A Discussion with

Senator John Heinz Plican,

and

Stephen D. Bryen Director, Defense Technology Security Administration

The Lehrman Auditorium The Heritage Foundation July 29, 1987

W. Bruce Weiurod On behalf of The Heritage Foundation, I would like to welcome you to a ,port policy and national security. I am Bruce Weinrod, discussion of U.S. ex Director of Foreign Policy and Defense Studies at Heritage. There appears to be a general consensus in this country that the U.S. and its allies ought not to provide the Soviet bloc with advanced technologies that would enhance Soviet or Warsaw Pact military capabilities. At the same time, there are differing perspectives on the best way to pr e vent advanced technology transfers or leakage to the Soviet bloc while at the same time not unduly infringing upon U.S. private sector exports. This, therefore, is the topic of our program: what policies should the U.S. adopt in order to make advanced tec h nology leakage difficult or impossible. To discuss this and related topics, we are pleased to have two of the people in the United States with the most knowledge on this subject. Each has spent years involved in various aspects of U.S. export policy. Firs t , I would like to introduce Senator John Heinz from Pennsylvania. Senator Heinz is in his second term in the Senate after two-and-a-half terms in the House and experience in the private sector prior to that. He serves on the Finance Committee, the Special Committee on Aging, and also on the Government Affairs Committee. But most relevant for us today, he is a senior member of the Senate Banking Committee, where he has spent a good bit of his time over the past few years working on export issues. So we welc ome you here today, Senator Heinz, and we look forward to your comments.

Senator John Heinz Thank you very much. It is good to be here with Steve Bryen, who has come before the Banking Committee on numerous occasions, and also with Bruce. One of the things he did not mention is that I had the honor of having him as my Legislative Director for a number of years. This is an extremely timely forum. The issues that we will be dealing with are in the news and on the table between the House and Senate, as the tr a de bill is in conference. So The Heritage Foundation has performed an important public service in arranging this forum. It should be clear to anyone who is concerned about U.S. national security that a major source of U.S. military strength lies in preser v ing the strategic balance with the Soviet Union via an advantage in high technology. For example, our technological edge ensures that the Soviets recognize our nuclear deterrent as the terrible weapon that it is. Our technological edge permits us to face military forces far larger than our own or our allies' with a great deal more confidence. And our technological edge permits us to track and to apprehend what is probably the most dangerous strategic weapon, the nuclear submarine.

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would put a serious dent in the profits of the companies that produce high technologies, and therefore in their ability to finance new technological developments.

If the first requirement is to make careful judgment, the second is to require that the controls be mu ltilateral. If the U.S. were simply enforcing its own control system without cooperation from its COCOM allies, principally the EEC and Japan, that would not produce a very successful export control regime. And no matter how tightly we control, even if mu ltilaterally, there is nothing we as a country can do to control directly the actions of a Toshiba before the fact. We have to have the Japanese do something about Toshiba before the fact. Our law does not reach to Japan. Only Japanese law does.

Two Factor s, So if my thesis is correct, meeting our twin objectives of competitiveness and appropriate control depends on two factors. First, and most important, agreement with our allies on the critical technologies to be controlled; this must be a mutual agreeme nt. Second, having reached that agreement, a regime for effective and universal enforcement must be established.

To do that, we need the support of both industry and our allies. We can delude ourselves, I suppose, into thinking that controls on every techn ology from the most mundane to the most advanced represent the appropriate amount of caution to preserve our national security. But if we attempt to place national security controls on many of the items available in any Radio Shack, our allies will, and t h ey have, question the seriousness of our effort and our exporters will throw up their hands in despair. We will achieve none of our objectives. We will not be promoting U.S. . interests and we will not be achieving multilateral control of the leakage of c ritical technology to the Soviet Union.

Solid Principl& Setting aside the issue of consensus, we have to realize that it is senseless to spread our control efforts too thin, especially at the low end of the technology spectrum where foreign availability th rough rapid diffusion of technology makes control virtually impossible. The notion that foreign availability should guide our export control policy is a longstanding principle in our law. it is one more honored in the breach than in the observance in some of our export control decisions. But it is a good and solid principle.

Once we have agreed on the technologies requiring control, we come to the real keystone of export control, and that is effective, universal licensing and enforcement. Here we must prov ide our exporters clear policy guidance and efficient licensing services. We must demonstrate that those attempting to evade controls will be caught and severely punished, and we must ensure that our allies do likewise.

