〔Submitted on 1 December 2017〕

Additional Opinion Brief on China’s Draft Export Control Act
Title: Opinion Submitted Regarding Export Control Act (publicly released draft)
Destination: Department of Treaty and Law, Ministry of CommerceCenter for Information on Security Trade Control (CISTEC)Japan Machinery Center for Trade and Investment (JMC)
Japan Foreign Trade Council, Inc. (JFTC)Japan Electronics and Information Technology Industries Association (JEITA)
Japan Business Machine and Information System Industries Association (JBMIA)
Japan Chemical Exporters and Importers Association（JCEIA）(Supporting Organizations)Japan Business Federation (KEIDANREN)
The Japan Chamber of Commerce and Industry (JCCI)In response to the request for public comment on the Export Control Act (Public Draft)issued in June of this year by the Department of Treaty and Law, Ministry of Commerce,
People’s Republic of China (PRC), members of Japan’s industrial sector submitted an
opinion dated July 13 through the CISTEC, an entity whose members comprise the principal
exporting companies in Japan and that specializes in security trade control.
Subsequently, the principal economic organizations in Japan involved with trade andinvestment in China had an exchange of views among themselves. They concluded that withrespect to those points of interest to the Japanese industrial sector it would be desirable toconvey in greater detail their concerns about the system as presented in the draft and its
operation as well as the impact it would have on the trade and investment environment as awhole. Accordingly, we have put together this additional Opinion Brief.
The present Opinion Brief reflects the consultations held with the relevant departments
and bureaus in the aforementioned principal economic organizations in Japan.

The Opinion Brief already submitted by CISTEC included its opinions, questions, anddesires based on the view that China is a nation that has a major status in the global political
economy and strives to execute its international obligations under a spirit of international
cooperation, and based on the perspective that is generally welcoming of the effort to develop
a system of export control laws while regarding mutual agreements with the international
community as crucial.
1Subsequently, the principal industrial and economic organizations in Japan had a further
exchange of views among themselves regarding the content of the Public Draft. It became
clear that, owing to the shortness of the period of time for accepting public comment at justone month and the need for specialized knowledge to understand export control systems,
the corporate and industrial sectors involved in trade and investment with China had by nomeans developed an adequate understanding of the Draft’s content and impact. We cannot
even say that people were fully aware that the Draft itself existed.
We are deeply concerned that, should the work on drafting this legislation move forward
in a short time-frame under these conditions and the act be promulgated and put into force,it could lead to great confusion among the enormous numbers of companies and individuals
involved with trade and investment in China.
Additionally, the present draft includes more than a few elements to its system that differ
from those of the usual export control systems of the sorts agreed to under the international
export control regime. These include elements that may be thought of as problems from the“Level Playing Field” perspective widely accepted as a general principle when it comes toexport control systems. We are gravely concerned that these elements eventually could
become factors that would greatly inhibit China’s trade and investment environment.
As supplement to the Opinion Brief submitted in July that also includes these views, wenow submit the Additional Opinion Brief and requests that follow. We ask for your forbearance
as some elements may duplicate the opinions that have already been submitted. There areparts that may seem to be criticisms. However, that is not our intention. We hope you will
understand that we present them from a perspective of seeking mutual benefit for China andJapan and encouraging further trade and investment between our two countries and also
others.

