July 2, 2007
On June 19th, 2007, the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) published a final rule (the “China Rule”), effective immediately, that implements significant changes to its dual-use export control regulations for exports to the People’s Republic of China (“PRC”). BIS intends the China Rule to encourage trade with legitimate civil end-users in the PRC, while further tightening controls on exports that could assist the PRC with its military modernization efforts.
BIS first published a proposed rule regarding its export licensing policy to the PRC in July 2006, and the final China Rule takes into account a number of the fifty-seven public comments that were submitted to BIS during the past year. The China Rule has three main components: (1) imposition of additional licensing requirements for exports destined for a military end-use in the PRC; (2) creation of the Validated End-User program; and (3) revision of existing End-User Statement requirements.
First, the China Rule makes clear that it is BIS’s policy to approve licenses authorizing export of items for civil end-uses and generally deny license applications requesting authorization to export items or technology that will make a “direct and significant contribution” to China’s military, including items controlled for national security, chemical and biological weapons proliferation, nuclear nonproliferation, or missile technology reasons. In addition, the China Rule includes a list of approximately twenty items and related technology (thirty-one distinct Export Control Classification Numbers) that have not previously required a license for export to the PRC. Under the new rule, BIS prohibits unlicensed export of these items if the exporter or reexporter has knowledge that the item is destined for a military end-use in the PRC. License applications requesting authorization to export these items will be reviewed on a case-by-case basis to determine whether the transfer will make a “material contribution” to China’s military capabilities to the detriment of U.S. national security interests. These new regulations are consistent with the United States’ longstanding embargo on arms exports to the PRC.
Second, to encourage and facilitate U.S. exports to civilian end-users in the PRC, the China Rule establishes the new Verified End-User (“VEU”) program. Chinese companies that can demonstrate a history of responsibly engaging in only civil end-use activities are eligible for VEU authorization, which allows the unlicensed export and reexport of certain controlled items to those companies from any exporter or reexporter, even if a license would ordinarily be required for such a transfer to the Chinese company. Although applying for VEU authorization is voluntary, BIS anticipates that a number of Chinese companies that must currently apply for individual licenses to import many items will seek VEU authorization to eliminate the burdens associated with repeatedly applying for multiple individual licenses. BIS expects to publish the first list of VEUs soon, possibly within the next few weeks, and extend the program to Indian companies in the near future.
The China Rule provides detailed procedures for applying for VEU authorization. Chinese companies may apply directly, or exporters may apply on their behalf. The regulations do not, however, afford VEU applicants a mechanism to appeal a BIS decision denying a VEU application. Companies may apply for VEU authorization any number of times, and BIS has indicated that it will work with denied applicants to address any issues. Although it is unclear whether BIS will publish the names of VEU applicants who have been denied authorization, BIS has taken the position that such a denial will not constitute a “black mark” that will negatively affect the denied applicant’s chances of acquiring a license for any particular transaction.
Finally, the China Rule expands the range of items for which U.S. exporters must acquire End-User Statements (“EUSs”) from the Chinese Ministry of Commerce (“MOFCOM”). Under the new rule, BIS requires exporters and reexporters to obtain an EUS from MOFCOM for every export to the PRC that requires a license and is valued over $50,000. Previously, the value threshold was $5,000, but exporters only had to obtain an EUS for exports of certain items that required a license to export. Accordingly, although the new regulation requires U.S. exporters to obtain an EUS for exports of a broader range of items (i.e., all items that require a license for export to the PRC), BIS does not anticipate an overall increase in the total number of EUSs that MOFCOM must issue because the new $50,000 value threshold is significantly higher than the previous $5,000 threshold. Regardless of value, BIS will still require an EUS from a U.S. exporter or reexporter in connection with transfers of particularly sensitive items or technology to the PRC.
The full text of the China Rule can be found at
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