NOVEMBER/DECEMBER 1987 - VOLUME 8 - NUMBERS 11 & 12
E A S T - W E S T T R A D E
Export Control Policy
by Steve Hirsch
The events of the next few months could make 1987 a pivotal year for U.S. export control policies. The Reagan administration, which came into power determined to toughen restrictions on the transfer of technology abroad seemed, as the year unfolded, to be moderating its policies.
Advocates of moderating U.S. policy do not see their ideas as taking a soft line on strategic trade, but as taking a more realistic one, aimed at protecting key technologies from Soviet acquisition while loosening up what they see as the more unreasonable, draconian portions of the system. In March testimony before the House Subcommittee on International Economic Policy and Trade, Under Secretary of Commerce for Trade Administration Paul Freedenberg supported the moderate position assumed by former Commerce Secretary Malcolm Baldrige and other top officials of the Commerce Department. He stated,
U.S. national security requires that, American companies must be healthy... We must not, therefore, continue to bite the hand that feeds us... We must stop subjecting to over-control the very same private sector companies upon which we rely to keep us technologically superior to our adversaries.We must limit the role of government to doing only what is truly necessary to protect national security. And then, at that point, government should get out of the way, and let American business go about its business of selling quality products at competitive prices.
Hardliners are more concerned with the shift. They see the year's changes as dangerous steps which could allow the Soviets too much access to militarily useful U.S. technologies. Richard Perle, former Assistant Secretaryof
Defense for International Security Policy, views Congressional and Commerce Department efforts to "weaken export controls" as "lumbering forward behind the banner of'competitiveness,'thfs year's slogan masquerading as a policy." He expressed deep concern that "six years of hard work are threatened by commercial greed, an indifferent Congress and an administration all too ready to acquiesce to pressures it once resisted with courage and determination."
The two key events which have shaped the direction of export control policy this year, and continue to do so are , a National Academy of Sciences WAS) report on controls policy and the disclosure of the Toshiba-Kongsberg diversion of high technology to the Soviets.
The former has had an enormous effect in galvanizing the reformers; the latter has taken the wind out of their sails and could reverse the flow of policymaking back toward a more hardline direction, in the context of this year's congressional consideration of omnibus trade legislation, consideration next year of export controls legislation and administration policy actions in the future.
There are two major fallacies about what causes export control policies to change. The first is that "perestroika," the system of reforms instituted by Soviet leader Mikhael Gorbachev, is a major factor in U.S. controls policies. Although the ultimate target of East-West export controls is Moscow, and although his defenders claim Gorbachev is throwing off the chains of what the Soviets call the "age of stagnation," Soviet reforms, be they real or false, have yet to have any impact on U.S. efforts to keep its key technologies out of Soviet hands.
The second fallacy is that the debate on export control policy is a dispute between conservatives and liberals. U.S. strategic trade policy is aimed at restricting the East's access to technologies which, although primarily civilian, have important military uses. Such technologies are referred to as having a "dual use." Most export control controversies revolve around whether or to what extent a specific technology should be subject to controls by the United States or its allies.
In general, the hardliners in such cases are often headed by the Defense Department and those backing more lenient controls are often led by U.S. business interests. The Commerce and State departments, the National Security Council (NSC), the Central Intelligence Agency (CIA) and important members and committees of Congress assume various positions on the spectrum from issue to issue.
The point is, generally, you can be with the Pentagon or you can be with business, or somewhere in between, but that's the range. Liberals will not find a way to be on the side of the oppressed on this issue, unless they want to support corporate America; and conservatives will not find an easy formula to stand for a"strong' America, because they have to choose between the Pentagon and industry.
What does cause U.S. controls policy to shift is changing administration and congressional thinking on how far to go either toward "the business point of view" or "the Defense Department point of view" in specific export control issues and in overall export control policy.
When this administration came into power, it made a concerted effort to toughen both export controls and export control enforcement. First, the administration pushed to strengthen the Coordinating Committee on Multilateral Export Controls (COCOM), the international organization that coordinates the allies' multilateral control system, and second it imposed the Siberian gas pipeline controls.
Most commentators believe that strengthening the multilateral system of controls administered under COCOM was a good idea. The NAS report, while critical of unilateral export controls by the U.S., strongly recommends "that the United States take the lead in further strengthening the COCOM mechanism so that it can function as the linchpin of a fully multilateral national security export control regime for dual use technologies."
