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l
I. Introduction
This study focuses on one element of the work of the
Panel on the Impact of National Security Controls on
International Technology Transfer: the effects of the
controls on the competitive effect of U.S. products in
international trade. Determining the overall competitive
effects of the export licensing system is difficult both
because the mechanisms by which the effects manifest
themselves can be diffused and because the licensing system
has so many varying degrees of influence.
In principal, the U.S. export control system should
have very little, if any, relative competitive impact on
U.S. firms. The costs of utilizing the system might
discourage some firms from exporting but otherwise there
should be no competitive effects. This would be the case
if the U.S. controls and procedures were identical to those
utilized by other countries who subscribe to the
multilateral control system (COCOM). But in fact, they are
not identical.7 The difference in degree of economic
activity covered, the greater stringency with which trade
is governed by controls, and the greater complexity of the
7Al l U. S . firms interviewed for this study that had
worked with foreign licensing systems of other COCOM-member
states supported this view.
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procedures by which U.S. controls are administered are all
factors when combined mean that U.S. firms bear a
competitive as well as an administrative cost in complying
with U.S. export control regulations.
In order to understand the scope of this study, a
series of schematics frame the extent of U.S. firms'
foreign sales covered by the U.S. control system. We start
by looking just at U.S. exports. Basically, one can divide
all U.S. export trade into the portion covered by export
controls and the portion that is not.8 (See Figure 1.)
The vertical axis of the figure breaks down total export
trade by geographic region. The three regional groupings
identified are those of relevance to the issue of licensed
trade: the Bloc/People's Republic of China (PRC), the
countries of the multilateral international Coordination
Committee (COCOM), and lastly, the non-COCOM, "West"
countries. This is the most basic level, but it
excessively oversimplifies the framework. Further
divisions are necessary because important subcategories are
8Technically, all U.S. exports require a license. A
large portion of U.S. exports goes out under a self-
license, i.e., the exporter is not required to get prior
written approval.
—2—
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t
left out which have very different degrees of control by
-the licensing system.
Moving to Figure 2, the basic distinctions of type of
export control, whether national security or foreign policy
or nuclear/other, are specified. Basically, this study
seeks only to focus on national security controls, but
practically speaking this narrower definition of scope
cannot always be maintained. Not all of the data developed
for this report could be broken down by type of export
control (i.e., national security, foreign policy, nuclear
nonproliferation, short supply, and crime control). To
keep this in perspective, however, where we were able to
identify licenses by national security versus other types
of controls, 99 percent of the license cases were
classified as national security. This indicates that the
basic data is overwhelmingly reflecting national security
controls. It should also be noted that most U.S.
businesses do not realize there is a distinction among the
different types of controls. Management decisions are
based on the need to obtain a license, not on the
underlying rationale for the license.
-3-
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Now to begin to appreciate how difficult assessing the
competitive effects can be, examine Figure 3. Here, the
geographic divisions have been further differentiated
because the geographic divisions identified in Figure 2 are
still too aggregate from the standpoint of examining
competitive impact of the licensing system. For example,
the East-West category is divided into the Peoples Republic
of China (PRC) and all other Bloc countries. This
differentiation is needed because a very different
licensing policy pertains to the PRC relative to all other
Bloc countries. Similarly, Canada is separated out from
other COCOM countries because the U.S. does not require a
validated license for exports to Canada. Changes in U.S.
license procedures should have no effect directly on U.S.-
Canada trade. Lastly, the Memorandum of Understanding
(MOW) West countries are treated differently in the license
review process from all other non-COCOM, non-MOU West
designations. This necessitates making 2 unique category
for them. Column 1 of Figure 3 indicates a possible six
categories of licensed trade which could be analyzed. But
the picture is still not complete.
The segment of trade covered by national security
controls needs to be broken down further to reflect the
—4—
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fact that there are different types of licenses. The
procedures by which these different licenses are issued and
their purpose sets up differential effects as far as their
influence on business activity. With this additional
division, there becomes 18 possible combinations of type of
license and country destination for which competitive
effects could be examined. (See Figure 4.)
