China's First Export Control Target: 'Encryption Technology, Not Rare Earths'

Effective from January 1, 2021... Likely to Use Rare Earths as the Last Card

2mm work-in-progress product made during the rare earth processing stage (Photo by AP)

Asia Economy Beijing=Special Correspondent Jo Young-shin] Contrary to expectations that the first item to be subject to China's Export Control Law would be 'rare earth elements,' the Chinese government designated encryption technology instead. The Export Control Law, which came into effect on the 1st, is aimed at the United States and allows restrictions on the export of technologies or products that could threaten national security. There is an interpretation that rare earth elements were deliberately excluded due to the anticipated strong backlash if an export permit system were implemented.

On the 3rd, China's Ministry of Commerce announced through a public notice that encryption technology used to protect personal information (including data leakage prevention semiconductor chips) will be converted to an export permit system and will be enforced starting January 1 of next year.

The Ministry of Commerce explained that, in accordance with relevant provisions of the 'Encryption Law,' 'Export Control Law,' and 'Customs Law,' it decided to apply export-import licenses to commercial encryption technology to maintain national security and social public interest. Specific permitted items include encrypted telephones (including mobile phones), fax machines, encryption cards, and encrypted VPN (Virtual Private Network) equipment. Accordingly, these items will require up to five stages of review, including the preparation of export applications, before export is allowed, and companies violating these rules may face fines up to ten times the amount.

Attention is focused on the background of rare earth elements being excluded from this measure. Immediately after the announcement of the Export Control Law enforcement on the 30th of last month, rare earth elements were strongly mentioned locally in China as a likely export restriction card aimed at the United States. Rare earth elements such as lithium are essential raw materials for advanced industries like electric vehicle batteries, wind turbine motors, and missiles. Known as the 'industrial vitamins,' rare earth elements exert powerful influence as China controls about 60% of the global market.

The United States also depends on China for imports of rare earth elements, which are raw materials for advanced weapons. If rare earth elements are designated as export permit items, it could directly impact advanced industries worldwide, not just in the U.S.

Within China, various interpretations have emerged regarding the exclusion of rare earth elements from the first designated items. Given their significant influence on the U.S., the possibility of using them as a last card is gaining credibility.

In fact, international prices for rare earth elements have shown strength since the announcement of the Export Control Law enforcement. A Chinese state-owned enterprise mentioned that prices for rare earth permanent magnets surged after the law was enacted. Orders for rare earth magnets have increased significantly, but supply has not kept pace with demand.

China's state-run Global Times also reported a sharp increase in rare earth orders following the enactment of the Export Control Law. This confirmed the potential global impact of the law itself.

Additionally, there is analysis that the damage caused by restricting rare earth exports could also affect domestic export companies, and with U.S. President Donald Trump soon to leave office, there is also an expectation of improved U.S.-China relations.

A Beijing source said, "If relations with the U.S. worsen further due to additional sanctions on Chinese companies, the Chinese government may include rare earth elements in the Export Control Law," but also predicted, "Given the significant impact on advanced industries worldwide, China is likely to use rare earth elements only as a pressure card."