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POSITION | FOREIGN ECONOMIC POLICY, INTERNATIONAL MARKETS | EXPORT CONTROL

China‘s Export Control Comments on the Second Draft of a Chinese National Export Control Law

January 23, 2020

23. Oktober 2017 Background Late December 2019, the Chinese authorities published a second draft of the People’s Republic’s export controls law. A first draft of the legislation had been presented in June 2017, which BDI had strongly criticized. From the perspective of German industry, the revision shows some improvements. The draft is now aligned much closer with the internationally established standards of export controls. China appears to have responded to some extent to the comments made by economic operators. This demonstrates that the country intends to expand its role as a responsible international economic power. However, the law should, in general, provide more clarity regarding the proposed structured cooperation with trade partners. For example, the expert mechanism could guarantee that problems can be addressed and, in the best case, resolved by judicial procedure. Regarding still necessary clarifications of undefined legal terms, it is important to ensure that the law does not generate any extraterritorial effect, even in the context of implementation regulations that follow. Moreover, the use of blacklists should be completely avoided. Furthermore, companies should also be protected more effectively against potentially arbitrary official prosecution.

China‘s Export Control

BDI Position The proposed law describes that at the center of the Chinese export controls regime are dual-use goods, i.e. “[...] especially those goods, technologies and services that can be misused for the design, development, production and use of weapons of mass destruction [...].” In the interests of legal certainty, the law should explicitly refer to the established lists of the international export controls regimes. Extraterritorial provisions as well as the mixing of security and economic interests were mostly removed from the scope of application of the amended law. However, some ambiguity remains regarding the application of the law, for example by mentioning “development” in Article 3 or the reference to “reexports” in Article 45 without further defining them. The Law also addresses the export of military equipment (Chapter III). Since the amended law focuses on dual-use goods, it would be a logical step if military equipment were to be regulated in a separate law, as is the case in the EU or the United States. Moreover, a more explicit official competence between the State Council (and its subordinate bodies) and the Central Military Commission in the control of dual-use goods would be preferable. The BDI would welcome if MOFCOM was given responsibility for granting licenses under the present law. An expert mechanism that was already outlined in the first draft was improved. It is now mentioned in Article 5 in direct connection with the institutional responsibilities of the State Council, its subordinate bodies, and the Central Military Commission. However, further clarification of the exact purpose and structure of the mechanism would be welcome. Furthermore, Article 14 of the draft law describes a process in which economic operators with functioning internal control systems are promised simplified export authorization procedures. This incentive was missing in the previous draft. Unfortunately, general licenses as such are no longer explicitly included in the new draft. Article 19 specifies a system of export control authorities for the risk assessment of end-users and enduse. It would be preferable for implementation provisions to clarify which measures exporters must take to comply with the requirements of the official risk assessment. In the draft law, Chinese authorities reiterate their commitment to process export applications within 45 business days after submission. Article 24 stipulates that exceptions are allowed only in justified individual cases. In such cases, the authorities may request an extension of 15 business days but are also obligated to explain the reasons for the extension to the concerned economic operators. However, the processing period should start as soon as the applicant submits the application.

China‘s Export Control

BDI Criticism Three aspects need to be critically mentioned despite the overall positive assessment of the revision. First, Article 10 still describes a so-called “blacklist” - i.e. official export bans. While the intent of the export bans is limited to the fulfilment of international obligations and national security interests, a limitation to items already controlled, however, is not entirely clear from Article 10. It allows temporary control of goods outside the control lists, but these controls should no longer be unlimited in time and should only apply for a maximum period of two years. Similarly, export bans should also be limited in time. It also remains unclear to what extent national security interests and the possibly undesirable behavior of citizens of other states are brought into line with one another in practice. Clarification in this context should be provided in the law rather than in subsequent regulations to create legal certainty. Legal uncertainty is also created by Article 45, which explicitly refers to the concept of re-exports. These are only relevant, however, with regard to duty-free zones and bonded areas. Implicitly, the text refers to the fact that such zones must be areas in China. Accordingly, the transfer to such duty-free zones and bonded areas and the subsequent transfer “overseas” would require a permit. This is unlikely to result in a basic licensing requirement for non-Chinese exporters of installed Chinese components (finishing) – although this has not been finally clarified. It is therefore unclear whether the Chinese authorities really want to subject re-exports to extraterritorial export controls. The structure of the supervision and administration of Chinese export control law is worrying. According to Article 30, Chinese law enforcement authorities are allowed to investigate economic operators for “[...] any form of suspected illegal conduct [...]” by all police means and without an independent judicial warrant. From a rule-of-law perspective, such intrusion without independent examination of initial suspicions is highly problematic. Unclear legal concepts and a lack of self-regulation mechanisms can create uncertainty by leaving room for arbitrary actions. Where, for example, individual economic operators in the sensitive area of export control do not comply with their obligations, the state must intervene. However, Chinese law enforcement authorities must also be obliged to independently investigate material suspicions before they are given access to sensitive data on economic operators and private individuals. Only verifiable processes based on the rule of law can create legitimate legal rights, legal certainty, and a healthy environment for strong economic cooperation.

