oversight

Export Controls: Change in Export Licensing Jurisdiction for Two Sensitive Dual-Use Items

Published by the Government Accountability Office on 1997-01-14.

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

                  United States General Accounting Office

GAO               Report to Congressional Requesters




January 1997
                  EXPORT CONTROLS
                  Change in Export
                  Licensing Jurisdiction
                  for Two Sensitive
                  Dual-Use Items




GAO/NSIAD-97-24
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division

             B-272258

             January 14, 1997

             The Honorable Floyd Spence
             Chairman
             The Honorable Ronald V. Dellums
             Ranking Minority Member
             Committee on National Security
             House of Representatives

             The U.S. export control system for items with military applications is
             divided into two regimes. The Department of State licenses munitions
             items, which are designed, developed, configured, adapted, or modified for
             military applications, and the Department of Commerce licenses most
             dual-use items, which are items that have both commercial and military
             applications. Although the Commerce licensing system is the primary
             vehicle to control dual-use items, some dual-use items are controlled
             under the State system. In March 1996, the executive branch announced a
             change in licensing jurisdiction for two items—commercial jet engine hot
             section technology and commercial communications satellites—from
             State to Commerce.1 In October and November 1996, Commerce and State
             published regulations implementing this change, with Commerce defining
             enhanced export controls to apply when licensing these two items.
             Commerce’s regulations are interim regulations, effective on publication,
             and Commerce allowed for a 45-day public comment period on its
             regulations.

             In response to your request, we reviewed the implications of this change in
             export licensing jurisdiction. Specifically, we (1) assessed the military
             sensitivity of the two items, (2) determined the executive branch’s
             rationale for the change in jurisdiction, (3) compared the licensing systems
             that the two Departments use to control exports, and (4) analyzed
             proposed changes in Commerce controls for these two items.


             The Department of State controls munitions items under the authority
Background   provided in the Arms Export Control Act. State promulgates the
             International Traffic in Arms Regulations (ITAR) and establishes, with the
             concurrence of the Department of Defense, the U.S. Munitions List. State
             and Defense can include a dual-use item on this list, as provided by the
             ITAR, if it “is specifically designed, developed, configured, adapted, or



             1
             Hot section technology is the technical information required for the design, production, manufacture,
             maintenance, or modification of the engine hot section.



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modified for a military application, and has significant military or
intelligence applicability such that control under [the ITAR] is necessary.”

The Department of Commerce controls dual-use items under a system
established under the Export Administration Act.2 Commerce imposes
export controls on the items within its jurisdiction through the Export
Administration Regulations and establishes the Commerce Control List in
consultation with other agencies and in parallel with U.S. commitments in
international control regimes. In arriving at a licensing decision,
Commerce provides license applications for the review of other agencies,
including Defense, State, the Department of Energy, and the Arms Control
and Disarmament Agency. A December 1995 executive order states that
Commerce may refer all applications for a validated license to these
agencies for review.3 If an agency disagrees with Commerce’s initial
licensing decision, it can appeal the decision to interagency review
committees.

In March 1993, we reported that jurisdiction over commercial jet engine
hot section technology and space-related items, such as communications
satellites, was a long-standing issue between State and Commerce.4 In
November 1990, the President ordered the removal of dual-use items from
the U.S. Munitions List and State’s licensing controls, unless significant
national security interests would be jeopardized. Pursuant to this order,
State led an interagency review, including officials from Defense,
Commerce, and other agencies, to determine which dual-use items should
be removed from the munitions list and transferred to Commerce’s
jurisdiction and which warranted retention on the munitions list. This
review was conducted between December 1990 and April 1992. As part of
this review, an interagency working group identified and established
performance parameters for the militarily sensitive characteristics of
communications satellites. If a satellite met or exceeded these parameters,
the satellite would be controlled by State, otherwise it would be licensed
by Commerce. As a result of the interagency review, over two dozen


2
 Although the Export Administration Act lapsed on August 20, 1994, Commerce is currently acting
under the authority conferred by Executive Order 12924 of August 19, 1994. In the executive order, the
President invoked his authority, including authority under the International Emergency Economic
Powers Act, to continue the system of controls that the United States had maintained under the Export
Administration Act. This has been extended by two presidential notices issued in 1995 and 1996.
3
 Many items on the Commerce Control List can be exported under a general license to particular
destinations. Commerce is not notified of and does not review these exports. Selected items require
that exporters obtain Commerce approval through an individual validated license for each export.
4
 Export Controls: Issues in Removing Militarily Sensitive Items from the Munitions List
(GAO/NSIAD-93-67, Mar. 31, 1993).



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                   dual-use items were removed from the munitions list and placed under
                   Commerce’s jurisdiction, including approximately half of the commercial
                   communications satellites. Jurisdiction for hot section technology,
                   however, was not resolved as a result of the interagency review.

