Where Industry and Security Intersect
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Good morning. It is a great pleasure to be with you today. Rather than provide my usual litany of accomplishments, I want to talk about the changes that have occurred in the global marketplace that force us to rethink our export control policies and then conclude with a word about the mythology of export controls that holds us back from taking the steps we need to take to be ready for the next century.
The rationale for the Administration's approach was laid out by President Clinton in his speech commemorating the fiftieth anniversary of the GATT last year, when he said, "Economic globalization is not a policy option; it is a fact." More efficient modes of transportation and communication, the internationalization of capital flows, the development of the information-based economy, all transform national economic systems into one which is truly global -- where capital, ideas, goods, technology -- and increasingly labor -- all flow across borders, not always freely, but more often than not successfully.
This reality underlies the Administration's national security philosophy in two respects. First, maintaining military superiority means maintaining the gap in capabilities between ourselves and our adversaries. That gap is sustained and enlarged both 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.
Second, we know that new technologies, particularly in the information sector, are effective instruments of foreign policy, bringing Western values, ideas, and principles to peoples still held hostage by authoritarian regimes. We did not win the Cold War in a military victory. We won a war of ideas. Our system worked; theirs didn't. Our people were free and prosperous; theirs were not. Some of the tools we used to win that war were mundane -- television, radio, fax machines, telephones. Today, we can add the Internet. These are how ideas spread. These are how people all over the world learn that they have alternatives, discover the importance of free speech, free press, and market economics.
So, for example, when we decide not to launch a satellite on a Chinese rocket, we are denying the Chinese people television, Internet, and cellular phone service, and by doing so are postponing their exposure to our ideas and their integration into Western economic and political systems.
As a result, this Administration's approach differs from that of the Cold War, which was based on a broad policy of denial of a wide variety of goods to the Soviet Bloc on the assumption that anything shipped would be diverted to military use. Instead, our approach is based on the reality of economic globalization and the realization that, as a result, our national security is a direct function of our economic health and security.
This is so for two reasons:
1) The ubiquity of critical technologies and the ease of their transfer makes export controls much more difficult than twenty or even ten years ago. 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. In recent months, news stories have noted that technology to "cluster" these computers is also readily available through the Internet. These inexpensive and easy to install connections create systems operating at thousands of MTOPS, which are the equivalent of the high performance computers we have been controlling.
These facts resulted in the President's decision announced on July 1 to raise the control levels for high performance computers. The level requiring a license for Tier II countries will be 20,000 MTOPS instead of 10,000, and Poland, Hungary, Brazil, and the Czech Republic are moved into Tier II. For Tier III the President retained the separate levels for military and civilian end users, raising the former from 2000 MTOPS to 6500 and the latter from 7000 to 12,300. Perhaps most important, he also announced that henceforth we will review these levels at regular six month intervals. Finally, he indicated he would submit legislation to Congress shortening the six month waiting period for the change in Tier III military end use. Otherwise, the change to 6500 MTOPS, which affects the notification process, would not occur until next year. Maximizing our technological leadership in this sector will inevitably have more to do with making sure we are running faster than our adversaries than it will with trying to hold them back. Congress can assist us in that by shortening the waiting period to one month.
2) Our military's transition to Commercial Off the Shelf items (COTS), due to declining defense budgets and the inability of military procurement of specially designed items to keep up with fast-changing sectors, particularly electronics, means that the technology driver in our economy 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, as Desert Storm demonstrated.
At the same time, our military, including our intelligence services, do not buy enough HPCs to constitute significant market share or to keep our companies healthy. In fact, it is exports that increasingly keep the U.S. HPC, and other high-tech, companies thriving. More than 50% of the sales of these companies are exports. A 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, in contrast, are more susceptible to controls, but the implications of too-broad controls are the same as for HPCs. 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 is precisely what the Reagan Administration's decision to deny India HPCs did.
Moreover, our lead in many of these sectors, is not based on our monopoly of the technology; rather it is based on our quality and efficiency of 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 twenty 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 ability to retain global leadership.
In other words, the 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.
Adding to the complexity of this debate is the mythology of export controls that has built up over the past twenty years and has had the effect of precluding rational discussion. As someone who has worked on these issues for over twenty years, who has watched Democrats attack the Reagan and Bush Administrations for exports to Iraq, and who is now suffering Republican attacks on the Clinton Administration for exports to China, I can testify that the subject provides many opportunities for finger pointing. I've pointed a few fingers myself over the years. Yet what is astonishing is the extent to which a few stories can seize control of the debate and transform it from a constructive discussion of options to a political exercise of laying blame.
I'm sure most of you remember the VAX computer in the early 1980s which was destined for South Africa and mysteriously ended up in eastern Europe, or the Toshiba-Kongsberg machine tool case in 1987 which ostensibly gave the Soviet Union the capacity to make quieter submarines. Estimates of the cost of overcoming the damage done in the latter case, incidentally, ranged from $2 billion to over $100 billion, which suggested that no one really had a grip on the problem.
In this Administration we have had McDonnell Douglas machine tools, and the satellites and computers, and now a new element which appears to come from misreading the Cox Report. Many Members of Congress appear to have read only the summary and to have done so quite quickly. They seem to have concluded that because the Chinese stole weapons secrets from our national labs, the export licensing system has failed. Whether or not it has failed is something we can debate, but I guarantee that what happened at the labs is not evidence of that failure. I have urged Congress to examine our process carefully during its consideration of Export Administration Act renewal and in doing so to identify specific concerns. Thus far I have heard about McDonnell Douglas and not much else.
