In a significant step in the reform of U.S. export controls, the Department of Commerce issued a proposed rule on Friday, July 15, 2011, that would fundamentally affect the overlap between, and operation of, the International Traffic in Arms Regulations ("ITAR") administered by the U.S. Department of State, Directorate of Defense Trade Controls, and the Export Administration Regulations ("EAR") administered by the Department of Commerce, Bureau of Industry and Security. See Proposed Revisions to the Export Administration Regulations (EAR): Control of Items the President Determines No Longer Warrant Control Under the United States Munitions List, 76 Fed. Reg. 41,958 (July 15, 2011) (amending 15 C.F.R. Pts. 730, 732, 734, 738, 740, 742, 743, 744, 746, 748, 756, 762 ,770, 772 and 774). The changes, which are based on the interagency review of the U.S. export control system that was initiated by President Obama in August 2009, would create a regulatory construct for harmonizing the United States Munitions List ("USML") of the ITAR and the Commerce Control List ("CCL") of the EAR, as well as standardizing certain key definitions between the two regulatory systems.
A summary of the key provisions follows.
Structural Changes to Regulatory Framework
Under the proposed rule, the regulatory structure would be
altered to allow for large numbers of parts and components
currently covered by the ITAR to migrate to the EAR. The steps
contemplated in the rule would serve as an intermediate step
towards the ultimate aim of creating a single "dual-use"
and munitions control list. 76 Fed. Reg. at 41,960. The USML would
eventually be changed to make its categories more positive (i.e.
using objective criteria to describe controlled items) and aligned
with the CCL. Id. at 41958. The changes will also shrink
the number of items subject to the ITAR, perhaps considerably, as
some current catch-all ITAR categories of items now subject to
control are replaced with specifically enumerated lists. For
example, the catch-all ITAR categories of parts and components
would be replaced with specifically enumerated lists of parts and
components. Other specific items would be moved from the USML
altogether and relegated to EAR control. Id. at 41,959
(mentioning tow trucks as an example of the latter).
To accomplish the initial migration, Commerce has proposed the
creation of a new set of controls in the CCL, comprising what is
functionally a "Commerce Munitions List" that would
assign items moved from the ITAR and not otherwise fitting an
existing Export Control Classification Number ("ECCN") to
"600 Series" control numbers. 76 Fed. Reg. at 41,960. The
600 Series would be subject to significant control (National
Security Column 1), and would require an export license to all
countries other than Canada unless a license exception is
available. Id. Further, under the proposed rule foreign
"600 Series" items would be subject to a 10% de
minimis rule for U.S. origin content. Id. at
41,966.
The proposed rule would also create a mechanism for exporters to
apply for application of the recently created Strategic Trade
Authorization ("STA") license exception to "600
Series" items. If approved, the STA license exception would
allow exports of such items for ultimate end use by certain
government bodies of the countries that qualify for the STA
exception. Id. at 41,963. The proposed rule indicates that
the STA exception will be made available when the item "does
not provide a critical military or intelligence advantage to the
United States or is otherwise available in countries that are not
regime partners or close allies," unless the Departments of
Commerce, Defense, and State articulate an "overarching
foreign policy rationale" for restricting the availability of
the STA license exception. Id. at 41,975.
The proposed rule would also create a new temporary "holding
category" on the CCL, analogous to the USML's Category XXI
(Miscellaneous Articles), for which the U.S. Government is
determining an appropriate control on the CCL. Id. at
41,966. Classification under this holding category would be
available in one year increments for up to a total of three years.
Id. at 41,967.
Migration of Items to the EAR
The proposed rule includes specific transfer of an initial group
of military use vehicles from USML Category VII to new ECCNs in
Category 0 of the CCL. Vehicles being transferred would include
those designed or modified for "non-combat military use."
Id. at 41,979. Thus, military modifications for vehicles
including pneumatic tire casings, tire pressure inflation control
systems, armored protection of vital parts, special mounting for
weapons, and black-out lighting would not necessarily subject
vehicles to control under the USML. Id. at 41,979, 41,982
(proposed ECCN classifications and descriptions for ground
vehicles).
On the CCL, some "600 Series" items would be placed in a
"y" category that is subject to only antiterrorism
controls. Others would be in an "x" category for which
few license exceptions would be available. It is significant,
however, that General Interpretation No. 2 in EAR part 770.2, which
provides that parts physically incorporated into a machine or
equipment do not require a license, would continue to apply in the
usual manner to end items subject to the EAR. This means U.S.
industry could incorporate "600 Series" "x"
category components in civilian end products and proceed with
export in accordance with the ECCN governing the end product, even
if the component had been developed earlier on a military
program.
Changed Definitions
One of the most important features of the proposed rule is a new
definition of "Specially Designed" that would apply to
the new "600 Series" category, existing ECCNs, and
revised USML categories using the Term. Id. at 41,960. The
rule was formulated with the aim of formulating a clear and
objective definition that would rely less on subjective intent.
Id. at 41,967.
The new definition of "specially designed" would apply
where an item has properties that are responsible for achieving or
exceeding performance levels referenced in the CCL, or for
"parts or components" of items that are controlled either
on the USML or on the CCL for reasons other than Anti-Terrorism.
Id. at 41,980. In a change to a much-maligned aspect of
the current definition of "specially designed," the
proposed rule would remove application of that term to common
hardware and unassembled parts such as screws and bolts that are
used in civil items. Id.
Although in many cases the new definition of "specially
designed" will liberalize current controls to remove items
from the ITAR, it is possible that the more objective criteria in
the new definition, particularly the requirement for an item to be
in "serial production" in the civilian sector in order to
qualify under paragraph (d)(3), will cause some items that would
have been subjectively "intended" for civilian as well as
military markets, and thus outside of ITAR previously, to come
within ITAR under the new definition.
Definitions for other terms such as "parts,"
"components," and "end items" would also change
under the proposed rule. In a largely semantic change, the
terminology attaching to "dual use" items would change to
"items for export," to more clearly express the scope of
the CCL as covering a broad range of U.S.-origin items.
Id. at 41,966.
Conclusion
Although it represents a considerable step in the reform of U.S. export controls, the new rule has not yet taken effect. The Department of Commerce will accept comments on the draft rule up to and including September 13, 2011. Given the considerable scope of the rule and import of many of its changes, businesses affected by the changes may wish to submit comments on the proposed rule. Further, businesses involved in exports would be wise to revisit their export control compliance programs now to determine what effect, if any, the regulations in the proposed rule would have on their business, and to begin planning accordingly for forthcoming changes.
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