Last week, President Trump threatened "massive" tariffs on Chinese goods, explicitly citing China’s recently expanded export control regulations as the basis for the escalation. In this piece, we provide a detailed explanation of the new dual-use export control rules, as well as an examination of the strategic rationale for their introduction, encompassing closing loopholes, direct retaliation, and geopolitical considerations.
What are the new export control rules
The new export control rules effectively expand the number of dual-use items by adding new goods, equipment, and technology to the list:
- Five new rare earth elements
- Rare earth production equipment and raw materials
- Rare earth extraction, processing, magnet manufacturing technology and data
- Lithium battery and materials, equipment and technology
- Some superhard materials, equipment, and technology
It is worth noting that China has already been restricting the export of rare earth-related technology under its Foreign Trade Law. However, the formal inclusion of such technology in the export control rules subjects the technology to more detailed and stringent regulatory frameworks, including more severe penalties and the application of deemed export rules, as explained below.
In addition, MOFCOM also announced the following implementation rules when it comes to rare earth export controls, further tightening the loopholes:
- Foreign Direct Product (FDP) Rule analog
A license is required for exports of foreign-produced items (rare earth metals, alloys, rare earth permanent magnets, parts and components containing the magnets, and target materials, as identified by MOFCOM) manufactured using Chinese-origin rare earth technologies (such as mining, smelting, separation, metal refining, manufacturing, or recycling).
- De Minimis Rule analog
A license is required for exports of foreign-made items (rare earth permanent magnets, parts and components containing the magnets, and target materials, as identified by MOFCOM) incorporating Chinese-origin controlled content (rare earth metals and alloys), and the value share of the Chinese-origin content in the final product is ≥ 0.1%.
- 50% ownership rule for export control entity list
There is a presumption of denial for exports destined for military or sanctioned entities (such as on China’s export control entity list or the list of entities of concerns), as well as their subsidiaries or branches with 50% or higher ownership even when they are not on the sanctions lists.
- Deemed exports for knowhow
Regarding export controls on rare earth extraction, processing, magnet manufacturing technologies and related technical data, "export" refers to the transfer of the controlled items from within the territory of China to overseas destinations, or to foreign organizations or individuals either inside or outside China. "Transfer" through licensing, investment, R&D collaboration, and consultancy all fall under the definition of "export."
This rule effectively restricts Chinese persons from providing support and assistance to foreign rare earth production.
- Catch-all provision
Non-controlled goods and technology may also be subject to China's licensing requirement if the exporter knows or has reason to know that such item would be used or substantially contribute to overseas activities of rare earth mining, smelting, refining, magnet manufacturing or recycling.
This catch-all provision broadens the reach of export licensing obligations, mirroring the "end-use/end-user control" principle under Western export control regimes. This approach suggests China's increasing adoption of risk-based export compliance mechanisms.
As a final point on the implementation rules, it is worth noting that these rules strongly mirror the existing U.S. legal framework. However, at the moment, these rules only apply to specified rare earth exports and are not applicable to other controlled items on China’s dual-use item list.
Reasons behind the October 9 export controls
China’s announcement of sweeping export control rules last week was driven by three main factors: Non-proliferation and losing loopholes, retaliation against U.S. policy, and a broader geopolitical tactic to enhance global leverage.
The official rationale issued by the Chinese government is non-proliferation and compliance loopholes. MOFCOM grounded the new measures in its commitment to "better safeguard world peace and regional stability and fulfill its international obligations, including non-proliferation" due to "military conflicts" around the world and "the important military applications of medium and heavy rare earth items."
The new rules are designed to close loopholes and curb rule-circumvention of existing controls. A MOFCOM official explained (link in Chinese) that since China adopted the initial rare earth controls in April, "some overseas organizations and individuals have been transferring or providing controlled items originating in China, either directly or after processing," and these items have been "directly or indirectly used in sensitive areas such as military operations, causing significant damage or potential threats to China's national security and interests," therefore undermining non-proliferation efforts.
