The Commission’s Report on the Implementation of the Recast Dual-Use Regulation: Context, Takeaways and Outlook

Context

On Tuesday, 23 November 2021, the European Commission (“the Commission”) released its report on the implementation of the recast EU Dual-Use Regulation (Regulation (EU) 2021/821, hereinafter “Recast Dual-Use Regulation”) which recently entered into force on 9 September 2021. For key takeaways on the Recast Dual Use Regulation, see our earlier news alert.

The Recast Dual-Use Regulation, which had been five years in the making, provided an important update of the EU rules on the trade of dual-use items (i.e., goods, software and technology that can be used for both civilian and military applications), taking into account company interests and longstanding concerns from the business community. The Recast Dual Use Regulation forms part of a set of EU measures intended to defend EU interests and values in a world of increasing economic competition. The adoption of the EU Foreign Direct Investment Screening Regulation (Regulation (EU) 2019/452) is another outstanding example in this context.

These new regulations were accompanied by a merging of responsibilities for the screening of foreign direct investments and export controls of dual-use items under a single unit within the EU Directorate General for Trade. These administrative reorganizations are mirrored in the joined publication of the dual-use export report with the first-ever annual report on the screening of foreign direct investments into the Union (please see here for our assessment of the Commission’s report and key takeaways).

It deserves recalling that, while the Recast Dual-Use Regulation replaced the previous dual-use regulation adopted in 2009 (Regulation (EC) No 428/2009), the origins of contemporary European controls of trade in dual-use items date back much further. Essentially, they take their origin in the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies of 1996, the first comprehensive post-Cold-War multilateral export control regime.

But is only from 2013 onwards that the Commission started to publish annual reports on exports under the predecessor dual-use regulation of 2009. The latest report is the last report covering the time before the entry into force of the Recast Dual-Use Regulation.

Takeaways

The substantive part of the latest dual-use report covers two topics: data on dual-use exports in 2019 and an overview of the EU’s work on the topic in 2020.

In 2019, the value of EU dual-use trade is estimated at roughly EUR 119 billion, representing around 2.3% of total EU27 exports. The majority of exports are directed towards countries covered by Union General Export Authorisations (“EUGEAs”), such the United States as the single largest export destination or Switzerland as the third largest destination (measured by transaction value in Euro). Noteworthy other export destinations include China as second, Russia as fourth and Singapore as fifth largest destinations for dual-use exports.

In total, 30.292 applications for, and notifications of, exports under pre-existing licenses were covered in the report. Around 17% of these cases were covered under EUGEAs. Furthermore, national authorities granted 20,300 single licenses for exports. Only 603 export transactions were denied amounting to 0.02% of total EU exports.

As regards regulatory developments, two items stand out. On 15 December 2020, the new updates expanding Annex I on controlled dual-use items entered into force. The list of controlled items was expanded particularly in regards to goods classified as possible items of “digital surveillance”. The practice of license granting in 2019 already anticipated this regulatory shift as the year saw a sharp decrease to only 44 export licenses granted and 81 denials of such applications.

Further, after the end of the Brexit transition period (see our related news alert here), from 1 January 2021 onwards the export of dual-use items to the UK was subject to the EU dual-use regulation. However, most exports to the UK were subject to the simplified procedure as the UK was added to the list of countries under EUGEAs with Regulation (EU) 2020/2171.

Outlook

Prospective exporters of goods under the “digital surveillance” label of the EU particularly need to keep a keen eye on the newest regulatory developments. Particularly since the Recast EU Dual-Use Regulation introduces the new human security concept for such items and EU Dual-Use Coordination Group plans to keep a focus on developments in the sector in the future.

It furthermore is noteworthy that the Dual-Use Coordination Group is working on improving data collection and information sharing by national authorization authorities. Five countries are currently spearheading the development of a digital tool for administrations to handle license applications. The implementation of an effective tool that would hopefully streamline and harmonize the handling of applications seems overdue. From a practical perspective, it seems questionable that in the past comparable applications for licenses in different Member States were handled differently by national authorities, leading to distortions and unfair competitive advantages while undermining the aim of export controls at the same time.

It is also noteworthy that the report admits that Member States collect data on exports differently or some do not at all. While the Commission should be applauded for the transparency provided by its latest dual-use report, it is thus offset by its lacking comprehensiveness. In general, more transparency on both EU and national developments is necessary to allow effective planning for exporters in the future.