Emerging Trends 07.27.20
This series of alerts focuses on practical issues relating to China’s new Foreign Investment Law, which came into effect at the beginning of 2020.
A. Background of the Updated Catalogue
According to the Regulations of the People's Republic of China on the Administration of Technology Import and Export (the Regulations), the Ministry of Commerce and the Ministry of Science and Technology jointly formulated, adjusted and published the Catalogue on August 28, 2020. The main purpose of the Regulations and the Catalogue is to standardize technology export management, promote technological progress and foreign economic and technological cooperation, and safeguard the national economic security.
The last revision of the Catalogue was in 2008. With the rapid development of science and technology and the continuous improvement of China's scientific and technological strength and industrial competitiveness, the Chinese government believes that it is imperative that the Catalogue be adjusted and updated in a timely manner in accordance with international practices. Analysts suggest that the recent tensions between the United States and China over trade and technology have accelerated the issuance of the updated Catalogue.
B. Main Updates to the Catalogue
According to the Ministry of Commerce’s explanations, the ministry has been working on the updates to the Catalogue since 2018 by soliciting opinions from relevant departments, industry associations, academics and the public. The main updates to the Catalogue include the following:
C. Implications on Technology Export from Chinese Companies
The Regulations’ requirements on approval and license for export of restricted technology are not new. China has been implementing such approval and licensing requirements on export of restricted technology for more than a decade. However, the Catalogue has not been updated for more than 10 years. Chinese experts and government officials indicated that the adjustment to the Catalogue has long been expected and is in line with China’s agenda to protect intellectual property and enhance its national security.
Based on Article 2 of the Regulations, “technology export” refers to the transfer of technology through trade, investment or economic and technological cooperation from China to abroad, including the transfer of patent rights, the transfer of patent application rights, the licensing of patents, the transfer of technology secrets, technical services and other forms of technology transfer. That is to say, all transfer of technology abroad, whether by trade or investment and other methods, must comply with the Regulations. As such, potential sales of business and assets (including technology) by a Chinese seller to an overseas’ buyer may be considered as a “technology export” subject to the Regulations.
Under the Regulations, technology export is divided into three categories: non-restriction (free export), restriction and prohibition. Export of items categorized as “free export” is subject to post-contract registration and filing with the commerce department while the import and export of restricted technology requires a license.
According to Regulations, companies preparing to export restricted technologies in the updated Catalogue must fill in the "Application for China’s Export Restricted Technologies" form and submit the application form to the provincial level commerce department for application before any substantive negotiations with foreign parties. If the technologies to be exported involve state secret technologies, the applicant must go through the confidentiality review procedures in advance.
If the application is approved by the Commerce Department, the applicant company will obtain a technology export license letter of intent from the approving department and apply for export credit, make insurance commitments, and then start and conduct substantive negotiations with the foreign parties to sign a technology export contract. After the technology export contract is signed, the Chinese company must also apply for a technology export license with the provincial commerce department. The technology export contract will not take effect until the date of the issuance of the technology export license.
D. Our Observations and Suggestions
It is believed that the ongoing negotiations over the proposed sale of TikTok may be impacted by the issuance of the updated Catalogue. Analysts indicate that certain ByteDance technology involved in the proposed overseas sale may be covered by the newly added 23 restricted technology items in the updated Catalogue, such as “personalized information push service technology based on data analysis” newly added under Item (21) and “artificial intelligence interface technology” under Item (18). If any technology covered by the updated Catalogue will be “exported” by ByteDance in connection with the proposed sale of TikTok’s business and assets to the overseas buyer(s), relevant approval and license from the Chinese government must be obtained before the execution of the definitive agreement for the technology transfer. This does not necessarily mean that the Chinese government is blocking the potential sale. However, the potential transfer of the restricted technology involved in the sale is now subject to prior review and approval by the Commerce Department of China and issuance of the license, which will definitely delay and might complicate the process of the sale. ByteDance released a public statement on August 30 that the company is aware of the updated Catalogue and will comply with the Regulations and the Catalogue in handling business involving technology export.
More broadly, Chinese companies that export technology overseas and overseas companies that import technology from China should review the updated Catalogue and evaluate whether it could impact any ongoing and proposed transactions involving technology export.