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William Reinsch Addresses ACI: ‘Future of Export Controls’
Date: 4/27/2005

Remarks made April 27, 2005, by William A. Reinsch, President, National Foreign Trade Council, at the 8th ACI National Forum on Export Controls, Washington, DC. [Mr. Reinsch previously served as the Under Secretary for Export Administration, U.S. Department of Commerce. These remarks reprinted with permission of the author.]

"Nice to be back, although it does suggest that export controls, long a policy backwater, is becoming hot again - and in the worst possible way under the worst possible circumstances. There are two trends I want to talk about - threatened expansion of controls in order to combat terrorism and expanded controls on China. These are not unrelated events. Actions are being taken in the name of the former even though they're really about the latter.

Times have changed. The proximate cause is 9/11, which transformed the way this Administration thinks about security. Now, four years later, they are extending their approach into the world of technology transfer in some ways that make sense and some that do not.

* The Commerce Department published on March 28th a Federal Register notice soliciting comments on recommendations of its Inspector General that, if adopted, would lead to a significant expansion of the deemed export program.

* That follows its proposal last year to change the definition of "knowledge" in a way that would probably lower the bar to prosecutions.

* We also understand there are people at DOD talking about expanding the deemed export program to cover all foreign nationals.

* Henry Hyde, chairman of the House International Relations Committee, has said publicly he intends to review our export control laws, both dual use and ITAR. At a recent luncheon, he said: "First, I have been troubled by the continued pursuit of policies and initiatives that were put in place before 9/11 to relax export controls,
particularly in the area of arms technology transfer. The basic assumption by the responsible agencies appears to be that our policies in this area are somehow immune from the increased risks associated with the war on terrorism - that we do not need to do anything to tighten up or deal with increased risks. I disagree with this Pollyanna-ish view of weapons control. I am absolutely persuaded that there needs to be a top-to-bottom review of current and future threats.

For example, it is not self-evident that current policies and procedures help us deal effectively with any of the terrorist threats the National Intelligence Council (NIC) believes we will face by the year 2020...."

* Even Sen. Mike Enzi has indicated he plans to pursue his EAA bill once again. That will likely not happen, because of his other responsibilities as HELP Committee chairman, but I'm sure you all remember the painful experience - for him and for all of us - the last time he did that, even though he began from a constructive position.

* And, of course, there is everybody's favorite - Duncan Hunter,who has not showed his cards but can be expected to propose at least what he put into last year's defense authorization and then build on that, using the possibility of the EU ending its arms embargo on China as the excuse. Our information is that he will go ahead with his
proposals even if the EU puts this decision off, as it apparently has done.

That, of course, illustrates how quickly this issue becomes complicated. Reviews that were begun with counter-terrorism in mind rapidly turn into opportunities for the anti-China crowd to pursue their paranoia. For 50 years no one has disagreed with the premise that we do not want sophisticated dual use technology to fall into the hands of our adversaries. The argument instead has been over precisely what technology we care about. Even today most of the key actors in this play have given the same speech - we want higher fences around a smaller number of items; by trying to control everything, you end up controlling nothing. I'm sure you've all heard this speech. I gave it myself many times.

There are three problems with it.

1) Once you get past nuclear weapons components and stealth technology, there is no agreement on what else should be inside the fence.

2) A lot of dangerous stuff inevitably ends up outside the fence. With respect to WMD, much of the necessary equipment, particularly for chemical and biological weapons, is easily obtained, and the product can be produced in the equivalent of a high school chemistry lab. Controlling these items is virtually impossible, and trying to do so
would cripple vast amounts of trade. It is true, on the other hand, that ability to mass produce and to develop means of delivery can be more effectively controlled because they require substantial capital and a high degree of technological sophistication. And when we were focusing on state actors, that was a compelling argument.

3) But that is the third problem. Now we are focused on a new population, the transnational terrorist, who is presumed not to be all that interested in mass production or sophisticated means of delivery but instead wants to sneak a bomb into the country in a suitcase and blow it up in somebody's subway. Yet, in order to defend ourselves against this possibility, we are going to be asked to swallow significant expansions of our control regime, whether or not they make sense.

