On December 3, China's Ministry of Commerce issued a public notice announcing strict export controls on gallium, germanium, antimony, superhard materials, graphite and other related dual-use products to the United States.
Various Western media outlets generally viewed this decision as a countermeasure to U.S. export control practices.
The public announcement also included this statement: "Organizations and individuals from any country or region that violate relevant regulations will be held accountable in accordance with the law."
A Bloomberg report on December 6 said that China has already begun to extend the aforementioned export controls to companies inside and outside China and to include Chinese products or products containing Chinese components in the scope of the sanctions. This move marks a precedent for China to ban companies from other countries from selling products to the United States for the first time.
China is gradually strengthening its countermeasures against US sanctions and trade controls, and is doing so with three measures: the "Unreliable Entity List Provisions" and the "Export Control Act," enacted in 2020, and the "Anti-Foreign Sanctions Act," introduced in 2021.
January 31, 2020 On September 9, 2020, the Ministry of Commerce (MOFCOM) of the People’s Republic of China (PRC or China) released Order No. 4 of 2020, entitled Provisions on the Unreliable Entity List (Provisions). The Unreliable Entity List is a list-based countersanction that allows the Chinese government to impose punitive measures against foreign entities, including companies, organizations, or individuals. Under article 2 of the Provisions, foreign entities may be added to the Unreliable Entity List and have measures levied against them for conduct in international economic and trade activities that:
The prohibited conduct is broadly described, which provides the Chinese government with flexibility in the application of the Provisions. Listing ProcedureUnder the Provisions, the Chinese government will establish a “working mechanism” composed of various government agencies to implement the Provisions and administer the Unreliable Entity List, with an office in MOFCOM. The working mechanism will make decisions regarding whether to conduct investigations and place foreign entities on the Unreliable Entity List. The working mechanism may directly place a foreign entity on the Unreliable Entity List when the known facts regarding the entity’s conduct are clear. In addition, the working mechanism may provide the foreign entity with an opportunity to present a defense. The working mechanism shall consider the following factors when determining whether to list a foreign entity:
If the working mechanism decides to list a foreign entity, it shall make a public announcement that will also describe the risks of doing business with that foreign entity. Authorized Punitive MeasuresThe Provisions provide for various punitive measures to be levied against listed foreign entities, including:
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China’s Export Control Law is the first comprehensive export control legislation put out by Beijing. Starting December 1, 2020, it will regulate the export of sensitive materials and technologies from China to overseas, obliging both, Chinese exporters and foreign customers, to carefully review their compliance to Beijing’s export control policy or be liable to get penalized. China’s Export Control Law (“ECL”), which comes into effect December 1, this year, will tighten up the country’s export’s supervision regime through strict monitoring and imposition of penalties. The ECL includes five chapters covering general provisions, control policies, control lists and control measures, regulations, legal liabilities, and supplementary provisions – with a total of 49 articles. The ECL also extends Chinese jurisdiction even beyond the national territory, by providing penalties and obligations binding on importers, end-users, and, more generally, by subjecting organizations and individuals located outside of the territory of the People’s Republic of China to its export control provisions. On October 17, 2020, the National People’s Congress Standing Committee passed the ECL to unify the pre-existing legal framework composed of several regulations, with the aim of fulfilling international obligations, safeguarding national security and national interests, and enhancing export control by introducing restrictions on the export of specific items. What items are subject to China’s Export Control Law?Controlled itemsThe ECL applies to the so-called “controlled items” and to the technical information and data related to such items. More specifically, under the ECL – the notion of controlled items includes dual-use items, military items, nuclear items, technologies, services and items related to the maintenance of national security and national interests and to the performance of anti-proliferation, among others. Control lists and temporary controlsThe controlled items mentioned above should not be seen as an exhaustive list of the items covered under the ECL restrictions. Indeed, such measures shall also be applied to further items indicated under control lists, directories, and catalogues to be issued by the departments of the State Council and the Central Military Commission (“State Export Control Administrative Departments” or SECADs) from time to time. In addition, the SECADs shall also exercise temporary control over goods, technologies, and services not mentioned under the export control lists and shall enforce this control for a period of two years before determining whether or not to list such items on a control list. Unlisted itemsBeyond the controlled items mentioned above and the items subject to temporary controls, there is another category of items that are subject to ECL restrictions – those goods, technologies, or services that:
