Faced with increased regulations and enforcement targeting select sectors of its economy, China is taking a page from the United States' playbook by enacting new regulations and implementing countermeasures. In this alert, we cover the latest Chinese export control rules impacting the global electric vehicle (EV) market – restrictions on graphite exports from China.

Summary of Recent Developments

Graphite is a key raw material used in producing EV batteries. Graphite makes up close to 30 percent of an EV battery and is a key input for anodes, the negatively charged portion of the EV battery. Raw graphite goes through several phases before it can be used for manufacturing EV batteries, including mining, purifying, and processing. China is a dominant player in the graphite market. It currently has the world's largest graphite reserve and handles over 90 percent of the graphite processing. 

As the global demand for EV batteries grows, China has imposed restrictions on graphite exports. On October 20, 2023, China issued the Announcement on Optimizing and Adjusting the Temporary Export Control Measures for Graphite Items, which prohibits the export of the following graphite items without a license:

• High-purity (purity>99.9 percent), high-strength (flexural strength>30Mpa), high-density (density>1.73g/cubic centimeter) artificial graphite materials and related products
• Natural flake graphite and related products (including spheroidized graphite, expanded graphite, etc.)

*Export licenses are no longer required for low-sensitivity graphite items, such as carbon electrodes for furnaces, lamp carbon rods, battery carbon rods, and certain other graphite products.

In order to obtain a graphite export license, exporters must complete an application form for the export of dual-use items and technologies and submit documents that include export agreements, end-user and end-use certifications, profiles of the importers and end-users, and technical specifications or testing reports for the graphite items. 

The graphite export controls are country-agnostic, meaning they could impact any of China's top customers, such as Japan, the United States, India, and South Korea. Chinese authorities will consider the destination of the export, the end-user and end use, and the effect of the export on China's national security when deciding whether to grant an export license.

Key Takeaways

• Graphite Could Be a Focus of Enforcement in 2024. China has stepped up its export enforcement efforts since passing its Export Controls Law (ECL) in 2020, with an increasing focus on graphite. The graphite restrictions aim to help solidify China as an EV powerhouse and position its economy at the heart of the EV battery supply chain. It is likely that graphite will continue to be a focus of export control enforcement in China. 
• Compliance Risks for Chinese Exporters. Chinese exporters, including Chinese subsidiaries of multinational companies, should exercise heightened caution when exporting graphite products to ensure compliance with the new export controls. Violations of the ECL may result in fines up to RMB 5 million (approx. USD 700,000), as well as suspension of business and revocation of qualification for exporting controlled items. Further, the Chinese export control authority could deny the exporter's future export license applications for up to five years. 
• Exterritorial Application. The ECL also applies to entities and individuals outside China whose export violations "compromise China's national security and interest" or "interfere with the fulfillment of nonproliferation and other international obligations." However, the ECL does not specify the legal consequences for these non-Chinese entities and individuals but merely states that they "shall be subject to legal liability under Chinese laws."
• More Countermeasures May Be Forthcoming. As the U.S. continues to implement and enforce restrictions targeting China, particularly with respect to the Uyghur Forced Labor Prevention Act (UFLPA) enforcement targeted at the automotive industry, the Biden administration's investigation of Chinese-made "smart cars," and sensitive technologies and products such as semiconductors and artificial intelligence, we should expect to see additional, similar countermeasures from China. For example, in July 2023, China imposed export controls on gallium and germanium products—two minerals used in manufacturing microchips and other high-tech devices.
• Potential Exposure under the UFLPA. It has been reported that certain critical minerals were processed for export in the Xinjiang region of China or sold into intra-China supply chains (for example, large Chinese battery makers). Therefore, imports from China containing these materials are at risk of detention under the UFLPA, particularly given the Congressional call to expand the UFLPA Entity List to include companies and entities outside the region because of their affiliations to those involved in the critical minerals industry in the region. 

For more information, please contact:

Daniel A. Solomon, dsolomon@milchev.com, 202.626.5982

FeiFei (Andrea) Ren, fren@milchev.com, 202.626.5962

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