                   The executive branch’s recent decision to change the export licensing
                   jurisdiction for commercial jet engine hot section technology addresses a
                   long-standing disagreement as to whether State or Commerce should
                   control its export. Until this decision, Commerce had claimed jurisdiction
                   over hot section technology of commercial engines not derived from
                   military technology, while State and Defense had maintained that hot
                   section technology for commercial engines that is derived from military
                   engines is the same technology used in military fighter engines and is of
                   such sensitivity that ITAR control was appropriate. Now, all hot section
                   technology for commercial engines, including certain civil and military
                   engines that share the same hot section technology and are evolving
                   together, will be controlled by Commerce. All commercial
                   communications satellites, including those with militarily sensitive
                   characteristics, will be licensed by Commerce.


                   The items transferred to Commerce’s control, commercial jet engine hot
Results in Brief   section technology and commercial communications satellites, are
                   militarily sensitive items. Hot section technology gives U.S. fighter aircraft
                   the ability to outlast and outperform other aircraft, a key element in
                   achieving air superiority. Because of the military significance of this
                   technology, State does not allow the export of the most advanced hot
                   section technology for either military or commercial use. Commercial
                   communications satellites being transferred to Commerce’s jurisdiction
                   contain militarily sensitive characteristics, such as crosslink capabilities
                   that transmit data from one satellite to another without going through a
                   ground station and thus permit very secure communications. Defense and
                   State officials expressed concern about the potential for improvements in
                   missile capabilities through disclosure of technical data related to
                   integrating the satellite with the launch vehicle and the operational
                   capability that specific satellite characteristics could give a potential
                   adversary. State has approved the export of commercial communications
                   satellites for foreign launch with conditions for safeguarding sensitive
                   technologies for certain destinations such as China.

                   The executive branch’s decision to transfer licensing jurisdiction reflects
                   Commerce’s position that all hot section technology and communications



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satellites for commercial use should be under Commerce’s jurisdiction.
Transferring jurisdiction also makes U.S. national controls for these items
consistent with international trade commitments to control them as
dual-use items. Jet engine and satellite manufacturers support the change
in jurisdiction, viewing the Commerce system as more responsive to the
needs of business.

The State and Commerce export control systems differ. State has broad
authority to deny a license, and it can deny simply with the explanation
that it is against U.S. national security or foreign policy interests.
Commerce controls items to achieve specific national security and foreign
policy objectives. National security controls are aimed at preventing items
from reaching certain destinations such as China and Russia. Foreign
policy controls are aimed at achieving specific objectives, including
antiterrorism, regional stability, and nonproliferation.

In recognition of the military sensitivity of these items, Commerce is
implementing new and expanded control procedures. These changes
include establishing a new foreign policy control known as a “significant
item” control. These new control procedures are intended to allow
Commerce to control and deny, where appropriate, exports of the two
items to all destinations. This is particularly important for control of hot
section technology—exports of the most sensitive hot section technology
have not been permitted, even to close allies.

According to Commerce and other executive branch officials, the change
in jurisdiction is not intended to change U.S. licensing policy—that is,
what destinations and end users the United States will approve export
licenses for. Rather, it is intended only to change the procedures under
which licensing decisions will be made. Whether the current licensing
policy will be maintained with the change in jurisdiction is uncertain. The
underlying objectives of the two systems differ. The Arms Export Control
Act gives State the authority to use export controls primarily to protect
U.S. national security without regard to economic or commercial interests.
Under the Export Administration Act, on the other hand, Commerce
weighs economic and trade interests along with national security and
foreign policy concerns. These differences in the underlying basis for
decisions create uncertainty as to whether the changed procedures for
making licensing decisions will result in changes in licensing policy.
Uncertainty is also created by the newness of the “significant item” control
because it is not clear how it will be applied.




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The Two Items Are
Militarily Sensitive

Commercial Jet Engine    A jet engine is composed of three sections: the cold section, or the fan and
Hot Section Technology   compressor, which is where the air enters the engine; the hot section,
                         comprised of the combustor and portions of the turbine, which are the
                         components exposed to combustion gases; and the warm section, or
                         exhaust nozzle, which is where the exhaust gases leave the engine. The
                         turbine is one of the more critical components of jet engines because it
                         extracts energy from combustion gases and converts it into the engine’s
                         mechanical force. Hot section gas turbine technology that is used to
                         manufacture military engines incorporate advanced design concepts,
                         materials, and manufacturing processes that help keep the turbine cool
                         while the engine operates at extremely hot temperatures.

                         The key to achieving greater engine performance is to increase the
                         temperature of operation within the engine’s hot section. Increased engine
                         effectiveness enhances the performance of the aircraft and leads to
                         improved survivability, lethality, reliability, and sustainability. According
                         to Defense officials, the U.S. military has air superiority over other
                         countries in large part because of the advanced technology used to build
                         hot sections for military engines. U.S. fighter aircraft have the ability to
                         outlast and outperform other foreign-built aircraft, which translates into a
                         significant combat advantage over possible adversaries.

