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 ? L / I 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.
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)