oversight

Export Controls: U.S. Policies and Procedures Regarding the Soviet Union

Published by the Government Accountability Office on 1990-05-24.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

May I!J!)O
                                EXPORT CONTROLS
                                U.S. Policies and
                                Procedures Regarding
                                the Soviet Union



                                               141545




_--__--~
(;A( ,/‘NSIAI)-90-   1r(T,I”S
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   National Security and
                   International Affairs Division

                   B-239423
                   May 24,199O

                   The Honorable Lloyd Bentsen
                   Chairman, Committee on Finance
                   United States Senate
                   Dear Mr. Chairman:
                   As requested, this fact sheet provides information on U.S. export con-
                   trols regarding the Soviet Union. Specifically, it contains information on
                   export control policies and procedures, the current level of control on
                   exports to the Soviet Union, and U.S. plans to liberalize these controls,
                   In addition, it discussesUS. businessviews on the impact of export con-
                   trols on United States-Soviettrade. While U.S. export control policy is
                   not on the agendaof the current United States-Soviettrade negotiations,
                   it is an important consideration in assessingthe potential for increased
                   United States-Soviettrade.

                   The United States controls U.S. exports of militarily significant commer-
Results in Brief   cial products to the Soviet Union and other selectedcountries by licens-
                   ing the export of controlled products to every country except Canada.
                   The CommerceDepartment administers the control system and reviews
                   all proposed exports, including those to the Soviet Union. The Depart-
                   ment of Defensereviews proposed exports to the Soviet Union that are
                   at a certain level of technical sophistication. About 86 percent of U.S.
                   exports to the Soviet Union are agricultural goodsthat do not require an
                   export license. However, most sophisticated goodsthat are exported,
                   including almost all advanced aircraft exports, do require a license, as
                   do most advanced computers, telecommunications equipment, and
                   machine tools. Applications for all exports that require a licensejumped
                   from 1,110 in 1987 to 1,813 in 1989, a 63 percent increase. During these
                   3 years, $2.6 billion in export licenseswere approved, compared to
                   about $1 billion that were not approved (some applications not
                   approved may have been resubmitted and approved at a later date).

                   U.S. export control policy toward the Soviet Union is in a state of flux.
                   During the 198Os,U.S. export controls regarding the Soviet Union were
                   very stringent. However, domestic changesin the Soviet Union, as well
                   as in Eastern Europe, have prompted calls for a significant reduction in
                   export controls. In May 1990, the President announcedthat the United
                   States would propose to its Western allies that export control policies
                   regarding the Soviet Union and Eastern Europe be liberalized. According


                   Page 1                                     GAO/NSIAD-SO-LSSFS   Export   Controls
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              B-239423




              to Commerce,the U.S.’ Western allies are likely to support these
              proposals.
              Many U.S. businesseshave been calling for liberalization of U.S. export
              controls. They complain that U.S. controls imposed for national security
              and foreign policy reasonshave hindered their efforts to market prod-
              ucts in Eastern Europe and the Soviet Union. They also maintain that
              U.S. controls are stricter and take more time to processthan those of
              other Western countries.
              The United States has about 100joint ventures in the Soviet Union.
              However, most are in low-technology and service industries, and only a
              few have been successful.
              Appendix I includes information on export control policies and levels of
              control for exports to proscribed countries. Appendix II discussesU.S.
              export control policies regarding the Soviet Union. Appendix III dis-
              cussesUS. businessviews on the impact US. export controls have on
              United States-Soviettrade.

              We collected statistical information from the CommerceDepartment on
Scopeand      the number and dollar value of license applications for exports to the
Methodology   Soviet Union from 1987 through 1989. Commerce,State, and Defense
              Department officials provided information on U.S. export control licens-
              ing procedures for the Soviet Union and on the levels of export control
              for certain high-tech exports to the Soviet Union.
              To obtain information on U.S.joint ventures in the Soviet Union and
              how export controls affect the ability of U.S. companiesto export to the
              Soviet Union, we interviewed several individuals from private compa-
              nies and trade associationsand a former high-level CommerceDepart-
              ment official. We also obtained information from an International Trade
              Commission survey that included private sector views on U.S. export
              controls.
              We did not seek formal agency comments on this report. We conducted
              our review between February and May 1990.
              As agreed with your office, we will distribute this fact sheet to other
              congressionaloffices and the Secretariesof Commerce,State, and
              Defense.We will make it available to additional interested parties upon
              request.


