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Copyright 1999 Federal News Service, Inc.  
Federal News Service

MARCH 3, 1999, WEDNESDAY

SECTION: IN THE NEWS

LENGTH: 5350 words

HEADLINE: PREPARED TESTIMONY OF
DAVE MCCURDY
PRESIDENT
ELECTRONIC INDUSTRIES ALLIANCE
BEFORE THE HOUSE INTERNATIONAL RELATIONS COMMITTEE
SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY
SUBJECT - DUAL-USE EXPORT CONTROLS POLICY
FOR THE INFORMATION AGE

BODY:

I. INTRODUCTION
Thank you, Madam Chairman, for the opportunity to testify today on dual-use export controls policy for the Information Age. I represent the Electronic Industries Alliance (EIA). EIA is a federation of associations and sectors operating in the most competitive yet innovative industry in existence. We are comprised of over 2100 members representing 80% of the $550 billion U.S. electronics industry. Our member and sector associations represent telecommunications, consumer electronics, components, semiconductor standards as well as several other vital areas within the electronics industry.
I am also a former member of Congress from Oklahoma. During my 14 year tenure in this body, I served as Chairman of the House Intelligence Committee, as well as subcommittee chairman on the Armed Services Committee and the Science Committee. I continue to serve as a member of the Weapons of Mass Destruction Commission, a group of experts investigating how this county can combat proliferation. So I am well aware of how dual-use civilian technologies can be used for military purposes, and the important role of export controls to our national security. But I also recognize the severely limited effectiveness of export controls, as well as the vital importance of a strong and innovative high technology sector to keep our armed forces a step ahead of any adversary.
II. REALITIES OF THE GLOBAL ECONOMY
In my new capacity as EIA's President, I have the privilege of representing the most dynamic and competitive industry in the U.S. economy today -- actually, I should say, in the world economy today. The companies we represent operate globally, they think and plan in global terms, and they face intense international competition. The fact is, the days when U.S. companies dominated the high-technology industry are over. Similarly, the days when the domestic U.S. market could sustain the industry are also over. It has become almost cliche, but the global economy is a fact of doing business for us, and is a critically important concept to keep in mind as we formulate public policy in this area.
As any successful CEO will tell you, competing -- indeed, surviving -- in the global economy means exporting. The phenomenal success of the U.S. technology industry comes from its entreprenurialism, its aggressiveness, its willingness to compete - all those free market forces that drive innovation. In this kind of business environment, tapping new markets before the competition does is the key to success. In 1997, more than one-third of what the U.S. electronics industry produced was exported overseas, over $150 billion in goods. That means more than a third of the 1.8 million employees who work for U.S. electronics companies depend on exports for their jobs, and the percentage goes up every year. Too often, we fail to recognize the profound implications of these facts, and I will get to those in a moment.
We must also recognize that our high-tech companies are the engine for technological innovation and economic growth in the world today. The U.S. economy is the most competitive in the world due in no small part to the amazing advancements our companies have achieved. Technologies which, not long ago, had only military or limited civilian applications are now pervasive in our society, and the greater economic efficiency stemming from this diffusion of technology has been the driving force for the remarkable prosperity so many Americans are experiencing.
The impact of export controls on how this industry competes in the global economy is substantial. They hold us back from competing. Unilateral export controls essentially force us to cede the playing field to our overseas competitors, or at least burden us to the point that we cannot compete effectively. The case of encryption controls provides the best example. No amount of government subsidies could do more to develop the European encryption industry than U.S. export controls have.
In short, we agree that when export controls are used properly, they can be a useful tool in combating the development and proliferation of weapons of mass destruction. But they are a tool to be used carefully and sparingly because of their severe negative impact on our industry and their often-limited impact on the target country.
