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B
Panel Foreign Fact-Finding
Mission Reports
During the first quarter of 1986, delegations of panel members and staff
traveled on two fact-finding missions to six Western European countries
(the United Kingdom, Belgium, France, Austria, the Federal Republic of
Germany, and Sweden) and to five Asian countries (Japan, Korea, Hong
Kong, Malaysia, and Singapore). The stated objectives of these missions
were to seek the views of government officials, industrial leaders,
academics, and others regarding: (1) the U.S. national security export
control regime, (2) the indigenous export control policies and procedures
of each country, and (3) various means for improving the effectiveness of
the Western control effort.
At each stop on a particular mission's itinerary, the delegation received
a briefing from the appropriate country team at the U.S. embassy. At the
request of the panel, embassy control officers, who accompanied the
delegation to some of its meetings with government officials, generally
were not present for meetings with private industry. All meetings were
considered unofficial and "off the record," and delegation members
provided assurances that nothing in the panel's report would be attributed
to specific individuals.
The two major sections of this report, one concerning the European
mission and the other the Asian mission, are based on the detailed trip
notes prepared by the members of the particular delegations (panel
members and staff) and on the tapes of debriefing meetings held en route.
Each section is, in turn, divided: first, into a summary of the most
significant generic policy issues that emerged from discussions through
~3
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I 84 APPENDIX B
out the trip; and second, into a brief presentation of the special charac-
teristics of and problems with the export control policies and procedures
of each country.
EUROPEAN MISSION*
Generic Policy Issues
UNDERLYING ASSUMPTIONS
During the course of their visits to the United Kingdom, Belgium,
France, Austria, the Federal Republic of Germany, and Sweden, the
various delegations identified a number of common assumptions that form
the basis of European views on national security export controls. A1-
though there was, of course, some degree of variation, the following
points represent the foundations of European thinking:
1 . The panel found support for the basic premise of U. S. national security
export controls: namely, that truly strategic products, processes, and tech-
nical data should be denied to the Soviet Union and the other Warsaw Pact
countnes. The principal difference between the European position and
that of the United States involved what should be considered truly cntical.
2. Europeans expressed a related concern that overly broad restric-
tions could neutralize whatever might be achieved, through the effective
use of trade, to encourage political and social change within the Soviet
Union and to enable Eastern European nations to distance themselves
somewhat from Moscow.
3. Europeans also reiterated their view of trade as a right as distin-
guished from the U.S. view of trade as a privilege. This view has led, in
turn, to a presumption in favor of exports (rather than the reverse). It is
possible, however, that this view may be driven as much by reaction to
the aggressive U.S. pressure for export controls as by fundamental
philosophical positions.
4. European concerns about export controls focused primarily on the
impact of controls on West-West trade. Europeans considered West-East
trade to be far less problematic due, in part, to the impact of the French
Farewell papers and a certain cynicism about the commercial (if not the
scientific) importance of the East.
*The delegation to the United Kingdom was headed by John McLucas and included panel
members Tom Christiansen and Ruth Greenstein and staff members Mitchel Wallerstein and
Stephen Gould. Richard Cooper led the delegation to Belgium, France, and Austria; the
remaining members were the same as that to the United Kingdom. The panel delegation to
the Federal Republic of Germany and Sweden was led by G. William Miller; once again, the
remaining members were the same.
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PANEL FOREIGN FACT-FINDING MISSION SPORTS l 85
5. A number of individuals pointed out that the entire Western control
effort can work only if the relationship is built on trust. U.S. efforts to
impose restrictions on West-West trade with the CoCom countries send
precisely the wrong signal; that is, they have the effect of destroying the
element of trust in the relationship.
COLLATERAL IMPLICATIONS OF CONTROLS
The delegations consistently heard a number of views, stemming from
the assumptions stated above, that illustrate important collateral aspects
of the control effort.
1. The panel groups were reminded frequently of the apparent discon-
tinuity between U.S. policy on technology sharing for weapons cooper-
ation and coproduction, including the Strategic Defense Initiative (SDI),
and the thrust of West-West controls. The implication drawn was that the
two DoD policies frequently conflict with one another in ways that are
damaging to the NATO alliance.
2. The continuing tension between scientific cooperation and protec-
tionism was noted. It was suggested that, in an era of constrained
budgets, it is unrealistic to expect the European nations to be anxious to
cooperate on expensive joint science and technology undertakings if they
are denied full access to the information produced. This is especially true
for fields in which the United States is not preeminent.
3. The sentiment was expressed that continued discrimination against
nationals of CoCom countries (e.g., in terms of access to university
research or sessions of professional society meetings) is likely to lead to
a further deterioration in the level of trust and goodwill within CoCom.
4. There is a continuing concern in those countries in which SDI
research has been discussed actively that such research will result in a
one-way flow of technology to the United States both for commercial
and military applications and that the Europeans might even lose the
right of access to information they themselves had produced.
SCOPE OF CONTROLS
The Europeans generally agreed that the current control regime in-
cludes too many items to be practical, from the point of view of either
administration or enforcement, and that current list review procedures
are biased toward adding rather than deleting items. This perception of
bias is reinforced by their view that the United States tends to place items
on the CoCom agenda with little or no prior notice and then to demand
immediate action. They further suggested that an overly broad set of
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I 86 APPENDIX B
controls undermines the legitimacy of the process if countries perceive
that items of only limited national security importance are controlled. As
a result, items approved for export at the national discretion level may
receive minimal review in most European countries. If this judgment is
accurate, the practical implication is that U.S. exporters are handi-
capped both when selling items that are controlled at the national
discretion level as well as when selling items that are unilaterally
controlled by the United States- without a commensurate benefit to
national security.
