Technology and East-West Trade: An Update · logical leads through development of a list of militarily critical technologies-which both the United States and its allies would deny

Technology and East-West Trade: An Update

May 1983

NTIS order #PB83-234955

Technology and East-West Trade

An Update

Library of Congress Catalog Card Number 79-600203

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

ForewordBefore 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 Senators Garn and Riegel, Chairman and Ranking Minority Memberof the Committee on Banking, Housing, and Urban Affairs, is designed to assistCongress in this process. It updates OTA’S 1979 report on Technology 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 the Communist world, discussing these impacts in the context of the thennewly enacted Export Administration Act.

This report has a narrower scope but nonetheless revisits many of the sameissues. It summarizes the major provisions of the 1979 Export AdministrationAct, highlighting those provisions which have led to problems of interpretationor execution; recounts major provisions in U.S. export control policy towards theSoviet 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 grateful for the assistance of the Council on Foreign 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 the cooperation of the Departments of State, Defense, and Commerce 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. GIBBONSDi re c t o r

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Technology and East-West Trade: An UpdateProject Staff

Lionel S. Johns, Assistant Director, OTAEnergy f Materials f and International Security Division

Peter Sharfman, Program ManagerInternational Security and Commerce Program

Ronnie Goldberg,* Principal Investigator

Kate Tomlinson, * Analyst

Jonathan Sack,* Research Assistant

Administrative Staff

Jannie Coles Dorothy Richroath Jackie Robinson

OTA Publishing Staff

John C. Holmes, Publishing Officer

John Bergling Kathie S. Boss Debra M. Datcher Joe Henson

Doreen Foster Linda Leahy Donna Young

*OTA Contractor

Acknowledgments

This report was prepared in the International Security and Commerce Program of the Officeof Technology Assessment. The staff wishes to acknowledge the assistance of the 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:

The Central Intelligence Agency The Department of DefenseThe Department of Commerce The Department of StateThe General Accounting Office The National Security CouncilThe Congressional Research Service

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Contents

Chapter Page

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

vii

CHAPTER I

Summary:Issues and Findings

Contents

IMPACTS ON THE U.S. ECONOMY. . . . . . . . . . .

POLITICAL IMPACTS . . . . . . . . . . . . . . . . . . . . . . .

U.S.-Allied Relations . . . . . . . . . . . . . . . . . . . . . . . . .U.S.-Soviet Relations . . . . . . . . . . . . . . . . . . . . . . . . .

MILITARY IMPACTS . . . . . . . . . . . . . . . . . . . . . . .

OPTIONS FOR U.S. POLICY . . . . . . . . . . . . . . . . .

TheTheTheThe

National Security Perspective . . . . . . . . . . . . . .Foreign Policy Perspective. . . . . . . . . . . . . . . . .Efficiency Perspective . . . . . . . . . . . . . . . . . . . .Trade Promotion Perspective. . . . . . . . . . . . . . .

Combining the Perspectives . . . . . . . . . . . . . . . . . . .

TableTable No.1. Options for U.S. Policy . . . . . . . . . . . . . . . . . . . . .

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CHAPTER I

Summary: Issues and Findings—— .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 hasborne direct responsibility for the 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 security requires greater protection ofAmerica’s technological leads. Simultaneous-ly, worldwide and domestic recession have in-creased the importance to the U.S. and other‘Western economies of a healthy export sector,requiring the development of new markets andthe 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 haveconfirmed 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-quate in the face of these developments andshould 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 bedrafted.

This document, written at the request of theChairman and the Ranking Minority Memberof the Senate Committee on Banking, Hous-ing, and Urban Affairs, is designed to assistCongress in this process. EAA applies to U.S.

trade with all nations. However, this updatefocuses narrowly on American exports to theU.S.S.R. It does not argue for a particular‘‘right’ answer regarding the optimum direc-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. national security; the abil-ity to use trade leverage in the conduct of for-eign policy; and predictability in the exportlicensing process. This effort was complicatedby the nature of technology transfer itself. Inthe present environment, technology is com-plex, often intangible, widely diffused, andsubject to swift change. Thus, the difficultyof definition exacerbates the difficulties ofcontrol.

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-mental to the national 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 threat 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 ● Technology and East-West Trade: An Update

ambition of protecting U.S. military techno-logical leads through development of a list ofmilitarily 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 those in the White House. The adminis-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 andSpain, 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 policy controls other than those onagricultural commodities, but it does stipulatethat affected industries be consulted and Con-gress be notified before the imposition of re-strictions; and it directs the President to con-sider alternative actions and a detailed list ofcriteria before instituting the controls.

Herein lies a basic dilemma. EAA assumesthat 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 questionablecases 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 andthe U.S.S.R. is still a matter 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 toguarantee the sanctity of agricultural exportcontracts. Exporters of goods not subject tothese protections are now questioning the eq-uity of such legislation. Second, the fact thatthe 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 reactionto the declaration of martial law in Poland.This action pro~’eked intense controversy athome, and outrage in Western Europe. U.S.business has reacted to the situation’s unpre-dictability: in some cases, the fate of licenseapplications has been the subject of great un-certainty; in other cases, ongoing previously

——. .— Ch. I—Summary: Issues and Findings ● 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. firms from exporting petroleumequipment and technology to the U.S.S.R.This attempt failed in the sense that foreigngovernments 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.