                         Hot section technology required for military aircraft also has applications
                         for engines used on commercial aircraft. Commercial engines require
                         different performance parameters than military engines, but higher
                         operating temperatures provide greater fuel efficiency. According to
                         officials at Commerce, Defense, and State and industry representatives,
                         the core elements of hot section technology are similar for both military
                         and commercial jet engines. Although all agree that it is almost impossible
                         to distinguish between military and commercial hot section technology,
                         they differ in opinion on the applicability of commercial hot section
                         technology to military uses. Defense and State officials informed us that
                         exporting commercial hot section technology gives a foreign manufacturer
                         information allowing it to build either a commercial or military engine if it
                         is willing to make certain trade-offs in manufacturing, such as sacrificing
                         durability to achieve higher performance and temperatures. Commerce
                         officials maintain that if a foreign manufacturer decides to adapt



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                            commercial hot section technology to military use, it can make a military
                            engine, but it will not have sufficient experience to allow it to make an
                            engine equal to or exceeding U.S. military capabilities. Engine
                            manufacturers agree that selected hot section technology for commercial
                            engines should be protected for both competitive interest and national
                            security, but they believe that certain technical data transfers to foreign
                            partners facilitate cooperative engine development, production sharing,
                            operational maintenance, and repair.

                            Because of the military importance of hot section technology and the
                            similarity between commercial and military technology, Defense officials
                            are concerned about the diffusion of technology and availability of hot
                            section components that could negatively affect the combat advantage of
                            U.S. aircraft and pose a threat to U.S. national security concerns. To
                            protect national security interests, Defense officials review applications
                            referred by State to determine whether the export would undermine the
                            U.S. lead in hot section technology and, consequently, U.S. air superiority.5
                            Defense and State have not approved the export of the most advanced hot
                            section technology for either military or commercial use, although certain
                            exports have been allowed under government-to-government agreements
                            with U.S. allies that restrict transfer beyond the government.

                            In addition to protecting the export of state-of-the-art hot section
                            technology, Defense also makes recommendations on the advisability of
                            exporting selected individual parts that make up the hot section (i.e., the
                            blades, discs, and combustor lines). These parts are exposed to
                            combustion gases and, in state-of-the-art engines, they must have the
                            ability to sustain very high temperatures. According to Defense officials,
                            allowing the export of the most advanced components would allow
                            foreign manufacturers to assemble hot sections that match the capabilities
                            of U.S. engines used in fighter aircraft. State defers to Defense’s
                            recommendations on license applications for these parts. Licensing of
                            these components is not affected by the change in jurisdiction and remains
                            with State.


Communications Satellites   Commercial communications satellites are intended to facilitate civil
                            communication functions through various media, such as voice, data, and
                            video. Commercial satellites often carry Defense data as well. In contrast,
                            military communications satellites are used exclusively to transfer

                            5
                             Pursuant to the December 1995 executive order stating that Commerce may refer license applications
                            to Defense and other agencies, Defense also reviews applications received by Commerce.



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information related to national security and have characteristics that allow
the satellites to be used for such purposes as providing real-time
battlefield data and relaying intelligence data for specific military needs.

Satellites used for either commercial or military communications may
contain one or more of nine militarily sensitive characteristics. A
description of the characteristics is provided in table 1. Satellites with
characteristics exceeding certain parameters are considered militarily
sensitive.




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Table 1: Militarily Sensitive Characteristics Integrated in Commercial Communications Satellites
                                                                                      Military sensitivity of characteristics
                                                                                      exceeding certain performance
Characteristic or component                    Definition                             parameters
Antijam capability                          Antennas and/or antenna systems with the        Ensures that communications remain open
                                            ability to respond to incoming interference     during crises.
                                            by adaptively reducing antenna gain in the
                                            direction of the interference.
Antenna                                     Allows a satellite to receive incoming          An antenna aimed at a spot roughly 200
                                            signals.                                        nautical miles in diameter or less can
                                                                                            become a sensitive radio listening device
                                                                                            and is very effective against ground-based
                                                                                            interception efforts.
Crosslinks                                  Provide the capability to transmit data from    Permit the expansion of regional satellite
                                            one satellite to another without going          communication coverage to global
                                            through a ground station.                       coverage and provide
                                                                                            source-to-destination connectivity that can
                                                                                            span the globe. It is very difficult to
                                                                                            intercept and permits very secure
                                                                                            communications.
Baseband processing                         Allows a satellite to switch from one           On-board switching can provide resistance
                                            frequency to another with an on-board           to jamming of signals.
                                            processor.
Encryption devices                          Scramble signals and data transmitted to        Allow telemetry and control of a satellite,
                                            and from a satellite.                           which provide positive control and deny
                                                                                            unauthorized access. Certain encryption
                                                                                            capabilities have significant intelligence
                                                                                            features important to the National Security
                                                                                            Agency.
Radiation-hardened devices                  Provide protection from natural and             Permit a satellite to operate in nuclear war
                                            man-made radiation environment in space,        environments and may enable its electronic
                                            which can be harmful to electronic circuits.    components to survive a nuclear explosion.
Propulsion system                           Allows rapid changes when the satellite is      Military maneuvers require that a satellite
                                            in orbit.                                       have the capability to accelerate faster
                                                                                            than a certain speed to cover new areas of
                                                                                            interest.
Pointing accuracy                           Provides a low probability that a signal will   High performance pointing capabilities
                                            be intercepted.                                 provide superior intelligence-gathering
                                                                                            capabilities.
Kick motors                                 Used to deliver satellites to their proper      If the motor can be restarted, the satellite
                                            orbital slots.                                  can execute military maneuvers because it
                                                                                            can move to cover new areas.
                                            Source: Departments of Commerce and Defense.



