[Senate Hearing 107-272]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 107-272


                   ESTABLISHING AN EFFECTIVE, MODERN
                     FRAMEWORK FOR EXPORT CONTROLS

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

                                HEARINGS

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                                   ON

  ESTABLISHING AN EFFECTIVE, MODERN FRAMEWORK FOR EXPORT CONTROLS BY 
        MEANS OF THE EXPORT ADMINISTRATION ACT OF 2001 (S. 149)

                               __________

                        FEBRUARY 7 AND 14, 2001

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

                                _______

                  U.S. GOVERNMENT PRINTING OFFICE
77-577                     WASHINGTON : 2002

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      PHIL GRAMM, Texas, Chairman

RICHARD C. SHELBY, Alabama           PAUL S. SARBANES, Maryland
ROBERT F. BENNETT, Utah              CHRISTOPHER J. DODD, Connecticut
WAYNE ALLARD, Colorado               TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming             JACK REED, Rhode Island
CHUCK HAGEL, Nebraska                CHARLES E. SCHUMER, New York
RICK SANTORUM, Pennsylvania          EVAN BAYH, Indiana
JIM BUNNING, Kentucky                ZELL MILLER, Georgia
MIKE CRAPO, Idaho                    THOMAS R. CARPER, Delaware
JOHN ENSIGN, Nevada                  DEBBIE STABENOW, Michigan
                                     JON S. CORZINE, New Jersey

                   Wayne A. Abernathy, Staff Director

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                      Linda L. Lord, Chief Counsel

           Amy F. Dunathan, Senior Professional Staff Member

             Katherine McGuire, Subcommittee Staff Director

             Martin J. Gruenberg, Democratic Senior Counsel

                       George E. Whittle, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                      WEDNESDAY, FEBRUARY 7, 2001

                                                                   Page

Opening statement of Chairman Gramm..............................     1

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................     2
    Senator Enzi.................................................     3
        Prepared statement.......................................    22
    Senator Johnson..............................................     4
    Senator Stabenow.............................................     5
    Senator Miller...............................................    14
    Senator Corzine..............................................    16
    Senator Reed.................................................    16
    Senator Ensign...............................................    19
    Senator Gramm................................................    22
    Senator Bunning..............................................    23

                               WITNESSES

Dan Hoydysh, CoChair, Computer Coalition for Responsible Exports.     6
    Prepared statement...........................................    24
Paul Freedenberg, PhD, Government Relations Director, Association 
  for
  Manufacturing Technology.......................................     7
    Prepared statement...........................................    26
    Response to written questions of Senator Enzi................    39
Larry E. Christensen, Vice President, International Trade Content 
  Vastera, Inc., Testifying on Behalf of the AEA.................     9
    Prepared statement...........................................    33
Richard T. Cupitt, PhD, Associate Director, Center for 
  International Trade and Security, The University of Georgia....    11
    Prepared statement...........................................    36

                              ----------                              

                      WEDNESDAY, FEBRUARY 14, 2001

Opening statement of Chairman Gramm..............................    43

Opening statements, comments, or prepared statements of:
    Senator Enzi.................................................    44
    Senator Miller...............................................    45
    Senator Allard...............................................    45
    Senator Corzine..............................................    46
    Senator Stabenow.............................................    46
    Senator Sarbanes.............................................    57

                               WITNESSES

John J. Hamre, PhD, President and Chief Executive Officer, Center 
  for
  Strategic and International Studies............................    46
    Prepared statement...........................................    68
Donald A. Hicks, PhD, Chairman, Hicks & Associates...............    50
    Prepared statement...........................................    71

                                 (iii)

 
    ESTABLISHING AN EFFECTIVE, MODERN FRAMEWORK FOR EXPORT CONTROLS

                              ----------                              


                      WEDNESDAY, FEBRUARY 7, 2001

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:30 a.m., in room SD-538 of the 
Dirksen Senate Office Building, Senator Phil Gramm (Chairman of 
the Committee) presiding.

            OPENING STATEMENT OF CHAIRMAN PHIL GRAMM

    Chairman Gramm. Let me call the Committee to order and 
thank our witnesses today.
    We are here today to talk about the Export Administration 
Act. As all our colleagues know, and most people in the 
audience know, the Export Administration Act is a very 
important piece of legislation because it is our attempt as a 
Nation to deal with conflicting goals. On the one hand, we want 
to dominate the production of high-tech items in the world. We 
want to produce more and better items. We want to be at the 
cutting edge of the world's commercial market.
    And at the same time, as the preeminent defender of freedom 
and right in the world, we want, to the degree to which we can 
at prices we are willing to afford to pay, to prevent would-be 
adversaries and hostile forces from gaining access to 
technology that could endanger our interest, our freedom, or 
our lives.
    We have put together on this Committee, on a bipartisan 
basis, what I believe to be an excellent bill.
    I want to congratulate Senators Enzi, Sarbanes, and Johnson 
for their leadership. I believe we have a bill that will come 
close to getting a unanimous vote in Committee, I am hopeful 
that it will be supported by the Administration and become the 
law of the land.
    The basic premise of the bill is that if something is mass-
marketed--if you can buy it in the marketplace of the world--
while it may have defense uses, there is no way to prevent a 
would-be abuser of that technology from gaining access to it.
    Our bill is based on the premise that we need to build a 
higher wall around a smaller number of items, and we need to 
have stiff penalties for people who, on a knowing and willful 
basis, violate the law. We have established a system which I 
believe meets both our security and commercial concerns.
    We establish a mechanism whereby we can look into the 
future and judge the flow of technology and the timing so that 
if we are about to have a change in the MTOPS capacity of 
computers--the ability of computers to do theoretical 
calculations per second--if we know that that is going to rise 
in 6 months on a broad basis, rather than waiting for it to 
rise and then requiring American producers to apply for a 
license, we can, on a prospective basis, change the standard 
and allow American producers to be the leaders in the market 
rather than having to delay action with an application.
    I am very proud of this bill. We are eager to move forward 
with it. And we are holding our first hearing today with those 
who represent the commercial interests of America, that have a 
vital stake, as well as an academic who has specialized in this 
area.
    So, with that, let me stop and recognize my colleagues. And 
let me begin with Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman.
    I am pleased to join you in welcoming our panel of 
distinguished witnesses this morning.
    The subject of today's hearing, S. 149, the Export 
Administration Act of 2001, was introduced a couple of weeks 
ago by Senators Enzi, Johnson, Gramm and myself. It is very 
similar to legislation which was introduced in the last 
Congress and reported out of this Committee on a 20 to nothing 
vote.
    I believe this legislation is a carefully balanced effort 
to provide the President authority to control exports for 
reasons of national security and foreign policy, while also 
responding to the need of U.S. exporters to compete in the 
global marketplace.
    We have two objectives, worthy objectives, that we have to 
achieve here and we have to reconcile them because, to some 
extent, they come into conflict with one another, and it is 
very important to balance them in a careful way.
    I think I ought to underscore that extensive consultation 
took place in the development of this legislation, when we 
brought it 
before the last Congress, consultation with the then-
Administra-
tion, the Commerce Department, the Defense Department, the 
intelligence agencies, the National Security Council, and 
extensive consultation with representatives of different 
industry groups and outside national security experts. So the 
legislation represents a process that has been gone through 
very carefully.
    We of course now are undertaking to repeat I guess part of 
that process, although I do not think it is necessary to go 
through it as comprehensively as it was done only very 
recently. And obviously, we expect to work closely with the new 
Administration.
    I want to commend Senator Enzi, who was the Chairman of the 
International Trade and Finance Subcommittee in the last 
Congress, who, I gather, is going to move on to other pastures 
in this Congress. And Senator Johnson, who was the Ranking 
Member of that Subcommittee, and who is also moving on to other 
pastures in terms of ranking. But I think they are both going 
to get this thing done before that happens. And also, Senator 
Gramm.
    We were able, all of us, to work I think in a very positive 
and constructive way. And the respective staffs, which always, 
of course, are an essential part of any such effort to develop 
a bipartisan consensus.
    Let me in closing just note that the EAA has not been 
reauthorized since 1990, more than 10 years ago, except for 
temporary extensions, in 1993, 1994, and again last year.
    At the end of the last Congress, we passed a temporary 
extension until August 20 of this year. Prior to this recent 
temporary extension, the authority of the President to impose 
export controls has been exercised pursuant to the 
International Economic Emergency Powers Act (IEEPA).
    In my view, Congress should put in place a permanent 
statutory framework for the application of export controls. 
They should not be imposed in effect on a permanent basis 
pursuant to emergency economic authority of the President, 
which is what we have been doing now for most of the decade.
    In fact, one of our witnesses, in his testimony this 
morning, points out that it is difficult for the United States 
to encour-
age other countries to put in place a statutory framework for 
the 
exercise of export controls when we have such difficulty doing 
it ourselves.
    I look forward to the testimony of our witnesses and I look 
forward to working closely with the Chairman and with Senators 
Enzi and Johnson and other Members of the Committee as we try 
to move ahead on this important legislation.
    I think it is an obvious candidate, it seems to me, for 
fairly early action in this Congress, and I hope--although I 
appreciate that a new Administration has just come into place, 
so they may be sorting out their positions--although I do 
believe that the President endorsed this legislation, or 
certainly endorsed this concept, in the course of his campaign 
last fall.
    Mr. Chairman, I look forward to working with you on this 
and I hope we can carry it through to completion in the near 
future.
    Chairman Gramm. Thank you, Senator Sarbanes.
    Senator Enzi.

              STATEMENT OF SENATOR MICHAEL B. ENZI

    Senator Enzi. Thank you, Mr. Chairman.
    I appreciate your bringing this up so promptly this 
session, and I appreciate the effort that you have put into the 
bill.
    I learned a tremendous amount working with you on it last 
year. I know that you had some of the same disappointment to 
put that much effort into a bill and then not have it finished. 
And you are not used to that.
    [Laughter.]
    So I appreciate your elevating it to the Full Committee.
    Chairman Gramm. I do not want to get used to it, either.
    [Laughter.]
    Senator Enzi. Elevating it to the Full Committee so that we 
can put that kind of emphasis on it this year.
    This is a day of mixed emotions. I am so pleased that we 
are working this bill again, but I am disappointed that we are 
working this bill again.
    It makes it kind of like old home week. The people that are 
here watching today have been here numerous times before and 
are very well versed in all that we are doing. And of course, 
our witnesses today, we have heard from before.
    They have even been involved in other efforts that are 
related to EAA in the meantime and have made some great 
contributions there. So we definitely have some experts working 
on it. And we appreciate Mr. Hoydysh and Mr. Freedenberg and 
Mr. Christensen and Mr. Cupitt being willing to do this again.
    Thank you for your efforts on that.
    I have to mention Senators Sarbanes and Johnson and the way 
that they went about working on crafting this bill as we went 
through the unique process last time of taking an issue that 
had failed 12 times previously--in fact, had not even gotten 
out of Committee before that--and putting together a bill that 
would get out of Committee 20 to nothing. We are talking about 
bipartisan efforts this time. That is an example of a 
bipartisan effort last time.
    Senator Johnson has been an integral part of that process. 
He and I have appeared at numerous places selling this bill 
after we had gone through the process of finding out how it all 
worked so that we could craft a bill. I mentioned that today is 
kind of a day of mixed emotions.
    One of the reasons for that is that Paul Nash, who works 
for Senator Johnson, and has put just an incredible amount of 
effort into both working on the bill and working to get it 
passed, is going to be taking another job. We are going to lose 
his expertise, even though--what are we infiltrating?
    No.
    [Laughter.]
    Even though we will be finding out about some other areas 
of private work. And I congratulate you on your new job and 
want to mention how sad we will be not to have your efforts 
here working on our side of the issue.
    Chairman Gramm. Senator Johnson.

                COMMENTS OF SENATOR TIM JOHNSON

    Senator Johnson. Thank you, Mr. Chairman.
    I have just a brief remark that I want to make. One is to 
welcome, of course, the members of the distinguished panel, and 
I appreciate Chairman Gramm bringing this group together.
    I want to thank Chairman Gramm, Senators Sarbanes and Enzi 
for their leadership on our issue, on this issue, as we work to 
now build on last year's EAA efforts. As was noted, last year 
was a very closely consultative effort. It resulted in a 
bipartisan 20 to zero vote out of this Committee. We ran out of 
time at that point.
    I am pleased that Senator Enzi has acknowledged the 
contribution of Paul Nash on my staff, and the extraordinary 
work that he put into this legislation. We are going to miss 
Paul.
    But I also want to acknowledge that while a lot of people 
played an active role in bringing this EAA legislation to the 
point where we are today, Senator Enzi exhibited a persistence 
that is seldom seen, I think, around here on an issue such as 
this one. I think his effort, perhaps more than any other, is 
the reason why we have reached this point.
    S. 149 largely does what we were doing last year. It has 
been pointed out that we have gone since 1990 now without 
reauthorization. We have been relying on emergency authority. 
And as Senator Sarbanes observed, that is not only bad policy, 
it is bad precedent for our efforts to work with our allies 
around the world.
    It also leaves open some serious legal issues on which I 
think we tempt fate, as long as we fail to come up with a 
permanent statutory framework for these trade issues.
    The principles at stake here are fairly simple. It is to 
reduce or eliminate control where there really is no serious 
security implication, and to tighten the control where in fact 
that control is needed, utilizing mass market standards as a 
benchmark for what in fact can and should be controlled and 
what simply cannot be controlled. Again, I extend my 
appreciation to Senator Enzi for his leadership and to Senator 
Gramm for making this a high priority item for this Committee.
    And as we embark on the 107th Congress, I am hopeful as 
well that we can move this fairly quickly through Committee and 
onto the floor, giving the Administration, obviously, a fair 
opportunity to examine the details.
    But I hope that we can keep this on a reasonably fast 
track.
    Mr. Chairman, thank you for your leadership here.
    Chairman Gramm. Well, thank you, Senator Johnson. Thank you 
for your good work.
    Does anybody else want to make a statement?
    Senator Stabenow.

              STATEMENT OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman.
    If I might, as a cosponsor of the legislation and someone 
who is supportive of the efforts from the House side last year, 
I did want to make a comment, if I might, about the hard work 
and the effort and the leadership that has gone on in this 
Committee. And I want to congratulate everyone for being 
involved in this.
    This is truly a bipartisan legislative effort to streamline 
the current export review process and will allow most 
technology products to be sold overseas with very limited 
obstruction from the U.S. Government, which of course means 
more exports and more jobs for workers in the high-tech 
industry.
    I did want to just take a moment, if I might, to plug my 
State of Michigan because, while we are known for automobiles 
and very proud of that, we also, just outside of Detroit and 
metro Detroit, have what is now being known as Automation 
Alley. This is an area that includes a cluster of 1,800 smaller 
companies that are producing advanced technology products for 
export all over the globe. This group of companies is 
prospering so much, that they are now competing with the well-
known Silicon Valley and Route 128 outside of Boston and other 
areas.
    And so, I want to make my colleagues aware that Automation 
Alley is thriving in Michigan and will definitely benefit from 
this legislation. I am very pleased to be a cosponsor, Mr. 
Chairman, and look forward to swift passage.
    Thank you.
    Chairman Gramm. Thank you very much. Anyone else care to 
make a statement?
    Well, let me then call on our witnesses.
    Our first witness will be Dan Hoydysh, with Unisys, who is 
representing the Computer Coalition For Responsible Exports. 
Our witnesses will be Paul Freedenberg, who is representing the 
Association For Manufacturing Technology; Larry Christensen 
from Vastera, representing AeA, which was formerly known as the 
American Electronics Association; And finally, Mr. Richard 
Cupitt, who is associate director for the Center for 
International Trade and Securities at the University of 
Georgia.
    Well, let me ask each of you, if you can, to try to stay 
within 5 minutes. But if you need to say something more, I am 
not going to object if you run over a little bit.
    Mr. Hoydysh, why don't we start with you, and then we will 
just go down the table.

               STATEMENT OF DAN HOYDYSH, COCHAIR

           COMPUTER COALITION FOR RESPONSIBLE EXPORTS

    Mr. Hoydysh. Thank you, Mr. Chairman.
    I appreciate the opportunity to present the views of the 
CCRE on an issue that is of critical importance to the national 
security of the United States and to the technological 
preeminence of the U.S. computer industry.
    I will briefly summarize my testimony and ask that a 
complete copy of my testimony be submitted for the record.
    Chairman Gramm. It will. Everybody's full testimony will be 
printed in the record as if given.
    Mr. Hoydysh. I almost hate to admit it, but I have been 
laboring in the export control vineyard for almost 20 years, 
first, as part of the Reagan Administration's effort to make 
export controls an effective weapon against the Soviet Union. 
And for the past 3 years, as part of the CCRE, to create an 
effective export control system for the emerging network world. 
Therefore, I fully appreciate the leadership this Committee has 
taken to craft a bill that appropriately addresses the complex 
technological, economic and security issues that we are facing 
at the beginning of the 21st century.
    The CCRE applauds the Committee's efforts. We believe this 
bill creates, with some exceptions that I will note shortly, 
the framework for establishing an export control system that 
will protect our security without compromising our prosperity 
or technological preeminence. The key to creating an effective 
export control system is contained in Section 202. This section 
is designed to give the President the authority and flexibility 
to update controls in response to rapidly changing technology 
and market conditions.
    Flexibility to address rapidly changing circumstances is 
critical to maintaining an effective system. Unfortunately, the 
flexibility contained in Section 202 cannot be applied to 
computers because the National Defense Authorization Act of 
1998 imposed a rigid requirement that control decisions must be 
based on MTOPS.
    MTOPS is a metric that was developed almost 10 years ago to 
measure computer performance. It is now generally agreed upon 
by industry, the Department of Defense, and the GAO that MTOPS 
is an outdated metric that has lost its effectiveness as a 
control measure. Yet, the NDAA continues to mandate that the 
President use this obsolete metric when making control 
decisions.
    Therefore, the CCRE believes that a necessary step to 
creating an effective export control regime is to repeal the 
MTOPS-related provisions of the NDAA. Please note--repeal of 
the MTOPS provisions does not equate to decontrolling 
computers. It would only permit the President to develop a 
control regime that is not rigidly bound to MTOPS, if he so 
chooses. Only when the President is freed from the MTOPS 
straightjacket will the new Administration be able to craft an 
export control regime that is appropriate for the post-Cold War 
network world.
    Section 202 can be further improved by explicitly 
recognizing that controllability is one of the risk factors 
that should be considered by the President when determining 
which items to keep on the control list. The CCRE believes that 
attempting to control uncontrollable items is not only 
ineffective, but also counterproductive. It is ineffective 
because it simply will not work. It is counterproductive 
because it diverts industry and government resources from 
policing truly sensitive items. And it creates the illusion of 
safety without providing any real security.
    The CCRE believes that if the Committee takes into 
consideration the improvements suggested in my testimony, S. 
149 can serve as the basis for an effective export control 
regime. We look forward to working with the Committee on this 
important issue. I will be happy to answer any questions.
    Chairman Gramm. Thank you.
    Mr. Freedenberg.

               STATEMENT OF PAUL FREEDENBERG, PHD

                 GOVERNMENT RELATIONS DIRECTOR

            ASSOCIATION FOR MANUFACTURING TECHNOLOGY

    Mr. Freedenberg. Thank you, Mr. Chairman.
    I appreciate the opportunity to testify today. I would only 
note, I first got involved in this in 1979, as a member of the 
minority staff of this Committee and then worked on revisions 
of the Act from 1979 to 1985. The last time this Act was 
comprehensively updated and amended was 1988, which is before 
the fall of the Berlin Wall or the dissolution of the Soviet 
Union. It is obvious, given the premises of the Act, that it is 
badly in need of revision.
    I will be testifying on behalf of AMT--the Association for 
Manufacturing Technology, where I am director of government 
relations. We represent 370 member companies with annual sales 
ranging from less than $2 million to several hundred million, 
many of whom, by the way, are in Automation Alley, mentioned 
earlier.
    The major point I make in my testimony, in terms of 
background, is that the problem we have is that the current 
multilateral export control regime is aimed at keeping 
dangerous technology out of the hands of the pariahs, out of 
the states like Iran, Iraq, Libya, North Korea. But the problem 
beyond that is that we have yet to decide, either within our 
own country or, more importantly, with our allies, what to do 
about China.
    Our allies do not view China in the same manner that we 
view China. Certainly, the more conservative Members of every 
Administration that I have worked with, who are generally found 
in the Defense Department, view China as a potential technology 
transfer threat and are very conservative about approving 
licenses, particularly for machine tools.
    The record which I lay out in my testimony is that, on 
average, the record has been that about 50 percent of the 
licenses for machine tools have been approved over the decade 
of the 1990's. And the time that it takes to approve those 
licenses is several months to as long as a year.
    During that period of time for approval, it is quite 
possible for the customer, or the potential customer, to get 
tired of waiting and go on to buy a machine of one of the 
competitor companies. And I also point out that in the area 
that DoD is most concerned about--five-axis machine tools--
there are 718 models worldwide and about 580 are made outside 
the United States. That means that there are plenty of 
competitors waiting in the wings with export licenses if the 
U.S. company is unable to either get approval or get approval 
in a reasonable length of time.
    That is a major problem. Your legislation deals with this 
issue. It sets time limits. I think it improves a number of 
things. I will just note what it improves. We can get into the 
discussion in the questions and answers. There is a very 
important improvement in that what I have just been talking 
about--the foreign availability issue--is improved 
significantly, because your legislation recognizes that foreign 
availability can come from our trade partners, as well as from 
outside the export control regime.
    And in fact, the problems we have are not caused by 
countries who we do not have good relations with. The problems 
we have, the licenses that are lost in China, particularly, are 
lost to the Germans, the Swiss, the French, or the British. 
They are not lost to Taiwan or to Afghanistan, who are outside 
Wassenaar. They are lost to our close trading relationships.
    We feel that it is very important that you have the foreign 
availability provision that you have in the bill. We are also 
very happy with the mandate to the Administration to tighten up 
the multilateral regime. Currently, the regime is almost worse 
than having no regime at all because it is based on national 
discretion. A national discretion regime is not really a 
cooperative regime. It is a regime that essentially allows each 
country to make its own decision. We do not even share 
information.
    If we want to know if the Germans have shipped a particular 
machine tool, we do not have the right under the current 
regime--Wassenaar--to ask them for that information. And we do 
not have a no-undercut rule, which is a promise by our allies 
not to ship to an end-user that we have denied a license to. 
They have to tell us about it, but they do not have to tell us 
within 60 days. That is not a very effective discipline on 
them.
    Finally, since I see the time is up, I would say that we do 
have a problem with one part of the act, which is 502(b)(3). We 
think it would cause problems for exactly what we have been 
talking about. It reverses the Executive Order that I talk 
about in my testimony. It reverses the Executive Order of 1995, 
which allowed all agencies to review all export licenses, in 
return for which they had to stay within very tight time limits 
and, more importantly, get the approval of a policy level 
official in order to escalate a disagreement through the 
system.
    This 502(b)(3), the way I read it, calls for consensus 
among all the licensing officials or all the officials at the 
first level of interaction. That in itself would create further 
delays. The exact delays I document in my testimony. I would be 
happy to work with the Committee on drafting in that area. But 
I think that that is the one major flaw and the one reversal.
    And as I say, our problem is with denials, obviously. But 
it is also with delay. And delay is the enemy of U.S. 
exporters. I think we have to work to get a process that cuts 
down on that delay.
    I will be happy to answer questions.
    Chairman Gramm. Thank you.
    Mr. Christensen.
    Senator Johnson. Mr. Chairman, may I intervene just a 
second?
    I failed to acknowledge earlier as we were beginning the 
hearing that Mr. Christensen is a former classmate of mine at 
the University of South Dakota, who has gone on to a 
distinguished career. It is good to see Mr. Christensen here 
today representing the American Electronics Association. But I 
also want to acknowledge for your benefit, Mr. Chairman, that I 
believe it is South Dakota two, Texas A&M one at this 
particular hearing.
    [Laughter.]
    Thank you.
    Chairman Gramm. It is always dangerous to identify former 
classmates. They remind people what a poor student you were.
    [Laughter.]
    Mr. Christensen.

               STATEMENT OF LARRY E. CHRISTENSEN

                         VICE PRESIDENT

           INTERNATIONAL TRADE CONTENT VASTERA, INC.

                TESTIFYING ON BEHALF OF THE AEA

    Mr. Christensen. Well, thank you for the opportunity to 
discuss hopefully legislation today. Mr. Chairman, and Members 
of the Committee, I am here representing AeA, the largest high-
tech trade association. I am a Vice President of Vastera, where 
we are engaged in compliance. We manage global trade for over 
200 firms with software, consulting, and management services, 
and we represent two distinguished firms I will talk about just 
briefly, and that is Dell of Texas and Gateway of South Dakota. 
And that is about as bipartisan as I can get.
    We are in the trenches every day. I have spent 11 years 
with the 
Bureau of Export Administration, where I was charged with 
managing the rewrite of these rules and interpreting them. I am 

a professor at Georgetown, where I teach export controls, and 
in 
the private sector and in government I have spent 22 years in 
export controls.
    The AeA overall has to tell you that the Committee and the 
leadership of the Committee has to be congratulated for the 
work it did last year. We are supportive of your efforts to 
renew the EAA. And I have to tell you that I am personally 
gratified, having spent 22 years laboring in these vineyards, 
that your staff and the Members have exhibited a level of 
expertise that I think is important to regain this Committee's 
rightful position on these topics. Of all the wonderful things 
you have gained, I think achieving that level of expertise and 
commitment again is the most important.
    We all know that there are problems caused by government in 
not renewing an EAA and its disciplines and authorities. There 
are also problems from industry. I am going to touch on just a 
few of those from the perspective of AeA.
    The high-tech industry is concerned, first of all, that 
under the current regulatory schemes, there is too much 
restriction on intra-company transfers, especially of 
technology and software. To be a market leader in the world, 
you have to be in the market and you have to be in many areas 
of the world. And too many U.S. companies, we believe, are 
heavily restricted by the current licensing system, especially 
in their inability to freely use all their nationals in the 
United States, foreign nations in the United States, and around 
the world.
    We believe it is useful to permit, in other words, greater 
leeway in intra-company transfers.
    Second, the language in the statute at 201(c) regarding 
end-use and end-user controls--we realize it is late in the 
game. We realize that the Committee wants to move very quickly 
and there are good reasons to do so. We would ask, however, 
that you consider the language of 201(c), and the possibility 
of a low-value exemption. Working with companies every day and 
seeing these values drive enormous costs, even for $100 or $200 
or $2,000 exports. You can see the difficulty that industry 
faces. So we would propose perhaps a $10,000 ceiling on these 
high burdens with the ability of the Secretary to identify 
those very few low-cost items that are out there that may need 
this kind of rigid, strict end-use control.
    When I testified 2 years ago before Senator Enzi, I 
mentioned to the Committee that these controls applied to 
basketballs and refrigerators. And at the noncontrolled low 
end, in fact, they do. And I think that we should all look for 
some means to reduce some of those burdens.
    On the penalty section, the AeA would like to see a little 
modification, especially of the civil penalties, to move closer 
to the customs service strategy, where the level of penalties 
are tiered based on negligence, gross negligence or fraud. Of 
course, the bill does that in the criminal area. But the civil 
area, we would find that helpful as well.
    We support, Mr. Chairman, your notion that foreign 
availability should leave the discretion of the President to 
look a bit forward. We think that is very important to an 
efficient administration of the system, and I think no 
President has abused that authority and that that discretion 
should be left with the President.
    One last point about the Office of Technology Evaluation. 
AeA, and I certainly think that this is a very important idea, 
the contribution we would like to make is this. The statute or 
the legislative history should make very clear that something 
is necessary for those folks to do their job, their job of 
examining mass-market treatment and, above all, the 
effectiveness of other regimes in other countries. And that is 
training. They need to know the facts. They need to get out 
from behind their desks, visit with companies, have exchanges 
with high-tech companies and so on. Believe it or not, one of 
the hardest things to do in implementing these programs and 
these standards is to get the facts.
    And so, that is our last recommendation regarding the OTE.
    Thank you very much.
    Chairman Gramm. Mr. Cupitt.

