Hearing on Establishing an Effective Modern Framework for Export Controls.

Mr. Chairman: Thank you for the invitation to address the Committee on Banking, Housing, and Urban Affairs regarding legislative efforts to craft the Export Administration Act (EAA) of 2001. I direct the Washington, DC office of the Center for International Trade and Security of the University of Georgia (CITS/UGA), a non-partisan institution that specializes in research, teaching, and service related to US and international export control issues. Among other things, CITS/UGA is the only institution that makes periodic comparable and comprehensive assessments of national export control systems, having done assessments on more than two dozen countries since 1996. This year, I am also a Visiting Scholar at the Center for Strategic and International Studies (CSIS), where I assist the staff in their work on export controls. Please note that these remarks represent my personal views and not necessarily those of either CITS/UGA or CSIS.

Let me preface my remarks by noting some assumptions behind my views:

• Proliferation of nuclear, chemical, biological, and other weapons of mass destruction (WMD), coupled with the proliferation of their means of delivery, poses the greatest threat to US national security today and for the immediate future;

• Export controls provide a relatively low-cost (but not no-cost) approach to delaying the diffusion of critical proliferation-related technologies or increasing the costs of obtaining WMD; and

• National and multilateral export control systems always need improvement as long as determined proliferators seek WMD systems;

Developing a prudent export control system always demands a delicate and coherent balance of military, economic, and other interests that constitute US national security policy. As the members of this Committee know, the many conflicts among the competing stakeholders has foiled a decade’s worth of efforts to produce a new EAA.

Without the direction a legislative mandate confers, the United States has not sent clear messages regarding export controls to friends and foes alike. This has several immediate and long-term consequences. For example:

• The United States, almost by default, is ceding leadership on export controls to the European Union (EU). On list enumeration, on countries of concern, on controls on intangible technology and deemed exports, and perhaps on catch-all controls, EU standards are becoming the global norm. The attractions of joining or working with the EU, where export controls have become mandatory for prospective members (an acquis communitaire), helps explain why many countries adopt EU-like export controls. Nonetheless, why the EU and the United States have not reached common ground on many export control practices stems in part from a lack of consensus on US policy.
• The four major supplier arrangements (i.e., the Australia Group, the Missile Technology Control Regime, the Nuclear Suppliers Group, and the Wassenaar Arrangement) have made few improvements in the last five years, despite general agreement that the infrastructure for multilateral coordination remains appallingly weak. This is not limited to the lack of headway, which is likely to persist, regarding stronger "no undercut" procedures in the Wassenaar Arrangement or to the lack of agreement on how to treat China. Many foreign officials criticize the arrangements for, among other things, a failure to share information on national policies, poor exchange of intelligence on end-users of concern within and between arrangements, and inadequate threat assessments for controlled items. Given that entities trying to acquire WMD always try to exploit weaknesses in the multilateral system, this means that the multilateral system has not merely stagnated but it has become weaker over the last five years.
• US officials constantly find themselves in the hypocritical position of telling foreign officials and industry representatives that their governments need strong legal frameworks for export controls. This undermines trust and creates practical difficulties. Discussions with US officials about encryption export controls, for example, prompted the People’s Republic of China (PRC) to introduce very stringent controls in late 1999. By that time, however, the United States had reversed course on such controls. Although the overwhelmingly negative response from Japanese, US, and European companies induced Beijing to adopt a more liberal interpretation of State Council Decree 273, confusion over the status of Chinese controls on encryption items still reigns.

Without developing a solid consensus on how the United States should approach export controls, it will be ever harder to create coherent ideas and incentives that will allow the United States to reassert its leadership effectively. My primary recommendation to the Committee, therefore, is to keep at this until Congress enacts a prudent, even if not perfect, EAA in this session.

Building a new consensus must overcome the substantial distrust and lack of understanding that exists between industry and the government. In a recent survey of 120 companies conducted by CITS/UGA, the compliance activities of US exporters varies considerably, with scores ranging from 54 to 94 on a 50-100 scale (producing an overall average of 76). While many US exporters have well-developed export control compliance programs, it appears that others do far less than "best practices." Creating incentives for industry to adopt --- voluntarily and appropriate to the company --- better compliance practices would foster more effective export controls and demonstrate why government should place more trust in those companies that do follow "best practices." Internationally, many Japanese and some European companies already have sophisticated internal compliance programs, so this is not a matter of placing US companies at a competitive disadvantage. Indeed, better compliance practices may make companies more profitable by improving their logistical systems. Calling for improved compliance practices would also mean that the United States would not ask more of Russian and Chinese companies than we do our own as we do now in some instances.

