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. |