1. Necessity of Arrangements That Have Had Adequate Time
for Alerting Industrial Sectors Everywhere and Stepwise
Implementation of Regulations(1) Adequate publicity regarding work of drafting legislation and insuring
opportunities for exchange of views with domestic and foreign industrial sectors
We believe that the Public Draft has been reviewed by considering opinions submitted
during the solicitation for public comment as further investigations aimed at giving it definite
form have proceeded. However, this has received limited coverage in the mass media.
Furthermore, despite being a bill that will have a major impact on economic relations, there2are many people connected with the business sector who are not aware of the existence ofthe draft. If the work on drafting the legislation were to proceed under these conditions, we
believe that this would inevitably invite great confusion later.
In particular, the present Draft would implement new regulations on dual use commodities
and technologies related to conventional arms. Naturally, there is no problem with theintroduction of regulations itself that are generally implemented under the international export
control regime. However, dual use commodities and technologies related to conventionalarms are very different from those related to weapons of mass destruction (WMDs), and an
extremely far-reaching range of civil use products and technologies will become regulated.
Aside from the fact that these include numerous products produced and exported bydomestic and foreign companies alike in “the World’s Factory” that is China, it could also
target products and the like including those in new technological domains in which start-up
companies are planning to conduct research and development, manufacturing, and export
activities in China. Furthermore, it would have a major impact on the current daily practicesof trade and investment and in the future. There are also concerns that in some cases theneed that would emerge to revisit product development in order to comply with Chinese
export control laws, the draft law could not only lead to increased costs for the company
trying to manufacture its products in China and export them but also become a cause for
quality problems to develop that would be inherent to China.
Furthermore, in the event that work goes forward on crafting and enacting this legislation
without ensuring the concerned parties fully understand and are prepared for the possibilities
that this state of affairs may produce, it cannot be denied that deep and widespread confusion
could arise in the industrial sector stretching across all industries.
Furthermore, as discussed earlier that confusion would have a major impact on the tradeand investment environment for China as well and at the very least would be greatly
detrimental. Given this, we believe it all the more necessary to pull together extensive
opinions and questions that are based on a full understanding of the Draft’s content to serve
as material for consideration in the work of drafting legislation.
For these reasons, we ask that information be released once again about the existence of
the Public Draft and its contents, and that opportunities be guaranteed for a broad andcontinued exchange of opinions. Furthermore, we also ask that venues be arranged forreceiving an explanation of the plans and enforcement methods for the Draft including its
intent, its content, the formulation of its detailed rules and guidelines, its enforcement, andplans for putting it into practice. These may be accomplished through explanations provided
to organizations from foreign countries and foreign affiliated companies involved with tradeand investment in China, and through briefings in the principal countries around the world3

that have close trade and investment relations with China.
(2) Securing an Adequate Extension after Detailed Information Made Available andStepwise Implementation of Regulations
Regarding regulations, the industrial sectors involved cannot make preparations without
not only the law itself but also the details of how it will operate being made clear. For example,
it is not possible to make the preparations for coping with license systems

without clarity

regarding such points as—•

The differences in how Individual Licenses, Global Licenses, and License Exceptions
are handled,•

What sorts of favorable treatment are offered based on the standard of autonomous
control, and•How Country Groups are classified based on what sort of standards.

Once these points are clarified, the industrial sectors can study the impact on their supply
chains related to China and take the necessary steps. In particular, the regulations regarding
dual use items related to conventional arms target a wide range of products and technologies.
Just those companies that have actually advanced into China still comprise an enormous
group and range in size from major concerns to SMEs. Furthermore, they have supply chainsthat are spread out all through China and elsewhere in the world. For example, even an SME
that manufactures components in Japan and supplies them to a Japanese productmanufacturing company may not even fully understand Japan’s export regulations. In orderto achieve an understanding of the regulations’ content that includes these companies andensure they take appropriate measures, we believe that in some cases the preparations will
require an appreciable amount of time in units of years. Furthermore, one can fully conceiveof a situation in which numerous problems arise while work on specific responses is moving
forward. A careful response will be necessary so that this does not interfere with foreign tradeor encouraging investment.
Given this reality, we ask that an adequate grace period be guaranteed after the details
have been settled, and also ask for consideration be given to introducing these regulations
in a stepwise fashion rather than all at once.

2. Reexamination of Systems That Could Become Major
Hindrances to the Trade and Investment Environment―Need for Systems Conforming to the “Level Playing Field”
Principle

