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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. -45-

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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. -46-

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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 -47-

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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. -48-

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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. -49-

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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. -50-

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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 -51-

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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. -52-

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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. -53-

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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. -54-

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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 -55-

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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. -S6-