Where Industry and Security Intersect
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Thank you, Mark and Eileen. I appreciate that introduction, and want to begin by thanking you and all the people of the Bureau of Industry and Security (BIS) for your help and support over the past several weeks as I’ve prepared to become part of the Commerce Department team. America is well served by the dedicated and hard-working employees of BIS, and I feel privileged to join you.
Let me particularly thank Eileen’s team in Office of Exporter Services. The record-breaking attendance at Update this year is testimony to the excellent outreach they do all year long, all across the country. I’ve suggested to Eileen that we see how much it would cost to rent out RFK Stadium for next year’s conference!
Twelve years ago this month, I attended a meeting at the Commerce Department to talk about export controls. At the time, I worked in the private sector, and was part of a group invited to speak with the then-Assistant Secretary for Export Administration about the future of export controls. At the appointed hour, we trouped into the Assistant Secretary’s office and began a long discussion about the end of COCOM, export controls on encryption, and which agency should regulate sales of aircraft engines.
Two weeks ago I walked into that very same office, boxes in tow, to be sworn in as the new Assistant Secretary, and the memory of that meeting came back to me. Certainly much has changed since then, as the theme of this year’s conference reminds us. But as we reflect on the last decade, I would also like to look forward, focusing this morning on three trends that will shape export controls in the 21st Century:
The evolving nature of the security threat;
The Focus of Controls
During the Cold War, it was sufficient for export controls to focus almost exclusively on countries: exports to the Soviet Union and Warsaw Pact were broadly restricted, regardless of the customer. There was a clear international consensus on the security threat, and a relatively singular focus to the controls. Today the threat is different, and more diffuse. As President Bush said, “the gravest danger our Nation faces lies at the crossroads of radicalism and technology.”
The security threat we face is evolving, so export controls must evolve too. Terrorists and proliferators do not wear uniforms, do not advertise their intentions, and do not restrict their quest for deadly weapons conveniently within the borders of a single state. They operate across borders, and even within the open societies of friendly nations. Clearly, 21 st Century export controls must look beyond state-based threats, toward individual customers and entities of concern.
Second, export controls must take account of our complex relationships with emerging powers. Nowhere is this more evident than in the case of China. As President Bush and others have said, the United States welcomes the growth of a peaceful and prosperous China, and our policy is to encourage China to become a responsible stakeholder in the international system that has enabled its success. This means working to expand and promote trade and peaceful development, even as we also prudently hedge against the uncertainties of a rapid military buildup. Our export controls must reflect the duality inherent in this policy, and must distinguish between different kinds of customers within a large and diverse economy.
So whether we are trying to focus controls against proliferators and terrorists, or trying to encourage vital relationships with emerging powers, the need is the same: our export controls must focus not just on countries, but also on customers.
To accomplish this shift, we need to give you, America’s exporters, more information. This doesn’t mean that government regulations will replace the need for you to know your customer. As businesspeople engaged in the global marketplace, you are our first line of defense, and knowing your customer helps keep sensitive technologies out of the hands of those who shouldn’t have them. But government can and should tell you more about who the trusted and the suspect customers are, and we will take major steps in the coming year to do so.
For example, we will embark on a major initiative to create a new authorization for Validated End-Users (VEU). The concept is simple. For customers who have demonstrated their ability to use controlled items responsibly, and have agreed to periodic audits, fewer export licenses will be required. While this concept was introduced as part of our proposed rule regarding China, we will consider applying this authorization to customers in India as President Bush has suggested, and we may consider it for other countries as well.
In the past, the world of export controls was a world of many sticks and few carrots. VEU is a step in a different direction. For the first time, we will create an export authorization that will act as a market-based incentive for firms in controlled countries to demonstrate good export control behavior. Customers who act responsibly with sensitive products would have better access to such technology than their domestic competitors. And U.S. exporters would be able to sell more efficiently to their best civilian customers. We hope that customers will be anxious to earn this treatment – showing that market competition and counter-proliferation can be mutually reinforcing.
Because the VEU would be a new authorization, I understand that exporters are going to give it careful review. Of course, exporters will be welcome to continue filing for individual licenses if they want to; no one will be forced to use VEU. But exporters and customers who ignore VEU run the risk of turning their backs on a significant opportunity to facilitate their business in highly competitive markets. It is an opportunity their competitors may not pass up.
When I worked in the private sector for three large companies that did business in China and India, most of our sales were to a finite set of well-known customers. In fact, the majority of our exports went to our own overseas subsidiaries. Such repeat customers and subsidiaries would make excellent candidates for VEU.
The proposed rule on China is firmly rooted in America’s foreign policy toward the PRC. For more than three decades across seven presidential administrations, the United States has worked to encourage China’s economic integration with the world. VEU will help facilitate such trade. At the same time, the United States has also expressed consistent concerns about China’s military modernization, and has long maintained an embargo on military sales to the PRC. So other aspects of our proposed rule are driven by the need to ensure that rapid advances in civilian technology do not unintentionally chip away at the effectiveness of the arms embargo.
The same technology that poses little threat when used in a civilian application could undermine the arms embargo if used for military purposes. That is why the proposed rule says that licenses will be required for certain dual-use products exported to China, if the exporter knows they are destined for a military end-use. There has been a great deal of misunderstanding about the scope of this proposed requirement. It is simply wrong to label it a “catch-all”: it would apply only to a clearly defined set of products, under a clearly defined set of circumstances that have clear national security implications.
