The draft ECL sets a basic framework and unified standards for policies, lists, measures, supervision and management of China’s export control on items for nuclear and military use. When preparing the draft, the legislators also considered rules and standards adopted by foreign countries and international treaties, such as the Biological Weapons Convention, Treaty on the Non-Proliferation of Nuclear Weapons, and the Chemical Weapons Convention. Notably, China is not a member of various multilateral export control regimes of which the United States is a member, including the Australia Group, the Missile Technology Control Regime, the Nuclear Suppliers Group, or the Wassenaar Arrangement. Though China is not a member of these export control regimes, Chinese legislators considered and incorporated rules of these regimes when drafting relevant Chinese rules and regulations, which are the basis of the draft ECL:

ii. Export control policies and lists

China currently does maintain lists of items controlled for export. Military items are detailed on the Administrative List of Export of Military Products, which identifies specific military goods controlled for export. Dual-use items are detailed in the Index of Management of Import and Export Permits of Dual-Use Items and Technologies, which also covers nuclear, biological, chemical, and missile-related dual-use goods. The lists are available in Chinese only.

Under the draft ECL, the national export control administration departments with SCCMC shall be responsible for the export control policies and lists. The departments will assess the risk of the destination country or region to determine the corresponding export control measures.

Subject to the approval of China’s SCCMC, the export control administration department may adopt measures to prohibit the export of certain items, or prohibit the export of items to a specific country or region, or selling the items to specific individuals, entities or other organizations. In addition, China may impose a temporary control over goods, technologies or services not on the export control list. The draft ECL specifies that temporary control shall not be more than two years. The temporary control provision would codify existing practice. For example, in 2015 China imposed temporary control over unmanned aerial vehicle.

iii. Export control requirements on business operators

Consistent with existing practice, the draft ECL includes a license requirement on business operators for all items on the export control lists to be implemented by the ECL. Under the draft ECL, the export control administration department will consider the following factors when reviewing the application of the license: international obligations and commitments; China’s national security; sensitivity of the item; destination country or region; end user and end use; and credit records of the business operator.

The draft ECL also requires business operators to establish an internal export control compliance system. The business operator may obtain corresponding credits from the export control administration department, if the compliance system properly operates and the company has no record of a major violation.

iv. Supervision and management

The draft ECL sets the scope of electronic data that can be collected and reviewed for investigations on potential export control violations. Electronic data that relates to the facts of the export may be collected and reviewed, including but not limited to, documents and certificates, agreements, books and accounts, business communications and other relevant materials.

The draft ECL did not introduce any mitigating measures for voluntary disclosures of potential violations. However, the final version might include such measures, as China is working on setting up voluntary disclosure rules in relevant areas. For example, the 2016 Regulation on Customs Inspection provides for a reduction in or mitigation of an administrative penalty, if an entity voluntarily discloses its violation to the CCB. For voluntary disclosures of minor violations which are timely rectified and have not caused any actual damage, the CCB may even exempt the entity from any administrative penalty.

2. China’s ‘Unreliable Entity List’ regime

On May 31, 2019, MOFCOM announced that China would introduce the UEL regime for the stated purposes of protecting the national security and interests of China. The UEL regime will operate under China’s Foreign Trade Law, Anti-Monopoly Law, National Security Law and other relevant China laws and regulations. China has yet to release the companies on the list or any detailed enforcement measures against the companies.

The following four factors will be considered when determining whether a foreign entity or individual should be added to the Unreliable Entity List:

i. whether the entity has implemented any measures to boycott or cut off supplies to Chinese companies, or taken any other discriminatory actions against Chinese companies;

ii. whether these actions are taken for noncommercial purposes, and in breach of market rules or contract obligations;

iii. whether these actions cause actual damage to the Chinese companies and relevant industrial sectors; and

iv. whether these actions threaten or potentially threaten China's national security.

3. China institutes national security system in Hong Kong

On May 28, China passed the Decision of the National People’s Congress on Establishing the National Security Law and Enforcement Mechanism in Hong Kong (Decision). The Decision includes an introduction and seven general clauses regarding establishment of the National Security law system in Hong Kong. General Clause One provides that the law system should maintain the “one country, two systems” principle. General Clause Four provides that “Hong Kong shall set up institutions and establish a comprehensive enforcement system to protect its national security.” In particular, General Clause Four states that “the central government of China shall be entitled to set up offices of relevant agencies or institutions in Hong Kong, to protect the national security and perform relevant duties.”

