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

Mr. Chairman and Members of the Committee, the Industry Coalition on Technology Transfer (ICOTT) appreciates your interest in the important issue of export controls and your invitation for ICOTT to express its views. We understand that the Committee soon will release draft legislation to revive the Export Administration Act (EAA). Because we have not yet seen this bill, however, we have limited our statement to the principles we believe should underlie any EAA renewal.

ICOTT is a group of major trade associations--the American Electronics Association (AEA), American Association of Exporters and Importers (AAEI), Electronic Industries Alliance (EIA), Semiconductor Equipment and Materials International (SEMI), and Semiconductor Industry Association (SIA)--whose thousands of individual member firms export controlled goods and technology from the United States. Our organization was founded in the early 1980s. Its principal purposes are to advise U.S. Government officials of industry concerns about export controls, and to inform ICOTT's member trade associations (and in turn their member firms) about the federal government's export control activities.

Much has changed in the past few years. If the United States ever had a corner on high technology, it is long gone. Technology is spreading ever faster across the globe. It may be that we can protect some especially sensitive technology, but we currently are attempting to control far more than we effectively can control. There have been some reductions in controls over the past few years but our reach still vastly exceeds our grasp. Justice Potter Stewart wrote that when everything is classified, nothing is classified. So too for export controls. We still are not focusing our energy on protecting the most sensitive items. As a result, we end up covering so much that private sector compliance erodes and the government's enforcement personnel spend far too much time protecting technologies that are widely available to ordinary consumers and thus impossible to control. Congress has required, for example, that all sales of workstations to China and the other "Tier 3" countries be the subject of post-shipment verification by the Commerce Department, even though many such sales pose no risk of diversion.

By way of example, we control exports of Microsoft Office 97, which is available in tens of thousands of retail outlets throughout the United States, because it contains 128-bit encryption. We treat computers containing two Pentium III chips as "high performance" and require elaborate Security Safeguard Plans for workstations.

Our domestic economy no longer is the sole support of our high technology sector. Access to global markets is essential to our economic security. The Electronic Industries Alliance, one of ICOTT's member associations, testified in March that more than $150 billion worth of United States electronic products--one third of the output of the domestic electronics industry--was exported in 1997. This means in turn that more than a half million employees of that industry owe their jobs to exports. The acquisitions side of the Defense Department is busily encouraging exports of new high technology items as a way of reducing the per unit cost of such items to DOD. At the same time, other elements of DOD are taking a strict view of what ought to be controlled. This produces the specter of an agency at war with itself--hardly a prescription for good or efficient government.

Only last week, Deputy Secretary of Defense John Hamre spoke before a government-industry group about export controls. He said that just because we can control something doesn't mean that we should control it. We cannot afford, he added, a nostalgic trip back to the '60s in which we apply inappropriate solutions to complex problems and end up hurting United States industry without providing any benefit to national security.

We see four points as paramount:

• First, is there a need for a new Export Administration Act? To put it a bit differently, what is the problem to which a new EAA is the solution?
• Second, "national security" has not one, but two components--military security and economic security. Measures that discourage research, development, and innovation by our high technology industries hurt our economy, export American jobs, and weaken our nation's security. Such measures accordingly can be justified only if they significantly retard the ability of adversaries to challenge our military posture.
• Third, unilateral controls don't work. They may make us feel virtuous, and may in rare cases succeed in sending a message to their targets. The globalization of technology, however, means that the targets of such controls generally will be able to secure the items they seek by looking outside the United States.
• Finally, controls on generally available items--those that are available freely at the retail level within the United States--also are counterproductive. Such items are not controllable. Such controls reward the dishonest, do not prevent target countries from securing the goods in question, and punish honest American exporters and workers.

ICOTT has noted with dismay the growing propensity toward unilateral controls and controls on items that are widely available inside and outside the United States. Far too many of these controls, which are ineffective in harming their foreign targets but devastating to United States industry, are statutory in origin. We worry that the attempt to renew the EAA may leave the national interest worse off than it is today. There is nothing mysterious or secret about industry's view of reviving the EAA: If renewal legislation does not improve the lot of United States exporters, many in industry would prefer taking their chances with the existing, essentially standardless control system that is authorized by the International Emergency Economic Powers Act (IEEPA). This is the concern that has caused industry's reluctance to support renewal efforts during the past decade.

If the EAA is to be revived, we believe that the legislation should at a minimum accomplish the following.

• Foreign availability; controllability. EAA renewal legislation should establish a strong presumption of decontrol for items that are (1) available freely abroad or (2) uncontrollable from a practical standpoint regardless of whether they are available abroad. Given the speed of technological advancement and the time it takes to implement new regulations, assessments of foreign availability should be prospective in nature (i.e., "Where will the global market be six to eighteen months from now?"), rather than retrospective ("What is the state of the market today?") as some have suggested.
• Unilateral controls. The EAA should circumscribe the use of unilateral controls, especially where the United States is not the sole source of a controlled item. Congress should instruct the Executive Branch that if we cannot convince the other suppliers of a technology to control it, we should skip the fruitless and costly exercise of controlling it unilaterally.
• Hidden unilateral controls. There is a subset of unilateral controls that masquerade as something else. The imposition by the United States of license restrictions that foreign supplier nations do not impose is a form of unilateral control. So is the substantially longer waiting time for licenses that is imposed by the current system of having every application reviewed by a host of agencies other than the Commerce Department.
• Catch-all nonproliferation controls. The catch-all, "know" provisions of the Enhanced Proliferation Control Initiative (EPCI) impose a substantial burden on business without significantly advancing the aims of the EPCI program. Congress should reform EPCI as follows:

• The EAA should compel publication of a list of commodities to which the EPCI "know" provisions apply. This would eliminate the need for the makers of such benign items as facial tissue, rubber bands, kitchen appliances, and furniture to establish costly internal corporate compliance programs.

