“Too many bricklayers make a crooked wall.”
– A Chinese Proverb
In light of U.S. President Trump’s speech at the United Nations, regurgitating his ramblings of putting U.S. interests first, I’d like to revisit the U.S. effort to reform it’s export controls system (Export Control Reform Initiative – ECRI). The ECRI was launched in 2009, by former President Barack Obama, as a comprehensive review of the U.S. export control system.
The ECRI is another attempt by the U.S. to strike a balance between national security and economic competitiveness. Since the Second World War, the U.S. has attempted to strike a balance between the two, whereby export controls are one of the tools in the U.S.’ arsenal to maintain its national security. One could describe the debate on striking the right balance as building a wall; how high and how wide should the wall be?
Revisiting this issue is important given President Trump’s “America First,” policy, whereby the pursuit of U.S. interests are placed at the forefront of the current U.S. Administration. However, to a large extent, the success of the ECRI and the functioning of export controls in general, depends to a large extent to international cooperation. This policy has had an impact on security issues, which of course has impacted the field of export controls, e.g. the agonizing burden-sharing debate within NATO, but also the approach towards the nuclear deal with Iran. Given that economic competitiveness and national security are not mutually exclusive, it will take a combination of diplomacy and statesmanship to navigate the U.S. to strike the right balance.
Summary of the ECRI
Currently, the U.S., similar to close allies and other major powers (e.g. the Russian Federation), maintains security related trade controls regarding so-called strategic items. These are commonly known as export controls, which restrict the export in:
- military items, i.e. munitions;
- dual-use items (goods, technologies and software) – i.e. goods destined for the civilian market, but which have the potential for either military end-uses or the proliferation weapons of mass destruction (nuclear, chemical, and biological);
- certain nuclear materials and technology; and
- items and technologies which facilitate the deliver of weapons of mas destruction – e.g. the missile technology.
U.S. export controls are also used to restrict exports to certain countries on which the United States imposes economic sanctions (e.g. Iran and North Korea).
Since 1979, the U.S. has attempted to reform the landscape of its export controls. This is because the structure and execution of U.S. export controls have come under pressure given their byzantine character. Even at the height of the Cold War, certain aspects of the U.S. export control system was subject to a yo-yo of criticism – as being either too or insufficiently rigorous, obsolete, and/or inefficient.
The current U.S. export control system is an opaque structure, which contains a myriad of different licensing and enforcement agencies. Exports of dual-use items — as well as some military items—are licensed by the Department of Commerce, munitions are licensed by the Department of State, and restrictions on exports based on U.S. sanctions are administered by the ubiquitous U.S. Department of the Treasury.
For instance in 2010, while expounding the blueprint of the ECRI, former Defense Secretary Robert M. Gates described the bureaucratic structure of U.S. export controls as a “byzantine amalgam of authorities, roles, and missions scattered around different parts of the federal governments.”
In the same year, then-Defense Secretary Robert M. Gates went on to outline the blueprint for a new system based on four singularities:
- a single export control licensing agency for the three-main security related trade controls, i.e. dual-use items, military items, and U.S. economic sanctions and embargoes (see Basic overview U.S. Export Controls)
- a unified control list (i.e. one list of items subject to U.S. export controls)
- a single license and enforcement coordination agency, and
- a single integrated information technology (IT) system.
The ECRI would be implemented in three phases (see below). The main thrust of the ECRI is probably updating and modernizing of the dual-use (CCL) and military/ munitions control (USML) lists. This often referred to as the rationalization of the control lists. Further, the Obama Administration did not provide any details for the single licensing agency, although it did lay some of the required foundations for such an agency – e.g. developing a consolidated screening list.
How High and wide should the wall be?
In the debate to reform U.S. export controls, most relevant to us since 1979, parties generally fall into two camps. Firstly, those who believe that (further) liberalization of export controls may compromise U.S. national security interests; and secondly, those who wish to liberalize such controls in order to promote U.S. exports to boost U.S. national security.