Based on that Decision, on June 30, the Standing Committee of the National People’s Congress of China passed the Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region, establishing the national security system in Hong Kong. The new law comprises six chapters and a total of 66 articles, providing for: (1) the duties of Hong Kong government to protect national security; (2) the Hong Kong government agencies responsible for such duties; (3) the offices of the Central People’s Government in Hong Kong for the protection of national security; (4) the crimes of secession, subversion, terrorism, and collusion with foreign forces, which are all punishable up to life imprisonment; and (5) the jurisdiction, application of laws and procedures. This law applies to Hong Kong citizens and people from other countries who commit the above crimes in or outside Hong Kong territory.

B. U.S. trade regulations and national security developments regarding China

The U.S. government has taken various regulatory and legal action in rapid pace within the last few months in response to China’s security measures in Hong Kong and concerns regarding efforts by military end users in China to acquire U.S. items and technology for the development of weapons, military aircraft, and surveillance technology, among other military end uses, through civilian supply chains or under civil end-use pretenses.

1. Revision of the Military End Use and End User rules

On April 28, the Department of Commerce’s Bureau of Industry and Security (BIS) issued a new rule under EAR, expanding the export, reexport, and transfer controls related to military end use and military end users in China, Russia, and Venezuela. The new rule took effect on June 29. The new rule is one of several recent export control actions taken by BIS, including the elimination of certain license exceptions, to prevent what the Commerce Department sees as circumvention efforts by China, Russia, and Venezuela to acquire U.S. technology under civilian-use pretenses.³ Commerce Secretary Wilbur Ross stated: “It is important to consider the ramifications of doing business with countries that have histories of diverting goods purchased from U.S. companies for military applications,” adding: “Certain entities in China, Russia, and Venezuela have sought to circumvent America’s export controls, and undermine American interests in general, and so we will remain vigilant to ensure U.S. technology does not get into the wrong hands.”⁴

Importantly, BIS expanded the licensing requirements to China for certain low-sensitivity items. Under the new rule, BIS requires exporters, reexporters, and transferors to obtain a license for specified low-sensitivity items if at the time of the export, reexport or transfer to China they had knowledge that the item was intended in entirety or in part for Chinese military end users, in addition to military end use. The relevant items subject to this license requirement are listed in the regulations under Supplement No. 2 to 15 C.F.R. Part 744. BIS already required a license for such items intended for a military end use and end users in Russia and Venezuela.

Reed Smith published a detailed summary of the expanded MEU rule, which can be found on reedsmith.com.

More recently, BIS published FAQs regarding the MEU rule, which can be found at bis.gov/FAQs. Many of the FAQs address questions regarding the scope of what constitutes a military end user by directing exporters to conduct due diligence on the specific end user, particularly between parent and subsidiary entities or affiliated entities. This is good and bad news for exporters. The good news is that BIS is essentially confirming that exporters should not assume a specific end user is a military end user just because it is owned by a parent or is affiliated with an entity that engages in military activities. The bad news is that BIS provides little guidance on appropriate levels of due diligence, leaving exporters with significant risks to manage.

2. Announcement to decertify Hong Kong’s autonomy

The U.S. State Department is required by the Hong Kong Policy Act of 2019 (HKPA) to annually assess the autonomy of Hong Kong from China. In response to China’s National People’s Congress announcement to impose national security legislation on Hong Kong, Secretary of State Michael Pompeo, certified to Congress “that Hong Kong does not continue to warrant treatment under United States laws in the same manner as U.S. laws were applied to Hong Kong before July 1997” and stated that “no reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China.”⁵ On May 28, Pompeo submitted a report and certification to Congress, in which he stated that “[t]he Department of State is obligated by law to certify to Congress annually whether Hong Kong continues to warrant differential treatment under U.S. law. After careful consideration, as required by Section 301 of the Hong Kong Policy Act, I can no longer certify that Hong Kong continues to warrant such treatment.”⁶

On May 29, President Trump announced that the U.S. government will take the following actions:⁷

• Revoke Hong Kong’s preferential treatment as a separate customs and travel territory from the rest of China;
• Begin the process of eliminating policy exemptions that give Hong Kong different and special treatment that “will affect the full range of agreements [the United States has] with Hong Kong, from our extradition treaty to our export controls on dual-use technologies and more, with few exceptions;”
• Take necessary steps to sanction Chinese and Hong Kong officials directly or indirectly involved in eroding Hong Kong’s autonomy;” and
• Revise the State Department’s travel advisory for Hong Kong to reflect the increased danger of surveillance and punishment by the Chinese state security apparatus.

