It's a pleasure to be here today to discuss the challenges in U.S. strategic trade policy and the Administration's reasoned, common-sense approach to address these challenges.
Let me begin with some general principles, and then talk about some specifics on particular countries and issues. The Administration is seeking to structure our export control policies to address both the threats and the opportunities that the United States faces. In so doing, we don't seek to tighten, or liberalize, controls as a matter of general principle or ideology. Our overriding focus is to prevent exports to end-uses that are contrary to our security and foreign policy interests, while still providing favorable marketing opportunities for U.S. exporters.
We are seeking to promote both U.S. security and economic interests – not to “balance” them. “Balancing” implies a tradeoff where one interest is sacrificed at the expense of another. On the contrary, we consider that effective strategic trade policy promotes economic relations by creating a secure trading environment where we can be confident that the commodities and technology we export will be used for legitimate rather than nefarious purposes. Military conflicts and terrorist attacks have a devastating impact on trade. Conversely, we have a strong national security interest in the health of our industry and academia. The bottom line is that trade and security are complementary rather than competing objectives.
Of course, some discussions on export control policy are complex, and reasonable people can – and do – disagree. I believe that those of us who are stakeholders in the policy process can minimize these differences if we are careful to act by applying agreed principles to agreed facts, rather than reacting based on assumptions, rhetoric, or partisan interest. It is also vitally important that, as much as possible, the government provide an opportunity for all stake holders to comment and that we take into account their suggestions. Such a process can achieve substantial consensus on export controls, even if differences continue at the margins.
With these guiding principles in mind, I would like to explain what we are doing to ensure that the dual-use export control system advances our critical security and foreign policy goals, while still becoming more responsive to the needs of the exporting community.
Let me begin by reviewing where we are and where we're going with respect to particular countries, starting with policy toward China. We have seen vast increases in trade with China as it continues to move away from the inefficient principles of Communist central planning and becomes more open to international investment and foreign presence. Other countries are moving quickly to enter this market with a wide range of products, technologies, and services. The days are over when Western countries reviewed all license applications for exports to China as likely transfers to a hostile military. In the post-Cold War era, licensing exports to China is more complex.
It serves our common security, foreign policy and economic interests for China to seek cooperation with the West and for China to become a player and a partner in promoting regional and global stability. At the same time, we continue to have significant differences with China on a range of security and foreign policy issues that dictate a cautious way forward in our overall political, economic, and strategic relationship. Accordingly, our objective is to expand trade with China, consistent with a sober consideration of the security and foreign policy concerns.
Our dual-use export controls are not major impediments to overall U.S. trade with China. Licensing requirements affect only 1.5% of exports to China and, for those exports that require a license, about 95 percent of the applications are approved. Further, for those exports to China requiring a license, we have reduced processing times from FY 2004 to the first half of FY 2005. We will continue to work with the interagency community to reduce the time it takes to act on such license applications and make the system work more efficiently.
Nevertheless, some in the exporting community assert that these statistics don't tell the whole story. They argue that many U.S. firms don't apply for export licenses because of our controls, so that high-technology exports to China would increase if our controls were liberalized. They say we are ceding market opportunities to countries that do not share our security concerns regarding trade with China.
At the same time, some critics of our policy consider that we should be implementing more stringent controls on the grounds that China poses a significant threat to both regional and global security. They say that the parochial interests of companies seeking to do business with China should not outweigh the broader national imperative to restrict China's access to advanced technology.
The Bush Administration appreciates the need to accommodate both our security and our economic interests in controlled trade with China. And so we seek to ensure that U.S. exports are not diverted to end-uses within China that we do not support, or re-exported to other foreign government or terrorist weapons programs that are adverse to our interests. However, we acknowledge that engagement with China is beneficial for both of our nations, and we support exports that facilitate China's peaceful economic development. Let me explain to you how we are drawing the lines for approvals and denials and what we are doing to make approvals more possible.
