    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

         THE EXPORT ADMINISTRATION ACT: A REVIEW OF OUTSTANDING POLICY
                                 CONSIDERATIONS

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

                                    HEARING

                                   BEFORE THE

             SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION AND TRADE

                                     OF THE

                          COMMITTEE ON FOREIGN AFFAIRS
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  JULY 9, 2009

                                   __________

                               Serial No. 111-35

                                   __________

            Printed for the use of the Committee on Foreign Affairs

     Available via the World Wide Web: http://www.foreignaffairs.house.gov/

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                          COMMITTEE ON FOREIGN AFFAIRS

                     HOWARD L. BERMAN, California, Chairman
    GARY L. ACKERMAN, New York           ILEANA ROS-LEHTINEN, Florida
    ENI F.H. FALEOMAVAEGA, American      CHRISTOPHER H. SMITH, New Jersey
        Samoa                            DAN BURTON, Indiana
    DONALD M. PAYNE, New Jersey          ELTON GALLEGLY, California
    BRAD SHERMAN, California             DANA ROHRABACHER, California
    ROBERT WEXLER, Florida               DONALD A. MANZULLO, Illinois
    ELIOT L. ENGEL, New York             EDWARD R. ROYCE, California
    BILL DELAHUNT, Massachusetts         RON PAUL, Texas
    GREGORY W. MEEKS, New York           JEFF FLAKE, Arizona
    DIANE E. WATSON, California          MIKE PENCE, Indiana
    RUSS CARNAHAN, Missouri              JOE WILSON, South Carolina
    ALBIO SIRES, New Jersey              JOHN BOOZMAN, Arkansas
    GERALD E. CONNOLLY, Virginia         J. GRESHAM BARRETT, South Carolina
    MICHAEL E. McMAHON, New York         CONNIE MACK, Florida
    JOHN S. TANNER, Tennessee            JEFF FORTENBERRY, Nebraska
    GENE GREEN, Texas                    MICHAEL T. McCAUL, Texas
    LYNN WOOLSEY, CaliforniaAs  TED POE, Texas
        of 3/12/09 deg.                  BOB INGLIS, South Carolina
    SHEILA JACKSON LEE, Texas            GUS BILIRAKIS, Florida
    BARBARA LEE, California
    SHELLEY BERKLEY, Nevada
    JOSEPH CROWLEY, New York
    MIKE ROSS, Arkansas
    BRAD MILLER, North Carolina
    DAVID SCOTT, Georgia
    JIM COSTA, California
    KEITH ELLISON, Minnesota
    GABRIELLE GIFFORDS, Arizona
    RON KLEIN, Florida
                       Richard J. Kessler, Staff Director
                    Yleem Poblete, Republican Staff Director
                                     ------

             Subcommittee on Terrorism, Nonproliferation and Trade

                       BRAD SHERMAN, California, Chairman
    GERALD E. CONNOLLY, Virginia         EDWARD R. ROYCE, California
    DAVID SCOTT, Georgia                 TED POE, Texas
    DIANE E. WATSON, California          DONALD A. MANZULLO, Illinois
    MICHAEL E. McMAHON, New York         JOHN BOOZMAN, Arkansas
    SHEILA JACKSON LEE, Texas            J. GRESHAM BARRETT, South Carolina
    RON KLEIN, Florida
                   Don MacDonald, Subcommittee Staff Director
              John Brodtke, Subcommittee Professional Staff Member
                Tom Sheehy, Republican Professional Staff Member
                 Isidro Mariscal, Subcommittee Staff Associate

                                C O N T E N T S

                                  ----------
                                                                       Page

                                   WITNESSES

    The Honorable John Engler, President and Chief Executive Officer,
      National Association of Manufacturers (Former Governor of the
      State of Michigan).............................................     7
    Arthur Shulman, Esq., Senior Research Associate, The Wisconsin
      Project on Nuclear Arms Control................................    20
    Owen Herrnstadt, Esq., Director of Trade and Globalization
      Policy, International Association of Machinists and Aerospace
      Workers........................................................    27

              LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

    The Honorable John Engler: Prepared statement....................    10
    Arthur Shulman, Esq.: Prepared statement.........................    22
    Owen Herrnstadt, Esq.: Prepared statement........................    29

                                    APPENDIX

    Hearing notice...................................................    52
    Hearing minutes..................................................    53
    The Honorable Donald A. Manzullo, a Representative in Congress
      from the State of Illinois: Prepared statement.................    54