Europeans have charged that these foreignpolicy controls have been implemented in ahypocritical and unfair manner. In their view,the U.S. Government has 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 ofoil and gas equipment and technology, itemsin which Europe and Japan have a greater eco-nomic stake. It could be argued that this seem-ing contradiction in U.S. policy has given theEuropeans 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, are explored in the following pages.

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

IMPACTS ON THE U.S. ECONOMYThe volume of U.S. trade with the Soviet

Union 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 ofthe foreign trade balance sheet are indirect andunquantifiable, and weighing their importancerelative to the political and national securityconsequences 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 restricting it, no matterhow 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 ofthe expansion or contraction of trade that arefelt on both the micro and macro levels. Bothpoints are illustrated in the results of the 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–

perhaps permanently—lucrative marketshares.

The retroactive and extraterritorial natureof 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 actionscasts a pall over the conduct of internationaltrade. Concern over possible interruption offuture 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. economythan trade with the Soviet Union. The intensenegative reaction at home and abroad pro-voked by the U.S. sanctions argues that theystruck close to the nerve. Multilateral 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 andvaried interested parties.

Unfortunately, there is no way to measurethis 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.

POL IT ICAL IMPACTS

U . S . - A L L I E D R E L A T I O N S and acceptable scope of trade with the SovietUnion than those prevailing in the White

It 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

Ch. I—Summary: Issues and Findings ● 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 stimulating equipment and technologysales. 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 turnstress the failure of the United States to ap-preciate the grounds for their conceptions ofnational 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 the Reagan administration, culminat-ing with a dispute between the United Statesand France over the meaning and intent of adeclaration on East-West trade signed at theJune 1982 Versailles Summit. This disputewas immediately followed by U.S. impositionof extraterritorial, retroactive export controlson oil and gas technology. Through these sanc-tions, the United States attempted to embargoall oil and gas equipment trade between theU.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 multilateral studies 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 recrimination and ill will in Europe, itis reasonable to expect differences among theother participants’ perceptions as 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 East-West trade. Rather, it is that contin-ued lack of communication and persistent dif-ferences will lead to another public display ofserious 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 significant incremental 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 ofwhat is best for West European security dif-fers from that of the West Europeans them-selves. Should the United States use 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 bydomestic imperatives in Europe and Japanand worldwide economic forces than they 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 markets.

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

According to the view currently predomi-nant in the administration, the East-West con-frontation is an expression of a fundamentallyadversarial relationship which is unlikely tobe changed in the near future, and certainlyunlikely to be relaxed through trade. Indeed,


trade with the Soviet Union is no longer seenas in part an opportunity for forging peacefulties, but rather exclusively as the means bywhich the West is contributing to the strength—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 ofexpressing 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, many believe that 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 therebyexact changes in Soviet behavior. This is a con-troversial view.

In both Technology and East-West Tradeand Technology and Soviet Energy 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. Theaftermath of U.S. attempts to embargo grainand energy equipment exports to the U.S.S.R.dramatically demonstrate the limitations onU.S. power to successfully conduct a tradeleverage 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 these 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 itselfhave benefited from the disruptions in theWestern alliance precipitated by U.S. policies.The gas pipeline sanctions have been variouslyjustified as being designed to:

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protest Soviet responsibility for the decla-ration of martial law in Poland;prevent West European dependence onSoviet gas;damage-or at least not aid-general So-viet economic development by inhibitinga 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. - -

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 unclear.

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-ment of the effects of U.S. policies to the in-determinate future.

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

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Ch. I-Summary: Issues and Findings. 9

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10 . Technology and East-west Trade: An Update

M I L I T A R Y

There is no question that the U.S.S.R. hasbenefited militarily from Western technol-ogies and equipment. In cases where the U.S.Government has expressly permitted the saleof such items to the Soviet Union, it has en-gaged in actions which injure its own nationalsecurity. Recent intelligence analysis has con-firmed the fact that the U.S.S.R. is engagedin a massive high-level effort to acquire mili-tarily relevant Western technology, and thatit 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 isthat different transfer mechanisms lend them-selves to different legislative and administra-tive remedies. Unfortunately, in the rhetoricsurrounding 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‘ ‘sieve, and that 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 ofextending controls to a larger array of technol-ogies and products, and reducing Americancommercial 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 future 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.,transfers occurring through perusal ofopen scientific literature, academic ex-changes, trade fairs, etc.

I M P A C T SII.

III.

IV.

v.

Legal transfers through purchase oftechnologies under general license.Legal transfers through purchase oftechnologies 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.

Constraints on technology transfers in cat-egory I risk impinging on the free worldwideaccess to scientific developments, on whichscientific advances depend. In addition, Amer-ican academics are jealous of the prerogativesof academic freedom. U.S. exchange programswith the U.S.S.R. have been characterized bya basic lack of symmetry, but the transfer ofinformation 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., commercial-channels. In addition, stronglegal and social forces in the United Statesmake this area particularly intractable to well-targeted controls.

