Think Before You Ship: Who, What, and Where?

June 27, 2020

Congratulations! You received your first order from a foreign customer. You want to fulfill and deliver it as soon as possible to encourage repeat business. But before you package and slap on the shipping label, you might want to consider exactly what you are shipping, what its possible uses are, and which countries it will travel through en-route to its final destination.

Recently, a small U.S. manufacturer and exporter of metal alloys posed the question: “Are there any specific re-export controls of a U.S. sourced zirconium alloy used as a component in a finished product manufactured in Canada which in turn is exported to its ultimate destination in China?” If your jaw hit the floor as mine did, you might be thinking they would only be asking such a specific question for one reason. It already happened.

The root problem in the above scenario is the U.S. supplier was asking the wrong questions at the wrong time. Before fulfilling the order, they should have asked whether zirconium is controlled by any U.S. export regulations.  They would have discovered that zirconium is controlled by the International Trafficking in Arms Regulations (ITAR) as a Category V item (Explosives & Propellants) and by the Missile Technology Control Regime (MTCR) Annex to the ITAR as a Category II item when it is granulized to a certain size. They also would have discovered that zirconium is controlled by the Export Administration Regulations (EAR) when it is in a form that can be used as a component in a nuclear reactor.

As for the question about re-export controls, that should have been asked before shipping too. The U.S. supplier would have learned that their export license should contain the following statement as outlined under ITAR section 123.9 paragraph b:

‘‘These commodities are authorized by the U.S. Government for export only to [country of ultimate destination] for use by [end user].  They may not be transferred, transshipped on a non-continuous voyage, or otherwise be disposed of, to any other country or end-user, either in their original form or after being incorporated into other end items, without the prior written approval of the U.S. Department of State.’’

Translated, that means an ITAR controlled item without Department of State approval cannot be shipped to a Canadian customer who intends to use it as a component in a manufactured product which will then be exported to China.

Companies who export products overseas must be aware of the ITAR, MTCR, and the EAR and know how they relate to their exports.  As a rule of thumb, companies should consider the following before fulfilling a new overseas order:

1.  Is the product you’re shipping a possible dual-use item that can be used for both civilian as well as military purposes?  If so, is the possible military application related to missile, nuclear, or unmanned aerial vehicle technology? This is not always clear. For example, the same microchips used in a video game console could be considered dual-use if encased in a hardened exterior.

2.  What is the specific classification (Commodity Jurisdiction) of the item on the Commerce Control List (CCL) of the EAR, and does the item appear in the United States Munitions List (USML) of the ITAR or in the MTCR Annex?  A quick check of the following lists might help to quickly identify items that are clearly covered:

If still unsure about the classification of a specific item, exporters can submit a Commodity Jurisdiction (CJ) request to the State Department. Information about CJ requests is available on the State Department’s Directorate of Defense Trade Controls (DDTC) web page.

3.  Where is the final destination of the export and who is the end-user? Compliance is not just about the initial transaction between the U.S. supplier and their immediate customers. Due diligence on the ultimate destination and possible intermediaries is vital. Some countries, entities, and individuals are off-limits for doing business with U.S. companies, and some of those entities may also have available exemptions.

So before you say bon voyage to your next overseas shipment, it might be a good idea to think about how your product fits into the big picture of the supply chain beyond the transaction between just you and your immediate foreign customer.  The above suggestions are not meant to substitute for legal advice, but rather they are meant to highlight the importance of considering export compliance before shipping seemingly benign products overseas. Please share your thoughts on this topic below.