         THE EXPORT ADMINISTRATION ACT: A REVIEW OF OUTSTANDING POLICY
                                 CONSIDERATIONS

                                  ----------

                             THURSDAY, JULY 9, 2009

                  House of Representatives,
                         Subcommittee on Terrorism,
                                Nonproliferation and Trade,
                                  Committee on Foreign Affairs,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 10:06 a.m. in
    room 2172, Rayburn House Office Building, Hon. Brad J. Sherman
    (chairman of the subcommittee) presiding.
        Mr. Sherman. We will bring the subcommittee to order. I
    would like to thank the witnesses for being here, at least two
    of them.
        I know that Governor Engler is on his way. I am sure his
    staff, who is here, will tell him that this opening statement
    by the chairman was erudite, concise, truly an inspiration.
        The purpose of this hearing is to examine how the U.S.
    Government can implement necessary safeguards to protect
    national security and simultaneously preserve American jobs in
    industries that are subject to export control. We must make the
    current system more effective to reflect economic realities.
    National security is the paramount concern.
        This hearing will hopefully provide the first step in a
    long overdue process to reauthorize the Export Administration
    Act, also known as the EAA.
        The Export Administration Act provided statutory authority
    for export controls on sensitive dual-use technologies, namely
    those technologies that have both a military and a civilian
    use. It expired 8 years ago, demonstrating that it is by no
    means clear that the United States Government needs a Congress
    since for 8 years we haven't had the law and things have gone
    on pretty much as they were before.
        Despite several attempts earlier this decade, Congress has
    not been able to reauthorize the Export Administration Act
    since it expired in 2001. Instead, our control over dual-use
    goods has been imposed for nearly a decade by regulatory fiat
    under the International Emergency Economic Powers Act.
        One problem that arises from this, however, is that the
    Commerce Department, the agency responsible for enforcing our
    dual-use export control regulations, and particularly the
    Bureau of Industry and Security, the BIS, lost its status as a
    law enforcement agency and therefore lost powers that it needs
    to carry out its job most effectively.
        Representative Manzullo and I have introduced the Export
    Control Improvements Act. We did this last year. We will be
    reintroducing it this year. We look for additional co-sponsors.
        The bill addressed a handful of issues related to the EAA,
    including the integration of export control data into the
    automated export system, which is a system basically currently
    maintained for statistical purposes. It reinstated the BIS' law
    enforcement authorities and dealt with diversion and
    transshipment of goods.
        Now, recently the GAO released a study on June 4 that
    demonstrated the obvious, but did so poignantly. It described
    how undercover investigators successfully purchased dual-use
    sensitive items from distributors and manufacturers using a
    bogus front company, fictitious identities and a domestic
    mailbox.
        They were also able to ship without detection by U.S.
    enforcement officials dummy versions of the items subject to
    export controls to known transshipment points for terrorist
    organizations and foreign governments who are hostile to the
    United States and attempting to acquire sensitive technology.
        More specifically, they obtained what are known as spark
    gap plugs, not to be confused with spark plugs or spark plug
    gapper. A spark gap plug is a device that can be used in either
    highly technical medical equipment or can be used in a nuclear
    device. It has a limited number of legitimate domestic users.
    It is of great economic importance.
        What this study demonstrated was what I think we already
    know, and that is if any one of 300 million people can buy it
    easily it is kind of silly to say that we are going to license
    its export, especially if it is a relatively small, non-bulky
    item.
        We can go through the charade and give ourselves the
    psychological joy of saying we are controlling sensitive
    technologies, but if anyone who happens to be a tourist in the
    United States, anyone who happens to be in the United States,
    any diplomat who happens to be in the United States can just
    desktop publish some stationery and rent a P.O. box and obtain
    a spark gap plug then it is going to be silly to say oh, we are
    going to prevent that from being exported.
        Maybe \1/10\ of 1 percent of the export packages are looked
    at by U.S. Government authorities, so maybe if you wanted to
    export 1,000 spark gap plugs you would have to buy 1,001, mail
    them all and figure you are going to lose one to the inspection
    process.
        There is no requirement when somebody is sending something
    abroad that they use a legitimate sender address on the
    package, so there is no risk of liability. You do risk maybe
    one-thousandth of your shipment.
        So we ought to be looking at a different approach to
    controlling items, particularly those items that are small and
    available to just about anybody in the United States. We ought
    to categorize items on a number of different formats. The first
    is the item freely available in the United States or is it,
    like some chemicals, subject to a licensing procedure?
        Second is size. How bulky is the item in a quantity of
    great significance to our adversaries? Obviously a bullet is
    small, but if you want to drive us out of Afghanistan you need
    a number of bullets that I would describe as quite bulky.
        Does the item have a legitimate civilian use? We saw orange
    patches designed to be used by U.S. soldiers to prevent our
    aircraft from shooting at them appear on the dress of Taliban.
    Why? Apparently because anybody in the United States can buy
    these orange patches designed for this exclusive military use.
    They have no legitimate civilian use. Once anybody in the
    United States can buy it, it is not surprising that the Taliban
    can get their hands on it.
        We have to look at whether allowing the export is good for
    American jobs or is in fact a job killer. We have circumstances
    where the entire purpose of the export is to ship something
    overseas, have it processed and have it returned to the United
    States. In other words, what looks like an export regulation
    that is hurting jobs may actually be preventing the offshoring
    of jobs.
        We should not think of sacrificing one iota of our national
    security in order to facilitate offshoring and job killing, and
    we ought to of course, as we do now, look at whether the item
    is widely available abroad without significant controls.
        Now, to control these items effectively may involve the
    jurisdiction of other committees, but I don't want to go back
    to my constituents and say we don't have an effective export
    control program. We do have a program that is killing a lot of
    jobs for no good reason, but don't worry about it. At least we
    didn't involve any of the other committees in Congress.
        It seems to me that we are going to need to decontrol some
    items and we are going to need to have control at the factory
    gate for other items. There is no reason why anybody in this
    country can buy a spark gap plug.
        So I look forward to taking a fresh look at our export
    controls, looking at national security, looking at the effect
    on American jobs, looking at what is really practical and
    perhaps creating a circumstance where we control a lot less and
    we control it a lot better.
        I now yield to our ranking member, the gentleman from
    California.
        Mr. Royce. Thank you, Mr. Chairman. I thank you also, Brad,
    for holding this committee hearing today, and I think it
    continues the subcommittee's work on this critical and rather
    arcane issue of export controls.
        Our satellite export hearing that we had in April I think
    produced some important language for the State Department
    authorization bill, and previous hearings that we have had
    spurred some greater efficiencies in terms of export licensing.
    It is clear to me, however, that more fundamental changes are
    needed here.
        An effective export control system does a couple of things.
    It denies sensitive technologies to foes, including Iran and
    terrorist organizations. It has to have the capacity to match
    sophisticated proliferation networks such as A.Q. Khan's
    network. At the same time, effective controls have got to
    facilitate technology exports to all others.
        Our national defense relies upon a technological edge.
    Having an edge in the face of increasing global competition
    requires vibrant manufacturers who depend upon robust exports
    and cooperation with governments and companies overseas.
        Unfortunately, our export control system is a bureaucracy,
    while our enemies, agile and determined and bold, are not. The
    system has trouble making decisions and focusing on the really
    important items and leaving the others alone.
        Two years ago, the subcommittee heard from the Government
    Accounting Office, and the GAO reported poor coordination
    between the State and Commerce Departments. Problem number one.
    Problematic disputes over which export control lists particular
    items belong on, and that problem continues. These factors harm
    investigation and enforcement activity, and there is a lack of
    systemic assessments which create, in their words, significant
    vulnerabilities.
        The GAO had designated the effective protection of
    technology critical to national security as ``a high risk
    area.'' Some progress has been made, but the high risk label in
    their assessment remains.
        The lack of a valid EAA statute is a problem. Dual-use
    items are regulated through a patchwork of emergency
    authorities and executive orders, complicating prosecutions.
    There are other legal shortcomings that make it difficult to
    target commercial espionage, and commercial espionage has
    become a growing problem in this area.
        I am concerned with the Validated End User program run by
    the Commerce Department. One of today's witnesses has
    documented the problems of tracking sensitive exports to China.
        Last year the GAO recommended that this program with China
    be suspended because the Department had not been able to reach
    an agreement with Beijing for on-site reviews. There is an
    agreement today, but knowing what I know about China, where the
    industrial/military line is blurred, to say the least, this
    provides small comfort.
        Mr. Chairman, the subcommittee must keep pushing, but
    without strong leadership and commitment from the highest
    levels of the current administration we are carrying an awfully
    heavy load. Unfortunately, I don't see that type of commitment
    happening, and this is not being partisan. The previous
    administration was no different. These issues aren't attention-
    grabbers until I suppose there is a glaring failure.
        Hopefully I am wrong, but let us keep harping on this
    issue, doing our job, holding these hearings and trying to
    drive legislation to improve this process. I thank you again
    for holding this hearing.
        Mr. Sherman. I thank our ranking member. I know he will
    have to go back to Financial Services for a brief time. We look
    forward to seeing him again.
        Are there any other members who wish to make an opening
    statement? I believe our vice chair has an opening statement.
        Mr. Scott. Thank you, Mr. Chairman. Monitoring and
    controlling the items we export that may pose a national
    security risk is undoubtedly a high priority for me, this
    committee and this Congress.
        And certainly no one wants to see dual-use items fall into
    the wrong hands and be turned against the United States either
    by terrorists or rogue governments, and that includes the
    United States companies that make and market this technology.
        However, we must keep in mind the need for our companies to
    be able to stay competitive in an increasingly integrated
    global marketplace. Globalization is no longer just an emerging
    phenomenon. Globalization is now our way of life. We are no
    longer the sole supplier for a great many of the items that we
    control the export of, and that list is growing quickly.
        Moreover, there are many countries with less stringent and
    less complicated export control systems that afford their
    companies greater opportunities to compete. We saw that in our
    examination of satellite technology exports several months ago.
        So we must find the proper balance between protecting
    sensitive materials and allowing our companies to contend, and
    I think perhaps developing a broader, more robust Validated End
    User program can very well allow us to do just that, so I am
    interested in hearing our witnesses and their thoughts on
    expanding that program.
        Mr. Chairman, I am also very concerned, as I know that you
    are as well, by an article that I recently read in the
    Washington Times, this article in the Washington Times
    regarding the domestic availability and subsequent diversion of
    sensitive technologies.
        The article highlights a recent GAO investigation into
    procurement of dual-use and military technology over the
    internet and the case of sending that equipment to persons and
    places that would ordinarily require an export license. With
    the blossoming of the internet and the person-to-person
    commerce it has facilitated in the modern world, I think an
    examination into the possibility of controlling some of this
    diversion is absolutely warranted.
        With that, Mr. Chairman, I will join you in welcoming our
    witnesses, and I yield back the balance of my time.
        Mr. Sherman. I thank the gentleman from Georgia and yield
    to the gentleman from California.
        Mr. Rohrabacher. Mr. Chairman, first and foremost I would
    like to thank you for the personal interest you have taken in
    this issue. Your leadership on this issue of looking at exports
    and the export controls that we have to deal with in our
    society is going to be of great service to the people of this
    country, so I want to especially let you know that we
    appreciate your focus on this very important subject.
        Being an accountant--I am a former journalist, and most of
    the people we work with are former lawyers. Brad is a former
    accountant, and he knows when something doesn't add up,
    something doesn't look right with the figures. Certainly when
    you take a look at export controls, Mr. Chairman, it doesn't
    add up. It does not. The cost and the effectiveness
    does deg. not just correlate the way they should in
    terms of government regulations.
        I personally believe in free trade between free people, and
    I have always advocated that. Over the years there has been a
    great difficulty in trying to promote even free trade between
    free people because what has happened is there have been
    certain people and groups in our society that are making so
    much money in dealing with despotic and hostile governments and
    hostile societies that we have had to try to have the same
    restrictions placed on them, yes, but also those same
    restrictions placed on people who are actually trading with
    free countries, with Belgium, with Brazil, with Britain, with
    Italy.
        It makes no sense at all that we should be controlling the
    trade with free peoples throughout the world because we are
    unwilling to set a two-track system in place that will help us
    regulate and control those technologies that go to despotic and
    potentially hostile regimes as separate from those countries
    that are run by democratic governments and that pose no threat
    to the United States of America.
        The last hearing we had on this issue highlighted that when
    we talked about China and the transfer of technology that went
    to China about 15 years ago when we were permitting Chinese
    rockets to be launching American satellites, and then in the
    end what happened was we upgraded their entire rocket and
    missile system in China.
        But because high tech industry in this country has been so
    intent on making a very quick profit from the China trade that
    we have been unable to free other companies that would like to
    have long-term economic relationships with freer and more
    democratic countries from the restrictions that we have to
    place on Commerce because of these other companies who want to
    focus their profit making on dictatorships and potentially
    hostile countries.
        This is an issue that cries out for some serious
    consideration. Again, I think the answer in the long run is for
    us to be honest about what countries pose a threat, what groups
    pose a threat there, to see that our technology doesn't go to
    those people that will come back and hurt us, but at the same
    time commit ourselves to freeing up the trade between countries
    and people that pose no threat to us.
        So in short a two-tier system, which we have not been able
    to implement in the past, is something that would serve us
    well. Thank you very much, Mr. Chairman.
        Mr. Sherman. And we will yield to the gentleman from New
    York for an opening statement.
        Mr. McMahon. Thank you, Mr. Chairman, and I echo the
    sentiments of our colleagues and commend you for convening this
    very important hearing.
        Clearly export controls serve an incredibly valuable
    purpose, yet at the same time the economic future of our
    country depends on our ability to compete on a global market.
        The world would be a far more frightening place if a
    country like Iran acquired and developed nuclear, biological or
    chemical technologies through the seemingly innocent transfer
    of technology. Unfortunately, this example was illustrated in
    2006 when the computer circuits exported to the UAE were
    diverted to Iran, where they were fashioned into bomb
    detonators and used in Iraq.
        History has proven that hostile regimes have managed to
    penetrate U.S. export controls network due to the fact that the
    international community has yet to follow suit with similar
    export controls of their own.
        There is no doubt that the United States still has the most
    sophisticated defense technologies in the world, which is the
    reason why we must guard our designs through such extreme--
    which seems sometimes to be extreme--restrictions. But these
    limitations are no doubt decreasing the prestige and need for
    our technologies in the world.
        There is a great need to balance nonproliferation standards
    with the U.S. competitiveness in the global market. I am
    particularly concerned with restrictions on commercial
    communications satellites and gray areas in the Export
    Administration Act which deal with encryption technologies used
    in free global communications and messaging technologies.
        In regards to satellites, I am concerned that if other
    countries, our allies even, were to develop ITAR free
    satellites and become as competitive in the United States in
    this market we would most certainly reach a whole new frontier
    in global terrorism.
        And although I do not share the same concern for encryption
    technologies, it is important to note that foreign regimes
    cannot use messaging services for nefarious purposes; rather
    the civilians living under these regimes can access and relay
    more information to the outside world through the use of these
    technologies as we have seen in the recent Iranian election
    protests.
        Therefore, I would like to learn from our distinguished
    panel of witnesses today how the U.S. can successfully balance
    its business interests with the security interests of not only
    the United States, but the whole world.
        Again, thank you, Mr. Chairman, and I yield the remainder
    of my time.
        Mr. Sherman. I thank the gentleman from New York.
        We will now move on to our first witness. We welcome the
    former Governor of Michigan, John Engler, who currently serves
    as president and CEO of the National Association of
    Manufacturers.
        Mr. Engler?

