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8 December 1998
Source:

USIS Washington File
_________________________________

07 December 1998

COMMERCE DEPT.'S REINSCH ON EXPORT CONTROLS

(Cites "uphill battle" with Congress tied to China)  (4100)

Washington -- Under Secretary of Commerce William Reinsch says he will
resist any attempts in the next Congress to remove export control
licensing authority from the U.S. Department of Commerce.

In December 7 remarks to a Practicing Law Institute seminar, Reinsch
said congressional opponents of Clinton administration China policy
should debate that policy, not tamper with the licensing process.

"Using the licensing process as a proxy for debate leads to a
lose-lose outcome for all of us," Reinsch said. "It will not change
our policy, but it will destroy an efficient, effective system."

Under investigation by several congressional committees over satellite
and computer exports approved for China, Reinsch's bureau has spent an
enormous amount of time collecting and forwarding hundreds of
thousands of documents, some nearly a decade old, slowing down its
regular work of processing license applications.

In the past two years, Congress has reversed two key administration
decisions by returning export-control licensing authority for
satellites from Commerce to the State Department and by reimposing
stricter controls on computer exports to 50 countries.

Reinsch spoke in defense of President Clinton's export-control policy,
which emphasizes that keeping U.S. high-tech industries competitive is
essential for national security as well as U.S. economic performance.

That policy has meant changing regulations as technology and foreign
relations evolve, he said.

"We have worked hard to adapt our policies and procedures to these new
realities, but we are finding, frankly, that it is an uphill battle as
we contend with those, primarily in the Congress, who do not
understand these changes and respond to them by trying to return to
the simpler era of the cold war and a single adversary," Reinsch said.
"Only this time it is China."

Following is the text of Reinsch's remarks as prepared for delivery:

[Compare with Reinsch address to PLI of December 8, 1997.]

(begin text)

KEYNOTE ADDRESS
UNDER SECRETARY WILLIAM A. REINSCH
BUREAU OF EXPORT ADMINISTRATION
U.S. DEPARTMENT OF COMMERCE

PRACTISING LAW INSTITUTE
COPING WITH U.S. EXPORT CONTROLS
DECEMBER 7, 1998

Introduction

Good morning. I am pleased to be back with PLI once again to discuss
the direction of the administration's export control program. I
believe this is the fourth time I've been privileged to be with you.

Accelerating Global Change

This administration's stewardship of export controls has occurred
during a period of unprecedented political and economic
transformation. We have worked hard to adapt our policies and
procedures to these new realities, but we are finding, frankly, that
it is an uphill battle, as we contend with those, primarily in the
Congress, who do not understand these changes and respond to them by
trying to return to the simpler era of the cold war and a single
adversary. Only this time it is China. I will return to that
challenge, but let me begin by commenting on some of the changes we
will have to deal with as we head into a new century.

The most important was laid out by President Clinton in his speech
commemorating the 50th anniversary of the GATT when he said "economic
globalization is not a policy option; it is a fact." More efficient
modes of transportation and communication, the internationalization of
capital flows, the development of the information-based economy, all
work together to transform the traditional, national economic system
into one which is truly global -- where capital, ideas, goods,
technology -- and increasingly labor -- all flow across borders.

This means that companies have new choices. They can build,
manufacture, produce and sell in multiple locations all over the
world. They can locate their R&D facilities wherever they wish and
often separate from their production facilities. They do so because
they can, because they have to -- as a condition of doing business
somewhere -- or because it is cheaper or more efficient. It is also
true that the fact that we have fewer adversaries today than during
the Cold War means that companies have new markets with expanded
international demand for their products -- even though we have placed
half the world's population under sanctions of one sort or another.

Second, countries have more choices. With more competition and more
sources of products and capital, they can keep companies out or pull
them in with inducements or threats, playing one supplicant off
against the other.

