The Departments of State and Commerce published final rules in the Federal Register on April 16, 2013, moving export control jurisdiction from the State Department to the Commerce Department for a wide range of aircraft and aircraft parts that formerly were controlled as military items. The new rules, which amend the International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations (EAR), come into effect on October 15, 2013. Transitioning to the new rules will entail a good deal of work for aerospace companies and their suppliers over the next few months. Once the transition is complete, however, those companies should benefit from lower regulatory burdens and additional export markets for many of their products.
The new rules are the result of the President's Export Control Reform Initiative. A main focus of that initiative is to revise the U.S. Munitions List (USML) to become an objective list of equipment and technology that actually warrant the more stringent export controls imposed under the ITAR for military items. The USML, prior to these new rules coming into effect, contained broad catch-all provisions that covered as a military item anything that was specifically designed or modified at any point for a military application. As a result, companies had to devote substantial resources researching the distant origins of their parts and technology to determine whether they were subject to export controls under the ITAR or the EAR. Perhaps even more aggravating, the slightest modification to meet a military customer's specifications would turn a basic commercial item into a "defense article," requiring a license for almost all exports.
The new rules have not quite accomplished the objective of the reform initiative because the "specially designed" catch-all language remains in the USML, albeit applied to a much narrower group of products, and it is being added to the EAR in new 600 series Export Control Classification Numbers (ECCN) that will apply to the items being transferred over from the ITAR. However, those new 600 series ECCNs distinguish among the various aircraft parts being transferred over, with a large number of such parts eligible for export without a license to most countries. Thus, whether a part can be exported to a particular destination and the regulatory burden imposed on that export will vary greatly, depending on how the part is classified under the new ECCNs.
An important benefit of the shift from the ITAR to the EAR is that the affected products no longer will be "ITAR Contaminated." Foreign and even U.S. customers are reluctant to purchase parts for their own products if those parts are controlled under the ITAR because the ITAR controls on those parts would then apply to the customer's product into which that part was incorporated. There is no de minimis level for ITAR content. Thus, for example, a $1000 part that is subject to the ITAR could cause a commercial aircraft worth millions of dollars to be subject to the ITAR. The EAR, by contrast, has a de minimis provision that exempts from U.S. export controls foreign-made equipment if it contains less than 25 percent controlled U.S. content. The EAR de minimis rule would apply to the items transferred over from the ITAR, except that the zero de minimis rule would continue to apply to most of those products if the foreign item into which they are being incorporated will be re-exported to a country subject to the U.S. arms embargo, which does include China. With the fear of ITAR contamination removed from those parts with respect to re-exports to most of the world, U.S. companies should see greater acceptance of those parts by potential foreign customers.
The first step companies must take in transitioning to the new rules is to determine which of their products are being transferred to control under the EAR and which will remain subject to the ITAR. This step can be accomplished by reviewing the new Category VIII of the USML. Subcategories VIII(a) and (f) provide a list of the types of aircraft that remain subject to the ITAR. If your company's aircraft is not on the list, then that aircraft is no longer subject to the ITAR. Subcategory VIII(h) contains a detailed list of the types of aircraft parts that remain subject to the ITAR. The "specially designed" catch-all remains with respect to parts for certain named aircraft and aircraft components (e.g., tail hooks and arresting gear and specially designed parts and components therefor).
The ITAR will have a new two-part definition of "specially designed" following a "catch and release" model. The first part -- the "catch" -- contains broad language to ensure that any products the government would want covered by the ITAR are caught by the specially designed definition. The second part -- the "release" -- then contains numerous exceptions to release from ITAR-control those products and technologies the government has decided no longer need to be controlled under the ITAR. The net result is that most aircraft parts currently subject to the ITAR would not fit any of the types of aircraft parts listed in the new subcategory VIII(h) or would be released under the second part of the "specially designed" definition and, consequently, will be subject to the EAR after October 15, 2013.
