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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
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.
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
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
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
:~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
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
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
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
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
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
194 APPENDIX B little to depart from the accepted line on controlling exports to the Soviet bloc. Like many of the smaller CoCom members, Belgium faces a particular problem in reaching informed judgments on cases brought before the multilateral forum. There are, as a result, some circumstances in which the government must consult with Belgian industry to formulate its position. The Belgians expressed uneasiness regarding U.S. reexport controls, particularly the audit requirements under the distribution license. Never- theless, they seem resigned to accommodating U.S. controls, although they prefer that the audits be kept strictly as internal company matters. They also expressed the idea that the United States manipulates CoCom for its own ends; the PRC export policy change again was cited. The Belgians, aware of their position as a lesser member of CoCom, would like steps taken to ensure a "level playing field." Yet, they also want CoCom to remain small and informal. THE NORTH ATLANTIC TREATY ORGANIZATION Part of the time spent by the delegation in Brussels was devoted to meetings with the U.S. delegation to NATO and representatives of the North Atlantic Assembly, a nongovernmental group that meets in parallel with NATO. The U.S. NATO delegation emphasized a clear separation of responsibilities between NATO and CoCom; the former is responsible for armaments cooperation and production and for security within the Atlantic alliance, and the latter is responsible solely for the control of trade to proscribed destinations. There is apparently little, if any, communication between the two organizations, which is indicative of the somewhat paradoxical policy adopted by DoD, which advocates in- creased cooperation within NATO on arms coproduction, standardiza- tion, and so on, but also seeks to restrict access to the most sensitive U.S. technology. Within the NATO context, the final decision on whether or not to share a particular technology and enter into coproduction may rest on domestic considerations, primarily the impact on jobs within the domestic econ- omy. Whatever the reasonks), the inhibitions on technology sharing have direct costs both in military and economic terms for example, higher R&D costs, slower technological advancement, redundancy, and so forth. THE COMMISSION OF THE EUROPEAN ECONOMIC COMMUNITY While in Brussels, the delegation met with senior officials of the European Commission, the administrative body of the European Eco
PANEL FOREIGN FACT-FINDING MISSION REPORTS 195 nomic Community (EEC). These officials reported that the pipeline restrictions imposed by the United States were a "rude jolt" to several European Community member countries and probably have colored their view of all subsequent export control efforts. The restrictions have, for one thing, stimulated the search for non-U.S. sources of supply sources that would not be subject to interruption. Here again, the "trust issue" emerged, with the feeling expressed that U.S. efforts to impose extrater- ritoriality are offensive and degrading and imply nonequality of treatment. The commission is, of course, mindful of the fact that the EEC is to become integrated by 1991. This suggests the need for a common approach to export controls within Europe, an approach in which controlled items might be traded freely within the EEC countries (and, by inference, within CoCom). Such a communalization of the issue is problematic, however, because Ireland, which is a member of EEC, currently is not a member of CoCom. THE EUROPEAN PARLIAMENT Although the delegation did not actually visit members of the European Parliament, some of its recent deliberations deserve mention. In early 1986, the parliament adopted a resolution* calling on the EEC to investigate whether the 1985 amendments to the Export Administration Act eliminated the conflict between U.S. reexport licensing requirements and the requirements of the Treaty of Rome, which mandate unconstrained movement of goods within EEC countries. The resolution further stated that, if it is determined that the conflict continues to exist, the commission is to take action to bring the matter before the European Court of Justice for settlement. The resolution went on to criticize U.S. technology transfer limits, claiming that U.S. restrictions particularly those that involve extrater- ritoriality go far beyond those agreed to in CoCom and that they are ineffective in any case. The resolution also recommended the develop- ment of an independent European technological capability that would rival that of the United States. FRANCE The delegation to France received the definite impression that French views on the national security export control issue changed rather dramatically in 1981. In that year, the government obtained through its *As reported in Aviation Week and Space Technology (March 17, 1986).