Third, if ever the U.S. had a monopoly on technology, that is no
longer so. Technology has joined land, labor and capital in the
Ricardian equation of comparative advantage, and it is the most
fungible of these factors of production, residing as it does in books,
blueprints, diskettes, our workers' brains in the form of know-how.
The diffusion of technology as well as the rapidly growing cost of
state-of-the-art production facilities in a growing number of high
tech sectors means that joint ventures are the economic and political
reality of the future. Going it alone is too expensive and too
isolating in a global marketplace.

Fourth, the line between military and civilian goods is increasingly
fuzzy because of the military's growing reliance on commercial
off-the-shelf technologies for reasons of cost, quality, and speed of
procurement. As our military's use of civilian high technology to meet
a wide range of needs expands, it demands that our industries be on
the cutting edge. That, of course, takes money, which means our
companies have to be profitable.

And the reality, of course is that while the Defense Department relies
on a strongly civilian high tech sector to continue to develop and
manufacture new and better defense products, it does not buy enough
itself to keep them healthy. Instead, in a globalized economy, exports
have become the key to growth and good health and, in turn, to a
strong defense. For example, in the computer and satellite industries,
between 50 and 60 percent of all revenues come from sales outside the
U.S. Thus the equation is simple: exports equals healthy companies
equals strong defense equals improved national security.

While pursuing the benefits of a global economy by having top-notch
high-tech industries is very much in the interest of economic growth
and jobs, it is also entirely in our national security interest as
well. And it is our national security priorities that form the basis
for our export control system.

That means we must continue to work multilaterally in tying to prevent
bad actors' acquisition of high-tech tools. But we fool ourselves if
we think export controls alone can stop the spread of high technology,
and we underestimate the resistance we will encounter from other
nations who accuse us of unilaterally trying to hold back their
economic growth and entry into the global information age. Working
with the international community to develop consistent export control
policies continues to be the only sure way to accomplish our
nonproliferation goals.

Following the dissolution of the Soviet Union, the United States and
its western partners no longer target the Warsaw Pact states and
instead seek to expand rather than restrict high-technology trade with
the East. Our interest is to bring these countries into the
international economic and political systems. That means helping them
end their economic isolation and integrating them into western
economic structures. That means trade -- not just because it is good
for us economically, but because it is good for our collective
national security as well.

To that end BXA works closely with foreign nations to encourage strong
export control programs. Over the past several years we have helped
former Soviet Bloc states draft laws, obtain and install hardware and
software to maintain a control program, train licensing officers,
enforcement agents, and border control officials, and prepare to
adhere to international regimes. The result will be better global
controls which will benefit all of us.

Accomplishments

When I first met with you several years ago, I laid out our goals for
reform, streamlining and liberalization to deal with these changes.

The good news is that many of these goals have been met. The bad news
is that there are attempts to roll back those hard-fought changes and
return us to a darker era that will not only hurt us economically but
will ultimately harm our security as well. Even so, we are not
standing still, and I would like to take a few moments to comment on
our successes, our plans, and what we hope will be unsuccessful
efforts to roll them back.

Process Reform

As you know, we've made a great deal of progress reforming our
process; yet much of that is imperiled by congressional investigations
from two perspectives. First, the sheer volume of demands for
documents and information has slowed the licensing pace to a crawl as
licensing officers in both Commerce and Defense spend their time
reviewing old files and rounding up documents, some of them as much as
eight years old. While we have for the time being put off the threat
of actually having to close down, we continue to lag behind the
standards of the Executive Order, and with the six inspectors general
investigation gearing up, there is no relief in sight.

Second, I anticipate that these investigations will lead to efforts to
move the licensing process from Commerce to some other place.
Obviously, we will resist that. Some 95 percent of what the licensing
agencies do collectively is non-controversial and handled properly by
consensus at the working level in a system that is designed to be
transparent, responsive to the applicant, and efficient. Changing a
system that works well -- when we are not buried in congressional
requests -- does a disservice to exporters, to business generally, to
our goal of competent government, and, most important, to our national
security.

