3
The Impact of Export Controls on U.S. Industry

As the global demand for goods and services has expanded since the end of World War II, the U.S. position as the world's foremost producer and exporter has come under increasing challenge. Export controls are one of a number of factors that collectively contribute to the competitive difficulties of the United States. Experts are unable to measure, and disagree about, the relative contribution of most of these factors, but it is clear that export controls can, in some circumstances, impose significant burdens on the economy. Unlike some other factors, however, export controls are largely modifiable by changes in U.S. policy, and hence, their negative impact can be ameliorated, if not entirely eliminated.

The three subpanels for this study worked in parallel with the main panel to, among other things, assess the effect of export controls on specific industrial sectors. The export-sensitive, high-technology areas selected—advanced materials and composites, commercial aircraft and jet engines, and computers (both hardware and software)—reflect a range of structural features that can alter the way export controls affect competitiveness. Some of the effects and areas of concern are common to much of U.S. industry; others are industry specific.

Before examining the specific effects of export controls on the industrial sectors that were the subject of detailed study, this chapter briefly describes three general areas of concern to U.S. industry. These issues are discussed further in Chapter 5, and recommendations for change in the export control policy process are presented in Chapters 79.



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Finding Common Ground: U.S. Export Controls in a Changed Global Environment 3 The Impact of Export Controls on U.S. Industry As the global demand for goods and services has expanded since the end of World War II, the U.S. position as the world's foremost producer and exporter has come under increasing challenge. Export controls are one of a number of factors that collectively contribute to the competitive difficulties of the United States. Experts are unable to measure, and disagree about, the relative contribution of most of these factors, but it is clear that export controls can, in some circumstances, impose significant burdens on the economy. Unlike some other factors, however, export controls are largely modifiable by changes in U.S. policy, and hence, their negative impact can be ameliorated, if not entirely eliminated. The three subpanels for this study worked in parallel with the main panel to, among other things, assess the effect of export controls on specific industrial sectors. The export-sensitive, high-technology areas selected—advanced materials and composites, commercial aircraft and jet engines, and computers (both hardware and software)—reflect a range of structural features that can alter the way export controls affect competitiveness. Some of the effects and areas of concern are common to much of U.S. industry; others are industry specific. Before examining the specific effects of export controls on the industrial sectors that were the subject of detailed study, this chapter briefly describes three general areas of concern to U.S. industry. These issues are discussed further in Chapter 5, and recommendations for change in the export control policy process are presented in Chapters 7–9.

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Finding Common Ground: U.S. Export Controls in a Changed Global Environment AREAS OF CONCERN TO U.S. INDUSTRY In general, U.S. industry has three primary concerns about the U.S. implementation of export controls: the unilateralism of U.S. export control policy, the lack of selectivity in developing and managing lists of controlled items, and the lack of fairness and efficiency in the administration of export controls. Unilateralism The negative economic impact of export controls on the U.S. economy has stemmed almost entirely from the unilateral aspects of U.S. policy, including restrictions and control practices not followed by U.S. allies and partners in the Coordinating Committee for Multilateral Export Controls (CoCom). Significant unilateral features of the U.S. control system include the following: controls on reexports of U.S. items to third countries and the requirement for written assurances regarding end use and reexport; controls on U.S.-owned foreign entities; controls on foreign products that use (or are made with) technologies of U.S. origin; controls on foreign products that have U.S.-origin components in them; control of some dual use items as munitions that other CoCom nations regulate less restrictively as dual use products; selective imposition of unilateral product and technology controls; more burdensome and complex licensing regimes; and more stringent enforcement mechanisms. Except in those increasingly less frequent cases in which the United States has a functional monopoly on items in question, unilateral U.S. controls do not significantly affect the availability of items to proscribed nations. In fact, the major export control problems have involved West-West, rather than East-West, trade. As a result, the costs of export controls in the past have largely derived, not from the loss of specific sales to customers in proscribed countries, but from the loss of sales in nonproscribed countries because of pragmatic concerns by importers in those countries about the unilateral features of U.S. controls. Unilateralism disadvantages the U.S. economy and can rarely be justified in a competitive world economy by security concerns. Unilateral features should be eliminated from U.S. national security export controls