              Page 2                                     GAO/NSIAIMO-185FS   Export   Controls
E

    B-239423




    The major contributors to this fact sheet were James McDermott, project
    director, Elizabeth Sirois, project manager, and Elizabeth Morrison,
    evaluator. If you or your staff have any questions, I can be reached on
    (202)275-4812.

    Sincerely yours,




    Allan I. Mendelowitz, Director
    Trade, Energy, and Finance Issues




    Page 3                                    GAO/NSWD@O-186FS   Export   Controls
contents


Letter
Appendix I
Export Control         Licensing Procedures
                       Export Control Proceduresfor Proscribed Countries
Policies and
Procedures
Appendix II                                                                                          9
US. Export Control     Current Levels of Control on Exports to the Soviet Union                     10
                       Current U.S. Initiatives                                                     15
Policy Regarding the   Legislative Changesto U.S. Export Control Laws                               16
Soviet Union
Appendix III                                                                                        18
U.S. Business Views    Types of United States-SovietJoint Ventures                                  19
on Impact of U.S.
Export Controls on
United States-Soviet
Trade
Figures                Figure II. 1: US. Decisionson Export Licensesto the                          12
                           Soviet Union
                       Figure 11.2:U.S.-Approved Export Licensesto the Soviet                       13
                           Union
                       Figure 11.3:U.S.-RejectedExport Licensesto the Soviet                        13
                           Union
                       Figure 11.4:U.S.-ReturnedWithout Action Export                               14
                           Licensesto the Soviet Union




                       Abbreviations

                       COCOM     Coordinating Committee for Multilateral Export Controls
                       DOD       Department of Defense


                       Page 4                                    GAO/NSIAD@O-185FS   Export   Controls
Page 6   GAO/NSIADSO-185FS   Export   Controls
Appendix 1

Export Control Policiesand Procedures


                       The Export Administration Act of 1979, as amended,is the primary
                       authority for controlling U.S. exports of dual-use products and technolo-
                       gies, that is, militarily significant commercial products, such as com-
                       puters and aircraft. The U.S. government controls dual-use exports to
                       enhancenational security. The act also gives the President authority to
                       limit exports to further foreign policy goals and to limit exports of com-
                       modities in short supply.’ The Department of Commercelicensesall
                       exports of dual-use goods and technical data2to every country except
                       Canada.
                       National security controls are maintained on the export and reexport of
                       strategic commodities and technical data worldwide to prevent the
                       diversion of strategic goodsto proscribed countries. Section 5(b) of the
                       Export Administration Act requires the President to establish a list of
                       proscribed countries for national security purposes. A decision to add or
                       remove any country from the list is basedon whether the export of
                       goodsor technology to the country would significantly contribute to its
                       military capability and, therefore, threaten the national security of the
                       United States.:’Countries designated as “proscribed” include the Soviet
                       IJnion, the People’s Republic of China, and the Warsaw Pact countries in
                       Eastern Europe.

                       The United States imposes controls on certain strategic goodsin cooper-
                       ation with other nations through the Coordinating Committee for Multi-
                       lateral Export Controls (CQCOM). Agreements within COCOM must be
                       reached unanimously. Each member country upholds the international
                       standard through its domestic statutory authority to control exports.
                       COCOM member countries include the United States, Japan, Australia,
                       and NATOcountries (except Iceland).

                       The Department of Commerce,in consultation with other agencies,
Licensing Procedures   administers the U.S. system for licensing dual-use exports4 U.S. exports
                       that have no strategic value do not require the exporter to apply for a

                       ’ National security controls relate to exports that could contribute to the military and economic
                       strength of the Soviet IJnion and other potential adversaries. Foreign policy controls relate to broad
                       issues of human rights, antiterrorism, regional stability, and chemical warfare.
                       “Technical data is defined as information of any kind that can be used or “adapted for use in the
                       design, production, manufacture, or utilization” of products or materials.
                       “IInder the Export Administration Act, as amended, countries can generally only be added to the list
                       if Western allies also agree to control exports to these countries.

                       ‘The Department of State regulates all munitions exports.



