Where Industry and Security Intersect
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I am pleased to be back with PLI once again to discuss the direction of the Administration's export control program. I believe this is the sixth time I have been privileged to be with you. Today I want to discuss some specific recent developments that might be of interest to you, but let me begin with a few words about the changes that have occurred in the world that have prompted us to rethink export controls.
Although the end of the Cold War has handed us a more complex world situation with a more diffuse set of adversaries and less multilateral agreement on what to do about them, our goal of maintaining military superiority has not changed, and we still achieve it by maintaining the gap in capabilities between ourselves and our adversaries. That gap is sustained and expanded through policies that retard our adversaries' progress, such as export controls, and through those that help us run faster -- increased research, development and acquisition of advanced technologies here at home.
What has changed is the relative balance of those two tactics, as economic globalization has accelerated the pace of technological change and made export controls more difficult to implement and enforce. That means that our national security has become a direct function of our economic health and security.
The ubiquity of critical technologies and the ease of their transfer makes export controls much more difficult. Intel, for example, has 50,000 authorized dealers worldwide. 60% of its business is exports. Personal computers are also ubiquitous -- hundreds of thousands are made in the U.S. and cloned around the world. Microprocessors, which are the key ingredient for High Performance Computers (HPCs) as well as PCs, have become a commodity product widely available throughout the world from numerous sources.
The personal computers you have on your desks are available in uncontrollable quantities -- manufactured around the world and sold through mail order and over the Internet. The technology to "cluster" these computers is also readily available through the Internet.
Second, our military's increasing reliance on microprocessor technology -- primarily in computers and telecommunications -- means that their technology driver is the civilian sector, not the military contractor. That means, in turn, that our military strength is directly tied to the health of the civilian companies that produce the products the Pentagon buys and invent the technologies it needs.
A good example is HPCs -- our defense establishment increasingly needs them for weapons design and test simulation, fluid dynamics analysis, small particle analysis, "smart weapons," command, control and communications functions, etc. The 21st century fighting force will be more reliant on computers than any before it, and whoever has an edge in this technology will have an edge on the battlefield.
At the same time, our military does not buy enough HPCs to keep our companies, healthy. In fact, it is exports that keep the U.S. HPC and other high-tech companies thriving. More than 50% of the sales of these companies are exports. Failure to export means fewer profits being rolled into R&D on next generation technologies and fewer funds available to address particular defense-related concerns.
Thus, our equation is: exports = healthy high-tech companies = strong defense. Cripple our companies by denying them the right to sell, and you set back our own military development.
Although I have used HPCs as an example, the logic is true for other fast moving sectors, including semiconductors, software, and telecommunications. Large capital items are more susceptible to controls, but the implications of too-broad controls are the same. These include items like machine tools and semiconductor manufacturing equipment, where the U.S. has a minority share of the world market and where current foreign availability is a serious problem; and satellites and some aerospace items where the U.S. has a strong global position but is under growing pressure from competent competitors.
A key -- and growing -- reality in all these cases is the capacity of our adversaries to make these products themselves or to obtain them from those who lie outside the circle of multilateral control regimes. In the case of computers, for example, China, as well as India and others, have the capacity to make these machines themselves. While they do not -- and cannot -- manufacture to compete with U.S. companies, they can make machines that will function at performance levels sufficiently high to provide the military capabilities they seek. Denying them U.S. products simply encourages their own development and production -- which was precisely the effect of the Reagan Administration's decision to deny India HPCs.
Moreover, our lead in many of these sectors is not based on our monopoly of the technology; rather it is based on the quality and efficiency of our production. Close a market and we will create viable competition where there is very little now. And that competition, as we have learned in so many other sectors over the past thirty years, will not stop with China or India but will move on to compete head to head against us elsewhere to the long term detriment of our global leadership.
In other words, the biggest loser in the face of closed markets is not the Chinese or the Indians but the Pentagon, whose access to cutting edge goods and technologies will be slowed, and the United States, whose technological leadership will face new challenges from new suppliers.
When I first met with you, I laid out our goals for reform, streamlining and liberalization to deal with these global changes.
