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echnology and East-West Trade: An Update

May 1983

NTIS order #PB83-234955

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Library of Congress Catalog Card Number 79-600203

For sale by the Superintendent of Documents,U.S. Government Printing Office, Washington, D.C. 20402

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F o r e w o r d

Before the Export Administration Act expires on September 30, 1983, Con-gress must determine whether present law adequately addresses recent de-velopments and should be renewed; or whether amendment or further legislationis required to meet changing technological, political, and economic circumstances;and if so, how such legislation should be drafted. This document, written at therequest of Senat ors Gar n a nd Riegel, Chairma n and Ranking Minority Member

of the Committee on Banking, Housing, and Urban Affairs, is designed to assistCongress in t his pr ocess. It u pda tes OTA’S 1979 report on Techn ology and East-West Trade.

The latter study identified, and where possible evaluated, the economic, po-litical, and military costs and benefits that accrue to the United States in its tradewith t he Communist world, discussing th ese impacts in t he cont ext of th e th ennewly enacted Export Administration Act.

This report ha s a n ar rower scope but n oneth eless revisits m any of th e sameissues. It summarizes the major provisions of the 1979 Export AdministrationAct, highlighting those provisions which have led to problems of interpretationor execut ion; recoun ts ma jor p rovisions in U .S. export contr ol policy toward s t he

Soviet Union since 1979; and discusses the impacts and implications of thoseevents—for the domestic economy, for U.S. political relations with the NATO alliesand with the Soviet Union, and for U.S. national security. The report concludeswith a discussion of the policy alternatives open to Congress in 1983.

OTA is gra teful for t he a ssist an ce of th e Coun cil on F oreign Relations, whichconvened a discussion group whose members provided valuable insights into U. S.-Soviet trade during the early stages of the preparation of this report; for theassistance of the Congressional Research Service and the General Accounting Of-fice; for th e coopera tion of th e Depar tm ent s of Sta te, Defense, a nd Comm erce aswell as the Central Intelligence Agency and the staff of the National Security Coun-cil; and for the help of a number of individuals in and out of the Government,who reviewed the draft of the report.

JOHN H. GIBBONS D i r e c t o r

. .

///

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T e c h n o lo g y a n d E a s t -We s t T r a d e : An U p d a t e

P r o je c t St a ff

Lionel S. Johns, Assistant Director, OTA

Energy f Materials f and International Security Division

Peter Sharfman, Program Manager International Security and Commerce Program

Ronnie Goldberg,* Principal Investigator

Kate Tomlinson, * Analyst

Jonathan Sack,* Research Assistant

Administrative Staff

J a n n ie Coles Dor ot h y Rich r oa t h Jackie Robinson

OTA Pu blishing Sta ff

John C. Holmes, Publishing Officer

John Bergling Kathie S. Boss Debr a M. Da tch er J oe Hen son

Doreen Foster Lin da Lea hy Donn a You ng

*OTA Contractor

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A c k n o w l e d g m e n t s

This report was prepared in the International Security and Commerce Program of the Officeof Techn ology Assessment . The st aff wishes to a cknowledge th e as sista nce of th e following inthe preparation and review of material for the report:

Council on Foreign Relations Joseph Kirschheimer Deborah TalbotForrest R. Frank Vladimir Pregelj Myron UretskyDonna L. Gold Angela Stent U.S. Chamber of CommerceJohn P. Hardt

The following Government agencies also provided assistance:

Th e Cen tra l Int elligen ce Agency Th e Depar tmen t of Defen seThe Department of Commerce The Department of StateTh e Genera l Accou nt in g Office Th e Na tiona l Secu rit y Cou ncilThe Congressional Research Service

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. . ——. -.——

C o n t e n t s

Ch a p te r Pa ge

I. Summary : Issues and Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

II. The Export Administration Act of 1979 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

111. implementation of the Export Administration Act of 1979 . . . . . . . . . . . . . . . . 25

IV. The Impact of Export Administration Policy on the U.S. Economy . . . . . . . . . 51

V. The Foreign Policy Implications of Export Administration Policy. . . . . . . . . . 63

VI. The National Security Implications of Export Administration Policy . . . . . . . 75

VII. Options for U. S. Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Appendix—Other East-West Trade Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

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C H AP T E R I

S u m m a r y :

I s s u e s a n d F i n d i n g s

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C H AP T E R I

S u m m a r y : I s s u e s a n d F i n d i n g s—— .

Since the passage of the Export Administra-tion Act of 1979 (EAA), evidence has mountedof an extensive Soviet military buildup; theU.S.S.R. has invaded Afghanistan; and it hasborn e direct r esponsibility for th e impositionof martial law in Poland. These activities, cou-pled with the election of a U.S. President whotakes a strong anti-Communist position, haveall tended to reinforce the belief that U.S. na-tional secur ity requires grea ter protection of America’s technological leads. Simu ltan eous-ly, worldwide and domestic recession have in-creased the importa nce to th e U.S. and other

‘Western economies of a healthy export sector,requiring the development of new ma rkets a ndthe maintenance of established trading rela-tionships. These trends together have madethe question of the relative costs and benefitsof trade with the Soviet Union a matter of in-creased interest at home and rising tensionabroad, as the United States and its alliespublicly disagree about the appropriate boundsof such trade.

The reactions to and consequences of theSoviet trade policies pursued under EAA have

confirmed and sharpened a basic perceptionshared by many of the act framers—there isno export control policy which does not incurundeniable costs and confer uncertain benefitson the United States. Before EAA expires onSeptember 30, 1983, Congress has to deter-mine whether the present law remains ade-quat e in t he face of these development s an dshould therefore be renewed without majorchanges; whether amendment or new legis-lation is required to meet changing technologi-cal, political, and economic circumstances;and, if so, how such legislation should be

drafted.This document, written at the request of the

Chairman and the Ranking Minority Memberof the Sen ate Committ ee on Ba nking, Hous-ing, and Urban Affairs, is designed to assistCongress in this process. EAA applies to U.S.

tr ade with a ll nations. However, th is updatefocuses narrowly on American exports to theU.S.S.R. It does not argue for a particular‘‘right ’ an swer regar ding th e optimu m d irec-tion and details of U.S. trade policy towardthe Soviet Union. It does seek to clarify theissues and the tradeoffs entailed in craftingsuch a policy.

In 1979, the debate over export controlended with an attempt to strike a practicalcompromise between the demands for increasedprotection of U.S. nat iona l secur ity; the a bil-

ity to use trade leverage in the conduct of for-eign policy; and predictability in the exportlicensing process. This effort was complicatedby the na tu re of techn ology tr an sfer itself. Inthe present environment, technology is com-plex, often intangible, widely diffused, andsubject to swift change. Thus, the difficultyof definition exacerbates the difficulties of control.

One way in which EAA sought to providea framework for dealing with these issues wasby clearly separating the criteria and proce-

dures of controls enacted for national securityfrom those instituted for foreign policy rea-sons. The former were to be applied only whennecessary to restrict exports which make a sig-nificant contribution to the military potentialof another country which would prove detri-ment al to the n at ional security of the UnitedStates. The latter were to be used only wherenecessary to significantly further the foreignpolicy of the United States or to fulfill U.S.international obligations. However, controver-sies have arisen over the proper scope and im-plementation of both kinds of controls.

In the national security area, both theCarter and Reagan administrations have ex-pressed concern over the magnitude of theSoviet military th reat and the degree to whichthe U.S.S.R. has used U.S. and other Westerntechnologies to increase that threat. But the

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4 q Technology and East-West Trade: An Update

ambition of protecting U.S. military techno-logical leads th rough developmen t of a list of militarily critical technologies-which both theUnited States and its allies would deny theU.S.S.R.–is far from being fulfilled. This ef-

fort has been inhibited at home, where the in-clusiveness of the proposed critical technol-ogies list has been criticized. It is also pro-gressing very slowly abroad, where opinionson the bounds of military significance differfrom th ose in th e White House. The adm inis-tration maintains that U.S. initiatives to ex-pand and tighten export controls are succeed-ing, albeit on a case-by-case basis, in the Coor-dinating Committee for Multilateral ExportControls (CoCom), an informal organizationcomposed of the United States and 14 of itsallies (the NATO countries, minus Iceland and

Spain, plus Japan) that attempts to implementa uniform export control system throughoutthe Western bloc. However, as the discussionbelow makes clear, it is unlikely that the otherCoCom members will undergo the wholesalechange of attitude necessary to bring the orga-nization in line with the opinion prevailing inthe U.S. Government.

Foreign policy controls have provoked a dif-ferent set of problems. The EAA does not pro-vide for congressional veto over the exerciseof foreign p olicy cont rols other th an th ose on

agricultural commodities, but it does stipulatethat affected industries be consulted and Con-gress be notified before t he im position of re-strictions; and it directs the President to con-sider alternative actions and a detailed list of criteria before instituting the controls.

Her ein lies a bas ic dilemma. E AA assum esthat the freedom to export is a right, to beabridged only under specific circumstances.At the same time, it grants the Executivesweeping powers to define these circumstancesand places the burden of proof in questionable

cases on the potential exporter. The Executivepower is offset primarily by nonbinding provi-sions designed to limit its use; i.e., EAA re-quests, but does not enforce, Executive self--restraint. This is the root of much of the con-troversy which has recently surrounded exportadministration. When an emergency produces

a national consensus on trade controls, the lawworks well. Under less drastic circumstanceswhere the President and Congress disagree asto whether export controls are appropriate oreffective, the provisions of EAA tend to mag-

nify basic policy differences, and the distinc-tion between national security and foreign pol-icy controls tends to blur. This was the casewith both President Carter’s partial embargoon U.S. grain sales to the U. S. S. R., and withPresident Reagan’s controls on sales of oil andgas equipment and technology.

The grain embargo was imposed by Presi-dent Carter after the Soviet invasion of Af-ghanistan. It roused intense domestic opposi-tion, particularly from farm interests. Its eco-nomic impact on both the United States andth e U.S.S.R. is still a mat ter of debate, but itis probably accurate to say that the costsborne by the American economy were at leastas great as those which devolved on theU. S. S. R., and that the Soviet Union seems tohave succeeded in replacing the United Statesas its principal agricultural supplier. In addi-tion, the conduct of the grain embargo raisedtwo troublesome policy issues. First, domesticpolitical reaction resulted in legislation to pre-vent agricultural commodities from being sin-gled out for use as foreign policy tools, and toguara nt ee the sa nctity of agricultu ral export

contracts. Exporters of goods not subject tothese protections are now questioning the eq-uit y of such legislat ion. Second, t he fact th atthe grain embargo was imposed on groundsof both national security and foreign policyhas helped confuse important differences be-tween these mechanisms.

The Reagan administration lifted the grainembargo, but provoked a controversy of itsown when it imposed extraterritorial and ret-roactive controls on oil and gas technology ex-ports to the U.S.S.R. as part of its reaction

to the declaration of martial law in Poland.This a ction pr o~’eked int ense cont roversy athome, and outrage in Western Europe. U.S.business has reacted to the situa tion’s un pre-dictability: in some cases, the fate of licenseapplications has been the subject of great un-certainty; in other cases, ongoing previously

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——. .— Ch. I—Summary: Issues and Findings q 5 —

approved deals have been abrogated. The reac-tion abroad stemmed from the attempt to pre-vent foreign firms with legal commercial rela-tions to U.S. firm s from export ing petr oleumequipment and technology to the U.S.S.R.This at tempt failed in t he sense t hat foreign

governments and firms in France, the UnitedKingdom, West Germany, and Italy defiedU.S. orders. The controls were lifted afterAllied agreement to a series of studies onaspects of a unified East-West trade policy.

Eur opeans h ave char ged that these foreignpolicy controls have been implemented in ahypocritical and unfair manner. In their view,the U.S. Governmen t ha s bowed to domestic

pressures to lift sanctions on grain, the one ex-port in which the United States dominated theSoviet market; at the same time, U.S. officialscontinually call for allied restraint on sales of oil and gas equipment and technology, itemsin which Eu rope and J apan have a greater eco-nomic stak e. It could be argued t hat this seem-ing cont ra diction in U .S. policy ha s given th eEuropeans an additional justification for de-clining to endorse American views on East-West trade. Other consequences for the UnitedStates of the major events in export administ-ration, and the lessons to be learned fromthese consequences for the drafting of new leg-islation, ar e explored in t he following pa ges.

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6 q Technology and East-West Trade: An Update —

I M P AC T S O N T H E U . S . E C O N O M Y

The volume of U.S. trade with the SovietUnion is small and is likely to remain so. Itsrole in the U.S. economy is not well under-

stood; assessments of its impact and impor-tance have been controversial; and this impactcannot be measured solely through balance-of-trade statistics. Important components of the foreign trade balance sheet are indirect andunquantifiable, and weighing their importancerelative to the political an d n ational secur ityconsequences of trade is a highly subjectivematter .

One view of the commercial value of U. S.-Soviet trade is that it is of such trivial eco-nomic consequence that policy makers shouldnot be deterred from restr icting it, no mat terhow slight the resulting national security gain.Those who question this position raise twopoints. First, exports can be of small signifi-cance to the economy as a whole, but still veryimportant to specific sectors of that economy,particular industries, or firms within those in-dustries. Second, there are indirect impacts of the expansion or contraction of trade that arefelt on both t he m icro an d ma cro levels. Bothpoints a re illustr at ed in the results of th e re-cent U.S. embargoes on exports of grain, andoil and gas technology to the U.S.S.R.

In the case of grain, the magnitude of theeconomic costs to the United States is stilldebatable, but it is clear that these includedthe direct costs of farm support programs andthe less easily quantifiable values of lostmarket shares and the acquisition by U.S. sup-pliers of the reputation as unreliable. It ischarged that this reputation also now sur-rounds oil and gas equipment and technologyfirms, several of which have similarly lost–

pe r ha ps pe r m a ne n t ly—luc r a t ive m a r ke tshares .

The retroactive and extraterritorial nature

of the oil and gas controls has given rise toother economic problems. While it is disingen-uous of U.S. firms to assert or imply thatbroad controls of this sort are likely to be fre-quently or lightly applied, it is similarly naiveto deny that the possibility of such actionscast s a pall over th e condu ct of int erna tionaltrade. Concern over possible interruption of future transactions may produce a chilling ef-fect on the climate in which U.S. firms operateand on the business decisions they make. Thebroad scope of extraterritorial controls, asthey were applied in this case, may lead tolong-term adverse impacts on West-Westtrade, far more important to the U.S. economytha n tr ade with t he Soviet Union. The intensenegative reaction at home and abroad pro-voked by the U.S. sanctions a rgues th at th eystr uck close to the nerve. Multilatera l dealsare highly intricate, potentially involving mul-tifarious second- and third-order relationshipsin several nations. Extraterritorial controlscan therefore have many unanticipated andundesirable consequences as their impactspreads in a ripple-like effect to numerous and

varied interested parties.Unfortu na tely, th ere is no way to measur e

this kind of impact, even after the fact. Neitheris it possible to gauge the magnitude of sucheffects in advance. One can judge that the in-direct negative economic impacts of sanctionsare real-and perhaps more important thanthe direct impacts. It is probably also true thatthese impacts are not as severe as their harsh-est critics assert.

P O L I T I C A L I M P A C T SU . S . - A L L I E D R E L A T I O N S and acceptable scope of trade with the Soviet

Union than those prevailing in the WhiteIt is now commonplace to point out that House. Many of these differences have crystal-

America’s allies in Western Europe and Japan lized around the issue of the new West Siberi-have different notions of the role, importance, an gas pipeline, which is being built largely

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Ch. I—Summary: Issues and Findings q 7 . — —

with European and Japanese equipment. Pres-ident Reagan opposed this pipeline, but WestGermany, France, and Italy consider import-ing Siberian gas a desirable way to increaseand diversify energy supplies while simultane-

ously stimu lating equipment an d t echnologysales. The West European policies have per-sisted despite U.S. diplomatic efforts tochange them. American critics have tended toview them as shortsighted and dangerous tothe cohesion of the alliance. Europeans in turnstr ess the failur e of th e United Sta tes to ap-preciate the grounds for their conceptions of national security. They also resent Americanattempts to dictate matters which they con-sider to be internal economic policy, and totake major foreign policy steps without con-sultation.

Public displays of these differences on East-West trade policy have increased markedlyduring th e Reagan adm inistrat ion, culminat -ing with a dispute between the United Statesand F ran ce over the mean ing and inten t of adeclarat ion on Eas t-West tr ade signed at th eJune 1982 Versailles Summit. This disputewas immedia tely followed by U .S. impositionof extraterritorial, retroactive export controlson oil an d gas technology. Thr ough th ese san c-tions, the United States attempted to embargoall oil and gas equipment trade between the

U.S.S.R. and foreign subsidiaries and licenseesof U.S. firms. When European firms defiedU.S. orders, several were then subjected toAmerican export control sanctions. The con-trols were lifted in November 1982, only afterthe United States and its allies agreed to con-duct a series of multilatera l stu dies concern-ing trade with the U.S.S.R.

Within the United States itself, informedobservers offer markedly different interpreta-tions of the content, timing, and status of themultilateral studies. Given the degree of con-fusion within the United States, and the resi-due of recrimina tion an d ill will in E ur ope, itis reasonable to expect differences among theoth er par ticipan ts’ perceptions a s to the mean -ing and utility of this exercise. The “worstcase” outcome of these studies is not that theywill fail to produce new allied policy initiatives

on Ea st-West tr ade. Rat her, it is that cont in-ued lack of communication and persistent dif-ferences will lead to another public display of serious disagreement between the UnitedStates and its allies on Soviet trade policy.

Just as the meaning and potential importof the forthcoming studies are debatable, sotoo is the evaluation of the political costs andbenefits which have accrued to the UnitedStates in the wake of the sanctions. Some haveclaimed that American export controls causeda significan t in cremen ta l delay in completionof the West Siberian pipeline and a consequentloss in hard currency for the Soviets; othersare skeptical. Regardless of the actual impacton the pipeline schedule, the effort to disruptthe project raises a disturbing question. Inthis case the U.S. Government’s evaluation of what is best for West Eur opean securit y dif-fers from that of the West Europeans them-selves. Should t he Un ited Sta tes u se its for-eign policy controls on exports to the U.S.S.R.as much to inconvenience and modify the pol-icies of its allies as to inconvenience or exactconcessions from the Soviet Union? This is ar-guably a bad precedent for the conduct of U.S.foreign policy in general and for alliance rela-tions in particular.

In the end, future allied trade relations withthe U.S.S.R. are likely to be shaped more by

domestic imperatives in Europe and Japanan d worldwide economic forces th an th ey areby U.S. concerns. There is no evidence thatallied nations are about to renounce their fun-damental beliefs about East-West trade. Tothe extent that retrenchment takes place, par-ticularly in granting credits to or buying en-ergy from the U. S. S. R., it will likely in largepart be due to the state of the world credit andenergy mar kets.

U . S . - S O V I E T R E L A T I O N S

According to the view currently predomi-nan t in t he administr ation, the East -West con-frontation is an expression of a fundamentallyadversarial r elat ionship which is un likely tobe changed in the near future, and certainlyun likely to be relaxed thr ough t ra de. Indeed,

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trade with the Soviet Union is no longer seenas in part an opportunity for forging peacefulties, but rather exclusively as the means bywhich t he West is contr ibuting to the st rength—and hence the threat-of a country it hasevery reason to distrust. In this view Westerntrade policy toward the U.S.S.R. should alsoavoid creating situations in which the U.S.S.R.might gain leverage over its trading partners(as in the case of the pipeline). At the sametime, it can be used as an effective means of expressing displeasure at Soviet actions in amanner which will inflict harm on theU.S.S.R.’s economy (hence, technology andequipment embargoes).

U.S. policymakers have long tended to char-acterize the Soviet military sector almost en-tirely in terms of its strengths, and the Sovieteconomy almost always in terms of its weak-nesses. But despite serious inherent weak-nesses the Soviet economic system enjoysmany strengths. On the other hand, Westernimports have relieved critical shortages,hastened technological progress, and generallyimproved economic performance. Consequent-ly, ma ny believe th at policies of economicleverage are useful and that the United Statescan affect the Soviet Union through well-tar-geted sanctions which exert economic pressureon points of Soviet vulnerability and thereby

exact changes in Soviet behavior. This is a con-troversial view.

In both Technology and East-West Trade

and Techn ology and S oviet E nergy Availabil-ity, OTA found that trade leverage usuallyworks under very limited conditions, and thatpast precedents have demonstrated its weak-ness when used against the Soviet Union. Theafterma th of U.S. at tempt s to embargo grainand energy equipment exports to the U.S.S.R.dramatically demonstrate the limitations onU.S. power to successfully conduct a trade

leverage policy. Although both embargoeswere directed at vulnerable areas of the Sovieteconomy, their results were inconclusive atbest. U.S. sanctions and embargoes may wellhave hurt the U. S. S. R., but it is unlikely thatthey have hurt enough to make a real econom-ic difference.

It has been argued that equivocal economicimpacts aside, the political utility of tradesanctions lies as much in the message of U.S.resolve that they convey to the U.S.S.R. as inprecipitating measurable changes in Soviet be-havior. According to this view, U.S. policiescan and should be judged according to theirsymbolic value. The impact of th ese symbolicactions has been lessened by two factors,however: the messages sent to the U.S.S.R.have been unclear; and the U.S.S.R. may itself have benefited from the disruptions in theWestern alliance precipitated by U.S. policies.The gas pipeline sanctions have been variously

justified as being designed to:

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protest Soviet responsibility for the decla-ration of martial law in Poland;prevent West European dependence on

Soviet gas;damage-or at least not aid-general So-viet economic development by inh ibitinga project of’ great economic importance;protest the use of “slave labor’ in pipelineconstruction; ordeny the U.S.S.R. hard currency earningsfrom gas sales in Europe.

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These are very different goals. Yet, if the suc-cess of a policy rests on its symbolic message,its impact may be weakened when the messageitself is un clear .

The extent of the second problem can onlybe determined in the context of the valuewhich the U.S.S.R. places on driving wedgesbetween the members of the Western alliance.If an important Soviet political goal is to gen-erate as much divisiveness as possible amongNATO partners, and to encourage the WestEuropeans and Japanese to depart from U.S.policies on East. West relations, the gas pipe-line embargo was arguably a welcome politicalwindfall for the U.S.S.R. A counterargumentis that any such damage was superficial, illu-

sory, and/or short-term. In this view, the Westis going through a necessary, albeit painful,reevaluation which will eventually result in astronger and more unified front vis-à-vis theU.S.S.R. This position in effect defers judg-men t of th e effects of U.S. policies t o th e in-determinate future.

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Photo credit: T ASS from SOVFOTO “Model A“ Fords roll off the Gorki assembly lines in 1929

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10 . Technology and East-west Trade: An Update

M I L I T A R Y

There is no question t hat the U .S.S.R. ha sbenefited militarily from Western technol-ogies and equipment. In cases where the U.S.Government has expressly permitted the sale

of such items to the Soviet Union, it has en-gaged in actions which injure its own nationalsecurity. Recent intelligence analysis has con-firmed t he fact th at th e U.S.S.R. is engagedin a ma ssive high-level effort to acquire mili-ta rily relevant Western t echnology, and t hatit has obtained these technologies by bothlegal and illegal means.

Observers of the Soviet economy still dis-agree over the efficiency of this technology ac-quisition program, but the significance of itsmultifaceted nature for U.S. policy makers is

that different transfer mechanisms lend them-selves to different legislative and administra-tive remedies. Unfort un at ely, in the r hetoricsurrounding export control, the distinction be-tween legal and illegal technology transfersis often blurred. The resulting confusion inten-sifies the impression that the West is a‘‘si ev e, and tha t the U.S.S.R. is benefitingfrom a veritable hemorrhage of U.S. technol-ogy. This impression is in turn useful in foster-ing a climate of public opinion supportive of extending controls to a larger array of technol-ogies and products, and reducing American

commercial relations with the U.S.S.R. Re-gardless of the wisdom of such a policy, main-taining a clear distinction between militarygains made by the U.S.S.R. through theft anddeception, and gains made “legitimately”under U.S. law, is essential to any serious at-tempt to reform or refine that law so as tominimize futu re gains.

Thus, any serious attempt to affect militar-ily relevant U.S. technology flows to theU.S.S.R. must carefully separate the follow-ing channels:

I. Legal transfers made possible by theopen nature of Western society, e.g.,tr an sfers occurr ing thr ough peru sal of open scientific literature, academic ex-changes, tra de fairs, etc.

I M P A C T S

II.

III.

IV.

v.

Legal transfers through purchase of technologies under general license.Legal transfers through purchase of technologies under validated license.

Illegal transfers through purchase, e.g.,by agents, through third countries orforeign embassies, dummy corpora-tions, etc.Illegal transfer through industrial espi-onage or the theft of materials classifiedby the U.S. Government.

Constr aint s on technology tran sfers in cat-egory I r isk impinging on th e free worldwideaccess to scientific developments, on whichscientific advances depend. In addition, Amer-ican academics are jealous of the prerogatives

of academic freedom. U.S. exchange programswith the U.S.S.R. have been characterized bya ba sic lack of symmetr y, but t he t ra nsfer of information through academic and scientificexchange programs is probably less likely toresult in the ability to absorb, diffuse, and im-prove on a technology than are more active—i.e., commer cial-cha nn els. In a ddition, str onglegal and social forces in the United Statesmake this area particularly intractable to well-targeted controls.

Categories IV and V involve illegal actions

on the part of the U.S.S.R. or its agents. Thereis broad agreement that better enforcementof existing laws and regulations should be-come an important priority, although opinionsdiffer as to how enforcement efforts shouldbe implemented. These efforts are complicatedby the fact that there are both domestic andforeign aspects to the problem of illegal trans-fer. The problems of improving enforcementwithin the United States are relatively tract-able compared to those which surround the il-legal disposition of American technologiesonce they leave the country. Here, the United

States must rely on the enforcement agenciesof other nations, and cooperation has notalways been forthcoming. So long as East-West trade policy differences between theUnited St at es and its allies persist, no quick

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Ch. I—Summary: Issues and Findings q 11

or easy solution to this problem can be ex-pected.

Categories II and III contain items which,to the extent th at they strengthen the Sovietmilitary, are not adequately protected by U.S.law. Category II raises the issue of identify-ing those items which sh ould be, but a re not,controlled for national security purposes.Agencies charged with export control arefaced with the enormous technical task of keeping abreast of rapidly developing technol-ogies in a variety of fields, with a variety of potent ial milita ry applicat ions. It is t he ta sk of the legislator to allocate adequate resourcesfor an administrative framework within whichflexible and farsighted evaluation of the direc-tion of technological change in both the civil-

ian a nd m ilitar y sectors can t ake place. Thiseffort will be made more difficult by the factthat important new technologies are nowbeing developed in the civilian, not the mil-itary, sector. These may have no known orpractical military utility now, but could wellhave important military applications in thefuture.

Problems in category III arise from the ex-isting export licensing apparatus, which intheory should adequately identify technologiesand products with potential “dual” (i.e., bothmilitary and civilian) use, and allay all reason-able doubt that sale of the item in question willnot result in a militar y gain by the U.S.S.R.In practice, export licensing procedures havebeen th e subject of inten se criticism. The pr ob-lem is tha t wh ile it is r elatively easy to iden-tify past licensing decisions that seem to havecontributed to Soviet military capabilities, itis not clear that:

q

q

q

q

economic or political considerations at thetime were not considered by high-leveldecisionma kers to outweigh th e militaryrisks;

these military applications could havebeen anticipated at the time;denial of a U.S. license would have with-held t he t echn ology from t he U . S. S. R.;and/orany other licensing mechanism would nec-essarily result in fewer such “mistakes.

The lesson here is that evaluation of the ex-port licensing process cannot be undertakenin isolation from an understanding of the basicassumptions which guide it. The technical andlogical criteria for including technologies in the

export licensing process and the “case law”which provides the grounds for granting li-censes in disputed cases together reflect anun derst an ding of th e concept of “militar y sig-nificance,” which has been subject to widelyvaried interpretations, often colored by theprevailing political climat e. Congress ha s en-dorsed efforts to develop a means of assessingmilitar y risk wh ich r ests on objective techno-logical criteria’ and is therefore relatively im-mu ne to sh iftin g political opinion. Th is effortis predicated on th e assum ption t hat one canidentify the subset of technologies on which

U.S. military technological superiority is mostdependent; and that these technologies can bedescribed on a Militarily Critical TechnologiesList (MCTL), and subjected to stringent ex-port control. One advantage of producing sucha list would be that the items on it could bemade immune from at tempts to use them asinstruments of political leverage. It is diffi-cult, after all, to make a rational case for sell-ing a m ilita rily critical item or process to th eU. S. S. R., no matter what the political de-mands of the moment.

However, it would be both misleading andunwise to regard the MCTL as a panacea. Theexisting MCTL has been criticized for beingso extensive that it constitutes a “ModernTechnologies List, ” a reflection of the fact thatthe Department of Defense’s view of the scopeof militar y crit icality is cont roversial. On t heevidence of the historical precedent forchanges in the prevailing interpretation of theconcept of military significance, and of thelongstanding difficulties surrounding the Crit-ical Technology Exercise, it is unlikely thatcontroversy in the export licensing community

over the boundary between acceptable andnonacceptable military risk will be quickly orpermanently laid to rest.

