5 New VEUs in China = A Reason to Review the New China Rules One Last Time
October 2007
It has been a few months since the US slapped new export/reexport controls on China to attempt to slow the growth of the Chinese defense industry, and thus hamper the growth of Chinese military capability. On October 17, 2007, BIS announced the names of the five new Validated End Users (VEUs) in China. (OK, I admit my prediction that the VEUs would be a long time coming was wrong.)
So, it after hearing a wide range of people talk about the new China military end use license requirement and the VEU program, maybe now is time for me to issue the last word analysis of the new China rules.
For the most part, what does exist today, and what companies must comply with today, is a new approach to restricting certain export/reexport to China that are imposed by the new set of export/reexport restrictions on China.
Let’s look at the details of the new requirements.
The new rule requires an export/reexport license for exports/reexports of certain formerly no license required (NLR) items to “military end use” in China. The new provisions in the Export Administration Regulations (EAR) are intended to have a direct impact on manufacturers of military items in the PRC; and, by impacting the manufacture of military equipment in the PRC, the new rule will impact the Chinese military. The new rule does not impact as many items as the Commerce Department original proposal. For example, the original proposed rule applied to exports/reexports of commercial aircraft parts classified as ECCN 9A991 to “military end use” in China, while the new rule does not restrict exports/reexports of commercial aircraft parts. The new rule, however, does require an export/reexport license for commercial aircraft, commercial aircraft engines, and 9E991 technical data related to commercial aircraft, engines and parts.
OK, let’s get more specific and look at the details of the new restrictions.
Main Impact - License Requirement for Certain Transfers to “Military End Uses”:
The EAR now requires an export/reexport license for items listed in the new Supplement 2 to Part 744 when the items are intended for a “military end use” in the PRC. So, it is a two part control-for the control to apply the items must be listed in the new Supp. 2 and they must be destined to a “military end use.” If either of those facts is not present, the new rule does not apply.
So, review the new Supp. 2 to see if it includes any items you export/reexport. If it doesn’t, the new rule doesn’t impact your exports/reexports. If you do have stuff in the new Supp 2, then take the next step.
The key issue is that “military end use” activities are what cause there to be an export/reexport license requirement for Supp 2 items. If you “know” (think of it as you know or suspect) your Supp 2 item is destined for a “military end use” you now need an export/reexport license. “Military end use” means:
- Incorporation into a military item;
- For the “use”, “development”, or “production” of military items;
- Deployment of 9A991 items
Notes:
1) Military items as used above means military items controlled in the US Munitions List, military items controlled by the Wassenaar International Munitions List; and military items classified in xx018 ECCNs (e.g., 9A018) in the Commerce Control List. Generally speaking, the USML plus the xx018 ECCNs has usually been the equivalent of the Wassenaar International Munitions List.)
2) As defined in Part 772 of the EAR, “use” means operation, installation (including on-site installation), maintenance (checking), repair, overhaul and refurbishing; “development” is related to all stages prior to serial production, such as: design, design research, design analyses, design concepts, assembly and testing of prototypes, pilot production schemes, design data, process of transforming design data into a product, configuration design, integration design, layouts; and “production” means all production stages, such as: product engineering, manufacture, integration, assembly (mounting), inspection, testing, quality assurance.
For purposes of this section, operation means to cause to function as intended; installation means to make ready for use, and includes connecting, integrating, incorporating, loading software, and testing; maintenance means performing work to bring an item to its original or designed capacity and efficiency for its intended purpose, and includes testing, measuring, adjusting, inspecting, replacing parts, restoring, calibrating, overhauling; and deployment means placing in battle formation or appropriate strategic position.”
The rule is not an across the board ban on exports/reexports to military end users. If the Chinese military is flying an unmodified Cessna, you can send 9E991 technical data to it without an export/reexport license because the use of an unmodified commercial aircraft by the military is not a “military end use” under the new China requirements. And, be careful because things can get tricky-for example, the new rule does not prohibit you from shipping 9A991 parts to “military end use” but it does prohibit the export/reexport of 9E991 data to “military end use.”
