News of foreign investment blocks and punitive tariff measures between the United States and China certainly dominate the headlines. These are, however, merely small skirmishes in a much larger battle. The primary ground for which each side is fighting relates to technology. Not specifically China’s practices as to the protection of intellectual property, which is the stated rationale for the Section 301 tariff measures imposed by the US—but rather the strategic control of competitive advantage in and access to technology globally.
The US has long had an export control regime that regulates trade worldwide in goods which may contain US-origin technology subject to the Export Administration Regulations even beyond the US border. China may soon be entering this particular fight more directly.
The Ministry of Commerce (MOFCOM) of the People’s Republic of China published a draft Export Control Law for public comment on 16 June 2017. If enacted, the China’s new Export Control Law will be the first comprehensive and unified export control legislation in China, which is aimed at upgrading the country’s existing regime consisting of various disparate administrative regulations and internal circulars.
In March of this year, the State Council issued its legislative proposal for 2018. Amongst the proposed bills for submission to the Standing Committee of the National People’s Congress this year is the Export Control Law. There is no guarantee that this bill will be passed into law this year but it is high on China’s priority list and is widely expected to be enacted within the calendar year. We therefore examine more carefully the key provisions of the draft Export Control Law.
The draft Export Control Law introduces four categories of controlled items including
Items outside these control lists could also be temporarily controlled for up to two years, subject to approval of the State Council, the Central Military Commission and their designated authorities (so called “Competent Authorities”). In addition, a “catch-all” provision extends potential control to items not included on these control lists but that the exporter “knew or should have known may give rise to national security and terrorism concerns”. These Competent Authorities may also maintain blacklists of foreign importers and end-users that have been found to have violated the Export Control Law, and may have the authority to prohibit the export of controlled items to such entities outside of China.
Significantly, the draft law also provides that if China is subject to any discriminatory export control measures by any country, retaliatory measures against such country may be initiated under the Export Control Law. Furthermore, the controls over the export of any goods, technologies or services may be imposed in order to safeguard security and interests during wartime or urgent situations concerning international relations.
The draft Export Control Law introduces the concepts of deemed export and re-export in China, which will bring China’s system closer to the export control regime implemented by the US. Deemed exports may include the provision of controlled items by a citizen, legal person or other organization in China to any foreign person. The item need not be physically exported from China. Reexport controls cover the export of controlled items (i.e. items comprising a prescribed amount of content controlled by China) from one overseas jurisdiction to another. Thereby applying Chinese law extraterritorially as does the US with its export control scheme.
The draft Export Control Law introduces a requirement to obtain licences from the Competent Authorities for carrying out controlled activities. Additionally, exporters may also be subject to recordkeeping and monopoly qualification requirements.
The Competent Authorities may request exporters to submit end-use certificates or documents issued by the importers or relevant agencies in the countries of import. The exporters are also under a positive obligation to review the end-users and uses of the exported items, and to immediately report to the Competent Authorities of any change in end-users or uses. The Competent Authorities may conduct on-site verifications on the end-users and end uses.
The draft grants the Competent Authorities significant investigative authority to enter the business premises of parties under investigation for violations of the Export Control Law, conduct interviews with staff and other persons of interest, access and copy relevant documents, inspect shipments as well as seize assets and bank accounts of exporters found to be in violation.
In addition, the draft law includes a provision for personal liability for those directly responsible for any violations that could include fines of up to RMB 300,000 (USD 44,196). Finally, businesses also risk suspension or revocation of export privileges and licenses, being negatively marked in China’s Enterprise Credit Management System and other non-financial penalties. More serious cases may even bear the risk of criminal charges. Finally, the draft text also incorporates measures to encourage compliance including internal compliance mechanisms, self-policing, and a voluntary self-disclosure provision.
In a May 2017 policy paper, MOFCOM noted that China is responsible for 25 per cent of global manufacturing output and, anecdotally, more than 700 suppliers of Apple’s iPhone in the Shenzhen area alone. Should China decide to exercise export control over content of Chinese origin, such manufacturing intellectual property could well provide China with significant leverage.
The on-going US-China trade dispute has been slowly brewing since before China’s ascension to the World Trade Organisation. The deficit in US goods trade with China has long been a pressure point with succeeding US administrations. In recent years, that deficit has grown to unprecedented levels. In the most recent statistics from the US Census Bureau, the trade imbalance in goods imported from China versus goods exported to China has grown by more than a third in 2017, compared with the year before. For president Trump, who was elected in part on his tough talk surrounding US trade relations with China, this is not a headline for re-tweeting.
It is important to note that China is the largest trading partner of the US and the US is China’s second-largest trading partner. Their relationship is therefore a high-stakes global issue. Under Trump, the US has taken aggressive action to try and enforce what, in its view, should be a more level playing field with China. China, for its part, appears to be implementing a longer-term strategy that recognises its competitive advantage in manufacturing, while building towards competing for control over the real value in the modern supply chain – the intellectual property.
Indirect Tax Leader, PwC Middle East
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Middle East Tax & Legal Services Leader, PwC Middle East
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Partner, Middle East Customs & International Trade, PwC Middle East
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