May 13, 2013

Significant Milestone Reached on Export Control Reform

Chris Mitchell

A multi-year initiative by the Departments of State, Commerce and Defense to reform the nation’s export control regime achieved an important milestone in April with publication in the Federal Register of the first in a series of final rules revising the U.S. Munitions List (USML) and the Commerce Control List (CCL). In finalizing the rules, the Obama Administration has navigated policy terrain historically strewn with political landmines, and in so doing, it has established a pathway for the most far-reaching reform of export control rules in U.S. history.

Launched in August 2009, the Administration’s multi-phased initiative to revamp U.S. export controls is designed to bolster national security by focusing the government’s attention on those sensitive defense articles that truly merit restrictions. The revisions—especially those to the USML—are also likely to result in increased export opportunities for the nation’s defense contractors and aerospace companies, many of which are now beginning to feel the effects of sequestration. U.S. companies have long complained that the current regime’s cumbersome, inefficient and archaic controls undermine U.S. competitiveness in the global marketplace.

The Administration’s vision for reform, best articulated by then-Defense Secretary Robert Gates in 2010, called for a single control list, single licensing agency, single enforcement agency, and single information technology platform. Legislation will be required to fully realize the Administration’s agenda, but under existing statutory authority, the State and Commerce Departments can establish a shared IT platform and revise their respective control lists. State manages defense articles on the USML and Commerce manages dual-use items on the CCL. The herculean task of revising these lists is complicated by the Administration’s desire to minimize the use of catch-all phrases in favor of objective criteria that will allow exporters to more clearly identify controlled items.

The State and Commerce rules published last month represent the most significant step in the reform effort to date, and companies likely to be affected should carefully review the lengthy rules. The State rule, most notably, revises USML Category VIII (aircraft and related equipment) and creates a new Category XIX (gas turbine engines and related equipment). USML revisions are likely to entail the migration of thousands of items from the USML to the CCL, and so the Commerce rule creates ten new 600 series export classification numbers as a first step in accommodating these migrating defense articles. Both the State and Commerce rules include a definition for “specially designed” and call for a 180-day transition.

In publishing these final rules, the State and Commerce Departments overcame a serious hurdle: congressional notification. Although Congress has no formal role in approving the USML revisions, State is required to formally notify Congress pursuant to Section 38(f) of the Arms Export Control Act. In practice, the 38(f) notification process gives Congress the opportunity to delay or derail USML changes. Publication of the final rules last month suggests that Congressional leaders, though they may harbor concerns, are sufficiently comfortable with the Administration’s reform approach to allow its advance. A House Foreign Affairs Committee (HFAC) hearing last month revealed substantive questions and concerns but no open hostility to the Administration’s agenda. Congress’ assent marks a dramatic departure from the contentious post-Cold War reform efforts of the last twenty years that pitted Congressional defense hawks against trade and industry advocates.

With Congress’ cooperation, the Administration is on track to implement a complete revision of the USML by as early as year’s end. With last month’s regulatory action, the Administration has finalized two of the 12 category revisions it has published. Assistant Secretary of Commerce Kevin Wolf recently indicated that the next set of final rules will include Categories VI (naval vessels), VII (tanks and military vehicles), XII (auxiliary military equipment), and XX (submersible vessels). Seven additional category revisions are working their way through the interagency review process, and Category XV (satellites) is likely next in the queue. The Administration has also signaled its desire to reissue a draft rule for the thorny and complex Category XI (military electronics).

After years of interagency deliberations, the now accelerating reform is prompting fresh excitement as well concerns within industry. Chief among these concerns is the confusion that is likely to accompany the transition to the new regime. Out of abundance of caution, exporters are likely to file a record number of commodity jurisdiction requests in the short-term, straining already stretched resources at Commerce and State. Both departments are pledging extensive educational outreach to mitigate the need for superfluous CJ requests.

The pace of reform also has reinvigorated interest on Capitol Hill in a reauthorization or replacement of the Export Administration Act (EAA). At April’s HFAC hearing, Chairman Ed Royce argued that an update of the EAA is “long past due” and he urged the Administration to release its legislative proposal. Brian Nilsson, director of nonproliferation at the National Security Council, did not appear at the hearing, but he told reporters later that the Administration has more work to do on its legislative proposal and is principally focused now on completing revisions to the USML and CCL.

Nilsson’s response casts further doubt on Congress’ ability to update the EAA this Congress, but the Administration is likely to push legislative reforms before President Obama exits office in January 2017. Although little known and understood outside the exporting community, export control reform will be a signature Obama achievement, and enactment of legislation modernizing the EAA would represent a crowning achievement for an Administration that has committed so much time and energy to this issue.