Export Controls: Change in Export Licensing Jurisdiction for Two
Sensitive Dual-Use Items
(Letter Report, 01/14/97, GAO/NSIAD-97-24).
Pursuant to a congressional request, GAO reviewed the implications of
changing export licensing jurisdiction for two sensitive dual use items
from the Department of State to the Department of Commerce, focusing on:
(1) the military sensitivity of the two items; (2) the executive
branch's rationale for the change in jurisdiction; (3) the licensing
systems that the two departments use to control exports; and (4)
proposed changes in Commerce controls for these two items.
GAO found that: (1) the items transferred to Commerce control,
commercial jet engine hot section technology and commercial
communications satellites, are militarily sensitive items; (2) hot
section technology gives U.S. fighter aircraft the ability to outlast
and outperform other aircraft, a key element in achieving air
superiority; (3) because of the military significance of this
technology, State does not allow the export of the most advanced hot
section technology for either military or commercial use; (4) commercial
communications satellites being transferred to Commerce jurisdiction
contain militarily sensitive characteristics; (5) State has approved the
export of commercial communications satellites for foreign launch with
conditions for safeguarding sensitive technologies for certain
destinations such as China; (6) the executive branch's decision to
transfer licensing jurisdiction reflects Commerce's position that all
hot section technology and communications satellites for commercial use
should be under Commerce jurisdiction; (7) transferring jurisdiction
also makes U.S. national controls for these items consistent with
international trade commitments to control them as dual use items; (8)
State has broad authority to deny a license, and it can deny simply with
the explanation that it is against U.S. national security or foreign
policy interests; (9) jet engine and satellite manufacturers support the
change in jurisdiction, viewing the Commerce system as more responsive
to the needs of business; (10) the state and Commerce export control
systems differ; (11) Commerce controls items to achieve specific
national security and foreign policy objectives; (12) national security
controls are aimed at preventing items from reaching certain
destinations such as China and Russia; (13) foreign policy controls are
aimed at achieving specific objectives, including antiterrorism,
regional stability, and nonproliferation; (14) in recognition of the
military sensitivity of these items, Commerce is implementing new and
expanded control procedures; (15) these new control procedures are
intended to allow Commerce to control and deny, where appropriate,
exports of the two items to all destinations; (16) according to Commerce
and other executive branch officials, the change in jurisdiction is not
intended to change U.S. licensing policy, but it is intended only to ch*
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD-97-24
TITLE: Export Controls: Change in Export Licensing Jurisdiction
for Two Sensitive Dual-Use Items
DATE: 01/14/97
SUBJECT: Jurisdictional authority
Dual-use technologies
Export regulation
Interagency relations
Licenses
International trade restriction
Technology transfer
Foreign trade policies
Aircraft engines
Communication satellites
IDENTIFIER: U.S. Munitions List
Dept. of Commerce Control List
China
Russia
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Cover
================================================================ COVER
Report to Congressional Requesters
January 1997
EXPORT CONTROLS - CHANGE IN EXPORT
LICENSING JURISDICTION FOR TWO
SENSITIVE DUAL-USE ITEMS
GAO/NSIAD-97-24
Export Controls
(707174)
Abbreviations
=============================================================== ABBREV
ITAR - International Traffic in Arms Regulations
GAO -
Letter
=============================================================== LETTER
B-272258
January 14, 1997
The Honorable Floyd Spence
Chairman
The Honorable Ronald V. Dellums
Ranking Minority Member
Committee on National Security
House of Representatives
The U.S. export control system for items with military applications
is divided into two regimes. The Department of State licenses
munitions items, which are designed, developed, configured, adapted,
or modified for military applications, and the Department of Commerce
licenses most dual-use items, which are items that have both
commercial and military applications. Although the Commerce
licensing system is the primary vehicle to control dual-use items,
some dual-use items are controlled under the State system. In March
1996, the executive branch announced a change in licensing
jurisdiction for two items--commercial jet engine hot section
technology and commercial communications satellites--from State to
Commerce.\1 In October and November 1996, Commerce and State
published regulations implementing this change, with Commerce
defining enhanced export controls to apply when licensing these two
items. Commerce's regulations are interim regulations, effective on
publication, and Commerce allowed for a 45-day public comment period
on its regulations.
In response to your request, we reviewed the implications of this
change in export licensing jurisdiction. Specifically, we (1)
assessed the military sensitivity of the two items, (2) determined
the executive branch's rationale for the change in jurisdiction, (3)
compared the licensing systems that the two Departments use to
control exports, and (4) analyzed proposed changes in Commerce
controls for these two items.
--------------------
\1 Hot section technology is the technical information required for
the design, production, manufacture, maintenance, or modification of
the engine hot section.
BACKGROUND
------------------------------------------------------------ Letter :1
The Department of State controls munitions items under the authority
provided in the Arms Export Control Act. State promulgates the
International Traffic in Arms Regulations (ITAR) and establishes,
with the concurrence of the Department of Defense, the U.S.
Munitions List. State and Defense can include a dual-use item on
this list, as provided by the ITAR, if it "is specifically designed,
developed, configured, adapted, or modified for a military
application, and has significant military or intelligence
applicability such that control under [the ITAR] is necessary."
