BIS

Recommendations for the Next Reform

The complexity of U.S. export control regulations is at an all-time high. If you had the ability to decide the next administration’s export control reform agenda, what would it be?

PAST REFORMS

U.S. export controls are principally administered by the State Department under the International Traffic in Arms Regulations (“ITAR”) and the Commerce Department under the Export Administration Regulations (“EAR”). Over the years, private industry, academia, think tanks, and even the government have criticized these regulations as outdated and overly complex.

President Clinton’s EAR Simplification (1996)

The Clinton Administration made a significant attempt to simplify the regulations in 1996 when it issued a 328 page rule that restructured and reorganized the EAR, clarified regulatory language, and generally made the regulations more user-friendly. [FN 1] This rule, which was issued shortly after the end of COCOM and beginning of the Wassenaar Arrangement, established much of the modern day EAR.

President Bush’s NSPD-56 on Defense Trade Controls (2008)

Responding to industry complaints of delays in State Department license and commodity jurisdiction processing, President George W. Bush issued National Security Presidential Directive 56 (“NSPD-56”) on Defense Trade Reform in 2008. NSPD-56 focused on the State Department’s failure to timely process license applications and commodity jurisdiction requests and required that the State Department complete such reviews within 60 days. However, in implementing NSPD-56 requirements, the State Department created broad exceptions to the license review deadline and it often exceeds the commodity jurisdiction review deadline.

President Obama’s Export Control Reform Initiative (2010-2016)

President Obama’s Export Control Reform Initiative (“ECR”) promised to merge the ITAR U.S. Munitions List (“USML”) and EAR Commerce Control List (“CCL”) into a single list, to establish a single agency to administer the single list and issue licenses for exports, and to create a single information technology platform to accept and process license requests. The reform updated export control lists and transferred certain COMSAT items to the CCL. But, with over 100 Federal Register notices, it also vastly increased the complexity of the regulations and transferred many purely military articles from the USML to the CCL without establishing a single control list, single agency or a single information technology platform. 

RECOMMENDATIONS

Below are Defense Trade Law Blog’s Top 5 recommendations for the incoming Trump Administration on how to fix the U.S. export control system in the next reform.

1. Push Congress to reauthorize the Export Administration Act.

The Export Administration Act of 1979 served as authority for the EAR, but expired in 2001. Several attempts at reauthorization failed and, albeit the time, energy, and millions of dollars spent on reform, legislation to reauthorize the Export Administration Act remains far from sight. In the meantime, the Commerce Department continues to administer the EAR under the authority of the International Emergency Economic Powers Act (“IEEPA”).

IEEPA was not intended to serve as long-term authority for the EAR. Although courts recognize it as authority for agency enforcement of EAR violations, IEEPA does not address control lists, multilateral regime commitments, reasons for control (i.e., national security, foreign policy, and short supply), foreign availability determinations, limitations on the use of unilateral “foreign policy” based controls, types of licenses or license processing. These are all necessary elements of the U.S. export control framework previously addressed by the Export Administration Act.

2. Transfer military items back to the ITAR where they belong.

The ECR transfers of defense articles from the ITAR USML to the EAR CCL created the lion’s share of confusion that characterizes the post-ECR U.S. export control system. The new rules applicable to these items require interpretation of “specially designed”, a complex multilayered term; require companies that formerly only needed to comply with one set of regulations to comply with two sets of complex regulations; and provide Commerce Department control over many military items that often still require State Department authorization to export depending on the circumstances of related activities (e.g., part of Foreign Military Sale, associated defense services, associated brokering of foreign defense services, etc.).

Many companies have not yet reclassified their products post-ECR. Moreover, several years after the start of ECR, the State Department’s Defense Trade Advisory Group (“DTAG”), a Federal Advisory Committee Act committee comprised of industry experts in the area of export controls, reported that the reclassifications of hardware and technical data required by ECR is still problematic for industry and that significant expenditures of time, money, and company resources continue to tax industry in reclassifying products. [FN 2]

The Obama Administration claimed that the USML to CCL transfers were necessary to increase interoperability with NATO allies. More specifically, it claimed that the Arms Export Control Act (“AECA”), the legislative authority for the ITAR, does not permit the creation of country-based exemptions in the ITAR, and that the list transfers were therefore needed to allow use of EAR country-based license exceptions in exports of parts and components to NATO countries and other U.S. allies. But AECA Section 38(j) expressly allows the President to create country-based ITAR license exemptions. While Section 38(j) also requires bilateral defense trade treaties, members of Congress proposed legislation waiving this requirement in a bipartisan measure, which passed by the House and was pending in the Senate at the start of ECR. [FN 3] But the Obama Administration pushed for its list transfers instead.

