[Senate Hearing 106-1104]
[From the U.S. Government Publishing Office]


                                                       S. Hrg. 106-1104
 
               S. 1712, EXPORT ADMINISTRATION ACT OF 1999

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 4, 2000

                               __________

    Printed for the use of the Committee on Commerce, Science, and 
                             Transportation








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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virginia
KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine              JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
SAM BROWNBACK, Kansas                MAX CLELAND, Georgia
                       Mark Buse, Staff Director
                  Martha P. Allbright, General Counsel
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel











                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held April 4, 2000.......................................     1
Statement of Senator Gorton......................................     5
    Prepared statement...........................................     5
Statement of Senator McCain......................................     1
    Prepared statement...........................................     3

                               Witnesses

Bodner, James M., Principal Deputy Under Secretary of Defense 
  (Policy).......................................................    20
    Prepared statement...........................................    22
Douglass, John W., President and CEO, Aerospace Industries 
  Association....................................................    40
    Prepared statement...........................................    43
Enzi, Michael B. Hon., U.S. Senator from Wyoming.................    15
    Prepared statement...........................................    18
Holum, John D., Senior Advisor for Arms Control and International 
  Security Affairs, U.S. Department of State.....................    24
    Prepared statement...........................................    25
Reinsch, William A., Under Secretary for Export Administration, 
  U.S. Department of Commerce....................................    27
    Prepared statement...........................................    31
Schneider, William Jr., Adjunct Fellow, Hudson Institute.........    52
    Prepared statement...........................................    54
Thompson, Fred, Hon., U.S. Senator from Tennessee................     6
    Prepared statement...........................................    10

                                Appendix

Response to written questions by Hon. John McCain:
    James M. Bodner..............................................    61
    John D. Holum................................................    63
    William, A. Reinsch..........................................    64















               S. 1712, EXPORT ADMINISTRATION ACT OF 1999

                              ----------                              


                         TUESDAY, APRIL 4, 2000

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:30 p.m. in room 
253, Russell Senate Office Building. Hon. John McCain, Chairman 
of the Committee, presiding.

            OPENING STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    The Chairman. Good afternoon. We are here today to hear 
testimony about the proposed Export Administration Act. I am 
pleased to welcome our panelists, who are well informed about 
this topic and who can share with us their different 
perspectives.
    Attaining and maintaining the correct balance between 
globalized trade and protection of our national security is one 
of the greatest challenges of our time. As important as the 
substantive determination of what is the right amount of 
technology transfer to be allowed is the establishment of a 
process which assures necessary checks and balances to result 
in the right substantive balance. The balance to be struck 
between trade and national security is often hard to determine, 
particularly as technologies are produced and refined ever more 
quickly. A process that assures a complete, competent, 
technical and policy review, may not move at the ``Internet 
time'' pace that industry desires. Still, compromise on the 
process in order to meet the demands of trade may unfortunately 
result in compromised national security.
    We are all well aware of some of the flaws of the current 
export system. Numerous congressional hearings, including one 
held by this Committee in September 1998, have documented 
security lapses and illegal or ill-advised technology transfers 
to China. The highly publicized problems with satellite 
technology transfers and the apparent linkage to the 1999 
campaign finance scandals have created an appearance of 
impropriety that demands close scrutiny of this export 
administration authorizing legislation.
    It is critical that no aspect of this balancing be driven 
by, or perceived to be driven by, political contributions or 
influence. There will be no credibility behind decisions 
regarding particular export licenses if the process can be 
distorted, controlled, influenced or biased by improper 
motivations. Our country will have no confidence that national 
security is being protected if decisions are made in favor of 
industry as a result of campaign contributions.
    Additionally, investigations by the Inspector Generals of 
the Departments of Defense, State, and Commerce identified 
problems in June 1999 which must be addressed fully by the 
legislation in order to achieve the balance necessary to ensure 
passage. The Cox Committee recommendations, along with the 
Inspector Generals' recommendations, highlight specific areas 
of inquiry and revision to avoid future improprieties or errors 
in export decisions.
    Some of the most pressing questions about the current 
process, and how S. 1712 would address the same issues, include 
whether adequate time frames exist for referral of license 
applications, whether appropriate referrals are being made by 
the Department of Commerce for commodity classifications, as 
well as for license applications, whether deemed exports are 
being appropriately controlled, whether the appeal process is 
biased, how cumulative impacts of licensing decisions are 
addressed, whether adequate monitoring and enforcement of 
license conditions is occurring, and whether sufficient 
training is provided to licensing officers in each of the 
agencies.
    One example of problems in the current process that must be 
remedied in new legislation relates to commodity classification 
referrals from Commerce to State and the Department of Defense 
(DOD). The June 1999 Inspector General report notes that out of 
the thousands of commodity classification requests submitted to 
the Department of Commerce (DOC) between April 1996 and March 
1999, the Commerce Department referred only 12 of the requests 
to DOD for input. A sampling of items which were not referred, 
and which DOD thought should have been, included two items 
which could likely be munitions items.
    The IGs from both DOC and DOD concurred that this lack of 
referral is a problem. To quote the IG's report, ``The first 
request was for a ruggedized, portable, encrypted radio. 
Commerce officials stated that the radio had not been built to 
military standards and therefore was not a munitions item under 
the jurisdiction of the International Traffic in Arms 
Regulations. DOD officials stated that the literature described 
the radio as militarized and that other radios built by the 
manufacturer were subject to munitions export licenses. The 
second request was for the antenna. Commerce officials stated 
that the antenna was not a munitions item, despite company 
literature describing it as militarized. DOD officials stated 
that the literature satisfied International Traffic in Arms 
Regulations criteria for a `defense article' and that the 
manufacturer had a history of exporting products under the 
munitions export licensing process.''
    Clearly under the current export process, the Department of 
Commerce has a great deal of discretion to decide when or 
whether to refer a commodity classification request. This broad 
discretion has resulted in a dearth of referrals--and has in 
fact resulted in classification decisions which are incorrect. 
How does the process proposed in S. 1712 change this balance or 
provide additional checks and balances on the discretion of 
Commerce?
    Similarly, the 1999 IG Report identified a bias in the 
appeal process as a potential problem, at least in some cases. 
The IG for the Department of Commerce concurred that the appeal 
committee chair had felt pressured by the Department of 
Commerce management to decide some cases in favor of Commerce, 
regardless of the input from other agencies. While Commerce 
officials disputed that there had been any undue influence, the 
IG concluded that it is critical to the process that the appeal 
chair be considered objective, and recommended that such 
influence was not appropriate. How does the process that would 
be established in S. 1712 avoid any appearance of bias or 
impropriety in the appeal process?
    There are many other examples. I'd like to get specific 
answers to how the proposed legislation addresses these issues, 
as well as the other recommendations made by the IGs and the 
Cox Committee.
    We also cannot look at dual-use commodity exports in a 
vacuum. While this legislation covers only dual-use 
commodities, we should consider how our policy and process on 
these dual-use items compares with satellites, munitions and 
other items covered by different statutes and regulations. Can 
the overall policy and national security interest be 
gerrymandered simply by reclassifying items or defining items 
differently? Can the Secretary of Commerce negate a 
classification unilaterally, or can any of the other agencies? 
If we are to achieve our dual goals of promoting free trade 
while protecting national security, we must be consistent and 
clear in our licensing programs. I am anxious to hear testimony 
that will address this concern.
    I appreciate the difficulties in balancing which products 
or services can be exported without damaging national security. 
These are important and increasingly complex decisions in a 
world with rapidly changing technologies, demands for exports, 
and changes in foreign situations. I appreciate the effort that 
has gone into attempting to balance all of the competing 
interests in this legislation. Our task today is to produce a 
review of problems which have been identified before and 
consider whether they have been adequately addressed. And I 
thank the witnesses for being here today and look forward to 
their testimony. Senator Gorton?
    [The prepared statement of Senator McCain follows:]

                Prepared Statement of Hon. John McCain, 
                       U.S. Senator from Arizona
    We are here this afternoon to hear testimony about the proposed 
Export Administration Act. This is a matter of great importance. I am 
pleased to welcome our panelists who are well informed about this topic 
and who can share with us their differing perspectives.
    Attaining and maintaining the correct balance between globalized 
trade and protection of our national security is one of the greatest 
challenges of our time. As important as the substantive determination 
of what is the ``right'' amount of technology transfer to be allowed, 
is the establishment of a process which assures necessary checks and 
balances to result in the right substantive balance. The balance to be 
struck between trade and national security is often hard to determine, 
particularly as technologies are produced and refined ever more 
quickly. A process that assures a complete, competent technical and 
policy review, may not move at the ``Internet time'' pace that industry 
desires. Still, compromise on the process in order to meet the demands 
of trade may unfortunately result in compromised national security.
    We are all aware of some of the flaws of the current export system. 
Numerous Congressional hearings, including one held by this Committee 
in September 1998, have documented security lapses and illegal or ill-
advised technology transfers to China. The highly publicized problems 
with satellite technology transfers and the apparent linkage to the 
1996 campaign finance scandals have created an appearance of 
impropriety that demands close scrutiny of this export administration 
authorizing legislation.
    It is critical that no aspect of this balancing be driven by, or 
perceived to be driven by, political contributions or influence. There 
will be no credibility behind decisions regarding particular export 
licenses if the process can be distorted, controlled, influenced or 
biased by improper motivations. Our country will have no confidence 
that national security is being protected if decisions are made in 
favor of industry as a result of campaign contributions.
    Additionally, investigations by the Inspector Generals of the 
Departments of Defense, State and Commerce identified problems in June 
1999 which must be addressed fully by the legislation in order to 
achieve the balance necessary to ensure passage. The Cox Committee 
recommendations, along with the Inspector General Recommendations, 
highlight specific areas of inquiry and revision to avoid future 
improprieties or errors in export decisions.
    Some of the most pressing questions about the current process, and 
how S. 1712 would address the same issues, include whether adequate 
time frames exist for referral of license applications, whether 
appropriate referrals are being made by the Department of Commerce for 
commodity classifications, as well as for license applications, whether 
``deemed exports'' are being appropriately controlled, whether the 
appeal process is biased, how cumulative impacts of licensing decisions 
are addressed, whether adequate monitoring and enforcement of license 
conditions is occurring, and whether sufficient training is provided to 
licensing officers in each of the agencies.
    One example of problems in the current process that must be 
remedied in new legislation relates to commodity classification 
referrals from Commerce to State and the Department of Defense. The 
June 1999 Inspector General report notes that out of the thousands of 
commodity classification requests submitted to the Department of 
Commerce, between April 1996 and March 1999, Commerce referred only 12 
of the requests to DOD for input. A sampling of items which were not 
referred, and which DOD thought should have been, included two items 
which could likely be munitions items.
    The IGs from both DOC and DOD concurred that this lack of referral 
is a problem. To quote the IG's report, ``The first request was for a 
ruggedized, portable, encrypted radios. Commerce officials stated that 
the radio had not been built to military standards and therefore was 
not a munitions item under the jurisdiction of the International 
Traffic in Arms Regulations. DOD officials stated that the literature 
described the radio as militarized and that other radios built by the 
manufacturer were subject to munitions export licenses. The second 
request was for an antenna. Commerce officials stated that the antenna 
was not a munitions item, despite company literature describing it as 
militarized. DOD officials stated that the literature satisfied 
International Traffic in Arms Regulations criteria for a `defense 
article' (munitions) and that the manufacturer had a history of 
exporting products under the munitions export licensing process.''
    Clearly under the current export process, the Department of 
Commerce has a great deal of discretion to decide when or whether to 
refer a commodity classification request. This broad discretion has 
resulted in a dearth of referrals--and has in fact resulted in 
classifications decisions which are incorrect. How does the process 
proposed in S.1712 change this balance or provide additional checks and 
balances on the discretion of Commerce?
    Similarly, the 1999 IG Report identified a bias in the appeal 
process as a potential problem, at least in some cases. The IG for the 
Department of Commerce concurred that the appeal Committee chair had 
felt pressured by DOC management to decide some cases in favor of 
Commerce, regardless of the input from other agencies. While Commerce 
officials disputed that there had been any undue influence, the IG 
concluded that it is critical to the process that the appeal chair be 
considered objective, and recommended that such influence was not 
appropriate. How does the process established in S.1712 avoid any 
appearance of bias or impropriety in the appeal process?
    There are many other examples. I would like to get specific answers 
to how the proposed legislation addresses these issues, as well as the 
other recommendations made by the IGs and the Cox Committee.
    We also cannot look at dual-use commodity exports in a vacuum. 
While this legislation covers only dual-use commodities, we should 
consider how our policy and process on these dual-use items compares 
with satellites, munitions and other items covered by different 
statutes and regulations. Can the overall policy and national security 
interest be gerrymandered simply by reclassifying items, or by defining 
items differently? Can the Secretary of Commerce negate a 
classification unilaterally? Or can any of the other agencies? If we 
are to achieve our dual goals of promoting free trade while protecting 
national security we must be consistent and clear in our licensing 
programs. I am anxious to hear testimony that will address this 
concern.
    I appreciate the difficulties in balancing which products or 
services can be exported without damaging national security. These are 
important and increasingly complex decisions in a world with rapidly 
changing technologies, demands for exports, and changes in foreign 
situations. I appreciate the hard effort that has gone into attempting 
to balance all of the competing interests in this legislation. Our task 
today is to provide a review of problems which have been identified 
before and consider whether they have been adequately addressed.
    Again, I thank the witnesses for being here today and look forward 
to their testimony.

                STATEMENT OF HON. SLADE GORTON, 
                  U.S. SENATOR FROM WASHINGTON

    Senator Gorton. Thank you, Mr. Chairman. I find it rather 
frustrating that we have not been able to deal with this issue 
decisively. It raises questions both with respect to national 
security and with respect to our trade policies at a time when 
we are subject to more and more foreign competition. It is 
difficult, extremely difficult, for our export industries to 
operate under the present set of circumstances. Since the 
expiration of the Export Administration Act more than 5 years 
ago, the administration has been forced to impose export 
controls that have not entirely prohibited our high-tech 
communities and aerospace industries from prospering overseas.
    Certainly we shouldn't compromise national security or 
relax controls that are necessary to ensure the safety of our 
nation and of our foreign relations. At the same time, export 
controls are utilized for billions of dollars worth of overseas 
sales. We need to strike a balance and I think we need to 
strike it promptly. I support those efforts to strike this 
needed balance, and I think particularly that Senator Enzi and 
Senator Graham crafted a bill that does properly deal with 
security-oriented provisions and ensures that the Secretary of 
Commerce obtain concurrence from Defense with the creation of a 
national security control list that provides additional 
penalties, and for a timely and accurate review of license 
applications.
    I understand they have also made certain compromises with 
those that feel that the national security provisions in their 
bill do not go far enough, but I have every hope that we will 
reach such an accommodation and that we will do so promptly so 
that we can move forward in a way that is both valuable to our 
economic interests and does not derogate from our security 
interests.
    [The prepared statement of Senator Gorton follows:]

               Prepared Statement of Hon. Slade Gorton, 
                      U.S. Senator from Washington
    While it is unfortunate that Congress has been unable to 
reauthorize the expired Export Administration Act, it is quite clear 
that the longer we loom on this subject matter, the more difficult it 
becomes for our major trade dependent communities that rely on export 
control guidelines to conduct business overseas. It places these 
advancing industries in a dangerous state of flux, while at the same 
time we require the Administration to establish these weighty and 
detailed guidelines on their behalf. Meanwhile, all parties involved 
are expected to accomplish these significant tasks with the utmost 
interest of national security in mind.
    Since the expiration of the Export Administration Act in 1994, the 
Administration has been forced to impose export control measures that 
thankfully have not entirely prohibited our high-tech communities and 
aerospace industries from prospering overseas. Without question the 
United States should not compromise national security interests or 
relax those controls necessary to ensure the safety and longevity of 
international trade or foreign relations. However, recognizing export 
controls are utilized for billions of dollars worth of overseas sales, 
we do need to strike a balance between maintaining the sanctity of our 
national security while permitting trade to flourish.
    I support those efforts to strike this needed balance, and in 
particular believe that Senators Gramm and Enzi have crafted the basis 
of a bill that not only adds security related provisions, but ensures 
that the Secretary of Commerce obtain concurrence from the Secretary of 
Defense with the creation of the National Security Control List, 
provides for the increase in penalties and the necessary addition of 
investigators, provides for the timely and accurate review of license 
applications, and includes a host of other provisions that address 
these serious concerns.
    I understand there is ongoing deliberation and negotiations between 
the parties of differentiating views on this legislation regarding 
national security interests, foreign trade desires, and the general 
future of export controls. I sincerely hope that those parties involved 
will be successful in establishing this balance necessary for the U.S. 
to compete and remain secure in a world economy.

    The Chairman. I welcome my two colleagues. We will begin 
with Senator Thompson. Thank you for being here today and thank 
you for your involvement in this issue as chairman of a 
committee that has important oversight of this issue, and one 
who has a clear understanding about some of the events that 
took place in the past, which caused, in the view of this 
Senator at least, significant allegations concerning transfer 
of national security technology to China. I thank you, Senator 
Thompson.

 STATEMENT OF HON. FRED THOMPSON, U.S. SENATOR FROM TENNESSEE, 
              CHAIRMAN, U.S. SENATE COMMITTEE ON 
                      GOVERNMENTAL AFFAIRS

    Senator Thompson. Thank you very much, Mr. Chairman. And I 
think that you hit the nail on the head when you said that we 
are here to attempt to balance legitimate interests that we all 
have. Commerce and trade on the one hand, national security on 
the other. I think that this hearing and hearings like this one 
will go a long way toward that. In August of 1998, after many 
of the administration's various export control problems came to 
light, I wrote to the Inspector Generals at six Federal 
agencies, Commerce, Defense, State, Treasury, Energy and the 
CIA, and I asked them to take a comprehensive review of U.S. 
export control practices and then report their findings back to 
the Governmental Affairs Committee, which I chair.
    Their reports and testimony reveal a system full of holes, 
one that I am afraid clearly favors trade over national 
security. Their findings we can talk about in some detail if we 
need to, but they go into my thinking as we approach S. 1712., 
whose predecessor expired in 1994, establishes an export 
licensing policy for dual-use items--equipment, materials, 
technology and know-how that can be used for both commercial 
and military purposes. In the wrong hands, these items can be 
used to build weapons of mass destruction, ballistic missiles 
and other military-related items that threaten the United 
States.
    The Export Administration Act's sponsors argue that this 
bill brings the United States' export policies out of the Cold 
War era and adapts them to the strategic and commercial 
realities of the 21st century. They contend that this bill 
protects national security while freeing American businesses to 
remain competitive in the global marketplace. I respectfully 
disagree.
    The world today is different than it was 10 years ago. The 
collapse of the USSR reduced tensions, opened new markets, and 
set the stage for dynamic growth in global trade. The 
technological genie is definitely out of the bottle and nobody 
even wants to try to put it back in again. The integration of 
economics linked to growing markets abroad and the increasing 
availability of advanced technologies have made it more and 
more difficult to try to control these dual-use items for 
national security reasons. Nowhere has this tension been more 
pronounced than in the computer industry, for example.
    But since the end of the cold war, there is another part of 
this new world equation. And that is that in the new world we 
are living in, we also have additional threats to our country 
that have actually increased due to the proliferation of 
weapons of mass destruction and the means to deliver them. This 
has been verified repeatedly by the U.S. intelligence community 
and outside groups like the Rumsfeld Commission and the Deutch 
Commission.
    These threats have been advanced in large part because of 
the misuse or diversion of sensitive dual-use items such as 
high-performance computers and advanced machine tools that are 
often critical to weapons construction, development and 
testing.
    The Cox Committee, for example, found that with regard to 
China, our export control policies have facilitated the PRC's 
obtaining of militarily useful technology. With regard to the 
PRC, which has been described by the U.S. intelligence 
community as perhaps the worst proliferator of weapons of mass 
destruction and missile technologies in the world, according to 
the Cox Committee, high-performance computers are essential to 
China's nuclear weapons, ballistic missile, intelligence 
collection and other military programs. The report added that 
the PRC is convinced that the United States has the most 
advanced high-performance computer technology and that they 
seek to acquire as much of it as they can for their military 
programs.
    The Cox Committee report also stated that the Clinton 
Administration's relaxation of U.S. export controls, poor 
administrative oversight, and failure to investigate and punish 
export violators have made matters worse. It is no secret that 
the licensing requirements for high-performance computers sold 
explicitly for military use to countries like China and 
Pakistan have been raised by the Clinton Administration from 
2,000 million theoretical operations per second, MTOPS, in 
1995, to 12,500 MTOPS today, giving the People's Liberation 
Army an unprecedented capability to design and build advanced 
weapons the United States has yet to field. Even more 
outrageous is the fact that ostensibly civilian end users in 
China, as if there are any, can purchase computers rated at 
20,000 MTOPS, which can give researchers the ability to conduct 
nuclear blast simulations.
    This brings us right back to the Export Administration Act 
and the need to balance trade and security. The problem with 
the bill reported out of the Senate Banking Committee is that 
it codifies the worst practices of the Clinton Administration 
and then liberalizes some of them further. It would give 
unprecedented authority to the Secretary of Commerce. It would 
bind the hands of the President in controlling exports and 
conducting foreign policy in ways that I do not think we 
should. The President can take action, but it provides hoops 
that he has to jump through before he can take action on behalf 
of national security. And among other things it creates two new 
legal categories that would exempt dual-use items from export 
controls: foreign availability, and mass market status.
    In other words, if these items fall into those two new 
categories created by this bill, there is no export control. 
They are vague and subjective standards that have been 
challenged by the GAO and others. And what constitutes mass 
marketing? Well, the Department of Commerce relying upon 
technical people within the department, but essentially the 
Department of Commerce decides what constitutes a mass marketed 
item. In other words, if a sensitive item is produced abroad or 
manufactured and marketed in sufficient numbers here in the 
United States, such as high-performance computers, this bill 
would prohibit export controls on sales to even countries like 
China or Pakistan.
    By assuming that the threats to our national security are 
minimal, that dual-use items are impossible to control, and 
that U.S. businesses are suffering under the weight of onerous 
export controls, the bill would remove, I believe, the checks 
and balances critical to an effective export control system.
    And the fact is that dual-use items can be controlled. The 
keys to an effective export control system are simple. Clear 
rules, trained staff, state-of-the-art resources, intensive 
background checks, rigorous post-shipment verifications, and 
tough enforcement. The Governmental Affairs Committee, as I 
mentioned, discovered in our hearings last summer that I 
referred to that the Commerce Department has failed on all 
counts. In fact, out of 190 high-performance computers shipped 
to China in 1998, a post-shipment verification was conducted on 
only one of them.
    It is absurd to suggest we should now loosen our export 
administration system because the administration has not 
bothered to implement it properly. The Cox Committee also 
pointed out that, when dealing with this question of post-
shipment verification, that we finally did, our country finally 
did reach an agreement with the Chinese that would allow post-
shipment verification. They said we were not doing more than we 
were doing because the Chinese would not let us, and so finally 
we did get tough enough to say in 1998, we demanded an 
agreement of some kind to allow us some post-shipment 
verification. So apparently we have struck an agreement, but 
the administration will not make it public. They refuse to make 
the agreement public, apparently, according to the Cox Report, 
because the Chinese demand that we not make it public to our 
own citizens. But the Cox Report does go so far as to say they 
have looked at it and found it inadequate.
    And even if sensitive items like high-performance computers 
can be smuggled out of the country or bought at Radio Shack, 
there is no reason to let potential adversaries or 
proliferators buy them in volume, and acquire service and 
technical support from our best suppliers. Export licenses not 
only place controls on commodities, they are an invaluable 
intelligence collection mechanism. They help us track what 
dual-use items are being used for, who is using them and how 
much, and how such items might be configured with other 
sensitive items to advance a country's military weapons of mass 
destruction programs. This is important information to have 
when you are defending the Nation.
    Finally, export controls, respectfully, are not hurting 
businesses or dampening the economy. That is not to say, and I 
am sure it would not be valid to say, that there are not some 
administrative hurdles, there are not some time delays, there 
are not some egregious circumstances which cannot be justified. 
Clearly all of this needs to be looked at, and where those 
things are present with regard to nonsensitive items, we need 
to do something about that in this mix also. That is not what 
we are talking about.
    Fewer than 1 percent of all exports today require licenses 
and roughly 90 percent of these license applications are 
approved. The Congressional Research Service, Congress's own 
nonpartisan research branch, estimates the range of economic 
loss due to export controls is between $2 to $4 billion 
annually. That is .04 percent of our $9.2 trillion GDP last 
year. It is a small price to pay for the benefits of making it 
harder for rogue nations and others to acquire weapons of mass 
destruction and missile capabilities, and only a small fraction 
of what it may ultimately cost to build missile defense systems 
and acquire other materials necessary to defend against the 
weapons that these dual-use items may help create.
    Obviously, we are going to have to do all of the above now 
because we are learning--the CIA and Rumsfeld Commission, and 
all the others are reminding us on a very regular basis--that 
weapons of mass destruction continue to proliferate. There are 
a rapidly developing number of rogue nations, of course, which 
have the capability and means of hitting our troops, hitting 
our allies, and shortly, the capability of hitting us.
    Mr. Chairman, I am a strong believer in free trade. It has 
been both an engine of growth and prosperity for our great 
nation since its birth and has created incredible opportunities 
for millions of Americans. But when it comes to national 
security, we have to draw the line. I simply believe that 
rather than loosening export controls now, we should be 
tightening them.
    Now, I am dealing here with a moving target because Senator 
Enzi, my friend here, knows we have been in discussions about 
this bill. I am not sure where we stand on it now. If I have 
mischaracterized any recent changes, he can straighten me out. 
But the Chairman of the Armed Services Committee, Chairman of 
the Foreign Relations Committee, Chairman of the Intelligence 
Committee and myself have all had concerns about this. We still 
have concerns about this bill that have not yet been satisfied, 
basically having to do with the involvement of the defense 
community with regard to some of these decisions.
    Export controls are a complex issue which require further 
study and debate. This matter has also been complicated by the 
mistrust between Congress and the administration with regard to 
export controls and trade promotion, especially when it 
involves China. The Chairman referred to the fact that we went 
through this controversy about sending this authority, taking 
it away from State and sending it over to Commerce, including 
jet engine hot section technology, satellites and all of that.
    We had the Hughes/Loral scandal that is under criminal 
investigation now. Hughes/Loral is apparently going in for 
another contract while under investigation. Congress got 
involved, transferred that authority back from Commerce to the 
munitions list at State. All of that has gone on. It is been 
held that it damaged national security, the Hughes/Loral 
situation.
    That is the backdrop, and it has created an atmosphere of 
distrust with regard to this Administration's handling of these 
export control matters.
    I simply think that rather than rushing the controversial 
bill--with significant national security implications--through 
Congress in an election year, that we should postpone this 
legislation until next year, when we can hopefully get together 
and through hearings such as this, come to some agreements that 
will reauthorize the Export Administration Act, which I think 
needs to be done, too. We should not be operating in an area of 
this importance on the basis of Executive Orders, and these 
exporters need some clarity, but we also need to make sure in 
the very beginning of the process that all those with national 
security concerns who have had hearings and have had experience 
are at the table in the beginning, so that those interests can 
be considered, too. I thank the Chairman.
    [The prepared statement of Senator Thompson follows:]

