The U.S. Department of State, in response to the President’s Export Control Reform Initiative, published final rules in the Federal Register on April 16, 2013 moving export control jurisdiction from the State Department to the U.S. Department of Commerce for a wide range of aircraft and aircraft parts that formally were controlled as military items. On that same day, the Commerce Department published its own final rules to implement that transfer of jurisdiction. The new rules, which amend the International Traffic in Arms Regulations (“ITAR”) and the Export Administration Regulations (“EAR”), will take effect on October 15, 2013.
These rules, and the rulemaking process that led up to them, reflect the continuing tension within the U.S. Government between approaching China as a friend or as a foe, specifically as to security and military-related issues. China has long responded to U.S. complaints about the trade imbalance between the two countries by stating that, were it not for U.S. export controls, China would buy a lot more from the United States . The new rules will make more U.S. products available to China, but due to the lingering view of China as a potential security threat, do not go nearly as far as they might have. China remains a special case, not treated as an enemy like Cuba, Iran, North Korea, Syria and Sudan, but still not trusted to have access to military equipment and technology. Consequently, the implementation of the new rules is unlikely to resolve the question of whether more liberal export controls on China would result in a material reduction in the trade imbalance.
A main focus of the President’s initiative is to revise the U.S. Munitions List (“USML”) to become an objective list of equipment and technology that actually warrants more stringent export controls imposed under the ITAR for military items. Items that do not require being controlled under the ITAR would then be moved to the Commerce Control List (“CCL”) where they would be subject to the more exporter-friendly EAR (treated more as commercial than military items).
The USML, prior to these new rules coming into effect, contained broad catch-all provisions that covered as a military item anything that was specifically designed or modified at any point, for a military application. Thus, the slightest modification to meet a military customer’s specifications would turn a basic commercial item into a “defense article,” requiring a license for almost all exports. Such modifications cause products, like all other products subject to the ITAR, to be subject to the U.S. arms embargo that prohibits the export of defense articles to China.
The new rules have not quite accomplished the objective of the reform initiative because the “specially designed” catch-all language remains in the USML, albeit applied to a much narrower group of products, and it is being added to the EAR in new 600 series Export Control Classification Numbers (“ECCN”) that will apply to many of the items being transferred over from the ITAR. Moreover, the new 600 series ECCNs will perpetuate many of the regulatory impediments to exporting, such as a presumption of denial for exports to China. However, not all items transferred over from the USML will fall into the 600 series ECCNs and those new 600 series ECCNs distinguish among various aircraft parts being transferred, with a large number eligible for export without a license to most countries. Thus, whether a part can be exported to a particular destination and the regulatory burden can be imposed on that export will vary greatly, depending on how the part is classified under the Commerce Control List.
An important benefit of the shift from the ITAR to the EAR is that affected products no longer will be “ITAR Contaminated.” Foreign and even U.S. customers are reluctant to purchase parts for their own products when those parts are controlled under the ITAR because the ITAR controls on those parts would then apply to the customer’s product into which that part was incorporated.
There is no de minimis level for ITAR content. Thus, for example, a $1000 part that is subject to the ITAR could cause a commercial aircraft worth millions of dollars to be subject to the ITAR. The EAR, by contrast, has a de minimis provision that exempts from U.S. export controls foreign-made equipment when the equipment contains less than 25% controlled U.S. content. The EAR de minimis rule would apply to items transferred over from the ITAR, except that the zero de minimis rule would continue to apply to 600 series ECCNs when the foreign item into which they are being incorporated would be re-exported to a country subject to the U.S. arms embargo.
The arms embargo includes China. Thus, whether the product can be exported to China under the new rules will depend predominantly on whether the product would be classified under the new 600 series ECCNs. The bottom line is that a fair number of products that previously could not be exported to China will become available to China after October 15, 2013, but not the more militarily sensitive products that will remain subject to the arms embargo.
Determining Which Products Will Be Subject To The New Rules
The first step companies must take in transitioning to the new rules is to determine which of their products are being transferred to control under the EAR and which will remain subject to the ITAR. This step can be accomplished by reviewing the new Category VIII of the USML. Subcategories VIII(a) and (f) provide a list of the types of aircraft that remain subject to the ITAR. When a company’s aircraft is not on the list, that aircraft is no longer subject to the ITAR. Subcategory VIII(h) contains a detailed list of the types of aircraft parts that remain subject to the ITAR. The “specially-designed” catch-all remains with respect to parts for certain named aircraft and aircraft components (e.g., tail hooks and arresting gear and specially designed parts and components for them).
