Emergency Committee For American Trade - Publications

SECTION III.8: EXPORT CONTROLS

U.S. export control policy must continue to shift away from a system of broad controls to one that promotes U.S. national security, while maintaining U.S. technological and competitive 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. This section largely focuses on ECAT’s concerns with controls affecting high technology. At the same time, ECAT recognizes that other parts of the U.S. export control regime have serious implications for key U.S. industries and similarly require reform.

Harm to the international competitiveness of the high technology sector and other U.S. industries 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 as opposed to attempting to control a wide range of commercial products. 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 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.

Computer and Software 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 to countries that are known proliferation risks. Over the past few years there have been adjustments to the level of performance of computers allowed for export, rising from a performance threshold of 2000 MTOPS (millions of theoretical operations per second) to the current level of 190,000 MTOPS. There are 48 countries regarded as proliferation risks, comprising the list of Tier 3 countries in the U.S. export regulations. Tier 3 countries include China, Russia, India, Pakistan, Vietnam and all countries of the Middle East, except Turkey. 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, computers with a composite theoretical performance (CTP) not exceeding 190,000 MTOPS and related software 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). On November 5, 2004, BIS finalized new rules to expand license exceptions for the export of computer technology and software, including for certain deemed exports of computer technology and source code.

In December 2005, the Wassenaar Arrangement, discussed in more detail below, replaced the MTOPS metric with the so-called Weighted Teraflop (WT) metric, which measures how fast a computer performs trillions of floating point operations that involve mathematical calculations involving figures extending to multiple decimal places. While the WT system is not based on a theoretical calculation like the MTOPS, it is still a performance-based control. Yet it represents a significant improvement because it removes extraneous factors from the calculation of performance for a high-performance computer system. On February 6, 2006, the Administration notified Congress of changes to high-performance computer controls, triggering the 60-day review period.

While ECAT welcomes this modification, ECAT continues to be concerned that performance-based systems fail to adequately recognize the technological realities of the marketplace, putting U.S. companies at a competitive disadvantage compared to foreign competitors, without advancing U.S. national security interests. As found in a December 2000 report by the General Accounting Office (GAO) – Export Controls: System for Controlling Exports of High Performance Computing is Ineffective – MTOP performance-based controls are largely ineffective. 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.

ECAT Position: ECAT urges Congress to repeal the 1998 National Defense Authorization Act requirements related to 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, ECAT welcomes the decision of the Wassenaar Arrangement and the Administration to modify the metric for measure of high-performance computers from the outdated MTOPS threshold to the Weighted Teraflop metric.

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 countries sponsoring terrorism.

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.

On December 9, 2004, BIS updated the EAR with respect to encryption by:

Implementing a standard 30-day review for encryption reviews;
Expanding the EU’s license-free zone to account for the EU’s expansion to include Cyprus, Estonia, Latvia, Lithuania, Malta, Slovakia and Slovenia. The seven new countries now belong to the “Supplement 3” list of countries that are allowed to receive non-mass market encryption items from the United States, provided they register with the BIS for review using an encryption license. (The Czech Republic, Hungary and Poland – the other three countries that were part of the EU enlargement – were already included in the supplement 3 list).
Clarifying the criteria for licensing to “government end-users.”
Eliminating the requirement for separate requests for de minimis eligibility.
Permitting updates or modifications to certain publicly available encryption posted on Internet software without additional notification.
Deleting references to “retail” to eliminate confusion with respect to “mass market” products.

ECAT Position: ECAT supports efforts to liberalize controls on encryption products.

Microprocessor Controls

The United States’ proposal to decontrol microprocessor technology used in mass-market computers with multi-media applications was adopted by Wassenaar members in December 2006. This decision opens the door for new U.S. regulations that will bring U.S. microprocessor controls more in line with technological advances.

Under current standards, BIS requires licenses for any such microprocessor technology with a CTP exceeding 530 MTOPS. That threshold was initially set in 2000 and was based on 1999 performance technology, which is totally outdated. These controls have been particularly burdensome for U.S. industry given the extremely low threshold and the limited two-year period for licenses.

The 2006 Wassenaar decision provides that controls would not be required for mass-market computers with multi-media applications. Controls will be focused instead on advanced microprocessor technology used to design and make chips for advanced computers capable of designing conventional weapons, that is microprocessors of 32 bits or more that can perform more than two 64 bit or larger floating point operation results per cycle.

ECAT Position: ECAT welcomes the Wassenaar decision to revise microprocessor controls to more accurately reflect technological advances and urges the U.S. Government to issue regulations implementing this decision expeditiously.

Dual-Use Export Control Policy with Respect to China

On July 6, 2006, the Bureau of Industry and Security (BIS) issued a proposed rule for public comment on dual-use export control policy toward China. In particular, the BIS proposal would:

Revise the licensing policy for items controlled on the Commerce Control List (CCL) for national security reasons, including a new control based on knowledge of a military end-use on exports to the PRC of certain CCL items that otherwise do not require a license to the PRC.
Revise the licensing review policy for items controlled for reasons of chemical and biological proliferation, nuclear nonproliferation, and missile technology for export to the PRC, requiring that applications involving such items be reviewed in conjunction with the revised national security licensing policy.
Create a new authorization for validated end-users in certain destinations, including China, to whom certain, specified items may be exported or reexported.
Expands the requirement for exporters to obtain End-User Certificates, issued by the Chinese Ministry of Commerce, for all items that both require a license to China for any reason and exceed a total value of $5,000.