III. PRINCIPLES FOR A NEW ERA
This Committee has a critical role to play in overseeing this country's export control system, and we appreciate your interest in taking a fresh look at the system, with an eye towards updating it to reflect the technological and political realities of the postCold War world. It is a daunting challenge, as you are well aware. This is a subject which has confounded policy makers for much of this decade, as evidenced by the fact that the Export Administration Act lapsed nearly five years ago. It is an important issue with high stakes for our national security and economic vitality alike, and we look forward to working with you as you continue in this process. With that in mind, I would like to lay out three very broad principles which guide our thinking on export control issues, and which I urge you to consider in your deliberations.
A. Export controls must reflect post-Cold War realities
The first principle is that U.S. export controls must reflect the new commercial and political realities of the post-Cold War world. The Cold War export control regime was based on the then-accurate premise that if you prevent U.S. companies from exporting a product to specified countries, you will have denied that country the use of that product or technology. But as I mentioned earlier, this premise no longer holds true. Whereas U.S. industry used to have a monopoly over the development and production of high technology products, today many countries produce the same, or even better, commercial technologies as U.S. manufacturers. Furthermore, the governments of our competitors do not place the same restrictions on their export activities. When U.S. companies are prevented from selling abroad, our competitors are willing and able to fill the void.
During the Cold War, national security threats came from clearly identifiable sources, that is the Communist bloc, and the western alliance was basically united in confronting these threats. Through the multilateral export control alliance called "CoCom," the western alliance cooperated to prevent exports of militarily sensitive technologies to the Communist bloc. CoCom controls were binding, as any member state could veto an export by another member state.
But with the collapse of Communism, the multilateral consensus collapsed with it. The threats to our national security are more diffuse, coming from rogue terrorist cells or a few outlaw nations. The successor to CoCom, known as the "Wassenaar Arrangement," reflects the disagreement among our allies regarding where new threats will come from. The Wassanaar Arrangement is nominally directed against only four states -- Iraq, Iran, Libya, and North Korea -- and even in those cases, no Wassanaar member country has the power to veto any exports of other countries.

The members have pledged only to limited information sharing, relating to technologies with obvious military applications. Despite extraordinary efforts by the U.S. government to strengthen the binding aspects of the Arrangement, this was the most our allies would agree to. That is the reality we are faced with as we consider unilateral export controls. The exceptions are the multilateralregimes to control the spread of nuclear, chemical and biological weapons of mass destruction and their means of delivery. In these areas, strong multilateral export controls are more effective.
Our best example of the lack of international consensus, and the most important from industry's perspective, is China. While the U.S.-China relationship may be controversial in this country, there is no such dilemma for our allies. For them, China is a strategic partner to cooperate with on a wide range of political and economic issues, and is also the single largest emerging market in the global economy. Though I certainly do not condone China's record on human rights, I tend to agree with the assessment that if we treat China as an enemy, it will become an enemy.
I would like to make one last point on the Cold War. During that period, many in the high technology industry were dependent on the domestic market for sales. Today, virtually all commercial high-tech industry must compete globally to survive. This fact has important ramifications for our armed forces and our national security. Post- Cold War budget realities dictate that many defense suppliers can longer depend on the Pentagon as their primary buyer, meaning the military increasingly must depend on dualuse civilian technology. Yet, in certain sectors, the U.S. is losing its market share to other producers. U.S. national security may be harmed if the lead in dual- use commercial technology moves offshore as the result of unsound U.S. export control policies.
Clearly, we should not use Cold War-era solutions to solve Information Age problems. Unilateral export controls are Cold War solutions.
B. The current export control system is appropriate and effective in protecting national security
The second broad principle is that the current model for administering U.S. export control law is appropriate and effective in protecting national security. Currently, there are two systems for administering export controls, both of which provide for interagency review of license applications. The Commerce Department handles applications for the export of civilian and dual-use products and seeks advice from other agencies, including the Departments of Defense, Energy, State, Justice, and the intelligence community. The referral agencies participate fully in the license review process and have the ability to place conditions on license approvals, or recommend denial. This is the system which is authorized under the EAA.