Prepared Statement of Hon. Fred Thompson, U.S. Senator from Tennessee, 
        Chairman, U.S. Senate Committee on Governmental Affairs

    Later this year, the Senate may consider the Export 
Administration Act (EAA) of 1999. This legislation, whose 
predecessor expired in 1994, establishes export licensing 
policy for ``dual-use'' items--equipment, materials, 
technology, and know-how that can be used for both commercial 
and military purposes. In the wrong hands these items can be 
used to build weapons of mass destruction (WMD), ballistic 
missiles, and other military- related items that threaten the 
United States.
    The EAA's sponsors argue that this bill brings the United 
States' export policies out of the Cold War era and adapts them 
to the strategic and commercial realities of the 21st Century. 
They contend that this bill protects national security while 
freeing American businesses to remain competitive in the global 
marketplace. I disagree.
    The world today is different than it was ten years ago. The 
collapse of the USSR reduced tensions, opened new markets, and 
set the stage for dynamic growth in global trade. The 
integration of economies, linked to growing markets abroad, and 
the increasing availability of advanced technologies have made 
it more and more difficult to try to ``control'' these ``dual-
use'' items for national security reasons. Nowhere has this 
tension been more pronounced than in the computer industry.
    But since the end of the Cold War, the threats to our 
country have actually increased due to the proliferation of 
weapons of mass destruction and the means to deliver them. This 
has been verified repeatedly by the U.S. Intelligence Community 
and outside groups like the Rumsfeld and Deutch Commissions. 
These threats have been advanced in large part due to the 
misuse or diversion of sensitive ``dual use'' items-such as 
high performance computers (HPCs) and advanced machine tools--
that are often critical to a weapon's construction, 
development, or testing.
    Take, for example, the People's Republic of China (PRC), 
which has been described by the U.S. Intelligence Community as 
perhaps the worst proliferator of WMD and missile technologies 
in the world. According to the Cox Committee report, HPCs are 
essential to China's nuclear weapons, ballistic missile, 
intelligence collection and other military programs. The report 
adds that ``The PRC is convinced that the United States has the 
most advanced HPC technology'' and that the PRC ``seeks to 
acquire as much of it as it can'' for its military programs.
    The Cox Committee report also stated that the Clinton 
Administration's relaxation of US export controls, poor 
administrative oversight, and failure to investigate and punish 
export violators have made matters worse. It is no secret that 
the licensing requirements for HPCs being sold explicitly for 
military use to countries like China and Pakistan, have been 
raised by the Clinton Administration from 2,000 million 
theoretical operations per second (MTOPS) in 1995 to 12,500 
MTOPS today, giving the People's Liberation Army an 
unprecedented capability to design and build advanced weapons 
the United States has yet to field. Even more outrageous is the 
fact that ostensibly ``civilian'' end users in China--as if 
there are any--can purchase computers rated at 20,000 MTOPS, 
which can give researchers the ability to conduct nuclear blast 
simulations.
    This brings us right back to the Export Administration Act 
and the need to balance trade and security. The problem with 
the bill reported out of the Senate Banking Committee is that 
it codifies the worst practices of the Clinton Administration, 
and then liberalizes them even further. It would give 
unprecedented authority to the Secretary of Commerce; bind the 
hands of the President in controlling exports and conducting 
foreign policy; and, among other things, create two new legal 
categories that would exempt ``dual-use'' items from export 
control: ``foreign availability'' and ``mass market status''--
vague and subjective standards that have been challenged by the 
GAO and others. In other words, if a sensitive item is produced 
abroad or manufactured and marketed in sufficient numbers here 
in the United States--such as high performance computers--this 
bill would prohibit export controls on sales to even countries 
like China or Pakistan.
    By assuming that the threats to our national security are 
minimal, that ``dual use'' items are impossible to control, and 
that U.S. businesses are suffering under the weight of onerous 
export controls, the bill would remove the checks and balances 
critical to an effective export control system.
    The fact is, dual use'' items can be controlled. The keys 
to an effective export control system are simple: clear rules, 
trained staff, state of the art resources, intensive background 
checks, rigorous post shipment verifications, and tough 
enforcement. The Governmental Affairs Committee, which I chair, 
discovered in hearings we held last summer that the Commerce 
Department has failed on all counts. In fact, out of the 190 
high performance computers shipped to China in 1998, a post 
shipment verification was conducted on only one of them. It is 
absurd to suggest that we should now dismantle our export 
control system because this Administration hasn't bothered to 
implement it properly.
    And even if sensitive items like high performance computers 
can be smuggled out of the country or bought at Radio Shack, 
this is no reason to allow potential adversaries or 
proliferators to buy them in volume--and acquire service and 
technical support from our best suppliers. Export licenses not 
only place controls on commodities, they are an invaluable 
intelligence collection mechanism: they help us track ``what'' 
dual use items are being used for, ``who'' is using them, and 
``how'' such items might be configured with other sensitive 
items to advance a country's military and WMD programs. This is 
important information to have when you are trying to defend the 
nation.
    Finally, export controls are not hurting business or 
dampening the economy. Fewer than 1% of all exports today 
require licenses, and roughly 90% of these license applications 
are approved. The Congressional Research Service, Congress' own 
non-partisan research branch, estimates the range of economic 
loss due to export controls at only $2-4 billion annually, or 
no more than .04% of our $9.2 trillion GDP last year. This is a 
small price to pay for the national security benefits of making 
it harder for rogue nations and others to acquire WMD and 
missile capabilities--and only a small fraction of what it may 
ultimately cost to build missile defense systems and acquire 
other military hardware necessary to defend against the weapons 
these ``dual use'' items may help create.
    I am a strong believer in free trade. It has been an engine 
of growth and prosperity for our great nation since its birth, 
and has created incredible opportunities for millions of 
Americans. But when it comes to national security, we must draw 
the line. Rather than loosening export controls as this new EAA 
does, we should be tightening them.
    Export controls are a complex issue which require further 
study and debate. This matter has also been complicated by the 
mistrust between the Congress and the Administration with 
regard to export controls and trade promotion, especially when 
it involves China--lest we forget the Loral/Hughes satellite 
escapade in 1995-96 that seriously damaged our national 
security. Rather than rush a controversial bill, with 
significant national security implications, through the 
Congress in an election year, we should postpone this 
legislation until next year, when a new President can work with 
Congress to find a responsible solution that balances trade and 
security.


                                                   PERFORMANCE LEVELS OF COMPUTERS THAT SUPPORT SELECTED APPLICATIONS OF MILITARY SIGNIFICANCE
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
 Computor Performance
    Level (MTOPS)                                                                                     Applications
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
4,000 to 6,000                                          Joint Attack Strike Aircraft design; nonacoustic antisubmarine warfare sensor development; advanced synthetic aperture radar computation
8,000 to 9,000         Bottom-contour modeling of shallow water in submarine design; some synthetic aperture radar applications; algorithm development for shipboards' infrared search and track
10,457 to 21,125                                                                                                                                                        Nuclear blast simulation
15,500 to 17,500                                                                      Computational fluid dynamics applications to model the turbulence around aircraft under extreme conditions
20,000 to 22,000                                                                                       Weather forecasting; impact of blasts on underground structures; advanced aircraft design
21,125+                                                                                                                                       Submarine design; shallow water acoustics analysis
24,000+                                                                                                                                        Automatic target recognition template development
=120,000                                                                                                                                                Multi-line towed array signal processing
 ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Building on the Basics: An Examination of High-Performance Computing Export control Policy in the 1900s (1995) and High-Performance Computing, National Security Applications, and
  Export Control Policy at the Close of the 20th Century.



                         HIGH PERFORMANCE COMPUTER (HPC) EXPORTS  TO TIER III COUNTRIES
              (India, Pakistan, Middle East, Former Soviet Union,  China, Vietman, Central Europe)
----------------------------------------------------------------------------------------------------------------
                               LICENSE REQUIRED FOR MILITARY      LICENSE REQUIRED FOR
         DATE CHANGED                       USE                       CIVILIAN USE              REVIEW PERIOD
----------------------------------------------------------------------------------------------------------------
S. 1712                        ?                              ?                             30 Days (Reid Amdt)
----------------------------------------------------------------------------------------------------------------
August 2000 (likely)           40,000 MTOPS (est.)            ?                             Six Months (law)
----------------------------------------------------------------------------------------------------------------
February 2000                  12,500 MTOPS                   20,000 MTOPS                  Six Months (law)
----------------------------------------------------------------------------------------------------------------
July 1999                      6,500 MTOPS                    12,300 MTOPS                  Six Months (law)
----------------------------------------------------------------------------------------------------------------
October 1995                   2,000 MTOPS                    7,000 MTOPS                   18-24 Months
                                                                                             (policy)
----------------------------------------------------------------------------------------------------------------
April 1994                     (no category)                  500 MTOPS                     18-24 Months
                                                                                             (policy)
----------------------------------------------------------------------------------------------------------------
September 1993                 (no category)                  194 MTOPS                     18-24 Months
                                                                                             (policy)
----------------------------------------------------------------------------------------------------------------


    The Chairman. I thank you, Senator Thompson. I just wanted 
to ask you one question because you became very well-known for 
a number of other things, but one was to investigate the 
connection between transfer of U.S. technology and campaign 
contributions that came in from China and other sources. Do you 
find it interesting that those who now seem to be sponsoring 
this return to Commerce of this authority, are also opposed to 
even outlawing foreign contributions to American political 
campaigns, even though we have the Foreign Corrupt Practices 
Act which prevents American companies and corporations from 
contributing to foreign political campaigns? I wondered if you 
had a comment on that?
    Senator Thompson. Well, that, that is somewhat ironic. I 
find it difficult to understand how there could be any 
opposition to foreign contributions of any kind. We know that, 
that there were some. Even more appropriate to this particular 
area are the domestic contributions. We all know that Mr. 
Schwartz was an extremely large contributor, contemporaneous 
with the consideration of his companies of getting control over 
satellites transferred to Commerce. We know Mr. Ron Brown was 
very active in this regard, that Mr. Armstrong was writing the 
President and telling him, you know, that he had better loosen 
up, he needed to remind him, that he was a big supporter of 
his. And all of the--all of the wrong messages in a manner that 
had to do, that ultimately our own intelligence community has 
concluded jeopardized or harmed national security.
    At the end of the day, we sent that technology over there, 
left it unattended and apparently wound up harming national 
security. So that is, you know, I don't want to--we are in the 
last months of this administration. I have got enough battles 
going on with whom, my record on all of this is historical. I 
don't want to beat a--any kind of a horse in this regard. But 
it absolutely makes no sense to me that we negotiate with this 
administration at this time on the details of an Export 
Administration Act. Period.
    The Chairman: Hong Kong representative of China Aerospace, 
Chinese Lieutenant Colonel Liu Chao-Ying, provided $50,000 in 
cash from the Chinese military to a Clinton aide in exchange 
for good things from the President, according to congressional 
investigators, and President Clinton waived export restrictions 
for Loral and let China satellite be launched on a Chinese 
rocket. You know, I think there is a very clear connection 
there. I was on a program on Sunday with Mr. LaBella, who 
articulated that this Attorney General did not even discuss 
with him a memo that he sent to the Attorney General of the 
United States recommending the appointment of an independent 
counsel, also that of the Director of the FBI, and a lot of it 
had to do with transfer of technology to China and perhaps 
other countries.
    So now, the way I understand this legislation, we are going 
to go back and give that same authority to the Department of 
Commerce, is that correct?
    Senator Thompson: Well, the Department of Commerce has more 
authority than I think that it should. I don't want to 
overstate my case but yes, what goes on the control list, for 
example, basically is something the Department of Commerce 
controls. And surely, it should not have--unless that has been 
changed recently--surely it should not have unilateral control 
of that. That it is just one example.
    But the Chairman points out that in the history of this, 
there are a couple of things that are very important. There 
were two tracks here. One is that you had money coming in from 
places like the Chinese military, Madam Lu, and others who were 
highly connected, her father was military, a high-ranking 
official and all of that. Money coming in to the DNC. You had 
four or five people who were raising tremendous amounts of soft 
money for the DNC with close connections with the People's 
Republic of China, historical connections. One of them was 
recently convicted, Maria Hsia, who our Committee determined 
was--with FBI acquiescence, that we cleared it with--was an 
agent of the Chinese government.
    You had all of those, all of those things going on, all of 
the money coming in from these various sources. The other thing 
that we know is going on from the Cox Committee Report is that 
for a long time, China has had a very intense program and 
endeavor, at all levels, to try to get our technology as best 
they can. We know about the Los Alamos situation. What we are 
learning more and more about is how they go about their 
business in getting little pieces of information from numerous 
people, rather than having one big spy somewhere. We know the 
industrial espionage that is going on, and we know from the Cox 
Committee Report what they are doing now with some of the 
things that we are sending them.
    The biggest problem that I have is what we do not know with 
what we are doing, with what we are sending them. We supposedly 
control these MTOP levels, and they are going up all the time. 
You can argue about how fast they ought to go up; clearly more 
and more are involved in commerce, you cannot easily keep 
control of it. To a certain extent, you have got to allow MTOP 
levels to increase. But they tell us that the Chinese are 
bundling these computer capabilities so they are getting MTOP 
levels far beyond, in all probability, of what we even suspect 
they are acquiring, which will allow them, of course, 
additional support for their military and nuclear programs and 
all of that. And now we know that we have basically no end user 
verification.
    We have two systems. One is civilian use, one is military 
use. There is no civilian use over there. If we send it over to 
civilian use and give them higher MTOP levels, it is in the 
hands of the military and that is already the case up to--I 
think the latest may be 20,000 MTOPS. It keeps going up all of 
the time. The assumption is that the request will be made in 
August of this year for 40,000 MTOP level for military use.
    So you have those two things going on historically. All of 
which just tells me not that we try to build a wall around our 
Nation--not that we cut off exports or make things so onerous 
to businesspeople who obviously and legitimately want to trade 
abroad, even with Tier III countries. There are a lot of other 
countries that do not present these problems. We are 
essentially talking about Tier III countries here--that we not 
do all of that, that we have a proper balance. And if all it 
does is buy us a little time when we are trying to develop a 
national missile defense, if all it does is buy us a little 
time, then it is well worth the effort to have an export 
control policy that does not get so carried away on the trade 
side of the equation in these times of peace and prosperity, 
where people really do not think we have any problems or 
threats anymore, that does not get so carried away there that 
we overlook our long-range national security concerns.
    The Chairman. I thank you, Senator Thompson. I know you 
have to go. And I appreciate the fact that you took the time to 
be here before the Committee today. Senator Enzi, welcome.

                 STATEMENT OF HON. MIKE ENZI, 
                   U.S. SENATOR FROM WYOMING

    Senator Enzi: Thank you, Mr. Chairman. I think that 
probably when Senator Thompson was speaking and talking about 
the experience of the people that objected to this bill, that 
he was probably referring to how short a time I have been in 
the Senate. I was Senator number 100 just 3 years ago. I am now 
the Subcommittee Chairman for International Trade and Finance 
and was assigned this as soon as I got that position in the 
beginning of my sophomore years. I tried to find out why I had 
been assigned it and decided that since Senator Johnson is the 
ranking member on that Committee, and neither of us have 
foreign borders or an ocean and hardly any exports, that we 
have to be the security people involved in this. It is a much 
more detailed and difficult situation than I ever imagined as 
we started on it. And as a result of your questions and the 
statements that Senator Thompson has made, I would ask that my 
statement be a part of the record, but I would rather address 
the things that have been brought up.
    The Chairman. Without objection.
    Senator Thompson. And mine too, Mr. Chairman.
    The Chairman. Without objection.
    Senator Enzi: I would mention in the time that I have 
worked on this I have gotten to talk to a lot of senators that 
have worked on this issue before. I have read all the previous 
literature that has been out and I am always astounded at how 
much the Senate puts out on any given issue. And this act did 
expire in 1994 and there have been 11 attempts since that time 
to pass this bill. It had not made it out of Committee before 
last year. But there is a lot of testimony and expertise that 
is available that can be read on what the problems are and why 
it did not proceed that far, and I am just trying to keep this 
from being number 12.
    From talking to senators, people in industry, people in the 
administration, I have got to say that I am impressed with the 
deep concern and care there is for national security. 
Particularly in a time when we are enjoying so much economic 
success; that always makes it easier to overlook security. We 
have not done that in this bill.
    The EAA did expire in 1994, and most of the problems that 
are mentioned happened since 1994. We are operating under 
Executive Orders. All of the reports that have been mentioned 
previously mentioned that our difficulty is that we are 
operating under Executive Orders. It does not give the proper 
authority to any of the people that are necessary to do the 
things that need to be done to assure the best national 
security.
    Where are we now? We have probably passed the window for 
being able to debate any kind of an EAA bill other than some 
small amendment to an appropriations bill because we are now in 
the budget process. We know how long that will take; then we 
will be in the appropriations process, we know how long that 
takes; so probably once again we will fail to plug the holes 
that are obvious in all of the reports.
    I fear that we are trying to achieve a utopia and utopias, 
first of all, do not work and second of all, do not pass around 
here. I am also running into a lot of confusion because it is 
so detailed. One of the confusions is that there are actually 
three lists. I am only dealing with one of the three lists. The 
other two are the munitions list and the satellite list. This 
bill does not govern those items. This is the dual-use items. 
These are the things that could have some military use, but are 
market items.
    Executive Orders have created quite a few problems. One of 
those problems is penalties. We did a little analysis of one of 
the convictions that had been done recently. In that particular 
instance, the maximum fine will be $132,000 in administrative 
fines. Criminal fines will be about $600,000. These companies 
spend more on an ad than it is going to cost them for penalties 
under the present Executive Orders that we are working under, 
and the only way we can change that from Executive Orders is to 
pass a bill.
    Now, this bill has penalties in it. Penalties have gotten 
everybody's attention. Penalties are a backbone for enforcing 
and getting people's attention and getting compliance. That 
same company would have had $12 million in administration fines 
and $120 million in criminal fines. The bill also provides for 
imprisonment for acting outside of the balance of this law, 
imprisonment. And it can be, with multiple violations, up to a 
lifetime in prison. That has gotten everyone's attention. That 
is essential in the EAA.
    Process has been mentioned. I have been down, I have 
watched how the process works, I have read the reports, I read 
the Cox Commission report while it was still--while all of it 
was still classified to see if we were on the right track with 
what we were doing. We recognized that there had to be a better 
appeals process. The current appeals process chaired by the 
Commerce Department would require a person who is dissenting to 
find their boss, and get their boss to understand it well 
enough to file an appeal within a very limited period of time.
    The way we have done it now, we looked at a number of 
different processes that we could do, but the one that there 
was universal appeal for was one that would allow the person 
who was on that operating Committee to appeal it himself. He 
has already been there, he has already heard the data. He fills 
out the papers, he files the papers, it moves on up, and it 
requires concurrence by Department of Defense, Secretary of 
State, and Department of Commerce at some point in the process, 
if it gets appealed that high. But we have allowed the appeals 
process to take into consideration the things that have been 
addressed and to plug those holes.
    On enforcement, I mentioned the penalties already. One of 
the things that we are trying to achieve with this bill is to 
make enforcement possible. Right now, we are trying to enforce 
everything in the world, and it isn't working. The way that we 
came up with was to come up with a priority system, a mechanism 
where we can concentrate on those things with the greatest 
danger to the United States first, and those things that 
probably cannot be controlled and have much less danger last.
    It still provides for watching out for all of them. We have 
foreign availability. Foreign availability is not a new 
concept. Foreign availability was in the 1979 Act. We have kept 
it in the Act. Under foreign availability, there has been one 
item that has matched foreign availability in the time that 
that has been in possession since 1979.
    We do have a new name for a process, mass market. Again, it 
is to get to this prioritization so that we can work on things 
with the most exposure. Mass market goes under the concept that 
if you are already selling it in Wal-Mart and Best Buy and 
Circuit City and everyplace else in the Nation, that it can be 
purchased in quantity by any number of people and it can get in 
foreign hands. And there is no way to do the enforcement to 
make sure that it does not get purchased in those 
establishments easily.
    So we have concentrated on post-shipment verification. We 
have tightened the noose on post-shipment verification. We have 
a mechanism to make sure that the post-shipment verification is 
allowed by companies and by countries, but we put a priority on 
it.
    Then we have done all these things for security; why would 
the industry be interested in it? There is only one thing that 
helps industry in this. I guess it has got more than one name 
but it is the same characteristic. They want stability, 
reliability, and predictability. Those are all common 
characteristics that help the business community to operate 
with greater capability. Stability, reliability, 
predictability. And we have a system where we think we can 
protect what needs to be protected, but still provide those 
parts.
    I would mention that this has been through the Banking 
Committee, as I am sure you are aware. There are people on the 
Banking Committee from a number of other Committees in the U.S. 
Senate who worked tediously on this bill, and I say that 
because of the amount of detail that is in it. It did pass the 
Banking Committee 20 to nothing. There have been some 
discussions since that time that perhaps the bill could be 
divided up and done in little pieces here and there. That is, 
that is a possible scenario, but I do not think it is a 
possible action.
    First of all, if we do it in kneejerk ways, I think we will 
wind up with a skewing actually away from national security. If 
we do the bill in total and then look at additional ways that 
other things can be done, that has potential. Why won't it pass 
on a kneejerk, one at a time basis? I read the rest of the 
legislation. I looked at the other examples of how we tried to 
do this. And I noted that it is easier to defeat a bill than it 
is to pass a bill and that is exactly what has happened. When 
it skews too far one side, the other side gets the votes 
together at one point in the process, to have a majority of the 
votes, and that ends any discussion on the bill.
    We have worked hard for balance. I hope that that balance 
is there. We have been taking suggestions on it throughout the 
entire process and trying to work them in, but again, trying to 
make sure that it is a balance that will work and that will 
pass so that we can get those higher penalties, better 
enforcement, and a more workable process in place. And I thank 
the Chairman for the time.
    [The prepared statement of Senator Enzi follows:]

