What has happened and what does it mean?
The U.S. Departments of State and Commerce have published proposed new “Export Control Reform” rules that, once effective, will transfer export control of semi- and non-automatic firearms, components and related ammunition, including associated technical data, from the International Traffic and Arms Regulations (ITAR) to the Export Administration Regulations (EAR).
Like the ITAR, the EAR control the export of hardware and technology, and require export licenses in many instances. The main difference is that the items controlled by the EAR are used commercially as well as in defense applications (so-called “dual use” items), in contrast to items controlled by the ITAR, which are intended to be items that are solely for military use. Export Control Reform (ECR) is intended to align firearm hardware and technology with that distinction, by moving non-military and dual-use firearms and ammunition from the ITAR to the EAR.
After the new rules become effective, non-automatic and semi-automatic firearms, components, ammunition and certain other items that currently require an ITAR export license will still require an export license in most instances but under the more flexible rules of the EAR. Another key change will be the disappearance for most of the industry of annual $2,250 registration fees to the Directorate of Defense Trade Controls (DDTC) at the U.S. Department of State, as well as the $250 per license fee for ITAR licenses.
The new rules will effect numerous other changes in the export control regime that currently applies to the firearms and ammunition industry.
When will the new rules become effective?
The new rules will be open to public comment for 45 days following their publication in the Federal Register. After the close of the public comment period, the Government will review the comments, prepare responses and issue final rules. It is not possible at this time to predict when final rules will be published, but for purposes of Orchid Advisors’ planning and communications, we currently assume the response and issuance of final rules will occur 90 days following the close of the comment period. The final rules will become effective no later than 180 days after their publication in the Federal Register. It is possible that the effective date could occur in fewer than 180 days.
The above translates into an effective date for the final rules as soon as January 1, 2019 or as late as July 1, 2019.
It is possible, even likely, that changes, probably minor, will be made to the proposed rules before they take final form. Those who seek to get a head start on preparing for the new world of EAR will need to develop flexible plans that don’t fully gel until the final rules are published.
Impact of the New Rules
It is not an exaggeration to state that the new rules will effect a total change – 100% — in the interface between companies in the firearms and ammunition industry and United States export control regulations.
Export classification, licensing, compliance programs, design and manufacturing collaborations will all occur under a new and quite different set of regulations. Everything will change.
After they adapt to the new EAR controls, companies dealing in non-automatic and semi-automatic firearms, components and ammunition will find that they can do business with foreign customers, distributors, vendors and other partners more easily and less expensively than today. The transition from the ITAR to the EAR promises to be arduous, however, as the industry learns new ways of conducting business.
How long will the transition last? You should expect that by SHOT Show 2020, your company and most of the industry will have adjusted to the new rules.
Orchid Advisors is committed to bringing the industry information on the new commercial opportunities ECR will present, as well as service and outsourcing solutions Orchid can offer to make it easier for manufacturers, retailers, exporters and others to capitalize on those opportunities.
What specifically will change?
The first thing to understand is that, with one exception, export control reform does not mean export control removal. Export controls on non-military firearms, components, ammunition and certain technology will continue. The one area in which controls will disappear is that services relating to items and technology that move to the EAR – known as “defense services” under the ITAR – will no longer be controlled.
The mechanics of export licensing for non-automatic and semi-automatic firearms and components, as well as ammunition for those firearms, will completely change. All personnel whose activities interface with the ITAR in any way – not just the licensing personnel – will need to be trained in the new rules. Export compliance manuals and procedures will need to be rewritten. You will have to redo your product classification matrices, too. These are only the more significant changes, however. There are many others.
Looking beyond the mechanical changes, how will ECR deliver on its promise to reduce the friction in international trade in non-military and dual-use firearms and ammunition? The answer depends on the role you play in the market.
1. Manufacturers and Exporters
Manufacturers of non-automatic and semi-automatic firearms, components and ammunition items (for the most part, currently USML Categories I(a), (g), (h) and III(a)) will be able to fulfill purchase orders much more quickly and to obtain licenses that permit more flexibility for product substitutions. Also, the paperwork burden that the ITAR imposes on foreign customers will be reduced.
The following changes will help U.S. manufacturers:
- Obtain export licenses before receiving purchase orders. Applications for DSP-5 licenses cannot be submitted until the seller has received a purchase order. This results in unavoidable delay in order fulfillment of four weeks or longer, rendering U.S. manufacturers unable to compete in foreign tenders and solicitations that require quick turnaround and, in all other situations, putting them at a delivery-time disadvantage relative to foreign competitors. By planning ahead, manufacturers of non-automatic and semi-automatic firearms selling into the international market will now be able to have licenses in place, in many instances, before orders are received.
- Blanket purchase orders encouraged. DDTC rules prohibit approval of DSP-5 licenses for blanket purchase orders. The EAR encourage blanket purchase orders. This will make both sale and sourcing arrangements simpler to structure and implement.
- Requirement for identifying firearm variants specifically in licenses will ease. EAR licensing rules permit identification of firearms by platform rather than with detailed descriptions of barrel length, caliber, round capacity, etc. ECR will simplify the interaction between U.S. sellers and foreign customers and permit greater flexibility in purchase orders.
