New Round of Export Control Reforms: Is This One For Real?

12/10/2010
By Sandra I. Erwin
President Obama promised U.S. exporters this week that the administration is taking concrete action to reform the perennially despised regulatory regime that restricts sales of high-tech products to foreign customers.
Companies for decades have been skeptical about the prospect of reform. Just about every administration since the 1960s has offered assurances but consistently failed to deliver. Obama’s proposed overhaul, originally announced in August 2009, appears to be gathering momentum and is being aided by the nation’s bad economy. Unlike previous attempts at revamping export regulations, this one comes at a time when the United States needs to create jobs, and export sales are seen as essential to future recovery.
Most encouraging to industry is that the first phase of Obama’s reform plan will be a revision of the U.S. “munitions list” that catalogs items that are considered of high military value, and thus require a State Department export license before they can be sold. Civilian technologies fall under the Commerce Department’s less restrictive control list.
The munitions list, manufacturers have contented for years, includes far too many “dual-use” technologies — such as electronic components, software and sensors — that can be purchased commercially and have no special military value. The onerous export controls over dual-use technologies have undermined the competitiveness of U.S. high-tech and aerospace companies, industry officials say.
Most recently, senior national security leaders, including Defense Secretary Robert Gates and Secretary of State Hillary Clinton, have slammed the existing export controls because they undercut military alliances by making it too difficult for the United States to share technology with allies. In aspeech earlier this year, Gates said the U.S. government is wasting time and resources “tracking technologies you could buy at Radio Shack.”
Gates says the existing controls endanger national security because they incentivize exporters to engage in “forum shopping” by seeking export licenses under the State or the Commerce list, based on which one offers an easier path. The system today promotes interagency fighting over whether an item should be on one list or the other, Gates contends, rather than focusing on the reasons why an item should or should not be exported.
Obama says the plan is to revise the munitions list so that tight restrictions only apply to sensitive military technologies, such as stealth coatings for military aircraft.
“This week is the first time we are seeing concrete action” on specific revisions to the munitions list, saysLarry E. Christensen, a partner at the law firm Miller & Chevalier’s export controls practice, in Washington, D.C.
The proposed rewrite of the munitions list, he says, “provides much greater clarity on what’s required from exporters. … We’re starting to see the next level of detail.”
Christensen says the ongoing reforms may be a “once-in-a-lifetime opportunity for government and industry” to make common cause and accomplish what appeared impossible even a year ago.
The munitions list is so outdated and ambiguous that companies today spend millions of dollars on attorney fees just so they can figure out what exports require what license, says Christensen. The Holy Grail would be a single controls list, although that could take years to achieve.
“Industry would like to see something that is clear on what parts and components are controlled,” he says. A military vehicle may have a mix of military-unique and commercial components. Exporters would like restrictions to be removed from commercial items, even if they are used in military vehicles.
The administration is seeking to revise the munitions list so it truly prevents sensitive technologies from being sold to U.S. enemies, while making it less overreaching when it comes to dual-use systems, says Christensen.
The Commerce Department is soliciting comments from industry over the next 60 days, says Christensen. He does not expect the review process to be completed for another year, however.
Within the defense industry, any rewrite of the munitions list will be most welcome by sub-tier suppliers that provide parts and components. Most prime contractors will not be affected, Christensen says. “I don’t think we’re going to see a single change in major weapon systems. I don’t see any change at all in terms of what requires a license.”
He does credit the administration for having reduced the timelines for obtaining export licenses, even for military products. “Licenses that used to take three months are down to three to four weeks,” he says. “I don’t think the current reform effort will make too much difference in the level of review time for license applications.”
What could become dramatically simplified is the process by which a company determines whether its product is subject to the International Traffic in Arms Regulations, or ITAR. The cumbersome process, known in legalese as a “commodity jurisdiction request” is costly, he says. If commercial items are removed from the munitions list, companies will save lots of time and money, says Christensen. “It will make the system more predictable for companies, for government agencies and for prosecutors.”
For many companies, the biggest problem with the munitions list is that it’s imprecise, he says. A major source of uncertainty is what happens when minor changes are made to certain parts. “If you tweak the length of a hydraulic hose, will you be subject to ITAR? Do you have to submit a commodity jurisdiction request?” Answering those questions often runs up hefty legal fees.
Administration officials say a minor rewrite of the munitions list last year — a  revision that applied to military vehicles by narrowing the control on commercial parts — reduced the number of ITAR license applications by 74 percent.
A draft rewrite of Category VII of the munitions list, released Dec. 10, suggests that the plan is to allow government officials to make educated judgments about what constitutes military-sensitive technology, as opposed to the “blank check the State Department has had for decades,” says Christensen.
To the chagrin of the space industry, satellite exports will not be addressed in this round of reforms. Any change to current satellite export controls will require Congress to pass new legislation.
The administration is being careful about keeping Congress in the loop regardless of whether they legally have to, Christensen says. Close coordination, officials hope, should avert the politicization of this issue, even in today’s polarized Congress.
If all goes well, the revised control list will be one that “even a hawk would love,” Christensen says.
The way the proposed reforms are being handled is “very different from anything we’ve seen in the past,” he says. “Agencies are working together quite effectively.”
One issue that industry would like to see tackled, too, is how real-world changes will be applied to the control list, he says. Rapid advances in technology and emerging national security threats will require updates to the control list, he says. “That is just as important as writing one static list.”
It is still uncertain whether the administration can win over cynics who will only believe reform when they see it. The conventional wisdom is that export reform efforts are often announced, seldom started and never completed, says Christensen. “That’s the record since 1949, when the first significant export controls were implemented.”
Obama’s Dec. 9 speech to the President's Export Council suggests that the economy will serve as a major impetus for reform. The National Association of Manufacturers says that updates to export controls could increase sales by U.S. firms and help grow the gross domestic product by $64.2 billion, create 160,000 manufacturing jobs and heighten overall employment by 340,000 jobs by 2019.

Topics: Business Trends, Doing Business with the Government, International

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