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National Defense > Blog > Posts > Discontent in Defense Sector Over Export Controls
Discontent in Defense Sector Over Export Controls
By Sandra I. Erwin



Aerospace and defense firms have cheered the Obama administration's five-year effort to overhaul the U.S. export licensing system at a time when American manufacturers seek international growth.

But industry groups of late are voicing displeasure with the pace and substance of the reforms. They also fear that the administration is weighing new export controls over increasingly sought-after technologies such as cloud computing, cyber security and encryption.

Over the past 18 months, the administration has acted to remove civilian, or "dual use" technologies like aircraft components and communications satellites from the U.S. munitions list — managed by the State Department — to the less restrictive controls of the Commerce Department.

While these changes have been welcome by the private sector, they do not go far enough, a coalition of 18 industry groups argued in an April letter sent to President Obama.

Exporters are frustrated by the heavy administrative burden and by a lack of transparency in the export licensing process, said The Coalition for Security and Competitiveness. Defense and aerospace firms contend the latest round of reforms has done nothing to ease the sale of U.S. technology to allied militaries. Information technology suppliers also worry that their products could soon come under stricter export controls as the administration shifts into the final phase of the reforms. "Many of the other issues your officials have indicated they plan to examine in the future, such as cloud computing, record keeping, cyber security, and possibly encryption, are subjects that industry fears will lead to more controls and more complex compliance requirements," the letter said.

The coalition also asked for greater transparency in the licensing process. This has been a long-standing gripe of defense contractors because they deal with multiple decision makers within the government who do no always agree on the exportability of a product. The coalition asked for the Defense Department to consolidate its "technology review boards and revise their mission for clarity, consistency, transparency and timeliness."

Export control reforms have overlooked the defense sector, said Remy Nathan, vice president of international affairs at the Aerospace Industries Association, one of the coalition members. "There is a need for a more coherent approach to defense exports," he said during a recent meeting with reporters. "It's going to be helpful for industry to have an understanding of where the government will allow us to fish."

After U.S. companies eye potential deals, they have run the "'Mother, may I' gauntlet," said Nathan. "You run the gauntlet sometimes with uncoordinated offices and departments saying different things. Anybody can say 'no,'" he said. "We have to get away from that."

Different agencies might have conflicting views of what technologies fall under the control of the International Traffic in Arms Regulations. "Review boards are not transparent or predictable," he said. Under the Obama reform, the Pentagon agreed to consolidate a portion of its 13 boards. Oversight is important, said Nathan, but the industry needs "more rational results out of these review boards to help planning." Exporters want to be able to know where they can pursue business, he said. In high-stakes fighter aircraft competitions, licensing issues create undue chaos, said Nathan. "What capabilities are acceptable? The amount of resources and confusion is significant. It impedes our ability to compete."

Nathan insisted that the industry is mindful of national security concerns in selling technology to foreign buyers. "We should have technologies on the U.S. munitions list, but we should be able to transfer more easily to friends and allies." Industry groups have sought an exemption from licenses for the export of spare parts that are used by allied forces. When the U.S. military or a foreign ally send parts back to United States for repairs, they are subject to export licensing before they go back to the customer. "The administration understands that it doesn't make sense," said Nathan. "The bad news is that they have not acted to implement that exemption."

Prime contractors also should be able to obtain a single export license per program, rather than individual ones for each component, he said. Program licenses are offered today, but they require the prime contractor to assume liability for every transaction underneath it. That is not acceptable to most exporters, he said. "No company on the planet is going to absorb the liability of noncompliance by other companies. The program licensing that exists on paper is not functional."

The international arms market looms larger than ever for U.S. companies, said Nathan. "We cannot afford to have the status quo approach to defense exports. We need more and better coordination in the interagency, evaluating opportunities. Once decisions are made, we need to make sure transactions happen in a timely manner."

Pentagon acquisitions chief Frank Kendall has been a proponent of designing U.S. weapon systems with "exportability" in mind. A cautionary tale in this case is the Air Force F-22 fighter, which contains top-secret technology and was designed to never be exported. As the production line was winding down in recent years, some countries expressed interest in buying it, but that was out of the question because it would have had to be torn apart and rebuilt with less sensitive components, Nathan noted. "Even if the government had allowed the export of F-22, it became cost prohibitive because of the amount of reengineering work that it would take to make an exportable version."