The Department of Commerce controls dual-use items under a system
established under the Export Administration Act.\2 Commerce imposes
export controls on the items within its jurisdiction through the
Export Administration Regulations and establishes the Commerce
Control List in consultation with other agencies and in parallel with
U.S. commitments in international control regimes. In arriving at a
licensing decision, Commerce provides license applications for the
review of other agencies, including Defense, State, the Department of
Energy, and the Arms Control and Disarmament Agency. A December 1995
executive order states that Commerce may refer all applications for a
validated license to these agencies for review.\3 If an agency
disagrees with Commerce's initial licensing decision, it can appeal
the decision to interagency review committees.
In March 1993, we reported that jurisdiction over commercial jet
engine hot section technology and space-related items, such as
communications satellites, was a long-standing issue between State
and Commerce.\4 In November 1990, the President ordered the removal
of dual-use items from the U.S. Munitions List and State's licensing
controls, unless significant national security interests would be
jeopardized. Pursuant to this order, State led an interagency
review, including officials from Defense, Commerce, and other
agencies, to determine which dual-use items should be removed from
the munitions list and transferred to Commerce's jurisdiction and
which warranted retention on the munitions list. This review was
conducted between December 1990 and April 1992. As part of this
review, an interagency working group identified and established
performance parameters for the militarily sensitive characteristics
of communications satellites. If a satellite met or exceeded these
parameters, the satellite would be controlled by State, otherwise it
would be licensed by Commerce. As a result of the interagency
review, over two dozen dual-use items were removed from the munitions
list and placed under Commerce's jurisdiction, including
approximately half of the commercial communications satellites.
Jurisdiction for hot section technology, however, was not resolved as
a result of the interagency review.
The executive branch's recent decision to change the export licensing
jurisdiction for commercial jet engine hot section technology
addresses a long-standing disagreement as to whether State or
Commerce should control its export. Until this decision, Commerce
had claimed jurisdiction over hot section technology of commercial
engines not derived from military technology, while State and Defense
had maintained that hot section technology for commercial engines
that is derived from military engines is the same technology used in
military fighter engines and is of such sensitivity that ITAR control
was appropriate. Now, all hot section technology for commercial
engines, including certain civil and military engines that share the
same hot section technology and are evolving together, will be
controlled by Commerce. All commercial communications satellites,
including those with militarily sensitive characteristics, will be
licensed by Commerce.
--------------------
\2 Although the Export Administration Act lapsed on August 20, 1994,
Commerce is currently acting under the authority conferred by
Executive Order 12924 of August 19, 1994. In the executive order,
the President invoked his authority, including authority under the
International Emergency Economic Powers Act, to continue the system
of controls that the United States had maintained under the Export
Administration Act. This has been extended by two presidential
notices issued in 1995 and 1996.
\3 Many items on the Commerce Control List can be exported under a
general license to particular destinations. Commerce is not notified
of and does not review these exports. Selected items require that
exporters obtain Commerce approval through an individual validated
license for each export.
\4 Export Controls: Issues in Removing Militarily Sensitive Items
from the Munitions List (GAO/NSIAD-93-67, Mar. 31, 1993).
RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
The items transferred to Commerce's control, commercial jet engine
hot section technology and commercial communications satellites, are
militarily sensitive items. Hot section technology gives U.S.
fighter aircraft the ability to outlast and outperform other
aircraft, a key element in achieving air superiority. Because of the
military significance of this technology, State does not allow the
export of the most advanced hot section technology for either
military or commercial use. Commercial communications satellites
being transferred to Commerce's jurisdiction contain militarily
sensitive characteristics, such as crosslink capabilities that
transmit data from one satellite to another without going through a
ground station and thus permit very secure communications. Defense
and State officials expressed concern about the potential for
improvements in missile capabilities through disclosure of technical
data related to integrating the satellite with the launch vehicle and
the operational capability that specific satellite characteristics
could give a potential adversary. State has approved the export of
commercial communications satellites for foreign launch with
conditions for safeguarding sensitive technologies for certain
destinations such as China.
The executive branch's decision to transfer licensing jurisdiction
reflects Commerce's position that all hot section technology and
communications satellites for commercial use should be under
Commerce's jurisdiction. Transferring jurisdiction also makes U.S.
national controls for these items consistent with international trade
commitments to control them as dual-use items. Jet engine and
satellite manufacturers support the change in jurisdiction, viewing
the Commerce system as more responsive to the needs of business.
The State and Commerce export control systems differ. State has
broad authority to deny a license, and it can deny simply with the
explanation that it is against U.S. national security or foreign
policy interests. Commerce controls items to achieve specific
national security and foreign policy objectives. National security
controls are aimed at preventing items from reaching certain
destinations such as China and Russia. Foreign policy controls are
aimed at achieving specific objectives, including antiterrorism,
regional stability, and nonproliferation.
In recognition of the military sensitivity of these items, Commerce
is implementing new and expanded control procedures. These changes
include establishing a new foreign policy control known as a
"significant item" control. These new control procedures are
intended to allow Commerce to control and deny, where appropriate,
exports of the two items to all destinations. This is particularly
important for control of hot section technology--exports of the most
sensitive hot section technology have not been permitted, even to
close allies.
