Balancing the National Interest U.S. National Security Export Controls and Global Economic Competition (1987) / Chapter Skim
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Appendix C: Operation and Effects of U.S. Export Licensing for National Security Purposes
Appendix C: Operation and Effects of U.S. Export Licensing for National Security Purposes
Pages 221-253
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MERRILL Senior Sta;f{Consultant INTRODUCTION Determining the economic effects of U.S. national security export controls requires a detailed understanding of how technology trade is conducted, how U.S.
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Substantially more information is available on the processing and use of IVLs, although even those data are incomplete and in some respects misleading because they do not include actual shipments and relate only to the government's handling of license applications. Virtually no information is available on distribution licenses, the most widely used bulk export authorization.
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Most of it focused on the processing of individual validated licenses and individual reexport authorizations because delays and uncertainty in the handling of IVLs have long been considered to be significant problems, especially for smaller U.S. exporters.
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Commerce Department Data Bank 1. A sample of 500 cases was drawn at random from 3,613 individual validated licenses approved between April 15 and April 30, 1986.
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2. With the assistance of the Commerce Department, a separate questionnaire prepared by Stephen Merrill was mailed to all recent and current holders of distribution licenses.
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As late as May 1986, when the questionnaire was mailed, the department's mailing list contained a number of duplications, companies that were no longer active license users, and one-time applicants that had not received a distribution license. The estimate of 650 active distribution license holders is that of Commerce Department licensing officials.
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Controlled transactions involving services or transfers of technical data not directly related to product sales were not examined in detail. Fifth, an effort was made to distinguish national security export controls from controls for foreign policy, nuclear nonproliferation, short supply, and other purposes; but it is not always possible to isolate data on national security controls.
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Respondents to the distribution license survey reported that in calendar year 1985 they exported nearly $3.7 billion in manufactured goods under 109 licenses, representing 17 percent of the estimated 650 distribution licenses outstanding in 1985. Large companies holding distribution licenses may have been underrepresented in the sample.
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36 22 Exports under individual licenses Exports under distribution licenses Exports under other bulk licenses (project, service supply) 4 TOTAL 62 SOURCES: Commerce Department license data; Quick, Finan and Merrill surveys of U.S.-based firms.
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In the sample of IVL applications on which final action was taken in the first week of June 1986, Eastern bloc applications accounted for 3 percent of the total number, the PRC for 6.5 percent, CoCom countries for 46.2 percent, and other Western countries for 44.3 percent. The value of license applications in the sample by destination shows roughly the same distribution.
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SOURCE: Quick, Finan analysis of Commerce Department export license data. expanded at a rapid rate between 1980 and 1985, but the level remains relatively small.
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In FY1985 the Commerce Department approved a total of $26.1 billion of IVL applications alone under ECCN 1565; but according to trade data the United States exported only $15 billion of computers in calendar year 1985. COMPOSITION BY LEVEE OF MILITARY SENSITIVITY The distribution of licensed exports by level of military sensitivity shows a heavy concentration at the lower end of the spectrum.
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SOURCE: Quick, Finan analysis of Commerce Department export license data. sample of processed IVL applications categorized by Commerce Department examiners, slightly more than one-third of the cases fell within AEN limits;*
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Thus, it is the case that large companies, although in the minority, account for most of the exports and an even higher percentage of other foreign sales under distribution licenses. According to the findings of Quick, Finan, exporters that rely entirely on individual validated licenses are almost exclusively small firms.
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system an effective means of control? License Processing Times OVERALL DISTRIBUTION As reported by the Commerce Department, the average processing times for various types of cases and destinations for most of the first quarter of 1986 are shown in Table C-6.
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Figure C-1 compares the distribution of cases completed in April 1986 according to the two definitions of processing time, and Figure C-2 shows the same comparison on a cumulative basis.* Under the Commerce Department definition, 80 percent of the cases are completed in less than 30 days, whereas only one-half of the cases are disposed of in that period under the total processing time definition.
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BY FIRM SIZE It was hypothesized that small firms experience longer processing times than large firms because they have fewer resources to devote to coping with the licensing system. Under the Commerce Department definition the distribution of average processing times does not support the hypothesis; but a significant difference emerges when total processing times are examined and if destination is also taken into account.
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License Actions The Commerce Department denies very few license applicationsbetween 1 and 2 percent. This is not a significant measure of the restrictiveness of the system because companies generally avoid submitting applications that are likely to be rejected or that will require .
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SOURCE: Quick, Finan analysis of sample from Commerce Department export license data. suggests modification of the proposed transaction.*
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components may also seek a separate individual reexport authorization from the Department of Commerce. It is possible TABLE C-9 Distribution of Adverse Actions on IVL Applications by Destination and Level of Sensitivity Multilateral Control Unilateral Control Destination AEN PRC DL >DL DL >DL Bloc Denied RWAd PRC Denied RWAd 15 Western countries Denied RWAd Other Western countries Denied RWAd CoCom Denied RWAd SOURCE: Quick, Finan analysis of sample from Commerce Department license files.
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of distribution licenses are used for the reexport authority accorded foreign consignees. Sales by foreign affiliates under distribution licenses in 1985 were on the order of $22 billion.
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EFFECTS OF CONTROLS ON BUSINESS Administrative Costs The Quick, Finan and Merrill surveys requested detailed information on the administrative costs firms incur in complying with national security export controls, taking into account all personnel time, overhead, and expenses devoted to preparing and filing applications, training corporate personnel in required procedures, hiring outside consultants and legal assistance, and recordkeeping, reporting, and auditing. The accuracy of the responses depends on how such expenses are allocated in corporate accounts.
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A small share of this amount is for outside service providers. Current expenditures nevertheless represent a sharp increase over pre-1985 expenditures, largely as a result of May 1985 regulations requiring distribution license holders and their foreign consignees to ensure against the diversion of controlled items to the Soviet bloc by establishing internal control and recordkeeping systems subject to onsite inspection by agents of the license holder and the U.S.
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The 107 license holders in the sample employ 747 people, 20 percent or more of whose time is devoted to distribution license compliance. Sixty percent of these employees are foreign based.
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IP = weighted, aggregated industrial production indexes for CoCom countries (excluding the United States and Canada) XR = four-quarter moving average of weighted exchange rates for CoCom countries (excluding the United States and Canada)
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components. The Case of Foreign Consignees Under Distribution Licenses Under the Export Administration Regulations (section 373.3)
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Extrapolating to all license holders, the total loss is in the range of $450 million. Most license holders consider this an acceptable price to pay to retain their distribution licenses.
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Moreover, companies of all sizes reported that it is becoming more difficult to recruit new consignees; some consignees have reduced their orders even though remaining on a license; and in general the United States may be imposing too many restrictions to retain and expand its foreign customer base. These concerns are reinforced by perceptions of widespread foreign availability of products eligible for distribution licenses.
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· Processing times, at least for applications to destinations other than the Eastern bloc, do not vary consistently with the degree of military sensitivity associated with different levels of technology, as judged by the United States and its CoCom partners. The treatment of cases involving the least sensitive (i.e., AEN)
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Similarly, the recent imposition of new accounting and auditing requirements on foreign customers that receive controlled goods under U.S. distribution licenses has already caused some erosion of the distribution networks of U.S.
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