ANALYSIS: New Export Controls Throw Global Trade in a Spin Cycle

In 2021, Kazakhstan exported three washing machines to Russia. In 2022, it sent 120,000 across the same border. Why this strange spike?

One possible reason: Semiconductors control modern washing machines. Russia is purportedly running low on military-grade semiconductors, and the chips in washing machines may be adequate for certain military purposes. Washing machines are therefore considered “dual-use” items—that is, having both civilian and military applications—making them subject to export control requirements.

Many governments require businesses to obtain permission to export certain dual-use items to prevent their military use. Until recently, washing machines generally would not have required such an export license. But because of a component’s new potential use in weapons, washing machines may be subject to stricter controls.

In 2024, the scope of items and entities subject to export controls will continue to widen. Moreover, we will see new multilateral or coordinated actions—including enforcement and regulations—among governments with common interests.

Governments Cooperate to Target High-Risk Products

2023 has been an active year for export controls, with several governments issuing rules that have expanded the number of products subject to export restrictions or prohibitions, often in coordination with other countries.

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In September, the US coordinated first with the EU, Japan, and the UK, and later with other members of the Export Enforcement Five (Australia, Canada, New Zealand, the UK, and the US; also known as “Five Eyes”), to expand a list of “common high-priority items.” This international cooperation increases controls on items at high risk of diversion to the Russian military.

As a result of this coordination, the EU, Japan, the UK, and the US prohibit export of the listed dual-use goods to Russian and Belarusian end users. The four governments recommend that businesses exporting high-priority items take steps to prevent their diversion, even if the business is not directly dealing with prohibited users or regions. These steps include enhanced “know your customer” due diligence that includes customers’ written assurances that they also comply with export controls requirements.

The US and its allies have also controlled access to advanced semiconductor manufacturing equipment (SME) to restrict China’s ability to manufacture advanced chips. China has responded with export control measures of its own, limiting global access to critical minerals necessary to build the chips.

Intergovernmental Coordination Adds Impact

Export controls are more effective when applied by multiple countries. Unilateral controls are “damming half a river,” in the words of former Under Secretary of Commerce Eric Hirschhorn, especially if the controlled items are available elsewhere. A Congressional Research Service report recently highlighted the importance of coordinating export controls to increase their effectiveness.

One example of the power of coordinated controls began with unilateral action. In October 2022, the US Bureau of Industry and Security (BIS) issued rules to restrict China’s access to advanced chips and semiconductor manufacturing equipment (SME). After discussions with the US, Japan and the Netherlands—the other leading manufacturers of advanced SME—agreed in January to implement similar restrictions. As a result, China can’t legally access SME necessary to make the most advanced semiconductors.

A May BIS rule further aligned US export controls with other members of the Global Export Controls Coalition. Governments announced the GECC in 2022 in response to the Russian invasion of Ukraine. The White House described the GECC as “unprecedented coordination [that] significantly expands the scope of restrictions on Russia.” It added, "[f]urther engagement with Allies and partners will continue to maximize the impact on Russia’s military capabilities.” The GECC includes Iceland, Liechtenstein, Norway, Switzerland, Australia, Canada, Japan, South Korea, Taiwan, New Zealand, the UK, and the member states of the EU.

In June, Five Eyes agreed to formalize cooperation on export controls enforcement. The agreement improves the participants’ ability to enforce their own export control laws by collectively identifying evasion trends that might otherwise go undetected. The June decision by the Cold War-initiated intelligence-sharing group increases cooperation with the GECC to restrict Russia’s access to technology.

More Products Require Export Permission

Several governments, including the US, the EU, China, and Taiwan, are expanding the scope and enforcement of their export controls with increasing impact and frequency.

In July, China used its Export Controls Law to restrict exports of the critical minerals gallium and germanium, and related products. China is the leading producer of both minerals, which are used in semiconductors, electric vehicles, and other electronics. China also has proposed revisions to its export controls list that would add biotech, solar power, information technology, and transportation technology (e.g., autonomous vehicles) to the list of items requiring export licenses. These proposed restrictions will considerably expand the number of products subject to Chinese export controls.

October was an extremely busy month, even by 2023’s frenetic standards.

On Oct. 3, the EU released a list of critical technology areas, namely advanced semiconductor technologies, artificial intelligence technologies, quantum technologies, and biotechnologies, that it will evaluate for technology security and technology leakage (the unwanted transfer of information) risks. The list may be the first step in EU-wide export controls for these products. The EU list was not developed in coordination with the US, but it covers many products that the US also restricts.

On Oct. 4, the Taiwanese Ministry of Economic Affairs announced it would investigate four Taiwanese companies for possible violations of US export controls regulations because they worked with Chinese tech company Huawei. Taiwan said it is undertaking the investigation in part to ensure Taiwanese businesses comply with US export controls laws.

On Oct. 25, the BIS published interim final rules that expand on its October 2022 rule to further restrict China’s access to advanced chips and semiconductor manufacturing equipment. The rules add more covered items, include new license requirements, and implement measures to prevent circumvention. While other countries haven’t yet implemented similar rules, the BIS stated that these rules were made “in anticipation of formal multilateral regime adoption.” As with the October 2022 BIS rules, Japan and the Netherlands may adopt similar rules.

On Oct. 20, China announced that certain types of graphite will be subject to dual-use export license requirements. Covered graphite will require the Chinese government’s permission to be brought out of the country. Graphite of this specific quality and formulation is used in manufacturing electric vehicle batteries, semiconductors, and other products. China is the leading producer, processor, and exporter of the critical mineral.

‘Know Your Customers'—And What They’re Making

Businesses should stay informed about shifting and potentially conflicting rules issued globally. Reconciling different countries’ requirements may be challenging or even impossible. In some cases, manufacturers may even need to develop lower-tech ways to produce certain items for export.

For example, Chinese export controls regulations under development will likely contain provisions similar to a 2021 Chinese Ministry of Commerce order that prohibits Chinese entities from cooperating with foreign investigations. Such a rule could render impossible the BIS-mandated end-use checks that rely on access to overseas facilities to verify compliance with the Export Administration Regulations.

As always, exporting businesses need to know their customers to avoid violating export control laws. Adequate due diligence will now require knowledge of their customers’ customers, and beyond. This expansion means that even businesses that do not directly export their products may have export controls obligations.

Access additional analyses from our Bloomberg Law 2024 series here, covering trends in Litigation, Transactions & Contracts, Artificial Intelligence, Regulatory & Compliance, and the Practice of Law.

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