Industry Official: China Preparing to 'Invoke' Its Own Foreign Direct Product Rule Restrictions
China appears to be preparing to use its own set of extraterritorial export controls against the U.S. in response to the Biden administration’s latest chip restrictions and Entity List additions, an official with the U.S.-China Business Council said.
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Zach Tomatz, senior manager of business advisory services with the council, pointed to Beijing’s Dec. 3 announcement restricting certain key critical minerals and other dual-use items from being shipped to the U.S. for military uses and end-users. That announcement came one day after the U.S. published a new set of semiconductor-related export controls aimed at China (see 2412020016 and (see 2412030022).
Although Tomatz said portions of the Chinese notice were unclear, he said it contained language that suggested Beijing is preparing to use its own version of U.S. foreign direct product rule (FDPR) restrictions.
“There was a warning about reexports and transshipments to the U.S.,” Tomatz said during a Dec. 10 Regulations and Procedures Technical Advisory Committee meeting. “And so we believe this is China preparing to actually invoke the FDPR - their FDPR.”
Beijing unveiled its own version of the FDPR in its recently issued dual-use export control regulations, which could potentially subject foreign firms to Chinese export licensing requirements if those firms deal in certain goods and technologies made in China or with Chinese-origin technology (see 2411140037 and 2410210042).
The Dec. 3 Chinese announcement also placed an export prohibition on dual-use items to U.S. military end users, but Tomatz said it’s not clear how Beijing defines American military end-users.
“Does that mean it's the U.S. defense contractors that are named on [China’s] Unreliable Entity List” or sanctioned under China’s “Anti-Foreign Sanctions Law?” he asked. “We don't know.” He said he would guess that Beijing is “most concerned” with U.S. companies that it has sanctioned for selling arms to Taiwan (see 2412050011 and 2409180004).
He also noted that China may not have the resources to broadly enforce new export controls on key critical minerals destined to the U.S., on U.S. military end-users, or through its version of the FDPR. China’s Ministry of Commerce has about 85 employees, he said, compared to about 400 to 500 for the Bureau of Industry and Security.
“We don't actually see this really as a workable system,” he said. “Enforcement is kind of pick and choose.”
He said U.S. companies can try to apply for licenses from Beijing, but that could involve end-use checks by the Chinese Ministry of Commerce. Tomatz said he has heard that Japanese companies applying for licenses have had to “prep their government” about the Chinese ministry “coming to ask for certifications about end uses.”
“And so our companies are curious: Would their state government, in whatever American state, be ready for questions from the Chinese Ministry of Commerce about the end uses of Chinese products coming into their states?” he said.
Asked how he thinks China will continue to respond to U.S. chip controls, Tomatz said Beijing is encouraging Chinese companies to “design out as quick as they can all American” equipment. “The government has kind of given a blank check to domestic semiconductor firms, including many that were just put on the Entity List, to design out American [items] as quickly as possible,” he said.
Tomatz said the U.S.-China Business Council recently polled its members about the main compliance challenges of U.S. export controls. About 75% said their top challenge is conducting due diligence, while others said they are most challenged by the export control conflicts they must navigate between American and Chinese legal regimes.
“When I was in China, it was a very common topic of conversation,” he said. “How do we comply with one and not violate the other?” Tomatz added that firms are specifically worried about being added to China’s Unreliable Entity List or designated under its Anti-Foreign Sanctions Law, which gives Beijing broad discretion to penalize companies for obeying U.S. and other countries' restrictions against China (see 2309270039).
“It's created a pretty serious conflict of law,” Tomatz said, adding that it’s “sort of a situation where conducting due diligence in China for [Export Administration Regulations] compliance can actually land you, we believe, on these lists.”
Tomatz was also asked whether any U.S.-China Business Council members that operate or use chip fabs in China are looking to stop business in the country as a result of the U.S.' complex chip export controls. He said most of their member companies say they aren’t reducing their investments in China or pausing future investment planning. “The majority of our members are maintaining the level that they've had in China,” he said.
But he also acknowledged the “regulatory picture there is extremely complicated” for members that deal in advanced semiconductors. “But within our semiconductor membership base, many of the firms there are in China to serve the automotive sector. That's a huge growth area in China,” Tomatz said. “There are growth areas in autos, in particular, that I think compel further investment.”