Second phase of the Export Control Reform Initiative allows certain U.S. industries to fall into categories that may make them more attractive to foreign buyers.
On January 6, the Obama administration reached another important milestone of the president’s Export Control Reform (ECR) Initiative, with the second phase of revised export control lists and regulations taking effect.[1] These second phase changes significantly affect naval warfare, ground vehicle, and other industries as they present an opportunity for manufacturers and exporters to reclassify certain items under a more flexible and beneficial regulatory system.
The New Rules
The new lists and regulations continue the process of fundamentally updating the United States’ export control regimes and include revisions to U.S. Munitions List (USML) Categories VI (Vessels of War and Special Naval Equipment), VII (Tanks and Military Vehicles), XIII (Auxiliary Military Equipment), and XX (Submersible Vessels). The revisions transition many less sensitive items from the U.S. Department of State’s International Traffic in Arms Regulations (ITAR) USML to the more flexible Department of Commerce’s Export Administration Regulations (EAR) Commerce Control List (CCL).
The new USML controls in these four categories are no longer broad and generic controls that capture everything. They are now detailed, enumerated lists that impose controls based on the sensitivity of an item.
Category VI (Vessels of War and Special Naval Equipment)
“Surface vessels of war” remain in USML Category VI and are now positively defined in new ITAR section 121.15 as the following: battleships, aircraft carriers, destroyers, frigates, cruisers, corvettes, littoral combat ships, mine sweepers, mine hunters, mine countermeasure ships, dock landing ships, amphibious assault ships, or cutters. Less sensitive items—such as generic parts, components, accessories, or attachments—are now subject to the more flexible authorities of the EAR and will transition to the CCL under Export Control Classification Number (ECCN) 8A609.
The key to determining whether an item will transition from USML Category VI to the CCL under ECCN 8A609 or another ECCN in the CCL will depend on the application of the new ITAR and EAR definitions of “specially designed.” The revised USML Category VI does not contain controls on all general parts, components, accessories, and attachments specifically designed or modified for a defense article, regardless of their significance to maintaining a military advantage for the United States. Rather, it now contains a positive list of specific types of parts, components, accessories, and attachments that continue to warrant control on the USML. All other parts, components, accessories, and attachments are subject to the new “600 series” controls in Category 8 of the CCL.
Category VII (Tanks and Military Vehicles)
The revision narrows the types of ground vehicles controlled on the USML to only those that warrant control. Changes include the removal of most unarmored and unarmed military vehicles, trucks, trailers, and trains (unless specially designed as firing platforms for weapons above .50 caliber) and armored vehicles (either unarmed or with inoperable weapons) manufactured before 1956. Engines are now covered in revised USML Category XIX.
A significant aspect of the revised USML Category VII is that it does not contain controls on all generic parts, components, accessories, and attachments that are specifically designed or modified for a defense article, regardless of their significance to maintaining a military advantage for the United States. Rather, it contains a positive list of specific types of parts, components, accessories, and attachments that continue to warrant control on the USML. All other parts, components, accessories, and attachments are subject to the new 600 series controls in Category 0 of the CCL.
USML Categories XIII (Auxiliary Military Equipment) and XX (Submersible Vessel) also have been revised similarly. Category XIII continues to control certain cameras and encryption/information security items. Category XX will now control all submersible vessels in a single category, including submarines, as they have been moved from Category VI.
Definition of “Specially Designed”
The definition has a two-part approach. Part one “catches” things that are “specially designed,” and part two releases many types of items from the definition of “specially designed” so that they become not “specially designed.” Assuming an item is caught by part one, the exporter should focus on part two of the definition, i.e., the six separate “releases.”
Under part two, there are six possible ways an item can be released from being specially designed. For example, a part, component, accessory, attachment, or software is not considered to be specially designed if it is, regardless of form or fit, “a fastener (e.g., screws, bolts, nuts, nut plates, studs, inserts, clips, rivets, pins), washer, spacer, insulator, grommet, bushing, spring, wire, or solder.”
Also under part two, a part, component, accessory, attachment, or software is not deemed to be specially designed if it has the same function and performance capabilities and the same or equivalent form and fit as a commodity or software used in or with an item that (i) is or was in production (i.e., not in development) and (ii) is either not enumerated on the CCL or USML or is described in an ECCN controlled only for antiterrorism reasons.
Therefore, exporters and manufacturers should review the new definition of “specially designed” to ascertain if any items pending sale are released from the definition.
Implications
These changes will significantly affect exporters and manufacturers of naval warfare, ground vehicles, and other items as these items may no longer fall under ITAR jurisdiction, making the products more attractive to foreign buyers. Exporters and manufacturers will no longer need a manufacturing license agreement document for foreign manufacture of CCL items. Additionally, because there is no concept of “defense service” under the EAR, providing services related to CCL products will not require any technical assistance agreement documents. Items that become classified as EAR99 generally do not require a license to be exported or reexported to most destinations, and there is no annual registration fee paid to the Commerce Department, unlike under the ITAR. Furthermore, there is no “brokering” registration or licensing under the EAR.
In addition, many of the items moved to the CCL are now eligible for export without specific licenses under EAR license exceptions. One such EAR license exception is strategic trade authorization (STA), which is used when the item is intended for the ultimate end use by the governments of 36 U.S. allies and partners (although such exports carry with them additional compliance requirements). Failure to comply with STA requirements may result in an unlicensed export, opening up the exporter to significant penalties and fines.
On July 1, 2014, five more USML categories are scheduled to transition to the CCL in the third phase of ECR:
- Category IV (Launch Vehicles, Guided Missiles, Ballistic Missiles, Rockets, Torpedoes, Bombs, and Mines)
- Category V (Explosives and Energetic Materials, Propellants, Incendiary Agents, and Their Constituents)
- Category IX (Military Training Equipment)
- Category X (Personal Protective Equipment)
- Category XVI (Nuclear Weapons Related Articles)
Marynell DeVaughn also contributed to this article.
[1]. For more information on the first phase that occurred in October 2013, view our November 14, 2013 LawFlash, “Export Control Changes Affecting Aircraft Industry Take Effect,” available here.
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