With reference to the export of these unlisted items, controlled items, and items subject to temporary control, the ECL provides that export operators shall apply to the SECADs for a license. The SECADs shall approve, or not, the export of the items based on their assessment of the following:
How are exports regulated under the ECL?The ECL provides that the State shall exercise export control over the export of the above-mentioned items, meaning that the State shall apply prohibitive or restrictive measures on transfers of controlled items from China to overseas, and on provisions of controlled items by any citizen or incorporated or non-incorporated organization of the People’s Republic of China to any foreign organization or individual. Find Business Support Gain intelligence about diversifying your Asia supply chain ⟶ Furthermore, under the ECL, the State will also control the transit, trans-shipment through transportation, re-export of controlled items, or the export of controlled items from bonded areas, export processing zones, other areas subject to special customs supervision zones, and regulated bonded places, such as regulated export warehouses and bonded logistics centers. Who is affected by the ECL provisions?The ECL imposes obligations not only on exporters located in China, but also on end-users and importers who have specific duties under this law and may be subject to heavy restrictions. End-users and end-useWhen applying for the license, the export operators shall submit documents certifying end-users and end-use of the items. In this regard, the ECL states that end-users shall undertake not to alter the end-use of the items, nor assign them to any third-party without the approval of the SECADs, and if an export operator or importer becomes aware of any possible change of the end-users or end-use – they should immediately report to the SECADs. Importers and end-usersThe ECL provides that the SECADs shall issue a restricted list mentioning the importers and end-users that:
Against those mentioned under this list, the SECADs can either prohibit or restrict deals regarding the export of the controlled items, suspend the export of such items, and withhold export licensing facilitation measures. Besides this, the ECL also provides that export operators shall not enter any transactions with importers or end-users included in the restricted list. However, if an export operator has a true need to enter a transaction with one of them, it can submit an application to the SECADs. Interestingly, according to the ECL, importers and end-users can apply to SECADs asking to be removed from the list, if the circumstances that initially justified the inclusion under the list have been eliminated. ExtraterritorialityIt is worth noting that the ECL expressively provides that any organization or individual – outside of the territory of the People’s Republic of China – that violates the provisions of the ECL in relation to the administration of export control, endangers China’s national security and national interests, and hinders the performance of non-proliferation and other international obligations, shall be subject to investigation and legal liability in accordance with the ECL. What are the penalties for export controls’ violations?Investigations and related penaltiesThe SECADs have strong investigative power and, in case of any suspected export control violation, may take the several measures ranging from on-site inspections, interviews, duplicating documents, inspecting means of transport used for export, confiscation and seizure of items, and bank-account examinations. The export operator who refuses or obstructs any regulatory inspection, can receive a warning, but can be also punished with a fine ranging from RMB 100,000 (about US$ 15.109) to RMB 300,000 (about US$ 45.328). Serious violationsWhen an export control violation occurs, the imposed penalties may consist of warnings, orders to suspend the illicit behaviour, confiscation of the illegal income, and fines, the amount of which depends on the offense and on the amount of illegal income. In case of serious violations – such as unlicensed exportation of controlled items without obtaining the qualification for export operations, exporting controlled items without approval, exporting controlled items beyond the approved scope specified in the export license, or exporting controlled items that are prohibited from being exported, or engaging in unlicensed transactions with importers or end-users listed under the restricted list – a fine of up to RMB 5 million (about US$ 755.857) or 10 times the gains made from the illegal activities may be imposed, together with business suspension and revocation of export business qualification. Other violationsWith reference to other violations, such as fraud and bribery, the authorities shall withdraw the approval and revoke the export license, confiscate any illegal income, and impose a fine that is greater than five times and smaller than 10 times the illegal turnover – if the illegal turnover is more than RMB 200,000 (about US$ 30.218). If there is no illegal turnover or the illegal turnover is less than RMB 200,000, a fine ranging from RMB 200,000 to RMB 2 million (about US$ 302.343), shall be imposed. In case of forgery, falsification, purchase, or sale involving export licenses, the fine that may be imposed will be greater than five times and smaller than 10 times the illegal turnover – if the illegal turnover is more than RMB 50,000 (about US$ 7.554). If there