[House Hearing, 111 Congress]
[From the U.S. Government Printing Office]
THE EXPORT ADMINISTRATION ACT: A REVIEW OF OUTSTANDING POLICY
CONSIDERATIONS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON TERRORISM, NONPROLIFERATION AND TRADE
OF THE
COMMITTEE ON FOREIGN AFFAIRS
HOUSE OF REPRESENTATIVES
ONE HUNDRED ELEVENTH CONGRESS
FIRST SESSION
__________
JULY 9, 2009
__________
Serial No. 111-35
__________
Printed for the use of the Committee on Foreign Affairs
Available via the World Wide Web: http://www.foreignaffairs.house.gov/
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COMMITTEE ON FOREIGN AFFAIRS
HOWARD L. BERMAN, California, Chairman
GARY L. ACKERMAN, New York ILEANA ROS-LEHTINEN, Florida
ENI F.H. FALEOMAVAEGA, American CHRISTOPHER H. SMITH, New Jersey
Samoa DAN BURTON, Indiana
DONALD M. PAYNE, New Jersey ELTON GALLEGLY, California
BRAD SHERMAN, California DANA ROHRABACHER, California
ROBERT WEXLER, Florida DONALD A. MANZULLO, Illinois
ELIOT L. ENGEL, New York EDWARD R. ROYCE, California
BILL DELAHUNT, Massachusetts RON PAUL, Texas
GREGORY W. MEEKS, New York JEFF FLAKE, Arizona
DIANE E. WATSON, California MIKE PENCE, Indiana
RUSS CARNAHAN, Missouri JOE WILSON, South Carolina
ALBIO SIRES, New Jersey JOHN BOOZMAN, Arkansas
GERALD E. CONNOLLY, Virginia J. GRESHAM BARRETT, South Carolina
MICHAEL E. McMAHON, New York CONNIE MACK, Florida
JOHN S. TANNER, Tennessee JEFF FORTENBERRY, Nebraska
GENE GREEN, Texas MICHAEL T. McCAUL, Texas
LYNN WOOLSEY, CaliforniaAs TED POE, Texas
of 3/12/09 deg. BOB INGLIS, South Carolina
SHEILA JACKSON LEE, Texas GUS BILIRAKIS, Florida
BARBARA LEE, California
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
MIKE ROSS, Arkansas
BRAD MILLER, North Carolina
DAVID SCOTT, Georgia
JIM COSTA, California
KEITH ELLISON, Minnesota
GABRIELLE GIFFORDS, Arizona
RON KLEIN, Florida
Richard J. Kessler, Staff Director
Yleem Poblete, Republican Staff Director
------
Subcommittee on Terrorism, Nonproliferation and Trade
BRAD SHERMAN, California, Chairman
GERALD E. CONNOLLY, Virginia EDWARD R. ROYCE, California
DAVID SCOTT, Georgia TED POE, Texas
DIANE E. WATSON, California DONALD A. MANZULLO, Illinois
MICHAEL E. McMAHON, New York JOHN BOOZMAN, Arkansas
SHEILA JACKSON LEE, Texas J. GRESHAM BARRETT, South Carolina
RON KLEIN, Florida
Don MacDonald, Subcommittee Staff Director
John Brodtke, Subcommittee Professional Staff Member
Tom Sheehy, Republican Professional Staff Member
Isidro Mariscal, Subcommittee Staff Associate
C O N T E N T S
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Page
WITNESSES
The Honorable John Engler, President and Chief Executive Officer,
National Association of Manufacturers (Former Governor of the
State of Michigan)............................................. 7
Arthur Shulman, Esq., Senior Research Associate, The Wisconsin
Project on Nuclear Arms Control................................ 20
Owen Herrnstadt, Esq., Director of Trade and Globalization
Policy, International Association of Machinists and Aerospace
Workers........................................................ 27
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
The Honorable John Engler: Prepared statement.................... 10
Arthur Shulman, Esq.: Prepared statement......................... 22
Owen Herrnstadt, Esq.: Prepared statement........................ 29
APPENDIX
Hearing notice................................................... 52
Hearing minutes.................................................. 53
The Honorable Donald A. Manzullo, a Representative in Congress
from the State of Illinois: Prepared statement................. 54
THE EXPORT ADMINISTRATION ACT: A REVIEW OF OUTSTANDING POLICY
CONSIDERATIONS
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THURSDAY, JULY 9, 2009
House of Representatives,
Subcommittee on Terrorism,
Nonproliferation and Trade,
Committee on Foreign Affairs,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:06 a.m. in
room 2172, Rayburn House Office Building, Hon. Brad J. Sherman
(chairman of the subcommittee) presiding.
Mr. Sherman. We will bring the subcommittee to order. I
would like to thank the witnesses for being here, at least two
of them.
I know that Governor Engler is on his way. I am sure his
staff, who is here, will tell him that this opening statement
by the chairman was erudite, concise, truly an inspiration.
The purpose of this hearing is to examine how the U.S.
Government can implement necessary safeguards to protect
national security and simultaneously preserve American jobs in
industries that are subject to export control. We must make the
current system more effective to reflect economic realities.
National security is the paramount concern.
This hearing will hopefully provide the first step in a
long overdue process to reauthorize the Export Administration
Act, also known as the EAA.
The Export Administration Act provided statutory authority
for export controls on sensitive dual-use technologies, namely
those technologies that have both a military and a civilian
use. It expired 8 years ago, demonstrating that it is by no
means clear that the United States Government needs a Congress
since for 8 years we haven't had the law and things have gone
on pretty much as they were before.
Despite several attempts earlier this decade, Congress has
not been able to reauthorize the Export Administration Act
since it expired in 2001. Instead, our control over dual-use
goods has been imposed for nearly a decade by regulatory fiat
under the International Emergency Economic Powers Act.
One problem that arises from this, however, is that the
Commerce Department, the agency responsible for enforcing our
dual-use export control regulations, and particularly the
Bureau of Industry and Security, the BIS, lost its status as a
law enforcement agency and therefore lost powers that it needs
to carry out its job most effectively.
Representative Manzullo and I have introduced the Export
Control Improvements Act. We did this last year. We will be
reintroducing it this year. We look for additional co-sponsors.
The bill addressed a handful of issues related to the EAA,
including the integration of export control data into the
automated export system, which is a system basically currently
maintained for statistical purposes. It reinstated the BIS' law
enforcement authorities and dealt with diversion and
transshipment of goods.
Now, recently the GAO released a study on June 4 that
demonstrated the obvious, but did so poignantly. It described
how undercover investigators successfully purchased dual-use
sensitive items from distributors and manufacturers using a
bogus front company, fictitious identities and a domestic
mailbox.
They were also able to ship without detection by U.S.
enforcement officials dummy versions of the items subject to
export controls to known transshipment points for terrorist
organizations and foreign governments who are hostile to the
United States and attempting to acquire sensitive technology.
More specifically, they obtained what are known as spark
gap plugs, not to be confused with spark plugs or spark plug
gapper. A spark gap plug is a device that can be used in either
highly technical medical equipment or can be used in a nuclear
device. It has a limited number of legitimate domestic users.
It is of great economic importance.
What this study demonstrated was what I think we already
know, and that is if any one of 300 million people can buy it
easily it is kind of silly to say that we are going to license
its export, especially if it is a relatively small, non-bulky
item.
We can go through the charade and give ourselves the
psychological joy of saying we are controlling sensitive
technologies, but if anyone who happens to be a tourist in the
United States, anyone who happens to be in the United States,
any diplomat who happens to be in the United States can just
desktop publish some stationery and rent a P.O. box and obtain
a spark gap plug then it is going to be silly to say oh, we are
going to prevent that from being exported.
Maybe \1/10\ of 1 percent of the export packages are looked
at by U.S. Government authorities, so maybe if you wanted to
export 1,000 spark gap plugs you would have to buy 1,001, mail
them all and figure you are going to lose one to the inspection
process.
There is no requirement when somebody is sending something
abroad that they use a legitimate sender address on the
package, so there is no risk of liability. You do risk maybe
one-thousandth of your shipment.
So we ought to be looking at a different approach to
controlling items, particularly those items that are small and
available to just about anybody in the United States. We ought
to categorize items on a number of different formats. The first
is the item freely available in the United States or is it,
like some chemicals, subject to a licensing procedure?
Second is size. How bulky is the item in a quantity of
great significance to our adversaries? Obviously a bullet is
small, but if you want to drive us out of Afghanistan you need
a number of bullets that I would describe as quite bulky.
Does the item have a legitimate civilian use? We saw orange
patches designed to be used by U.S. soldiers to prevent our
aircraft from shooting at them appear on the dress of Taliban.
Why? Apparently because anybody in the United States can buy
these orange patches designed for this exclusive military use.