Categories IV and V involve illegal actionson 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 UnitedStates must rely on the enforcement agenciesof other nations, and cooperation has notalways been forthcoming. So long as East-West trade policy differences between theUnited States and its allies persist, no quick

Ch. I—Summary: Issues and Findings ● 1 1

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

Categories II and III contain items which,to the extent that they strengthen the Sovietmilitary, are not adequately protected by U.S.law. Category II raises the issue of identify-ing those items which should be, but are not,controlled for national security purposes.Agencies charged with export control arefaced with the enormous technical task ofkeeping abreast of rapidly developing technol-ogies in a variety of fields, with a variety ofpotential military applications. It is the taskof 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 and military sectors can take 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 military gain by the U.S.S.R.In practice, export licensing procedures havebeen the subject of intense criticism. The prob-lem is that while it is relatively easy to iden-tify past licensing decisions that seem to havecontributed to Soviet military capabilities, itis not clear that:

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●

economic or political considerations at thetime were not considered by high-leveldecisionmakers to outweigh the militaryrisks;these military applications could havebeen anticipated at the time;denial of a U.S. license would have with-held the technology from the 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 theexport licensing process and the “case law”which provides the grounds for granting li-censes in disputed cases together reflect anunderstanding of the concept of “military sig-nificance,” which has been subject to widelyvaried interpretations, often colored by theprevailing political climate. Congress has en-dorsed efforts to develop a means of assessingmilitary risk which rests on objective techno-logical criteria’ and is therefore relatively im-mune to shifting political opinion. This effortis predicated on the assumption that one canidentify the subset of technologies on whichU.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 attempts to use them asinstruments of political leverage. It is diffi-cult, after all, to make a rational case for sell-ing a militarily critical item or process to theU. 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 military criticality is controversial. On theevidence 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 communityover 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

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

it most wants. These constraints include theextent to which the Soviets use illegal meansto acquire Western technology; lack of alliedagreement on a more strenuous multilateralexport control policy; the difficulties inherentin identifying in advance which technologieswill have important military payoffs; and theincreasing worldwide diffusion of technology.While existing export criteria could certainlybe 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 realistic export control program.It is successful to the extent that 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.

OPTIONS FOR U.S. POLICYThe debate over U.S. export administration

policy 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 ExportAdministration Act will reflect congressionaldecisions 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— xxxx—

—x

x—xxxx—

— —x—

— —— —— —— —

x xxxx

—— —

x— —— —x x— — —.

T H E N A T I O N A L S E C U R I T YP E R S P E C T I V E

G o a l s

The primary goal of policy options whichfocus on U.S. national security is to make itas difficult as possible for the Soviet defenseestablishment to acquire and use Westerntechnology. Proposed legislation is designedto prevent or inhibit the dissemination ofequipment and technologies believed to havemilitary utility.

A s s u m p t i o n s

Adherents of this perspective believe that:●

●

●

●

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 the economic costs 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 YP E R S P E C T I V E

G o a l s

The primary goal here is to preserve a situa-tion in which Presidential use of trade as aninstrument for achieving political objectiveshas been as easy and effective as possible. Thisinvolves the power to apply controls to itemswhich 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 ● 1 3—

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 YP E R S P E C T I V E

G o a l s

The primary goal here is to allow actual orpotential exporters the ability to plan ahead,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-velopment would allow U.S. companies 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; andthat complex licensing procedures place unnec-essary burdens on U.S. businessmen and tax-payers which could be avoided by adherenceto a clear and consistent policy.

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

T H E T R A D E P R O M O T I O NP E R S P E C T I V E

GoalsThe primary goal of the trade promotion per-

spective is to enable U.S. companies to com-pete effectively in selling the widest possiblevariety of civilian goods and technologies any-where in the world. Therefore, controls shouldbe tightly limited in scope and administeredin 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 UnitedStates 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 EP 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 betransferred for the legislative to the executivearena and resolved by Presidential decisionsor administrative action.

CHAPTER II

The Export AdministrationAct of 1979

Contents

PageFORERUNNERS 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

CHAPTER 11

The Export AdministrationAct of 1979

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-WestTrade. This account reveals two relatedthemes. The first is the continued tension be-tween the forces urging export control versusexport promotion. The second is the clearchange 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-ertheless, the perpetuation of the two diver-gent positions has continued to shape U.S. ex-port control policy, and both can find expres-sion in the Export Administration Act of 1979(EAA). This chapter reviews the major provi-sions of the current legislation and identifiesthe controversies which have grown up aroundits interpretation.

FORERUNNERS TO THE 1979 EXPORTA 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 nationalemergency. The Export Control Act of 1949,passed in the early stages of the Cold War,marked the inception of two important poli-cies: the imposition of export controls on aregular and continuing basis during peace-time; and the legislative expression of thethesis that nonmilitary trade 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 security dangers of commercial in-tercourse with the Communist world; and thebroad language of the act allowed the controlof 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 warfare was deleted. The act now at-tempted to reconcile an encouragement oftrade with the East with the maintenance ofU.S. military security. Thus, the dual but oftencontrary tendencies in export control policyremained; the weight and the presumption,however, had shifted in the spirit of detenteto 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 name of national security was re-vived. Each time some provisions to strength-en export controls were included, but the pre-vailing opinion weighed largely in favor ofmodest facilitation of East-West trade. Thedebate which preceded the passage of the 1979EAA, however, reflected both disenchantmentwith detente and an intensified concern with

17


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 resultinglegislation embodies both concerns, althoughits findings and declaration of policy clearlylean in the direction of easing the difficultiesattendant on conducting East-West trade.

The law assumes that the freedom to exportis a basic and important right which shouldbe abridged only under specific circumstancesand then only in a clearly delineated manner.At the same time, EAA grants the Executivesweeping 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 its administration.When an emergency situation produces a na-tional consensus on the propriety and utilityof instituting export controls, differences be-tween the basic intentions of the EAA framersand the manner of its implementation do notarise. However, under less drastic circum-stances where the President and Congressmay disagree as to whether export controls areappropriate or effective, the provisions ofEAA tend to magnify any basic policy dif-ferences between the law’s spirit and 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.

