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s An Assessment of U. S. National Security Export Controls INTRODUCTION U.S. policy on national security export controls should result from a process that weighs the benefits of controls to the United States in its relations with adversaries against the costs of controls in relations with allies and trading partners. The purpose of controls is to prevent or delay improvements in Warsaw Pact military capabilities that can be accom- plished through the acquisition and use of Western technology and goods. Military capabilities can be enhanced directly, through better weapons performance, or indirectly, through improved capability to manufacture military equipment. In peacetime the United States and its allies can counter such advances by the Soviet bloc, albeit by incurring higher military expenditures that impose additional costs on Western economies. The benefits of controls, therefore, are measured by the degree to which Soviet military advances are prevented or delayed and the extent to which savings to the West are realized. The adverse effects of controls are harder to measure because they derive primarily from a complex web of competitive and cooperative relationships among Western countries. Of principal concern are the sales and market share that U.S. producers of goods and technologies may lose or forego as a result of how the U.S. control system is designed and administered and how it compares with the control systems of other countries with competitive suppliers. Reduced revenue may translate into less investment, a lower growth rate, and reduced innovation, the effects 103
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104 BALANCING THE NATIONAL INTEREST of which could be important to the military as well as the commercial sector. To the extent that private firms anticipate that controls will have an adverse effect on their ability to exploit new technologies, innovation may be directly discouraged. Export controls can also cause friction between the United States and its allies and may interfere with their collaboration on technology security; on weapons development, produc- tion, and standardization; or on other matters bearing directly on West- East relations. The advantages to the West of controlling technology transfers to the East are not simply strategic; controls may yield savings in Western defense expenditures that could be devoted to nonmilitary uses including private investment. Similarly, the costs of controls are not strictly commercial; they too have implications for the military balance of power as well as for West-East competition in political spheres. Thus, assessing U.S. export controls solely in terms of military security gains versus commercial costs is inappropriate because the basis of comparison is incomplete. It follows that a strictly quantitative benefit-cost assessment of export controls is not feasible. Not all, perhaps not even the most important, advantages and disadvantages of controls can be precisely quantified or compared. They derive from a rapidly changing context and rest on qualitative judgments. The panel affirms that there is a compelling justification for national security export controls. Nevertheless, certain features of the control system impose excessive costs or have little effectiveness. In these cases, it is the panel's judgment that changes in the control system are warranted. This chapter addresses three basic questions. First, how effective are U.S. national security export controls in denying or delaying Soviet acquisitions of Western dual use technology? Second, how efficiently are they administered? And third, what costs to the economy and the research enterprise are associated with current controls and their admin- istration? Because knowledge about the effects of controls on commercial markets as well as on national security will never be complete, and because judgments will be affected by changes in West-East relations, economic conditions, and technology, this chapter also addresses a fourth, procedural issue: Is the current U.S. policy process capable of generating adequate information, weighing the competing considerations, and balancing U.S. interests over the long term, during which it will be necessary to maintain some type of export control system? Detailed answers to these questions have eluded previous assessments of the export control system. Not only are the effectiveness and costs of controls uncertain, but there is a dearth of reliable data even on such basic points of reference as the value, composition, and share of U.S. export trade affected by national security export controls.
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ASSESSING U.S. NATIONAL SECURITY EXPORT CONTROLS 105 The Department of Commerce, for example, publishes aggregate fig- ures for individual validated license (IVL) applications-the total number of applications and their total value. It compiles but does not publish breakdowns of the number and value of IVL applications by Control List category (ECCN). But the department's published or prepared data do not distinguish between items controlled for national security reasons and those controlled for foreign policy, nuclear nonproliferation, or other reasons; nor do they distinguish between applications for exports and those for reexports. The department does not examine individual licenses that are returned after use to determine what proportion of the value of goods authorized for export was actually shipped. Nor does the depart- ment routinely obtain from qualified exporters or other government sources (e.g., the Bureau of the Census) reports on the volume and value of transactions made under bulk licenses. Furthermore, the Commerce Department data base does not provide the percentages of reexport applications that are submitted by U.S.- headquartered and independent foreign-based companies even though reexport approval requirements, especially as they affect independent foreign manufacturers and distributors, are a highly controversial feature of the U.S. export control system both in the United States and abroad. Perhaps most importantly, there is no correspondence between Control List categories and the product statistical classifications under which exports are reported to and by the government a linkage essential to any quantitative analysis of the effects of controls on U.S. export perform ance. As a result of congressional and business community pressures to increase the speed of individual licensing decisions, data are available on the processing of IVLs. Although this information is useful, Commerce Department officials have otherwise received little encouragement and few resources to analyze the scope and consequences of their activities. This information deficit impedes informed policymaking and efficient administration as much as it does independent evaluation. The panel attaches high priority to correcting these deficiencies. In making its own assessment of the operation and effects of export controls, the panel took a variety of steps to fill the information void. In addition to the briefings presented by government officials and business representatives and its study missions to Western Europe and Asia, the panel commissioned two types of studies, each with several components. First, the panel requested- and was granted a "national interest" exception under Section 12(c) of the Export Administration Act, permit- ting its consultants unprecedented access to Commerce Department license files and data bases subject to strict observance of the confiden- tiality of business information. The consultants' study included analyses
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106 BALANCING THE NATIONAL INTEREST of a randomly selected sample of recently approved individual license applications; a random sample of license applications returned without action; a sample of reexport authorization applications submitted during a recent period; and more than half of the license applications, catego- rized by administrative criteria corresponding to levels of military critical- ity, for which processing was completed in a recent 1-week period. Second, the panel commissioned two surveys of U.S.-based companies affected by national security export controls. The first survey focused primarily on experience in applying for and using individual validated licenses. The second survey was designed to ascertain how the distribu- tion license is used and what have been the erects of recent changes in the Export Administration Regulations governing such licenses. The conclusions and judgments reached by the panel following these fact-finding efforts are discussed below. EFFECTIVENESS OF NATIONAL SECURITY EXPORT CONTROLS Intelligence and Enforcement Evidence Direct evidence of the effectiveness of national security export controls is confined to the results of enforcement activities and fragmentary intelligence data (see Chapter 21. The former presents a mixed but narrow picture from which only tentative conclusions can be drawn. Some investigations, as in the VAX case, have documented the elaborate, unpredictable, and presumably costly lengths to which the Soviets have gone in the pursuit of certain embargoed items; but other cases suggest that the scale and complexity of international marketing and distribution activities afford ample opportunities to evade controls. Intelligence sources estimate that the Soviets are paying twice the market price or more to obtain dual use technology illegally, which suggests that controls are raising the cost to the Soviets of their reliance on Western sources. By the Soviets' own estimate, however, contained in the Farewell documents obtained by French intelligence, 70 percent of the Western items that they target and succeed in acquiring are subject to some form of national security export control. The proportion was the same during the most recent Soviet 5-year economic plan (1981-1985) as it was in the previous 5 years (1976-1980), a period of relatively looser Western controls. ~ On the other hand, according to the same sources the Soviets fulfill only about one-third of their requirements annually, sug- gesting that they encounter some delays in obtaining what they want when they want it.2 The extent to which such delays have in turn delayed Soviet deployments of advanced military equipment is not known.
