Remarks of Eric L. Hirschhorn 92nd Annual Conference in Washington, DC

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Under Secretary Hirschhorn Remarks

American Association of Exporters and Importers

June 18, 2013

I want to thank Karen Kelly for her kind introduction. I’d also like to thank Marianne Rowden and AAEI for inviting me here today. Two years ago, I spoke before many of you at AAEI’s 90th annual conference in New York City. At that time, we were still in the early stages of our work on President Obama’s export control reform initiative.

We’ve come a long way since then. My department and our counterparts across the federal government have been working around the clock these past three years on this initiative. We’re in a good place thanks to the hard work of many dedicated public servants.

I know many of you are familiar with the reform initiative, but let me briefly describe why we are doing this, as well as some of the tangible national security and economic benefits. I will then provide an update on where we stand today and how Commerce is preparing itself and the exporting community for transition.

Why Reform U.S. Export Controls?

Export control reform is a national security initiative intended to: (1) focus our limited resources on the threats that matter most; (2) improve interoperability with our close friends and allies; (3) strengthen the U.S. defense industrial base by reducing the current incentives for foreign manufacturers to "design out" controlled U.S.-origin parts; and (4) ease the licensing burden on U.S. exporters, which in turn helps sales and creates jobs.

Today’s export control system is confusing and overly complex. For example, under the International Traffic in Arms Regulations (ITAR), a bolt for an F-16 fighter jet is controlled the same as the F-16 itself. Does that bolt warrant a lot of documentation and a wait of weeks or months for issuance of an export license before it can be sent to a reliable foreign government end-user?

A cornerstone of our reform effort is to clarify and rationalize our two control lists, in preparation for ultimately consolidating them into a single positive list.

The Defense Department, assisted by the Departments of Commerce and State, has conducted a detailed analysis of the State Department’s United States Munitions List (USML) to identify those defense articles that continue to warrant the strict, one-size-fits-all controls of the International Traffic in Arms Regulations (ITAR). This has involved working closely with the military services – who are, after all, the experts - to list specifically what should be controlled in order to remove the basket categories that today account for more than half the 85,000 licenses issued annually under the ITAR.

Working from the results of this effort, the Departments of State and Commerce have prepared proposed revisions and new control categories. Those articles that are now ITAR-controlled, but were not identified as warranting continued control on the USML, will become subject to the controls of the Commerce Department-administered Export Administration Regulations (EAR) and its Commerce Control List (CCL).

This will not be a decontrol of such items. Rather, we have created a "600 series" on the CCL to control items that no longer will be ITAR-controlled. Because the EAR allows for country-based exceptions, this will allow the government to "right size" controls on less sensitive military items, such as that bolt for an F-16, that are destined for allies and other multilateral control regime partners.

Commerce, State, and Defense have agreed on almost all the proposed revisions of control list categories, and we have already published proposed rules for most of the USML categories.

Our changes will make it easier for U.S. companies, especially small and medium-sized businesses, to engage in secure trade. This has the tangible benefit of bolstering the security of supply from small companies that are second and third tier suppliers to the U.S. and our allies. At the same time, we are ensuring that the nation’s export control system prevents items from ending up where they should not.

Right now, our ability to compete and cooperate is burdened by overly complicated or overbroad regulations such as the "see-through" rule. Under the "see-through rule," the presence of a single, non-critical ITAR-controlled part, such as a switch or a bolt, will render an entire foreign-made end product, such as an Airbus A-320 passenger aircraft, subject to U.S. reexport controls. That encourages foreign buyers to select non-U.S. parts and components—even when a U.S. solution offers price, schedule, and performance advantages—in order to avoid making the end product subject to the ITAR.

The movement of tens of thousands of U.S.-manufactured parts and components from the USML to the more flexible CCL will enable the U.S. Government to make more nuanced distinctions among destinations and end-users, and apply a greater variety of authorizations, than under the ITAR. The transfer of items will remove: (1) annual registration requirements and related annual registration fees; (2) the requirement for a multitude of authorizations; and (3) the "see-through" rule.

