Introduction on export controls: economic sanctions

Qinghua Wang
AllBright, Shanghai
wangqinghua@allbrightlaw.com

Cheng Shi
AllBright, Shanghai
Shicheng@allbrightlaw.com

Liuya Yuan
AllBright, Shanghai
liuyayuan@allbrightlaw.com

Export controls and economic sanctions play pivotal roles in national security, economic interests and foreign policy objectives.

Introduction

Definition of export controls and economic sanctions

Export controls refer to the regulations that identify goods, technologies and services leaving a country’s borders to ensure compliance with objectives of national security, foreign policy and domestic economic interests. Economic sanctions involve measures imposed by governments to restrict trade or financial transactions with specific countries, entities or individuals for various reasons such as national security and economic interests.

When used carefully, and for the right reasons, these tools can help a country stay safe, protect its important businesses and further its strategic interests on the global stage. However, it is essential to recognise that the indiscriminate or disproportionate use of export controls as extensions of foreign policy or political strategy may yield unintended consequences. Ideally, fostering international cooperation and collaboration offers a more sustainable and mutually beneficial approach to addressing shared challenges and advancing common objectives. By engaging in dialogue, diplomacy and multilateral cooperation nations can seek to resolve disputes, address security concerns and promote economic stability without resorting to coercive measures like export controls and economic sanctions.

Principles and objectives of export controls and economic sanctions

Export controls and economic sanctions regulations are designed to govern the export of confidential items, technologies or the prohibition of certain transactions. These regulations also manage interactions with embargoed or sanctioned countries, entities and individuals. The principles and objectives underlying these measures are multifaceted. Countries impose export controls and economic sanctions to protect national security interests, promote foreign policy and achieve economic and political objectives.

One of the primary objectives of export controls and economic sanctions is to protect national security. By regulating the export of sensitive technologies, dual-use items and confidential technologies, governments aim to prevent these assets from falling into the hands of adversaries. For instance, the US states that it implements export controls on advanced semiconductor technologies and cybersecurity tools to maintain a technological edge and protect its own national security.

Export controls and economic sanctions are also instrumental tools in promoting foreign policy objectives. Governments use these measures to influence the behaviour of other countries and entities.

Another key objective of export controls and economic sanctions is to protect and promote economic and political interests. By controlling the export of certain goods and technologies, governments can support domestic industries and maintain competitive advantages. Economic sanctions can also be used to restrict the economic capabilities of rival countries, thereby influencing global trade dynamics. For example, the export controls imposed on China concerning advanced semiconductor technologies are intended to curtail China’s rapid technological development and protect the competitive edge of US technologies. These measures help implementing countries to ensure that political interests are safeguarded.

Key components of export controls and economic sanctions regimes

Classification of controlled items, technologies and activities

A fundamental component of export control regimes is the classification of items, technologies and activities that are subject to regulation. This involves identifying and categorising items that are deemed sensitive or critical for national interest and security objectives. Such items can include military-grade equipment, dual-use technologies and advanced technologies such as semiconductors, artificial intelligence (AI) and software. Additionally, specific activities and transactions are also restricted, such as embargoed countries and sanctioned entities. This classification process ensures that sensitive assets are protected and not inadvertently exported to adversaries and rivals.

Licencing and permit requirements

Licence and permit requirements are widely used in export control and economic sanction systems. Governments require exporters to obtain export licences for the controlled items and technologies. This system enables authorities to monitor and regulate the flow of critical materials, ensuring they are only transferred to authorised recipients. The licencing process involves a comprehensive assessment of the proposed export – including the end use and end user – in order to prevent the controlled items from being transferred to unauthorised entities. Furthermore, governments have the authority to repeal licences at any time to tighten restrictions in response to changing geopolitical or security concerns. For example, on 7 May 2024, the US Department of Commerce revoked the licences of Intel and Qualcomm to sell chips to China, demonstrating the dynamic nature of export control measures. In April, the US forced Dutch chip equipment giant ASML to stop servicing tools made with US tech sold to Chinese customers. Licencing requirements are an effective tool by controlling who has access to sensitive goods and technologies.

Penalties or charges for non-compliance

Penalties and charges for non-compliance are the ways export controls and economic sanctions regimes are enforced. Regulations typically stipulate severe consequences for violations, which can include fines, revocation of export privileges and even criminal charges for individuals and entities that fail to adhere to regulations. These penalties serve as a deterrent against non-compliance. For example, the US International Traffic in Arms Regulations (ITAR) and Export Administration Regulations (EAR) outline specific penalties for violations which can include multimillion-dollar fines and imprisonment. Those enforcement mechanisms are one of the key components of export controls and economic sanctions regimes.

By classifying controlled items, technologies and activities, governments can effectively regulate sensitive exports. The implementation of licensing and permit requirements allows for stringent oversight and control over the transfer of critical materials. Moreover, the imposition of penalties for non-compliance ensures that regulations are enforced. Together, these components form a comprehensive framework deeply rooted in export controls and economic sanctions regimes.

