[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
EXPORT CONTROL REFORM: CHALLENGES FOR SMALL BUSINESS? (PART II)
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HEARING
before the
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
FEBRUARY 11, 2016
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 114-043
Available via the GPO Website: www.fdsys.gov
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HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
CHRIS GIBSON, New York
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
CARLOS CURBELO, Florida
MIKE BOST, Illinois
CRESENT HARDY, Nevada
NYDIA VELAZQUEZ, New York, Ranking Member
YVETTE CLARK, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRENDA LAWRENCE, Michigan
ALMA ADAMS, North Carolina
SETH MOULTON, Massachusetts
MARK TAKAI, Hawaii
Kevin Fitzpatrick, Staff Director
Emily Murphy, Deputy Staff Director for Policy
Jan Oliver, Deputy Staff Director for Operation
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Steve Chabot................................................ 1
Hon. Nydia Velazquez............................................. 2
WITNESSES
Hon. Kevin J. Wolf, Assistant Secretary of Commerce for Export
Administration, Bureau of Industry and Security, United States
Department of Commerce, Washington, DC......................... 4
Hon. Brian Nilsson, Deputy Assistant Secretary for Defense Trade
Controls, Bureau of Political-Military Affairs, United States
Department of State, Washington, DC............................ 6
APPENDIX
Prepared Statements:
Hon. Kevin J. Wolf, Assistant Secretary of Commerce for
Export Administration, Bureau of Industry and Security,
United States Department of Commerce, Washington, DC....... 24
Hon. Brian Nilsson, Deputy Assistant Secretary for Defense
Trade Controls, Bureau of Political-Military Affairs,
United States Department of State, Washington, DC.......... 31
Questions for the Record:
Questions from Hon. Steve King to Hon. Kevin J. Wolf and Hon.
Brian Nilsson and Responses from Hon. Kevin J. Wolf and
Hon. Brian Nilsson from Hon. Steve King.................... 36
Additional Material for the Record:
None.
EXPORT CONTROL REFORM: CHALLENGES FOR SMALL BUSINESS? (PART II)
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THURSDAY, FEBRUARY 11, 2016
House of Representatives,
Committee on Small Business,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in Room
2360, Rayburn House Office Building. Hon. Steve Chabot
[chairman of the Committee] presiding.
Present: Representatives Chabot, Huelskamp, Brat, Curbelo,
Velazquez, Meng, Moulton, and Payne.
Chairman CHABOT. Good morning. I call this meeting to
order.
I want to thank you all for joining us today for our
Committee on Small Business hearing on the Export Control
Reform Initiative (ECRI). This is part of our hearing series on
the ECRI. Yesterday, the Subcommittee on Agriculture, Energy,
and Trade held a hearing where members heard directly from
small businesses and trade compliance specialists on their
firsthand experiences with the new Export Control System. I
will mention we heard some good things about the current status
of the ECRI, and perhaps unsurprisingly, we heard some bad
things. And now that we have identified some of the challenges
America's small businesses face when navigating the Export
Control System, I hope we can take the opportunity that this
hearing presents to address some of these concerns and figure
out just how the administration plans to better assist small
businesses engaged in trade.
As a longtime member of the House Foreign Affairs Committee
and current chair of the Committee on Small Business,
international trade has continued to be one of the topics that
I am very passionate about, and I will also note that I
understand the importance of the United States Export Control
System and the underlying implications for our national
security goals, foreign relations, and economic growth. Defense
materials and products and services that serve a civilian and
military purpose, also known as dual-use items, should
undoubtedly be scrutinized when they are leaving the country
and being sold to a foreign buyer. However, small businesses
should not carry the burden of navigating a complex Export
Control System, and since the administration has moved to
implement the ECRI, it looks like they agree.
As I mentioned, we heard yesterday from some small
businesses directly engaged in the Export Control System. They
all agreed that while the goal of improving the Export Control
System is a good one, government agencies are asking too much
of the exporters, particularly small business exporters. These
businesses are often discouraged from exporting due to their
limited time and resources that cannot be redirected to
navigating the complexities of the Export Control System. I
recognize that, generally, the ECRI has been met with broad
support from American businesses, and good or bad, change is
hard. I believe there is a certain level of responsibility on
the government to ensure that this transition does not
overburden small businesses, and I am concerned with the
government's somewhat lackluster outreach efforts.
Additionally, we have heard that the export control lists
are not completely synchronized, and that is creating some
confusion. There are also valid concerns about the long delays
in the agency's licensing approval processes and the cumbersome
paperwork requirements, so clearly, much work still remains to
be done. I think we all look forward to hearing from our
administration witnesses about what progress the ECRI is making
in the simplification of export controls, but I am more
interested in hearing about how the administration is
alleviating pressures on small business exporters.
I want to thank you again and thank everyone for being here
today, and I would now like to yield to the ranking member for
her opening statement.
Ms. VELAZQUEZ. Thank you, Mr. Chairman, and thank you for
holding this valuable hearing.
With small and mid-size firms accounting for 98 percent of
U.S. exports, America's small businesses have a great stake in
how our export licensing regulations function. Not only do
small manufacturers stand to benefit as we improve this system,
but entire regional economies rely on robust U.S. exports. In
New York, for example, about 400 million tons of cargo move
through the city's port system and volume is expected to
increase 48 percent by 2040. Numbers like this make it clear
that a well-run export licensing system is vital to sustaining
and creating good jobs, especially in places like Brooklyn and
New York City where local ports generate significant economic
activity. There is a long history of restricting certain types
of products for export from the United States, specifically
those related to defense or items that have both military and
civilian uses.
We all understand the importance of these regulations. It
is vital to our national security and diplomatic relations that
appropriate export control mechanisms are in place.
At the same time, this system has become increasingly
cumbersome. As we have seen in many other instances, when
federal requirements become overly complex, small firms suffer
the most. Often, they do not have the same resources that
larger competitors utilize to navigate these processes. These
concerns were one driving force behind the administration's
interagency review of the U.S. Export Control System. These
changes are welcome, and so far we have heard positive feedback
from the small business community. The 2010 reforms are an
important example of the administration's working to reduce
regulatory burdens on the private sector. It is clear from
small business survey data that this review and these reforms
are necessary. Fully three-quarters of businesses report time-
consuming difficulties when trying to work with our Export
Control System. More than half noted problems from dealing with
multiple regulatory agencies. This should be no surprise. Seven
departments share jurisdiction over the export control process.
Add to this a responsibility of companies to know exactly what
components in their products are regulated by which department
and you have a recipe for a serious bureaucratic mess.
These hurdles create challenges for even the most
experienced, sophisticated exporters. For a small manufacturer
who is looking to enter foreign markets for the first time,
these difficulties may seem unsurmountable. I am particularly
concerned that if our export control is not fully modernized,
we will hinder growth among firms that show the greatest
promise for innovation. We have heard entrepreneurs that
manufacture wind turbines, solar panels, and energy efficiency
devices are losing opportunities to foreign competitors due to
our export licensing procedures. Similar programs are reported
in other high technology and rapid growth sectors. This is
distressing as these are the very same industries we are
counting on for job creation in coming years.
In a few weeks, this committee will visit New York for a
field hearing where we will hear from local manufacturers.
During that session, I intend to ask our witnesses about their
experience with U.S. export licensing controls.
Mr. Chairman, I think all of us share the goal of ensuring
our export licensing procedures function effectively,
protecting our diplomatic and national security interests,
while also ensuring U.S. small businesses are not needlessly
burdened. I believe this goal is something we can achieve by
working together. In that regard, I thank our witnesses for
being here and offering their insight.
With that, I yield back.
Chairman CHABOT. Thank you. The gentlelady yields back.
If Committee members have opening statements, I would ask
that they be submitted for the record.
I will take just a moment to explain our lighting system
for our witnesses. You are probably familiar with it, but we
basically operate under the 5-minute rule here, and there is a
lighting system to help you in that. The green light will be on
for 4 minutes; the yellow light will come on to let you know
you have about a minute to wrap up; and the red light, we would
ask you to complete your testimony by that time, if at all
possible. We will give you a little flexibility, but we would
ask you not to abuse the process. And we operate under the same
rules ourselves, so we limit ourselves to 5 minutes as well.
I would now like to introduce the panel today which
sometimes is four witnesses; today, only two. Our first witness
is the Honorable Kevin Wolf, Assistant Secretary of Commerce
for the Export Administration at the Department of Commerce.
Mr. Wolf was sworn in on February of 2010 and assists and
advises the Under Secretary on the development of policies
pertaining to Export Administration issues. And we thank you
for being here.
Our other witness today is the Honorable Brian Nilsson,
Deputy Assistant Secretary for Defense Trade Controls at the
State Department. Mr. Nilsson was appointed to this position on
October of 2015 and provides overall policy guidance regarding
the transfer of defense technologies to other countries. And we
thank you very much for being here.
And Mr. Wolf, you are recognized for 5 minutes.
STATEMENTS OF THE HONORABLE KEVIN J. WOLF, ASSISTANT SECRETARY
OF COMMERCE FOR EXPORT ADMINISTRATION, BUREAU OF INDUSTRY AND
SECURITY, U.S. DEPARTMENT OF COMMERCE; BRIAN NILSSON, DEPUTY
ASSISTANT SECRETARY OF DEFENSE TRADE CONTROLS, BUREAU OF
POLITICAL-MILITARY AFFAIRS, U.S. DEPARTMENT OF STATE
STATEMENT OF KEVIN J. WOLF
Mr. WOLF. Sure. Thank you, Chairman Chabot and Ranking
Member Velazquez.
The purpose of export controls is to put a regulatory net
over the export, re-export, and transfer of particular items,
software, and technology to various destinations, end uses, and
end users for a wide variety of foreign policy and national
security reasons. If the exporters and re-exporters do not
understand these rules and how to comply with them, then the
national security and foreign policy objectives of the controls
are not met. I want to thank you, this Committee and the
members, for having hearings like this and helping bring
attention to the topic to help us get the word out to enhance
overall compliance. Thank you for that.
As with most areas of regulations, export controls are
inherently complex. There are different items of different
sensitivities. There are countries of different levels of
concern. End uses and end users are of different concerns.
Foreign policies and national security priorities change over
time. Technologies evolve. What was once very advanced and
sophisticated and spooky becomes quite widespread and
commercial. Slightly different fact patterns and particular
capabilities of an item can have very different outcomes. The
rules that exist today are the result of decades of legislation
and regulatory decisions made by hundreds of individuals that
fit into a multilateral export control regime system of like-
minded countries. These countries try to align their controls
all in a system that tries to take into account the various
equities of the law enforcement side, the export and economic
security side, national security folks, et cetera. All of these
equities are all pulled in together to make what is inherently
a complex system.
