April 17, 1997

Important Questions Remain

[This paper updates an RPC paper entitled, "The Chemical Weapons Convention:

Impact on U.S. Business Could Be Far-Reaching," 7/29/96. See also, RPC paper,

"Former Defense Secretaries and Secretary of State Testify on the CWC," 4/16/97]

Much of the discussion about the Chemical Weapons Convention (CWC) has been on issues such as verification, compliance, and other matters typical of arms control agreements. In that vein, three former Secretaries of Defense in Republican administrations testified before the Senate Foreign Relations Committee on April 8, 1997, in opposition to the CWC. They warned that the treaty is unverifiable, not global and mandates the transfer of militarily relevant chemical offensive and defensive technologies to untrustworthy countries. On that same day, Secretary of State Madeleine Albright testified in support of the Treaty, stating that the CWC sets the standard against the building and possession of chemical weapons, and gives the United States strong and effective tools for enforcing that standard.

While such concerns will continue to be a major factor as the Senate debates whether to give its advice and consent to ratification of the CWC, the question of the treaty's impact on American business -- including firms whose products are not generally understood as having any relation to chemical weapons -- is gaining increasing attention. The Senate Foreign Relations Committee held a hearing on April 15, 1997 on this issue. Smaller business owners highlighted the burden the CWC would place on their businesses, while the Chemical Manufacturing Association, which represents larger industries, testified in support of the Treaty.

This paper provides an overview of the likely impact of the Chemical Weapons Convention (CWC) on U.S. companies, with dissenting views by those who support ratification of the Treaty.

The issues addressed include: verification challenges; the regulatory impact; the potential for losses of confidential business information; the Constitutional implications of the treaty's inspection regime; and the impact on chemical trade.

Verification Challenges

The CWC aims to ban the development, production, acquisition, stockpiling, and transfer of chemical weapons. It also requires parties to the Convention to destroy their existing chemical weapons (CW) stockpiles within 10 years of the Treaty's entry into force. The Treaty has substantial verification provisions which require extensive monitoring of the global chemical industry designed to prevent parties to the Treaty from engaging in the illicit production of chemical weapons.

Unlike nuclear weapons, which require a large, specialized industrial base, CW agents can be made with commercial equipment generally available to any country. Moreover, nearly all of the chemicals used to make CW have legitimate commercial uses in the manufacture of products such as pesticides, pharmaceuticals, plastics, and paints. For example, thiodiglycol, a solvent used in ballpoint pen ink and other legitimate products, is easily converted to mustard agent in a one-step process.

Most Widespread International Inspections of U.S. Industry

Although the Intermediate Nuclear Forces Treaty and the Nuclear Nonproliferation Treaty have resulted in some monitoring of a small number of private U.S. facilities, the CWC would require inspections of thousands of U.S. private sector facilities. Opponents of the Convention warn that these inspections could yield information that is highly valuable to other countries also involved in the competitive worldwide chemical marketplace.

The CWC calls for two types of inspections: routine and challenge.

• Routine inspections would be directed at sites producing chemicals that present the greatest risk of diversion to weapons uses. A CWC party could be subject to up to 20 routine inspections and a specific site to up to 2 inspections per year.
• Challenge inspections can be requested by a party to the treaty and can take place anywhere on short (12-hour) notice. There is no limit on the possible number of challenge inspections.

Inspectors would be permitted to interview site personnel, inspect records, photograph on-site apparatus, take samples, record readings of plant equipment, and use instruments to monitor processes. Inspected firms would be responsible for escorting the inspectors, briefing them on the plant site, and providing other support the inspectors might need to perform their duties. Inspections may involve production shutdowns, with potentially large associated costs.

Proponents of the Treaty point out that inspections of facilities that use chemicals that pose a higher risk to proliferation, the "Schedule 2" chemicals, will be governed by facility agreements that plant officials help to write.

Supporters of the Treaty also note that the purpose of routine inspections is to verify that data declarations are accurate. CWC supporters contend inspectors will have little or no reason to pursue a line of investigation concerning diversion of chemical agent production, unless they detect something suspicious during the data certification stage of the inspections.

Finally, CWC supporters note that the purpose of a challenge inspection is to ascertain whether noncompliance with the CWC's prohibitions against the development, production, acquisition, stockpiling, transfer or use of chemical weapons has occurred.

Direct Costs from Inspections

Critics of the Treaty warn that direct costs from inspections could be high, as expressed by Department of Defense figures.

• The Department of Defense has estimated that the cost of hosting inspections of large facilities engaged in highly proprietary activities could be as high as $500,000 per inspection (mostly in nonrecurring costs), while small businesses should expect inspections to cost $10,000-$20,000 [according to a letter from the Office of the Secretary of Defense to OTA, 4/93]. The country "hosting" the inspectors are expected to comply completely with the inspectors' demands, while paying the full cost of the inspection, including meals and lodging of the inspectors. While the United States would be reimbursed for these costs from the Organization for the Prohibition of Chemical Weapons (OPCW, the organization which will administer the Treaty), the U.S. taxpayer is still paying 25 percent of this effort, and will be reimbursing other countries for inspections at this same rate.

