China is considering new export restrictions on advanced technologies, including, in particular, in the life sciences sectors. In late December 2022, China’s Ministry of Commerce (“MOFCOM”) issued the proposed amendment to the country’s Catalogue of Technologies Prohibited and Restricted for Export (the “Export Catalogue”) for public consultation (the “Proposed Amendment”). The Proposed Amendment is subject to change but, once finalized, would be another significant revamp after two other major amendments of the Export Catalogue, first in 2008 and then again in 2020. The amended Export Catalogue, if passed in the proposed form, would introduce “cell cloning and gene editing for human use,” “CRISPR gene editing,” and “synthetic biology” to the control list. Biotechnology and pharmaceutical companies in China and also their licensees and collaborators overseas, especially those whose business involves technologies relating to the proposed new controlled technologies, should closely monitor the development of the Proposed Amendment.
China’s technology export control regime
TIER and Export Catalogue
The import and export of technologies for civilian use are regulated under the PRC Administrative Regulations on Technology Import and Export (“TIER”). Technology export is broadly defined under Chinese law to encompass any cross-border provision of technologies from a Chinese entity to overseas – whether by way of patent assignments, patent licenses, software licenses, transfers of technical know-how, or the provision of technical services, or by any other means. TIER requirements are mandatory and apply regardless of the choice of governing law in the underlying agreements.
Export of technologies for military and dual use purposes is regulated under a separate regime pursuant to the Export Control Law (“ECL”). The ECL lays out a comprehensive framework for restricting export of products, technologies, and services concerning national security or interest, or related to China’s international anti-proliferation obligations. It is not intended to replace the existing regulatory framework under TIER, but to govern an area of technology export where TIER does not apply.
TIER divides technology export into the categories of “prohibited,” “restricted,” and “unrestricted.” As the names suggest, “prohibited” technologies cannot be exported outside China, while approvals from provincial offices of MOFCOM are required for export of “restricted” technologies. The “prohibited” and “restricted” technologies are defined by the Export Catalogue, which is published and maintained by MOFCOM and the Ministry of Science and Technology (“MOST”). Any technology which is not included in either the prohibited or restricted catalogue is considered “unrestricted.” Similar classification under TIER also applies to technology import into China, which is subject to separate import control catalogues. This client alert is not intended to address technology import.
Filing requirements for “unrestricted” technologies
Under TIER, technology contracts relating to the export of “unrestricted” technologies must be registered with the local MOFCOM office within 60 days of execution. Registration is, however, not a condition for the relevant contract to take effect; and there is no explicit penalty (monetary or otherwise) for failure to register. However, non-compliance with TIER may give rise to adverse consequences. For example, the Chinese exporting party may experience difficulties in receiving payments from overseas because Chinese banks will normally require sight of the MOFCOM registration certificate before processing foreign exchange and payments.
Approval requirements for “restricted” technologies
Where a technology is listed as subject to export restrictions, the Chinese exporting party will be required to obtain a formal approval from its local provincial MOFCOM office. Approval is a two-step process:
- A preliminary approval (namely, a “Letter of Intent on Technology Export Licensing”) that must first be obtained before “substantive negotiations” begin; and
- Once the Letter of Intent is granted, a technology export contract must be signed within the validity period of the Letter of Intent. The provincial MOFCOM office will, while cooperating with other authorities (e.g., the provincial MOST office), evaluate the outbound technology transfers based on the impact on China’s national security and on “core technology innovation development capabilities in key areas.” The final approval (namely, the “Technology Export License”) must be obtained before the technology is actually exported.
Consequences of TIER violations
Failure to comply with China’s technology export control regime may lead to following adverse consequences:
Structure of the Export Catalogue and the Proposed Amendment
As with the 2008 and 2020 iterations of the Export Catalogue, the controlled technologies in the Proposed Amendment are listed in a discrete, granular manner on an industry-by-industry basis, in the form of a one-line description followed by several “key controlled points.” They are not grouped under “types” or other indicators. Therefore, the export control analysis essentially relies on cross-checking the specific features of the subject technology against the controlled items listed in the Export Catalogue. Whether particular technologies fall within either of the restricted or prohibited catalogue can be a fact-intensive inquiry that requires extensive trade and technical analysis on a case-by-case basis.
The Proposed Amendment seeks to remove 32 controlled items, modify 36 controlled items, and add seven new controlled items, which mainly involve Internet/IT, photovoltaic/new energy, autonomous driving, life sciences, and other frontier technology fields.
Three out of the seven newly introduced controlled items have particular relevance to the biotech and pharmaceutical industries, including:
China’s biopharmaceutical industry has been facing increased pressure in recent years from various directions, such as practical challenges in access to advanced technologies and certain Chinese companies being placed on the Entity List under the U.S. Export Administration Regulations. In response, China has been strengthening its own export control over China-originated cutting-edge biotechnologies, highlighting concerns over national security and public interest and also the redirected focus on domestic markets.
Companies in the biopharmaceutical field should closely monitor China’s legislative and regulatory trends in foreign trade and export controls. Companies are advised to conduct precautionary risk assessments as to whether any of their products or services fall under the new controlled items in the Proposed Amendment and therefore might be considered restricted, or even prohibited, for export if the amended Export Catalogue comes into effect as currently proposed. We also recommend that biopharmaceutical companies conduct proactive consultations with MOFCOM in order to have a better understanding of the regulatory examination criteria based on the controlled points specified in the Export Catalogue. For export-restricted technologies, the relevant companies should apply to the competent MOFCOM office for a Technology Export License in a timely manner. In the event that there is an export of human genetic resources (as defined under Article 2 of the Administrative Regulations on Human Genetic Resources) along with a technology export, the parties should also be mindful to comply with the Biosecurity Law and the Administrative Regulations on Human Genetic Resources.
Increased export control of sensitive biotechnologies may also complicate the internal allocation of operations and resources within multinational biopharmaceutical companies, including when they conduct intra-group multi-site collaborations (e.g., animal testing or clinical trials) involving controlled technologies such as gene editing. For instance, multinational companies having R&D functions both in and outside China may have a centralized intellectual property management mechanism in place where all the resulting technologies are owned and managed by a dedicated IP holding affiliate. Such IP holding entities are often established in offshore jurisdictions in order to benefit from preferential tax regimes. It is important to note that such internal operating mechanisms are likely to involve the export of China-originated technologies. Multinational companies may need to assess the potential impact of the amended Export Catalogue on their R&D activities in China and consider strategic IP arrangements to minimize compliance risk in the evolving regulatory environment while also meeting the needs of their business operations.