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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: