Where Industry and Security Intersect
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BXA's Office of Strategic Industries and Economic Security (SIES) plays a leadership role in a wide range of issues that relate to both the national and economic security of the United States. SIES is the focal point within the Commerce Department for issues related to the competitiveness of the U.S. defense industrial base. Its efforts include assisting American companies to diversify their product lines, adding commercial production and markets to their defense-related business; promoting the sale of U.S. weapons systems to our allies; analyzing the impact of export controls on key industrial sectors; and conducting primary research and analysis on critical technologies and defense-related sectors. The office comprises three divisions, which include Defense Programs, Strategic Analysis, and Economic Analysis. For a detailed description of the office programs and functions, consult the SIES web site.
In FY99, SIES developed a comprehensive, searchable data base detailing U.S. and foreign technology cooperation with China in the aerospace/aviation and telecommunications industry sectors. The data base covers technology cooperation with China between January 1996 and April 1999 and deals exclusively with cooperative ventures in the aerospace/aviation subsectors of airframes, avionics, and engines, and the telecommunications subsectors of fiber optics, switches, and wireless base stations. The data base will enable further analysis of the potential short and long-term implications of these technology transfers for both the U.S. and Chinese economies. In January 1999, SIES released a study that highlighted the dynamics faced by U.S. and other western firms that conduct business with China, with an emphasis on the formal and informal ways in which Chinese officials use the leverage of their vast market potential to obtain industrial, technological, and economic benefits from foreign investors.
During FY99, SIES provided research and analytic support to other BXA offices and BXA management on a variety of export control issues. For example, SIES prepared a paper that examined how recent advances in the performance levels of microprocessors, coupled with gains in both the performance and affordability of computer network equipment and software, justified a reassessment of U.S. foreign policy-based export control reporting and licensing requirements for certain computers and microprocessors. The paper noted that the widespread availability of microprocessors, the increased use of multiprocessor computer workstations and servers, and the existence of large distribution networks have combined to limit the effectiveness of export controls on computers and computer components, especially those at the lower end of the performance spectrum.
SIES provides staff support to the Under Secretary for Export Administration in his role as a member of the interagency Committee on National Security (CNS). The CNS advises and assists the White House National Science and Technology Council on increasing the overall effectiveness and productivity of our national security efforts, specifically focusing on critical infrastructure protection research and development, international technology transfer, nonproliferation, and arms control. SIES serves as primary liaison to one of the several CNS working groups, the International Technology Transfer Working Group (ITTWG).
During FY99, BXA conducted three case studies as part of its work with the ITTWG: (1) international participation in SEMATECH; (2) rocket motor casing manufacturing; and (3) co-production of the M109 howitzer. These studies examined how the Federal interagency process worked in each of these cases, with an emphasis on what the role of the government should be as industries globalize, resulting in more international transfers of technology.
BXA also assisted the ITTWG in developing a work plan for FY 2000 which includes: (1) examining emerging trends and considering what changes in U.S. policy might be necessary to harmonize the promotion of American economic and security interests; (2) examining the feasibility of interagency review of export control issues and addressing current practices and authority to make agreements; (3) exploring the desirability of using checklists to track key issues and as an administrative tool to monitor progress; and (4) improving interagency coordination of the management of issues involving foreign participation in Cooperative Research and Development Agreements and Intellectual Property Licensing.
The review of The Defense Memoranda of Understanding (MOU) is an ongoing SIES activity. MOUs are international agreements between the United States and its allies for various types of cooperation in the defense industrial and defense technological fields. SIES's role is to determine whether these agreements will result in an adverse impact on the U.S. industrial base and competitiveness of U.S. industry.
In FY99, SIES reviewed 89 MOUs with 22 countries. Since 1990, SIES has reviewed almost 600 of these agreements. A comprehensive database of the MOUs was developed and a multi- year study is currently underway to review the technology transfer implications of these agreements.
