United States: Obama Administration Announces Proposed Comprehensive Reform to U.S. Export Control System, Including Single Licensing Agency and Single Control List

INTRODUCTION

In August 2009, President Obama announced that his Administration would conduct a thoroughgoing review of the country's export control regimes. These regulatory regimes, rooted in the Cold War era and ill-designed to address the threats of the 21st century, have long been the focus of criticism from policy-makers, academics, and the high-tech community. The recent interagency review of the current U.S. export control system, led by a joint task force from the National Security Council and National Economic Council, was intended to identify fundamental reforms that would enhance U.S. national security, strengthen the nation's ability to counter the proliferation of weapons of mass destruction and the means of their delivery, and keep America at the vanguard of technological innovation. Participants in the review came from the Departments of Defense, State, Commerce, Energy, and Homeland Security, as well as the intelligence agencies. Its results have been endorsed at the principal level by each of those agencies.

SPEECH BY SECRETARY GATES IDENTIFIES THE CURRENT SYSTEMS' FAILINGS

On April 20, 2010, in a speech delivered to a meeting of Business Executives for National Security ("BENS") at the Ronald Reagan Building in Washington, D.C., U.S. Secretary of Defense Robert M. Gates proclaimed, in the clearest of terms, that the United States must totally revamp its present export control system because, as currently configured, it is actually detrimental to national security. In the long-awaited presentation, Secretary Gates set forth the principal shortcomings of the existing system and laid out a program and timetable of reforms to address those problems.

Gates first told his audience that the current export control system not only fails adequately to protect crucial American capabilities, but actually makes it nearly impossible to share needed capabilities with allies and partners in a timely and effective manner. Gates explained that the current export control system, particularly the International Traffic in Arms Regulations ("ITAR"), impedes the military effectiveness of America's closest allies, tests their patience and goodwill, and hinders their ability to cooperate with U.S. armed forces in joint operations being conducted in Afghanistan, Iraq and elsewhere.

At the same time, Gates noted, the complexities and opaqueness of the current control regimes negatively (and unnecessarily) impact U.S. competitiveness. Gates explained, for example, that some U.S. manufacturers must apply for export licenses from two separate agencies to fill a single purchase order from a foreign customer, only to be approved for one but denied for the other. Consequently, Gates stated, the current U.S. export control system has the effect of discouraging some potential exporters from even approaching the process. Moreover, he noted, the negative competitive effects of the present bureaucratically labyrinthine export control system create unintended incentives for multinational corporations to move their research and production offshore, thereby gradually eroding the U.S. defense industrial and technology base and prompting the loss of American jobs. Secretary Gates illustrated this point by giving the example of some European manufacturers who actually market their products (such as commercial satellites) as being free of U.S. export controls, thereby attracting overseas customers as well as well-trained scientists and engineers.

Secretary Gates also noted that there have been a number of lapses in recent years with respect to the U.S. export control system – from highly sensitive materials being exported to vital homeland security capabilities being delayed – all of which underscore the flaws of the current regime. The recent interagency review concluded, he explained, that the current U.S. export control system fails adequately to mitigate national security risks primarily because its structure is overly complicated, contains too many redundancies, and is unnecessarily expansive in scope. In other words, a significant part of the problem is that, because the present system attempts to control too much, it ends up failing to control the most important items with the requisite consistency and reliability. Moreover, the current system consists, in the main, of two uniquely constructed control lists (the State Department's U.S. Munitions List ("USML") in the ITAR and the Commerce Department's Commerce Control List ("CCL")) administered by two distinct departments with very diverse missions. In addition, Gates explained, there are three primary licensing agencies – none of which oversees either of the others, a host of different enforcement agencies with overlapping and redundant jurisdiction, and numerous information technology systems of different vintages and capabilities – none of which "talk" to each other. This "byzantine amalgam" of an export control system, as Secretary Gates called it, is so broad in scope that exporters had to obtain approximately 130,000 licenses last year alone.

GATES'S SPEECH OUTLINES THE PROPOSED REFORMS

There has long been a consensus, in government, academia, and the exporting community, that the present system is badly "broken" and in need of comprehensive and fundamental reform. However, in the past, the defense establishment and the business community have been on opposite sides when it came to the substance of the needed reforms. Within the Obama Administration, however, because it has concluded that regulatory stringency and national security can no longer be equated (and are, indeed, now often at odds with one another), these rifts have apparently ended. Thus, the reform proposal announced by Secretary Gates enjoys the full support of the President's senior national security team, including (as well as Gates himself) the Secretaries of State, Commerce, Energy and Homeland Security, the Director of National Intelligence and the National Security Advisor.