We've been working with the Chinese Government to facilitate on-site end-use visits by U.S. nationals to ensure that the items we export are being used for authorized purposes. In 2004, we concluded an end-use visit understanding with China that goes a long way toward accomplishing this goal. To date, we are very encouraged because China has, in good faith, been abiding by the terms of this understanding, as have we. The bona-fides of end-users are a primary factor in the interagency review of applications. So effective implementation of this understanding should lead to more approvals, encourage more firms to apply for licenses, and facilitate continued improvement in licensing times.
We have supported China's admission to the Nuclear Suppliers Group and we are pleased that they are now members of this important nonproliferation export control regime. We endorsed China's membership because it is already a declared nuclear weapons state and can be a major supplier of nuclear technology. Conversely, China is actively seeking to develop its civil nuclear electric power capabilities and we have encouraged them to consider purchasing U.S. equipment for this purpose. Over time, we will be able to gauge, based on China's actions, whether China's admission to other export control regimes would serve international security interests. I hope that China will take the steps necessary to address weaknesses in its export control system and acknowledge the global security threats facing us today.
As much as we favor expanding trade with China, we will not knowingly approve any export that will help China modernize its military capabilities. We continue to support the arms embargo and have urged our European allies to do likewise. We will also require a license for all exports that an exporter knows could materially assist the Chinese military. We will review any application that supports the advancement of Chinese military capabilities under a general policy of denial. We will encourage our allies to adopt similar positions.
We also deny all items controlled for missile technology reasons that enhance China's space launch capabilities. Since civil space launch and military space launch technology is virtually identical, we do not have adequate assurances that our exports will only be used for peaceful applications.
As overall U.S.-China political and strategic relations develop, I expect that our export control policies will evolve with them.
Our relations with India also deserve special mention. We have a strong national interest in promoting expanded trade relations with the world's largest democracy and an ally in the war on terrorism. Although we have significant disagreements with India over their nuclear and missile technology programs, there are more common interests that unite us than differences that divide us. We consider India our partner for most endeavors in the international arena and we are seeking to expand trade relations by a wide variety of means in a wide variety of commodities and technologies, including defense trade. Toward this end, we have been working diligently with India to narrow the scope of our disagreements and expand areas of mutual cooperation.
President Bush has taken the initiative to narrow U.S./India strategic differences, under the Next Steps in Strategic Partnership, or NSSP. The NSSP sets forth a phased approach toward expanding common ground, recognizing that steady, mutual and incremental steps forward represent the best means to transform a friendly relationship into a true and full partnership. In Phase One, the Government of India agreed to implement measures to address proliferation concerns and to ensure compliance with U.S. export controls. In return, we were able to ease restrictions on the export of selected dual-use items to India 's civil space and civilian nuclear power programs. Based on these steps, trade with India requiring a license has declined while overall trade with India has increased. We project that U.S. exports to India will increase by about 20% this year, but the value of trade that requires a license will decline by about 40%.
Because active engagement is beneficial for both of our countries, we have agreed to move forward with the next steps of the NSSP as quickly as possible. As India takes additional steps to implement credible and effective nonproliferation policies, the United States will take steps to bring our two nations closer together and expand cooperation in the areas of civilian space programs, civil nuclear power production, and high technology trade.
During the past year, we have implemented significant changes in our export control policy toward several other countries, including Syria, Iraq, Libya, and Cuba. In some cases, we have liberalized controls and in others we have imposed further restrictions. More steps are likely throughout 2005.
Given Syria 's continued support for terrorism and regional destabilization, we have further tightened controls as required by law. Only food and certain medicine may be exported to Syria without a license. And only a few other commodities are eligible for export licenses, based on a case-by-case review by the interagency licensing community.
We have further tightened controls on exports to Cuba in order to apply increased economic pressure on Castro's regime. Additional travel restrictions to Cuba have been likewise imposed. Additional steps may be taken this year to clarify these rules.
We have significantly liberalized export policy toward Libya in light of that country's decision to abandon its weapons of mass destruction programs and its support for international terrorism. Although Libya is still a terrorist designated country, it is no longer the pariah that it was. If Libya continues to demonstrate its change of course, we will be able to further liberalize controls. We expect to publish another rule later this year that will authorize license exceptions for certain basic items to be used by U.S. persons doing business in Libya.