However, analyzing export control reform is not that simple, given that national security and trade are not mutually exclusive. In the context of the ECRI, the balancing act basically boils down to the question how high and how wide should the wall be (i.e. the cordon) surrounding export controlled items.
The two sides of the debate readily agree that the exports of goods, software and technologies which threaten U.S. national security and foreign policy goals, e.g. military or dual-use items which can enhance the proliferation of weapons of mass destruction, need to be controlled.
An example of this is North Korea’s controversial nuclear program, which unnecessarily continues to raise the adrenaline levels in Washington. Another example of this debate, is the ongoing debate within NATO allies regarding their defense expenditures, which President Trump has again confronted U.S. allies with. Although this debate is not usually equated with export controls, it is an illustration of the debates within many NATO member states regarding how to strike the balance between national security and trade.
Those favoring liberalizing controls, primarily representatives of U.S. industry, cite that too strict export controls are a security threat to America. These argue that a healthy and competitive U.S. economic base is a fundamental prerequisite to U.S. security and military preeminence. They argue that too strict exports controls, especially if these are unilaterally imposed, can be detrimental to the U.S. economy and American companies, which can lead to loss of market share, loss of competitiveness and erosion of U.S. jobs. As a result, too strict controls threaten to dislodge the U.S.’ technological supremacy in those industries which underpin America’s military dominance. As such, the export controls system needs to be overhauled.
Those supporting the national security approach, believe that security concerns must be paramount in the U.S. export control system and as a result, they view export controls as an potent tool to safeguard U.S. military supremacy and against those who proliferate weapons of mass destruction which threaten the security of the U.S. As result, their approach can be described as “a gram of prevention is worth a kilo of cure.”
Controversies have arisen with certain exports, e.g.
- “hot-section”aerospace technology,
- the effectiveness of multilateral export control regimes,
- the U.S. licensing proces and organization hereof,
- the issue of deemed exports,
- the foreign availability of equivalent U.S. controlled items against unfriendly countries (i.e. the availability of substitute goods and technologies equivalent to U.S. export controlled items on the global market which makes unilateral U.S. export controls pointless), and
- restricting access to U.S. goods solely based on nationality, which is not only administrative burdensome, but can also be discriminatory under non-U.S. employment laws.
The balancing act is best illustrated in the Export Administration Act (EAA), the statue which regulates, amongst others, the export of U.S. dual-use goods. The EAA is implemented through the Export Administration Regulations (EAR).
Although the reasons for control in the EAA can be contradictory, they are all compelling, whereby striking the right balance between national security and trade is probably a never ending balancing act. In this context, the EAA demonstrates how countries apply security related trade controls. In the case of the U.S., export controls were introduced in ernst after the Second World War, although were widely applied during the First World War.
Under the EAA, the licensing policy cover three types of controls, namely national security, foreign policy, non-proliferation, and short supply controls. These are all interlocked and reflect different dimensions of U.S. national security policy. The controls are connected to not only controlled goods (based on the inherent technical characteristics of an item), but also their potential end-uses, end-users and end-destinations (see for instance Supplement No. 1 to Part 740—Country Groups).
However, the fundamental drawback of the ECRI, which also applied to earlier attempts to reform U.S. export controls in the 1970’s and 1980’s, is the fact that reforms only address what has been described as the “mechanics of U.S. export controls,” e.g. organizational issues, reviews of the controlled items or the licensing process.
Although these issues need to be addressed, it’s questionable whether the ECRI can achieve the aim to strike the right balance, and decrease the export control burden to U.S. industry. In my opinion, only focusing on the mechanics of export controls is not enough, given that there are other factors which impact U.S. export controls.
Firstly, the post Cold War strategic environment has, at least for the U.S., not been the impetus to liberalize the export controls burden.
Despite the tremendous change in the strategic landscape after the fall of the Soviet Union, the export control burden has not dissipated. The paradox is that extensive military controls aiming to isolate the conventional military power of the Soviet Union are no longer required. Even during the last phase of the Cold War, with the emergence of non-U.S. alternatives to U.S. technologies, the extensive U.S. export controls were already too restrictive and self-defeating. To be fair, the ECRI has addressed this issued with the transfer of many low risk items from the munitions list to the dual-use list.