According to Commerce and other executive branch officials, the
change in jurisdiction is not intended to change U.S. licensing
policy--that is, what destinations and end users the United States
will approve export licenses for. Rather, it is intended only to
change the procedures under which licensing decisions will be made.
Whether the current licensing policy will be maintained with the
change in jurisdiction is uncertain. The underlying objectives of
the two systems differ. The Arms Export Control Act gives State the
authority to use export controls primarily to protect U.S. national
security without regard to economic or commercial interests. Under
the Export Administration Act, on the other hand, Commerce weighs
economic and trade interests along with national security and foreign
policy concerns. These differences in the underlying basis for
decisions create uncertainty as to whether the changed procedures for
making licensing decisions will result in changes in licensing
policy. Uncertainty is also created by the newness of the
"significant item" control because it is not clear how it will be
applied.
THE TWO ITEMS ARE MILITARILY
SENSITIVE
------------------------------------------------------------ Letter :3
COMMERCIAL JET ENGINE HOT
SECTION TECHNOLOGY
---------------------------------------------------------- Letter :3.1
A jet engine is composed of three sections: the cold section, or the
fan and compressor, which is where the air enters the engine; the hot
section, comprised of the combustor and portions of the turbine,
which are the components exposed to combustion gases; and the warm
section, or exhaust nozzle, which is where the exhaust gases leave
the engine. The turbine is one of the more critical components of
jet engines because it extracts energy from combustion gases and
converts it into the engine's mechanical force. Hot section gas
turbine technology that is used to manufacture military engines
incorporate advanced design concepts, materials, and manufacturing
processes that help keep the turbine cool while the engine operates
at extremely hot temperatures.
The key to achieving greater engine performance is to increase the
temperature of operation within the engine's hot section. Increased
engine effectiveness enhances the performance of the aircraft and
leads to improved survivability, lethality, reliability, and
sustainability. According to Defense officials, the U.S. military
has air superiority over other countries in large part because of the
advanced technology used to build hot sections for military engines.
U.S. fighter aircraft have the ability to outlast and outperform
other foreign-built aircraft, which translates into a significant
combat advantage over possible adversaries.
Hot section technology required for military aircraft also has
applications for engines used on commercial aircraft. Commercial
engines require different performance parameters than military
engines, but higher operating temperatures provide greater fuel
efficiency. According to officials at Commerce, Defense, and State
and industry representatives, the core elements of hot section
technology are similar for both military and commercial jet engines.
Although all agree that it is almost impossible to distinguish
between military and commercial hot section technology, they differ
in opinion on the applicability of commercial hot section technology
to military uses. Defense and State officials informed us that
exporting commercial hot section technology gives a foreign
manufacturer information allowing it to build either a commercial or
military engine if it is willing to make certain trade-offs in
manufacturing, such as sacrificing durability to achieve higher
performance and temperatures. Commerce officials maintain that if a
foreign manufacturer decides to adapt commercial hot section
technology to military use, it can make a military engine, but it
will not have sufficient experience to allow it to make an engine
equal to or exceeding U.S. military capabilities. Engine
manufacturers agree that selected hot section technology for
commercial engines should be protected for both competitive interest
and national security, but they believe that certain technical data
transfers to foreign partners facilitate cooperative engine
development, production sharing, operational maintenance, and repair.
Because of the military importance of hot section technology and the
similarity between commercial and military technology, Defense
officials are concerned about the diffusion of technology and
availability of hot section components that could negatively affect
the combat advantage of U.S. aircraft and pose a threat to U.S.
national security concerns. To protect national security interests,
Defense officials review applications referred by State to determine
whether the export would undermine the U.S. lead in hot section
technology and, consequently, U.S. air superiority.\5 Defense and
State have not approved the export of the most advanced hot section
technology for either military or commercial use, although certain
exports have been allowed under government-to-government agreements
with U.S. allies that restrict transfer beyond the government.
In addition to protecting the export of state-of-the-art hot section
technology, Defense also makes recommendations on the advisability of
exporting selected individual parts that make up the hot section
(i.e., the blades, discs, and combustor lines). These parts are
exposed to combustion gases and, in state-of-the-art engines, they
must have the ability to sustain very high temperatures. According
to Defense officials, allowing the export of the most advanced
components would allow foreign manufacturers to assemble hot sections
that match the capabilities of U.S. engines used in fighter
aircraft. State defers to Defense's recommendations on license
applications for these parts. Licensing of these components is not
affected by the change in jurisdiction and remains with State.
--------------------
\5 Pursuant to the December 1995 executive order stating that
Commerce may refer license applications to Defense and other
agencies, Defense also reviews applications received by Commerce.
COMMUNICATIONS SATELLITES
---------------------------------------------------------- Letter :3.2
Commercial communications satellites are intended to facilitate civil
communication functions through various media, such as voice, data,
and video. Commercial satellites often carry Defense data as well.
In contrast, military communications satellites are used exclusively
to transfer information related to national security and have
characteristics that allow the satellites to be used for such
purposes as providing real-time battlefield data and relaying
intelligence data for specific military needs.
