Remarks of Eric L. Hirschhorn Under Secretary for Industry and Security at the Society for International Affairs Fall Conference October 28, 2013

Remarks of Eric L. Hirschhorn Under Secretary for Industry and Security at the Society for International Affairs Fall Conference October 28, 2013

 

Thanks, Beth, for that kind introduction, and thanks to the organizers of SIA’s fall conference for inviting me to discuss President Obama’s export control reform initiative. I looked over the agenda and see an eye-popping lineup of A-list panelists.

 

My department and our counterparts across the federal government have been working around the clock for the past four years on this initiative. Thanks to the hard work of many dedicated public servants, we’re in a good place.

 

I know some 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 has prepared itself and the exporting community for the transition.

 

Why Reform U.S. Export Controls?

 

Export control reform is a national security initiative that: (1) focuses our limited resources on the threats that matter most; (2) improves our interoperability with our close friends and allies; (3) strengthens the U.S. defense industrial base by reducing the current incentives for foreign manufacturers to “design out” controlled U.S.-origin parts; and (4) finally, and perhaps most importantly for those in this room, eases the licensing burden on U.S. exporters.

 

The export control system we’re leaving behind is confusing and overly complex, plus it tries to protect too much. That in turn has diminished our ability to focus on the most essential national security priorities. For example, under the International Traffic in Arms Regulations (ITAR), a bolt for an F-16 fighter jet is controlled pretty much the same as the F-16 itself. The question that led us into this effort was propounded by then-Secretary of Defense Gates: Does that bolt warrant a lot of documentation and a wait of weeks or possibly 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, State, and other departments and agencies, 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 involved working closely with the military services – who are, after all, the experts - to list specifically what should be controlled on the USML in order to remove, as far as we could, the basket categories that until now have accounted 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 prepared proposed revisions and published new control categories. Those articles that have been ITAR-controlled, but were not identified as warranting continued control on the USML, are becoming subject to the controls of the Commerce Department’s Export Administration Regulations (EAR) and Commerce Control List (CCL).

 

This is not 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 as well as distinctions based on the technical specifications of an item, this allows the government to “right size” controls on less sensitive military items, such as that bolt for an F-16, that are destined for our allies and other multilateral control regime partners.

 

The participating agencies have agreed on almost all the proposed revisions of control list categories, and we have already published proposed rules for most categories as well as begun publishing and implementing final rules.

 

Our changes make it easier for U.S. companies, especially small and medium-sized businesses, to engage in defense trade. This bolsters the security of supply—this is security for us, the U.S. Government—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 any controlled items from ending up where they should not.

 

Until now, our ability to compete and cooperate has been burdened by overly complicated or overbroad regulations such as the “see-through” rule. I suspect that many, if not most of you, are familiar with the “see-through” rule, under which 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 has encouraged foreign buyers to select non-U.S. parts and components—even when a U.S. solution has offered price, schedule, and performance advantages—in order to avoid making the end product subject to the ITAR.

 

The movement of thousands of U.S.-manufactured parts and components from the USML to the more flexible CCL enables the U.S. Government to make more nuanced distinctions among technologies, destinations, and end users, and to apply a greater variety of authorizations, than under the ITAR.

 

Rather than being burdened by the “see-through” rule, companies can take advantage of the EAR de minimis rule. For most ultimate destinations, foreign-made items with transferred components constituting 25 percent or less Commerce-controlled U.S. parts are not subject to U.S. reexport controls. This exclusion is not available, however, for China and other countries that are subject to arms embargoes. That is, the de minimis level for those countries for items transferred from the USML to the CCL is going to remain zero, just as it is under the ITAR’s “see-through” rule. But for most countries in the world, it will be 25% or less.

 

Where Export Control Reform Stands Today

 

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

 

On April 16 of this year, State and Commerce published final rules for the aircraft and engine categories. These were the first two of approximately 19 USML categories to be rewritten and to “go final.” These rules took effect October 15.

 

The April 16 rules also include a revised definition of the term “specially designed” and transition rules for items moving from State to Commerce jurisdiction. Each is essential to the reform effort.

