Tightening of US-Export Controls

Since 2018, US-export controls are geared to support the country’s industrial policy. This damages global value chains and hurts the transatlantic marketplace. The systemic challenge posed by China has triggered this development. In concert with its European partners, there is much the incoming US-Administration can accomplish. Due to the challenge China poses, a return to the status quo ante in export controls is impossible.

The Export Control Reform Act (ECRA) of 2018 seeks to protect the national security of the United States through the regulation of American exports. ECRA focuses on so-called Dual Use goods, that is, goods that can assume either military or civilian applications.

United States Claims Global Regulatory Sovereignty

In principle, U.S. export controls are extraterritorial. This means that the United States applies its rules to persons and circumstances well beyond its territory. In contrast to the practice of other countries, U.S. goods do not lose their “citizenship” even if processed abroad. The transboundary shipment between two third countries and non-U.S. companies, a so-called re-export, can be in certain cases subject to approval by the Bureau of Industry and Security (BIS). The same can apply to the transfer of certain goods within a country. So-called “deemed exports” can occur within a company, in which a good does not leave the company but rather is shared between employees with and without U.S. citizenship. ECRA directly intervenes in such operational processes and such an exchange is potentially subject to approval.

Goods that contain a share of at least 25 percent of total value from the United States are also affected (this threshold is lowered to 10 percent as soon as countries and markets with terrorist connections are involved). Companies or persons who violate export or re-export regulations are liable to prosecution, this includes lenders such as banks and other financial institutions. Since most financial intermediaries must refinance in U.S. dollar, its currency allows U.S. export controls to be in effect outside the United States.

Through ECRA, U.S. export controls take on geoeconomic significance. The law explicitly requires the President to use export controls to maintain U.S. economic leadership in science, engineering, industry, and foundational research: “the national security of the United States requires that the United States maintain its leadership in the science, technology, engineering and manufacturing sectors […]” As a consequence, ECRA introduced further controls for certain emerging and foundational technologies. Larger categories for emerging technologies have already been defined. It is encouraging that US-authorities have sought to implement those controls by way of listing respective items with the competent multilateral control regime. However, juxtaposing economic and security interests creates conflicting goals within U.S. export controls. This has the potential to compromise the transatlantic economic relationship just as much as hurting the common undertaking within the international non-proliferation regimes.

China to Have Access to High Technology

As a result of increased emerging technology controls, the civil-military fusion – the merging of a previously separate civil sphere with the goals of military end-users – in the People’s Republic of China is now coming into the view of U.S. export controls. In April 2020, the BIS published new rules for the Export Administration Regulations (EAR). Here, the export, re-export, and non-transboundary transfer of goods to China, Russia, and Venezuela are tightened. From now on, as soon as exporters suspect that their exports could serve a military purpose, these exports are subject to assumption of denial approval processes. Thus, military end-use and military end-user are now defined more broadly, the aspect of “regional stability” is sharpened as a criterion for evaluation, and economic operators are required to electronically file exports to the aforementioned group of countries more comprehensively than before. This allows the U.S. authorities a more precise overview of goods and merchandise exports in the future. In addition, nine categories of goods have been identified that are also subject to approval. These include chemicals; information, sensor and laser technology; aviation and avionics, and propulsion technology and space vehicles.

Review of Exemptions by the BIS

The licensing requirement for the export, re-export and domestic transfer of certain goods to states with a D:1 classification has been tightened. States with this classification are considered by the United States as potential threats to national security. These include, for instance, China and Russia. A previous exemption for exports to a civilian end user with the purpose of a plausible civilian final destination was thus revoked.

Moreover, the BIS examines whether the licensing privileges of certain states should be terminated in the case of re-exports. A corresponding consultation process on “Additional Permissive Re-Exports” ended in June. The BIS sees deficits in the enforcement of U.S. interests in the licensing practices of many A:1 states and Hong Kong, of re-exports to D:1 states. A:1 states are deemed fundamentally trustworthy. This group is composed of the Wassenaar Arrangement countries, excluding Russia, Ukraine, and Malta.

Concerns of the Globally Integrated German Industry

From the perspective of the United States, the tightening of export controls is coherent and politically understandable. The People’s Republic of China poses a systemic challenge to the liberal democratic market economies of the political West. China’s technological progress, economic development, and military armament are more difficult to separate in this conflict than they were in the past. The civil-military fusion in the People’s Republic is clearly the driving force behind the tightening of U.S. export controls. China’s export control legislation, which became effective December 2020, is another reason for concern. It gives the communist party yet another instrument to leverage its economic influence in service of its geopolitical interests. The argument made by the U.S. administration, namely that emerging and foundational technology controls protect the intellectual property of economic operators, is reasonable. A regulatory response by the U.S. was to be expected.

However, for German industry, there are two clear problems. On the one hand, the militarization of the civil economy in China and the response in U.S. export controls are damaging the legitimacy of the international export control regimes. These regimes are guardians for the non-proliferation of weapons of mass destruction (WMD) and represent a very valuable asset to the international community. The unilateral use of export controls for geopolitical purposes carries the realistic danger of undermining the goal of WMD non-proliferation.

Secondly, the question of the emergence of exclusive economic hemispheres is increasingly being raised in trade policy. It is becoming more and more probable that, at least in the short- and medium-term, value chains will no longer be able to follow price signals. Economic operators will increasingly have to shape value creation and supply chains along the predetermined breaking points of international politics. Separate economic zones will thus become more likely. Different product lines for different markets would be the consequence. This applies initially to the high-tech sector, but for an Industry 4.0, as is taking shape in Germany, it is an extremely alarming development.

In the long run, a “semi-sanctioned” area could be created by U.S. export controls. German industry rejects the protectionist bias in ECRA, since it can decrease competitiveness and minimize economic vitality. However, German industry recognizes that the liberal-democratic West has to adapt under the pressure of the security policy circumstances created by China. The transatlantic partners should agree to closely collaborate in the future when deciding to impose new controls. Moreover, coordinated and meaningful export control practices could create fresh impetus for the multilateral non-proliferation regimes.