196 APPENDIX B intelligence services the 1979 and 1980 editions of the Soviet Western technology "shopping list," the so-called Farewell papers. As a result of the revelations in these papers, the French government assigned ongoing responsibility for these matters within the General Secretariat for Na- tional Defense (the equivalent of the U.S. National Security Council). Its mandate includes gathering evidence and examining cases of fraud or evasion of controls; analyzing and warning the government of pending changes in CoCom or the regulations of other countries; and evaluating Soviet military/scientific capabilities, especially their efforts in new tech- nologies. The French have a relatively tight system of export controls on indigenous technology, although reexport approval by the government is not required. The system relies on end use certification. If and when it is discovered that a foreign consignee has violated the end-use statement, the firm is denied the right to make future purchases. The French now are in the process of establishing their own distribution license system, which will, unlike the U.S. system, handle imports as well as exports. French foreign consignees operating under U.S. distribution license requirements also will have to qualify for the French license, and the system will permit the French government to perform audits on behalf of the U.S. govern- ment. This is important because the French, like the British, take a generally dim view of U.S. extraterritorial provisions. Although the French are concerned about the appearance of accepting U.S. extraterritoriality, they are generally far more pragmatic in their approach than the British. They also are pragmatic with regard to CoCom; they feel that it has increased in effectiveness in recent years, and they see little to be gained from altering its status (e.g., making it a formal treaty organization or even acknowledging the existence of a "two-tiered" CoCom). There also is sensitivity in France to the growing problem of technology available from third countries, including those in Europe. French industry in general also takes a pragmatic approach both toward CoCom and toward the U.S. export control regime. Because of the Farewell papers, French industry is now probably "overcareful" about exports to the Warsaw Pact. Nevertheless, the view was expressed that there is an excessive amount of unnecessary paperwork associated with U.S. reexport licenses and that, in any case, licenses should not be required for companies from CoCom countries. Both the French government and French industry recognize that, in order to maintain their world position, they must continue to develop and export new technol- ogy. There is great concern about how export controls will affect this effort.
PANEL FOREIGN FACT-FINDING MISSION REPORTS 197 THE EUROPEAN SPACE AGENCY While in Paris, the delegation made a brief visit to the headquarters of the European Space Agency (ESA). ESA officials pointed out that the origins of ESA are in the scientific community and that it still retains characteristics associated with the relatively open exchange of informa- tion. These officials stated their opinion that the U.S. government is sometimes unreasonable in its technology transfer policies. They offered the example of a European subcontractor who provided technical data to a U.S. prime contractor, who was then denied permission by the U.S. government to license the information for transfer back to Europe. There also was a feeling among those interviewed that some U.S. controls exist more to protect commercial interests in rapidly developing fields, such as supercomputers, than to support legitimate national security aims. Nevertheless, it was indicated that controls, although a nuisance, currently do not present an insurmountable problem. For ESA in particular, however, there may continue to be problems associated with cooperation on the space station due to the fact that two ESA member countries, Ireland and Sweden, are not part of CoCom. THE FEDERAL REPUBLIC OF GERMANY The West Germans, like the French, take a generally pragmatic view of both the U.S. national security export control regime and the need for multilateral export controls. If anything, the West Germans are even more tolerant of U.S. extraterritoriality provisions than are the French, which may derive in some degree from the special U.S.-West German postwar relationship. On the other hand, government officials and indus- try leaders in West Germany are becoming increasingly concerned about the time delays and costs associated with reexport licensing. The situation is complicated, of course, by West Germany's relation- ship with its Communist "other half." In talks with the panel delegation, West German government officials acknowledged that an export to East Germany is more or less tantamount to a transfer directly to the Soviet Union. Trade with East Germany is limited to control such transfers; nevertheless, it is of considerable political importance. In general, how- ever, West German customs officials and the Ministry of Trade have been diligent in pursuing active diverters. The delegation also was told that liberal elements within the West German government would like to increase trade with the East and are concerned about the extent of controls over major high-technology exports. It was pointed out repeatedly that, unlike the United States,