Designing systems that can be more easily exported is a "great concept," said Nathan. But the industry has little confidence that what is exportable today will be exportable tomorrow under a different administration. "If we commit to working with this system and following the parameters upfront, what's going to happen five or 15 years from now if the decisions shift?" he asked. "The only way this works is if you have a process to harness cooperation at a high level to look at defense exports writ large ... and you have coordination within and between departments."

Companies in the information-technology sector, meanwhile, are fretting over comments made earlier this year by Caroline Atkinson, Obama's deputy national security adviser for international economics. She suggested that as part of the third and final phase of the administration's export control reforms, officials will be "working on the definitions of what is and not in the scope of export controls." As part of that effort, they would study the exportability of cyber security, encryption and cloud computing technologies.

Atkinson's remarks rippled through the industry, said Nathan. "There is a danger of over-control," he said. "We've seen that with satellites. It's of concern to us that they're exploring some difficult new areas. We see that as export controls, not as reforms."

Bill Reinsch, president of the National Foreign Trade Council, said he was "struck" by Atkinson’s comments. After further inquiries with the White House, the industry became alarmed by the possibility of new restrictions. "What concerned us was that while we support what they are doing, the initiative on new areas implies new controls, more controls. That wasn't what we thought was the right direction."

An area like cloud computing is unchartered territory for export regulators, said Reinsch. "Where is the cloud? Who controls the cloud? The cloud moves around, it's in multiple locations. Does it matter where it is? When is something exported? If you put your data into the cloud, is that an export? Does it depend on where the cloud is physically?" he asked. "Today your data might be stored in Texas but tomorrow the information might move to Singapore. Who has access?"

Reinsch predicts an uphill battle for industry. The tired argument that if U.S. companies don't sell something, other countries will, usually falls on deaf ears, he said. "It's not politically salable. We've learned over 30 years that making that argument does not move the needle on Capitol Hill or in the Executive Branch."

Nathan agreed. "Business is not going to win against the national security argument," he said. Administration officials have acknowledged that, too.

On the heels of record-high U.S. arms sales, defense industry pleading a case for less controls is unlikely to draw sympathy. "Current controls haven’t prevented the U.S. from dominating arms exports," observed Pro Publica, an investigative news organization. In 2011, the United States scored $66 billion in arms sales agreements, or nearly 80 percent of the global market, Pro Publica reported. It noted that Obama's reforms "could increase the flow of American-made military parts to the world’s conflicts and make it harder to enforce arms sanctions."

Since the administration launched its export control review in 2009, experts have cautioned that the reforms were never intended to liberalize the arms trade. Brandt Pasco, an attorney at Kaye Scholer, in Washington, D.C., who specializes in export controls, said military exports will remain tightly controlled. The intent of the administration, Pasco told National Defense last year, is to ensure that commercially available goods and services do not have to undergo the same licensing process as sensitive military technology.

Some exporters insist, however, that the problem is that there is no clear definition of what is "commercially available" versus what is "military sensitive." That leaves a huge grey area of technologies whose exportability is a matter of subjective judgment.

One industry executive from a large high-tech firm said there is no objective standard to decide what products fall under ITAR. "I know ITAR when I see it," is the response he has received from government officials, said the executive, who asked that his name and company not be mentioned because of fear of retribution. "How can you work with that?" he asked. "It's cavalier the way the government handles ITAR. I have no faith in what they call reforms, because I don't think it will reform the core problem."

Manufacturers of advanced technology expect to continue to face these hurdles, he said. Export controls have actually deterred companies from participating in Pentagon-funded research programs. "We don't do government R&D unless it's to keep some of our people employed and it is something that has no commercial value," said the executive. "It's not worth our time. It's sad that we've come to this." Any program that receives government R&D dollars automatically becomes ITAR-controlled, he said. For a diversified company, "that could contaminate a whole line of products." Many technologies for which the U.S. government denies export licenses, he added, are commercially sold in other countries. "They still turn it down," he said of the export license. "They are not interested in hearing about the product being available from other countries."

Photo Credit: Thinkstock

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