Report of the Presidental Board on Arms Proliferation Policy


Report of the Presidential Advisory Board on Arms Proliferation Policy

Dr. Janne E. Nolan, Chair
Edward Randolph Jayne II
Ronald F. Lehman
David E. McGiffert
Paul C. Warnke





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                                                                                PREFACE
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Title XVI, Section 1601 of the National Defense Authorization Act for Fiscal
Year 1994 mandated the creation of the President's Advisory Board on Arms
Proliferation Policy to conduct a study of (1) the factors that contribute to the
proliferation of strategic and advanced conventional military weapons and
related equipment and technologies, and (2) the policy options that are
available to the United States to inhibit such proliferation. The five-member
Board was established by executive Order 12946 on January 20, 1995 (1), and
tasked to advise the President on implementation of United States con-
ventional arms transfer policy, other issues related to arms proliferation
policy, and other matters deemed appropriate by the President. Areas
specified for study in the Board's Terms of Reference include trends in the
international arms market, instruments of restraint, export financing
facilities, and the relationship between arms exports and the defense
industrial base. (2)

In its initial conception of the Board, Congress envisioned it as a participant in the
development of the Clinton Administration's conventional arms transfer policy,
which was finalized in February 1995 in a Presidential Decision Directive (PDD). In
fact, the timing of the Board's appointment was such that this PDD had been re-
leased before the Board began its deliberations. The Board has accordingly under-
taken both to examine the policy itself and to make recommendations on how to
proceed with the next steps. Further, the Board offers recommendations for the gov-
ernment's administrative and policy processes.

The Board understands that conventional weapons transfer to friendly regimes can
contribute to national security. And it understands that, particularly because mili-
tarily-useful technologies are increasingly commercial in origin, the vigor of our ex-
port economy can be limited by export controls. For both these reasons, it is incum-
bent on those concerned with controlling the transfer of conventional weapons and
technologies not to overreact. On the other hand, unregulated proliferation of con-
ventional arms and technologies - particularly in their more advanced forms and to

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1 Executive Order 12946 is appended to this document.
2 See Marcy Agmon, James Bonomo, Michael Kennedy, Maren Leed, Kenneth Watman,
Katharine Webb, and Charles Wolf, Jr., Arms Proliferation Policy: Support to the Presidential
Advisory Board, Appendix B, MR-771-OSD, 1996, for texts of these documents.
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pariah states - can drastically undermine regional stability and hence U.S. national
security. It can promote arms races. By enhancing the capability of potential adver-
saries, it can increase the risk to U.S. military personnel in the event of war. Finally,
conventional weapons can serve as delivery systems for weapons of mass destruc-
tion.

The Board has a healthy respect for the difficulties associated with establishing ef-
fective controls on conventional weapons. Our focus is on increasing security
through control and risk reduction in the transfer of conventional weapons and
technologies. The Board does not advocate a single approach or regime, but instead
emphasizes the criticality of U.S. leadership, of genuine long-term policy
commitment, and of an Executive Branch policy process that can accurately and
efficiently execute current and future conventional arms control policies.

Further, given the long and complex legislative history of conventional arms control
and the structure and functioning of the various organizations in the Executive
Branch that are responsible for policy and administration in this area, the Board is
convinced of the need for closer legislative-executive cooperation. The inherently
transnational character of the arms market and the absence of consensus among
governments regarding common policy objectives also make it clear that efforts to
elicit other countries' support for new initiatives should be given the highest priority.
Executive Branch initiative, with the backing of Congress, is essential to this task.
In fashioning its recommendations, the Board did not examine and does not propose
changes in the substantive U.S. legislative standards that govern the export of
weapons and related technologies. Furthermore, the Board has not attempted to go
into detail regarding the structure of regimes for the control of technology and con-
ventional arms, leaving that task to the National Security Council (NSC) policy pro-
cess. There are several promising concepts presented here. Likewise, we have out-
lined a series of process improvements without trying to dictate technical solutions
or assignments of lead responsibilities among the affected agencies. Again, we look
to the NSC process to execute needed improvements.

In executing its mandate, the Board met frequently throughout 1995 and into 1996.
Board members were ably assisted by two key groups. Within the government, the
Defense Security Assistance Agency provided outstanding staff support, administra-
tive skills, and coordination of the many meetings and presentations. We were sup-
ported in our detailed analytic efforts, and in our research for data and alternative
policy and process approaches, by RAND. The RAND team worked closely with the
Board to produce the companion study, MR-771-OSD, an effort that addresses many
of the specific issues brought to us in the course of our deliberations. The Board
commends the RAND analysis and findings to those interested in this topic.

The Board neither endorses nor rejects the detailed aspects of the RAND study. In
key areas of both policy and process, however, the RAND approach is consistent with
the Board's thinking, and we hope that the Administration and the Congress will pur-
sue initiatives that reflect the spirit and thrust of these ideas, if not their detailed
characteristics.

The Board appreciates the many presentations, discussions, and written materials
provided to us by governmental and private organizations and interested individuals.
Our recommendations reflect a genuine effort on our part to consider the range of
issues and policy alternatives that were raised in these discussions. (2)

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2 See RAND's companion report, MR-771-OSD, for an outline of Board meetings, meeting
participants and attendees, presentations to the Board, and other contributors.
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                                                                        CONTENTS
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Preface .............................................................   iii

Chapter One
THE CONVENTIONAL WEAPONS CHALLENGE....................................    1

Chapter Two
       NEGOTIATION OF AN INTERNATIONAL CONTROL REGIME ..................  5
       Where to Start...................................................  5
       Control of Weapons...............................................  6
       Control of Technologies .........................................  7
       Transparency....................................................   7
       Transparency, International Negotiations, and Industrial
             Cooperation ..............................................  11

Chapter Three
        INTERNATIONAL INSTITUTIONAL DEVELOPMENT........................  11

Chapter Four
        DOMESTIC ECONOMIC AND INDUSTRIAL BASE ISSUES ..................  15
        The Role of Economic Criteria..................................  15
        Financing of Arms Sales......................................... 16
        The R&D Recoupment Charge......................................  17
        Offset Provisions..............................................  17
        The Defense Industrial Base ..................................   19

Chapter Five
        IMPROVING THE GOVERNMENT'S PROCESSES FOR EXPORT
             CONTROL POLICY AND ADMINISTRATION........................   21

Chapter Six
        SUMMARY........................................................  25

Appendix: EXECUTIVE ORDER 12946.......................................   29

The Board Members


                                                                Chapter One
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                                         THE CONVENTIONAL WEAPONS CHALLENGE                              
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Since the end of the cold war the constant dollar value of conventional weapons ex-
ported by the six major suppliers has dropped by more than half, mostly because of a
sharp decline in exports from the former Soviet Union. (1) Accompanying this overall
decline in exports, domestic arms procurement in supplier countries also has
dropped precipitously, leaving excess weapons production capacity worldwide. As a
result, economic pressures to export advanced weapons and technologies have in-
creased, exacerbated by a growing interest in high-end weapons and technology
stimulated in part by the Gulf War. At the same time, the Coordinating Committee
on Multilateral Exports (CoCom) was disbanded. Although this left in place national
laws controlling transfers, it meant that the only remaining formal international
controls were limited to those on weapons of mass destruction and related missile
technologies. The recently concluded Wassenaar Arrangement holds promise for
restraining both conventional arms and weapons-related technology exports, but it is
too early to judge its potential impact.

The control of conventional arms and technology exports has always been subordi-
nate in priority to other forms of military trade regulation. The nuclear nonprolifer-
ation regime owes its genesis to the monopoly on nuclear capabilities maintained for
many years by the five declared nuclear powers and is held together by a widespread
consensus about the unique dangers of nuclear weapons. In the case of chemical
and biological weapons, eliciting multinational support for a restraint regime is pos-
sible in large measure because of the less than compelling military utility of these
weapons among the advanced powers and the opprobrium raised by the grave risks
they pose to noncombatants.