They have no legitimate civilian use. Once anybody in the
United States can buy it, it is not surprising that the Taliban
can get their hands on it.
We have to look at whether allowing the export is good for
American jobs or is in fact a job killer. We have circumstances
where the entire purpose of the export is to ship something
overseas, have it processed and have it returned to the United
States. In other words, what looks like an export regulation
that is hurting jobs may actually be preventing the offshoring
of jobs.
We should not think of sacrificing one iota of our national
security in order to facilitate offshoring and job killing, and
we ought to of course, as we do now, look at whether the item
is widely available abroad without significant controls.
Now, to control these items effectively may involve the
jurisdiction of other committees, but I don't want to go back
to my constituents and say we don't have an effective export
control program. We do have a program that is killing a lot of
jobs for no good reason, but don't worry about it. At least we
didn't involve any of the other committees in Congress.
It seems to me that we are going to need to decontrol some
items and we are going to need to have control at the factory
gate for other items. There is no reason why anybody in this
country can buy a spark gap plug.
So I look forward to taking a fresh look at our export
controls, looking at national security, looking at the effect
on American jobs, looking at what is really practical and
perhaps creating a circumstance where we control a lot less and
we control it a lot better.
I now yield to our ranking member, the gentleman from
California.
Mr. Royce. Thank you, Mr. Chairman. I thank you also, Brad,
for holding this committee hearing today, and I think it
continues the subcommittee's work on this critical and rather
arcane issue of export controls.
Our satellite export hearing that we had in April I think
produced some important language for the State Department
authorization bill, and previous hearings that we have had
spurred some greater efficiencies in terms of export licensing.
It is clear to me, however, that more fundamental changes are
needed here.
An effective export control system does a couple of things.
It denies sensitive technologies to foes, including Iran and
terrorist organizations. It has to have the capacity to match
sophisticated proliferation networks such as A.Q. Khan's
network. At the same time, effective controls have got to
facilitate technology exports to all others.
Our national defense relies upon a technological edge.
Having an edge in the face of increasing global competition
requires vibrant manufacturers who depend upon robust exports
and cooperation with governments and companies overseas.
Unfortunately, our export control system is a bureaucracy,
while our enemies, agile and determined and bold, are not. The
system has trouble making decisions and focusing on the really
important items and leaving the others alone.
Two years ago, the subcommittee heard from the Government
Accounting Office, and the GAO reported poor coordination
between the State and Commerce Departments. Problem number one.
Problematic disputes over which export control lists particular
items belong on, and that problem continues. These factors harm
investigation and enforcement activity, and there is a lack of
systemic assessments which create, in their words, significant
vulnerabilities.
The GAO had designated the effective protection of
technology critical to national security as ``a high risk
area.'' Some progress has been made, but the high risk label in
their assessment remains.
The lack of a valid EAA statute is a problem. Dual-use
items are regulated through a patchwork of emergency
authorities and executive orders, complicating prosecutions.
There are other legal shortcomings that make it difficult to
target commercial espionage, and commercial espionage has
become a growing problem in this area.
I am concerned with the Validated End User program run by
the Commerce Department. One of today's witnesses has
documented the problems of tracking sensitive exports to China.
Last year the GAO recommended that this program with China
be suspended because the Department had not been able to reach
an agreement with Beijing for on-site reviews. There is an
agreement today, but knowing what I know about China, where the
industrial/military line is blurred, to say the least, this
provides small comfort.
Mr. Chairman, the subcommittee must keep pushing, but
without strong leadership and commitment from the highest
levels of the current administration we are carrying an awfully
heavy load. Unfortunately, I don't see that type of commitment
happening, and this is not being partisan. The previous
administration was no different. These issues aren't attention-
grabbers until I suppose there is a glaring failure.
Hopefully I am wrong, but let us keep harping on this
issue, doing our job, holding these hearings and trying to
drive legislation to improve this process. I thank you again
for holding this hearing.
Mr. Sherman. I thank our ranking member. I know he will
have to go back to Financial Services for a brief time. We look
forward to seeing him again.
Are there any other members who wish to make an opening
statement? I believe our vice chair has an opening statement.
Mr. Scott. Thank you, Mr. Chairman. Monitoring and
controlling the items we export that may pose a national
security risk is undoubtedly a high priority for me, this
committee and this Congress.
And certainly no one wants to see dual-use items fall into
the wrong hands and be turned against the United States either
by terrorists or rogue governments, and that includes the
United States companies that make and market this technology.
However, we must keep in mind the need for our companies to
be able to stay competitive in an increasingly integrated
global marketplace. Globalization is no longer just an emerging
phenomenon. Globalization is now our way of life. We are no
longer the sole supplier for a great many of the items that we
control the export of, and that list is growing quickly.
Moreover, there are many countries with less stringent and
less complicated export control systems that afford their
companies greater opportunities to compete. We saw that in our
examination of satellite technology exports several months ago.
So we must find the proper balance between protecting
sensitive materials and allowing our companies to contend, and
I think perhaps developing a broader, more robust Validated End
User program can very well allow us to do just that, so I am
interested in hearing our witnesses and their thoughts on
expanding that program.
Mr. Chairman, I am also very concerned, as I know that you
are as well, by an article that I recently read in the
Washington Times, this article in the Washington Times
regarding the domestic availability and subsequent diversion of
sensitive technologies.
The article highlights a recent GAO investigation into
procurement of dual-use and military technology over the
internet and the case of sending that equipment to persons and
places that would ordinarily require an export license. With
the blossoming of the internet and the person-to-person
commerce it has facilitated in the modern world, I think an
examination into the possibility of controlling some of this
diversion is absolutely warranted.
With that, Mr. Chairman, I will join you in welcoming our
witnesses, and I yield back the balance of my time.
Mr. Sherman. I thank the gentleman from Georgia and yield
to the gentleman from California.
Mr. Rohrabacher. Mr. Chairman, first and foremost I would
like to thank you for the personal interest you have taken in
this issue. Your leadership on this issue of looking at exports
and the export controls that we have to deal with in our
society is going to be of great service to the people of this
country, so I want to especially let you know that we
appreciate your focus on this very important subject.
Being an accountant--I am a former journalist, and most of
the people we work with are former lawyers. Brad is a former
accountant, and he knows when something doesn't add up,
something doesn't look right with the figures. Certainly when
you take a look at export controls, Mr. Chairman, it doesn't
add up. It does not. The cost and the effectiveness
does deg. not just correlate the way they should in
terms of government regulations.
I personally believe in free trade between free people, and
I have always advocated that. Over the years there has been a
great difficulty in trying to promote even free trade between
free people because what has happened is there have been
certain people and groups in our society that are making so
much money in dealing with despotic and hostile governments and
hostile societies that we have had to try to have the same
restrictions placed on them, yes, but also those same
restrictions placed on people who are actually trading with
free countries, with Belgium, with Brazil, with Britain, with
Italy.
It makes no sense at all that we should be controlling the
trade with free peoples throughout the world because we are
unwilling to set a two-track system in place that will help us
regulate and control those technologies that go to despotic and
potentially hostile regimes as separate from those countries
that are run by democratic governments and that pose no threat
to the United States of America.
The last hearing we had on this issue highlighted that when
we talked about China and the transfer of technology that went
to China about 15 years ago when we were permitting Chinese
rockets to be launching American satellites, and then in the
end what happened was we upgraded their entire rocket and
missile system in China.
But because high tech industry in this country has been so
intent on making a very quick profit from the China trade that
we have been unable to free other companies that would like to
have long-term economic relationships with freer and more
democratic countries from the restrictions that we have to
place on Commerce because of these other companies who want to
focus their profit making on dictatorships and potentially
hostile countries.
This is an issue that cries out for some serious
consideration. Again, I think the answer in the long run is for
us to be honest about what countries pose a threat, what groups
pose a threat there, to see that our technology doesn't go to
those people that will come back and hurt us, but at the same
time commit ourselves to freeing up the trade between countries
and people that pose no threat to us.
So in short a two-tier system, which we have not been able
to implement in the past, is something that would serve us
well. Thank you very much, Mr. Chairman.
Mr. Sherman. And we will yield to the gentleman from New
York for an opening statement.
Mr. McMahon. Thank you, Mr. Chairman, and I echo the
sentiments of our colleagues and commend you for convening this
very important hearing.
Clearly export controls serve an incredibly valuable
purpose, yet at the same time the economic future of our
country depends on our ability to compete on a global market.
The world would be a far more frightening place if a
country like Iran acquired and developed nuclear, biological or
chemical technologies through the seemingly innocent transfer
of technology. Unfortunately, this example was illustrated in
2006 when the computer circuits exported to the UAE were
diverted to Iran, where they were fashioned into bomb
detonators and used in Iraq.