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Security export control systems are necessary for guaranteeing international peace andsecurity. In keeping with it being one of the pillars behind the intent of putting together the
Public Draft, ensure smooth international cooperation by devising links with international
statutes is regarded as necessary.
At the same time, the notion of the Level Playing Field is regarded as a common principleof export controls. This principle arises from the concern that if a system operates in a fashionthat deviates from the globally shared systems and operations grounded in the consensus in
the international export control regime, the competitive conditions for the companies andindustrial sector in the country in question will be at a disadvantage compared to those fromother countries. It holds that this situation should be avoided.
It is normal for the industrial sector and regulatory authorities in each country to holdrepeated discussions about rationalizing regulations and so forth in order to achieve more
effective export controls. This is something that is mutually understood as a principle uponwhich they should be based at that time.
There are concerns that systems and operations that deviate from internationally common
systems and operations will interfere with the smoothness of normal corporate activities andcreate an enormous burden for companies. Japan’s industrial sector also works to draw out
issues from companies with respect to regulations and their operation, holds discussions withthe regulatory authorities, and works to rationalize them so that the legal systems and theiroperations are appropriate.
Viewing the Public Draft from these perspectives, we sense that it is clearly detrimental inlight of the Level Playing Field principle from the point of view of Chinese companies including
foreign affiliated companies that operate in China, and also that it includes systems that we
fear may be greatly detrimental to the trade and investment environment in China.
The primary issues here are the re-export controls and the deemed export regulations.
These are not systems that are generally agreed upon under the international export control
regime. They can be described as idiosyncratic systems. Creating an idiosyncratic systemthat differs from the international export control regime in the areas of international trade andinvestment presents a great stumbling block from the perspective of preserving a favorable
international trade and investment environment. While we understand that a similar system
has been implemented in the U.S. and serves as a specific security measure from theperspective of preventing WMD proliferation, it is also a fact that it presents both potential
and actual stumbling blocks to international trade and investment. We cannot imagine it being
profitable to create the same sort of system as the U.S. when it comes to achieving theobjectives of expanding exports and obtaining a leading position internationally when it
comes to making proactive use globally of newly created materials in strategic newly5

developed industrial sectors. On the other hand, we can imagine this system having anegative effect on those policies aimed at upgrading Chinese industry by actively making themost of foreign affiliated companies and foreign engineers.
We will explain the implications in concrete terms below.
(1) Re-Export Controls[1] Re-Export Controls as a Whole
The U.S. has re-export controls in place. However, the governments of Japan andEuropean countries have long pointed out that these fundamentally amount to an
extraterritorial application of regulations and are questionable from the perspective ofinternational law. CISTEC has requested that they be abolished (if the country that has an
appropriate export control system in place is the export destination, entrust it to the country
in question).
Even setting aside their questionability from the perspective of international law, re-export
controls come with numerous side effects and demerits. If it becomes necessary to obtainlicense from the Chinese government to re-export from an import country the products thatwere imported from China or products that use more than a certain percentage of parts thatwere imported from China, then using Chinese products will become a risk and it will createa strong incentive in industrial sectors in foreign countries to avoid using them. It will become
necessary to make a point-by-point calculation of the percentage of Chinese products
included based on a complex formula. Furthermore, if the relevant parties cannot determine
whether a product that has been supplied through a variety of supply chains is originally aChinese-origin product and if so whether it is subject to regulation, then they will not even beable to calculate the percentage that originates from China. The system in the U.S. currently
does not oblige that export destinations be notified about whether an item is subject toregulation, and has problems in terms of its effectiveness. However, if even so the parties
involved were to make a maximum effort to track down a products place of origin and whether
or not it is subject to regulation, it would require an enormously burdensome procedure. Thatalone would create a powerful incentive to avoid the use of Chinese products. Even if it was
put into use, companies would make a group effort to reduce their use rates of the designated
Chinese-origin products. If burdens of this sort are produced for a large number of products,
companies are likely to begin studies to find suppliers outside of China.
On this point, a similar situation has in fact arisen with respect to the U.S. re-export controls.
The European aerospace sector has made an explicit effort to avoid using U.S. products.
Furthermore, considering CISTEC’s public call for the abolition of re-export controls, theBureau of Industry and Security (BIS) at the U.S. Department of Commerce in 2009 issued
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a call for public comment regarding the impact of re-export controls on U.S. products.
CISTEC sent the BIS the public comment based on a questionnaire taken of its member
companies information about the tremendous burdens that come with the U.S. re-export
controls and showing that a majority of respondents said they avoid procuring U.S. products
if they can obtain substitute goods from other countries.
Given that situation, cross-sectional nationwide manufacturing groups in the U.S. havealso held talks with representatives from industrial sectors in Japan and Europe and raised
issues from the perspective that the existence of re-export controls in the U.S. is detrimental
to U.S. business.
The industrial sectors of Japan and Europe have experienced the heaviness of the burdenthat comes with the U.S.’ re-export controls, and it would have a significant negative impact
if China were to implement such controls together with newly introducing far-reaching export
regulations on general products related to conventional arms.

