China’s New Export Control Law: Impact on

Global Business

December 16, 2020

This presentation is intended for the general information of individuals and organizations on matters of current interest. It is not legal advice. Participants should not act on the

information in this presentation without professional counsel. Participating in or viewing this presentation is not intended to establish and does not establish an attorney/client

relationship with Thompson Hine LLP.

Panelists

Jianwei (Jerry) Fang, Partner, Zhong Lun Law Firm, Shanghai

Francesca M.S. Guerrero, Partner, International Trade, Thompson Hine LLP, Washington, D.C.

Michelle Li, Associate, International Trade, Thompson Hine LLP, Washington, D.C.

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U.S. – China Economic Relationship

$163.00

$471.80

$116.20

$37.70

$- $50.00

$100.00 $150.00 $200.00 $250.00 $300.00 $350.00 $400.00 $450.00 $500.00

2019

U.S. Exports to China U.S. Imports From China US Investment in China Chinese Investment in US

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DEVELOPMENTS IN US TRADE AND INVESTMENT REGULATIONS TARGETING CHINA

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U.S. Economic and Security Concerns

Section 301 report

– China 2025 plans to pursue global preeminence in certain sectors

– IP appropriation concerns

Privacy and data security

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Recent Actions Section 301 tariffs on specific goods imported from

China

DOJ enforcement focus in trade secret theft

Military end-user / end-use rules tightened starting in April 2020

Xinjiang Supply Chain Business Advisory on July 1

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Recent Actions – Company Sanctions

Extensive use of Entity List – placement of Huawei and other Chinese entities on the Entity List

SDN designation of entities in Xinjiang in connection with forced labor allegations

E.O. 13959 Ban on investment in companies designated as supporting Chinese military aims

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DEVELOPMENTS IN CHINESE TRADE CONTROLS –PRC EXPORT CONTROL LAW

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PRC Export Control Law• Export Control Law adopted on October 17, 2020 and effective on December 1,

2020.

• The first comprehensive regulatory framework for China‘s export control ofmilitary and dual-use products and technologies,

• Consolidated the existing control lists issued under relevant export controlregulations.

• Driving factors

• Domestic: high-speed development in the filed of high technology industries(aerospace industry, AI and telecommunication)

• International Environment: enforcement activities of U.S. regulators

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Comparison between PRC and U.S. United States

Export Administration Regulations

International Trade in Arms Regulations

Regulating Items

Commerce Control List

U.S. Munitions List

Regulating Subjects

Country Chart – controls for depend on destination country

Entity List

End-User & End-Use Restrictions

PRC

Export Control Law (“ECL”)

Regulating Items

• Export Control List

• Temporary Control

Regulating Subjects

• Establish Control List for importers and end users

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PRC Export Control LawKey Control Measures and Methods• Export Control List of controlled items (“Controlled Item List”)• Impose temporary control over goods, technologies and services not included

in the export control list• Adopts a licensing system for the export of controlled items• Establish Control List that places restrictions on importers and end users

Note: The first three methods are for item control, while the last method is for subject control.

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“Controlled Items” Under ECL

Scope of the “Controlled Items”: “Dual-use items, military products,nuclear and other goods, technologies, services and items that relate tothe safeguarding of national security and interest and performance ofinternational obligations such as non-proliferation; meanwhile it also cover“technical materials related to Controlled Items”.

Practitioner Insight: Although the ECL references dual-use items, the lists ofControlled Items appears more limited than the list of dual-use items on theCCL. The ECL also functions in practice more like the ITAR than the EAR, inthat a license is required for all exports regardless of end-user or destination.

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Pre-existing Controlled Item ListsFields Control List and Catalogue

Dual-use items and technology(consolidated control list)

Nuclear Items

http://www.mofcom.gov.cn/article/b/c/201912/20191202927099.shtml

Missile

Biological Items

Chemical Items

Military Items https://www.fmprc.gov.cn/ce/cgvienna/chn/dbtyw/fks/c3/t206373.htm

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Temporary Control

Temporary Control: Export control authorities may impose temporary control over goods, technologies and services not included in the export control list and make announcements thereof. The duration of temporary control shall not exceed two years.

