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China: Technology export control and beyond

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11 September 2020

As technology and IP have increasingly become the focal point of tensions between the U.S. and China, the Chinese Government announced its amendments to the Catalogue of Technologies Prohibited or Restricted from Export (the Catalogue) on 28 August 2020. It is worth noting that China has long had a technology export control regime in place. The most recent update has put into specific focus as it is been widely speculated that it is a reaction to the recent sanctions the U.S. Government has imposed on Chinese companies as well as the potential forced sale of TikTok’s U.S. operations. 

To what extent the amendments to the Catalogue would increase regulatory hurdles in connection with technology transactions is yet to be determined and is likely to vary on a case-by-case basis.  Having said that, the inclusion of artificial intelligence and other emerging technologies in the Catalogue seems to indicate that China is taking a firmer stance on key area where Chinese technology has made significant strides. Overall, this may be a signal of wider protectionist approach beyond the export control regime.

China technology export regime revisited

Technology exports in China are mainly governed by the Regulations on the Administration of the Import and Export of Technology, together with the Measures for the Administration of Technology Import and Export Contract Registration and the Measures for the Administration of Export-Prohibited and Export-Restricted Technologies (collectively, the Technology Export Regulations). 

Pursuant to the Technology Export Regulations, technologies are divided into three categories: export-prohibited, export-restricted and freely transferrable. The Ministry of Commerce (MOFCOM) and the Ministry of Science and Technology (MOST) have maintained a catalogue of export-prohibited and export-restricted technologies setting forth specific technical parameters or “control points” for export purposes. The export of technology falling within the prohibited category is banned, while the export of technology in the restricted category is subject to prior approval by MOFCOM. This means that contracts for the export of restricted technology are invalid under PRC law until approval by MOFCOM. 

The Technology Export Regulations are intended to apply broadly, covering the acts of transferring technologies from China to outside China “in the form of trade, investment or economic and technological cooperation”. At least the following constitutes an act of export: (i) assignment of patents or patent applications; (ii) licence of patents; (iii) transfer of know-how; and (iv) technical services. 

What is new in the Catalogue?

MOFCOM and MOST last updated the Catalogue in 2008. In a span of more than a decade, as a key part of its industrial plans, China has invested significantly in cultivating domestic technology industries and developing cutting-edge and emerging technologies resulting in significant advancements in a range of areas.  

The additions to the Catalogue, to some extent, reflect the trends and shifts in technology development, particularly in relation to technologies of strategic importance or pertaining to national security. A summary of notable additions to the Catalogue is set out at the end of this alert. The highlights include the following:

  • A total of 23 categories have been added to the restricted list.
  • These include a wide range of technologies such as 3D printing, drone, laser, password security, high-performance detection, and design and manufacturing technology of core components of petroleum equipment.
  • The technical parameters of 21 existing categories have been updated to include new technologies.
  • For information processing technology, the additions include personalised information push services based on data analytics, speech synthesis technology, voice evaluation technology, as well as artificial intelligence interactive interface technology.
  • For biotech and pharmaceutical industry, newly added restricted technologies include oral rotavirus vaccines and polysaccharide protein binding technology.

Furthermore, the Catalogue also removed a small number of relatively older technologies:

  • Four categories of technologies have been removed from the export prohibited list, including microbial fertilising, caffeine production (by chemical synthesis or semi-synthesis) and medicine production (by chemical synthesis or semi-synthesis) technologies.
  • Five categories of technologies that are restricted from export have been removed, including Newcastle disease vaccine, natural medicine production and information security firewall software technologies.

Notably, MOFCOM published the draft amendments to the Catalogue for public comments in June 2018. Most of the changes mentioned above were included in the earlier draft version.

Please refer to the Appendix for the detailed amendments to the Catalogue.

Implications for technology and IP transactions

According to the Technology Export Regulations, export of any restricted technology requires both a pre-approval and post-verification by MOFCOM. Applications need to be submitted to MOFCOM at the provincial level. Local MOFCOM will transmit the application for review and consultation with local MOST. This leaves considerable discretion to the agencies in processing the applications, ranging from requiring the details of the technology to be exported, to interpreting the technical parameters which appear to be broadly worded under the Catalogue, and potentially regulating the export of sensitive technologies in various different forms.   

In particular, in addition to an outbound IP assignment or licensing arrangement, typical licence-back or grant-back clauses in connection with a joint venture cooperation or a pure inbound licensing deal would arguably constitute a technology export. Export of finished products involving sensitive technologies as well as cross-border technical service arrangements could also fall within the purview of the export control regime.

This might be the reason why ByteDance may have to suspend negotiations over the pending sale of TikTok and reassess the requisite PRC regulatory requirements that might be triggered by the potential deal. The Catalogue now sets out restricted categories relating to personalised information push service technology based on data analytics, as well as a set of artificial intelligence technology, including voice recognition, microphone array and interaction and understanding technology. TikTok is reported to rely on an array of proprietary algorithms for its artificial intelligence and related spheres that potentially fall within these restricted categories. 

Although the TikTok implications have drawn a significant amount of attention to China’s existing export control regime, we note that the export approval process has been rarely triggered historically. Most provincial MOFCOMs have limited experience in dealing with these types of applications. As such, the actual, broader implications of the recent amendments to the Catalogue will likely vary, depending on the nature of the IP, the sensitivity of the technology, as well as the parties involved and the structuring of the transaction. 

Potential impact on the FDI regime and beyond

While the immediate implications for the technology and IP transactions are yet to be fully assessed, the amendments to the Catalogue have signalled China’s intention to enhance the protection of its emerging technologies in the sense of both national security and strategic importance. 

Similarly, regulatory control and intervention in the other contexts might become more visible and active, in light of the increasing tension in the US-China relationship.

From the foreign direct investment perspective, the Tech Import and Export Regulation will apply in if an inbound transaction both falls into the national security review regime and involves technologies listed out in the Catalogue, in which case the relevant intellectual property authorities will carry out technology review. The amendments to the Catalogue substantially extend the scope of the sensitive technologies especially in regard to those cutting-edge technologies, and possibly may reframe the regulatory landscape of the inbound transactions caught by the amended Catalogue. This is likely to be a countervailing trend compared to the lift of the foreign investment approvals in recent years. 

In the meantime, MNCs which have or plan to build up R&D centres or similar tech division in China, may need to assess the potential impact from the amended Catalogue, and consider structuring proper intellectual property arrangement to both satisfy the commercial needs of business operation and minimise compliance exposure in the changing regulatory environment.

Conclusion

The Allen & Overy team handled of one of the first export approvals in China several years ago. While the approval process itself involved substantial preparation and communication with the government, our experience was a smooth and successful one. On a broader level, we expect to see the technology export control regime, together with related regulatory areas, will continue to evolve and further complicate the structuring, protection and compliance analysis our clients will be facing, particularly with the growth of cross-border uses of data and IP into and out of China. We will closely monitor any further developments and provide updates in due course.

*Services in relation to the laws of the People’s Republic of China are provided through Allen & Overy Lang Yue (FTZ) Joint Operation Office.