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ASSESSING U.S. NATIONAL SECURITY EXPORT CONTROLS 107 It is reasonable to surmise on the basis of this limited evidence that the control system, relative to a free market, inhibits and raises the cost but rarely foils completely technology acquisition efforts as sophisticated and well-financed as those mounted by the Soviet Union. Nevertheless, the question of which controls are relatively more or less effective remains unanswered. Compliance An indirect indicator of the effectiveness of controls is the level of corporate compliance. Although this level cannot be determined precisely, there is substantial evidence that compliance has increased in recent years as the government has committed more resources to enforcement. Between FY1981 and FY1985 the number of IVL applications increased more than 70 percent (from 71,369 to 122,606), exceeding the rate of increase in U.S. high-technology exports. Interviews conducted for the panel confirm what has been widely suspected. For years, many small exporters had been doing business unaware that their products required validated licenses. Directly and as a result of the publicity surrounding it, the U.S. Customs Service's Operation Exodus, which resulted in the seizure or detainment of numerous shipments lacking proper authorization, brought about a greater awareness of the Export Administration Regulations and thus a significant improvement in formal compliance. It is not known whether the enforcement campaign has reduced the number of intentional diversions. Meanwhile, reexport license applications received by the Department of Commerce increased at an even faster rate, nearly doubling between FY1983 and FY1985. In this case, however, the increase in compliance has been one-sided. The overwhelming majority (about 90 percent by value) of reexport applications are from U.S.-headquartered companies and their foreign affiliates, a rate double or triple the estimated share (30 to 40 percent) of U.S. exports represented by intrafirm trade. Unrelated foreign firms initiate only 10 percent of reexport authorizations. The disparity in the shares of reexport authorization applications of U.S. affiliates and foreign-owned firms is greatest in the case of CoCom member countries, which are the source of more than 80 percent (more than 90 percent by value) of all reexport applications. In a representative sample of recent applications from three major CoCom trading partners, between 87 percent and 98 percent of the submissions were traced to U.S. affiliates. The data strongly suggest that independent foreign companies are either ignorant of or casual in their compliance with U.S. reexport controls except in the few countries, such as Switzerland, that require their firms to follow the rules of the country of origin when exporting imported products.
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108 BALANCING THE NATIONAL INTEREST These findings are not surprising in view of the fact that most CoCom countries, for reasons of national sovereignty, refuse to cooperate in the enforcement of U.S. reexport controls and are prepared to resist any systematic effort by the United States to penalize noncomplying foreign companies. Of course the export of all but unilaterally controlled U.S.- origin items to proscribed destinations from CoCom countries is subject to licensing by other governments. In these cases, U.S. reexport require- ments are not only problematic but also redundant. Discrimination in Licensing and Enforcement In addition to the level of formal compliance, the effectiveness of export controls depends on the government's allocation of resources and effort in licensing and enforcement. Controlled products and technologies are of varying military significance, and countries and customers are of varying reliability in preventing their diversion to the Soviet bloc. It follows that exports of the most critical technologies and exports to countries with no or ineffective controls should receive the most scrutiny. Discrimination, or the lack of it, is a function both of how much is swept into the control system and how it is treated. In the first instance the panel estimates that a very large percentage of U.S. exports as much as one-half of all nonmilitary manufactured goods shipped in 1985-is covered by one or another type of validated license.* Because exports that the Department of Commerce considers "high technology" consti- tute about two-fifths of U.S. manufactured exports, it is apparent that controls extend to products embodying relatively low technology. The panel analyzed a sample of licenses" for goods classified by level of military sensitivity, using administrative criteria developed by the U.S. government andior in the course of CoCom negotiations. The analysis showed that the broad control net is heavily weighted with transactions in less-sensitive items with allied and other friendly Western countries. Ninety percent of license applications are for exports to Free World countnes. One-third of these applications are for items that may be exported to CoCom countries under a general license and even to Soviet bloc destinations *See pp. 116-117 for a detailed explanation of this estimate. tThe analysis was of a sample of 1,618 processed license applications categorized by Department of Commerce license officers. In each case, the officer identified, independent of the intended destination, the item being exported as either within the administrative exception note (AEN) 9 level, within the level of goods that can be exported to the PRC without CoCom approval, eligible for shipment under a distribution license, or ineligible for shipment under a distribution license. The first three of these categories are stepwise inclusive rather than mutually exclusive. The four categories represent progressively higher levels of military criticality.
