Where Industry and Security Intersect
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Good morning. I am pleased to be back with PLI once again to discuss the direction of the administration's export control program. I believe this is the fourth time I've been privileged to be with you.
This administration's stewardship of export controls has occurred during a period of unprecedented political and economic transformation. We have worked hard to adapt our policies and procedures to these new realities, but we are finding, frankly, that it is an uphill battle, as we contend with those, primarily in the Congress, who do not understand these changes and respond to them by trying to return to the simpler era of the cold war and a single adversary. Only this time it is China. I will return to that challenge, but let me begin by commenting on some of the changes we will have to deal with as we head into a new century.
The most important was laid out by President Clinton in his speech commemorating the fiftieth anniversary of the GATT, when he said, "economic globalization is not a policy option; it is a fact." More efficient modes of transportation and communication, the internationalization of capital flows, the development of the information-based economy, all work together to transform the traditional, national economic system into one which is truly global -- where capital, ideas, goods, technology -- and increasingly labor -- all flow across borders.
This means that companies have new choices. They can build, manufacture, produce and sell in multiple locations all over the world. They can locate their R&D facilities wherever they wish and often separate from their production facilities. They do so because they can, because they have to -- as a condition of doing business somewhere -- or because it is cheaper or more efficient. It is also true that the fact that we have fewer adversaries today than during the Cold War means that companies have new markets with expanded international demand for their products -- even though we have placed half the world's population under sanctions of one sort or another.
Second, countries have more choices. With more competition and more sources of products and capital, they can keep companies out or pull them in with inducements or threats, playing one supplicant off against the other.
Third, if ever the U.S. had a monopoly on technology, that is no longer so. Technology has joined land, labor and capital in the Ricardian equation of comparative advantage, and it is the most fungible of these factors of production, residing as it does in books, blueprints, diskettes, our workers' brains in the form of know-how. The diffusion of technology as well as the rapidly growing cost of state-of-the-art production facilities in a growing number of high tech sectors means that joint ventures are the economic and political reality of the future. Going it alone is too expensive and too isolating in a global marketplace.
Fourth, the line between military and civilian goods is increasingly fuzzy because of the military's growing reliance on commercial off-the-shelf technologies for reasons of cost, quality, and speed of procurement. As our military's use of civilian high technology to meet a wide range of needs expands, it demands that our industries be on the cutting edge. That, of course, takes money, which means our companies have to be profitable.
And the reality, of course is that while the Defense Department relies on a strong civilian high tech sector to continue to develop and manufacture new and better defense products; it does not buy enough itself to keep them healthy. Instead, in a globalized economy, exports have become the key to growth and good health and, in turn, to a strong defense. For example, in the computer and satellite industries, between 50 and 60% of all revenues come from sales outside the U.S. Thus the equation is simple: exports = healthy companies = strong defense = improved national security.
While pursuing the benefits of a global economy by having top-notch high tech industries is very much in the interest of economic growth and jobs, it is also entirely in our national security interest as well. And it is our national security priorities that form the basis for our export control system.
That means we must continue to work multilaterally in trying to prevent bad actors' acquisition of high tech tools. But we fool ourselves if we think export controls alone can stop the spread of high technology, and we underestimate the resistance we will encounter from other nations who accuse us of unilaterally trying to hold back their economic growth and entry into the global information age. Working with the international community to develop consistent export control policies continues to be the only sure way to accomplish our nonproliferation goals.
Following the dissolution of the Soviet Union, the United States and its western partners no longer target the Warsaw Pact states and instead seek to expand rather than restrict high technology trade with the East. Our interest is to bring these countries into the international economic and political systems. That means helping them end their economic isolation and integrating them into western economic structures. That means trade -- not just because it is good for us economically, but because it is good for our collective national security as well.
To that end BXA works closely with foreign nations to encourage strong export control programs. Over the past several years we have helped former Soviet Bloc states draft laws, obtain and install hardware and software to maintain a control program, train licensing officers, enforcement agents, and border control officials, and prepare to adhere to international regimes. The result will be better global controls which will benefit all of
When I first met with you several years ago, I laid out our goals for reform, streamlining and liberalization to deal with these changes.