 

The new definition of “specially designed” is a critical term that in most instances, one can apply without knowing the design intent. This is an important change from the ITAR. This should bring increased clarity, reliability, and predictability for exporters.

 

Our transition rule describes how items that were previously controlled by the ITAR are dealt with under the CCL. This rule addresses: (1) new license periods (which for Commerce is now 4 years instead of 2); (2) the applicability of ITAR exceptions not previously in the EAR; (3) what to do with existing State Department licenses and agreements; and finally, (4) grandfathering periods and arrangements for current licenses.

 

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

 

The April 16 rules were followed on July 8 by the publication of the next four categories to go final—vehicles, surface vessels, submersible vessels, and materials/miscellaneous articles. These changes, again subject to a 180 day waiting period, will become effective on January 6.

 

We have completed five more categories— that include energetic materials, personal protective equipment, military training equipment, and launch vehicles. The Department of State began the congressional notification process on these categories last week, which means that the final versions of these rules will be published early in 2014.

 

Public comment on the first proposed version of category XI (military electronics) led to significant changes, so we published it again in proposed form and solicited another round of comments. We’re working through the comments, though the government shutdown has slowed this and other aspects of the list review process. This is a good time to emphasize that we very much value your comments. We view them as professional, highly qualified, “free labor.” I encourage you to watch the Federal Register, read our proposed rules, and provide comments. We read every comment, and agencies spend day after day going through them. The electronics category is a good example of their importance. We hope to get the electronics rules to the Congress for notification by early next year, with publication of the final rules about two months after that.

 

I should add, by the way, that the recent federal government shutdown is likely to increase license processing times for a while, though we and our colleagues at other agencies will do our best to expedite processing.

 

Satellite Jurisdiction

 

Unlike the other control list categories, satellites and related components were, until this year, ineligible for transfer from the USML to the CCL. In response to the unauthorized transfer of sensitive technology in connection with satellite launches in the 1990s, Congress required by statute in 1998 that all satellites, components, and launch services be on the USML.

 

Along with other factors, this had a devastating effect on the U.S. satellite industry. According to the Aerospace Industries Association, the U.S. had 73% of the worldwide share of satellite exports in 1995. A decade later, this had fallen to 25%.

 

Last January, though, President Obama signed the 2013 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 – and they were from both parties - who made this possible.

 

A proposed rule transferring jurisdiction of satellites from State to Commerce was published May 24. Our interagency team from the Departments of Commerce, State, and Defense, as well as NASA, the FAA, and other agencies is reviewing the public comments. The shutdown interrupted work on this category, too, but we still hope to get our draft final regulations to the Congress by the end of 2013 and to publish a final rule about two months thereafter.

 

October 15th

 

The October 15th effective date for the first final rules providing for the initial implementation of ECR has come and gone. On that day, thousands of aircraft and gas turbine engine items moved from the USML to the CCL. Exporters have begun in earnest taking advantage of License Exception STA—Strategic Trade Authorization—for the aircraft and engine items that were transferred.

 

STA streamlines exports to and among our 36 closest NATO and multilateral regime partners by removing license requirements for items currently on 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 require a Commerce 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 improving the competitiveness of our defense industrial base, particularly our small- and medium-sized companies.

 

STA provides greater flexibility and predictability, while still providing necessary safeguards. Here, as elsewhere in life, there is no such thing as a free lunch. 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 undertake to handle that item in accordance with the EAR. These written exchanges provide the paper trail that is necessary for effective enforcement, and we believe they are easier, cheaper, and faster for companies to administer than conventional export licenses.  

 

But, the use of STA is optional. Although we think it’s considerably more predictable and efficient than obtaining a license, any exporter who prefers the latter course is permitted to follow it.

 

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 our 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. 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.

 

Also, on September 11 BIS proposed a rule that would strengthen the Unverified List to increase U.S. government insight into transactions involving foreign parties whose bona fides—that is, their suitability and reliability as recipients of U.S. exports—BIS has been unable to verify. This action would 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.

 

Preparing for Transition

 

We recognize that the transition requires some hard work in the short term for you as much as for us. 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 are also updating the on-line interactive STA tool, which assists companies in determining whether they are eligible for and compliant with STA so that it fully takes into account the 600 series.

