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1 It A THE NATURE OF THE PROBLEM The vigor of science and technology in the Western* democracies and the greater economic vitality of these nations in comparison to the Soviet bloc are sources of strength for the West in its continuing effort to maintain its military security. The West benefits from open societies with free and rapid exchange of scientific information and from competitive industrial bases, both of which drive the development of new technolo- gies. Many of these items are dual use in character that is, products or data with both commercial and military applications. The Soviet Union lacks the open communication and commercial advantages of the West and seeks to compensate for them, not only by directing a greater percentage! of its gross national product (GNP) to the development and production of military equipment but also by aggressive attempts to acquire and apply Western technology to its military programs. These Soviet initiatives, in turn, pose a policy dilemma for the West because the open communication and free markets that are fundamental to the Western advantage in technology also facilitate the Soviet acqui- sition effort. Government controls over technology transfers collide with the character and principles of a free society, which are a source of so *As used throughout this report, Western or West includes Japan. tNearly three times that devoted by the United States. 28

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INTROD UCTION 29 much of our strength in competition with the Soviet Union. There is a point at which interference with the free exchange of technology and information in the West could be more damaging to Western societies than the loss of technology under less-stringent controls.* The question is: Where does that point lie? And is the damage from such interference incremental and not evident until long after irreparable harm has been done? Answers to these questions may not be conclusive, but they directly affect our stales in the long-term competition with the Soviet Union. Given what is known about Soviet technology acquisition activities, an effective strategy for preserving the Western lead in military technology logically must include two elements. First, it is essential to maintain the vitality of the Western technological enterprise that is, to continue to maintain technological leadership over potential adversaries. Second, it is necessary to deny or at least impede access by potential adversaries to militarily significant Western technology.! For a number of (primarily military) technologies, such as stealth or antisubmarine warfare (ASW) technologies, a clear and legitimate need exists for safeguards. Thus, when undertaken in tandem with efforts to invigorate the technological base, the denial strategy: makes it more difficult for the Soviet Union and its allies to upgrade their military systems through information, technology, and products acquired in the West; and requires the Soviet Union to commit substantial domestic resources to military research and development (R&D) rather than applying tech- nology acquired in the West or simply using the results of Western R&D to avoid the costly "dead ends" that are an inevitable part of the technological development process. In recent years the United States has pursued its policy with respect to national security export controls! during a period in which there have been dramatic alterations in the economic and technological environment - *The private sector, which is a vital source of military technology, sees some controls as essential and others as burdens. Government, on the other hand, does not incur directly the costs imposed on industry and therefore is less inclined to consider them. tThere is no standard, agreed-upon term for technology with military significance that is subject to control. Thus, a number of modifiers are used interchangeably throughout this report. tThe term national security export controls is used here and throughout this report in the same sense as that employed in the Export Administration Act of 1979, as amended. The act authorizes such controls "to restrict the export of goods and technology which would make a significant contribution to the military potential of any other country or combination of countries which would prove detrimental to the national security of the United States." National security export controls that relate primarily to military matters are distinguished

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30 BALANCING THE NATIONAL INTEREST that existed in the first few decades following the end of World War II. These changed circumstances have created a need for a broader definition of national security, a definition that recognizes explicitly the importance of maintaining the economic vitality and innovative capability of the United States and indeed of all Free World nations. Because the world economic and technological environment has changed, the panel believes that U.S. national security can be ensured only through the adoption and implementation of policies that simultaneously promote economic vital- ity, strengthen alliance relationships, and continue the maintenance of military preparedness. Such a broadened definition of national security also must take account of several important new factors in the international environment: Greater scientific and technological parity now exists among the most advanced industrialized countries. In many important areas, the United States-once preeminent in most major fields now shares technical leadership with other countries and therefore depends and must build on ideas and innovations developed abroad. Significant changes in the overall patterns of world trade are evidenced by the rapid emergence of major exporters among the newly industrializing countries (NICs), particularly along the Pacific rim. The result is that U.S. companies now face severe competition at home, from import penetration, and abroad, from an ever-widening circle of firms in both industrialized and industrializing countries that are vying for global markets. Although in the United States the domestic market continues to ab- sorb the majority of goods and services, foreign trade has become essential to maintaining continued economic vitality. U.S. companies-especially those operating in high-technology sectors are turning increasingly to export markets. Transnational business organizations headquartered in many industrialized countries have become commonplace to achieve economies of scale, maintain levels of technological innovation, facil- itate access to markets, and sustain profitable operations by dispersing production in a manner that lowers factor costs (e.g., labor, raw materials, etc.~. A variety of domestic and international factors have promoted a huge increase in U.S. imports, which has in turn contributed to the foreign trade deficit. Meanwhile, increasing competition for export markets among the Western industrialized countries has created an atmosphere that makes cooperation on export controls among those countries more difficult to achieve. from controls imposed for purposes of foreign policy or for protecting the domestic economy from the short supply of specific items.