Satellites used for either commercial or military communications may
contain one or more of nine militarily sensitive characteristics. A
description of the characteristics is provided in table 1.
Satellites with characteristics exceeding certain parameters are
considered militarily sensitive.
Table 1
Militarily Sensitive Characteristics
Integrated in Commercial Communications
Satellites
Military sensitivity of
characteristics exceeding
Characteristic or certain performance
component Definition parameters
------------------------- ------------------------- --------------------------
Antijam capability Antennas and/or antenna Ensures that
systems with the ability communications remain open
to respond to incoming during crises.
interference by
adaptively reducing
antenna gain in the
direction of the
interference.
Antenna Allows a satellite to An antenna aimed at a spot
receive incoming signals. roughly 200 nautical miles
in diameter or less can
become a sensitive radio
listening device and is
very effective against
ground-based interception
efforts.
Crosslinks Provide the capability to Permit the expansion of
transmit data from one regional satellite
satellite to another communication coverage to
without going through a global coverage and
ground station. provide source-to-
destination connectivity
that can span the globe.
It is very difficult to
intercept and permits very
secure communications.
Baseband processing Allows a satellite to On-board switching can
switch from one frequency provide resistance to
to another with an on- jamming of signals.
board processor.
Encryption devices Scramble signals and data Allow telemetry and
transmitted to and from a control of a satellite,
satellite. which provide positive
control and deny
unauthorized access.
Certain encryption
capabilities have
significant intelligence
features important to the
National Security Agency.
Radiation-hardened Provide protection from Permit a satellite to
devices natural and man-made operate in nuclear war
radiation environment in environments and may
space, which can be enable its electronic
harmful to electronic components to survive a
circuits. nuclear explosion.
Propulsion system Allows rapid changes when Military maneuvers require
the satellite is in that a satellite have the
orbit. capability to accelerate
faster than a certain
speed to cover new areas
of interest.
Pointing accuracy Provides a low High performance pointing
probability that a signal capabilities provide
will be intercepted. superior intelligence-
gathering capabilities.
Kick motors Used to deliver If the motor can be
satellites to their restarted, the satellite
proper orbital slots. can execute military
maneuvers because it can
move to cover new areas.
--------------------------------------------------------------------------------
Source: Departments of Commerce and Defense.
Jurisdiction over commercial communications satellites that did not
have any of these militarily sensitive characteristics changed to
Commerce in October 1992 as a result of the interagency review begun
in 1990. Those with any of the nine components remained under
State's jurisdiction, as did the individual components themselves and
all sensitive technology to design, develop, or manufacture a
satellite. The regulations move commercial satellites with one or
more of the nine characteristics to Commerce, while the export of
individual systems and components not incorporated in a satellite
remain under State's jurisdiction, as does the technology to design,
develop, and manufacture the satellite. Certain kick motors that are
not embedded in satellites, however, will be subject to Commerce's
jurisdiction when they are to be used for specific satellite
launches, provided that a kick motor is neither specifically designed
or modified for military use nor capable of being restarted after the
satellite is in orbit.
In reviewing export license applications, Defense and State officials
examine the potential for the export of satellite technologies. The
process of planning a satellite launch takes place over several
months, and there is concern that technical discussions between U.S.
and foreign representatives may go beyond that needed for the launch
and lead to the transfer of information on militarily sensitive
components. Officials say they are particularly concerned about the
technologies to integrate the satellite to the launch vehicle because
this technology can also be applied to launch ballistic missiles to
improve their performance and reliability. They also expressed
concern about the operational capability that specific
characteristics, in particular antijam capability, crosslinks, and
baseband processing, could give a potential adversary.
State has approved the exports of commercial communications
satellites and established detailed security guidelines and
conditions to address concerns about the disclosure of technologies
associated with the launch vehicle and militarily sensitive
characteristics for launches from China and sites in the former
Soviet Union. These conditions require that safeguards be applied to
prevent the disclosure of technology beyond that needed for
integration and launch of the satellite, as provided for in safeguard
agreements between the United States and these countries. For
launches in China and Russia, State also requires a technical
assistance agreement, which is a signed contract between the U.S.
firm and the foreign government that specifies what technical
assistance and data can be provided. In addition, State requires
that exporters fund the travel costs of Defense personnel traveling
to oversee the satellite launches. In licensing communications
satellites already under its jurisdiction, Commerce also places
conditions on the export license on the type of technical information
that can be transferred but does not require exporters to fund the
travel costs of Defense personnel overseeing the launch.
RATIONALE FOR CHANGING
LICENSING JURISDICTION
------------------------------------------------------------ Letter :4
Export control of dual-use items has been a matter of contention over
the years between Commerce and State. State claimed jurisdiction for
both commercial and military hot section technology because State and
Defense maintained that (1) the technology and manufacturing
processes applied to the hot sections of military and commercial
engines are basically the same and originated in military programs
and (2) diffusion of critical hot section technology for commercial
engines would accelerate other countries' abilities to design and
manufacture engines, including military engines, of equal capability
to those manufactured in the United States. Commerce claimed
jurisdiction for commercial hot section technology not derived from
military technology.