SIES also continued its monitoring role with the Department of Defense in both the development and production phases of the Japanese FSX/F-2 aircraft, a derivative of the U.S. F-16 fighter aircraft. Each phase is governed by the terms of a separate MOU. SIES represents U.S. industry interests in the ongoing U.S. and Japanese government discussions regarding the implementation of the MOUs and adherence to their provisions.
Under Title I of the Defense Production Act (DPA), the President is authorized to require the preferential acceptance and performance of defense contracts or orders over other contracts or orders to meet approved defense and energy program requirements and to allocate materials, facilities, and services as needed to meet those requirements. Authority for establishing priorities and allocations of industrial resources is delegated to the Department of Commerce and, within Commerce, to SIES.
In FY99, SIES staff worked closely with Boeing, its subcontractors, and lower tier vendors and suppliers, to meet a critical mid-August accelerated U.S. Air Force delivery requirement of 1,320 Joint Direct Attack Munitions (JDAM) to replace stocks of the weapon used during the air war in Serbia and Kosovo. SIES also spearheaded a Department of Defense effort to maintain production by Optical Imaging Systems (OIS) of active matrix liquid crystal displays (AMLCD) used in combat aircraft, such as the AH-64 Apache Longbow helicopter, and the F-15, F-16, and
F-18 aircraft. OIS was the sole source qualified producer of these displays.
SIES continued to ensure timely U.S. industrial base support for NATO's ongoing peacekeeping effort in Bosnia and the deployment troops from the U.S. and other Alliance nations to the area. SIES also continued to work with representatives to the NATO Industrial Planning Committee on the North Atlantic Council recommendation to Alliance nation members concerning implementation of priorities and allocations plans and procedures. This effort will help ensure international industrial base defense cooperation in the event of future NATO defense emergencies.
The newly revised DPAS handbook, which contains the regulation (15 CFR Part 700), statutory authority, and a series of questions and answers about the DPAS, was made more accessible early in FY99 by placing it on the BXA Website.
SIES is the lead organization in the Department on international defense trade advocacy issues. The Department will consider formally supporting a conventional arms transfer if the transfer is in the economic interests of the United States, and after the U.S. Government determines that the transfer will further U.S. national security and foreign policy objectives.
In FY99, SIES defense advocacy efforts supported sales of approximately
$4.2 billion, which included the $2 billion F-16 fighter aircraft and $1 billion Patriot missile system sales to Greece, and the $1.2 million sale of AH 64 Apache Longbow helicopters to Singapore. During FY00, SIES will continue outreach activities at major defense-related trade shows in an effort to increase awareness among small and medium-size U.S. defense firms of the important advocacy role that SIES and the Department play in this highly competitive industry sector.
SIES's capabilities and effectiveness are enhanced through partnerships with a wide range of defense and civilian federal agencies. Through an alliance with the Federal Lab Consortium, which represents more than 700 federal labs nationwide, the competitive enhancement and defense diversification needs of small and medium-sized businesses are matched with federal resources. A unique partnership between SIES, the Navy Department, and the University of Maryland promotes the sharing of exceptional manufacturing practices being used in industry, government, and academia. The goal of this partnership program is to provide low cost opportunities to small businesses to help them achieve competitiveness in manufacturing.
For the last five years, SIES has worked with small businesses nationwide to help them gain access to government resources that could improve their competitiveness. In FY99, SIES formed a partnership with the Federal Laboratory Consortium (FLC) to assist businesses in the western region of the United States. SIES gathers basic information about each of the companies and asks what type of assistance would be of benefit to it, such as manufacturing technology deployment, product/service development, reasearch and development programs, and exporting.
After analyzing completed surveys, SIES forwards summary information to appropriate members of an interagency response team who follow up directly with the firms, providing them information about the asssistance programs that their organizations offer. The team includes the Commerce Department, the 700 laboratories who are part of the FLC, the Department of Labor, and the Small Business Administration.
