EU Impacted by Extraterritoriality of US Export Control Laws

Introduction

Navigating the complexities of international trade in our interconnected world, it’s clear that the influence of US export control laws extends beyond the US borders. A prime example of this wide reach is the Foreign Direct Product Rules (FDP). These regulations enforce the jurisdiction of the US Export Administration Regulations on items produced outside the US, but created using specific US technology, software, or equipment. In this blog post, we explore the extraterritorial reach of these rules and their impact on international trade.

Historical Context

The extensive extraterritorial application of US export control laws is not new. Rooted in principles of jurisdiction that justify extraterritorial legislation, like the protective principle, these laws have a significant history. Over time, the US has expanded the application of the FDP rules, broadening its jurisdictional reach in ways few other nations have.

The Current Landscape

Export control law governs exports, brokering, transits, and re-exports. The profound impact of US export control is clear in the ITAR, where a regulated component, once incorporated into a foreign-produced item, remains under ITAR jurisdiction. Conversely, under the EAR, foreign-made goods are only regulated if they include a certain percentage of US-origin parts. This percentage can be 25%, 10%, or there may be no de minimis level, as with items in the 9×515 ECCN and 600 series.

However, the foreign direct product rule now has a broader reach and impact on non-US operators.

According to §734.3(a) of the EAR, another group of items subject to the EAR is: “(4) Certain foreign-made direct products of US-origin technology or software, as described in §736.2(b)(3) of the EAR.” Rather than regulating foreign-made items as they incorporate controlled US-origin components, the foreign direct product rule targets items produced using EAR-regulated technology, software, or equipment. Consequently, exporting (including re-exporting or in-country transfer) foreign-produced items subject to this rule from a country outside the US without an EAR license or license exception is prohibited. This Foreign-Direct Product rule (FDP) has been revised and affects global trade.

Current FDP

Over the years, the BIS has revised the FDP several times, introducing various sub-rules. You can find these rules in §734.9 of the EAR, including:

• National Security FDP rule (sub b)
• 9×515 FDP rule (sub c)
• 600 Series FDP rule (sub d)
• Entity List FDP rule (sub e)
• Russia & Belarus FDP rule and Russia & Belarus Military End User FDP rule (sub f & g)
• Advanced Computing FDP rule (sub h)
• Supercomputer FDP rule (sub i)
• Iran FDP rule (sub j)

The FDP rules, complex in nature, apply when an item meets multiple criteria.

Examples of the FDP

The FDP rule targeted Huawei Technologies Co. Ltd and its affiliates, as referenced in footnote 1, without explicitly naming them. Since 2020, the revised version no longer requires a license for foreign-made items known to be incorporated into, or used in, the production or development of parts or equipment for Huawei, or when Huawei is involved.

Another example is the introduction of foreign-direct product rules related to Russia and Belarus in 2022. These rules apply to products that are direct products of US technology, software, or equipment when destined for Russia or Belarus. Effectively, the rule applies to all trade with these countries. The military end-user FDP rule, noted in footnote 3 in the entity list, is specifically for military end-users.

A recent example is the Foreign Direct Product (FDP) rule for supercomputers. This rule applies to foreign-produced items that are direct products of specific EAR-controlled semiconductor, computer, telecommunications, or encryption technology, software, or equipment. The rule mandates that these items be used in the design, development, production, operation, installation, maintenance, repair, overhaul, or refurbishing of a supercomputer located in or intended for China.

View on FPD

Under the current regulatory framework, the FDP rules apply to items produced outside the United States that use particular types of US technology, software, or equipment. Interestingly, even if these items contain no apparent US-origin content and are traded between parties in countries outside the US, they still fall under the US’s EAR jurisdiction. This underlines the extraterritorial nature of these rules.

Implications for European Operators

These expansive rules significantly impact European operators involved in international trade. The extraterritorial application of US export control laws requires European businesses dealing with specific items subject to these rules to ensure strict compliance. This applies even if all their activities are conducted entirely outside the United States.

Conclusion

The extraterritoriality of US export control laws, especially the recent introduction of the Foreign Direct Product (FDP) rules, has significant implications for European operators. These rules extend US jurisdiction beyond its borders, affecting foreign-made items that incorporate US-origin technology, software, or equipment. As a result, European operators must conduct thorough reviews of their activities for compliance. This not only complicates operations but also increases potential risks and liabilities. It may also influence strategic decisions about sourcing and partnerships. Therefore, understanding and managing these rules is crucial for European operators to maintain regulatory compliance, avoid potential sanctions, and ensure smooth operation in their international trade endeavors.

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