China’s export control law to become ‘key dynamic’ in US relations

SHANGHAI — China’s new export control law, which took effect Tuesday, aims to consolidate existing mechanisms for safeguarding the national interest in response to foreign trade pressure.

The law will strengthen Beijing’s control over the flow of goods, technology and services. Subject to broad interpretation under national security, it raises concerns over additional trade barriers even as Beijing seeks trade deals with other countries.

Passed by the Standing Committee of the National People’s Congress on Oct. 17, the law comes a year after the U.S. adopted export controls targeted at Chinese tech companies such as Huawei Technologies and ByteDance.

Military products, nuclear materials and items with dual uses in the civil and defense sectors are among the categories controlled under the law, which involves an extensive bureaucracy that cuts across departments under the State Council, or China’s cabinet, and the Central Military Commission.

The upshot of the law is expansive as it involves exporters, intermediary service providers such as freight forwarders, as well as buyers of such goods abroad.

End users are also subject to the law, as is any transaction that re-exports any of the controlled items. Re-exports face potential blacklisting and fines of up to 20 times the amount of the illegal contract, or 5 million yuan ($757,000).

While the government has yet to publish the list of controlled items, businesses are expected to need additional resources in order to meet the new requirements.

“At present the EC Law is very vague and lacks the precision required for implementability beyond the basic framework outlined,” according to analysts at Mondaq, a U.K. consultancy firm.

The law has stirred market uncertainty even before its implementation.

Prices of rare-earth metals, the raw materials used in production of electronic gadgets including smartphones, shot up in November in anticipation of their inclusion under the controlled items. Already restricted export items with China controlling more than 80% of production, some products such as neodymium oxide surged over 37% in November, according to the Global Times.

At least one company director has been arrested for allegedly violating the import and export law. Zhang Fangliang, founder and chairman of Hong Kong-listed GenScript Biotech, a life sciences company providing antibody cells to global pharmaceutical manufacturers, was detained on Nov. 20 along with two other employees that handled import and export activities.

While no official charge has been made against the Nanjing-based company boss, several local news outlets, including The Paper, reported that the case involved blood and genetic samples prohibited under export control law.

Though comprehensive in nature, the export control law is not China’s first as Beijing has long had measures restricting exports of sensitive products, Nathan Bush, a partner at law firm DLA Piper in Singapore, told Nikkei Asia.

Beijing intervened in the sale of ByteDance’s mobile app Tiktok in the U.S. a few months back, effectively labeling the technology that powered the social media platform as a restricted item.

“One critical development in the new export control law is Beijing’s answer to Washington’s ‘Entity List,'” said Bush, referring to sanctions against Chinese tech companies in the name of national security.

With Joe Biden set to take the reins of the U.S. presidency, Bush expects the use of export controls as a form of economic sanction to remain a “key dynamic” of Sino-U.S. relations for the foreseeable future.

Not only the U.S. but Beijing can likewise restrict exports to any foreign party it deems to have acted contrary to Chinese national interests, he added.

This appears to send mixed signals to trading partners, in particular signatories to the recently concluded Regional Comprehensive Economic Partnership, of which China is a member.

As the law requires businesses to apply for licenses for unlisted items that may be sensitive to national security, it could give Beijing extra leverage in areas such as technology transfers.

“The threat of blacklisting under the law may deter foreign companies from commercial activities or public relations positions inimical to Chinese government policies,” said Bush.

With China now on a par with the U.S. in terms of sanctions tools, non-U.S. companies may find themselves in a bind, Bush said. Such groups “risk steep U.S. penalties for continuing to do business with blacklisted Chinese companies, or risk Beijing’s wrath by cutting them off.”