SIES has expanded its role as one of six regional satellite centers for the U.S. Navy's Best Manufacturing Practices (BMP) program which aims to increase the quality, reliability and maintainability of goods produced by American firms. In March 1999, SIES announced full partnership in the BMP program, which allows SIES to participate in decisions about the program's focus and overall goals as well as promote awareness of BMP among government and industry representatives.
Economic Analysis of U.S. Export Controls
Since late 1994, SIES has the expanded responsibility for analyzing the economic
impact of U.S. export control policies and export licensing decisions. During
FY99, SIES performed a wide array of economic impact studies on a number of
critical export control issues.
SIES prepared a report designed to assist the U.S. International Trade Commission (ITC) in its investigation of the economic impact of sanctions that the U.S. imposed on India and Pakistan following nuclear tests by these countries in May 1998. The report contained an analysis of BXA licensing data on India and Pakistan that showed how the U.S. unilateral foreign policy-based export controls based on these sanctions had significantly reduced the ability of domestic companies to export non-strategic items to affected Indian and Pakistani entities. The report estimated that U.S. companies lost more than $150 million in exports to India as a result of the U.S. sanctions. SIES prepared a similar report on the impact of the India/Pakistan sanctions in response to a Congressional request.
SIES also conducts annual reviews of the economic impact on U.S. industry of U.S. foreign policy-based export controls, the results of which are included in BXA's annual foreign policy report to the Congress.
In addition to analyzing the effects of existing export controls, SIES has provided the Administration with analyses of how proposed changes in unilateral U.S. export controls could impact the competitiveness of U.S. industries. For example, SIES conducted a review of the potential impact on U.S. industries of proposed changes in unilateral foreign policy-based export controls on Cuba.
SIES also prepared economic impact assessments to assist other offices in BXA (and sometimes other agencies as well) in reviewing export license applications. These applications generally consist of transactions that do not clearly fall within the scope of certain export controls or licensing policies and where failure to complete the transaction would probably have serious economic consequences for the exporting company. The economic impact assessments introduce a broader industry perspective into the licensing process by addressing such factors as the extent to which denials of individual export license applications could have a long term adverse impact on the overall competitiveness of U.S. exporters in various foreign markets.
SIES regularly provides data to BXA's offices responsible for administering export controls on goods subject to control under the Wassenaar Arrangement, Nuclear Suppliers Group, Australia Group, and Missile Technology Control Regime. SIES provides economic impact data that address issues such as the appropriate level of export controls for various goods and technologies. The information provided by SIES often consists of data on the international markets for specific goods, as well as major U.S. and foreign producers of such goods (e.g., semiconductor manufacturing equipment, encryption products).
The National Security Emergency Preparedness (NSEP) program has been the Department's focal point to ensure that the Nation's industrial/technology base can respond effectively to the requirements of national emergencies. In FY99, SIES continued to participate with the interagency community in NSEP activities. We participated in NSEP exercises to ensure government continuity of operations and in planning activities to ensure adequate government response to catastrophic natural disasters (e.g., the NOAA-led intra-agency "Out of Harm's Way Program"), as well as the threat of Y2K disruption. Commerce continues to be the lead Federal agency responsible for industrial emergency preparedness planning and implementation of a variety of NSEP programs, and SIES continues to be a major interagency contributor to ongoing reviews and assessments of the industrial/technology base.
SIES reviews the proposed transfer of defense equipment to foreign buyers as Excess Defense Articles (EDA) to ensure that any proposed transfer does not interfere with ongoing sales or marketing by the U.S. defense industry. In FY99, SIES reviewed 155 proposed EDA transfers valued at almost $450 million. SIES determines whether the transfer will have an adverse impact on the defense industrial base and, if so, can recommend to the Department of Defense that the transfer not be made.
Section 5021, the "Exon-Florio" provision, of the Omnibus Trade and Competitiveness Act of 1988 (which amended Section 721 of the Defense Production Act of 1950) provides authority for the President to review the effects on national security of certain mergers, acquisitions, and takeovers of U.S. companies by foreign interests. The interagency Committee on Foreign Investment in the United States (CFIUS) and the Department of The Treasury have authority to implement the law in consultation with other CFIUS members. SIES represents BXA on the CFIUS.