              Prepared Statement of Hon. Michael B. Enzi 
                       U.S. Senator from Wyoming
    Thank you, Mr. Chairman and Ranking Member, for allowing me the 
opportunity to testify before this panel regarding S.1712, the Export 
Administration Act of 1999.
    Let me begin by emphasizing the need to reauthorize the expired 
Export Administration Act (EAA) of 1979. The EAA provides authority to 
control exports for dual-use items, or items which are used for 
commercial applications but could also be used for military purposes. 
For six years the Congress has failed to update and reauthorize this 
important Act. Instead, our export control laws have been implemented 
by Executive Orders under the authority of the International Emergency 
Economic Powers Act (IEEPA).
    This inaction by Congress is inexcusable and irresponsible. It has 
created an increasingly dangerous situation. IEEPA was not intended to 
allow the President to maintain export controls indefinitely without 
congressional authorization. S.1712 would correct this situation and 
place our export control system on firm statutory ground. It 
strengthens national security by granting the Department of Defense 
more involvement than was given to them in the expired Act.
    There are other reasons it is vital to reauthorize the EAA, 
however, I will give only brief mention to them. First, the U.S. has 
difficulty convincing other countries, even our strongest allies, of 
the importance of multilateral controls when the Congress has not 
passed a law authorizing the use of export controls. Second, the 
Department of Commerce provides assistance to countries, such as the 
former Soviet republics, so these countries might implement an export 
control system to stem the proliferation of certain technologies. The 
lack of statutory export control authority in the U.S. sends the signal 
to these countries that we are not serious about controlling dual-use 
items. And finally, S.1712 would place specific criteria on the 
exercise of export control authority, and require transparency and 
accountability from the executive branch. Without Congressional action, 
the executive branch has the ability to use any criteria for control, 
decontrol, decision-making, risk assessment--you name it--for the 
entire export control regime. Bottom line: the export control system 
will change as Administrations change, unless we reauthorize the EAA.
    In crafting a new EAA, we examined the problems identified with the 
current export control framework and the recommendations of the Defense 
Science Board, the Cox commission report, and the commission to study 
the Proliferation of Weapons of Mass Destruction. We also studied the 
EAA of 1979 and used it as our baseline. Keep in mind that this Act 
helped bring us through a particularly dangerous period of the Cold 
War.
    S.1712, as unanimously reported from the Senate Banking Committee, 
is good for national security. As I mentioned earlier, it restores the 
expired authority to control the export of commercial items. The bill 
contains several provisions that allow for the protection of sensitive 
technologies, regardless of any other provision in the bill. I refer to 
these as ``carve-outs''. These checks and balances are placed 
throughout the bill.
    Section 201(c) of the bill allows controls to be imposed on any 
item that could contribute to the proliferation of weapons of mass 
destruction or the means to deliver them, based on the end use or end 
user.
    Section 309 of the bill also allows the control of any item in 
order to comply with international obligations. I have heard several 
individuals, including one who testified at the most recent Armed 
Services Committee hearing, claim S.1712 would decontrol items that we 
would not want decontrolled. One assertion by this witness was that 
this bill would decontrol triggers contained in kidney stone machines 
that can also be used for nuclear weapon triggers. However, he even 
admitted that this item is controlled by the Nuclear Suppliers Group! 
Therefore, under Section 309 of the bill, these machines would still be 
controlled to certain end users and for certain uses because of its 
control under an international obligation.
    S.1712 strengthens the role of the Department of Defense. The bill 
requires concurrence in the making of the national security control 
list, and we have agreed to explicitly state that concurrence would 
also be required when taking an item off the list. Additionally, at the 
first level of interagency dispute resolution, a representative from 
any department or agency present can escalate any decision made by the 
Chair. Currently, only the head of that agency is able to request 
escalation of a decision. In addition, the bill requires each member to 
clearly state the reasons for his or her position and the reasons are 
entered into the minutes. The minutes will give the Congress much 
better oversight of the process, including who attended the meetings 
and the reasoning for the decisions. This greatly increases 
transparency and accountability.
    The bill toughens criminal and civil penalties. It increases 
penalties significantly from the levels of IEEPA, making exporters 
think twice before exporting without the proper authorization. An 
exporter will no longer simply calculate the fines for non-compliance 
with the law as a cost of doing business. Under S.1712, the fine levels 
are set high enough to deter any exporter from shipping without proper 
license.
    The bill is also good for trade. It streamlines the controls and 
makes the system more transparent for exporters and the Congress. It 
provides guidance to the executive branch to develop a stronger 
multilateral export control regime. The bill also creates a framework 
compatible with the high-tech economy. It attempts to remove 
ineffective controls by decontrolling items that are readily available 
from foreign sources or are available at a mass-market (commodity) 
status. Government regulation has always lagged behind industry. This 
is even more the case today as the pace of technology is greatly 
outstripping the ability of any government to effectively control mass-
market items. The Final Report of the 1999 Defense Science Board Task 
Force on Globalization and Security said,

        ``Protection of capabilities and technologies readily available 
        on the world market is, at best, unhelpful to the maintenance 
        of military dominance and, at worst, counterproductive . . . 
        DOD must put up higher walls around a much smaller group of 
        capabilities and technologies.''

    I urge my colleagues to work with Chairman Gramm, Ranking Member 
Sarbanes, Senator Johnson and me to reauthorize the EAA this year. We 
all deeply care about the national security of the United States. The 
Banking Committee regularly addresses issues relevant to national 
security, especially the economic security of the nation. We do not 
want a re-control of many items, as some members would strongly 
support. Several of the suggestions by critics of the bill would 
effectively do this.
    We have been reasonable and have listened to everyone's concerns. 
We have tried to address every concern without upsetting the balance in 
the bill. We must look the big picture. The country will be better 
served if a balanced EAA is passed. Critics are speeding down a one-way 
street that dead ends in the status quo. Most everyone agrees that the 
status quo is not where we want to end up.
    It would not be good public policy to ``fix'' the system in a 
piece-meal or knee-jerk manner as Congress has already attempted to do 
in several areas of export control policy. The Congress must resist the 
feel good temptation to pass a bill that only increases penalties. It 
will not fix the underlying problems with the current system that I 
identified at the beginning of my testimony.
    Reasonable people may disagree even given the same facts. But 
reasonable people should be able to agree it is good policy to 
reauthorize the EAA. Leaving a broken system in place for one day 
longer leaves our country open to serious national security risks. 
S.1712 is good for the national security of this great nation and it is 
not in the best interests of the United States to delay reauthorization 
another year.


                 COMPARISON OF MAXIMUM PENALTIES FOR EXPORT VIOLATIONS IN A RECENT INDICTMENT\1\
----------------------------------------------------------------------------------------------------------------
                                  EAA of 1979 Now expired          IEEPA  Current law       EAA of 1999  S. 1712
----------------------------------------------------------------------------------------------------------------
CRIMINAL FINES                 $600,000                       $132,000                      $120 million
ADMINISTRATIVE FINES           $132,000                       $132,000                      $12 million
----------------------------------------------------------------------------------------------------------------
\1\ U.S. companies may also face other charges, such as conspiracy and false statement which each carry a
  $500,000 fine.


Selected Quotes on the Reauthorization of the Export Administration Act
    ``The Select Committee recommends that the appropriate committees 
report legislation to reenact the Export Administration Act, with 
particular attention to re-establishing the higher penalties for 
violation of the Act that have been allowed to lapse since 1994.''
        --Cox Committee on Technology Transfer to China, May 1999

    ``The dual-use licensing process would be best served through the 
reenactment of the EAA.''
        --Joint Inspector Generals' Interagency Review of the Export 
        Licensing Processes for Dual-Use Commodities and Munitions, 
        June 1999

    ``Congress should enact and the President should sign a new Export 
Administration Act, reflecting the post-CoCom export control regime, 
and containing substantially greater penalties than now apply to export 
control violations.''
        --The Commission to Assess the Organization of the Federal 
        Government to Combat the Proliferation of Weapons of Mass 
        Destruction, July 1999

    ``Protection of capabilities and technologies readily available on 
the world market is, at best, unhelpful to the maintenance of military 
dominance and, at worst, counterproductive (e.g., by undermining the 
industry upon which U.S. military-technological supremacy depends) . . 
. DOD must put up higher walls around a much smaller group of 
capabilities and technologies.''
        --Final Report of the Defense Science Board Task Force on 
        Globalization and Security, December 1999

    The Chairman. Thank you very much, Senator Enzi. Thank you 
for all your hard work on this issue. And I thank you and 
Senator Thompson for being here. Thank you very much.
    Senator Enzi. Thank you.
    The Chairman. The next panel is the Honorable James Bodner, 
Principal Deputy Under Secretary of Defense for Policy, 
Department of Defense, Mr. John Holum, the Senior Advisor to 
the Secretary of State for Arms Control and International 
Security, and the Honorable William Reinsch, the Under 
Secretary of Export Administration, Department of Commerce. 
Please come forward.
    Mr. Bodner, we will begin with you. Welcome back before the 
Committee. It is good to see you again.

STATEMENT OF JAMES M. BODNER, PRINCIPAL DEPUTY UNDER SECRETARY 
                      OF DEFENSE (POLICY)

    Mr. Bodner. Thank you, Mr. Chairman. I believe I submitted 
a more complete statement for the record. I would like to 
summarize that for presentation here.
    The Chairman. Thank you. Without objection, all the 
witnesses' complete statements will be made part of the record.
    Mr. Bodner. Mr. Chairman, I appreciate the chance this 
afternoon to appear before the Committee to discuss the Export 
Administration Act. DOD views the enactment of an effective 
Export Administration Act as important for national security. 
And we look forward to working with you, this Committee and 
others in the Congress to produce the best possible 
legislation.
    As Senator Thompson and Senator Enzi mentioned, for nearly 
6 years we have operated within the regulatory framework for 
export control that is based on the provisions of the last EAA 
carried forward by Executive Order. We think the time has come 
to update that framework and establish it in law so that we 
have the tools we need to exercise effective controls in the 
face of a rapidly changing world.
    From the Pentagon's perspective there are certain critical 
principles that underline effective Export Administration Act. 
First we need to have a strong basis in law that identifies 
U.S. security interests as the primary underpinning for U.S. 
export controls. Second, for controls to be effective in 
protecting and promoting our national security objectives, the 
underlying authority must provide sufficient flexibility in 
establishing and implementing controls. The pace of change in 
technology as well as in the economic and security environment 
requires a system that is both agile and adaptable. Third, 
while controls are considerably more effective if they are 
implemented on a multilateral basis the law needs to maintain a 
sufficiently broad basis for imposing unilateral controls when 
necessary. There are in fact circumstances under which the 
United States must be able to take unilateral action.
    As you know, Mr. Chairman, DOD bears special responsibility 
for national security. We work closely with our interagency 
colleagues, particularly at the State Department and Commerce 
Department to prevent, slow and counter the proliferation of 
weapons of mass destruction and their means of delivery and 
more generally the diffusion of technologies that could 
adversely affect our military edge.
    Preserving our military technological advantage involves 
not only limiting the acquisition of critical technology by 
potential adversaries but it also involves promoting a vibrant, 
innovative public sector that can continue to support cutting 
edge research, development and production. We in fact enhance 
our national security by ensuring that U.S. industry can engage 
in legitimate international trade and investment and that our 
scientists, engineers and other researchers can collaborate 
with international counterparts.
    Moreover, given that we generally conduct military 
operations in concert with friends and allies, promoting 
national security requires that we both have effective export 
controls and effective mechanisms for international industrial 
collaboration in defense products. We aim to widen the gap with 
potential adversaries while at the same time closing the gap 
with allies and those with whom we expect to conduct military 
operations in the future. Both of these are essential to 
national security.
    Now one key to accomplishing both objectives is to ensure 
that the export control system is as efficient as possible. At 
DOD over the last year, year and a half we have taken numerous 
steps to improve our role within the current export control 
system. We have reformed our internal organization and our 
procedures to reduce significantly the license review times and 
to improve the quality of reviews by focusing on the most 
sensitive, complex cases. We have also improved the efficiency 
and quality of the interagency national disclosure process that 
DOD chairs, and on a related front we have reengineered the 
foreign military sales program to be more efficient, 
transparent and responsive.
    In that context we believe that enactment of an effective 
Export Administration Act is another key element in assuring 
that our export control system meets our national security 
requirements.
    We know that the United States is not the only source of 
key technologies. Therefore it is essential that we work with 
our export control partners to maintain multilateral export 
control regimes, to strengthen other nations' export control 
systems and to encourage other countries to adopt policies and 
practices that reflect our shared security interests. We favor 
a statutory framework for export controls that highlights 
existing multilateral nonproliferation regimes such as the 
Nuclear Suppliers Group, the Missile Technology Control Regime, 
the Australia Group and the Wassenaar Arrangement.
    A critical element in any export control system is a 
comprehensive export control list. U.S. and multilateral 
control lists serve as a foundation for national security 
export controls; and to be effective, control lists must 
comprise only those items for which there is a clear and 
compelling national security rationale. Under the current 
regulatory framework, DOD participates actively in the 
interagency and multilateral processes that define these lists. 
We do so by providing critical assessment of how specific items 
relate to military capabilities. This is an open and 
transparent process that affords all relevant agencies an 
opportunity to address their concerns, and when consensus 
cannot be reached, to escalate issues up to the President if 
necessary for resolution.
    I would note that the same is true for the system of 
reviewing export license applications which is also open and 
transparent. Such a structure enables DOD to play its important 
role in an effective manner and it illustrates the core 
principle that an Export Administration Act should have applied 
generally to the export control process to which DOD can make a 
contribution.
    DOD believes that an EAA to be effective must contain 
sufficient flexibility for the President and his senior 
advisors at DOD, State and Commerce to impose special controls 
or to maintain controls on items of particular importance to 
national security.
    With that, Mr. Chairman, I'd like to commend this Committee 
and the Senate for its hard work on trying to draft an Export 
Administration Act that meets the needs of the Nation. I would 
note that we still have some distance to cover as the previous 
testimony suggested but I am hopeful that agreement can be 
reached soon on effective legislation that can gain broad 
enough support to be passed and enacted. Thank you.
    The Chairman. Thank you very much, Mr. Bodner. Mr. Holum, 
welcome.
    [The prepared statement of Mr. Bodner follows:]

        Prepared Statement of James M. Bodner, Principal Deputy 
                  Under Secretary of Defense (Policy)
    Mr Chairman, Members of the Committee, good afternoon. I appreciate 
the opportunity to appear before this Committee today to discuss the 
Export Administration Act.

    The Department of Defense views the passage of an Export 
Administration Act (EAA) as important, and we hope will it be 
accomplished as early as possible in this session of Congress. Although 
there is a good deal that we are able to do within the present 
regulatory framework--which is based on the provisions of the lapsed 
EAA carried forward by Executive Order--we believe that the time has 
come to update that framework and provide us with the tools that we 
need to do the job more effectively. We are very interested in working 
with this Committee and others in the Congress to produce the best 
possible legislation.

    There are several critical elements which I believe must be kept in 
mind in consideration of an Export Administration Act. First, we need a 
strong policy basis in the law that recognizes U.S. security interests 
as the primary underpinning for U.S. export controls. Second, in order 
for controls to be effective in protecting and promoting our national 
security objectives, it is essential that the underlying authority 
provide substantial flexibility in both establishing and implementing 
controls. As Members of this Committee most particularly can 
appreciate, the increasing pace of change in technology and the 
economic and security environment requires a system that can adapt 
quickly to changing needs and circumstances. Third, while controls are 
considerably more effective if they are implemented on a multilateral 
basis the law needs to maintain a sufficiently broad basis for imposing 
unilateral controls when necessary. There are circumstances where the 
U.S. must take unilateral action.

    Working closely with other USG agencies, most importantly the 
Departments of State and Commerce, DOD's role in U.S. government export 
control policy and implementation focuses primarily on two closely-
linked objectives: (1) slowing--and, where possible, countering--the 
proliferation of weapons of mass destruction (nuclear, chemical, 
biological) and their means of delivery, and (2) preventing and slowing 
the spread of products, commodities and technologies which can 
adversely affect U.S. national security, particularly where there could 
be a resultant loss of superior military capabilities.

    We recognize, however, that our approach on controls must balance 
those objectives with a number of other national security objectives, 
including close cooperation with allies and friends.

    Preserving our military technological advantage involves not only 
limiting the acquisition of critical technology by potential 
adversaries, but also promoting a vibrant, innovative private sector 
that supports defense research, development and production. Our 
national security is thus enhanced by ensuring U.S. industry can engage 
in legitimate international trade and investment. It is also enhanced 
by our scientists, engineers and other researchers being able to 
collaborate with their counterparts around the world. This has always 
been the case, but in an era in which we must rely increasingly on 
commercial products, technologies and processes to sustain and improve 
military capabilities it is all the more important that our industry be 
able to compete effectively in world markets for sales, talent and 
capital.

    We also recognize that allied and coalition operations, of 
increased importance to us and to our allies, require a high degree of 
interoperability. This means sharing information, transferring 
technology (both from us and to us) and cooperating in R&D, production 
and testing. It also means, increasingly, that we consider defense 
contractors in allied countries as assets alongside as our own defense 
contractors. We find, however, that it is ever more difficult to 
convince other nations that we are serious in our efforts to improve 
defense capabilities in NATO (and in other contexts) when our allies 
are questioning the reliability of the U.S. as a supplier. To achieve 
interoperability with our allies and enhance cooperation more broadly, 
we are working to modernize our export control procedures, as well as 
improve our approaches to disclosure processes, defense industrial base 
and FMS procedural reforms. We believe that an Export Administration 
Act much like that under consideration in the Senate can help us in 
improving these important aspects of our relationship with allies and 
friends.

    The United States is not the only supplier of many key items and 
technologies. Important know-how is diffused among a number of 
countries. To have effective export controls that meet our security 
interests, we need the cooperation of other supplier nations. In this 
regard, DOD strongly favors working closely with our export control 
partners to foster and sustain multilateral export control regimes, to 
increase the effectiveness of other nations' export control systems and 
to encourage other countries to adopt policies and practices consonant 
with shared security interests. An updated statutory framework for U.S. 
export controls should highlight the existing multilateral non-
proliferation regimes such as the Nuclear Suppliers Group, the Missile 
Technology Control Regime, the Australia Group and the Wassenaar 
Arrangement on Export Controls for Conventional Arms and Dual-Use Goods 
and Technologies is needed. At the same time we need a strong statutory 
basis for controls we share with other nations which are suppliers of 
comparable items and technologies but not necessarily within a 
``formal'' regime or framework. It is particularly important, given the 
speed of technological change and the current security environment, 
that we have a strong basis in law for the support of multilateral 
efforts.

    One of the key elements of any effective export control system is a 
comprehensive export control list. U.S. and multilateral control lists 
serve as the foundation for all national security and non-proliferation 
export controls. We believe that in order for control lists to be 
effective, there must be a clear and compelling national security, non-
proliferation or foreign-policy rationale for all items on the list. In 
that regard, DOD participates actively in the interagency and 
multilateral processes that define these lists and brings to bear the 
critical assessments of how items relate to military capabilities. This 
is an open and transparent process that affords all relevant agencies 
an opportunity to address their concerns and, when consensus is not 
reached, to escalate issues for resolution. The same is true for the 
system for reviewing export license applications, which is also open 
and transparent.

    These generally applicable principles should be embodied in an 
Export Administration Act that is ultimately enacted. Such a process 
will ensure that DOD plays its proper role in an effective manner.

    We also believe that an EAA must contain sufficient flexibility for 
the President and his senior advisors in DOD, State and Commerce to 
impose special controls or to maintain controls on items of particular 
importance to national security.

    Much hard work has been done by Senators to draft an EAA that meets 
the needs of our Nation. I am hopeful that agreement can be reached 
soon on legislation that can be passed and enacted into law.

