First, a word about the process. We received 12,650 applications from you last fiscal year -- an 18 percent increase over 1998 and the most since 1993 when we began major streamlining of the list. Of the nearly 12,600 we actually processed during the year, we approved 74 percent and denied 9 percent. (The remaining applications were returned without action.) That relatively high rate of denial is attributable mostly to applications for India and Pakistan, which also account for much of the increase in the licensing volume.
We also received 2,657 notifications of computer sales to Tier III countries (during calendar year 1999) under the National Defense Authorization Act of 1999. Of those, 116 were converted to licenses. We approved 21 of those NDAA licenses, denied 4, and returned 83 without action; 8 were still pending. That’s a denial rate of only about 3 percent. I should note that NDAA notices increased sharply in the last few months of 1999, rising from 35 notifications in January to 456 in December. The President's July 1999 decision to adjust the control levels which took effect on January 23 should reduce NDAA notices. So hopefully the increase will prove to have been a temporary "spike." It confirms the point, however, that if we do not continue to adjust computer control levels, we could quickly be inundated with notifications.
Certainly one of the major accomplishments of the year was our adjustment of the control levels for computers in response to dramatic increases in processing speeds and mass market penetration of increasingly powerful PCs. The individual validated license threshold was increased to 6,500 for military end users in Tier III on January 23 following a six-month waiting period required by Congress. In addition, we have made some processing improvements that will speed decisions on computers that still require an individual validated license. By doubling the staff handling computer cases, streamlining the standard conditions for these licenses, and other measures, we have already reduced the average processing time for these cases from 68 days to 45 days.
These revisions are based upon sound principles of market availability of computers and defense applications on which there is broad agreement, and which has depoliticized this process. We must be careful, however, to avoid applying this formula too broadly, too loosely, or too soon. To do so would damage the industry's credibility and risk re-politicizing these decisions. With that in mind, however, the Administration intends to make further recommendations on computer controls in June, and again in December, to reflect further changes in the computing capabilities of machines that will become available on a mass market scale.
In a similar vein, we were able to greatly expand the ability of U.S. manufacturers to export encryption products under license exception. As with computers, this was a recognition of the market availability of such products, including the growing availability from foreign producers. The changes in our regulations for both computers and for encryption reflect a successful effort to adjust our controls to the spread of the Internet and the growth of electronic commerce. Compare where controls were on these items just four years ago to the progress that has been achieved.
Although we have sought additional delegations of authority from other agencies, and have received a few, we continue to refer the vast majority of all applications -- about 86 percent last year -- to one or more other agencies for review. As result of both the increased volume and a slowdown in interagency response, our average processing time last year took an unfortunate jump from 33 days in 1998 to 40 days in 1999. Some of this increase in average processing time is attributable, we believe, to an increase in commodity jurisdictional disputes stemming from the transfer of satellites and related items from Commerce to State. Night vision devices and other sensors have been a particular problem, as illustrated by their use in such dangerous weapons as Cadillac automobiles.
Various components which are controlled because they are "space qualified" have been a particular problem for us and for industry. Some sixteen categories of these items were transferred from State munitions jurisdiction to Commerce in the late 1980's and early 1990's because, even then, they had come to be used more in civilian applications than in satellites. We were not able to agree on the disposition of those particular items when we issued the regulations transferring satellites and "related items" last year, and there has been substantial confusion about them since. I’m pleased to announce today that the National Security Council will make decisions on these items by the first week of April. While this review is underway, these items remain under Commerce jurisdiction, and a notice to that effect went up on our website today. Licenses or license exceptions that have been issued for any of these items by either State or Commerce remain valid. But all licenses or commodity classification requests should be submitted or resubmitted to Commerce until this review is complete. We will use the usual means -- Web-site and the Federal Register -- to inform industry of any changes after April, and we hope this clarifies the licensing requirements in the meantime.
One of the most important questions from you is: "Never mind the averages, what about the more difficult cases -- the ones that take ninety days or more?"