The State Department's Final Rule also established a new USML Category XIX to cover gas turbine engines and associated equipment formerly covered in Categories IV, VI, VII and VIII. The new Category XIX contains a detailed list with technical specifications of the gas turbine engines covered in the category and a catch-all of all engines "specially designed for armed or military unmanned aerial vehicle systems, cruise missiles or target drones." It also covers specifically enumerated parts and components for gas turbine engines and generally any other parts and components specially designed for the engines included in the category.
If your company's product is no longer included in the new USML Categories VIII or XIX, then the next step in the transition is to determine under which subsection of the new 600 series ECCNs it would be classified in the EAR. The Final Rule adds new ECCN 9A610 for military aircraft and related commodities and ECCN 9A619 for military gas turbine engines and related commodities. There are also new corresponding ECCNs for test equipment, materials, software and technology related to the commodities classified under new ECCNs 9A610 and 9A619. The new ECCN 9A610 currently has a subcategory (a) covering military aircraft moved over from the USML and 12 subcategories for parts for military aircraft, including a catch-all subcategory (x) that covers any part for a military aircraft that does not fit under one of the other subcategories. The licensing requirements vary greatly depending upon which subcategory covers a particular part. For example, items classified under subcategory (y), which has a large list of covered aircraft parts, can be exported without a license to any country, except the handful of countries subject to anti-terrorism controls (Cuba, Iran, North Korea, Sudan and Syria). By contrast, most of the other subcategories are subject to national security controls and presumptively need a license to be exported to any country other than Canada. However, various exceptions to the licensing requirements may apply, depending upon the specific transaction.
Many of the regulatory burdens that exist under the ITAR will follow those products to the EAR because of new requirements being added to the EAR for the 600 series ECCNs. For example, an AES filing will be required for all such exports (i.e., the exceptions to filing an AES for most exports to Canada and most exports under $2,500 will not apply), the ECCN must be added to the standard destination control statement, and there are certain reporting requirements even if you are able to use a license exception to ship the product to your foreign customer. The most commercially significant regulatory burden that will follow products classified under the new 600 series ECCNs is that they may not be exported to China or other countries subject to a U.S. arms embargo without a Commerce Department license. None of the license exceptions, other than License Exception GOV, can be used for 600 series ECCNs when the destination is China or one of the other arms embargo countries. Although the absolute prohibition on licenses for those countries found in the ITAR will not exist in the EAR, the usual licensing policy is likely to be one of denial.
There will be a 180-day transition period between the publication of the final rule for each revised USML category and its effective date. During the transition period, both the State and Commerce Departments will accept license applications for items moving to the EAR, but the Commerce Department will not issue licenses prior to the effective date. State Department licenses for transitioning items issued prior to the effective date that do not include any items that will remain on the USML will remain valid for two years from the effective date unless they expire earlier. State Department licenses covering both transitioning and nontransitioning items will remain valid until expired.
Technical Assistance Agreements and other State Department approved agreements, covering both transitioning and non-transitioning items will remain valid for two years from the effective date unless they expire or are terminated earlier. The U.S. party to the agreement will need to submit an amendment to the agreement to address the transitioning items in order for an agreement to remain valid beyond two years. Agreements containing solely transitioning items will remain valid for a period of two years from the effective date unless terminated earlier. After two years, any on-going activity must be conducted under the appropriate Commerce Department authorization.
For further information on the material presented in this alert, please contact John Burke at firstname.lastname@example.org or 202-861-1625; Melvin Schwechter at email@example.com or 202-861-1559; Mark Joye at firstname.lastname@example.org or 713-646-1313; or J. Garrett Cornelison at email@example.com or 713-646-1361 or your BakerHostetler relationship contact.
Authorship Credit: John J. Burke
Baker & Hostetler LLP publications are intended to inform our clients and other friends of the firm about current legal developments of general interest. They should not be construed as legal advice, and readers should not act upon the information contained in these publications without professional counsel. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you written information about our qualifications and experience. © 2013 Baker & Hostetler LLP