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COVID-19 Trade Update: FEMA Implements Export Controls and Exclusion Guidance for Personal Protective Equipment

PPE

COVID-19 Trade Update: FEMA Implements Export Controls and Exclusion Guidance for Personal Protective Equipment

On April 3, 2020, President Trump issued a Presidential Memorandum directing the Department of Homeland Security, through the Federal Emergency Management Agency (“FEMA”), to utilize the Defense Production Act to restrict the export of scarce domestic materials being used to respond to the spread of COVID-19, including certain personal protective equipment (“PPE”).

Effective Tuesday, April 7, FEMA implemented this Order through a Temporary Final Rule (the “TFR”) that restricts U.S. exports of 5 specific categories of PPE products that were previously designated by the Department of Health and Human Services (“HHS”) as “scarce or threatened materials.” Both U.S. Customs and Border Protection (“CBP”) and FEMA have since issued additional guidance on the TFR that provides further detail on the scope of the restrictions as well as key exclusions for certain U.S. exporters.

The TFR differs from traditional U.S. export control regulations, such as those administered by the U.S. Departments of Commerce and State, in that there is no licensing system in place and FEMA’s determination is not based on the proposed end-use or end-user of the product – rather, FEMA will assess all U.S. exports of designated PPE materials and reallocate those products domestically as required. Because FEMA is not an agency that traditionally administers U.S. export control regulations, it is critical for manufacturers, suppliers, and distributors of PPE products and related medical materials to be aware of the specific articles impacted by the TFR, the scope of the restrictions, the timeline for implementation, consequences for non-compliance, and the potential for expanded product coverage.

PPE Export Restrictions Overview

The TFR providing for PPE export restrictions is effective as of April 7, 2020 for a period of 120 days. The TFR designates 5 of 15 categories of materials previously identified as “scarce or threatened materials” by HHS. In particular, the subject restricted PPE “covered materials” are the following:

-N-95 Filtering Facepiece Respirators, including devices that are disposable half-face-piece non-powered air-purifying particulate respirators intended for use to cover the nose and mouth of the wearer to help reduce wearer exposure to pathogenic biological airborne particulates;

-Other Filtering Facepiece Respirators (e.g., those designated as N99, N100, R95, R99, R100, or P95, P99, P100), including single-use, disposable half-mask respiratory protective devices that cover the user’s airway (nose and mouth) and offer protection from particulate materials at an N95 filtration efficiency level per 42 CFR 84.181;

-Elastomeric, air-purifying respirators and appropriate particulate filters/cartridges;

-PPE surgical masks, including masks that cover the user’s nose and mouth and provide a physical barrier to fluids and particulate materials; and

-PPE gloves or surgical gloves, including those defined at 21 CFR 880.6250 (exam gloves) and 878.4460 (surgical gloves) and such gloves intended for the same purposes.

Before any shipments of the above-listed PPE materials can be exported from the U.S., CBP will temporarily detain the shipment so that FEMA can determine whether to (i) prohibit the export and return the shipment for domestic use; (ii) utilize the Defense Product Act (“DPA”) to issue a “rated order” for the materials (a priority contract or order placed in support of a national defense program under the DPA), or (iii) allow the export of part or all of the shipment.

In making its determination, FEMA may consider the following factors: (1) the need to ensure that scarce or threatened items are appropriately allocated for domestic use; (2) minimization of disruption to the supply chain, both domestically and abroad; (3) the circumstances surrounding the distribution of the materials and potential hoarding or price-gouging concerns; (4) the quantity and quality of the materials; (5) humanitarian considerations; and (6) international relations and diplomatic considerations.

Scope and Exemptions

On April 9, 2020, CBP issued an updated internal guidance memorandum (the “CBP Internal Guidance”) to its field operators to clarify key definitions and general exceptions to the PPE export restrictions provided for in the TFR. CBP highlighted that the focus of the TFR is on “commercial quantities” of PPE exports, currently defined as shipments valued at $2,500 or more and containing more than 10,000 units.