198 APPENDIX B West Germany must trade to survive (one-third of its GNP is derived from exports). Further, "transit trade" (see the earlier section on "Goods in Transit") is very important in Europe due to the geographic proximity of the countries and the nature of the EEC agreement. Controlling transit trade is an especially difficult aspect of the West German export control problem. West Germany currently maintains few restrictions on exports to third countries such as Brazil (with which it has a large volume of trade); many people with whom the delegation spoke felt that this aspect of West German policy must be addressed in the near future. There also was concern about the implications of German involvement in SDI namely, whether technology developed in West Germany might get "sucked in" by the SDI program and become inaccessible for commercial exploitation. The West Germans fully support the CoCom process and favor increased transparency, streamlined lists, and better definitions of exactly what is controlled. However, there was some suspicion that certain countries (read: the United States) try to railroad through controls in CoCom without permitting time for adequate response by other members. Some interlocutors felt that an informal, two-tiered CoCom arrangement already exists de facto. AUSTRIA The fundamental message conveyed to the panel delegation visiting Austria (one of the non-CoCom countries of Western Europe) was that the only way the nation can remain master of its own destiny is by maintaining its status of permanent neutrality. This can only be accom- plished if its economy remains stable, which in turn depends on its ability to trade (exports account for 35 percent of Austrian GNP). Austrian interlocutors emphasized that in Austria trade is a right and not a privilege (as it is in the United States). Moreover, because of Austria's neutral status, it is politically impossible for it to accept the CoCom control lists in tote. Although Austria does not share the U.S. view of the need for export controls, it respects the right of the United States to determine what is in its national security interests. At the end of 1984, the Austrian government adopted a new, "auton- omous" export control policy and appropriate implementing legislation, which is now being carried out. This new system essentially mimics the extant controls of the country of origin for a particular shipment; whatever restrictions are imposed there (including reexport licensing requirements) also are imposed in Austria. Given its geopolitical situation, Austria continues to have signifi
PANEL FOREIGN FACT-FINDING MISSION REPORTS 199 cant problems both with respect to diversions and to goods in transit. In part due to Austria's neutral status and also to its long history as a trading nation, its customs officials have difficulty with the idea of seizing shipments moving through bonded customs zones. The offi- cials indicated, however, that they can act if something is misla- beled, although they do not have the manpower to find "needles in the haystack" unless they are tipped off in advance. A revised U.S.- Austrian customs agreement was signed recently and is now being implemented. SWEDEN Like Austria, Sweden carefully guards its neutral status. Yet, Swedish attitudes toward export controls have been changing rapidly over the past few years, driven in large measure by the publicity surrounding some of the major diversion cases (e.g., the VAX 11/780 computers). It is important to point out that export control problems in Sweden generally are not related to illegal or questionable activities by the major Swedish manufacturers; the problems involve the so-called "techno-bandits," diverters who set up companies in Sweden solely for the purpose of reexporting proscribed technology to the Warsaw Pact countries. Part of the difficulty Sweden has encountered in trying to stop diverters stems from the fact that it has few applicable laws on the books. In 1982 the Swedes set up a system (under their Defense Material Administration) to issue end-use certificates and conduct prelicense checks of facilities (as well as follow-up visits every 12 months) whenever there was to be an import of sensitive U.S.-origin computers or computer- related technology. Recently, the Swedes announced additional regula- tions designed to make it more difficult for diverters to use Sweden for their operations. In all their efforts, however, the Swedes must tread a narrow line to maintain their neutral status; they are under continuing criticism by the Soviets for "catering" to the United States on export control matters. Officials in Swedish industry and the Swedish government made it clear that, although they do not like the extraterritorial provisions of the U.S. export control regime particularly reexport licensing they com- ply with them and will continue to do so. At the same time, industry representatives indicated an active interest in designing around U.S. components wherever possible, although they also admitted that the United States is simply too important an export market to abandon. Sweden also is consulting closely with the other two major non-CoCom neutral countries, Austria and Switzerland, and is determined to maintain
