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


 
          A STRATEGIC AND ECONOMIC REVIEW OF AEROSPACE EXPORTS

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

                                HEARING

                               BEFORE THE

         SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION AND TRADE

                                 OF THE

                      COMMITTEE ON FOREIGN AFFAIRS
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 9, 2009

                               __________

                           Serial No. 111-74

                               __________

        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,                       DONALD A. MANZULLO, Illinois
    FloridaUntil 1/4/       EDWARD R. ROYCE, California
    10 deg.                          RON PAUL, Texas
ELIOT L. ENGEL, New York             JEFF FLAKE, Arizona
BILL DELAHUNT, Massachusetts         MIKE PENCE, Indiana
GREGORY W. MEEKS, New York           JOE WILSON, South Carolina
DIANE E. WATSON, California          JOHN BOOZMAN, Arkansas
RUSS CARNAHAN, Missouri              J. GRESHAM BARRETT, South Carolina
ALBIO SIRES, New Jersey              CONNIE MACK, Florida
GERALD E. CONNOLLY, Virginia         JEFF FORTENBERRY, Nebraska
MICHAEL E. McMAHON, New York         MICHAEL T. McCAUL, Texas
JOHN S. TANNER, Tennessee            TED POE, Texas
GENE GREEN, Texas                    BOB INGLIS, South Carolina
LYNN WOOLSEY, California             GUS BILIRAKIS, Florida
SHEILA JACKSON LEE, Texas
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
VACANT
                   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

Matthew S. Borman, J.D., Acting Deputy Assistant Secretary for 
  Export Administration, U.S. Department of Commerce.............     7
Mr. Robert S. Kovac, Acting Deputy Assistant Secretary for 
  Defense Trade, Bureau of Political-Military Affairs, U.S. 
  Department of State............................................    16
Ms. Marion Blakey, President and Chief Executive Officer, 
  Aerospace Industries Association...............................    35
Mr. David J. Berteau, Senior Advisor and Director of the Defense-
  Industrial Initiatives Group, Center for Strategic and 
  International Studies..........................................    52
Mr. Henry Sokolski, Executive Director, Nonproliferation Policy 
  Education Center...............................................    58

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Matthew S. Borman, J.D.: Prepared statement......................    10
Mr. Robert S. Kovac: Prepared statement..........................    18
Ms. Marion Blakey: Prepared statement............................    38
Mr. David J. Berteau: Prepared statement.........................    53
Mr. Henry Sokolski: Prepared statement...........................    60

                                APPENDIX

Hearing notice...................................................    82
Hearing minutes..................................................    83
The Honorable Gerald E. Connolly, a Representative in Congress 
  from the State of Virginia: Prepared statement.................    84
The Honorable Brad Sherman, a Representative in Congress from the 
  State of California, and Chairman, Subcommittee on Terrorism, 
  Nonproliferation and Trade: Letter to Foreign Affairs Committee 
  Chairman Howard L. Berman, dated October 16, 2009, from the 
  International Association of Machinists and Aerospace Workers..    85


          A STRATEGIC AND ECONOMIC REVIEW OF AEROSPACE EXPORTS

                              ----------                              


                      WEDNESDAY, DECEMBER 9, 2009

              House of Representatives,    
                     Subcommittee on Terrorism,    
                            Nonproliferation and Trade,    
                              Committee on Foreign Affairs,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:03 p.m. in 
room 2200, Rayburn House Office Building, Hon. Brad J. Sherman 
(chairman of the subcommittee) presiding.
    Mr. Sherman. I want to thank everyone for being here. As 
one of our largest sources of exports, the aerospace industry 
plays a vital role in securing our military strength and 
bolstering the economic competitiveness of the United States. 
Today's hearing is to examine the strategic and economic impact 
of our current policy on this industry. This is part of an 
ongoing effort by this subcommittee. We have held hearings on 
this issue; in July 2007, May 2008 and earlier this year, both 
in April and in July. These hearings have led to changes in 
policy and procedure in the Executive Branch and to the 
passage, through at least the House, of important legislation 
that has yet to make it through the Senate.
    This includes the Defense Trade Controls Improvement 
Performance Act, which has passed the House twice, the second 
time as part of the Foreign Relations Authorization Act, which 
is pending in the Senate. That act pending before the Senate 
has the work of this subcommittee and collegially several of us 
in the Section 826, which provides authority to remove 
satellites and related components from State Department control 
to Commerce control, while at the same time protecting our 
technology from China. We are also in the process of including 
in a larger bill the Export Controls Improvement Act. The 
aerospace industry has been a particular focus, not only of 
myself, but Mr. Royce, our ranking member, Mr. Manzullo, who 
has focused on small business, and our vice chairman, Mr. 
Scott.
    We have seen important changes involving Section 17(c) 
related to civilian aviation equipment in response to the 
concerns of this subcommittee. The Commerce and State 
Departments, both of which are with us today, worked together 
to issue a rule in August 2008 that clarifies jurisdiction 
significantly. Moving forward, ongoing clarification in this 
arena from the Departments of State and Commerce would be 
beneficial, as will a timely review of control items. Also, as 
a result of this subcommittee's previous work with the 
directorate of defense trade controls, the DDTC, I am pleased 
to see that the State Department has decreased the average 
license application processing time to one-third of the 2006 
average, so you are to be commended.
    I want to commend both agencies represented here for 
responsiveness to congressional concern. Not only does the 
aerospace industry contribute to the economic output of the 
U.S. and provide high paying jobs, it also is critical to the 
defense strategic capacity of the United States, to that of our 
allies, and the fact that we are building the planes means that 
some other country isn't and that we are preventing the 
development of technology in hands that we might not control. 
In fact, organizations, such as the International Association 
of Machinists and Aerospace Workers, warned at our last hearing 
on this subject that failure to consider the employment impact 
in export control policy may exacerbate the existing job crisis 
in the United States.
    I want to submit for the record a letter sent to us by the 
Machinists' Union which states, in part, mindful that policies 
that encourage or facilitate further outsourcing of technology 
and production can, and do, have a detrimental impact on U.S. 
workers and will impede our nation's recovery. Clearly, in 
deciding what our policy in this area ought to be we should be 
weighing on the one hand any possible, or even remotely 
possible, diminution in our national security by shipping 
abroad sensitive technologies versus the jobs impact. Where we 
have a circumstance where something has a negative jobs impact, 
then we should not accept even the tiniest and most theoretical 
diminution in our national security.
    Now, currently there is no legal requirement for the export 
control process to take into account the employment impact when 
assessing licensing decisions or the consequences that certain 
transfers will have to the stability of the defense industrial 
base. While companies need licenses through the DDTC to 
manufacture certain munitions overseas, it is time to start 
thinking about making a similar requirement for dual-use items, 
and whether it is Commerce or State, no license should be 
issued that doesn't take into consideration the affect on jobs. 
As I have said before, there is no reason to issue a license if 
it is going to have a detrimental impact on jobs.
    We need to insure that we are not outsourcing our critical 
national security infrastructure or facilitating the 
outsourcing of U.S. jobs and perpetuating our trade deficit. A 
particular issue arises over the defense needs of Japan, their 
prior interest in the F-22, their possible future interest in 
the F-35. I know that we have refused past Japanese 
Government's requests for them to purchase, for us to sell, the 
F-22. Every year since 1998, Congress has imposed a year long 
ban on foreign sales of the F-22. This has not been done by the 
Foreign Affairs Committee, but rather, through the 
appropriations process.
    I can't blame the Appropriations Committee for taking this 
action when our committee has not stepped forward with a clear 
policy answer to the question of whether, and what, should be 
the limitations on the export of the F-22. When we don't act, 
they do. Congress works best when the different roles of the 
appropriations and authorizing committees are followed, and I 
look forward to a return to regular order on that issue. The 
2010 National Defense Authorization bill includes reporting 
language, rather, a reporting requirement to detail the 
feasibility, cost and impact of selling the F-22s abroad 
showing that the other relevant authorizing committee is, in 
fact, taking a look at whether we should sell these F-22s in 
certain circumstances.
    As I said, there may be interest in the F-35. I would say 
that it is in the U.S. national security interest for Japan to 
have a major qualitative advantage over China and other 
potential Japanese adversaries, and to enhance Japanese 
security is, for the most part, to enhance American security. 
Notably, due to a recent change in the ruling party, the 
Japanese Government, which had expressed continuing interest in 
purchasing the F-22, may or may not be interested at the 
present time. They had been interested in purchasing 40 to 60 
aircraft. Taiwan has also expressed an interest in purchasing 
F-16 aircraft. Given the violence done to the American economy 
by the illegal actions of China in so many economic spheres, 
for us to accede to the Chinese concerns in not providing the 
F-16 to Taiwan seems to add, not insult to injury, but injury 
to injury.
    U.S. aerospace companies have had significant financial 
interest in the export of their commercial products. Our 
industry today faces foreign competition for these sales. The 
Europeans unfairly subsidize their industry. I believe the 
United States has a vested interest in supporting our domestic 
producers. For example, markets in China and Russia have 
potentially high demand for U.S. commercial aircraft. In 
particular, the Chinese may have a demand for as many as 3,700 
new civilian aircraft in the next 20 years. That represents $40 
billion in potential sales. Additionally, new Russian airline 
Rossiya, and I am sure I mispronounced that name, has solicited 
bids for up to 65 aircraft.
    I have long advocated for a better relationship between the 
United States and Russia, and the integration of U.S. 
commercial planes into the Russian civil aviation carriers 
would be a real signal of an improvement in increased U.S./
Russian cooperation. Finally, I want to comment on the 
possibility that GE might want to move various facilities to 
China, perhaps to take advantage of the Chinese market. We have 
a strategic decision to make. One is do we try to compete 
against the Europeans to see who can hand more technology to 
China on the thickest silver platter, or do we want to 
cooperate with Europe to say that as long as China is running 
such a huge trade surplus with the world, that perhaps this is 
one area of economics that they should not be expanding into.
    None of the arguments in favor of cooperating with China 
should assume that cooperation with Europe on this is 
impossible until we at least try. I look forward to hearing 
from today's witnesses, and I especially look forward to 
hearing the opening remarks of our ranking member, Mr. Royce.
    Mr. Royce. Thank you very much, Mr. Chairman. This is the 
latest hearing on export controls. The subcommittee is, I 
think, very well positioned should the committee move ahead 
with broad export control legislation. Let me just make a 
couple of observations, and one is that aerospace is one of our 
nation's key industries, both economically, but certainly 
national security-wise as well. Of course, American dominance 
and leadership can't be assumed here. Russia and China are 
focused on developing exportable aircraft. India has a vibrant 
space program. Our export control system was crafted during our 
economic and technological dominance. That has changed, 
unfortunately.
    The question today is whether the system has evolved 
appropriately in a way that doesn't choke innovation and 
competitiveness, yet protects critical technology. There have 
been some helpful reforms, made mainly by the past 
administration, and there have been encouraging words by the 
current administration, but more is needed to manage rapidly 
evolving technology and crafty foes. A witness at our satellite 
hearing called the system broken, very bureaucratic and unable 
to distinguish what is commercially available and what is not. 
The GAO has observed an inherently complex system having what 
they call significant vulnerabilities. Meanwhile, the GAO keeps 
rattling the system.
    GAO put out a June report that explained how its 
investigators beat export controls by buying sensitive 
technology and illegally shipping fake versions abroad. It was 
very easy for them to pull that off, and this is a big problem. 
The full House has approved an authorization bill giving the 
President authority to remove satellites from the State 
Department managed munitions list, except for technologies that 
could be transferred or launched into space by China. This 
change reflects the view of the Pentagon and others that 
satellite export controls have hurt U.S. innovation. Excluding 
China is smart, though. For one, China is working with Iran on 
space and satellite programs. I have expressed concerns about 
China before, particularly the validated end-user program, 
which expedites tech exports to China, yet lacks strong 
monitoring capacity.
    There is too much trust. But it is not just in export 
controls that China is naively viewed. A recent Time Magazine 
story analyzed what a lousy decade we are finishing. We had 9/
11, two market collapses, the financial crisis, Katrina, and so 
forth. On the plus side of its ledger, one of the few 
``amazingly great'' things was the, ``stunning rise of China.'' 
``Amazingly great,'' as if China is not a totalitarian country 
aggressively stealing our technology. We need more realism 
about China across the board in this society. I want U.S. 
companies to be world class. That means killing the 
bureaucratic excess. I want to deny terrorists, and Iran, 
critical technology, and that means being efficient. These 
aren't contradictory goals. We won't get near them unless 
export control betterment is a key administration goal. I hope 
to be proved wrong in my skepticism. Let us start today. Thank 
you very much, Mr. Chairman, and I yield back.
    Mr. Sherman. Thank you. With that, let us see who else has 
an opening statement. I assume Mr. Scott does.
    Mr. Scott. Thank you, Mr. Chairman. I appreciate this 
hearing, the commercial and military aerospace industries are 
very significant in terms of our export, but also in terms of 
vital employment, for our aerospace industries employ hundreds 
of thousands of workers in the United States. The recent 
economic downturn has affected a great number of Americans with 
unemployment exceeding well over 10 percent, so it is timely, 
and it is a pleasure to be with you here. I would like to join 
you in welcoming our distinguished witnesses as we tackle the 
subject of strategic and economic review of aerospace exports. 
The topic of today's hearing is one that we have broadly been 
considering for quite a while.
    The specific aspects of today's hearing, particularly the 
economic impact of aerospace exports, is one that I am keenly 
interested in. So I thank you once again, Mr. Chairman, for 
providing this forum to discuss these important issues. As I 
said, the boom and bust of aerospace exports has played out on 
the stage, particularly of my congressional district where 
Lockheed Martin and the people of Georgia build some of the 
finest planes in the world. As a matter of fact, Lockheed has 
long been the structural backbone of the reason why the United 
States has the air superiority that we have today which means 
we have the military superiority in the world today.
    Let me tell you, Mr. Chairman, the Obama administration 
dealt a mighty blow to my district when it decided to terminate 
a program that employed thousands of workers, not just in 
Georgia, but all across this country, impacting over 85,000 
employees, and that is in the building of the F-22. The F-22. 
That platform that gives us, and has given us, that competitive 
edge, that has helped us to maintain our military superiority. 
Myself and hundreds of other Members of Congress, both in the 
House and the Senate, implored the President. I visited the 
White House on three different occasions to plead with the 
President and Secretary Gates to consider the economic 
consequences of closing this production line.
    Our entreaties were roundly ignored by this administration, 
though. During a time when our economy is hemorrhaging jobs 
left and right, they decided to kill thousands of more jobs. 
And so what is left for these workers? Is there any hope that 
their jobs might be saved? Well, we do have the F-35 coming on 
line, but when? It is my understanding that the Japanese, for 
example, wanted to purchase F-22s, but the administration has 
told them no. Of course, that makes little sense on any front. 
The Japanese are a close friend, and they are a close ally who 
wish to help out the United States economy by purchasing high 
value products from us, but we tell them no.
    Mr. Chairman, I do want to add one other point at this 
time, that I think it is very important for us and the Foreign 
Affairs Committee, and us, particularly on our subcommittee, 
for it is our subcommittee that deals with international trade, 
and while I have great respect for the Appropriations 
Committee, they are appropriators. It is the Foreign Affairs 
Committee that provides the analytical information, the 
thoughtful embrace of these decisions dealing with our military 
and our defense needs and relations to our foreign policy, 
interwoven with the very important issue of international 
trade, and I think it is very important that if there is a 
final say so in terms of the F-22 and others that will come on 
line regarding international trade, that it should be done in 
the committee of jurisdiction, which is the Foreign Affairs 
Committee, and certainly in the bosom of the subcommittee of 
which we sit today.
    As I said, the Japanese are close friends and they are 
allies. By purchasing these high value products from us it 
helps us. Moreover, this administration has stated a commitment 
to helping our partners build their capacity for defense and 
security. It has been pointed out it is important that our 
partners in the world maintain the qualitative edge, whether it 
is Japan on one hand, or perhaps Israel and the Middle East on 
another hand. So it is even more cresotic that this 
administration would tell the Japanese that they can't buy what 
they want, and especially with the Japanese being our friend. 
Admittedly, the United States Government does not have a 
responsibility to promote exports from one particular company 
or another, and economic concerns shouldn't always trump 
national security concerns. In fact, they must not.
    When our economy is struggling and a friend offers us a 
win/win solution and help that creates and preserves jobs and 
helps ensure our national security at the same time, why not 
jump at the chance instead of telling them thanks, but no 
thanks and driving them into the hands of others? So, well 
again, Mr. Chairman, I have had my say on this, and I hope that 
my points have been made clear, and I thank you for giving us 
the chance to explore, and I look forward to the testimony of 
our witnesses.
    Mr. Sherman. I agree with the gentleman from Georgia that 
when we don't sell to one of our friends we drive them into the 
hands of others. So not only do we not help the development of 
our industry, we help the development of industry elsewhere 
which creates a new competitor economically, and, depending 
upon who that competitor is, a new competitor strategically as 
well. Mr. Ruppersberger, the chair of the Technical and 
Tactical Subcommittee of the Intelligence Committee, who helped 
to bring to our attention the potential impact of ITAR on the 
domestic satellite industry and the potential ramifications of 
that for U.S. intelligence would like to submit a statement for 
the record on that issue, and so, without objection, I would 
like to have that statement added to the record at the 
appropriate place. Hearing no objection, it will be done. In 
addition, I would like unanimous consent to add to the record 
the Congressional Research Service study of November 25 done at 
the request of this subcommittee. It is some 32 pages long and 
is comprehensive and helpful, and, without objection, will be 
added to the record of this hearing. I guess the gentleman from 
Illinois does not have an opening statement.
    Mr. Manzullo. I am going to waive mine. I am very anxious 
to hear the testimony of the witnesses and would like unanimous 
consent to make it part of the record.
    Mr. Sherman. Why thank you. I know the gentleman from 
California is no less anxious to hear the witnesses, but we are 
anxious to hear his opening statement.
    Mr. Rohrabacher. Thank you very much, Mr. Chairman. I want 
to thank you for your leadership in this very significant issue 
in terms of exporting American technology and these economic 
decisions that are also national security decisions, and thank 
you for letting me be part of this subcommittee hearing today. 
So many American companies are now American in name only, 
having sent their manufacturing facilities, along with millions 
of American jobs, overseas. This has been both an economic and 
a national security disaster for the people of the United 
States. The latest move by GE to join forces with a Chinese 
Government run company to compete with Boeing and Airbus in the 
sale of avionics technology is particularly unforgivable.
    It is a betrayal of American aerospace engineers, and 
workers and entrepreneurs who over the years have done so much 
for our prosperity and our national security. It is 
unforgivable. Mr. Chairman, it was a disastrous economic 
mistake for this Congress to grant Communist China most favored 
nation in trading status to begin with. Ever since then, tens 
of millions of good jobs have been lost to China, which has 
resulted in the present disastrous situation where Communist 
dictators control our economy by holding trillions of dollars 
of U.S. debt. They also have technology available to them to 
outcompete us and to defeat us militarily, which is, again, a 
disaster for the people of the United States of America.
    The Foreign Affairs Committee should ensure that the greed 
of a few American businesspeople who have already done so much 
damage to the American economy, and again, so much damage to 
the well-being of American engineers and skilled laborers, that 
we have do what we can to make sure that they are not permitted 
to render our nation's security in permanent vulnerability. If 
we end up sending over to Communist China, which is involved 
with proliferation and involved with sending military equipment 
to rogue regimes, if we let them have the technology that was 
developed by hundreds of millions, even billions of dollars 
worth of U.S. research, shame on us for not stepping in and 
getting in the way of these so-called Americans who are putting 
our country at risk. Thank you very much, Mr. Chairman. I am 
looking forward to the hearing.
    Mr. Sherman. Thank you. Sometime you will tell us how you 
really feel. We have with us two acting deputy assistant 
secretaries. Acting does not comment adversely on the 
authoritativeness of their pronouncements, but it does reflect 
on the fact that it has taken a very long time for this 
administration to gear up and get its people into positions 
throughout government. We are at the close of 2009. You could 
blame the administration for the fact that they have been slow 
to gear up, you could blame the Senate. This is one of the few 
things going wrong in Washington for which you cannot blame the 
House of Representatives. I welcome Mr. Matthew S. Borman, 
acting deputy assistant secretary of commerce for export 
administration. In this capacity, Mr. Borman is responsible for 
implementing the Bureau of Industry and Securities, also known 
as BIS, controls on dual-use items.
    After Mr. Borman, we will hear from Robert S. Kovac, acting 
deputy assistant secretary of state for defense trade and the 
managing director of the directorate of defense trade controls, 
also known as DDTC, at the State Department. First Mr. Borman.

