Summarizing CSIS on Getting Traction with BIS Export Controls: Short Term Panic Followed by Predictable Patterns

On Friday, new names emerged as potential nominees for the Undersecretary position in the Department of Commerce’s Bureau of Industry and Security (BIS) – or as the New York Times put it, “The Agency at the Center of America’s Tech Fight With China.” While we await an official announcement, Center for Strategic & International Studies (CSIS) Senior Adviser and Scholl Chair in International Business William Alan Reinsch weighed in on the position at BIS. “I think the most important criterion is to find someone who can listen to the different points of view and produce regulations that will stand up in court and provide reasonable certainty to the business community,” he noted. “Policy decisions about China are going to be made in the White House, not BIS. The Bureau needs somebody who can implement the policy in a timely manner without making mistakes and who can obtain business community cooperation in doing so. The Bureau’s success has always rested on the latter, since the companies have always been the front line of defense against unauthorized technology transfer.”

Reinsch offered an in depth look at BIS and export controls in May 2020 with CSIS Fellow Jack Caporal. They unpacked China’s doctrine of Military Civil Fusion (MCF) as well as what it means for export controls and the future of the Department of Commerce’s Bureau of Industry and Security (BIS), which now has tighter export control rules under the 2018 Export Control and Reform Act. Their prescient analysis is worthy of review as the agency has a heightened role of importance these days, and the forthcoming selection of its leader is critical to achieving the Administration’s policy goals. China Tech Threats reviews their analysis below.

Reinsch and Caporal observed that the new BIS rules expand the number of products that require export licenses and remove certain license exemptions, giving BIS considerable discretion to administer export controls. They observed that even though in the short-term some exporters panicked and felt uncertainty and potential for rejection, this would subside as approval patterns emerge. They concluded that the new rules could be a helpful starting point for addressing the risks posed by exporting advanced dual-use technologies.

Reinsch and Caporal observe that China’s practice of MCF, which blurs the lines between China’s military and commercial sectors, has increased the risk and difficulty for U.S. firms and regulators to determine whether exports are going to their legitimate, purported use. While arms themselves are prohibited for exports, there are advanced dual-use technologies which come into play, and many have been reported to have inadvertently fallen into military hands in China. They reference the Pentagon’s report to Congress in 2019, noting that since 2015, China has specifically attempted to obtain: “radiation hardened integrated circuits, monolithic microwave integrated circuits, accelerometers, gyroscopes, naval and marine technologies, syntactic foam trade secrets, space communications, military communication jamming equipment, dynamic random access memory, aviation technologies, and anti-submarine warfare.”

The new rules expand the number of products requiring Export Administration Regulations (EAR) licenses and concurrently the clarifications that firms need from BIS. New product categories include: 1) materials, chemicals, microorganisms, and toxins; 2) materials processing; 3) electronics design, development, and production; 4) computers; 5) telecommunications and information security; 6) sensors and lasers; 7) navigation and avionics; 8) marine; and 9) propulsion systems, space vehicles, and related equipment.

Given BIS’ considerable discretion, Reinsch and Caporal observe,

  • “It is therefore important to distinguish between the uncertainty impact—the consequences of exporters not knowing how the rules will be implemented—and the rejection impact—the consequences of previously approved licenses now being rejected. Experienced exporters already have a good idea of what they need to do to make sure their exports are not going to unacceptable end users. Exporters who have not had to deal with sales to problematic entities in the past, however, are going to be faced with new challenges following the expansion of the military end use definition. It is generally true that uncertainty declines as patterns become clear. For semiconductor companies with established bulk customers, for example, they will have to decide initially whether they now need to apply for a license or not in a particular case. However, once they decide, the situation clarifies—either by BIS acting on the application if they made one confirming that they don’t need to apply or taking enforcement action if they are supposed to apply and do not. Over time, the situation will become clear with respect to existing customers, and they will probably adopt new procedures for vetting new customers. The CSIS Technology Policy Program has explained how this would lead to a helpful establishment of precedents specifically for semiconductor companies. In other words—short-term panic, long-term settling into a groove.
  • The greater impact will occur if BIS ends up rejecting a significant number of license applications, which would not have been submitted but for the rule. There is a presumption of denial for military end users in China, but BIS decisions will probably turn more on whether or not the end user is actually ‘military’ as defined in the rule. Companies will likely apply for a license out of an excess of caution (with exceptions—some will follow the old cliché that it’s better to ask forgiveness than permission), and BIS will deny those going to entities it views as military end users but not to entities it views as benign. And there, again, as patterns develop, panic will decline. If a company gets a license approved, they can safely assume future licenses to that entity will likely be approved as well and perhaps get BIS to tell them that the particular entity is not a military end user and, therefore, no license is required. That said, there is also the chilling effect of an ambiguous rule. Some companies will choose not to apply for a license, having concluded that their customer meets the military end user definition, which would mean a sale foregone—unnecessarily if the company’s judgment about the end user was wrong. There again, as word gets around, as it always does, about which end users are being approved and which are not, panic will subside.”

The CSIS analysis concludes that China’s practice of MCF is real and endangers Americans’ security. It underscores the importance of BIS to deliver effective enforcement of export controls.