The good news is that many of these goals have been met. The bad news is that there are attempts to roll back those hard-fought changes and return us to a Cold War mentality that will not only hurt us economically but will ultimately harm our security as well. Despite these pressures, we are not standing still, and I would like to take a few moments to comment on some recent developments.
The public debate over encryption continues to be very spirited. As I stated last year, the Administration remains committed to a balanced, market-driven approach to encryption policy which advances the full range of national interests, including promoting electronic commerce; supporting law enforcement and national security; and protecting privacy.
After extensive dialogue with industry and other interested parties, on September 16 the Administration announced a new framework for encryption policy that will simplify the export control process. This approach is comprised of three elements: promotion of information security and privacy; a new framework for export controls; and updated tools for law enforcement.
With respect to export controls, this update rests on three principles: one-time technical review, post-export reporting, and government review of exports to foreign government and military organizations and to nations of concern. Under this new policy, encryption commodities or software of any key length may be exported under a license exception, after a technical review, to commercial firms and other non-government end users in any country except the seven state supporters of terrorism. Further, retail encryption products may also be exported under a license exception to government end users in any country except to the seven state supporters of terrorism, after a technical review. Only non-retail products being exported to government end users will require an individual license. Two weeks ago we circulated to our industry colleagues a draft regulation for their further review and comment. We expect the final product to be published by December 15.
On July 1, President Clinton unveiled new export controls on HPCs and semiconductors. This new policy includes changes critical to maintaining the strong, vibrant high technology industry that is vital to our national security. The revised controls maintain the four country groups announced in 1995 but amend the countries in, and controls levels for, those groups. At the same time, the President committed the Administration to review HPC export control policy every six months in order to ensure a realistic export control regime in this rapidly changing sector.
He also has submitted legislation to Congress shortening the six month waiting period for the change in Tier III military end use. Since Congress unfortunately failed to act on that proposal, the increase to 6500 MTOPS, will not take effect until late January.
The Departments of Commerce, Defense, Energy, and State, the NSC and NEC are already well along in their discussions of the next round of control level modifications for computers, and we recently published a regulation increasing the MTOPS level for microprocessors to 3500. There is agreement amongst all of us that the next change needs to reflect the reality of continued rapid technological progress in the computer sector. We expect to send a new recommendation to the President this month.
We continue to review India-Pakistan sanctions. On October 25, Congress further extended waiver authority for most of the sanctions on India and Pakistan, however, we are unlikely to revise the discretionary sanctions imposed under the Glenn Amendment until there is more significant progress in bilateral nonproliferation talks with each country. If we can make progress in our nonproliferation cooperation, adjustments to the sanctions would be appropriate. With respect to the list of sanctioned entities within India and Pakistan, the Act requires that the President submit a report to Congress within 60 days listing the Indian and Pakistani entities whose activities contribute to missile or weapons of mass destruction programs. We are currently examining the list of named entities and the scope of products covered by the sanctions in preparation for submitting that report. Although there are no decisions yet, I expect the list will become shorter rather than longer once our review is completed.
For dual-use items caught by the sanctions, we assess each proposed export carefully. When we have been able to assure ourselves that they pose no proliferation threat and would not be contrary to the restrictions mandated under the Glenn Amendment, we have approved them. We value our important commercial relationship with these two countries, and we hope that it will return to normal in the near future.
In our own hemisphere, we have undertaken some changes in response to new circumstances, but Administration action is severely constrained by law. In early 1998, the President announced a new initiative to aid the people of Cuba. The streamlining of export licensing procedures for sales of medicines and medical equipment to Cuba has resulted in a sharp increase in approvals of exports of these items. Last January, the President also authorized the sale of food and certain agricultural items to the private sector in Cuba. This was a bold step intended to help invigorate the small but important private sector. Progress has been slow in this area, with few license applications for food sales and no approvals to date, but we will continue to work with U.S. exports on this initiative.