History has proven that hostile regimes have managed to
penetrate U.S. export controls network due to the fact that the
international community has yet to follow suit with similar
export controls of their own.
There is no doubt that the United States still has the most
sophisticated defense technologies in the world, which is the
reason why we must guard our designs through such extreme--
which seems sometimes to be extreme--restrictions. But these
limitations are no doubt decreasing the prestige and need for
our technologies in the world.
There is a great need to balance nonproliferation standards
with the U.S. competitiveness in the global market. I am
particularly concerned with restrictions on commercial
communications satellites and gray areas in the Export
Administration Act which deal with encryption technologies used
in free global communications and messaging technologies.
In regards to satellites, I am concerned that if other
countries, our allies even, were to develop ITAR free
satellites and become as competitive in the United States in
this market we would most certainly reach a whole new frontier
in global terrorism.
And although I do not share the same concern for encryption
technologies, it is important to note that foreign regimes
cannot use messaging services for nefarious purposes; rather
the civilians living under these regimes can access and relay
more information to the outside world through the use of these
technologies as we have seen in the recent Iranian election
protests.
Therefore, I would like to learn from our distinguished
panel of witnesses today how the U.S. can successfully balance
its business interests with the security interests of not only
the United States, but the whole world.
Again, thank you, Mr. Chairman, and I yield the remainder
of my time.
Mr. Sherman. I thank the gentleman from New York.
We will now move on to our first witness. We welcome the
former Governor of Michigan, John Engler, who currently serves
as president and CEO of the National Association of
Manufacturers.
Mr. Engler?
STATEMENT OF THE HONORABLE JOHN ENGLER, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, NATIONAL ASSOCIATION OF MANUFACTURERS
(FORMER GOVERNOR OF THE STATE OF MICHIGAN)
Mr. Engler. Thank you very much, Mr. Chairman and Ranking
Member Royce, who will be back I am sure, members of the
subcommittee, fathers of triplets. We have that in common.
The National Association of Manufacturers appreciates very
much today's hearing on the Export Administration Act, the EAA.
I have prepared a statement for the record that is more
extensive, and I just want to offer some brief initial remarks.
While it is not often in the public eye in recent years,
certainly the issue of export controls is one that truly ranks
as a priority. It is a competitive priority for the nation and
for our Nation's manufacturers.
Commerce Secretary Gary Locke recently met with members of
the NAM Executive Committee, and it was interesting in our
discussion, which was wide-ranging. Several times we came back
to the topic of export controls. It is that important. Export
controls exist to protect our national security, and that must
always be paramount, but when export control policy becomes
obsolete, national and economic security are both threatened
and American jobs are lost.
Obsolete export control policies that control too much
promote the growth of technologies in other countries and other
parts of the world. These are areas where we compete, and when
we promote the growth of technologies there it comes at the
expense of U.S. jobs.
The NAM and the Coalition for Security and Competitiveness
believe in the need to modernize the export control system.
Modernization would improve both our security and our
competitiveness.
The current export control system was developed really 60
years ago at the onset of the Cold War. The last time the EAA
was actually updated by Congress was in 1979, three decades
ago, and the threat that the system was designed to address at
the time, the Soviet Union, actually doesn't even exist in that
form any longer.
Today the threats are different, and some of them have been
I think eloquently described by the committee members today,
but yet the export control system hasn't really changed to deal
with them effectively. When the current system was developed,
the United States was the source of almost all the cutting edge
technologies and could unilaterally deny foreign access to
them.
The United States remains a leader in technology, but many
other nations have developed equally good or in some cases even
better technologies. The bottom line is that key technologies
are often available globally, and buyers have alternatives.
I think the chair and Congressman Scott, you both made this
point in your opening comments. The question of foreign
availability rarely came up when the export control system was
first developed, and now it is one of the dominant facts of
global commerce.
These trends--wider availability, greater competition--will
only accelerate. Restricting United States sales of products
being freely sold by Germany or Japan or Italy, other
countries, does nothing to help United States national
security. However, it does harm our Nation's economic strength,
and I think it harms very much our future innovation.
Our economy depends on our ability to compete globally in
high tech areas, as Congressman Rohrabacher mentioned, and we
compete not on labor costs, but on quality and the ability to
innovate and the ability to develop new technologies. We must
seek to be number one in technology and innovation.
Today our share of the world's manufactured goods exports
is less than 10 percent. It is about half of what it was 25
years ago. Employment in America's high tech industries is
almost one-fourth smaller than in 2000, and high tech exports
now account for less than one-third of all our manufactured
goods exports. That was about 40 percent in 2001. Our export
controls are a contributing factor to this decline.
The NAM and the CSC have been working with the
administration to obtain changes that lessen the burden on
American manufacturers without putting national security at
risk. We have made 19 proposals. Most of them were adopted or
accepted by the previous administration, and we are continuing
to work for additional changes with the Obama administration.
All this helps. We cannot ignore that the need for change
is so fundamental that a new twenty-first century Export
Administration Act is necessary to design controls that will be
effective in the twenty-first century that we live in.
My prepared statement lists the major principles the NAM
believes the new EAA should be based on. We need a more
focused, effective and efficient control system. Clear lines of
agency jurisdiction and changes to licensing mechanisms are
necessary. There should be regular reviews to update lists of
what needs to be controlled and sunset provisions to ensure
obsolete items drop off the lists.
Foreign availability and mass market status need to move to
center stage in determining what is controlled. Intracompany
transfers and steps to facilitate technology sharing with
friends and allies need to be improved. Improvements are also
needed to both the substance and enforcement provisions of EAA.
Addressing one without the other does little to improve the
system or to protect national security.
There are those, Mr. Chairman, who say well, modernism is
some kind of euphemism for allowing companies to undercut
national security. Absolutely not. We want strong security and
strong controls on what is really sensitive. Changes we seek
strengthen our security and focus government resources on the
problem areas.
Mr. Chairman, I thank you very much. We hope to see a new
EAA written this year. Our staff and I and our member companies
would look forward to working with you.
[The prepared statement of Mr. Engler
follows:]Engler.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Sherman. Governor, we thank you for your comments. I am
going to have to interrupt you now because we do have a vote on
the floor. We will resume this hearing immediately after the
last vote in this series, which will probably be quite some
time from now.
So I thank the witnesses for their patience, and we will be
back as soon as we can be. Thank you.
Mr. Engler. We will be here.
[Recess.]
Mr. Sherman. I thank the witnesses for bearing with us for
that short break, and I want to welcome Arthur Shulman, who
serves as general counsel at the Wisconsin Project on Nuclear
Arms Control, which carries out research and public education
designed to inhibit the spread of weapons of mass destruction.
Mr. Shulman?
STATEMENT OF ARTHUR SHULMAN, ESQ., SENIOR RESEARCH ASSOCIATE,
THE WISCONSIN PROJECT ON NUCLEAR ARMS CONTROL
Mr. Shulman. Thank you, Mr. Chairman. I am pleased to
appear before you today to discuss dual-use export controls and
their role in stemming the spread of mass destruction weapons.
I will summarize a few points from my written testimony, which
I ask be entered in the record.
The Export Administration Act is the foundation of our
system for controlling the export of dual-use militarily
sensitive technologies from the United States. While the EAA
has been in lapse, the export control system has not been
updated to reflect the post-Cold War and post-9/11 security
environment.
But the focus on export control reforms should be on
ensuring that the system protects U.S. national security in the
twenty-first century. We need a comprehensive public analysis
of the current security challenges, how the dual-use export
control system is meeting these challenges and what changes are
needed.
Thanks to the efforts of the subcommittee, our Nation's
arms exports will be subjected to just such a comprehensive
national security review if H.R. 2410 becomes law. The same
must now be done for dual-use trade. Only then would we have
the hard data needed for thinking about a new Export
Administration Act, one that would protect our security today
and tomorrow.
In the interim, we must ensure that the current system is
working well to protect us. In many ways it is not, but there
are things we can do now to change that. Congress should give
the Bureau of Industry and Security at Commerce enough
resources to do the job it has now. Congress should also
provide robust oversight to ensure that those resources are
being used well.
On export enforcement, we support your efforts to pass a
stand-alone bill that would immediately give the Office of
Export Enforcement at BIS permanent law enforcement authority.
BIS must also get more staff and resources to do its export
enforcement work.
I will cite two examples where BIS must do a better job
administering controls. I discussed them in my testimony before
this subcommittee last year and will provide a brief update.
One is the 2-year-old Validated End User program (VEU). It is
supposed to be a white list of trusted companies and locations
prescreened to receive controlled goods license free.
But my organization revealed last year that two of the
first five Chinese companies designated as VEUs were closely
linked to China's military/industrial complex, to Chinese
proliferators sanctioned by the United States and to U.S.
companies accused of export violations.
