People’s Republic of China : intensification of the economic sanctions regimes against North Korea and awakening of export control policies.

October 17th, 2017, by Gao JING  and Arnaud FENDLER

The continuous development of North Korea’s nuclear and missile programs urged the United Nations Security Council to pass a few resolutions to apply economic pressures on North Korea in persuading this country to temper its current policy.

Recently, after North Korea’s most powerful nuclear test on September 3rd 2017, the United Nations Security Council unanimously stepped up sanctions by imposing a ban on the country’s textile exports and capping imports of crude oil.

This constitutes the ninth sanctions resolution unanimously adopted by the 15-member council since 2006. While these sanctions have always been strictly applied by western countries, it took some of North Korea’s close partners a bit more time to adopt within their legislation provisions restricting trade with North Korea.

An effective implementation of the UN résolutions

The People’s Republic of China (PRC), North Korea’s main trading partner which seats in the UN Security Council, has lately significantly increased the severity of its national sanctions regime against North Korea.

  •  By implementing UNSCR 2270 in response to the nuclear test made by North Korea on January 6th 2016, the PRC’s Ministry of Commerce and other relevant authorities jointly announced on June 14th 2016 a ban of exports of dual-use items and technologies related to weapons of mass destruction and their means of delivery to North Korea effective from the date of promulgation.
  • By implementing UNSCR 2321 in response to the nuclear test made by North Korea on September 9th 2016, the PRC’s Ministry of Commerce and General Administration of Customs jointly announced on February 18th 2017 further measures against North Korea.

This announcement:

  • Set up the cap on North Korea coal exports, i.e. total exports coal originating from North Korea are limited to 400,870,018 US dollars or 7,500,000 metric tons per year, whichever is lower, starting in 2017, exclusively for livelihood purposes;
  • Ordered Chinese enterprises to halt coal imports from North Korea as soon as the United Nations issues a notice stating that 95% of the annual quota has been used, and
  • Banned the import and export trade with North Korea of the following materials:
  1. import of copper (26030000, chapter 74), nickel (26040000, chapter 75), zinc (26080000, chapter 76), silver (26161000, 7106, 71070000), and statue (9703)
  2. export of helicopters (88021100, 88021210, 88021220) and ships (chapter 89), unless the United Nations approve on a case-by-case basis in advance.

This announcement was supplemented on the same date by the suspension of the import of coal originating from North Korea from February 19th 2017 to December 31st 2017.

  •  By implementing UNSCR 2371 in response to the ballistic missile tests made by North Korea on July 3rd and July 28th 2017, the PRC’s Ministry of Commerce and General Administration of Customs jointly announced on August 14th 2017 a total ban on import from North Korea of coal (2701, 2702), iron (7201100010, 7201100090, 7201200000, 7201500010, 7201500090), iron ore (2601111000, 2601112000, 2601119000, 2601120000, 2601200000), lead and lead ore (2607, chapter 78), and seafood products (chapter 3, 1603, 1604, 1605).
  • At last, by implementing UNSCR 2375 to condemn the strong nuclear test by North Korea on September 2nd, China ordered North Korean-owned businesses established in China to be closed by January 2018.

The development of an autonomous export control regime

In parallel, on June 2017, the PRC’s Ministry of Commerce (“MOFCOM”) released the draft Export Control Law of the People’s Republic of China (the “ECL”). Once enacted, it will substantially change the PRC’s export control regime and affect business operations within and outside China.

So far, the PRC has lacked an effective general export control regime. The Export Control Law would not only combine all the separated regulations and rules previously adopted by the PRC but will also introduce new legal concepts and raise the penalties. It will have a stronger legal authority than the existing regulations.

It will impact companies dealing with the PRC controlled items, whether or not they are Chinese or non-Chinese individuals or entities. A wide range of activities and industries may be affected.

Four (4) categories of items will be controlled: (1) dual-use items; (2) military items; (3) nuclear items; and (4) other items (goods, technology and service) that may affect the national security of the PRC.

The regime sets out a variety of measures to restrict the export of controlled items (e.g. end-use and end-user certificate, end-user inspection, blacklists, licensing requirements). Therefore, control lists will be established (one for dual-use items and one for military arms and goods).

The draft law includes a de minimis exception for re-exports which, provides that below a certain threshold, items would not be controlled under the export law after they leave the PRC. Whereas, the value proportion has not been specified by the draft law.

The regulation aims to support enforcement actions in practice, and the new regime will forth new measures to encourage compliance such as the consultation with state export control authorities in the event of uncertainty regarding the requirement of a license, as well as whistleblower protection for those informing authorities of suspected violations.

Any violation of the PRC export control may result in administrative (fine, confiscation, suspension or revocation of the export license) or criminal penalties (if violations constitute a crime). The fines are significantly higher than those imposed previously, and vary according to the gravity of the violation.

If enacted as drafted, this regime will strengthen significantly the export control in the PRC. Exporters and their customers may face additional burdens to be in compliance with the new regime.

A first reading at the National People’s Congress is expected in 2018.