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 make MTOPS-based computer controls ineffective and will soon render the newly announced controls obsolete. As a result, current U.S. export controls continue to put U.S. computer companies at an 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 performance threshold of, 2000 MTOPS (millions of theoretical operations per second), 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, Vietnam 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 Administration raised the notification licensing threshold for Tier 3 countries to 6,500 MTOPS effective in January 2000. Since then the Administration has raised this Tier 3 threshold four times. The last change in March of 2002 raised the threshold for Tier 3 to 190,000 MTOPS. In March of 2001 the Administration also combined Tier 1 and Tier 2 countries so that computers of any MTOPS level do 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).

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. There have been multiple subsequent reports from the Defense Department and the security community that have reached similar conclusions about the ineffectiveness of performance-based controls.

Despite these findings, the Defense Technology and Security Administration has proposed an alternative performance metric for - not relying on the measurement of MTOPS - for controlling high-performance computer exports to Tier III countries. The computer industry is strongly opposed to this proposal principally because it ignores the technological realities of the marketplace and does not deal with the fundamental problems of MTOPS or any performance - based control system for computers.

Microprocessor Export Restrictions

On March 21, 2002, the Commerce Department raised the MTOPS license threshold for the export of microprocessors to the "D1" countries (e.g. the former Soviet Union countries and the PRC) from 63,500 MTOPS to 12,000 MTOPS. The rapid pace of improvements in technology and the large volume of these devices entering world markets have necessitated multiple threshold increases over the past several years. In early 2001 several Wassenaar member nations recognized the futility of using MTOPS for setting export controls on general purpose microprocessors and proposed its elimination. Practically, Wassenaar members support this reform. The semiconductor industry has urged the U.S. Government to support the elimination of MTOPS as proposed in Wassenaar. In addition, 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 approved by Congress in 2000 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] Pending enactment of a more fundamental reform of the EAA, President Bush issued an Executive Order on August 17, 2001 extending the Export Administration Act under the International Emergency Economic Powers Act.

Efforts to engage in a more fundamental rewrite of the EAA gathered momentum in 2001 and will be considered again in 2002. On January 23, 2001, Senators Gramm (R-TX) and Enzi (R-WY) introduced S. 149, the Export Administration Act of 2001, to reauthorize and reform the EAA. 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; (2) to stem the proliferation of weapons of mass destruction; and (3) 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.

Following hearings in February and March 2001, the Senate Banking Committee favorably reported this legislation by a vote of 19-to-1 after making amendments sought by the Administration and adopting amendments from Senator Enzi (to terminate the authority on September 30, 2004 unless the Administration provides Congress with a report on the implementation of this legislation) and from Senator Bennett (to repeal computer export control provisions).

During Senate floor consideration, the following amendments were adopted:

An amendment by Senator Thompson to redefine foreign availability criteria of "directly competitive" used for decontrolling an item based on mass-market status. Under the Thompson language, an item could not be found to be directly competitive if it was "not of comparable quality" (compared to the original language that an item was "substantially inferior."
An amendment by Senator Kyl to allow for license denial if a country refuses post-shipment verification;
An amendment by Banking Committee Chairman Sarbanes that made several modifications, including stating that this legislation would not authorize export controls on agricultural products.

The Senate passed this legislation on September 6, 2001 by a vote of 85-to-14.

On July 19, 2001, in the House, Representative Menendez (D-NJ), Rules Committee Chairman Dreier (R-CA) and Representatives Flake (R-AZ), Houghton (R-NY), and Blumenauer (D-OR) introduced H.R. 2557, which is identical to the original S. 149. On July 20, 2001, Representative Ben Gilman (R-NY) introduced similar legislation, H.R. 2581, on July 20, 2001, which was marked up by the House International Relations Committee on August 1, 2001. This legislation has raised a number of concerns, however, because it limits the flexibility required in this area. The Committee favorably reported the legislation by a vote of 26-to-7 after adopting several the following amendments:

A controversial amendment by Chairman Hyde to allow the President to control items on the National Security List that pose a "threat" rather than a "significant threat" to national security.
An amendment by Chairman Hyde and Representative Lantos that presumes a denial for products that make a "material contribution" to proliferation or items that could enhance the military capability of a country that could undermine regional stability or is detrimental to the United States and its allies. if the end-user is involved with weapons of mass destruction or instruments used to deliver such weapons, or if the end-user is in a country that does not comply with multilateral regimes that control this proliferation.
An amendment by Representative Lantos to expand the purposes of foreign policy controls to govern the export of test articles for clinical trials on human subjects and to restrict the export of such items to countries that engage in torture.
An amendment expanding the definition of "export" to include release of technology to foreign nationals within the United States, including permanent residents.
Several amendments that build in additional delays to the export licensing and commodity classification processes and further tie the President's hands in administering these processes.
Several amendments that limit the President's authority in exercising foreign policy and national security by mandating license denials under a variety of circumstances.
An amendment that dilutes the mass market and foreign availability provisions by raising the standard for determining when one item is competitive with another.

ECAT is very concerned that the Hyde amendments in particular would significantly and unnecessarily impede export licensing.

The International Relations Committee referred H.R. 2581, as amended, to the Committees on Agriculture, Armed Services, Energy and Commerce, Judiciary, Ways and Means, and Intelligence until December 7, 2001. This deadline has been extended.

On March 8, 2002 the House Armed Services Committee marked up the bill adding another set of amendments strongly opposed by industry and the Administration including:

An amendment further expanding the definition of "export to include transfers of hardware and software to foreign nationals IN the US.
A series of amendments giving the Secretary of Defense broad concurring authority in the administration of dual-use export controls including the mass market and foreign availability determination process, as well as the classification and licensing processes.
Amendments that restrict the President's authority in administering license review by creating vague statutory standards for license denial by substituting the word "could" for "would"
An amendment that will modify the interagency dispute resolution process to require unanimous interagency concurrence in order to approve an export license.
Amendments that prescribe how computer exports should be controlled including a requirement for a pre-shipment notification for any computer export over $250,000 and the use of post-shipment verifications .

The bill is currently with the House Rules Committee.

Encryption

On January 14, 2000, the Bureau of Export 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). 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, BXA 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 governmentsof these countries and Canada, and theworldwide offices of firms, organizations, 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, handheld 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.

The President's Export Council Subcommittee on Encryption (PECSENC) met throughout 2001 to review and advise the President on encryption policy. Upon the expiration of its charter on September 30, 2001, this group no longer meets.

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 nonbinding "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. Countries also agreed to liberalize controls on general purpose microprocessors and high performance computers and a decontrol of mass- market encryption products.

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. Throughout 2001, member states discussed numerous new proposals but reached no new agreements. The United States also held bilateral consultations with the EU (regarding dual-use issues) and Switzerland (on machine tools) in 2001.

On January 3, 2002, BXA implemented the revisions to the Wassenaar Arrangement agreed to in December 2000. The rule revises certain entries that are controlled for national security reasons and makes changes to the List of Dual-Use Goods and Technologies.

ECAT POSITION: ECAT supports efforts to liberalize controls on encryption products and urges the Administration and Congress to repeal the 1998 National Defense Authorization Act requirements related to computers and the MTOPS methodology for imposing controls on high performance computers and give the President the flexibility to develop effective controls in this area, as he has in all other product categories. In the short term, the Administration should continue to expedite upward adjustments in the current MTOPS threshold in line with technological advances. Similarly, the Administration should support the elimination of MTOPS controls on microprocessors, as supported by most Wassenaar member countries.

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.