Emergency Committee For American Trade - Publications

SECTION 9: 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.

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 production of information and communication technology goods and services has been responsible for approximately one-third of the acceleration in U.S. productivity over the last decade.

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 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 reform 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 all of 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.

In December 2003, the Administration amended the Export Administration Regulations to implement the December 2002 revisions to the Wassenaar List of Dual-Use Goods and Technologies. As a result, the computers with a composite theoretical performance (CTP) not exceeding 190,000 MTOPS may now be exported and reexported without a license, except to embargoed or sanctioned destinations. High performance computers with a CTP greater than 190,000 MTOPS to computer Tier 1 destinations remain authorized under a license exception. In March of 2001, the Administration also combined Tier 1 and Tier 2 countries, so that computers of any MTOPS level being shipped to formerly Tier 2 countries will no longer require licenses. (Tier 2 countries are those classified as a low risk for proliferation and include many Asian, Latin American and African countries). In May 2002, the Administration moved Latvia from Tier 3 to Tier 1.

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 in place of MTOPS for controlling high-performance computer exports to Tier 3 countries. ECAT members are 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 Controls

Effective January 14, 2003, the Commerce Department’s Bureau of Industry and Security (BIS) (formerly called the Bureau of Export Administration (BXA)) removed license restrictions on exports and reexports of general purpose microprocessors to most destinations to conform with changes in the List of Dual-Use Goods and Technologies maintained and agreed to by governments participating in the Wassenaar Arrangement (discussed below). This represents an important change to the former controls, which required licenses of microprocessors to the “D1” countries (e.g., the former Soviet republics and the PRC).

The rapid pace of improvements in technology and the large volume of these devices entering world markets had necessitated multiple licensing 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. The U.S. semiconductor industry and ECAT have also urged the U.S. Government to support the elimination of MTOPS-based controls for microprocessors, as proposed in Wassenaar.

At the same time, BIS rules maintain license requirements for exports and reexports to designated terrorist-supporting countries (e.g., Iraq, North Korea, Sudan, Syria, and Cuba). The rule also establishes a license requirement if the exporter knows, has reason to know, or is informed by BIS that the item will be or is intended to be used for a “military end-use” in a country that is of concern for national security reasons or by a “military end-user” in such a country.

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 has extended the Export Administration Act under the International Emergency Economic Powers Act through executive order.

Efforts to engage in a more fundamental rewrite of the EAA have been proposed since 2001, but not yet completed. On January 7, 2003, Rules Chairman David Dreier and Representatives Jeff Flake (R-AZ) and Robert Menendez (D-NJ) introduced the Export Administration Act of 2003, H.R. 55 (which was virtually identical to bills introduced in 2001).

The primary provisions are as follows:

National Security Controls: The bill establishes an export control list for sensitive technologies and products. 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 and 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 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 foreign policy 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.

This legislation has been referred to the House Committee on International Relations, but no action has been taken as of the end of April 2004.

Encryption

In 2000, the BIS (then called BXA) issued regulations permitting 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. BIS 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) in the 106th Congress.

On June 6, 2002, the BIS published revised encryption regulations as part of the Export Administration Regulations (EAR) to reflect changes made to the Wassenaar Arrangement List of dual-use items, and to update and clarify other provisions. These regulations:

Permit the export and reexport (without a license) of “mass market" encryption commodities and software with symmetric key lengths exceeding 64-bits, following a 30-day review;
Permit the export and reexport of equipment controlled under ECCN 5B002 under License Exception ENC; and
Update and clarify the notification, review, licensing and post-export reporting requirements for publicly available encryption items, including "publicly available" encryption source code and "short range" wireless products.

This rule makes no changes to export or reexports of encryption to terrorist-sponsored countries.

On June 17, 2003, the BIS further clarified its encryption regulations with the following modifications:

Clarifies that all persons (except nationals of Country Group E:1 countries) may take “personal use” encryption commodities and software to any country not listed in Country Group E:1.
Clarifies that medical equipment and software incorporating encryption or other “information security” functions are not controlled as encryption.
Clarifies that “publicly available” ECCN 5D002 encryption source code (and the corresponding object code) is eligible for de minimis treatment, once the notification requirements have been satisfied.
Publishes a checklist to help exporters better identify encryption and other “information security” functions that are subject to U.S. export controls.
Clarifies circumstances when short-range wireless and other encryption commodities and software pre-loaded on laptops, handheld devices, computers and other equipment may be given mass market or retail treatment.

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 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 decontrol mass-market encryption products.

At the ninth plenary meeting of the Wassenaar Arrangement in December 2003, the participating countries reviewed the operation of the Arrangement and took steps to enhance controls on conventional arms and dual-use goods and technologies, focusing in particular on strengthening the ability of governments to combat terrorism. Among the actions taken in December, include:

Tightening controls on Man Portable Air Defense Systems (MANPADS) to prevent acquisition or diversion of such weapons by terrorists;
Expanding the scope of mandatory reporting of transfers of small arms and light weapons and lowering the threshold for transfers of artillery systems;
Developing “Elements for Effective Legislation on Arms Brokering” to be incorporated into national legislation;
Agreeing to require governmental authorization for the transfer of non-listed dual use items that are subject to United Nations arms embargoes; and

Strengthened controls on certain items, including microwave electronic devices, semiconductor lasers, and navigation equipment.

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.

ECAT welcomes the Administration’s removal of license controls for the export of general purpose microprocessors to most destinations, as supported by most Wassenaar member countries.

ECAT supports ongoing efforts to re-authorize the Export Administration Act, 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.