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ASSESSING U.S. NATIONAL SECURITY EXPORT CONTROLS 109 without prior CoCom approval. According to the sample, the United States rarely refuses a license to export these so-called "national discretion" items to any destination including the Eastern bloc. Two-thirds of the individual license applications were for items sufficiently lacking in military importance that they can be shipped from any CoCom country to the People's Republic of China without prior CoCom approval. The large volume of cases involving exports of less-critical items to friendly countries severely limits the degree to which licensing officials are able to focus their efforts on the most-critical items. Nevertheless, in 1985 there were two major attempts to sharpen that focus, primarily with respect to country destinations. First, as discussed in Chapter 4, the Export Administration Amendments Act authorized the export of AEN 9-level items to CoCom countries under a general license (G-COM). Although this afforded some relief, the anticipated 15 percent reduction in IVL applications has yet to be realized, evidently because of ignorance or caution on the part of some exporters.* Second, President Reagan directed the Department of Defense, concurrently with the Commerce Department, to review license applications for selected products to 15 Western countries that are not parties to multilateral control agreements and that are regarded as potential points of diversion. This greater attention to so-called "third countries" is reflected in longer processing times and slightly higher denial rates than for exports to CoCom destinations although it entails an additional layer of review whose independent contribution to the quality of the review process has been questioned by the General Accounting Office.3 Although more-sensitive technology items are excluded from distribu- tion license coverage, the panel found little evidence that in the individual licensing process more attention is devoted to products of greater strategic importance than to those of lesser importance. License process- ing times for applications to Free World destinations do not vary significantly among categories that the Export Administration Regula- tions treat as more or less militarily critical. Similarly, on the panel's study missions to Europe and Asia, panel members heard frequent complaints from U.S. and foreign enforcement officials that on direction from Washington they devote much of their effort to seeking out diversions of low-technology, widely available products-instead of concentrating on goods of more strategic importance. One foreign-based U.S. Customs officer commented, "We spend most of our time chasing after PCs [personal computers]." The evidence strongly suggests that a greater focusing of efforts could enhance the effectiveness of the control system. *See pp. ~12-l 13.
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10 BALANCING THE NATIONAr INTEREST Benefits of Controls A 1985 study sponsored by the Department of Defense4 is the only major attempt to date to quantify the benefits of export controls. Using a sample consisting mainly of rejected 1983-1984 license applications for exports directly to the Soviet bloc, the study estimated that the Soviets could have saved $0.5 billion to $1 billion a year over a 13-year period if the applications in the sample had been approved and the acquired technology exploited. Under the same assumptions, the study projected additional U.S. and NATO defense expenditures of roughly the same magnitude to counter the improved Soviet capabilities. These conclusions are based on 79 cases (from a universe of 2,000 applications) that were judged by a panel of military and technical experts to involve militarily "important" state-of-the-art technology~with high reverse engineering potential. In other words, these 79 rejected applica- tions represent the type of control on exports directly to Warsaw Pact countries of highly sensitive dual use items whose effectiveness and cost are least likely to be questioned. These cases further suggest that most of the benefits of controls, if they can be realized, are probably concentrated in a relatively narrow range of products and technologies. Otherwise, the study's conclusions provide little policy guidance. The claimed benefits of controls are hypothetical in several respects. No attempt was made to determine whether the Soviets did or could acquire the technologies by other means nor to determine if the Soviets did or were capable of exploiting what they might have acquired. The study also assumed that disapproval implied denial, an assumption that is unrealistic for many technologies and, for any particular technology or product, less and less realistic as time goes by. The study's estimates that the Soviet Union could have saved $6.6 to $13.3 billion over a 13-year period by acquiring the items specified in the sample of license applications, and that additional allied expenditures of $7.3 to $14.6 billion would be required over the same period to compensate for such gains, are the judgments of a group of military experts, but their criteria and assumptions are only partially stated. The more widely quoted assertion that "the cumulative costs of the Soviet long-term acquisition program are much higher perhaps $20-50 billion per year"s is not supported in the text of the report. In view of these uncertainties and lacking access to information that might resolve them,* the panel must question how much weight these estimates should be accorded. *The panel requested from DoD but did not receive back-up data for both sets of estimates.