For small business owners, the removal of registration fees will directly affect their bottom line because the law prohibits Commerce from charging licensing fees. Right now, those subject to the ITAR are required to pay a $250 fee to the State Department for an item that sells for $200. The minimum fee is $2,250 per year even if there is no export.

Further, rather than being burdened by the "see-through" rule, companies will be able to take advantage of the EAR de minimis rule. For most ultimate destinations, foreign-made items with transferred components controlled by the EAR constituting 25 percent or less Commerce-controlled U.S. parts will not be subject to U.S. re-export controls. This exclusion will not be available, however, for China and other countries subject to arms embargoes; that is, the de minimis level for those countries for items transferred from the USML to the CCL will remain zero, just as it is today under the ITAR’s "see-through" rule.

Where Export Control Reform Stands Today

In recent months, we have seen significant progress in making this reform initiative a reality.

On April 16, State and Commerce published final rules for the aircraft and engine categories. These are the first two of approximately 19 USML categories to be rewritten and "go final." In addition to these categories, the final rules include a revised definition of "specially designed" and transition rules for items moving from State to Commerce jurisdiction. Both are essential to the reform effort.

The definition of "specially designed" is a critical term that in most instances, you can apply without knowing the design intent. This should bring increased clarity, reliability, and predictability for exporters.

Our transition rule describes how items that were previously controlled by the ITAR will be dealt with under the CCL. This rule addresses: (1) new license periods (4 years instead of 2); (2) the applicability of ITAR exceptions under the EAR; (3) what to do with existing State Department licenses and agreements; and (4) grandfathering periods and arrangements for current licenses.

At the request of industry, the new regulations include a 180-day delay in the effective date (until October 15 for the first set), to allow companies to adjust their internal order processing and compliance programs to the new rules. Although Commerce will accept license applications once a given set of regulations is published in final form, no licenses will be issued until the conclusion of this period.

Once this transition period is complete, companies can begin taking advantage of License Exception STA—Strategic Trade Authorization—for the aircraft and engine items that have been transferred.

STA streamlines exports to and among our 36 closest NATO and multilateral regime partners by removing license requirements for items currently under the CCL. In the case of items transferred from the USML, the items must be for ultimate end use by the governments of those 36 countries.

Exports and reexports to other countries, and of former USML items for other uses within STA countries, still will require a license. Given the expectation of tighter defense budgets domestically, STA presents an opportunity to strengthen our national security not only by improving interoperability with our allies, but also by allowing U.S. defense contractors to take advantage of these markets through more streamlined export requirements.

STA will provide greater flexibility and predictability, while still providing necessary safeguards. Exporters using STA, and their customers, are responsible for compliance with that license exception’s requirements to ensure the items are not reexported outside STA-eligible countries, or employed for unapproved end uses within such countries.

An exporter wishing to use STA must, prior to export, inform its overseas customer of the export classification of the item. The non-U.S. customer must confirm its understanding of that classification, and must undertake to handle that item in accordance with the EAR. These written exchanges provide the information necessary for effective enforcement and are easier, cheaper, and faster for companies to administer than conventional export licenses.

Incidentally, the use of STA is optional. Any exporter who prefers to obtain an actual export license may do so.

Enhanced Enforcement

ECR includes enhanced enforcement capabilities within BIS and across the U.S. government. This is partly the result of the establishment of the Information Triage Unit (ITU) and Export Enforcement Coordination Center (E2C2), which have enhanced our intelligence abilities and interagency collaboration.

The ITU compiles, coordinates and reports intelligence and other information about foreign parties, which enhances our review of license applications. The E2C2 improves interagency export enforcement coordination by ensuring the various agencies are talking to one another.

We are also strengthening our end-use check program in two ways. First, BIS and State are working together to coordinate end-use checks where U.S. Munitions List and CCL items are co-located, so that both organizations can expand the total number of end-use checks while minimizing burdens on your foreign customers from multiple checks.

