New Restrictions on Exports of Aircraft and Other Products to China Under New “Military Catch-All” Regulations

In late June, the U.S. Department of Commerce Bureau of Industry and Security (BIS) implemented a new regulation that expands the types of commercial products requiring a license for export to the People’s Republic of China (PRC), but only when the exporter knows or has reason to know the product will be used for a “military end-use” in the PRC. In particular, this regulation applies to civil aircraft, aero gas turbine engines, and certain aeronautical communication and navigation systems.

Companies whose products are directly affected need to immediately take steps to comply with these new requirements. Other companies should also review their export procedures to the PRC, as these regulations are merely one aspect of increased scrutiny by the U.S. government of technology exports to the PRC.

Under What Circumstances Do the New Restrictions Apply?

Licensing restrictions apply if: (1) a product, software or technology is identified in the expanded list of controlled items; and (2) the U.S. exporter knows or has reason to know that the item is going to a military end-use.

Which Products, Software and Technology Are Included on the New List of Controlled Items?

Listed Items

The list of products, software and technology are all items already identified on the Commerce Control List (CCL) of controlled dual-use goods. However, the new restrictions apply to items that, prior to issuance of this regulation, could generally be exported without a license to any country and entity person – except embargoed countries and certain prohibited end-users/end-uses. The list identifies products from various categories – including, but not limited to, the following:

• aircraft
• aero gas turbine engines
• airborne communication and navigation systems
• carbon fiber and prepregs for use in composite structures
• hydraulic fluids
• bearings and bearing systems
• computer-controlled machine tools and non-computer-controlled machine tools used for generating optical quality surfaces
• dimensional inspection or measuring equipment
• oscilloscopes
• radio equipment that meets MILSPEC requirements or uses QAM
• phased-array antennas
• optical sensing fibers
• microprocessors with certain performance criteria (these are already controlled for military end-use to a number of countries, including China, under existing regulations)

What About Parts and Components?

In general, airframe and engine parts are not controlled under the new regulations. Whereas, parts for airborne navigation and communications systems and other avionics are controlled if the equipment itself is controlled under the new regulations.

What About Software Training and Technical Support?

If the software training or technical support relates to one of the above categories, it is also controlled.

What Constitutes “Knowledge” That a Given Item Will Have a Military End-Use?

What Is the Definition of “Military End-Use”?

A military end-use is defined as follows:

• The item will be incorporated into a piece of military equipment, software or technology (e.g., into a communications systems specifically designed for a military application).
• The item will be for the “use,” “development,” or “production” of military items, as these terms are defined by BIS (e.g., a repair or replacement part for a civil aircraft operated by the PRC military or test and manufacturing equipment that will be used to produce/test military equipment).
• For civil/demilitarized aircraft and aero gas turbine engines, military end-use also means the “deployment” of such items to a battle formation or appropriate strategic position (e.g., supplying such items where they will be assigned to PRC military units).

What Constitutes “Knowledge”?

Although the formal definition of “knowledge” is legalistic, as a practical matter you have knowledge if:

• Your company has actual knowledge of a military end-use by the PRC for your product.
• Your company “should have known” of such military end-use.
• Your product is specifically identified by BIS as being intended entirely or in part for military end-use in the PRC.
• A particular transaction or entity in the PRC is identified as being at-risk.

Expanded List of Items/Entities

In the regulations, BIS indicated that they may notify individual companies or publish lists of items subject to additional restrictions. The implications of this are unclear, but it may mean BIS will indirectly require additional due diligence or license requirements for certain items that it believes are likely to be used by the PRC military. In addition, BIS recently expanded the criteria for placing companies on the “entity list” (which bars virtually all exports to that entity).

Can My Company Still Get a License?

If the product is on the list and will be exported for a military end-use, a company can apply for a license; however, grants of such licenses are likely to be few and far between, and likely subject to a lengthy interagency review process. A presumption of denial would apply in many cases.

No License Exceptions

Generally, no license exceptions will be applicable where there is a military end-use.

End-User Statement

An “end-user statement” will be required for any export that requires a license to China if it exceeds $50,000 in total value – except for certain controlled cameras and computers, on which the limit is $5,000. This end-use certificate is issued by MOFCON, the Chinese Ministry of Commerce. Since this requirement was not coordinated with MOFCON, it is unclear whether it will be easy or difficult to obtain such certificates.

Does This Rule Apply to Transactions Outside the U.S and to Foreign Manufactured Goods?

These regulations would apply to both exports from the U.S. and re-exports of “U.S. origin products” from third-countries to the PRC, even if no U.S. entity is involved in the transaction. For the purposes of the new restrictions, an item is of U.S. origin if more than 25% of its value is of U.S. origin or if it is an aircraft or avionics containing the QRS11 micromachined angular rate sensor found in many newer commercial aircraft. For example, the sale of an Airbus 380 with Pratt & Whitney engines from the EU to the PRC military may fall under the rule (if the aircraft meets the U.S. origin test).

Validated End-User (VEU) Procedure

The one “carrot” in these regulations is a new provision that allows a Chinese company to receive advance screening as a “validated end-user.” If approved, that company could then receive items that would otherwise require a license to export to the PRC. In theory, this could apply to any item (except missile/crime-control items), provided the Chinese company intended to use the item for a bona fide civil purpose at that company’s facility, consume it during use, or transfer it subject to a BIS license.

Complying With the New Regulations

While this regulation primarily affects U.S.-based companies, virtually any company that sells U.S. products in the PRC needs to review its existing products and customers to determine whether it is affected by the new regulations and, if so, what it needs to do to comply. The hardest part of compliance will be assessing what steps need to be taken to be reasonably assured the item is not going to a military end-use. Some measures to consider are the following:

Contractual Requirements/Customer Certification

Companies should consider including end-use restrictions as a standard contractual provision and/or as part of a separate customer certification form.

Additional Due Diligence on Customers

When supplying controlled products, companies should consider conducting some level of due diligence, particularly given the wide definition of “military end-use.” For example:

• For certain controlled manufacturing or test equipment, it may be possible to ascertain whether the Chinese customer manufactures goods for the PRC military.
• While sales to companies owned by or linked to the PRC military may not be prohibited, this should be a red flag that triggers additional due diligence.

Conclusion

These new regulations represent a major change in export controls for the aerospace industry. Historically, most civil aircraft, engines and components did not need a license to virtually any country other than embargoed countries. With this change, it will be important for companies to verify classifications of avionics and other aircraft parts. In addition, underlying this new regulation is a policy goal of trying to prevent U.S. products and technology from being used to enhance the PRC military. In this light, virtually any sales to the PRC military or its wide-flung commercial enterprises are potentially suspect. It may be that BIS’ recent expansion of the criteria for placing entities on the “entity list” is a precursor to allowing BIS to designate on this list certain Chinese entities closely associated with the PRC military.