Lawyers: Companies Seeing ‘Impossible to Uphold’ End-User Language From Chinese Exporters

Matt Lapin, an international trade lawyer with Wiley, gave one example in which a client received a “certification request” from their European distributor that was actually forwarded from the distributor’s “second- or third-tier sub-supplier” in China. That certification request asked for information about the final end user of a shipment of Chinese magnets.

The Chinese suppliers are now the ones “coming back and asking you due diligence questions,” instead of the other way around, Lapin said during the “Never Tariffied” podcast, hosted by his law firm last week. “That's a different model than we've ever dealt with before.”

Laura Louca, a Blomstein trade lawyer based in Germany, said “many” of the firm’s clients have been asked by Chinese companies to sign end-user certificates, and they usually each contain different language. The Chinese government has apparently shared a draft end-user certificate with Chinese companies to send foreign business partners, she said, but Chinese companies appear to be adding their own language and, in some cases, new clauses that are “impossible to uphold.”

She pointed to one example in which a European company was asked to verify that a product reached the final end user in its supply chain, including with “post shipment audits and controls and so on.” But European companies “have no way of doing that,” Louca said.

“If they go to a U.S. company and tell them this -- that 'I'm going to give you this product, but I have to reserve the right to come every year and check whether that product still is within your company and has not gone to a military end user' -- nobody's going to buy from them anymore,” she said.

Louca said she believes Chinese companies also aren’t “happy” about these new rules, partly because they don’t have much experience carrying out export control due diligence. China’s rare earth export control regime is relatively new, compared with controls maintained by the U.S. and the EU, especially the now-suspended rules that Beijing announced earlier this year, which were set to restrict overseas exports that contain certain levels of Chinese-origin material (see 2510090021 and 2511100047).

“The Chinese companies, it's not like they're happy about it. At least that's my feeling,” Louca said. “Because suddenly they're faced with all this red tape that they have to approach their clients in Europe and show them end-use certificates.”

She added that American and European companies “have experience with export control clauses” and have been facing “arbitration challenges” stemming from export control language in contracts for years. The Chinese companies have “always been on the other side -- signing them -- but they've never been on the side of drafting them,” Louca said. “So there's panic and confusion on both sides, Chinese and European.”

Lapin said that's “exactly what we’ve heard as well.” This new dynamic is introducing “new sanctions or export-control-type restrictions that are now being injected into the supply chain where they didn't exist before.” The Chinese controls are made especially challenging because rare earths cover “such a broad set of sectors,” he added, as opposed to specific U.S. or EU controls that cover narrow sets of technologies and dual-use items.

“Even if you are an experienced, international, multinational company with a diverse supply chain, and you think you have experience in this world,” Lapin said, “it may not be the experience that is going to be necessarily relevant to this new state.”

Lapin also touched on broader compliance challenges that exporters face, saying that he believes companies should expect to continue to see “less regulatory certainty from your own regulators,” especially in Europe. He said EU companies have traditionally had a “much less adversarial relationship with your regulators and the sanctions and export control space” than American companies have had with the U.S. government, but that seems to be changing.

“I think we're seeing more of that on the EU side, and some of that's also just because they don't have the time, because they're much more busy enforcing laws,” Lapin said. “You as a company may now be able to rely less on that day-to-day counseling you were used to receiving” from the government.

In addition, Louca stressed the importance of in-house compliance teams recognizing the reputational risks presented by export controls and sanctions, even if they’re not found guilty of a violation. She cited the example of a media outlet reporting that a company was selling products to Russia. Even if those shipments weren’t violating any trade laws, “perspective is everything,” she said, “and it does impact your business.”

She said an in-house lawyer for a client recently told her that “reputation is not my issue. The legal certainty is my issue.”

But “one does not go without the other anymore,” she argued. “Don't forget to consider the reputational risks that might impact your company in an even larger amount than regulatory violations might.”