Concerns about Military Technology Development in China Drive Changes to U.S. Export Controls

4 min

Last month the U.S. Department of Commerce, Bureau of Industry and Security (BIS), announced additional restrictions in the Export Administration Regulations (EAR) with respect to certain export transactions involving military end users and end uses in the People's Republic of China (PRC) and elsewhere. These changes (corrected last week) appear to reflect the Trump administration's policy objective of bringing economic pressure to bear on state actors in countries like the PRC and Venezuela. For U.S. exporters, it means increased obligations to vet customers in sensitive jurisdictions in order to stay fully compliant with export regulations.

Later this month, on June 29, 2020, BIS will impose more stringent end-use and end-user controls in Part 744 of the EAR. Among other things, BIS will expand the licensing controls in Section 744.21 to restrict not only "military end uses" in the PRC, but now also "military end users" in the country. BIS already requires exporters to apply for licenses for certain controlled items going to Russian and Venezuelan military end users, which BIS currently considers on a case-by-case basis. Notably, as part of the regulatory changes, BIS will now adopt a presumption of denial review policy for such licenses to the PRC, Russia, and Venezuela.

In addition to more expansive controls on military end users, BIS will also expand the definition of a "military end use" in § 744.21 to restrict not only designated items intended for the "development" or "production" of military items, but also those that support or contribute to the operation, installation, maintenance, repair, overhaul, or refurbishing of military items. Moving forward, any one of these uses will be sufficient grounds to make an item one for a "military end use" – and subject to denial.

As BIS notes, the change will require increased diligence with respect to end uses in the PRC, "particularly in view of China's widespread civil-military integration." The definition of a "military end user" is "the national armed services (army, navy, marine, air force, or coast guard), as well as the national guard and national police, government intelligence or reconnaissance organizations, or any person or entity whose actions or functions are intended to support 'military end uses'" (emphasis added). While this definition remains unchanged, the new restrictions on PRC "military end users" and the expanded scope of "military end uses" mean that U.S. exporters must be increasingly cautious about transactions with any customers that potentially support the military establishment in the PRC.

The rule change also expands the list of Export Control Classification Numbers (ECCNs) of designated items for which a license will be required pursuant to the Section 744.21 end-use and end-user controls. In addition to 9x515 or "600 series" items, the list of ECCNs now includes the following categories, with new or expanded ECCNs noted in bold:

Category 1: 1A290, 1C990, 1C996, 1D993, 1D999, 1E994;
Category 2: 2A290, 2A291, 2A991, 2B991, 2B992, 2B996, 2B999, 2D290;
Category 3: 3A991, 3A992, 3A999, 3B991, 3B992, 3C992, 3D991, 3E991;
Category 4: 4A994, 4D993, 4D994;
Category 5: 5A991, 5A992, 5B991, 5D991, 5D992, 5E991;
Category 6: 6A991, 6A995, 6A996, 6B990, 6C992, 6A993;
Category 7: 7A994, 7B994, 7D994, 7E994;
Category 8: 8A992, 8D992, 8E992; and
Category 9: 9A991, 9B990, 9D991, 9E991.

In addition and relatedly, BIS will also amend Section 758.1 of the EAR to require filing of Electronic Export Information (EEI) for all items on the Commerce Control List (EAR-99 items excluded) destined for China, Russia, or Venezuela, regardless of the value of the shipment, unless the shipment is eligible for an Export License Government (GOV).

As a result of this imminent rule change, U.S. exporters will have yet another issue to monitor in order to ensure full compliance with the EAR. This is consistent with other recent policy and regulatory changes due to growing concerns from the current administration about state actors like China and Venezuela. For example, in recent years the Committee on Foreign Investment in the United States (CFIUS) has received an expanded mandate to review potential foreign covered transactions, with investments from China being a particular concern. In another example, earlier this year the administration directed Chevron Corporation, currently the last major U.S. oil company still operating in Venezuela, and others to "wind down" their business in Venezuela by December 1, 2020 and leave the country. More policy changes are undoubtedly coming, especially with the end of preferential treatment for Hong Kong announced last month.

If you have any questions about whether these upcoming changes to U.S. export controls will impact your operations, please reach out to Venable's International Trade Group for guidance.