Commerce has argued that since the international Coordinating
Committee for Multilateral Export Controls classified communications
satellites and other space-related items as dual use, the entire
category, except strictly military items, should be transferred to
its jurisdiction.\6 State and Defense insisted that the decision
should be made on an item-by-item basis as part of the interagency
review begun in 1990. Therefore, an interagency working group
comprised of all concerned agencies was assembled to conduct an
item-by-item review. The working group decided in 1992 to move
approximately half the commercial communications satellites (those
that did not have one or more of the nine ITAR performance
characteristics) to the Commerce Control List.
According to Commerce officials, the executive branch's decision
reflects Commerce's long-held position that all commercial hot
section technology and commercial communications satellites should be
under its jurisdiction. Commerce argues that both items are, by
definition, intended for commercial end use and are therefore not
munitions. This argument reflects the view that all dual-use items
should be subject to export control under Commerce's licensing system
because most applications of these items are commercial. Commerce
also maintains that transferring jurisdiction to the dual-use list
also makes U.S. controls consistent with treatment of these items
under multilateral export control regimes. In contrast, State and
Defense point out that the ITAR is not based on end use
considerations, but on whether an item has been specifically designed
for military applications. The executive branch's decision is the
result of an interagency review involving State, Commerce, Defense,
and the intelligence community in which the agencies developed a
common recommendation to the President to clarify the licensing
jurisdiction of these items.
--------------------
\6 The United States was a member of this committee, which called for
member nations to assert control over munitions, dual-use items, and
nuclear items as agreed to by all members. Although this committee
ceased to exist in 1994, communications satellites are still
controlled multilaterally as dual-use items.
INDUSTRY SUPPORTS THE CHANGE
IN JURISDICTION
---------------------------------------------------------- Letter :4.1
Manufacturers of jet engines and communications satellites we talked
with support the transfer of the items to the Commerce Control List.
They cite the following reasons for favoring Commerce's control:
-- Export licensing jurisdiction should be determined solely by an
export's commercial application, and since both items are
predominantly for commercial end use, they are not munitions and
should therefore not be subject to State's licensing process.
-- The Commerce process is more responsive to business because time
frames are clearly established, the review process is more
predictable, and more information is shared with the exporter on
the reasons for denials or conditions on the license.
-- Under State's jurisdiction, commercial products become subject
to certain mandatory sanctions and embargoes that require denial
of exports. Some sanctions and embargoes apply only to items on
the munitions list and not to items on the Commerce Control
List.
-- Exports under State's jurisdiction that exceed certain dollar
thresholds are subject to congressional notifications, and
exporters say this can delay the process. Satellite exports
exceed these thresholds.
-- The competitive market for commercial aircraft creates the need
to establish foreign overhaul and repair facilities and to use
foreign expertise to develop and manufacture current and new
commercial aircraft engines. Although the jet engine industry
agrees in principle that selected high technology know-how
should be protected for both competitive and national security
reasons, manufacturers believe certain technical data transfers
to foreign partners facilitate cooperative engine development,
sharing of production, and operational maintenance.
-- China is seen as a large and growing market for commercial
aircraft engines. Competing in the China market for the
100-passenger airliner requires transfer of technology for the
maintenance and production of hot section components of an
engine for such an aircraft .
-- Some of the militarily sensitive systems or characteristics of
communications satellites are no longer unique to military
satellites.
COMMERCE'S AND STATE'S
LICENSING SYSTEMS DIFFER
------------------------------------------------------------ Letter :5
State and Commerce implement different laws to control exports of
military and dual-use items. The underlying objectives of these laws
differ. State controls munitions items to further the security and
foreign policy of the United States. Commerce, on the other hand,
weighs U.S. economic and trade interests with national security and
foreign policy interests.
Commerce controls the export of dual-use items under the Export
Administration Act, as implemented under the Export Administration
Regulations. The key provisions of its export control system are
discussed in table 2.
Table 2
Key Provisions of Commerce's Export
Control System
Provision Definition
------------------------- -----------------------------------------------------
License categories An individual validated license authorizes the export
of a specific item during a specified period to a
designated consignee. A general license requires no
application and permits export within the provisions
of the Export Administration Regulations. A special
comprehensive license consolidates five types of
special licenses for such purposes as large-scale
exports of a wide variety of items for specified
activities, certain multiple exports and re-exports,
and other purposes.
Reasons for control National security controls restrict the export and
re-export of strategic items worldwide to prevent
their diversion to certain destinations, such as
China and Russia. Foreign policy controls restrict
the export of items to prevent them from reaching
countries for reasons that include antiterrorism,
regional stability, and nonproliferation.
Permanency of controls Foreign policy controls are not permanent and must be
renewed annually by the Secretary of Commerce, as
delegated by the President, and reported to Congress.
Foreign availability A determination that an item is comparable in quality
to an item subject to U.S. national security export
controls and is available from a non-U.S. source in
sufficient quantities to render the U.S. export
control of that item or the denial of a license
ineffective. This determination results in mandatory
decontrol of items controlled solely for national
security reasons. This provision does not apply to
items controlled for foreign policy reasons.
