International Trade & Compliance 

As described in our April 25, 2013 International Trade & Compliance Advisory, the U.S. government is engaged in a broad export control reform initiative. On October 15, 2013, the first regulatory amendments implementing export control reforms will take effect. These amendments will modify the U.S. State Department’s International Traffic in Arms Regulations (“ITAR”), which generally apply to military items, and the U.S. Commerce Department’s Export Administration Regulations (“EAR”), which generally apply to commercial “dual use” items. The amendments will transfer many types of equipment and software from the ITAR to the EAR.

These first ITAR and EAR amendments address aircraft, certain aircraft engines and related items. Other amendments covering other types of items have been and will be proposed and are scheduled to come into effect in the months following October 15. As the new export control rules begin to take effect, U.S. and non-U.S. companies should be adjusting their international trade compliance programs to account for them. Compliance program updates should address new product classifications and establish revised policies, procedures and compliance training arrangements.

Treatment of Parts and Components and New “Specially Designed” Definition

As discussed in our earlier advisory, the amendments becoming effective October 15 will implement two particularly significant changes. First, these amendments, like subsequent amendments, will broadly move parts and components of many military systems from the ITAR to the EAR. The October 15 amendments will cover aerospace parts and components. This will result in application of relatively less onerous EAR controls to these items. Exporters will benefit because, for example, the EAR, unlike the ITAR, generally do not control exports of services relating to controlled hardware. At the same time, companies should not make the mistake of assuming that these aerospace-related items will be wholly decontrolled.

In addition, the October 15 amendments will implement extensive new provisions on the meaning of the regulatory term “specially designed.” The term is important since many export controls apply to items based on their being “specially designed” for expressly controlled items. These new “specially designed” provisions are highly controversial. They do seem to clarify the instances in which end items are controlled due to their being “specially designed.” The provisions that govern whether parts and components are “specially designed,” however, are less clear and may expand controls in some circumstances.

Recent Changes to Reform Amendments Effective October 15

Last week, the Commerce and State Departments published adjustments to the ITAR and EAR amendments that are scheduled to become effective October 15. While the government characterized these adjustments as modest clarifications and corrections, these will modify export control reforms in important ways. Two of these ways merit comment.

First, in some respects EAR license requirements for parts and components will be more limited than anticipated. In a November 2012 proposal, the government indicated that the EAR control list would be revised to establish that many export control classification numbers (“ECCNs”) that currently cover only parts or components of equipment systems will cover both parts and components. This change—in truth, an expansion of export controls—will still be made to some ECCNs. But the change will not be as far-reaching as was indicated in the November 2012 notice.

For example, ECCN 3B001 controls certain semiconductor manufacturing equipment and “specially designed” components, but it does not mention “parts” of these equipment systems. The November 2012 proposal indicated that this ECCN would be amended to extend the controls to parts of controlled semiconductor manufacturing systems. A notice published last week, however, indicates that ECCN 3B001 will not be broadened to cover parts. Although buried in an obscure notice, this is an important step forward for the semiconductor equipment industry. It effectively clarifies that semiconductor equipment parts generally are not subject to EAR controls by removing the argument that the reference to “components” encompasses parts.

Second, a clarifying note has been added to the provisions on the “specially designed” standard discussed above. The clarification is important for exporters who could benefit from a determination that a part or component is “specially designed.” An exporter could benefit from a part or component being “specially designed” for an equipment system if: 1) the equipment system is not controlled or is subject to limited controls; and 2) evaluated independently, the part or component would be controlled. In these circumstances, the part or component would, like the system into which it is incorporated, be considered to be non-controlled or subject to limited controls due to its being “specially designed” for the system. The regulatory note published last week clarifies and reinforces that exporters can benefit from the “specially designed” provisions in this manner.

The Orrick International Trade & Compliance Group is deeply involved in export control matters. For more information about these developments, please contact Harry L. Clark at (202) 339-8499 or [email protected], W. Clark McFadden II at (202) 339-8479 or [email protected], or your Orrick relationship lawyer.