that those Chinese lawyers who have advised clients on issues relating to the U.S. export control law will have better competitive advantages. He is also optimistic about the outlook of China's export control regime and the legal service offerings in this field. According to Ni, “The role that Chinese lawyers can play in advising on the U.S. law is, after all, limited. As China builds a more unified and well-established export control regime, the prospect for Chinese lawyers will then be quite promising."
He shares his own experience: "My team used to concentrate efforts on trade remedies, but now we are gaining a foothold in export control and trade compliance, two areas I believe to be soon highlighted among lawyers practicing in foreign-related matters.”
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