Hearing on Reauthorization of the Export Administration Act:
Private Sector Views


Prepared Testimony of Mr. Kyle Seymour
President
Cincinnati Machine - A UNOVA Company


10:00 a.m., Thursday, June 24, 1999

Mr. Chairman, members of the Subcommittee, I appreciate the opportunity to testify before you today on the reauthorization of the Export Administration Act ("EAA"). I am the President of Cincinnati Machine, a Division of UNOVA Corporation, of which I am also Corporate Vice President. UNOVA is the largest producer of machine tools and manufacturing systems in the United States, with sales of about $2 billion. Today, I will be speaking on behalf of AMT - The Association For Manufacturing Technology, for which I am the Chairman of the Government Relations Taskforce on Export Controls. AMT represents 377 member companies, with sales ranging from $10 million to more than $1 billion, who make machine tools, manufacturing software, and measurement devices. Industry sales total nearly $7 billion and exports account for more than one-third of those sales.

In your invitation you asked that I address the Staff Discussion Draft of the EAA. I will focus my testimony on the provisions of that document that are relevant to the machine tool industry and also comment on how export controls have affected the industry.

There seems to be widespread agreement regarding United States export control policies aimed at keeping dangerous technology out of the hands of the

so-called pariahs, or rogue states, and the AMT strongly supports this policy. Nevertheless, the most difficult issues revolve around what to do about China.

Certainly China presents a dilemma for U.S. export policy. On the one hand, China is a major trading partner and needs to import capital goods, including machine tools, to support its commercial economic development. On the other hand, China is quite clearly viewed by U.S. export licensing authorities as a military threat and a potential technology transfer risk.

The picture is no clearer beyond our national borders. There is not a consensus within the Western alliance about how to treat technology transfer to China, and there is presently no effective multilateral forum in which to address U.S. Government concerns about dual-use exports. This dilemma has led to the worst of all worlds for both the U.S. Government and U.S. machine tool companies. The Chinese can readily obtain the machine tools they desire, and U.S. companies are denied participation in the business.

In prior testimony by Dr. Paul Freedenberg, AMT expressed its views on the merits of past and present multilateral control regimes, and pointed out where the current regime falls short. I refer you to Dr. Freedenberg's testimony on the subject, but I can add something of our own experiences as a licensee. In the days of CoCom, the licensing process was slow and the outcome was uncertain, but we were confident that it provided a level playing field among our potential competitors with rules that were reasonably clear. It's successor regime, the Wassenaar Arrangement, leaves licensing decisions and methods up to individual countries based on a concept called "national discretion." This arrangement provides neither a level playing field nor clear rules, and our evidence suggests that since CoCom ended, U.S. licensing policies and practices have been far more restrictive than those of our allies in Europe.

As a result of its role as a technical advisor to the Wassenaar negotiating team, AMT has conducted studies of the licensing process and its outcomes among Wassenaar members. These studies show that the licensing process in the U.S. is far more lengthy and far less certain in outcome that the equivalent process in European countries and Japan. The length of the process and the uncertainty of the outcome combine to put U.S. companies at a tremendous competitive disadvantage, even when they are competing for obviously legitimate commercial projects.

In some cases, my company has been denied even the opportunity to bid on projects in China because of the wariness of the Chinese customer about the likely outcome of the licensing process. More recently, Chinese customers have asked that my company provide a guarantee that an export license will be obtained as a condition of the order with significant financial penalties to accrue if the license is denied. Of course, no U.S. machine tool company could offer such a guarantee.

The view of these Chinese companies is well justified. Statistics indicate that the United States Government is far more likely to disapprove machine tool licenses for China than any of our European allies. While a mere handful of U.S. machine tool licenses have been approved over the past five years (a total of 25 licenses, or an average of five licenses per year), trade statistics indicate that our European allies have shipped a substantial volume of far more sophisticated machine tools to Chinese end-users.