      STATEMENT OF THE HONORABLE JOHN ENGLER, PRESIDENT AND CHIEF
       EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF MANUFACTURERS
               (FORMER GOVERNOR OF THE STATE OF MICHIGAN)

        Mr. Engler. Thank you very much, Mr. Chairman and Ranking
    Member Royce, who will be back I am sure, members of the
    subcommittee, fathers of triplets. We have that in common.
        The National Association of Manufacturers appreciates very
    much today's hearing on the Export Administration Act, the EAA.
    I have prepared a statement for the record that is more
    extensive, and I just want to offer some brief initial remarks.
        While it is not often in the public eye in recent years,
    certainly the issue of export controls is one that truly ranks
    as a priority. It is a competitive priority for the nation and
    for our Nation's manufacturers.
        Commerce Secretary Gary Locke recently met with members of
    the NAM Executive Committee, and it was interesting in our
    discussion, which was wide-ranging. Several times we came back
    to the topic of export controls. It is that important. Export
    controls exist to protect our national security, and that must
    always be paramount, but when export control policy becomes
    obsolete, national and economic security are both threatened
    and American jobs are lost.
        Obsolete export control policies that control too much
    promote the growth of technologies in other countries and other
    parts of the world. These are areas where we compete, and when
    we promote the growth of technologies there it comes at the
    expense of U.S. jobs.
        The NAM and the Coalition for Security and Competitiveness
    believe in the need to modernize the export control system.
    Modernization would improve both our security and our
    competitiveness.
        The current export control system was developed really 60
    years ago at the onset of the Cold War. The last time the EAA
    was actually updated by Congress was in 1979, three decades
    ago, and the threat that the system was designed to address at
    the time, the Soviet Union, actually doesn't even exist in that
    form any longer.
        Today the threats are different, and some of them have been
    I think eloquently described by the committee members today,
    but yet the export control system hasn't really changed to deal
    with them effectively. When the current system was developed,
    the United States was the source of almost all the cutting edge
    technologies and could unilaterally deny foreign access to
    them.
        The United States remains a leader in technology, but many
    other nations have developed equally good or in some cases even
    better technologies. The bottom line is that key technologies
    are often available globally, and buyers have alternatives.
        I think the chair and Congressman Scott, you both made this
    point in your opening comments. The question of foreign
    availability rarely came up when the export control system was
    first developed, and now it is one of the dominant facts of
    global commerce.
        These trends--wider availability, greater competition--will
    only accelerate. Restricting United States sales of products
    being freely sold by Germany or Japan or Italy, other
    countries, does nothing to help United States national
    security. However, it does harm our Nation's economic strength,
    and I think it harms very much our future innovation.
        Our economy depends on our ability to compete globally in
    high tech areas, as Congressman Rohrabacher mentioned, and we
    compete not on labor costs, but on quality and the ability to
    innovate and the ability to develop new technologies. We must
    seek to be number one in technology and innovation.
        Today our share of the world's manufactured goods exports
    is less than 10 percent. It is about half of what it was 25
    years ago. Employment in America's high tech industries is
    almost one-fourth smaller than in 2000, and high tech exports
    now account for less than one-third of all our manufactured
    goods exports. That was about 40 percent in 2001. Our export
    controls are a contributing factor to this decline.
        The NAM and the CSC have been working with the
    administration to obtain changes that lessen the burden on
    American manufacturers without putting national security at
    risk. We have made 19 proposals. Most of them were adopted or
    accepted by the previous administration, and we are continuing
    to work for additional changes with the Obama administration.
        All this helps. We cannot ignore that the need for change
    is so fundamental that a new twenty-first century Export
    Administration Act is necessary to design controls that will be
    effective in the twenty-first century that we live in.
        My prepared statement lists the major principles the NAM
    believes the new EAA should be based on. We need a more
    focused, effective and efficient control system. Clear lines of
    agency jurisdiction and changes to licensing mechanisms are
    necessary. There should be regular reviews to update lists of
    what needs to be controlled and sunset provisions to ensure
    obsolete items drop off the lists.
        Foreign availability and mass market status need to move to
    center stage in determining what is controlled. Intracompany
    transfers and steps to facilitate technology sharing with
    friends and allies need to be improved. Improvements are also
    needed to both the substance and enforcement provisions of EAA.
    Addressing one without the other does little to improve the
    system or to protect national security.
        There are those, Mr. Chairman, who say well, modernism is
    some kind of euphemism for allowing companies to undercut
    national security. Absolutely not. We want strong security and
    strong controls on what is really sensitive. Changes we seek
    strengthen our security and focus government resources on the
    problem areas.
        Mr. Chairman, I thank you very much. We hope to see a new
    EAA written this year. Our staff and I and our member companies
    would look forward to working with you.
        [The prepared statement of Mr. Engler
    follows:]Engler.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Sherman. Governor, we thank you for your comments. I am
    going to have to interrupt you now because we do have a vote on
    the floor. We will resume this hearing immediately after the
    last vote in this series, which will probably be quite some
    time from now.
        So I thank the witnesses for their patience, and we will be
    back as soon as we can be. Thank you.
        Mr. Engler. We will be here.
        [Recess.]
        Mr. Sherman. I thank the witnesses for bearing with us for
    that short break, and I want to welcome Arthur Shulman, who
    serves as general counsel at the Wisconsin Project on Nuclear
    Arms Control, which carries out research and public education
    designed to inhibit the spread of weapons of mass destruction.
        Mr. Shulman?