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Finding Common Ground: U.S. Export Controls in a Changed Global Environment except in those rare instances in which such a unilateral action would be effective or holds the prospect of changing the position of other countries within a relatively short time. Lack of Selectivity in Developing and Managing Control Lists For much of the recent past, multilateral controls have been applied to a broader range of goods and technologies than appears to have been warranted by the facts, or for which there was a real consensus within CoCom. The June 1990 CoCom High-Level Meeting produced two significant achievements: (1) the number of controlled-item categories was reduced by approximately one-third and (2) a commitment to further reductions was made through the ab initio creation of a ''core list" of controlled items. Thus, the problem of overinclusiveness appears to be in the process of remediation; it should not be permitted to recur. Lack of Fairness and Efficiency in the U.S. Export Control Process Although routine licensing has become more efficient and routine processing times have been reduced, requests for export licenses involving first entry into a new market, or those that require more detailed examination for other reasons, can still be substantially delayed. Moreover, it can be difficult to get information about the cause of any delay and the prospects for its resolution. The U.S. export control system is viewed as overly complex, and process information can be hard to obtain. Reports from other CoCom countries suggest that private industry in those countries has much better access to information about the ongoing export control process. Here again, U.S. companies may be substantially disadvantaged with regard to "first entry" licenses that may open export markets. THE EFFECT OF EXPORT CONTROLS ON SPECIFIC U.S. INDUSTRIAL SECTORS Advanced Materials* The Subpanel on Advanced Industrial Materials noted that while U.S. export controls apply only to a limited portion of worldwide trade in advanced materials, their estimated impact on U.S. competitiveness is substantial. The *   The complete report of the Subpanel on Advanced Industrial Materials is included as Appendix A.

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Finding Common Ground: U.S. Export Controls in a Changed Global Environment effect of export controls on the materials industry derives from controls on both the advanced materials and the end products incorporating the materials. The subpanel also noted that some circumstances peculiar to the materials industry figure in the impact of export controls on the industry. For example, advanced materials are not militarily critical of themselves. It is the design, fabrication, and application technology that are critical for strategic applications.* If a material is patented for commercial use without provisions preventing detailed disclosure, the formula and most effective fabrication method may also be specified in the patent, thereby undercutting the effect of export controls. Another distinctive feature of the materials industry is that most applications of advanced materials are commercial, but military funding typically drives research and development (R&D) efforts. Advanced materials require a long lead time between R&D and application. As a result, a number of materials that were developed under Department of Defense (DoD) contract have not yet been incorporated into weapons prototypes or systems, but they are nonetheless controlled for export. Further, controlling materials on the basis of military specification of performance characteristics assumes that the same performance characteristics are not necessary or useful for commercial applications. A recent Department of Commerce study stated, however, that high-performance, advanced materials figure prominently in those emerging technologies with the greatest potential for commercial application and for advancing production and quality levels.1 Cuts in military spending and the high cost of investment capital, combined with continued export restrictions on advanced materials with high commercial potential, could suffocate the U.S. technology base and severely limit incentives for investment in R&D. The Department of Commerce study referred to above also indicated that the United States is currently behind Japan, and likely to continue losing ground, in advanced materials and emerging technologies that are highly dependent on advanced materials. At the same time, many small U.S. materials companies are being bought by multinational firms, which results in an "export" of technology. These facts limit the ability of the United States to control access to, and the diffusion of, advanced materials, and they presage problems for U.S. defense capabilities because these same technologies figure prominently in the long-term strategy for maintaining the qualitative superiority of U.S. *   Canopies for jet fighter planes are an illustration of this fact. The canopies themselves are controlled as munitions items. They are made from a certain quality polycarbonate sheet, which is also controlled. It is the process for forming the sheet into the canopy, however, that is complicated and protected, even in the United States, for security and proprietary reasons. Without the process know-how, the polycarbonate sheet has no critical value.