200 APPENDIX B control policies that are roughly analogous to what the other two are doing with respect to the U.S. control regime and the other CoCom countries. . ANECDOTAL COMMENTS OF EUROPEAN INTERLOCUTORS* United Kingdom There's an increasing tendency for U.K. firms to non-U.S. source parts and components to avoid present and future complications with U.S. export controls of any kind, not just national security. · U.S. reexport controls are very long and difficult to follow....The time required for U.S. reexport approvals can also be very long. · Apprehension about the scope of U.S. extraterritorial controls has caused J to develop their own internal sources of some critical components and in other cases to seek non- U.S. suppliers. · Recipient countries (e.g., U.K.J are looking for alternative sources (e.g., JapanJ as a result of U.S. extraterritorial controls. Where no alternative sources exist, European companies are asking the European Economic Com- munity to set up research projects with the goal of eliminating dependence on U.S. products. Whenever the U.S. imposes additional unilateral controls, companies look for non- U.5. sources. · ~ ~ is using a computer to draw up a list of U.S. components in order to seek alternate suppliers. · ~ ~ has teamed up with two other European companies to eliminate dependence on U.S. sources. · The backlash against U.S. export controls has not become overt. However, the resentment is steadily building and could become problematic. Belgium · Difficulties with the U.S. reexport licensing process prompt foreignfirms to buy non- U.S. · Extensive time delays are often compounded by erroneous clerical assumptions within the U.S. government. Such misconceptions are most difficult to deal with when the Pentagon becomes involved in the review process, whether in the West-East cases or in those West-West transactions now subject to DoD review. Difficulties are also encountered with U.S. unilateral controls and supplying U.S. licensed spare and replacement partslsubassemblies for use in controlled and noncontrolled foreign products. * To maintain confidentiality, identifying nomenclature has been deleted.
PANEL FOREIGN FACT-FINDING MISSION REPORTS 201 France · To avoid the extraterritorial reach of U.S. exportlreexport controls, some French companies may be trying to avoid the use of U.S.-origin parts and components in favor of non- U.S. sources. . J believes that they are penalized vis-a-vis American firms because the U.S. might approve an export of an AEN-level item while ~ J would have to apply for a reexport license. There is also a cost in delays in terms of technology exports and legal fees in the U.S. It is unacceptable that ~ J must seek approval to reexport from France to West Germany or Italy. U.S. approval may take up to 6 months. Austria · We need a source of reliable information and a source of necessary papers (i.e., forms and applicationsJ in Europe to assist Europeans to follow U.S. regula- tions. Keeping track of U.S.-origin parts and components in Austrian products and filing the appropriate reexport requests is very burdensome on Austrian firms. It takes an inordinate amount of time and effort, and receiving decisions from the U.S. is a lengthy process. As a result, non-U.S. sources are being actively sought. It's highly doubtful that the time and effort expended on reexports is worth it. · Austrian manufacturers, not certain that U.S. approvals will be forthcoming, often look for alternate, non-U.S. sources of supply so they won't be caught unprepared. Federal Republic of Germany · The U.S. Department of Commerce uses surface mail to issue approvals, and send RWAs [notices of licenses "returned without action"] even though ¢ J uses airmail this adds weeks to the process. · Although buying non-U.S. parts, components, and other products has its difficulties, some West German firms are beginning to explore this ap- proach since it would insulate them from potential, capricious U.S. interfer- ence in their freedom. This also applies to West German firms with U.S. subsidiaries. · Small- and medium-sized West German firms who are or who wish to become foreign consignees under the U.S. distribution license are just now seriously looking into the requirements of the U.S. internal control guidelines. They are very concerned since the requirements are quite complex, and they wonder how they can possibly carry them out. · U.S export licensing controls extended to Western countries are difficult to cope with-long, unexpected, unforeseeable delays are characteristic. In
