Senate Banking, Housing and Urban Affairs Committee

Subcommittee on International Trade and Finance


Hearing on the Export Control Process


Prepared Testimony of Mr. Larry E. Christensen
Vice President, International Trade Content
Vastera Inc.


10:00 a.m., Tuesday, April 14, 1999

Mr. Chairman and members of the Subcommittee, thank you for the opportunity to discuss renewal of the Export Administration Act and the burdens of doing business under the current export control system. My name is Larry Christensen, and I am the vice president of international trade content for Vastera. We develop international trade software to automate compliance steps and to automate trade documents under the rules of several countries around the world. We provide our software and data to over 100 firms. I am also here as Chairman of the Export Controls Committee for the American Association of Exporters and Importers (AAEI). AAEI has over 1,000 U.S. member firms and is the only national association specifically representing U.S. corporations involved in both importing and exporting before the Executive Branch, Congress and the regulatory agencies. I am also an adjunct professor of law at Georgetown University Law Center where I teach a course on export controls and trade sanctions. Today, I do not speak for Georgetown or for any customers of Vastera. Earlier, I spent eleven years with the Bureau of Export Administration in career positions, where I directed the first complete rewrite of the Export Administration Regulations. In the private sector and in government, I have worked in the area of export controls for twenty years.

The themes of my remarks are effectiveness and discipline. Industry and government both have strong interests in making the export control system as effective as possible. Exporters support effective national security and non-proliferation export controls. The challenge for government is to impose disciplines on the system to avoid ineffective controls that do not advance important interests of the United States but impose on our citizens lost jobs and lost export opportunities. Exporting is good for the United States. It drives the growth in our economy, it provides well-paid jobs for our people, it provides an industrial base necessary for our military, and it generates the revenues for the research and development necessary to move to the next generation of products.

Truly multilateral regimes are effective:

Multilateral regime building is by far the most important work by the Government in the export control process. It is also the biggest challenge for our State Department diplomats. I cannot emphasize enough the importance of regimes that are effective.

Unilateral export controls do not work. They do not deny a target country access to the controlled item. Unilateral controls are often criticized by U.S. industry because they cause U.S. employees to lose jobs and U.S. firms to lose sales, market share, and revenues for research and development. In my judgment, unilateral controls are bad for the national security of the U.S. for yet another reason. Unilateral controls give policy makers and the media the false sense of security that we have solved a given national security problem when, in reality, we have not. National security and non-proliferation controls that are unilateral in practice divert necessary oversight attention and diplomats do not spend the time and effort necessary to build an effective multilateral regime to deny the potential enemy access. Such ineffective regimes are sheep in wolves clothing.

Just what is an effective export regime? It is a cooperative arrangement among countries that represent all the producers of a controlled item and who have agreed to four elements. Those elements are a common list of items, a common set of target countries or target end users, a common set of license triggering events, and a common license application review policy. If a regime lacks any one of these elements, it will be ineffective. If a regime has all four elements, it is a means to leverage United States sovereignty and to achieve goals it cannot achieve on its own.

If the regime members do not include all that countries that produce a given product, then the country that is not a member of the regime will supply the product to target countries; and the regime’s objective in denying access to the target country will not be met. This is simply the law of economics. In the terms used in the Export Administration Act of 1979, there is "foreign availability." The regime and the U.S. export rules implementing the regime are ineffective. The days are long gone when the United States had a monopoly over the production of critical dual use products.

If the members of a regime do not agree on all four common elements, then the regime will be ineffective. For example, if the United States denies the export of a semiconductor fab to China and another member of the Wassenaar Arrangement authorizes its manufacturer to fill the same order, then the regime is similarly ineffective. Under the current terminology, we say that the United States denial has been "undercut" by another regime member granting a license for the same transaction.

During the Cold War, COCOM gave each member country a veto or blackball over the exports to the former-U.S.S.R. of high-end items on the COCOM Industrial List. During the 1980’s, the U.S. regularly exercised this veto with no support from any other country. Our allies resented this, and they are now unwilling to agree to such a procedure in the export control regimes of today—the Wassenaar Arrangement (WA), the Missile Technology Control Regime (MTCR), the Nuclear Supplier Group (NSG), and the Australia Group (AG). However, the United States Government has worked hard to develop so-called "no under cut" arrangements or at least notifications procedures under which one country notifies all the other members of the particulars of its denial of a given license application. In this way, other members are informed of the position and will think long and hard before granting a license that under cuts their fellow regime member.