Current developments in global export controls and economic sanctions

Recent years have seen significant developments in global export controls and economic sanctions, reflecting the changes of international relations and emerging concerns of technological advancements. Key developments include the tightening of sanctions against specific countries and updates to export control regulations to address new technological threats. Specifically, the US and the EU have been at the forefront of releasing export controls and economic sanctions regulations to achieve foreign policy objectives. By imposing new export restrictions on major economies such as Russia and China, and enforcing existing measures, they aim to curb activities deemed contrary to their strategic interests and national security.

Global export controls and economic sanctions on Russia

There are global trade export controls and sanctions against Russia. These measures target key sectors of the Russian economy including finance, energy and defence. Specific actions include freezing assets of Russian individuals and entities in Western jurisdictions and banning their travel. There are also sectoral sanctions that restrict the export of technology and equipment critical to Russia’s energy and defence sectors. This includes bans on the transfer of advanced oil extraction technology and certain dual-use goods. Additionally, financial restrictions are implemented to cut off Russian banks from the SWIFT international payment system, significantly hampering their ability to conduct international transactions. These global measures aim to pressure the Russian government by destroying its economic capabilities and isolating it from the global financial system.

US tighten export controls on China

The US has significantly tightened export controls on China, focusing on restricting access to advanced technologies that could enhance China’s military and surveillance capabilities and its progress in international competition. The US has imposed stringent controls on the export of semiconductors and AI technologies to China. Chinese tech giants are added to different types of lists to restrict their access to US items and technologies. Restrictions have been also placed on the export of sophisticated chip-making equipment to Chinese companies, aiming to slow China’s progress in developing an independent semiconductor industry. These measures are part of a broader strategy to maintain technological superiority and prevent the use of advanced technologies in ways that could undermine US national security and its edge in international competition.

Technological advancement focus

Traditionally, export control regimes aimed to prevent the proliferation of large-scale weapons and the misuse of force, as well as to protect human rights. These controls were primarily concerned with conventional weapons and military equipment, ensuring that dangerous technologies did not fall into the hands of hostile actors. While these objectives remain central, recent regulatory developments in export control regimes have increasingly focused on the implications of technological advancements. There are several compelling reasons why technological advancements have become a primary focus in the realm of global export controls and economic sanctions. Primarily, these advancements are targeted to curtail the strategic advantages of rival countries in international competition. By restricting access to cutting-edge technologies, nations can impede the military and economic progress of their adversaries ensuring a favourable balance of power. Additionally, beyond the direct aim of maintaining a competitive edge, focusing on technological restrictions serves broader foreign policy goals. These restrictions are a strategic tool to exert pressure and achieve diplomatic objectives without resorting to direct conflict.

Future trends in export controls and economic sanctions

In the near future, the trend of tightening export controls and economic sanctions is likely to continue. This tendency is driven by several factors that highlight the strategic importance of these measures in global politics and national security.

One significant factor driving the continued use of export controls and economic sanctions is domestic political changes, particularly the elections play a crucial role. Political candidates often advocate for strong sanctions and export controls as a means to demonstrate their commitment to national interests and economic protection.

Another driving force behind the ongoing trend of tightening export controls and sanctions is the persistence of geopolitical and regional conflicts. As these conflicts remain unresolved, robust and adaptive policies will continue to be critical tools in influencing the behaviours of other countries. The conflict in Ukraine has prompted the US and EU to impose stringent sanctions on Russia to weaken Russia’s economic and military capabilities and further aim to influence the action of Russia. Beyond direct conflicts, the indirect competition is also an intrinsic driving factor. China’s progress has led to increased scrutiny and sanctions by Western countries. Export controls targeting critical technologies, such as semiconductors, are designed to curtail China’s military modernisation and regional dominance. As geopolitical dynamics and unresolved regional issues continue to evolve, robust and adaptive export controls and sanctions policies will remain critical tools in the near future.

Economic considerations are another crucial factor influencing future trends of export controls and economic sanctions policies. Countries assess their economic growth prospects and international trade trends to make informed policy decisions. For instance, the imposition of tariffs and export controls during trade disputes can protect domestic industries from foreign competition. Additionally, economic sanctions can be used as a tool to compel behavioural changes in other countries without resorting to military action. These economic measures are designed to exert pressure on the sanctioned country by limiting its economic capabilities, thereby influencing policy decisions on economic sanction.

Technological developments, particularly in semiconductor technologies, AI biotechnology and so on, significantly impact export controls and economic sanctions policies due to their implications for national security and cybersecurity. In the semiconductor industry, advancements in chip design and manufacturing have critical implications for national security. Semiconductors are essential components in everything from consumer electronics to sophisticated military systems. For instance, advancements in AI have led to new export control regulations to prevent sensitive technologies from falling into the hands of adversaries. For example, the US Department of Commerce has added several Chinese AI firms to the Entity List, restricting their access to American technology. It aims to protect national security by controlling the export of technologies that could enhance the military capabilities of rival nations. These technological considerations underscore the need for dynamic and adaptive export controls and sanctions policies to address emerging security challenges.

In summary, export controls and economic sanctions are instrumental tools for national security, foreign policy and economic interests. Considering various factors like geopolitical dynamics, economic imperatives and technological advancements, it’s foreseeable that the trend of intensifying export controls and economic sanctions will persist in the near future.