EXPORT CONTROL REFORM CHANGES OF APRIL 16, 2013:
FOR BETTER OR FOR WORSE FOR THE U.S. ECONOMY?
President Obama's Export Control Reform (ECR) initiative has taken a significant step forward with the final rule changes published by the U.S. State Department and U.S. Department of Commerce on April 16, 2013. State: http://www.gpo.gov/fdsys/pkg/FR-2013-04-16/pdf/2013-08351.pdf Commerce: http://www.gpo.gov/fdsys/pkg/FR-2013-04-16/pdf/2013-08352.pdf. ECR began in 2009, and new rule changes are expected throughout 2013. The first set primarily deals with aircraft and associated parts – changes in regulation of other defense articles are likely later this year. The total export value of the items affected by the recent rule changes exceeds $20 billion annually.
The process to bring about reform has been lengthy, necessitating interagency committees to identify possible changes, periods of public comment, and congressional notification and comment. The defense industry has encouraged the reform process, arguing that the reforms were necessary to increase American industrial competitiveness and remove unnecessary or outdated restrictions on exports. Nonetheless, there has been some opposition from the International Association of Machinists and Aerospace Workers; they are concerned that changes that reduce restrictions on the export of American defense articles and the inclusion of American defense articles in foreign goods will cause more manufacturing to move abroad. Until the rule change takes effect, it will be difficult to predict which of these outcomes for U.S. production and jobs will prevail.
The broad thrust of the recent reforms is to reduce controls on less sensitive items or items whose military value has become dated, allowing more effective oversight of genuinely sensitive materials. Moreover, the reforms aim to simplify the process of predicting and determining which items are subject to control by using enumerated, positive lists rather than catchalls to determine the appropriate restrictions. Certain items currently on the U.S. Munitions List (USML), which are subject to licensing by the U.S. State Department's Directorate of Defense Trade Controls (DDTC) as part of its administration of the International Traffic in Arms Regulations (ITAR), will be moved to the Commerce Control List (CCL), a less restrictive categorization subject to licensing by the U.S. Department of Commerce's Bureau of Industry and Security (BIS) as part of its administration of the Export Administration Regulations (EAR). It is worth noting that although the CCL is less restrictive, its regulatory framework is more complicated than the USML, meaning that the transition is likely to impose somewhat increased regulatory costs in the short-term.
Changes to USML and CCL
There will be a number of changes to the USML and CCL as part of the new reforms. The first is the creation of a new category under the USML, Category XIX (Gas Turbines and Associated Equipment) which will include gas turbine engines for cruise missiles, surface vessels, vehicles, and aircraft that formerly fell under USML Categories IV, VI, VII, VIII. As noted, there were also significant changes to Category VIII (Aircraft and Related Parts); in addition to those items transferred to Category XIX, a positive list of parts included in Category VIII has replaced more general catchalls, and other items have been moved to the CCL under the new Export Control Classification Number (ECCN) 600 series. These changes will significantly ease the process of determining which parts are regulated by ITAR.
The 600 series ECCN's will cover most of the items being moved to the CCL from the USML, and will generally have stricter controls than other items on the CCL. There are three categories of items in the 600 series; items from the ".a" through ".w" paragraphs are positively enumerated and require a license to export to any country aside from Canada. The .a – .w paragraphs include items such as canopies, life support systems, military instrument flight trainers and combat simulators, and other similar equipment. The .x paragraph is a catchall for items "specifically designed" for a military purpose or in relation to items included in the .a – .w. paragraphs. The .y paragraph positively enumerates items that do not require a license to export except to embargoed countries, including items such as analog cockpit gauges and indicators, survival aids, hydraulic and fuel hoses, potable water storage systems, and many others.