This is reflected in the average unit prices of machine tools exported from Europe to China, which are up to five times the average unit price of machine tools exported from the U.S. to China. Since the technical sophistication, accuracy, and productivity of a machine tool is directly proportional to its selling price, this indicates that the Europeans are shipping to China precisely those machine tools that are likely to be subject to export controls. Trade figures further indicate that by freely selling the same sophisticated machine tools to the Chinese which would be most likely unavailable from United States manufacturers, German and other European providers are also garnering sales in the non-controlled machine tool categories, putting U.S. manufacturers at a further disadvantage. Germany alone now has twice the market share of machine tool sales to China, as does the United States. This is in marked contrast to the situation in South Korea where favorable export policies by the U.S. Government have led to a 20 percent market share by U.S. companies.

In the past three years, representatives of my company have visited many of the Chinese companies involved in the manufacture of components for commercial aircraft. We were astounded at the number of state-of-the-art European machine tools (all of which required export licenses) that had been delivered into those companies since 1994.

By far the most frustrating aspect of this situation is that many of the commercial aircraft factories in China contain joint ventures and co-production arrangements with American aircraft companies. Some of our industry's most valued customers are moving production work from the U.S. to China to satisfy offset requirements related to Chinese aircraft purchases. China already accounts for seven percent of Boeing Company's sales. Boeing projects that China will become the largest aircraft market outside of the U.S. and could, within seven years, account for nearly 25 percent of Boeing's total business. There is every reason to believe that production of commercial aircraft parts in Chinese factories will continue to grow in tandem with the Chinese demand for commercial aircraft.

The Chinese factories producing parts for American aircraft are often supervised or monitored on site by American managers, yet current U.S. Government policy virtually assures that the machine tools used in those factories will be of European, not American, origin. I am at a loss to understand how this policy enhances our national security.

In sum, as my industry has testified previously, there is a fundamental problem with the current export regime. Not only does it lack discipline internationally with regard to a country about which the United States Government has indicated technology transfer concerns; it also puts U.S. companies on an uneven playing field with regard to sales to what is likely to be the fastest growing and largest market for capital goods over the coming decade. Repeatedly over the past five years, the United States Government has taken a negative approach toward machine tool sales to China while our allies have not. The result has been that the Chinese have been denied nothing in terms of high technology, but U.S. firms have lost out in a crucial market. This serves neither our commercial nor our strategic interests and needs to be addressed in whatever legislation your committee considers.

With this as background, I would now like to comment on specific provisions in your Staff Discussion Draft of the EAA.

Recommendations

First, on behalf of AMT, I would like to commend the Committee for undertaking the critically important task of revising the Export Administration Act. As everyone here is aware, the EAA was last amended in 1988, a year before the collapse of the Soviet Union, and the authority of the act lapsed almost five years ago. Certainly, there is ample justification to draft and adopt a new EAA to guide export controls in the 21st Century. The Staff Discussion Draft is a strong beginning toward new export control legislation. AMT would like to comment on a few areas where we feel the bill needs to be clarified, strengthened, or altered.

In earlier testimony, AMT strongly recommended that any export control legislation have a very strong provision defining "foreign availability" in terms of the reality in which U.S. companies compete today. Current law defines "foreign availability" as any item that can be supplied from outside the multilateral export control system in sufficient quantity and comparable quality so as to make the existing export controls on any particular item ineffective in achieving the objective of the controls.

Today, however, we operate in a context of weak to non-existent multilateral controls and, as I have pointed out, a multilateral system that allows any member country to use "national discretion" to decide whether or not to license a product. AMT agrees with the Committee that the new EAA should not be allowed to perpetuate the fiction that the current multilateral export control system functions effectively to deny technology to targets of that regime, particularly China, which has, at best, an ambiguous status in relation to the Wassenaar Arrangement's list of restricted technologies.

Consequently, the legislation should acknowledge that "foreign availability" can exist within a multilateral control system, not just outside that system. By excluding language such as that included in the current law, which limited a finding of "foreign availability" to products or technologies produced outside the multilateral organization, your draft legislation has implicitly acknowledged this new view of foreign availability.