                       Page 6                                                       GAO/NSIAD-90.1SSPS Export Controls
                       Appendix I
                       Export Control   Policlee   end Procedures




                       license, Most US. exports to all countries, including the Soviet Union,
                       fall in this category.
                       A license is required before certain high-technology items can be
                       exported to most destinations, including the proscribed countries. Com-
                       merce maintains a commodity control list citing categoriesof exports
                       that would require a license. Exporters must submit a license applica-
                       tion to the CommerceDepartment and obtain government approval to
                       export these types of products.
                       According to the Department of Commerce,the Department has a maxi-
                       mum of 120 days to processa license application. However, hundreds of
                       license applications each year take longer than 120 days to process,pri-
                       marily becauseof disagreementsbetween Commerceand the Depart-
                       ment of Defense(DOD) over whether to approve a license.

                       Commerceand, in somecases,DOD, reviews exports of controlled prod-
Export Control         ucts and technical data to proscribed countries. DOD reviews exports to
Procedures for         the Soviet Union that are at a certain level of technical sophistication.
Proscribed Countries   In reviewing proposed exports to proscribed countries, DOD’S primary job
                       is to examine the product’s military significance. In addition, both DOD
                       and Commercescreencustomer identification data and check the
                       buyer’s ties to the military. DOD screensend-usersthrough an intelli-
                       gencedatabase it has developed. Commercealso has accessto an intelli-
                       gencedatabase for screeningend-users,

                       Commerceand DOD engineersmake technical reviews of proposed
                       exports to proscribed countries to establish the technical level and mili-
                       tary significance of the product and the appropriateness of its stated
                       end-use.Generally, the more sophisticated the product, the more inten-
                       sive the review. In addition, proposed exports of technical data are gen-
                       erally scrutinized more closely and may take longer to review than
                       commodity exports, since the data could provide the “know-how” to
                       manufacture strategic products.
                       If WD and Commercelicensing officers cannot agree on whether to
                       approve a license application, the application enters an interagency
                       review process.If a decision cannot be reached at lower levels, the appli-
                       cation is reviewed by the Export Advisory Review Board, which is
                       chaired by the Secretary of Commerce.As a last recourse, the applica-
                       tion goesto the President. This interagency processprovides a structure


                       Page 7                                       GAO/NSL&D-!M-186PS   Export   Controls
                        Appendix I
                        Export Control   Pollcles   and Procedures




                        for making decisionson complex and precedent-setting casesand other
                        policy issueson which agreementcannot be reached at the working
                        level. License applications reviewed at the Export Advisory Review
                        Board level or by the President are often delayed for considerable time
                        periods; these types of caseshave, in someinstances,taken several
                        years to resolve,
                        In somecases,Commerce’sand DOD’S       approval of a license application is
                        conditioned on the exporter’s agreeing to certain restrictions, such as
                        provisions for inspections. In other cases,the agenciesmay suggest
                        reducing the technological level of the proposed export.
                        Someapplications are referred to COC~M.    The United States refers such
                        applications to COCOM  only after the federal government’s interagency
                        review is completed and the United States supports approving the
                        license application. (An application doesnot go to COCOM    if the United
                        States disapproves a license.) A license is not issued until COCOM  unani-
                        mously approves the export.
~. --,
Levels of Control for   Goodsand technical data that are consideredto be at the national dis-
Exports to Proscribed   cretion level (sometimes referred to as “administrative exception note”
                        items)-the least sophisticated of the controlled products-are not
Countries               reviewed by DODor COCOM.”   Licensing these items is left to the national
                        discretion of each COCOM  country. Each country is required, however, to
                        report to cOCOM  the national discretion items it has licensed. According
                        to Commerce,the United States has reviewed national discretion items
                        much more carefully in recent years than other COCOM      members.
                        The next category of controlled goods and technical data is referred to
                        as “favorable consideration” items, COCOM   must review license applica-
                        tions for these items. However, there is a general presumption that they
                        will be approved. The burden of proof is on the country opposing the
                        export to show why it should not be approved.
                        At the general exception level-items at the highest level of technologi-
                        cal sophistication-cocoM must review and unanimously approve all
                        goods and technical data.


                        “As of April 1990, the Department of Defense announced that it would no longer review licenses for
                        exports to the Soviet Union at the national discretion level. Previously, the Defense Department had
                        reviewed all licenses for the Soviet Union.