Another Chinese VEU was designated this April, and our
analysis reveals that components useful in gas centrifuge
enrichment plants can now be shipped without limits or prior
scrutiny to a building that houses the headquarters of a
Chinese company which as recently as December was under United
States sanctions for proliferation to Iran and/or Syria.
I ask that this analysis be made part of the record for
this hearing.
A month after this new Chinese VEU was designated, its
parent has filed for bankruptcy. What will happen to the export
authorization now?
The VEU program has been not only a selection failure, but
also a verification cripple. Even now, on-site VEU reviews in
China require a 60-day notice and must be arranged and
accompanied by Chinese Government officials.
And what are the inspection procedures for India's first
VEU designation detailed just last week?
Given these fundamental flaws, limitations and
uncertainties, the VEU scheme should be scrapped. At the very
least, a moratorium on new designations should be imposed as
Congress studies whether the program can operate without
undermining our security.
Another example is the Entity List maintained by BIS. A
mirror of VEU, the list is supposed to inform exporters about
foreign entities that pose a risk of diversion, especially to
WMD programs, but the list is incomplete and out of date. Some
entries are now inaccurate, and others are not usable.
My organization has published and submitted to BIS concrete
proposals for updating this national security resource. Despite
our hopes, BIS has made none of these changes. The list now has
more names tied to smuggling, but it is not more accurate or
clear and has lost its focus on nonproliferation. Congress
should press BIS to make the Entity List a real tool for
exporters to screen their transactions and prevent diversions.
This subcommittee has taken a leadership role in addressing
the risks of transshipment and diversion of dual-use U.S.
goods. I would like to offer for inclusion in the hearing
record an updated chronology documenting how Dubai and other
points in the United Arab Emirates have served for decades as
the main hubs in the world for nuclear and other smuggling. We
have also seen such activity channeled through Malaysia and
other countries with weak export controls.
Another facet of this problem is what you, Mr. Chairman,
alluded to in your opening statement, domestic sales of
controlled dual-use goods. There are things that we can do to
meet these challenges as well. I have listed some examples in
my written testimony and would be happy to discuss them.
In conclusion, I would like to mention that the challenges
I have discussed today have been exposed and publicized through
the work of this subcommittee and others. Congress should
expand and systemize this oversight and enlist other
investigators to help it.
For example, the GAO should be tasked with the review of
export records and BIS licensing decisions every year. Congress
should also use help from the Inspectors General of the
relevant Federal agencies.
Thank you.
[The prepared statement of Mr. Shulman
follows:]Shulman.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Sherman. Thank you for your presentation. I look
forward to talking to you about controlling domestic sales of
some of these items.
Mr. Shulman. Yes, sir.
Mr. Sherman. Now we will go on to Owen Herrnstadt, director
of trade and globalization for the International Association of
Machinists and Aerospace Workers.
The machinists union represents several hundred thousand
workers in more than 200 basic industries in North America, and
his organization has been helpful in teaching me that it is not
always favorable to jobs to just open things up; that it is not
just business activity versus national security, but that
sometimes when you allow exports you are actually hurting jobs.
With that, I would like to hear from the witness.
STATEMENT OF OWEN HERRNSTADT, ESQ., DIRECTOR OF TRADE AND
GLOBALIZATION POLICY, INTERNATIONAL ASSOCIATION OF MACHINISTS
AND AEROSPACE WORKERS
Mr. Herrnstadt. Thank you very much, Mr. Chair, and thank
you for your invitation to appear before you today.
As you noted in your opening, and we appreciate your
comments regarding the serious nature of exports and jobs. As
you also just noted in my introduction, the machinists union
represents several industries. We truly understand the
importance of exports.
We are troubled that our Nation's export strategy has yet
to embrace policies that ensure the creation of jobs here at
home. Among other things, comprehensive and detailed employment
impact analysis is not undertaken when transactions are
reviewed that could involve outsourcing to other countries,
specifically the transfer of technology and production to
current and potential competitors.
Given the current job crisis, the importance of export
controls and suggestions concerning the reauthorization of the
EAA, a discussion of how the current export system can be
improved to include consideration of its impact on domestic
employment is highly critical.
It is no secret that U.S. workers--indeed, our entire
economy--is in a crisis; 6.5 million workers have lost their
jobs since December 2007. Nearly 2 million of these workers are
in the manufacturing industries. Our unemployment rate is at
9.5 percent and many predict it will shoot to 10 percent and
will stay high for the next several months.
Industries like manufacturing, aerospace, electronics and
many others that were once the bedrock of our Nation's economy
are barely shadows of what they once were. Our economic
security and our physical security diminishes deg.
with the loss of these basic industries and the jobs they
provide.
As the nation grapples with the current economic crisis,
Congress and the administration must explore new measures to
ensure that our overall export strategy supports the creation
of jobs here at home. We can start by discarding the
presumption that any policy that promotes exports is
automatically good for U.S. workers and the long-term growth of
domestic jobs. Attention must be paid to export programs and
unregulated outsourcing arrangements that can and do result in
the loss of jobs.
My colleague seated to the right talked briefly about the
Validated End User program. It serves as a classic example that
neglects meaningful employment impact review. The machinists
protested one of the initial programs that was adopted by the
VEU. In the announcement of the entire program, the Under
Secretary stated that it would be good for U.S. jobs.
In our protest, we said given the massive loss of jobs that
we have experienced in the United States aerospace industry
over the past 20 years, the increase in aerospace production in
China in general, the recent announcement that China is
planning on entering the large commercial aircraft industry and
China's continued use of transferred production and technology
from the United States aerospace industry enabling it to
accomplish these tasks, we find it very difficult to believe
that your actions regarding one specific VEU program are good
for U.S. workers or the U.S. economy.
Another example where employment impact reviews are much
needed involves the virtually unregulated category of
outsourcing that presents a serious threat to our Nation's
economy and our physical security, that known as offsets, the
transfer of production and technology in return for jobs.
They are significant, they are increasing, and we are
losing thousands of jobs to the use of offsets. They create
foreign competition that comes back to further hurt our job
prospects. The decimation of our skilled workforce also
presents a serious danger if a situation occurs in which a
rapid buildup of defense production is required.
In view of the national, economic and security interests
that are threatened by offsets and other offshoring
arrangements like the VEU program, export control policy must
be improved to ensure that it is in fact assisting in the
creation and maintenance of jobs here at home.
Here are four very brief recommendations for your
consideration: 1) Shining a light on current export policy to
determine with precision its employment impact on the domestic
workforce; 2) Strengthening offset reporting requirements so
that agencies like the Bureau of Industry and Security apply a
meaningful and precise employment impact analysis to all offset
deals which come under its jurisdiction; 3) Undertake efforts
to eliminate offset and offset-like activities through all of
our international negotiations; and 4) Form a national
commission to review export policy and its impact on U.S.
employment by including labor, academic, members of the
industry and of course the government to join together to
figure out solutions for this critical, critical area.
Mr. Chairman, I would like to submit my written testimony
for the record, as well as a report which I reference in my
written testimony on offsets as well.
Thank you.
[The prepared statement of Mr. Herrnstadt
follows:]Herrnstadt.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Sherman. Without objection it will be entered in the
record, as well as the full opening statements of the other
witnesses.
With that, Mr. Scott, did you want to go first?
Mr. Scott. Sure. I will be glad to.
Mr. Sherman. I will recognize the vice chair of the
subcommittee to go first with questioning and then move to the
Republican side.
Mr. Scott. I would like to kind of focus my questions on
the national security aspect both at home and abroad and its
economic implications.
Export control reform attempts to balance national security
interests with the promotion of a vibrant economic environment
for the United States businesses to export their products. In
the post September 11 world, national security concerns are of
paramount importance, and with that in mind, understanding the
impact of exports on the economic climate here at home in the
United States is critical.
So I would like to ask a series of questions with that
backdrop first with you, Mr. Herrnstadt. I am very moved by
your testimony, and I think it would be well if you could share
with us just how dramatic in numbers in comparison of time in
terms of the job losses that you refer to due from offsets.
How many jobs are we talking about? Over what period of
time? In other words, just how impactful are these job losses?
Yes.
Mr. Herrnstadt. Thank you. I would be glad to respond.
Let me preface this by saying with one of the serious
problems with offsets is that there is so little amount of
information that is actually known. Some information is
reported in the defense industry to the Bureau of Industry and
Security.
Mr. Scott. Do me a favor, Mr. Herrnstadt, because a lot of
times we have these hearings they are made public through C-
SPAN. Just for the benefit, what are offsets?
Mr. Herrnstadt. Okay. Very good. As I explained in my
written testimony, offsets are when another government
institutes an industrial policy that says we will buy your
good, but only if you transfer some of the technology related
to that good or some of the production related to that good to
one of the companies in our country in return for the sale.
