Good morning everyone. Thank you, Senator Shaheen, for the introduction and for inviting me up here. It is my first trip to the great state of New Hampshire, but I can assure you that it will not be the last. I am so pleased to see so many people here on a Monday morning to hear about the Administration’s export control reform initiative. Now I know that this is a subject that might not be movie-plot material like some of the other issues in my wheelhouse – nuclear terrorism, biological weapons and anti-piracy efforts, to name a few, but I assure you that this is one of the most important things that we have been doing the last four years insofar as it is good for American national security, good for American business and the culmination of years of effort. It is has been work that has occurred mostly under the radar, so I am glad to be here to shine some light on what we have been doing.
President Obama came into office strongly believing that we needed to improve the outdated export control system in order to strengthen U.S. national security and advance U.S. foreign policy interests. He also believed that we needed to create an efficient and predictable system using modern business practices and tools to help our exporters become more competitive now and in the future.
For decades, the U.S. export control system supported national security objectives by keeping our most sophisticated technologies out of the hands of Cold War adversaries. Our efforts produced significant successes; in many cases, the United States was the sole producer of many of those technologies and could control their export with relative ease. In the case of foreign producers of such items, the United States was able to work with their governments to similarly control these sensitive technologies.
Today, we no longer face a monolithic adversary like the Soviet Union. Instead, we face terrorists seeking to build weapons of mass destruction, states striving to improve their missile capabilities, and illicit front-companies seeking items to support such activities. To further complicate things, countries don’t always agree on the right approaches for addressing these threats.
In addition, the United States is not the only player on the court anymore. Today, cutting edge technologies are being developed at lightning speed in places all around the globe. To maintain competitiveness, many U.S. companies are partnering with foreign companies as they work to develop, produce, and sustain leading-edge military hardware and technology. And in many cases commercial technologies can be developed faster than military ones. Militaries are now using these commercial technologies, and the line between what is military and what is commercial has become blurred.
In the face of all these changes, our export control system failed to keep pace. Let me give you an example of what I am talking about.
As of 2009, the U.S. Munitions List or USML, administered by the Department of State, and the dual-use control list administered by the Department of Commerce had not been comprehensively updated since the early 1990s. I imagine we can all think of a few things that have changed since the era of brick-sized cell phones. Items on the USML required individual licensing for most countries. For example, if you wanted to export an F-16 aircraft, you were going to need a license for the aircraft, but you were also going to need licenses for any replacement nuts and bolts inside that F-16. After those licenses were obtained, you would need licenses for the conversations between you and the buyer about how to use that F-16 or the nuts and bolts – since they don’t really come with IKEA-style instructions.
Beyond all the steps involved, our system required us to spend as much time on proposed exports to our closest allies as we were spending on proposed exports to the rest the world. Further, the time devoted to protecting our “crown jewel” technologies, was the same as the time devoted to controlling the nuts and bolts of those technologies. By doing things this way, we were also stretching our enforcement officers thin and having them spend too much on little things and not enough time on the really important things. You can see how something like the engine on an F-16 and the windshield wiper might not require the same scrutiny.
All this led to the situation where, by 2009, our munitions licensing system was processing over 80,000 license applications per year. The military forces of our allies faced unpredictable and, in some cases, quite lengthy delays in their efforts to obtain U.S. defense articles – even when they were working alongside U.S. forces in theatres of conflict.
U.S. exporters were experiencing the growing efforts of foreign competitors to replace or remove U.S. defense articles from their products. By doing so, foreign companies could avoid having to deal with our licensing system, or obtaining our permission if they wanted to re-export a product that contains a U.S. defense article – even something as small as a bolt. The developing trend of avoiding the International Traffic in Arms Regulations, also referred to as going “ITAR-free”, is quite troubling.
I have a bit of show and tell that will show you the problem. This bolt came from a hardware store. This nearly identical bolt started life the same as its brother here.But then the company that makes the hardware store bolt milled it down a bit for use in holding spacecraft on transport devices, as they move to launch sites. That little bit of milling landed this bolt on the USML. Now, if a company wants to build and export a spacecraft and they use this bolt, they will have to get a license – even if nothing else in the whole spacecraft is a U.S. “controlled item.” With the expansion of commercial activity in space, we don’t something like this little bolt getting in the way of our businesses.
