U.S. Satellite Export Policy

Testimony of

Under Secretary William A. Reinsch

Before the

Senate Foreign Relations Subcommittee on International Economic Policy, Export and Trade Promotion

June 7, 2000

Thank you for this opportunity to appear before the Committee on an important and troubling issue.

Since March 17, 1999, when the Congress transferred export licensing jurisdiction for commercial communications satellites back to the Department of State, we have engaged in a large scale experiment in export control policy that has serious implications for future efforts to reform or restructure our controls. The outcome of this experiment, I would say, has not been positive and it is not one I think the U.S. should repeat. I applaud the Subcommittee for examining this problem.

The jurisdictional change affected our foreign relations, our national security and a broad range of U.S. industry, from small, high tech firms to industrial giants, even for sales to allies. Since the transfer, which this Administration opposed, satellite exports have declined forty percent, from $1.06 billion in 1998 to $637 million in 1999 according to Census Bureau export statistics, and the satellite industry has told us that the U.S. share of the world market has dropped from 73% in 1998 to 62% in 1999 and to 52% for the last 3 quarters. The changed controls on satellites bear some of the responsibility for this, and we can only conclude that a system that works well for arms exports is, even with the best intentions in the world, not appropriate for commercial exports. This is a fundamental point for export controls -- treating exports of commercial items, like communications satellites, as an arms sale does more harm than good to our national security and to the high tech industries upon which our military and intelligence agencies depend.

I'd like to touch briefly on a number of factors which the Committee may wish to consider as it contemplates the satellite licensing issue. The first factor is that we are operating in an increasingly global economy where commercial cooperation between companies in different countries is the norm and where technology flows are shaped less by national borders than by the needs of the global market. Information, financing, research and development, and production are broadly diffused and can be quickly transferred to meet market needs. No one nation can remain at the leading edge of technology unless it participates in this global market. This requires the ability to export.

More efficient transportation and communication, the internationalization of capital flows and the growth of an information-based economy have transformed national industrial systems into components of this larger market. The ability of any one nation to prevent the technology transfers that accompany such flows is limited. The power of the global market is such that if one source chooses to deny an export, absent a broad consensus among our partners, some other supplier will meet the demand. To succeed in this market requires companies -- and nations -- to evolve and to adapt practices which emphasize speed and the transnational nature of business. Failure to adapt means economic decline.

Long-term changes in defense spending also shape the satellite export control issue. At the end of the previous administration, agencies with a role in space operations realized that DOD purchases would no longer be enough to support the robust satellite industry we need to meet our military and intelligence requirements. In contrast, the civil use of space has exploded. Ten years ago DOD and NASA accounted for more than half of aerospace sales. Today, industry sources say that government purchases account for only 35 percent of sales, while exports account for 40 percent. As the commercial telecommunications markets have exploded, companies have come to rely on commercial sales -- including exports -- for the bulk of their business. Globally there is overcapacity, and sales to DOD or the U.S. domestic market are not enough to maintain a strong and leading edge space industry and to stay at the cutting edge of technology.

It may seem contradictory to say that we do more to build our strength the more open we are as an economy; however, as the Defense Science Board Task Force on Globalization and Security recently reported, shutting U.S. companies out of markets that are served instead by foreign firms weakens U.S. commercial advanced technology sectors upon which U.S. economic security and military advantage depend. In the case of satellites, the same companies that manufacture the most sophisticated military satellites are the leading commercial communications satellite makers.

The third factor that bears on the satellite issue is the difference between our two principal export licensing systems -- one for weapons and one for dual-use industrial products. These differences are appropriate; we should treat the export of tanks, fighters or submarines in a more deliberate and restrained manner. However, the arms export system can be needlessly damaging when applied to commercial items like communications satellites. Exports of major weapons systems have serious implications for our foreign policy and defense, and a process of lengthy deliberation and complex licensing requirements is appropriate. However, regulating commercial goods as if they were weapons harms our technological lead and the industrial base that is the basis for our military strength and economic health.

There are many procedural differences between the systems which have contributed to the problems the satellite industry now faces, but two are most important. One is the scope of controls. Items on State's Munitions List require an individual license to any destination, whether that destination is India or the United Kingdom. In the case of satellites, many separate licenses can be required for a single sale. In some cases one license is required for technical data, another to make a bid, and a third to actually export hardware. If technology is transferred, another license is required. Some of these licenses may have to be notified to Congress. Commerce regulations allow safe transactions to go forward without delay. This has proven to be particularly important in the satellite field, as one result of the transfer of jurisdiction was that U.S. companies now have to obtain licenses for routine exports related to satellite launches or manufacturing for Japan and the NATO countries that previously could move under license exception. The Department of State, in cooperation with the Department of Defense, has put into place a package of reforms that bring some flexibility to State's licensing which my colleagues can describe in more detail.