              STATEMENT OF RICHARD T. CUPITT, PHD

                       ASSOCIATE DIRECTOR

          CENTER FOR INTERNATIONAL TRADE AND SECURITY

                   THE UNIVERSITY OF GEORGIA

    Mr. Cupitt. Thank you, Mr. Chairman.
    I would like to also extend my thanks to the Committee for 
its hard work and persistence in this issue area because I 
think developing a new EAA is incredibly important. I think, in 
fact, the failure to revamp the EAA over the last decade has 
had some really troubling consequences. The United States, by 
default, is ceding leadership on this issue to the European 
Union. The multilateral arrangements are in a period of 
stagnation because we have had difficulty providing leadership.
    Also, the double standard of urging others to have a strong 
permanent legal framework for their export control systems when 
we consistently have problems creating one for ourselves 
exacerbates what is really a substantial amount of distrust 
about U.S. motives and behaviors.
    So the work of the Committee has been excellent and I 
really appreciate all that has been done. Let me say that these 
represent my personal views, not those of the Center For 
International Trade and Security, the University of Georgia, 
nor the Center for Strategic and International Studies, where I 
am a visiting scholar.
    I think many aspects of S. 149 will help alleviate a lot of 
the problems. I would like to focus quickly on three areas 
where there may be some--I know the Committee wants to move 
quickly, but maybe some additions or some things that you might 
think about in negotiations as this moves onto the floor. First 
is how to create a stronger government-industry partnership. 
For an effective export control system, you have to have one in 
which industry wants to abide by this policy, wants to exercise 
its duties and obligations to the United States, wants to 
fulfill this mission that is set out in the EAA.
    Our center recently did a survey of compliance activities 
of about 120 U.S. exporters. One of the things that we found 
was that there is considerable variation in the range of 
compliance activities. I think the bill, as written, addresses 
some of these issues. One element in Section 601, talking about 
more outreach, is particularly important.
    I think supporting outreach activities here and abroad is 
really a crucial element for the success of the EAA because one 
of the things that we noticed, anyway, was that companies 
typically say most violations are related to a lack of 
knowledge and a lack of understanding of the rules. And so, I 
think that the outreach effort is really crucial.
    The second part of that, of building this partnership, 
would be to share more information with companies about threat 
assessments. In Section 202, I note that there is a suggestion 
that we need to do some more threat assessments on all of the 
items. It might be helpful even to talk about a rolling threat 
assessment, to keep doing that over time. But providing 
companies some information about these threat assessments is 
crucial to having, let's say, the compliance officers make the 
argument to their company CEO's and their stockholders that 
this is an important thing for us to do. This is why we need to 
pay attention to this.
    The third thing is if there is a way to consider building 
more incentives into the system that would help companies on a 
voluntary basis adopt strong internal compliance programs, or 
export management systems, and I suggest several in my written 
testimony.
    Let me move to another area where I have a fair amount of 
experience, and that is assessing national export control 
systems mentioned in Section 203. Personally, I have probably 
done more national export control assessments than anybody else 
over many years now. That means I know that making policy is 
like making sausage in a lot of countries. You do not want to 
really see it happen in some cases. But one of the other things 
I have learned is that it is not cheap to do these assessments. 
To do them comprehensively and to create reliable and accurate 
information is really difficult. I am concerned that if there 
are not adequate resources dedicated to this task in the 
Department of Commerce and the Office of Technology Evaluation, 
and not enough help from the State Department and Defense 
Department and other agencies, that this may create a 
bottleneck in terms of the time required to assess and put 
countries on country tiers.
    I see my time is up and so, let me just say that I would be 
happy to answer any questions and work with the staff on these 
and other issues.
    Thank you very much.
    Chairman Gramm. Well, let me begin by thanking our 
panelists for excellent and very helpful testimony. Let me make 
it clear that, while you might argue that it is late in the 
process, we have a bill. The bill passed the Committee last 
year unanimously.
    We want to write the best bill we can write. So if you have 
any suggestions, it is not too late to change the bill. We have 
simply gone out and tried to put together the best ideas we 
could find. If we find better ideas, we will change the bill. I 
want to urge our panelists, and anybody who is in the audience 
and anybody else who is interested in this area, that any 
suggestions you have as to changes that should be made, we 
would like to see them.
    Let me just ask a couple of generic questions, and let me 
just ask each panelist to respond to them. First of all, it is 
my thesis, given that the Berlin Wall has been torn down, given 
that we have liberated Eastern Europe and destroyed the Soviet 
Union, that, clearly, there is a need to change the basic focus 
of our export administration system. Does everybody agree with 
that?
    Mr. Hoydysh. Yes.
    Mr. Cupitt. Yes.
    Mr. Christensen. Yes.
    Mr. Freedenberg. Yes, Senator.
    Chairman Gramm. It is also my thesis that even when Ivan 
was at the gate, we were trying to control too many things and 
not putting enough focus on controlling the things that really 
mattered.
    Does everybody agree with that?
    Mr. Freedenberg. I would add one thing. During that period, 
I think we alienated our European allies. And that is one of 
the reasons they do not want to cooperate with us now, because 
we were so tight in our controls.
    Chairman Gramm. Mr. Hoydysh.
    Mr. Hoydysh. I have a different spin on it, a different 
perspective. I agree that we ended up by controlling too much. 
But I think that the basic difference between Soviet-era 
controls and the controls that we have now is that we really 
were in the business of trying to destroy the Soviet Union. We 
were in the business of breaking down their economy and their 
industrial base, not just preventing high-tech military 
equipment from going to the Soviet Union. We are not in that 
business now, with the exception of some of the rogue States 
like Iraq and North Korea.
    We are not in the business of destroying the economy of 
India or the economy of China. In fact, it is in our interest 
to build those economies up.
    That is where the major shift in emphasis is between the 
1950's, 1960's, 1970's, even 1980's style export controls and 
what we have to be looking at into the future.
    Chairman Gramm. Let me ask one more generic question. It is 
my sense that what is unique in America's national security is 
our ability to dominate the flow of new and productive ideas as 
they relate to technology, not our ability to protect old ideas 
that either we or anybody else has developed. That in the end, 
you cannot protect technology. You can delay it. But in the 
end, productive ideas ultimately get employed everywhere.
    Does everybody agree with that thesis?
    Mr. Hoydysh. I agree. And to amplify that, I think that who 
succeeds in the 21st century will not be who can regulate the 
best or who can restrict technology the best, but who can 
integrate and use it most efficiently and faster than anyone 
else. And that is basically what we need to focus on. We need 
to focus on running faster than everyone else and not trying to 
tie the opponent's shoelaces as much as we have in the past.
    Chairman Gramm. Well, it seems to me that is critical in 
terms of export controls because, ultimately, the thing we do 
not want to do is cede our leadership in new technology by 
trying to limit export of items that ultimately will be 
exported by somebody. And that brings me to my last question as 
I am running out of time.
    Mr. Freedenberg, you mentioned that you talked about 50 
percent of the machine tool applications have been rejected.
    Mr. Freedenberg. Right.
    Chairman Gramm. During that period, to the best of your 
knowledge, has a would-be purchaser ever had difficulty buying 
the item from some other country?
    Mr. Freedenberg. No. And that is the problem we have and 
that is what I pointed out, particularly with regard to China. 
We simply do not have consensus with our allies about what to 
control and what not to control. We have a list, but the list--
we rigidly enforce the list and our allies do not.
    Chairman Gramm. In all the years that you have been looking 
at this--well, at least during the period that you were talking 
about--where half of our applications have been denied, machine 
tool manufacturers in the United States have lost sales that 
have gone to Switzerland or Germany or some other place. But in 
the end, the target has ended up getting the machine tools.
    Mr. Freedenberg. Precisely. And that is why I started with 
the old system. In the old system, we had a veto. Easy. We just 
said no. We angered our allies quite a bit. There were 
multimillion, and sometimes billion dollar projects we vetoed.
    We cannot do that any more. And as a result--and our allies 
see it not as--with regard to China, I believe, not as a 
national security type negotiation, but more as kind of a trade 
negotiation. They do not see a threat, so they are not 
interested in the same kinds of arguments that we had before; 
nor can we, with great clarity, bring intelligence that shows a 
particular factory as a threat because Chinese factories 
sometimes are integrated. They might have one end of the 
factory has got some military or does some subcontracting for 
military, while most of the factory is building something for 
Boeing, for example.
    Chairman Gramm. Well, I certainly believe that this bill is 
important in giving us the sort of standing we need to get 
multilateral efforts back into place, which is one of the 
reasons I want to do it.
    I am going to call on our Members going back and forth by 
the order that they came this morning.
    And the next person on the list that is here is Senator 
Miller.

                COMMENTS OF SENATOR ZELL MILLER

    Senator Miller. Let me ask this question of Mr. Cupitt.
    You recommend creating incentives, for the industry to 
adopt better compliance practices, more along the line of best-
practices. Do you think a more developed export control 
compliance program would be a better standard than best 
practices?
    Do you see what I mean?
    Mr. Cupitt. That is why I want to just talk about it being 
voluntary, Senator. I think one of the concerns is that best 
practices for one company may not be the best practices for 
another kind of company that is structured differently and 
operates differently and in a different--it may be machine 
tools versus aerospace and there may be some different ways 
that you would want to approach the marketplace.
    Senator Miller. Let me interrupt you. You have just 
completed a survey of U.S. exports.
    Mr. Cupitt. Right.
    Senator Miller. Do you think that U.S. exporters could even 
agree on a set of best practices?
    Mr. Cupitt. I think that that probably will be difficult, 
actually, because I point to, let's say, some companies that 
have business models based more on distribution centers, where 
they just produce a product, send it overseas to a distribution 
center, and then it goes out somewhere, versus the companies 
that may have different distribution models of getting their 
product to the customer.
    I think in some of the discussions we had with industry, 
that has been expressed, some concern that they would be forced 
to do some things that would, in essence, bankrupt the company 
because they would have to change their business model. But I 
still think that trying to build some incentives for good 
compliance programs, ones that are adapted to individual 
circumstances, but still strong compliance programs, could be 
created.
    And I think that there are several things that you might 
do. One is improve licensing or make it easier for companies 
that have good compliance programs--let's say one here in the 
United States and one in England--to trade with one another. I 
think you might talk about sharing more information on end 
users. That is a particular problem that some companies do not 
discover an end-user problem until they get a denial, or they 
are pretty far in the licensing process. I think those kinds of 
incentives might be built-in, but I am pretty flexible on this. 
I just think that that is an area to focus on, is how to 
improve that partnership.
    Senator Miller. Thank you. I do not have any other 
questions.
    Chairman Gramm. Thank you, Senator Miller.
    Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman. And again, I want to 
thank everybody for their testimony, particularly the full 
testimony that will be a part of the record. In looking through 
that, there are several common threads that you have done a 
good job of making a part of the message, both last year and 
this year. And those will be an important consideration for us 
to make.
    One of the problems that we have on the bill, of course, is 
timing. If we get this bill debated early, we have a better 
chance of getting a completed bill. It also operates a little 
differently than some of the other bills that come through 
Congress in that, while the Banking Committee has jurisdiction, 
there are some other Committees that feel very jurisdictional. 
So we have been running everything through four other 
Committees as well, trying to avoid additional hearings in 
those Committees, which is traditional--I mean, it is not 
traditional for the Senate to farm this stuff out for multiple 
hearings by other Committees. And we intend to maintain that.
    As a result, some of the things that need to be debated 
will probably be debated more on the floor than they are in 
Committee.
    The Committee's expeditious review of this and getting it 
to the floor will be more beneficial to a final bill, I think, 
than if we keep vetting it out to all of the other 
jurisdictions. And in light of the common thread that there is 
among the testimony, I will just direct questions to one person 
for the answer and we will take into consideration all of them. 
For Mr. Hoydysh, President Clinton raised the threshold on the 
MTOPS level for computers to 85,000. Could you give us an 
explanation of how this increase balances our economic and 
national security interests, and of course the emphasis that 
you made on that if it is the wrong measurement, perhaps what 
the right measurement would be?
    Mr. Hoydysh. Yes, thank you, Senator. There is a certain 
class of computers that fits under this MTOPS metric. 
Generally, they are computers that are in the 32 processor 
category that are used in ordinary commercial applications. For 
example, here's a press release about an insurance company 
using an ES 7000 UNISYS 32 processor computer for its billing 
purposes, Another press release describes a bank using it for 
e-brokerage purposes; a health service provider using it for 
billing, and also, a school system using it for administrative 
processes.
    So the systems that are represented by the new levels are 
large servers, but they are still sold in relatively high-
volume. And they are items that represent a good return on 
investment for the companies selling them.
    At the low end of the computer spectrum where sales are in 
the millions, for example PC's, the profit margins are 
relatively small. In big systems, the profit margin is higher. 
So it is much more profitable for companies to be able to sell 
these types of systems.
    The new MTOPS level allows us to sell large servers that 
are used for benign commercial purposes and for commercial 
purposes that are now just beginning to take off. All of these 
e-business, 
e-commerce type of applications require these large systems 
which are primarily designed for transaction processing. They 
can handle thousands of inquiries in any given second, as 
opposed to computers that do one task at a time.
    This last MTOPS increase permits us to sell exactly this 
kind of e-commerce system, which is essential for the 
development of the networked world and for the global economy.
    Senator Enzi. Mr. Freedenberg, you concentrated a little 
bit more on the dual-use technologies and had some valuable 
information about how long it takes to get approval in some of 
the competing countries to us.
    Are there some ways to maintain that inter-agency dispute 
resolution provision contained in the bill while preserving 
some timeliness in the decision making?
    Mr. Freedenberg. Time limits are the most important thing. 
But the problem is there are ways to stop the clock and there 
is no way to legislate against that, such as asking for more 
information or there are delays having to do with intelligence 
or requests for more intelligence. It is very hard to legislate 
the time limit.
    I think what you want to do in your final bill is create a 
structure that is conducive to rapid movement toward a final 
decision. If there is a policy dispute, it should be handled by 
the policy level people. But if it is just a dispute about 
facts, I do not think--I think those sorts of things ought to 
be resolved quickly and it is just an up-or-down kind of vote.
    It does not happen with machine tools. And we have had very 
bad experiences with it.
    Senator Enzi. Thank you. My time is expired.
    Chairman Gramm. Senator Corzine.

               COMMENTS OF SENATOR JON S. CORZINE

    Senator Corzine. Mr. Chairman, I am in catch-up mode here, 
so I will pass at this time. Thank you.
    Chairman Gramm. All right.
    Senator Reed.

                 COMMENTS OF SENATOR JACK REED

    Senator Reed. Thank you, Mr. Chairman. And thank you, 
gentlemen, for your testimony.
    I first want to commend the Chairman and particularly 
Senators Enzi and Johnson for all the hard work they have put 
in this legislation, bringing it to this point. Let me just ask 
a few questions, if I may.
    Mr. Hoydysh, you suggested the elimination of MTOPS as a 
benchmark to give the President more flexibility. What other 
types of benchmarks would you suggest the President employ in 
making these judgments about export controls?
    Mr. Hoydysh. We do not have a specific benchmark that we 
are proposing.
    What we are suggesting is that the MTOPS benchmark has now 
been generally recognized as being ineffective and obsolete. 
And 
although the MTOPS metric is obsolete, it is still a 
requirement in the NDAA that whatever the President does has to 
be based on MTOPS. We are suggesting that the MTOPS be removed 
from the legislation, not from the regulatory structure which 
now uses MTOPS. We are suggesting that the Administration work 
with the industry to look at what type of metric or whether any 
type of metric is appropriate.
    Although there may be other ways of controlling computers, 
we basically believe that it is virtually impossible in this 
networked world to actually control raw computing power because 
you can cluster lower-end systems to obtain higher performance.
    But what we object to primarily is having the President in 
this MTOPS straightjacket where we cannot make any progress. 
Even if someone were to come up with a new architecture, a new 
metric, a new something, it cannot be used because we have to 
rely on MTOPS. So all we are suggesting is get it out of 
legislation and let the President do what is necessary to get a 
system that works in this new environment.
    Senator Reed. Let me infer from your response that there 
are some guidelines basically that the industry would at least 
be able to discuss and advise upon. The alternative is not 
standard. You are not suggesting that. You are suggesting that 
we get away from this one and move to something else. I am just 
trying to find out what the something else is.
    Mr. Hoydysh. We are suggesting that maybe a standard based 
on performance is not necessarily the correct way to go. Even 
if you remove MTOPS from the control regime, you still have a 
very extensive and restrictive end-user regime. We cannot sell 
to end-users that are identified by the government as being off 
limits, or if we have knowledge that the end-user is involved 
in developing weapons of mass destruction.
    Even if you eliminate MTOPS entirely, you have not 
eliminated the export control system. We are prepared to 
discuss other technological ways of trying to get a handle on 
this, or looking at improving the end-user based system to make 
sure that these systems do not end up in the wrong hands.
    And I would like to emphasize--we are not talking about 
removing controls on any of the rogue states like Iraq, Iran, 
North Korea, Libya. We are content to allow these controls to 
continue to stay in affect. We are talking about the rest of 
the world and whether performance-based controls make any sense 
since they can be circumvented so easily.
    Senator Reed. Mr. Freedenberg, the answer sort of dovetails 
on the question I have for you. You seem to suggest the world 
is divided into three parts, the rogue states, China, and 
everybody else.
    Mr. Freedenberg. Yes, I would say so.
    Senator Reed. And how does this legislation roughly match 
up, given those three different challenges--the rogue states, 
China and the rest of the world?
    Mr. Freedenberg. I think it helps. It has good provisions 
dealing with terrorism, antiterrorism, and with proliferation. 
And it helps with the world outside China. I do not know that 
it clarifies or, well, even I do not know that it clarifies 
China. But that problem, as I say in my testimony, is a debate 
within the U.S. Government. Unless we resolve it and decide 
what we want to do about China, how can legislation?
    You cannot legislate that to a conclusion. It has to do 
with threat assessments. It has to do with all types of issues. 
That is why export controls are so difficult to administer, 
because it is where policy meets technology and it is a very 
difficult decision to make.
    Senator Reed. I guess I can infer also that if we come to 
some consensus, we would have a better chance of talking to our 
allies and our other technological countries in terms of a 
common----
    Mr. Freedenberg. I think so, and I think having that would 
enhance our security, which is the most important thing. I 
mean, if we do have correct assessments of some of these 
places, they shouldn't be getting the technology they are 
getting. If we do not, then we should try to resolve that 
internally, what the facts are.
    Senator Reed. Thank you. Just one quick question and I 
think both Mr. Cupitt and Mr. Christensen touched upon it. That 
is the education of industry as far as these controls. I 
wonder, from your research, Mr. Cupitt, have you seen a 
difference between the small business and major business in 
terms of their ability to operate? And should we focus efforts 
through the SBA or some other organization to reach out to 
small business?
    Mr. Cupitt. Generally speaking, that is not just in the 
United States, but that is a difficulty many governments face, 
is how to deal with small and medium-sized businesses. Some are 
quite experienced. But typically, an internal compliance 
program may cost in the neighborhood of $400,000 or $500,000 a 
year. And that is just way too much for some smaller companies. 
So that is a difficult issue for most companies to grapple 
with. And I think increased outreach is one of the main ways 
that you try to do that along with developing a good 
infrastructure with freight-forwarders and others who might be 
handling the exporting activities of some of the smaller 
businesses.
    But it is a problem, and not just for the United States, 
Japan has a big problem with it. They know they have a problem 
with it. The Chinese are beginning to realize that they are 
going to have a big problem with that.
    So I think that is a major issue, but outreach can really 
help.
    Senator Reed. Thank you very much. Thank you, Mr. Chairman.
    Chairman Gramm. Thank you.
    Senator Ensign.

                COMMENTS OF SENATOR JOHN ENSIGN

    Senator Ensign. Thank you, Mr. Chairman.
    Obviously, for those of us new on the Committee, this is a 
very difficult issue and I am sure it is actually a difficult 
issue for those who have been on the Committee. And for those 
of you in industry and academia, because of the problems that 
have been pointed out today dealing, as fast as technology is 
changing today and trying to decide whether or not, first of 
all, whether you can ever control the advancement of that 
technology, that some of these people that we don't want to get 
that technology, whether they can get it from other places.
    It also seems to me that we have to be careful what we put 
in legislation versus regulatory controls because regulatory 
controls obviously can be changed much more quickly. Whereas, 
we see with legislation, it can be a very timely process. And 
as fast as technology is changing, it seems to me that if we do 
not have the mechanisms in place to be able to change some of 
the standards that the White House is dealing with some of 
these other countries, that they seem to need that flexibility 
to be able to change. Otherwise, this legislation could be 
mostly obsolete within just a couple of years if those kinds of 
things are not built in. I do not know if any of you want to 
comment on that. But just in the brief part that I have been 
reading about this legislation, it seems to me that that is a 
major challenge of this legislation.
    Mr. Hoydysh. I would like to comment, Senator. Again, as I 
said in my testimony, we think the bill does create a system 
that gives the Executive Branch, the President, the necessary 
authority to do what is appropriate, with the exception of the 
computer field where MTOPS is embedded in cement. This is a 
metric that is already 10 years old and that lost its currency 
maybe 3 or 4 years ago.
    Failure to address this MTOPS issue now could result in 
MTOPS being in legislation for the next 5 years. This is akin 
to fighting the next war with the tactics used in the Korean 
War.
    You cannot put the President in that kind of situation 
where you deny the flexibility to fix the system. Again, this 
legislation simply creates a process to get to a desired 
result. It does not decontrol anything. The President will 
still have all the authority necessary to consult with everyone 
to do the right thing. But the Administration must be given the 
authority to do this.
    Otherwise, you end up with absurd results.
    Mr. Freedenberg. If I could comment.
    We did not as an association propose any changes in 
technology limits. We did not try to legislate or propose any 
legislation on that. And the suggestions we had had to do with 
process.
    I think the most important thing to moving toward a 
conclusion is get the process to work. And the complaints that 
people have had is that the process does not always work. That 
plus improvements in the companies internal control systems.
    You would come up with a really good bill and one that 
would leave sufficient flexibility to the Administration to 
adapt new technologies. I do not think you want to put 
anything, technological limits, at all in this legislation.
    Mr. Christensen. Senator, I would add a point about process 
and oversight that we have not talked about that I think is 
critical to the operation of the system. And that is active, 
well-funded support from the intelligence community.
    One of the fundamental differences between the Cold War era 
that Dan Hoydysh talked about and the current day is in the 
Cold War, if something went to the Soviet Union, we assumed it 
would get in the wrong hands. It was a simple system. You just 
denied everything you could and as Paul Freedenberg said, you 
used your black ball veto at COCOM.
    We do not live in that world any more. Rather, both in 
license review and end-use license requirements, in countries 
with which we actively trade--India, China, Pakistan--companies 
are put to the burden of knowing what the end-use is or they 
are put to the burden of getting their license or not getting 
their license depending on what the intelligence community 
tells the review authorities about an individual they might 
seek to hire or a customer they might seek to serve.
    Recently, I was very disturbed that the intelligence 
community for a 3- or 4-week period just cut off its 
recommendations on deemed export cases. It said they could not 
add value. When you are in the government and you have to make 
these decisions, you cannot pull facts out of the air. And the 
intelligence community usually has to be the best source of 
information. It does not mean they know everything in the 
world. But I do think as you go forward and have oversight of 
the system, you need to always keep in mind the important role 
of the intelligence community.
    Chairman Gramm. Thank you. Well, let me make it clear that 
we do not write MTOPS into this bill. The fact that they are 
now written into law is a testament to what happens when you do 
not have a permanent legal structure. In the defense 
authorization bill last year, someone thought that we could 
constrain gravity and repeal the laws of physics by having 
action by the legislative branch. As a result, we have written 
technology into law without informing technology and the 
innovation process.
    But in any case, that is something we intend to fix.
    Let me announce that--I think we have already announced it. 
But we are going to have a hearing on Friday. I am very sorry. 
I know a lot of our colleagues will not be here. But we are 
looking toward the rewriting of the Defense Production Act, 
which is probably the most powerful and all-encompassing law 
ever adopted by the American Congress.
    It virtually gives the President in the name of national 
security police powers, the power to take property, to set 
prices, to mandate allocation. It is a law that was used by 
Richard Nixon to impose wage and price controls. It was the law 
used by President Clinton to mandate that natural gas producers 
and suppliers sell natural gas in California without the 
ability to negotiate price, without any guarantee they will 
ever be paid. And that order was extended for 2 weeks by the 
Bush Administration.
    So next Friday, we are going to take a very small look at 
the use of the Defense Production Act in California. Clearly, 
it is my intention this year to have us rewrite the Defense 
Production Act, and again, rewrite it in recognition that in 
1951, when we passed the Defense Production Act, we were at war 
in Korea. Ivan was at the gate. Our national survival was 
threatened. We were willing to give the President these 
extraordinary powers. It would be my intention to take a long, 
hard look at the Defense Production Act in the context of the 
world that we live in today.
    I just thought the recent use of the Defense Production Act 
was too good an opportunity to miss. Given that I think the 
order expires Tuesday, is it?--today. Today--it would be a good 
idea to go ahead and hold a hearing while this is fresh on 
everybody's mind.
    So I want to thank everybody for coming. Let me say that we 
are eager to move ahead with this bill. It is not too late to 
have an input. We would appreciate any support from people and 
letting other Members of the Senate know that this is an 
important issue, and barring the fact that any of my other 
colleagues want to say anything--Senator Enzi?
    Senator Enzi. I just wanted to make a quick comment, that I 
do have some other questions for the panel and there are some 
other people out there that I see. So my staff and I will be 
talking to you to get some answers so that we can better 
incorporate what you have said into what we will do.
    Thank you.
    The Chairman. Again, let me thank you all for coming.
    The Committee stands adjourned.
    [Whereupon, at 11:45 a.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, 
supplied for the record follow:]

                PREPARED STATEMENT OF SENATOR PHIL GRAMM

    Senator Phil Gramm, Chairman of the Committee on Banking, Housing 
and Urban Affairs, made the following statement today at a Full 
Committee hearing on S. 149, the Export Administration Act of 2001. The 
bill, introduced January 23, would provide the legal framework for the 
executive branch to implement export controls on nonmilitary items for 
both national security and foreign policy reasons.
    We are here today to talk about the Export Administration Act. As 
our colleagues know, the Export Administration Act is a very important 
piece of legislation because it is our attempt as a Nation to deal with 
apparently conflicting goals.
    On one hand, we have a goal to dominate the production of high-tech 
items in the world. We want to produce new and better items. We want to 
be at the cutting edge of the world's commercial markets and, at the 
same time, as the preeminent defender of freedom and right in the 
world, we want, to the degree we can and at prices we are willing to 
pay, to prevent adversaries and would-be hostile forces from getting 
access to technology that could endanger our interests, our freedom and 
our lives. We have put together on this Committee on a bipartisan basis 
an excellent bill. I want to congratulate Senators Enzi, Sarbanes, and 
Johnson for their hard work on this bill. I believe we have a bill that 
will come close to getting a unanimous vote in committee, and I am 
confident that it will be supported by the Administration and will 
become the law of the land.
    The basic premise of the bill is if something is mass marketed or 
if you can buy it in the marketplace of the world, while it may have 
defense uses, there is no way you can prevent a would-be user of that 
technology from having access to it. Our bill is based on the premise 
that we need to build a higher wall around a smaller number of items 
and that we need to have stiff penalties for people who, on a knowing 
and willful basis, violate the law. We have established a system in our 
bill that I believe meets both our security and commercial concerns.
    We establish a mechanism whereby we look to the future to judge the 
flow of technology and the timing so, for example, if we are about to 
have a change in the capacity of computers--such as the ability of 
widely marketed computers to do theoretical calculations per second--
rather than waiting for it to rise, requiring American producers to 
apply for a license that will be approved, we can on a prospective 
basis change the standard and allow American producers to be leaders in 
the market. That is clearly better than having to fool around with an 
application process for a technology that is already widely available.
    I am very proud of this bill. We are eager to move forward with it. 
We are holding our first hearing today with people who represent the 
commercial interests of America, which have a vital stake in this 
legislation, as well as an academic who specializes in this area. We 
want to write the best bill that we can write. If anyone has any 
suggestions, we want to hear them. We have simply tried to put together 
the best ideas we could find. If we find better ideas, we will change 
the bill.
    It is my thesis that, given that the Berlin Wall has been torn 
down, given that we have liberated Eastern Europe and destroyed the 
Soviet Union, clearly there is a need to change the basic focus of our 
export administration system. It is also my thesis that even when Ivan 
was at the gate, we were trying to control too many things and not 
putting enough focus on controlling the things that really mattered.
    I believe that the ultimate source of America's national security 
is our ability to dominate the flow of new and productive ideas as they 
relate to technology, not our ability to protect old ideas that we or 
anybody else has developed. In the end, you cannot protect technology. 
You can delay it, but in the end, productive ideas get employed 
everywhere.
                               ----------

             PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI

    Thank you, Chairman Gramm for holding this hearing on S. 149, the 
Export Administration Act of 2001. I extend my appreciation to the 
other cosponsors of this important legislation, Senators Sarbanes, 
Johnson, Hagel, Roberts and Stabenow. I thank each of them for their 
help in drafting and supporting this bipartisan bill.
    I also welcome back Mr. Freedenberg, Mr. Hoydysh, Mr. Christensen 
and Mr. Cupitt to the Committee. Thank you for continuing a 
constructive dialogue on the issues surrounding the reauthorization of 
the EAA. I look forward to hearing your views today and working with 
you as this bill moves through the legislative process.
    The goal of the EAA of 2001 is to eliminate unnecessary trade 
barriers, while focusing controls on the items most sensitive to our 
national security. It establishes a modernized framework to recognize 
the rapid pace of technological innovation and the realities of 
globalization, and puts higher fences and more enforcement priority 
around the most sensitive items and destinations. At the same time it 
takes into account the realities of today's global economy, 
incorporating the concept that some items are very difficult to 
control. The bill recognizes that items available from foreign sources 
or available in mass-market quantities cannot be effectively 
controlled.
    S. 149 builds upon last year's EAA reform bill by making several 
improvements. We have studied the issue for several years now, with 
this being the Banking Committee's eighth hearing since 1999.
    It is essential that the EAA be reauthorized and reformed this year 
as the EAA expires on August 20. There have been long lapses in the EAA 
as a result of repeated failures to update and reauthorize this 
important Act in the past decade. As a result, our export control laws 
have been inadequately governed by either the EAA of 1979, or more 
often than not, by emergency Presidential authority under the 
International Emergency Economic Powers Act (IEEPA). This situation has 
effectively allowed the Administration, instead of Congress, to set the 
export control policies of the United States. The bill introduced today 
would place our export control system on firm statutory ground.
    Another important, but often overlooked reason for the 
reauthorization of the EAA is that it would enhance our efforts to 
convince other countries to implement more effective export controls, 
particularly in the multilateral export control regime context. The 
June 1999 joint Offices of Inspectors General report to the Senate 
Committee on Governmental Affairs pointed out:

          The United States encourages other countries, such as those 
        in Eastern Europe and Southeast Asia, to implement export 
        controls, it must set the example by sending a clear, 
        unambiguous message that it is committed to export controls. It 
        has been 10 years since the expiration of the Export 
        Administration Act, in our opinion, this could send the wrong 
        signal to these countries as well as our allies that the United 
        States is not truly committed to export controls.

    We currently have a one-year extension of the outdated statute 
governing export controls. The failure; however, to update the 
antiquated 1979 Act compromises our position of world leadership in 
stemming technologies related to the transfer of weapons of mass 
destruction. Once again, a strong endorsement for quickly updating and 
reenacting an export administration bill.
    In September 1999, the Senate Banking Committee unanimously 
approved a Committee Print, S. 1712, to the Senate. I expect S. 149 
will also have strong bipartisan support from the Committee as we 
modify and move forward with this legislation. I look forward to 
working with my colleagues and other interested parties to reauthorize 
the EAA during the coming months. S. 149 is necessary to advance both 
our national security and trade objectives. Thank you, Mr. Chairman.

                               ----------

               PREPARED STATEMENT OF SENATOR JIM BUNNING

    Mr. Chairman, I would like to voice my strong support for S. 149, 
the Export Administration Act.
    We tried to pass an Export Administration Act last year. We passed 
it unanimously out of this Committee. But we were unable to bring it to 
a vote on the Senate floor. It is my hope we can pass this bill 
rapidly, and get it to the President's desk. I support this Export 
Administration Act bill because it has real teeth.
    We will be able to restrict companies from selling technologies 
that may harm our national security. We will finally be able to levy 
real penalties against those companies who would undermine our security 
to make a profit.
    We also will allow the agencies in charge of our export controls to 
concentrate on those items that will hurt our national security if 
passed along to other nations. They will not be forced to try and stop 
products that rogue nations can buy at radio shack. Our export controls 
badly need to be updated. This bill will protect our security and bring 
our export control laws into the 21st century.
    I would like to commend Senators Enzi, and Johnson, Chairman Gramm 
and Senator Sarbanes for their hard work on this issue.
    If it was easy to reauthorize the Export Administration Act, it 
would have been done long ago. Or it would have been done last year. 
Now we have a good bill that I believe all of my colleagues should 
support.
    I hope that we will continue to work with our colleagues from the 
armed services, foreign relations, governmental affairs and 
intelligence committees. Hopefully we can overcome the pitfalls that 
prevented this bill from becoming law last year. And I hope at the end 
of the day we can have a bill that everyone can support. I urge my 
colleagues to support the Export Administration Act.
    Thank you Mr. Chairman.

                   PREPARED STATEMENT OF DAN HOYDYSH

       CoChair of the Computer Coalition for Responsible Exports

                            February 7, 2001

    Mr. Chairman, Members of the Committee: Good morning. My name is 
Dan Hoydysh. I am Director of Trade, Public Policy & Government Affairs 
at the Unisys Corporation. I also have the privilege of serving as 
CoChair of the Computer Coalition for Responsible Exports (CCRE) and am 
testifying today on CCRE's behalf (a curriculum vitae is attached). I 
want to thank you for providing me and the CCRE with the opportunity to 
share our views on U.S. computer export controls.

Overview of Testimony

    In our testimony today, we want to raise several key points 
concerning S. 149, the Export Administration Act of 2001, focusing on 
what we consider to be the heart of the bill--Section 202--which 
empowers the President, Secretary of Commerce, and Secretary of Defense 
to review and update the National Security Control List to decide 
whether or how an item can be effectively controlled. CCRE wishes to 
emphasize that: (1) the benefits of Section 202 will not extend to our 
industry unless the computer control requirements in the National 
Defense Authorization Act (NDAA) are repealed; and (2) Section 202 can 
be strengthened by (a) requiring the Secretary of Commerce to review 
the National Security Control List on a continuing basis, and (b) 
clarifying that a relevant Risk Assessment Factor is whether the 
capability or performance provided by an item can be effectively 
controlled.

The Computer Coalition for Responsible Exports (CCRE)

    CCRE is an alliance of American computer companies and allied 
associations established to inform policymakers and the public about 
the nature of the computer industry--its products, market trends, and 
technological advances.
    CCRE members include Apple Computer, Inc., Compaq Computer 
Corporation, Dell Computer Corporation, Hewlett-Packard Company, IBM 
Corporation, Intel Corporation, NCR Corporation, SGI, Sun Microsystems, 
Inc., Unisys Corporation, the American Electronics Association (AeA), 
the Computer and Communications Industry Association (CCIA), the 
Computer Systems Policy Project (CSPP), the Electronic Industries 
Alliance (EIA), the Information Technology Industry Council (ITI), and 
the Semiconductor Industry Association (SIA).
    CCRE is committed to promoting and protecting U.S. national 
security interests, and seeks to work in close partnership with the 
Congress and the Executive Branch to ensure that America's economic, 
national security, and foreign policy goals are realized. CCRE also 
believes that a strong, internationally competitive computer industry 
is critical to ensuring that U.S. national and economic security 
objectives are achieved and that U.S. economic and technological 
leadership is maintained.
    The U.S. computer industry has a history of cooperation with the 
U.S. government on security-related high technology issues. They take 
their responsibilities in the area seriously. CCRE members believe that 
U.S. national security is tied to U.S. technological leadership. U.S. 
computer companies also devote hundreds of employees and millions of 
dollars annually to complying with export control regulations. It is 
not our role, to define U.S. national security needs--that is for the 
Congress and the Executive Branch. Rather, we do and will continue to 
provide the Congress and Executive Branch with information concerning 
the rapidly changing technology and international market conditions 
that we believe they will need to take into consideration in shaping 
up-to-date and effective U.S. export control policies.

Introduction

    CCRE would like to begin our remarks today by thanking this 
Committee for its leadership in pushing forward with its agenda for 
meaningful export control reform. It has been a long road, and we 
appreciate the Committee's legislative efforts in recent years, 
including its efforts in connection with S. 1712, the Export 
Administration Act of 1999. Like S. 1712, the bill now before this 
Committee--S. 149, the Export Administration Act of 2001--reflects 
several positive elements for reform.
    At the heart of S. 149 is Section 202, which we believe is the key 
to implement-
ing effective national security controls. Section 202 empowers the 
President, Secre-
tary of Commerce, and Secretary of Defense to review the National 
Security Control 
List and determine whether an item can and should be controlled. The 
decision of 
whether or how to control an item is the most fundamental, threshold 
step in export control administration. In making this risk assessment, 
the President needs to consider not only U.S. national security goals, 
but rapidly changing developments in technology and international 
market conditions. For precisely this reason, Section 202 is designed 
to provide the President with the authority and flexibility needed to 
implement up-to-date and effective export control measures.

The Need to Repeal NDAA Computer Control Requirements
    Notwithstanding the promise of Section 202, its application to 
computers is seriously undermined by another statute, the National 
Defense Authorization Act (NDAA), which imposes mandatory, rigid 
controls on high performance computer (HPC) exports. As a general rule, 
it is a bad idea to legislate static technological standards to address 
dynamic technological challenges. The NDAA violates this principle by 
requiting the President to use the MTOPS (millions of theoretical 
operations per second) metric to measure computer performance and set 
export control thresholds based on Country Tiers. Although the 
Department of Defense and the General Accounting Office now consider 
the NDAA approach to be ``ineffective,'' the NDAA severely limits the 
authority of the President to determine both what computers should be 
controlled and how they may be controlled. CCRE believes that the 
flexibility contemplated in Section 202 will be essentially nullified 
in relation to computers unless S. 149 also repeals the NDAA computer 
provisions. Put another way, if the NDAA computer provisions are not 
repealed, the computer industry would be the only industry that is 
essentially read out of Section 202.
    We wish to emphasize that a decision to repeal the NDAA's computer 
provisions will not alter the way in which computer exports are 
currently controlled under the Export Administration Regulations (EAR). 
If the NDAA computer provisions are repealed, the current MTOPS-based 
regime will continue to remain in place and controlled computers will 
remain on the National Security Control List. What would change, 
however, is that the President, Secretary of Commerce, and Secretary of 
Defense would be empowered to reassess the effectiveness of these 
controls in the future pursuant to the Section 202 framework.
    The need for Presidential flexibility in administering computer 
export controls is especially clear in light of recent reports by the 
Department of Defense (DoD), General Accounting Office (GAO), and 
Defense Science Board (DSB), all of which conclude that the rigid 
MTOPS-based approach required by the NDAA is obsolete and fails to 
advance U.S. national security. A recent DoD report concludes, for 
example, that ``MTOPS has lost its effectiveness as a control measure . 
. . due to rapid technology advances.'' On this point, DoD has 
emphasized that:

          Controls that are ineffective due to market and technology 
        realities do not benefit national security. In fact, they can 
        harm national security by giving a false sense of protection; 
        by diverting people and other finite export control resources 
        from areas in which they can be effective; and by unnecessarily 
        impeding the U.S. computer industry's ability to compete in 
        global markets.

The GAO's report to the Senate Armed Services Committee similarly 
concludes that the MTOPS standard is ``outdated and invalid'' and that 
``[t]he current export control system for high performance computers, 
which focuses on controlling individual machines, is ineffective 
because it cannot prevent countries of concern from linking or 
clustering many lower performance uncontrolled computers to 
collectively perform at higher levels than current export controls 
allow.'' Finally, the Defense Science Board echoes this same analysis, 
warning that ``[c]linging to a failing policy of export controls has 
undesirable consequences beyond self-delusion.''
    In essence, U.S. defense and security experts now agree that the 
NDAA's MTOPS regime is outmoded and needs to be dismantled. The 
recommendations of the DoD, GAO, and DSB highlight the President's need 
for administrative authority to design and implement the most 
appropriate types of controls to advance U.S. national security for all 
dual-use items, including computer systems. CCRE believes that this can 
only be accomplished if the NDAA computer provisions are repealed.
Strengthening Section 202
    Section 202 can also be strengthened in two important ways. First, 
Section 202 can be more effective if it requires the Secretary of 
Commerce to continuously review the coverage of the National Security 
Control List to ensure that its controls are frequently updated to 
account for rapidly changing technological and market realities. On 
this point, we note that while Section 211(a) requires the Secretary to 
review on a ``continuing basis'' the foreign availability and mass 
market status of items subject to a license, Section 202 requires only 
that the Secretary conduct a ``periodic review'' of the National 
Security Control List. This distinction is sharp--``periodic'' review 
is generally less frequent than ``continuous'' review--and the heart of 
an effective control system should be an updated determination of 
whether an item should be controlled in the first place. For this 
reason, Section 202 can be more effective if it requires the Secretary 
to conduct continuous rather than periodic review of the National 
Security Control List.
    Finally, CCRE believes that the Risk Assessment Factors identified 
in Section 202(b) would benefit from greater elaboration. Section 
202(b)(2)(C) states that among the risk factors that the Secretary 
shall consider are ``[t]he effectiveness of controlling the item for 
national security purposes of the United States, taking into account 
mass-market status, foreign availability, and other relevant factors.'' 
While the catch-all ``other relevant factors'' is conspicuously broad, 
we believe that this provision should prominently list an additional 
factor central to the concept of controllability--whether the 
capability or performance provided by the item can be effectively 
restricted.
    The plain language of the bill wisely recognizes that the foreign 
availability or mass market status of an item is not the only 
consideration relevant to an item's controllability. Consider, for 
example, that while various U.S. computer systems have not yet attained 
mass market status, the equivalent computing power can be easily 
achieved by ``clustering'' several widely available, low-level systems. 
In this regard, the Department of Defense, General Accounting Office, 
and Defense Science Board agree that while the most advanced stand-
alone high performance computers may be controllable, high performance 
computing is not. For precisely this reason, CCRE believes that 
explicit among Section 202(b)'s Risk Assessment Factors should be the 
consideration of whether the capability or performance provided by the 
item can be effectively controlled.
Conclusion
    In summation, CCRE believes that with S. 149, the Committee is 
moving forward in the right direction. In particular, we believe that 
the review mechanism provided in Section 202 has great potential to 
provide meaningful export control reform. Unfortunately, however, the 
promise of Section 202 will not be delivered to the computer industry 
unless the NDAA computer provisions are repealed. If the NDAA computer 
provisions are not repealed, the President will remain confined within 
the MTOPS straitjacket and will lack the administrative authority 
necessary to implement the most appropriate types of national security 
controls for computers. Section 202 can also be strengthened by 
requiring the Secretary of Commerce to review the National Security 
Control List on a continuing basis, and by clarifying that a relevant 
Risk Assessment Factor is whether the capability or performance 
provided by an item can be effectively controlled.
    CCRE remains committed to working with the Congress and the 
Executive Branch in helping to formulate solutions that effectively 
advance U.S. economic and national security interests. We thank the 
Committee for its attention to these important issues.

                               ----------

              PREPARED STATEMENT OF PAUL FREEDENBERG, PHD

                     Government Relations Director
           AMT--The Association For Manufacturing Technology

                            February 7, 2001

    Mr. Chairman, Members of the Subcommittee, I appreciate the 
opportunity to testify before you today on S. 149, which would 
reauthorize the Export Administration Act (``EAA''). As a former 
Assistant Secretary for Trade Administration and Under Secretary for 
Export Administration in the Administration of President Ronald Reagan, 
and as a former Staff Director of the Banking Subcommittee with export 
control oversight responsibility, I believe that I can offer some 
perspective and some background on this issue. Thirteen years ago, I 
testified in front of this Committee on behalf of the Reagan 
Administration, during the hearings that led up to passage of the 
Omnibus Trade Act of 1988, the last time that the Congress passed 
comprehensive legislation to reauthorize the Export Administration Act. 
From the time that I left office in 1989 until the fall of 1998, I was 
an international trade consultant, specializing in technology transfer 
issues; so in addition to my administrative experience, I believe that 
I can also bring the perspective of someone whose clients have been 
regulated by export control policy to my discussion of the issue.
    Today, I will be speaking on behalf of AMT--The Association for 
Manufacturing Technology, where I am the Director of Government 
Relations. AMT represents 370 member companies, with annual sales 
ranging from less than $2 million to several hundred million, who make 
machine tools, manufacturing software, and measurement devices. 
Industry sales total nearly $7 billion, and exports account for more 
than one-third of those sales. In your invitation you asked that I 
address the specifics of S. 149, which is similar to S. 1712, the EAA 
bill that the Senate failed to acted upon during the 106th Congress. I 
will focus my testimony on that bill and how I believe that it will 
affect the United States business community, in general, and the U.S. 
machine tool industry, in particular.
    By way of introduction, however, and to put my comments into 
perspective, I would also like to discuss the multilateral export 
control regime and how that regime has affected U.S. policy, 
particularly in China. The most important point to be understood with 
regard to United States export control policy is that while it is 
ostensibly aimed at keeping dangerous technology out of the hands of 
the so-called pariahs, or rogue states, the really important issues 
revolve around the question of what to do about China. Unfortunately, 
the China issue is being addressed unilaterally by our Government, 
because there is absolutely no consensus within the Western alliance 
about how to treat technology transfer to China.
    The end of the Cold War led to the end of CoCom--the international 
coordinating committee that regulated technology transfer since 1949. 
When CoCom officially went out of business on March 31, 1994, our 
leverage for limiting technology transfer to China on a multilateral 
basis disappeared as well. CoCom was created in the same year as NATO, 
and it stood with NATO as one of the preeminent tools of the 
containment strategy that guided our policy for more than 40 years. The 
guiding premise was that the West could not match the Soviet Union and 
its allies man for man, tank for tank, or even missile for missile. 
Moreover, if the West maintained tight multilateral controls over the 
transfer of technology to the East, we could use our superior 
technology as a force multiplier that would tip the scales to our 
benefit. The Soviets and their allies could produce great numbers of 
weapons and keep large numbers of men under arms, but our technological 
superiority would more than compensate for that numbers deficiency. One 
example of the validity of this assumption was demonstrated in the 83 
to 1 victory of U.S.-built F-15's and F-16's over Soviet-built MIG 21's 
and MIG 23's over Lebanon's Bekkha Valley in 1982. While pilot skill 
played an important role in that victory, technology was the critical 
factor.
    The successor regime to CoCom, which is named the Wassenaar 
Arrangement, after the Dutch city in which it was formed, came into 
existence in 1996. Unfortunately, Wassenaar has none of the elaborate 
rules or discipline that characterized CoCom. Most importantly, the 
U.S. Government no longer has a veto over the goods and technologies 
exported to the target countries of Wassenaar. The current multilateral 
export control regime is based on what is known as ``national 
discretion.'' Each Wassenaar member makes its own judgments about what 
it will and will not license for export and, as a matter of fact, 
whether to require an individual validated license (``IVL'') at all. 
Other multilateral export control regimes, whose focus is 
nonproliferation (such as the Nuclear Suppliers Group, the Missile 
Technology Control Regime, and the Australia Group), do obligate 
signatories to require an IVL for the export of proscribed items to 
nonmembers, but Wassenaar does not.
    China is not identified as a target of Wassenaar. In fact, during 
the negotiations which led up to the formation of Wassenaar, the U.S. 
representatives explicitly assured other potential members that 
Wassenaar was created to keep dangerous weapons and technologies out of 
the hands of the so-called rogue and pariah states: Iran, Iraq, Libya, 
and North Korea. China was never mentioned as a target of Wassenaar.
    This brings me to an important point about the lack of both 
national and international consensus regarding China. Judging from 
official statements over the past decade, it is unclear what U.S. 
technology transfer policy toward China is. China is obviously seen as 
a major trading partner, and great effort is put forth to ensure that 
U.S. companies obtain a major share of the China market, which is 
predicted to be the largest in the world in most capital goods 
categories over the next decade. Clearly, however, China is also viewed 
by U.S. licensing authorities as a potential technology transfer risk. 
This is reflected in the fact that the U.S. Government is far more 
rigorous (and more time-consuming) than any other industrialized state 
in reviewing and disapproving licenses for exports to China.
    There is a myth that has grown in the popular media that U.S. 
technology transfer policy toward China is lax. This myth is fed by 
disgruntled Defense Department employees who are against improved trade 
relations with China in high technology manufactured goods. The facts, 
particularly with regard to machine tools, indicate quite the opposite. 
Nothing could be further from the truth than the assertion that the 
U.S. Government is soft in its review of exports to China. The U.S. 
Government has consistently been by far the most rigorous with regard 
to reviewing license applications for exports to China. Other countries 
within the Wassenaar Arrangement simply do not share our assessment of 
the risk factors involved in technology transfer to China and have 
generally maintained a far less stringent licensing policy. Indeed, one 
could say, without any equivocation, that our European allies maintain 
what could only be described as a favorable export licensing policy 
toward China. This can be illustrated by the following data.
    Based on evidence gathered informally at Wassenaar meetings by the 
AMT technical advisor to the U.S. delegation, the following machine 
tool license processing times could be expected if an export license 
for the shipment of products or technology destined for China were to 
be applied for in major industrialized countries:

          United States--Several months--up to a year--is the norm for 
        difficult cases.

          Germany--The longest it could possibly take is 30 days, 
        although many take less time for processing. For a while there 
        was a 24-hour turn-around promised by the licensing office, 
        because the big companies tended to camp out in the 
        office and monopolize this service, the licensing agency has 
        discontinued it. 
        Nonetheless, it is only in cases of prelicense check that it 
        takes as long as 
        30 days.

          Italy--They expected 30-day turn-around, with extraordinary 
        cases involving prelicense checks to take as long as 60 days.

          Japan--For their part, the Japanese said that the norm was 2 
        to 3 weeks, with up to a month in the cases where there was 
        some sort of prelicense check.

          Switzerland--The Swiss said 2 days was the norm, with the 
        possibility that a license could take as long as 7 to 10 days 
        to process if it were difficult.

    Subsequent reports by commercial and economic officers posted at 
embassies in those countries have confirmed these informal license 
processing time estimates. When these comparative timeframes were 
raised with U.S. Government officials, the response that AMT received 
from them was that the various agencies involved almost always 
processed licenses within the 30-day time limit that the statute 
prescribes. But this time estimate fails to take into account times 
when the clock is stopped in order to obtain more information from the 
exporter, which is a quite frequent occurrence. And, even more 
significantly, the 30 days does not include the time that it takes to 
complete the Government's end-user check, which is almost always a very 
time consuming activity. U.S. companies are judged by their customers 
not merely by the time that any particular agency of the U.S. 
Government completes its license processing but rather by the total 
elapsed time that it takes for delivery from the moment that the order 
is placed. Any legislative provisions aimed at improvements in the 
licensing process must include improvements in the total licensing 
time, not just the time that licensing officials actually have physical 
possession of the license.
    As I have argued, the total elapsed time that it takes to process a 
license is only part of the problem. Official licensing statistics 
demonstrate that the U.S. Government is far more likely to disapprove 
machine tool licenses for China than any of our European competitors. 
(This is true in many other sectors such as scientific instruments, 
semiconductor-manufacturing equipment as well; but I will concentrate 
on machine tool exports, where I have the most complete data.) While a 
mere handful of U.S. machine tool licenses have been approved during 
the period from 1994 to 1999 (a total of 25 licenses, or five licenses 
per year), trade statistics indicate that our European allies have 
shipped a huge volume of far more sophisticated machine tools to 
Chinese end-users.
    China is the largest overseas market (in dollars) for U.S. machine 
tools, and it has the potential to grow significantly from its current 
total of machine tool imports from all sources of $2 billion. However, 
unlike other East Asian markets where U.S. market share has been 
substantial, U.S. machine tool sales represent a relatively small 
percentage of the Chinese market.
    For example, South Korea is at a similar point in its economic plan 
as China. Both South Korea and China are developing their auto 
industries, high-volume consumer durables, small and medium combustion 
engines, and second-tier aerospace industries. Both China and South 
Korea have indigenous machine tool industries, but the development of 
their respective metalworking industries requires imported machine 
tools.
    There is a major difference, however, in the way U.S. export 
control policy views the two countries. Korea is an ally of the United 
States and U.S. export control policy reflects that. By contrast, the 
U.S. Government's implementation of the Wassenaar export control list 
toward China is highly restrictive. One result is that in 1998, the 
last year in which we have complete data, China imported only 9.9 
percent of its machine tools from the United States. By contrast, 
Korea, which is not subject to restrictive U.S. export controls, 
imported 22.3 percent of its machine tools from U.S. providers. If one 
attributes the difference in import totals to the difference in U.S. 
export control policy toward the two countries, it can be argued that 
the cost to U.S. machine tool builders of the restrictive export 
control policy is approximately a quarter of a billion dollars per year 
in lost export sales to China.
    A major reason for this differential is that Western European 
countries are exporting to China modern machine tools that would be 
unlikely to be licensed by the U.S. Government. As evidence of this, 
the average unit prices of European machine tools in categories likely 
to be subject to controls are up to 250 percent higher than the average 
unit prices for machine tools in the same categories exported from the 
United States to China. In 1996, while the average unit price of 
machine tools sold to China by U.S. manufacturers was $155,000; the 
average unit price of those sold by Italy was $208,000; by Switzerland 
$348,000; and by Germany $407,000. Average unit prices are a key 
indicator of the sophistication, accuracy, and productivity enhancement 
of machine tools. Those factors are accounted for by higher precision, 
five-axis (and above) machine tools that perform more productively and 
thereby command a higher price. But it is precisely those 
characteristics that cause a machine tool to be listed on the Wassenaar 
list of presumably restricted technologies. If this is true, the 
statistics indicate that Europeans are shipping to China machines that, 
had they been produced in the United States, would be very rigorously 
reviewed by the U.S. Government, with a low probability of their being 
granted an export license.
    The U.S. Government's rigorously enforced limits on machine tools 
significantly disadvantage U.S. machine tool builders in the global 
marketplace, since China has proved able to buy from a variety of 
foreign makers. The most rigorously controlled machine tools are those 
that possess five axes. A recent survey by AMT indicated that there are 
718 different models of five-axis machine tools manufactured around the 
world, with 584 different models made outside the United States in 
countries such as Japan, Germany, France, Italy, Sweden, Spain, and 
Taiwan. There are even six models manufactured in China (as the Chinese 
themselves displayed at the Beijing Machine Tool Show in 1999).
    One U.S. company reported, based on its agents' personal 
observations, that between 1993 and 1996, 15 large, five-axis machine 
tools were purchased by Chinese aerospace end users. All 15 were made 
by Western European manufacturers. In addition, Shenyang Aircraft 
purchased 12 five-axis machine tools in 1 year alone. These machine 
tools came from Italian, German, and French factories and not a single 
one from American machine tool producers.
    Chinese importers often wish to buy several machines at one time to 
upgrade a factory or to complete or augment a production line. The 
inability of U.S. manufacturers to guarantee delivery of a particular 
machine tool requiring a license has an amplified effect on sales of 
machines that do not require a license. For example, Germany's market 
share of machine tools imported by China is more than double the U.S. 
market share. The trade figures indicate that by freely selling the 
same sophisticated machine tools to the Chinese which would be most 
likely unavailable from U.S. manufacturers, German and other European 
providers are also garnering sales in the noncontrolled machine tool 
categories as well, further disadvantaging U.S. manufacturers. This is 
made even more frustrating to U.S. machine tool builders and their 
workers by the fact that many of the commercial aircraft factories in 
China contain joint ventures and coproduction arrangements with 
American airframe and aircraft engine companies. In other words, 
despite the fact that these Chinese factories are supervised, or 
monitored, by American executives (or at least have a strong American 
presence to assure the production of quality components), U.S. 
Government export control policy creates a situation in which machine 
tools in those factories are almost certain to be supplied by European 
machine tool builders. How does that assure our national security?
    As I have noted, while machine tool license applications to China 
are likely to be approved in a matter of days, or weeks, by our 
European allies, U.S. applications languish for months, or longer. 
Executives of U.S. machine tool companies have told me that they have 
decided to forego business in China if it involves an export license 
application. That is how discouraged they have become by the current 
licensing process. For their part, as recently as last month the 
Chinese told U.S. companies that, in the future, they will not even ask 
them to bid for business, since the Chinese experience with the U.S. 
licensing process has been so negative and so time-consuming. For those 
U.S. companies who are still asked to bid, the Chinese have begun to 
demand a guarantee from those manufacturers that they will be able to 
obtain an export license from the U.S. Government for the product in 
question, with a penalty built into the contract if that guarantee is 
not met. Obviously, this is a further deterrent to doing business in 
China. It is expensive enough to bid on business in China, without 
having to undertake the added risk of a monetary penalty for failure to 
obtain an export license on a timely basis.
    A very recent example will illustrate many of the problems inherent 
in attempts by U.S. companies to obtain an export license for machine 
tool sales to China. Last year, an AMT member asked for my assistance 
in obtaining final approval for an export license that had been already 
been pending for many months. The Chinese, who were making purchases 
for an aircraft engine plant, informed the AMT member company that they 
were at the end of their patience in waiting for U.S. export license 
approval. This particular company had been delaying the Chinese buyer 
repeatedly, while it attempted to obtain an individual validated 
license for two five-axis machine tools. After waiting many months the 
Chinese cancelled one of the two machines on order, but gave the 
company one last chance to obtain the export license from U.S. 
authorities for the remaining machine. The company was particularly 
eager to gain approval for this license, because its owners believed 
that there would be follow-up orders for as many as a dozen additional 
machines is they could prove that they could obtain a license for this 
one. The U.S. Government was aware that a Swiss company had offered to 
fill the order for these machine tools, and, in contrast to the 
American company, the Swiss made it clear to the Chinese that there 
would be no security conditions, or compulsory visitations by the Swiss 
company if they were given the business by the Chinese.
    In order to create an incentive to approve the license, the AMT 
member company offered to provide special software that would limit the 
use of the machine tool to only a small group of activities approved by 
the U.S. Government and to provide regular visitations to ensure that 
the machine tool would only be used for the jobs described in the 
license. While all this was being negotiated, the State Department 
declined to demarche the Swiss Government to warn them of the U.S. 
Government's concerns with the sales of machine tools to the Chinese 
plant. Negotiations between the AMT member and the Defense Department 
dragged for another 2\1/2\ months, with none of the AMT member's 
security or post-shipment visitation proposals deemed adequate by DoD. 
Finally, just as the license, which had by then been pending for 6 
months, was about to be escalated to the Cabinet level for resolution, 
the Chinese buyer informed the AMT member company that they had lost 
patience with U.S. licensing process and cancelled the order. As it 
turned out, the Chinese plant manager had decided instead to go with 
the Swiss machine tool alternative, which required no post-shipment 
conditions and which had already obtained a license from its government 
months earlier. Reportedly, when informed of the Chinese cancellation 
and the need to return the license without action, the comment of the 
Defense representative inter-agency review panel (known as the 
Operating Committee) was that he was happy because DoD had achieved its 
objective; no U.S. machine tool would be going to that Chinese factory.
    Of course, the U.S. machine tool would have gone to that factory 
under strict conditions with numerous follow-up visits to ensure that 
it was being used for the purposes stated in the license, while there 
will be no guarantee that Western authorities will be able to check on 
the projects on which the Swiss machine tools will be used. 
Nonetheless, DoD was apparently happy, having accomplished its 
objective of blocking the U.S. sale, and, I presume that the State 
Department was happy as well, since it did not have to offend any of 
our friends or allies by taking a strong position or asking 
uncomfortable questions of them. The only ones who are unhappy are the 
owners of the U.S.-based machine tool company, who may very well move 
production offshore to avoid a repeat of this unpleasant and 
unproductive process; and, of course, the employees who may lose their 
jobs are not very happy either.
    I would ask the Committee to consider what this case illustrates 
about the national security benefits of our current export control 
policy, other than the fact that such a policy is likely to maintain 
machine tool employment in Switzerland. It certainly did not have any 
appreciable effect on Chinese ability to obtain machine tools for 
whatever aerospace projects they deem appropriate.
    This inability to sell into the market while foreign machine tools 
are freely exported to China is particularly burdensome for the U.S. 
machine tool industry, because recent market projections have indicated 
that China will represent the largest and fastest growing market for 
commercial jet aircraft in the first 2 decades of the 21st Century. As 
recently as 1995 China represented less than 2 percent of Boeing sales, 
today China represents more than 9 percent, Boeing estimates that China 
will be the largest market outside the United States over the next 20 
years. Within the next 6 years, China could account for nearly 25 
percent of Boeing's total business.
    In 1992, 90 percent of Boeing's aircraft components were built in 
the United States. Today, more than half the components are imported. 
China's exports to the United States of civilian aerospace components 
have grown 63 percent in the past 5 years. Moreover, Boeing's 
acquisition of McDonnell Douglas has given them an operation in which 
half of the MD-90 (and its successor, the 717) built each year are 
wholly constructed in China. Given the tremendous market power that 
China will possess, it is certain that the Chinese Government will 
demand and receive what are known as ``offset'' contracts to build ever 
greater shares of Boeing's aircraft in their own aircraft factories on 
their own machine tools. If the trend I have described continues, and 
licensing policy does not change, U.S. machine tool builders are highly 
likely to be displaced and replaced by their foreign competitors who 
will be able to take advantage of a far more lenient export licensing 
policy to make the sales to stock the new productions lines that the 
Chinese will demand.
    Machine tool licenses to China are but one example of a larger 
problem--the lack of international consensus about how to regulate 
technology transfer to China. Whatever technology transfer concerns the 
U.S. Government may have about China are not reflected in the largest 
and most active multilateral export control regimes to which we belong. 
The absence of a China reference in Wassenaar means that there are no 
internationally agreed upon rules or standards that the U.S. Government 
can cite to induce our allies to follow our lead with regard to China 
technology transfer policy.
    Indeed, our former adversary Russia is a charter member of the 
Wasssenaar Arrangement, and China would see any United States 
Government attempt to make them a target of this export control regime 
as a hostile act. In fact, discussions were held in 1998, with the goal 
of making China a Wassenaar member. I note all of this in order to 
provide some perspective regarding the degree to which the U.S. 
Government lacks leverage in denying technology to China. The U.S. 
Government may decide not to sell machine tools, or satellites, or 
scientific instruments, or semiconductor manufacturing equipment to 
China, but that does not obligate the Japanese, the Germans, or the 
French to follow our lead.
    That is a fundamental problem with the current export regime. Not 
only does it indicate a lack of discipline regarding a country with 
which the U.S. Government has indicated technology transfer concerns; 
it also puts U.S. companies on an uneven playing field with regard to 
sales to what is likely to be the fastest growing and largest market 
for capital goods over the coming decade. Repeatedly over the past few 
years, whether it is in the category of machine tools or scientific 
instruments, the U.S. Government has taken a negative approach to 
technology transfer to China while our allies have not. The result has 
been that the Chinese are denied nothing in terms of high technology, 
but U.S. firms have lost out in a crucial market. This serves neither 
our commercial nor our strategic interests.

Recommendations
    The Committee is well aware of the fact that the authority of the 
Export Administration Act will lapse on August 19, 2001. As you also 
know, in the 1990's, both the first Bush Administration and the Clinton 
Administration extended that authority under the pretense of an 
emergency that did not exist by virtue of invoking the International 
Emergency Economic Powers Act (``IEEPA''). The EAA, which was extended 
repeatedly under the authority of IEEPA, was last amended in a 
significant way while I was serving the Reagan Administration as Under 
Secretary for Export Administration, in 1988, a year before the fall of 
the Berlin Wall and 3 years before the collapse of the Soviet Union. 
These facts would seem to be reason enough to justify the passage of a 
new, revised EAA to guide export controls in the 21st Century. That is 
why, with the proper changes, AMT sees great value in S. 149. A 
comprehensive rewrite of the Act is long overdue. I will now comment on 
what I see to be the most valuable and important elements of S. 149. I 
will also point out a serious defect. As I see it, one of the most 
beneficial provisions of S. 149 is that it has a very strong provision 
defining ``foreign availability'' in terms of the reality in which U.S. 
companies compete today. Current law defines ``foreign availability'' 
as any item that can be supplied from outside the multilateral export 
control system in sufficient quantity and comparable quality so as to 
make the existing export controls on any particular item ineffective in 
achieving the objective of the controls. S. 149 seeks to adapt that 
element of current law to the era in which we live today, which is an 
age of weak to nonexistent multilateral controls and a multilateral 
system with rules of the game that allow any member country to decide 
whether to license a product on the basis of ``national discretion.'' 
Importantly, the bill acknowledges that ``foreign availability'' can 
exist within a multilateral control system, not just outside that 
system.
    The key provision in S. 149 is found in Section 211(d)(1), which 
states: ``The Secretary shall determine that an item has foreign 
availability status under this subtitle, if the item (or a 
substantially identical or directly competitive item) (A) is available 
to controlled countries from sources outside the United States, 
including countries that participate with the United States in 
multilateral export controls [emphasis added]; . . .''
    I would consider the inclusion of such language in any EAA 
reauthorization reported by this Committee to be of critical importance 
to the creation of a fair and equitable ``foreign availability'' 
definition, one that reflects the new reality in which U.S. companies 
find themselves. Any new EAA should not be allowed to perpetuate the 
fiction that the current multilateral export control system functions 
effectively to deny technology to targets of that regime, particularly 
China, which I have argued has, at best, an ambiguous status in 
relation to the Wassenaar Arrangement's list of restricted 
technologies. Not to give U.S. companies the right to petition for 
relief from a system which allows trade competitors to use the 
multilateral system to garner new business by taking advantage of lax, 
or nonexistent, national export control systems, would be to perpetuate 
an anachronism in the law, one which would be grounded in an era that 
no longer exists.
    That is a very positive provision in your bill. In addition, I feel 
that the mandate to the Administration, contained in Section 601, to 
strengthen the existing multilateral export control regimes and to 
annually report to Congress on progress in that endeavor potentially 
has great value. But this is such a critical area that I would suggest 
that you strengthen the mandate substantially and create some sort of 
an oversight mechanism to provide pressure on the Administration to 
vigorously pursue the multilateral goals established in the section.
    As I have argued, Wassenaar provides weak guidance and almost no 
discipline upon its members. In some ways, it is worse than having no 
multilateral regime at all, because it gives the appearance of 
restricting technology transfer, while leaving all the key judgments up 
to its constituent members. To get an idea of how weak an export 
control regime it really is, one only has to ask what useful 
information the U.S. Government can obtain about the technology 
transfer decisions of other regime members. Under the rules of the 
Wassenaar Arrangement, the U.S. Government is not entitled to 
information about the licensing decisions of any other regime member 
unless that member is licensing an export to an end-user to which the 
U.S. Government has previously denied a license. And then, the 
Government in question is only obligated to inform the U.S. Government 
within 60 days of the decision to license, most likely after the 
technology or product in question has already been shipped. Such an 
obligation on Wassenaar members can hardly be called discipline.
    I agree with the goals created in Section 601, that revisions of 
the Wassenaar Arrangement charter ought to include far better regime 
member discipline, including improved rules for information exchange. 
One idea that Section 601 proposes that would be particularly valuable 
would be to institute the ``no undercut'' rule within Wassenaar. The 
``no undercut'' rule obligates all members of the regime to deny a 
license to any end-user who has been denied a license by any other 
member of the regime. The adoption of that rule alone would ensure that 
U.S. companies, such as those I have described in the machine tool 
industry, are not alone in denying their products to end-users in China 
when their licenses are denied by the U.S. Government. This amounts to 
unilateral export controls, and it is particularly frustrating, because 
the current Wassenaar Arrangement export control regime allows the 
Chinese to simply turn to another Wassenaar member in order to obtain 
the very same product, frequently with no delay or conditions. In the 
process, the Chinese are denied nothing, while the U.S. companies 
develop a reputation as unreliable suppliers.
    I have noted what I see to be among the most positive aspects of S. 
149, but there is one provision where I see a great potential for 
mischief. That is Section 502(b)(3). I believe that it would be a 
mistake to reverse the inter-agency decisionmak-
ing structure created by the Executive Order of 1995. Until issuance of 
the 1995 Executive Order, referral of most licenses was at the discretion 
of the Secretary of Commerce. The Executive Order authorized all relevant 
agencies to review any export license submitted to Commerce. But, in return 
for this comprehensive review authority and also to facilitate the movement 
of the licensing process along toward the final decision, reviewing agencies 
would have to complete their review within rigorous time limits, and 
importantly, any dissenting agency's representative to the first level of 
inter-agency dispute resolution (the Operating Committee) would have to 
convince his or her policy-level supervisor to formally challenge a 
decision, rather than the licensing officer having the authority to veto 
and escalate on his or her own authority. It is important to understand 
that the inter-agency process created by the 1995 Executive Order allows 
any dissent by representatives of the Defense, State, or Energy Departments 
to be escalated all the way up to the President if the policy level of the 
dissenting agency concerned is dissatisfied with the results of its 
appeal.
    I am convinced that reconfiguring this system into one that 
requires consensus at all decisionmaking levels, as is prescribed in 
Section 502(b)(3), would have the result of introducing a low-level 
veto back into license processing. Any one individual licensing 
official, in any agency, could then delay a license for a considerable 
amount of time, with little or no justification. This, almost 
certainly, would lead to vastly greater numbers of license denials and, 
without doubt, much greater delays and lost sales in the cases of those 
licenses that do ultimately receive approval. Remember, as I recounted 
in the case study cited earlier in my testimony, the elapsed time that 
a license takes before it receives approval is the enemy of U.S. 
exporters almost as much as license denials. The machine tool industry 
has already seen a significant number of cases where the customer 
simply got tired of waiting for a license to be issued by the U.S. 
Government and turned to the foreign competitor, who invariably was 
waiting in the wings armed with a validated export license for the same 
product containing authorization to ship approved by his home 
government. I am afraid that Section 502(b)(3), as it is currently 
drafted, would reverse what little progress there has been in a system 
that is already too complex and too slow to enable the machine tool 
industry, among others, to compete effectively in China with our 
foreign counterparts. I would urge the Committee to reconsider this 
provision.
    We need more than just a ``feel good'' China policy, or a ``feel 
good'' renewal of the EAA. We need to ask if it is possible to convince 
our allies to share our strategic vision of China (assuming that we 
ourselves have concluded what that vision is). At the current time, we 
do not have a multilateral technology transfer organizational structure 
that is conducive to entering into a debate about China--let alone one 
that would be able to enforce standards and rules about technology 
transfer if such a consensus were to be reached. Without such a 
multilateral technology transfer structure and without a clearer idea 
of what U.S. technology transfer policy toward China ought to be, it 
will be difficult to draft an EAA that is an effective guide to policy. 
I hope that these comments will be helpful to your consideration of S. 
149, which reauthorizes the Export Administration Act and brings it up 
to date. I would be happy to answer any questions that the Committee 
might have.

                               ----------

               PREPARED STATEMENT OF LARRY E. CHRISTENSEN

                             Vice President

      International Trade Content Vastera, Inc., On Behalf of AeA

                            February 7, 2001

    Good morning Mr. Chairman and Members of the Committee, thank you 
for the opportunity to discuss the legislation known as the Export 
Administration Act of 2001 (S. 149) that was introduced on January 23, 
2001. My name is Larry Christensen, I am Vice President of 
International Trade Content for Vastera. I am here today on behalf of 
AeA (formerly the American Electronics Association), 
a 3,700-member company organization, and the largest U.S. high-tech 
trade association representing the U.S. electronics, software and 
information technology industries. I have a brief oral statement 
describing my company and background, and AeA's comments on S. 149. I 
ask that my written statement be made part of the record.
    My company, Vastera, manages global trade for our clients through 
software, consulting, and managed services. We provide our software and 
services to over 200 blue chip clients, and we are on the front lines 
of international trade every day. I am also an adjunct professor at 
Georgetown University Law Center and coteach export controls and trade 
sanctions. Earlier I served the Commerce Department for 11 years where 
I directed the first complete rewrite of the Export Administration 
Regulation. In the private sector and in government, I have done export 
control work for 22 years.
    Overall, AeA supports the creation of a new Export Administration 
Act, as it would provide a certain and stable legal framework for the 
executive branch to implement export controls. As recent events have 
shown, absence of an EAA can bring new challenges to the U.S. exporting 
community. In 1990, the EAA of 1979 expired and the International 
Emergency Economic Powers Act (IEEPA) was put in place to fill the 
void. Never intended to be a replacement for the EAA, IEEPA's authority 
was recently challenged in the U.S. District Court, M.D. Florida, Tampa 
Division, in the case of the Times Publishing Company, and Media 
General Operations, Inc., d/b/a The Tampa Tribune versus the U.S. 
Department of Commerce. If the U.S. Government had not successfully 
appealed the original decision, it would have had two potentially 
catastrophic impacts: (1) it would have undermined the current U.S. 
export control regime; and (2) it would have enabled competitors, 
especially foreign ones, to obtain highly confidential marketing and 
pricing information of U.S. high technology companies.
    As a result of this case, last October Congress reinstated through 
August 20, 2001 the expired EAA of 1979. AeA is very appreciative of 
the initiative taken by the Senate Banking Committee on this issue. 
However, I believe that this is a short-term fix to a long-term 
problem. After August 20, 2001, the disciplines of the EAA will no 
longer be available unless the statute is renewed.
    Industry and government both have strong interests in making the 
export control system as effective as possible. AeA's member companies 
support effective national security and nonproliferation export 
controls. The challenge for government is to avoid ineffective controls 
that not only do not advance important interests of the United States, 
but also might result in lost jobs and lost export opportunities. 
Exporting is good for the United States. It drives the growth in our 
economy, provides well-paid jobs for our people, provides an industrial 
base necessary for our military, and generates the revenues for the 
research and development necessary to move to the next generation of 
products.
    In regard to S. 149, the essentials of the dual-use structure carry 
over from the approach of the 1979 EAA as amended, which were developed 
at the height of the Cold War. AeA member companies now find themselves 
in a much different environment; the Cold War and the peer-to-peer 
technological competition between the United States and its major 
potential adversary of that period are a thing of the past. 
Administrative approaches developed in the Cold War environment are no 
longer effective and, in fact, can be seriously harmful to truly 
globalized U.S. companies. In response to this new environment, AeA has 
recommendations that would enhance the bill and minimize some of the 
harmful by-products of the current control regime. Our recommendations 
are focused on two key areas:

          (1) the controls on transfer of technology and software 
        within U.S. enterprises; and,
          (2) the open-ended nature of EPCI catch-all controls on 
        decontrolled and uncontrollable products, particularly in light 
        of the order of magnitude increases in civil penalties found in 
        S. 149.

Section 2(10)

    AeA recommends including language in Section 2(10), definition of 
an export, specifying that an export for the purposes of the Act does 
not include transfers of data, technology or source code within a 
company.
    U.S. companies must operate in a competitive global environment. 
Integration of worldwide facilities and efficient use of resources 
within U.S. companies are critical to the maintenance of leadership 
within high-technology industries and the economic and employment 
benefits that leadership provides. These activities are seriously 
impeded by restrictions that apply to non-U.S. employees in the United 
States and abroad. Inclusion of the recommended AeA language would 
build on stringent company controls on proprietary data and be a step 
forward in minimizing this impediment. The United States can maintain 
and enhance its national security interest by controlling the transfer 
at the critical stage abroad, rather than inhibit the sharing of 
knowledge at a U.S. enterprise.

End-Use and End-User Controls (Section 201(c))

    End-use and end-user controls in Section 201(c) should be enhanced 
with language that would mandate the exclusion of certain items from 
control that fall below reasonable low value standards, thereby 
eliminating proforma Enhanced Proliferation Control Initiative (EPCI) 
controls from marginal and uncontrollable transactions. Such language 
would provide a concrete benchmark for the ``material contribution'' 
standard already specified in the catch-all proliferation controls in 
this section.
    This language would provide that no controls on end-use or end-user 
could be imposed on exports or reexports if, for example, the item 
would qualify for export or reexport to the country of destination 
under ``No License Required,'' notwithstanding controls on end-use or 
end-user, and the value of the export is less than $10,000.
    This exemption from end-use/end-user controls would not apply if 
the Secretary of Commerce determined that any item specifically 
identified and published in the Federal Register, if released from 
control by this provision, would pose a serious risk to the national 
security. It also would not apply to any export controlled under 
statutory authority other than the EAA.
    This provision could eliminate EPCI end-use/end-user screening from 
tens of thousands of low value export transactions involving 
decontrolled products, eliminating the need for extensive screening for 
decontrolled products. In addition, it would create reasonable 
boundaries for potential imposition of massive civil penalties for low 
value administrative errors of no national security significance. An 
``escape clause'' would be available to specifically list items that 
are so sensitive that a low value shipment criteria would pose serious 
security risks.

Penalties (Section 603)
    In regard to penalties contained in Section 603, AeA asks that the 
Committee seriously consider development of a tiered system similar to 
that used by the U.S. Customs Service. Customs' system ranks offenses 
as negligence, gross negligence, and fraud, with a corresponding tiered 
schedule of penalties.
    The potential for imposition of civil penalties for low value 
administrative errors, particularly under EPCI controls, is extremely 
great, and is exacerbated by the order of magnitude increase in civil 
penalties included in the draft legislation. Under these conditions, 
boundaries must be established to protect exporters from arbitrary 
enforcement involving low value administrative errors in an extremely 
complex regulatory environment. In the absence of such limits, many 
exporters, particularly small businesses, may forgo the export market.

Country Tiers (Section 203)
    AeA members believe the five-tier system laid out in Section 203 is 
counterproductive and should be eliminated. A country-tier approach 
limits the flexible and effective management of controls by imposing 
artificial groupings and constraints based on country criteria alone. 
Moreover, the five-tier system articulated in the draft would not lend 
simplicity to the system, but would complicate it further. Finally, the 
tier classifications have been proven to acquire a life of their own, 
becoming ``signals'' of potential policy shifts rather than being modes 
of control as originally intended, thus tying the hands of any 
Administration wishing to change them.

Foreign Availability and Mass Market (Section 211)
    Incorporate into Section 211 language that is forward looking. For 
instance, Section 211(d)(1)(A) currently reads ``is available . . .''. 
AeA recommends that it read ``is or will be available''.
    Export control legislation needs to encompass language that takes 
into account present realities as well as future developments. This is 
particularly important to the high-tech sector where technology is 
constantly advancing and new products are regularly entering the 
marketplace. The requirements for determining foreign availability and 
mass market status currently established in S. 149 are restrictive. If 
the Act does not provide for the Administration to anticipate probable 
competitive developments that undermine the effectiveness of controls, 
U.S. exporters will first have to lose a market and demonstrate that it 
is lost before relief can be granted. However, once a market is lost, 
it is often lost forever and the damage to the U.S. industrial base 
cannot be undone.

Office of Technology Evaluation at the Department of Commerce
(Section 214)
    Establish criteria such as annual training and internship programs 
that ensure that the staff of this office is up-to-date in its 
technical knowledge and information.
    The Office of Technology Evaluation will have important 
responsibilities including, but not limited to, foreign availability 
and mass market assessments, evaluation of global technological 
developments, and the monitoring and evaluation of multilateral export 
control regimes. It is therefore important that the staff's knowledge 
is current with the present day export environment and technologies. 
Deficiencies in this area will directly impact the exporting community.

National Defense Authorization Act (NDAA)
    Repeal the provisions of the NDAA relating to high performance 
computers (Subtitle B of the NDAA). These provisions no longer reflect 
the realities of the marketplace and have become a serious obstacle to 
U.S. interests. The ``MTOP's'' restriction on computers which requires 
the President to control computers based on their performance levels, 
no longer make sense under current technological trends, much less for 
future circumstances. The exponential growth of computing power and the 
availability of clustering and other technological developments have 
made this metric-based approach obsolete. While the metric fails to 
serve national security interests, it imposes a serious burden on U.S. 
economic interests and the Administration, diverting resources to 
constant adjustment of the MTOP's thresholds to reflect the latest 
technological trends.
    In summary, AeA feels a new EAA is important. However, the 
legislation must be reflective of today's and future realities, while 
not undermining national security and foreign policy objectives. Again, 
I thank you Mr. Chairman and Committee Members for this opportunity, I 
am happy to answer any questions you may have.

              PREPARED STATEMENT OF RICHARD T. CUPITT, PHD

                           Associate Director

   Center for International Trade and Security, University of Georgia

                            February 7, 2001

Introduction

    Mr. Chairman: Thank you for the invitation to address the Committee 
on Banking, Housing, and Urban Affairs regarding legislative efforts to 
craft the Export Administration Act (EAA) of 2001. I direct the 
Washington, DC office of the Center for International Trade and 
Security of the University of Georgia (CITS/UGA), a nonpartisan 
institution that specializes in research, teaching, and service related 
to United States and international export control issues. Among other 
things, CITS/UGA is the only institution that makes periodic comparable 
and comprehensive assessments of national export control systems, 
having done assessments on more than two dozen countries since 1996.\1\ 
This year, I am also a Visiting Scholar at the Center for Strategic and 
International Studies (CSIS), where I assist the staff in their work on 
export controls. Please note that these remarks represent my personal 
views and not necessarily those of either CITS/UGA or CSIS.
---------------------------------------------------------------------------
    \1\ Most of these assessments are available on the CITS/UGA 
website, www.uga.edu/cits.
---------------------------------------------------------------------------
    Let me preface my remarks by noting some assumptions behind my 
views:

 Proliferation of nuclear, chemical, biological, and other 
    weapons of mass destruction (WMD), coupled with the proliferation 
    of their means of delivery, poses the greatest threat to U.S. 
    national security today and for the immediate future;
 Export controls provide a relatively low-cost (but not no-
    cost) approach to delaying the diffusion of critical proliferation-
    related technologies or increasing the costs of obtaining WMD; and
 National and multilateral export control systems always need 
    improvement as long as determined proliferators seek WMD systems;

Developing a prudent export control system always demands a delicate 
and coherent balance of military, economic, and other interests that 
constitute U.S. national security policy. As the Members of this 
Committee know, the many conflicts among the competing stakeholders has 
foiled a decade's worth of efforts to produce a new EAA.

The Consequences of Failure

    Without the direction a legislative mandate confers, the United 
States has not sent clear messages regarding export controls to friends 
and foes alike. This has several immediate and long-term consequences. 
For example:

 The United States, almost by default, is ceding leadership on 
    export controls to the European Union (EU). On list enumeration, on 
    countries of concern, on controls on intangible technology and 
    deemed exports, and perhaps on catchall controls, EU standards are 
    becoming the global norm. The attractions of joining or working 
    with the EU, where export controls have become mandatory for 
    prospective members (an acquis communitaire), helps explain why 
    many countries adopt EU-like export controls. Nonetheless, why the 
    EU and the United States have not reached common ground on many 
    export control practices stems in part from a lack of consensus on 
    U.S. policy.
 The four major supplier arrangements (for example, the 
    Australia Group, the Missile Technology Control Regime, the Nuclear 
    Suppliers Group, and the Wassenaar Arrangement) have made few 
    improvements in the last 5 years, despite general agreement that 
    the infrastructure for multilateral coordination remains 
    appallingly weak. This is not limited to the lack of headway, which 
    is likely to persist, regarding stronger ``no undercut'' procedures 
    in the Wassenaar Arrangement or to the lack of agreement on how to 
    treat China. Many foreign officials criticize the arrangements for, 
    among other things, a failure to share information on national 
    policies, poor exchange of intelligence on end-users of concern 
    within and between arrangements, and inadequate threat assessments 
    for controlled items. Given that entities trying to acquire WMD 
    always try to exploit weaknesses in the multilateral system, this 
    means that the multilateral system has not merely stagnated but it 
    has become weaker over the last 5 years.
 U.S. officials constantly find themselves in the hypocritical 
    position of telling foreign officials and industry representatives 
    that their governments need strong legal frameworks for export 
    controls. This undermines trust and creates practical difficulties. 
    Discussions with U.S. officials about encryption export controls, 
    for example, prompted the People's Republic of China (PRC) to 
    introduce very stringent controls in late 1999. By that time, 
    however, the United States had reversed course on such controls. 
    Although the overwhelmingly negative response from Japanese, United 
    States, and European companies induced Beijing to adopt a more 
    liberal interpretation of State Council Decree 273, confusion over 
    the status of Chinese controls on encryption items still reigns.