     STATEMENT OF ARTHUR SHULMAN, ESQ., SENIOR RESEARCH ASSOCIATE,
             THE WISCONSIN PROJECT ON NUCLEAR ARMS CONTROL

        Mr. Shulman. Thank you, Mr. Chairman. I am pleased to
    appear before you today to discuss dual-use export controls and
    their role in stemming the spread of mass destruction weapons.
    I will summarize a few points from my written testimony, which
    I ask be entered in the record.
        The Export Administration Act is the foundation of our
    system for controlling the export of dual-use militarily
    sensitive technologies from the United States. While the EAA
    has been in lapse, the export control system has not been
    updated to reflect the post-Cold War and post-9/11 security
    environment.
        But the focus on export control reforms should be on
    ensuring that the system protects U.S. national security in the
    twenty-first century. We need a comprehensive public analysis
    of the current security challenges, how the dual-use export
    control system is meeting these challenges and what changes are
    needed.
        Thanks to the efforts of the subcommittee, our Nation's
    arms exports will be subjected to just such a comprehensive
    national security review if H.R. 2410 becomes law. The same
    must now be done for dual-use trade. Only then would we have
    the hard data needed for thinking about a new Export
    Administration Act, one that would protect our security today
    and tomorrow.
        In the interim, we must ensure that the current system is
    working well to protect us. In many ways it is not, but there
    are things we can do now to change that. Congress should give
    the Bureau of Industry and Security at Commerce enough
    resources to do the job it has now. Congress should also
    provide robust oversight to ensure that those resources are
    being used well.
        On export enforcement, we support your efforts to pass a
    stand-alone bill that would immediately give the Office of
    Export Enforcement at BIS permanent law enforcement authority.
    BIS must also get more staff and resources to do its export
    enforcement work.
        I will cite two examples where BIS must do a better job
    administering controls. I discussed them in my testimony before
    this subcommittee last year and will provide a brief update.
    One is the 2-year-old Validated End User program (VEU). It is
    supposed to be a white list of trusted companies and locations
    prescreened to receive controlled goods license free.
        But my organization revealed last year that two of the
    first five Chinese companies designated as VEUs were closely
    linked to China's military/industrial complex, to Chinese
    proliferators sanctioned by the United States and to U.S.
    companies accused of export violations.
        Another Chinese VEU was designated this April, and our
    analysis reveals that components useful in gas centrifuge
    enrichment plants can now be shipped without limits or prior
    scrutiny to a building that houses the headquarters of a
    Chinese company which as recently as December was under United
    States sanctions for proliferation to Iran and/or Syria.
        I ask that this analysis be made part of the record for
    this hearing.
        A month after this new Chinese VEU was designated, its
    parent has filed for bankruptcy. What will happen to the export
    authorization now?
        The VEU program has been not only a selection failure, but
    also a verification cripple. Even now, on-site VEU reviews in
    China require a 60-day notice and must be arranged and
    accompanied by Chinese Government officials.
        And what are the inspection procedures for India's first
    VEU designation detailed just last week?
        Given these fundamental flaws, limitations and
    uncertainties, the VEU scheme should be scrapped. At the very
    least, a moratorium on new designations should be imposed as
    Congress studies whether the program can operate without
    undermining our security.
        Another example is the Entity List maintained by BIS. A
    mirror of VEU, the list is supposed to inform exporters about
    foreign entities that pose a risk of diversion, especially to
    WMD programs, but the list is incomplete and out of date. Some
    entries are now inaccurate, and others are not usable.
        My organization has published and submitted to BIS concrete
    proposals for updating this national security resource. Despite
    our hopes, BIS has made none of these changes. The list now has
    more names tied to smuggling, but it is not more accurate or
    clear and has lost its focus on nonproliferation. Congress
    should press BIS to make the Entity List a real tool for
    exporters to screen their transactions and prevent diversions.
        This subcommittee has taken a leadership role in addressing
    the risks of transshipment and diversion of dual-use U.S.
    goods. I would like to offer for inclusion in the hearing
    record an updated chronology documenting how Dubai and other
    points in the United Arab Emirates have served for decades as
    the main hubs in the world for nuclear and other smuggling. We
    have also seen such activity channeled through Malaysia and
    other countries with weak export controls.
        Another facet of this problem is what you, Mr. Chairman,
    alluded to in your opening statement, domestic sales of
    controlled dual-use goods. There are things that we can do to
    meet these challenges as well. I have listed some examples in
    my written testimony and would be happy to discuss them.
        In conclusion, I would like to mention that the challenges
    I have discussed today have been exposed and publicized through
    the work of this subcommittee and others. Congress should
    expand and systemize this oversight and enlist other
    investigators to help it.
        For example, the GAO should be tasked with the review of
    export records and BIS licensing decisions every year. Congress
    should also use help from the Inspectors General of the
    relevant Federal agencies.
        Thank you.
        [The prepared statement of Mr. Shulman
    follows:]Shulman.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Sherman. Thank you for your presentation. I look
    forward to talking to you about controlling domestic sales of
    some of these items.
        Mr. Shulman. Yes, sir.
        Mr. Sherman. Now we will go on to Owen Herrnstadt, director
    of trade and globalization for the International Association of
    Machinists and Aerospace Workers.
        The machinists union represents several hundred thousand
    workers in more than 200 basic industries in North America, and
    his organization has been helpful in teaching me that it is not
    always favorable to jobs to just open things up; that it is not
    just business activity versus national security, but that
    sometimes when you allow exports you are actually hurting jobs.
        With that, I would like to hear from the witness.

       STATEMENT OF OWEN HERRNSTADT, ESQ., DIRECTOR OF TRADE AND
     GLOBALIZATION POLICY, INTERNATIONAL ASSOCIATION OF MACHINISTS
                         AND AEROSPACE WORKERS

        Mr. Herrnstadt. Thank you very much, Mr. Chair, and thank
    you for your invitation to appear before you today.
        As you noted in your opening, and we appreciate your
    comments regarding the serious nature of exports and jobs. As
    you also just noted in my introduction, the machinists union
    represents several industries. We truly understand the
    importance of exports.
        We are troubled that our Nation's export strategy has yet
    to embrace policies that ensure the creation of jobs here at
    home. Among other things, comprehensive and detailed employment
    impact analysis is not undertaken when transactions are
    reviewed that could involve outsourcing to other countries,
    specifically the transfer of technology and production to
    current and potential competitors.
        Given the current job crisis, the importance of export
    controls and suggestions concerning the reauthorization of the
    EAA, a discussion of how the current export system can be
    improved to include consideration of its impact on domestic
    employment is highly critical.
        It is no secret that U.S. workers--indeed, our entire
    economy--is in a crisis; 6.5 million workers have lost their
    jobs since December 2007. Nearly 2 million of these workers are
    in the manufacturing industries. Our unemployment rate is at
    9.5 percent and many predict it will shoot to 10 percent and
    will stay high for the next several months.
        Industries like manufacturing, aerospace, electronics and
    many others that were once the bedrock of our Nation's economy
    are barely shadows of what they once were. Our economic
    security and our physical security diminishes deg.
    with the loss of these basic industries and the jobs they
    provide.
        As the nation grapples with the current economic crisis,
    Congress and the administration must explore new measures to
    ensure that our overall export strategy supports the creation
    of jobs here at home. We can start by discarding the
    presumption that any policy that promotes exports is
    automatically good for U.S. workers and the long-term growth of
    domestic jobs. Attention must be paid to export programs and
    unregulated outsourcing arrangements that can and do result in
    the loss of jobs.
        My colleague seated to the right talked briefly about the
    Validated End User program. It serves as a classic example that
    neglects meaningful employment impact review. The machinists
    protested one of the initial programs that was adopted by the
    VEU. In the announcement of the entire program, the Under
    Secretary stated that it would be good for U.S. jobs.
        In our protest, we said given the massive loss of jobs that
    we have experienced in the United States aerospace industry
    over the past 20 years, the increase in aerospace production in
    China in general, the recent announcement that China is
    planning on entering the large commercial aircraft industry and
    China's continued use of transferred production and technology
    from the United States aerospace industry enabling it to
    accomplish these tasks, we find it very difficult to believe
    that your actions regarding one specific VEU program are good
    for U.S. workers or the U.S. economy.
        Another example where employment impact reviews are much
    needed involves the virtually unregulated category of
    outsourcing that presents a serious threat to our Nation's
    economy and our physical security, that known as offsets, the
    transfer of production and technology in return for jobs.
        They are significant, they are increasing, and we are
    losing thousands of jobs to the use of offsets. They create
    foreign competition that comes back to further hurt our job
    prospects. The decimation of our skilled workforce also
    presents a serious danger if a situation occurs in which a
    rapid buildup of defense production is required.
        In view of the national, economic and security interests
    that are threatened by offsets and other offshoring
    arrangements like the VEU program, export control policy must
    be improved to ensure that it is in fact assisting in the
    creation and maintenance of jobs here at home.
        Here are four very brief recommendations for your
    consideration: 1) Shining a light on current export policy to
    determine with precision its employment impact on the domestic
    workforce; 2) Strengthening offset reporting requirements so
    that agencies like the Bureau of Industry and Security apply a
    meaningful and precise employment impact analysis to all offset
    deals which come under its jurisdiction; 3) Undertake efforts
    to eliminate offset and offset-like activities through all of
    our international negotiations; and 4) Form a national
    commission to review export policy and its impact on U.S.
    employment by including labor, academic, members of the
    industry and of course the government to join together to
    figure out solutions for this critical, critical area.
        Mr. Chairman, I would like to submit my written testimony
    for the record, as well as a report which I reference in my
    written testimony on offsets as well.
        Thank you.
        [The prepared statement of Mr. Herrnstadt
    follows:]Herrnstadt.

