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Iv. Analysis of Firm Ouestionnaire on Export ControlsSO
In order to analyze how the export control process
influences U.S. competitiveness, a survey of U.S. firms was
conducted. The surveyed firers were taken predominantly
from five industrial categories selected because they
account for the preponderance of validated licenses issued
for manufactures exports.
A casual Inspection of the CCLs identified in Tables
11 and 12 indicates that exports of items generally
characterized as related to electronics and aircraft (large
dollar value) are the two industrial categories most
covered by the licensing system.51 Certain equipment might
be picked up in CCL 1565, for example, because it has an
embedded microprocessor, but the equipment is not
inherently "electronic." Machine tools would be one
50Questionnaire responses cited in this section are
cross referenced to Appendix C which has a complete listing
of responses. Questionnaire responses reported in this
chapter refer to a firm size split according to reported
1985 foreign sales. The Appendix C responses are reported
on the basis of size split by reported ,985 domestic sales.
A copy of response results based on foreign sales is
available to the Panel by request to Quick, Finan
Associates.
51Part of the reason for the large number of
occurrences for electronics firms relates to the
restrictive covenants of the DL to non-COCOM, West destinations.
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example. Thus, in designing the sample of U.S. firms for a
questionnaire on the export control process, the sample was
oriented towards firms in the sectors of electronics
(equipment and components), aircraft (airframes, engines,
etc.), but also firms in the sectors of instrumentation and
machine tools were included. Of the $130 billion in total
U.S. high technology foreign sales estimated for 1985, the
firms responding to the Academy survey accounted for
roughly $36 billion or about 28 percent. Thus, the survey
respondents represent a significant proportion of U.S. high
technology foreign sales in 1985.
· The first overriding point brought out by the survey
responses relates to why the controls influence
competitiveness at all. In some sense, if U.S. controls
were identical in type and administered identically to
those of other major trading partners, the system would be
neutral. That is, some U.S. firms at the margin might be
influenced not to export due to compliance costs, but there
would be no differential effects relative to firms based in
other COCOM countries. According to our Questionnaire
responses, the U.S. system is not neutral.52 Based on the
52This is especially the case for foreign policy
controls which are unilateral.
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responses of firms to the NAS Questionnaire, the export
control system is causing two principal problems: (a) the
licensing system directly impedes some firms from exporting
(this is beyond legitimate restrictions imposed for
national security purposes) due to administrative barriers;
and (b) the U.S. system is causing an erosion of the
international distribution/marketing structure by which
U.S.-based firms can successfully establish and sustain
marketing advantages internationally. The direct monetary
cost of compliance was not identified as a major concern.
These two broad problems were indicated from responses
to two questions: (1) does the firm have an export control
specialist, and (2) has the firm lost foreign business
principally due to U.S. export controls. The responses
showed that:
47 percent of the firms had one or more employees
working nearly full time on export control compliance
(i.e., effectively specialists) reflecting the complex
nature of the controls; and
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52 percent of the firms surveyed reported they had
lost sales in the past 12 months principally due to
export controls.
The remainder of this chapter deals with two issues:
how firms view the functioning of the license system, and
how the controls influence the competitive position of U.S.
firms.
IV.A. Functioning of the License System
License processing time delays and uncertainties are
viewed as the factor creating the greatest problem for U.S.
firms' competitiveness. (See Appendix C, Question 40.~53
Thus, even though firms report that only 5 percent of their
applications, on average, are denied54 or RWAd.55 the
53Large firms indicate the availability of equivalent
product from alternative foreign sources with less
stringent controls pose an even greater problem. See also
the AEA survey results, Appendix D, which indicate that the
degree to which a firm sees the license system as a major
problem is heavily influenced by experience with processing
times.
54There is anecdotal evidence that indicates firms
request a license be RWAd if they have reason to believe it
will be denied. The survey respondents reported they
withdrew applications in only 27 cases to avoid rejection.
This is a sufficiently high rate of incidence to indicate
this type of action alone would lower the reported denial
rate by 25 percent.