• A given company could be subject to two routine inspections per year, per site and potentially, an unlimited number of challenge inspections.
• The aggregate cost to U.S. industry is subject to conjecture, but could be substantial with estimates of the cost ranging as high as $200 million annually ["Ratifying the Chemical Weapons Convention: American Business Will Pay the Price," Heritage Foundation, 7/18/96].

However, CWC supporters claim that no reliable cost estimates, either from industry or other sources exist; but that a more reliable analogy would be the average cost to industry of Occupational Safety and Health Association (OSHA) or Environmental Protection Agency (EPA) inspections. Treaty proponents also argue that given time, money and workforce constraints, the OPCW will only be able to institute a limited number of challenge inspections per year, therefore making it unlikely a U.S. facility would receive multiple challenge inspections.

Regulatory Impact

The new regulatory burden which would be imposed by the CWC is significant, both because of the large number of firms which would be affected -- especially medium- and small-sized industries -- and because of the detailed reporting and inspections required.

Number of Affected Companies

According to a study on the CWC prepared by the Office of Technology Assessment (OTA), the United States has roughly 20,000 chemical manufacturing plants, or about a third of the world's total chemical production capacity. Chemical manufacturers are distributed throughout the country, with no state having fewer than 25 facilities. In addition to companies that produce chemicals, businesses which are "downstream" users of some chemicals may have to file declarations and accept inspections, including firms in such diverse sectors as the pharmaceutical and potentially fertilizer and pesticide industries.

However, there is sharp disagreement over how many firms would be affected by the Treaty:

• OTA estimated as many as 10,000 firms would be affected.
• According to data supplied by the Commerce Department, the Foreign Relations Committee estimates that 3,000 to 8,000 companies (many with multiple sites) produce CWC-regulated material.
• The Chemical Manufacturers Association -- which supports CWC ratification and represents 193 of the larger companies producing chemicals regulated under the Treaty -- estimates that only 2,000 sites would be affected.

Treaty opponents highlight that large companies undoubtedly will be able to handle the additional regulatory burden better than smaller companies. As noted by Donald Rumsfeld, Secretary of Defense under President Gerald Ford and former Chairman and CEO of a major U.S. pharmaceutical business, "I don't suggest for a minute that the large American companies aren't going to be able to cope with these regulations -- they are. They'll do a whale of a lot better than small or medium-sized companies" [Hearing before the Senate Foreign Relations Committee, 4/8/97]. Rumsfeld also pointed out that many of the smaller companies probably are not familiar with the details of the Treaty, do not believe it would apply to them, and do not understand they could be subjected to inspections.

However, Treaty proponents point out that some exemptions have been tentatively approved to prevent the plastics industry and breweries and wineries from falling within the scope of the CWC's monitoring. Treaty supporters further note the Administration hopes to negotiate other exemptions for industry in the future.

Time Involved in Filling Out Forms

The CWC places restrictions on known CW agents and some precursor chemicals that can be converted to chemical weapons in one or a few steps. Depending on their utility in producing chemical weapons and the extent to which they have commercial uses, these compounds are classified into three "schedules." Each schedule has its own regime of reporting requirements, forms to be submitted, and inspection liabilities for producing firms. The Treaty's reporting requirements also apply to facilities which produce nonscheduled substances called discrete organic chemicals. The U.S. Department of Commerce estimates that filling out the paperwork will take anywhere from 2.5 to 9 hours for each chemical depending on its schedule classification.

Cost of Filling Out Forms

It is difficult to predict the exact costs companies will incur to fill out the additional government forms that will be required if the CWC is ratified. However, as noted by critics of the Treaty, it is possible to establish a range of costs based on industry responses. Some companies conducted comprehensive internal reviews of their own based on the instruction manual and draft regulations compiled by the Commerce Department.

• Cost estimates associated with the reporting burden ranged from $1,500-$2,000 for two small companies producing discrete organic chemicals to $250,000 estimated by a large, diversified company.
• If the average cost to a company for filling out CWC forms were only $20,000, and only 3,000 companies were affected, the total cost to the economy would still approximate $60 million per year. If 8,000 companies are affected, the cost would equal $160 million per year.

Treaty proponents, however, believe that companies' cost estimates at this point could be misleading because there is not enough data to support such estimates. Treaty supporters also note that the first declaration plants will have to make will be the most difficult one, and point out that the Commerce Department expects less time will be required to complete subsequent data declarations.

Potential Losses of Proprietary Information

According to the OTA study on the CWC, the U.S. chemical industry is one of the top five industries targeted by foreign companies and governments for proprietary information; and the problem of industrial espionage is growing. Critics of the Treaty cite that a primary concern about CWC inspections is the potential loss of confidential business information, a general term covering trade secrets and other types of proprietary data, like the chemical structure of a new pesticide or the recipe for Coca-Cola.