Another frequently noted issue relating to the scope of controls was the
failure of the current control regime to take account of foreign availabil-
ity. It was suggested that, particularly for some of the "low-end"
technology controlled either unilaterally by the United States or multilat-
erally through CoCom, export restrictions were virtually futile because of
the extensive availability of the technology in question. Most Europeans
did favor the notion of a common approach to those so-called "third
countries" (i.e., non-CoCom, Free World countries) that might represent
alternative sources or points of reexport for controlled items. But they
also emphasized that, in most cases, reexport controls are not the answer,
particularly for widely available technologies that are considered to be
virtual commodities by many countries.
CONTROLS AND COMMERCIAL ADVANTAGE
Many Europeans, in a number of the countries visited by the delega-
tions, expressed the view that somehow the United States had designed
its controls to confer commercial advantage on American companies.
(Perhaps the most frequently cited example was the recent change in the
U.S. policy toward the People's Republic of China.) At the panel's
request, some vague anecdotal information was presented to back up
such claims, but a cause-and-effect relationship was never substantiated.
Most interlocutors reacted with bemusement to panel members' sugges-
tions that U.S. industry felt that it actually was more severely disadvan-
taged by the control regime. Nevertheless, the feeling in Europe was very
real (and is probably increasing) that some substantial part of U.S.
national security export controls are a "smokescreen" for the protection
and promotion of American commercial interests.
National Security Versus Foreign Policy Controls
The delegations encountered a substantial degree of confusion through-
out Europe concerning the distinction between the application of export
controls for foreign policy purposes versus controls for national security
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PANEL FOREIGN FACT-FINDING MISSION REPORTS I 87
reasons. It was made abundantly clear in a number of meetings, particu-
larly those held with government officials, that the U.S. attempt to impose
controls on pipeline equipment after the invasion of Afghanistan and
European resistance to that initiative-has been a factor in all subsequent
control efforts. It was difficult, at times, to determine the depth of the
professed European uncertainty about the circumstances in which export
controls are justified on the basis of foreign policy or to assess whether
such doubts were part of a more general antipathy toward economic
embargoes. (It is worth noting that the delegation traveled to Europe
shortly after the imposition of U.S. economic sanctions on Libya.) The
net effect, however, is that the CoCom countries often suspect that the
United States attempts to justify, or perhaps mask, its foreign policy
initiatives by invoking the mantle of national security. Europeans contend
that, if this suspicion is accurate, such attempts have the effect of
seriously diluting the consensus within CoCom on truly important na-
tional security matters.
EXTRATERRITORIALITY
Yet another area in which Europeans see a clash of foreign policy and
national security motivations is the U.S. effort to extend the reach of its
law to other countries through the imposition of reexport controls. U.S.
demands to permit the inspection, investigation, and audit of firms on
another nation's soil frequently appeared as another manifestation of the
same issue. For the British, in particular, all forms of extraterritoriality
constituted matters of high principle and were generally considered to be
anathema. Elsewhere in Europe, opposition to U.S. reexport controls
was based on a combination of ideological and practical considerations.
Even in countries in which ideological opposition to extraterritoriality
was muted, there seemed to be a general belief that such an extension of
one nation's law to another was probably counter to established interna-
tional norms. Outside CoCom, reexport controls were criticized primarily
because of practical problems in their implementation.
COCOM VIEWS/POEICIES
There seemed to be widespread agreement among the countries the
delegations visited on the value and importance of CoCom, which was
viewed as substantially more effective and efficient than it was 5 years
ago. Furthermore, most interlocutors felt that CoCom should be strength-
ened so that the United States could rely on its restrictions and proce-
dures as an alternative to the unilateral imposition of reexport controls.
Panel members frequently encountered concerns regarding the establish
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:~8 APPENDIX B
ment of a military subcommittee to CoCom; many Europeans contended
that such an action would reinforce the existing bias toward increasing the
scope of controls.
Among CoCom member countries, there was considerable resentment
about the way in which the United States handled the changes in its policy
toward the People's Republic of China (PRC). The belief was fairly
widespread that the United States deliberately failed to consult with its
allies on the proposed change in order to give U.S. companies an
advantage in the China trade. Moreover, there was a general perception
that the United States is inconsistent in the positions it has taken within
CoCom, appearing to delay the applications of other countries while
promoting U.S. interests. It was pointed out also that the United States is
the single largest requester of exceptions to the CoCom International List
of controlled dual use items. Overall, the twin issues of confidence and
trust were paramount in the minds of the Europeans: They saw U.S.
unilateral and extraterritorial initiatives as seriously damaging to the spirit
of cooperation that must exist for CoCom to be effective as an informal,
nontreaty arrangement.
During the course of the trip, the delegations heard and discussed a
variety of proposals to improve the operational effectiveness of CoCom.
Among the most prominent (and viable) were the following:
· Transparency For better understanding of the CoCom decision
process, provide industry with sanitized information about specific
CoCom license approvals and denials in a reasonably prompt manner
(e.g., within 6 months) but enough delayed that the information would not
be useful in specific deals by competitors.
· "Sunset provision"~onsider adding a provision, at least for admin-
istrative exception note items, that would cause these items to be removed
automatically from the CoCom International List after a set period of time
(e.g., 4 years) unless their continued inclusion were rejustified.
· Two-tier system Recognize explicitly that there is a natural division
within CoCom in terms of the commitment of different countries to treat
and enforce export control policies and "reward" compliant countries
with the removal of reexport requirements.