We have embarked on an unprecedented effort to communicate and explain our export control policy toward China. Last Friday we published on our website a list of detailed questions and answers to help exporters understand more about what we’re proposing, and why. Your input will be welcomed, especially on how to make VEU operate effectively. To further encourage such input, we will be extending the comment period on the proposed China rule until December 3.
I am planning trips in the coming months to encourage America’s allies in Europe and Asia to adopt similar rules. I will highlight our shared interest in deepening economic engagement with China, while discouraging sales that would undermine the embargoes that many nations – not just the United States – maintain on military sales.
Telling you more about validated end-users will help facilitate sales to legitimate civilian customers. But on the other end of the spectrum, we also plan to tell you more about customers that raise concerns. My colleagues in Export Enforcement will speak more with you in the next few days about the Unverified List – customers that should raise a concern because BIS has been unable to conduct an end-use check. In addition, BIS has begun working with our interagency partners on enhancing the Entity List. Our goal is to have a more complete continuum of information – from the Unverified List through the Entity List to the Denied Persons List – available for exporters to use in screening potential customers.
To inform our decisions on both trusted and suspect customers, BIS will propose an inter-agency committee to review end-users. This committee would handle everything from considering requests for VEU authorization to looking at changes in the Entity List. And with an increased focus on individual customers, it is vital that BIS have good information from the intelligence community – so I am creating the position of Intelligence Liaison in the office of the Assistant Secretary.
Globalized Research, Development, and Production
Even as we adjust the focus of export controls, we must also ensure that controls keep up to date with technology. Today’s research community is a global one, and a significant percentage of scientists in the United States are foreign-born. Many high-tech products are the result of collaborative research carried out across borders, and partially manufactured in many different countries.
To stay on top of these trends, BIS will reach out for timely advice. Last week, the new Deemed Export Advisory Committee was launched to take a top-to-bottom look at how we control access to technology by foreign nationals in the United States. As I said to the committee members, both the nature of R&D and the nature of the national security threat have evolved since the current deemed export regulations were published in 1994. We’ve asked the committee for advice on what technologies should be controlled, to whom, and how and when controls should apply.
Outside advisory groups are important, but we also need a strong in-house capability. I’m pleased that a new Office of Technology Evaluation has been established in BIS to better inform export control policymaking and ensure that America remains competitive in critical technologies. OTE has already begun work on a study of the defense microchip industry and will launch further studies soon.
One excellent example is an important new study we are releasing today on the U.S. thermal imaging industry. Anyone familiar with today’s military – or anyone who has seen TV coverage of our troops in Iraq and Afghanistan – knows that night vision equipment is vital to America’s defense superiority. What you might not know is that there are also growing commercial applications for thermal imaging cameras, from checking the structural integrity of railroad tunnels to screening people for infectious diseases.
In a comprehensive study, BIS found a vibrant, growing thermal imaging industry dominated by U.S. firms that are investing in R&D and creating U.S. jobs. But the study also identified a disturbing anomaly: in an otherwise healthy industry, one product segment has seen a big drop in U.S. exports and a loss of market share to European and Japanese competitors. Industry argues that U.S. export controls are the reason. The study doesn’t draw policy conclusions, but we do know that thermal imaging cameras accounted for the largest number of licenses issued by BIS last year, and the vast majority of them were for exports to U.S. allies in Europe and Japan. We will work with our colleagues from other agencies to understand what’s happening in this industry, and to determine what steps the government could take to address this issue.
Cooperating Internationally
To be most effective, export controls should be as multilateral as we can make them. As we continue to move toward end-user controls, we must work with allies in the major regimes to share information, seek consensus, and ensure a level playing field. I look forward to supporting and strengthening the four major multilateral control regimes that form the backbone of our counter-proliferation strategy.
We will also pursue bilateral initiatives. Early next year, we look forward to hosting our colleagues from India for the next session of the High Technology Cooperation Group (HTCG). In addition to discussing the possible eligibility of Indian customers for VEU, we will continue to address tariff and non-tariff barriers to trade in areas such as biotechnology, information technology, and defense.
I hope to lead a delegation next year to China to conduct an export control seminar for Chinese and U.S. businesses, and to highlight the major opportunities presented by the VEU concept. China has made many improvements in its export control regulations in recent years, but implementation and enforcement continue to lag. We will offer our assistance to China to improve industry compliance with export controls.
Conclusion
Ladies and gentlemen, it has been a decade of remarkable change. Ten years ago, in the wake of the Soviet collapse and the spread of freedom across Central Europe, some may have thought export controls would go the way of the dinosaur.
But export controls remain a vital part of America’s national security strategy. While the menace of the Soviet Union has receded, new and different threats have emerged. Terrorists and proliferators seek sensitive technologies that could do us great harm. Outlaw nations flout international agreements and seek to buy, steal, or otherwise acquire whatever they need to build weapons of mass destruction. And possible onward proliferation from such states poses new dangers. Our Cold War-era export controls must be adjusted in response.
To meet these challenges, we will transition to a system that can focus on both countries and customers. We will give exporters more information about who the good guys and the bad guys are, and implement market-based incentives for good export control behavior. We will recognize that globalization has transformed not only trade in goods, but also trade in ideas – and we will work to stay ahead of the curve in a world of global research, development, and production. And we will seek increased international cooperation to make export controls more effective and fair.
We look forward to working with you as we pursue this transformation – for the security of our country, for the strength of our economy, and for the prospect of a world that trades peacefully in freedom.
Thank you.