Ironically, the USML to CCL transfers now present significant obstacles to interoperability with NATO member countries and other allies. For instance, before ECR, U.S. companies supporting allies could simply apply for a license from the State Department for exports of parts and components for use in tanks, jetfighters, and other inherently military defense articles. Following ECR, U.S. suppliers must now go line-by-line through long part number lists and work with a multitude of manufacturers to determine which items are described on the USML and which are described on the CCL—subject to million dollar fines for any mistakes made in the process.

Even when able to complete the classifications in time to navigate potential ITAR proposal and brokering restrictions and enter a successful response to a foreign government request for quote, U.S. suppliers must often obtain separate licenses from the Departments of State and Commerce for exports under the same contract. And while the revised regulations may permit the export of EAR items under a State Department license in certain narrow circumstances, these circumstances are largely outside the control of U.S. suppliers because the order of shipments is most often determined by customer purchase orders.

Behind the scenes, Defense Department officials are reportedly seeking reversal of the USML to CCL list transfers. Such reversal is needed and would be much less burdensome on industry than continuing to live under the USML to CCL transfers for a variety of reasons:

  • The return of military items to the USML does not require Congressional approval and can be performed by executive order;
  • The military nature of most items to be transferred back to the USML is obvious;
  • Many companies have not yet reclassified their items under ECR;
  • Most companies that have already reclassified items maintain records of how their items were classified before the ECR list transfers;
  • The agencies can recognize existing licenses for exports of transferred items; and
  • The long-term benefits of clarity in jurisdiction, consistency with multilateral regime commitments, and other simplifications that result from controlling military items on a munitions list outweighs the inconveniences of reversing the ECR list transfers.

In conjunction with returning military items to the USML, the Trump Administration can also follow-up on Congress’ earlier offer to amend AECA Section 38(j) to allow country-based exemptions for exports of parts, components, accessories, and attachments to U.S. allies without the need for bilateral defense trade treaties.

3. Replace “specially designed” with simple terms.

Instead of following the simple definition of “specially designed” used in the Missile Technology Control Regime and by members of the Wassenaar Arrangement [FN 4], the Obama Administration created its own multilayered definition for “specially designed” and inserted it throughout revised control listings. Public comments to proposed notices of rulemaking described the definition as “overly complex, even for large sophisticated businesses”; “intrinsically complicated and inconsistent with the basic concept of a definition”; “complicated and imprecise”; and “overly complex and confusing.” [FN 5]

Today, the ITAR definition for “specially designed” is over 900 words long. [FN 6] The EAR definition, with explanatory notes, is over 1,500 words long.[FN 7] These definitions are so complex that the Departments of State and Commerce each developed online tutorials on use of the term; export compliance practitioners offer assistance in applying the term as a key service area; trainers offer seminars devoted entirely to helping industry understand the term; and testimony before Congress warned that reclassifications under the definition of “specially designed” is financially prohibitive for many small businesses and requires information that is often hard to obtain. [FN 8]

Perhaps most significant in evaluating the ECR definition of “specially designed,” the DTAG found that application of the term leads to inconsistent results, even among highly experienced export control professionals. [FN 9]

In conjunction with returning military items to the USML, the Trump Administration should replace the specially designed term with common words given their ordinary meaning. Industry can then look to the dictionary for definitions that stay consistent over time and do not vary among agency officials.

4. Eliminate undefined export controls on emerging technology.

Under the Due Process Clause of the United States Constitution, the government, not private industry, should bear the risk of uncertainty arising from the government’s failure to clearly describe what is controlled. Nevertheless, through ECR, the Obama Administration significantly expanded unenumerated controls on emerging technologies by expanding the scope of USML Category XXI, which subjects “Articles, Technical Data, and Defense Services Not Otherwise Enumerated” to ITAR control; and by creating new Export Control Classification Number (“ECCN”) 0Y521 on the CCL to catch emerging technologies not yet enumerated on the CCL.

Prior to the ECR revisions, the scope of Category XXI was applied to articles, technical data, and services which (1) had substantial military applicability and (2) which had been specifically designed, developed, configured, adapted, or modified for military purposes. The Obama Administration removed these two qualifiers and, following other ECR changes to the State Department’s policy on designating defense articles and services on the USML at ITAR Section 120.3, the government can now apply Category XXI to many emerging technologies regardless of design intent, if the government determines the technology provides a critical military or intelligence advantage such that it warrants AECA control.

The Obama Administration also created 0Y521 to serve as a holding place in the CCL similar to Category XXI that can catch items warranting Commerce Department control, but that are not yet enumerated in an existing ECCN. Pursuant to the final rule implementing the control, 0Y521 classification determinations focus on whether an item provides a significant military or intelligence advantage to the U.S. or is justified for foreign policy reasons. Upon such a determination, the classifications are made through Commerce Department Federal Register notices, which are followed by descriptions of classified items at Supplement No. 5 to the CCL.