The good news is that many of these goals have been met. The bad news is that there are attempts to roll back those hard-fought changes and return us to a darker era that will not only hurt us economically but will ultimately harm our security as well. Even so, we are not standing still, and I would like to take a few moments to comment on our successes, our plans, and what we hope will be unsuccessful efforts to roll them back.
As you know, we've made a great deal of progress reforming our process; yet much of that is imperiled by congressional investigations from two perspectives. First, the sheer volume of demands for documents and information has slowed the licensing pace to a crawl as licensing officers in both Commerce and Defense spend their time reviewing old files and rounding up documents, some of them as much as eight years old. While we have for the time being put off the threat of actually having to close down, we continue to lag behind the standards of the Executive Order, and with the six inspectors general investigation gearing up, there is no relief in sight.
Second, I anticipate that these investigations will lead to efforts to move the licensing process from Commerce to some other place. Obviously, we will resist that. Some 95% of what the licensing agencies do collectively is non-controversial and handled properly by consensus at the working level in a system that is designed to be transparent, responsive to the applicant, and efficient. Changing a system that works well -- when we are not buried in congressional requests -- does a disservice to exporters, to business generally, to our goal of competent government, and, most important, to our national security.
More important, such proposals divert attention from the real issue, which is not about the licensing process but about licensing policy. Specifically our policy toward China. There are members of Congress who oppose the President's policy of constructive engagement with China and instead would treat them as the Soviet Union of the next century. I believe they are wrong, but it is an issue worthy of debate. Using the licensing process as a proxy for such a debate leads to a lose-lose outcome for us all. It will not change our policy, but it will destroy an efficient, effective system.
Let me say on that latter point of effectiveness, you will no doubt hear accusations that the system is less effective than in previous administrations, and I will be prepared to refute those one by one. Every administration has had its difficulties dealing with the realities and limitations of export controls, and this one is no exception. But having been involved in this field for more than twenty years, I can tell you with some authority that this Administration's record is better than most, and our country is stronger for it. In terms of both our security and our economy.
Now let me turn to some specific developments of interest to you.
Last October, the Congress finally passed Chemical Weapons Convention implementing legislation that compels industry compliance with the data declaration and inspection requirements of the treaty.
The Department of Commerce will be responsible for industry compliance with the CWC and will promulgate two regulations in the near future: an interim/final rule amending the EAR to address new export controls and end-use requirements; and proposed regulations addressing data declaration and inspection requirements. After finalizing the latter, BXA will collect and forward industry declarations and escort inspection teams at U.S. commercial sites. BXA is working with other agencies, such as the FBI and the Defense Threat Reduction Agency, to meet its CWC responsibilities and will ensure that staff is properly trained and certified to maximize the protection of confidential business information and minimize the costs and burdens of implementation to industry.
We are also deeply engaged in the ongoing negotiations to strengthen the Biological Weapons Convention by providing a similar inspection system.
The Wassenaar Arrangement on dual use technologies and conventional weapons entered into force two years ago. Its lack of strong central authority and its lack of explicit target countries, in contrast with COCOM, is a reflection of the times -- the absence of a single large threat and lack of agreement over the nature and seriousness of the smaller ones. But that weakness has complicated its development and made consensus among the expanded membership more difficult to achieve. Nevertheless, its inclusion of conventional weaponry is a major step forward. We have seen a marked improvement in the transfer data reported by member countries, and I am confident that discipline will continue to grow.
One of the things the CWC battle reminded us is that arms limitation agreements rarely arrive fully grown and complete. They are incremental. Establishing comprehensive adherence and compliance is an ongoing process that takes years of patience and confidence building. The result is worth waiting for, but the time spent getting there is also not wasted. Even works in progress produce successes along the way.
In past years you have listened to me tick off our domestic accomplishments: licensing process reform, rewritten regulations, control liberalizations on computers, software, semiconductors, semiconductor manufacturing equipment, and oscilloscopes to mention a few. 1997 and 1998 brought about some steps backward in our past accomplishments, specifically in the areas of computers and satellites. The implementation of the national defense authorization act to more closely monitor certain computer exports to the People's Republic of China and the former Soviet Union has increased our licensing volume and enormously expanded our post-shipment visit burden in a way that makes no enforcement sense. This increase will not be offset by the handful of licenses we will lose with the retransfer of satellites back to the State Department next year.
