Emergency Committee For American Trade - Publications

Export Controls

U.S. export control policy must continue to shift away from a Cold War-driven system that emphasizes broad controls to a system that promotes U.S. national security while maintaining U.S. technological leadership. The free flow of technology, capital, ideas, and goods in the global economy has made unilateral export controls increasingly ineffective and out of step with technological and commercial reality. For example, in the information technology sector alone, more than half of the industry’s total revenues are from exports and, in 1999, high technology exports increased to $181 billion and represented more than a quarter of total U.S. exports. In 2000, the largest increases in U.S. exports were in capital goods, primarily semiconductors and computer accessories. In the last decade, U.S. exports of such products increased by 276 percent. To maintain its high level of exports, the information technology sector must be able to meet foreign competition for all types of computers and technological know-how.

The recent announcement of a further relaxation of export controls on high performance computers only provides a reprieve. As found in reports by the Department of Defense and the General Accounting Office, advances in technology and the ability to cluster lower performance processors together will render the newly announced controls obsolete. As a result, current U.S. export controls continue to put U.S. computer companies at a serious international competitive disadvantage.

Harm to the international competitiveness of the high technology sector has serious implications for U.S. national security. With the level of technological innovation growing exponentially in the private sector, along with diminished federal spending for research and development, the United States military relies increasingly on the high tech sector for development of advanced technologies for weapons systems and other defense needs. If export revenues in the high tech sector decline, it will mean that the sector will not have sufficient resources to support the research and development necessary to develop the next generation of advanced technologies.

Maintaining the international competitiveness of the U.S. high technology sector is also critical to sustaining the growth of the national economy. The high technology sector has been responsible for approximately 35 percent of real economic growth in the United States and employs over 4.3 million Americans.

To achieve the twin goals of protecting national security interests and promoting the international competitiveness of U.S. high technology industries, U.S. export control policy should focus on those technologies that are critical to protecting U.S. national security. It should target those areas of technology that are not readily available in global markets and on which there is consensus within multilateral export control regimes on the need for controls. In the short term, these goals can be achieved by ensuring that the export control thresholds for high performance computers and microprocessors keep in step with the rapid advances in computer technology. In the long term, efforts must continue to build a bipartisan consensus among the Congress, the Administration, and business community in support of meaningful reform of the U.S. export control system. Any effort to renew the Export Administration Act should codify the recent liberalization in export controls; it should not become a vehicle for turning back the clock to a Cold War system of stringent unilateral controls which lacks the support of U.S. trading partners, undermines U.S. international competitiveness, and ultimately harms U.S. national security.

High Performance Computer Export Restrictions

The 1998 National Defense Authorization Act imposed pre-shipment notification and licensing and post-shipment verification requirements on exports and re-exports of high performance computers over a certain performance threshold, measured in millions of theoretical operations per second (MTOPS), to 52 countries regarded as proliferation risks that are classified under U.S. export regulations as Tier 3 countries. Tier 3 countries include China, Russia, India, Pakistan, and the Middle East. Adjustments to high performance computer control levels can be proposed by the Administration following a determination that the adjustment will not harm national security. Any decision to adjust high performance computer controls for Tier 3 countries had been subject to a 180-day Congressional review period. This requirement was modified to a 60-day review period in 2000.

The Clinton Administration raised the notification and licensing threshold to 6,500 MTOPS effective in January 2000 and to 12,500 MTOPS for Tier 3 countries effective in July 2000. The Clinton Administration announced that it would further increase the threshold to 28,0000 for Tier 3 countries and to 45,000 MTOPS for Tier 2 countries (from 33,000 MTOPS) effective February 26, 2001 (after the 120-day Congressional review period).

In January 2001, the Clinton Administration announced that it was increasing the MTOPS level three-fold to 85,000 MTOPS for Tier 3 countries, effective March 20, 2001. The Administration also combined Tier 1 and Tier 2 levels so that computers above 45,000 MTOPS would not need licenses to Tier 2 countries. (Tier 2 countries are those classified as a low risk for proliferation and include many Asian, Latin American and African countries). As well, the Clinton Administration moved Lithuania from Tier 3 to Tier 1 effective May 19, 2001.

In December 2000, the General Accounting Office (GAO) published a report, Export Controls: System for Controlling Exports of High Performance Computing is Ineffective, which found that these controls are largely ineffective because of the clustering problem cited by the Defense Department. The GAO report presents several alternative approaches, many of which are controversial. A Department of Defense study published in early 2001 made similar findings regarding the ineffectiveness of current controls on high performance computer hardware.

Congress may consider whether to repeal or modify the requirement that MTOPS be used as the basis of computer controls in order to give the President greater flexibility.