You need to realize that you should not base your new compliance procedures on simply determining who your customer or end user is-the new rule is not a prohibition against exports/reexports to military end users, it is a prohibition against exports/reexports to “military end uses.” In many cases the new rule will apply when you export/reexport to a manufacturer or somebody doing service, for example, if they are making or servicing a military item. So, you need to know what your customer will do with your stuff to know whether there is a “military end use.”
Secondary Impact - Reduction of License Requirements for VEUs
The EAR authorizes the Commerce Department to grant a special Validated End User (VEU) status to certain entities in China and not require export/reexport licenses for those entities. The items that will not require an export/reexport license may vary from one approved VEU to another and will be whatever items the US Government decides should be license free to a specific entity. If a Chinese entity agrees to be audited by the US Government whenever the US Government requests to do so, and the US Government decides it can trust the Chinese entity, the entity might get the VEU status. So far, all of the VEUs are actually Chinese entities that are owned/controlled/affiliated by/with companies from other countries.
In the October 19, 2007 Federal Register the Commerce Department granted VEU status to these five entities in China:
- Applied Materials China, Ltd.
- BHA Aerocomposite Parts Co., Ltd.
- National Semiconductor Corporation
- Semiconductor Manufacturing International Corporation
- Shanghai Hua Hong NEC Electronics Company, Ltd.
These VEUs are listed in the new Supplement No. 7 to Part 748 of the EAR. Supplement 7 identifies the eligible locations for each of the VEUs and specifies which ECCNs are eligible for shipment to each of the VEUs. In other words, you may use the VEU authorization only to export/reexport specifically listed ECCNs to specifically listed locations for each VEU.
Tertiary Impact - New Written License Approval Policies for China
The new rule also adds a lot of information related to US export license approval policy for exports/reexports that may directly or indirectly involve military-type activities in China. The bottom line is if the US Government wants to deny your license for whatever reason, the licensing policy gives it plenty of explicit policies upon which it may base its denial. In the past the US Government normally was able to find a legal basis for denying any license it wanted to deny for China, so I wouldn’t have even brought up this aspect of the new rule if it weren’t for the fact that it gives me a chance to use the word “tertiary.”
Practical Export/Reexport Compliance Action Items:
So, what should you do to comply with all of this? Well, here is a sample “To Do” list to get you started.
1) Look at the new Supplement 2 to Part 744 to see if it lists any formerly No License Required ECCNs that you export/reexport (e.g., items your produce, possess and might export/reexport, source from third parties for export/reexport). If you do not have or export/reexport anything on the new Supp 2, this rule creates absolutely no problems for you. But, be careful — for example, 9E991 tech data is on the Supp 2, even though 9A991 parts are not.
2) To the extent you export/reexport some of the ECCNs on the new Supp. 2, immediately take a close look at all pending exports/reexports of those items to China. If you are not certain that the listed items are not going to a “military end use,” you might want to request end use information from the customer in China. Take immediate (at least stop-gap) measures to screen exports/reexports for the new restrictions.
3) In the long run, when you export/reexport items on the new Supp 2, you should be on the lookout for information that makes you know or suspect they will be used in a “military end use.” Be on the lookout for the obvious information and any Red Flags that might indicate that there is a risk of use in a “military end use.” First, decide how you are going to analyze all of the information your company (including each individual employee) possesses regarding the use of the items being exported/reexported. Then, decide whether you are going to go further and request specific, written end-use information from Chinese parties who will be receiving Supp 2 items.
4) Figure out how to revise your export/reexport compliance checks to address the new rules — for example, if you use an Export/Reexport Compliance Checklist to process export/reexport orders, you might need to add a “PRC Military End-Use Screening” line item to your checklist. The new line item should identify whether the item is listed in Supp. 2 and whether it is destined for a “military end use.”
5) Training: You have to spread the word throughout your company to let people know how the new restrictions impact the things you export/reexport. If your fellow employees read about this in the newspaper, they likely have no realistic idea what the new rule is about and may think it is all about relaxing export/reexport controls for kosher entities in China.