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ASSESSING U.S. NATIONAL SECURITY EXPORT CONTROLS THE EFFICIENCY OF EXPORT CONTROL ADMINISTRATION The Export Administration Regulations have evolved over a long period and currently fill more than 570 pages of the Code of Federal Regulations. Understanding and applying the rules are difficult tasks even for full-time, experienced, technically trained, English-speaking export licensing specialists. The system's complexity alone imposes consider- able costs on and often undermines compliance by exporting firms. The burden is heaviest on small- and medium-sized companies that are unable to spread the costs over a large volume of export business. For the exporter, obtaining, using, and (in the case of distribution licenses) keeping export licenses entail an elaborate series of procedures, some of them requiring sophisticated technical judgments. The scope and mechanics of a compliance program will vary with the commodities being exported, the size of the company, and the type of validated license employed. Nevertheless, certain activities are required of all companies that export controlled goods: · The exporter must properly classify each export product within a category on the U.S. Control List, normally with assistance from in- house technical experts and sometimes from outside consultants. · If prior government approval is needed for exports of its products, the exporter must prepare and submit license applications, each of which may require at least several hours of effort. Individuals must be trained in how to prepare applications and must be prepared to monitor their progress to ensure that the applications are not lost or delayed by the U.S. government. Assistance from outside consultants is sometimes required. · The exporter must keep careful records of each individual shipment under an export license; submit to U.S. Customs a shipper's export declaration listing the license authority for each shipment; and ensure that all shipping documents contain the required destination control state ments. · The exporter must monitor additions to the Table of Denial Orders (the list of parties denied the privilege of purchasing U.S.-origin goods or technology) as well as changes in the Export Administration Regulations. Commerce Department notices of amendments to the regulations- ranging from major changes in the rules governing particular types of licenses to revisions of Control List entries to minor technical correc- tions-appear in the Federal Register on an average of about once a week. · The exporter must review all of its "exports" of technical data including international telephone conversations, servicing and installation activities abroad, and employment of foreign nationals to ensure that any
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~12 BALANCING THE NATIONAL INTEREST necessary license authority has been obtained. In many cases the ex- porter must obtain prior U.S. government approval for a technology transfer or obtain a written assurance of compliance with U.S. law from the recipient of the technical data. · The exporter must maintain tight controls over servicing activities including exports of spare and replacement parts to ensure that proper license authority has been obtained. · The exporter,may need to advise or assist its foreign affiliates and customers in obtaining license authority for reexports of U.S.-origin products from one foreign country to another or for exports from a foreign country of a foreign-made end product containing U.S.-origin parts and components. Distribution license holders and their approved foreign consignees are required in addition to implement a series of internal control measures that are unique to that type of license. These measures include designat- ing and training employees with export control responsibilities; screening customers against the denial list, nuclear end use restrictions, and a profile of potential diverters; screening transactions against product and country restrictions on the use of the license; and maintaining extensive records to enable the Commerce Department to conduct periodic audits. In addition, distribution license holders are required to inform, train, and audit their approved foreign consignees and to correct and report in- stances of noncompliance. In addition to incurring administrative costs, exporters have difficulty interpreting the regulations and obtaining authoritative advice and clari- fication. For example, proper classification of a product is obviously crucial to compliance; but even engineers often find the U.S. Control List performance specifications, exceptions, and qualifications highly confus- ing because the terms and measurements often differ from those conven- tionally used in industry. The Commerce Department will issue a classi- fication decision in response to a written request. Such determinations have been given low priority, however, and commonly have taken several weeks or even months to process. Personnel assigned by the Commerce Department to respond to telephone inquiries are typically of little help on technical matters. Abroad, U.S. embassy officials are frequently ill- informed about even general EAR requirements. Neither in any case can render advice that binds the government. In circumstances of confusion, uncertainty, or ignorance, many export- ers err on the side of caution, submitting unnecessary applications for validated licenses. Seventeen percent of all processed applications in the sample of licenses taken 6 months after the introduction of the G-COM license were found to be eligible for this general license for low-level
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ASSESSING U.S. NATIONAL SECURITY EXPORT CONTROLS 1 13 technology to CoCom-member countries and therefore need not have been filed and reviewed at all. Instead of returning such filings with a notation that they are eligible for a general license, the Commerce Department finds it easier simply to process license applications that are submitted in error. Even so, exporters who take elaborate precautions frequently find that their submissions are not in strict compliance with the regulations. There is a pressing need to rewrite, simplify, and condense the Export Administration Regulations and to upgrade the competence of Exporter Services and diplomatic personnel to provide timely, accurate assistance. Processing Times A perennial concern of Congress, the business community, and the responsible agencies has been the time it takes to process licenses, especially IVLs. Some improvements have been made in response to statutory deadlines and other congressional pressures and as a result of partial automation and decontrol actions. Nevertheless, licensing delays and uncertainties remain a problem for a significant percentage of export transactions. Shipping delays impose immediate financial costs on the exporter as well as a longer-term cost in customer confidence. When a product is available but cannot be shipped on receipt of an order, warehousing and other carrying costs are incurred. More expensive means of transporta- tion may need to be used to make up for the delay in obtaining a license, and the exporter may have to pay contract penalties to the purchaser and to subcontractors who supply components and assemblies. In some cases, sales are lost altogether. The objective of efforts to improve licensing efficiency has been to reduce average processing times. In contrast to the 27-day average reported by the Commerce Department, respondents to the survey commissioned by the panel reported a 54-day average processing time. This discrepancy is explained in part by a difference in definition. For the department, the clock starts when the application is recorded and stops with final issuance of the license or other action. For the exporter, the time extends from the mailing of an application to the receipt of a license or adverse decision, not counting the time spent in license preparation, obtaining end use statements, and other steps preparatory to submission. As far as the exporter's ability to ship is concerned, the latter or total processing time is of course determinative. In contrast, license application turnaround times by the governments of other CoCom countries are generally much shorter. In Japan, for exam- ple, the Ministry of International Trade and Industry (MITI) usually responds within 2 or 3 days to applications for exports to Free World r'