The ITAR will have a new two-part definition of “specially-designed” following a “catch and release” model. The first part – the “catch” – contains broad language to ensure that any products the government would want covered by the ITAR are caught by the specially-designed definition. The second part – the “release” – then contains numerous exceptions to release from ITAR-control those products and technologies the government has decided no longer need to be controlled under the ITAR. The net result is that most aircraft parts currently subject to the ITAR would not fit any of the types of aircraft parts listed in the new subcategory VIII(h) or would be released under the second part of the “specially-designed” definition and, consequently, will be subject to the EAR after October 15, 2013.
The State Department’s Final Rule also established a new USML Category XIX to cover gas turbine engines and associated equipment formerly covered in Categories IV, VI, VII, and VIII. The new Category XIX contains a detailed list with technical specifications of the gas turbine engines covered and a catch-all of all engines “specially designed for armed or military unmanned aerial vehicle systems, cruise missiles, or target drones.” It also covers specifically enumerated parts and components for gas turbine engines and generally any other parts and components specially designed for the engines included in the category.
When the product is no longer included in the new USML Categories VIII or XIX, the next step in the transition is to determine under which ECCN the product would be classified in the EAR. The Final Rule adds new ECCN 9A610 for military aircraft and related commodities and ECCN 9A619 for military gas turbine engines and related commodities. The new ECCN 9A610 currently has a subcategory (a) covering military aircraft moved over from the USML and eleven subcategories for specific types of parts for military aircraft that would be covered under ECCN 9A610. It also contains a catch-all subcategory (x) that covers any part “specially designed” for a military aircraft that does not fit under one of the other subcategories. The Commerce Department then uses its own version of the two part “specially designed” test that would first “catch” in subcategory (x) most of the aircraft parts being transferred over from the ITAR and not already captured by the other subcategories, but then “release” many of them that do not require the more stringent controls of the 600 series ECCNs. One of the criteria under which an aircraft part may be released is that it is functionally equivalent to a similar part used in a commercial aircraft.
The Bottom Line
The licensing requirements vary greatly depending upon which subcategory covers a particular part. For example, items classified under subcategory (y), which has a large list of covered aircraft parts, can be exported without a license to any country, except China and the handful of countries subject to anti-terrorism controls (Cuba, Iran, North Korea, Sudan and Syria). By contrast, most of the other subcategories are subject to national security controls and presumptively need a license to be exported to any country other than Canada. However, various exceptions to the licensing requirements may apply, depending upon the specific transaction, although those exceptions generally will not be available for exports to China.
Many of the regulatory burdens that exist under the ITAR will follow those products to the EAR because of new requirements being added to the EAR for the 600 series ECCNs. For example, an AES filing will be required for all such exports (i.e., the exceptions to filing an AES for most exports to Canada and most exports under $2,500 will not apply), the ECCN must be added to the standard destination control statement and there are certain reporting requirements even when it is possible to use a license exception to ship the product to one’s own foreign customer.
The commercially most significant regulatory burden that will follow products classified under the new 600 series ECCNs is that they may not be exported to China without a Commerce Department license. Although the absolute prohibition on licenses for those countries found in the ITAR will not exist in the EAR, the usual licensing policy is likely to be one of denial.
The bottom line for China in these new rules is that most aircraft parts that cannot be exported to China because they are subject to the ITAR under the old rules still cannot be exported to China under the new rules inasmuch as they either remain subject to the ITAR or to the new restrictions in the EAR covering 600 series ECCNs. However, China will be able to buy some products previously controlled under the ITAR that no longer will be subject to the ITAR and are released from the 600 series ECCNs by the second part of the specially designed test. Many of those items would fall under existing ECCNs that do not require a license for export to China. Thus, many of the products that are released from both the ITAR and the 600 series ECCNs will move from the USML, where they could not be exported to China, to classifications on the Commerce Control List that could go to China without even needing a license.