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processing times can vary over a significant range.56 Thi-
was discussed in Chapter 3. Table 20 summarizes, by size
of exporter, actions taken on IVLs and the reported
processing times for different destinations. These times
and profiles are consistent with the data taken directly
from the Commerce Department.
One way firms try to deal with complications that
arise when normal license processing may delay or cost a
sale is to request emergency processing. The survey
respondents indicate Whey request emergency processing for
about 4 percent of their applications. This translates
into approximately S,000 emergency cases per year.
Commerce Department sources in turn report that the request
for three-quarters of the emergency cases are accepted.
Thus, emergency processing can act as an escape valve to
some degree.
55This is about one-third of DOC's figures. But DOC
records cover multiple RWAs which may explain why there is
such a difference.
56Processing times reported here are from time of
submission until return of the processed license. Commerce
processing times only cover from date of entry into the
record-keeping system at the Commerce Department until
final approval or completion of processing. DOC's average
time is 4 weeks, whereas firms report an average processing
time of roughly 6 to 7 weeks. Given the difference in
definition, this differential is fairly consistent. See
also Appendix A for processing time definitions.
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-
With respect to overall averages for license approvals
and processing times shown in Table 20, it can be seen that
roughly one in 10 licenses are denied or Returned Without
Action.57 Combined with that uncertainty is the variation
for the duration of processing time. For 5 percent of
applications to free-world destinations, processing times
can take twice as long as the average.
The data reported by the firms also showed that
relative to large exporters, small exporters have two and
one-half times greater likelihood of their license not
being approved and, for free-world destinations, average
processing times 25 percent longer. The processing
variance (longest processing times relative to average
time) is 21 percent for large exporters, 70 percent for
medium, but 150 percent for small exporters. These results
are consistent with the indications discussed in Chapter
III that small firms have a greater degree of difficulty
with the licensing process.
Tables 21, 22, and 23 show action taken and average
processing times for the survey responses of three of the
participating trade associations. The responses from firms
57Note DOC data indicates about double this rate.
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who are members of the aerospace industry, the analytic
instruments industry and the semiconductor equipment
industry are aggregated by firm size. The evidence in two
of the three cases supports the hypothesis of a firm-size
effect, independent of product. Small firms in the
aerospace industry reported average processing times 28
percent longer than the large firms. Similarly, average
processing times reported by semiconductor equipment firms
are 84 percent longer for small firms than large firms.
As was discussed in Chapter lIT, the type of license
used depends to some degree on the volume of exports for a
firm. The Academy Survey data clearly confirms this.
Small firms tend to use IVEs relatively more than large
firms. (See Table 24.) Larger exporters utilize bulk
licenses for 60 percent of their foreign sales requiring
validated licenses.
There were over 600 Distribution Licenses (DLs)
outstanding in the first quarter of 1986. The surveyed
firms held about one-third of this total. Small exporters,
in turn, held about half the sample total number of DLs.
Of the 76 firms who reported they did not have a
Distribution License, 63 stated it was because they
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processed too few ~V~s--S7 of these 63 firms were small
exporters. An additional 14 firms, 12 of which were small
exporters, cited the cost of the DL compliance system as
the reasons they did not hold a DL. Larger firms reported
average DL compliance costs to be $260,000 in 1985,
anticipating that to increase to $444,000 in 1986.58
As indicated above, direct compliance costs do not
seem to be a major problem for firms. Taking into account
DL compliance costs as well as other additional direct
compliance costs, based on the survey data we would
estimate that overall U.S. firms expended $300 million in
1985 for administrative costs associated with compliance.59
In addition, another $6 to $9 million annually was spent to
procure outside service support. The surveyed firms
S8DL compliance cost estimates for smaller firms were
judged to be unreliable. Cost estimates, per small firm,
were 5 percent of the cost figures reported for large
firms. Large firms usually have budget categories for DL
compliance costs and therefore have more reliable
information on actual compliance costs. Small firms seemed
to report only the direct cost associated with obtaining a
DD, not the ongoing compliance costs associated with
holding a DL.