· Treaty Formalize the CoCom arrangement as an international
treaty to require all participating nations to deal with national security
export controls on a multilateral basis.
VIEWS ON U.S. POEICIES AND PROCEDURES
Europeans recognized clearly that little progress would be achieved
with respect to increased rationalization of CoCom or any other related
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PANEr FOREIGN FACT-FINDING MISSION REPORTS ~89
issue without the agreement, or at least the acquiescence, of the United
States. But government and industry people also reported substantial
confusion and consternation with existing U.S. policies and procedures.
The issues below were the most frequently cited.
1. Speed and rationality of the licensing process The most universal
concern indicated by European companies was the length of time required
to obtain a validated export license and the apparent impenetrability of
the Commerce Department licensing process. The claim was made that
there is virtually no "institutional memory"; as a result, each case is
considered de novo-even if it involves precisely the same technology
licensed previously. The delegations also heard of multiple examples of
licensing decisions sent back to Europe by surface mail, thereby wasting
weeks in the process, simply because a clerk failed to recognize that the
applicant was located outside the continental United States.
2. Reexport controls This was probably the issue of second greatest
concern due to the onerous and confusing nature of the requirements and
the issues of national sovereignty raised by the extension of U.S. law to
other countries. A good deal of support was registered for the idea that
reexport control regulations must and should take account of a "de
minimis" requirement; that is, when the percentage or dollar value of
U.S. componentry in an item falls below a certain level, the shipment
becomes exempt from licensing requirements.
3. Distribution license regulations Bulk licensing regulations were
judged to be confusing, and great resistance was expressed to both
company and Department of Commerce audit requirements.
4. Technical data controls There is growing concern in Europe about
possible revisions to the technical data controls specified in the Export
Administration Regulations and the impact such revisions would have on
the capacity of U.S. and European firms to discuss future commercial
relationships.
5. DoD "15-country list" Great resentment was expressed over what
was seen as the singling out of European countries on the list of
non-Communist destinations for which DoD has review authority.
6. Embassy expertise A common criticism concerned the level of
competence of U.S. embassy personnel in regard to the technical details
of export control regulations. Many European companies reported that
they have felt obliged either to open their own Washington or New York
office or to retain a law firm to represent them on U.S. licensing matters.
DIVERSIONS
There was universal agreement throughout the countries visited by the
delegations that the diversion of licensed products to nonapproved end
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190 APPENDIX B
users was undesirable. As might be expected, diversions were a particu-
larly sensitive issue in the two non-CoCom countries, Sweden and
Austria; but West German officials also reacted somewhat defensively to
charges that the Federal Republic of Germany served as a point of
diversion to the German Democratic Republic (East Germany). In both
Sweden and Austria, the delegation heard evidence of efforts to modify
the system to detect and deter diversions. It also was apparent, however,
that there were limits to what the non-CoCom countries were prepared or
able, under existing laws, to do to stop reexport operations especially
since none of the other CoCom countries currently impose reexport
licensing requirements.
GOODS IN TRANSIT
A problem similar to that of diversions exists with respect to goods
transiting a country under bond. The CoCom countries in principle
indicated a willingness to enter bonded customs zones to open shipments
when evidence of possible illegalities was presented; they emphasized,
however, that most governments had neither sufficient staff for nor great
interest in embarking on such "fishing expeditions." Furthermore, in
some countries, including the Federal Republic of Germany, there are
legal limitations on the handling of goods in transit. Other deterrents to
investigative action include the central importance of trade and, in the
case of Austria and Sweden, their neutral status, all of which make these
countries reluctant to take any action that might impede commerce.
ENFORCEMENT
The delegations were struck by the wide variety of governmental
approaches to export enforcement. Some of the countries handle the
matter strictly through customs, while others deal with it through their
ministries of trade. The overall impression the panel members gained,
particularly from discussions with U.S. embassy officials, was that the
quality of the enforcement effort is uneven. In general, the British,
French, and Germans take enforcement seriously and cooperate with
U.S. customs agents (albeit on an informal basis). Other CoCom coun-
tries are viewed, even within the European context, as being far more
lax in their efforts to the point where there may occasionally be
violations of agreed-upon CoCom proscriptions. Enforcement in the
non-CoCom countries is especially delicate, given that these nations are
under no specific obligation to stop goods that have left the country of
origin. Often, the United States or some other originating CoCom country
can do no more than ask the host government to delay the forward
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PANEL FOREIGN FACT-FINDING MISSION REPORTS ~9~
movement of a shipment while some legal means is found to stop a
potential diversion.
EUROPEAN INDUSTRY VIEWS
U.S. foreign policy controls continue to be of great concern to
European industry; furthermore, such controls tend to raise the specter of
U.S. industry as an unreliable trading partner. U.S. unilateral national
security export controls (both in terms of original exports and reexports)
raise economic concerns uncertainty, delay, hassle, special proce-
dures all of which add up to additional cost. Industry representatives
with whom the delegations spoke indicated that obtaining a U.S. license
approval within a month or two was unusual and that 6-month delays
were frequent. There also was widespread disgust with the inefficiency of
the system: Europeans cited lost applications; the high number of
unexplained or "silly" license applications returned without action, for
example, because of the absence of a street address for a firm in a rural
Third World area; technically incompetent questions; and delays caused
by the use of surface mail.