However, despite the thawing of the Cold War, the U.S. has tended to tighten export controls. Although the U.S. does not face the same level and magnitude of organized military threats by the Soviet Union, it still faces a variety of security threats by terrorism and the proliferation of weapons of mass destruction by rogue states. This was clearly demonstrated by the tragedy of 9/11, the continuing embargo against Cuba, and the nuclear ambitions of North Korea. As a result, the U.S. has increasingly imposed tighter unilateral foreign policy, end-user controls or embargoes to a growing list of countries, as a matter of (foreign) policy, rather than motivated by national security interests.
One aspect of this trend which does impact the mechanics of export controls, but not fully addressed in the ECRI, is the discretionary power of the U.S. President to impose unilateral security related trade controls. Although these are more geared towards foreign policy controls, since 1985, the EAA for instance places some restrictions on the President to impose unilateral foreign controls.
For instance, the President has to consult with the U.S. Congress, allies and U.S. industry before imposing unilateral foreign policy controls. For instance, the earlier cited controversy regarding the issue of foreign availability is addressed in the EAA (Sections 4, 5 and 6). In particular, Section 6 (h) EAA requires the elimination of export controls if there is sufficient credible evidence to suggest the ineffectiveness of U.S. export controls. Thus, during the revisions of the EAA, as far back as 1985, the complaints of U.S. industry were already recognized.
However, seen from an ECRI perspective, i.e. the concessions to industry to lighten the burden of export controls, these sections could be best described as a poisoned chalice.
Secondly, the EAA itself exempts certain items from a so-called foreign availability analysis. U.S. export controls imposed to fulfill international obligations, anti-terrorism and/or the protection of human rights are exempted.
In the post 9/11 world, including an upsurge of UN Nations Security Council embargoes, there is little chance that U.S. Administrations and close allies for that matter, e.g. the EU, will remove such controls. Whether the such controls should be seen as a burden, especially the respect for human rights, is another debate, which I won’t go into now, but should be seen as the price of doing business in the global market.
Although I’d argue that companies, especially multinational companies have a social responsibility, the problem here is that the opaque wording of the controls can be interpreted extremely broadly by governments. In this context, I’d question whether companies are sufficiently proficient to understand and apply the complexities of ensuing obligations under human rights treaties.
Thirdly, from a procedural point of view, the U.S. President can easily side-step these restrictions by changing the ‘controls reason’ to national security or, during an emergency, to national defense.
Why would the U.S. President run the gauntlet of difficult discussions and negotiations, while he/she could just re-characterize the reason for controls. In this context, the U.S. President is asked to enter into either bi- or multilateral negotiations with countries to address the issue of foreign availability. The imposition of unilateral U.S. export controls can thus arise if these negotiations simply fail. The risk of such controls increases in an era in which we have a U.S. Administration that aspires to place America’s interests first.
Note that these debates are not only confined to the issue of export controls, but issues of foreign policy between countries.
Given that export controls are one of the tools to implement foreign policy, they are subject to changes, which invariably include disagreements. Even during the Cold War, despite the common resolve not to export strategic goods to the Soviet block, the U.S. and close allies disagreed on the scope and depth of export controls, e.g. the Siberian Pipeline Dispute and the 1987 Toshiba-Kongsberg incident.
These disagreements have also spilled into the realm of embargoes and sanctions, e.g. the case of Iran in which U.S. allies weren’t always willing to enforce sanctions or divest themselves from the lucrative Iranian oil sector. In the post-Nuclear Deal era, we see again a possible schism between the U.S. and it’s allies on how to proceed with Iran.
Fourthly, since the post Cold War, the export controls burden for the private sector, not only for U.S. companies, has increased due to a marked shift in export compliance responsibilities.
