The Bureau of Industry and Security (BIS) of the US Department of Commerce recently published its much anticipated China Policy Rule (China Rule). The China Rule, fondly referred to as the "China Catch-All Rule" by practitioners during the comment period, establishes a bifurcated treatment for "dual-use" items destined for China: it expedites civil trade while simultaneously restricting military trade. The BIS, which appears to have received extensive input (some 1,000 pages of comments) from practitioners during the comment period, incorporated some of these comments into the final rule. Despite concession that the final version is not actually a catch-all, many practitioners have voiced skepticism regarding the new China Rule.
The new rule consists of three principal sections, effectively dispersed throughout the Export Administration Regulations (EAR).
Military End Use
The most restrictive of the rule’s new provisions is the section that establishes a new control for military end use. This control is based on knowledge as defined in section 772.1 of the EAR. Exports to China of certain items on the Commerce Control List (CCL) that previously did not require a license may now require a license if the exporter knows that those items are intended for a military end use. In response to the public comments, the military end-use restriction covers approximately 20 products and associated technologies and applies to 31 Export Control Classification Numbers (ECCN), rather than the originally proposed 47 entries.
End Use Statements This section includes a US$50,000 transactional value threshold for obtaining end-user statements for exports to China, an increase from the previously proposed US$5,000 value threshold, for items on the CCL requiring a license to China. The BIS’ stated purpose for this higher threshold is to strengthen the implementation of the April 2004 enduse understanding between the vice minister of commerce of China and the US undersecretary of commerce for industry and security. There are important exceptions to the application of the transactional value threshold: the export of certain night-vision equipment and computers exceeding US$5,000 still require end-user statements.
Validated End User
This provision, intended to balance restrictive military end-use control and make good on the BIS’ promise to facilitate civil trade with China, authorizes the BIS to designate certain China-based companies as "validated end users" (VEUs) to which specified items may be exported or re-exported without a license. VEUs will be placed on a list in the EAR after review and approval by the US government. China-based companies must apply for this status, and several dozen have already started the process. The BIS has noted that it will determine whether onsite inspections are necessary on a case-by-case basis. The initial batch of VEUs is anticipated to be announced by summer’s end or early autumn.
As with the other provisions, there are exceptions. Notably, items controlled for crime and military technology are not eligible for this provision due to statutory export restrictions. China is the test case for the VEU program; if successful, the BIS plans to "roll out" the VEU authorization to other countries.
There are a couple other noteworthy provisions. First, in terms of license review policy for items controlled for national security reasons, the BIS responded to practitioners’ objections to the originally proposed "material contribution" standard and instead retained the current "direct and significant" standard. Second, applications for the export of chemical, biological, nuclear and missile controlled items may be reviewed in conjunction with the national security licensing policy to determine if such exports contribute to China’s military capabilities. For this reason, practitioners have reluctantly conceded that the final China Rule is not truly a catch-all.
The BIS claims that the China Rule is "sharp and focused." Only time, however, will determine whether it turns out to be the originally feared "catch-all" or, in the end, looks more like a "catch-lots."
Developing Asia is facing considerable headwinds. Delayed recovery in major industrial economies and moderating prospects for the large economies of the China and India weigh on region's project growth forecasts.
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