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Administration Moves To Simplify International Sales

Mar. 7, 2013 - 04:33PM   |  
The White House and the Washington Monument are pictured in Washington. The Obama administration has submitted its first batch of reforms to the export control system to Congress on March 7.
The White House and the Washington Monument are pictured in Washington. The Obama administration has submitted its first batch of reforms to the export control system to Congress on March 7. (Jewel Samad / AFP via Getty Images)
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WASHINGTON — A month after telling Congress that it intended to file an overhaul of the export control system, the administration formally submitted its first batch of reforms to Congress Thursday afternoon.

Aimed at easing the flow of products to U.S. allies and allowing U.S. defense companies to better compete in the global marketplace, the reforms sent to Congress mark the culmination of work begun early in President Obama’s first administration among several government agencies.

The filing lays out new categories defining carefully restricted items used for aircraft and turbines, as well as articulating a new system under which many items previously watched over by the State Department will now be monitored by the Department of Commerce. The new categories are designed to list specific items that are restricted on the U.S. Munitions List (USML), a document enumerating those items that can only be sold after a review by the State Department in conjunction with the Department of Defense.

Previously, the categories were vague lists relying upon design intent to specify if a product couldn’t be commercially exported. In practice, this meant that a contractor couldn’t easily discern if an item was restricted unless he knew whether the item was specifically designed to be used on a defense product. And even those that might have been designed with that intent could have been parts commonly found on other commercial items.

Congress now has 30 days to review the modifications, which include revision to category 8 (aircraft), the creation of category 19 (turbines), and a variety of new management mechanisms, before the final rules will be published. A 180-day transition period would follow before the new approach will be up and running.

Officials said that the two categories in this first batch of reforms were chosen because they represent a large percentage of the total license requests and are therefore in the most need of immediate action.

In February, Congress was given “pre-notification,” including text of the intended rule changes, and although there have been numerous discussions, the changes seem to be on track for publishing next month, said Andrew Shapiro, the assistant secretary of state who overseas the Bureau of Political-Military Affairs.

“We have not had a member directly object to us moving ahead, so we will be moving ahead,” he said.

Shapiro said that he anticipates that the move will help bring new revenue streams to defense contractors.

“We think this could be significant,” he said. “Billions of dollars in additional sales; that’s why this has become such a priority for the administration. Additional sales means additional jobs.”

But Shapiro and other administration officials emphasized that the driving force behind the move was to provide partner countries with the equipment that they need, more easily.

“Increasingly, we are operating in a world where we work within coalitions, we are increasingly trying to help others keep security in their own neighborhood,” said Tim Hoffman, deputy director of the Defense Technology Security Administration.

In practice, the new rules mean that more items previously sold through the cumbersome USML process will now be sold as commercial items. It also means some items that reside on the Commerce Control List (CCL) can be sold to 36 partner countries without additional licensing.

These items will not be left unprotected, as they will still be controlled, but by moving the process to the Department of Commerce, which has a much faster and less complicated licensing path, the hope is to simplify and speed up sales.

“If we can get these items onto the CCL and these other countries don’t have to contend with ITAR [International Traffic in Arms Regulations] level licensing, they’re going to be apt to buy from American vendors as opposed to other vendors as a work-around to the ITAR system,” Hoffman said.

In the past, when a USML-restricted item was added to a system, even if that item was only a bolt that possessed no special technology, the entire system would become trade restricted. And determining whether that bolt deserved to be restricted in the first place was at times quite difficult.

To avoid that problem, the new rules attempt to avoid basket categories that catch items based on design intent, and instead rely on DoD to list specific items.

“Anything that you can list, that you think is important, you get to keep,” said Eric Hirschhorn, undersecretary of commerce for industry and security. “And it stays on the munitions list, but the basket categories, which is where more than half of the licenses that State issues every year fall, are no longer going to exist. Everything that you don’t think is important is going to come over to the commerce list. It’s not going to be decontrolled, and we’re going to control it fairly strictly.”

That should help avoid issues such as discerning the intent of designers, a problem that has resulted in manhunts for the engineers, Hirschhorn said.

“If you have a basket category, what if you’re not the manufacturer?” he said. “What if you’re a distributor or a scrap dealer? How the hell do you know if it’s specially designed? They have literally had instances of interviewing people in retirement homes, I’m told. Engineers who designed something 20 years ago, asking ‘what did you design this for?’”

One potential complication is that the list must be more carefully updated to retain its applicability. Previously, when basket categories were used, the specifics on the list were less important.

“As you put in precise objective controls, as the state of technology improves, you’re going to find that industry is going to increasingly bump up against these controls and you’re going to have to go out and modify them,” Hoffman said. “That’s been a subject that we’ve talked about. That said, we think we can handle it.

“Both the CCL and the USML are going to have to be living documents,” he said.

To make sure that new technologies aren’t missed, the lists include new technology categories that allow for temporary categorization until the technology can be more effectively itemized.

But the hope for an expedited process and new revenue for the U.S. market could be stymied by the automatic spending cuts known as sequestration. If furloughs are implemented, a near inevitability if sequestration remains unaltered, then the manpower necessary to review licenses could be compromised.

“We are concerned that if we have to go into the furlough business, that’s going to reduce the number of people who are available and the number of days that they’re available per week, and that’s going to invariably have some impact on our ability to support State and Commerce in licensing,” Hoffman said. “We think the licensing time lines will likely slow down to some degree.”

Much of the credit for initiating the process of reforming export controls should be given to former Secretary of Defense Robert Gates, the administration officials said.

“Everywhere Secretary Gates went he was getting beat up by his counterparts with, ‘How come this is so cumbersome, how come this takes so much time?’” Hoffman said.

Those meetings encouraged Gates to seek reform.

“The idea for this effort came from the Pentagon,” Shapiro said. “It was Bob Gates’ recommendation to the president that initiated this process. So you had the Pentagon, which was traditionally viewed as the agency that was most reluctant in regards to export control reform, leading the charge. And that’s changed both the bureaucratic dynamic and the interagency dynamic.”

The intent was never to release the first batch of items in March, and they weren’t intended to be filed less than a week after the triggering of sequestration, the officials said.

The administration targeted the completion of the reforms by the end of President Barack Obama’s first term. When it became apparent that the process wouldn’t be completed by then, it was the cause of some concern.

“Think about how we felt in October,” Hirschhorn said. “This wasn’t, ‘oh let’s wait till March,’ we didn’t know if there was going to be a March.”

The first filing is far longer and more complicated than subsequent rule changes, despite only containing two category revisions. By law, all of the regulations for managing the transition of products from the USML to the CCL, as well as the mechanism that Commerce will employ to oversee its expanded list, had to be included in the first batch.

Others will follow in the coming months, with the target of having the entirety of the USML revised in the next couple of years. Once in place, the officials said they believe the new system will allow them to focus on what matters, as opposed to spending resources protecting inane parts.

“If we have to spend time worrying about bolts, that’s time we’re not spending on F-14s,” Hirschhorn said. “If we have to spend time worrying about the U.K., that’s time we’re not spending on much dicier destinations. We have limited resources, it’s all over the papers how limited they are, and we don’t want to be wasting them.”

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