Second, we're working on a rule that would strengthen the Unverified List to increase U.S. government insight into potential transactions of concern involving foreign parties whose bona fides - meaning their suitability and reliability as recipients of U.S. exports - BIS has been unable to verify. This action will provide more clarity to exporters on how to address "red flags" involving transactions with foreign parties where BIS has been unable to complete an end-use check. When coupled with our other unique administrative authorities, including the Entity List, BIS’s compliance tools provide exporters with more information about the reliability of foreign parties to safeguard your transactions from illicit diversion.

Our changes will benefit national security, foreign policy and our defense industrial base over the medium and long term but we recognize that the transition will require some hard work in the short run.

Preparing for Transition

BIS is helping the exporting community to get up to speed. We have deployed on the BIS website two interactive tools to assist exporters in understanding and complying with the new rules: the "Specially Designed" Decision Tool and the Commerce Control List (CCL) Order of Review Decision Tool. The "Specially Designed" tool will help you determine whether an item is "specially designed" through a series of "yes" or "no" questions. The "CCL order of review" assists in determining whether item is classified as a "600 series" military ECCN, a non-"600 series" ECCN, or EAR99. We will also be updating the on-line interactive STA tool to assist companies in determining whether they are eligible for and compliant with STA to take into account the 600 series.

The Bureau is conducting a series of teleconferences and webinars to assist you in understanding and complying with the Initial Implementation rule and future ECR rules. These webinars are being recorded and made available for later listening on the BIS website. I encourage you to take advantage of this training resource.

We are also ensuring that the Automated Export System (AES) is ready to accept the newly created 600 series ECCNs (9y610 and 9y619) for BIS licenses and for a limited number of license exceptions (LVS, TMP, RPL, GOV, TSU, STA). Of particular note, if a 600 series ECCN is reported under a non-eligible authorization, AES will generate a fatal error. Additionally, all exports of 600 series items (with the exception of .y items) will require an AES filing, regardless of value or destination. We explained these changes in detail in a May webinar that you can access on the BIS website.

On June 12, BIS conducted a webinar to get freight forwarders up to speed on changes they need to be ready for when the Initial Implementation Rule goes into effect. We emphasized the importance of continued and strengthened communication with customers, as well as improved internal processes and automation to ensure that exports of items transitioning from the USML to CCL are compliant.

We’re also helping other government agencies with the transition. Over the next few months, BIS will be working closely with the Outbound Branch of U.S. Customs and Border Protection to implement a CBP port training program, and with the FBI and DHS’s Homeland Security Investigations (HSI). The goal of this training will be to inform CBP, FBI, and HSI of the changes they will be seeing as a result of ECR. We don’t want our law enforcement partners to be surprised when they see a defense part, component, accessory, or attachment exported under a BIS license or license exception instead of an ITAR license. This training should help ensure a smooth transition at ports of export.

Last but not least, we’ve almost fully staffed our Munitions Control Division (MCD) with twenty-two staff trained to process incoming 600-series licenses. A majority of these new hires have Department of Defense (DOD) backgrounds, with almost one-third being combat veterans of Iraq or Afghanistan. They have direct, hands-on experience with military equipment and DOD programs.

In fact, the new division is already receiving license applications for aircraft and engine 600-series items. Although we are accepting license applications once a given set of regulations is published in final form, no licenses will be issued until the delayed effective date.

Satellite Jurisdiction

Unlike the other control list categories, satellites and related components were, until this year, statutorily ineligible for transfer from the USML to the CCL. This was in response to the unauthorized transfer of sensitive technology in connection with satellite launches in the 1990s. Congress required by statute that all satellites, components, and launch services be on the USML regardless of whether a particular item presents a national security risk.

This and other factors had a devastating effect on U.S. industry. According to the Aerospace Industries Association, the U.S. held 73% of the worldwide share of satellite exports in 1995. This fell to 25% by 2005.

In early January though, President Obama signed this year’s National Defense Authorization Act, which restored his authority to determine the appropriate export controls for satellites and related parts and components. We owe thanks to those in the Congress – from both parties - who made this possible.

The proposed satellite rule transferring jurisdiction of satellites from State to Commerce was published on Friday, May 24. Comments are due by Monday, July 8. I encourage all interested members of the public to comment.

In preparing for the transfer of many satellites to Commerce, we are planning to hire two more licensing officers for the new satellite responsibilities.

