How U.S. Foreign Policy and National Security Concerns Impact International Trade

Many companies in the firearms and ammunition industries are increasing their efforts in global trade. There are many reasons for doing this, not the least of which is the significant downturn in the U.S. market since President Trump took office. As demand in the United States has decreased, companies are looking to the international marketplace to fill the gap. In addition, the Trump Administration has rolled out new policies to spur exports of U.S. military equipment abroad, including finally moving forward with the complete overhaul of the export controls over most firearms and ammunition. These so-called “transition rules” (see my 2-part Legally Armed series in Small Arms Review, Vol. 22, No. 8 (October 2018) and Vol. 22, No. 9 (November 2018)) are expected to be finalized at the end of 2018 or in the first quarter of 2019.

Despite the many draws, however, the decision to enter into the global marketplace must take into consideration the enormous amount of government oversight and risks inherent to bureaucratic permissions. As many readers know, a fundamental principle of the U.S. import/export control laws is that appropriate government authorization must be in place prior to either exporting or importing firearms or ammunition, as well as all parts, components, accessories and attachments. That authorization can be a license, agreement or other form of authorization (e.g., license or permit exemption, retransfer approval) issued by the controlling agency of the U.S. Government. Without such authorization, the company cannot lawfully proceed with an export or an import, as the case may be.

The licensing process is cumbersome and expensive. Noteworthy is the fact that many U.S. businesses have been deterred from venturing into foreign markets because of the complexity of U.S. import and export laws governing firearms and ammunition. But for those who have decided to play in this sandbox, the challenges do not end with getting authorization from the U.S. Government. There may be limitations on the license or permit (the dreaded license “provisos”) or required notifications (example, submitting a list of serial numbers of all firearms actually received by the foreign customer). But these pain points are often outweighed by the overall pleasure in obtaining the approval.

It is too tempting to take for granted that once an authorization is received it will remain valid for the term granted on the license. A done deal, so to speak. But such complacency presumes that the geopolitical relationships of the United States and its allies remain static. Nothing could be farther from the truth. Always lurking beneath the surface is the possibility that the U.S. Government may take away the permission to export or import at any time. Government authorization to export or import is not irrevocable. Indeed the ability of a U.S. company to engage in international trade is not a guaranteed right. With a rapidly changing international marketplace, it is vital that U.S. businesses keep this in mind.

When faced with a revocation, suspension or an amendment that changes the scope of an open authorization, companies may wonder how the U.S. Government has the authority to seemingly take away something that had been previously granted. The question may arise as whether such an action is a “taking” of property and if a company’s “due process” has been infringed in violation of the Fifth Amendment to the Constitution.

Though decided several years ago, the B-West Imports, Inc. v. U.S. case, 75 F.3d 633 (Fed. Cir. 1996), still stands as precedence and is illustrative of the U.S. Government’s broad authority to revoke, suspend or amend approved import or export authorizations. In this case, several munitions importers challenged a federal ban on the importation of defense articles from China. The ban originated in a press conference President Clinton gave on May 26, 1994, in which he announced the renewal of the Most Favored Nation trading status for China. Despite extending this status, however, President Clinton also made clear that his administration would implement certain trade sanctions against the country because of China’s continuing human rights abuses. One of the sanctions was a ban on the importation of munitions from China.

Two days after the president made this announcement, the Secretary of State advised the Secretary of the Treasury (at that time, the U.S. Treasury had jurisdiction over imports of defense articles under the Arms Export Control Act or “AECA”) to “take all necessary steps to prohibit the import of all defense articles enumerated in the U.S. Munitions Import List.” Consequently, the U.S. Customs Service advised its agents that the embargo was effective on May 28, 1994, and that all permits for importing munitions from China had been rendered null and void. The Bureau of Alcohol, Tobacco and Firearms (ATF) advised permit holders that in light of the embargo, all permits were revoked, effective immediately. Subsequently, the U.S. Congress passed legislation that provided some relief to importers by allowing shipments in transit to the United States in a Customs Bonded Warehouse or Foreign Trade Zone as of May 26, 1994.