De minimis thresholds Under the Export Administration Regulations, prior
written approval from Commerce is not required for
the re-export of a foreign-made product incorporating
materials of U.S. origin if the U.S. content value is
less than 10 percent or 25 percent, depending on the
destination, of the product.
Judicial review The Export Administration Act provides for limited
administrative review of license denials, but it
precludes judicial review.
Contract sanctity If Commerce imposes a new foreign policy control and
a contract to manufacture a product for which an
exporter has obtained an export license is underway,
the contract generally does not have to comply with
the new control and the exporter can export the
product.
Congressional Items are not subject to mandatory congressional
notification notification with the exception of items subject to
controls for antiterrorism.
Enforcement of sanctions Although Commerce does not allow the export of
certain dual-use items to certain countries when the
United States imposes sanctions on those countries,
if these items are embedded within larger items that
are not subject to sanctions, the larger items can be
exported to sanctioned countries.
--------------------------------------------------------------------------------
While the Export Administration Act provides broad authority to
control exports, the national security and foreign policy controls
that Commerce has put in place through the Export Administration
Regulations provide for control of exports to specific destinations
to achieve specific objectives. National security controls are to
ensure that exports do not make a contribution to the military
potential of specified countries such as China and Russia. Foreign
policy controls can be imposed on all destinations and include the
regional instability control and missile technology control. Exports
controlled for regional instability reasons are reviewed to determine
whether the exports could contribute directly or indirectly to any
country's military capabilities in a manner that would alter or
destabilize a region's military balance contrary to the foreign
policy interests of the United States.
State controls munitions items under the Arms Export Control Act.
State requires individual licenses for all exports under its
jurisdiction, with the exception of certain Defense exports. State
has broad authority to deny a license, and it can deny simply with
the explanation that it is against U.S. national security or foreign
policy interests. State's controls are permanent and do not need to
be renewed periodically, and there are no provisions for foreign
availability findings or re-exporting under de minimis thresholds.
The Arms Export Control Act does not preclude judicial review of a
licensing decision but no court has reversed a licensing decision by
State. State has the authority to revoke a license for an export if
it believes it to be against U.S. national security interests, even
after a contract to manufacture the product to be exported is
underway. All applications to export items that exceed certain
values, including all commercial communications satellites, are
subject to congressional notification prior to approval.
Commerce and State enforce several types of unilateral U.S.
sanctions on exports, including two domestic laws with particular
significance for exports of commercial communications satellites and
jet engine hot section technology. These are (1) the amendments to
the Export Administration Act and Arms Export Control Act made by the
National Defense Authorization Act for fiscal year 1991 (P.L.
101-510, Title XVII) regarding sanctions for activities related to
specified trade in items on the Missile Technology Control Regime
annex and (2) the sanctions in effect since 1990 on exports of
munitions to and satellites for launch in China as a result of the
Tiananmen Square incident that are published in the Foreign Relations
Authorization Act for fiscal years 1990 and 1991 (P.L. 101-246,
Title IX, as amended.
The United States is a member of the Missile Technology Control
Regime, a group formed in 1987 whose members coordinate their
national export controls to limit the proliferation of missiles
"capable of delivering nuclear weapons." This group is composed of
the United States and 27 other countries. The United States
implements its export control policies partly based on the regime's
annex, which lists 20 items of missile-related goods and
technologies, divided into two categories. Category I covers missile
systems and their major subsystems and production equipment, and
category II covers materials, components, production, and test
equipment. Under the missile sanctions amendments to the Export
Administration Act and Arms Exports Control Act, State determines
whether sanctionable trade in items within category I or II of the
Missile Technology Control Regime annex has occurred.
If the sanctionable trade was in category I items, the laws require
Commerce to deny the export of all items controlled under the Export
Administration Act and State to deny the export of all items
controlled under the Arms Export Control Act, in addition to certain
other sanctions. If the sanctionable trade was in category II items,
the laws require Commerce to deny the export of items listed in the
annex that are controlled under the Export Administration Act and
State to deny the export of items listed in the annex that are
controlled under the Arms Export Control Act. In addition, the
sanctions for trade in category II items permit the denial of exports
of items not listed in the annex. An example of such an item is
comercial communications satellites, which contain items listed in
the annex. The National Security Council left the decision of how to
treat such exports to Commerce and State. Thus, when the United
States imposed category II sanctions on China in 1993, exports of
commercial communications satellites controlled by State were not
approved while exports of those satellites controlled by Commerce
were not affected.
The Tiananmen Square sanctions include prohibitions on the export of
items on the munitions list and the export of satellites for launch
from launch vehicles owned by China. The President can waive these
prohibitions if such a waiver is in the national interest.\7 Waivers
have been granted allowing Commerce and State to approve the export
of commercial communications satellites for launch from Chinese
launch vehicles. Exports of hot section technology controlled by
State are prohibited by the Tiananmen Square sanctions, while exports
of hot section technology controlled by Commerce are not prohibited.
--------------------
\7 Missile sanctions are also subject to certain exceptions and
waivers.