The proliferation of conventional arms and technologies, by contrast, shares few of
these attributes. The monopoly among a few suppliers for all but the most advanced
armaments is already shattered, the dangers of proliferation are disputed by many,
and the perceptions of utility tend to overwhelm any moral opprobrium.
Conventional weapons transfers also have been seen as a benign alternative to nu-
clear proliferation and remain the most common instrument of dissuasion in efforts

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1 The value of former Soviet weaponry is based on the equivalent constant dollar value of
comparable Western equipment. For further reading on how these calculations are made, see
"Estimating and Interpreting Defence Economic Data," in The Military Balance, 1994-1995,
International Institute for Strategic Studies, Brassey's, London, 1994, pp. 278-285. Also 
see the Board's discussion in Chapter Three of the need to consider estimates based on methods 
other than dollar-value comparisons.
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to stop new states from acquiring nuclear weapons. The principal formal interna-
tional conventional arms transfer restraint arrangement, the Missile Technology
Control Regime (MTCR), restricts the sale of ballistic and cruise missiles, largely be-
cause of their association with nuclear, chemical, or biological weapons delivery.

The problem is made more difficult by the absence of internationally accepted crite-
ria for determining what kinds of arms and technology exports are undesirable. It is
impossible as a practical matter to classify most weapons and technologies as either
offensive or defensive. A tank, for example, could be either, depending on the pro-
clivities of the user. And while it may be possible at any given time to identify poten-
tial aggressors, today's peace-loving state may be tomorrow's pariah or vice versa.

The experience of the U.S.-led coalition war against Iraq indicates the dangers of a
laissez-faire approach to the international trade in conventional arms and technolo-
gies. Western militaries confronted an Iraqi arsenal made up largely of weapons and
technologies provided by the industrialized countries, prompting recognition that
the political will to control the military technology trade was far too weak. Since
then, however, the predominant focus of policy innovations has remained on nu-
clear, chemical, biological, and missile technologies. The real challenge yet to be ad-
dressed in the United States and other advanced countries is how to preserve supe-
rior conventional military capabilities and a healthy industrial base without a chronic
dependency on exports of the kind that can accelerate diffusion of weapons and
technology beyond what is prudent.

Bureaucratic inertia compounds the difficulty of meeting this challenge. The illumi-
nation of a new problem, or the assignment of urgent priority to an existing issue, is
often greeted with less than enthusiasm by policy makers and bureaucrats. Aside
from the crush of daily business in the Departments involved, today's budget con-
straints are unparalleled in recent decades. Nonetheless, the Board is strongly con-
vinced that control of conventional arms and technology transfers must become a
significantly more important and integral element of United States foreign and de-
fense policy if the overall goals of nonproliferation are to succeed.

Among the many reasons for this conviction, five stand out. First, "conventional"
weapons - i.e., those with destructive mechanisms that are not nuclear, chemical, or
biological - have in some cases attained degrees of military effectiveness thought of
in the past as associated only with nuclear weapons. Further, certain advanced sys-
tems can be used to deliver weapons of mass destruction.

Second, as the world's economies develop technologically, the current and potential
future sources of advanced conventional weapons steadily expand beyond the
handful of nations previously designing and building such systems, This changing
and increasingly diffuse character of the international technology market further
complicates the effective application of international controls.

The effects of this diffusion are diverse and profound. Supplier instruments, like the
missile technology cartel, work only in proportion to the clout of the members and
their relative monopoly on the products they are trying to control. Over thirty-five
countries are able to export conventional weapons (2) (admittedly of widely varying
levels of capability) and some suppliers have indicated they would not support a re-
straint regime until they have a more equal share of the arms market. In areas of
weaponry where domestic procurement needs have fallen sharply, such as fighter
aircraft and naval vessels, the consensus in favor of controls is even weaker.

The third reason stems from the sum of the economic stresses and discontinuities
brought on by the fall of the former USSR and the Communist governments in key
east European states, the decline in U.S. defense procurement budgets, and the
downsizing of military force structures throughout the world. These events have
caused both governments and their defense industrial base to become significantly
more aggressive in trying to sell products abroad that they had previously bought for
or sold to their own armed forces.

Fourth, trends in the technology market presage declining control by governments
over the disposition of defense-related innovations. Critical technologies vital to
defense, from supercomputers to biotechnologies to fiber optics, are increasingly
commercial in origin. As developing countries establish their own weapon indus-
tries, they too become more capable of tapping into new sources of commercial and
dual-use goods without reference to constraints imposed by larger powers. In the
future, an ever-shrinking percentage of technology will be subject to direct govern-
ment controls, testing the viability of supplier cartels or trade restrictions for all but a
select number of the most advanced technologies.


Fifth, certain transfers may have a substantial adverse effect on American national
security policy and on the security of U.S. personnel deployed overseas, especially if
an American military presence is maintained in key regions such as Asia and the
Persian Gulf. Heavily armed countries that are (or become) politically unstable could
pose a direct threat to the security of deployed U.S. personnel or America's allies. In
many contingencies, the proliferation of advanced weaponry could constrain U.S.
policy options by making the human and material risks and costs associated with
forward deployment prohibitively high.

In the face of the economic forces detailed above, alliances and individual nations
that heretofore have been counted upon to take conservative and restrictive ap-
proaches to sales of state-of-the-art conventional weaponry today show much less, if
any, inclination to do so. The demise of CoCom, with its structured and reasonably
disciplined approach to the control of conventional arms and related technologies,
left a major gap in the international coordination of national export control policies.
An opportunity for filling this gap may lie in the new Wassenaar Arrangement on
Export Controls for Conventional Arms and Dual-Use Goods and Technologies, dis-
cussed in the next chapter, but thus far agreements reached have fallen well short of
U.S. goals.

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2 World Military Expenditures and Arms Transfers, 1993-94, U.S. Arms Control and
Disarmament Agency, Washington, D.C., 1994.
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Finally, we note that the challenge to restrain such proliferation includes the demand
side of the equation. Desired levels of security cannot be achieved by supplier action
alone. The dangers inherent in proliferation will not be eliminated in many parts of
the world until changes occur in two key areas. First, the political nature of certain
regimes in power must change. Second, responsible nations must improve security
arrangements in their respective regions. A more comprehensive collective eco-
nomic, political, military, and diplomatic strategy will be necessary to create the
conditions for such change.


                                                                     Chapter Two
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                                  NEGOTIATION OF AN INTERNATIONAL CONTROL REGIME
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The Board believes that the first priority for the U.S. government is to continue, with
a greater dedication of resources, to push for international consensus and control
mechanisms to limit selected conventional weapons and technologies. The funda-
mental principles of national, international, and regional security, and arms control
must be the basis for that consensus. U.S. leadership is essential; nothing will hap-
pen without it.

WHERE TO START

The Board believes that sustainable, multilateral progress on an issue as controver-
sial as arms and technology exports will best be served by beginning with modest
objectives that can be expanded over time. This suggests that any initiative should
start with incremental or technical measures that are relatively noncontroversial in
countries' domestic politics, and which might therefore gain early support. The idea
is to minimize the political burden that initiatives would bear at the outset in order to
develop the fundamental infrastructure - both domestic and international - that
would permit the institutionalization of arms restraint. Given the novel nature of this
kind of diplomacy, there is much to be learned even from technical discussions.
Such dialogue can create the procedures and institutions which could in turn lead to
success in more ambitious undertakings.

Discussions of technical issues - from global bans on potentially destabilizing
weapons or technologies to tighter restrictions on clients' disposition of dual-use
technologies received from the larger powers - need not be seen as either a substi-
tute for, or a sacrifice of, the larger objective of developing more general codes of
conduct. Making progress in areas that involve a minimum of controversy could
lead to the development of agreed criteria for more far-reaching application.

The Wassenaar Arrangement appears to incorporate such an approach. Concluded
in December 1995, the Arrangement is still a work in progress, and the outcome of
future negotiations will determine its effectiveness. In its initial form, the
Arrangement covers sales of both conventional arms and militarily-useful technolo-
gies, but relies on the policies of individual nations for enforcement. Transparency
measures are expected to allow for cooperative efforts, as members share informa-
tion on sales of military goods. Important U.S. objectives such as prior notification of
transfers and more comprehensive data sharing, however, have not been accepted in
the initial agreements. (1) It is nevertheless the Board's view that the Arrangement
represents a practical and potentially promising forum in which to address the dan-
gers of proliferation of conventional weapons and related technologies.