SIES conducts Exon-Florio national security reviews in coordination with other relevant offices within the Department. In FY99, the Department reviewed 69 investment notifications; one case went to the 45-day investigation period. SIES, as a participant in CFIUS, works to ensure that the U.S. defense industrial base will not be compromised by foreign acquisitions. This is consistent both with the confines of the law and the Administration's open investment policy.
At the request of industry, Congress, and other agencies, SIES conducts investigations of the effects of imports on national security. These studies conducted under the authority of Section 232 of the Trade Expansion Act of 1962, provide recommendations to the President, who may, if necessary, use Section 232 authorities to adjust imports. During FY99, the Department of Commerce initiated an investigation of the impact of imports on crude oil and refined petroleum products. The Department self-initiated this investigation because of strong Congressional interest on the impact that oil import levels have on the financial viability of non-integrated independent producers. These producers allege that growing imports of oil at below market prices threaten to force them out of business, resulting in lower U.S. domestic production and higher levels of imports from unreliable suppliers. The final report will be released in FY00.
SIES conducts primary market research and analysis on critical technology developments and industrial base capabilities of key sectors of the economy. The office uses industry-specific surveys to provide essential data. The final reports provide recommendations to government policy makers and industry leaders. The studies are conducted in cooperation with experts from the private sector and other government agencies. The result of this collaboration is detailed data that are unavailable from other sources. The goal is to maintain and enhance economic security and to enable the private sector to monitor trends in their respective sectors. Customers for these reports include the Armed Services, Congress, and industry associations.
SIES is conducting a major national security assessment of the U.S. maritime industry in partnership with the Department of the Navy and other public and private entities. The study is being conducted to identify opportunities for increased sharing of maritime technologies between public and private entities and to expand the use of public maritime capabilities in order to increase private industry competitiveness. This will require SIES to conduct several maritime sub-sector surveys as part of the assessment. The first of the surveys was sent to approximately 330 companies involved in building and repairing ships, boats, and other marine platforms. It is anticipated that preliminary findings will be available in January 2000.
SIES is conducting a follow-on national security assessment of the U.S. cartridge and propellant actuated device (CAD/PAD) industry for the Navy Department. CAD/PADs (small energetic devices) are vital to many weapons systems such as aircraft anti-missile defense and pilot and aircrew ejection seats.
The request was made by the Indian Head Division of the Naval Surface Weapons Center in view of the decline in combat aircraft production and the overall reduction in defense procurement. The assessment will reevaluate the health and competitiveness of the industry and recommend appropriate actions that can be taken to assure its long-term ability to support defense needs. SIES conducted the original assessment in 1995.
In July 1999 SIES forwarded CAD/PAD assessment surveys to 35 firms located throughout the United States. The firms are obligated to complete and return the survey under the provisions of the Defense Production Act of 1950, as amended. The data from the surveys will be analyzed and the aggregate information will be compiled into a report with a completion date in 2000.
High-Performance Explosives and Explosive Components
The U.S. Navy's Naval Surface Warfare Center, Indian Head Division requested
that SIES perform an assessment of the high-performance explosives and explosive
components industry. The Navy was concerned about the health and competitiveness
of explosives manufacturers because of declining defense spending over the
past ten years. With this decline, several firms have exited the explosives
business. In addition to the loss of suppliers, the Navy was also concerned
about the loss of manufacturing expertise at remaining facilities. The Navy
feared that these trends could lead to a munitions availability crisis in
a time of conflict.
In FY98, a survey was distributed and returned by firms in the explosives sector. The data are currently being analyzed. SIES also has conducted several visits to explosives manufacturing facilities (domestic and foreign) in FY99 and will make several more in FY00. The report will be written and finalized after the last round of site visits is complete.