 STATEMENT OF MATTHEW S. BORMAN, J.D., ACTING DEPUTY ASSISTANT 
    SECRETARY FOR EXPORT ADMINISTRATION, U.S. DEPARTMENT OF 
                            COMMERCE

    Mr. Borman. Thank you, Mr. Chairman. It is a pleasure to be 
here before you and the committee again. I commend you for your 
continued interest in this subject. Chairman Sherman, Ranking 
Member Royce and distinguished members of the subcommittee, 
thank you for the opportunity to testify on the Department's 
role in controlling the exports of aerospace items. The 
Department's Bureau of Industry and Security, in conjunction 
with other Federal agencies, administers controls on a range of 
dual-use items, including aerospace commodities, software and 
technology, to further U.S. national security, foreign policy 
and economic objectives. We administer and enforce the controls 
through the Export Administration Regulations.
    The promotion of the competitiveness of the aerospace 
industry is the responsibility of the Department's 
International Trade Administration, which is a different part 
of the Department of Commerce. The International Trade 
Administration of Commerce performs several critical functions 
to help ensure the U.S. aerospace industry remains globally 
competitive. The aerospace market is the United States' most 
significant advanced technology export sector. In the last 
fiscal year, Fiscal Year 2009, over $80 billion worth of 
aerospace exports were made from the United States. In the 
aerospace industry sector, of course, there are many dual-use 
items, items that have both civilian and military applications.
    In the last fiscal year, the Bureau of Industry and 
Security approved 1,230 applications for licenses to export 
aerospace products worth about $1.3 billion. That constituted 
more than 7 percent by volume of all of the roughly 20,000 
export license applications we processed. Our controls seek to 
allow U.S. companies to supply secure markets and to benefit 
from international technology collaboration, while minimizing 
potential threats to national security and foreign policy. 
Under the Export Administration Regulations, most civil 
aircraft and related parts, including virtually all commercial 
aircraft and engines, can be exported to most of the world 
without individual export licenses. Individual licenses are 
required to export these items, however, to Cuba, Iran, North 
Korea, Syria and Sudan, as well as a range of proscribed 
persons.
    In 2008, the Departments of Commerce and State clarified 
our respective regulations on the export jurisdiction of 
certain aerospace components. It appears that the clarification 
has served its purpose as the number of requests for commodity 
jurisdiction determinations for aerospace items, which had been 
significantly increasing, has dropped substantially after the 
publication of that clarification. We also seek to regularly 
update our list of controlled items, the Commerce Control List, 
to ensure that it reflects global realities, including the 
availability of controlled items from foreign sources. In this 
regard, our Technical Advisory Committees, and particularly, 
our Transportation Technical Advisory Committee, has formulated 
modifications to make sure that aerospace controls are up to 
date as partnership between the aerospace industry and the 
Bureau of Industry and Security has been an effective tool in 
our continuing efforts to more precisely target our controls.
    Our enforcement efforts help to ensure compliance with our 
dual-use aerospace export policy. This includes thwarting 
potential violations of the regulations by a variety of means, 
including end-use checks abroad and temporary denial orders. We 
also vigorously pursue violations of the regulations, and 
several examples of enforcement actions involving aerospace 
items are included in my written testimony, which I request, 
Mr. Chairman, be included in the hearing record. A significant 
challenge for the Bureau, especially with respect to its 
enforcement activities, is the longstanding lapse of the Export 
Administration Act. This lapse hinders the ability of the 
bureau to employ up to date authorities to enforce the dual-use 
export control system.
    In August, the President made his annual renewal of our 
authority to continue our dual-use export control regulations 
in light of a lapse of the EAA. He also directed that the 
National Security Council launch a broad-based interagency 
process for reviewing the overall U.S. export control system. 
The aim of the review is to ensure that the system best 
addresses the threats and changing economic and technological 
landscape we face today. This review is well underway. Thank 
you for the opportunity to testify on the Department of 
Commerce's controls on the export of aerospace items. I am, of 
course, pleased to answer any questions members have. Thank 
you.
    [The prepared statement of Mr. Borman 
follows:]Matthew Borman deg.













    Mr. Sherman. Thank you.

   STATEMENT OF MR. ROBERT S. KOVAC, ACTING DEPUTY ASSISTANT 
   SECRETARY FOR DEFENSE TRADE, BUREAU OF POLITICAL-MILITARY 
               AFFAIRS, U.S. DEPARTMENT OF STATE

    Mr. Kovac. Thank you, Chairman Sherman, and members of the 
subcommittee for the opportunity to testify on the export 
control processes and policies of the Department of State. 
Directorate of defense trade controls and the Department of 
State administers the U.S. defense trade system. Its mission is 
to advance national security and foreign policy through the 
licensing of direct commercial sales for defense articles and 
services and the development and enforcement of defense trade 
control laws, policies and regulations. Like any regulatory 
agency, our goal is to ensure that this mission is performed in 
a manner that is transparent, efficient and predictable as 
possible while preventing exports or retransfers of defense 
articles and technologies that are counter to, or could 
undercut, U.S. national security and foreign policy interests.
    Several years ago, without justification, the directorate 
had a less than stellar reputation for the processing of 
licensing applications. During calendar year 2006 the 
directorate processed 70,000 license applications with an 
average processing time of 43 days. This does not tell the 
whole story, however. At one point in 2006, the directorate had 
over 10,000 license applications open and awaiting final 
action. I am proud to say that the situation has changed 
radically and for the better. In 2008, the Department processed 
over 84,000 license applications while decreasing the average 
processing time to just over 16 calendar days. The number of 
applications open at any one time average 3,400, and the number 
of cases that took over 60 days were reduced to just 1,100 
during that year.
    I am also extremely proud to note that this was not an 
isolated event or the result of extraordinary exertions that 
could not be sustained. So far in 2009 the Department has 
processed over 70,000 license applications at an average 
processing time of just 15 days. The number of open cases at 
one time has also dropped. Improvement of this magnitude 
requires changes to process, policy and practices, as well as a 
sustained effort on the part of all those involved in the 
export process. The promulgation of NSPD-56 provided the 
impetuous for many changes in policy in the processing of 
licenses, including the establishment of the 60 day limit in 
processing unless national security or foreign policy concerns 
apply, and the requirement for applicants to utilize electronic 
licensing.
    Department of Defense support in the policy and process 
improvements has also been critical. The Department's Defense 
Technology Security Administration has been a steadfast partner 
in all of the regulatory and policy changes, and most 
importantly, in its own process improvements, which included 
the use and continued refinement of a do not staff list 
identifying technologies and circumstances that do not require 
DOD review. Finally, and most importantly, these improvements 
have been the result of actions within the directorate itself. 
We have done a detailed review of the processes, policies and 
practices used in licensing, developed internal standard 
operating procedures, published guidelines and policy notices 
to the exporting community and maintained a sustained effort on 
all fronts to improve the process on a daily basis.
    Kevin Maloney and his team in the office of Defense Trade 
Controls, Licensing, deserve much of the credit for these 
improvements. Regulatory changes have, and will, play a part in 
these improvements. As I already mentioned, Section 17(c) 
changes last year have significantly reduced the number of 
aircraft-related commodity jurisdiction requests. Expansion of 
the exemption that permits retransfers without prior approval 
to include NATO agencies has likewise had a positive impact. 
The Department has recently published a draft rule to clarify 
the exemption for exports in furtherance of foreign military 
sales cases and work was just completed on a draft rule to 
clarify exports exempt from licensing when buying for the 
United States Government.
    Other improvements are on the drawing board. In summary, 
the improvements that have taken place have been impressive, 
and will continue. The Department is committed to making the 
system efficient, transparent and predictable. Our goal is 
threefold. First, to establish a regulatory regime that 
requires licenses only when required by law or when U.S. 
national security and foreign policy concerns are a factor that 
the applicant cannot address. Second, to make the process as 
expeditious as possible when a license is required. Finally, to 
design the process to support enforcement. Any specific future 
improvement be implemented will depend on a number of factors, 
including the impact of any legislation that might be 
forthcoming. However, any improvement, as Under Secretary 
Tauscher and Assistant Secretary Shapiro have made clear, will 
be executed with the U.S. national security being the primary 
consideration. I would be happy to respond to your questions.
    [The prepared statement of Mr. Kovac 
follows:]Robert Kovac deg.