In the extreme, there are two ways in which to have a
radically more simple system. You can have a system that
imposes controls on everything equally everywhere all the time,
and therefore, there is not much analysis required in terms of
what requires a license, where, and to what destinations, a
system that does not require a license anywhere, anytime,
except when a company is specifically told about it. The
former, of course, would impose a massive regulatory burden on
U.S. companies and require a tremendously larger U.S. export
control system to be able to accommodate that one. The latter,
of course, does not satisfy the national security or foreign
policy objectives of why the controls exist in the first place.
What this Administration has tried to do since the
President announced the Export Control Reform Initiative in
2009, and then as better laid out by Secretary of Defense Gates
in the early part of 2010, is to modernize and update the
system. This effort had really been tried and announced several
times over the decades, but never really accomplished, seeks to
take into account different levels of sensitivity for different
countries of control in order to increase interoperability with
NATO and our other close allies.
The hearing yesterday was an example, by the way, of all
the points that I just described. You had a manufacturer that
was saying please do not control my item on the ITAR. Please
allow me to have the regulatory flexibility of the Commerce
Department regulations so I can stay competitive with my non-
U.S. counterparts in this area and have fewer regulatory
burdens. Then a freight forwarder saying it would be much
easier if everything required a license everywhere and there
were not country specific designations or differences and all
items were treated equally all the time. Your panel yesterday
was a good description of the inherent tension of export
controls.
One of the things that we have done as part of the reform
effort is to take into account the realities of the rules that
have been in place for a couple of years. These are two pivot
blocks. I heard the members like props, so I brought props that
we have been using for a long time. But these two actually
summarize this entire massive multiyear export control reform
effort really quite well. All they do is hold brake assemblies
together on large vehicles. One of these was developed,
specifically modified for a military vehicle, and the other one
was developed for a dump truck. They both serve exactly the
same function, have exactly the same basic holes. The only
difference is that this one is for metric because the Marines
like a metric system and the dump truck people like a standard
dimension.
Under the old system, prior to the reform effort, it was
simple. This required a license everywhere, all the time, as a
statutory requirement under the regulations of my friend over
here, and if a French company were to buy this and install it
into a fire truck, then that French company making fire trucks
would forever need a license from his department as a statutory
requirement everywhere that fire truck was exported. And so
that created a disincentive under the old regulatory system. It
was simple to apply for non-U.S. companies to buy relatively
simple items largely made by small- or medium-size companies.
The regulatory burden that would go along with something having
once been originally modified for military application that has
now found its way into widespread commercial applications
created the disincentive. This one, designed for the dump
truck, could be exported worldwide without any requirements
except for the embargoed countries.
What we have done with the reform effort--and I have
literally hundreds of thousands of examples I could have
brought with me today--is to take items that are less sensitive
and to no longer regulate them on the State Department list,
but to move them over to the Commerce Department list. They are
now relatively similar in control so that you do not have this
regulatory burden that I was describing that creates a
disincentive for non-U.S. companies to buy U.S. origin items
for less sensitive military or for commercial applications.
Now, the upside of that is that there could be fewer
regulatory burdens. The downside of that, as described
yesterday, is now people have to go through and decide am I
exporting a pivot block or a sensitive foreign missile
component and everything in between. That is where education
and outreach and training is so critical.
The controls still exist for these items as military items
to embargoed countries and for bad end uses and bad end users,
which also adds to the level of burden in that sense. If a
company is exporting this to France or England, the burden is
less, but if it is to a country subject to an arms embargo or
for bad end use, the burden is increased in making those
determinations.
We have at BIS, Bureau of Industry and Security, an entire
office that does nothing but education and outreach. We
estimate that we were able to contact almost 100,000
individuals by one means or another. Last year, we conducted or
held or participated in over 350 seminars. I, Kevin, the
Assistant Secretary, answer every question that comes in to BIS
about the export control rules and the reform on a free
conference call that anybody can dial in to every Wednesday at
2:30. This has been a terrific benefit for exporters in that
they can get answers to their questions free and of benefit to
everybody else who may be dialing in.
Chairman CHABOT. Mr. Wolf?
Mr. WOLF. Yes.
Chairman CHABOT. I have to cut you off.
Mr. WOLF. Sure.
Chairman CHABOT. We will get around to you in the
questions.
Mr. WOLF. Oh, I have just passed my 5-minute line.
Chairman CHABOT. You did. You went a little over the
allotted time.
Mr. WOLF. I got really excited there.
Chairman CHABOT. You went over the allotted time, but you
brought such excellent props that we are going to forgive you.
Mr. WOLF. I apologize. I was thinking I had 2 minutes left,
so never mind. Thank you.
Chairman CHABOT. We will get around to you in the
questions. Thank you very much.
Mr. Nilsson, you are recognized for 5 minutes.
STATEMENT OF BRIAN NILSSON
Mr. NILSSON. Great. Thanks very much.
Good morning, all, and Mr. Chairman and Ranking Member
Velazquez and other members of the Committee. Thanks very much
for having the hearing with us today. I have been working on
the Export Control Reform Initiative since its inception. We
are very enthusiastic about it, and we very much appreciate the
opportunity to speak about it. We would not be where we are
today, as far down the path in doing reforms, if it had not
been with the help and assistance of a lot of people across the
departments, and across Congress. This Committee helped us in
partnering us with the Small Business Administration and
others, so we very much appreciate the help and support that we
have gotten to get as far as we have gotten so far.
ECR is, first and foremost, a national security review. It
has three core objectives: better using our resources,
improving interoperability with our allies, and bolstering the
health and competitiveness of our industrial base, which
includes the second and third tier suppliers, which are
predominantly smaller and medium-size businesses. The system
that we had been operating under, the pre-ECR system, was based
on a premise that the United States has exclusive ownership of
all the technologies that we need for our industrial base and
that we actually procured enough to where we sustain our
industrial basis without the need for exports. That has
changed, and so the reality is now that we do joint development
programs with our allies and we do not procure enough, even
among those for the items that we do procure, to be able to
really sustain the health of the industrial base, particularly
at the second and third tiers of supply.
And so we have been systematically going through a process
so that we can make it easier for the small- and medium-size
companies who constitute the second and third tiers of supply,
so that they can actually do the aftermarket sales and support
for the larger systems that we have already exported without
the need for having to come in for individual licenses. The
goal is to make sure that we maintain the health and
competitiveness of our industrial base and to keep that
manufacturing in the United States so that they are there when
we need them for current and future national security needs.
The cornerstone of the effort that Kevin has referenced is
really looking at the Department of State's Munitions List,
USML. The USML is comprised of 21 categories of items. Pre-ECR,
it was not really a list, per se. The categories listed broadly
what end items were in a given category. For example, Category
VIII controls aircraft, helicopters, drones, and then within
that category, it also had very broad, nonspecific catchall
language, and it said that we controlled anything specifically
designed, adapted, modified, or configured for anything that is
in this category. And so as a result of that, it created
sweeping controls without prioritization. And so not only would
I control a fighter aircraft on my list, I would control every
part, every nut, every bolt, every screw, the seatbelt, the
windshield wiper, the clips, all the things that I have now
transferred over to Kevin, without prioritization. That is like
Lucy and Ethel in the chocolate factory where the things are
coming down the production line and we are not able to
prioritize those items that warrant the greater scrutiny
because we are spending so much time on all the lower level
items. The reality is that we need to control them but we want
to make them to be able to go more easily to our allies and
make it easier for small- and medium-sized companies to be able
to export.
What we have done is in 2012, using the aircraft example,
we did over 22,000 export licenses just in that 1 of 21
categories on the Munitions List, and over 76 percent of those
were for these unnumerated, unspecified items that are caught
by this `specifically designed, adapted, modified, or
configured for any military use'. As a result of that, we have
taken a 6-year, painstaking, interagency process led by the
Department of Defense where we have actually opened every
category and looked at what is inside each of these categories
that provides the United States with the critical military
intelligence advantage. And if it does not meet that standard,
we should move it over to Kevin's list to make it eligible for
export under more flexible authorities.
And so on aircraft alone, last year our licensing dropped
to about 6,800 licenses, which is about a 70 percent drop from
what we had seen pre-ECR. And instead of that unemunerated list
specifically designed, adapted, modified, or configured for
military applications, we now have a relatively short list of
specific items that warrant control, and everything else is
moved over to the Commerce list. We have seen an 83 percent
reduction in licensing for the items that are like this that
are now moved over to Kevin's jurisdiction.
Where we are in the effort now? We have completed the work
on 18 of the--we have published proposed rules for 18 of the 21
categories on the list. Of those 18, we have published final
rules for 15 categories, and so those have gone into effect.
And we are doing this through a series of proposals and then
final rulemaking so that the public has an opportunity to
provide input, which has been instrumental in the work that we
have been doing.
That leaves me with six more categories on my list. Three
of those categories we have published in proposed form: for
Category XII, which is night vision and thermal imaging
cameras; Category XIV, toxicological agents; and then Category
XVIII for directed energy weapons. Category XII and XIV are
among the most difficult we have had. We have had interagency
struggles over what the right controls have been for probably
15 to 20 years, and so we are working through those now. Based
on the public input on Category XII, we are in the process of
going out for a second pair of proposed rules because we did
not quite get it right based on the industry's input. So we are
redoing and moving forward with those now.
The prioritization now is to get Category XII out again. We
are then working towards doing final rules for XIV and XVIII,
for directed energy weapons and for toxicological agents. That
leaves my final three categories, which are firearms, big guns,
and ammunition. Those are next among the priorities, and we are
turning to those next as we get these others out the door. We
are committed to proceeding with finalizing our initial review
of the entire USML by the end of this year, so we are looking
at finishing or looking at having proposed rules for all six
categories by the end of this year.
Other things I could talk about very briefly, we can talk
about our IT infrastructure. I am happy to answer questions
about that. Outreach and partnership, as I said at the out
start, we would not have done this and not have gotten this far
if it had not been for the instrumental input that we have
gotten from everyone involved. Pre-ECR, the State Department
did not do proposed rules. We claimed a foreign policy
exemption. We were in charge and we published rules and the
rules were the rules. Now what we do is we do proposed
rulemakings. We do dialogue with industry, with our partners,
with our allies, with the Congress. If we do not get it right,
we put it out again for another proposed rulemaking.
This past year, we have participated in over 700 events
where we do training and outreach. We have a dedicated team
that is just answering questions from industry. We have done
about 19,000 phone calls last year to answer questions. We did
over 22,000 emails where we were answering and following up. We
also have, everything that we do, facts, Q&As, we actually have
decision trees to help exporters walk through the regulations
that we have on our website, on Kevin's website.
The administration has a single website where all the
departments who are participants in this put everything they
are including: our proposed rules, all the public comments that
we receive. So it is very transparent. Industry can sign up for
that and they can get e-notices so they know what is happening
and when.
Chairman CHABOT. Thank you. I think we will get to the rest
of your testimony maybe through the question process.
