China's Export Control Law 2020 - 10 steps for European companies to take

As a strategy to address the concerns of protecting its national security and interests, China promulgated on 17 October 2020 its new Export Control Law with various export control mechanisms, including a process for imposing reciprocal measures against instances that China views as an abuse of export control measures by foreign governments. It entered into force on 1 December 2020.

As this new legislation is very relevant for European companies (1), we identified 10 steps to take in order to avoid fines and blacklisting (2).

1 - The Chinese Export Control Law is relevant for European companies

1.1. In 2020, China overtook the U.S. as EU’s biggest trading partner.

Where trade with most of Europe's major partners dipped due to the Covid-19 pandemic, trade between China and the EU was worth 586 billion EUR last year, compared with 554 billion EUR worth of imports and exports from the U.S..

China was the only major global economy to see growth in 2020, with a strong demand for European cars and luxury goods (+ 5.6 % in imports overall). Meanwhile, China's exports to Europe benefited from strong demand for medical equipment and electronics (+ 2.2 % in exports overall).

China is the largest exporter, and the third largest importer in the world (2019).

The five-year strategy adopted by the EU on China in 2016 mapped out the European Union's relationship with China. It promotes reciprocity, a level playing field and fair competition across all areas of co-operation. It also includes a trade agenda with a strong focus on improving market access opportunities, deals with overcapacity and calls on China to engage with ambition at multilateral level.

China is now the third largest partner of EU exports of goods (10.5 %) (2020) and the largest partner for EU import of goods (22.4 %) (2020). Among EU Member States, the Netherlands are the largest importer of goods from China (2020), while Germany is the largest exporter of goods to China (2020).

China’s sophisticated supply chain has enabled it to become a high-tech export giant, with computers, power devices, broadcasting technology, telephones, and transport equipment dominating Chinese exports.

1.2. There are different drivers for this new export control legislation.

The developments in China’s export control regime have increasingly been driven by various new initiatives and challenges, such as the Made in China 2025 policy, cybersecurity concerns and the U.S.-China trade war. Chinese government policymakers determined that the lack of a comprehensive export control law made it difficult to protect China’s national security and interests, especially against the backdrop of U.S. sanctions imposed in recent years on major Chinese technology companies, such as Huawei, Tencent, and ByteDance.

The emergence of China's Export Control Law is significant because it represents the first effort of its kind to launch a unified and comprehensive export control regime. The new law is a strategic pivot for the country as it matures in its view of its own national security and its place in the world as a competitive producer of sensitive goods.

For decades China operated without a comprehensive export control law, relying instead on various administrative regulations to regulate export activities involving sensitive items, including nuclear items, biological items, chemicals, missiles, and military products.

China’s export control legislation was relatively fragmented, the overall coordination mechanism of export control work was not perfect, the scope of controlled items and control measures were not completely equal and balanced with other countries, and they were no longer suitable for the requirements of the development of the times [1].

China however joined the Zangger Committee [2] and the Nuclear Suppliers Group (NSG) [3] and has formally applied for the membership in the Missile Technology Control regime (MTCR) [4] and keeps contact and exchanges with the Wassenaar Arrangement [5] and the Australia Group [6] through several rounds of dialogues and consultations.

1.3. Extraterritoriality and a significant shift in China’s export control landscape.

Companies engaging in international trade must pay close attention to this significant shift in China’s export control landscape. Many aspects of implementation and enforcement of the law are yet to come. The heart of the entire system - the Control List - has not yet been released. Guidance on how the export control authorities will monitor end users and end uses, and the creation of the monitoring list, are all areas on which the legislation remains unclear.

As there will be severe penalty provisions for violation of the law, multinational companies should take compliance control measures as soon as possible so as to avoid serious consequences of penalties or sanctions by the law.

Apart from China based export operators and deemed exporters, European importers, end-users and re-exporters, as well as third-party service providers, should be very attentive to the developments in Chinese export control legislation. The extra-territorial effect of the new legislation is demonstrated through different provisions, some of them directed against States.