In his speech, Secretary Gates outlined a reform effort aimed at building higher walls around fewer items—in other words, focusing U.S. export control efforts on the goods and technologies which, if they found their way into the wrong hands, could actually threaten U.S. national security, and devoting fewer resources (both in the government and the regulated community) to the rest. This reform effort entails transformation of the current diffuse U.S. export control system to "four singles"-- a (i) single export control list; (ii) single primary enforcement coordination agency; (iii) single information technology system; and (iv) single licensing agency. The proposed reform effort would be implemented in three phases that Gates projects will unfold over the course of the next year. As described in his speech (and below), the initial steps of this reform can (and will) be implemented immediately by the Administration, without legislation. The final phase will require that Congress establish by statute a simplified, streamlined, and focused export control regime that would dramatically reduce the number of required export license applications, while simultaneously enhancing long-term national security by ending the existing incentives for developing sensitive technologies overseas.

Phase I of the proposed export control reform will refine and harmonize the definitions across the USML and CCL, in an effort to end jurisdictional overlap and confusion and usher in a new common tiered control list structure with new independent control criteria for related screening procedures. In addition, Phase I contemplates implementing regulatory-based improvements to streamline and standardize licensing processes and policy in an effort to increase efficiencies and eliminate redundancies. With regard to enforcement, Phase I also entails the creation of an Enforcement Fusion Center, which will seek to synchronize and de-conflict the current array of different enforcement agencies with overlapping and redundant missions. Further, an assessment will be undertaken to determine government-wide information technology needs and the creation of a single U.S. Government point of entry for exporters.

After the groundwork for the new, enhanced export control regime has been laid during Phase I, Phase II will seek interagency coordination to transfer certain items from the USML to the CCL or, in limited instances, remove list-based export controls altogether. Simultaneously, efforts will go forward with the Congress toward procuring additional funding as needed for the enhanced enforcement structure and information technology infrastructure. Specifically, Phase II contemplates restructuring the two principal U.S. export control lists into identical (presumably pyramidal) tiered structures, with truly critical "crown jewels" technologies subject to the most stringent controls at the top, and cascading down to less rigorous controls for less critical technologies, and the removal of unilateral controls, as appropriate, for items where obsolescence and/or foreign availability has rendered controls either unnecessary or futile. These changes would be accompanied, where appropriate, by proposals for conforming reforms and updating of the several multilateral export control regimes of which the U.S. is a member. In the licensing arena, Phase II will complement transition toward a mirrored control list system with fully harmonized State and Commerce Department licensing regimes, to allow export authorizations within each control list tier to carry significantly reduced procedural burdens while still preserving and enhancing national security. Regarding information technology, Phase II will also entail steps toward the transition to a single electronic licensing system.

Phase III, which would complete the transition to the new U.S. export control regime based on the "four singles," will require implementing legislation. Phase III contemplates the statutory merger into a single list of the CCL and USML, with the implementation of a systematic process to keep the list current, the establishment of the single licensing agency, the consolidation of enforcement activities into a Primary Enforcement Coordination Agency, as well as the implementation of a single, government-wide information technology system for use in both licensing and enforcement. Secretary Gates did not indicate in which Department the single licensing agency would reside, or whether licensing and enforcement coordination would be consolidated into a single agency.

CONCLUSIONS

The proposed reforms reflect the twin realities that the source of the most important defense and communications technologies of this century (including command and control capabilities) will be produced in the private sector and adapted for military and intelligence applications, rather than the other way around, and that the U.S. will continue to depend for its national security on its technological superiority over potential adversaries. Because, in a globalized world, the development and exploitation of private-sector technologies are inherently "movable," the U.S. Government has had to come to grips with the fact that the current export control system creates compelling incentives to transfer those activities elsewhere, leading to a future in which maintaining U.S. technological superiority (including military superiority) becomes increasingly expensive, unreliable, and (ultimately) unsustainable.

The proposals described in the Gates speech to BENS demonstrates recognition within the Administration that new export control strategies are needed immediately to support long-term national security goals. The goals, and implementing means, of the leaders of the Administration are fairly clear. Likely, the regulated community will strongly support both, particularly if the more difficult-to-achieve objectives of Phase III do not delay implementation of the streamlining and greater transparency to be brought about during Phases I and II. More difficult to predict, however, are the reactions of the bureaucracies that have been administering the current export control system for decades and members of Congress (and their personal and committee staffs) who may see, in the proposed reforms, a diminution of either protections to national security or of their own "turf." The Administration has set for itself a monumental task in proposing to reform the entire export control system in the space of less than a year. Whether all, or even most, of that task is achievable within months, or even during President Obama's current term, is quite speculative. What is certain, however, is that the pace of proposed changes to the ITAR and, to a lesser extent, the Commerce Department's Export Administration Regulations, will be fast and furious, and will require constant attention by those involved in exports and re-exports from the United States.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.