On October 19, 2024, China released new regulations governing exports from China of dual-use items.[1] The Regulations, which take effect December 1, 2024, supplement the Export Control Law (“ECL”; see our alert here) and provide more specifics regarding jurisdiction, restricted party lists, export licensing systems, and end-user/end-use requirements.[2] Notably, the Regulations also impose new requirements on third parties to proactively report suspected violations and lay out a framework for extraterritorial regulation not dissimilar from the de minimis and foreign-produced direct product rules under the U.S. Export Administration Regulations (“EAR”). A machine translation of the Regulations can be found here.
Scope, Jurisdiction, and Extraterritoriality
The Regulations apply only to dual-use items[3] and replace existing regulations covering most controls on missiles and on nuclear, biological, and chemical dual-use items.[4] The Regulations apply to dual-use items exported from mainland China elsewhere in the world (including Hong Kong and Macau) but not to items exported from Hong Kong and Macau.
The Regulations include more details about when the ECL can apply extraterritorially, although these restrictions apply only when MOFCOM—the key regulator and enforcer of the ECL and the Regulations—requires, in three potential situations:
- Item-based: dual-use items manufactured outside of mainland China that contain, integrate, or are mixed with specific dual-use items originating from China.
- Technology-based: dual-use items manufactured overseas using specific technologies and other dual-use items originating from China.
- Other: “specific dual-use items originating from China”
The first restriction has echoes of the de minimis rules under the EAR, although the Regulations provide no further specifics on percentage limits or calculations.[5] The second restriction has rough parallels with the foreign-produced direct product rules under the EAR, although the Regulations do not specify what technologies are or might be subject to this clause. The Regulations provide few details on when MOFCOM might invoke this extraterritoriality, mentioning only transfers to “specific countries or regions or specific organizations or individuals” outside of China.[6]
Control List, Licensing Process, End-User/End-Use Certifications, and Verifications
The Regulations expand somewhat on the process outlined under the ECL for establishing a control list of dual-use items, which will be released on December 1 when the Regulations take effect.[7] The Regulations also outline a (modestly simplified) licensing framework for dual-use goods, including describing materials to be provided as part of applications for general or one-off licenses, and call upon MOFCOM to approve or deny a license (including the interagency process as needed) within 45 working days, although that timeline could be longer in some situations.
The Regulations also provide more details on the ECL requirement for end-user/end-use certifications (“EUCs”) as part of license applications. MOFCOM may also require foreign governments to provide EUCs.
On the reverse side, the Regulations require Chinese entities to accept an export control site visit conducted by a foreign government only after MOFCOM consents, under penalty of fines and suspension of business.[8]
Restricted Party Lists
The Regulations outline two restricted party lists: a “Watch List” (关注名单) and a “Restricted List” (管控名单).[9] (The ECL referenced only a Restricted List.)
The Watch List, which is invoked when a company does not cooperate with MOFCOM site verification or provide the appropriate certifications, seems to be mirroring the U.S. Unverified List. China-based entities require one-off licenses from MOFCOM to export dual-use items to entities on the Watch List.
MOFCOM can place companies on the Restricted List on its own initiative or based on suggestions and reports from relevant parties, if a company:
- violates end-user or end-use requirements;
- potentially endangers national security and interests;
- uses dual-use items for terrorist purposes;
- uses dual-use items for the design, development, production, or use of weapons of mass destruction and their delivery systems; or
- is subject to prohibitions or restrictions on transactions or cooperation.
The final trigger suggests a potential connection between the Restricted List and countermeasures such as the Unreliable Entities List and the Countering Foreign Sanctions Law.
MOFCOM can subject parties on the Restricted List to one or more sanctions: (1) prohibiting transactions involving relevant dual-use items; (2) restricting transactions involving relevant dual-use items, (3) ordering the suspension of exports of dual-use items; and/or (4) implementing other necessary measures.[10] Roughly similar to the U.S. Entity List, China-based entities cannot export dual-use items to entities on the Restricted List without special approval from MOFCOM.
Reporting Obligations and Fines
The Regulations impose obligations on certain service providers involved in exporting to report “promptly” to MOFCOM if they “discover suspected violations” of exports of dual-use items. The Regulations specifically identify service providers such as agents, freight forwarders, delivery services, customs brokers, third-party e-commerce trading platforms, and financial services.[11] The Regulations do not provide more details on the reporting obligation, but note that failure to report can subject the service provider to a warning or fines.[12]
Penalties for non-compliance for various provisions of the Regulations range from warnings to fines up to RMB 5 million (about USD 700,000).[13]
Unanswered Questions
The Regulations provide certain additional details beyond the ECL, which was enacted in 2020, and additional tools for the Chinese government to use to advance its national security priorities. The Regulations do not, however, suggest whether/which certain items will or will not be subject to control or whether/how MOFCOM will use its new authority to regulate extraterritorially.
Given the ambiguity in the Regulations and geopolitical uncertainty, multinational companies with items in China that are or could be deemed to be dual-use, or companies outside of China that may source items based on China-origin technology, should continue to watch developments from MOFCOM in this area.
If you have any questions concerning the material discussed in this client alert, please contact the members of our International Trade Controls practice.
[1] The regulations are dated September 30, 2024, but were released publicly only on October 19.
[2] China released draft Regulations in April 2022. Compared to the draft, the final Regulations modify the provisions on registration-based export certificates and general licenses; impose additional responsibilities and obligations on exporters and service providers; create a “Watch List” mechanism; and clarify that gifts, temporary exhibits, and other forms of transfers are subject to export controls.
[3] The Regulations, like the ECL, define “dual-use” items as “goods, technologies and services that have both civilian and military uses or that can contribute to the enhancement of military potential, in particular goods, technologies and services that can be used to design, develop, produce or use weapons of mass destruction and their means of delivery, including related technical data and other related materials.” Regulations, Art. 2; see also ECL, Art. 2.
[4] Certain “controlled chemicals” will continue to be subject to the Regulations on the Administration of the Controlled Chemicals. Regulations, Art. 47.
[5] Regulations, Art. 49.
[6] Regulations, Art. 49. It will be interesting to see whether MOFCOM invokes this end-user scope, and if designations under the countermeasures such as the Unreliable Entities List and/or the Countering Foreign Sanctions Law are swept in under this provision and/or the Watch List/Restricted List.
[7] The Regulations call on MOFCOM to consult companies, trade associations, and chambers of commerce, and authorize MOFCOM to conduct surveys and assessments. Items not on the control list can still be controlled temporarily for up to two years, with two subsequent extensions.
[8] Regulations, Art. 38; cf. Art. 43 (penalties). This requirement for MOFCOM pre-approval has been a longstanding requirement in law and in practice, first announced in a MOFCOM Notice in September 2007 (available here), and is now incorporated into the Regulations, giving it additional legislative strength.
[9] The literal translations of these lists are “Concern List” and “Control List.” Given that “control list” is commonly used to refer to a list of items subject to export restrictions, this summary uses “Restricted List” to refer to a list of entities subject to specific restrictions based on past conduct.
[10] Exporters are presumably prohibited from conducting transactions involving dual-use items with importers or end users on the Restricted List, and must apply to MOFCOM for approval on a case-by-case basis if such transactions are necessary. See Article 29. Article 30 outlines procedures for removal from the Restricted List.
[11] Regulations, Art. 36.
[12] Regulations, Art. 40.
[13] The Regulations themselves refer to maximum fines of RMB 3 million (about USD 420,000), but Article 39 refers back to penalties in Article 34 of ECL, which calls for maximum fines of RMB 5 million (about USD 700,000).
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