STATEMENT OF JOHN D. HOLUM, SENIOR ADVISER FOR ARMS CONTROL AND 
                INTERNATIONAL SECURITY AFFAIRS, 
                      DEPARTMENT OF STATE

    Mr. Holum. Thank you, Mr. Chairman. It's a pleasure to be 
back. And thank you for the opportunity to provide the views of 
the Department of State on the Export Administration Act. The 
administration has been working extensively with Congress to 
develop legislation that carefully and properly balances our 
goals of protecting U.S. national security and foreign policy 
interests while supporting U.S. economic leadership and 
assuring the security of the U.S. and its friends and allies. 
At every step of this process, talks between Congress and the 
administration have been constructive and open-minded, which 
will undoubtedly result in a better final bill.
    The State Department fully recognizes that U.S. exports, 
particularly in high technology fields, are important not only 
to the prosperity of the American people but also to the 
security and foreign policy of the United States. In an 
environment where our defense and foreign policy resources are 
stretched to the limit, we rely upon the innovative and 
productive capacity of the U.S. economy to provide new and more 
efficient tools to ensure a decisive technological advantage 
over our potential adversaries. Export performance is a key 
factor in U.S. industry's ability to grow and invest in these 
new technologies. However, with U.S. technological leadership 
also comes a great responsibility.
    Our adversaries, particularly those countries that are 
attempting to develop weapons of mass destruction, missile 
systems and advanced conventional weapons, can also derive 
great benefit from dual-use technologies. Export controls 
therefore are a balancing act, or an exercise in risk 
management. The objective is to maintain an export control 
system that encourages exports while also fulfilling our 
international nonproliferation obligations and preventing 
dangerous technology transfers.
    We in government have well-defined responsibilities and 
authorities aimed at ensuring that trade is conducted in a 
manner that promotes U.S. foreign policy objectives and 
national security interests. We also have an obligation to 
exporters of dual-use goods and technology to create an 
environment that does not unnecessarily hinder industry's 
ability to compete in the global marketplace. Our approach to 
the new EAA is to craft a bill that reaches this balance.
    A major responsibility in the State Department is to ensure 
that any legislation will allow us to continue to exert 
leadership and to fulfill our obligations in the multilateral 
export control regimes. Any legislation on export controls 
needs to provide this and future administrations with the 
flexibility to negotiate strong export controls on a 
multilateral basis. Unilateral controls are sometimes 
necessary, but multilateral controls clearly are preferable. If 
legislation prevents us from adhering strictly to these 
international regimes, they will cease to be viable, cutting 
off our main avenues for achieving effective multilateral 
controls on sensitive transfers.
    With that in mind, the State Department believes that any 
new legislation needs to avoid provisions that: inadvertently 
weaken existing multilateral regimes and hamper our ability to 
encourage other countries to adopt stringent export controls; 
or unduly restrict our ability to implement foreign policy 
controls or are duplicative of existing sanctions authority.
    With those criteria in mind, State has followed the 
progress of a number of key aspects of the draft EAA, including 
penalty provisions, mass market and foreign availability 
provisions, exceptions to foreign policy controls, definition 
of State's role, and sanctions provisions. We look forward to 
working closely with Congress to finalize these and other 
provisions in this important legislation. The State Department 
appreciates congressional efforts to undertake a thorough 
review of this extremely complex subject and produce a new EAA.
    Export controls, as I have said, implicate both the 
American economy and international security as a cornerstone of 
our nonproliferation and arms control efforts. The Department 
of State welcomes the opportunity to work with the Committee on 
this complex but essential task. Thank you.
    [The prepared statement of Mr. Holum follows:]

 Prepared Statement of John D. Holum, Senior Adviser for Arms Control 
        and International Security Affairs, Department of State
    Thank you for the opportunity to provide the views of the 
Department of State on the Export Administration Act (``EAA''). We 
welcome the Congress' interest in revising and updating the now lapsed 
EAA. The Administration has worked extensively with various committees 
to address our concerns with the draft legislation. We stand ready to 
work with the Congress as a whole to develop legislation that carefully 
and properly balances our goals of protecting U.S. national security 
and foreign policy interests while supporting U.S. economic leadership 
and assuring the security of the U.S. and its friends and allies. At 
every step of this process, we feel that the dialogue between the 
Congress and the Administration has been constructive and open-minded, 
which will undoubtedly result in a better final bill.
    Let me start by emphasizing that the State Department fully 
recognizes that U.S. exports, particularly in high-technology fields, 
are important not only to the prosperity of the American people, but 
also to the national security and foreign policy of the United States. 
In an environment where our defense and foreign policy resources are 
stretched to the limit, we rely upon the innovative and productive 
capacity of the U.S. economy to provide new and more efficient tools to 
ensure a decisive technological advantage over our potential 
adversaries. Much of the innovation upon which we rely comes from 
private sector efforts to develop new products and systems for 
commercial purposes. Export performance is a key factor in U.S. 
industry's ability to grow and invest in these new technologies.
    However, with U.S. technological leadership also comes a great 
responsibility. Just as the U.S. military derives great benefit from 
dual-use technologies, so can our adversaries, particularly those 
countries that are attempting to develop weapons of mass destruction, 
missile systems and advanced conventional weapons.
    Export controls, therefore, are a balancing act, or more 
appropriately, an exercise in risk management. The only way to be sure 
that the transfer of U.S. technology cannot threaten our interests 
would be to stop all exports of high-technology goods. That would be 
just as disastrous as having no controls over such goods. The only 
sensible alternative is to maintain an export control system that 
encourages exports while providing the capability to fulfill our 
international nonproliferation obligations and to prevent dangerous 
technology transfers.
    We in government have well-defined responsibilities and authorities 
aimed at ensuring that trade is conducted in a manner that promotes 
U.S. foreign policy objectives and national security interests. We also 
have an obligation to exporters of dual-use goods and technology to 
create an environment that does not unnecessarily hinder industry's 
ability to compete in the global marketplace. Accordingly, our comments 
on the shape of the new EAA are directed at crafting a bill that 
appropriately reaches this balance.
    Any revision to the EAA should ensure that we retain strong curbs 
to combat the proliferation of weapons of mass destruction and their 
means of delivery, the accumulation of destabilizing advanced 
conventional weapons, and the export of items useful for terrorists.
    A major responsibility of the State Department in this process is 
to ensure that any legislation will allow us to continue to exert 
leadership and to fulfill our obligations in the multilateral export 
control regimes. At the same time, the new EAA must allow us the 
flexibility to impose unilateral controls on items to achieve critical 
U.S. foreign policy goals. Provisions in the new EAA--particularly 
those that provide exemptions to controls--need to be carefully 
considered with these interests in mind. Before focusing on provisions 
of particular interest to State, I would like to say a bit more about 
our participation in multilateral regimes.

    Multilateral Regimes

    Broadly speaking, U.S. objectives in multilateral regimes are the 
same as our export control policy as a whole--balance economic 
considerations with the national security requirement to prevent the 
proliferation of dangerous military technologies, particularly those 
related to weapons of mass destruction, missiles, and advanced 
conventional weapons. All agencies share these objectives.
    Specific U.S. objectives regarding the Nuclear Suppliers Group, the 
Australia Group, the Missile Technology Control Regime, and the 
Wassenaar Arrangement are developed through interagency working groups 
involving all relevant agencies, including the Intelligence Community. 
The Department of State chairs these groups and is responsible for 
attempting to reconcile interagency positions and resolve conflicting 
points of view. If necessary, disputes are escalated through the NSC 
process.
    State generally leads the U.S. delegations to these multilateral 
regime meetings. The delegations generally include all interested 
agencies and, on occasion, representatives of U.S. industry as well.
    All the multilateral export control regimes work by consensus. Any 
changes require the acquiescence of all participating states. This can, 
of course, be a cumbersome process. While all participants in the 
multilateral regimes have agreed to the basic underlying principles 
that the regimes embody, there are often serious differences on 
specific issues. Progress often involves significant diplomatic efforts 
not only on the part of our delegations at the meetings but also our 
embassies and Washington officials from all relevant agencies.
    Above all, it should be recognized that participation in the 
multilateral regimes is in the national security interest of the U.S. 
Any legislation on export controls needs to provide this and future 
Administrations with the flexibility to negotiate strong export 
controls on a multilateral basis. Although unilateral controls are 
sometimes necessary, we agree strongly with the assertion that 
multilateral controls are preferable. If legislation prevents us from 
adhering strictly to these international agreements, these regimes will 
cease to be viable, cutting off our main avenues for achieving 
effective multilateral controls.
    Therefore, we must be mindful of the interrelationship between our 
domestic controls and multilateral objectives. If we do not maintain 
credible domestic controls on dual-use technologies, or if our domestic 
legislation or unilateral actions appear to give competitive advantages 
to our exporters, our regime partners will not be receptive to U.S. 
proposals to strengthen multilateral controls. In short, maintaining 
multilateral discipline and cooperation is essential to both our 
nonproliferation and commercial interests.

    Provisions of the EAA

    With that background in mind, I'd like to mention some of the 
general provisions that might be a part of a new EAA. In particular, 
any new legislation needs to avoid provisions that:

    inadvertently weaken existing multilateral regimes and 
hamper our ability to encourage other countries to adopt stringent 
export controls; or
    unduly restrict our ability to implement foreign policy 
controls or are duplicative of existing sanctions authority.

    With those criteria in mind, State has followed the progress of a 
number of key aspects of the draft EAA, including:

  Penalty provisions
  Mass Market and Foreign Availability provisions
  Exceptions to Foreign Policy Controls
  Definition of State's role
  Sanctions provisions

    We look forward to continuing to work with the Congress on these 
and other issues in this important legislation.

Conclusion

    The State Department appreciates Congressional efforts to undertake 
a thorough review of this extremely complex subject and produce a new 
EAA. Export controls not only have an effect on the health of the 
American economy--they have a global impact in that they are in many 
ways the cornerstone of our nonproliferation and arms control efforts. 
As we move further into an era in which the lines between military and 
civilian goods grow increasingly blurred, it is important that our 
export controls balance the need of American enterprises to compete 
overseas on an equal footing with the need to protect present and 
emerging national security interests.
    The Department of State welcomes the opportunity to work with the 
Committee on this complex, but essential, task.

    The Chairman. Thank you, sir. Mr. Reinsch.

  STATEMENT OF WILLIAM A. REINSCH, UNDER SECRETARY FOR EXPORT 
             ADMINISTRATION, DEPARTMENT OF COMMERCE

    Mr. Reinsch. Thank you very much, Mr. Chairman. I am glad 
to be back. It is tempting in this situation to take some time 
to comment on some statements made by the previous panel such 
as the comment that we had made--the Commerce Department made 
only one end-use visit in China. In fact, we have made 60, and 
have more scheduled.
    But rather than go down a list, I would hope that perhaps 
later you might ask us to comment on some of the comments from 
the other panelists because there are some other points, I 
think when we deal with--as Senator Enzi said, it is a question 
of details in many respects. It is a very complicated issue, it 
is a complicated bill, as you well know. I think it is 
important that we all be working with the same set of details 
as we go forward.
    But let me, if I may, just give an abbreviated version of 
my statement, beginning with what I think we are trying to do 
in the administration as far as our concept of export controls 
is concerned. Our vision, if you will, is to continue to 
maintain military superiority in the face of more diffuse 
adversaries and less multilateral agreement on precise security 
threats. We seek to maintain the gap between our capabilities 
and those of our adversaries by both retarding their progress 
and accelerating our own. What has changed in recent years is 
the relative balance of those two tactics, as economic 
globalization has accelerated the pace of technological change 
and made export controls more difficult to implement and 
enforce.
    That means our national security has become increasingly 
reliant on our economic health and security.
    Our military's increasing reliance on microprocessor 
technology, primarily in computers and telecommunications, 
means that their technology driver is the civilian sector, not 
the military contractor. That means, in turn, that our military 
strength is directly tied to the health of the civilian 
companies that produce the products the Pentagon buys and 
invent the technology that it relies on.
    At the same time the reality is that our military does not 
buy enough to keep our companies healthy. In fact, it is 
exports that keep the U.S. HPC and other high-tech companies 
thriving. More than 50 percent of the sales of these companies 
are exports. Failure to export means fewer profits being rolled 
into R&D on next generation technologies and fewer funds 
available to address particular defense-related concerns.
    Thus, we believe that in many cases the equation has 
become: Exports equal healthy high-tech companies equal a 
strong defense. If export controls cripple our high-tech 
companies by denying them the right to sell, you set back our 
own military development and with it our security. The key and 
growing reality in these kinds of cases is the capacity of our 
adversaries to make these products themselves or to obtain them 
from those who buy outside the circle of multilateral control 
regimes. In the case of computers, for example, China as well 
as India and others have the capacity to make these machines 
themselves. While they do not--and cannot--manufacture to 
compete with U.S. companies, they can make machines that will 
function at performance levels sufficiently high to provide the 
military capabilities they seek. Denying them U.S. products 
simply encourages their own development and product.
    Moreover, our lead in many of these sectors is not based on 
our monopoly of the technology; rather it is based on quality 
and efficiency of our production. Close a market and we will 
create viable competition where there is very little now. And 
that competition, as we learned in so many other sectors in the 
past 30 years, will not stop with China or India but will move 
on to compete head-to-head against us elsewhere to the long 
term detriment of our global leadership.
    In other words we believe that in some cases, the biggest 
loser in the face of closed markets is not the Chinese but the 
Pentagon, whose access to cutting edge goods and technologies 
will be slowed, and the United States, whose technological 
leadership will face new challenges from new suppliers.
    In these cases we think the key security issue is the 
United States' continued ability to stay at the cutting edge of 
developing and producing these technologies. The challenge for 
government is to identify trends in these sectors that could 
compromise our capacity and then to take steps to prevent that 
from happening. This is very different from the cold war 
approach of simply denying a very wide band of much slower 
moving technologies and products to clearly identified 
adversaries.
    Now with respect to the EAA, continuing to operate under 
emergency authority creates a number of problems for us. First, 
as mentioned by Senator Enzi, our penalties are substantially 
lower than those available for violations that occurred under 
the old EAA of 1979. But even those penalties are too low, 
since they have been eroded in the last 20 years by inflation. 
The longer we are under the International Emergency Economic 
Powers Act, which is our current statutory basis, the more 
companies will begin to think of the lower penalties merely as 
a cost of doing business.
    Another limitation of IEEPA concerns our enforcement 
agents' police powers, and my statement details that problem at 
greater length. Third, the longer the EAA lapse continues, the 
more likely we will be faced with challenges to our authority. 
For example, IEEPA does not have an explicit confidentiality 
provision like that in the Export Administration Act or similar 
provisions in the various bills that are pending, including the 
one under discussion today.
    The prediction I made in 1997 that the Department's ability 
to protect from public disclosure information concerning 
license export applications, the licenses themselves, and 
related export enforcement information is likely to come under 
increasing attack on several fronts--that prediction has come 
true.
    The Department is currently defending two separate lawsuits 
brought under the Freedom of Information Act seeking public 
release of export licensing information subject to the 
confidentiality agreements of our law. If we cannot defend the 
confidentiality of this proprietary information, we will face 
increased business reluctance to cooperate with our system. 
Similarly, the absence of specific antiboycott references in 
IEEPA has led some respondents in antiboycott cases to argue--
thus far unsuccessfully--that the Department of Commerce has no 
authority to implement and enforce the antiboycott provisions 
of the EAA and the Export Administration Regulations.
    Finally, we have noticed abroad that our failure to enact a 
new law sends the wrong message to our regime partners, many of 
whom we have urged to strengthen their export control laws and 
procedures. As part of our cooperation with the former Soviet 
Union and Warsaw Pact countries, for example, we have urged 
them to enact strong export control laws. Our credibility is 
diminished by our own lack of a statute.
    Now in 1994 the Administration proposed to revise the EAA 
and to refocus the law on the new security threat we face--the 
proliferation of weapons of mass destruction--without 
sacrificing our interest in increasing exports, reducing our 
trade deficit, and maintaining global competitiveness in 
critical technologies. Congress did not act on that bill, but 
in 1996 the House passed H.R. 361, which made several 
significant improvements to the EAA which were similar to those 
contained in the Administration's bill. Those improvements 
include control authority updated to address current security 
threats, increased discipline on unilateral controls, and 
enhanced enforcement authorities. It also contained provisions 
consistent with administration reforms and of the licensing and 
commodity jurisdiction processes which are largely embodied in 
Executive Order 12981, which was issued in late 1995. That 
order makes clear that all agencies with a stake in the 
outcome, namely my colleagues here as well as the Department of 
Energy, have a seat at the table. Commerce manages the system, 
as it always has, but State, Defense and Energy may review any 
license they wish and take their concerns through a dispute 
settlement process that goes all the way to the President. It 
is a tribute to the effective management of the system and the 
good faith agencies have demonstrated in working with us that 
all agencies have agreed on an outcome, in these license 
applications, more than 90 percent of the time, and conduct 
their reviews on average in less than half the allotted time 
that the Executive Order gives them. Thus far all differences 
of view have been resolved at the assistant secretary level, 
and none have had to go to the Cabinet or to the President in 
this Administration.
    Now, the Senate did not act on the House-passed bill in 
1996, but as observed earlier the Senate Banking Committee 
reported out S. 1712 last September. While different in 
structure from the House-passed bill, it updates control 
authority to address current security threats and contains 
other useful provisions, such as enhanced enforcement 
authorities and significantly higher penalties. It is also 
largely consistent with the Administration's reforms of the 
licensing and commodity jurisdiction process.
    We appreciate the constructive, bipartisan approach taken 
by the Committee's leadership--Senators Gramm, Sarbanes, Enzi 
and Johnson. And we understand that they have done an 
exceptional job in the wake of a very difficult subject. 
Despite their efforts, however, we understand that S. 1712 
continues to be the subject of discussions between the Banking 
Committee and interested members of other committees, as 
Senator Thompson observed. The Administration has not yet taken 
a position on S. 1712 pending the outcome of those discussions, 
but we look forward to a successful outcome that would enable 
the bill to be considered on the Senate floor.
    In closing, Mr. Chairman, let me simply say that we need an 
EAA that allows us to effectively address our current security 
concerns while maintaining a transparent and efficient system 
for U.S. exporters. The Administration and the House, via H.R. 
361, and the Senate Banking Committee, in S. 1712, have agreed 
on many of the salient issues, such as focusing on multilateral 
controls, further discipline on unilateral controls and the 
licensing process and enhanced enforcement. These reforms would 
facilitate the proper balance for controlling dual-use items 
while minimizing the burden on exporters. My preference is to 
take up reauthorization of an EAA that would build on a 
consensus already achieved and further enhance our security in 
the way I defined in the beginning of my statement.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Reinsch follows:]

 Prepared Statement of William A. Reinsch, Under Secretary for Export 
                 Administration, Department of Commerce
    Thank you for the opportunity to testify on the Export 
Administration Act (EAA). Since the EAA's August 1994 expiration, we 
have maintained our system for controlling the exports of dual-use 
goods and technologies through a combination of emergency statutory 
authority--the International Emergency Economic Powers Act (IEEPA), 
executive orders, and regulations. As I noted in past testimony, the 
Cold War has ended, and the need for an EAA that reflects this reality 
is long overdue.
    Reauthorizing and modernizing the EAA will provide U.S. businesses 
an updated legal framework in which to operate. A legal framework which 
recognizes the current realities of a fast-paced highly competitive 
global market, and helps to ensure our national security by controlling 
sensitive dual-use technologies. Moreover, it would preclude some of 
the legal challenges that are now being brought under IEEPA and would 
enhance our credibility in international fora.
    I want to begin with an explanation of the logic that has guided 
this Administration's thinking on dual-use export controls and then 
focus on three key points: the complications of continuing to operate 
under the IEEPA and how a new EAA could alleviate those complications; 
the Administration's proposed revisions to the EAA as well as the 
significant features of H.R. 361, passed by the House in 1996; and S. 
1712, reported last fall by the Senate Committee on Banking, Housing 
and Urban Affairs.

Post-Cold War Export Controls

    Although the end of the Cold War has handed us a more complex world 
with a more diffuse set of adversaries and less multilateral agreement 
on what to do about them, our goal of maintaining military superiority 
has not changed, and we still seek to achieve it by maintaining the gap 
in capabilities between ourselves and our adversaries. That gap is 
sustained and expanded through policies that retard our adversaries' 
progress, such as export controls, and through those that help us run 
faster--increased research, development and acquisition of advanced 
technologies here at home--not to mention the sound economic policies 
that have produced the longest period of economic growth in our 
history.
    What has changed is the relative balance of those two tactics, as 
economic globalization has accelerated the pace of technological change 
and made export controls more difficult to implement and enforce. That 
means our national security has become increasingly reliant on our 
economic health and security.
    The ubiquity of some critical technologies and the ease of their 
transfer makes export controls much more difficult. For example, 
microprocessors, which are the key ingredient for High Performance 
Computers (HPCs) as well as PCS, have become a commodity product widely 
available throughout the world from numerous sources. The technology to 
``cluster'' these computers is also readily available through the 
Internet.
    Our military's increasing reliance on microprocessor technology--
primarily in computers and telecommunications--means that their 
technology driver is the civilian sector, not the military contractor. 
That means, in turn, that our military strength is directly tied to the 
health of the civilian companies that produce the products the Pentagon 
buys and invent the technologies it relies on.
    At the same time, our military does not buy enough to keep our 
companies healthy. In fact, it is exports that keep the U.S. HPC and 
other high-tech companies thriving. More than 50% of the sales of these 
companies are exports. Failure to export means fewer profits being 
rolled into R&D on next generation technologies and fewer funds 
available to address particular defense-related concerns.
    Thus, we believe that in many cases the equation has become: 
exports=healthy high-tech companies=strong defense. If export controls 
cripple our hi-tech companies by denying them the right to sell, you 
set back our own military development and thus our security.
    A key--and growing--reality in all these cases is the capacity of 
our adversaries to make these products themselves or to obtain them 
from those who lie outside the circle of multilateral control regimes. 
In the case of computers, for example, China, as well as India and 
others, have the capacity to make these machines themselves. While they 
do not--and cannot--manufacture to compete with U.S. companies, they 
can make machines that will function at performance levels sufficiently 
high to provide the military capabilities they seek. Denying them U.S. 
products simply encourages their own development and production--which 
was precisely the effect of the Reagan Administration's decision to 
deny India HPCs.
    Moreover, our lead in many of these sectors is not based on our 
monopoly of the technology; rather it is based on the quality and 
efficiency of our production. Close a market and we will create viable 
competition where there is very little now. And that competition, as we 
have learned in so many other sectors over the past thirty years, will 
not stop with China or India but will move on to compete head to head 
against us elsewhere to the long term detriment of our global 
leadership.
    In other words, in some cases, the biggest loser in the face of 
closed markets is not the Chinese but the Pentagon, whose access to 
cutting edge goods and technologies will be slowed, and the United 
States, whose technological leadership will face new challenges from 
new suppliers.
    In all these cases, we think the key security issue is the United 
States' continuing ability to stay at the cutting edge of developing 
and producing these technologies. The challenge for government is to 
identify trends in these sectors that could compromise our capacity and 
take steps to prevent that from happening. This is very different from 
the Cold War approach of simply denying a very wide band of much slower 
moving technologies and products to clearly identified adversaries.

The Need for a Revised Export Administration Act

    Continuing to operate under emergency authority raises the 
possibility of increasing legal and political complications. Operating 
under authority of IEEPA, as we have done on a number of occasions, 
including for the past five and one-half years, complicates our ability 
to function and leaves important aspects of our system increasingly at 
risk of legal challenge. In addition, operating under emergency 
authority can undercut our credibility as leader of the world's efforts 
to stem the proliferation of weapons of mass destruction.

Legal Limits

    In some significant areas, we have less authority under IEEPA than 
under the EAA of 1979. The penalties for violations of the Export 
Administration Regulations that occur under IEEPA, both criminal and 
civil, are substantially lower than those available for violations that 
occur under the EAA of 1979. Even the EAA penalties are too low, having 
been eroded over the past 20 years by inflation. The Administration's 
proposed revised EAA significantly increased these penalties, as did 
H.R. 361 and S. 1712. The longer we are under IEEPA, or even the EAA of 
1979, the more the deterrent effect will be eroded, and companies will 
begin to think of the lower penalties merely as a cost of doing 
business.
    Another limitation of IEEPA concerns the police powers (e.g., the 
authority to make arrests, execute search warrants, and carry firearms) 
of our export enforcement agents. Those powers lapsed with the EAA of 
1979. Our agents must now obtain Special Deputy U.S. Marshal status in 
order to exercise these authorities and function as law enforcement 
officers. While this complication can be overcome, doing so consumes 
limited resources that would be better used on enforcement. The 
Administration's proposed EAA, H.R. 361 and S. 1712 would continue 
these powers.
    Finally, the longer the EAA lapse continues, the more likely we 
will be faced with challenges to various aspects of our authority. For 
example, IEEPA does not have an explicit confidentiality provision like 
that in section 12(c) of the EAA of 1979 or similar provisions in the 
Administration's proposal, H.R. 361 and S. 1712. The prediction I made 
in 1997--that the Department's ability to protect from public 
disclosure information concerning export license applications, the 
export licenses themselves, and related export enforcement information 
was likely to come under increasing attack on several fronts--has come 
true. The Department is currently defending two separate lawsuits, 
brought under the Freedom of Information Act, seeking public release of 
export licensing information subject to the confidentiality provisions 
of section 12(c). Similarly, the absence of specific antiboycott 
references in IEEPA has led some respondents in antiboycott cases to 
argue--thus far unsuccessfully--that BXA has no authority to implement 
and enforce the antiboycott provisions of the EAA and Export 
Administration Regulations.