Without developing a solid consensus on how the United States should 
approach export controls, it will be ever harder to create coherent 
ideas and incentives that will allow the United States to reassert its 
leadership effectively. My primary recommendation to the Committee, 
therefore, is to keep at this until Congress enacts a prudent, even if 
not perfect, EAA in this session.

Developing a New Industry-Government Partnership on Export Controls
    Building a new consensus must overcome the substantial distrust and 
lack of understanding that exists between industry and the government. 
In a recent survey of 120 companies conducted by CITS/UGA, the 
compliance activities of U.S. exporters varies considerably, with 
scores ranging from 54-94 on a 50-100 scale (producing an overall 
average of 76). While many U.S. exporters have well-developed 
export control compliance programs, it appears that others do far less 
than ``best 
practices.'' Creating incentives for industry to adopt--voluntarily and 
appropriate to the company--better compliance practices would foster 
more effective export controls and demonstrate why government should 
place more trust in those companies that do follow ``best practices.'' 
Internationally, many Japanese and some European companies already have 
sophisticated internal compliance programs, so this is not a matter of 
placing U.S. companies at a competitive disadvantage. Indeed, better 
compliance practices may make companies more profitable by improving 
their logistical systems. Calling for improved compliance practices 
would also mean that the United States would not ask more of Russian 
and Chinese companies than we do our own as we do now in some 
instances.
    Partnership, however, implies mutual responsibilities. In return 
for tighter industry compliance practices, the U.S. Government might, 
for example, permit more special licensing processes for dual-use 
transactions between companies that meet some standard of compliance. 
These incentives might parallel those outlined in the Defense Trade 
Security Initiative.
    In addition, the United States Government could share information 
on end-users of concern in a timely fashion to more people. Under 
current practices, if the end-user is not on the Entity List, the 
Denied Parties List or something similar, an exporter often only finds 
out about an end-user problem through a license denial or similar 
notification. Other exporters, however, will not get this information 
until they too attempt to acquire a license. Worse, companies ill-
informed about the ramifications of the Enhanced Proliferation Control 
Initiative (ECPI) may proceed with a transaction believing that no 
license is required. Current rules also appear to direct immoderate 
government enforcement resources toward addressing minor (and often 
self-reported) violations. While a good compliance program already 
serves as a mitigating factor in enforcement decisions, limited 
enforcement resources puts a premium on directing those resources to 
where they will improve effectiveness. A new legislative consensus 
behind U.S. export controls should generate a new strategy to direct 
enforcement resources toward the objectives of a revamped EAA.
    Most important, Section 202 includes language to require new threat 
assessments associated with each item on the National Security Control 
List. Sharing persuasive threat assessments with industry, especially 
with our allies is a critical step in reforming U.S. export controls 
to meet the challenges and opportunities of the twenty-first century. 
A large number of foreign officials or representatives from industry 
do not appear to understand the specific security threats related to 
individual controlled items. A solid threat assessment makes for a more 
compelling argument for compliance than vague references to national 
security. In addition, a rolling review of the threat associated with 
each controlled item would help keep the United States and multilateral 
control lists from becoming glaringly obsolete.

Assessing National Export Control Systems and
Multilateral Export Controls
    One of the more interesting elements of S. 149 comes with the 
creation of the Office of Technology Evaluation. The Office will 
undertake a considerable number of crucial actions, particularly 
identifying and monitoring foreign availability, mass-market 
evaluations, and assessments of various national export control 
systems. Although all three-activities are important, let me focus on 
the evaluation of foreign export control systems (see Sections 203.C.3-
7). Assessing foreign systems plays an important role in determining 
into which tier a country falls (Section 203), evaluating the 
multilateral arrangements (Section 601), and identifying if violations 
of national laws adopted by other countries are violated (Section 604).
    Somewhat surprisingly, few comparative assessments of national 
export control systems exist. Along with the more comprehensive 
comparisons made by CITS/UGA, Saferworld (UK), the Stockholm 
International Peace Research Institute (SIPRI), Vastera, Ltd., and the 
EU have produced some studies in recent years that compare several 
aspects of national export control systems. One conclusion stands out--
countries have not harmonized their export control systems very 
closely, even among those countries with a history of coordinating 
their systems through the EU or the now defunct Coordinating Committee 
(COCOM). The differences identified in the lengthy negotiations with 
Australia and Great Britain, for example, over the Defense Trade 
Security Initiative are illustrative of how little harmonization 
exists. Taken together, the lack of assessments and the absence of 
harmonization indicate that serious evaluations of national export 
control systems and the four multilateral arrangements will require 
significant amounts of original data collection.
    To give you an idea of the scope of the problem, let me draw on my 
own experience. Over the past 5 years, I have conducted or supervised 
assessments of the export control systems of the PRC, Hong Kong, India, 
Japan, South Korea, Taiwan, and the United States, as well as 
contributed to similar studies of Argentina, Cuba, the Czech Republic, 
Israel, all the republics of the former Soviet Union, and the United 
Kingdom. Retrieving accurate, comprehensive, and reliable information 
for these assessments requires a well-designed research protocol and 
considerable work in-country, which is not inexpensive. Using our 
protocol, for example, it typically takes one investigator about 4 
months to conduct an initial assessment (although follow-up monitoring 
involves a smaller investment of resources).
    Given the number of countries involved, especially classifying 
their systems across categories of controlled items, the Office of 
Technology Evaluation will need to apply considerable resources to this 
task. In other words, the assessments could become a bottleneck for 
creating and adjusting the country tiers, evaluating harmonization for 
the multilateral arrangements, and other legislative requirements if 
they receive insufficient support from Commerce and inadequate 
assistance from Defense, Energy, and State.
Conclusion
    I would like to thank the Members and staff of the Committee for 
their efforts in drafting a new EAA. I will be happy to pass additional 
comments on specific sections of the legislation on to the staff. Given 
the history of this legislation, several of the proposed sections will 
bring out significant opposition, so I think it is worth keeping 
several points in mind in steering the bill through the legislative 
waters:

 The export control systems of other countries are not 
    harmonized with that of the United States and the infrastructure to 
    coordinate this divergent systems is very weak. Compromises that 
    assume otherwise will only succeed by serendipity.
 Focus on incentives (and disincentives) that will make the 
    relationship between government and industry more of a duet than a 
    duel.

Most important, the United States needs a legislative framework that 
will serve its interests in the post-Cold War world. Without developing 
a solid consensus on where U.S. export controls should take the 
country, the United States will cede its leadership role by default. 
Thank you again for the opportunity to speak before the Committee.

    RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI FROM PAUL 
                          FREEDENBERG

Q.1. In your testimony you noted that many export control 
decision conflicts were those for exports going to the People's 
Republic of China. Are there instances where U.S. export 
control policy toward certain machine tool exports to countries 
other than China has been problematic?

A.1. The vast majority of the problems that machine tool 
companies have had with the licensing process have been with 
regard to licenses for products destined for China. However, 
problems have arisen with regard to other destinations as well. 
I will cite three recent examples. The first case had to do 
with a machine tool being sold to the largest aerospace 
producer in Spain. The end-user was fine with regard to its 
ability to prove that it would need and initially only use the 
machine for a large European space consortium project. But 
apparently some in the U.S. Government did not like the fact 
that this company had done legitimate business in the past with 
Libya, and these Government officials wanted to punish the 
Spanish company for its past behavior. Unfortunately, in a 
world in which there are multiple suppliers for the very same 
machine being sold to Spain, the only ones that they would have 
punished would have been the American workers who would have 
lost their jobs without the Spanish business. After some delay, 
the license was approved, but that did not serve to enhance the 
U.S. company's reputation in Spain.
    Second, there was a significant delay recently on a license 
for a machine tool to a new end-user in Brazil. Embrier, the 
largest Brazilian aircraft manufacturer, decided to subcontract 
to Brazilian job shops, much as U.S. aerospace companies 
frequently do when work becomes too heavy. The new Brazilian 
end-user was unknown to DoD, and significant delay ensued, as 
DoD debated with other export control agencies whether the new 
company could be trusted. It was pointed out that Brazil had 
entirely given up its missile program, and it was unlikely the 
machine could be transshipped out of the country. The U.S. 
supplier became very nervous, because, once again, the 
reliability of that company as a source of future machine tools 
was called into question. The license was eventually approved, 
but not without significant delay and some damage to the U.S. 
machine tool company's reputation.
    Finally, I am also aware of significant delay in a machine 
tool sale to Taiwan. Obviously, Taiwan is an ally, but that 
does not mean that delays cannot occur when the Foreign 
Commercial Service individual assigned to this task has too 
much on his plate to find the time to go out to distant 
locations to check out the bone fides of specific end-users. 
Before the check was completed, the customer became impatient 
and threatened to give its business to the European competitor 
of the U.S. supplier. But the end-user check was carried out 
just in time to save the order. In all three of these cases, 
the delay inherent in the U.S. licensing system came close to 
costing members of my association business and might very well 
have damaged their reputations irreparably with these 
particular customers. As I stated in my testimony, time is the 
enemy of U.S. companies competing for business in foreign 
markets. Obviously, the system is still in need of improvement, 
and hopefully your bill will eliminate needless delays.

Q.2. I am aware that companies often complain that it can take 
months to obtain a commodity jurisdiction determination as to 
whether their product is subject to a license under the 
Department of Commerce's Export Administration Regulations or 
the Department of State's International Traffic in Arms 
Regulations. This delay can often be very costly in terms of 
lost export opportunities--especially for smaller companies or 
start ups. Are you aware of any examples that are particularly 
troubling to you?

A.2. Mr. Chairman, I am pleased to address one of the most 
vexing problems facing American industry as they confront the 
export control regulatory scheme--the problem of getting a 
prompt response to requests for ``commodity jurisdiction 
determinations.'' As you know, exporters are frequently 
confronted with the question of whether a product is subject to 
the Export Administration Regulations administered by the 
Department of Commerce or the International Traffic in Arms 
Regulations, administered by the Department of State.
    Often a product, particularly a new product, does not 
readily fall into one category or another and the exporter is 
left with a dilemma. He may guess which regulation governs his 
product, but if he guesses wrong he could face very serious 
consequences. Alternatively, he may take advantage of the 
provisions in the regulations to seek a commodity jurisdiction 
determination--usually referred to as a ``CJ''. The problem is 
that it often takes months to get an answer, and that delay can 
be debilitating, particularly for a start up company. In a 
highly competitive world, that delay can spell the difference 
between success and failure.
    Let me cite a specific example. Jaycor Tactical Systems, 
Inc., a start up company in San Diego principally owned by 
Jaycor, Inc., (an established company) has developed a range of 
nonlethal technologies that are of great interest to law 
enforcement and military agencies around the Nation and 
overseas. Essentially, JTS's PepperBallTM product 
uses a commercially available paintball-type of compressed air 
launcher to fire projectiles containing Oleoresin Capsicum (OC) 
powder, which has been used for decades by law enforcement and 
the military in aerosol pepper sprays. The product, which has 
only recently been introduced to the market, is attracting much 
interest among U.S. law enforcement agencies because of its 
great effectiveness. It is accurate and very effective at a 
range of 0 to 50 feet, the range most useful to police. As a 
credible alternative to a firearm, it has, over the past year, 
been used in several hundred instances to successfully quell 
violent suspects without resorting to lethal force.
    Obviously, the company would like to market this product 
overseas. In April of last year, they began discussing with the 
Departments of Commerce, State, and Defense where their product 
would be classified. After receiving conflicting informal 
advice, they submitted a formal CJ request in June of 2000. 
Despite repeated calls to the government they have not yet 
received an answer. In fact, I understand most recently they 
learned that one department had misplaced some of the 
paperwork, resulting in even further delay.
    The consequence of this delay, and delays suffered by 
countless other companies, is that U.S. exports are lost, U.S. 
jobs are placed in jeopardy, and foreign competition can gain 
the upper hand. In the case of JTS, Mr. Chairman, you can also 
imagine the utility that its nonlethal technology could be to 
Israeli security forces as they deal with Palestinian anger on 
the streets. Had JTS been able to export their 
PepperBalITM technology to Israel it is possible 
that many lives could have been saved.
    The problem faced by JTS is faced daily by hundreds of 
companies. I do not know how many CJ requests are currently 
pending, but I urge the Committee to look into the 
unconscionable delay in responding to CJ requests. If the 
Administration won't speed up this process, then Congress 
should act to force the process, perhaps by enacting a 
mandatory time--say 60 days after a CJ request is filed--after 
which, if no answer is received, an exporter is free to export 
the product under the less restrictive regulation.


    ESTABLISHING AN EFFECTIVE, MODERN FRAMEWORK FOR EXPORT CONTROLS

                              ----------                              


                      WEDNESDAY, FEBRUARY 14, 2001

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 9:30 a.m., in room SD-538 of the 
Dirksen Senate Office Building, Senator Phil Gramm (Chairman of 
the Committee) presiding.

            OPENING STATEMENT OF CHAIRMAN PHIL GRAMM

    Chairman Gramm. Let me call the Committee hearing to order.
    I want to thank our witnesses today. We have two people 
today who have rendered great service to this country and who 
are probably the two leading experts on the issue before us--
export administration--in the country.
    John Hamre--many of us know him from the old days as the 
senior staffer on the Armed Services Committee--is now 
President and Chief Executive Officer of the Center for 
Strategic and In-
ternational Studies. He is a former Deputy Secretary of 
Defense. 
And he is, in fact, now in the process of conducting a study on 
this 
very subject.
    Our second witness is Mr. Donald A. Hicks, who is Chairman 
of Hicks & Associates. He is former Under Secretary of Defense 
for Research and Engineering, and he is Chairman of the Defense 
Science Board Task Force on Globalization and Security. So, in 
terms of hearing from knowledgeable people about export 
administration, there are hardly two people in America that we 
could have chosen who could give us as educated testimony. Let 
me just say, having spoken on this subject many times, there is 
an inherent conflict in the goals that America has.
    We want to dominate the world in high technology, to do the 
research, to provide cutting-edge products on the world market, 
and to dominate the world market with those products. At the 
same time, we are the principal guard at the gate in terms of 
the security of the world. We are the protector of freedom on 
the planet.
    And so, we have concerns about powerful technology getting 
into the wrong hands. And to be honest with ourselves, we have 
to say that there is, at least at the margin, a conflict in 
these two goals.
    The bill we have put together over several years of effort, 
with input not only from Members of this Committee, but from 
many witnesses and many Members of other Committees, is an 
effort to deal with this conflict. It is really based on a few 
simple principles.
    Number one, if something is mass-marketed, it may be very 
powerful. It may be that you would wish that the number of 
theoretical calculations per second that a computer will make 
will not grow as fast, that the machines would not proliferate 
because they have military usage and potential.
    But the reality is the number of MTOPS is doubling every 6 
months and no law we could pass could stop that from happening.
    So, the first thing we try to do in our bill is to say, 
those things that are mass-marketed, that are sold on the world 
market, while they may have defense implications, there is 
nothing we can do about them. And so, they ought to be 
decontrolled.
    Second, we ought to build a higher fence around the things 
that we can control, have an effective process of analysis of 
what those things are, strengthen the individual departments in 
terms of the potential for objecting on national security 
grounds, have very stiff penalties for those who knowingly and 
willingly violate the law.
    Finally, a change we have made in the bill which I think is 
justified--and in fact, the President already has the power to 
do under the Constitution--despite a process that we have set 
out for systematic evaluation, at the end of the process, if 
the President of the United States decides that he wants to 
control an export for national security reasons, he has the 
right to do that.
    That right cannot be delegated to anybody else. It has to 
be made on an individual item basis. And therefore, the 
President has to be answerable for it. But he has that power.
    That is a summary of our bill. I am very happy that our 
witnesses are here. I want to give my colleagues an opportunity 
to make an opening comment.
    I would say, in recognizing Senator Enzi, that I have been 
in the Senate now for 16 years, I have never seen anyone become 
as personally involved in an issue. I have never seen a Senator 
who has attended meetings of agencies to try to figure out how 
they work. I have never seen anybody with that hands-on 
approach. And I want to say that I am a great admirer of that 
approach.
    This is Senator Enzi's bill, and I intend to be there, this 
year, when the President signs this bill into law, standing 
right next to Senator Enzi. And I intend to see him handed the 
first pen.
    I intend to get my pen after he gets the first one.
    Senator Enzi.

              STATEMENT OF SENATOR MICHAEL B. ENZI

    Senator Enzi. Thank you, Mr. Chairman. Thank you for the 
kind words and thank you for holding this second hearing on S. 
149, the Export Administration Act.
    It is a delightful day. Today, Mr. Hamre is back. Mr. Hamre 
took me through that educational process from the Department of 
Defense standpoint and spent a lot of hours educating me and 
then spent a lot of hours working with Bill Reinsch, who is the 
Under Secretary of Commerce who was involved in the export 
administration, working laboriously, extreme detail, to try and 
resolve how we meet this balance between national security and 
having an effective export trade. And the willingness to work 
and to dedicate the hours is very much appreciated. He came up 
with some very creative methods by which we can reach those 
goals.
    It is good to have you back again to hear some additional 
comments on this. As one of the most knowledgeable people on 
EAA, I appreciate your doing that.
    I also want to commend Mr. Hicks for the tremendous amount 
of work that he put into the 1999 Defense Science Board Task 
Force on Globalization and Security--one of those small titles 
that we have around here. And of course, globalization has 
become a dirty word to some people in society. But as the 1999 
Defense Science Board report points out, globalization is not 
an option. It is a fact. Its cause is derived from various 
factors, but the result is the same.
    Dual-use technologies are fully globalized and therefore, 
are very difficult to effectively control. The solution that we 
point to in the bill is to control those items that are 
controllable and not available in foreign or mass markets.
    We build higher walls around those things that we can 
control and are able to focus the attention of the people that 
do the enforcement on less things to a great extent, which 
should provide for more security for this country.
    So, I look forward to hearing the views of the 
distinguished witnesses and moving this to a mark-up, hopefully 
later this month.
    Thank you.
    Chairman Gramm. Thank you. Let me say for our new Members, 
I am very grateful that you came. This is a subject that the 
public does not understand. And the reason they do not have to 
understand it is we have men like the two witnesses before us 
who do understand it and who, in Democrat and Republican 
Administrations, have been good stewards of our interest.
    But it means a lot to me that you came, and I want to thank 
you.
    Senator Miller, did you have a statement you wanted to 
make?

                COMMENTS OF SENATOR ZELL MILLER

    Senator Miller. No, I do not have a statement. I am looking 
forward to the testimony.
    Thank you.
    Chairman Gramm. Thank you.
    Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Mr. Chairman, I just have a brief statement 
I would like to make. First, I would like to commend you, Mr. 
Chairman, for holding this meeting. You have clearly 
demonstrated that the issue of export control is a top priority 
and I appreciate your dedication. I would like to commend my 
colleague Senator Enzi, for his very hard work on this issue.
    I would just comment that in the last session, I had a lot 
of sympathy for the amount of work that he was putting in, and 
I know he experienced a lot of frustration with this issue. And 
as Chairman of the International Trade and Science Subcommittee 
during the 106th Congress, Senator Enzi laid the groundwork for 
our consideration of this matter.
    The Export Administration Act is an important tool for 
protecting national security and implementing foreign policy. 
We have already gone too many years without a clear, balanced, 
long-term export controls policy in place and I appreciate the 
opportunity to address this lapse. Our world has seen many 
changes in recent years. Economies are now global and 
technology progresses at an incredibly rapid pace.
    International trade has also become increasingly important. 
The challenge has been to find a way to compete in the global 
market, while simultaneously protecting our national security 
and our national interests.
    As a Member of the Armed Services and Banking Committee and 
a former Member of the Intelligence Committee, I have had the 
opportunity to examine both sides of this issue. One point that 
has come up in all of my committees is how critical export 
controls are in controlling the proliferation of technology to 
our adversaries.
    Although national security certainly must play a primary 
role, it is also appropriate that we consider the business side 
of the equation. There are legitimate dual or commercial use 
items and I believe that it is possible to find ways to address 
legitimate national security concerns without placing 
unnecessary restrictions on American business.
    I look forward to hearing the witnesses' comments on this 
point and I look forward to their testimony.
    Chairman Gramm. Thank you, Senator Allard.
    Senator Corzine.

               COMMENTS OF SENATOR JON S. CORZINE

    Senator Corzine. Yes. Thank you, Mr. Chairman.
    I look forward to listening and learning here. I commend 
Senator Enzi and all those that worked on this most complicated 
subject.
    Chairman Gramm. Senator Stabenow.

              COMMENTS OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman.
    I would also just welcome our guests. As you know, I am a 
cosponsor of the legislation and think it is critical that we 
modernize our export control policy, and I am looking forward 
to your testimony today.
    Chairman Gramm. Thank you. Let me suggest that all three of 
you--why don't we leave a seat for Senator Sarbanes and why 
don't you all move up here.
    Mr. Hamre why don't you start.

                STATEMENT OF JOHN J. HAMRE, PHD

             PRESIDENT AND CHIEF EXECUTIVE OFFICER

         CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES

    Mr. Hamre. Senator Gramm and distinguished Members, thank 
you for the opportunity to come back. I spent 17 years of my 
life working for the Congress and it is a great joy to have a 
chance to come back up here.
    When we think of the Nation, you think of the President. 
When you think of the words, we, the people, you think of the 
Congress.
    I think that is one of these issues that can only be 
settled in a place like the U.S. Congress. This is an area 
where, as you said, Senator, conflicting interests have to be 
reconciled. We have important goals that are all important and 
we have to strike a balance among those goals. And that is what 
this institution was created 212 years ago to do--to strike a 
balance where we need to reconcile competing goals and 
interests for the country.
    I really do thank you for taking the time to do this. I 
personally don't think there is a more important issue right 
now facing the country where national security and economic 
well-being come together than this.
    Your leadership is, I think, absolutely crucial, and I 
thank you all for it.
    First, let me say, as you have all said, we need export 
controls for our national security. We have to have some form 
of export controls. The types of controls that are in place 
today do not work, and I think they fail badly on several 
counts. We need to think about national security with a capital 
S and a small s, and small s security is watching every license 
to make sure that it does not get out to the bad guys. But 
there is a capital S security, which is the vitality of our 
economy, our ability to work with allies, to strengthen allied 
relationships that when we have to go to war, we can fight 
together, for example, so our radios work together.
    There is that capital letter S, security, that is being 
lost now by a preoccupation with a small s, security, which is 
just trying to follow a lot of rules and procedures that I 
personally do not think are now buying us much security.
    We need a new framework, which is what you have really 
asked for in this hearing and in this legislation, a new 
framework for export controls that fits today's environment and 
provides real security in today's world.
    I would like to briefly give highlights of my written 
testimony. You have worked through the details of this bill. I 
would like to discuss the large principles, if I may.
    First, any export control framework has to address two 
basic things.
    Number one is the export control system cannot fight the 
business practices of the day. It has to figure out how to work 
with the business practices of the day.
    Back 50 years ago, when the export control systems were 
being put in place, most of the manufacturing process was 
parochial and local. Manufacturing took place around a 
geographical location. The engineers had to be close to the 
production facilities. It was easy to put an export control 
system in place that was around licenses, controlling things 
leaving a plant.
    Well, today, you now have companies that are setting up 
their design teams around the globe so that one part of the 
design team hands it off to the other as the sun moves, so that 
they never stop working on the project.
    Well, we now have just-in-time international business 
practices. We also have to find export controls that work for 
today's business practices, not those that just are nostalgic 
and worked in the past.
    Our problem is that when the world started to get more 
complicated with export controls, we did not step back and 
design a new framework for them. Instead we made the system 
more complicated. We have made the system more complicated and 
more failure-prone, and we now have a system for which people 
know they are going to be making mistakes. Making innocent 
mistakes, in this environment, creates big political casualties 
because it is so easy to mischaracterize what a company did--in 
honesty, not trying to break the law, but it is not hard to 
break the law when you get down to today's complex export 
control system.
    We have to design a system that, first of all, comprehends 
today's business practices and design a control system around 
today, not around the past and not try to force people into the 
past. The second thing we need to do is only try to control 
exports where there is an international consensus that it is a 
problem. The world does not think exporting 5-ton trucks is a 
big national security problem. And yet, we are still trying to 
control the export of 5-ton trucks.
    We do agree that we ought to try to control the export of 
nuclear-related technology. We always should. We do not want 
the bad guys to get more nukes.
    We should be designing export controls around things for 
which there is a genuine consensus that this is a national 
security threat of significance, and we have the support of 
allies trying to work it. Our allies do agree with us on an 
issue like nuclear technology and they work with us on trying 
to limit exports of nuclear technology.
    They do not agree with us on things like computers and they 
are trying to beat our pants off.
    By simply holding back our companies in an international 
competition environment, we are only denying our companies 
access to markets. This is not going to solve a national 
security problem. So we have to accommodate these two things.
    We have to design a system that fits the business practices 
of the day. And we have to focus our constraints on things 
where there is an international consensus, that this really 
does matter for national security.
    I think the key for your framework has to rest on three 
partnerships. We need to design a partnership between the 
government and the private sector.
    Right now, we have maybe 30,000 employees working for 
industry that are preparing licenses to try to get them past a 
couple hundred inspectors in Washington. It is adversarial. It 
is confrontational. We need to turn that around so that those 
30,000 licensed individuals and companies are the first line of 
defense for the country. They are not trying to beat their 
government.
    That means we have to change the way we think about talking 
to them.
    I personally think we should shift our focus so that we are 
licensing a company to export by certifying the internal 
controls of their export control process, rather than making 
them submit individual licenses, license by license by license 
for each sale.
    Today if you want to sell a pump here, here, here, here. 
Every one of those requires an individual license.
    Instead, what we ought to do is work with the companies and 
say, if you design the adequate internal controls, I am going 
to trust you. I am going to make you the first line of defense.
    I am going to hold you accountable, but I am going to make 
you the first line of defense for the country rather than have 
300 poor inspectors here in Washington looking through 
mountains of paper trying to sort it out themselves. So the 
first thing we have to do is to create a partnership with 
industry.
    The second thing we need to do is to create genuine 
partnerships with other governments.
    This is more in the area of the military exports, less on 
the dual-use items. You license an F-15 and then you license 
the missiles that go on it, the software that goes in the 
computer, the support equipment that goes with it, the 
publication manuals. All of these are separate licenses. And 
many times, it is to our best allies.
    I had the ambassador from the Netherlands who came to me 
when I was the deputy secretary, while we were fighting in 
Kosovo. His pilots were fighting side-by-side with our pilots. 
And he said, can you help me get a license through the system 
because I need to buy more missiles so that my pilots can fly 
with your pilots. That is pretty embarrassing. Our best allies. 
We had already provided them with these weapons, but they had 
to come back and get another license for a new set of missiles. 
This is very counterproductive.
    We need to be working with these alliance relationships and 
build on those relationships.
    They are willing to be our partners. And we need to 
establish a new partnership relationship with those allies, and 
then start lowering the barriers between our companies between 
these two countries, or three countries, or whatever are these 
relationships.
    The third partnership we need is to be working better 
inside the government agency to agency.
    You know what Washington is like. It is all tug-o-war. 
Everybody is pulling against each other. And it should be more 
like competitive rowing, where we are all sitting in the same 
direction pulling on the oars together. But that is not how it 
works.
    How it works in this town is we are all fighting each 
other. And we need to find ways to get the agencies to see that 
it is in their collective interest--They need to help each 
other get the collective problem done.
    That is not the culture that exists right now. They need to 
be sharing information.
    There is no automated way to share information across the 
government when it comes to licenses. We should be demanding 
that.
    Why do we make the private sector come around and touch 
bases, the kind of a stations-of-the-cross approach to try to 
get your licenses approved by going around to every agency that 
has a stake in the process?
    It ought to be far more customer-friendly and user-
friendly, and it would be good for the government if we did 
that as well. I think you should be insisting on that. You 
should be insisting that your government does a better job of 
working internally. I know that is a big feature of your bill. 
And again, those are details that have to be worked out in 
partnership with the new Administration.
    I think the new administration is very interested and 
committed to making it work and they want to be your partner on 
it because I have had conversations with them.
    Please do not let up on this. There is no more important 
agenda, I think, for the Senate than this agenda. This is the 
time we have to change. If we do not change, I fear we are 
going to lose that capital S security. We are going to fall 
further behind. Our com-
panies are going to take work offshore. We are going to lose 
technology from America and we are going to lose working 
relation-
ships with allies.
    That is not going to be good for our security over a period 
of time. That has to be a big feature of your thinking as you 
are moving this legislation.
    Thank you for being the sponsors and the proponents of this 
bill, and I would be delighted to help in any way as you work 
it through the system.
    Chairman Gramm. Thank you.
    Don.