None of the company representatives with whom delegation members
talked could disaggregate all the factors that now militate against buying
from U.S. firms. However, among those most frequently cited were the
following: (1) the possibility of additional U.S. embargoes, (2) the
additional cost of dealing with U.S. controls, (3) the nuisance value of
complying with a myriad of U.S. procedures, and (4) the recent strength
of the U.S. dollar. Company after company made it a point to discuss
their efforts to identify and, where possible, design around U.S. parts
and components. Most indicated a substantial reluctance to disrupt
long-established supply relationships. But it was evident that, once the
link to U.S. suppliers is broken and new trade relationships are estab-
lished (e.g., with the Japanese or others), it becomes extremely difficult
for U.S. companies to recapture their share of the market.
NON-COCOM-COUNTRY ISSUES
In the countries visited by the panel delegations, some distinction was
made between the European non-CoCom countries and those in the rest
of the world. Because Switzerland, Austria, and Sweden have recently
instituted CoCom-like policies and procedures, Europeans frequently
expressed the view that these nations do not now represent the same
degree of problem as that posed by the rapidly industrializing countries of
the Far East, such as Korea, Taiwan, Singapore, or Malaysia. There was
general agreement that diversions and foreign availability from the
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192 APPENDIX B
so-called "third countries" (non-CoCom, Free World) were serious and
growing problems; there also was agreement that CoCom needs to
develop a common approach to these countries and that reexport controls
are probably not the answer. Some hope was expressed for the current
CoCom "third country initiative."
RUNNING FASTER
Although it was not discussed at length, several interlocutors volun-
teered that the answer to Soviet efforts to steal, divert, or purchase
Western technology was simply to continue to "run faster" technologi-
cally. Some even suggested that the realization of the West's intent to
stay ahead was the only thing that eventually would prod the Soviets
toward meaningful disarmament negotiations.
U.S. EXPORT CONTROL REGIME MODIFICATIONS
Because almost all the countries visited (except the United Kingdom)
consider the U.S. control regime to be a given, the majority of suggestions
for improvement focused on how the current system could be made to
work better.
· Abandon reexport controls on exports to other CoCom countries. (It
was noted that the new G-COM license works only for lower-level goods
and that a broad distribution license is not available for all users.)
· Provide some form of general or bulk license (a so-called "gold
card") for well-established firms that are considered responsible, whether
or not they are consignees of a U.S. distribution license.
· Establish a European office that could provide, either directly or by
computer link with Washington, knowledgeable export control advice to
European firms, thereby minimizing the delays inherent in the licensing
process.
· Reduce the reach of the CoCom control list. (Little guidance was
offered, however, as to how this should be accomplished.)
· Increase the "transparency" of the system by providing, in a
reasonably prompt fashion, sanitized information about specific CoCom
. . . .
licensing c Decisions.
Country Summaries
THE UNITED KINGDOM
Among the CoCom countries, the United Kingdom maintains an export
control posture that is probably closest to the U.S. view of the Soviet
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PANEL FOREIGN FACT-FINDING MISSION REPORTS 193
threat and the need to control the flow of sensitive technology and
products to the Warsaw Pact countries. It is partially (but certainly not
exclusively) for this reason that the British are so offended by what they
see as a lack of trust by the United States. They find this particularly
irksome in view of the efforts they have made over the past 2 years to
tighten their system.
By far, the overriding issue in the minds of U.K. government officials
and industrial leaders is extraterritoriality. This is for them both a matter
of high principle and immediate practicality. They object in principle to
the extension of U.S. law and regulations to Great Britain, and they
object in practical terms to the additional delay and paperwork necessary
to obtain a license and/or submit to an internal audit. There is a strong
feeling in the United Kingdom, especially in the high-tech community,
that extraterritoriality represents a lack of trust in the British and their
control regime. Moreover, there is a feeling that the United States lacks
a sense of proportion, often seeking to treat relatively inconsequential
parts and components the same way as major end items. As a result, U.S.
credibility is undermined, and cooperation within CoCom suffers.
A widespread British view maintains that the U.S. control regime-
and, indeed, U.S. behavior within CoCom is designed to work to the
advantage of U.S. companies. (The change in U.S. policy on exports to
the PRC was mentioned frequently.) There also is a general residue of ill
will created by a series of discrete events, including the pipeline foreign
policy embargo, grain sales, and the so-called "IBM letter" that was
circulated within the United Kingdom; these will not soon be forgotten.
Despite these problem issues, there still appears to be an opportunity
for the United States to redeem itself in the eyes of the British but that
opportunity may be limited. The delegation heard strongly from both
government and industry about a conscious effort under way in the
United Kingdom to use non-U.S. sources wherever possible or to
produce the needed technology indigenously. Moreover, panel members
were reminded that, officially at least, the European Economic Commu-
nity will eliminate all trade barriers in the early l990s an action that will
greatly complicate U.S. export problems if the United States continues to
proceed unilaterally. In the final analysis, the British would like to see a
system that is based on trust and that relies firmly on coordinated,
multilateral action.
BELGIUM
The panel delegation's meetings with Belgian government and industry
officials were of limited duration. It was apparent, however, that, given
the degree of U.S. penetration within their economy, the Belgians will do
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210 APPENDIX B
before the 1997 political transfer, for it will become increasingly difficult
to treat Hong Kong as a CoCom territory while maintaining China's
modified proscribed status.
VIEWS ON U.S. POLICIES
To the extent that Asians distinguish at all between CoCom and U.S.
controls, they made the following comments.