Partnership, however, implies mutual responsibilities. In return for tighter industry compliance practices, the US government might, for example, permit more special licensing processes for dual-use transactions between companies that meet some standard of compliance. These incentives might parallel those outlined in the Defense Trade Security Initiative.

In addition, the United States government could share information on end-users of concern in a more timely fashion to a more people. Under current practices, if the end-user is not on the Entity List, the Denied Parties List or something similar, an exporter often only finds out about an end-user problem through a license denial or similar notification. Other exporters, however, will not get this information until they too attempt to acquire a license. Worse, companies ill-informed about the ramifications of the Enhanced Proliferation Control Initiative (ECPI) may proceed with a transaction believing that no license is required. Current rules also appear to direct immoderate government enforcement resources toward addressing minor (and often self-reported) violations. While a good compliance program already serves as a mitigating factor in enforcement decisions, limited enforcement resources puts a premium on directing those resources to where they will improve effectiveness the most. A new legislative consensus behind US export controls should generate a new strategy to direct enforcement resources toward the objectives of a revamped EAA.

Most important, Section 202 includes language to require new threat assessments associated with each item on the National Security Control List. Sharing persuasive threat assessments with industry and especially with our allies is a critical step in reforming US export controls to meet the challenges and opportunities of the twenty-first century. A large number of foreign officials or representatives from industry do not appear to understand the specific security threats related to individual controlled items. A solid threat assessment makes for a much more compelling argument for compliance than vague references to national security. In addition, a rolling review of the threat associated with each controlled item would help keep the US and multilateral control lists from becoming glaringly obsolete.

One of the more interesting elements of S. 149 comes with the creation of the Office of Technology Evaluation. The Office will undertake a considerable number of crucial actions, particularly identifying and monitoring foreign availability, mass-market evaluations, and assessments of various national export control systems. Although all three activities are important, let me focus on the evaluation of foreign export control systems (see Sections 203.C.3-7). Assessing foreign systems plays an important role in determining into which tier a country falls (Section 203), evaluating the multilateral arrangements (Section 601), and identifying if violations of national laws adopted by other countries are violated (Section 604).

Somewhat surprisingly, few comparative assessments of national export control systems exist. Along with the more comprehensive comparisons made by CITS/UGA, Saferworld (UK), the Stockholm International Peace Research Institute (SIPRI), Vastera, Ltd., and the EU have produced some studies in recent years that compare several aspects of national export control systems. One conclusion stands out --- countries have not harmonized their export control systems very closely, even among those countries with a history of coordinating their systems through the EU or the now defunct Coordinating Committee (COCOM). The differences identified in the lengthy negotiations with Australia and Great Britain, for example, over the Defense Trade Security Initiative are illustrative of how little harmonization exists. Taken together, the lack of assessments and the absence of harmonization indicate that serious evaluations of national export control systems and the four multilateral arrangements will require significant amounts of original data collection.

To give you an idea of the scope of the problem, let me draw on my own experience. Over the past five years, I have conducted or supervised assessments of the export control systems of the PRC, Hong Kong, India, Japan, South Korea, Taiwan, and the United States, as well as contributed to similar studies of Argentina, Cuba, the Czech Republic, Israel, all the republics of the former Soviet Union, and the United Kingdom. Retrieving accurate, comprehensive, and reliable information for these assessments requires a well-designed research protocol and considerable work in-country, which is not inexpensive. Using our protocol, for example, it typically takes one investigator about four months to conduct an initial assessment (although follow-up monitoring involves a smaller investment of resources).

Given the number of countries involved, especially classifying their systems across categories of controlled items, the Office of Technology Evaluation will need to apply considerable resources to this task. In other words, the assessments could become a bottleneck for creating and adjusting the country tiers, evaluating harmonization for the multilateral arrangements, and other legislative requirements if they receive insufficient support from Commerce and inadequate assistance from Defense, Energy, and State.

I would like to thank the members and staff of the Committee for their efforts in drafting a new EAA. I will be happy to pass additional comments on specific sections of the legislation on to the staff. Given the history of this legislation, several of the proposed sections will bring out significant opposition, so I think it is worth keeping several points in mind in steering the bill through the legislative waters:

• The export control systems of other countries are not harmonized with that of the United States and the infrastructure to coordinate this divergent systems is very weak. Compromises that assume otherwise will only succeed by serendipity.
• Focus on incentives (and disincentives) that will make the relationship between government and industry more of a duet than a duel.

Most important, the United States needs a legislative framework that will serve its interests in the post-Cold War world. Without developing a solid consensus on where US export controls should take the country, the United States will cede its leadership role by default. Thank you again for the opportunity to speak before the Committee.

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