The State Department handles applications for exports of explicitly military items, using a similar interagency referral process. Their system is authorized under the Arms Export Control Act, which is not up for renewal.
The license review processes in both systems can be improved, but essentially they are appropriate as separate functions. The Commerce Department review system ensures that commercial exports needed for U.S. economic strength are permitted to theextent possible without threatening U.S. national security and foreign policy interests. The State Department review system ensures that military exports promote our national security and foreign policy objectives.
Many people are unaware that the Commerce Department conducts numerous follow-up checks on high technology exports to ensure that goods are being used where they are supposed to be, and for the purpose for which they were approved. The Department also audits U.S. exporters' record keeping and compliance with license conditions on a regular basis.
C. High-tech companies strive to be good corporate citizens
The third principle is that our industry strives to be compliant with the relevant export control laws. In fact, our industry devotes significant resources to be compliant with those laws. Many companies have elaborate and expensive export control compliance systems that include highly trained staff. This resource allocation demonstrates our industry's recognition that export controls are important and that there is a need to maintain a system that serves to protect our national security and foreign policy interests. This is especially true when it comes to preventing the spread of technologies to rogue nations.
While we support general government aims to create an effective control system, we also want to ensure that these controls are administered in a way that allows legitimate sales to go forward, while preventing those truly detrimental to our national security and foreign policy interests.
IV. GUIDELINES FOR AN INFORMATION AGE EXPORT CONTROL REGIME
EIA members have a keen interest in the substance and content of the Export Administration Act. Importantly, we have been involved with previous rewrite efforts and have worked closely with this and other relevant committees of jurisdiction. We recognize that there has been much debate within Congress, and within our own industry, as to whether there should be a renewal of the Act this year. I am not here today to debate the merits of this course of action but instead to discuss what we see as the key elements of any rewrite of the EAA. The following is a recitation of our priority export control issues.
A. Curtailing Unilateral Export Controls
U.S. foreign policy and national security export controls, when implemented without coordination or cooperation from our key allies, frequently place U.S. companies at a significant competitive disadvantage vis-a-vis foreign competitors. While our industry is not opposed to the use of export controls to punish rogue nations orindividuals, we believe that unilateral export controls have a very limited effect on a particular target country and unnecessarily hurt our most competitive industries.
We propose that if unilateral controls must be used, policy makers consider a number of issues in their formulation. First, we believe that this type of tool should be used sparingly and implemented for a finite period of time (perhaps six months) while our government negotiates with foreign governments on a broader multilateral implementation.
Furthermore, we advocate that our government follow certain criteria in their decision-making process. These criteria should provide a check-list of steps that policy makers follow before the controls are imposed, and help them evaluate the effectiveness of the controls. For example, if multilateral agreement cannot be reached, after a defined period, then the unilateral controls should be removed, and U.S. producers be allowed to export without restriction. The critical element here for policy makers to evaluate, in the implementation of controls, is the balance between maintaining the health of our economy, and the protection of our foreign policy and national security interests. These criteria would also establish a rationale for continuing the controls past their expiration date. Such a balancing test should address:
(1) The actual effect that the controls would have on the target country;
(2) The ability of the target country to obtain the technology from other sources;
(3) The potential effect that the controls would have on U.S. industry; and
(4) The level of multilateral cooperation that the U.S. is able to secure.
While we recognize that there may be instances where export controls are needed in order to punish a nation for their undesirable activities, we recommend that the controls be imposed under strict time limitations combined with a review mechanism that evaluates its effectiveness. If the controls are not deemed to be effective, then they should be discontinued.
Finally, for any export restriction that is imposed unilaterally, there should be a requirement that the government attempt to negotiate a multilateral agreement from other relevant industrialized countries. An export restriction is only as effective as its ability to limit a target country from obtaining the desired goods and technology. If the target country is able to do this by trading with other countries, the unilateral controls are rendered ineffective. However, if the U.S is able to gain consensus from other countries to prohibit the export of the technology, then the restrictions will be more effective.