[2] Re-Export Controls Regardless of Whether or Not Origin of Items is Chinese
Aside from de minims rules about Chinese origin, in the present Draft, regardless ofwhether or not the origin of items is Chinese,

re-exporting goods from the export-destination

country would require license . However, under those condition, exporting to a third country
products made using parts and materials imported from Japan, the U.S., and European andother countries (in short, not of Chinese origin) from a second country that imported those
products from China would be require the license of the Chinese government.
Not even the U.S. has implemented such regulations under its system. Furthermore, if
such controls were implemented, the thriving added-profit trade in which foreign affiliatedcompanies and Chinese companies alike are involved would be greatly inhibited.
(2) Deemed Export Regulations
The clause about far-reaching deemed export regulations—a system for obtaining
licenses to supply commodities, technologies, and services to foreign affiliated companies
and foreign persons (persons of non-Chinese nationality) in China—also raised concernsthat it might impose tremendous constraints on the activities of foreign affiliated companies
in China.
The international export control regime does not stipulate that deemed export regulations
be implemented as a general obligation, and no other countries has stipulated such farreaching controls.
For example, the U.S. does impose restrictions on supplying technologies and software
source codes to foreign persons (persons of foreign nationalities) in the U.S. However, it
7does not do so with respect to the supply of goods or software object codes to such persons
in the U.S. Furthermore, there are many exceptions regarding licenses with respect to theregulations on supplying technologies and software source codes. They strike a balance with
the need to maintain the smoothness of corporate activities.
Furthermore, aside from the U.S. there are no countries that impose regulations acrossthe board with regard to supplying

to foreign persons (persons of foreign nationalities) in

those respective countries. Some countries do impose regulations on supplying technologies
and software

to non-residents under certain conditions, but these are primarily aimed at“foreign students, trainees, researchers, and persons on business trips” not affiliated withany domestic institution.
Furthermore, no country in the world imposes regulations on supplying

to foreign

affiliated companies in their country. In short, because Japan, the U.S., and European
countries with their varied regulations treat foreign affiliated companies in their countries thesame as domestic companies, there are no regulations on supplying to them within thatcountry and the regulations that do exist do not have a major impact on corporate activities
in their respective countries.
In the case of China’s deemed export regulations in the Draft, foreign affiliated companies
across the board including joint ventures and independent companies are included in the
category of “foreign company” in China. They are subject to these regulations, as is
everything up to technical dealings with foreign employees within

a company. Additionally,

if not just technologies but also the supply of commodities and services is subject toregulation, it will result in an idiosyncratic system without precedent worldwide.
If such an idiosyncratic system were to be introduced, the regulations would extend tocover all domestic dealings between foreign affiliated companies in China and Chinesecompanies. Our concern is that the domestic dealings that have gone so smoothly to datewith no exceptional regulations in place would be inhibited. With regard to the materials usedin products of foreign affiliated companies, given the ongoing increase in the proportions ofChinese-origin materials it is difficult to imagine a situation in which regulations would be
imposed when procuring them. Chinese companies would also wind up having to determine
in their domestic dealings whether a partner is a foreign affiliated company

and assess

whether the commodities and technologies they handle are subject to regulation. However,
we do not think that this is realistic.
Furthermore, if dealings with foreign employees in a company were also subject toregulation, it would produce a great deal of concern thatthe technical briefings anddiscussions that take place a regular basis with executives and employees sent from thehome office abroad could not be undertaken smoothly, along with such activities as accessing8

