On March 15, 2011, the State Department's Directorate of Defense Trade Controls (DDTC) issued a proposed rule amending two aspects of the International Traffic in Arms Regulations (ITAR). The new rule would eliminate export licensing requirements for:
- Replacement parts and components sent abroad under certain circumstances for the repair of previously-licensed US-origin defense end-items in the inventory of foreign governments; and
- Defense articles that have been incorporated into an end-item subject to the Export Administration Regulations (EAR) under certain conditions.
The new license exemptions promise to significantly reduce the licensing burden for exports that meet the specified requirements. Given certain ambiguities in the language of the proposed rule and DDTC’s invitation to comment, exporters should evaluate how the proposed rule may affect their operations and consider providing comments to DDTC prior to April 15, 2011.
Replacement Parts and Components
DDTC proposes to add a new Part 123.28 to the ITAR to facilitate the repair of US-origin defense end-items that have already been shipped abroad under a license. The change comes in large part as a response to calls by US allies operating in Iraq and Afghanistan for a streamlined process to obtain replacement parts for US-origin defense articles. Under the new rule, license-free exports of replacement parts and components (hereinafter “replacement items”) for US-origin end-items held in foreign government inventories may occur if all of the following conditions are met:
- The exporter must have been the applicant for a previously-approved export of the US-origin end-item;
- The exporter must be eligible to export defense articles (e.g., it must be registered with DDTC and cannot be debarred or suspended from exports);
- The consignee of the shipment must be the foreign government authorized under the original end-item license;
- The replacement items cannot “upgrade” or enhance the capability of the end-item;
- The type, frequency and amount of replacement items to be supplied must accord with normal logistical support requirements in light of the end-user’s inventory of eligible end-items;
- The shipment and use of the replacement items adhere to the requirements (e.g. license provisos and terms) of the original export authorization of the end-item;
- The replacement items “are consistent with the US Government authorized maintenance activities”;
- The value of the order cannot exceed congressional notification level requirements; and
- The foreign government end-user may not be subject to restrictions under Part 126.1 of the ITAR.
Of these conditions, the following appear to be of particular note:
Only Applicants for the Original End-Item License May Ship Replacement Items License-Free.
The exemption contains a significant limitation since it allows only original end-item license applicants to take advantage of the new exemption. A subcontractor, supplier or distributor of the original exporter cannot itself ship replacement items under the new exemption. If such a seller wished to export replacement items, then, it may be necessary to first send the items to the original license applicant on the license for the original end-item, which would then have to ship the parts or components. The original license applicant, it should be noted, need not be the end-item manufacturer or the exporter. DDTC made clear it is still considering whether to expand this condition to allow exports by a party other than the original applicant. It has already rejected expansion to a generic “second exporter” who otherwise met all conditions, while recognizing it may be appropriate to expand the provision to apply to a major component subcontractor. This aspect of the rule would be ripe for comment to DDTC by potentially affected parties.
The Replacement Items Cannot “Upgrade” the End-Item.
The proposed rule states that replacement items eligible for the license exemption may not enhance the capability of the end-item. However, if an item identical to that being replaced is unavailable, replacement items that improve only the “reliability or maintainability” of the end-item can qualify for the exemption. Under this restriction, a more durable or less error-prone replacement item may be allowable, but not one that increases the actual performance capability of the item. This approach is similar to the existing, parallel restriction in License Exception RPL in the EAR (15 C.F.R. Part 740.10), which makes ineligible for a license exception dual use items that “improve or change the basic design characteristics, e.g. as to accuracy, capability, performance or productivity.” While the limitation on the proposed ITAR license exemption is understandable, if replacement items have been upgraded or improved over time (e.g., software has had new or improved functionality added in a newer version), it will need to be licensed for export even if replacing a now obsolete part.
The Level of Exports Must be Commensurate with the Foreign Inventory.
The new rule requires that the type, amount and frequency of replacement items to be supplied must be consistent with normal logistical repair and replacement needs in light of the amount of relevant end-items in the foreign nation’s inventory. This restriction reflects DDTC’s intent to allow the supply of replacement parts while reducing diversion risks and prevent stockpiling. Nevertheless, neither the rule nor its preamble make clear how the exporter is supposed to establish or document that it has met this condition.
