HCR Law Events

14 September 2020

How can we get new technology out of China? A look at China’s new restrictive export controls

Recent changes to China’s export controls will affect both those trying to buy newly ‘restricted’ products from within China, companies selling those products outside China and any international firm making or doing R&D work on them in China. The move is designed to ensure that a new range of products can only be exported with special approval.

The changes came at the end of August, from China’s Ministry of Commerce (MOFCOM), which announced the changes to the Catalogue of Technologies Prohibited or Restricted from Export (the Export Catalogue).

We won’t be setting out all the changes here, but some examples of technologies that have been newly added to the ‘restricted’ category are as follows:

  • core components of petroleum equipment
  • 3D printing
  • drones
  • password security
  • technology for apps that have push services
  • voice recognition
  • various other AI functions
  • certain vaccines.

It seems extremely unlikely that China would hobble its own industry champions and so we doubt that the restrictions will really bite companies like DJI that sell millions of drones worldwide.

What is the framework for China’s export controls?

When we talk about export in this context, we don’t just mean loading crates onto ships or planes.  The regulations cover many methods of transferring technology, including by shipping, by investment and even by “cooperation”. This would include patent licences, knowhow transfer and even technical advice contracts.

There is a solid legal framework in place for export control under which exports are either prohibited, restricted or freely permitted. The Export Catalogue, which sets out what products fit into each category, is occasionally updated by MOFCOM based on the policies of the wider Chinese government. This doesn’t happen very often – the last time was in 2008.

Contracts for export of ‘restricted’ products are only valid if approved by MOFCOM. The other two categories are self-explanatory – under no circumstances can ‘prohibited’ products be exported, while ‘freely permitted’ exports don’t need approval. Prohibited products are of various types and include, to take three random examples, satellite positioning technology, certain ingredients for Chinese medicine, and the process for making traditional Chinese xuan paper.

We do not yet know how China will handle export of the new ‘restricted’ technologies, but we do know how such exports were handled in the past:

  • get pre-approval by applying to the provincial branch of MOFCOM
  • wait while MOFCOM gets in touch with the relevant department of the Ministry of Science and Technology (MOST). (This part is not very transparent, or is as transparent as the relevant officials want to make it. They can demand all kinds of verifications and engage with the exporter in great detail, or they can just wave it on through.)
  • Finally, there is a verification procedure by MOFCOM.

How will this work in practice?

In practice this is not a commonly used procedure (according to MOFCOM). This is either because Chinese exporters ensure that their exports are not categorised as ‘restricted’ (the nature of many products means that the exporter itself has some discretion in how to categorise it), or because it is not common for Chinese entities to seek to export ‘restricted’ products. This would explain why MOFCOM staff are not familiar with this regime.

What should you do now?

Despite the above, foreign companies need to be wary of how these regulations might be wielded in the future. Anyone who has outsourced production or R&D of technologies in the above categories need to watch out in case China refuses to allow export of their own technology back out of China.  This doesn’t mean they shouldn’t do it, but it does mean they need to think carefully about how to structure such arrangements, either by limiting technology or seeking assurances from local government to reduce risk.

For advice or information, please contact Nicolas Groffman at ngroffman@hcrlaw.com or on 07816 592 934.

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About the Author
Nicolas Groffman, Partner, Head of International Team

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