               STATEMENT OF DONALD A. HICKS, PHD

                  CHAIRMAN, HICKS & ASSOCIATES

    Mr. Hicks. Senator Gramm and Members of the Committee, I am 
pleased to be here. Thank you for inviting me.
    There has been a lot of effort in this area, among others, 
by the Defense Science Board.
    We had some extremely fine people from a lot of different 
backgrounds that worked on the report. If you look at the 
report, you will see their names.
    I should also add that we touched on many things besides 
the 
issue of export control--which is certainly important--
regarding 
U.S. Security.
    I have a verbal remarks paper here that would take 15 
minutes, which I defer to save time.
    Chairman Gramm. We will print them in the record.
    Mr. Hicks. Actually, my written statement will take care of 

that, also.
    In looking at export controls and trying to see what was 
wrong, many of the things have been discussed by John Hamre. It 
is really a big problem.
    Having read over your papers before I came back here, Mr. 
Chairman, I am impressed that so many of those problems are 
being resolved by your bill.
    I commend Senator Enzi and anyone else involved in the bill 
because I think it contains many items that will help the 
situation a great deal.
    My approach in discussing this with you is not just to talk 
about export control, but to talk about the implications to 
defense. I could be talking to the Armed Services Committee, 
but, still, I think that this is important for you to recognize 
these issues as you proceed with your bill.
    These unnecessary trade barriers, as John says, are really 
restrictive. They do not help us. They hurt us. We have to 
recognize what globalization means in the first place. 
Globalization is a fact--it is not going to change. You have to 
set your policy recognizing that it is real.
    We know that we do not control the flow of monies. We do 
not control the flow of people in many cases, and we find that 
cultures are changing as a result.
    All that is happening and has happened before. However, in 
the last 10 years, it has been remarkable because of the 
information technology advance. Things have progressed so 
rapidly in the area of communication that information is spread 
everywhere.
    Having said that, my feeling was, well, what does it do to 
hurt the DoD or help the DoD? And actually, both occur.
    And here, I think something that John said is terribly 
important and we stress this very strongly in the report--do 
not try to control things that are uncontrollable. Control 
things you can control that are important. And, by the way, we 
used an example of that in our security section.
    You have been reading about there is 800,000 or some number 
of people who have clearances at the secret level who have not 
been checked in 5 years, and so on. An enormous number of 
people, a ridiculous number of people, because the number of 
things that really should be controlled is far less than that.
    And yet, if we look at the history of having lost important 
data, we find that they were lost by people who had the highest 
clearances. There is a whole list in our report, the names of 
individuals who are traitors, giving crucial data either to our 
enemy or so-called friends, who had top clearances. They had 
access to the gold nuggets of our defense situation.
    So what happened?
    Well, what happened was we had this enormous number of 
defense investigators looking for breaches in security and not 
focusing on the important items. If you have a job, for 
example, that is really critical and knowledge that is really 
critical, you have given up certain privacy rights, by 
definition, in my mind.
    We should not have concentrations on security across a 
broad range of things that nobody cares about. And that is 
where the Export Control Act comes in because we are trying to 
control unimportant things that just cause problems, not 
solutions.
    Our allies then either buy from someone else or build them 
themselves to prevent our interference in their foreign policy.
    That presents economic problems to our industry. It takes 
business away from companies that are struggling to maintain 
themselves. And it does not make a lot of sense for our overall 
security.
    The other thing that is important to recognize is that 
things have drastically changed in preventing countries in 
accessing defense systems.
    What has happened now is that there is so much information 
out, that individual countries can produce a system that I call 
``good-enough.'' It is not what we do. It is not as good as 
what we do. But it is sufficient to be a very serious security 
problem to us. A good example of that, of course, is the North 
Korean missile.
    You can say, well, here is a little backward country, 
cannot even feed its people. And yet, they are able to produce 
a missile. It is not anything like ours. I am sure the accuracy 
is lousy and so on.
    It does not matter--it could do a lot of damage.
    It is also important to note that our use of high 
technological 
capabilities as evident in the Gulf War has impacted other 
coun-
tries' thinking. They begin to say, hey, look, we cannot beat 
the 
United States that way. Let's beat them some other way. They 
come up with asymmetric solutions to the problem. One of the 
important asymmetric solutions which we tend not to want to 
face is the problem of getting our people there, the issue of 
transporting people there.
    It took us months to get the necessary people into the Gulf 
area in order to commence the Gulf War. Our potential enemies 
know that. They are not stupid, that if we did not have 
airfields, if we did not have ports, we would have big problems 
in producing the necessary military strength--that Secretary 
Rumsfeld is now trying to see what the real requirements are 
for our military--and by the way, that ties into the foreign 
policy of what should we really be doing overseas?
    Our people are so stretched now, the ordinary grunt, as I 
call him. They are always being sent some place. And so, the 
question is, what is our foreign policy in terms of 
intervention?
    And having said that, what does that do to our military 
requirement? And what if we do lose ports and airfields in some 
places? What do we do about it?
    Well, it turns out that the legacy systems do not help us 
much. And so, it is important, I think, that we continue to 
view these things and think about them and recognize that if we 
impose export controls that are harsh and ineffective, all they 
do is hurt us. They do not hurt the enemy at all. You will see 
in our DSB report, that we stress capabilities, not 
technologies.
    The fact is that technologies are widespread.
    I can go back to the B-2 bomber, of course, which is my 
favorite subject because I think it is so important.
    We had all types of things going on that thing that were 
technologies. Stealth is not a single technology--it is many 
technologies. And yet, if you looked at the situation around 
the world--let's take, for example, one of the things we did in 
the B-2 that was unique was to recognize that Maxwell's 
equations and hydrodynamic equations were compatible. You could 
design a vehicle we never had designed before.
    That led to the capable and stealthy B-2 bomber.
    The Russians had better people than we did in terms of 
mathematical capability. But what they did not have was the 
money to put into the systems, the engineers, the architects, 
the individuals who could do it, the factories to build it, on 
and on and on. So, that is what we want to protect. We want to 
protect that capability.
    We have to face the fact that we are losing technologies 
broadly. It is something we cannot control.
    If you look at a graduate student in our prestigious 
universities today, 40 percent of the time, he is a foreign 
student. Where do you think he is taking that information? Some 
of them stay, if they are lucky. But a lot of it goes back to 
their own countries. Technology is widespread and there is 
nothing much that we can do to prevent that. There is another 
fact that I believe is very important. While, it really is not 
this Committee's worry, since you all are good Senators, you 
should think about it.
    When I was Under Secretary of Defense for Research and 
Engineering we had about--in 1985 dollars--$90 billion for 
production systems.
    Today, even though it has been increased this year, it is 
about $60 billion dollars. So the production budget is probably 
half of what it was when I was Under Secretary of Defense for 
Research and Engineering and was controlling acquisition.
    Around 3 percent of those production dollars are spent by 
companies on their Creative Independent Research & Development.
    That is where a lot of the really creative defense systems 
are created. That is where a lot of our sensors are developed. 
That is where a lot of our communications systems are 
developed.
    So, we have less money for new creative defense systems. 
Additionally, because we are buying legacy systems in general, 
not the systems I think that will come out of Rumsfeld's study, 
people in industry have to put their R&D money where the 
production money will be spent, not on new creative systems but 
on legacy systems.
    It is offset--I agree--by the incredible expansion of the 
commercial area in R&D, which is available to everybody.
    So going back to what you said earlier, Senator Gramm, we 
have to put high barriers on important things, and I call those 
capabilities, not technologies, and recognize that a lot of the 
technologies we just cannot control.
    And so we must spend our time and effort and money trying 
to control things we can control.
    Thank you.
    Chairman Gramm. Thank you. I just want to ask a couple of 
questions.
    First of all, I am constantly reminded in this job, as I am 
sure each of you have in your careers, that Jefferson was right 
when he said good men--a person now would say good people--with 
the same facts are often prone to disagree. And that is exactly 
what has happened on this subject.
    I find myself in disagreement with a handful of people who 
are very concerned about national security.
    It is kind of a paradox because, John, as you will remember 
when I came to the Armed Services Committee, my dad was a 
career soldier, a sergeant in the Army for 28 years, 7 months, 
and 27 days. I believe in national defense. I am proud that I 
wrote 
the 1981 budget in the House that helped provide the funds that 
ultimately tore down the Berlin Wall and won the Cold War, 
along with a lot of other things that happened. I am from a 
part of the country that lost a war. This is something that I 
have a deep feeling for.
    But I guess as I look at the world that exists today, there 
may have been a time in American history, clearly was in the 
1960's and 1970's, when much of our new technology was coming 
out of defense labs. These were literally our secrets.
    Invariably, they leaked into the private sector. They had 
to go into the industrial military complex or they were not any 
good to us. But they gradually leaked into the private sector 
and then gradually leaked out to the world.
    And so, you were fighting a losing game in preventing them 
from ultimately getting out, but there was a great advantage to 
slowing the process down.
    As I look at the world, the Soviet Union is gone. Most of 
our new technology is now coming from the private sector, 
interestingly enough, similar to what the world was like in 
World War I. We were there trying to adapt private technology 
to defense uses.
    I have concluded that the principal source of our security 
is to maintain our leadership in generating technology, that, 
ultimately, our security is to be sure that we are the engine 
which is driving technology because, A, we will always have it 
first and, B, we will always understand it better. When I am 
looking at our national security concerns, there is a very real 
trade-off between guaranteeing that we are always this engine 
and protecting the secrets we have. And I guess when forced to 
err here, I come down on the side of immediately cutting loose 
things that we cannot really control.
    If I can buy something at Radio Shack, even though it will 
run a missile defense system in some region in China, the 
Chinese Embassy knows where the Radio Shack is. And I assume 
they go there just as I do.
    But in any case, I would like to just ask each of you to 
tell me what you would say to people who are concerned about 
national security and about the approach we are taking, and who 
believe that there is a peril to America in taking the approach 
we are taking.
    Mr. Hamre. Let me give an example because I find 
theoretical discussions hard to understand.
    I will give a real example that I personally feel very 
strongly about. For 25 years, we have been limiting the ability 
of commercial satellite manufacturers to sell commercial 
products. And the reason is that we have been terrified that 
bad guys are going to be able to buy reconnaissance-quality 
photos that could come back and cause a military problem for 
us. I worry about that.
    The fact is, though, that other people around the world are 
now building satellites of that quality.
    Our approach in export controls and government licensing 
has been, well, we are not going to let an American company 
have a license to sell commercial imagery until they can prove 
that a foreigner can do it better.
    I cannot imagine that that is going to be in our best 
security interest over time, that we in essence have created a 
protected market for foreigners to produce a product that is 
better than what we are letting our own companies produce that 
is going to create a security dilemma.
    Frankly, if we are going to have a future time when we are 
in conflict, and I want to ask a company to turn off its 
satellite for a couple of days, I would rather have the area 
code be out in Silicon Valley rather than in the Loire Valley. 
I think that is the reality of it. You want your companies to 
dominate. This is this partnership that I think we have to talk 
about. It is a bigger, broader definition of security.
    Trying to block the loss of technology simply creates an 
incentive for others outside of American interests to create 
it.
    Instead, we ought to be doing this in partnership with our 
companies and how we contribute to their commercial success. It 
is not an easier world, but it is one that is inevitable and we 
have to figure out how to deal with it. That is a real-world 
example we need to wrestle with in this country.
    Mr. Hicks. I agree. I think that--let me go back to the 
issue of capabilities.
    The thing I worry about in our country is that we are not 
focusing and producing what I think are the crucial weapons 
systems.
    It is a priority issue. I have arguments on both sides.
    But I believe that we have not taken advantage of the 
military technical revolution as we should. We are not building 
enough smart weapons. We are running out of smart weapons. John 
knows how that works.
    People are so interested in platforms and so on, that they 
forget what the thing is really supposed to do. My issue of 
security is based on the fact that we have unique capabilities.
    Now, we are going to continue to have that because we are a 
rich country. We have great manufacturing capabilities.
    Let me give an example.
    When the B-2 bomber was being designed, we carried an 
aluminum wing for a long period of time. The reason we did 
that, we were not sure that Boeing could actually build that 
composite wing. When they did finally work that out, which is a 
very tough technical problem, engineering problem, no new 
technologies, just plain good engineering, we saved around 8,000 
or 9,000 pounds on the weight of the bomber. Very important in 
terms of its overall performance.
    That, by the way, fed into the 777 and the capability that 
Boeing had. So, we have in this country enormous strengths in 
terms of architectural engineering, good teams, manufacturing 
capabilities, enormous infrastructure, that other countries 
just cannot match.
    They can in fact take commercial technologies and do what I 
call good enough, which we have to worry about. You take care 
of good-enough things by trying to have something better that 
counters it. But if we spend all of our time worrying about 
losing technologies and do as I said earlier, lose our ability 
to spend more money because we need to on very creative defense 
capabilities, we are going to lose. We can still take advantage 
of all the commercial stuff.
    One of the things that we talked about in our report was 
what is an important thing to protect?
    I noticed in your bill, without reading it in detail, but 
you discussed having some kind of a group that looked at that.
    We actually spent a fair amount of time on our report 
talking about that situation, properly computerized, properly 
feeding in from the agencies and so on.
    Well, a lot of this stuff is out-in-the-open literature. We 
can find out, in a very classified way, what we have that 
nobody else has. I think that is an important issue. It is one 
of the things that covers what you are worried about. Do we let 
something go that we should not let go?
    And my view is, yes, we have to be careful there. But in 
general, we cannot control so much of this stuff. But we can 
control what we are doing with our enormous capability as a 
country to build things and build the right things.
    My concern is that if the budget is down by 50 percent, we 
can say, well, the Cold War is over. Let me tell you--in some 
ways, the world to me is more dangerous now than it was then. 
It is less definable. I think we are not looking at the right 
thing. So I again say that I think that Secretary Rumsfeld, and 
I have no detailed information on this at all, is doing the 
right thing to try to relook at what the real worries are for 
defense. That has an impact, then, on the issues of what we 
have to control with our exports.
    Chairman Gramm. Let me say that we do have a forward-
looking science board in this bill, and if we know that the 
number of MTOPS is going to double in the next 6 months--if 
that is even a relevant factor now in terms of export control--
then instead of waiting for that to happen and then allow 
companies to apply for waivers, we could go ahead and change 
the standards.
    Or in your example, if we know that there are about to be 
competitors who can do satellite imaging, we go ahead and allow 
our people to do it first.
    Let me just conclude, Mr. Hicks, by asking you a couple of 
questions. In looking at your defense science board task force, 
you have the Who's Who of experts in this area on it--Bill 
Snyder, Ash Carter, others--and you reached some conclusions. I 
would like to read three of them and then ask you, were these 
unanimous or were there solid majorities, or was there split 
opinion.
    Conclusion: An overly cautious approach to dealing with 
globalization will result in a net erosion of U.S. military 
dominance.
    Mr. Hicks. I think there was no lack of concurrence in that 
statement.
    Chairman Gramm. So that was unanimous?
    Conclusion: It is utterly futile for the United States to 
attempt to unilaterally control technologies and goods that are 
available on the world market.
    Mr. Hicks. Also totally agreed.
    Chairman Gramm. Conslusion: The United States must put up 
much higher walls around a much smaller group of capabilities 
and technologies.
    Mr. Hicks. Exactly, and that is what you said in your 
opening statement. Absolute agreement.
    Chairman Gramm. Well, it seems to me, that your report, in 
essence, in many ways calls for exactly what we have tried to 
do.
    And let me say to both of you--and to anyone who is here 
that is more knowledgeable about this than we are--that while 
we have put together a bill, it is not the final word. We tried 
to put together the best bill we could, and we met extensively 
with those who were opposed to it. In fact, I spent over 40 
hours talking to individual Senators who were opposed.
    It was at that point I decided that I have invested enough 
in this--I want it to happen.
    But in any case, if one has a better idea, do not get the 
idea that we have closed the book on this bill. If you have a 
better idea, we will throw out ours and take yours.
    I hope that both of you, and anyone else who has a 
suggestion about something that is not in here but should be, 
or something that is in here that shouldn't be, or how 
something could be done better, let us know.
    We do not have any great pride of authorship in the sense 
that if somebody has a better idea, we will take it. We want to 
write a good bill.
    Senator Sarbanes, you were not here when we did opening 
statements. So let me call on you next, and then I will go to 
questioning.

