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lI. Structure of U.S. Export Trade and International Sales
as They Relate to the Export Licensing System
In order to analyze the influence of the export
control licensing process on U.S. firms' competitiveness,
one first needs to understand the general characteristics
of U.S. export trade and international sales as they
pertain to the export licensing system. The first section
of this chapter provides this overview, while the second
section looks at the relationship between the coverage of
the export license system and U.S. trade. Information
collected from the Department of Commerce (DOC) licensing
database, DOC trade statistics, and from the Academy survey
of U.S. exporters forms the basis for the analysis
presented in this chapter.
Referring to Figure 5 again, what will be developed is
an estimate of the scope of U.S. foreign economic activity
covered to any degree by export controls. The extent of
foreign firm activity influenced by the U.S. control system
is not captured by these estimates.
There is a further limitation on the scope of coverage
of the data that will be presented. Whereas the system
covers U.S. foreign merchandise transactions, i.e., both
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t
manufacturing and nonmanufacturing-related activity, the
data presented will cover only manufactures-related
activity. The reason for this limitation is based on the
appraisal that the central concern regarding effects of the
export controls on competitiveness of U.S. firms centers on
the manufacturing sector.
The extent to which the manufactures versus total
merchandise distinction matters can be gauged by looking
just at the data for the value of Individual Validated
Licenses (IVLs) issued by the Department of Commerce in
Fiscal Year (FY) 1985.9 In that period, the value of all
IVL application approvals for all exports was $88 billion.
Of the total, only about $SO--or 57 percent of the total--
was for manufactures exports.l°,ll The balance, or nearly
$40 billion, was represented by exports of commodities such
gives are only one form of validated license. A
different form is called bulk license. Refer to Figures 4
and 5 to note the limitation being applied in developing
trade coverage related to IVEs.
1OLicense records are usually reported for fiscal
periods, while trade data is usually summarized for
calendar years. This necessitates switching back and forth
between FY and CY.
ilThe Department of Commerce tabulation of TV~s by
dollar value was the basis for these numbers. We sorted
the Ills by manufacturing vs. nonmanufacturing categories
to estimate the manufactures share.
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as petroleum, petroleum products and bulk materials of
various types, even horses.
IT.A. U.S. Foreign Sales
As indicated in the simple schematic of Figure 5, the
export controls cover a portion of U.S. exports and foreign
sales made through affiliates. This section looks at the
structure of U.S. foreign business activity in these
different channels. Exports are discussed first, followed
by an examination of total U.S. international sales.
In 1985, countries in the multilateral international
Coordinating Committee (COCOM) accounted for the
destination of about 56 percent of total U.S. exports,
while trade with China and the Bloc countries accounted for
3 percent.12 (See Table 1.)13 The balance of U.S. export
trade was with other non-COCOM, non-Bloc countries. This
last category was a significant component of U.S.
12This is total trade, not just trade identified as
requiring any validated license.
13Table ~ shows how U.S. exports for 1980 and 1985
were distributed by regions grouped according to a meaning
relevant to this study. Bloc countries were defined to be,
using the Export Administration country groupings, country
groups W and U. with exceptions being that Laos, Latvia,
Estonia, Lithuania, and Mongolia were omitted.
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manufactures export trade, representing over two-fifths of
U.S. manufactures exports, though over the past five years,
it has declined from roughly half of total manufactures
export trade.
The segment of U.S. manufactures trade most likely to
require some type of validated license--whether individual
or bulk--can be roughly identified as equivalent to U.S.
high technology exports.l4 In 1985, high technology
exports represented about 38 percent of total U.S.
manufactures exports, or about $68 billion.15 Collecting
U.S. high technology export trade into the same geographic
groups used in Table 1, exports to COCOM country
destination are only about half of total U.S. high
technology exports with nearly an equal amount going to
Other Country destinations (the East Asian Newly
Industrialized Countries (NICs) account for 20 percent,
LDCs 44 percent, and developed countries about 20 percent
14High technology products are defined as having at
least 5 percent R&D content.
15As will be explained, this definition includes
commodities that do not require a validated license. Thus,
it overstates the license coverage associated with these
trade categories.
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of this category).l6 (See Table 2.) High technology trade
with China expanded at a rapid rate between 1980-85, though
the level remains relatively small. The level of U.S.
trade with the Bloc countries remained insignificant
between 1980-85.