This new technology study, initiated in late FY98, is an outgrowth of previous cooperative efforts between SIES and other agencies and associations in our defense diversification efforts. SIES initiated this study at the request of the Education Department's National Institute on Disability and Rehabilitation Research (NIDRR) and the Federal Laboratory Consortium. Assistive technology devices enable persons with disabilities to function more fully in the workplace and in society as a whole. The purpose of the study is to identify the industry's technology needs and match these with the defense-related technologies that are available in federal laboratories. An industry-unique survey was mailed to more than 1,700 firms in the industry; the results will be used to make such matches. This effort is expected to be completed in FY00.
SIES developed its Diversification and Defense Market Assessments program to assist small and medium-sized U.S. companies in their efforts to diversify and/or expand into overseas commercial and defense markets. This program is structured to provide market information for dual-use and defense products and is implemented through publication of a series of international diversification and defense market assessment guides. These guides provide information to U.S. manufacturers regarding dual-use and defense markets in specific regions: Europe; the Middle East; the Pacific Rim; and the Western Hemisphere. Each chapter within the guides provides comprehensive information on how to do business in a specific country. This information includes details on specific upcoming commercial and defense trade opportunities open to U.S. firms in these markets, as well as a listing of key points of contact, both in the United States and in the host country, who can provide additional information and assistance to U.S. firms.
In FY99, BXA added the existing defense market assessment guides to BXA's Web site in an effort to increase access by small and medium-sized companies. Updates of all the editions, including the Middle East and Western Hemisphere Guides, are underway and will be completed in late FY00. These guides are also available in printed format.
SIES provides Department of Commerce input into policy development and ongoing operation of the National Defense Stockpile, including acquisition, disposal, and storage of stockpiled materials. The National Defense Stockpile, managed by the Department of Defense (DOD), is currently a $5 billion holding of strategic and critical materials, which are unavailable in the United States in sufficient quantities to meet anticipated national security emergency requirements.
Representatives from SIES and the Department of State co-chair the Stockpile Interagency Market Impact Committee (MIC), which provides expert interagency advice to DOD on Stockpile acquisitions and disposals. The MIC is responsible for helping DOD avoid undue market impact and protecting the government from avoidable loss. In FY99, the MIC continued to monitor closely the depressed prices in several major commodity markets and has encouraged DOD to limit proposed stockpile sales of these commodities.
During FY99, SIES continued to represent the United States on the NATO Industrial Planning Committee (IPC) which is responsible for coordinating industrial preparedness planning among the NATO allies for both NATO military defense and civil emergency preparedness response. SIES plays a leading role in the IPC's industrial analysis subgroup, which has been focusing on defense industry consolidation within the NATO Alliance nations and improvements in international industrial emergency supply protocols. In October 1998, SIES hosted a meeting of the IPC during which these and other issues were discussed.
Other NATO related activities in FY99 included SIES participation, on behalf of the Department, with representatives from other U.S. departments and agencies in the NATO- sponsored CMX-99 civil-military readiness exercise and planning for the CMX-2000 exercise. These annual exercises are designed to test the civil emergency preparedness of NATO nations to support both military and catastrophic natural disaster requirements.
During FY99, SIES submitted the fourth annual report of Offsets in Defense Trade report to the Congress under authority of section 309 of the Defense Production Act of 1950, as amended. Offsets are mandatory compensation required by foreign governments when purchasing U.S. defense systems; they include technology transfer, licensing coproduction agreements, and countertrade. SIES is responsible for preparing this report and assessing the impact of offsets on the U.S. defense industrial base, in particular small- and medium-sized subcontractors.
This fourth annual report reviews offset agreements and offset transactions data for the five-year period from 1993 to 1997. Based on data provided by U.S. prime contractors, these agreements have proliferated over the years both in terms of the number of countries demanding offsets and as a percentage of the export sales contract.
SIES also addressed offsets as a trade concern for the first time in the U.S. Trade Representative's (USTR) Title VII Report on Unfair Foreign Government Procurement Practices. The report alerted governments around the world that the United States is seeking a way to conduct defense trade without offsets.