    Mr. Sherman. I thank you both for your testimony. Our 
export control system is based on the idea of controlling that 
which is exported. Therefore, an awful lot of items, important 
dual-use items, can be purchased by any American for any 
reason, or for no reason, no matter who they are, and then we 
are going to hope that that person doesn't then ship it abroad 
without permission. Mr. Borman, given the fact that many of 
these dual-use items could be put in a pick up truck and 
trucked to the Iranian Ambassador in Ottawa any day of the 
week, are we just fooling ourselves with the idea that we can 
allow these items to be purchased by anybody who can go on the 
internet in the United States, and then that somehow we are 
going to prevent their export?
    Mr. Borman. Well, Mr. Chairman, I can tell you how we 
currently try to deal with that situation. There are two 
aspects. As it relates to release of controlled technology to 
foreign nationals in the United States, there is a part of the 
regulations that covers that. So if an individual in the United 
States seeks to get access to technology information that would 
require a license----
    Mr. Sherman. For many years there was stuff at sale at 
Egghead. This shows how far back, when Egghead was where you 
bought your software, but it was illegal to ship abroad, so the 
Iranian Ambassador to the United Nations was free to buy it at 
Egghead, but somehow we were going to prevent him from sending 
it, or the electrons on the disk, back to Tehran. Are you 
saying that we make sure, or at least have a system to make 
sure, that any American buying something has a good use for it 
and a legitimate reason to buy it if that is something that we 
would not allow the export of?
    Mr. Borman. No. What I am saying is the current system 
requires a license if a foreign national who is in the United 
States----
    Mr. Sherman. Foreign national.
    Mr. Borman [continuing]. Could get access to controlled 
technology.
    Mr. Sherman. Okay. So the Iranian Ambassador to the U.N. 
would have to have one American citizen friend willing to do 
this. So you have got to go on the internet. You can't say ship 
it to the U.N. Ambassador of Iran, you would have to say send 
it to this one individual. Given the recent terrorist arrests, 
are we assuming that every legal citizen and resident of the 
United States, that not a single one of them would cooperate? 
Is our whole export control program based on the assumption 
that not a single one of them would cooperate with, say, Iran?
    Mr. Borman. No. The definition of ``export'' as it is in 
the Export Administration Act doesn't give us the authority to 
control the domestic----
    Mr. Sherman. Yes. I am not blaming you. I am saying 
Congress created a really stupid system, which you are doing a 
great job of administering, where we think we are accomplishing 
something by saying, you know, if you are sitting in Malaysia 
or in Denmark, you can't buy this widget, but if you are the 
Iranian Ambassador to the U.N.'s best friend, you can.
    Mr. Borman. Well, that would still be a violation of the 
existing law because if there is a domestic transfer and then 
there is an attempt to make that----
    Mr. Sherman. Trust me, whoever is his best friend is 
willing to violate the law of the great Satan. Basically, any 
American citizen or resident can buy any one of these things, 
put it in the back of a pick up truck and drive to Canada or 
Mexico, and the only person violating the law would be the guy 
in the pick up truck, right?
    Mr. Borman. Well, whoever is facilitating that illegal 
export.
    Mr. Sherman. Well, you go on the internet, you buy it, it 
is delivered to your house by UPS, you are not going to put the 
UPS driver in jail, you know, what he is doing is entirely 
legitimate, he puts it in his pick up truck and he drives to 
Mexico City. We have got one person violating the law, we have 
got terrorist organizations where people are willing to blow 
themselves up. Here, the chance at being caught is, would you 
say zero?
    Mr. Borman. We have had cases. We have had enforcement 
cases where we have apprehended and prosecuted individuals who 
have procured things in the United States and tried to do 
exactly what you have said.
    Mr. Sherman. Do we have a system that would do that or we 
just get real lucky?
    Mr. Borman. No. I mean, we have law enforcement agents, 
both in our department and other departments, who are on the 
look out for that. That is what they do.
    Mr. Sherman. I would say you have got thousands of things 
on your list you are trying to control. Any one of my staff can 
buy any of them as long as they can afford them just by going 
on the internet. They don't have a use for any of them, and 
thank God none of them is a good friend of the Iranian 
Ambassador to the United Nations. With that, I will yield to 
Mr. Royce.
    Mr. Royce. Thank you, Mr. Chairman. I am going to ask Mr. 
Borman a couple of questions here and I will start by asking in 
January the Bureau of Industry and Security announced the full 
implementation of the validated end-user program with China. 
There have been concerns that one of those entities, Aviza 
Technology China, shared an address with a state owned firm 
that was sanctioned by the State Department in December 2006, 
and they were sanctioned expressly for illicit sales to Iran 
and to Syria as well. So I would ask, are you confident that 
this program is defensible on national security grounds?
    Mr. Borman. Yes, I am. In that particular case that end-
user underwent a thorough intelligence, law enforcement, 
interagency review and the location is actually a bonded 
warehouse, and so we have a long record of being able to check 
and see what they are doing there, and the Intel information, 
as I said, intelligence, law enforcement information indicated 
that the bonded warehouse that Aviza uses is a bonded 
warehouse, which means the items come in, they are secure and 
then they are sent to their customers. Of course, the company 
is responsible for informing us if items authorized to go there 
don't end up at the customer where they are supposed to go, 
which is a strong business incentive for them.
    Mr. Royce. But here is part of the catch. You have got to 
give 60 days notice, I understand, right? You have got to give 
that notice to the Chinese Government before you subsequently 
have that opportunity to do that inspection. Now, first I would 
ask, is that still 60 days? Because that seems like an awful 
long time to get your ducks in a row if you are notified that 
the U.S. is tripped to some question here as to the end-use. 
Let me ask you about that.
    Mr. Borman. It is 60 days. That is right.
    Mr. Royce. Must an inspector be accompanied when he goes in 
there by an official representative of the Chinese Government? 
Is that also still part of the----
    Mr. Borman. The Chinese Government can choose to do that. 
On Aviza, remember that the business model here is the item 
goes into the facility, which is the bonded warehouse, and then 
it goes to a customer.
    Mr. Royce. Right.
    Mr. Borman. So if it were to go to someone else than the 
customer, I mean that is a significant business impact for the 
companies so they have a strong incentive to make sure that the 
individual item that comes in that is for a specific customer 
and order then goes there. It is not a stockpile.
    Mr. Royce. On the other hand, the return on investment can 
be very, very high. Well, let me ask you one other question. In 
June, the GAO concluded as a result of its covert testing that 
sensitive dual-use and military technology can be easily and 
legally purchased from manufacturers and distributors within 
the United States and illegally exported without detection. The 
items in its test included gyro chips, night vision equipment, 
parts used for smart bombs and nuclear explosives. What are 
your thoughts on that? Then I will defer to other members.
    Mr. Borman. Well, as I mentioned to Chairman Sherman, right 
now, under the legal authority, we don't have authority to 
regulate domestic transfers of controlled dual-use items. What 
are illegal, of course, is if there is a domestic transfer and 
the parties know that they are going to illegally take it out 
of the country. We have had any number of enforcement cases 
where we have identified those transactions, apprehended the 
individuals and prosecuted them.
    Mr. Royce. Well, these accelerometers, as they are called, 
are pretty handy for smart bombs, and frankly, for nuclear 
explosives as well, so we have got a little bit of a problem. 
Mr. Chairman, I yield back.
    Mr. Sherman. Thank the ranking member. Recognize our vice 
chairman, and then we will need to go vote. We will reconvene 
after the votes.
    Mr. Scott. Thank you, Mr. Chairman. Let me just ask a 
question. First of all, I want to deal with the security 
environment in the Pacific I alluded to in my opening remarks. 
With North Korea moving with their nuclear program and missile 
program, China now having, really in the midst of developing a 
counterpart to the F-22, it seems to me that these events that 
are on the front pages of our newspapers, what effect would the 
U.S. sales of military aircraft, like the F-22, to Japan or the 
F-16s to Taiwan have on the insecurity environment in the 
Pacific region given what I said about North Korea and China?
    Mr. Kovac. Well, in any export there is going to be a 
positive and negative effect. Increase your friends, decrease 
the enemy. In each of those cases, when we receive the request 
we look at it very seriously to balance both the national 
security and foreign policy of the United States of that 
country and the potential regional impacts, as we are required 
to do by law.
    Mr. Scott. So, I mean, do you see an imbalance occurring as 
a result of this? Do you see a need to move more aggressively? 
Do you see some need for us to look more carefully at this 
situation? Are you all concerned about the balance in the 
Pacific and what role we are or are not playing to get a better 
balance there?
    Mr. Kovac. Yes, sir. We work in very close coordination 
with the Department of Defense, and, you know, from the 
Department of Defense, the PAYCOM commander, and what his 
regional security plan is and how that interplays with any 
specific request that we receive is taken very seriously.
    Mr. Scott. So if you had your doubters about this, you 
would say we need to move ahead and try to respond to Japan's 
request for our F-22s and Taiwan for F-16s.
    Mr. Kovac. Absolutely, sir. The State Department isn't in 
the trade advocacy business.
    Mr. Scott. Right.
    Mr. Kovac. We only evaluate the requests that we do 
receive, and we evaluate them at the time. For Japan, for 
example, we have got an extremely loyal, upstanding country. 
They have got a tremendous record on export controls, they are 
in a relatively dangerous part of the world, and we have 
wholeheartedly supported exports there in the past and would in 
the future, if that was available.
    Mr. Scott. Okay. Good. I know we have got a vote, Mr. 
Chairman, but let me just ask a question about the employment 
impact that I brought up. Given the impact from an employment 
standpoint in our country, how might including economic impact 
studies and rendering export control decisions mitigate the 
harmful effects of outsourcing on the U.S. economy?
    Mr. Kovac. You want to take that one first?
    Mr. Borman. Well, sir, at least on the dual-use side the 
economic impact of a proposed transaction is always part of the 
equation. In the vast majority of cases, frankly, it is an 
issue for the U.S. company that wants to make the export, and 
then they typically make the case, or try to make the case, 
that if the export is not allowed the business goes to a 
foreign competitor and that has an adverse impact on jobs in 
the United States. So that is the most typical scenario that we 
hear about. From time to time, we do studies on specific 
industry sectors to evaluate the foreign availability of the 
product that we are trying to control.
    Mr. Scott. Okay.
    Mr. Sherman. The statements of the President that America 
does not torture apply only to the Executive Branch. We are 
going to ask our witnesses to remain, and we are going to 
continue to ask them questions after the votes. Thank you.
    [Recess.]
    Mr. Sherman. Other colleagues will be here when they can 
be. We will start the second, and for your sakes, hopefully 
last, round. In an effort to appear to be a nice guy, I am 
going to start with Mr. Scott in the second round of questions.
    Mr. Scott. Thank you, Mr. Chairman. I would like to get an 
idea of a ranking of our exports. I understand Canada is number 
one, is that correct?
    Mr. Kovac. Yes.
    Mr. Scott. Could you give us the other top, say, three or 
four in order?
    Mr. Kovac. I know the UK is high. I would have to get back 
to you with a specific order in the ranking.
    Mr. Scott. All right. Let me ask you about then Russia 
specifically. In recent months, the Obama administration has 
made overtures toward improving U.S./Russian relations. I am a 
member of the NATO parliamentary assembly, and I am the general 
rapporteur in our science and technology area. An area in which 
we are moving forward on is how do we more progressively bring 
Russia into a more stronger partnership with the alliance? 
Could you tell me how might the sale of American made 
commercial aircraft to Russia improve relationships between the 
United States and Russia? Mr. Borman?
    Mr. Borman. I will take a shot at that. On its merits, we 
would just evaluate the issue of technology transfer, but 
generally speaking, the sale of full up commercial aircraft to 
Russia would not even require an export license.
    Mr. Scott. You said it doesn't?
    Mr. Borman. It would not. If these are civilian aircraft 
going for a civilian end-use in Russia, it would not require a 
license, and so then it is really a business transaction to the 
parties involved. The U.S. seller and the Russian buyer think 
that it makes business sense. So that is the perspective that 
we would bring to that transaction. Now, others may impute 
additional meaning to such a sale, but from our point of view, 
the issue is really do the items need a license to go to Russia 
or not? If they do, you do a national security analysis.
    Mr. Scott. What do you feel would be the unique challenges 
to this and the unique opportunities?
    Mr. Borman. Well, on the challenges side, I suppose if 
there is an issue of transfer of controlled technology to make 
sure that it is used for those civilian aircraft. The 
opportunities, I think, I guess are obvious, that is, you have 
potentially significant sales for a U.S. company, and then with 
that there might be other impacts on the bilateral 
relationship.
    Mr. Scott. And so how would you categorize the status quo 
right now?
    Mr. Borman. Well, it is as I said before. If it is a full 
up civilian aircraft, it can be exported to a civilian end-user 
in Russia without any export licensing impediment or 
implication.
    Mr. Scott. Okay. Let me ask you if you could give us a bit 
of an idea of the extent of our Canadian export relationship. 
It is the largest. It is about $9.7 billion. How would you 
explain our Canadian exports?
    Mr. Borman. Well, Canada is our largest export market. In 
the aerospace area last year, calendar year 2008, there were 
over $6 billion worth of aerospace exports alone to Canada, and 
then there is a very strong connection, integration between the 
industrial base, particularly in the aerospace area, in Canada 
and the United States. A lot of U.S. companies have facilities 
in Canada, there are Canadian companies that have facilities in 
the United States, so from the point of view of the aerospace 
market, it is almost one market.
    Mr. Scott. Right. So there is a certain part that is for 
the licensed products, and then there are unlicensed products. 
What is the differentiation between that and a one hand holds 
one, one hand holds the other? How much is the unlicensed?
    Mr. Kovac. Well, sir, in both our cases we have licensed 
and unlicensed exports. I think the vast majority of what the 
Commerce Department does is unlicensed.
    Mr. Borman. To Canada.
    Mr. Kovac. To Canada.
    Mr. Borman. Sorry. From a dual-use export control 
viewpoint, we have very, very few export licensing 
requirements. The companies have to get individual government 
approval before a transaction for exports to Canada, even in 
the aerospace area.
    Mr. Scott. So combined, what are we talking about in dollar 
figure? Over $10 billion?
    Mr. Borman. Yes.
    Mr. Scott. Okay. Let me move to, if I may, Mr. Chairman?
    Mr. Sherman. For one more question.
    Mr. Scott. I wanted to while we are moving around to in 
2007, the United States signed treaties with the United Kingdom 
and with Australia that would eliminate the need for the export 
licenses for certain defense and counterterrorism technologies. 
One motivation for these treaties was to facilitate 
collaboration of military aircraft, such as the joint strike 
fighter. More than 2 years after their signing, the treaties 
have not been ratified by the Senate. So what impact would 
ratification of these treaties have on the domestic aerospace 
industry?
    Mr. Kovac. Basically, determining what the impacts are 
going to be of the treaties, if ratified, is a little tough to 
determine far down range. The treaties have certain specific 
requirements. The end-uses are recorded in the treaty, U.S. 
Government, the UK MOD, or an approved program, or an 
operation. They have an approved community which would be a UK 
approved community, in addition to the U.S. community, whom are 
our exporters, and then it has an exclusion list of certain 
technologies that are excluded from being treated as exports 
under the treaty. Because of all of those variables it would be 
extraordinarily difficult to predict the impact of the treaties 
on a specific sector or a specific area. Time is going to have 
to tell.
    Mr. Scott. All right. Thank you, Mr. Chairman.
    Mr. Sherman. We are in a hybrid situation in that one 
member has done his second round, but we have got members who 
haven't done their first round, starting with Mr. Manzullo.
    Mr. Manzullo. Well, thank you, Chairman, for having this 
meeting, and thank you for collaborating last year on that 
marvelous victory on 17(c) of the Export Administration Act 
along with Mr. Blumenauer and Mr. Crowley. The area that I 
represent used to be known as the machine tool center of the 
world, and that is Rockford, Illinois. We have probably 2,000 
factories in the congressional district. No one really knows 
because it is kind of hard to quantify them all. Unemployment 
is officially at 16.9 percent. Add seven points to it, that is 
22, 23 percent. I guess what has really bothered me for years 
is the restriction on exports of the five axis machine tools. 
When I was elected, the U.S. share of worldwide machine tool 
sales was around 13-17 percent.
    Now it is down to 7 percent. We have a situation in 
Rockford where a wholly owned Chinese industry bought a machine 
tool shop, saved 90 jobs directly, indirectly another 180, and 
that company wanted to make a five axis machine. They couldn't 
export it back to China even though China owns all the 
technology and is actually manufacturing it here in the United 
States. I mean that is lunacy. It has continued over the years 
as we have tried to rework the Export Administration Act. Year 
after year we sell fewer and fewer machine tools. It is not 
that. It is just parts on United States becoming an unreliable 
supplier. We can never quantify how many sales are lost because 
the United States is simply an unreliable supplier.
    I have seen the brochures come in from Canadian and 
European companies saying we are ITAR free. I just don't know 
how long or what it is going to take for this Congress or for 
the agencies to realize that there is nothing immoral about a 
five axis machine. Constituents have bought an eight axis 
cutting tool from a German company. We have one of the most 
sophisticated laser manufacturers in the world, W.A. Whitney. 
The laser is so powerful it can cut through one and a quarter 
inch of bullet proof stock. W.A. Whitney couldn't even 
manufacture it here because unless you can have an overseas 
sale, you know, why limit it just to domestic manufacturers?
    I mean, you know, I guess my question is why don't we just 
grow up and realize that the world is more than four axis? 
People can come in and take a look at these machine tools at 
EMO in Milan every 2 years or in Chicago and simply copy them 
by taking a picture of them. Anybody want to tackle that one?
    Mr. Borman. I guess that is in my bailiwick.
    Mr. Manzullo. There you are.
    Mr. Borman. I think you are right. I mean, this is a very 
vivid example of the challenge of export controls because, as 
you well pointed out, folks in the machine tool industry, I 
think, would say export controls are significantly responsible 
for the decrease in market share and the development of foreign 
competitors. Of course, the challenge is, I think most would 
agree, that we would not want a five axis machine tool going to 
a country for their military programs.
    Mr. Manzullo. No, but you don't know. I mean, you know, 
Canada was selling the five axis machine and it could be used 
for military or nonmilitary. I mean, it is almost commoditized. 
In today's technology you have got to have more than four axis. 
Even BIS considers the moveable platform to be an axis. I just, 
you know, those regulations really, I mean, they are 
regulations, I mean, and so it ends up being used for military 
application, but Canada can sell the same machine. These are 
machines that cut pieces. They cut steel, they cut iron, they 
cut whatever is necessary. They do precision lasering. We lose 
all the jobs here and the technology.
    Mr. Borman. Yes. Two further responses. One is we actually 
are in the process of developing I would call it a short-term 
revision to the regulation to address this, at least in part, 
based on a foreign availability study we did. Of course, that 
is exactly the kind of thing the long-term, the more 
fundamental reform the President has directed us to do has to 
look at exactly those kinds of issues. That is exactly right.
    Mr. Manzullo. Okay. The other question is you had published 
a notice of inquiry on the effects of export controls on 
decisions by companies abroad to use or not use U.S. parts. 
Could you comment, Mr. Borman, on the gist of those comments 
and where we are going with that?
    Mr. Borman. Yes. We did receive a significant amount of 
input from foreign companies, and not surprisingly, many of 
them said their preference would be to avoid U.S. products or 
U.S. components if they can because they don't want to take the 
risk that somehow the export control system and policies will 