Mr. NILSSON. Okay, thank you.
Chairman CHABOT. Thank you very much for your testimony,
and we are giving Mr. Wolf credit for his excellent props, and
we will give you credit for an ``I Love Lucy,'' reference. I
think that is the first time since I have been chair. That is a
great episode if you have not seen it, by the way, when Ethel
and Lucy are trying to take care of the chocolate machine. It
is a classic.
So, of course, this is a Small Business Committee, so most
of our concerns are with reference to small business, and I
will recognize myself for 5 minutes to get into some of those.
My first question would be--this would probably be more
directed to you, Mr. Wolf--most industry experts seem to agree
that export controls disproportionately impact small business
folks. What effort is the administration making to help narrow
the gap between larger and small business when it comes to
navigating the Export Control System?
Mr. WOLF. Sure. There are two ways to approach that. One is
from the structural regulatory changes we are making, and
second, from the length and the type of outreach that we do. On
the structural changes, it goes back to my pivot blocks. I
mean, small and medium size companies, prior to the reform
effort, if they were the maker of one of these types of items
to export, as a military item, they would have been required to
register with the State Department. They would have been
required to pay fees. They would have been required to get
purchase orders before every individual shipment. The foreign
parties that bought these would be forever required to get
permission from the State Department even when they were
incorporated into commercial or other items for allied
countries. They would have required these very lengthy
manufacturing license agreements and technical assistance
agreements in order to be able to transfer data or to do
services overseas. They would have required permission to
perform services on these items. There are requirements on
importing these items back into the United States. There were
precious few license exceptions available to be able to
transfer these and related items and technology for repair or
for government end users or for NATO countries. Under the
reform effort, all of those burdens, all of that massive
regulatory structure that I have just described--which is
massive, trust me--for items that have moved over to our
Commerce list after the six years of work that Brian was just
describing, have disappeared.
So from the regulatory structural perspective, we have made
massive changes to the requirements for trade largely with NATO
and other friendly countries that have radically reduced the
overall regulatory burden for primarily small- and medium-size
countries. So that is baked into the system.
So when you bring about a change like that, whenever you go
from something that forever before this required a license
everywhere all the time and the small company never had to
think about what country, what end use, what it was going into,
just get a license for everything, that raises all the
difficulties and the burdens described in the testimony
presented to your panel yesterday and today. And that is where
our education and outreach efforts come in. Every available
resource that we have in our entire office is dedicated to
nothing other than to conduct panels to go out and visit
companies, to do online training resources, everything that we
can think about to solve that.
Chairman CHABOT. Thank you.
Mr. NILSSON. Once the changes get baked in, then it becomes
easier.
Chairman CHABOT. Let me move on to another--thank you.
As I had mentioned before, and as you are aware, one of our
Subcommittee hearings met yesterday and we had some small
business folks commentating and giving us their experience on
this. And in the testimony that the Subcommittee received
yesterday, we heard that some clients struggle with missing,
incomplete, or contradictory definitions of underlying export
principles. What effort is the administration making to address
these issues? And either one of you are welcome to answer the
question.
Mr. WOLF. You are going to love what we are going to
publish here in the next couple of months because we have been,
over the last couple of years, working on a large rule to
largely harmonize all of the underlying and structural
definitions between my set of regulations and his set of
regulations. The final rule will be out in the next few months,
and we have been making changes in that regard. The two sets of
regs evolved differently in different orbits for the last 40,
50 years, and they are either Latin or Greek. I completely
acknowledge and agree with everything that was said yesterday
about the difficulties in comparing between the two sets of
regs, but in about two or three months, you are going to see a
very large regulation that is going to take the same words, the
same phrases, and largely the same structures between his regs
and my regs, and to the extent that they warrant being made the
same, will be made the same. And this all leads to the ultimate
objective, which neither Brian nor I got--actually, why do you
not do the ultimate objective since I have been talking so much
about where we are leading.
Mr. NILSSON. Yeah. The ultimate objective of this is all
the work that we are doing is a prerequisite, a prerequisite to
the eventual nirvana in export controls where our agencies
would merge and we would have a single export control agency
that has a single export control list. I mean, actually, in the
early days of ECR, at the request of Representatives Berman and
Ros-Lehtinen, the GAO did an assessment and did a comparison of
our five closest allies for how are their Export Control
Systems are structured and how it compared with our vision of a
single licensing agency, a single control list, a single
primary enforcement agency, and a single IT system to rule them
all. The answer was that everyone else and our closest trading
partners, the British, the Canadians, the Japanese, the Swedes,
and the----
Mr. WOLF. Other friendly countries.
Mr. NILSSON. One other--I forget--had all separately come
to the same common sense conclusion. All of the work that we
are doing is tailored toward that because all the stuff, while
I gave him my pivot blocks, eventually we should be able, the
way we have structurally done this, to merge the list together
to where these will still be treated as less sensitive. It will
be easier to export those. For the items that are the most
sensitive items that provide us with a critical military
intelligence advantage, they would still be warranting the
level of control that I am required to do by statute on the
Arms Export Control Act.
Chairman CHABOT. Thank you. Thank you. My time has expired.
The ranking member is recognized for 5 minutes.
Ms. VELAZQUEZ. Thank you, Mr. Chairman. You know, we hold a
lot of hearings on this Committee and focus on improving the
climate for small businesses to really thrive. And I can say
today that I like what I hear. It sounds good. Execution, of
course, is very important, and to that point I would like to
address my first question to both of you. While coordination
and cooperation among agencies is a primary goal for improving
the system, we heard some complaints from freight forwarders
about the role CBP has in this process and how delays due to
their own confusion hinder their companies. What kind of
outreach and education are you doing for government employees
to expedite approvals and, of course, to reduce confusion?
Mr. WOLF. That was a terrific comment yesterday. We did, at
BIS, a whole tour of several Customs and Border Protection
offices over the course of last year, but there is always a
great deal of turnover and it is a very large agency, so that
comment yesterday and your comment just now reminds us that we
need to make sure to keep doing that over the course of this
year and follow-on years. When you have any sort of change that
is as massive as what we have done, you have to spend a lot of
time educating not only the exporters, but other parts of the
U.S. Government so that they are comfortable as well. Because,
remember, the system had been baked in for about 40 or 50
years, and given the absence of a lot of definitions on key
terms, exporters and government officials had largely made up
their own rules. So what we are trying to do is shake things up
to get everybody on the same page. And your point is very well
taken. I can give you the numbers later on the number of
Customs officials that we educated and trained last year, and
sometime over the course of 2016, we will be doing the same,
but your comment is a reminder that we need to keep doing that
on a very regular basis.
Ms. VELAZQUEZ. Thank you. Mr. Wolf, the BIS requested $115
million for Fiscal Year 2016, an increase of over $12 million
over the Fiscal Year 2015 enacted level, and received $112.5
million. Is any of this additional funding spent on better
assisting small business exporters in any way?
Mr. WOLF. Well, not yet. It has only been about a month
since the budget has come into being. And it has gotten us back
to the level of giving us enough resources to be able to fill
many unfilled positions, some of which were in our education
and outreach office. So absolutely, a significant portion of
that will be to education and outreach. Yes, thank you.
Ms. VELAZQUEZ. And Mr. Wolf, yesterday's panel of private
sector witnesses explained that many businesses under the ITAR
system are now getting lost in the ECR system and experiencing
significant complications. Are you doing anything to ease their
transition to operating under a new system?
Mr. WOLF. In two ways. Structurally, what we have done is
that we have had significant grandfathering periods of several
years for companies to get used to the new system before they
were required to transfer over to it. A company can have two
and sometimes four years before they have to go into the new
system. With every one of the rules we, as Brian described,
have done as proposed rules asking for massive industry output,
the weekly conference calls, and the hundreds of seminars and
conferences that we have supported as well in order to educate
people. And so, yes, we have been doing it in two ways: one,
structurally with significant delays and implementation,
allowing people to transition over; and then second, education
and outreach.
And then third, just a complete recognition, and we ask
companies about this at the beginning where we said if we were
going to do this very large transition in the system, it is
going to be very hard for several years. You are going to have
to completely rethink everything that you got used to over the
last 50 years in how export controls work. Is the long-term
gain of the reduced regulatory burden and the simplified system
worth the short-term pain in getting used to what those new
rules are and getting off of old practices? And almost
overwhelmingly exporters said yes. So that is why we have done
what we have done for the national security objectives that
Brian laid out very well in his opening.
Ms. VELAZQUEZ. Thank you.
Mr. Nilsson, in July 2013, the State Department
successfully transferred its export licensee database and
software platform to the one used by the Department of Defense.
The Department of Commerce was scheduled to begin using it in
early 2014. As a result, the three largest departments
involving export licensing are now on a single IT platform. Can
you describe whether the creation of a single IT platform
allowed the Departments of State, Commerce, and Defense to more
effectively administer the Export Control System?
Chairman CHABOT. And the gentlelady's time has expired, but
you can answer the question.
Ms. VELAZQUEZ. Thank you, Mr. Chairman.
Mr. NILSSON. Yes. I can report that the transition took us
longer than we had anticipated. We actually did not fully
transition--the Commerce Department, Department of Energy and
the other parts of the State Department did not fully
transition to EXPORTS database until October 2015. But the
beauty of us all being on one system is that previously we were
all on separate IT systems, and so I could never see what Kevin
had approved and I could never see what Kevin denied, which is
also even of more concern, and vice versa. And so now by having
everybody on the same IT system, we as a whole government can
tell collectively what the U.S. Government has approved and not
approved for export.
The beauty also of us now up on a single platform is that
now we are able to turn our attention to creating a single
portal so that exporters would only have to go to one place to
be able to file a license application or any other of these
types of authorizations or determinations that they seek from
the government. We had done some preliminary work on that in
2010, but then realized we needed to wait until we had
everybody on the IT platform first. We have returned to that
work now. We are in the early days, but it is ongoing, and the
beauty of that will be particularly helpful for the small- and
medium-size companies because as you come in through a single
portal, it will guide you as you fill out your application for
where you need to go. Therefore, they do not have to figure out
if they are filing at the wrong agency. We will be able to sort
that out electronically for them.
Chairman CHABOT. Thank you very much. The gentlelady's time
has expired.
The gentleman from Kansas, Mr. Huelskamp, who is the
chairman of the Subcommittee on Economic Growth, Tax, and
Capital Access is recognized for 5 minutes.
Mr. HUELSKAMP. Thank you, Mr. Chairman. I appreciate you
holding this hearing. Gentlemen, thanks for joining us today
and trying to get a very quick up-to-speed understanding of
export control reform. I know you have been working on this a
long time, 5 or 6 years' initiative of the administration. I
appreciate the efforts.