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Finding Common Ground: U.S. Export Controls in a Changed Global Environment weapons systems. Thus, instead of protecting the qualitative superiority of U.S. weapons systems, export controls on advanced materials may contribute to the weakening of U.S. defense capabilities. Commercial Aircraft and Jet Engines* The Subpanel on Commercial Aircraft and Jet Engines found that export controls, and in particular foreign policy controls, have a generally pernicious effect on the export sales of the U.S. commercial aerospace industry. The decision to purchase U.S. or foreign aircraft is often a very close call. Although many factors are involved in the loss of a sale, repeated U.S. experience has shown that the long-term ability of U.S. firms to provide spare parts and product support can be a determining factor in the purchase. Variable and unpredictable U.S. foreign policy controls that can affect product support have had a significant impact on U.S. exports. Further, unilateral embargoes on exports to numerous countries not only make sales impossible but actually encourage foreign competitors to develop relationships with the airlines of the embargoed countries. By the time the U.S. controls are lifted, those foreign competitors may have established a competitive advantage. Each lost export sale, in turn, generates further long-term effects. According to a generally accepted industry rule of thumb, for every aircraft sold, at least three more will be sold to the same customer in the future. Once an airline has chosen a particular producer, it may continue in some instances to buy airplanes from that producer over several decades; the same is obviously true for engine purchases. Thus, the loss of one sale due to export controls can bring about the loss of an entire export market. The negative impact of export controls is heightened by particular characteristics of the aerospace industry. The aircraft business is volatile. It involves great risk in the introduction of new products and continual changes in technological leadership among the major companies. Very long lead times are required to develop and introduce new transports and engines and to recoup massive investments of capital and skilled labor. Export controls heighten the risk that such investments will not pay off. In addition, aircraft and jet engine technology is a perishable commodity; much know-how diffuses rapidly throughout the industry through sales, licensing arrangements, and competitive R&D. The challenges faced by U.S. aerospace firms occur against a backdrop of ever-increasing foreign competition. Although the U.S. commercial aircraft and jet engine industry has prospered in recent years, and despite the fact that the United States is still the overall leader in R&D, German, French, *   The complete report of the Subpanel on Commercial Aircraft and Jet Engines is included as Appendix B.

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Finding Common Ground: U.S. Export Controls in a Changed Global Environment British, and Japanese firms are becoming increasingly competitive and/or are pulling ahead in many areas of technological application. Moreover, foreign competitors, such as the European Airbus Industrie consortium, receive government support. Airbus is gaining market share and is working to reduce the proportion of U.S. components and subsystems in their aircraft. At the same time, a continuing trend toward internationalization of large-scale projects and supplier bases makes controls by any single nation generally ineffective. Computers* The Subpanel on Computer Technology found no good quantitative assessments of the costs of export controls to the U.S. computer and microelectronics industries. Export controls are, at best, only a secondary factor in the overall decline in the international competitive position of U.S. firms in this sector. Controls have hurt U.S. competitiveness in specific instances, however, and an argument can be made that relatively strict U.S. interpretation of controls has contributed to a significant loss of business for U.S. firms. The U.S. and global computer industries are heavily influenced by the nature of the technologies involved. Although the most spectacular of its products are large and complex machines, the industry's volume and global importance are due to the pervasive abundance of small, increasingly inexpensive, modular components that are easily interconnected. Computers and other electronic devices can be assembled anywhere in the world, given moderate technical skills, an entrepreneurial spirit, good organization, and an adequate supply of components. To an increasing extent, components are being manufactured all over the world, especially in the newly industrializing countries of the Far East. In the past, when the United States dominated the global computer technology industry, all international computer technology buyers needed U.S. components and subsystems, and export controls had no adverse impact on U.S. firms. The situation is much changed today, however. Components and subsystems to integrate equipment of significant computing power are available from numerous suppliers in and outside of CoCom. Under intensive competitive pressure, marginal supplier disadvantages can lead to significant losses in market position, and it is just such marginal disadvantages that can be introduced by export controls. Disadvantages that are frequently mentioned by manufacturers include the time it takes to get export licenses, in particular for first international shipments; the perception that U.S. policy on exports is variable, and thus, that a component that is freely usable today may be unavailable for export to- *   The complete report of the Subpanel on Computer Technology is included as Appendix C.