Policy Ramifications

    The lapse of the EAA also has policy ramifications. Although we 
have made great progress in eliminating unnecessary controls while 
enhancing our ability to control truly sensitive exports, industry has 
the right to expect these reforms to be certain and permanent. For 
example, while the Administration is implementing the President's 
executive order on the licensing process, which increases the 
discipline and timeliness of that process, a statutory foundation for 
that process would send an important message to U.S. exporters that 
these reforms will not be rolled back. Our exporters will then have the 
certainty they need to plan their export transactions.
    In addition, failure to enact a new EAA sends the wrong message to 
our regime partners, many of whom we have urged to strengthen their 
export control laws and procedures. As part of our export control 
cooperation with the former Soviet Union and Warsaw Pact countries, we 
have urged them to enact strong export control laws. Our credibility is 
diminished by our own lack of a statute.

Recent Attempts to Revise the Export Administration Act

The Administration's Proposal

    In February 1994, the Administration proposed a revised EAA that 
refocused the law on the new security threat we face--the proliferation 
of weapons of mass destruction--without sacrificing our interests in 
increasing exports, reducing our trade deficit, and maintaining global 
competitiveness in critical technologies. Our bill emphasized the 
following principles: (1) a clear preference for export controls 
exercised in conjunction with the multilateral nonproliferation 
regimes; (2) focus on economic security by increased discipline on 
unilateral controls; (3) a simplified and streamlined export control 
system; (4) strengthened enforcement; and (5) expanded rights for 
exporters to petition for relief from ineffective controls.

H.R. 361--The Omnibus Export Administration Act of 1996

    H.R. 361 made several needed and significant improvements to the 
EAA which were similar to those contained in the Administration's 1994 
proposal. These improvements include control authority updated to 
address current security threats, increased discipline on unilateral 
controls, and enhanced enforcement authorities. H.R. 361 also contained 
provisions consistent with Administration reforms of the licensing and 
commodity jurisdiction processes which are largely embodied in 
Executive Order 12981, issued in December 1995. That order makes clear 
that all agencies with a stake in the outcome have a seat at the table. 
Commerce manages the system, as it always has, but State, Defense, and 
Energy may review any licenses they wish and take their concerns 
through a dispute settlement process that goes all the way to the 
President. It is a tribute to the effective management of the system 
and the good faith agencies have demonstrated in working with us that 
all agencies agree on an outcome more than 90% of the time and conduct 
their reviews on average in less than half the allotted time. Thus far, 
all differences of view have been resolved at the assistant secretary 
level, and none have had to go to the Cabinet or the President.
    We did have concerns, however, about H.R. 361's terrorism, unfair 
impact, antiboycott private right of action, and judicial review 
provisions. We also believe that certain provisions raised 
constitutional issues.

S. 1712-The Export Administration Act of 1999

    The Senate Banking Committee reported S. 1712 in September of last 
year. While different in structure from H.R. 361, it also updated 
control authority to address current security threats and contains 
other useful provisions, such as enhanced enforcement authorities, and 
significantly higher penalties. It is also largely consistent with the 
Administration's reforms of the licensing and commodity jurisdiction 
process.
    We also appreciate the constructive, bipartisan approach taken by 
the Committee's leadership--Senators Gramm, Sarbanes, Enzi and Johnson. 
The unanimous support for the bill in their committee is testimony to 
the way they have handled a difficult, controversial subject. Despite 
their efforts, however, we understand that S. 1712 continues to be the 
subject of discussions between the Banking Committee and interested 
members of other Senate committees. The Administration has not yet 
taken a position on S. 1712 pending the outcome of those discussions, 
but we look forward to a successful outcome that would enable the bill 
to be considered on the Senate floor.
Conclusion
    We need an EAA that allows us to effectively address our current 
security concerns while maintaining a transparent and efficient system 
for U.S. exporters. The Administration and the House, in H.R. 361, and 
the Senate Banking Committee in S. 1712 agreed on many of the salient 
issues, such as focusing on multilateral controls, further discipline 
on unilateral controls and the licensing process, and enhanced 
enforcement. These reforms would facilitate the proper balance for 
controlling dual-use items while minimizing the burden on U.S. 
exporters. My preference is to take up reauthorization of an EAA that 
would build on the consensus already achieved and further enhance our 
security in the way I defined it at the beginning of my statement.

    The Chairman. Thank you, Mr. Reinsch, and I think your 
suggestion is appropriate. I would like to begin with Mr. 
Bodner and ask if he or Mr. Holum or you have a response to the 
concerns raised by Senator Thompson in his comments. You do not 
have to, Mr. Reinsch obviously wishes to, but if you do not or 
Mr. Holum does not, that is fine with me.
    Mr. Bodner. Perhaps you will want to proceed with Mr. 
Reinsch, and then John and I might have comments.
    The Chairman. OK, fine. Mr. Reinsch.
    Mr. Reinsch. Well, I wanted to stick to facts, Mr. 
Chairman. There are issues that are questions of opinion, and 
we can discuss those. But I want----
    The Chairman. I think it is important for you to respond, 
as you said.
    Mr. Reinsch. Let me just say on computers the control 
numbers we are dealing with are not 12,000 and 25,000. They are 
6,500 and 12,300. Those went into effect on January 23rd. We 
are currently reviewing further numbers. The higher numbers 
Senator Thompson alluded to in the absence of Congressional 
intervention will go into effect on August 14th, but they are 
not in effect now. The bill does not move commercial 
communications satellites back to the Department of Commerce. 
In fact the bill, S. 1712, has nothing to do with commercial 
communication satellites. I have heard some rumors that there 
may be some senators who will make that proposal, but that is 
not part of that bill, and we have not seen any such 
legislation that has been proposed as far as I know.
    The Department of Commerce does not now and would not under 
this bill unilaterally add or remove items from the control 
list. That is an interagency exercise which we undertake with 
my two colleagues here, and we make joint decisions. Likewise 
in the licensing process as I described, the Department of 
Commerce does not unilaterally issue export licenses, unless we 
are talking about the relatively small number of items in which 
our sister agencies have told us they are not interested in 
reviewing those applications. One of the things that the 
Executive Order issued in December 1995 did was tell agencies 
that they can see anything they want. Agencies have the right 
to tell us they want to see everything. After that Executive 
Order was issued the number of licensed referred to other 
agencies jumped from 52 percent to 94 percent. It has since 
fallen down a little bit because agencies have decided they do 
not want to look at certain things because it does not affect 
their equities, and we are now referring somewhere between 85 
and 90 percent of our licenses.
    Even so, they all go out; they all fan out in the process, 
are widely distributed and the decisionmaking is a joint 
process in which--as I said this gets obscured in the debate--
but we actually agree 90 percent of the time on these things, 
and that is the end of it. We agree at the working technical 
level and this moves on. What you read about are the small 
fraction that we do not agree on, that work their way up 
through the dispute settlement process, but which as I said 
have always gotten resolved at the assistant secretary level 
and have not yet had to go higher, though the means exists to 
do that.
    As I mentioned in the beginning, we have not done one, only 
one end-use visit in China, we have done 60. We have more 
scheduled. The agreement we have with the Chinese is classified 
confidential. We gave it to the Cox Committee. We gave it to 
our authorizing committees. We are happy to give it to the 
Governmental Affairs Committee. We are happy to give it to you, 
Mr. Chairman, and have you look at it. I could not tell you 
that we are entirely pleased with it. In fact, my Assistant 
Secretary is in China as we speak negotiating with the Chinese 
to try to strengthen it. And I hope that she will come back at 
the end of the week with some improvements, because I think we 
can do more. But I think 60 is a big improvement. I also say 
that that does not count the other some 200 end-use visits that 
we have to conduct, because we are required by law to visit all 
computers shipped, not just to China but to 50 countries. And 
the Congress has not seen fit to give us additional resources 
to do that, so we have been able to do 60 in China, we have 
been able to do some 200 in the other 49 countries, some of 
which I can enumerate if you wanted me to. But the other big 
ones are India, Pakistan, Russia and Israel. Those along with 
China comprise about 85 percent of that particular group in the 
marketplace.
    I think in terms of facts, Mr. Chairman, I'll just stop 
there and respond as you wish to anything else.
    The Chairman. Thank you. Mr. Holum, do you have anything to 
add?
    Mr. Holum. No.
    The Chairman. Mr. Bodner?
    Mr. Bodner. No, sir.
    The Chairman. I guess the concern is about the small number 
of those that resulted in the legal sale by American companies 
of biological materials to Iraq during the 1980's, providing 
the basis for that country's biological weapons program: the 
acquisition by Iraq of glass fiber technology used to improve 
weapons systems, including guided missile components; the sale 
to the former Soviet Union of the common river truck plant, the 
product of which was used extensively during the invasion of 
Afghanistan; the sale to China of machine tools used in the 
manufacture of advanced fighter jets; and numerous transactions 
involving the sale to China of computers and other technologies 
to institutes with integral ties to the People's Liberation 
Army.
    All those, I am sure, are some of the few that slipped by 
during previous administrations, when the previous Export 
Administration Act had not expired. Is it true, Mr. Reinsch, 
that Department of Commerce under this proposed legislation 
would decide whether referrals were made to DOD and State?
    Mr. Reinsch. Of export license applications no, Mr. 
Chairman. It would largely repeat the structure which we have 
now, in which the other agencies would indicate to us what they 
wish to see. And they tend to do it through what might best be 
called a negative option. That is, we assume they want 
everything; they delegate back to us authority not to send them 
certain things, and as I have said, what that has resulted in 
is we refer 85 to 90 percent of all our licenses. If anybody 
wants to see all of them, we are happy to do that. This bill 
would not change that process.
    The Chairman. I would like to give you a chance to respond. 
On ``60 Minutes'' there was, a report on dual-use technologies 
which referenced a factory in China to which military sensitive 
U.S. machine tools were sent. This factory was known to produce 
Silkworm missiles. In response you noted the factory also 
produces bicycles. Would you care to respond to that?
    Mr. Reinsch. I remember that program, Mr. Chairman. That 
was one of the more interesting events of my tenure.
    The Chairman. I do have some sympathy for you.
    Mr. Reinsch. What I learned, as perhaps you observed, too, 
Mr. Chairman, from that is the bigger the program, the more 
furniture they move when they interview you. It took them an 
hour and a half to set up and an hour to shut down for what you 
saw, which was a very brief interview. There is no question in 
this case, Mr. Chairman, that there was a diversion. That is 
also under investigation, and as you may be aware, last October 
19th, criminal indictments were issued against McDonnell 
Douglas Corporation and a Chinese corporation and certain 
individuals for their alleged involvement in that case. That 
will be working its way through the criminal justice system.
    What is often forgotten in that particular case is that of 
the 30-plus machine tools that were involved in this larger 
shipment, six were--five or six were actually diverted to the 
Nanchang plant which is the one you were referring to.
    What most people fail to mention is two things. First of 
all, we got them all back before they had been used. All but 
one of them had not even been taken out of its crate, and the 
company was able to visit them to verify that. We were able to 
ascertain and demonstrate that they had not been used. These 
are not machines you simply plug in and run. The one that was 
uncrated was a hydraulic stretch press that needed water, 
connections, and a lot of other things. We were confident they 
were not used. They were all returned to another facility where 
they are under American control. They continue to be visited, 
and we are confident that they were not used.
    The irony, I would say, Mr. Chairman, is that what that 
report on ``60 Minutes'' also did not comment on is after that 
stretch press was sent back, was recovered and sent back into 
American control, the Chinese bought a brand-new one from 
Europe to replace it.
    The Chairman. I hate to do this to you, but I do have some 
questions----
    Mr. Reinsch. Fire away.
    The Chairman. --that I would like to submit to you all that 
I would like responses for the record. I know how busy you are, 
and I will try to keep those questions at a minimum.
    But let me just ask the three of you to address concerns 
that have been raised by the Inspectors General of each of your 
departments that you represent. And that is this whole issue 
which really focuses a lot of the concerns that Members have 
and Americans have about dual-use technologies and especially 
dual-use technology that is exported to China, given the 
indivisible relationship between the Chinese Army and their 
commercial enterprises.
    That is, that is the great cause for concern. I think 
amongst most of the Members of this Committee and other Members 
of the Senate. Would you--would you discuss those concerns 
specifically, beginning with you, Mr. Bodner.
    Mr. Bodner. I do think it is possible to square this circle 
in terms of the challenges posed by the fact that technology is 
advancing at a very rapid pace, and it is spreading and it is 
becoming ubiquitous in the industrial environment, the business 
environment and, of course, the military environment, and that 
is where the rub comes because of the overlap there.
    What we need to do is to make sure we have processes in 
which in each case an appropriate balance can be struck and 
judged. And I do think that it has been stated here when the 
Department of Commerce determines that a license is required, I 
do think the interagency process works. And we are satisfied 
generally with that. Similarly, with regard to the question of 
the formulation of a list, as it exists now, and as it exists 
under the proposed legislation, particularly as it came with 
changes in the manager's amendment as it now stands.
    There obviously are cases in which it is a little more 
difficult to make determinations. I would note that in a 
parallel process at the State Department runs for Munitions 
List items under the Arms Export Control Act, there is a very 
transparent system there that we are very pleased with in terms 
of determinations made by State that a license is required. We 
have adequate insight into how that works, and we think that 
system works well. We also have adequate insight into the State 
Department system for deciding whether a license is required, 
the so-called commodity jurisdiction process, and we think that 
works well.
    I will tell you that within the Department of Defense one 
of the things we have done to improve our system is we have 
gathered the three military departments together, and we have 
had them identified together which of them has the best 
practice for each of the different elements of their export 
license review process, and then we encourage them to adopt the 
best practice, even though for a particular department they may 
be borrowing a practice from another. And I think in this case 
we may have a similar situation.
    We think the commodity jurisdiction process works quite 
well. It is transparent and open, and we are pleased with our 
colleagues in the State Department that we have insight into 
how they make a judgment as to whether a license is required or 
not, and we think that is a best practice. And as a principle 
in life, I would say that we should all be looking to adopt 
best practices.
    The Chairman. Mr. Holum.
    Mr. Holum. Going specifically to the question of whether it 
is possible to export a dual-use commodity to an entity in 
China and not have it end up in the service of the military, 
the PLA, it seems to me that it is possible in two ways. One is 
the technology may not lend itself to a particular military use 
or might not be useful. It may be embedded technology where 
having access to what's really valuable to the commodity might 
result in destruction of the product, which would leave them 
with nothing. And another way is through the end-use process 
that Under Secretary Reinsch described, and I think it does 
serve our interests, if we have confidence that we are 
protecting U.S. technology from diversion, to, for example, 
provide computing capability to weather predicting operations 
in China. That can serve international air traffic safety, for 
example, and weather prediction.
    I think we have a broader set of interests here. Both the 
commercial transaction and other national interests can be 
served, so I do not regard everything that goes to China as 
inherently going to the PLA. I do not think that is the 
appropriate standard for review of dual-use items, but I do 
think we need to be careful to protect the technologies from 
diversion and strongly enforce against the exporter and 
entities in China when there are diversions.
    The Chairman. Mr. Reinsch.
    Mr. Reinsch. I thank you.
    I think, Mr. Chairman, I would draw a distinction between 
information technologies and other technologies, particularly 
production technologies. If you look at our record overall on 
machine tools or semiconductor manufacturing equipment or 
production equipment--things that are used to make other 
things--with respect to China, it has been quite tight. In 
fact, I am quite confident if you were to have a machine tool 
industry witness on your next panel, he would give you nothing 
but a series of complaints, which the three of us have gotten 
over the last several years about this administration's failure 
to do what that industry would like. I am going down to their 
annual meeting tomorrow, and I expect to hear those complaints. 
We have got similar complaints, incidentally, from the 
semiconductor manufacturing equipment organization.
    IT, information technologies, is in a little bit different 
category because of its ubiquity, because of the pace at which 
it moves, because the real issue here as far as computers are 
concerned is not so much the box, but the chips. The chips are 
made all over the world. Intel will tell you they have 50,000 
authorized dealers, and those are not the people who sell 
clones. Those are the people that sell, you know, the real 
thing. It is very difficult in those situations to box up that 
technology and keep it out of individual hands.
    In the case of China, some 60, 65 percent of computers that 
have gone there have gone to banks, phone companies, weather 
prediction organizations, and I think railroads. Now, we 
believe that those are essentially benign institutions. We have 
visited many of them. Of all the visits we have done in China, 
we have not found any problems. Every computer that was shipped 
was where it was supposed to be, doing, as far as we can tell, 
what it was supposed to do. We think that in the computer IT 
area there are limits to what we can accomplish. Beyond that I 
would agree with Mr. Holum. And that is an area where you can 
draw the distinction. Elsewhere, I think we have been quite 
tight.
    The Chairman. Well, I guess you say 65 percent went to 
those, and that gives rise to the question, where did the other 
35 percent go?
    Mr. Reinsch. Radio and television stations. Actually, I can 
submit that for the record.* We have got a complete accounting.
---------------------------------------------------------------------------
    * The information referred to was not available at the time this 
hearing went to press.
---------------------------------------------------------------------------
    The Chairman: I would appreciate that.
    Mr. Reinsch. Research institutions. It raises an 
interesting question, Mr. Chairman. For example, if you want to 
make an analogy, if you want to make an American analogy, we 
might send one to the Johns Hopkins University. Well, that 
sounds good, but the Johns Hopkins University owns and operates 
the Applied Physics Laboratory which, as you probably, engages 
in a great deal of classified research for the Department of 
Defense and others. Does that mean we should not give a 
computer to the university? I mean, these are the kind of 
problems we face in China.
    The Chairman. Johns Hopkins is not owned by the United 
States Army. There is a little less than subtle difference.
    Mr. Reinsch. These are the Chinese institutions that I am 
talking about. They are not owned by the Army, but they have 
relationships with the Army. There is no question about that. 
But, you know, the other reality is in any country in the 
world, if we ship something overseas, you know, we lose a 
modicum of control over it. I mean, if you are going to tell me 
the PLA can march into the Guangjou Telephone Company and rip 
their computer out of its flooring and take it somewhere, the 
answer to that is probably yes, but that can happen in most any 
country in the world if that is what the military wants to do.
    What we have tried to do in that technology is parse what 
we are doing in relation to the widespread availability of the 
technology, and their own ability to make these products 
themselves.
    The Chairman. But again, I do not mean to be argumentative, 
but there are different levels of concern, and our concern I 
think is driven by the actions of those particular countries. 
And obviously if it went to England, then we might have a 
different level of concern than if it went to China or Iraq or 
Libya or Iran so--and again with all due respect, you are 
saying well, any country in the world. I think there are 
different levels of concern about what exports go to which 
country, and I am also aware that those countries can serve as 
middlemen and all of that. But I guess the concern that many of 
us have is when we see what apparently is a very significant 
investment in military capability on the part of China, which 
was not true some years ago, that it makes us even more 
cognizant of this particular aspect of our export of high 
technology which can be used again, which is dual-use.
    Mr. Reinsch. We share that concern, Mr. Chairman. I think 
there is no question about that, and there--probably the two 
countries that as an interagency group we spend the most time 
talking about for precisely that reason is China and India 
because of recent events there, and they both pose some very 
complicated policy dilemmas. I think we would concur completely 
with the concern you are expressing or attempting to work our 
way through it one by one, which is what we do in the licensing 
business as best we can.
    The Chairman. I thank you all. I thank you for taking time 
this afternoon to be here, and I think it has helped a great 
deal as we examine this very important piece of legislation. I 
thank the panel.
    The next panel is Mr. John Douglass and Dr. William 
Schneider.
    Welcome back, Mr. Douglass.
    Mr. Douglass. Thank you, Mr. Chairman.
    The Chairman. Please begin, and how are you, Mr. Schneider?
    Dr. Schneider. Very good, sir.
    The Chairman. You have not aged a bit since you and I have 
first encountered each other in the middle 70's. Now you are in 
your middle 70's, are you not? That is not a kind remark. I 
apologize for that, Bill.
    Dr. Schneider. I worked for the State Department, I am well 
insulated from assaults of that sort.
    The Chairman. Thank you.
    Dr. Schneider. Thank you, Mr. Chairman.
    The Chairman. John.