Henry Hyde again:

"...we are going to be examining these matters in their totality and attempting to come to some conclusions on three levels:

(1) Whether we have the right policies and procedures in place to deal with the post-9/11 threats to U.S. homeland defense and national security interests;

(2) whether the U.S. Governmental organization, itself, is properly designed, organized and staffed to carry out those policies and procedures; and,

(3) what kind of leadership our country needs to provide internationally in order to create the conditions for other countries to adopt policies and programs that, if not necessarily aligned with United States interests, at least do them no harm.

That's a pretty sweeping review, and Chairman Hyde plans to implement it by looking at:

* Budget anomalies: He suggests Commerce's budget is too big and that of State and Defense too small.
* Chronic delays in license review:

* Enforcement anomalies: by which he appears to suggest that State and Defense might need enforcement authority of their own like Commerce - or that alternatively, Commerce's could be folded into Customs.

* End use monitoring: how to better integrate the separate Commerce, State and Defense programs for monitoring the end use of goods and technology shipped overseas.

* Poor interagency computer connectivity:

* Transparency issues: "There is no transparency for the general public," he says, but he means Congressional review of the several hundred commodity jurisdiction determinations made each year by State and several thousand commodity classification determinations made each year by Commerce.

* Licensing Inconsistencies: Mr. Hyde is concerned that we permit dual use exports to countries where we have an arms embargo - i.e., China. He believes that "even minor components such as traveling wave tubes, wiring harnesses and vacuum hoses in Chinese missiles and attack aircraft help increase the reliability of those systems and that there is a moral question presented when such systems are deployed against U.S. forces or those of our allies."

Taken together, this renewed interest in export controls represents both a step forward and a step backward.

It is a step forward I predicted before I left office in 2001 - a movement toward controlling technology and away from controlling items. The reality of globalization is that everything is made everywhere. Controlling things will be increasingly ineffective because of alternative sources of supply that do not adhere to our restraints. What really matters is not so much the things as the ability to make them and to develop new generations of them - in other words, the technology. Of course, I also predicted technology controls would be much harder to maintain and enforce - and then I left office on that happy note. Now, after four years of relative inactivity, the issue is heating up - as exemplified by the deemed export issue, impelled by 9/11 but really focused on China.

This is tackling the right issue - the transfer of technology - but through the wrong means. The Commerce Department processes between 800 and 1000 deemed export license applications each year and, during my tenure, rejected one or two of them. I understand that currently it is slightly more than that. This is not a very efficient use of imited
resources.

The most immediate threat is the Inspector General's report from last year which recommended, among other things, requiring a deemed export license on the basis of national origin rather than current residence. In other words, if you're born in China, you're always Chinese, even though you may have been living in Canada the past 20 years.

That logic flies completely in the face of global market realities and the Doha Round Mode 4 negotiations - and that is the step backward. We have lost touch with what is actually happening in the marketplace.

Bill Perry in the last Administration was the first to really understand and explain what was happening to defense-related technology, and many of you have heard me give that speech before as well. In brief, because of rapid technological change, the military is shifting rapidly to commercial products and away from specially designed items. That puts them in the position of relying on civilian producers whose major markets are both civilian and export. Those producers win the competitiveness race by staying ahead of their competition, and they do that by plowing their profits back into R&D on next generation products. America's future lies in our ability to keep on winning that race.
That only works, however, if they have profits. These days that requires the ability to export. Thus, Perry concluded that exporting was a key element of our ability to make advanced defense technologies and the Pentagon's ability to buy them.

This was a sea change in thinking that informed the Clinton Administration's export control policies - with some success on the dual use side and less on the ITAR side, but not for lack of effort. This Administration has abandoned this approach - though I know from personal experience that Rumsfeld understands it - and is going down a road that will harm our security rather than enhance it.

