Remarks of Under Secretary of Commerce Eric L. Hirschhorn at Update 2012 Conference

Details

U.S. Department of Commerce
Bureau of Industry and Security

Update 2012 Conference

Remarks of
Eric L. Hirschhorn
Under Secretary for Industry and Security
July 17, 2012

Thank you, Bernie.  Good morning and welcome to BIS’s twenty-fifth annual Update conference.  Thanks to Toni Jackson, her staff, and you as well as the many other BIS and U.S. government colleagues who have contributed to this event.

I would like to introduce our BIS management team.  Please stand when I call your name.  Please hold your applause until I have read everyone’s name.  We have Assistant Secretaries David Mills and Kevin Wolf, Deputy Under Secretary Dan Hill, Chief of Staff Sharon Yanagi, Deputy Assistant Secretaries Matt Borman and Don Salo, Director of Administration Gay Shrum, Charles Kinney, our new Director of Congressional and Public Affairs, and Chief Information Officer Eddie Donnell. 

Before proceeding with my remarks, I would like to thank Mike Froman, Deputy Assistant to the President and Deputy National Security Advisor for International Economics, and Brian Nilsson of the National Security Staff for their important work facilitating export control reform.  Additionally, excellent interagency cooperation and teamwork has played a major role in the progress we have made in advancing the reform effort.  Our interagency colleagues deserve recognition for their hard work in facilitating reform while simultaneously performing their “day jobs.” 

This conference demonstrates the importance of the partnership between BIS and America’s exporting community. Your responses to the rules proposed by Commerce and State have provided valuable assistance to export control reform.  I implore you to remain engaged and assist us in moving reform forward.

First and foremost, an effective export control system is needed to help protect U.S. national security.  This administration’s fundamental reform of the Cold-War era export control system will strengthen national security by:

  1. Focusing limited resources on the threats that matter most;
  2. Facilitating military interoperability with our close friends and allies; and
  3. Strengthening the U.S. defense industrial base by reducing the current incentives for foreign manufacturers to “design out” U.S.-origin parts and components because they may be controlled under the International Traffic in Arms Regulations (ITAR) and hence, under the ITAR’s “see through” rule, which effectively causes the entire foreign-made end product to become subject to U.S re-export controls regardless of the significance of the U.S.-origin content.

Reform also will yield the important collateral benefit of easing other unnecessary financial, regulatory, and “red tape” burdens on U.S. exporters.  That, in turn, will promote manufacturing growth and create jobs.

I would like to review the progress we have made in establishing an export control system based on the three overarching principles I discussed in my 2010 Update speech—the three “E”s.  These are Efficiency, Education, and Enforcement.

EFFICIENCY

Our approach to protecting U.S. national security rests on two fundamental principles that are reflected in the final and proposed export control reform rules we have issued to date.  First, rules should be transparent and predictable.  Second, streamlined processes, combined with effective safeguards, are required to control sensitive items appropriately while facilitating exports of less sensitive items to destinations, end users, and end uses that do not pose significant national security, proliferation, or human rights concerns.

I. Transparency

Transparency and predictability have been key elements of the export control reform final and proposed rules we have issued.  These are virtues not only for their own sake, but also because it is vital to our national and economic security that American companies be reliable and predictable suppliers of products.  Transparency and predictably are also vital to compliance.  If exporters can’t understand the rules, then they can’t comply with them.  The Defense Department, assisted by the Departments of Commerce and State, has conducted a detailed analysis of the U.S. Munitions List (USML) in order to identify those defense articles that warrant the controls of the ITAR.  Working from the results of this effort, the Departments of State and Commerce have prepared proposed revisions to and new control categories.  Those articles that are now ITAR controlled but that were not identified as warranting control on the USML would become subject to the controls of the Export Administration Regulations (EAR) and its Commerce Control List (CCL). This would not be a decontrol of such items.  Rather, we have proposed creating a “600 series” of on the CCL to controls items that would no longer be ITAR controlled after this review is completed.  Because the EAR allows for country-based exceptions, this will allow the government to “right size” controls on less sensitive military items destined for allies and other multi-regime partners. 

We have established within BIS a Munitions Control Division, staffed by technical and regulatory specialists who will process the licenses and classification determinations for these items.  They will be ready to go as soon as the rules become final.  Our goal is that the licensing transition will be seamless from the perspective of the exporter.

BIS has published 12 proposed rules, including the recently issued proposals on “specially designed” and transition issues.  These are in addition to the joint Defense and State Department Section 1248 report to Congress on satellites, which also included draft proposed changes to Category XV of the ITAR and corresponding changes to the CCL to control satellites and related items that would no longer be ITAR-controlled.       

The revised “specially designed” proposed rule, published in June, represents an effort to have a uniform definition of this term that neither over-controls nor under-controls the items that meet the regulatory criteria.   We need and appreciate your comments.  We seek a definition that will provide increased clarity, reliability, and predictability for exporters. 

