Updated: May 29, 2020
The U.S. will enforce significant EAR changes in one month's time, restricting exports of certain goods to China, Russia, Venezuela and other countries. We present the TOP 3 changes you need to know about and provide a practical example towards the end.
The United States controls the export and re-export of U.S.origin goods and technology to all countries around the globe.
The rules covering the goods which can be use for both civil and military use, also is known as dual-use goods, are known as the Export Administration Regulations (EAR). They are changed and administered by BIS.
What are BIS and the EAR?
The Department of Commerce’s Bureau of Industry and Security administers the U.S. export control policy through the EAR. The mission of the BIS is to advance U.S. national security, foreign policy, and economic objectives by ensuring an effective export control and treaty compliance system and promoting continued U.S. strategic technology leadership. The EAR controls the export of dual-use goods as well as goods that are not controlled by other regulations.
U.S. Exports or U.S. Reexports of certain high-use technology products which can find their way into military applications or army hands in certain countries of concern are restricted from 29 June 2020 onwards to four countries,
BIS has amended several parts of the EAR, including exceptions and general licences to archive this aim.
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Here is a high-level overview of what changed:
1) Military End-Use & End-User Export Controls are broadened
How do you define when a good can be or is used by the military? When or how do you know if a good you export will end with a foreign army?
Well, the good news is from 29 June, some U.S. businesses do not have to worry about that any more. That is because the trade of their products, to China, Russia or Venezuela will simply have to stop!
On that day, BIS will require individual companies to apply for licences when intending on exports, reexports, and transfers (in-country) of certain goods to China, Russia, or Venezuela, where they could be potentially used for military end-use or by military end-users.
The difference between needing a licence and not: From administrative nightmare to complete loss of export business
Observers reckon that due to the broadening of the definition of what constitutes military "end-use", in the context of supplying certain goods to China, Russia and Venezuela (as well as other countries), thousands of additional BIS licences may now be needed.
And even if an exporter would apply to BIS, such licence may be not easily granted. BIS has a license policy of "presumption of denial".
That means that the starting point of the U.S. Export Control authorities is, therefore, to say NO! to you. As a result, some U.S. Businesses may risk loosing this trade altogether.
Good news: No change to "military end-user" definition
The definition of the EAR as a "military end user" does not change and continues to apply generally to "national armed forces (army, navy, navy, air force or coast guard) as well as to the national guard and the national police, the government secret service or intelligence organizations or any person or organization whose actions or functions are designed to support "military end-uses".
Bad news: Expanding the definition of "military End Use"
It is a fundamental requirement under the EAR regulations that if the exporter or re-exporter (or anyone really) knows or they have been informed that the product may have a military end-use, for goods going to Russian, China and Venezuela, that a licence is needed unless there are exceptions. That's not new and such wording is commonly used in catch-all provisions.
The definition of what is military end-use under the EAR in these circumstances is also clearly defined
The regulation mentions:
and then provides details as to what this is.
Under the new rules, the definition of what constitutes "development" and "production" of “military end-use” is extended. From 29 June 2020, any in-scope good that merely "supports" or "contributes" to the operation, installation, maintenance, repair, overhaul, refurbishing, development or production of military items. would be covered by the need to have a licence.
The extension "support or contribute" means that licence requirements are placed on numerous products that are usually have very little touch points with the military. These may be goods used in traditional electronics sales.
More high-volume off-the-shelve goods in the scope
The list of articles that are subject to the requirements for military end-use and the license for military end-users in Appendix No. 2 to Part 744 is extended by the following export control classification numbers (“ECCNs”) in the categories
Electronics and telecommunications
Sensors and lasers and propulsion
The ECCN numbers are:
2A290, 2A291, 2B999, 2D290, 3A991, 3A992, 3A999, 3B991, 3B992, 3C992,
3D991, 5B991, 5A992, 5D992, 6A991, 6A996 und 9B990.
These changes, in essence, introduce military end-use / end-user controls on off-the-shelf items.
BIS believes these are important building blocks or components for products and technologies that China, Russia and Venezuela may need to develop their military capabilities.
What's the workaround?
A classic question. How do we make it happen? Well, normally, export control experts now point to General Licences and, ideally Licence exceptions. And, usually, one could recommend exploring Licence Exception CIV and General Licence APR. The problem is that BIS was clever enough to think about these, too.
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2) Removal of License Exception CIV
From 29 June 2020, BIS will remove the licence exception CIV from the Export Administration Regulations.
