Under Secretary Eric L. Hirschhorn Remarks
Trade Development Alliance of Greater Seattle
Seattle, Washington February 26, 2015
(As prepared for delivery)
Good afternoon. Thank you, Nelson for that kind introduction. I would also like to thank Samantha Paxton, Sam Kaplan, and the Trade Development Alliance of Greater Seattle for bringing us together today. The Bureau of Industry and Security values the dialogue we have established with the exporting community and groups such as the Trade Development Alliance.
When I was here four years ago to speak with the Alliance, I shared the Obama Administration’s vision of an Export Control Reform Initiative - to create an export control system that is responsive to the national security, technology, and commercial imperatives of the 21st Century. It is a pleasure to be here today to bring you up to date on the status of the initiative as well as share recent export control policy changes for several countries, including heightened sanctions for Russia and the Crimea region of Ukraine, and export control policy developments involving India and Cuba.
Four years ago, we were at the beginning of a massive list review exercise to focus controls on the most sensitive items while facilitating exports to allied and partner destinations. My department and our counterparts across the U.S. Government have been hard at work for over four years on this initiative. Some of you may be familiar with the reform initiative but let me first provide a brief overview for you before I share our successes to date.
President Obama announced the initiative in August 2009 to update the United States’ Cold War-era export control system to one that addresses today’s national security threats and economic opportunities. ECR is fundamentally a national security effort, intended to achieve greater regulatory efficiency and rationality, and to focus controls on the most significant items and destinations—higher fences around the most sensitive items.
Export control reform: (1) improves our interoperability with our close friends and allies; (2) reduces the current incentives for non-U.S. manufacturers to "design out" controlled U.S.-origin parts; and (3) focuses our limited resources on the threats that matter most. It also eases the licensing burden on U.S. exporters.
The legacy export control system is not responsive to current threats and the emerging challenges of the 21st century; plus it tries to protect too much. That in turn has diminished our ability to focus on the most important national security concerns. For example, under the State Department’s International Traffic in Arms Regulations, or ITAR, a bolt for an F-16 fighter jet is controlled pretty much the same as the F-16 itself. 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?
As I mentioned earlier, when I was last here, we were at the beginning of a massive review list exercise to clarify and rationalize the two U.S. 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, the USML, to identify those defense articles that continue to warrant the strict, one-size-fits-all controls of 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, or EAR, and Commerce Control List, or 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 are ITAR-controlled.
Because Commerce’s EAR allow for country-based exceptions as well as distinctions based on the technical specifications of an item, the U.S. government can "right-size" controls on less sensitive military items, such as that bolt for an F-16, that are destined for our country’s allies and other multilateral control regime partners.
Implementing these objectives has required significant regulatory change. The Defense Department, with the cooperation of State, Commerce, and other departments and agencies, identified those defense articles on the USML that continued to warrant the strict, one-size-fits-all controls of the ITAR.
Over the past two years, Commerce and State have been transferring tens of thousands of less sensitive military items from the State Department’s USML to the Commerce Department’s more flexible Commerce Control List. These less sensitive military items are being classified under the new "600 series" on the CCL.
A significant element of the reform effort is to streamline exports and reexports to and among our country’s 36 closest NATO and multilateral regime partners. We have achieved that through the creation of License Exception Strategic Trade Authorization, or STA. When I last spoke to you, we had just published the proposed rule for STA.
License Exception Strategic Trade Authorization (STA) allows for former USML items to be controlled in a more flexible way for exports to countries that are friends and allies of the United States. In the case of the "600 series" items that have transferred from the USML to the CCL, companies are able to export items without a license using License Exception STA if the (1) ultimate end use is by the government of one of those 36 countries, (2) the item is for return to the United States, or (3) the item is to be used in connection with an existing license issued by the U.S. Government.
Commerce and State have published final rules covering 15 of the 21 categories of the USML, all of which are now effective.
In 2013, Commerce and State published final rules revising the controls on aircraft and gas turbine engines (particularly parts and components), military vehicles, vessels of war, submersible vessels, and auxiliary and miscellaneous items.
In 2014, we published another five categories – energetic materials, personal protective equipment, military training equipment, launch vehicles, and nuclear items. On November 10, 2014, the export control rule changes covering certain commercial satellites went into effect; satellites are not controlled under the new "600-series," but under the new Commerce categories 9x515. The State and Commerce final military electronics rules went into effect on December 30, 2014. This is expected to be the second largest transfer of military items, behind aircraft and associated equipment.
Last October, to mark the one year anniversary of ECR, the Department of State announced that they had seen a 64% reduction in licensing volume in the 13 implemented categories of the USML. This trend doubtless will continue as additional CCL categories become eligible for "600 series" licensing treatment and/or license exceptions.
BIS's Munitions Control Division, which licenses "600 series" items and reviews STA transactions, has processed approximately 11,000 licenses with an average processing time of under 15 days. Commerce exports for the first ECR rules involving aircraft and related parts, as well as gas turbine engines amounted to more than 53,000 shipments valued at approximately $2.1 billion.
Between October 15, 2013 and December 31, 2014, License Exception STA was used for exports of "600 series" items, valued at more than $300 million. Exporters also continue to make heavy use of other exceptions such as RPL, GOV, TEMP, and LVS.
ECR provides another important benefit for U.S. companies. Under ECR, the defense articles that are moving from the State Department to the Commerce Department’s jurisdiction will no longer be subject to the ITAR’s "see-through" rule. The controls of the ITAR, also called the "see-through" rule, contain no "de minimis" exclusion.
This means that any amount of U.S.-origin USML content incorporated into a foreign produced end item will render the entire end item subject to U.S. export and reexport controls.