Roughly 20 European countries have exceedingly
sophisticated offset policies. At times those offset policies
say that we will only buy your good unless you offset to us
production or technology that sometimes exceeds the value of
the sale item itself.
So, for example, if a country wants to buy a jet fighter
they will say we will buy your jet fighter, but we want to do
some production in our country. Offsets get even more
complicated because sometimes the traded item under the offset
may not even be related to the weapons system involved. It
could involve something well, like a printing press, for
example, that has nothing to do with it.
The point of offsets is that other countries realize that
this is a mechanism they can use to employ their workforce and
to get their industries going. Our own Government has very
little policy itself that impedes the use of offsets.
One of the specific problems we have is that very little
information is known about offsets because these are primarily
private contracts that occur between one company and another
government or another company in that country.
Mr. Scott. Okay. Now, because my time is short, give me a
number. Give us a number to hang onto. How do you quantify the
job losses?
Mr. Herrnstadt. Okay. Well, the Bureau of Industry and
Security at one point estimated that the number of job losses
that occurred due to offsets were roughly around 16,000 jobs or
so a year.
But as I point out in my written testimony, they also say
those were offset--unrelated to the term offset--by jobs that
were created because the sale went through. We dispute that
claim for a variety of reasons, which are found in my written
testimony.
But that is just defense-related offsets. Those don't even
include the job losses that occur in the commercial industry
because, quite frankly, there is very little information that
is given. Workers certainly don't know about it because they
are not told about it by companies.
Mr. Scott. All right. Well, thank you for that.
I know my time is up. Mr. Sherman, if we have another round
at this I would like to ask everybody on the whole jobs area
just how our U.S. jobs in particular are affected by the
totality of export control regulations and have our export
controls been a factor in the outsourcing of U.S. jobs.
So maybe we will get around to that the second time. I
don't want to overextend here.
Mr. Sherman. We will do a second round. We kept these
witnesses waiting. I see no reason not to keep them here when
they can talk to us since they were here for hours not talking
to us.
With that, I will ask the gentleman from Illinois if he has
any questions.
Mr. Manzullo. Well, thank you very much. I have a couple of
questions.
Mr. Herrnstadt, did your organization take a position on
the cap in trade bill that just passed?
Mr. Herrnstadt. Yes. I mean, we took the same position that
Labor did, the AFL-CIO and others did.
Mr. Manzullo. Governor Engler, could you tell us what
impact the cap in trade had on our exports and our ability to
manufacture in this country?
Could you press the button please, Governor?
Mr. Engler. I am sorry. Labor opposed the cap in trade
legislation, didn't they?
Mr. Manzullo. My question is----
Mr. Herrnstadt. We are concerned specifically with the
trade issue involved with the cap in trade program. We are also
very concerned with the effect that it will have on our own
manufacturing industries here.
Mr. Manzullo. So you were opposed to the bill that passed
this past week?
Mr. Herrnstadt. I have to double check on exactly what our
position was on that, to be quite honest with you on it.
I know that our concerns were primarily job-related on it,
and we were also concerned with making certain that developing
countries weren't given an exception.
Mr. Manzullo. Okay.
Mr. Herrnstadt. Yes.
Mr. Manzullo. Okay. Governor Engler, if I could ask you? I
know you come from a state that has just a little bit of
unemployment, and I think Illinois is right behind you.
The general question, and I understand we will have a
second round here, is I think you share my concern that this
administration or this Congress has put no emphasis upon
restarting manufacturing in order to build our way out of this
recession as opposed to just spending all types of money coming
from the top.
As a person who understands manufacturing, do you agree
with that statement? If so, could you give us your thoughts on
that?
Mr. Engler. A couple of things. Certainly we think
manufacturing is the key to wealth creation and growth. The
United States remains the number one manufacturing economy in
the world, but we are under challenge from all over the world,
and a strategy to maintain the U.S. leadership and to expand
opportunities for workers of this country comes through the
development of new products and new markets.
Those markets can certainly be domestic if we were to say
take on the major challenge of renewing our infrastructure in
the country. That could be enormously helpful. At the same
time, we are only 4-5 percent of the world's population. There
are a lot of growth opportunities and expanding markets around
the world, and we would like to be able to compete for those.
One of the concerns with the issue specifically in front of
the committee today is that in the area of export controls we
sometimes as a country choose to control products that are
widely available in the marketplace, and therefore we simply
through our controls take ourselves out of the opportunity to
compete against the German, French, Italian, Japanese company.
We would argue that in some of those cases the consequence
of that is specific to job loss and company exiting of those
lines of products and businesses here.
Mr. Manzullo. And that is heard. I know you are familiar
with Rockford, Illinois. We used to be called the machine tool
capital of the world.
When I was elected in 1993 I think the U.S. had a 17
percent market share of machine tool sales in the world. Now we
are down to about seven. One of the reasons is we have become
an unreliable supplier. It is very difficult for countries to
buy a for-access machine tool in this country.
Could you elaborate on that, Governor, and the impact that
that has on domestic jobs?
Mr. Engler. Sure. I think if the tooling--again, tooling is
subject also to its own innovation and so you want to continue
to improve your products that have markets. If we are not able
to sell those products to the broadest possible market, the
global market, then other competitors will rise up, meet those
needs and suddenly their innovations are outpacing ours.
It isn't just in the production cost of the machine. There
is much more than the mere labor cost or the materials cost. It
is the whole intellectual property behind that machine and the
capabilities of that machine. I would say these machines today
are all smart machines with chips. We don't make any of those
chips in this country now, save what Intel does, which is
substantial, but a lot of that is gone.
I would argue, Congressman, that export controls are a
factor in this. Nobody would say this is the total reason at
all, but it is a factor and it is one that is fixable.
Mr. Manzullo. Thank you. We are going to have another round
of questions? Thank you.
Mr. Sherman. We hope to unless a vote is called on the
floor. We are not going to ask these gentlemen to wait for
another 40 minutes or so for us.
The GAO report urges that we suspend the Validated End User
program with China. I would like each of the witnesses to
comment on if we just got rid of Validated End User with China
would that have a positive or negative effect on jobs? Mr.
Herrnstadt?
And really it goes down to, are the exports to China real
exports or are they the offshoring of processing?
Mr. Herrnstadt. I think you are asking a good question, and
one of the questions that we have raised with the VEU program
is does anyone count if this does have a direct impact on jobs.
I mean, obviously we thought that one of the programs certainly
did.
Mr. Sherman. We can always do a study and put things off
for a few years, or should we just end the program with China?
Mr. Herrnstadt. I think we should just suspend it at this
point.
Mr. Sherman. Governor, do you have an argument that we
should continue to have a Validated End User program with
China, especially given the fact that we have been able to
reach a Validated End User specific inspection program with
China?
Mr. Engler. Well, I think to the credit of the Obama
administration that has now been reached. In January, the
Department of Commerce and MFCOM signed an agreement that would
allow BIS to do these end user reviews.
The five companies--five. Not exactly a program running
rampant here, but the five companies that are in the program. I
think we should continue that. I think it certainly should be
monitored, and we ought to test the agreement. The idea was to
create trusted entities.
Mr. Sherman. Are those entities buying goods for use in
China or are they simply processing goods to ship back to the
United States?
Mr. Engler. They are for use in China is my understanding.
Mr. Sherman. Mr. Herrnstadt, do you have any specific
information on this, or Mr. Shulman?
Mr. Herrnstadt. No. I would just encourage the committee to
take a look at the Commerce Secretary Mancuso's at the time
announcement of the VEU program.
One of the programs involved the work of composites done in
the aerospace industry in China. Mr. Shulman and his
organization have also described that, and I think that had to
do with production that was moved to China or at least
initiated in China.
Mr. Sherman. Mr. Shulman, what if we went with a program in
which we controlled fewer things, but we had internal U.S.
controls so that you couldn't just send in an order for a spark
gap plug?
Would that be a system that would better control the spread
of technologies, or do you endorse a system of controls at the
border rather than controls at the factory gate?
Mr. Shulman. It is a very tough question, Mr. Chairman. I
think there are more incremental things that we can do to deal
with the domestic sales problem. I think we probably ought to
be checking and controlling both at the factory and at the
border.
Mr. Sherman. Governor?
Mr. Engler. Well, actually I don't think it is that tough.
It is bureaucracy that needs some good, firm guidance from the
Congress because we really need harmonization by Customs and
Border Protection.
You have one sort of numbering or classification system
that BIS uses, and then you have Custom and Border Protection
with different numbering, and simply bringing that together--
presumably we are not caring about what is actually happening
internal in the country. We are caring about what might happen
outside the country.
Mr. Sherman. As a practical matter, if we do not impose on
American business the additional bureaucracy of having to
license certain small portable items and we continue the policy
the spark gap plug can be sold to anyone with a post office box
in the United States, then we have no control over spark gap
plugs.