• The OTA study noted, "Because proprietary information is often the basis for a chemical company's competitive edge, both nationally and internationally, the theft of trade secrets can result in a major loss of revenue and investment -- even for a large company. Industrial espionage can enable a competitor to obtain at minimal cost information that its originator acquired only through an enormous investment of time and money, thereby erasing the competitive advantage of that investment in R&D. For this reason, the theft of trade secrets can cripple even a giant company, and can be fatal to a smaller enterprise."
• Incidents of industrial espionage are more common than many people realize. The OTA study also discussed the results of a survey of U.S. companies in which 8 of the 11 firms responding reported attempts to misappropriate proprietary business information. The 8 affected companies reported a total of 21 incidents, 6 of which cost the companies more than $86 million.

Critics also warn that if the United States ratifies the CWC, specific decisions about which American sites would be inspected, the composition of the inspection team, and the procedure for analyzing samples taken during the inspection would be made by the UN-style Organization for the Prohibition of Chemical Weapons. CWC inspectors would be afforded unprecedented opportunities to collect information that could lead to the compromise of valuable trade secrets. It is possible that inspectors might be nationals of countries known to have active industrial espionage programs against American firms, like China and France. It is even possible that a challenge inspection would result from a request by a country seeking access for purposes of espionage; and the U.S. Government would have no ability unilaterally to halt the challenge inspection.

The danger of economic espionage was highlighted by former Secretary of Defense James Schlesinger at a hearing on April 8, 1997, before the Senate Foreign Relations Committee:

"We are dealing not only with the verification of chemical weapons, we are dealing with possible industrial espionage in the United States. And that industrial espionage is going to be a godsend -- I repeat, a godsend -- to foreign intelligence agencies and to the corporations which will feed on those foreign intelligence agencies."

Supporters of Treaty ratification admit that there are some concerns about the potential loss of confidential business information during a CWC inspection, but believe the Treaty has numerous mechanisms that chemical companies can use to protect their proprietary data. They also claim that chemical industry officials participated in the Treaty negotiation and made substantial contributions to the CWC's Annex on Confidentiality and on its provisions for the conduct of inspections. Therefore, they say, the existence of these mechanisms will safeguard industry's trade secrets.

Constitutional Questions

The challenge inspections established by the CWC raise serious concerns about the protection of the rights of Americans under the Fourth and Fifth Amendments to the U.S. Constitution.

• With regard to the Fourth Amendment which protects individuals from unlawful searches and seizures, the CWC's provisions do not require a warrant or that a nation requesting a challenge inspection provide probable cause or meet any other evidentiary standard. While many U.S. industries are now subject to a variety of domestic regulations and inspection requirements, such inspections generally are limited to facilities engaged in regulated activities. Under the CWC, however, any nation may request a challenge inspection of any facility, including non-commercial industries.
• With regard to the Fifth Amendment (which prohibits uncompensated taking of property), there are questions regarding uncompensated costs in the form of compromised proprietary information. The CWC limits the right of redress in the event of economic espionage during inspections since the OPCW will not be held liable for the loss of confidential business information. According to John Yoo, acting professor of law at U. of California-Berkeley's Boalt Hall School of Law, "Under the CWC, the American government would not owe compensation because the guilty parties would be the international inspectors. CWC officials would not owe compensation because they are not members of the American government and are immune from suit" [Wall Street Journal, 4/16/97]. This treatment differs from U.S. law for the Environmental Protection Agency (EPA) and other government agencies which are "legally punishable" for revealing any company secrets that may be obtained during inspections.

Those who support CWC ratification point out that Article VII of the CWC states that, "Each State Party shall, in accordance with its constitutional processes, adopt the necessary measures to implement its obligations under this Convention."

Treaty critics point out that this exposes one of the tensions in the Treaty -- that it somehow must not be excessively intrusive with regard to American persons but at the same time must be sufficiently intrusive to detect noncompliance by foreign persons. For example, if American courts would have the authority to interpret U.S. domestic constitutional protections to the advantage of Americans subject to CWC inspection, it would have to be assumed that the courts of Iran, etc., would be able to make the same determinations about claimed violations in that country.

Impact on Chemical Trade

Treaty proponents claim that American chemical companies will lose a significant amount of money if the CWC is not ratified, since states that have not joined the CWC will be subject to automatic trade penalties that will be implemented in phases. The Chemical Manufacturers Association claims that in such an event, chemical companies may be subject to trade restrictions, which will place roughly $600 million of annual U.S. chemical trade at risk.

But as Treaty critics point out, CMA's most recent "upper-bound" estimate indicates $227 million in annual U.S. chemical exports would be jeopardized by non-ratification. This $227 million represents about 0.38 percent of total U.S. chemical exports, indicating that if CMA's figures are accurate, more than 99.6 percent of U.S. chemical exports will be unaffected by failure to ratify the CWC.

Treaty opponents also note that CMA also estimates as much as $426 million in chemical imports potentially could be affected by non-ratification. The United States has the most advanced chemical industry in the world. Although short-term disruptions might occur if U.S. firms were unable to import certain chemicals, American industry almost certainly would be capable of producing the same chemicals currently purchased from abroad. Over the long run, the resulting gains to U.S. firms from this import substitution would probably overtake or offset any decline in revenues from lost exports.