The pipeline controls, imposed in 1982 in response to the crisis in Poland, were aimed at making it more difficult for the Soviets to build their Siberian gas pipeline from the Urengoi gas field to the Czechoslovakian grid, from which the gas is transported throughout Western Europe. Some feel the sanctions were successful, but a lot of people agree, sometimes privately, that this embargo was the most ill-advised move since controls were set up after World War II.
According to a report by the National Center for Export-Import Studies, those sanctions caused problems for a number of U.S. firms, including General Electric and Caterpillar. Caterpillar, which had contracted with the Soviets to supply 200 pipelayers worth about $100 million, was not able to regain Soviet business after the sanctions were lifted in November of the same year. General Electric (GE) was able to recover its business with West European customers, although the Italian and West German licensees subsequently sought alternative suppliers in Europe or decided to develop their own capacity to produce equipment previously manufactured under license from GE.
Caterpillar's share of the Soviet market fell from 85 percent in 1978 to about 15 percent in 1984. While waiting for licenses to be approved for sales to the Soviet Union, a Japanese competitor, Komatsu, was able to move in, picking up most of Caterpillar's lost market share.
Beyond the costs directly associated with the lost sales during the embargo, companies lobbying for U.S. trade policy reform often complain that unilateral measures such as the gas pipeline sanctions have serious long-term adverse effects on their ability to compete for other contracts in the future. The argument is that the U.S. export control policy does not respect contract sanctity, and so potential customers will avoid the risk of relying on U.S. suppliers of equipment and technology.
In addition to the financial losses incurred by US. companies and associated foreign companies, the gas pipeline sanctions are often criticized for having placed a serious strain on international relations among Western allies. For instance, John Brown Engineering, one of GE's licensees, received a directive from the British government not to comply with the U.S. embargo. The British company proceeded to ship equipment in stock to the Soviet Union. The Italian licensee of GE, Nuovo Pignone, also broke the embargo.
Despite these financial and political costs, some argue that the gas pipeline sanctions assisted in attaining West European agreement with a U.S. initiative in the following year, under the auspices of the International Energy Agency, to limit long-term Western dependence on Soviet sources of energy by developing Norwegian supplies. The agreement limits the share of West European gas consumption supplied by the Soviets to 30 percent. Currently, that share is around 25 percent. Administration officials estimated that "with the completion of the second Soviet pipeline to Western Europe and use of excess capacity on existing pipelines, West European dependence on Soviet gas supplies would have reached 50-60 percent," had alternative sources not been developed.
On another front, for most of the Reagan years, the Republicans controlled the Senate. That meant that while liberal House Foreign Affairs Committee Democrats like Rep. Don Bonker D-Wash. and, earlier, the late Rep. Jonathan Bingham D-N.Y. chaired the International Economic Policy and Trade Subcommittee, two hardline Republicans, Sen. Jake Cam R-Utah, who headed the Banking Committee and International Finance and Monetary Policy Subcommittee Chairman John Heinz RPa., worked together to form a solid Republican front against any attempt to congressionally undercut too many of the administration's actions.
One example of the face-off between reformers in the House and hardliners in the Senate involved a provision of the Export Administration Act relating to Department of Defense involvement in licensing exports to Western countries. For several years, Bonker has backed interpreting current law to mean that the Pentagon's review authority is limited to West-East exports; led by Cam, the Senate has pushed for greater Defense Department authority over West-West licenses.
Consequently, during the first six years of the Reagan administration, while the legislative engine of the export control system, the Export Administration Act, seemed to be under almost constant scrutiny or revision, not only was the administration heading in a hardline direction, but there were limits to what congressional Democrats could do to stop the drift.
In February the National Academy of Sciences released its report Balancing the National Interest: U.S. National Security Export Controls and Global Economic Competition. This report could be the most influential policy document on export controls in almost a decade.
