Remarks of Assistant Secretary Kevin J. Wolf as Prepared for Delivery at the BIS Update Conference July 23, 2013

Details

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

Update 2013 Conference

Remarks of 
 Kevin J. Wolf
 Assistant Secretary for Export Administration

July 23, 2013

 

As Eric has just described, we are beginning to implement some fairly fundamental changes to the export control system. I’m often asked for a summary of the reactions to the changes. They generally track something along the lines of what I’m beginning to call "The 5 Stages of Export Control Reform Acceptance."

I. The Five Stages

The initial reaction is denial. "It won’t happen." "The departments will never agree." "Congress will stop it." "It’s been tried before." "If Thomas Jefferson couldn’t reform the system, then no one can." "Government officials don’t take risks. They play it safe."

The second stage is curiosity. "You know, if this did work, it would be really good for our business. It would eventually reduce our regulatory burden for sales and work in allied countries." "It would actually accomplish the national security objectives the Administration has laid out." "You know, we do struggle a lot with the borderline between the EAR and the ITAR and, yes, the ITAR does over-control less significant military items." "Nah, it’s never gonna work."

The third stage is panic. "Oh my. This actually might happen. We don’t have enough time for this." "I have to figure out which of my products will be affected." "I have to figure out new rules." "I didn’t like the old rules, but I (mostly) understood them." "I have to re-mark my tech data." "But I liked MY private definition of ‘specially designed.’ This one is too complicated and takes away all my wiggle room." "I know industry has asked the Government for fundamental change, but I just wanted the government to decontrol all my products." "How do I change my order processing software?"

The fourth stage is intense focus. "How will the new rules apply to me and my products?" "What about this fact pattern?" "What about that?" "What did you mean when you wrote this? Really? I didn’t read it that way." "Why did you use an Oxford comma in one place but not another?" "Why so many quotation marks?" "How is Commerce’s definition of ‘required’ technology different from State’s definition of ‘directly related’ technical data?" "How many angels can you fit on top of a paragraph (b)(2) nutplate?"

The fifth stage is acceptance. "You know, this is actually kind of clever. It all holds together rather well now that I understand it." "It’s going to eliminate hundreds of licenses and thousands of pages of MLAs that always get approved anyway." "I can get product out the door to allied countries more quickly." "Having a de minimis rule for sales to most of the rest of the world helps." "I can often go straight to the release paragraphs in the definition of ‘specially designed’ for what is really just a one sentence definition for me." "Gee, this is simpler, although with more words." "There is a little tweaking to be done, but it works." "The definitions do allow for more reliable, predictable, consistent outcomes." "I have the option of getting a license or using License Exception Strategic Trade Authorization (STA) for the 36 countries, whichever works best for me." "OK, there will be more enforcement focused on exports and reexports to countries of concern." "The Administration is listening to me."

There is also a sixth reaction, which is "OK, ECR is great, but what have you done for me lately? What about my products and my markets?"

These are all valid reactions. Yes, there is a lot of work to be done by the aircraft and engine industry, and the government, to get ready for October 15th. Once the new system settles in, it will accomplish all the national security, foreign policy, and economic security objectives that Eric set out. There is a lot of work, though, to get to that point.

II. Work to be Done

We need to finish drafting the new and revised controls on missiles, explosives, personal protective equipment, and training equipment so that we can begin the congressional notification process on these changes. We expect to be able to publish these final rules around Thanksgiving.

We need you all to finish reviewing the second proposed revisions to military electronics, which will be published this Thursday, and send us comments by the September 9th deadline. We will want to review those comments and get a final version ready for congressional notification by the end of the year. Remember, if we have described something on the revised Category XI or in the new 600 series electronics controls that is in normal commercial use, don’t just tell us about it in conclusory fashion, prove it with evidence of such use. That’s one reason why we decided to publish a second pair of proposed rules. Also, for this and all other proposed rules, don’t just tell us what you think is wrong, tell us what you think is good and what works.

We need to finish up and publish next month the CCL "clean-up" rule. This rule will conform various definitions throughout the CCL, such as by making consistent references to "parts" and "components." If the control doesn’t refer to "parts," then "parts" are not controlled. If it does, it does. We’ll standardize the headings in the ECCNs. Sometimes the headings contain control text. Sometimes they just are a summary of what’s controlled. The rule should clear up these and other long-standing CCL issues the public has raised with us in the comment process.