More important, such proposals divert attention from the real issue,
which is not about the licensing process but about licensing policy --
specifically our policy toward China. There are members of Congress
who oppose the President's policy of constructive engagement with
China and instead would treat them as the Soviet Union of the next
century. I believe they are wrong, but it is an issue worthy of
debate. Using the licensing process as a proxy for such a debate leads
to a lose-lose outcome for us all. It will not change our policy, but
it will destroy an efficient, effective system.

Let me say on that latter point of effectiveness, you will no doubt
hear accusations that the system is less effective than in previous
administrations, and I will be prepared to refute those one by one.
Every administration has had its difficulties, dealing with the
realities and limitations of export controls, and this one is no
exception. But having been involved in this field for more than 20
years, I can tell you with some authority that this Administration's
record is better than most and our country is stronger for it, in
terms of both our security and our economy.

Now let me turn to some specific developments of interest to you.

Chemical Weapons Convention

Last October, the Congress finally passed Chemical Weapons Convention
implementing legislation that compels industry compliance with the
data declaration and inspection requirements of the treaty.

The Department of Commerce will be responsible for industry compliance
with the CWC and will promulgate two regulations in the near future:
an interim/final rule amending the EAR to address new export controls
and end-use requirements; and proposed regulations addressing data
declaration and inspection requirements. After finalizing the latter,
BXA will collect and forward industry declarations and escort
inspection teams at U.S. commercial sites. BXA is working with other
agencies, such as the FBI and the Defense Threat Reduction Agency, to
meet its CWC responsibilities and will ensure that staff is properly
trained and certified to maximize the protection of confidential
business information and minimize the costs and burdens of
implementation to industry.

We are also deeply engaged in the ongoing negotiations to strengthen
the Biological Weapons Convention by providing a similar inspection
system.

Wassenaar Arrangement

The Wassenaar Arrangement on dual-use technologies and conventional
weapons entered into force two years ago. Its lack of strong central
authority and its lack of explicit target countries, in contrast with
COCOM, is a reflection of the times -- the absence of a single large
threat and lack of agreement over the nature and seriousness of the
smaller ones. But that weakness has complicated its development and
made consensus among the expanded membership more difficult to
achieve. Nevertheless, its inclusion of conventional weaponry is a
major step forward. We have seen a marked improvement in the transfer
data reported by member countries, and I am confident that discipline
will continue to grow.

One of the things the CWC battle reminded us is that arms limitation
agreements rarely arrive fully grown and complete. They are
incremental. Establishing comprehensive adherence and compliance is an
ongoing process that takes years of patience and confidence building.
The result is worth waiting for, but the time spent getting there is
also not wasted. Even works in progress produce successes along the
way.

Domestic Changes

In past years you have listened to me tick off our domestic
accomplishments: licensing process reform, rewritten regulations,
control liberalizations on computers, software, semiconductors,
semiconductor manufacturing equipment, and oscilloscopes to mention a
few. 1997 and 1998 brought about some steps backward in our past
accomplishments, specifically in the areas of computers and
satellites. The implementation of the national defense authorization
act to more closely monitor certain computer exports to the People's
Republic of China and the former Soviet Union has increased our
licensing volume and enormously expanded our post-shipment visit
burden in a way that makes no enforcement sense. This increase will
not be offset by the handful of licenses we will lose with the
retransfer of satellites back to the State Department next year.

We are now processing some 10,000 licenses per year, and I do not
expect it to decline significantly in the future because I see few
high-volume areas ready for major liberalization. Our challenge will
not be to shrink it but to keep it from growing due to our failure to
keep pace with technology advances.

Encryption

Encryption continues to be a hotly debated issue. As I stated last
year, the U.S. continues to support a balanced approach to encryption
policy which considers privacy and commercial interests as well as
protecting law enforcement and national security interests.
Furthermore, we also remain committed to promoting the growth of
global electronic commerce through secure financial and business
communications.

