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HOME > TOPICS > The Nonproliferation Regime      
A More Transparent, Less Instrusive, Market Approach to Export Controls

A report on U.S. arms control policy presented to the CSIS Control Regime Working Group.

Nov 05, 2000
AUTHOR: Henry Sokolski
A More Transparent Less Instrusive Market Approach to Export Controls (PDF) 28.35 KB

A More Transparent, Less Instrusive, Market Approach to Export Controls

Introduction

Although the U.S. needs to prevent strategic technology from falling into the hands of potential adversaries, it is increasingly difficult to do so simply by proscribing the export of a list of controlled items to a number of specified of destinations. The reasons why are clear enough. On the one hand, the U.S. no longer has a Cold War list of enemies and, thus, consensus about what the proscribed export destinations should be is lacking. On the other hand, it is far less clear what technology and hardware needs to be controlled. First, the rate of civilian innovation in high technology has all but exceeded the capacity of U.S. and allied governments to identify and agree in a timely fashion on what items are of strategic significance. Second, weapons of strategic significance, increasingly can be made with know-how and hardware not on any control list.

Given these realities, some experts argue that attempting to control exports has become both passe and self defeating. Controls, they argue, could be easily circumvented by foreign firms and proliferators. At the same time, their enforcement would only deprive U.S. high-technology firms of the export markets they need to be prosperous and innovative enough to supply our military and keep it clearly superior to other nations¡¦ militaries. By this logic, the control system that controls less, controls best.

However persuasive such arguments might be, they run against two harsh realities. The first is that it is rhetorically awkward to argue against government controls on the grounds that they are ineffective in curbing proliferation while at the same time complaining that they are all too effective in curbing U.S. exports. Second, as long as politicians believe that there are states hostile to the U.S., there will there a political need to prevent them from acquiring strategic technology that they might use to undermine U.S. or allied security. Thus, few, if any experts favor dropping all export controls of dangerous strategic technology to proliferators or nations that retain strategic forces that might be aimed at us, such as Russia and China.

The rub then comes in trying to square these two views. Certainly, whatever export controls and export enforcement efforts the U.S. engages will have to be sustained with less political consensus than was present when existing control efforts were established during the Cold War. At the same time, they will have to be flexible enough to prevent the U.S. government from actually allowing or encouraging U.S. firms from actively assisting the worst proliferators in developing the most threatening weapons. In specific, these efforts ought to:

  • "hƒn build on existing control efforts to make them more effective rather than suppose there is sufficient political interest and will to create new, more ambitious explicit listings of controlled items and destinations or new multilateral control regimes,
  • "hƒn be flexible enough to be able control items and technology that might not be on any current control lists,
  • "hƒn garner the active support not only of government officials and the public, but of industry and the legal experts they depend upon.
  • "hƒn clarify what technologies must be kept from the worst proliferators and why.

The task of this paper is to suggest how this might be achieved with more transparent, less intrusive, market-oriented control-related measures. Essentially, this approach entails:

  • "hƒn Combining existing national authority to control unlisted items destined to a weapons or nuclear program of concern with the existing multilateral export control regime practice of not undercutting members¡¦ export denials,
  • "hƒn Supporting both of these efforts by making far more information available about the commercial activities of proliferators in and outside of the U.S. and about past and prospective U.S. exports.
  • "hƒn Conducting a government review to clarify what U.S. technology, if exported to any but America¡¦s very closest allies, would prove inimical to U.S. and allied security.

How one might meet each of these requirements is briefly described below.

Blocking Bad Exports to Bad Destinations Without Creating New Control Lists or Regimes

With the precipitous decline in the number of licensed exports both here and abroad there has been increased interest in focusing the controls that remain on "end users of concern." As the Deutch- Specter Commission to Assess the Organization of the Federal Government to Combat the Proliferation of Weapons of Mass Destruction noted in its final report (recommendation 4.1): For export controls to keep proliferation-sensitive materials, equipment and technology out of the wrong hands, assessments of the likely end user should be critical to decisions of whether to approve or deny any export license. This is increasingly true, as shown by our experience in Iraq. Proliferators will revert to using "low" technology when they are denied access to high technology and their WMD aspirations require only a "low-tech" solution.

This new proliferation challenge, however, cannot simply be addressed with good intelligence. In addition, nations must have legal authority to control not only "high" technology, but relevant "low" technology not on any current control list. The question is how. During the Cold War two approaches were taken. Multilateral consensus was reached either to add items to legal control lists or to limit exports to specific destinations. Sometimes consensus was reached on both.

