Where Industry and Security Intersect
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Good morning and welcome to Update West.
It is a pleasure to be with you again at BXA's annual West Coast reunion with American exporters. This conference provides an opportunity to brief you on what we have accomplished and what we are planning and to hear back from you on whether our direction is the right one.
This Administration's stewardship of export controls has occurred during a period of unprecedented political and economic transformation. We have worked hard to adapt our policies and procedures to these new realities and have accomplished a great deal over the past five years. Now we are finding, however, that further change is an uphill battle, as we contend with those who do not understand these changes and respond to them by trying to construct a modern day Maginot Line around American technology. But before I get to that, let me comment on some of the changes that all of us have to deal with as we head into a new century.
The foundation for our approach, in contrast, was laid out by President Clinton in his speech commemorating the fiftieth anniversary of the GATT, 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. Maintaining military superiority means maintaining the gap in capabilities 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 those that help us run faster -- increased research, development and acquisition of advanced technologies here at home.
This approach is fundamentally different 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 or proliferation use. Instead, our approach is based on the realization that our national security is a direct function of our economic health and security.
This is so for two reasons:
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.
Our military relies on a strong high tech sector to continue to develop and manufacture new and better products; yet it does not buy enough by itself to keep them healthy. Instead, exports have become the key to growth and good health. In the computer and satellite industries, for example, between 50 and 60% of all revenues come from sales outside the U.S. A failure to export also means fewer profits being rolled into R&D on next generation technologies and fewer funds available to address particular defense-related concerns.
Thus, the 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.
The argument that, even so, we should simply deny them the right to export to China is likewise fallacious. If we shut our door to China, in less than a year new competitors in Taiwan, Korea, Japan, and Europe will be walking through theirs. 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 but will move on to compete head to head against us elsewhere.
In other words, the loser in the face of closed markets is not the Chinese 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.
The other reason closing markets like China to HPCs misses the point is the fact that China, as well as India and others, has 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.
Although I have used HPCs as an example, the logic is true for other fast moving sectors, including semiconductors, controlled software, and telecommunications. Large capital items, in contrast, are more susceptible to controls, but the implications for our defense 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 of global market share and where current foreign availability is a serious issue; and satellites and some aerospace items where the U.S. has a strong global position but is under growing pressure from competent competitors.
Despite these challenges, our top priority remains protection of the nation's security. Let me be clear on this point -- this Administration is not in favor of eliminating export controls, but rather on focusing controls on what matters -- choke point technologies.
The best way to do that is still to strengthen the multilateral control regimes -- the Nuclear Suppliers Group, the Australia Group, and the Missile Technology Control Regime -- and the new Wassenaar Arrangement, which succeeds and moves beyond the outdated COCOM. Wassenaar's lack of strong central authority and its lack of explicit target countries is a reflection of the times -- the absence of a single large threat and lack of agreement over the nature and seriousness of the smaller threats. But that weakness has complicated its development and made consensus among the expanded membership more difficult to achieve, although its inclusion of conventional weaponry is a major step forward from COCOM.
Last year's List review saw major changes to the encryption and telecommunications categories and the adoption of new control parameters based on current ISO levels for machine tools. At the next meeting this spring, we expect to review the areas of computers and microprocessors, since most members support bringing these controls more in line with technological advancements. The Wassenaar Arrangement will also be examining the strategic relevance of items relating to computers, electronics and telecommunications in the meeting later this month.
This year the members will also be assessing the overall functioning of the Arrangement. The first meeting will take place later this month. U.S. objectives for the 1999 assessment are still being developed but will likely include strengthening the Arrangement's "no undercut" provisions, improving the export data exchanged on dual-use goods, and reducing divergences in licensing practices among members.
At the June 1998 U.S.-China summit, China committed to "actively study" joining the MTCR which was considered a very positive development in U.S.-China relations. Since June, the U.S. and China have had several bilateral discussions where the United States has encouraged China to follow-up on its commitment, and has offered our support in helping China complete its study, with the ultimate goal of it joining the MTCR.
We have been criticized for these efforts by some in the nonproliferation community who fail to understand that the perfect can be the enemy of the good. All these regimes are works in progress. None are perfect, but if we refused to accept anything but the perfect, we would still be empty-handed. Instead, brick by brick, we are building walls against terrorism and weapons of mass destruction. The result is worth waiting for, but the time spent getting there is also not wasted. Even works in progress produce successes along the way, and the world is a far safer place for it.
Another of our significant accomplishments has been ratification of the Chemical Weapons Convention. The CWC, which prohibits the development, production, acquisition, retention, transfer and use of chemical weapons, is one of the most comprehensive arms control treaties of the post World War II era, and I look forward to working with industry to ensure an effective compliance program.
Finally, we have made substantial progress over the past five years in overhauling our own export control system: licensing process reform, rewritten regulations, control liberalizations on computers, software, telecommunications equipment, semiconductors, semiconductor manufacturing equipment, and oscilloscopes to mention a few, a new commodity jurisdiction review process -- including resolution of the hot section technology and commercial communication satellite issues -- at least until Congress got into the act.
