Every time there is a new round of reforms under the President’s Export Control Reform initiative, we hear the same advice:
- Controls on certain items are eliminated or reduced (which creates new opportunities for manufacturers and exporters); but
- The new rules bring new complexities, so be careful.
Attorneys in the export control space correspondingly inundate us with articles advising, in effect, call your export control lawyer.
On December 30, 2014, ECR revisions to USML Category XI (Military Electronics) take effect. You will likely hear the “less control but more complexity” mantra repeated many times. Here at the GlobalTradeLawBlog, our crack team tackles a much more important question:
So what? If the mantra of “less control but more complexity” is true of every ECR round, then what is new with this round that we need to know?
To begin with, the Category XI revisions are likely the most complex changes we have seen to date. They revisions were first proposed in November 2012 (yes, two years ago). After an intense comment period, the rule was not made final but instead was re-released as a supplemental proposed rule. The revisions were issued as a final rule in July, 2014. The U.S. Departments of State and Commerce have both poured plenty of effort into crafting these rules. As a result, boy are they tricky.
At the same time, the Category XI revisions may also create the most new opportunities for exporters and manufacturers. Let’s examine the changes and see what possibilities they hold.
2. This is good: the catch-all categories disappear
Pre-ECR Category XI (until December 30, 2014) contains two catch-all categories as follows:
XI(a): Electronic equipment not included in Category XII of the U.S. Munitions List which is specifically designed, modified or configured for military application.
XI(c): Components, parts, accessories, attachments, and associated equipment specifically designed or modified for use with [Category XI equipment], except for such items as are in normal commercial use.
Between these two catches, most electronic items designed, modified, or configured for a military use was a USML item. Moreover, thanks to the ITAR’s “see-through” rule , even when items as small as microchips are ITAR-controlled, they would render systems in which they were incorporated ITAR-controlled as well. (The “see-through” rule is not found in statute or regulation. It was most succinctly articulated in the State Department’s Draft Charging Letter in the Boeing “QRS-11” matter, as follows: “the QRS-11 is covered by the U.S. Munitions List” and “did not cease to be controlled by the ITAR simply by virtue of its inclusion into” a non-USML flight instrument.” In a 2013 speech, Commerce Under Secretary Eric Hirschhorn described the effect of the see-through rule as follows: “Under the ‘see-through rule,’ the presence of a single, non-critical ITAR-controlled part, such as a switch or a bolt, will render an entire foreign-made end product, such as an Airbus A-320 passenger aircraft, subject to U.S. reexport controls. That encourages foreign buyers to select non-U.S. parts and components . . . in order to avoid making the end product subject to the ITAR.”).
These catch-all categories have constrained U.S. manufacturers whose products were modified for a military purpose and, because of the see-through rule, the catch-alls created huge headaches all the way down the supply chain.
However, neither catch-all paragraph remains in the revised Category XI language. Now the USML list of military electronics is a positive list of discrete specifications that an item must have to be controlled in that category. Consequently, many electronic parts and components will be moved from the USML to the Commerce Control List, including into Export Control Classification Number 3A611.
3. Not so fast: the EAR now has a Catch-all
Where will all those electronic parts and components go when they are removed from the ITAR? Well, if they are not enumerated in the 3A611 subcategories listing certain specifications, then they will likely fall under 3A611.x, which covers parts, components, accessories, and attachments that are “specially designed’’ for a commodity controlled under 3A611 or by the USML.
Under the new definition of specially designed, however, many electronics may be “released” from 3A611.x, such as the following:
- Items that have the same function and performance capabilities as commercial items;
- Items that were developed with knowledge that they would be used for both military and commercial purposes; or
- Items that were developed with no knowledge that they would be used for any specific purpose, including a military purpose.
4. SIA and BIS clarify some of the EAR “releases.”
These releases could be great news for small electronics makers, such as microchip manufacturers. For that reason, the Semiconductor Industry Association obtained an opinion letter from BIS clarifying the “specially designed” definition as it applies to multipurpose die, standard packages, and integrated circuits. Following the analysis of the letter, it appears that many semiconductor devices may be ready to move from the catch-all category of Category XI to EAR99, significantly reducing the export restrictions on those produces.
5. Hey, does this mean I can sell military hardware to China?
Whoa there. The real headline here is that many formerly ITAR-controlled items will now be on the Commerce Control List. Those that are also released from coverage under the “specially designed” rule and are otherwise not enumerated on the CCL will be EAR-99 items. As we advised here, be careful in implementing your “specially designed” analysis. But once you’ve done the required homework, the resulting items will no longer be considered military, and can be exported with no license required to nearly all destinations like any other EAR-99 item.
The revisions to Category XI have been a long time coming, but they will significantly change the export market for U.S. electronics manufacturers. It is true that there are nuances and pitfalls in the regulations of which those companies must be wary but, with careful analysis and planning, 2015 may be a big year for export under (or out from under) USML Category XI Military Electronics. Happy New Year.