International trade gained a new layer of complexity with the adoption and updating by the People’s Republic of China of two trade regimes, the Unreliable Entities List (UEL) and the Export Control Law (ECL). These actions add to short-term uncertainties in the US-China relationship. With the arrival of a new US presidential administration, companies involved in or affected by trade between the United States and China will need to prepare for potentially significant shifts in the US-China relationship, and cope with uncertainties as the new US presidential administration reveals its priorities.
While the UEL has already taken effect with the Ministry of Commerce of China (MOFCOM) taking the lead on implementing that regulation, China has yet to name any entities to this list, which applies restrictions to “Foreign Entities” determined to have acted in a manner that “endangers” China’s national “sovereignty, security and development interest.” China has not made clear how it will determine when an entity should be placed on the UEL. Nonetheless, entities that do business or hope to do business in China must take seriously the prospect of being included on the UEL. Companies named to the UEL could be subject to severe restrictions, including a prohibition on engaging in China-related import or export activities.
The implementation of the UEL, and the potential reinvigoration of China’s export control regulations, means that multinational companies will need to manage the regulatory requirements posed by China’s regime while also taking into account the requirements of other jurisdictions, most notably US and EU obligations. Potentially competing requirements could require companies to choose between compliance with one regime over another. While China’s developments may ultimately bring a greater level of certainty to its export control regime, companies engaged in cross-border trade will need to develop strategies for working within the confines of the conflicting requirements.
As of December 1, 2020, the ECL also went into effect, establishing China’s first comprehensive framework for restricting exports of military and dual-use (items having both civilian and military applications) products and technology for national security and public policy reasons. It resembles the export control regime in the United States and certain enforcement provisions correlate with the UEL. The ECL’s purpose varies from its UEL counterpart, however. For instance, the UEL focuses more on terminating or suspending transactions of foreign entities with their Chinese trading partners, while the ECL’s “Controlled Entities” list concentrates more on Chinese companies and on compliance by subsidiaries and end-users. Violations of the ECL can be subject to severe penalties, including large fines, the suspension of business licenses, or the revocation of export qualifications.
Organizations with global operations should also take into account some of the lesser-known implications of the UEL rules:
Likewise, China’s ECL contains less obvious provisions that companies should consider, including:
Companies potentially subject to these changes in China’s trading regulations need to plan how they will address their new responsibilities. For example, entities may need to identify redundancies and update processes to enable operations to continue without interruption, and to address the new compliance risks associated with these regulations.
Morgan Lewis anticipates the enactment of more a fulsome framework as a legislative priority in the near future. For more in-depth information, please contact Stefani Cornwall for further information, including slides and a recording of a recent webinar on this subject.