My question though is what is taking so long in Categories
I, II, and III? And I see from your website or the government
website absolutely no effort is reported on that. So, and that
would be the firearms, guns, and ammunition categories. I will
note for those listening that you have completed the missiles
portion, IV; explosives, V. Satellites, nuclear, chem bios made
some progress as well, but for some reason, Categories I, II,
and III have been sitting out there for 2 or 3 or 4 years. I do
not know who would answer that and explain what the reason is
for the delay.
Mr. NILSSON. Sure. I own those categories so I will answer
the question. The prioritization of the categories was really
based on the remarks from Secretary of Defense Gates when we
did the rollout in April 2010, where he said--I have outlined
the three objectives of the reform initiative--but the SecDef's
view was that we needed to prioritize based on interoperability
with allies. And so the categories that we have been doing are
based on those that provide the best benefit for
interoperability with our key allies. We have also
systematically been working through those. We have not come to
Categories I, II, and III yet. We have done some preliminary
work on them, but we are committed to finalizing the initial
review of all the categories this year.
Mr. HUELSKAMP. Is there an interagency group recommended to
move forward on that?
Mr. NILSSON. Yes. It is the same seven departments that
have been working on all of the categories, and so we have done
work on all 21 categories from the start. We are just not quite
there for publishing proposed rules.
Mr. HUELSKAMP. Exactly why are those categories not making
progress, and when will we make progress?
Mr. NILSSON. Well, we are committed to publishing,
finishing the initial review, and having those categories done
this year. The primary reason----
Mr. HUELSKAMP. This year----
Mr. NILSSON. Yes, in 2016.
Mr. HUELSKAMP. Well, this administration is going to run
out of time.
Mr. NILSSON. Yes.
Mr. HUELSKAMP. Again, there is absolutely no progress. You
have got proposed rules in 2011, 5 years ago, for like Category
VIII, and it is glaring. I just do not understand why those
three have absolutely no progress. In terms of this sheet, even
though there have been recommendations from the interagency
group that you move forward. When was that recommendation made?
Mr. NILSSON. We were working on rules in 2012 on all 21
categories. Again, it has been a prioritization for those
categories meeting the Secretary of Defense's priority for
those that contribute to interoperability. In the final
category----
Mr. HUELSKAMP. And he has not been the Secretary of Defense
for a while now.
Mr. NILSSON. Yes.
Mr. HUELSKAMP. But my question is, I still do not
understand why these three categories do not have any progress
on them.
Mr. NILSSON. Primarily because we are prioritizing those
that are key for interoperability with allies. In our firearms
category, that category warrants reform just as all the other
categories. But over 90 percent of what I control in that
category are not being exported to governments or militaries,
so there is not an interoperability issue with regard to those.
But that begs the question that they certainly warrant going
through reform just as all other sectors warrant going through
reforms. And so some industries have not benefited yet from
reform, that is firearms, that is large manufacturers of things
like howitzers. It is people that do toxological agents, do
chemicals. We will finish the job.
Mr. HUELSKAMP. Those are all in Categories I, II, and III?
Mr. NILSSON. Those are all in the categories that have not
yet been deployed and finalized.
Mr. HUELSKAMP. Okay. Well, some of those are not I, II, and
III, obviously.
Mr. NILSSON. That is right.
Mr. HUELSKAMP. But you have made a proposed rule on a
number of those already. My question is Categories I, II, and
III. When can I expect----
Mr. NILSSON. This year.
Mr. HUELSKAMP. This year?
Mr. NILSSON. This year.
Mr. HUELSKAMP. This administration?
Mr. NILSSON. We will finish. We are going to finish the
USML this year.
Mr. HUELSKAMP. Have the rules not been almost approved all
the way up the chain and proposed those?
Mr. NILSSON. They have not been finalized yet. So, again--
--
Mr. HUELSKAMP. Who has not signed off on them? I am just
trying to get----
Mr. NILSSON. The seven departments have not signed off on
them for what the rules would propose. But we are committed to
doing proposed rules on those categories as all other
categories.
Mr. HUELSKAMP. Well, there are firms that are waiting on
this and have been waiting years trying to fix----
And you were given, I think, $10 million additional to
finish some of these things in the current fiscal year. So are
we going to get done in the current fiscal year, or are you
talking about next fiscal year before we even get done? When
you say ``current year,''----
Mr. NILSSON. Well, we need to go through--the way the
process works is we do proposed rules. We digest the public
comments on those to see what adjustments we need to make, and
then at that point, then we would draft final rules, and then
we would publish final rules.
Mr. HUELSKAMP. Sure.
Mr. NILSSON. Then there is a delayed effective date to
allow each affected industry to be able to have time to
transition to the new rules. That is the process for every
category. So that process will run for Categories I, II, and
III, just as we are in the midst of Categories XII, XIV, and
XVIII.
Chairman CHABOT. The gentleman's time has expired.
Mr. HUELSKAMP. Thank you, Mr. Chairman.
Chairman CHABOT. Thank you.
Mr. HUELSKAMP. I had a prop if that would help last longer.
Chairman CHABOT. We like props.
Mr. HUELSKAMP. Thank you, Mr. Chairman.
Chairman CHABOT. The chair would just note that there is
considerable, I think, suspicion by many members, at least
probably half the members on this Committee, that this
administration, because it is not particularly considered to be
a friend of guns or ammo, that this is sort of a willful
neglect on their part at least, and the irony is that because
of this attitude towards concern about the administration's
attitude towards guns, there has been a boon in sales of guns
and ammos during the administration. So I think that is
probably the underlying sentiment of my colleague's questioning
there.
I would now like to recognize the gentleman from New
Jersey, Mr. Payne, for 5 minutes.
Mr. PAYNE. Thank you, Mr. Chairman.
Let us see. I am just trying to gather myself after that.
Thank you, Mr. Chairman.
Mr. Wolf, in the 2014 budget, the Bureau of Industry and
Security processed 30,953 export license applications. BIS
approved 83 percent of the applications, returned 16 percent
without action, and denied 1 percent of them. Can you tell us,
can you take us inside the BIS review process and explain how
you make a determination on each application and what industry
and sector had the highest denial rate?
Mr. WOLF. Sure. The way--for items that are subject to the
Commerce regulations, and our volume has not quite doubled, but
moved from about 23,000 to about a little over 36,000 since the
beginning of the reform effort for items that are on longer
subject to their regulations. A company will submit--well,
first, it will go through the analysis of determining whether
their item is subject to our regulations and determining
whether a license is required for that destination. So that is
the first step, because under our regulations the answer is
that it depends upon what country you are shipping to about
whether a license is required. Then, if a license is required
to that destination, the regulations say to the exporter, you
can go through and see if one of our exceptions apply. If it is
an export to a friendly country for a certain item, then you
will not need a license if you follow these conditions. And so,
for example, under license exception Strategic Trade
Authorization, which is one of the hallmarks of the reform
effort, there have been over 23,000 shipments of items where
exporters have determined a license is not required where prior
to the reform effort a license was required.
So let us say they get to the point where an exception is
not available but a license is required, they, through an
electronic system, send in information about end use, end-user
destination, value, country, what the end use is going to be,
and a description. We, Commerce, will go through that and
determine if all the information is there and sufficient, and
then we forward it out to the Department of State, the
Department of Defense, and Department of Energy for them then
to further defer out to other parts of their agencies for
review as to whether is a national security or foreign policy
issue with the approval, denial, or conditioning of that
license. Within a set period, roughly 30 days, under an
executive order, they will get their answers back in to us. In
most cases, all of the agencies agree and we will send back an
approval or a denial or an approval with conditions limiting
what they had asked for initially. In those very rare cases
where there is a disagreement, we have an escalation process up
to the Assistant Secretary and beyond, a process within the
government to resolve disputes among the agencies. Once the
disputes are resolved, then electronically a document goes back
saying you have permission to export to these end users for
these end uses. That is the essence of how the process works.
Mr. PAYNE. Okay. And what was the denials? What is the
largest sector of denials?
Mr. WOLF. So given that the largest volume of what we are
dealing with now is in the aircraft and engines category in
absolute numbers, those tend to be among the higher either
denial or RWA rates just based on absolute numbers. In terms of
percentage denials, it would be in areas of night vision and
optics where there are significant limitations or conditions
about how those commercials items would be used overseas that
could be potentially used for a bad end use. So the answer
depends if it is an absolute or a percentage-based number.
Mr. PAYNE. Okay. Well, I appreciate your testimony today.
It is very refreshing to have an entity come before us and are
really working to reduce the bureaucracy and meld together and,
you know, I wish you continued success in that effort.
Mr. WOLF. Thank you.
Chairman CHABOT. Does the gentleman yield back? Okay, thank
you. The gentleman yields back.
The gentlelady from New York, Ms. Meng, who is the ranking
member of the Agricultural, Energy, and Trade Subcommittee who
held the hearing yesterday, is recognized for 5 minutes.
Ms. MENG. Thank you, Mr. Chairman and to our Ranking Member
Velazquez, and to our witnesses for being here and for the
great presentations.
I know that, Mr. Wolf, you spoke a little bit about
education and outreach initiatives through BIS, and I would
love to hear some more. Mr. Nilsson, I am wondering how you
provide such assistance, specifically regarding the U.S.
Munitions List. How do you work with the SBA Export Assistance
offices? And do you have staff in these offices who can assist
a potential small business exporter who has a USML classified
technology product and has never exported before, and just how
this process works?
Mr. NILSSON. Yeah. The State Department, we actually do not
have staff who are in the SBA export centers. We do, in
partnership with the Commerce Department though, coordinate our
regulations so that they are actually shared with the SBA and
shared with the Export Assistance Centers, so they see the
rules rather than having to just rely on seeing them in the
Federal Register or relying on our websites. But we do have
them on our websites. We do outreach and training. We actually
work closely with a number of organizations around the country,
particularly with the Society for International Affairs, which
is a nonprofit organization which hosts tailored export control
sessions around the country on the U.S. Munitions List.
We also, you know, I think we mentioned earlier, we have a
number of decision tools and guidelines so that you can walk
through a decision tree for how to engage our controls that we
have on our website. We also have a dedicated team that does
nothing but talk to people on the phone and answer questions.
Last year we did a little over 19,000 phone call counseling
sessions with companies. We also answered a little over 22,000
emails of people coming in and asking questions. We also
coordinate with the other six departments, and we have a single
website that is an administration-wide website where everything
that we do is in one spot, so it is sort of a one-stop shop
that is intended to guide and help provide assistance to
companies. Then we participate with our sister agencies, with
regional organizations, to do outreach and training. We did a
little over 700 last year.
Mr. WOLF. So a few other points. Prior to the reform
effort, there were about a dozen different parts of the U.S.
