LEXIS-NEXIS® Congressional Universe-Document

LEXIS-NEXIS® Congressional

April 4, 2000, Tuesday

TYPE: COMMITTEE HEARING

LENGTH: 17786 words

COMMITTEE: SENATE COMMERCE COMMITTEE

HEADLINE: U.S. SENATOR JOHN MCCAIN (R-AZ) HOLDS HEARING ON THE EXPORT ADMINISTRATION ACT

LOCATION: WASHINGTON, D.C.

BODY:

(CORRECTED COPY)

U.S. SENATE COMMITTEE ON COMMERCE, SCIENCE AND TRANSPORTATION

HOLDS HEARING ON THE EXPORT ADMINISTRATION ACT OF 1999

APRIL 4, 2000

SPEAKERS: U.S. SENATOR JOHN MCCAIN (R-AZ), CHAIRMAN

U.S. SENATOR TED STEVENS (R-AK)

U.S. SENATOR CONRAD BURNS (R-MT)

U.S. SENATOR SLADE GORTON (R-WA)

U.S. SENATOR TRENT LOTT (R-MS)

U.S. SENATOR KAY BAILEY HUTCHISON (R-TX)

U.S. SENATOR OLYMPIA J. SNOWE (R-ME)

U.S. SENATOR JOHN ASHCROFT (R-MO)

U.S. SENATOR WILLIAM FRIST (R-TN)

U.S. SENATOR SPENCER ABRAHAM (R-MI)

U.S. SENATOR SAM BROWNBACK (R-KS)

U.S. SENATOR ERNEST F. HOLLINGS (D-SC), RANKING

U.S. SENATOR DANIEL K. INOUYE (D-HI)

U.S. SENATOR JOHN D. ROCKEFELLER IV (D-WV)

U.S. SENATOR JOHN F. KERRY (D-MA)

U.S. SENATOR JOHN B. BREAUX (D-LA)

U.S. SENATOR RICHARD H. BRYAN (D-NV)

U.S. SENATOR BYRON L. DORGAN (D-ND)

U.S. SENATOR RON WYDEN (D-OR)

PANEL 1:

U.S. SENATOR MIKE ENZI

U.S. SENATOR FRED THOMPSON

PANEL 2:

JAMES BODNER, PRINCIPAL DEPUTY UNDERSECRETARY

OF DEFENSE FOR POLICY

JOHN HOLUM, SENIOR ADVISER TO THE SECRETARY

OF STATE FOR ARMS CONTROL AND INTERNATIONAL

SECURITY

WILLIAM REINSCH, UNDERSECRETARY OF EXPORT

ADMINISTRATION

PANEL 3:

JOHN DOUGLASS, PRESIDENT AND CEO, AEROSPACE

INDUSTRIES ASSOCIATION OF AMERICA

DR. WILLIAM SCHNEIDER, PRESIDENT, INTERNATIONAL

PLANNING SERVICES, INC.

*

MCCAIN: Good afternoon. We're here this afternoon to hear testimony about the proposed Export Administration Act. It's a matter of great importance. I'm pleased to welcome our panelists, who are well informed about this topic and who can share with us their different perspectives.
Obtaining and maintaining the correct balance between globalized trade and protection of our national security is one of the greatest challenges of our time. As important as the substantive determination of what is the right amount of technology transfer to be allowed is the establishment of a process which assures necessary checks and balances to result in the right substantive balance.

The balance to be struck between trade and national security is often hard to determine, particularly as technologies are produced and refined ever more quickly.

A process that assures a complete, competent technical and policy review may not move at the Internet time pace that industry desires. Still, compromise on the process in order to meet the demands of trade may, unfortunately, result in compromise of national security.

We are all well aware of some the flaws of the current export system. Numerous congressional hearings, including one held by this committee in September 1998, of documented security lapses in illegal or ill-advised technology transfers to China.

The highly publicized problems with satellite technology transfers and the apparent linkage to the 1996 campaign finance scandals have created an appearance of impropriety that demands close scrutiny of this export administration authorizing legislation.

It is critical that no aspect of this balancing be driven by, or perceived to be driven by, political contributions or influence. There will be no credibility behind decisions regarding particular export licenses if the process can be distorted, controlled, influenced or biased by improper motivations.

Our country will have no confidence that national security is being protected if decisions are made in favor of industry as a result of campaign contributions.

Additionally, investigations by the inspectors general of Departments of Defense, State and Commerce identified problems in June of 1999, which must be addressed fully by the legislation in order to achieve the balance necessary to ensure passage.

The Cox committee recommendations, along with the inspector general recommendations, highlight specific areas of inquiry and revision to avoid future improprieties or errors in export decisions.

Some of the most pressing questions about the current process and how S. 1712 would address the same issues include whether adequate timeframes exist for referral of license applications, whether appropriate referrals are being made by the Department of Commerce for commodity classifications, as well as for license applications, whether deemed exports are being appropriately controlled, whether the appeal process is biased, how accumulated impacts of licensing decisions are addressed, whether adequate monitoring and enforcement of license conditions is occurring, and whether sufficient training is provided to licensing officers in each of the agencies.

One example of problems in the current process that must remedied in new legislation relates to commodity classification referrals from Commerce to State and the Department of Defense. In June -- the June 1999 inspector general report notes that out of the thousands of commodity classification requests submitted to the Department of Commerce between April 1996 and March 1999, Commerce referred only 12 of the requests to DOT (sic) for input.

A sampling of items which were not referred which DOD thought should have been included two items which could likely be munitions items. The IGs from both DOC and DOD concurred that this lack of referral is a problem. To quote the IG's report, "The first request was for a ruggedized portable encrypted radios." Commerce officials stated that the radio had not been built to military standards, and therefore is not a munitions item under the jurisdiction of the International Traffic in Arms Regulations.

DOD officials stated that the literature described the radio as militarized and that other radios built by the manufacturer were subject to munitions exports -- export licenses.

The second request for the antenna. Commerce officials stated that the antenna was not a munitions item, despite company literature describing it as a militarized -- as militarized. DOD officials stated that the literature satisfied International Traffic in Arms Regulations criteria for defense article, and that the manufacturer had a history of exporting products under the munitions export licensing process.

Clearly, under the current export process, the Department of Commerce has a great deal of discretion to decide when or whether to refer a commodity classification request. This broad discretion has resulted in a dearth of referrals, and has, in fact, resulted in classification decisions which are incorrect.

How does the process proposed in S. 1712 change this balance or provided additional checks and balances on the discretion of Commerce? Similarly, the 1999 IG report identified a bias in the appeal process as a potential problem, at least in some cases. The IG for the Department of Commerce concurred that the appeal committee chair had felt pressured by the Department of Commerce management to decide some cases in favor of Commerce, regardless of the input from other agencies.

While Commerce officials disputed that there had been any undue influence, the IG concluded that it is critical to the process that the appeal chair be considered objective and recommended that such influence was not appropriate.

How does a process established in S. 1712 avoid any appearance of bias or impropriety in the appeal process? There are many other examples. I'd like to get specific answers to how the proposed legislation addresses these issues, as well as the other recommendations made by the IGs and the Cox committee.

We also cannot look at dual-use commodity exports in a vacuum. While this legislation covers only dual-use commodities, we should consider how our policy and process on these dual-use items compare with satellites, munitions and other items covered by different statutes and regulations.

Can the overall policy and national security interests be gerrymandered simply by reclassifying items or defining items differently? Can the sector of Commerce negate a classification unilaterally? Or can any of the other agencies?

If we are to achieve our dual goals of promoting free trade while protecting national security, we must be consistent and clear in our licensing programs. I'm anxious to hear testimony that will address this concern.

I appreciate the difficulties in balancing which products or services can be exported without damaging national security. These are important and increasingly complex decisions in a world with rapidly changing technologies, demands for exports, and changes in foreign situations.

I appreciate the effort that has gone into attempting to balance all of the competing interests in this legislation. Our task today is to produce a review of problems which have been identified before and consider whether they've been adequately addressed, and I thank the witnesses for being here today and look forward to their testimony.

Senator Gorton.

GORTON: Thank you, Mr. Chairman.

I find it rather frustrating that we've not been able to deal with this issue decisively, yet it raises questions both with respect to national security and with respect to our trade policies at a time at which we're subject to more and more foreign competition.

It's difficult, extremely difficult for our export industries to operate under the present set of circumstances. Since the expiration of the Export Administration Act more than five years ago, the administration has been forced to impose export control numbers that have not entirely prohibited our high tech communities and aerospace industries from prospering overseas. Certainly we shouldn't compromise national security or relax controls that are necessary to ensure the safety of our nation and of our foreign relations.

At the same time, export controls are utilized for billions of dollars worth of overseas sales, and we need to strike a balance, and I think we need to strike it promptly.

I support those efforts to strike this needed balance and I think, particularly, that Senator Enzi and Senator Gramm crafted a bill that does properly deal with security-related provisions and ensures that the Secretary of Commerce obtain concurrence from Defense, with the creation of a national security control list, provides additional penalties, and for a timely and accurate review of license applications.

I understand they've also made certain compromises with those that feel that the national security provisions in their bill don't go far enough, but I have every hope that we will reach such an accommodation and that we will do so promptly so that we can move forward in a way that is both valuable to our economic interests and doesn't derogate from our security interests.

MCCAIN: I welcome my two colleagues. We'll begin with Senator Thompson.

Thank you for being here today and thank you for your involvement in this issue. As chairman of a committee that has important oversight of this issue and one who has a clear understanding about some of the events that took place in the past which caused, in the view of this senator, at least significant allegations concerning transfer of national security technology to China.

I thank you, Senator Thompson.

THOMPSON: Thank you very much, Mr. Chairman, and I think that you hit the nail on the head when you said that we're here to attempt to balance legitimate interests that we all have, commerce and trade on the one hand, national security on the other. I think that this hearing and hearings like this one will go a long way toward that.

