Where Industry and Security Intersect
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I am very pleased to welcome you to Update West, the Bureau of Export Administration’s Annual Conference on Export Controls and Policy. The purpose of this conference has always been to assist American exporters, businesses and industry in understanding the procedures and requirements that govern exports and ensure our nation’s security.
This conference also serves as an invaluable opportunity for us to understand the perspective of exporters and to listen to the concerns you have. This is crucial in our effort to be forward thinking and to implement rules and procedures that are responsive to the ever-changing demands of the global economy.
It is with this in mind that I am always grateful for the opportunity to discuss our export control program. As usual, there have been some important developments that may be of interest to many of you, but I would like to begin with a few words about the changes that have occurred in the world that have prompted us to rethink export controls, especially as we look to the challenges and possibilities of this new century.
Although the end of the Cold War has handed us a more complex world 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 seek to 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 -- not to mention the sound economic policies that have produced the longest period of economic growth in our history.
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 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. For example, 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 relies on.
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, this Administration's equation has become: 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 had a strong global position but is under growing pressure from competent competitors. The latter sector is also a classic case of the U.S. shooting itself in the foot. Congressional action to transfer licensing of commercial comsats back to the State Department has been nothing short of a disaster for the industry's ability to compete internationally and for its long term viability. These items are not munitions -- everybody knows that -- and it is unfair to both the industry and the State Department to treat them as such.
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 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.
In this context, our goals for reform have focused squarely on streamlining and liberalization as the requisite means to deal with the global changes I have outlined.
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 selectively on some recent events.
The public debate over encryption continues to be 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 and invaluable consultation with industry and privacy groups, the Administration last September 16th announced a new framework for encryption policy based on promotion of information security and privacy, a new framework for export controls, and updated tools for law enforcement.
With respect to export controls, we published a new rule on January 14 that provides for our new approach based on three simple principles: a review of encryption products in advance of sale, a post-export reporting system that takes into account industry’s distribution models, and review of exports to foreign government end-users. The new rule streamlines our encryption export controls in several ways:
First, any encryption commodity or software, including components, of any key length may now be exported to any non-government end-user in any country except for the seven terrorist countries after a simple technical review. Exports to government end-users may be approved under a license.
Second, products designated as "retail" may be exported to any end user outside the terrorist countries, including governments.
Third, telecommunications and Internet service providers may now receive any encryption product under a license exception to provide encryption services, including public key infrastructure services for the general public. Provision of services specific to governments, such as running a virtual private network for a government agency will continue to require an export license .
Fourth, encryption source code that is freely available to the public may be exported without a technical review. It can be exported or posted on the Internet under a license exception. Products made abroad with the unrestricted source code are not subject to U.S. reexport controls. This releases most "Open Source" code from licensing requirements and recognizes the vitality and importance of this form of software development.
Finally, reporting requirements are eliminated for many encryption items. BXA will work with the exporter to ensure that the reporting requirements reflect their business models. BXA will be able to waive reporting requirements in some cases.
This new encryption rule is an important step forward. It will support the growth of electronic commerce, including business-to-business e-commerce, and it will also help U.S. industry maintain its leadership in research, market share, and competitiveness.
Last July, President Clinton liberalized export controls on HPCs to keep up with this rapidly changing technology, as he had done in 1993 and 1995. At the same time, the President committed to review HPC export control policy every six months in order to ensure our controls keep pace with changing realities. Because Congress mandated a six-month waiting period for the revised controls on exports to military end users in so-called Tier III countries, that increase to 6500 MTOPS did not go into effect until January 23rd.
The President will announce shortly new changes to our policy in line with our commitment to six month reviews. At the same time, I expect him to reiterate his request that Congress shorten the waiting period from six months to thirty days, a change it failed to make last year.
Recently, we revised our regulations for the export clearance process to provide flexibility so that parties could structure their transactions as they wished, but which would also ensure accountability, so 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.
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.
The Automated Export System (AES) is a Census/Customs program to facilitate exports by allowing export data to be submitted directly through electronic submissions. We believe that AES will complement our existing SED Review Program by providing our enforcement arm with more accurate and timely data.
Beginning today, we will accept requests from exporters to file SED data using AES Option 4 (filing SED data after the export takes place). Exporters may use Option 4 for exports of items requiring a license from the Bureau after meeting the criteria outlined by Census for AES participation, and if the applicant is not a denied person and the export is not to a terrorist country. Requests will be approved following our review and acceptance of an exporter's certification and response to several questions that pertain to their prior compliance with our regulations.
