International Law Advisory - BIS Proposes Revisions of Export Controls for the People’s Republic of China

The Department of Commerce, Bureau of Industry and Security (“BIS”), is publishing a proposed rule in the Federal Register (attached) amending export and reexport controls for the People’s Republic of China (“PRC”) that may significantly affect some companies exporting to the PRC.  The proposed rule introduces a new control policy based on an exporter’s knowledge of a military end-use for certain dual-use items.  Second, the proposed rule creates a new authorization for validated end-users located in certain destinations, including the PRC, to whom controlled items may be exported without individual license applications and approvals.  Third, BIS proposes to expand the requirement that exporters obtain an End-User Certificate from the PRC Ministry of Commerce for all items that both require a license to the PRC for any reason and exceed a total value of $5,000.  These proposed revisions, to be published in the Federal Register on July 6, 2006, are designed to implement the Commerce Department’s stated policy of facilitating the expansion of trade between the United States and China, particularly in the high-technology sector, while ensuring that U.S. national security is fully protected.

New Military End-Use Control 
The proposed rule, designed to implement a Wassenaar Arrangement 2003 Statement of Understanding, would impose a new licensing requirement for certain items controlled on the Commerce Control List (“CCL”), but which do not currently require a license for export to China, if the exporter has knowledge, or is informed, that such items are destined for military end-use in the PRC.  This would principally affect certain items that are currently controlled only for anti-terrorism reasons.  The BIS proposal adopts the current definition of “knowledge” in the Export Administration Regulations (“EAR”), which includes both positive knowledge and an awareness of a high probability of the existence of a particular fact.  This is more expansive than earlier drafts of the proposed rule, which were limited to instances involving actual knowledge.  “Military end-use”, in turn, will be defined as incorporation into, or use for the production, design, development, maintenance, operation, installation, or deployment, repair, overhaul, or refurbishing of items listed on the U.S. Munitions List, on the International Munitions List, or covered by Export Control Classification Numbers ending in “A018”.  Because of this end-use focus, the rule would not require licenses for every sale of a listed item to a Chinese military end-user.  At the same time, current U.S. export control policy is to deny applications for exports that will contribute materially to the PRC’s military capabilities.  While exports covered by this new military end-use policy will be reviewed on a case-by-case basis, exporters will need to explain why the proposed export should be approved in the face of U.S. concerns with Chinese military capabilities.

New Validated End-User Authorization
BIS also proposes to establish a new authorization for validated end-users (“VEU”) that would allow license-free export, reexport, and transfer of eligible items to specified end-users in an eligible destination, including the PRC.  This change will expedite exports to end-users already vetted by the government in recognition of the fact that many recipients of U.S. goods in China have no ties to the Chinese military or other programs of concern and are often affiliates of companies headquartered in the U.S. or its allies.  A list of VEUs will be developed by BIS, in conjunction with other agencies, by reviewing certain criteria, including factors such as the foreign person’s record of exclusive engagement in civil end-use activities, compliance with U.S. export controls, capability to comply with VEU requirements, agreement to on-site compliance reviews by representatives of the U.S. government, and corporate relationships with U.S. and foreign companies.  The VEU list will be published in the Federal Register.

End-User Certificate Requirements
The proposed rule expands the current requirement for exporters to obtain End-User Certificates from the PRC Ministry of Commerce, so as to apply to all exports of controlled goods that require a license to the PRC for any reason and exceed a total value of $5,000.  Currently, this requirement only applies to exported items that are controlled for national security.  In order to minimize the impact on exporters, particularly in light of concerns about the Chinese Ministry of Commerce’s capacity to process certificates in a timely fashion, BIS has proposed that exporters need not submit the PRC End-User Certificate with their license applications and instead may include the serial number of the certificate and retain the certificate in accordance with the recordkeeping provisions of the EAR.  However, the requirement to obtain a certificate from the PRC’s Ministry of Commerce may pose a significant challenge to companies with numerous customers in China.

Conclusion
BIS will be accepting comments regarding these proposed revisions of U.S. export and reexport controls to the PRC until November 3, 2006.  The impact of the proposal will depend greatly on a company’s particular business model as well as the nature and volume of a company’s transactions with China.  Should you have any questions regarding how these proposed changes may affect your company and whether it would be in your company’s interest to submit comments to BIS, please contact Peter Lichtenbaum at 202-429-6263 or Ed Krauland at 202-429-8083.