[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]



 
                EXPORT CONTROL REFORM: THE AGENDA AHEAD

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

                                HEARING

                               BEFORE THE

                      COMMITTEE ON FOREIGN AFFAIRS
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 24, 2013

                               __________

                           Serial No. 113-52

                               __________

        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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                       http://www.gpo.gov/fdsys/

                                 ______


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                      COMMITTEE ON FOREIGN AFFAIRS

                 EDWARD R. ROYCE, California, Chairman
CHRISTOPHER H. SMITH, New Jersey     ELIOT L. ENGEL, New York
ILEANA ROS-LEHTINEN, Florida         ENI F.H. FALEOMAVAEGA, American 
DANA ROHRABACHER, California             Samoa
STEVE CHABOT, Ohio                   BRAD SHERMAN, California
JOE WILSON, South Carolina           GREGORY W. MEEKS, New York
MICHAEL T. McCAUL, Texas             ALBIO SIRES, New Jersey
TED POE, Texas                       GERALD E. CONNOLLY, Virginia
MATT SALMON, Arizona                 THEODORE E. DEUTCH, Florida
TOM MARINO, Pennsylvania             BRIAN HIGGINS, New York
JEFF DUNCAN, South Carolina          KAREN BASS, California
ADAM KINZINGER, Illinois             WILLIAM KEATING, Massachusetts
MO BROOKS, Alabama                   DAVID CICILLINE, Rhode Island
TOM COTTON, Arkansas                 ALAN GRAYSON, Florida
PAUL COOK, California                JUAN VARGAS, California
GEORGE HOLDING, North Carolina       BRADLEY S. SCHNEIDER, Illinois
RANDY K. WEBER SR., Texas            JOSEPH P. KENNEDY III, 
SCOTT PERRY, Pennsylvania                Massachusetts
STEVE STOCKMAN, Texas                AMI BERA, California
RON DeSANTIS, Florida                ALAN S. LOWENTHAL, California
TREY RADEL, Florida                  GRACE MENG, New York
DOUG COLLINS, Georgia                LOIS FRANKEL, Florida
MARK MEADOWS, North Carolina         TULSI GABBARD, Hawaii
TED S. YOHO, Florida                 JOAQUIN CASTRO, Texas
LUKE MESSER, Indiana

     Amy Porter, Chief of Staff      Thomas Sheehy, Staff Director

               Jason Steinbaum, Democratic Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page

                               WITNESSES

Mr. Thomas Kelly, Acting Assistant Secretary, Bureau of 
  Political-Military Affairs, U.S. Department of State...........     4
The Honorable Kevin J. Wolf, Assistant Secretary of Commerce for 
  Export Administration, Bureau of Industry and Security, U.S. 
  Department of Commerce.........................................    10
Mr. James A. Hursch, Director, Defense Technology Security 
  Administration, U.S. Department of Defense.....................    20

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Mr. Thomas Kelly: Prepared statement.............................     6
The Honorable Kevin J. Wolf: Prepared statement..................    12
Mr. James A. Hursch: Prepared statement..........................    22

                                APPENDIX

Hearing notice...................................................    50
Hearing minutes..................................................    51
The Honorable Gerald E. Connolly, a Representative in Congress 
  from the Commonwealth of Virginia: Prepared statement..........    53
The Honorable Edward R. Royce, a Representative in Congress from 
  the State of California, and chairman, Committee on Foreign 
  Affairs: Material submitted for the record.....................    55
The Honorable Brad Sherman, a Representative in Congress from the 
  State of California:
  Chinese entities sanction under INKSNA since October 2008......    58
  Statement for the record from the International Association of 
    Machinists and Aerospace Workers dated March 19, 2013........    59
Questions submitted for the record by the Honorable Edward R. 
  Royce and responses from:
  Mr. Thomas Kelly...............................................    61
  The Honorable Kevin J. Wolf....................................    73
Questions submitted for the record by the Honorable Eliot L. 
  Engel, a Representative in Congress from the State of New York, 
  and responses from:
  Mr. Thomas Kelly...............................................    94
  The Honorable Kevin J. Wolf....................................    98
Questions submitted for the record by the Honorable Christopher 
  H. Smith, a Representative in Congress from the State of New 
  Jersey, and responses from the Honorable Kevin J. Wolf.........   110
Questions submitted for the record by the Honorable William 
  Keating, a Representative in Congress from the Commonwealth of 
  Massachusetts, and responses from Mr. Thomas Kelly.............   113
Questions submitted for the record by the Honorable David 
  Cicilline, a Representative in Congress from the State of Rhode 
  Island, and responses from:
  Mr. Thomas Kelly...............................................   115
  The Honorable Kevin J. Wolf....................................   116


                        EXPORT CONTROL REFORM: 
                            THE AGENDA AHEAD

                              ----------                              


                       WEDNESDAY, APRIL 24, 2013

                       House of Representatives,

                     Committee on Foreign Affairs,

                            Washington, DC.

    The committee met, pursuant to notice, at 10:10 a.m., in 
room 2172 Rayburn House Office Building, Hon. Edward Royce 
(chairman of the committee) presiding.
    Chairman Royce. This Export Control Reform hearing will 
come to order. Today we meet to discuss the agenda for 
advancing U.S. export control reform. The U.S. has long had in 
place a system of strategic export controls. These controls 
restrict the commercial export of both arms and dual-use 
items--that is, items that have both a civilian and military 
application--in order to advance our national security, our 
foreign policy, and of course our economic interests around the 
globe.
    The main goal of our export controls is to restrict the 
flow of sensitive technology to terrorists and state sponsors 
of terrorism, or other countries that may be hostile to the 
United States. Under this system, the State Department is 
responsible for regulating arms exports while the Commerce 
Department is responsible for regulating exports of dual-use 
items. The Department of Defense identifies and helps protect 
military critical technologies, including by providing 
technological expertise. Several agencies, including the 
Department of Justice and the Department of Homeland Security, 
are responsible for export enforcement.
    This committee has jurisdiction over all aspects of U.S. 
strategic export controls, and for many years this system has 
been regarded as the gold standard of national export control 
regimes. But over time, the GAO and many others have observed 
that the complexities of the system have begun to erode its own 
effectiveness. In particular, the nature of our controls became 
out of step with changes in defense acquisition policy, global 
manufacturing trends, and technological development. The world 
economy left our bureaucracy behind.
    As we will hear today, the administration has begun a 
comprehensive restructuring of the U.S. export control system. 
The goal of that reform effort is to better tailor U.S. export 
controls to our national security interests. These interests 
include helping our industries shed needless bureaucracy and 
compete in the global marketplace and strengthening our 
economy.
    Indeed, this reform will affect a broad swath of American 
business, including the defense industry, aerospace, the 
commercial satellite and space industry, electronics, 
semiconductors, and communications technology. The goal is a 
more transparent and a more efficient system.
    However, some caveats are in order. The primary 
beneficiaries of the current reforms are expected to be small 
and medium sized industries, but they and others initially may 
struggle to adapt to the intricacies of a new regulatory 
regime. Likewise, it is uncertain whether executive branch 
agencies themselves are fully prepared for these changes, both 
with respect to licensing and enforcement functions.
    Effective outreach to business will be critical. Missteps 
in implementation are inevitable. The committee will be 
watching and lend a hand when we can.
    Meanwhile, there is a large reform agenda still ahead. More 
effort should be placed on enhancing licensed defense trade 
with friends and allies. Implementation of multilateral regime 
changes should be accelerated. The increasingly elaborate 
Export Administration Regulations need to be simplified. Some 
of these goals can be accomplished by the executive branch, but 
Congress also has an important role to play here. And in this 
regard, I look forward to working with the ranking member on 
bipartisan legislation to advance common sense reforms.
    As with the historic reforms of U.S. satellite controls 
that passed Congress last year, we hope to cooperate closely on 
these matters with the executive branch. Here, I would suggest 
it is long past due to reassess the status of the lapsed Export 
Administration Act. Let us ensure that we are guarding against 
those enemies that are determined to hurt us with our own 
technology.
    And I turn now to the ranking member for his opening 
statement.
    Mr. Sherman?
    Mr. Sherman. Mr. Chairman, it is like old times. For 6 
years we were the ranking member and chair of the Terrorism, 
Nonproliferation, and Trade Subcommittee. We held five hearings 
on this issue. And I want to commend you for bringing this 
issue early in your first year as chair of this committee to 
the full committee. We have got two statutory regimes--arms 
sales regulated by the State Department which creates the 
Munitions List, dual-use items regulated by the Department of 
Commerce which both by the nature of the items it regulates and 
its own proclivities is somewhat less stringent.
    In late 2006, the State Department had a backlog of 10,000 
license applications. Waiting times went for months. Even 
exporting handguns to be used by police officers in the most 
friendly countries could take months. Delays in the 
adjudication are often just as bad as answering with a no, 
because in either case the business will go elsewhere. The 
effect of that is not only lost jobs in the United States, but 
also money flowing into the industrial base of countries that 
may be less stringent or even unfriendly to the United States.
    Manufacturers have viewed being on the Munitions List as a 
great difficulty, leading to the so-called ITAR-free 
satellites, satellites carefully constructed so not a single 
part would be subject to the International Traffic in Arms 
Regulations of the State Department. I look forward to 
satellites being moved to the dual-use list with some 
additional restrictions.
    Our subcommittee held six hearings on this. I want to 
commend especially the State Department for allocating 
additional resources and shortening the wait times. The Obama 
administration has announced the outlines of export control 
reform. Secretary Gates was right when he said we need to build 
a higher fence around a smaller yard, and I would add, with a 
faster gatekeeper.
    The President's Export Reform Initiative will make a number 
of improvements to the system, including an enforcement 
coordinator to coordinate Commerce and State IT improvements to 
allow easier submission and processing applications, and a 
single electronically available list of prescribed entities 
ineligible for exports, which has been made available.
    The focus here is to look category by category at items on 
the Munitions List and determine what items in that category 
can be transferred to a new Commerce Department Munitions List 
I referred to as the Series 600. And so you have a State 
Department list that is getting smaller, and a Commerce 
Department list that is getting larger. We need to reauthorize 
the statute for the Commerce Department. The Export 
Administration Act, right now it is being continued on life 
support under the general emergency statute, IEEPA. It is about 
time Congress actually craft legislation in this area rather 
than keeping alive ancient legislation or letting the 
administration do so. We need to carefully look at the export 
control reform, perhaps move toward a single agency rather than 
just coordination between two agencies.
    Finally, I want to emphasize that it is not in our interest 
to be exporting not goods, but to export tools and dies and 
blueprints. The effect of that is not only that we lose jobs 
but that we build an arms or dual-use infrastructure elsewhere. 
And I think it should be an explicit part of our policy that we 
are not here to liberalize the rules to offshore production, 
even if there are powerful interests in this area that would 
find that the profitable thing to do.
    So I look forward to hearing from our witnesses how we can 
make sure that the infrastructure and manufacturing 
infrastructure stays here in the United States and that there 
are not undue delays in exporting that which should be 
exported. I yield back.
    Chairman Royce. Well put. We will go to our representatives 
now from the Departments of State, Commerce and Defense. We 
will start with Mr. Thomas Kelly, acting Assistant Secretary 
for the Bureau of Political-Military Affairs at the State 
Department. In his career as a Foreign Service Officer he has 
served in posts across the continent of Europe and South 
America.
    Mr. Kevin Wolf serves as Assistant Secretary for Export 
Administration for the Bureau of Industry and Security at the 
Department of Commerce, and prior to this appointment he 
practiced law specializing in Export Administration Regulations 
and International Traffic in Arms Regulations.
    And we have Mr. James Hursch, Director of the Defense 
Technology Security Administration for the Defense Department. 
His career at the Department began 28 years ago. He has been 
awarded the Secretary of Defense Exceptional Service Award.
    We are welcoming here all our witnesses to the committee, 
and without objection the witnesses' full prepared statements 
will be made part of the record. And members may have 5 days to 
submit statements and questions and extraneous material for the 
record. So I would ask that you all summarize your prepared 
statement, and we will start with Mr. Kelly.