ITEMS TRANSFER TO COMMERCE
LICENSING JURISDICTION
------------------------------------------------------------ Letter :6
In October and November 1996, Commerce and State published changes to
their respective regulations transferring licensing jurisdiction for
commercial jet engine hot section technology and commercial
communications satellites to Commerce. Commerce's interim
regulations provide enhanced controls for the items. Additional
controls are being implemented through an executive order and a
presidential decision directive issued in October 1996.
As a result of the change in licensing jurisdiction, State returned
four applications for exports of commercial communications satellites
without action. Two of these applications involved launches in
China, one involved a launch in French Guiana, and the fourth
involved a launch from a Russian-controlled facility in Kazakhstan.
The exporters were advised by State to resubmit their license
applications to Commerce and, in two cases, to request a separate
license from State for items remaining subject to State licensing
(e.g., rocket fuel).\8 As a result of the change in jurisdiction,
these exports will not be subject to certain sanctions or to
congressional notification requirements. They will be subject to the
controls put in place through Commerce's interim regulations.
Commerce's new controls make the following changes for commercial jet
engine hot section technology and commercial communications
satellites:
-- The items must be exported under individual validated licenses
and will not be eligible for special comprehensive licenses or
general licenses.
-- Pursuant to the December 1995 executive order, Commerce may
refer license applications to Defense, State, and other agencies
for review. According to Commerce officials, all applications
for the two items will be subject to full interagency review.
-- The items will be controlled for national security reasons to
all destinations. National security controls have been focused
on preventing exports to certain destinations.
-- A new "significant item" control will be created for these two
items. This new foreign policy control will require a license
for all destinations, except Canada. Although most foreign
policy controls define specific and limited policy objectives,
the policy objective for this control--consistency with U.S.
national security and foreign policy interests--is broadly
stated. Commerce officials stated that this control gives them
broad discretion to deny an export.
-- Technical information that can be transferred under a satellite
license is more clearly defined.
-- The two items transferring to Commerce's jurisdiction will not
be subject to mandatory decontrol or licensing as a result of a
foreign availability finding, as is normally the case for items
controlled solely for national security reasons. Commerce
officials stated that mandatory licensing and decontrol do not
apply to items controlled for foreign policy and that the
provisions of the Export Administration Regulations requiring
mandatory decontrol or licensing of items controlled for
national security can be waived if the President determines that
such a waiver is in the national interest. Rather than seek a
presidential waiver on a case-by-case basis, a presidential
decision directive has been issued saying that, in advance,
mandatory decontrol or licensing is not in the national
interest. Regulations providing the exporter with the ability
to request a foreign availability finding and consideration of
foreign availability in arriving at licensing decisions will
still apply to these items.
-- De minimis provisions will not apply to the two items. In the
case of hot section technology, the de minimis provision
provides that any technology prepared or engineered abroad for
the design, construction, operation, or maintenance of any plant
or equipment that uses U.S.-origin hot section technology will
be subject to U.S. export control regulations.
-- Contract sanctity provisions will not apply.
In addition, procedures for interagency review of Commerce's initial
decisions on individual licenses have been modified for these items.
These procedures provide for participation by reviewing agencies,
including State and Defense. Commerce makes initial licensing
decisions unless reviewing agencies are not in agreement. In those
cases, decisions are made by an interagency group known as the
Operating Committee, which is chaired by Commerce and includes
representatives from Defense, State, Energy, and the Arms Control and
Disarmament Agency. Under normal procedures, the chair of the
Operating Committee, a Commerce official appointed by the Secretary
of Commerce, decided to approve or deny a license and to include
conditions on the license, after considering input from other
committee members.\9
Under revised procedures for these two items, the decision to deny or
approve a license, and conditions for approval, will be made by a
majority vote of the members of the Operating Committee. The
executive order that establishes procedures for interagency review of
Commerce license applications was revised in October 1996 to
implement this procedural change.
--------------------
\8 According to Commerce officials, a separate license from State
will not be required.
\9 An agency disagreeing with a decision made by the Operating
Committee can appeal it to the Advisory Committee on Export Policy,
which is composed of members at the assistant-secretary level from
the same agencies represented in the Operating Committee and makes
its decision based on majority vote. If the dissenting agency
disagrees with this decision, it can be appealed to the Export
Administration Review Board, which is composed of the secretaries of
the same agencies represented in the Operating Committee and also
makes its decision based on majority vote. If the dissenting agency
still disagrees with the decision, it can then be appealed to the
President. In practice, decisions are rarely escalated beyond the
Advisory Committee on Export Policy.
IMPLICATIONS OF CHANGE ARE
UNCERTAIN
---------------------------------------------------------- Letter :6.1
These regulatory and procedural changes are intended to allow
Commerce to control and deny, when appropriate, exports of the two
items to all destinations. This is particularly important for
control of hot section technology. Exports of the most sensitive hot
section technology have not been permitted, even to close allies.
State approved exports of commercial communications satellites with
conditions on the safeguard of the satellite and associated
technology. According to Commerce and other executive branch
officials, the change in jurisdiction is not intended to change U.S.
licensing policy--what destinations and end users the United States
will approve licenses for--but only the procedures under which
licensing decisions will be made.