202 APPENDIX B addition and particularly annoying are U.S. reexport controls. To avoid these, some West German firms seek to avoid U.S. suppliers, a clearly uneconomic move. · There is evidence that the Soviets are rejecting others for non-U.S. equipment containing major critical U.S. parts or components. This is on the basis that the U.S. reexport authorizations will not be granted, or, if granted, service or the supply of U.S. origin spare parts andlor replacement parts may be curtailed sometime in the future. · ~ ~ questioned if it was worthwhile to have some research on West German products performed in the U.S. since this might result in the application of U.S. exportlreexport controls. · ~ J wanted to exhibit at a Moscow trade fair, but they could not determine whether they would be granted a license for the equipment. So they went with a non-U.S. supplier. · ~ J said the company's European activities submitted 625 U.S. reexport requests in 1985, most from customers. Three to four weeks were required on the average to obtain a decision, although ten weeks were required for some (surface mail was not involved in either directions. Of the 625, 53 were returned without action, usually requiring further information. Sweden · U.S. reexport controls pose a major problem. For many years, they [Swedish firms] have avoided difficulties by specifying a certain amount of reexport in the major individually validated licenses....Recently, however, the approvals have had riders deleting some countries. This requires time-consuming and separate applications and may lead them to consider non-U.S. sourcing. · ~ ~ would like to establish some engine manufacturing facilities in the U.S. This would benefit both countries. However, there's a reluctance to become involved because many of these activities would become enmeshed in the U.S. export controls. · ~ ~ has real problems figuring out U.S. Control List classifications. The Department of Commerce returns applications by surface mail! ~ J does not have same problems with European companies and they are definitely looking for non- U.S. sources. · ~ ~ have not been denied licenses but have experienced long delays. The process takes too long. · ~ ~ has a major problem with low-level bureaucratic delays andfoul-ups in the U.S. Commerce Department, including occasional lost submissions. · Smaller Swedish firms have a difficult time with export and reexport controls. They have little knowledge and experience a difficult time of getting informa- tion from foreign suppliers.
PANEL FOREIGN FACT-FINDING MISSION REPORTS 203 ASIAN MISSION* General Issues COUNTRY CAPABILITIES The remarkable economic strides of the Pacific Rim countries and the deterioration of the U.S. trade position vis-a-vis these countries have fostered an impression that the Asian newly industrializing countries (NICs) are on the same development path as Japan and will become formidable competitors in high technology as well as basic industries. In fact, the differences are as striking as the similarities. Abundant capital and technical manpower ensure that Japan will continue to be the United States' major rival virtually across the board in high-technology industries and will assume world leadership in a growing number of specific technologies, primarily commercial but also military. Acknowledgment of this reality is implicit in several recent U.S. initia- tives efforts to gain access to the results of Japanese government- sponsored R&D, an agreement to acquire selected military technologies, an agreement to control the sales and use of supercomputers, and stepped-up monitoring of Japanese developments by teams of U.S. experts. What is less apparent is that the United States will soon find itself in the unusual position of identifying foreign technologies as candidates for CoCom control in advance of their domestic development or acquisi- tion by the United States in military systems. Korea's technological capabilities are concentrated in a handful of large, diversified, export-oriented conglomerates that together account for more than 40 percent of Korean GNP. A few of these companies are already producing, in volume, some CoCom-controlled commodities (e.g., high-density memory chips and 16-bit microcomputers) and are committed to acquiring more advanced electronics capabilities (e.g., fiber optics, robotics, machine tools, new materials, chemicals, and biotech- nology). These highly leveraged companies are not deterred from these new ventures by cyclical downturns in world markets. Indeed, over the short term, they appear unconcerned about returns on world markets. Nevertheless, there are several clear vulnerabilities in the Korean economy: a degree of duplication of effort that is unsustainable by the *The delegation to Japan was chaired by Lew Allen and included panel members John McLucas and Richard Meserve; staff members were Mitchel Wallerstein and Stephen Merrill. The Korean delegation was led by John McLucas; accompanying him were panel member Leif Olsen and Mitchel Wallerstein and Stephen Merrill. The delegations to Hong Kong, Singapore, and Malaysia were led by John McLucas; the remaining members were the same as those for the Korean trip.