For the answer to that you need to look at the cases that were escalated to the OC and the ACEP. We had such 723 cases this year. Of those, we approved 65 percent and denied 15 percent. An analysis of these cases leads to several conclusions. They are mostly capital equipment -- not end products. They are mostly for China, India and Israel. Many involve facilities that are known to have both military and civilian production, but where the track record of civilian production is not always well established.
The reduction of controls on mass market items increases our attention to exports of items that are not mass market -- that remain possible to control because they are not so pervasive, but are produced and exported in small numbers. That boils down to capital equipment, and it is a fact that we are concentrating more of our attention on capital equipment, especially to Tier III countries. Over half of all license applications -- and nearly all of the most controversial ones -- now involve capital equipment. That's another indication, I think, that we have eliminated most controls on mass market consumer products.
The much better news on the processing side is that we no longer have any backlog or delay -- none, as in "zero" -- in entering new applications into the system. We attribute this to your increasing use of SNAP -- our Web-based application system. While there have been a few glitches with SNAP, you have made it your preferred route for applications, eliminating -- hopefully for good -- the paper backlogs that we have occasionally experienced at the "front end" of the process. Since January 1, for example, 50 percent of new applications have been submitted through SNAP.
Of course, most supporting documentation and the like must still be submitted on paper. One of our goals for the current fiscal year is to develop a system that will allow you to submit this supporting documentation electronically, making it -- in turn -- easier for us to store, retrieve and use that material.
More good news is that, over the past six months, we have been able to respond to and clear away most of the Freedom of Information requests that were weighing heavily on us at this time last year, although we are still responding to several GAO and IG investigations, and some of the FOIA cases are in the courts where we could face further information requests.
Finally, "deemed export" licenses -- another category of particular concern to industry -- remained constant last year at about 800. By raising the licensing thresholds slightly, and obtaining some delegations of authority from other agencies, we were able to reduce the average processing time for those licenses from 54 days to 48. The changes we have made in the new encryption regulations, which allow U.S. firms to make "deemed exports" of encryption technology to their foreign employees without a license, should greatly reduce the number of these licenses -- perhaps by as much as a third -- and set a good precedent for this category of controls.
Now let me turn to some policy changes we have made, mostly reflecting changes in trouble spots abroad. Although it affected relatively little trade, we made several adjustments in the regulations in response to the situations in Bosnia, Serbia, Kosovo and Montenegro. Emergency licenses were needed from time to time to get commercial items to U.N. and NATO forces there. There is now, of course, an exception for Kosovo and Montenegro from the general sanctions against the former Yugoslavia.
We have continued our existing favorable export policy toward Hong Kong as stipulated by the Hong Kong Policy Act of 1992, while closely monitoring its autonomy and the effectiveness of its export licensing system upon which our policy depends. We are having regular exchanges of information and personnel with Hong Kong and continue to have a high level of confidence in the integrity of the Hong Kong trade system. Lacking an export control policy like Hong Kong's, however, neighboring Macau, which reverted to Chinese control in December, will be treated the same as China.
Our policy toward India and Pakistan, of course, has required considerable effort and attention. In response to consultations that we and the State Department have had with India on export controls and other issues, we recently removed 51 entities from the sanctions list. I am pleased to announced today that decisions have subsequently been made to restore license exception "CTP" for computers for India and to move from a presumption of denial for EAR99 items to a presumption of approval for entities still listed. Regulations to that effect will be published very soon.
Multilateral cooperation remains an important part of our policy and our activities. The BXA management team attended the year-end 1999 plenary meetings of the Wassenaar Arrangement. In the technical negotiations leading up to that meeting, the member countries agreed to the new threshold for microprocessor controls at 3,500 MTOPs [and computers at 6,500]. Other progress, however, was stymied by the unwillingness of the Wassenaar partners to expand reporting on conventional arms sales and to strengthen the denial notification procedures. We are currently beginning our review of proposals within the U.S. government for Wassenaar initiatives for the coming year. I came away from the meetings impressed, on the one hand, by the extent of underlying support for export control cooperation among most of the members, but also frustrated by the ability and determination of just a few governments to hold things back. The sharp difference between the United States and the rest of the Wassenaar members with regard to export control treatment of China remains another obstacle to cooperation.
