Acme Electronics (Acme) is a medium-sized company in the U.S. that makes products (primarily circuit board assemblies and wiring harnesses) used in commercial and military aircraft. Acme occasionally sells these products to aircraft manufacturers, but most of its sales are to major U.S. and foreign subcontractors to aircraft manufacturers.
Acme has a pretty straightforward process for classifying the subassemblies on the U.S. Munitions List (USML) of the International Traffic in Arms Regulations (ITAR) or on the Commerce Control List (CCL) in the Export Administration Regulations (EAR). If the subassembly is used in a military aircraft, it goes in Category VIII of the USML, which includes parts of military aircraft. If it is used in a commercial aircraft, the subassemblies are classified in the CCL, usually in ECCN 9A991 as parts of an aircraft.
This situation is going to become more complicated in the near future due to Export Control Reform.
On Nov. 7, 2011, a proposed rule was published in the Federal Register to revise Category VIII of the USML. The proposed revision would remove certain articles from that category and transfer them to the CCL. It would also add more precise descriptions of what articles are controlled in Category VIII. The proposed revision, (which has not become final) would have a major impact on military aircraft, helicopter manufacturers, and suppliers to those manufacturers.
Assume the proposed rule becomes final with no changes. How it would affect Acme?
The proposed revision to Category VIII would control components, parts, accessories and attachments for certain types of aircraft. These include those designed for use in specific aircraft, such as the B-1 and B-2 bombers, and the F-15SE, F-18E/F/G, F-22, F-35 and F-117 fighter aircraft. Category VIII would also control certain subassemblies of military aircraft as well as parts and components specially designed for these subassemblies. These include certain gear boxes, rotor blade and aircraft wing folding systems, tail hooks and arresting gear, bomb racks, certain flight control systems, radar altimeters, air-to-air fueling systems, UAV flight control systems, classified aircraft parts, and other components and subassemblies. Parts and components not falling within these descriptions would not be controlled in Category VIII and would be transferred to the CCL.
Under the proposed rule, Acme’s business would potentially be easier, because some of its military products could find their way to the CCL where license exceptions may be available for some exports. However, the process of determining the classification and jurisdiction of its products would become more difficult. Acme could no longer assume that its military circuit board assemblies and wiring harnesses were controlled under the ITAR. Instead, Acme would need to determine the end use of these articles and whether they were specially designed for use in the specific controlled aircraft or subassemblies. In some instances this information is readily available. For example, the drawing or specification provided by the customer may state how the article is to be used. In other instances, Acme will need to ask its customer,(or customer’s customer) about the aircraft or subassembly in which the circuit board assembly or wiring harness will be used.
This raises the question: “Couldn’t Acme continue to assume that military articles are controlled under the ITAR and commercial articles under the EAR”? Let’s see where that approach might lead.
For example, Acme produces and sells a military circuit board assembly to a domestic company that in turn installs it in a larger system that is sold to the aircraft manufacturer. Acme advises its customer that the circuit board assembly is classified in Category VIII and controlled under the ITAR. The customer might disagree with the classification and require that Acme reconsider the classification. On the other hand, the customer might assume that Acme’s classification is correct and treat it, and the system in which it is employed, as ITAR-controlled. Both parties would then need to adopt all the requirements associated with ITAR-controlled articles and technical data. These include registration with the Directorate of Defense Trade Controls (DDTC), payment of the registration fee, controlling foreign national access to products and technology, and all other requirements associated with ITAR-controlled products and technical data. These can add up to a considerable expense and administrative burden, whereas expenses and burdens could be less under EAR jurisdiction.
If Acme were exporting its products to foreign companies, this classification presumption could have more significant repercussions. By assuming its products were classified in Category VIII and subject to ITAR controls, Acme would need to do all the things associated with those controls. It would need to register with DDTC and pay an annual fee, appoint one or more empowered officials, and apply for required licenses. These things all take time, of course, and would slow down Acme’s delivery schedule, and ultimately add to its expenses. Acme may also need to obtain DDTC-approved license agreements, prepare and submit a technology control plan, institute controls on foreign national access, and administer the licenses, agreements and controls. Some, or perhaps all, of these things would not be required if the products were actually subject to CCL controls. In submitting a license application, Acme would likely need to provide information on the end use of the articles proposed for export so that DDTC could verify the classification. This means that Acme would need to research the end use of the product anyway or risk having its application returned without action.
One way or the other, Acme will need to know the end use of every military circuit board assembly and wiring harness it sells. The end result may be simpler licensing requirements; however the path to get there may be somewhat rocky.
The revisions to Category VIII and other changes to the USML and CCL may go into effect before the end of this year. The goals of Export Control Reform are laudable, but the transition may be a challenge. Nonetheless, change is coming, so be ready!