The GAO study proved what I think everyone in this room
knows, and that is you can put a small item in an envelope and
mail it to Venezuela.
So the question is do you see the members of NAM willing to
accept that certain products which have a very high military
value and which are highly portable cannot just be shipped to
any P.O. box in the United States just because the customer
paid for it?
Mr. Engler. Well, if we are asking if instead of the
Department of State say processing 100,000 export licenses we
get the most important 5,000 and look at those carefully, I
think we could talk.
The idea is if we are going to go from 100,000 to 200,000
that would probably be headed in the wrong direction.
Mr. Sherman. I am not even talking about Department of
State here because it would not be an international
transaction.
But when a GAO employee posing as a ne'r-do-well is able to
buy a spark gap plug and have it shipped to his P.O. box
anywhere in the country that is a problem, and the solution to
that problem imposes additional bureaucracy on your members.
I think that would have to go hand-in-hand with reducing
the bureaucracy imposed on your members in other ways.
Mr. Engler. Sure. I think I would be happy to talk about
that.
Now, I don't know if you can buy the same thing if we are
the only people in the world that have that particular item and
you can't buy that in Germany or you can't buy that somewhere
else if it is just a question that we are strictly the only
ones today that have that.
Mr. Sherman. As I laid out in my opening statement, among
the things we need to look at are how portable is the item,
what is its military significance, does it have many civilian
legitimate users and, finally, is it widely available around
the world.
I believe I have gone over and will recognize our ranking
member, Mr. Royce.
Mr. Royce. Thank you, Mr. Chairman. I wanted to ask Mr.
Shulman a question, Mr. Chairman, and this goes to the hearing
that you and I participated in the other day on the UAE.
Mr. Shulman, you testified that the pending nuclear
cooperation agreement with the UAE should be held up in your
view unless UAE makes real export control improvements. I guess
they adopted a stronger law in 2007, but haven't implemented it
yet or haven't put the regulations in place I take it.
But the supporters claim that the UAE made these
improvements. You raised this point. I was going to ask you
your thoughts on that, on how long a track record of
improvement should the UAE have before the agreement is
approved?
And then I guess the key point, should the agreement ever
be approved given proliferation concerns beyond UAE's export
control record? And so just your thoughts on that.
Mr. Shulman. Thank you, sir. Our sense is that
consideration of approval of the 1-2-3 agreement with the UAE
should involve a real examination of efforts by the UAE to
improve their export controls.
As you mentioned, they passed this legislation 2 years ago.
They just held I believe the first meeting of the committee,
which will be charged with administering it, a month or 2 ago
and announced their intention to really enforce this
legislation.
Part of the problem, one of the things that could be done
fairly easily I would think is both for our Government and for
the Government of the UAE to make more public whatever efforts
the UAE is doing to actually improve their export control
policy and practice because very little is known about it now.
It may be that they are doing things that we just don't
know about, but in any case what is known so far is that there
are still export control cases being brought both by the United
States and other governments involving smuggling to Iran and
other places of very dangerous items going through Dubai and
other Emirates.
Certainly more needs to be done by the UAE to really prove
that they are headed in the right direction.
Mr. Royce. Let me ask you another question on the same kind
of subject.
In 2007, the Commerce Department proposed the creation of
another category, a C category, Country Category C I guess is
what you would call it, which would list countries of diversion
concern, and as a consequence those countries would be subject
then to a much stricter requirement for export licensing.
So that was the concept back then. It was never
implemented. Was it a good idea? Which countries in your mind
would belong in such a category if we ever did take this up a
notch and create Category C? It is kind of a unique way to
approach the problem.
Mr. Shulman. I think it is definitely a good idea. I think
it should be implemented, and I think the first two countries,
based on the information that we have seen, the first two
countries that ought to be considered for such a designation
would be the UAE and Malaysia.
Mr. Royce. I see. Let me ask you. The Obama administration
has been in office 5 months now. Could you give me your
assessment? What can be said about its export control policies
at this point?
Mr. Shulman. I don't think too much can be said so far in
part because at the Department of Commerce the relevant
officials have not been appointed yet, so I think we will have
to wait and see once they are in place what it is that they do.
Mr. Royce. I guess my time is about expired here. Let me
ask Mr. Herrnstadt a question.
Mr. Engler describes a very competitive global environment,
an economy in which an increasing number of countries will be
challenging the U.S. in developing and designing and
manufacturing cutting edge technology. He also states that the
rate of technological advance is so fast today that products
are obsolete within months.
I was going to ask if you agree and, if so, how your
proposals then cope with those realities.
Mr. Herrnstadt. I think he obviously has raised a very good
point. Our concern is that we don't have an export control
policy in this country that the offshore of technology and
production discourages to other countries.
Many times by merely giving another country technology that
enables them to build a platform upon which to even produce
more advanced technology, comes back to hurt our own
businesses, hurt our own workers and our own communities. It
creates the global competition that we are currently facing.
And that is a real concern. It is a concern that we are hearing
from our members, that we are seeing occur all the time.
Let me point out in the paper I wrote on offsets,
specifically, I focus on the aerospace industry and China and
how Europe and the United States have transferred lots of
technology in terms of aerospace to China. Guess what? China is
now in the regional aircraft market, and they announced that
they would be entering the large commercial aircraft market to
give Boeing and Airbus a run for their money. So I think we
need to formulate a comprehensive policy that addresses this.
Mr. Sherman. The gentleman from California, Mr.
Rohrabacher?
Mr. Rohrabacher. Thank you very much, Mr. Chairman. I would
just like the panel to give a very brief answer if you could.
Do you think that United States developed technology has
played a significant role in the developing of this massive
Chinese economic challenge that we face today?
Mr. Engler. I will go first, Congressman. There is no
question that just as I suppose in the early days of this
country European technology helped us, there is no question
that American technology has played a role over there.
Mr. Rohrabacher. The answer is yes.
Mr. Engler. Yes. Absolutely.
Mr. Rohrabacher. One difference of course is that when we
were young we didn't throw religious believers in jail, and we
had a fledgling democratic government.
They still have an intransigent communist dictatorship
which, as far as I know, as we speak is shooting Uighurs down
in the streets, arresting Falun Gong members for their
religious freedom, as well as the Tibetan people.
Mr. Shulman, do you think that United States technology has
played a significant role in developing China into the threat
that it poses to us today?
Mr. Shulman. Yes.
Mr. Herrnstadt. Let me say yes, and let me say they are
doing a wonderful job of playing Europe and the United States
against one another to drain that technology off.
Mr. Rohrabacher. Right.
Mr. Herrnstadt. A good example is the Airbus A320 that was
just assembled in China.
Mr. Rohrabacher. Right. Governor, when you said Intel has
gone, where did Intel go?
Mr. Engler. No. No. I said Intel is really the remaining
chip maker that is here.
Mr. Rohrabacher. Okay. Where did the rest of them go then?
Mr. Engler. Singapore, Ireland, lots of places.
Mr. Rohrabacher. Okay. But you don't see chip manufacturers
going to Ireland as a problem? Is that right?
Mr. Engler. I am reporting it as a fact.
Mr. Rohrabacher. I know.
Mr. Engler. I would like to have it all here. When I was
Governor of Michigan, I wanted it all in Michigan.
Mr. Rohrabacher. Okay. See, I don't see any problem with
trading with Ireland or maybe even Singapore.
I do find it troubling when we send technology to China
that could come back to hurt us. I understand the People's
Liberation Army owns many manufacturing systems in China, and
that seems to me to be a travesty.
When we talk about U.S. technology going to these other
countries, is much of this technology not just technology
developed by our own companies, but also aren't we also talking
about technology that was developed by the United States
taxpayers?
Mr. Engler. I think one good example, and Congressman Royce
asked this question of Mr. Shulman. I would just comment the
UAE is committed to spending I think $40 billion on the nuclear
industry. No question. We know where that all got started. That
started here.
We were the leaders, and much of the technology that
started here is why France is able to generate 80 percent of
their electricity from nuclear power, why Japan has got a
robust nuclear power industry. Now China is building nuclear
power plants. We should be doing that here.
The UAE is going to do them. The question is do we want any
U.S. jobs as a result of their $40 billion expansion? There is
simply nothing that is not available from France or other
places in the world for the UAE.
Mr. Rohrabacher. Correct me if I am wrong. Isn't this an
issue of whether we should work with them in building up a
nuclear capability there versus the idea of sending technology
to a country which then will manufacture, using that in a
manufacturing process?
Mr. Engler. The way I would say it, and maybe we are saying
exactly the same thing, but since I am not sure the way I would
say it is simply they have made a commitment to spend $40
billion on a nuclear power industry for domestic energy
purposes. We have a chance to be major suppliers or not.
Mr. Rohrabacher. Yes.