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Finding Common Ground: U.S. Export Controls in a Changed Global Environment morrow; and the perception of risk of eventual denial of access to components if, for instance, a component of U.S. origin is found to be part of a system ultimately diverted to a proscribed nation. None of these disadvantages is a major obstacle by itself; but in combination they can reduce a U.S. supplier's competitive edge. A principal cause of problems for the computer and microelectronics industries in the past has been the failure to decontrol items in a timely fashion. As technology improves capabilities and reduces the size and cost of components and full systems, many items formerly at the technological forefront move into the mainstream. New suppliers for the same items arise, often in overseas markets. In some instances, components and even end products have become so inexpensive or so widely available as to reach commodity status. Export control lists, however, have failed to keep up with these rapid technological changes; as a result, controls continue to be imposed on products that are available from overseas producers or are so inexpensive and portable as to be effectively uncontrollable. The problem is currently being addressed through the establishment of a much-reduced CoCom core list of controlled items, but it will unquestionably threaten to recur in the future. As the 1988 report on Global Trends in Computer Technology and Their Impact on Export Control stated, "quick and expert review of the appropriateness of the control status is essential if the potential for U.S. market success is to be maximized and the risk to national security minimized. Anecdotal evidence, however, casts doubt on the ability of the current system to provide sufficiently rapid and expert review."2 The existence (and unilateral enforcement) of reexport controls is another source of problems. The extraterritorial nature of such controls makes them politically distasteful; they are difficult to enforce; and if trading partners are relatively less effective in enforcing them, they can become in effect unilateral controls. The recent changes in the Soviet Union and Eastern Europe can be expected to have a significant effect on indigenous computer industries and the prospects for trade with those countries. East European computer industries are selling their assets to, or establishing joint ventures with, Western companies, and they are expected to produce higher quality computers for Eastern Europe and the Soviet Union. On the other hand, many more channels for the legitimate transfer of Western machines and technology to these countries have been opened (e.g., relaxation of CoCom controls, dissemination of Western computer journals, increased travel by Soviet programmers, and contracting Soviet research institutes or "software cooperatives" to develop software for Western systems). One consequence has been the decreased demand for indigenous machines, often functional duplicates of now-obsolete Western systems. One of the most visibly affected sectors of the computer industry is that of high-performance computers, or supercomputers, a technology indigenous

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Finding Common Ground: U.S. Export Controls in a Changed Global Environment to the United States and for which significant Japanese competition now exists. Supercomputers as a class have been subjected to rigorous and cumbersome end-use controls for several years. The establishment of performance levels that define supercomputing has been problematic. In the past, controls on the export of supercomputers have been invoked at performance levels that remained relatively static over time. Advances in technology have been rapid, however, and the performance of many mainframe, and even work-station, computers has come to exceed the performance threshold for supercomputers. The static definition of supercomputer control levels has meant that controls are being applied to many machines that are far below the state of the art and to a much broader range of machines than necessary. Decisions at the June 1990 CoCom High-Level Meeting redefined control levels for computers, but they did not address control levels for supercomputers. Industry concern with this problem will likely remain strong for the long term as high-performance architectures and machines proliferate and as definitions of what is a "supercomputer" evolve. SUMMARY No single factor explains the decline of U.S. global competitiveness. Export controls are only one of a number of factors, but in some cases they can be significant. It is important to examine control policies carefully, to guard against situations in which modifiable policies diminish the capacity of exporters to compete. To a large extent, loss of competitiveness due to export controls can be avoided or minimized by ensuring that controls are multilateral, highly selective , and fair and efficient. Balancing the national interest between security and competitive opportunity is, more than ever, a necessary goal. Chapter 5 analyzes the changing policy forces that shape export controls, and Chapter 6 examines current U.S. and multilateral export control processes. In those chapters, as well as in discussions in later chapters on policy processes, the analysis includes consideration of both the concerns of industry and national security issues in balancing the national interest. NOTES 1.   U.S. Department of Commerce, Technology Administration, Emerging Technologies: A Survey of Technology and Economic Opportunities (Washington, D.C.: U.S. Government Printing Office, 1990). 2.   National Research Council, Global Trends in Computer Technology and Their Impact on Export Control (Washington, D.C.: National Academy Press, 1988), p. 233.