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Sherman. Without objection it will be entered in the
    record, as well as the full opening statements of the other
    witnesses.
        With that, Mr. Scott, did you want to go first?
        Mr. Scott. Sure. I will be glad to.
        Mr. Sherman. I will recognize the vice chair of the
    subcommittee to go first with questioning and then move to the
    Republican side.
        Mr. Scott. I would like to kind of focus my questions on
    the national security aspect both at home and abroad and its
    economic implications.
        Export control reform attempts to balance national security
    interests with the promotion of a vibrant economic environment
    for the United States businesses to export their products. In
    the post September 11 world, national security concerns are of
    paramount importance, and with that in mind, understanding the
    impact of exports on the economic climate here at home in the
    United States is critical.
        So I would like to ask a series of questions with that
    backdrop first with you, Mr. Herrnstadt. I am very moved by
    your testimony, and I think it would be well if you could share
    with us just how dramatic in numbers in comparison of time in
    terms of the job losses that you refer to due from offsets.
        How many jobs are we talking about? Over what period of
    time? In other words, just how impactful are these job losses?
    Yes.
        Mr. Herrnstadt. Thank you. I would be glad to respond.
        Let me preface this by saying with one of the serious
    problems with offsets is that there is so little amount of
    information that is actually known. Some information is
    reported in the defense industry to the Bureau of Industry and
    Security.
        Mr. Scott. Do me a favor, Mr. Herrnstadt, because a lot of
    times we have these hearings they are made public through C-
    SPAN. Just for the benefit, what are offsets?
        Mr. Herrnstadt. Okay. Very good. As I explained in my
    written testimony, offsets are when another government
    institutes an industrial policy that says we will buy your
    good, but only if you transfer some of the technology related
    to that good or some of the production related to that good to
    one of the companies in our country in return for the sale.
        Roughly 20 European countries have exceedingly
    sophisticated offset policies. At times those offset policies
    say that we will only buy your good unless you offset to us
    production or technology that sometimes exceeds the value of
    the sale item itself.
        So, for example, if a country wants to buy a jet fighter
    they will say we will buy your jet fighter, but we want to do
    some production in our country. Offsets get even more
    complicated because sometimes the traded item under the offset
    may not even be related to the weapons system involved. It
    could involve something well, like a printing press, for
    example, that has nothing to do with it.
        The point of offsets is that other countries realize that
    this is a mechanism they can use to employ their workforce and
    to get their industries going. Our own Government has very
    little policy itself that impedes the use of offsets.
        One of the specific problems we have is that very little
    information is known about offsets because these are primarily
    private contracts that occur between one company and another
    government or another company in that country.
        Mr. Scott. Okay. Now, because my time is short, give me a
    number. Give us a number to hang onto. How do you quantify the
    job losses?
        Mr. Herrnstadt. Okay. Well, the Bureau of Industry and
    Security at one point estimated that the number of job losses
    that occurred due to offsets were roughly around 16,000 jobs or
    so a year.
        But as I point out in my written testimony, they also say
    those were offset--unrelated to the term offset--by jobs that
    were created because the sale went through. We dispute that
    claim for a variety of reasons, which are found in my written
    testimony.
        But that is just defense-related offsets. Those don't even
    include the job losses that occur in the commercial industry
    because, quite frankly, there is very little information that
    is given. Workers certainly don't know about it because they
    are not told about it by companies.
        Mr. Scott. All right. Well, thank you for that.
        I know my time is up. Mr. Sherman, if we have another round
    at this I would like to ask everybody on the whole jobs area
    just how our U.S. jobs in particular are affected by the
    totality of export control regulations and have our export
    controls been a factor in the outsourcing of U.S. jobs.
        So maybe we will get around to that the second time. I
    don't want to overextend here.
        Mr. Sherman. We will do a second round. We kept these
    witnesses waiting. I see no reason not to keep them here when
    they can talk to us since they were here for hours not talking
    to us.
        With that, I will ask the gentleman from Illinois if he has
    any questions.
        Mr. Manzullo. Well, thank you very much. I have a couple of
    questions.
        Mr. Herrnstadt, did your organization take a position on
    the cap in trade bill that just passed?
        Mr. Herrnstadt. Yes. I mean, we took the same position that
    Labor did, the AFL-CIO and others did.
        Mr. Manzullo. Governor Engler, could you tell us what
    impact the cap in trade had on our exports and our ability to
    manufacture in this country?
        Could you press the button please, Governor?
        Mr. Engler. I am sorry. Labor opposed the cap in trade
    legislation, didn't they?
        Mr. Manzullo. My question is----
        Mr. Herrnstadt. We are concerned specifically with the
    trade issue involved with the cap in trade program. We are also
    very concerned with the effect that it will have on our own
    manufacturing industries here.
        Mr. Manzullo. So you were opposed to the bill that passed
    this past week?
        Mr. Herrnstadt. I have to double check on exactly what our
    position was on that, to be quite honest with you on it.
        I know that our concerns were primarily job-related on it,
    and we were also concerned with making certain that developing
    countries weren't given an exception.
        Mr. Manzullo. Okay.
        Mr. Herrnstadt. Yes.
        Mr. Manzullo. Okay. Governor Engler, if I could ask you? I
    know you come from a state that has just a little bit of
    unemployment, and I think Illinois is right behind you.
        The general question, and I understand we will have a
    second round here, is I think you share my concern that this
    administration or this Congress has put no emphasis upon
    restarting manufacturing in order to build our way out of this
    recession as opposed to just spending all types of money coming
    from the top.
        As a person who understands manufacturing, do you agree
    with that statement? If so, could you give us your thoughts on
    that?
        Mr. Engler. A couple of things. Certainly we think
    manufacturing is the key to wealth creation and growth. The
    United States remains the number one manufacturing economy in
    the world, but we are under challenge from all over the world,
    and a strategy to maintain the U.S. leadership and to expand
    opportunities for workers of this country comes through the
    development of new products and new markets.
        Those markets can certainly be domestic if we were to say
    take on the major challenge of renewing our infrastructure in
    the country. That could be enormously helpful. At the same
    time, we are only 4-5 percent of the world's population. There
    are a lot of growth opportunities and expanding markets around
    the world, and we would like to be able to compete for those.
        One of the concerns with the issue specifically in front of
    the committee today is that in the area of export controls we
    sometimes as a country choose to control products that are
    widely available in the marketplace, and therefore we simply
    through our controls take ourselves out of the opportunity to
    compete against the German, French, Italian, Japanese company.
        We would argue that in some of those cases the consequence
    of that is specific to job loss and company exiting of those
    lines of products and businesses here.
        Mr. Manzullo. And that is heard. I know you are familiar
    with Rockford, Illinois. We used to be called the machine tool
    capital of the world.
        When I was elected in 1993 I think the U.S. had a 17
    percent market share of machine tool sales in the world. Now we
    are down to about seven. One of the reasons is we have become
    an unreliable supplier. It is very difficult for countries to
    buy a for-access machine tool in this country.
        Could you elaborate on that, Governor, and the impact that
    that has on domestic jobs?
        Mr. Engler. Sure. I think if the tooling--again, tooling is
    subject also to its own innovation and so you want to continue
    to improve your products that have markets. If we are not able
    to sell those products to the broadest possible market, the
    global market, then other competitors will rise up, meet those
    needs and suddenly their innovations are outpacing ours.
        It isn't just in the production cost of the machine. There
    is much more than the mere labor cost or the materials cost. It
    is the whole intellectual property behind that machine and the
    capabilities of that machine. I would say these machines today
    are all smart machines with chips. We don't make any of those
    chips in this country now, save what Intel does, which is
    substantial, but a lot of that is gone.
        I would argue, Congressman, that export controls are a
    factor in this. Nobody would say this is the total reason at
    all, but it is a factor and it is one that is fixable.
        Mr. Manzullo. Thank you. We are going to have another round
    of questions? Thank you.
        Mr. Sherman. We hope to unless a vote is called on the
    floor. We are not going to ask these gentlemen to wait for
    another 40 minutes or so for us.
        The GAO report urges that we suspend the Validated End User
    program with China. I would like each of the witnesses to
    comment on if we just got rid of Validated End User with China
    would that have a positive or negative effect on jobs? Mr.
    Herrnstadt?
        And really it goes down to, are the exports to China real
    exports or are they the offshoring of processing?
        Mr. Herrnstadt. I think you are asking a good question, and
    one of the questions that we have raised with the VEU program
    is does anyone count if this does have a direct impact on jobs.
    I mean, obviously we thought that one of the programs certainly
    did.
        Mr. Sherman. We can always do a study and put things off
    for a few years, or should we just end the program with China?
        Mr. Herrnstadt. I think we should just suspend it at this
    point.
        Mr. Sherman. Governor, do you have an argument that we
    should continue to have a Validated End User program with
    China, especially given the fact that we have been able to
    reach a Validated End User specific inspection program with
    China?
        Mr. Engler. Well, I think to the credit of the Obama
    administration that has now been reached. In January, the
    Department of Commerce and MFCOM signed an agreement that would
    allow BIS to do these end user reviews.
        The five companies--five. Not exactly a program running
    rampant here, but the five companies that are in the program. I
    think we should continue that. I think it certainly should be
    monitored, and we ought to test the agreement. The idea was to
    create trusted entities.
        Mr. Sherman. Are those entities buying goods for use in
    China or are they simply processing goods to ship back to the
    United States?
        Mr. Engler. They are for use in China is my understanding.
        Mr. Sherman. Mr. Herrnstadt, do you have any specific
    information on this, or Mr. Shulman?
        Mr. Herrnstadt. No. I would just encourage the committee to