Today, however, it is much more difficult to reach such consensus. On the one hand, key exporting nations disagree about what countries or projects might be dangerous. On the other hand, the range of technologies that might be used to make strategic arms is too broad and expanding to permit a description in any static legal listing. As such, trying to force agreement over such matters, as we tried in creating the Wassenaar Arrangement, is a surefire way to fail.

There is, however, an alternative. Instead of trying to force agreement over end destinations and control entries, the U.S. could continue to use existing export control regimes but encourage members to use and adopt catch-all restraints. Such restraints were first developed in the l970s to capture U.S. dual-use exports not on any U.S. or multilateral control lists that might nonetheless help make nuclear weapons. After Desert Storm, the U.S. expanded its use of such catch-all authority to cover unlisted dual use exports that might help other nations make long-range missiles or chemical and biological weapons. Shortly after it promulgated export regulations, the European Union (EU) adopted such catch-all controls as well.

Under such restraints, if an exporter knows or is informed by his government that one of his exports might be used to develop a foreign strategic weapon, his government can require him to secure an export license. The government may, then, deny the license if it chooses. In this case, the government would ask that all members of the appropriate multilateral control regime uphold it license denial by not allowing a similar export from their countries. This approach avoids endless debate about what items should be controlled to what destinations. Instead, it encourage members to exchange substantive threat assessments, leave each to determine what it should control where but bind all to these determinations.

This approach also has the advantage of being firm precisely where it needs to be. The reason why has to do with the no undercut provision already present in the charters of the Australia Group, Nuclear Suppliers Group and the Missile Technology Control Regime. The rules of this provision are clear. Once a member denies an export and so notifies the control regime, no member can undercut the denial by shipping the same item to the same destination without first gaining the agreement of the other members. In a number of cases, the EU and the U.S. have mated existing no undercut requirements with their own catch all controls and successfully blocked critical goods that were not on any control list from being exported to bad destinations.

This trend should be encouraged. Unfortunately, not all members of existing export control regimes have catch-all control authority in place. In addition, those promoting exports both here and abroad generally oppose the use of such authority. If we are serious about catching bad exports to bad destinations, though, we need to encourage the adoption and use of such controls and back their use much more vigorously with appropriate intelligence sharing.

Those countries that already have such catch all controls, the U.S. and those in the EU, though, can and should act now. In addition to controlling unlisted items in the fashion noted above, they should try to identify for themselves what items on the Wassenaar lists could arguably be significant from a chemical, biological, nuclear or missile standpoint. If any exporter attempts to ship these items to a project of concern, its government should have the authortity to indict it. The government should, then, notify all other nations in the relevant control regime (whether it be the NSG, AG, or MTCR) not to undercut its denial of this export. In this fashion, the no undercut rule could be extended to some of the most critical of Wassenaar listed items without creating a new export regime or new agreed lists.

To facilitate the implementation of the proposals discussed above, it also would be helpful if nations began to monitor and screen unlicensed exports by enforcing existing laws requiring the filing of shipper export declarations (SED). These declarations require the exporter to identify the export by type and worth and to specify the end destination of the item. Unfortunately, the U.S. and many other countries allow their exporters to file these declarations some time after the item has been shipped. Yet, for well over a decade Australia has required its exporters to file their SEDs by computer before the shipment of any item. Because this is done by computer, it is less tedious than filing paper forms. More important, under this scheme the government is able to check the declarations against its own listing of troublesome destinations and is able to interdict suspicious items.

The U.S. has such a system, the Automatic Export System. But it is voluntary. Recently, the President has signed legislation that encourages exporters to use this system (See Section 1253 of the National Defense Authorization Act of 2000, entitled "The Proliferation Prevention Enhancement Act of l999"). A more vigorous move in this direction, as recommended by the Deutch Proliferation, could help: U.S. Customs estimated a decade ago that perhaps as much as $40 billion in U.S. exports went unrecorded every year. Undoubtedly, some of these unmonitored exports included items helpful to projects of concern. If the U.S. had an Automatic Export System with updated export type categories in place that all U.S. exporters used, these disturbing numbers could be significantly reduced.

Promoting Private Enforcement of Such Controls by Awarding Damages to U.S. Firms Undercut by Competitors that Proliferate and By Identifying the Business Activities of Proliferators in the U.S.

