China Issues New Export Control Regulations on Civil-Military Dual-Use Items

Dual-Use Items
Dual-use items are defined under the Export Control Regulations as goods, technologies and services (including technical materials and other data related to the above-mentioned items) that have both civilian and military applications or contribute to enhancing military capabilities, especially those that can be used to design, develop, produce or use weapons of mass destruction and their delivery measures.

Export Activities Subject to the Export Control Regulations
Consistent with China’s Export Control Law (see Pillsbury alert here, effective on December 1, 2020), the Export Control Regulations apply to the:

• transfer of dual-use items from within the territory of the PRC to outside of the PRC;
• provision of dual-use items by any citizens, legal persons or non-legal person organizations of the PRC to any foreign organizations and individuals (similar to the concept of “deemed export” under the U.S. export control regime);
• transportation of dual-use items that begins in a territory outside of the PRC and continues transporting those items through PRC territory (including transit by using PRC’s domestic inland road, reloading items to different transportation vessels in the territory of China where customs is established, and transporting items into the port in the territory of the PRC by ships and aircrafts, and then transporting them out of the territory of the PRC by the same ships and aircrafts) to a territory outside of the PRC;
• re-export of dual-use items (definition of “re-export” has not yet been clarified); and
• transfer of dual-use items from special customs supervision areas and bonded supervision zones to territory outside China.

The export activities subject to the Export Control Regulations include the trade export of dual-use items and gifts to overseas parties, exhibitions, cooperation, assistance and other transfers.

Furthermore, the Export Control Regulations provide the Chinese Ministry of Commerce (MOFCOM) with export control jurisdiction outside China. MOFCOM has the authority to apply the rules of the Export Control Regulations if a foreign entity or individual provides or transfers the following goods, technologies or services outside the PRC:

• Dual-use items manufactured outside China which contain, incorporate or comingle with the dual-use items originating from China;
• Dual-use items manufactured outside China by using technologies originating from China; and
• Dual-use items originating from China.

The above rules seem to draw upon the De minimis Rule and Foreign Direct Product Rule under the U.S. Export Administration Regulations. However, questions remain, and the relevant PRC authorities are expected to offer more details on regulations and enforcement practices. For example, the rule doesn’t establish a minimum threshold like the de minimis rule under U.S. law.

Dual-Use Items Control List and Temporary Control
According to the Export Control Regulations, dual-use items subject to export control mainly include two types of control, which include those listed on the dual-use items control list (Dual-Use Items Control List) and those subject to temporary export control.

MOFCOM and the Ministry of Justice (MOJ) are updating the Dual-Use Items Control List, and it should be issued in the coming month(s).

In addition to the Dual-Use Items Control List, MOFCOM, upon approval by the State Council, may impose temporary controls on certain dual-use goods, technologies and services not listed in Dual-Use Items Control List. The temporary controls are usually based on the need to safeguard national security and interests and to fulfill international obligations, such as non-proliferation. The duration of each temporary control shall not exceed two years (with up to two extensions when necessary, and with each being no more than two years).

Types of Licenses
For the export of dual-use items in the Dual-Use Items Control List or the items subject to temporary control, exporters can use three types of licenses/certificates:

1. Single License. This license allows an exporter to export a specific dual-use item to a single end user. The valid period of a single license shall not exceed one year. If the export is completed within the valid period, the single license will automatically become invalid.

2. General License. This license allows multiple exports of specific dual-use items by an exporter to one or more end users. A general license shall only be effective for no more than three years. An export operator that has established an internal export control compliance system, operates well, and has relevant export records of dual-use items and relatively stable export channels and end users may apply for a general license.

3. Export Certificate. This certificate requires an exporter to submit registration to file relevant information with MOFCOM each time before exporting certain dual-use items and obtain an export certificate. An exporter can apply for an export certificate through registration with MOFCOM by submitting the required information before each export of specific dual-use items that meet any of the following conditions:

• Dual-use items re-exported to the original end user after being imported for repair, testing or inspection within a reasonable period;
• Dual-use items re-imported after being exported for repair, testing or inspection within a reasonable period;
• Dual-use items exhibited at exhibitions held within the PRC and re-exported in their original form to the original export location immediately after the exhibition ends;
• Dual-use items exhibited at exhibitions held outside the PRC and re-imported in their original form immediately after the exhibition ends;
• Export of civil aircraft parts for repair and spare parts; and
• Other circumstances specified by MOFCOM.

Once an application is submitted, MOFCOM will review and provide the license/certificate or reject the application within 45 working days. (This may be extended for further investigation if MOFCOM deems it necessary.) If MOFCOM believes the export may significantly affect national security, it may consult with and obtain additional approvals from the State Council or the Central Military Commission.

End-User Management and List of Controlled Persons and List of Concern
Under the Export Control Regulations, exporters must export dual-use items within the scope, conditions and validity period specified in the export license. They are required to report the actual export details, including transportation, arrival, installation and usage. Furthermore, the exporters must submit end-user and end-use certification issued by the end user. The end user of dual-use items must commit to the requirements set by MOFCOM and must not change the final use of the dual-use items or transfer them to any third party without MOFCOM’s permission. If there is any change to the key elements of an export license, including, among others, the destination country/region, end user, or end use during the validity period of an export license, the exporter must reapply for a new export license for dual-use items.

The Export Control Law established the concept of “List of Controlled Persons,” which comprises those persons whom may be restricted or even prohibited from exporting items from China. The Export Control Regulations further provide that a person may be listed in the List of Controlled Persons for the following reasons:

• Violation of end-user or end-use requirements;
• Harming national security and the interest of China, including (i) such persons using dual-use items in designing, developing or using weapons of massive destruction and their carriers, or (ii) such persons who are prohibited or restricted from transactions and cooperations; and
• Using dual-use items for terrorism purposes.

Persons listed in the List of Controlled Persons may apply for delisting from the list with MOFCOM by truthfully disclosing the relevant facts, stopping illegal behaviors, adopting proactive measures, eliminating harms, and meeting specific requirements as requested. MOFCOM may delist such persons if the reason for their inclusion has been eliminated.

Importers and end-users that don’t cooperate with the end-use and end-user verification may be listed on the “List of Concern,” a list which is similar to the Unverified List under U.S. law.

Observations
We anticipate that the updated Dual-Use Items Control List that will be issued by MOFCOM and MOJ may include not only traditional civilian and military dual-use products but also advanced technologies, software and items recently developed by Chinese companies, and based on their innovations or critical minerals that may be used for both civilian and military industries, such as chips design and semiconductor technology, drones, artificial intelligence, encryption, quantum computing, biotechnology, battery, electronic vehicles, rare earths, etc.

The new regulations show the Chinese government’s intentions and efforts to manage and control technologies with potential applications for both civilian and military uses to secure China’s national security and competitive advantage.

In light of the new Export Control Regulations, this is the best time for companies already doing business in and with China (including Chinese subsidiaries of multinational corporations) that export or may export dual-use items to review items they plan to export and start developing or enhancing their China export control programs.

The Export Control Regulations highly encourages companies to develop internal export compliance programs, and they are one of the prerequisites for applying for a general license.

Exporters shall also keep all relevant export records for at least five years, which include end-user and end-use certification, as well as contracts, invoices, account books, receipts, business correspondence and other related materials relating to the export of dual-use items.