US-based companies may export their dual-use products and technologies to China to establish a joint venture in China to support the growing civil aerospace industry, but they may not export defense articles or defense services to China. The compliance challenge for the US-based partner arises when the joint venture has the opportunity to sell its “dual-use” products to a military agency in China or for use in the military or space industry in China.
The general rule is that exports, re-exports and transfers to and within China of dual-use goods and technologies on the Commerce Control List (CCL) of the Export Administration Regulations (EAR) are subject to licensing requirements as specified on the CCL. However, even if an item on the CCL does not require a license for export to China, a license may be required if the item is intended for a military end-use in China. Further, items that are specifically designed, modified or adapted for military application and are defined as defense articles under the International Traffic in Arms Regulations (ITAR) effectively are prohibited from export to China.
We previously reported that many of the global aerospace and defense contractors have established manufacturing joint ventures in China to address the future supply chain requirements of the two principal players in the aerospace industry in China, Aviation Industry Corporation of China (AVIC) and Commercial Aircraft Corporation of China (COMAC). AVIC, which is the largest aviation company in China, is principally engaged in the development and production of military and commercial aircraft and components. In 2008 China’s government approved the formation of COMAC to design and produce commercial aircraft with the goal of reducing China’s dependency on foreign-produced aircraft and to compete with Boeing and Airbus in the world’s markets. COMAC has begun production of its regional aircraft ARJ21 and has plans for production of the larger C919 passenger aircraft. Lacking experience in the production of large commercial aircraft, China has invited other companies to participate in the design and manufacture of components and systems. For some components (e.g., engines and landing gear), COMAC will contract directly with foreign suppliers. For others, a China-foreign joint venture is preferred (e.g., cockpit panel components and systems, and electrical power distribution components and systems) or effectively required to qualify as a subcontractor (e.g., hydraulic and fuel systems).
Establishing a joint venture in China may involve ongoing delivery of components, technology and services. The ultimate end-use and end-user of these continuing exports are known or constructively known to the US partner, making the US partner accountable for end-use and end-user screening of the transfers by the joint venture – therein lie the export controls compliance concerns. Even assuming that the intended purpose of the joint venture was to support China’s COMAC ARJ21 and C919 civil aircraft, the joint venture may identify other opportunities to sell its products. The following progressive cases are illustrative of the compliance concerns.
Case One. The joint venture intends to sell dual-use products to AVIC. Given AVIC’s mission, it is likely that the US partner knows (or has reason to know) that the products ultimately will be used in a military application. In this case, the components and technology exported from the United States may require a license, even if the CCL indicates that no license is required. Section 744.21 of the EAR imposes a licensing requirement for certain CCL-listed items when they are exported for a military application in China. In addition, a US Bureau of Industry and Security (BIS) license may be required for the transfer of the joint venture product for a military application, if the US-controlled content is greater than 25 percent of the joint venture product value.
Some examples of items requiring a license to export to or transfer within China for a military application follow. Related software and technology may also require a license.
- 1C990 Limited to fibrous and filamentary materials other than glass, aramid or polyethylene not controlled by 1C010 or 1C210, for use in “composite” structures and with a specific modulus of 3.18 x 106m or greater and a specific tensile strength of 7.62 x 104m or greater.
- 2A991 Limited to bearings and bearing systems not controlled by 2A001 and with operating temperatures above 573K (300 [deg]C).
- 2B991 Limited to “numerically-controlled” machine tools having “positioning accuracies”, with all compensations available, less (better) than 9[mu] along any linear axis; and machine tools controlled under 2B991.d.1.a.
- 2B992 Non-”numerically controlled” machine tools for generating optical quality surfaces and specially designed components therefor.
- 3A292.d Limited to digital oscilloscopes and transient recorders, using analog-to-digital conversion techniques, capable of storing transients by sequentially sampling single-shot inputs at greater than 2.5 giga-samples per second.
- 3A999.c All flash x-ray machines, and components of pulsed power systems designed thereof, including Marx generators, high power pulse shaping networks, high voltage capacitors and triggers.
- 7A994 Other navigation equipment, airborne communication equipment, all aircraft inertial navigation systems not controlled under 7A003 or 7A103, and other avionic equipment, including parts and components, n.e.s.
- 7B994 Other equipment for the test, inspection or “production” of navigation and avionics equipment.
- 9A991 Limited to “aircraft”, n.e.s., and gas turbine engines not controlled by 9A001 or 9A101.
Case Two. The joint venture intends to modify the dual-use products for a military application. The modifications may cause the dual-use product to become a defense article. However, the joint venture is not subject to the ITAR. It is not a US person under the ITAR, and the defense article does not contain any US-origin ITAR-controlled content. The dual-use components from the United States do not make the foreign-made defense article subject to the ITAR. Thus, the joint venture may be permitted to proceed with this transaction if it were to operate independently of the US partner receiving only dual-use components from the United States.
However, the US partner must be mindful of its obligations under the ITAR. The ongoing support of technology and services from the US partner may constitute defense services under the ITAR. A defense service is defined as “[t]he furnishing of assistance (including training) to foreign persons, whether in the United States or abroad in the design, development, engineering, manufacture, production, assembly, testing, repair, maintenance, modification, operation, demilitarization, destruction, processing or use of defense articles.” Thus, the US partner may not provide assistance to the joint venture that would be specific to a defense article manufactured in China, as proposed by the joint venture.
Examples of assistance that may constitute defense services include:
- Assisting in the selection of options or features or advising on trade-offs of choices for a dual-use item to address a specific military or space application; and
- Assisting in the design modifications to a dual-use item to achieve a desired result for a specific military or space application.
It is not a defense service to:
- Assist in the selection of options or features of a dual-use item to meet a customer’s requirements when the end application is not known and normally would not be known (no duty to investigate end-use); or
- Assist or train a customer in the use of a dual-use item to achieve the best results, without reference to a particular application.
If the China-based joint venture is permitted to pursue sales to China’s military organizations or in military or space applications, it may be advisable to establish procedures or guidelines to protect against any violation of the ITAR attributable to the US-based partner.