CONTROL OF WEAPONS

Control of end items could focus on advanced conventional weapons and on espe-
cially repugnant weapons of lesser military utility. In many ways, the most threaten-
ing advanced conventional weapons are those that possess certain characteristics,
including autonomous (fire-and-forget) operation, high accuracy, long range, and/or
the ability to defeat countermeasures. Examples include submarines, stealth aircraft,
advanced missiles, and directed energy weapons. The combination of high military
effectiveness, low substitutability and low opportunity cost could serve as guidelines
for selecting candidates for this approach. (2)

Another approach would be to emphasize restraint in the sale of weapons that raise
international concerns because of the risks they pose to noncombatants or because
of their perceived repugnance even when used on the battlefield. A candidate list of
such weapons, known by some as "weapons of ill-repute," would include certain in-
cendiary and fragmentation weapons, weapons easily diverted to terrorist use such
as advanced man-portable air defense systems, and weapons currently under U.S.
and international review, such as blinding lasers and antipersonnel mines. (3)
Discussions of global bans on the export of weapons in which no government has a
significant military stake and that pose particular risks to noncombatants could be a
reasonable starting point for beginning a multinational dialogue on technology
transfer restraint.

The significance of controls on weapons of ill-repute would initially be far more polit-
ical than military. Achieving agreement even on broad principles or codes of con-
duct for the sales of such weapons, however, could serve as a foundation for more
ambitious undertakings. Such efforts could build on existing instruments such as the
1980 Convention on Conventional Weapons (CCW, also known as the Inhumane
Weapons Convention), which prohibits weapons that produce fragments not de-
tectable by x-rays, incendiary weapons, and some land mines. (4)

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1 The hoped-for progress on these issues was not realized at the Vienna meeting of the Wassenaar
participants on April 3-4, 1996. Talks will resume after the Russian elections in July.
2 Weapons have low substitutability when alternatives are prohibitively costly or nonexistent; 
low opportunity cost refers to minimizing the economic losses for potential sellers. For further 
details on this proposal, see the companion report, MR-771-OSD, Chapter Three.
3 Historically, the definition of "weapons of ill repute" included the concept of low military 
utility. As more significant technology has been packaged into smaller and smaller devices and 
weapons, however, some rather high-utility weapons have become targets of the same
proliferation/
control concerns as were landmines, incendiary bombs, and the like. For example, man-portable
anti-aircraft missiles and blinding lasers, which by any measure have significant military 
utility in various scenarios, have come to be viewed as part of the subset of items for which 
the threat to noncombatants and the risk of diversion to terrorist use can be severe, thus the 
"weapons of ill repute" label.
4 The United States has not ratified Protocol 3 of the CCW, which restricts the use of 
incendiary weapons.
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CONTROL OF TECHNOLOGIES

Key technologies are those with potentially significant military applications, includ-
ing certain "dual-use" technologies, along with a smaller set of "military-only" items
such as fuse or warhead technologies. This broad category of items, in the form of
hardware in some cases but "knowledge" in others, may move in international trade
in what is on the surface a nonmilitary and therefore nonproblematic way. Given to-
day's weapon systems engineering and the growing roles of sensing, data processing,
and communication technologies in the effectiveness of advanced weapons and
military operations, uncontrolled proliferation of relevant technology is highly un-
desirable. (5)

Supplier restrictions still have a critical role to play in identifying and targeting the
technologies that are almost exclusively pertinent to weapons development - that
are not "dual-use." Many vital inputs for missile development, such as advanced
guidance needed for missile accuracy, remain in the hands of just a few suppliers,
and such commerce can be segregated from routine trade. In addition, export con-
trol policies are needed that are effective in a technology market in which there are
many channels of supply, where many advanced technologies that can contribute to
weapons development have wholly legitimate nonmilitary applications, and where
economic imperatives make a competitive trading system inevitable.

In short, the growing weakness of supply-side restraints flowing from the commer-
cialization of military technologies argues for a control system that begins to shift the
focus away from controls only on exports to controls on the actual end use of tech-
nologies. Likewise, for items that are commercial in origin but have dual or multiple
uses - from biotechnologies to space systems - nonproliferation efforts increasingly
will have to shift away from an exclusive focus on supply controls toward monitoring
the application of technologies. Although current agreements include end-use as-
surances, they have not been reliably enforced. The Board believes that a credible
system of end-use assurances is essential and can be achieved.

Such end-use arrangements will require profoundly greater levels of transparency in
the international trading system and a more effective system of enforcement. Like-
minded states independently and together must enhance their monitoring, verifica-
tion, and compliance policies and capabilities. Moreover, judging from the cases of
Iraq and North Korea, multinational cooperation to isolate and penalize violators
must go well beyond today's levels.

TRANSPARENCY

Transparency both within the decisionmaking process of individual nations and
among trading nations will play an ever more critical role as more and more nations
develop advanced industries. Although recognition of this fact will not alone meet
the challenge, it does provide a principle around which efforts can be focused. The

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5 See MR-771-OSD, Chapter Three, for a discussion of various proposals for the control of the
transfer of military technologies.
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Board believes that important deficiencies in transparency exist within the Executive
Branch of the United States, as discussed in Chapter Five, and that these should be
relatively easy to address. The problem of significant improvement in international
transparency is more daunting.

The Board heard many proposals for greater transparency, most of them technical.
Their viability will require a greater degree of cooperation and common purpose
among trading nations than now exists. An obstacle to progress in this regard is that
a transparency requirement for reporting and monitoring the disposition of sensitive
technology would seem to impose added regulatory burdens for industry and for re-
cipients, as could the administration of sufficient sanctions to deter misuse. It is true
that a new system would have to be devised and be seen as reliable. However, if this
could reduce intrusions on legitimate trade, now at the core of grievances about ex-
isting regimes, while still protecting credible nonproliferation objectives, reduced
regulations could result and be welcomed by participants.

Western enterprises that manufacture and trade dual-use products have long ad-
hered to cumbersome requirements for prior approval under restrictions imposed by
national legislation, CoCom, or more selective regimes such as the MTCR. Many of
these arrangements were directed against the former Soviet Union and its Warsaw
Treaty allies and have lost much of their original political rationale. But there is still a
strong inclination to continue them against countries of concern such as Iraq.

Countries choosing not to join a transparency regime could be denied access to its
benefits, or given access on significantly more restrictive terms, at costs that become
more directly calculable by governments and individuals. By seeking to advance the
principle of free trade for all compliant states, and providing a clear incentive to
suppliers and recipients to abide by monitoring arrangements in return for greater
market access, the regime could remove many of the political impediments currently
hampering control initiatives, including the perception of discriminatory application
among potential recipients.

TRANSPARENCY, INTERNATIONAL NEGOTIATIONS, AND INDUSTRIAL
COOPERATION

Whether a new control regime should begin as a comprehensive multinational effort,
engaging both suppliers and recipients at the outset, or should start with the major
advanced countries will depend on prevailing political conditions and the scope of
restraint proposals envisioned. A multinational regime could be pursued on several
tracks, however, consisting of supplier negotiations and separate recipient negotia-
tions, with regional restraint regimes being considered over time. This could sup-
plement national, bilateral, and informal efforts.

At the international level, a multinational secretariat with the mandate to monitor
proliferation in an integrated manner could help redress the problems posed by the
fragmentation of existing arrangements and bolster their effectiveness. Such a
mechanism could help formalize and streamline control guidelines, establish proce-
dures for routine consultations among participants, and anticipate new technologi-
cal and political challenges. While it could build on the operational experiences of
such institutions as CoCom and the UN Special Commission, the new organization
would have to avoid being seen as a supplier cartel. A supplier arrangement that at-
tempts to minimize or avoid consultation with recipient countries would likely be re-
garded as high-handed and self-defeating. Accordingly, the Board urges that the
evolving Wassenaar process strive to ensure such broad and inclusive consultation.

To make such a regime work, particularly as regards technology controls, coopera-
tion with industry is essential. In the United States, for example, restraint policies
have been imposed by the government after only limited consultation with industry.
One result has been industry antagonism and efforts to undercut unpopular policies
through Congress or the media. But industry has a potentially vital role to play in a
future restraint regime. As the main source of expertise on technology and usually
the party most involved in actual transactions, industry may be the best means by
which governments can track compliance with restrictions on exported products.
Industry could help identify relevant building blocks and "fingerprints" for particular
proscribed technologies and devise safeguards and other end-use restrictions to pre-
vent the diversion of civilian or dual-use equipment to military application.