PROVISIONS OF THE 1979 EXPORTA 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:

● The findings and declaration of policy ofthe act both stress the importance of ex-ports to the U.S. economy and thereby tothe national security and well-being of thecountry. It is deemed the policy of theUnited States to minimize uncertainty inexport controls; to apply such controlsonly after full consideration of their eco-nomic impacts; and only to the extent nec-essary to protect national security, fur-ther significant foreign policy goals, orprotect the domestic economy in cases ofshort supply.

● EAA separates the criteria 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 necessary to re-strict exports which make a significantcontribution to the military potential ofanother country which would prove detri-mental to the national security of theUnited States. The latter are to be usedonly where necessary to significantly fur-

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

● A number of provisions are designed tomake the export licensing process moreaccountable to the public, quicker, moreefficient, and less inclusive. Among theseare the following:–The establishment of Qualified General

Licenses which authorize multiple ex-ports to the Soviet Union, Eastern Eu-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 regularly by the Secre-tary of Commerce; and that license ap-plicants be informed of the progress oftheir application and the reasons fordenial.

—The establishment of action deadlinesfor referral of applications in the eventof interagency review.

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

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

●

●

●

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

—The detailed specification of proceduresfor 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 impactof the waiver.The President is given total discretion indeciding to apply foreign policy controls,but the act clearly intends to inhibit thispower by providing detailed guidance 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 enjoinsthe President to consider alternative ac-tions and the following criteria before in-stituting the controls:–the probability that the controls will

achieve the 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;—the ability of the United States 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 President 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 CoComlist to a mutually acceptable and enforce-able level; and enhancement of foreign en-forcement activities.The role and powers of the Secretary ofDefense 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-plications to countries for which exportsare controlled for national securitypurposes.

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 reflectsa widening of the criteria for the exercise ofnational 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 thatsuch legislation is interpreted differently bydifferent parties, or that those empowered toexecute the law will do so in a manner consist-ent with their own policies.

20 . Technology and East-West Trade: An Update

AMBIGUITY IN THE 1979 EXPORTA 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 sources. First, the languageof export control has always included broadterms which lend themselves to varying inter-pretations. The discussion in chapter 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 ofthis power to cover all goods and equipmentproduced 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 administration’s pay-ing only lip service to legislative provisions incases where these might inhibit desired policyactions. 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 further 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 has been nearly 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-merit. ) Other issues, i.e., control of scientificand 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. Thissubject has been resistant to legislation dueto the informal and consensual character ofCoCom 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 have 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 availability in chapter 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 Stion of specific provisions, and more general-ly, over the intent of its framers. Much of thiscontroversy is the familiar expression of the

Ch. II— The Export Administration Act of 1979 ● 2 1

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-logical leads. Ironically, it has becomesimultaneously more important to sell to andto withhold U.S. goods from the Communistworld. It will be the difficult task of thosedrafting the next Export Administration Actto craft a policy which addresses both of theseneeds without being so dualistic as to furtherneither.

CHAPTER III

Implementation of theExport Administration

Act of 1979

.— .—

Contents

——

PageFOREIGN POLICY CONTROLS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

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

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

Soviet Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Eastern Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

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

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

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

Export Administration Amendments Act of 1981 . . . . . . . . . . . . . . . . . . . . 43Agriculture and Food Act of 1981 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Futures Trading Act of 1982 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

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


TablesTable No. Page2. Time Required To Process Licenses, Fiscal Year 1982 . . . . . . . . . . . . . . 393. Results of Operation Exodus During Fiscal Year 1982.. . . . . . . . . . . . . 404. Comparison of OEE and Customs Cargo Seizures . . . . . . . . . ..+...... 42

CHAPTER I I I

Implementation of theExport Administration Act of 1979

The Export Administration Act (EAA) of1979 has governed U.S. export control policytoward the Soviet Union under two differentPresidents. Its implementation has of coursebeen influenced by the general foreign policystances of these administrations. But it hasalso been shaped in important ways by a seriesof events which have contributed to a funda-mental reassessment of trade with the Sovietbloc.

Even before the December 1979 invasion ofAfghanistan, the Carter administration hadbegun to express disillusionment with thedetente-era view that trade with the Westwould moderate Soviet behavior. In 1978, forinstance, export controls were placed on someU.S. oil and gas equipment as a response toSoviet treatment of dissidents. In the wake ofthe invasion, President Carter tightened thecriteria for licensing equipment and technol-ogy exports to the U.S.S.R. and imposed em-bargoes on grain and other commodities.Thus, the Reagan Presidency began during aperiod of markedly cooler trade relations withthe Soviet bloc. These relations further deteri-orated with the declaration of martial law inPoland and in response to the Reagan admin-istration’s strong anti-Communist views.

This chapter presents a detailed account ofevents related to U.S. policy on exports to theU.S.S.R. from December 1979 through thespring of 1983. Two basic themes emerge: theuse of export controls as instruments of U.S.foreign policy; and a focus on the importanceof strengthening national security controls.The former development seems to havestemmed from the perception that other for-eign policy instruments were either insuffi-ciently forceful (diplomatic demarches, can-cellation of academic and scientific exchanges)or unsuitable (military responses), and thebelief that withholding U.S. exports can inflictreal economic damage on the U.S.S.R. The lat-ter trend first emerged under President Carter,but it particularly reflects the Reagan ad-ministration’s concern over the magnitude ofthe Soviet military threat and the degree towhich that threat has been enhanced by theacquisition of U.S. and other Western technol-ogy.