  STATEMENT OF MR. THOMAS KELLY, ACTING ASSISTANT SECRETARY, 
 BUREAU OF POLITICAL-MILITARY AFFAIRS, U.S. DEPARTMENT OF STATE

    Mr. Kelly. Thank you very much, Mr. Chairman, and good 
morning. Thanks to you and to Congressman Sherman for your 
remarks.
    Chairman Royce, Congressman Sherman, committee members, it 
has been 2 years since the committee last met to hear testimony 
on the President's Export Control Reform Initiative. A lot of 
work has been done in the intervening period. I would like to 
start by thanking the committee on behalf of the State 
Department for its bipartisan support throughout this process.
    As the pace of technological advance accelerates and as 
technological capability spreads around the world, the need to 
update our export controls is increasingly urgent. We are no 
longer in an era in which a handful of countries hold the keys 
to the most sensitive technologies, as was the case during the 
Cold War. Today a whole range of nations have advanced 
technological capability. At the same time, because of the 
diffusion of technology many U.S. companies must collaborate 
with foreign partners to develop, produce and sustain leading 
edge military hardware and technology. And their survival 
depends on it.
    But because our current export controls are confusing, time 
consuming, and many would say overreaching, our allies 
increasingly seek to design out U.S. parts and services thus 
avoiding our export controls, and use monitoring that comes 
with them, in favor of indigenous design. This threatens the 
viability of our defense industrial base especially in these 
austere times.
    Our current system has another problem. It can prevent our 
allies in theater from getting the equipment and technology 
they need to fight effectively alongside our troops in the 
field. The system has its basis in the 1960s and hasn't 
undergone significant updates since the early 1990s. It is 
cumbersome, complex, and incorrectly controls too many items as 
though they were crown jewel technologies. And what that has 
meant is that there has been an inordinate amount of agency 
resources both in terms of licensing and compliance activities 
that have been expended on nuts and bolts as well as our real 
crown jewel technologies.
    In November 2009, President Obama directed a White House 
taskforce to identify how to modernize our export control 
system so that it will address the current threats that we face 
as well as account for the technological and economic landscape 
of the 21st century. His direction was grounded in national 
security with a goal of putting up higher fences around the 
items that deserved the greatest protection while permitting 
items of lesser sensitivity to be exported more readily when 
appropriate.
    To address the problems the task force identified, they 
recommended reforms in four key areas: Licensing policies and 
procedures, control lists, information technology, and export 
enforcement. The President accepted the recommendations, and 
since early 2010 agencies have been working very hard to 
implement them. Much of the agencies' efforts have centered on 
revising the U.S. Munitions List and Commerce Control List. 
This reform will draw a bright line between the two lists using 
common terms and control parameters. This will help our 
exporters determine far more easily which list their products 
are on. The reform will ensure that those items of greatest 
concern to us from a national security and foreign policy 
perspective will remain on the USML and thus be subject to the 
most stringent licensing requirements, while items of less 
sensitivity will be moved to the CCL.
    I want to emphasize a key point. Items moving to the CCL 
are going to remain controlled. They are not being de-
controlled, but in specific circumstances they will be eligible 
for export under Commerce's more flexible licensing mechanisms. 
I am confident that the revised list will permit State to 
continue to perform its national security and foreign policy 
mandates in export licensing. I would also like to note that we 
are making tremendous progress in the effort to rewrite the 
categories. We published 12 rebuilt USML categories in the 
Federal Register for public comment. The proposed rules for the 
seven remaining categories have been drafted and are either 
undergoing or awaiting interagency review so that we can then 
publish them for public comment.
    On April 16, the Departments of State and Commerce 
published companion rules that implement the revised USML 
categories, eight aircraft and 19 engines. This is the first 
pair of series of final rules that put in place the rebuilt 
export control lists. Our goal is to publish the revised USML 
in its entirety on a rolling basis throughout this year.
    In the last phase of our reform effort we will need 
legislation to bring the initiative to its logical conclusion 
by creating a single licensing agency. The administration 
hasn't yet determined when to approach this effort, but we will 
fully engage our oversight committees and know we can count on 
your support when we do so.
    On that note, one final point I want to make is that this 
hasn't only been an interagency process, it has been a cross-
government process. Over the course of the past 3 years I have 
had the opportunity to work closely with the committee, with 
many others across the Congress on both the broad strategic 
questions of national security and the finer technical details 
of our proposals. Our work together shows what we can achieve 
together. I am very grateful for your bipartisan support for 
this initiative. I look forward to working closely with you on 
the remainder of the reform effort.
    And with that I want to thank you for inviting me to 
testify, and I would like to turn the floor over to my 
colleague, Commerce Assistant Secretary Kevin Wolf.
    [The prepared statement of Mr. Kelly follows:]

    
    
    
    
    
    
    
    
                              ----------                              


 STATEMENT OF THE HONORABLE KEVIN J. WOLF, ASSISTANT SECRETARY 
 OF COMMERCE FOR EXPORT ADMINISTRATION, BUREAU OF INDUSTRY AND 
             SECURITY, U.S. DEPARTMENT OF COMMERCE