In August of 1998, after many of the administration's various export control problems came to light, I wrote to the inspector generals at six federal agencies, Commerce, Defense, State, Treasury, Energy and the CIA, and asked them to take a comprehensive review of U.S. export control practices and then report their findings back to the Governmental Affairs Committee, which I chair.

Their reports and testimony revealed a system full of holes, one that I'm afraid clearly favored trade over national security. Their findings we can talk about in some detail if we need to, but they go into my thinking as we approach 1712.

Seventeen-twelve, whose predecessor expired in 1994, establishes an export licensing policy for dual-use items, equipment, materials, technology and know-how that can be used for both commercial and military purposes. In the wrong hands, these items can be used to build weapons of mass destruction, ballistic missiles, other military- related items that threaten the United States.

The Export Administration Act's sponsors argue that this bill brings the United States' export policies out of the Cold War era and adapts them to the strategic and commercial realities of the 21st century. They contend that this bill protects national security, while freeing American businesses to remain competitive in the global marketplace.

I respectfully disagree. The world today is different than it was 10 years ago. The collapse of the USSR reduced tensions, opened new markets and set the stage for dynamic growth in global trade. The economic genie is -- technological genie is definitely out of the bottle and nobody wants to even try to put it back in again.

The integration of economics, linked to growing markets abroad and the increasing availability of advanced technologies have made it more and more difficult to try to control these dual-use items for national security reasons. Nowhere has this tension been more pronounced than in the computer industry, for example.

But since the end of the Cold War, there's another part of this new world equation, and that is that in the new world we're living in, we also have additional threats to our country that have actually increased due to the proliferation of weapons of mass destruction and the means to deliver them.

This has been verified repeatedly by the U.S. intelligence community and outside groups, like the Rumsfeld commission and the Deutch commission. These threats have been advanced in large part due to the misuse or diversion of sensitive dual-use items, such as high performance computers and advanced machine tools, that are often critical to a weapon's construction, development and testing.

The Cox committee, for example, found that with regard to China, our export control policies have facilitated the PRC's obtaining of militarily useful technology -- the Cox report. With regard to the PRC, which has been described by the U.S. intelligence community as perhaps the worst proliferater of weapons of mass destruction and missile technologies in the world. According to the Cox committee, PRC's high performance computers are essential to China's nuclear weapons, ballistic missile, intelligence collection, and other military programs.

The report added that the PRC is convinced that the United States has the most advanced high performance computer technology and that they seek to inquire as much of it as they can for their military programs.

The Cox committee report also stated that the Clinton administration's relaxation of U.S. export controls, poor administrative oversight and failure to investigation and punish export violators have made matters worse.

THOMPSON: It's no secret that the licensing requirements for high performance computers being sold explicitly for military use to countries like China and Pakistan have been raised by the Clinton administration from 2,000 million theoretical operations per second, MTOPS, 2,000, that is, in 1995, to 12,500 MTOPS today, giving the People's Liberation Army an unprecedented capability to design and build advanced weapons the United States has yet to field.

Even more outrageous is the fact that ostensibly civilian end users in China, as if there are any, can purchase computers rated at 20,000 MTOPS, which can give researchers the ability to conduct nuclear blast simulations.

This brings us right back to the Export Administration Act and the need to balance trade and security. The problem with the bill reported out of the Senate Banking Committee is that it codifies the worst practices of the Clinton administration and then liberalizes some of them further.

It would give unprecedented authority to the secretary of commerce, it would bind the hands of the president in controlling exports and conducting foreign policies in ways that I don't think we should. The president can take action, but it provides hoops that he has to jump through before he can take action on behalf of national security.

And, among other things, it creates two new legal categories that would exempt dual-use items from export controls, foreign availability and mass market status. In other words, if these items fall into those two new categories created by this bill there's no export control. They're vague and subjective standards that have been challenged by the GAO and others.

And what constitutes mass marketing? Well, the Department of Commerce, relying upon technical people within the department, but essentially the Department of Commerce decides what constitutes mass marketing.

In other words, if a sensitive item is produced abroad or manufactured and marketed in sufficient numbers here in the United States, such as high performance computers, this bill would prohibit export controls on sales to even countries like China and Pakistan.

By assuming that the threats to our national security are minimal, that dual-use items are impossible to control, and that U.S. businesses are suffering under the weight of onerous export controls, the bill would remove, I believe, the checks and balances critical to an effective export control system.

And the fact is that dual-use items can be controlled. The keys to an effective export control system are simple: clear rules, trained staff, state of the art resources, intensive background checks, rigorous post-shipment verification and tough enforcement.

Now, the Governmental Affairs Committee, as I mentioned, discovered in our hearings that I referred to last summer that the Commerce Committee has failed on all counts. In fact, out of 190 high performance computers shipped to China in 1998, a post-shipment verification was conducted on only one of them.

It's absurd to suggest that we should now loosen our export control system because the administration hasn't bothered to implement it properly.

The Cox committee also pointed out that with dealing with this question of post-shipment verification, that we finally did, our country finally did reach an agreement with the Chinese that would allow post-shipment verification. They said we weren't doing more than we were doing, because the Chinese wouldn't let us. And so, finally, we did get tough enough to say, in 1998, we demand an agreement of some kind to allow us some post-shipment verification.

So, apparently, we have struck an agreement, but the administration will not make it public. They refuse to make the agreement public, apparently, according to the Cox report, because the Chinese demand that we not make it public to our own citizens. But the Cox report does go so far as to say, we've looked at it and it's only inadequate.

And even if sensitive items like high performance computers can be smuggled out of the country, or bought at Radio Shack, there's no reason to allow potential adversaries or proliferators to buy them in volume and acquire service and technical support from our best suppliers.

Export licenses not only place controls on commodities, they are an inevitable intelligence collection mechanism. Invaluable, I should say. They help us track what dual-use items are being used for, who is using them and how much -- how such items might be configured with other sensitive items to advance a country's military and weapons of mass-destruction programs. This is important information to have when you're defending the nation.

Finally, export controls, respectfully, are not hurting businesses or dampening the economy. That is not to say, and I'm sure it would not be valid to say, that are not some administrative hurdles, there are not some time delays, there are not some egregious circumstances which cannot be justified. Clearly, all of this needs to be looked at and where those things are present with regard to non- sensitive items we need to do something about that in this mix also.

That's not what we're talking about. Fewer than 1 percent of all exports today require licenses. And roughly 90 percent of these license applications are approved. The Congressional Research Service, Congress' own nonpartisan research branch, estimates the range of economic loss, due to export controls, is between two to four billion dollars annually, that is about 0.4 percent -- I should say, four-tenths of 1 percent of our $9.2 trillion GDP last year.

It's a small price to pay for the benefits of making it harder for rogue nations and other to acquire -- others to acquire weapons of mass destruction and missile capabilities and only a small fraction of what it may ultimately cost to build missile defense systems and acquire other military hardware necessary to defend against the weapons that these dual-use items may help create.

Obviously we're going to have to do all of the above now, because we're learning, the CIA and Rumsfeld commission and all the others are reminding us on a very regular basis that weapons of mass destruction continue to proliferate.

There are a rapidly developing number of rogue nations, of course, which have a capability and means of hitting our troops, hitting our allies, and shortly, capability of hitting us.

Mr. Chairman, I'm a strong believer in free trade. It has been both an engine of growth and prosperity for our great nation since its birth and it's created incredible opportunities for millions of Americans. When it comes to national security, we have to draw the line. I simply believe than rather than loosening export controls now, we should be tightening them.

Now, I'm dealing here with a moving target, because Senator Enzi, my friend here, knows, we've been in discussions about this bill. I'm not sure where we stand on it now. If I've mischaracterized any recent changes, he can straighten me out.

But the chairman of the Armed Services Committee, chairman of the Foreign Relations Committee, chairman of the Intelligence Committee and myself have all had concerns about this. We still have concerns about this bill that have not yet been satisfied, basically having to do with the involvement of the defense community with regard to some of these decisions.

Export controls are a complex issue which require further study and debate. This matter has also been complicated by the mistrust between Congress and the administration with regard to export controls and trade promotion, especially when it involves China.

The chairman referred to the fact that we went through this controversy about sending this authority, taking it away from State and sending it over to Commerce, including hot engine technology, satellites and all of that. We had the Hughes-Loral scandal that's under criminal investigation now. Hughes-Loral apparently going back in for another contract while they're under investigation.

Congress got involved, transferred that authority back from Commerce over to -- back to the munitions list at State. All of that has gone on, it's been held that it's damaged national security, the Hughes-Loral situation.

That's the backdrop and it's created an atmosphere of distrust with regard to this administration's handling of these export control matters. I simply think that rather than rushing a controversial bill through with significant national security implications, through Congress, in an election year, that we should postpone this legislation until next year when we can hopefully get together and through hearings such as this come to some agreements that will re- authorize the Export Administration Act, which I think needs to be done, too,

We shouldn't be operating in an area this important on the basis of executive orders and these exporters need some clarity, but we also need to make sure in the very beginning of the process that all those with national security concerns, who have had hearings and who have had experience, are at the table in the beginning, so that those interests can be considered, too.

I thank you, Mr. Chairman.

MCCAIN: I thank you, Senator Thompson.

I just want to ask you one question, because you became very well known for a number of other things, but one was to investigate the connection between transfer of U.S. technology and campaign contributions that came in from China and other sources.

Do you find it interesting that those who now seem to be sponsoring this return to Commerce of this authority are also opposed to even outlawing foreign contributions to American political campaigns, even though we have a Foreign Corrupt Practices Act, which prevents American companies and corporations from contributing to foreign political campaigns. I wondered if you had a comment on that?