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INTRODUCTION 3 ~ Juxtaposed against these new global circumstances are the continuing realities of the East-West political struggle and its inherent military competition. In Europe, the North Atlantic Treaty Organization (NATO) alliance continues to be the centerpiece of efforts to deter aggression by the Soviet Union and the other Warsaw Pact countries. In Asia, the United States maintains close diplomatic and military relations with Japan and South Korea and is promoting closer ties with the People's Republic of China and the Southeast Asian free market countries, in part to discourage possible Soviet initiatives in that region. In these circumstances the United States faces a policy dilemma of considerable proportions. The Western alliances depend on technological advantage to deter the Soviet Union and its allies. Moreover, Western military technology derives increasingly from technical advances in the commercial sector, advances that are the foundation for important dual use technology advantageous to the West. Because the Soviet Union now has attained numerical superiority over NATO in many important military categories, the potential loss of dual use technology has assumed greater strategic significance. Export controls are needed to help prevent the rapid erosion of this advantage, an advantage stemming in large measure from a vigorous, commercial high-technology sector that depends on innovation, competition, and trade for its strength. The rapid diffusion of technology, the importance of Western alliances, and the international character of high-technology industry all mean that: (1) export control can be neither perfect nor permanent, and (2) control policies must not interfere unnecessarily with Western commercial development and trade. The Technology-Security Nexus The Allied victory in World War II was made possible in large part by the mobilization of the enormous manufacturing capability of the United States. But outproducing the adversary as a military strategy presupposes an extended conflict. Since World War II, the existence of nuclear weapons has brought about an evolution of military thought. Much current thinking is that the outcome of a future global war, whether or not it involves the use of nuclear weapons, will depend more on the quality and quantity of the weapons and other war materiel on hand (or readily available for rapid mobilization and deployment) at the outbreak of hostilities than on the industrial capacity, of either side, that can be turned to military production. At the same time the social and political structure of the Soviet Union has permitted it to place continuing emphasis on its military posture. Total uniformed personnel and the numbers of many types of military

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32 BALANCING THE NATIONAL INTEREST equipment in the Warsaw Pact greatly exceed the numbers of comparable personnel and equipment in NATO in the European theater. For example, NATO placed its total rapidly deployable troop strength in 1984 at 2.6 million; the estimated Warsaw Pact rapidly deployable troop strength stood at 4 million. NATO forces had 13,470 rapidly deployable main battle tanks in 1984, as compared to an estimated 26,900 for the Warsaw Pact; the total of rapidly deployable artillery and mortar pieces was 11,000 for NATO as against an estimated 19,900 pieces for the Warsaw Pact. By all measures, therefore, the Western nations have been and are likely to continue to be substantially outnumbered in conventional military forces. Therefore, the NATO countries have affirmed the importance of maintaining a technological advantage to offset the numerical advantage of the Warsaw Pact. But maintaining technological superiority in military forces is not an easy task, due largely to competing demands for economic resources that make it difficult for Western societies to sustain the investment of sufficient resources in military R&D and procurement. In recent years, spurred in part by burgeoning commercial markets for high-technology goods, the West has been able to counter partially the numerical advantage of the Warsaw Pact countries through rapid progress in science and technology. A primary example is the explosion in electronic technology, including computers, that has occurred in commercial markets where many of the products also have important military applications. The United States has led but no longer dominates this revolution. Other Western indus- trialized nations have participated in and, particularly in the case of Japan, have taken the lead in selected areas. In addition, many newly industrializing countries (for example, the free market countries of the Pacific rim) are rapidly increasing their competence and are already competing effectively, albeit primarily at the lower end of the technology spectrum. The Soviet Union and its Warsaw Pact allies, on the other hand, with their controlled and sluggish civilian economies, have benefited much less from technological progress in the commercial sector. The Soviet Union has offset this disadvantage, however, by giving its military first priority in the allocation of resources. The Soviets have developed and fielded in large quantity some equipment in the European theater that rivals comparable NATO systems in technical sophistication (although typically such equipment is introduced later than in the West). The Western technology lead in military equipment, then, is critical to the maintenance of Western security. This lead is still significant and does not appear to be decreasing, but it is vulnerable to policies that dampen the continued development of the civilian market for high-technology

