Where Industry and Security Intersect
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Good morning. I appreciate the opportunity 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 and have accomplished a great deal over the past five years. Now we are finding, however, that further change is an uphill battle, as we contend with those, within the Congress and without, 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 bipolar adversary. Only this time it is China. A good example of this is the Cox Committee -- whose report will be issued shortly. But before I get to that, let me comment on some of the changes that all of us 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." You know this because you live it in your jobs every day. 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, not always freely, but more often than not successfully.
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, often separate from their production facilities. They do so 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 no longer face a Bloc of adversaries today as we did during the Cold War means that companies have new markets and increased international demand for their products.
Second, countries have 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, it is no longer so. 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.
It is the reality of globalization that underlies this Administration's national security export control philosophy. The key element in military superiority is the gap in capabilities between ourselves and our adversaries, and that gap is maintained and enlarged both through policies that retard our adversaries' progress (export controls, arms control agreements, among other things) and through policies that promote the research, development and acquisition of advanced technologies domestically.
This approach is fundamentally different from that of the Cold War, which was based on a broad policy of denial of a wide variety of goods to the Soviet Bloc on the assumption that anything shipped would be diverted to military or proliferation use. Instead, our approach is based on the reality of economic globalization and the realization that, as a result, our national security is a direct function of our economic health and security.
This is so for two reasons:
1) The ubiquity of critical technologies and the ease of their transfer makes export controls much more difficult than twenty or even ten years ago. Intel, for example, has 50,000 authorized dealers worldwide. 60% of its business is exports. Conversely, roughly two-thirds of the components of one of our leading computer manufacturer's products come from abroad. Microprocessors, which are the key ingredient for High Performance Computers (HPCs) as well as PCs, have become a commodity product widely available throughout the world from numerous sources. Maximizing our technological leadership will inevitably have more to do with making sure we are running faster than our adversaries than it will on trying to hold them back.
2) Our military's transition to Commercial Off the Shelf items (COTS), due to declining defense budgets and the inability of military procurement of specially designed items to keep up with fast changing sectors, particularly electronics, means that the technology driver in our economy is the civilian sector, not the military contractor. That means, in turn, that our military strength is directly tied to the health of the civilian companies that produce the products it buys. So is our economic health. The computer industry, for example, indicates that 45% of GDP growth in the past 2 and 1/2 years came from its products.
A good example is HPCs -- our defense establishment increasingly needs them for weapons' design and test simulation, fluid dynamics analysis, small particle analysis, "smart weapons," command, control and communications functions, etc. The 21st century fighting force will be more reliant on HPCs than any before it, and whoever has an edge in this technology will have an edge on the battlefield, as Desert Storm demonstrated.
The result is that the military relies on a strong high tech sector to continue to develop and manufacture new and better products; yet it does not buy enough by itself to keep them healthy. Instead, in a globalized economy, exports have become the key to growth and good health. In the computer and satellite industries, for example, between 50 and 60% of all revenues come from sales outside the U.S. Last year, USA Today reported that one of our companies had to eliminate 300 jobs after suspending work on three Asian satellites due to the flagging Asian economy. A failure to export also means fewer profits being rolled into R&D on next generation technologies and fewer funds available to address particular defense-related concerns.
Thus, the equation is: exports = healthy high-tech companies = strong defense. Cripple our companies by denying them the right to sell, and you set back our own military development.
The argument that, even so, we should simply deny them the right to export to China or some other "small" market is likewise fallacious. Leaving aside the fact that China won't stay a small market for long, the more important reason is that if we shut our door to China, in less than a year new competitors in Taiwan, Korea, Japan, and Europe will be walking through theirs. Our lead in many of these sectors, is not based on our monopoly of the technology; rather it is based on our quality and efficiency of production. Close a market and we will create viable competition where there is very little now. And that competition, as we have learned in so many other sectors over the past twenty years, will not stop with China but will move on to compete head to head against us elsewhere.
In other words, the loser in the face of closed markets is not the Chinese but the Pentagon, whose access to cutting edge goods and technologies will be slowed, and the United States, whose technological leadership will face new challenges from new suppliers.
