With new export controls, US takes another step to clamp down on China

New US rules restricting exports to China to prevent sensitive technologies from being used by the Chinese military are the latest development in the deteriorating relationship between the two countries. And the worst is yet to come, legal experts say.

The new rules, which went into effect on June 29, expanded requirements for US exporters to obtain licenses for goods intended for military purposes, including for weapon development, military aircraft or surveillance operations.

The expansion, first introduced by the US Commerce Department in April, also banned exports to any entities in any relationship with China's People's Liberation Army, labelling them as potential military end users.

While the rules, also applicable to Russia and Venezuela, have existed for more than a decade, the expansion shows the Trump administration's commitment to find every angle in its "whole of government" approach to confronting China and containing China's technological ambitions.

People's Liberation Army soldiers wearing protective face masks as they march past the Forbidden City in Beijing. The US has tightened export restrictions for products that could wind up used by the PLA. Photo: EPA-EFE alt=People's Liberation Army soldiers wearing protective face masks as they march past the Forbidden City in Beijing. The US has tightened export restrictions for products that could wind up used by the PLA. Photo: EPA-EFE

The administration has ratcheted up fights against China, first in trade, then on multiple fronts with a focus on tech. US export policy has toughened extensively. In recent years, the Commerce, Defence and State departments have instituted a slew of regulations to rein in tech transfers to China.

Among other measures, Chinese tech acquisitions have faced more stringent reviews, and scores of Chinese individuals and companies have been placed on an "entity list" to block them, for national security concerns, from doing business with American counterparts.

After China imposed a national security law on Hong Kong a month ago - alarming US officials who now regard the city as merely another part of the mainland - Washington swiftly removed Hong Kong's export licensing privileges to restrict its access to "sensitive US technology" and cut off Beijing's access to hi-tech goods that can be used to bolster the PLA.

"This is just one rule out of a number of actions we've seen that are impacting China. And there is more to come," George Grammas, a Washington-based international trade lawyer at law firm Squire Patton Boggs, said on Wednesday.

Grammas said he anticipated more regulations that would be "taking technologies, goods and products that are not subject to a license requirement for China today and transition into a license requirement.

"And I don't think it will be limited to this administration."

The Hogan Lovells law firm assembled a "toolbox" of export controls, sanctions and other measures the US can use against China. Chart: Hogan Lovells alt=The Hogan Lovells law firm assembled a "toolbox" of export controls, sanctions and other measures the US can use against China. Chart: Hogan Lovells

The US government has been concerned with technology leadership by China at least since the Obama administration. China's ambitions were publicised in 2015 through its "Made in China 2025" initiative, shifting the government's focus to developing higher-tech products and emphasising critical industries including robotics, aerospace and artificial intelligence.

Under Chinese President Xi Jinping, Beijing's industrial policies are seen to leverage China's private sector for state-directed objectives through "military-civil fusion", a national strategy to develop the PLA into a world-class military by 2049.

"The Chinese government's military-civil fusion policy aims to spur innovation and economic growth through an array of policies and other government-supported mechanisms, including venture capital funds, while leveraging the fruits of civilian innovation for China's defence sector," the US-China Economic and Security Review Commission, a Congressional advisory body, wrote in its annual report last year.

"Business partnerships between the United States and China could aid China's military development," the report warned.

As one example, the report noted that China is already the global leader in producing commercial drones. If through involvement with US companies, it learns how to make cheaper, lighter and longer-lasting lithium-ion batteries, it can make unmanned aerial vehicles that strengthen its military capability.

Military end-use and end-user restrictions aren't new. In 2007, the Commerce Department introduced a rule that significantly expanded the types of commercial products requiring a license for export to China. That new rule was colloquially referred to as the China "Military Catch-All".

But export controls have previously focused narrowly on so-called dual-use technologies and sanctions violations.

Now the regulations seem to be coming from a range of angles, lawyers said. The US has put more than 80 Chinese companies - including Huawei Technologies - and their affiliates on the Commerce Department's entity list, effectively blocking them from doing business with American suppliers.

With the latest expansion of the export rules, the administration is "really clamping down on Chinese companies that are supporting Huawei as [it] seeks to outsource its production or development efforts", Grammas said.

Separately, last month the Defence Department issued a list of 20 companies that it said were operating directly or indirectly in the US and were owned or controlled by "Communist Chinese military".

Along with Huawei, the list included leading Chinese tech firms Hangzhou Hikvision Digital Technology, China Mobile Communications and China Telecommunications.

Huawei Technologies and its affiliates have been a particular focus of US export restrictions. Photo: Reuters alt=Huawei Technologies and its affiliates have been a particular focus of US export restrictions. Photo: Reuters

"I wouldn't be surprised to see the DOD list being transitioned to the entity list," said Grammas. "We'll certainly see more use of the entity list."

If there is a silver lining to the wave of regulations, Ajay Kuntamukkala, who specialises in national security issues at the Hogan Lovells law firm, noted that the US has so far stayed clear of invoking "the nuclear option": the Treasury Department's Specially Designated Nationals (SDN) list.

The assets of those persons or entities on that list are blocked and US persons and businesses are generally prohibited from dealing with them.

The entity list "has a more limited impact", Kuntamukkala said.

Yet nobody can rule out the possibility of harsher regulations to come, legal experts said, as the US-China relationship - already in its worst state in decades - continues to degrade.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2020. South China Morning Post Publishers Ltd. All rights reserved.