204 APPENDIX B small domestic market, dependence on foreign (mainly U.S. and Japa- nese) technology and/or critical components (16-bit microprocessors), growing protectionism among the industrialized countries, a large exter- nal debt ($47 billion) and potential political instability, and a shortage of highly trained resident scientists and engineers. The latter is more a constraint on innovation than on the development of highly productive manufacturing capacity. Japanese industrialists agree that Korea and Taiwan, probably alone among the Asian NICs, are able to absorb and replicate sophisticated production processes. Conscious of the boomer- ang effect (in steel, shipbuilding, and now automobiles), the Japanese are growing more reluctant to transfer advanced technology to the Koreans and regard American firms' openness to high-technology joint ventures with Korean companies as shortsighted. Hong Kong has almost no indigenous high technology. Roughly 60 multinational companies, most of them American, employ 35,000 people in the assembly of electronic components and the manufacture of some finished products. These companies export to their home markets for final processing and/or sales. Upwards of 1,000 firms under domestic Chinese management employ 60,000 people in the manufacture of consumer goods or low-technology components (circuit boards and capacitors) or in the servicing of other companies. These capital-poor, labor-intensive opera- tions have experienced real difficulties in the recent electronics recession. The three or four exceptions to this pattern firms engaged in higher- technology, capital-intensive activities (e.g., wafer fabricationWare closely linked to the PRC. It is generally agreed that their product is of poor quality. They have had little success in marketing locally or worldwide and are experiencing difficulty obtaining financing. PRC aspirations for these com- panies to become commercially viable are considered unrealistic. In recent years the Singapore government has made a big push to shift the economy into higher value-added, more capital-intensive manufactur- ing to differentiate Singapore from its neighboring low-wage competitors. More money is going into research, into programs to encourage automa- tion, and into a "science park." Foreign investment, especially if it entails R&D activity, is welcomed. Nevertheless, until recently a policy of rapid wage increases and high forced savings (to finance the social security system) has driven up business costs and exacerbated the current economic crisis 2 or 3 years of negative or negligible growth following two decades of 8 percent annual growth attributable also to the slump in shipbuilding, petroleum refining, and other key sectors. Singapore has been pricing itself out of the assembly business, so far without securing a firm foothold in higher-technology manufacturing. In Malaysia, a policy of inducements for foreigners to set up manufac- turing operations in nine designated free trade zones has resulted in a
PANEL FOREIGN FACT-FINDING MISSION REPORTS 205 bifurcated economy. Although Malaysia is one of the world's largest exporters of semiconductors, these are exclusively the product of Amer- ican, Japanese, and a few European companies that import materials and export assembled components to home or third markets. Their main contribution to the domestic economy is the employment of a semiskilled, overwhelmingly female but diminishing (on account of automation) work force. As a general rule, American multinationals provide more opportu- nities for local managers and engineers than do other foreign-owned companies. The government's current strategy is to encourage diversifi- cation domestic production of integrated circuit materials and manufac- ture of finished consumer electronics in the hope that these activities will spill over into the domestic economy. In a more ambitious step, the government has created MIMOS, the Malaysian Institute of Microelec- tronic Systems, to design chips for specialized commercial applications. NEC, the Japanese firm, has contributed $1 million to MIMOS. Despite its high-level political support, however, and the enthusiasm of its staff, observers are skeptical that the venture will be successful. ROLE OF FOREIGN TECHNOLOGY Japan, historically, has been an importer of technology. That balance has now shifted, but the Japanese continue to place a premium on acquiring the latest U.S. developments. The NICs are acutely aware that their progress will continue to depend on licensing or copying Western technology for some time to come. National policies to encourage technology imports vary widely. Korea places many conditions on foreign investment; Malaysia offers generous tax and other concessions. Governments and businesses in Asia generally professed a strong preference for American over Japanese technology and investment for a variety of reasons: historical antipathy to the Japanese, continuing belief in the superiority of U.S. technology, Japanese reluctance to transfer technology, the closed Japanese management system, and the Seclusiveness of Japanese resident managers. Nevertheless, such preju- dices appear not to have gotten in the way of government and private decisions, and many representatives of American firms fear that they are losing ground to the Japanese on both exports and direct investment opportunities, largely because "Japanese companies plan for the long term." PERCEPTIONS OF THE SOVIET UNION Generally speaking, the five countries visited by the delegations view the Soviet Union as a political adversary and a potential military threat;
