It’s common knowledge that China exports heavily to the United States. But lost in the headlines about the prickly relationship between the two countries is how much the U.S. exports to China.
While the trade balance remains strongly in China’s favor, the United States exports more to China each year than anywhere else in the world except Canada and Mexico—more than $150 billion in 2022, accounting for 7.5 percent of all U.S. exports, according to the Bureau of Industry and Security (BIS).
These exports aren’t typically consumer goods, but rather agricultural products; industrial materials like plastics and chemicals; and industrial machinery and equipment. Despite the significant additional controls imposed on exports to China in recent years, little of it is highly controlled; in 2022, 98.6 percent of all U.S. exports to China were classified either as EAR99 or in an Export Control Classification Number (ECCN) qualifying for shipment with No License Required (NLR).
But the fraught relations between the two countries, and the increasing divide between global political blocs – U.S./NATO vs. Russia/China to put it crudely – can create confusion about export controls on U.S.-origin and other items bound for China.
For an overview about exporting to China, see the related post, Complying With U.S. Export Controls to China – Three Strategies for Success. For an update on how the export environment to China has evolved over the last few years, read on.
ITAR and a policy of denial
China has been under a U.S. arms embargo since the Tiananmen Square massacre in 1989. That means there is effectively no defense trade with China. Any license applications to export to China under the ITAR meet with a general policy of denial.
Also, for the purpose of U.S. export controls, including the ITAR, Hong Kong has been stripped of its previous status as a distinct destination and is now treated like any other region of China.
The EAR: It gets complicated
Some people assume this embargo somehow extends to all items subject to the EAR. That’s not the case. But you could forgive the error since a cursory glance at China’s entry in the Commerce Country Chart, which itemizes applicable EAR reasons for control to each country, displays a lot of Xs. (Remember: An “X” means a license is required for ECCNs with the corresponding reason for control.)
And new controls are being added regularly. For instance, BIS recently imposed a license requirement on items controlled unilaterally for nuclear nonproliferation reasons by inserting an X in China’s Nuclear Nonproliferation Column 2—even though China remains part of the 48-nation Nuclear Suppliers Group.
Other controls have been added for items related to advanced computing and semiconductor manufacturing—part of a two-pronged push by the federal government to 1) make it harder for China to obtain sensitive U.S. technology, and 2) increase U.S. capacity to produce these items domestically.
As part of these EAR controls, all items classified in 600 series (military) and 9×515 (space) ECCNs require a license for China. And you’ll want to be sure that your business with China is properly authorized, because all exports of items on the Commerce Control List (CCL), no matter the value, must be reported to the government using the Automated Export System (AES).
Foreign-Direct Product Rules
The Foreign-Direct Product Rules (FDPRs) are the mechanism by which BIS extends the scope of the EAR beyond U.S.-origin items to control the reexport and transfer of foreign-made items if their production involves certain U.S. technology, software or equipment. Application of the rules can vary, depending on the destination, parties or activities involved. [For more detail, see related post: Understanding the Foreign Direct Product Rule.]
These rules have been greatly expanded in recent years. They now take several different forms and have become much more important, as well as a source of confusion. Seven of the nine FDPRs apply to China or Chinese entities, including:
- The National Security, 9×515 and 600 series FDPRs render a range of foreign-made dual-use, space and military items subject to the EAR for reexport or transfer to China.
- The Entity List FDPR takes aim at Chinese technology champions – including Huawei, Biren Technology and Loongson Technology – by including non-U.S.-origin-items made with technology and software controlled in specific Category 3, 4 and 5 ECCNs.
- The Russia/Belarus-Military End User FDPR includes several Chinese entities for what BIS alleges are their contributions to Russia’s military or defense industrial base. This FDPR has an especially broad product scope, which may apply to a non-U.S.-origin item that is a direct product of technology or software subject to the EAR and classified in any ECCN.
- The revised Advanced Computing and Supercomputer FDPRs target direct products of technology or software – as identified by certain Category 3, 4 and 5 ECCNs – destined for China. The Advanced Computing FDPR can also apply to affiliates of Chinese entities in any country.
BIS has made clear its intent to enforce the FDPRs. In 2023, data storage company Seagate Technology was fined $300 million – the largest standalone administrative penalty in BIS history – for reexporting hard drives to Chinese telecom giant Huawei.
End-use and end-user restrictions
Looking for restricted parties is one of the more labor-intensive aspects of an export compliance process. It’s difficult to come up with a precise number of parties in China, Hong Kong or Macao that have ended up on a restricted party list [see related post: Understanding The Various Restricted Party Lists]. But it’s somewhere around 2,000 and includes some large, established multinational operators. There are numerous Chinese entries on all the BIS-maintained lists: Entity List, Denied Persons List, Unverified List and Military End-User List.
So after determining if an export is eligible for NLR or a license exception, make sure to conduct a thorough search for any end-use or end-user-based restrictions that prohibit the export.
Worth noting: The Specially Designated Nationals (SDN) List, maintained by the Office of Foreign Assets Control (OFAC), contains some of the most radioactive non-U.S. entities sanctioned by the U.S. Many are associated with comprehensively sanctioned governments, drug trafficking, terrorism and human rights violations. U.S. companies absolutely, positively can’t do business with them.