an in-house database. Additionally, in the event that a company of foreign origin imported a
key device, say, from their home country headquarters or a facility in some other region, it ispossible that the very act of sharing that product or technology with foreign executives orforeign individuals on assignment would become subject to controls. This would prevent
regular trade routines from flowing.
Given that these foreign affiliated companies are nonetheless established in China on thebasis of Chinese law, we believe it would be appropriate for them to be seen as Chinesecompanies in the same ways how Japan, the U.S., and European countries handle suchcompanies in their respective countries. Also, when comes to foreign persons we believe
there is a need to regulate technical transfer to “foreign students, trainees, researchers,
persons on business trips, and other such individuals” not affiliated with an organization thathas been permitted to establish itself in China and prepare comprehensive license systems
and license exceptions systems so that the regulations would not interfere significantly withnormal corporate and research activities.
Furthermore, on the issue of preventing any unauthorized outflow of sensitive
commodities and technologies from with an organization, it is our understanding that as arule they are secured not with an export control system but rather through a legal systemsetting up a framework for protecting company secrets and a legal system for controlling
unauthorized access by employees and outside parties who are not directly concerned. In
Japan, such matters are regulated by a framework for protecting trade secrets based on the
Unfair Competition Prevention Act.

Thus, it may be seen that re-export controls and far-reaching deemed export regulations
include major elements of uncertainty for the industrial sectors from all countries that are
involved with trade and investment in China. They give the impression of being pointed inexactly the opposite direction of China’s stance that it wishes to strive harder at industrial
development by encouraging international cooperation and taking advantage of foreign
investment.
Also, in China to date the many foreign persons in the form of engineers, management
executives, and so forth have been active at foreign affiliated companies and elsewhere andcontributed to the country’s industrial development. We are deeply confused about the ideaof a system being introduced that would have a negative impact on that situation.
With China aiming for further development based on international cooperation, theindustrial sectors of foreign countries ask that their activities in a country with that aim be
stimulated all the more. We are certain that the policy of encouraging inward investment in
China will continue to be important for the development of products and technologies in the9high-tech sector heralded in state plans such as Made in China 2025. Likewise, we are surethat foreign affiliated companies and foreign persons will continue to play major roles for thedevelopment of foreign trade.

Under those conditions, if a system were to be introduced in a form that deviates from theLevel Playing Field principle in export control systems and is seen to be directly opposed tothe direction of encouraging further reforms and opening up and of improving the trade andinvestment environment toward that end, we believe it would result in massive confusion
among the industrial sectors of foreign countries. It is said that at present exports from foreign
affiliated companies account for most of the exports from China. We believe that imposing
tremendous constraints on the activities of these foreign affiliated companies that havecontributed to the development of China’s industry and economy by means of an idiosyncraticsystem that deviates from the Level Playing Field principle would be a significant demerit for
China.
In the world of export control systems, achieving their legal objectives while simultaneously
guaranteeing smoothness in corporate activities continue to be issues. These go beyond
being just problems between regulatory authorities and the industrial sector. We believe they
are issues that can also be problems between regulatory authorities and those authorities
seeking to encourage trade and investment and promote industry. For these reasons, we ask
that the bureau drafting the law also hold earnest discussions about the various impacts that
regulatory measures would have with the industrial sectors in China and abroad and alsowith the various business promotional authorities. It is also our hope that a balance be struck
between these issues involved resulting in regulations that do not deviate from the Level
Playing Field principle in the implementation of a system that conforms to the international
export control regime.

3. Necessity of Implementing Regulations Conforming to theInternational Export Control Regime(1) Formulating a Controlled Items

List Conforming to the International Export

Control Regime
In the Draft explanation, executing international obligations and international cooperation
were billed as the aims that form its central pillar. Generally speaking, countries around theworld have built and operate systems that are based on the four international export control
regime agreements. Even those countries that do not participate in those regimes normally
have systems and practices based on them. Furthermore, the items subject to control are10