    Mr. Wolf. Chairman Royce, Congressman Sherman, members of 
the committee, I am pleased to be here today to discuss the 
President's Export Control Reform Initiative. As both of you 
said well in your introductions, the Obama administration is in 
the midst of the most comprehensive effort to reform our export 
control system in history. It will significantly enhance the 
national security, foreign policy and economic interests of the 
United States. It has taken unprecedented interagency 
cooperation, extensive consultation and discussion with 
Congress, and significant input from the public in order to 
bring about a reform of the Cold War-era system that we have 
now.
    As best described in a speech that then Secretary of 
Defense Gates gave in April 2010 on the subject, 
``Fundamentally reforming our export control system is 
necessary for national security.'' And what he meant by that is 
that our national security will be enhanced if our system 
allows for greater interoperability with our close allies, it 
reduces the current incentives in the system for foreign 
companies in allied countries to design out and avoid U.S. 
origin content, and allows the administration to focus its 
resources on more of the transactions of concern.
    The Commerce Department's Bureau of Industry and Security 
plays a unique role in this process. We are the only U.S. 
Government agency with trained staff focused on both the 
administration and the enforcement of export control Laws. This 
includes also educating the public on the rules, performing 
engineering and regulatory analysis of actual and proposed 
rules for purposes of making licensing determinations and 
proposed changes, and conducting enforcement analysis and 
investigations in order to help bring violators to justice.
    These technical skills combine with the judgments of the 
Departments of Defense, Energy and State to make decisions on 
licensing policy and applications for dual-use and other items, 
and until now a handful of less sensitive military items. In 
addition, BIS's law enforcement assets augment those of the 
Department of Homeland Security and the Department of Justice 
to investigate and prosecute violators criminally and 
administratively, as well as to further inform the intelligence 
community on policy and enforcement related activities.
    The export control effort that we are engaging in is a 
paradigm shift in how the U.S. Government implements U.S. 
export controls. In the near term, as was just described, that 
shift entails the transfer of tens of thousands of less 
significant military items that don't warrant the controls of 
the U.S. Munitions List to the more flexible controls of the 
Commerce Control List, a list that allows for both 
comprehensive embargoes and prohibitions as well as more 
flexible license exceptions for trade with certain allies and 
other countries.
    Although all these changes can be made in accordance with 
the notification provisions of Section 38(f) of the Arms Export 
Control Act and the new legislation pertaining to satellites, 
there are a number of authorizations that Congress could enact 
in the short term to enhance the effectiveness of the U.S. 
export control system. Of course, when we move beyond rewriting 
the lists and merging them into one, legislation, as was just 
described, will be needed to establish a single list as well as 
a single licensing agency and a primary enforcement 
coordination agency, the three final pieces of the fundamental 
reform envisioned by the effort. We are committed to working 
closely with Congress when we approach this phase of the 
initiative.
    In 2010, Congress granted BIS permanent law enforcement 
authorities as part of the Comprehensive Iran Sanctions, 
Accountability and Divestment Act of 2010, CISADA. However, 
BIS's authorization for non-enforcement related EAR activities 
under Section 109(d) of CISADA expires in 2013, later this 
year. We believe this authorization should be extended and that 
the confidentiality protections of Section 12(c) of the Export 
Administration Act should be made permanent.
    Additional resources would increase Commerce's operational 
efficiencies and activities. The President's Fiscal Year 2014 
budget requests $8.2 million for additional resources to 
augment BIS enforcement capabilities. These include additional 
analysts, special agents, and three new export control 
officers, two of whom would be dedicated to conducting end-use 
checks in STA-eligible countries, with the third expanding our 
regional footprint in the Middle East.
    Anyway, thank you very much for the opportunity to testify 
on this topic. I would be pleased to answer any questions that 
you have, and I now turn the floor over to my friend and 
colleague, DTSA Director Jim Hursch.
    [The prepared statement of Mr. Wolf follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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STATEMENT OF MR. JAMES A. HURSCH, DIRECTOR, DEFENSE TECHNOLOGY 
      SECURITY ADMINISTRATION, U.S. DEPARTMENT OF DEFENSE

    Mr. Hursch. Thank you, Mr. Chairman, Congressman Sherman 
and members of the committee, for the opportunity to discuss 
the Department of Defense's perspective on our work on export 
control reform. I would like to highlight briefly why this 
initiative is of such great importance to our national security 
and therefore to the Department of Defense.
    The hard work by the Departments of Defense, State, 
Commerce and other agencies has moved us closer to President 
Obama's vision of fundamentally reforming our export control 
system--a vision that has been supported by Secretary Gates, 
Secretary Panetta, and now Secretary Hagel. At the same time we 
still have much work ahead to achieve a more transparent, 
flexible, efficient and enforceable system based on the four 
singles of reform: A single control agency, working with a 
single control list, on a unified IT system, and supported by 
coordinated enforcement activities. The Department of Defense 
remains committed to this effort because it will enhance our 
national security in several ways.
    First and foremost, the goal of our revised controls is to 
be clearer and better focused on protecting those items and 
technologies that give our war fighters a military edge. We 
should concentrate our efforts on the crown jewel technologies 
to support our forces and protect our investments. For other 
important items, we should be more willing to share with our 
allies and partners, thus the second reason for DoD support.
    In the new strategic environment, coupled with increasing 
fiscal constraints, we rely more heavily on allies and partners 
to take on more of the security burden. While the U.S. will 
maintain the capabilities to defeat any adversary anytime and 
anywhere, we will seldom go to war alone. This means it is in 
our national interest to equip our partners and increase their 
military capacity to meet mutual security needs. More flexible 
licensing requirements for certain items means that our allies 
will no longer have to wait for a license for an essential but 
militarily insignificant spare part such as a hose or a switch. 
Of course, we do recognize that with increased flexibility and 
speed come compliance and enforcement needs.
    Accordingly, the administration has established new 
safeguards for these more flexible authorizations to mitigate 
risks. We will continue to have a policy of denial for items 
moved from the U.S. Munitions List to the Commerce Control List 
600 Series, if destined to embargoed or sanctioned countries, 
including China, including the re-export of any 600 Series item 
integrated into a foreign system.
    It is also important to note that export control reform 
will promote the health of our defense industrial base. It will 
help U.S. exporters, particularly our defense industry, to 
compete more effectively. This will in turn provide incentive 
for them to invest in advanced technologies that will enable 
the U.S. military to maintain its superiority in the future. 
The recent legislation, which returned the authority to 
determine the controls of satellites and related items to the 
President that was mentioned by both the chairman and the 
ranking member, will be an example of how reform can provide an 
important boost to a very important segment of our industrial 
base.
    We are moving forward to meet the reporting requirements 
set forth in the legislation on that matter and to send the 
draft regulations out soon for public comment. Rewriting our 
controls is an important interim step toward a single control 
list and will allow us to spend much less time discussing 
commodity jurisdiction issues to determine whether an item 
should be controlled on one list or another. The technology, 
not the jurisdiction, should be our focus.
    Again, the Defense Department is committed to fundamental 
reform and strongly supports continued efforts to establish a 
single control list and a single control agency. Our national 
security will not be served if we stop halfway. We must ensure 
that we protect those few critical technologies that are 
critical to our U.S. military superiority and establish new 
export control mechanisms that best serve the national security 
objectives of this reform effort.
    Thank you for the opportunity to speak to you today, and I 
look forward to answering any questions you may have.
    [The prepared statement of Mr. Hursch follows:]

    
    
    
    
    
    
    
    
    
    
    
    
    
    