Some of its recommendations called for strengthening COCOM so that controls could be more internationally based. Others called for stressing U.S. technological strength, economic vitality and allied unity in U.S. controls decisions. Among the key findings of the study was a conclusion that U.S. controls impede U.S. exports. With "competitiveness" as the watchword of U.S. trade policy activists this year, this report highlighted for many people the negative effects export controls might have had on U.S. competitiveness. The controversial study concludes that:
A reasonable estimate of the direct, short-run economic costs to the U.S. economy associated with U.S. export controls was on the order of $9.3 billion in 1985. This is a very conservative estimate because it only applies to a subset of business activity influenced by U.S. export controls. Associated just with lost U.S. exports was a reduction in U.S. employment of 188,000 jobs. If we were to calculate the overall impact on the aggregate U.S. economy of the value of lost export sales and the reduced R&D effort, the associated loss for the U.S. 1985 GNP would be $17.1 billion. The Pentagon attacked the NAS report, with former
Assistant Secretary Richard Perle calling the paper "rich in assertion, poor in evidence," and calling the conclusion of U.S. economic losses from controls "complete rubbish." Perle defended the Defense Department's role in export control administration against charges by the panel that Perle's office had overstepped its legislated authority in the decision-making process.
Nevertheless, the report had impact, both in the administration and in Congress. In the months following the report, there were a series of key congressional and administration actions aimed at reforming U.S. controls:
It was not just the NAS report that made these things possible, but it was the catalyst that changed the administration's official controls stance. There was a shift in the administration's internal power balance, with Baldrige's less hardline views of controls in ascendancy at the expense of hardliners like Perle. A key swing player between Commerce and Defense, the State Department, was beginning to side with Commerce more than with Defense. The administration's removal of controls on oil and gas technology and equipment in January reflected this shifting balance of power in the Cabinet, as the State Department sided with Commerce in a successful lobby for removal against the wishes of the Pentagon.
Some observers believe the shift in the administration's internal balance of power dates back at least to April 1985. At that time, there was a reorganization of the Cabinet level advisory panel concerned with East-West trade policy. Before the reorganization, the Senior Interdepartmental Group-International Economic
Policy (SIG-IEP), which included the Department of Defense (DoD), the CIA and the National Security Council (NSC) as full members, advised the President through his national security advisor. The NSC representative was the Executive Secretary of theSIG-IEP. Following the reorganization, the Economic Policy Council (EPC) took over that role as advisory board. The EPC is run by the Chief of Staff and does not include the DoD, CIA, or NSC as members. One former senior administration official said that he thinks, "the diminished role of the national security agencies in the internal economic policy-making process, with the establishment of the EPC in April 1985 resulted in a fairly dramatic shift away from a security-oriented U.S. East-West economic policy."
With the Democrats in control of both the House and Senate, and competitiveness everybody's favorite trade buzzword, Congress was less hardline than Commerce or the administration as a whole. While there were important differences, both branches seemed to be moving in the same general direction, and it seemed that mutually acceptable compromises could be worked out.
Then came the Toshiba-Kongsberg case.
The Toshiba-Kongsberg diversion involved the illegal sale to the Soviets bv a Toshiba subsidiary and Norway's Kongsberg-Vaapenfabrikk, of sophisticated technology which could allow the Soviets to build quieter submarines. There have been reports and announcements of other sales, and investigations of other allegations are going on throughout COCOM.
This diversion has been described bv some as the most serious diversion of strategic technology to the Soviet bloc since World War 11. Undersecretary of Commerce Secretary Paul Freedenberg told the Senate Subcommittee on International Finance in June, that he could not think of a "more significant technology transfer over the past decade, with more profound deleterious effects on the U.S. strategic posture."
This diversion involved foreign technology and a foreign company; U.S. licensing, control and enforcement agencies were not responsible for the transfer.
This was a case of a serious transfer of sophisticated technology by two U.S. allies to the Soviets just as pressure had been building to cut back the Defense role in favor of more cooperation with the allies. Not only that, but Japan, not everybody's favorite trading partner these days, was a key player.
Congress moved on the issue, with the Senate approving language imposing an import ban and a bar on government contracts against the two firms and providing for similar sanctions in the future. Senator John Heinz, who said "what Toshiba and Kongsberg did was ransom the security of the United States for 517 million," cosponsored with Se bill to ban imports from Toshiba and Kongsberg for two to five years. The amendment to the omnibus trade bill passed the Senate by a vote of 95 to 2. The measure does, however, included waiver allowing the Navy to continue purchasing Penguin anti-ship missiles from Kongsberg.
