With the Congressional Waiting Period Ending, the Export Control Community Waits for Reportedly Massive Regulations to Be Published

The Obama Administration recently took two key steps to kick off the long-anticipated US export control reform. First, On March 7, 2013, the President notified Congress of the first in a series of changes that will affect how certain products can be exported to countries overseas. Specifically, the President proposed transferring jurisdiction over certain items related to aircraft and gas turbine engines from the State Department’s US Munitions List (USML) to the Commerce Department’s Commerce Control List (CCL). Second, the President signed an Executive Order (EO) the next day to help facilitate the reform process by removing redundant export licensing responsibilities and eliminating excessive licensing requirements.

The Exporting Community now awaits the soon-to-be-published final rules.

Congressional Notification

The formal Congressional notification specifically proposed shifting the jurisdiction of items — principally parts and components — from USML Category VIII, covering aircraft, and Category XIX, covering gas turbine engines, to the CCL.¹ US manufacturers and exporters of these items will benefit from the more flexible rules of the Commerce Department’s Export Administration Regulations (EAR) than the arguably more stringent rules of the State Department’s International Traffic in Arms Regulations (ITAR). The items will qualify for de minimis treatment when incorporated with foreign-origin products: if the foreign-origin product contains less than 25 percent of the transferred items they will not be subject US export control regulations provided they are not being exported to any of the State Department proscribed countries (such as China and Iran). They will also be subject to a greater range of export license exceptions, most importantly perhaps the Strategic Trade Authorization (STA) license exception. The STA exception is expected to authorize the export of most 600 series parts and components items without a license to many European countries, Australia, Canada, Japan and New Zealand, provided all STA paperwork requirements are met.

The proposed shift of these categories will be accompanied by Commerce Department rules describing where the items will be placed on the CCL as well as other rules governing the general transition of items from the USML to the CCL (the transition rule) and the long-awaited revised definition of “specially designed.” The manner in which USML items transferred to the CCL are to be controlled was described in a proposed rulemaking on July 15, 2011² and further detailed in other proposed rules. It involves the creation of a separate “600 Series” subcategory of Export Control Classification Numbers (ECCNs) for each category on the CCL. The notification also included a revised definition for items “specially designed” for military applications but not significant enough to remain under USML controls, which has been subject of much commentary over the past year and a half.

By providing notice to the House Foreign Affairs Committee and the Senate Foreign Relations Committee, the Administration initiated a timetable for this proposed shift in jurisdiction. According to Section 38(f) of the Arms Export Control Act, Congress has 30 days to review the changes and seek clarification.

According to sources within the Administration, the final rule detailing these changes will be published before the end of April 2013. The Administration is allowing for a 180-day transition period following the 30 days before making any transfers effective in order to help companies comply with the new licensing procedures. The proposed rule reportedly will allow exporters of the transferred military aircraft and gas turbine engines to apply immediately for licenses to the Commerce Department under the EAR, but licenses will not be issued until 180 days after publication.

Executive Order

In addition to the congressional notification, President Obama signed an EO that updated delegated authorities relating to import and export controls. These changes represent another concrete step towards achieving the Administration’s goal of a unified export control licensing agency, control list, enforcement coordination agency and integrated technology system. Below are some of the more significant changes.

First, the EO eliminates the possibility that companies obtain two separate licenses in cases where an item that remains on the USML and related parts and components transfer to the CCL. The executive order would provide limited delegations of authority so that the State Department has the authority to license certain items under the jurisdiction of the Commerce Department. This allows the State Department to continue to issue licenses even after, for example, military aircraft parts and components are transferred to Commerce Department jurisdiction. The Executive Order specifies, however, that even if the State Department issues the license, the licensed products remain subject to EAR jurisdiction, thereby indicating, one would presume, that the violation of a State Department issued EAR license is a violation of the EAR, not the ITAR.

Second, the EO requires the Commerce Department to maintain a Congressional notification requirement similar to the State Department about transactions involving firearm items that move from the USML to the special “600 Series” subcategory in the CCL.

Finally, the EO consolidates all brokering registration and licensing requirements for exports, temporary imports and permanent imports under the State Department. This was necessary to clarify that brokering jurisdiction is entirely under State Department controls, and is not split between the State Department and the Bureau of Alcohol, Tobacco and Firearms, which controls the permanent import of defense articles that appear on the US Munitions Import List.

Next Steps

The Exporting Community is awaiting the publication of the first mammoth rules with some trepidation as the transition rule alone, double spaced, reportedly runs several hundred pages. Exporters in the military aircraft and gas turbine engine industries will have both a heavy reading load and the responsibility of acting as guinea pigs for the remaining USML categories that will be coming down the USML-CCL transferral pike in the coming months. In particular, the transition rule and the new “specially designed” definition will warrant close attention from all exporters.

Looking ahead, a proposed rule on USML changes in satellites, plus congressional notification of changes to controls for vehicles, ships, materials and miscellaneous USML items will be announced in the coming months, according to Assistant Secretary for Export Administration Kevin Wolf. These announcements will likely be the administration’s next step in export control reform.

It is important for companies active in government contracting or the exportation of items controlled by the USML or CCL, particularly those relating to aircraft and gas turbine engines, but also those whose products will transfer to the CCL in coming months, to note these complex changes and how they may affect future export licensing and business.