                        Page 8                                                      GAO/NSIAD-9048SFS       Export   Chttrola
Appendix II

U.S. Export Control Policy Regardingthe
Soviet Union

               In 1980, in responseto the Soviet invasion of Afghanistan, the United
               States instituted the “no exceptions policy,” which prohibited exports to
               the Soviet Union of all high-tech items or technical data that were at the
               general exception level, i.e., multilaterally controlled and requiring
               COCOMapproval. This policy meant that sophisticated technology could
               not be transferred to the Soviet Union by the United States or any other
               CQCOM member, since the United States would have disapproved any
               proposed general exception level exports submitted to COCOM. The
               United States exempted somegoods from its “no exceptions” policy,
               such as certain medical equipment and spare parts for previously
               exported products.

               In May 1989, the United States, in responseto the Soviet withdrawal
               from Afghanistan, discontinued the “no exceptions” policy. The United
               States now considerson a case-by-casebasis granting export licensesfor
               products controlled at the general exception level.
               Since this is a new policy, it is unclear what products the United States
               will approve for export to the Soviet Union. From June 1989 through
               December1989, approximately $1.3 million in exports were approved at
               the general exception level. Most of these involved computer and com-
               puter-related exports.

               In addition, there are currently two applications for export licenses
               pending before Commerceand DOD that Commercebelieves will be pre-
               cedent setting. One application involves the export of five mainframe
               computers that are 12-16times more powerful than those that could be
               exported to the Soviet Union without a license. The other involves mate-
               rial to be used for a fiber optic telecommunications link acrossthe Soviet
               Union. Commercebelieves the outcome of these licensing decisionswill
               indicate what level of exports the new system will allow to the Soviet
               Union.
               In addition to the former “no exceptions” policy, another constraint to
               trade with the Soviet Union is the “general technology” note of COCOM’S
               control list. The note mandates that certain technology for manufactur-
               ing goodsundergo a “general exception” vote by COCOM, even if the tech-
               nology is used in a product that is not subject to COCOM controls,
               According to Commerce,microelectronics would be among the technical
               data exports most carefully scrutinized since the data could be used to
               produce strategic items. According to a former high-level Commerce
               official, the “no exceptions” policy and the “general technology” note



               Page 9                                     GAO/NSlAD-90-186FS   Export   Controls
                        US. Export Control   Policy Regarding   the
                        Soviet Union




                        imposed a virtual embargo on the transfer of microelectronic technology
                        to the Soviet Union throughout the 1980s.

                        Proposedexports of raw materials or manufactured goodswithout any
Current Levels of       significant strategic use would not require a license for export to the
Control on Exports to   Soviet Union. Agricultural products, basic health care products, most
the Soviet Union        construction equipment, industrial controllers (such as thermostats), cir-
                        cuit boards, and low-level electronics products would fall in this cate-
                        gory. Similarly, food processingequipment and oil and gas equipment
                        would not be subject to control unless they contained sophisticated elec-
                        tronic components.According to Commerce,almost all advanced aircraft
                        exports would require a license, as would most sophisticated computers,
                        telecommunications equipment, and machine tool exports.

                        Certain low-technology computers, telecommunications equipment, and
                        machine tools can be exported without a license. These include (1) per-
                        sonal computers with a processingdata rate of 69 megabits per second
                        or less-such as AT compatible personal computers-and mainframes
                        with a processingdata rate less than 6.5 megabits per second(mid-
                        1970svintage), (2) most telecommunication analog switches, metallic
                        cable, somefiber optic cable, and multiplexers and microwave radios
                        with a transmission rate of less than 45 megabits per second,and
                        (3) machine tools with 3 or fewer axes and a positioning accuracy of 10
                        or more microns1
                        The most important items that require a license for export to the Soviet
                        Union are computers, digital telecommunications equipment, machine
                        tools, and aircraft. These goodsmay be controlled at the national discre-
                        tion, favorable consideration, or general exception levels. Listed below is
                        a brief description of these product categories and the levels at which
                        they are controlled.
                        1. All mainframes and minicomputers (i.e., all nonpersonal computers)
                        with a processingdata rate under 54 megabits per secondare controlled
                        at the national discretion level. Items in this category include Microvax
                        computers, someolder minicomputers (with IO-15-year-old technology)
                        and a few graphics workstations. Computers with a processingdata rate

                        ’ “Axes” refers to the number of linear and rotary motions that can be controlled by a machine tool:
                        the greater the number of axes, the more sophisticated the machine tool. A micron is one-thousandth
                        of a millimeter and is used as a measure of a machine tool’s precision. The lower the number of
                        microns, the greater the machine tool’s precision.