Export Licensing The administration of U.S. licensing has delayed
but not prevented access to U.S. technology and products. For exports to
non-CoCom Asian countries, 3-month delays are considered common and
unreasonable. Peripheral and component suppliers to Japanese systems
houses reported delays of up to 3 months for imports under individual
validated licenses (IVLs), but major Japanese firms cited much shorter
periods (3 to 4 weeks) for approval.
A number of additional dimensions of the U.S. export licensing system
also were identified as problematic. The current lack of a "de minimis"
provision in the current reexport control regulations a provision that
allows shipment without a reexport license when the percentage of U.S.
componentry in a product falls below a stated threshold is viewed as a
serious disadvantage. Many examples were cited of the problem of the
"$2 U.S. microchip in a $20,000 machine," which meant that the entire
product had to receive a U.S. reexport license. A second problem cited
was the current requirement that exporters who do not hold a distribution
license must go through the entire licensing procedure each time the
identical technology was exported under an IVL, with no apparent
institutional memory of previous case processing or rulings.
Investment A number of Japanese expressed greater concern about
other U.S. national security restrictions, especially those on the partici-
pation of foreign nationals in scientific conferences and on foreign
investment in U.S. companies performing military-sponsored R&D. Jap-
anese equity investments have been blocked or withdrawn in four or five
recent instances involving U.S. ceramics, materials, and communication
satellite firms; and these cases have received wide publicity in Japan.
Where military R&D is not involved or is insulated from foreign manage-
ment control, however, the Japanese have not experienced any difficulty
in dealing with U.S. subsidiaries and partners.
Mixed Motives As in Europe, there is a strong suspicion in Asia that
the U.S. government mixes security, foreign policy, and commercial
motives in formulating and administering national security export con
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PANEL FOREIGN FACT-FINDING MISSION REPORTS 211
trots; but the only example cited was the manner in which the United
States liberalized technology trade with the PRC. It is assumed that U.S.
companies had forewarning and thus a competitive advantage.
Technical Data Because Japan, Korea, and other Asian countries all
prize their access to U.S. technology, any expansion of U.S. controls on
West-West transfers of technical data would have serious political reper-
cussions. Notwithstanding MITI's licensing of technical data, Japanese
businessmen insisted that proprietary controls are adequate. They antic-
ipate serious problems with U.S. subsidiaries and partners, as well as
endless arguments about reexport controls on technology of mixed
national origin, if the United States revises its policy. They indicated that
technology flow in both directions would be curtailed. Elsewhere in Asia,
tightened restrictions on technical data would be interpreted as evidence
of a U.S. shift toward protectionism.
Extraterritoriality The Japanese consider U.S. extraterritorial (reex-
port) controls to be a violation of international law. They also complain
about the fact that, technically, if a Japanese company makes an
engineering change in a U.S. system in which there is technology under
license, it is obligated to report the change to the Department of
Commerce; this requirement is considered anathema. The Koreans
suspect that the United States delays reexport approvals on dual use and
military items to help U.S. firms usurp sales. Nevertheless, the behavior
of both countries is pragmatic. They dislike U.S. reexport requirements
and refuse any official cooperation, but they do not block voluntary
compliance. Above all, they have no intention of imitating the United
States. It would be extremely difficult, according to several Japanese, for
their government to take any steps that would be harmful to trade with
third countries. Consignees (other than U.S. subsidiaries) under U.S.
distribution licenses had only recently become aware of the new require-
ments for internal control programs and U.S. government audits. They
suggested that the effects on U.S. business would become apparent only
when U.S. officials begin to conduct the audits.
COMMERCIAL VERSUS MILITARY TECHNOLOGY
Asian countries with military forces and domestic arms industries
acknowledge the concept of dual use technology, but in practice they
draw a sharp distinction between commercial and military technology,
defining the latter as narrowly as possible to limit the impact of either
domestic or U.S. restrictions on arms sales. In Japan, the virtual ban on
military exports and the political sensitivity of national defense generally
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212 APPENDIX B
has led to a rigid segregation of military and commercial activities even
within the companies engaged in both. (The delegation was told by one
firm that even the president of the company must make special arrange-
ments to visit the military side of the operation.)
Korea is a modest arms exporter but is dependent on U.S. weapons
technology, not to mention the goodwill of the United States. The Korean
Ministry of National Defense maintains its own controls on military
exports, including requiring assurances against reexports, and accepts
U.S. reexport restrictions, although there have been differences over
Korean arms shipments to some Middle East countries. (The delegation,
in turn, received sharp questioning from the Koreans on the recent
diversion of Hughes helicopters through West Germany to North Korea.)
Similarly, Singapore is amenable to U.S. reexport controls on military
items, although it has been diversifying its sources of military technology.
All of these countries, on the other hand, are reluctant to impede
commercial exports they consider vital to their economic growth. A
Korean source suggested a related reason for this double standard: "In
dual use technology trade, it is a buyer's market; but in arms sales, it is
a seller's market."
THIRD COUNTRY INITIATIVE
Singapore, Korea, and Malaysia are among the approximately 30
countries targeted by CoCom for negotiations intended to lead to agree-
ments to control exports in a manner comparable to CoCom arrange-
ments. CoCom members have split up the list with a view to concluding
a series of bilateral memoranda of understanding (MOUs) that will
become the basis of similar agreements between each CoCom member
and each third country. The United States has taken the initiative with all
three Asian countries. The panel delegations were not privy to the terms
of the proposed MOU, but they were assured that the agreement would be
comprehensive (i.e., covering all CoCom-level technology regardless of
origin) and would be endorsed by the other CoCom partners.
During the delegation's visit to Singapore, an article appeared, not
coincidentally, in the Singapore Business Times. Among the points noted
were the following.