The CBP Internal Guidance then lists the following export circumstances that are excluded from the FEMA restrictions:

-Exports to Canada or Mexico;

-Exports to U.S. government entities such as U.S. military bases overseas;

-Exports by U.S. Government agencies;

-Exports by U.S. charities;

-Exports by critical infrastructure industries for the protection of their workers;

-Exports by the 3M Company;

-Express or Mail Parcels that do not meet the “commercial quantity” definition above;

-In-transit shipments.

On April 21, 2020, FEMA published additional guidance in the Federal Register on the full scope of the initial list of 10 exemptions, which are described as follows:

-Shipments to U.S. Commonwealths and Territories, including Guam, American Samoa, Puerto Rico, U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands (including minor outlying islands).

-Exports of “covered materials” by non-profit or non-governmental organizations that are solely for donation to foreign charities or governments for free distribution (not sale) at their destination.

-Intracompany transfers of “covered materials” by U.S. companies from domestic facilities to company-owned or affiliated foreign facilities.

-Shipments of “covered materials” that are exported solely for assembly in medical kits and diagnostic testing kits destined for U.S. sale and delivery.

-Sealed, sterile medical kits and diagnostic testing kits when only a portion of the kit is made up of one or more “covered materials” that cannot be easily removed without damaging the kits.

-Declared diplomatic shipments from foreign embassies and consulates to their home countries.

-Shipments to overseas U.S. military addresses, foreign service posts (e.g. diplomatic post offices), and embassies.

-In-transit merchandise: Shipments in transit through the U.S. with a foreign shipper and consignee, including shipments temporarily entered into a warehouse or temporarily admitted to a foreign trade zone.

-Shipments for which the final destination is Canada or Mexico.

-Shipments by or on behalf of the U.S. federal government, including its military.

Certain exclusions will require the submission of a letter of attestation certifying to FEMA the purpose of the shipment of covered materials that will also be placed on file with CBP.

Practical Advice and Next Steps

All U.S. manufacturers, suppliers, and distributors of PPE materials or other products designated by HHS as “scarce or threatened” (the relevant HHS guidance can be found here) that are considering exporting their products for sale need to have a comprehensive understanding of the FEMA TFR and applicable export restrictions. It may be the case that additional FEMA guidance will be issued regarding products identified by HHS as “scarce or threatened” in connection with the fight against the spread of COVID-19, and those additional items could be added to the list of restricted products for exports, including portable ventilators and certain drug treatment products that contain chloroquine phosphate or hydroxychloroquine HCl. Additional export, exporter or product-based exclusions may be issued in the finalized published FEMA/CBP guidance as well.

In the meantime, U.S. exporters of PPE products can expect delays at CBP ports around the country as FEMA and CBP develop and implement the TFR and related policy guidance. If you have any questions about the TFR, the impact of the TFR on exports of PPE products, or whether a particular product or proposed export is covered by a CBP exclusion, please contact a member of Baker Donelson’s Global Business Team.

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Alan Enslen is a shareholder with Baker Donelson and leads the International Trade and National Security Practice and is a member of the Global Business Team. He can be reached at aenslen@bakerdonelson.com.

 Julius Bodie is an associate with Baker Donelson who assists U.S. and foreign companies across multiple industries with international trade regulatory issues. He can be reached at jbodie@bakerdonelson.com.

BIS

BIS Introduces Significant Restrictions on U.S. Exports to China, Russia, and Venezuela

On April 28, 2020, the U.S. Department of Commerce, Bureau of Industry and Security (“BIS”) published three amendments to the Export Administration Regulations (“EAR”) that are expected to have a significant impact on businesses – both within the U.S. and beyond – with regard to the export, re-export, or transfer of goods, software, and technology subject to U.S. jurisdiction to Chinese, Russian, and Venezuelan entities, including both commercial and military end-users.

