Trio of New U.S. Export Control Rules Will Significantly Impact Future Trade and Investment With China

Faegre Drinker Biddle & Reath LLP

Faegre Drinker Biddle & Reath LLP

The U.S. Commerce Department’s Bureau of Industry and Security published three new rules on April 28, 2020 that will significantly change U.S. export controls on trade and investment with China in a range of technologies and industries. Two of these new rules will enter into legal force on June 29, 2020. The third is open for public comment as a proposed rule and may be finalized later this year. Companies doing business in or with China in a range of industries – from information technology to aerospace and advanced materials – should carefully analyze these latest rules and how they may impact their own supply chains, investments, existing contracts and future sales. In many cases, U.S. companies that have rarely been required to obtain export licenses for cross-border activities, joint research and other projects with Chinese partners will now face new and potentially stringent licensing requirements. Failure to comply with these requirements can lead to significant penalties.

BIS Eliminates License Exception CIV

License Exception Civil End Users (CIV) currently permits exports, reexports and transfers without a license of goods, technology and software (collectively items) that are controlled for national security reasons to China and certain other countries in BIS Country Group D:1 (including, among others, Libya, Russia, Ukraine and Vietnam), provided that the end use of the items is for civilian applications and does not involve other prohibited end users and end uses (such as terrorism). Examples of the many items currently eligible for the license exception include certain human and animal pathogens, advanced anti-friction bearings, semiconductors and semiconductor design and production technology, telecommunications equipment, optics and radar technology, civil aircraft parts and components, and other aerospace technology.

Effective June 29, 2020, License Exception CIV will be eliminated entirely. Companies seeking to export, reexport or transfer these items to China or other D:1 countries will be required to obtain a license from BIS. A license will also be required for projects that involve the sharing or exchange of national security-controlled technology or software with citizens of China and other D:1 countries.

Licenses Required for Both Military End Users and Military End Uses in China

Also effective June 29, 2020, BIS will require any person seeking to export, reexport or transfer certain designated goods, technology or software to military end users in China (including elements of Chinese national and regional military and security forces) to obtain a license from BIS. In many cases, such licenses will be denied.

Through this rule, BIS will also tighten its definition of restricted military end uses in China, Russia and Venezuela. Restricted military end uses will now include not only items used in the development or production of military-related items, but also any item that supports or contributes to the operation, installation, maintenance, repair, overhaul or refurbishing of military items. At the same time, the new rule will restrict exports of additional materials processing, electronics, telecommunications, information security, sensors and lasers, and propulsion technologies that have historically not required a license to military end uses in China, Russia and Venezuela.

Finally, the rule greatly expands the Electronic Export Information (EEI) filing requirements for exports to China, Russia and Venezuela. EEI is a set of data about an export that must be filed prior to export in a database maintained by the U.S. Census Bureau and U.S. Customs and Border Protection. Currently, U.S. exporters do not need to file EEI for shipments valued under $2,500 (unless an export license is required for those shipments) and do not need to report the Export Control Classification Number(s) (ECCN) for such shipments if they are exporting only items subject to anti-terrorism controls. The new rule will require all U.S. exporters to file EEI for virtually all exports to China, Russia or Venezuela regardless of the value of the shipment. In addition, even if no license is required to ship an item to those destinations, the EEI filing must include the correct ECCN regardless of reason for control.

In its guidance on the new rule, BIS cautions that companies will now need to undertake substantially increased due diligence with respect to end users and end uses of their items in China. BIS states that this rule change was prompted in part by the “widespread civil-military integration” of state-owned and nominally civilian commercial companies in China. In this regard, the new rule echoes the comments of Assistant Secretary of State Christopher Ford and other administration officials who have warned of the threat to U.S. national security from a Chinese government policy of “civil-military fusion.” In this regard, the latest rule change can be seen as another piece of the administration’s “whole of government” response to perceived national security threats from China.

Proposal to Limit Reexports of U.S. Technology From Third Countries to China

Currently, License Exception Additional Permissive Reexports (APR) authorizes the export from a third country (i.e., a reexport) of items that were originally exported to that third country from the United States or that are otherwise subject to U.S. export controls. Generally speaking, such reexports have been permitted without a license from BIS where they do not involve activities like missile development and where they are made pursuant to an export authorization from a country that is part of the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies.

BIS is now proposing to restrict the use of License Exception APR if a reexport involves China or another Country Group D:1 country. According to BIS, its proposal was prompted by “variations in how the United States and its partners . . . perceive the threat caused by the increasing integration of civilian and military technology development in countries of concern” such as China. BIS explains that it has seen cases where a trading partner government may approve a license for the reexport of a U.S.-origin item to China that BIS would have denied if that same item had been exported directly to China from the United States. Comments on the BIS proposal are due by June 29, 2020. The proposed rule is currently expected to be implemented later this year.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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