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124 BALANCING THE NATIONS INTEREST leverage and in the long run in cases in which a country agrees to control only exports of U.S.-origin technology. As the relative restrictiveness of U.S. controls becomes more apparent abroad, foreign customers are exploring alternative sources and some already have turned to non-U.S. suppliers. At the same time, U.S. firms are losing their relative competitive edge, not only in technological sophistication but also in price competitiveness, product quality, market- ing, and service factors that previously compensated for the negative competitive effect of export controls. U.S. producers of medium- and lower-level technology products are most vulnerable because increasing numbers of non-U.S. sources, many of them with cost or other competitive advantages, exist for these items or for their essential components. Not only does the U.S. national security export control system weigh more heavily than the controls of other countries with increasingly competitive suppliers, but it also cap- tures a great many lower-level items and treats them on a par with more advanced technology having greater military significance. Although the benefits of controls appear to be concentrated in a few technology areas, the costs are spread across a wide range of products of varying sophisti- cation and strategic importance. The panel developed two analyses that support the extensive anecdotal evidence acquired on its foreign visits and presented in briefings by export- ers. The first analysis deals directly with the question of lost sale& in this case those resulting from the imposition of controls that have been in part unilateral. The second indicates that extraterritorial controls are having an adverse effect on the structure of business operations by which U.S. firms establish and maintain a competitive position in world markets. THE CASE OF ANALYTIC INSTRUMENTS The category of analytic instruments provides a unique opportunity to isolate and measure the effects of U.S. unilateral export controls because of discrete regulatory changes in 1984 that affected products containing embedded microprocessors. In April 1984, following an extended public and internal government debate, the Department of Commerce an- nounced decontrol of roughly one-half of the categories of instruments previously requiring a validated license. Eight months later, however, the department issued interpretations of new CoCom agreements redefining incorporated microprocessors and reimposing controls on many of the same instrumentation categories. After adjusting for changes in exchange rates, price levels, and level of foreign industrial production, an analysis commissioned by the panel (see
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ASSESSING U.S. NATIONAL SECURITY EXPORT CONTROLS 125 Appendix C) indicates that when controls were relaxed early in 1984, U.S. analytic instrument exports increased (by the third quarter of 1984) roughly 7 percent over what they would have been without the change. Using the same assumptions and adjustments the analysis shows that when the relaxation was reversed late in 1984, exports (by the third quarter of 1985) were 12 percent below what they would have been if licensing requirements had not been reimposed. These fluctuations in trade reflect only the short-run observable effects probably attributable to unilateral export control. In the long term the on-off-on-again controls may erode the desire of foreign customers to purchase U.S. products. Also not resected in the analysis are the effects these restrictions may have had on foreign transactions in similar instrumentation produced abroad with U.S. technology or containing U.S. components. THE CASE OF FOREIGN CONSIGNEES UNDER D~sTR~suT~oN LICENSES In May 1985 the Commerce Department issued new regulations requir- ing distribution license holders and their foreign consignees to protect controlled items from diversion to the Soviet bloc by establishing internal control and recordkeeping systems subject to on-site inspection by agents of the license holder and the U.S. government.9 For the vast majority of U.S. exporters and their affiliates holding distribution licenses, the flexibility of the license unquestionably outweighs the administrative and other perceived costs of the new restrictions. But the combination of increased administra- tive costs, foreign sensitivities to the extraterritorial application of U.S. law, and in the case of firms located in other CoCom countries the duplication of effort entailed in complying with domestic as well as U.S. export control regulations raises a concern that the rules discourage independent foreign companies from doing business with U.S. suppliers. Surveyed in May 1986, only 1 month after the regulations became fully effective, distribution license holders responding (accounting for approx- imately 18 percent of the total number of licenses) reported the loss or removal of 32 percent of all the foreign consignees approved on their licenses 1,175 out of 3,68Win the previous 12 months since the regulations were issued. Business changes unrelated to the regulations, sales inactivity, and product decontrol actions were reported to account for one-half of these drop-outs; but the expense of compliance and consignees' refusal to comply accounted for 40 percent of the cases. More often than not, business is continuing with former foreign consignees under different licensing arrangements. Nevertheless, 28 licensees (25 percent of the sample) reported an immediate loss, albeit in the near term a small loss, of business as a result of the drop-outs. Companies also reported that under the new requirements it is becoming more difficult to
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~26 BALANCING THE NATIONAL INTEREST recruit new consignees and that some consignees have reduced their orders although they remain on a distribution license. Again, these findings represent only the short-run, observable effects of the regulations. Other evidence indicates that a number of foreign companies that chose not to terminate relationships with U.S. suppliers abruptly are now exploring alternative sources for the fi~ture.~° A crucial stage in implementing the regulations is approaching as license holders and the Department of Commerce begin systematic auditing of foreign consignees. In the meantime the regulations have already brought about some erosion of the distribution networks of U.S. exporters, a marginal loss of business, and an increase in the volume of individual license applications. TECHNICAL DATA CONTROLS Some firms find it difficult to understand and apply the general license GTDR and validated license requirements for the export of technical data. There is substantial confusion regarding what transactions (i.e., oral communication with foreign nationals, visual inspection by foreign na- tionals within the United States, and application of knowledge abroad) are considered to be "exports"; there also is uncertainty as to what transfers are unrestricted (and thus eligible for general license GTDA) or require written assurances of nondisclosure by the recipients (under general license GTDR). Some firms argue that the requirements associated with the GTDR license inhibit internal corporate information flows without affording any more protection than customary corporate procedures for handling proprietary information. Of greater concern to the panel, however, is the prospect of greatly expanded controls on technical data including data arising from research. There are at least three manifestations* of this emerging policy thrust. *A fourth was announced just before the panel completed its deliberations. Under an October 1986 policy directive (a memorandum from the President's national security adviser, John M. Poindexter, on a "Policy for Protection of Sensitive, but Unclassified Information in Federal Government Telecommunications and Automated Systems for Immediate Implementation by All Federal Executive Branch Departments and Agencies," 29 October 1986), the National Security Council has instructed all federal departments and agencies to safeguard sensitive but unclassified information in government telecommunica- tions and automated information systems. Although it is left to agency heads to identify "sensitive" information whose disclosure, loss, or destruction could damage national security or other government interests, the directive refers specifically to technological as well as other kinds of information. The directive does not, however, specify the means for protecting such information (for example, whether it is to be withheld from data bases such as the National Technical Information Service or, alternatively, whether access to such data bases is to be restricted); nor does it refer to penalties for unauthorized disclosure.