       STATEMENT OF JOHN W. DOUGLASS, PRESIDENT AND CEO, 
                AEROSPACE INDUSTRIES ASSOCIATION

    Mr. Douglass. Thank you, Mr. Chairman. I want to begin by 
thanking you for holding this hearing and giving me an 
opportunity to testify, sir. As you know, sir, we worked 
together before, I remember, and I especially remember your 
attempts to work with Senator Nunn on things that were in the 
Defense bill that should not have been in the Defense bill and, 
sir, I have always enjoyed that and greatly respect you for 
your valiant efforts there.
    The Chairman. Thank you.
    Mr. Douglass. I would like to just take what time we have 
left today to go over, provide a little information to the 
Committee, sir, about the system and about where our products 
are and then comment briefly on the bill and then turn it over 
to Bill.
    First point that I would like to make, sir, is that there 
are two systems, and the two systems have their roots in two 
basic laws. The Arms Export Control Act is administered by the 
Department of State, and that covers Defense articles and 
services which are clearly military items. And one aspect of 
the debate that I have heard often over and over in the past 
oh, 60 to 90 days--I have testified three times on this bill--
is that examples of things that are military tend to get into 
the debate when talking about dual-use items. There is 
considerable amount of confusion there.
    The bill that we are talking about, of course, is trying to 
get a new Export Administration Act. As previous witnesses have 
pointed out, we have not had one since 1994, so it has been 6 
years now. And these are essentially for commercial items, 
which might have some use by some potential enemy as a military 
product, and this is a very difficult judgment to make, sir. I 
could hold up a cell phone, and you and I could make the 
obvious discussion about how it could be used by a soldier. In 
fact, during our military operation down in the Dominican 
Republic a few years ago in the islands one of the soldiers 
called in on a cell phone in order to locate his unit. That 
whole system is administered by the Department of Commerce.
    But there is one interesting thing, sir, that has not been 
brought out in the debate. None of the previous witnesses 
mentioned it, and that is if there is an item that is being 
administered by the Department of Commerce and the Department 
of State feels that it is--belongs on the munition list, the 
Secretary of State has the unilateral authority to, you know, 
exercise jurisdiction over it. So things can be moved 
internally as it exists today without the intervention of the 
Congress.
    And finally, sir, I thought I would just mention, I 
mentioned it in my written statement, which I would like to 
submit for the record----
    The Chairman. Without objection. Both statements.
    Mr. Douglass. --is that the confusion about these two laws 
exists not only in the mind of the public and in the minds of 
people up here on the Hill, but it exists in the minds of 
business people, and indeed it exists in the minds of people in 
the government. After Secretary Holum testified recently, 
somebody in the State Department put up a summary of his 
testimony on their website and they had it all backward. They 
had the military things being controlled by Commerce and vice 
versa. You can imagine the impact that this would have on a 
small business somewhere out in the Midwest who might be 
bidding on a contract in England or France and trying to 
understand this. It is terribly confusing.
    [Chart.]
    Mr. Douglass. Next chart, please.
    As a result of the fact that we have two bills and as a 
result of the length of time that has gone by since these bills 
were put through our legislative system, a lot of things have 
changed. In the old days during the Cold War when the current 
bills were drafted, the distinctions were more clear than they 
are today. Indeed, the classic case that we have often 
discussed here is the commercial communications satellites. Is 
a communications satellite really a weapon or is it a dual-use 
item and where does it belong? I'll comment on the sales of 
those in a few minutes.
    We used to--generally speaking, sir, we used to do the R&D 
in the military side. This is where you and Senator Nunn worked 
together to try to keep the pork out, and then that military 
technology would be spun off into the commercial market. That 
paradigm existed for many years. But now there is much more 
investment over on the commercial side than there is on the 
military side. DOD R&D spending for the aerospace industry has 
declined by over 70 percent in the last 10 years, and there is 
all kinds of research going on in the commercial side for this 
industry to survive.
    I would also mention to you, sir, that there is a lot of 
confusion about the difference between classified information 
and information that just might be sensitive or helpful to 
someone. And generally speaking, when you get to the bottom of 
a lot of these discussions, we find that people are not talking 
about compromise of classified information. We are talking 
about how to do it or, you know, trade secrets or things of 
that nature which are certainly not classified.
    But there is an important point to be made here about what 
you asked one of the previous witnesses and that is when it 
comes to China, sir, it is interesting to note that we have 
here in the United States today in our graduate schools about 
45,000 graduate students from the PRC. Now, they are working in 
college laboratories and all over the United States. They are 
working on technologies that might become classified 5 or 6 
years from now when the military finds out about it. That is 
where a lot of the razor's edge of technology is getting spread 
all over the world because we educate a lot of scientists and 
engineers for tomorrow's projects right here in the United 
States, and none of that, sir, is controlled. It does not get 
controlled until later on in the process.
    And then finally, we used to do things on paper. Today, it 
is all done electronically, and if there is to be sharing of 
information or compromises of information, it is much more 
difficult to track. It is much easier to spread it around on 
the Internet and so on. I am sure from your duties here in the 
Congress, you have seen some of these awful things that get on 
the Internet about how to build bombs and so on, and so it is 
much more difficult today than it used to be.
    [Chart.]
    Mr. Douglass. Next please.
    Here is just a little bit of sales information. I thought 
you would find this interesting for the aerospace industry. If 
you were to go back to 1989, which most people consider to be 
the last year of the cold war, DOD is about 50 percent of the 
aerospace business in this country. And if you went back a 
little further, between DOD and NASA, they were 70 percent of 
our business base.
    Today, you can look at the chart on the right, and you can 
see that exports are over 40 percent of our business base. Our 
single biggest customer today is the global economy, and these 
are all overwhelmingly commercial products. I did dot in a 
little part there to show you the military products that go 
overseas. It is about 8 percent of our total production, but it 
is almost \1/3\, sir, of our fighter aircraft production that 
is sent outside the United States, but to our allies. We are 
not selling these things to people that we do not trust.
    [Chart.]
    Mr. Douglass. Next chart, please. I want to show how 
aerospace exports affect our country in an economic sense 
because as we all know, military security is one thing, but if 
you do not have economic security, the recent story in the 
Soviet Union and what happened to it is a good example. It does 
no good to have a big military without the economic security to 
go with it. These statistics on this chart are from 1997. And 
in that year, as can you see, aerospace was the largest earner 
of export credits for our country. That represents a $34 
billion surplus on about $50 billion of sales that year.
    And what's interesting is look at 1998, the next year after 
this. This is when the Asian recession began to set in. Almost 
all the blues went away, and we increased our surplus to $42 
billion on over about $60 billion of sales. And again 
reflecting on the comment that you made earlier, sir, the 
overwhelming amount of these sales are to America's closest 
allies; the biggest single chunk of that export surplus is with 
the United Kingdom.
    There are only two countries in the world we have an 
aerospace trade deficit with. One is Canada, in which we have 
no export licensing restrictions because of long-standing 
agreement. The other one is France, and that is primarily due 
to the production of the Airbus in France.
    There is some troubling postscript to this information that 
I am showing you, though, sir. In 1999, this export surplus has 
declined by over 10 percent. Our latest projections are that it 
is going to decline from the 42 billion down to around 37 
billion. Exports are down. Imports are up, and in some sectors 
there has been a very dramatic decline. Since the satellites 
were moved from the Commerce Department jurisdiction back into 
State, satellite sales have dropped about 40 percent. My 
organization has tracked it to be about 40 percent, but there 
are others I have seen that are reporting it higher. So there 
is some real concern that we are going over the top of a cycle 
here and that it is going to have a pretty serious and profound 
effect on our economy if we are not able to get this export 
licensing system straightened out.
    If you just go back to the first chart one more time, I 
just want to mention to you a little conversation I had with 
Senator Thompson before the hearing. Before you came into the 
hearing, he and I were discussing the issue that you have 
mentioned and he has mentioned, and that is the need for 
balance in this. And balance, as we all know, is tied very 
closely to people's perception. He asked me what recommendation 
I would make for the long term, and in the short term clearly 
our industry wants to see this Export Administration Act put in 
place because we need a bill now.
    But for the longer term we have called for a Presidential 
commission. We have asked both Presidential candidates that are 
still in the race to promise us a Presidential commission, a 
bipartisan commission with members of labor, business, our best 
people from our universities and colleges, from the Wall Street 
community to see how--why can't we make this one single system. 
Both of these bills rely on the advice of the Department of 
Defense that witnesses on the previous panel were explaining to 
you how they all go back to DOD to ask what should they do. We 
think for the long term you could have a much better system 
that would combine the two and give us the economic security we 
need along with our national, addressing our national security 
concerns.
    But for the short term, we think this bill needs to be 
enacted. It has been too long, sir, since we have been working 
on an Executive Order. Thank you.
    The Chairman: I thank you very much. Bill.
    [The prepared statement and charts of Mr. Douglass 
follows:]

      Prepared Statement of John W. Douglass, President and CEO, 
                    Aerospace Industries Association
    Mr. Chairman:

    I am John Douglass, President and CEO of the Aerospace Industries 
Association. We are pleased to have this opportunity to explain the 
impact of export controls on our industry (and our nation), with 
particular reference to S.1712, the Export Administration Act (EAA) of 
1999. AIA is the trade association that represents the major 
manufacturers of commercial and military aircraft, helicopters, 
missiles, satellites, engines, and related aerospace subsystems. Our 
industry produced $155 billion of aerospace products last year, and 
currently employs over 800,000 Americans (in high-tech, well-paying 
positions).
    We welcome the opportunity to discuss our export control system 
with you this afternoon. The EAA, and its companion legislation, the 
Arms Export Control Act, form the legislative foundation for today's 
export controls systems. These laws were both passed in the mid-
seventies, at the height of the Cold War. As I will note later in my 
testimony, much has changed in the political, technological, and 
business world since then. However, the laws have not been modified to 
reflect those changes.
    Indeed, it is noteworthy that it is now a decade since the Berlin 
Wall came down and the Cold War over. For over half that period, the 
EAA has been officially lapsed, as the executive branch and Congress 
have been unable to reach a consensus as to how to adapt that law to 
reflect current conditions. It is particularly embarrassing for the 
U.S. to preach the merits of a strong export control system to 
countries such as Russia and China, when our own law lapsed in 1994 and 
still refers to such Cold War fixtures as the Soviet Bloc and the 
Coordinating Committee on Multilateral Export Controls, or COCOM.
    To the credit of the Senate Banking Committee, it made a bipartisan 
effort to redraft the EAA to bring it into conformity with today's 
world. Yet it's efforts have been met with considerable second guessing 
from a number of critics, both from within and without the Senate. 
Partly this is because the legal and bureaucratic structure in not easy 
to understand. This was brought home to me last week, when following 
the testimony of Under Secretary of State John Holum before the House 
International Relations Committee, the State Department posted a report 
on the testimony on its web page. Let me quote one paragraph:

                Much of the regulation of arms for commercial export 
                was transferred by Congress from the Commerce 
                Department to the State Department in the spring of 
                1999. In addition to conventional arms, the system also 
                covers satellites, computers and other technology with 
                a dual use that could fall into the wrong hands and 
                jeopardize the security of the United States.

    Almost everything in that paragraph is incorrect. The Commerce 
Department has never had responsibility for licensing commercial sales 
of arms. The sale of computers and other dual use items was not 
transferred to State. Only commercial communications satellites, not 
all satellites, were transferred from State to Commerce and then back 
again.
    I am not trying to criticize a reporter for being confused, or even 
the State Department for posting a piece on such a subject without 
having a quality control system. What I am saying is that our current 
legal and bureaucratic export control system is confusing, and that it 
is high time the Congress to come up with an EAA that meets the 
security, foreign policy, and commercial needs of today, not yesterday.
    This hearing will hopefully help us all get on with that job. This 
afternoon I would like to briefly comment on how times have changed, 
and address how S.1712 addresses those changes. I would also like to 
make a plea that even if the Congress passes some form of S.1712, the 
next President and Congress should still take a hard look at what kind 
of export control system would make sense in the 21st century, and work 
to devise such a system. Let me now briefly review the changed world 
for which we need to adapt our current export control system, and the 
degree to which S.1712 attempts to do so.

Background

    During the Cold War, the U.S. was willing to sacrifice economic 
interests for the sake of limiting the ability of the Soviet Union and 
its allies to improve their military capabilities and to discourage 
other countries from joining the Soviet Bloc (or punishing those that 
did). This was also true of other industrial democracies who recognized 
the Soviet threat and the importance of the U.S. nuclear umbrella. We 
were able to obtain relative consensus on the importance of keeping a 
variety of technologies from the Soviet Bloc that would directly help 
those countries build their weapons systems, or improve their economies 
to support larger military establishments.
    It was also true that new advanced technologies generally 
originated from government supported military research first applied to 
military projects. These included such technologies as radar, nuclear 
energy, computers, lasers, sensors, satellites, and advanced materials. 
These technologies gradually migrated to the civilian sector. 
Technology and plans for hardware were generally recorded and 
transferred on paper.
    The Soviet Union has now collapsed. There is greater awareness that 
both the economic welfare and security of countries in the future will 
increasingly depend on their ability to compete in the global 
marketplace. There is far less consensus among our fellow industrial 
democracies as to how to deal with countries such as Russia and China; 
those countries themselves have become both purchasers and suppliers of 
advanced technology. In particular, China has become an important 
market for many countries, and is regarded as one that will steadily 
expand. The tradeoff between security and economic benefits has become 
more complex.
    At the same time, the distinction between military and commercial 
products has become less clear. The military is expanding the share of 
its budget that goes into such activities as communications, data 
processing, imaging, and simulation--all areas of accelerated 
commercial activity. Furthermore, in order to hold costs down, the 
military must turn to standard, or near standard commercial products to 
meet many of these needs. But lower costs and rapid technological 
innovation in the commercial sector are only possible for companies 
producing for a global marketplace, with the flexibility to rapidly 
penetrate new markets and to take on foreign partners.
    These changes are reflected in the aerospace industry. Ten years 
ago, more than 50 percent of our business was with the Department of 
Defense. The U.S. government, as a whole, accounted for three-fifths of 
our sales. Today the government accounts for about 35 percent of our 
sales, and of the remainder, foreign sales account for two thirds. 
Commercial space activity is our fastest growing sector, with sales 
having jumped form 1 to 5 percent of sales in the past decade.
    Increasingly, the Department of Defense looks to commercial 
research, development, and products to meet its needs, and to our 
foreign sales of military equipment to keep crucial defense lines open 
and to reduce unit costs to the U.S. military. Ten years ago we 
exported only 7 percent of our military aerospace output; last year we 
exported nearly one-third. More importantly, many of the concepts for 
future warfare, often called the revolution in military affairs, will 
depend on technologies originating in the commercial sector, and on 
coalitions with other countries. The recent rather well publicized 
disputes between the Departments of State and DOD over export controls 
stem in large part from DOD recognizing that the old paradigm of 
security and foreign policy interests as having to be weighed against 
economic interests is increasingly obsolete. Instead security from 
DOD's perspective relates to the ability of the U.S. and its allies to 
maintain a lead in advanced technology. That in turn depends on the 
economic vitality of the industries that produce that technology. The 
vitality depends on exports.
    This view is not only shared within our industry. In December, the 
Defense Science Board Task Force on Globalization and Security issued 
its final report. This report, written by an independent, bipartisan 
panel of national security authorities at the behest of the Department 
of Defense, makes many of the points I would like to bring to the 
Committee's attention. While I would like to submit the report in its 
entirety for the record, I would like to quote two paragraphs:

                The reality is that the United States' capability to 
                effectively deny its competitors access to militarily 
                useful technology will likely decrease substantially 
                over the long term. Export controls on U.S. 
                technologies, products and services with defense/dual-
                use applications will continue to play a role in the 
                pursuit of U.S. foreign policy objectives. However, the 
                utility of export controls as a tool for maintaining 
                the United States' global military advantage is 
                diminishing as the number of U.S.-controllable 
                militarily useful technologies shrinks. A failure by 
                U.S. leadership to recognize this fundamental shift--
                particularly if masked by unwarranted confidence in 
                broad or even country-specific export controls--could 
                foster a false sense of security as potential 
                adversaries arm themselves with available technology 
                functionally equivalent to or better than our own.

                Clinging to a failing policy of export controls has 
                undesirable consequences beyond self-delusion. It can 
                limit the special influence the U.S. might otherwise 
                accrue as a global provider and supporter of military 
                equipment and services. This obviously includes useful 
                knowledge of, and access to, competitor military 
                systems that only the supplier would have, and the 
                ability to withhold training, spares and support. 
                Equally obvious, shutting U.S. companies out of markets 
                served instead by foreign firms will weaken the U.S. 
                commercial advanced technology and defense sectors upon 
                which U.S. economic security and military-technical 
                advantage depend.

    Finally, the pace of high technology business has increased 
enormously. Designers work on common electronic bases in real time, 
often in several companies and several countries. Improved production 
techniques have reduced the time needed from order to delivery--in the 
case of commercial aircraft from three years to eighteen months--with a 
current target of nine months. Commercial companies, and increasingly 
the military, expect contractors to hold inventories and deliver parts 
anywhere in the world within 48 hours. Information is no longer 
transmitted on paper but through nearly instantaneous electric 
communications.

    The philosophical underpinnings, legal structure, and 
administrative framework for U.S. export controls, which are intended 
to deal with such technology, have not changed at a comparable pace. As 
a result, there are too many export licenses required and too many 
agencies involved in the review and administration of such licenses, 
and the process takes far too long.

S.1712

    I believe there are short-term and long-term fixes we can make. One 
short-term fix is to move forward on S.1712, The Export Administration 
Act of 1999. That bill provides several features of importance to 
industry. I will highlight the most significant, and also explain why I 
would not want to see certain alterations that have been suggested by 
some in the Senate.
    Title II has several provisions of importance to industry. Section 
204 assures that controls will not be imposed on an end item because it 
contains components that are controlled, nor that the U.S. will attempt 
to impose third country controls on end items produced in other 
countries just because they contain some U.S. content. That was the 
case some years ago for civil aircraft, which were controlled if they 
contained certain avionics. The notion that a country would spend 
several tens of millions of dollars to obtain a part that cost a few 
tens of thousands never made much sense, but it certainly didn't help 
the image of the U.S. as a dependable or rational supplier.
    Title II also limits the President's ability to impose national 
security controls on products that are available from foreign sources 
or are mass marketed. This makes eminent sense. After all, the idea of 
national security export controls is to deny a purchaser a capability, 
not to deny U.S. exporters a market. If the target country is able to 
obtain a technology from other sources, then it makes no sense to 
strengthen U.S. competitors that do not cooperate with the U.S. in 
imposing export controls, while we weaken U.S. industry.
    If anything, this section should be strengthened to allow for some 
proactive rather than reactive findings of foreign availability. In our 
industry an opportunity to sell a specific product to a given country 
may only arise once every decade or two, given our long product cycles. 
It makes no sense to lose such opportunities in order to establish 
foreign availability beyond a shadow of a doubt. For most industries, 
including our own, capabilities that are about to come on stream are 
well known to anyone who reads the right trade press. The Export 
Advisory Committees could certainly help the Office of Technology 
Evaluation with information on what products will be entering the 
marketplace.
    In this context I note that some have supported the idea of 
``carving out'' certain technologies and products that would be subject 
to export controls irrespective of foreign availability. We would 
object to any provision that would carve out products prior to a study 
as to whether there was foreign availability. Once such information is 
in hand, we would agree that the President should still have the 
authority to impose controls if he believes there is a security reason 
for doing so. But such a decision should be made with the best possible 
information, and hence after the foreign availability review called for 
in S.1712, not before. After all, the whole point of the foreign 
availability and mass marketing provision is to determine whether a 
policy of controlling a particular technology has a chance of 
succeeding, or is simply wishful thinking. Acting without information 
is unlikely to improve the odds of the decision being a correct one.
    Title III involves foreign policy controls, which most of us in 
industry believe are almost invariably ineffective at accomplishing 
their objectives of punishing foreign countries or convincing them to 
change their behavior. We certainly support the inclusion of a contract 
sanctity provision, as any time a U.S. company is forced to default on 
a contract it casts doubt on U.S. companies as reliable suppliers. The 
provision in section 304(b)(7) that requires the President to estimate 
the economic impact of a foreign policy export control on the U.S. 
economy is also important. One of the attractions of foreign policy 
export controls is they seem to be cost free--unlike the use of 
inducements such as foreign aid or threats of military action. But 
export controls are not cost free. The burdens fall on specific 
American workers and companies. A report at least forces the government 
to recognize and evaluate those costs, to be certain that we are not 
punishing Americans more than the intended target.
    We also support Section 307, which is admittedly a weak sunset 
provision. It automatically terminates foreign policy controls after a 
2-year period unless the President can provide a persuasive argument to 
continue them. Hopefully the report required of the President if he is 
to renew a control will force a more honest appraisal than the current 
annual renewal exercise.
    Title IV of the bill provides that foreign policy export controls 
shall not apply to agricultural commodities, medicine, and medical 
supplies. We would strongly urge that a similar exclusion be included 
for components and technical data required to maintain the safety of 
commercial passenger aircraft. Humanitarian, political, and commercial 
considerations militate against the U.S. putting civilian lives in the 
air and on the ground at risk as part of a sanctions exercise.
    Title V deals with the administration of export controls. We 
support the notion of providing time deadlines for decisions. In 
today's fast paced commercial world a delayed decision may well mean 
denial, as customers simply go elsewhere. It does a company no good to 
improve its cycle time from order to production to delivery if it 
cannot predict with some certainty how long a license will take.
    The title also provides an appropriate appeals process that allows 
an agency, if it desires, to force a decision to a higher level. That 
is appropriate. What is not appropriate is requiring consensus at each 
level. An agency should have the ability go on record as disagreeing 
with a decision, without having to force an appeals process unless it 
feels the issue is important enough to do so.
    While on the subject of the administration of export controls, I 
would urge the Committee, whether in this title or elsewhere, to 
consider language that would require the executive branch to move 
forward with an electronic data system that would link the Department 
of Commerce, State, Defense, Customs and industry. While this lack is a 
particular problem with the Department of State's management of the 
export control system as mandated by the Arms Export Controls Act, it 
is absurd that at the beginning of the 21st century the agencies that 
are responsible for controlling the export of advanced technology have 
not themselves been able to establish a functioning communications 
system among themselves.
    Finally, Title VI deals with multilateral arrangements. Certainly 
industry agrees that unilateral export controls rarely do anything 
other than punish U.S. workers and businesses rather than the intended 
target country. The emphasis in this title on multilateral agreements 
is appropriate.
    Section 605 (h) of the bill, the so-called Patriot Provision, is 
intended to give monetary incentives for an employee of a company to 
report violations of the Export Administration Act as a further 
enforcement mechanism. Unfortunately, while well intentioned, the 
provision undercuts the goal of stopping of prohibited transfers of 
technology. The subsection as written gives employees every incentive 
to sit on information of potential Export Administration Act violations 
until after they have occurred, thereby increasing the employee's 
chance of monetary recovery. This section should be amended to require 
that an employee report any potential violations immediately through 
the internal corporate control process before being eligible for an 
award of compensation.
    As I mentioned at the beginning of my statement, AIA strongly 
supports the approach and recommendations of the recent Defense Science 
Board Task Force report on Globalization and Security. The report makes 
several key recommendations that this Committee should consider in 
formulating any future legislation concerning controls. The more 
pertinent recommendations include:

   DOD needs to change substantially its approach to technology 
        security

    DOD should focus export controls on those technologies that are 
        exclusively available from the United States. In other words, 
        there should be higher export control walls around fewer items.

   DOD must realize fully the potential of commercial sector to 
        meet its needs

    DOD cannot just purchase available commercial products and adopt 
        commercial business practices. DOD must pro-actively engage 
        with commercial industry in developing new products and 
        services to better meet its needs.

   DOD should take the lead in establishing and maintaining a 
        real-time, interagency database of globally available, 
        militarily relevant technologies and capabilities

    Such a database would prove to be invaluable to export controllers 
        in their decision making process. Furthermore, such a database 
        would provide guidance to both government and industry in 
        identifying potential foreign sources and partners.

   DOD should facilitate transnational defense industrial 
        cooperation and integration

    While it is agreed that there are many potential benefits to 
greater transnational (particularly transatlantic) defense industrial 
integration, there are currently obstacles in place which prevent this. 
DOD should clarify its policy on cross-border defense industrial 
mergers and acquisitions. Additionally, DOD and other relevant agencies 
should also address the overly burdensome regulatory environment 
affecting both foreign direct investment in the U.S. defense sector and 
the transfer of U.S. defense technology, products and services.
    On balance, the Aerospace Industries Association believes that S. 
1712 is a step forward in bringing the EAA up to date, and we would 
support it as voted out of the Senate Banking Committee.
    However, this support does not mean AIA would be content with the 
passage of EAA if this would undermine the fundamental examination and 
reform of our current export control process. We feel that it is 
imperative that the next President and the next Congress conduct a 
thorough review of the entire legislative and administrative approach 
to export controls as a prelude to a total overhaul. As a 
representative of industry, I would like to emphasize my desire to work 
with both Congress and the Administration to help do just that.





    The Chairman. Thank you very much. Bill.