Given all these issues, in August 2009, President Obama directed a task force to review the whole export control system and recommend how to modernize it in order to better address current threats, and today’s rapidly changing technological and economic landscapes. The task force included representatives from the Departments of State, Defense, Commerce, Energy, Treasury, Justice, Homeland Security, and the Office of the Director of National Intelligence.
The task force completed its initial review of our export control system in early 2010, finding numerous deficiencies. In addition to the problems I mentioned previously, agencies had no unified computer system that let them communicate effectively with each other, let alone with U.S. exporters. Incredible, right?
Licensing requirements were not only onerous, they were confusing, which delayed U.S. exporters and made them less competitive in overseas markets. The task force also found that this confusion could help those who might evade our controls. The task force also noted enforcement activities that were ineffective and wasteful, mostly due to poor communication among the various export enforcement entities.
To address these problems, the task force recommended reforms in four key areas:
• Licensing policies and procedures
• Control lists
• Information technology
• Export enforcement
President Obama directed agencies to implement the recommendations in three phases. In the first phase, we made core decisions on how to rebuild our lists, recalibrate and harmonize our definitions and regulations, update licensing procedures, create an Export Enforcement Coordination Center, and build a consolidated licensing database. Agencies are now in the second phase of work, which is the implementation of all of those decisions. State, Commerce, and Treasury will adopt the Department of Defense’s secure export licensing database – called “USXports” – as the initial step to creating that government-wide computer system dedicated to supporting the export control process. For our part, I am pleased to report that the Department of State will shortly be rolling out the new system for munitions licensing.
A lot of what we have been doing in Phase 2 has involved revising the U.S. Munitions List (or, as you probably call it, the USML) and the Commerce Control List (CCL). The purpose of this is to make sure that the items of greatest concern from a military perspective will remain on the USML, and be subject to the strictest licensing requirements, while items of less sensitivity will be moved to the CCL. I want to emphasize a key point: items moving to the CCL will remain controlled. They are not being “decontrolled.” It is only under specific circumstances that items will be eligible for export under Commerce’s more flexible licensing mechanisms. We are making tremendous progress in the effort to rewrite the USML categories. We have published twelve revised USML categories in the Federal Register in proposed form for public comment. The next one, Category XV on Spacecraft, will be published in the coming days. The proposed rules for the six remaining categories will be published for public comment shortly.
We have benefited significantly from this public review, which has included sharing the draft proposed rules with Congress before their publication. The inputs we receive complement the careful methodology that we are using to rebuild the lists. This has also brought Congress into the process earlier – a key feature of our improved Congressional notification process for list review and arms sale issues. This was a reform that we put into place last year.
Going forward, we will release the rebuilt export control lists in pairs. The first pair, Category VIII and Category XIX covering Aircraft and Engines respectively was released on April 16. There wasn’t a lot of fanfare or any parades, but there are businesses that will be able to export their goods more efficiently and enforcement officers who will be able to spend more time focusing on the really sensitive items. In July, we will publish final rules for Categories VI and VII – Vessels of War and Military Vehicles, as well as Categories XIII and XX – Auxiliary Military Equipment and Submersible Vessels. We will publish the other final rules on a rolling basis, with the goal of publishing the revised USML in its entirety by the end of this year.
In addition to revising the control lists, we are updating our regulations to help streamline the licensing process. For example, we published a new definition of “specially designed” on April 16. The former definition was never clearly defined in our regulations, so it was subject to a wide variety of interpretations. The new definition should make things run more smoothly. We will be revising the definitions of “public domain,” and “defense services”, and we are drafting new exemptions for replacement parts and incorporated articles. Now this comes up in the nuclear arms control and nonproliferation world sometimes and people wonder why definitions would matter, but for anyone out there who has ever written a contract, you know – and the lawyers know – how important definitions are. We also are revising and clarifying the exemption for exports made by, or made for, the U.S. Government. These rules will appear during the next several months.
In Phase 3, the Administration will work with Congress on legislation to conclude the reform initiative by creating a single export control agency and consolidate some of our enforcement units. We have much more work to do to complete our work in the second phase, so there are still a lot of decisions about how to approach that effort.
So with that, I will stop and take some questions, but I want to thank you for your support the Administration’s Export Control Reform initiative. Your input to this process has been invaluable, and I urge you to keep reviewing and commenting on the proposed rules in the coming months. We look forward to working with you as we continue to bolster our national security, strengthen foreign policy goals, and protect and increase American jobs through export control reform.
Thank you and thanks again to Senator Shaheen for inviting me here.