In sum, there are severe constraints on thepower of U.S. export licensing to deny the So-viet Union access to the Western technologies

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12 q Technology and East-West Trade: An Update — — —

it most want s. These const raint s include theextent to which the Soviets use illegal meansto a cquir e Wester n technology; lack of alliedagreement on a more strenuous multilateralexport cont rol policy; t he difficulties inherent

in iden tifying in advan ce which t echn ologieswill have important military payoffs; and theincreasing worldwide diffusion of technology.While existin g export criteria could certa inlybe tightened, it is most improbable that evendrastic changes in U.S. export control policycould alter the fact that the U.S.S.R. benefitsmilitarily from Western technology. More-over, it is rare to find examples of technologies

obtained from the West which the U.S.S.R.could not have produced itself, albeit withdelays.

Given this situation, it is important that theUnited States not lose sight of the primary ob-

jectives of a rea listic export cont rol program .It is su ccessful to th e extent th at it increasesthe cost to the U.S.S.R.—in time, money, ef-fort, and efficiency–of obtaining the technol-ogies it desires; and to the extent that theroadblocks it creates limit the rate and volumeof Soviet technological acquisitions.

O P T I O NS F O R U . S . P O L I C Y

The debate over U.S. export administrationpolicy centers on how to simultaneously pur-sue and to balance four different objectives.All members of the export licensing communi-ty believe to some extent in each of thesegoals. They differ in their priorities, and in thepast, the relative emphasis accorded these ele-

Table 1 .—Options

ments has shifted. A new or revised ExportAdmin istr at ion Act will reflect congress iona ldecisions on how best to accommodate all fourwhich are described below. Table 1 lists someof the major policy options which are availableto Congress in furthering these objectives, andidentifies the primary thrust of each.

for U.S. Policy

Primary goal

Option National security Foreign policy Efficiency Trade-promotion

Change the locus of primary export licensing responsibility:Create an Office of Strategic Trade . . . . . . . . . . . . . . . . . . . .Give primary responsibility to the Secretary of Defense . .

Eliminate indexing (i.e., the automatic decontrol of“obsolete” technologies) . . . . . . . . . . . . . . . . . . . . . . . . . . .

Broaden the definition of technology to bring moretransactions under national security controls . . . . . . . . .

Redefine foreign availability criteria:Eliminate foreign availability as a reason for

granting licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Make it easier to prove foreign availability . . . . . . . . . . . . . .

Use militarily critical technologies list (MCTL):Adopt the existing MCTL . . . . . . . . . . . . . . . . . . . . . . . . . . . .Shorten the MCTL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tighten West-West export controls . . . . . . . . . . . . . . . . . . . . .Strengthen CoCorn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Curtail exchanges and access to open literature . . . . . . . . .Restrict technology sales to foreign embassies . . . . . . . . . . .Restrict the application of foreign policy controls . . . . . . . . .Decontrol embedded technology . . . . . . . . . . . . . . . . . . . . . . .Decontrol West-West trade . . . . . . . . . . . . . . . . . . ... . . . . .Create a comprehensive operations license . . . . . . . . . . . . .Improve enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SOURCE Office of Technology Assessment -

xx

x x —

— —

x —

x — — —

x—

x—

xx

xx—

—

x

x—

x

x

x

x—

— —

x —

— —

— —

— —

— —

x xxxx

— — —

x — — — —

x x — —

—.

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T H E N A T I O N A L S E C U R I T Y

P E R S P E C T I V E

G o a l s

The primary goal of policy options which

focus on U.S. national security is to make itas difficult a s possible for th e Soviet defenseestablishment to acquire and use Westerntechnology. Proposed legislation is designedto prevent or inhibit the dissemination of equipment and technologies believed to havemilitary utility.

A s s u m p t i o n s

Adherents of this perspective believe that:

q

q

q

q

the U.S.S.R. is making important militarygains through the acquisition of Westerntechnology;tightening U.S. export licensing require-ments can make significant inroads intothis process;the security benefits of such controls out-weigh t he economic cost s of foregone ex-ports; andthat sustained U.S. pressure can bringAmerica’s allies closer to its own positionon these matters.

T H E F O R E I G N P O L I C Y


G o a l s

The primary goal here is to preserve a situa-tion in which P residential use of tra de as a ninstrument for achieving political objectiveshas been as easy and effective as possible. Thisinvolves th e power t o apply contr ols t o item swhich do not fall under the rubric of nationalsecurity, and envisages that such controlswould be flexible and of limited duration.


Advocates of maintaining broad executivediscretion in the use of foreign policy controlsbelieve that :

Ch. l—Summary: Issues and Findings q 13 —

the Soviet need for Western imports pro-vides an effective lever for affecting Sovi-et policy and behavior;political intervention in the conduct of in-ternational trade is an appropriate mecha-

nism of diplomacy; and/orU.S. foreign policy requires a means bywhich the ‘President can reward or punishSoviet actions where no suitable alterna-tive to manipulation of trade controlsexists.

T H E E F F I C I E N C Y


G o a l s

The primary goal here is to allow actual orpotent ial export ers th e ability to plan a head,make long-term commitments, and to acquirethe reputation of reliable suppliers. A second-ary goal is to encourage compliance and in-crease the efficiency of the export licensingprocess. These ends would be achieved bymaking the export control systemdictable, consistent, and efficient.

more pre-


This perspective is based on the propositionthat, whether its objective is to limit or encour-age exports, U.S. policy should be adminis-tered in a timely and predictable manner andenforced so as to encourage compliance andachieve the maximum benefit/cost ratio for itspolicing efforts. It also assumes that such de-velopmen t would a llow U.S. compan ies to in-vest more sensibly and compete more efficient-ly in international markets. Holders of thisperspective tend to believe that foreign policycontrols are highly disruptive of trade but un-likely to cause changes in policies abroad; and

th at complex licensing pr ocedures place unn ec-essary burdens on U.S. businessmen and tax-payers which could be avoided by adherenceto a clear and consistent policy.

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14 q Technology and East-West Trade: An Update -.

T H E T R A D E P R O M O T I O N


Goals

The primary goal of the trade promotion per-

spective is to enable U.S. companies to com-pete effectively in selling t he widest possiblevariety of civilian goods and technologies any-where in the world. Therefore, controls shouldbe tightly limited in scope an d a dministeredin a consistent and predictable manner.


The trade promotion perspective rests onvarious combinations of some or all of threebasic lines of reasoning. First, the UnitedStates does not have a worldwide technologi-

cal monopoly; and since our allies are unlikelyto change their own export promotion policies,which protect only clearly military items, U.S.

efforts to deny the U.S.S.R. many productsand technologies are destined to fail. Second,foreign policy controls nearly always fail toalter the behavior of those against whom theyare directed. Moreover, because they are bynature unpredictable, these controls are highlydisruptive. Third, export controls are costlyto the United States and should be used to theminimum extent necessary. This view is basedon the perceptions that because the United

States is and must remain part of a world mar-ket, a healthy export sector is increasingly im-portant; and that export controls beyond those

obviously necessary for national security pur-poses reduce U.S. firms’ ability to compete forsales.

C O M B I N I N G T H E

P E R S P E C T I V E S

In some cases, these policy orientations aremutually supportive. It is consistent, for in-stance, to sponsor both provisions whichstrengthen national security controls andthose which promote flexibility for imposingforeign policy controls on trade. In others,they are inherently at odds. An obvious caseis the national security and export promotionperspectives, but there are others. For exam-ple, the very existence of foreign policy con-trols introduces an element of unpredictabili-

ty into the export licensing system, whichworks against both efficiency and trade pro-motion. Renewal of the Export Administra-tion Act may well lead to legislation thataddresses some or all of these perspectives. Itis possible that Congress will make difficultchoices and select among consistent measures.If it does not, it risks leaving export adminis-tration in much the same state as at present.Implementation of the 1979 EAA has beencomplicated by the fact that inconsistenciesof this sort were built into it. If this situationcontinues, controversies will once again be

transferred for the legislative to the executivearena and resolved by Presidential decisionsor administrative action.

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C H AP T E R I I

T h e E x p o r t Ad m i n i s t r a t i o n

A c t o f 1 9 7 9

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C o n t e n t s

Page

FORERUNNERS TO THE 1979 EXPORT ADMINISTRATION ACT . 17

PROVISIONS OF THE 1979 EXPORT ADMINISTRATION ACT . . . . 18

AMBIGUITY IN THE 1979 EXPORT ADMINISTRATION ACT . . . . . 20

SUMMARY AND CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

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C H AP T E R 1 1

T h e E x p o r t A d m i n i s t r a t i o nA c t o f 1 9 7 9

A detailed account of the history of U.S. ex-port control from 1949 to 1979 can be foundin chapter VII of Technology and East-West Trade. This account reveals two relatedthemes. The first is the continued tension be-tween the forces urging export control versusexport promotion. The second is the clear

change in the relative weight accorded thesefactors by Congress, a change manifested bythe passage of the first Export Administra-

tion Act in 1969. The 1969 law reflected con-

gressional adoption of the view that East-West trade restraints should be loosened. Nev-erth eless, the perpet uat ion of th e two diver-gent positions has continued to shape U.S. ex-port contr ol policy, and both can find expres-sion in the Export Administration Act of 1979(EAA). This chapt er r eviews th e ma jor p rovi-sions of the current legislation and identifiesthe controversies which have grown up aroundits interpreta tion.

F O R E R U NNE R S T O T H E 1 9 7 9 E X P O R TA D M I N I S T R A T I O N A C T

Before 1949, U.S. efforts to control exportson the grounds of national security had beenlargely confined to times of war or nationalemergen cy. The E xport Cont rol Act of 1949,passed in the early stages of the Cold War,mar ked t he inception of two importan t poli-

cies: the imposition of export controls on aregular and continuing basis during peace-time; and the legislative expression of thethesis that nonmilitary t rade with potentialadversaries could adversely affect U.S. securi-ty. Under this policy, the economic advan-tages to the United States of unfettered for-eign trade were clearly subordinated to theperceived securit y dan gers of commercial in-tercourse with the Communist world; and thebroad lan guage of th e act allowed th e contr olof exports of primarily economic (as opposedto military) significance to the purchaser.

In 1969, a long process of pressure for theabandonment of this policy, much of it fromthe business community and much of it reflect-ing the goals of detente, reached its climaxwith the passage of an Export AdministrationAct. One expression of the new spirit of the

law was the change in its title. This act im-plicitly treated the ability to export as a rightto be infringed only under explicit limited cir-cumstances, and all language implying thattrade restrictions might be used to promoteeconomic war fare was deleted. The act n ow at -

tempted to reconcile an encouragement of trade with th e East with the ma intenance of U.S. military security. Thus, the dual but oftencontrary tendencies in export control policyremained; the weight and the presumption,however, had sh ifted in th e spirit of detent eto the side of liberalizing exports to the East.

Major amendments to the 1969 act were en-acted three times—in 1972, 1974, and 1977.Each time, the debate between the demandsfor increased ease of export and increased con-trol in the n ame of nat iona l securit y was re-vived. Each time some provisions to strength-en export controls were included, but the pre-vailing opinion weighed largely in favor of modest facilitation of East-West trade. Thedebate which preceded the passage of the 1979EAA, however, reflected both disenchantmentwith detent e an d an intensified concern with

17

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the security implications of trade with theCommunist world, and a major effort on thepart of the business community to remove con-straints on nonmilitary trade. The resultinglegislat ion embodies both concerns , alth oughits findings and declaration of policy clearlylean in th e direction of easin g th e difficult iesattendant on conducting East-West trade.

The law assum es th at the freedom t o exportis a basic and important right which shouldbe abridged only under specific circumstancesand then only in a clearly delineated manner.At t he sam e time, EAA gran ts t he Execut ivesweeping powers to define these circum-stances. The Executive power is offset pri-marily by nonbinding provisions designed todeter its use. Herein lies an inherent ambiguity

in the law and the root of much of the con-troversy surrounding i ts administra t ion.When an emergency situat ion pr oduces a na-tiona l consensu s on th e propriety an d ut ilityof instituting export controls, differences be-tween the basic intentions of the EAA framers

and th e man ner of its implementat ion do notarise. However, under less drastic circum-stances where the President and Congressmay disagree as to whether export controls areappropriate or effective, the provisions of EAA tend to magnify any basic policy dif-feren ces between t he law’s spirit an d its ex-ecution. In sum, because EAA assumes Ex-ecutive self-restraint, it is most vulnerable tocriticism when that restraint is foregone. Thispoint can be further illuminated through abrief survey of the major provisions of the act.

P R O VI S IO NS O F T H E 1 9 7 9 E X P O R TA D M I N I S T R A T I O N A C T

The major provisions of the 1979 EAA canbe summarized as follows:

q The findings and declaration of policy of th e act both str ess th e import ance of ex-ports to the U.S. economy and thereby tothe national security and well-being of thecountry. It is deemed the policy of the

United Sta tes to minimize uncert aint y inexport controls; to apply such controlsonly after full considerat ion of th eir eco-nomic impacts; and only to the extent nec-essary to protect national security, fur-ther significant foreign policy goals, orprotect t he d omestic economy in cases of short supply.

q EAA separates the cr i ter ia and pro-cedures of controls enacted for nationalsecurity from those instituted for foreignpolicy reasons. The former are to be ap-plied only to the extent necessar y to re-

strict exports which make a significantcontribution to the military potential of another country which would prove detri-mental to the national security of theUnited Stat es. The latter a re to be usedonly where necessary to significantly fur-

ther the foreign policy of the UnitedStates or to fulfill its international obli-gations.

q A number of provisions are designed tomake the export licensing process moreaccountable to the public, quicker, moreefficient, and less inclusive. Among these

ar e t he following:–The establishment of Qualified General

Licenses which authorize multiple ex-port s to the Soviet Union, East ern E u-rope, and China .

—Language strengthening the require-ments that the business community befully apprised of changes in export con-trol policy; that their views on this pol-icy be solicited r egular ly by th e Secre-tary of Commerce; and that license ap-plican ts be inform ed of th e progress of their application and the reasons for

denial.—The establishment of action deadlines

for referral of applications in the eventof interagency review.

—The inclusion of an indexing provisionwhich would allow for the periodic de-

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Ch. II—The Export Administration Act of 1979 q 1 9

q

q

q

control of goods and technologies whichcan be considered “obsolete’ relative toannual increases in performance levelsof new technologies.

—The detailed specification of procedures

for establishing an ongoing capabilitywithin the Department of Commerce(DOG) to collect and disseminate infor-mation on foreign availability of goodsand technologies comparable to thosesold by U.S. firms.

The stipulation that validated licensesmay not be required in cases where for-eign availability has been demonstrated,unless this provision is specifically waivedby the President. In the latter case, theSecretary of Commerce must publish thegrounds and estimated economic impact

of the waiver.The President is given total discretion indeciding to apply foreign policy controls,but t he act clearly int ends to inhibit thispower by providing det ailed guida nce onthe factors to be considered and stepstaken in his decision. Although no con-gressional veto over foreign policy con-trols other than those on agricultural com-modities was included in the act, it pro-vides that affected industries be con-sulted and Congress be notified before theimposition of restrictions; and it enjoins

th e President t o consider alt erna tive ac-tions and the following criteria before in-stituting the controls:–the probability that the controls will

achieve th e intended purpose;—the compatibility of the controls with

other U.S. foreign policy objectives;—the reaction of other countries;—the likely impact on the U.S. economy;—th e ability of th e United St at es to en-

force the controls; and—the foreign policy consequences of not

imposing the controls.Authorization, but not funding, is pro-vided for U.S. participation in CoCom,and the P resident is enjoined to enter into

negotiations with other CoCom govern-ments with a view to reaching agreementon publication of the CoCom export con-trol list; establishment of periodic high-level meetings; reduction of the CoCom

list to a mutually acceptable and enforce-able level; and enhancement of foreign en-forcement activities.The role and powers of the Secretary of Defense in export licensing are delineated,and he is charged with primary responsi-bility for developing a Militarily CriticalTechnologies List (MCTL), which will beincorporated into the Commodity ControlList. The Secretary of Defense is alsogiven the right to review all license ap-plicat ions to coun tr ies for wh ich export sare controlled for national security

purposes.

On balance, these provisions tend to easerather than restrict the ability of U.S. firmsto export to the Communist world. But theoverall effect of the law has not been exportpromotion. Indeed, the period since the pas-sage of EAA has seen a marked contractionof U.S. trade with the Communist world (seech. V). This is in large part due to the applica-tion of foreign policy controls after the Sovietinvasion of Afghanistan and the declarationof martial law in Poland, but it also reflects

a widening of the criteria for the exercise of national security controls.

Soviet actions have been strongly con-demned in the United States, but there hasbeen disagreement over the extent to whichexport control constituted a proper or effec-tive arena for the American response. The factthat such measures are perceived by many inbusiness and in Congress as being at odds withthe intent of Congress in enacting EAA is areflection of the ambiguity embodied in thelegislation. It should hardly be surprising that

such legislation is interpreted differently bydifferent par ties, or t hat th ose empowered toexecute the law will do so in a manner consist-ent with their own policies.

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20 . Technology and East-West Trade: An Update

AM BI G UI T Y I N T H E 1 9 7 9 E X P O R TA D M I N I S T R A T I O N A C T

The controversies which have arisen on theadministration of the 1979 EAA stem fromseveral different sour ces. First, th e lan guageof export control has always included broadterms which lend themselves to varying inter-pret at ions. The discussion in chapt er VI overthe meaning of the term “military signifi-cance” reflects this problem.

Second, the Export Administration Act in-volves concepts, such as extraterritoriality,which have rarely been fully invoked. This pro-vision has traditionally been used to controlreexport of U.S. technology. The expansion of this power to cover all goods and equipment

produced by subsidiaries and licensees of U.S.firms has engendered surprise and alarm in theU.S. and international business communities,anger in allied governments, and extensivelegal debate. (See chs. IV and V.)

Third, the law provided guidelines for Pres-idential actions without imposing real controlson those actions. Congress has, in fact, reliedon Executive self-restraint to fulfill its intent.The result has been the admini st ra tion’s pay-ing only lip service to legislative provisions incases where these might inhibit desired policy

actions. Thus, in the case of the West Siberiangas pipeline equipment embargo, the admin-istration has been accused of only perfunctorycompliance with the stipulations regarding theimposition of foreign policy controls, includingfailure to seriously consider circumstanceslikely to affect the outcome of the controls, andfailure to adequately notify Congress of theintent to impose the embargo. (See chs. III,IV, and V for fur th er discussion of this case.)

Fourth, EAA does not and was not intendedto frame a totally inclusive and comprehensive

S U M M A R Y A N D

It h as been near ly 4 years since the passageof the 1979 EAA, and the intervening time hasseen numerous controversies over the execu-

East-West trade policy. There are issues—ex-port credit, for example-central to such apolicy which are outside the traditional juris-diction of EAA. (See the appendix to this docu-mer it. ) Oth er iss ues, i.e., contr ol of scient ificand technical publications and U.S. policy re-garding academic and scientific exchanges, in-volve delicate constitutional and domestic pol-icy issues and are extremely intractable toclarification in the context of an export con-trol law. (See ch. VI.)

Fifth, important areas of U.S. export con-trol policy involve multilateral issues, par-ticularly the role and status of CoCom. This

subject has been resistant to legislation dueto the informal and consensual character of CoCom and the political sensitivity of its ac-tivities for some European nations. Issues in-volving consultation with, and the cooperationof, U.S. allies are areas in which Congressseems to h ave limited influence. (See ch. V.)

Finally, EAA authorizes activities—the es-tablishment of ongoing foreign availabilitycapabilities and the MCTL, for example—which are complex and controversial enter-prises. There have been substantial disagree-

ments within the Government over the formthese activities should take and the way theirresults should be utilized. The net effect is thatfew concrete results have yet been seen ineither area , albeit for different reasons. TheMCTL is discussed at length in chapter VI andforeign a vailability in chapt er VII. Here, it isappropriate to note that it is unlikely thateither concept will form a useful part of theexport administration process in the nearfuture.

C O N C L U S I O N S

tion of specific provisions, and more general-ly, over the intent of its framers. Much of thiscontroversy is the familiar expression of the

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Ch. II— The Export Administration Act of 1979 q 21

dichotomy of views which has characterizedU.S. export control policy since its inception.But if the arguments presented and the inter-ests involved on each side seem largely thesame, there has been one change of great sig-

nificance: the stakes are now higher for all par-ties. Worldwide recession and the state of thedomestic economy have made the encourage-ment of exports, the maintenance of estab-lished trading relationships, and the develop-ment of new export markets of critical impor-tance to the United States as well as to Europeand Japan. Meanwhile, evidence of the extent

and nature of the Soviet military buildup,coupled with Soviet aggression in Afghanistanand events in Poland, have intensified aware-ness of the importance of safeguarding U.S.national security through protecting techno-

logica l leads . I ronica l ly , i t has becomesimultaneously more important to sell to andto withhold U.S. goods from the Communistworld. It will be the difficult task of thosedrafting th e next E xport Administra tion Actto craft a policy which addresses both of theseneeds without being so dualistic as to furthernei ther .

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C H AP T E R I I I

I m p l e m e n t a t i o n o f t h e

E x p o r t Ad m i n i s t r a t i o n

A c t o f 1 9 7 9

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.— .

C o n t e n t s

——

Page

FOREIGN POLICY CONTROLS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Grain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Oil and Gas Equipment and Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Other Commodities and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

NATIONAL SECURITY CONTROLS . . . . . . . . . . . . . . . . . . . . .0 . . . . . . . 35

Soviet Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Ea st er n Eu rope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

ADMINISTRATIVE ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

LEGISLATIVE DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Export Administration Amendments Act of 1981 . . . . . . . . . . . . . . . . . . . . 43

Agriculture and Food Act of 1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Futures Trading Act of 1982 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

DEVELOPMENTS IN COCOM ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44


Tables

Table No. Page

2. Time Requ ired To Pr ocess Licenses , Fiscal Year 1982 . . . . . . . . . . . . . . 393. Result s of Oper a tion E xodu s Du rin g Fiscal Year 1982.. . . . . . . . . . . . . 40

4. Compa rison of OEE an d Cust oms Car go Seizures . . . . . . . . . . .+. . . . . . 42

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26 . Technology and East- West Trade: An Update

counted for about three-quarters of U. S.-Soviet trade in recent years.

During t he 1970’s, the U nited St at es wasclearly the U.S.S.R. preferred agriculturalsupplier. American farmers were able to sell

to the U.S.S.R. the large quantities necessaryto simplify purchasing and shipping arrange-men ts. But from t he American point of view,the Soviet Union was an unpredictable cus-tomer, purchasing large amounts in someyears, and little in others. Following unex-pectedly large Soviet grain purchases in 1972,which ha ve been called ‘‘th e grea t grain rob-b e r y, and again in 1975, which led the Fordadminist rat ion t o impose a temporary mora-torium on grain sales to the Soviet Union, theUnited States and U.S.S.R. concluded a 5-yeargrain supply agreement. Beginning in October

1976, the agreement provided for minimumSoviet purchases of 6 million metric tons(MMT) of wheat and corn in approximatelyequal proportions each year, unless U.S. grainavailability fell below a certain level. Pur-chases beyond 8 MMT could be made afterconsu ltat ion with t he U.S. Government . TheUnited States pledged not to apply export con-trols to the first 8 MMT of grain exports. Dur-ing the first year of the agreement, the Sovietspurchased the minimum amount; during thesecond and third years their imports weremuch lar ger. In calendar year 1979, sales tothe U.S.S.R. accounted for 15 and 20 percent,respectively, of U.S. exports of wheat and feedgrains.

T h e C a r t e r E m b a r g ol

The partial grain embargo was the center-piece of th e Cart er ad minist ra tion’s Afghan -istan sanctions. Unlike the other sanctions im-posed at this time, those on wheat and cornwere justified on both national security andforeign policy grounds. The President presum-ably took th is st ep becau se EAA provides for

a congressional veto of restrictions on agricul-

‘This an d t he following section a r e based on U .S. Congress,House Committee on Foreign Affairs, Subcommittee on Eu ropeand the Middle East, An .4ssessment of the .4 fghanistan Sanc- tions: implicati ons for ‘Trad e and Diploma c j’ in the 1980(Washington: (J.S. ( ;o~ernrnent prin ting O ffice, 1981), pp . ZO-SZ.

tural commodities when these are applied forrea sons of foreign policy or sh ort s upp ly. TheUnited States had agreed to sell the SovietUnion up to 25 MMT of wheat and corn be-tween October 1979 and September 1980, thefourth year of the grain agreement. Under the

sanctions, the United States would makeavailable only 8 MMT.

This embargo was a imed at t he feed grain-livestock complex, one of the most vulnerablesectors of the Soviet economy, and the ad-ministration expected it to have a significantimpact on the Soviet Union. This belief wasbased on the fact that the Soviet Union’s 1979harvest had been poor, and the belief that ex-port pr ospects of other grain -producing coun -tries were less favorable tha n u sual. Thus, theresulting import shortfall would begin to be

felt before the U.S.S.R. harvested its 1980winter whea t crop and before grain from th eSouthern Hemisphere became available. Agri-cultural experts outside the administrationdisagreed with this forecast, believing that thefungibility of grain, the diverse channelsthrough which it is traded, and the availabili-ty of altern ative suppliers would ma ke graindifficult to embargo.

The administration recognized the criticalimport ance of secur ing intern at ional supportfor the embargo, despite the strong U.S. mar-

ket position: U.S. shares of world markets forcorn and soybeans were 75 and 80 percent, re-spectively; in addition, the United States sup-plied 40 percent of all the wheat traded on in-tern at iona l mar kets. On U.S. initiat ive, con-sultations were held in January 1980 with theother major grain-exporting countries (Cana-da, Australia, members of the European Eco-nomic Community (EEC), and Argentina) andwith the other major exporters of soybeans(Argent ina an d Bra zil). With t he exception of Argentina, the wheat-exporting countriespledged not to directly or indirectly replace the

embargoed grain. In practice, the other par-ticipant s appear ed to view th is agreement asa commitment not to sell more than “normal”or “traditional” amounts of grain to the SovietUnion. According to administration spokes-men, the agreement was for an indefinite peri-

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od. Argent ina declar ed its refusal to ‘‘par -

ticipate in economic sanctions or to controlsales by destination on the grounds that itlacked a legal mechanism to control sales byprivate t raders. Argentina did, however, de-

clare that it did not intend to take commer-cial a dvan ta ge of th e emba rgo or t o ‘‘seek t oalter artifially the current demands of the dif-ferent market s.” Argentina’s equivocal posi-

tion threatened the effectiveness of the em-bargo since its grain crop was uncommittedand would not be available until May. Subse-quent efforts by th e Carter adm inistra tion tosecure Argentine cooperation failed. On theissue of soybeans, Brazil took a positionsimi1ar to Argentina.

From late spring the grain embargo came

under increasing criticism, and events in t heUnited States and abroad threatened to under-mine it. F irst, t he U. S. Governm ent decidedto honor its commitment to sell the Soviets8 MMT of grain during the fifth and final yearof the grain agreement. Moreover, in a con-troversial move, the administration decided inJune 1980 to release U.S. grain-trading com-panies from their pledge not to sell non- U.S.grain through their foreign affiliates. Farmersand some Members of Congress viewed the lat-ter decision as an unfair easing of the embargo.Critics also charged that the embargo was

having a greater impact on the United Statesthan on the Soviet Union. The U.S. Depart-ment of Agriculture (USDA) statistics con-firmed that the Soviet Union was obtainingsignificantly more grain than the administra-tion had initially forecast, and the potentialeffect of the embargo on America’s own farmsector seemed significant. The record 1979grain harvest and increases in the prices of machinery and input s had led to preembargoforecasts of a 20-percent decline in 1980 farmincome. USDA estimated that the loss of 17MMT of gra in exports would redu ce farm in -

come by an additional $3 billion in 1980. Nooffsetting benefits to U.S. consumers wereforeseen; the embargo was not expected tocause a significant decline in food prices.

Therefore, the Government introduced pricesupport m easur es which included:

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incentives to farmers to place more grainin th e farm er-owned grain r eserve, thu ssiphoning it off the market;changes in the eligibility requirements forthe grain reserve program, which allowed

previously ineligible farmers t o use theprogram on a limited basis:temporary a ssumpt ion by th e Commodi-ty Credit Corporation (CCC) of exporters’contracts;purchases by CCC of certain agriculturalcommodities, including 4 MMT of embar-goed wheat:export promotion, including in creases inCCC export credit and guarantee pro-grams and the conclusion of grain supplyagreements with China and Mexico; and

incentives for alcohol fuels production.

According to initial official estimates, pricesupp orts would a dd $2 billion t o $3 billion t othe Federal budget for fiscal years 1980 and1981. Some private sector estimates werehigher– as much as $4 billion to $5 billion.

1 n response to pressure from the farm sec-tor, Members of Congress of both par-ties andin both Houses intr oduced legislat ion to re-scind the embar go. The key test of congres-sional opinion came on a n a mendment to anappropriations bill prohibiting the responsibleagencies from using funds to carry out or en -

force the embargo. The House rejected theamendment but the Senate approved it byvoice vote. The amendment was deleted in con-ference after the 1980 Presidential election.

