Impact of Export Control Reform on Small Businesses

DS_Small_BusinessThe International Trade Administration reports that small and medium-sized companies account for ninety-eight percent (98%) of U.S. exporters. [FN 1].  According to a National Small Business Association and Small Business Exporters Association Exporting Survey performed in 2013, three-fourths of U.S. small business exporting items controlled under either the State Department’s International Traffic in Arms Regulations (ITAR) or Commerce Department’s Export Administration Regulations (EAR) believe the system is too complex and time consuming. [FN 2]  These same small business concerns were raised at last month’s House of Representatives Subcommittee on Agriculture, Energy, and Trade hearing on “Export Control Reform: Challenges for Small Business?,” where industry representatives testified on the many ways that the President’s Export Control Reform Initiative adversely impacts small businesses. [FN 3]

Witnesses at the hearing testified about the difficulties small businesses encounter in addressing the complexities of reform. They explained how the reform requires the expenditure of thousands of hours to reclassify parts, components, and other items, that were clearly classified before the reform. One witness explained how reclassifications under the reform’s new “specially designed” standard is financially prohibitive for many small businesses and requires information that is often hard for small businesses to obtain. Witnesses further testified that the pain of reform is almost palatable, but that many small businesses still prefer the pain of the ITAR over the complexities of reform.

Despite the hearing testimony, the Administration posted an article earlier this week on the Commerce Department website that claims “businesses large and small continue to benefit from the successes of the ECR Initiative.” [FN 4] The article lists six ways the Administration believes small businesses “benefit” from the reform:

  1. There are no registration requirements with the Commerce Department.
  2. There are no fees for submitting license applications.
  3. There are no requirements to get permission merely to manufacture or to market abroad.
  4. There is no requirement to have a purchase order for each license application.
  5. Except in situations involving military and satellite items destined to countries subject to embargoes, the EAR generally do not have a “see-through” rule if the U.S. content is less than 25 percent.
  6. The EAR have multiple license exceptions that do not exist in the ITAR.

Purported benefits 1 and 2 are that the Commerce Department does not impose registration requirements or fees for submitting licenses applications. But, based on the hearing testimony, it seems that any savings in registration and license fees is vastly overshadowed by the cost of employee time, export compliance counsel and other professionals needed to address the new complexities added by reform.

Purported benefit 3 is that there are no EAR requirements to get permission merely to manufacture or to market abroad. But manufacturing and marketing abroad that involves exports of EAR-controlled technology requires a license unless a license exception applies just the same as the ITAR requires a license for exports of ITAR-controlled technology unless an exemption applies. Moreover, the Administration has still not clearly defined the scope of ITAR defense services when installing, integrating, and/or testing EAR items with USML articles—and most EAR 600 series parts, components, accessories, and attachments are exported for such purposes.

Purported benefit 4 is that there is no requirement to have a purchase order for EAR license applications. But while industry members frequently complain of the State Department’s purchase order requirement, it was never a serious concern for most businesses. More often than not, they can obtain purchase orders from customers.

Purported benefit 5 is that, except in situations involving military and satellite items destined to countries subject to embargoes, the EAR generally does not have a see-through rule if the U.S. content is less than 25 percent. But an unfortunate result of reform complexities is that foreign manufacturers often dispute reclassifications for transferred items, which is a significant obstacle to overcoming overseas “ITAR-free” design requirements—as well providing an obstacle to compliance generally. Further, the risks of the new EAR see-through rule for 500 and 600 series items provides a strong incentive for foreign manufacturers to design out all U.S. origin items, regardless of whether subject to the EAR or ITAR.

Purported benefit 6 is that the EAR has multiple license exceptions that do not exist in the ITAR. But ITAR license exemptions easily outnumber EAR license exceptions.  And more than half of EAR exceptions do not apply to 600 series items transferred from the ITAR.  Moreover, many EAR exceptions that may apply are often just as narrow and risky to use as previously applicable ITAR exemptions.

Clearly, the Administration has a overly optimistic view of how export control reform benefits small businesses. This is unfortunate because the testimony at last month’s House hearing raises very significant problems that must be addressed.


*   *   *

[1] “Profile of U.S. Exporters Highlights Contributions of Small- and Medium-Sized Businesses,” International Trade Administration, April 8, 2015.  Available at http://blog.trade.gov/2015/04/08/profile-of-u-s-exporters-highlights-contributions-of-small-and-medium-sized-businesses

[2] “2013 Small Business Exporting Survey,” National Small Business Association and Small Business Exporters Association, at p. 13. Available at www.nsba.biz/wp-content/uploads/2013/06/Exporting-Survey-2013.pdf

[3] “Export Control Reform: Challenges for Small Business? (Part I),” Subcommittee on Agriculture, Energy and Trade, February 10, 2016. Available at http://smallbusiness.house.gov/calendar/eventsingle.aspx?EventID=398809

[4] “Six Ways Small Businesses Benefit from Export Control Reform,” February 29, 2016. Available at http://www.commerce.gov/news/blog/2016/02/six-ways-small-businesses-benefit-export-control-reform



*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 3, 2016. 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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