The developments discussed in this chapterfocus first on these two themes. In addition,the chapter chronicles changes in licensing andenforcement procedures and describes thereactions of Congress and U.S. allies to theseevents.

FOREIGN POLICY CONTROLS

G R A I N

B a c k g r o u n d

The agricultural, and particularly the grain,sectors of the United States and the SovietUnion exhibit a high degree of complementari-ly. A net exporter until the early 1960’s, theSoviet Union has since periodically importedlarge quantities of grain for the livestock feed

needed to fulfill plans to increase meat con-sumption. The United States, in turn, has fol-lowed an export-oriented agricultural strategyto dispose of large production increases. Amajor grain exporter during the 1960’s, theUnited States exported more than half itswheat crop, 30 to 40 percent of its corn, and50 percent of its soybean crop by the early1980’s. Agricultural commodities have ac-

25‘ 1- 1. 1 – . . – : ‘ .

26 . Technology and East- West Trade: An Update

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

During the 1970’s, the United States wasclearly the U.S.S.R. preferred agriculturalsupplier. American farmers were able to sellto the U.S.S.R. the large quantities necessaryto simplify purchasing and shipping arrange-ments. But from the 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 have been called ‘‘the great grain rob-bery , and again in 1975, which led the Fordadministration to 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 October1976, 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 afterconsultation with the 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 larger. 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 the Carter administration’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 this step because EAA provides fora congressional veto of restrictions on agricul-

‘This and the following section are based on U.S. Congress,House Committee on Foreign Affairs, Subcommittee on Europeand the Middle East, An .4ssessment of the .4 fghanistan Sanc-tions: implications for ‘Trade and Diplomacj’ in the 1980(Washington: (J.S. (;o~ernrnent printing Office, 1981), pp. ZO-SZ.

tural commodities when these are applied forreasons of foreign policy or short supply. 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 thesanctions, the United States would makeavailable only 8 MMT.

This embargo was aimed at the 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 prospects of other grain-producing coun-tries were less favorable than usual. Thus, theresulting import shortfall would begin to befelt before the U.S.S.R. harvested its 1980winter wheat crop and before grain from theSouthern 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 alternative suppliers would make graindifficult to embargo.

The administration recognized the criticalimportance of securing international 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-ternational markets. On U.S. initiative, 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(Argentina and Brazil). With the exception ofArgentina, the wheat-exporting countriespledged not to directly or indirectly replace theembargoed grain. In practice, the other par-ticipants appeared to view this 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-

od. Argentina declared 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 traders. Argentina did, however, de-clare that it did not intend to take commer-cial advantage of the embargo or to ‘‘seek toalter 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 the Carter administration tosecure Argentine cooperation failed. On the issue of soybeans, Brazil took a positionsimi1ar to Argentina.

From late spring the grain embargo cameunder increasing criticism, and events in theUnited States and abroad threatened to under-mine it. First, the U. S. Government 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 companies 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 washaving 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 ofmachinery and inputs had led to preembargoforecasts of a 20-percent decline in 1980 farmincome. USDA estimated that the loss of 17MMT of grain exports would reduce 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 measures which included:

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incentives to farmers to place more grainin the farmer-owned grain reserve, thussiphoning it off the market;changes in the eligibility requirements forthe grain reserve program, which allowedpreviously ineligible farmers t o use theprogram on a limited basis:temporary assumption by the Commodi-ty Credit Corporation (CCC) of exporters’contracts;purchases by CCC of certain agriculturalcommodities, including 4 MMT of embar-goed wheat:export promotion, including increases inCCC export credit and guarantee pro-grams and the conclusion of grain supplyagreements with China and Mexico; andincentives for alcohol fuels production.

According to initial official estimates, price supports would add $2 billion to $3 billion tothe Federal budget for fiscal years 1980 and1981. Some private sector estimates were higher– 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 introduced legislation to re-scind the embargo. The key test of congres-sional opinion came on an amendment 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 to hold that the United States hadcaused the Soviets a shortage of 10 to 11MMT of grain, and pledged to continue theembargo until the Soviets made a ‘‘tangibleand demonstrable” move to end the occupa-tion of Afghanistan.

Overseas, support for U.S. policy was wan-ing. In November 1980 the Canadian Govern-ment announced that it would no longer im-pose limitations on grain sales to the SovietUnion, but pledged, nonetheless, not to replace


grain embargoed by the United States. TheCanadians also pledged that their sales wouldnot be higher than they would have been inthe absence of a U.S. embargo. Canada wasreportedly acting here on the belief thatlimiting grain sales had harmed its own farmsector; and out of displeasure with the U.S.policy of promoting grain sales to China. Chinahad been a steady customer for Canadiangrain since 1970. Australia, another tradi-tional supplier of grain to China, was alsoreported to be displeased with the U.S.-Chinagrain agreement. Despite French efforts to endthe Common Market support for the embargo,the European Economic Community (EEC)agreed to hold sales to the previous year’s level(1.7 MMT).