I might add parenthetically that ov er the last few years Congress has come to recognize that we need more resources for export licensing and enforcement. Budgeting for resources of the Commerce Department devoted to export administration has grown in the last ten years from $6 million to $ 27 million, more than four-and-one-half times, and personnel from 150 to roughl 550 You might think the results of those efforts would be considerable. The 7act is", they have

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Vax process control computers. Finally, individual licenses still were required for blacklist ed companies and for shipment to COCOM countries who had not met their obligations under the COCOM agreement. The EAA amendments also would reduce those licensing requirements for U.S.-made component parts that have resulted in such U.S. parts not. being u sed in foreign designs. Under the new language, exporters would be free to ship U.S. components--often simply chips--of larger systems that are not themselves controlled. Foreign suppliers also would be able to build up to 20 percent U.S. content into the i r products without seeking export licenses. Taken together, these changes would eliminate about 25,000 to 30,000 licenses each year, a reduction of about 25 percent. They would remove controls whose principal enect has been to limit U.S. ability to compet e without having any effect on the strategic balance. And in no case would the essential controls on high technology flows to the East be removed. That is to say, everything above the PRC greenline remains as it has been.

The second element of these amendm ents is aimed at ensuring effective, universal enforcement. Since we have been unable enforce our laws through COCOM ourselves, we have adopted a second-best solution, namely deterring foreign violators by threatening them with the loss of the U.S. market . Such sanctions would put real teeth into our export control laws. In 1985 in the Banking Committee, I pressed for discretionary import sanctions as part of the EAA amendments. I added debarment from U.S. government procurement for five years in this year ' s bill. And after the committee hearings on Toshiba/Kongsberg, it became clear that even sterner measures were necessary, and then Senator Garn and I offered the so-called Toshiba Amendment, which mandates two-to-five-year import sanctions on any COCOM vi olator.

, most important amendment of its kind The Toshiba Amendment may be the. that has ever been passed by the Senate. It certainly has received a lot of attention, both here and abroad. It is not every day that heads of big corporations resign. But thi s does not mean the problem is solved. Other amendments in the bill call for multilateral improvements of export controls through negotiations with COCOM. The key provisions provide that serious violations must incur a high penalty.

Taking Controls Seriou sly. This is not the preferred method for promoting improved COCOM enforcement, for dealing with those who have sold export agreements short. It is second best. But our COCOM allies, other than the Japanese, are beginning to take export controls seriously for the first time in their history. Even the Norwegians, who have traditionally been viewed as strong COCOM supporters, but who have not acted to support this position, have realized the weakness of their export control laws and taken measures to improve . But the guilty parties, whether in the U.S. or elsewhere, have to be punished as sternly as possible, if we are going to deter future diverters.

It is apparent to me after wrestling with Export Administration Act issues for nearly a decade that the U.S. cannot exert complete control--even of the most critical technologies. They are made in other countries. Toshiba and Kongsberg

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did very well throughout the 1970s, or indirectly, which they have been doing very successfully since the 1980s.

ne reason for the change is that this Administration tightened up here at home. The Soviets started operating off-shore, first in the neutral countries. Then when the neutral countries closed division operations down, the Soviets turned to the the COCOM countries. Their effort to get technology in the COCOM countries continues today. And in the COCOM countries, there is clearly not enough of an offensive to confront a massive Soviet effort. For example, Norway has just six licensing officials and Japan, only ten. And I suspect that Japan exports more high- tech than the U.S.

Back to BottonL So what we must do is go to our COCOM allie s to try to get their renewed, serious cooperation. Think of export controls as similar to a slide in a children's playground. The hard part is climbing the ladder to the top, and then it is zip right down to the bottom. Export controls are precarious in the same way. You woric your w@y up the ladder, but if you are not careful it is zip right down to the bottom again.

And what some of us fear and why we are concerned about the Senate bill, however well-intentioned it is, is that it might push the U.S. dow n the slide a lot more precipitously than is desirable. There is no doubt that the infrastructure for export controls is in need of vast repair, particularly abroad. It is not especially effective at home, as many exporting companies know. It is a difficu lt and cumbersome system, and much must be done to improve it.