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ASSESSING U.S. NATIONAL SECURITY EXPORT CONTROLS 127 First, the Department of Defense is moving to place restrictions on unclassified technical data developed in DoD-sponsored research and falling within a category on the Militarily Critical Technologies List (MCTL). Although the export of such data always has been subject to the provisions of EAR and ITAR, domestic U.S. dissemination was unfettered. The current initiative relies on authority in the 1984 DoD Authorization Act to exempt such data from public disclosure through requests under the Freedom of Information Acted The panel does not question the authority of DoD to control technical data arising from militarily sensitive research projects it funds. Neverthe- less, extending controls to unclassified technical data that relate to the wide range of technologies on the MCTL and allowing access to that data only by U.S. and foreign firms previously certified by the U.S. govern- ment would seriously encroach on the exchange of information in the technical community without necessarily enhancing national security. Of particular concern is the impact of this new system on the commu- nication of research through professional society meetings and publica- tions. Communication fostered by scientific and engineering society activities has been crucial to the rapid advancement of commercial and military technology in the United States and thus to national security. Although Soviet access to this communication is of legitimate concern, the panel believes the risks are outweighed by the important role of open and rapid communication of ideas and findings, including conceptual dead-ends, in promoting innovation. A second manifestation of efforts to expand controls on technical data concerns patent information. Serious constraints on the use of new knowledge to benefit U.S. commercial and military activities could result from the development by the Patent and Trademark Office, in consulta- tion with the Department of Defense, of a new type of patent secrecy order. (See also Chapter 4.) The order can be issued when a patent application contains unclassified technical data relating to inventions with military or space application. Although the patent would be withheld until the secrecy order was lifted, the data contained in the application could be disclosed to U.S. residents; the invention could be developed and marketed domestically; and the inventor could apply for patent protection in most European countries and Australia. Other foreign disclosure or marketing could occur only under a validated export license. Because the applicant would not be authorized to file for patent protection in most newly industrializing countries, marketing this invention could lead to legal pirating by enterprises in those countries. Use of the MCTL or any other broad criteria as guidance could result in subjecting a considerable number of applications to such secrecy orders. The panel believes that extensive use of secrecy orders would
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128 BALANCING THE NATIONAL INTEREST undermine the benefits of the patent system, increase the duplication of R&D activities, and result in important innovations being withheld from commercial markets. Third, the Department of Defense has culled from the MCTL a subset of critical dual use items with an eye to proposing that these technologies and the technical data associated with them be subject to validated licensing to Western destinations.~3 Of all the initiatives to restrict transfers of technical data, this is potentially the most troublesome because controls would not be limited to know-how or inventions derived from government-sponsored research and development or contained in patent applications but would apply regardless of the information's origin, form, and means of transfer personal, print, or electronic. Despite the problems associated with it, general license GTDR remains critical to the ability of many U.S. firms to conclude sales, explore international joint ventures, and transfer research results-to foreign business partners. Requiring a validated license for data covered by broad categories of the MCTL would significantly alter the nature of communi- cations within the Free World. Although the comprehensive operations license authorized in 1985 might limit the burden on large multinational firms, other companies with less well-established international operations would be adversely affected. There is little doubt that unclassified but militarily sensitive technical information can be diverted from Western channels of communication; but there are enormous practical difficulties as well as political and economic risks in treating information in the same manner as tangible products. The How of technical data within and among enterprises is essential to their operation. CoCom agreement to adopt similar restrictions is doubtful; some member governments lack legal authority to control intangible data. Finally, it is not clear that the benefits the Soviets derive from adapting, applying, diffusing, and improving upon unclassified technical data acquired from the West are substantial enough, relative to other means of obtaining technol- ogy, to warrant broad application of intrusive controls. USE OF THE MILITARILY CRITICAL TECHNOLOGIES LIST Regardless of the regulatory mechanism the panel is concerned by the prospective use of the Militarily Critical Technologies List as a de facto and possibly unilateral control list for technical data. It also considers unwise and unworkable the long-standing congressional mandate, re- newed in the 1985 Export Administration Amendments Act, to integrate the MCTL with the U.S. Control List-except on a case-by-case basis in which CoCom negotiation and agreement precede the adoption of a new control by the United States.
