Step by painful step, the Obama administration’s reform of export controls, a key plank in its goal to double exports, is taking shape.
In June, the Commerce Department’s Bureau of Industry and Security announced a rule that eases licensing requirements for Commerce Control List items being shipped to U.S. allies, items ranging from nuclear materials and chemicals to electronics, lasers and space vehicles.
A month later, BIS proposed a regulation that would begin the migration of “militarily less significant” items from the U.S. Munitions List to the CCL. The BIS is starting with a relative handful of parts and components for military vehicles, but by the end of the year, the transfer will move on to naval and aircraft parts, electronics, materials and CCL categories.
The changes are most apparent to experts who can wade through a sea of acronyms, classification numbers and statutory references, but in the end, exporters will find it easier to ship controlled goods to foreign buyers. The new system will be more flexible and transparent while keeping items away from countries hostile to the U.S.
“My sense is that the largest beneficiaries are going to be the small and medium-sized companies that make civilian items but periodically modify or tweak them for a military end item,” said Kevin Wolf, assistant secretary for export administration. Any time an item is tweaked for military use, it falls under the International Traffic in Arms Regulations, which comprise the munitions list.
“Regardless of the origin of an item, the mere modification of it specifically for military use causes it to flip from a relatively uncontrolled item to a completely controlled item,” Wolf said. “There is very little flexibility in the ITAR. The least significant item is controlled the same way as the most significant item. The Commerce Control List structure allows us more flexibility, given the sensitivity of the item.”
“With the USML, the notion was that all military technology needs to be monitored and tracked. That was when everything was specifically designed for the military,” said Remy Nathan, vice president for international affairs at the Aerospace Industries Association. “That was the logic behind our U.S. Munitions List: Let’s keep track of everything that would go into a military system.”
When the U.S. and Iran were allies, Iran acquired U.S. military weapons, Nathan said. ITAR restrictions prevented Iran from acquiring repair parts for its F-14 fighters. “We’re able to keep those F-14s grounded, because we keep track of every single part of an F-14.” Such rigid controls make less sense now because the military is using more commercially made off-the-shelf products, he said.
The ITAR also requires the exporter to keep track of an item after it ships. Consider the U.S. manufacturer of an electrical switch for a civilian aircraft, Wolf said. EADS, the European aircraft manufacturing consortium, wants to use a modified form of the switch in a military transport. The switch goes into a cockpit assembly built in a German factory, which ships it to France for final aircraft assembly. At each step, the U.S. must give its permission for the transfer across borders.
“Even though the aircraft is foreign-made, it would require U.S. permission for all the re-transfers,” Wolf said.
Not only does the ITAR rigidity create delays that annoy the United States’ closest allies, it creates huge incentives for foreign manufacturers to find other sources for parts and components, Wolf said. This is at the heart of the administration’s efforts to reform export controls: to prevent U.S. companies from losing market share.
“We typically see the problems in the supply base,” Nathan said. “Given the choice of buying widgets from U.S. suppliers, or widgets that are treated as commercial products by everybody else in the world, which one are you going to choose?” When satellite technology went on the USML in 1999, the United States’ once-dominant market share plunged from 79 percent to 22 percent, he said.
“People say it’s the downturn in market and all kinds of other factors, but a good part of it is the fact that it became so much easier for companies to buy components outside the U.S.,” Nathan said. A U.S. manufacturer may have the perfect component for the job, but because of the ITAR restrictions, “there may be a European supplier whose product is almost as good, and there is no red tape attached to it.”
The BIS rule that took effect in June adds the “Security Trade Authorization” to the list of license exceptions in the CCL. An exporter can get an STA to ship a CCL item to any of 36 NATO members, or signatories to various international arms control agreements. Any further shipments require no license.
“The billions of dollars of defense trade with close allies will become more flexible, and remove all the collateral controls that come from being ITAR-controlled,” Wolf said.
Commerce, State and Defense department committees have met for most of the year to define items on the USML. Wolf calls it “positive” definition that clears away ambiguity in ITAR descriptions. The lower costs of compliance are a benefit for exporters.
“Most people in the government don’t see that the real burden on industry is the massive amount of time spent trying to figure out whether the regulations apply and how to comply,” Wolf said. “The amount of time, money and commitment that’s required just to determine whether something is controlled by far exceeds the burden of any group of licenses.”
What happens, Wolf asked, if the item to be exported was designed for the military 20 years ago? “The amount of time it takes to figure it out is massive. If you don’t know the answer, you export at your peril, because you don’t know if you’re exporting an ITAR-controlled item.”
“There’s the bureaucratic view that a reasonable person ought to be able to look at the regulations and follow the rules. Then there’s the legal interpretation of it all,” Nathan said. “There’s a fundamental misunderstanding among those people who don’t understand the need for change in the export control regime. They don’t understand how much the legal liability, criminal and contractual, has tied our entire industrial base into knots.”
Under the ITAR regime, an exporter may have to hire legal counsel, and have a tracking system to make sure the company doesn’t violate the law, Nathan said. “They are going to eat into any profits I might get for the export.”
The public has until Sept. 13 to comment on the changes BIS proposes. Wolf said it’s important to hear from exporters, what they like, don’t like, and what should be changed in the final rule. “We’re actively soliciting comments on whether the proposed regulation will accomplish the objectives we set out,” he said. “We all think we’re pretty smart people, and we think we’re doing good things, but we’ve got to know what the trade thinks.”
Contact R.G. Edmonson at email@example.com.