impede their ability to do business, and so, again, that is 
exactly the kind of thing that is being fed into this 
fundamental review that the President has asked----
    Mr. Manzullo. So what is going to happen after you review 
it? Can you take the envelope and read through it and give us 
an idea?
    Mr. Borman. Well, I can tell you this. I can tell you that 
the charge to us is don't necessarily just look at the existing 
system and decide how to make it better, but really look at 
what would be the best system in light of all these factors, 
including foreign availability, including design out desires of 
foreign buyers, to construct a system that really best 
addresses the security, and technology and economic realities 
of the 21st century. So, and one of the pieces of the charge is 
to take a very hard look at the control lists and see, should 
the control lists be pared down to something less than they are 
now?
    Mr. Manzullo. Do you anticipate a date by which that will 
occur? I know we are rewriting the Export Administration Act in 
our committee.
    Mr. Borman. Right. Well, the current NSC led process is 
designed to have a recommendation or a set of recommendations 
to the agency principals early next year, and then they will 
have to decide based on those recommendations, how to implement 
that or what they want to implement. I think the goal is to 
really do something next year.
    Mr. Manzullo. Thank you.
    Mr. Sherman. Thank you. Now the gentleman from Virginia.
    Mr. Connolly. Thank you, Mr. Chairman, and welcome. This 
subcommittee had a hearing a number of months ago where we 
looked at the satellite industry and how export controls have 
affected the satellite industry. It is not too much of a 
stretch to say that with the best of intentions in trying to 
control sensitive technology and the export of it we ended up 
damaging the domestic satellite industry and unintentionally 
helping foreign competitors who then had no controls over the 
technology transfer, and so in an effort to do a noble thing 
our actions were self-defeating, obviously not intentional, but 
we hurt both the industry and, frankly, ultimately had trouble 
achieving the goal behind our actions. What do you think we 
have learned from that? What do you take away from that 
experience?
    Mr. Kovac. I will take that first because I have got them. 
I think that in any, as Matt was saying, the control lists are 
the key. Narrowing them down, making them specific, making them 
clearly where there is an edge required to go ahead and 
maintain that, but not take it down so far that you end up 
hurting everybody in the process, even those that do not cause 
a problem in the greater scheme of things. Where the technology 
is simple, well-known, foreignly available, we take a look at 
that. The problem we have with our two lists right now is that 
we look at them very myopically. The structure should be very 
myopic. I control defense articles. Defense articles, anything 
specifically designed and developed for, you know, specifically 
designed and developed for a military end-use, or an end-use, 
or an end-use that is determined to be military.
    The vast majority of firearms, for example, aren't military 
firearms, but I control all firearms, so therefore, I control 
all the parts and components of those firearms. When the action 
was taken in 1999 to move the satellites, it had the identical 
effect and it controlled things that we did not care about in 
satellites and things that we cared a lot about in satellites. 
So with the legislation as currently, you know, the 24/10, if 
that is able to be realized, and right now the Department of 
Defense has a study ongoing under Section 1248 of their NDAA to 
go ahead and look at the industry and separate that wheat from 
the chaff, to look at those that may receive or require higher 
controls and those which should be controlled in another 
manner, if those two things come to fruition, I think we will 
have a better way to do it.
    Mr. Connolly. Yes. I guess I would add, Mr. Kovac, and I 
certainly concur with what you just said, but I guess I would 
add one other thing you haven't considered, and that is 
unintended consequences.
    Mr. Kovac. Absolutely.
    Mr. Connolly. Because you could still do what you did and 
come to the same conclusion and you would be wrong.
    Mr. Kovac. Correct.
    Mr. Connolly. In retrospect, I don't think you can argue 
that our policy vis-a-vis satellites worked. It hurt domestic 
industry and the technology got transferred anyhow just by 
other people who are then able to exploit commercial sales and 
so forth, so that can't be the intended consequence. I think we 
have to look at even if the goal is desirable, if we realize 
that by adopting a policy, you know, the operation is a success 
but the patient dies, I think we have got to look at that 
saying that is not something, you know, we want to achieve, 
that is not a desirable objective.
    Mr. Kovac. Absolutely.
    Mr. Connolly. Mr. Borman?
    Mr. Borman. If I could just add a little bit to that. In 
the fundamental review that we are undertaking right now on 
export controls, that is exactly one of the tenants we are 
applying is we really don't want to have a policy that drives 
foreign customers to foreign suppliers.
    Mr. Connolly. Even at the risk then of technology transfer.
    Mr. Borman. Yes.
    Mr. Connolly. Okay.
    Mr. Borman. You work to mitigate that as much as you can, 
but ultimately, if a foreign customer buys a U.S. product, at 
least we have some control in visibility over that in addition 
to the economic benefit.
    Mr. Connolly. And let me ask, building on that a little 
bit, a Devil's advocate question. Perhaps the nature of 
technology today that is very different than when we envisioned 
the original export control regime in the middle of the Cold 
War, you can't control it. I mean, it is sort of a hopeless 
venture, and so there may be some limited things of highly 
sensitive nature we still control, but Devil's advocate 
question, maybe you have to basically yield to, you know, the 
imperative of technology and just say there are just things we 
can't control, and so we are going to recognize that and move 
on. The very notion of an export control list is questioned in 
that Devil's advocate question, obviously. I am just trying to 
determine how far our thinking is along those lines?
    Mr. Borman. Well, one of the ways we have been evolving the 
system, and my sense is we will continue to do this, is you are 
right, there are strata of technologies that are just not 
controllable but they still can do us harm, and so another way 
to get at that is to deal with the foreign parties involved. 
One of the ways we have dealt with that is we have identified a 
procurement ring of foreign parties that were buying and 
trafficking in low level electronic components that were the 
same type showing up in IEDs in Iraq and Afghanistan. You can't 
really control them based on their technology level, but we 
published a list of these parties and made them restricted and 
that has had some effect. So there may be other ways to get at 
this because there are technologies, low level, that can do us 
and our allies harm and we want to deal with them in some way, 
but you are right, at some point you can't based on technology.
    Mr. Connolly. If I may, Mr. Chairman. Just a final point. I 
hope in your deliberations, and I am very glad we are having 
this review, keep in mind the burden in private sector, too. 
You know, I worked in the industry for the last 20 years and I 
can remember every year the last 6, 7 years I had to take a 
refresher on export control rules. I will be honest with you, I 
am a high school graduate, but they were tough to fully get 
straight and make sure you weren't violating the law, and which 
falls in which category. When you multiply that in terms of 
liability of large companies that, you know, are in various 
businesses, it is a real burden, it is an economic burden they 
bear, and so if we can in streamlining our own requirements 
also streamline the burden on private industry, I think that 
would be a good thing for the American economy. Thank you, Mr. 
Chairman.
    Mr. Sherman. Thank you. I will now start the second round, 
and then we will have second round for the two that haven't had 
a chance. Mr. Borman, now and then it seems like we are 
allowing exports to a particular country with a promise that 
the goods will only be used for civilian use within that 
country. Do we put any stock at all if that promise comes from 
a Chinese company? I mean, if they double promise and cherry on 
top that they are not going to use it for military purposes, 
does that ever convince you?
    Mr. Borman. We don't rely solely on the assertions or 
promises that a foreign company puts on it. There are license 
conditions on the U.S. company, and we have the ability to do 
end-use checks.
    Mr. Sherman. Mr. Borman, when it comes to China is there 
any time when you are going to allow the export because you are 
told that the end-user is not going to be military?
    Mr. Borman. Not solely because of what the end-user says. 
There are any number of other sources we look at.
    Mr. Sherman. If it has not been used by the military today, 
it will be at any time, it is useful for the military, so there 
are occasions when if you had two applications, one said we are 
shipping this to the People's Republic's Army and the other 
says we are shipping this to a private company that is owned by 
Chinese interests and located in China, you might treat those 
two applications differently?
    Mr. Borman. Well, sure, because there are plenty of end-
users in China who have legitimate civilian businesses and 
there are any number of ways----
    Mr. Sherman. And is there a single one of them which would 
defy the People's Liberation Army if that army wanted those 
goods to be used temporarily or permanently for military 
purposes?
    Mr. Borman. Well, you have to remember, most of the things 
that we license are of course on the dual-use side so they are 
machine tools or they are----
    Mr. Sherman. Well, I am not saying that they couldn't be 
used for civilian purposes from 9 o'clock to 5 o'clock, but can 
you imagine that they wouldn't be used for military purposes 
from 5 o'clock to 9 o'clock?
    Mr. Borman. Well, again, in the interagency review process 
with State, Defense and Energy, we look at all the available 
information, including classified information, to make an 
assessment as to----
    Mr. Sherman. Well, I would hope that you would be less 
trusting and would simply recognize that once something is 
physically located in China, it is available to the People's 
Liberation Army at their request, at any time, regardless of 
any promises that have been made to you.
    Mr. Borman. Right.
    Mr. Sherman. If you start with that as a starting point, 
you will have a more--the goal here isn't to paint a pretty 
picture; the goal is to actually control this technology, which 
is why I will shift back to the idea of goods that are widely 
available in the United States. If something is easily portable 
and easily purchasable by anybody in the United States, does 
that factor into whether you think you can actually control the 
technology by prohibiting its export?
    Mr. Borman. Well, maybe I ought to take a step back and 
describe a little bit how we put things on the control list. 
Our control list, roughly three-quarters of the items are 
subject to a multilateral export control regime. The process 
every year that happens is in the United States we, Defense and 
State Department, look at the list and decide are there items 
that should come off the list because they are widely 
available, lower technology now, or they are items that should 
be added to the list. Then we have to get all of the other 
members of the regimes to decide. So the items that are on the 
list are items that really are supposed to have----
    Mr. Sherman. So there are plenty of things on the list that 
anybody in the United States could buy on the internet and put 
in that pick up truck I talked about.
    Mr. Borman. I wouldn't say that there are plenty of things 
on the list.
    Mr. Sherman. Hundreds?
    Mr. Borman. There clearly are things that could be bought 
over the internet, but again, you know, people buy them----
    Mr. Sherman. Do we need to shift to a system where we have 
a know your customer regime, just as we have opposed a know 
your customer regime on the bank, where we identify a few 
hundred items or a few thousand items and say, look, if you 
want to sell these in the United Stats, it has got to be to a 
licensed consumer? Yes, hospitals have a reason to buy those 
isotopes, but you can't just ship them to Jack Jones in Toledo 
who doesn't own a hospital.
    Mr. Borman. Yes. And that is the case in some cases. I 
mean, select biological agents, for example, or some hazardous 
sales.
    Mr. Sherman. Isotopes is the wrong example there.
    Mr. Borman. Yes. The order of magnitude. Last year we 
processed about 20,000 dual-use export license applications for 
exports. If we were to look at imposing a similar government 
vetting before sale review for domestic sales, you are 
talking----
    Mr. Sherman. Well, you would license the purchaser and once 
somebody is a certified purchaser, you wouldn't have to look at 
it again, and you might very well take hundreds of items off 
your international control list. I mean, this stuff works 
bureaucratically, but the fact is anything that a guy named 
Jack Jones, you know, with a P.O. box in Toledo can buy and 
truck to Mexico or Canada is not controlled. You can believe it 
is controlled, you can say it is illegal to do this or that, 
you can say I have got certificates, and files and a review 
process, but the other guy has got a pick up truck, and that 
trumps you.
    Mr. Borman. Sir, if I could?
    Mr. Sherman. Yes.
    Mr. Borman. If ultimately the system comes down to anything 
that somebody couldn't take out of the country and that 
magnitude, you are talking about an extremely small list.
    Mr. Sherman. Well, I am talking about those things for 
which we cannot identify those customers that have a legitimate 
use. It is one thing to say it is going to be sold to Jack 
Jones. It is another thing to say it is going to be sold to a 
company that is known to the seller and has a legitimate end-
use for it. It is extremely easy for a foreign state or a 
terrorist organization to get a P.O. box in the name of a guy 
named Jack Jones. It is much more difficult to establish an 
aircraft manufacturing operation that would have a legitimate 
use for this or that. We are not going to make it impossible, 
but so far our enemies have not created whole, large scale 
dummy companies in the United States. P.O. boxes are a lot 
easier.
    Mr. Kovac, just want to--hope my colleagues indulge me for 
one last question. The UAE has been a state of concern. It is 
now claimed that scores of ships have been intercepted by their 
security forces carrying illicit cargo, and while I doubt that 
that is not an exaggeration, I note that the UAE hasn't adopted 
regulations to enforce its 2007 export statute. Malaysia is 
another key transport hub and hasn't even taken those actions. 
Can we trust Malaysia with U.S. technology? Should we oppose 
technology transfer, especially when it facilitates offshore 
production to Malaysia at this time?
    Mr. Kovac. Yes. You are going to have to because that is a 
little out of my field.
    Mr. Borman. Yes. On the UAE, you are right, the UAE now has 
an export control law. They are in the process of standing up 
their export control authority. What they have told us when we 
have discussed this with them is right now, because they don't 
effectively have regulations in place, any controlled item is 
prohibited from being transited through the UAE. They are in 
the process. They have said they have hired a number of people 
for their export control organization.
    Mr. Sherman. Do they have an export control list?
    Mr. Borman. Yes.
    Mr. Sherman. Have they copied ours?
    Mr. Borman. No. All the multilateral regime items are on 
their list.
    Mr. Sherman. Okay.
    Mr. Borman. Malaysia, we continue to try to press them to 
make progress. They are not nearly as far along.
    Mr. Sherman. Have they made progress?
    Mr. Borman. Well, they are working on an export control 
law, they tell us, and we continue to press them to accomplish 
that.
    Mr. Sherman. Well, when is the first time they told us that 
they were working on it?
    Mr. Borman. They have been working on it for a while.
    Mr. Sherman. Did I have hair at that time?
    Mr. Borman. I am not sure. You very well may have.
    Mr. Sherman. Let me yield to the gentleman from Illinois.
    Mr. Manzullo. I wanted to follow up. You sell a five axis 
machine to China that is used to make a dump truck, but then 
the same dump truck has a military application as a truck in 
the Chinese army. You know, export controls in the United 
States unfortunately means that we are losing all our 
technology because of being an unreliable supplier. Assume they 
are trying to dance on the head of a needle as to whether that 
truck that will have parts that are machined or cut from five 
axis machines are used for civilian or defense, and then they 
just, you know, why would you recreate a whole new frame, for 
example, on a military truck when it is going to be the same 
tonnage of carrying for a civilian truck?
    I am sorry. I have got a new Blackberry and I can't figure 
out the technology of it yet, but it is Canadian technology, I 
think is what it is, even though at one time the insides were 
magnesium and were made here in the United States, but now it 
is plastic, unfortunately. That is why, you know, we sit back, 
and the arguments have been going on for, I have been for 17 
years. How much more of our machine tool industry do we have to 
lose? You know, you can buy a profiling machine now for 
$25,000. You just send in your coordinates on your design, and 
with the layering they can create a product like this for a 
very small amount of money. So when somebody buys it they know 
exactly what it is.
    In fact, I have got in my bag, it is a man's hand that has 
been profiled by a laser and then with the layering machine as 
a composite of a person's hand. That is how exact this stuff 
is. It goes on all the time. How much more of our machine tool 
industry are we going to lose because we are losing all the 
technology? I know you are with me on the issue, but I guess 
with C-SPAN here, maybe we get the message out more we have got 
to move faster. I mean, this is really saving American jobs.
    Mr. Borman. Yes. I mean, the challenge, frankly, with China 
and machine tools is not really the factory that makes dump 
truck parts. The challenge is in the aerospace you have to have 
a lot of colocation facilities that make parts for civilian 
aircraft and military aircraft. That is one of the challenges. 
I am not saying that I disagree with you, I am just pointing 
out the challenges. The other, of course, is that these are 
multilaterally controlled. We know that other partners apply a 
different China policy than we do. If they are not 
multilaterally controlled, then you open up the possibility for 
these type of machines to go from other countries to a place 
like Iran. So that is how we have got to try to figure out, how 
do we address the very legitimate concerns?
    Mr. Manzullo. Well, I don't know if you can stop that 
either. I mean, at one time knowledge was discovered. Today it 
is invented. It is not that difficult. You know, you don't want 
to give the people, the bad guys in Iran, anything, but 
goodness gracious, with the incredible marsh of technology and 
the ability to make these machines almost anywhere, and here we 
are in the United States, we keep on losing more, and more, and 
more. I mean, I have talked to people that, you know, have been 
to these machine shows and they say, you know, we would like to 
buy more from the United States, and, I mean, it even got so 
dumb here that I had to rewrite the Fastener Quality Act.
    We just, you know, wrote off a huge amount of our business 
here because that footbridge collapsed in Kansas City and it 
wasn't the problem with the tensile strength of the bolt, it 
was just the wrong one was put in by the architect on it. That 
is the whole problem that we have with manufacturing here is 
that some of my colleagues, and Dana is a good friend of mine, 
think that because we have got a real gem here, that we can 
prohibit somebody else from using it when the same thing is 
made in a country like Canada that doesn't have the extent of 
those controls on it. I just wanted to share that with you. I 
had one further question on deemed export.
    Mr. Borman. Just to follow-up on that.
    Mr. Manzullo. Go ahead. Then I will stop right here.
    Mr. Borman. That is exactly the point, though, of the 
review we are undertaking is exactly to try to grapple with 
those issues in a way that reflects the 21st century reality. 
Absolutely.
    Mr. Manzullo. The other issue is that we have University 
Diacome that has many foreign students and I helped link up 
that university to a very sophisticated company, and the school 
is now doing research for the company. The problem is with 
deemed exports, some of these kids come in from the countries 
on the list. I mean, the companies are really getting in 
trouble and the school figures that what are we going to do 
here? Are you taking a look at the deemed export issue also?
    Mr. Borman. Absolutely.
    Mr. Manzullo. Okay.
    Mr. Borman. Yes. In fact, we have a new advisory committee, 
we call it the Emerging Technologies and Research Advisory 
Committee, that is specifically looking at the issue of what 
methodology we should decide to apply to technologies that 
should be subject to deemed exports. So we are looking very 
hard at that issue because we know the impact it has on 
research.
    Mr. Manzullo. Thank you.
    Mr. Sherman. Gentlemen, thank you. We will now move on to 
the next panel. Matter of fact, I will sing their praises as 
they take their seats. We will first hear from Ms. Marion 
Blakey, president and CEO of the Aerospace Industries 
Association. Prior to her work with that association, Ms. 
Blakey served as administrator of the FAA and chair of the 
National Transportation Safety Board. Next, we will welcome 
David Berteau, senior advisor and director of the Defense-
Industrial Initiatives Group at the Center for Strategic and 
International Studies. Mr. Berteau was principal deputy 
assistant secretary of defense for production and logistics.
    Lastly, we will welcome Henry Sokolski, executive director 
of the Nonproliferation Policy Education Center. He currently 
serves as a member of the Congressional Commission on the 
Prevention of Weapons of Mass Destruction, Proliferation and 
Terrorism. Previously, he served as deputy for nonproliferation 
policy in the Department of Defense. Ms. Blakey?