                        Page 10                                                     GAO/NSL4D-9O-185FS      Export   Controls
                          Appendix II
                          U.S. Export Control   Policy Regarding   the
                          Soviet Union




                          of 78 megabits per secondor less are controlled at the favorable consid-
                          eration level. Most older minicomputers and mainframes would fall into
                          this category. Computers with a processingdata rate greater than
                          78 megabits per secondare controlled at the general exception level.
                          Almost all mainframes and superminicomputers fall into this category,
                          as do most graphics workstations and personal computers using
                          386-basedmicroprocessors.

                          2. Most telecommunications equipment made today is controlled at the
                          general exception level, except for somedigital switches and somefiber
                          optic cable controlled at the national discretion level. There are no
                          favorable consideration items.
                          3. Generally, machine tools with more than 2 axes and a positioning
                          accuracy of less than 10 microns are controlled at the general exception
                          level. According to Commerce,most machine tools made today fall in
                          this category. Only a few machine tools are controlled at the national
                          discretion level, and there are no favorable consideration items.

                          4. Aircraft exports are controlled according to the technological level of
                          their engines and avionics. All advanced commercial aircraft are con-
                          trolled at the general exception level. Most spare parts related to avion-
                          ics or engines are similarly controlled.


Licensing Statistics on   From 1987 to 1989, export license applications for the Soviet Union
Exports to the Soviet     jumped from 1,110 to 1,813, a 63 percent increase.During these 3 years,
11.-.:,,                  69 percent of U.S. export licensesto the Soviet Union were approved;
UlllVll
                          4 percent were rejected; and 24 percent were returned without action-
                          compared to 7 percent returned without action for all destinations in
                           1989. As a practical matter, a license application returned without
                          action has the sameeffect as a denial becausethe proposed export can-
                          not take place.
                          According to Commerce,a high percentageof applications for the Soviet
                          Union were returned without action becausemany of them were for
                          exports at the general exception level (at a time when the U.S. “no
                          exceptions” policy was still in place), and U.S. companiespreferred to
                          have their applications returned without action rather than denied. In
                          other cases,applications were returned without action becauseCom-
                          merce requested more information about a proposed export than a com-
                          pany was willing to give. A small percentageof the applications that
                          were returned involved salesthat fell through. (Seefig. II. 1.)


                          Page 11                                        GAO/NSIADW-186FS   Export   Controh
                                            Appendix II
                                            U.S. Export Control     Policy Regarding    the
                                            Soviet Union




Figure 11.1:U.S. Decisions on Export
Licenses to the Soviet Union (1987-l 989)   Poromntagn




                                                   1887      1988       1889
                                                   VOWS

                                                   I      !1 Returned Without Action licenses
                                                             Rejected lIcm305
                                                           Approved licenses
                                                   II

                                            Note: In 1989, 7 percent of applications were still pending.
                                            Source: Commerce Department, Bureau of Export Administration,   1990.


                                            During these 3 years, $2.6 billion in export licenseswere approved;
                                            $32 million were denied; and $978 million were returned without action.
                                            According to Commerce,there is no way to determine how many of the
                                            approved exports were actually shipped.
                                            Someof these licensesmay have been for exports that were to be deliv-
                                            ered over several years. In addition, a few of the approved applications
                                            to export could have been submitted by different companiescompeting
                                            for contracts to ship the sameexport, in which caseonly one of the com-
                                            panies will actually ship it. (Seefigs. 11.2-4.)




                                            Page 12                                                    GAO/NSIAD-!40-186FS   Export   Controls
                                             Appendix II
                                             U.S. Export Control              Policy Regmlhg    the
                                             Soviet Union




Figure 11.2:U.S.-Approved Export
Licenses to the Soviet Union (1987-l 989)
                                             1400     Dollanln         MillIon




                                              200

                                                       1987            1888            1889
                                                       Yoan

                                             Source: Commerce Department, Bureau of Export Administration,   1990.