                                            Jurisdiction over commercial communications satellites that did not have
                                            any of these militarily sensitive characteristics changed to Commerce in
                                            October 1992 as a result of the interagency review begun in 1990. Those



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with any of the nine components remained under State’s jurisdiction, as
did the individual components themselves and all sensitive technology to
design, develop, or manufacture a satellite. The regulations move
commercial satellites with one or more of the nine characteristics to
Commerce, while the export of individual systems and components not
incorporated in a satellite remain under State’s jurisdiction, as does the
technology to design, develop, and manufacture the satellite. Certain kick
motors that are not embedded in satellites, however, will be subject to
Commerce’s jurisdiction when they are to be used for specific satellite
launches, provided that a kick motor is neither specifically designed or
modified for military use nor capable of being restarted after the satellite
is in orbit.

In reviewing export license applications, Defense and State officials
examine the potential for the export of satellite technologies. The process
of planning a satellite launch takes place over several months, and there is
concern that technical discussions between U.S. and foreign
representatives may go beyond that needed for the launch and lead to the
transfer of information on militarily sensitive components. Officials say
they are particularly concerned about the technologies to integrate the
satellite to the launch vehicle because this technology can also be applied
to launch ballistic missiles to improve their performance and reliability.
They also expressed concern about the operational capability that specific
characteristics, in particular antijam capability, crosslinks, and baseband
processing, could give a potential adversary.

State has approved the exports of commercial communications satellites
and established detailed security guidelines and conditions to address
concerns about the disclosure of technologies associated with the launch
vehicle and militarily sensitive characteristics for launches from China and
sites in the former Soviet Union. These conditions require that safeguards
be applied to prevent the disclosure of technology beyond that needed for
integration and launch of the satellite, as provided for in safeguard
agreements between the United States and these countries. For launches
in China and Russia, State also requires a technical assistance agreement,
which is a signed contract between the U.S. firm and the foreign
government that specifies what technical assistance and data can be
provided. In addition, State requires that exporters fund the travel costs of
Defense personnel traveling to oversee the satellite launches. In licensing
communications satellites already under its jurisdiction, Commerce also
places conditions on the export license on the type of technical




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                     information that can be transferred but does not require exporters to fund
                     the travel costs of Defense personnel overseeing the launch.


                     Export control of dual-use items has been a matter of contention over the
Rationale for        years between Commerce and State. State claimed jurisdiction for both
Changing Licensing   commercial and military hot section technology because State and
Jurisdiction         Defense maintained that (1) the technology and manufacturing processes
                     applied to the hot sections of military and commercial engines are
                     basically the same and originated in military programs and (2) diffusion of
                     critical hot section technology for commercial engines would accelerate
                     other countries’ abilities to design and manufacture engines, including
                     military engines, of equal capability to those manufactured in the United
                     States. Commerce claimed jurisdiction for commercial hot section
                     technology not derived from military technology.

                     Commerce has argued that since the international Coordinating
                     Committee for Multilateral Export Controls classified communications
                     satellites and other space-related items as dual use, the entire category,
                     except strictly military items, should be transferred to its jurisdiction.6
                     State and Defense insisted that the decision should be made on an
                     item-by-item basis as part of the interagency review begun in 1990.
                     Therefore, an interagency working group comprised of all concerned
                     agencies was assembled to conduct an item-by-item review. The working
                     group decided in 1992 to move approximately half the commercial
                     communications satellites (those that did not have one or more of the nine
                     ITAR performance characteristics) to the Commerce Control List.


                     According to Commerce officials, the executive branch’s decision reflects
                     Commerce’s long-held position that all commercial hot section technology
                     and commercial communications satellites should be under its
                     jurisdiction. Commerce argues that both items are, by definition, intended
                     for commercial end use and are therefore not munitions. This argument
                     reflects the view that all dual-use items should be subject to export control
                     under Commerce’s licensing system because most applications of these
                     items are commercial. Commerce also maintains that transferring
                     jurisdiction to the dual-use list also makes U.S. controls consistent with
                     treatment of these items under multilateral export control regimes. In
                     contrast, State and Defense point out that the ITAR is not based on end use

                     6
                      The United States was a member of this committee, which called for member nations to assert control
                     over munitions, dual-use items, and nuclear items as agreed to by all members. Although this
                     committee ceased to exist in 1994, communications satellites are still controlled multilaterally as
                     dual-use items.



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                             considerations, but on whether an item has been specifically designed for
                             military applications. The executive branch’s decision is the result of an
                             interagency review involving State, Commerce, Defense, and the
                             intelligence community in which the agencies developed a common
                             recommendation to the President to clarify the licensing jurisdiction of
                             these items.