Our position has always been to seek industry-led, market-driven
solutions to achieve a balanced approach. What has changed is the
direction where technology and the market place are taking us. Key
recovery technology remains a very important part of our policy;
however, over the past two years, we have recognized that key recovery
is not a solution for all problems.

That recognition, brought about in part as a result of our ongoing
dialogue with industry, has helped us also focus on recoverable
technologies that can enable law enforcement to continue its
authorized activities.

As a result, on September 16, Vice President Gore unveiled a policy
update, which will not end the debate, but which does include steps to
further streamline exports of key recovery products and other
recoverable products which allow law enforcement, under proper legal
authority, recovery of plain text.

The update also provides for 1) the export of 56 bit DES worldwide to
any end user under a license exception; 2) exports of strong
encryption to U.S. companies and their subsidiaries under a license
exception; 3) exports of strong encryption to the insurance and
medical sectors in 45 countries under a license exception; and 4)
exports of strong encryption to secure on-line transactions between
on-line merchants and their customers in 45 countries under a license
exception. This is consistent with our earlier announcement relating
to financial institutions.

This is an evolutionary process and we intend to continue our
dialogue. We must continue to adapt to changes, and we will review our
policies again within the year to determine whether further change is
necessary. We intend to publish regulations implementing the Vice
President's announcement this month.

With respect to developing a common international approach to
encryption policy, Ambassador David Aaron, our special envoy on
cryptography, is working with other countries to ensure that our
policies are compatible. He has found that most major producing
countries have public safety and national security concerns similar to
ours and are interested in developing a harmonized international
approach regarding compatible infrastructures for electronic commerce
and for a key management infrastructure. At last week's Wassenaar
Arrangement plenary session, the participating states approved a
number of changes to modernize and improve multilateral encryption
export controls. These changes removed controls on products below 56
bits and on certain consumer entertainment systems, such as DVD
products, and on cordless phone systems designed for home or office
use.

Most important, participating states agreed to extend controls to
mass-market encryption exports above 64 bits, thus closing a
significant loophole. This will enable governments to review the
dissemination of the strongest encryption products that otherwise
might fall into the hands of rogue end users.

For those of you deeply interested in the details of our encryption
policy, we have a specific session devoted to it tomorrow.

Enforcement

On the enforcement side our most significant accomplishment is the
framework arrangement we reached in June of this year with China on
end-use visit practices. The arrangement gives the United States the
ability to visit and inspect the locations of end-users of U.S.
dual-use exports. This is an important first step for increasing
confidence in the proper use of controlled items and one that we have
been seeking from China for 15 years. Until we reached this
arrangement, the U.S. had been able to conduct post-shipment checks in
all of our major trading partners except China.

Exporter of Record

In August, the Census Bureau published a proposed amendment to its
regulations relating to shippers export declarations. Census has been
concerned that forwarding agents, who complete and file a large
percentage of all SEDS, have not been getting complete and accurate
data from their customers. They are particularly concerned about cases
when the customer is the foreign buyer, as is frequently the case when
the sale is on an "ex works" basis or on other trade terms that make
the buyer responsible for arranging for the shipment and export
authorization. For BXA, the SED is an export control document, and we
want it to contain accurate entries regarding product classification
and the applicable license exception or other export authorization.

There was a deluge of public comment on the proposed rule, most of it
critical. The central concern was that the proposed changes would
impose new or uncertain responsibilities on sellers for the
performance of forwarding agents hired by buyers.

That controversy caught my attention. Census and BXA management
conferred and agreed to an approach that should produce good results.
We recognized that the SED rules in the Census and BXA regulations
must be coordinated and give common terms consistent meaning. Census
has agreed to put its changes on hold while BXA defines the changes
needed for export control purposes. The resulting proposed rules will
be published at the same time. I cannot now provide specifics as to
content or timing, but I can tell you that we are giving serious
attention to the public comments and to pinpointing the
responsibilities of the various participants to supply data in a way
that does not disrupt business practices and relationships.