Microprocessor Export Restrictions

On June 13, 2000, the Commerce Department raised the MTOPS threshold for the export of microprocessors from 3,500 MTOPS to 4,500 MTOPS to Tier 3 countries (defined above). This represents the fifth increase in the MTOPS limit since 1995 to keep pace with improvements in technology and the large volume of devices entering world markets. The current process for increasing the MTOPS limit for microprocessors is subject to delay and not predictable. It is important that that this process be expedited and made more certain in order for the U.S. semiconductor industry to remain competitive in world markets. Enactment of a mass-market product exception similar to the one included in S. 149, the Senate EAA reauthorization legislation, would also help ensure that U.S. export controls do not undermine the competitiveness of U.S. industry.

Export Administration Act Reauthorization

U.S. export control programs have been administered under the authority of the International Emergency Economic Powers Act (IEEPA) since 1994, when the Export Administration Act (EAA) expired. Since that time, the Administration has sought reauthorization of the EAA because of the legal vulnerabilities of administering export controls under IEEPA. A short-term EAA reauthorization (H.R. 5239) was finally approved last year and enacted on November 13, 2000. In addition to reauthorizing EAA until August 20, 2001, the legislation increased entity penalties for EAA violations to the greater of $500,000 or five times the value of the exports for each knowing violation. Individuals would also face fines up to $250,000 or five times the value of the exports and/or imprisonment for up to five years. (Penalties had been $10,000 per violation.) The reauthorization also included provisions to guarantee the protection of confidential business information.

Efforts to engage in a more fundamental rewrite of the EAA gathered momentum in the last Congress and will be considered in 2001. In September 1999, the Senate Banking Committee unanimously approved S. 1712, the Export Administration Act of 1999. The bill was developed by Senator Gramm (R-TX), Chairman of the Senate Banking Committee, and Senator Enzi (R-WY), Chairman of the Senate Banking Subcommittee on International Trade and Finance to reauthorize and reform the EAA. The legislation was never considered on the Senate floor after several Senators, including Senators Thompson (R-TN), chairman of the Governmental Affairs Committee, Senator Helms (R-NC), chairman of the Foreign Relations Committee, Senator Shelby (R-AL), chairman of the Select Committee on Intelligence, and John Warner (R-VA), chairman of the Armed Services Committee, objected to its consideration.

On January 23, 2001, Senators Gramm and Enzi introduced similar legislation, S. 149, the Export Administration Act of 2001. The Senate Banking Committee held its first hearings on reauthorization of the EAA in February 2001. The primary provisions are as follows:

National Security Controls: The bill establishes an export control list for sensitive technologies. It authorizes the imposition of national security controls (1) to restrict items that would contribute to the military potential of countries in a manner detrimental to U.S. national security; (1) to stem the proliferation of weapons of mass destruction; and (1) to deter acts of international terrorism. The bill authorizes the development, by the Secretary of Commerce, with the concurrence of the Secretary of Defense, of the National Security Control List based on a series of risk factors, including the effectiveness of controlling the item, taking into account mass-market status, foreign availability and other factors. The bill establishes a five-tiered system to classify countries.
Mass Market and Foreign Availability Provisions: The bill creates a six-month process for reviewing requests that items be removed from the National Security Control List because they are mass-market products or the products are available abroad.
Foreign Policy Controls: The bill tightens the criteria for imposing foreign policy controls and requires the President to announce his intention to impose such controls, 45 days before doing so in order to solicit and consider public comments. The President also is required to submit a report to the Senate Banking Committee and the House International Relations Committee on the proposed control. The bill also requires that controls be terminated after two years, unless specifically renewed by the President after a period of public comment (except for controls targeted against countries designated as supporting international terrorism).
Exemptions: The bill prohibits the imposition of foreign policy controls on agricultural commodities, medicine, and medical supplies, except for countries subject to the Trading with the Enemy Act (Cuba and North Korea). The bill would also terminate any existing export controls upon enactment, unless specifically reimposed.
Export Licensing and Dispute Resolution: The bill seeks to expedite and increase the transparency and predictability of the export-licensing review process. It establishes criteria for the review of license applications and sets up a time-limited process for the Secretary of Commerce and other Executive Branch Department officials to review and provide a recommendation on the license: referrals must be made within nine days and recommendations within 30 days (with certain limited exceptions). The bill also establishes a process to resolve interagency disputes over the approval or denial of a license within 90 days of the application’s original referral.
International Arrangements: The bill encourages the United States to participate in new multilateral export control regimes and to take steps to enhance existing regimes.
Penalties and Enforcement: The bill would increase criminal fines (up to $1 million or 10 times the value of the export with the possibility of imprisonment) and civil penalties ($1 million per violation and a denial of export privileges) for EAA violations. The bill also authorizes sanctions on (1) foreign entities that endanger U.S. national security by violating multilateral export control regimes; (2) persons that contribute to the proliferation of missiles and items on the Missile Technology Control Regime (MTCR) Annex; and (3) persons that contribute to the proliferation or development of chemical or biological weapons. With regard to enforcement, the bill requires the Secretary of Commerce to target post-shipment verifications on exports that pose the greatest risk to national security and authorizes penalties against end-users that refuse to allow verification. The bill also authorizes additional resources for the Commerce Department to enforce U.S. export control laws.
Advisory Committees: The bill authorizes the President to establish the President’s Technology Export Council and Export Control Advisory Committees.

