- S. 1712, EXPORT ADMINISTRATION ACT OF 1999

[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,

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.