Figure 11.3:U.S.-Rejected Export
Licenrer, to the Soviet Union (1987-l 989)   20     Dellam       In MIlllam

                                             18

                                             16

                                             14

                                             12
                                                             1
                                             10

                                              8

                                              6

                                              4

                                              2

                                                                                            b
                                              0
                                                                 L               A
                                                    1987             1989            1989



                                             Source. Commerce Department, Bureau of Export Administration,   1990




                                             Page 13                                                   GAO/NSlAD-SO-186FS   Ekport   Controls
                                                                                                                                           ..


                                           Appendix           II
                                           U.S. ‘Export            Control     Policy Regarding   the
                                           Soviet Union




Figure 11.4:U.S.-Returned Without Action
Export Licenses to the Soviet Union        600     Dollar9         in Mllllonm
(1987~1989)


                                           800




                                           300



                                           200



                                                 d-l
                                           100
                                                                    A            A
                                                       1987             1988       1989
                                                       VOWS

                                           Source: Commerce Department, Bureau of Export Administration,    1990


                                           In 1989,62 percent of the license applications approved for the Soviet
                                           Union were for exports of nonmilitary aircraft, helicopters, and engines;
                                           27 percent were for technical models for demonstration (these are non-
                                           working models of controlled goods,such as computers); and 10 percent
                                           were for electronic computing equipment. (These percentagesare based
                                           on the dollar value of the exports.)
                                           In 1989, only 1.5 percent of total export licensesthe United States
                                           approved were for the Soviet Union. Lessthan 1 percent of the total
                                           dollar value of exports approved were for the Soviet Union.
                                           In the sameyear, the averageprocessingtime for export license applica-
                                           tions for all countries was 16 days, compared to 57 for the Soviet Union
                                           and Eastern Europe.”
                                           In 1989, the Department of Commerceestimated that it took 86 days to
                                           processexport licensesfor the Soviet Union and East European coun-
                                           tries that were referred to COCOM or other agenciesfor review, such as


                                           “Commerce Department officials note that the average processing time for licenses for all destinations
                                           has been reduced from 60 days in 1984 to 16 in 1989.



                                           Page 14                                                      GAO/NSIAIMO-186FS       Export   Controls
               Appendix D[
               U.S. Export Control   Policy Regarding   the
               Soviet Union




               DODor the State Department. This figure compareswith 67 days on
               average for referred casesfor all countries.

Current U.S.   During the 1980s US. export controls regarding the Soviet Union were
               very restrictive. However, domestic changesin the Soviet Union, as well
Initiatives    as in Eastern Europe, have prompted a reevaluation of U.S. export con-
               trol policy. Two studies were submitted to the President in April 1990:
               the Joint Chiefs of Staff conducted one study to assessthe potential
               impact of increased technology transfers on the Warsaw Pact, and the
               intelligence community conducted a study to evaluate East European
               countries’ illegal acquisition of Western technology.

               Basedon these studies, the President concluded that a complete over-
               haul of the control list was warranted. The United States has recom-
               mended to COCOM that a new core list of goodsand technologies be
               developed by the end of 1990 that is significantly shorter and less
               restrictive than the present list. The executive branch has determined
               that many goods and technologies that the United States controls to
               Eastern Europe and the Soviet Union are of low strategic value and that
               controls on these items could be revised immediately. Specifically, the
               President has proposed that COCOM decontrol almost all goods and tech-
               nologies, other than computers and telecommunications equipment, up
               to the “China Green Line”3 for all destinations.

               The United States and its COCOM allies have identified three priority sec-
               tors for immediate or partial decontrol: computers, telecommunications
               equipment, and machine tools. These sectors account for a large portion
               of all export license applications and are key to infrastructure improve-
               ments in the Soviet Union and Eastern Europe. The U.S. proposals
               include
               1. Decontrolling for all countries computers with a processingdata rate
               up to 276 megabits per second.These include all personal computers
               that are available commercially, someminicomputers, and a few main-
               frames Computers with a processingdata rate of between 275 and 660
               megabits would be controlled at the favorable consideration level. Com-
               puters with a processingdata rate of 650 megabits or greater would be
               controlled at the general exception level.

               “The “China Green Line” refers to the level at which export controls are imposed on the People’s
               Republic of China. According to Commerce, goods at this level are generally more sophisticated than
               those that can currently be exported to Eastern Europe and the Soviet Union, particularly in the
               computer area.



