It is a little-known fact that when an article is exported from one non-U.S. country to another (known as a ‘re-export’), if that article has some U.S. content, it may be subject to U.S. export laws even though the components have already left the U.S.! The US government is proposing new policies that would expand the scope of the parts that are regulated in this way, which could have a negative effect on US exports of aircraft parts.
In order to be fair, the U.S. has a de minimis exception that provides that if the amount of US content is below a certain threshold, then the U.S. will not assert jurisdiction over the ‘re-export.’
The latest government proposal, made by the Bureau of Industry and Security, would remove the de minimis exception for “re-export” Category 7 articles that are controlled for missile technology (MT) reasons on the Commerce Country List.
Most avionics are generally included in Category 7. Specifically, Category 7 articles that are controlled for MT reasons include certain accelerometers, gyros, inertial systems, gyro-astro compasses, GPS receiving equipment, UAV auto-pilots, three axis magnetic heading sensors, and other instrumentation and navigation equipment. Component parts for each of these categories would also be affected. Therefore this proposed change would have a direct affect on the aviation industry.
In general, a U.S. article that is controlled for export purposes is also controlled for ‘re-export’ purposes. Thus, if a U.S. company needs an export license to export the product to a non-U.S. distributor, the non-U.S. distributor will need a license to re-export the article to third location. This means that an aircraft part sent overseas by a U.S. manufacturer may need to be licensed a second time if it is sent to a distributor or repair station that will ultimately provide the product to someone else.
But what about non-U.S. made aircraft parts containing U.S.-sourced parts? For example, imagine that a French manufacturer of Inertial Navigation Units (INUs) relies on gyros from the United States. If the gyros were required to be licensed when they were first exported, then it is possible that the French manufacturer of the INUs that contain the U.S. gyros installed within might need to secure a U.S. export license to ‘re-export’ the INUs with the gyros. This requirement represents an extension of U.S. jurisdiction over already exported products. This extension of jurisdiction creates concerns in the international community, which sometimes objects to the US assertion of jurisdiction over a transaction that does not touch US territory. The U.S. created the de minimis rule to address these concerns.
The De Minimis Rule
The de minimis rule allows certain articles with U.S.-origin components to be re-exported without requiring a U.S. license. Under the de minimis rule as it stands today, the Commerce Department defines when the U.S.-origin content of a commodity is sufficiently small that the commodity will not be deemed to be subject to the export control restrictions set forth in the Export Administration Regulations. This rule applies to the re-export of foreign-made articles – so it would apply to aircraft parts fabricated outside the US that incorporated some US-origin content.
The normal de minimis standard is that products incorporating 25% or less U.S. content are considered to NOT be subject to U.S. export control laws. Those that incorporated more than 25% U.S. content are considered to be controlled, and may require a U.S. export license when re-exported from one foreign (non-U.S.) country to another foreign (non-U.S.) country. This threshold drops to 10% if the article will be re-exported to a group E:1 country (Cuba, Iran, North Korea, Sudan or Syria).
Applying this threshold to our hypothetical INUs, the gyros and any other U.S. content would have to represent more than 25% of the value of the INUs in order for the U.S. to assert export jurisdiction over the French-manufactured INUs. So if U.S.-content accounted for only 15% of the value of the INSs, most exports would be outside the jurisdiction of the U.S. Commerce Department. But if the same INSs were being exported from France to Cuba, Syria, or another group E:1 country, then the 10% threshold would apply and the unit would need a U.S. export license to get exported. Additionally, French export laws would also apply.
When U.S. content is incorporated into a commodity, even if that content is not itself subject to U.S export controls, the content must satisfy the requirements of the de minimis rule, or the incorporation of the content may subject that commodity to U.S. export controls. So if the U.S. content of an INU was not export-controlled (e.g. non-controlled hardware and components), but the INU is export controlled (and the U.S. content exceeds the 25% or 10% threshold – depending on destination) – then the INU might still be subject to US export controls.
The de minimis rule allows a non-U.S. manufacturer to carefully control its designs to make sure that they will not be subject to U.S. export controls. MARPA Members who supply non-U.S. manufacturers may be receiving business – in part – because their content fits within the de minimis rule.
The proposed change to the rule is a drastic and jarring departure. The U.S. Commerce Department is proposing to eliminate the de minimis rule as it applies to almost all Category 7 articles. This would mean that most non-U.S. manufactured avionics would be subject to U.S. export jurisdiction if they incorporated any U.S. content. This would inhibit the re-export of such avionics, and it would also serve as a disincentive to using U.S. component suppliers.
The Aviation Parts Exception(?)
Initially, it appears that this proposal to eliminate the de minimis rule contains an exception for the aviation community. But the apparent exception is illusory. The exception would apply only where “the commodities are incorporated as standard equipment in FAA (or national equivalent) certified civilian transport aircraft.” This exception is practically useless:
• It would only apply to parts that are installed in transport category aircraft. Articles that are shipped in a container (not installed in an aircraft) would not benefit.
• It would not apply to articles for Part 23 or Part 27 aircraft, even if they were installed in the aircraft.
• It would apply only to “standard equipment.” This term was just redefined by the State Department in August (See the October issue of Avionics News at Page 60). The term is now equivalent to what the civil aviation community thinks of as “standard parts.” ALmost nothing that fits within Category Seven will meet the new definition of “standard equipment!”
File Your Comments With the Government
This proposal could represent a serious problem for the industry. By seeking to impose re-export limitations on non-U.S. avionics that have some small amount of U.S. content, and to shift exempt avionics into a licensable classification, this proposal could create compliance problems for U.S. and non-U.S. exporters alike. It may also cause non-U.S. manufacturers to eschew U.S. component suppliers. Most importantly, it appears that there is no good policy reason for the change.
The proposed change is found in the November 20, 2008 issue of the US Federal Register, at page 70,322. It can be found online at http://edocket.access.gpo.gov/2008/E8-27588.htm. Comments must be received no later than January 20, 2009.
It is important that PMA manufacturers everywhere carefully read this proposal, and file comments (1) opposing the elimination of the de minimis thresholds and (2) seeking an expansion of the aviation exception to include all civil aircraft parts in Catgeory Seven.