The new world of export controls

In the summer of 2009, President Obama announced a plan for a complete U.S. export control reform (ECR).  Then Secretary of Defense Robert Gates argued that the system was “overly complicated, contains too many redundancies, and in trying to protect too much, diminishes our ability to focus” on the truly important. 

The system was to be simplified and consolidated, because U.S. companies were needlessly losing sales and market share to foreign competitors. Potential customers avoid buying from the U.S. to escape the bureaucratic restrictions encountered when they purchase U.S. high tech products and weapons systems.  Even combat cooperation with close allies was delayed by pointless licensing requirements of a rigid compliance system.

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Since 2009, licensing officials at the State, Commerce and Defense Departments have reformed both the lists of licensed items and the manner in which they are licensed.  This Herculean task involves reconciling export control definitions, regulations, and policies that govern the export of tens of thousands of items worth hundreds of billions of dollars.  At its conclusion, it is expected that 90 percent of items now governed by the State Department Munitions List (ML) will be transferred to a simpler and more flexible Commerce Department jurisdiction or decontrolled.  The object is to have the ML contain only the “crown jewels” of U.S. national security technology.

The Commerce Department’s Export Administration Regulations have been clarified and the need for an individual validated license, in order to export to those American allies and friends. some say that the most attractive licensing reform is the creation of a new Commerce license exception known as “the Strategic Trade Authorization” (STA). It allows exports without a validated license to 36 countries that are either U.S. allies or have agreed to adhere to the various regimes created to prevent proliferation. But STA also creates additional compliance burdens on the exporter and requires significant new paperwork and commitment to compliance from the end-user.  Interestingly, the STA is not available to China or Russia, the two countries with high license volumes and the most difficult licensing challenges, where the licensing relief would be most attractive to exporters. With the new license Items are exported according to strict guidelines and with strict compliance requirements, but do not require prior U.S. Government approval, making it a giant time saver.    

U.S.-based multinational corporations have expressed support for this massive undertaking and have participated through public fora with detailed written comments.  Yet, their praise has been muted. They understand the great cost and effort involved in transforming their export compliance systems to conform to the new requirements.  Assistant Secretary of Commerce for Export Administration, Kevin Wolf stated that while ECR will mean short term pain, as companies are forced to revise their compliance programs, there is likely to be long term gain, as companies reap the benefit of a simplified system with fewer validated licenses with which to contend. 

Will the risks and rewards balance in the long run?

Multinational companies in particular are concerned that the ECR, which has taken the better part of four years and is still not completed, has diverted the Obama Administration’s attention from the equally important task of simplifying and expediting the licensing process for sales to China and other difficult destinations. They are also concerned that other important tasks such as reforming encryption controls, creating an effective way to authorize inter-company exchange of data on a worldwide basis, and increasing the utility of the UK and Australia arms treaties, have been deferred.

2014 will be the acid test of the ECR initiative.  Beginning on October 15, when the first of the new regulations go into effect,  exporters planning to export high technology will begin  to switch to the new regulations, create new compliance programs, and re-categorize almost all of their inventories.  We shall see whether the ECR lives up to the Administration’s promises of actually enhancing national security while providing  export control efficiency and simplicity, and whether the Obama Administration can point to the new licensing system as an accomplishment that is worth all the work that has been put into it.

Freedenberg served as Under Secretary of Commerce, heading the Bureau of Export Administration in the U.S. Department of Commerce, during the reagan administration. Czinkota serves on the Faculty of Marketing and International Business  at Georgetown University. His book International Marketing is in its 10th edition.