We need to spend a lot more quality interagency time coming to some policy and control conclusions on several difficult issues in the ongoing review of USML categories XII – fire control and night vision -- and XIV – toxins, biologics, and related items. We had put the review of these off for a while so that we could finish up with the initial implementation efforts. Now that those initial rules have been completed, we are focusing on categories XII and XIV again and plan to have out early this fall proposed rules for public consideration.

We need to listen closely to you regarding how the new regulations are actually working in practice to spot any unintended consequences. So far, we think we’ve spotted them all, but with any change this big, there will inevitably be the need for tweaks to get it right. So, do not hesitate to let us know if you spot something that seems odd or unintended. It may have been deliberate, but maybe not.

We need to keep up the training and outreach, not just for the things that change but also for the things that don’t. We don’t have the resources to train everyone, but we can still do a lot. For example, we have conducted approximately 230 outreach events to date in FY2013, including 31 of the weekly conference calls. More than 11,000 people have participated in the training events we’ve conducted so far this year. We need to continue to expand the scope of our outreach to reach the small and medium defense exporters who will significantly benefit from the transfer of less sensitive munitions items from the USML to the CCL. And of course, you are here for the next three days.

We need to keep working with the other agencies, such as Customs and Border Protection, ICE, and the FBI, to make sure they understand the new rules. Much of what we are doing will make it easier for them to do their jobs. For example, we are creating largely positive lists of what the USML items are and also a definition of "specially designed" that allows for a solid, legal conclusion through asking a series of "yes" / "no" questions rather than having to dive into the mind of the original manufacturer to determine whether a part is or isn’t controlled.

We need to make sure that BIS’s new munitions licensing division is running smoothly. This includes making sure that the referrals to and from State and Defense work efficiently and quickly. We need to make sure that exporters who are used to submitting requests for DSP-5s know how to get a Commerce license. We need to make sure that exporters used to using D-TRADE are comfortable using SNAP-R. We must ensure that we smoothly transition to the single licensing database, USXPORTS.

For 600 series items and all other items subject to the EAR, we need to make sure that applicants provide in their applications the information the government needs for processing. We need clear and complete descriptions of the transaction, the items, the end uses, and the end users. We need to get exporters to the point where they can anticipate questions we might ask and be sure to address them in their applications. In general, good, tailored, clear, jargon-free applications lead to shorter reviews and fewer provisos. Don’t ask for the kitchen sink when you only need to export the stopper.

By the way, if you are about to enter into a particularly complex or unusual transaction, please feel free to call your licensing officer before submitting the application. A lot of time can be saved for both you and us by initiating an early dialogue and working through what we need before you submit. Also, if a condition you get back doesn’t make sense or is unworkable, then let us know. When providing information to other parts of the government about an application you’ve submitted to BIS, make sure that BIS has the same information. Finally, you don’t have to wait until October 15th to begin submitting applications to export military aircraft parts and engine parts. The sooner you get them in, the quicker we’ll be able to process them.

We need to keep educating foreign recipients of items subject to the EAR of their obligations associated with the items. U.S. companies can do a lot to help train their foreign buyers and partners. Indeed, we are putting together some standard materials that U.S. aircraft and engine part companies can send to their foreign buyers and partners to explain the new rules.

We need to keep doing our audit and outreach visits to ensure compliance with License Exception STA – that exporters are getting the required certifications and watching out for red flags, for example. As we reported last year, we review the data reported in the Automated Export System (AES) to track STA shipments. Exporters and consignees are required to provide, upon request, copies of their documents pertaining to STA exports. We conduct on-site document reviews to verify compliance. By the way, exporters have made nearly 2,000 shipments of dual-use items, valued at nearly $200 million, under STA. These numbers will certainly grow once it becomes available for 600 series items.

We need to make sure that the AES system is ready to accept the newly created 600 series ECCNs. So far, all seems in order and there shouldn’t be any issues. By the way, 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 other than .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.

As we finish the drafting on the USML-CCL regulations later this year, we need to have ready a whole series of EAR-specific regulatory reforms to get out to you for review and comment during the remainder of this year and next. These will, for example, include proposed changes to the outdated support document and recordkeeping requirements. There are lots of other housekeeping regulations in the work, such as those that would clear up provisions related to routed transactions, and License Exceptions, particularly BAG and AVS. Eric has already mentioned the goals regarding the encryption regulations. And, as always, we’ll continually be working with our regime partners to update and refine the control list.

III. Big Picture Point about Regulations

When thinking about the creation of new regulations and the revision of old ones, we, of course, think first about the national security or foreign policy reasons for the control. But we next think about how to reduce the policy objective into regulatory text.