THOMPSON: That is somewhat ironic. I find it difficult to understand how there could be any opposition to foreign contributions of any kind. We know that there were some.

Even more appropriate to this particular area are the domestic contributions. We all know that Mr. Schwartz (ph) was an extremely large contributor, contemporaneous with the consideration of his company's getting control over satellites transferred to Commerce.

We know Mr. Ron Brown was very active in this regard, that Mr. Armstrong (ph) was writing the president and telling him, you know, that he'd better loosen up. He needed to remind him -- remember, he was a big supporter of his, in all of -- of the wrongness, in a matter that had to do, that ultimately, our own intelligence communities concluded -- or harmed national security.

At the end of the day, we brought that technology over there, set it over there, left it unattended, apparently, and wound up harming national security.

So that's, you know, I don't want to -- we're in the last months of this administration. I've got enough battles going on with them, my record on all this is historical. I don't want to beat any kind of a horse in this regard.

But it absolutely makes no sense to me that we negotiate with this administration at this time on the details of an Export Administration Act. Period.

MCCAIN: A Hong Kong representative of China Aerospace, Chinese Lieutenant Colonel Liu Chaoying, provided $50,000 in cash from the Chinese military to a Clinton aide in exchange for good things from the president, according to congressional investigators, and President Clinton waived export restrictions for Loral and let China (inaudible) be launched on a Chinese rocket.

You know, it's -- I think there's very clear connections there. I was on a program on Sunday with Mr. LaBella, who articulated that this attorney general didn't even discuss with him a memo that he sent to the attorney general of the United States recommending the appointment of a special -- independent council, also that of the director of the FBI, and a lot of it had to do with transfer of technology to China and perhaps other countries.

So now we understand this legislation, we're going to go back and give that same authority to the Department of Commerce. Is that correct?

THOMPSON: Well, the Department of Commerce has more authority than I think that they should. I don't want to overstate my case, but yes, what goes on the control list, for example, basically is something the Department of Commerce controls. And surely they should not have -- unless that's been changed recently -- surely they should not have unilateral control of that. That's just one example.

But the chairman, you know, points out, in the backdrop and the history of this, a couple of things that are very important. There were two tracks here. One is that you had money coming in from places like the Chinese military, Madame Liu and others who were highly connected. Her father was a military high-ranking official and all of that. Money coming into the DNC.

You had four or five people who were raising tremendous amounts of soft money for the DNC, with close connections with the People's Republic of China, historical connections. One of them was recently convicted, Maria Hsia, who our committee determined was, with FBI acquiescence, we cleared it with, was an agent of the Chinese government.

You had all of those -- all of those things going on, all of the money coming in from these various sources.

The other thing that we know was going on, from the Cox committee report, is that for a long time China has had a very intense program and endeavor, at all levels, to try to get our technology as best they can.

We know about the Los Alamos situation, what we're learning more and more about is how they go about their business in getting little pieces of information from numerous people, rather than having one big spy somewhere. We know the industrial espionage that's going on. And we know from the Cox committee report what they're doing now with some of the things that we're sending them.

THOMPSON: The biggest problem that I have is what we don't know with what we're doing -- with what we're sending them.

We supposedly control these MTOP levels and they're going up all the time, you can argue about how fast they ought to go up. Clearly more and more has been coming in Commerce, you can't keep control of it.

To a certain extent, you've got to allow them to increase, but they tell us that the Chinese are bundling these computer capabilities, so they're getting MTOP levels far beyond, in all probability, of what we even suspect that they're having, which will allow them, of course, additional support for their military and nuclear program and all of that.

And now we know that we have basically no end user verification. We have two systems, one is civilian use, one is military use. There is no civilian use over there. If we send it over to civilian use and give them higher MTOP levels, it's in the hands of the military, and that's already the case up to, I think the latest may be 40,000 MTOPs. It keeps going up all the time -- 20,000. In August -- in August -- the assumption is that the request will be made in August of this year for 40,000 MTOP level for military use.

So, you have those two things going on historically, all of which just tells me not that we try to build a wall around our nation, not that we cut off exports or make things so onerous to business people who obviously and legitimately want to trade abroad -- even with tier three countries, there are a lot of other countries that don't present these problems, we're essentially talking about tier three countries here -- that we not do all of that, but that we have a proper balance.

And if all it does is buy us a little time, when we're trying to develop a national missile defense program, if all it does is buy us a little time, then it's well worth the effort to have an export control policy that does not get so carried away on the trade side of the equation in these times of peace and prosperity, where people really don't think we have any problems or threats anymore, that it does not get so carried away there that we overlook our long-range national security concerns.

MCCAIN: I thank you, Senator Thompson. I know you have to go and I appreciate the fact that you took the time to be here before the committee today.

Senator Enzi, welcome.

ENZI: Thank you, Mr. Chairman.

I think that probably when Senator Thompson was speaking and talking about the experience of the people that objected on this, that he was probably referring to how short a time I've been in the Senate. And I was senator number 100 just three years ago.

I am now the subcommittee chairman for International Trade and Finance, and was assigned this as soon as I got that position in the beginning of my sophomore years. I tried to find out why I had been assigned it and decided that since Senator Johnson is the ranking member on that committee and neither of us have foreign borders or an ocean and hardly any exports, that we have to be the security people involved in this.

It's a much more detailed and difficult situation than I ever imagined as we started on it. And as a result of your questions and the statements that Senator Thompson has made, I would ask that my statement be a part of the record, but I'd rather address the things that have been brought up.

MCCAIN: Without objection.

THOMPSON: And mine, too, Mr. Chairman.

MCCAIN: Without objection.

ENZI: I would mention that in the time that I worked on this, I've gotten to talk to a lot of senators who have worked on this issue before. I've read all of the previous literature that's been out and I'm always astounded at how much the Senate puts out on any given issue. And this bill, this act did expire in 1994. And there have been 11 attempts since that time to pass this bill. It hasn't made it out of committee yet.

But there is a lot of testimony and expertise that's available that can be read on what the problems are and why it didn't proceed that far. And I'm just trying to keep this from being number 12.

From talking to senators, people in industry, people in the administration, I've got to say that I am impressed with the deep concern and care there is for national security. Particularly at a time when we're enjoying so much economic success. That always makes it easier to overlook security. We haven't done that in this bill.

The EAA did expire in 1994 and most of the problems that are mentioned happened since 1994. We are operating under executive orders. All of the reports that have been mentioned previously mention that our difficulty is that we're operating under executive orders. It doesn't give the proper authority to any of the people that are necessary to do the things that need to be done to assure the best national security.

Where are we now? We have probably passed the window for being able to debate any kind of an EAA bill, other than some small amendment to an appropriations bill. Because we're now in the budget process, we know how long that will take, then we'll be in the appropriations process, we know how long that takes.

So probably, once again, we will fail to plug the holes that are obvious in all of the reports.

I fear that we're trying to achieve a utopia, and utopias, first of all, don't work, and second of all, don't pass around here. I'm also running into a lot of confusion, because it's so detailed.

One of the confusions is that there are actually three lists. I'm only dealing with one of the three lists. The other two are the munitions list and the satellite list. This bill does not govern those items. This is the dual-use items. These are the things that could have some military use, but are market items.

Executive orders have created quite a few problems. One of those problems is penalties. We did a little analysis of one of the convictions that's been done recently. In that particular instance, the maximum fine will be $132,000 in administrative fines. Criminal fines will be about $600,000. These companies spend more on an ad than it's going to cost them for penalties under the present executive orders that we're working on. And the only way we can change that from executive orders is to pass a bill.

Now, this bill has penalties in it. Penalties have gotten everybody's attention. Penalties are a backbone for enforcing and getting people's attention and getting compliance. That same company would have had $12 million in administrative fines and $120 million in criminal fines.

The bill also provides for imprisonment for acting outside of the bounds of this law. Imprisonment. And it can be with multiple violations up to life-time imprisonment. That has gotten everyone's attention. That is essential in the EAA.

Process has been mentioned. I've been down, I've watched how the process works. I've read the reports, I read the Cox commission while it was still class -- while all of it was still classified, to see if we were on the right track with what we were doing.

We recognized that there had to be a better appeals process. The current appeals process, chaired by the Commerce Committee, would require a person who is dissenting to find their boss and get their boss to understand it well enough to file an appeal within a very limited period of time.

The way we've done it now, we looked at a number of different processes that we could do, but the one that there was universal appeal for was one that would allow the person who's on that operating committee to appeal it himself. He's already been there, he's already heard the data, he fills out the papers, he files the papers, it moves on up. And it requires concurrence by Department of Defense, secretary of state and Department of Commerce at some point in the process, if it gets appealed that high.

But we have allowed the appeals process to take into consideration the things that have been addressed and to plug those holes.

On enforcement. I mentioned the penalties already. One of the things that we're trying to achieve with this bill is to make enforcement possible. Right now we're trying to enforce everything in the world, and it isn't working. The way that we came up with was to come up with a priority system, a mechanism where we can concentrate on those things with the greatest danger to the United States first and those things that probably cannot be controlled and have much less danger last. It still provides for watching out for all of them.

We have foreign availability. Foreign availability is not a new concept. Foreign availability was in the 1979 Act. We have kept it in the act. Under foreign availability, there has been one item that has matched foreign availability in the time that that has been in possession since 1979.

We do have a new name for a process -- mass market. Again, it's to get to this prioritization so that we can work on the things with the most exposure the most. Mass market goes under the concept that if you're already selling it in Wal-Mart and Best Buy and Circuit City and every place else in the nation, that it can be purchased, in quantity, by any number of people and it can get in foreign hands. And there is no way to do the enforcement to make sure that it doesn't get purchased in those establishments easily.

So, we have concentrated on post-shipment verification. We have tightened the noose on post-shipment verification. We have a mechanism to make sure that the post-shipment verification is allowed by companies and by countries. But we put a priority on it.