Regulators have demanded that exporters increase their compliance obligations on end-use and end-user controls. This has resulted in companies having to invest more resources in compliance programs. Coupled with increased penalties, the attraction to settle out of court with regulators (not only a phenomenon limited to the U.S.) and ever increasing extra-territorial reach of U.S. export controls and sanctions, companies have become more conservative and erred on the side of caution, which has led to an increase in the compliance burdens instead of the desired lightening hereof.
This shift in export controls responsibilities is probably the main obstacle to lighten the burden for U.S. industry. Liberalizing the export controls, i.e. rationalizing the controls lists or shifting controls from the military to dual-use controls, can also be considered a poisoned chalice for business, if the compliance burden for companies is increased.
Firstly, compliance regarding U.S. dual-use items, although more flexible than the military controls, has not made life easier.
Even with the introduction of the Strategic Trade Authorization (STA) license exception (see EAR Par. 740.20), which aims to facilitate transfers to low-risk countries and to promote interoperability to U.S. allies in the field, restrictions are still cumbersome. See for instance U.S. Federal Register “Export Control Reform Initiative: Strategic Trade Authorization License Exception,” 76 Federal Register 35276, June 16, 2011.
STA eligibility requires considerable due diligence and is relatively expensive to apply. For example, U.S. exporters must provide notification to the U.S. Government of the transaction and a destination control statement notifying the foreign consignee of the exception’s safeguard requirements; exporters must also obtain from the foreign consignee a statement acknowledging the consignee’s understanding and willingness to comply with the requirements of the license exception. Furthermore, for those U.S. munitions items controlled by the EAR, STA-eligible recipients are not allowed to re-export such items without a license. Such recipients are also prohibited from re-exporting “STA-eligible items to any destination outside the STA-eligible countries.”
Secondly, the ECRI has not, despite positive developments in this field, eliminated the earlier cited problem of possible discrimination based on nationality, e.g. the status of dual-nationals or controls following the deemed export rule. Although this issue has been overhauled, it still remains a thorny subject.
In 2010, the Obama Administration, in an effort to create centralized, i.e. an unified, U.S. export control system, announced that it would take action to eliminate “obstacles to exporting to companies employing dual nationals.”
In particular, the plan was, i.e. is, to harmonize the conflicting standards used by the Departments of Commerce and State to determine a foreign person’s nationality, in order to make certain export control decisions.
In the globalized market, attracting the best skilled workers for critical jobs usually ignores the nationality of the worker in question. Thus, imposing any types of restrictions on the movement of skilled people is detrimental for the private sector, which invariably will lead to companies pressurizing their governments to lift any impediments.
In 2011, when the State Department (the most restrictive of U.S. export control regulators) revised its rule, it admitted that the country-of-birth based controls were discriminatory, administratively burdensome with little gains to U.S. nationality security.
The fundamental issue regarding ECRI is that we shall always have walls surrounding security related trade controls. Export controls have always been and shall remain a permanent feature concerning certain goods. Given the demands on the national and foreign security policies of countries, governments will remain imposing such controls. An interesting question is whether the U.S. Trump Administration will be able and willing to finalize the ECRI, e.g. create a central licensing agency. A more interesting question will be to see whether the America First Policy will potentially undo the ECRI by not isolating the U.S. from key allies, but also through the imposition of U.S. unilateral controls.
The ECRI is an attempt to reform these types of controls, although they focus primarily on the mechanics of export controls. Releasing the controls of less sensitive items is a welcome, although this should not divert our attention to the fact that controls remain and in some instances have increased. From a compliance perspective, given the fact that the U.S. Government, a trend to be found in other countries, has shifted its focus on enforcement, arguably at the expense of companies, e.g. by imposing stricter due diligence responsibilities – end-user obligations, the export control burden for (U.S.) companies shall remain, and in some cases, increase. Thus, not matter how many controls are loosened, the burden remains.
In my opinion, the compliance burden has increased as the earlier cited trend is not only limited to the field of export controls, e.g. health environment and security, labor conditions, finance, privacy, etc. In many cases, companies must have a holistic approach to compliance or they risk to be inundated in rules, which at times can also be contradictory.