T h e E n d o f t h e E m b a r g o

In light of candidate Reagan’s opposition tothe grain embargo, most observers expectedhim to lift controls on grain exports soon aftertaking office. The issue, however, proved tobe difficult and controversial within theReagan administration. The press reportedthat Agriculture Secretary Block was urgingan end to the embargo, while Secretary ofState Haig favored its retention.

Those who wished to lift the embargo ar-gued that it was ineffective, and that itharmed the U.S. farm sector more than theSoviet Union. Their opponents rejoined thatthe sanctions were having an impact on theSoviet Union and that the impact on theUnited States had been overestimated. Theyargued that the embargo would become moreeffective in 1981, having only been in effectfor half of the 1980/81 crop year, during whichthe United States had sold the Soviet Uniona total of 15 MMT of grain. They also pointedout that the Soviet Union had recently ex-perienced its second consecutive poor harvestand had drawn down grain stocks in responseto the embargo. Most importantly, the timingwas bad. Soviet troops remained in Afghan-istan and were poised on the Polish border.Lifting the embargo would send the U.S.S.R.the wrong signal.

Despite these arguments, the Presidentlifted the sanctions on agricultural com-modities and phosphates (see next section) onApril 24, 1981. Attempts by some Membersof Congress to reinstate the embargo throughan amendment to the Export AdministrationAmendments Act of 1981 were rejected incommittee.

I m p a c t o f t h e E m b a r g o o n t h eU n i t e d S t a t e s a n d t h eS o v i e t U n i o n

Assessment of the relative costs and ben-efits of the grain embargo remains a controver-sial issue, largely because of lack of agreementon the appropriate criteria for measuring itsimpacts. For example, some critics of the em-bargo argued that it failed because Sovietforces remained in Afghanistan. Others main-tained that this was an unfair test as it wasunrealistic to expect U.S. trade sanctions toforce a Soviet withdrawal. President Carterhimself appeared to take the latter view, em-phasizing the use of trade controls as signalsof U.S. disapproval designed to deter futureAfghanistans. Alternatively, both critics andsupporters of the embargo have focused on thedegree of punishment inflicted on the SovietUnion as keys to its successor failure. In thisview, the most important measurements arethe gap between intended and actual importsby the Soviet Union, Soviet meat production,and livestock inventories. No unambiguousanalyses of these have yet appeared, and ex-perts continue to disagree on the costs to theU.S.S.R. of U.S. actions. The issue of the im-pact of the grain embargo on the U.S. economyis discussed in chapter IV.

P o s t - E m b a r g o P o l i c y o n G r a i nS a l e s t o t h e S o v i e t U n i o n

After lifting the embargo, the Reagan ad-ministration had the options of authorizingabove-agreement sales of grain for the re-mainder of the existing 5-year agreement, dueto expire on September 30, 1981, and of rene-gotiating a new agreement. At this time, theadministration was moving towards a policy

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

of normalized grain trade with the U. S. S. R.,and offered to sell the Soviets an additional3 MMT of wheat and 3 MMT of corn over the8 MMT of grain already authorized for the re-mainder of the agreement. The administrationalso began to prepare a negotiating positionon a new long-term grain agreement (LTA).Apparently because there was insufficienttime for a full-scale renegotiation, both coun-tries agreed to extend the existing agreementfor a sixth year, through September 30, 1982.The administration immediately offered to sellthe Soviet Union up to 23 MMT of grain dur-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 because the Soviets could obtain grainfrom 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, whichwould have required expensive compensationfor farmers in the event of a selective embargoon agricultural commodities, may have con-tributed to this decision (see below).

But to the dismay of farmers and grain trad-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 that grain sales have 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 August 1982,President Reagan stated that the embargowas 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 theseventh year of the 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 itselfas 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 Reaganannounced an end to the ban on negotiationsfor an LTA.

As will become clear in the next section, theReagan administration has adopted 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. and foreign companies 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 arguethat grain is a strategic good since it is vitalto 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 thesame time, however, U.S. officials continual-

30 ● 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 contradiction in U.S. policy has given theEuropeans an additional justification for de-clining to endorse American views on East-West trade. This subject is discussed furtherin chapter V.

O I L A N D G A S E Q U I P M E N TA 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 ofthe American oil and gas industries has tradi-tionally made the United States a preferred-ifnot 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 peakand sharply decline by the mid-1980’s, pro-ponents of trade leverage or linkage identifiednumerous items of American oil equipmentand technology, the denial of which purported-ly would have a serious impact on the Sovietoil industry. These items ranged from blow-out preventers and drill bits to sophisticatedseismic equipment. (See Technology andSoviet 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 WestEuropean credits and equipment, is destinedto furnish significantly increased amounts ofSoviet gas to West Germany, France, Italy,and other European nations.

From its inception, the idea of a West Si-berian pipeline aroused the concern of manyMembers of Congress. Their anxieties cen-tered on the potential dangers of West Euro-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.

