Chip Fixation Creates CJ Chaos

Did you ever think that a $400 postage stamp sized chip would cause upwards of a thousand commercial jets to become subject to State Department defense trade licensing requirements?  Well, a closely watched case is doing precisely that, and in the process is sowing utter confusion among the hapless export compliance administrators already struggling to understand the commodity jurisdiction decision making process between the dual use Export Administration Regulations (EAR) and the defense use International Traffic in Arms Regulations (ITAR).

On the one side are the Pentagon and Capitol Hill, under the encouragement of former Office of Defense Trade Controls Director William Lowell, who have managed to use this little defense article chip to wreak licensing havoc among commercial aircraft manufacturers, such as Boeing, Airbus, Cessna and Bombardier, along with a number of US and overseas subcomponent manufacturers who use the chip.  On the other side are a battery of Washington lawyers, lobbyist and, yes, BSA consultants, who work with industry and bask in the golden fees generated by the ensuing regulatory fog.

Somewhere in the middle are confused export compliance folks trying to make sense of the already confounding commodity jurisdiction process.  Also caught a little flat footed is the State Department, who must busy themselves with licensing the movement of thousands of little chips as they constantly export, temporarily import and retransfer themselves in their conveniently mobile $30 million commercial aircraft vessels, including to proscribed and terrorist countries - and all requiring written authorization under the ITAR.

How the heck did we get here?  It all began over ten years ago at BEI Technologies, a chip manufacturer in California, who produced chips which were used for aerospace attitude indication applications.   According to knowledgeable industry sources, the company would sort the high end chips from the lower end chips in the production run, selling only the higher end chips for missile use and marketing the lower end chips for use in commercial back-up avionics.

Under traditional views of commodity jurisdiction determination, if a product is actually used in a commercial end use, the product becomes “dual-use” and subject to the EAR.  If there’s any doubt, the company would apply for a commodity jurisdiction (CJ) ruling.   A key jurisdiction test in ITAR 120.3 states that a defense article is one that “does not have a performance equivalent (defined by form, fit and function) to those of an article… used for a civil application.” A logical reading of the requirement would lead one to believe that if the reverse was true - that if the chip was used (and, in this case, FAA certified) in a civil application — it no longer met the explicit ITAR requirements for designation as a defense article as it now did have a performance equivalent for a civil application.

But a logical reading of the ITAR will never deter some who don’t like the result of a reasonable regulatory interpretation.  They would rather point the finger and accuse a violation, rather than fix the ITAR language into something that creates a more satisfying result.  And so it happened in the case of BEI Technologies. After the chip became incorporated, FAA certified, and widely used on a number of commercial jets, including Boeing and Airbus passenger aircraft, someone in the chip supply chain decided to put in a CJ ruling request for the chip.

By this time, the chip was predominately used in commercial applications, which meets another explicit 120.3 ITAR test that normally warrants EAR jurisdiction.   One could argue that the high performance chip for missiles was not the same as the lower end chip used commercial applications, with one being ITAR and the other EAR. But again, certain Washington ego’s appeared to have a bigger semiconductor to forge, and a decision was made to keep the chip with all its dual use applications ITAR, regardless of the consequences.

And the consequences are huge.  Under the ITAR see through rules, once a part is designated as a defense article then it remains controlled no matter what the higher assembly it ends up in.  So as a result of the chip CJ ruling, a thousand commercial aircraft flying with the chip were now subject to ITAR licensing requirements whenever they crossed a border.

Four licensing officers are now dedicated to commercial aircraft licensing at DDTC as a result of this chip.  But the full force of licensing has yet to hit State.  Should all commercial airlines and operators flying with the chip on board be registered with DDTC as exporters of defense articles as required by the ITAR?   Should every flight on the JFK-Heathrow route be licensed, never mind all international routes, as is required by the ITAR?  Should all the commercial aircraft and parts brokers start registering and obtaining approval for the commercial aircraft sales activities around the world, as is required by ITAR Part 129?  Should political contributions, fees and commissions for the sale of commercial aircraft containing the chip be reported to State, as required by ITAR Part 130?  Imagine all the potential voluntary disclosures!  The licensing and regulatory permutations are endless.

The State Department thus far has conveniently overlooked most of these permutations by attempting to control the first sale of new commercial jets with the chip, not each daily cross border flight, and try to get foreign airline customers to agree not to fly the jets to terrorism supporting countries.  Special and difficult licensing waivers must be obtained for the proscribed countries like China.   A larger trade war also looms: Airbus is already accusing State of giving Boeing unfair licensing advantages by granting licensing waivers for recent China proscribed country deliveries of 737’s that contain the chip, while not affording Airbus similar treatment.  In short, the chip debacle threatens to swamp the State Department in a resource burn better utilized for more meaningful protections of national security.

Some export administrators are wondering what to do with the traditional views of aircraft commodity jurisdiction of parts.  There are many thousands of aircraft parts with commonality between defense and commercial aircraft. The Pentagon has in fact pushed this parts crossover for years in an attempt to hold procurement costs down.   But should a bracket or a gasket used on an F-16 now be licensed or CJ’d for all 777 uses?   Unfortunately, at a recent Defense Trade Advisory Group meeting, Deputy Assistant Secretary of State Lincoln Bloomfield seemed to insinuate that DDTC intends to broaden its inquiry beyond the chip into other parts traditionally viewed as EAR controlled.

What should an aerospace or defense company do in the face of all this madness?  Well, State and the Pentagon seem to indirectly be saying that use the traditional CJ analysis for all the low end parts: brackets, o rings and the like. The traditional analysis is certainly supported by the actual language in the ITAR.  But at a certain undefined point of sensitivity, only known to a handful of people at the Pentagon and State, companies must instead let the government decide ITAR jurisdiction at their complete discretion.  The problem: no one has an idea where the sensitivity point lies, and it is not embodied in any regulation.

As a result, the chip case therefore threatens to create a thousand ad hoc and subjective methods of looking at sensitivity in the commodity jurisdiction process.  The likely result is that industry and the bureaucracy will burn up tremendous energy attempting to sort out jurisdiction and licensing on thousands of inconsequential items at the cost of less oversight of the truly significant.   Unfortunately, the Washington players have become so hopelessly entrenched in their competing positions that, at this time at least, the battle over the chip will be paid at a steep price of an unclear and unworkable commodity jurisdiction process.