                              ----------                              

    Chairman Royce. Well, the most immediate would come to mind 
is as Mr. Sherman points out, we have had this dialogue for 
many years now, and when do you intend to submit legislative 
details of the proposal in terms of that new single licensing 
agency?
    Mr. Hursch. When we first have briefed this and in the task 
force report, we set up a three-phase plan to do fundamental 
export control reform. We are into phase 2 and working through 
that with the revised lists that we have published for public 
comment and will submit for congressional consideration through 
the 38(f) process. We believe we need to get further down the 
road with that before we submit legislation to enable that. And 
we will work closely with you when that time comes.
    Chairman Royce. Well, the Export Administration Act is 
expired, so what you are using now, for a number of years now, 
is emergency authority to carry out the Commerce Department's 
basic licensing and enforcement activities, and hence, the 
desire on our part either to work together with you in terms of 
updating and reauthorizing or replacing that expired act.
    And one of the things I was going to ask you is the impact 
that the expiration may have had on enforcement efforts to 
combat illegal technology transfer. With you operating under 
emergency powers now and without us moving forward to actually 
reauthorize the act or replace it or not having received the 
submission of your details for your proposal, has it had an 
impact on that?
    Mr. Wolf. With respect to the enforcement of the existing 
regulations it has had no impact. There is a significant number 
of, over the years, civil and criminal actions that have been 
taken and maintained to that end under the International 
Emergency Economic Powers Act. As I described in my testimony 
and in a little bit more detail in my prepared remarks, there 
is a little bit more that can be done. But with respect to the 
ability to bring and maintain criminal and civil enforcement 
actions it hasn't had an impact.
    Chairman Royce. Let me ask you just for a minute, should we 
be able to get this proposal out there and get this done? What 
would it mean for U.S. exporters as a consequence? What is the 
payoff, if you could----
    Mr. Wolf. Are you referring to the single enforcement 
agency?
    Chairman Royce. To get the single enforcement agency 
through to the finish line, what then would that----
    Mr. Wolf. Oh, the payoff for national security we have just 
described very well on the panel, but with respect to exporters 
the goal is a more efficient, more organized, more transparent 
system than what we have now.
    Chairman Royce. Maybe in dollar terms, if you could 
quantify that for----
    Mr. Wolf. Well, we don't have a dollar estimate with 
respect to the particular economic benefit, but in the end it 
will result in a dramatically more efficient system.
    Chairman Royce. That is our hope, and I think that is why 
we need to see the details of the proposal. I think there is 
one item that I have long been concerned about and I guess I 
will bring it up here. And that was Viktor Bout's ability, 
frankly, his machinations around the globe to get his hands on 
the transfer of military equipment. And a lot went into 
bringing him to the bar of justice. Not only his capture, but 
getting him extradited here was something we were very involved 
in.
    So we have got a situation where motivated by profit, and 
we have a situation where arms brokers search for ways to 
funnel arms to terrorist groups and to rebel groups, and many 
of the items being proposed to move from the Munitions List to 
the Commerce List have clear military value to a guy like Bout. 
He would be very focused on that. Presently, pre-export checks 
allow the government to identify risks of diversion or other 
illicit activities.
    With intelligence information gleaned from those checks, 
the U.S. Government then stops U.S. companies from working with 
these shady brokers. That has been our experience. If you could 
explain the types of pre-export checks that military items 
moved to the Commerce List will receive for companies seeking 
to export to the 36 destinations judged to be of low risk, I 
think once these goods get to Europe that is going to be the 
test of your implementation of your enforcement. I just wanted 
to get some feedback on that, Mr. Wolf.
    Mr. Wolf. Sure. With respect to the use of the license 
exception, Strategic Trade Authorization, a condition is that 
all of the foreign parties have gone through the U.S. 
Government licensing system before so that they have been 
vetted, effectively, the same way that they would be vetted 
now. In addition, there is a limited number, a listed group of 
items, not all items that would warrant it, and it is only for 
ultimate end use by the governments of those 36. To the extent 
those and a series of other notification and certification 
obligations can't be satisfied, then a license would be 
required from the Commerce Department even to that group of 36.
    Chairman Royce. Thank you, Mr. Wolf.
    Mr. Sherman?
    Mr. Sherman. Thank you, Mr. Chairman.
    Mr. Wolf, China is clearly, or at least Chinese companies, 
sending technology to Iran. Some of that technology is 
American. Why haven't we designated China as a country of 
diversion concern and applied the measures called for by Title 
3 of CISADA?
    Mr. Wolf. That is actually a State Department question.
    Mr. Sherman. Okay, Mr. Kelly?
    Mr. Kelly. I am sorry. Could I have the question again?
    Mr. Sherman. Oh. Why haven't we designated China as a 
country of diversion concern and applied the measures called 
for in Title 3 of CISADA?
    Mr. Kelly. Okay, I will take that question back. Thank you, 
sir.
    Mr. Sherman. Okay, we look forward to getting an answer for 
the record. Mr. Kelly, I will----
    Mr. Kelly. I am sorry. I will provide it now. For CISADA, 
ODNI is required to provide an annual report that identifies 
each country that the government in which the director 
believes, based on information available to the director, is 
allowing diversion of a country of goods, services and 
technologies described in the act to Iranian end users. The 
report is classified so we can't go into too much detail in 
this forum, but what I can say is that the report hasn't yet 
provided us with a case that would enable us to so designate 
China or any other country to date. Thank you.
    Mr. Sherman. Well, several Chinese companies have already 
been sanctioned, so you have the specifics. And we know how we 
are very reluctant to do anything that would upset our Chinese 
friends. And that may be the real reason, but I am sure that 
the official State Department reason will be provided in 
greater depth for the record. As I said in my opening 
statement, one concern I have is that we will use this 
relaxation not to export goods but to export tools, dies, 
technology and offshore production.
    Without objection, I would like to enter into the record a 
letter from the International Association of Machinists and 
Aerospace Workers where they hope that there is a comprehensive 
review of how the changes, including transfers of items to the 
CCL, will impact U.S. employment and suppliers. When we export 
technology rather than products, we lose the jobs and we build 
the technological base of those not subject to the control of 
you three gentlemen.
    What steps are we taking so that we review the impact of 
moving a particular item from the State Department list to the 
Commerce List to see whether that will have the effect of 
allowing the export of blueprints, tools and dies technology?
    Mr. Wolf. That is a very good question. As I said in my 
introduction, one of the national security justifications for 
the entire effort is to reduce the current incentives that 
exist in the system to design out to avoid U.S. origin content. 
As someone working in this area for over 20 years, I have seen 
this firsthand.
    Mr. Sherman. Mr. Wolf, I think I may need to rephrase the 
question. Many items have already been transferred to the 
Commerce List.
    Mr. Wolf. Yes.
    Mr. Sherman. The effect of that is to make it easier to 
export the technology and to do the production abroad. What has 
been done in this review process, moving an item from one list 
to another to see whether that will lead to the export of goods 
or whether that will lead to the export of technology? Mr. 
Kelly, do you have a response?
    Mr. Kelly. Sure. I would just say that the whole rationale 
behind this reform effort is to enhance our national security. 
And an important part of that is our defense industrial base.
    Mr. Sherman. But if I were at random to identify an item 
that has been moved from one list to another, would you be able 
to assure me that that liberalization has the effect of making 
it easier to export goods and will not result or is not likely 
to result in the export of technology and the offshoring of 
production?
    Mr. Kelly. Well, sir, the basis for transferring from USML 
to CCL was asking the following question: Does this item 
contribute to preserving U.S. military advantage? And that was 
the basis of our decision. And for items that are important to 
preserving U.S. military advantage, we have kept them on the 
USML.
    Mr. Sherman. I would hope you add something else to your 
criteria and that is, is the action you're about to take likely 
to lead to offshoring of production, the decline of the U.S. 
industrial base, the decline of U.S. jobs, and an increase in 
the industrial technology base of other countries? If you leave 
that out of the decision making process, what looks like an 
effort to enhance America's position will actually hurt it. I 
ask for unanimous consent to put this letter in the record.
    Chairman Royce. Without objection, the letter from the 
Association of Machinists and Aerospace Workers as well as the 
sanctioned companies mentioned in China will be entered into 
the record.
    Mr. Sherman. Thank you, Mr. Chairman. I yield back.
    Chairman Royce. We go now to Ileana Ros-Lehtinen.
    Ms. Ros-Lehtinen. Thank you so much, Mr. Chairman, and 
thank you to the panelists for excellent testimony. I have 
consistently been supportive of making common sense 
improvements in our export control system as long as it 
enhances our national security and proper procedures are in 
place to avoid our sensitive technologies from falling into the 
wrong hands. At a time when our economy is struggling, it is 
imperative that necessary reforms for our export control system 
are undertaken in order to help American businesses create jobs 
and grow our economy.
    Has the administration undertaken a detailed economic and 
regulatory analysis of the impact of these rules on small 
businesses before they are implemented, and if so, what were 
the results? Last Congress, I introduced the Export 
Administration Renewal Act which would have allowed for the 
removal of the least sensitive items from the U.S. Munitions 
List, because we can all agree that generic items like bolts, 
nuts and wires, as you had testified, should not be regulated 
in the same manner as truly sensitive defense articles.
    Streamlining this process would provide U.S. manufacturers 
immediate benefits, while at the same time would allow for 
quick common sense reform which we could also all agree on. 
That the initiative could be implemented in a much timelier 
manner than some of the reforms set forth by the administration 
while still ensuring that effort is consistent with our 
national security interests. However, this is not the path that 
the administration has chosen. Instead, it has opted to act 
unilaterally in reforming export controls, and the scope of its 
agenda is so sweeping and so complex in its implementation that 
it raises several concerns.
    Two of my main concerns with the administration's approach 
have been enforcement and oversight. It has taken the 
administration several years now just to get to our current 
state. For example, the administration has proposed to transfer 
military end-use items, thousands of other sensitive components 
and parts, and even software code to the Commerce Munitions 
List under the Commerce Control List. Such a proposal may 
eliminate congressional notification requirements for the 
export or retransfer of such defense articles, and that is of 
grave concern to me because congressional notification must be 
kept. And this leaves these items eligible for a broad new 
license exemption to over 36 friendly countries, but it fails 
to include key safeguard measures such as end-use monitoring 
programs that could keep these items from falling into the 
wrong hands.
    So what protocols and safeguards are in place to ensure 
that third-party transfers, front companies, or foreign 
intelligence entities are not using these country exemptions 
for defense articles? This broad license exemption also raises 
the possibility of actually making it easier for regimes such 
as China, North Korea, and Iran to obtain U.S. parts and 
components related to fighter jets, tactical airlift, 