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INTROD UCTION 33 products in the United States and abroad and to procedures that inade- quately control the flow of militarily significant technology to the Soviet Union and its allies. The Current Challenge With increased awareness of Soviet efforts to acquire militarily signif- icant Western technology has come a renewed emphasis on promoting and protecting the West's technology lead. This emphasis extends to military technologies and also to dual use technologies. The need to Protect dual use technologies has created a new set of problems, precipitated by the perceived incompatibility between the execution of national security export controls and the realities of the global trading system. Among the new challenges confronting the United States are: the growing lag over the past decade between the development and application of new technologies in commercial products and the incor- poration of the same or related technologies into military systems; the attitudes of some European countries that, unlike the United States, see the political and economic advantages of certain types of trade with the Eastern bloc (e.g., "Ostpolitik") outweighing potential damage to military security; extension throughout the world of technology development and manu- facturing capacity, both by U.S. and foreign multinational companies, which has been driven by competitive pressures and has contributed to the growth of technology-intensive industries outside the United States; and greatly intensified competition for domestic and world markets, which has created an environment in which the negative effects of national security export controls can be detrimental to the health of elements of the U.S. economy. The net result of these challenges has been a growing debate over how to reconcile the conflicting values and objectives that are the basis for U.S. national security export controls. On the one hand the United States, as the leading free market democracy, is determined to protect fundamental Western security interests by denying the Soviet Union and its allies access to advanced technology that could substantially advance Eastern bloc military capabilities. On the other hand the United States is faced with expanding technological capabilities outside the CoCom* countries and with the imperatives of the global economy factors that - *Japan and all of the NATO countries except Iceland are members of the informal, nontreaty organization known as the Coordinating Committee on Multilateral Export Controls (CoCom). (See further details in Chapter 4.)

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34 BALANCING THE NATIONAL INTEREST make technology more broadly available and thus make it increasingly difficult to maintain controls on any but the most critical high-technology items. It was with a view to analyzing this conflict and its implications for national security export control policy that this study was undertaken. ORIGINS AND MANDATE OF THE STUDY The current study had its origins in 1984 when the 98th Congress failed to reach agreement on major new amendments to the expired Export Administration Act of 1979. At the time, government and industry leaders expressed mounting concern about the apparent polarization of attitudes toward the national security export control issue and the seeming conflict between the national interests in maintaining military security and pro- moting international trade. Within the federal government the develop- ment of policy for national security export controls continued to be contentious and highly divisive along lines of agency jurisdiction despite the existence of a senior interagency group charged with resolving such differences. Within the private sector the trade associations representing the industries most affected by the controls (e.g., electronics, computers, and scientific apparatus) were concerned enough to form the Industry Coalition on Technology Transfer to press the case for reform. There was in sum a clear need to move beyond the existing impasse toward a national policy that recognized fully the fundamental interests at stake. Given the central role of science and technology in the national security export control problem and the need for an independent assessment, the National Academy complex* represented an appropriate institution to undertake a comprehensive and objective assessment, especially in view of several major studies it had completed on related topics. For example, in 1982 the Academy complex's Committee on Science, Engineering, and Public Policy (COSEPUP) convened a special panel to determine whether U.S. security interests were being compromised by the open communi- cation of the results of basic research. The report of the resulting study, Scientific Communication and National Security2 (known as the Corson report after its chairman, Dale R. Corson), which appeared in September 1982, laid the basis for the development and release in 1985 of National Security Decision Directive (NSDD) 189. This directive restated the importance to the national interest of maintaining the open communica- tion of "fundamental" research within the constraints imposed by clas- sification or other existing law. At the time of its report, however, the *The National Academy complex includes the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine.