    take a look at the Commerce Secretary Mancuso's at the time
    announcement of the VEU program.
        One of the programs involved the work of composites done in
    the aerospace industry in China. Mr. Shulman and his
    organization have also described that, and I think that had to
    do with production that was moved to China or at least
    initiated in China.
        Mr. Sherman. Mr. Shulman, what if we went with a program in
    which we controlled fewer things, but we had internal U.S.
    controls so that you couldn't just send in an order for a spark
    gap plug?
        Would that be a system that would better control the spread
    of technologies, or do you endorse a system of controls at the
    border rather than controls at the factory gate?
        Mr. Shulman. It is a very tough question, Mr. Chairman. I
    think there are more incremental things that we can do to deal
    with the domestic sales problem. I think we probably ought to
    be checking and controlling both at the factory and at the
    border.
        Mr. Sherman. Governor?
        Mr. Engler. Well, actually I don't think it is that tough.
    It is bureaucracy that needs some good, firm guidance from the
    Congress because we really need harmonization by Customs and
    Border Protection.
        You have one sort of numbering or classification system
    that BIS uses, and then you have Custom and Border Protection
    with different numbering, and simply bringing that together--
    presumably we are not caring about what is actually happening
    internal in the country. We are caring about what might happen
    outside the country.
        Mr. Sherman. As a practical matter, if we do not impose on
    American business the additional bureaucracy of having to
    license certain small portable items and we continue the policy
    the spark gap plug can be sold to anyone with a post office box
    in the United States, then we have no control over spark gap
    plugs.
        The GAO study proved what I think everyone in this room
    knows, and that is you can put a small item in an envelope and
    mail it to Venezuela.
        So the question is do you see the members of NAM willing to
    accept that certain products which have a very high military
    value and which are highly portable cannot just be shipped to
    any P.O. box in the United States just because the customer
    paid for it?
        Mr. Engler. Well, if we are asking if instead of the
    Department of State say processing 100,000 export licenses we
    get the most important 5,000 and look at those carefully, I
    think we could talk.
        The idea is if we are going to go from 100,000 to 200,000
    that would probably be headed in the wrong direction.
        Mr. Sherman. I am not even talking about Department of
    State here because it would not be an international
    transaction.
        But when a GAO employee posing as a ne'r-do-well is able to
    buy a spark gap plug and have it shipped to his P.O. box
    anywhere in the country that is a problem, and the solution to
    that problem imposes additional bureaucracy on your members.
        I think that would have to go hand-in-hand with reducing
    the bureaucracy imposed on your members in other ways.
        Mr. Engler. Sure. I think I would be happy to talk about
    that.
        Now, I don't know if you can buy the same thing if we are
    the only people in the world that have that particular item and
    you can't buy that in Germany or you can't buy that somewhere
    else if it is just a question that we are strictly the only
    ones today that have that.
        Mr. Sherman. As I laid out in my opening statement, among
    the things we need to look at are how portable is the item,
    what is its military significance, does it have many civilian
    legitimate users and, finally, is it widely available around
    the world.
        I believe I have gone over and will recognize our ranking
    member, Mr. Royce.
        Mr. Royce. Thank you, Mr. Chairman. I wanted to ask Mr.
    Shulman a question, Mr. Chairman, and this goes to the hearing
    that you and I participated in the other day on the UAE.
        Mr. Shulman, you testified that the pending nuclear
    cooperation agreement with the UAE should be held up in your
    view unless UAE makes real export control improvements. I guess
    they adopted a stronger law in 2007, but haven't implemented it
    yet or haven't put the regulations in place I take it.
        But the supporters claim that the UAE made these
    improvements. You raised this point. I was going to ask you
    your thoughts on that, on how long a track record of
    improvement should the UAE have before the agreement is
    approved?
        And then I guess the key point, should the agreement ever
    be approved given proliferation concerns beyond UAE's export
    control record? And so just your thoughts on that.
        Mr. Shulman. Thank you, sir. Our sense is that
    consideration of approval of the 1-2-3 agreement with the UAE
    should involve a real examination of efforts by the UAE to
    improve their export controls.
        As you mentioned, they passed this legislation 2 years ago.
    They just held I believe the first meeting of the committee,
    which will be charged with administering it, a month or 2 ago
    and announced their intention to really enforce this
    legislation.
        Part of the problem, one of the things that could be done
    fairly easily I would think is both for our Government and for
    the Government of the UAE to make more public whatever efforts
    the UAE is doing to actually improve their export control
    policy and practice because very little is known about it now.
        It may be that they are doing things that we just don't
    know about, but in any case what is known so far is that there
    are still export control cases being brought both by the United
    States and other governments involving smuggling to Iran and
    other places of very dangerous items going through Dubai and
    other Emirates.
        Certainly more needs to be done by the UAE to really prove
    that they are headed in the right direction.
        Mr. Royce. Let me ask you another question on the same kind
    of subject.
        In 2007, the Commerce Department proposed the creation of
    another category, a C category, Country Category C I guess is
    what you would call it, which would list countries of diversion
    concern, and as a consequence those countries would be subject
    then to a much stricter requirement for export licensing.
        So that was the concept back then. It was never
    implemented. Was it a good idea? Which countries in your mind
    would belong in such a category if we ever did take this up a
    notch and create Category C? It is kind of a unique way to
    approach the problem.
        Mr. Shulman. I think it is definitely a good idea. I think
    it should be implemented, and I think the first two countries,
    based on the information that we have seen, the first two
    countries that ought to be considered for such a designation
    would be the UAE and Malaysia.
        Mr. Royce. I see. Let me ask you. The Obama administration
    has been in office 5 months now. Could you give me your
    assessment? What can be said about its export control policies
    at this point?
        Mr. Shulman. I don't think too much can be said so far in
    part because at the Department of Commerce the relevant
    officials have not been appointed yet, so I think we will have
    to wait and see once they are in place what it is that they do.
        Mr. Royce. I guess my time is about expired here. Let me
    ask Mr. Herrnstadt a question.
        Mr. Engler describes a very competitive global environment,
    an economy in which an increasing number of countries will be
    challenging the U.S. in developing and designing and
    manufacturing cutting edge technology. He also states that the
    rate of technological advance is so fast today that products
    are obsolete within months.
        I was going to ask if you agree and, if so, how your
    proposals then cope with those realities.
        Mr. Herrnstadt. I think he obviously has raised a very good
    point. Our concern is that we don't have an export control
    policy in this country that the offshore of technology and
    production discourages to other countries.
        Many times by merely giving another country technology that
    enables them to build a platform upon which to even produce
    more advanced technology, comes back to hurt our own
    businesses, hurt our own workers and our own communities. It
    creates the global competition that we are currently facing.
    And that is a real concern. It is a concern that we are hearing
    from our members, that we are seeing occur all the time.
        Let me point out in the paper I wrote on offsets,
    specifically, I focus on the aerospace industry and China and
    how Europe and the United States have transferred lots of
    technology in terms of aerospace to China. Guess what? China is
    now in the regional aircraft market, and they announced that
    they would be entering the large commercial aircraft market to
    give Boeing and Airbus a run for their money. So I think we
    need to formulate a comprehensive policy that addresses this.
        Mr. Sherman. The gentleman from California, Mr.
    Rohrabacher?
        Mr. Rohrabacher. Thank you very much, Mr. Chairman. I would
    just like the panel to give a very brief answer if you could.
        Do you think that United States developed technology has
    played a significant role in the developing of this massive
    Chinese economic challenge that we face today?
        Mr. Engler. I will go first, Congressman. There is no
    question that just as I suppose in the early days of this
    country European technology helped us, there is no question
    that American technology has played a role over there.
        Mr. Rohrabacher. The answer is yes.
        Mr. Engler. Yes. Absolutely.
        Mr. Rohrabacher. One difference of course is that when we
    were young we didn't throw religious believers in jail, and we
    had a fledgling democratic government.
        They still have an intransigent communist dictatorship
    which, as far as I know, as we speak is shooting Uighurs down
    in the streets, arresting Falun Gong members for their
    religious freedom, as well as the Tibetan people.
        Mr. Shulman, do you think that United States technology has
    played a significant role in developing China into the threat
    that it poses to us today?
        Mr. Shulman. Yes.
        Mr. Herrnstadt. Let me say yes, and let me say they are
    doing a wonderful job of playing Europe and the United States
    against one another to drain that technology off.
        Mr. Rohrabacher. Right.
        Mr. Herrnstadt. A good example is the Airbus A320 that was
    just assembled in China.
        Mr. Rohrabacher. Right. Governor, when you said Intel has
    gone, where did Intel go?
        Mr. Engler. No. No. I said Intel is really the remaining
    chip maker that is here.
        Mr. Rohrabacher. Okay. Where did the rest of them go then?
        Mr. Engler. Singapore, Ireland, lots of places.
        Mr. Rohrabacher. Okay. But you don't see chip manufacturers
    going to Ireland as a problem? Is that right?
        Mr. Engler. I am reporting it as a fact.
        Mr. Rohrabacher. I know.
        Mr. Engler. I would like to have it all here. When I was
    Governor of Michigan, I wanted it all in Michigan.
        Mr. Rohrabacher. Okay. See, I don't see any problem with
    trading with Ireland or maybe even Singapore.
        I do find it troubling when we send technology to China
    that could come back to hurt us. I understand the People's
    Liberation Army owns many manufacturing systems in China, and
    that seems to me to be a travesty.
        When we talk about U.S. technology going to these other
    countries, is much of this technology not just technology
    developed by our own companies, but also aren't we also talking
    about technology that was developed by the United States
    taxpayers?
        Mr. Engler. I think one good example, and Congressman Royce
    asked this question of Mr. Shulman. I would just comment the
    UAE is committed to spending I think $40 billion on the nuclear
    industry. No question. We know where that all got started. That