  STATEMENT OF WILLIAM SCHNEIDER, JR., ADJUNCT FELLOW, HUDSON 
                           INSTITUTE

    Dr. Schneider. Thank you, Mr. Chairman, and I appreciate 
the opportunity and privilege to appear before you, and I 
particularly appreciate your energy and insights in working on 
modernizing the export control system. Because I know the hour 
is late I'll just compress my remarks into a few points.
    The reason to modernize the export control system relates 
to two issues. The first is the change in the strategic 
situation that reflects the collapse of the former Soviet Union 
and its associated bloc. Second, but equally important, has 
been the change in the source of enabling technology that 
produces advanced military capabilities. These enabling 
capabilities in the past have been developed in the Defense 
sector were generally not only developed there, but were also 
manufactured in the Defense sector and integrated into weapons 
systems that provided our forces with the military capabilities 
they needed to maintain military superiority. What has changed 
since then has been that the source of these enabling 
technologies is now largely in the commercial sector, and 
this--the importance of the commercial sector as a source of 
military power is likely to grow in the years ahead, and our 
export control system needs to reflect that.
    I had substantial direct personal experience during my 
service in the Department of State in managing both the 
Department of State's munitions licensing system and serving as 
the Chairman of an interagency activity involved in 
coordinating this. And it is clear that the circumstances 
require a refocusing of the export control system so as to 
limit the possibilities that these enabling technologies will 
get to bad end users but to do so in a way that does not 
cripple our ability to maintain the benefits of a vibrant 
export sector in our high technology area.
    I call attention to three concerns I have--relating to the 
national security aspects of the pending legislation, S. 1712. 
The first one I would like to call attention to is the end use 
verification and post-delivery system. My reading of the 
legislation and the hearings surrounded it cause concern about 
the difficulties of taking national security considerations 
into account in a decision to continue controlled exports to 
end users that refuse end user verification. This is likely to 
be a problem, and I think it is--as the enabling technologies 
become more pervasive as having arisen from the commercial 
sector, the need to do effective post-delivery verification is 
going to become more and more important. And when dealing with 
high-performance computers, especially to the Tier III 
countries that have a very high propensity to engage in 
proliferation-related activities, it is a particular source of 
concern. The commission that was set up by the Congress to 
investigate the organization of the U.S. Government to deal 
with the proliferation problem affirmed the need of the Bureau 
of Export Administration to conduct effective post-shipment 
verifications.
    The second point I would like to raise is the concern about 
the differential PRC Hong Kong export control standards. It has 
certainly been our hope that the PRC would be able to maintain 
the autonomy of Hong Kong. But from an export control 
perspective, there are some reasons to be concerned, and I 
believe it would be constructive for the export control 
legislation to provide opportunities for U.S. national security 
concerns to be asserted in that area.
    The final point raised is the issue of foreign availability 
and mass market determinations. The U.S. Government does not 
maintain a foreign availability data base, and this is a 
limitation on the ability of the government to really maintain 
an effective, fully up-to-date, and comprehensive data base on 
foreign availability so these kind of determinations can be 
made. Absent such a data base, the authority given in the 
statute to the Secretary of Commerce makes the process unduly a 
prisoner of assertions by the applicant of foreign 
availability.
    And the importance of this point I think is sufficient to 
justify finding out some way to deal in a more effective way in 
this matter. It was a recommendation in the Defense Science 
Board globalization study to tend to the matter of developing a 
government data base for this purpose because foreign 
availability is also on issue in munitions licensing.
    I'll conclude my remarks at this point, Mr. Chairman, and 
be glad to take any questions you may have.
    [The prepared statement of Mr. Schneider follows:]
     Prepared Statement of William Schneider, Jr., Adjunct Fellow, 
                            Hudson Institute
    Mr. Chairman and Members of the Committee:

    It is a privilege to appear before this Committee to discuss the 
national security aspects of S.1712, the pending bill to renew the 
Export Administration Act. Exports are a matter of great importance to 
the vitality of the American economy, and are responsible in no small 
measure for its sustained high level of performance.
    My remarks are focused on narrow dimension surrounding this 
important legislative initiative--its national security implications. 
My testimony today derives from my experience in the Federal government 
where I served as Under Secretary of State for Security Assistance, 
Science and Technology. In that post, I had both interagency export 
control policy responsibilities as well as management of the Department 
of State's role in export controls, both for dual use and U.S. 
Munitions List items. In addition, I have served as a Member of two 
Congressional Commissions that have addressed the export control issue 
in the context of the proliferation of weapons of mass destruction 
(WMD) and the means of delivering them. Two years ago, I served as a 
Member of the Commission to Assess the Ballistic Missile Threat to the 
United States led by former Secretary of Defense, Don Rumsfeld. More 
recently, I served as a Member of the Commission to Assess the 
Organization of the Federal Government to combat the Proliferation of 
Weapons of Mass Destruction. The former Director of Central 
Intelligence, Dr. John Deutch, chaired this Commission. The Vice-
Chairman was Senator Arlen Specter. This Commission addressed the 
question of the export control function and its role in U.S. policy to 
combat the proliferation of weapons of mass destruction. The Commission 
delivered its final report to the Congress in July 1999.
               The Post-Cold War Role of Export Controls
    The role of export controls in U.S. national security policy has 
changed fundamentally subsequent to the demise of the former Soviet 
Union in 1991. During the Cold War period, export controls were an 
important instrument to limit the access of the Soviet bloc to 
technology that could facilitate the modernization of their armed 
forces. The export control system was a multilateral one operated 
through an informal, but effective non-treaty based entity, the 
Coordinating Committee on Multilateral Export Controls (COCOM) based on 
U.S. diplomatic property in Paris. The U.S. participation in COCOM was 
supported by an aggressive diplomatic effort reinforced by a large-
scale Intelligence Community collection, processing, and dissemination 
effort. The COCOM controls were effective, and forced the former Soviet 
Union and its allies to depend largely on indigenous technology for its 
defense modernization. The technology developed indigenously in the 
Soviet bloc proved inadequate to support its foreign policy aims. Its 
inability to modernize its scientific and industrial base was a 
contributing factor to the collapse of Soviet military power in the 
latter stages of the Cold War.
    The diminished contemporary role of export controls is reflected in 
aggregate statistics of licensure. In the mid-1980s when I had 
interagency coordination responsibilities for export controls as an 
official of the Department of State, the Department of Commerce issued 
nearly 150,000 validated dual-use export licenses per year. In FY 98, 
the number of export licenses issued by the Department of Commerce 
declined to less than 12,000. This order-of-magnitude decline 
understates the scope and magnitude of the sweeping liberalization of 
export controls since the volume of high-tech trade has increased 
several-fold over the same period.
    The decline in the relative importance of export controls in U.S. 
national security policy reflects the change in the nature of post-Cold 
War security concerns. The massive edifice of Soviet military power and 
ambition has collapsed. Twenty-first century security concerns are now 
focused on a more amorphous amalgam of threats including state-
sponsored terrorism and the proliferation of weapons of mass 
destruction and the means of delivering them. A monolithic adversary 
has been replaced by several regional powers whose military power is 
more narrowly focused, but yield little to the former Soviet Union in 
their hostility to the United States and its allies. It is the change 
in the nature of U.S. post-Cold War security concerns and the changing 
sources of technology that animates that threats forcing a re-
examination of the role export controls might play. This change will be 
the subject of my comments on S.1712.
   The post-Cold War Proliferation of WMD and Their Means of Delivery
    Since the 1980s, a fundamental change has taken place in the nature 
of the problem of proliferation--a change with profound implications 
for U.S. export control requirements, and indeed, the role of export 
controls in U.S. foreign policy. The worldwide trend toward democratic 
order, economic liberalism, and deregulation of advanced technology 
commerce has spurred a widely distributed boom in international trade. 
The broadening of the scope of international markets has in turn 
stimulated the globalization of manufacturing and service sectors to 
serve the global market. These developments have overwhelmingly served 
the interests of the United States in both economic and security terms.
    These developments have also had a negative dimension to which 
public policy must respond. The globalization of advanced technology 
science and industry converged with the deregulation of international 
trade to diminish the obstacles posed to nations hostile to the U.S. 
seeking to develop WMD and the means to deliver them.
    The very technology that has contributed so much to American 
prosperity and security has paradoxically stimulated and facilitated 
WMD and missile proliferation. The fruits of the American command of 
the application of advanced civil sector technology for military 
applications became apparent during Operation Desert Storm in the Gulf 
War in 1991, and more so during Operation Allied Force--the seventy-
eight day air campaign in Kosovo in 1999. Previous calculations of 
conventional military power were swept away by the efficacy of the 
military applications advanced sensors, signal processing, materials, 
telecommunications, and precision geo-spatial location technologies. 
The ironic effect of the eclipse of conventional ``analog'' military 
power has been to stimulate the development of weapons of mass 
destruction and the means to deliver them by a number of states hostile 
to the United States.
    Frustrated at their inability to achieve their regional ambitions, 
Iran and North Korea for example, have turned to the development of WMD 
and long-range missiles to offset their inability to use conventional 
military power to deter American (and allied) involvement in regional 
disputes. Their ability to do so has been abetted by the liberalized 
policy and regulatory environment of the post-Cold War period. The U.S. 
Department of Energy has declassified obsolete (but functional) 
information about nuclear weapons design, manufacturing, and testing as 
part of its contribution to post-Cold War openness. This ``obsolete'' 
(to the U.S.) information is now widely available, and has made the 
U.S. the leading provider of scientific and industrial information on 
the military applications of atomic energy. Iran and North Korea are 
able to bypass the arduous process of nuclear weapons design and 
development permitting them to focus their attention on gaining access 
to fissile material.
    Similarly, information made widely available relating to the 
production and weaponization of chemical and biological agents has 
produced a surge in development activities despite powerful 
international norms arrayed against such programs. Indeed, among 
nations hostile to the United States, international norms against WMD 
and long-range missile development have been honored more in their 
breach than in their observance.
    Liberalization in access to aerospace-related technologies, abetted 
by a breakdown in the portions of the U.S. export control system still 
in place after the Cold War, has permitted the accelerated development 
of long-range ballistic and cruise missiles as well by nations hostile 
to the U.S. So rapid have been these developments that the Rumsfeld 
Commission was forced to conclude in 1998 that:

                The warning times the U.S. can expect of new, 
                threatening ballistic missile deployments are being 
                reduced. Under some plausible scenarios--including re-
                basing or transfer of operational missiles, sea and 
                air-launched options, shortened development programs 
                that might include testing in a third country, or some 
                combination of these--the U.S. might well have little 
                or no warning before operational deployment.

    Today, nations among the poorest on earth have or are well on the 
road to the development and deployment of WMD and the means to deliver 
them. The changing nature of the post-Cold War security environment has 
created a community of interests among nations seeking WMD and the 
means to deliver them, despite widely divergent political and strategic 
interests. Close collaboration between Iran, North Korea, and Pakistan, 
for example, is serving to accelerate WMD and delivery system 
development, and is contributing to the creation of a WMD and missile-
manufacturing infrastructure that may be the source of subsequent 
proliferation in the decades ahead.
     Changes in the Sources of Technology for Military Application
    The rapid advances being made in virtually every scientific and 
industrial discipline is a phenomena that is being diffused to 
virtually every corner of the globe as a consequence of the process of 
globalization. The availability of advanced technology and its 
extraordinarily rapid development cycle has changed the source of 
advanced military capabilities. In the past, the defense sector 
produced advanced technology for military applications. In areas such 
as aviation, microelectronics, telecommunications, materials, etc., 
these developments eventually ``trickled down'' to the civil sector. 
Over the past decade or two, these circumstances are being reversed. 
The specialized defense sector now creates advanced military 
capabilities from technologies primarily developed for civil 
applications.
    The defense sector is now a minor participant in the market for 
advanced civil sector technology products, and for the most part, must 
draw from what it can find in the civil sector to meet military 
requirements. In many cases, civil sector requirements are more 
demanding than military requirements. Civil sector product development 
cycles are measured in months rather than years or decades, as is the 
case with major defense platforms. The defense sector is increasingly 
becoming an industry whose primary function is to transform and 
integrate widely available technology into advanced military 
capabilities that can assure the U.S. of military superiority.
    This development has important implications for national 
defense.\1\ The United States will be able to develop very 
sophisticated military capabilities more rapidly and at much lower cost 
than would be the case if such technologies were developed by the 
defense sector. However, adversary states will enjoy access to the same 
technology base available to the United States. Differences in future 
military capabilities will depend less on access to military-unique 
technologies than on unique ways in which these technologies are 
transformed and integrated to produce advanced military capabilities.
---------------------------------------------------------------------------
    \1\ The Defense Science Board has undertaken a recent study of the 
phenomena. See Donald A. Hicks, Chairman, Report of the Defense Science 
Board Task Force on Globalization and Security, (Washington: Office of 
the Under Secretary of Defense for Acquisition and Technology, December 
1999).
---------------------------------------------------------------------------
    These circumstances also create a new environment with important 
implications for U.S. export control policy. As enabling (civil sector) 
technology for military applications become ubiquitous, military 
capabilities rather than technologies relevant for military 
applications need to become the focus of export control activities. In 
a de facto manner, this is taking place. While dual-use export licenses 
issued by the Department of Commerce have declined by more than an 
order of magnitude in the past decade, munitions licenses issued by the 
Department of State have declined by only twenty percent over a similar 
period despite a fifty-percent decline in international arms transfers. 
If this characterization of current circumstances is accurate, do 
export controls on dual-use technologies have any role in supporting 
U.S. post-Cold War national security objectives, and what are its 
implications for S. 1712?
 Can Export Controls Serve a Constructive Post-Cold War Public Policy 
                                Purpose?
    The dynamics of the post-Cold War international economy and the 
evolution of the sources of military advantage have raised questions 
about the role and efficacy of export controls as an instrument to 
support U.S. foreign policy objectives. The U.S. has an enduring 
interest in preventing or slowing the spread of WMD and the means to 
deliver them. An interest in preventing or slowing adversary access to 
advanced conventional military capabilities has also emerged as a post-
Cold War objective of public policy. Both the legislative and executive 
branches of government on numerous occasions have affirmed this 
interest in law, policy, and regulation.
    Achieving these public policy purposes cannot be achieved through 
the instrumentality)--broad multilateral export controls--which were 
used to such good effect during the Cold War. If export controls are to 
achieve a public policy purpose worth the effort, such controls must be 
far more focused than was the case during the Cold War. The Deutch-
Specter Commission summarized U.S. post-Cold War export control needs.

                The export control system needs to adapt to these 
                changes if it is to contribute to combating 
                proliferation effectively. This can be accomplished by 
                refocusing the export control system from broad-based 
                technology-driven controls to limiting or denying 
                access to proliferation-enabling technologies by 
                potential proliferators. Reinforced by the coordinated 
                employment of other policy instruments available to the 
                U.S. government, ranging from diplomacy to arms 
                transfers, export controls can provide leverage to 
                these initiatives to achieve U.S. goals in combating 
                proliferation.

    In affirming the utility of a modernized system of export controls 
for combating proliferation, the Deutch-Specter Commission cited three 
ways in which export controls contribute to the efficacy of U.S. policy 
to combat proliferation.

                First, the very process of developing export controls 
                within a nation or negotiating export controls 
                multilaterally, educates government, officials and 
                individual companies about technologies, materials, and 
                equipment that could be diverted for proliferation-
                related purposes. Doing so facilitates the broad-based 
                voluntary compliance by exporters without which no 
                system could function effectively.

                Second, export controls and the enforcement apparatus 
                that supports them can prevent dangerous goods from 
                reaching their intended destinations. In this 
                connection, the Commission acknowledges the 
                determination and creativity in enforcing export 
                controls by U.S. officials.

                Third, export controls provide a legal basis for 
                punishing violators. For those exporters who fail to 
                comply, violation of export controls may result in 
                fines, denial of export privileges, or in extreme 
                cases, prison sentences.

    If a modernized export control apparatus can serve the more 
specialized post-Cold War national security concerns of the United 
States, then the pertinent question is whether or not S.1712 
contributes to the modernization of U.S. export controls.
                  National Security Aspects of S. 1712
    My remarks will not address the legislative and statutory history 
of the Export Administration Act (EAA) and its relationship to the 
national security aspects of export controls. Comments will be limited 
to areas where S.1712 could be improved with respect to post-Cold War 
U.S. national security interests. The recent report of the Cox 
Committee\2\ identified a number of areas where improvements in the 
U.S. export control system are needed. Some--especially increased 
penalties for non-compliance--are incorporated in S.1712. However, a 
number are not.
---------------------------------------------------------------------------
    \2\ Hon. Christopher Cox, Chairman, Report of the Select Committee 
on U.S. National Security and Military/Commercial Concerns with the 
People's Republic of China, (Washington: GPO, 1999).

    1. End-use verification and post-delivery verification: The 
provisions of S.1712 that provide for end-use verification are weakened 
by a failure to provide an institutional basis for taking national 
security considerations into account in a decision to continue 
controlled exports to end-users refusing end-use verification. 
Moreover, repeal of the provisions of the National Defense 
Authorization Act of Fiscal Year 1998 that require post delivery 
verification to Tier 3 countries of high performance computers (HPCs) 
is unhelpful in combating proliferation as these nations are among the 
most proliferation-sensitive destinations. The Deutch-Specter 
Commission strongly affirmed the need for post-shipment verification. 
---------------------------------------------------------------------------
Its recommendation [5.19] stated:

                The Bureau of Export Administration should expand its 
                post-shipment verification to encompass technologies of 
                proliferation concern and Congress should ensure that 
                the Bureau has the resources and the discretion it 
                needs to implement an effective and aggressive post-
                shipment verification program.

    2. Diminished impact of national security concerns in the National 
Security Controls List: While S. 1712 provides for consultation with 
the Secretary of Defense on establishing the content of the national 
security control list, only the President can overrule decisions made 
by the Secretary of Commerce. Moreover, determinations of foreign 
availability (which the neither the Department of Commerce or Defense 
has a database to support) and mass-market decisions can be made 
without consultation with the Secretary of Defense.\3\ This too 
requires presidential intervention to reverse. The institutional 
reality of Executive branch decision-making renders engaging 
interagency conflict infrequent and reversals a rare event. As a 
practical matter, the process established in S. 1712 will diminish the 
priority of national security concerns in export control decisions to 
sensitive destinations. A procedure as noted in (6) below to mandate 
incorporation national security expertise in such decisions could 
mitigate the problem.
---------------------------------------------------------------------------
    \3\ The Report of the Defense Science Board, op cit., pp. 36-37 
recommends that a foreign availability data base be established, but no 
initiative has yet been undertaken to do so, nor does S.1712 provide 
authorization or resources for such an effort.
---------------------------------------------------------------------------
    3. Ambiguity concerning ``deemed export'' provisions: The growing 
importance of labor mobility in the international economy creates new 
opportunities for proliferation-sensitive data to be transferred to 
inappropriate end-users. An important way of dealing with this issue in 
current law and regulation requires employees who are non-U.S. persons 
to obtain an export license for them to gain access to export 
controlled information in the United States. While the legislation is 
ambiguous on this point, some readings of its provisions could lead one 
to conclude that current law and regulation in this respect is being 
weakened. Such an outcome would undermine the ability of the U.S. to 
promote such practices among U.S. allies who share similar export 
control issues arising for increased labor mobility in the high tech 
sector.
    4. Procedural impediments to the introduction of national security 
concerns into export licensing decisions: The limitations of the 
interagency appeal process described in (2) above are retained in S. 
1712, but rendered more difficult to introduce because of a series of 
procedural impediments. To the institutional impediments to appealing 
an export licensing decision to the President are added a set of 
process improvements intended to eliminate unneeded foreign policy 
controls and compress license processing time. The President has only 
thirty days to appeal a mass market decision of the Secretary of 
Commerce, while HPC export decisions are reduced from the present 180 
days (in the FY 98 NDAA) to 60 days. The evidentiary and policy aspects 
of such decisions are often very difficult, and it is unlikely that 
complex issues could be fully resolved in this period. The cumulative 
impact of procedural and institutional characteristics make it unlikely 
that national security considerations will receive due consideration 
under the provisions now embedded in S. 1712.
    5. Differential PRC-Hong Kong export control standards: The basis 
for maintaining differential export control standards between the PRC 
and Hong Kong is an expectation that the autonomy of Hong Kong's export 
control institutions can be preserved. While there is some evidence 
that this expectation is justified, there are also some ominous 
portents that place this expectation at risk. First, there have been 
numerous legal challenges to Hong Kong's autonomy within the PRC's 
legal and political system, though these challenges have not directly 
affected the export control function. Second, several countries of 
proliferation concern have stepped up their activity and presence in 
Hong Kong. For example, North Korea has recently established a 
diplomatic presence in Hong Kong. In light of reported PRC assistance 
to North Korea's ballistic missile program(s), the establishment of a 
diplomatic conduit for the diversion of controlled technologies, 
equipment, and technical data to North Korea from Hong Kong would be 
difficult for Hong Kong authorities to interdict, given their limited 
autonomy.
    6. Foreign availability and mass market determinations: As noted 
previously, the Secretary of Commerce has the authority to make foreign 
availability and mass market determinations under the bill without 
consultation with the Secretary of Defense. Only a successful appeal to 
the President can reverse such a decision. There is no U.S. government 
database to support foreign availability decisions, nor does one appear 
to be contemplated.\4\ The provisions of S.1712 that permit the 
Department of Commerce to make foreign availability decisions do not 
provide for the incorporation of appropriate USnG expertise. An 
alternative approach that would assure that appropriate inter-agency 
expertise was incorporated in the decision process would be to require 
the affirmative support of the three cabinet level officers of the 
national security agencies--the Secretaries of Defense and State, and 
the Director of Central Intelligence. Foreign availability and mass 
market determinations could not be made in the face of an objection 
from a Cabinet officer of the three national security officers unless 
reversed by the President.
---------------------------------------------------------------------------
    \4\ This is also true in the Department of State in support of its 
responsibilities to manage exports of products and services on the U.S. 
Munitions List. Although President Clinton's 1995 Conventional Arms 
Transfer Policy declaration affirmed authority to use foreign 
availability considerations in USML licensing decisions, no resources 
have been provided to develop such a database.

---------------------------------------------------------------------------
Conclusion and recommendations

    The export control system is in urgent need of modernization. The 
current system neither meets the needs of U.S. exporters, nor reflects 
a capacity to incorporate contemporary national security concerns. The 
need to do so has been affirmed by several Executive and Legislative 
branch studies, commissions, and reports. S.1712 is an appropriate 
vehicle to do so. However, in its present form, S.1712 fails to 
adequately provide for U.S. national security needs that address the 
proliferation issue. To be sure, export controls cannot carry the 
entire burden of combating proliferation, or even a major part of it. 
Other measures must be employed in conjunction with export controls if 
overall national security objectives are to be achieved. Nevertheless, 
export controls can support other measures to combat proliferation. As 
a result, the opportunity to modernize and thereby strengthen the 
contribution of export controls should be taken by modification of S. 
1712.
    Mr. Chairman, this concludes my testimony. I am prepared to respond 
to questions raised by you and other Members of the Committee.