ECAT and other business groups have expressed strong concern over the proposed rulemaking. Most importantly, the proposed rulemaking would be ineffective in its purported objective of denying to the Chinese military access to the listed items given the widespread foreign availability of the controlled items, including production in China. This lack of effectiveness is exacerbated by the fact that this would be a unilateral rulemaking of the United States, and there is no indication that it will be implemented by our allies. As a result, if implemented, this rulemaking would impose a very high and unique cost on U.S. industry with no national security benefit.

Moreover, the proposed rulemaking undermines broader U.S. efforts to develop a cooperative and improved relationship with China, promoting China’s role as a “responsible stakeholder” in the world community. This proposal seems very much at odds, for example, with the new U.S.-China High Technology and Strategic Trade Working Group, established by BIS and the Chinese Ministry of Commerce (MOFCOM) at the 2006 U.S.-China Joint Commission on Commerce and Trade (JCCT) meeting, that seeks to strengthen U.S.-Chinese civilian high technology and strategic trade cooperation.

While not advancing U.S. security interests, the proposed rulemaking would, however, significantly increase the risks and costs of compliance for American companies that operate globally. The very expansive proposal includes ambiguous definitions, lacks due diligence guidance, and would create an enormous administrative challenge for U.S. companies, while at the same time putting them at a competitive disadvantage.

ECAT Position: ECAT urges that the proposed rule of the Bureau of Industry and Security on revising U.S. export control policy with China be withdrawn and that BIS expand its discussions with business and other experts to develop workable and effective rules in this area.

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. In 2003, Rules Chairman David Dreier (R-CA), Representative Jeff Flake (R-AZ) and former Representative Robert Menendez (D-NJ) proposed H.R. 55, the Export Administration Act of 2003 (which was virtually identical to bills introduced in 2001).

The primary provisions were 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) if 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 adopts several of its 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 business 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.

ECAT and ECAT members remain committed to many of the bill’s provisions described above and are ready to support a well-crafted bill that recognizes technological advances, global availability of certain technology and the need for predictable, transparent and timely regulatory decisions. ECAT remains concerned, however, about the possible inclusion in such legislation of restrictive provisions that unilaterally impose controls on U.S. companies that would not strengthen national security.

ECAT Position: While ECAT companies support continued efforts to renew and modernize the Export Administration Act in a manner that recognizes technological advances, global availability of certain technologies and the need for predictable, transparent and timely regulatory decisions, ECAT companies note that many of the most needed reforms can be accomplished through regulatory revisions. If there is legislation, it should provide an export control system that promotes national security and maintains U.S. technological leadership. Whatever path is taken, the revised export control system should provide for a higher threshold for the imposition of foreign policy controls, create a new mass-market regulation, ease the ability to obtain foreign-availability determinations, and reduce export-license processing time. Furthermore, the committees of jurisdiction should resist the temptation to add new, unilateral export controls to the Act. Such controls would have little effect on the intended target and would likely further undermine U.S. company competitiveness in vital overseas markets.

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. Current participating countries in Wassenaar are: Argentina, Australia, Austria, Belgium, Bulgaria, Canada, Croatia, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, New Zealand, Norway, Poland, Portugal, the Republic of Korea, Romania, the Russian Federation, Slovenia, Slovakia, South Africa, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom and the United States.

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. As discussed above, in December, 2006, Wassenaar members agreed to new controls for computers and microprocessors to bring the 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 tenth plenary meeting of the Wassenaar Arrangement in December 2004, the participating countries agreed to the following amendments in the criteria for selecting dual-use items:

Dual-use goods and technologies to be controlled are those that are major or key elements for the indigenous development, production, use or enhancement of military capabilities.
Foreign availability outside Participating States should be taken into consideration.
The ability to control effectively the export of goods should be taken into consideration.
An item that is controlled by another regime should not be dealt with in the Wassenaar Arrangement unless additional coverage proves to be necessary according to the criteria of the Wassenaar Arrangement. When an item is controlled by another regime it should not be automatically excluded from the Wassenaar Arrangement, in particular when concerns and objectives are not identical.
The ability to make a clear and objective specification of the item should be taken into consideration.

In July 2005, BIS issued a final rule to implement these changes and to expand U.S. unilateral controls in certain areas.

At the eleventh plenary meeting of the Wassenaar Arrangement in December 2006, the participating countries updated the criteria for the selection of dual-use items. Most significantly, the participating countries agreed to change the metric used to measure high-performance computer controls from the MTOPS metric to the Weighted Teraflop, discussed above. The countries also welcomed Croatia, Estonia, Latvia, Lithuania and Malta to the Wassenaar Arrangement as new Participating States and agreed to the addition of South Africa as a Participating State. On September 7, 2006, BIS issued new rules to implement the 2006 Wassenaar decisions, including through adding Croatia, Estonia, Lithuania, Malta and South Africa as Participating States.

The Wassenaar Arrangement represents an important process to promote greater coordination, information-sharing and consistency in review processes; however, Wassenaar could do more, for example, to promote common guidance on the issuance of licenses; review of country-control practices and conditions imposed on the licenses; and continued work on the removal of outdated controls.

ECAT Position: ECAT supports continued work through the Wassenaar Arrangement to promote greater coordination and information on country-specific export controls. ECAT recommends that the Wassenaar countries expand their efforts to promote greater coordination and information sharing and develop common guidance where appropriate.