The Strategic Significance of Beijing's New Export Control Law

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Research Fellow and Centre Coordinator East Asia Centre The Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi Dr. Jagannath Panda

 
In a massive move largely aimed at adding to countermeasures against trade restrictions imposed by the United States, China's legislative body the Standing Committee of the National People's Congress (NPC) passed the Export Control Law (ECL)1 on October 17, 2020. ECL came into effect at the beginning of December 2020; officially established and proposed to “safeguard national security and interests” and “enhance and regulate export control”. The ECL allows Beijing to limit, or even altogether block, Chinese shipments to international companies that it deems may compromise national security or be detrimental to either the public interest or environmental protections2. The ECL not only institutionalizes China's export control regime, but also marks the country's first comprehensive export control legislative framework to manage the outward flow of sensitive materials, products and technologies. 
 
First drafted in 2017, the Act's passing, at this juncture is seemingly a reaction to the US' ban on Chinese imports including cutting-edge technologies (such as 5G) from Chinese tech giants like Huawei which made trade with the second-largest world economy ever-more politicized3. However, although the ECL may have been spurred by US trade restrictions, the “milestone” regulation will affect both exporters and importers, and will have widespread repercussions that puts global businesses on their guard4. As Asia's largest economy5, and by being deeply integrated in the regional supply chains, the impact of the ECL on the trade ties with Asian partners which are exceedingly pertinent to Beijing's geopolitical future will be borne by China and all parties involved. In this context, how will the new regulation shape China's economic relationships with Asian economies, especially India, Japan and ASEAN, as well as the world at large? 
 
The ECL is expected to unite existing mechanisms in China to protect its national interest in light of unfamiliar international trade pressure. The law's limitations cover military supplies, items that can be redirected to military use, innovations, technology, services and information6. Export of such critical items will no longer be permitted without approval of the Chinese government, while some international companies may even be put on the nation's export boycott or limitations list. Entities found in violation of the ECL will not only be fined but also be held criminally responsible; highlighting the seriousness that the Chinese government is according to the trade tensions that Beijing is currently embroiled in with a spectrum of countries. 
 
China accounted for 14 per cent of India's imports and 5 per cent of Indian exports in 2019-20207, and remained India's second largest trade partner after the United States; for the first half of 2020-2021 financial cycle, China has overtaken the US as India's largest trade partner8. Additionally, Beijing is one of Japan's oldest and biggest trade partner9. Despite some reduction in Chinese imports in 2020, both India (which has a bilateral trade deficit with China worth almost USD 48.66 billion10) and Japan (with a bilateral trade of almost USD 1.20 billion11) still run huge trade deficits with China. 
 
China is focused on reinventing its manufacturing under ‘Made in China 202512' and becoming a self-sufficient world leader in quality, technology driven manufacturing. It seeks to achieve greater automations of production lines, indigenization of key technologies in high-tech and high-risk sectors, while also creating faster production lines and value-added jobs. Considering this shift in policy from a focus on importing advanced foreign technologies to exporting its own technology, the fact that China is now seeking to impose stricter export controls is no surprise. 
 
One of the major purposes of the ECL is to safeguard national security and interests, particularly by fulfilling international obligation such as non-proliferation, while ensuring state's export control on dual-use items, military products, nuclear goods, technologies and services. This is suggestive of China's greater willingness to comply with international control regimes. Essentially, China has a membership in only one multilateral export control mechanism: the Nuclear Suppliers Group (NSG). However, the ECL is indicative of the enhanced alignment between the country's focus on the control of missile goods and technology exports, and the standards adhered by several Multilateral Export Control Regimes (MECRs) such as the Australia Group (AG)13, the Missile Technology Control Regime (MTCR)14 and the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Technologies (WA)15, which China is not a part of. This, more importantly, provides a potential for greater international cooperation and engagement between China and the members of the MECRs, such as India, Japan as well as Australia on issues like non-proliferation. 
 
Nevertheless, the ECL confines export of items manufactured outside China as well as materials transported from China16. It further specifies that the Chinese government has the authority to take “reciprocal measures” against any country or region which misuses export control measures and represents a threat to China's national security interests. Hence, the ECL's provisions critically extend China's jurisdiction well beyond its national territory17, allowing for penalties on importers and end-users based outside the PRC. With the law in place, exports from China – which India and Japan remain heavily dependent on despite their emerging attempts at dismantling such overdependence – will come under duress even as the demand for imports from these states reduce further. 
 