Government that maintained lists of individuals and companies
against which there were sanctions or prohibitions or
limitations on dealing with. These came from different parts of
Commerce, from State, from the Treasury Department and
elsewhere, and one of the early things that we did in the
reform effort at the Commerce Department is that we took on the
responsibility for consolidating all these various lists that
are pumped out on a daily basis by the U.S. Government of
entities and persons against which there are some sort of
sanctions or limitations, and we have consolidated that all
into one list administered by Commerce that we make free and
available in a downloadable format for exporters. Tat has been
a significant improvement for exporters.
As I mentioned, the 300 or so conferences that we did last
year, an entire office that handled about 33,000 phone calls
from exporters answering generally very basic questions about
how the system works. We are redrafting parts of the
regulations and the definitions, as Brian mentioned, so that
you do not have to do a sort of guesswork as to whether
something is or is not controlled. I was a practitioner in this
area for a long time before joining the government, and it was
as much lore as it was law. People could not actually believe
the regulations in front of them because it was done by
reputation or lore, or black magic, as opposed to actual bright
line definitions. In addition to defining the terms, we are
defining them in such a way as that someone can go onto one of
these decision tree tools that Brian and I are creating on our
websites, go through and answer a series of questions, ``yes''
or ``no'' objective questions, and always get to the right
answer as a matter of law, and thus, not need expensive outside
counsel to be able to go through and make those determinations.
As I said, education and outreach is absolutely vital to what
we do, not just for the sake of the small companies, but for
the mission itself, because if they cannot understand and
comply, then the national security and foreign policy
objectives are not met.
Any other ideas or suggestions or attention that this
Committee could help us bring to that effort or suggestions,
you know, we are all ears, and we are thrilled that you are
engaged in participating and helping us on this.
Ms. MENG. Thank you so much. I know I am just about out of
time, but I just wanted to ask my last question. Lastly, just a
note on the commercial relationship with our closest ally,
Israel. In December 2014, President Obama signed into law the
U.S.-Israel Strategic Partnership Act of 2014, which provides
in part that the administration shall take steps so that Israel
may be included on the Strategic Trade Authorization One list.
If I could request that you advise me in writing what steps
have been taken as required by the law and what more needs to
be done in order to fulfill this requirement. Thank you, and I
yield back.
Chairman CHABOT. The gentlelady yields back, and we would
ask that the panel comply with the gentlelady's request. Thank
you.
We will move into a second round now, and I will recognize
myself for 5 minutes.
We heard from one of our small business witnesses at the
Subcommittee meeting yesterday that delays at the Directorate
Defense Trade Controls sometimes lasted over 90 days and that
classifications were occasionally kicked back between the DDTC
and BIS, resulting in further licensing delays up to 3 weeks.
What is the explanation for this delay, and what effort is
being made to address these concerns, Mr. Nilsson?
Mr. NILSSON. Sure. That is a good question, so thank you.
We have a process called the Commodity Jurisdiction
Determination Process, and that is where exporters can come in
to us and ask whether or not I have jurisdiction for the item
or Kevin has jurisdiction for the item. That is a process that
has been in place a long time. When President Clinton did a
reform initiative, he issued new directives as to how to
improve the process. Because of the vagueness and the lack of
specificity in the Munitions List, it became increasingly
difficult for companies to know whether or not their items were
subject to our list. Then President Bush, in his reform
initiative, also issued new guidelines for how to run that
process at the end of his administration.
So where we are now is we actually anticipated that we
would have a surge of such requests as a result of the changes
that we are making just based on companies wanting the comfort
of having something from the government to tell them whether or
not their item is subject to my list. We actually had the most
number of commodity jurisdiction determination requests we have
ever had in 2012. We did 1,367 CJ requests that we processed.
Surprisingly, with the numbers that are coming in, we expected
spikes by category as we have deployed new categories so that
people would have questions, like when aircraft first went
live, we anticipated getting a lot of commodity jurisdiction
requests, and we have not had that. We have actually had a
relatively steady decline in the number of CJ requests as a
result of ECR. So last year we were down to slightly over
1,000, but we have seen about a 13 percent decline, and we
attribute that because we have taken out that language that I
mentioned earlier where it says an item is specifically
designed, adapted, modified, or configured for anything above,
and now it is an enumerated list. My list is working as
intended as we are transitioning.
We will always process CJs if someone asks for one, if they
want that clarity and they want that piece of paper to say
that, yes, it falls under Category VIII(h) of the ITAR or not.
In that regard, we think the system is working as intended and
we are not having the spike that we thought we would have.
With regard to license applications, companies have had a
history of coming in to the State Department and asking for
authorization where they may not specify in great detail what
is on that license application because, again, because of the
vagueness of my own list pre-ECR. Now they do have the
challenge of knowing more specifically about what they are
requesting on an export license application. In some cases, we
will return that application without action if it is not my
jurisdiction. And in each category, similar to what I mentioned
on CJs, in each category that they have gone live, we have had
a spike in return without actions with people coming in just
for clarification because, again, they wanted a piece of paper
from us coming back to say it is no longer our jurisdiction; go
see the Commerce Department. So it provides them the comfort
level and it provides them the piece of paper so that if a
Customs agent stops them at the border, they have a piece of
paper from me to be able to answer that question.
Chairman CHABOT. Thank you. Let me cut you off there
because I have a little over a minute left and I want to get to
one more question.
This one is for you, Mr. Wolf. Among a broad spectrum of
businesses, particularly amongst small businesses, the staff
that they can devote trade compliance issues and programs
oftentimes it is just not what they would probably like to do
because they have so many other things that they are getting
hit with. Does the administration take this kind of reality of
a situation out there in the small business world into
consideration when you are working with these programs?
Mr. WOLF. Oh, absolutely, for the two reasons or ways in
which I described earlier in terms of the structure of what we
are doing and the reduction of the burden of items that move
and our philosophy and mindset and the resources that we devote
to education and outreach. Personally, I do every day because
that is where I came from. I was a counselor to large and small
companies for 17 years before joining the government, and know
very, very well the difficulties they have and had in complying
with these regulations. Every day I bring that experience in to
trying to make the system more understandable for them. We have
not actually completed by any means, but we have moved a
dramatic way in that regard.
Think about this little company that makes the pivot
blocks. Think about all those documents that I described that
used to be required and all those regulatory requirements that
used to exist in order to trade in these items prior to the
system. Those largely no longer exist for the vast majority of
trade. The number of times I talk with a small- and medium-size
company where they go from having to have their compliance
staff to administer 100 Manufacture License Agreements and
Technical Assistance Agreements, these large complex
agreements, under their system down to a very small number of
pieces of paper under our system is dramatic. I hear it
everywhere I go.
We can always find situations of individual companies where
something is not working or is not clear or they have a 3-month
delay on a classification request or a license, but in the
aggregate, the data are such that the overall regulatory burden
structurally is dramatically reducing.
Chairman CHABOT. Thank you very much. My time is expired.
The gentlelady is recognized for 5 minutes.
Ms. VELAZQUEZ. Thank you.
Mr. Nilsson, ITAR license application must be reviewed
within a 60-day timeframe. On average, how long does it take
for this application to be reviewed?
Mr. NILSSON. Sure. That requirement comes as part of
President Bush's Export Control Initiative where he issued a
directive in SPD 56 in 2008 that required me to process a
license within 60 days. Our processing times have actually gone
up as a result of ECR. I would say the last full year before we
started making changes to the list we did close to 90,000
licenses, and our average processing time was 19 days. Last
year we did about 44,600 licenses, so it was almost half of
what we were doing previously because I have given all the easy
cases to Kevin, and our processing times have gone up to 27
days. The reason being is because the pivot block cases were
easy, and so these are easy cases to process, and so it
actually helped me keep my average processing times quite low.
When I gave Kevin all the easy cases, that leaves me with the
hard cases. Anyway, yeah, I am not taking jurisdiction back.
As a result, that actually is sort of the whole point, was
that the items that are left on my list are the most sensitive
items, and so we want our licensing offices within State and
the Department of Defense to have the time to really look at
these cases that warrant the level of control. It is the higher
wall around a smaller yard that Secretary Gates often spoke of.
Ms. VELAZQUEZ. Thank you.
Mr. Wolf, there is evidence to suggest that many foreign
companies actually avoid U.S. companies when searching for
products due to the increasingly strict export regulations.
Foreign customers will often buy a more expensive, non-U.S.
source part just to avoid our Export Control System. This is
particularly true when the international traffic in arms
regulations apply. Mr. Wolf, at a time when we are trying to
increase American manufacturing, are there other reforms or
actions that can be taken to ease the burden on competition?
Mr. WOLF. Well, what you described in your question is the
essence of what I have been living for the last six years, the
ITAR-free movement. The Defense Department did a terrific job
several years ago describing the harm to the U.S. satellite
industrial base that resulted from ITAR controls, as required
by statute, by the way, for all commercial satellite spacecraft
and related items. That created the very situation you have
described of a disincentive for non-U.S. companies to avoid
U.S. origin content for the very reason that you described.
Fortunately, working with Congress on a bipartisan basis, we
were able to get those controls removed and allowed for a more
tailored control for our satellite and space industrial items.
To answer your question about what next, because what you
described, again, is the essence of why we are doing what we
are doing for the less sensitive items to the countries that
are not subject to embargos is to continue on, finishing up,
revising the remaining categories, fixing them over the years
as technologies change, threats change, to correct mistakes
that we have made, and eventually get into the export nirvana
of a single agency under a single list, which is something we
will not be able to complete now, but all of the work that we
have done these last 6 years are all the groundwork to get to
that point. This is a multiyear effort to accomplish the very
point that you were describing, again, never forgetting that
these controls exist for a reason, the national security and
foreign policy reasons of there are some items to some end
users for some end uses we do not want. In getting to that
point, you described the difficulty that was described on the
panel because under the old system it was very easy for the
practitioner, for the freight forwarder to know when a license
was or was not required. The downside is it has the negative
effect that you described very well. The system thus in
tailoring it creates more complexity, but eventually it will
achieve the objectives that you just described.
Ms. VELAZQUEZ. Thank you.
I yield back.
Chairman CHABOT. Thank you. The gentlelady yields back.
The gentleman from Florida, Mr. Curbelo, who is the
chairman of the Subcommittee on Agriculture, Energy, and Trade
that held the Subcommittee hearing yesterday on this issue is
recognized for 5 minutes.
Mr. CURBELO. Thank you, Mr. Chairman. Thank you for your
leadership on this issue. Thank you for your hearing, and I
thank the ranking member as well.
Yesterday, we learned a lot from witnesses who have
experience in dealing with all of these complex issues,
including a small business owner from my district in South
Florida. I wanted to ask, through your agency's collaboration
with the SBA, do you consider the Office of International Trade
Staff to be trained well enough to address many of the
questions small businesses have regarding the complex export
control regulations? I want to focus in on this because it was
a recurring theme yesterday where a lot of these people just
could not find answers.
