Why is China Introducing New Export Controls?

• Update: The Standing Committee of the National People’s Congress will deliberate on China’s new export control law at a session starting Tuesday, October 13, 2020, with the goal of safeguarding national security interests and could ban Chinese suppliers from doing business with specific foreign companies. This law is expected to be enacted next year. Details are awaited on what will be the scope of these restrictions, what constitutes a threat to national security, guidance for firms to establish internal compliance mechanisms, and what happens in case export controls are violated.

On August 28, 2020, the Ministry of Commerce of the People’s Republic of China (MOFCOM) and the Ministry of Science and Technology jointly issued the Announcement No. 38 (2020) (“Announcement”) amending the Catalogue of Technologies Prohibited or Restricted from Export (“Catalogue”).

In total, 53 items have been deleted, added, or revised – with new restrictions imposed on the export of 23 cutting edge technologies, which are either based on China’s indigenous intellectual property or are data-based personalized products that have become sensitive due to geopolitical assessment or foreign government scrutiny.

The timing of the proposed export controls is interesting as they come at the heels of deteriorating relations with the US (exemplified by the pressure on TikTok owner, ByteDance, to sell its US operations). Geopolitical tensions have also tightened scrutiny on China’s overall tech market access.

How are China’s technology exports regulated?

To standardize the administration of technology exports, promote scientific and technological progress, facilitate foreign economic and technological cooperation, and maintain the economic security of the state – China has put in place a policy of catalogue management on technology exports since 1998.

By technology exports, China’s government refers to the transfer of technology from the People’s Republic of China to overseas through trade, investment, or economic and technical cooperation. The specific format of such transfers could include patent assignment, transfer of patent application rights, patent licensing, transfer of technology secrets, technical services, and other forms of technology transfer.

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According to MOFCOM statistics, in 2013, the value of China’s technology export contracts was US$20 billion, less than half the value of its technology import contracts. In 2019, the contract value of technology exports rose to US$32.1 billion, which saw China’s exports closing the gap with the contract value of its technology imports.

More specifically, in 2019, China exported nearly RMB 2.96 trillion (US$434 billion) worth of merchandise to the European Union – immediately followed by the United States – counting technologies among its top export goods, besides clothes and accessories. In fact, the export of data processing machines and related components alone were worth RMB 1.14 trillion (US$167 billion). This is no longer surprising as China’s sophisticated supply chain has enabled it to become a high-tech export giant, with computers, power devices, broadcasting technology, telephones, and transport equipment dominating Chinese exports. (US$1=RMB 6.82).

In this respect, the Regulations on Technology Import and Export Administration of the People’s Republic of China (“Regulation” revised in 2019) provide that the competent foreign trade department under the State Council shall, in conjunction with other relevant departments, formulate, regulate, and publish catalogues of technologies the import and export of which is prohibited or restricted.

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Accordingly, all technology exports, whether through trade or investment or other way, should strictly abide by the Regulation. Hence, technologies listed under the Catalogue as prohibited (those that include materials containing state secrets, cultural relics and antiques, and endangered species) shall not be exported.

On the other hand, technologies listed in the restricted category will be subject to licensing administration – an approval must be obtained from relevant commerce departments in charge at the provincial level prior to making substantive negotiation with the foreign party and signing any contracts for the technology export.

Update: China’s new export control law expected in 2021

China appears to be formalizing a new export control law that will implement export curbs to protect specific products, technologies, and services and require extra documentation from Chinese companies that export items on this list, according to reporting from Nikkei Asia.

Chinese companies seeking permission to export the restricted items should note that Chinese authorities will assess the intended use of the products and services as well as make a judgment based on which foreign companies are involved.

The Chinese export control legislation follows recent US legislative curbs on doing business with or exports favoring certain Chinese firms due to concerns over national security, such as the use of technology exports for military use.

Details are awaited on the new export law, including clarity on the scope of the export restrictions, what constitutes a threat to national security, guidance for firms to establish internal compliance mechanisms, and any punitive consequences or criminal liability in case export controls are violated.

The Standing Committee of the National People’s Congress will deliberate on the new export control law at a session starting this week. This law is expected to be enacted as soon as next year.

Amendments to China’s ‘Catalogue of Technologies Prohibited or Restricted from Export’

• China has removed four technical items that are prohibited from export, including microbial fertilizer technology, caffeine production technology, riboflavin production technology, and vitamin fermentation technology.
• Removed five technical items that are restricted from export, including Newcastle disease vaccine technology, natural medicine production technology, functional polymer material preparation and processing technology, chemical synthesis and semi-synthetic medicine production technology, and information security firewall software technology.
• Added 23 new technical items whose exports will be restricted, including artificial breeding technology of agricultural wild plants, cashmere goat breeding and breeding technology, space material production technology, large-scale high-speed wind tunnel design and construction technology, aerospace bearing technology, and laser technology, among others.
• Modified the control points and technical parameters of 21 technical items involving crop breeding technology, aquatic germplasm breeding technology, chemical raw material production technology, biological pesticide production technology, spacecraft measurement and control technology, space data transmission technology, map mapping technology, information processing technology, vacuum technology, among other fields.