History tells us that as countries gain experience with each other in a given regime, they are likely to agree to more effective procedures. I think that is the experience of the U.S. in the MTCR, NSG, and AG. The WA has a ways to go. It has a general agreement—albeit unpublished—that the four rogue countries of North Korea, Iran, Iraq, and Libya are targets of the regime. However, the WA does not yet have agreement on other targets. Keeping in mind that all countries that produce a controlled product should belong to the relevant regime, it is important that Russia has become a member of the WA. China is neither a member nor a target of the WA.

Unilateral controls are symbolic only:

All export controls and sanctions come with a cost. There are no cost-free controls. It is on the benefits side that unilateral controls are especially hard to justify. A unilateral control does nothing to deny an enemy or target consignee access to the equipment he needs. That is so almost invariably because there is foreign availability for that equipment from a nation other than the United States.

So what good is a unilateral control imposed by the Executive Branch or the Congress? Usually, a unilateral control achieves nothing in return for heavy costs in lost jobs and lost credibility of U.S. producers. Such controls prompt buyers around the world to view U.S. firms as unreliable suppliers because of the limitations imposed by the United States Government. These are some of the reasons that unilateral controls are often referred to as "shooting ourselves in the foot." The Russian pipeline control and related cases of the early 1980s best illustrate the costs of a misguided unilateral export control. Virtually all of Europe opposed the U.S. policy to curtail exports to the then Soviet Union for the purpose of building a gas pipeline from Siberia to Europe. This resulted in an emotional clash with our allies, blocking statutes, a permanent loss of jobs and market share in the earth moving equipment business, and the construction of the pipeline as originally planned. In the final analysis, the United States paid a heavy price to achieve nothing.

Unilateral controls are especially likely to generate strong complaints from our allies when foreign firms within their jurisdiction are made subject to U.S. reexport controls or when foreign subsidiaries of U.S. firms are directed to follow U.S. rules. This problem goes at least as far back as the 1960s and is illustrated by the French court decision in Frehauf. The U.S. authorities ordered U.S.-based directors of a U.S.-based firm to order its French subsidiary to refuse to honor a contract to sell trailers to another French firm, which planned to export them from France to China. The French authorities directed that French firms honor the contract; and the French court found French interests prevailed. The U.S. authorities basically stood down.

Beware of the "distancing" rationale:

Proponents of unilateral controls would argue that a unilateral control would achieve a symbolic goal of "distancing" the United States from the abhorrent behavior of the government of another country. When you see the Department of Commerce or the State Department use the term "distancing", you can rest assured that represents a type of code word that means the United States Government does not expect the support of allies and does not expect to change the behavior of the target government.

Symbols are important to Americans. Perhaps there are times when the majority of Americans would choose to pay the costs of a unilateral control in return for making a symbolic point. However, my opinion is that the media and the public at large seldom have enough information to judge whether a given unilateral control is worthwhile or even whether it is, in fact, a unilateral control. Unilateral controls are often wrapped in press releases and speeches that mislead the public and give the false impression the control will, in fact, change the behavior of the target government. These policy statements create a false sense of security that something is being done to promote national interests effectively when that is simply not true. In the face of such policy marketing or spinning, it can often take a good deal of political courage to question the control, but these are precisely the circumstances that call for hard analysis of a policy to see just what it achieves and what it does not achieve. In other words, unilateral controls require the highest degree of oversight and statutory discipline to minimize their use and the burdens they impose upon the American people. Unilateral controls should be imposed or continued only after an open, honest policy debate to determine whether the costs of the control are worth the symbolic gesture.

Beware of the "leadership" rationale:

Another argument for unilateral controls is leading other nations to follow the policy of the United States. In fairness to the State Department negotiators, the early days of an export control regime may require some level of patience before reaching a consensus on targets countries or end users, license requirements, and license review policy. The AG and the MTCR both began with very little consensus on these issues and have substantially matured to become more effective. However, the WA is many years old now and does not yet have a consensus on its goals. The U.S. diplomats have worked hard to achieve an effective regime under its notification procedures, but indications in the press are that at least one recent U.S. denial of a license was undercut when another WA member issued a license for the same transaction.

