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By John Butcher
U.S. companies from Dow Chemical to Intel should prepare for a new defense-related export control law that could affect their business operations in China and come with stiff penalties for breaking the rules, analysts in China are telling Bloomberg BNA.
The proposal still could be changed, since the government released the draft law earlier in the year and the deadline for comments ended just weeks ago. According to IHS Jane’s Defence Industry, the draft legislation is expected to be introduced in the National People’s Congress in 2018.
If approved, the draft export control law would strengthen the government’s authority to deal with companies that export controlled goods in four categories: dual-use items (goods used for both military and peaceful purposes); military items; nuclear items and other items that may affect national security.
The draft law also would give Beijing authority to take retaliatory action against foreign countries that implement discriminatory export controls directed at China. The Ministry of Commerce, the Chinese Customs Bureau, and the State Council and Central Military Commission administer and enforce Chinese export control laws, according to the U.S. Bureau of Industry and Security.
For U.S. companies with facilities in China it would mean taking a more cautious approach to exporting from the country, according to analysts, and some may want to consider the viability of facilities there altogether because of data transfer issues between China and the outside world.
“A wide range of industries may be affected, such as those related to aerospace, military, and defense, energy, material-processing, electronics, semiconductors and navigation,” David Stepp, partner at Bryan Cave, an international law firm with offices in China, told Bloomberg BNA.
Chemical producers, biotechnology companies, and technology firms “who manufacture goods or develop some technology that may be used for the production of missiles or of a nuclear weapon could also be affected,” according to Ren Qing, a partner in the Beijing office of the Global Law Firm.
U.S. companies that could potentially be affected because they operate facilities in China include semiconductor maker Intel Corp.; Esterline Technologies Corp., which makes defense and aerospace technology; and Dow Chemical Co., which has facilities in Shanghai.
While the law affects U.S. companies in China, it is a not a reaction to Trump administration actions or to U.S. export controls, according to Stepp. The main reason for the law is to strengthen enforcement powers and meet international obligations as a permanent member of the United Nations Security Council and a member state to relevant international treaties, including the Treaty on the Non-Proliferation of Nuclear Weapons, the Chemical Weapons Convention, and the Biological Weapons Convention, Ren said.
An exact list of controlled goods has not yet been released, but it is likely to be close to the Wassenaar Arrangement, a multilateral list of controlled items with 41 participating countries, which does not include China, that was established in 1996, according to Robert Clifton Burns, counsel at Bryan Cave.
The law would require exporters, foreign importers, end users, agents, freight forwarders, customs brokers, e-commerce platforms and financial service providers involved in the export process of controlled goods to obtain an export license from the Chinese authorities.
It would strengthen Chinese authorities’ investigative powers and include tough penalties for rule-breaking, including personal fines of up to $43,000 and company fines of up to up to ten times “illegal turnover.” It also would give the government authority to imprison offenders, seize goods and transportation, revoke export licenses, and freeze bank accounts, according to Ren
The inclusion of dual-use items, goods that could be used for more than one purpose, within the law, means an array of goods could be affected by it, Ren told Bloomberg BNA. And use of the term “national security” is also broad and “open to abuse” by the authorities, who could use it as a legislative tool to penalize U.S. companies unfairly.
However, potentially the most hazardous part of the new legislation, he said, is its reference to “deemed exports.”
Exports, re-exports (that originated in China), transit goods (goods that didn’t originate in China but are passing through its territory), and deemed exports are all subject to the law. Deemed exports include sharing technology or information from inside China with the outside world that could be regarded as breaking export laws, according to Ren, and that could affect U.S. companies with subsidiaries in China communicating research and other information between locations.
Subsidiaries in China will need to be “cautious” when “sharing technology or information with colleagues or a parent company abroad by email or by some other electronic transmission,” he said, and this may cause U.S. companies to consider carefully whether they open facilities in China.
In addition to the company-level regulation, the law would give Beijing the authority to take retaliatory measures against countries that implement discriminatory export controls directed against China.
The draft law doesn’t clarify what might be considered discriminatory controls used by a foreign country, leaving the Chinese authorities “with a certain amount of discretion in the application of this provision in practice,” according to Stepp.
“U.S. companies based in China may be affected by this provision, provided the U.S. is deemed as taking discriminatory export control measures against the PRC and China decides to take corresponding measures against the U.S.,” he said, referring to the country’s official name, the People’s Republic of China.
The Chinese regulations could become particularly onerous for companies producing items controlled both in China and the U.S., according Burns.
“The company won’t be able to do anything with respect to that product without getting authorization from both the U.S. and Chinese authorities,” he told Bloomberg BNA.
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