BIS Issues Guidance On 'Second Incorporation Principle' Under De Minimis Rule

On January 6, the Bureau of Industry and Security (BIS) of the U.S. Commerce Department published a redacted September 2009 advisory opinion which, in an incremental way, may reduce the downstream burden of U.S. reexport controls.

1. Pressure to "Design Out" U.S. Content from Foreign-Made Products

   In a recent speech on the importance of exports to the U.S. economy, Secretary of Commerce Gary Locke cited a "troubling quote" from the head of a European aerospace industry group, to the effect that the only way to resolve technology access and U.S. government export restrictions was by "not including any U.S.-sourced technology in our products." In addition to regulating the actual shipment or transmission of U.S.-origin commodities, software and technology from one foreign country to another, the Export Administration Regulations (EAR) control, among other things, reexports from abroad of foreign-made items incorporating U.S.-origin materials, parts, components, software or technology. BIS, which administers the EAR, acknowledged the potential downside of such reexport controls in October 2008, stating, "Modifying U.S. rules may reduce the pressure to 'design out' U.S. origin items from foreign products, and thereby provide significant benefit to U.S. businesses while enabling BIS to continue exercising appropriate jurisdiction over foreign-made items incorporating controlled U.S. content."

2. EAR De Minimis Rules

   To a degree, the global reach of the EAR reexport controls is limited by "de minimis" rules, under which foreign-made items containing no more than 25 percent by value of EAR-controlled U.S.-origin content are generally not subject to the EAR when reexported from abroad to most foreign countries. Foreign-made items containing no more than 10 percent by value of EAR-controlled U.S.-origin content are generally not subject to the EAR when reexported to Cuba, Iran, North Korea, Sudan or Syria. However, even when the EAR de minimis provisions place a foreign-made item outside the scope of the EAR, Office of Foreign Assets Control (OFAC) restrictions may apply if the item is destined for a U.S.-sanctioned country, individual or entity.

   Unfortunately, the complexity of the EAR de minimis provisions may undercut their effectiveness in countering the pressure on foreign manufacturers to "design out" U.S.-origin content. Generally, for example, the EAR de minimis rules only address foreignmade commodities that incorporate controlled U.S.-origin...