Export Control Overhaul Begins; Manufacturers Rejoice, Cautiously

The White House took a significant step this month toward overhauling the nation's outdated and complex export control system and streamlining how companies do business with new and emerging markets overseas.

As always, with these changes come new compliance challenges.

President Obama signed an executive order March 8 updating delegated authorities so they are in line with impending revisions to the U.S. Munitions List and the Commerce Control List—authorities that were last updated in 1977 under President Gerald Ford. The executive order comes just one day after the Obama Administration formerly notified Congress of the upcoming changes.

The executive order paves the way for long-awaited revisions to export control that industry groups have been pushing for since the administration launched a review of the export control system in 2009. “It's really exciting to see the export control reform initiative move into this new phase,” says Lauren Airey, a spokesman on trade policy for the National Association of Manufacturers.

According to the White House, the aim of the new initiative is to enhance national security by letting the government better focus its export licensing and enforcement resources on items and geographic areas of greatest concern, while also providing U.S. companies with a streamlined export authorization process for thousands of parts, components, and products.

“The practical effect will be that we in industry, along with the government, will be able to focus our resources on controlling the most important national security technologies,” says Kathryn Greaney, vice president of global trade controls at Boeing Co. “We talk about it as building higher fences around a smaller yard.”  

U.S. companies stand to see significant benefits. For years the export control regime has exasperated businesses because of complexities and inefficiencies within the system itself. The problem: All items on the Munitions List—the State Department's official list of all goods that might have military applications overseas—must be enforced equally, which effectively means companies must obtain an individual license each and every time they want to export an item on the list, no matter how trivial. For example, a part as small as a lug nut that holds the wheel on a fighter jet is subject to the same stringent controls as the fighter jet itself.

The new export control system as proposed would move trivial items off the Munitions List and onto the less stringent Commerce Control List, overseen by the Commerce Department. That list deals primarily with products and technology that have either commercial use or dual use (that is, the product has both civil and military applications).

“Rebuilding our export control lists and moving less sensitive items from the State to the Commerce list will provide us the flexibility to more efficiently equip and maintain our partner's capabilities while allowing us to focus on preventing potential adversaries from acquiring military items that they could use against us,” the White House stated.

Real World Applications

In practice, the new rules mean that items previously licensed through the Munitions List can now be marketed and sold as commercial items, allowing U.S. companies greater flexibility to compete in the global marketplace.

DRS Technologies is one such company that welcomes the changes. As a supplier of defense electronic systems to the government and commercial markets, the company makes products such as infrared detection technology: crucial to soldiers'  night-vision goggles, yes, but also great for items as security cameras and collision-avoidance cameras for the auto industry.

“It's really exciting to see the export control reform initiative move into this new phase.”

—Lauren Airey,

Leader of Trade Facilitation Policy,

National Association of Manufacturers

“We have companies that won't do business with us because they're concerned the products are defense regulated, and they don't want to be caught up in that trap,” says Greg Hill, senior director of export/import operations and regulatory affairs for DRS Technologies. With these new reforms, he says, those concerns go away.

The first phase of the reform initiative applies to Category 8 (military aircraft) and Category 19 (gas turbine engines), which are only two out of the 21 total categories on the Munitions List. Still, the scope of companies that fall under those groups is broad, encompassing any company that makes any kind of aviation, aircraft, or aerospace parts and components.

Items to be removed from the Munitions List include lug nuts, bolts, rudders, tires, life rafts, mirrors, and many more items. Highly sensitive defense products—such as fully assembled engines, mission computers, and radar equipment—would continue to require State Department sign-off.

The Aerospace Industries Association, which has been a long-time advocate of export control reform, hailed the changes. “The inflexible application of export control restrictions coupled with their lack of clarity has long been a burden to the U.S. defense industrial base, a barrier to cooperation with our military allies and partners, and a boon to our foreign competitors,” AIA President Marion Blakey said in a statement.

The executive order further gives the State Department authority to issue licenses for accompanying items that have been removed from the Munitions List to prevent any potential double-licensing requirement. In that way, a company that gets permission to sell a military product—such as a fighter jet—won't have to get separate permission from the Commerce Department for the non-sensitive items that make up the product.

