On July 17, 2006, I attended BIS’s hearing on the proposed regulation revising export and reexport of certain goods for military end-uses in China (the “China catch-all” proposed rule). The hearing lasted about an hour, and was attended by about 50 people. During the hearing, BIS officials fielded a number of questions from attendees, most of whom expressed concerns about the heavier compliance burdens the proposed rule imposes, as well as confusion over how to comply. I am providing a synopsis of the main concerns and questions posed at the hearing below.

1. What is the expected due diligence to comply with the new regulations?
A number of people asked BIS officials what kind of steps they would be expected to take to meet the due diligence requirements to ensure that goods are not shipped for military end-uses without proper licensing. BIS officials indicated that the due diligence expected to meet the new regulations is the same as is expected now. Exporters and reexporters should obtain a destination control statement, know their customers and be mindful of red flags. When in doubt, exporters and reexporters can seek guidance from BIS.

2. Would the proposed rule affect current licenses?
An employee from a company that manufacturers notebooks and desktops which has employees in the United States and China asked whether the proposed regulations would affect the company's current licenses. BIS officials responded that each license “stands on its own” and remains valid for the period specified in the license. Furthermore, he clarified that the additional controls specified in the proposed rule apply to 47 categories that did not require any type of license before, so he did not anticipate that any current license would be affected.

3. Will BIS provide guidance on how to determine whether an item is destined for a military use?
Larry Christiansen of Vastera asked whether BIS would offer guidance on how to determine whether an item is determined for a military end-use as opposed to a civil end-use. He observed that it could be difficult for U.S. salespeople to get accurate information from Chinese officials regarding the intended use of an item. In such cases, would BIS expect exporters to make decisions based on what the product was developed and designed for? BIS officials responded that they would consider this issue and develop guidelines if necessary. They also responded that they did not expect exporters and reexporters to query the Chinese Government on intended end-use. However, exporters and reexporters are expected to do some research into the customer to determine if there is a military end-use.

4. Can all exporters and reexporters rely on a BIS determination that a customer is a validated end-user (“VEU”)?
BIS explained that, once a customer is designated as a VEU, all exporters and reexporters can rely on a BIS determination that an end-user is a civil end-user. In such cases, the exporter or reexporter would not need to do his own research on the customer, regardless of the number of transactions with the customer. However, if the exporter or reexporter becomes aware of facts that indicate that the VEU might intend to use an item for a military end-use, the exporter or reexporter must research the matter. Also, exporters and reexporters must maintain records regarding their shipments to VEUs as required by the proposed rule.

5. The proposed rule seems over inclusive. Is BIS going to reconsider some of the ECCNs listed in the proposed rule?
Some attendees complained that the proposed rule imposed license requirements that seemed overly broad or inconsistent. A common complaint was that some of the ECCNs cover items and technology that China already has. For example, items covered by ECCN 1C990 (certain fibrous and filamentary materials for use in “composite” structures) are, according to one attendee, “basic” and “commonplace,” and Chinese industry has had the technology to manufacture them for over a decade. BIS responded that they did not consider foreign availability of items covered by the 47 ECCNs when drafting the proposed rule. However, BIS officials said that they would welcome comments and information as to whether China had its own production capacity for any of the ECCNs included in the proposed rule and would consider them in drafting the final rule.

Another attendee complained that the proposed rule would require licenses for all exports and reexports of technology under 5E992 for military end-uses, whereas licenses requirements for technology within category 3 and category 4 are more limited. BIS officials responded that the “breadth of coverage was intentional” in the specific case of 5E992. However, they encouraged commenters to explain their disagreements with the proposed rule.

6. Does the rule apply to military end-users using items for civil uses?
No, the proposed rule would apply only to military end-uses.

7. What items can be sent to VEUs?
VEUs will be certified for certain ECCNs. Just because a customer is designated a VEU for one item within the 47 ECCNs covered by the rule does not mean that an exporter or reexporter can assume it can ship items covered by other ECCNs to it without a license. If an exporter or reexporter would like to have a customer designated as a VEU, it should include a list of all of the items for which it would like the VEU to be certified. The list should be as broad as possible.

8. Can U.S. subsidiaries be fast-tracked to be designated VEUs?
No. BIS will treat VEU applications for U.S. subsidiaries the same as it will for other customers. There will not be a fast track for U.S. subsidiaries. However, BIS anticipates the process will naturally move faster because BIS would expect to have more information about U.S. subsidiaries.

9. How should exporters and reexporters treat items that are exported to aircraft repair facilities that service both civil and military aircraft?
One attendee asked about the due diligence requirements that would apply to a company that exports or reexports parts and components for airplanes. If the parts go into a customer’s inventory, and the facility to which they are sent services both military and civil aircraft, must the exporter or reexporter assume the part or component will be used for a military end-use? BIS officials suggested the attendee submit a comment so that BIS could consider the question during rulemaking.

10. Are deemed exports treated the same as exports and reexports under the proposed rule?
Yes.

11. Could U.S. companies with employees in China have their employees certified as VEUs?
BIS has not considered this. BIS officials will consider it during the rulemaking process.

12. What will the United States do if it appears that the Chinese Ministry of Commerce or Chinese companies are delaying providing information or are uncooperative in an effort to delay certifications to gain a competitive edge?
BIS officials believe this is unlikely because they think that China is eager to receive U.S. technology and products. Nevertheless, if it seemed that China was manipulating the certification process to gain a competitive advantage, the United States would address the issue n bilateral talks.

13. Does certification of a VEU require a pre-certification visit?
Yes. In response to concerns that there is only one person in China to do on-site visits (Jeanette Choo), BIS officials explained that BIS had conducted some visits already in expectation that some exporters or exporters are likely to request certain customers become VEUs.

14. What happens if a VEU certification is declined?
BIS will not publish its denial of certifications, nor will it automatically refuse to grant a license if it does not grant a customer VEU status. However, BIS will consider denial of VEU status as a red flag that must be researched in making licensing decisions.

For more information, contact: Kay Georgi or Laura Farhang.