Industry and its lawyers could be given positive incentives to enforce and encourage the nonproliferation restraints noted above. Governments, could, for example, give U.S. exporters the right to sue competitors who undercut existing national or international controls (or to plead their cases before some U.S. regulatory body). Relief could include legal judgements for damages to law abiding businesses and injunctions barring offending foreign firms from access to the U.S. market either to sell their goods or to raise capital in U.S. financial markets. Such relief might not only help equalize whatever trade disadvantages export controls might otherwise inflict on U.S. firms, it would give private industry a financial interest in alerting the U.S. government to illicit trade activities abroad. If other nations sought to adopt similar measures of their own, it would only tend to increase the level of trade restraint in dangerous technology to suspect destinations.

In fact, legal precedent exists for the U.S. affording private U.S. firms standing to seek such relief. In l986, the "Comprehensive Anti-Apartheid Act" against South Africa, Section 403 gave U.S. persons the right to sue for damages against any person "that takes commercial advantage of any sanction or prohibition against any national of the United States imposed by or under this Act." The idea, then, would be to craft follow-on legislation to give U.S. persons the right to sue for damages against any person that takes commercial advantage of any export control restraint or prohibition binding on U.S. persons or foreign entities. The desired effect of such legislation would be to create a private incentive for lawyers and industry to police themselves and their competitors both here and abroad.

To help support such legal actions, the U.S. could make public the names of all foreign firms doing business in the U.S. that are owned or run by the worst proliferators. Here, again, there already is legal precedent. Under Section 1237 of the Defense Authorization Act of FY l999 (P.L. 105-261), the Secretary of Defense is required to publish a list of persons operating in the U.S. that are affiliated with the Peoples¡¦ Liberation Army. The express aim of this law was to make it more difficult for Chinese military-related companies operating in the U.S. to bypass U.S. export control laws in any effort they might make acquire militarily sensitive technology. The sharing of this same kind of information, however, could be used to help private U.S. persons file suit against such firms if they engaged in illicit commerce in a manner that undercut legitimate competing U.S. concerns. In specific, the U.S. government could propose to expand the coverage of such public disclosure to include all firms affiliated with the governments already identified annually by the CIA to be proliferating weapons of mass destruction.

An additional supporting effort, formally proposed by the Chairman of the House Banking Committee (see "The U.S. Market Security Act") and endorsed by the Deutch Proliferation Commission, should be considered. This initiative would have the U.S. Securities and Exchange Commission identify foreign entities associated with foreign proliferating governments that are trying to raise or borrow money from U.S. financial institutions. This information could be shared on a routine basis on a public internet site or sent to Capitol Hill for review. The idea, here would be make this information available to private U.S. persons to mobilize them, rather than the government to leverage the behavior of foreign proliferators. First, U.S. businesses that might be undercut by the illicit proliferation activities of these firms could use this information to plead for relief in the form of cutting off these foreign firms¡¦ access to U.S. capital markets. Second, the moral hazards of dealing with firms formally identified as affiliates of proliferators would encourage the U.S. financial and bond market to shy from helping these foreign entities gain easy access to U.S. capital in the first place.

Informing the Policy Debate Over U.S. Export Controls.

Although there is heated debate over how well the U.S. export control system is or is not working, there is all too little critical information to judge the merits of the various contentions made in this debate.

Currently, all U.S. export licenses, for example, are born and remain classified in perpetuity by 12 c of the Export Administration Act. Only aggregate information about U.S. exports is shared with the public. As such, it is impossible for outside analysts in the nonprofit world or within industry to fully assess the financial or strategic impact U.S. export control policies are having. Nor is it possible to gauge to what extent these controls are being undermined by foreign competitors, and to what extent the U.S. government is doing a sound job in approving and denying exports. For these reasons alone, it would make sense to declassify these licenses after a given period of time after they were approved or denied.

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A related effort would be to get industry and government officials to discuss what future challenges and opportunities new technologies might present to the enforcement of export controls. To date enforcement of technology export controls has been an entirely reactive affair. Lists of sensitive items are generated based on existing weapons systems or known weapons research efforts. More important, controls are enforced on the basis of export license requests and exports themselves. All of this enforcement activity comes after industry has decided to exploit a given technology and identified specific markets. It would be useful to see to what extent one could get ahead of this process by asking industry what technologies it is planning to exploit for what markets before it acts on such plans. One advantage of such an approach would be the possibility of matching or developing enforcement techniques in anticipation of a market trend.

One possible example in the information technology world is the likely shift from autonomous computers to an increased reliance of such computers on centralized servers containing data bases and critical program software. In such a world, the market demand for high-powered autonomous supercomputers might be less significant than demand for access to key centralized computer services. Illicit use of the later for strategic weapons development might be monitorable if government and industry could agree on the appropriate means.