The high tech trade categories most likely to be
covered by the export licensing system include:
communication equipment, aircraft and parts, computers/
office equipment, scientific instruments, components, and
machine tools. These six categories accounted for about 70
percent of U.S. total high technology exports. (See Table
3.) Firms responding to the National Academy of Sciences
Questionnaire (to be reviewed in Chapter IV) were
predominately from these six trade categories.
Trade with the Soviet Union and Bloc countries is an
area where U.S. firms report they are especially confronted
with unequal treatment with regard to what can be licensed
and the ease of getting a license approved relative to
16For electronics trade with some regions of the
world, especially South East Asia, a large part of U.S.
export trade consists of subassemblies which are assembled
and then reexported back to the U.S. Thus, the importance
of these regions ("All Other Countries') as consuming areas
is overstated in Table 2.
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their other COCOM-based competitors.l7 Table 4 shows trade
for the European Community (EC) and Japanl8 with the Soviet
Union and Eastern Bloc countries compared with U.S. trade
levels to those same areas. The EC and Japan export 25
times the value the U.S. does to the Bloc. Relative to
total exports, Bloc trade for these countries represents 3
times what it does for the U.S. Still, it should be noted
that Bloc trade does not represent a very large component
of EC and Japanese export trade, only averaging around 3
percent of their total annual exports.
Because the coverage of U.S. national security
controls extends to the international sales of U.S. firms
(where appropriate) as well as their direct exports from
the United States, one needs to look at the global span of
U.S.-based firm sales, including exports, if one wants to
develop a more complete measure of the scope of U.S.
business activity reached by the national security
controls. In 1982, the worldwide sales of U.S. firms
17See Appendix B. the case study of the machine tool
sector, for example. Some of the constraints cited arise
solely from foreign policy controls.
18This is approximately total COCOM trade, excluding
Canada and the U.S.
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totalled $3,491 billion,l9 of which 70 percent was U.S.
parent sales, and nearly 30 percent was foreign sales of
U.S. affiliates.20 (See Table 5.) Sales of manufactures
constituted 40 percent of U.S. parent sales, and 35 percent
of the foreign sales.
In order to develop some rough estimates of the scope
of the total foreign sales and related U.S. exports that
are likely to come under the U.S. national security
controls, the set of U.S. manufacturing sectors specified
earlier as the most likely to be covered by the controls is
used.21 These categories accounted for $77 billion or 25
percent of total U.S. foreign sales in 1982.22 (See Table
19This discussion draws heavily on data taken from a
1982 U.S. government benchmark survey of U.S. foreign
operations. See U.S. Department of Commerce, Bureau of
Economic Analysis, U.S. Direct Investment Abroad: 1982
Benchmark Survey Data, (U.S. Government Printing Office,
Washington, DC), December 1985. See Table 7, p. 16
20This excludes export sales to unaffiliated parties.
2iSee Table 2. The categories were communications,
aircraft/parts, computers/office equipment, instruments,
components, machine tools. These were matched to
categories defined in the BEA benchmark survey.
22We use this grouping to illustrate likely U.S.
foreign sales and report patterns and orders of magnitudes.
Tt should be recognized that there is no way to define a
perfect mapping between the scope of U.S.-based enterprise
trade and foreign sales covered by the controls and readily
available statistics on exports and sales.
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5.) By 1985, given the growth of the world economy between
1982-1985, it is estimated that U.S. foreign sales in these
categories probably increased to about $93 billion. This
figure is exclusive of direct export sales by the parent to
unaffiliated purchasers.
Again, referring to Table 5, of the total of $77
billion of foreign sales of U.S. affiliates in these high
tech categories, $65 billion (84 percent) of the sales were
concentrated in developed countries and $58 billion (90
percent) was estimated to occur in COCOM countries.
Restating that slightly, almost three-quarters of the
foreign sales of U.S.-based enterprises which are most
likely to be covered by national security controls occur in
COCOM countries.
To obtain a total of all U.S. foreign sales, the value
of direct export sales must be included.23 For 1982,
direct exports for the high tech sectors were $30 billion.
Combined with sales of foreign affiliates this indicates
that U.S. high tech foreign sales in 1982 totaled $107
billion. (See Table 6.) For 1985, the figure would have
23These are export sales by the U.S. parent which do
not pass through a related foreign affiliate.