• The Commerce Department should publish a list of the countries to which the "know" provisions apply. There are close to two hundred nations in the world, yet only a handful are of proliferation concern. Exporters should not be required to exercise costly vigilance as to the vast majority of destinations that do not present proliferation dangers.
• Computer control thresholds. The National Defense Authorization Act for Fiscal 1998 requires that increases in computer control thresholds lie before Congress for 180 days before taking effect, and that changes in certain country groups lie here for 120 days before taking effect. We disagreed with the enactment of these provisions and believe that they should be repealed. The hurdle they create has been the principal reason why computer control thresholds have not been increased in several years despite the quantum leap in computer technology during that time. Failing repeal, the waiting periods are far too long given the pace of technological advance: Moore's Law tells us that chip and computer technology levels double every eighteen months. If the waiting periods are not repealed outright, they should be reduced to thirty or at most forty-five days.
• The "de minimis" rule. Unless extraterritorial United States controls are eliminated (see below), the existing "de minimis" rule, which was established more than a decade ago, should be continued. Under this rule, United States reexport controls do not apply to foreign products containing less than twenty-five percent (ten percent, in the case of terrorist-supporting destinations) United States content. Indeed, the Committee should consider simplifying the rule to apply a twenty-five percent standard across the board.
• Encryption. We recognize that the encryption issue is being considered by other Senate committees. Whether it emanates from this Committee or others, legislation should be enacted that releases 128-bit or higher items from control without coercing industry cooperation in a "key management" crusade that has failed of acceptance in the marketplace. This is a field where the rest of the industrialized world is overtaking the United States in a hurry. A recent study revealed that far more countries are producing far more numerous, far more sophisticated encryption devices than was the case only a couple of years ago.

• Unfair impact. The legislation should protect exporters against "unfair impacts" due to foreign availability or uncontrollability. Exporters should receive relief if controls are ineffective due to actual or anticipated foreign availability or if controls place exporters at a commercial or competitive disadvantage. Further, as the Clinton Administration's 1994 EAA bill envisioned, such relief should be available for all export controls, including nonproliferation controls, and not only traditional "national security" controls.
• Administration of export controls. The Commerce Department has been doing an excellent job of administering the export controls under its jurisdiction. That agency processes license applications and other correspondence relatively efficiently and is more "user friendly" than the State Department in terms of responsiveness to inquiries and special problems. Licensing of "dual use" items should remain at Commerce. The opportunity of other agencies to veto applications unilaterally, to delay decisions on licenses or to insist upon the imposition of killer conditions on licenses should be reduced, not expanded. In particular, involving the Defense Department in routine commodity classification decisions would contribute little from a military security standpoint in comparison to what it would cost exporters in terms of expense and delay.

• Contract sanctity. When new controls are imposed or existing controls expanded, the Executive Branch should be required to respect the sanctity of existing contracts. America's reputation as an unreliable supplier is heightened by the lack of protection for existing transactions when new controls are imposed. Our competitors abroad make much of this policy in their efforts to take business away from us.

• Extraterritoriality. The Committee should consider terminating (or greatly limiting) the extraterritorial application of United States export controls. United States secondary boycotts (such as the Iran Libya Sanctions Act of 1996) and our insistence that United States-origin goods and technology remain subject to United States export controls forever--no matter how many years may pass or how many different owners the items may have--are but two examples of unacceptable extraterritorial controls. Such controls are opposed even by our closest allies, lack support in international law, and are needlessly injurious to our economic security.
• Penalties. The existing civil and criminal penalties under the EAA are substantial, particularly given (1) the recent shift toward treating voluntary self-disclosures of innocuous violations more harshly than in the past, (2) the adoption of automatic increases in fines to reflect increases in the cost of living,⁽¹⁾ (3) the fact that civil penalties may be imposed on a strict liability basis (i.e., even for entirely accidental or unavoidable infractions),⁽²⁾ and (4) the Commerce Department's practice of levying as many as three charges for each alleged infraction. If the Committee is determined to increase penalties, the legislation should (1) impose civil penalties only for conduct that is negligent or grossly negligent, (2) prohibit the kind of "piling on" that occurs when a single infraction is made the subject of multiple charges, and (3) ensure that maximum penalties in cases of voluntary self-disclosures are significantly less than the maximums for violations unearthed by the authorities.
• Judicial review. Decisions under the EAA--like those under such other statutes as IEEPA, the National Security Act, the environmental protection laws, the Federal Reserve Act, the securities statutes, and the laws administered by almost every other federal agency--should be subject to review in the courts. The paucity of any lawsuits (much less successful lawsuits) while export controls have subsisted under IEEPA for seven and one-half of the past nine years proves that fears of a flood of litigation are groundless.
• Payment of legal costs. The EAA should be made subject to the Equal Access to Justice Act, which requires the government to pay the litigation costs of small businesses when the government's position is substantially unjustified.
• Private right of action in antiboycott cases. The renewal bill that passed the House in 1996 would have created a private right of action for those alleging injury because of a violation of the antiboycott provisions of the EAA. Given that two agencies--the Internal Revenue Service and the Commerce Department's Office of Antiboycott Compliance--already enforce the antiboycott provisions of the Internal Revenue Code and the EAA, we question the need for such a provision.

I began by asking whether we need an EAA at all. Capitol Hill is littered with the bones of previous renewal bills that did not answer this question positively. ICOTT supports the concept of resurrecting the EAA, but only if the renewal legislation addresses most, if not all, of the concerns we have expressed here today.