              COMMENTS OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Well, I will just pass.
    Chairman Gramm. All right.
    Senator Enzi.
    Senator Enzi. Thank you, Mr. Chairman.
    I want to thank the two people who testified. I took 
extensive notes. I will borrow a lot of what you said for use 
in the floor debate later.
    I may be jumping a step there, I am anticipating that we 
will have the floor debate and a final vote on this and get 
this problem that has existed since 1994 taken care of. Because 
of having worked on this before and having looked through the 
12 previous failures, I do want to raise the issue that even 
though we use some examples that deal with munitions and with 
satellites, this bill deals with dual-use items. Items that are 
primarily for civilian uses, but may have some military 
applications as well. We tried to limit the bill to those 
applications, even though some of these munitions and satellite 
examples give an excellent example of what the problems are and 
why they need to be solved and how they can be solved.
    But I get a little nervous in light of the times that this 
has had difficulty without mentioning that. Again, I commend 
the witnesses for some outstanding quotes, both in the 
testimony that they presented to us and in what you said 
verbally here.
    You have taken an issue that has great potential to create 
glazing the eyes over, and putting it in real terms so that 
people will stay interested in this extremely vital issue.
    Mr. Hamre, at CSIS, you are currently undergoing several 
studies that deal with both dual-use and military export 
controls. In light of the additional time and tremendous focus 
that you put into this, do you think that the recommendations 
that these studies are doing are consistent with the principles 
that are in S. 149, which is, namely, of course, focusing 
controls on what can be effectively controlled?
    Mr. Hamre. Sir, I do. I think that the spirit is certainly 
the same. There are going to be some differences in engineering 
details as you implement a system that will work, and that is 
frankly the hard part. That has to be something that you do 
directly with the Administration.
    The real problem when we did not get anything done in the 
last several years is that you did not trust the Administration 
and you did not feel that they were honest with you. There was 
not a fabric of trust that was there around which to build the 
next step forward. I think that is possible now.
    So sit down with them early to work out some of the 
details.
    If I could say a couple of things.
    One, please design in your system a way for people to get 
some transparency about what is going on.
    The hardest, thing that I sensed with industry is that 
there is no way for them to figure out what the government is 
really thinking at any point in time. They have to go around 
and hire consultants and try to figure out what the government 
is thinking--We ought to tell you what is going on.
    The government should say, I have a problem and here's why 
I have a problem. There is no good way to get that right now. 
There is no good way for the government--the government is not 
forced to tell them in explicit reasoning, why is this a 
national security risk I am worried about, so that you can talk 
about that. I think that that would be an important thing, some 
transparency.
    The second thing--and I think this is a hard issue. But you 
have to design the system in a way so that the bureaucrats, and 
I do not mean that in a negative sense because they have to 
carry out the laws that you pass and that we try to enforce.
    You want them to be dutiful executors of the law. But you 
do not want them to make policy at their own level. That is 
your job. That is my job--not mine any more. But when I was in 
government, I did not want a GS-12 deciding new policy on 
whether we would control three micron microprocessor chips, for 
example.
    That was my job and I ought to be held accountable for it, 
either making the right decision or the wrong decision. But 
right now, we have a system where the bureaucrats, and I do not 
mean that in a negative sense, but the bureaucrats are 
interpolating policy based on precedent and making that the 
direction for the government, rather than forcing senior 
management--me, you--to determine what is in our national 
interest?
    We must design a system that makes sure that the 
bureaucracy carries through policies that exist today, but it 
does not create new policy under the rubric of just simply 
expanding existing precedents. I think that is a very hard 
engineering detail. It is going to be the hardest part as you 
engineer your bill.
    But I know that that is the center of your focus and I 
commend you for it, sir.
    Senator Enzi. Thank you. That fits well with your comment 
about the 30,000 people preparing the information for the 200 
people that are trying to keep them from being able to do this, 
as opposed to putting them on the same team and having 
everybody work together.
    In the February 13 edition of the USA Today, there was an 
article about high-tech companies expanding their companies 
overseas amidst the U.S. slowdown. Many of the high-tech 
companies are going to China, according to the article. It is 
another example of the globalization of business and 
technology. And for both of you, how do these developments 
change the dynamics of export controls and increase the 
importance of strengthening the multilateral export control 
regimes?
    Mr. Hicks. Well, I view this as, again, a situation that is 
uncontrollable. The fact of the matter is that it is an 
economic situation that you have to live with and find ways 
around.
    One of the things that I tried to find ways to say to this 
Committee was that what you are doing is part of a much bigger 
fabric. And that fabric in our mind was to maintain military 
dominance for the United States to protect our country. And 
when you have a system like that and you have to look at all 
the interplays and everything else, it is not an easy job. It 
is not a job for this particular bill as compared to other 
bills. It is sort of our Administration, our Congress, our 
Senate, all have to think about this in a broad sense.
    In my mind, the way your bill has come out, and I have not 
read it in detail, but I certainly have gone through the 
comments that were made that I got from the press, it sounds 
like it is doing exactly what we felt was necessary to try to 
get it in step with that overall issue of globalization is 
real. Don't try to pretend it is not because there is nothing 
you can do about it. It is going to happen without you. 
Understanding that, try to find out how to live with it and, in 
fact, increase our military capability as a result of this.
    Now one of the things I will say is that on this group of 
science advisors you have--I have forgotten how it was worded--
there are lots of things that are still classified that we know 
about. So there is a need, I think, for the Defense Department 
to have another group that gets information from all the 
various intelligence agencies, from the State Department 
overseas and so on, that keeps track of these things so that we 
do know when there is something that is not obvious to people, 
that we do not want to have that released, for whatever reason, 
we make sure it is not released.
    But I believe those are going to be few and far between. 
And that is why this issue which we have in our report and 
which Senator Gramm talked about initially, is having high 
barriers around important things, instead of having rather 
lousy security--look, most of the stuff that goes to the export 
control places now, about 98 or 99 percent of it are approved 
eventually.
    Mr. Hamre. Yes, 99.4 percent.
    Mr. Hicks. It takes forever to get it through.
    It is not a question that we are protecting anything. It is 
that we are screwing up in what we look at. So I can say, well, 
maybe we did catch 1 percent. Well, if people are thinking 
right, that would never have been an issue in the first place.
    We would have known very early and could have said very 
early, don't bother. That is not going to be allowed.
    Senator Enzi. I think the Office of Technology Evaluation 
that we have in the bill does provide for the things that you 
mentioned. And I appreciate that.
    Mr. Hicks. Well, I think it does, it is an unclassified 
issue. I think it is important. I would not take it out. It is 
just that I think that the Defense Department has got to have a 
different--and we talked about it in our report, where we have 
a group where we use computers, frankly, and we stress that 
because it makes it easy to filter through, and get all the 
inputs that we have to have, some of them are top secret, 
whatever, that will help us in that situation.
    Senator Enzi. If the Committee would indulge me----
    Mr. Hamre. If I can just give you a concrete example.
    Senator Enzi. Yes.
    Mr. Hamre. I spent 2 years when I was the deputy secretary 
fighting the software industry on the encryption issue. I was 
convinced that these guys were going to sell our security down 
the river and we needed to protect ourselves and I fought them.
    I knew how to come up here and testify and say intimidating 
things that would scare you so that you would not go with them.
    We are all good at that. That is Washington now. We all 
know how to put testimony out in front that makes it awkward 
for you to vote. And this town has become muscle-bound in a lot 
of ways.
    But then I had a dark night of the soul where I realized, 
we are probably not going to be safer as a country if all the 
encryption software is written overseas.
    It is a lot better if we know what our companies are doing 
and that they are talking to us and they give us a running 
start on how to stay up with it. And so we said, we are going 
to change our approach here. We are going to think about this 
as a partnership.
    Yes, it is a little risky. I would love to be able to say 
it is just not going to happen, or say, we are going to enter 
into a partnership and I am going to tell you exactly what I 
need and I am not going to try to get in your way. But you are 
going to tell me what you are doing so I know how to stay in 
advance of it.
    I think that is working, and I think that is that core 
partnership that we need to create with our industries. Our 
industries are not disloyal. But they are going to be driven by 
a market force. And if we block them here--I know companies 
that are relocating overseas to avoid our export controls.
    Senator Bennett. We tried to tell you that at the time.
    Mr. Hamre. Sir, I wasn't as smart as you were. So I 
apologize.
    [Laughter.]
    I hate it when you point that out.
    Senator Sarbanes [presiding]. I think we had better go to 
Senator Corzine at this point.
    John.
    Senator Corzine. Thank you. I just have a brief question.
    I come from an industry where, after-the-fact analysis and 
self-regulation are a fundamental part of the control 
structure. Is that built into this bill in a way that you all 
are satisfied that there is some transparency to what has 
happened, so that when we look at whether we breached those 
high walls, that there is enough information to decide whether 
that has occurred?
    Mr. Hamre. Sir, first of all, I will give you a response, a 
more thoughtful response. I will look through it more carefully 
to try to answer your question.
    I do want to say that I think that the basic framework, the 
answer is yes, you are not trying to control things where you 
cannot create an audit trail. You cannot create an audit trail 
if you can buy a microprocessor through the mail. You can order 
it through the Internet and buy it through the mail and have it 
sent to a post office. You cannot set up an export control 
system around that.
    And you are not trying to. And I think that that is a 
premise that says, you are not trying to control things for 
which you cannot design a good audit system or an audit control 
system.
    Are there concerns that people have that the bill has 
adequate tracking where you want to track?
    Let me study that, and I will get back to you, sir, if I 
could.
    Mr. Hicks. As I said earlier, I think it is important that 
we have a group of very competent people from the intelligence 
agency and so on, that continually looks at what is available 
outside, where things are, try to decide what would be not 
right to release.
    Let me give you the software issue. We spend a lot of time 
on software. I think there has been more committees on software 
than there are software.
    But, you know, so much of our software is written in India 
or some other place. And it gives you the opportunity to put in 
trap doors that allow people to get into your system any time 
you want. One of the recommendations we had was that those 
systems that are very important to us, we do not use commercial 
software. We develop our own software. Clearly, you would not 
want a flight control system software to have a trap door that 
somebody could get into that says, shut down the engines, when 
you are in the middle of combat. So there are risks inherent in 
globalization you have to think about.
    Let's say, we had a virus yesterday that shut down 
companies. E-mail stopped for 12 hours, for example, in some 
companies because the only way they can prevent it is to stop 
it. So we have lots of vulnerabilities that are generated by 
globalization. And we are trying to struggle, I think, with 
ways to solve that problem.
    It is not an easy problem.
    Mr. Hamre. Senator, if I might just say, I think your 
question is crucial because if you are going to enter into a 
partnership with business, and they are going to be the first 
line of defense for export controls, they need to know you are 
going to audit them.
    They need to know there is going to be an audit trail that 
you can follow up on and if they have not done it, you are 
going to clobber them. That is just the guts of it, and is the 
reason why the new systems used for auditing financial records 
for corporations work. So that is the model.
    But that means the government needs to change its focus. No 
longer just try to approve every little license as it comes 
through the door, but set up a process where you come in and 
you certify a system the company uses and then you periodically 
check to see if they do it.
    I think it is a crucial question that you have raised.
    Senator Sarbanes. Senator Bennett.
    Senator Bennett. Thank you, Mr. Chairman.
    Mr. Hamre, you made a comment saying we need to trust the 
Administration, and that maybe we had not in the past. And with 
the new Administration, we could.
    I want the record to be crystal clear that we always 
trusted you.
    [Laughter.]
    Mr. Hamre. Thank you, sir.
    Senator Bennett. You were one of the fellows that we could 
always go to, or I could always go to, get a straight answer 
without equivocation, and we are grateful to you for your 
service, sir.
    Mr. Hamre. Thank you. Thank you, sir.
    Senator Bennett. We are glad to have you where you are now.
    I sit in the Senate seat that was occupied by Reed Smoot, 
the author of the Smoot-Halley tariff.
    Paul Johnson says in his book, the Smoot-Halley tariff did 
not cause the Great Depression. It simply exported it to the 
rest of the world.
    [Laughter.]
    I think we should have learned by that--and by the way, 
Senator Smoot was an exemplary Senator in most other ways.
    He just was wrong on the issue of protectionism and the 
1930's version of globalization. And he thought that the U.S. 
market would be big enough for U.S. products and U.S. companies 
so that they could survive selling only to the U.S. market and 
put barriers that would prevent anybody else from coming here 
and, consequently, other people going.
    Where I am going with this if I hear what you are saying, 
is, in today's market, if we prevent U.S. companies from 
exporting this technology elsewhere, we are guaranteeing that 
they are in a tiny market where they ultimately cannot survive 
because you cannot survive with a product that sells only in 
the U.S. market in today's world.
    You have to be able to spread your overhead costs and your 
research costs among sales worldwide, or those costs are going 
to kill you. And ultimately, all this technology will be in 
foreign hands simply because, through a protectionist attitude. 
And this is not driven by economic protectionism. It is driven 
by security protectionism. But the impact on the economy is 
exactly the same.
    Am I right in assuming that we could destroy American 
companies by shutting them off from markets elsewhere and 
create the circumstance that you described where we have to go 
to the Loire Valley rather than the Silicon Valley?
    Mr. Hamre. Yes, sir. And undermine alliance relationships. 
I mean, if you do not let your allies team up with your company 
so that they can jointly develop things, they are going to go 
off and do their own thing and we are going to have inter-
operability problems that are going to just block our ability 
to fight together.
    Mr. Hicks. I agree. I do not think I need to comment.
    Senator Bennett. Okay. Well, I have nothing further then, 
if 
you agree.
    [Laughter.]
    I will quit while I am ahead. Thank you.
    [Laughter.]
    Senator Sarbanes. Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman.
    First of all, thank you again for your public service and 
your comments today. I share the concern that in the global 
economy that we have today, we have to look at the realities of 
what we can control and not control and focusing on national 
security while focusing also on the ability for our companies 
to compete and be successful in a world economy.
    It has been a difficult balance to bring that together to 
end up with this legislation.
    I think the bottom line for our colleagues and for the 
public is the question of national security, and if you believe 
that will be enhanced or diminished by this bill. I would 
appreciate both of you commenting for the record on that.
    Mr. Hamre. I personally believe that a bill to reform our 
export controls is essential for our national security in the 
future because I think what we are doing now is undercutting 
the long-term viability of our strategy, our strategy to work 
with allies, our strategy to be competitive internationally, to 
have a dynamic economy. And I think export controls, as they 
currently exist, are now undercutting that. I think there needs 
to be a new system. I think your bill gets us to the new 
system.
    Let me say, I think there are a few cases even where it is 
hard to control, we still want to try. Nuclear technology, I 
want to try to control that at almost any cost. Precursor 
chemicals that go into chemical weapons, biological sequencing 
devices, things like this, I would like to try to control that.
    But we are spending the bulk of our time and our money 
controlling things that do not matter. Five-ton trucks, and 
equipment like that. We are wasting resources that do not 
really provide national security and really become a serious 
impediment to cooperation and we are diverting them away from 
the things where we do need to spend money for national 
security, through export controls.
    Your bill is essential, and I think it is a step in the 
right direction. I leave it to you working with the 
Administration to work out the fine details. It has to be that 
way. You have to trust them. They have to know what you want. 
And rather than have an outsider and a has-been like me tell 
you what it ought to be, work with them to get the final fine-
tuning.
    But absolutely, you have to get this bill moving for the 
good of the national security.
    Mr. Hicks. For the record, I agree with John. I would like 
to add something to that. In the past, I recall restrictive 
export control issues has not allowed us to take advantage of 
the globalization in a positive way.
    There are a lot of things outside, and I think John has 
talked about some of them--the cooperation we can make with 
allies, the benefits we can get from allies--that bills in the 
past have very often made them unlikely to want to do it.
    People who would say, look, I am not going to buy this from 
you because I cannot include it in my system, and all of a 
sudden, I have to get permission to sell it. And that may take 
forever.
    My view is that a bill like this is crucial, not only 
because it opens up the issues for business, but it allows us 
from the standpoint of defense to have a better utilization of 
the globalization issues. But, we are not the only smart people 
in the world. I would like to think we were, but we are not. We 
do have the tremendous economy and the ability to build things. 
We should really take advantage of what we can do well.
    I am afraid that what has happened to the defense budget is 
we are losing that. I am not saying it is gone. But if you look 
at what has happened to our defense industry as a whole, it is 
a changed world from what it was 15 years ago when I was Under 
Secretary.
    And not for the better, I think.
    Senator Stabenow. Thank you.
    Senator Sarbanes. Well, gentlemen, I am very pleased to 
welcome you here.
    Both of you have made really very distinguished 
contributions to our national defense. You had careers in the 
public service which I think command the respect of us all. You 
are intimately familiar with the challenges of implementing our 
export control system on dual-use technologies, those that can 
have both commercial and military applications.
    And of course, as you well know, it is a very difficult 
balance to strike between the national security interests and 
our trade interests in terms of encouraging exports.
    Mr. Hamre, I want to thank you for the role you played as 
Deputy Secretary of Defense in helping to shape the 
legislation.
    I think Senator Enzi would agree with me that it was an 
important contribution, and the work of the Defense Science 
Board Task Force, Mr. Hicks, in which you have been so 
intimately involved.
    I have just a couple of observations.
    First, I cannot allow this to pass. This is an aside issue.
    Mr. Hicks, you said that the world is more dangerous now 
than it was then, referring back to the Cold War period. People 
say that all the time and I have decided that I just want to 
raise a kind of caution light or a red light to that comment.
    I do not think that the world now is a nondangerous place. 
There are lots of dangers out there. But I do not accept the 
proposition that it is more dangerous now than it was then when 
we were in the midst of the Cold War.
    I just want to make that comment, for whatever it is worth. 
Now here's my concern as I listen to you this morning. Some of 
your statements and positions overreach this bill. They in a 
sense go beyond this bill. I am concerned about that because 
there has been great difficulty in getting this bill as far as 
we have gotten it and we were not able to get it through.
    It is not as though we were able to move it through and we 
are just coming back to do a technical exercise here. We still 
have the problem of confronting others who think that the bill, 
even as it is written, goes too far.
    And of course, some of what you have said this morning 
would go further. It is actually not in the bill. And I want to 
try to be clear about that because we do not want to add some 
extra weight to this bill as we try to move it through.
    Now much of what you have pointed to, the bill I think 
takes care of and I think it does address a lot, this 
transparency issue.
    It also addresses getting a decision for the private sector 
in a reasonable period of time, which I think is a very 
important issue. And of course, Senators Enzi and Johnson 
worked so hard on this in the last Congress and I think did a 
really very first-rate job of sort of crafting this.
    Let me just put this to you, although, Mr. Hamre, you seem 
to move off of this position in a response to Senator Stabenow, 
and I was encouraged by that.
    Earlier, you were saying that the United States should I 
think try to control things only when there is an international 
consensus with our allies that these things should be 
controlled. That is a pretty common-sense observation because 
if they won't control it and they can do it, then they can just 
circumvent us. But a total adherence to this proposition would 
mean that the lowest common denominator could well end up 
setting the standard.
    So, you really have the question, how do we provide the 
leadership to try to get to a higher standard? We have had 
instances in which we have undertaken to do that. In the end, 
the others came around. Not many examples, but there are 
examples of that.
    And of course, you said to Senator Stabenow, as I 
understand you, that there are certain areas, certain 
technologies, I guess that you would not be willing to transfer 
in certain categories, even if others had at least some aspects 
of that technology.
    Presumably, they want the American technology. So there is 
a certain bonus that goes with it. This bill does not preclude 
the United States taking that position, that leadership 
position, or making some judgment that there are certain 
countries that we do not want to trade with in any event, for a 
whole host of reasons unrelated to the spread of this 
technology.
    I wonder if you would just address that.
    Mr. Hamre. Sir, yes, thank you.
    First of all, let me say, I agree with you that what we 
ought to do is first lead with a policy initiative to try to 
create an international consensus that things should be 
controlled. I think we did that when it came to nuclear 
material. We did that when it came to chemical-biological 
materials. We did that on missile technology.
    And our problems tended to be places like China or North 
Korea, that did not observe those conventions and we were 
trying to get them to observe those conventions.
    We were still holding our companies to them, though, 
because we felt that that was important.
    I think that is the inherent tension of using national 
security and export controls to try to accomplish those goals.
    I do not think that we ought to just unilaterally as a 
country say, well, we do not like country X and therefore, we 
are going to try to deny them something, and the rest of the 
world does not agree with the policy goal until we build a 
consensus for that.
    All we are really doing there I think is hurting American 
companies. We may still choose to do that and that is 
ultimately what you are going to decide. That is what Members 
of Congress do.
    Senator Sarbanes. Iraq, for example.
    Mr. Hamre. I think that is a very good instance. We had a 
lot of people with Iraq who just do not believe any longer that 
the sanctions should be in place.
    We do. And this is going to be a tension. We are going to 
have to figure out how--we either have to recreate an 
international consensus around Iraq or find another solution. 
But right now, we have great tension. And that has to be 
resolved. That is one of the real challenges for the new 
Administration.
    I think we have a left-over of the 1990's where we really 
tried to create foreign policy through export controls that 
only got unilaterally imposed on American companies. And 
indirectly, we tried to impose them on others.
    And frankly, that is now a great sense of frustration and 
tension inside the community. You hear that all the time.
    And I think it has to start with what you said. You have to 
build the consensus for the foreign policy objective first. I 
absolutely agree with that.
    I do think that what we have tended to let the kind of 
bureaucratic momentum carry us along and pretend that there is 
a consensus around stuff that really does not matter. And it is 
like the 5-ton trucks and all the little stuff that, frankly, 
is not important, but it just gets caught in the inertia of 
regulatory processes.
    Senator Sarbanes. I am trying to focus on the important 
stuff.
    Mr. Hamre. Yes, sir.
    Senator Sarbanes. Can you think of a country that has taken 
a lead on export controls beyond or ahead of the United States?
    Or has it been our role, so to speak, to inevitably be the 
leader, the one who's trying to put together these regimes on 
the movement of this technology?
    Mr. Hamre. Well, sir, I think we have been a leader, but I 
think we have had good partners. I think when you get to, for 
example, nuclear technology, Japan has been very cooperative 
and very much leading in trying to be an agent for that in 
Asia. You will find that the United Kingdom was very strong. 
France and Germany are very strong on precursor chemicals.
    So where there is an agreement, these are dangerous, 
terrible things. We ought to do what we can and use this as an 
additional tool to control. I think you see that there is 
cooperation. That ought to be the centerpiece for designing a 
system. Your lowest common denominator approach, unfortunately, 
is the norm in the Wassenaar process. That was what we were 
fighting all the time on encryption, is that people were going 
to a lower common denominator time after time. Then we had to 
just say, we have to design a new system, a very different 
approach to make it work for that.
    Senator Sarbanes. Mr. Hicks.
    Mr. Hicks. I would make two comments. One is, I think one 
of the reasons that we have been the leader in the past is 
because we had the stuff. We had the lead in most of the 
technologies and certainly the capabilities which, I do not 
know if you were here when I was talking about this. I think it 
is important we focus on capabilities more than technologies 
because that is where the real rubber hits the road.
    As far as whether this is a more dangerous world, let me 
give you some feelings about that.
    That is in the eyes of the beholder, I am sure. And my 
beholding is that we have had nuclear capabilities, the 
deterrence from a nuclear standpoint, which, in my mind, may 
have put us on the edge of the problems, but it kept peace from 
that standpoint for a long time for a major war.
    We still got ourselves racked up in a Korea or a Vietnam. 
But certainly from the standpoint of the Soviet Union and China 
and so on, the Soviet Union has been the only real threat, our 
nuclear capability, which I think we have to maintain, was 
crucial.
    Now why I think it is a more dangerous world now is that we 
see a lot of capabilities coming out in other countries that we 
are not friendly with that can prevent us from doing some of 
the things I think we want to do nationally, internationally, 
worldwide, in our own interest.
    Part of that problem in my mind is that we have been able 
to rely upon nuclear deterrence. And in those cases, what do 
you do if you have a small country that you know you have to 
take care of, that you would like to be able to suppress?
    Do you want to nuke them? I do not think so. That is a 
terrible problem for a president to have to handle.
    What we have not done is to take our conventional 
capabilities and put them to a position where they are 
equivalent to what we had in what I call a real deterrent.
    A conventional deterrent says that you have to be able to 
do major damage to an infrastructure of a country without 
nuclear weapons. And by the way, when you do that with what we 
have available to us, which is smart weapons and so on, you do 
this with a minimum of casualties.
    Why I say it is more dangerous is because we do not have 
the deterrent we had in those times that I think we must have 
now.
    And I believe our approach to legacy systems will not lead 
us there. And that is why I hope that the studies that Mr. 
Rumsfeld is pushing will lead to a proper approach to that 
issue.
    Senator Sarbanes. Well, the only place I differ with you is 
using the word more. I think it is a dangerous world.
    There is a movie around town now, ``13 Days.'' You would be 
hard put to see that movie and not figure that was a pretty 
dangerous world back then, and continued on of course for a 
period of time. And may come back again. I hope now.
    Well, my time is up. I do want to thank you for your 
testimony. If you have the opportunity, if you can work through 
the bill and give us some specific suggestions, with an 
appreciation of the tasks that exist here in terms of trying to 
move this legislation through.
    You come with one point of view, but there is another point 
of view out there that we have to deal with, and it stymied us 
in the last Congress. Hopefully, it won't do so again in this 
Congress.
    I think that the work that Senators Enzi and Johnson did 
was really an excellent piece of legislative craftsmanship and 
that is the bill that we have now put in and we are going to 
try to move it through.
    Chairman Gramm. Thank you, Senator Sarbanes.
    I know, Mr. Hamre, we promised you that you could get to an 
11 a.m. call.
    I would say that I agree with Senator Sarbanes. I think we 
do live in a dangerous world and I think we have many problems. 
I think there are great uncertainties in this new world.
    But I do not think anybody can logically conclude that the 
world is more dangerous today than it was in 1980. I think the 
world is a much safer world today than it was in 1980, and I 
think as a result, we have the ability to do a lot of things 
now we could not do then, and we want to have more ability, 
which is what all this is about.
    Thank you both very much. We stand adjourned.
    [Whereupon, at 10:55 a.m., the hearing was adjourned.]
    [Prepared statements, supplied for the record follow:]

                PREPARED STATEMENT OF JOHN J. HAMRE, PHD

                 President and Chief Executive Officer
             Center for Strategic and International Studies

                           February 14, 2001

    Mr. Chairman, Members of the Committee, thank you for inviting me 
to testify this morning before this distinguished group. Let me commend 
you at the outset for holding this series of hearings, and for your 
willingness to tackle this critical issue. While many of our days are 
filled with small and sometimes trivial activities, this is momentous 
legislation. This is precisely what the U.S. Congress is supposed to 
do--weigh the pressing matters of our day, assess the positive and 
negative implications of current policy and design a new approach for 
the future. Only the U.S. Congress can handle such large and important 
issues facing the country, and I congratulate you for your leadership.
Summary
    Let me state the essence of my testimony in summary form at the 
outset. America needs effective export controls to protect its national 
security. Our current system of export controls fails that test--fails 
badly. It provides inadequate security where it is most needed, and it 
imposes counterproductive procedures that I believe are now causing 
security problems. America's security rests not just with blocking the 
export of important technology to potentially dangerous adversaries. It 
ultimately is grounded in a dynamic and innovative economy, a creative 
society and an inventive and industrious citizenry. Our times are 
characterized by international economic and scientific activity and 
collaboration. Government activities that block these natural and 
developing patterns of science and commerce will ultimately imperil our 
security. We should have such impediments only where they contribute to 
genuine and immediate security threats. Hence, it is the task of this 
Committee to develop a new framework for export controls that protects 
America from the loss of critical technology, but promotes the economic 
vitality and growth of our economy.
America Needs Effective Export Controls
    Mr. Chairman, at the dawn of the Cold War when it was apparent we 
faced a large, ominous and growing threat, America crafted a long-term 
national strategy. We could not and chose not to match the military 
might of our opponent tank for tank, soldier for soldier. Instead, we 
sought to match the quantitative might of the Warsaw Pact with the 
qualitative superiority of American armaments. Export controls played a 
critical role in our strategy. We needed to insure that our side in the 
global struggle had superior technology for the vitality of our economy 
and the sophistication of our forces. We invested in high technology 
and we sought to block its loss to our opponents through a multilateral 
system of export controls.
    While it was arguably an inefficient strategy, it worked. We never 
fully blocked the loss of technology to our opponents, but we slowed 
its loss to stay ahead in the long-term race. Two dimensions to the 
policy were critical--a steady investment in new technology and a 
systematic method for monitoring its export to limit its transmission 
to our opponents.
    During the last 20 years, export controls were expanded to include 
a number of so-called ``rogue'' nations that sought to develop and 
field dangerous new weapons of mass destruction. Joining with other 
countries, the United States established a multilateral framework to 
block the proliferation of technology and equipment that would 
facilitate the construction of dangerous arsenals in these nations. 
While this too has not prevented proliferation, it has, I believe, 
slowed down the dispersal of dangerous technology to irresponsible 
nations. That remains a security concern to this day.
Export Controls Become More Complex and Pervasive
    During the 1980's and the 1990's, export controls became a major 
new dimension for America's foreign and security policy. The growing 
complexity of products and commodities required ever more elaborate 
rules and regulations. The collapse of the Warsaw Pact and the rise of 
rogue nations greatly expanded the use of export controls as a major 
element of foreign and security policy. And frankly, it often became 
easy to legislate restrictions on trade as a means to express our 
policy concerns and frustrations.
Export Controls Have Now Become a Security Problem
    Three factors have combined, however, to make export controls a 
serious problem, and increasingly a counterproductive solution to 
national security.
    First, the nature of industry and business has changed dramatically 
over the past 20 years. Twenty years back, most advanced equipment was 
manufactured in geographic proximity. Design engineers had to be 
relatively close to the production facilities, at least in the initial 
phases of production, in order to work out problems that developed 
during production. Today, modern design tools permit design teams to be 
located around the world and never near the production location or 
locations. Our export control system was designed at a time when design 
and manufacturing was local. Today the design and manufacturing process 
is international.
    Second, we are living in a time of business partnering in complex 
enterprises. We see the rise of international alliances, designed 
either to reduce the risk associated with the development of new 
products or to insure easier access to global markets. These 
international partnerships are good for American business in that they 
utilize the comparative advantage of others where it exists and help to 
insure market access for American products. Yet export controls are now 
undermining such partnerships for American firms because companies in 
other countries cannot count on and plan with confidence that licenses 
will be approved on a timely basis.
    Third, where the United States had an overwhelming technology 
advantage 20 and 30 years ago, we now find comparable capabilities 
around the world. Increasingly American goods are competitive, but not 
necessarily superior to foreign-produced goods. Blocking American 
exports does not necessarily prevent other countries from gaining 
access to high technology.
    The export control system has tried to stay current with these 
growing complexities by developing ever more elaborate and complex 
regulations. This has occurred at the same time that the American 
public has demanded streamlined processes and more efficient 
government. As such, too much of our export control resources are 
devoted to licensing relatively benign transactions, diverting 
resources away from far more important and dangerous transactions. In 
demanding to put a stamp on every export transaction, then ultimately 
approving 99.4 percent of the requests, we are not really protecting 
our security. In fact, we are diverting resources from protecting the 
most important technology and products.
    More important, these factors in combination have undermined 
desirable collaboration between American companies and companies 
located in allied countries. I believe we should be trying to encourage 
greater collaboration with allies in order to further knit together our 
economies and our interests. Instead, our export control procedures are 
driving a wedge between the United States and our friends and allies. 
Our export controls also increasingly shelter a market for our 
commercial competitors to exploit. Indeed, I believe for some important 
sectors, the satellite industry being a good example of this, we are 
effectively creating incentives for foreign companies to develop their 
own technology solutions and avoid collaboration with the United 
States.
A New Framework for Export Controls
    Mr. Chairman, as I said at the outset, I strongly believe that 
America needs effective export controls for our national security. But 
we need export controls that meet two important tests. First, export 
controls must recognize and complement modem business practices. 
Because high-technology business today is international, we need export 
control procedures that recognize transnational business models.
    Second, effective international export controls require a consensus 
on the threat we face together. We have an international consensus in 
important areas. Internationally we maintain controls over nuclear-
related technology. Frankly, these controls are so important that they 
should be strengthened. There are effective multilateral controls on 
the export of precursor products for chemical weapons. There is a 
consensus on export controls on missile-related technology. Effective 
export controls must begin first with a shared consensus on threats. 
Too often the United States has attempted unilaterally to impose its 
policy concerns on the rest of the world through unilateral export 
controls. History shows that this is largely ineffective and 
counterproductive. America fails to prevent our would-be opponents from 
acquiring the technology and we block American companies from the 
business.
    You have been working on a new approach to the Export 
Administration Act for some time. I realize it is a complex process to 
balance the competing perspectives of all affected parties and to 
strike a balance. I suspect that no one will completely agree with your 
approach. That is to be expected, and that is precisely what the 
constitutional framers anticipated when they created the United States 
Congress which is uniquely suited to hearing and balancing the 
conflicting perspectives of all affected parties.
    Therefore, I do not think it is helpful for me to give you a 
precise formula. Instead, let me outline the broad features of a new 
framework that I think are needed to meet the challenges outlined 
above. This framework would, in large measure, work for both military 
items on the so-called ``munitions list'' and dual use items regulated 
by the State Department.
Three Partnerships
    I believe an effective new framework for export controls must be 
grounded on three partnerships--a partnership between the U.S. 
Government and its business community, partnerships between the U.S. 
Government and the governments of allies and friends, and third, a 
partnership inside the Federal Government between national security, 
intelligence, commerce and law enforcement departments. Let me briefly 
outline each of these three partnerships.
    The first critical partnership is between the government and 
industry. The current system is adversarial. Tens of thousands of 
export officers in companies are preparing forms to try to get licenses 
past a few hundred government reviewers. The first goal of a new system 
should be to convert those thousands of company export administration 
employees into extended enforcers of a system.
    I believe the best way to accomplish this is to convert from a 
transaction-based licensing system to a process-based licensing 
approach. In essence, rather than require companies to submit licenses 
for each individual sale, instead the government should license the 
export control procedures of a company. If a company had acceptable 
internal controls in place, it would be free to export controlled 
commodities without individual licenses. The government would shift its 
focus to monitoring and approving internal control procedures and spot-
checking the functioning of those internal controls. Under this 
approach, the thousands of export administration employees in private 
companies become the extended security element for our export control 
system.
    At the same time we need to fundamentally reassess what it is we 
are trying to control. By far the bulk of things we try to control do 
not represent critical threats to the United States if they fall into 
the hands of opponents. These things should come off the control lists 
now. We need a more objective and explicit process for determining what 
needs to be controlled. Government should provide an explicit 
explanation of why a technology should be controlled, from whom and for 
how long. I also believe we need a dynamic assessment process for 
determining risk. When I was in the government we attempted to 
establish such a process for computer products, looking ahead to insure 
that we did not block computers that effectively became commodities in 
the marketplace.
    Third, the export controls need to be designed so that senior 
officials bear the obligation and the responsibility for deciding the 
policy. When I was the Deputy Secretary of Defense, I found often that 
policy decisions were being made on a defacto basis by lower-level 
government officials who in good faith were trying to extend their 
understanding of previous policy on new products and services. Yet I 
felt that was my job. I felt I had the responsibility for deciding new 
policy directions, yet too often I did not even know a license was 
pending or rejected until some extraordinary appeal action was mounted 
by a company or a concern. We need a more explicit process where new 
developments that require new policy determinations are made by senior 
officials, not by lower-level employees, extending through inertia the 
policies of the past.
    The second partnership is between governments. As business becomes 
transna-
tional in scope, the regulatory framework needs to similarly become 
transna-
tional. If we want to encourage American partnering with trusted 
friends and allies in order to foster closer collaboration for national 
security reasons, we must extend closer working collaboration 
government-to-government. At present the picture is mixed. I find very 
good collaboration among customs agencies, for example, when they 
collectively try to stop the flow of precursor chemicals. There is far 
less collaboration, however, where there is no shared policy consensus 
on the underlying risk we face and the goals of export controls.
    The Defense Department has pioneered a framework for government-to-
government partnerships for arms exports through the so-called 
``Declaration of Principles'' between the U.S. Department of Defense 
and the U.K. Ministry of Defense. Following these principles, the 
governments of the United States and the United Kingdom will police a 
shared industrial base perimeter, permitting relatively unregulated 
transactions in munitions between these two countries. This is modeled 
after the U.S.-Canadian export control exemption that has been in place 
for 25 years. This approach to defense industrial partnering should be 
extended to other countries, but only where the partner country commits 
to serious and extensive collaboration with the United States. This 
does not solve all military export control problems, but it will go a 
long way toward facilitating more efficient operations.
    Let me say at this point that the absence of such an agreement 
between the United States and another country does not preclude 
collaboration between companies in these respective countries. But it 
does mean that transactions between the United States and 
nondeclaration of principle countries would require ongoing licensing 
for arms exports. We also need to be careful that the bureaucrats do 
not make requirements for reaching such an agreement so convoluted that 
there is no prospect for moving forward. This framework should promote 
defense cooperation, not block it.
    The third partnership is inside the U.S. Federal Government between 
the agencies of government. Currently the interagency process is more 
turf-prone than consensus prone. It is inevitable that we will have 
conflict among agencies. That is to be expected and indeed can be 
healthy. But the turf wars too often block the flow of information and 
impose added burdens on American companies. We should work to a common 
government-wide integrated database for licenses. The government also 
needs to develop more effective ways for integrating other data bases 
so that questionable transactions can be identified by cross-
correlating information that is already being collected by the 
government for other purposes.
    We can adopt much of this approach to the dual use exports that 
would be regulated by an Export Administration Act. We need to build 
the partnership between government and industry, by focusing on a 
company's processes and procedures rather than on licensing each 
transaction. We need to remove commercially available items off the 
control lists, and we need to make senior officials bear responsibility 
for decisions. Improving partnership among the many export control 
agencies is also essential.
    However, this needs to be done in the context of an international 
climate where, for dual-use items not controlled for reasons of 
nonproliferation, there is little agreement on prospective threats and 
little prospect for consensus. These controls fall under the mandate of 
the Wassenaar Arrangement. Its lists are too long and its aims too 
outmoded to contribute effectively to international security. I applaud 
the Committee for its work in this bill to modernize our national 
export controls and I hope the new Administration will seek to do the 
same with a multinational controls in the Wassenaar Arrangement.
Conclusion
    Mr. Chairman, I know that the Committee has worked long and very 
hard on its legislation to amend the Export Administration Act. This is 
very important work and I commend the committee for it. Only the U.S. 
Congress is capable of this reform. It is critical and you must be 
successful. The long-term security of this country rests in your hands.
    Thank you for the opportunity to testify before you today. I would 
be pleased to answer any questions that you might have.
                               ----------

               PREPARED STATEMENT OF DONALD A. HICKS, PHD

                      Chairman, Hicks & Associates
          Representing the Defense Science Board Task Force on
                       Globalization and Security