What the Senate has targeted (in terms of the goods that are shipped to the COCOM countries) are goods that for the most part do not go through the individual validated licensing process anyhow . They are sent abroad under a variety of bulk licenses, the most well-known one, the one that the Commerce Department tightened up a few years ago, is called the distribution license. The license authorizes companies which sell large quantities of goods a broad to sell those goods in an approved trading network, where they carry out some significant responsibilities in making sure that the recipients of those goods can be relied on, are good customers, and will not divert products or engage in other activi ties that are against U.S. interests.

Requirements Tightened. That system, as it stood before 1985 or so, had to be improved. We had found that the auditing and the care with which U.S. and foreign companies were handling the process was far below par. And the Commerce Department very appropriately tightened up the license requirements. That is where the $56 billion budget increase, at least the substantial portion that goes to the COCOM countries, really is at work is in the Distribution Ucensing System.

Now what the Senate amendments would do in principle is eliminate the Distribution Ucensing System for the goods in the China greenline bracket, and that is three-quarters of the goods, and replace it with a system that would send goods off to Europe to a ny customer, except those that are explicitly on the banned list. There they will be disposed of using European licensing systems.' Now Senator Heinz himself has said that clearly the system in the alliance is not what it ought to

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Under the proposal in the Senate, as it currently stands, the U.S. would not know. And while it is true that in the Senate proposal those on the banned list could not receive goods directly, there are plenty who are working up to getting on the banned list. They are diverting goods but have not quite gone through the administrative process that Commerce has to get on the Black List, and they are receiving these goods like hot cakes.

The point is that the U.S. sho uld sell things to people who are reliable, not to anybody--and should reward people who are reliable. That was the notion behind the Certified End-user Program, and I was surprised that the Senate failed to consider it in thinking through the program to streamline the licensing system.

Nobody can argue against making the system effective, but in any reform that we propose, we must be sure it does not result in reindustrializing the Soviet Union, which is the goal they were trying to achieve through diversions.

Some Spectaculu Succem Senator Heinz said that U.S. success has been moderate. I would argue that our success has been fairly close to spectacular in certain respects. In the 1970s through illegal and through legal means the Soviets received turnkey factories from the United States and from the allies in an almost unbridled way. That is what really enabled them to carry out one of the biggest military buildups known in this century, a successful one, and one that has caused us great problems and gre ater expense.

In the 1980s, no turnke factory or high-tech or controlled goods have been sold on a legal basis, or as L as I can tell on any illegal basis, to the Soviet Union. We have prevented a major incremental gain by the Soviet Union. What we are up against now is, on the one hand, the technobandits, the thieves, and on the other, these unhappy cases where major companies simply bypass all reason and all law, as in the Toshiba/Kongsberg case.

What the U.S. should do is adopt something like the Certified End-user Program--reward reliable customers, but not just dump our equipment off on to allies and say, "You police it!"

Rec4nocity NeededL It is important to move forward on enforcement. The Senate amendment is a great step forward on that score, and it deserves greatest praise, especially the idea of giving us the possibility of cutting off imports against companies and individuals who do business with our enemies. But there are some companies who do not export anything into the United States, and in those cases, the U.S. pust rely on allies to prosecute. But there must be some re, . ty, so nproci that a crime in one country is a crime in another. It is a serious business.

Neither the United States nor its allies can allow technology leakage to the So viet Union. We have to use our creativity and our political clout now to bring about a system that really can protect our technology, not harm our business interests, but protect our technology and get us to a position where we can continue to maintain a leadership role in this and the many other areas essential to our responsibilities as a free country and a free world.

Ile greenline was intentionally made an extremely generous list. Not only that, the U.S. has been actually expanding it since then. It was never intended to limit the Chinese, except in some very special areas. In fact, the purpose of the Chin a greenline list was help reindustrialize China, to strengthen it, to enable it both in commercial and in military terms, to become a much more senior player. What I am really afraid of is that the bill seeks to take the gr@enline out of the licensing pro c ess. What we are trying to do is to prevent the reindustrialization of the Soviet Union, because we know that most of that reindustrialization has as its final purpose the modernization of Soviet military forces. We do not see the Soviet Union making Atar i games, or any other civilian products. The real thrust is military might. It is the one lobby in the Soviet Union that really has influence.

It is unfair to say that we take a position on the list of controlled goods simply for a negotiating posture. We have tried to understand, as best we can, what the Soviets have been seeking from us, and we have tried to prevent them from getting it, if we thought we could do so in an. effective way. And I think we have been fairly successful.

