State and Commerce Departments Publish Significant Rule Changes to Export Controls Regulations

On April 16, 2013, the U.S. Department of State and Department of Commerce published final rules that implement several important changes to the International Traffic in Arms Regulations (the "ITAR") and the Export Administration Regulations (the "EAR"), respectively.  (Available here and here.)  These new rules are the leading edge in a series of coordinated rule publications that the State and Commerce Departments plan to make during 2013 as they retool administration of export controls according to the President’s Export Control Reform Initiative (the "ECR").  The "cornerstone" of the ECR is the eventual unification of the United States’ two principal export controls lists, the State Department–administered U.S. Munitions List (the "USML") and the Commerce Department–administered Commerce Control List (the "CCL").  These departments have set about moving less sensitive dual-use items from the USML to the CCL with the final objective of creating a single control list that will avoid much of the confusion and inefficiency endemic to the current export control system. 

The new rules implement revisions to USML category VIII, covering controlled aircraft and associated equipment, and create category XIX, covering gas turbine engines.  They also include final versions of "transition" rules and a new definition of "specially designed" intended to ready the ITAR and the EAR for further reforms in the coming months and years.

Aircraft and Gas Turbines

The State Department final rule narrows the types of aircraft and related articles controlled under the USML to only those covered by the Arms Export Control Act and more clearly defines the term "aircraft" for purposes of category VIII in order to focus on aircraft with military critical capable activities.  Category XIX, covering gas turbine engines, was created to clarify that gas turbine engines with military capabilities for cruise missiles, surface vessels, vehicles, and certain aircraft are controlled by the USML.  The new category supersedes controls on gas turbine engines previously under categories IV, VI, and VII.  To accommodate these changes, the corresponding Commerce Department final rule creates new 600 series export control classification numbers ("ECCN") to include in the CCL the aircraft and gas turbine engines formerly covered by the USML.

Transition Rules

Throughout the comment period, companies in and groups representing the aerospace industry generally welcomed these changes, but voiced concerns over the potential effect they could have on compliance.  The new rules include several measures designed to assist companies with operations affected by the transition of articles from the USML to the CCL and to lessen concerns over the effects of the new rule.  Recategorization rules promulgated under the ECR will become effective 180 days after publication in the Federal Register.  The rules published April 16, 2013 will take effect Monday, October 14, 2013.  In the interim, applications for items transitioning from the USML to the CCL will continue to be handled by the State Department.  In addition, manufacturers, exporters, and brokers who will no longer be required to register with the State Department following the implementation of these rules may request an extension of their registration expiration date until the effective date of the new rules.  Further, under these new rules, previously approved licenses will remain valid until their current expiration date or for a period of two years, whichever comes first.  Following the effective date of the new rules, the validity period of licenses will be extended from two to four years.  The transition measures also require the Department of Commerce to provide a certification to Congress prior to granting licenses for certain high-level exports.

Definition of "Specially Designed"

In addition to rationalizing control categories through a fluid process, one of the goals of the ECR is to establish positive, enumerated export controls based on objective criteria.  Yet the USML and CCL contain many references to items "specially designed" for a particular purpose.  The new rules set out a definition of specially designed to coordinate its application across the USML and the CCL. It moves away from the prior catch-all definition that deemed as defense articles even insignificant parts or components that were modified in any way for use in a defense end item.  The new definition embodies a catch-and-release approach, meaning it describes a broad category of specially designed items, then lists several categories that are carved out through exceptions.  The definition provides for a sequential analysis, and in the first place, an item is "specially designed" if it:

(1) [a]s a result of "development" has properties peculiarly responsible for achieving or exceeding the performance levels, characteristics, or functions in the relevant ECCN or U.S. Munitions List (USML) paragraph; or

(2) [i]s a "part," "component," "accessory," "attachment," or "software" for use in or with a commodity or defense article ‘enumerated’ or otherwise described on the CCL or the USML.[1]

The definition now catches this wide range of items, then releases many of them through exceptions.  For example, all fasteners, like nuts, bolts, and bushings, regardless of whether they were modified for use in a defense article, fall outside the definition of specially designed.  Likewise, parts, components, accessories, attachments, and software that are substantially similar to those used in civil applications are no longer considered specially designed.  The exceptions also cross-reference the USML and the CCL for specific exceptions embedded within controlled categories.

The Commerce Department’s new rule also allows applicants to request a determination as to whether a part, component, accessory, attachment, or software is not specially designed.  The Commerce Department stated that it intended to "replicate" a program already used by the State and Defense Departments to provide such formal determinations.

Conclusion

In the near term, these rules will likely challenge many companies’ export compliance systems, requiring new policies, procedures, and training to stay abreast of their products’ place in the regulatory scheme.  But over the long run, these changes will help the government get closer to an export controls system that, in the words of then Secretary of Defense Robert Gates, "dispenses with the 95 percent of easy cases and lets us concentrate our resources on the remaining 5 percent."[2]

The rule changes from April 16 span more than 100 pages of the Federal Register.  Outside the aerospace, defense, and engine segments, the text contains important global changes.  While the broad brushstrokes are covered here, companies with any ITAR or EAR exposure should pay close attention to this initial set of rules, if only to prepare for later changes that will result from the ECR.