Next Steps for Export Control Reform

Although publication of the final rule on the first two categories, as well as the proposed rule on satellite jurisdiction, are important milestones for export control reform, much work remains to be done. And we are making significant progress.

We have an ambitious plan over the next year to continue with our proposed rules, congressional notifications, and final rules. Export control reform is far from complete, but the end of the massive list review exercise is in sight. In July, we anticipate publishing a final rule on four categories for which we’ve received public comment—USML categories VI (ships), VII (vehicles), XIII (materials and auxiliary equipment), and XX (submarines). Public comment on the first proposed version of category XI (electronics) has led to some significant changes, so we’ll be publishing it again in proposed form and soliciting another round of comments sometime in July.

We also plan in the next few months to submit congressional notification on the intended transfer of jurisdiction over items related to missiles, explosives, training equipment, and protective personal equipment from the State to Commerce Department.

Let me take a few moments to discuss some other plans and possibilities to make the system more rational, efficient, and user-friendly. I should stress that not all of these ideas have yet been reviewed by our sister agencies.

First and foremost, we need to complete the USML list review effort. Although the drafts of each category are written, we still need to publish the few remaining categories in proposed form, work through public comments on remaining categories, notify Congress of each category change, and make the changes in the revised USML and "600 series" ECCNs with all of the other edits to the ITAR and EAR necessary to allow for the change.

Much of our focus thus far has been on the USML, but we expect to pay a good deal of attention to the CCL and EAR over the coming years. We began this process with the publication on November 29th of our proposed CCL "clean-up" rule, which describes ways to make the CCL more user-friendly for exporters. The proposed rule, in many respects, is the product of public comments in response to an Advance Notice of Proposed Rulemaking from December 9, 2010. In July, we plan to publish a final rule to implement the changes that we – and you, the public – have identified to clarify the CCL.

The Administration is also working diligently to revise controls on radiation-hardened chips. Alternatives to the current control structure must be found to avoid bringing mass-market civilian chips under ITAR controls, which would cause significant disruption to the market for these products. We have actively reviewed solutions and a proposed solution has been included in the proposed rules on satellites that were published May 24.

Our efforts will also involve a review of the CCL with a similar degree of attention to that given to the USML review. Such a review, starting with the strategic rationales for specific controls, has not been attempted since 1991. This effort will be complicated somewhat by the fact that the multilateral regimes are capable of handling only a limited number of changes each year.

Additionally, we want to review the EAR to update, clarify and streamline the regulations. The EAR has not had a comprehensive review since 1996. Our goal is to increase the quality of our controls and provide better service for the exporting community.

Beyond this CCL and EAR review, we would like to revise and simplify encryption controls. The encryption rules, which were streamlined in June 2010, could be made more concise and clear.

Turning to support documentation requirements, we are drafting a proposed rule that would clarify existing requirements, including the International Import Certificate.

With respect to recordkeeping, we are preparing to seek public input on how to revise the current recordkeeping requirements.

On routed transactions, we are preparing a proposed rule that will 1) clarify the responsibilities of the parties under the EAR for determining export license requirements and, if necessary, applying for a BIS license; 2) draw a brighter line between the types of transactions where foreign parties may assume those responsibilities under the EAR and those where they may assume export clearance responsibilities under the FTR; and 3) facilitate better information sharing between the parties.

Although this is not a comprehensive list of possible projects for the President’s second term, we expect to continue to work with all of you on improving our export control system. Your perspectives are essential to this initiative.

In addition to all of the efforts I have described for you, we still find time (in the wee hours) to continue our work in keeping the EAR updated to reflect changes agreed upon by multilateral export control regimes of which the United States in a part. On June 5, we published a rule implementing understandings reached at the 2012 plenary meeting of the Australia Group. On June 20 – this Thursday - we will publish a rule implementing the changes agreed to at the Wassenaar Arrangement 2012 plenary meeting. In the next few weeks, we anticipate publication of a rule to implement changes to the Missile Technology Control Regime Annex.

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.

As you can see, we are forging ahead.

Thank you for your time and interest in this initiative.