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ASSESSING U.S. NATIONAL SECURITY EXPORT CONTROLS 129 As mandated in the Export Administration Act of 1979 and revised periodically by the Department of Defense, the complete MCTL is a classified document of 800 pages, including specifications and justifica- tions. An abbreviated, unclassified version was published in October 1984. Updating has not changed its initial character. The MCTL is an extensive compilation of militarily useful technologies and equipment. It lacks prioritization and reflects the paucity of detailed information on near-term and long-term Soviet needs and capabilities. Further, the MCTL's development has not been disciplined by considerations of clarity, foreign availability, or enforceability, considerations that should be reflected if it is to be used as an operational control list accessible to licensing officers and exporters. The MCTL serves a useful but limited purpose as a reference document for developing control proposals and making in- formed licensing decisions. Explicit internal DoD guidance could enhance the latter role and dispel much of the confusion that surrounds the MCTL. The Militarily Critical Technologies List was an attempt to embody general control criteria developed by a 1976 task force of the Defense Science Board under the chairmanship of J. Fred Bucy.~4 The Bucy task force implicitly faulted the traditional emphasis on controlling exports of products for neglecting the source of any nation's industrial capability and of the U.S. military advantage over the Soviet Union in particular mastery of the know-how required to specify, design, build, test, maintain, and use sophisticated products. The Bucy task force instead proposed controls on critical design and manufacturing processes; essential manufacturing, in- spection, and test equipment; and operation, application, and maintenance data accompanying products. Furthermore, the task force urged closer scrutiny of revolutionary rather than slowly evolving technologies and of active means of transfer for example, turnkey factories, training, and ongoing technical exchanges- rather than routine sales of products. The Bucy criteria have strong theoretical appeal but have proven extremely difficult to put into operation. They rely on distinctions- "critical," "revolutionary," "keystone"-on which opinions are widely variable and difficult to reconcile. As the panel's observations on techni- cal data controls indicate, it is especially hard to define categories of know-how that need to and can be controlled, beyond proprietary protections but short of security classification, without disrupting routine and vital technical communication. THE POLICY PROCESS AND THE BALANCING OF U.S. INTERESTS The panel's findings underscore the need for a policymaking process that will continue to generate new information and weigh convicting
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~30 BALANCING THE NATIONAL INTEREST judgments. Economic and technological change in the West requires continuous balancing and rebalancing of diverse national stakes. Divided administrative responsibility, congressional oversight checks on admin- istrative discretion, consultation with private industry, and negotiations with allies can ensure that some balancing of views and interests occurs in the evolution of export control policy. But these long-standing features of the policy process have limitations and drawbacks and are not up to the challenge of reconciling controls with the need to sustain a vigorous technological enterprise in an increasingly competitive international econ omy. In many areas of economic and social regulation in the United States, federal statutes, executive orders, or judicial decisions directly require or indirectly encourage analysis of costs and benefits. This is not the case with export controls. Because they involve matters of foreign and military affairs, both national security and foreign policy export controls are exempt from the Administrative Procedures Act (5 U.S.C. 553), which provides for judicial review and for notice of and public comment on proposed regulations, and from Executive Order 12291, which mandates economic impact analysis of most domestic regulations. To impose export controls for foreign policy purposes (or to maintain them after their automatic expiration after 1 year), however, the Export Administration Amendments Act of 1985 requires the President to deter- mine that the adverse effects on U.S. export performance, the reputation of U.S. companies as reliable suppliers, and the welfare of companies, their employees, and communities will not exceed the foreign policy benefits. Furthermore, before applying foreign policy controls, the Pres- ident first must have tried other means to influence the offending country's behavior. He also must have consulted with Congress, indus- try, and other countries so that he is in a position to certify to Congress that the actions he is considering are likely to achieve their objective, are enforceable, and are not likely to be undermined by the behavior of other countries. The General Accounting Office is directed to "second-guess" the President's judgments and to determine whether they meet the statutory criteria. None of these formal checks and balances, intended by Congress to contain the costs and ensure the effectiveness of the President's actions, applies to national security export controls. Nor has the bureaucratic structure served to produce analysis and debate. Shared responsibility among agencies with diverse and often conflicting perspectives has been a chronic feature of export control policy and administration. The Export Administration Act assigns the Department of Commerce primary responsibility for the list of controlled dual use goods and technologies and for administering and enforcing the licensing sys- tem. The Department of State has the lead in negotiations with other
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ASSESSING U.S. NATIONAL SECURITY EXPORT CONTROLS 13 ~ countries, both CoCom and non-CoCom, to achieve cooperation on multilateral controls. The Department of Defense is charged with provid- ing technical advice on the military significance of goods and technologies and the security risks of their transfer to proscribed countries. Finally, the Customs Service has primary responsibility for the enforcement of controls at points of exit and for investigations of diversions abroad. Although this dispersion of authority has disadvantages, the panel believes that both the policy guidance and the division of labor set forth in the Export Administration Act are appropriate. It is not difficult to conceive of alternative arrangements, but none promises an ideal balance of the national interests in export controls. The deficiencies of the current arrangement, however, are threefold. First, there has been no regular policy guidance at the highest level of the U.S. government nor an effective means of reconciling differences among the agencies. Second, certain departments, notably Commerce and State, lack resources and assertiveness commensurate with their responsibilities. And third, recent changes within the departments have shifted export control responsibili- ties away from officials responsible for technology and trade develop- ment, resulting in a concentration of authority in administrative units with a narrower perspective. The lack of an effective overarching mechanism has allowed a legiti- mate but limited view of military security to dominate without giving sufficient weight to the health of the economy as a crucial element of national security. The White House has intervened only intermittently and then to contain bureaucratic conflict rather than to give policy direction. The Senior Interagency Group on Technology Transfer has been a weak instrument of coordination and conflict resolution. It has not considered its responsibility to be that of balancing the requirements for enhancing U.S. competitiveness, maintaining the U.S. lead in military technology, and promoting cooperation with our major allies. DoD's assertiveness on export control issues is not counterbalanced by the Departments of State and Commerce. On its foreign fact-finding missions, the panel was told repeatedly that the United States speaks with several voices on technology transfer policy to the consternation and frustration of foreign negotiators. By the same token, several recent DoD initiatives, notably on the review of foreign availability findings and of license applications to certain Free World countries, have had the effect of weakening the authority of the Commerce Department and the morale of its Export Administration personnel. One unfortunate result of the imbalance is the lack of any effective mechanism for weeding out from the Control List those products and technologies that have ceased to be strategic or that have become so widely available that control for all practical purposes is impossible. The