Only Foreign Governments Can be Consignees.
Under this limitation, only foreign governments authorized under the original license can be consignees. Other potential recipients, such as foreign subsidiaries or other affiliates of the replacement part applicant or exporter are ineligible to receive the replacement items, which may result in logistical problems and delay if the repair is to be undertaken by a party other than the foreign government.
In addition to satisfying the above conditions, exporters must follow a number of steps to claim the exemption. They must:
- Possess a purchase order from the foreign government end-user/consignee;
- Cite the original license number in the Automated Export System when exporting the replacement items (there is no requirement that the license be active or unexpired);
- Provide a copy of the license and/or purchase order at the request of the Port Director at the place of export;
- Use the US Postal Service or a freight forwarder registered and in good standing with DDTC; and
- Maintain records establishing the exporter’s authority to use the exemption.
Exports to US Government entities operating abroad are covered by a separate exemption.
Export and Re-Export of Defense Articles Incorporated into Items Subject to the EAR
In another long-awaited development contained in the proposed rule, DDTC intends to modify the so-called “see through” rule. Under the “see through” rule, a commercial or dual-use item that contains an ITAR-controlled defense article is itself subject to the ITAR for most purposes. As exemplified by the case of an ITAR-controlled gyroscope widely used in civilian aircraft instrumentation, this rule imposes DDTC controls on items that may raise a national security risk more appropriately managed under the EAR. The new rule seeks to anticipate such scenarios and limit ITAR coverage to cases where diversion is a significant concern.
Under DDTC’s proposed rule, which adds a new Part 126.19 to the ITAR, a license is not required for the export or reexport of defense articles incorporated into end-items subject to the EAR when all of the following conditions are met:
- The end-item would be rendered inoperable or benign by the removal of the defense article;
- Any technology subject to the EAR for the production, development or use of the end-item does not contain technical data or assistance qualifying as “defense services” relating to the defense article in the end-item;
- The defense article’s incorporation does not make the end-item a “military commodity” and does not provide to the recipient a military capability, or is not related to a military application or “military end use”; and
- The value of the defense article is de minimis, at less than 1% of the end-item’s value.
Components (as defined by the ITAR) are eligible for similar license-free treatment if the conditions described in the second and third bullets above are met and the defense article would be totally destroyed, i.e., irreparable, following its removal from the component.
Again certain aspects of the proposed rule warrant further consideration and comment.
Military Commodity or End Use.
The definitions to these terms are defined by cross-reference to the EAR, which, in summary, defines a “military commodity” to mean an item described on the USML or on the Wassenaar Arrangement Munitions List (including certain ECCNs ending in A018). Similarly, a “military end use” means an item incorporated into an item described on one of those lists or having an A018 ECCN; as well as the “use,” “development” or “production” of such items; and “deployment” of certain aircraft and gas turbine engines classified under ECCN 9A991. These definitional aspects appear to treat 9A991 items materially more restrictively. The other aspects of these definitions, however, seem to restrict applicability of the rule only where incorporation turns the EAR item into a defense article – which appears to beg the question of when that result occurs. DDTC may have taken a complex route to say the obvious -- that items covered by the USML are not eligible. Exporters should consider whether these definitional ambiguities would affect their particular prospective exports and take advantage of the comment period if warranted.
Technical Data Qualifying as a Defense Service.
Rules applicable to EAR-controlled technical data about the end-item itself appears unchanged by the proposed rule. The proposed rule is contingent upon exporters not transferring ITAR-controlled technical data (e.g., development and production information) about the incorporated defense article. The preamble to the rule states this point with relative clarity, but the language proposed for the rule itself is less clear, potentially raising questions for exporters.
One Percent of Value.
The incorporated defense article is limited to one percent of the value of the end-item. Again, exporters should consider during the comment period whether this valuation restriction would severely limit the application of the rule to items that do not present national security concerns.
The new provision will not go into effect until the Bureau of Industry and Security, Department of Commerce, amends the EAR to harmonize coverage between it and the ITAR.
DDTC will accept comments on the proposed rule for 30 days after its publication.