* The deemed export expansion, along with our visa policies, will, simply put, drive smart people away from here - the same smart people that have been the key to our economic success for the past 200 years.

* Companies will respond by putting their research labs and other facilities off shore, creating a reverse brain drain and ultimately not only transferring more technology offshore but setting up conditions to create it offshore.

* Congress, through its likely overreaction to the EU arms embargo issue - whether or not the EU actually drops the embargo -- will cripple transatlantic defense cooperation, retard NATO inter-operability and prompt the Europeans to put more money into their own defense R&D,costing us important sales in the future.

* If the detailed scrutiny afforded the IBM-Lenovo deal turns out to be only the tip of the iceberg, there could be a chilling effect on inward investment which, coupled with a Chinese government decision to diversify its paper, could have serious adverse macroeconomic effects.

None of this is good news. On the other hand, the part of it that has to do with Congress may never happen. It's been 18 years since we were able to revise the EAA, and the many subsequent failures, most of which I've been involved in, testify it's not due to lack of effort. In fact, Congress is divided. In particular, the Republicans are divided in much the same way they are on immigration policy, so gridlock remains the
most likely option.

The Administration, however, is a different story. Despite having begun in 2001 with a set of promises to the high tech community and a very constructive effort that same year on the EAA, 9/11 seems to dominate their thinking to the point where we are out of balance. And this is a wave the anti-China folks are cheerfully riding."

4. Counsel Comment (L. Zengerle & J. Claxton): "FY 2006 H-1B Visa Cap Expected to be Reached Sooner than Last Year" (Source: Steptoe & Johnson LLP, Washington DC, Lynda Zengerle,lzengerle@steptoe.com, and Joan Claxton, jclaxton@steptoe.com)

April 26, 2005. Industry sources report that the fiscal year 2006 H-1B visa cap is expected to be met in record time since filings began April 1, 2005 for employment start dates of October 1, 2005 , the first day of fiscal year 2006. H-1B visa petitions can be filed no more than 6 months before the date the employee will begin working for the
petitioner. We strongly encourage employers to assess their staffing needs for the upcoming year now and file H-1B visa petitions before June 2005 for employment start dates of October through December 2005 in order to beat the Congressionally mandated 65,000 H-1B visa cap.

Historically, the US Citizenship and Immigration Services ("USCIS") has not kept the business community informed of the possible premature closure of visa acceptance. The current uncertainty regarding the availability of the additional 20,000 visas approved by Congress in December 2004 for foreign graduates of US colleges or universities who have attained a Master's degree or higher has forced employers to file increased numbers of petitions for foreign workers for FY 2006. USCIS has also reported that it miscounted FY 2005 H1-B visa allocations and, therefore, additional visa numbers might be deducted from the 20,000 additional H-1B visas in question.

In conclusion, employers who want or need to hire talented and skilled foreign workers should plan ahead and file H-1B visa petitions early to increase their chances of approval before the 2006 cap is reached.

5. New U.S.-Cuba Trade Association Formed (Source: http://www.djacobsonlaw.com/tradelawnews.html; Law Offices of Douglas N. Jacobson LLC, Washington, DC; 202-721-0020, djacobson@djacobsonlaw.com)

A group of companies, state agencies and organizations have formed the U.S.-Cuba Trade Association (USCTA), whose mission is "to protect current trade with Cuba, expand and increase the potential for future business, and promote the full normalization of commercial relations between the U.S. and Cuba." The Board of Directors of the USCTA is
headed by Bill Reinsch, former Under Secretary of Commerce and current President of the National Foreign Trade Council (NFTC). The USCTA has formed a strategic partnership with the NFTC and its USA*Engage Coalition of more than 600 U.S. companies which have opposed the use of unilateral economic sanctions, including the Cuba embargo. The USCTA's Board of Advisors will be chaired by William D. Rogers, former Assistant Secretary of State and a Vice Chairman of Kissinger Associates.

More information on the USCTA, including a list of the members of the Board of Directors, Board of Advisors and membership information, can be found at www.uscuba.org.