We think industry may well prove supportive of at least selective export controls for
advanced dual-use products that raise international security concerns. Facing con-
tinued conflicts over the p rmissibility of exports of supercomputers and associated
software, for example, IBM set about in 1990 to help devise credible end-use assur-
ances that would prevent diversion of civilian computers to military uses while per-
mitting freer trade with legitimate clients.



                                                                   Chapter Three
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                                         INTERNATIONAL INSTITUTIONAL DEVELOPMENT
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With modest exceptions, international concern about conventional proliferation has
not been translated into effective policy implementation. Following a series of nego-
tiations beginning in 1991, for example, a majority of members of the General
Assembly approved a proposal in December of that year to establish an international
registry of arms exports and imports, under the auspices of the UN Secretary-
General. The Permanent Five (P-5) members of the Security Council (the United
States, Russia, China, Britain, and France) also began discussions of procedures and
negotiated guidelines for prior notification of arms contracts, an important initiative
whose implementation failed earlier in the decade but was revisited during negotia-
tions of the Wassenaar Arrangement. The "Small Group" of Arrangement members,
which includes four of the Permanent Five (not China) along with Italy and Germany,
continues to discuss notification procedures.


At a minimum, the arms registry, if it succeeds, will represent an important move to-
ward greater transparency in the international defense trade system and a resump-
tion of P-5 cooperation may prove critical in troubled regions. The Board wishes to
emphasize that important international efforts such as these will not advance with-
out better data on arms and technology sales. The Board believes that current esti-
mates of the international arms market made in dollars or other currencies, however
useful, cannot substitute for comprehensive data on disaggregated quantities and
specific types of transfers. Indeed, they can mislead assessments of international se-
curity consequences and estimates of economic implications. Also, a much more
detailed approach to quantity and quality must be developed, in any case, if the
transparency regimes anticipated in this report are to have the desired effects.

Within international lending institutions such as the International Bank for
Reconstruction and Development, the International Money Fund, and the more re-
cently established European Bank for Reconstruction and Development, there is
growing interest in linking international financial assistance to various norms of mili-
tary behavior, including defense expenditures and, more ambitiously, compliance
with treaties. This represents a marked shift in attitude among institutions that for
decades promulgated the formal fiction that a country's defense sector should not be
included in evaluations of its economic performance, political stability, and other
variables that go into decisions about credit or aid eligibility.

Bilateral aid agencies, such as the U.S. Agency for International Development and
Japan's Ministry of Foreign Affairs, have made it explicit that they will consider mili-
tary behavior in granting aid. Further examples of this linkage may be found in vari-
ous Western arrangements to provide financial and material assistance to former
Soviet bloc countries.

Direct financial inducements are being used increasingly for advancing efforts to
constrain the diffusion of former Soviet weapon designers and engineers from lend-
ing their expertise to defense industries in developing nations. The recent increase
in the membership of the MTCR may also be a basis for discussions of additional
conventional weapons technologies, including more comprehensive understanding
about advanced cruise missiles. The regime has grown from an initial membership
of seven in 1987 to twenty-eight members to date, of which Russia, South Africa, and
Brazil are the most recent. In addition, while not official members, China, Israel, and
Ukraine have agreed to abide by MTCR guidelines.

The possibility of aid to countries to establish export control programs needs exami-
nation. There is precedent: With the assistance of Western specialists, the Russian
government has announced plans to set up a special body, composed of senior offi-
cials from departments in the foreign policy, industry, economics, finance, and se-
curity ministries, for exercising political control over arms exports. It may be that the
Wassenaar Arrangement could provide a forum for exploring such initiatives.

In evaluating candidate regimes, the Board heard from a number of officials in the
responsible agencies - Departments of Defense, State, and Commerce, Arms Control
and Disarmament Agency (ACDA), etc.- regarding conceptual approaches to new
restraints. The ideas put forth included several aimed at creating incentives or miti-
gating economic losses for prospective signatories of such regimes. In all likelihood,
these ideas will continue to be analyzed and debated in the ongoing U.S. government
policy process.

The Board has looked closely at these ideas, and believes that two of them warrant
brief description and comment here. One proposed incentive would involve a sys-
tem of free defense trade in nearly all existing advanced weapons and related tech-
nologies within a signatory group as a "carrot" for regime members agreeing to rig-
orous transfer restraints on agreed items to third parties. The Board doubts the fea-
sibility of this concept. Access to U.S. technology and weapons should continue to
require a broad determination by the United States as to shared policy and values
with the recipient, often including specific security treaty participation or other
agreements.

Providing such access to a constraint regime signatory simply in return for agree-
ment not to sell certain items to third parties could have a perverse effect on nations
not already possessing significant defense technology or production capacity. In
such cases, proliferation might in fact be increased through "incentive" transfers to
those who heretofore had no such access. In our view, proliferation involving one or
more recipient countries does not represent a useful incentive for restraint regimes,
the very purpose of which is to reduce or halt that same proliferation elsewhere.

The second incentive the Board finds inappropriate is one based on the technologi-
cal superiority of the United States and certain key allies. Some officials postulated
using membership in joint weapons development or production programs, and oth-
ers suggested offering access to specific dual-use or defense technologies as well, as
carrots to certain nations to induce their acceptance of restraint regime rules. The
Board sees a potential proliferation problem in this approach as well.

In addition, we believe that there are problems of practicality with these concepts.
Past efforts at major multinational weapons development or production programs
have for the most part failed to deliver their touted economic benefits for either the
United States or its partners. As a result, industry and its shareholders - as well as a
number of governments - show little interest today in such arrangements, except on
extremely favorable economic terms. As for using technology transfer as a regime in-
centive, there is a further question. Since industry in the United States, Europe, and
Japan holds proprietary claim to most such technologies - especially those devel-
oped commercially - it is not feasible for the United States or other governments to
offer simply to "give" this knowledge to a prospective regime member. The legal ob-
stacles in determining proprietary rights and establishing compensatory value for
such transfer, plus the obvious federal budget impact of any required compensation,
are probably insuperable.


Our purpose in this discussion is not to discourage broad, creative thinking in pursu-
ing new restraint concepts. Nor do we want to understate the potential value of in-
centives for inducing participation by nations with obvious economic reasons to seek
markets for their arms industries. The Board also recognizes that the desire for full
participation in other high-technology markets has provided nonproliferation incen-
tives for many nations. However, we believe that the primary motivation for national
and multinational restraint is and should be the resulting genuine increase in na-
tional security derived from nonproliferation of advanced weaponry.

Another area for examination is the rationalization and integration of existing non-
proliferation regimes. The United States alone currently participates in at least six
distinct control arrangements to restrict nuclear, chemical, and biological weapons,
missiles, select conventional weapons, and dual-use technologies. They each have
had varied histories and political fortunes, and contain different mechanisms for
surveillance, control, enforcement, and administration.

Even as they operate as separate entities, in practice the regimes face similar legal,
regulatory, and administrative challenges. Over time, the phenomenon of weapons
proliferation has in and of itself become synergistic as more countries seek to acquire
proscribed weapons, weapons production technology, and material as part of con-
certed national strategies. Violations experienced within the various regimes often
involve the same arms traders and conduits of clandestine transfer, and thus pose
common intelligence and enforcement challenges as well. International intelligence
sharing, shared procedures for monitoring and inspections of trade flows, joint
preparation of lists of controlled items and end-users, and a concerted effort to mar-
shal political support for enforcement would obviously benefit from streamlining
existing national and multinational enforcement mechanisms. (1)

These measures might be implemented by the Wassenaar Arrangement, which
would receive data collected through national licensing procedures. Data sharing
and transparency measures to promote the desired restraint would have to be ac-
companied by an international consensus that concealment of information should
be subject to penalties, just as there must be punitive measures for violations of in-
ternationally accepted norms.

The principle of open disclosure and cooperative enforcement is already imbedded
in the Chemical Weapons Convention, which has been signed by 160 nations to date.
Similar undertakings include, inter alia, the U.S. effort to recast the premises and
guidelines of the Export Administration Act, continued development of the
Wassenaar Arrangement, and support for more intrusive challenge inspections pur-
suant to the Nuclear Non-Proliferation Treaty.