 STATEMENT OF MS. MARION BLAKEY, PRESIDENT AND CHIEF EXECUTIVE 
           OFFICER, AEROSPACE INDUSTRIES ASSOCIATION

    Ms. Blakey. Thank you, Mr. Chairman. I do want to thank you 
and the other members of our panel today for the attention you 
are paying to this. The Aerospace Industries Association of 
America appreciates the opportunity to testify today, and I 
would like to ask that my written statement be submitted for 
the record, if I might. AIA represents more than 273 member 
companies with total high technology workforce of 267,600 
people. We operate as the largest trade organization in the 
United States across three lines of business: Space systems, 
national events, civil aviation. Our industry consistently 
generates America's largest manufacturing trade surplus, $57.4 
billion in 2008, but continuing this track record of success 
can't be taken for granted.
    So why do aerospace exports matter? Last year, nearly half 
of the over $205 billion in U.S. aerospace sales went to 
overseas customers. It is critical to recognize that these 
exports are necessary to both sustain and increase the capacity 
for cutting edge innovation in the United States industrial 
base. We must continue to compete effectively in the 
international marketplace in order to speed up our economic 
recovery, increase our jobs and set a trajectory for even 
greater economic growth. Aerospace exports also serve as a 
foundation for building key relationships and a shared future 
for the important international allies and partners. 
Additionally, our companies rely on exports to provide 
Americans defending our country and guarding our homeland with 
the very best technology at the best price for the U.S. 
taxpayer.
    The value of aerospace exports is certainly not lost on 
members of this subcommittee, nor on other leaders here on 
Capitol Hill and in the administration. The consistent and 
sustained efforts of senior leadership in Congress and the 
administration is crucial to ensuring a level playing field, 
opening up markets for U.S. products, winning sales 
opportunities, particularly in the face of strong and 
determined advocacy from foreign governments on behalf of our 
international competition.
    Presuming our industry is able, with the help of the U.S. 
Government, to compete successfully for a contract in the 
international marketplace, one of the last hurdles to cross is 
the U.S. export control system. This subcommittee has heard 
from AIA in the past about our ultimate goal for modernization, 
a more predictable, efficient and transparent system. We have 
heard that before today, but permit me the opportunity to 
clarify again what we mean. By efficient, the government must 
make decisions on export authorizations in a timely manner, 
eliminating unnecessary administrative delays. By predictable, 
we mean that the license process must be consistent with 
applicable laws and policies and that similar export licenses 
should be considered in similar timeframes.
    Transparent means that the rules governing the license 
process must be interpreted and used consistently, and industry 
and foreign partners have quick, easy access to the information 
on the status of their applications. In 2007, our Cold War Era 
export control system had reached a point where it was 
paradoxically hurting our national security. It was also 
hurting our economic strength, and our technological 
competitiveness had a good chance of worsening. This 
subcommittee recognizes that it is in our national security 
interest both to prevent our adversaries from accessing our 
technology and to facilitate technology trade with our closest 
allies and trading partners.
    So I am pleased to report that your efforts have resulted 
in a great deal of improvement in how the export control system 
operates. However, I think it is clear to everyone that 
additional steps will make the system more predictable, 
efficient and transparent. AIA continues to be a staunch 
supporter of Senate ratification of the UK and Australia 
Defense Trade Cooperation Treaties. Our industry has also 
welcomed President Obama's call in August for a comprehensive 
review of the U.S. export control system. We believe that there 
are several potential reform initiatives that this committee 
can actually lead. I encourage the committee to review my 
submitted testimony for detailed descriptions.
    In conclusion, the U.S. aerospace industry has the strength 
to lift America in these challenging times. Our nation reaps 
the benefits of aerospace exports in the form of enhanced 
national security and economic growth. The government/industry 
partnership supporting aerospace exports is crucial and it 
can't be taken for granted. As you are aware, previous 
modernization efforts have met with varying degrees of success. 
Experience suggests that critical factors and enabling 
meaningful reform includes sustained oversight by senior 
administration officials, as well as effective consultation 
with Congress and the private sector. We stand ready to work 
with you and the Obama administration to ensure that we 
continue to make meaningful progress toward a 21st century 
technology control regime. Thank you very much.
    [The prepared statement of Ms. Blakey 
follows:]Marion Blakey deg.