Mr. WOLF. We would not expect the SBA to be an export
control authority or expert in this, and in my testimony it
describes a great deal of outreach and interaction we have had
with the SBA. Your question reminds me that we need to keep
doing that over the course of 2016 to get to the point that
anybody at SBA or any other small business organization knows
enough at least to be able to refer it to State or Commerce for
us to then take it from there. It really would not be practical
to try to deputize effectively other agencies to come up to
speed and become experts on this. I think the best that we can
hope is that they are sensitized to the issues and the options
and the resources that are available within the Departments of
Commerce and State.
Mr. CURBELO. I think what at least I would request is that
there be a special emphasis on small businesses. Again, the
large corporations, they can figure this out. They can hire
teams. They can hire consultants. It is the small businesses
that really get left waiting for answers and sometimes never
figure this out. I think I would probably speak for most
members here on the Committee and say if there could be a
greater emphasis, focus, dedication of resources to helping
referrals from the SBA, for example, that I think could make a
big difference.
Mr. WOLF. I agree. Any other ideas or suggestions or help
in terms of visibility or people to talk to or companies to
make sure are in the loop, I look forward to working with you
on that. I completely agree with everything you said.
Mr. NILSSON. I will add that we have been partnering with
SBA to make sure that they see the rules and the proposals and
the finals as they come through, but one of the things that we
can take back is that Kevin and I both have dedicated staff
that do nothing but outreach and counseling and answering the
phones, and so we can make sure that the folks in SBA know who
to call on what. We can certainly take that back and make sure
that that is happening.
Mr. CURBELO. Thank you.
Thank you, Mr. Chairman.
Chairman CHABOT. Thank you very much. The gentleman yields
back.
And we want to thank our witnesses for their testimony here
today. I think you have shed some light on an area that can be
quite complicated, but nonetheless is extremely important and
particularly to the small business community, and that is
obviously our principal responsibility is to make sure that we
are looking out for the small businesses all across America who
actually hire 70 percent of the new folks that come into this
economy. So we appreciate your testimony.
I would ask unanimous consent that members have 5
legislative days to submit statements and supporting materials
for the record, and if there is no further business to come
before the Committee, we are adjourned. Thank you very much.
[Whereupon, at 11:13 a.m., the Committee was adjourned.]
A P P E N D I X
Opening Remarks of
Kevin J. Wolf
Assistant Secretary of Commerce for Export Administration
House Committee on Small Business
Hearing
``Export Control Reform: Challenges for Small Business?''
February 11, 2016
Thank you, Chairman Chabot and Ranking Member Velazquez.
The purpose of export controls is to create an enforceable
regulatory net over the export, reexport, and transfer by
foreign and domestic persons of specific types of commodities,
software, technology, and services to specific destinations,
end uses, or end users for various national security, foreign
policy, and other reasons. Unless those affected by the
regulations understand them, they cannot comply with them, and
the national security and foreign policy objectives of the
controls will not be met. This is why outreach and education,
particularly of small- and medium-sized companies, is a vital
part of our mission. Hearings such as this and your continued
interest in the topic help us considerably. So, thank you
again.
As with most areas of regulation, export controls are
inherently complex. Some items and activities warrant strict
controls, many warrant few controls, and others warrant a mix
depending on the circumstances of a particular transaction. Not
all destinations, end uses, and end users are of equal concern.
Foreign policy concerns and priorities change over time.
Technologies evolve. Newly developed technologies can be
extremely sensitive; others morph from predominant military use
to something that is in normal commercial use. Controls are
needed on end uses and end users of concern even if the items
involved are widely available or unsophisticated. Subtle
differences in fact patterns or technical characteristics of a
product can have significantly different outcomes in the scope
of control. Most controls reflect compromises in wording and
scope reached by dozens of like-minded countries in
multilateral export control arrangements. All reflect consensus
views of the law enforcement, national security, foreign
policy, and economic security equities of multiple U.S.
government agencies. Finally, the controls are an aggregation
of decades of individual statutory and regulatory decisions
spread out over multiple government agencies written and edited
by hundreds of different individuals that have accreted into
the complex system we have today.
In the abstract, there are, in the extreme, two ways to
make the system vastly more simple--require a license
everywhere, all the time, always for all items or all listed
items or don't require a license at all unless specifically
informed by the government. The former, of course, would impose
a massive and devastating regulatory burden on exports and
require the creation of a U.S. Government export control
infrastructure far larger than what we have today. The latter
would not satisfy the national security and foreign policy
objectives of the controls. There is thus an inherent tension
in export controls between simple, broad regulations that
control too much and impose an excessive licensing burden, on
the one hand, and tailored, detailed controls that control just
the right amount but are initially more complex to work
through, on the other. This is the daily challenge for export
control policy makers--deciding where the lines should be
drawn. This Administration has focused on trying to tailor the
controls to reduce the overall regulatory burden as much as
possible without compromising the national security and foreign
policy objectives of the controls. This means that education
and outreach are vital to the success of the effort.
Although there are many U.S. government agencies that
control the export of items in one form or another, the two
agencies with the largest portion of the responsibility are
represented here before you today--the Commerce Department's
Bureau of Industry and Security (BIS), which administers the
Export Administration Regulations (EAR), and the State
Department's Directorate of Defense Trade Controls (DDTC),
which administers the International Traffic in Arms Regulations
(ITAR). I can assure you that both BIS and DDTC management and
staff are committed to administering their controls in the
least burdensome way possible without impairing the national
security and foreign policy objectives of the controls.
These are not just words. The Obama Administration launched
in 2010 the most fundamental reform of the system since World
War II. The reform focuses our controls on those items that
must be rigorously protected while ensuring that our controls
do not drive foreign customers to foreign suppliers and U.S.
companies offshore. Two significant parts of this plan are
nearly complete--(1) the transfer of less sensitive military
and commercial satellite items from the ITAR to the EAR to
allow for more flexible controls over trade with allied
countries and (2) the update and harmonization of key EAR and
ITAR terms and principles to reduce inherent regulatory
burdens. Once companies learn and adapt to the new structures--
and we recognize that the transition process can be difficult--
the regulatory compliance obligations, particularly for small-
and medium-sized companies, will generally be materially
reduced.
First, the revisions identify more clearly what is actually
controlled. For too long, determinations about what was and was
not controlled, and which list governed an item, were, as a
practical matter, more a function of lore rather than law. Over
the last six years, we have engaged in a massive industry
outreach effort to ask for help in re-writing most of the
controls in ways that industry can better understand. Every
change was proposed for comment--some more than once--to ensure
that we got it as clear as possible.
Second, the rebuilding of the control lists moved--but did
not de-control--hundreds of thousands of items, mostly parts
and components predominantly manufactured by small businesses,
and related technologies from State's regulations to the more
flexible Commerce regulations. The transfer to Commerce's
regulations of these less sensitive military and commercial
satellite and space items eliminates many regulatory burdens.
For example, for the items that have moved to the Commerce list
from the State list:
There are no registration requirements. This
eliminates the expense of paying to register and the
burden and expense of preparing and submitting these
forms or fees. For those companies with a limited
product line where all their items have transferred,
this allows for a significant reduction in burden and
cost.
There are no fees for submitting license
applications. For small companies exporting products
with low margins, this is a significant advantage.
There are no requirements to get permission
merely to manufacture or to market abroad. The Commerce
regulations, of course, still control the flow of
goods, technology, and software, but with far shorter
and simpler forms than State's Manufacturing License
Agreements and Technical Assistance Agreements. Most
Commerce authorizations also have significantly fewer
conditions and regulatory burden requirements than do
State's agreements.
There are no per se requirements to have a
purchase order for each application. This means that an
exporter can resolve its licensing obligations before
knowing whether it has a sale, which saves time. It
also dramatically reduces the total number of
applications and licenses needed over the duration of a
regular relationship with a foreign customer that will
involve multiple purchase orders.
Except in situations involving military and
satellite items destined to countries subject to
embargoes, the Commerce rules generally do not have a
``see through'' rule. This is the rule that means that
an item is always subject to U.S. jurisdiction even
when incorporated into foreign-made items or
uncontrolled items. For trade with non-embargoed
countries, the Commerce regulations have a de minimis
rule, which means that if the value of controlled US-
origin content is less than 25%, then the foreign-made
item is generally not subject to U.S. jurisdiction.
This change largely eliminates the incentive for
foreign companies in non-embargoed destinations to
design-out U.S. origin items, particularly parts and
components. It thus bolsters the health and
competitiveness of the U.S. industrial base because
those in non-embargoed countries will generally no
longer need to second source parts and components
elsewhere.
Most importantly, the Commerce regulations
have multiple license exceptions that do not exist in
the State regulations, and which State is prohibited by
law from creating. In most cases, these exceptions
allow exporters to ship their products to allied and
other non-embargoed countries without the need to apply
to the government for a license, assuming the parties
are willing to abide by various recordkeeping and other
conditions to help ensure compliance with the
exceptions. One of the exceptions developed as part of
the reform effort, License Exception Strategic Trade
Authorization (STA), allows for significant reductions
in regulatory burdens associated with trade with NATO
and other close allies. It enhances our national
security by making our systems more interoperable.
For all these reasons and others, the Export Control Reform
effort helps small businesses, particularly defense exporters,
by increasing the security of supply from small companies that
are the second and third tier suppliers in the defense
industry, facilitating timely and reliable supplier
relationships between U.S. exporters and their foreign customer
base, and enhancing their long-term health and competitiveness.
These sectors include aerospace, military vehicles, marine
vessels, space, satellites, and electronics.
There are many other actions Commerce has taken to make
compliance for small and medium-sized companies easier. For
many years, the Departments of Commerce, State, and Treasury
have maintained eleven separate lists of entities that are
sanctioned for various national security and foreign policy
reasons, including for illegally exporting arms or other items,
violating US sanctions, engaging in terrorism, and trafficking
narcotics. If a company or individual appears on the list, U.S.
firms must do further research into the individual or company
in accordance with the administering agency's rules before
doing business with them. To ease this review process, an
interagency task force created the Consolidated Screening List
(CSL) in 2009 so that all eleven lists can be accessed in one
place. Further, in July 2015, the Department of Commerce
created a new web search tool to help US companies easily
search the CSL. This CSL web search tool has ``Fuzzy Name
Search'' capabilities enabling companies to search the CSL
without knowing the exact spelling of an entity's name. This is
particularly helpful when searching for names on the CSL that
have been transliterated into English from non-Latin alphabet
languages. All of these actions taken together have greatly
benefitted U.S. companies by reducing the time needed to search
all eleven lists and by providing a free alternative to costly
third-party software vendors.
We also revised a number of license exceptions, such as
those for temporary exports, exports of replacement parts, and
exports to governments in order to broaden their scope and to
make them less burdensome. They still need work but they are
better. We've increased the license validity periods and
greatly expanded, as a matter of practice, the flexibility of
our licenses so that they can be tailored to specific
transactions. We revised and significantly reduced the support
document requirements--requirements that were among the most
complicated sections of the EAR. We have simplified the license
conditions on approved licenses.