Again, the history of past efforts to limit armaments teaches us that restraints de-
pending solely on supplier cartels are insufficient and are further weakened when
they appear discriminatory. As with the effort to control drug trafficking or other il-
licit forms of trade, control agreements must ultimately focus on the demand side. It
is in regional contexts that conventional balances deserve the most attention, but
where consultative mechanisms are the least developed. For restraint initiatives to
be considered seriously outside of the advanced countries, they will require devising
new mechanisms for regional security consultations that can bring new states into a
broader security partnership.

Regardless of how much progress in arms restraint agreements is or is not achieved,
the development of common understandings to guide crisis management and crisis
resolution among nations will become increasingly important as regional power
alignments become more diffuse and clients more militarily capable. Bilateral and
multilateral regional security talks, as have been pursued in the Middle East and
South Asia in recent years, are in and of themselves a vital undertaking that in turn
could serve as the foundation for agreements on arms shipments tailored to specific
areas. Such initiatives are unlikely to succeed, however, if the major suppliers are
engaged in intense competition for arms markets motivated by their respective
domestic interests.

----------------------------------------------------------------------------------
1 Perhaps the most important example of the benefits of an integrated approach to 
nonproliferation is the case of Iraq. By combining nuclear, chemical, biological, and 
missile technologies under Resolution 687 - the blueprint for the disarmament of Iraq - 
the UN Security Council explicitly recognized the need for an integrated approach to the 
detection and destruction of the Iraqi arsenal. Combined verification efforts, in turn, 
have proven vital to the effectiveness of 687. Many of these lessons could a ply to 
other control regimes.
----------------------------------------------------------------------------------

                                                                       Chapter Four
----------------------------------------------------------------------------------
                                        DOMESTIC ECONOMIC AND INDUSTRIAL BASE ISSUES
----------------------------------------------------------------------------------

The Board's review included examination of issues regarding the defense industrial
base and associated employment. The Board heard from both government and in-
dustry representatives on these subjects, and from interested scholars and citizens,
and looked closely at the economic impact of controlling conventional arms trans-
fers.

In response to the profound decline in Department of Defense procurement over the
past five years, U.S. industry has downsized, shut down, and otherwise restructured
many production facilities and weapons assembly lines. Some firms have exited the
business in particular weapons categories, but there remain one or more producers
active in each key product area. Further, while the global trade in conventional arms
has dropped significantly from the historic highs of the mid-eighties, the U.S. totals
have remained relatively constant. In today's shrinking international arms market,
the United States has thus significantly increased its market share, from an average
of 21 percent in the 1980s to a 1994 level of 52 percent of the total world volume.

Nevertheless, as specific sales are reviewed and key regional transfer policies debated
(the Middle East and South Asia are perhaps the most significant examples), U.S. in-
dustry has put forward declining DoD procurement budgets and the value of "warm"
production lines as arguments for approval. Indeed, a number of "mainline" weapon
system production lines today are operating solely to meet foreign sales require-
ments, with no budgeted DoD procurement of those systems for U.S. use. Examples
include the F-15 fighter, the Ml main battle tank, and the Harpoon antiship missile.

THE ROLE OF ECONOMIC CRITERIA

As discussed more extensively later in this chapter, the Board finds that U.S. arms
transfer policy can and should be developed and executed separately from issues of
maintenance of the defense industrial base, which we believe are better handled by
specific DoD industrial base policy. We do not believe that arms sales that would be
rejected on the basis of foreign policy and national security considerations should be

----------------------------------------------------------------------------------
1 Average U.S. share of world arms exports, 1983 - 1989; from U.S. Arms Control and
Disarmament Agency, World Military Expenditures and Arms Transfers, 1993-1994, February
1995, p. 15.
2 U.S. share of all arms deliveries worldwide in 1994. See Richard F. Grimmett, 
Conventional Arms Transfers to Developing Nations, 1987-1994, Congressional Research 
Service, August 4, 1995, p. CRS-82.
----------------------------------------------------------------------------------

approved simply to preserve jobs or keep a production line open. The Board believes
it is essential that the U.S. government take steps to make this policy clear at home
and abroad.

A policy approving arms transfers solely for industrial base reasons would undercut
and perhaps even preclude the very sorts of new and effective international restraint
regimes we urge here. If any participating country is allowed to use its independent
judgment regarding its own internal economic circumstances as a rationale to
transfer a weapon or technology, the whole purpose and nature of a restraint regime
would be subverted. Accordingly, the Board believes that it is not only appropriate
but mandatory that the United States and other nations agree to handle legitimate
domestic economic and defense industrial base issues through other policies and
actions, rather than allow them to circumvent restraint agreements for particular
weapons and technologies.(3)

The erosion of restraint driven by this sort of economic competition could have se-
vere consequences. The United States and its allies have been fortunate in that their
soldiers, sailors, and airmen have seldom had to face in combat advanced conven-
tional weapons of their own manufacture. The few examples, however, are troubling.
The Board is concerned that domestic political pressures already strong in major
supplier countries could increase significantly the number of risky sales in the name
of jobs or the economy. A disturbing image is forming: ever more transfers driven by
shrinking defense industries placing increasingly more capable weapons in troubled
regions. The exporting states in turn feel compelled to develop and produce even
more advanced weapons to counter this proliferation. This increasingly vicious cir-
cle is indeed worthy of prevention or early treatment.

FINANCING OF ARMS SALES

The Board also reviewed instances where, under current law, U.S. arms sales are at
an economic disadvantage both in competition with equivalent foreign products and
as compared with other U.S. exports. As a matter of principle, the Board believes that
free trade without the price distorting mechanism of government subsidies is a de-
sirable goal. Excessive government involvement frequently inhibits free trade and
reinforces unhealthy special-interest relationships between governments and indus-
tries within their jurisdiction, particularly with government owned or subsidized
companies. In the case of arms sales, this can lead to strong domestic pressures to
make sales of weapons or technologies that may be unwise from an international se-
curity perspective. Certain sales to Iraq are a case in point.

U.S. policy toward government financing of its own exports should support the goal
of reducing or eliminating subsidies on a global basis. (4) Compromise legislation
passed and signed into law in February 1996 creates a defense financing facility de-

----------------------------------------------------------------------------------
3 See discussion in MR-771-OSD, Summary.
4This argument is not meant to preclude various forms of U.S. government aid to other 
nations, such as training assistance, development loans, and outright grants of 
equipment.
----------------------------------------------------------------------------------

signed to provide government loan guarantees. The selling company or its foreign
customer must pay an "exposure fee" to cover potential U.S. government liability.
Such an approach can help American companies meet the requirement for
government-backed loans that some foreign governments demand. The Board fears
that pressure to use the new defense financing facility to provide genuine subsidies
will grow unless the goal of reducing and eliminating subsidies among competing
suppliers is advanced. The Board believes that the Administration and the Congress
should work together to develop and implement a strategy to gain multinational
restraint on all manner of price distortion and unfair trade practices.

THE R&D RECOUPMENT CHARGE

Current law provides that when certain weapons developed for U.S. use are sold
abroad by the U.S. government, a charge is to be added to the price and remitted to
the Department of Defense. This requirement, intended to recover part of the U.S.
government's original investment, is called an R D recoupment charge. The case-
by-case application of this charge has historically been both uneven and contro-
versial. Various administrations have obtained numerous exceptions from Congress,
allowing the charge to be reduced or waived for foreign policy reasons. General
exceptions currently exist in law for individual nations, including NATO allies.

Industry has argued that the charge discriminates against defense contractors, since
such recoupment rules have no such parallel in other areas where the U.S. govern-
ment has made major R D investments in developing and purchasing capital
equipment - for example, power generation, telecommunications, computer sys-
tems, and nuclear reactor technology. Further, American firms cite the R&D re-
coupment charge as a clear and sometimes significant price discriminator against
them as they compete for sales in third countries against foreign producers. These
foreign competitors have no equivalent added costs, and may even benefit from
overt or covert subsidies from their respective governments. Based upon its review
of this issue, the Board supports the Administration's stated intent to seek repeal of
the current R&D recoupment charge.

OFFSET PROVISIONS

The Board also heard differing opinions on a long-standing issue regarding arms
transfers - the negotiation of offset provisions in sales contracts that involve agree-
ments to buy one or more aspects of the weapon program in question in the
purchasing country's own economy, very much like the current approach by foreign
automobile producers selling in the United States. Such direct offset agreements can
also involve conducting final assembly, integration, and test tasks in the purchasing
countries, similar again to the automotive market's trend to shift foreign product fi-
nal assembly onshore to the United States.

