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Statement of Need: This rule is needed to describe how items that no longer warrant ITAR control--but, because they are specially designed for military applications, warrant some degree of control--will be made subject to the EAR and listed on the CCL. In particular, this rule establishes the framework within which items that are transferred from the ITAR to the EAR will be identified in and controlled by the EAR. Such ready identification is needed to allow for public understanding of the changes and to facilitate executive branch compliance with the requirements to notify Congress when items are removed from the ITAR. Such controls are needed to accomplish the national security and foreign policy objectives of controlling transfers of military items, which includes complying with statutory and international obligations to prevent the transfer of such items to certain countries, end uses, and end users.

Summary of the Legal Basis: The Export Administration Act of 1979, as amended, authorizes the President to prohibit or curtail exports for national security or foreign policy reasons. Section 3(1) of that Act provides that "It is the policy of the United States to minimize uncertainties in export control policy and to encourage trade with all countries with which the United States has diplomatic or trading relations, except those countries with which such trade has been determined by the President to be against the national interest." Although the Export Administration Act of 1979 (EAA), as amended, expired on August 20, 2001, Executive Order 13222 of August 17, 2001 (3 CFR, 2001 Comp., p. 783 (2002)) as extended by Notice of August 12, 2010, 75 FR 50681 (Aug. 16, 2010) continues the EAR in effect under the International Emergency Economic Powers Act (IEEPA). The EAA and the IEEPA provide the President with the discretion to tailor controls, such as through the use of license exceptions and the creation of country groups in the implementing regulations, over different types of items based on their significance or other factors relevant to the national interest. The Arms Export Control Act (22 U.S.C. 2778) gives the President the authority to identify any item as a "defense article." The list of "defense articles" is identified on the U.S. Munitions List (USML) of the International Traffic in Arms Regulations (ITAR). (22 CFR chapter I, subchapter M). Section 38(f) of the AECA requires the President to periodically review the list of defense articles and determine which, if any, should be removed from the list. Section 38(f) authorizes the President to remove defense articles from the USML and control them under other statutory and regulatory authorities, such as the export control regulations administered by the Commerce Department, after completing a 30-day congressional notification.

Alternatives: BIS considered several alternative regulatory structures for the items that would be moved from the ITAR to the EAR, including creating a separate Commerce Munitions List in the EAR and attempting to insert all items transferred into the existing ECCN structure. BIS selected the "600 series" structure because it provided the best balance between ease of use and the need to readily identify items moved or to be moved from the ITAR to the EAR for congressional notification purposes. A separate Commerce Munitions List would have readily identified items moved from the ITAR, but would have required the public to consult two lists to assess whether license requirements applied to a particular item. Attempting to place all transferred items within the existing ECCN structure would have minimized the number of ECCNs to be consulted but would have unduly obscured the ITAR origin of the transferred items.

Anticipated Costs and Benefits: The underlying policy motivation for the reform effort is not a traditional economic cost/benefit analysis. Rather, it is a national security effort. When the Administration first began to consider how the export control system should be reformed to enhance national security, it did not take into account whether there would be particular economic benefits or costs. After conducting the review, the Administration ultimately determined that our national security will be strengthened if (i) our export control system allows for more interoperability with our NATO and other close allies; (ii) our industrial base is enhanced by, for example, reducing the current incentives created by the export control rules for foreign companies to design out or avoid U.S.-origin content; and (iii) our resources are more focused on controlling or prohibiting, as needed, the items that provide at least a significant military or intelligence advantage to the United States. Items made subject to the EAR as a result of this rule generally would require a license to all destinations except Canada and exporters, reexporters and transferors would incur the costs associated with applying for such licenses. BIS would need additional resources to review the additional licenses and to handle the related compliance activities that will accompany the planned change in jurisdictional status of items. The net burden on the government and that the government imposes on industry, however, would be substantially reduced because this rule would apply to items that currently are subject to strict, generally inflexible ITAR license requirements that impose many collateral compliance burdens and costs on exporters and the U.S. Government. BIS believes that replacing such ITAR license requirements with the more flexible EAR license requirements is not likely to result in any net increase in costs. However, the benefits of the move would be substantial, although not readily quantifiable.

Risks: Not all items currently subject to the ITAR are appropriate for movement to the EAR. Care must be taken to ensure that large sophisticated weapons and other inherently military items (as opposed to items unique to defense articles merely because of a change in form or fit) are not moved to the EAR. BIS believes that the ongoing interagency review process is adequate to guard against any transfers contrary to national security and foreign policy interests. At the same time, one must consider the risks of not transferring to the EAR defense articles that no longer warrant ITAR controls. These risks include continued excessive costs to exporters in complying with unnecessarily restrictive rules, continued disincentives for defense manufacturers to use U.S. origin parts and components, and continued excessive costs associated with supplying allied armed forces with U.S. origin parts and components. BIS believes that this rule sets up a structure for controls that will allow for the appropriate balance between the risks of continuing the status quo and the risks of unwarranted relaxation of controls.