U.S. efforts to stop the pipeline 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 and Norwegian gas)were considered either impractical or un-acceptable in Europe.The prospect of equipment sales was atleast as important to the West Europeansas the gas purchases. The West Germansteel industry, for example, has a largestake in the 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. TheUnited 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 stations. These items, as well as manypieces 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 Research Service,Office of Senior Specialists, so~’iet Gas Pipeline: U.S. Options,Issue Ilrief # IB82020, Jan. 20, 1983, (prepared by John P.Iiardt and Donna 1.. (;old); and U.S. Congress, House Commit-

Ch. III

position of martial law in Poland, PresidentReagan announced on December 29, 1981 thatexports of equipment for the transmission andrefinement of oil and gas would require val-idated licenses. Since the issuance of such li-censes for the U.S.S.R. was halted, this wastantamount to an embargo of the export of allU.S. oil and gas technology and equipment tothe Soviet Union. Among the licenses affectedby this action was one that had been pendingfor Caterpillar Tractor Co. to export 200 pipe-layers, for use in gas pipelines.3

This embargo did not simply affect itemsshipped directly from the United States. 1 talso applied to U.S.-origin equipment and tech-nology abroad. Foreign subsidiaries and li-censees of U.S. firms were allowed to conductoil and gas-related business with the U.S.S.R.only under the conditions that their exports:1 ) did not contain any U.S.-manufactured com-ponents: 2) did not contain any U.S.-originmaterial; and 3 ) were not manufactured usingU.S. technology exportd to the subsidiary orlicensee after August 1, 1978. Thus, theBritish, Italian, French, and West Germanfirms which had contracted to supply theU.S.S.R. with gas turbines for the WestSiberian pipeline were prohibited from usingGeneral Electric rotors and blades in theirmachinery.

As of June 22, 1982, the U.S. Governmentmaterially escalated this situation by extend-ing the oil and gas equipment embargo to over-seas subsidiaries and licensees of U.S. firms.In other words, foreign subsidiaries of U.S.companies were prohibited from exporting oiland gas equipment to the U.S.S.R., regardlessof whether the equipment contained U. S.-

Implementation of the Export Administratlon Act of 1979 ● 31—

origin components or material, or had beenproduced with U.S. technology. The controlswere also applied retroactively, i.e., to con-tracts which had already been concluded andfor which licenses had been granted.

European reaction to these controls was vo-ciferous. Four days after their imposition,EEC foreign ministers declared them in viola-tion of international law and in August. EECissued a formal protest. Meanwhile, theFrench Government officially ordered the af-fected French companies to defy the ban andhonor their contracts. The British Govern-ment followed suit, and the Italian ForeignMinistry publicly announced that Italian con-tracts with the U.S.S.R. would be honored.

The first firm to export pipeline equipmentto the Soviet Union in defiance of the UnitedStates was Dresser France, which shippedthree compressors on August 26. The U.S. De-partment of Commerce ( DOC) immediatelyplaced a temporary order on it and on Creusot-Loire, a nationalized French company, deny-ing them the right to import or use any U.S.goods, services, or technology. For Dresser theform of this ban was softened in early Septem-ber (apparently after the intercession of theSecretaries of State, Commerce, and theTreasury) to cover only U.S. goods and tech-nical data for oil and gas exploration, produc-tion, transmission, or refinement. Firms inItaly, Britain, and West Germany were placedunder the revised and more limited denialorder: however, the ban on Creusot-Loire wasnot modified to bring it in line with the sanc-tions on other firms until late October. Allsanctions on European firms were lifted onNovember 13, under the circumstances de-scribed in chapter V.

Although both sets of sanctions were osten-sibly undertaken in direct response to thesituation in Poland, the Reagan administra-tion has also justified them in terms of theireffect on the construction of the West Siberianpipeline. Regardless of whether the pipelinewas the direct or only a secondary target ofthe controls, the ensuing debate over the ad-ministration policy centered largely on the


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 Committee 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 interests. This issue is discussed atlength in chapter IV.

O T H E R C O M M O D I T I E SA 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 concentratesof phosphoric acid, and all concentrates ofphosphatic fertilizer. No export applicationsfor these commodities were to 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 salesconstituted 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-tities of SPA, a high-quality liquid phosphate

concentrate used in the production of fer-tilizers, for varying quantities of other fer-tilizer chemicals, anhydrous ammonia, urea,and potash. In 1980, Occidental’s exports ofSPA were to rise to the contract maximum-1MMT valued at $400 million.

The rationale for the phosphate embargowas 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 mightreduce the 1981 crop by 2 to 2.5 MMT. Sincethe United States accounted for 90 percent ofworld production of SPA, they had little 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, andanother 50 percent with raw phosphate rockfrom Mexico and Morocco. In addition, Oc-cidental is believed to have shipped 40,000tons of SPA in 1980 before the embargo wentinto effect. President Reagan lifted thephosphate embargo together with the partialgrain embargo.

The Soviet Union probably was inconven-ienced by the U.S. action—phosphate rock re-quires processing and is highly corrosive. Onthe other hand, it appears that the major ef-fect of the embargo fell on the United Statesand 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-

‘Assessment of Afghanistan Sanctions, op. cit., pp. 55-56.

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

duced losses for U.S. producers and gains forU.S. farmers. The impact naturally was great-est for Occidental, which converted one of itsplants to produce the lower priced merchant-grade phosphoric acid, at the cost of somejobs. The Carter report forecast that theUnited States would maintain its dominantposition on the world phosphate market, butas in the case of grain, there seems to havebeen some rearrangement of world trade pat-terns.