On September 17, the President announced the easing of some sanctions against North Korea. The United States is taking this action in order to pursue improved overall relations with North Korea and in order to further stimulate North Korean policies that may lead to a lessening of tensions on the Korean Peninsula, a lasting moratorium on missile tests and exports, and reaffirmation of the tenets of the 1994 U.S.-DPRK Agreed Framework governing peaceful nuclear power generation. To implement the President's initiative, Commerce has circulated a draft regulation easing licensing requirements for North Korea. We hope to have this regulation approved by the interagency community by the end of the year, with publication sometime in early 2000.
Under this new policy, most items designated EAR99, may be exported or reexported to North Korea without a license. Some EAR99 items, like those currently controlled for Iran, Sudan and Syria, will be exempt from this general liberalization. In addition, BXA is changing the licensing policy for certain items on the Commerce Control List destined to North Korean civil end-users from a policy of denial to case-by-case review. This does not affect U.S. antiterrorism or nonproliferation export controls on North Korea, including end-use and end-user controls maintained under the Enhanced Proliferation Control Initiative.
We hope that this will help turn Pyongyang from its current dangerous path. We are also very keen on helping U.S. companies invest in North Korea and establish a market-based structure there that will strengthen the economy and allow it to devote more resources to feeding the people and reconstituting the agricultural sector.
Recently, as you may be aware, the Department revised its regulations for the export clearance process. Our goal was a regulation that would provide flexibility so that parties could structure their transactions as they wished, but which would also ensure accountability, so that parties would agree who was responsible for obtaining licenses. That responsibility would default to the U.S. principal party in interest responsible for the export if no other party assumed responsibility in writing. It would ensure that parties communicated with each other by providing relevant information for the transaction.
We also focused on simplifying the clearance process by reducing the regulations from about 20,000 words to about 6,000 and ensuring that the EAR stays focused on export controls, while Shipper's Export Declaration requirements are left to the Foreign Trade Statistics Regulations. Requirements for Shippers Export Declarations can now be found in one section of the proposed regulation. Assistant Secretary Amanda DeBusk, responsible for seeing this project through, will be speaking in more detail on this issue.
AES (Automated Export System) is a Census/Customs program that allows export data to be submitted directly through electronic submissions. BXA has been involved in AES discussions primarily from an enforcement point of view. We believe that AES will complement our existing Shipper's Export Declaration Review Program by providing our enforcement arm with more accurate and timely SED information and data.
We have also decided to permit exporters to file SED data using AES Option 4 (that is, after the export takes place) for BXA-licensed exports under certain circumstances. We have shared this proposal with some of our advisory committees and will be sending our recommendations to Census in the near future. We expect to implement the new policy by January 1 and will update our BXA web page with details.
Lastly, I'd like to remind you of a new domestic compliance program known as LEAP -- License and Enforcement Action Program. The business community needs to understand both its obligations and rights under our export control system, and it is incumbent upon those who administer the regulations to ensure that they are easy to understand. Exporters should be aware that we are renewing our efforts to enhance compliance. As a first step, we are standardizing the conditions we apply to licenses. These conditions are sometimes necessary to ensure that approved items are in the correct location and used as designated in the license application. When a license carries conditions, exporters are required to notify other parties to the transaction of those conditions and to obtain a written acknowledgment from the end user overseas that they have been so informed. Other activities I intend to undertake under LEAP include expanded end use visits, reviews and spot checks of license exceptions, broader information sharing with the intelligence community, and expanded outreach efforts.
Despite -- or perhaps because of -- what we have done, we are subject to attack from those who do not accept or do not understand our cornerstone that the end of the Cold War and globalization require a new approach.
The end of the Cold War has reduced, but not destroyed, the degree of consensus among our friends over what the threats are. So not only is technology harder to control, it is harder to agree to whom it should be controlled.
That does not mean we give up. This Administration is not in favor of eliminating export controls, but rather on focusing controls on what matters -- choke point technologies -- and on making sure that our controls do not have the unintended result of limiting our own ability to acquire the cutting edge items we need for our own protection.