The plaintiffs in the case, B-West Imports, Hing Long Trading Co., K-Sports Imports, Inc., Century Arms, Inc., Intrac Corporation, Northwest Imports, J’s Pacific Enterprise, Inc., and Sportarms of Florida, filed suit in the U.S. Court of International Trade (CIT). They argued the government’s actions exceeded the scope of authority granted by the AECA and that the revocation of import permits violated the Due Process and Takings Clauses of the Fifth Amendment to the U.S. Constitution. The CIT granted the government’s motion for summary judgment and dismissed the complaint, finding the AECA authorized the President to order a ban on importing arms from China because of the statutory grant of authority to “control” arms imports, and such control includes the ability to totally prohibit such imports. Further, the lower court held that ATF was authorized to implement the ban by revoking or withholding regulatory approval (i.e., the permits). The court rejected plaintiffs’ constitutional claims on the grounds that there was no statute or regulation that gave the parties a property right to import firearms or other munitions into the United States from China. In other words, by virtue of granting a permit or license to import products into the United States, the government does not confer to the permit holder a legitimate claim of entitlement that invokes the government’s obligations under the Due Process Clause. According to the court, because the statutes and regulations governing arms imports make it clear that the business of importing into the United States is subject to such extensive government controls, the government’s denial or revocation of an import permit cannot be regarded as a taking of property within the meaning of the Takings Clause. See generally, B-West Imports, Inc. v. U.S., 880 F.Supp 853 (Ct. Int’l Trade 1995).

On appeal, the U.S. Court of Appeals for the Federal Circuit affirmed the lower court’s decision, finding no statute or regulation that grants a right to engage in the import of defense articles. Indeed the appellate court reiterated that nothing in the statute or regulations state or imply that an authorization, once granted, becomes irrevocable. As there is no right infringed, there is no valid due process argument to be made that a revocation of an open import permit constitutes a taking of property.

To drive home this point, the appellate court cites the Mitchell Arms, Inc. v. United States case (7 F.3d 212 (Fed. Cir. 1993)), another case in which the court rejected a takings claim. In the Mitchell case, ATF revoked import permits for certain “assault weapons,” resulting in Mitchell losing the opportunity to sell the firearms in the United States under an existing contract. The Mitchell court held that ATF’s revocation of the import permits did not amount to a taking under the Constitution.

Mitchell’s expectation of selling the assault rifles in domestic commerce was not inherent in its ownership of the rifles. Rather, it was totally dependent upon the import permits issued by ATF. In short, Mitchell’s ability to import the rifles and sell them in the United States was at all times entirely subject to the exercise of ATF’s regulatory power. Consequently, any expectation which arose on Mitchell’s part as a result of the import permits did not constitute a property right protected by the Fifth Amendment.
Mitchell at 217.

This same rationale is equally applicable to export licenses issued by the Directorate of Defense Trade Controls (DDTC). The receipt of an export approval from DDTC necessarily comes with it the chance that it could be revoked, suspended or amended by DDTC for foreign policy or national security reasons. Section 38 of the AECA grants the President the authority to control the import and export of defense articles “in furtherance of world peace and the security and foreign policy of the United States.” As the B-West court points out, the U.S. Government’s authority to act in foreign affairs is broadly construed and has been held to include the ability to prohibit particular export and import activities, even if previously licensed.

With this broad authority comes the known commercial risk that approved licenses and permits may be suspended or revoked by the same government agency that granted them in the first place. Companies assume this risk when they choose to engage in heavily regulated activity, like importing and exporting firearms and other munitions. With the rapidly changing international landscape, it is more important than ever that companies keep this in mind when participating in international trade. Maintaining a robust compliance program, screening each transaction for prohibited parties, countries and end-uses, and generally keeping aware of current events can go a long way in staying ahead in the export control game.

The government giveth, the government taketh away.

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The information contained in this article is for general informational and educational purposes only and is not intended to be construed or used as legal advice or as legal opinion. You should not rely or act on any information contained in this article without first seeking the advice of an attorney. Receipt of this article does not establish an attorney-client relationship.