Then we've done all these things for security. Why would the industry be interested in it? There's only one thing that helps industry in this. I guess it's got more than one name, but it's the same characteristic. They want stability, reliability and predictability. Those are all common characteristics that help the business community to operate with greater capability. Stability, reliability, predictability. And we have a system where we think we can protect what needs to be protected, but still provide those parts.

I would mention that this has been through the Banking Committee, as I'm sure you're aware. There are people on the Banking Committee from a number of other committees in the United States Senate who worked tediously on this bill, and I say that because of the amount of detail that's in it. It did pass the Banking Committee, 20 to nothing.

There have been some suggestions since that time that perhaps the bill could be divided up and done in little pieces here and there. That's a possible scenario, but I don't think it's a possible action. First of all, if we do it in knee-jerk ways, I think we'll wind up with a skewing actually away from national security. If we do the bill in total and then look at additional ways that other things can be done, that has potential.

Why won't it pass on a knee-jerk, one at a time basis? I read the rest of the legislation. I looked at the other examples of how we tried to do this. And I noted that it's easier to defeat a bill than it is to pass a bill. And that's exactly what's happened, when its skews too far one side, the other side gets the votes together at one point in the process, to have the majority of the votes, and that ends any discussion on the bill.

We've worked hard for balance. I hope that that balance is there. We've been taking suggestions on it throughout the entire process and trying to work them in. But again, trying to make sure that it's a balance that will work and that will pass so that we can get those higher penalties, better enforcement, and a more workable process in place.

I thank the chairman for the time.

MCCAIN: Thank you very much, Senator Enzi, and thank you for all your hard work on this issue, and I thank you and Senator Thompson for being here.

Thank you very much.

ENZI: Thank you.

MCCAIN: Our next panel is the Honorable James Bodner, as the principal deputy undersecretary of defense for policy of the Department of Defense, Mr. John Holum, who is the senior adviser to the secretary of state for arms control and international security, and the Honorable William Reinsch, who is the undersecretary of export administration at the Department of Commerce.

Please come forward.

Mr. Bodner, we will begin with you. Welcome back before the committee. It's good to see you again.

BODNER: Thank you, Mr. Chairman.

I believe I've submitted a more complete statement for the record. I'd like to summarize that for presentation here.

MCCAIN: Thank you.

Without objection, all the witnesses' complete statements will be made part of the record.

BODNER: Mr. Chairman, I appreciate the chance this afternoon to appear before the committee to discuss the Export Administration Act.

DOD views the enactment of an effective Export Administration Act as important for national security, and we look forward to working with you, this committee, and others in the Congress to produce the best possible legislation.

BODNER: As Senator Thompson and Senator Enzi mentioned, for nearly six years we have operated within a regulatory framework for export control that is based on the provisions of the last EAA carried forward by executive order.

We think the time has come to update that framework and establish it in law so that we have the tools we need to exercise effective controls in the face of a rapidly changing world.

From the Pentagon's perspective, there are certain critical principles that underlie an effective Export Administration Act. First we need to have a strong basis in law that identifies U.S. security interest as the primary underpinning for U.S. export controls.

Second, for controls to be effective in protecting and promoting our national security objectives, the underlying authority must provide sufficient flexibility in establishing and implementing controls. The pace of change in technology, as well as in the economic and security environment, requires a system that is both agile and adaptable.

Third, while controls are considerably more effective if they are implemented on a multilateral basis, the law needs to maintain a sufficiently broad basis for imposing unilateral controls when necessary. There are, in fact, circumstances under which the United States must be able to take unilateral action.

As you know, Mr. Chairman, DOD bears special responsibility for national security. We work closely with our inter-agency colleagues, particularly at the State Department and Commerce Department, to prevent, slow and counter the proliferation of weapons of mass destruction and their means of delivery and more generally, the diffusion of technologies that could adversely affect our military edge.

I would note that preserving our military technological advantage involves not only limiting the acquisition of critical technology by potential adversaries, but it also involves promoting a vibrant, innovative private sector that can continue to support cutting edge research, development and production.

We, in fact, enhance our national security by ensuring that U.S. industry can engage in legitimate international trade and investment, and that our scientists, engineers and other researchers can collaborate with international counterparts.

Moreover, given that we generally conduct military operations in concert with friends and allies, promoting national security requires that we both have effective export controls and effective mechanisms for international industrial collaboration in defense products.

We aim to widen the gap with potential adversaries, while at the same time closing the gap with allies and those with whom we expect to conduct military operations in the future. Both of these are essential to national security.

Now, one key to accomplishing both objectives is to ensure that the export control system is as efficient as possible. At DOD, over the last year, year and a half, we have taken numerous steps to improve our role within the current export control system.

We've reformed our internal organization and our procedures to reduce significantly the license review times and to improve the quality of reviews by focusing on the most sensitive, complex cases.

We've also improved the efficiency and quality of the inter- agency national disclosure process that DOD chairs, and on a related front, we've reengineered the foreign military sales program to be more efficient, transparent and responsive.

In that context, we believe that enactment of an effective Export Administration Act is another key element in ensuring that our export control system meets our national security requirements.

We know that the United States is not the only source of key technologies. Therefore it's essential that we work with our export control partners to maintain multilateral export control regimes, to strengthen other nations' export control systems and to encourage other countries to adopt policies and practices that reflect our shared security interests.

We favor a statutory framework for export controls that highlights existing multilateral nonproliferation regimes, such as the Nuclear Suppliers Group, the Missile Technology Control Regime, the Australia Group and the Wassanaar Arrangement.

A critical element in any export control system is a comprehensive export control list. U.S. and multilateral control lists serve as a foundation for national security export controls. And to be effective, control lists must comprise only those items for which there is a clear and compelling national security rationale.

Under the current regulatory framework, DOD participates actively in the inter-agency and multilateral processes that define these lists. We do so by providing critical assessment of how specific items relate to military capabilities. This is an open and transparent process that affords all relevant agencies an opportunity to address their concerns and when consensus cannot be reached, to escalate issues up to the president, if necessary, for resolution.

I'd note that the same is true for the system of reviewing export license applications, which is also open and transparent. Such a structure enables DOD to play its important role in an effective manner and illustrates the core principle that an Export Administration Act should apply generally to the export control process in which DOD can make a contribution.

DOD believes that an EAA, to be effective, must contain sufficient flexibility for the president and his senior advisers at DOD, State and Commerce to impose special controls or to maintain controls on items of particular importance to national security.

With that, Mr. Chairman, I'd like to commend this committee, the Senate, for its hard work on trying to draft an Export Administration Act that meets the needs of the nation. I would note that we still have some distance to cover, as the previous testimony suggested. But I'm hopeful that agreement can be reached soon on effective legislation that can gain broad enough support to be passed and enacted.

Thank you.

MCCAIN: Thank you very much, Mr. Bodner.

Mr. Holum, welcome.

HOLUM: Thank you, Mr. Chairman.

MCCAIN: It's good to see you again.

HOLUM: It's a pleasure to be back. And thank you for the opportunity to provide the views of the Department of State on the Export Administration Act.

The administration has been working extensively with Congress to develop legislation that carefully and properly balances our goals of protecting U.S. national security and foreign policy interests while supporting U.S. economic leadership and assuring the security of the U.S. and its friends and allies.

At every step of this process, talks between Congress and the administration have been constructive and open-minded, which will undoubtedly result in a better final bill.

State Department fully recognizes that U.S. exports, particularly in high technology fields, are important not only to the prosperity of the American people, but also to the security and foreign policy of the United States.

In an environment where our defense and foreign policy resources are stretched to the limit, we rely upon the innovative and productive capacity of the U.S. economy to provide new and more efficient tools to ensure a decisive technological advantage over our potential adversaries.

Export performance is a key factor in U.S. industry's ability to grow and invest in these new technologies. However, with U.S. technological leadership also comes a great responsibility. Our adversaries, particularly those countries that are attempting to develop weapons of mass destruction, missile systems and advanced conventional weapons, can also derive great benefit from dual-use technologies.

Export controls, therefore, are a balancing act or an exercise in risk management. The objective is to maintain an export control system that encourages export where also -- while also fulfilling our international non-proliferation obligations and preventing dangerous technology transfers.

We in government have well-defined responsibilities and authorities aimed at ensuring that trade is conducted in a manner that promotes U.S. foreign policy objectives and national security interests.

We also have an obligation to exporters of dual-use goods and technology to create an environment that does not unnecessarily hinder industry's ability to compete in the global marketplace. Our approach to the new EAA is to craft a bill that reaches this balance.

A major responsibility of the State Department is to ensure that any legislation will allow us to continue to exert leadership and to fulfill our obligations in the multilateral export control regimes.

Any legislation on export controls needs to provide this and future administrations with the flexibility to negotiate strong export controls on a multilateral basis. Unilateral controls are sometimes necessary. But multilateral controls clearly are preferable.

If legislation prevents us from adhering strictly to these international regimes, they will cease to be viable, cutting off our main avenues for achieving effective multilateral controls on sensitive transfers.

With that in mind, the State Department believes that any new legislation needs to avoid provisions that inadvertently weaken existing multilateral regimes and hamper our ability to encourage other countries to adopt stringent export controls or unduly restrict our ability to implement foreign policy controls or are duplicative of existing sanctions authority.

With those criteria in mind, State has followed the progress of a number of key aspects of the draft EAA, including penalty provisions, mass market and foreign availability provisions, exceptions to foreign policy controls, definition of State's role and sanctions provisions.

We look forward to working closely with Congress to finalize these and other provisions in this important legislation. The State Department appreciates congressional efforts to undertake a thorough review of this extremely complex subject and produce a new EAA.

Export controls, as I've said, implicate both the American economy and international security as a cornerstone of our nonproliferation and arms control efforts. The Department of State welcomes the opportunity to work with the committee on this complex but essential task.