This drive to curb illicit trade has been underscored by recent enforcement activities, including China’s Ministry of State Security's disclosure of two cases of bypassing Chinese export controls on rare earths and the subsequent arrest of eight suspects in late September. MOFCOM has also warned of a more aggressive move by sanctioning companies involving in smuggling and illegal trade of controlled items. The new rules constitute a significant escalation in regulatory authority beyond previous measures.
Another driver is Beijing's intention to retaliate against U.S. export control policies.
The most direct trigger of China's retaliation may be the recent U.S. revision of its rules so export controls will apply to subsidiaries of companies on the Entity List or the Military End-User List. At the time, MOFCOM pledged to take "necessary measures." One week later, MOFCOM adopted a similar 50% ownership rule applicable to sanctioned entities.
The Economist magazine noted that "[t]he Americans saw the 50%-rule as an innocuous step to close a legal loophole. But China, which is highly sensitive to such measures, may have seen it as a breach of the spirit of the two countries’ recent trade talks." Martin Chorzempa, a senior fellow at the Peterson Institute, also wrote on social media that "BIS 50% rule will go down as major miscalculation based on outdated thinking CN would not retaliate hard. While CN had already prepped its measures, prob would have kept in back pocket w/o US rule that aims at real problem but is escalatory & upends tons of non-sensitive exports to CN."
In addition, Beijing has long had objections to U.S. long-arm jurisdiction. In a recent statement (link in Chinese), MOFCOM lambasted the United States for imposing "unilateral long-arm jurisdiction on numerous products, including semiconductor equipment and chips," including the use of "de minimis export control rules, with levels as low as 0%." This critique may have driven Beijing's parallel adoption of its own FDP (Foreign Direct Product) and De Minimis Rules. As Gerard DiPippo, a fellow at RAND China Research Center, noted, "Beijing has been mirroring the U.S. economic-security toolkit."
The export control rules also serve as a geopolitical strategy, rather than constituting immediate, all-out escalation.
China’s new rules mark a decisive turning point in the evolution of Chinese export control governance. By adopting measures with expanded regulatory scope and extraterritorial reach, Beijing has signaled its readiness to employ legal tools as strategic deterrence and enhancing its leverage in the global technology competition.
Meanwhile, these rules grant Beijing expansive administrative discretion, as they implement discretionary control rather than an outright ban, with a presumption of denial applicable only in a narrow range of cases. Such discretion is the heart of the geopolitical advantage, as an Economist article noted that "China could, in peaceful times, grant licences speedily, minimising disruption to the world’s supply chains. But if trade relations turn sour, it can also dial up the disruption by turning down licences, slow-walking applications and ramping up enforcement."
MOFCOM has reinforced this perspective, underscoring that "China's export controls is not a ban on exports. As long as export applications are for civilian purposes and comply with regulations, they will be approved, and companies need not worry." The agency also suggested future facilitation measures such as general licenses and license exemptions.
More broadly, the export control rules, along with recent sanctions on 23 firms, most of which are based in the U.S., retaliatory port fees on U.S.-affiliated ships, and a new anti-trust investigation on Qualcomm, form a tactic of "extreme pressure" deployed ahead of a potential leadership meeting between the U.S. and China. ChuCheng Feng, founding partner of Hutong Research, a Chinese research firm, described these actions as Beijing "effectively reactivating its April playbook—escalating first to force a negotiation reset, rather than waiting passively for the next talks."
This new approach by Beijing, notably absent during the first Trump administration but emerging in the second Trump term, may be a direct reflection of Trump's negotiating tactics. MOFCOM had explicitly cited new "restrictive measures" implemented by the U.S. since the Madrid talk that "seriously undermines the atmosphere of bilateral economic and trade talks." Recent U.S. actions, including adding Chinese firms to the sanctions list, the 50% ownership rules "that affect thousands of Chinese companies," and the enforcement of Section 301 measures in maritime and shipbuilding sectors, may have incentivized Beijing to adopt a similar strategy of pre-negotiation pressure.
President Trump first responded with aggressive rhetoric by characterizing the Chinese actions as "strange" and "hostile" and "surprising" and "sinister." Later, he toned down his language by stating: "Don't worry about China, it will all be fine! Highly respected President Xi just had a bad moment." Will China's approach yield more tangible compromises or accelerate a deeper strategic decoupling? Only time will tell.