shared throughout the world every year based on agreements made at regime meetings.
A tremendous burden is created when the items and technologies subject to control differ
from those of the international regime agreements. The Draft explanation states that it seeks
to promote links with international statutes and strengthen international cooperation.
Accordingly, we strongly request that the list of controlled items related to conventional arms
be brought into conformance with the control list established under the Wassenaar
Arrangement (WA).
(2) Curbing Unreasonable Demands for Technological Disclosure in Export
Inspections
Normally, conducting an export screening entails classifying the item and reviewing theend user and the end use. That said, when it comes to the classification made by the exporter,
it is normal to defer to what the exporters themselves have made. Even if the screening
authorities do make a check, they do so only when the classification made by the exporter
seems suspect. There are concerns that the application of China’s export control act might
not conform to this international standard practice and an exporter might be constantly
receiving unreasonable requests for technological disclosure from the authorities about agiven product.
While large numbers of advanced industrial products such as information technology andtelecommunications devices are manufactured in and exported from China, there are morethan a few instances of key devices and technologies that are imported to it from foreigncountries. They also include products that are exported to China after they have already been
licensed based on the export control laws of exporting country. If China’s export control
authorities were to demand technological disclosure of these sorts of key devices andtechnologies that have already been properly approved for export once, it would beunreasonable from the perspective of implementing regulations that conform to theinternational export control regime; the industrial sector would no longer be able to procure
key devices and technologies from foreign countries with any peace of mind; and as a result,
it would make it difficult to export cutting-edge industrial products from China.
(3) Reexamination of Methods and Conditions for On-site Investigations Regarding
End Users and Uses
The Draft stipulates on-site verification of an item’s end users and uses after it has been
exported. We understand the need in export controls to carefully screen for whether there
are any concerns about an end user or end uses, and we can also understand the need forfollow up depending on the case regarding how it is being used after export.
11However, stipulating the power to conduct on-site inspections in the export destination by
law would give that Law the character of making an extraterritorial application of sovereignty.
Under the international export control regime, generally speaking the end-user inspection
method is limited to particularly sensitive items for which there are concerns of being diverted
for use related to WMDs, and, in general when obtaining export license, an end user has tofile a report in the form of a promissory letter on end use that lays out how an item is being
used, and when re-exporting the item under the license, they usually need to request
approval from the export control authorities. Even when on-site verifications are required, we
understand they are done in cooperation with the government of the country where the end
user is located and using a method that strikes a balance with the requirement of internationallaw.
From that perspective, we believe careful reexamination is necessary with respect to themethods and conditions for end-user investigations.

4. Reexamination of Elements Related to Industrial
Development and Trade Policy: Necessity for Systems andOperations Conforming to the WTO(1) “International Competitiveness” and “Supply with Regard to the International
Market” and the “Equivalence Principle” as Points for Consideration Aside from
“Peace and Security”
The purpose of security export controls is to secure to the utmost peace and security
internationally and in the home country. Based on that common objective, other countries
have put together their systems that conform to the international export control regime.
However, the sections regarding formulating a control list in the Draft stipulate points that
go beyond “national security” and “international obligations” to also require giving
consideration to “trade and industrial competitiveness,” “supply with regard to theinternational marketplace,” and “the development of technology.” We sense that these items
were likely present for reasons of industrial promotion and trade policy. We believe that they
are not in keeping with an export control system whose objectives are peace and security. If“supply with regard to the international market” is meant to refer to so-called “foreign
availability” (the principle that regulating those items that can readily be obtained anywherein the world is meaningless, so they should not be made subject to regulation), then werequest that this intent be made clear.
We believe that export regulations based on such elements would produce connections
with separate international rules regarding trade under the WTO and so forth.
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Furthermore, even with regard to the “equivalence principle” that sets down taking
reasonable measures against those countries that have implemented discriminatory export
controls against China, we can imagine that this would create problems in connection with
the international rules for solving such issues based on dispute-settlement procedures.
(2) “Protection of Important Strategic Rare Materials”
From the discussion in the Draft explanation regarding the need for drafting this law, we
fully understand and welcome the items that came up in putting together export control
system such as protecting national security, strengthening investigatory authority, executinginternational obligations, and strengthening international cooperation.
However, with respect to protecting important strategic rare materials, there are no otherexamples of subject materials in security export controls. Furthermore, even a research
report from the Chinese Academy of International Trade and Economic Cooperation(CAITEC) written during the process speaks of the need to include rare materials in (security)
export control regulations as a means of coping with the issue of international litigation.
In light of this, we imagine this might create problems even in relation to the WTO’s rules
on trade and request that careful discussions be done on a government basis.

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