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3 Takeaways from New Export Control Act

The Export Control Reform Act — the less-buzzed-about law passed alongside an overhaul of the Committee on Foreign Investment in the United States — highlights the growing push by the U.S. government to curb foreign access to critical technological innovation.

The law, which was signed by President Donald Trump in August alongside the Foreign Risk Review Modernization Act as part of the National Defense Authorization, provides a formal framework for reviewing exports of dual-use items, such as commercial hardware, software and technical know-how that may also have a military application, to foreign entities.

But it also takes the process a step further, expanding the scope of technology that may be subject to licensing to include, for the first time, emerging and foundational technology.

“Before ECRA, it was possible that your emerging or foundational technology would not have been subject to any export control licensing requirements because it was not specifically described in the export regulations,” said Christopher Timura, a Gibson Dunn & Crutcher LLP of counsel in the firm’s international trade practice group. “Now, as such technology is identified, it can become subject to new licensing requirements.”

Here, Law360 outlines three major takeaways from the new law.

Reflects US Push to Protect New Tech

The Export Control Reform Act, which formally codifies much of what was in practice for the export of dual-use items, or goods with both civilian and military uses, also seeks to give the U.S. more insight and control over the export, re-export or in-country transfer of so-called emerging and foundational technology as the country looks to establish ways to protect cutting-edge technology.

According to the law, part of protecting national security in the U.S. is ensuring the country can “maintain its leadership in the science, technology, engineering and manufacturing sectors, including foundational technology that is essential to innovation.”

The desire to protect emerging and foundational technology is also reflected in the Foreign Investment Risk Review Act, which was also passed as part of the NDAA and seeks to modernize CFIUS.

“With CFIUS reform, there are enhanced restrictions when it comes to protecting technology. Well, there’s something similar at play here,” said Anthony Rapa, a partner in Kirkland & Ellis LLP’s international trade and national security practice group. “The U.S. seems to be on the road to issuing new regulations where we are going to control the flow of new technology purely to protect our technological advantage.”

In fact, the idea of having CFIUS review outbound transfers of technology was initially incorporated in an earlier version of FIRRMA. However, it was ultimately stripped from the final version, with the task being shifted to the Commerce Department, which is already set up to review exports of dual-use items.

“Even though they were very concerned about the unreviewed and strategic acquisition of sensitive U.S. intellectual property by China or other competitors, cooler heads prevailed and they recognized that there was an agency that already exists that might be more effective at managing outward flows of emerging and foundational technology across a range of transactions than CFIUS,” Timura said.

Leaves Key Parameters to Be Defined

While there is an interest in monitoring who has access to emerging and foundational technology, the exact products that will be considered to be emerging and foundational technology and the controls to be placed on them still have to be defined by the U.S. Department of Commerce and a handful of other federal agencies.

The law calls on the president and the secretaries of Commerce, Defense, State and Energy, as well as any other federal department heads deemed necessary, to make the determination and to “have a regular and robust process to identify the emerging and other types of critical technologies or concern and regulate their release to foreign persons.”

“It’s a new interagency task force that’s responsible for identifying emerging and foundational technology and then establishing controls around the export and re-export of them,” said Ama Adams, a Ropes & Gray LLP partner who advises on international transactions and U.S. regulation of trade and investment.

While the technology that would be deemed emerging or foundational has not yet been determined, it’s anticipated that the government will look closely at areas like semiconductors and artificial intelligence for such technology.

That task force will be called on to “establish and maintain a list of foreign persons and end-uses that are determined to be a threat to national security” and ensure that no licenses are granted in those situations.

There is no specified timeline for these aspects of the act to be finalized, however it will likely take several months before all is said and done.

“The White House will lead an effort to identify these emerging and foundational technologies, and then the Commerce Department will issue a proposed rule in the Federal Register in which it will identify the technologies and propose a corresponding export licensing regime, i.e., propose how the export of the technologies will be restricted. Then ultimately, a set of final regulations will be promulgated,” said Brian Curran, a partner in Hogan Lovells’s international trade and investment group.

“It’s going to take a while,” he added.

Intersects Slightly With CFIUS

The Export Control Reform Act overlaps with CFIUS in more than just its interest in addressing national security concerns about foreign entities’ access to sensitive technology. CFIUS is also expected to utilize the definition of emerging and foundational technologies that comes out of the task force as part of its own definition of critical technologies.

Those types of technologies defined as emerging and foundational by the Commerce Secretary and the fellow members of the group will also trigger a CFIUS review of related covered investments by foreign entities in those products.

For exports, there does not need to be a corporate transaction involved for licensing to be required for the export, re-export or in-country transfer of dual-use items. However, in certain instances, like the establishment of a joint venture or collaboration with a foreign entity, the review process for the license can be reminiscent of the CFIUS process.

In those instances, the review process can include bringing in the intelligence community to better understand who the foreign entity is, and which entities it is backed by.

“The role [of the intelligence community] in conducting a threat assessment in connection with an export license application and the provision under which the Commerce Department can ask for ownership information about the foreign party if the transaction involves a joint venture or some similar collaboration — both of these features are essentially borrowed from CFIUS reviews,” Curran said.

“So they’ve taken an existing export licensing regime under the [Export Administration Regulations], and they’ve beefed it up for these technologies by including these two features borrowed from the CFIUS process,” he said.