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INTROD UCTION 35 Corson panel indicated that there was another major dimension to the problem that it did not have the opportunity to examine in depth: namely, that of technology transferred as part of or in association with commercial activities. In other related activities, the Academy complex released a report in 1983 entitled International Competition in Advanced Technology: Decisions for America,3 and in 1985 the National Academy of Sciences published the proceedings of a special 2-day symposium, sponsored jointly with the Council on Foreign Relations, entitled Technological Frontiers and Foreign Relations.4 The leadership of the Academy complex decided to maintain its commitment to the issue by considering the national security implications of technology transfer beyond the stage of basic research. There have of course been other studies of various aspects of the national security export control problem undertaken outside the Acad- emy complex. Among the earliest and most influential of these was the 1976 report of the Defense Science Board Task Force on Export of U.S. Technology, An Analysis of Export Control of U.S. Technology- A DoD Perspective,5 known as the Bucy report after its chairman J. Fred Bucy (the major recommendations of that study are considered in Chapter 51. More recently the Center for Strategic and International Studies (CSIS) issued a report in 1985 entitled Securing Technological Advantage: Balancing Export Controls and Innovation;6 and the Business-Higher Education Forum published Export Controls: The Need to Balance National Objectives7 in 1986. The current study builds on the intellectual foundations of these past efforts, but it departs from or goes beyond them in several respects. To undertake the study, COSEPUP established the Panel on the Impact of National Security Controls on International Technology Transfer. The specific mix of individuals invited to serve on the panel was the result of a search process by the presidents of the National Academy of Sciences and the National Academy of Engineering with the object of ensuring balance, depth of expertise, and objectivity. The panel includes many individuals who have had substantial experience in government at the most senior levels pertaining to national security affairs; a number of others who have held senior posts in or contributed advice to the Intelligence Community; and still others who possess substantial legal expertise from relevant work both within and outside the government. Many hold (or have held) leadership positions in high-technology indus- tries. Four members of the current panel also served on the Corson panel mentioned above. COSEPUP charged the panel to "seek strategies to regulate the international transfer of technology through industrial channels in such a manner as to balance the national objectives of national security, eco

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36 BALANCING THE NATIONAL INTEREST nomic vitality, scientific and technological advance, and commercial, educational, and personal freedom."* The charge also stipulated the following panel tasks: (1) examination of the global technological envi- ronment, including the problem of controlling dual use technologies; (2) assessment of the control problem for the CoCom countries in terms of what was being lost through commercial channels, how it was being lost, and to whom; (3) evaluation of the effectiveness of CoCom; (4) consid- eration of the impacts on U.S. industry of current export control policies; and (5) examination of the current export control policies and procedures maintained by the U.S. government and by other CoCom and non- CoCom countries. The panel responded to the COSEPUP charge by mapping out and then pursuing an ambitious scope of work to fulfill its mandate. SCOPE OF THE PANEL'S WORK To carry out its specified tasks the panel and its professional staff undertook a broad agenda of research and briefings. The staff collected and analyzed available public literature and a large volume of restricted documents made available by the General Accounting Office and other government agencies (see the annotated bibliography in Appendix H). The panel invited representatives of all the federal agencies involved directly in the formulation or implementation of national security export control policy namely, the Departments of Defense, Commerce, State, Treasury (U.S. Customs Service), and Justice to appear before it. In addition the panel heard three classified briefings from the Intelligence Community, including one requiring high levels of clearance, and a briefing from the National Aeronautics and Space Administration (NASA) on technology transfer issues associated with the proposed space station. The panel's agenda also included a day of hearings devoted to the views of industry, with testimony offered by officials of both large and small companies representing a range of manufac- turing sectors, and a series of discussions with individuals who have had substantial experience with various aspects of national security export controls. (Appendix G includes a list of briefers and contributors and their affiliations.) Two panel foreign fact-finding missions constituted a second element of the study. In January 1986 delegations of the panel traveled to six European countries: Austria, Belgium, France, Great Britain, Sweden, and West Germany. In March 1986 other delegations visited five Asian *Appendix A is the complete text of the COSEPUP charge.

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INTRODUCTION 37 countries: Japan, Hong Kong, Malaysia, Singapore, and South Korea. In each country, panel members held frank and confidential meetings with government officials, industry leaders, academics, and other in- formed observers on export control matters. (Summary reports describ- ing the panel's foreign fact-finding missions are Appendix B of this volume.) A third element of the study involved the commissioning of a series of research reports prepared both by outside consultants and by the panel's professional staff. Some of these reports developed and analyzed new primary data; others reexamined existing problems from new perspec- tives. These reports are included here (see Appendixes C and D) and in a companion volume. FOCUS OF THE STUDY This study examines the current system of laws, policies, procedures, regulations, international agreements, and organizations referred to collectively as the national security export control regime that control the international transfer of technology through industrial channels. Where appropriate, it also recommends new approaches to balancing the national policy objectives of national security, scientific and technological advance, and economic vitality. In the course of its deliberations, the panel found it both useful and appropriate to limit the focus of its effort in the following respects: Concentration on impacts of controls on the Free World There is widespread agreement in the West that the sale of sophisticated Western technology to the Soviet bloc should be controlled. There is also widespread agreement that trade among the Free World countries should be restricted as little as possible. Consequently, it is generally accepted that the decision to impose national security restrictions on trade within the West should depend on whether such sales are likely to result, directly or indirectly, in a transfer of militarily significant goods or technology to the Soviet bloc. Thus, the focus of this report is on the effects of national security export controls on the technological development and economic vitality of the Free World countries. Focus on dual use goods and technology Soviet military capability can be enhanced by the export of certain dual use goods and technology, as well as directly by military hardware (i.e., munitions). The Export Administration Act, as amended, establishes a system of national security export controls that is intended to regulate the flow of dual use items. Exports of military hardware are controlled under the terms of the Arms Export Control Act; this part of the system appears to function well. The