Industry Supports the        Manufacturers of jet engines and communications satellites we talked with
Change in Jurisdiction       support the transfer of the items to the Commerce Control List. They cite
                             the following reasons for favoring Commerce’s control:

                         •   Export licensing jurisdiction should be determined solely by an export’s
                             commercial application, and since both items are predominantly for
                             commercial end use, they are not munitions and should therefore not be
                             subject to State’s licensing process.
                         •   The Commerce process is more responsive to business because time
                             frames are clearly established, the review process is more predictable, and
                             more information is shared with the exporter on the reasons for denials or
                             conditions on the license.
                         •   Under State’s jurisdiction, commercial products become subject to certain
                             mandatory sanctions and embargoes that require denial of exports. Some
                             sanctions and embargoes apply only to items on the munitions list and not
                             to items on the Commerce Control List.
                         •   Exports under State’s jurisdiction that exceed certain dollar thresholds are
                             subject to congressional notifications, and exporters say this can delay the
                             process. Satellite exports exceed these thresholds.
                         •   The competitive market for commercial aircraft creates the need to
                             establish foreign overhaul and repair facilities and to use foreign expertise
                             to develop and manufacture current and new commercial aircraft engines.
                             Although the jet engine industry agrees in principle that selected high
                             technology know-how should be protected for both competitive and
                             national security reasons, manufacturers believe certain technical data
                             transfers to foreign partners facilitate cooperative engine development,
                             sharing of production, and operational maintenance.
                         •   China is seen as a large and growing market for commercial aircraft
                             engines. Competing in the China market for the 100-passenger airliner
                             requires transfer of technology for the maintenance and production of hot
                             section components of an engine for such an aircraft .
                         •   Some of the militarily sensitive systems or characteristics of
                             communications satellites are no longer unique to military satellites.




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                    State and Commerce implement different laws to control exports of
Commerce’s and      military and dual-use items. The underlying objectives of these laws differ.
State’s Licensing   State controls munitions items to further the security and foreign policy of
Systems Differ      the United States. Commerce, on the other hand, weighs U.S. economic
                    and trade interests with national security and foreign policy interests.

                    Commerce controls the export of dual-use items under the Export
                    Administration Act, as implemented under the Export Administration
                    Regulations. The key provisions of its export control system are discussed
                    in table 2.




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Table 2: Key Provisions of Commerce’s Export Control System
Provision                                Definition
License categories                       An individual validated license authorizes the export of a specific item during a specified
                                         period to a designated consignee. A general license requires no application and permits
                                         export within the provisions of the Export Administration Regulations. A special
                                         comprehensive license consolidates five types of special licenses for such purposes as
                                         large-scale exports of a wide variety of items for specified activities, certain multiple
                                         exports and re-exports, and other purposes.
Reasons for control                      National security controls restrict the export and re-export of strategic items worldwide to
                                         prevent their diversion to certain destinations, such as China and Russia. Foreign policy
                                         controls restrict the export of items to prevent them from reaching countries for reasons
                                         that include antiterrorism, regional stability, and nonproliferation.
Permanency of controls                   Foreign policy controls are not permanent and must be renewed annually by the
                                         Secretary of Commerce, as delegated by the President, and reported to Congress.
Foreign availability                     A determination that an item is comparable in quality to an item subject to U.S. national
                                         security export controls and is available from a non-U.S. source in sufficient quantities to
                                         render the U.S. export control of that item or the denial of a license ineffective. This
                                         determination results in mandatory decontrol of items controlled solely for national
                                         security reasons. This provision does not apply to items controlled for foreign policy
                                         reasons.
De minimis thresholds                    Under the Export Administration Regulations, prior written approval from Commerce is
                                         not required for the re-export of a foreign-made product incorporating materials of U.S.
                                         origin if the U.S. content value is less than 10 percent or 25 percent, depending on the
                                         destination, of the product.
Judicial review                          The Export Administration Act provides for limited administrative review of license
                                         denials, but it precludes judicial review.
Contract sanctity                        If Commerce imposes a new foreign policy control and a contract to manufacture a
                                         product for which an exporter has obtained an export license is underway, the contract
                                         generally does not have to comply with the new control and the exporter can export the
                                         product.
Congressional notification               Items are not subject to mandatory congressional notification with the exception of items
                                         subject to controls for antiterrorism.
Enforcement of sanctions                 Although Commerce does not allow the export of certain dual-use items to certain
                                         countries when the United States imposes sanctions on those countries, if these items
                                         are embedded within larger items that are not subject to sanctions, the larger items can
                                         be exported to sanctioned countries.

                                        While the Export Administration Act provides broad authority to control
                                        exports, the national security and foreign policy controls that Commerce
                                        has put in place through the Export Administration Regulations provide
                                        for control of exports to specific destinations to achieve specific
                                        objectives. National security controls are to ensure that exports do not
                                        make a contribution to the military potential of specified countries such as
                                        China and Russia. Foreign policy controls can be imposed on all
                                        destinations and include the regional instability control and missile
                                        technology control. Exports controlled for regional instability reasons are




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reviewed to determine whether the exports could contribute directly or
indirectly to any country’s military capabilities in a manner that would
alter or destabilize a region’s military balance contrary to the foreign
policy interests of the United States.