We are now processing some 10,000 licenses per year, and I do not expect it to decline significantly in the future because I see few high volume areas ready for major liberalization. Our challenge will not be to shrink it but to keep it from growing due to our failure to keep pace with technology advan
Encryption continues to be a hotly debated issue. As I stated last year, the U.S. continues to support a balanced approach to encryption policy which considers privacy and commercial interests as well as protecting law enforcement and national security interests. Furthermore, we also remain committed to promoting the growth of global electronic commerce through secure financial and business communications.
Our position has always been to seek industry-led, market-driven solutions to achieve a balanced approach. What has changed is the direction where technology and the market place are taking us. Key recovery technology remains a very important part of our policy; however, over the past two years, we have recognized that key recovery is not a solution for all problems.
That recognition, brought about in part as a result of our ongoing dialogue with industry, has helped us also focus on recoverable technologies that can enable law enforcement to continue its authorized activities.
As a result, on September 16, Vice President Gore unveiled a policy update, which will not end the debate, but which does include steps to further streamline exports of key recovery products and other recoverable products which allow law enforcement, under proper legal authority, recovery of plaintext.
The update also provides for 1) the export of 56 bit DES worldwide to any end user under a license exception; 2) exports of strong encryption to U.S. companies and their subsidiaries under a license exception; 3) exports of strong encryption to the insurance and medical sectors in 45 countries under a license exception; and 4) exports of strong encryption to secure on-line transactions between on-line merchants and their customers in 45 countries under a license exception. This is consistent with our earlier announcement relating to financial institutions.
This is an evolutionary process and we intend to continue our dialogue. We must continue to adapt to changes, and we will review our policies again within the year to determine whether further change is necessary. We intend to publish regulations implementing the Vice President's announcement this month.
With respect to developing a common international approach to encryption policy, Ambassador David Aaron, our special envoy on cryptography, is working with other countries to ensure that our policies are compatible. He has found that most major producing countries have public safety and national security concerns similar to ours and are interested in developing a harmonized international approach regarding compatible infrastructures for electronic commerce and for a key management infrastructure. At last week's Wassenaar Arrangement plenary session, the participating states approved a number of changes to modernize and improve multilateral encryption export controls. These changes removed controls on products below 56 bits and on certain consumer entertainment systems, such as DVD products, and on cordless phone systems designed for home or office use.
Most important, participating states agreed to extend controls to mass-market encryption exports above 64 bits, thus closing a significant loophole. This will enable governments to review the dissemination of the strongest encryption products that otherwise might fall into the hands of rogue end users.
For those of you deeply interested in the details of our encryption policy, we have a specific session devoted to it tomorrow.
On the enforcement side our most significant accomplishment is the framework arrangement we reached in June of this year with China on end-use visit practices. The arrangement gives the United States the ability to visit and inspect the locations of end-users of U.S. dual-use exports. This is an important first step for increasing confidence in the proper use of controlled items, and one that we have been seeking from China for 15 years. Until we reached this arrangement, the U.S. had been able to conduct post shipment checks in all of our major trading partners, except China.
In August, the Census Bureau published a proposed amendment to its regulations relating to shippers export declarations. Census has been concerned that forwarding agents, who complete and file a large percentage of all SEDs, have not been getting complete and accurate data from their customers. They are particularly concerned about cases when the customer is the foreign buyer, as is frequently the case when the sale is on an "ex works" basis or on other trade terms that make the buyer responsible for arranging for the shipment and export authorization. For BXA, the SED is an export control document, and we want it to contain accurate entries regarding product classification and the applicable license exception or other export authorization.
There was a deluge of public comment on the proposed rule, most of it critical. The central concern was that the proposed changes would impose new or uncertain responsibilities on sellers for the performance of forwarding agents hired by buyers.
