China's Export Control Law Discussed in WTO Meeting

At the March 31 and April 1 meeting of the WTO's Council for Trade in Goods, for which minutes have just recently been circulated by the WTO, both the EU and Japan raised concerns about China's new export control law.

To provide some background, Beijing started work on a comprehensive Export Control Law in 2017. The law was passed in October 2020 and took effect in December of the same year. Drafted in the backdrop of increasingly tightened U.S. export controls that target China, the law is heavily modeled after the U.S. export control regime. It comes with some ambiguities that will require further implementing rules and interpretation to fully understand.

At the WTO meeting, the EU raised several questions about the law, including its extra-territorial application, the scope of "exports" and "re-exports," the scope of "national security and interests," and the retaliation measures in the law.

28.3. The EU is closely following the developments in China's new Export Control Law, which passed the Standing Committee of China's National People's Congress on 17 October 2020 and took effect on 1 December 2020. While recognizing that it consolidates China's non-proliferation commitments and export controls, the EU has four major concerns regarding China's Export Control Law.

28.4. First, on extra-territorial application, because the law contains a new provision with extraterritorial application determining the consequences for foreign individuals and organizations outside of China violating the law and endangering the national security and interests of China (Article 44), which is not in line with internationally agreed export control standards.

28.5. Second, on rules on deemed exports and re-exports, because the law appears to provide for controls that apply to transactions within China (referred to as deemed exports, Article 2.3). In this regard, the EU places great importance on the non-discriminatory treatment of EU companies in China (for example, of their Chinese subsidiaries). The EU is concerned that the concept of deemed exports, which goes beyond the internationally agreed export control standards, might lead to unequal treatment and have adverse effects on the activities of EU companies in China (including their research and development activities, for example). Furthermore, the law foresees controls on re-transfer or re-exports (Article 16 and Article 45), while it is unclear whether the obligation not to re-export items without the prior consent of the Chinese authorities also applies to foreign products that contain controlled items obtained from China as components. The previous draft included an explicit provision in this regard in case the controlled items exceeded a certain threshold. It would be useful if China could confirm that such obligation is not included in the current re-export provision.

28.6. Third, on the objectives and scope of controls, because the law names "national security and interests" as a prime objective, next to "non-proliferation and other international obligations". Even though the law does not any longer reference "development interests", "industrial competence", or "technological development" as control principles (as previous drafts did), the EU is nevertheless concerned that Article 1 ("national security and interests") as well as Article 3 ("national security" and coordination of "security and development") contain vague language still reflecting objectives other than China's international security obligations and commitments. The EU recalls that the objectives and scope of export controls should be in line with international obligations and multilateral commitments. The EU would therefore welcome clarification in this regard, as well as on the intended application and specification of other related provisions that could lead to legal uncertainty for economic operators, as, for example, on the application of control parameters ("national security" and "development", Article 1, Article 3, and Article 13; and "terrorist purposes", Article 12), the scope of controls ("temporary controls", Article 9) and related control lists, the understanding of exporters' obligations in this regard ("is or should be aware", Article 12), the scope of investigations by the authorities (in case of "suspected violations", Article 28), and the information restrictions (prohibited for reasons of national security, Article 32).

28.7. Fourth, on the retaliation clause, because Article 48 provides for "reciprocal measures by the Chinese Government where the abuse of export control measures by any country or region endangers its national security and interests". This provision is not in line with international export control standards. The EU will place great importance on any secondary legislation and would welcome clarifications and specifications on the application of such provisions.

It is worth noting in this context that the EU recently implemented a new set of export control rules, which would have a significant impact on exports to China.

Japan also expressed its concerns about the scope of the Chinese law, which Japan considered "goes beyond the scope of the international export control regime" and possibly violates WTO rules on quantitative export restrictions. In particular, Japan raised concerns over possible export controls on rare earth products:

28.9. Japan continues to have concerns over China's Export Control Law, which entered into force last December. Japan believes that this law may constitute an overly stringent export regulation that goes beyond the scope of the international export control regime and may be inconsistent with Article XI of the GATT. As Japan has stated in past Council meetings, and taking into consideration the objective of the law to safeguard national security and interests, Japan is concerned that the scope of products subject to restrictions appears to be quite diverse, and that there may be cases that require unnecessary disclosure of technological information during classification and end-user/usage investigations. Japan is also concerned that the provisions on countermeasures for discriminatory export regulation by other countries are maintained in the law.

28.10. As for the scope of the targeted items, the draft regulations concerning rare earths, which were published in January 2021, provide that the export of rare earth products shall comply with said Export Control Law. Japan is concerned that, in complying with the law, the export controls on rare earth products will be carried out in an inappropriate manner due to Japan's aforementioned concerns. When Japan looks at the draft regulations, which provide a certain amount of control over reserves of resources, prioritizing already exploited minerals as strategic reserves in order to offset domestic demand might be regarded as de facto export controls, and there might be a possibility that they are inconsistent with Article XI:1 of the GATT. Japan urges China not to include rare earth products among the items to be covered in the law and to treat domestic demand and export demand equally and in a non-discriminatory manner when it buys and sells reserves on the basis of the rare earth regulation. Japan remains concerned that the "Unreliable Entities List" contains a wide range of possible measures that may be used as countermeasures, in the same way as the countermeasures stipulated in the Export Control Law. In addition, Japan is concerned by the lack of clarity on the relationship between the entities list in the Export Control Law and this "Unreliable Entities List".

28.11. Japan is further concerned by the catalogue of technologies subject to export bans and restrictions based on the Foreign Trade Law. The list's objective and scope lack a clear definition and could be widely defined as reasons for restrictions for listed technologies and may contain measures that are inconsistent with the Agreement. The relationship between the items covered in the law and the technology list in the Export Control Law is also unclear. Japan understands that the details of the procedure for implementing the law will be provided in due course and expects that the scope of the items, as well as the technologies list and entities list under the Export Control Law, will be provided within the appropriate scope. Japan also expects that a procedure that does not require excessive disclosure of technologies will be prescribed in due course. In addition, Japan is of the view that the countermeasure provisions should be removed from the law. Finally, Japan will continue to observe the actual practice in the implementation of the law. In this connection, Japan would like to request China to provide information on the detailed regulations and the timeline for them, with sufficient leeway and in full transparency.

China's brief response to these comments was as follows:

28.13. China requests the European Union to provide them with its technical questions. At present, China is still drafting the supporting regulations and control lists of the "Export Control Law". China will keep in communication with the relevant Members and will provide updates in due course.

China is still in the process of formulating implementing rules for the Export Control Law as well as the controlled lists. Last December, China’s Ministry of Commerce and customs authorities issued the Export Controlled List of Commercial Encryption Technology and the related licensing procedure. This is the first set of the controlled list and licensing rules that China has issued after the new law took effect.