AIA 12/2 deg.













AIA deg.

AIA deg.

    Mr. Sherman. Thank you. Mr. Berteau?

STATEMENT OF MR. DAVID J. BERTEAU, SENIOR ADVISOR AND DIRECTOR 
    OF THE DEFENSE-INDUSTRIAL INITIATIVES GROUP, CENTER FOR 
              STRATEGIC AND INTERNATIONAL STUDIES

    Mr. Berteau. Thank you, sir. This mike on? Yes. We are 
adjusted now. Mr. Chairman, thank you for the opportunity to be 
here today. My statement will stand for the record. I will just 
make a couple of comments and go there. CSIS has been engaged 
in looking at export controls for quite a number of years. We 
have a long record of studies. I cite those in my statement. We 
have learned a number of lessons for those. They are in there 
as well. I think all I want to say orally are two things. One 
is there are some national security issues here that the 
current regime tends to work in the opposite direction of what 
we would intend them to do so. I would note three things. One 
is, in fact, there is a lack of prioritization in the system 
today that leads us to spend an awful lot of time on things 
that we should well spend less time on, and perhaps ignore the 
things that are more important.
    Secondly is the effect of globalization, and a number of 
the committee members brought this up in earlier with the first 
panel, and the degree to which at some point we may get to the 
point where we can't get access to what we need because 
somebody else doesn't want to be subject to our controls. We 
haven't reached that point yet. We have come close to it a 
number of times. There is no smoking gun, but the elements of 
the gun are there. Third is the degree to which we have the 
unintended consequences of promoting a capability elsewhere 
that actually works against our national interests rather than 
in favor of it. These are all tough questions that are hard to 
wrestle with. I think it is also instructive, and my statement 
goes into some detail on this, to look at what the Europeans 
are doing with the new EU directives on both procurement and 
transfer and the potential to create a situation that would, I 
think, substantiate some of the comments I made about the 
national security impacts. With that, Mr. Chairman, I will 
yield back the rest of my time and proceed to your questions.
    [The prepared statement of Mr. Berteau 
follows:]David Berteau deg.











    Mr. Sherman. Thank you. Let us move on to the third 
witness.

     STATEMENT OF MR. HENRY SOKOLSKI, EXECUTIVE DIRECTOR, 
            NONPROLIFERATION POLICY EDUCATION CENTER

    Mr. Sokolski. Thank you, Mr. Chairman, for holding this 
hearing. I note the presence of my congressman, at least 
indirectly. My mother lives in Palos Verdes, so you have been 
there a long time. We actually are contemporaries. I went to PV 
High. Not quite the same school, but close. Mr. Chairman, I 
want to thank you again, and the ranking member, for inviting 
me to speak today on this issue of controlling U.S. aerospace 
controls, and ask that the full statement that I have written 
be placed in the record. My general recommendation, which is 
based on my experience over the last 20 years initially working 
in the Defense Department licensing a lot of aerospace items, 
particularly missile tech, is that it would generally be a 
mistake to encourage more U.S. aerospace exports to go license 
free or to reduce our ability at least to detract them.
    After 9/11, and at least three post-Cold War rounds of 
export control decontrols, we now are at a point where 
according to the GAO 99.5 percent of the goods subject to 
Commerce Department regulation are already being exported 
license free. As for munition items, the U.S. last year sold at 
least 10 times more than any other country, capturing 68 
percent of the world's arms market. This suggests that we are 
holding our own against our competition even under current 
export control. More important, I think such controls are still 
warranted. This is my role, I believe, on this panel, to make 
that case.
    At the high end there is plenty of aerospace technology 
that the U.S. should only export with the greatest care and 
only in support of the most critical security alliance and 
cooperative undertaking. These technologies, and they are 
explicated in much greater length in the testimony, include 
things like software codes, aerospace black art skills, there 
is systems integration insights, satellite technology relating 
to the design, integration and satellite subsystems of 
satellites that we use in our military, unmanned air vehicles 
and related ground equipment and technology, stealth technology 
and air and missile defense penetration aides, and advanced 
missile and air defense systems.
    It should be noted that most of these military-related 
technologies and their subsystems are controlled by the Missile 
Technology Control Regime, and that when you do decontrol, you 
have to attend to that. We talk generally about reducing 
nuclear arms. This will inevitably lead to some kinds of 
limits, I suspect, on missile technology and missiles. The 
instrument for doing that will be very heavily dependent on the 
MTCR. Now, it could be that we get rid of the MTCR, but then we 
are in a bit of a bind with regard to our general goals on 
doing strategic arms reductions. There are still difficult 
adversaries out there and they may try to acquire our goods and 
they cannot get them anywhere else.
    In fact, there have been 50 to 75 Federal prosecutions last 
year of individuals attempting to export these items illicitly 
out of the U.S. Despite all of the reasonable points the 
chairman points out, I sympathize with what he is commenting 
on, still the law does get exercised. Also, after 9/11, the 
transhipment of dual-use and military technology directly from 
the U.S. has become a much greater security concern. At the 
very low end we have this example of bin Laden buying a surplus 
military transport, which is, to my knowledge, I am not sure if 
it is a controlled technology. Even now I think it is still 
possible. He used it for transport purposes. The General 
Accounting Office study was cited. I won't go into that.
    Meanwhile, I think neither State, nor Commerce, has yet to 
reassess what a complete list of items might be that terrorists 
might be seeking. Slightly different point. In other words, I 
think they have got their eye on the commercial ball, and that 
is important, but I am not sure they have their eye on the 
other ball which they have to balance. Why then is there a push 
for decontrol? I think one reason has to do with the 
integration of U.S. with European aerospace firms. The EU-based 
consortiums that operate throughout the EU and the U.S. no 
longer have a very high interest after the Cold War in 
investing heavily to develop defense capabilities.
    As a result, they are falling further and further behind 
the U.S. in key leading military-related technologies, 
including the list I just gave you, and they have a clear 
interest in gaining access to this technology without having to 
pay for the research and development themselves. These same EU-
based vendors are among those most interested in decontrolling 
military exports to places like China. They tried to do so 
several years ago. Let me get to the recommendations. I think, 
by the way, doing a totally license free approach, even with 
regard to Australia, my wife is Australian so I say this with 
hesitation, would probably be a mistake. You still want to keep 
track of things.
    I don't think you want to hold things up, but you want to 
keep track of things and you don't want to send things without 
a trace, even to good neighbors like Australia. I say that 
hesitantly. My wife will talk to me later. Recommendations. I 
think you need to clarify what is being controlled before 
authorizing any further decontrol. What specifically might be 
shipped out under decontrols needs to be specified by industry 
before government pushes to change broad categories to reform 
the export control system. Second, I think we need to consider 
ways we might share the benefits of controlled technology 
without transferring the technology itself. In the case of 
space launch vehicle services, the services relating to UAVs 
and the intelligence they might gather, there is, in fact, 
something of a burgeoning industry already.
    I think we need to investigate how much more can be done. 
Finally, I think we need to strengthen, rather than undermine, 
certain critical multilateral aerospace control efforts, such 
as the MTCR. In particular, if we are going to have missile 
defenses, it would be nice if the technology to defeat them 
wasn't going around license free or uncontrolled. The MTCR 
doesn't cover all of that yet. It ought to. With that, I 
conclude. I should make one last comment. I certainly 
sympathize with the previous panel's need to make things 
transparent and to expedite. I was a little astonished after so 
many years looking at the system to see how many inefficiencies 
it still has. They are doing better, though.
    [The prepared statement of Mr. Sokolski 
follows:]Henry Sokolski deg.