Thank you.

MCCAIN: Thank you, sir.

Mr. Reinsch.

REINSCH: Thank you very much, Mr. Chairman. I'm glad to be back.

It's tempting in this situation to take some time to make some comments on some statements made by the previous panel, such as the comment that we had made -- the Commerce Department had made only end use visit in China. In fact, we made 60, and have more scheduled.

But rather than go down the list, I would hope that perhaps later you might ask us to comment on some of the comments from the other panelists, because there are some other points -- I think when we deal with this, as Senator Enzi said, it's a question of details in many respects. It's a very complicated issue. It's a very complicated bill, as you well know. I think it's important that we all be working from the same set of details as we go forward.

But let me, if I may, just give an abbreviated version of my statement, beginning with what I think that we are trying to do in the administration as far as our concept of export controls is concerned.

Our vision, if you will, is to continue to maintain military superiority in the face of more diffuse adversaries and less multilateral agreement on precise security threats. We seek to maintain the gap between our capabilities and those of our adversaries by both retarding their progress and accelerating our own.

What has changed in recent years is the relative balance of those two tactics, as economic globalization has accelerated the pace of technological change and made export controls more difficult to implement and enforce.

That means our national security has become increasingly reliant on our economic health and security. Our military's increasing reliance on microprocessor technology, primarily in computers and telecommunications, means that their technology driver is the civilian sector, not the military contractor.

That means in turn that our military strength is directly tied to the health of the civilian companies that produce the products the Pentagon buys and invent the technologies that it relies on.

At the same time, the reality is that our military does not buy enough to keep our companies healthy. In fact, it is exports that keep the USHPC (ph) and other high-tech companies thriving. More than 50 percent of the sales of these companies are exports.

Failure to export means fewer profits being rolled in R&D on next generation technologies and fewer funds available to address particular defense-related concerns. Thus, we believe that in many cases the equation has become exports equal healthy high tech companies equal a strong defense. If export controls cripple our high tech companies by denying them the right to sell, you set back our own military development and with it, our security.

A key and growing reality in these kinds of cases is the capacity of our adversaries to make these products themselves or to obtain them from those who lie outside the circle of multilateral control regimes.

In the case of computers, for example, China, as well as India and others, have the capacity to make these machines themselves. While they do not and cannot manufacture to compete with U.S. companies, they can make machines that will function at performance levels sufficiently high to provide the military capabilities they seek.

Denying them U.S. products simply encourages their own development and production. Moreover, our lead in many of these sectors is not based on our monopoly of the technology. Rather, it is based on the quality and efficiency of our production. Close the market and we will create viable competition where there is very little now. And that competition, as we've learned in so many other sectors over the past 30 years, will not stop with China or India, but will move on to compete head to head against us elsewhere, to the long-term detriment of our global leadership.

In other words, we believe that in some cases the biggest loser in the face of closed markets is not the Chinese, but the Pentagon, whose access to cutting-edge goods and technologies will be slowed, and the United States, whose technological leadership will face new challenges from new suppliers.

In these cases, we think the key security issue is the United States' continued ability to stay at the cutting edge of developing and producing these technologies. The challenge for government is to identify trends in these sectors that could compromise our capacity, and then to take steps to prevent that from happening.

This is very different from the Cold War approach of simply denying a very wide band of much slower moving technologies and products to clearly identified adversaries.

Now with respect to the EAA, continuing to operate under emergency authority creates a number of problems for us. First, as mentioned by Senator Enzi, our penalties are substantially lower than those available for violations that occurred under the old EAA of 1979, but even those penalties are too low since they have been eroded over the past 20 years by inflation.

The longer we are under the International Emergency Economic Powers Act, which is our current statutory basis, the more companies will begin to think of the lower penalty as merely as a cost of doing business.

Another limitation of IEEPA concerns are enforcement agents' police powers, and my statement details that problem in a little bit more detail.

Third, the longer the EAA lapse continues, the more likely we will be faced with challenges to our authority.

For example, IEEPA does not have an explicit confidentiality provision like that in the Export Administration Act, or similar provisions in the various bills that are pending, including the one under discussion today.

The prediction I made in 1997, that the department's ability to protect from public disclosure information concerning export license applications, the licenses themselves, and related export enforcement information was likely to come under increasing attack on several fronts -- that prediction has come true.

The department is currently defending two separate lawsuits brought under the Freedom of Information Act seeking publicly release -- public release of export licensing information, subject to the confidentiality provisions of our law. If we cannot defend the confidentiality of this proprietary information, we will face increased business reluctance to cooperate with our system.

Similarly, the absence of specific anti-boycott references in IEEPA has led some respondents in anti-boycott cases to argue -- thus far unsuccessfully -- that the Department of Commerce has no authority to implement and enforce the anti-boycott provisions of the EAA and the Export Administration regulations.

Finally, we have noticed abroad that our failure to enact a new law sends the wrong message to our regime partners, many of whom we have urged to strengthen their export control laws and procedures. As part of our cooperation with the former Soviet Union and Warsaw Pact countries, for example, we have urged them to enact strong export control laws. Our credibility is diminished by our own lack of a statute.

Now, in 1994, the administration proposed a revised EAA that refocused the law on the new security threat we face -- the proliferation of weapons of mass destruction -- without sacrificing our interest in increasing exports, reducing our trade deficit and maintaining global competitiveness in critical technologies.

Congress did not act on that bill, but in 1996, the House passed H.R. 361, which made several significant improvements to the EAA, which were similar to those contained in the administration's bill. Those improvements include control authority updated to address current security threats, increased discipline on unilateral controls and enhanced enforcement authorities.

It also contained provisions consistent with administration reforms of the licensing and commodity jurisdiction processes, which are largely embodied in Executive Order 12981, which was issued in late 1995. That order makes clear that all agencies with a stake in the outcome -- namely, my colleagues here and the Department of Energy -- have a seat at the table. Commerce manages the system, as it always has, but State, Defense and Energy may review any licenses they wish and take their concerns through a dispute settlement process that goes all the way to the president.

It is a tribute to the effective management of the system and the good faith agencies have demonstrated in working with us that all agencies have agreed on an outcome in these license applications more than 90 percent of the time and conduct their reviews, on average, in less than half the allotted time that the executive order gives them.

Thus far, all differences of view have been resolved at the assistant secretary level, and none have had to go to the cabinet or to the president in this administration.

Now, the Senate did not act on the House-passed bill in 1996, but as observed earlier, the Senate Banking Committee reported S. 1712 last September. While different in structure from the House-passed bill, it updated control authority to address current security threats and contains other useful provisions such as enhanced enforcement authorities and significantly higher penalties. It is also largely consistent with the administration's reforms of the licensing and commodity jurisdiction process.

We appreciate the constructive bipartisan approach taken by the committee's leadership -- Senators Gramm and Sarbanes, Enzi and Johnson. And we all understand that they've done an exceptional job in the wake of a very difficult subject matter. Despite their efforts, however, we understand that S. 1712 continues to be a subject of discussions between the Banking Committee and interested members of other committees, as Senator Thompson observed.

The administration has not yet taken a position on S. 1712, pending the outcome of those discussions, but we look forward to a successful outcome that would enable the bill to be considered on the Senate floor.

In closing, Mr. Chairman, let me simply say that we need an EAA that allows us to effectively address our current security concerns while maintaining the transparent and efficient system for U.S. exporters. The administration and the House, via H.R. 361, and the Senate Banking Committee, in S. 1712, agreed on many of the salient issues, such as focusing on multilateral controls, further discipline on unilateral controls and the licensing process, and enhanced enforcement. These reforms would facilitate the proper balance for controlling dual-use items, while minimizing the burden on exporters.

My preference is to take up reauthorization of an EAA that would build on a consensus already achieved and further enhance our security in the way I defined it at the beginning of my statement.

Thank you, Mr. Chairman.

MCCAIN: Thank you, Mr. Reinsch. And I think your suggestion is appropriate. I'd like to begin with Mr. Bodner, and ask if he or Mr. Holum or you have a response to the concerns raised by Senator Thompson and his comments.

You don't have to. Mr. Reinsch obviously wishes to, but if you don't, or Mr. Holum doesn't, that's fine with me.

BODNER: Perhaps you will want to proceed with Mr. Reinsch, and then John and I might have comments.

MCCAIN: OK. Fine.

Mr. Reinsch, you can...

REINSCH: Well, I would just -- I wanted to stick to facts, Mr. Chairman.

MCCAIN: Sure.

REINSCH: I mean, there are issues here that are questions of opinion, and we can discuss those. But I do want...

MCCAIN: I think it's important for you to -- to respond as you said.

REINSCH: Let me just say, on computers, the numbers -- the control numbers we're dealing with are not 12,500 and 20,000, they're 6,500 and 12,300. Those went into effect in January -- on January 23. We are currently reviewing further numbers. The higher number Senator Thompson alluded to, in the absence of congressional intervention, will go into effect on August 14, but they are not in effect now.

The bill does not move commercial communication satellites back to the Department of Commerce. In fact, the bill -- S. 1712 has nothing to do with commercial communication satellites. I've heard rumors that there may be some senators that will make that proposal, but that is not part of that bill, and we have not seen any such legislation that has been proposed, as far as I know.

The Department of Commerce does not now, and would not under this bill, unilaterally add or remove items from the control list. That is an interagency exercise which we undertake with my two colleagues here, and we make joint decisions.

Likewise, in the licensing process, as I described, the Department of Commerce does not unilaterally issue export licenses unless we are talking about the relatively small number of items in which our sister agencies have told us they're not interested in reviewing those applications.

One of the things that the executive order issued in December '95 did was tell agencies that they can see anything they want. Agencies have the right to tell us they want to see everything.