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increased to roughly $130 billion.24 The importance of
foreign sales to U.S. enterprises is also indicated in
Table 6. Approximately one-fourth of all of the sales of
U.S.-based firms are foreign sales.
Another aspect of the structure of U.S. export trade
which is important to the export control process is the
role of intrafirm trade.25 U.S. exports are not always
transactions between unrelated parties. This reflects the
multinational character of many U.S. firms. The extent to
which intrafirm trade is a factor in U.S. exports can be
examined by breaking it down into the part that flows to
unaffiliated versus the part that flows to affiliated
parties. The Bureau of Economic Analysis's benchmark
survey data on U.S. foreign operations for 1982 indicates
that of the total for U.S. merchandise exports of $212
billion, $163 billion, or 77 percent, was shipped by U.S.-
based parents. (See Table 7.) Of manufactures exports,
24This estimate is an extrapolation taking into
account real growth and general price level changes, but
does not take into account any negative factors, such as
relative tightening, if any, of U.S. export controls.
25This discussion is partly based on the article
"Intrafirm Trade and U.S. Protectionism: Thoughts Based on
a Small Survey," by Jane S. Little, New England Economic
Review, Jan/Feb. 1986, pp. 43-49. Little estimated that
roughly 30-40 percent of U.S. exports are intrafirm trade.
_19 _
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U.S. firms accounted for $102 billion of the $163 billion
total, or 63 percent.26j27 Two-thirds of U.S. parent U.S.
exports went to unaffiliated parties.
The high tech segments of exports to unaffiliated
parties equalled 46 percent. For high tech shipments to
affiliated parties, about half went to COCOM country
destinations. U.S. exports to affiliated and unaffiliated
enterprises vary widely by sector. (See Table 8.) Some
sectors have large portions of exports going to affiliated
parties; this is true for computing and office equipment,
electronic components and instruments. While in the
communications and other transport equipment sectors,
shipments to unaffiliated parties are more the rule. In
turn, for trade with affiliated parties overall, 60 percent
goes to COCOM country destinations. If electronic
components are excluded to account for subassemblies
exported to the NICs, it is almost 75 percent.
260f the $102 billion, $65 billion was shipped to
unaffiliated parties and $37 billion was shipped to
affiliated parties.
27This raises another point about the U.S. licensing
system. A fairly significant share of U.S. export trade is
performed by foreign firms. A large number of foreign
firms operate in the U.S. and export; obviously, they are
subject to U.S. national security controls.
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The large intrafirm component of export trade has
several implications for measurement of competitive effects
of the U.S. license system. First, it suggests that some
competitive effects of the U.S. license system may show up
only outside the U.S. due to U.S. controls on reexport and
resale of U.S.-origin goods and technology within the Free
World--controls largely unique to the U.S. control system.
To illustrate, for large U.S. multinational corporations,
the structure of their complex international manufacturing,
distribution ard marketing networks may be affected by
changes in U.S. licensing regulations. For example, they
may lose unaffiliated distributors due to U.S. reporting
and compliance rules.28 Thus, to the degree foreign
unaffiliated distributors are lost, ultimately U.S. export
trade are affected. This suggests that for multinational
firms their competitive position within foreign markets may
be adversely influenced by U.S. licensing actions, but the
linkages back to how this affects their U.S. operations may
be difficult to measure directly.
A second implication of the high proportion of
intrafirm trade is on the type of license utilized by the
28This, in fact, has occurred. See the response to
the questionnaire, Appendix C.
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firm. The type of license used is, in part, a function of
the structure of the firm. Firms with significant
intrafirm trade would be expected to utilize bulk licenses
to a greater degree than firms which transact mainly with
unrelated parties. The distribution and project licenses
are designed around multinational firms with a large volume
of international transactions. As will be discussed below,
over half of all U.S. foreign sales requiring a license are
conducted using a bulk license.
II.B. Coverage of the Export Control License System of
U.S. Foreign Sales
While all U.S. exports require a license, only a
certain segment requires a validated one--that is, the
exporter must receive prior written approval from the
Department of Commerce before exporting certain goods or
technical data. Typically, the segment requiring a license
covers the "more strategic 'I or more sensitive items. The
U.S. national security controls process covers not only
products as they flow across the U.S. border, but also
covers certain transactions abroad. These transactions
might include, for example, products produced and sold
offshore by a U.S. affiliate; they might also include
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products manufactured by a foreign firm incorporating U.S.
origin components or technology.