               Page 16                                                    GAO/NSL4.B9O-1S5PS      Export   Controla
                        Appendix II
                        U.S. Export Control Policy Regarding   the
                        Soviet Union




                        2. Decontrolling for all countries machine tools with a positioning accu-
                        racy between 2 to 3 microns. These include machine tools that make
                        water meters, commercial ball bearings, automatic pistons, and machine
                        components.All other machine tools would be controlled at the general
                        exception level. These include equipment for manufacturing parts for
                        automatic fuel injectors, computer hard drives, precision instrument
                        parts, and optic instruments.
                        3. Decontrolling for all countries telecommunications equipment, includ-
                        ing analog cellular telephone systems, ground satellite receivers, and
                        fiber optic cable. Controls on other telecommunications equipment
                        would be liberalized for Eastern Europe but not for the Soviet Union.
                        In addition, the United States has proposed that East European coun-
                        tries agreeing to certain conditions be accordedmore favorable licensing
                        treatment than the Soviet Union. Specifically, these countries would be
                        required to adopt measuressafeguarding controlled goods and technolo-
                        gies from reexport to the Soviet Union and to certify that the controlled
                        items would not be used for military purposes.
                        Other COCOM members are likely to support U.S. proposals to liberalize
                        export controls. However, somemembersdo not support the US. propo-
                        sal to liberalize export controls to a greater extent for Eastern Europe
                        than for the Soviet Union.

                        The U.S. proposals were transmitted to COCOM in May 1990, and a COCOM
                        meeting to discussthese proposals is scheduled for early June. Accord-
                        ing to Commerce,these proposals could be implemented as early as
                        July 1990.

                        In May 1990, the House Foreign Affairs Committee approved a bill
Legislative Changesto   amending the Export Administration Act. The bill calls for the United
US. Export Control      States to propose to COCOM decontrol of all goodsand technologies up to
Laws                    the China Green Line.
                        The Omnibus Trade and Competitiveness Act of 1988 significantly
                        amendedthe Export Administration Act of 1979 to reduce restrictions
                        on exports. The most important changeregarding trade between the
                        United States and the Soviet Union concernsthe export of technical
                        data. Before passageof the 1988 Trade Act, the United States unilater-
                        ally controlled virtually all proprietary technical data for export to
                        Eastern Europe and the Soviet Union, even if it related to decontrolled


                        Page 16                                      GAO/NSIAD-9O-185F!3   Export   Controls
Appendix II
U.S. Export Control   Policy Regarding   the
Soviet Union




goods,The 1988 Trade Act mandated that unilateral U.S. national secur-
ity controls on commodities and technical data be eliminated. As a
result, much proprietary technical data, previously controlled, can now
be exported from the United States to Eastern Europe and the Soviet
Union without a license.4
The 1988 Trade Act also mandated that the executive branch decontrol
all national discretion items, except those for which continued control
was explicitly agreed to by COCOM. This change,however, has not yet
been fully implemented. The 1988 Trade Act also decontrolled most
medical instruments and equipment and eliminated reexport controls on
foreign-produced products containing 25 percent or fewer U.S. parts and
components.In addition, the act included provisions for expediting for-
eign availability” reviews and license processingtimes.




4Exports of technical data controlled by COCOMstill require a license.

““Foreign availability” refers to militarily significant commercial products that are freely available to
the Soviet Union and East European nations, In 1977, the Congress directed that such products not be
controlled unless the President determines that national security requires such control.



Page 17                                                       GAO/NSIAD-!30-185FS      Export   Controls
Appendix III

US, BusinessViews on Impact of U.S. Export .’
Controls on U.S.-SovietTrade

                   Businessesin the IJnited States have frequently complained that U.S.
                   export controls imposed for national security and foreign policy reasons
                   have been a major hindrance to their efforts to market products in East-
                   ern Europe and the Soviet Union. The following are comments from U.S.
                   businessesand trade associationsregarding the effect U.S. export con-
                   trol laws have had on their ability to export to the Soviet Union:

               l A U.S. trade association told us that the United States has a reputation
                 in the Soviet Union as being an unreliable supplier, becauseof the diffi-
                 culty US. companieshad in getting export licensesapproved in the
                 1980s.This reputation has hindered U.S. companies’ ability to gain long-
                 term contracts for such products as construction and oil and gas equip-
                 ment. The Soviets have increasingly turned to non-U.S.companiesto
                 supply equipment in these areas.
               . One company told us that its salesto the Soviet Union could reach
                 $100 million if export controls were relaxed on processcontrol equip-
                 ment. The company stated that Japanesecompaniesare “waiting in the
                 wings” for U.S. export licensesto be turned down in areas such as pro-
                 cesscontrols so they can obtain the contracts.
               l A U.S. trade association told us that U.S. companiesare restricted from
                 providing modern civilian telecommunications equipment to East Euro-
                 pean countries and the Soviet Union becauseof export controls, even
                 though the administration has publicly stated that modern telecommuni-
                 cations infrastructure is critical for these countries’ economicreform.

                   Another company told us that the United States had 45 percent of the
                   Soviet market in oil and gas exploration and production equipment
                   before foreign policy controls were imposed on the export of this equip-
                   ment in the late 1970sand early 1980s.These controls were imposed for
                   a variety of reasons,including the Soviet invasion of Afghanistan in
                   1979 and the imposition of martial law in Poland in 1981. Although the
                   foreign policy controls have since been removed, U.S. companieshave
                   never been able to regain their previous market share. According to this
                   company, the IJnited States now holds less than 1 percent of the Soviet
                   market in oil and gas exploration equipment. The CommerceDepartment
                   estimated that if U.S. manufacturers had maintained their traditional
                   share of the Soviet petroleum equipment and servicesmarket, they
                   would have received about $2 billion in orders during the 1979-1985
                   period, instead of the $170 million they actually did receive.
                   Another company told us that its share of Soviet imports of construction
                   equipment fell from 80-85 percent in the late 1970sto near zero by 1982
                   becauseof foreign policy controls imposed on its exports in the late


                   Page 18                                   GAO/NSIAD-90.185FS   Export   Controls
                      Appendix III
                      U.S. Budneee Views on Impact of U.S. Export
                      Controln on U.S.&viet Trade




                      1970s and early 1980s.The company noted that although these controls
                      had been lifted over 6 years ago, it has never regained its leadership
                      position in the Soviet market. Its current market share is only
                      10 percent.
                      A 1990 International Trade Commission study reported that several US.
                      exporters believe U.S. export controls are a major factor in inhibiting
                      salesto the Soviet Union. In general, the Commissionreported that com-
                      panies that spoke about export controls felt that U.S. controls were
                      stricter and took more time to processthan those of other CCICOM coun-
                      tries, causing US. firms to be at a competitive disadvan age in the
                      Soviet Union. Several representatives from the private L ctor told the
                      Commissionthat extending most favored nation status* to the Soviet
                      Union would have little effect in increasing U.S. exports unless export
                      controls were liberalized. Many companiesthat the Commissioncon-
                      tacted spoke of the need to increasepredictability in U.S. export control
                      policies. They noted that U.S. businesseswant a clear indication of what
                      exports to the Soviet Union will be permissible.


                      U.S. firms had 97 joint ventures in the Soviet Union as of October 1989.2
Types of United       However, many of these are not operational and, of the onesthat are,
States-Soviet Joint   most are in low-technology and service industries; only a few have been
Ventures              successfuldue in part to weaknessesin the Soviet infrastructure and a
                      lack of currency convertibility.
                      Many experts on United States-Soviettrade agreethat the areas that
                      hold the most potential for successfuljoint ventures include civil tele-
                      communications; food products and processing;hotel and resort indus-
                      tries; oil and gas production; and environmental programs. Sectorsthe
                      Soviets have targeted for joint ventures include oil and petrochemicals;
                      agroindustries (including food processingand distribution); and high-
                      tech industries such as machine tools and computer control systems.




                      “‘Most favored nation” treatment generally refers to the practice of providing nondiscriminatory
                      treatment in the form of customs duties and other charges imposed on imported products.
                      “As of October 1989, the United States ranked third in joint ventures behind West Germany (163) and
                      Finland (110).



(rssacra)             Page 19                                                     GAO/NSIAJHO-185JTS Export Controls
1   ‘I‘lrtw~ is 8 26% tiiscoiinl,   on orders for 100 or more copiths rnailtd   to 8
    sin@* adclress.