    started here.
        We were the leaders, and much of the technology that
    started here is why France is able to generate 80 percent of
    their electricity from nuclear power, why Japan has got a
    robust nuclear power industry. Now China is building nuclear
    power plants. We should be doing that here.
        The UAE is going to do them. The question is do we want any
    U.S. jobs as a result of their $40 billion expansion? There is
    simply nothing that is not available from France or other
    places in the world for the UAE.
        Mr. Rohrabacher. Correct me if I am wrong. Isn't this an
    issue of whether we should work with them in building up a
    nuclear capability there versus the idea of sending technology
    to a country which then will manufacture, using that in a
    manufacturing process?
        Mr. Engler. The way I would say it, and maybe we are saying
    exactly the same thing, but since I am not sure the way I would
    say it is simply they have made a commitment to spend $40
    billion on a nuclear power industry for domestic energy
    purposes. We have a chance to be major suppliers or not.
        Mr. Rohrabacher. Yes.
        Mr. Engler. We should approve the 1-2-3 agreement 1-2-3,
    real fast.
        Mr. Rohrabacher. You know, I guess when we talked earlier
    about a dual track, there are different layers to this onion.
        One layer is that we don't want someone to get a hold of a
    piece of technology that can also be used against us both
    militarily and economically, but when we are talking about some
    technologies what we are really talking about is the technology
    that would enable them to expand their manufacturing
    capabilities so that our aerospace workers which now have
    leverage on slave labor because we got technology in place----
        Well, if you give that same technology to slave labor
    countries that undercuts our abilities if they use it in
    manufacturing. Does that make sense?
        Mr. Herrnstadt. Yes, it does. I actually testified on this
    point before the China Economic Security Review Commission on
    the growth of China's aerospace industry. I think that is a
    real risk that we run. It is something that we talked about for
    many years.
        Mr. Rohrabacher. Right. Because we don't really worry that
    the United Arab Emirates is going to go into the business of
    building nuclear power plants for people in competition with
    General Electric or something here.
        What we are really worried about in UAE is whether or not
    there is going to be a nuclear power plant that could be used
    for military purposes.
        Mr. Engler. I think that is true, Congressman, although I
    do think that some actually worry that if that were to happen
    they would prefer that it would be said that somehow the
    technology came from the French, not the United States.
        Mr. Rohrabacher. Thank you, Mr. Chairman. Let me just note
    with one last statement, and that is we have subsidized this
    massive development in China with technology transfers, with
    educating young Chinese graduate students, with knowledge that
    will permit them to basically put our own people out of work. I
    think that has been not thoughtful on our part.
        Thank you very much, Mr. Chairman.
        Mr. Sherman. Since so much of your questioning dealt with
    the jobs and the UAE and their nuclear program, I will reprise
    what I said about that when we had hearings about it in this
    room, and that is--the word is--``the fix is in.''
        The French are going to get the lion's share of the jobs in
    return for France doing a little thing that will help UAE
    security, namely building a French naval base in that area.
        We provide massively for their security; in fact, they
    would have been overrun by Saddam had we not organized--not
    France, but we organized--the effort to liberate Kuwait, and
    our State Department has made it excruciatingly clear to UAE
    that they are free to give us just the crumbs and they will
    still get the massive security umbrella we provide, and then
    they can get an additional security enhancement from France if
    they give them the lion's share of the jobs. So it is not
    surprising that the UAE is going to do this.
        Years ago they decided to buy a French phone system, and I
    commented that when you dial 911 on a French phone system you
    get Paris, not the Pentagon, but what the UAE has correctly
    deduced is that they can get all of the United States security
    commitment and diplomatic support without anybody in our State
    or Defense Department concerned about the jobs aspects.
        With that I want to recognize the gentlelady from
    California, Diane Watson.
        Ms. Watson. Thank you, Mr. Chairman, and I thank the
    witnesses for their patience and being here. If I raise an
    issue that has already been addressed, would you please let me
    know?
        In the absence of an Export Administration Act, the U.S.
    dual-use export control system continues to be dependent on the
    President's invocation of emergency powers under the
    International Emergency Economic Powers Act and no
    comprehensive legislation to rewrite or reauthorize the EAA was
    introduced in the 110th Congress.
        Given the state of today's economy and the threat of global
    security, what problems do you foresee in the near future if
    significant effective legislation is not passed in the 111th
    Congress? Any of you gentlemen can respond.
        Mr. Engler. Well, I guess at this table as the primary
    advocate for the rewrite for commercial purposes, I see U.S.
    companies being left off of bid opportunities in some of the
    international products where you actually have bids being
    submitted by saying no export control approvals required, that
    kind of thing.
        I think that you will see competitors who have goods that
    are export controlled in this country commercially available,
    and they will compete more effectively and will cost us job
    opportunities, so I really think at a time when we are in a
    recession we ought to be saying what are all of the things we
    could do to create potential opportunities.
        This happens to be one that I think is low-hanging fruit
    that we could do. I know we have been busy the last 30 years,
    but it is time to rewrite and modernize the Act.
        Ms. Watson. Mr. Shulman?
        Mr. Shulman. Yes, ma'am. I think that there is much that we
    can do to modernize and make the system more effective and
    efficient for industry and for national security without
    undertaking a rewrite of the EAA at this time for the purpose
    of dealing with these problems as quickly as possible in the
    current economic climate.
        Ms. Watson. What are some of those things that you might
    have in mind?
        Mr. Shulman. Well, for one I think it is imperative to
    allocate more resources to the Commerce Department, to the
    Bureau of Industry and Security, to replenish their staff,
    which they have lost many, many quality people in the last few
    years because they have been operating effectively in a hiring
    freeze.
        Ms. Watson. Yes.
        Mr. Shulman. To dedicate more resources to administering
    the export control system to make it work more quickly and more
    effectively, to devote more resources to create resources for
    industry and for exporters to make export control decisions,
    classifying their items, trying to determine whether they are
    controlled for export or not, informing them of potential
    buyers in other countries of whom they should be wary.
        Those are all things which could be done just with
    additional resources dedicated to BIS.
        Ms. Watson. Mr. Herrnstadt?
        Mr. Herrnstadt. Yes. Just very quickly, and I will direct
    you to my written testimony.
        We believe that part of the component of any relook at the
    current EAA should give consideration for some sort of
    employment impact study so that when export control licenses
    are considered there is an analysis about how many jobs this
    will impact at home in the short-term and then in the long-term
    in terms of a transfer of technology and production.
        Ms. Watson. Thank you. Should the U.S. designate specific
    countries as sinners of transshipment concern and impose
    additional restrictions on exporting to those destinations?
    Thoughts?
        Mr. Engler. I believe that is the law and that we do do
    that, but I don't have a problem.
        Ms. Watson. Well, if you need any changes, what would they
    be?
        Mr. Engler. Well, I would take the list of all of the
    covered products and reduce that rather sharply and
    dramatically so that we were able to put our regulatory
    enforcement focus on those particular items that represent the
    greatest threat where we uniquely have that product in this
    country where the same product isn't available from one of our
    allies who is willingly selling it.
        And in some cases I suspect even if the ally is willing to
    sell it we should not. I don't argue that point, but I think we
    are quite over broad today because the Act is outmoded.
        Ms. Watson. Mr. Shulman?
        Mr. Shulman. Yes, ma'am. I believe that there have been
    both regulatory and legislative proposals to create a special
    designation for countries of diversion concern. I believe such
    a designation should be created.
        Two of the countries that have been mentioned as candidates
    for such designation are the United Arab Emirates and Malaysia
    because of their history of diverting things to Iran.
        Ms. Watson. Thank you so much. My time is up, Mr. Chairman.
        Mr. Sherman. Mr. Herrnstadt, we have talked free trade. A
    wonderful thing. We will export. We will import without
    governmental involvement.
        Then you bring to our attention these offset agreements and
    co-production agreements. Is it fully legal under our various
    trade treaties for us to impose such requirements on those
    exporting to the United States?
        Mr. Herrnstadt. Well, it gets a little complicated for us.
    There is the government procurement provision under GATT 1979.
    There is a separate agreement under GATT dealing with civil
    aviation of which we are a signatory to.
        Mr. Sherman. But China is able to do this if you are
    exporting paperclips to them.
        Mr. Herrnstadt. They are not a signatory to the civil
    aviation agreement. And then there was the 1992 United States-
    European agreement on large commercial aircraft which got
    dissolved with respect to the WTO subsidy.
        So part of our argument is that we really need to
    reinvigorate prohibitions on the use of offsets in free trade
    agreements, in multilateral trade agreements, at the WTO and in
    investment----
        Mr. Sherman. Well, these other countries are going to look
    at their agreements with us and they are going to say we don't
    want to change those. They are pretty sweet for us.
        I realize you are here representing the machinists and not
    the UAW, but are we allowed to require co-production and
    technology transfer and offsets to anyone who wants to export a
    vehicle to the United States?
        Mr. Herrnstadt. You know, I will confess I will need to
    take a double look at it, but my immediate reaction is I would
    be interested to see why we couldn't do it, particularly in the
    commercial arena.
        Mr. Sherman. Well, it is because our free trade agreements
    are designed to be one-sided in favor of American investors and
    importers.
        I believe the Governor is a little bit more in favor of
    free trade agreements than most members of organized labor. I
    ought to let him comment. Do you see a circumstance where we
    have to put up with offsets and co-production agreements, but
    we are not able to impose them on anybody shipping into the
    United States?
        Mr. Engler. Well, I do think that it is a pretty
    competitive world out there, and some of these agreements--I
    mean, I am proud. For a long time General Motors has been
    number one in China with the Buick. I mean, that is a good
    thing.
        Mr. Sherman. Well, that is the example of a co-production