As indicated in the preceding section, the foreign
sales just of U.S.-based firms potentially covered by the
licensing system is estimated to be S130 billion in 1985.
This total figure can be divided into transactions under
self-license ("noncontrolled") versus transactions under
validated license ("controlled"). (This was represented in
Figure 5.) The controlled transactions can be divided into
transactions controlled for national security or other
purposes.29 The national security controls are implemented
via either bulk or individual licenses. The largest
portion of the total value of U.S. foreign economic
activity is transacted under a bulk license. But most of
the data on the transactions covered by the licensing
system pertain to the IVLs. This is especially true with
regard to Commerce Department information on operational
parameters of the licensing system. Therefore' estimates
29In estimating the coverage of the export control
system, the focus is on the national security controls, but
the data used to develop the estimate has included some
transactions controlled for other reasons. These other
controls only apply to a small proportion of transactions,
probably less than ~ percent of the total value.
Therefore, the data can for all practical reasons be
treated as purely related to national security controls.
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are directly developed for IVL coverage while the bulk
license coverage is estimated as a residual value.
Two separate approaches using different data sets are
used to estimate the fraction of U.S. direct manufactures
export trade covered by the export control process. This
provides a cross-check on the reasonableness of the
results. The first approach uses data from both the
Commerce Department and the Academy Survey of U.S.
exporters. The second approach uses data exclusively
developed from companies.
In FY1985 (1984.4-1985.3), Commerce records indicate
that applications for individual licenses were received for
approximately $64 billion of manufactures exports.30 In
the same time period, license approvals for manufactured
goods totalled about $50 billion.31 This figure includes
more than just the value of licenses for direct export from
30In this time frame, Commerce received applications
totaling $10S.5 billion. Of this total, $41 billion was
estimated to be nonmanufacturing exports.
31Note that this value of processed licenses is in
FY85, and there is no assurance as to when the license was
actually used. The difference between the $64 billion
value of applications and $SO billion value of approvals is
accounted for by denials, RWAs, and timing differences,
i.e., the inventory of license applications pending decision.
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the United States. It also includes the value of reexport
license applications approved which equalled approximately
$6.4 billion in FY85. Thus, the value of direct U.S.
exports is about $43.5 billion. It is likely that only 50
to 85 percent of the value of all approved individual
licenses are actually used.32 Therefore, between $22
billion to as much as $36 billion of the authorized $43.5
billion was actually shipped under an IVL.
The second approach to estimating the extent of U.S.
exports covered by an individual validated license uses
only data developed from the Academy Questionnaire sample
of firms which have foreign sales and whose sales are to
some degree covered by the licensing system.33 Forty-one
percent were shipped or sold General Destination (GDEST);
that is, without requiring a validated license. Applying
this distribution to the estimated total U.S. foreign high
tech sales in 1985 of $130 billion indicates that
approximately 60 percent, or $78 billion, were transactions
32This estimate is taken from responses to the Academy
Questionnaire and interviews. One reason firms request
more than they actually use is that there is an asymmetry
in the valuation process--i.e., firms have an incentive to
be sure the license value is sufficiently large, but there
is no penalty if the actual value shipped is less.
33 Chapter ITI discusses the validity of the sample.
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covered by export controls. (See Table 9.) The portion
requiring a license was divided between 39 percent
utilizing an IVL and the balance of 61 percent going under
a bulk license. Thus, of the $78 billion of foreign sales
covered by a validated license in 1985, about $30 billion
was covered by an IVL.34 This compares reasonably well
with the range of the other estimate of between $22 to $36
billion for IVL covered shipments.
The balance of foreign transactions, $42 to $56
billion, goes under some form of bulk license. Note that
these estimates do not reach to the transactions of foreign
firms--including distributors, OEMs, etc.--who utilize
U.S.-origin commodities and technology which are subject to
U.S. export controls.
34To arrive at this number, the following estimates
were made. The $107 billion, Table 6, was adjusted to a
1985 value of $130 billion. The distribution of license
coverage by category was then applied. See Table 9 for the
distributions. IVEs were used to cover approximately 23
percent of total foreign sales or 39 percent if only the
portion of trade requiring validated licenses is looked at.
This percentage was applied to the $78 billion.
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Representative terms from entire chapter:
export trade
