United States: The View From Above: How Export Control Reform Will Impact Aviation

Jonathan M. Epstein is a Partner in our Washington, D.C. office

As part of their efforts to reform export controls, the Department of State and the Department of Commerce are planning to move certain military aircraft, aircraft engines, and specially designed aircraft parts and components off of the U.S. Munitions List ('USML') under the International Traffic In Arms ('ITAR') list, and place such items under the licensing jurisdiction of the Department of Commerce. It is not unlikely that these reforms, proposed in late 2011, will be implemented some time in 2013. These reforms will reduce the type of military aircraft parts and components that require a licence to export to certain countries.

Reform and progress to date

The original export control reform plan, enunciated by then Secretary of Defense Gates in April 2010, sought to consolidate all export-controlled items onto a single list administered by a single agency, with a single licensing system for all types of exports. The primary impetus was to increase interoperability with NATO and other allied countries by reducing the kind of delays and problems caused by the need to obtain licences for virtually any export of military items.

Over the last three years, some of the more ambitious goals, such as creating a single agency, have effectively been sidelined. However, the U.S. government has made remarkable progress in pushing forward reforms when measured against past reform efforts, and the glacial speed at which the wheels of the Washington bureaucracy turn. Furthermore, both the State Depart - ment and the Commerce Department actively solicited comments from the public, giving industry a voice, if not a vote, in the process.

Congressional concerns have long been considered a major issue to implementing reforms, and the administration has gone to great lengths to keep Congress apprised of the proposed reforms. With the reelection of President Obama and changes in Congress, the prospects for reform are significantly improved. For example, the National Defense Authorization Act for Fiscal Year 2013 contained authority to move commercial communication satellite systems and related items controlled under the ITAR back to the jurisdiction of the Department of Commerce. The last major hurdle to moving items from the USML is formal notification process required under the Arms Export Control Act. In early March 2013, the first of these formal notifications was made to Congress (which included aircraft and gas turbine engines).

To date there have been a number of incremental improvements as part of export control reform, including:

  • Consolidated screening list: The U.S. maintains a plethora of lists of persons and entities that are blacklisted from buying U.S.-origin goods and services. For example, neither U.S. nor non-U.S. companies can sell U.S.-origin goods to entities on the Department of Commerce Denied Person's list. The U.S. government now has a consolidated list available at: http://export.gov/ecr/eg_main_0231 48.asp.
  • New rules for dual/third country nationals employed by foreign defence contractors: The Department of State revised licensing requirements for foreign companies licensed to manufacture or work on joint defence projects. For example, a U.S. company engaged in a joint development project with a Canadian company would no longer need to request authorization for an employee of the Canadian company who is a dual Canadian/Indian national. However, the Canadian company will need to implement procedures to screen employees.
  • New dual-use exception: Under a new Department of Commerce exception 'STA' for strategic trade authorization, many dual-use items, including certain avionics components and technology that formerly required a licence, can now be exported from the U.S. to many European countries, Australia, Canada, Japan, and New Zealand, with more limited application to several other countries, notably Israel, India, and South Africa. This exception also allows re-exports within and among these countries. Unfortunately, certain commercial aviation inertial navigation systems, which previously required a licence, will likely still require a licence even to these countries.

Which aircraft, engines and components are being removed from the USML?

In November 2011, the Department of Commerce and the Department of State published parallel proposed rules regarding military aircraft and associated parts, components, and associated technical data, and a month later they proposed a similar set of changes for military gas turbine engines. These proposals seek to migrate less sensitive items off the USML, and to place them under the more flexible Commerce Control List ('CCL') administered by the Department of Commerce. While these proposed rules have significant limitations, if implemented they would reduce the number and type of military parts and components that require licensing for export to most countries.