When doing so, there is a fundamental tension between complexity and precision, on one hand, and simplicity and over-control, on the other. The two simplest systems would be one that requires a license to export everything, everywhere, all the time and one that that doesn’t require a license to export anything, anywhere, anytime. The latter is unacceptable because, of course, there are significant national security, foreign policy, human rights, and other reasons for why the U.S. Government wants visibility into and the final say regarding whether specific items, technology, software, or services can be exported or reexported to certain end uses, end users, and destinations. The former is unacceptable because, although simple, it would impose an unbearable and unacceptable regulatory burden on U.S. industry -- as well as harming, our national and economic security objectives. So, the solution lies somewhere in the middle.

But once an agency starts treating different items with different parameters differently to different end uses, end users, and destinations, then detail is required -- more words, more definitions, more provisions, more technical specifications, more license exceptions. More complexity.

I mention this because a common -- and a very reasonable -- request from industry is to "simplify the regulations." We are doing everything we can to make the regulations as simple and internally coherent as possible. Indeed, as well said by Under Secretary of Defense for Policy James Miller to Congress, "Our national security will be far better served by a more agile, transparent, predictable, and efficient regime." Our regulatory changes will accomplish this, which will then allow you to be as reliable, predictable, and efficient exporters as possible. The regulations are, however, never going to be simple because of the need to "right size" the controls in world that is no longer bi-polar.

We are, however, doing things that, on first read may not seem simple but whose efficiencies will be more apparent after a second (or third) read. For example, License Exception STA will allow for the export of 600 series military items and most related technology to 36 countries if for ultimate end use by the governments of one of those countries, for return to the United States, or if in connection with a reexport transaction the US government has already authorized. But we realize that complying with the conditions of STA may, in some cases, be more complex than simply having a license to engage in the same transaction, such as if companies in a joint effort are in both STA-36 countries and non-STA 36 countries. That’s okay. That is why we made the use of License Exception STA optional. Either way, the U.S. Government’s objectives are satisfied. You choose the approach that works best for you.

Another example is the definition of "specially designed." Yes, it is longer than the current, non-existent, definition. It has a series of reliable shortcuts, however, that, once understood, allow for consistent, reliable, predictable outcomes in common situations. Again, more words were required, but I’m certain that the amount of time spent analyzing the new definition will be less than the amount of time companies have spent trying to comply with the regulations absent a definition.

IV. Summary of the Essence of the Reform Effort

Another thing I’m often asked to do is to describe the impact of the current stage of the reform effort. If you are a supplier of military parts and components to regular, known customers in one of the 36 countries, for ultimate end use by the government of an "STA 36" country or the United States, these changes will have a significant, positive impact on your business – and on our national security objectives of strengthening the U.S. defense industrial base and increasing interoperability with our allies. If you can satisfy the conditions of License Exception STA, these types of sales and joint development and production activities will be significantly more efficient for you.

If, on the other hand, you want to trade, directly or indirectly, 600 series or satellite-related items with countries subject to arms embargoes, you will be disappointed. For transferred items, we are maintaining the same embargoes that exist in the ITAR with respect to those countries. Indeed, one objective of the reform effort is to focus more of our resources on investigating and enforcing exports and reexports to these countries and to other end uses and end users of concern.

If you are engaged in trade with the rest of the world, individual licenses will still generally be required, but there are efficiencies that come with being EAR controlled. In particular, the EAR allow for a de minimis amount of U.S.-origin content to be incorporated into foreign-made end items without causing them to become subject to U.S. reexport licensing obligations -- except if destined to countries subject to U.S. arms embargoes. This will reduce the current incentives for foreign manufacturers to design out or avoid U.S.-origin content. That is one objective of the reform effort and, we believe, will help the defense industrial base. You won’t have to deal with registration, fees, Manufacturing License Agreements, Technical Assistance Agreements, temporary import authorizations, defense service analyses, or brokering issues. There are, of course, still authorizations required under the EAR to export controlled commodities, technology, and software, but we believe that the Commerce system, for these types of items, will eventually be less burdensome and further the national security objectives of the effort.

V. The Export Control System Today

While BIS and its interagency partners work on the reform effort, we also continue to ably handle the daily business of running the export control system. BIS, for example, processed 23,000 licenses last year. Since October 1st, we have processed nearly 19,000 additional license applications. We have issued this year 22 notices in the Federal Register, including 17 final and 5 proposed rules. Since 2008, we have issued 34 rules expanding the Entity List of foreign parties, adding 498 entities to the Entity List and removing 57. Since 2007, we have qualified fifteen companies in China and India as validated end-users (VEUs). These companies have received approximately $163 million in controlled high technology items and software under controlled circumstances. We have continued to update the EAR to reflect changes agreed upon by the multilateral export control regimes. On June 5, we published a rule implementing understandings reached at the 2012 plenary meeting of the Australia Group. On June 20, we published a rule implementing the changes agreed to at the Wassenaar Arrangement’s 2012 plenary meeting. On July 16, we published a rule implementing changes to the Missile Technology Control Regime Annex. Later this summer, we anticipate publishing a rule implementing changes the Nuclear Suppliers Group has made this year.

