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CvT: China Ups the Ante with New Export Control Regime

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This month, China’s first comprehensive export control regime, the Export Control Law (ECL) came into force. Those familiar with Export Administration Regulations (EAR), the US equivalent, may take comfort in the fact that many aspects of the new law are recognizable. However, some provisions reflect Beijing’s distinct worldview, and with US-China tensions at an all-time high, it is likely that recent US trade actions against Chinese technology companies renewed Beijing’s interest in the law, which was originally proposed in 2017.

Despite the geopolitical context, the ECL will likely have a limited impact on foreign companies compared to EAR, and do little in the future to prevent the US from acquiring or domestically developing any technological capabilities of Chinese origin. However, it offers useful insight into the strategic use of export controls in an age when national security encompasses broad economic interests and coalition-building has become increasingly difficult for the reigning hegemon.

Control regime framework and “reciprocity” clause

China introduced the ECL to regulate the export and re-export of sensitive technology and materials. This law provides for the creation of a unified export control system by establishing control lists, licensing guidelines, and implementing bodies. Like EAR, the ECL creates separate lists for military-use, dual-use, and nuclear items. State Export Control Administrative Departments (SECADs) composed of members from the State Council (China’s chief administrative body) and the Central Military Commission are tasked with adding items to these lists and processing licenses for the export of controlled items.

The ECL has several clauses that distinguish it from EAR. Unlike its previous iterations, the ECL in its current form places limits on the law’s extraterritorial reach, and it requires exporters to seek permission from the SECADs before exporting items that are harmful to national security or the “national interest,” even if they are not currently on any control lists (also known as a “catch-all”). It also imposes heavy fines between five to ten times the value of the items in question if an exporter violates export control regulations.

Given the current state of US-China trade relations, the clause garnering the most attention is the “reciprocity” clause. According to the ECL’s second to last article, “if any country or region abuses export control measures to endanger the national security and national interests of the People’s Republic of China, the People’s Republic of China may, based on the actual situation, take reciprocal measures against that country or region.” While not yet a bottleneck for global supply chains like the US, which produces non-fungible high-tech components, this clause will allow Beijing to deter future trade partners from imposing export controls or embargoes as Chinese industry moves up the value chain.

Implications for foreign exporters

While the ECL is extraterritorial, which subjects entities outside of China to Chinese laws, its reach does not go as far as that of its 2017 iteration. The 2017 version of the law would have included a controversial clause nearly identical to America’s de minimis rule, which requires foreign exporters to seek a license from the US Department of Commerce if the American-made components of the non-US item in question make up 25% or more the non-US item’s fair market value and are subject to EAR. Had the ECL included a similar clause, it would have required non-Chinese companies exporting items with significant Chinese-owned content to seek a license from the Chinese Ministry of Commerce.

However, it is likely that this clause did not make its way into the final law because its enforcement would have hurt domestic industry by encouraging foreign customers to search for non-Chinese substitutes or alternatives. This is the case due to the fungibility of Chinese exports as well as the added cost for foreign customers that obtaining a license entails. Instead, the ECL only requires foreign entities to obtain a license for a direct re-export of a Chinese-made good.

Lessons from the US on the strategic use of export controls

The watering down of China’s ECL offers a valuable lesson – an export control system’s efficacy is directly related to the difficulty of finding or developing substitutes for the controlled item. If substitutes exist, then export controls impose costs on domestic industries in the form of lost market share. Even if substitutes do not exist, the country imposing export controls needs to assess whether the target nation can develop the controlled technology indigenously.

The United States’ attempts at botching a Soviet oil pipeline connecting the Eastern Bloc with Soviet oil fields offers a case in point. In 1962, the US attempted to block the construction of the Friendship Pipeline by persuading the West German government to halt the export of extra-large diameter pipeline to the USSR. While the West German government ultimately acquiesced to US demands, the US lacked the leverage to dissuade the UK and Italy from selling similar pipe to the USSR. Furthermore, the pressure from Washington motivated the Soviets to develop indigenous pipeline manufacturing capabilities. As a result, relations among NATO allies were strained, the pipeline’s construction was delayed by only a year, and the USSR became increasingly independent from foreign technology.

Conversely, the United States’ restrictions on the sale of semiconductors and related technology to Huawei and ZTE offer a useful window into the effective use of controls to apply pressure. Unlike extra-large diameter pipeline, much of the technology and know-how to manufacture semiconductors resides in the US. Furthermore, developing indigenous capabilities is quite difficult and will likely take years, even with state support. In areas where it possesses technological hegemony, the US can engage unilateral export controls to successfully apply pressure.

In areas where it possesses near-technological hegemony, the US export control strategy relies on a multilateral approach that has frayed in recent years. The technological know-how to build commercial jet engines, for example, resides in both the US and the EU. Prior to imposing export controls banning their sale to China, the US would have to ask the EU to impose similar controls. Otherwise, American companies would needlessly cede their share in the vast Chinese market to European rivals.

However, the US can no longer rely on the comity that it enjoyed with other advanced industrialized nations during the Cold War. Prior to imposing unilateral export controls that incapacitated Huawei, the US struggled in persuading its European allies to exclude Chinese telecommunications companies from their markets. Views on China in Washington and European capitals have diverged – while the bipartisan consensus in the US has shifted away from engagement, Germany’s economy minister still believes that “change can be accomplished through trade.” It is increasingly the case that countries, especially those with large development needs, seek healthy working relationships with both the US and China. The days when the US was the undisputed economic partner of choice are coming to an end.

Sovereignty takes center stage

This makes balancing coalitions difficult to assemble, and therefore reduces the possibility of either the US or China persuading other countries to adopt similar export controls. The absence of multilateral export control arrangements directed at either the US or China reduces the possibility of effective export controls by either country on a wide range of technologies, with commercial jet engines providing just one example. It also means that for either country to successfully engage export controls, it must engineer a substantial lead in critical technologies.

Although ECL is of little strategic value to Beijing in the current technological climate, its relevance will grow in tandem with China’s progress toward realizing MIC 2025. Nonetheless, the fact that both China and the US have highly competitive economies means that technological convergence, or the ability of both countries to indigenously develop controlled items, will likely occur. In the long run, both ECL and EAR are doomed to lose their potency as tools of great power competition.

The strong emphasis on developing domestic capabilities, and the unlikelihood for well-defined economic and political blocs to form highlights the overwhelming importance of technological sovereignty to Washington and Beijing. In pursuit of this goal, China already makes vast resources available to industries it considers strategic – expect calls for Washington to grow louder in the near-term.

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