Nearly half a decade after the Administration’s first promise of reform, the Export Control Reform Initiative (“ECR”) reached a high point last week with the implementation of final rules transferring many commercial communications satellite (“COMSAT”) items from the Department of State’s International Traffic in Arms Regulations (“ITAR”) U.S. Munitions List to the newly established “500 Series” export control classification numbers in the Department of Commerce Export Administration Regulations (“EAR”) Commerce Control List. [F/N 1]
For some background, the Administration promotes the transfer of items from the U.S. Munitions List to the Commerce Control List as a means to reduce industry burdens by:
“Removing the “see through” rule which requires the manufacturer to inform all domestic and foreign customers that the U.S. item is controlled as a defense article and never loses its identity, regardless of what it is incorporated into, thus making all of those customers’ products U.S. munitions items as well until the original item is destroyed or permanently returned to the United States.” [F/N 2]
Despite the above, benefits of the recent COMSAT transfers are limited by the imposition of a zero percent de minimis level for exports of 500 Series items to ITAR embargoed countries. This new “EAR See-Through Rule” effectively prohibits exports of foreign manufactured items incorporating any 500 Series item to over twenty countries subject to the ITAR embargoes, to include China. Such prohibited exports include disclosures of technology on 500 Series items to foreign nationals of embargoed countries.
As previously discussed on DTL, the “ITAR See-Through Rule,” the predecessor to the EAR See-Through Rule, has and continues to subject foreign-manufactured items to complex U.S. re-export licensing requirements and U.S. embargoes when the foreign manufactured items contain any amount of ITAR-controlled content. This extraterritorial application of U.S. law incentivizes many foreign manufacturers to pursue “ITAR-free” designs that exclude ITAR-controlled items. [F/N 3] It is logical to assume that new EAR See-Through Rule will provide similar incentives for foreign manufacturers to design out U.S. technology.
The Administration does not address the potential negative impact of the new EAR See-Through Rule in press releases, speeches, and other ECR promotion activities. Instead, it draws industry attention to the new EAR Strategic Trade Authorization (“STA”) exception established by ECR, which is available for many exports to close U.S. allies, and claims that the COMSAT transfers and STA exception will eliminate the ITAR-free trend. However, such a result is highly questionable.
ITAR-free designs have already gained prominence among U.S. allies in Europe, where the Department of State has a history of enforcing the ITAR See-Through Rule to block European and Chinese space collaborations. [F/N 4] Considering the European space industry’s negative experience with the ITAR See-Through Rule, as well as recent European Commission support for collaborations in space with China [F/N 5], many European space industry members will likely do what they can to avoid application of another see-through rule in the EAR. This can lead foreign manufacturers to design out all U.S. origin content, regardless of whether controlled under the EAR or ITAR.
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[F/N 1] “Amendment to the International Traffic in Arms Regulations: Revision of U.S.Munitions List Category XV,” 79 Fed. Reg. 27,180 (May 13, 2014); “Revisions to the Export Administration Regulations (EAR): Control of Spacecraft Systems and Related Items the President Determines No Longer Warrant Control Under the United States Munitions List (USML),” 79 Fed. Reg. 27,418 (May 13, 2014).
[F/N 2] “Export Control Reform Initiative Factsheet #5: Improvements for Small Businesses,” November 27, 2014, available at http://export.gov/%5C/ecr/eg_main_023180.asp
[F/N 3] See e.g., Peter B. de Selding, “European Satellite Component Maker Says It is Dropping U.S. Components Because of ITAR,” Space News, June 29, 2004, available at http://www.spacenews.com/article/european-satellite-component-maker-says-it-dropping-us-components-because-itar
[F/N 4] Peter B. de Selding, “With Chinese Option Blocked, European-built Satellite To Fly Atop Falcon 9,” Space News, June 17, 2013, available at http://www.spacenews.com/article/launch-report/35820with-chinese-option-blocked-european-built-satellite-to-fly-atop-falcon-9
[F/N 5] See e.g.,”Horizon 2020 – what’s in it for China?,” European Commission website, available at https://ec.europa.eu/programmes/horizon2020/horizon-2020-whats-it-china; Rob Coppinger and SPACE.com, “Europe May Work with China on Space Station,” Scientific American, May 1, 2013, available at http://www.scientificamerican.com/article/europe-may-work-with-china/.
*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 May 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.