The best way to do that is through strengthening the multilateral control regimes, particularly the Wassenaar Arrangement. On the whole, the existing multilateral regimes have done a decent job of controlling technology transfers to pariah states. Aided in some cases by UN sanctions, we have had a good degree of success with destinations like Iraq, Libya, Iran and North Korea. As in the case of COCOM, our multilateral restraints have not been perfect, but they have slowed down and made more expensive and less certain terrorist states' acquisition of goods and technology needed to develop weapons of mass destruction. If we can continue to develop greater information sharing and cooperation among Wassenaar Arrangement members, we will be able to improve the regime's grade from C+ to B+.
Where the various regimes have been less successful is in the gray area of countries that are neither friend nor foe but which are pursuing proliferation policies we find troubling. India, Pakistan, and China are obvious examples. The fact that they are large countries in strategic locations adds to the complexity. It is here where we have the least allied agreement on how to treat them and where the countries are best equipped to bypass the road blocks we create -- either through indigenous production or acquisition from other sources.
It is also here where we have the most to gain from a constructive dialogue that could restore these countries to responsible paths. It is no secret that we have spent a lot of time on this, and no secret that we have not had as much success as we would like, even when we have imposed sanctions. Our agenda for the future must enhance our efforts to bring the gray area countries into patterns of responsible behavior, both through direct bilateral dialogues on specific matters and through membership in the multilateral export control regimes. This will not be easy, and clearly we must work harder to show these countries why the regimes are not a club of the military "haves" trying to make sure the "have-nots" stay that way. As anyone who has tried to do it knows well, selling non-proliferation is often two steps forward, one step backward, but we have no choice but to continue the effort.
Some of our sales power needs to be devoted to our friends as well, so we can reach agreement on how these countries should be treated until we can bring them into the fold. That won't be easy either, but with more imagination, creativity, and senior-level focus we ought to be able to do better than we have. The Wassenaar Arrangement, where the concrete is not so firmly set around its procedures, provides a good place to begin, but it will need high level attention to succeed.
Internally, we must deal with those who have difficulty with the increasingly blurred distinction between civilian and military items. Critical technologies like night vision or radiation-hardened items have military applications, but they are also essential to the development of a legitimate modern industrial economy. We must deal with the growing tendency to define as a weapon anything that has military application regardless of the size of the commercial market. That is a guaranteed ticket to oblivion for our manufacturers. If anything, the migration should be in the other direction -- munitions moving to the Commerce Control List as commercial demand for them grows.
We also most continue to resist misguided attempts to destroy the efficiency of our licensing process in the name of policy reform. A number of the Cox Report's recommendations, for example, would slow down the process, even though agencies are already taking less time than they're allowed, and give any agency a veto, even though they currently can take their concerns all the way to the President if they wish.
In that regard, I believe the Export Administration Act reauthorization reported by the Senate Banking Committee is a responsible step taken under difficult circumstances. Senators Gramm and Enzi, with bipartisan support from their counterparts Senators Sarbanes and Johnson, have spent an extraordinary amount of time delving into this complicated subject and have produced a thoughtful and responsible bill which will revitalize the export control system and make it ready for the next century. Proof of their hard work and careful product lies in the unanimous vote of approval by their committee. While there are provisions we find troubling, I am confident we can work them out. The greater problem lies with those in the Congress who have not yet accepted the need and rationale for this bill and instead close their eyes to the changes in the world that compel this legislation. This is a tough fight, but the Senators in charge have been deft in their tactics, and I am hopeful they can bring the bill to a successful conclusion.
While the Administration will continue its own reforms, which have produced substantial reductions in the number of controlled items over the past six years, the real debate, which this legislation addresses, must be the larger one which began my remarks -- how we must change the way we look at national security, put aside the myths, and pay at least as much attention to how we run faster as to how we apply controls.
I have been preaching this course for some years now, and we have worked hard to adapt our policies and procedures to this new reality. As we move into the next century, we must keep our eye on these larger issues while battling those who would construct a modern day Maginot Line around American technology. The problems posed by economic globalization are not amenable to such simple answers, and such a Line will work no better than the original one did. Worse, its cost will be lost U.S. leadership in key technologies and diminished economic performance. The best policy is one that moves in the direction of building alliances rather than enemies, but we will need not only the vision to see that and pursue it but also the courage to take on those who would take us back to the Cold War. I hope that we can work together to that end.
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.