But OFAC has other lists too. One of the newer ones is the Non-SDN Chinese Military Industrial Complex Companies List (NS-CMIC). Created in 2021 as part of an effort to prohibit U.S. investments in China’s military-industrial complex, it has no direct bearing on export controls. However, if you use the government’s Consolidated Screening List to search for restricted parties, or if you pay a commercial service to help in that search, entities on the NS-CMIC List will show up alongside entities from the SDN List.
So look carefully at screening results. A name that shows up from the NS-CMIC is prohibited from receiving financial investments—but not necessarily from receiving EAR-controlled exports. Still, it may be wise to consider reputational or other risks when doing permissible business with a company on any restricted party list.
Many shipments to China are also affected by the EAR’s Military End-Use Rule (MEU), which imposes a license requirement on export, reexports and transfers of items identified in Supplement No. 2 to Part 744 of the EAR when the shipper knows the item is intended for a military end-use or a military end-user.
The MEU rule now applies to more items than it once did, including in some widely applicable ECCNs such as 3A991 (microprocessors, integrated circuits), 5A992/5D992 (mass market encryption) and 9A991 (many aircraft parts).
Risk of diversion
China has a long history of doing business with countries under strict U.S. sanctions, such as North Korea and Iran; and it has long presented an elevated risk that exports will be diverted for an unauthorized end use or end user.
For example, in January 2024, the Department of Justice indicted four Chinese nationals for an alleged conspiracy to smuggle U.S.-origin electronic components to Iran’s military by first sending them through Hong Kong and China. According to DOJ, the activities in question date from 2007 until at least 2020. If convicted, the defendants face prison sentences that could exceed 30 years.
At one time, export controls to Russia and China were comparable. But since Russia’s 2014 annexation of Crimea and especially its 2022 full-scale invasion of Ukraine, tight export controls to Russia have been imposed on such a wide range of items that it’s become comparatively easier to export to China.
Given the strong China-Russia relationship and Russia’s need for goods to support arms production, regulators are serious about enforcement of rules around unauthorized reexports to Russia; and China is considered a country of concern.
Supply chain complexity
So many supply chains run through China that it can be difficult to identify and prevent export violations. Many U.S. companies routinely transmit drawings and documents to Chinese companies to obtain quotes, produce goods and collaborate with affiliates there. It’s not enough that you don’t export sensitive items to China without authorization. You should take care to ensure nobody else in your supply chain is doing so either.
It does happen. In 2022, BIS issued a Temporary Denial Order (TDO) – one of the harshest civil sanctions available – temporarily suspending all export privileges of Quicksilver Manufacturing Inc. and two related companies. The reason: Multiple instances when Quicksilver or its affiliates shared technical drawings and 3D-CAD files of military and space-related components to partners in China. The situation was only discovered after one company ordered sensitive parts from Quicksilver and received them with labeling indicating they were shipped from China.
In February 2023, 3D Systems – a pioneer in 3D printing – accepted a $27 million settlement for much the same thing, according to BIS: exporting designs and technical data subject to the EAR and the ITAR to its Chinese subsidiary, among others, to get quotes for production.
The takeaway is that procurement is a major risk in today’s supply chain environment. You need strong internal controls against the inadvertent export of information while doing everyday business. Even email and cloud-based services present risk. [See related post: Navigating the Export Implications of Cloud Computing.]
Deemed exports
If technology or software source code subject to the EAR is provided to a foreign person in the United States, it’s treated like an export to that person’s home country. Some fairly common technologies and software may trigger license requirements before sharing with Chinese nationals—particularly those related to aerospace, telecommunications, semiconductors and other electronics.
Many Chinese students study in undergraduate and graduate programs at U.S. universities, then seek to join the U.S. workforce, so while deemed export requirements are by no means limited to Chinese persons, they often arise with them.
When a company hires a foreign person and needs to provide that person with access to technology or software which requires a license to China, it obtains a deemed export license. It’s a reasonably routine process; BIS authorized about 1,350 deemed export licenses in 2022, with 35 percent involving Chinese nationals.
If your company hires foreign nationals and handles technology or software that requires any kind of export license, obtaining deemed export licenses when appropriate and strictly controlling access to sensitive information are important compliance issues.
It’s worth mentioning that there is also such a thing as a “deemed reexport”—a similar concept to a deemed export that may arise with technology or software releases outside the U.S. For example, if a Singaporean company wants to release certain controlled technology or software subject to the EAR to its Chinese employee, that could be a deemed export requiring a license.
Do you have questions about exporting to China, Hong Kong or Macao? Visit kj5v.617885.com to learn about our company, our faculty, our staff and our esteemed Export Compliance Professional (ECoP®) certification program. To find upcoming e-seminars, live seminars in the U.S., Europe and elsewhere and live webinars, and browse our catalog of 75+ on-demand webinars, visit our ECTI Academy. You can also call the Export Compliance Training Institute at 540-433-3977 for more information.
Scott Gearity is President of ECTI, Inc.