I might add one other p oint: recently the British made some proposals for stre '-- e COCOM list. And I thought they were very good. Without going into e ails, I can tell you right now that they do not propose making available anything like the PRC greenline list. They are purpo s ely way below that, because they share the idea that we do not want to let such goods go to the Soviet Union. That is their bottom line, and that is the common thread. It is what we have to build on in terms of enforcement and in terms of developing a sys tem that can really work.

Senator Heinz: In terms of what we are trying to do in the Senate bill, we have no interest in decontrolling up to the PRC line. We are interested in COCOM destinations that are reliable. What we propose in the Senate bill is to r ely on European licensing systems for those goods that basically the Europeans and the Japanese and others already make as well or better than the U.S. does, which, apart from the psychological desire of the Soviets to have U.S. brand-name products rather than Japanese brand-name products, are controlled nonetheless by the producing countries under their own national export regime. There is not much point in atteinpti@g to control an IBM AT computer, which you can buy at Sears, by the way, in Belgium, or i n trying to control its re-export, under U.S. law as well as under the law of Belgium, when there are NEC computers that are every bit as good, built in Japan, already for sale in Belgium to anybody who wants to come through, the Libyans, the Soviets, or t he Cubans. Not much is gained by maintaining strict licensing on that kind of technology.

There of course should be restrictions on a Vax 8500, and that is permitted. That was part of the legislation discussed with Steve Bryen in the Committee. It was agre ed it would solve the problem if we could structure the legislation where first there would be control, and second, a paper trail for critical items, when there was not something as good or better from friendly competitors. I think it goes back to the que stion of where to draw the line. And I do not know where DOD

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Dr. Brye= And I do not think you will prevent goods being sent. 1,et me give you a case . point. This is a real case. A year and a half ago, there was a diversion of gr ics workstations, very sophisticated ones, which fall within the China gree . e might add. They went from the U.S. to Germany, and from Germany they were sent either directly to East Germany or to Austria, from where they.were sent on to the Soviet Union. -We thought then and we are pretty well convinced now that the reason for the Soviet interest in these work stations was to help develop very lar*e-scale inte g rated circuits for their military program. It was under a distribution license, and the licensee had the responsibility to check the end-user. The end-user in Germany lived in an apartment. His business was in this ap"ent, and the millions of dollars wort h of workstations that he had been acquiring theoretically were in this apartment, which meant there was a small living space. But indeed, he never did take delivery of them. He just sent them on later, to wherever, as burglar alarm systems.

What I see is that we had some possibility of getting a German prosecution, but we had not succeeded in that. But we should be able to prosecute under the distribution license procedure if we can show some malfeasance. Whether we can or not is still being debated. But there is a possibility of following it with a prosecution. As I understand the amendment, however, with all the managers' modifications and formulae that have been thought of, these goods would just be shipped directly to this guy's apartment.

Senator Heinz: I must ask you one question about the graphics workstations. They were--correct me if I am wrong--on the list that we thought, or knew, that the Soviets had targeted.

Dr. Bxyen: That is correct, but so is all the rest of it.

Senator Heinz: As I think we all made clear in the course of debate on the bill, it would be the intention of the government, of Commerce and Defense, in designing general licenses, to stipulate for special attention those items that had been targeted by the Soviet Uni on. And that list of what they have targeted is great deal shorter than the list that would be subject to a general license under PRC greenline.

Dr. Bxyen: I do not think it is.

Senator Heinz: Well, that is what you testified to in the debate.

Dr. Bryew Of course they had not written their list according to COCOM definitions. The way they do it, as you can imagine, is say we need 3,000 graphics workstations by Techtron, we need 2000 Vax computers, and they go out and get them. And the next day they make up another list. So what you are asking us to do is to try and bypass the existing system that is already set up, which has lists, and has comprehension of this, and select out for special treatment some subset.