State controls munitions items under the Arms Export Control Act. State
requires individual licenses for all exports under its jurisdiction, with the
exception of certain Defense exports. State has broad authority to deny a
license, and it can deny simply with the explanation that it is against U.S.
national security or foreign policy interests. State’s controls are permanent
and do not need to be renewed periodically, and there are no provisions
for foreign availability findings or re-exporting under de minimis
thresholds. The Arms Export Control Act does not preclude judicial
review of a licensing decision but no court has reversed a licensing
decision by State. State has the authority to revoke a license for an export
if it believes it to be against U.S. national security interests, even after a
contract to manufacture the product to be exported is underway. All
applications to export items that exceed certain values, including all
commercial communications satellites, are subject to congressional
notification prior to approval.

Commerce and State enforce several types of unilateral U.S. sanctions on
exports, including two domestic laws with particular significance for
exports of commercial communications satellites and jet engine hot
section technology. These are (1) the amendments to the Export
Administration Act and Arms Export Control Act made by the National
Defense Authorization Act for fiscal year 1991 (P.L. 101-510, Title XVII)
regarding sanctions for activities related to specified trade in items on the
Missile Technology Control Regime annex and (2) the sanctions in effect
since 1990 on exports of munitions to and satellites for launch in China as
a result of the Tiananmen Square incident that are published in the
Foreign Relations Authorization Act for fiscal years 1990 and 1991 (P.L.
101-246, Title IX, as amended.

The United States is a member of the Missile Technology Control Regime,
a group formed in 1987 whose members coordinate their national export
controls to limit the proliferation of missiles “capable of delivering nuclear
weapons.” This group is composed of the United States and 27 other
countries. The United States implements its export control policies partly
based on the regime’s annex, which lists 20 items of missile-related goods
and technologies, divided into two categories. Category I covers missile
systems and their major subsystems and production equipment, and



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                     category II covers materials, components, production, and test equipment.
                     Under the missile sanctions amendments to the Export Administration Act
                     and Arms Exports Control Act, State determines whether sanctionable
                     trade in items within category I or II of the Missile Technology Control
                     Regime annex has occurred.

                     If the sanctionable trade was in category I items, the laws require
                     Commerce to deny the export of all items controlled under the Export
                     Administration Act and State to deny the export of all items controlled
                     under the Arms Export Control Act, in addition to certain other sanctions.
                     If the sanctionable trade was in category II items, the laws require
                     Commerce to deny the export of items listed in the annex that are
                     controlled under the Export Administration Act and State to deny the
                     export of items listed in the annex that are controlled under the Arms
                     Export Control Act. In addition, the sanctions for trade in category II items
                     permit the denial of exports of items not listed in the annex. An example
                     of such an item is comercial communications satellites, which contain
                     items listed in the annex. The National Security Council left the decision of
                     how to treat such exports to Commerce and State. Thus, when the United
                     States imposed category II sanctions on China in 1993, exports of
                     commercial communications satellites controlled by State were not
                     approved while exports of those satellites controlled by Commerce were
                     not affected.

                     The Tiananmen Square sanctions include prohibitions on the export of
                     items on the munitions list and the export of satellites for launch from
                     launch vehicles owned by China. The President can waive these
                     prohibitions if such a waiver is in the national interest.7 Waivers have been
                     granted allowing Commerce and State to approve the export of
                     commercial communications satellites for launch from Chinese launch
                     vehicles. Exports of hot section technology controlled by State are
                     prohibited by the Tiananmen Square sanctions, while exports of hot
                     section technology controlled by Commerce are not prohibited.


                     In October and November 1996, Commerce and State published changes to
Items Transfer to    their respective regulations transferring licensing jurisdiction for
Commerce Licensing   commercial jet engine hot section technology and commercial
Jurisdiction         communications satellites to Commerce. Commerce’s interim regulations
                     provide enhanced controls for the items. Additional controls are being


                     7
                      Missile sanctions are also subject to certain exceptions and waivers.



                     Page 15                                                          GAO/NSIAD-97-24 Export Controls
    B-272258




    implemented through an executive order and a presidential decision
    directive issued in October 1996.

    As a result of the change in licensing jurisdiction, State returned four
    applications for exports of commercial communications satellites without
    action. Two of these applications involved launches in China, one involved
    a launch in French Guiana, and the fourth involved a launch from a
    Russian-controlled facility in Kazakhstan. The exporters were advised by
    State to resubmit their license applications to Commerce and, in two
    cases, to request a separate license from State for items remaining subject
    to State licensing (e.g., rocket fuel).8 As a result of the change in
    jurisdiction, these exports will not be subject to certain sanctions or to
    congressional notification requirements. They will be subject to the
    controls put in place through Commerce’s interim regulations.

    Commerce’s new controls make the following changes for commercial jet
    engine hot section technology and commercial communications satellites:

•   The items must be exported under individual validated licenses and will
    not be eligible for special comprehensive licenses or general licenses.
•   Pursuant to the December 1995 executive order, Commerce may refer
    license applications to Defense, State, and other agencies for review.
    According to Commerce officials, all applications for the two items will be
    subject to full interagency review.
•   The items will be controlled for national security reasons to all
    destinations. National security controls have been focused on preventing
    exports to certain destinations.
•   A new “significant item” control will be created for these two items. This
    new foreign policy control will require a license for all destinations, except
    Canada. Although most foreign policy controls define specific and limited
    policy objectives, the policy objective for this control—consistency with
    U.S. national security and foreign policy interests—is broadly stated.
    Commerce officials stated that this control gives them broad discretion to
    deny an export.
•   Technical information that can be transferred under a satellite license is
    more clearly defined.
•   The two items transferring to Commerce’s jurisdiction will not be subject
    to mandatory decontrol or licensing as a result of a foreign availability
    finding, as is normally the case for items controlled solely for national
    security reasons. Commerce officials stated that mandatory licensing and
    decontrol do not apply to items controlled for foreign policy and that the

