Brave New World of Export Controls

on Monday, 07 October 2013. Posted in Export Control Reform

By Dr. Paul Freedenberg

In the summer of 2009, at the urging of Secretary of Defense Robert Gates, President Obama announced a plan for a complete reform of our nation’s export control process.  Gates, who had experienced the export control system first-hand as President of Texas A & M University, articulated the President’s concerns when he argued that the system was “overly complicated, contains too many redundancies, and in trying to protect too much, diminishes our ability to focus” on the truly important.  The President told the national security bureaucracy that he wanted the system simplified and consolidated, both for the sake of good government and because our companies were needlessly losing sales and market share to foreign competitors as potential customers avoided buying from US in order to escape the bureaucratic delays and needless restrictions they encountered when they purchased US high tech products and weapons systems.  Even combat cooperation with close allies was delayed by needless licensing requirements built into a rigid compliance system.

 As a consequence of the President’s mandate, over the past four years licensing officials at the State, Commerce and Defense Departments have been diligently at work reforming both the lists of licensed items and the manner in which they are licensed.  This is a Herculean task.  It involves reconciling export control definitions, regulations, and policies that govern the export of tens of thousands of items worth hundreds of billions of dollars.  At its conclusion, it is expected that fully 90 percent items governed by the State Department Munitions List (“ML”) will be transferred to Commerce Department jurisdiction or decontrolled.  They will have moved from the more restrictive and less flexible State Department ML to the simpler and more flexible Commerce Control List.  Those items inherently military and needing tighter controls will have been more precisely defined on a less ambiguous, positively defined ML.  The object is to have the ML contain only the “crown jewels” of U.S. national security technology.

Within that “Export Control Reform initiative” (“ECR”), the Commerce Department’s Export Administration Regulations have been clarified and the need for an individual validated license in order to export to America’s allies and friends who accept international restrictions on high technology exports has been greatly reduced.  In keeping with the good government, reform theme, many enforcement functions have been consolidated and export licensing has been made available on-line in almost all cases.

Probably the most attractive licensing reform of the ECR initiative is the creation of new Commerce license exception known as the Strategic Trade Authorization (“STA”) which allows export without a validated license to 36 countries that are either U.S. allies or who have agreed to adhere to the various regimes created to prevent proliferation – the Australia Group, the Nuclear Suppliers Group, and the Missile Technology Control Regime.  The jury is still out with regard to how widely this new STA license exception will be utilized, because it creates additional compliance burdens on the exporter and it requires significant new paperwork and commitment to compliance from the end-user.  These new burdens may very well prompt many exporters to pass on the new license exception and stay with the validated licensing process that they know rather than embark into the unknown world of requirements inherent in the new STA, with which they have no experience and in which they are obligated to make new demands on their customers.  But despite its restrictions and its paperwork burden, it should be attractive to a number of companies who previously operated under the State Department’s tight restrictions.

Interestingly, the STA is not available to China or Russia, the two countries with high license volumes and the most difficult licensing challenges, where the promise of licensing relief would be most attractive to exporters, particularly large exporters with large numbers of licenses. Balanced against the merits of the STA license exception’s enhancement of an exporter's licensing obligations and reduction of the paperwork burden of the licensing process is the fact that the new license exception eliminates the requirement for exporter to submit his decision to the U.S. Government and await its decision regarding the approval of the proposed export.  The item is exported according to strict guidelines and with strict compliance requirements, but it does not require prior U.S. Government approval.  Understandably, it is highly unlikely that the Congress would look favorably on this special expedited treatment for the two countries in question.  Congress has been clear in its desire that the U.S. Government should not just set the rules but make the decision with regard to the licensing process, particularly when it involves countries where U.S. security or proliferation concerns are manifest, such as China or Russia.  Hence, the STA provides licensing relief to three dozen countries, but it avoids the controversy that would come from providing that licensing relief for countries where exporters might find it most welcome. 

Despite the desire to reduce the number of individual validated licenses with devices such as the STA, it is clear that the Obama Administration will be careful to confine those license reductions to the lower risk categories and countries, likely to raise the fewest eyebrows among Members of Congress.

U.S.-based multinational corporations have expressed support for this massive undertaking and have participated through public fora and the detailed written comments that they have submitted.  But their praise has been muted. They understand the great cost and effort involved in transforming their export compliance systems to conform to the new requirements.  Assistant Secretary of Commerce for Export Administration, Kevin Wolf has addressed this concern when he said recently that while ECR will mean short term pain, as companies are forced to revise their compliance programs, there is likely to be long term gain, as companies reap the benefit of a simplified system with fewer validated licenses with which to contend. 

Some exporters have expressed concern, wondering if the risks and rewards will balance in the long run.  Multinational companies in particular are concerned that the ECR, which has taken the better part of four years and is still not completed, has diverted the Obama Administration from the equally important task of simplifying and expediting the licensing process for sales to China and other difficult destinations, which has been completely ignored as all resources have been diverted to the West-West trade orientation of the ECR.  They are also concerned that other important reforms have been put off into the indefinite future as the time-consuming task of revising and combining the export control lists is completed.  Such tasks as reforming encryption controls, creating an effective way to authorize inter-company exchange of data on a worldwide basis, and increasing the utility of the UK and Australia arms treaties have been deferred as work continues on the fundamental rewrite of the regulations.

There is a lot riding on this four-year long undertaking.  2014 will be the acid test of the ECR initiative.  Beginning on October 15, when the first of the new regulations go into effect, everyone planning to export high technology will be forced to switch to the new regulations, create new compliance programs, and re-categorize almost all of the their inventories.  We shall see whether the ECR lives up to the Administration’s promises of actually enhancing national security while providing export control efficiency and simplicity, and whether the Obama Administration can point to the new licensing system as an accomplishment that is worth all the work that has been put into it.