Officials Can See End of the Long Road to Export Reform

By Stew Magnuson
For the past two years, federal officials have been methodically revising the lists of U.S. defense technologies that require special export licenses.

The goal has been to remove goods or services that no longer pose a threat to U.S. forces if they should fall into the wrong hands, and to maintain safeguards for sensitive items that do.

Former Secretary of Defense Robert Gates proposed overhauling the system at the outset of the Obama administration. He eschewed the overly broad, catch-all system that was both failing to keep sensitive technologies from making their way to overseas rivals and putting restrictions on those that were no longer cutting edge, which in turn made U.S. industries less competitive. 

“We were wasting our time and resources tracking technologies you could buy at Radio Shack,” he said in an April 2010 speech.

Since then, officials at the two main departments tasked with granting export licenses, State and Commerce, have been deliberately moving through the munitions list category by category in order to “rationalize” the system.

Items and services in the munitions list fall under the International Traffic in Arms Regulation regime, and therefore require the approval of the State Department’s directorate of defense trade controls to export. Technologies that give U.S. forces an edge in battle are denied licenses.

Running afoul of the law and shipping such sensitive technologies to foreign countries can result in stiff fines for companies.

The Defense Department advises the two departments but doesn’t ultimately decide what can and can’t be exported, or to whom.

The reform process has sought to turn the broadly defined munitions lists into specific ones, said Kevin Wolf, assistant secretary of commerce for export administration at the Commerce Department.

There has been “incredible transparency and openness and interaction with the public,” during the process, Wolf said at the Satellite 2014 conference in Washington, D.C.

The two departments, with input from Defense and other interested federal agencies, have been rolling out the revised lists since last year. First up were ships, military vehicles and engines. The new rules and definitions of what items were still sensitive and what could be moved to the less restrictive Export Administration Regulations regime — administered by Commerce — were finalized in early January.

To reach that point, the agencies first came together with their proposals for what should be on or off the list. After those were released, then came the public comment period.

This is where the fine details were hashed out, Wolf and other officials speaking at the conference said.

“For these new regulations to make sense, it does require as much input as possible from industry,” he added.

Officials from all the interested federal agencies and departments gathered in one room and put each public comment up on a screen. Each point was discussed until a consensus was reached on whether it had merit or not, Wolf said.

After the public comment period was finished, the final rules were released. A six-month grace period where industry had time to absorb and adjust to the new regulations followed.

Export licenses that have already been granted are grandfathered in for two years, or until the license reaches its natural expiration date.

The missiles and explosives category is currently in this six-month phase. There were few changes there, Wolf said. “Those are not the kinds of things that have widespread commercial applications.”

Next will be the highly anticipated new rules on satellites and spacecraft.

This category is a special case because in 1999 Congress passed a law placing all rockets, spacecraft and their components on the more restrictive munitions list.

It was reacting to charges that satellite manufacturer Space Systems/Loral had been passing on technical information and other sensitive components to China, when that country was launching U.S.-made commercial satellites. The data it shared could have made China’s rockets, and therefore its intercontinental ballistic missiles, more dependable. The company eventually agreed to pay $20 million in fines.

Since the law was passed, the U.S. satellite industry complained that the language in the law was too broad and included not only commercial satellites that had no military applications, but all spacecraft components, including ones that were not cutting edge.

Since the law includes the re-export of components, subcontractors could break the law if a satellite-related part found its way onto a foreign-made satellite, which was in turn sold to a third party without a license.

As recently as last fall, Aeroflex Corp. was fined $8 million for selling radiation-hardened chips to a French satellite manufacturer without State Department approval. The chips were used in satellites that made their way to China, according to industry publication Space News.

“We’re right there. We’ve written the rules, and we’ve gotten through interagency clearance, so we really are close,” Lou Ann McFadden, chief of the strategic issues division at the Defense Technology Security Administration, said of the satellite category.