About the author

Johanna Reeves is the founding partner of the law firm Reeves & Dola, LLP in Washington, DC (www.reevesdola.com). For more than fifteen years she has dedicated her practice to advising and representing U.S. companies on compliance matters arising under the federal firearms laws and U.S. export controls. Since 2011, Johanna has served as Executive Director for the Firearms and Ammunition Import/Export Roundtable (F.A.I.R.) Trade Group (http://fairtradegroup.org). She has also served as a member of the Defense Trade Advisory Group (DTAG) since 2016. Johanna can be reached at jreeves@reevesdola.com or 202-715-9941.

Living in a Toy Store

After several years in business as a non-corporate entity, SARCO was finally incorporated in 1962. It has since established a long tenure of 38 years in the arms business. SARCO’s emphasis is strictly focused on surplus merchandise. Although activities are conducted in commercial-type material, virtually all the business centers around the accumulation of surplus material.

Through the years, SARCO has expanded into almost every facet of the gun business, except for the commercial end. Much of the business is done with military arms collectors, shooters and military history re-enactors. Steen describes his business as having allowed him to, “live in a toy store all these years.”

Steen began collecting militaria at the tender age of five when he began to fill the drawers of his clothes dresser with military surplus. “I’m a collector at heart,” he chuckles. He later served in the U.S. Marine Corps. and afterward began selling arms at gun shows as a way to support himself while in college where he studied engineering. He had plans to become a machine gun designer. When he told his wife of his intention to become a part-time gun show vendor, she made an agreement with him that if he did not clear $60 a week profit from the activity within the first year, he would give up on the idea. However, Steen’s very first weekend at gun show dealing gave him a lot of incentive to stay in the gun business as he made $200 during those first two days, a whopping sum for him at the time.

Another big coup for Steen’s fledgling business was expanding into mail order by advertising in the then new publication, Shotgun News. In contrast to the multiple full-page ads Sarco now runs in that advertiser publication, his first ad was just 3-inches by 3-inches in size. Steen estimates SARCO is the Shotgun News’ longest continuously-running advertiser. Today, sales by mail order make up the largest part of SARCO’s volume, with sales to U.S. and foreign governments playing the next largest role.

Traveling around the world in SARCO’s early years during the 1960’s, Steen built up a global network of agents who remain on the lookout for surplus materials when such items are offered from military and government sources. The agents alert Steen to the items being offered and bidding/purchase procedures. Steen says his import activities over the years have probably earned him the distinction of being the largest U.S. importer of gun parts.

Overseas manufacturing is another area of the business that has been developed. For instance, SARCO has slings for the Mauser 98 and Johnson rifles made overseas, in addition to 400-500 other items. Steen got into the machine gun part business by offering parts for .30 and .50 caliber Brownings. SARCO does sell live machine guns as well. A wide assortment of non-firing rebuilt machine guns (with a dummy receiver) are available and machine gun parts sets (sans the receiver).

Among the more notable surplus material Steen has sold over the years, was a model 95 Gatling Gun with limber which went to Bill Gasser of the American Armour Foundation museum in Long Island, New York. The serial number of this piece was in the same range as were the Gatling Guns shipped to Cuba at the time Teddy Roosevelt was there.

Steen also bought the Rock Island Armory’s military manual library containing seven to eight tons of manuals. In one of his more unusual purchases, Steen bought several Navy model KDB-1 remote controlled drones. These were used in the 1950’s and 1960’s for training in air-to-air and ground-to-air combat. They are radio-controlled targets that could be recovered after a parachute landing.

Made by Breech Aircraft and powered by a 125 h.p., 6 cylinder, 2-cycle, turbo- supercharged engine, the drones are 15-feet long and have a 12-foot wingspan, making them the largest, radio-controlled airplane models you can get.

Sarco has successfully fulfilled several contracts with the federal government and recently supplied the feds with 17,000 units of a multiple magazine holder. This product holds two magazines, in a “V” configuration on the underside of the M16 rifle. Once the first 30 rounds are fired, the holder allows another magazine to be inserted into the rifle within seconds.