After that executive order was issued, the number of licenses we referred to other agencies jumped from 52 percent to 94 percent. It has since fallen down a little bit because agencies have decided they don't want to look at certain things because it doesn't affect their equities, and we're now referring somewhere between 85 percent and 90 percent of our licenses.

Even so, they all go out -- they all fan out in the process, are widely distributed, and the decision-making is a joint process in which, as I said -- this gets obscured in the debate -- but we actually agree 90 percent of the time on these things, and that's the end of it -- that we agree at the working technical level and this moves on. What you read about are the small fraction that we don't agree to that work their way up through the dispute settlement process but which, as I said, always have gotten resolved at the assistant secretary level and have not yet had to go higher, although the means exists to do that.

As I mentioned in the beginning, we have not done one -- only one end-use visit in China, we've done 60. We have more scheduled. The agreement we have with the Chinese is classified confidential. We gave it to the Cox Committee. We gave it to our authorizing committees. We're happy to give it to the Government Affairs Committee. We're happy to give it to you, Mr. Chairman, and have you look at it.

I could not tell you that we're entirely pleased with it. In fact, my assistant secretary is in China as we speak, negotiating with the Chinese to try to strengthen it. And I hope that she will come back at the end of the week with some improvements because I think we can do more. But I think 60 is a big improvement.

I'd also say that that doesn't count the other some 200 end-use visits that we have to conduct because we are required by law to visit all computers shipped not just to China, but to 50 countries. And we have -- the Congress has not seen fit to give us additional resources to do that, so we've been able to do 60 in China. We've been able to do some 200 in the other 49 countries, which I could -- some of which I could enumerate, if you wanted me to -- but the other big ones are India, Pakistan, Russia and Israel. Those are -- together with China, comprise about 85 percent of that particular group in the marketplace.

I think, in terms of facts, Mr. Chairman, I think I'll just stop there and respond as you wish to anything else.

MCCAIN: Thank you.

Mr. Holum, do you have anything to add?

HOLUM: No.

MCCAIN: Mr. Bodner?

BODNER: No, sir.

MCCAIN: I guess the concern about the small number are those that resulted in the legal sale by American companies of biological materials to Iraq during the 1980s, provided the basis for that country's biological weapons program; the acquisition by Iraq of glass fiber technology used to improve weapons systems, including guided missile components; the sale to the former Soviet Union of the Kama River truck plant, a product which was used extensively during the invasion of Afghanistan; the sale to China of machine tools used in the manufacture of advanced fighter jets; and numerous transactions involving the sale to China of computers and other technologies to institutes with integral ties to the People's Liberation Army.

All those were, I'm sure, one of the few that slipped by during -- during previous administrations when the Export -- previous Expert Administration Act did not expire.

Is it true, Mr. Reinsch, that the Department of Commerce, under this proposed legislation, will decide whether referrals are made -- whether referrals are made to DOD and State?

REINSCH: Of export license applications -- no, sir, Mr. Chairman. It would largely repeat the structure that we have now in which the other agencies would indicate to us what they wish to see. And they tend to do it through what might best be called a negative option -- that is, we sort of assume they want everything they delegate back to us authority not to send them certain things. And as I said, what that's resulted in is that we refer 85 percent to 90 percent of our licenses. If anybody wants to see all of them, we are happy to do that.

This bill would not change that process.

MCCAIN: I'd like to give you a chance to respond. On 60 MINUTES, there was the -- on the use -- on the aspect of dual-use technologies, as exemplified -- in a 60 MINUTES reference to the factory in China to which military sensitive U.S. machine tools are sent, which is known to produce Silkworm missiles. In response, you noted the factory in question also produces bicycles.

Would you like to respond to that?

REINSCH: I remember that program, Mr. Chairman. That was one of the interesting events of my tenure.

MCCAIN: I do have some sympathy for you in that respect.

REINSCH: What I learned -- as perhaps you've observed, too, Mr. Chairman -- from that, is that the bigger the program, the more furniture they move when they interview you. It took them an hour and a half to set up and an hour to shut down for what you saw, which was a very brief interview.

What I said -- which they neglected to report -- was that in that particular case -- I mean, there's no question in this case, Mr. Chairman, that there was a diversion. That is also under investigation, and as you may be aware, last October 19, criminal indictments were issued against the McDonnell Douglas Corporation and a Chinese corporation -- certain individuals for their alleged involvement in that case, and that will be working its way through the criminal justice system.

What is often forgotten in that particular case is that of the 30-plus tools that -- machine tools that were involved in this larger shipment, six were -- five or six were actually diverted to the Nanchang plant, which is the one you're referring to.

What most people fail to mention is two things -- first of all, we got them all back before they had been used. All but one of them had not even been taken out of its crate. And the company was able to visit them along the way. We were able to ascertain and demonstrate that they had not been used. These are not machines you simply plug them in and run them. They're -- the one that was uncrated was a hydraulic stretch press that needed water, you know, facilities and a lot of other things.

We are confident they were not used. They were all returned to another facility where they -- under American control. They continue to be visited, and we are confident that they were not used.

The irony, I would say, Mr. Chairman, is that what that report in 60 MINUTES also did not comment on is after that stretch press was sent back -- was recovered and sent back into American control, the Chinese bought a brand-new one from Europe to replace it.

MCCAIN: I hate to do this to you, but I do have some...

REINSCH: Fire away.

MCCAIN: ... questions that I would like to submit to you all that I would like responses for the record. I know how busy you are, and I will try to keep those questions at a minimum.

Look, let me -- let me just ask the three of you to address what I think the concerns have been expressed by the inspectors generals -- inspectors general of each of your departments that you represent. And some -- and concerns have been raised in IG reports in all three departments that you represent.

And that's this whole issue, which really focuses a lot of the -- the concerns that members have and Americans have about dual-use technologies and especially dual-use technology that is exported to China, given the indivisible relationship between the Chinese Army and their commercial enterprises. That's -- that's the great cause for concern, I think, amongst most of the members of this committee and other members of the Senate.

Would you -- would you discuss those concerns specifically, beginning with you, Mr. Bodner?

BODNER: I do think it's possible to -- to square the circle in terms of the challenges posed by the fact that technology's advancing at a very rapid pace, and it is spreading. And it's becoming ubiquitous in the industrial environment and business environment, and of course, in the military environment. And that's where the rub comes because of the overlap there.

What we need to do is to make sure we have processes in which, in each case, an appropriate balance can be struck and judged. And I do think that has been stated here, when the Department of Commerce determines that a license is required, I do think the interagency process works. And we're -- we're satisfied generally with that.

BODNER: Similarly, with regard to a question of the formulation of the list, as it exists now and as it exists under the proposed legislation, particularly as it came with changes in the manager's amendment as it now stands.

There obviously are cases in which it's a little more difficult to make determinations. I'd note that in a parallel process that the State Department runs for munition list items, under the Arms Export Control Act, there's a very transparent system there that we're very pleased with in terms of when a determination is made by State that a license is required, we have adequate insight into how that works, and we think that system works well.

We also have adequate insight into the State Department system for deciding whether a license is required -- the so-called commodity jurisdiction process -- and we think that works well.

I will tell you that within the Department of Defense, one of the things we've done to improve our system is we've gathered the three military departments together, and we've had them identify, together, which of them has the best practice for each of the different elements of their export license review process. And then we've encouraged them to adopt the best practice -- even though, for a particular department, they may be borrowing a practice from another.

And I think in this case, we may have a similar situation. We -- we think the commodity jurisdiction process works quite well. It is transparent and open, and we're pleased with our colleagues in the State Department that we have insight into how they make a judgment as to whether a license is required or not. And we think that's a best practice.

And as a principle in life, I would say that we should all be looking to adopt best practices.

MCCAIN: Mr. Holum.

HOLUM: Going specifically to the question of whether it's possible to export a dual-use commodity to an entity in China and not have it end up in the service of the military -- the PLA -- it seems to me that it is possible in two ways. One is the technology may not lend itself to a particular military use or might not be useful. It may be embedded technology that having access to what's really valuable in the commodity would result in destruction of the product, which would leave them with nothing.

And another way is through the end-use process that Undersecretary Reinsch described. And I think it does serve our interests if we have confidence that we are protecting U.S. technology from diversion to, for example, provide computing capability to weather-predicting operations in China. I don't -- that can serve international air traffic safety, for example, and weather prediction. I think we have a broader set of interests here. Both the commercial transaction and other national interests that can be -- that can be served.

So I don't -- I don't regard everything that goes to China as inherently going to the PLA. I don't think that's the appropriate standard for review of dual-use items. But I do think we need to be careful to protect the technology from diversion and strongly enforce against the exporter and -- and entities in China when there are diversions.

REINSCH: I think...

MCCAIN: Mr. Reinsch.

REINSCH: Thank you. I think, Mr. Chairman, I would draw a distinction between information technologies and other technologies, particularly production technologies.

I think if you look at our record overall on machine tools or semi-conductor manufacturing equipment or production equipment -- things you use to make other things -- with respect to China, it's been quite tight. In fact, I'm confident if you were to have a machine tool industry witness on your next panel, they would give you nothing but a series of complaints, which the three of us have gotten over the last several years about this administration's failure to do what they would like. I'm going down to their annual meeting tomorrow, and I expect to hear those complaints.

We've got similar complaints, incidentally, from the semi- conductor manufacturing equipment organization.

IT -- information technologies -- is a little bit of a different category because of its ubiquity, because of the pace with which it moves, because the real issue here, as far as computer is concerned, is not so much the box but the chips. The chips are made all over the world. Intel will tell you they have 50,000 authorized dealers -- and those aren't the people that make the clones, those are the people that make, you know, their own.

It's very difficult in those situations to box up that technology and keep it out of individual hands. In the case of China, some 60, 65 percent of the computers that have gone there have gone to banks, phone companies, weather prediction organizations and, I think, railroads.

