Firearms Export Control Reform (ECR) -- Big Opportunities for International Retail Sales
By Jeff Grody and Jordan Young, Orchid Advisors ITAR / EAR Practice
For U.S. companies that sell, or want to sell, aftermarket firearm components to foreign retail customers, Export Control Reform (ECR) will significantly expand their opportunities starting sometime in early 2019.
Several features of the International Traffic in Arms Regulations (ITAR) severely constrain the international retail market today:
·Retailers must pay a $2,250 annual registration fee in to export firearms, components, or certain accessories.
·Shipments of more than $100 of firearm parts to foreign destinations require a license (the limit is $500 for Canada).
·There is no exemption at all for major firearm parts, defined under the ITAR as barrels, cylinders, receivers (frames), or complete breech mechanisms. Exports of these items always require a license.
·ITAR licenses cost $250 apiece, rendering most non-exempt retail sales uneconomical.
·ITAR licenses take too much time to prepare to be worthwhile for smaller sales.
These “facts of life” for the international retail market in U.S. firearm parts will change under ECR in ways that will open doors for U.S. sellers and their international customers:
·There will be no annual registration fee for exporters who solely export non-automatic or semi-automatic firearms or their components or accessories.
·The $100 worldwide exemption under the ITAR will increase to $500 and will cover almost all firearm parts (all parts for exports to Canada).
·Some firearm parts will no longer be export-controlled at all.
·Stocks, grips, scope mounts, accessory rails, iron sights, sling swivels, butt plates, recoil pads, and bayonets will not require an export license to most countries.
·Obtaining licenses, when required, won’t be cost-prohibitive.
Taken together, these changes will make the international after-market easily accessible for U.S. sellers who want to reach foreign consumers directly.
Let’s look at these aspects of the new rules in more detail.
Exporters will no longer be required to pay an annual registration fee
To export even one firearm, component or accessory that is listed on the United States Munitions List (i.e., items covered by the ITAR), a seller must register with the Department of State, Directorate of Defense Trade Controls (DDTC) and pay a $2,250 registration fee. Registration is required even to make low-value exempt exports. The registration fee must be paid annually after the initial registration.
Under the new, Export Administration Regulations (EAR) that will take effect in 2019, there is no registration fee.
The DDTC registration fee is a significant barrier to entry into the international retail market for small companies, especially the ones that want to dip their toes in the water before making a significant commitment. Elimination of this fee under ECR will make it much easier for small companies to get in the game.
Almost all low-value business-to-consumer international sales of firearm parts will be exempt from export licensing
When the new Export Administration Regulations rules take effect in 2019, very few international retail sales of parts for non-automatic and semi-automatic firearms will require an export license. That’s essentially the opposite of today, when almost all international retail sales do require a license.
Two ECR changes are behind this. The primary change will be an increase -- from $100 per shipment to $500 -- in the value of firearm parts that can be exported from the U.S. without a license. $100 is too low for most sales; the $500 limit will permit many retail sales to occur.
In addition to the increase in the dollar value, the scope of the exemption will expand to cover all firearm parts other than receivers, frames, complete breech mechanisms and the castings, forgings or stampings from which those parts are made. If the export is to Canada, even these exclusions will not apply – in other words, no shipment of firearms parts to Canada will require a license if the value is $500 or less.
Certain parts will no longer be controlled at all
Two categories of firearm parts that are controlled under the ITAR will no longer be controlled when ECR takes effect:
·Pistol and rifle magazines with a capacity of 15 or fewer rounds will be EAR99, i.e., not controlled at all.
·Parts that are not “specially designed” for use with firearms will be EAR99. “Specially designed” is defined in Part 772 of the EAR. Fasteners (e.g., screws, bolts, nuts, nut plates, studs, inserts, clips, rivets, pins), washers, spacers, insulators, grommets, bushings, springs, and wires are deemed not to be specially designed for firearms, even if their shape, form or size is configured for a particular gun and their specs are included in the technical data package. In addition, “specially designed” does not include parts that have the same function, performance capabilities, and the same or “equivalent” form and fit as items that are commercially available and not otherwise controlled by the ITAR or EAR.
These are, to be sure, limited carve-outs and most firearm parts will continue to be controlled, but the removal of controls from even a small number of firearm parts will make international commerce easier.
Certain parts and accessories will be controlled in a category that permits their export to almost all countries without a license
When ECR takes effect, stocks, grips, scope mounts, accessory rails, iron sights, sling swivels, butt plates, recoil pads, and bayonets will be authorized for export without a license, regardless of quantity or value, to all countries except Cuba, Iran, North Korea, Sudan, Syria, China and any country subject to a U.N. embargo. (See proposed ECCN 0A501.y)
There are two caveats to this. First, stocks and grips that contain fire control components such as triggers, hammers, sears or disconnectors are excluded from this category. Second, Department of State Commodity Jurisdiction determinations (CJs) that have classified any of these items as not controlled (i.e., EAR99) will remain in effect provided the item does not change. New configurations of parts or accessories covered by CJs will not be covered by the CJ and will be classified in ECCN 0A501.y. (See proposed change to General Order No. 5, paragraph (e)(3), in Supplement No. 1 to EAR Part 736.)
One could argue that this change is a step backward since many of these items are thought to be EAR99 today (or have been so classified in CJs) and they will become controlled under ECR. On the other hand, the specific classification of these items in the EAR will provide clarity and reduce the need for CJs. As a practical matter, this change will not materially limit the countries to which they can be sold without a license.
Obtaining export licenses for small international retail sales will become economical under ECR
So far, we’ve looked at the types of retail transactions that will be able to occur under ECR without an export license. When a license is required – as in the case of any sale valued at more than $500 -- it will be much less expensive to obtain a license and licensing will require less employee time.
This happy development will be the result of several significant changes effected by ECR:
·There is no fee for EAR licenses (in contrast the $250 per license fee under the ITAR).
·The only license supporting document that will be required for an EAR license will be an important permit from the destination country or a statement that an import permit is not required.
·The employee and customer time spent under the ITAR in obtaining license supporting documents that comply with DDTC technical requirements will go away.
·Under the EAR, there will be significant opportunities to automate all or most of the export licensing process and to drive licensing through the company’s ERP system.
In short, ECR will eliminate the out-of-pocket cost associated with export licensing under the ITAR, but even more significantly, it holds the potential to reduce the human time associated with export licensing to a fraction of what it is today.
If the dream of retail exporters of firearms, components or accessories is for international transactions to be no more complicated than domestic sales, ECR will put that dream almost within reach for sellers who implement the right systems.
How can Orchid Advisors help?
Orchid Advisors, the #1 provider of regulatory compliance solutions to the firearms and ammunition industry, is laser focused on the exciting new business opportunities that will become available to the industry when ECR becomes effective in 2019.
Orchid’s ITAR / EAR Practice helps companies in the firearms and ammunition industry (i) sell firearms, ammunition, components and accessories to foreign customers, (ii) build sustainable export compliance programs, and (iii) design, source and manufacture firearms, components, tools and accessories outside the United States.
Look to Orchid Advisors to help you take command of the new ECR export environment in the following ways:
·Formulation of EAR-driven international sales and sourcing strategies
·Technology solutions for reducing the cost and increasing the speed of export license determinations, license preparation and related activities.
·Preparation of export licenses and provision of other “export compliance department” services on an outsourced basis.
·Practical advice on making near-term decisions under the ITAR that will be affected in 2019 by the new rules.
·Development of integrated export and ATF compliance solutions for transitioning to the post-ITAR world.
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