Senate Banking, Housing and Urban Affairs Committee

Subcommittee on International Trade and Finance


Hearing on the Reauthorization of the Export Administration Act and
Managing Security Risks for High Tech Exports


Prepared Testimony of Mr. John Douglas
President
Aerospace Industries Association


9:30 a.m., Tuesday, March 16, 1999

Mr. Chairman:

I am John Douglass, President and CEO of the Aerospace Industries Association. I am pleased to have the opportunity to present our views on the impact of export controls on our industry, with particular reference to multilateral controls. AIA is the trade association that represents the major manufacturers of commercial and military aircraft, helicopters, missiles, satellites, engines, and related aerospace subsystems. It might be noted that the industry in 1998 exported products valued at $59 billion, and its positive sectoral trade balance of $37 billion is the largest of any sector in the U.S. economy. In fact over 40% of the aerospace products manufactured in the U.S. are exported. Not surprisingly, our industry is deeply concerned with export control legislation, regulation, and administration.

I would like to briefly explain that while the world has changed in the past decade, we believe the export control laws and regulations have not changed accordingly. We are concerned that if we do not revamp our export control system, we will weaken the very industries that produce the technology on which U.S. security depends. In order to avoid such a situation, we must rely more on multilateral controls. This, in turn, means we must be realistic about how we gain consensus among countries that have the technology we hope to keep from adversaries and potential adversaries.

Background

During the Cold War, the U.S. was willing to sacrifice economic interests for the sake of limiting the ability of the Soviet Union to improve its military capabilities and to discourage other countries from joining the Soviet camp (or punishing those that did). Other industrial democracies who recognized the Soviet threat and the importance of the U.S. nuclear umbrella agreed. We were able to obtain relative consensus on the importance of keeping a variety of technologies from the Soviet Union that would directly help them build their weapons systems or improve their economy in a way that would allow them to support a larger military establishment.

It was also true that new advanced technologies generally originated from government supported defense research first applied to military projects. These included such technologies as radar, nuclear energy, computers, lasers, sensors, satellites, and advanced materials. These technologies gradually migrated to the civilian sector. Technology and plans for hardware were generally recorded and transferred on paper.

The Soviet Union has now collapsed, and there is greater awareness that both the economic welfare and security of countries in the future will increasingly depend on their ability to compete in the global marketplace. There is little consensus among our fellow industrial democracies as to how to deal with countries such as Russia and China. Furthermore, those countries themselves have become both purchasers and suppliers of advanced technology. In particular, China has become an important market for many countries, and is regarded as one that will steadily expand. Thus the tradeoff between security and economic benefits has become more complex.

At the same time, the distinction between military and commercial products has become less clear. The military is expanding the share of its budget that goes into such activities as communications, data processing, imaging, and simulation, all areas of accelerated commercial activity. Furthermore, in order to hold costs down, the military must turn to standard or near standard commercial products to meet many of these needs. But lower costs and rapid technological innovation in the commercial sector are only possible for companies producing for a global marketplace, with the flexibility to rapidly penetrate new markets and take on foreign partners.

These changes are reflected in the aerospace industry. Ten years ago over 60 percent of our business was with the Department of Defense. The U.S. government as a whole accounted for three-quarters of our sales. Today the government accounts for about 40 percent of our sales, and of the remainder; foreign sales amount to 75 percent. Commercial space activity is our fastest growing sector, with sales having jumped from 1% to 9% of sales in the past decade. Increasingly, the Department of Defense looks to our commercial research, development, and products to meet its needs, and to our foreign sales of military equipment to keep crucial defense lines open and reduce unit costs to the U.S. military.

Finally, the pace of high technology business has increased enormously. Designers work on common electronic bases in real time, often in several companies and several countries. Improved production techniques have reduced the time needed from order to delivery. In the case of commercial aircraft, it has been reduced from three years to eighteen months, with a current target of nine months. Commercial companies, and increasingly the military, expect contractors to hold inventories and deliver parts anywhere in the world within 48 hours. Information is no longer transmitted on paper, but through nearly instantaneous electronic communication.

The philosophical underpinnings, legal structure, and administrative framework for U.S. export controls, which are intended to deal with such technology, have not changed at a comparable pace. As a result, there are too many export licenses required, and too many agencies are involved in the review and administration of such licenses. The process to obtain a license from beginning to end takes far too long.

Unilateral Versus Multilateral Controls

While the importance of exports to U.S. high technology industries has increased dramatically over the past decade, our share of the world market has generally declined for those same industries. This is because there are few technologies in which the U.S. dominates. We may be the best, but we are seldom the only player in any technology arena. Thus if technologies and products are to be denied from certain countries, it is possible to do so only with the cooperation of other suppliers. Unilateral controls tend to shift the source of supply away from the U.S. damaging our industry, while seldom preventing the buyer from obtaining the desired technology or commodity.