Among the most important provisions in the bill are those relating to the mass-market and foreign availability determinations. The provisions are intended to respond to U.S. industry concerns about the adverse impact of U.S. export controls on the international competitiveness of U.S. products, particularly in the computer sector. Under the bill, an item has mass-market status if it is: (1) produced and available for sale in large volumes; (2) widely distributed through marketing channels; (3) conducive to shipment by accepted commercial means; and (4) able to be used for its intended purpose without substantial or specialized service. Once an item has been determined to have mass-market status, it is removed from the export control list, unless the President finds that decontrolling the item would represent a "serious threat" to U.S. national security and controlling the export of the item would diminish the threat. If the President makes such a determination, it must be reviewed every six months.

The bill provides that an item has foreign availability status if it is available from sources outside the United States at a price that is not excessive compared with the U.S. price of the controlled item and in a sufficient quantity that renders control ineffective. The President can set aside a foreign availability determination if he finds that not controlling an item would prove "detrimental" to U.S. national security and there is a high probability that foreign availability will be eliminated through multilateral negotiations in a reasonable period of time or the failure to control the item would be contrary to treaty obligations. The bill also provides that the foreign availability "set-aside" terminates (1) within six months if the President fails to initiate negotiations; (2) on the date when negotiations fail; (3) on the date that the President determines there is not a high probability of eliminating foreign availability through negotiations; or (4) an agreement to eliminate the foreign source is not reached within 18 months. The bill also includes a "set-aside" provision for mass- market product determinations, but it is not time limited.

This legislation responds to many of the national security concerns raised in the Cox-Dicks report from the House Select Committee, U.S. National Security and Military/Commercial Concerns with the People’s Republic of China, and includes several recommendations, including: (1) emphasizing the importance of strengthening multilateral export control regimes; (2) incorporating a multilateral export control violation provision; (3) enhancing enforcement resources; and (4) significantly increasing criminal fines and civil penalties for export control violations.

Some concerns have been raised by businesses and others over this bill’s continuation of a tiered country system, the functioning of the dispute resolution system, the increase in penalties provision, and the lack of provisions to address the MTOPS issue discussed above.

Senate Banking Committee Chairman Gramm has indicated that he will schedule a markup of this legislation shortly. He and the other cosponsors will then seek to schedule floor consideration of this legislation, although there is likely to be opposition from the same members that opposed the similar bill last year. The Bush Administration has not yet indicated whether it will support this bill.

Encryption

In September 1999, the Clinton Administration announced that it would remove some restrictions on the export of U.S. encryption technology. On January 14, 2000, the Clinton Administration published revised encryption regulations as part of the Export Administration Regulations (EAR). The regulations permit the export or re-export of any encryption commodity or software after a technological review by the Government. The major sections of the regulations provide that:

Any encryption commodity or software of any key length can be exported license-free to individuals, commercial firms, and other non-government users in any non-terrorist country, following a one-time technical review;
Retail encryption commodities and software can be exported to any end-users in non-terrorist countries. The Bureau of Export Administration (BXA) will determine which encryption products qualify as "retail;" and
Export controls on source code, tool kits, and chips are relaxed.

The revised regulations include a broad definition of retail goods, which encompasses web-based products and any functionally equivalent product, and clarify that the definition of government entities does not include telecommunications firms, Internet Service Providers or educational facilities. The regulations contain many of the provisions in the Security and Freedom through Encryption Act, H.R. 850, sponsored by Congressman Goodlatte (R-VA 6th). While the revised regulations are an improvement over earlier Administration proposals, U.S. industry remains concerned that they remain too complex and believes that the U.S. government needs to address the competitive disadvantage U.S. industry faces in competing with European, Australian, and Japanese suppliers of encryption technology.

The Goodlatte encryption bill was approved by the House Committees on Judiciary, International Relations, Commerce, Intelligence, and Armed Services, but was not considered on the House floor during the 106th Congress. The primary provisions in this proposal would:

Establish a national Electronic Technologies Center within the Justice Department to allow federal and local law enforcement officials to examine encryption techniques and obtain information on current technology;
Permit any person to use any encryption method and sell it in interstate commerce;
Prohibit federal and state law enforcement officials from requiring private encryption keys;
Prohibit any person who possesses an encryption key from being required to transfer control of the key to another person other than for law enforcement purposes; and
Penalize the encrypting of communications relating to a federal felony.

