[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
__________
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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
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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.