Mr. Engler. We should approve the 1-2-3 agreement 1-2-3,
real fast.
Mr. Rohrabacher. You know, I guess when we talked earlier
about a dual track, there are different layers to this onion.
One layer is that we don't want someone to get a hold of a
piece of technology that can also be used against us both
militarily and economically, but when we are talking about some
technologies what we are really talking about is the technology
that would enable them to expand their manufacturing
capabilities so that our aerospace workers which now have
leverage on slave labor because we got technology in place----
Well, if you give that same technology to slave labor
countries that undercuts our abilities if they use it in
manufacturing. Does that make sense?
Mr. Herrnstadt. Yes, it does. I actually testified on this
point before the China Economic Security Review Commission on
the growth of China's aerospace industry. I think that is a
real risk that we run. It is something that we talked about for
many years.
Mr. Rohrabacher. Right. Because we don't really worry that
the United Arab Emirates is going to go into the business of
building nuclear power plants for people in competition with
General Electric or something here.
What we are really worried about in UAE is whether or not
there is going to be a nuclear power plant that could be used
for military purposes.
Mr. Engler. I think that is true, Congressman, although I
do think that some actually worry that if that were to happen
they would prefer that it would be said that somehow the
technology came from the French, not the United States.
Mr. Rohrabacher. Thank you, Mr. Chairman. Let me just note
with one last statement, and that is we have subsidized this
massive development in China with technology transfers, with
educating young Chinese graduate students, with knowledge that
will permit them to basically put our own people out of work. I
think that has been not thoughtful on our part.
Thank you very much, Mr. Chairman.
Mr. Sherman. Since so much of your questioning dealt with
the jobs and the UAE and their nuclear program, I will reprise
what I said about that when we had hearings about it in this
room, and that is--the word is--``the fix is in.''
The French are going to get the lion's share of the jobs in
return for France doing a little thing that will help UAE
security, namely building a French naval base in that area.
We provide massively for their security; in fact, they
would have been overrun by Saddam had we not organized--not
France, but we organized--the effort to liberate Kuwait, and
our State Department has made it excruciatingly clear to UAE
that they are free to give us just the crumbs and they will
still get the massive security umbrella we provide, and then
they can get an additional security enhancement from France if
they give them the lion's share of the jobs. So it is not
surprising that the UAE is going to do this.
Years ago they decided to buy a French phone system, and I
commented that when you dial 911 on a French phone system you
get Paris, not the Pentagon, but what the UAE has correctly
deduced is that they can get all of the United States security
commitment and diplomatic support without anybody in our State
or Defense Department concerned about the jobs aspects.
With that I want to recognize the gentlelady from
California, Diane Watson.
Ms. Watson. Thank you, Mr. Chairman, and I thank the
witnesses for their patience and being here. If I raise an
issue that has already been addressed, would you please let me
know?
In the absence of an Export Administration Act, the U.S.
dual-use export control system continues to be dependent on the
President's invocation of emergency powers under the
International Emergency Economic Powers Act and no
comprehensive legislation to rewrite or reauthorize the EAA was
introduced in the 110th Congress.
Given the state of today's economy and the threat of global
security, what problems do you foresee in the near future if
significant effective legislation is not passed in the 111th
Congress? Any of you gentlemen can respond.
Mr. Engler. Well, I guess at this table as the primary
advocate for the rewrite for commercial purposes, I see U.S.
companies being left off of bid opportunities in some of the
international products where you actually have bids being
submitted by saying no export control approvals required, that
kind of thing.
I think that you will see competitors who have goods that
are export controlled in this country commercially available,
and they will compete more effectively and will cost us job
opportunities, so I really think at a time when we are in a
recession we ought to be saying what are all of the things we
could do to create potential opportunities.
This happens to be one that I think is low-hanging fruit
that we could do. I know we have been busy the last 30 years,
but it is time to rewrite and modernize the Act.
Ms. Watson. Mr. Shulman?
Mr. Shulman. Yes, ma'am. I think that there is much that we
can do to modernize and make the system more effective and
efficient for industry and for national security without
undertaking a rewrite of the EAA at this time for the purpose
of dealing with these problems as quickly as possible in the
current economic climate.
Ms. Watson. What are some of those things that you might
have in mind?
Mr. Shulman. Well, for one I think it is imperative to
allocate more resources to the Commerce Department, to the
Bureau of Industry and Security, to replenish their staff,
which they have lost many, many quality people in the last few
years because they have been operating effectively in a hiring
freeze.
Ms. Watson. Yes.
Mr. Shulman. To dedicate more resources to administering
the export control system to make it work more quickly and more
effectively, to devote more resources to create resources for
industry and for exporters to make export control decisions,
classifying their items, trying to determine whether they are
controlled for export or not, informing them of potential
buyers in other countries of whom they should be wary.
Those are all things which could be done just with
additional resources dedicated to BIS.
Ms. Watson. Mr. Herrnstadt?
Mr. Herrnstadt. Yes. Just very quickly, and I will direct
you to my written testimony.
We believe that part of the component of any relook at the
current EAA should give consideration for some sort of
employment impact study so that when export control licenses
are considered there is an analysis about how many jobs this
will impact at home in the short-term and then in the long-term
in terms of a transfer of technology and production.
Ms. Watson. Thank you. Should the U.S. designate specific
countries as sinners of transshipment concern and impose
additional restrictions on exporting to those destinations?
Thoughts?
Mr. Engler. I believe that is the law and that we do do
that, but I don't have a problem.
Ms. Watson. Well, if you need any changes, what would they
be?
Mr. Engler. Well, I would take the list of all of the
covered products and reduce that rather sharply and
dramatically so that we were able to put our regulatory
enforcement focus on those particular items that represent the
greatest threat where we uniquely have that product in this
country where the same product isn't available from one of our
allies who is willingly selling it.
And in some cases I suspect even if the ally is willing to
sell it we should not. I don't argue that point, but I think we
are quite over broad today because the Act is outmoded.
Ms. Watson. Mr. Shulman?
Mr. Shulman. Yes, ma'am. I believe that there have been
both regulatory and legislative proposals to create a special
designation for countries of diversion concern. I believe such
a designation should be created.
Two of the countries that have been mentioned as candidates
for such designation are the United Arab Emirates and Malaysia
because of their history of diverting things to Iran.
Ms. Watson. Thank you so much. My time is up, Mr. Chairman.
Mr. Sherman. Mr. Herrnstadt, we have talked free trade. A
wonderful thing. We will export. We will import without
governmental involvement.
Then you bring to our attention these offset agreements and
co-production agreements. Is it fully legal under our various
trade treaties for us to impose such requirements on those
exporting to the United States?
Mr. Herrnstadt. Well, it gets a little complicated for us.
There is the government procurement provision under GATT 1979.
There is a separate agreement under GATT dealing with civil
aviation of which we are a signatory to.
Mr. Sherman. But China is able to do this if you are
exporting paperclips to them.
Mr. Herrnstadt. They are not a signatory to the civil
aviation agreement. And then there was the 1992 United States-
European agreement on large commercial aircraft which got
dissolved with respect to the WTO subsidy.
So part of our argument is that we really need to
reinvigorate prohibitions on the use of offsets in free trade
agreements, in multilateral trade agreements, at the WTO and in
investment----
Mr. Sherman. Well, these other countries are going to look
at their agreements with us and they are going to say we don't
want to change those. They are pretty sweet for us.
I realize you are here representing the machinists and not
the UAW, but are we allowed to require co-production and
technology transfer and offsets to anyone who wants to export a
vehicle to the United States?
Mr. Herrnstadt. You know, I will confess I will need to
take a double look at it, but my immediate reaction is I would
be interested to see why we couldn't do it, particularly in the
commercial arena.
Mr. Sherman. Well, it is because our free trade agreements
are designed to be one-sided in favor of American investors and
importers.
I believe the Governor is a little bit more in favor of
free trade agreements than most members of organized labor. I
ought to let him comment. Do you see a circumstance where we
have to put up with offsets and co-production agreements, but
we are not able to impose them on anybody shipping into the
United States?
Mr. Engler. Well, I do think that it is a pretty
competitive world out there, and some of these agreements--I
mean, I am proud. For a long time General Motors has been
number one in China with the Buick. I mean, that is a good
thing.
Mr. Sherman. Well, that is the example of a co-production
agreement. General Motors gets the profits, but the UAW doesn't
get the jobs.
I am sure that a lot of countries will welcome our
investment and our technology so long as none of the
manufacturing benefits American workers. If that is a big win,
a few more wins like that and we are going to be a third rate
country.
Do you see the Buicks made in China as the route to
prosperity for the future?
Mr. Engler. Unfortunately, I see them being more profitable
than the vehicles being made in the North American market at
the moment.