In a recent deal, SARCO purchased much of the production facilities of the old High Standard Co. This included nine models of pump and automatic shotguns including the famous Model 10B bull pup police shotgun, three models of pump and semi-auto .22 rifles, and ten models of revolvers.

The deal also encompassed SARCO’s acquisition of all fixtures for production, drawings, sources, flow schedules, spare parts (including barrels and receivers), five cut-away guns, five trademarks for revolvers and technical data on High Standard silencers. There are also tons of spare parts, filling some five 40-foot trailers. “We bought this as a project to produce guns,” Steen says, “but there just isn’t enough time in the world for us, as new deals keep coming in. We expect that with the making of a few parts, approximately 400 Model 10B’s could be produced.” The lot was being offered for sale at the time of the author’s visit.

Today, Sarco employs up to fifty persons in its 20,000-square-foot store/warehouse, with an additional two warehouses comprising 7,500- and 24,000-square-feet respectively. “While I thought this second (24,000-square-foot) warehouse would be the last I would need, we filled it up to capacity due to the good deals I have been offered on merchandise from my suppliers,” Steen says. About 20,000 guns, mainly surplus military rifles, are kept in stock at the store.

Among his other activities, Steen is very active in the F.A.I.R. (Firearms Importers’ Roundtable) Trade Group (serving as its president), which protects the interests of firearms importers by monitoring legislation and other activities. The organization was founded in 1994 and has its headquarters in Washington, D.C. FAIR’s membership is composed of firearms and ammunition importers, manufacturers, distributors and sales representatives. The group’s goal is to keep the American firearms and ammunition markets open to the global community of suppliers, with an end goal of a “level playing field” that will provide American consumers the broadest market choices.

The Clinton-Gore Administration had taken the position that global commerce in firearms and related items is the “weak link” of the American firearms industry. The Administration had taken its anti-gun campaign global by working closely with international disarmament groups and the United Nations to push the anti-gun agenda worldwide. FAIR has been very successful in keeping American markets open, but Clinton and Gore had achieved some significant victories as well. These include: -use of Presidential Authority to impose and continue an embargo on the importation of firearms, parts and ammunition from China. This ban led to the formation of FAIR. -Use of Presidential Authority to direct the Department of Treasury, in collaboration with the Department of State, to implement a Voluntary Restraint Agreement with Russia banning the importation of various guns and calibers of ammunition. —Establishing a new policy on, “foreign policy grounds,” that the Department of State shall be the agency having jurisdiction over the authorization of the importation of foreign and U.S. origin firearms component parts and ammunition, instead of the Bureau of Alcohol, Tobacco & Firearms, since the policy of the State Dept. is not to approve such transactions.

One of SARCO’s most recent successes is the publication of its Machine Gun Catalog #4. Several years in the making, the nearly 100-page book contains parts, tools and accessories for: M-2 Browning .50 caliber machine guns; M-3 Browning aircraft machine guns; the M-85 machine gun; the 1919A4/A6 Browning m.g.; the M-37 m.g.; the M-60 m.g.; the B.A.R.; M3/M3A1 “Grease Gun”; the Lewis and Vickers machine guns; the German MG-34; and the Bren Gun.

SARCO usually has some live, transferable machine guns in stock. At the time of the author’s visit, these included: a Walther MPK; IMI Micro, Mini and commercial UZI submachine guns; and the Galil in .223 and .308.

Getting There

For those who would like to visit, SARCO is in northern New Jersey, situated in the southern corner of Morris County. The store is about 20 minutes south of Morristown, and 15 minutes north of Plainfield/Route 22. It is most easily reached from Exit 36 on Interstate route 78, a major east-west highway, only five minutes from SARCO’s door.

After leaving Exit 36 on route 78, go north (past the Exxon station) on King George Road. At the traffic light by the church, turn right onto Valley Road. Proceed one mile to the traffic light at Main Street. Turn left and go four blocks to Union Street. Turn left on Union – SARCO is the last building on the left. For more information: Sarco, Inc., 323 Union St., Stirling, N.J. 07980 Telephone (908) 647-3800 FAX: (908) 647- 9413 Web site: www.sarcoinc.com E-mail: info@sarcoinc.com.