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OCR for page 103
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
OCR for page 104
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
OCR for page 106
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
OCR for page 112
~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
OCR for page 113
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'
OCR for page 124
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
OCR for page 125
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
OCR for page 126
~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:
security export
