[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]





 
    EXPORT CONTROL REFORM: CHALLENGES FOR SMALL BUSINESS? (PART II)

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

                                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)

                              ----------                              


                      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.