Defense Industrial Base: BIS’s Defense Industrial Base activities help ensure that our military has access to the cutting-edge technologies they require. The Bureau conducts three core activities in support of this base: priorities and allocations, foreign acquisition reviews, and industrial capability studies. We will be issuing a proposed Defense Production and Allocations System rule this year that implements recent amendments to the Defense Production Act.

With respect to defense industrial base assessments, the Bureau's Office of Technology Evaluation Defense Industrial Base Survey Division plays a leading role in: (i) mapping the intricate industrial supply chains for key defense sectors such as space, strategic and critical materials and aircraft; (ii) assessing the overall health of companies that support these sectors, and (iii) identifying equipment, labor, and technology shortfalls in sectors that could jeopardize the ability of our Defense Department to successfully accomplish missions. In particular, the space industry assessment was a good example of BIS’s working closely with defense and civilian agencies, such as the Air Force, NASA, and the National Reconnaissance Office, and leveraging its unique authorities and analytical capabilities to accomplish its mission of maintaining and enhancing the U.S. defense industrial base. BIS, in conjunction with these agencies, surveyed approximately 4,000 companies that directly or indirectly supply products and services to the U.S government for space-related purposes. The results of this survey give the U.S. Government visibility (that it has historically lacked) into the issues and challenges that affect companies’ long-term viability in the space sector. We plan to initiate a major U.S. military aircraft, helicopter, and unmanned aerial vehicle industrial base assessment this fall.

CFIUS: The Bureau participates in the Committee on Foreign Investment in the United States (CFIUS), which reviews the national security implications of foreign acquisitions of United States businesses. We support CFIUS by drawing on our export control and industrial base knowledge.

Treaty Compliance: An equally important responsibility for BIS is its international treaty compliance implementation responsibilities. BIS administers the industry compliance aspects of the Chemical Weapons Convention (CWC) and participates in activities to enhance implementation of the Biological Weapons Convention (BWC).

BIS is responsible for collecting and transmitting annual data declarations and reports from the U.S. chemical industry to the Organization for the Prohibition of Chemical Weapons (OPCW). In FY2012, BIS processed 850 declarations and reports covering activities of 561 U.S. chemical facilities. BIS also hosted 19 inspections of U.S. chemical facilities by OPCW.

BIS has the linchpin role of establishing and managing the U.S. Additional Protocol Reporting System, which receives declarations on the nuclear and nuclear-related activities from U.S. industry, the Nuclear Regulatory Commission (NRC), and the Department of Energy (DoE). BIS assembles those declarations into a draft declaration for interagency review and then a consolidated U.S. declaration for congressional review and subsequent transmittal to the IAEA. BIS has taken the first steps toward developing an Additional Protocol Reporting System to allow industry to submit reports electronically instead of the current paper process.

VI. The Conference and the Thanks

On Thursday, my staff and I will be available to answer detailed questions about the final and the proposed rules. This session will be open to the public via conference call. My deputy, Matt Borman, will lead an interagency panel tomorrow to describe the agencies’ roles under the current, new, and contemplated rules. They, too, will answer questions. BIS staff will conduct individual panel sessions on key elements of the reform effort such as transition licensing, "specially designed," and license exceptions. On Thursday, we have organized 40 roundtables where you can meet subject matter experts from the Munitions Control Division as well as other BIS groups.

So, with that, I’d like to thank you all for attending. And I’d like to close by thanking all those who have made all this work possible. Under Secretary Hirschhorn for his terrific leadership of BIS. My staff in Export Administration, who make all the things I just described happen. You are all professionals and excellent public servants. Those in our Regulatory Policy Division who are doing the heavy lifting on the drafting of the regulations. The Licensing Officers who keep the day-to-day licensing and classification work of EA flowing smoothly. My Deputy, Office Directors, and front office staff for everything. Rebecca Joyce, Toni Jackson, and the Outreach and Educational Services team for putting together yet another exceptional Update conference.

I’d also like to thank my colleagues in the other agencies who are vital to the reform effort and the day-to-day work of BIS.

Thank you for listening. Enjoy the conference.