206 APPENDIX B but these perceptions are highly colored by local and regional concerns- for example, the Soviets' support of North Korea and Vietnam, their occupation of the northern Japanese islands, the downing of KAL 007, and so forth. Few of the public or private officials the delegations spoke with shared the U.S. preoccupation with the global military balance of power or the belief that the West's technological lead is critical and threatened. Because the Japanese exposure is mainly to technology in the Soviet civilian sector, the prevailing view is that Japan and the United States possess a commanding (5- to 20-year) lead (especially in comput- ers, software, and telecommunications) that is widening rather than narrowing. PERCEPTIONS OF THE PEOPLE S REPUBLIC OF CHINA With the exception of Hong Kong, whose future is tied to the mainland, Asians are ambivalent about China and suspect that U.S. liberalization of technology trade with the PRC has proceeded too far and too fast. Their reservations reflect not a perceived military or other external threat but two somewhat contradictory concerns-worries about future Chinese competition and doubts about the stability of China's internal political and economic course. For the time being, the latter are predominant. Even the Koreans are willing to do business with China, albeit indirectly and in nonstrategic goods. (Korean exports to the PRC, mainly through Hong Kong, amount to nearly $1 billion annually.) Koreans are concerned about the reflow of dual use technology with military application from China and the Soviet Union to North Korea and about Chinese and Soviet behavior in the event of a North Korean move against the South; but they do not expect the Chinese to encourage the North to take significant risks. Japan and the NICs are not counting on the Chinese to maintain their liberal- ization and modernization drives without occasional sharp deviations and setbacks. China's current shortage of foreign exchange has reduced expectations everywhere, but especially in Japan. Export Control Issues FOREIGN AVAILABILITY/DOMESTIC CAPABILITY The delegations were struck continually throughout their study mission by the widespread availability of "low-end" technology ostensibly con- trolled by CoCom. In every country visited, they determined either through direct observation or reliable reporting that microelectronics products and computers with sophistication at least equalling that con- trolled at the administrative exception note (AEN) level by CoCom were
PANEL FOREIGN FACT-FINDING MISSION REPORTS 207 available for sale over the counter. In some cases, these products were of CoCom origin, while in others they were either domestic copies or "no-name" generic technology. Looking beyond the current situation, the delegations were afforded the opportunity to tour a number of R&D and production facilities in most of the countries. One could not help but be impressed by the singleness of purpose with which the goal of high-technology development is being pursued in areas such as fiber optics, memory chips, and so on. It was not difficult, on this basis, to arrive at a view that, whereas the current control problem involves (with the obvious exception of Japan) foreign availabil- ity of CoCom-origin technology, the day is not far off when many of the East Asian NICs will be able to develop and produce technology rivaling that on CoCom's International List. DIVERSIONS Direct transfers of locally produced dual use technologies from the five countries to the Soviet bloc occur, but they appear at least currently- to represent only a minimal problem. Japan adheres closely to formal CoCom restrictions and maintains tight visa controls and close surveil- lance of bloc visitors. The Japanese repeatedly asserted that their insularity and habits of loyalty to group, employer, and country are effective deterrents to illegal activities. The sale a few years ago of a floating drydock that the Soviets used to repair warships was an embar- rassment "that will not be repeated." The few Soviet students in Japan are studying language. Japan has virtually no scientific exchanges with bloc countries. There are several small- and medium-sized trading firms, so-called "friendly companies," that do extensive business with the Soviets, but these are well known and presumably watched fairly closely. A potentially bigger loophole is the absence thus far of a Japanese espionage statute, another legacy of the postwar antimilitaristic senti ment. There is no official Soviet presence in South Korea, internal security is tight, and Koreans conduct negligible direct trade with the Soviets. The first and last factors apply also to Hong Kong. Needless to say, however, there is a large PRC presence in Hong Kong, and trade relations, communications, and travel are extensive and increasing. Most of the known or suspected cases of illegal diversions to the mainland apparently involve relatively low-technology, widely available products. The delegations all heard from many sources in the countries they visited that numerous opportunities exist in the Far East for diversion of controlled products to the Soviet bloc through third countries, given the absence of all but minimal controls on reexports and goods in transit.