The ITAR’s strict "see-through" rule has led foreign manufacturers to design and market their products as being "ITAR Free" which, in turn, has reduced U.S. sales of defense-related parts and components.
Now, under ECR, foreign-made items incorporating U.S.-origin 600 series content will not be subject to the EAR so long as the value of the controlled U.S. content represents 25% or less of the total value of the foreign end item and the foreign-made item is not destined to U.S. arms-embargoed countries (Country Group D:5).
This change will benefit U.S. defense companies because it will result in expanded worldwide market opportunities for U.S. exporters’ sales of defense items, under their new classification as "600 series" items. "ITAR Free" is no longer a marketing tool our foreign competitors can use to help "design out" U.S.-origin defense items that are now subject to the Commerce regulations.
Please note, however, that all "600 series" items destined for U.S. arms-embargoed countries (ITAR 126.1) have 0% de minimis level and are subject to the EAR, even when incorporated into foreign end items.
All "600 series" items will require a license when destined for China and are subject to a policy of denial, consistent with United States arms embargo policies [set forth in § 126.1 of the ITAR].
We are working with our colleagues at the Departments of State, Defense, and Homeland Security to reach consensus on proposed amendments to export controls on Category XII, night vision devices and sensors, and Category XIV, toxins and biological organisms. This spring, State and Commerce hope to publish proposed rules for these categories, which will also include minimal changes to Category XVIII, directed energy weapons.
We are also working with the Department of State on harmonized definitions of some of the most significant terms in our respective regulations, including "publicly available," "fundamental research," "technical data," and "export."
Commerce and State soon will be publishing a Notice of Inquiry to solicit comments from the public on the first implementation rules for ITAR Categories VIII and XIX, for aircraft, related parts, and gas turbine engines. This is an opportunity for you to tell us how the reform effort is going. We plan to publish a Notice of Inquiry for each of the other ECR category changes as we move forward in the implementation process.
Believe it or not, we’ve been busy with more than just reforming an antiquated export control system. Let me take a few minutes to bring to up-to-date on country-specific policy changes that have taken place over the past year.
On December 17, 2014, President Obama announced changes in our Cuba policy designed to provide U.S. support for the Cuban people. On January 16, BIS and the Treasury Department’s Office of Foreign Assets Control published regulations to implement the President’s policy. BIS’s changes include the creation of a new License Exception – Support for the Cuban People - that authorizes certain exports and reexports to improve living conditions, support independent economic activity, strengthen civil society, and improve the free flow of information to, from and among the Cuban people.
We are working to further implement the U.S.-India Bilateral Understanding that was announced by President Obama and India's Prime Minister Singh in 2010. In November 2014, India imposed reexport controls on U.S.-origin items controlled for regional stability and crime control reasons. Accordingly, on January 23, BIS removed license requirements for certain items controlled to India for crime control and regional stability reasons. This rule furthers President Obama’s and former Prime Minister Singh's commitment to work together to strengthen the global nonproliferation and export control framework and realize the full potential of the strategic partnership between the two countries.
On January 25, 2015, President Obama and Prime Minister Modi issued the India-U.S. Delhi Declaration of Friendship, which builds on earlier strategic agreements and commits to elevate the Strategic Dialogue to a Strategic and Commercial Dialogue. This reflects both countries’ commitment to strengthen commercial and economic ties to advance mutual prosperity, regional economic growth, and stability.
Last October, in response to the Venezuelan military's violent repression of the Venezuelan people, BIS imposed new license requirements on the export, reexport, or in-country transfer of certain items to or within Venezuela when intended for a military end use or end user. This complements an existing U.S. arms embargo against Venezuela for its failure to cooperate in areas of counterterrorism.
In recent months, BIS and the Treasury Department’s Office of Foreign Assets Controls have implemented a number of sanctions to deter Russian conduct that violates international norms – specifically, to convince Russia to desist from its territorial claims against Crimea, interference in Ukraine, and potential misconduct elsewhere. BIS’s sanctions cover certain exports, reexports, and transfers to the defense and energy sectors, as well as certain transactions with specified foreign persons.
Most recently on January 29, BIS published a rule imposing license requirements, with a presumption of denial, for the export and reexport to the Crimea region of Ukraine of all items subject to the EAR other than food and medicine.
As sanctions continue, the U.S. Government is coordinating with our international partners on shared definitions, identifying items of strategic concern, and standardizing license decision making. We are prepared to impose additional sanctions if circumstances require. We are working to harmonize implementation of the Russia sanctions with our European and Asian allies.
Before turning to questions, I’d like to highlight the Administration’s commitment to small and medium-sized companies on other fronts.
Last year, the U.S. exported $2.3 trillion dollars of goods and services, an all-time high. Those exports support a total of 11.3 million American jobs at over 300,000 companies - 98 percent of which are small and medium- sized businesses. On average, export-related jobs pay 13-18 percent more than non-export-related jobs.
Trade agreements help unlock our export potential. 95 percent of our businesses' potential customers live outside the United States.
The President intends to aggressively pursue his trade agenda. That means working with Congress to pass a bipartisan Trade Promotion Authority bill. This legislation is critical in moving forward on job creation.
There is a lot of pressure from all sides on this issue, but we're comfortable that the agenda the President has laid out will unlock significant opportunities for American businesses to increase their exports and create jobs.
My remarks today underscore not only the deep commitment and demonstrated follow-through of the Obama Administration to Export Control Reform but also our export control activities across a broad spectrum of country policy issues. Our commitment to you, the business community, is to maintain an open dialogue so that you can stay abreast of these important issues and to reach back to us to provide your ideas and feedback.
I would be happy to take a few questions and welcome your comments.