    8
     According to Commerce officials, a separate license from State will not be required.



    Page 16                                                         GAO/NSIAD-97-24 Export Controls
    B-272258




    provisions of the Export Administration Regulations requiring mandatory
    decontrol or licensing of items controlled for national security can be
    waived if the President determines that such a waiver is in the national
    interest. Rather than seek a presidential waiver on a case-by-case basis, a
    presidential decision directive has been issued saying that, in advance,
    mandatory decontrol or licensing is not in the national interest.
    Regulations providing the exporter with the ability to request a foreign
    availability finding and consideration of foreign availability in arriving at
    licensing decisions will still apply to these items.
•   De minimis provisions will not apply to the two items. In the case of hot
    section technology, the de minimis provision provides that any technology
    prepared or engineered abroad for the design, construction, operation, or
    maintenance of any plant or equipment that uses U.S.-origin hot section
    technology will be subject to U.S. export control regulations.
•   Contract sanctity provisions will not apply.

    In addition, procedures for interagency review of Commerce’s initial
    decisions on individual licenses have been modified for these items. These
    procedures provide for participation by reviewing agencies, including
    State and Defense. Commerce makes initial licensing decisions unless
    reviewing agencies are not in agreement. In those cases, decisions are
    made by an interagency group known as the Operating Committee, which
    is chaired by Commerce and includes representatives from Defense, State,
    Energy, and the Arms Control and Disarmament Agency. Under normal
    procedures, the chair of the Operating Committee, a Commerce official
    appointed by the Secretary of Commerce, decided to approve or deny a
    license and to include conditions on the license, after considering input
    from other committee members.9

    Under revised procedures for these two items, the decision to deny or
    approve a license, and conditions for approval, will be made by a majority
    vote of the members of the Operating Committee. The executive order that
    establishes procedures for interagency review of Commerce license
    applications was revised in October 1996 to implement this procedural
    change.


    9
     An agency disagreeing with a decision made by the Operating Committee can appeal it to the Advisory
    Committee on Export Policy, which is composed of members at the assistant-secretary level from the
    same agencies represented in the Operating Committee and makes its decision based on majority vote.
    If the dissenting agency disagrees with this decision, it can be appealed to the Export Administration
    Review Board, which is composed of the secretaries of the same agencies represented in the Operating
    Committee and also makes its decision based on majority vote. If the dissenting agency still disagrees
    with the decision, it can then be appealed to the President. In practice, decisions are rarely escalated
    beyond the Advisory Committee on Export Policy.



    Page 17                                                         GAO/NSIAD-97-24 Export Controls
                             B-272258




Implications of Change Are   These regulatory and procedural changes are intended to allow Commerce
Uncertain                    to control and deny, when appropriate, exports of the two items to all
                             destinations. This is particularly important for control of hot section
                             technology. Exports of the most sensitive hot section technology have not
                             been permitted, even to close allies. State approved exports of commercial
                             communications satellites with conditions on the safeguard of the satellite
                             and associated technology. According to Commerce and other executive
                             branch officials, the change in jurisdiction is not intended to change U.S.
                             licensing policy—what destinations and end users the United States will
                             approve licenses for—but only the procedures under which licensing
                             decisions will be made.

                             Whether the current licensing policy will be maintained with the change in
                             jurisdiction is uncertain. The underlying objectives of the two systems
                             differ. The Arms Export Control Act gives State the authority to use export
                             controls primarily to protect U.S. national security without regard to
                             economic or commercial interests. Under the Export Administration Act,
                             on the other hand, Commerce weighs economic and trade interests along
                             with national security and foreign policy concerns. The importance
                             attached to economic and commercial interests is reflected in Commerce’s
                             role in the process as the representative of commercial interests. Defense,
                             as the voice for national security concerns, is one of several agencies in
                             Commerce’s licensing system. Under State’s licensing system, Defense is
                             one of two agencies involved in licensing decisions. According to State,
                             State denies an export if Defense raises significant national security
                             concerns.

                             These differences in the underlying basis for decisions create uncertainty
                             as to whether the changed procedures for making licensing decisions will
                             result in changes in licensing policy. Uncertainty is also created by the
                             newness of the “significant item” control because it is not clear how it will
                             be applied.


                             The Departments of Defense and Commerce provided written comments
Agency Comments              on a draft of this report (see apps. I and II, respectively), and the
and Our Evaluation           Department of State provided oral comments. Both Defense and State said
                             they had no objections to the report. State also commented that the report
                             fairly and accurately laid out the issues associated with State’s position in
                             these matters. Commerce stated that the President’s decision to transfer
                             jurisdiction of the two items discussed in this report was based on the
                             unanimous recommendation of Defense, Commerce, and State. Commerce



                             Page 18                                         GAO/NSIAD-97-24 Export Controls
              B-272258




              cited major factors involved in the recommendation and decision:
              (1) changed military and industrial environment after the Cold War, (2) all
              U.S. allies treat these items as dual-use goods rather than munitions,
              (3) since December 1995 all agencies have had the right to participate fully
              in licensing deliberations, and (4) it made good business sense. Commerce
              suggested that our characterization of Defense’s and State’s positions was
              based on the views of junior staff members at these agencies and ignored
              the consensus that was ultimately achieved.