“From an operations perspective, we're excited about it because of the reduced burdens,” Hill says. The changes will allow DRS Technologies and others in the industry to service customers and respond to requests from supply chains much more quickly and efficiently, he says. 

Items licensed or otherwise approved by the Secretary of State under this delegation remain subject to the jurisdiction of the Commerce Department, including for enforcement purposes.

The executive order also consolidates with the Secretary of State all responsibilities for maintaining registration and licensing requirements for brokering of defense articles and services. “This one-stop approach provides better clarity for the defense trade community and makes it easier for industry to comply,” the White House stated.

EXECUTIVE ORDER REVISIONS

The new executive order makes the following changes:

Consolidation of All Brokering Responsibilities With the Department of State: The Arms Export Control Act requires the registration and licensing of brokering activities for defense articles and services for both exports and imports. A broker is a person who acts as an agent for others in negotiating or arranging contracts, purchases, sales or transfers of defense articles or services. The Executive Order consolidates and delegates to the Secretary of State all statutory responsibility for maintaining registration and licensing requirements for brokering of defense articles and services on either the State or ATF [Alcohol, Tobacco, Firearms, and Explosives] lists which both control defense articles and services under the Arms Export Control Act.

Elimination of Possible “Double Licensing” Requirements: The Department of State licenses entire systems, including any accompanying spare parts, accessories, and attachments, yet many of these items will be moved to the Commerce list which may mean that an exporter would need two licenses instead of one. The President's delegation, via an amendment to Executive Order 13222, will allow the Department of State to authorize those accompanying items that may have moved to the Commerce list and prevent any potential double-licensing requirement.

Congressional Notification Process: The President has directed that the Department of Commerce establish procedures for notifying Congress of approved export licenses for a certain subset of items that are moved or that may move from the State list to the Commerce list. A key feature of the President's reform initiative is to enhance transparency with Congress and the public in the administration of our export control system.

Other Administrative Updates: The Executive Order delegates to the Attorney General the functions previously assigned by Executive Order 11958 to the Secretary of the Treasury, reflecting the 2003 move of ATF to the Department of Justice from the Treasury (accommodated by Executive Order 13284). It also makes a number of other necessary updates to ensure that the authorities to administer our export control system are current.

Source: White House.

Challenges Ahead

All that being said, export control reform will create new compliance challenges. Items exported under the authority of the Commerce Department will continue to be subject to compliance requirements similar to the International Traffic in Arms Regulations (ITAR), including appropriate product classifications, end-user verification, recordkeeping, and reporting requirements. 

“Many companies may find themselves operating under both the ITAR and Export Administration Regulations and having to develop compliance programs that meet the requirements of both,” Greaney says. Boeing has long operated under a number of licensing and compliance regimes—such as ITAR, EAR, and the Treasury Department's Office of Foreign Assets Control—“so working under multiple jurisdictions is something we are used to,” she says.

Changes to Category 8 and Category 19 on the Munitions List will take effect 180 days after being published in the Federal Register. All other reforms to the U.S. Munitions List that are currently in the works concerning non-aircraft items will be published on a rolling basis throughout 2013.

With the wheels in motion toward export reform, now comes the tedious work of publishing proposed rules for each category, wading through public comments, and making final changes. “Until we actually see those regulations, we're not quite sure what the impact is going to be,” Hill says.

“Education will be the key to ensuring compliance with the new regulatory landscape,” Greaney says. “We have been preparing for the reforms for some time. We are gearing up our effort as the rules move toward publication to ensure that we are well positioned to take advantage of the benefits of ECR as final rules are published and become effective.”

The next year will see not only a significant transition period, but lots of training and communication to help companies respond to changes to the system, Airey adds. “We're really excited to see what comes down the pike in the next six months,” she says.

In the meantime, industry groups—such as NAM and the AIA—say they will continue to work with the administration to push reforms forward and help member companies take advantage of whatever new opportunities are around the corner.