208 APPENDIX B Government officials and foreign business representatives displayed a natural tendency to point the finger elsewhere the Japanese and Kore- ans to Hong Kong and Singapore, the residents of Hong Kong to Singapore and Indonesia, and the Singaporeans to India. Because the delegations received little specific information on documented or sus- pected cases, they had little basis on which to judge the magnitude or locus of the problem, let alone to compare it to the situation in Europe. Nevertheless, based on their overall assessment of the situation, the delegations found it reasonable to conclude that diverters can and do ship through the freewheeling, high-volume ports of Singapore and, to a lesser extent, Hong Kong, with virtual impunity. This would be particularly true with respect to goods originating in CoCom countries other than the United States, which do not impose reexport control requirements. ENFORCEMENT Recently, Japan successfully prosecuted its first two cases of export control violations. Penalties were minimal- small fines and/or brief suspension of exporting privileges but the actions, regarded as symbol- ically important, received favorable press and public reaction. Given the "loss of face" for the companies (and individual executives) involved, these penalties may be more severe within the cultural context than they would at first appear. Previously, when the United States reported suspected diversions to the government of Japan, there was rarely an official response. It is assumed that investigations ensued and violators were dealt with, if only by reprimand, but the government took no public action. The Ministry of International Trade and Industry has authority to require postshipment reports and to conduct on-site inspections but has used it sparingly, if at all. Hong Kong trade officials emphasized their limited capability to mon- itor shipments through the harbor. The customs agency has 14 full-time investigators and 300 officers engaged part-time in spot checks. Hong Kong Department of Trade officials indicated that they have power under the terms of a "direction order," which requires that the item in question cannot move farther than Hong Kong without the permission of the original exporter. To date, no such direction orders have been imposed on goods in transit, nor, apparently, has the U.S. government requested such action. Although U.S. consular officials consider Hong Kong authorities fully cooperative, both sides complain that they spend far too much of their time chasing after low-level, widely available products intended for the PRC. Singapore officials emphasized that the task of closely monitoring trade through the port would greatly exceed their resources. Surprisingly, in
PANEL FOREIGN FACT-FINDING MISSION REPORTS 209 view of concerns about the extent of diversions through Singapore, the responsible U.S. Customs attache is stationed in Bangkok, from which he covers three countries (Malaysia, Thailand, and Singapore). The Singaporeans claim that they have a system the import certificate/ delivery verification (IC/DV) system, which is discussed elsewhere in this volume by which items can be tracked through Singapore. However, despite persistent questioning of various interlocutors, the panel delega- tion could find no evidence that any system was in operation that could spot, much less prevent, diversions. Enforcement has not yet become an issue in Malaysia, primarily due to the fact that the movement of all CoCom- level technology is controlled directly by the multinational corporations operating in the country's free trade zones. ATTITUDES TOWARD COCOM Japanese and Hong Kong spokesmen expressed general support for CoCom but offered the following observations. · The scope of the CoCom dual use list is too broad, encompassing items of marginal strategic significance that are available from a variety of sources with minimal or no controls (e.g., personal computers and commodity semiconductors). Efforts to control the uncontrollable detract from the effectiveness of controls in various ways-diverting resources from review and enforcement activities focused on the truly critical technologies, undermining support for the system within CoCom coun- tries, and discouraging the cooperation of non-CoCom countries that are beginning to produce products at the low-technology end of the control spectrum. · Compliance is uneven. The Japanese suggested that some European members interpret the agreements to suit their commercial interests. Although not alleged to be in violation of CoCom agreements, the greater willingness of U.S. companies to transfer technology abroad in the interest of short-term returns is viewed as undermining the effectiveness of controls. · The lack of accountability is troublesome but represents the price of avoiding divisive political controversy in some CoCom countries. It may be feasible, however, to institute an appeals mechanism for cases that are turned down under the rule of unanimity. · In the eyes of Hong Kong officials, the relaxing of controls on China while retaining its proscribed status will not be tenable for long. They urge the removal of China from the CoCom control regime. The proliferating economic ties between Hong Kong and the PRC may force the issue well
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
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
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
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.
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.
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
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
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
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.
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.
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.
