U.S. rolls out big export policy changes for satellite industryStory
June 04, 2014
The U.S. State Department and U.S. Department of Commerce are making big changes to long-standing export control policies as part of an effort to improve the international competitiveness of the U.S. space industrial base.
For many years, the U.S. space industrial base has faced challenges competing for international contracts – forced to compete against foreign manufacturers not constrained by U.S. export controls. To move beyond this roadblock, the U.S. space industry and government are collaborating to fundamentally change the nature of U.S. export controls on most commercial, scientific, and civil satellites, as well as related technology such as radiation-hardened Integrated Circuits (ICs).
On May 13, 2014, the U.S. Department of State amended the International Traffic in Arms Regulations (ITAR) to revise the spacecraft and satellite category of the U.S. Munitions List (USML) by more precisely describing the articles warranting control in that category and moving them to the U.S. Department of Commerce’s Control List (CCL).
For national security reasons, all items on the USML require the U.S. Department of State’s authorization prior to export. Until now, this has made it extremely difficult for U.S. manufacturers of spacecraft and satellite parts and components to compete in the international market.
The U.S. military relies on the commercial satellite industry to manufacture its military satellites and systems, according to the Satellite Industry Association (SIA; Washington, D.C.; www.sia.org), while commercial U.S. satellite owners and integrators provide 80 percent of the Department of Defense’s (DoD’s) communications.
In 2010, the DoD and Department of State published a report for Congress, known as the “1248 Report,” which assessed the risks of removing non-satellites and related components from the USML. The report concluded that keeping non-critical satellites and related components on the USML and monitoring low-risk launch activities provides only limited national security benefits.
The 1248 Report states, in part: “This practice places the U.S. space industrial base at a distinct competitive disadvantage when bidding against companies from other advanced satellite-exporting countries that have less stringent export control policies and practices. Transferring select items from the USML to the CCL would allow for controls consistent with other technologies and help enhance the competitiveness of the U.S. space industrial base, while continuing to protect U.S. national security needs. It would also provide the flexibility needed to apply U.S. export control personnel and resources to higher-priority issues, increasing protection of those items that do provide the U.S. with significant military or intelligence advantages.”
The 1248 Report also determined that the U.S. is the only space-faring nation that controls all commercial satellites and related items – including technology – as munitions items.
To put the financial impact into perspective, U.S. manufacturers lost approximately $21 billion in satellite revenue during 1999 to 2009, according to estimates by the Aerospace Industries Association (AIA; Arlington, VA; aia-aerospace.org), once USML controls were applied to commercial satellites.
The satellite industry is now poised for tremendous growth, with AIA predicting that the international market outside the U.S. for satellite manufacturing and launch services through 2021 will reach $132 billion – thanks to developing markets in South America and the Middle East, which are experiencing steady growth.
This means it’s never been more critical for U.S. companies to be able to compete in the international market. In a move to make it easier, several key items are being removed from the USML, including: communication satellites that don’t contain classified components; remote-sensing satellites with high-performance parameters; any spacecraft parts, components, accessories, attachments, equipment, or systems not specifically identified in the revised category; and most radiation-hardened microelectronic microcircuits.
The changes to the export controls on radiation-hardened microelectronic microcircuits take effect June 27, 2014, while the rest begin November 10, 2014.
A key companion rule, published by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) on the same day as the Department of State’s ITAR revision, enables satellites controlled by the CCL that use certain parts and components controlled by the USML to remain CCL-controlled, if certain conditions are met. It also removes certain spacecraft from the USML, while supporting the U.S. National Space Policy by creating conditions that allow the U.S. government to more easily host payloads on commercial satellites (see Figure 1.)
Figure 1: Further reading on export issues.
(Click graphic to zoom by 1.9x)
Combined industry and government effort
Most people would be surprised by the many factions of government that came together to make these export rule changes happen, according to Chuck Tabbert, Vice President of Sales and Marketing for Ultra Communications Inc. (Vista, CA; www.ultracomm-inc.com), a company that creates fiber optics for harsh environments.
“There were several meetings with the industry during the writing of the 1248 Report, so they got a good sense of what’s going on and what needed to change from the business community,” he says. “The entire food chain of industry associations lobbied for these changes.”
What was the first indication that the export rule changes would actually happen? “It was the move by Congress giving the President the authority to take satellite technology and transfer it from the USML to Commerce,” Tabbert says.
Congress had to return to the President the authority to determine the export control jurisdictional status of satellites and related items before any of the other changes could proceed.