The second crucial difference is the extraterritorial reach of the two systems. Once a munitions item has been exported, U.S. approval for any resale or reexport is required. Further, any foreign made item which incorporates a U.S. munitions item, no matter how small, is considered to have become a U.S. munitions item and also requires a license for any resale or reexport. To use an actual example, if Daimler Chrysler Aerospace (DASA) uses a piece of plastic film which is on the U.S. Munitions List in a satellite it is building in Germany, that satellite becomes subject to U.S. controls and a license is required from the State Department for any sale. If, on the other hand, DASA buys the film from a British firm, the U.K. does not consider the film or the satellite a munition, and no further license from Britain is required. This is a significant problem in cases like communications satellites, since our partners in the multilateral regimes consider communications satellites and the parts that go in them as dual use items, not as munitions. Among all the satellite producer nations in the world, only the U.S. treats these sales as arms exports.

The obvious response of foreign manufacturers is to avoid using U.S. parts and components, and we have seen a trend to "design out" U.S. satellite components that poses grave risks to our industry. Several U.S. satellite component suppliers were notified by DASA that it has been directed to find European suppliers for parts. Other European and Japanese aerospace companies, Matra for example, have made similar public statements. Commerce regulations, while they also apply to certain high-level re-exports, were modified in the Reagan Administration to avoid this broad extraterritorial reach. I expect the industry panel can provide you with additional examples of the damage caused by the transfer of jurisdiction.

Another factor is the fact that the commercial satellite market has tripled in size since 1992. Increasingly, these launches are for foreign satellite operators and international consortia. The pace of sales is also much faster. In 1992, it took 2 or 3 years to manufacture a satellite. Now, manufacturing time is down to one year in some cases, as satellite companies begin to produce "standard" models. Recent consolidation in Europe's commercial space industry, coupled with the history of cooperation on joint projects through the European Space Agency, have created a collaborative environment well suited to rapid manufacturing, and one of the main advantages that Europeans now have is being able to deliver spacecraft on a more timely basis. The ability to meet customer demands quickly is particularly important in light of the way that the satellite services industry is developing. Today, the most important criteria in the success of a commercial satellite business are reliability, scheduling and cost -- in that order. While U.S. firms still enjoy a cost advantage, export restrictions can have a devastating effect on timeliness and predictability.

An illustration of the scope of this problem is that some financial analysts now predict that the jurisdiction change will affect the ability of U.S. satellite makers to tap capital markets. Other analysts believe that the main effect will be on companies' ability to obtain launch insurance, which is often critical to securing sales and financing. To have a strong space industry, we need our companies to be able to compete in the international market for communications satellites, and the companies that can best service the international market will dominate the space sector. While the U.S. was, before the transfer of jurisdiction, the unquestioned leader, we have seen in the last year the early warning signs of a shift in market leadership. Our current export controls on satellites have had the unintended consequence of building stronger competitors overseas. Losing the lead in satellites to foreign producers is not a good outcome for national security.

Obviously, any consideration of the jurisdictional issue must address the question of illicit technology transfer and the security of foreign launches of U.S. satellites. This matter has been subject to extensive scrutiny and is routinely cited to justify the transfer. The specific cases in question are under investigation, and it would not be appropriate to comment on them, but it is important to note that all of them -- whether they were licensed by Commerce or State -- occurred prior to the President's 1996 transfer of the remaining jurisdiction to Commerce, and we believe that as part of that decision and subsequently we have put in place procedures sufficient to protect our security. I would also point out that both the Defense and State Departments concurred in each of the satellite licenses that the Department of Commerce licensed, including all of the conditions of those licenses. Further, these agencies would review any licenses we receive in the future should jurisdiction be transferred back.

To sum up, we find ourselves in the paradoxical situation where denial or delay of exports under the rubric of national security has, in the end, done more harm than good to our nation's military and economic strength. Industry figures from the past 15 months suggests that the changed controls on satellite exports hurt the U.S. more than they hurt any intended target. While the Department of State has laudably taken action to alleviate problems, the fundamental issue remains that it is not practical or desirable to treat commercial export sales as munitions transfers. The better solution, in my view, is to recognize dual use items for what they are and control them through the Commerce procedures that are designed for that purpose. In fact, Congressmen Gejdenson and Goodlatte last month introduced legislation in the House to do precisely that.

Mr. Chairman, I applaud the steps State and Defense have taken to streamline the arms licensing process for our closest allies. The question for the Committee remains, however, whether it is appropriate to treat commercial communications satellites as weapons. One alternative is to return jurisdiction to Commerce in a way that strengthens our national security and reverses the damage done to our satellite industry. Part of any return should be a mandate for proper monitoring of satellite campaigns by both Defense monitors and Commerce enforcement agents knowledgeable in our regulations, and by better educational efforts with U.S. companies to reduce or eliminate the risk of technology transfer. A careful examination by experts from DOD, NASA and other agencies with satellite expertise to identify critical technologies which must be tightly protected is also necessary in this regard. The alternative, an export strategy dominated by risk-avoidance, may do more to damage our security than protect it. The position of this Administration has been that the U.S. can achieve a net security gain if it properly exploits globalization and commercialization trends. Our satellite export policy must reflect this, and I think the best way to ensure that is to begin the process of considering how best to transfer the control of satellite exports back to Commerce while ensuring U.S. Government oversight over sensitive exports.