The post-ECR Category XXI and 0Y521 controls are much broader and open ended than previous catchalls, allowing the government to apply tight export control restrictions on any technology that officials perceive as providing a critical military or intelligence advantage—a determination that is entirely in the eyes of the beholder. Worsening this situation, the only way to know if technology is subject to Category XXI is through a commodity jurisdiction determination or other official letter from the State Department. These unique compliance risks raise significant Constitutional issues. They also reduce the certainty necessary to cost-benefit analyses of international investment and collaborations in emerging technologies.

5. Clearly establish the Fundamental Research Exclusion.

Issued by the Reagan Administration in 1985, National Security Decision Directive 189 sets forth longstanding U.S. Government policy limiting controls on “fundamental research,” defined by the Directive as “basic and applied research in science and engineering, the results of which ordinarily are published and shared broadly within the scientific community, as distinguished from proprietary research and from industrial development, design, production, and product utilization, the results of which ordinarily are restricted for proprietary or national security reasons.”

The scope of ITAR and EAR exclusions from control for fundamental research have confused academia and industry for decades—a problem worsened by inconsistent agency guidance and recent ECR amendments.

The State Department advised academia that the ITAR Fundamental Research Exclusion only covers the publication of the results of fundamental research and does not cover disclosures of information to foreign students in the course of research involving ITAR technical data or defense articles because such disclosures constitute defense services. Then, in a proposed ECR rule amending the ITAR definition of “Public Domain” (under which the ITAR Fundamental Research Exclusion exists), the State Department stated that it requires U.S. government agency approval before any publications of ITAR-controlled technical data in the public domain. [FN 10] As a result, it is unclear what, if anything, the ITAR Fundamental Research Exclusion actually covers.

ECR amendment of the EAR Fundamental Research Exclusion has also set the stage for significant confusion in application of the exclusion. Rather than select from a variety of established agency definitions for the “basic” and “applied” research—key terms used by the State Department, Defense Department, National Science Foundation and other agencies in defining “fundamental research”—ECR altogether removed these key terms from the EAR definition of fundamental research. [FN 11]

The incoming Trump Administration should require the Departments of State and Commerce to commit to the Fundamental Research Exclusion by amending the regulations to adopt consistent definitions for basic and applied research and by clearly stating in the regulations when, if ever, the exclusions apply to information disclosed to researchers for use in performing of research, information disclosed to researchers in the course of performing research, and information that results from the research.

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[1] 61 Fed. Reg. 12,714 (March 25, 1996).

[2] See DTAG ECR Working Group White Paper (October 28, 2015), Documents and Presentations from October 29, 2015 DTAG Plenary. Available at http://www.pmddtc.state.gov/DTAG/index.html

[3] The Foreign Relations Authorization Act for Fiscal Year 2013 (H.R. 6018) proposed to amend the Arms Export Control Act by adding “38(l) SPECIAL EXPORT LICENSING FOR UNITED STATES ALLIES,” which provided:

“The President may establish special licensing procedures for the export of replacement components, parts, accessories, attachments, equipment, firmware, software or technology that are not designated as major defense equipment or significant military equipment to the North Atlantic Treaty Organization, any member country of that Organization, or any other country described in section 36(c)(2)(A) of this Act.”

The bill passed the House on July 17, 2012 and was pending at the Senate at the time ECR provisions were added to the National Defense Reauthorization Act for Fiscal Year 2013.

[4] The Wassenaar does not define “specially designed,” but many member countries follow a definition adopted by COCOM, the predecessor to Wassenaar, which is very narrow in scope. The former COCOM members, who generally opposed U.S. broad views of controls, required that the U.S. delegation to COCOM agree to a Statement of Understanding to narrowly define specially designed as “equipment used solely for a particular purpose” that could not be used with uncontrolled items. Following the COCOM Statement of Understanding, the MTCR adopted the COCOM interpretation and presently defines the term to describe equipment, parts, components or software which, “as a result of “development”, have unique properties that distinguish them for certain predetermined purposes.” The Missile Technology Control Regime Annex Handbook – 2010, p. xxiii. As an example, the MTCR explains that a piece of equipment that is “specially designed” for use in a missile will only be considered specially designed if it has no other function or use.

[5] See e.g. Public Comments to “Specially Designed” Definition RIN 0694-AF66 from: Tech America (“the “catch and release” approach is overly complex, even for large sophisticated businesses.”); Semiconductor Equipment and Materials International (“This structure is intrinsically complicated and inconsistent with the basic concept of a definition – which should simply specify the meaning of a term.”); Alliance for Network Security (“The definition published in the Proposed Rule is complicated and imprecise.”); ION Geophysical (“This third proposed definition of “specially designed” is again overly complex and confusing.”).

[6] 22 C.F.R. § 120.41.

[7] 15 C.F.R. § 772.1.

[8] “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

[9] See DTAG ECR Working Group White Paper (October 28, 2015), supra

[10] 80 Fed. Reg. 31,525, 31,528 (June 3, 2015).

[11] 81 Fed. Reg. 35,586, 35,589 (June 3, 2016).

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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 November 28, 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