helicopters, tanks, and satellites that can pose an unintended 
threat to our national security.
    Given this reality, I am concerned about the lack of 
government oversight over the military items that have been 
eliminated from both the U.S. Munitions List and the Commerce 
Control List. As you are aware, Singapore, and Malaysia, and 
even China, have emerged as transshipment hubs for the export 
of Commerce-controlled goods to Iran. Now that Commerce will 
also license munitions, what will the administration do to 
ensure that these items do not reach those irresponsible 
governments and do not end up in countries like Iran and North 
Korea?
    So thank you, gentlemen, if you could answer in written 
form the questions I have posed, but any comments you care to 
make now would be fine.
    Mr. Wolf. Sure. I am happy to, thank you. A whole series of 
questions, I will try to touch on many of them. In the big 
picture, one of the primary goals of the effort is to allow us, 
in fact, to focus more of our resources not so much on the 
transactions that are of less concern with respect to those for 
ultimate end use by the governments of the 36 countries that 
you mentioned but with respect to the diversions and reexports 
that are of concern. So in the main that is at the core of what 
we are dealing with.
    With respect to the congressional notification question, we 
have written into our regulation that the major defense 
equipment that would move, to the extent there is any, to the 
Commerce Control List would have congressional notification 
obligations attached to it.
    Ms. Ros-Lehtinen. Thank you.
    Mr. Wolf. Sure.
    Ms. Ros-Lehtinen. And I will ask for the rest of the 
questions to be in written form, and I will give you the 
questions so you could respond.
    Mr. Wolf. Sure.
    Ms. Ros-Lehtinen. Thank you, Mr. Chairman.
    Chairman Royce. We go now to Mr. Eni Faleomavaega from 
American Samoa.
    Mr. Faleomavaega. Thank you, Mr. Chairman. And I want to 
thank members of the panel for their testimony this morning, 
and deeply appreciate your services to our nation.
    I suppose the two fundamental principles underlying the 
whole question of export control system is one based on 
national security, and then on the other hand export 
competitiveness. And it is my understanding we are currently 
the number one exporter of military equipment in the world.
    Could you give me some idea of how much, what is the dollar 
value of the amount of military equipment that we sell to the 
world at this point in time? I think $35 billion maybe, or 
maybe I am overestimating.
    Mr. Hursch. Sir, I don't have the very latest number, but 
it has been in that neighborhood.
    Mr. Faleomavaega. Can you provide that for the record?
    Mr. Hursch. I will provide that.
    Mr. Faleomavaega. And probably also the top five exporters 
of military equipment, I would be very curious. I suppose China 
and Russia----
    Mr. Hursch. I believe it is China, Russia----
    Mr. Faleomavaega [continuing]. And our European allies 
perhaps.
    Mr. Hursch [continuing]. And Israel, yes.
    Mr. Faleomavaega. Okay. We currently have what, 11 aircraft 
carriers? And you are talking about--which the bottom line is 
that understandably competitive as economically, what does this 
mean in terms of jobs for the American people? When you are 
looking at, say, we export $35 billion-plus worth of military, 
what does this mean in terms of jobs to our fellow Americans?
    Mr. Hursch. I don't have the numbers on that with me, but 
we can certainly get it----
    Mr. Faleomavaega. Can you provide that for the record?
    Mr. Hursch. Yes.
    Mr. Faleomavaega. Did we not just recently sign an 
agreement selling some $10 billion worth of military equipment 
to our allies in the Middle East? I believe it was to Israel--
--
    Mr. Hursch. Yes.
    Mr. Faleomavaega [continuing]. Saudi Arabia and the United 
Arab Emirates. Do you happen to have a listing in terms of 
exactly what are some of these toys that we provide for our----
    Mr. Hursch. Well, I believe those will all be notified by 
the Department of State at the appropriate time, sir.
    Mr. Faleomavaega. And touching on the fact that it is in 
our national security interests as well as economic 
competitiveness, do our European allies compete in this effort 
in selling this military equipment to the Middle East? France 
maybe?
    Chairman Royce. Might I suggest, Mr. Kelly, would you hit 
the button?
    Mr. Kelly. Yes, Congressman, the economic stakes indeed are 
vast. It is very important for U.S. companies all over the 
United States. Just last year we had our best year in terms of 
defense sale exports ever. Just in the foreign military sales 
programs that we administer, last year we had sales of 
approximately $70 billion, which is by far the most that we 
have ever achieved. So the trend line is in the right path. Our 
partners all over the world want U.S. equipment because it is 
the best military equipment that is available and it hugely 
empowers us to work with our allies better in the battlefield 
as well because we are all using the same equipment.
    I would just add that these sales create excellent well 
paying jobs all over the country, and so the stakes are very 
well. It is a great credit to U.S. companies, I think, that 
they have performed so well over the last couple of years even 
as they continue to have to deal with the system that has 
developed in export controls over the past few years. It is the 
administration's estimation that once we get through this 
process, our defense exporters are going to be more competitive 
than ever.
    Mr. Faleomavaega. More competitive than ever? Okay. I have 
a different twist in terms of trying to understand the issues. 
You know when our country was attacked by these 19 terrorists 
on September 11th, it is my understanding there were 16 Federal 
agencies all had subdivisions on intelligence and the process 
of filtering information, and by the time it got to the 
President a lot of cherry picking went into the process. And 
you get to wondering how accurate, how well are we monitoring a 
system so that we can get a sense of accuracy--oh man, I only 
have 7 seconds left.
    Thank you, Mr. Chairman. I would love to follow up with 
some written questions on this end. Thank you, Mr. Chairman.
    Chairman Royce. We will go now to Mr. Chris Smith of New 
Jersey.
    Mr. Smith. Mr. Chairman, thank you for convening this very 
important hearing. On February 15th, 2006, I chaired a hearing 
in this room. The first in a series on gross violations of 
global online freedom especially in China, and on the selling 
and harmful transfer of weapons of mass surveillance to 
dictatorships' secret police that systematically employ torture 
and repressive militaries. Representatives from Google, 
Microsoft, Yahoo!, and Cisco testified, and it was further 
revealed at that hearing that Cisco had greatly enhanced the 
command and control capabilities of the secret police in China, 
enabling them to hunt down human rights activists, religious 
believers, and democracy activists as well.
    So since 2006, I have introduced the Global Online Freedom 
Act endorsed by a virtual who's who of human rights 
organizations from Freedom House to Human Rights Watch, 
Reporters Without Borders, Amnesty International, access, and 
12 other human rights organizations, and by Yahoo!, and others 
have shown a great deal of interest on the corporate side as 
well. The Global Online Freedom Act addresses what Eric Schmidt 
calls the ``dark side of the digital revolution.'' The bill 
would prohibit the export of hardware or software that can be 
used for surveillance tracking and blocking to the governments 
of Internet-restricting countries. Current export control laws 
do not, as you know, take into account the human rights impact 
of these exports, and therefore do not create any incentive for 
U.S. companies to evaluate their role in assisting repressive 
regimes.
    The Global Online Freedom Act will not only help stop the 
sale of these items to repressive governments, but will create 
an important foreign policy stance for the United States that 
will help ensure that dissidents abroad know that we are on 
their side, tangibly and for real, and that the U.S. businesses 
are not either wittingly or unwittingly profiting from this 
repression. This export control law is long overdue and 
thoroughly consistent with the approach Congress has taken, for 
example, in restricting certain exports for crime control 
equipment to the People's Republic of China. It seems to me to 
make no sense for us to allow U.S. companies to sell 
technologies of repression to dictators, or enable it, then 
turn around and have to spend millions of dollars to develop 
and deploy circumvention tools and other technologies to help 
protect dissidents.
    So my question is--I hope you have seen the bill; it has 
been around; we have pushed it for a long time; we have had 
many hearings on it--are you in any position to offer a view as 
to whether or not you could support the Global Online Freedom 
Act? And your thoughts on these weapons of mass surveillance. 
Again, they are modern tools used to hunt down dissidents and 
to jail them and to torture them.
    Mr. Kelly. Congressman Smith, first of all, thank you very 
much for your support for export control reform. I am not at 
liberty to express an opinion on the bill. What I will say is 
that our arms transfer policy continues to be governed by our 
Conventional Arms Transfer Policy which has been in effect for 
many years, more than a decade, and it requires us to consider 
a number of different factors as we decide whether to approve 
the export of conventional arms and defense related exports. 
And those considerations include a host of foreign policy 
considerations that include human rights, intellectual property 
rights and considerations like that.
    Mr. Smith. I would ask you if you--Mr. Wolf?
    Mr. Wolf. Yes, we haven't as an administration, I believe, 
taken a position, but from the export control angle it is a 
significant issue that we are spending a significant amount of 
time internally researching and thinking through without 
creating unintended consequences. So I don't have an answer for 
you yet, but I can guarantee that a significant amount of time 
is being spent internally trying to think through the very 
issues that you set out from an export control perspective.
    Mr. Smith. I certainly do appreciate that. If you could, 
H.R. 491, take a look at it, and if you can convey at least a 
view back to the committee for inclusion in our record, I would 
appreciate it.
    Mr. Wolf. Understood.
    Mr. Smith. And I thank you for that. And I yield back the 
balance. And Mr. Chairman, I do hope that our committee could 
take a good long look at this legislation as well and mark it 
up. I have been pushing it for 7 years. We got it out of 
subcommittee one year. There has been some opposition to it, 
but I think we were more than willing to work with the 
corporations to try to find a way that is very corporate 
friendly but also human rights friendly. There is a way of 
threading that needle, and I think this legislation in its most 
current form does precisely that.
    Chairman Royce. And we will take a look at that, Mr. Smith.
    Mr. Smith. I appreciate that.
    Chairman Royce. And we go now to Mr. Gerry Connolly of 
Virginia.
    Mr. Connolly. Thank you, Mr. Chairman, and welcome to the 
panel. I begin with a different premise than some of my 
friends. I actually believe we need to blow apart the current 
system. It doesn't work. I believe that the bottom line for us 
ought to be efficacy. If you can control sensitive information, 
great. But the facts are that ubiquity of knowledge and 
technology today make that a very problematic proposition, and 
we are wasting time and we are damaging U.S. industry when we 
attempt to control something we can't.
    And the commercial satellite industry is a classic case 
study, where for a normal cause to deny a particular country 
sensitive technology we handed over the industry to foreign 
competition. They got it anyhow, and we allowed an indigenous 
industry to grow up with a competitor, damaging jobs here and 
our industry here, and the goal was, in fact, foiled. Would 
that be a fair characterization in your opinion, Mr. Wolf?
    Mr. Wolf. No, I don't think so. I think because the rules 
do still have a very fundamental impact----
    Mr. Connolly. No, wait. I am sorry. My question is, is that 
a fair characterization about the commercial satellite 
industry?
    Mr. Wolf. Oh. Well, as described in the report that both 
the Departments of Defense and State provided last year, yes. 
The controls that were imposed in the late 1990s had a 
significant negative impact on the U.S. satellite industry.
    Mr. Connolly. Thank you. My staff has just handed out to 
you three so you can see it, because I know it is going to be 
hard, this is a flow chart of what you have to go through on 
the U.S. Munitions List process for export practices. Is this 
an accurate depiction of the flow chart?
    [The information referred to follows:]
    