Several U.S. foreign policy controls outside the scope of national security and non-proliferation controls have failed completely to generate support from our allies. Expressions of "leadership" in that context ring hollow. Solid Congressional oversight must cut through such claims and determine whether the symbolism of such a control is worth the costs in lost jobs, lost credibility with allies, and lost vigor in the U.S. economy necessary to support our military.

What are the burdens on business under the current system?

Under the current system, businesses face at least six types of burdens. The newest among these is imposed by the restrictions initiated nine years ago prohibiting the end use of all products in connection with proliferation activity. These end use controls extend to the entire economy and not just items on the Commerce Control List. This is the key element of the Enhanced Proliferation Control Initiative or EPCI.

The United States Government often takes the position that EPCI represents a trade off. Many items were taken off the Commerce Control List, and in return the United States Government shifted important judgments to the private sector. Each firm now has the burden of avoiding exports and reexports with knowledge the buyer is going to engage in nuclear, missile, or chemical and biological weapons end uses. This is not easy to do; and the task brings with it considerable expense and effort.

The second burden is the explosion of names blacklisted by the United States Government. There are more than 3000 names blacklisted by the United States Government; and it is a per se felony for a U.S. firm to deal with anyone of those blacklisted firms or people anywhere in the world. Most of these names are published by the Office of Foreign Assets Control (OFAC) of the Treasury Department and are fronts for embargoed governments. These are called Specially Designated Nationals. OFAC also publishes two other lists. The State Department publishes debarred and sanctioned parties; and the Commerce Department publishes parties denied export privileges as well as non-proliferation entities of concern. Once again, this burden extends to all products in the U.S. economy and to many transfers abroad. The burdens of export controls are not limited to high tech companies any more. This Subcommittee may not have jurisdiction over all the regulatory systems that impose these blacklists; however, all these blacklists create a burden on industry through the export control system. The requirement to vet all sales through thousands of ever-changing entities, located both in the United States and abroad, creates an enormous potential for liability for all U.S. businesses. I believe that it is important for this Subcommittee to understand the whole system and to play a role whenever the Senate addresses these matters.

The third burden on industry is the classification burden. This requirement is to determine whether each product is on the Commerce Control List and, if so, what is the proper individual entry on the Commerce Control List. This burden falls on far more firms than those that make products that are actually controlled. In effect, every firm has the practical task of establishing that its products are not on the Commerce Control List. Without classifying a product, a firm often cannot know whether it needs a list-based license. In my judgment, there is very little Congress can do to reduce this burden. It is inherent in the system. However, Congress can see that exporters continue to have a right to a timely response from the Commerce Department when a firm asks how its product must be classified. That is essential in a fair export system.

The fourth burden is the time delay in getting a required license. Once a company’s products are classified, it can determine whether a list-based license is required or not. If a license is required, then the firm must submit an application and wait for an answer. The time consumed in this process is frustrating to industry because this delay can cause the loss of an order. The time required for the interagency process to pass on a license application is a feature of the export control system that must be disciplined. Congress should review this performance regularly; and the EAA should codify time limits for review and escalation of license applications. Codification of the current Executive Order would be a good feature for a renewed EAA in my judgment. However, many in industry would argue that the Executive Order allows the United States Government too much time to review an application.

The fifth burden on industry is the uncertainty of jurisdiction among the agencies and complexity driven by the different processes and standards of the different agencies. The United States Government is the only government in the world I am aware of that splinters export-licensing jurisdiction so widely. The regulatory definitions and systems are quite different among the agencies (Commerce, State, Treasury, etc.). As between State and Commerce, some uncertainty of jurisdiction remains despite the order of President Bush to remove commercial items from the U.S. Munitions List.

The sixth burden of industry is the challenge of dealing with different countries and procedures in every country of the world. Even a medium sized manufacturing firm in the United States will often have manufacturing or distribution centers in five other countries. Each has different rules and processes. Once again, this underscores the importance of developing truly multilateral controls.

So where are the snags?

