In 2005, United States companies exported approximately $41 billion worth of items to the People’s Republic of China ("PRC" or "China"). During that same time period, American business concerns reportedly lost an estimated $12.5 billion in potential export revenue. This reported loss was due in large part to the United States government’s two conflicting objectives: creating an efficient system to export items for civil applications while at the same time protecting national security interests by denying exports that will advance Chinese military capabilities.
As part of regular revisions to the Export Administration Regulations ("EAR"), the Commerce Department’s Bureau of Industry and Security ("BIS") published a proposed rule in the Federal Register, dated July 6, 2006, that outlined three changes to current PRC export policy. The first, and most significant, development is the creation of the authorization Validated End User program ("VEU"), which for certain companies could make exporting civil end-use items to the PRC dramatically more efficient. Second, BIS has expanded the licensing review and license requirements for exports to the PRC. Third, exporters and reexporters will be required to obtain an end-user certificate for all goods and technologies currently requiring an export license and valued at more than a certain dollar threshold.
New Authorization VEU
Of greatest potential significance is BIS’s creation of an alternate export control regime for civil end-use items. This VEU authorization has the potential to reduce the regulatory expense incurred in exporting items to the PRC for qualifying companies. Under this program, exporters may make repeated exports to the PRC of items which would ordinarily require individual licenses where the end-user is validated by BIS and other agencies. This validation is specific to the items included in the request for validation, and covers a number of export-related issues, such as compliance with U.S. export controls, a history of only exporting items for civil end-use, agreement to on-site compliance reviews by BIS representatives, etc. Once validation has been provided, any approved items may be exported to the PRC end-user by either the original exporter or other qualifying exporters without obtaining a license for each transaction. However, in order to take advantage of this new authorization program, exporters will be required to meet additional recordkeeping requirements, submit annual reports of their export activity under this authorization, and agree to regular audits by BIS to confirm compliance with all VEU requirements.
But for whom does this program make sense? While the regulatory burdens on U.S. companies could be greatly decreased by the proposed rule, the burdens on the Chinese end-users would be significantly increased. These end-users, as part of maintaining their validation, would be required to submit regular reports to the U.S. government and to allow periodic, on-site inspections by U.S. export authorities. Because these fairly extensive regulatory requirements may be costly to implement, have a serious impact on normal "arms-length" export transactions, and represent a serious departure
from current practice, it is possible that neither the U.S. exporters nor the PRC end-users will wish to do business under the proposed system. On the other hand, in situations where PRC-based end-users require access to large quantities of export-controlled U.S. products, the possibility of securing a steady supply of these products without the ups and downs of the export licensing process may be incentive enough to implement these controls and keep them in place.
Revision of Licensing Review Policy and License Requirements
The second change in the proposed rule would expand the coverage of Part 742.4(b)(7) of the EAR, which controls exports to the PRC, based upon issues of national security. Under this proposed regulation, a presumption of denial will be in place for any exports which would make a "material" contribution to the military capabilities of the PRC. As the "material" standard is significantly more expansive than the current "direct and significant contribution" standard, it is likely that many previously-uncontrolled items could become regulated.
This revision also affects Part 744.21 of the EAR, which places new restrictions on certain products destined for military end-uses in the PRC. Under this new provision, exporters are prohibited from engaging in any unauthorized export, reexport, or transfer of items classified under the following export classifications, if the exporter has knowledge or reason to know that the item is intended for a military end-use in the PRC:
- Category 1—Materials, Chemicals, Microorganisms, and Toxins (1A290, 1B999, 1C990, 1C995, 1C996, 1D999, 1D993, and 1E994)
- Category 2—Materials Processing (2A991, 2B991, 2B992, 2B993, and 2B996)
- Category 3—Electronics Design, Development and Production (3A292, 3A999, 3B991, 3B992, 3D991, 3E292, and 3E991)
- Category 4—Computers (4A994, 4D993, 4D994, and 4E992)
- Category 5—(Part 1) Telecommunications (5A991, 5B991, 5C991, 5D991, and 5E991)
- Category 5—(Part 2) Information Security (5A992, 5D992, and 5E992)
- Category 6—Sensors and Lasers (6A995 and 6C992)
- Category 7—Navigation and Avionics (7A994, 7B994, 7D994, and 7E994)
- Category 8—Marine (8A992, 8D992, and 8E992)
- Category 9—Propulsion Systems, Space Vehicles and Related Equipment (9A991, 9B990, 9D990, 9D991, 9E990, and 9E991)
Although items being exported under these classifications would not ordinarily require an export license to China, these items are now subject to an export licensing requirement if intended for a military end-use.
Revision of End-User Certificate Requirements
The final part of the proposed rule will increase the need for end-user certificate requirements. Currently, exporters are required to obtain certain assurances from both the PRC government and the end-users based in the PRC prior to exporting any items controlled for national security reasons under Part 748.10). BIS wants to greatly expand this regulation to encompass all exports of controlled goods and technologies, not just those subject to national security controls.
Under the proposed rule, an exporter dealing in any controlled item or technology which requires an export license for the PRC must obtain an end-use certificate from the PRC Ministry of Commerce if the export is valued at more than $5,000. Thus, a large number of exports that did not previously require an end-use certificate will now be burdened with extra regulatory requirements prior to export.
Conclusion
While the proposed rule may be an important first step toward creating a more efficient export control regime, the end result could be more burdensome for many exporters. Companies should be aware of what effect these changes may have on their businesses, especially if additional licensing or review will be required to comply with U.S. export control laws and regulations. Comments on the Proposed Rule are due Nov. 3, 2006. The Reed Smith Export, Customs & Trade Team will continue to monitor ongoing developments on the proposed regulation.
This article is presented for informational purposes only and is not intended to constitute legal advice.