The 2013 National Defense Authorization Act gave President Obama the authority to take space technology off the munitions list and transfer it to Commerce Department control.

That took more than a decade of lobbying, which had to be backed up with assurances from the Defense Department to Congress that changing the law wouldn’t damage national security, McFadden said.

A point had to be made that this was not a case of deregulation. Moving an item from the munitions list was not decontrol, she said. “There were adequate safeguards in the Commerce Department, that were very flexible, that were going to help us on the national security side, with helping our partners and allies, while being able to keep certain things from the bad guys,” she said.

Changing the law was given a sense of urgency when a new National Space Policy was released in 2010. It said maintaining the space industrial base was vital to national security, and it singled out effective export policies as a way to make U.S. companies more competitive.

The satellite manufacturers and their thousands of subcontractors were clearly suffering under the 1999 law, McFadden said. Foreign makers were advertising their spacecraft as “ITAR free,” meaning nothing onboard was made in the United States.

“We had a lot of internal conflict because not everyone agrees on what is best for the industrial base,” she said.

One argument said the more items that can be sold the better. The other stated that if more components went overseas, foreign competitors could use them to make bigger and better systems, she noted.

McFadden said some 16 space-related items have remained on the munitions list.

Sarah Heidema, policy team chief at the State Department office of trade controls policy, said services such as the integration of satellites onto launch vehicles as well as launch failure analysis, and GPS receivers are among the items that will continue to be tightly controlled.

If a space component is not specifically mentioned on the munitions list, it is automatically regulated by Commerce, she said.

Perhaps coming as a surprise to some observers, low-end remote sensing satellite capabilities will not be on the munitions list, she said.

“This is going to be a regular process,” she said. “There will be periodic and regular reviews.”

Mark Webber, director of international trade policy and government and regulatory affairs at satellite manufacturer Lockheed Martin, said, “It’s not just about sales and international partnerships. It’s about the industrial base. It’s about the thousands of suppliers that support us as a company … and it’s about reducing costs of systems, delivery timelines, compatibility and integration of systems.”

Wolf cautioned that reform has actually added complexity to export controls, and it will take a while for industry to adjust, which is one reason why there is a six-month period before the new rules go into effect.

The idea was to take broad categories and make them more specific. Furthermore, the new regime has divided the world into three categories that exporters must consider. There are some 36 nations, including NATO members and other close allies such as Japan and Australia, where export licenses will be easier to obtain. Then there are most of the other countries, where it will be more difficult. And of course, the third category includes countries such as China, Iran and North Korea, where defense technologies are under a strict embargo.

Wolf said: “Because we realize there are fundamental and radical changes — and certainly a paradigm shift in thinking with respect to the way things are controlled — there are lot more details on how things are listed and where. Industry needs time to adopt and adjust to the changes.”

Webber said: “As we move forward, I think we can expect more bumps in the road. There are going to be issues that are more challenging.”

Communication between government and industry is vital so everyone understands what’s going on, he said.

“Success will be with a rational system where the really sensitive items are protected and … will be measured if the government can continue to identify ways to streamline the process,” he added.

International customers must look to U.S. suppliers as reliable partners and know that they can acquire the technologies that they have been seeking, he said.

“And that is as much about perception as anything else,” Webber said.

Wolf countered that if foreign companies still think the system is not reliable, then U.S. companies should let Commerce and State Department officials know.

“Our experience is that industry isn’t shy about telling us when something doesn’t work or something is too burdensome. I would continue to encourage that,” he said.

The next revised list after space systems is military electronics. Wolf said this broad category has required two rounds of public comment.

“The comments the first time around were so good, and we wanted industry to have a second chance to see if what we were writing made sense and is clear,” he said. The final rule for electronics should come out this summer.

Fire controls, biologics and toxins and directed energy systems will begin the process this year or next, he said.

Topics: Business Trends, Defense Department, DOD Policy, Procurement

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