Effective 1 December 2024: PRC’s new Regulation on the Export Control of Dual-Use Items and Unified Dual-Use Items List

The new Regulation on Export Control of Dual-Use Items (中华人民共和国两用物项出口管制条例) (Regulation),¹ published by the PRC State Council, and the new PRC Dual-Use Items Export Control List (中华人民共和国两用物项出口管制清单) (Dual-Use Items List),² published by the PRC Ministry of Commerce (MOFCOM), consolidate the PRC’s pre-existing export controls in respect of ‘dual-use items’, which broadly refer to goods, technologies or services that can be used for both civilian and military applications (or otherwise to enhance military capabilities).

Export control in respect of dual-use items has been a subject of scrutiny around the world, as well as a key chess piece in the United States (US)-China trade war. The new Regulation applies to all dual-use items to be exported from the PRC (with the exception of controlled chemicals and certain missile-related items and technologies, the export control of which will continue to be regulated under pre-existing product-specific regulations).

The enactment of the new Regulation marks a significant update to the PRC’s export control regime since the introduction of the Export Control Law (ECL) in 2020. In particular, it:

1. introduces the extraterritorial effect of PRC export controls;
2. establishes a simplified licensing arrangement for the temporary exports of dual-use items;
3. expands the grounds for designating persons on the ‘Control List’ identifying importers and end-users of concern, and introduces a ‘Watch List’;
4. clarifies the requirement to re-apply for or amend export licenses in cases of ‘key’ or ‘non-key’ modifications of an intended export;
5. imposes new reporting obligations on trading businesses and related service providers; and
6. introduces one unified list identifying items subject to export controls and a new classification system.

In this article, our Asia Competition, Trade and Foreign Investment team explains the key features of the new regime.

1. Extraterritorial effect of PRC export controls

PRC export controls have historically been focussed on regulating the transfer of dual-use items from within the PRC to a foreign territory, or by PRC persons to foreign persons.

The Regulation has expanded the scope of restrictions by identifying the circumstances under which a transfer of PRC-origin dual-use items, even if carried out by non-PRC entities outside of the PRC, can potentially be subject to PRC export controls. Under Article 49 of the Regulation, MOFCOM may require overseas organisations and individuals that provide or transfer the following goods, technologies or services to specific destination countries or regions, organisations or individuals, to comply with the Regulation:

• (i) dual-use items manufactured outside of the PRC that contain, integrate, or are mixed with specific dual-use items originating in the PRC;
• (ii) dual-use items manufactured outside of the PRC using specific technologies or other dual-use items originating in the PRC; or
• (iii) specific dual-use items originating in the PRC.

Many would consider (i) and (ii) to be the Chinese counterparts of the De Minimis rule and the Foreign Direct Product rule under US export control rules, although it would appear from the wording of Article 49 that any such requirement would be contingent upon MOFCOM’s express request. Subject to further guidance from MOFCOM, the precise scope of application of Article 49 is likely to be subject to MOFCOM’s discretion on a case-by-case basis.

2. A simplified licensing arrangement for temporary exports of dual-use items from the PRC

In addition to (i) single-use licenses or (ii) general licenses (both of which have been provided for under the ECL), the Regulation now provides for a new, simplified licensing route, namely (iii) export certificates which may be obtained through a registration system. It is expected that the new licensing route will be utilised where a dual-use item is to be exported or transferred for a temporary use only, for example, for repair or exhibition purposes.

Article 19 of the Regulation provides for a non-exhaustive list of eligible circumstances as follows:

• where the item will be returned to the PRC (or to the original end-user at the original place of export, as the case may be) within a reasonable timeframe after being exported for repair, testing or inspection purposes;
• where the item will be returned in its original state to the PRC (or to its original place of export, as the case may be) immediately after the end of an exhibition; or
• overseas maintenance and repairs which require the export of civilian aircraft parts or spare parts.

The new licensing arrangement bears some resemblance to temporary license exceptions available under other export control regimes, which is likely to minimise the administrative burdens on businesses engaging in temporary exports. Note, however, that temporary licenses are unlikely to be available to exporters with a record of serious non-compliance with export control, or where any importer or end-user in question is listed on the Watch List (discussed below). In those cases, the exporter would likely be required to formally apply for a single-use license and comply with other applicable requirements under the Regulation.

3. Expansion of the grounds for designating persons on the ‘Control List’ identifying importers and end-users of concern and introduction of a ‘Watch List’

‘Control List’

MOFCOM currently maintains a Control List identifying importers and end-users of concern, who are subject to corresponding restrictive measures under PRC export controls. Persons who have been designated on the Control List under the ECL have typically included importers and end-users who (i) have violated applicable end-use or end-user restrictions, (ii) are likely to endanger national security and interest, or (iii) have used dual-use items for terrorism purposes – which are existing grounds of listing under the ECL. Under the Regulation, an importer or end-user may be designated on the Control List on additional grounds of national security, including where the person (iv) has used dual-use items for the design, development, production or use of weapons of mass destruction (WMD) and their means of delivery, or (v) (as a catch-all potentially subjecting persons sanctioned by the PRC to PRC export controls) has otherwise been prohibited or restricted by relevant authorities in accordance with law from engaging in a transaction or dealing.