Nations purchasing arms are sometimes unable to provide cost competitive or tech-
nologically suitable weapons components, and in such cases often use indirect offset
as a way to defray part of the costs of their purchase and the negative trade balance
impact of such major imports. U.S. and other exporting weapons producers have in
these instances agreed to purchase or broker a wide variety of nondefense items from
the purchasing country, or to make equity investments in commercial enterprises
there. (5)

The Board notes that certain opponents of current arms control policy, along with
organized labor, argue that the U.S. government should prohibit, or at least signifi-
cantly restrict, offset agreements as a part of arms sales. Primary reasons voiced in
support of this position are that offsets can involve destabilizing proliferation (as in
providing design or manufacturing expertise) and that, similarly, they create eco-
nomic loss both through near-term diversion of jobs overseas and through the long-
term risk of strengthening foreign competitors in the marketplace. On the first point,
the Board agrees that all transfers of arms and related technology warrant careful
government review, especially when the transaction creates a new military or indus-
trial capability abroad. However, if offset provisions pass such an examination, the
economic aspects of each sale should be left to the producer and purchaser. (6)

In considering the second issue, that of job loss, which applies both to direct and in-
direct offsets, the Board finds no persuasive argument for U.S. policy constraints
other than the same basic arms/technology transfer criteria noted above. (7) The long
and successful history of U.S. commercial trade in high-technology items (from
power-generation equipment to industrial machinery to transportation vehicles) is
full of direct and indirect offset arrangements, and the net benefit to the U.S.
economy has been substantial. The overall economic and employment impact of
foreign trade - of which offsets are a small subset - is highly positive. In summary,
the Board believes that once a proposed transaction meets U.S. policy on arms
control and transfer restraint, that same transaction's specific business terms
between seller and buyer should not be artificially altered for economic reasons by
the governments involved.

----------------------------------------------------------------------------------
5 Indirect offset examples from past sales show great diversity and creativity on the part 
of the buyers and sellers. The list includes consumer goods of all types, commitments to a 
certain volume of tourist trade (involving airline tickets, hotel and tour group reservations, 
and visits to certain designated regions), bartering of various foodstuffs into the U.S. or 
other economies, and joint venture equity investments in everything from powerplants to hotels 
to commercial and industrial real estate and construction.
6 A long series of major arms exports with significant offset, from the original F-16 European
Production Group in the late 1970s to the Japanese F-15 co-production arrangement, through the
Korean K-1 tank development, to the more recent Japanese F-2 (formerly FS-X) fighter
development, have all involved this type of major government review and item-by-item approval
for the direct offset involved.
7 If the alternative to granting offset demands could be simply retaining complete workshare 
(all jobs) here, then U.S. industry would (and in some cases actually can) do so. In cases 
where a U.S. firm faces no credible competition and where the buyer has a strong security 
rationale for the weapon in question, American firms have been able to negotiate without 
significant offset concessions. In most instances today, however, U.S. and other producers use 
offset as well as other economic concessions to secure business in a competitive environment. 
In that market, winning while conceding a portion of workshare through offset results in the 
creation or extension of American jobs. It is important to remember that if the alternative is 
that the U.S. firm loses the sales contract, the U.S. economy ends up losing every one of the 
jobs involved.
----------------------------------------------------------------------------------

THE DEFENSE INDUSTRIAL BASE

The final economic issue reviewed by the Board involves arguments by some in the
U.S. defense industry who contend that robust foreign arms sales are critical for sus-
taining an adequate defense industrial base. (8) The Board rejects any notion that
stepping back from well-conceived arms restraint policies is the way to ensure the
health of our defense industrial base. The radical restructuring and adjustment to
much smaller markets in the world's defense industries will, as the RAND and other
studies document, continue into the foreseeable future. The export market is much
too small to offset the overall decline in defense procurement. Hence, the existence
of export sales opportunities for U.S. firms, while obviously valuable in preserving
jobs and production lines in many cases, will not be sufficient to allow the affected
companies to forgo the downsizing required for their survival.

As President Clinton has stated, U.S. defense firms and their labor forces should not
be the scapegoats of sweeping sectoral change. The Administration has created a
defense industrial conversion program to help American companies adjust to the
decline in procurement. Contractors who do not succeed in diversifying out of de-
fense production will still face difficult problems of excess capacity and job losses,
but arms exports that would not otherwise be approved are not the proper remedy.
Likewise, means other than questionable arms sales are available to maintain or re-
constitute essential elements of the defense industrial base.

In short, the Board believes that, in general, the best solution to overcapacity in de-
fense industries, in the United States and worldwide, is to reduce supply rather than
increase demand. For that reason, the Board has concerns about any cooperative
approach or cartel that would constitute a floor for rather than a constraint on arms
sales. Some companies now in the world arms market are not competitive and are
financial drains on their respective nations' economies. With due regard to the
complexities involved, the Board believes that an approach that discourages subsi-
dizing or otherwise maintaining uneconomical defense industries makes the most
sense. Unwise arms sales remain unwise no matter how many jobs are involved;
moreover, those jobs are protected only in the short term.

----------------------------------------------------------------------------------
8 On this subject, the Board commends the reader to the RAND analysis, MR-771-OSD,
Chapter 5.
----------------------------------------------------------------------------------


                                                                      Chapter Five
----------------------------------------------------------------------------------
                                   IMPROVING THE GOVERNMENT'S PROCESSES FOR EXPORT
                                                 CONTROL POLICY AND ADMINISTRATION
----------------------------------------------------------------------------------

As we stated in the Introduction, good policy and good process go hand in hand. The
present U.S. system of export controls is, however, so dispersed that the line between
policy formulation and its implementation is murky and day-to-day administration
is less efficient than it should be. More specific attention at the senior policymaking
level is needed. A December 6, 1995 Presidential Executive Order' on export controls
restructures the review process for dual-use licenses, but it is too early to judge its
impact.


The outcome of deliberations over technology and arms sales often is influenced by
the relative clout of the agencies involved, the perceived importance of the recipient
in domestic political terms, and even the expertise or endurance of individual partic-
ipants involved in evaluating cases. Bureaucratic warfare, rather than analysis, tends
to be the modus operandi in what is often a protracted process of plea bargaining
and political compromise that may not reflect long-term national objectives.

In its examination of arms proliferation policy, the Board recognizes that U.S. goals
are neither solely nor even primarily in the arms control arena. The composite na-
tional security strategy, foreign policy, and domestic agenda of the government
reflects an attempt to optimize among incommensurate and not always complemen-
tary objectives. Thus, the interagency process created to make decisions should rep-
resent effectively the diverse views of the various departments and agencies created
to address different objectives of the United States. Certainly, for example, the State
Department must weigh diplomatic considerations, the Defense Department must
consider its own programs and overseas security relationships, and the Commerce
Department must look to trade. All of the major departments also have an interest in
preventing the proliferation of weapons and technologies of concern, but in each
case that perspective is subject to countervailing pressures at all levels of decision-
making.

Separate export review mechanisms grew up first for weapons and later for dual-use
technologies. Consequently, there are unnecessary differences and duplication be-
tween these two processes. Further, the process by which the various responsible

----------------------------------------------------------------------------------
1 Executive Order 12981 may be found in MR-771-OSD.
2 Under the Arms Export Control Act, the State Department administers controls on the export of
weapons and related technology and services, based on the U.S. Munitions List, with input from
the Defense, Energy, and Treasury Departments, the Arms Control and Disarmament Agency, and
the Intelligence Community. Under the Export Administration Act (EAA) and its antecedents,
exports of dual-use items are administered and controlled by the Commerce Department, with
input from the same agencies. Over time, the EAA and associated regulations have been expanded
from their initial focus on ensuring adequate domestic supplies of critical technologies during
World War II to support for efforts to keep certain enabling technologies out of the hands of
hostile states. The MTCR, nuclear nonproliferation, and chemical and biological weapons control
regimes are all supported through this law, as was the CoCom regime. Although the EAA expired
in 1994, the law and associated regulations continue to be enforced through Executive Order
12924, issued pursuant to the International Emergency Economic Powers Act.
----------------------------------------------------------------------------------

agencies review individual export requests, and are able to communicate their posi-
tions to the designated coordinating department or agency, is cumbersome and out-
dated. Unlike similar government policy processes within a single agency, the export
licensing mechanism has seen little modernization or upgrade, largely because of the
challenge of getting broad interagency agreement on information system hardware,
software, and operating procedures.