The Government has been unable to publish many of the names of entities that are engaged in proliferation activity. I understand that this is often due to State Department objections based upon diplomatic concerns that are difficult for me to understand. If the United States Government is concerned with an entity, it should ordinarily publish its name. If dealing with that entity would violate the end use restrictions against exports with knowledge of a missile, nuclear, or chemical or biological end use, then the Government should publish that name. However, I believe the State Department has been far too reluctant to concur in the publication of entities of concern. Diplomatic sensitivities should give way to clear guidance for non-proliferation controls. It is the intelligence community that is and must be the source of such names.

Of course, some entities will not and should not be published for fear of compromising intelligence sources and methods. The intelligence community plays a critical roll in license review and threat analysis as well identifying entities of proliferation concern. The intelligence community is the necessary window on the facts as they stand around the world. A strong commitment of intelligence resources is essential for the effective operation of the system.

The end result from the failure to publish names of proliferation concern is to shift much decision-making to industry without the best guidance the government can provide. It leaves industry in a type of "gotcha" quandary. Government can and does question end use judgments of industry after the fact. Information comes at a cost to industry and is seldom perfect. The intelligence community often has little or no information about a given foreign buyer and yet every export of every product (including refrigerators and hammers) is subject to end use licensing requirements. If the Government is to continue end use controls—and it likely will—then it is important to publish proliferation entities of concern. Entities of concern and regulations generally are not published in the absence of interagency consensus.

One step the Government could take to lighten this burden is to limit the scope of products subject to end use controls. However, interagency efforts to do so have long met without success.

Not everyone in industry would agree with the conclusion that the Government should publish more entities of proliferation concern. The recent publication by the Department of Commerce of over 200 names of firms in India and Pakistan did respond to industry’s desire for more guidance. It also responded to the nuclear tests in those countries. Many U.S. exporters believe the list is too broad. In effect, the lesson is to be careful what you ask for because you may get it.

The increase in microprocessor speed will recontrol personal computers unless the control levels are raised, and the computer and microprocessor industry has made its position clear. Another snag in the current system is the requirement for a document from the Chinese Government to support certain exports of computers to China. The responsible Chinese agency will be inundated with requests for such documents because of the above-described increase in the operating speed of personal computers. I understand the Executive Branch is working on a solution to the problem regarding documents. Another snag in the system is that the time to process license applications went up last year. That was largely associated with the requests for more than 350,000 documents. I am hopeful that review times by Commerce will go down in 1999. Licensing review times at the State Department are going up under the International Traffic in Arms Regulations, but I do not know why.

China:

China is on everyone’s mind both in industry and in government. Other countries of the world view China as the likely largest single market of the world early in the next century. Other countries do not consider China an enemy or a direct threat to their national security. We are engaged in a great debate in the United States to determine our policy toward China. I do not know how that debate will end, but I am confident of one important factor that I think should be considered in that debate. Our allies have no interest in making China the target of the Wassenaar Agreement or any other national security export control regime. If the United States Government were to impose a unilateral tightening of controls on China, I believe there is little or no chance that our allies would follow such a policy.

As for the non-proliferation regimes, China is a member of the NSG. As a practical mater, the NSG could not hope to be effective without the support of China. Of course, China is also a nuclear weapons state and a party to the Nuclear Non-proliferation Treaty (NNPT). In other words, China has a treaty right to maintain nuclear weapons under a treaty ratified and long supported by the United States. The U.S. has had its disputes with China over its nuclear trade with other nations. My personal view is that the nations of the NSG have more leverage over and powers of persuasion with China as a cooperating member of NSG than would be the case if China were not in the NSG. The same is true as far as China’s obligations under the NNPT.

The topics of espionage and campaign finance have confused and made more difficult a clear discussion of export control policy toward China. This is especially true of missile technology. Frankly, the business community is concerned about legislation to renew the EAA in this environment.

My view is that the highest objective of the United States is to convince China that it is in China’s self-interest to refrain from missile trade and to join the MTCR. Career public servants at the State Department have indicated recently that they have made progress toward this goal. Of concern to me is their conclusion that if the United States Government chooses to make China an enemy, then it will be more difficult to bring China into the group of nations committed to stemming the proliferation of missiles. The MTCR can be far more successful with China as a cooperating member. At the end of the day, the United States can and will do that which is in its self-interest. Obviously, the relationship with China is complex. Among those complexities is the self-interest in the United States in seeing that China cooperates with the non-proliferation goals of the MTCR.

