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China’s new export control and sanctions law: Should the world be afraid?

by Hartmut Henninger and Patrick Heid, law firm Graf von Westphalen

The basic concept of China’s Export Control Law (ECL) corresponds to the EU Dual-Use Regulation: The export of goods listed as critical requires a license. This list of goods includes dual-use goods, military goods, nuclear goods, and those concerning China’s national security and national interests.

The term goods cover goods and technology, but services as well. The exporter receives authorization only if he is deemed reliable and submits a declaration by the third-country recipient on the end-user and the end-use of the goods.

At present, however, all this is largely a gray theory. There is not yet a consolidated list of goods. And authorities have not yet received instructions on how to implement these regulations. Until they do, companies in China will have to continue to comply with the separated export regulations that have been in place since the 1990s in some cases. However, companies should already adapt their respective export control programs – MOFCOM has already provided detailed guidelines for this purpose. In particular, export control clauses in contracts should be amended to not create vulnerability.

An explicit provision on re-export control was removed from the ECL at the last moment. China does reserve the right in some provisions of the ECL to take measures with extraterritorial effect if it sees its interests at risk. For companies outside China, however, the decisive factor is whether they have to operate a structured re-export control in the EU concerning listed components from China. This is currently not (yet) the case, and they currently only have to comply with any commitments agreed upon in end-use declarations.

Unreliable Entity List

The concept of an Unreliable Entity List is known from the USA. If a foreign company is placed on this list, Chinese companies may only engage in business activities with it when certain conditions are met. Companies can be put on this list if they discriminate or harm Chinese companies due to measures taken by their countries, or endanger China’s interests.

If companies restrict their business with these and many other Chinese companies on the US Entity List, they run the risk of being placed on the Unreliable Entity List themselves. This also affects EU companies if they do not supply listed US goods to Chinese companies in order not to violate US (re-)export controls.

Blocking Rules and Anti-Sanctions Law (ASL)

Blocking Rules are aimed at companies in China. China prohibits these countries to comply with regulations with extraterritorial features issued by third countries. As with the EU Blocking Rules, such third-country regulations must be explicitly identified. These blocking rules may be particularly relevant for Chinese subsidiaries of EU companies that (have to) comply with EU and US export control and sanctions law due to cross-group export control in China.

The ASL corresponds to restrictive measures of EU sanctions lists. The assets of listed persons or entities in China may be frozen and business dealings prohibited. In addition, individuals can be denied entry. The ASL is directly aimed at individuals and organizations that were or are involved in the creation of sanctions against China, i.e. politicians, political institutions, and NGOs. It is also possible, however, that companies could be sanctioned if, as part of their ESG policy, they support initiatives that, from Chinese perception, affect internal concerns of the People’s Republic, above all, human rights.

Both instruments provide that if Chinese companies feel they have been treated unfairly by the practices of their business partners, they can hold them accountable in Chinese courts. This option gives companies considerable bargaining power. There is concern that this will be exercised in the future.

What can be done?

Companies in China should not hesitate to set up an internal export control program, as is common in the EU or the US if they meet the risk profile. Even if individual elements of the ECL are still unclear or implementation regulations are lacking, these mechanisms will take full effect sooner or later.

As in other areas of Chinese intervention administration, companies are well-advised to establish close contact with the authorities to personally identify any obligations. Second, caution should always be exercised if one’s conduct can be interpreted as discriminatory towards China or Chinese companies, especially if the conduct is motivated by EU or US sanctions regulations. Companies should then stop and consider how they can reconcile their obligations under EU, US, and Chinese sanctions regimes in light of the new rules. This will not always be easy and will not always succeed.

Finally, companies must bear in mind that their employees in China may feel personally threatened by possible sanctions and may find themselves in an irresolvable dilemma as a result of action taken in conjunction with EU and US regulations.

So far, the Chinese leadership has mainly revealed its toolbox. The legislative project was initially directed primarily against US President Trump and his trade wars. Since the change of administration in the US, while the tone has undoubtedly improved, the existing conflicts have not been resolved but rather deepened and multiplied. Unfortunately, these are not circumstances that allow a positive prognosis for the application of the laws and regulations described here. If it serves China’s interests, these instruments will be applied to instill fear in the world.

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