Editorial Analysis by John Black
I am old. I can’t even count the number of times I have heard well intentioned high level government officials tell us that they plan to make significant reforms in the US export control system. Some government officials have told me that they are going to make the system so transparent and user friendly that they will put consultants like me out of business.
It’s been 26 years for me in this business and numerous government pledges to make things better. As far as I can tell, I am still here and there is still a huge demand for assistance in dealing with the infinite number of problems that US export controls create for companies who try to comply with the rules. Yes, this reform could be different.
So, I apologize (for a change) in advance for being the cynic as a good number of my peers spout enthusiastically about Defense Secretary Gates’ call for comprehensive reform to the US export control system. Reform certainly makes sense. Comprehensive reform could both promote national security and make compliance a bit easier for companies.
Comprehensive reform is highly unlikely. Adjustments to certain aspects of US export controls might be the better-than-nothing result we should hope for. And, changes to the current system that will create a lot of extra work for us without actually improving anything is what we should fear. (Well, this last scenario will probably be a gold mine for my seminar and consulting businesses.)
On behalf of the Obama Administration, Secretary Gates called on Congress to make sweeping reforms. There are four pillars of the reform:
1) Create a single export control list.
2) Create a single export licensing government agency.
3) Designate a single agency to coordinate the currently dispersed export enforcement resources.
4) Create a single, unified IT infrastructure for the US export control system
Items 1 and 2 seem to be the focus of most of joyful exporter discussions. Item 3 seems to be closely related to item 2, except I guess the licensing agency and the enforcement agency could be separate agencies. Item 4 is the least talked about and would be a relatively natural consequence of item 2.
I once again apologize in advance. Something I do now that I am old. Here is my editorial view of the 4 pillars.
Single Control List
The number of export control lists we have is not as big a problem as a) the US imposing severe military product type controls on non-military products such as satellites; and b) the difficulty determining where an item is controlled.
We could get a single list and keep those two problems. We could have bombs, satellites, and machine tools on the same list. But if the new single list says that satellites are subject to the same ITAR-type requirements as bombs, we have we gained nothing. If in the current structure, satellites were moved from the ITAR to the EAR but that move included creating EAR MLAs, TAAs, exclusion from the de minimis rule, etc. for satellites and the US continued to deny all licenses involving countries such as China, the list switch doesn’t benefit satellite companies.
READ THIS: And, worse yet, unfortunately, a single list could increase the risk that items currently controlled by the friendly EAR rules could be made subject to ITAR type export controls. Right now, the EAR structure is not set up to impose ITAR type controls on, let’s say, a super duper machine tool. But if both military and commercial items exist in the same list, that implies that some items will be covered by ITAR type controls and some will be covered by EAR type controls. So, if that machine tool is covered by regulations that include ITAR type controls, the government could much more easily apply ITAR type controls to machine tools because the ITAR type controls would be part of the regulations that apply to that single list.
On to problem b): A significant problem companies face is determining whether an item is controlled by the ITAR’s USML or the EAR’s CCL. (The fact that companies might not like their commercial items being subject to ITAR-type controls is discussed above.) For example, let’s say a single list merges renames ITAR Category XI as ECCN 6A881 and Category XII as 6A882 and puts those ECCNs into EAR Category 6. If the new ECCNs use the words from the former ITAR categories, then the difficulty in figuring out whether something is controlled by 6A881, 6A882 or 6A003 is the same as the current problem of figuring out if something is Category XI, Category XII, or 6A003.
The difficulty in determining jurisdiction/classification is due to the words used in categories XI and XII—these words are sometimes ambiguous and open to interpretation, and perhaps that is a naturally unavoidable problem that a single control list will make neither better nor worse. But a bigger problem might be the fact that DDTC is willing to say an item is controlled by categories XI or XII even if there are no words in the ITAR that says that item is controlled by either of those categories. (The ITAR says DDTC can put USML controls on things not mentioned in the USML, and DDTC says the USML is “illustrative” of the things subject to ITAR jurisdiction.) So, some exporters live in a world where DDTC imposes ITAR controls on a thing not described by the ITAR—that is a world where “white” might mean “black” so some companies live in fear that their product, that they treat under the EAR could be the next “QRS-11 case,” a case where DDTC imposed ITAR controls on a commercial aircraft part, just because it wanted to. So, some companies err on the conservative side and treat items as being ITAR controlled because maybe DDTC would want to control them. Since the new regulations that apply to the single list will be able to apply ITAR-type controls to some items and EAR-type controls to other items, the implications of making the wrong classification decision in the single list could be as serious as the current risk associated with making the wrong ITAR vs. EAR jurisdiction determination.