The proposal is a fairly complex tiered approach, as follows:

  • Combat and other specialized aircraft and components with certain unique military functions remain controlled on the USML.
  • Non-combat military aircraft and most 'specially designed' parts and components for such aircraft would be controlled under new classifications on the CCL, which would still require a licence to many destinations and end-users.
  • Certain parts and components associated with common aircraft systems such as aircraft tyres would general ly no longer require licensing.
  • Basic parts, such as fasteners, may be decontrolled further even if designed specifically for use in a military aircraft.

A similar structure is proposed for military gas turbine engines, which are carved out of the aviation category and placed in separate USML and CCL categories because of the use of gas turbines in non-aviation applications.

Proposed changes to the USML

Category VIII of the USML currently controls virtually all aircraft designed for military use and all specially designed parts and components thereof. The Department of State is proposing to make Category VIII of the USML become a 'positive' list. This means that if an item is not specifically enumerated on the list, it will no longer be ITAR-controlled, but rather will be controlled on the CCL.

The proposed Category VIII list only contains certain types of military aircraft (e.g., fighters, bombers, attack helicopters, jet trainers, and military unmanned aerial vehicles), and for such aircraft only specialized military parts and components that have military significance (for example, bomb racks, tail hooks, and notably all parts and components designed for stealth aircraft). If the hardware is no longer controlled under Category VIII, the corresponding technical data and services will also no longer be controlled under the ITAR.

To take a real world example, an F16 aircraft would remain on the USML, but its landing gear would not, and nor would the overhaul by a U.S. person of such gear for a foreign person implicate the USML. However, just because an item would no longer be controlled under the USML, it does not mean it is no longer 'military', and, as discussed below, it may very well now require a Department of Commerce licence to be exported to most countries.

A new Munitions List Category XIX would control gas turbine engines meeting certain performance criteria, such as those with afterburners or capable of inverted flight, as well as certain engine models and specific major components, such as hot section parts and components. Unfortunately, the rubric of controlling all 'specially designed' parts and components still applies to a laundry list of specific engine models.

New Commerce Control List Classifications

The Commerce Department proposed to create new export control classification numbers ('ECCNs') to control military aircraft, gas turbine engines, and most specially designed parts and components that would no longer be controlled on the USML. The 'catch' is that the Commerce Department will require a licence to export or re-export these items to almost every country in the world, with limited exception. Further, these new categories each contain catch-alls for components and parts 'specially designed' for military use. Hence, the proposal does little to fix one of industry's major concerns: how to determine whether a part is 'specially designed' for military purposes, and that determination is still very relevant in determining licence requirements.

Notwithstanding these shortfalls, there are three very real benefits for the aerospace industry:

  • Initially 29 enumerated components (and parts thereof) of military aircraft would be largely decontrolled and no longer would need export licences to most countries. These include items such as aircraft tyres, analogue cockpit gauges, galleys, lavatories, life rafts, and magnetic compasses. For military gas turbine engines components (and parts thereof), items such as oil tanks, fuel and oil filters, identification plates, and clamps are largely decontrolled.
  • Many simple unassembled aviation parts such as screws, bolts, spacers, grommets, springs, and wire would be decontrolled, even if they are modified for a particular military application.
  • Some parts and components, and related technology, may qualify for a licence exemption to European and certain other friendly U.S. countries under the STA exception. Another indirect benefit to U.S. industry is that, unlike the ITAR, the Commerce Department does not generally control foreign-made goods with de minimus U.S.-origin content.

This will reduce foreign manufacturers' incentive to 'design-out' all U.S. content - an issue of concern for U.S. satellite manufacturers for many years.

Conclusion

This article vastly oversimplifies export reform and the proposed changes. Export control 'reform' should not be confused with export control 'simplification'. The proposals will create complex categories for the aerospace industry with numerous notes, exceptions, and cross references. Hence, determining licence requirements for second- and third-tier part and component suppliers will be challenging. Exporters will be challenged to keep abreast of these changes to take advantage of relaxations in licensing requirements and to remain in compliance.

Previously published by WorldECR

www.hklaw.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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