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38 BALANCING THE NATIONAL INTEREST current study focuses primarily on the problems associated with the control of dual use items rather than of munitions. Diversion and espionage Items subject to U.S. national security export controls are sometimes diverted from their approved destination or end user, either directly or through intermediaries, to the Soviet bloc. Preventing such diversions is a major objective of U.S. export (and reexport) controls, and this problem is discussed extensively in this report. Espionage is another extremely serious channel for the loss of militarily critical technology and information; it is not, however, addressed in detail here because national security export controls are unlikely to affect directly the outcome of covert operations. The panel is deeply concerned, as are most citizens, about the evidence of serious loss due to espionage; it is clear that Soviet success in espionage can circumvent controls for commercial dual use technology. This report, however, focuses on national security export controls, which are only one element of the broader measures required by the West to protect militarily critical technology. Other limitations At least three other important subjects were determined to lie outside the panel's frame of reference. First, although obviously an important determinant of technology lead in military sys- tems, the panel did not examine in detail the problem of deficiencies in the U.S. military procurement process. This matter has received substantial recent attention,8 and, although the results were considered by the panel, no additional analysis was deemed necessary or feasible. Second, the panel was not charged to consider other applications of export controls, including foreign policy and short supply constraints. Foreign policy export controls in particular may occasionally become intertwined or confused with national security export controls. One example is the case of controls imposed on the export of pipeline technology to the Soviet Union following the imposition of martial law in Poland. Foreign policy controls were not examined by the panel, however, except to the extent that they affect the effective functioning of the national security export control regime. Finally, this report does not address the problems associated with exports to particular nations outside the Soviet bloc such as Libya or Syria. Despite these necessary limitations in focus, the panel examined the details of the national security export control system, considered a wide spectrum of issues, and heard arguments for both expanded and reduced national security export controls. It has examined these positions care- fully with one goal in mind: to discern what types of national security export controls are reasonable and practicable in light of the new economic and technological realities that confront the United States in the final years of the twentieth century.

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INTRODUCTION 39 ORGANIZATION OF THE REPORT The panel's report comprises eight chapters and eight appendixes. Chapter 2 provides evidence on the technology transfer problem at the unclassified level, while Chapter 3 analyzes the changing global techno- logical and economic environment in which national security export controls must operate. Chapter 4 describes U.S. national security export controls and lays out the dimensions of the multilateral control system. Chapters 5 and 6 in turn assess the effectiveness of the U.S. and multilateral national security export processes. The report concludes by presenting the panel's findings and key judgments in Chapter 7 and its recommendations in Chapter 8, followed by eight appendixes of supple- mentary materials. NOTES 1. U.S. Department of Defense, Soviet Military Power, 1985 (Washington, D.C.: U.S. Government Printing Office, 1985), p. 77. 2. National Academy of Sciences, Scientific Communication and National Security (Wash- ~ngton, D.C.: National Academy Press, 1982). 3. National Research Council, Panel on Advanced Technology Competition and the Industrialized Allies, International Competition in Advanced Technology: Decisions for America (Washington, D.C.: National Academy Press, 1983). 4. National Research Council, Office of International Affairs, Technological Frontiers and Foreign Relations (Washington, D.C.: National Academy Press, 1985). 5. U.S. Department of Defense, Office of the Director of Defense Research and Eng~neer- ing, An Analysis of Export Control of U.S. Technology-A DoD Perspective (Report of the Defense Science Board Task Force on Export of U.S. Technology) (Washington, D.C.: U.S. Government Printing Office, 1976). 6. Stephen A. Merrill, ea., Securing Technological Advantage: Balancing Export Controls and Innovation (Washington, D.C.: Center for Strategic and International Studies, Georgetown University, 1985). Business-Higher Education Forum, Export Controls: The Need to Balance National Objectives (Washington, D.C., 1986). 8. See in this regard the President's Blue Ribbon Commission on Defense Management (also known as the Packard commission), A Quest for Excellence: Final Report to the President (Washington, D.C.: U.S. Government Printing Office, 1986). 7.