Critical Infrastructure

You may recall that I mentioned critical infrastructure protection
when I spoke with you last year. In response to recommendations issued
by a presidential commission, the federal government has organized
itself to assure the security of the increasingly vulnerable and
interconnected infrastructures of the U.S., including
telecommunications, banking and finance, energy, transportation, and
essential government services. We understand that the private owners
and operators of these infrastructures are on the front lines of this
effort, and we are working in partnership with them both to deal with
threats and to develop new protections to make such threats less
credible. The Commerce Department has a large role in these efforts,
both as the lead agency for the information and communications sector
and as the home of the Critical Infrastructure Assurance Office, or
CLAD, which serves as the staff to the coordinator at the National
Security Council. The CIAO has coordinated the Administration's
initial efforts for a public-private partnership to assess
vulnerabilities to cyber and physical attacks, eliminate significant
vulnerabilities, develop plans for alerting and rebuffing an attack in
progress, and rapidly reconstituting minimum essential capabilities
after an attack. The CIAO has also initiated consultations with the
business community, state and local governments, Congress, and other
like-minded nations to maximize the alliance for our security.

I'm sure you will be hearing a great more about this in the future.

The Future

Despite -- or perhaps because of -- our progress in reorienting our
export control system, we are under fire at the same time major
challenges remain. As the pace of economic globalization quickens,
technology becomes more diffuse, and maintaining effective controls in
the face of widespread foreign availability becomes more difficult.

We do not have a monopoly on sophisticated technology, and countries
intent on developing weapons of mass destruction can usually find a
number of suppliers to choose from. We would be wasting our time if we
maintained long lists of items to control unilaterally that are
available from other sources.

As we seek to pare those lists down to what is truly critical, we now
have to contend with those who want to bring back the good old days of
the Cold War. The insidious problem of fighting those efforts is that
even if we win, we have used all our time and energy playing defense
and have not further advanced our policy,

If we can climb out of this swamp of investigations, we could conclude
the reform of our own procedures and concentrate on increasing
multilateral discipline.

Concluding our own reforms means focusing on true choke points and
eliminating controls -- and sanctions -- that do not advance our
security or policy objectives. Doing so will add to our credibility
with our trading partners, most of whom take a much more limited
approach. It also means making sure our controls take into account the
pace of technology development, particularly in sectors like computers
where a new overall is badly overdue.

In addition, we must provide more information to exporters and our
trading partners about problem end users. Most of our trading partners
have followed our lead and adopted a catch-all clause like our
enhanced proliferation control initiative. Making them work
effectively means sharing more information -- about end users, end
uses, potential for diversion, and so on. We have made some progress
on this issue, and we seek to expand the information we provide
exporters.

Finally, we must continue our efforts to reform sanctions policy in
both the executive and legislative branches. Sanctions have a role to
play. We are driven to them in cases like Cuba and Iran, often because
of the Congress, but also by our determination to condemn and modify,
if we can, behavior we find unacceptable. Increasingly, however, we
tend to think of them as a first resort rather than a last resort.
More than many other issues, however, the sanctions devil is in the
details. Badly implemented, these measures can cause enormous
uncertainty and difficulty for businesses -- even for those who do not
trade with these countries and have no intention of doing so. Careful
implementation will minimize the extraterritorial impact that so
irritates our allies.

We made progress this year in moving toward a healthier sanctions
policy, but we fell short of final congressional action. We need to
renew that effort in 1999. Our success will not only be a sounder
policy, but it will facilitate our efforts to obtain multilateral
consensus in other areas as well.

Conclusion

In closing, let me thank you for your understanding during these last
few years. The changes I've described have not come easily, and we
have tried very hard to consult with affected industries as we have
gone forward. Your cooperation and support in that is much appreciated
and continues to be needed -- particularly as we face a difficult year
ahead.

(end text)