Senator Heinz: And I asked you this question: can you think of any technology that is above the AEN level, which is low, and below the PRC greenline, which is not broadly available from sources outside the U.S. yet within COCOM? in aph I

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Mr. LNan&- I am not trying to get at the merits. I am trying to figure out what kind of licensing now affects that kind of computer, under existing law, compared to what it would be under your amendment. Senator Heinz: Under existing law, it would be under a distribution license. And under our amendment, it would be under general license. -

Mr. Evans: It would go from distribution to general, and that in essence would pull it out of the Pentagon system. What is it then, Steve Bryen, that makes this worse than the existing system? Dr. Bryen: What makes it wors e in my view, but not in Senator Heinzs view, is that in effect the U.S. releases the goods without any knowledge, without any way of ensuring responsibility for where they go. Under current law, companies are responsible under their distribution license t o ensure that the people they sell those goods to are respectable businesses with reasonable uses for the equipment. And if they do not do it, and they do not attempt to police their distribution license themselves, they will lose their distribution licen s e. And so, the companies have a responsibility. And I might add that we are the only country that really uses distribution licenses and bulk licenses on this scale. Most of our allies require valid permits for shipments within COCOM. The Germans, for exam p le, require a license for every shipment within COCOM. We do not. Miles Costi* Institute for Strategic Trade: In cases of diversion, such as the graphics example, would they not be much better dealt with by applying espionage statutes than handling under e xport controls? This also would be a deterrent. Senator Heinz: The U.S. law is pretty tough. We do not shoot anybody for selling controlled technology to the Soviet Union, but we can put them away for ten years, and that is pretty severe. The problem is t hat many of our allies in the COCOM re*ime do not have very stiff penalties, and they have very, very short statutes of limitation. But you are right, if we could get them to have a much tougher enforcement regime, it would be a lot better.

Philip Hu ghes, Department of State: What this discussion suggests to me is the classic inability of our export control community to stop focusing on details and look at a larger picture. If I could, let me take a second to synthesize for the. nonexperts in the audience what in the Senate bill and the House bill are the three basic ideas about how to ease the burden on West-West trade that arise from our East-West trade controls.

One idea is to shorten the control list. And connected to that idea is shortening the contro l list by taking into account widespread foreign availability. Everybody should understand when we shorten the control list, that means those goods, whatever we take off the list, are now available as freely to the Soviet Union and its allies as they are to Western destinations. This is a debate about where to draw the line.

The second idea that most of this discussion is focused on is eliminating certain licensing requirements, certain control requirements for controlled goods, to

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tough and focus mainly on enforcement, and at. the same time, make shorter lists or say we are going to rely more on the other nations means for tracking these sales.

And I have two answers for you. One is I do not think it is inconsistent to say, "Look, we are not going to try and apply our law to you. We are going to ask you to do what you say you are - going to do. - And secondly, we are not going to get you to control a bunch of things, like IBM ATs, which we think are kind of ridiculous to try to control. We prefer that we not be embarassed by the Soviets using them. Just file off the brand name, please." And say at the same time, "Now that we have agreed on a smaller list, you've got laws. Let's all really do something with them." I do not think that is inconsistent.

But even if it is, I would say that the alternative is worse. The alternative is not to enforce, as happened in the case of Toshiba. That is really the major item which seems to have awakened our COCOM allies. The idea of not enforcing and then taking actions to hit the perpetrator s, which are companies, not countries, would be a bad alternative.

Mr. Weinrod: I would like to give each of our panelists a brief opportunity for closing remarks.

Dr. Bryen: I think the real discussion is over whether or not we are going to end up decont rolling a substantial part of our high-tech exports, which will then end up in the Soviet Union. As Senator Heinz pointed out, 0 the $80 billion of high- tech exports, $56 billion fit into this category. What a bonanza for Gorbachev. I just do not think t h at the amendment, however well-intentioned, that the Senate has come up with will do anything less than stand by while the U.S. lead over the Soviets evaporates. And I hope that the Senate will take a step back from this and take another look at it, befor e plunging ahead. If I have any appeal to make today, it is precisely that.

Senator Heinz: Nobody wants to help the Soviet Union reindustrialize, or gain the kind of base that they can use to make an even more effective challenge than they already have to destabilizing the world order. But I think that, if we are going to have cooperation from all the other people who have technology that is as good as or equivalent to ours, some of whom are not COCOM members, we have to use judgment about how far to go. T h is debate is not over whether or not we should control the export of critical technologies to the Soviet Union. This debate is not over whether we should obtain validated licenses on supercomputers. This debate is not over whether there should be tough en forcement. ne debate is not over whether there should be reexport controls by either ourselves or our COCOM allies.

The question is who is going to do it. And is it realistic to expect the United States to have re-export controls on a computer sold under a distribution license to the erivalent of Sears in either Brussels or Athens or to expect that there is any way o prosecuting violations of those export controls?

Mr. Weinrod: We thank both of you very much.