is no illegal turnover or the illegal turnover is less than RMB 50,000, a fine ranging from RMB 50,000 to RMB 500,000 (about US$ 75.546) shall be imposed. Third-parties’ liabilities and related penaltiesThe ECL also foresees that any third-party that provides agency, shipping, delivery, customs clearance, third-party e-commerce trading platform, financial, and other services to any export operator, knowing such operator engages in export control violations, they shall be sanctioned with warnings, orders to stop the illicit conduct, confiscation of illegal income, and a fine greater than three times of and smaller than five times of the illegal turnover – if the illegal turnover is more than RMB 100,000 (about US$ 15.109). If there is no illegal turnover or the illegal turnover is less than RMB 100,000, a fine ranging from RMB 100,000 to RMB 500,000 (about US$ 75.546) shall be imposed. Additional penaltiesThe ECL states that for a period of five years from the date of the punishment, the SECADs will not accept any export license application made by the punished exporter and will not allow any person responsible for the violation to engage in relevant exporting activities. Notably, it is also provided that where the export control violation constitutes crime, criminal penalties shall also apply, and any person who is subject to criminal penalty for export violation shall not engage in export activities over their lifetime. How to interpret the ECL in the international context?The ECL has been adopted by the Chinese government in order to establish a uniform framework of rules disciplining the export of specific items, ensuring that the scope of the said measures is equal and balanced with the export control policies adopted by the other countries, and with the ultimate purpose of safeguarding China’s national security and interests. Even though the ECL does not target any specific country, it clearly states that “if any country or region abuses export control measures to endanger the national security and national interests of the People’s Republic of China, the People’s Republic of China may, based on the actual situation, take reciprocal measures against that country or region”. This provision reveals the Chinese government’s intention to adopt any measure deemed appropriate to respond to export restrictions set by other countries towards China. With this perspective, the ECL appears to be setting the legal ground for Chinese authorities to fight back against the export control regime recently adopted by the US, which has targeted leading Chinese companies, such as Huawei Technologies Co., the Semiconductor Manufacturing International Corp., etc. It is worth noting that a first step in this direction was already taken in August this year, when China amended the Catalogue of technologies prohibited or restricted from export by adding among the restricted items, speech recognition and recommendation technology – thereby giving the Chinese government the opportunity to intervene in the sale of TikTok’s US operation. On the other hand, the EU is finalizing a plan concerning the export control on technologies, including dual-use technologies, under which companies will be required to obtain a license to sell such products abroad. Hence, China’s Export Control Law appears, again, as a means through which China can safeguard its interests and ensure reciprocity against other countries’ export control policies. Thus, to assess the impact of the ECL at the international level, it will be necessary to monitor the relationships among China, US, and EU, as well as other countries since it is already clear that the ECL scope covers enterprises (and individuals) located both in China and abroad. Hence, companies must carefully evaluate their compliance with the law and, in case it is required, adjust their businesses accordingly. |
July 31, 2021On July 10, 2021, the Standing Committee of the National People’s Congress of the People’s Republic of China (PRC or China) passed the Anti-Foreign Sanctions Law (AFSL), which came into effect on the same day. The AFSL provides general authorization for countersanctions against countries, organizations, and individuals for issuing and implementing sanctions against China and its companies and individuals. It is a hybrid sanction law, mainly operating as a list-based countersanction with the inclusion of a civil claim for damages resulting from the implementation of foreign sanctions. The issuance of the AFSL comes on the heels of other legal and regulatory measures that have provisions to counteract foreign laws and sanctions:
The AFSL creates a direct approach to countersanctions and elevates the regime to the level of law rather than agency rules and provisions. 1. Responsible Agencies According to the content of the AFSL and recent reporting, it appears that the two Chinese agencies with the most responsibility when it comes to implementing the AFSL will be MOFCOM and the Ministry of Foreign Affairs. What is interesting is that MOFCOM is the agency in charge of two other provisions, (1) Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures and (2) Provisions on the Unreliable Entity List, that bear some strikingly similar language to the AFSL. As a result, it may be beneficial for companies to consider these rules and provisions in conjunction with the AFSL. 2. Who Could Be Subject? Under the AFSL, Chinese government agencies may add individuals and entities to a countersanctions list. The countersanctions list can include individuals and organizations that directly or indirectly participate in the formulation of, decision on, and implementation of sanctions against China as well as their spouses, immediate family members, senior managers or actual controllers of listed organizations, and organizations managed by or actually controlled by listed individuals. Organizations and individuals in China must implement any adopted countermeasures. 