‘Watch List’

The Regulation has further introduced a Watch List, which is designed to identify importers and end-users that have failed to cooperate with MOFCOM in its end-use and end-user verification exercises.

The Watch List is expected to serve as an interim measure, creating incentives for businesses to cooperate with the competent authorities. Persons listed on the Watch List (and those dealing with them) may experience difficulty in obtaining export licenses:

• As above, where an importer or end-user is on the Watch List, the exporter may not be able to apply for an export license by way of simplified registration.
• When applying for a single-use license in respect of an export involving an importer or end-user on the Watch List, the exporter will be required to submit a risk assessment report regarding the listed importer or end-user, and provide compliance undertakings.
• When reviewing applications involving any party on the Watch List, MOFCOM will not be bound by the standard review timeframe (45 business days).

The Regulation further allows MOFCOM to move a person designated on the Watch List to the Control List where the person is determined to have violated end-user or end-use restrictions, or in other ways poses risks to the PRC’s national security and interest.

4. Requirement to re-apply for or amend an export license in cases of ‘key’ or ‘non-key’ modifications of an intended export

Pursuant to Article 18 of the Regulation, during the term of an export license, an exporter who wishes to modify any ‘key’ elements of the export (such as the destination country or region, end-user or end-use) must suspend the export, apply for a new export license, and return the original license. For any changes only to ‘non-key’ elements of the export, an application to amend the export license is required, in which case MOFCOM will issue its review decision within 20 business days (as compared to 45 business days in the case of a new export license application).

As the ECL is silent on the circumstances in which a new application or an amendment may be required, the Regulation has provided a helpful clarification in this regard. That said, the interpretation of ‘key’ and ‘non-key’ elements is likely to be a matter subject to the discretion of MOFCOM based on the circumstances of each case.

5. New reporting obligations imposed on trading businesses and related service providers

Exporters, importers and/or service providers involved in the export of dual-use items are now subject to a range of new obligations under the Regulation.

In particular, a reporting obligation arises where:

• an exporter becomes (or ought to become) aware that an export no longer meets the conditions for obtaining an export certificate through the simplified registration route;
• an exporter or importer becomes aware that the end-user or end-use of the dual-use item under export has changed or may change, or that the relevant end-user or end-use certificates have been forged, altered, invalidated, or have been obtained through deception, bribery or other improper means;
• an exporter becomes aware that its export activities involve circumstances of concern (including in ways that may endanger national security and interest, or are related to WMD or terrorism);
• an exporter becomes aware of a material change to the basis on which an export license was granted, such as in relation to the item, destination country or region, end-user and end-use;
• a related service provider (such as a trade agent, freight forwarder, mailing operator, customs declaration service provider, third-party e-commence transaction platform, or financial service provider) becomes aware of any suspected violations of applicable export controls; or
• any PRC entity or citizen receives any requests from a foreign government (such as request for interview or on-site inspection) relating to export controls.

A failure to comply with the above reporting obligations would be punishable by warnings and/or heavy fines against the relevant entity or individual, and may result in criminal liability.

6. Introduction of one unified list identifying items subject to export controls and a new classification system

The Dual-Use Items List consolidates the lists of dual-use items currently subject to PRC export controls. Critical materials, goods and technologies in respect of which export restrictions have been imposed in recent years, such as gallium, germanium, antimony, graphite and high-performance drones, are now also listed on the Dual-Use Items List. Going forward, MOFCOM will regularly review and update the Dual-Use Items List in accordance with the Regulation.

Moreover, MOFCOM has taken the opportunity to revamp its approach to classifying dual-use items, moving away from the conventional Harmonized System (HS) code to a five-digit alphanumeric code in line with international standards, identifying the industry field, type of the item, reason for control, and the corresponding serial number, of each dual-use item.

While the PRC is not a party to the Wassenaar Arrangement (WA), the new classification system is closely modelled on that used under the WA in line with international standards, with adjustments made primarily to reflect the broader scope of controls imposed under the PRC regime. It is unsurprising yet important to note that, as a matter of national law, the codes are not aligned to the Export Control Classification Numbers (ECCNs) used in the US’ Commerce Control List (CCL). Businesses are reminded not to make assumptions and simply adopt the US’ ECCNs for the purposes of classifying dual-use items under PRC export controls.

To navigate how this development may affect your business activities or supply chain, please get in touch with Jocelyn Chow or a member of our Asia Competition, Trade and Foreign Investment team.

¹ See the full text of the Regulation here: 中华人民共和国两用物项出口管制条例_对外经贸合作_中国政府网 (available in Chinese).

² See the announcement of MOFCOM dated 15 November 2024, enclosing the Dual-Use Items List, here: 商务部 工业和信息化部 海关总署 国家密码局公告2024年第51号 关于发布《中华人民共和国两用物项出口管制清单》的公告 (available in Chinese).