On July 6, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) published a proposed rule, commonly referred to as the “China Catch-All,” that, if promulgated in its current format, would impose new restrictions on certain exports, reexports and transfers to China. The proposed rule is intended to prevent exports that would make a material contribution to Chinese military capabilities. The new rule would impose new licensing requirements on many items that are controlled for anti-terrorism reasons to military end-uses in China. It would also impose a number of due diligence requirements and increase compliance burdens for many exporters. Interested parties may comment on the proposed rule until November 3, 2006.

Click here for the proposed rule as it appears in the Federal Register.

The most notable provisions of the proposed rule are as follows:

• A new licensing requirement for commodities, software, and technology controlled on the Commerce Control List (CCL) under 47 specific Export Control Classification Numbers (ECCNs) that at present do not require a license for export to China and are controlled for anti-terrorism (AT) reasons. The license requirements would apply to a broad-range of electronics, computers and telecommunications equipment such as software designed for certain general purpose electronic equipment, software designed for real-time processing equipment, certain high performance computers, many types of telecommunications test equipment, certain information security software products, GPS and navigation equipment, and commercial aircraft and parts.
• A license would be required if the person, at the time of export, reexport or transfer, has "knowledge" or is informed that the items is destined for a "military end-use" in China. A license would also be require for persons who are not the exporter, reexporter or transferor to "knowingly support" - e.g. finance, transport or freight forward -- a transaction that would require a license under this provision.
• "Military end-use" is defined as "incorporation into, or use for the production, design, development, maintenance, operation, installation, or deployment, repair, overhaul, or refurbishing of items: (1) Described on the US Munitions List . . .; (2) Described on the International Munitions List . . .; or (3) Listed under ECCNs ending in "A018" on the Commerce Control List . . ."
• The following is a list of the 47 specific ECCNS that will require a license for export to military end-uses in China. If your product is on this list, you should check the BIS proposed rule for further details, as in some cases, BIS has only controlled SOME of the items under a given ECCN and not the entire ECCN:
• Cat 1:   1A290, 1B999, 1C990, 1C995, 1C996, 1D999, 1D993, 1E994
  Cat 2:   2A991, 2B991, 2B992, 2B993, 2B996
  Cat 3:   3A292, 3A999, 3B991, 3B992, 3D991, 3E292, 3E991
  Cat 4:   4A994, 4D993, 4D994, 4E992
  Cat 5:   5A991, 5B991, 5C991, 5D991, 5E991
  Cat 5:   5A992, 5D992, 5E992
  Cat 6:   6A995, 6C992
  Cat 7:   7A994, 7B994, 7D994, 7E994
  Cat 8:   8A992, 8D992, 8E992
  Cat 9:   9A991, 9B990, 9D990, 9D991, 9E990, 9E991
• Revision of the licensing review policy for items controlled for reasons of national security, chemical and biological proliferation, nuclear nonproliferation and missile technology. These items already required a license for export to China but the license standard would be changed to a presumption of denial for items that would "make a material contribution to the military capabilities" of the PRC;
• An expanded requirement to obtain an End-Use Certificate from China’s Ministry of Commerce for exports of all items that (i) require a license for any reason, and (ii) exceed a total value of $5,000 per individual ECCN. Currently, an end-use certificate from the Ministry is required only where the exported item is controlled for National Security reasons; and
• A new authorization for exports of eligible items to certain validated end-users (VEUs) in eligible destinations, including China. Individuals or entities could be certified as VEUs by submitting to BIS an advisory opinion request that includes a list of the items to be exported to the end-user and a description of how each item will be used. Exporters and reexporters who use authorization VEU would be required to submit annual reports to BIS. Moreover, exporters, reexporters and end-users who use VEU would be audited by BIS "on a routine basis."

A number of exporters have expressed concerns about the proposed rules. In particular, some have complained that the proposed compliance requirements would impose new burdens on exporters and would require extensive due diligence on routine low-tech, low-risk transactions, which would hinder the ability of U.S. companies to compete successfully in China. Also, there are concerns about the length of time it could take to obtain End-Use Certificates from China’s Ministry of Commerce. Some of these concerns were voiced at the BIS hearing on the Proposed Rule held on July 17, 2006.

For more information, contact Kay Georgi.