The first rule expands existing export restrictions on military end-users in China, Russia, and Venezuela. The second rule eliminates License Exception Civil End Users (“CIV”), which previously authorized the export of certain items restricted for national security reasons to countries in Country Group D:1, including China, Russia, and Venezuela. These two rules are being issued as final rules (i.e., without an opportunity for public comment), and will become effective on June 29, 2020. The third rule is a proposal to modify license exception Additional Permissive Reexports (“APR”), which currently authorizes the re-export of certain U.S.-origin items from third countries to China and other Country Group D:1 destinations that cannot be exported directly from the United States without a license. Under the proposed revisions, a license from BIS would be required for such re-exports. Comments on this proposal must be received by BIS no later than June 29, 2020.

The three rules may have been the product of a White House Cabinet meeting that apparently took place on March 25, 2020.  That meeting reportedly considered U.S. policies with respect to transfers of U.S. technology to China, particularly those involving Huawei. Prior to the meeting, BIS prepared two draft rules that would (1) reduce the de minimis U.S. controlled content threshold applicable to Huawei and its affiliated companies from 25% to 10%, which would dramatically increase the number of foreign-made products that would be considered subject to U.S. jurisdiction and therefore require a license, and (2) amend the EAR’s “foreign direct product rule” to limit Huawei’s ability to obtain chips that are the product of U.S.-origin semiconductor manufacturing equipment (for example, chips produced by Taiwan Semiconductor Manufacturing Company).

According to reports, the Cabinet meeting resulted in an agreement to tighten these limitations through an amendment to the foreign direct product rule. While that rule has not yet been released by BIS (and may yet be forthcoming), the three rules published on April 28, 2020, constitute an even broader effort to tighten technology controls on China.

Expansion of Export, Re-export, and In-Country Transfer Controls for Military End-Use or Military End Users

The first rule will significantly expand export restrictions on military end-users by broadening the list of items requiring a license when exported, re-exported, or transferred to a “military end-user” or for a “military end-use” in China, Russia, and Venezuela pursuant to § 744.21 of the EAR.  For example, under the new rule, mass-market encryption items classified under Export Control Classification Number (“ECCN”) 5A992.c would trigger the license requirement.  Popular consumer devices – including mobile phones, laptops, and “smart” devices – may potentially be restricted under the new rule if intended to any “military end-user” or a “military end-use” in any of the three destinations.

In connection with this new rule, it is important to note that the existing definition of “military end-users” is already very broad. In addition to the army, navy, air force, marines, and coast guard, it also includes “national guard/police, government intelligence and reconnaissance organization[s],” as well as “any person or entity whose actions or functions are intended to support ‘military end-uses.’” Additionally, the rule further expands the definition of “military end-use” to include any item that supports or contributes to the operation, installation, maintenance, repair, overhaul, refurbishing, “development,” or “production,” of certain military items.

Businesses involved with the export, re-export, or in-country transfer of items or technology subject to U.S. jurisdiction to China, Russia, and Venezuela will, therefore, need to conduct increased diligence and carefully assess whether the end-users or end-uses of those items or technology fall within these broad definitions, in particular government-adjacent end-users, such as state-owned enterprises or government contractors. BIS has indicated that it intends to issue guidance regarding the level of due diligence it expects from industry to comply with the expanded licensing requirements.

Additionally, this rule broadens the list of items requiring a license when exported to a military end-user or for a military end-use to cover items and technology subject to relatively low levels of control that relate to materials processing, electronics, telecommunications, information security, sensors and lasers, and propulsion. The new ECCNs covered under the scope of new regulation include, by way of example, mass-market encryption items and software (e.g., smartphones), certain microchips and integrated circuits, certain electronic testing and processing equipment, telecommunications test equipment, and certain materials processing equipment, such as mining and drilling equipment and industrial pumps.

Further, while exports that previously required a license under § 744.21 were reviewed on a case-by-case basis by BIS, the new rule states that license requests will be reviewed under a presumption of denial.  This means that such applications will be rejected in principle unless the presumption can be overcome. Overcoming the presumption is fact-specific and rare, but will likely depend upon the policy goals of BIS at the time the license application is made (for example, BIS could conclude that an export that would meet a humanitarian need could outweigh the presumption of denial).