The embargo was a major Presidential cam-paign issue, with Ronald Reagan chargingthat the policy had failed. President Cartercontinued t o hold that the Un ited States hadcaused the Soviets a shortage of 10 to 11MMT of grain, and pledged to continue theembar go un til t he Soviets ma de a ‘‘ta ngibleand demonstrable” move to end the occupa-

tion of Afghanistan.

Overseas, su pport for U.S. policy was wan -ing. In November 1980 the Canadian Govern-ment ann ounced tha t it would no longer im-pose limitations on grain sales to the SovietUnion, but pledged, nonetheless, not to replace

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Ch. III– Implementation of the Export Administration Act of 1979 q 29 ———..—..—- ——

of normalized grain trade with the U. S. S. R.,and offered to sell the Soviets an additional3 MMT of wheat an d 3 MMT of corn over th e8 MMT of grain already authorized for the re-mainder of the agreement. The administration

also began to prepare a negotiating positionon a new long-term grain agreement (LTA).Apparently because there was insufficienttim e for a full-scale r enegotiat ion, both coun-tries agreed to extend the existing agreementfor a sixth year, through September 30, 1982.The administration immediately offered to sellth e Soviet Union u p to 23 MMT of gra in du r-ing this year.

The declaration of martial law in Poland ef-fectively postponed negotiations on a newLTA. But although the President left open thepossibility of additional sanctions, on January27, 1982, administration officials told Con-gress that another grain embargo had been re-

jected becau se th e Soviets could obta in gra infrom other sources. This position was reaf-firmed in March when the President statedthat there would be no embargo on agricul-tural commodities “except in extreme situa-tions and as part of a broader embargo. ” ThePresident had previously expressed the opin-ion that equity required an embargo on all ex-ports, not just agricultural commodities. TheAgriculture and Food Act of 1981, which

would have required expensive compensationfor farmers in the event of a selective embargoon agricultural commodities, may have con-tributed to this decision (see below).

But t o the dismay of farm ers and grain tr ad-ers, President Reagan ruled out a new LTAon the grounds that “[t]he Soviets should notbe afforded the additional security of a newlong-term grain agreement as long as repres-sion continues in Poland. ” On the other hand,Reagan also instituted efforts to regain theU.S. share of the Soviet market lost followingthe embargo. On July 30, 1982, the Presidentannounced that he had authorized negotia-tions on a l-year extension of the agreementfor larger sales. He reiterated the administra-tion’s position t ha t gra in sales h ave little im-pact on Soviet military and industrial capabil-ities, and that they absorb hard currency that

the Soviets might otherwise spend on technol-ogy to improve their military and industrialcapabilities. Thus, in a speech to the NationalAssociation of Corn Growers in Augu st 1982,President Reagan stated that the embargo

was still hurting U.S. farmers, that grainprices were still low, and that the UnitedStates had lost a significant share of theSoviet market. Having stated that “we mustrestore confidence in U.S. reliability as a sup-plier, ” he authorized U.S. negotiators to offerthe Soviet Union 23 MMT of grain during thesevent h year of th e agreement. The embargoprotection covering the first 8 MMT would ap-ply to the whole amount, if the Soviets con-tracted for it in November and took deliverywithin 180 days. The U.S.S.R. declined this of-fer. It has apparently decided to wean itself

as much as possible from dependence onAmerican agricultural goods. In another effortto halt or reverse the erosion of the Sovietgrain market and to reaffirm America’s relia-bility as a supplier, on April 22, 1983 Reaganan nounced an end to the ban on n egotiationsfor an LTA.

As will become clear in the next section, theReagan adm inistrat ion h as a dopted differingpolicies on grain and on technology and equip-ment sales to the U. S. S. R.: it declines to em-bargo the former, while attempting to prohibitboth U.S. an d foreign compa nies from engag-ing in the latter. These policies have been con-troversial in the United States and abroad. Do-mestic critics have argued that withholdinggrain is the best leverage the United Stateshas over the Soviet Union. First, Americangrain is difficult and expensive to replace incomparable quantities. Second, some argueth at grain is a stra tegic good since it is vita lto the Soviet economy. The ability to importit allows the Soviet Union to avoid agriculturalreforms and to focus resources instead on in-

dustrial and military development. Europeanshave charged that U.S. policies are hypo-critical and unfair. In their view, the Govern-ment bowed to domestic pressures to lift sanc-tions on the one export in which the UnitedStates dominated the Soviet market; at thesam e t ime, however, U.S. officials cont inu al-

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30 q Technology and East-West Trade An Update —

ly call for allied restraint on sales of the itemsin which Europe and Japan have a greater eco-nomic stake. It could be argued that this seem-ing cont ra diction in U.S. policy ha s given th eEuropeans an additional justification for de-clining to endorse American views on East-West tr ade. This subject is discussed furt herin chapter V.

O I L A N D G A S E Q U I P M E N T

A N D T E C H N O L O G Y

B a c k g r o u n d

The Soviet energy sector has long been con-sidered an appropriate target for U.S. exportcontrols, both because of its importance to theSoviet economy and because the strength of the American oil and gas industries has tradi-

tionally made the United States a preferred-if not sole—supplier of energy equipment andtechnology sought by the U.S.S.R. When in1977 the Central Intelligence Agency pro-

jected that Soviet oil production would peak an d sh ar ply decline by th e mid-1980’s, pro-ponents of trade leverage or linkage identifiednumerous items of American oil equipmentand technology, the denia l of which pur ported-ly would h ave a ser ious im pact on t he Sovietoil industry. These items ranged from blow-out preventers a nd dr ill bits to sophisticatedseismic equipment. (See Technology a n d Soviet Energy Availability for an evaluationof this claim. ) The predicted collapse of Sovietoil production has not of course materialized.Meanwhile, the focus of attention has shiftedfrom oil to gas, and particularly to the WestSiberian gas pipeline project. This pipeline,which is being built almost entirely with WestEur opean credits and equipment , is destinedto furnish significantly increased amounts of Soviet gas to West Germany, France, Italy,and other European nat ions.

From its inception, the idea of a West Si-

berian pipeline aroused the concern of manyMembers of Congress. Their anxieties cen-tered on th e potent ial dangers of West E uro-pean dependence on Soviet gas and the oppor-tunities provided by the pipeline for Soviethard currency earnings. The Reagan admin-

istration has shared these concerns, and hasattempted to dissuade the West Europeanpartners to the pipeline from participating inthe project. These attempts have failed forseveral reasons:

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U.S. efforts t o stop the p ipeline began inearnest well after the West Europeanshad committed themselves to its con-struction.An important motive for the pipeline wasdiversification of energy supplies to lessenEuropean dependence on OPEC oil. U.S.suggestions for alternatives to Soviet gas(e.g., American coal a nd Norwegian ga s)were considered either impractical or un-acceptable in Europe.The prospect of equipment sales was a tleast as important to the West Europeans

as th e gas purchases. The West Germa nsteel industry, for example, has a largesta ke in th e pipeline.The West Europeans have a differentevaluation of the costs, benefits, and risksof engaging in such a cooperative effortwith the U.S.S.R. (see ch. V).

.S. ability to unilaterally affect the con-struction of the pipeline has been limited bythe fact that it is not the sole or even thepreeminent producer of much of the Westernequipment being used on the project. The

United States, for instance, does not producethe large diameter steel pipe which constitutesthe U.S.S.R.’s largest single energy-related im-port requirement. Two kinds of Americanequipment are relevant to the pipeline,however: pipelaying machinery and blades forthe 25-megawatt turbine used in the gas com-pressor stat ions. These items, as well as m anypieces of oil industry equipment, have beendenied the U.S.S.R. in the trade sanctionspolicy described below.

T h e E m b a r g o : P h a s e O n e2

Declaring that the Soviet Union bore a“heavy and direct responsibility” for the im-

‘See Library of Congress, Congressional Resea rch Ser vice,Office of Senior Specialist s, so~’iet Gas Pipe l ine :U.S. Options,Issue I l r i e f # IB82020 , Jan. 20, 1983, (prepared by John P.I i a r d t and Donna 1. . (;old); and U.S. Congress, House Commi t -

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wisdom and utility of attempting to stop ordelay this project. As might be expected, theimposition of the second phase of what cameto be known as “the pipeline embargo” en-gendered a great deal of controversy in Con-

gress and outrage in Europe and in the U.S.business community. In the House of Repre-sentatives, legislation was introduced to repealthe expanded oil and gas sanctions. In theSenate, hearings on the pipeline sanctionswere held in March, July, and August 1982before the Subcommittee on InternationalEconomic Policy of the Commi ttee on ForeignRelations. Witnesses included administrationofficials as well as economists, lawyers, andbusinessmen. The latter group generally de-cried the sanctions, contending that theywould have minimal impact on the U.S.S.R.

(see ch. V) and inflict great damage on U.S.business inter ests. This issue is discussed atlength in chapter IV.

O T H E R C O M M O D I T I E S

A N D E Q U I P M E N T

P h o s p h a t e s

On February 5, 1980, as part of its post-Afghanistan trade policy, the Carter ad-ministration imposed a validated licensing re-quirement on phosphate rock, all concentrates

of phosphoric acid, and all concentrates of phosphatic fertilizer. No export applicationsfor t hese commodities were t o be considered,pending a policy review. Later that month, theSecretary of Commerce announced that thereview had been completed and that the em-bargo would be continued indefinitely.

In 1979, the United States sold to the SovietUnion 543,000 tons of phosphates valued at$93.6 million. Most of these exports consistedof superphosphoric acid (SPA) sold by the Oc-cidental Petroleum Co. The phosphate sales

constituted one part of a complex 20-yearagreement with the Soviet Union, concludedin 1973 with the approval of the Nixon ad-ministration. A section of this agreement pro-vided that Occidental exchange varying quan-tit ies of SPA, a high-quality liquid phospha te

concentrate used in the production of fer-tilizers, for varying quantities of other fer-tilizer chemicals, anh ydrous amm onia, u rea,an d potas h. In 1980, Occident al’s exports of SPA were to rise to th e cont ract m aximum-1

MMT valued at $400 million.The rationale for the phosphate embargo

was that it was inconsistent for the UnitedStates to sell phosphate–used in the fertilizernecessary to Soviet grain production—and atthe same time embargo grain. Carter ad-ministration officials initially forecast that,although the embargo would have little impacton the Soviet Union’s 1980 grain crop, it mightredu ce t he 1981 crop by 2 to 2.5 MMT. Sincethe United States accounted for 90 percent of world pr oduction of SPA, th ey ha d litt le con-cern about Soviet ability to find alternativesuppliers. Both the Departments of State andCommerce, however, believed that the Sovietsmight be able to substitute solid phosphateand phosphatic fertilizer from Morocco andMexico.

4

In fact, the phosphate embargo probably didcome too late to have much impact in 1980.Nor is it likely that it seriously affected the1981 grain crop. At the end of 1980, it wasreported that the Soviet Union had replacedabout 5 percent of the embargoed SPA withpurchases from a Belgian company, and

another 50 percent with raw phosphate rock from Mexico and Morocco. In addition, Oc-cidental is believed to have shipped 40,000tons of SPA in 1980 before t he em bar go wentinto effect. President Reagan lif ted thephosphate embargo together with the partialgrain embargo.

The Soviet Union probably was inconven-ienced by the U.S. action—phosphate rock re-quires processing a nd is highly corr osive. Onthe other han d, it appears t hat the ma jor ef-fect of the embargo fell on the United States

and the world phosphate market. Accordingto a Carter administration report, the diver-sion of a large quantity of phosphates from theSoviet Union caused price declines, which pro-

‘Assessm ent of A fghanistan San ctions, op. cit., pp. 55-56.

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34 q Technology and East-West Trade An Update

mored personnel carriers or tanks. The UnitedStates also received information that Kamaengines have been used in vehicles producedat ZIL, another Soviet factory. Nevertheless,the Secretary of Commerce held that no viola-

tions had occurred, since the licenses had notcontained any end-use stipulations. The onlyrestrictions on the computer license applied tothe capability of the equipment.

The Carter administr ation established for-eign policy contr ols on pa rt s a nd componen tsfor truck engine assembly lines intended forKama as part of its post-Afghanistan sanc-tions. Their chief effect was to block Ingersoll-Rand from exporting a truck engine assemblyline. There was evidence that Kama truckswere appearing in Afghanistan, and the deci-sion was justified on t he grounds t ha t it was

inconsistent with U.S. policy for an Americancompany to supply a factory that producedvehicles for the invasion. Moreover, U.S.equipment could be furth er u sed to increaseproduction while Soviet forces remained in Af-ghanist an . These cont rols were extended be-fore President Reagan took office. The Reaganadministration broadened them to cover addi-tional equipment and technical data and ex-ports destined for ZIL.

The degree of impact of these controls oneither th e Soviet Union or th e United Sta tes

is debatable. In a report to Congress, the Rea-gan administration concluded that the denialof the Ingersoll-Rand equipment “ . . . hasgreatly delayed Soviet expansion of engineproduction, and h as pr obably caused t hem t oforego planned production of a substantialnu mber of tru cks;” moreover, th e expandedcontr ols on export s t o Kam a a nd ZIL “shoulddelay modificat ion, u pdat ing, or expa nsion of these plants while alternate sources are devel-o p e d .

6The report also noted the possibility

of diversion from a pproved consignees in t heSoviet Union (not all Soviet automotive fac-tories a re covered by t he contr ols). After con-

— —

“{Report to the Congress Extending a nd E xpanding F oreignl)olicy F;xport Controls, ” reprinted in U .S. Department of Com-merce, International T r a d t ~ Administration, Export Admin i s t ra -tion Annua l Repor t F}r 1982, J$’ash ington , 1).(’., Februar~ ’ 1983,p, 152.

suiting with In gersoll-Rand, th e administr a-tion concluded t ha t th e loss of th e $8 millioncontract had little impact on the company, itsemployees, or the community.

A somewhat different assessment was later

presented to the Senate Foreign RelationsCommittee by Ingersoll-Rand officials.’ Theytestified that the Soviet Union had contractedwith Comau, a division of Fiat, for replacementequipment. Ingersoll did not find an alternateuse for the order, but it did receive partial com-pensation under a political risk insurance pol-icy. However, insurance companies were un-willing to continue Ingersoll’s political risk in-surance for proposed sales of automotiveequipment to the Soviet Union and East, Ger-many, Without the insurance or assurancesfrom the Government that the contracts

would not be abrogated, Ingersoll decided notto pursue the deals, which were valued at $60million. Several hundred workers and contrac-tors were laid off in consequence.

S a n c t i o n s R e l a t e d t o

t h e O l y m p i c s

On May 28, 1980, the Carter administr ationimposed foreign policy controls on all exportsexcept medicine and medical supplies intendedfor use or sa le dur ing th e 1980 Moscow Sum -mer Olympics. The control also applied to

“payments or transactions which are in anyway related t o arra ngements involving or r e-quiring such exports, where such payments ortransactions could provide financial supportfor such games. ” The prohibition on paymentswas aimed at NBC, winner of the network bid-ding war to televise the Olympics. In a d irec-tive to the Secretary of Commerce, the Presi-dent explained that th e purpose was to carr yout his decision against “any United Statesparticipation in or aid to” the Games.” The

“’Sta tem ent of T. A. Dukes , I+; xecutive Vice President , t h[~

Ingersoll-Rand Co., accompanied by Robert J. Secombe, VicePresident, Automated Production Systems Division, WoodcliffI .ake , N.J., ” in U.S. Congress, Senate Commit tee on ForeignRelations, Subcommittee on International Economic Poliq,

Economic R elations W ith the S oviet Un ion, hearings, 97thCong, , 2d sess . , J u l ~F 30 , A u g . 12 an{i 13 , 1982 (}$’ashington,r). c.: U.S. ( jo \ re rnm en t Printing office, 19821, pp. 204-207.‘ileprinted in 45 F R 21613 ,

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Ch. III --- Implementation of the Export Administration Act of 1979 q 35

cont rol followed a r equest , by DOC to the 20or 30 firms involved to voluntarily refrain fromexporting supplies for the Games. Severalfirms had announced that they would upholdthe President request, but many urged the

administra tion t o impose a man datory ban be-cause of their concern that voluntary compli-an ce would expose th em t o Soviet br each-of-contract suits.

These export cont rols, which lapsed in Ja n-uary 1983, appear to have had a minimal eco-nomic impact on either the Soviet Union or theUnited States as a whole. According to theReagan administration report to Congress,licenses for goods valued at $35 million wererevoked or denied, and payments of $27 mil-lion for special rights and privileges were

stopped.” Although press reports indicate thatth e Soviet Un ion wa s able to repla ce some of

‘ I{,,fjt ,rl t {J 1 h( ( ‘( ,n~r(,~+ l’: xt f ,n( l ill~ ,‘ (Jp {’It , p 1 ‘~.-)

the embargoed U.S. goods, this control causedinconvenience and somewhat reduced hardcurr ency receipts. U.S. firms also sufferedsome short-term and, in the case of companiesthat sought to break into the Soviet market

by being Olmpic suppliers, possible long-termlosses.

10

In sum, while the foreign policy controls ongrain and oil and gas technology are consid-ered to have had the greatest impact on boththe Un ited States a nd t he Soviet U nion (theseare discussed in ch. IV), the controls on phos-phates, equipment for Kama, and Olympic-re-lated goods and payments probably reinforcedthe message of the sanctions policy. At thesame time, they may also have contributed tothe perception of the United States as an un-

reliable supplier.

N AT I O N A L S E C U R I T Y C O N T R O L S

As in the case of foreign policy controls, thepolicies of the Carter and Reagan administra-tions on national security controls reflect achanged climate of opinion on the desirabilityof trade with the U.S.S.R. Since the passage

of the 1979 EAA, licensing of exports to theSoviet Union was temporarily’ suspendedtwice and more stringent licensing criteriahave been applied. Both administrations havedifferentiat ed between t he Soviet U nion andsome East European nations.

S O V I E T U N I O N

All out stan ding validated licenses an d t heprocessing of applications for new licenses forexport s t o the Soviet Union were sus pendedin early January 1980 after the invasion of Afghanistan and U.S. licensing policy was re-viewed. In April 1980 DOC began reviewingsuspended validated licenses, and began toprocess new applications using more restric-

tive policy guidelines. 11The new guidelines in-

cluded the following:

A “no exceptions” policy, under which theUnited St ates would deny most applica-

tions to export goods subject to CoComcont rols. Thus, th e United St at es wouldno longer request exceptions in CoCom.There were some ‘‘exceptions to the ex-ceptions’ for humanitarian exports (itemsessential to public health and safety), andfor exports enhancing Western security(servicing for safeguards and items pro-tecting Western access to vital commodi-ties). At U.S. request, the other CoCommembers also adopted a ‘‘no-exceptions"policy.Adoption of str icter techn ical criter ia for

computer exports.

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Applications involving process controltechnology in militarily relevant indus-tries, technology for producing oil and gasequipment, and technical data related toitems subject to multilateral controls

would be subject to special scrutiny.A presumption of denial would exist forapplications for proposed exports of tech-nology for ma nu factu ring oil and ga s ex-ploration and production equipment. Apresumption of approval would exist forend-use pr oducts.

In addition, DOD canceled a delegation of authority to DOC, under which it exempteditself from reviewing applications for low-tech-nology exports destined for the U.S.S.R. Alllicense applications involving high-technologysales to th e Soviet U nion were den ied duringthe 18 months ending September 30, 1981.

12

Of the more than 1,000 validated licensesreturned to DOC after the suspension, over500 were canceled before being reviewed be-cause they had expired or because the exporthad been shipped. During the review, 281 werereinstated, 120 revoked, 54 more canceled, andprocessing of 21 was discontinued.

13

The Reagan administr ation also condu cteda lengthy review of licensing policy for theSoviet Union, concluding that a significanttightening of export licensing was required.

It has retained the no-exceptions policy, andfollowing the Polish declaration of martial law,suspended all licensing for exports to the Sovi-et Union for nearly 11 months. Licensing wasresumed only after November 13, 1982. (Seethe Foreign Policy section above.) These ac-tions all reflect the administration’s view thatsecurity concerns must take precedence overcommercial inter ests in cases of export s withpossible military relevance.

E A S T E R N E U R O P E

The Carter administration never applied the“no-exceptions’ policy to Eastern Europe, nor

IW.S. Gener al Account ing Office, Export Gkmtrol RegulationGxdd B e R@duced Without Affecting National Security, Wash-ington, D. C., May 26, 1982, p. 8. (Her eafter , GAO Report . )‘3Export Administration Annual Report FY 1982, op. cit.,

p. 28 .

did it change its policy of treating these coun-tries individually rather than as members of the Soviet bloc. The rationale here was thatthe other Warsaw Pact countries did not par-ticipate in the Soviet invasion of Afghanistan.

This policy, known as the “independent coun-try” or “differentiated” policy, allowed theUnited St at es to apply more liberal licensingcriteria to countries that maintain some dis-tance from Soviet foreign policy (Romania

14)

or have more liberal domestic policies than theSoviet Union. The Carter administration liber-alized licensing policy towards Hu ngar y on t helatter grounds. The change, which went intoeffect in June 1980, reflected the entry intoforce of the U.S.-Hungarian trade agreement,Hungary’s relatively liberal internal and emi-gration policies, and its implementation of the

Helsinki Final Act.15

At the same time, applications for licensesto East European countries have been morecar efully scrut inized for possible diversion t othe Soviet Union. Exporters have chargedthat this policy has significantly slowed li-cense processing. Be that as it may, the valueof app roved high-technology exports to Ea st-ern Europe increased from $127 million in1979 to $340 million in 1980.

16

In September 1982 a new interagency groupon policy towards Eastern Europe affirmed

the practice of differentiating U.S. relationswith the countries of Eastern Europe. How-ever, one sphere in which the Reagan adminis-tr at ion’s policy differs from t ha t of its prede-cessor is on th e quest ion of techn ology tr an s-fers to non-Soviet Warsaw Pact nations. Thecurrent program involves tightening, in con-sultation with our allies, export controls acrossth e board in order to guard against diversionto the Soviet Union.

17The following factors are

14Romatia’s recent imposition of an education tax on prospec-

tive emigrees ma y possibly lead to the suspension of its MFN

sta tus, It is also possible tha t license applications for exportsto Romania will now be reviewed more st rictly.“45 FR 37183-37184.“GAO Report, op. cit., p. 33.“Reprinted in U.S. Congress, House Committ ee on Foreign

Affairs, Subcommittee on Eu rope and t he Middle East, Devel-opmen t s in Eu rope August 1982, hearings, 97th Cong., 2d sess . ,Aug. 10, 1982 (Washington, D. C.: U.S. Government PrintingOffice, 1982), p. 23.

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Ch. Ill—implementation of the Export Administration Act of 1979 q 3 7 —- — . —

now considered in licensing exports to EasternEurope:

q

q

m

For all items contr olled for secur ity pur -poses, the risk of diversion to military usein East European countries.

For items which would not be approvedfor export to the U. S. S. R., the risk of di-version to that country.For items of marginal security concern,efforts by certain

-East European coun-

tries to distance themselves from Sovietforeign or domest ic policies, par ticular lyRomania and Hungary.]’

The administration distinguishes betweentechnology and products, assuming that theform er is more likely to be ma de available t othe Soviet Union by East European importers.

In order to prevent possible diversion of em-bargoed items to the U. S. S. R., in June 1982th e Reagan adm inistrat ion adopted the prac-tice of denying all applications involvinghigh-technology exports to Poland and morecarefully checking applications involving lowtechnology. This practice was rescinded inNovember 1982.

19In the meantime, no vali-

dated licenses were issued for Poland. More-over, there is some evidence that the entire

1“Gerhard Many, “Technology Transfer Controls, ” Depm- t -

me n t of Stite Bulletin, vol. 82, No. 2068 (November 1982), p. 53 .‘94’7 FR 51858-61.

policy of differentiation has recently existedmore in theory than in practice, and that infact all of Eastern Europe is now being treated—particularly by the Department of Defense—much the same as the U.S.S.R. for export con-

tr ol pur poses.

T h e M i l i t a r i l y C r i t i c a l

T e c h n o l o g y L i s t ( M C T L )2 0

The first version of the MCTL, compiled inDOD, was published in classified form in Jan-uary 1980. DOD has since revised the list; anda second version was published in November1981. Again, except for the Contents, the800-page MCTL was classified. The a dmin is-tra tion ha s been using th e MCTL and the in-formation obtained in preparing it in its

CoCom proposals. Defense is also using theMCTL as a guide in reviewing license applica-tions, although Commerce only employs asmall part of it in its own reviews. The MCTLwill have to be further refined before being in-corporated into the Commodity Control List,and CoCom approval will have to be obtainedfor multilateral use. Technical Advisory Com-mittees, composed of technical representativesof business (predominately defense suppliers)and the Government, are presently workingon th ese revisions. Th e MCTL is discussed fur -ther in chapter VI.

‘“S W also Technology and East-Wrest Trade, op . cit., ch . V.

A D M I N I S T R A T I V E I S S U E S

L I C E N S I N G

The export licensing system has long beencriticized as being t oo cumbers ome, too slow,and too opaque, and the Export Administra-tion Regulations have been described as com-plex and difficult to interpret. Licensing deci-

sions have also been the subject of controversy.For some, too many applications are denied;for others, too few. Those of the former view-point have often complained that the Govern-ment denies licenses for goods and technology

freely available abroad, to the detriment of ex-porters and the U.S. balance of payments.Chapter II has listed the measures in the 1979EAA designed to address these concerns.Events subsequent to 1979 have shown mixedresults in implementing m any of these provi-sions.

There is general agreement, for instance,that DOC has made little or no progress in es-tablishing a capacity to monitor foreign avail-ability, a perception supported by the fact that

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40 q Technology and East-West Trade: An Update ——. .—

inspection efforts. Ot her sta ges will focus oninvestigations and the active involvement of Cust oms’ agent s sta tioned oversea s in viola-tion cases. Table 3 presents the first yearresults of the program. It is not clear, however,

how many of the seizures involved genuine at-tempts at diversion, and how many simplyresulted from errors in paperwork or documen-tation.

Exporters and some Members of Congressnow complain that the Exodus program is de-laying legal shipments and causing customerproblems. The Cust oms Ser vice’s r eport onOperation Exodus acknowledges these com-plaints, but cont ends t ha t delays “should di-minish substa nt ially in t he near futu re” withthe improved training of agents and liaisonwith DOC’s licensing staff. Operation Exodushas also been criticized on the grounds thatcargo inspection has been overemphasized. Ac-cording to GAO, the utility of cargo inspec-tion is limited by the following factors:

the growing volume of exports,the large number of exit points,the difficulty of inspecting more than afraction of U.S. exports,the problem of determining g whether a giv-en shipment requires a license,the trend towards containerization, andthe fact that some exports do not become

illegal unt il they are-

reexported.27

From his experience as a prosecutor of casesinvolving export control violations, the Depu-ty Assistant Secretary of Commerce for Ex-port Enforcement, Theodore Wai Wu, con-cluded that there is a role for cargo inspection,but that investigatory efforts “concentrated—

“GAO Report, pp. 24-25. GAO is preparing a report on Opera-tion Exodus, which will be completed later this year.

Table 3.—Results of Operation Exodus DuringFiscal Year 1982

Number of detentions . . . . . . . . . . . . . . . . . . . 2,481Number of shipments seized . . . . . . . . . . . . 765Value of shipments seized . . . . . . . . . . . . . . . $55,665,482Percentage of detentions resulting

in seizures . . . . . . . . . . . . . . . . . . . . . . . 30.8Average detention period (in days). ., . . . . . . 3-5

SOURCE Operafion Exodus—FY 1982 Report, p 6

as far upstream as possible produce the bestpossible results.”

28Similarly, although the

ratio of detentions to seizures is high, and hastherefore been criticized, Customs asserts thatth e increase from t he 196 seizur es valued at

$9 million in calendar year 1981 to 765 seizuresvalued at $56 million in 1982 is a significantresult of Exodus.

Other Government agencies are also in-volved in en forcement . Alth ough th e FBI ha sno jurisdiction in cases involving unclassifiedtechnology subject to export controls, it caninvestigate enforcement cases if foreign intel-ligence agencies are involved; if unclassifiedtechnology valued at more than $5,000 isstolen and transported across State lines; orif the technology is classified for nationalsecurity reasons. Related FBI activities in-clude the Development of CounterintelligenceAwareness program for defense contractors.

The in telligence agencies provide inform a-tion to DOC and Customs, and if the case hasinternational a spects, th e Stat e Departmentmay become involved.

29State maintains a net-

work of Economic Defense Officers (EDO),who perform the following functions on a full-er part-time basis:

c prelicensing and postshipment checks,. report ing on potent ial diversions,

. service of legal papers, as permitted bylocal la w,

. liaison with local enforcement authorities,and

. informing U.S. and local businessmen of U.S. export controls.

EDO’s a nd Foreign Commercial Service per-sonnel appear t o be th e major implement orsof DOC investigations overseas. When the

*“’Prepared Statement of Theodore Wai Wu, Deputy Assist-ant Secretary for Export Enforcement, International Trade Ad-ministra tion, Departmen t of Commerce, before the Su bcommit-

tee on International Economic Policy and Trade of the ForeignAffairs Committee and Subcommittee on Trade of the Waysand Means Committee, U.S. House of Representatives, Wash-ington, D. C., Mar . 1, 1983, ” rn imeo, pp. 3-4.““Prepared Statement of Harry Kopp, Deputy Assistant Sec-

retar y of Stat e for E conomic and Bu siness Affairs, Departmen tof State, in Export Administration Amendments Act of 1981,

op. cit., pp. 34-37.