I do think that the fact that China is now the largest auto
market in the world, passing this country, probably would argue
that if you are a global auto company you would want to be
there and be in some production.
Mr. Sherman. As of a few years ago, we were the largest
auto market in the world, and lots and lots of big auto
companies decided not to give us our fair share of the jobs,
and many of them sold cars in this country without giving us a
single manufacturing job.
It is hard to say, well, China is a big market so we have
to give them a lot of jobs, and we are a big market so they
have to avoid giving us any of the jobs as long as we get the
profits.
Mr. Engler. You know, the government is in charge of the
auto industry or a good deal of it today. I am sure it will be
fixed, but the reality I think is----
Mr. Sherman. The government is in charge of two companies
in the auto industry that account for way less than half of the
autos sold in the United States.
The fact is whether we are talking autos or we are talking
textiles or whether we are talking anything else, when we want
to export to many countries they hit us hard with co-production
agreements. When they want to export to us, we just fire a
bunch of employees. We just fire a bunch of workers and open
our markets.
Let us see. I see my time is expiring. I did want to go on
to another line of questioning, but I will recognize the
gentleman from Illinois.
Mr. Manzullo. Thank you. I am going to show my age,
especially with Frank Vargos sitting behind you.
Do you remember the battle of Three Gorges Dam? For the
younger members here, when I was first elected and sworn in in
1993, Ex-Im Bank would not allow a company such as Caterpillar
and Rotec and others to use the favorable financing of Ex-Im to
go into the massive Three Gorges Dam project in China because
of concern over the Siberian crane and Chinese alligator.
We were arguing for massive change in our Ex-Im policy that
allowed the U.S. to be more competitive because if our products
are going there they were more environmentally safe than the
products that were eventually purchased because of favorable
financing.
I think that is a reasonable analogy or a good analogy as
to several things that we are trying to do here. UAE is going
to buy their nuclear equipment from somebody. The issue is from
whom are they going to buy it, and if they buy it from us we
have the opportunity to put in the strongest set of verifiable
controls that can be envisioned because we have a great
interest obviously in making sure that there is no more nuclear
proliferation going on.
Governor, is that not really what we are talking about in
terms of modernizing export controls so we can be on the cusp
to have the best controls possible and yet to be able to have
as much manufacturing and engineering here in this country?
Mr. Engler. Congressman, that is exactly what this
discussion is about. I mean, we are ranging far afield today,
which I always enjoy the discourse, but I think this is a
fairly narrow set of issues here.
The UAE would like to buy American products for that
nuclear expansion. I mean, I met with UAE officials. That would
be very high on their list. We need to get out of the way, and
the 1-2-3 agreement is part of that. I think that that has been
made pretty clear. I think that we would be highly competitive
if in fact we removed the obstacles.
And you are absolutely correct. They made the decision to
spend $40 billion in this area. They are going to buy from
somebody, and because we have been so sort of hostile to
nuclear power for a number of years the industry in this
country has been pretty dormant, but all of that technology
started here.
So I see this as an opportunity to operate the supply base
as a precursor to a renewal of a nuclear power industry in this
country that is urgently needed, especially if we are serious
about reducing carbon emissions.
Mr. Manzullo. And would you not call those green jobs?
Mr. Engler. They don't get any greener than that. They are
green in terms of the environment, and they are green in terms
of the cash.
Mr. Manzullo. That is a great answer.
Mr. Shulman testified that 99 percent of dual-use exports
do not require licenses. He suggests that the manufacturing
industry is complaining essentially over nothing.
Mr. Engler. Well, we have thousands and thousands and
thousands of products, and many of them don't require any
license, but many do. Many of those unfortunately are also
readily available elsewhere in the world.
Mr. Manzullo. That was the 17C fix that Mr. Sherman----
Mr. Engler. Yes.
Mr. Manzullo. We worked on last year.
Mr. Engler. And I am just suggesting that we can be more
discerning in an Act which references the Cold War written 60
years ago really last touched 30 years ago.
It is time to bring that into this century, and in so doing
I think we can do a better job for national security on the
things that really matter while clearing away just what really
has become a regulatory morass.
The big companies could really afford this. Interestingly
enough, I think the companies who get hurt the most by this are
the small and medium sized companies who don't have an army of
lawyers working for them. The big people staff up, and they
just do it. They hate it and it is expensive, but they do it.
Medium and small sized companies can't. They can't do it.
Mr. Manzullo. I want to thank the three of you for your
testimony. Weren't you the panel that got caught up in the 6
hours of voting a couple weeks ago? Sorry for that.
Mr. Sherman. Does the gentlelady from California have
additional questions?
Okay. Well, then I will call on myself for a few questions.
Mr. Shulman, how much harm is it that BIS currently does
not have law enforcement authority?
Mr. Shulman. They have found a way to work around that
problem, but it requires effort which would be better spent on
doing export enforcement with the limited resources that they
already have, so it seems to me that it could be a relatively
simple fix to give them that permanent law enforcement
authority, freeing them up to do their jobs better.
Mr. Sherman. Governor, we have a deemed export definition
where even if you are shipping a good in the United States if
you are shipping it to a foreign national then you need the
same license as if you were shipping it abroad.
That legal fiction, but useful one, could be useful in
saying for certain items, and I keep coming back to the spark
gap plug, that we are going to deem it an export even if you
are sending it to someone whose folks came over on the
Mayflower.
That is to say if it leaves the factory gate we are going
to want to keep track of it and know where that item is going
and that you are sending it to somebody who has a legitimate
use for it. Is this something that we should apply to some
easily transportable, highly militarily significant products?
Mr. Engler. You know, it is something that I think is part
of the discussion of the Modernization Act that can be looked
at.
I was part of a commission that started out being co-
chaired by Bob Gates and Norm Augenstein and ended up being
chaired by Augenstein after Gates was appointed to the Defense
post that recommended a number of changes in the export law as
well, so that is an area that is useful to look at.
The other thing that we haven't talked about today, but I
think it is also relevant because again it helps to clear this
up, is that we have companies that are cleared that we work
with very closely in our most top secret areas. We don't allow
those companies the kind of flexibility on intracompany
transfers from this country to another country.
We have got now negotiations, and earlier we were talking
about a list of countries that we might not trust. There are
countries we do trust, Australia and Great Britain, and we have
defense treaties pending there that need to be acted on, so
there are lots of ways to look at this and to narrow the focus
down to those few things that are most important.
Mr. Sherman. So the verified end user program might apply
to a company that is already dealing with the most sensitive--
--
Mr. Engler. Sure.
Mr. Sherman [continuing]. Technology that has a branch in a
foreign country, particularly if that foreign country was a
place we trust.
I don't care how much I like Google and Yahoo, but when
they do business in China all of a sudden they are turning over
all kinds of documents to the Chinese Government that we would
prefer they not.
Mr. Herrnstadt, I can see why the machinists would fear
competition from a low wage country. Most of those countries
the Governor is referring to are not low wage countries.
Do you see a threat to jobs if we make it easier for a
United States company with a branch in Australia or Britain to
move goods from here to there and back more easily?
Mr. Herrnstadt. Yes, we certainly do. It is not just an
issue with a developing country. The developing country issue
particularly with labor standards not met, internationally
recognized labor standards, like Mexico and China exacerbate
the situation, but yes. Certainly.
Mr. Sherman. I mean, Australia probably has better labor
standards than we do and certainly stronger unions I hate to
say.
Mr. Herrnstadt. Well, we will give the Rudd government a
little bit more time.
Mr. Sherman. But you would want the same job scrutiny
whether we are talking about an end user certificate----
Mr. Herrnstadt. Absolutely.
Mr. Sherman [continuing]. In Australia as with China or
Mexico?
Mr. Herrnstadt. Yes. Absolutely. The problem with offsets
is that basically our Government's policy is to relegate the
issue of offsets to private parties, so we have private
companies negotiating either with countries or companies in
other countries regarding the offset process.
Mr. Sherman. I would also comment the biggest problem with
offsets is they tend to exist only in those very few areas
where the United States is a net exporter, chiefly aircraft and
some high technology, and if we are going to have balanced
trade on the one or two things that we export and then we are
going to have massive deficits in everything we import then our
trade deficit is going to get much worse.
And that is why it is interesting that these co-production
agreements only seem to exist when America is exporting and
only as to those few goods where America still tends to be a
net exporter.
I believe we have gone long enough, and the gentleman from
Illinois has no more questions. Gentlemen, you have been very
patient with us, and I thank you for your appearance.
We would be anxious to get from each of you proposed if not
statutory language, at least something close to statutory
proposals to improve this whole system because we can't write
it all ourselves.
Mr. Engler. We would be happy to work with you, Chairman.
Mr. Sherman. Thank you.
[Whereupon, at 2:05 p.m., the subcommittee was adjourned.]
A P P E N D I X
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