During the Cold War, under U.S. leadership all industrial democracies participated in the Coordinating Committee for Multilateral Export Controls, better known as CoCom. This multilateral arrangement had a target agreed upon by all participants – the Soviet Bloc countries. There was a list of controlled technologies, and any country could impose a veto on the sale of any item on the list of products to any target country.

With the end of the Cold War, the consensus among the industrial democracies declined markedly. The best the United States was able to do was to cobble together what is known as the Wassenaar Arrangement, which included the CoCom states plus Russia and several other members of the former Soviet bloc. Unlike CoCom, countries act on the basis of "national discretion." No country has a veto over another country’s actions. The only agreed targets for control of technology and weapons are four pariah states – Iran, Iraq, Libya and North Korea. Of greatest importance, the Wassenaar agreement does not address the issue of technology transfer to China, and clearly other Wassenaar members do not support the kind of export controls for that country as the United States does.

Other multilateral control groups – the Missile Technology Control Regime, the Australia Group (chemical and biological weapons and precursors), and the Nuclear Suppliers Group, all have a narrower agenda and agree to a list of specific products which require export licenses. Unfortunately, in each case some countries, which are suppliers of the controlled products, do not participate in the agreement. In most cases, the U.S. tends to be more conservative in its approach as to what the lists actually include when it comes to specific products and subcomponents. The license processing time is longer than for our competitors. Nonetheless, U.S. companies are less disadvantaged when most of the major suppliers operate under roughly the same restrictions as we do. Clearly we would urge the Congress and Administration to put more emphasis on finding ways to create greater consensus among suppliers about what should be controlled, on whom we want controls to be imposed, and the most equitable and effective means to exert those controls.

What and Whys of Controls:

If the U.S. is to gain greater consensus for multilateral controls, we should first review how we deal with these issues in our own system. There would seem to be three reasons for imposing export controls. Each reason encompasses a different but often overlapping cluster of products:

Currently the Arms Export Control Act (AECA) provides the statutory framework for controls of weapons systems, while the Export Administration Act (EAA) is basically responsible for the second two categories. Yet, the last Congress transferred a clearly commercial product, communications satellites, back to the munitions list as if it were a weapons system. On the other hand, foreign policy controls, which one might think were the province of the State Department, are administered by Commerce. Both State and Commerce rely on the Department of Defense for advice on technical matters. Indeed, most of the 45,000 licenses the Department of State issues each year have little to do with foreign policy issues, but rather technical concerns with the transfer of weapons, parts, and technology. The blurring of distinctions among weapons, technology, and foreign policy is likely to become even more complex in the years ahead. This certainly leads to the question of whether current law, including a modified EAA, is still appropriate.

Legal Framework:

Several laws currently provide the statutory framework for export controls. In addition to the Export Administration Act and the Arms Export Control Act (AECA), the Trading with the Enemy Act and the International Emergency Economic Powers Act (IEEPA) are also used to control exports and international transactions.

These laws fall under different jurisdictions in the Congress, and are not necessarily under parallel committees (e.g., the EAA is under the House International Relations Committee and the Senate Banking Committee). The laws are not always mutually consistent, and ascribe primary administrative authority to different agencies. A strong argument can be made that in the long run all export and financial controls ought to be consolidated under a single permanent act.

Administration:

Currently, the Department of State administers the AECA; Commerce the EAA; Treasury the Trading with the Enemy Act; Treasury and Commerce the IEEPA. This has resulted in overlapping and confusing regulatory systems, often for the same goods, technology, and services. It has also led to unique and duplicative licensing forms, administrative staffs, and computer systems. Congress might examine whether one agency could serve as a single administrative shop for all export licenses. This would provide industry with a consistent, more user-friendly regulatory system, a "one-stop shop" for license applications, and hopefully lead to a single computer system and reduced number of forms and data collection.

Assigning the responsibility to receive and process license applications to one bureaucracy would in no way be intended to alter the policy responsibility or involvement of specific types of license applications. Statute and executive order could clearly delineate which agency has primary responsibility for policy for each type of export license, which agencies have a right to participate in the license decision process, and how disputes among agencies should be resolved.

Licenses:

From industry's perspective, far too much time is expended by government officials and industry employees handling license applications for exports of parts, technical data, and routine end items to countries certain to be approved. All too often license applications are even staffed to several agencies for "information" or courtesy where there is clear policy precedent that the licenses will be approved.