3. New export control restrictions on Hong Kong

With respect to export controls, per the recent announcements from the State Department and Department of Commerce, new restrictions will now apply to Hong Kong, in line with restrictions applicable to China. Prior to these changes, the EAR implemented by the Department of Commerce’s Bureau of Industry and Security (BIS) treated Hong Kong as a separate export destination from mainland China. As a general matter, most dual-use items that require a license to China also require a license to Hong Kong. However, Hong Kong was a less restricted destination than China under the EAR due to various end use and end user controls that apply to China. In the past, BIS had also stated that Hong Kong receives favorable treatment with regard to U.S. export licensing, meaning that BIS was treating Hong Kong favorably when reviewing license applications. The main restrictions on China under the EAR that do not currently apply to Hong Kong, but may soon apply in light of recent developments, include the following:

• China is classified under Country Group D, whereas Hong Kong is currently classified under Country Group A:6 and B. Countries classified under Country Group D generally do not receive the full benefit of various license exceptions. BIS has further removed the applicability of License Exception Civilian End Users and License Exception Additional Permissive Reexports to China. The Department of Commerce recently confirmed that it is removing the availability of any license exception for Hong Kong that is not available for China.
• China is subject to a military arms embargo which prohibits the export of any military items to China and requires exporters to obtain a license from BIS to export a broad list of commercial items, including mass-market IT and software products, to military end users or for military end use in China (the MEU Rule). BIS maintains a policy of denial for such license requests. A summary of the expanded MEU rule can be found on reedsmith.com.
• China is subject to a restriction on exports, reexports and transfers of microprocessors and associated “software” and “technology” for “military end uses” and to “military end users.” BIS maintains a presumption of denial for applications to export, reexport or transfer (in-country) such items.

As initially referenced, the State Department also announced that the United States is ending exports of U.S.-origin defense equipment and will take steps toward imposing the same restrictions on U.S. defense and dual-use technologies to Hong Kong as it does for China.

4. Other potential changes in U.S. trade law

In light of President Trump’s announcement to revoke Hong Kong’s status as a separate customs territory, Hong Kong may now be subject to the same trade tariffs and duties as China. The Office of the U.S. Trade Representative (USTR) has issued increased tariffs on certain imported products from China under Section 301 of the Trade Act of 1974. At this time, the additional duties imposed by the Section 301 remedy only apply to articles that are products of China. Imported goods that are legitimately the product of Hong Kong or Macau are not currently subject to the additional Section 301 duties.

From a U.S. sanctions perspective, the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) does not currently maintain any broad economic sanctions against China but has sanctioned certain Chinese entities as Specially Designated Nationals or blocked parties under various sanctions programs including North Korea. In addition, BIS has listed numerous Chinese companies, universities, as well as Hong Kong entities on its Entity List, which restricts exports to those entities.

In his recent announcement, President Trump stated that the U.S. government intends to “sanction [Chinese] and Hong Kong officials directly or indirectly involved in eroding Hong Kong’s autonomy”.⁸ The authority for such sanctions comes under Section 7 of the HKPA, as amended by the Hong Kong Human Rights and Democracy Act of 2019 (HKHRDA), where the President shall, subject to waiver power, impose sanction on individuals identified as responsible for the extrajudicial rendition, arbitrary detention, or torture of any person in Hong Kong; repeated acts or decisions which contravene the shared obligations of China and Hong Kong under the Joint Declaration and Basic Law and undermine the national interests of the United States in Hong Kong’s autonomy and the rule of law; or other gross violations of internationally recognized human rights in Hong Kong. Sanctions that can be imposed under HKPA on such identified individuals include asset blocking, revocation of visas, ineligibility for visas for the sanctioned individual and immediate family, admission or parole. Following President Trump’s announcement, on May 29, the White House issued a proclamation titled “Proclamation on the Suspension of Entry as Nonimmigrants of Certain Students and Researchers from the People’s Republic of China.” The proclamation, effective June 1, announced certain limitations on the entry of students and researchers from the People’s Republic of China.