“Once the President decided to go ahead with export reforms, the Department of State and Department of Commerce worked closely on the changes, and handled it well. This gave Congress the confidence that we weren’t trying to move toward decontrol – it was simply a shift of control.”
Another giant hurdle was, of course, the DoD’s finding in the 1248 Report that moving generic satellite technology from State to Commerce was a low risk to national security. “If we hadn’t gotten it in writing for Congress, the entire export reform initiative would have been sunk,” he adds.
Immediate implications of the rules
The rule changes are significant for the U.S. companies involved, in large part because the amount of business coming from the U.S. military has been steadily declining.
“To continue to be profitable, these companies need to be able to put more money into R&D, so this means they need to be able to sell abroad and compete as freely in international markets as their non-U.S. competitors,” says Marwa M. Hassoun, an associate who specializes in export and import regulations for Arent Fox LLP (Los Angeles, CA; www.arentfox.com).
Allies have been buying U.S. satellite-related parts for 30 years, and many have already established relationships with many manufacturers. But the export policy changes should now make it much easier to obtain good quality parts at better prices than they could achieve with in-house manufacturing.
“Most satellites are in a one-year build cycle, so we might see the full effects of the new policy within two to three years,” Tabbert notes. “It could be immediate, based on existing relationships, but my sense is that it’ll be more like two to three years.”
This makes it important for U.S. manufacturers – especially those within the IC realm – to begin marketing right away, as Tabbert points out. He expects an immediate increase in demand for space-qualified ICs in the European, Japanese, and Brazilian markets.
The satellite industry has been subject to ITAR for so long that a learning curve is to be expected. There are also certain license exceptions now available, so there will be a period of time when everyone needs to learn how to use exemptions and do licensing under the BIS’s Export Administration Rules (EAR) – and this may be a significant challenge.
The EAR license exception, Strategic Trade Authorization (STA), eliminates the license requirement for transfers to or among the 36 countries specifically designated for the exception (see Figure 2).
Figure 2: List of countries proscribed for export of satellite technology, and those still proscribed under ITAR.
(Click graphic to zoom)
“Manufacturers will be able to use the Strategic Trade Authorization Exemption that was written for the Department of Commerce, which essentially allows us to ship – with a little bit of paperwork involved – satellite technology from the U.S. to 36 countries,” Tabbert says. “They, in turn, can now ship within the group of 36 without being required to request U.S. permission.”
For those struggling with the export policy changes, Hassoun recommends “attending an event with others experiencing the same challenges. A huge overhaul of a significant set of regulations doesn’t happen every day. Learning by attending conferences and seminars – especially ones hosted by the Commerce Department’s Bureau of Industry and Security – will be helpful to companies both large and small.”
Avoid enforcement actions
Everyone will need to get up to speed quickly and continue working to avoid enforcement actions, which Hassoun points out will be a continuing theme related to maintaining ITAR authorizations and agreements.
“If you obtain authorizations from the State Department, be sure that the people who actually need to live under them understand the limits to ensure they don’t exceed them – whether it involves exporting or providing defense services not under the scope of the agreement or exceeding its authorized value,” Hassoun says. “A lot of work needs to be done to manage those authorizations, and several companies have been penalized recently. It’s critical to stay on top of it, because other companies are reluctant to do business with noncompliant companies.”
If you repeatedly show up on the State Department’s radar, it can be detrimental to business. “Giving a U.S. facilities tour to a People’s Republic of China delegation, for example, may not go unnoticed,” she notes.
The more mistakes a company makes, the more closely they’ll be watching, “because it’s a strong indicator that you’re not in compliance with U.S. export rules,” explains Hassoun. “The government’s goal is to ensure that U.S. national security interests are maintained and enforced, since these companies are working on technologies and products considered sensitive to national security.”
Again, these export policy changes are rewriting rules that have been in place for 30 years, so it’s possible that unintended consequences may emerge.
While the Department of State says it believes that “substantial national security benefits will flow from the changes to the controls on spacecraft and related items,” it acknowledges that further analysis is warranted for control thresholds for remote-sensing satellites.
“The industry is working to determine whether or not anything is covered now that wasn’t before,” Tabbert says. “Also, is it too difficult to understand how to use the license exemptions now?”
Another key question – still to be determined – is what do our allies think of the new rules? “The international space community may be a little leery because this is a big step for the U.S., and they need to trust that we’re not going to revert back to the way things were,” Tabbert notes.
If consequences emerge as a result of the changes, a process is in place to deal with them. “Things will inevitably come up, and hopefully this process will work in the future if we need to make further changes,” he adds.