 

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

 

The Automated Export System (AES) can accept the newly created 600 series ECCNs for BIS licenses and for the applicable 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 (except .y items) 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 13, BIS conducted a webinar to introduce the initial implementation rule to freight forwarders and get them up to speed on changes in AES and properly completing export documentation. We emphasized the importance of communication between freight forwarders and exporters, as well as improved internal processes and automation to ensure that exports of items transitioning from the USML to CCL are compliant. Last Wednesday we held a follow-up webinar that focused on making sure freight forwarders and exporters get their ECR related AES reporting correct.

 

This complements the work we are doing to help other government agencies with the transition. BIS is working closely with the Outbound Branch of U.S. Customs and Border Protection by implementing a CBP port training program. In late September, a team from BIS trained approximately 200 CBP Officers. This training is to inform CBP of the changes in AES and export documentation they are seeing as a result of ECR. In addition, BIS has been instrumental in providing training information to our partners in the FBI and DHS’s Homeland Security Investigations (HSI), which has simultaneously conducted extensive training for agents across the country. Together we are ensuring that our law enforcement partners are prepared to see defense parts, components, accessories, or attachments shipping under a BIS license or license exception instead of a traditional ITAR license. This should help to ensure a smooth transition at ports of export.

 

Next week, we will be taping a training video for CBP outbound officers who were not able to attend the live training. I should note that CBP has mandated this training for all outbound officers. Tomorrow, Gerry Horner, Director of BIS’s Office of Technology Evaluation, will be providing you with further details.

 

To prepare for the first rules that became effective on October 15, the Department of Commerce has staffed and trained the new Munitions Control Division (MCD) to handle new license applications and classification requests for items formerly on the USML. Todd Willis, the Director of MCD, is here today and will give you more details later in the program.

 

Commerce is also educating exporters and other organizations affected by ECR about the changes made to the system. This includes outreach to American companies, foreign companies, other government agencies, and the governments of allied countries. And of course this outreach includes important events such as this conference. Senior BIS licensing and enforcement staff are well represented on panels over the next two days.

 

Next Steps for Export Control Reform

 

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

 

The Departments of Commerce, State, and Defense, along with our other interagency partners are currently reviewing two of the more difficult categories—Category XII, which includes sensors and night vision items, and Category XIV, which includes biological items, toxins, and related items.

 

We have an ambitious plan over the next year to continue with our proposed rules, congressional notifications, and final rules. The reform project is far from complete, but the end of the massive list review exercise is in sight.   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 the other necessary edits to the ITAR and EAR. I must say that it is truly a massive task, just from the perspective of workload.

 

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 next year or two. We began with the publication on October 4 of our final CCL “clean-up” rule, which makes the CCL more user-friendly for exporters.   We recognize that the Federal Register version of these changes may be difficult to follow, so we’ve integrated the line in/line out changes into the full EAR and the full CCL on the BIS website.

 

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 such products. A proposed solution is included in the satellite proposal that I mentioned earlier.

 

Our efforts will also involve a substantive review of the CCL beyond the “clean-up” rule, starting with the strategic rationales for specific controls which has not been attempted since 1991 and is certainly overdue. This effort will be complicated somewhat by the fact that the multilateral export control regimes are capable of handling only a limited number of changes each year.

 

In addition, we want to update, clarify and streamline the EAR which haven’t had a comprehensive review since 1996. Our goal is to improve the quality of our controls and provide better service for the exporting community.

 

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

 

We are drafting a proposed rule that would clarify existing support documentation requirements, including the International Import Certificate, and are preparing to seek public comment on how to revise and update recordkeeping requirements.

 

We are preparing a proposed rule on routed transactions 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 Foreign Trade Regulations; and, finally, (3) facilitate better information sharing between the parties.

 

Although this is not a comprehensive list of possible projects, we will continue to work with all of you on improving our export control system. Your perspectives are essential to this initiative.

 

*          *          *

 

Over the past four 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 have completed a considerable portion of the project and we are forging ahead on the remainder.  

 

As my new boss, Secretary Penny Pritzker likes to say, we are open for business. Thank you for your time and interest in this initiative. I would be happy to take a few questions.