Against the backdrop of the U.S.-China trade frictions, the Bureau of Industry and Security (BIS), which is under the U.S. Department of Commerce, made changes to part 744 of the Export Administration Regulations (EAR) by adding 44 Chinese entities to its original export control list. These regulations came into effect on 1 August 2018.
According to the End-User Review Committee (ERC) of the U.S. Department of Commerce, these entities pose a “significant risk” to U.S. national security and foreign policy interest and were added to the list because they had made so-called illegal purchases of both goods and technology from the United States that were subsequently used in the Chinese military without authorisation. Here, it is worth noting that according to the ERC’s rules, a majority vote is required for an entity to be added to the list, but a unanimous vote is required for an entity to be removed from the list.
The 44 Chinese entities that have been added to the list include eight companies and 36 of their subsidiaries. Among these include the China Aerospace Science and Industry Corporation Second Academy and its affiliated research institutes, the 13th Institute of China Electronics Technology Group Corporation (CETC) and its affiliates and subsidiaries, the 14th Institute of CETC and its affiliates and subsidiaries, the 38th Institute of CETC and its affiliates and subsidiaries, the 55th Institute of CETC and its affiliates and subsidiaries, China National Technical Import and Export Corporation (CNTIC), China Volant Industry Co., Ltd. (VOLINCO), and Hebei Far East Communication System Engineering Co., Ltd..
By listing an additional 44 Chinese entities on its export control list in the midst of intensifying trade frictions between the two countries, the U.S. Department of Commerce is adding insult to the injury, and such a move by the U.S. Department of Commerce has heightened the sense of panic within the domestic market, at least from the perspective of the Chinese media and public. At this point of time, the only convincing and objective analysis of this situation within the country has been provided by the spokesperson of the Chinese Foreign Ministry, who voiced a tough official stance against it.
So, what are the implications of the U.S, government’s policies for China in light of the tightening export control review? How will this impact the Chinese market and will there be any long-term adverse effects? These are some of the questions that concern the Chinese market. Based on a comprehensive collection of data and analysis, the research team at Anbound Think Tank—cautiously—puts forward the following views on two issues that have garnered the most attention:
First of all, one must draw a distinction between an export control policy and an export embargo policy. There this perception within China that the 44 Chinese entities that have been added to the list will be subject to export embargoes by the U.S., and some media outlets have even reported that these 44 entities have been added to the embargo list. Likewise, some research institutions have also referred to this as an embargo, a case in point being the conference call that was allegedly recorded from the China International Capital Corporation (CICC), which states the following: “there is no need to panic about the US export embargo because since 2006, the BIS of the U.S. Department of Commerce has already established relevant regulations to limit exports to 31 major categories of products. Moreover, it is not as if such embargoes have not happened before, and we all know that the list is added to every few years.”
Anbound is convinced that it is a mistake to characterise the U.S. export review as an embargo, rather, it is a review policy of export licensing. It is necessary to interpret and understand this situation objectively in order to avoid other misunderstandings. One can only imagine how disastrous such a misreading would be if it affected decision making.
Anbound’s research team has perused a domestic report analysing the impact of similar export control policies in 2016. According to the report, of the US$115.78 billion worth of products that the U.S. exported to China in 2016, 77.0% had no regulatory requirements and 22.7% needed to declare Export Control Classification Numbers (ECCN). Furthermore, of the 22.7% required to declare ECCNs, 3.8% needed to apply for a license through the US Department of Commerce's BIS, while there were no license requirements (NLR) for the remaining 18.9% of exports. Of the 3.8% that required BIS licenses, 0.3% had to go through a license application process while the remaining 3.5% used BIS license exceptions.
In 2016, BIS reviewed 3,077 Chinese export or re-export license applications that had a total value of USD 6.4 billion. The global total of exports came up to 33,195 with a value of USD 235.40 billion, so China accounts for 9.3% and 2.7% of these figures respectively. Therefore, in terms of quantity, China’s share is 9.3%, but the proportion of China’s licensing applications is only 2.7%—this is a significant disparity that indicates that among the products that China has applied licenses for, there are relatively few that are of high value. In terms of the number of license applications, 82.2% of China's were approved, accounting for 2,528 items worth a total of USD 4.1 billion. Meanwhile, 85.0% of license applications were approved globally with a value amounting to USD 210.30 billion.
Evidently, the EAR is simply an export license review system that has been in place for many years on a global level; more than anything else, it is an export security control system. It is not, as some believe, an export control measure targeted at China, nor is it an embargo system.
Secondly, the U.S. has been gradually increasing its export controls for China. However, it is only to be expected that U.S. export controls on Chinese companies will gradually increase as U.S.-China trade frictions intensify. This will manifest in three ways: firstly, more and more Chinese entities will be added to the Export Control Audit, as seen with the recent addition of the 44 Chinese entities; secondly, export restrictions on Chinese entities will become stricter; thirdly, the U.S. will continue to expand the scope of its “national security.”
Based on what we have seen so far, the U.S. has been tightening its export controls towards China in recent years. For example, since 2014, the number of applications approved by the United States for China related to goods, software, and technology has decreased year by year. In 2014, the total value of these came up to $16.90 billion but the figure fell to $14.38 billion in 2015 and experienced a sharp decrease in 2016 when it fell to $4.12 billion. Moreover, the value of license applications that were Returned Without Action (RWA) has increased significantly, from $320 million in 2015 to $2.24 billion in 2016.
On the other hand, a closer examination of the list of export controls reveals that a lot of it hinges on the technical content of the export products. For example, in 2016, of all the products exported to China that were on the control list, the highest number of exports were of mass spectrometers, followed by aviation gas turbine engines, pressure sensors, computer numerical control (CNC) units, and biological material processing equipment. In terms of licensing exceptions, the export of information security systems, equipment, and integrated circuits to China were the highest, followed by equipment used for the production of semiconductor devices, non-9A001 controlled aircraft, gas turbines and their components, information security software, as well as navigation equipment systems and their components. Accordingly, there has been an increase of export controls on entities dealing with chips, radars, communications, etc. with the addition of the 44 new entities to the list, and the most significant impact that the export controls has on this companies is related to the import of equipment.
Final Analysis and Conclusion:
The US Department of Commerce's Bureau of Industrial Security (BIS) has added 44 Chinese entities to its export control list this year, and this has undoubtedly tightened export restrictions for Chinese companies. However, this only signifies that the scope of export license review has broadened and the license approval rate has been reduced—it is not an export embargo targeted at China.