    agreement. General Motors gets the profits, but the UAW doesn't
    get the jobs.
        I am sure that a lot of countries will welcome our
    investment and our technology so long as none of the
    manufacturing benefits American workers. If that is a big win,
    a few more wins like that and we are going to be a third rate
    country.
        Do you see the Buicks made in China as the route to
    prosperity for the future?
        Mr. Engler. Unfortunately, I see them being more profitable
    than the vehicles being made in the North American market at
    the moment.
        I do think that the fact that China is now the largest auto
    market in the world, passing this country, probably would argue
    that if you are a global auto company you would want to be
    there and be in some production.
        Mr. Sherman. As of a few years ago, we were the largest
    auto market in the world, and lots and lots of big auto
    companies decided not to give us our fair share of the jobs,
    and many of them sold cars in this country without giving us a
    single manufacturing job.
        It is hard to say, well, China is a big market so we have
    to give them a lot of jobs, and we are a big market so they
    have to avoid giving us any of the jobs as long as we get the
    profits.
        Mr. Engler. You know, the government is in charge of the
    auto industry or a good deal of it today. I am sure it will be
    fixed, but the reality I think is----
        Mr. Sherman. The government is in charge of two companies
    in the auto industry that account for way less than half of the
    autos sold in the United States.
        The fact is whether we are talking autos or we are talking
    textiles or whether we are talking anything else, when we want
    to export to many countries they hit us hard with co-production
    agreements. When they want to export to us, we just fire a
    bunch of employees. We just fire a bunch of workers and open
    our markets.
        Let us see. I see my time is expiring. I did want to go on
    to another line of questioning, but I will recognize the
    gentleman from Illinois.
        Mr. Manzullo. Thank you. I am going to show my age,
    especially with Frank Vargos sitting behind you.
        Do you remember the battle of Three Gorges Dam? For the
    younger members here, when I was first elected and sworn in in
    1993, Ex-Im Bank would not allow a company such as Caterpillar
    and Rotec and others to use the favorable financing of Ex-Im to
    go into the massive Three Gorges Dam project in China because
    of concern over the Siberian crane and Chinese alligator.
        We were arguing for massive change in our Ex-Im policy that
    allowed the U.S. to be more competitive because if our products
    are going there they were more environmentally safe than the
    products that were eventually purchased because of favorable
    financing.
        I think that is a reasonable analogy or a good analogy as
    to several things that we are trying to do here. UAE is going
    to buy their nuclear equipment from somebody. The issue is from
    whom are they going to buy it, and if they buy it from us we
    have the opportunity to put in the strongest set of verifiable
    controls that can be envisioned because we have a great
    interest obviously in making sure that there is no more nuclear
    proliferation going on.
        Governor, is that not really what we are talking about in
    terms of modernizing export controls so we can be on the cusp
    to have the best controls possible and yet to be able to have
    as much manufacturing and engineering here in this country?
        Mr. Engler. Congressman, that is exactly what this
    discussion is about. I mean, we are ranging far afield today,
    which I always enjoy the discourse, but I think this is a
    fairly narrow set of issues here.
        The UAE would like to buy American products for that
    nuclear expansion. I mean, I met with UAE officials. That would
    be very high on their list. We need to get out of the way, and
    the 1-2-3 agreement is part of that. I think that that has been
    made pretty clear. I think that we would be highly competitive
    if in fact we removed the obstacles.
        And you are absolutely correct. They made the decision to
    spend $40 billion in this area. They are going to buy from
    somebody, and because we have been so sort of hostile to
    nuclear power for a number of years the industry in this
    country has been pretty dormant, but all of that technology
    started here.
        So I see this as an opportunity to operate the supply base
    as a precursor to a renewal of a nuclear power industry in this
    country that is urgently needed, especially if we are serious
    about reducing carbon emissions.
        Mr. Manzullo. And would you not call those green jobs?
        Mr. Engler. They don't get any greener than that. They are
    green in terms of the environment, and they are green in terms
    of the cash.
        Mr. Manzullo. That is a great answer.
        Mr. Shulman testified that 99 percent of dual-use exports
    do not require licenses. He suggests that the manufacturing
    industry is complaining essentially over nothing.
        Mr. Engler. Well, we have thousands and thousands and
    thousands of products, and many of them don't require any
    license, but many do. Many of those unfortunately are also
    readily available elsewhere in the world.
        Mr. Manzullo. That was the 17C fix that Mr. Sherman----
        Mr. Engler. Yes.
        Mr. Manzullo. We worked on last year.
        Mr. Engler. And I am just suggesting that we can be more
    discerning in an Act which references the Cold War written 60
    years ago really last touched 30 years ago.
        It is time to bring that into this century, and in so doing
    I think we can do a better job for national security on the
    things that really matter while clearing away just what really
    has become a regulatory morass.
        The big companies could really afford this. Interestingly
    enough, I think the companies who get hurt the most by this are
    the small and medium sized companies who don't have an army of
    lawyers working for them. The big people staff up, and they
    just do it. They hate it and it is expensive, but they do it.
    Medium and small sized companies can't. They can't do it.
        Mr. Manzullo. I want to thank the three of you for your
    testimony. Weren't you the panel that got caught up in the 6
    hours of voting a couple weeks ago? Sorry for that.
        Mr. Sherman. Does the gentlelady from California have
    additional questions?
        Okay. Well, then I will call on myself for a few questions.
        Mr. Shulman, how much harm is it that BIS currently does
    not have law enforcement authority?
        Mr. Shulman. They have found a way to work around that
    problem, but it requires effort which would be better spent on
    doing export enforcement with the limited resources that they
    already have, so it seems to me that it could be a relatively
    simple fix to give them that permanent law enforcement
    authority, freeing them up to do their jobs better.
        Mr. Sherman. Governor, we have a deemed export definition
    where even if you are shipping a good in the United States if
    you are shipping it to a foreign national then you need the
    same license as if you were shipping it abroad.
        That legal fiction, but useful one, could be useful in
    saying for certain items, and I keep coming back to the spark
    gap plug, that we are going to deem it an export even if you
    are sending it to someone whose folks came over on the
    Mayflower.
        That is to say if it leaves the factory gate we are going
    to want to keep track of it and know where that item is going
    and that you are sending it to somebody who has a legitimate
    use for it. Is this something that we should apply to some
    easily transportable, highly militarily significant products?
        Mr. Engler. You know, it is something that I think is part
    of the discussion of the Modernization Act that can be looked
    at.
        I was part of a commission that started out being co-
    chaired by Bob Gates and Norm Augenstein and ended up being
    chaired by Augenstein after Gates was appointed to the Defense
    post that recommended a number of changes in the export law as
    well, so that is an area that is useful to look at.
        The other thing that we haven't talked about today, but I
    think it is also relevant because again it helps to clear this
    up, is that we have companies that are cleared that we work
    with very closely in our most top secret areas. We don't allow
    those companies the kind of flexibility on intracompany
    transfers from this country to another country.
        We have got now negotiations, and earlier we were talking
    about a list of countries that we might not trust. There are
    countries we do trust, Australia and Great Britain, and we have
    defense treaties pending there that need to be acted on, so
    there are lots of ways to look at this and to narrow the focus
    down to those few things that are most important.
        Mr. Sherman. So the verified end user program might apply
    to a company that is already dealing with the most sensitive--
    --
        Mr. Engler. Sure.
        Mr. Sherman [continuing]. Technology that has a branch in a
    foreign country, particularly if that foreign country was a
    place we trust.
        I don't care how much I like Google and Yahoo, but when
    they do business in China all of a sudden they are turning over
    all kinds of documents to the Chinese Government that we would
    prefer they not.
        Mr. Herrnstadt, I can see why the machinists would fear
    competition from a low wage country. Most of those countries
    the Governor is referring to are not low wage countries.
        Do you see a threat to jobs if we make it easier for a
    United States company with a branch in Australia or Britain to
    move goods from here to there and back more easily?
        Mr. Herrnstadt. Yes, we certainly do. It is not just an
    issue with a developing country. The developing country issue
    particularly with labor standards not met, internationally
    recognized labor standards, like Mexico and China exacerbate
    the situation, but yes. Certainly.
        Mr. Sherman. I mean, Australia probably has better labor
    standards than we do and certainly stronger unions I hate to
    say.
        Mr. Herrnstadt. Well, we will give the Rudd government a
    little bit more time.
        Mr. Sherman. But you would want the same job scrutiny
    whether we are talking about an end user certificate----
        Mr. Herrnstadt. Absolutely.
        Mr. Sherman [continuing]. In Australia as with China or
    Mexico?
        Mr. Herrnstadt. Yes. Absolutely. The problem with offsets
    is that basically our Government's policy is to relegate the
    issue of offsets to private parties, so we have private
    companies negotiating either with countries or companies in
    other countries regarding the offset process.
        Mr. Sherman. I would also comment the biggest problem with
    offsets is they tend to exist only in those very few areas
    where the United States is a net exporter, chiefly aircraft and
    some high technology, and if we are going to have balanced
    trade on the one or two things that we export and then we are
    going to have massive deficits in everything we import then our
    trade deficit is going to get much worse.
        And that is why it is interesting that these co-production
    agreements only seem to exist when America is exporting and
    only as to those few goods where America still tends to be a
    net exporter.
        I believe we have gone long enough, and the gentleman from
    Illinois has no more questions. Gentlemen, you have been very
    patient with us, and I thank you for your appearance.
        We would be anxious to get from each of you proposed if not
    statutory language, at least something close to statutory
    proposals to improve this whole system because we can't write
    it all ourselves.
        Mr. Engler. We would be happy to work with you, Chairman.
        Mr. Sherman. Thank you.
        [Whereupon, at 2:05 p.m., the subcommittee was adjourned.]

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