Testimony on U.S. Export Controls by Department of State Assistant Secretary for Political Military Affairs (Acting) Stephen D. Mull before the House Committee on Foreign Affairs’

Subcommittee on Terrorism, Nonproliferation and Trade

The Department of State has been responsible for regulating defense trade since 1935, with the objective of ensuring that defense trade supports U.S. national security and foreign policy interests. The Department’s primary mission in this regard is to deny our adversaries access to U.S. defense technology, yet permit appropriate defense trade with our allies and coalition partners to allow for their legitimate self defense needs and to fight effectively alongside U.S. military forces in joint operations.

This function is vested in the Bureau of Political Military (PM) Affairs’ Directorate of Defense Trade Controls (DDTC), headed by a Deputy Assistant Secretary and consisting of the Offices of Policy, Licensing, Compliance, and Management. The Arms Export Control Act (AECA) and Foreign Assistance Act of 1961 are the basic legal authorities, implemented by the International Traffic in Arms Regulations (ITAR), including the U.S. Munitions List (USML). The USML covers items specially designed for military applications, and its 20 categories extend from firearms to the Joint Strike Fighter.

The administration of U.S. export controls has become increasingly complex in the post-Cold War era, particularly since the terror attacks on September 11, 2001. The emergence of a significant transnational terrorist threat using unconventional methods, coupled with globalization of the world’s economies, presents challenges to export control practices developed in simpler times.

The revolution in international finance, transportation, and communications have reduced significantly the cost structure of international trade and transformed the global economy. U.S. companies are now global in nature, manufacturing an increasing amount of goods overseas and deriving an increasing percentage of revenue through overseas operations and sales. The defense industry is not immune to these changes. Globalization also is fueled by the increasingly unfettered movement and immigration of human capital across national boundaries. In the EU, for example, nationals can move freely to seek employment throughout the community. Such changes have made industry and trade more complex to understand and difficult to regulate.

Unfortunately, these same globalization trends are being distorted by international terror organizations to conduct attacks in the United States and against our friends and allies on their soil. This fact was evident on September 11, 2001 and equally linked to terror attacks in London, Madrid, and Bali. Terror organizations such as al-Qaeda and Hezbollah also seek to acquire sensitive U.S. military hardware and technology, including sophisticated night vision devices, MANPADs and components for crude weapons of mass destruction.

To combat this international terror threat, the United States has put together a coalition of nations to take the fight to the terrorists. The United Kingdom, Australia and other coalition partners are critical to U.S. efforts in Iraq, Afghanistan and against terror targets internationally. Building the partnership capacity of these nations is now a primary U.S. foreign policy and national security objective, both to allow these countries to control their territory and to ensure our partners can operate with us on the battlefield, alleviating the need for additional U.S. forces. From an export control perspective, we have no higher priority than approving licenses for coalition forces in the field in Iraq and Afghanistan.

At the same time, more traditional national security and foreign policy challenges continue to exist in terms of export control policy. China’s rise as an economic powerhouse coupled with its increased military spending and recognized efforts to acquire sensitive U.S. military technology require U.S. diligence to halt U.S. military technology from fueling these trends. From a regional security perspective, the United States also must continue to seek to restrict sensitive technology from going to Iran, other state sponsors of international terrorism, Venezuela and others.

In a June speech, the Attorney General noted the critical importance of export control enforcement to combating these threats and to counter the proliferation of nuclear weapons, their delivery systems and related technologies. The Department of Justice recently announced the appointment of the first National Export Control Coordinator to support a nationwide export enforcement initiative. The scope of the threat and the importance of this work are seen in the growth in export enforcement cases in the past few years. In FY 2006, law enforcement actions (DHS-ICE) pursuant to the AECA and the ITAR resulted in 119 arrests, 92 indictments, and 60 convictions. Many of these cases involved efforts to illegally export defense technology to China or Iran or to terrorist groups. Export controls and the Department play a key role in preventing the illegal export or diversion of militarily sensitive items to rogue states and terrorist organizations.

All of these international trends - globalization, the war on terrorism, and the shifting balance of power in Asia and other regional hot spots, are reflected directly in the export control work of the Department of State’s Bureau of Political-Military Affairs. Specifically, these trends are reflected in the increasing number of licenses received by the PM Bureau and the value of overall licensed trade. In FY 2007, the PM Bureau expects to license up to $100 billion in authorized exports. On a year-to-year basis, the number of application received have increased at an eight percent pace, with total licenses completed by the Bureau anticipated to rise from 66,000 in FY 2005 to up to an estimated 80,000 in FY 2007.

