On June 11, the European Union published new regulations on the regime for export controls of dual-use goods, marking the first major reform to the structure of the EU’s export control regime since 2009.

Dual-use goods are products that could have both civil and military use purposes, and the designation covers a wide range of items, from the obvious, such as certain types of drones, to the seemingly innocuous, such as ball bearings and sensors.

The recast regulation, which is the result of years of negotiation, will enter into force on September 9.

While the purpose of this reform – initially proposed by the European Commission in 2016 – is to modernise the EU’s dual-use goods regulations to take into account new technological developments, Jasper Helder and Chiara Klaui, international trade partners in the London office of international law firm Akin Gump, tell GTR that the rule changes are a “missed opportunity”, and will result in greater uncertainty for exporters.

 

GTR: What is the background of this reworking of the dual-use regulation?

 Helder: The original dual-use regulation covered products that you could use for both civil use and for military use, as well as certain ‘catch all’ controls that caught the supply of items for weapons of mass destruction purposes, for military end-use purposes in countries targeted by an arms embargo, as well as where items might be used in violation of human rights.

When the European Commission initially launched its proposal to recast the EU dual-use regulation, they added what they called a human security element. This was intended to focus on new technologies that could be used for human rights abuses like monitoring and surveillance equipment as well as imposing restrictions on exports of items if these could be used for human rights violations.

It was an ambitious proposal because it included all kinds of enhancements to the existing controls. It then went to the European Parliament where these controls were enhanced even further, given the importance in the world we live in nowadays to control these critical technologies. However, industry wasn’t too enthusiastic about this because it could lead to further divergence, including different interpretations by EU member states as to what would qualify as human rights violations.

The proposal then went to the European Council, and because member states couldn’t reach agreement on the enhanced controls, the final regulation contains only a fraction of those initial ambitions.

 

GTR: What issues does the new regulation present for exporters?

Klaui: In the new regulation, certain products are controlled, and if you export these products from the EU, you need a licence. That’s clear-cut. However, even if a product is not included in this control list, a member state can still block its export or put in a licence requirement if there is reason to assume that is going to be used in a way that we don’t want it to be used.

That brings a lot of uncertainty, and we have experienced numerous times with clients the situation where one EU member state blocks an export, while another member state decides not to, even though the export concerned the exact same item and end user. It is not a level playing field if you cannot ship the products from, for example, France, whereas your competitor in Germany can ship them.

Instead of fixing this problem by creating an EU wide catch all, the EU has merely introduced a new catch-all possibility for cyber surveillance items, making this a missed opportunity in terms of harmonising the applicable controls.

Helder: Because the regulation now recognises that each and every individual EU member state may start to control items that are not on the uniform EU dual-use control list, it makes it more complicated. If you are a pan-European business and you have plants in several countries, what you would prefer is a consistent compliance requirement for all your operations, so you can manage it centrally. However, this new regulation actually expands the possibility of EU member states creating national control lists and other EU member states applying these controls in their own countries as ‘transmissible controls’, a concept newly created under the EU dual-use regulation. That just creates more diversity which makes it harder for businesses to manage it.

 

GTR: What do exporters need to be aware of, and how can they address this uncertainty?

Helder: Companies need to look very carefully at their supply chain. Where are they manufacturing products, where are they storing products that they are distributing, and from which country in the EU are they exporting?

There might be a rationale from a compliance perspective to concentrate everything in a single country, instead of having depots spread out over numerous countries. If for example your product is shipped globally from the Netherlands but your spare parts depot is in Italy, you don’t want to run into a situation where you can’t supply spare parts because the Italian regulator takes a different view to a particular requirement than the Dutch regulator does.

So, you really need to carefully look at your supply chain so that you can standardise to the maximum extent possible the internal requirements. Otherwise it will be complicated, and if business processes are more complicated there is more chance for errors.

Klaui: The wish for harmonisation has not been achieved and this means that companies cannot just rely on reviewing the controls set out in the EU dual-use regulation, but must also verify whether there are any relevant national controls that must be taken into account.

They need to understand what these controls are in the countries that they are dealing with, including whether there are any practical implications of these controls that may impact their operations. If you deal with a number of different EU member states, you need to know the regulators, you need to know the policies/interpretations they adopt, and you need to know if these member states are in the habit of imposing catch-alls for a product that you manufacture or intend to export.

That is what makes this complicated, because it isn’t just a case of reading the wording of the regulation, it is understanding how the EU dual-use regulation is being applied in practice, and that is just an additional compliance burden because it will require a lot more time and effort on the part of the exporters to identify what the exact requirements are that they need to comply with going forward.