Issues in Brief

At Long Last, Substantive Export Control Reforms

Vice President
October 28, 2013

Introduction
Excessive use of export controls simply permits other countries to gain a market advantage by supplying the industrial technology and products that U.S. companies are banned from exporting. In 1987, an estimated 40 percent of all U.S. exports of non-military manufactured products required government approval before export—a figure that has barely decreased in the intervening period. The United States has invoked export controls so broadly that U.S. businesses are sometimes regarded as unreliable sources of supply. Designing U.S. parts and components out of foreign products has become an all too common occurrence.

While export controls can be critical to national security and foreign policy, the systems in place today were largely built upon concerns dating back to the Cold War. Some critics have said that existing U.S. export control efforts have become counterproductive to national security objectives.

October 15, 2013 marked the effective date of the first step of a much-anticipated substantive reform of the U.S. export control system initiated by the Obama administration.

The Export Control Structure

  • The U.S. export control system is chiefly administered by three licensing entities:
  • The Department of Commerce Bureau of Industry and Security (BIS) has authority to control and license exports of so-called “dual-use” items and technology (i.e., that have both military and civilian applications). BIS operates pursuant to the Export Administration Regulations and the Commerce Control List (CCL).
  • The Department of State Directorate of Defense Trade Controls has authority to control and license military products pursuant to the International Traffic in Arms Regulations (ITAR) and the incorporated U.S. Munitions List (USML).
  • The Treasury Department Office of Foreign Assets Control administers and enforces economic and trade sanctions and related licenses.

The Reform Initiative
Early in his first term, President Obama issued an order for a broad-based interagency review of the U.S. export control system, including dual-use and defense regulations. The goal of this initiative was to strengthen national security and the competitiveness of the U.S. manufacturing and technology sectors by focusing on current threats and adapting to the changing economic and technological landscape. The review determined that the export control system is overly complicated, contains too many redundancies, and diminishes the country’s ability to focus its efforts on the most critical national security priorities.

The goals of the reform were outlined by then–Secretary of Defense Robert Gates in a speech on April 20, 2010; the four-pronged approach aimed to (1) create a single export licensing agency for both dual-use and munitions exports, (2) adopt a unified control list, (3) establish a single enforcement coordination agency, and (4) use a single database of sanctioned and denied parties.

The administration envisioned that these changes would be implemented in three phases, with the final phase requiring legislative action. In Phase I, preparatory work would be undertaken to harmonize the CCL with the USML. Phase II would implement a harmonized licensing system with two identically structured control lists, potentially allowing for a reduction in the number of licenses required by the system. Certain items could be moved from the USML to the CCL, for which congressional notification would be required; unilateral controls on certain items would be examined; and consultations would take place with multilateral regime partners to add or remove multilateral controls.

As proposed, the new export control system would debut in Phase III. A single licensing agency would be established; the two harmonized control lists would be merged, with mechanisms for review and updating; and a single IT system for licensing and enforcement would become operational. At that time, an Export Enforcement Coordination Center would be housed and funded by the Department of Homeland Security. Changes in agency structure would likely require legislation.

Where We Stand Now
The administration has concentrated on rationalizing the controls lists to form the basis from which other reforms will flow. One goal is to convert the current USML from a “negative list” to one resembling the “positive” approach taken in the CCL. The CCL list is controlled according to objective criteria through a “bright line” process to determine which items should be controlled as dual-use goods and which should be controlled as munitions. The administration determined that this approach is necessary, in part, because of the USML’s current reliance on design intent (i.e., whether an item was “specifically designed, modified, or adapted” for military use) and its catchall controls of parts and components of these items. By law, everything on the USML is controlled equally—whether it is an F-18 fighter jet or a bolt modified for use on that aircraft—and each item requires an individual license. This system has created significant obstacles and delays in providing equipment to allies and partners for interoperability with U.S. forces, and has in certain instances been harmful to the U.S. industrial base. Each category of the USML is being screened by an interagency team, and revisions to categories are being proposed through the rulemaking process.

The broad thrust of the reforms to date is to reduce controls on less sensitive items whose military value has become dated, allowing more effective oversight of sensitive materials. Items moved from the USML to the CCL will be subject to the generally less restrictive licensing scrutiny of the Department of Commerce.

In April 2013, the first of a pair of rules implementing these reforms was published in the Federal Register. Changes include final versions of the “Specially Designed” and “Transition” rules, as well as revisions to USML Categories VIII (Aircraft), XIX (Gas Turbine Engines), XVII (Classified Articles and Technical Data), and XXI (Miscellaneous Articles). The changes went into effect in October 2013.

A new Export Control Classification Number (ECCN) has been created to accommodate items being moved from the USML. There are six license exemptions for this ECCN 600 series, of which the STA (strategic trade authorization) exemption will play the largest role. It will allow some items to be exported to 36 countries without a license when the government of the recipient country is the end user (otherwise, a license would be needed for export to anywhere other than Canada).

In July 2013, the second round of proposed rules implementing export control reform were published. These rules include revisions to USML Categories VI (Vessels of War and Special Naval Equipment), VII (Tanks and Military Vehicles), XIII (Auxiliary Military Equipment), and XX (Submersibles). With this publication, 8 of the 19 USML categories have now been rebuilt. These rules take effect in January 2014. The remaining USML changes will be published on a rolling basis through 2013 and likely into 2014.

Conclusion
These export control reforms represent a significant step toward a more efficient, predictable, and transparent system. U.S. exporters, particularly those in the defense industry, have long advocated reforms along these lines. There has been some opposition—the International Association of Machinists and Aerospace Workers has expressed concerns that changes that reduce restrictions of the export of defense articles and the inclusion of U.S. defense articles in foreign goods will cause more manufacturing to move offshore. Even proponents of these reforms admit that, at least in the short term, the changes will pose significant compliance challenges for U.S. exporters.

Much remains to be done. The administration’s goals face a number of barriers, including legislative action during a time of unprecedented partisan divide in Congress, funding concerns, and bureaucratic hurdles. Much-needed reforms seem to be close to reality and it would be a serious loss for both the United States and its exporters if these changes did not come about.

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