There is nothing inevitable about this situation. The solution rests with a sustained
effort by senior policymakers, particularly the President and the National Security
Council. Because export controls are justified on national security and foreign policy
grounds and because of the many agencies involved, the National Security Council
must take the lead in fundamental policy formulation. The Board does not here try
to lay out exactly what policy mechanisms the NSC should use - obviously, different
agencies will have different points of view and a means to give them a voice in
policymaking and to resolve major disputes is required. But the NSC's role should be
more than that of a mediator. It should take the lead in formulating policy and
issuing policy guidance. This will require deeper institutionalization of the export
control policymaking process - a process that today is episodic and tends to produce
guidance at such a high level of generality as to be much less useful than it should be.

The day-to-day administration of export controls can also be greatly improved. The
most prominent players in export control decisions are now the State Department,
the Commerce Department, and the Treasury Department (which implements vari-
ous country-specific embargoes under the International Emergency Economic
Powers Act). Although the Defense Department does not make final licensing deci-
sions, its views and those of the Arms Control and Disarmament Agency heavily in-
fluence those decisions. The Board found reason to be concerned that due regard
may not be given to nonproliferation issues, absent a clear voice representing that
perspective at all levels, including the Oval Office. The Board believes that this re-
sponsibility has rested primarily with the United States Arms Control and
Disarmament Agency since 1961. Until such time as the threat from proliferation is
greatly diminished, the Board believes that such an independent agency is essential
and a further strengthening of its nonproliferation mandate is warranted.

As already indicated, these agencies have different and often conflicting missions. As
a result, too much time is spent in settling disputes and not enough in operating the
export control system; senior policymakers often lack a balanced view of important
policy issues; regulations overlap and sometimes conflict; enforcement jurisdictions
overlap; and information flow within and among agencies is inadequate, inefficient,
or both.

Proponents of consolidation of some or all elements of the arms and dual-use tech-
nology export application, review, and approval process into a single organization
cite two primary benefits of such change. To the extent that multiple offices, staffs,
registration and analysis procedures, forms, data systems, and review processes
could be rationalized and consolidated, there could be significant budgetary savings.
In addition, the many American businesses - both large and small - seeking permis-
sion to export would benefit from the cost, time, and consistency advantages of so-
called "one-stop shopping." American business has a legitimate concern that its
international competitors gain an advantage from the relatively inconsistent and
slow-moving U.S. regulation of technology exports.

Such consolidation could, as a first step, include the administrative aspects of case
applications and information service for applicants. It could also be expanded to
provide individual approval/denial decisions in clear-cut cases where the responsi-
ble policy agencies were comfortable delegating such authority without requiring
formal interagency review. At the extreme, it is conceivable that a set of statutory re-
visions could transfer and consolidate legal authority for essentially all cases in a
single department, agency, or office.

While the Board takes no position as to where and in what form such consolidation
would best be accomplished, it agrees that the Executive Branch should pursue such
an approach. Even if only the first two steps noted above were executed - processing
of applications and approval authority for certain routine or noncontroversial
cases - the efficiencies would be significant. In addition, the government's ability to
then share and distribute transfer information both internally and externally would
also be enhanced. Such increased efficiency and transparency would further many
U.S. interests and goals, both in nonproliferation policy and elsewhere. While con-
solidation all the way to the third step described here has potential benefits, it also
raises other questions regarding both feasibility (securing the complex legislative
agreement and change required) and desirability (overall policymaking consolida-
tion by its nature can reduce the interplay of the different responsibilities and per-
spectives at Defense, State, Commerce, Energy, ACDA, and other interested depart-
ments and agencies). The Board accordingly believes the Administration's focus
should be on the first two areas, where the benefits clearly outweigh the costs and
risks.

Whether or not consolidation takes place, an investment in modern data base man-
agement is badly needed; it will save money and make for more consistent and intel-
ligent application of policy in the long-run. The development of such a regime has
been frustrated by failure to get interagency agreement on information system hard-
ware, software, and operating procedures, and by lack of adequate funding.

In summary the Board recommends the following principles to guide this much-
needed innovation and improvement in the interagency process.

1. Given the many interests involved, the NSC process must be used, and used effec-
tively. A senior official from the NSC staff, as opposed to any of the affected agen-
cies, should lead this extensive effort, with the clear goal of promptly improving
the decisionmaking effectiveness and efficiency for all arms and dual-use tech-
nology export issues.

2. Insofar as possible without new legislation, the President should, by executive or-
der, merge the administrative and routine decisionmaking arms and technology
transfer control processes, and should ensure maximum efficiency and intera-
gency coordination, as well as the integration of their information more fully into
the policy process.

3. Through the NSC process, a package of legislative and regulatory changes to inte-
grate the current transfer regulations into a single, coherent framework should be
developed and proposed to the Congress.

4. The Administration should identify and empower a responsible agency or organi-
zation, working closely through the NSC interagericy process, to develop an inte-
grated management information system for use by all agencies involved in the ex-
port control process. This new system should be optimized for efficient electronic
exchange of information on license applications; reporting requirements for the
United Nations, other international organizations, and the U.S. government; and
for direct interconnect with the intelligence and enforcement communities as
they both input and draw information from the license application and review
process. The Administration should propose and the Congress agree to a one-
time appropriation to fund procurement and installation of the system.

5. The Administration should continue and redouble its current efforts to increase
the intelligence community's focus and capabilities to understand and monitor
key conventional weapons capabilities, overt and covert export to third parties of
such weapons or technologies, and the potential near- and longer-term impact for
U.S. and allied joint commanders and forces.


                                                                 Chapter Six
----------------------------------------------------------------------------------
                                                                     SUMMARY
----------------------------------------------------------------------------------


Advisory Boards such as ours invariably grapple with broad mandates, changing cir-
cumstances, and widely diverse interests concerned with the substance of Board
charters. As we have noted, our approach has been to review and offer
recommendations on both policy and process. We have endeavored to review the
Administration's current policies regarding conventional arms control, and have
commented only where we concluded it appropriate. We are under no illusions as to
our limitations in addressing but a few of the myriad interests and issues of great
concern to the various parties concerned with arms proliferation policy.

At the core of our recommendations is our belief in the value, indeed the necessity, of
strong U.S. leadership in the quest for more effective arms control in the nation's in-
terest. This leadership must come from the top, involving the President, his Cabinet,
and the Congress. As we have stated, within the Executive Branch that initiative re-
quires in the first instance, more policy-oriented interagency coordination and exe-
cution of policy, which in turn requires a strong focal point of administration leader-
ship. We believe that leadership can and must come from the National Security
Council's long-standing interagency process. That NSC-led process, in addition to
selecting and implementing the kind of advanced conventional arms restraint regime
postulated here, must also address the thorny question of governmental process the
Board has highlighted. There is no doubt that how we make policy and how we make
individual arms or technology transfer decisions is absolutely critical to achieving
U.S. arms control goals.

We believe that it is of great importance to reemphasize a point about focus. The
Board's recommendations for both policy and process are built on a long-term
commitment to improvement and progress, rather than on any discrete preferred
regime or proposed organizational realignment. The world struggles today with the
implications of advanced conventional weapons. It will in the future be confronted
with yet another generation of weapons, whose destructive power, size, cost, and
availability can raise many more problems even than their predecessors today.

These challenges will require a new culture among nations, one that accepts
increased responsibility for control and restraint, despite short-term economic and
political factors pulling in other directions. While the image of a "journey" has
become almost trite in today's culture, it is just such a concept that perhaps best
describes the strategy for success in achieving necessary restraint on conventional
arms and strategic technologies, and the resulting increase in international security.

The Administration has in recent months, in parallel with the Board's deliberations,
taken steps such as the Wassenaar Arrangement, which could be the key to more en-
during and comprehensive successes in restraint and control. Leaders in the
Administration and in the Congress should be heartened to know that there is no
shortage of individuals, in and out of government, whose energy and commitment
can contribute to the ongoing effort. We are proud to have been a part of that
dialogue, and are committed to continuing our participation. We summarize here
the major recommendations put forward in our report:

- Effective restraint requires international cooperation. U.S. leadership is essential
to this end.