    Mr. Sherman. I want to thank you. I am going to have to 
step out in a few minutes for a few minutes and our vice chair 
will take over chairing the hearing in that interim. Ms. 
Blakey, reading the detailed testimony that you referred us to, 
I am looking for things we can do here in Congress and you 
basically have said pass H.R. 2410. Been there, done that. Is 
there anything else for the House of Representatives to do?
    Ms. Blakey. Well, we think at this point of course we would 
like to ask you, of course, to be as persuasive as possible 
with your set of colleagues because I do think a lot of the 
actions, as you are undoubtedly noting here, rightly sits 
there.
    Mr. Sherman. My advocacy for a unicameral legislature has 
not been taken well by the state.
    Ms. Blakey. You know, but I do think we do think there are 
a number of things that might be very helpful in all of this. 
We would like to see more flexibility in the way DDTC can use 
the fees that are being collected because we want to see the 
system modernized, and we do want to see the kind of updated 
computer system that the State Department needs.
    Mr. Sherman. Now, does H.R. 2410 provide that flexibility 
on the fees?
    Ms. Blakey. It is my understanding you do, so, you know, I 
would--all right, let me go to one that is a tiny bit harder. 
Again, this is something that is a multilateral issue, but it 
is one that I think, you know, as we are discussing things here 
with the panel, when we are talking about the Missile 
Technology Control Regime, right now we are catching all forms 
of UAVs as missiles there. This goes to things that are 
essentially blimps.
    Mr. Sherman. Essentially you say blimp?
    Ms. Blakey. Blimps.
    Mr. Sherman. Blimps. Got you.
    Ms. Blakey. You know, dirigibles. I mean things that none 
of us would ever recognize or consider to be a missile. It is 
the way the language is constructed. The definitions are not as 
precise, and they certainly are not up-to-date with regard to 
these kinds of technologies. Now, again, advocacy on that part 
and helping to instruct that we take that on, it is a task that 
needs to be done.
    Mr. Sherman. So if we deleted from the definition of 
missile anything that travelled at under 200 miles an hour we 
would pretty much solve this problem?
    Ms. Blakey. You know, I don't want to try to pin down that 
definition, I am certainly not the one who can conjecture all 
the potential issues there, but we do see that this is not up-
to-date, it is not clear, and it is certainly something that is 
not to our advantage as it is currently constructed. So, you 
know, among the things that I would point out, those are some 
of the things that I think we would very much appreciate 
congressional action on across the board.
    Mr. Sherman. I have been concerned with Iran being able to 
get its hands on various technologies, including aircraft 
parts. We made a mistake in allowing Boeing to just ship them 
aircraft parts. We don't necessarily have to make that mistake 
again. Now, I posited to the last panel the fact that it is not 
tough for Iran to just get a P.O. box in the name of Jack 
Jones, maybe print up some letterhead on a computer, Jack Jones 
Aircraft Repair, Incorporated. How much of a burden would it be 
if there were certain items produced by your members where they 
weren't just allowed to ship it to anybody who claimed to have 
a company and a use for it, they would actually have to know 
something about the customer.
    Ms. Blakey. The circumstances I am familiar with are going, 
of course, to commercial aircraft, and they are going to the 
issue of safety of flight. This is a situation where I think we 
all understand that we have enormous issues with the Iranian 
regime, but we certainly don't want to undermine the safety of 
passengers flying----
    Mr. Sherman. Well, if I could interrupt, though, that is 
outside the scope of this hearings deg.. What we 
should have done is said Iran should ground its fleet as long 
as it is developing nuclear weapons and that anybody who dies 
on one of those planes dies at the hands of the Ayatollah, not 
at the hands of the United States. We made a clear mistake in 
instead telling Iran that they can have commercial aircraft 
functioning and a nuclear program. That is a mistake we made. 
It is outside the scope of these hearings. Let us return to the 
scope of the hearing. How much of a burden would it be if your 
members had to know the difference between a real user of their 
product, on the one hand, and some guy with a P.O. box and some 
letterhead he printed up on his own printer?
    Ms. Blakey. I think at this point in the defense arena 
there is no question about the fact that our companies do know 
who the end-users are. Defense products are not shipped willy-
nilly to Jack Smith at a P.O. box, and that is something that I 
really do not think we are encountering difficulty on.
    Mr. Sherman. I am focusing more on the dual-use items.
    Ms. Blakey. Even on dual-use. I mean, I think, again, for 
things that are at real issue that have defense and military 
sensitivities of higher order, I don't think we are running 
into an issue there, but when you get down to what I think is 
at the heart of this, it is an enforcement issue, and, you 
know, how do you track those issues when someone violates U.S. 
law?
    Mr. Sherman. We will never be able to enforce against a guy 
named Jack Jones who drove his pick up truck to Mexico City, so 
the question then is do we have a list of companies that you 
are allowed to ship to? Do we just say that it is your 
obligation to know your customer? We have to put the burden, 
unfortunately, on legitimate actors saying that Jack Jones, the 
guy in his pick up truck, is subject to criminal prosecution. 
It is not going to deter Jack Jones. So we have got to control 
things at the factory gate of legitimate factories, not just 
hope that we can--in any case, I think I am over time, as my 
staff has identified. It is now time to recognize Mr. 
Rohrabacher, and I will return in just a few minutes.
    Mr. Rohrabacher. Thank you very much, Mr. Chairman. Let me 
identify myself with your very good idea of making sure that 
when we state a policy toward Iran there is teeth behind it. 
Mr. Chairman, I identify with your statements about grounding 
the Iranian airline fleet, which it should have been. If we 
were going to actually be serious about putting pressure on 
them not to develop nuclear weapons, that would have been a 
very good way to do it and a safe way to do it. It sounds like 
we didn't have courage enough at that time to move forward with 
that policy. Let me just ask, there is a debate been going on 
about whether or not we should have a two-tiered system of 
controls on exports of aerospace and other technologies, that 
one tier would be a tier which would have somewhat controls on 
it to undemocratic and potentially hostile governments versus 
the other tier which would be clearly democratic governments 
and it would be had with somewhat unlimited restrictions.
    China has been the one element that has prevented us from 
having that system because there are so many companies, large 
American companies, that are making huge short-term profits by 
dealing with that gangster regime. What does the panel think 
about two-tiered system and whether or not China should be 
treated any differently than Belgium when exporting potentially 
dangerous technology?
    Mr. Berteau. Mr. Rohrabacher, let me take a first crack at 
that. I think there are two issues associated with the idea of 
the two-tiered system that are very hard to solve. It is pretty 
easy to put most countries in the world into one category or 
the other. As you note, it is the ones at that boundary, plus 
China, which is a different question that come into play. The 
two issues are at the boundary. Number one is where exactly do 
you draw that line? The second is, in fact, as you know, 
sometimes countries move from one of those categories into 
another without a whole lot of warning, and so the system would 
have to be able to accommodate both of those things. Neither of 
those would solve your China issue, however, where the question 
of short-term versus long-term clearly needs to be addressed.
    Mr. Rohrabacher. Well, our refusal to define China as a 
potential enemy, even as it is still the world's worst human 
rights abuser, and expanding their own military capabilities, I 
think, has had a dramatic negative impact on the security of 
the United States in the long run, but go ahead. The question 
is still on the table.
    Mr. Sokolski. I think, first, we do differentiate the 
lobbying, if you will, when we are getting someone on the good 
or the naughty list is always an act of policy issue. I would 
warn you, though, having administered export controls, it is 
end-use controls, and destination controls are something that 
you have and you use, but in the end, for the really important 
stuff there is an expression: It is like kissing your sister, 
it is not serious. The reason why is if something is worthwhile 
and important it will move, and it will move from the 
destination you have okayed to destinations you don't want it 
to move. If you don't have a way of tracking that, and that 
usually means an individual validated analysis, your goose is 
cooked.
    A lot of these schemes where you send things to the EU, or 
Great Britain, or, I say again Australia, license free means it 
is over to them, and if they don't have a tracking system and 
we don't as to what was received, it is over.
    Mr. Rohrabacher. Well, I agree with that, so we are talking 
about necessarily for everybody that we have to know who the 
end-user is going to be and ably have a system to determine 
that. I agree with that. What about you on a two-tiered system?
    Ms. Blakey. I don't think any of us are advocating license 
free per se. I mean, the UK and Australia treaties that we are 
very much in favor of still stipulate appropriate technologies 
and, of course, trusted end-users there, so, and that is the 
highest echelon here.
    Mr. Rohrabacher. Well, let us just take a look at this, 
what we have got now. General Electric announces they are going 
to go into the, and as a partnership with producing aerospace 
parts in China. Is this not against the national security 
interest of the United States considering that China is still a 
vicious dictatorship and considering that China's relationship 
with the regimes, like Iran, and North Korea, et cetera, that 
where we traced very irresponsible, if not hostile, actions, 
Burma, et cetera, is this not in against the interests of the 
United States of America national security, as well as 
economic?
    Ms. Blakey. My understanding of the new joint venture that 
General Electric has entered into is that it is entirely on the 
commercial side, commercial avionics is what we are talking 
about. We are talking about, again, technologies that are 
appropriate and widely available worldwide. In speaking about 
the economic interest, the issue in the long run is that you 
are going to have a healthier industry and you are going to 
have, also, both jobs in the United States that are created 
when you do have a vibrant vigil like this.
    Mr. Rohrabacher. Okay. Let me just note for the record, and 
of course I have strong disagreement with you this, the idea 
that you can now differentiate between the avionics going into 
a modern jet airliner and the avionics that will go into a 
bomber that will deliver a weapon on Taiwan, or somebody else, 
or the United States, or Japan, I don't think that there is 
this distinction. I think that number one, anybody in our, and 
our big corporations have been doing this, anybody who builds 
up the avionics and the aviation aerospace capabilities of 
China at this time is: (1) betraying their employees who have 
been loyal to them all this time, rather than having them buy 
parts from us, they are going to now manufacture it in China; 
and (2) it is not only bad for us economically, but our 
national security will suffer greatly in the long run unless, 
of course, there is, like you mentioned, countries have a way 
of changing.
    China could well have some sort of a, Tiananmen Square 
might have succeeded. Of course, the Bush administration back 
then decided not to wade in on the side of democracy and 
decided to side basically, with their silence, with the people 
who murdered the democracy movement. So, anyway, let me ask you 
one question, and then I know we will move on. I am using my 
time. I see, it is my perception, that the high level decision 
makers in the aerospace industry are not considering the 
national security interests of the United States and not even 
considering the long-term interest of their employees, much 
less their own stockholders who in the end we are ending up 
building an industry that will compete with ours in China. Can 
we logically say, then, that it is not a good thing to leave 
these decisions up to people in the industry, but instead, we 
should be trying to establish a policy to make sure our 
country, and our countrymen, are not betrayed?
    Ms. Blakey. Well, I would take complete and enormous 
exception, of course, to the characterization of the aerospace 
interest in terms of our national security. I think we are the 
bailiwick on that, and I do believe, in fact, that we with the 
kind of innovation and the kind of ability to compete, which we 
have great confidence in, that with appropriate technologies, 
not all technologies, the United States can increase our 
national security because, in fact, we will be able to continue 
to innovate. We will have the kind of economic engine that 
allows us to continue to have the technological edge. That is 
inherent in the system that we are currently using. I would 
refer you back again to $57.6 billion of trade surplus, which 
is what is driven by our ability to also, appropriate 
technology, share with allies.
    Mr. Rohrabacher. Well, when the Chinese can manufacture 
this and pay their people, unlike our own very well paid 
aerospace engineers who deserve the pay they get, if we ship 
those jobs over there, we are not going to have that trade 
surplus anymore because people are going to be able to buy 
Chinese made airplanes. I think this is a catastrophe in the 
making, and every patriotic American should stand up to the 
aerospace industry. I am someone who stands in awe of the 
accomplishments of the aerospace industry in the past. Let us 
just hope they are not doing things that are going to put my 
children in jeopardy and make sure that we don't have good 
paying jobs for our own people. Any other comments?
    Ms. Blakey. Could I make one other comment about this, 
though?
    Mr. Rohrabacher. Sure.
    Ms. Blakey. We are talking about a situation in which we 
actually cannot control the world dynamic on this. The fact of 
the matter is that the Chinese are entering the aviation and 
aerospace market. Whether we are there or not, that will 
happen. It is not a situation we control. What I have 
tremendous confidence in, and I think that is shared among the 
leadership of our industry, is our ability to innovate and to 
compete is something that will keep us in the leadership as 
long as we are not trying to pull back into a shell and hold on 
tight to only what we have now. We will evolve, and exports 
will help us evolve.
    Mr. Rohrabacher. I will leave you with the last word on 
that. Go right ahead.
    Mr. Sokolski. I would like to make one comment.
    Mr. Rohrabacher. Yes.
    Mr. Sokolski. I am old enough to have been here before 
during the Loral Hughes controversy. I think you were here. 
That was not a pretty time for the American aerospace industry. 
We made mistakes, and they were very, very significant. We are 
still paying for those.
    Mr. Rohrabacher. Just a note. Fifteen years ago when that 
happened and we had a more open policy of trade, and I 
supported it originally because I bought on to the argument let 
them launch the satellites, there is not going to be any tech 
transfer, in the end now, there was so much technology transfer 
that Chinese rockets today can outcompete American rockets 
because they have got technologies which either they have 
stolen from us or transferred back in those days that give them 
tremendous capabilities based on, what, research and 
development paid for by the United States taxpayer. We just 
hand it over to them or they come in and steal it, and now they 
are using it to put us out of work and outcompete us. I am glad 
you brought that up. Thank you very much, Mr. Chairman. I 
appreciate this hearing.
    Mr. Scott [presiding]. Well, thank you. I am always 
continually impressed with my good friend from California and 
his intellect and depth of these issues. I enjoy our travels 
together, and you continue to make some excellent points. I 
might add that it might be perhaps our laissez faire attitude 
with China might have something to do with the fact they 
control over $1 trillion of our debt right now. Doesn't 
necessarily put us in the best position, and it is something we 
both are working hard to address. Let me go back to the 
economic issue here a little bit. Would each of you agree that 
it makes sense to support U.S. jobs and the manufacturer of 
U.S. goods as a part of our national security policy?
    Mr. Berteau. Mr. Scott, I think that that is clearly a very 
significant issue associated with that. One of the real 
challenges this entire question of the export control system 
faces is that we don't have a good definition from a national 
security point of view of what defense industrial base we 
really do need to protect and at what level. It is not just a 
technology question. It is a question of skill, it is a 
question of supplier base, it is a question of access to 
materials and technology as well. We tend, as a government, to 
look at these kinds of questions on a program by program basis 
rather than in a comprehensive manner across the board. Until, 
and unless, we tackle this from a more comprehensive approach, 
your question is just an academic one.
    Mr. Scott. Yes, Mr. Sokolski.
    Mr. Sokolski. If I was out of work, it wouldn't be 
academic.
    Mr. Scott. That is right.
    Mr. Sokolski. I think we are losing, though, scope on what 
we really want to focus on. I think I actually sympathize with 
what you I think were trying to say. What you want to do in all 
business ventures and military, diplomatic, and probably even 
social ventures, is build up your comparative advantage. 
Sometimes that means letting go. I think that was industry's 
point. But, how shall I put it, they might let go a lot earlier 
than I would. That is where we differ. But just saving jobs and 
industries, that wouldn't be a complete thought, I don't think. 
What you want to do is say, hey, we are really good here, we 
can compete here, let us build on that strength. How do we do 
that? So you have got to identify where you are strong.
    Mr. Scott. Well, let us take a specific situation, you said 
a specific situation, in terms of strengthening the U.S. 
industrial base. Doesn't it make sense for a United States 
company, a United States company, to build the next tanker for 
the United States Air Force as opposed to building it by the 
Europeans through Airbus even knowing that some of the 
production will be in the United States?
    Mr. Sokolski. Well, they are nervous, I am not. I have lots 
of cars. I have actually five. I have a big carbon footprint, 
potentially. I don't drive them, I collect them. Two of them 
are American, the other three are Japanese. Japanese car is a 
lot better. I think on this we have to be fair. If the Japanese 
are willing to build plants here and get us to build these 
wonderful cars even though they are their design, even though 
they include, on the other hand, American materials, science 
and other things, I mean, it is a kind of collaborative thing 
that car, should we care? If they are trusted allies, I don't 
think so. I think when you get to the Chinese and some of these 
other things, I think you have to worry. So I am a little 
agnostic on that one. By the way, I still have the two old 
cars.
    Mr. Scott. What about you, Ms. Blakey? How do you feel 
about that?
    Ms. Blakey. Well, we are certainly, because, as you know, 
we represent the industry on all fronts and we are not in a 
position to comment on the tanker competition, but I do think 
it is important, going to this issue of what our industrial 
base should be capable of doing, and preserving those 
capabilities is a very important consideration as DOD is making 
choices that we do need to be certain that we continue to be 
able to preserve the technological edge that this country has 
always had. I would simply say that it is something that as 
tough choices and tough budget choices are being made, I hope 
that will be very much a part of their strategy and the 
consideration it needs to be.
    Mr. Scott. Well, in examining the rationale of the United 
States' policy for doing something like this, like awarding the 
U.S. Air Force tanker contract to a foreign company, the 
question to the man on the street is why would we do that, 
particularly if it is for our own armed forces? That is a major 
issue, it is a concern. We hear it from our union members. How 
do we grapple with that?
    Mr. Berteau. We have spent a lot of time looking at 
questions like that, not just only for the tanker, but for, in 
fact, most defense systems. I think you have got to start from 
the very strong starting point that this is not about who wins 
the contract but about what the military requirements are and 
whether or not those military requirements will be satisfied. 
Now, we could have a whole different conversation about whether 
the draft request for proposals that was put out by the Defense 
Department for the tanker actually does the right job of 
defining those requirements and whether or not the source 
selection criteria and the source evaluation criteria will 
align with satisfying those requirements. That is a different 
issue. I think the primacy of the military requirements has got 
to be where we start from here, not the question of who wins 
the work.