Regarding Iraq, it has been almost a year since licensing jurisdiction was transferred from Treasury to Commerce. With this transfer came a significant liberalization of controls based on the downfall of Saddam Hussein's regime. The actual volume of trade with Iraq has been modest in light of the current insurgency. But of course, we are optimistic that the situation in Iraq will further stabilize and with it will come increased trade and the possibility for further relaxation of export licensing requirements. In the meantime, we will publish a few changes to address public comments received on this rule.
I'd like to talk now about how we are adapting our export controls to address the terrorist and WMD threat. We are doing this through several steps.
First, we have revised our Commerce Control List to include items that terrorist groups are most likely to seek. Specifically, we have secured Australia Group support to add a number of biological agents, small fermenters and chemical weapons precursors to the multilateral control list. Further, we are currently seeking Australia Group agreement to add 25 additional biological agents that are domestically regulated by the Center for Disease Controls, but are not specifically identified on the control list.
We have secured agreement from the Missile Technology Control Regime to control Unmanned Air Vehicles that are capable of delivering chemical and biological weapons. Before, the MTCR focused only on long-range systems that could deliver a 500 kilogram payload. But since chemical and biological weapons can produce widespread lethal impact with small payloads, it is critical to include systems that can deliver such weapons regardless of the size of the payload.
And, within the Wassenaar Arrangement, we led the effort to tighten controls on Man Portable Air Defense Systems (MANPADS) to respond to the threat they pose to civil aviation. We have also implemented stringent retransfer controls on night vision equipment given the strong interest by terrorist groups in acquiring enhanced abilities to conduct operations in the dark. We are also seeking agreement to adopt “catch-all” controls for terrorist end-uses.
Second, we have tightened our “catch-all” rules to ensure that even non-sensitive items are not used for terrorism or WMD proliferation. For example, we now prohibit exports of any items to entities that support terrorism. We are working to develop an anti-terrorism “catch-all” that would require exporters to apply for a license if they know that any item is destined for a possible terrorist end-use. We have also expanded the scope of our missile, chemical and biological nonproliferation “catch-all” controls to ensure more global application instead of focusing only on selected countries of concern.
In brief, we have modified control lists and U.S. policies in response to the terrorist threat. These changes have a small impact on the volume of commercial trade.
I now want to talk about a regulatory program that has sparked significant interest in many quarters – our “deemed exports” on the release of controlled technology in the United States to certain foreign nationals.
Some have argued that our “deemed export” rule is ineffective, imposes unwarranted burdens on U.S. industry and that the best way to prevent hostile foreign nationals from acquiring technology in the United States is to deny them visas. Others have argued, to the contrary, that such “water's edge” measures are necessary but insufficient in order to protect our advanced technology from hostile intelligence agents bent on espionage. Accordingly, they say that the current “deemed export” provisions represent a necessary second line of defense and that the current provisions need to be further tightened by expanding the scope of foreign nationals subject to licensing, and by broadening the scope of activities that qualify as releases of technology.
We agree that stringent visa reviews should ensure that people with hostile intentions are prohibited from entering our country. But any visa review system has its limitations. Evidence of foreign nationals' hostile intentions may develop after they enter the country. Moreover, we may be willing to grant a license for work on certain technology but not other technology; yet, the visa is a “yes or no” action. Further, the technology to which the individual seeks access may change over time, after the visa is issued.
Accordingly, the “deemed export” rule provides a necessary additional level of scrutiny for sensitive technology releases. To reduce the burden on industry, we are improving the overall operation of the licensing process. Toward this end, we have reduced processing times for deemed export licenses from 62 days in FY 03 to 42 days in FY 04 - a drop of nearly one third. We have implemented important administrative improvements, such as making licenses valid as long as the foreign national's visa. Further, we have interagency agreement that technology upgrades for current license holders will be completed within 20 days. The Administration's liberalizations of controls on microprocessors and advanced computer technology have also limited “deemed export” license applications.