    

    Mr. Kelly. I think it is accurate to say that the status 
quo is very complex, and that is why we are working so hard to 
try to reflect that.
    Mr. Connolly. Well, I am kind of stuck in the status quo 
before we get to what are we doing to try to improve it. So the 
current system is spread across seven primary departments, is 
that accurate? Somebody, yes?
    Mr. Wolf. Yes.
    Mr. Connolly. Yes. There are three primary export licensing 
agencies. Is that correct?
    Mr. Wolf. Yes.
    Mr. Connolly. And there are two different lists.
    Mr. Wolf. At least.
    Mr. Connolly. At least. And somebody has to make a 
qualitative decision, which list do I want to go under.
    Mr. Wolf. Correct.
    Mr. Connolly. Both at your end and at the, say, the 
industry, the corporate end. Is that correct?
    Mr. Wolf. Correct.
    Mr. Connolly. Have any of you--I did, so in truth of 
advertising--any of you taken a test to see if you understand 
compliance requirements on export controls?
    Mr. Wolf. Sir, I have practiced in this area for 20 years, 
so yes, many tests, and on a regular----
    Mr. Connolly. You have taken a test?
    Mr. Wolf. On a regular and daily basis, yes.
    Mr. Connolly. Okay, so you have been doing it for 20 years.
    Mr. Wolf. Yes.
    Mr. Connolly. But if you are sort of doing a lot of other 
things in a corporate world this is not necessarily your 
expertise, but nonetheless you have to pass a test to make sure 
you can show you understand the rules of engagement. Would you 
concede they are fairly complex and sometimes subjective?
    Mr. Wolf. Yes, they are complex, and we are trying to move 
away from that. And yes, they are subjective, and we are trying 
to move away from that as well with a straightforward list.
    Mr. Connolly. Well, tell me--and I applaud that. I think 
you have really made some progress. But I guess what I want to 
hear is simplicity, clarity and, frankly, focus.
    Mr. Wolf. Right.
    Mr. Connolly. So it is not some Cold War where we are going 
to control everything because we can when we know we can't. So 
what are we focusing on in the efforts you are making, which I 
do applaud, I think they are making progress, but what are you 
focused on? What is the ultimate achievement here in terms of 
what is doable? And are we going to continue to control things 
like rubber hoses and nuts and bolts that we know we can't 
control, and I am not sure why we waste our time doing it?
    Mr. Wolf. Well, at the core of the effort is the goal to 
spend dramatically less time and attention with respect to the 
less significant items to countries of less concern, primarily 
the group of 36 NATO and other plus allies, so that we can 
focus our resources more on the transfers of more sensitive 
items for transfers to other countries.
    With respect to the complexity point, inevitably there will 
be some degree of complexity with any compliance regime when 
you have to control everything always, everywhere all the time 
versus controlling nothing anywhere any time.
    And when you try to lay out different degrees of control 
and sensitivity with respect to different items of different 
concern to different groups of countries, inevitably complexity 
results. But what we are trying to do with this effort is to 
try to make those rules more objective and standardized and 
common across those multiple regimes that you just referred to.
    Mr. Connolly. A laudable goal, and I urge you on in your 
efforts. But I plead with you, the bottom line should be 
efficacy. One might feel good about a whole bunch of rules and 
regulations to control X, but if you know that X is free-
flowing and you can't control it, give it up. Thank you so 
much. Thank you, Mr. Chairman.
    Chairman Royce. Thank you. We go now to Mr. Rohrabacher of 
California.
    Mr. Rohrabacher. Thank you very much, Mr. Chairman, and 
thank you for your leadership you personally have shown on this 
and so many other vital issues. Let us not miss the bottom line 
in all this, or I should say the central issue and what has 
brought us together. It is that business companies, 
international corporations or even major American corporations 
cannot be trusted to make economic decisions for their company 
and take into consideration the national security of our 
country. That can't be expected.
    The American people look at the business community and see 
the people going into their country clubs and their churches, 
et cetera, and expect that maybe these people love their 
country so much that they wouldn't do something to make money 
that would hurt us and put us in jeopardy. That is just not the 
case, and we have seen it time and again. Businessmen are 
overwhelmed with the idea that their corporation has to have a 
20 percent profit instead of a 10-percent profit, and if it 
means putting us in jeopardy, America a little more in 
jeopardy, they will do it in a heartbeat.
    One example of this could be the National Foreign Trade 
Council which has long lobbied us against sanctions that we 
have placed on Iran and China and among other adversaries to 
our country, that in its ratings last year the National Foreign 
Trade Council gave those of us who voted for sanctions on Iran, 
no less, on Iran, we got a negative mark from them for voting 
for sanctions on Iran. Now I am sure my friend Mr. Connolly 
does not think that was a bad vote. I am sure you were very 
supportive of our efforts against Iran, but we need to take 
into consideration that our business community does things like 
this.
    Another example perhaps is one that we have just heard 
discussed, was the satellites. I originally was supportive and 
got talked into the idea that our satellite manufacturers 
should have more freedom to deal with the Chinese. And I was 
assured by the administration, the Clinton administration, that 
there would be so many protections that no transfer of 
technology would happen that I went ahead and supported it. 
Well, within a short period of time we found out that all these 
safeguards amounted to nothing. As soon as we permitted it, the 
businesses moved forward as fast as they could, and what was 
the result? The result was long-range Chinese missiles were 
made much more reliable, and then after our help were MIRV and 
could carry more than one payload. So they would hit more than 
one city if they decided to attack the United States.
    Well, we can't let that happen again. And let us note that 
the reason why it has taken so long for you to be here and us 
discussing this today is because for over a decade the business 
community has refused to put countries that may be harmful to 
the United States and accept that they should be looked at 
differently than those countries like the democratic countries 
they deal with--Belgium, Brazil, whatever country. I am happy 
to see today that we, indeed, as we shift the satellite issue 
from the State Department Munitions List over to the Commerce 
Department that these new rules in the Commerce--and you will 
please correct me, Mr. Wolf, if I am wrong--that there are yes, 
there will be fewer rules on our satellite industry, except for 
cases like China and Iran and other countries that are deemed 
potential adversaries of the United States. Is that correct?
    Mr. Wolf. That is correct.
    Mr.Rohrabacher. All right. And let us not minimize what you 
just said. It took us 10 years to get to that point, because 
fair trade and free trade with all the rest of these countries 
was being held hostage by our business community so that they 
could deal with China and make a huge profit in dealing, short 
term profit in dealing with China. The last thing this country 
needs is to help China build an aerospace industry to compete 
with our aerospace industry. And so we need to make sure that 
our technology that is going over there isn't going to come 
back and hurt us not only with military planes but also put our 
people out of work as Mr. Sherman outlined.
    Thank you very much for holding this hearing. And I 
appreciate your testimony today. And this is a very serious 
issue and I can see that you guys have done your homework. 
Thank you.
    Mr. Hursch. Mr. Congressman, if I could just respond. One 
of the few items that is truly seared upon my memory from my 
experience in this position was sitting here 2 years ago and 
listening to you talk about China and the satellites. And as 
you mentioned, we took very careful efforts in the 1248 report 
that was finally issued and in the legislation to take account 
of those. I think you will find, when you look at the 
regulations for what we have just finished notification to 
Congress on that, we have also taken very careful work on China 
and other prohibited countries. And I think you will see that 
we have done a lot to do risk mitigation in that area.
    Mr.Rohrabacher. Yes, sir. Thank you very much. As I say, 
you did your homework.
    Chairman Royce. Mr. Cicilline of Rhode Island?
    Mr. Cicilline. Thank you, Mr. Chairman, and thank you to 
members of the panel. I am interested in receiving from you in 
written form because I want to focus on another area. But first 
I want to acknowledge and applaud the administration's 
interagency effort to reform our export control system, which 
began with the President's Export Control Reform Initiative, 
with the goal of making it more efficient for all the parties 
and to eliminate duplication within the system. I think the 
implications for America's competitiveness and securing our 
national security interests around the world are obvious.
    I am very interested, some estimates say that tens of 
thousands maybe even hundreds of thousands of items will be 
transferred to the Commerce Control List. And so I am 
interested to know how will the Department of Commerce decide 
if an item is eligible for a license exemption into one or more 
of the 36 friendly countries? Two, how we will ensure that the 
items that are going to this list are going to the correct 
government and not being diverted for some improper use, and 
what is the system for review of that and examination of it? 
And three, are there, as there are under the Arms Export 
Control Act, sufficient sanctions for a violation of that by 
