A version of this article first appeared in the December 2020 issue of Export Compliance Manager, no. 9.
It can challenging to deal with a disgruntled overseas customer that purchased a product now in need of repair. The challenge of satisfying that customer can be even greater if the product in question may not be shipped freely across borders.
Imagine the following scenario: you are a trade compliance manager of a California company making advanced navigation and positioning equipment. Your customer in Japan has contacted your company about a gyroscope sold three years ago and warranted for 10 years. The gyroscope is malfunctioning due to a faulty component, and, as a result, the customer’s heavy-duty industrial candy-making robot, in which it is used, must be idled. Millions of deserving Japanese children, and even some adults, are at risk of foregoing their favorite treats, not to mention your customer’s risk of foregoing billions of yen of profits. “The gyro needs to be repaired or replaced YESTERDAY!” – yells your company’s key account manager through your laptop screen during the Zoom meeting. The only complication is that the gyro is classified under ECCN 7A002 and was exported under a Bureau of Industry and Security (“BIS”) license, which has since expired.
You analyze the situation and examine your options:
- ECCN 7A002 controls not only the gyros with specified performance capabilities, but also “specially designed” “components” therefor. Thus, export licensing requirements will apply not only to the shipment of a gyro itself, but also to the shipment of the faulty “specially designed” component.
- Your company’s service center in China has the “specially designed” replacement component made in China, and the technicians with sufficient expertise to replace the component. The gyro would need to be shipped to China to be fixed there. The problem is that Japan is a party to the Wassenaar Arrangement and has its own licensing requirements for the shipment of a 7A002 gyro to China. You have no idea what it would take to obtain the export permit in Japan, but you have a sense that it is not going to be quick or easy.
- Your company’s subsidiary in South Korea happens to have in stock the same gyro model as the one needed by your customer in Japan. You face great pressure to release that gyro for immediate shipment across the Sea of Japan. You need to resist that pressure. That gyro was shipped to South Korea under a BIS export license for ultimate end-use in South Korea. Sending it to Japan would be a re-export, and it would require a separate re-export license from BIS.
- Obtaining a new license from BIS authorizing the re-export of a replacement gyro, or the export of the specially designed component from the U.S. would take at least 2-3 weeks. This timeframe would be ruinous for your customer’s business.
- You review the list of License Exceptions in Part 740 of the Export Administration Regulations (“EAR”), and discover that you could export the replacement component from the United States without an export license under License Exception RPL provided for in EAR section 740.10(a)(2) (One-for-one replacement of parts, components, accessories, or attachments). Eureka! You carefully review section 740.10 and confirm that the export of the component will be eligible for the license exception as a one-for-one replacement, since the original gyro was lawfully exported from the United States (if it was not, General Prohibition 10 in Part 736 dictates that you may not do pretty much anything with the gyro without seeking a special authorization from BIS), and there are no applicable exclusions. You take note of the requirements of section 740.10(a)(2)(iii) that the component to be replaced must be either destroyed abroad or promptly returned, and decide that the faulty component in question should be destroyed, and you should obtain and retain a photographic proof of its destruction.
- As you prepare to send the replacement component to your customer in Japan, you realize that replacing this component is not a simple matter and will require detailed technical instructions of proprietary nature. It strikes you that such instructions may amount to controlled “technology,” and, indeed, upon careful review of Category 7 of the Commerce Control List you discover that ECCN 7E003 controls “technology” for the repair of equipment controlled by ECCNs 7A001 to 7A004. Accordingly, you would need to obtain an export license to provide 7E003 technology to your customer in Japan. Oh, no!
- Then you remember that those smart technicians at the service center in China have the expertise to replace the faulty component! Why not send one of them to your customer’s site in Japan, when the component arrives from the U.S.? In fact, you could even send one of the U.S. guys or gals who know how to do it, if you had to. As long as they didn’t show the Japanese customers how to perform the replacement of the component, there would be no “release” of the controlled repair “technology” within the meaning of EAR section 734.15 and Part 772. Finally, problem solved!
This scenario illustrates just one of the many possible iterations of the problem of servicing or repairing controlled items located in another country, and some key issues that need to be considered. There are many other possible scenarios, which would change the analysis and the outcomes. For example, if the item to be repaired were a military commodity controlled by the International Traffic in Arms Regulations (“ITAR”), you would likely need both an import and an export license to repair the item in the United States, but may also be exempt from these licensing requirements under ITAR section 123.4(a)(1). Or, imagine that foreign-made equipment is shipped for repairs to a U.S. service center. It would be important to know the export classification of this equipment, which may not have been determined if it was not controlled from the country of export (e.g. China), and ensure that an export license is obtained, if necessary, to send the repaired product back.
In summary, the following are the key points that could help your company manage the challenges of repairing export controlled items:
- Know what you are shipping – keep in mind that in many cases, not only the equipment itself, but also its parts and components are subject to export controls.
- Pay attention to territorial export control jurisdiction – remember that a controlled item may be subject to the jurisdiction of not only the country from which it was originally exported, but also of the country in which it is physically located. This is especially true for military items and for countries that enforce export controls harmonized under the aegis of the Wassenaar Arrangement.
- Pay attention to technology – it is often necessary to export technology for the repair of broken items along with those items. For most dual-use controlled products, repair technology is not controlled. However, it is controlled for some dual use items, as discussed in the example above, as well as generally for 600-series items, and military commodities controlled by the ITAR.
- Utilize license exceptions – in most cases, temporary import and export of items to and from the U.S. for the purposes of servicing and repairs will be facilitated by license exceptions and exemptions. This includes the General License TMP for Temporary Imports, Exports, Re-exports, and Transfers (in country) under section 740.9 of the EAR, as well as the General License RPL for Servicing and Replacement of Parts and Equipment, and the license exemption under the ITAR section 123.4.
- Plan in advance – if your company provides export-controlled products or equipment which are subject to warranties and may need service or repairs, it should plan its supply chain and service capabilities in advance, taking into consideration export licensing requirements. Such planning may include adding spare parts and components to the scope of the original export licenses; maintaining export licenses for the duration of the warranty periods; locating service centers in the same jurisdictions as the customers of controlled products; furnishing such service centers with controlled parts, components, and technology exported under appropriate export authorizations and thorough training regarding responsibilities with respect to controlled items; or, at the very least, managing the customers’ expectations with regard to the servicing and repair of controlled products.