· Control of exports is one of a number of trade issues (intellectual
property rights, generalized system of preferences, textiles) on which the
United States is taking an increasingly protectionist line vis-a-vis the
NICs but refusing to accept trade-oDs.
· U.S. treatment of export licenses to Singapore as if the country
were a significant diverter is unjustified and offensive. The United
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PANEL FOREIGN FACT-FINDING MISSION REPORTS 213
States has not offered any incentives, by way of more favorable treat-
ment, if Singapore agrees to the MOU.
· The MOU covers items that Singapore and other NICs are just
beginning to produce, that are available from many other sources without
controls, or that have not been shown to represent a significant security
risk if the Soviets acquire them.
· The United States is asking Singapore to undertake commitments
that it cannot fulfill because of limited manpower and authority to monitor
transshipments through the port of Singapore.
· The draft MOU presented to Singapore is broader than those the
United States has accepted in other cases (e.g., India, which has agreed
to control only U.S.-origin technology).
· Acceptance of the MOU in its present form would disadvantage
Singapore in relation to its competitors.
The delegations explored this set of issues with officials in other
countries the panel visited. In most cases, the delegation met with
incomprehension when it asserted that national security export controls
are separated from other trade policy issues in U.S. thinking and
bureaucratic responsibility. The Japanese, on the whole, understand that
the two are not at all closely linked.
VIEWS AND PRACTICES OF U.S. BUSINESSES
U.S. company representatives are concerned about Japanese competi-
tion in Asia and NIC competition in the U.S. market, but few perceive
U. S. export controls to be a major competitive handicap-as distinct from
a significant administrative cost, source of bafflement, and considerable
nuisance. Nevertheless, several companies reported lost sales as a result
of delayed licenses (especially to China and India), citing examples of
deals with government agencies whose spending authority expired before
a transaction could be consummated. One source claimed that delays on
licenses to India, pending India's signature on an MOU, had cost U.S.
exporters hundreds of millions of dollars and created an opportunity for a
Norwegian firm to capture a large share of the Indian computer market
and to establish a joint venture with the Indian government. Several
companies were especially critical of reexport authorization requirements
that apply to foreign products with minimal U.S. content and of regula-
tions that sometimes restrict the supply of spare parts and servicing but
not the sale of the original equipment. It was the consensus that the
distribution license greatly facilitates original sales and reexports but that
the new conditions attached to it for example, audit requirements may
well discourage its use.
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214 APPENDIX B
Not surprisingly, small firms and distributors reported many more
problems than large multinational corporations. Many conceded that,
with a bit of ingenuity, it is relatively easy for U. S. or foreign competitors,
not to mention would-be diverters, to circumvent controls. A number of
company representatives speculated about the likely impact of export
controls on some of the business practices now being introduced in the
Far East. Specific mention was made of two factors: (1) the difficulty of
maintaining "just-in-time" delivery procedures (a policy adhered to to
avoid large inventory requirements) if there are delays in licensing-
especially when the Japanese can deliver on time; and (2) the growing use
of "drop shipments" (wherein goods are purchased for delivery else-
where), which may well be problematic for some destinations under
current licensing procedures.
Country Summaries
JAPAN
Despite the fact that Japan is a member of CoCom, there are certain
difficulties inherent in dealing with Japan on technology transfer matters.
For one thing, Japan approaches the problem from a different cultural and
governmental perspective. To be found violating government regulations
is a severe "loss of face" for a Japanese company and is simply not done.
Moreover, Japanese company representatives work closely with their
government counterparts. As a result, export license applications are
rarely submitted if they are not virtually certain to be approved.
The Japanese constantly reiterate their strict adherence to the CoCom
lists. Although this is apparently true, there is some definite question of
"the letter" versus "the spirit" of enforcement. There is no evidence that
the Japanese ever have been engaged in shipping CoCom-proscribed
technology directly to the Warsaw Pact countries. On the other hand,
Japan has enormous markets in Hong Kong, Singapore, and elsewhere,
and it makes little or no attempt to determine whether there is reexport
through these destinations and, if so, to whom.
Diversions that are undertaken by Japanese companies occur largely
through the so-called "friendly trading companies." There are no esti-
mates available of the scope or seriousness of these activities. The
Japanese have, until recently, been extremely reluctant to prosecute such
cases, but the tide of public opinion appears to have changed. As a result,
the government of Japan recently prosecuted a company in public for the
first time. The more common practice is for MITI to call in the president
of a company for "administrative guidance." This, too, is considered a
loss of face for the individual in question.
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PANEL FOREIGN FACT-FINDING MISSION REPORTS 215
MITI officials described the principal features of the Japanese control
system they administer.
· MITI annually processes about 400,000 individual license applica-
tions for exports of CoCom-listed items to all destinations. Applications
must be accompanied by an import certificate issued by the government
of the importing country. Exports to Communist countries (1 percent) are
reviewed by the newly established Office of Security Export Control (11
staff members). All other applications are processed by MITI's industrial
bureaus and regional offices (350 to 450 people are involved). The system
is not automated. Other agencies have no formal role and are rarely
consulted. The average turnaround time on bloc applications is 2 months;
on Free World applications, 2 to 3 days. Exporters frequently consult
with MITI before submitting applications; in the case of exports to
proscribed destinations, they are strongly advised to do so. Denials, as a
result, are extremely rare.
· Transfers of technical data relating to the design, manufacture, or use
of items on the CoCom list are separately licensed for security, not
economic, reasons. There is a separate list of controlled technologies.