B. Forward Looking Foreign Availability
As noted above, assessments of foreign availability are a very important aspect of the determination of the effectiveness of U.S. export controls. Accordingly, when a controlled product is deemed to be effectively available from foreign sources, U.S. law should allow for quick and decisive relaxation of restrictions on the relevant product. Our industry has much experience with situations where a product or technology was deemed to have been available from foreign sources by the Department of Commerce, however, by the time that the assessment had been completed, the product life cycle of the technology had already passed and U.S. manufacturers had missed out on an important foreign sale.
A strong foreign availability assessment process is an essential part of any rewrite of the Act. These assessments ensure that U.S. export controls are not implemented in a vacuum and are effective in light of today's global realities. In essence, they are export control "reality checks" that make our control system relevant.
In addition to supporting a strong foreign availability system, EIA proposes an additional element: The ability of these assessments to take into account what technological levels will be in the future. This is called "forward looking" foreign availability and it provides for a process by which government analysts make reasoned assessments of where selected technology is expected to develop in six months and then propose relaxation of the relevant export controls. Such a regime would address the problem that many find with the current foreign availability process, in that the entire analytical process can take months for conclusion. Meanwhile, valuable sales opportunities could be lost by U.S. firms. A forward looking process would eliminate delays through a prospective determination of future technology levels which would trigger appropriate adjustments to control levels before they had a detrimental effect on U.S. industry.
Additionally, we believe that the Department of Commerce should remain central to this process. This agency has a successful history in making these determinations.
C. Indexing of Control Levels Related to the notion of forward looking foreign availability is the concept of the indexing of controls levels. This concept is especially important for the high technology industry because of the extremely fast pace of today's technological development. While at one time product life-cycles were a year or longer, today our most competitive companies find themselves faced with product life-cycles of six months or less. The brevity of these life cycles necessitates that export controls are fashioned in a way that they are able to keep up with technological changes. This problem is most apparent in the computer manufacturing and internetworking sector.
The most effective way to solve this problem is the creation of an indexing system that would peg U.S. export control levels on products (such as computers) on current levels of technological sophistication of products on the market. This indexing system would include an assessment of the most technologically advanced system on the market at the time and then calculate a control level that reflected an appropriate percentage of that level. If implemented, U.S. export controls would be truly reflective and responsive to industry developments. Such a system would not have a deleterious effect on national security because control levels would reflect the current global market for the technology and would also reflect foreign technological developments.
D. Repeal of FY '98 NDAA Computer Controls
Related to our indexing proposal is our desire to see the recent changes to computer export controls repealed. As a part of the FY 1998 National Defense Authorization Act (NDAA), export control restrictions on computers were significantly increased. The provisions of this authorization included mandatory review of exports of relatively low level computers to a number of significant countries.
This provision is important for our discussion because it does not reflect the reality of current technological development, and because it does not take into account the foreign availability of high- performance computers world wide. The licensing requirements contained in this legislation places significant time burdens on companies that prevent them from exporting their most competitive products in a timely manner. In addition, the provisions also place restrictions on how the Department of Commerce can respond to new developments in computer technology. Instead of being able to adjust control levels as new developments warrant, lag periods are built into the control system that result in 6 to 12 months delays before any changes can be made. Such delays could wipe out the advantage U.S. finns have in marketing their best technologies and provide foreign competitors an opening to sell their products without the competitive threat from U.S. manufacturers.
E. Reform of export screening requirements
The United States, alone among exporting nations, publishes extensive lists of individuals, companies, and organizations with whom commercial business is prohibited from dealing. These lists, published separately by the Departments of Commerce and Treasury, now comprise nearly 3,000 entries and are expanding at a staggering rate.