Finally, the rule separately expands Electronic Export Information (“EEI”) filing requirements in the Automated Export System (“AES”) for all exports to China, Russia, or Venezuela. Previously, exporters were not required to file an EEI for many shipments valued under $2500 (unless an export license is required), nor was it necessary to enter the ECCN in the EEI when the item is classified EAR99 (i.e., the item is not identified on the Commerce Control List (“CCL”)), nor if the sole reason for control is for anti-terrorism (“AT”) reasons. The new rule will now require filing an EEI for all items destined to China, Russia, or Venezuela regardless of the value of the shipment unless the shipment is eligible for License Exception GOV. This is significant because the failure to file EEI, even if a license from BIS is not required, may constitute a separate violation of the EAR and of the Foreign Trade Regulations administered by the U.S. Census Bureau.

Elimination of License Exception Civil End Users (CIV)

Pursuant to the second new rule, License Exception CIV is eliminated in whole. In the explanatory portion of the final rule, BIS stated, “the primary goal of this effort is to advance U.S. national security, foreign policy, and economic objectives by ensuring an effective export control and treaty compliance system and promoting continued U.S. strategic technology leadership.” While the final rule did not make mention of China, China most assuredly is the primary target of this effort, as the country has long been criticized by Trump Administration officials for exploiting perceived gaps in U.S. export controls via retransfers of U.S. technology. Previously, the License Exception authorized the export, re-export, or transfer (in-country) of certain items subject to control only for low-level national security (“NS”) reasons, and identified as eligible for the license exception most commercial end-users in destinations identified in Country Group D:1 (including China, Russia, and Venezuela, among other countries), without the need for prior review by BIS. This rule modification removes the previously applicable license exception for such low-level items.

Modification of License Exception Additional Permissive Reexports (APR)

Finally, citing the need “[t]o get better visibility into transactions of national security or foreign policy interest to the United States,” BIS proposes to modify License Exception APR for certain controlled items.  Previously, paragraph (a) of License Exception APR authorized the re-export of certain US.-origin items from a country in Country Group A:1 (i.e., countries, like the United States, participating in the Wassenaar Arrangement for multilateral export controls) or Hong Kong to certain more controlled destinations, provided that the re-export is consistent with an export authorization from the country of re-export.

In particular, License Exception APR currently authorizes re-exports to Country Group D:1 (which, as noted above, includes China, Russia, and Venezuela) so long as the items are only subject to national security controls.  BIS is proposing to remove countries in Country Group D:1 as a category of eligible destinations, as “even Wassenaar participating states in Country Group A:1 may have export authorization policies that do not align with the national security or foreign policy interests of the U.S. government.” If License Exception APR is modified as proposed, re-exports of certain national security-controlled items must be reviewed by the U.S. government before proceeding. Given the increasing consensus within the U.S. government that additional U.S. export restrictions will be needed to counter China’s “civil-military fusion,” it is reasonable to conclude that the new rule also is intended to target China in particular.

Unlike the other two rules released contemporaneously by BIS, this third rule is only a proposal. BIS is currently accepting comments on the rule through June 29, 2020, and so it is possible that revisions may be made to the final version of the rule. Companies that would be affected by the proposed rule and other interested parties should consider drafting comments on the rule to make their voices heard prior to the deadline.

Conclusion

The three rules published by BIS on April 28, 2020, reflect the Trump Administration’s latest effort to pursue stricter controls on U.S. goods and technology, even as the full economic effect of the COVID-19 pandemic has yet to be realized. While the April 28, 2020 rules impact exports, re-exports, and in-country transfers to a variety of destinations, based on reports of the March 25, 2020, Cabinet meeting, and other high-profile actions targeting Huawei, China appears to be the principal motivation behind the new rules.

Although the two final rules will not become effective for 60 days, all companies conducting cross-border transactions involving goods, software, or technology subject to U.S. jurisdiction should carefully conduct due diligence on the end-users of their items and ensure that their compliance procedures are fully implemented to avoid even inadvertent violations of these tightened trade restrictions.