The proposed transition rule addresses the treatment of items that will move from the ITAR to the CCL.  This rule proposes, among other things, establishing a General Order regarding continued State Department authorizations for the transition period, revising license exceptions in the EAR to make them consistent with ITAR exemptions, and extending the validity of future Commerce licenses from two years to four years, which is the case now for State Department licenses.

In December 2010, BIS sought comment on how the description of items controlled on the CCL could be made clearer.  Soon we will publish a proposal to implement changes that we—and you, the public—have identified to clarify the CCL.  

Before any final rule transferring items from the USML to the CCL is published, State is required by Section 38(f) of the Arms Export Control Act to notify its congressional oversight committees.  It is my understanding that State expects to send the first Section 38(f) notifications to Congress in late summer or early fall.  Meanwhile the agencies continue to work with key committee staffers and are doing all they can to answer their questions and provide as much information as possible.

The House recently passed an amendment as part of the National Defense Authorization Act (NDAA) that would restore the President’s authority to determine the appropriate export controls for commercial satellites.  This change is reflected in bills introduced by Congressman Berman of California and Senator Bennet of Colorado.  The Administration supports this goal.  Included in the amendment, however, were some provisions that could delay or cripple the entire export control reform initiative for all items, not just satellites.  As the legislation moves through the Congress, we are working to remove or ameliorate those provisions.

II. Streamlined Processes and Higher Fences

The second critical element of efficiency involves ensuring control over items requiring review while facilitating exports of less sensitive items to end users that do not pose a national security concern.   The creation of License Exception Strategic Trade Authorization (STA) represented one step toward allowing the U.S. Government to focus on more significant items and on destinations of the greatest concern.  STA has streamlined exports of many items on the CCL.

STA also will be available for exporting many items that move from the USML to the CCL.  This license exception will streamline exports of many items to 36 close NATO and multilateral regime partners for ultimate end use by the governments of those countries.  This will enhance U.S. security by increasing interoperability with close allies and strengthening the U.S. defense industrial base.  

Another key benefit of export control reform will be reducing the incentives foreign companies have to “design out” U.S. content due to the ITAR’s “see through” rule.  Under this rule U.S. reexport control is imposed upon a foreign-made end item if it incorporates even the most minor part subject to the ITAR.   

STA will provide exporters with greater flexibility and predictability, but there are no free lunches.  Exporters using STA remain responsible for managing their compliance with that license exception’s requirements to ensure the items are not reexported outside STA-eligible countries, or employed for other end uses within such countries, without prior U.S. government approval. 

We have begun implementing an enhanced initiative to verify compliance with license exception STA.  We review the data reported in AES to track STA shipments and identify users of STA.  We require exporters and consignees to provide, upon request, copies of their export control documents relating to STA.  We also are conducting export document reviews of STA users to verify compliance. As items transferred from the USML to the CCL become eligible for STA, we will expand such outreach, compliance, and review efforts to guard against and detect misuse.

At the same time, the export control reform initiative has not changed, and will not change, U.S. export control policies with respect to China and the other embargoed countries.  For example, the government has no plans to alter its prohibitions on exporting Munitions List items (including “600 series” items) to China or dual-use items for military end use in China.

III. Operational Issues

The remaining element of regulatory efficiency involves the resolution of operational issues.  

0Y521 Rule: In May, BIS established a new export control classification (ECCN) series 0Y521, to cover certain items not listed elsewhere on the CCL that warrant control but are not yet listed.  As we move to more positive lists – i.e., lists without sweeping catch-all controls – it’s vital that the government have the ability to control specific items, such as some types of emerging technologies, warranting control when they are identified.  This was an industry recommendation at the beginning of export control reform.

USXports I.T. Platform:   We anticipate that sometime this fall, Commerce will have initial operating capability on the Department of Defense’s USXports I.T. platform.  Use of this platform by all export control agencies will upgrade significantly the ability of licensing officers to review and make timely decisions on license-related issues.

Information technology is an important element of export control reform and this year we will conduct a panel on Information Technology and Export Controls.  We also have set up an I.T. demonstration group in the Cardozo Room on the terrace level of Columbia Hall to answer your questions and demonstrate our new items. 

Single Licensing Form and Harmonized Definitions: We have previewed with our industry-led technical advisory committees some additional harmonized definitions and will in time seek public comment on those.  We also plan to seek comments on what elements should be included in a unified electronic export license submission form.  

EDUCATION

A core principle for ensuring the success of reform is an informed regulated community.  This sold-out Update conference demonstrates the exporting community’s strong commitment to compliance.  BIS continues to expand our outreach and education effort and conducted more than 200 outreach events during FY 2011. 