improperly diverting materials or items by, for example, 
terminating future sales? So I would like some detail on the 
kind of standard that is used, what the review process is to be 
sure that the end use is as described, and what is the sanction 
if there is a violation.
    But I would like to use my time today to really focus on 
another area and that is, really, advocacy. In my district in 
Rhode Island as many of our defense companies are looking to 
expand their business, really, to respond to declines in 
defense domestic spending, international sales are becoming 
even more important and really critical not only to the 
companies but to the job growth in my state. These are sales 
which are essential to maintain the positions they have, to 
grow jobs, and to maintain a steady flow of work throughout the 
supply chain especially for small- and medium-sized businesses.
    And I would really like to encourage the administration to 
increase its efforts when appropriate to advocate for these 
defense sales internationally, and I am particularly 
interested, Mr. Wolf, in understanding what you understand to 
be the timeline. My understanding is the Department of Commerce 
has the responsibility for approving advocacy for defense 
sales. What is the current time period under which that occurs? 
What is the average time for approving request for advocacy of 
defense sales? And also do you anticipate as a result of 
sequestration whether or not that will have some impact on 
this? Because very often this time is critical to a company.
    And then, Mr. Kelly, I would like to ask you, from where 
you sit are there recommendations that you can make for 
improving the process to advocate specifically for defense 
sales? This is important to my district, important to Rhode 
Island's economy, and while I want the review to be done 
properly, I am anxious to know how we might accelerate that 
process in the appropriate circumstances.
    Mr. Wolf. Sure. With respect to the defense trade advocacy, 
that is another part of the Commerce Department and I will have 
to get back to you with respect to what the actual timelines 
are on that topic. With respect to the second question, I think 
it was directed at Mr. Kelly?
    Mr. Cicilline. Yes.
    Mr. Wolf. Okay.
    Mr. Kelly. Thank you, Congressman. I am very happy to 
respond to that issue. I think all of us at the State 
Department, indeed, all through government understand the 
critical importance of advocacy on behalf of our defense 
producers and exporters. And I will say as somebody who has 
been involved in this field for many decades, now back in 
Washington at the Political-Military Bureau, that it is an 
issue that has the attention of every top level official who is 
working on foreign policy throughout the government, including 
the top officials at the State Department who are certainly 
engaged in talking to our partners, especially from the 
countries that are our biggest customers, in advocating on 
behalf of our companies and doing everything we can to make 
sure that these sales go through, again taking into 
consideration all the other factors that we are required to 
consider in the Conventional Arms Transfer Policy.
    At the same time, many of us not just in the State 
Department but across government try to participate in defense 
sales shows all over the world. I recently traveled to the UAE 
where I participated in the biggest defense sales conference in 
that region, and had bilaterals with a dozen countries where I 
pressed for them to buy American. And that is something that we 
are doing every day on basically every continent in the world 
and we take it very, very seriously, and we are constantly 
thinking of how we can do better.
    But some of the issues that are critically important to our 
competitiveness relate to structural issues like the export 
control regime, and that is why we have spent thousands of man-
hours and lots of consultations with this committee and with 
others in trying to enhance our system so that our defense 
industry is going to become even more competitive than they are 
already. Thank you.
    Mr. Cicilline. I thank you, Mr. Chairman. I yield back.
    Chairman Royce. We go to Mr. Chabot, Steve Chabot from 
Ohio.
    Mr. Chabot. Thank you, Mr. Chairman. In November 2010, the 
U.S. committed to support India's full membership in the four 
multilateral export control regimes--the Nuclear Suppliers 
Group, the Missile Technology Control Regime, the Australia 
Group for chemical and biological controls, and the Wassenaar 
Arrangement, which was for dual-use and conventional arms 
control in a phased manner. For its part, the Government of 
India committed to taking steps toward the full adoption of the 
regimes' export control requirements. What progress has been 
made by India and the United States in advancing this important 
matter?
    Mr. Kelly. Okay, thank you for your question, Congressman. 
We are working very closely with India on a number of different 
issues including on these four regimes. They are working 
intensively on their adherence to all these regimes. We are 
working and collaborating with them. We think it is very 
important that India be brought on and participate in these. We 
think that it is going to enhance the international strength of 
all these regimes, and it is a high priority for us.
    I would just add that we are engaged with India in 
intensive conversations on a whole range of defense issues. I 
just traveled to India recently. It is my second trip in the 
past year with a Department of Defense delegation in which we 
engaged with our Indian friends in talking about how we can 
bring our defense relationship to another level. Thank you.
    Mr. Chabot. Thank you very much. The new Secretary of State 
was before this committee about a week ago, and received a lot 
of questions. There were so many things going on. I raised an 
issue, but he really didn't have the time to answer it to any 
degree, so I would like to raise it again. It has been more 
than a decade since President Bush back in 2001 announced that 
Washington was willing to sell Taiwan eight diesel electric 
submarines at a cost of about $12 billion. The official 
position of Taiwan's Ministry of National Defense is that it 
remains committed to procuring those submarines from the U.S. 
Of course, the U.S. stopped making diesel submarines quite some 
time ago, so the sale has been stalled and we work with some of 
our European partners on this issue as well, and that hasn't 
come to anything yet.
    Could you advise what the current status of those 
submarines are and whether the administration is planning to 
get this moving again? I am the chair of the Asia and the 
Pacific Subcommittee. I am going to be in Asia next week, in 
Taiwan, Korea, and Japan. So I am sure that the Taiwanese are 
going to raise this issue and I would like to have an answer 
for them.
    Mr. Kelly. Yes, sir. If I may, I would like to take that 
back and we will give you an update. I will say that as is 
consistent with the Taiwan Relations Act we are in constant 
communication with Taiwan about their defense requirements, and 
that dialogue continues and is vigorous.
    Mr. Chabot. Thank you very much. Finally, if you could get 
us some additional information before Saturday it would be 
particularly helpful because that is when we are leaving. If it 
is a little later than that, you can get it to my office and 
they can get it back to me.
    I will tell you what, instead of asking a third question 
which is going to take some time, Mr. Chairman, I will yield 
back at this time.
    Chairman Royce. I thank you, Mr. Chabot. We will go now to 
Mr. Deutch of Florida.
    Mr. Deutch. Thank you, Mr. Chairman. I wanted to follow up 
on a question I think the chairman asked originally and 
Congressman Sherman asked as well. The fact sheet that we had 
received says that these reforms will make it harder for 
countries like Iran to acquire arms, but it doesn't really 
explain why. And what I am trying to understand is, if we know 
that the Iranians, for example, and other countries are 
actively seeking to acquire U.S. arms, defense items, 
technology, manufacturing equipment, et cetera, and we have a 
reform proposal that transfers defense items from the Munitions 
List to the Commerce Control List, what impact does that 
transfer have and why does it make it harder and not easier for 
them, ultimately, to acquire those sorts of arms?
    Mr. Wolf. Thank you, very good question. There are two 
primary ways. One, the Commerce Department is adding its 
enforcement and investigative resources into the mix with 
respect to such items, so we are taking the status quo of all 
of the law enforcement and intelligence resources and adding 
more to it, and that is one way. And the second way goes to the 
fundamental nature of the reform effort in that we would be 
spending less of our time with respect to trade for ultimate 
end use by governments of NATO-plus countries, and taking more 
of those resources that we spend today in monitoring and 
licensing and approving and reviewing those items and diverting 
them toward enforcement and follow-up on the transactions of 
concern that you just mentioned.
    Mr. Deutch. Okay. Let me ask you, you said it was generally 
off point then to talk about the way things work today, not in 
the enforcement area--well, let us talk about export control 
agents for a second. Mr. Wolf, that is your area as well. For 
those of us who don't think about these issues every day, tell 
me what an export control agent does.
    Mr. Wolf. It is all the same things another law enforcement 
officer does in terms of investigating, following up on leads, 
reviewing intelligence, and then participating in the 
prosecution of those that have violated U.S. export control.
    Mr. Deutch. And where are our export control agents outside 
of this country?
    Mr. Wolf. There are seven outside the United States.
    Mr. Deutch. And where are they?
    Mr. Wolf. Just a moment. I have that list.
    Mr. Deutch. And as you look, I ask because at a hearing we 
had 2 years ago I asked the question and was told then that we 
