Where Industry and Security Intersect
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It is a pleasure to be here at ComDef to discuss the Department of Commerce’s view of export controls and arms transfers in a rapidly changing security environment. Your meeting comes at an interesting time when large transformations in the global defense industry have resulted in major challenges for the United States and Europe. The overall globalization of industry and the concurrent mergers/consolidations on both sides of the Atlantic have encouraged agencies like mine to re-examine regulations that were developed in the Cold War era to keep dual-use and defense technologies away from the nations of the Soviet Bloc.
Let me spend a few minute with you today outlining BXA's perspective on this new era of international trade and our work to update export control regulations to meet the challenges brought on by this globalized market.
The emergence of this new economic and security environment has been a major catalyst in our drive to modify the export control environment. The reality of globalization, embodied in more efficient modes of transportation and communication, the internationalization of capital flows, and the development of the information-based economy underlies the Administration’s export control philosophy. The key element in military superiority is the capability gap between ourselves and our adversaries, and that gap is maintained and enlarged both through policies that retard our adversaries’ progress, such as export controls, and through policies that help us run faster than our adversaries by promoting research, development and acquisition of advanced technologies.
While we continue the former, we increasingly emphasize the latter because we realize that because of economic globalization our national security is a direct function of our economic health and security. This is so for two reasons: 1) the worldwide ubiquity of critical technologies and the ease of their transfer; and 2) our military’s transition to Commercial-Off-the-Shelf items (COTS) which is increasingly tying them to the health of the civilian companies that produce the products they buy.
A prime example is the High Performance Computer (HPC). Our defense establishment increasingly needs these products for weapons design and test simulation, fluid dynamics analysis, small particle analysis, "smart weapons", command, control and communications functions. The 21st century fighting force will be more reliant on High Performance Computers and other elements of information technology than at any time in the past, and the nation that maintains an edge in this technology will have an edge on the battlefield, as Desert Storm demonstrated.
That means our military relies on a strong high technology sector to continue to develop and manufacture new and better products; yet it does not buy enough by itself to keep this sector healthy. Instead, in a globalized economy, exports have become the key to growth and good health. In the computer and satellite industries, for example, between 50 and 60 percent of revenues come from sales outside the U.S. Last year, USA Today reported that one of our companies had to eliminate 300 jobs after suspending work on three Asian satellites due to the stagnating Asian economy. Failure to export also means fewer profits invested in research and development for next generation technologies and fewer funds available to address particular defense-related concerns. If we cripple our companies by denying them the right to export, then we set back our own military development.
Although I have used high performance computers as an example, the logic is true for other high technology sectors, including semiconductors, controlled software, and telecommunications. Large capital items, in contrast, are more susceptible to export controls, but the implications of broad export controls for U.S. industry are the same as for high performance computers. These areas include machine tools and semiconductor manufacturing equipment; industry sectors where the U.S. has a small portion of global market share and where foreign availability is a serious issue. In addition, satellites and aerospace products are examples of goods and services in which the U.S. has a strong global position but is under growing competitive pressure from European and Asian firms, particularly in the wake of Congressional action last year.
At the same time these changes have transformed the way we look at exports controls, a parallel transformation is going on in the defense industry. Since the end of the Cold War, the global defense market has contracted and competition has intensified. This new market dynamic has heightened awareness among national governments of the importance of supporting their industries to maintain and expand their share of the defense market.
Another by-product of a globalized defense industry is the strong trend toward industry consolidation on both sides of the Atlantic. Through mergers and acquisitions, the number of defense players has decreased sharply in the United States and has reshaped the competitive environment domestically. The European defense industry is also undergoing a consolidation and realignment which is also producing a new industrial structure. The challenge for governments is how to adjust defense policies, especially in the area of technology transfer, to fit this new market environment.
The Departments of Defense, State and Commerce have been engaged in discussions about how best to update our technology transfer regulations to meet this emerging challenge of deeper trans-Atlantic ties between U.S. and European defense firms. I hope that we can build on this dialogue to provide a trading environment that will allow U.S. defense firms to fully compete and build strategic alliances with European firms.
In light of the accelerating changes in the trans-Atlantic defense trade environment, I believe we should, bilaterally and multilaterally, develop a more intensive discussion of the challenges and barriers to international defense trade across the Atlantic. For years, Europe has perceived our "Buy America" legislation as a barrier to selling into the U.S. market, while we have viewed the creation of organizations such as the Western European Armaments Group (WEAG) and the Letter of Intent (LOI) countries as trends toward a "Fortress Europe" which may preclude U.S. industry involvement in future European defense procurement. We need to grow beyond these perceptions and gain a better understanding of each other's perspectives and policies. We can do that through discussions between governments and between our defense industries that will put misconceptions on both sides to rest and work to reduce trade barriers within this important industry sector.