China‘s Export Control

Recommendations The second draft of the Chinese export control law is an encouraging sign that the People’s Republic considers itself a responsible actor in the globalized world. The difficult task of a functioning export controls law is to reconcile the necessities of export controls with the needs of a globally interconnected economy. With the second draft of the export control law, China has chosen a pragmatic approach, which is much more aligned with international standards. This is positive as only dependable institutions can guarantee long-term mutual economic exchange. Nevertheless, improvements need to be made in a number of areas. 1. We welcome an expert mechanism through which experts from industry are involved in the technical assessment. However, this mechanism should be defined more clearly: ▪

Who is eligible for the expert mechanism?

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What is the purpose of such a body?

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Are security and economic interests balanced?

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How exactly will the consultation mechanisms be structured?

2. In several instances it is necessary to clarify undefined concepts. For example: ▪

What is the difference between the terms “products”, “materials”, “goods”, “technologies”, “objects” and “services”?

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What is meant by “security of the state” and what are the criteria used to assess this? Particularly regarding Articles 10 and 13, economic operators need clear criteria to make appropriate assessments.

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Regarding Article 4: What is meant by “other procedures”?

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What is meant by the principle of equality and “mutual benefit”?

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What is meant by “significant policy measures” in Article 8?

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What scale is contemplated in Article 13 with regard to the “degree of sensitivity of the objects”?

3. The provision of Article 16 should be clearly specified as an optional provision. It should be left to the exporter’s discretion to request the national authority in the case described in that article. 4. Articles 10, 14, 20 and others do not make a clear distinction between prohibited goods and goods requiring authorization. This needs to be clarified urgently, as prohibitions and control obligations are fundamentally different categories.

China‘s Export Control

5. The extensive powers of intervention of law enforcement authorities should be complemented by a judicial review mechanism. 6. The law should allow the prosecution authorities more discretion to mitigate sanctions in the case of active and self-initiated investigation of misconduct (cf. Article 58 of the 2017 draft). 7. Chinese export controls should also be based on international standards in connection with the transfer of goods to duty-free zones or bonded areas. 8. The control of re-exports should be used as a means of introducing extraterritorial policies. 9. In order to increase administrative transparency, decisions on further controls and measures should be disclosed publicly. The “evaluations” laid down in Article 8 should be made public as well. 10. It would be useful if the lists of goods were presented in consolidated form as an annex to this law. Not only in terms of the listed goods, but also in terms of structure, the lists of goods in China should be based on the list of goods of the Dual-Use Regulation in the European Union and the Commerce Control List (CCL) in the United States. In addition, Article 9 should ensure enough time for companies to implement changes in the commodity lists. Thus, changes should only come into effect three to four months after publication. 11. Article 21: It would be useful to digitalize the customs declaration and its accompanying documentation. (In the EU, for example, a system of codes is used). 12. Article 21 allows the authorities to stop exports. The current wording in the draft could allow arbitrary action by the authorities. They should be required to give concrete reasons why an export was suspended. 13. Article 34 et seq.: A clear cap should also apply to cases with transaction value. 14. The “credit assessment” of exporters referred to in Article 13 should not be used as a criterion for the assessment of export licenses. There is no clear link to information relevant to export control law. Overall, China’s second draft for a national export control law deserves recognition. This is a decisive step towards a law which, after further improvements, could also be used effectively in legal practice.

China‘s Export Control

Imprint Federation of German Industries (BDI) Breite Straße 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0

Editorial Office Dr. Stormy-Annika Mildner T: +49 30 2028-1568 S.Mildner@bdi.eu Friedolin Strack T: +49 30 2028-1423 F.Strack@bdi.eu Ferdinand Schaff T: +49 30 2028-1409 F.Schaff@bdi.eu Dr. Nikolas Keßels T: +49 30 2028-1518 N.Kessels@bdi.eu Stefan Gätzner T: +86 10 8532-2862 S.Gaetzner@bdi.eu Eckart von Unger T: +32 2 7921-1020 E.vUnger@bdi.eu

BDI publication number: D 1124