                           February 14, 2001

    Mr. Chairman and Members of the Committee: I am pleased to be here 
today. I will not provide an assessment of the draft Export 
Administration Act of 2001 that is under consideration by this 
Committee. I will, however, speak about the realities of globalization 
and their implications for national security and, more specifically, 
for export controls as a function of national security.
    My remarks will be based primarily on the deliberations and 
findings of a Defense Science Board Task Force on Globalization and 
Security that I chaired, and which completed its work in December 1999; 
I have provided each Member of this Committee a copy of the Task 
Force's final report. The Task Force was chartered by the Under 
Secretary of Defense for Acquisition and Technology to: (1) examine the 
impact of globalization on DoD, and (2) advise the Department on 
innovative policies, procedures and/or technologies that may allow DoD 
to maximize the benefits of trends associated with globalization while 
concurrently mitigating any associated risk. Not long into 
deliberations, the Task Force refined its overarching objective into 
advising the Department of Defense on how to enhance U.S. military 
dominance in the face of globalization. This course change stemmed from 
members' strong belief that the United States can achieve a net 
military capability gain over its potential competitors if it 
vigorously exploits the globalization trends. Conversely, members 
believe as strongly that an overly cautious approach to dealing with 
globalization will result in a net erosion of U.S. military dominance, 
due primarily to relative or asymmetrical capability gains made by 
potential adversaries who are, in fact, seizing the opportunity to 
exploit the global availability of militarily useful technology, 
products and services.
What Is Globalization and How Is It Affecting DoD?
    Before discussing the Task Force's key findings and 
recommendations, it is important to establish a working definition of 
the now-ubiquitous term ``globalization''--which means different things 
to different people--and to offer the Task Force's broad sense of 
globalization's impact on DoD. From the Task Force's perspective, 
globalization--defined as the integration of the political, economic 
and cultural activities of geographically and/or nationally separated 
peoples--it is not new, but rather is a continuously evolving process. 
What is new is the dramatic acceleration of global integration and the 
resulting political, economic, and technological change the world has 
seen over the last decade. Goods and services, materials, capital, 
technology (know-how and equipment), information, customs, people, and 
energy all flow across national borders, not always freely but most 
often successfully. Most important, the phenomenon of accelerated 
global integration is largely irresistible. Thus, globalization is not 
a policy option, but a fact to which policymakers must adapt.
    Globalization has accelerated as a result of many positive factors, 
the most notable of which include the collapse of communism and the end 
of the Cold War; the spread of capitalism and free trade; more rapid 
and global capital flows and more liberal financial markets; the 
liberalization of communications; international academic and scientific 
collaboration; and more rapid and efficient forms of transportation. At 
the core of accelerated global integration--indeed, its principal cause 
and consequence--is the information revolution. Driven by quantum leaps 
in telecommunications and computing efficiency and effectiveness, the 
information revolution is knocking down barriers of physical distance, 
blurring national boundaries and creating cross-border communities of 
all types.
    Globalization affects DoD in two distinct, if overlapping, ways:
    First, globalization is altering fundamentally the composition of 
DoD's supporting industrial base. DoD once depended upon, and could 
afford to sustain, a dedicated domestic industrial base for the 
development, production and provision of its equipment and services. 
Today, the ``U.S. defense industrial base'' no longer exists in 
its Cold War form. Instead, DoD now is supported by a broader, less 
defense-inten-
sive industrial base that is becoming increasingly international in 
character. This 
transformation is due largely to the confluence of three factors: (1) 
deep cuts in 
U.S. defense investment in the Cold War's wake (procurement and R&D are 
down 70 percent and 25 percent in real terms, respectively, since the 
late-1980's), (2) an explosion in commercial sector high-tech R&D 
investment and technological advancement, and (3) a shift in 
procurement emphasis from weapons and platforms, per se, to the 
sophisticated information technologies so amplifying their 
capabilities.
    Indeed, yesterday's U.S. defense industry is, with few exceptions, 
reconstituting itself into a global, more commercially-oriented 
industry. The traditional core of the U.S. defense industrial sector--
those firms still focusing nearly exclusively on the defense market--
comprises firms that will focus increasingly on the integration of 
commercially developed advanced technology to produce military 
capabilities. That which remains of this sector:

 has undergone an intense period of consolidation;
 has already begun--although mainly in the lower industrial 
    tiers--the process of integration across national borders, via 
    mergers, acquisitions, joint ventures and strategic partnerships 
    with European counterparts, who are themselves in a period of 
    rationalization and consolidation; and
 is now supplied to a significant degree by the commercial 
    sector and is increasingly dependent on commercial business and 
    defense product exports for growth and good health.

    It is now the commercial sector, which pays scant attention to 
national boundaries, which is driving the development of much of the 
advanced technology integrated into modern information-intensive 
military systems. This is especially true of the software and consumer 
microelectronics sectors. The National Science Foundation reports that 
over 80 percent of high-technology exports (some of them dual-use) 
originate from outside the United States. Moreover, high-technology 
commercial exports dwarf arms exports in magnitude. Accordingly, future 
U.S. military-technological advantage will derive less from advanced 
component and subsystem technology developed by the U.S. defense sector 
than from the military functionality generated by superior, though not 
necessarily U.S.-based, defense sector systems integration skills.
    Second, and perhaps most significantly, globalization is reshaping 
the military-technological environment in which DoD must compete. 
During most of the Cold War, the United States enjoyed a near-monopoly 
on the development of and access to advanced military technology, and 
could, to a large degree, deny other nations access to such technology 
in order to maintain a wide military capability gap between itself and 
its potential adversaries. No longer. It is now likely that a majority 
of militarily useful technology will eventually be available 
commercially and/or outside the United States as a result of many 
factors, all of which are direct manifestations of the globalization 
phenomena. The United States remains the world's premier military 
technology integrator and developer of military systems; this is not 
likely to change. Over time, all states--not just the U.S. and its 
allies--will share access to the majority of the technology 
underpinning the modern military.
    In developing its findings and recommendations, the Task Force 
focused its energies on four specific areas: maintaining U.S. military 
dominance amidst global technological leveling; globalization of the 
U.S. defense industry; DoD acquisition of commercial technology, 
products and services; and personnel security. All four areas are 
important; however, I will concentrate the remainder of my remarks on 
the first one, as I believe it has the most direct relevance to the 
work of this committee.

Maintaining U.S. Military Dominance Admidst Global
Technological Leveling
Findings
    From a strategic standpoint, globalization's most significant 
manifestation is the leveling effect it is having on the military-
technological environment in which DoD must compete. Access to 
commercial technology is virtually universal, and its exploitation for 
both civil and military ends is largely unconstrained. Many of the most 
important enabling technologies for information-intensive U.S. concepts 
of warfare (that is, access to space, surveillance, sensors and signal 
processing, high fidelity simulation, and telecommunications) are 
equally available to the United States, our friends and allies, and 
potential U.S. adversaries. In other words, much of the technology the 
United States is most anticipating leveraging to maintain military 
dominance--information-related technology developed largely in the 
commercial sector--is that which DoD is least capable of denying its 
potential competitors. The so-called ``Revolution in Military Affairs'' 
is, at least from a technology availability standpoint, a truly global 
affair.
    Compounding this narrowing of the U.S. technological advantage are 
continuing declines in DoD research, development, test and evaluation 
(RDT&E) and defense industry internal or independent research and 
development (IR&D) investment. In addition, government and private 
defense R&D investments are skewed toward near-term priorities (that 
is, upgrades to fielded systems and the development of legacy system 
replacements) and away from fundamentally new capabilities.
    Traditionally, defense industry IR&D has funded the development of 
many of the United States' most advanced military technologies and 
innovative integrated defense systems. Stealth technology is but one 
example. Industry has historically put about 3 percent of the DoD 
procurement budget back into IR&D. However, with a 70 percent decline 
in procurement budgets in the past decade, contractors not only have 
less to spend on IR&D, they appear to be using many of these funds to 
secure increasingly scarce line-item business and/or maintain profit 
levels. The result is severely depressed U.S. military-technological 
innovation when the premium on innovation has never been higher, and a 
defense industry devoted primarily to the development of what the 
military says it wants--legacy system replacements--and not necessarily 
what it needs to meet emerging strategic challenges. Accordingly, this 
trend must be reversed if the United States is going to maintain the 
capability gap between it and its potential adversaries.

Strategic Implications of Global Technological Leveling
    As the technological playing field levels, the United States' 
potential competitors will be able to modernize their forces and 
augment their overall capability relative to ours at a much faster rate 
than was previously possible. One reason is that they will be able to 
take multiple, concurrent paths to military modernization.
    A common path will be through an increasingly permissive and 
technologically advanced global conventional arms market. The arms 
market has undergone a striking transformation in the last 5 or so 
years, the root cause of which is the contraction in worldwide defense 
spending that has increased significantly the pressure on firms to 
export--and on governments to encourage them to do so. When combined 
with increasing level of crossborder collaboration, the black and gray 
market availability of most types of defense products, and the pressure 
on already export-minded firms to offer their most sophisticated 
equipment, these trends will progressively erode the effectiveness of 
conventional arms and defense technology export controls worldwide. 
With a few exceptions, advanced conventional weapons will be available 
to anyone who can afford them.
    Beyond the global arms market, the general diffusion of 
technological know-how and commercial availability of so-called 
``strategic'' or ``enabling'' dual-use technologies (that is, advanced 
machine tools, high-performance computing, manu-
facturing of biotechnology products) will likely yield rapid advances 
in competitor 
industrial infrastructure development and, in turn, indigenous weapons 
production 
capability. Moreover, the commercial sector will offer an increasingly 
wide array of both advanced components and subsystems (particularly 
software and microelectronics) to aid indigenous defense system 
production and system upgrades, and of full-up systems (particularly 
information and communications related) offering direct capability 
enhancement.
    Moreover, owing to the ready availability of many key military 
capabilities, states will be able to time their investments in order to 
peak militarily when their forecasted opponent is least suited to 
engage them. This may present a particularly vexing challenge to the 
United States, which, by virtue of its commitment to maintaining a 
large general-purpose force structure, must spread its investment 
resources much more broadly. Because DoD does not have the resources to 
modernize all force elements concurrently, it must alternate 
modernization efforts between major force elements, frequently at 
decade-long (or longer) intervals, making it all but impossible for DoD 
to maintain state of the art forces across the board. Often, the stated 
DoD or Service rationale for investing in a particular force element is 
rooted not in a strategic imperative, but rather in the fact that it is 
the said force element's ``turn'' to be recapitalized. This limits 
DoD's investment agility, and thus its ability to react swiftly to 
unanticipated strategic military-technical developments. Also limiting 
DoD in this regard are the lingering cultural and, to a lesser extent, 
regulatory constraints on tapping the commercial sector--by which 
potential U.S. competitors may not be similarly shackled. Consequently, 
and particularly as militaries become more reliant on commercial 
products and services, adversaries over which the United States is 
otherwise dominant can be expected to achieve superior capabilities in 
narrow--yet potentially critical--areas.
    Furthermore, with virtually the full range of military technologies 
and capabilities available, competitors will also be able to tailor 
more effectively their investments to their particular geo-strategic 
circumstances to achieve scenario-specific advantages over potential 
foes. As previous DSB studies have pointed out, those states preparing 
for potential conflict with the United States will seek to capitalize 
on the great distances U.S. forces must travel to engage them, and U.S. 
forces' near-absolute reliance on unimpeded access to and use of ports, 
airfields, bases, and littoral waters in the theater of conflict.
    To exploit these vulnerabilities, potential competitors are not 
trying to match DoD ship-for-ship, tank-for-tank, or fighter-for-
fighter. Rather, they are investing asymmetrically, channeling their 
more limited resources into now widely available (and increasingly 
affordable) capabilities, conventional and unconventional, that could 
allow them to deny U.S. forces both rapid access to their region and/or 
and sanctuary once in-theater. These include conventional antinaval 
forces (that is, ultra-quiet diesel submarines, advanced antiship 
cruise missiles and sophisticated sea mines); theater-range ballistic 
and land-attack cruise missiles (with the latter expected to be 
available in the thousands, and, increasingly, with low-observable 
characteristics); and nuclear, chemical and biological weapons.
    In addition, future U.S. competitors will leverage the commercial 
space sector to achieve so-called ``step function'' gains in antiaccess 
capability. Capabilities such as space-based communications, 
surveillance, navigation services and equipment will become 
increasingly available through a variety of multinational consortia. 
Such unobstructed access to space for C3ISR support will allow even the 
most resource-constrained adversaries to monitor the location of, 
target and precisely attack U.S. forces in the field, at theater bases, 
ports and airfields, and moving through critical naval checkpoints. 
Viewed in this manner, technological leveling--globalization's most 
strategically unsettling manifestation from a U.S. perspective--is 
clearly the engine of the emerging ``antiaccess'' threat.
    Consequently, there is growing--if uncelebrated--risk inherent in 
U.S. power projection and force modernization strategy. Strategic risk 
is defined here as a discernible decrease in U.S. forces' capability to 
protect vital U.S. interests relative to adversaries' capability to 
threaten them: a potentially serious erosion of military 
dominance. At the root of the problem are the inherent limitations--
namely, sluggish deployment times and heavy dependence on theater 
access--of the legacy, primarily short-range general-purpose force 
elements to which the vast majority of the Services' modernization 
funding is currently, dedicated and the correspondingly inadequate 
investment planned in long-range force projection capabilities (that 
is, long-range stealthy bombers, standoff missiles, and long-range 
reconnaissance/surveillance). Viewed in this light, the continued 
budgetary, strategic and force structuring primacy of legacy systems in 
DoD budgets has a clear and high opportunity cost: the investment 
agility necessary to transform U.S. strategy and forces to meet the 
emerging strategic challenges posed by global military-technological 
leveling.

Export Controls: An Imperfect Panacea
    One might, at first glance, reason that the United States could 
mitigate the undesirable effects of global military-technological 
leveling by unilaterally tightening restrictions on dual-use and 
defense technology exports, and by coordinating with its allies 
enhanced multilateral restrictions dual-use and conventional military 
technology exports. This approach worked reasonably well during the 
Cold War, that is, through the Coordinating Committee on Export 
Controls (CoCom). However, unilateral and multilateral controls today 
are no longer a significant factor affecting potential adversaries' 
access to highly sophisticated dual-use technology and they have been 
only marginally more successful in the conventional weapons arena.
    CoCom's success, for example, derived from its members facing a 
common threat--the Warsaw Pact and, to a lesser extent, China--and 
sharing a common objective: retarding Warsaw Pact and Chinese 
technological advancement. CoCom also benefited from the 
disproportionate leverage the United States, its leading advocate, held 
over the other members as the guarantor of Western security. The Cold 
War's end undermined this cooperative impetus, and the United States 
can no longer count on its allies, its closest competitors in the high-
tech sector, to follow America's lead. The lukewarm success of CoCom's 
successor, the Wassenaar Arrangement, is a testament to the declining 
utility of multilateral technology controls in the post-Cold War era. 
It also points to the utter futility of the United States attempting to 
control unilaterally technologies, products and services that even its 
closest allies are releasing onto the world market.
    Wassenaar's lack of strong central authority and its dearth of 
explicit target countries is a reflection of the times--the absence of 
a single large threat and lack of agreement over the nature and 
seriousness of the smaller threats. This inherent weakness has 
complicated its development and made it more difficult to achieve 
consensus among the expanded (from CoCom) membership on which states to 
which they should control exports. With the exception of a few 
unanimously targeted pariah states (namely, Iraq, Libya, Iran and North 
Korea), for which it has been a reasonably effective control mechanism, 
Wassenaar is proving, in the words of one observer, little more than a 
``paper tiger.''
    China is perhaps the best and certainly the timeliest example of 
the difficulty of coordinating multilateral technology controls in the 
new environment. Under CoCom, the West had a well-coordinated position 
on dual-use trade with China. In the wake of CoCom's dissolution, a 
chasm has developed between the United States and many of its Western 
allies, who no longer view China as a threat and have relaxed or lifted 
dual-use export restrictions to China accordingly. This, in turn, has 
rendered many U.S. controls on exports to China essentially unilateral, 
thus neutralizing their utility as constraints on Chinese acquisition 
of dual-use technology.
    Also limiting the utility of dual-use export controls is the 
ubiquity of critical technologies and the ease of their transfer. 
Consider the case of high-performance computing. Microprocessors, which 
are the essential ingredient for high-performance computers (HPC's), 
have long been a commodity product widely available on the world market 
from a vast range of sources. Personal computers are similarly 
difficult to control. Each year, United States and foreign companies 
manufacture millions of PC's and sell them the world over, often via 
mail order and the Internet. The technology to ``cluster'' these 
computers (for example, link them together to multiply their computing 
power) is also available online. Through clustering, it is possible to 
create computer systems ranging in computing power from 4,000-100,000 
MTOPS (millions of theoretical operations per second)--equivalent to 
the supercomputers currently under strict export controls. In other 
words, while the most advanced United States stand-alone high-
performance computers may be controllable, high-performance computing 
is not.
    High-performance computers are a good example of limited 
controllability, but the same is true for other sectors where the 
state-of-the-art is advancing rapidly, such as telecommunications, and 
controlled software. It is somewhat easier for the United States to 
control the transfer of large capital items, mainly because the 
customer base is smaller and the products cannot be easily and 
inexpensively cloned and/or scaled-up in capability (that is, as PC's 
are clustered into HPC-level systems). However, as is the case with 
HPC's, this does not mean the technology will not be available outside 
the United States. In some of these sectors, such as machine tool and 
semiconductor manufacturing equipment, the United States has a minority 
global market share and the technology is widely available abroad. In 
others (that is, satellites) the United States currently has a strong 
global position but is under growing pressure from formidable 
competitors.
    Some argue that the obstacles to effective multilateral controls 
suggest that the United States should become even more restrictive 
unilaterally. In some cases, this may be necessary, but doing so 
broadly in the face of globalization is likely, in the end, to do the 
United States more harm than good. DoD is relying increasingly on the 
U.S. commercial advanced technology sector to push the technological 
envelope and enable the Department to ``run faster'' than its 
competitors. DoD is not a large enough customer, however, to keep the 
U.S. high-tech sector vibrant. Exports are now the key to growth and 
good health. In the computer and communications satellite industries, 
for example, between 50 percent and 60 percent of all revenues come 
from foreign sales. Any significant restriction on exports would likely 
slow corporate growth and limit the extent to which profits can be put 
back into research and development on next-generation technology. This 
is particularly true for internal or independent R&D (IR&D) designed to 
address particular DoD concerns, which, because it is less likely to 
yield products with near-term commercial demand, would likely receive 
even lower priority during any IR&D decline. If U.S. high-tech exports 
are restricted in any significant manner, it could well have a stifling 
effect on the U.S. military's rate of technological advancement.
    If the United States responds to what some parochially and 
inaccurately view as a preventable hemorrhaging of U.S. advanced 
technology (vs. the irresistible leveling of the global technological 
playing field) by unilaterally tightening controls on high-tech exports 
to states such as China, new competitors in Taiwan, Korea, Japan, and 
Europe can be expected to move quickly to fill the market void. The 
U.S. lead in most dual-use sectors is based not on the United States 
being the sole possessor of the technology, but rather on the 
comparatively high quality of U.S. products and the efficiency with 
which they are produced (which enables competitive pricing). Shutting 
U.S. industry out of major markets such as China will necessarily 
create viable competition where little currently exists. As has been 
demonstrated in other sectors, the increased competition will not be 
limited to the Chinese market. New competitors will use their market 
share in China and all its benefits (that is, accelerated IR&D funding) 
as a springboard to challenge U.S. dominance elsewhere. In other words, 
if the United States were to unilaterally tighten dual-use controls to 
China, the loser is not likely to be the Chinese. Rather, the losers 
will be U.S. industry, whose technological and market leadership will 
face new challenges, and DoD, whose access to the world's most advanced 
technologies will be at the very least complicated, and perhaps 
compromised, by virtue of their being developed and produced by non-
U.S. firms.
    Furthermore, because the dual-use sector is fully globalized, 
export control tightening meant to deny single states such as China 
access to certain technology can do unintended damage to vitally 
important U.S. business relationships elsewhere. Congress' 1999 
decision to return commercial communications satellites to the State 
Department's U.S. Munitions List from the Commerce Department's dual-
use list--and the U.S. Government's interpretation of Congress' 
direction--may already be having such an effect. Consider the case of 
Europe. The United States and European space sectors are deeply 
interconnected. In the wake of the controversy leading up to the 
decision to move satellites back to State--intended by Congress as a 
means of tightening controls over satellite exports to China--the U.S. 
Government has become much stricter in its interpretation of the ITAR, 
which govern the export of items on the munitions list. This is 
particularly true of the DoD and its interpretation of ITAR Part 
124.15(a), which states specifically that: ``The export of any 
satellite or related item . . . or any defense service controlled by 
this subchapter associated with the launch in, or by nationals of, a 
country that is not a member of the North Atlantic Treaty Organization 
or a major non-NATO ally of the United States always requires special 
export controls, in addition to other export controls required by this 
subchapter . . .'' DoD has insisted on applying these ``special export 
controls'' on our NATO and major non-NATO allies (as is allowed for 
under Part 124.15(c)); it is this approach that may be proving the most 
damaging.
    Most European satellites--and most European military systems, for 
that matter--contain U.S. components that are also subject to the 
stricter controls. The U.S. Government's stricter interpretation of the 
ITAR may also be having a negative ripple effect on the behavior of the 
U.S. space industry, which has, in turn, ratcheted up its own security 
procedures. According to some in Europe, this is making it increasingly 
difficult to do business with the U.S. space industry. Said one 
European space industry official in a recent media report: ``To have a 
simple telephone conversation with a U.S. customer or supplier, I have 
to inform him of my wishes 30 days in advance, then fax him an outline 
of what I want to talk about. The fax gets passed on for clearance by 
the U.S. State Department: What is the purpose here--national security 
or protectionism?'' The long-term effects could be damaging. European 
defense/aerospace firms, which currently depend on U.S. companies to 
assure their supply chain, will logically look elsewhere for suppliers 
if the cost of doing business with the United States remains 
unacceptably high.
    A tightening of dual-use controls could also spawn--or hasten--the 
development of indigenous R&D and production capabilities where they 
might not otherwise flourish. For example, China has the capacity to 
produce high-performance computers indigenously. While China cannot 
currently compete with U.S. companies on the global market, they can 
produce machines with performance sufficient to provide many of the 
military capabilities they seek, though perhaps at greater time, effort 
and cost than would be the case with the highest performance computers. 
Denying countries such as China U.S. products could very well encourage 
their own development and production.
    Finally, increased technology protection amidst global 
technological leveling could well limit the special influence the 
United States might otherwise accrue as a global provider and supporter 
of military equipment and services. This includes intimate knowledge 
of, and access to, military systems that only the supplier would have, 
and that could prove militarily instrumental in crisis and conflict and 
is particularly true regarding communications and information systems.
    The strategic significance of the ongoing leveling of the global 
military-technological playing field cannot be overstated. It presents 
a direct challenge to the fundamental assumption underlying the modern 
concept of U.S. global military leadership: that the United States 
enjoys disproportionately greater access to advanced technology than 
its potential adversaries. This assumption also underpins the 
increasingly strained logic holding that technology controls are the 
sine qua non of U.S. military dominance.
    Such a parochial assumption is simply not consistent with the 
emerging reality of all nations' militaries sharing essentially the 
same global commercial-defense industrial base. The resulting erosion 
of long-standing technical and economic barriers to acquiring advanced 
militarily-useful technology will increasingly negate enduring U.S. 
advantages in technology development, namely, superior infrastructure, 
education and resources. By virtue of its comparatively large defense 
R&D investment--past and present--the United States will likely 
maintain over the long-term a developmental advantage over its 
competitors in a limited number of cutting-edge, defense-specific 
technologies; directed-energy weaponry is one example. However, such 
niche technological advantages will not sustain a meaningful, long-term 
military capability gap between the United States and its potential 
adversaries.
    Rather, with the whole world working from essentially the same 
military-technological ``cookbook,'' the United States will need to 
rely on its unique strengths as a ``chef'', that is, as the world's 
most innovative integrator of militarily useful--though not always 
U.S.-developed--technology. The United States will need to redouble its 
efforts at out-innovating, out-integrating and out-investing its 
competitors. This involves exploiting our currently superior systems 
integration skills, training, leadership, education and overall 
economic/industrial wherewithal to translate globally available 
technology into dominant military capability. To remain dominant, DoD 
will need to not only ``run faster,'' but also to ``pick alternate 
routes''--that is, respond asymmetrically to its competitors' 
asymmetrical strategies by intelligently altering its own warfighting 
strategy and investment plans. Indeed, sustaining military dominance in 
the face of technological leveling will ultimately come down to the 
age-old questions of how--and with what--DoD chooses to fight.

Key Recommendations
    (1) The Department needs a new approach to maintaining military 
dominance. Globalization is irresistibly eroding the military advantage 
the United States has long sought to derive through technology 
controls. Accordingly, the more the United States depends on technology 
controls for maintaining the capability gap between its military forces 
and those of its competitors, the greater the likelihood that gap will 
narrow. To hedge against this risk, DoD's strategy for achieving and 
maintaining military dominance must be based on the recognition that 
technology controls ultimately fail to deny U.S. competitors access to 
militarily useful technology.
    DoD must shift its overall approach to military dominance from 
``protecting'' militarily-relevant technologies--the building blocks of 
military capability--to ``preserving'' in the face of globalization 
those military capabilities essential to meeting national military 
objectives. Protection would play a role in an overall strategy 
for preserving essential capabilities, but its primacy would be 
supplanted by three other strategy elements: direct capability 
enhancement, institutionalized vulnerability analysis and assessment, 
and risk mitigation efforts designed to ensure system integrity.
    To shift its approach from technology protection to essential 
capability preservation, the Task Force recommended that DoD: (1) 
establish a permanent process for determining a continuously-evolving 
``short list'' of essential military capabilities, and (2) develop 
strategies for preserving each essential capability. Both the list of 
essential military capabilities and the strategies for their 
preservation are needed to inform the development of: U.S. warfighting 
strategy and the forces to underpin that strategy (by identifying how 
and with what the United States will need to fight to remain dominant), 
DoD positions on technology and personnel security (by helping to 
identify those capabilities and/or constituent technologies which DoD 
should attempt to protect and how vigorously they should be protected); 
and DoD acquisition risk mitigation measures (by identifying those 
systems that should be the focus of intense efforts to ensure system 
integrity).
    (2) DoD needs to change substantially its approach to technology 
security. The Task Force did not challenge the propriety of the 
Department of State's statutory obligation to evaluate proposed defense 
technology transfers against U.S. foreign policy objectives. That said, 
the leveling of the global military-technological playing field 
necessitates a substantial shift in DoD's approach to technology 
security, the principal objective of which is to help maintain the U.S. 
military-technical advantage. DoD should attempt to protect for the 
purposes of maintaining military advantage only those capabilities and 
technologies of which the United States is the sole possessor and whose 
protection is deemed necessary to preserve an essential military 
capability. 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 (that is, by 
undermining the industry upon which U.S. military-technological 
supremacy depends). Where there is foreign availability of 
technologies, a decision to transfer need only be made on foreign 
policy grounds by the Department of State. If foreign availability has 
been established, DoD should not review export license applications. 
This change will allow the DoD licensing review to concentrate on cases 
where the availability of technology is exclusive to the United States.
    Moreover, military capability is created when widely available and/
or defense-unique technologies are integrated into a defense system. 
Accordingly, DoD should give highest priority in its technology 
security efforts to technology integration capabilities and the 
resulting military capabilities themselves, and accordingly lower 
priority to the individual technologies of which they are comprised. 
For those items and/or information that DoD can and should protect, DoD 
security measures need improvement. The means for such an improvement 
might come from a redistribution of the current level of security 
resources/effort, whereby DoD relaxes security in less important areas 
and tightens up in those most critical. In short, DoD must put up 
higher walls around a much smaller group of capabilities and 
technologies.
    (3) 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, which would 
facilitate rapid and authoritative determination of the foreign 
availability of a particular technology or military capability, would 
serve two principal functions. First, it would allow those involved in 
the export licensing and arms transfer decisiomnaking process to 
determine what is available abroad and, thus, no longer U.S.-
controllable. Second, it would enhance U.S. access to the global 
technological marketplace by illuminating potential foreign sources 
and/or collaborators.
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