That controversy caught my attention. Census and BXA management conferred and agreed to an approach that should produce good results. We recognized that the SED rules in the Census and BXA regulations must be coordinated and give common terms consistent meaning. Census has agreed to put its changes on hold while BXA defines the changes needed for export control purposes. The resulting proposed rules will be published at the same time. I cannot now provide specifics as to content or timing, but I can tell you that we are giving serious attention to the public comments and to pinpointing the responsibilities of the various participants to supply data in a way that does not disrupt business practices and relationships.
You may recall that I mentioned critical infrastructure protection when I spoke with you last year. In response to recommendations issued by a presidential commission, the federal government has organized itself to assure the security of the increasingly vulnerable and interconnected infrastructures of the U.S., including telecommunications, banking and finance, energy, transportation, and essential government services. We understand that the private owners and operators of these infrastructures are on the front lines of this effort, and we are working in partnership with them both to deal with threats and to develop new protections to make such threats less credible. The Commerce Department has a large role in these efforts, both as the lead agency for the information and communications sector and as the home of the Critical Infrastructure Assurance Office, or CIAO, which serves as the staff to the coordinator at the National Security Council. The CIAO has coordinated the Administration's initial efforts for a public-private partnership to assess vulnerabilities to cyber and physical attacks, eliminate significant vulnerabilities, develop plans for alerting and rebuffing an attack in progress, and rapidly reconstituting minimum essential capabilities after an attack. The CIAO has also initiated consultations with the business community, state and local governments, Congress, and other like-minded nations to maximize the alliance for our security.
I'm sure you will be hearing a great more about this in the future.
Despite -- or perhaps because of -- our progress in reorienting our export control system, we are under fire at the same time major challenges remain. As the pace of economic globalization quickens, technology becomes more diffuse, and maintaining effective controls in the face of widespread foreign availability becomes more difficult.
We do not have a monopoly on sophisticated technology, and countries intent on developing weapons of mass destruction can usually find a number of suppliers to choose from. We would be wasting our time if we maintained long lists of items to control unilaterally that are available from other sources.
As we seek to pare those lists down to what is truly critical, we now have to contend with those who want to bring back the good old days of the Cold War. The insidious problem of fighting those efforts is that even if we win, we have used all our time and energy playing defense and have not further advanced our policy.
If we can climb out of this swamp of investigations, we could conclude the reform of our own procedures and concentrate on increasing multilateral discipline.
Concluding our own reforms means focusing on true choke points and eliminating controls -- and sanctions -- that do not advance our security or policy objectives. Doing so will add to our credibility with our trading partners, most of whom take a much more limited approach. It also means making sure our controls take into account the pace of technology development, particularly in sectors like computers where a new overall is badly overdue.
In addition, we must provide more information to exporters and our trading partners about problem end users. Most of our trading partners have followed our lead and adopted a catch-all clause like our enhanced proliferation control initiative. Making them work effectively means sharing more information -- about end users, end uses, potential for diversion, and so on. We have made some progress on this issue, and we seek to expand the information we provide exporters.
Finally, we must continue our efforts to reform sanctions policy in both the executive and legislative branches. Sanctions have a role to play. We are driven to them in cases like Cuba and Iran, often because of the Congress, but also by our determination to condemn and modify, if we can, behavior we find unacceptable. Increasingly, however, we tend to think of them as a first resort, rather than a last resort. More than many other issues, however, the sanctions devil is in the details. Badly implemented, these measures can cause enormous uncertainty and difficulty for businesses -- even for those who do not trade with these countries and have no intention of doing so. Careful implementation will minimize the extraterritorial impact that so irritates our allies.
We made progress this year in moving toward a healthier sanctions policy, but we fell short of final congressional action. We need to renew that effort in 1999. Our success will not only be a sounder policy, but it will facilitate our efforts to obtain multilateral consensus in other areas as well.
In closing, let me thank you for your understanding during these last few years. The changes I've described have not come easily, and we have tried very hard to consult with affected industries as we have gone forward. Your cooperation and support in that is much appreciated and continues to be needed -- particularly as we face a difficult year ahead.
In April of 2002 the Bureau of Export Administration (BXA) changed its name to the Bureau of Industry and Security(BIS). For historical purposes we have not changed the references to BXA in the legacy documents found in the Archived Press and Public Information.