I especially want to recognize the unprecedented outreach efforts of Assistant Secretary Kevin Wolf.  Kevin conducts weekly export control reform call-ins where he answers questions regarding proposed rules.  Not only do these sessions attract large audiences, sometimes in excess of 150 listeners, but the questions asked increase our understanding of industry concerns and where we may have missed something.  Kevin is conducting two two-hour open sessions Thursday to answer questions about the proposed rules.  Then will be your chance to play “Stump the Assistant Secretary.”

The Office of Exporter Services is developing a targeted and multi-faceted outreach program to support the USML-to-CCL process and to get exporters up to speed once these changes are published in final form.  We have deployed on the BIS website an educational interactive tool to assist companies in determining whether they are eligible for and compliant with STA.

The Office of Exporter Services and the Office of Technology Evaluation continue to work with the U.S. Census Bureau and U.S. Customs and Border Protection (CBP) to improve AES to alert filers if they make errors that are inconsistent with our regulations.

BIS does not confine its outreach events to U.S. exporters.  During FY 2011, BIS participated in 30 international outreach events sponsored by the Department of State’s Export Control and Border Security program. These dialogues assist other nations in establishing effective export control systems to address—collectively—the global threats of proliferation and terrorism. 

ENFORCEMENT

BIS will continue using its unique administrative enforcement authorities—the Entity List, the Denied Persons List, and the issuance of Temporary Denial Orders—to focus on problem parties and to exclude foreign bad actors from the legitimate commercial marketplace. 

BIS is erecting higher fences to prevent the unauthorized reexport of items outside the STA zone.   “600 series” items that will be eligible for export to allied countries under License Exception STA will be subject to a multi-layered compliance strategy.  I will mention briefly the key elements of this collaborative approach.  Assistant Secretary David Mills will discuss these issues more fully in his remarks tomorrow morning.

  • A one-time advance review will be required for would-be STA consignees that have not been previously approved under a Commerce or State license. 
  • The Office of Exporter Services and The Office of Technology Evaluation are conducting enhanced outreach and review for current users of STA.
  • The Office of Export Enforcement and the Office of Export Analysis will conduct targeted end-use checks overseas, which they will coordinate with State’s Blue Lantern program for defense articles, to increase the number of “600 series” items subject to on-site review.
  • The Administration has established an Information Triage Unit (ITU) in our Office of Enforcement Analysis.  This unit compiles, coordinates, enriches, and reports all-source information about foreign parties to controlled export transactions.  The enhanced role for the Intelligence Community through their direct involvement in the ITU will assist all the license review agencies in making better decisions.

THE FUTURE

Export control reform is far from complete but the end of the massive list review exercise is in sight.  So too are the agencies’ move to the Defense Department’s USXPORTS licensing system and a number of other aspects of export control reform. 

Let me take a few moments, then, to mention some potential future projects to make the system more rational and more user friendly.  I should stress that not all of these projects have yet been reviewed by our sister agencies.

  • We need to finish the effort to systematically review the CCL.
  • We need to complete the effort to harmonize the terms in the EAR, the ITAR, and other relevant export control regulations.
  • The EAR must be made easier to use.
  • Our encryption rules, which were streamlined somewhat in 2010, need to be more clear and concise in the 2nd rule we plan.
  • The intra-company transfer proposal should be revisited.
  • The deemed export rule often has been criticized and merits discussion.
  • We would like to expedite the interagency review of license applications and perhaps do more to harmonize or standardize license conditions.
  • The levels of at least some License Exception LVS thresholds might be adjusted to reflect inflation and market realities.
  • Our rules governing recordkeeping antedate today’s widespread reliance on electronic databases, and accordingly should be updated.
  • The General Prohibitions need to be revised.
  • We need to work with the international regimes to help them revise their procedures so that we can get more proposed changes through their systems.
  • Finally, we may review—if only for clarification’s sake—the rules relating to cloud computing.

Should the President be reelected, we hope to consider these items as second-term initiatives.

CONCLUSION

Over the past three years the Obama Administration has sought, through export control reform, to achieve greater regulatory efficiency and rationality, focus controls on the most significant items and destinations, increase education to sensitize exporters to their compliance responsibilities, and strengthen enforcement.  Moving forward, BIS will continue to seek public involvement through outreach conferences, proposed regulations, and our technical advisory committees. 

As I noted at the outset of my remarks, our open dialogue with you will help ensure that we fulfill the “three E’s”—Efficiency, Education, and Enforcement.  BIS and its sister agencies welcome your comments.

Andrew Shapiro, Assistant Secretary of State for Political-Military Affairs, will now discuss how State’s reform of defense trade controls will enhance defense trade and economic prosperity.   Thereafter, Kevin Wolf will discuss the “specially designed” proposal, how Commerce will control items that move from State and become part of the “600 series,” and other aspects of BIS’s daily work.  Tomorrow morning, David Mills, BIS’ Assistant Secretary for Enforcement, will address export control enforcement issues, including how we will enforce controls on the items that move from State to Commerce.

I hope you find our Update program useful and I look forward to hearing your feedback. 

Thank you.