US, EU and China export control developments

At the start of the New Year, we take a brief look at significant recent developments on export controls. Our export control team are happy to answer any questions you have.
 
Wider US restrictions on ICTS exports 
Late last year, the US Department of Commerce published a proposed rule which would allow it to impose restrictions on a wider range of information and communication technology and services (ICTS) exports using US-origin technology, based on the potential risk to national security.

The proposed rule would establish very broad discretion to review ongoing or proposed  ICTS transactions and would create a significant new regulatory framework for national security reviews of international transactions, in parallel to the existing Committee on Foreign Investment in the United States (CFIUS). It could impact transactions by not only persons in the US but also by non-US persons that have a sufficient US nexus, particularly telecom and IT equipment and service providers, internet and digital service providers, and vendors of infrastructure development (related measures are already targeting Huawei and the US is pressing others to follow suit, which has been resisted to date by EU Member States).

Emerging and Foundational Technologies
More broadly, the US (and, less intensively, the EU) are looking at options to extend export controls on certain technologies deemed to be sensitive to national security.  Most recently, the US Commerce Department has published a final rule to impose an licensing requirement on exports of artificial intelligence used, for instance, in the detection and classification of objects from aircraft and satellites. The Department is developing proposals focused on particular technologies of concern, notably AI and Quantum computing, with the aim of facilitating secure technology transfers between like-minded states while locking out countries considered to be a threat to national security. Other technologies under consideration include: biotechnology (e.g. genetic engineering), navigation, microprocessors, data analytics, logistics, 3D printing, robotics, brain-computer interfaces, hypersonics, advanced materials and surveillance.
In parallel, the EU is working to develop a clear understanding of existing controls on emerging technologies (e.g. what items, end-users and destinations) as a starting point for constructing a European approach to tougher controls on such technologies.

ITAR to exclude encrypted technical data
The US State Department’s Directorate of Defence Trade Controls has issued an interim final rule, coming into effect on 25 March 2020 (subject to public comments, to be received by 27 January) listing a number of activities which are not controlled under the International Traffic in Arms Regulations (ITAR). Notably, these include the transfer of unclassified technical data if it is encrypted using end-to-end encryption in accordance with ITAR guidance (although such data cannot be sent to Russia or other proscribed countries).
This step has been long-awaited since it broadly (though not entirely) harmonises ITAR with the similar provisions in the Export Administration Regulations (EAR 734.18) adopted in 2016. This step, once finalised, should significantly ease the transfer of data that would otherwise be subject to the ITAR, including the use of international cloud services and remote servers for the storage of such data.

It remains notable that the European Commission and most EU Member States have yet to provide similar clarification, leaving ambiguity over the conditions in which storing encrypted dual-use technology on a server located outside the EU does or does not require an export licence. 

Other activities excluded from ITAR are: launching items into space; providing technical data to US persons within the US or within the same country abroad; and moving a defense article within the territory of the US.

China’s Draft Export Control Law
China has recently published a second draft of its proposed new Export Control Law (the text is only available in Chinese but a translation is expected soon), open for public comment until 26 January. The draft makes a number of changes from the first, published in 2017, mainly: dropping provisions on retaliation against discriminatory measures taken by other countries; a new requirement for an internal compliance program; and a mandatory requirement for the submission of end-user certification.
 
The main substantive provisions remain unchanged, in particular extraterritorial application covering re-exports and deemed re-exports of PRC-origin items or foreign-manufactured products that contain more than de minimis PRC-controlled content from a foreign country to a third country (similar to US export controls). China may also maintain blacklists of foreign importers and end-users, prohibiting the export of controlled items to them. 

The law could have a significant impact on companies with supply chains in China. It remains unclear when the law will be finalised and brought into force: two more rounds of deliberation are expected within the next few months.

Annual Update of the EU Dual-Use List
The EU Dual-Use List has received its regular annual update, incorporating changes agreed in the international export control regimes during the past 12 months. The Commission has published a summary of the main changes. There are no radical revisions, most of the changes relating to amendments to existing control entries, but businesses dealing with dual-use equipment, software or technology are advised to check the list in case the changes may affect them.

Arms Exports to Saudi Arabia
In the light of concerns over possible breaches of humanitarian law in the conflict in Yemen by Saudi Arabia and its coalition partners, as well as the murder of the journalist Jamal Khashoggi in Istanbul in October 2018, a number of EU countries continue to suspend arms sales to Saudi Arabia. These include Germany, Austria, Denmark, the Netherlands, Norway, Sweden, Austria and Greece. However, Italy, France and Spain continue to permit such exports. 

The UK has suspended the granting of new export licences for arms sales to Saudi Arabia and its Gulf allies that might be deployed in the war in Yemen, following the Court of Appeal ruling in June 2019 that the Government’s decision-making process for granting export licenses was “irrational” and therefore “unlawful”.  The UK government is appealing the judgement. 

This split in the EU has highlighted the absence of a common arms export policy; the importance of understanding the choices of Member State where goods are exported from; and the challenges of building an integrated EU defence industry.