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Supplementary ControlSupplementary Control: Where exporter operators know or should have known, or are notified by the State's export control authorities that the relevant goods, technologies and services may have any of the following risks (three types of risks), such goods, technologies and services also belong to the scope of export control:

endangering national security and interests;

being used in the design, development, production or use of weapons of mass destruction and their means of delivery; and

being used for terrorist purposes.

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End-user Control ListStandards for Placing a Company of Person on Control List

breach of requirements for administration of end-users or ultimate usage;

being likely to endanger national security and interests; and

using controlled items for any terrorist purpose.

For importers and end-users on the Control List, the PRC authorities may prohibitor restrict transactions of relevant controlled items.

Exception: Where an exporter does need to trade with any importer or end userincluded on the Control List under special circumstances, it may file an applicationwith the State’s export control authorities.

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Procedure for Export License Request

First, obtain Exporter Business Qualification Explicitly required under the Administrative Measure of the Export Registration of

Sensitive Items and Technologies• Website: http://exctrl.mofcom.gov.cn/Second, apply for the Export License from MOFCOM The specific requirement on the application materials may vary among different

categories of controlled items. In general, a copy of the contract, end-user certification and end-use certification,

and description of end users, are required under all categories. Website: http://exctrl.mofcom.gov.cn/zhinan4.shtml (biological dual-use items)NOTE: See requirements at http://exctrl.mofcom.gov.cn/

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End-user and Ultimate Usage Certification

At the time of export, the exporters shall submit to the State’s export control authorities a document certifying the end-user and ultimate usage of the controlled item, issued by the end-user or by a government agency in the country or region where the end-user is located.

The end-user of controlled items shall also undertake not to change the ultimate usage of the relevant controlled items or transfer such items to any third party without the consent of the State’s export control authorities.

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General Export License under ECLArticle 14 of the ECL states that where an exporter has established an internal compliance system for export control and is in good operation, the State’s export control authorities may grant it a general license or take other facilitation measures for relevant controlled items exported by it.

A general license may allow transactions of a certain type to occur over a period of time rather than requiring a transaction-by-transaction license.

Currently, there are no rules for the standards and procedures for granting such general license.

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Possible Penalties Warning and order to cease illegal acts Confiscation of illegal gains Fine up to 10 times to 20 times of the illegal turnover.

– Significantly higher than that of the Regulations on the Administration of the Import and Export of Technology and other related regulations, which mostly base fines on illegal income.

Suspension or disqualification of business. Denial of export privileges. Criminal penalties under laws against smuggling, illegal business operations, the

disclosure of State secrets and/or the forgery, alteration, sale and purchase of official documents, certificates and seals of State organs. – The business entity as well as its directly responsible supervisors and other responsible persons

may be criminally liable.

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Key Issues Awaiting Rules / Regs

The definition and scope of the “Service” being subject to the control

Standards and procedures for obtaining a “General License”

The determination process and specific standard for the “Control List” on Importers and End-users

Definition, scope and application scenario of “Re-Export”

Scope and rules regarding “Deemed exports”

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Commercial Encryption On August 20, 2020, the State Cryptography Agency published Regulations for the Administration of

Commercial Encryption (“Regulations”).

– The commercial encryption items fall into the scope of dual-use items.

On December 2, 2020, MOFCOM, the State Cryptography Agency and the General Administration of Customs jointly published an Import List, an Export List and Procedural Rules on Applying for Licenses for the Import and Export of Commercial Encryption (effective January 1, 2021). Some key takeaways:

– The export list of the commercial encryption items is the first export control list published in accordance with the ECL;

– Commercial encryption items listed in the import list and export list are designated as dual-use items and technologies and thus importers and exporters must obtain licenses from the MOFCOM; and

– The procedural rules may shed some light on obtaining licenses for other controlled items under the ECL, i.e. materials to be submitted for application, reviewing process, and legal implications.

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DEVELOPMENTS IN CHINESE TRADE CONTROLS –IMPORT & EXPORT OF TECHNOLOGY

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Export Control of Technology

The regulatory system for the general export of technology mainly consists of:

Regulations on the Administration of the Import and Export of Technology;

Administrative Measures on Technologies Prohibited and Restricted for Export;

– The procedures for the license application for the export of restricted technology.