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Consequently, PSI staff recommended givingCustoms temporary responsibility for enforcement and then creating an Office of StrategicTrade, as proposed by Senator Garn. (See ch.VII.)

Even before these reports, DOC itself hadbeen concerned about th e effectiveness of itsenforcement activities, and it has now in-tr oduced or plan ned several measur es to im-prove them. They included an organizationalchange in which the Compliance Division wasupgr aded to become t he Office of Export En -forcement , and t he appointment of a Deput yAssistan t Secreta ry for Export En forcement.Perhaps more importantly, DOC has now de-voted more resources to enforcement by shift-ing fun ds from oth er offices within th e Int er-national Trade Administration. More investi-gative equipment has been purchased andtravel funds increased. Two field offices inCalifornia were opened. There are plans to im-prove intelligence operations and to automatecertain functions. DOC has also taken somesteps to improve cooperation with the Cus-toms Service. For instance, the Secretary of Commerce has issued blanket authority forrelease of proprietary data. In addition, thetwo agencies are n egotiat ing a Memoran dumof Understanding, setting out the respon-sibilities of each. In sum, in the words of Com-

mer ce’s In spector Gener al,. . . the Department clearly has taken stepssince last spring to give its export enforce-ment mission additional resources, greatercohesion, and more professional management.

Many of the problems we identified in our in-spection have been corrected, and others seemwell on the way to correction. Does this meanthat everything necessary has been done toevolve an effective national strategy to com-bat the illicit leakage of technology? Of course

not. The operative word is “evolve, “32

DOC officials have assured Congress thatDOC does ha ve an enforcement str at egy andhas made considerable progress. They reporttha t OEE was th e sole or pr imary investigatoror initial referee of 16 of the 23 cases involv-ing possible criminal violations referred to theJ ust ice Departm ent since J uly 1, 1982. Table4 presen ts st at istics compar ing Comm erce’san d Cust oms’ car go inspection program s.

O t h e r P r o b l e m s

It ha s been charged tha t action is tak en ontoo few detected violations, and that penaltiesare too lenient, often the imposition of ad-ministrative rather than criminal sanctions.A variety of explanations for this situationhave been advanced. First, a number of viola-tions, such as exporting under expired li-censes, are minor. Second, to be prosecuted ascriminal the violation must have been a know-ing or willful act.

33Third, criminal prosecution

——

‘*’’Statement by Sherman M. Funk, Inspector General, U.S.Department of Commerce, Before the Senate Committee onBanking, Housing and Urban Affairs, Feb. 3, 1983, ” mimeo,p. 8.3“’Prepared Statement of William V. Skidmore, Director, Of-

fice of Export Administration, Department of Commerce, ” inExpor t Administration Amendments Act of 1981, op. cit., p. 14.

Table 4.—Comparison of OEE and Customs Cargo Seizures

Violationsresulting in Percentage of detentions

Time period Detentions seizures resulting in seizures

FY 81 —Commerce. . . . . . . . . . . . . . . . . 628 128 25.5 [sic]FY 82—Commerce. . . . . . . . . . . . . . . . . 584 242 42.5 [sic]

FY 82—Customs OPEXODUS ... , . . . 2,481 765 30.8’FY 83—Commerce

b. . . . . . . . . . . . . . . . 167 81 48.5

FY 83—CustomsbOPEXODUS . . . . . . 809’ 286

C35.3

aAccording to DOC, these figures include 82 seizures pursuant to the Arms Export Control Act so the Percentage connected

with the Export Administration Act is 275.bThrough Jan. 11, 1983.cReported to OEE by Customs

SOURCE” “Statement of Lionel H Olmer, Under Secretary for International Trade, U S. Department of Commerce, Before theSenate Banking Committee, Feb. 3, 1983, ” mimeo, Attachment B

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Ch. Ill—implementation of the Export Administration Act of 1979 q 4 3 — — — ———

of foreign na tionals is extr emely difficult un -less th ey are arrested in th e United States.Few coun tr ies view export contr ol violat ionsas seriously as does the United States, andmany countries are hesitant to permit extra-

dition. Fourth, GAO has found that due to thelength of investigations an d a growing backlogof cases, DOC is closing a high percentage of cases with warning letters instead of stricterpenalties. One of the reasons for this backlogis the length of time needed to conduct a majorinvestigation overseas.

Overseas investigations of potential exportcontrol violations a re car ried out by both Com-merce and Customs. GAO has criticized DOCfor conducting their activities through em-bassy officials in st ead of relying on Cu stoms.It argues that these officials have little ex-perience in such cases and accord them lowpriority, whereas the Customs Service hasagents stationed abroad and mutual assist-ance agreements with parallel agencies andpolice in other countries. These issues arediscussed further in chapter VII.

L E G I S L A T I V E D E V E L O P M E N T S

Export administration, and particularly thePresident’s use of foreign policy controls, was

a controversial issue in the 96th and 97th Con-gresses. Many in Congress supported bothPr esident Cart er’s and Pr esident Reagan’s useof embargoes and sanctions. Others were con-cerned about the impact of the grain embargoon the U.S. farm sector and on the U.S. reputa-tion as a reliable supplier. These legislatorssought embargo protection, and their concernsled to the adoption of provisions enforcing ex-isting agricultur al export contr acts an d r equir-ing compensation for farmers in the event of a selective embargo on agricultural com-modities. Several highly publicized violationsof U.S. export controls raised the level of con-gressional attention to enforcement and com-pliance. These issues were the subjects of thelegislation described below.

E X P O R T A D M I N I S T R A T I O NAMENDMENTS ACT OF 1981

In addition to extending authority for ex-port controls through September 30, 1983, andauthorizing appropriations for export ad-ministration in fiscal years 1982 and 1983, the

Export Administration Amendments Act of 1981 (Public Law 97-145) was intended to im-prove enforcement and compliance. Reactingin large measure to testimony by GAO thatthe agencies responsible for enforcement—DOC, FBI, an d Cust oms—were not cooperat -

ing in investigating suspected violations of the1979 EAA, the drafters included a provision

requ iring responsible agencies to sha re infor-mation relevant to enforcement in a mannerconsistent with the “protection of intelligence,counterintelligence, and law enforcementsources, meth ods, and activities. ’ ’

34This pro-

vision does not a pply to Census Bureau dataor to certain information from tax returns. Theact increased maximum penalties for viola-tions, distinguishing between individuals andentities such as corporations, which are liableto higher fines. Maximum criminal penaltieswere increased from $100,000 to $250,000 forindividuals and $1,000,000 for businesses.Maximum civil penalt ies for violations of na -tional security controls, but not of other con-trols, jumped from $10,000 to $100,000 perviolation. (Many cases involve multiple vio-lations.)

The 1981 act also stipulates that informa-tion on export controls be made available tothe Chairmen and Ranking Minority Membersof the commi tt ees of jurisdiction an d, subjectto certain restrictions, to GAO. The impetusfor this provision was the delay GAO experi-enced in obta ining in form at ion from DOC for

a congressionally mandated study .35

Reflecting widespread concern that theSoviet Union might invade Poland to crush

“Senate Report No. 97-91, p. 2.“Ibid.

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44 q Technology and East-West Trade: An Update ———

Solidarity, the act includes a provision thatno legislat ion should be const ru ed as pro-hibiting the imposition of a total embargo inthe event of “military action” against Polandby the Soviet Union or the Warsaw Pact. Thelegislation does prohibit the President from

imposing foreign policy controls on agricul-tural commodities that would cause “meas-urable malnutrition, ” unless he determinesthat controls are necessary to protect U.S. na-tional security or that the food would not bedistributed to those most in need.

A G R I C U L T U R E A N D

F O O D A C T O F 1 9 8 1

The Agriculture and Food Act of 1981 (Pub-lic Law 97-98) reflected congressional concern

on the issue of agricultural embargoes which,many felt, had not been adequately addressedin the Export Administration AmendmentsAct. It d id not directly limit th e Pr esident ’sability to embargo agricultural commodities,but established compensation for farmers forlosses due to selective controls on the assump-tion that the increased budgetary costs wouldtend to discourage the President from selec-tively barring agricultural exports in cases notserious enough to warrant embargoing a l lexports.

The act stipulates that if a selective em-bargo is imposed on agricultural commoditiesfor reasons of national security or foreignpolicy, the Government must:

1.2.

3.

set the loan rate at 100 percent of parity,make direct payments to producers equalto the difference between parity and post-embargo prices, orintroduce an equivalent combination of loans and cash payments. To become ef-

fective, the embargoed country must ac-count for more than 3 percent of U.S. ex-ports of the affected commodity.

F U T U R E S T R A D I N G

A C T O F 1 9 8 2

Congressional concern th at th e san ctity of existing agricultural export contracts beguaranteed in the event of another embargowas reflected in an amendment to the FuturesTrading Act of 1982 (Public Law 97-444),passed in October 1982. Known as the con-tract sanctity provision, it prohibits restric-tions on export contracts concluded before theimposition of an embargo, if they call fordelivery within 270 days following the em-bargo announcement. The provision is not ap-plicable when the United States is at war orduring a nat ional emergency declared by th ePresident. There was speculation that Presi-dent Reagan would veto the bill because thecontract sanctity provision would reduce hisflexibility to conduct foreign policy. The StateDepartment was reported to have recom-

mended a veto. Nonetheless, the President an-nounced at a meeting of the Farm Bureau Fed-eration on January 11, 1983, that he hadsigned the bill.

D E V E L O P M E N T S I N C O C O M

The Reagan administration’s review of U.S.East-West trade policy placed special em-phasis on CoCom. Its concern reflected therecognition that cooperation with other majorWestern countries was essential to stemmingthe flow of technology to the Soviet Union,and the belief that CoCom was not as effec-tive a control mechanism as it could andshould be. The administration’s assessment of CoCom was capsulized in the testimony of a

high-ranking Commerce official, who told Con-gress, “Quite frankly, CoCom needs rejuvenat-ing. Even t he st rat egic criteria on which th einstitutional structure rests may require ex-a m i n a t i o n .

36

“U.S. Congress, Senate Committee on F oreign Relations, Sub-committee on International Economic Policy, East-West

Econom ic Re la t ions , hearings, 97th Cong. , 1st se s s . , Sept. 16,1981 (Washington, D. C.: U.S. Government Printing Office,1981), p. 9.

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It was reported that the other CoCom mem-bers agreed to “redefine” CoCom’s guidelines,to include modem technologies on the list, andto refrain from requesting exceptions for ex-ports to th e Soviet bloc un til t he 1982/83 list

review had been completed. 41

In a communique issued at the end of the1982 Versailles summit, participants pledgedto continue work on improving the CoComcont rol system an d mem bers’ enforcement ar -rangements.

42 This will be a two-pronged ef-fort . First, as part of the program of studiesannounced in November 1982, and discussedin chapter V, the United States, the majorWest European countries, and Japan willstudy ways to speed up and broaden CoCom’swork and CoCom will study whether to include

oil and gas equipment on the List even thoughit does not have direct military applications.

The second effort is the routine List review,which occurs approximately every three years.The first round of the 1982/83 List review ranfor 4 m onths , concluding in F ebrua ry 1983; th esecond round may have begun as this docu-ment goes to press. Under Secretary Buckley’stestimony in May 1982 indicated that theUnited States was working on proposals to‘‘expand CoCom control Lists into previous-

‘]U.S. Allies Agree to Redefine Rules on Sales to Soviets, ”op. cit., p. 31 an d Lewis, “Soviet Pipeline Called Vulnerable. ”The former followed up on an agreement to add specific refer-ences to technology as well as t o products t o the CoCorn s tra-tegic criteria and to include controls on technology in the CocomList itself rat her th an a s an “administrat ive principle” appendedto the List, which was proposed by the Car ter a dministr ationduring the 1978/79 List review.

“For th e text of the Commun ique, see Department of StateBu l l e t i n , vol. 82, No. 2064 (J uly 1982), pp. 7-9.

ly uncovered priority industries, ”43

includingthe following: gas turbine engines, large float-ing dry docks, certain metallurgical processes,electr onic grad e silicon, print ed circuit boar dtechnology, space launch vehicles and space-

craft, robotics, ceramic materials for engines,certain advanced composites, communicationsswitching equipment, computer hardware, andcomputer software technology and know-how.This is an ambitious agenda and particular re-sistance is expected in the case of gas turbineengines and computer software technology.The administration also plans proposals onharmonization and enforcement.

In nonspecific terms, U.S. officials havenoted progress in obtaining approval of U.S.positions in CoCom. Their lack of specificity

ma y reflect th eir observan ce of confident iali-ty. Many observers, however, su spect th at italso reflects persistent differences within theorganization. Members of the a dministr ationconcede that the process of reaching agree-ment will be lengthy and difficult, but they citeU.S. successes in obtaining greater involve-ment of allied military and defense officials inCoCom pr oceedings an d in usin g inform at ionobtained from the Defense Intelligence Agen-cy and other int elligence sour ces t o convinceCoCom to add items to its List or to denylicense applications. In addition to its impor-

tance for East-West trade, the CoCom List re-view is critical to West-West trade since theReagan administration has linked progress inCoCom to changes in controls on U.S. tradewith CoCom countries.

.—————‘B ~ m sfe r of Un j&d States Technology, OP . cit., P P . 158-59.

S U M M A R Y A N D C O N C L U S I O N S

Since 1979 both the Carter and Reagan ad- were the grain embargo and the expanded con-ministrations have significantly tightened na- trols on oil and gas equipment. The former ledtional security controls on exports to the to passage of legislation to prevent agricul-Soviet Un ion a nd employed a n um ber of con- tu ra l commodities from being s ingled out fortr oversia l foreign policy cont rols in response use as a foreign policy tool and to guaranteeto Soviet actions. Particularly controversial th e san ctity of agricultu ral export cont racts.

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C H AP T E R I V

T h e I m p a c t o f E x p o r t

Ad m i n i s t r a t i o n P o l i c y o n

t h e U .S . E c o n o m y

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C o n t e n t s

Page

U. S .-SOVIET TRADE, 1979-82 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

IMPACT OF FOREIGN POLICY CONTROLS ON THEU.S. ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Grain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54Oil and Gas Equipment and Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57


Tables

Table No. Page

5. U.S. Trade With the U.S.S.R. and Eastern Europe, 1978-82 . . . . . . . . . 516. U.S. Exports to the U.S.S.R., 1978-82 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527. U.S. Share of Soviet Imports of Wheat and Coarse Grains . . . . . . . . . . 56

Figure

FigureNo. Page

l . OECD Countr ies’ Trade With Soviet Un ion an d E ast Eu ropeanCMEA and U.S. Share.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

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C H A P T E R I V

T h e I m p a c t o f E x p o r t

Ad m i n i s t r a t i o n P o l i c y o n

t h e U .S . E c o n o m y

The volume of U.S. trade with the SovietUnion is small, Its role in the U.S. economyis not well understood, and assessments of itsimpact an d importan ce ha ve been cont rover-sial. This impact cannot be measured solelythrough balance-of-trade statistics. Importantcomponents of the foreign trade balance sheetare indirect and unquantifiable, and weighing

th eir importan ce relative to th e political an d

national security consequences of trade is ahighly subjective matter. This chapter at-tempts no such cost/benefit analyses. Rather,it identifies the direct and indirect effects onthe U.S. economy of trade with the U.S.S.R.and discusses the economic consequences of the implementation of U.S. export control pol-icies under the 1979 Export Administration

Act.

U . S . - S O V I E T T R A D E , 1 9 7 9 - 8 2

Trade with the Soviet Union has never con-stitu ted a major sha re of U.S. foreign tr ade.As table 5 indicates, the absolute level of thistra de and its percentage of total U.S. tra de areboth small. Even including all of EasternEu rope, since 1978 t he Soviet bloc has neveraccounted for more than $5.7 billion or 3.2 per-cent of U.S. exports and $1.9 billion or 0.9 per-cent of U.S. imports. Most of this trade has

been conducted with the U. S. S. R., and thevast majority of U.S. exports here have con-sisted of agricult ur al comm odities. This is il-lustrated in t able 6.

These trade levels are the result of both U.S.and Soviet policies. As Technology and East-West Trade discusses in detail, trade with theindustrialized West has always played a rela-

Table 5 .—U.S. Trade With the U.S.S.R. and Eastern Europe, 1978-82 (millions of U.S. dollars)

—————————.

1978 - -- ‘1979 1980 1981 1982

Exports Imports Exports Imports Exports Imports Exports Imports Exports Imports

U.S.S.R 2,249- 540 3,604 “ 873 1,510 453 2,339 347 2,589 228Bulgaria . 48 19 56 35 161 25 258 34 106 28C z e c h o s l o v a k i a 105 58 281 51 185 66 82 67 84 62E a s t G e r m a n y 170 35 346 36 477 44 296 48 223 54H u n g a r y . , 98 68 78 112 79 107 77 129 68 133Poland ., . . . ., ., 677 439 786 426 710 417 681 365 293 212R o m a n i a 317 347 500 329 720 312 504 560 223 348

Total . . . . 3,665 - 1,507 5,651 1,863 3,843 1,424 4,237 1,550 3,585 1065

U.S. World Trade . . . 141,228 176,052 178,798 210,286 216,762 245,262 228,961 260,982 207,158 243,952Trade with Soviet bloc as

percent of total tradeExports (o/o ). . . . . 2,6 3.2 1.8 1.9 1.7I m p o r t s (0/0) 0.9 0.9 0.6 0.6 0.4

NOTE Columns may not add to totals due to rounding Domest ic export s on an f a s basis and general imports on a customs value basis

SOURCE U S Department of Commerce International Trade Administration and Bureau of the Census

51

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52 q Technology and East-West Trade: An Update — —

Table 6.– U.S. Exports to the U. S. S. R., 1978.82(millions of U.S. dollars)

PercentYear Total Agricultural agricultural

1978 . . . . . . . . . . 2,249.0 1,686.6 –

751979 . . . . . . . . . . . . . . . . 3,603.6 21854.9 79

1980 ......, . . . . . . . . . . 1,509.7 1,047.1 691981 . . . . . . . . . . . . . . . . 2,338.6 1,665.0 711982 . . . . . . . . . . . . . . . . 2,589.1 1,855.0 72

SOURCE U.S. International Trade Commission and Department of Agriculture.

tively minor role in the Soviet bloc, where over-all levels of East -West tr ade h ave been keptartificially low as a matter of policy. On theother side, the United States has capturedonly a small share of this already limitedmarket .

Thus, as figure 1 demonstrates, althoughthe U.S. share in trade with the Soviet blochas grown about twelvefold since 1969, it hasnever amounted to more than 15 percent of theOrganization of Economic Cooperation andDevelopment (OECD) exports to or importsfrom this region. This is partly because Japanand the countries of Western Europe have tra-ditionally been active trading nations (theUnited States has not) with historical tradingties to Eastern Europe and Russia. Equally,if not more, importa nt is the fact th at for bothpolitical a nd economic reasons J apa nese a ndWest European governments have pursued

policies designed more to encourage than toinhibit tr ade with th e Soviet bloc. The sa mecannot be said of the United States.

Technology and East- West Trade identifiedthree factors which have constricted U.S.trade with the Soviet Union:

lack of official credits and guarantees tofinance U.S. exports,lack of normal t ra ding relations su ch a sextension of most-favored-nation status(MFN), andU.S. export controls.

In OTA’s judgment , the first of th ese was t hemost importa nt:

[T]he primary obstacle to rapid growth of trade with the communist world is the com-munists’ inability and/or unwillingness to ex-

port on a competitive basis to Western mar-kets. Consequently, a shortage of hard curren-cy inhibits communist imports from the West.Credits that supply hard currency would at-tack this shortage directly; extension of MFNwould facilitate some communist exports; di-

rect export controls are significant only in cer-tain industries to which communist nationsaccord priority in their allocation of hard cur-rency (e.g., computers or oil extraction tech-nology in the case of the U.S.S.R.)’

While this observation still holds true, theevents of the past few years ha ve shown th atuse of export controls can make significant in-roads into even the existing low levels of U. S.-Soviet trade. This fact is dramatically illus-trated in tables 5 and 6. The decline of U. S.-Soviet tr ade an d U.S. ma rket shar es in 1980was the direct result of the grain and technol-

ogy embargoes imposed after the invasion of Afghanistan. Interestingly, the lifting of mostof these sanctions has not resulted in recoveryabove 1979 levels. This reflects worldwide re-cession and the persistence of some U.S. tradecontrols, but it also may be at least partly dueto th e U.S.S.R. finding temporar y or perma -nent alternative suppliers for the grain andequipment it had purchased from the UnitedStates. In any case, the U.S. Department of Commerce (DOC) anticipates that U.S.-Soviettrade flows in 1983 will not increase over 1982levels. DOC projects U.S. exports of some $2.8billion, of which $1.9 billion will be agriculturalgoods.’

It is apparent that U.S. exports to theU.S.S.R. ar e far t oo small in the aggregate tohave a significant direct impact on the Ameri-can economy. One view of the policy conse-quences of this fact has been expressed byHerbert Stein of the American Enterprise In-stitut e in Wash ington, D. C.:

Everything that needs to be said on thissubject [of U.S. trade with the Soviet bloc] canbe said in a few words. U.S. trade with the

‘Technology’ and lltIs t-U ”est ‘Trade (Washington, D. C.: U.S.

Congress, Office of Technology Assessment, OTA-ISC-101”,No\ ’embe r 1979), pp. 5-6.W’illiam Cooper, “Modest ‘1’rade Growth May Follow I.if~ing

of Sanctions, ” Business America, k’eh. 21, 1983, p. !21.

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Ch . IV— The Impact of Export Administration Policy on the U.S. Economy q 53

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54 q Technology an d East-West Trade: An Update —

Soviet bloc-whether we have it or do nothave it, whether we interrupt it in whole or inpart; or make it contingent on political events—is of trivial economic consequence to theUnited States. If there is anything we can dowith this t rade t hat is of even slight value tothe U.S. security or U.S. foreign policy, weshould not be deterred by fear that it will dam-age the U.S. economy significantly.

3

‘U.S. Congress, Senat e Committee on Foreign Relations, Sub-commit tee on Int erna tional E conomic Policy, Economic Rela-

tions with th e Soviet Union hearings, 97th Cong., 2d sess . , Ju ly30, Aug. 12-13, 1982 (Washington, D. C.: U.S. GovernmentPr int ing Office, 1982), p. 199.

I M P A C T O F F O R E I G NO N T H E U . S .

Chapter III has discussed some of the conse-quences for the U.S. economy of the varioustrade sanctions imposed on the U.S.S.R. underthe Carter and Reagan administrations. Withtwo exceptions, much of this information issketchy and many of the individual impactsseem minimal. The exceptions are discussedin this section—the impact on the U.S. econ-omy of the partial grain embargo of 1980 andof the 1982 foreign policy controls on oil andgas equipment and technology.

G R A I N

Estimates of the impact of the grain embar-go vary widely. According to one view, the em-bargo caus ed “only rat her m odest da mage toproducers and exporters here in the UnitedStates. ”

4This analysis does not challenge the

fact that U.S. grain producers and exporterswere hurt in 1980 and 1981, but argues thatother factors, such as inflation, high fuel costs,sluggish demand, and high interest rates, were

“’Statement of Robert L. Paa r l b e rg , Assistan t Professor, POl i t ica l Science Wellesley College, ” in U.S. Congress, SenateCommittee on Agricultur e, Nutr ition, and Forestr y, Subcom-mittee on Foreign Agricultural Policy, Economic Impact of

Agricultura l Em bargoes, hearings, 97th Cong. , 2d se s s . , Feb.3 and 5, 1982 (Washington, D. C.: U.S. Government PrintingOffice, 1982), pp. 23-24,

This position gives secondary weight to twokind s of economic impacts. F irst , export s canbe of small significance to the economy as awhole, but nevertheless highly important tospecific sectors of that economy -i.e., the agri-

cultural sector—or to particular industries, orfirms within those industries. Second, thereare subtle and less quantifiable indirect im-pacts of the expansion or contraction of U.S.trade with the U.S.S.R. that are felt on bothth e micro an d ma cro levels. These, as well asthe direct impacts, are discussed below in thecontext of identifying potential costs to theU.S. economy of the export control policy pur-sued by the pr esent administration.

P O L I C Y C O N T R O L SE C O N O M Y

more important causes than the embargo. Inthis view, the embargo resulted in a rearrange-ment of trading patterns in grain, which “nulli-fied” the embargo’s impact on both the UnitedStat es and th e Soviet Un ion. While th e U.S.share of the Soviet market declined, its shareof the world market was actually 2 percentagepoints higher in t he 1980-81 mar keting yearthan in the year preceding the embargo. Quitea different picture of the embargo’s impactemerges from other studies.5 One estimatesthat direct costs and losses to the UnitedStates can be counted in billions of dollars andinclude lost output of goods and services, em-ployment losses, and the cost to the Govern-ment of assuming contracts and acquiring andstoring agricultural commodities.

Another way of assessing the economiccosts of the grain embargo is through its rela-tive impact on the United States and theU.S.S.R. Some ar gue th at th e embargo was afailur e becau se it inflicted lar ger costs on t he

United Sta tes th an on th e Soviet Union. Stilloth ers believe th at th ere was little impact on

————

“’Effects of the 1980 an d 1981 Limita tions on Gra in Export sto the U.S.S.R. on Business Activity, Jobs, Government Costs,and Farmers, “ in t he a bove, prepared by Schnittker Associates,pp. 113-125.

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Ch. IV— The Impact of Export Administration Policy on the U.S. Economy q 5 5

either country. These analyses are complicatedby the multiplicity of factors influencing Sovi-et meat production and U.S. farm income.

It is generally accepted that the impact of

th e embargo on t he Soviet Union was n ot a sgreat as the Carter administration predicted,but disagreement on the actual impact per-sists. The view prevalent in the Reagan admin-istration and among agricultural specialists isthat the Soviet Union was able to substantial-ly offset the impact of the embargo by import-ing more grain from other sources, using sub-stitutes for feed grain, drawing down grainreserves, and importing record quantities of meat. In contrast, the Carter administration,the Stat e Department , and others, held thatthe embargo did impose significant costs on

the Soviet Union. Since most protagonists relyheavily on the same U.S. Department of Agri-culture (USDA) statistics, any assessment of this issue rests on the definition of “signifi-c a n t .

Before t he emba rgo, USDA had estimat edthat the Soviet Union would respond to thepoor 1979 harvest by importing 34 millionmetric tons (MMT) of grain (25 MMT from theUnited States and 9 MMT from other coun-tries) during the 1979-80 marketing year anddra wing 16 MMT of gra in from its own gra in

stocks. In J an uar y 1980, USDA forecast th atth e embar go would den y the Soviet Un ion 11MMT of U.S. grain , but th at 2 MMT could bereplaced from other sources. The resulting de-cline of 9 MMT in imports would lead to a de-crease of about 6 MMT or 5 per cent in Sovietfeed grain usage an d th e drawing of an addi-tional 3 MMT out of reserves.

6Administration

officials also foresaw distress slaughter of live-stock, which would result in temporary in-creases in meat supplies, but would yield tosignificant declines in meat production andconsumption.

This scenario proved incorrect. Soviet grainimport s reached a r ecord 31 MMT during t hemarketing year, leaving a gap of about 3 to

‘U.S. General Accounting Office, Lessons T o Be Learned From Offsetting th e Impact of the S otriet Grain Sales Suspen-sion, Ju ly 27, 1981, pp. 46-47.

6 MMT, depending on how intended Soviet im-ports are estimated.

7In sum, the Soviet Union

replaced about half of the grain embargoed bythe United States during the first half of 1980and virt ually all of the embargoed grain dur-

ing the second half of the years The additionalsales by oth er n at ions were consider ed ‘in a c-cordance with the countries’ statements of co-o p e r a t i o n .

The embargo did not result in distressslaughter. In fact, Soviet livestock inventorieswere higher on January 1, 1981, than the yearbefore, although t he ra te of invent ory growthwas smaller. Meat production in 1980 was 15.1MMT or 2.6 percent lower than in 1979. Someattribute the decline in whole or in part to theembargo. Others ha ve concluded th at th e de-

cline was “simply the continuation of a trendalready in progress. “

10In any case, the Soviets

acted to offset the decline in production by im-porting a record 700,000 tons of meat in1980,” maintainingg but not increasing per cap-ita consumption.

Supporters of the grain embargo have ar-gued that the Soviet Union had to pay asmuch as a $1 billion premium for the grain itreplaced. Others h ave noted th at any premiumprices were largely offset by lower prices paidfor pa rt of th e grain imports. In addition, th e

U.S.S.R. incurred unquantifiable costs throughinconvenience and disruption of shippingschedules. While conceding th at th e U.S.S.R.

—.‘The gap is 6 MMT if USDA’s revised estimat e th at the

Soviets int ended t o import 37.5 MMT is accepted. But manyanalysts view it as too high. Their estimates of the import gapran ge from 2.5 to 4 MMT. See, for example, U.S. Departmen tof Agr icul ture Economics and Stat istics Ser vice, ‘i”he U. S Sales

Suspension and Soviet A@”cult ur e: An ( k to b e r Assessment,Supplement 1 to WAS-23, prepared by Angel O. Byrne and An-ton F. Malish, Washingt on, D. C., p. 12; and Robert L. Paar lberg,“Lessons of the Grain Embargo, ” Foreign Affairs, VO] . 59 , No ,

1 (fall 1980), p. 155.