The exporter must identify all types of technology referred to in the sales
contract. No import certificate is required.
· A bulk licensing procedure was introduced in 1985. Coverage is
limited to CoCom country parties with which the exporter has a continu-
ing contractual relationship, but there are no product exclusions and
consignees are not checked. Approximately 120 such licenses were
granted in the first year. They must be renewed annually.
· Aside from the IC/DV procedure, there are few controls on reexports
of Japanese products. No end-use statement is required except from
consignees in proscribed countries, no end-use or postshipment check is
made, no denial list is maintained (insofar as could be ascertained), no use
is made of the U.S. Table of Denial Orders, and there is no requirement
for Japanese government approval of a reexport.
· The Ministry of Foreign Affairs conducts bilateral and multilateral
negotiations and represents Japan at CoCom. MITI shares enforcement
authority with but also supervises customs operations (part of the
Ministry of Finance). The National Police Agency conducts criminal
investigations.
In the view of the government of Japan, CoCom has been functioning
well. The principal defect government officials see with CoCom has been
its inability to do something about the third country problem. Although
Japan is willing to cooperate in a multilateral initiative, it believes that
progress is more likely through bilateral initiatives (which it is support-
ing). The maintenance of exports is unquestioningly vital to the health of
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2 ~ 6 APPENDIX B
the Japanese economy, but it was reiterated that trade with the Soviet
Union could never be normalized until the "northern territorial issues"
were settled.
KOREA
Korea maintains no formal export controls other than on military
equipment. The Koreans find no need for export controls because they
produce nothing of a dual use nature that is militarily sensitive. Further-
more, they are constantly aware of the omnipresent threat from the North
and that it would be inimical to their own interests to have militarily
sensitive technologies find their way there. Nevertheless, it is clear that
Korea is now capable of producing memory chips and entire computer
systems that are at or near the lower threshold of CoCom-controlled
items.
The Koreans are pushing hard and successfully to join the developed
country "club" and, more specifically, to catch the Japanese. As this goal
becomes more and more a reality, export controls will become increas-
ingly necessary. There was some indication that Korea might be willing to
join CoCom-if for no other reason than the prestige of being recognized
as a developed country. Over the near term, efforts will have to be
initiated soon by the United States to negotiate an MOU with the Korean
government.
HONG KONG
The situation in the Crown Colony of Hong Kong presents a fascinating
study in contradictions. The vitality of the city is due in large measure to
the fact that the People's Republic of China has needed an entrepot since
the days of the Communist revolution. Hong Kong's natural port also has
served as a convenient, geographically central location from which to
break up shipments for reexport in smaller lots to a variety of Pacific
destinations. Import/export trade is the complete preoccupation and
lifeblood of the city; without it, the economy would wither and die.
At the same time, Hong Kong now anticipates the fundamental changes
that will commence with the shift of governance in 1997. It is not clear to
anyone what the future holds for this model of capitalist entrepreneurial
spirit after the PRC takes control. The delegation was struck, however,
by how little concern it detected. There seems to be general confidence
that the PRC needs Hong Kong.
In the meantime, as a British territory, Hong Kong adheres to CoCom
requirements and procedures. Licenses for exports to other than pro
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PANEL FOREIGN FACT-FINDING MISSION REPORTS 217
scribed destinations are processed locally by the Hong Kong Trade
Department in consultation with technical specialists, although there is no
provision for denial of such applications. Applications for the Soviet bloc
and China are submitted to the U.K. Department of Trade and Industry,
which also handles submissions to CoCom. The number of applications
referred to this department has increased from 239 in 1983 to 457 in 1985.
Hong Kong Trade Department officials insist that they have no authority
to require an import certificate from the government of a nonproscribed
recipient country.
Under Hong Kong law, goods passing through the colony that are
transferred from one vessel to another for onward movement are consid-
ered transshipments; they must be registered as an import and licensed as
an export. Goods in transit, on the other hand, are those that remain on
the same ship or are transferred temporarily to a bonded warehouse
before being returned to the same ship; they are considered to be neither
imports nor exports and therefore are not scrutinized. Finally, goods
brought into Hong Kong that remain for a period of time, often after being
broken up into smaller lots, are considered reexports and are subject to
. .
licensing.
The delegation heard substantial anecdotal evidence from U.S. com-
pany representatives operating in Hong Kong. There was little or
no suggestion that there was active diversion trade directly to the War-
saw Pact countries. Most of the discussion focused around the com-
petition (primarily with the Japanese) for the PRC market. It was
suggested that everyone bends the CoCom rules to some extent to
avoid losing sales, but it was felt that the Japanese are particularly
lax, both with respect to the PRC and with respect to other East Asian
NICs. Mention was also made of the fact that, beginning in Febru-
ary 1986, the PRC Ministry of Foreign Economic Relations and Trade
will issue end-use certificates for 27 product categories. This procedure
is supposed to facilitate a higher volume of trade with the CoCom
countries, but businessmen fear that it now will result in additional
bureaucratic delays in China being factored on top of licensing delays at
CoCom.
SINGAPORE
Like Hong Kong, Singapore "trades to live." It is the only country
in the world whose exports are three times its gross domestic product.
There is no interest in Singapore in facilitating the movement of high
technology to the Soviet bloc, but Singaporeans are interested in main-
taining the free flow of trade, which is their lifeline. There are approxi
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218 APPENDIX B
mately 400 ships per month through the Singapore harbor, about 10
percent of which arefrom the Soviet Union or other Eastern bloc
countries. There is a small Soviet and East European presence in
Singapore, but its expansion is not actively encouraged, either by the
public or private sectors.
