EAR

Export Control Reform Impacts in Space

DS_ITARinSpaceWhen it comes to our domestic space industry, there’s no shortage of reports on the billions in lost revenue, thousands in lost jobs, and offshoring of research, development, and production caused by United States export control restrictions.  Adding to these reports, the Bureau of Industry and Security Office of Technology Evaluation (“OTE”) recently released a “Deep Dive Assessment” on the impact of U.S. export controls on the U.S. Space Industrial Base.[1]

In addition to discussions on its survey methodology, respondent characteristics, and select industry responses, the Assessment discusses the “ITAR-Free” movement in which foreign manufacturers design out U.S. origin space-related items and technology to avoid application of the “ITAR See-Through Rule.”

The ITAR See-Through Rule

The ITAR See-Through Rule is the U.S. Department of State Directorate of Defense Trade Controls (“DDTC”) policy that foreign manufactured items are subject to U.S. re-export control restrictions when they contain U.S. origin content subject to the International Traffic in Arms Regulations (“ITAR”).

In some respects, the ITAR See-Through Rule makes good sense because there are many situations where defense articles do not lose their military character when incorporated into another end item, such as when machine guns or armor plates are installed on a Jeep.  However, as applied by DDTC, the ITAR See-Through Rule applies regardless of whether the final end item has military characteristics and regardless of the percentage of U.S. content of the completed foreign end item. For example, a $300 million French manufactured commercial communications satellite that incorporates a $3,000 U.S. origin radiation-hardened microelectronic circuit subject to the ITAR is itself subject to the ITAR, despite the fact that the dollar value of the circuit is less than one percent of the whole.

Because every export and re-export of items subject to the ITAR requires a DDTC license unless a license exemption applies, the ITAR See-Through Rule often leads to lengthy shipping delays and impedes the ability to use upstream integrators and other necessary production partners.  It can also limit foreign launch destination options and prevent certain foreign end users from taking possession of what are otherwise commercial items.

ITAR-Free Designs

The OTE’s Deep Dive Assessment discusses how foreign manufacturers strategically decide to avoid application of the ITAR See-Through Rule through what is essentially a boycott of all U.S. origin items subject to the ITAR:

“The most common impact was the avoidance of exporting space-related products and services that are subject to the ITAR. Respondents also recognized that non-U.S. organizations have been incentivized to ‘design-out’ or avoid buying U.S. origin space products and to offer ‘ITAR-free’ space-related products and services.”[2]

The Assessment further discusses the pending transfer of certain space-related items from Category XV of the ITAR U.S. Munitions List (“USML”) to the U.S. Export Administration Regulations (“EAR”) Commerce Control List “500 Series ECCNs” as part of the President’s Export Control Reform Initiative (“ECR”).  As established by ECR, 500 Series space-related items will be subject to a zero percent de minimis rule (i.e., a see-through rule) for exports to China and over twenty other ITAR-embargoed countries.

As noted in previous DTL posts, the ECR zero percent de minimus treatment of 600 and 500 series items is referred to by many in industry as the “EAR See-Through Rule” because it creates the functional equivalent of the ITAR See-Through Rule in the EAR.  While a see-through rule in the EAR may have been required for Congressional approval of the ECR list transfers, apparent motivations of the Administration do not alleviate the impact of the new rule.

Impact of the EAR See-Through Rule

The OTE Deep Dive Assessment does not address impact of the EAR See-Through Rule on space industry exports.  If fact, it does not even discuss existence of the zero percent de minimus treatment in its section on exports of 500 series items to embargoed destinations.  Instead, it promotes use of the new Strategic Trade Authorization (“STA”) and other EAR license exceptions available for certain exports of 500 series items and summarily concludes:

“The transition of certain USML Category XV items to the CCL is likely to have a positive impact on the ability of U.S. companies to export space-related products and services.”[3]

However, license exception STA and nearly every other exception cannot be used to export 500 series items to ITAR-embargoed countries – and many allies do not have embargoes against China and other countries embargoed by the U.S.  This creates a gap that incentivizes foreign manufacturers to design out EAR 500 series items (in addition to designing out ITAR articles) to preserve otherwise available markets.  In other words, the very problem presented by the ITAR See-Through Rule that led foreign partners to ITAR-Free designs is now repeated through the Administration’s implementation of the EAR See-Through Rule.

The Administration may have justifiable foreign policy and national security reasons for the see-through rules, but it should not portray ECR changes as welcomed by foreign manufacturers.  Foreign manufacturers are unlikely to care whether a U.S. see-through rule arises under the ITAR or the EAR.  This is especially true in the case of foreign manufacturers at the bottom of the supply chain who often do not know the long list of companies involved upstream, the intended end user or the launch destination of the end item in which their product will be incorporated.  For these companies, it makes no difference whether U.S. re-export controls apply to all countries under the ITAR See-Through Rule or to only twenty-five countries (i.e., the number of countries presently subject to the ITAR embargo adopted by the EAR See-Through Rule).

Impact of Added ECR Complexity

The Deep Dive Assessment also did not address the impact of the complexities added by ECR, which will likely further incentivize foreign manufacturers to design out U.S. content.  The seeds of this impact were specifically noted in industry responses to the Assessment’s survey:

“. . . nearly all other countries have moved to alternative designs that do not include our products.  The main reasons for this is the restrictions and uncertainty that our export controls cause.”[4]

This impact is very likely to increase with reform.  In fact, the length of the ECR Initial Implementation rule, which was only the first of many ECR rules, exceeds the length of export controls laws in many other countries.

Counterpoints and Conclusion

Likely agency counterpoints to the issues raised above are that the responsibility of foreign manufacturers to identify end users has not changed under ECR and that lengthier regulations generally provide more direction to exporters.

The likely satellite industry interest group position is that, although not ideal, the transfers are a step in the right direction, even with imposition of the EAR See-Through Rule.  Those with this view are also likely to view the current ECR changes as interim measures by the Administration intended to appease Congress until the time is right to make further changes.

Nevertheless, an unfortunate result of imposing the EAR See-Through Rule and the increased regulatory complexity added by ECR may be that foreign manufacturers now decide to design out all U.S. origin space-related items, regardless of whether subject to the EAR or ITAR.   Considering the dwindling U.S. market share of the global space industry, the harm to the U.S. space industrial base and national security caused by such a result may be irreparable.

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[1] “U.S. Space Industry “Deep Dive” Assessment: Impact of U.S. Export Controls on the Space Industrial Base,” Bureau of Industry and Security Office of Technology Evaluation, February 2014.

[2] Ibid. at 53.

[3] Ibid. at 50.

[4] Ibid. at 33.

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* The above is not intended as an exhaustive list of restrictions that may apply to a particular transaction nor advice for a specific transaction because the specifics of an individual case may implicate application of other U.S. laws as well as foreign laws that carry added or different requirements.  In addition, U.S. export control and sanctions laws are frequently subject to change.  Such changes can affect the continued validity of the information above, which is based on U.S. law existing as of March 21, 2014. For these reasons, assistance from a qualified attorney competent to advise on such matters is highly recommended.

Matthew A. Goldstein is an International Trade Attorney in Washington D.C. licensed to practice in the District of Columbia.  He can be reached at (202) 550-0040 and Matthew@GoldsteinPLLC.com.

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