Not only is the licensing volume and dollar value rising, the complexity of license applications also is increasing, particularly in the area of Technical Assistance Agreements (TAA) - the export of defense technology and services, which includes furnishing assistance to a foreign person in the design, development, and production of defense articles. Such agreements reflect the complexities inherent in globalization, with such applications including multiple countries and third country nationals, as well as complex flows of technology transfers. In FY 2006, more than 7,000 TAAs were received and the value of defense services provided with such agreements is roughly equal to or greater than the value of hardware exports. We refer nearly all such agreements to the Department of Defense’s Defense Technology Security Administration for review to ensure the proposed activities are consistent with our national security interests.

This added complexity and increased volume of licenses has led to an increase in the number of license application the PM Bureau is working. At the beginning of FY07 DDTC had over 10,000 pending applications, but by January 2007 the number was reduced to approximately 5,200. We currently have approximately 7,200 pending applications, with 567 over 60 days old. It should be noted there always will be a significant number of cases in the processing pipeline (this simply reflects the hundreds of new applications we receive daily) and some cases will be difficult from a national security and foreign policy perspective.

To deal effectively with the increasing license volume, the Department is exploring policy initiatives to manage the risk of more expeditiously licensing military hardware to U.S. allies, as well as taking internal steps to facilitate the processing of licenses. We expect these efforts to allow us to use our resources more efficiently to focus on restricting U.S. military technology from potential U.S. adversaries.

A prime example of the former is the U.S.-UK Treaty on Defense Cooperation, which was signed by President Bush and Prime Minister Blair in June 2007. This treaty recognizes the UK as our closest ally and one of our largest defense trade partner and will permit without prior written U.S. authorization the export of USML items, with certain exceptions, to the United Kingdom for the following purposes: (1) combined U.S.-UK military and counter-terrorism operations, (2) joint research, development and production projects, (3) UK only projects for end-use by the UK military and (4) items for the end-use of the U.S. military. The department will maintain its authority of which end-users can have access to USML items under the treaty in the UK by vetting and approving an approved community in the UK. In addition, the UK has agreed to make USML items exported under the treaty subject to the UK Official Secrets Act, which will prevent re-exports and re-transfers of such items outside the approved community without U.S. approval. The Administration is preparing to provide the Treaty to the Senate for advice and consent, and hopes that the Congress will strongly support this initiative.

The U.S.-UK Treaty is a good example of the Department managing risk to fulfill its dual obligations to build partnership capacity and to protect U.S. military technology via exports controls. In the past two years the Department has processed roughly 14,000 license application for the United Kingdom, with only 18 licenses denied, none of which were for exports to the UK government. Given these facts, we are comfortable with creating a license free zone for mutually agreed projects with the UK. Among the benefits we expect to see from implementing this Treaty is a reduction in the overall growth rate in license applications received.

The Administration also is reviewing the recommendations put forward by the Coalition for Security and Competitiveness.

In the Department’s continuing review of export control policy, the PM Bureau also is initiating changes to manage export control risk. Let me briefly mention three of these. First, I have asked the Deputy Assistant Secretary for Defense Trade Control to institute a mandatory DAS-level review of any OIF or OEF case that is pending for greater than seven days. Second, we will shortly commence with the concurrent review of TAA applications with DOD, which we expect to expedite the review of such items. Third, we are set to initiate a policy change that will permit employees of foreign companies who are nationals from NATO or EU countries, Japan, Australia and New Zealand to be considered authorized under an approved license or TAA. This will alleviate the need for companies to seek non-disclosure agreements for such nationals and recognizes the low risk to of transferring technologies to nationals of these countries under an approved license or TAA.

The Administration values Congress’s role in the consideration of U.S. munitions exports. The AECA requires advance notification to Congress if a proposed license exceeds a certain value. For NATO, Japan, Australia and New Zealand, the thresholds are $25 million for Major Defense Equipment (MDE) and $100 million for all other defense articles and services, and the notification period is 15 days. For all other countries, the thresholds are $14 million for MDE and $50 million for all other exports, and the notification period is 30 days. Small arms exports over $1 million must also be notified to Congress, as well as all overseas manufacturing agreements for Significant Military Equipment, regardless of value. The AECA allows both houses of Congress to enact a joint resolution prohibiting the export within the 15/30 day notification period.

The Department would ask the HFAC and other committees of jurisdiction take a close look at several areas that would

help the Executive Branch manage the risk of facilitating defense trade with partners and allies, while continuing to restrict U.S. military technology from reaching potential competitors and enemies. For example, the Congress may wish to consider raising the dollar reporting threshold for Congressional notifications.

In the end, U.S. export control policy is designed to enhance our national security and foreign policy interests, which of course include protecting sensitive technology and preserving our economic strength and industrial base. Those two standards are sometimes in conflict. What we as your government owe the American people is designing a system that adjudicates such conflicts efficiently and transparently. We hope, with your help and support, to reform our system with that goal in mind in order to protect our national interest.