While customer screening based on these lists is not a formal government requirement under most circumstances, U.S. companies are completely liable for violations of U.S. export regulations should they engage in any business transaction with a sanctioned party in any location around the world. This liability exists regardless of the size of the transaction or the commodity involved. As a consequence, extensive, costly and time consuming screening of all U.S. economic activity overseas is a requirement, as it is the only means of achieving the absolute compliance required by U.S. regulation.While customer screening can be a valuable export control tool, current U.S. requirements are bureaucratic, overreaching, costly, and strategically useless. Current requirements hamper global commerce over the Internet, and in so doing, threaten the future of electronic commerce, American high-technology leadership, and U.S. jobs.
We propose eliminating liability of non-sanctioned U.S. persons for engaging in transactions with Department of Commerce Denied Parties and Treasury Department Specially Designated Nationals when such transactions are limited to:
(1) Transfers of $5,000 or less and would not otherwise require an individual validated license (IVL); OR
(2) Field service activity (repair, adjustment, or modification or upgrade of previously exported commodities) and would not otherwise require an IVL; OR
(3) Transfers of software or technical data that would not otherwise require an IVL; OR
(4) Transactions conducted or initiated on the Internet, via telephone ("telesales"), or through direct mail, that would not otherwise require an IVL.
We also propose eliminating liability of non-sanctioned U.S. persons for engaging in transactions with Department of Commerce Denied Parties and Treasury Department Specially Designated Nationals when such transactions have been screened electronically using commercially available name-screening software.
These exemptions would not apply if the exporter had knowledge obtained in the normal course of business that the goods or technology would be used in, or diverted for use in, a project of proliferation concern.
F. Ensuring reasonable review periods and escalation of disputes
The Departments of Defense and State, as well as the CIA, each have the right to review any export license which the Commerce Department handles. In addition, the Justice Department may review any encryption license, and the Energy Department may review any license dealing with nuclear-related technology.
Over the past several years there have been relatively few instances when licensing officers from each of the different departments have disagreed on whether or not to permit a particular export to go forward.

In situations where disputes do arise, the case is escalated to progressively higher levels of authority, first to mid-level political appointees and theoretically up to the President for resolution. The departments have specified periods of time to review the licenses and escalate the case if necessary. The point is, no agency at the lower bureaucratic levels has complete veto power over anexport and, equally important, cannot stonewall a case indefinitely, but each has the power to raise objections and make their objections known.
EIA supports this basic procedure, and we believe agencies are already given more than sufficient time for license reviews. In an era of"just-in-time" manufacturing, the drawn-out export licensing process often imposes unreasonable delays, costs, and uncertainty on U.S. companies. Bureaucratic delays of weeks or months -- and the uncertainty that goes with it -- seriously handicaps our ability to market our products. If dependability and speed are important considerations for our overseas buyers, which is often the case, they will opt for our foreign competition because U.S. companies are viewed as unreliable suppliers. Thus, we cannot support any proposal which grants an agency unreasonable authority to delay or veto an export license.
G. Updating Penalties
Currently the Department of Commerce has means to financially punish those companies which fail to abide by export control law. These penalties, which can be imposed for each infraction of the rules that have been violated, can amount to a significant financial strain on a particular company. While EIA is not opposed to the assessing of penalties on illegal behavior, we are concerned if current penalty levels are increased to such a prohibitive level that relatively minor infractions of the regulations result in fines that could put them out of business. Particularly when selling mass market products, companies fear facing overwhelming liabilities for a minor infraction multiplied thousands of times. As the regulations have become increasingly convoluted, the danger increases even more.
H. Private Right of Action
In past congresses, there has been efforts to create a private right of action for anti-boycott measures. In particular, during the last rewrite effort of the EAA, an amendment was added that created a federally allowable cause of action for tort claims of individuals who believe they have been damaged by the activities of companies that abided by foreign boycotts. This private right of action would be problematic for many EIA companies in that it creates a right to sue even before a company has been determined by the Department of Commerce to have engaged in the alleged boycott activities. EIA believes that such a provision would only add to the potential costs that companies must face in their international dealings, and could harm their ability to conduct legitimate sales overseas.