In the last fiscal year, notable progress was made in the area of international consultations. Negotiations have been pursued on both a multilateral and bilateral basis. Important steps have been taken to address the issue with our European allies, since they are our largest defense trade partners and demand the highest offsets. A meeting with representatives of the Netherlands government was held with the objective of eliminating or reducing offsets in exchange for improved access to the U.S. market. Meetings were also held with Canadian representatives to see what progress can be achieved in reducing offsets. Because it is our largest trading partner, and because of its role in the North American defense industrial base, it is important to make progress with Canada. Very preliminary discussions were also held with the EU, the Swedes, the Danes, and the French, who may be interested in discussing alternatives to offsets as well.
The Department of Commerce charters Technical Advisory Committees (TACs) to provide advice and assistance from U.S. industry regarding the formulation and implementation of export control policy. The TACs advise the Department of Commerce on proposed revisions to the U.S. and international export control lists, on worldwide availability and use of production technology and on export control regulations and procedures. The Committees serve as a valuable source of information and advice on regulatory and policy matters.
The Information Systems Technical Advisory Committee (ISTAC) addressed issues relating to Control List Categories 3 (semiconductor section), 4, and 5. The ISTAC forwarded to BXA comments and proposals on the following topics: aggregation and control issues for high- performance computers; graphics controls; microprocessors; 3D vector controls; indexing; radiation-hardened semiconductors; and proposed changes to The Wassenaar Arrangement, including those for control parameters on test equipment, cluster tools, and lithography. The ISTAC also provided a detailed response to country proposals on a definition for "specially designed."
The Materials Technical Advisory Committee (MTAC) reviewed proposals regarding Control List Category 1. The MTAC focused on the Biological Weapons Convention implementation protocol, addressing proposals on inspections, data declaration formats and triggers, and definitions of terms. The Committee provided input on implementation of the Chemical Weapons Convention and on the proceedings of the Australia Group. The MTAC alerted BXA to problems related to controls on hydroxy terminated butadiene materials and copolymer. The MTAC also reported on the market effects of adding controls for salts, esters, and hydrates of the 54 chemical precursors already controlled by ECCN 1C350.
The Materials Processing Equipment Technical Advisory Committee (MPETAC) made recommendations that would align current Control List Category 2 parameters with those of the Wassenaar Arrangement. The MPETAC Chairman continued to serve as a participating expert at Wassenaar negotiation. The Committee prepared a guide to controls on general purpose machine tools and other manufacturing equipment as referenced by the control regime in the Commerce Control List. The MPETAC recommended posting the guide on the BXA Web site as well as publishing it in the Federal Register and in the EAR.
The Regulations and Procedures Technical Advisory Committee (RPTAC) continued to advise the Department on policies and procedures pertaining to the Export Administration Regulations. The Committee made recommendations on a wide range of issues, including the following: the Exporter of Record; the implementation and impact of specific unilateral economic sanctions; license practices, including country groups, electronic submission of supporting documents, license exceptions, and cycle times; deemed exports; the implementation of The Wassenaar Arrangement encryption rules; and various export enforcement initiatives.
The Sensors and Instrumentation Technical Advisory Committee (SITAC) advised the Department regarding commodities and data within Control List Category 3 (instrumentation section) and Category 6. The Committee selected the following topics for review: commodity jurisdiction and control of remote sensing equipment; Control List proposals regarding signal analyzers, synthesizers, amplifiers, and underwater acoustic sensors; and development of a standard form for submission of modifications to the Commodity Control List.
The Transportation and Related Equipment Technical Advisory Committee (TransTAC) advised the Department on commodities and technical data within Control List Categories 7, 8, and 9. The Committee submitted a comprehensive set of List Review proposals for Category 9 (Propulsion Systems, Space Vehicles, and Related Equipment). The TransTAC also examined controls on gas turbine items (ex., single crystal technology), focusing on the current foreign availability of those items.
Go to Chapter Six
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.