““Statement of Hon. John R. Block, Secretary, U.S. Depart-ment of Agricultur~” in Economic Impact of Agricultural

Embargoes, op. cit., p. 67.‘Cited by GAO in Lessons To Be Learned op. cit., p. 49.

USDA estimated that the participating countries (Argentina,Australia, Canada, and members of the European EconomicCommunity) would have sold 9.5 MMT absent the embargo.But, actua l sales were 13.4 MMT during the 1979-80 marketingyear .

‘“Econom ic Im pact of Ap”cultu ral Embargoes, op. cit., p. 23.1 ~~ssons T. Be L.earne~ Op . ci t .+ P . 49 .

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did have to arr ange for imports from a lar genumber of suppliers, which disrupted shippingschedules and caused port congestion, and hadto purchase nontraditional feeds, critics of theembar go do not consider th e inconvenien ce a

major cost to the Soviet Union.

Similarly divergent assessments exist of theembargo’s impact on the United States. Afterthe announcement of the embargo, prices forwheat, corn, and soybeans declined, recover-ing to preemba rgo levels only some 9 month slater. Farm income also declined during 1980.

12

The main disagreement centers around thequestion of how much of these declines are at-tributable to the embargo, and how much toother factors such as high interest rates andincreased costs of fertilizer and other inputs.

The price support program and the droughtduring the summer of 1980 also put upwardpressur e on prices.

The General Accounting Office has con-cluded that the variety of variables precludesaccurate measurement of the impact of the em-bargo or of the price support program onprices.

13But farmers and farm organizations

generally single it out as the major cause of declines. Secretary of Agriculture John R.Block described t he im pact of the emba rgo insimilar terms:

. 0 . the United States paid a heavy price. Animmediate result of the embargo was a sharpdecline in grain prices and U.S. farmers con-tinue to suffer to a certain degree from theselosses, and the market uncertainty that fol-lowed. This contributed to a decline in net in-come already underway largely because of in-flation in producer costs and higher interestrates .

14

Others downplay the embargo’s effect. FormerSecretary of Agriculture Robert Bergland hastold Congress that the embargo had a “rela-tively small” impact on farm income compared

with other factors influencing supply and de-mand. He estimated th at due to the Govern-

12

Assessment of Afghanistan Sanctions, op. cit., pp. 45-46.l g~ s s ons TO & Learned oP . ~t .? P. 8 “

I iEconomic Impac t of Agricultural Embargoes, op . cit. , PP .

67-68.

ment’s price support program gross farm in-come declined by only 0.5 percent.

15

The price support program added slightlymore than $2 billion to the Federal budget.This is a readily identifiable cost to the UnitedStat es, though it is not a fina l estimate sincethe Government still holds grain acquiredth rough the price support program.

16Another

cost of the em bar go is th e decline in t he U.S.sha re of the Soviet ma rket (see ta ble 7).

There is virtually no disagreement thatwhere the United Sta tes was once theU.S.S.R.’s preferred supplier, it has now beenrelegated to a residual position. But whilemost observers consider U.S. losses a gain foroth er grain-export ing nat ions such as Argen-tina, Cana da, Aust ralia, and members of th e

Eur opean Economic Commu nity, an alterna -tive interpretation is that, since Soviet pur-chases are often unpredictable and sometimesmarket-disrupting, the lost share of the Sovietmarket could actually benefit the UnitedStates, as long as t he United Stat es retainsits share of the world market.

17

Most critics of the emba rgo view its conse-quences as potentially more serious in the longterm than in the short term. They argue that

“U.S. Congress, Senate Canm.i t t .ee on Banking, Housing, and

Urban Affairs, Suspension of United States Exports of HighTechnology and Grain to the Soviet Union, hearings, 96thCong. , 2d sess., Aug. 19 and 20, 1980 (Washin gton, D. C.: U.S.Government Printing Office, 1980), p. 108.

“Econom ic Imp act of Agrieultud Emlxqyw+ op. cit., p. 71.(Cost figure supplied by Secretary Block.)

“Ibid., pp. 24-25.

Table 7.—U.S. Share of Soviet Imports ofWheat and Coarse Grains

United States Total U.S. shareYear (million metric tons) (percent)

1972-73 a . . . . . . . . . 13.7 22.5 60.91973-74 . . . . . . . . . 7.9 10.9 72.51974-75 . . . . . . . . . 2.3 5.2 44.2

1975-76 . . . . . . . . . 13.9 25.7 54.11976-77 . . . . . . . . . 7.4 10.3 71.81977-78 . . . . . . . . . 12.5 18.4 67.91978-79 . . . . . . . . . 11.2 15.1 74.21979-80 . . . . . . . . . 15.2 30.4 50.01980-81 . . . . . . . . . 8.0 34.0 23,51981-82 . . . . . . . . . 15.3 45.0 34.0aJuly-June marketing year.

SOURCE Wharton Econometric Forecasting Associates,

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Ch. IV— The Impact of Export Administration Policy on the U.S. Economy q 5 7

it has given t he United Stat es the reputa tionof being an unreliable supplier, and that othercountries are now doubtful of the certainty of U.S. agricultural supplies. For instance, Mex-ico, which signed a grain supply agreement

with t he Un ited Stat es in 1980, is report edlynow considering signing long-term supplyagreements with other countries.

18In addition

to seeking alternative sources of supplies, im-porting countries may also be encouraged tobecome more self-sufficient in grain or findsubsti tutes.

19 Another potential longrun im-pact is increased production in other grain-exporting countries. U.S. competitors mayhave already increased plantings as a directresponse to the embargo.

20

O I L A N D G A S E Q U I P M E N T

A N D T E C H N O L O G Y

Assessment of th e cost to U.S. firms of th isset of sanctions must take into account thefact that the controls were applied both retro-actively and extraterritorially--i.e., they abro-gated contracts which had been concluded andwhich were permitted u nder genera l or vali-dated export licenses, and they applied to theexports of foreign subsidiaries and licenseesof U.S. firms.

One way of measuring the direct cost of ret-

roactive sanctions is t o assess t he value of can -celed contracts in terms of both revenues and jobs. This kind of analysis was provided to theSubcommittee on International Economics of th e Senat e Committ ee on F oreign Relat ions,by the Caterpillar Tractor Co., which compiledlists of lost revenue, cancellation charges, andemployee layoffs incurred by its subcontrac-tors due to the Government sanctions imposedon technology and equipment exports to theU.S.S.R. in December 1982. Presumably dataof th is kind from a n um ber of compan ies wascompiled to reach the U.S. Government’s offi-

cial estimate t ha t t he cont rols on oil and gas

“’’Statement of Dr. Michael 1.. Cook, Executive Director,Market Research and Development, FAR-MAR-CO, ” in Eco-nomic Im pact of Agricultural Em bargoes, pp . 11 , 20.

‘gIbid., pp. 12-13.‘“See, for exam ple, testimony by Cook a nd Block in ibid., pp.

12, 75-76.

equipment and technology sales to the U.S.S.R.would probably cost U.S. firms $300 millionto $600 million in exports over 3 years .2’ Thisamount may be insignificant spread over t heeconomy as a whole; it is more significant

when concentrated in a small number of firmsin a few industr ies.

Retroactive sanctions impose at least twoadditional costs on the U.S. economy, madeno less real by the fact that it is difficult orimpossible to quantify them. First is the costof foregone future transactions, one result of the reputation of unreliability, which can hard-ly fail to remain with exporters who may beordered by their government at any time to

21’’-pared Statement of Hon. I.ionel H . Olmer , ” in Economic

Relations With th e Sov ie t Union, p. 11.

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abrogate legal contracts. In the view of onelawyer studying this subject, the practice of interfering with exports can cause serious dis-rupt ions in th e buyer-seller r elationsh ip:

Since major export sales often lead to and

grow out of long-term business relationships,the confidence of both buyer and seller is re-quired. To the extent foreign purchasers be-lieve that the United States has adopted a pol-icy of prohibiting or restricting exports for po-litical rea sons, th ey may come to think of American firms as unreliable suppliers andmay consequently consider third country ordomestic suppliers more favorably. Even if alternative products are more expensive or of poorer quality, concern over American exportpolicy can render t hem equivalent in th eminds of buyers. Although the effect may bemore pronounced in nations already subject

to some controls and aware of the danger, itmay be felt in any nation that fears becominga target of future controls. Further, becausethe United States seeks to regulate reexportsof its products and technical information andeven of the goods made with the use of con-trolled information, major American tradingpartners may begin to seek alternate supplysources for sensitive products and technol-ogies, even for benign products to be exportedto sensitive areas, all to avoid the interferenceof American reexport controls. Any perma-nent diversion of trade brought about by suchconcerns could profoundly affect the relative

economic and political power of the UnitedStates.”

This erosion of market share has taken placewith grain exports. Examples can also befound of U.S. equipment for which presumablypermanent alternative suppliers have beenfound. Prominent here is the case of Cater-pillar pipelayers. Prior to the first U.S. exportcontrols on oil and gas equipment and tech-nology imposed by President Carter in 1978,Caterpillar had captured 85 percent of thelucrative Soviet market for pipelaying ma-

chinery. The Japanese firm Komatsu had 15percent of the market. Today, Caterpillar con-tends, these figures have been exactly re-

versed. In response to Soviet demand for a reli-able supplier of equivalent equipment, Komat-su has added capacity. This, together with ag-gressive pricing and credit policies, has led tothe Japanese developing into serious competi-

tors. In March 1983 Komatsu announced thatit h ad won a n order t o supply 500 pipelayersworth $210 million to the U.S.S.R. Caterpillarexpects its market share to be permanentlyaffected.

The s econd in direct cost of ret roactive con-trols is even less tangible. It has to do withthe chilling effect such sanctions could haveon the climate in which U.S. firms operate andon the business decisions they may feel com-pelled to ma ke:

Concern over possible interruption of future

transactions influences American exporters aswell as foreign purchasers. Entering a new ex-port market is an expensive and lengthy proc-ess. Concern over possible future controls maymake the risks attendant upon researchingand preparing a market, building customerrelationships, and negotiating sales too high,especially for new and smaller exporters. Ex-porter s’ concern s ar e heighten ed when li-censes appear to be denied because a foreignpolicy gestur e is n eeded, when cont rols ar eissued retroactively or without opportunityfor prior public comment, and when licensesare suspended or revoked or consideration is

publicly given to doing so. In the view of many in American business and government,such actions have already chilled the effortsof business to increase exports, offsetting gov-ernmental efforts to promote them.

23

Extraterritorial sanctions give rise to fur-ther economic problems. DOC has estimatedthat the continuation of the expanded extra-territorial sanctions imposed by PresidentReagan in June 1982, could have cost the sub-sidiaries a nd licensees of U.S. firm s as mu chas $1.6 billion in business with the U.S.S.R.over 3 years.

24Again, these are presumably

estimates of direct costs, measured in termsof canceled contracts. It is not known whetherprobable spinoffs to those contr acts for m ain -

**Kenneth W. Abbott, “Linking Trade to Political Goals: For-eign Policy Export Controls in th e 1970s an d 1980s, ” Mrme so t aLaw Review, vol. 65, No. 5, June 1981, pp. 827-828.

‘gIbid., p. 829.2401mer , op. cit., p. 11.

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Ch. IV— The Impact of Export Administration Policy on the U.S. Economy 59 —.

tenance, spare parts, follow-on, etc., are in-cluded in the estimate. But extraterritorialsanctions alSo inflict indirect costs.

Foremost among these is the potential ef-fect of extraterritorial export controls on trade

between the United States an d Western E u-rope and Japan. This so-called West-Westtrade is many times more important to theU.S. economy than trade with the SovietUnion. Yet the sanctions may well have a long-term adverse effect on the U.S. reputation asa dependable business partner to countriesother than the U. S. S. R.:

Any company in the world considering thepurchase of American technology as opposedto, say, Japanese technology, now has to thinkabout t he possibility tha t the U.S. Govern-ment at some point in the future for foreign

policy reasons may undertake sanctions againstthat company to stop its exporting that prod-uct to some other country,

26

The extremely broad scope of the sanctions,which left numerous unresolved legal and com-mercial problems in their wake, intensifies thisproblem.” As promulgated, the regulationswhich implement ed th e President’s J une 1982emba rgo covered a wide var iety of goods an dservices with no necessary connection to theUnited Sta tes or even to the West Siberian gaspipeline; and they entangled a wide variety of persons, entities and business relationships

worldwide in a complex and largely untestedportion of U.S. export control law. In the opin-ion of a lawyer who ha s stu died these issues,the regulations were so drafted as to cover thefollowing cases:—. —.

“Edward A. Hewett, in Economic Relations IIrith th e

U.S.S.R, p. 60.25This section is ba s ed on Stanley J. Mar cu s s , in Library of

Congress, Congressional Research Service, Th e Prem ises of

East-West (%mm ercia l Relations: A 14’orkshop Sponsored by

th e Committee on Foreign Relations, United Sta te s Senate(1$’ashington, D. C.: U.S. Government Printing Office, 1983), pp.45-77.

[I]f a British bank–having no connectionwith the United States—had financed a Ger-man company’s export of trucks with U.S.-ori-gin tires to a subsidiary of the French Com-pany, Creusot Loire, in Morocco (CreusotLoire being one of the blacklisted companies)

to deliver heating oil to homes in Fez, Moroc-co, the British bank, the German company,and the French company could have been inviolation of U.S. law. By the same token, if aU.S. company exported U.S.-origin sheetmetal to John Brown in England, one of theblacklisted firms, for use in a refinery inChina, the U.S. company, John Brown, andthe Chinese refining enterprise could havebeen in violation of U.S. law.

z’

The revocation of the U.S. sanctions hasmooted a tt empts in th e cour ts t o define t heirscope. Thus, the potential scale of the impact

of U.S. export controls remains largely un-defined.

It is, of cour se, disingenu ous of U.S. firm sto assert or imply that U.S. export control lawis likely to be app lied in cases like th ose out -lined above. But it is similarly naive to denythat the possibility of such actions casts a pallover the conduct of international trade. Thefact that the June sanctions evoked such anintense negative reaction in the United Statesand abroad argues that they struck close tothe nerve in those areas of the economy in-volved in international trade. Multilateral

deals are highly intricate, potentially involv-ing multifarious second a nd t hird order r ela-tionships in several nations. Extraterritorialcontrols can therefore have many unantici-pated a nd u ndesirable consequences as th eirimpact spreads in a ripple-like effect to numer-ous and varied interested parties.

—

“Ibid., ‘p. 55.

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T h e

I m p l i c a t i o n s

C H AP T E R V

F o r e i g n P o l i c y

o f U . S . E x p o r t

Ad m i n i s t r a t i o n P o l i c yT o w a r d t h e U .S .S .R .

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C H A P T E R V

T h e

u s .

—

F o r e i g n P o l i c y I m p l i c a t i o n s o f

E x p o r t Ad m i n i s t r a t i o n P o l i c y

T o w a r d t h e U .S .S .R .——. .— —— -—_-——

One of th e enduring debates in t he ar ea of American export administration policy hasbeen over th e propriety and effectiveness of using controls on trade as instruments of foreign policy. Chapter- IV discusses theecnonomic consequences of imposing such ex-port controls. The purpose of t his chapter- isto examine t his subject from another perspec-

- -—.—-—-. .— -——-——— ———-. —. ————.—- —-—-.. ——- . —.—

tive, i.e., the foreign policy consequences forth e United Stat es of th e actions taken in ad-ministering th e 1979 Export Administra tionAct (EAA) The chap ter focuses on the polit-ical impact on U.S. relations with its Westernallies and with the U. S. S. R. of controling ex-ports to the Soviet Union,

U . S . - AL L I E D R E L A T I O N S1

It is by now commonplace to point out thatAmerica’s CoCom allies in Western Eu ropeand Japan have notions of the role, impor-tance, and acceptable scope of trade with theSoviet Union which are different from theviews prevailing in the U.S. Government.OTA addressed this issue in 1979 in Technol-

ogy and East-West Trade and again in 1981in Technology and Soviet Energy Availabili-

ty. Since th e publicat ion of the lat ter report.the policies of America’s allies toward tradewith , an d m ore par ticular }” energy develop-ment in, the U.S.S.R. have come increasinglyinto the public spotlight. It would appear,however, that OTA previous findings arestill valid. These include the following:

qTrade with the U.S.S.R. has been far moreimportant for the economies of most of America’s CoCom a llies t ha n it h as beenfor the United States.

qThere is widespread skepticism in Europeand J apan over the ut ility of tr ade sanc-

tions in achieving political objectives vis-à-vis t he U .S.S.R.These nations, unlike the United States.consider trade wit h the U.S.S.R. a desir-able element in their foreign and domesticeconomic policies, and they 1argelv es-

.

chew the use of foreign policy controls forpolitical purposes. Nor do these countrieshave national legislation comparable to

EAA to provide legal mechanisms forsuch controls.The United Sta tes an d its allies had dif-ferent expectations from detente andtherefore different evaluations of itsresults. In general, West Europeans havecoun ted t he gains of detent e in term s of normal trading relationships and a con-tinuing dialog with Moscow, both of which contribute to maintenance of theEuropean status quo. In the case of WestGermany, detente has also become ameans of significantly improving rela-

tions with E ast German y. Soviet a ctivi-ties in the Third World are seen as viola-tions of an American-defined code of con-duct, but not necessarily a breach of theU.S.S.R. detente commitments in Europe.

63

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Given t he const raint s un der which it op-era tes, CoCom work s well. It is a n effec-tive mechanism for implementing na-tional security controls in those areaswhere the members agree that such con-

trols are necessary and effective. CoComdoes not fun ction well where th is kind of consensus is lacking.All CoCom partners agree that exports tothe U.S.S.R. of equipment and technologywith direct military relevance should becont rolled for r easons of nat iona l securi-ty, but the United States tends to favora much broader interpretation of “mili-tary relevance” than its allies. Similarly,the European and Japanese definitions of “security” include an economic dimensionwhich inclines them to view trade with the

Soviet Union as a positive factor in East-West relations.Western E urope and J apan already im-port or plan to import significant quan-tities of Soviet energy. These countriesview with apparent equanimity the quan-tum rise in the level of East-West energyinterdependence which will result fromthe West Siberian gas pipeline project.West Germany, France, and Italy all con-sider importing Siberian gas a desirableway to increase and diversify energy sup-plies while simultaneously stimulating

equipment and technology exports. Thelatter consideration is also important toJapan .Western importers of Soviet energy, par-ticularly gas, are all mindful of the risksof energy dependence on the U.S.S.R.These countries have developed contin-gency plans in case of a cutoff of Sovietgas. The plans as they stand now appearinadequate to many U.S. observers; nev-ertheless, the nations involved believethat the potential benefits of importingSoviet gas outweigh the risks.

These views have persisted in Western Eu-rope and Japan despite U.S. diplomatic effortsto change them. American critics of the pol-icies of other CoCom nations have tended toview them as sh ort -sighted and da ngerous t o

the security of the alliance. Europeans in turnstress the failure of the United States to ap-preciate the extent to which their own concep-tions of national security are influenced bytheir history and geography-particularly

their export dependent economies and theirproximity to the U.S.S.R. They also resent at-tempts by the Un ited States to dictat e whatthey see as matters of internal economic pol-icy, and to take major foreign policy stepswithout consultation or even prior notificationof the affected parties. The resulting case of mut ual r ecrimination is well illustrat ed by thechain of events following th e Versa illes su m-mit meeting.

D I S A G R E E M E N T S O V E R

E A S T - W E S T T R A D E

P O L I C Y

The declaration signed by the foreign minis-ters of the North Atlantic Treaty Organiza-tions (NATO) at the close of the Versaillessummit in J une 1982 stated that the part ici-pating countries would approach East-Westeconomic relat ions ‘‘in a pru dent an d diversi-fied manner consistent with our political andsecurity interests. ” The signatories a lso agreedto observe “commercial prudence” in grantingexport credits to the Communist world, and

to exchange information on “all aspects of oureconomic, commercial, and financial relationswith Warsaw Pact countries. ” This undertak-ing was clearly the result of U.S. initiatives.It is also clear that eliciting such a statementwas a high priority with th e U.S. delegat ion,which was troubled by the East-West econom-ic policies of America’s NATO partners, par-ticularly those resulting in favorable creditterms for the U.S.S.R. (This subject is dis-cussed in great er deta il in t he appen dix. )

It t ook only about a week for t he ba sic pol-

icy differences which lay behind this jointstatement to manifest themselves. Immedi-ately after Versailles, President Mitterranddenied that the declaration would affectFrance’s credit policy vis-à-vis the U.S.S.R.This action effectively eliminated any impres-

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——

Ch. V— The Foreign Policy Implications of U.S. Export Administration Policy Toward the U.S.S.R. q 65

sion of a unified Western commercial policyon East-West trade. The fact that the U.S. ad-ministra tion ha d publicly heralded th e stat e-ment as just such a development made Mit-terrand’s announcement all the more disturb-

ing, both as an apparent manifestation of thelikely limits of good faith cooperation on East-West trade among the allies and as an indica-tor of the inability or unwillingness of theUnited Sta tes t o accept an d work within thoselimits.

There are several interpretations of the rootsof the controversy which followed the Ver-sailles declaration. To some it is an exampleof th e propensity of European n at ions to paylip service to policies they have no intentionof carryin g out . To other s, it is a n exam ple of

America’s failure to accept European nations’views of their own political and security inter-

ests . According t o th is view, the contretempsarose over the simultaneous unwillingness of the French to appear to make public policyconcessions in the face of U.S. pressure, andth e failure of th e United Sta tes to appreciat e

both the substantive limits to, and the publicsensitivity of, the Versailles declaration inEurope.

Whatever the cause, the effect of this epi-sode was to reveal an element of discord inalliance relations. The situa tion was serious-ly exacerbated by President Reagan’s an-nouncement, ha rd on th e heels of Mitter ra nd’sstatement, th at the United Stat es would ex-ten d its foreign policy contr ols on oil and gasequipment exports to the U.S.S.R. retroactive-ly and extraterritorially, i.e., to cover com-pleted contracts for equipment produced over-seas by subsidiaries and licensees of U.S.

Photo credit: TASS from SOVFOTO

Separation installations at a West Siberian gas compression station

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66 qTechnology and East- West Trade: An Update

firms. (See chs. III and IV above.) Europeancountries with firms affected by this order professed surprise. All reacted as if to a U.S. viola-tion of their national sovereignty. Indeed, asnoted in chapter III, the British and French

Governments ordered the companies on theirsoil to disregard the American order and tofulfill their contractual obligations to ship theequipment to the U.S.S.R. in compliance withnational laws. In addition, the European Eco-nomic Community strongly protested the U.S.action. Nevertheless, the United States im-posed sanctions —in the form of orders deny-ing the privilege of importing any U.S.-origingoods or technical data related to oil and gasexploration, production, transmission, or re-finement—on the firms in England, France,West Germa ny, and Ita ly which h ad defied the

U.S. embargo. Extensive as t his ban was, itactua lly represent ed a relaxation of th e Gov-ernment original order which would have prevented the export of all U.S.-origin goods anddat a to th e affected compa nies. *

The r esolution of this situa tion took n ear -ly 5 months. In November 1982, PresidentReagan announced the lifting of the controlson oil and gas transmission and refining equip-ment. At the same time, he announced thatthe governments of the major West Europeannations, Japan, and Canada had agreed to con-duct studies aimed at arriving at a commonpolicy on major aspects of East-West trade:energy purchases from the Soviet Union, cred-it policies, and strengthened controls onstra tegic exports. The part icipants also agreednot to sign new contracts to purchase Sovietgas until the completion of the studies, astipulation which is probably moot in any case,as the state of the world economy and energyma rket s ha s for t he present significant ly di-minished West European demand for Siberiangas.

Some confusion still exists as to whether all

parties explicitly committed themselves to un-dertake the studies as a public quid pro quo

*The firms were AEG- Kanis (FRG ), Creusot-Loire (France),Dresser Fran ce, ,John Brown Engineering (U. K.), Mannesm ann(FRG) and Nuovo Pignone (Italy).

for the lifting of U.S. sanctions. Obvious assuch a n ar ran gement m ight have seemed toobservers, the issue was still controversialenough within th e Fr ench Government for itto later deny that it was a party to the agree-

ment. However, the French are now partici-pating in the studies.

C O S T S A N D B E N E F I T S

O F U . S . P O L I C Y

As in th e afterma th of the Versa illes sum-mit, this episode is variously interpreted as anexample of divisions within the French Gov-ernment and/or French hypocrisy, or of U.S.maladroitness and insensitivity to Europeanpolitical reality. However one apportions theresponsibility, it is another example of the

basic lack of communication between theUnited Sta tes a nd its closest allies on an issueof vital import an ce to th e continu ed viabilityof the alliance itself. Given these precedentsand the residue of recrimination and ill will oc-casioned by the U.S. sanctions, it is reasonableto question the likelihood that a concrete andmeaningful common policy on East-Westtrade will emerge from the studies, and to con-sider the political costs and benefits to theUnited States of its sanctions policy. Not sur-prisingly, there are widely divergent views oneach of these points.

The st udies an nounced in November 1982are proceeding under four separate aegises.The Organization for Economic Cooperationand Development (OECD) is evaluating West-ern credit policies toward the U. S. S. R.; the In-ternational Energy Agency (IEA) is examin-ing alternatives to Soviet energy for WesternEurope; CoCom is considering proposals tostrengthen its controls on strategic items andto add oil and gas equipment to the CoComlist; and an umbrella study, designed to coor-dinate the findings of the other groups and toadd a strategic perspective, is going on underthe direction of the Economic Secretariat inNATO. Major U.S. European allies and Japanar e represent ed in OECD, IEA, and CoCom.J apa n, while not a member of NATO, is par -ticipating informally in the latter exercise

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Ch. V -- The Foreign Policy Implications of U.S. Export Administratlon Policy Toward the U S S R q 67

through a mechanism which allows it to ob-serve or be briefed on the results of NATOmeetings and to comment through a NATOmember.

Officially, the U .S. (governm ent ha s h ailed

these studies as concrete evidence that theallies have ‘‘reached agreement on t aking afirmer stance toward trade with the SovietUn ion. ” Indeed, the President made them thesubject of his November 13 radio address tothe Nation, declaring that the industrializeddemocra cies ha d ‘‘rea ched subst an tia l agree-ment on a plan of action. But this interpreta-tion is n ot u niversal, even with in th e admin-istration. Some observers familiar with theOECD study process are skeptical that OECDand IEA efforts will produce more than a re-iteration of credit and energy studies already

on the shelf. Indeed, given the time con-straints and t he sensitivity that this kind of multilateral study has engendered in the past,an y oth er result would be remar kable. In ad-dition, there are differing opinions as to whenresults can be anticipated and what form theywill take. Some U.S. officials cite a May 1983deadline for completion of the studies, set sothat the conclusions and practical policy rec-ommendations can be ready for the next sum-mit, to be held that month in Williamsburg,Va. Others believe that only general or pre-liminary results will be ready in time for Wil-

liamsburg, with detailed findings t o follow atsome unspecified date. Still others doubt thesubject will even be raised at Williamsburg.

Similarly, there has been no public formalcommitm ent a s to the st at us of th e completereports. Th ey could be endorsed by th e govern-ments involved; or conclusions could appearin the name of the OECD and IEA Director-ates. The latter would obviously have a weakerimpact. Nor is th ere general agreement on th equestion of what the studies will ultimatelyproduce-concrete and specific “rules” to

which sovereign governments will agree toadhere; nonbinding general guidelines; a basisfor ongoing n egotia tions; or a ny combinat ionof th ese.

‘ I lu<inf’ss .ln]f~ri(:i, 1.’(’1) 21, 1 !)8:1, p 1 h

Given the degree of confusion within theUnited States, it is also reasonable to an-ticipate differences among the other par-ticipant s in t heir perceptions of the mean ingan d u tility of these st udies. Th e ‘‘worst case’outcome of this exercise is not that it will failto produce new allied agreements or unitedpolicy initiatives on East-West trade. Rather,it is that continued lack of communication andpersistent differences among the motives, in-tentions, and interests of the parties involvedwill lead to another public display of seriousdisagreement between the United States andits allies on the issue of policy toward theSoviet Union.

J ust a s the m eaning and potential importof the forthcoming studies are debatable, sotoo is the evaluation of the political costs and

benefits which have accrued to the UnitedStates in the wake of its trade policy. Whileit admits that the imposition of extrater-ritorial foreign policy controls had seriouscosts in terms of U.S.-allied relations, the ad-ministr ation cont ends t ha t its policy of send-ing strong ‘‘signals’ about U.S. resolve in thearea of Soviet trade to Europe and Japan willlead to significant long-term benefits. Theseinclude causing real delay in the completionof the West Siberian gas pipeline; and precipi-tat ing a new awareness of the dan gers of East -West trade in the Western alliance. Evidence

of the latter, it is claimed, will be seen in futureallied East-West trade policies, and is alreadymanifest in a new cooperative spirit in CoCom,where U.S. efforts to strengthen the CoComlist are meeting with significant success.

Many informed observers interpret theprogress in CoCom as being less the directproduct of high-level reaction to U.S. “sig-n a l s , than the outcome of carefully docu-mented and highly technical cases, in whichthe United States has been able to demon-strate—with concrete evidence—that specific

Western technologies have been used directlyby the Soviet military in the production ordeployment of weapons. In other words, whenthe United States “does its homework” andprepares a convincing case for a technology’shaving direct military utility, its allies are will-

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ing to listen. Their receptivity of course mayhave been heightened in the first place by theirperceptions of a new strength of U.S. commit-ment to these issues. But this does not neces-sarily mean t hat th e allies are willing to ex-pand their own definitions of military rele-vance to the point desired by the UnitedStates. Thus, it is likely that battles will con-tinue to be fought out in CoCom on a case-by-case basis an d th at progress will cont inue t obe slow.

The claim that U.S. actions effectively de-layed the completion of the gas pipeline ismore difficult to evaluate. There is intelligenceinformation tending to support this claim.However, to anyone familiar with the ineffi-ciencies inh eren t in t he Soviet economic sys-tem and the poor Soviet track record for on-

time completion of large projects, pipeline de-lays were inevitable—for a myriad of reasonshaving little or nothing to do with the U.S. em-bargo. It is, therefore, extremely difficult toisolate the impact of embargo-caused delaysand distinguish these from the series of otherproblems which are probably plaguing theproject. Moreover, delays in completion of thenew pipeline will not necessarily affect Sovietability to deliver increased quantities of gasto Western Europe through excess capacityin existing pipelines.

But even assuming that U.S. trade controlshad a real incremental impact on the pipelineconstruction and gas delivery schedules, a dis-turbing question remains. In this case the U.S.Government’s evaluation of what is best forWest European security differs from that of the West Europeans themselves. The WestGerman position, for instance, is that the

pipeline is “a p roject consider ed by th e Eu ro-peans to be reasonable and very important fortheir future . On the other hand, the UnitedStates believes that European participation inthe West Siberian gas pipeline project is, inthe words of the former Under Secretary of State for Security Assistance, Science, andTechnology, “ill-advised and potentially harm-ful to our joint security interest. ”

4It would

appear in this case that the United States hasused its foreign policy controls on exports tothe U.S.S.R. as much to inconvenience andmodify the policies of its allies as to incon-venience or exact concessions from the SovietUnion. This is arguably a bad precedent forthe conduct of U.S. foreign policy in generaland for alliance relations in pa rticular.

In the end, future allied trade relations with

the U.S.S.R. are more likely to be shaped bydomestic imperatives in Europe and Japanan d worldwide economic forces th an th ey areby U.S. concerns. There is no evidence thatallied nations are about to renounce any of thefundamental beliefs about East-West tradepresented at the beginning of this chapter. Tothe extent that retrenchment takes place, par-ticularly in granting credits to or buyingenergy from the U. S. S. R., it will most likelyin large part be due to the st at e of th e worldcredit and energy markets.

—.

‘Letter from t he Germ an American Cham ber of Commerceto Sen. Charles McC. Math ias, in U.S. Congress, Senat e Com-mittee on Foreign Relations, Subcommittee on InternationalEconomic Policy, Econom ic Relations With the Soviet Union,hear ings, 97th Cong., 2d sess . , Ju ly 30, Aug. 12-13, 1982 (Wash-ington, D. C.: U.S. Government Printing Office, 1982), p. 69.

“’Sta tem ent of Hon. J am es F. Buckley, ” in t he a bove, p. 15.

U . S . - S O VI E T R E L AT I O N S

Several months after the passage of the the U.S.S.R. and events in Poland have con-1979 Export Administration Act, the U.S.S.R. joined t o inhibit a ny n oticeable impr ovementinvaded Afghanistan and relations between in U.S.-Soviet relations. The White Housethe United States and the Soviet Union cooled views export controls as import an t weaponsmarkedly. The election of an administration in its foreign policy arsenal, and their use haswith an avowedly “hard-line” stance toward accompanied the strained relationship be-

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—

Ch. V– The Foreign Policy Implications of US.——..————— — —

tween the United States and the Soviet Union.Opinions as to their effect on the U.S.S.R. andtheir effectiveness in furthering U.S. policygoals differ, however. The remainder of thischapter is devoted to examining these two as-

pects of U.S. trade policy, i.e., its economic im-pact on the U. S. S. R.; and the foreign policycosts and benefits which have accrued to theUnited States from its implementation.

E C O N O M I C I M P A C T O N

T H E S O V I E T U N I O N

At the heart of much of the controversy overthe wisdom of controlling trade with theU.S.S.R. for reasons of foreign policy are dif-

fering evaluations of the strength of the Sovieteconomy; th e degree t o which t he U .S.S.R. isdependent on Western exports for its eco-nomic development; and the maximum impactthat denial of Western goods and technologiescould h ave on th e Soviets. One feat ur e of th eadm inistr at ion’s view of the U .S.S.R. is tha twhile it characterizes the Soviet military sec-tor almost entirely in terms of its strengths,its characterization of the Soviet economy isalmost always in terms of its weaknesses,Thus, William P. Clark has spoken of makingthe Soviets bear the brunt of their own eco-

nomic failures. A few others have suggestedth at th e U.S.S.R. economy could be “broughtto its knees” by Western trade policies or eventhat economic pressure could force the collapseand eventual restructuring—along Westernlines-of the entire economic system. The lat-ter view seems to assum e th at political mod-eration inevitably follows the establishmentof a free mar ket economy, and t herefore t hatit is not in t he interest s of th e United Stat esfor t he Soviet Un ion to impr ove its economicefficiency. This is a highly debatable point. Bethat as it may, there is a substantial body of

opinion which questions the factual premiseon which all of these positions are based.

Export Administration PolIcy Toward the U S S R . 69

The views of the U.S. intelligence communi-ty are pertinent here. In a briefing before theJoint Economic Coremittee in December 1982,

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70 q Technology and East-West Trade An Update

the Central Intelligence Agency presented thefollowing evaluation of the Soviet economy:

5

q

q

q

The Soviet economy is undeniablyplagued with many problems, and Sovieteconomic perform an ce can accur at ely be

described as poor by Western s tan dar dsand “deteriorating” in its own terms. Yet,an economic collapse—i.e., a su dden an dsustained decline in Soviet GNP—is not“even a remote possibility.Despite the serious weaknesses inherentin the Soviet economic system, that sys-tem enjoys many strengths. Among theseis the U.S.S.R. high degree of economicself-sufficiency.The U.S.S.R. is not autarkic. Western im-ports have relieved critical shortages, has-

tened technological progress, and general-ly improved economic performance. Onthe other hand, the U.S.S.R. does not de-pend on trade for survival and “the abili-ty of the Soviet economy to remain viablein the absence of imports is much greaterth an th at of most, possibly all, oth er in-dustrialized economies. Consequently, thesus ceptibility of the Soviet U nion t o eco-nomic leverage tends to be limited. ”

This view weighs against the utility of broadpolicies of economic warfare, but it leavesroom for the possibility of affecting the Soviet

Union through well-targeted sanctions. Sucha policy would be further supported by thework of the Wharton Econometric ForecastingAssociates, which found that while in the ag-gregate the dependence of the Soviet economyon trade with the West is low, there neverthe-less could be limited areas in which the Sovieteconomy is critically dependent on such trade.

6

Following this line of argument, one arrivesat the position tha t thr ough a carefully craftedpolicy of trade leverage, the United Statescould exert economic pressure on points of

“ ‘Central Intelligence Agency Briefing on the Soviet Econ-t)rny, Statement of Henry Rowen, Chairman, National In -

tk’lligence Council, Central Intelligence Agency, before the JointP;conomic Committee, Subcommittee on International Trade ,

h’inance, and Securi t~’ I+jconomics. I)ec. 1, 1982.“Reprinted in lhmi.w.~ of fi;a.st- tl-est {’comm ercial Re la t ions ,

op. c-it., pp. 9,5- I 02 .

Soviet vulnerability and thereby exact changesin Soviet behavior.

The theory and practice of trade leverage orlinkage are the subjects of widespread debate.The assumptions behind and past effects of

this policy are discussed in detail in Tech-nology and East-West Trade and Technology

and Soviet Energy Availability. The conclu-sion of both reports is th at first, it ha s yet tobe convincingly demonstrated–indeed itwould be virtually impossible to prove—thatthe U.S.S.R. has ever moderated its policiesin response to thr eats or a ctu al imposition of tr ade san ctions: and second, that in order fora policy of trade leverage to be effective, theUnited States would itself have to have eithera virtual monopoly on the goods in question

or to elicit broad cooperation from alternativesuppliers willing to participate in the embargo.In other words, trade leverage can only work un der very limited conditions and past prec-edents have demonstrated its weakness whenused against the Soviet Union.

The aftermath of United States attempts toembargo exports of both grain and energyequipment to the U.S.S.R. (see chs. III and IV)dramatically demonstrate the limitations onU.S. power to successfully conduct a tradeleverage policy. These embargoes were bothdirected at vulnerable areas of the Soviet

economy. Soviet agricultural productivity isnotoriously poor, and p roblems in t his sectorhave been exacerbat ed by bad weath er an d aseries of poor h ar vests. The pipeline is beingbuilt largely with imported Western equip-ment and its importance to Soviet economicplan s in t he 1980’s can h ar dly be overest i-mated. Yet the results of U.S. embargoes ineach of these areas are inconclusive at best.Many argue that both were failures, and ac-cording to th is view, while th e embar goes in-flicted some costs on the U.S.S.R. (perhaps

smaller costs than were inflicted on the UnitedStates), the Soviet Union has been able to paythese costs without changing its policies andwithout incurring serious or long-term damageto its economy. American grain has been re-placed in the Soviet marketplace with grainfrom alternate suppliers. And despite the pos-

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sibility that the United States may havecaused some additional delays to the comple-tion of the West Siberian gas pipeline, not eventhe most avid supporter of the pipeline em-bargo has su ggested th at th e project will not

be completed. [J. S. sanctions and embargoesha ve hurt th e U. S. S. R., hut it is debat ablewhether they have hurt enough to make a realeconomic difference, at least in the short andmedium term.

POLITICAL COSTS AND

B E N E F I T S

The economic impact on the U.S.S.R. of U.S.trade embargoes has been equivocal, However,there might still be a sense in which the UnitedStates could be said to have gained diplomatic

or politicall benefits from its export controlpolicies, Such advantages cannot, be measuredin terms of Soviet political concessions. TheSovet Union is still occupying Afghanistan:little or no progress has been made in Poland;and th e situat ions with respect t o dissidenceand emigration have worsened. Indeed, theAndropov regime shows little signs of flexibili-ty in any of the areas which have been citedby the United States as targets for its sanc-tions.

It has been argued that lack of Soviet move-

ment in these areas in no way vitiates the ef-fect of or importance of undertaking U.S. pol-icies. It was vital that the United Statesdisplay its concern over Soviet actions; indeed,it is impossible to imagine that the UnitedStates should not undertak e some drama ticmeasu res, short of milita ry action, to assu rethe U.S.S.R. of its outrage. This argumentraises several difficult questions: are tradesanctions appropriate means through whichto show concern; should they be imposed evenif there exists a danger that they will hurt theUnited States as much or more than they hurt

the U. S. S. R.; and should they be imposed evenif they risk damage t o alliance relationships?

A variation of the ‘‘displaying concern” rea-soning is th at just a s American actions h avesent strong signals to the Western allies, sotoo the political u tility of tr ade sa nctions lies

as m uch in t he clear mess age of U.S. resolvethat they convey to the U.S.S.R. as in pre-cipitating measurable changes in Soviet be-havior. According to this view U.S. policiescan and should be judged according to their

symbolic value. The impa ct of these s ymbolicactions has been mitigatd by two factors,however: the messages sent to the U.S.S.R.have been unclear; and the U.S.S.R. may itself have benefited from the disruptions in theWestern alliance precipitated by [ J . S . policies.

The first of these pr oblems st ems from t hefact that the United States has sent the SovietUnion mixed messages. It has engaged in be-havior that can he interpreted as inconsistentor unsustained — removing the grain embargo,for example; and it has not always madeclear —to th e Soviets, to th e allies, or even t oitself—the objectives of its policies. The lat-ter point is illustra ted by the fact t hat the gaspipeline sanctions have been justified at var-ious times and by various Government spokes-men as being designed t o:

qprotest Soviet responsibility for the dec-larat ion of martial law in Polan d;

. prevent West European dependence onSoviet gas; or on steel and equipment ex-ports to the (U. S. S. R.;

s damage—-or at least not aid — generalSoviet economic developmen t by inh ibit-

ing a project of great economic’ impor-tance;

. deny the U.S.S.R. hard currency earningsfrom gas sales in Europe; or

qprotest the use of “slave labor” in pipelineconstruction.

These are very different goals. Yet, if the suc-cess of a policy rests on its symbolic message,its impact, may be weakened when the messageitself is un clear ,

The extent of the second problem can onlybe deter min ed in t he cont ext of one’s est ima-tion of the value which the U.S.S.R. places ondriving wedges between the United States andother members of the Western alliance. If animportant Soviet political goal is to generateas much divisiveness as possible amongNATO partners, and to encourage the West

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Europeans and Japanese to depart from U.S.policies on Ea st-West rela tions, th en it couldbe argued th at t he gas pipeline embargo wasa welcome political windfall for the U.S.S.R.This charge has in fact been made by oppo-

nents of the administration’s policy in Con-gress, in the business community and, privately, in the executive branch. A counterargu-ment is that any such damage was superficial,illusory, and/or sh ort term . In t his view, theWest is going through a necessary, albeit pain-ful, reevalua tion which will eventu ally resultin a s tr onger an d more un ified front vis-à-visthe U.S.S.R. This position effectively post-pones judgment of the effects of U.S. policiesto the indeterminate future.

In the final analysis, each of the positionsdescribed here rests as much on fundamentalbeliefs as it d oes on empirical evidence. Each

is shaped as much by the world view of itsholders as by objective weighing of the eco-nomic, political, military costs, and benefitsof alternative policies. Those who believe thatthe United States and Soviet Union are des-

tined to remain implacable enemies, that mil-itary conflict is probably inevitable, and/orthat it is primarily the threat of retaliatoryforce which restrains Soviet aggression arelikely to judge that the benefits of U.S. policieshave outweighed the costs. Those who believethat the United States can and must learn tolive with a strong Soviet Un ion, and th at th eU.S.S.R. is best restrained by being drawninto normal relations with the Western worldar e more likely to look as kan ce at th e ut ilityof trade sanctions in moderating Soviet be-havior.

S U M M A R Y A N D C O N C L U S I O N S

The past few years have seen an increasingamount of attention accorded to the use of ex-port controls as instruments of U.S. foreignpolicy. The controversy over the propriety andeffectiveness of such controls escalated mark-edly in 1982, when t he U.S. Government ap-plied them extraterritorially and thereby at-

tempted to obtain the participation of WestEuropean firms in actions to which their gov-ernments did not acquiesce. The outcome of U.S. policy ha s st ill to be fina lly assessed. In

the short term, alliance relations appear tohave been damaged while the U.S.S.R. seemslittle affected. P rospects st ill exist for longerterm benefits—including the achievement of a unified Western policy on trade with theSoviet Union–but these prospects must betempered by the persistence in Western Eu-

rope and Japan of notions of the role, impor-tance, and acceptable scope of Soviet tradewhich are fundamentally different from thoseprevailing in the U.S. Government.

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C H A P T E R V I

T h e N a t i o n a l S e c u r i t y

I m p l i c a t i o n s o f E x p o r t

Ad m i n i s t r a t i o n P o l i c y

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their acquisitions of Western technology, par-ticularly in the strategic, aircraft, naval, tac-tical, microelectronics, and computer areas.This multifaceted Soviet acquisitions programhas allowed the Soviets to:

qSave hundreds of millions of dollars inR&D costs, and years in R&D develop-ment lead time , . . ,

qModernize critical sectors of their militaryindustry and reduce engineering risks byfollowing or copying proven Western de-signs, thereby limiting the rise in theirmilitary production costs.

c Achieve greater weapons performancethan if they had to rely solely on their owntechnology.

q Incorporate countermeasures to Westernweapons early in the development of theirown weapon programs.

These gains are evident in all areas of mili-tary weapons systems.’

According to the CIA, the U.S.S.R. has ob-tained these militarily significant technologiesby both legal and illegal means, ranging fromthe collection of open Western scientific litera-ture to outright industrial espionage and theftof classified documents.

These findings have important implicationsfor the legislative concept of military risk (dis-cussed below). Compelling as the CIA andSubcommittee evidence is, however, two addi-

tional factors must be pointed out:.

‘U.S. Central Intelligence Agency, Sovie t Acquisition of Mili-t a q Technology, April 1982, p. 10.

First, although the U.S.S.R. has un-doubtedly realized savings from pursuingthe strategy of a “technology follower, ”nowhere has it been demonstrated thatit has obtained any technology from theWest which it could not have developeditself, given adequate incentive and re-sources.Second, a significant consequence of rely-ing on theft or illegal purchase for tech-nological advances is that the recipient isin a relat ively poor position t o capit alizefully on the acquisitions. This is both be-cause it is far less efficient to utilize “pas-sive” than “active” transfers of technol-ogy (especially those requiring reverse en-gineering); and because, having made atechnological advance through a method

which bypasses the establishment of anR&D base or an ongoing vendor relation-ship, the offender must continue to relyon expensive and risky illegal tactics tomake most further advances. For exam-ple, if the U.S.S.R. steals plans for anAmerican weapon, not only must it devel-op its own complex system of operationalsupport, but it will not necessarily havebuilt the R&D base necessary if it is itself to build the n ext generation of th e wea-pon. The Soviets would therefore be obli-gated to conduct another successful piece

of espionage to gain access to the plansfor the follow-on weapon.

S O V I E T M E T H O D S F O R A C Q U I R I N GW E S T E R N T E C H N O L O G Y

One of CIA’s ma jor findings is th at th e So- acquisition program for Western technology.viet effort to obtain Western technology is These include legitimate studies of open litera-

“massive, well planned, and well managed— ture, such as scientific journals, National Tech-a national-level program approved at the high- nical Inform at ion Service (NTIS) docum ent s,

est party and governmental levels.”4 The CIA and patent searches; part icipation in academicand Subcommittee reports describe a blend of exchanges, trade fairs and trade delegations;legal and illegal, overt and clandestine, meth- legal purchases of items under both general

ods which the U.S.S.R. has employed in its and validated licenses; illegal purchases, in-volving either unauthorized transshipment or

‘Ibid., p. 1. purchases through dummy or Communist-

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78 q Technology and East-West Trade: An Update . ———.— — —.

on free and worldwide access to all develop-ments, even in seemingly unrelated fields. Thisaccess can only be achieved t hr ough open in-ternational publications, scientific meetings,and personal communication. In addition,

American academics are jealous of the prerog-atives of academic freedom and have beenquick to condemn suggestions which appearto impinge on these prerogatives. They partic-ularly object to proposals which have soughtto place the burden of preventing undesirabletechnology transfer on the universities, requir-ing them to monitor and restrict the activitiesof Soviet and East European students. Most

——-

universities hold that the responsibility shouldlie with the Immigration and NaturalizationService, which can refuse to grant visas in thefirst place.

On the other hand, Members of both theHouse and the Senate have expressed the be-lief th at th e benefits of scientific comm un ica-tion and academic and scientific exchange de-volve far more on the U.S.S.R. than on theWest. They note, for instance, that mostAmerican exchange students do research inth e hu ma nities a nd social sciences, while Sovi-et exchange participants are often established

Photo credit: U S Department of Energy

American magnetohydrodynamic (M H D) technology arrives in the Soviet Unionas part of the U.S./U.S.S.R. Cooperation Program

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Ch. VI— The National Security Implications of Export Administration Policy q 79

scientists who enter programs in advanced sci-ence and technology.

6This disjunction is due

to the fact that the Soviets carefully screenthe exchan ge students t hey admit to their owncountry and just as carefully target the stu-

dents th ey send t o the West. An obvious re-sponse would be for the United States to adoptsimilar procedures, although such an attemptrisks running counter to the generally ac-cepted view that U.S. exchanges are primarilyan aspect of academic life and not a tool of foreign policy.

The NAS report does not deny that U.S. ex-change programs with the U.S.S.R. have beencharacterized by a basic “lack of symmetry,or that the Soviet Union has gained militarilyfrom the net flow of “products, processes, and

ideas’ from West to East. The report also rec-ognizes the importance and propriety of pro-tecting certain research through classificationand the problems posed by the existence of afew “gray” areas of particular sensitivity,which are not amenable to Government classi-fication. Nevertheless, with the exception of th ese, NAS recommends th at no restr ictionsof an y kind limiting a ccess or commun icat ionbe applied to basic or applied university re-search. This conclusion is grounded on theAcadem y’s jud gment s t ha t “in comparisonwith other channels of technology transfer,

open scientific communication involving theresearch comm un ity does not present a m ate-rial danger from near-term military implica-t ions, '

7 and that the important economic,

political, an d militar y benefits t o the UnitedStates of unfettered exchange and communica-tion out weigh th e risks. It is also relevant topoint out th at ma ny believe that th e tran sferof information through academic and scientificexchange programs is less likely to result in

‘See U.S. Senate, Committee on Governmental Affairs, Per-manent Subcommittee on 1 n v e s t i ~ a t i o n s , Transfer of 7’ech-

n o lo ~ ’ to the %~’iet Bloc, hearings, 96th Cong. , 2d sess., Feb.20, 1980 (Washington, D. C.: U.S. Governm ent Print ing Office,1980) pp. 36ff .

‘National Academy of Sciences, National Academy of Engi-neering, an d In stitute of Medicine, Pan el on Scientific Commu -nication and Nat ional Securit y, Committ ee on Science, Engi-neering, and Public Policy, Scientific (%nrnunication and Na-

tional .S ecurit.}’ (Washington, D. C.: National Academy Press,1982), p. 41. (Emphasis in the original. )

th e ability t o absorb, diffuse, and impr ove ona technology than are more active—i. e., com-mercial-channels. In addition, strong legaland social forces in the United States makethis area particularly intractable to careful tar-

geting of controls.

I L L E G A L T E C H N O L O G Y

T R A N S F E R S

As chapter VII points out, there is broadagreement that enhanced enforcement of exist-ing regulations should become a n import antpriority, although opinions as to how enforce-ment efforts should be implemented may dif-fer. Unfortunately, in the rhetoric surrounding

export control, the distinction between legaland illegal technology transfers is often blurred.The resulting confusion helps to intensify theimpression that the West is a “sieve, and thatthe U.S.S.R. is benefiting from a veritablehem orrh age of U.S. technology. This imp res-sion is in t ur n u seful in foster ing a clima te of public opinion supportive of extending con-trols to a larger array of technologies and prod-ucts and reducing American commercial inter-course with the U.S.S.R. Regardless of one’sviews on the wisdom of such a policy, main-taining a clear distinction wherever possible

between milita ry gains made by t he U .S.S.R.th rough theft and deception, and gains m ade“legitimately” under U.S. law is essential toany serious attempt to reform or refine thatlaw so as to minimize future gains. Thus, theutility of distinguishing categories IV and Vfrom the other, legal, modes of technologytransfer lies in highlighting the difficulty fac-ing policy makers in their efforts to assess themagnitude of the illegal transfer problem, andin placing in perspective the relative securityrisks to the United States of the U.S.S.R.legal and illegal activities.

Admiral Inman has testified that some 70percent of the Soviet military gains which theCIA attributed to Western technology in its1981 study were gains “accomplished by theSoviet and East European intelligence serv-ices, using clandestine, technical, and overt

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80 q Technology and East-West Trade: An Update —— . . . . .

collection operations.”8 Thus, strengthened ex-port contr ols would affect t he m ajority of th eU.S.S.R.’s acquisitions only to the extent thatthey resulted in significantly improved en-forcement and compliance. The fact that much

of th e U.S.S.R. Wester n technology is illega-ly acquired also makes problematic the CIA’sassertion that, “while difficult to quantify, itis clear that the Western military expendituresneeded to overcome or defend against the mili-tary capabilities derived by the acquisition of Western techn ology far outweigh t he West ’searnings from the legal sales to the Soviets of its equipment and technology. “g

Once illegal acquisitions are distinguishedand treated separately, several important im-plications emerge for the formulation of policy

designed to limit future Soviet opportunities.These arise from the fact t hat th ere are bothdomestic and foreign aspects to the problemof illegal transfer. On the domestic side, imped-iments to Soviet acquisition of militarily rele-vant American technology might be madewithin the framework of existing law by devot-ing additional resources to compliance and en-forcement. Such an effort would probablymeet with widespread approval, althoughthere is presently disagreement over whetherth e prima ry resp onsibility for enforcement of export control laws should remain in the De-

partment of Commerce, or whether all export-related compliance activities should be placedin the Customs Bureau. This issue is discussedfurt her in chapter VII. In a ddition, Congresscould be asked to consider sensitive new legalprovisions —concerning the commercial activ-ities of foreign embassies, foreign nationals,and foreign-owned companies in the UnitedStates, for example-as a means of inhibitingillegal activities in the future.

The problems of improving enforcementwithin the United States are relatively tract-

able compared to those which surround the il-legal disposition of American technologiesonce they leave the country. Here, the UnitedStates must rely on the enforcement agencies

‘In Tran sfer of United S tates High T echnology, op cit., p. 577,

‘CIA, op. cit., p. 10.

of other nations. Even in the case of CoComallies, cooperation has not always been as closeas th e United Stat es would wish. The mat teris further complicated by the fact that the ex-tr at erritoriality provision in U.S. law mea ns

that certain U.S. technologies cannot be reex-ported from foreign firms, wh ich ha ve legallyacquired them, without the express permissionof the U.S. Government. There is concern overthe stringency with which U.S. allies, CoComand non-CoCom alike, pursue and prosecutecases involving the unauthorized reexport of such goods, especially in cases of goods whoseexport to the Soviet Union is illegal accordingto American law, but not according to thecountry’s own or CoCom regulations.

So long as the policy differences between the

U.S. and its allies discussed in chapter V per-sist, no quick or easy solution to this set of enforcement problems can be expected. Butthe fact remains that stressing the legal andconceptual separation between those itemswhich the Soviet Union buys and those it isforced to st eal is a useful wa y of focusing a t-tention on the kinds of technologies and prod-ucts which contribute to Soviet military capa-bilities, but which are not adequately pro-tected by U.S. law. The latter are discussedin the following section.

P U R C H A S E S U N D E R

G E N E R A L A N D

V A L I D A T E D L I C E N S E S

Categories II and III encompass two sepa-rate problems in the administration of exportcontrol policies designed to limit the degreeto which the U.S.S.R. benefits militarily fromU.S. technology. Category II raises the issueof identifying those items which should be, butare not, included on the U.S. Commodity Con-trol and the CoCom lists. There are, of course,political difficulties in the United States andabroad which accompany most efforts to in-clude new items on these lists. But aside fromthese, and arguably more important from theperspective of designing effective export con-trol guidelines, is the technical task of keep-ing abreast of rapidly developing technologies

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Ch. VI— The National

in a variet y of fields, with a var iety of poten-tial military applications.

No law can delineate these technologies.Rather, it is the task of the legislator to man-dat e and allocat e adequat e resources for t hecreation of an administrative framework with-in which flexible and farsighted evaluation of th e direction of techn ological cha nge in boththe civilian and military sectors can take place.There are serious practical and conceptual bar-riers here. At the root of most of these prob-lems is the fact that important new technol-ogies exist now in the West, which are beingdeveloped in the civilian sector and whichpresently have no known or practical militaryutility. However, these technologies may wellhave important military applications in the

future.One aspect of this problem involves lead-

tim es. Today’s em erging t echn ologies ma y beat the center of export licensing controversies5 years hence. It is t herefore vital th at an ef-fective mechanism exist for identifying suchtechnologies early enough to gather them intothe control process before so much worldwidediffusion occurs as to make the controls moot.A second difficulty is that the United Statesis not necessarily the originator of importantnew technologies. Civilian technologies withpotential military significance-robotics, forexample—are developing in allied countries.In these cases, not only must the UnitedStates have the ongoing capability to identifythe technology early, but it must also beginearly to persuade other Western nations tobring the items or processes in question underthe rubric of control.

Finally, the entire process of identifyingtechnologies with potentially important mili-tary significance is made more difficult by thefact that, in contradistinction to the situationin years past, there are technological areas in

which development in the military sector lagsthat of the civilian. The same problem applieshere a s in t he situ ation described above: th erelevant technologies must be identified, and

Security Implications of Export Administration Policy q 8 1

a convincing case must be made for their pro-tection.

Category III addresses procedural issues,i.e., the fun ctionin g of th e existing export li-censing apparatus. In theory, when it is work-ing properly this apparatus should adequatelyidentify technologies and products with poten-tial “dual” (i.e., both military and civilian) use,and employ an elaborat e intera gency reviewmechanism to allay all reasonable doubt thatsale of the item in question will not result ina military gain by the U.S.S.R. In practice, ex-port licensing procedures have been the sub-

ject of intense criticism and there exists a longlist of suggestions—some mu tu ally exclusive–for improving them. The problem is thatwhile it is relat ively easy in t he clear light of

hindsight to identify licensing decisions thatnow seem to ha ve contr ibut ed to Soviet mili-tary capabilities, it is by no means obvioust ha t :

economic or political considerations at thetime were not considered by high-leveldecisionma kers to out weigh t he m ilita ryrisks;these military applications could havebeen ant icipated at the time;denial of a U.S. license would have with-held t he t echn ology from t he U . S. S. R.;and/orany other licensing mechanism would nec-essarily result in fewer such “mistakes.”

This is not t o suggest t hat it is impossibleto impr ove th e licensin g process, or t ha t con-cern over Soviet military gains resulting fromlegally purchased American goods and tech-nologies is unwarranted. It is to assert thatevaluation of the process cannot be under-taken in isolation from an understanding of the basic assumptions which guide it. Thetechnical and logical criteria for including tech-nologies in the export licensing process and

the “case law” which provides the grounds forgranting licenses in disputed cases togetherreflect the prevailing understanding of the con-cept of “military significance. ”

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82 Technology and East-West Trade: An Update

T H E C O N C E P T O F M I L I T A R Y S I G N I F I C A NC E

The largely int erchan geable t erm s–’’mili-ta ry significance, “ “milita ry ut ility,” an d “mil-ita ry r isk’ ’—which lie at th e hea rt of exportcontrol policy have been subject to widely var-ied interpr etat ions. At t imes th eir definitionhas been colored by the prevailing politicalclimate. Just as there was a tendency to ex-ten d export cont rols to items of only indir ectmilitary utility during the Cold War period,a coun ter-trend du ring detent e led to relaxa-tion of export controls on the grounds that theeconomic and political benefits of detente out-weighed the military risks created by the saleof dua l use techn ologies. Thus , export licens-ing decisions have long reflected judgmentsbased on other than technical military assess-

ments.In 1976, the Defense Science Board pro-

duced a report which a ssessed the impa ct onU.S. national security of the transfer of se-lected high technologies. This document, com-monly known as the Bucy Report, has becomethe basis for a protracted effort on the partof the U.S. Government to develop a meansof assessing m ilita ry r isk which r ests on objec-tive technological criteria and is therefore rela-tively immune to shifting political opinion.This effort, the Critical Technologies Exercise,is predicated on the assumption, implicit in the

Bucy Report, that one can identify the subsetof significant technologies on which U.S. mili-tary technological superiority is most depend-ent; and that these technologies can be de-scribed on a Militarily Critical TechnologiesList (MCTL), and subject to stringent exportcontrol. One advantage of producing such alist would be that the items on it could bemade immune from attempts to use exportlicenses as “carrots” or “sticks” in exertingpolitical leverage. It is difficult, after all, tomake a rational case for selling a militarily

critical item or process to the U. S. S. R., no mat-ter what the political demands of the moment.

Congress felt t he creat ion of an MCTL a suf-ficiently promising enterprise to mandate itin the 1979 EAA. As envisioned in the act, theList would consist of:

A)

B)

c)

arrays of design and manufacturingknow-how;keystone manufacturing, inspection, andtest equipment; and

goods accompanied by sophisticated opera-tion, application, or maintenance know-how which are not possessed by countriesto which exports are controlled . . . andwhich, if exported, would permit a signifi-cant advance in a military system of anysuch country.

The List was to be specific enough to guidevalidated licensing decisions, and to becomepart of the Commodity Control List.

Technology and East- West Trade, publishedshortly after the passage of the 1979 EAA, ex-

pressed reservations as to the extent to whichthe critical technologies effort could be countedon t o allay th e debate over t he boundar ies of military relevance:

It would be both misleading and unwise toregard the development of a critical technol-ogy list as a panacea to the difficult problemof protecting U.S. military technology leads.Skepticism already exists, both in Govern-ment circles and within the business commu-nity, as to whether the revised lists will indeed beshorter t han present ones; there is fear, inoth er words, tha t reluctance to decontrol

items or a broad definition of criticality willresult in similar or longer lists. This might fur-ther inhibit East-West trade and could alsoprovoke objections among some members of CoCom. From the other side, there are fearsthat a critical technology list will be too short,i.e., that items of marginal, but potentially im-portant, military utility will be decontrolledto the ultimate detriment of the United States.

10

These reservations are equally apt today,and uncertainty over the ultimate dispositionof the MCTL has not yet been dispelled. TheList, which except for its table of contents is

classified, is said by some to be so voluminousthat it constitutes a “Modern TechnologiesList. ” This view may a t least part ly rest onmisperceptions arising from the fact that rela-

——— —

‘“Technology and East -West Tra de, op. cit., p. 94.

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C H A P T E R VI I

O p t i o n s f o r U . S . P o l i c y

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——.

C o n t e n t s

Page

EXPORT ADMINISTRATION POLICY ORIENTATIONS . . . . . . . . . . . 87

The National Security Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87The Foreign Policy Per spect ive. , . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . 88The Efficiency P er spect ive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88The Trade P rom otion Per spect ive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

EXPORT ADMIN ISTRATION POLICY OPTIONS . . . . . . . . . . . . . . . . . 89

Pr oposals Designed t o Stren gth en N at iona l Secur ity Cont rols . . . . . . . . . . 89Pr oposa ls Designed t o Prom ote E as t-West Tra de . . . . . . . . . . . . . . . . . . . . 94Pr oposals Designed To Im prove the En forcement of U.S. Export

Control Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9?

A FINAL NOTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

Table

Table No. Page

8. Rela t ionsh ips Be tween Policy Objectives . . . . . . . . . . . . . . . . . . . . . . . . . 89

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C H A P T E R V I I

O p t i o n s f o r U .S . P o l i c y

E X P O R T A D M I N I S T R A T I O NP O L I C Y O R I E N T A T I O N S

In February 1983, Congressman Don Bonk-er introduced the “Export Promotion and Con-trol Act of 1983,’” a bill to amend the 1979Export Administration Act (EAA). The bill’stitle neatly captures the twin foci of U.S. ex-port administration policy, which has soughtto deal with the sometimes irreconcilable prob-lems of maximizing the commercial benefitsof trade and safeguarding national security.

Ind eed, one in formed observer of the legisla-tive process ha s predicted t ha t m easur es foramending or replacing EAA “will be proposedby legislators who have as their primary con-cern one or the other of these two problems.

Arrays of specific proposals have alreadybeen put forward by both sides. The billdrafted by the administration emphasizes theimportance of preventing or delaying thetransfer of “militarily sensitive” technology,and includes provisions aimed at tighteningstrategic controls. In contrast, CongressmanBonk er’s bill would lift m an y of th e bur densplaced on exporters by existing control poli-cies. Bills sponsored by Senators Gain, Heinz,and Nunn and Representatives Byron and Roefall within t hese t wo extremes.

Examina tion of these proposals an d of th earguments advanced in their support revealsthat while this dichotomy of views accuratelycaptures the basic concerns of many of the prota gonists in t he export administr ation policydebate, there exists a more complex matrix of policy goals. In fact, t he debat e over U.S. ex-por t adminis t ra t ion pol icy toward the

U.S.S.R. centers on how to simultaneouslypursue and to balance four different objec-

‘1~. R. 1566.‘Paul Fr e e de nbe r g , “U.S. Export Controls: Issues for High

Technology Industries, ” ,Vational JournaL Dec. 18, 1982, p.

2190.

tives. In the past, the relative emphasis ac-corded t hese elements h as from time to timeshifted. A new or revised Export Administra-tion Act will reflect congressional decisions—or refusal to decide—how best to accommo-date all four objectives.

T H E N A T I O N A L S E C U R I T Y


G o a l s

The primary goal of policy options which focuson U.S. national security is to make it as dif-ficult as possible for the Soviet defense estab-lishment to acquire and use Western technol-ogy. Therefore, proposed legislation is de-signed to prevent or inhibit the disseminationof equipment and technologies believed tohave military utility. Such exports are deemedinherently damaging to the United States.These proposals seek to impose permanent-or

at least relatively long-lasting—controls onitems, based on technical evaluation of theirproperties an d capabilities.


Adherents of this perspective believe that:

q

q

q

q

the U.S.S.R. is making important militar ygains through the acquisition of Westerntechnology;tightening U.S. export licensing require-ment s can ma ke significant inroads into

this process;the security benefits of such controls out-weigh t he econom ic costs of foregone ex-ports; andthat sustained U.S. pressure can bringAmerica’s allies closer to its own positionon th ese mat ters.

87

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88 q Technology and East-West Trade: An Update -- — —

T H E F O R E I G N P O L I C Y


G o a l s

The primary goal here is to preserve a situa-

tion in which Presidential use of exports as aninstrument for achieving diplomatic objectiveshas been as easy and effective as possible. Thisinvolves th e power t o apply contr ols t o item swhich do not fall under t he ru bric of na tionalsecurity, and envisages that such controlswould be flexible and of limited duration.


Advocates of maintaining broad executivediscretion in the use of foreign policy controlsbelieve th at :

the Soviet need for Western imports pro-vides an effective lever for affecting So-viet policy and behavior; and/orpolitical intervention in the conduct of in-ternational trade is an appropriate mech-anism of diplomacy; and/orU.S. foreign policy requires a means bywhich t he Pr esident can r eward or punishSoviet actions where no suitable alter-native instruments to manipulation of trade controls exists.

T H E E F F I C I E N C YP E R S P E C T I V E

G o a l s

The primary goal of this category of pro-posals is to create a licensing system whichwill allow actual or potential exporters theability to plan ah ead an d to retain or a cquirereputations as reliable suppliers. A secondarygoal is t o encoura ge compliance and increasethe efficiency of the export licensing process.These ends would be achieved by making theexport control system more predictable, con-sistent, and efficient.


This perspective is based on the propositionthat, whether its objective is to limit or en-courage exports, U.S. policy should be ad-

———

ministered in a timely and predictable man-ner and enforced so as to encourage com-pliance and achieve the maximum benefit/costratio for its policing efforts. It also assumesthat such development would allow U.S. com-

panies to invest more sensibly and competemore effectively in international markets. Thisexpectation is grounded on the necessity forbusiness to predict well in advance whethera given export will be approved. Holders of this perspective tend to believe that foreignpolicy controls are highly disruptive of tradebut unlikely to cause changes in policiesabroad. Some hold tha t such cont rols ar e ap-propriate only when there is a general consen-sus in CoCom on t heir a ppropriateness. Sim-ilarly, some proponents of this position holdthat complex licensing procedures place un-

necessary burdens on U .S. businessmen a ndtaxpayers which could be avoided by adher-ence to a clear and consistent policy.

T H E T R A D E P R O M O T I O N


G o a l s

The primary goal of the trade promotion per-spective is to enable U.S. companies to com-pete effectively in selling t he widest possiblevariety of civilian goods and technologies any-

where in the world. Therefore, controls shouldbe tightly limited in scope an d a dministeredin a consistent and predictable manner.


The trade promotion perspective rests onvarious combinations of some or all of threebasic lines of reasoning. First, the UnitedStates does not have a worldwide technologi-cal monopoly; and since our allies are unlike-ly to change their own export promotion poli-cies which protect only clearly military items,

U.S. efforts to deny the U.S.S.R. many tech-nologies are destined to fail. Second, foreignpolicy contr ols nea rly always fail to alter th ebehavior of those against whom they are di-rected. Moreover, because they are by natureunpredictable, these controls are highly dis-ruptive and cost U.S. business present and

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future sales. Third, export controls are costlyto the United States and should be used to theminimum extent necessary. This view is basedon the perceptions t hat the U nited States isincreasingly becoming a tra ding na tion, t hat

its balance of payments is consequently im-portant, and that export controls beyond thoseobviously necessary for national security pur-poses reduce U.S. firms’ ability to compete forsales.

In some cases, these policy orientations aremutually supportive. It is consistent, for in-stance, to sponsor both provisions whichstrengthen national security controls andth ose which pr omote flexibility for imposingforeign policy controls on trade. Similarly, at-tem ptin g to maximize the efficiency an d pre-dictability of the export licensing system isconsistent with either the national security ortrade promotion perspective. On the otherhand, the national security and export promo-tion perspectives are inherently at odds. Fur-thermore, the very existence of foreign policycontrols introduces an element of unpredicta-bility int o the export licensing system , which

Ch. VII— Options for U.S. Policy q 89 ——————— —— —

works against both efficiency and trade promo-tion. Administr at ion of the 1979 EAA is com-plicated by the fact that inconsistencies of thissort were built into it, and a like result in Sep-tember 1983 could lead to similar problems.

The relat ionsh ips bet ween ba sic policy objec-tives are summarized in table 8.

The remainder of this chapter examines thespecific options available to Congress in craft-ing an export control policy, and discussessome of the potential consequences of and crit-icisms aimed at each. Several of these pro-posals embody more than one of the four basicpersp ectives described above. While they ar ereviewed here under the rubric of strengthen-ing national security versus promoting ex-ports, the reader should bear in mind the varie-

ty of possible combinations. For instance, itis entirely consistent to seek to limit the flowof technology by tightening export require-ments to non-Commu nist n ations, while at th esame t ime seeking to improve th e reliabilityof U.S. exporters by forbidding the retroactiveapplication of foreign policy controls.

Table 8.– Relationships Between Policy Objectives

National ForeignSecurity Policy Efficiency

I. National security-

—.—

— C o n s i s t e n t - C o n s i s t e n tIl. Foreign Policy Consistent — InconsistentIll. Efficiency Consistent Inconsistent —

IV. Trade Promotion Inconsistent Inconsistent Consistent

SOURCE Office of Technology Assessment.

Trade-

Promotion

InconsistentInconsistentConsistent

E X P O R T A D M I NI S T R A T I O N P O L I C Y O P T I O N S

P R O P O S A L S D E S I G N E D T O simultaneously responsible for the promotion

S T R E N G T H E N N A T I O N A L and control of trade. It is possible that in some

S E C U R I T Y C O N T R O L Scases th is may result in neither fun ction be-ing optimally served, but the focus here is

R e m o v e P r i m a r y R e s p o n s i b i l i t y primarily on the fear that, because of its pro-f o r E x p o r t L i c e n s i n g F r o m t h e

motional mandate, DOC is not as vigorous as

D e p a r t m e n t o f C o m m e r c eit should be in applying and expanding na-tional security controls on exports to the

Crit ics of the expor t licensing sys tem have U.S .S .R . Two-kinds of legislative remedies

observed that the Department of Commerce have been proposed: to assign primary respon-(DOC) plays an am bivalent r ole becau se it is sibility for export control to the Secretary of

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Defense; or t o creat e an entirely new an d in-dependent body with sole responsibility for ex-port control.

The first of these suggestions appeared intwo bills introduced in January 1983 in the

House of Represent at ives.’ In 1979, OTA re-viewed similar proposals and observed thatsuch a shift might h ave greater symbolic thanoperational impact, given the active role al-ready assigned the Secretary of Defense byEAA. This symbolic value could be signifi-cant , however, both a s a signal t o America’sallies of U.S. resolve to increase the prom-inence of security in trade policy; and as asignal to the business community that Gov-ernment policy was clearly moving to restricttrade with the U.S.S.R.

The second suggestion, put forth by SenatorJake Garn, is to create an independent Officeof Strategic Trade (OST), with a director whowould sit on the National Security Council. Itis Senator Garn’s contention that export con-trol is too important a function to be lodgedin a Depart ment whose principal tr ade fun c-tion is promotional, and that a high-level OSTwould ‘‘be able t o att ra ct top qua lity person-nel and be able to give consistent and balancedpolicy guidance to the President. ” The Senatorfurther argues that the United States willnever “devote the resources commensurate

with t he m agnit ude of th e Soviet effort to ac-quire Western technology as long as the ex-port control function is contained within theexport promotion agency; and that “we willnever make the consistent, high level effortnecessary to induce our allies to tighten up andharmonize the CoCom control list unless wehave a n a gency with direct access to th e Na-tional Security Council, and th rough it t o thePresident . ’

4

Compelling as this argument may be, theconcept of an OST h as been criticized by par-

ties on both sides of the export control/promo-tion debate because it would create a newagency. In this case, the intrinsic merits of the

‘H~R. 381, introduced by Mr. Roe; and H.R . 483, introducedby Mrs. Byron.

4Freedenberg, op. cit., p. 2192.

proposal ma y be subordinated t o the pr evail-ing mood, both in and out of government,which argues against the proliferation of bu-reaucracies. An intermediate step, less likelyto arouse opposition on these grounds, wouldbe to reorganize the export control functionswithin DOC, both to elevate th e sta tu s of th eOffice of Economic Affairs within the Depart-ment and to remove it from the jurisdictionof an Under Secretary who also has trade pro-motion responsibilities. Such a reorganizationhas reportedly been proposed, but held upwithin the Administration. Should it eventual-ly take place, it will address part, but not all,of Sena tor Gar n’s concerns .

R e m o v e I n d e x i n g F r o m E A A

Existing law mandates that, where appro-

priate, annual increases be made in the per-formance level for items subject to exportlicensing requirements, and that goods andtechn ologies be per iodically deleted from th eCommodity Control List (CCL) as they “be-come obsolete with respect to the nationalsecurity of the United States. ” Indexing hasbeen opposed by th ose who see in it th e dan gerthat items obsolete in terms of Western stateof the art, but still able to significantly im-prove existing Soviet military capabilities, willbe decont rolled. On t he other h and, t he busi-ness community has charged that the CCLstill contains items which a re t rivial by today’stechnological standard and which are easilyavailable worldwide. Room probably does ex-ist for removal of such items without poten-tial damage to U.S. national security. Interest-ingly, the indexing provision of the 1979 Acthas not been implemented by the executivebranch. The administration proposes modify-ing the aut omat ic nat ur e of this provision byrequiring that th e anticipated military needsof potential adversaries be taken into accountbefore decontrol.

B r o a d e n t h e D e f i n i t i o n o f

T e c h n o l o g y

Senator Garn’s Office of Strategic Trade billexpands the definition of technology to covertechnological or technical data which include:

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Ch. VII— Options for U.S. Policy q 91— —

. . . information or knowledge of any kind thatcan be used or adapted for use in the design,production, manufacture, repair, overhaul,processing, engineering, development, opera-tion, maintenance, or restoration of goods orcommodities, including computer software.

Information or know-how may take tangibleform, such as models, prototypes, drawings,sketches, diagrams, blueprints, or manuals, ortake an intangible form, such as training ortechnical services. Technological data shallalso include all goods or commodities that willbe used in the industrial application of thetechnological information, regardless of theend-use classification of the good or commodi-ties.

This definition rightly recognizes the subtle-ty and complexity of technology, and the wideand diverse arr ay of har dware an d softwar e,

tangibles and intangibles, which can ultimate-ly result in the creation of militarily relevantcapabilities. The problem with basing an ex-port licensing system on such a definition isits very breadth and subtlety. The more in-clusive the categories of goods and knowledgecovered by licensing regulations, the more dif-ficult such regulations are to promulgate, ad-minister, and enforce. This is particularly trueof controlling the movement of highly portablean d easily conveyable items , and of monitor-ing oral communication.

R e d e f i n e o r R e m o v e F o r e i g n

A v a i l a b i l i t y C r i t e r i a F r o m E A A

Existing law recognizes that the availabili-ty from other sources of items controlled bythe United States undermines U.S. policiesand places American firms at a competitivedisadvantage. EAA, therefore, directs the Sec-retary of Commerce to establish an ongoingcapacity for reviewing foreign availability, andrequires that, unless the President directs oth-erwise, licenses be granted for those items forwhich foreign availability can be demon-

strated.

Some proposals have been made to entirelyremove foreign availability as a ground forgranting licenses or to define it so as to makeits finding more difficult. The latter approachis taken in the Office of Strategic Trade bill,

which requires that for an item to be availableit be possessed in “compar able quan tity orquality, ” a term which includes the followingfactors:

. . . cost, reliability, the availability and reli-

ability of spare par ts a nd t he cost a nd qua li-ty thereof, maintenance programs, long-termdur ability, scale of production, eas e withwhich machinery will be integrated in themode of production, and spoilages and tol-erance factors for end products produced bythe machinery.

This language goes well beyond that of the1979 EAA, which nowhere defined comparablequa nt ity or qua lity. The adm inistr at ion’s billwould modify the foreign availability test bysubstituting “sufficient” or “significant”quantities.

In Technology and Soviet Energy Avail-ability, OTA discussed at length the practicaland conceptual issues entailed in the require-ment that DOC establish a foreign availabilityassessment mechanism. The above definitionaddresses many, but not all, of the conceptuali s sues ; the prac t ica l p roblems remain .Foremost among them is that most of the re-quired information is likely to be proprietarydata which would have to be obtained from pri-vate firms in other countries, raising the spec-tr e of the U.S. Governm ent ’s engaging in in-

dustrial espionage in allied nations. OTA con-cluded that ascertaining foreign availabilitywould be “expensive, time-consuming, andperha ps intru sive;” and that since DOC’s for-eign availability a ctivities h ad yet to becomefully operational, it could not be determinedwhether foreign availability could be assessedin a cost-effective ma nn er.

In fact, eliminating or narrowing the foreignavailability provision may be moot. DOC stillhas done little to implement this part of theexisting law. In December 1982, it let a con-

tract to a private firm for a year-long study(which will be completed only after expirationof EAA) designed, a mong other th ings, to de-termine the kind of data needed and the rele-vant technological parameters for assessingforeign availability. At this writing, threeemployees staff DOC’s foreign availability as-

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Ch. V/l—Options for U.S. Policy 93 ————— ——

Obtaining multilateral agreement to theU.S. position is liable to be a difficult and long-term process; some would say it is impossible.Part of the difficulty stems from the natureof CoCom itself. CoCom is based on an infor-

mal agreement. Decisions must be unanimousand compliance with its decisions is voluntary.In addition, CoCom’s day-to-day activities areconducted by fairly low-ranking officials, whorequire guidance from their governments.None of these are insurmountable obstacles toaction; in fact, many of these problems existin th e North Atlantic Treaty Organization andare probably endemic to international organi-zations.

A more serious difficulty stems from thefun damen tal differences between t he U nitedStates and the other members in their perspec-tives on East-West trade. (See ch. V.) Thereis a consensus that goods and technology thatwould strengthen the military capacity of theCommunist countries should be controlled toprotect Western security and that CoCom isthe appropriate mechanism to achieve thisend. But since CoCom was founded in 1949,there have been differing definitions of whatconstitutes a strategic commodity and, hence,what to control. The United States has gen-erally favored controlling a larger number of items than the other members. This was true

even during the 1970’s when the United Stateswas the largest requester of exceptions to theCoCom controls. Moreover, the United Statesdevotes more resources to enforcement thando the other members, and it treats violationsmore seriously. Other members do not imposereexport controls, and few impose criminalpenalties on violators. Finally, while the U.S.Government has endorsed the critical technol-ogy approach, European and Japanese leadersremain skeptical th at it can be made to work in pra ctice an d ar e likely to balk at its inclu-siveness.

The question is not whether these problemsare insurmountable, but rather whether Con-gress can legislate meaningful changes inallied policy. Recent events–notably the pipe-line embargo-have suggested that policiesthat can be interpreted as coercive or critical

of the allies may be counterproductive in coun-tries where East-West trade is a sensitiveissue. Yet, there is evidence that quiet di-plomacy and careful preparation of casesbased on solid evidence have led to positive

movement in CoCom. It would seem, there-fore, that CoCom negotiations best take placeat a high level out of the public eye. On theother hand, Congress could signify the impor-tance it attaches to the CoCom effort by ap-propriating funds for America’s CoCom activ-itles.

C u r t a i l A c a d e m i c a n d S c i e n t i f i c

E x c h a n g e P r o g r a m s a n d A c c e s s

t o O p e n L i t e r a t u r e

The difficulties raised by such proposals arediscussed in chapter VI. The conclusionsdrawn in t his discussion ar e tha t first, it ha snot been previously demonstrated that the po-tential security danger to the United Statesof exchange programs outweighs the political,scientific, and cultural benefits of maintain-ing open chan nels of commun icat ion with th eU.S.S.R. Second, it is gen era lly believed th atsuch passive mechanisms of technology trans-fer are less likely to result in Soviet ability toabsorb, diffuse, a nd impr ove on techn ologicalacquisitions than are more active, commercialchannels.

While few would suggest that the U.S. Gov-ernment attempt to control scientific journals,th ere ha ve been calls for restr ictin g access tothe National Technical Information Service(NTIS) on the grounds that the U.S.S.R. usesthis service to acquire valuable militarily rele-vant information arising from Government-sponsored resear ch. It is t ru e tha t Soviet cit-izens can ea sily and legally obta in NTIS doc-uments. However, it is not clear that one classof potential recipients can be excluded fromNTIS circulation without placing cumbersomerestrictions on, or changing the open natureof, the entire service. A more promising alter-native would be to ensure that militarily rele-vant research be disseminated not throughNTIS, but through the Defense Technical In-formation Center, to which Soviet officials donot have legal access.

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94 q Technology and East-West Trade: An Update — ——-...——— - — ———--——

R e s t r i c t T e c h n o l o g y S a l e s

t o F o r e i g n E m b a s s i e s

The administration favors granting thePresident a ut hority to prohibit sales with inthe United States of goods and technology to

embassies of countries to which such exportsare controlled. This proposal is justified on thegrounds that such sales may be reducing theeffectiveness of national security controls.While th is provision would eliminat e a gap inthe law, and thereby have symbolic value, itwould be extremely difficult to administer, andit is not clear that it could be made effective.

P R O P O S A L S D E S I G N E D T O

P R O M O T E E A S T - W E S T

T R A D E

R e s t r i c t P r e s i d e n t i a l P o w e r t oI m p o s e F o r e i g n P o l i c y C o n t r o l s

o n T r a d e

Perh aps n o trade cont rol issue h as so gal-vanized th e U.S. business commu nity as th erecent controversy over extraterritorial andretroactive foreign policy controls on oil andgas technology. The legislative grounds forand circumstances under which these controlswere extended, as well as their potential eco-nomic and political consequences, ha ve beendiscussed elsewhere in this report. Fear of

these consequences, coupled with the generalclimate of unpredictability and uncertaintyengendered by President Reagan’s action,has led to a number of proposals designed invarious degrees to curtail the President vir-tu ally un limited powers in th is area by mak-ing it more costly and less easy to imposetrade controls for reasons of foreign policy.

Suggestions here fall into three basic cate-gories. First, a number of proposals seek toinvolve Congress and the public to varyingdegrees in the decision to impose foreign policy

controls on trade. Second, legislation has beenintroduced by Congressman Bonker (H.R.1565) to authorize insurance against losses in-curred by firms from the imposition of exportcontrols. Third, some measures are designedto make the imposition of foreign policy con-

trols less attractive or available by eitherlimiting the range of eligible transactions orreq uiring that export controls be accompaniedby other measures. Thus, the “Export Admin-istration Act Amendment of 1983” (S. 397) in-troduced by Senat or Heinz cont ains a sancti-

ty of contract provision, meant to ensure thatfinalized cont racts a nd oth er a greements n otbe abrogated by foreign policy controls im-posed after t he fact. Also in t his category aresuggestions to eliminate or curtail extrater-ritorial cont rols, and to require t hat cont rolsbe placed on imports from as well as exportsto countries which are the targets of foreignpolicy sanctions.

Measures in the first category include creat-ing the mechanism for an outright congres-sional veto of foreign policy controls; in-

stituting shorter expiration periods for con-trols once imposed; requiring meaningful priornotificat ion of Congress , including a showingof need, effectiveness, and foreign unavailabili-ty; prior a ssessment by th e administr at ion of the economic and political costs of trade sanc-tions; and holding public hearings and solicit-ing written comments on proposed controls.Many of these measures are strengthened ver-sions of safeguards already enacted into lawin 1979. Their rea ppear an ce is a r eflection of the extent to which presidential actions areperceived to have departed from Congress’ in-

tent in drafting the foreign policy control sec-tion of EAA; and of th e lack of faith in fut ur eexecutive self-restraint.

However, this class of proposals raises sev-eral difficult problems. Foremost is th at th eability to conduct foreign policy is essentialto the concept of Presidential power. Lawswhich seek to encroach on that power risk be-ing unenforceable. They also risk inhibitingnecessary elements of diplomacy-flexibility,the ability to respond quickly to internationalsituations, and the ability to select from a

variet y of responses, short of milita ry action.Moreover, denying the President formal ac-cess t o foreign p olicy cont rols does not neces-

sarily mean that exports will not be used asforeign policy tools. A determined Presidentwould still have access to powers under the In-

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..

Ch. VII—Options for U.S. Policy 95

ternational Emergency Powers Act (IEPA).Forcing recourse to this Act or encouragingthe President to justify trade sanctions asmatters of national security might be counter-productive. Using IEPA would require declar-

ing a nat ional emergency and th us perha ps es-calating t he importan ce of the situa tion. It ispossible that this alone would deter the useof foreign policy controls, but once imposedon these grounds, virtually no checks wouldexist on them. Surely this outcome runs direct-ly coun ter to th e desires an d expecta tions of those seeking to remove trade from the foreignpolicy arena.

The insurance proposal assumes both thatGovernment insurance could adequately com-pensate U.S. firms for lost business, and that

measures which would directly raise the do-mestic cost of foreign policy controls wouldmake them less attractive and tend to limittheir use. While insurance coverage of nonagri-cultural goods would constitute equitabletreatment for nonfarm exporters, in fact, it isnot clear that the compensation providedwould be satisfactory to affected firms or thatserious eligibility problems would not arise.More importantly, insurance might well havethe opposite effect to that intended: the im-position of foreign policy controls might be en-couraged if the government anticipated that

insurance reimbursement would neutralizenegative reaction from U.S. businesses.

Those proposals in category three whichwould result in narrowing the range of trans-actions subject to foreign policy controls seemthe most promising. A sanctity of contractprovision would effectively extend to all ex-porters the same protection now offered onlyto sellers of agricultural commodities. This initself would be equitable treatment. Such aprovision might also help dispel part of the

reputation of unreliability, discussed in chap-

ter IV, which U.S. exporters believe now ham-pers their efforts abroad. Efforts to conduct“lightswitch diplomacy, condemned by Sec-retar y of State Schultz when he was P residentof Bechtel Corp., would probably be curtailed.

The concept behind sanctity of contract hasbeen accepted by the administration, but

many businessmen feel that as framed in theadministration’s bill, it would do little to ac-tually discourage the imposition of foreign pol-icy contr ols or am eliora te t heir im pact on ex-isting contracts. The administration bill would

protect only those contracts requirin g deliverywith in 270 da ys of th e imposition of contr ols,and even t hese cont racts could be set aside if the President deemed it in the national interestth at such export s be prohibited. By cont rast ,the existing contract sanctity provision foragricultur al goods can be set a side only in caseof war or a national emergency declared by thePresident.

Similarly, reducing the scope of U.S. foreignpolicy controls which could be applied toforeign na tionals would be welcomed by U.S.

allies and would possibly retard some of theemerging reluctance on the part of foreignfirms to enter into business relationships withthe United States. Both of these measures tosome extent limit Presidential options. Neitherdoes so as fundam enta lly as t he pr oposals incategory one above.

D e c o n t r o l I t e m s C o n t a i n i n g

E m b e d d e d T e c h n o l o g y

One area of dispute between the Depart-ments of Commerce and Defense has been the

extent to which the list of items subject to na-tional security controls can be shortened, par-ticularly by deleting items incorporating mi-croprocessors. At present, all equipment whichcontains microprocessors requires a validatedexport license, regardless of foreign availabili-ty or strategic significance. The Under Secre-tary of Commerce has testified before Con-gress that as many as 10,000 separate prod-ucts—including personal computers and elec-tr onic toys —are contr olled simply becau sethey included this so-called embedded technol-ogy. The embedded technology debate reflects

the classic dispute between those who put thebenefit of the doubt on the side of nationalsecurity at the expense of U.S. commercial in-terests, and those who believe that the evi-dence for the military risk claimed in thesecases is too tenuous to justify the economiccosts of controls.

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E a s e F o r e i g n A v a i l a b i l i t y

C r i t e r i a

Chapter III discussed the problems associ-ated with creating the capability to assess for-eign availability within the U.S. Government.

One altern ative to un derta king th is difficulteffort would be t o accept potent ial exporter s’own evidence of the existence of such avail-ability. The practical consequence of such apolicy would probably be to moot most of thenational security controls which the UnitedStat es imposes unilat erally, as t here ar e fewcases in which the United States holds a worldtechnological monopoly, and many cases inwhich other Western nations differ from U.S.views on military criticality. Unless and un-til th e U.S. nat iona l secur ity contr ol list con-tains a manageable number of militarily crit-ical items which the United States and itsCoCom allies all agree to deny to the U. S. S. R.,the result would be to release goods and tech-nologies which the Government considers dan-gerous to U.S. security, but which firms inother countries can and do sell to the U.S.S.R.

D e c o n t r o l E x p o r t s t o N o n -C o m m u n i s t N a t i o n s

The Business Roundtable, expressing a viewshared by many other business organizations,has recommended that except for militarily

critical technologies, validated licenses not berequired for any exports to CoCom countries;and that the same principle should apply tosales to neutral non-CoCom nations, so longas they enter into bilateral agreements withthe United Stat es that subject t hem to rulessimilar to those observed by CoCom members.

As was observed above, adoption of theseproposals would significantly reduce thepaperwork routinely processed by DOC. Fur-th ermore, it would redu ce burden s on firms,especially multinationals, which regularly send

large quant ities of equipment a nd da ta over-seas. Such streamlining makes particularsense in light of the fact that information from

routinely processed West-West license applica-tions does not now appear to be used in an yway by the Departments of Commerce or De-fense. On the other hand, these proposals relyon t he dual assumptions th at a small subset

of militarily critical technologies can be readilyand consensually identified, and that CoComand bilat eral agreements can be relied on t oprotect U.S. security interests. As this re-port’s discussions of the MCTL and of CoComhave indicated, both assertions are debatable.

C r e a t e a N e w L i c e n s e C a t e g o r y

f o r M u l t i p r o j e c t O p e r a t i o n s

Several business organizations have pro-posed th e esta blishmen t of a ComprehensiveOperations License (COL) which would be used

for the transfer of militarily critical technol-ogy by firms with substa nt ial overseas man -ufacturing operations. COLs would cover thetransfer of a broad spectrum of militarily crit-ical goods and data between Western compa-nies which have a defined legal relationship(e.g., licensees, subsidiaries, joint ventures) aslong as the transferred material belonged toa class enumerated in the application andserved the company’s predefine mission.These licenses would be of unlimited duration,but subject to periodic review. Transfers tomultiple destinations would be authorized pro-

vided these were listed on the application. Thisproposal has support in the House and Senatebut is opposed by the administration.

The COL would meet part of the demand byU.S. businesses for increased predictability,efficiency, and flexibility in the export licens-ing process. And, as in the case of suggestionsfor eliminating West-West licensing require-ments, Government paperwork could be sig-nifican tly r educed. However, th is pr oposal isbound to arouse the opposition of those whobelieve that U.S. security would not be well

enough protected by cont rols which would beessent ially self-imposed an d self-pat rolled byprivate compan ies.

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Ch. VII—Options for U.S. Policy q 97

PROPOSALS DESIGNED TOIMPROVE THE ENFORCEMENT

OF U.S. EXPORTCONTROL LAWS

Chapter III has discussed criticisms recent-ly directed at export control enforcement ef-forts, and a forthcoming GAO report willassess the effectiveness of existing enforce-ment procedures. There is widespread a gree-ment that such efforts need to be improved.Indeed, this is one issue on which the opinionsof trade controllers and promoters alike are insubstantial harmony. As might be expected,however, sp ecific suggestions on how best toenhance enforcement activities vary greatly.One issue which can be expected to receiveprominent a t tent ion, for instance, is that

greater clarity in the laws and regulationscould substantially increase voluntary com-pliance and thereby greatly facilitate enforce-ment. This section reviews other proposalswhich have emerged in this area.

O r g a n i z a t i o n a l I s s u e s

Perhaps the most fundamental disputeamong those who agree that the system needsimproving is over where t he pr imary r espon-sibility for export control enforcement andcompliance should rest. The three leading sug-

gestions ar e that it remain with DOC; th at itbe moved to Cust oms; or th at it become pa rtof a new OST. The latter option is subject tothe difficulty discussed above, i.e., the presentresistance to the notion of creating new gov-ernment agencies. The Administration clearlyfavors the first proposal, acknowledging DOC’spoor record in the past, but claiming substan-tial improvement s in recent month s. Some of those who have investigated enforcement andcompliance activities (notably the Senate Per-manent Subcommittee on Invest igat ions)have recommended that the responsibility be

assu med by th e Customs Service. Their r ea-soning, as presented in chapter 111, is thatCustoms ha s better domestic and foreign re-sources for and experience in investigating ex-port control violations; and that DOG enforce-ment activities can har dly help but be weak-

ened by th e Departm ent’s du al mission to si-multaneously promote and control trade.

P o w e r s a n d A u t h o r i t y

There is also a fair degree of consensus on

the fact that Government power to investigateexport control cases should be enhanced, re-gardless of where primary enforcement re-sponsibility is lodged. Thus, legislation hasbeen introduced in the House (H.R. 1566)which would keep t he compliance fun ction inCommerce, but would authorize DOG e m -

ployees to: 1) carry firearms and make war-rantless arrests; 2) execute warrants; and3) conduct warrantless searches and seizureson the basis of probable cause. Proposals totr ansfer enforcement t o the Customs Servicehave also recognized existing limitations in thepowers an d flexibility of investigat ors. Theseproblems are addressed in Senator Nunn’s bill,the “Export Administration Enforcement Actof 1983 (S. 407) which gives Cu st oms officersbroad power t o search per sons, vehicles, ves-sels, packages, and containers where there isreasonable cause to suspect that goods or tech-nology will be illegally exported.

These provisions a ddress t he pr oblem t ha texisting law inhibits the conduct of export con-trol-related investigations by constrainingagent s’ int ervent ion. But increas ing search

and seizure powers too far is likely to meetwith resistan ce. One response to complaint sthat Operation Exodus has seriously inter-fered with routine shipment of goods, for in-stan ce, is a pr oposal by Mr. Bonker th at ran -dom inspections in t he en forcement of exportcontrols be prohibited, and searches limitedto cases where specific information of possi-ble violations has been received.

Other suggestions may be found in th e ad-minist ra tion’s bill. It conta ins a crimin al for-feiture provision authorizing the Government

to seize any proceeds of a violation of nationalsecurity controls. This provision aims to re-duce the monetary incentives to violate exportcontr ols. The a dmin istr at ion’s bill would a lsoauthorize the President to prohibit foreign vio-lat ors of U.S. nat iona l secur ity cont rols from

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export ing to th e United Sta tes. The adminis-tration views this provision as a forcefulmeans of penalizing foreign companies thatviolate U.S. national security controls. How-ever, it has already met with strong Europeanopposition.

R e s o u r c e s

A final issue on which there appears to besubstantial agreement is that additional re-sources should be devoted to enforcement. Butwhile the level of effort funded in DOC hasbeen obviously inadequate, it would be a mis-take to believe that money can solve exportcontrol enforcement problems, or that thereis a necessary correlation between the budgetand the results of an enforcement program.There are three reasons for this situation.

First , so long a s var ious kinds of int elligenceand investigation activities are dispersedwithin the Government, interagency coopera-tion is vital. Larger budgets will not necessari-

ly solve problems of duplication or turf issues.Second, an important part of the enforcementeffort d epends for it s su ccess on t he coopera-tion of foreign officials. The degree of thiscooperation may partly reflect the scope of U.S. efforts, but it is also directly related tothe larger diplomatic issues discussed in chap-ter V.

Finally and most importantly, no enforce-ment effort, no matter how massive, can hopeto detect and prosecute all, or even most, il-legal shipments. An enforcement programmust be visible and successful enough to posea ser ious det errent , but it sh ould a lso recog-nize some point beyond which the cost/benefitrat io produces diminishing retu rns. The verynature of sensitive technology -e.g., the sizeof microprocessors; the portability of data; the

volume and variety of computer software—makes much of it relatively easy to carry un-detected and/or extremely intractable to well-defined cont rol guidelines.

A F I N A L N O T E

Few of th e policy options discussed in th ischapter are new. Similarly, the basic policyorientations have long constituted the centralth emes of th e export cont rol debat e, and it is

highly unlikely that September 1983 will seethe passage of a radically different export ad-ministration law. However, this hardly meansthat the present process is trivial or irrelevant.Congress presently faces both a great oppor-tunity and a great danger: it can craft legisla-

tion which expresses a coherent stance ontrade with the U.S.S.R.—be it more restrictiveor liberalizing-and contains provisions de-signed to ensure a s far as possible tha t t he ex-

ecution of the law is in accordance with thatstance; or it can compromise in ways that frag-ment its message and vitiate efforts to pur-sue consistent policies. As this report hasalready noted, the st akes a re now higher forall part ies interested in U.S.-Soviet t rad e.

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A p p e n d i x

O t h e r E a s t -We s t

T r a d e I s s u e s

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A p p e n d i x

O t h e r E a s t -W e s t T r a d e I s s u e s

This report is not intended to be a comprehen-sive analysis of U.S. trade relations with the Com-munist world. Rather, it focuses on U.S. trade pol-icy toward the U. S. S. R., as governed by the Ex-port Administration Act (EAA). Of the importantissues which lie outside the narrow scope of thisstudy, two seem to merit particular attention: U.S.trade relations with the People’s Republic of China(PRC) and the role of credit in East-West trade.These are the subject of this appendix, which seeksto document significant developments in theseareas over the past 4 years.

T H E P E O P L E ’ S R E P U B L I C

O F C H I N A

In 1972, the U.S. Government, which had previ-ously banned virtually all trade with China, em-barked on a policy of “evenhandedness” in eco-nomic relations with China, i.e., treating it and theSoviet Union in the same fashion. This policy be-gan to erode in 1978, when President Carter im-posed foreign policy controls on certain oil and gasequipment exports to the Soviet Union, but notto China or to other Communist countries. ’ TheSoviet invasion of Afghanistan accelerated theprocess of differentiation. The vehemence of theChinese reaction against the U.S.S.R. assuaged,even if it did not entirely remove, lingering doubtsabout China’s commitment to opposing the SovietUnion and seeking closer relations with the UnitedStates. Deepening Sine-American political rela-tionships led to a liberalization of U.S. export con-trols, the first concrete indication of which wasDefense Secretary Harold Brown’s announcementthat the United States was willing to considerlicensing exports of some dual-use military equip-ment to China on a case-by-case basis. Examplesof possible exports were trucks, communicationsequipment, and early warning radars. Further-more, in January 1980, Congress approved a tradeagreement with China, and the U.S. Governmentdecided to license Chinese purchases of nonlethalmilitary support equipment on the Munitions Con-

‘U.S. Congress, House Committee on Foreign Affairs, Subcommit-tee on Europe and the Middle East, An Assessment of the Afghanistan

San ctions: Implications for Trad e and Diploma c.1’ in the 1980 (Wash-

ington, 1). C.: [J. S. Government Printing Office, 1981), pp. 115-116,

trol List. Since 1978, U.S.-PRC trade has grownmore than fourfold in nominal terms. (See table 9.)The new U.S.-PRC trade policy has been re-

flected in the reclassification of China in U.S. ex-port control regulations so that it is no longertreated in the same fashion as the U.S.S.R.

2Th e

change was justified on the basis of the differinggrounds on which the identification of exports det-rimenta l to U.S. security is carr ied out in th e casesof China and the Warsaw Pact countries. Thesedifferences were reflected in the approval of licenses for secure communications equipment forChinese diplomatic facilities in the United States,computers for use in metal refineries, peripheral

enhancements for computers previously exportedto China by U.S. firms, technology for manufactur-ing transport helicopters, and some integrated cir-cuits. In September 1980 the Carter administra-tion announced new licensing guidelines. They in-cluded the following:

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Licenses would no longer be automaticallydenied when the end-user was engaged in mili-tary activities.Licenses for equipment or data for manufac-turing military items would probably bedenied if the military items themselves wouldnot be approved for export.Licenses would not be approved if the poten-

tial military application was “so significantthat the export would present an unaccept-able risk regardless of the stated end-use.”3

The Reagan administration’s review of exportlicensing policy included reconsideration of ex-ports to the PRC. One of the first indications of the new policy was the announcement in June 1981of President Reagan’s decision to liberalize export—————

245 FR 27922.

“’New Guidelines Set for Exports to China, ” Business America, oct.

6, 1980, p. 20.

Table 9.—U.S.-PRC Trade, 1978-82(million U.S. dollars)

U.S. Exports U.S. Imports Trade Turnover

1978 . . . . . . . $818.24 $323.95 $1,142.19 1979 . . . . . . 1,716.50 592.28 2,308.781980 . . . . . . . 3,748.99 1,058.34 4,807.331981 ...., . . 3,598.60 1,895.33 5,493.931982 . . . . . . . 2,904.54 2,283.70 5,188.24

SOURCE U S Department of Commerce

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controls, to make China eligible to purchase mili-tary equipment, and to ask Congress to removerestrictive clauses from the legislation that pro-vide for equa l trea tment of the PRC a nd t he SovietUnion. In July 1981, the Department of Commerce(DOC) announced more specific guidelines, stating

a “predisposition” to approve exports at twice thetechnical level previously exportable to China.’ Ap-plications for exports at higher levels would beconsidered on a case-by-case basis. In addition,DOC announced that the Depart ment of Defense(DOD) would only review applications for exportssubject to CoCom controls. Unilateral review byCommerce was expected to significantly speed thelicensing process.

The new guidelines were confirmed and expand-ed on December 29, 1981.

5According to the

Federal Register notice, the Reagan administra-tion determined that:

. . . it is in our national interest to foster a strong,

secure and friendly China, capable of deterringpotential aggressors and contributing to peace andstability, and to participate in China’s economicdevelopment for the benefit of China and for theUnited States. The Administration recognizes theneed for a clear trade policy that will lend flexibili-ty and predictability to American business in trad-ing with China, while ensuring our national securi-ty, promoting U.S. foreign policy and protectingU.S. commercial interests.This statement of policy notwithstanding, ap-

plications are to be reviewed to ensure that exportsto the PRC are consistent with the policy ex-pressed in EAA of restricting the “export of goodsand technology which would make a significantcontribution to the military potential of any coun-try or combination of countries which would provedetrimental to the national security of the UnitedStates. ” The regulations reaffirmed the 1980guidelines and explicitly doubled the technicallevel for permissible exports to the PRC.

U.S.-PRC trade policy under the Reagan admini-stration has not always appeared consistent. InJune 1982, Ambassador Stoessel speaking on be-half of Secretary Haig to the National Council onU.S.-China Trade, characterized China as “afriendly country with which we are not allied, butwith which we share many common interests.“

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Nonetheless, at about the same time the admin-istration reportedly tightened licensing policy———-

4U.S. International Trade Commission, 29th Quarterly Report to Gm -

gress and the Trade Policy (h-mnittee on Trade between the United States an d the Nonmarke t Economy Chntries During 1981 (Washing-ton, D. C.: March 1982), pp. 33-34.

’46 FR 6283G.‘Reprinted in Department of State Bulletin, vol. 82, No. 2064, July

1982, p. 50.

towards the PRC in response to intelligence re-ports of technology leakage to it and the SovietUnion.’ Yet, in September 1982, the Reagan ad-ministration licensed the sale of a sophisticatedcomputer, used in the United States for simulatingmissile flights, to the PRC.

U.S. exporters and others have also charged thatU.S. licensing policy towards China remains un-clear. In their view, licensing decisions have beenspeeded somewhat, but still remain slow, and li-censing has not been liberalized as much as thenew policy would suggest, preventing U.S. ex-porters from competing effectively. They suggestseveral reasons: First, despite the announcedchange in policy, DOD is still reviewing about thesame number of applications. Second, licensingagencies interpret the new guidelines differently.Commerce has a “presumption of approval” incases falling within the “2-times guideline, ” butDefense only a “predisposition” to approve. Third,

DOD still takes a tough position on PRC trade. 8

In addition, they argue that unilateral U.S. con-trols on software place them at a disadvantage vis-à-vis other Western firms and that there are noclear guidelines for software exports.

In the opinion of many U.S. exporters, the fun-damental problem is the ambiguity of U.S. policy.This view was forcefully expressed by an officialof the U.S.-China Trade Council in testimony be-fore Congress. Commenting on the December 29Regulations, he argued that:

The new regulations thus give with one hand andtake away with the other. This leaves the businesscommunity and the bureaucracy to work with a sys-

tem that seeks to “foster a strong, secure, andfriendly China capable of deterring potential ag-gressors,” but prohibits contributions to China’smilitary potential. Making this policy even more dif-ficult to implement is that, because China is classi-fied as a country to which exports are controlled fornational security reasons, the Secretary of Defenseis required . . . to recommend disapproval of any ex-port of goods or technologies that would make a sig-nificant contribution to China’s military potential.With the question of whether China is a friend oran adversary unresolved, it is not surprising thatthere are interagency disputes over implementation.Nor is it surprising that technical guidelines set outunder administration policy have not been followed.

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‘Michael Weisskopf, “Chinese Trade Issues Seen Snagging S hu l t z , ”Washington Posk Jan. 31, 1983, p. A12.“Chris Brown, “The problems With Country Group P,” Ct i a Busi-

ness Review, vol. 9, No. 2, March-April 1982, pp. 21-22.“’Prepared Statement of Roger W. Sullivan, Executive Vice Presi-

dent of the National Council for U.S.-China Trade, before the Subcom-mittee on International Economic Policy and Trade, Committee on For-eign Relations, U.S. House of Representatives, Mar. 8, 1983, rnimeo.,

p. 2. (Emphasis in t he original.)

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Appendix— Other East-West Trade Issues . 103

Others in the United States have the oppositeconcern; i.e., that export controls for the PRC havebeen liberalized too far.

Chinese officials have been reported to be dis-pleased a t U.S. licensing policy, part icular ly atdelays in licensing. Referring to this issue, HuangHua, the former Foreign Minister, told the Coun-

cil on Foreign Relations, “In view of the recentdevelopments . . . one cannot help asking, ‘Doesthe United States view China as a friend or af o e ? ’

1 0

An important test of U.S. licensing policy to-wards China will be license action for a satelliteground station to receive and process data fromthe LANDSAT-D satellite, which provides agricul-tural and geophysical data. The computers andother equipment for the ground st ation a re notconsidered to have direct military applications, butin the view of many U.S. experts, could conceiv-ably be put to military use. The issue first aroseduring the Carter administration. On January 31,

1980, it signed an agreement that would allow thepurchase of a ground station, but the PRC delayedthe transaction, probably because of a shortage of har d currency. On October 8, 1982, the Reagan a d-ministration announced that it was prepared toconsider applications to export satellite groundstations and notified potential sellers that tech-nical and procedural guidelines were available.

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On J anua ry 17, 1983, China an nounced that it hadsigned a contract with a U.S. firm, Systems & Ap-plied Sciences Corp., to purchase the necessaryequipment. Although the administration has ap-proved the sale in principle, the firm will have toapply for a license.

Technology sales cannot be viewed in isolationfrom other aspects of U.S.-PRC relations, whichhave recently deteriorated. On the U.S. side, thereare serious concerns about the PRC basic orien-tat ion in intern ational politics an d a bout reportsthat it has supplied nuclear aid to South Africaand Pakistan. On the Chinese side, there are con-cerns about U.S. policy towards Taiwan, textile ex-ports to the United States, and policy on sales of nuclear equipment.

Thus, U.S. licensing policy towards the PRC hasbeen significantly liberalized under both the Carterand Reagan administrations. This policy, whichwas effectuated through administrative measures,illustrates the large degree of leeway conferred onthe President by EAA. Since this policy could bereversed, those favoring greater liberalization inpractice and in policy advocate statutory changes.

C R E D I T I S S U E S

The Polish debt crisis, Romania’s repaymentproblems, and effort s by both th e Cart er an dReagan administrations to curb or raise the costof Western credit to the Soviet Union all reinforcethe importance of the role of credit in East-Westtrade. U.S. concerns about future Eastern bloccreditworthiness now extend beyond Poland andRomania to countries such as the Soviet Unionand the German Democratic Republic, oncethought to be excellent credit risks. Part of thisconcern centers on the danger of “reverse lever-age, ” in which the borrower acquires influence overthe lender through the very size of its debt.

It is possible that slower growth and decliningcreditworthiness will moot the issue of private andofficial credit to the East, as bankers and govern-ments focus on collecting old loans rather than ex-tending new ones. Many believe that the Eastern

countries’ shortage of hard currency makes creditthe most important of all Western commodities tocontrol. Closely related to this point of view is onethat holds that if trade is to be used as an instru-ment of foreign policy, controls should be placednot simply on exports, but also on credits and im-ports as well. However, the United States alonehas little leverage in this area: the Jackson-Vanikamendment precludes the extension of officialcredits to most nonmarket economy countries, andexcept in time of war or national emergency thereis no legal mechanism for restricting private cred-its, although the Government may informally re-quest U.S. banks to use restraint in their lending

policies.O f f i c i a l C r e d i t s t o t h e

S o v i e t U n i o n

Under the Carter administration, the UnitedStat es launched a dua l effort to curb or r aise thecost of credit to the Soviet Union. One part en-tailed negotiations within the Organization forEconomic Cooperation and Development (OECD)to persuade members to raise interest rates fromth e levels set in 1978 in t he Arran gement onOfficially-Supported Export Credits. Adhered toby 22 countries, the Arrangement specifies min-imum rates for official credits to all nations. Coun-

tries are assigned to one of three categories (rel-atively rich, intermediate, and relatively poor) onthe basis of per capita national income.

l2A second

—“Besides the United States, the participants in the Arrangement are

the Eu ropean Economic Community, Australia, Austria, Canada , Fin-land, Japan, New Zealand, Norway, Portugal, Spain, Sweden, andSwitzerland.

‘“Quoted in Weisskopf.1147 FR 44595.

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Appendix—Other East-West Trade issues . 105 —

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limit subsidized credits by raising the interestrate charged, requiring larger downpayments,or limiting the share of a project that couldbe financed through official credits;establish a mechanism to monitor a programfor reducing subsidized credits;

place the Soviet Union in a separate categoryfor all economic relations and coordinate theflow of Western credits to it; andplace a temporary moratorium on credit to theSoviet Union while credit issues were dis-cussed.

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The U.S. team was not able to achieve its goalof securing an agreement before the Versailles eco-nomic summit, and the attitude of the French Gov-ernment was widely thought to have been themajor barrier. At U.S. insistence, the issue wasplaced on the summit agenda. Although un-doubtedly weaker than the United States hadhoped, language on credit was included in the com-

munique issued at the end of the meeting. It readas follows:

. . . ta king int o account existing economic and fi-nancial considerations, we have agreed also to han-dle cautiously financial relations with the U.S.S.R.and other Eastern European countries in such a wayas to ensure that they are conducted on a sound eco-nomic basis, includ ing also the n eed for comme rcial

prudence in l imiting export credits. ( E m p h a s i s

added.)

The participants also agreed to exchange informa-tion in OECD on credits and other aspects of com-mercial relations with the East. As was describedin chapter V, whatever partial consensus achieved

here was challenged less than 2 weeks later byFrench Pr esident Mitterr and, who rejected th eidea of limiting credits to the Soviet Union.

Mitterra nd’s stat ement notwithstan ding, theparticipants in the OECD Arrangement, includingFrance, did agree to changes which effectivelyraised the minimum interest rate charged theSoviet Union to 12.15 percent. This was accom-plished by changing the U.S.S.R.’s classificationfrom “intermediate” to “relatively rich” and byraising minimum interest rates for groups of coun-tries in these categories. The new interest rates,which went into effect on July 5, 1982, are shownin table 10.

Administration officials have expressed satisfac-tion with the revised OECD agreement, but theUnited States did not achieve all that it sought.

‘“Christopher Madison, “East-West Trade okay, Says U. S., But ItShouldn’t Be on the Cuff, ” ,\ ’ational JournaL Aug. 21, 1982, p. 1464and .John Plender , “East-West Trade: An End t o Business as Usua l, ”

Economist, May 22, 1982, pp . 70 , 72.

Table 10.—Minimum Interest Rates Under theOECD Arrangementa

Over 5 to Over 81/2 to2 to 5 years 81/2 years 10 years

Relatively rich . . . . 12.15 12.40 N/Ac

Intermediate b . . . . 10.85 11.35 N/Ac

Relatively poor . . . 10.00 10.00 10.00aThese rates do not apply to off!cial credits in yen nor to credits for exports ofcertain aircraft or nuclear powerplants

bFrom July 5 to Dec 31, 1982, there were different rates for countries that hadpreviously been in the intermediate categories and those that had been “grad-uated” from poor to Intermediate.

c Relatively rich countries and ‘‘old” intermediate are ineligtblefor credits over81/2 years “New” Intermediate countries remain eligible for credits up to 10years.

SOURCE Export-lmport Bank

In addition, some are skeptical about compliance,They assert that it is easy for a country to circum-vent the agreement by lowering the price chargedfor equipment while offering the agreed interestrate, or by “grandfathering” a credit agreement.

T h e P o l i s h D e b t

At th e end of September 1982 Poland’s debt tothe West was estimated at $25 billion, of whichsome $17.5 billion is owed to Western govern-ments or is guaranteed by Western governments.About $7.5 billion is private, unguaranteed debt.As table 11 demonstrates, U.S. entities hold arelatively small share of Polish debt,

The United States and other Western countriesrescheduled official Polish credits falling due in1981, but, in response to the declaration of mar-tial law in Poland, declined to reschedule debts fall-

ing due in 1982. At a meeting in ear ly January1982, the NATO ministers agreed not to resched-ule these debts, which a re th ought to total about$10 billion, until th e situa tion in Polan d was nor-malized. President Reagan has set three conditionsfor U.S. rescheduling of Poland’s official 1982debts: 1) an end to martial law, 2) release of po-litical prisoners, and 3) resumption of the Govern-ment’s dialog with Solidarity and the Church. Theadministration does not consider the Polish Gov-

Table 11 .—Poland’s Debt to the United States,as of September 1982 (billion U.S. dollars)

Nonguaranteed loans by private creditors(primarily commercial banks) ... ... ... ... ... .. $1.197

Direct credits and guarantees from CCC . . . . . . . . 1.701Export-Import Bank loan . . . . . . . ... . . . . . . . . . . . 0.247AID loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.006

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.152

SOURCE U S Department of Treasury Off Ice of East-West Economic Policy

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