Hearing on Emerging Technology Issues and Reauthorization of the Export Administration Act


Prepared Testimony of Mr. Frank C. Carlucci
Chairman
Nortel Networks


10:00 a.m., Thursday, June 17, 1999

Mr. Chairman, and distinguished Members of the Committee. It is a pleasure to have been invited to appear before you today. I am Frank Carlucci. I have been a member of the board of directors of Nortel Networks since 1989 and became the Chairman of the Board in April of this year. I joined the Carlyle Group in 1989 where I am now Chairman. From 1987 to 1989, I was the Secretary of Defense and previously served as President Reagan's National Security Advisor in 1987. In my capacity as both Secretary of Defense and National Security Advisor I dealt with our countries export control laws and regulations.

I was asked to address how export control policy should be applied to "emerging" or "new" technologies. My comments will be made from the perspective of Nortel Networks, a world leader in the developing technologies for telephone and Internet protocol-based data, wireline, and wireless networking services.

Nortel Networks is one of the world's largest suppliers of digital network solutions, and the most broadly diversified developer of high capacity switching and optics technology. We have over 100 years experience in building communications equipment. And we are at the heart of the Internet. In fact, over 75 percent of all Internet traffic travels over Nortel Networks infrastructure. We are a global company with a presence in over 150 countries where we work with customers to build and deliver communications and IP (Internet Protocol)-optimized networks or what we call "Unified Networks." No other company in the world can deliver global applications and services that merge new and existing networking elements and technologies into a seamless open network. The Unified Networks approach gives our customers distinct advantages while simplifying network operations and reducing costs.

Some of the most innovative recent developments in this area relate to the convergence of telephone and data networks. For example, just last week we announced eleven new products; all designed to facilitate the use of the same networks for voice and data (including Internet) transmissions.

Nortel Networks is a global company. And while we have Canadian heritage, our U.S. presence has been steadily increasing over the past 25 years and we have had more employees here than anywhere else for years. And since our merger with Bay Networks of Santa Clara, California last fall, we are an even stronger U.S. company. We continue to have more employees in the U.S. than in any other country. About 35,000 of our 75,000 worldwide employees work in our U.S. facilities. These 35,000 employees contribute to annual global U.S. exports of over $2 billion. Nortel Networks has an invested base in the U.S. of $10 billion, and growing. And all four of our business units are based here. Nortel Networks is traded on the New York Stock Exchange and other major stock exchanges around the world.

I want to emphasize that notwithstanding the end of the Cold War, there remain important threats to U.S. and world security. It is clear that we still need export controls for various categories of commercial, dual-use products. But the parameters of export control policy have changed considerably since I was the Secretary of Defense.

First, with very few exceptions, our enemies are no longer obvious or unified. That is why we presently are not able to maintain a strong and comprehensive multilateral system of export controls.

As a practical matter, it is very difficult to restrict effectively exports of commercial products to countries with which we have normal trade relations. We may sometimes be uncomfortable with our former adversaries, but we are fully engaged with them economically, and it is in no one's best interests to increase tensions unnecessarily by disengaging from them -- especially if we are acting alone. Moreover, if we act alone, we are unable to fulfill our policy objective, since the technologies usually can be provided by other countries. The end result is that only U.S. industry is harmed.

Second, the sources of new technologies have shifted. In the past, much of the most important technologies were created by the military, or by private industry under contracts to the military, and commercial uses for those technologies were developed later. Today, most of the exciting new technologies are being created by private industry for commercial purposes, without involvement of the government. Many of the new technologies, especially those relating to communications and the Internet, have become tightly integrated into the way in which commerce is now conducted. Although those commercial products in some instances may be capable of adaptation for military purposes, it will become increasingly difficult for the government to keep abreast of new developments and to control the direction of development.

Third, the pace of technological change and development has greatly accelerated. This has happened not just for computers and software, but for all forms of high technology products, including communications equipment. "Moore's law", first formulated in 1965, states that the capacity of computer chips will double every 18 months; we are finding that the pace of improvements in our business is actually faster than that today. Export controls that are pegged to quantitative limitations such as speed and capacity will quickly become outdated.

Fourth, users are demanding higher levels of interoperability, so that they can use any manufacturer's products with any other's. This means products in many cases must be designed with "open architectures," so that unrelated companies can design their products to be compatible with each other. This, in turn, will make it even easier for a foreign purchaser to buy third country products if U.S. products are not available because of export control restrictions.

An example of this new interoperability is a product introduced earlier this year by Nortel Networks called SUCCESSION Network. SUCCESSION is an open, standards-based solution that allows a telephone company to preserve its existing equipment investment while allowing the telco to deliver the new types of data and e-commerce services being demanded by their business customers. SUCCESSION can be used with any vendor's network equipment.

Fifth, the advent of new types of communications technologies, such as the Internet, has led to the decentralization of technology development. Companies and individuals from all over the world can share ideas quickly and effortlessly because the Internet is a world without boundaries. Many companies, such as Nortel Networks, rely heavily on these technologies to increase our own productivity and creativity. Indeed, it is this desire for increased productivity that drives the market for Nortel Networks' products and services. In today's world "global economy" means "global technology". We can't escape it.

Given these changed parameters, we need to view the role of export controls in a different way.

While mindful of the dangers of proliferation of weapons of mass destruction in the hands of renegade states, we should acknowledge that the U.S. benefits greatly from being able to export cutting edge technology products, both because we use them ourselves and because there is an enormous and still growing market for the purchase of such products abroad. We believe Nortel Networks is now one of the world's technology leaders, but we also know that if we slow our pace of new product development, or are unreasonably constrained in our efforts to grow in foreign markets, we will quickly be left far behind by our foreign competitors and become a weaker company. So export control policy must recognize that, now more than ever before, unintentionally interfering with legitimate export activities of U.S. companies not only harms the U.S. economy, but also U.S. technology leadership.

In that connection, the Pentagon's Revolution in Military Affairs (RMA) is highly dependent on commercial technology, particularly in the information technology area. More specifically, let me explain that the RMA is based on the premise that in order to achieve victory in a conflict, the victor must have incorporated new technology, evolved his organization and revolutionized his operating doctrine to the extent that victory is attained in the immediate instance. Without the adoption of robust technology, the revolutions that have led to countless wartime victories would never have happened.

We also need to acknowledge that many categories of products and technologies are becoming less and less susceptible to control. What this suggests is that we should focus our export control efforts on those categories that have important military uses, and which we can actually control with some effectiveness. At the same time, there should be an enhanced partnership between government and industry, so that government fully understands the capability of the technologies, and industry understands the concerns of the government.

Today's threat to our security is beyond a doubt a high tech threat. The Cox Report makes this point graphically. Whether it is the Tae-Po-Dong missile from North Korea or Sadaam's nuclear program, we need to staunch the flow of technology to those who would harm us. But we should do only that which has an effect, not that which simply makes us feel good. Many technologies are uncontrollable given the access of the Internet; others can and will be supplied by our competitors. Our job - or better said - your job with advice from us and the Executive is to strike the right balance - don't help our enemies but at the same time allow innovation and research to flourish.

It is a tough task. We at Nortel Networks stand ready to help.

I want to again thank the Committee for inviting me to appear before you, and I would be pleased to answer any of your questions to the best of my ability.



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