There are six license exemptions for the ECCN 600 series, including LVS (shipments of lesser value), TMP (temporary imports, exports, re-exports and transfer), RPL (servicing or replacement of parts and equipment), TSU (technology and software unrestricted), GOV (governments and international organizations only), and STA (strategic trade authorization). Of these, STA will play the largest role; although some items require specific BIS authorization to be subject to the STA exemption, it allows many items from the a. – .w paragraphs to be exported to 36 countries without a license so long as the government of the recipient country is the end-user.
Specifically Designed
The reforms also changed the definition of "specifically designed," a phrase which was a regular source of confusion under the old system. The old definition emphasized designer intent, a problematic standard given the difficulty of establishing the specific intent of designers of many articles, especially more minor parts. The result was that the old rule constituted a broad catchall, and it was often hard to determine what qualified; the new rule will replace the broad catchall with a catch and release system. The catch section is defined by paragraph (a), which states an item qualifies if: "as a result of 'development,' it has properties peculiarly responsible for achieving or exceeding the performance levels, characteristics, or functions described in the relevant ECCN or USML paragraph; or it is a part, component, accessory, attachment or software for use in or with a commodity or defense article 'enumerated' or otherwise described in the CCL or USML."
There are a number of items which qualify under paragraph (a) but are then released by paragraph (b). There are six releases in paragraph (b), which exempt items designed for a non-military application, items designed for a military application that is only subject to anti-terrorism (AT) controls, items which perform at a similar or lower level than other items that do not require a license to export, items that have already been determined by BIS or DDTC to be exempt, and fasteners such as bolts, screws, etc.
The result of these changes is that although there is still a catchall provision, it is significantly more limited than the prior definition and much more clearly defined; particularly because its provisions are generally tied to the now more specific provisions of the a. – .w paragraphs. This should ease the regulatory burden both on the government and on corporations of determining which items qualify, and should make it easier to export those items that fall under the new release provisions.
De Minimis Assessments for the 600 Series
Another significant difference for items moved from the USML to the CCL will be a change in the applicable de minimis level. Under ITAR, there is no de minimis level for items on the USML; such items cannot be transferred without a license even if they are a small part of a much larger whole. The result is that there is a reluctance to use anything from the USML as a part of an item intended for export. In contrast, the de minimis level for the ECCN 600 series is 25% by value, with an exception for countries subject to an embargo, for whom the de minimis level on the ECCN 600 series will remain zero. There is therefore a significant reduction in concerns about "ITAR contamination" – meaning it will be much easier to include those items from the ECCN 600 series into other goods destined for export. While this likely will increase U.S. exports, it also may make it easier to incorporate formerly ITAR regulated items into items produced abroad if they are partially assembled in the United States. It is that tension that makes it so difficult to predict the impact of the new changes and the resulting impact on U.S. production and jobs.
Transition
The new reforms do not take effect for 180 days. In the interim, both DDTC and BIS are accepting applications for licenses, but BIS will not issue any licenses for items currently listed on the USML until the change actually takes effect. The DDTC will continue issuing licenses for those items until the change takes place. Licenses issued by the DDTC will remain valid for two years, including after the reform takes effect.
In order to avoid the risk of requiring double licensing for some items, the DDTC will have authority to issue licenses for items on the CCL that are used in or with items on the USML without requiring separate authorization from BIS. This should ease some industry concerns about double regulation after the reform takes effect.
Conclusion
The long-term goal of the ECR initiative is described by the "four singularities:" a single control list, a single export licensing agency, a single enforcement agency, and a single information technology system. There are a number of barriers to accomplishing this goal, including legislative requirements, bureaucratic hurdles, and other concerns. The administration has said for example that a single license application form has been drafted, but they do not have the requisite funding to implement it.
In the meantime, more reforms will take time, with the process of interagency cooperation, public comment periods, congressional comment periods, and delays to allow for regulatory transition ensuring the process will not be quick. It is yet to be seen precisely how the reforms will affect overall U.S. exports. While the reduction of export restrictions will certainly allow more goods to be exported, it also makes it easier to export components that can be used in manufacturing abroad, allowing some manufacturing processes that happen in the United States in the status quo to be moved abroad.
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