Wednesday, July 18, 2007

BIS Implements New “China Rule”on Dual-use Export Control

The Federal Register published the Department of Commerce’s updated China regulations, which have come to collectively be known as the “China rule.” As commented by Mario Mancuso, the Under Secretary of Industry and Security, it is a “right of balance” and a “model of future cooperation.” BIS intends the China Rule to encourage trade with legitimate civil end-users in the PRC, while further tightening controls on exports that could assist the PRC with its military modernization efforts.

Three main issues have been included in the Rule. First, it imposes additional licensing requirements for exports destined for a military end-use in the PRC; second, it creates the Validated End-User program (VEU); and the third, it revises the existing End-User Statement requirements by improving the threshold from the value of $5, 000.00 to $50,000.00.
This article addresses the VEU and the Threshold increase for End-User Statement issues, which are closely related to our clients’ business operation.

Validated End-User Program

Based on the China Rule, BIS removed individual license requirements for certain authorized customers in China. Under the “Validated End-User” (VEU) program, certain “trusted customers” in China with a track record of responsible civilian use of U.S.-controlled technology will be able to receive certain items without individual export licenses. This arrangement shall actually and significantly lower the administrative and regulatory burden of exporting to these “trusted” customers. “VEU will reduce lag time, expense, and uncertainty in the licensing process, helping U.S. exporters to be even more competitive in China. VEU will also act as a powerful market-based incentive for good behavior by rewarding the many firms in China who handle sensitive U.S. technology with care,” as remarked by Mario Mancuso. Currently the VEU program applies only to Chinese companies, with the expectation that it will be extended to India companies and companies in other countries in the future.

The complete procedure to request VEU authorization, as well as the procedures, timelines, and criteria the End-User Review Committee (ERC) will use in considering such requests can be found in Section 748.15 and Supplement Nos. 8 and 9 to Part 748 of the Export Administration Regulations (EAR). The Commerce Department expects to publish an initial list of approved Validated End-Users as early as July. Sectors likely to benefit from VEU include electronics, semiconductor equipment, and chemicals. BIS anticipates that a number of Chinese companies that must currently apply for individual licenses to import many items will seek VEU status to eliminate the burdens associated with repeatedly applying for multiple individual licenses.

Based on the Rule, either Chinese companies, or exporters on behalf of intended import Chinese Companies may apply for VEU status. According to the template designed to assist the application in preparing and submitting their requests for Validated End-User (VEU) authorization, some initial information and documentation should be included in the filing for an Advisory Opinion Request for Authorization Validated End-User (VEU). This includes general information such as candidate company name, operating name, destinations, company physical address and contact information, information about submitting company; structure, ownership and business activities of the candidate company; recording keep and compliance information; certification which can be an original statement with candidate company letter head containing required statements and other additional information. The deadline for the End-User Review Committee (ERC) to make a decision on the request is 30 calendar days after the application is circulated to all ERC agencies.

End-Use Certificate Threshold Improvement

The China Rule expanded the range of items for which U.S. exporters must acquire End-User Statements (“EUSs”) from the Chinese Ministry of Commerce (“MOFCOM”). However, the China Rule also addresses industry concern about additional administrative burdens relating to end-use certificates by raising the dollar threshold for obtaining an end-use certificate to $50,000 (from $5,000). However, the value limitation does not apply to the transfers of particularly sensitive items or technology to the PRC, in which case, the exporters or re-exporters shall still need to get a EUS.

Additional Links for Reference

The links below contain some helpful information and the full text of the Rule:

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