The dangerous US-China "tit-for-tat" strategy that kills off global trade: Is Export Control next?

Why are we not paying attention to the real challenge facing us?

China Export Control Law!

From Brexit to USMCA, from BIS changes to OFAC sanctions, from Hong Kong to Huawei...trade conflicts and uncertainties keep global businesses on their toes. Yet the next big change affecting most of us goes hardly unnoticed: China enacting its first consolidated Export Control Law. The impact can be explosive - especially if China follows the "tit for tat" strategy of "equivalent retaliation".


Can you imagine what would happen if China announced its Export Controls would now also have an extraterritorial reach like U.S. Export Control Law?


Time to understand what is going on in China as regards export controls and to assess if and when we need to be truly worried.


Nobody should be surprised: Its already three years in the making

After a first draftin 2017 by the Ministry of Commerce (MOFCOM), the Standing Committee of the National People's Congress published the second draft of the Export Control Law or ECL.


If approved in this form the draft ECL would be China's first national collective legislation regulating export controls.


Analysing the law, it appears that it is, at least in part, to be designed to give China legal powers to counter US export control measures against China.


Many years of US-China Tensions

Ever since the Trump Administration took office, a Sino-US Trade War has been raging. US-China Section 301 Investigation and Tariffs and China's retaliatory have hurt global trade, US and Chinese businesses alike. It has been two years since the US-China Trade War began in July 2018, largely due to two main factors: the United States’ perception that trade between the United States and China is unequal, and that China has been participating in unfair intellectual property practices. As the trade war persists, United States exports have suffered, affecting both businesses and consumers: "The Trade War has an immense negative impact on American exports because tariffs increase the prices for specific exported goods, making them undesirable or difficult to sell in foreign nations. As prices for American goods increase, companies' profits begin to decrease", Wharton University writes in January 2020.


A China-Us Trade Deal makes things...WORSE?

A trade deal with China was not meant to cut duty rates and ease businesses burden on both sides like in traditional trade agreements. Instead, it was meant to get China under controls and make them buy more US product. A one-sided deal that simply could not work. Result? Forbes, at the beginning of June 2020 reported that: "China has not met its obligations under the deal as of April 1 data [...] No one in their right mind can say that Trump can force China to buy soybeans and pork meat, airplanes and LNG when its economy was crushed in a pandemic. China does need to eat. China does need fuel, especially cheap fuel. It’s getting it elsewhere".


Don't mention Huawei

"The recent Huawei Entity Listing alongside the Temporary General License Removal has brought the conflict into the area of export controls. The addition of Huawei and its affiliates to the Entity List imposed a license requirement on the listed entities supplemental to those found elsewhere in the Export Administration Regulations (EAR).The impact is significant: Suppliers now need to conduct due diligence to determine if the items will or are intended to be exported to Huawei or one of its listed affiliates and if so, seek a licence from BIS, which they are unlikely to get unless there is a specific reason.


Summer of Horror?

Then, in June 2020, things got more serious: "The Bureau of Industry and Security (BIS) today announced plans to protect U.S. national security by restricting Huawei’s ability to use U.S. technology and software to design and manufacture its semiconductors abroad. This announcement cuts off Huawei’s efforts to undermine U.S. export controls"


What followed? BIS amended its longstanding foreign-produced direct product rule and the Entity List to narrowly and strategically target Huawei’s acquisition of semiconductors that are the direct product of certain U.S. software and technology.


Supplying essential materials to Huawei? Forget about it

BIS essentially made the components and the intelligence that make the Huawei products licensable. Semiconductor designs, when produced by Huawei and its affiliates on the Entity List (e.g., HiSilicon), that are the direct product of certain U.S. Commerce Control List (CCL) software and technology; and Items, such as chipsets, when produced from the design specifications of Huawei or an affiliate on the Entity List that are the direct product of certain CCL semiconductor manufacturing equipment located outside the United States - they all need an export licence and most likely, won't get it.


More provocation against Beijing - deeper escalation of tensions!


Please don't tell me you will mention HK next

Of course! In July 2020, the U.S. Government announced it was ending controlled defense exports to Hong Kong. The US argued that as Beijing moved forward with passing the national security law, the United States needed to end exports of U.S.-origin defense equipment to HK. And it took the steps towards imposing the same restrictions on U.S. defense and dual-use technologies to Hong Kong as it does for China: "We can no longer distinguish between the export of controlled items to Hong Kong or to mainland China", the US said. The system of “One Country, Two Systems" is over. The United States says it "is reviewing other authorities and will take additional measures to reflect the reality on the ground in Hong Kong”. So there may be more to come.


The Chinese Export Control Law as a Retaliation Measure against US hostilities?

How will China react? Put in this context, do you see why, suddenly, the Export Control Law of China is so relevant and potentially explosive for US, EU and global Business?


As I mentioned, on 28 December 2019, the National People’s Congress (“NPC”), the highest legislative body in China, published a new draft of the Export Control Law (“ECL”) to solicit public comment. The draft ECL has passed its first review by the NPC. Due to the coronavirus outbreak, the next session of the NPC happened only recently, however, did not focus on export controls. Formally, we are still on the '2nd draft' is not a final draft. Some observers, however, have begun advising that companies could rely on the current draft to prepare for the new export control regime in China.


The new law could pass anytime. Are we ready for it?


The time that we analysed the details that we know already has come.


What to look at?


Here are some of areas that businesses may wish to look at more closely:

  • The new law: the WHAT? WHO? WHEN? HOW?

  • Definitions (Export, Re-Export, Deemed Export, EBO, De Minimis etc)

  • List-based Controls (What do they look like - China is not part of the Wassenaar Arrangement)

  • Restricted Parties and Additional Controls (How to deal with Sanctions, RPS and temporary controls)

  • Sanctions & Compliance (Fines, scope and personal liability + wide-ranging powers)

Live China Export Control Webinar


We explore all of these topics in our Live 45 min Webinar Recording, which you can instantly access and download here.

WATCH A PREVIEW

PLEASE NOTE


What businesses can do

It remains to be seen whether the ECL will be passed in its current draft, and how these control measures will be landed in the implementing regulations and guidelines.

After watching the webinar, I hope you agree with me that doing business in China and out of China, it is now more important and ever to consider the potential application of the Chinese ECL to your business.


As we detailed in the webinar (free preview), the compliance obligations not only include to prove end-use and end-user, but also the requirement of license applications for the items unlisted but controlled, and the reporting obligations for any awareness of the changes in end-use or end-users.


I explained in the webinar (free preview) that not only exporters or re-exporters, but also providers of intermediary services, such as banks, freight forwarders, e-commerce platforms, etc., could be affected by the law. We discussed the liabilities for facilitating violations highlight the risks for companies who provide services to international trading or exporting business.


It shall raise the concerns of many international logistic companies, which perform an essential part in the global supply chain to deliver the products made in China to every corner in the world.


It is also emphasized to conduct a third-party compliance investigation into the counterparties, to prevent the risk of knowingly facilitating illegal transactions or trading with the parties in the blacklist, as mentioned in the webinar (free preview), too.


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