For Indian and Japanese businesses, the impact of China's ECL will be especially tough on their Micro, Small & Medium Enterprises (MSMEs), which particularly deal with Chinese controlled items. India's MSMEs account for 30 per cent to the country's GDP18, while, the Small and Medium Enterprises (SMEs) in Japan are responsible for almost 70 per cent19 national employment and are central to the functioning of larger companies and industries in Japan20. The MSMEs and SMEs in both nations have become increasingly dependent on China for their manufacturing, raw materials and transport of goods; both India, under its ‘Atmanirbhar Bharat'21, and Japan, via its USD 2.2 billion stimulus22 to move manufacturing out of China, have realized the need for rapid decoupling from China amidst the pandemic. Simultaneously, investing in bilateral MSME sectors has become a major part of the India-Japan economic ties23
 
Likewise, on September 19, 2020, China also enacted the Provisions on the Unreliable Entities List (UEL) regime24, which catalogues non-Chinese parties acting “contrary to China's national interests” and allows Beijing to suspend normal transactions or impose discriminatory measures against these entities. The extra-territorial reach instituted under the ECL and the UEL furnishes25 China with more unequivocal and integral assets to counter restrictions by countries like the US, Australia, Japan and India – all of whom have banned variants of Chinese companies, products or applications over the past year, particularly those by the Chinese tech firms such as the Huawei, ByteDance (TikTok) and Tencent (WeChat). 
 
As governments across the world, especially the US, further constrict Beijing's access to cutting-edge technological innovations in areas like artificial intelligence (AI), ECL will be increasingly focused on safeguarding Chinese interests by penalizing foreign actors. By all indications, China's tech involvement in areas like telecommunication will dwindle in the coming times; while Japan has already banned Chinese investments through Huawei in its 5G telecommunication network26, India has imposed restrictions27 and is in the process of issuing an outright ban as well28. Both are instead devoting their focus to supporting each other in achieving their 5G goals29, eliminating the need for Beijing all together. This has already negatively impacted the Chinese interests, but now, such moves could potentially be subject to penalties or fines by Beijing30. Therefore, for countries looking to reduce their over-reliance on Beijing in light of the vulnerabilities exposed by the COVID-19 pandemic, the ECL is a vital tool in China's foreign policy arsenal that could hinder their efforts and coerce them into compliance.
 
Additionally, the law could also have serious implications for the Association of Southeast Asian Nations (ASEAN), which has swiftly risen to become China's biggest trade partner amidst the emerging trend of decoupling in the aftermath of the pandemic31. Alongside robust bilateral trade, in the first three quarters of 2020 alone, Chinese investment in ASEAN states equaled a whopping USD 10.72 billion32 – an increase of almost 77 per cent from the previous years. However, the Chinese government's increased control over their exports under the ECL could throw a break in the building economic momentum between both parties, hindering higher integration between their markets. Unlike with the West, China's trade structure with ASEAN is characterized by a production dispersion system in which both are integrated in cross-border supply chain networks. Such a co-production relationship is underpinned by China's export of critical and advanced technologies, machinery and appliances, with 2020 being marked the year of digital economy cooperation in China-ASEAN ties33. Hence, Beijing's tighter control over its tech outflows could potentially slow down their digital infrastructure cooperation. 
 
Furthermore, China's abilities to impose punitive measures on any organization acting in conflict to its national interest will only make the ASEAN further subject to China's will. The small and middle power states of Southeast Asia will only be more hesitant to take any action that could displease China and halt their collaborations in technologies which are likely to be critical drivers of future economies. 
 
Fundamentally, China's new ECL seeks to protect its national interests and security, refashion status quo export controls systems and demonstrate Beijing's strong commitment to fulfilling its international obligations34. Although many countries are re-evaluating their reliance on China, a complete economic decoupling from Beijing is an unfeasible scenario. Therefore, it will be critical for India, Japan, ASEAN and the world at large to focus on enhancing Chinese presence in international export control regimes in a manner that allows for multilateral cooperation and a positive-sum international trade governed by fair and equitable norms. With this goal, China's trans-Pacific partners must look towards the advantages that the ECL can bring and reorient their own trade policies vis-à-vis China in preparation of the impact of the law.
 
 
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1  Unofficial Translation Courtesy of Covington & Burling LLP. “PRC Export Control Law.”      https://www.cov.com/-/media/files/corporate/publications/file_repository/prc_export_control_law_2020_10_cn_en_covington.pdf(December 21, 2020 retrieved)
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Dr. Jagannath Panda is a Research Fellow and Centre Coordinator for East Asia at the Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. He is the Series Editor for “Routledge Studies on Think Asia”.

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