    Mr. Scott. Do we have any empirical data or information to 
do any comparative analysis on the number of jobs in the 
aerospace industry 20 years ago, or the percentage of those 
jobs that were here in the United States, as opposed to jobs we 
have lost outside of the United States due to our export 
policies?
    Mr. Berteau. There is a lot of data that you could use to 
analyze that. Unfortunately, a lot of that data is provided not 
necessarily by the government, but by those who are 
participating in the process. Back during the 1990s, in part as 
a cost saver, we no longer required companies to provide that 
level of information, particularly for subcontractors when they 
had a government contract because the government had to pay for 
the companies to collect and provide that information, so we 
saved the money by no longer getting that data. We can create 
estimates, we can look at estimates. I am not aware of anything 
that looks particularly at the answer to your question, but we 
will check and see what is available on the record and provide 
that for you.
    Mr. Scott. We currently have very searing unemployment in 
this country, loss of jobs. Do you see anything that needs to 
be changed in our export policy dealing with the aerospace 
industry that could help us with the unemployment in this 
country? Do you see any need of change?
    Mr. Berteau. I think it is a very timely question. I would 
actually call the attention of the subcommittee to a front page 
article on the Wall Street Journal today; in fact, you might 
want to consider including it in the record at this point, on 
the value of the Export-Import Bank in promoting aerospace 
exports from the U.S. I think it is a very positive indication 
of how you can have a countercyclical, from an economic point 
of view, benefit from export promotions. I would note that the 
article itself doesn't cite this but that the level of default 
on those is essentially zero. It is almost a win/win situation. 
I think the degree to which we could look for other 
opportunities to do that would be something that would behoove 
us.
    Ms. Blakey. I certainly think, you know, when you look at 
the drop in market share in the commercial satellite arena, the 
steps this committee and this House has taken are very 
constructive, as well as the significant improvements that DDTC 
has made in terms of license processing. There are a lot of 
levels to this, but in the long run, our jobs are depending 
upon a very significant export ability.
    Mr. Sokolski. I would suggest one change in recognition of 
a trend. Another article I would recommend is in the Economist. 
In there, they describe the provision of intelligence gathering 
and UAV-related services. I think we think too much about 
selling hardware and not enough about what probably is easily 
very significant, maybe even more significant, which are things 
that are not hardware. Much of the concern we are going to be 
facing regarding Iran is going to be dealing with all kinds of 
missiles. That technology goes there because folks are selling 
a lot of hardware. I am not sure you should be doing that. I 
think there is a lot more industry to be had and a lot more 
high paying jobs to be had if we build on the comparative 
advantage of the services that we can provide with the 
hardware, but not leaving it or shipping it overseas.
    Mr. Scott. Okay. Mr. Chairman, I just had one----
    Mr. Sherman [presiding]. One more point.
    Mr. Scott [continuing]. More point. I know you just came in 
at the time, but those moments were shared with the other 
questioner. I wanted to go back for a moment and get a good, 
clear understanding of your thoughts on the deemed exports, if 
I may. I wanted to get your opinions on what type of security 
threat, in your opinion, is posed by foreign nationals inside 
the United States who are working on or purchasing controlled 
technologies.
    Ms. Blakey. Well, in the area of working on technologies, I 
mean, there is a very tiny percentage of foreign nationals who 
are involved in defense and production, and therefore, in the 
area of controlled technologies. There is a very definite 
distinction in facilities across the board in our companies 
between what foreign nationals may do on the commercial side 
where there is certainly a significant workforce, but it also 
again contributes to the expertise, the pool, if you will, of 
talent, but strictly on the commercial side when you look at 
the numbers.
    Mr. Scott. Do you feel that our security is tight enough? 
In a kind of a halfway related way, we had an incident, for 
example, at Ft. Hood. Who would have thought that even within 
our own military we would have that kind of terrorist mentality 
at work? This individual engaged in communications with a known 
terrorist in getting this. So it begs the question if we have 
this happening right within our military units, how sure we 
don't have this kind of situation happening let us say in this 
area where we have sensitive technologies? Do you believe that 
our security is strong enough in place to prevent any sensitive 
material from getting into the hands of individuals, like Iran 
or others, who might not be on the same page with us?
    Mr. Sokolski. If I may. I think what has changed in the 
industry, aerospace field, is the most valuable things no 
longer are tangible, they are intangible things. This presents 
an immense problem for control, and it doesn't get any better 
if you can't keep track of who is working where on what. That 
is a very difficult problem, but I think it is worth bearing 
down on because that is at least as important as some of the 
physical things that we are worried about.
    Mr. Scott. Yes. I am glad that you mentioned that because 
in my district, if you all recall, it was in the news, we had 
Georgia Tech students who were arrested on terrorism charges 
because of a similar incident in dealing with sensitive 
materials and trying to get it back out. So I think it is good 
that we brought that up as a part of the record. It is good to 
hear that you all feel that we are not as secure. It is an area 
we certainly need to tighten up on. With that, I yield back to 
you, Mr. Chairman.
    Mr. Sherman. Thank you. My initial questions will relate to 
your district more than mine, and that is on this tanker deal. 
I understand Ms. Blakey can't talk about it and our other two 
witnesses, I am, frankly, disagree with their position. Since I 
introduced them I am aware of their qualifications, but, I hate 
to say it, also lack of qualifications in the sense that we 
here in Congress are responsible for jobs and the economy, you 
spent your lives a step away from those constituent concerns, 
and we are concerned, especially in this subcommittee, on the 
unfair trade practices that are used to create the enormous 
national debt.
    If we don't fight back, we are going to see a hollowing out 
of the U.S. economy even more than what we face now. Finally, I 
don't think either of you have been involved in trying to 
explain to a town hall why it is a good thing that we spend so 
much on military hardware. One of those arguments is that we 
build it here, we build our companies here, we build jobs here, 
and so being an agnostic as to whether the tankers are built 
here in the United States or not, or whether they are built by 
U.S. companies or foreign companies makes it hard for you to be 
an Evangelist for the idea of us having the tankers at all. I 
am sure that even though you have spent time, at least one of 
you, at the Pentagon, nobody in there is screaming stop 
spending money on the military.
    I would hope that, I mean, looking at everything involved 
you cannot be an agnostic on the economic impact of where we 
get our tankers. Now, Mr. Sokolski, I couldn't agree with you 
more, it is not all about hardware. Software, you don't even 
need that pick up truck to take the stuff to Mexico.
    Mr. Sokolski. Do not.
    Mr. Sherman. So there is an even greater concern to making 
sure that those who are legally in the United States who get 
their hands on stuff should get their hands on things for the 
right purposes with the right restrictions. The idea that, and 
this harkens back to the 1990s, it could be sold at Egghead, 
which was a place they bought software back long ago----
    Mr. Berteau. I used to buy a lot from Egghead.
    Mr. Sherman. Yes, but will let anybody who walks in with 
cash to Egghead to buy it but we are going to prevent its 
export--may have heard of this thing, it is called the 
internet. You can just, any program you have got. So now I 
would like to shift to coproduction and talk about things Ms. 
Blakey may be allowed to talk about. We import from China five 
times what they are willing to buy from us, or they buy from us 
only one-fifth of what they sell. That, if anything, overstates 
the amount they are willing to buy from us because when they 
are willing to buy from us it is the subject of these 
coproduction agreements.
    In fact, U.S. companies reported some 9,200 offset 
transactions worth $45 billion from 1993 to 2007. Not all of 
those are with China. Now we see them saying well, of course, 
we will have free access to U.S. markets whenever we want, but 
Americans will sell aerospace products to us only subject to 
coproduction agreements. Ms. Blakey, is it entirely legal for 
China to be demanding these coproduction agreements in order to 
purchase U.S. products?
    Ms. Blakey. I think we see a tendency around the world for 
developing countries and developing markets to want to share in 
the development of technologies and of these capabilities. 
Their proposition, of course, is: (1) it is an open market, and 
those who refuse to enter will do so. If U.S. firms do not, 
others will.
    Mr. Sherman. So what we could do is say if you insist on 
coproduction agreements as to aerospace, we immediately close 
our markets to all Chinese exports. That would be an effective 
response if our Government was capable of fighting for America 
rather than kowtowing to those few Americans who make a lot of 
money importing things into the United States. Since we don't 
do that, the very few exports that we do have to China only can 
be counted as exports in the short term. They are really 
imports in the long term. Either we don't sell to China at all 
or we are allowed to slit our own throats. In particular, we 
have this GE announcement. Is it in the interest of the total 
employment in your industry that we equip China with this 
capability?
    Ms. Blakey. I think a more robust capability on the part of 
our companies, U.S. companies, and certainly GE is one, in the 
long run will allow for a much greater share of the Chinese 
market. It is an enormous market from an aviation standpoint, 
and they already have sophisticated avionics. It is not as 
though avionics are not present on Chinese aircraft, and, in a 
multiplicity of ways, very competitive ones. This is all in the 
commercial arena. I would simply say that I think an argument 
certainly is a very strong one that in the long run this 
benefits U.S. economic terms and benefits our economy and 
benefits U.S. work.
    Mr. Sherman. So right now our companies face competition 
from Europe, just a little bit from Brazil. Are we conjuring up 
a world 20 years from now where the Chinese can take a good 
half, three-quarters of the world's commercial airplane 
business. Is that in America's interest?
    Ms. Blakey. Well, the Chinese market itself, which they 
have a great deal of control over, is an enormous market.
    Mr. Sherman. Well, if I can interrupt there. They have 
control of it as long as we are total wimps. Once we say you 
can't import anything into the United States unless you buy 
American aircraft, then we have control. Of course, that would 
require us to assert some fortitude, and it is unlikely that we 
will do so. So we live in a world where we have decided to 
bleed to death slowly, and the question is who will prosper 
during that process?
    Ms. Blakey. You are arguing broader economic policy than 
just the aerospace industry by a long shot; things that would 
quake the terms of trade and our economy itself.
    Mr. Sherman. So, but do you expect that your industry is 
going to face a loss of half of the world market due to Chinese 
exports 20 years from now?
    Ms. Blakey. No, we don't because we believe that, again, 
U.S. technology and U.S. capabilities are incredibly strong. We 
will continue to compete as long as we have----
    Mr. Sherman. Well, wait a minute. If you give all those 
capabilities to China so that they have the low labor cost, the 
ridiculously low currency and government subsidies, why do you 
think that you can give them the technology and you are still 
not going to face them as an international competitor?
    Ms. Blakey. I certainly can't speak to the specific 
technologies that may be involved in the terms that General 
Electric has set up, but again, we are talking about commercial 
technologies that are widely available there and do evolve, and 
will evolve on global basis. I do believe the United States and 
our capabilities when it comes to everything from, you know, 
the avionics itself, which is at issue here, all the way 
through composites, all the way through advanced designs, we 
will continue to maintain a technological edge, and therefore, 
an advantage in exports, which we have now, as long as we have 
the resources to do so. That, again, is fueled by this trade.
    Mr. Sherman. Is there any technology that we have in 
avionics that GE is holding back? Are we just shipping them our 
old and bad stuff or is GE fully cooperating with the Aviation 
Industry Corp. of China and providing them with avionics 
capabilities fully at the level that GE is able to provide?
    Ms. Blakey. Well, representing the industry as a whole, I 
can't speak specifically for the terms of this deal with GE, 
but what I would like to do is certainly ask that your question 
go to them directly and we will see about facilitating some 
further information.
    Mr. Sherman. Assuming U.S. companies fall over each other 
in an effort to get a short term advantage for a little while 
in China and provide to the Chinese all the technology that 
they are legally allowed to do so and presumably get the 
licenses that are envisioned by this GE agreement, why do you 
assume that we are not going to lose half the market or more to 
China 20 years from now?
    Ms. Blakey. I think because, again, it comes back to do we 
have our capabilities that have proven over time to be those 
that will be to our ultimate advantage? I think that has proven 
the case so far and it will continue to do.
    Mr. Sherman. We have certainly proven the ability to 
develop great aircraft. We have also proven the ability in 
every other industry to ship our technology to China and give 
it to them and to lose the market. We had great technology in a 
lot of other fields. The one thing American companies have 
proven the ability to do is to offshore. As a matter of fact, 
almost all the profits that are made are made from offshoring. 
Why do you think that your industry is incapable of immediately 
transferring in a very profitable way to China all the great 
technology that you and I are confident that they can develop? 
Why are you guys so bad at offshoring?
    Ms. Blakey. I can't suggest that I think it really comes 
down to that. I think, you know, when you are talking about a 
sophisticated set of technologies, which is what aerospace is 
all about, it is not making widgets, it is not going and giving 
them a singular technology that suddenly gives a tremendous 
advantage--I also think our companies are very intelligent 
about what makes sense in terms of strategic advantage and what 
does not. Again, I would be happy to get more specific 
information on this from General Electric's standpoint, but as 
a broad matter we are projecting that we can hold our market 
share very well using the kind of strategies that we are taking 
these days to the world market.
    Mr. Sherman. Well, you have lost a good share to Airbus, 
and there the Euro is 1\1/2\ to the dollar and is allowed to 
float. Assume that the Chinese currency is not only under 
priced by 40 percent, but let us say they decide to underprice 
their currency by 60 or 70 percent next decade. How confident 
are you that planes can be manufactured in the United States 
profitably to continue our level of the world market share?
    Ms. Blakey. You know, some of these are the dynamics of 
world trade that I honestly will tell you are not within the 
control of a singular industry, or even the kind of projections 
that any of us can make. You are conjecturing a future that I 
believe is not one that is necessary or reality, but at the 
same time, we are all going to have to be aware that there are 
bigger dynamics in this that are beyond, as I say, any single 
industry.
    Mr. Sherman. Are there elements in your coalition that are 
pushing for a denial of the licenses that are necessary in 
order to export all of our aerospace technology to China?
    Ms. Blakey. There is very little aerospace technology that 
is controlled technology that is going to China at this point. 
Again, we have been talking in the commercial arena almost 
exclusively today as regards China. Our companies are very 
serious about not only maintaining, but enhancing controls on 
sensitive technologies. It is something we are advocating. As a 
part of export control reform, we believe there needs to be 
greater scrutiny, and, in fact, something that may be somewhat 
counterintuitive even when it comes to the Commerce controlled 
items. We would like to see a gradation with some controls 
there that may be higher controls so that it is not simply a 
one size fits all approach.
    Mr. Sherman. So at the present point do you have an 
association position on whether we should grant the licenses 
necessary for this joint venture to go forward?
    Ms. Blakey. The joint venture has just been announced and I 
am not aware that there are licenses at issue. We can try to 
find out more and be more specific for you on it.
    Mr. Sherman. If you could get back to us and either say 
grease the skids or use every tactic to delay, which I would 
sure like to know your position on this joint venture. I have 
just begun to look at whether this is good for American jobs. 
They say it is going to provide 200 American jobs. That is a 
very few jobs to take in return for losing a big chunk of our 
technological advantage. Mr. Berteau, I think you----
    Mr. Berteau. Mr. Chairman, you have raised over the course 
of the last few minutes a broad array of very significant 
issues and I know that both Mr. Sokolski and myself have been 
busily jotting down notes of what we would like to say in 
response to these issues. I think that in light of the time and 
the pressure of that that I would request that we be allowed to 
provide for the record a number of comments on----
    Mr. Sherman. All three witnesses, and our two earlier 
witnesses, are all invited and urged to provide written 
comments for the record for 5 business days. In addition, if 
either of you recently ignored witnesses can have 1 minute to 
make an oral statement, that is fine. Otherwise, we will get 
your comments for the record.
    Mr. Sokolski. One comment. I think there is a one word or 
two word answer to your question. What has kept, or what will 
keep, whatever it is that you are worried about from happening 
would be export controls. So if the review is done properly, 
you might get the results you want. If it is not done or you 
get rid of the controls, caddie bar the door.
    Mr. Sherman. Not only do we need to maintain our export 
control system and make it better, we have got to put into that 
review an explicit jobs component on both what State, as well 
as Commerce, does.
    Mr. Berteau. And, Mr. Chairman, there is one area where we 
have stayed ahead of the global curve in terms of competitive 
advantage flowing to places other than the U.S. and that is in 
national security. I think that is the core issue why we have 
export controls in the first place. We have done it by 
investing in the research necessary to keep us ahead of the 
technology curve that others have developed. You asked earlier 
on what the Congress can do and I will expand a little bit on 
that in my written remarks because I think that is the key 
question.
    There are other industries where we have done the same. 
They are not a lot of them. I think the larger questions of how 
we maintain a competitive advantage not only against China, but 
against the rest of the world is a very significant challenge 
facing America. I think national security and the national 
defense arena plays an important role in that, both from an 
economic and a technology perspective, as well as from a 
defending America perspective. I will be glad to expand on 
that.
    Mr. Sherman. I look forward to getting your comments. Just 
as concluding comments, we have devoted hundreds of billions of 
dollars to national security research, chiefly in aerospace. 
This has given our companies an edge. That edge is important in 
order to maintain our national security and needs to be 
preserved. That edge has also been important to maintaining one 
of the last few industries where the United States is a major 
exporter, and we have to make sure that our national security 
research dollars not only keep us ahead in national security 
technology, but also preserve for the United States the lion's 
share of the jobs that are made available by the civilian 
exploitation of that technology. I want to thank you all for 
being here. These hearings are concluded.
    [Whereupon, at 5:13 p.m., the subcommittee was adjourned.]
                                     

                                     

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     Material Submitted for the Hearing RecordNotice deg.



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                               Connolly statement deg.
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                               Sherman--Int'l Assoc of Machinists,
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