Now, we believe that those are essentially benign institutions, and that -- we visited them -- of all the visits we've done in China, we've not found any problems. Every computer that was shipped was where it was supposed to be, doing -- as far as we can tell -- what it was supposed to do. And we think that that's, you know -- in the computer/IT area, there are limits to what we can accomplish, and I think I would agree with Mr. Holum that's an area where you can draw the distinction. Elsewhere, I think we've been quite tight.

MCCAIN: Well, I guess -- you say 65 percent went to those. Then that gives rise to the question, where did the other 35 percent go?

REINSCH: Radio and television stations -- actually, I can submit for the record. We've got a complete accounting...

MCCAIN: I'd appreciate it.

REINSCH: ... research institutions. I mean, it raises an interesting question, Mr. Chairman. For example, if you want to make an analogy -- if you want to make an American analogy, for example, we might send one to the Johns Hopkins University. Well, that sounds good. Well, the Johns Hopkins University owns and operates the Applied Physics Laboratory, which, as you probably know, does -- engages in a great deal of classified research for the Department of Defense and others.

Does that mean we shouldn't give a computer to the university? I mean, these are the kind of problems we face in China.

MCCAIN: Johns Hopkins is not owned by the United States Army. There's a little less than subtle difference...

REINSCH: Well, neither are the Chinese institutes that I'm talking about. They're not owned by the army, but they have relationships with the army, there's no question about that.

But, you know, the other reality is, in any country in the world, if we ship something overseas, you know, we lose a modicum of control over it. I mean, if you're going to tell me the PLA can march into the, you know, Kwangzhou (ph) telephone company and rip their computer out of its flooring and take it somewhere, the answer to that is probably yes. But that can happen in most any country in the world, if that's what the military wants to do.

What we have tried to do in that technology is, you know, parcel what we're doing in relation to the widespread availability of the technology and their own ability to make these products themselves.

MCCAIN: But again -- I don't mean to be argumentative, but there are different levels of concern, which are -- our concern, I think, is driven by the actions of those particular countries. And obviously, if it went to England, then we might have a different level of concern than if it went to China or Iraq or Libya or Iran.

So -- and again, in all due respect to your statement, "Well, any country in the world," I think there are different levels of concern about what exports go to which country. And I am also aware that those countries can serve as middle-men and all that.

But I guess the -- the concern that -- that many of us have is when we see what apparently is a very significant investment in military capability on the part of China, which was not true some years ago, that it makes us even more cognizant of this particular aspect of our export of -- of high technology, which can be used again -- which is dual-use.

REINSCH: And we share that concern, Mr. Chairman. I think there's no question about that. And there -- probably the two countries that, as an interagency group, we spend the most time talking about, for precisely that reason, is China and India because of recent events there. And they both pose some very complicated policy dilemmas. I think we would concur completely with the concern you're expressing, and we're attempting to work our way through it one by one, which is what we do in the licensing business as best we can.

MCCAIN: I thank you all. I thank you for taking time this afternoon. Thank you for being here. And I think it's helped a great deal as we examine this very important piece of legislation.

I thank the panel.

Next panel is Mr. John Douglass and Doctor William Schneider.

Welcome back, Mr. Douglass.

DOUGLASS: Thank you, Mr. Chairman.

MCCAIN: Please begin.

And how are you, Mr. Schneider?

SCHNEIDER: Very good, sir.

MCCAIN: Haven't aged a bit...

SCHNEIDER: (LAUGHTER)

MCCAIN: ... since you and I first encountered each other in the middle '70s.

SCHNEIDER: Yes. Yes, that's...

MCCAIN: Now you're in your middle '70s, aren't you?

(LAUGHTER)

MCCAIN: That's not a kind remark. I apologize for that, Bill, after...

SCHNEIDER: I work for the State Department, so I'm well- insulated from assaults of that sort. Thank you.

MCCAIN: Thank you.

SCHNEIDER: Thank you, Mr. Chairman.

MCCAIN: John.

DOUGLASS: Thank you, Mr. Chairman. I want to begin by thanking you for holding this hearing and giving me an opportunity to testify, sir.

As you know, sir, we've worked together before. I remember in -- especially your attempts to work with Senator Nunn on things that were in the Defense bill that shouldn't be in the Defense bill. And sir, I've always enjoyed that and greatly respect you for -- for your valiant efforts there.

MCCAIN: Thank you, sir.

DOUGLASS: I'd like to just take what time we have left today to go over -- provide a little information to the committee, sir, about the system and about where our products are -- and then comment briefly on the bill, and then -- and then to turn it over to Bill.

First point that I'd like make, sir, is that there are two systems, and the two systems have their roots in two basic laws. The Arms Export Control Act is administered by the Department of State, and that covers defense articles and services which are clearly military items.

And one aspect of the debate that I've heard often over and over -- over the past, oh, 60 days to 90 days, I've testified three times on this bill -- is that examples of things that are military tend to get into the debate when talking about dual-use items. There's considerable amount of confusion there.

The bill that we're talking about, of course, is trying to get a new Export Administration Act. As previous witnesses have pointed out, we haven't had one since 1994, so it's been six years now. And these are for essentially commercial items which might have some use by some potential enemy as a military product.

And this is a very difficult judgment to make, sir. I could hold up a cell phone, and you and I could make the obvious discussion about how it could be used by a soldier. In fact, during our military operation down the Dominican Republic a few years ago, or in the islands, one of the soldiers called in on a cell phone in order to locate his unit.

That whole system is administered by the Department of Commerce. But there is one interesting thing, sir, that hasn't been brought out in the debate -- none of the previous witnesses mentioned it -- and that is that if there is an item that is being administered by the Department of Commerce, and the Department of State feels that it is -- belongs on the munitions list, the Secretary of State has the unilateral authority to, you know, exercise jurisdiction over it. So things can be moved internally, as it exists today, without the intervention of the Congress.

And finally, sir, I thought I would just mention -- I mentioned it in my written statement, which I would like to submit for the record...

MCCAIN: Without objection.

DOUGLASS: ... sir...

MCCAIN: Both statements.

DOUGLASS: ... is that the confusion about these two laws exists not only in the minds of the public and in the minds of people up here on the Hill, but it exists in the minds of business people and, indeed, it exists in the minds of people in the government.

After Secretary Holum testified recently, somebody over there in the State Department put up a summary of his testimony on the -- on their Web site, and he had it all backwards. They had the military things being controlled by Commerce, and vice versa. You can imagine the impact that this would have on a small business somewhere out in the Midwest who might be bidding on a contract in England or France or whatever and trying to understand this. It just is terribly confusing.

Next chart, please.

As a result of the fact that we have two bills, and as a result of the length of time that's gone by since these bills were put through our legislative system, a lot of things have changed. In the old days, during the Cold War, when the current bills were drafted, the distinctions were more clear than they are today. Indeed, the classic case that we've often discussed here is the commercial communication satellites. Is -- is that really a weapon, or is it a dual-use item, and where does it belong? I'll comment on -- on the sales of those in a few minutes.

We used to -- generally speaking, sir, we used to do the R&D in the military side. This is where yourself and Senator Nunn worked together to try to keep the pork out. And then that would be spun off into the commercial market. That paradigm existed for many years. But now, there is much more investment over on the commercial side than there is on the military side. DOD R&D spending for the aerospace industry has declined by over 70 percent in the last 10 years, and there's all kinds of research going on in the commercial side for this industry to survive.

I would also mention to you, sir, that there is a lot of confusion about the difference between classified information and information that just might be sensitive or helpful to someone. And generally speaking, when you get to the bottom of a lot of these discussions, we find that people are not talking about compromise of classified information, we're talking about how-to-do-its or, you know, trade secrets, or things of that nature which are certainly not classified.

DOUGLASS: But there is an important point to be made here about what you asked one of the previous witnesses, and that is when it comes to China, sir, it's interesting to note that we have here in the United States today in our graduate schools about 45,000 graduate students from the PRC. Now, they're working in college laboratories in -- all over the United States. They're working on technology that might become classified five or six years from now when the military finds out about it.

That's where a lot of the razor's edge of technology is getting spread all over the world because we educate a lot of the scientists and engineers for tomorrow's projects right here in the United States. And none of that, sir, is controlled. It doesn't get controlled until later on in the process.

And then, finally, we used to do things on paper. Today, it's all done electronic. And if there is to be sharing of information or compromises of information, it is much more difficult to track it, much easier to spread it around on the Internet, and so on. I'm sure from your duties here in the Congress, you've seen some of these awful things that get on the Internet about how to build bombs and so on. And so it's much more difficult today than it used to be.

Next, please.

Here's just a little bit of sales information -- I thought you'd find this interesting -- for the aerospace industry. If you were to go back to 1989, which most people consider to be the last year of the Cold War, DOD is about 50 percent of the aerospace business in this country. And if you went back a little further, between DOD and NASA, they were 70 percent of our business base.

Today, you can look at the chart on the right, and you can see that exports are over 40 percent of our business base. Our single biggest customer today is the global economy, and these are all overwhelmingly commercial products. Did -- got in a little part there to show you the military products that go overseas. It's about 8 percent of our total production. But it's almost one-third, sir, of our fighter aircraft production is sent outside the United States, but to our allies. We are not selling these things to people that we don't trust.

Next chart, please.

In regards to -- how does this affect our country in an economic sense? Because, as we all know, military security is one thing, but if you don't have economic security -- the recent story of the Soviet Union and what happened to it is a good example. It doesn't do very good to have a big military without a -- the economic security to go with it.

These statistics on this chart are from 1997. And in that year, as you can see, aerospace was the very largest earner of export credits for our country. That represents a $34 billion surplus on about $50 billion of sales that year.