In terms of licensing procedures, we have listened to exporters. We will shortly be able to accept license applications and required reports over the Internet. Soon you will be able to sit at your home or office at any time of day and send us your application reliably and securely at no cost to the exporter.
We also continue to develop an encryption policy that reinforces market developments. We published new regulations on December 31 that make some significant changes in our encryption export policy. From now on, U.S. exporters can sell -- world wide (except for terrorist countries) -- any encryption software up to 56-bits. They can also sell any encryption product -- with or without key recovery to those industries in 45 countries that our research shows are most likely to demand stronger encryption: financial institutions, including insurance companies; medical and health care organizations; and on-line merchants. Also, companies will be able to export encryption products that include technology to provide "clear zones" at Internet service providers. Finally, the new regulations ease requirements on companies that use key recovery products, eliminating the requirement to name and approve key recovery agents for exports of key recovery products from regulations.
We have also made progress in coordinating our encryption policy with those of other nations. Specific improvements to multilateral encryption controls include removing controls on all encryption products at or below 56 bit and certain consumer entertainment TV systems, such as DVD products, and on cordless telephone systems designed for home or office use. Members of the Wassenaar Arrangement also agreed to extend controls to mass-market encryption exports above 64 bits, thus closing a significant loophole.
There are other items on our front burner that may interest you, including Shippers' Export Declarations, deemed exports, and sanctions. You will be hearing about these issues in greater detail later today and tomorrow.
Now, a word about the Export Administration Act. For the first time in some years there are signs of progress. I have already testified on the importance of renewing the EAA at a hearing of the Senate Banking Committee and expect to do so in the House later this month. As you know, there are many speed bumps on the road to enactment, but the enthusiasm for moving forward in the Congress is welcome, and we are determined to work with them to try to get an acceptable bill.
I also want to mention new steps we are taking to ensure compliance with export regulations and to enhance our enforcement operations. Our compliance program is extensive, but the new year presents an opportunity to remind exporters of their responsibilities -- and ours. For example, BXA will standardize the conditions we apply to licenses and require exporters to notify other parties to the sale of those conditions, and to obtain their written acknowledgment. We plan to increase our pre-license checks and post-shipment visits. BXA enforcement personnel will focus on shipments that have special conditions attached to the license to make certain those conditions are being met. Audits will be conducted on companies operating under Special Comprehensive Licenses, and we will periodically select license exceptions for audit and review. Finally, BXA staff will increase outreach efforts to ensure compliance with our regulations.
I think this is a significant record of accomplishment that this Administration can be proud of. We have preserved our security and at the same time contributed to our record-setting economic growth.
The Cox Committee Report, an unclassified version of which will be issued shortly, paints a picture of China as an adversary. We agree with the Committee on the need to maintain effective measures to prevent the diversion of U.S. technology and prevent unauthorized disclosure of sensitive military information. We also agree with the Committee that we should support U.S. high tech competitiveness consistent with national security, and the President has indicated we support a number of their recommendations. A few of them, however, threaten our progress over the past six years and would take us backwards to the Cold War. Those will require additional dialogue with the Congress as it works on legislation in this area.
Now let me close by explaining what we in the Administration are saying in order to deal with these challenges.
First, we plan to do a better job of showing the public how changing times demand our changed policy and how the world is no longer suited to a Cold War approach. We must also make clear that our policy is the way to better security and a stronger military and intelligence position, not the reverse. Industry, in turn, has the responsibility of explaining how globalization has affected you and the extent to which your health depends on exports.
A 21st century military that is the best in the world requires technology that is the best in the world. Having the best depends on our companies making profits and using them on R&D for next generation products and technologies. And that means the civilian sector. Tell our computer industry -- which leads the world -- that it can't sell in certain countries, and in a matter of months you will see new foreign competitors taking advantage of our self-inflicted wounds -- to the long run detriment of our competitiveness and our security.
The economic implications are obvious. Cut exports and you increase our costs, decrease our competitiveness and cost us jobs -- good, higher paying jobs. When this Administration came into office and unemployment was high, Congress cared about jobs. Some of the same people attacking us now wrote us in 1993 urging us to do exactly what we have done because of the state of the California economy at that time. Now that unemployment is low, apparently we don't need to think about jobs. But I guarantee you we will be thinking about them again -- and regretting any mistakes we make this year.
Second, we must explain our policy of constructive engagement with China and our belief that the quickest way to turn them into an adversary is to treat them like one. This does not mean we ignore our differences. Far from it. We have been outspoken in confronting the Chinese when we disagree and in seeking a dialogue to overcome them. And you know the Chinese do not make that easy. But it is important that we make very clear that some Congressional proposals would destroy our dialogue and push the Chinese into an adversarial position.
Third, we must remind the public and the Congress how high tech exports contribute to our foreign policy goals by spreading American ideas and principles. 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, 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 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. I can think of few things more counterproductive.
If we make our case, perhaps we can persuade Congress not to build its Maginot Line. The problems posed by economic globalization are not amenable to simple or parochial answers. The best policy is one that moves in the direction of building alliances rather than enemies, and an export control agenda for the next century must reinforce that principle.
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.