The House version of the trade bill was passed before the Toshiba-Kongsberg case broke. Consequently, the House has not voted on any measure comparable to the Senate amendment. As the trade bill passes through conference, this is certainly one of the most important differences between the House and Senate versions requiring agreement.
The administration has opposed sanctions against Toshiba on the grounds that other countries could retaliate, the legislation does not give the president enough flexibility, and it could hurt COCOM. The administration especially opposed sanctions when it became clear that Toshiba has such an important role in the U.S. electronics industry that the domestic industry could be hurt if the sanctions were enacted. Some of the largest U.S. corporations, including IBM, Xerox, Honeywell and Westinghouse have lobbied Congress and the administration to oppose the sanctions. Deputy Undersecretary of Defense Stephen Bryen, however, denies that private sector interests have played any role in the administration's opposition to sanctions. Bryen also agreed that he "supports the sanctions in principle," but he adds that in this case "legislation would be passed after the commission of the 'crime,' and that kind of expost facto law fails the test of due process."
The trade bill is still in conference, and it is not clear what will happen to it or the Toshiba provisions. But even without the trade bill, the Export Administration Act could be a popular law to try to amend in the coming years. The next periodic review of the Act is scheduled for 1989. However, if the trade bill currently in conference is derailed, a spokesperson for Bonker indicated that he would push for the policy reform as an amendment to another trade bill before 1989.
The Toshiba affair may provide hardliners in Congress and the administration with enough power to shift the direction of policy. Even if disclosures to date are not sufficient to shift policy, there could be more disclosures as investigations both here and abroad continue. Further revelations of major diversions could cancel out the effects of the NAS study.
Democrats will continue to control the House and Senate next year. But at the same time, Democrats do not form a monolithic bloc on this issue any more than on other issues, and hardliners exist in both parties. While Proxmire co-sponsored the sanctions approved by a wide margin in the Senate, an even more severe amendment sponsored by Alabama's Democratic Senator Richard Shelby called for a permanent ban on imports from Toshiba and Kongsberg. This proposal was defeated in the Senate by a vote of 78 to 19.
Moreover, those pushing for reforms both in Congress and the administration are not unconcerned with national security. They are not likely to push for easing controls in ways that industry wants if it becomes clear that some of those changes are "premature."
If the Toshiba case turns out to tip the balance away from the NAS study, it may hurt the chances of changes which reformers feel are justified even in light of the case but which hardliners feel decontrol too much technology. As for the administration, it is no longer clear whether the State Department is siding with Commerce. If it is not, that could move the administration more toward the hardline point of view.
The other major question has to do with C. William Verity, the new Commerce Secretary. While Chief Executive Officer of Armco, a supplier of oil drilling equipment to the Soviet Union, Secretary Verity served as U.S. co- chairman of the U.S.-U.S.S.R. Trade and Economic Council, a bilateral trade organization promoting the expansion of trade between the two countries. Soviet member ship includes top officials from the industrial ministries, planning committees and foreign trade organizations. U.S. membership includes major corporations such as Occidental Petroleum, PepsiCo, Coca-Cola, Ralston-Purina, Allis-Chalmers, Archer Daniels Midland, Caterpillar, Xerox, Dow Chemical, Monsanto and many others.
Although he advocates expanding trade with the Soviet Union, what stance he will take on controls in the administration and how effective he will be in pushing his point of view is still unknown.
Several unanswered questions still loom on the horizon. If the GOP holds onto the White House, it is up in the air. It could be a hardline, proDefense administration, or a heavily business-oriented administration. If the Democrats come into power, it seems probable they would not be as hardline as the Republicans could be, but there is a pretty wide range of possible positions for them as well.
It is certainly possible that "perestroika," and a Intermediate Nuclear Force (INF) arms control agreement at the upcoming Washington summit could herald a new era of good feeling between the two superpowers.
No matter how sweet the Soviets look to the Americans a year from now, though, the United States is not going to dismantle its system of strategic export controls. It is possible that if the Toshiba case disappears as a controlling issue and policies continue to move in the direction they were headed earlier this year, that good relations could have some impact on changes in controls, but that impact could be limited. Controls are aimed at keeping militarily useful technologies out of Moscow's hands and will continue to be aimed at that for the foreseeable future.
Steve Hirsch is a Washington, D.C. based writer specializing in international trade issues.