had--well, I will let you tell me the numbers. But I was 
particularly concerned about the numbers that we had in the UAE 
and then China. Very sensitive areas, very few export control 
agents.
    Mr. Wolf. Well, in addition to the resources that we would 
have working through our Embassies----
    Mr. Deutch. Yes, but how many do we have though?
    Mr. Wolf. We have one in the United Arab Emirates, 
Singapore, Hong Kong, India, Russia, and two in China.
    Mr. Deutch. Two in China, one in each of those other 
places?
    Mr. Wolf. Correct.
    Mr. Deutch. And then getting back to my original question, 
here is my concern. We have two export control agents in all of 
China.
    Mr. Wolf. Yes.
    Mr. Deutch. And we have one in the UAE. And we are making 
this pretty significant change under this reform proposal which 
you have, if I understood correctly, assured us is going to not 
make it easier for countries like Iran to acquire U.S. arms 
because we will have more resources to commit to enforcement?
    Mr. Wolf. We are adding those resources plus all of the 
other resources of the Commerce Department on top of that which 
exists today such as ICE, FBI, Homeland Security, which are 
spread out in a 140 other countries. So it is not only those 
seven people that are responsible for maintaining the 
enforcement and the investigations of----
    Mr. Deutch. Can you just tell me then, how does the 
export--oh, we are not going to have enough time to do this in 
detail, but just generally, the export control agent, the role 
that that person plays is what at the outset, and when would 
any of those other agencies come into play?
    Mr. Wolf. Those agents are dedicated full time to nothing 
but export controls. They will facilitate coordination with 
ICE, FBI, Homeland Security and other resources around the 
world in order to be able to monitor, follow up, do post 
shipment verifications, do Blue Lantern checks, do a variety of 
audits of where items are going after they have been shipped. 
The advantage of these people being added to the mix is that 
they are focused 100 percent of the time on the export control 
topic.
    Mr. Deutch. Who are we adding?
    Mr. Wolf. We are adding the Commerce Department's export 
enforcement authorities on top of those that already exist with 
respect to the current system.
    Mr. Deutch. And so my goal like yours, one of the goals 
here, I think, or certainly part of the overall goal we are 
trying to achieve is to ensure that we do everything we can to 
prevent U.S. arms from flowing into the hands of those, into 
those countries where they don't belong and we don't want them. 
Shouldn't part of this discussion include increasing the number 
of export control agents? Won't that make this easier? Instead 
of saying they are going to be able to continue to work with 
all of these other agencies, they are the only ones doing this 
full time and as we make this major change, shouldn't part of 
that also require an increase of those export control agents?
    Mr. Wolf. Indeed. And, in fact, in the President's Fiscal 
Year 2014 budget we have asked for an increase in the number of 
agents for many of the same reasons that you just----
    Mr. Deutch. How many?
    Mr. Wolf. Three.
    Mr. Deutch. Okay, and where are you asking that they be 
placed?
    Mr. Wolf. Turkey, Europe, and another one in the United 
Arab Emirates.
    Mr. Deutch. Okay, we will talk after. And if you could just 
think about how, particularly in China, if this reform were to 
be enacted, how those two export control agents will have 
enough time to do what they do every day already and coordinate 
all of their activities with all of these other agencies, 
perhaps we can follow up in my office on that. And I appreciate 
it. I yield back. Thanks, Mr. Chairman.
    Chairman Royce. Thank you. We go to Mr. Randy Weber of 
Texas.
    Mr. Weber. Thank you, Mr. Chairman. Gosh, I have got a lot 
of questions for you guys. I don't know who to aim them at. Oh, 
that might be a bad term when we are talking about weaponry, 
aim. How many licensed exporters are there would you guess? Mr. 
Wolf, maybe?
    Mr. Wolf. Well, in terms of numbers of licenses, I can give 
you, there were over 80,000 licenses processed by the State 
Department last year, and approximately 25,000 individual 
licenses from the Commerce Department. In terms of how many 
individual companies, there were----
    Mr. Kelly. 13,000.
    Mr. Weber. 13,000? What is the process if a licensee 
develops a new super weapon, what is the process whereby we get 
notified that this weapon we want to maintain control over and 
we don't want it exported, how do we get that notification?
    Mr. Hursch. Well, when the exporter--it depends a little 
bit where the weapon you are talking about is coming from. If 
it is something that the industry has developed on their own, 
then they look at the list, determine where on the list it 
falls and tell us that they are going to export. If it 
something that they have developed in coordination with the 
Department of Defense, then we are likely aware of it in other 
ways.
    Mr. Weber. Okay, so you are already going to know. Is it a 
problem for patent rights and proprietary information that they 
have to come to you and tell you that they are thinking about 
developing this, especially if it is not with the Department of 
Defense?
    Mr. Hursch. We are very, very careful when we deal with 
individual companies, and I believe that is true across the 
government, to make sure that we protect their proprietary 
information when it is identified to us as such.
    Mr. Weber. Okay. Are there ways of tracking? In other 
words, if a licensee, an exporter sends an export to a country 
that is prohibited, how do you track that?
    Mr. Wolf. Well, one, if it is prohibited such as with 
respect to 600 Series items destined to China, a license 
wouldn't have been granted in the first place. So by definition 
it would have been illegal. And then we use all the standard 
investigative tools in terms of intelligence, resources, tips 
from other countries, tips from companies, follow-on checks, 
post shipment checks, post shipment verifications. There is a 
wide range of methods in order to be able to identify whether 
an item is being transshipped from one country to another in 
violation of U.S. export controls.
    Mr. Weber. What is the most recent example you would give 
us?
    Mr. Wolf. There was a very large action taken with respect 
to a company operating out of Texas, which is a pending matter 
that the Justice Department has described in a press release 
and a series of indictments, of transferring items that 
required authorization to ship from the United States through a 
variety of different sources around the world into Russia, all 
activities which required a license that didn't exist. And we 
can provide you more information about it, but it was a rather 
substantial interagency exercise to monitor and track and 
follow up on illegal transfers.
    Mr. Weber. What is the penalty for that?
    Mr. Wolf. There are both administrative penalties in terms 
of debarment, the inability to do business, the inability to 
ship from the United States, in addition to criminal penalties, 
up to 10 years in jail and significant dollar penalties as 
well. The dollar and criminal penalties, by the way, have been 
harmonized between the State Department and the Commerce 
Department.
    Mr. Weber. Of course, you could argue the damage was 
already done because they already have that technology.
    Mr. Wolf. Understood. But the point of the threat of 
prosecution is to be able to compel compliance and to stop that 
once it is discovered and once it does begin to occur.
    Mr. Weber. Okay. When that happens, and forgive me, these 
are probably questions that you guys know and I don't have a 
clue on. When somebody sells technology abroad whether it is to 
Russia or China, whoever, do they service that equipment? Do 
they do follow-up service on it?
    Mr. Wolf. Generally it is not uncommon, and with respect to 
the State Department and the Commerce Department rules, that 
the regular follow-on transfer of technology or in the State 
Department's case, services, requires authorization as well.
    Mr. Weber. Okay, so you all get notified of that? You are 
supposed to get notified of that, let me rephrase it, is that 
right?
    Mr. Wolf. Generally, yes.
    Mr. Weber. Okay. When someone sells equipment or technology 
in violation of our rules, is there such a thing as a slap on 
the wrist and you just say don't do it any more, it was very, 
very low level, and you get notice that you are going to be 
taken off, you are going to lose your license?
    Mr. Wolf. Yes, both the Commerce Department and the State 
Department have a wide range of particular penalties, anywhere 
from a warning letter to a requirement for an audit, to dollar 
penalties, to suspension and debarment, all the way up to 
incarceration.
    Mr. Weber. Okay, so you have a list of those violations 
going how far back?
    Mr. Wolf. As far as our records indicate. There is a 
significant list going back, yes.
    Mr. Weber. Okay, thank you.
    Chairman Royce. Thank you. We want to thank our witnesses 
for their time this morning. And this is a critical issue in 
terms of both our economy, growing the economy, and at the same 
time protecting national security. So we will be following the 
administration's progress on this, and we look forward to 
collaborating closely with you as we move forward. I thank the 
members, and I thank the witnesses again. We stand adjourned.
    [Whereupon, at 11:36 a.m., the committee was adjourned.]
                                     

                                     

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 Material submitted for the record by the Honorable Edward R. Royce, a 
Representative in Congress from the State of California, and chairman, 
                      Committee on Foreign Affairs








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  Material submitted for the record by the Honorable Brad Sherman, a 
        Representative in Congress from the State of California






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