3. Authorized Countersanctions The AFSL authorizes basic countersanctions, including visa refusals, denial of entry, visa cancellation, or deportation as well as attachment of property within China. In addition, the sanctioning agency may prohibit or restrict listed individuals or organizations from engaging in transactions with organizations and individuals in China or take other measures. 4. Civil Damages The most challenging aspect of the AFSL is that it applies to compliance with foreign sanctions and creates a potential civil cause of action for that compliance. Specifically, the AFSL forbids organizations and individuals from implementing or assisting in the implementation of discriminatory foreign sanctions taken against Chinese citizens and organizations. Chinese citizens may file a suit in Chinese court requesting injunctive relief and compensation for damages. This is similar to language found in the MOFCOM-issued Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures. However, because the AFSL is considered a “law” in the hierarchy of Chinese law, it may be able to stand as a separate cause of action. 5. Example of the AFSL in Action While the MOFCOM Provisions on the Unreliable Entities List and MOFCOM Rules on Counteracting Unjustified Extraterritorial Application of Foreign Legislation and Other Measures have not yet been used in practice, the AFSL has already been used. On July 23, 2021, the Chinese Ministry of Foreign Affairs announced sanctions against several individuals in response to a Hong Kong Business Advisory. These individuals included members of the former Trump administration (including cabinet-level officials), heads and members of Congressional-Executive committees and commissions, and heads and members of private-research, political, and human-rights institutes. Companies should stay up to date on actions by various Chinese agencies, particularly MOFCOM, to identify potential risks to compliance with sanctions that affect a Chinese party. |
Bloomberg notes that China appears to have started using the provisions on the unreliable entity list to control anti-China actions taken outside China. In addition, on December 2, the US Department of Commerce introduced a new round of chip export bans against China, involving about 140 Chinese entities. This is the third action launched by the United States against China's semiconductor industry in the past three years.
On March 3, the website of the Ministry of Commerce of China published a public announcement:
1) on strengthening export control of dual-use items to the United States, including prohibiting the export of these items to the United States for military users or military purposes;
2) on strictly controlling the export of gallium, germanium, antimony, superhard materials, graphite-related dual-use items to the United States, and so on,
3) and implementing more rigorous review of end users and end uses.
Organizations and individuals in any country or region that violate the relevant provisions will be held accountable in accordance with the law.
Bloomberg noted that China is the world's largest supplier of dozens of key minerals, and the expansion of export controls will have a serious impact on the affected industries in the United States.
The moves are now expected to apply to a similar range of sectors as U.S. export control regulations, according to an analysis of China’s latest export controls by U.S. law firm Covington & Burling.
Tom Nunist, associate director at Beijing-based TriviumChina, said: “China has always been slow or cautious in launching countermeasures against the United States, but it now seems clear that China is starting to let go.”
Corey Coombs, deputy director at Cevic Consulting, said that while it was not yet clear what the exact enforcement criteria and intensity would be, China’s move was clearly aimed at closing potential loopholes for companies seeking to circumvent controls through third countries. For supply chain companies, he said, it meant they could not rely on any loopholes to maintain supplies of dual-use items. “In short, companies need to find alternative supplies as quickly as possible.”
However, it is not easy for companies to find “alternative supplies.”
Bloomberg has pointed out that China is the main source of gallium and germanium and other key minerals in the United States. According to a previous New York Times article, China has supplied the United States with 54% of germanium and 53% of gallium. Gallium for semiconductors has not been mined in the United States since 1987. Currently, 26% of gallium imports to the United States come from Japan, 21% from China, and 19% from Germany, in addition to several smaller suppliers.
In a report last November, the U.S. Geological Survey warned that a complete ban on gallium and germanium exports from China could cause direct losses of $3.4 billion to the U.S. economy and trigger a cascading effect of disruption to supply chain operations.
China is a major source of key U.S. minerals such as gallium and germanium Bloomberg Chart
In response to China's latest restrictions, a White House spokesperson said that an assessment was underway, but that "necessary measures" would be taken in response.
The spokesperson said: "These new controls underscore the importance of strengthening cooperation with other countries to reduce risks and diversify key supply chains from China." But he did not provide further details.
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