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132 BALANCING THE NATIONAL INTEREST momentum is to add, not to delete, and the principal licensing agency, with a stake in keeping its task from becoming unmanageable, has been unable to slow it down. A striking example is the failure of the Commerce Department's foreign availability program to yield the results intended by Congress when in 1979 and again in 1985 it mandated a procedure to eliminate one type of ineffective control-on items that the Soviet Union either can make itself or freely buy from uncontrolled sources. According to the statute, foreign availability exists when a non-CoCom-origin item of comparable quality is available to adversaries in quantities sufficient to satisfy their military needs so that U.S. exports of the item would not make a significant contribution to their military capabilities. A newly created Office of Foreign Availability (OFA), with valuable technical assistance from defense, intelligence, and other agencies, has completed 44 investigations of the availability of items under control or proposed for control. Many of these studies have contributed needed discipline to the process by which new controls are conceived and developed. Of the 44 investigations, 20 were assessments of whether or not foreign availability should lead to the removal of existing national security export controls. Most of these assessments have languished in interagency review for periods as long as 8 months. Only two negative findings and three positive findings, the latter leading to preliminary decisions to decontrol automatic silicon wafer saws and mercury cad- mium telluride uncooled array sensors and to modify specifications on floppy disks, have been published. One problem is that, although regula- tions specify expeditious Commerce Department evaluation of foreign availability claims, no constraints are imposed on the Defense Department's review of OFA findings. The review process is used as a means of delay. Further, DoD narrowly construes the foreign availability criteria to preclude decontrol in most cases. The panel believes that the meager results of this process mean that U.S. industry continues to bear unnecessary costs and the credibility of fJ.S. controls is further under- mined. Another recent change in the policy process is more subtle but no less consequential. In the current administration the bureaucratic balance of power has shifted toward security, intelligence, and law enforcement agencies and away from those entities responsible for technology devel- opment, trade, and international economic relations. In the Defense Department a new organization, the Defense Technology Security Ad- ministration, reporting to the under secretary of defense for policy, has assumed responsibility for technology transfer policy responsibility that previously resided in the Office of the Under Secretary for Research and Engineering. In the State Department, security assistance officials have
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ASSESSING U.S. NATIONAL SECURITY EXPORT CONTROLS 133 assumed the lead role formerly assigned to the Bureau of Economic Affairs. The Commerce Department has a statutory mandate to remove Export Administration from the International Trade Administration to stand on its own just below the Office of the Secretary. These changes have contributed to a reinvigorated control system, a credible enforcement capability, better threat assessment, a more asser- tive diplomacy, and even improvements in license processing. The reorganization of Export Administration in the Department of Commerce and the appointment of a senior representative for strategic technology policy in the Office of the Under Secretary of State for Security Assist- ance, Science, and Technology are two recent positive efforts to upgrade the administrative capabilities of responsible agencies. But there is a danger in isolating export control functions from trade and technology development responsibilities. The risk is that controls will become increasingly unrealistic and burdensome on U.S. competitiveness and innovation and that these adverse effects will not be acknowledged until they become obvious and possibly irreversible. The evidence of such erects is limited but sufficient to justify further adjustments in U.S. export control policy and administration. NOTES 1. U.S. Department of Defense, Soviet Acquisition of Militarily Significant Western Technology: An Update (Intelligence Community white paper) (September 1985), Table 1, p. 6. 2. Ibid., p. 6. 3. U.S. General Accounting Office, Export Licensing: Commerce-Defense Review of Applications to Certain Free World Countries (Washington, D.C., September 1986). 4. U.S. Department of Defense, Assessing the Eject of Technology Transfer on U.S.IWestern Security: A Defense Perspective (February 1985). 5. Ibid., pp. 5-8. 6. For example, exporters may not use the full amount of license authorizations because sales are not completed or orders are reduced. 7. See, for example, U.S. Department of Commerce, Foreign Policy Report to Congress, January 21, 1985, to January 20, 1986; and Stanley D. Nollen, "Business Costs and Business Policy for Export Controls," Journal of International Business Studies 18, no. 1 (Spring 1987). 8. Congress has long pressed for the elimination of these unilateral controls either by decontrol or through CoCom agreement to adopt them as multilateral controls. Although many items have been removed over the years and others such as communi- cations countermeasures equipment (ECCN 4516B) may be candidates for control under ITAR, a number of unilaterally controlled items appear to have little military signifi- cance and probably remain on the control list because of bureaucratic inertia. 9. 15 C.F.R. 373. 10. See "The Technology Gap: Western Countries Growing Apart?" (Speech by W. Dekker, president and chairman, N.V. Philips, at the Atlantic Institute for International
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134 BALANCING THE NATIONAL INTEREST Affairs, Paris, December 5, 1985); and "Reagan Curbs Hit U.S. Electronics Sales Overseas," Financial Times (October 16, 1986). 11. 1984 Department of Defense Authorization Act, 10 U.S.C. 140c. See DoD Directive 5230.25, "Withholding of Unclassified Technical Data from Public Disclosure" (No- vember 6, 1984). 12. Federal Register 51, no. 180, pp. 32938-32939. 13. U.S. Department of Defense, Militarily Critical Technologies Program (July 17, 1986), p. 21. 14. Defense Science Board Task Force on Export of U.S. Technology, An Analysis of Export Control of U.S. Technology-A DoD Perspective (February 4, 1976).
Representative terms from entire chapter: