Notes from the Defense Trade Advisory Group (DTAG) meeting
U.S. Department of State
26 November 2002

Lincoln Bloomfield, Assistant Secretary of State for Political-Military Affairs: Opening Remarks

• Many things are going on in defense trade; these remarks are to set the stage
• Go over impulse and intention behind the defense trade policy review
• There has been much discussion and debate about the export process; it is intended to make things “quicker, more user-friendly and simpler.”
• Remedies are now in train, and will be fully mature perhaps a year from now.
• Defense Trade Controls (DTC) is now at full strength to deal with 50,000 licenses a year, plus dealing with export law, negotiations on penalties, and other responsibilities.
  • There is work on re-engineering and documenting the export process.
  • Electronic upgrades are important, but can’t just be grafted onto the existing process: re-engineer for use with information technology.
  • The electronic upgrades will largely remedy complaints about time, he hopes.
• He wants to puncture the perception that the review will lead to a huge liberalization; this is the diligent thing for a new administration to do.
  • How can national security and foreign policy equities be satisfied with less burden to exporters?
  • There is no preordained ideological outcome to the review.
  • Realignment of the Political Military (PM) bureau: under the “Pol-Mil Action Team” (PMAT), which brings all the forces together and tries to relieve the front office from working on DTC.
  • After 9/11, they developed a 24-hour capability by tapping current PM staff and others who answer to John Bolton.
  • One deputy assistant secretary is responsible for everything newly required after 9/11.
  • Another deputy is responsible for all pre-9/11 responsibilities.
  • PM is too busy – one of the busiest bureaus in State. It needs more staff but doesn’t have the management structure in place to support it.
  • Bloomfield has spent much time working with DTC, to relieve the front office from “fast-burning” defense trade issues. The third deputy assistant secretary will relieve that load.
  • There is much inter-departmental policy work done at the assistant secretary or deputy assistant secretary level. The DAS will take that role.
• Spread the “Powell effect” (apparently, improve the work environment): a larger executive team can make DTC a better work environment.
• He wants to improve the “vertical fidelity” of license processing to foreign policy, that is, better “top-down” communication so that licensing decisions are better informed by foreign policy.  There is frequent ministerial-level engagement with other nations, and sometimes Powell will be surprised when a licensing issue crops up in discussion. He wants to improve the early warning for the Secretary.
• Expressed appreciation for the patriotism and hard work of Lowell and Dixon at DTC; he said he felt they were doing a great job and had been pressed far beyond reasonable limits.
• Some discussion of the policy and process outlined in the National Security Presidential Directive (NSPD). It does not just affect State; it includes the services and DoD.
  • NSPD attempts to clarify what the positions of these organizations are in the war on terror, and once their positions are understood State can delegate the process and not have to review every export.  The Pentagon needs to decide what it needs for capabilities and what is too sensitive for trading.
  • Questions include: what capabilities do our allies need in order to fight alongside us, and what capabilities are too sensitive to transfer?
  • NSPD policy is accepted among departments, and will assist the process people in carrying out their jobs, including at Commerce.
  • This is not the place for dual-use issues.
• Outlined the discussion topics for the morning, with reference to the agenda.
• Anti-competitive practices and barriers to trade: What are foreign practices, and what is outrageous?
• DTSI initiatives: DTSI initiatives so far have only covered the Joint Strike Fighter program.  What is the problem? Does the idea have no appeal, or does it need to be modified? (Bloomfield rhetorically asks audience) What could make DTSI more useful?
• Defense trade policies and practices that might benefit from review: What is unenforceable? What is gratuitous?
• Information that should be required on licenses to satisfy DoD releasability requirements: DoD often asks for more information on license applications that State refers to it.  How can the license application be restructured to regularize the process? It should ask for enough information to satisfy DoD, but not to excess.

William Schneider, DTAG Chair: Opening Remarks

• He wants to do fundamental thinking about the management of the licensing process.
• Think in transformational terms: the government controls distribution of capabilities, but consider other ways the system can be reformed.
• What fundamental changes can make the export control system more effective?

Questions and Answers

• Q: What does the USG communicate on license approvals? It would be good to provide some context and justification for the license approval, to head off “merchant of death” articles when a license is approved.
• Bloomfield: It is Bloomfield’s and Powell’s job to explain why a sale happens. Congress is vigilant, as they are notified of all arms sales and have the right to deny their export. Bloomfield then asked the audience rhetorically what would the world look like if weapons were sold by another country with less transparent export policies? Mentioned Grimmett Report on conventional arms exports and how the report shows the United States as being a leading exporter, but what would the world look like if 90 percent of the world’s arms exports came from other countries? “U.S. export controls are a success story, if you look at U.S. weapons and how well they have been used in the past.” If you go back 25 years, what U.S. arms sales were forces for instability or harm? He suspects there will be a few, but only a very few. It may be useful to explain the utility of each major weapon exported, and it is true that we need a more coherent way to regulate the trade in arms.
• Schneider: Why confer a capability upon a recipient? The question is how capabilities are embedded into technology. The “stage is set for powerful American dominance” of defense trade in the next ten years. DoD increasingly uses commercial, unclassified technology developed under auspices other than its own.

• Q: The capabilities of Commerce Control List (CCL) and U.S. Munitions List (USML) equipment are increasingly a “distinction without a difference.” If the NSPD is confined to review of the Arms Export Control Act (AECA), what is a process to infuse its results into the dual-use licensing process?
• Bloomfield: The NSPD is an open-ended process.  Commerce is a “dance partner” in the USML review: reviewers need to know where an item will go if it is removed from the USML.

• Q: There is a legitimate question about the national security implications of technology developed in the commercial sector. One can look at the criteria examined in the NSPD and debate a license; the debate is likely to “asymptotically approach” an answer but unlikely to produce an answer in finite time. In terms of the list review, is there anything constructive in the procedural discussion (of a license)? That is, if you can’t figure out in two weeks whether something should be released, does it really matter?
• Bloomfield: Formulas along the lines of “it takes 30 days or it’s automatically approved” are often floated. In some cases he sees a fit—the formula works some of the time. A thing that undermines it: sometimes there are factors outside the control of licensors—for example, they’re waiting for field information or a judicial decision. If it were possible to limit to such cases, the formula could be OK, but it would be too “racy” to automatically say yes in X number of days. What you can do is institute some rigor by automatically kicking the approval up a level (to a manager) if it’s waited for X days. The interagency discussion is interested in making decisions rather than sitting on them. Really can’t limit time for decision – still need to uphold security considerations.

• Q: Under the NSPD, will someone in the Office of the Secretary of Defense be able to make changes (to export policy)?
• Bloomfield: No, departments are independent and OSD does not outrank other departments. But policy-level leadership at DoD is collegial with leadership at other departments. All sides are reasonable and open-minded, contrary to common perception—perhaps less so on the working level, but more so on the policy level.

• Q: In sensors, the U.S. is not in the lead—the capability cannot be confined. Look at the jurisdiction on firefighting or commercial cameras. The “military application” designation creates disputes.
• Schneider: This raises the question of whether there needs to be one list or two.

• Q (Joel Johnson, Aerospace Industry Association): A few questions:
  • DTAG members don’t know much about the NSPD. It’s classified Confidential, while most DTAG members are cleared to Secret. Will DTAG be briefed? He’s not sure what he can ask in this room.
  • There have been implementation failures in the Organization for Economic Cooperation and Development (OECD) Code on Bribery. How to tighten bribery rules for foreign competitors?
  • Export financing: How do we finance exports to others? Can the system be changed?
• Schneider: DoD is interested in the Defense Export Loan Guarantee program. Ex-Im is also knowledgeable on defense issues.
• Q (follow-up from Joel Johnson): How about interoperability, especially with allies in the developing world? How to emphasize it? How to encourage sustainability of transferred equipment, and training for it?
• Bloomfield: Interoperability is meaningful. PM is engaged in coalition management, e.g. overflight coordination. Experience in Afghanistan and Iraq, and the Prague summit, have “crystallized” thinking: if you don’t have interoperable allies, you are alone, and arms sales should be consistent with our allies’ needs. Burden-sharing is also in the PM portfolio: he doesn’t want to leave a future President in a situation where only the U.S. is capable of responding to a threat.
  Regarding ways to transfer equipment to poorer countries, there is EDA, and with many allies in Operation Enduring Freedom—particularly the Philippines, Georgia, and Yemen—PM has had to look at their capabilities. What adds capability without sinking the economy? PM has to look at economic impact.
  PM must also pay attention to sustaining capability. There are good examples of developing countries who have developed capabilities and worked well with the U.S.

• Q: Regarding the licensing process: there is a disconnect with exporters’ business processes. Approval requires a signed contract in some cases, which imposes delays. The review should ask: how do companies have to operate to comply with the process?
• Q (follow-up): Applauds the department and administration on the comprehensiveness of the review. Asks how to ensure understanding of the business side.
• Bloomfield: Current mergers and contracts make the process complex. However, Congressional oversight is a necessary part of the process. Electronic licensing will speed the process. The review does not have authority over Congressional oversight: that is important and necessary, and it is a “stopping point” in licensing. In this new environment, DTC must look at allies’ export control systems to have confidence that they will control technology transferred to them.
• Q (follow-up): How can the “Congressional time-out” be eliminated?
• Bloomfield: Need private sector involvement: how often will Congress be asked to review applications which never make it to contract? Or when is the opportunity so great that it justifies a possible false notification to Congress?
• Q (follow-up): The 15 to 30 days in Congress is nothing. The problem is the pre-notification time. When a contract is submitted during the license application it is re-reviewed in DoD, even for trivial changes, and that imposes unpredictable delays.
• Q (follow-up): The problem is the dance among H (?), PM, and Congressional staff.
• Bloomfield: Submit a one-page specific case of a timeline and the review can take it into account.

• Q (rep from IBM): Statement concerning radiation-hardened microelectronics, category XV(d). Before 1999 commercial circuits were excluded. Some words were removed and the material is now ambiguous. The substitution is not found in the international lists. Future ICs may pass criteria without industry realizing it, and the tests are very expensive. Customers demand specialized parts. He requests the return of the words “specifically designed or rated” to exclude commercial electronics. Non-members of Wassenaar produce technology after we produce it, and their tech is not controlled. Category (d)(iv) is not up to date with technology.

• Schneider: Time is up for the morning’s discussion. One issue to consider is that of global license approval; the Joint Strike Fighter (JSF) is well understood but it could be harder to work with GPA for a development program.
• Bloomfield: Took issue with the JSF being described as “simple” – noted the number of licenses combined into one.

Break. After the end of the break, the meeting returned for a discussion of DTAG’s work program, led by Giovanna Cenelli and Joel Johnson.

• Cenelli: DTAG wants to inject certainty into the licensing process, particularly regarding the intangibles of know-how and technology transfer. Particular areas of focus:
  • Employment of foreign nationals. There should be more clarity on what information is needed. There used to be better understanding of how you employ a dual national. Commerce uses the last citizenship the person obtained, while State looks at all citizenships and applies the strictest restrictions.
  • What due diligence is needed with regard to customers? Exporters have a general familiarity with their customers but sometimes there is a new one. How much due diligence is enough on the export side? For example, exporters are required to give the address where equipment will be used, but some MoD’s won’t give more than a PO box or airport for security reasons. This happened in Israel. How much is enough to cover a license applicant for liability?
  • Acquisitions and divestiture issues. Juster (from Commerce) says that, when one company acquires another, liability for export practices extends to all past and present actions. There should be guidelines to aid understanding of policy. In particular, can a company get rid of liability for a violation by divesting a subsidiary which committed the violation?
• Bloomfield: On the last piece, corporate self-policing is the wave of the future. Corporations need to elevate the level of confidence in multi-national arrangements. There will be consequences for diversion but limited or little monitoring. An acquiring company must consider its due diligence to uncover liability for export violations. This also builds State’s confidence in an acquiring company.
• Cenelli: The export side is often reviewed later. Management views it as “in the weeds” but it should be considered alongside the financials of an acquired company.

• Schneider: How can exported goods be amortized over years? The U.S. and U.K. do this with leases.
• Johnson: The U.S. offers no governmental way to make such a deal, unlike its competitors.
• Schneider: We should consider privatizing export finance.

• Johnson: Are leasing and export finance a subject of the NSPD? Other topics to discuss:
  • Control of utility components: A-4M and satellites are manufactured without U.S. components. There should be de minimis provisions for control of dual use components.
  • Should broaden the experience of International Traffic in Arms Regulations (ITAR) waivers and project licenses. Bring this to the table with LOI6 – reconstruct a mini CoCom, create higher barriers to trade outside the group and lower inside it.
  • In a multilateral world, consider utility items and third country transfers.
• Bloomfield: In bilateral negotiations on ITAR issues, the European trend is significant. The U.S. cannot pull its allies by one arm while they are moving into Europe.

• Q (Victoria Ralston): How about a waiver for U.S. manufacturers to return goods to foreign importers? It could be used for repair and overhaul, not for enhancement of capabilities. It would touch 21 CFR 123.16(b) and 120.1(c).
• Schneider: UAVs are covered in the Missile Technology Control Regime (MTCR). Does this limit our ability to support our allies?
• Bloomfield: If the U.S. moves off center for UAV exports for a certain pool of countries, how would we work a rollout of missile defense? Fealty to MTCR is related to the proliferation of missile defense.

• Schneider: Foreign direct investment in U.S. companies: Regs have been liberalized and foreign direct investors have come in with the legal obligations of U.S. companies. Export licensing has increased the barriers of separation between U.S. subsidiaries and foreign parents. Consider how the export control system could evolve here.
• Cenelli: This is a bigger issue because of the consensus process. The government is looking at the use of the process to increase, though there was a GAO report on national security and the consensus process which wasn’t very complimentary.
• Bloomfield: Where is the national security downside? He is interested in the argument that the development of Fortress Europe and Fortress America takes us to a bad place. ITAR works bilaterally, and the EU evolution is becoming an impediment to this. The solution may rest in the improvement of EU members’ export control laws.
• Schneider: Recently DoD liberalized foreign direct investor access to the U.S. market. How can we reach a more integrated transatlantic market? U.S. subsidiaries act largely autonomously of the parent when the parent is offshore. In the long term U.S. companies must invest directly in Europe. He wants a regulatory environment which could aid integration. Defense is largely transatlantic—not in Asia or China—so it commingles with alliance politics.
• Bloomfield: What is the vision of the end result? A possible vision is that the Pentagon procures from foreign companies. Could R&D accelerate so that the best product is from a European factory? Are they then diligent about training and spares for us?
• Question: Consider: markets differ. In the U.S. the USG is the market, then we sell into the rest of the world. In Europe, the primary market is the rest of the world; European governments don’t buy so much.
• Schneider: What is the vision of transatlantic industry? Don’t need a structure of prime contractors.
• Q (Paula McDowell): Underlying technology isn’t about minor companies. Civilian technology is a major underlying part (of defense). We could have preferred suppliers: a major European supplier could be preferred if they agree to certain export practices.

Summary (Ramona Hazera, DTAG Vice Chair): Issues where continuation of work is necessary:

• Automated export systems
• Radiation-hardened ICs
• NSPD briefing
• USML review continuation
• Workflow within government. What is the process in State?

Final comments

• Joel Johnson: Civilian aircraft are UAVs. NASA seeks unmanned vehicles. How do we adapt to civilian use of technology?
• Comment: This applies to UVB’s too.