As evidence of how important education and outreach are to
our bureau. I would like to give you some representative
examples. In Fiscal Year 2015, we estimate that our outreach
programs resulted in over 100,000 interactions with U.S. and
foreign persons. We conducted over 350 events for industry,
including the weekly teleconferences that I host on specific
Export Control Reform topics, the seminars that are held
throughout the country and overseas, the industry group
meetings at which we speak, our Technical Advisory Committee
meetings, the small- and medium-sized business conferences that
we attend, and the webinars we produce. We conducted outreach
events in 18 states and ten foreign countries. We've conducted
or participated in 51 seminars in the United States.
Our seminars and online services are an effective way for
small- and medium-sized exporters to understand their
responsibilities as members of the regulated community. We have
published several blog posts on the Commerce Department website
on how export control reform benefits small businesses and
entrepreneurs, and we worked with the Small Business
Administration (SBA) to share this information through their
social media networks. We have added over 6,700 new users to
SNAP-R, our electronic license application system, bringing the
total number of users to over 36,400. The on-line interactive
decision tools we have developed received over 33,000 hits. The
BIS website has additional tools and resources in our Exporter
Portal. In addition, our Office of Exporter Services counseling
line provides exporters with free counseling via telephone. Our
export counseling staff has answered over 33,000 telephone and
e-mail inquiries.
We have partnered with SBA on a number of efforts. For
example, BIS Under Secretary Eric Hirschhorn conducted a
training session for SBA international trade staff from 68
district offices and 20 export assistance centers across the
country. The training was designed to help SBA staff identify
companies who may be covered by export control regulations and
direct them to BIS resources. Through such sessions, BIS
utilizes SBA's network to help inform small- and medium-sized
businesses.
BIS has also collaborated with SBA and other organizations
representing the interests of small and medium-sized
enterprises at a number of conferences. At our annual Update
conference, we partnered with SBA, the National Small Business
Association, the Maryland Small Business Development Center
(MDSBDC), and the Minority Business Development Agency. In
2015, BIS sent outreach, regulatory policy, and compliance
staff to the Association of Small Business Development Centers'
(ASBDC) annual conference in San Francisco and counseled
approximately 150 SBDC advisors. BIS representatives spoke at
four programs sponsored by ASBDC in collaboration with the
Bureau of the Census to educate exporters and freight
forwarders on properly reporting required information in the
Automated Export System. As a result of this partnership, ASBDC
has increased the number of export control-related workshops
and exhibitors at its annual conference, and begun to offer a
certificate in international trade and related-regulations to
its membership.
BIS has held open fora on SME comparative trade issues and
participated in state-level trade conferences to facilitate
trade. In 2015, the President's Export Council Subcommittee on
Export Administration, one of BIS's industry advisory
committees, prioritized its work with the National Institute of
Standards and Technology's ExportTech program, a national
export assistance program that targets small- and medium-sized
businesses. BIS representatives participated in a webinar
sponsored by FedEx that was intended to reach FedEx's small-
and medium-sized exporting customers.
For this year, we plan to sponsor or co-sponsor 23
seminars, including the annual Update conference and the West
Coast Export Control Forum, in thirteen different states. We
will develop and conduct many new webinars and will post
additional new educational videos on our website. BIS staff,
including the Under Secretary and I, will continue attending as
many compliance conferences and company training events as
possible. I will also continue to answer, every Wednesday at
2:30 over an open, free conference call, every question that
comes into BIS. These calls have been highly popular,
particularly with small- and medium-sized companies, which
generally do not have large legal teams or compliance staffs.
In addition to the short- and near-term rationalization
benefits for small- and medium-sized companies, this work has
established the framework for what could be an even more
significant rationalization and simplification of the system,
which is the creation of a common set of export control
regulations and then, eventually, with the help of Congress, a
single export licensing agency that would administer a single
set of regulations with a single list of controlled items. In
addition, now that the internal work on a common IT system for
interagency review of Commerce license applications is almost
complete, we're renewing the effort we started a few years ago
to complete a common Internet-based license application portal
for both Commerce and State and a single license application
form common to both the EAR and the ITAR. We will need a lot of
industry input and advice as we move to this next step to make
sure it is modern and effective.
Additionally, under ECR, the President established the
Federal Export Enforcement Coordination Center, to which the
Commerce Department contributes several personnel. Among its
mandates, the Center will coordinate law enforcement public
outreach activities related to U.S. export controls. In the
current U.S. export controls system, there are several federal
regulatory (including Commerce's BIS and State's DDTC) and
enforcement agencies (BIS' Office of Export Enforcement and
U.S. Immigration and Customs Enforcement's Homeland Security
Investigations), involved in outreach to industry often
targeting the same exporters or industry sectors, leading to
confusion regarding proper reporting or disclosure to
government agencies. Coordination of these efforts will result
in a more seamless, efficient, and holistic U.S. government
approach to private sector outreach to include small
businesses.
In conclusion, the ECR goal of creating a new export
control system defined by what we called the ``Four
Singularities''--a single control list, a single licensing
agency (SLA), a single IT, and a primary export enforcement
coordination agency was structured with the issues of small-
and medium-sized companies in mind. We recognized that small
firms account for more than 99 percent of all employers, 98
percent of all exporters, and a third of the annual value of
U.S. exports. They are the engine of technological innovation
and it is thus in our national and economic security interests
to ensure that these small businesses can successfully navigate
the nation's export control system. We understand that getting
used to the new system can be a burden. This is why we have
stretched the implementation of the changes out over a number
of years, with significant delayed effective dates and multiple
opportunities for industry to comment on the proposed rules
years before they became effective. I am completely confident,
however, that once the essence of the reform effort is in place
and companies have adapted to it, it will properly implement
the national security and foreign policy objectives of the
controls in the least burdensome way possible. I look forward
to your ideas, suggestions, and help for this part of our
mission. Thank you.
Testimony of Deputy Assistant Secretary of State for Defense
Trade Controls Brian Nilsson at the House Small Business
Committee Hearing on Export Control Reform
February 11, 2016
Good morning Chairman Chabot, Ranking Member Velazquez and
members of the committee. I welcome the opportunity to speak
with you today about the Administration's Export Control Reform
(ECR) initiative. Export controls are a key tool in our
national security and foreign policy toolkit yet they
historically have not received the attention that they deserve
largely because of their detailed, technical nature. The
Administration's early and regular engagement with the
Congress, and in particular this committee, since the beginning
of the reform initiative helped us administer a transparent
reform effort in which many companies, large and small,
actively participated. This committee in particular helped us
develop the partnership with the Small Business Administration
that Assistant Secretary Wolf mentioned, so again let me thank
you for your continued interest and support.
The U.S. Export Control System is distinct from many of our
allies' in that we have had two licensing agencies, one for
munitions items administered by the Department of State and the
other for dual-use items administered by the Department of
Commerce. This structure made sense when governments relied
heavily on technology that was uniquely developed for military
use. Generally, it took a significant amount of time for
defense technologies to migrate into commercial use. By design
and by the nature of their development, the commercial and
defense technology realms did not intersect as much as they do
today.
During this time the United States also was largely self-
sufficient: we almost exclusively owned the technologies we
needed to meet many of our defense needs and we procured enough
for our own military to sustain a robust defense industrial
base, both the prime contractors and the many small- and
medium-sized businesses that supported them. The threats we
faced were also more easily defined, with a largely bi-polar
world. These realities were reflected in our export control
laws and our implementing regulations, and they served us well.
But these realties have changed. The Berlin Wall came down;
the Warsaw Pact was dissolved, closely followed by the end of
the Soviet Union. Within a few years, the Pentagon started to
procure more off-the-self commercial items. The threats we face
today are more diffuse and often come not from nation states
but from non-state actors. Our export control system did not
evolve sufficiently to meet these new threats.
At the beginning of the Administration's reform initiative
in 2009, the Intelligence Community was tasked with assessing
the current and anticipated threats facing the United States,
to help inform our deliberations on what we should control and
how. That assessment concluded that by 2025, virtually all next
generation technologies would come from the commercial sector
and then find their way into defense applications. That means
an almost 100 percent reversal of the development trends that
justified having two different export control systems.
As a result of these new realities, our separate systems
increasingly collided, with similar items on both export
control lists based on subjective design-intent criteria. This
resulted in increased ambiguity, complexity, and costs to all
involved. Large companies could afford Washington lawyers to
help them navigate the system; most small- and medium-sized
firms could not. The clash was exacerbated by other fundamental
changes: the United States no longer exclusively owns most
technologies; many of our defense needs, both in developing
systems and in fielding them, are done jointly with our allies;
and we no longer procure enough ourselves to sufficiently
sustain our industrial base to ensure our companies remain
viable at all tiers of supply to meet new or future national
security needs.
The cornerstone of the Administration's effort to address
these changes has been to re-write the Department of State's
United States Munitions List (USML), as the scope of the USML
has the greatest impact on the regulated community and what we
control drives all other aspects of the export control system.
Prior to reform, the USML was a relatively short list of 21
categories of controlled items--like aircraft, helicopters,
drones, and lighter-than-air aircraft--not based on specific
technical parameters but on whether they were specifically
designed, modified, or equipped for military purposes. This
design-intent was also applied to all the parts, components,
accessories, attachments, and associated equipment for these
aircraft without enumeration. That meant we controlled military
aircraft, as well as very nut, bolt, screw, windshield wiper,
and seat belt buckle on that aircraft.
The aircraft category has typically constituted the largest
number of export license applications we process every year,
with over 22,000 export licenses in 2012, that last full year
before our reforms began to take effect. Of these regulations,
about 76 percent were for these unidentified parts, components,
accessories, attachments, and associated equipment, typically
manufactured or supplied by small- and medium-sized businesses.
We have been engaged in a multi-year, labor-intensive
technical review led by the Department of Defense to open each
category of the USML and to enumerate those items that provide
the United States with a critical military or intelligence
advantage. Those less sensitive military items that do not meet
this standard are being systemically moved to the Department of
Commerce's jurisdiction to allow them to be exported to our
allies under less rigorous requirements. This prioritization
allows us to better focus our limited resources on the items,
destinations, end-users, and end-uses of greatest concern,
while improving interoperability with allies and bolstering our
defense industrial base by allowing our parts and components
manufacturers--many small- and medium-sized businesses--to more
easily support systems we have already entrusted to our allies
and partners.
In my aircraft example, I can report that since our new
controls went into effect for this category and the gas turbine
engine category in October 2013, we have seen an 83 percent
reduction in license applications for parts, components,
accessories, attachments, and associated equipment. That means
that most of those companies making or supplying those items,
may no longer need to register, pay annual registration fees of
at least $2,250, pay per-license application fees as may be
required, no per-purchase order licensing requirements, no
agreement licenses, and generally no ``see through'' rule that
requires subsequent Department of State licenses for exports,
re-exports, or re-transfers for their items incorporated into
other items, until those other items' permanent importation
into the United States or their ultimate destruction.