Inevitably, part of that discussion will be about facilitating technology transfers that will permit closer trans-Atlantic cooperation. Much of that discussion is necessarily between Defense and State, the two agencies engaged in munitions licensing. Commerce participates in those discussions to the extent dual use technology is affected and to the extent we can facilitate process reforms that will produce more timely, transparent and efficient decisions. In that regard, we believe experience has demonstrated the efficiency and effectiveness of our dual use licensing system, which features time limits, license flexibility, clear rules for decision making, and transparency for exporters. At a minimum we ought to be able to find ways to embed those principles in trans-Atlantic technology transfer decision making in order to facilitate transfers while we continue discussions about broader changes of policy.
Those broader changes, in turn, in my judgment, will depend on our collective ability to create a critical mass on both sides of the Atlantic interested in closer defense trade relations. That will be difficult, because it is going to mean both finding ways to increase confidence in each other's security policies and in accepting some degree of mutual dependence in a sector that has been historically reluctant to do that. Clearly, we are not there yet in either respect, but it is in our mutual interest to continue our efforts.
No speech from me to this group would be complete without a brief word on offsets. Our fourth annual report, incorporating data for 1997, will be sent to Congress shortly.
In 1997, U.S. prime contractors entered into 58 new agreements, the highest annual number since we began collecting data. These agreements were valued at $3.85 billion and supported $5.84 billion in export contracts, yielding an overall offset ratio of 65.9 percent, a drop from 76 percent reported in 1996.
As in previous years, European nations dominated the offsets scene. They accounted for nearly 80 percent of the value of new offset agreements, compared to only 64 percent of the value of the export contracts. The offset percentage for European countries averaged 81.5 percent in 1997, down from 99.7 percent in 1996 and 104.4 percent in 1995.
Of 29 new agreements reached with European countries in 1997, 20 were for 100 percent (or more) of the export contract value. In comparison, only two new agreements out of 29 for the rest of the world were for 100 percent. For new agreements between 1995 and 1997, the European offset ratio was 88 percent, in striking contrast to 29 percent for the rest of the world.
The continuing high levels of European offset demands are the backdrop for ongoing interagency efforts to consult with these nations on the reduction and eventual elimination of this practice. More on that in a few minutes.
In 1997, 17 companies reported 574 offset transactions valued at $2.69 billion. They received offset credits of about 20 percent over and above this amount.
European nations accounted for most of the activity. Offset transactions with the region made up 83 percent of the actual value and 76 percent of the credit value of all transactions. Purchases, subcontracts, and technology transfers were again the most popular forms of transactions.
In our previous reports, we recommended international consultations on offsets, both bilateral and multilateral, as the best method to reduce or eliminate offset demands.
In the last year, we made progress in this area, pursuing discussions on both a multilateral and bilateral basis:
The U.S. Trade Representative has formally requested a working group on offsets with our European Union counterparts through the Transatlantic Economic Partnership; we’re awaiting a formal response from the E.U.
For the first time, offsets were mentioned as a trade concern in the 1999 USTR Title VII Report on Unfair Foreign Government Procurement Practices. The report alerted governments around the world that the United States is seeking a way to conduct defense trade without offsets. Further, a Department of Defense-led interagency group met with Canadian government representatives to discuss reducing Canadian offsets. As our single largest trading partner, more detailed discussions are planned with Canada.
In addition to Canada, the interagency group also met twice in the last year with representatives of the Dutch government to discuss eliminating or reducing offsets in exchange for improved access to the U.S. market. Preliminary discussions were also held or being planned with a number of other European countries and Australia.
Economic globalization has challenged the way that governments view international trade and the regulation of technology transfer. In the defense sector, the consolidation of industry in the United States and Europe, coupled with the trend toward stronger alliances between companies on both sides of the Atlantic, have challenged our agencies to review defense trade regulations. I am confident that through continued interagency and international dialogue we can provide an effective system to enhance U.S. competitiveness and meet defense technology security goals.
In April of 2002 the Bureau of Export Administration (BXA) changed its name to the Bureau of Industry and Security(BIS). For historical purposes we have not changed the references to BXA in the legacy documents found in the Archived Press and Public Information.