[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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