We suggest examining at least three approaches that might reduce the time and expense of the licensing process, and assure government personnel are used only to look at license applications involving real policy issues:

  • Program Licenses: When a license is granted for the sale of a specific end item, the license could also provide authority to allow a company to report on all subsequent shipments of spare parts and technical information related to that sale. This should apply to parts and information which do not alter the capabilities of the equipment. Companies could provide annual reports to the administering department. The government could rescind the program license at any time if circumstances warranted. If a foreign partner or customer should request technology or equipment outside of the scope of the project license, the company would have to request separate license approval.

  • License Free Regions: Licenses might be eliminated for a range of products for countries that maintain similar export restraints as the U.S. Such groupings might include the European Union and members of various export control organizations, such as the Australia Group and the Wassenaar Arrangement. Similarly, certifications involving transfers of U.S. origin goods to third countries might also be eliminated for transfers to countries or groups of countries with similar export restraints as the U.S.

  • Self Policing: The U.S. government licensing agency might certify individuals in companies to issue licenses on behalf of the federal government for certain types of products. These might include spare parts, technology, or equipment required for a joint program, or other activities involving a relatively high volume of licenses with a minimum policy content. The Federal Aviation Agency (FAA) has such a program with aerospace manufacturers in which designated company employees are delegated authority on behalf of the FAA Administrator to perform certain inspection and certification responsibilities. Obviously, such companies would need a strong compliance record. The designated employees also would be required to keep appropriate paperwork, provide notifications of decisions to the government, and be subject to government audit.

  • Industry Safeguards:

    Industry urges that a revised EAA and any future new legislation provide certain safeguards, many of which exist in one form or another in current law. These would include:

  • Foreign Availability: Except for very unusual circumstances, (mostly related to lethal military equipment), U.S. companies should be allowed to sell products that are, or are expected to be, available from other sources. Shifting the source of supply does not punish the importer; it punishes the exporter. A system to judge foreign availability should be rapid and look at future and current availability. Some product life cycles, particularly in the electronics areas, may be as short as eighteen months. A decision made after foreign competitors have a strong foothold in a market is not helpful.

  • Contract Sanctity: In general, companies should be able to honor existing contracts, except when multilateral sanctions cut all contracts. Under circumstances where contracts cannot be honored because of government controls, any non-performance breach of contract penalties owed by U.S. companies because of U.S. Government actions, should be compensated by the federal government.

  • Support of Formerly Exported Products: As a general rule, companies should be able to support products previously exported to a country, even if new sales are prohibited. This is particularly true for product support related to safety. This is especially important to my industry. I might also note that commercial aircraft, even from countries under U.S. sanctions, frequently carry U.S. citizens and close allies, and fly over the air space of a great many countries.

  • Multilateral vs. Unilateral Controls: In general, unilateral controls should only be imposed as an interim measure leading to multilateral controls. There should be a time frame within which the U.S. would succeed in gaining substantial multilateral support for controls, or U.S. controls would be terminated.

  • Economic Impact: Export controls are politically attractive because they are essentially an unfunded mandate. The cost of the controls is imposed on labor and industry and is not reflected in the federal budget. We suggest several remedies. Imposition of unilateral export controls should require a Congressional Budget Office estimate of the cost to the economy of such controls. Workers displaced from their jobs by such controls should be eligible for the same worker training and relocation programs as workers affected by imports.

  • Time Limits: Economic sanctions, particularly unilateral foreign policy controls, should be of limited duration. The U.S. has a large number of export sanctions in place which have clearly not accomplished their objective. However, there is no politically acceptable way to remove them. Sanctions that automatically terminate unless a new decision is taken help alleviate that situation.

  • Licensing Processing Time: Except in unusual circumstances, there should be some time deadlines imposed on the process by which licenses are reviewed by the Department of Commerce and other agencies. This is particularly important for commercial products generally purchased by private companies as part of an endeavor intended to return income to investors. If U.S. companies cannot act in competitive situations in a timely fashion, foreign bidders will have a clear advantage over U.S. companies.
  • Industry would support an updated EAA that incorporated the above safeguards. However, such a bill ought be passed for perhaps a three-year period, with the clear understanding that during that time the Executive Branch and Congress would review all existing export control legislation. The intention should be to help lay the groundwork for the next Congress to revise all export control legislation, perhaps in a single act, to meet the requirements of the next century. It could also serve to improve the prospects of gaining the kind of multilateral cooperation that is absolutely necessary if an export control regime is to have any possibility of accomplishing its objectives.

    AIA hopes that the above comments provide an overview to help Members in their deliberations concerning an extension of the EAA. AIA also hopes this information assists in future deliberations on totally new export control legislation to structure a more effective and economically sound export control system for the next century.


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