- The fundamental principles of national security, international and regional se-
curity, and arms control must be the basis for international agreement. The in-
evitable economic pressures that will confront individual states should not be
allowed to subvert these principles.

- Sustainable, multilateral negotiations over an issue as controversial as arms
transfers are best served by beginning with modest objectives that can be ex-
panded over time. The Wassenaar Arrangement represents the most practical
and promising forum to date in which to address the dangers of conventional
weapons and technology proliferation.

- New international export control policies are needed for a technology market
where there are numerous channels of supply and where many advanced tech-
nologies relevant to weapons development are commercial in origin. This re-
quires augmenting controls on the supply of a technology, with a greater em-
phasis on disclosing and monitoring end-use.

- U.S. arms transfer policy can and should be developed and executed separate
from policies for maintenance of the defense industrial base. It is not only ap-
propriate but essential that the United States and other nations handle legitimate
domestic economic and defense industrial base issues through such separate
policies and actions, rather than use them to abrogate or subvert arms control
agreements for particular weapons and technologies.

- Arms and weapons technology transfers should take place without the price-
distorting mechanism of government subsidies or penalties. The R&D recoup-
ment charge, which is inconsistent with the federal government's treatment of
sunk investment costs in any other area of policy or budget expenditure, should
be eliminated. Arms exports should not receive subsidized financing; rather, the
effort should be to eliminate such distortions internationally.

- There should not be governmental constraints on direct and indirect offsets
other than the review, under established standards, of any arms/technology
transfer involved. The overall economic and employment impact of foreign
trade is highly positive, and any attempt to dictate or curtail pricing, workshare,
or "countertrade" agreements between buyer and seller is counterproductive.

- The current fragmentation of U.S. government controls on transfers leads to
great inefficiency and uncertain policy implementation, to the detriment of pro-
liferation controls on the one hand and to the disadvantage of legitimate U.S.
commerce on the other. Administration, information systems, and routine deci-
sionmaking should be consolidated. An integrated management information
system should be developed as soon as possible for use by all agencies involved
in the export control process. In the longer run, statutory revisions to integrate
the entire process in a single office should be pursued.

- Within the U.S. government, the NSC should give substantially greater priority to
leading and improving the interagency arms export control process.

- The Administration should increase the intelligence community's focus and ca-
pabilities to understand and monitor conventional weapons and technologies
developments and transfers.

Respectfully submitted,

Janne E. Nolan
Paul C. Warnke
Ed Jayne II
Ron Lehman
David McGiffert




                                                                      Appendix
----------------------------------------------------------------------------------
                                                         EXECUTIVE ORDER 12946
----------------------------------------------------------------------------------


                                                                          4829
----------------------------------------------------------------------------------
Federal Register         Presidential Documents
Vol. 60, No. 15 
Tuesday. 
January 24, 1995
----------------------------------------------------------------------------------
Title 3 -               Executive Order 12946 of January 20, 1995
The President           President's Advisory Board on Arms Proliferation Policy

By the authority vested in me as President by the Constitution and the
laws of the United States of America, including section 1601 of the National
Defense Authorization Act. Fiscal Year 1994 (Public Law 103-160), and
the Federal Advisory Committee Act, as amended (5 U.S.C. App. 2) ("Act"),
except that subsections (e) and (f) of section 10 of such Act do not apply,
and section 301 of title 3, United States Code, it is hereby ordered as
follows:

Section 1. Establishment. There is established within the Department of
Defense the "President's Advisory Board on Arms Proliferation Policy"
("Board"). The Board shall consist of five members who shall be appointed
by the President from among persons in private life who are noted for
their stature and expertise regarding the proliferation of strategic and ad-
vanced conventional weapons and are from diverse backgrounds. The Presi-
dent shall designate one of the members as Chairperson of the Board.

Sec. 2. Functions. The Board shall advise the President on implementation
of United States conventional arms transfer policy, other issues related to
arms proliferation policy, and on other matters deemed appropriate by the
President. The Board shall report to the President through the Assistant
to the President for National Security Affairs.

Sec. 3. Administration. (a) The heads of executive agencies shall, to the
extent permitted by law, provide to the Board such information as it may
require for the purpose of carrying out its functions.
     (b) Members of the Board shall serve without compensation, but shall
be allowed travel expenses, including per diem in lieu of subsistence, as
authorized by law, including 5 U.S.C. 5701-5707 and section 7(d) of the
Act. for persons serving intermittently in government service.
     (c) The Department of Defense or the head of any other Federal department
or agency may detail to the Board, upon request of the Chairperson of
the Board, any of the personnel of the department or agency to assist
the Board in carrying out its duties.
     (d) The Secretary of Defense shall designate a federally funded research
and development center with expertise in the matters covered by the Board
to provide the Board with such support services as the Board may need
to carry out its duties.
     (e) The Department of Defense shall provide the Board with administrative
services, facilities, staff, and other support services necessary for the perform-
ance of its functions.

Sec. 4. General. (a) The Board shall terminate 30 days after the date on
which the President submits the final report of the Board to the Congress.
     (b) For reasons of national security or for such other reasons as specified
in section 552 (b) of title 5, United States Code, the Board shall not provide
public notice or access to meetings at which national security information
will be discussed. Authority to make such determinations shall reside with
the Secretary of Defense or his designee who must be an. official required
to be appointed by and with the advice and consent of the Senate.
     (c) Information made available to the Board shall be given all necessary
security protection in accordance with applicable laws and regulations.
     (d) Each member of the Board and each member of the Board's staff
shall execute an agreement not to reveal any classified information obtained by virtue
of his or her service with the Board except as authorized by applicable law and 
regulations

                                                            William Clinton

THE WHITE HOUSE
January 20, 1995




----------------------------------------------------------------------------------
                                                            THE BOARD MEMBERS
----------------------------------------------------------------------------------


Dr. Janne E. Nolan, Chair. Dr. Nolan is a Senior Fellow at the Brookings Institution
and an Adjunct Professor in the National Security Studies Program at Georgetown
University. Dr. Nolan served as a national security specialist in the Executive Branch
and in the U.S. Senate until 1987, including as a delegate to the U.S.-Soviet conven-
tional arms transfer negotiations during the Carter Administration. She is the author
of several books and numerous articles about U.S. security policy, and serves as a
member of the Secretary of Defense's Defense Advisory Board.

Edward Randolph Jayne II. Dr. Jayne, of Vienna, Virginia, is a member of Heidrick
Struggles, an international firm providing executive recruiting services. He has held
president, chief operating officer, and other executive positions in several aerospace
and other high-technology corporations. His prior government service includes the
White House staff, National Security Council staff, and the Office of Management
and Budget. Dr. Jayne served as a senior advisor to the recent DoD Commission on
Roles and Missions of the Armed Forces, and is a member of the Director of Central
Intelligence's Military Advisory Panel. He serves in a general officer assignment in
the Air National Guard as Assistant to the Commander in Chief, U.S. Space Com-
mand.

Ronald F. Lehman. Dr. Lehman is Assistant to the Director of Lawrence Livermore
National Laboratory. He was the Director of the U.S. Arms Control and Disarma-
ment Agency under President Bush. He served as Assistant Secretary of Defense for
International Security Policy, Ambassador and U.S. Chief Negotiator on Strategic
Offensive Arms (START), and Deputy Assistant to the President for National Security
Affairs under President Reagan. He served with the U.S. Army in Vietnam.

David E. McGiffert. Mr. McGiffert is a partner in the law firm of Covington & Burling
in Washington, D.C. He served as Assistant Secretary of Defense for International
Security Affairs from 1977 to 1981, having previously been Under Secretary of the
Army from 1965 to 1968 and Assistant to the Secretary of Defense for Legislative
Affairs from 1962 to 1965.

Paul C. Warnke. Mr. Warnke is a partner in the law firm of Howrey Simon in
Washington, D.C. He is also a member of the Scientific and Policy Advisory Commit-
tee of the U.S. Arms Control and Disarmament Agency, having served as Director of
that agency and Chief U.S. Arms Negotiator in 1977-1978. He also served as Assistant
Secretary of Defense for International Security Affairs from 1967 to 1969, and as Gen-
eral Counsel for the Department of Defense from 1966 to 1967.

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