New export rule for Defense-funded technology raises alarms.

* U.S. manufacturers have hailed the Obama administration's six-year effort to ease the red tape for exporters. Defense companies that make products with commercial applications especially have benefitted from reforms that have sought to draw a clear distinction between technologies that are uniquely military and those that are dual use.

One of the key goals of the reforms was to specify what items are regulated as "defense articles" by the State Department--as opposed to commercial products regulated by Commerce--and end the ambivalence that has vexed exporters.

So it might come as a surprise to Pentagon contractors that a new rule that affects electronic equipment would by default classify as a "defense article" any electronics developed with Defense Department funding, regardless of whether the technology is a sensitive military system or intended also for civilian applications.

The regulation, which affects electronic systems whose development is funded by any Defense Department contract dated July 1 or later, has the potential to become a compliance nightmare for companies that rely on government contracts to design products that they hope to commercialize later.

The rule has industry attorneys scratching their heads because it seems to run counter to the spirit of the administration's export control reform effort. Many industry CEOs have said the reforms have helped simplify the licensing process and removed onerous red tape from the exports of commercial technologies that once were categorized as defense articles under the U.S. Munitions List.

The electronics provision could have...