Here we go again: U.S. Export Control Reform Act 2018

On 15 February 2018, the U.S. Congress introduced  introduced H.R. 5040, the Export Control Reform Act of 2018 (ECRA). The ECRA is sponsored by the House Foreign Affairs Committee Chairman Ed Royce (R-CA) and by the committee’s ranking Democratic member, Eliot Engel (D-NY). This is yet again the latest attempt to reform and modernize the regulation of U.S. dual-use items

The ECRA correctly focuses on the export control risks surrounding technologies, which is also addressed in the Foreign Investment Risk Review Modernization Act (FIRRMA). Under the direction of the Committee on Foreign Investment in the United States (CFIUS), a CFIUS review would require greater scrutiny of firms involved in certain “critical” technologies, or technologies that are essential or that “could be essential” to U.S. national security. It remains to be seen whether both the ECRA or FIRRMA (or a combination of both) will be enacted. 

The ECRA aims to:

  1. repeal the Export Administration Act of 1979 (EAA)
  2. require that export controls ensure continued U.S. leadership in science, technology, engineering, manufacturing, and other sectors,
  3. provide new authority to identify and appropriately control critical emerging technologies, and
  4. support U.S. diplomatic efforts to promote greater international coordination and cooperation on export controls.

Key Aspects of the Export Control Reform Act

  • The ECRA aims to expand U.S. jurisdiction to regulate the transfer abroad by U.S. and non-U.S. persons of commodities, software, or technology regardless of any U.S. content.
  • The ECRA would for the first time apply U.S. deemed export controls to transfers of controlled technology to U.S. companies unless they are majority-owned by U.S. natural persons. 
  • The ECRA would establish control over release of technology that includes information at any stage of its creation, such as “foundational information” and “know-how,” in order to protect emerging technology and sensitive intellectual property. In this context, the present text of the ECRA requires that the U.S. President establish an inter-agency process to identify emerging technologies essential to U.S. national security that are not identified in any U.S. or multilateral export control lists.
  • Introduction of a License Exception for Missile Technology – under the ECRA, the BIS would no longer be prohibited from applying license exceptions to (re)exports, and transfers of missile technology items subject to its jurisdiction (although the BIS may decide to retain its current licensing policy). NB ECRA would not affect the licensing of any missiles (technologies) on the U.S. Munitions List.

The introduction of a permanent statutory authority to regulate the (re)export and transfer of commercial, dual-use, less sensitive military commodities, software and technologies, must be welcomed. This would certainly remove the embarrassing continuation of the EAA (implemented through the Export Administration Regulations) through Presidential executive orders under the International Emergency Economic Powers Act (IEEPA).

Furthermore, the ECRA would codify statutory language underlying the EAR’s anti-boycott measures that prohibit U.S. persons from providing support to boycotts, most notably the boycott against Israel, that are not supported by the U.S. government.

Finally, the bill would carry over sanctions from the EAA against U.S. and foreign persons who engage in commercial transactions that violate missile proliferation or chemical and biological weapons controls.

The text of the ECRA also aims to expand the jurisdiction over non-U.S. items. Unlike the current EAR, the ECRA aims to expand the control and regulation (i.e. (re)exports and transfers) of items not subject to the EAR which could cover non-U.S. items. This could apply to items outside of the U.S., as exports from the U.S. are already controlled.

Under Section 2 (6) the proposed definition of “item” that is subject to the ECRA includes “a commodity, software, or technology” and does not require that the item be located in the U.S., be of U.S. origin, contain any U.S. content, or be a direct product of U.S. technology or software. Given the broad ECRA definitions of “reexport” and “transfer,” which include “the shipment or transmission of the item from a foreign country to another foreign country” and “a change in the end use or end user of the item within the same foreign country,” the ECRA would appear to extend U.S. control over re-exports and transfers of non-U.S. items outside of the United States, without regard to whether the U.S. item incorporates any U.S. content or was produced using U.S. technology. Any such attempted expansion of U.S. jurisdiction is likely to be highly controversial and difficult to enforce.

Under Section 2 (9) the ECRA expands the definition of “technology” subject to U.S. export controls to include “information at whatever stage of its creation, such as foundational information and know-how, as further defined by regulations.”

Note that the criteria for information subject to this definition are yet to be defined. Some have indicated that the new definition aims to protect emerging technology and sensitive intellectual property, e.g. targeted by foreign investors, Chinese acquisitions, contrary to U.S. national security interests (a term which also remains undefined).

It is possible that here, ECRA makes a link to the earlier cited FIRRMA, which proposes to expand the scope of CFIUS jurisdiction to review any non-passive investment by a non-U.S. person in a U.S. critical technology company, with an updated definition that similarly focuses on capturing emerging technologies within the scope of “critical technology.”

FIRRMA Definition Critical Technology Company & Critical Technology

  • The definition of a critical technology company would include firms that are directly involved in critical infrastructure, but would also include a U.S. company that provides support or services to an entity that operates within a critical infrastructure sector or subsector. Critical materials and critical technologies would be defined as physical materials essential to national security; critical technologies would be defined as technologies that are essential or “could be essential” to national security.
  • The term critical technologies would include
    • (1) defense articles or services included on the United States Munitions List and the Export Administration Regulations (export control list) administered by the Commerce Department on the export of dual-use goods, technology, and software; certain defense articles or
    • (2) nuclear equipment and parts, components, software, etc.; items related to nuclear, chemical, and biological weapons proliferation, nuclear proliferation, or missile technology; items related to regional stability or surreptitious listening;
    • (3) certain nuclear facilities, equipment, and material;
    • (4) certain agents and toxins;
    • (5) and other emerging technologies that could be essential for maintaining or increasing the technological advantage of the United
      States over countries of special concern with respect to national defense intelligence, or other areas of national security, or gaining such an advantage over such countries in areas where such an advantage may not currently exist.

Under Section 2 (5) the ECRA also amends the definition of the U.S. person, which potentially affects how the release of technology is controlled to U.S. entities unless they are owned more than 50 percent by U.S. natural persons. However, some commentators, more serious than me, have stated that this is a drafting error, which will be rectified. It seems that the export control definition got combined with the anti-boycott definition of an U.S. person. 

A curious new control, introduced under Sections 103 (a)(2), requires the regulation of activities of U.S. persons, wherever located, relating to specific “foreign intelligence services.” Although not defined, this seems a strange control, given that any government would like to control the activities of its citizens with a foreign intelligence service. As such, I’d presume that any activities with such end-users are and have always been strictly controlled. 

The introduction of the ECRA was accompanied with the current U.S. Chinese-bashing, as Chairman Royce stated that the ECRA is “dictated by aggressive Chinese government policies that have increasingly forced U.S. companies to hand over sensitive technology as a cost of doing business in China.” 

As I’ve written before, the attempt to reform U.S. export controls, is not an easy one. A balance should be struck between controls and trade, but also effectively control security-threats that countries, in this case the U.S., face in the twenty-first century. Focusing on technology makes sense, however, it is clear that the export controls should not create additional burdens to industry or for that matter government. They should also be in place to safeguard the transfer of strategic goods, e.g. military or dual-use goods. Although I understand that using national security to protect domestic industries is easy for politicians, especially when the jingling of coins is preferred to the rattling of sabers, I wonder the ECRA is the best vehicle to achieve economic protection. 

To be continued…

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