These reforms are only effective if we keep them current.
Prior to ECR, the Department of State's control list was
largely static. As a result of ECR and as part of our business
practices going forward, the Department of State has
fundamentally changed how we do business.
First, we can best keep our list current in partnership
with all involved in the system--our interagency partners, the
Congress, our allies, and industry. It is our companies, large
and small, that are our front line of defense. They must be
able to clearly understand and implement our rules, if they are
to be effective, to provide for our collective security. We
have put in place a process so they can advise us on proposed
changes that we are contemplating, to tell us if we got it
right and equally important, if we got it wrong. They can also
advise us as technology evolves in their sectors, so we can
make continuous improvements to our list.
Thus far, we have published proposed rules for 18 of our 21
categories. We received significant public input on which we
relied in part to publish final rules revising 15 categories
that have now gone into effect. As a result, the Department has
seen a 56 percent reduction in licenses for these categories.
By our most recent tally, based on the volume of license
applications received, the largest categories are categories I
(Firearms), XII (night vision equipment), XI (Military
Electronics) and VIII (Aircraft)/XIX (Space and Missile), with
approximately 10,000; 8,000; 8,000 and 7,000 licenses
respectively. Of these, Categories I and XII have not yet been
published in final form. The revised categories with the
largest volumes are Military Electronics and Aircraft.
Of the remaining six categories, we have published three
for public comment. Two of these three, for Category XII (night
vision equipment) and for Category XIV (toxicological agents),
are our most complicated, and for the night vision equipment
category, we are finalizing a second proposed rule to publish
for public comment, to ensure that we get it right. We will
then turn to preparing final rules for the other two. This
leaves three categories that cover firearms, large guns, and
ammunition to publish for public comment. We plan to turn to
these categories once we complete our work on the current three
that are in process. The Department is working towards
reviewing the remaining USML categories, and is committed to
finalizing an initial review of the entire USML in 2016.
Going forward, we will routinely solicit public input on a
category-by-category basis and, drawing upon our own
interagency expertise and the public comments, will publish
proposed rules to update each category. Earlier this week, on
February 9, the Departments of State and Commerce published
proposed rule of updated controls for the aircraft and gas
turbine engine categories, with public comments due by March
25, 2016, and the public input period for four more categories
concluded on December 6, 2015.
We will continue this transparent process going forward.
The Arms Export Control Act requires the President to conduct a
periodic review of the list and to remove those items that no
longer warrant control. This requirement is fully consistent
with regulatory reform, one of this committee's top priorities.
The President has also provided further guidance in Executive
order 13563 of 2011 on requirements for improving regulations
and the regulatory review process.
Second, we are committed to continued enhanced engagement
with the exporting community. All our notices, proposed rules,
final rules, decision trees, and fact sheets are published on
our website, as well as the Administration's central ECR site.
We have also expanded our outreach efforts. In Fiscal Year
2015, we organized or participated in over 700 events, ranging
from conferences and webinars to end-use monitoring checks and
individual company visits. Our response team fielded over
19,000 phone calls and 22,000 e-mail inquiries. These actions
were all done in addition to frequent meetings we hold with
industry.
Third, we are changing how we manage our controls. Prior to
ECR, each of the licensing agencies and the departments and
agencies participating in the license application review
process were all on independent information technology (IT)
systems, or had no IT system at all. A key decision in phase
one of the reform initiative was the selection of the secure
Department of Defense internal licensing database, called
``USXPORTS,'' as the single licensing database. Moving to this
system would ensure that each licensing agency has full
information on what the United States Government has
collectively approved or denied for export to ensure that
current and future licensing decisions are fully informed ones.
The Department of State moved to USXPORTS for processing
munitions export license applications in July 2013 and for
considering Department of Commerce export license applications
in October 2015.
To aid industry, particularly small- and medium-sized
companies, in compliance efforts, the Departments of State,
Commerce, and the Treasury deployed a consolidated screening
list comprised of all three departments' various public
screening lists that can be downloaded by exporters to self-
screen parties to proposed transactions to facilitate
compliance. When the initial list was deployed in December
2010, it contained over 24,000 line items of names, including
variant spellings and pseudonyms, and was downloaded on average
about 32,000 times per month. Since that time the
Administration has deployed incremental improvements to this
tool, including automated updates any time a department makes a
change to one of its lists, a ``fuzzy logic'' search function,
and new options for downloading for use with existing screening
programs. The list is now being used to conduct more than
100,000 screens per day.
These improvements were prerequisites to building a single
portal through which exporters can submit requests and receive
licenses and other guidance documents. Preliminary work on a
single portal in 2010 was placed on hold pending completion of
the licensing agencies' transition to USXPORTS. The development
of the single portal has now resumed, with the goal of
deploying a smart single interface through which exporters can
submit all requests and the system will guide them through the
process to correctly route the request to the appropriate
licensing authority. This should be of particularly benefit to
small- and medium-sized companies.
To support these significant changes, the Department of
State last year created and filled a new Chief Information
Officer position within the Directorate of Defense Trade
Controls to oversee the Department of State's collaboration
with these IT projects and to undertake a comprehensive review
to modernization all aspects of the organization's work. This
effort is underway and, when completed, the core aspects of our
business will be fully automated. Implementing these modern
business tools and practices is anticipated to significantly
improve our administration of the munitions export controls.
Fourth, the Department of State will continue to provide
foreign policy oversight of our export control system for all
controlled items whether administered by the Department of
State or Commerce. The export of less sensitive military items
moved to Commerce jurisdiction will continue to be guided by
all aspects of the Conventional Arms Transfer policy including
human rights reviews. These changes will also not diminish the
key role that the Department of Defense plays in considering
exports to ensure they are consistent with our national
security interests. ECR is not a decontrol of these less
sensitive military items but a prioritization of how the
Executive Branch mitigates risks. Export controls are about
risk mitigation.
Export Control Reform has improved how the export control
community inside and outside the government interact, allows us
to prioritize our controls to better focus our resources of the
threats that matter most, improve interoperability with allies,
and bolster the health and competitiveness of the U.S. defense
industrial base, particularly small- and medium-sized
companies. ECR began as an initiative and is now a process.
That process could best be administered going forward by the
eventual consolidation into a single export control agency with
a single control list. This is the logical conclusion of the
initiative.
We look forward to continue working with Congress in
administering our new export control system. I look forward to
your questions. Thank you.
Responses to Questions for the Record from Rep. King
Departments of State and Commerce
Q1. On what specific date does the administration plan on
publishing the proposed rule to move US munitions List (USML)
Categories I, II and III (guns and ammo) over? What is taking
so long?
Wasn't the interagency work completed more
than three and a half years ago?
Hasn't the interagency group recommended to
the administration that it publish the agreed upon
proposed rules in the Federal Register?
How long did it take the other categories to
move after the interagency work was completed?
Why are these three Categories taking so
long?
During the House Small Business Committee
hearing you testified that the reason Categories I-III
have not moved forward is because of prioritization by
Secretary Gates in 2010. However, is it not true that
the rules for Categories I-III were ready to be
published as early as 2012 but were delayed by the
Administration? What was the reasoning for the delay?
Was it for political purposes before the 2012
Presidential Election?
A1. In terms of priority in publishing rules, the
Department's focus, as well as that of our interagency
partners, is to finalize the significant number of proposed
rule-makings currently in process, which include revisions to
U.S. Munitions List (USML) Categories XII (lasers and sensors);
XIV (biologics and toxins); and XIII (directed energy weapons).
In addition, to focusing on the review of the USML, the
Departments of State and Commerce are also focused on
completing final rules harmonizing the definitions in the
export control regulations administered by both departments.
The schedule for publishing ECR rules is based on the ECR
priorities, which include increasing interoperability with our
allies while enhancing their ability to acquire the
technologies needed to address our mutual security interests,
reduce unwarranted regulatory burdens, improve the
competitiveness of our defense industrial base, and establish
an adaptive control system.
Although important, revisions to export controls on non-
military firearms are not squarely within the scope of the
national security objectives of the reform effort. So although
policy discussions began and drafts were written in 2012, we
suspended those efforts to turn our attention to Categories
more central to our ECR reform objectives, as the export of
firearms has a separate and unique set of export control
considerations. Moreover, upon reflection and in calculating
the time remaining in the second term, we decided to keep work
going on an aggressive schedule to publish proposed and then
final revisions on the remaining military categories so that
the revisions on the military categories could be completed
before the end of 2016.
The Departments thus decided to set work on proposed
revisions to non-military firearms and ammunition categories
aside in favor of completing the work on the military
categories. The departments' plan was to re-engage on the
review of Categories I, II, and III when it was clear that they
would be able to finish the work on the military categories.
When comparing the firearms rules to the length of time it
takes on other categories the answer varies. Some of the
categories were completed within 1 year and other categories
(e.g., Category XII) has been subject to interagency work and
policy discussion for at least five years. Based on the current
schedule, our goal would be to finish the initial review of the
ECR Categories in 2016.
Q2. In the consolidated Appropriations bill passed by
Congress last year, the Bureau of Industry and Security (BIS)
received an additional $10 million over previously enacted
funding levels, $112,500,000. The House report that accompanied
the Commerce, Justice, Science and related agencies (CJS)
appropriations bill read, ``The increase for the Bureau of
Industry and Security (BIS), while not quite up to the
President's request, will allow BIS to continue its efforts to
protect national security while coping with an increased
workload of export license applications.'' Anticipation of
moving USML Categories I, II and III over to BIS was part of
the expected increased workload the Appropriations Committee
was referencing when it provided this increase. That has not
happened, yet. These funds were provided for the current fiscal
year. It appears that your department has willfully disregarded
the guidelines put forth by the United States. Why haven't you
used the increase in funds for their intended purposes?
Commerce Department Response:
A1. We respectfully disagree with the observation that the
``department has willfully disregarded the guidelines put forth
by the United States Congress.'' The Bureau is using the
appropriated funds precisely as it described it would in its
budget submission. Moreover, during the hearing, Members made
it clear that such funds should be used to the extent possible
for outreach and education of small and medium-sized companies,
which the bureau fully intends to do in addition to its other
requirements. These requirements include the processing of
nearly twice as many license applications and related
transactions that the Bureau has assumed responsibility for as
a result of the reform effort.
As described above, there is a schedule for addressing the
export controls on non-military firearms and such schedule
follows the national security objectives of the Export Control
Reform effort. With the funding that BIS has received, it will
have the resources to continue its work on the reform effort,
which includes a substantial increase in its licensing and
related responsibilities and its education and outreach
efforts.
State Department Response:
A2. I defer to the Department of Commerce, Bureau of
Industry and Security on its use of appropriate funds.