The McDonnell Douglas case actually explains a good bit about the strengths of our system. Clearly something happened that should not have -- machine tools were diverted to an unapproved location. Contrary to the mythology, these were not an "entire B-1 plant" but were actually about 16% of a closed facility in Ohio. Only about half the tools were sophisticated enough to require an export license (some were up to 25 years old), and of the 30-plus tools in question, only 6 were diverted, and none of them were used before we were able to get them back and restore them to American control.
From one standpoint, this is a failure. Items ended up in the wrong place. From another, generally forgotten, standpoint, this is a success. We got the items back under American control without them having been used, and the investigation into what happened continues. Perhaps most telling, however, was the aftermath for the Chinese. They replaced the most significant diverted item, a large stretch press, with a new one from a European producer. The ironic result of our efforts to get our stretch press back is that the Chinese now have a better one from someone else!
The Congress has had a lot to say about satellites, and since the Cox Committee Report has been released, you're going to hear more. While investigations of security breaches continue, it is useful to note that they involve launches licensed by both State and Commerce, suggesting that the process is not the problem, and that they concern events that occurred prior to the transfer of most satellite jurisdiction to Commerce in October 1996. To the extent there were problems, we believe the additional procedures we put in place in late 1996 corrected them, and we believe there have not been problems since then. Congress opted last year to retransfer jurisdiction back to State, impose additional procedures, and, in general, create a climate hostile to Chinese launches. This is already having a sharp adverse impact on our industry's competitiveness, and the recent failures of American launches make that much worse.
The Cox Committee attacks us on the computer issue, and, although I've said a great deal about them already, I want to add one further word about their mythology. I once prepared talking points on computers which summarized the debate by saying our opponents believe computers are the instrument of the devil, and we do not.
In a general sense, that's still true. This is a ubiquitous technology that moves rapidly to ever-higher levels of capability, but it is also a technology that has military applications. You can use them to design nuclear weapons, though we designed ours originally without them. You can use them for test simulations, which will be increasingly important in a CTBT world, although state of the art simulations require computing power far beyond levels that we strictly control. You can use them to accelerate a wide variety of industrial processes, though the processes can be run without them. Our military needs them, which certainly suggests that other militaries will want them too.
To non-proliferation activists, they are bad news. To ordinary Americans, and ordinary people all over the world, they are an essential tool of commerce, communication, and entertainment. Last May, I was struck by two articles that appeared simultaneously in my daily clips. One said, "Chinese hackers raid U.S. computers." The other said, "Internet emerges as news source for the Chinese." And there is the central dilemma of this technology. If we want to spread our ideas and values we must penetrate the communications Maginot Lines that authoritarian regimes erect. At the same time, doing so carries undeniable risks. But that dilemma is a long way from the mythology of evil that some of our friends have so successfully built up around these machines.
To close my mythology comments on a lighter note, I would mention the time during a Senate hearing when a senator asked Secretary Brown why we had sold the Chinese an aircraft carrier -- an allegation that was news to both of us. Upon looking into it, we discovered that the senator was referring to a ship built in the early 1940s and decommissioned in 1970. Both the Navy and the Defense Logistics Agency had certified in writing that it was usable only for scrap and that its weapons had been either removed or cut into pieces. As it turned out, it had been inspected by a Member of Congress before it left the United States, and it was not sold to China, it was sold to India. Aside from that, the senator had his facts straight. But you can be sure there are others in the Congress who believe to this day that the Department of Commerce compromised our security by selling China an aircraft carrier.
So what does all this mean for the future of export controls? From one perspective, that future is gloomy. Globalization by definition means greater difficulty in controlling technology and more widespread use of technology by ally and adversary alike. It also means a blurring of the distinction between civilian and military items. Critical technology items like advanced machine tools or testing equipment, as well as information technologies, have military or WMD applications, but they are also essential to the development of a legitimate modern industrial economy.
In addition, 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, we cannot agree to whom it should be controlled.
The existing multilateral regimes, I believe, 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 regimes' 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. 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 we will not succeed so long as we are perceived as a great international nanny constantly complaining to other countries about their manners. 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 not easy, 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 1999 review of 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.
Here at home I fear our agenda must be more defensive as we resist misguided attempts to destroy the efficiency of our licensing process in the name of policy reform. 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.
Perhaps the most intriguing recommendation is that we streamline licensing for less critical items and slow it down for the more important. In different words, that is the same speech all of us in this business have been giving for years. Choke points, higher fences around a smaller number of items, and so on. It's all the same thing, and it's a valid point, but I am concerned that these speeches may become a basis for criticism without a solid foundation. It has become very easy to say the system has been lax and needs to be tightened up for "critical items." At the same time, people who say that, worried that it will cause criticism from exporters, toss you the bone of expedited treatment for "less critical" items. I would urge you to examine that tradeoff very carefully. We think that what we are controlling now are the critical items, and the less critical items are the ones we have decontrolled. We make those decisions frequently, as we just did with computers. Those who criticize us for being too loose with the important items and imply we are too tight with other items must take on the burden of showing what items they are talking about and precisely what they would do differently. And it is your responsibility to put those questions to them, otherwise we could end up streamlining an empty box and slowing down everything currently on the list.
While we will continue our own list reviews, which have produced substantial reductions in the number of items subject to license over the past six years, the real debate must be the larger one I began my remarks with -- 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 than to how we apply controls.
I have been preaching that 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. 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.