Application of the changes

Since China’s joining the World Trade Organization (WTO) in 2001, a lot of reforms have been implemented to adjust the country’s customs regulatory system to match international standards. Today, given its current heavyweight position as a top exporter of technologies – the latest restrictions and changes to China’s export control policy could matter greatly to foreign countries.

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Indeed while the export liberalization of certain items previously listed as prohibited will certainly benefit foreign stakeholders, the newly added restrictions are another matter. But here the new changes must be considered in the international context, paying special attention to which technology exports will now be controlled and how that could affect future trade, investment, and/or economic and technical cooperation.

For instance, among the newly restricted items, the computer service industry has been subject to substantial changes. Included among the stipulated items that will now require licensing are some of the newest and most important technologies, such as information processing technology (which include speech synthesis technology, artificial intelligence interactive interface technology, voice evaluation technology, intelligent scoring technology, personalized information based on data analysis push service technology) and cryptographic security technology (which include cryptographic chip design and implementation technology and quantum cryptography technology). Other items – now restricted – are high-performance detection technology, information defense, and countermeasures technologies.

The imposed restrictions, as previously mentioned, essentially means that the identified technologies cannot be exported from China without a license. In other words, the PRC government’s approval for the export of such items, and therefore the issuance of the relevant license, is a precondition for the effectiveness of the contract for technologies export.

The licensing procedure

The licensing procedure is articulated mainly into two phases that can be summarized as follows:

Phase 1

• Filing: The applicant shall file the application before the competent foreign trade department under the State Council.
• Examination: The competent foreign trade department in conjunction with the science and technology administrative department under the State Council shall examine the application and, within 30 working days from the date of receipt of the application shall approve or disapprove it.
• Issuance of a letter of intent: In case of approval, the competent foreign trade department under the State Council shall issue a letter of intent for licensing the technology export.
• Negotiation and signature of the contract: After obtaining the letter of intent for licensing the technology export, the applicant may begin substantive negotiation and conclude a contract for the technology export.

Phase 2

• Application for the license for technology export: The applicant shall submit to the competent foreign trade department under the State Council the letter of intent previously obtained, a copy of the technology export contract, a list of technical information relating to the export, and any regulatory document certifying the legal status of the two parties to the contract.
• Examination: The competent foreign trade department under the State Council examines the authenticity of the technology export contract and decides, within 15 working days from the date of receipt of the documents provided, on approval or disapproval of the technology export.
• License issuance: In case of approval, the competent foreign trade department under the State Council issues the technology export license.

Based on the current legal framework, foreign companies should be prudent in dealing with Chinese companies engaging in activities related to restricted technologies – not only when it comes to purchasing tech products, but also, for example, when they buy technologies that might be rendered (almost) useless, if not supported by the transfer of a specific know-how, patent rights, or technical services.

Timing behind China’s tech export controls

China has amended the Catalogue several times in the past, though the last time it did so was back in 2008. With the rapid development of science and technology and China’s own continuous improvement and rising industrial competitiveness, it was felt important that China adjust its Catalogue in keeping with international practice.

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The newest changes, however, come at a different time. With the ratcheting up of US-China trade tensions, the amendments to the Catalogue is believed to be part of China’s fight back in response to the US blocking its access to sensitive technology imports as well as introducing barriers for China to access its tech market.

The timing of the Announcement itself may be pertinent – just two weeks prior, on August 14, the US President Donald Trump gave the Chinese multinational internet technology giant, ByteDance, 90 days to divest of its control of the short-format video sharing social media giant, TikTok, in the American market or risk a ban. That put the deadline at September 20. While this was initially a matter between the US entity and Washington DC, Beijing now appears to be invested and is expected to have a say on how the sale will be managed; in light of US-China back and forth, any technology controversy now gets framed in terms of national interest and intellectual property rights.

Just today alone, word got out that ByteDance was considering a sale to Oracle Corporation to manage its US operations of TikTok and that Microsoft, a leading contender up till now, was effectively out of the picture – only to be followed up with media reports that China’s latest tech export rules “could block the transfer or sale of ByteDance’s artificial intelligence technologies”. As of writing this article, ByteDance had not commented on the market rumors. However, it was reported Sunday by the Washington Post that ByteDance had made it clear to Microsoft that its proprietary algorithm, which powers TikTok, would not be for sale. What is for sale is thus only TikTok’s American operations.

The bottom line here is that foreign companies now have to carefully evaluate any operation or investment that involves the restricted technologies as identified by China and be aware of the risk that the Chinese government could have legal grounds to intervene.

This article was originally published September 14, 2020 and was updated on October 12, 2020 to reflect new developments.

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