Finally, the U.S. government needs to clarify what technology and hardware should be kept from others and why. Here, one must tackle the problem of China and Russia. According to the Central Intelligence Agency, these nations are the two most significant proliferators of strategic weapons related technology. More important, these two nations are the only two that have strategic forces that are exercised or trained against U.S. targets. For this reason, the U.S. still controls the export of strategic technology from being exported to Russia and China lest it advance their militaries in a fashion inimical to U.S. national security interests. Continuing to control such exports, however, has proved to be quite controversial. Many experts, both in an outside of industry, insist that such controls are antiquated -- i.e., relicts of the Cold War. Others, though, insist that China and Russia are still competing against the U.S. militarily.

A key reason why this debate is so heated is that it has been well over a decade and half since the U.S. last examined what should be controlled to Russia or China. Since then, the only studies that have been attempted or recommended are generic (i.e., country nonspecific) "breakpoint" analyses of what technologies are so commonly available that it pointless for the U.S. to continue to control them. These studies tell us much more about what to decontrol and why than what to control and why. This approach has increasingly placed pressure on the government to decontrol without reflecting on why it should continue to restrain trade.

All of this recommends a, government-wide review. Two reviews are desirable. The first of might ask what technology and hardware transfers to any nation (or any nation other than our closest allies who have export controls as good as ours) would be inimical to U.S. national security. The second review might ask the same questions in the specific context of Russia and China.

A Word About Export Control Sanctions

After the Indian-Pakistani nuclear tests in l998 and the legislatively mandated sanctions they triggered, Congress has become far less enthusiastic about passing similar legislation in the future. In fact, it took the extraordinary step of reversing some of the tougher aspects of the l994 law that demanded punitive actions against both countries. In addition, Engage USA, with the support of Senator Lugar, has called for eliminating all unilateral sanctions including those relating to nonproliferation.

That said, Congress hardly favors a free market in militarily useful technology. If anything, members of Congress are growing increasingly anxious about continued U.S. government subsidized exports and government authorized transfers of controlled commodities to known proliferators. The problem is real.. In l997, the U.S. government, for example, approved nearly a billion dollars in guaranteed loans to help U.S. firms complete a reactor for the Chinese National Nuclear Corporation. This Chinese firm is one the CIA had long identified as the key conduit for illicit nuclear exports to Pakistan and Iran The U.S. Export-Import Bank, meanwhile, granted over $21 million in U.S. government-guaranteed loans to sell controlled U.S. technology to Nanjing Chemical Industrial Group. This practice ended only after years of CIA reports on how Nanjing was assisting Iran¡¦s chemical weapons program in l997. These cases were hardly unique. In fact, they were only part of the $6.5 billion in strategic technology that the U.S. had sent to China the previous five years. Many of these transfers, were made to chemical, nuclear, and space firms that U.S. intelligence had identified as being responsible for illicit proliferation.

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If Congress is ambivalent about legislating new sanctions, then, it is just as anxious to prevent the U.S. government to be helping known proliferators. One effective way to avoid further U.S. support of known proliferators is to prohibit controlled exports to them. This was first proposed by Congressmen Curt Weldon and Ed Markey. Their legislation, "The Proliferation Desubsization Act", would require the Director of Central Intelligence (as opposed to cabinent-level secretaries inclined to pull their punches for the President) to share its list of foreign entities assisting other nations¡¦ missile, nuclear, chemical, and biological weapons programs with the Commerce and State Departments. Using this list, the U.S. government would then ban the transfer of licensed or controlled U.S. high-technology to these entities or the approval of government-backed loans or appropriations for such exports until the CIA director certified that the entities in question had stopped proliferating and were unlikely to resume.

With such legislation in place, one could consider sunsetting legislated unilateral, mandatory export control sanctions. The Executive Branch would still have the discretion under exisiting Executive regulations and orders to impose such sanctions but it would not be required to do so by law.

Conclusion

There clearly is plenty of work to be had in tackling these recommendations. That said, bringing them in to force should not be seen as a substitute for maintaining existing export controls. Instead, their implementation should be viewed as a way to enhance their future operation. What they might well substitute for, however, are the promulgation of additional controls of the sort industry has been so opposed to -- export restraints against specific, new lists of items going to a list of specific destinations. Indeed, it could be argued that we already have enough of those kind of Cold-War controls. What we lack are more transparent, less intrusive, market-like approaches to export control of the sort this paper has detailed. These would help.

The Nonproliferation Policy Education Center (NPEC), is a 501 (c)3 nonpartisan, nonprofit, educational organization
founded in 1994 to promote a better understanding of strategic weapons proliferation issues. NPEC educates policymakers, journalists,
and university professors about proliferation threats and possible new policies and measures to meet them.
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