Speaking Up Against the Military Catch-All Rule

Writing in the Asia Times Online, attorneys Donald Weadon and Carol Kalinoski (a former BIS Operating Committee chair) take a closer look at the anticipated military (read "China") catch-all rule and don't very much like what they see:

The actual regulation has yet to be published, but the US Bureau of Industry and Security (BIS) has been sharing drafts. In sum, the rule requires any US exporter of commercial goods who "knows" or is "informed" that the commodity is intended for "military end use" in any country subject to an arms embargo (either international, regional or unilateral) to seek a US export license - or not undertake the transaction.

For exports and re-exports where the transaction would make a "direct and significant contribution" (as yet undefined) to the military capabilities of the embargoed nation, such license applications would be denied. The rule would also establish new restrictions on the activities of US persons who knowingly support a military end use in China.

In essence, the rule is a disfavored unilateral control in "multilateral control" clothing, since no other allied nations implement the SoU comparably, and none implement the SoU against China. Moreover, the facilitation or transfer provisions of the rule directly apply to banks, freight forwarders and others in the logistics chain, and when viewed through the lens of the corporate-knowledge doctrine, the opportunities for serious liability exposure abound for service providers as well.                              

The rule also provides no reasonable avenues of due diligence where one could limit exposure to liability. Based on the current compliance environment, even approvable licenses will be seriously delayed for want of resources, lack of definitional clarity and the lack of a published list of entities or projects that would trigger the rule's prohibitions.

All potential non-US competitors are not similarly restricted and could supply most goods straight away. The prospect is the loss of commercial opportunity for US firms in a highly competitive global market, without the intended negative impact upon a Chinese military entity or its projects.

It's worth reading the whole thing. Like the authors, I'm dubious that the benefits of this proposal outweigh the costs and I'm alarmed by the compliance challenges inherent in a muddy end-use based restriction. You don't have to be Nostradamus to predict ferocious internecine warfare between Republican China hawks and the big business wing of the party.

I do have one small beef with the Asia Times Online piece though, related to this bit:

In early 2005, the administration of US President George W Bush proposed an expansion of the "deemed export" rule to scrutinize and license technology access for individuals of Chinese and foreign birth, even if they had been citizens of allied nations since their youth. Industry and academia violently reacted to this proposal, in essence faulting it for useless overreaching that would damage the access of industry and academia to talent, and thus adversely impact US innovation. More than 315 lengthy negative comments were lodged.

The purpose of this paragraph seems to be to claim a ham-handed and overly aggressive pattern of Bush Administration export policies on China. None of what's written is inaccurate, but Weadon and Kalinoski exclude a few key facts inconvenient to their argument:

1. The original deemed export rule change notice never specifically targeted China.
2. Neither does the as-yet-unpublished military catch-all proposal.
3. BIS chief David McCormick publicly disavowed the silly "birth" rule for deemed exports a month ago. Shouldn't the article have mentioned this? After all, maybe the real lesson is that the administration will respond when faced with overwhelming industry opposition. If enough companies scream loudly enough about the military catch-all maybe it will be softened somewhat, just like the deemed export proposals.

Comments

[Michael Deal]

The "Chicken Little" tone of the piece should be recognized as a time-honored marketing tool.

[Don Weadon and Carol Kalinoski]

In response to Mr. Gearity’s comments, China was indeed the principal subject of both proposed BIS rules. Anyone attending any of the numerous industry/coalition meetings (either in person or by teleconference) or significant export control conferences in the last year, listening to the rambling justification by BIS officials or even perusing the 2004 Commerce Inspector General's report (which was the provenance of the original deemed export country of birth modification initiative), he/she would have been hard pressed to hear or see the name of any other country BUT China.

Even the public U.S. calls for stronger EU enforcement of the Wassenaar catch-all and continuation of the EU arms embargo against China should provide an additional clue to the curious.

Clearly, had either rule stated the reality (China as principal focus), there would have been hell to pay diplomatically and commercially, with allegations of breaches of treaty obligations to say the least. That Under Secretary McCormick disavowed the "birth" proposal is true, but not substatively in the United States to U.S. exporters and academia--he did it obliquely in a Financial Times of London OpEd. It is problematic that McCormick didn't respond directly to any of the 315 incensed commenters on the rule (as one would have thought) or indirectly through the Federal Register.

Mr. Gearity is correct in one major point: industry needs to become better organized to shout down the kinds of poorly-thought-through regulatory initiatives coming out of BIS of late. If Under Secretary McCormick stands for "good government", as he has recently been quoted as saying, he had better get down to basics.

And in passing mention to Mr. Deal’s catty ad hominem one liner, as participants in the drafting of the American Bar Association comments on both rules (as well as those of other trade associations), and detailed commentators upon the substantial adverse impact upon US and allied companies, we would only hope that in the future he honor this helpful blog and its commendable objectives through insightful commentary which demonstrates his knowledge of the subject matter and helps educate the readers. Throwing bricks reflects poorly on his insight and objectives.