On May 21, a bipartisan bill, the Hong Kong Autonomy Act, was introduced in the U.S. Senate “to impose sanctions with respect to foreign persons involved in the erosion of certain obligations of China with respect to Hong Kong, and for other purposes.”⁹ The bill would, among other things, “impose mandatory sanctions on entities that violate China’s obligations to Hong Kong under the Joint Declaration and the Basic Law. The legislation would also impose mandatory secondary sanctions on banks that do business with the entities in violation of the Basic Law.”¹⁰ The legislation also expresses support for allowing Hongkongers to become eligible to obtain lawful entry into the United States if they are facing persecution or violence from Beijing. The bill has passed both the Senate and House of Representatives and will now go to the President for signature.

With respect to economic sanctions, and notwithstanding any additional legislation that may be passed by U.S. Congress, the President has broad authority under the International Emergency Economic Powers Act (50 U.S.C. 1701 et seq.) (IEEPA) “to deal with any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States, to the national security, foreign policy, or economy of the United States, if the President declares a national emergency with respect to such threat.” Under IEEPA, to the extent the President declares a national emergency with respect to a threat, the President has broad authority to, among other things, regulate and prohibit transactions with any foreign country or any nationals of the foreign country.

C. Key Takeaways

• China’s final version of the ECL is expected to be released in 2021. Before the law is formally issued, companies should review its business scope and operations based on the draft ECL and the existing lists to identify if any products, services, technologies or other items may be subject to China’s export control.
• Under the draft ECL, companies in China will be required to establish an internal export control compliance system based on the requirements set forth in the draft ECL. Such a system can help companies identify potential risks and timely disclose the violations to the CCB so that the company may obtain a reduction in or mitigation of an administrative penalty.
• When released, the UEL will have significant impact on any listed U.S. companies doing business in China. The UEL will also increase due diligence requirements for Chinese companies doing business with U.S. companies.
• Hong Kong’s status change under U.S. law will have a direct practical impact on U.S. importers and exporters who deal with Hong Kong. Products from Hong Kong may now be subject to additional tariffs when imported into the United States. U.S. exporters to Hong Kong will face a less favorable export licensing regime, additional scrutiny, and increasing due diligence requirements.
• The U.S. government has indicated its intention to sanction foreign government officials determined to be directly or indirectly involved in eroding Hong Kong’s autonomy. Further, the U.S. Congress has recently passed new legislation for broader sanctions, including mandatory secondary sanctions on banks. Specifically, the U.S. Senate and House of Representatives passed the Hong Kong Autonomy Act, which would in relevant part “impose mandatory sanctions on entities that violate China’s obligations to Hong Kong under the Joint Declaration and the Basic Law.” The bill has been sent to the President for signature.
• The U.S. government may also implement other policy tools, including favorable immigration policies toward Hongkongers and revised travel warnings by the State Department.

1. Press Statement, Secretary of State Michael R. Pompeo, U.S. Government Ending Controlled Defense Exports to Hong Kong, U.S. Dep’t of State (June 29, 2020), state.gov/defense-exports-to-hong-kong.
2. Press Release, Secretary of Commerce Wilbur Ross, Statement from U.S. Secretary of Commerce Wilbur Ross on Revocation of Hong Kong Special Status, U.S. Dep’t of Commerce (June 29, 2020), commerce.gov/revocation-hong-kong.
3. Press Release, Secretary of Commerce Wilbur Ross, Commerce Tightens Restrictions on Technology Exports to Combat Chinese, Russian and Venezuelan Military Circumvention Efforts, U.S. Dep’t of Commerce (April 27, 2020), commerce.gov/commerce-tightens-restrictions.
4. Id.
5. “P.R.C. National People’s Congress Proposal on Hong Kong National Security Legislation,” U.S. Department of State, press release, May 27, 2020, state.gov/hong-kong-national-security-legislation.
6. “2020 Hong Kong Policy Act Report,” U.S. Department of State, report, May 28, 2020, state.gov/2020-hong-kong-policy-act-report.
7. “Remarks by President Trump on Actions Against China,” The White House, remarks, May 29, 2020, whitehouse.gov/president-trump-actions-china.
8. “Remarks by President Trump on Actions Against China,” The White House, remarks, May 29, 2020, whitehouse.gov/president-trump-actions-china.
9. S.3798 — 116th Congress (2019-2020).
10. “Toomey, Van Hollen Introduce Sanctions Bill to Defend Hong Kong’s Autonomy,” U.S. Senate Office of Pat Toomey, press release, May 21, 2020, toomey.senate.gov.

Client Alert 2020-423