But the possible scope of economic activity influenced
by the license system is still broader than the scope
indicated in Figure 4 which covers only U.S. direct
exports. The U.S. licensing system covers more than just
U.S. exports, it can reach to the sales of U.S. affiliates,
as Figure 5 illustrates. And even this does not indicate
the full extent of possible coverage because foreign
enterprises, distributors, sales operation, manufacturers,
etc., are affected by the U.S. system in certain
circumstances. While this report attempts to extend the
scope over all direct U.S. enterprise activity, it does not
reach into this last area. Limitations of available
information rather than any belief that effects on foreign
operations are inconsequential is the reason. The scope we
utilize in this study is illustrated in Figure 6 J but with
the additional detail indicated in Figure 5. Reference
—5—
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will be made back to these figures from time to time to
refresh the readers' understanding of the framework of
analysis.
The competitive effects one can measure can vary
depending on country of destination and type of control;
this is depicted in Figure 6. That is, for the different
combinations of destination, type of license, and type of
economic activity analyzed, there are a large number of
possible economic effects created by the export control
system. This study will only address a limited set of
these effects. Estimates of the size of economic impact
developed in Chapter VI principally are prepared to
illustrate how for administrative costs and for effects of
reduced direct exports, the magnitude of the impacts are
consequential. But these estimates do not trace through
the possible economic effects of the controls on a number
of other areas. For example, the controls may be
decreasing the efficiency of the industrial R&D process in
the U.S. Raising R&D costs would lower R&D output and have
long-run competitive consequences. Likewise, the export
control system may be encouraging foreign rivals to U.S.
firms to engage in independent research and enter markets
previously dominated by U.S. firms. These effects are not
—6—
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examined. Thus, the cost estimates which are presented
only cover a subset of potential economic costs--namely
short-term, direct costs.
A concluding note on the scope of this report. The
competitive position of U.S.-based firms in international
markets is a function of many factors--only one of which is
the U.S. export control system. The effects of the control
system on competitiveness cannot be viewed completely in
isolation from the effects of other factors such as
exchange rates, relative productivity, product quality,
etc. But while some of these other factors, exchange rates
for example, cut across all export sectors, the export
control system effects vary by industry sector. Our
initial research indicated that it was the high technology
industries that were incurring the greatest economic costs
due to the U.S. export control system. We therefore
focused the analysis, for the most part, on the high
technology industries.
Because so little empirical data has been developed on
the export control process in the past, this report is
organized along somewhat unusual lines. Rather than
address generic issues, it reports on the various data
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sources utilized to analyze the system and concurrently
addresses various competitive issues. The second chapter
starts by providing an estimate of the scope of U.S.
business activity influenced by the controls. This
basically puts numbers in the slots of Figures ~ through 5.
The next three chapters report on three different sources
of information which were developed for this report. Each
source provides a different view of the basic issue of how
the competitive disadvantage is created by the U.S. export
control system and how extensive or significant it is.
Chapter ITI looks at various measures of performance
of the U.S. licensing system. This chapter draws
extensively on information taken from the Department of
Commerce databank on export licenses. Chapter IV looks at
the export control system from the viewpoint of the private
sector, using information developed from the nearly 200
responses to a National Academy Questionnaire. In order to
better define the complex competitive effects of the
system, interviews were conducted with over 20 U.S.-
headquartered firms that use the export control system.
Chapter V summarizes these interviews and defines why the
system can act as a barrier to exporting for some firms.
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Having analyzed the operation of the system from
-several different perspectives, the concluding chapter
pulls the pieces together to indicate the order of
magnitude of some of the associated economic costs. These
estimates show that the U.S. export control system does
create a significant economic cost which is uniquely borne
by U.S. business.
There is another inherent limitation in the research
design followed in this study that the Panel should
understand besides the point regarding the limited scope of
the cost estimates. We predominately collected data from
U.S.-headquartered operations, but some reports about
possible adverse competitive effects of the controls focus
on the reaction of the U.S. foreign customer base to U.S.
controls. To a major degree, we only obtained qualitative
appraisals of the changing customer relationships from the
U.S. point of view.
A final note. We are fully and solely accountable for
this study, but we would be remiss not to acknowledge the
excellent assistance and cooperation we received from the
Department of Commerce Export Administration, the National
Academy of Sciences and the following trade associations:
_9_
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1
Aerospace Industri
Association of America, Inc.,
Electronics Association, Computer Business Equipment
Manufacturer's Association,
Electronic Industries
Association, Health Industry Manufacturers Association,
National Electrical Manufacturers Association, National
Machine Tool Builders Association, Robotic Industries
American
Association, Scientific Apparatus Makers Association and
Semiconductor Equipment and Materials Institute.
-10-
Representative terms from entire chapter:
competitive effects