What is a License Exception?
An authorization that allows you to export or re-export, under stated conditions, items
subject to the EAR that would otherwise require a license.
What does CIV stand for?
CIV stands for Civil end-uses and end-users (no military or proliferation end-users). This exception authorizes exports, reexports, and transfers (in-country) of certain national security-controlled items without prior review by BIS to most civil end-uses in-country group D:1 destinations (except for North Korea).
The way the EAR sees the world…
Country Groups (Supplement 1 to Part 740)
Group A: Regime Members
Group B: Less Restricted
Group D: Countries of Concern
Group E: Terrorist Supporting
Group D:1 countriesArmenia, Azerbaijan, Belarus, Cambodia, China, Georgia, Iraq, Kazakhstan, North Korea, Kyrgyzstan, Laos, Libya, Macau, Moldova. Mongolia, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan, Venezuela, Vietnam, and Yemen.
BIS states that it is removing this license exception due to concerns related to the increasing integration of civilian and military technology developments in these countries.
Consequence: From 29 June 2020, the exporter must submit license applications to BIS exports of national security-controlled items on the Commerce Control List to D:1 countries.
3) Changes to APR license exception
BIS has proposed to change the "additional permissive exports" licence exception to forbid reexports of items controlled for national security reasons on the CCL
FROM Hong Kong -> D:1 countries
FROM A:1 countries -> D:1 countries
to D:1 countries from Hong Kong and country group A:1 countries.
A:1 countries: Argentina, Australia, Austria, Belgium, Bulgaria, Canada, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Ireland, Italy, Japan, Latvia, Lithuania, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, Luxembourg, Slovakia, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Turkey, and United Kingdom.
BIS is proposing this change because it has evidence of differences in licensing review standards under which A:1 countries may approve a license for the reexport of a U.S.-origin item that would have been denied if exported directly from the U.S. Comments on this proposed rule are due no later than June 29.
What other changes?
We should mention the following changes that all in all will make the trade of these products with D:1 countries much, much harder.
Expanding the licensing requirements for China to include military end-users in addition to military end-uses, which will require increased diligence with respect to the evaluation of end-users in China, particularly in view of China’s widespread civil-military integration.
Creating a new reason for control and the associated review policy for regional stability for certain items exported to China, Russia, or Venezuela.
Requiring the filing of electronic export information for exports to China, Russia, and Venezuela regardless of the value of the shipment (unless eligible for license exception GOV)
Practical example of how its getting tough under the new rules: How "MeltMe" and "ConnectMe" struggle
U.S. Company "ConnectMe" manufacture of various kinds of electronic devices, including diodes, transistors, and integrated circuits. It is well known in the U.S. semiconductor industry, however, receiving its metal parts from China is essential for its business success. It has been receiving small quantities of the required metals to create their wafers from a Chinese foundry for years.
Company "MeltMe" usually produces metal castings in China. It casts metals into shapes by melting them into a liquid, pouring the metal into a mold, and removing the mold material after the metal has solidified as it cools. The most common metals processed are aluminium and cast iron used for everyday operation on machines, buildings, from commercial to private living and even used to produce vehicles. It also produces metals for wafers and is regularly supplying them to "ConnectMe".
The question if any remote shape or form of these Chinese metal products could even remotely be used for military purposes or by the Chinese or Russian or other D:1 country's army has never been asked.
This has to change now because come 29 June, even the possibility of "supporting" or "contributing" of Chinese military end-uses could trigger licensing requirements.
MeltMe could be considered a “military end-users” if even a small volume of the semiconductor wafers they produce is used for integrated circuits for installation in defense goods. The result would be that US semiconductor device or material manufacturers would have to receive licenses to sell and supply these products to such foundries in accordance with ECCN 3B991.
Similarly, Chinese aircraft maintenance organizations that provide commercial and military aircraft maintenance services could be "military end users", resulting in licensing requirements for U.S. aircraft parts suppliers that are classified under ECCN 9A991, even if those parts are used only for passenger aircraft could become.
In one month, on 29 June 2020, the U.S. tightens its Export Controls of many off the shelf processing, electronics, sensors and laser goods to countries like China, Russia and Venezuela. Exporters intending to send these goods to any of the countries concerned must go through a rigorous review process to determine whether the items are intended for a military end-user or a military end-user for China, Russia or Venezuela and other countries and apply for the appropriate licence. Getting one will NOT be easy as BIS operates under a Presumption of Denial policy, Some trade will most likely have to stop.
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