Whether the current licensing policy will be maintained with the
change in jurisdiction is uncertain. The underlying objectives of
the two systems differ. The Arms Export Control Act gives State the
authority to use export controls primarily to protect U.S. national
security without regard to economic or commercial interests. Under
the Export Administration Act, on the other hand, Commerce weighs
economic and trade interests along with national security and foreign
policy concerns. The importance attached to economic and commercial
interests is reflected in Commerce's role in the process as the
representative of commercial interests. Defense, as the voice for
national security concerns, is one of several agencies in Commerce's
licensing system. Under State's licensing system, Defense is one of
two agencies involved in licensing decisions. According to State,
State denies an export if Defense raises significant national
security concerns.
These differences in the underlying basis for decisions create
uncertainty as to whether the changed procedures for making licensing
decisions will result in changes in licensing policy. Uncertainty is
also created by the newness of the "significant item" control because
it is not clear how it will be applied.
AGENCY COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :7
The Departments of Defense and Commerce provided written comments on
a draft of this report (see apps. I and II, respectively), and the
Department of State provided oral comments. Both Defense and State
said they had no objections to the report. State also commented that
the report fairly and accurately laid out the issues associated with
State's position in these matters. Commerce stated that the
President's decision to transfer jurisdiction of the two items
discussed in this report was based on the unanimous recommendation of
Defense, Commerce, and State. Commerce cited major factors involved
in the recommendation and decision: (1) changed military and
industrial environment after the Cold War, (2) all U.S. allies treat
these items as dual-use goods rather than munitions, (3) since
December 1995 all agencies have had the right to participate fully in
licensing deliberations, and (4) it made good business sense.
Commerce suggested that our characterization of Defense's and State's
positions was based on the views of junior staff members at these
agencies and ignored the consensus that was ultimately achieved.
Our presentation of the Defense and State positions is based on
discussions with senior level officials in these agencies, including
Defense's Director of the Defense Technology Security Administration
and State's Director of Defense Trade Controls. Neither State nor
Defense raised any objections to our presentation of their positions
in the draft report and State commented that the report fairly and
accurately reflected its position. Further, with respect to
Commerce's comment that the transfer of jurisdiction was based on the
unanimous recommendation of Defense, Commerce, and State, it should
be noted that an interagency group reviewing licensing jurisdiction
for commercial communications satellites had recommended that
commercial communications satellites with militarily sensitive
characteristics continue to be licensed by the State Department. It
also recommended further adjustments in the characteristics defining
militarily sensitive commercial communications satellites. The
Secretary of State upheld these recommendations. It was only after
Commerce appealed the Secretary of State's decision to the President,
and the President decided to transfer jurisdiction for both
commercial communications satellites and commercial jet engine hot
section technology to the Department of Commerce that unanimous
support for the transfer of jurisdiction came about.
SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8
To assess the military sensitivity of the two items, we interviewed
and obtained analyses from officials in the Air Force, the Navy, the
Office of the Deputy Under Secretary of Defense for Space, the
Defense Technology Security Administration, the National Security
Agency, the Defense Intelligence Agency, and the Department of State.
We also analyzed license applications for the two items submitted to
State and referred to Defense to gain an understanding of the
concerns at Defense and State related to the export of the items.
To determine the executive branch's rationale for the change in
licensing jurisdiction, we interviewed officials at Commerce and
State. We also interviewed and obtained documents from
representatives of the Aerospace Industries Association, The Boeing
Company, General Electric, The Hughes Corporation, Lockheed Martin,
and United Technologies Corporation. The Aerospace Industries
Association represents manufacturers of engines and spacecraft.
Boeing purchases jet engines for its commercial and military
aircraft. General Electric and United Technologies are two major
engine manufacturers, and Hughes and Lockheed Martin are two major
commercial satellite manufacturers. In addition, we reviewed
documents at Commerce, Defense, and State related to the development
of the interim regulations and analyses done by industry advisory
groups.
To evaluate the differences between Commerce's and State's export
licensing jurisdictions for the two items, we interviewed and
obtained documents from officials at Commerce, Defense, and State.
We compared the provisions in the Export Administration Act and the
Export Administration Regulations to those in the Arms Export Control
Act and the International Traffic in Arms Regulations. In addition,
we reviewed the interim final rule changing the jurisdiction to
Commerce to evaluate the new controls that Commerce plans to
implement to control the two items.
We performed our review from June to November 1996 in accordance with
generally accepted government auditing standards.
---------------------------------------------------------- Letter :8.1
As arranged with your offices, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 10 days after its issue date. At that time, we will send
copies to the Secretaries of Defense, the Army, the Navy, and the Air
Force and other interested congressional committees. Copies will
also be made available to others upon request.
Please contact me at (202) 512-4841 if you or your staff have any
questions concerning this report. Major contributors to this report
are listed in appendix III.
Katherine V. Schinasi
Associate Director, Defense Acquisitions Issues
(See figure in printed edition.)Appendix I
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
============================================================== Letter
(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
COMMERCE
============================================================== Letter
(See figure in printed edition.)
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III
NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C.
Karen S. Zuckerstein
Maria J. Santos
Maria B. Boyreau
OFFICE OF GENERAL COUNSEL
Raymond J. Wyrsch
*** End of document. ***
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