              Our presentation of the Defense and State positions is based on
              discussions with senior level officials in these agencies, including
              Defense’s Director of the Defense Technology Security Administration and
              State’s Director of Defense Trade Controls. Neither State nor Defense
              raised any objections to our presentation of their positions in the draft
              report and State commented that the report fairly and accurately reflected
              its position. Further, with respect to Commerce’s comment that the
              transfer of jurisdiction was based on the unanimous recommendation of
              Defense, Commerce, and State, it should be noted that an interagency
              group reviewing licensing jurisdiction for commercial communications
              satellites had recommended that commercial communications satellites
              with militarily sensitive characteristics continue to be licensed by the State
              Department. It also recommended further adjustments in the
              characteristics defining militarily sensitive commercial communications
              satellites. The Secretary of State upheld these recommendations. It was
              only after Commerce appealed the Secretary of State’s decision to the
              President, and the President decided to transfer jurisdiction for both
              commercial communications satellites and commercial jet engine hot
              section technology to the Department of Commerce that unanimous
              support for the transfer of jurisdiction came about.


              To assess the military sensitivity of the two items, we interviewed and
Scope and     obtained analyses from officials in the Air Force, the Navy, the Office of
Methodology   the Deputy Under Secretary of Defense for Space, the Defense Technology
              Security Administration, the National Security Agency, the Defense
              Intelligence Agency, and the Department of State. We also analyzed license
              applications for the two items submitted to State and referred to Defense
              to gain an understanding of the concerns at Defense and State related to
              the export of the items.

              To determine the executive branch’s rationale for the change in licensing
              jurisdiction, we interviewed officials at Commerce and State. We also



              Page 19                                         GAO/NSIAD-97-24 Export Controls
B-272258




interviewed and obtained documents from representatives of the
Aerospace Industries Association, The Boeing Company, General Electric,
The Hughes Corporation, Lockheed Martin, and United Technologies
Corporation. The Aerospace Industries Association represents
manufacturers of engines and spacecraft. Boeing purchases jet engines for
its commercial and military aircraft. General Electric and United
Technologies are two major engine manufacturers, and Hughes and
Lockheed Martin are two major commercial satellite manufacturers. In
addition, we reviewed documents at Commerce, Defense, and State
related to the development of the interim regulations and analyses done by
industry advisory groups.

To evaluate the differences between Commerce’s and State’s export
licensing jurisdictions for the two items, we interviewed and obtained
documents from officials at Commerce, Defense, and State. We compared
the provisions in the Export Administration Act and the Export
Administration Regulations to those in the Arms Export Control Act and
the International Traffic in Arms Regulations. In addition, we reviewed the
interim final rule changing the jurisdiction to Commerce to evaluate the
new controls that Commerce plans to implement to control the two items.

We performed our review from June to November 1996 in accordance with
generally accepted government auditing standards.


As arranged with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 10 days after its
issue date. At that time, we will send copies to the Secretaries of Defense,
the Army, the Navy, and the Air Force and other interested congressional
committees. Copies will also be made available to others upon request.

Please contact me at (202) 512-4841 if you or your staff have any questions
concerning this report. Major contributors to this report are listed in
appendix III.




Katherine V. Schinasi
Associate Director, Defense Acquisitions Issues
Page 20                                           GAO/NSIAD-97-24 Export Controls
Page 21   GAO/NSIAD-97-24 Export Controls
Contents



Letter                                                                                            1


Appendix I                                                                                       24

Comments From the
Department of
Defense
Appendix II                                                                                      25

Comments From the
Department of
Commerce
Appendix III                                                                                     27

Major Contributors to
This Report
Tables                  Table 1: Militarily Sensitive Characteristics Integrated in               8
                          Commercial Communications Satellites
                        Table 2: Key Provisions of Commerce’s Export Control System              13




                        Abbreviations

                        ITAR      International Traffic in Arms Regulations


                        Page 22                                      GAO/NSIAD-97-24 Export Controls
Page 23   GAO/NSIAD-97-24 Export Controls
Appendix I

Comments From the Department of Defense




             Page 24          GAO/NSIAD-97-24 Export Controls
Appendix II

Comments From the Department of
Commerce




              Page 25         GAO/NSIAD-97-24 Export Controls
Appendix II
Comments From the Department of
Commerce




Page 26                           GAO/NSIAD-97-24 Export Controls
Appendix III

Major Contributors to This Report


                        Karen S. Zuckerstein
National Security and   Maria J. Santos
International Affairs   Maria B. Boyreau
Division, Washington,
D.C.
                        Raymond J. Wyrsch
Office of General
Counsel




(707174)                Page 27                GAO/NSIAD-97-24 Export Controls
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