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Higher Walls Around Smaller Yards: The Implications of the Interagency Export Reform Initiative

Mitchell Silberberg & Knupp International Trade Alert

April 2011

by Susan Kohn Ross

The above-entitled program took place at the American Bar Association's International Law Section Spring Meeting in Washington, D.C., on April 8, 2011, and was notable for those who have followed export reform efforts in that the panel featured both Kevin Wolf, Assistant Secretary of Commerce for Export Administration, and Robert Kovac, Managing Director, Bureau of Political-Military Affairs, Department of State. Moreover, these two speakers made clear that, unlike past attempts at export reform, the agencies are now working together and in the open to achieve the long-term goal of protecting national security in a way that simplifies the process. But, for example, can terms and definitions such as "U.S. person" or "foreign national" finally be reconciled?

To appreciate the challenge, anyone who has not read Defense Secretary Gates' April 20, 2010, speech should do so. In it, Secretary Gates discusses how the various agencies are attempting to establish "a vigorous, comprehensive export control system." The fundamental reforms he outlines - a single sanctions regime, a single licensing agency, a single enforcement agency, and a single information technology (IT) system - exist only in a perfect world. Admittedly, we do not live in a perfect world, and for these "4 singles" to occur requires Congressional action. Nonetheless, there is much the agencies can accomplish and are accomplishing on their own.

One example of this reform activity is the December 10, 2010, Federal Register proposal to revise the International Traffic in Arms Regulations (ITAR). This often-discussed notice seeks to revise the ITAR to reflect Tiers 1, 2, and 3 for selected goods. Tier 1 generally consists of items that are critical military or intelligence products, where the U.S. has a clear benefit and the items are usually only available in the U.S. Tier 2 is designed to consist of items where the U.S. has a substantial military or intelligence advantage, but the product may be available outside the U.S. Tier 3 would then include items that are generally available.

The Department of Defense is leading the review of how individual products would be characterized, a process that seeks to evolve from a reliance on such arcane concepts as "specifically designed, manufactured or used for military items," a sort of catch-all, to a positive list wherein the product more clearly is or is not included based on objective, transparent criteria. For more details, click here.

Another example of the simplification process comes from the Department of Commerce's December 9, 2010, Federal Register notice about license exception - Strategic Trade Authorization (STA). This proposal focuses on Tier 2 products and puts certain conditions on their export, re-export, or in-country transfers, and is narrowly crafted in terms of the permitted products and destinations. The destinations in question consist of some of the closest U.S. allies and so involve what are thought to be our lowest-risk trading partners. There are three different authorizations: 

 

  1. When any or all of seven (7) reasons for control are met -- national security; chemical or biological weapons; nuclear nonproliferation; regional stability; encryption items; crime control (excluding ECCNs 0A981, 0A982, 0A983, 0A985, or 0E982 items of torture); or significant items -- goods may go on to one of 37 destinations;
     
  2. Less-sensitive items subject only to national security controls are permitted to two (2) additional destinations; and
     
  3. Still less-sensitive items subject only to national security controls may go to an additional 125 destinations, but for civil end-uses only. The 50 relevant ECCNs will include provisions that specifically exclude products not meeting the last two categories.
     

The comment periods for the ITAR and STA notices described above have closed. The interagency process of evaluating those comments is being finalized, and updates to both sets of proposed revisions are expected to be published shortly.

Bob Kovac discussed a noteworthy in fact that State approves approximately 90% of the licenses it receives, which last year totaled approximately 83,000 license applications. Of the roughly 1,000 Commodity Jurisdictions (CJs) filed in 2010, about 75% of them ended up as products under Commerce's jurisdiction. Given these numbers, what changes should be made in the ITAR to reduce the number of licenses and CJs, and do so in a way in which national security remains protected? This likely portends the long-awaited reform of the brokering rules, as well as clarification of the "see-through rule" (the situation where State has jurisdiction over a civil aircraft because one part was originally designed for military application).

Another point to keep in mind concerns the concept of a common IT system, one of the original "4 singles" addressed by Secretary Gates. Right now, the SNAP-R (Commerce) and DTrade (State) systems cannot talk to each other and neither agency is permitted to share its data with the other. Further, both systems contain unclassified data. As a result, Commerce and State are doing data dumps to Defense, which must then meld the unclassified data from the two agencies with the classified data in the intelligence database to get a proper license determination.

A few other noteworthy reforms are in the pipeline. The U.S. is a signatory to mutual defense pacts with Australia and the U.K., but regulatory reform is needed to fully implement them, and it seems likely those regulations will not be issued until the fall. Reforms related to third-country nationals are more likely to commence sooner. In light of the challenges posed by current regulations regarding human-rights and privacy concerns, the hope is to see definitive lists guiding product classifications, including limitations on the use of the data submitted for law enforcement, compliance, and other exclusive purposes.

Similarly, the uncertainty in academia should improve in view of the April 13, 2011 Federal Register notice which focuses the definition of "defense services" so that those based "solely upon the use of public domain data [e.g. textbooks and magazine subscriptions] would not constitute defense services ... and, therefore, would not require a license, technical assistance agreement, or manufacturing license agreement to provide to a foreign person." Click here for more details.

With the next Presidential election just 18 months away, it is not at all clear the necessary legislative changes are possible, much less on the radar of the appropriate Congressional committees. However, what is clear is that Defense, Commerce, and State are making some smart decisions about how best to reform the current system while still protecting national security. What more do you think should be done?  


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