The other reason closing markets like China to HPCs misses the point is the fact that China, as well as India and others, has the capacity to make these machines themselves. While they do not -- and cannot -- manufacture to compete with U.S. companies, they can make machines that will function at performance levels sufficiently high to provide the military capabilities they seek. Denying them U.S. products simply encourages their own development and production -- which is precisely what the Reagan Administration's decision to deny India HPCs did.
Although I have used HPCs as an example, the logic is true for other fast moving sectors, including semiconductors, controlled software, and telecommunications. Large capital items, in contrast, are more susceptible to controls, but the implications for our defense of too-broad controls are the same as for HPCs. These include items like machine tools and semiconductor manufacturing equipment, where the U.S. has a minority of global market share and where current foreign availability is a serious issue; and satellites and some aerospace items where the U.S. has a strong global position but is under growing pressure from competent competitors.
I mention these sectors, both because they cover the core of what we do in export controls at BXA but also because they are critical to the continued strength of the California economy.
Aerospace: California has a long history of aerospace manufacturing. Despite the defense cutbacks, approximately 168,000 workers are employed at more than 1,100 aerospace firms in California (23% of all U.S. aerospace production), including Boeing, Northrop Grumman, Lockheed Martin, Hughes, and McDonnell Douglas.
Computers: California's computer industry employs more than 175,000 people ( 27% of the nation's total in this industry). Companies such as Hewlett-Packard, Intel, Apple, and Packard Bell contributed to statewide sales and revenues of approximately $35 billion in this industry in 1995. That figure continues to grow.
California exports of computers comprise almost a quarter of the nation's total. Exports of industrial machinery and computer equipment in 1997 totaled $26 billion, up 3.5% from 1996.
Computer Software: California is the world leader in the computer software industry, employing more than 100,000 people in 1995. Although there are no official trade statistics on computer software, the American Alliance for Software Exports estimated U.S. software exports to be approximately $26.3 billion in 1994, the greatest share of which came from California companies.
Satellites: With the increasing demand for telecommunications systems, the California satellite industry is growing. A handful of California companies provide a majority of the world's satellites, employing more than 30,000 workers with sales exceeding $4 billion annually.
These statistics demonstrate the critical importance of these issues to California's economy and employment and explain why you should be particularly interested in what is going on in Washington in this area.
DEFENDING OUR POLICY
Now let me close by explaining what we in the Administration are saying in order to deal with the challenges we face from Congress.
The first defense of our policy is to explain it fully. We must do a better job of teaching the public how changing times demand the more sophisticated policy this Administration has adopted and how the world is no longer suited to a Cold War approach. In making that clear, we must also make clear that our policy is the way to better security and a stronger military and intelligence position, not the reverse.
This means we will be making a national security argument rather than a commercial argument. Since this is the basis for our policy anyway, it is not a hard argument to make, but it will take effort to overcome the cynicism of those who incorrectly believe our policy has only a commercial basis. We leave it to industry to explain how globalization has affected you and the extent to which your health increasingly depends on exports.
The second element is to explain our policy of constructive engagement with China and our belief that the quickest way to turn them into a committed adversary is to treat them like one. This does not mean we pursue a policy of leniency. Far from it. We have been outspoken in confronting the Chinese with our differences and in seeking a dialogue to overcome them. And you all know the Chinese do not always make that easy. But it is important that we make very clear that the Congressional approach on export controls would have the effect of destroying our dialogue and pushing the Chinese into an adversarial position.
That is what we are going to do. What about you?
First, you should strengthen your own internal procedures and adhere closely to our laws and regulations. Don't provide unintended ammunition for those seeking to turn back the clock and close our borders to commerce.
Second, continue to employ your own global strategies. Move into new markets -- grow your companies, develop new products, increase your R&D. It's good for our economy, our workers, our development of advanced technology. In other words, fight back by doing the only thing that makes sense -- advancing into the global marketplace rather than retreating from it.
Third, get involved. These issues affect you and your companies' futures. Decide what you think and don't be reluctant to say it out loud.
If we take these steps, perhaps we can persuade the Congress not to try to force the national security paradigm of the Cold War onto today's situations. This paradigm is obsolete, and cries for a return to past practices, no matter how strident, will not change that fact. The problems posed by economic globalization are not amenable to simple or parochial answers. The best policy is one that moves in the direction of building alliances rather than enemies, and an export control agenda for the next century must reinforce that principle.
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.