June 27, 2007
image International Trade update

Export of Dual-Use Items to China Addressed by the Department of Commerce                                                    

Commerce Amends the Export Administration Regulations

The Department of Commerce has amended the Export Administration Regulations (“EAR”) so as to impose new licensing obligations on exports and reexports of over 20 different types of products, software and technology to certain parties in the People's Republic of China ("PRC"). On June 15, 2007, the Commerce Department’s Bureau of Industry Security (“BIS”) amended its licensing policy of dual-use exports to China by (i) imposing new restrictions on dual-use technologies destined for a military end-use in China, (ii) creating the Validated End-User ("VEU") program to facilitate certain exports to approved customers in China and (iii) revising the circumstances under which End-User Statements, issued by the PRC Ministry of Commerce, must be obtained. 1

Military End-Use Restrictions


The final regulations implement a new control on exports and reexports to China of certain items that BIS considers to have the potential to advance the military capabilities of the PRC.
2 This rule imposes a new license requirement for certain items that the exporter knows (as defined under section 772 of the EAR), or has been informed by BIS, will be destined for military end-use in China.


The list of items subject to this restriction covers 20 products and related software and technologies as described under the newly added Supplement No. 2 to Part 774 of the EAR. This list includes specific items in the following categories:


• Materials, chemicals, microorganisms, and toxins (ECCNs: 1A290, 1C990, 1D993, 1D999, 1E994 and 1C996);
• Materials processing (ECCNs: 2A991, 2B991, 2B992 and 2B996);
• Electronics design, development, and production (ECCNs: 3A292, 3E292 and 3A999);
• Computers (ECCNs: 4A994, 4D994 and 4D993);
• Telecommunications (ECCNs: 5A991, 5D991 and
• Sensors and lasers (ECCNs: 6A995 and 6C992);
• Navigation and avionics (ECCNs: 7A994, 7D994, 7E994 and 7B994);
• Marine (ECCNs: 8A992, 8D992 and 8E992); and
• Certain aircraft, propulsion systems, space vehicles, and related equipment (ECCNs: 9A991, 9D991 and 9E991).



For purposes of the military end-use restriction rule, the term “military end-use” means: (i) for incorporation into a military item described on the U.S. Munitions List (USML); (ii) for incorporation into a military item described on the International Munitions List (IML); (iii) for incorporation into items listed under ECCNs ending in “A018” on the Commerce Control List (CCL) in Supplement No. 1 to Part 774 of the EAR; or (iv) for the “use,” “development” or “production” of military items described on the USML or the IML, or items listed under ECCNs ending in A018 on the CCL. Additionally, the term “military end-use” means deployment of items classified under ECCN 9A991 as set forth in Supplement No. 2 to Part 744.

The text of the regulations do not explain how the military end-use restriction will be implemented. Foremost, the regulations do not clarify how much information exporters will need to know, or will be deemed to know, about end-users. Accordingly, exporters will need to tread cautiously when dealing with Chinese business partners and customers. Exporters should also be attentive to customers and end-users that will have the exported items incorporated into larger systems, especially where the larger system may have possible military applications. Foreign parties who reexport U.S. commodities, technology and software to China should also be cautious given that the military end-use restriction applies to reexports to China. 3

Validated End-User Program


The VEU program is designed to provide Chinese companies easier access to certain specific controlled technology. The VEU program establishes a mechanism by which Chinese companies that have been reviewed and “validated” by the U.S. Government will be authorized to receive only certain specific U.S.-controlled items as indicated in the VEU application, without having to obtain an individual export license. To be classified as a validated Chinese company, an entity must meet a number of criteria to be reviewed by the U.S. government, including, among others, (i) a demonstrated record of engaging in the use of U.S. controlled items for civil end-use activities, (ii) a demonstrated history of compliance with U.S. export controls (iii) and the willingness to agree to on-site reviews by representatives of the U.S. Government to ensure compliance with the conditions imposed by the VEU authorization. Any end-user in China, as well as subsidiaries of U.S. or foreign companies in the PRC, may apply to receive products from the U.S. under the VEU program.


Certain restrictions apply to the use of the VEU authorization program. For example, items controlled under the EAR for missile technology and crime control are not eligible to be exported or reexported under the VEU program. Additionally, items under the VEU program must be applied to civil end-uses and must be installed in, or consumed/transformed during use at, the validated end-user’s facility.


The qualification of an entity to be designated as a validated end-user will be determined by an End-User Committee composed of representatives of the Departments of State, Defense, Energy and Commerce, and other agencies. This committee will be responsible for adding, removing and amending the list of VEUs published by BIS. At this time it is not clear whether the VEU mechanism will be a viable efficient means for exporters to engage in export trade with Chinese parties.


End-User Statements From the PRC Ministry of Commerce


The final regulations also revise the circumstances under which an exporter must obtain an End-User Statement from the PRC Ministry of Commerce. The End-User Statement regime facilitates the BIS’ ability to conduct end-use checks on exports or reexports of controlled articles and technologies to China. Prior to the final regulations, BIS imposed the End-User Statement requirement to certain specific controlled items with a dollar threshold value of $5,000. These items generally required a license from BIS to be exported to the PRC. The final regulations, however, impose a higher dollar threshold value of $50,000 to all exports of items to China that require a license under the EAR (including all items within the new Part 744.21).


1 72 Fed. Reg. 33,646 (2007) (to be codified at 15 C.F.R. Parts 742, 743, 744, 748, 750 and 758).

2 The items identified by BIS under these regulations as having the potential to enhance the military capabilities of China were not previously regarded by BIS as such. Accordingly, they did not require an export license to China.

3 Note that the military end-use restriction is applicable to all foreign reexporters, whether they are related or unrelated to U.S. entities.

 

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