- Simplification of requirements for ancillary documents. Import permits from destination countries will still be required, as will end user certificates, but format requirements that delay submission and approval of DSP-5s today will ease. DSP-83s will not be required for items that move to the EAR.
- No more Congressional Notification. There is no counterpart to Congressional Notification under the EAR. The lengthy delays in approval associated with orders of $1 million or more will be a thing of the past for non-automatic and semi-automatic firearms.
- Re-export from foreign distribution centers more readily. Distribution to multiple foreign countries from an overseas distribution point generally require a Warehouse and Distribution Agreement today. Licenses will continue to be required for this activity under the EAR but the process will become easier and a WDA will no longer be necessary. Companies that may have avoided international redistribution in the past may want to reconsider.
- Interact more freely with foreign affiliates. Technical Assistance Agreements (TAAs) and Manufacturing License Agreements (MLAs) under the ITAR are currently utilized to authorize U.S. firearms and ammunition companies to interact with foreign affiliates. They are cumbersome, time-consuming and often expensive to implement. When Congressional Notification is required, the approval time for TAAs and MLAs takes many months. Technology licenses under the EAR will replace ITAR TAAs and MLAs for non-automatic and semi-automatic firearms and their components and ammunition. EAR licenses will make technical collaborations among U.S. companies and foreign affiliates easier in many ways. Defense services will not be regulated at all.
- Design and source EAR products in cooperation with foreign partners. As noted, EAR technology licenses will replace ITAR TAAs and MLAs for the items moving to the EAR. EAR licenses will replace offshore procurement build-to-print licenses, too. What does this mean? It means that looking to the global market for services and products will become almost frictionless.
2. Retailers and Distributors
The single greatest benefit of ECR to retailers and distributors who sell into the international market – and those who don’t but want to — will be the reduction in the cost to play in the international arena. Small transactions that are cost-prohibitive under the ITAR won’t be under the EAR. Also, companies that conduct only a few export transactions a year will no longer be foreclosed from participating by high entry fees.
The most significant changes for retailers and distributors will be these:
- No annual registration fees. Companies that deal only in non-automatic and semi-automatic firearms will no longer be required to pay a $2,250 annual registration fee to DDTC. Registration is not required under the EAR, so the annual fee drops to $0 for these companies.
- No $250 per-license fee. After the first ten licenses per year, DSP-5s and other ITAR licenses cost $250 apiece. The fee for EAR licenses is $0.
- Increased exemptions. The $100 per-shipment license exemption that currently applies to all countries other than Canada under the ITAR will increase to $500. As a result, many business-to-consumer international sales that are uneconomical today will become profitable under the EAR. The $500 exemption that currently applies to Canada will be expanded.
- License-preparation technology. Under the ITAR, opportunities for using technology to accelerate and reduce the processing cost of export licenses are extremely limited. It is likely that this will change with the new rules, further enhancing the potential profitability of small sales.
3. Engravers and Gunsmiths
- Elimination of registration and licensing fees. Engravers and gunsmiths who want to do business with foreign customers will enjoy the same benefits from the elimination of registration and license fees as retailers.
- Simplification of exports and temporary imports. Receiving product from foreign customers and returning it after work is complete will no longer be too complicated for small businesspeople.
What should you be doing to get ready?
Companies that want to beat the competition will do three things right now:
- Prepare or update classification matrices. In order to identify where opportunities to take advantage of ECR may lie, companies need to identify which of their products will move to the EAR and which will not. This necessitates updating your existing product classification matrices or creating them from scratch if they do not already exist. Some classifications may change from the proposed rules to the final rules, but those who want to be ahead of the competition will get going now and make whatever adjustments are necessary when the final rules are announced.
- Devise ECR-compliant strategies for conducting international business. Now that the new rules have been announced, those who can should waste no time in learning how they will conduct business in the new environment. Manufacturers who take orders at NASGW in the fall and the customers who place the orders should both have at least a rough idea by that time of what they will be doing differently when the new rules take effect during the 2019 selling season.
- Pay attention to the news. In the coming months, Orchid Advisors, NSSF and others will provide additional information and details relating to ECR. These changes are far-ranging and important. By taking in information relating to ECR as it comes out, you will acclimate to the new rules more quickly.
How can Orchid Advisors help?
Orchid Advisors is the #1 provider of regulatory compliance solutions to the firearms and ammunition industry.
Orchid’s ITAR / EAR Practice helps companies in the firearms and ammunition industry (i) sell firearms, ammunition and components to foreign customers, (ii) build sustainable export compliance programs, and (iii) design, source and manufacture firearms, components, tools and accessories outside the United States.
Look to Orchid Advisors to help you take command of the new export environment in the following ways:
- Formulation of EAR-driven international sales and sourcing strategies
- Preparation of export licenses and provision of other “export compliance department” services on an outsourced basis. (Now may be the time to outsource export licensing, logistics support and record-keeping to professionals for whom this is their primary business)
- Practical advice on the making near-term decisions under the ITAR that will be affected in 2019 by the new rules.
- Development of integrated export and ATF compliance solutions for transitioning to the post-ITAR world.\
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