In response to recommendations from our Inspector General, we are currently considering whether to make any changes to the way we license foreign nationals who are not U.S. permanent residents. To promote the active involvement of all interested parties in this process, we are currently soliciting public comment. We will carefully review those comments before implementing any modifications to current operating procedures.
Let me talk about a few other BIS ongoing initiatives.
BIS continues to work toward adopting a new metric for controlling exports of strategically significant computers. Changes in computer technology and market developments have diminished the effectiveness of the current metric for measuring the critical performance of HPCs. The current metric is “MTOPS” – Millions of Theoretical Operations per Second. The U.S. Government and industry have been discussing options for replacing MTOPS. In 2005, we hope to finalize this reform effort and put in place a more modern system for controlling computers.
We also plan to update the existing “de minimis” rule for determining when a reexport is subject to U.S. jurisdiction. The “de minimis” rule determines when a reexport is subject to U.S. jurisdiction. Advisory committees and other industry groups have urged that we update this rule to reflect changes in technology, such as how software is now incorporated into hardware. For example, when a U.S.-origin chip provides instructions for a foreign car's engine. The merging of software and hardware makes it appropriate to review whether we should continue to treat software and hardware separately under our de minimis rule. We expect to move forward on this issue soon.
Modifying the existing country groups within the EAR, which still reflect the outdated bipolar world order. An important goal here is to ensure that U.S. export controls reflect today's security and trade environment, and put an end to the Cold War framework that no longer applies to a world where many former Eastern Bloc countries are our strong partners in the export control regimes.
We also published a proposed rule last October that would, first, revise the definition of “knowledge” that affects certain knowledge-based license requirements, especially relating to our anti-proliferation controls; second, provide a way for exporters to obtain a safe harbor from liability; and third, update our guidance on “red flags.” We received many comments on this rule. We are evaluating these comments and working with the interagency to publish a final rule this year.
This year in the enforcement area, there will be an increased focus on shipping companies and freight forwarders. Our outreach efforts seek to educate and develop cooperative relationships with all those in the export stream. Freight forwarders and shippers are the last best chance of preventing illegal exports and are critical in protecting our national security. Traditionally, the onus has been on the exporter alone to follow regulations and obtain licenses. A freight forwarder could deflect responsibility onto the exporter. However, recent cases have made clear that freight forwarders have a responsibility to know the customer and to pay attention to red flags.
Next, BIS is making a special effort this year to educate exporters about the benefits of voluntary disclosure and encourage exporters to voluntarily disclose. There are clear benefits to voluntary disclosures. Criminal charges are very unlikely to be imposed if you voluntarily disclose. Moreover, disclosures result in lower fines. Over the past 5 years, disclosures are up by 50%, and we hope this trend continues.
Finally, a word about the Export Administration Act – the EAA – which has been in lapse since August 2001. The President's Commission on the Intelligence Capabilities of the United States Regarding Weapons of Mass Destruction recently called for Congress to renew the EAA, stating that “BIS needs stronger law enforcement powers, something it has lacked in recent years, mainly because some of BIS's law enforcement authorities lapsed when the Export Administration Act expired.” The Administration agrees that it is important to renew the EAA so that our export controls are not based on emergency authorities. Legislation should provide enhanced export enforcement authorities, such as undercover and wiretap authority for BIS Special Agents, and increased penalties for violations. Enacting permanent legislation would also be consistent with U.N. Security Council Resolution 1540, which calls on all countries to establish and maintain effective export controls. It thereby would enhance the ability of the United States to advocate that other countries enact similar legislation. We will continue working with Congress to make progress so that we may meet the challenges facing us today in strategic trade policy.
In conclusion, the specific provisions of dual-use export controls will always evolve as the international political and strategic situation changes. What will not change is our approach. Under this Administration, we will always protect national security and foreign policy interests while avoiding unnecessary burdens on the U.S. export community. Again, thank you for the opportunity to speak with you today.