However, in order to avoid the danger of misinterpretation, AMT would strongly favor making this implicit definition an explicit one by incorporating language into the bill that was in H.R. 361, in 1996, stating the following: "the mere inclusion of items on a list of items subject to export controls imposed pursuant to a multilateral export control regime shall not alone constitute credible evidence that the government of a country provides an effective means of controlling the export of such items to controlled countries."

This would help to create an equitable "foreign availability" definition, one that reflects the new reality in which U.S. companies find themselves.

AMT is also concerned with the length of time proposed for negotiations to eliminate "foreign availability." Two years is simply too long a time for such negotiations. Either the country in question is willing to stop selling the particular product or technology to the target country, or it is not. For many U.S. companies, two years would give foreign competitors too great a head start in developing a new market. Thus, in practice, the liberal time limit in the proposed legislation could fatally undermine the stated purpose of the foreign availability provision, which would be to give U.S. companies a fair opportunity to compete for business in products already available to the target country. AMT recommends that the time limit be reduced to six months, or, at most, a year to ensure a better balance between adequate time for negotiations and competitive consequences to U.S. companies.

One area in which the Staff Discussion Draft makes major changes to existing practice is in the area of interagency dispute resolution and decision-making. This area is of great concern to AMT because, as I have testified, the length and uncertainty of the current process already places U.S. machine tool manufacturers at a competitive disadvantage in China, and the changes proposed have the potential to make the process even more lengthy and less certain.

The current interagency license decision-making structure was created in 1995 by Executive Order and allows a dissenting licensing official to escalate his or her concerns up to the next highest level of decision-making, all the way up to the President, if no satisfaction can be found at the lower levels of authority, provided that the policy-making official of the dissenting agency is willing to sign-off on that appeal. This applies at whatever level within interagency process the disagreement occurs. The informal trade-off in this procedure was that after it was instituted, all agencies with a stake in the export control process had the right to ask to see any license submitted to the Commerce Department.

To change the current system into one that requires consensus at all licensing levels, as the Staff Discussion Draft proposes, would be to reintroduce a veto system back into license processing. Particularly at the level of the licensing officer, any one individual, in any agency could significantly delay the granting of a license with little or no justification. This would almost certainly lead to greater numbers of license denials and greater processing delays in the cases of licenses that do ultimately receive approval. The current system, however cumbersome, has an implicit default to a decision. The proposed system would be an automatic default to delay through escalation of all cases in dispute. AMT believes that the time limits mandated in the proposed legislation would provide little protection because there is always a willingness on the part of the license applicant to suspend the rules or stop the clock if doing so has the potential to avoid a license denial.

AMT fears that this change would reverse what little progress has been made in a system that is already too complex and too slow to allow the machine tool industry to compete effectively in China with our foreign counterparts.

As a result, AMT would strongly recommend that the current system, despite its shortcomings, be retained.

Finally, it would be useful for your new EAA to include a very strong mandate to the Administration to go back to the negotiating table and make a serious effort to strengthen the Wassenaar Arrangement. As I have noted, and as the Cox Committee points out, Wassenaar provides weak guidance and almost no discipline upon its members. It is almost worse than having no multilateral regime at all, because it gives the appearance of restricting technology transfer, while leaving all the key judgments up to Wassenaar's constituent members.

AMT believes that revisions of the Wassenaar charter ought to include far better rules for information exchange than exist today. Under current rules, there is not even a "no undercut" pledge, under which each member state promises not to grant licenses to companies in target countries which have been previously denied licenses by another member of the multilateral regime. At the very least, the U.S. Government ought to be informed beforehand of the intent of other members to grant such licenses, and, at best, there ought to be a commitment among regime members to honor one another's denials.

AMT believes it is imperative that the status of China be clarified for regime members. If China is not a target of Wassenaar, what is it? Are there any limits on what technology Wassenaar members, at their own discretion, can export to China? These are the sorts of questions that need to be addressed. They are left ambiguous in the current multilateral arrangement.

As I noted, the Staff Discussion Draft is a good beginning on the path toward the first re-authorization of the EAA in more than a decade. With the proper changes, it can be the basis of our export control law in the next century.

I hope that my comments will be helpful to your consideration of the legislation before you as you move toward committee markup and consideration by the full Senate.



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