59This is administrative costs only. Most firms do
not track total compliance costs. For example, if a firm
must put together a special team of officials to meet with
government officials to discuss a license application
almost no respondents tracked the costs associated with the
time of the nonlicensed specialists.
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estimated a nearly 50 percent increase in compliance costs
expected in 1986 relative to 1985 due principally to the
increase in DL compliance costs. This would indicate the
current level of total administrative compliance costs to
be about $0.5 billion annually.
Foreign availability, general license provisions and
General License (GCOM) are all aspects of the system which
received attention in recent legislation. Table 25
summarizes the survey respondents' use of these provisions.
Over half the firms dz'd not report foreign availability
even when they believed it existed . A General License
(GCOM) allows an exporter to export to COCOM countries
products on the COCOM control list which do not require
COCOM approval for export to the Bloc countries. About 30
percent of the respondents indicated they were using this
type of license.60 Lastly, nearly half of all firms, and
80 percent of large and medium-sized exporters, have
utilized a General Technical Data Restricted license to
transfer technical data abroad.
6OThe low rate of utilization was evident in the data
presented in Chapter IIT which indicated a large portion
(17 percent) of the license applications in the sample were
eligible for GCOM.
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IV.B Effect of the System on the Competitive Position
of U.S. Firms
The questionnaire data indicate that the export
licensing process is having an adverse effect on the
structural mechanisms by which U.S. firms establish their
competitive position in international markets. One-quarter
of all large firms report losing unaffiliated distributors,
but only lO percent of the small firms report this
occurrence. This shift is taking place, in part, due to
the new Distribution License requirements.61
The surveyed firms report a significant number of
incidents where free-world customers have refused to
consummate business deals with them. While one-quarter of
all survey respondents indicate such an occurrence in the
past 12 months, an even larger proportion of larger firms
report such an occurrence:
Size of Firm
Overall
Average Large Medium Small
26% 36% 25% 24%
(% of Firms Reporting)
Source: NAS Questionnaire
61A separate report discusses the DL situation at
length.
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Firms were requested to report, for the last 12
months, whether to any significant degree due to U.S.
export controls in Free-WorId trade, had they had new
customers refuse to consummate a business deal or had
existing customers indicate a shift in preference to a non-
U.S.-based vendor. One quarter of the surveyed firms
responded affirmatively to having new customers refusing to
deal with them. The surveyed firms cited 212 instances
within the past 12 months. They reported an even higher
rate of existing customers expressing a preference to shift
to a non-U.S. source. Again, there was a much higher rate
of incidence reported among large and medium-sized firms
relative to small firms:
Size of Firm
Overall
Average Large Medium Small
38% 50% 65% 32%
(% of Firms Reporting)
Source: NAS Questionnaire
Among all firms, over 257 separate instances of a shift in
preference were cited. Most firms, especially the larger
ones, expect the number of these occurrences to increase in
the next 24 months. There were also four reported
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instances by smaller firms where they had a free-world firm
refuse to engage in a joint venture due to U.S. controls.
The U.S. more stringently controls exports to COCOM
destinations and other free-worId countries than do the
governments of other COCOM country-based firms. In
addition, the U.S. is essentially the only country that
employs reexport controls for sales to other COCOM
countries. These conditions explain why one of the major
competitive difficulties with U.S. controls reported by
U.S. firms is the imbalance between U.S. and other COCOM
countries' licensing procedures. To illustrate, 45 percent
of the respondents indicated they had direct knowledge that
foreign countries were interpreting the COCOM regulations
less stringently than the U.S. This difference is directly
influencing the willingness of U.S. firms to compete in
Bloc countries for business. (There is a further
discussion on this point in the next chapter.) And, in
turn, regardless of destination, they indicated that the
availability of competitive product from alternative
sources with less stringent controls as having a major
impact on their competitive position.
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Representative terms from entire chapter:
processing times