And what's interesting is look at 1998, the next year after this. This is when the Asian recession began to set in. Almost all the blues went away. And we increased our surplus to $42 billion on over about $60 billion of sales. And again reflecting on a comment that you made earlier, sir, the overwhelming amount of these sales are to America's closest allies. The biggest single chunk of that export surplus is with the United Kingdom.

There are only two countries in the world we have an aerospace trade deficit with. One is Canada, in which we have no export licensing restrictions because of long-standing agreement. The other one is France, and that's primarily due to the production of the airbus in France.

There is some troubling postscript to this information that I'm showing you, though, sir. In 1999, this export surplus has declined by over 10 percent. It's -- our latest projections are that it's going to decline from the 42 billion down to around 37 billion. Exports are down, imports are up, and in some sectors, there's been a very dramatic decline. Since the satellites were moved from the Commerce Department jurisdiction back into State, satellite sales have dropped by somewhere between 40 percent and 50 percent. My organization has tracked it to be about 45 percent, but there are other I've seen that are reporting it higher.

So there is some real concern that we're going over the top of a -- of a cycle here and that it's going to have a pretty serious and profound effect on our economy if we're not able to get this export licensing system straightened out.

And if you'd just go back to the first chart one more time -- I just want to mention to you a little conversation I had with Senator Thompson before the hearing. Before you came into the hearing, he and I were discussing the issue that you've mentioned and he's mentioned, and that is the need for balance in this. And balance, as we all know, is tied very closely to people's perception.

He asked me what recommendation I would make for the long-term. And clearly, our industry wants to see this Export Administration Act put in place because we need a bill now. But for the longer term, we've called for a presidential commission. We've asked both -- both presidential candidates that are still in the race to promise us a presidential commission to look at this, a bipartisan commission with members of labor, business, our best people from our universities and colleges, from the Wall Street community to see how -- why can't we make this one single system.

Both of these two bills rely on the advice of the Department of Defense. The witnesses on the previous council were explaining to you how they all go back to DOD to ask what should they do. We think for the long term, you could have a much better system that would combine the two and -- and -- and give us the economic security we need, along with our national -- addressing our national security concerns.

But for the short term, we think this bill needs to be enacted. It's been too long, sir, since we've been working on an executive order.

Thank you.

MCCAIN: I thank you very much.

Bill.

SCHNEIDER: Thank you, Mr. Chairman, and I appreciate the opportunity and privilege to appear before you. And I particularly appreciate your energy and insights in working on modernizing the export control system.

Because I know the hour is late, I'll just compress my remarks into a few points. First, the reason to modernize the export control system relates to two points. First is the change in the strategic situation that reflects the collapse of the former Soviet Union and its associated bloc.

But equally important has been the change in the source of enabling technology that produces advanced military capabilities. These enabling capabilities in the past have been developed in the defense sector, were generally not only developed there but were also manufactured in the defense sector and integrated into weapons systems that provided our forces with the military capabilities they needed to maintain military superiority.

What has changed since then has been the source of these enabling technologies. It is now largely in the commercial sector. And this -- the importance of the commercial sector as a source of military power is likely to grow in the years ahead, and our export control system needs to reflect that.

I had substantial direct personal experience during my service in the Department of State in managing the -- both the Department of State's munitions licensing system and serving as the chairman of the -- an interagency activity involving coordinating this. And it's clear that the circumstances require a refocusing of the export control system so as to limit the possibilities that these enabling technologies will get to bad end-users, but to do so in a way that does not cripple our ability to maintain the benefits of a vibrant export sector in our high-technology area.

I would just call attention to three concerns I have about the -- relating to the national security aspects of the pending legislation, S. 1712.

The first one I'd like to call attention to is the end-use verification and post-delivery system. My reading of the legislation and the hearings surrounded it caused concern about the difficulties of taking national security considerations into account in a decision to continue controlled exports to end-users that refuse end-user verification.

This is likely to be a problem, and I think it's -- as the enabling technologies become more pervasive, as having arisen from the commercial sector, the need to do effective post-user -- sorry -- post-delivery verification is going to become more and more important. And -- and when dealing with high-performance computers, especially to Tier Three countries that have a very high propensity to engage in proliferation-related activities, it's -- it's a particular source of concern.

The commission that was set up by the Congress to investigate the organization of the U.S. government to deal with the proliferation problem affirmed the need of the Bureau of Export Administration to conduct effective post-shipment verifications.

Second point I'd like to raise is the concern about the differential PRC/Hong Kong export control standards. It's certainly been our hope that the PRC would be able to maintain the autonomy of Hong Kong. But from an export control perspective, there are some reasons to be concerned. And I believe it would be constructive for the export control legislation to provide opportunities for U.S. national security concerns to be asserted in that area.

The final point that I'd raise is the issue of foreign availability in mass-market determinations. The U.S. government does not maintain a foreign availability database, and this is a limitation on the ability of the government to really maintain an effective, fully up-to-date and comprehensive database on foreign availability so these kind of determinations can be made.

Absent such a database, the authority given in the statute to the secretary of commerce makes the process unduly a prisoner of assertions by the applicant of foreign availability. And the importance of this point, I think, is sufficient to justify finding out some way to -- to deal in a more effective way in this matter.

There was a recommendation in the Defense Science Board globalization study to attend to the matter of developing a government database for this purpose because foreign availability is also an issue in munitions licensing.

I'll conclude my remarks at this point, Mr. Chairman, and be glad to take any questions you may have.

MCCAIN: I thank you very much.

Where do you differ with John Douglass?

SCHNEIDER: The -- well, a couple of points that he mentioned. First is I don't believe it's a practical aspiration to have a separate or, sorry, an integrated control system for munitions and dual-use items. The -- the underlying purpose of controlling defense- related items for -- to achieve foreign policy objectives I think is usefully set apart from the export control regulations that deal with the Department of Commerce.

So that, in any case, I think John would agree, is a somewhat utopian aspiration in this environment, in any case. But I think it -- it's better for -- for us to look at process improvements, liberalization and -- and maintaining a clear understanding of what we need to do to modernize this system as conditions change.

I don't disagree with any of his points about the need to -- to keep the system up-to-date and responsive to the needs of our exporters. I think the strategic advantages we enjoy as the consequence of the collapse of the Soviet Union provide us with an ability to very sharply narrow the impact of export controls on U.S. exporters.

The process improvements, I think, are en route. Even the much- maligned State Department is about to make a number of very significant process improvements that I think will diminish many of the concerns that exporters have had about protracted processing time and that sort of thing.

So I think the interest of the Congress is starting to be reflected in the behavior of the bureaucracy, and I hope that continues.

MCCAIN: John.

DOUGLASS: Well, I may be a little utopian to try to get a single system. I sort of stayed away -- or at least tried to stay away, other than just explaining that there was a different system for military products and some of the products that we're having there.

The principal problem that I see is that occasionally a problem will come up with a single country like, for example, we're all familiar with the highly worrisome situation that we see in China and certain aspects of it. Then we pass a law, and the same law applies then to England, France, Germany, our NATO allies and so on.

And so, I found myself, for example, in the -- as assistant secretary of the Navy, dealing with our friends in England and sharing nuclear technology with them, sharing submarine quieting technology, sharing all kinds of important, very, very serious classified information because we knew they would always be with us in coalition warfare, and we were cooperating with them to -- to make their systems as compatible and as good as we could.

And then a pump or a valve or something would be needed over there, and some low-ranking bureaucrat in the State Department would say, "No, they can't have it," because of the -- some reason, or it would get lost in the system, or whatever.

DOUGLASS: So I gradually, over the years, felt that there needed to be a system which was a little less sensitive to the foreign policy rulings and political atmosphere that sometimes develops around some of these issues and was a little more tied to the mainstream of what was going on in the Department of Defense.

And so, I always thought an integrated system might work. But I certainly respect Bill's views. He served in a different part of the system than I did, and our short-term objective is the same as Bill's, and that is to take the system we have today, which involves two laws, two systems, and improve it as best we can.

And that's why we've been supporting the passage of S. 1712. We -- we have some problems with it. They're in my written statement, Senator. But we think Senator Enzi has really gone the extra mile to try to address people's concerns.

And there are still a few amendments that are being talked about by the Armed Services committees and Intelligence committees, and so on. One of them involves the so-called "carve-out" -- which Bill mentioned -- for mass-market determinations. The only difference we have with the way that amendment is being discussed is where do you do the carve-out? We think before you unilaterally set aside an item which is probably available on the world market fairly readily, you ought to -- you ought to go out and look at the world market and do some studies, and then bring the results of those studies to the high- level decision-makers, rather than doing it at the beginning based on conjecture.

So it's just where it is in the system.

MCCAIN: I -- I'm sorry to tell you that we will probably have further conversations on this issue before it is finally resolved.

I thank you both for being here, and I thank you both for your contribution to this very important issue.

This committee obviously has significant jurisdiction if a lot of this authority's going to be transferred back to the Department of Commerce. And that's why I thought it was important for us to have this hearing and get the input of yours, as well as the administration witnesses.

And we'll be -- we'll be calling on you again in the future.

SCHNEIDER: Thank you, Mr. Chairman.

DOUGLASS: Thank you, Mr. Chairman.

MCCAIN: Thank you.

This hearing is adjourned.

END

NOTES:
Unknown - Indicates speaker unknown.
Inaudible - Could not make out what was being said.
off mike - Indicates could not make out what was being said.

PERSON: JOHN MCCAIN (94%); CONRAD BURNS (57%); TED STEVENS (57%); TRENT LOTT (56%); KAY BAILEY HUTCHISON (56%); SLADE GORTON (56%); JOHN DAVID ASHCROFT (55%); OLYMPIA J SNOWE (55%); ERNEST F HOLLINGS (54%); DANIEL K INOUYE (53%); JOHN F KERRY (52%); RICHARD H BRYAN (52%); RON WYDEN (51%); FRED THOMPSON (50%);

LOAD-DATE: April 8, 2000