I. Encryption Reform
EIA asserts that a more balanced encryption policy is necessary -- one which recognizes the interests of government, the high-tech industry, and corporate and individual users. While the business community recognizes the importance of keeping potentially dangerous technologies out of the wrong hands, the government mustsimilarly recognize the importance of a dynamic and innovative high-tech industry to our economy, and not incidentally, to our national security. We believe that the national security vs. economic security arguments present a false choice, and that a well-balanced and realistic compromise is within reach.
The basis of such a compromise could include four basic elements. First, the government needs to significantly ease the restrictions on low-level and mass market encryption software. It was not very long ago that encryption was a solely military application, and therefore easily controlled, but to continue imposing onerous controls on software which anyone can purchase at the local shopping mall just does not make sense.
Second, the law enforcement and national security agencies could better define their access requirements, thereby allowing industry to develop a variety of marketable solutions, as well as enabling the Clinton Administration to finally abandon its key recovery policy.
Third, our new policy needs to differentiate between the increasingly numerous uses for the technology, such as for voice communications, data transmission, and in consumer electronics, with appropriate controls on those applications that clearly present problems for government, and decontrolling the rest.
Finally, U.S. policymakers need to recognize the futility of unilateral export restrictions, which serve only to damage our domestic industries while doing little to protect our national security. Only when we encourage our allies to develop meaningful multilateral controls can we hope to prevent the bad actors from acquiring these technologies.
The bottom line is that our industry is willing to accept restrictions on encryption exports if the controls are reasonable, if they are effective at addressing the problem they are meant to solve, and if they do not impose unnecessary, overly burdensome requirements. We believe that by implementing these basic proposals, the Administration's legitimate concerns can be addressed, the U.S. high- tech industry will be allowed to compete globally, and users will have the security they need.
J. Confidentiality of Business Information
As part of the licensing process, companies are often required to submit very sensitive business information to the government. Under the EAA, the Department of Commerce had the authority it needed to keep that information confidential. However, under the International Emergency Economic Powers Act (IEEPA), the Department no longer has sufficient authority to guarantee confidentiality. Companies fear that, if the Commerce Department is challenged under the Freedom of Information Act, it could be required to release companies' trade secrets. The Department's authority has not been challenged in court yet, but it remains a legal possibility we would like to see preempted.
K. Office of Foreign Assets Control (OFAC)
The Office Foreign Assets Control (OFAC) plays an important part in the overall export controls process. This office regulates trade in financial instruments and also the implementation of U.S. export control sanctions against selected countries. EIA member companies appreciate the importance of this office, however, believe that it is important for this office to be responsive to the needs of the industry. As a result, we advocate the creation of an industry advisory committee to provide guidance to the office on issues related to the regulations that they implement. Such an advisory committee would be similar to those currently in place advising the Bureau of Export Administration and the Department of State on critical export control regulatory matters
L. Deemed Export
EIA encourages changes to be made to the current policy regarding the hiring of foreign nationals. Many of our companies have been troubled by the current interpretation of U.S. export control law which makes it increasing difficult for our companies to hire foreign nationals. We believe that a "deemed export" only occurs when the hiring company is aware that the foreign national in question will be exporting the acquired technology.
V. CONCLUSION
As we enter the new millennium the challenges facing our high technology companies will no doubt change. Unlike the middle part of the century when the U.S. electronics industry was at the fore front of technological innovation and development today, there are many potential challengers to our economic might. U.S. export control policy should not serve to disadvantage these interest at such a critical time. It is important also to recognize that the Cold War is over and that while or nation faces new threats they are different and necessitate a different approach from export control regulators. We hope that your rewrite of this statute will reflect these realities.
END


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