But, at least, if you classify an item as being 6A003 when, in fact, the government thinks it is 6A882, you won’t make the current mistake of getting an EAR license for an ITAR item. But the new single list rules could still impose an extremely harsh penalty if you export a 6A882 item under the 6A003 rules—say you export a 6A003 item under an EAR-type license exception to China when in fact it is subject to ITAR-type military rules.. The penalties might be described in a different way, but why would we assume that mistake will be subject to lesser penalties?
If there is going to be a single control list, there probably will first have to be a single agency. Some agency will have to take the lead in combining the control lists and the regulations that go around them. If that single agency is transparent, customer-service oriented, efficient, and friendly, life will be good. If that single agency is the opposite, life will be bad. I won’t make any stereotypical statements about the current State and Commerce department export licensing agency strengths and minuses.
If I am a company who exports only items classified as 9A991 and EAR99, the last thing I want is a single agency and a single set of regulations because I am thinking that things can only get worse than they are now. If I am a company who makes satellites, maybe I think a single agency can only make things better. But, ultimately, it is the rules and policies that are the issue, not the number of agencies who administer them. Sure, at the margin a single agency may improve consistency of interpretation (perhaps) and there might be benefits to the one-stop-shop export licensing agency. But, it is ultimately the regulations, rules, policies and procedures that are the biggest issue, not the number of agencies involved.
And I didn’t even talk about the fierce turf wars that will be involved in deciding what government department gets to have the single export control agency. The turf wars make take so long that by the time they are resolved, President Palin won’t favor the single agency idea anyway.
Don’t get me wrong. I support export control reform. And I know that reforms, if possible, could enhance our national security and make compliance a bit easier for exporters.
Obama’s reform plan is based on good ideas. I see the biggest challenge as being reforming the rules and policies that underlie the multi-control list and multi-agency structure we have. So many organization, agencies, and people have a vested interested in the current rules and policies—maybe of those entities and people created the system we have now, and they did it for what they see to be good reasons. And those entities, even at the lowest level of government, have an enormous capability to prevent real reform, even if the White House supports reform. (Remember when President Clinton’s Administration announced the Defense Trade Security Initiative and decided to create the special bulk ITAR authorizations (“Global Project,” etc.) for certain trade with our allies? DDTC ended up setting up those bulk authorizations in a way that no company wanted to use them. To prevent the White House from reforming the ITAR, DDTC had to implement the idea, but DDTC maintained the status quo by implementing that reform idea in a way that effectively blocked reform. We did get the allies maintenance exemption out of that, which was a decent improvement, but not a sweeping reform.)
Export control reform is a great idea. It is long overdue. But pardon me for wondering if real reform is possible. Who among you remember these labels for past reforms: “China Green Zone,” “The Core List” (and “The Bikini List”), the Defense Capabilities Initiative, and the ever popular “Higher Fences around Fewer Products,” and, of course, the above mentioned “DTSI.”
When I use the word reform, I mean significant and meaningful changes to the current system, not just superficial changes made that result in marginal improvements. Marginal changes to the system are not reform. They are adjustments. Adjustments can be good, and they are certainly possible.
At the end of the day, the White House is going to have to invest a great deal of time, effort and political capital into achieving its objectives, and even more if those objectives end up being beneficial for national security and exporters. US companies will have to invest a great deal of their resources into this too if they want to get beneficial reform. I think ultimately, most companies believe they have better places to spend their government relations budgets and ultimately the White House and Congress will decide they have better places to spend their time. Many of those with vested interests in the current system do not have a better place to invest their time and resources and they are willing to fight a slow war of attrition against reforming what they have created.
I do not think significant reform will happen.
I hear that most people in Washington disagree with me. Somebody just told me that Washington insiders are convinced real reform will happen.
I rest my case.