We also continue to implement our new License and Enforcement Action Program -- LEAP -- in an effort to increase business understanding of its obligations and rights under our export control system. Exporters should be aware that we are renewing our efforts to enhance compliance. We are standardizing the conditions we apply to licenses. 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 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.
BXA’s Nonproliferation and Export Control International Cooperation Program was established to strengthen foreign national export control systems to keep sensitive materials out of the hands of terrorists and rogue states. Its goal is to foster high-level political commitment, sound legal, regulatory, and organizational infrastructures, and a cadre of capable, well-trained government officials to administer effective national export control systems in nations where there is a significant risk of the export or transshipment of commodities or technologies of concern but which have not developed competent national export control systems meeting international standards. It operates on the presumption that Western nations can have the tightest, most effective export control systems imaginable, but if other nations possessing sensitive materials are leaking them to rogues and terrorists, our security may be as much at risk as if we had no system of our own.
NEC’s principal activity is conducting technical exchanges and conferences. The team organizes experts from BXA’s operating units and other U.S. agencies -- and in some cases from other nations with mature export control systems -- to work with appropriate officials from the target nations to increase their knowledge and skills.
During the six years of the team’s existence, a number of nations, led by Poland and Hungary, have made considerable progress in establishing and developing export control systems of their own. Following are some specific examples of NEC’s accomplishments:
Kazakhstan enacted an export control law based on a draft developed in Washington with Commerce Department legal specialists who also helped prepare implementing regulations.
Russia relies on continued Commerce assistance to help provide a paradigm and encouragement for industry-government cooperation on export controls, such as the unprecedented conferences on industry-government relations and enforcement workshops held in Russia and the U.S.
In January 1998, Ukraine issued an export control decree that was drafted following technical exchanges with parliamentarians and senior officials and comment from Commerce legal specialists.
One of NEC’s current initiatives involves the installation of the Internal Control Program Training Tool at foreign businesses and other enterprises in Russia, Ukraine, Kazakhstan, and several other nations. This tool will provide industry users a means of learning and understanding the process of setting up an internal control program within their own companies and facilitate their compliance with the export control laws and regulations of their respective nations.
There is a growing awareness that America’s information infrastructure - the basis of e-commerce - has become an attractive target for sabotage and so called cyber attack. Since the nation’s critical infrastructures are increasingly dependent on information technology, such attacks would not only create problems for our economy but could jeopardize our safety and security as well.
A Presidential directive in 1998 created the Critical Infrastructure Assurance Office or CIAO an placed it in the Commerce Department to coordinate actions within both the federal government and private sector to protect critical infrastructures.
The National Plan for Information Systems Protection, Version 1.0, issued this month is the first attempt by any national government to develop ways to protect electric systems, communications, and transportation networks, all of which are computer controlled, from deliberate attack and sabotage. The first step of the plan focuses on efforts being undertaken within the federal government to protect the nation’s critical cyber-based infrastructures. The second step will focus on efforts of infrastructure owners and operators as well as the perspectives of the broader business community and the general public.
In addition to coordinating the development of the National Plan, Commerce is helping to foster the Partnership for Critical Infrastructure Security. For the national plan to succeed, the government and private sector must work together in a partnership that raises awareness and, when appropriate, serve as a catalyst for action. A strategy of cooperation and partnership between the private sector and the U.S. government to protect the nation’s infrastructure is the linchpin of this effort.
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 argument that the end of the Cold War and globalization require a new approach.
The end of the Cold War has reduced 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. At home, that means continuing the streamlining that we have been undertaking for seven years and continuing to teach the public and the Congress how our true security interests lie in maintaining our global technology leadership, not in sacrificing it to Cold War mythology.
Abroad, we must continue our work to strengthen the multilateral control regimes, particularly the Wassenaar Arrangement. On the whole, the 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 gray area countries into patterns of responsible behavior, both through direct bilateral dialogues 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 and expand 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. 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. We took some important steps at the plenary last December, but major progress was blocked by Russia and Ukraine. Our work, therefore, is cut out for us this year, and Commerce is working closely with the State Department to that end.
Here at home, we must also deal with those who do not see 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. In recognition of that fact, the National Security Advisor recently made a decision with respect to the so-called "space qualified" items that will Roger will discuss with you in more detail.
We also must 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 for this bill and instead close their eyes to the changes in the world that compel it. 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 reduced the number of controlled items by more than half 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 begin 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 looks ahead rather than behind, but we will need not only the vision to see that 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.