Renewal of the EAA:

The first order of business in renewing the EAA is to do no harm to the export system. Some have considered a statutory veto in the staff of one department or another. In my judgment, that would be a bad mistake. It could mean the return to the poor performance of the 1980s when license applications languished for years. That is not a typographical error. Some license applications were neither granted nor denied for years. Of course, many purchase orders were lost simply by reason of the inability of the United States Government to make a decision. U.S. industry and American workers deserve better treatment. They should have a right under the EAA to timely decisions and to a resolution of license applications within the Executive Branch.

A veto by the career staff of any department could result in unending delays. In addition, it is simply inconceivable that superiors might be precluded by statute from reviewing interagency conflicts generated by their subordinates. One of the key features of the current system that is necessary is the escalation procedure. The President and the Cabinet have not and will not see more than one or two cases over any given two-year period. However, an escalation procedure up through the levels of the Executive Branch (office directors, Assistant Secretary level, cabinet, and the President) is absolutely necessary to discipline the system. A career public servant will not often take positions that his superiors cannot defend in the interagency process. That is as it should be. The potential for a different decision at higher levels in effect disciplines the initial decision. No one would suggest that a Senator’s vote should be subject to a veto by each member of his or her staff. Similarly, officials in the Executive Branch should not be hamstrung by a statute that imposes a type of tyranny of the staff.

The EAA should recognize the differences between multilateral controls and unilateral controls. It should then impose substantial disciplines upon the creation and extension of unilateral controls. Frankly, industry is skeptical that adequate disciplines can be developed. The current system requires that foreign policy controls sunset each year unless renewed by the Executive Branch sending a detailed report to Congress. A unilateral foreign policy control has been removed only once under this provision. That involved certain controls on oil field equipment destined for the former Soviet Union. At an absolute minimum, the Executive Branch should be required to report that a control is unilateral so that it may be subjected to a debate regarding its value. Oversight dedicated to minimizing unilateral control burdens is also important. Disciplines on Congressional imposition of unilateral controls are also necessary, and that is the subject of the debate initiated by Senator Lugar in the last Congress and supported by industry through U.S.A. Engage. From the perspective of industry, unilateral controls present the same problems whether implemented by the Executive Branch or the Congress.

On another matter, it is essential that the renewed EAA provide some method for industry to petition the government to raise facts that justify a measure of relief. The Export Administration Act of 1979 provided for certain relief when the petitioner could establish foreign availability. The Administration’s bill took a bit different approach that increases the grounds that support a petition but leaves the President a bit more discretion to deny relief even when a petitioner otherwise establishes his right to relief. The Senate should work long and hard to create disciplines for the use of unilateral controls.

Section 12(c) of the Export Administration Act of 1979 provided for the confidentiality of certain information provided by industry to the Department of Commerce such as license applications, classification requests, and other information necessary for the Executive Branch to do its job. The protection is important for the integrity of the system and to encourage industry to participate fully in the process. This protection must be included in any renewal of the EAA.

In my judgment, it is time for Congress to pass a limited right to judicial review from final administrative action. No such right now exists. In the 104th Congress, two members of the other chamber spent three days in nearly constant negotiations with the Office of the Chief Counsel for Export Administration. The result is language I urge the Senate to consider seriously.

In terms of legislative processes, industry is eager to see a working draft. That will likely generate much greater communication with the Subcommittee. The above list of recommendations is by no means comprehensive. The devil is in the detail when it comes to export controls and trade sanctions. A working draft will permit industry to give more specific recommendations, will help forge a consensus, and will provide a uniform structure within which industry can operate when the bill is passed into law.

The Subcommittee faces a difficult challenge in drafting a bill to renew the EAA. However, the Subcommittee has a long, distinguished record in the area of export controls; and I am confident that the Subcommittee can meet its goals. It has now been eleven years since the oversight committees of jurisdiction have amended the EAA in legislation that has passed into law. Rather, export control law has been shaped by amendments to the National Defense Authorization Act and funding bills for foreign aid. I am encouraged that the Banking Committee is asserting its authority; and I applaud the Subcommittee for holding these hearings.


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