The FBI and the Justice Department remain opposed to several aspects of this bill, based on concerns that terrorist groups could use encryption products.

On July 17, 2000, the Clinton Administration announced further revisions to the EAR regarding encryption. These rules:

Authorize the export and re-export of all encryption items, except cryptanalytic products and related technology, to the European Union, Australia, Czech Republic, Hungary, Japan, New Zealand, Norway, Poland, and Switzerland, after the submission of a commodity classification request to BXA.
Authorize the export of these products to the worldwide offices of firms, organizations, or governments headquartered in these countries or in Canada on the same terms.
Authorize the export of products that have components with cryptographic functionality limited to short-range wireless technology to any end-user, without a license, technical review, or reporting requirements. Products include audio devises, cameras, video recorders, computer accessories, hand held devices, mobile phones, and household appliances that communicate using short-range wireless technology.
Reduce reporting requirements on overseas U.S. distributors and remove post-export reporting requirements for client network appliances and single processor computers, laptops, and handheld devises that are preloaded with encryption software.
Authorize the export of U.S. products with an open cryptographic interface to the countries listed above under the license exception.
Authorize the export of proprietary encryption source codes under a license exception to non-government end-users after filing a classification request with BXA.
Authorize BXA to review the de minimis eligibility of certain encryption technologies.

These revisions were codified as part of the EAR and made effective on October 19, 2000.

Wassenaar Arrangement

In 1996, the United States and 32 other countries approved the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Technologies. The agreement replaced the Coordinating Committee for Multilateral Export Controls (CoCom). Unlike CoCom, the Wassenaar Arrangement does not impose mandatory multilateral export controls and instead operates on the basis of national discretion.

The Wassenaar member countries agreed to control certain dual-use items (items with a commercial and military use) that are listed in the appendix to the arrangement. Each member country has discretion to decide what export controls are appropriate for the dual-use items on the list. Wassenaar members continue to review the list of dual-use items and to attempt to coordinate their export control policies. In the area of encryption, Wassenaar members agreed to eliminate controls on encryption products below 56 bits and to extend controls to mass-market encryption products above 64 bits. Revisions were also made in the level of control for telecommunications products and machine tools. Wassenaar members are reviewing controls on computers and microprocessors to bring controls more into line with technological advances.

In July 1999, the United States issued regulations implementing an agreement among Wassenaar members to control exports of weapons-related goods and technology to pariah states and regions of instability. The regulations include a minor relaxation of controls on some telecommunications and computer equipment, as well as on digital video magnetic tape recorders. The United States has launched an initiative within the Wassenaar Arrangement to strengthen rules preventing members from undercutting the export license denials of other countries. The United States is concerned that countries with lax export control laws will circumvent the Wassenaar Arrangement and ship sensitive technology to China and other countries of concern. The U.S. proposal was deferred for further study due to objections raised by Russia and Ukraine.

In late 2000, the Wassenaar Arrangement countries adopted a set of nonbonding "best practices" to promote improved export control enforcement. In announcing the unanimously-approved practices, the Commerce Department indicated that the countries underscored the importance of members having "effective, transparent, and national-law based enforcement systems." The best practices focused on four areas: (1) preventive enforcement; (2) investigations; (3) effective penalties; and (4) international cooperation and information exchanges.

In February 2001, the EU formally issued a demarche to the United States to protest the decision to relax controls on high-performance computers (by increasing the MTOPS threshold as discussed above) because the United States failed to notify the EU in advance as required under the Wassenaar Arrangement.

ECAT POSITION: ECAT supports efforts to liberalize controls on encryption products and to build a strong bipartisan consensus for meaningful export control reform. ECAT urges the Administration and Congress to redefine the MTOPS methodology for imposing controls on high performance computers and, in the short term, to expedite upward adjustments in the current MTOPS threshold. Similarly, the Administration should establish an expedited, predictable process for raising the control threshold for microprocessors.

ECAT supports ongoing efforts to re-authorize the Export Administration Act this year, recognizing that such legislation needs to be bipartisan and reflect a consensus among the Congress, the Administration, and the business community. Such legislation should provide an export control system that promotes U.S. national security and maintains U.S. technological leadership. It should codify recent export control liberalization, provide for a higher threshold for the imposition of foreign policy controls, create a mass-market product provision, ease the ability to obtain foreign availability determinations, and reduce export-licensing processing time. Such legislation must not become the vehicle for further unilateral restrictions on U.S. exports.