New U.S. Export-Controls: Sales Will Be Better, But Transatlantic Impact Takes Time     Print Email
Tuesday, 31 August 2010

The Obama administration has started to deliver its promised new system of export controls on military-related technology. The goal of the reform is, as officials put it, “to build a higher fence around fewer, truly sensitive items.”

In practice, the streamlined system will affect different players in varying ways:

  • U.S. defense contractors are big winners: they can expect very significant boosts in their arms exports. The new licensing system frees up low-tech items completely and clarifies procedures for supplying foreign clients with more sophisticated items.
  • Allied countries’ military establishments will welcome the relief from some cumbersome U.S. bureaucratic requirements about sharing weapons technology. These security problems have impeded “interoperability,” i.e. the ability of European forces to fight alongside U.S. forces with the same U.S.-equipment, without having to fear paralyzing complications when they need upgrades or even battlefield spare parts.
  • European military industries have mixed feelings about the changes’ potential effects. On the one hand, they are glad to be relieved of thousands of out-dated restrictions that have crippled their ability to work with U.S. manufacturers efficiently. But at the same time arms manufacturers in Europe (and elsewhere) have seen parts of their markets protected by the often-prohibitive burden of U.S. bureaucratic maneuvering and time-consuming licensing procedures on arms sales – non-price tag cost that have driven some clients to seek non-U.S. suppliers.
  • For rogue arms dealers in nuclear weapons-development and other high technologies with security applications, the change is designed to be highly unwelcome by making it clearer and easier for the authorities to spot illicit attempts to acquire banned technology to smuggle out of the U.S.

This reform mantra – higher walls protecting only truly sensitive items – has often been heard in Washington, usually to little real effect. But this time significant change is really occurring. No deadlines were announced today for implementing the new system, but the White House has said that extended inter-agency consultations have produced a final blueprint that is starting to be put into effect.

  1. Under the new system announced Tuesday by the White House, the old tangled web of multi-agency oversight will be drastically simplified into a single three-tier export-licensing system. It will tighten controls on items with direct warfare applications such advanced weapons and electronics.  But there will be far fewer restrictions than before on widely-available products such as brake pads used on tanks.
  2. After decades of resistance from government offices seeking to protect their fiefdoms in export licensing, the White House is now going to install a single government-wide computer system to track the process – in order, an official said, to make sure that decisions are “fully informed.”
  3. Ultimately, the White House blueprint unveiled today calls for a single office to oversee the system – a goal that will require surmounting predictably strong Congressional resistance.

The European Institute’s members got an early briefing on this reform on May 25th when the institute hosted Eric Hirschhorn, Under Secretary of Commerce for Industry and Security, to discuss the challenges facing the implementation of President Barack Obama’s export control initiative and its implications for the transatlantic trade relationship. The under secretary emphasized that the reforms would not place any additional legal burden on U.S. companies and that the administration's goal is to make the process less cumbersome and more hospitable to growing the export market.  He said that he was hopeful that Congress would take up export control legislation this year or at the latest early next year.

Now the executive branch has moved ahead implementing its own part of the agenda. Many of the changes sound like commonsense reforms of antiquated red tape. For example, James Jones, head of the National Security Council, explained that henceforth “if we decide to share a weapons system with our partners, we shouldn’t require them to seek a license for every spare part.”

Jones presented the reform both as a means of strengthening U.S. national security and also of enhancing the competitiveness of U.S. manufacturing and technology. For one thing, it is supposed to better protect cutting-edge proprietary U.S. innovations from being pirated. But the big commercial change involves the elimination of red tape that has tied up U.S. arms exports and make them less competitive against a rising number of international manufacturers of weapons, electronics and other war-related materiel.

This presentation fit well with the Obama administration’s drumbeat of calls to increase American exports. The export rule-changes seem bound to release a leap in U.S. defense sales and help satisfy the White House’s quest for jobs – this time in arms and other high-tech manufacturing and labs.

In this light, it was unsurprising that the news was enthusiastically welcomed by the U.S. defense-industrial sector.  “We’re very happy,” said Bill Reinsch, president of the National Foreign Trade Council, which lobbied for the changes in this regulatory sector. He labeled them the most important renovation in at least 20 years and a fundamental clean-up of out-dated approaches left from the cold war era.

European defense contractors will find much to like in the changes – and in some cases much to fear. On the one hand, a more rational U.S. system will make allied defense contractors more confident about cooperating with U.S. If they collaborate in developing a weapons system, they will have less to fear about being caught up in intractable U.S. licensing requirements tied to a single U.S. component in the product. Amid mounting frustrations with U.S. rules, which can cause licensing delays for allies seeking spares or replacement parts even in combat situations, European officials have sometimes threatened to turn to non-U.S. sources for some of their arms purchases. “It’s a more competitive world these days: the U.S. government weapons labs no longer have a monopoly on many of the weapons we need,” an allied official said on the sidelines of a conference at the European Institute.

On other hand, some European manufacturers have concerns that a smoother U.S. licensing process may open the way to U.S. exports that take away own business, including even domestic orders. Indeed, the “competitive alternatives” to U.S. weapons that are restricted are often arms that have come from European manufacturers.
Of course, in the long run, the modernizing of the U.S. licensing system may contribute to a wider process of defense-industrial consolidation and specialization that sees more trans-Atlantic investment in defense industries and eventually help to rationalize defense production at a time of rising cost and shrinking government budgets.

The most daunting single change in the White House blueprint  – the creation of a single licensing agency – will require congressional approval, and it remains uncertain whether the Obama administration can prevail against the vested interests defending the current diffuse system. Currently, authority in this area is divided among the Commerce Department, the State Department, with input from the Pentagon and other agencies – all under the oversight of Congress and its staffers, who often see this power as an important prerogative. This entrenched foundation of the old system has always been seen as the most difficult and most fundamental challenge to real changes to provide more agility in export control philosophy and application.

Already, however, the reforms launched by the executive branch amount to a major clean-up of the often-frustrating tangle of cross-cutting regulations and jurisdictions. The reform involved a year-long review by Defense Secretary Robert Gates to refine rules that had been set up largely to keep “dual-use technology” (including encryption software and airplane parts) out of the hands of military adversaries. Businesses complained that the list of prohibited products was too long and out of date, and found it hard to tell if they were subject to a ban.

In his talk at the European Institute, Secretary Hirschhorn said that the President’s initiative will not only streamline export control processes but will also cut the number of items protected by current controls and require licenses for fewer components. In essense, the White House wants to draw a bright line between export items that should be covered by the State Department's Munifiction's List (weapons) and those that should be covered by the Commerce Department's Control List, which included dual-use items. For example, currently, there are 12,000 items on the highly restricted munitions list, many even in the truck category. he details released now indicate, that 74 percent of them will be relieved of all controls or transferred to less-restrictive lists. While a quarter would remain on the new consolidated list, none would be put in the highest (most restrictive) tier of licensing requirements that is being created.

In presenting the new system, White House officials stressed that it will improve the U.S. authorities’ ability to enforce export controls on truly sensitive items. For one thing, the more sharply-defined, shorter lists will enable the government (and perhaps also allied governments) to obtain more vigilance and help from cooperative companies that are manufacturing and selling these sensitive technologies. No one can spot a rogue company’s attempts to circumvent the ban on nuclear or other banned technologies than companies that are working legally in the field. That was a key lesson in a book on the changes need to prevent illicit purchases of nuclear-related technologies, "Peddling Peril: How the Secret Nuclear Trade Arms America's Enemies" by David Albright,  that is reviewed in the current issue of European Affairs.
--   European Affairs