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Expanded Export Control Obligations when Exporting to China

posted by Jennifer Diaz August 24, 2020 0 comments

Co-Authored by Sharath Patil, a trade policy researcher in Washington, DC, with a background in global logistics, international trade, and commercial diplomacy. Patil is an active member of the District of Columbia bar, and is a graduate of the University of Oregon School of Law.

Introduction

U.S. export controls refer to a set of federal laws which restrict the export of certain sensitive goods, technologies, information and services. Export controls are primarily enforced through two U.S. government agencies: the U.S. Department of Commerce (for Export Administration Regulations (“EAR”)) and the U.S. Department of State (for International Traffic in Arms Regulations (“ITAR”)). In recent months, U.S. export control laws have expanded exporters’ obligations when exporting critical technologies to China, as well as other sensitive export destinations such as Russia and Venezuela. In particular, U.S. laws on exporting critical goods to Hong Kong have changed; there is a greater requirement to exercise due diligence when exporting; the entity list has expanded; and filing requirements have changed. It is important for U.S. exporters to keep abreast of changes to export control laws in order to remain compliant and avoid serious penalties. We will explain each of these developments, in turn.

Termination of Hong Kong’s Special Status

Generally, the U.S. government practices a policy of denial with regards to U.S. exports of ITAR and EAR-controlled articles and technologies to China. However, historically, Hong Kong was an exception to this policy of denial. Under the Hong Kong Policy Act, the U.S. State Department is periodically required to assess Hong Kong’s autonomy from China and transmit its findings to Congress. On May 27, 2020, in response to a controversial security law in Beijing which encroached on Hong Kong’s autonomy, Secretary of State Mike Pompeo certified to Congress that Hong Kong was not autonomous from China and therefore does not continue to warrant special treatment under U.S. laws. Consequently, on June 14, 2020, President Trump signed an executive order ending the special status given to Hong Kong, and on June 29, 2020, the U.S. State Department prohibited exports of ITAR-controlled defense articles and services to Hong Kong. As a result, Hong Kong is now treated as part for China for the purposes of ITAR exports, and country of origin markings for goods made in Hong Kong must now state “Made in China”. Similarly, on June 29, 2020 the U.S. Commerce Department suspended preferential treatment for Hong Kong with regards to EAR and on July 30, 2020, the U.S. Commerce Department suspended all EAR license exceptions for exports to Hong Kong. U.S. exporters of ITAR or EAR-controlled articles or services should consider the Hong Kong market to be part of China. License applications to export to Hong Kong will no longer be accepted. Previously granted export licenses will continue to be valid for the duration of that export license, but U.S. exporters should not expect that license renewal requests will be granted.

Exercising Due Diligence

On June 29, 2020, the U.S. Commerce Department published a final rule requiring U.S. companies exporting to China under certain Export Control Classification Numbers (“ECCNs”) to exercise increased due diligence to ensure that articles will not be used for military end use purposes or provided to military end users. The rule applies to 35 ECCNs, which are enumerated in the final rule. In this context, the exercise of due diligence refers to the exporter’s obligation to ensure that the qualifying exports are used only for civilian purposes. Due diligence can be exercised through thorough research, tracking how exports are used, and screening against U.S. government lists. U.S. exporters can also exercise this due diligence by obtaining written assurances from customers, physically verifying the use of the product, and/or contractually stipulating the scope of the export’s use.

Expanded Entity List

The U.S. Commerce Department maintains several screening lists, known as Lists of Parties of Concern,  which U.S. exporters should consult before exporting. The screening lists help ensure that U.S. exporters do not export sensitive EAR-controlled goods to parties identified by the U.S. government as suspicious or problematic.  One such list is the Entity List. The Entity List is found in Supplement No. 4 of Part 744 of the EAR, and comprises persons “reasonably believed to be involved, or to pose a significant risk of being or becoming involved, in activities contrary to the national security” of the United States. In recent months, the entity list has continued to expand sharply and comprises hundreds of Chinese companies. U.S. exporters should be sure to screen against the Entity List and other Lists of Parties of Concern before exporting.

Changes to Filing Requirements

Finally, the June 29, 2020  final rule also expands filing requirements. Specifically, the final rule requires an Electronic Export Information (“EEI”) filing in the Automated Export System (“AES”) for exports to China, Russia, and Venezuela. Existing EEI filing requirements generally exempt exporters from filing EEI for shipments valued under $2,500 and from entering the ECCN in the EEI when the reason for control is Anti-Terrorism (“AT”). However, to promote greater transparency with regards to exports to China, Russia, and Venezuela, the new final rule revises existing rules to mandate filing for all EAR-controlled exports to China, Russia, and Venezuela unless the exports fall within a narrow license exception: GOV. The GOV license exception applies only to “exports and reexports for international nuclear safeguards, U.S. government agencies or personnel, agencies of cooperating governments, international inspections under the Chemical Weapons Convention, and the International Space Station.” Most EAR-controlled exports to China, Russia, or Venezuela will not fall into this category.

Conclusion

As geopolitical tensions rise between the United States and China, it’s more important than ever for U.S. exporters to comply strictly with U.S. export control laws. The latest developments in U.S. export control policy establish higher standards of compliance. If you have any questions for how your business should navigate this changing regulatory landscape, be sure to reach out to us at info@diaztradelaw.com.

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