China’s Export Control Law went into effect today. Ostensibly meant to bolster Chinese national security, the choice to enact it at this particular moment was likely spurred by a desire to provide Beijing with the legal ground to retaliate against export restrictions put in place by the Trump administration targeting China. Given such motivations, the new law could have a significant impact on bilateral trade and investment flows.
One of the most immediate results of the law, which features vague language and broad provisions, will be to increase the compliance burden on U.S. companies. But its impact could also prove much more sweeping. As some observers in China have pointed out, the law could enable Beijing to impose new restrictions on rare earth exports, either as retaliation against U.S. export restrictions or negotiating leverage. Beyond its immediate harm to U.S. supply chains, such a move would further roil the bilateral relationship and further fuel calls for decoupling the two economies.
China’s law could also motivate other countries to take similar measures. Japan, for example, recently imposed export controls on three key semiconductor materials to South Korea, citing concerns such materials could be used for military purposes. Unsurprisingly, South Korea views the decision as politically motivated.Although international adjudication could help limit the abuse of export controls, the crippled state of the World Trade Organization’s dispute settlement body means that such measures could prove ripe for abuse. This could disrupt international trade at a moment the global economy can least afford it.
The TikTok Deal
Beyond its abstract and theoretical consequences, the law could quickly and concretely impact the lives of U.S. citizens. Chinese company ByteDance, parent company of the wildly popular social media app TikTok that claims usage by 100 million Americans, was requested by President Trump to divest its U.S. operation by November 12 (later extended to December 4). At the center of this issue is TikTok’s algorithms, which industry analysts say are the “secret sauce” to the company’s success.
TikTok’s algorithms, however, appear to fall into two categories under China’s export control law: (1) personalized information push service technology based on data analysis, and (2) artificial intelligence interactive interface technology. ByteDance already submitted an application for an export license pursuant to China’s export control rules, but it is unclear when Beijing will announce its decision. In the meantime, to avoid running afoul of Chinese laws ByteDance and Oracle negotiated a deal under which Oracle will be ByteDance’s technology partner and assume management of TikTok’s U.S. user data but will not receive the algorithms from ByteDance.
However, this effort to comply with China’s new export restrictions may result in the Trump administration’s rejection of the deal, with Treasury Secretary Steven Mnuchin insisting that “All of the code will have to be in the United States. Oracle will be responsible for rebuilding the code, sanitizing the code.” If the divestiture effort fails, millions of U.S. TikTok users could lose access to the application.
The Ambiguous Export Control Law
China traditionally has implemented export controls through regulations, and its effort to craft a comprehensive Export Control Law did not begin until 2017. A final text was approved in October. Despite the years‐long process, some key parts of the law are still vague, which creates some uncertainties and challenges for the business community as it navigates these new rules.
This lack of clarity begins with the law’s key stated objective. Although the text declares the law’s goal as the protection of “national security and interests,” it does not provide further elaboration and the exact scope is unknown. Relatedly, the law authorizes agencies to take reciprocal measures if “any country or region abuses export control measures to endanger the national security and interests” of China. Again, under what circumstance this provision will be invoked is unclear.
In addition, the law provides for the establishment of a list of controlled items, which has not been published. This list is likely to include items already found on existing lists subject to China’s export control regime. However, the law also has a catch‐all provision, which allows export restrictions to be placed on items not currently on the controlled lists. This provision allows the authority to subject ad hoc items to export controls without going through an additional regulatory process first, adding another layer of uncertainty for the trade community.
The extra‐territorial jurisdiction of the law is similarly murky. The current law restricts re‐exports of Chinese goods and technology, but it does not define “re‐exports.” An earlier draft stipulates that foreign products that contain a certain percentage of China‐origin controlled items will also be subject to the law. However, this language has been taken out in the final text. As a result, the law’s extra‐territorial impact will not be known until Beijing enforces it.
How the Chinese Export Control Law will be carried out remains to be seen. At a first glance, it gives China another powerful legal tool in the trade war with the United States. As bilateral relations further deteriorate, we may see the law become a prominent feature of the trade landscape.