Catalogue of Technologies Prohibited or Restricted for Export from China (“Technologies Catalogue”)

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Export Control of Technology It should be noted that, the aforementioned regulatory system for the export of

technology does not cover the “Controlled Items” stipulated in the Export Control Law:

– Administrative Measures on Technologies Prohibited and Restricted for Export

• Article 21: “These Measures shall not apply to exportation of nuclear technologies, nuclear-related dual-use technology, dual-use chemical agents and related technologies, dual-use biological agents and related technologies, missile-related technology and proprietary technology for national defense.”

Practitioner Insight: the Controlled Items under the Export Control Law appears to be more narrow than the CCL and USML (combined). Meanwhile, the Technologies Catalogue is more broad, but restrictions apply to technology transfers and not import/export of goods.

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Technology Export Definition

According to the Article 2 of Administration Regulations, Technology Export means transfer of technology from the PRC to overseas, through trade, investment or economic and technical cooperation (e.g. patent assignment, transfer of patent application rights, patent licensing, transfer of tech secrets, technical services and other forms of technology transfer).

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Categories of Technology Export

Category Regulatory requirements

Free export of technologies

Subject to contract registration administration within 60 days of contract taking effect

Restricted export of

technologies

Subject to licensing administration, and shall not be exported without permission of commerce

department of the government.

Prohibited export of

technologiesProhibited from export

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Case of TikTok/ByteDance• Starting August 2020, ByteDance has been forced to explore various options

including a sale with regards to its TikTok operation in the U.S. and elsewhere.• On August 28, 2020, the MOFOCOM issued the updated version of Catalogue of

Technologies Prohibited or Restricted for Export by China. The last revision of thecatalogue was in 2008, more than 10 years ago.

• On August 30, 2020, Xinhua News Agency commented that ByteDance carefullystudy the adjusted catalogue, seriously and prudently consider whether to suspendthe substantive negotiation of relevant transactions and fulfill the legal filingprocedures before taking further action as appropriate.

• On September 21, 2020, ByteDance announced that Oracle, Walmart andByteDance have reached an agreement in principle.

• On September 23, 2020, ByteDance announced that it has submitted an applicationfor permit of technology export with Chinese authorities.

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DEVELOPMENTS IN CHINESE TRADE CONTROLS –UNRELIABLE ENTITY LIST

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Provisions on Unreliable Entities List

On September 19, 2020, the Ministry of Commerce issued the "Provisions on Unreliable Entities List" (the “UEL").

Regulatory Standards

– endangering the sovereignty, security and development interests of China

– interrupting normal transactions with Chinese enterprises, other organizations or individuals in violation of normal market transaction principles, or taking discriminatory measures against Chinese enterprises, other organizations or individuals, which seriously harms the legitimate rights and interests of Chinese enterprises, other organizations or individuals

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Measures Against Entities Included in UEL Include

Restricting or prohibiting the foreign entity from engaging in import or export activities related to China;

Restricting or prohibiting the foreign entity's investment within the territory of China;

Restricting or prohibiting the entry of the foreign entity's relevant personnel or transport vehicles into the territory of China;

restricting or cancelling the work permit, stay or residence qualification of the foreign entity's relevant personnel in China;

imposing a fine corresponding to the seriousness of the case against the foreign entity; and other necessary measures.

NOTE: There is also a procedure for an entity to petition for removal if it takes corrective action.

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BUSINESS CONSIDERATIONS

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Business Considerations Will technology face dueling control regimes?

– Location of R&D may be influenced by export controls.

– Critical to understand the interaction of IP/patent and export controls.

Compliance with US export restrictions could lead to placement on China’s Unreliable Entity List.

Employees may face new restrictions on working on sensitive technologies.

Increased need for compliance resources.

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Questions?

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China’s New Export Control Law: Impact on

Global Business

December 16, 2020

This presentation is intended for the general information of individuals and organizations on matters of current interest. It is not legal advice. Participants should not act on the

information in this presentation without professional counsel. Participating in or viewing this presentation is not intended to establish and does not establish an attorney/client

relationship with Thompson Hine LLP.