“A free and open economy is the foundation of global peace and prosperity.”
– Prime Minister Shinzo Abe, G20 summit, June 2019.
On July 1, 2019, only few days after Japanese Prime Minister Shinzo Abe opened the G20 summit with a speech endorsing an open global economy, the Japanese government announced that it will impose tighter controls on technology-related exports from Japan to South Korea for reasons of national security. The controls may have a devastating effect on trade between the two countries and will create further drag on the world economy.
The Movement of Technology: A Changing Landscape
Regular readers of globaltradelawblog will not be surprised to hear of new export controls designed to prevent the spread of knowledge. The new Japanese export control measures are part of a larger trend: countries are building walls around foreign access to their technology. Export control regulations are nothing new (the U.S. Government passed the Trading with the Enemy Act in 1917). But the recent trend of nationalism is throwing up new fences at a time when the world’s technology development is more interwoven across borders than ever.
The United States has increased its technology controls both through foreign investment scrutiny and export control enhancements (for more discussion, see our International Tech Investment Issue).
One of the new regulations in this trend may have some unexpected effects – at least, it may take some U.S. consumers by surprise. The regulation is a Chinese Export Control proposal that would establish the country’s first comprehensive and unified export control legislation. It would also impose U.S.-style controls on the export of knowledge.
China’s Proposed Controls: A Tech-tonic Shift
We note that there is no guarantee that the bill will be passed into a law anytime soon. Though, considering the actual context of international trade war, and the fact that China recently released an Entity List, there is reason to believe the bill may be enacted before the end of this year.
The bill looks a lot like the current U.S. export control regimes. It sets forth four categories of controlled items including:
- Dual-use items which may be used for civilian and military purposes;
- Military items;
- Nuclear items; and
- Other goods, technologies, services and items that are related to national security.
The bill also introduces a requirement to obtain government licenses (which would be issued by the State Council together with the Central Military Commission) for carrying out controlled activities. Depending on how the controls are implemented, it is possible that certain software and technology, including encryption, and certain hardware, including semiconductors, could be subject to licensing requirements. That could mean that your smart phone (which might be designed in California, but manufactured in China) may need a license just to get out of China.
The penalties for exporting goods, software, or technology from China without the appropriate license could result in some substantial penalties:
- An administrative penalty of up to 10 times the illegal business revenue or a fine of up to CNY 500,000 (USD 72,690) could be imposed if the illegal business revenue is less than CNY 50,000 (USD 7,269); and
- Any illegal income could be subject to confiscation.
Persons directly in charge and other persons directly held liable (not expressly defined, but may include employees or agents of the exporter) may also be given a warning and fined up to CNY 300,000 (USD 43,611). More serious violations could also lead to criminal charges.
The bill grants the Authorities with significant investigative powers. For instance, the Authorities would be able to enter the business premises of parties under investigation for violations of Export Control rules, conduct interviews, access relevant documents, seize assets or bank accounts of wrongdoer. That section of the law could give Chinese investigators significant powers to look into the inner workings of foreign companies through their Chinese presence.
Addressing the Changes: Stay Informed, Stay Nimble
The proposed Chinese export control legislation is still in draft form. It remains to be seen how the provisions will be enforced, whether any exemptions will be introduced, or if there will be any significant update to the bill before it is passed into law. However, global companies should take note of the potentially broad impact of the proposed bill. They should also be clear-eyed about the construction of new barriers to the free exchange of technology and goods around the globe.
Technology companies (and the know-how they control) are viewed more and more as critical national security assets of their respective countries. The geopolitical interactions of those countries will almost certainly pull and press the companies that span their borders. With significant changes happening now, and more changes almost certain to come, large companies may need something like their own State Department. Ok, maybe not a whole department, but companies would be well advised to invest in resources that can keep them up to date on the only thing that we can be certain of in today’s global economy: that everything changes.
*Julien Blanquart is an intern at Sheppard Mullin.