Export Control Reform at Risk of Reversals

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A combination of a volatile White House, new leadership at the State Department and concerns in Congress that China is after the jewels of U.S. technology may reverse the last eight years of reforms to the U.S. export control regime.

“Let’s just say there is a tweet that comes from the White House that says, ‘Obama gave away all our best space technology,’” posited John Ordway, a partner at Berliner, Corcoran & Rowe LLP.

“One of my concerns is that there could be a tightened licensing process or perhaps even a rollback of export control reform,” he said March 15 at the Satellite 2018 conference in Washington, D.C.

Reforming the International Traffic in Arms Regulations began in the Obama administration with the three main departments involved — State, Commerce and Defense — methodically re-examining the categories of items that could be considered weapons and therefore in need of special approvals and licenses to export.

The years-long process moved many items off the more restrictive U.S. munitions list (USML) — which required State Department’s bureau of industry and security approvals, along with input from the Defense Department — to the less restrictive Commerce Department’s Export Administration Regulations. The ultimate goal of the regime is to keep sensitive military items, data and knowledge out of the hands of potential adversaries.

The president by himself couldn’t reverse the policy with a simple tweet, said Tony Dearth, acting managing director of the State Department’s office of defense trade controls. However, if he asked the National Security Council and National Economic Council to convene on the matter, they could give directives.

“We comply accordingly. We just don’t do things on our own merit,” Dearth said.

Meanwhile, a law enacting certain export controls was supposed to be reauthorized in 2001, but wasn’t, meaning the it “has never been comprehensively reformed since its creation in the Cold War,” said Rep. Ed Royce, R-Calif., chairman of the House Foreign Affairs Committee, in a hearing on Capitol Hill March 14.

He, along with committee ranking member Rep. Eliot Engel, D-N.Y., introduced bipartisan legislation, the Export Control Reform Act of 2018, which would “repeal the expired and Cold War-era Export Administration Act of 1979 and replace it with a modern statutory authority to regulate ‘dual-use’ items,” Royce said in a statement.

The current EAA authorizes the president to establish export licensing mechanisms for items detailed on the Commerce Control List, and it provides some guidance and places certain limits on that authority, according to the Congressional Research Service.

“Under our approach, modernized U.S. export control laws and regulations will continue to have broad authority, governing the transfer of less-sensitive military and dual-use items and technology to foreign persons, whether that transfer takes place abroad or here in the U.S,” Royce said.

The hearing also looked at the Committee on Foreign Investment in the United States, which has the authority to review and investigate the acquisition of U.S. companies by foreign investors in order to prevent sensitive technologies from leaving the United States. CFIUS March 13 announced that it was reviewing the controversial $117 billion bid on the part of Singapore-based Broadcom for U.S. based Qualcomm, the maker of semiconductors.

Lawmakers at the hearing generally took a protectionist stance, expressing alarm at Chinese theft and acquisition of U.S. technologies and know-how in a variety of industries.

Meanwhile, the Commerce and State Departments continue to update the U.S. Munitions List. Dennis Krepp, director of the sensors and aerospace division at the Commerce’s office of national security and technology transfer controls, said reform is basically over, and in its place is a process where each category is looked at every two to three years.

“We are doing what we said we would do which is trying to do an ongoing review of USML categories now versus not doing them for years and years and years,” Krepp said.

A change in leadership after the firing of Secretary of State Rex Tillerson means there will be a period of adjustment, said Dearth. That is always the case with new leadership, who has to be educated about export control reform. Lately, big cases deemed important by members of Congress are approved at the highest levels of the department, he added.

Fred Shaheen, chief counsel of global trade controls at The Boeing Co., said after reform “it’s a better world.” But he wondered about the next phase. “It is a big question mark for industry.”

“A lot of gas has dripped out of the engine of reform, as a general matter,” he said.

It took a while for Commerce leadership to be put in place and the State Department is “still a work in progress," Shaheen said. "Industry is waiting to partner to help with what the next step is."

Meanwhile, he questioned whether the export control regime could keep pace with the development of technology. “It has always been a challenge for the regulator, for the legislators, for industry to work with regs and keep up with the change in technology.”

Nobody thinks export control reform is done. “It’s glass half full,” Shaheen said. “We really want to see export control reform— writ large — not rejuvenated, but to keep going,” he said. It’s not “mission accomplished,” he added.

Dearth replied: “I’m not sure what more the industry actually hopes to squeeze out of this rag.”

For example, prior to reform, the State Department issued 5,000 export licenses per year in the space systems category. That was due to onerous restrictions placed by Congress on commercial satellites, which it considered to be a military item. Now that they are back under Commerce jurisdiction, State did about 500 last year, and this year is on pace for only 300, Dearth said.

The restrictions on commercial satellites were in place for some 14 years and did a lot of damage to industry, Shaheen and several others pointed out.

Another factor that may shape export control in this sector is the Trump administration’s newly formed National Space Council. Its leaders have said they will be looking at exports and reporting their findings January 2019, said John. R. Shane, a partner at Wiley Rein LLP.

“With this administration, which is looking to reduce regulations on many fronts … there is an opportunity with the space council for industry to voice its concerns,” he said.

Topics: Acquisition, Acquisition Programs, Business Trends, Defense Department