The government of Singapore currently exercises no control over
exports other than munitions and explosives, although trade officials
insist that they routinely issue import certificates for imports from CoCom
countries. In fact, representatives of the government claimed that there
was an IC/DV system in place, a system capable of monitoring the
movement of goods through Singapore and on to the next destination.
Additional delegation queries, however, revealed that the system is
largely mythical; companies rarely, if ever, apply, and the government
does not require enforcement. And representatives of many U.S. firms in
Singapore were unaware that import certificates were either issued or
required by the U.S. government.
Even more than Hong Kong, Singapore is an archetypical free trade
port. There is little doubt that diversions are occurring with regularity
through Singapore to the Soviet bloc. As noted earlier, the United States
has been increasing pressure on the government of Singapore to sign an
MOU, but the Singaporeans so far have resisted.
MALAYSIA
Malaysia is not a "typical" newly industrializing country. For one
thing, more than 50 percent of the population are from immigrant families
who place a high value on education. As a result, the population is highly
literate. In 1979, Malaysia "turned east," focusing on the United States,
and there are now reportedly more than 25,000 Malaysian students in this
country learning engineering, computer science, and business administra-
tion. At the same time, Malaysia's economy is deeply dependent on
multinational enterprises, which operate with virtually complete freedom
out of nine free trade zones.
Although Malaysia controls imports and exports to Israel and South
Africa, it maintains no formal export controls for reasons of national
security. It does not, for example, control semiconductor exports (al-
though it is the world's largest assembler of semiconductors) or the
machines that make semiconductors. So far, the government of Malaysia
has not focused on the problem of export control or diversion. But, given
the rate at which the Malaysians are attempting to develop high-tech-
nology industry (especially in the microelectronics area), that day may
not be too far off.
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PANEL FOREIGN FACT-FINDING MISSION REPORTS 219
ANECDOTAL COMMENTS OF ASIAN INTERLOCUTORS*
Japan
~ ) is making no effort to non-U.S. source.
· ~J encountered delays on U.S. export approvals of six months to a year.
_J
· Most Japanese businesses do not reexport U.S. productslcomponents.
· National security controls inhibit Japanese access to technology and might
reduce investment in the United States.
) anticipates serious problems with U.S. subsidiaries and partners, and
endless arguments about reexport controls on technology of mixed origin, if the
U.S. revises its policy on technical data. Technology pow in both directions
would be curtailed.
· The U.S. Commerce Department should put together a readable summary of
U.S. regulations in Japanese for use in Japan.
· CoCom should have some sort of appeals or grievance process.
· U.S. embassies are not well enough informed to help exporters with questions
about U.S. regulations.
Korea
· There is a "huge technology gap" between Korea and Japan and the U.S.
Korea will have to rely on imported technology for at least 20 years.
· Controls on the transfer of U.S. technology are seen as an attempt by the U.S.
to maintain a competitive edge.
· There is no point in controlling exports to Hong Kong and Singapore because
goods are too widely available there.
· ~ J had a difficult time obtaining an export license for laser technology
from the U.S. They eventually chose to buy from a German company to avoid
U.S. export regulations due to the delays they had encountered. Each time they
wished to import the item they encountered a 2- to 3-month delay for essentially
the same product and the same application.
· A license was required for a voice-recognition system, even though it is widely
available in toys.
Hong Kong
· If there are difficulties in dealing with U.S. companies due to technology
transfer, it may cause the venture firm to look to other sources.
* To maintain confidentiality, identifying nomenclature has been deleted.
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220 APPENDIX B
· DoD has blocked the sale of ruggedized computers out of Hong Kong for use
in coal mines because such computers are controlled by ITAR; however,
versions of this equipment from European and Japanese sources are already
present in the PRC.
· The PRC is requiring a clause in licenses with U.S. companies that says that,
if a device is not delivered within 9 months, the contract will be cancelled.
.
J had a contract to provide equipment to a new hotel in PRC. The
contract was delayed by a license application, and a Japanese company went
to the hotel and said that they could provide the equipment immediately.
~ ~ lost the contract.
· U.S. trade is hurt by controls. There are many cases of the PRC buying from
Japan or France to get what they want.
Singapore
· Singapore is experiencing increasing delays in obtaining U.S. products, in part
because it is one of the countries reviewed by DoD. If these delays continue, it
will turn increasingly to Europe and Japan.
· ~ ~ is looking to buy chips from Japan for silicon processing due to
problems of getting technology out of the U.S.
· Licenses for machine tools with computer and numerically controlled devices
were very hard to get; a "ton offorms" had to tee filled out a year in advance.
Japanese companies promised to deliver the spare parts with no delay, and so
the company wound up buying the U.S. machine and Japanese electronic
components.
· ~ ~ estimates that they lost $8.6 million of business due to export controls
to India and China. One license was applied for in early 1984 and not granted
until October 1985. Another sale was lost because, by the time the license was
approved, the PRC ministry had lost its funding authority.
· Distribution license holders can promise delivery within 30 days while IVLs
require 90 days minimum. Since acquiring a DL requires a solid sales record in
a country, new or expanding companies are at a real disadvantage since they
must use IVLs.
· The American Business Council conducted a survey of its membership last year
on the loss of business due to controls. They found no evidence of loss at that
time but they found growing concern about opportunity cost.
Malaysia
· Exports are extremely important to Malaysia. Any actions that impede this
process would be viewed with extreme disfavor.
Representative terms from entire chapter:
export controls
