There are two issues: importation of encryption software, and exportation of encryption software.
Some countries (China, Russia, Iran, Iraq, Myanmar, etc.) restrict the use of cryptography by their citizens. It is illegal to import encryption software to those countries.
To enable unlimited encryption strength in the JDK, you have to download a new policy file. The software license there doesn't allow you to use the software if you're in a country that doesn't allow importation of encryption. This is called the "Unlimited Strength Jurisdiction Policy," and below I include part of its README.txt.
Other countries, like the US, don't want to export encryption software to the Axis of Evil. So, it can be illegal to export encryption software to those countries.
The US export restrictions have eased up considerably, probably in recognition of the futility of keeping encryption out of the hands of enemies, or possibly to encourage use of encryption that has been compromised by the NSA. But, they aren't gone altogether. I don't think the software can be licensed by terrorists.
JCE for JDK 5.0 has been through the U.S. export review process.
The JCE framework, along with the SunJCE provider that comes
standard with it, is exportable.
The JCE architecture allows flexible cryptographic strength
to be configured via jurisdiction policy files. Due to the
import restrictions of some countries, the jurisdiction policy
files distributed with the JDK 5.0 software have built-in
restrictions on available cryptographic strength. The jurisdiction
policy files in this download bundle (the bundle including this
README file) contain no restrictions on cryptographic strengths.
This is appropriate for most countries. Framework vendors can
create download bundles that include jurisdiction policy files
that specify cryptographic restrictions appropriate for countries
whose governments mandate restrictions. Users in those countries
can download an appropriate bundle, and the JCE framework will
enforce the specified restrictions.
You are advised to consult your export/import control counsel or
attorney to determine the exact requirements.