Cooperation in the other multilateral regimes -- the Nuclear Suppliers Group, the Missile Technology Control Regime, and the Australia Group -- remains strong, with more effective "no undercut" compliance and harmony of licensing practices. It is worth noting, in particular, that the U.S. Enhanced Proliferation Control Initiative (EPCI), once a unilateral U.S. practice, is increasingly being adopted by other nations in the form of "catch all" controls especially on items of concern for nuclear or missile purposes. This is a significant export control cooperation development which is too often overshadowed by the shortcomings of the Wassenaar Arrangement.
I should say just a word about the progress of our industrial inspection program under the Chemical Weapons Convention. We recently published interim final regulations governing these inspections, which BXA will manage and as the "host team" escorting the international inspectors and assisting the inspected companies comply with the Convention and U.S. laws authorizing these inspections, but also protecting their confidential business information. The good news, however, for exporters who are not affected by the CWC is that Congress did earmark funds for that purpose, and therefore we are not forced or tempted to divert funds needed for export license processing. We are holding outreach seminars around the country for the chemical industry to enable them to comply with these new requirements, including a special half-day devoted to that here at Update. With sufficient funding, we expect to increase the number of inspections we will be able to host to as many as three or four per month in 2001.
I should also mention our activities as the Commerce Department’s focal point for issues relating to the health and competitiveness of the U.S. defense industrial base. Our efforts include assisting American companies in diversifying from defense to commercial production and markets; providing government-to-government advocacy for the sale of U.S. weapon systems to our allies; analyzing the impact of export controls on key industrial sectors; and conducting primary research and analysis on critical technologies and defense-related sectors. Our studies have helped support interagency discussions in Washington to de-control items from licensing requirements, and our advocacy efforts have generated billions of dollars of defense sales in Australia, Kuwait, Singapore, South Africa, the United Arab Emirates, and many other countries.
We are also helping to implement the new "globalization" recommendations announced by the Defense Department as a result of its recently completed "Defense Science Board Study on Globalization and Security." One of these initiatives is a radical streamlining of the munitions export control system managed by the State Department. We will be hosting a "Defense Diversification" panel later this afternoon on current defense industry initiatives which may directly assist your company in gaining access to foreign markets and redirect your capabilities. I encourage you to visit our web page for more information on all our programs, including those on defense initiatives.
To put this all in the context of total U.S. trade, exports to all controlled destinations continues to add up to about $20 billion. Adding in exports to India, Israel, and a few other destinations that are not generally controlled destinations but where we have sanctions or other restrictions, still leaves us dealing with only about 3-4 percent of total U.S. exports. We recognize, nevertheless, that these can be extremely important exports -- often market-opening exports -- for some companies, and that even occasional denials can quickly give ammunition and opportunities to foreign competitors by making U.S. suppliers appear unreliable. So we need to continue to make every effort to be certain that there are real and sound reasons for denials (as well as approvals), and not fall back on the misleading argument made by some of our critics that we are dealing with an economically insignificant little piece of the total world market here. In a competitive, globalized world, no market segment is insignificant. As our economic interdependence increases, especially in the area of joint defense programs and strategies, it becomes all the more important that we keep our controls focused on the truly most critical items and threats.
All of this activity, and particularly the successes, have been the result of group efforts and teamwork within BXA. But there have also been a number of extraordinary individual efforts that have produced some of the better results. I want to acknowledge just a few of them. The progress we have made on encryption control policy is attributable in no small part to the efforts of Jim Lewis, our director for Strategic Trade and Foreign Policy Controls. Jim's understanding of the technology, interagency contacts, and sheer diligence and persistence in the policy debates and formulation of the implementing regulations has been extraordinary. He deserves significant credit for the policy that has now emerged. Likewise, my Deputy, Iain Baird, has worked very effectively on the microprocessor and computer control levels and issues, and deserves much of the credit for those results. Finally, as always, I want to acknowledge Eileen Albanese for putting together this excellent program.
In April of 2002 the Bureau of Export Administration (BXA) changed its name to the Bureau of Industry and Security(BIS). For historical purposes we have not changed the references to BXA in the legacy documents found in the Archived Press and Public Information.