    The Chairman. I thank you very much. Where do you differ 
with John Douglass?
    Dr. Schneider. Well, a couple of points that he mentioned. 
First, I do not believe it is a practical aspiration to have an 
integrated control system for munitions and dual-use items. The 
underlying purpose of controlling Defense-related items for--to 
achieve foreign policy objectives is usefully set apart from 
the export control regulations that deal with the Department of 
Commerce. So that in any case, I think John would agree, is a 
somewhat utopian aspiration in this environment in any case, so 
I think it is better for us to look at process improvements, 
liberalization, and maintaining a clear understanding of what 
we need to do to modernize this system as conditions change. I 
don't disagree with any of his points about the need to keep 
the system up-to-date and responsive to the need of our 
exporters.
    I think the strategic advantages we enjoy as a consequence 
of the collapse of the Soviet Union provide us with an ability 
to very sharply narrow the impact of export controls on U.S. 
exporters. The process improvements are en route. Even the much 
maligned State Department is about to make a number of very 
significant process improvements that I think will diminish 
many of the concerns that exporters had about protracted 
processing time and that sort of thing. So I think the interest 
of the Congress is starting to be reflected in the behavior of 
the bureaucracy, and I hope that continues.
    The Chairman. John.
    Mr. Douglass. Well, it may be a little utopian to try to 
get a single system. I sort of stayed away, or at least tried 
to stay away, other than just explaining that there was a 
different system for military products and some of the problems 
that we are having there.
    The principal problem that I see is that occasionally a 
problem will come up with a single country; like, for example, 
we are all familiar with the highly worrisome situation that we 
see in China in certain aspects of it, and we pass a law and 
the same law applies to England, France, Germany, our NATO 
allies and so on. And so I found myself, for example,--as 
Assistant Secretary of the Navy dealing with our friends in 
England that share a nuclear technology with them, sharing 
submarine quieting technology, sharing all kinds of important 
and very serious classified information because we knew that 
they would always be with us in coalition warfare, and we were 
cooperating with them to make their systems compatible and as 
good as we could, and then a pump or a valve or something would 
be needed over there and some low-ranking bureaucrat in the 
State Department would say no, they can't have it because of 
some reason, or it would get lost in the system.
    So I gradually felt that there needed to be a system which 
was a little less sensitive to the foreign policy rulings and 
political atmosphere that sometimes develops around some of 
these issues and was a little more tied to the mainstream of 
what was going on in the Department of Defense. And so I always 
thought an integrated system might work, but I certainly 
respect Bill's views. He served in a different part of the 
system than I did, and our short-term objective is the same as 
Bill's, and that is to take the system we have today which 
involves two laws, two systems, and improve it as best we can. 
And that is why we have been supporting the passage of S. 1712.
    We have some problems with it. They are in my written 
statement, Senator, but we think Senator Enzi has really gone 
the extra mile to try to address people's concerns, and there 
are still a few amendments that are being talked about by the 
Armed Services Committees and Intelligence Committees, and so 
on.
    One of them involves a so-called carve out, which Bill 
mentioned, for mass market determinations. The only difference 
we have with the way that amendment is being discussed is where 
do you do the carve out. We think before you unilaterally set 
aside an item which is probably available on the world market 
fairly readily, you ought to go out and look at the world 
market and do some studies and then bring the results of those 
studies to high-level decisionmakers rather than doing it at 
the beginning based on conjecture. So it is just where it is in 
the system.
    The Chairman. I am sorry to tell you that we will probably 
have further conversations on this issue before it is finally 
resolved. I thank you both for being here, and I thank you both 
for your contribution to this very important issue. This 
Committee obviously has significant jurisdiction if a lot of 
this authority is going to be transferred to the Department of 
Commerce, and that is why I thought it was important for us to 
have it this hearing and get the input of yours, as well as the 
administration witnesses, and we'll be calling on you again in 
the future.
    Dr. Schneider. Thank you, Mr. Chairman.
    Mr. Douglass. Thank you, Mr. Chairman.
    The Chairman. Thank you. This hearing is adjourned.
    [Whereupon, at 4:20 p.m., the hearing was adjourned.]
                            A P P E N D I X

responses to written questions by Hon. John McCain to James M. Bodner, 
          Principal Deputy Under Secretary of Defense (Policy)
    Question 1. How does S. 1712 address cumulative impacts of 
licensing decisions? Or the cumulative impact of categorization and 
delisting of items?
    Answer. S. 1712 does not specifically address the cumulative impact 
of licensing and/or the delisting of items. S.1712 does, however, 
require Commerce to annually provide data necessary for such an 
analysis. For example, under S. 1712 Commerce must provide an annual 
report that includes a description of changes made to the control list 
and a statistical summary to include export license data by ID code and 
country code. This report supplements the requirement directed under 
the National Defense Authorization Act of FY2000 for the President to 
provide a cumulative analysis of export to key countries of concern for 
each year through 2007.
    DOD supports the proposed floor manager's amendment (O:-CRA--
CR00.262) for S. 1712 Section 202 (a)(3) requiring the concurrence of 
the Secretary of Defense to adjust the National Security Control List 
to add items that require control under this section and to remove 
items that no longer warrant control under this section. As drafted, S. 
1712 requires DOD's concurrence on adding items to the list; the 
amendment adds the requirement for DOD's concurrence on the removal of 
items as well.
    DOD supports the language of Section 201(d) ``Enhanced Controls'' 
as drafted in the floor manager's amendment (O:--CRA--CR00.262). DOD 
continues to believe that a mechanism must exist that exempts certain 
items (e.g. encryption and hot engine technology) from foreign 
availability and mass market provisions of the Act.
    DOD believes the 18 month expiration date specified by Section 212, 
Presidential Set Asides, must be deleted. DOD believes that arbitrarily 
limiting the effective time of any Presidential determination can cause 
recalcitrant countries to delay negotiations on controlling technology 
until the 18 months have expired.

    Question 2. The 1999 DOD IG report states that the DOD sometimes 
changes its denial of a license application during the appeal process 
to an approval with conditions. It is my understanding that these 
conditions often require end-use checks or other site monitoring to 
ensure that the export has gone where it was suppose to go and is being 
used for the purpose intended. How does DOD know whether those 
conditions have been met?
    Answer. The Department of Commerce, Office of Export Enforcement is 
responsible for monitoring the implementation of and compliance with 
safeguards. If an end-use(r) check or site monitoring report is 
required, the Defense Department can review the information developed 
as a result of the check. Any non-compliance with the directed 
safeguards or licensing conditions could subject the company or the 
end-user to enforcement actions including criminal and civil penalties.
    (a) What provisions are in S. 1712 to ensure that monitoring and 
enforcement of conditions is adequate?
    Answer. Section 607 (a)(2)(c) authorizes officials designated by 
the Secretary of Commerce to conduct pre-license and post-shipment 
verifications (PSV) of controlled items. S.1712 also directs the 
Secretary to target PSVs to exports involving the greatest risk to 
national security, thereby focusing limited enforcement resources on 
exports that represent the greatest security risk.
    There are authorities in S.1712 that allow the Secretary of 
Commerce to deny exports to an end-user that has refused a PSV. 
Additionally, the Secretary may deny all such items to all end-users in 
the country. By providing the authority to deny any future license, 
S.1712 provides an incentive to exporters to comply with PSVs and 
monitoring conditions. Additionally, by providing the Secretary with 
the authority to deny all exports, countries have an incentive to 
ensure that PSVs are conducted quickly and efficiently. Finally, S.1712 
Section 607(j) requires the Secretary of Commerce to report annually on 
the effectiveness of the Commerce Department's end-use verification 
activities.
    S.1712 also contains strong criminal and civil penalties for 
violations of the Act.
    (b) Does S.1712 make post-shipment ``end-checks'' mandatory?
    Answer. PSV's are not mandatory. DOD believes that S. 1712 provides 
appropriate flexibility to focus PSVs on exports representing the 
greatest risk to national security.
    (c) What role does DOD play in making those ``end-checks'' under S. 
1712?
    Answer. When requested, DOD provides technical assistance to 
Commerce pre-license and post-shipment verification programs.

    Question 3. Both the DOD and Commerce IGs note that questions were 
raised during their 1999 review of the dual-use export process about 
the appeal process. Specifically, there were concerns raised that the 
Chair of the Operating Committee, which provides the first level of 
appeal, can determine the outcome of the appeal regardless of the input 
from interested agencies. There were also allegations that in some 
instances, though limited, the Chair was directed by Commerce to rule 
in favor of the Department, requiring other agencies to appeal to the 
next level.
    The DOD IG report states:

    ``(pg. D-36) Although the escalation process generally provided DOD 
with a meaningful opportunity for seeking review of disputed license 
applications, the outcome of the process often favored the Commerce 
position. In general, the OC Chair voted more often with Commerce than 
with DOD. In addition, the ACEP escalation process is predicated on the 
idea that an export will be allowed (typically a Commerce position) 
unless a Federal department or agency has concrete evidence that an 
end-user is a high-risk diversion. By more often favoring the Commerce 
position, the escalation process places a greater burden on DOD to 
substantiate concerns about exports such as potential diversions and 
possible links between known diversion risks and intermediary or end 
users.''

    How is the process for appeals established in S.1712 different from 
the current process?
    Answer. Section 502 of S.1712 specifies that an interagency 
committee be established to provide a review of all licenses where 
there is not interagency agreement. S.1712 further provides the 
authority to the President to establish additional review levels 
necessary to resolve agency conflicts with the decision taken by the 
initial review committee. This is consistent with current practice 
under Executive Order 12981. Under those procedures, DOD or another 
agency can appeal an initial Operating Committee decision to the 
Assistant Secretary-level Advisory Committee on Export Policy (AC EP) 
and if it continues to oppose the export, DOD has the authority to 
escalate that decision to the Cabinet-level Export Administration 
Review Board (EARB) and to the President, if necessary.
    (a) Does the Chair appointed by the Secretary of Commerce have 
discretion to rule in whatever way he or she determines?
    Answer. The Department does not have visibility into the internal 
Commerce Department decision-making process.
    (b) What checks and balances are provided in S.1712 to ensure that 
the decisions of the Chair of the appeal committee cannot be controlled 
by Commerce?
    Answer. S. 1712 does not specifically address this issue, however, 
we anticipate that the Administration will continue the checks and 
balances established by Executive Order 12981 that provide for full 
rights of escalation by any participating agency, including DOD up to 
the President if necessary.

    Question 4. In testimony to the Senate Committee on Armed Services 
on March 23 of this year, the IG for DOD provided several examples of 
incorrect commodity classification decisions made by Commerce without 
referral to DOD. He recommended that S.1712 be revised to require that 
referrals be made to DOD.
    Answer. DOD also believes that there must be a statutory 
requirement for the review by DOD of commodity classification 
determinations by the Department of Commerce. DOD recommends that 
S.1712 Section 501(h) be amended (underlined portion) to read as:

                ``In any case in which the Secretary receives a written 
                request asking for the proper classification of an item 
                on the Control List or the applicability of licensing 
                requirements under this title, the Secretary shall 
                promptly refer such requests for review to the 
                Secretary of Defense and other departments or agencies 
                the Secretary considers appropriate. Reviewing 
                departments and agencies shall notify the Secretary of 
                any objection within 10 days of receiving the referred 
                request. Any objections shall be subject to the 
                interagency dispute resolution process in this Title. 
                If there are no objections, the Secretary shall inform 
                the person making the request of the proper 
                classification within 14 days of receiving the 
                request.''

    Can you address why it is important for the Department of Defense 
to be referred commodity classification requests?

    Answer. Commodity Classification decisions can result in an item 
being exported without a license review. In addition, decisions can 
result in advice that a product is controlled under the Commerce 
system, when it should be controlled as a munitions item under the 
State system. DOD believes that such decisions need to be shared 
interagency to ensure that such decisions benefit from DOD's technical 
and security expertise.
    (a) Does S.1712 ensure that all appropriate referrals will be made 
to DOD?
    Answer. S. 1712 section 501 (h)( 1) contains a provision requiring 
the Secretary of Commerce to notif the Secretary of Defense. We believe 
that S.1712 should specifically provide the reviewing departments the 
authority to object to proposed Commerce classification decisions and 
to escalate those differences through the interagency dispute 
resolution process under section 502.

    Question 5. We seem to be in the unique and troubling position of 
having the State Department stand alone as the last vestige of 
institutional concern for the national security ramifications of dual-
use exports. Would you comment on efforts by the Commerce Department to 
assume greater control over not just dual-use items but those 
historically and logically included on the U.S. Munitions List? Could 
you describe instances where the Defense Department objected to the 
transfer of items from the USML to the CCL and was overridden?
    Answer. By Executive Order, any transfer or removal of an item 
controlled under the USML must receive the concurrence of the Secretary 
of Defense. We are aware of no circumstances where such concurrence was 
not obtained.

    Question 6. The June 1999 Department of Commerce IG report noted 
that the Department of Commerce was not screening license applications 
against the Treasury Enforcement Communication System database 
maintained by the U.S. Customs Service. What information would be 
gained through screening the applications through the Customs database?
    Answer. The Treasury Enforcement Communication System (TECS) was 
created to provide multi-agency access to a common database of 
enforcement data supplied by the participating agencies, such as 
Customs, the Drug Enforcement Administration, and the Bureau of 
Alcohol, Tobacco, and Firearms. The system was developed to satisfy a 
recognized need to promote the sharing of sensitive information between 
federal law enforcement agencies.
                                 ______
                                 
  Response to written questions by Hon. John McCain to John D. Holum, 
  Senior Advisor for Arms Control and International Security Affairs, 
                        U.S. Department of State
    Question 1. The June 1999 Department of Commerce IG report noted 
that the Department of Commerce was not screening license applications 
against the Treasury Enforcement Communication System database 
maintained by the U.S. Customs Service. What information would be 
gained through screening the applications through the Customs database?
    Answer. The U.S. Customs Service uses the Treasury Enforcement 
Communication System database in daily liaison with the Department of 
State in connection with a number of munitions export functions and 
issues. Since the question specifically refers to matters for which the 
Departments of Commerce and Treasury are responsible, however, it would 
be appropriate for those agencies to respond.

    Question 2. What is the current process for an export applicant to 
appeal a denial of a license? What role do State and Defense play in 
such an appeal? What process is established in S.1712 for applicant 
appeals, and what role would State and Defense play?
    Answer. I would defer to the Commerce Department for a full 
description of its current appeals process for Commerce-controlled 
items and the likely changes, if any, that would occur under the 
provisions of S.1712. Currently, the State Department has a voice in 
reviewing appealed denials through the interagency process coordinated 
by the Department of Commerce. Under the provisions of S.1712, the 
Department expects to play a similar role in the appeals process.

    Question 3. As you know, S.1712 was passed by unanimous vote of the 
Senate Banking Committee. Yet, the chairmen of every national security 
committee and subcommittee jointly wrote to the Majority Leader 
expressing their very grave concern with that bill's consequences for 
U.S. national security. Can you discuss the provisions in S.1712 which 
you believe ensure a proper balancing between free trade and national 
security?
    Answer. The Administration agrees that commercial concerns must be 
balanced with national security. However, national security can not be 
compromised in the name of economic gain. We have worked with Senate 
staff to ensure that no provision of this bill will force any President 
or Administration to make decisions that jeopardize our national 
security.

    Question 4. I am aware that the Arms Export Control Act mandates 
the President periodically review the U.S. Munitions List to determine 
what items could be moved to the less restrictive Commodity Control 
List. I am more than a little concerned, however, by reports I have 
heard that the export control structure that divides exports between 
dual-use Commodity Control List items from military-related U.S. 
Munitions List items is being deliberately eroded. Specifically, it is 
my understanding that efforts are being made to move increasing numbers 
of items from the USML to the CCL without regard for State Department 
considerations and despite your own statement before the Foreign 
Relations Committee that no such moves would occur for the duration of 
the current Administration tenure. Is it your opinion that activities 
have been consistent with the spirit of your statement?
    Answer. The Executive Branch revised the entire ITAR in 1993 and an 
extensive review of the USML continued into 1996. The most recent USML 
revision became effective March 15, 1999, with the return of commercial 
satellites to State Department jurisdiction.
    We believe the USML covers the commodities that warrant special 
controls as administered under the Arms Export Control Act and the 
International Traffic in Arms Regulations (ITAR).
    So, while we do not anticipate removing any items from the USML 
during this administration, we are considering means by which the 
Department of Defense might advise State in a systematic fashion of 
those commodities that it does not believe merit its national security 
scrutiny When such advice would be received by DOD, State would decide 
upon the continued commodity coverage in terms of U.S. foreign policy 
considerations. As is our practice, the Congress would be consulted 
prior to any removal of any category of items from the USML.

    Question 5. A principal outcome of over two dozen congressional 
hearings, including by this Committee, into the transfer of satellite 
and missile technology to China was the statutory reversal of the 
Administration's decision to transfer control over commercial 
communications satellites from the State Department to the Commerce 
Department. It is my understanding that the Administration has 
interpreted the language in the Strom Thurmond National Defense 
Authorization Act for Fiscal Year 1999 so as to exclude satellite and 
space-related items and to include ground stations and key components. 
Do you believe such a policy is consistent with both the letter and 
intent of the law?
    Answer. The State Department regulations promulgated to implement 
the Strom Thurmond National Defense Authorization Act for FY1999 stated 
that all specifically designed or modified systems, components, parts, 
accessories, attachments, and associated equipment for communications 
satellites would be controlled on the U.S. Munitions List (USML). The 
Commerce Department's regulation specified that entries on the CCL 
containing items that are space qualified'' would be reviewed within 30 
days from the issuance of the regulation to determine the appropriate 
jurisdiction and that the review might result in a rule change. 
Unfortunately, other demands prevented the Departments of State and 
Commerce from resolving the issue of how to treat so-called ``space 
qualified'' items within the period specified in the regulations. The 
NSC directed the two Departments to launch a process to review space-
qualified items to determine whether any met the definition established 
in the State Department regulation as being ``specially designed or 
modified for use in space'', and therefore subject to USML controls. To 
reduce confusion while this review is being carried out, it was agreed 
that industry should be notified that in the interim such items fall 
under Commerce control.
                                 ______
                                 
         Response to questions written by Hon. John McCain to 
                           William A. Reinsch
    Question 1. S. 1712 provides in Section 202 that the Secretary of 
Commerce is to develop a National Security Control List (NSCL) as part 
of the Control List for dual-use commodity exports. The NSCL is to 
contain those items which are controlled for national security 
purposes. Section 202 also provides that items on the National Security 
Control List are to be determined with the ``concurrence'' of the 
Secretary of Defense. Is it your interpretation of this provision that 
the Secretary of Defense has a veto over the listing, or delisting, of 
any items on the National Security Control List?
    Sec. 211 permits the Secretary of Commerce to delist ``any item'' 
which is controlled by the act if the Secretary of Commerce determines 
that such item ``has a foreign availability or mass market status.'' In 
making that determination, the Secretary is to ``consult'' with the 
Secretary of Defense. Can the Secretary of Commerce delist items from 
the National Security Control List based upon the mass market or 
foreign availability determination? If so, does this ``consult'' 
requirement with the Secretary of Defense give DOD the same veto as it 
has over the listing and delisting of items on the NSCL? If not, 
doesn't this section negate the intent of the NSCL and for the 
``concurrence'' of the Secretary of Defense? In other words, doesn't 
this give the Secretary of Commerce total discretion over the NSCL?
    Answer. Under Section 202 of S. 1712, the Secretary of Commerce 
must have the agreement of the Secretary of Defense to include items 
on, or remove items from, the NSCL. Under S. 1712, the NSCL would be a 
subset of the Commerce Control List. The Administration anticipates 
that all the items on the Commerce Control List currently controlled 
for national security and nonproliferation reasons, including all of 
the items controlled pursuant to the multilateral export control 
regimes, would be included on the NSCL. In addition, S. 1712 would not 
alter the process for adding items to, or removing items from, the 
Commerce Control List. Under the interagency regulations review process 
administered by the Office of Management and Budget, changes to the 
Commerce Control List are cleared by the Departments of Defense, State 
and Energy and, for encryption products, the Department of Justice 
(Federal Bureau of Investigation) as well.
    Section 211 authorizes the Department of Defense and other 
departments to determine how the foreign availability and mass market 
process affects the NSCL. Section 211 requires the Secretary of 
Commerce to consult with the Secretary of Defense and other appropriate 
departments to determine whether an item subject to a foreign 
availability or mass-market petition has foreign availability or mass-
market status. Even if an item is determined to have foreign 
availability or mass-market status, it will not be decontrolled if:

        (1) the determination is set aside for national security 
        reasons (Sec. 212--foreign availability determination may be 
        set aside for up to 18 months if absence of controls would 
        prove detrimental to U.S. national security and there is a high 
        probability that negotiations will eliminate foreign 
        availability and Sec. 213--mass market determination may be set 
        aside indefinitely if decontrol would seriously threaten U.S. 
        national security and continuing controls would diminish that 
        threat);
        (2) the item is subject to end use and end user based controls 
        (Sec. 201(c)); or
        (3) decontrol would be inconsistent with U.S. participation in 
        the multilateral export control regimes (Sec. 309).

    Thus, under Sec. 211 other departments have two opportunities to 
influence whether foreign availability or mass-market considerations 
change the NSCL. First, other departments can participate in 
determining whether an item has foreign availability or mass-market 
status. Second, even if an item is determined to have such status, 
there are three different criteria departments can invoke to prevent an 
item from being decontrolled. In the current Administration, these 
decisions would be the result of interagency consensus.

    Question 2. The Department of Commerce IG expressed concern in June 
1999 that the Department is not under current policy and regulations 
adequately controlling ``deemed exports.'' In a follow-up report dated 
March, 2000, the IG noted that Commerce has done little since June 1999 
to address this issue.
    The IG states in the recent report that ``(t)o help us determine 
whether U.S. high technology companies are generally complying with 
deemed export regulations, we sought to obtain a reasonable estimate of 
what the level of license applications might be with good compliance. 
BXA was unable to provide us with such an estimate. As one indication, 
we alternatively compared the number of deemed export license 
applications submitted to BXA in fiscal year 1999 (783) with the number 
of `high technology' employment visas issued to foreign nationals 
during this same time period (115,000) . . . the tremendous gap between 
the two figure, at a minimum, raises questions about the extent of U.S. 
companies' knowledge of and compliance with the deemed export 
regulations . . .''
    What provisions of S. 1712 address deemed exports and would result 
in more thorough control and review of them?
    Answer. Neither the June 1999 nor the March 2000 Department of 
Commerce Inspector General reports identified any deficiencies or 
recommended any changes to the statutory authority for control of 
deemed exports. S. 1712 authorizes continuing control of deemed exports 
but does not, consistent with the Inspector General's reports, include 
new deemed export provisions. The Inspector General's June 1999 report 
recommended that the Department's Bureau of Export Administration (BXA) 
work with the National Security Council to ensure that the policy and 
regulations on deemed exports are clear and do not provide any 
avoidable loopholes. The June 1999 report also recommended that once 
the policy and regulations are clarified, BXA increase its efforts to 
inform U.S. industry of the requirements of the deemed export rule. The 
Inspector General's March 2000 report repeated these recommendations 
with a special focus on federal agencies and research facilities. None 
of these recommendations require additional statutory authority.
    In response to these recommendations, BXA has been working with the 
National Security Council and other departments to clarify the 
Administration's policy on deemed exports. BXA is also developing 
additional detailed guidance for exporters regarding the application of 
the deemed export rule. Finally, BXA is working, within available 
resources, on expanding its outreach to industry and federal agencies 
to enhance their understanding of the scope and application of the 
deemed export rule.

    Question 3. The June 1999 IG report noted that Commerce was not 
screening license applications against the Treasury Enforcement 
Communication System database maintained by the U.S. Customs Service. 
The March 2000 report concludes that such is still the case. Does S. 
1712 require Commerce to do this?
    Answer. S. 1712 does not, and should not, require Commerce to 
screen all license applications against the Treasury Enforcement 
Communication System (TECS) database maintained by the U.S. Customs 
Service. S. 1712 requires the Secretary of Commerce to refer all 
license applications to the Department of Defense and other appropriate 
departments and agencies, and it also explicitly authorizes the 
Secretary of Commerce to undertake enhanced cooperation with the United 
States Customs Service (Sec. 607(k)).
    Since the March 2000 IG report, Commerce has begun screening export 
license applications against the Treasury Enforcement Communication 
System database maintained by the U.S. Customs Service.

                                
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