In June 2007, the Commerce Department’s Bureau of Industry and Security (“BIS”) issued a final rule to revise and clarify U.S. licensing requirements and policy on exports and reexports to the People’s Republic of China (“PRC”). This final rule, known as the “China Rule,” amends the Export Administration Regulations. In announcing the new rule, the Commerce Department stated that the rule remains consistent with the U.S. Government’s policy to facilitate U.S. exports to the PRC for legitimate civilian end-use, while simultaneously preventing exports that would enhance or contribute to the development of the PRC’s military capability.
Generally, the rule imposes new controls on items destined for military end-use, and facilitates exports through a new Validated End-User Program (“VEU”). It also reduces the paperwork burden by raising the dollar threshold for U.S exporters to obtain Ministry of Commerce end-user statements. This newsletter focuses on items destined for military enduse and the requirements of the VEU program.
Items Destined for Military End-Use
The rule implements new controls on a focused list of exports if they are destined for military end-use in the PRC. The lists of items covered by this military end-use restriction are 20 distinct product categories and associated technologies and software. In determining what items would be subject to military end-use control, the BIS considered the military application of the item, the relative foreign availability of the item, and the level of U.S. commercial exports of the item to the PRC. Some items subject to the new military end-use controls include aircraft, aircraft engines, inertial navigation systems, lasers, certain optical sensing fibers, underwater cameras and propulsion system, certain composite materials, and telecommunications equipment for space communications or air defense.
Applications to export, reexport or transfer items controlled for military end-use will be reviewed on a case by case basis to determine if the product will make a material contribution to the military capabilities of the PRC and be contrary to the national security interests of the United States. As a result, a license will be required if the exporter knows that the product is destined for military end-use. Exporters must understand that the term “knowledge” in the regulation includes both actual knowledge and a reason to know. Therefore, exporters cannot avoid the licensing requirements by simply not inquiring about the final end-user of the product.
Validated End-User Program (“VEU”)
The VEU program is designed to facitate the export of goods to “trusted customers” in the PRC by allowing Chinese companies that qualify the ability to receive certain U.S. controlled items without individual export licenses. The Commerce Department expects that as the program expands and matures it could facilitate the export of millions of dollars of U.S. exports to the PRC and likely benefit U.S. electronics, semiconductor equipment and chemical industries.
To become a “trusted customer” the Chinese company must have an established track record of using U.S. technology for responsible civilian uses and must make a request directly to the Commerce Department for participation in the VEU program. Alternatively, an exporter can initiate the process on behalf of its Chinese customer. Regardless of the entity making the request, all applicants will be required to disclose the following:
1. Name of Proposed VEU Candidate: a request must include all the names under which the Chinese company does business, its physical address, phone number, fax number, e-mail, and web address. If the entity submitting this information is submitting on behalf of a Chinese company, then the submitting entity must provide the same information about itself.
2. Overview of Company Structure: a request must include a description of the Chinese company’s business activity, ownership structure, subsidiaries, and joint ventures. Further, a description regarding any business or corporate relationship with either the Chinese government or any Chinese military organization is required.
3. List of Proposed Item(s): a request must include a description of the item to include its technical and performance specifications, where the item will be used, and whether the company expects to re-export the item, and if so, to what country.
4. Record Keeping: the company must comply with the internal control and record keeping requirements in the regulation.
5. U.S. Site Visits: the company must sign a statement certifying that it will comply with all the requirements of the VEU program and allow on-site reviews by U.S. Government officials to verify compliance.
In meeting the requirements outlined above, the BIS website (www.bis.doc.gov) provides a template designed to assist companies in preparing their request. In evaluating requests, the BIS will consult with the Departments of State, Energy, Defense, and other agencies as appropriate. Consideration will be given to the company’s (1) nonmilitary use of products, (2) compliance with U.S. export controls, (3) ability to comply with VEU requirements, and (4) agreement to allow on-site compliance inspections. Should an applicant be denied acceptance into the VEU program, regular licensing requirements will apply.
In conclusion, the number of Chinese companies that are willing to disclose significant amounts of sensitive information about their ownership and operations to the U.S. Departments of Commerce, State, Energy, and Defense will reflect the impact of this new rule and specifically the VEU program. Moreover, those willing to submit to inspection by U.S. Government officials for compliance will also be interesting to monitor. The Commerce Department has committed to posting a list of approved companies on its website. As of this writing, no companies are posted.