E q u i p m e n t f o r t h e K a m aR i v e r P l a n t

Even before the invasion of Afghanistan,U.S. participation in the Soviet Kama RiverAutomotive Plant was controversial.’ Theworld’s largest truck factory, Kama includesan IBM computer and other U.S.-origin equip-

‘Ibid., pp. 68-70.

ment, purchased under licenses approved bythe Nixon and Ford administrations. In thelate 1970’s, the U.S. Government began to re-ceive reports that the Soviet military wasusing Kama trucks and that its diesel engineswere being installed in military vehicles. Thisissue became a matter of public controversyin late 1979, when Lawrence J. Brady, thenDeputy Director of the Office of Export Ad-ministration, told a congressional committeethat the Soviet Union was violating U.S. ex-port controls by diverting Kama trucks to mil-itary uses.

According to members of the defense andintelligence communities, the Government hadknown of the diversion of Kama products since1977, but had not been aware of its scale untilthe time of Mr. Brady’s testimony. U.S. ex-perts concluded that the engines might be suit-able for light armored vehicles, but not for ar-

Photo credit TASS from SOVFOTO

Civilian trucks on the main conveyor at the Soviet Kama River plant

34 ● 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 administration established for-eign policy controls on parts and componentsfor 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 the grounds that it wasinconsistent with U.S. policy for an Americancompany to supply a factory that producedvehicles for the invasion. Moreover, U.S.equipment could be further used to increaseproduction while Soviet forces remained in Af-ghanistan. These controls 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 the Soviet Union or the United Statesis 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 has probably caused them toforego planned production of a substantialnumber of trucks;” moreover, the expandedcontrols on exports to Kama and ZIL “shoulddelay modification, updating, or expansion ofthese plants while alternate sources are devel-o p e d . 6 The report also noted the possibilityof diversion from approved consignees in theSoviet Union (not all Soviet automotive fac-tories are covered by the controls). After con-

— —“{Report to the Congress Extending and Expanding Foreign

l)olicy F;xport Controls, ” reprinted in U.S. Department of Com-merce, International Tradt~ Administration, Export Administra-tion Annual Report F}r 1982, J$’ashington, 1).(’., Februar~’ 1983,p, 152.

suiting with Ingersoll-Rand, the administra-tion concluded that the loss of the $8 millioncontract had little impact on the company, itsemployees, or the community.

A somewhat different assessment was laterpresented 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 contractswould 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 ot h e O l y m p i c s

On May 28, 1980, the Carter administrationimposed foreign policy controls on all exportsexcept medicine and medical supplies intendedfor use or sale during the 1980 Moscow Sum-mer Olympics. The control also applied to“payments or transactions which are in anyway related to arrangements involving or re-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 direc-tive to the Secretary of Commerce, the Presi-dent explained that the purpose was to carryout his decision against “any United Statesparticipation in or aid to” the Games.” The

“’Statement of T. A. Dukes, I+; xecutive Vice President, th[~Ingersoll-Rand Co., accompanied by Robert J. Secombe, VicePresident, Automated Production Systems Division, WoodcliffI.ake, N.J., ” in U.S. Congress, Senate Committee on ForeignRelations, Subcommittee on International Economic Poliq,Economic Relations With the Soviet Union, hearings, 97thCong,, 2d sess., Jul~F 30, Aug. 12 an{i 13, 1982 (}$’ashington,r). c.: U.S. (jo\rernment Printing office, 19821, pp. 204-207.

‘ileprinted in 45 FR 21613,

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

control followed a request, 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 theadministration to impose a mandatory ban be-cause of their concern that voluntary compli-ance would expose them to Soviet breach-of-contract suits.

These export controls, which lapsed in Jan-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 werestopped.” Although press reports indicate thatthe Soviet Union was able to replace 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 hardcurrency receipts. U.S. firms also sufferedsome short-term and, in the case of companiesthat sought to break into the Soviet marketby 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 United States and the Soviet Union (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.

NATIONAL SECURITY CONTROLSAs in the case of foreign policy controls, the

policies 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 passageof the 1979 EAA, licensing of exports to theSoviet Union was temporarily’ suspendedtwice and more stringent licensing criteriahave been applied. Both administrations havedifferentiated between the Soviet Union andsome East European nations.

S O V I E T U N I O N

All outstanding validated licenses and theprocessing of applications for new licenses forexports to the Soviet Union were suspendedin early January 1980 after the invasion ofAfghanistan 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. 11 The new guidelines in-cluded the following:

A “no exceptions” policy, under which theUnited States would deny most applica-tions to export goods subject to CoComcontrols. Thus, the United States 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 stricter technical criteria forcomputer exports.


Applications involving process controltechnology in militarily relevant indus-tries, technology for producing oil and gasequipment, and technical data related toitems subject to multilateral controlswould be subject to special scrutiny.A presumption of denial would exist forapplications for proposed exports of tech-nology for manufacturing oil and gas ex-ploration and production equipment. Apresumption of approval would exist forend-use products.

In addition, DOD canceled a delegation ofauthority 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 the Soviet Union were denied 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 administration also conducteda 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 interests in cases of exports 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. General Accounting Office, Export Gkmtrol RegulationGxdd Be R@duced Without Affecting National Security, Wash-ington, D. C., May 26, 1982, p. 8. (Hereafter, 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 ofthe 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 States to apply more liberal licensingcriteria to countries that maintain some dis-tance from Soviet foreign policy (Romania14)or have more liberal domestic policies than theSoviet Union. The Carter administration liber-alized licensing policy towards Hungary on thelatter 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 theHelsinki Final Act.15

At the same time, applications for licensesto East European countries have been morecarefully scrutinized for possible diversion tothe Soviet Union. Exporters have chargedthat this policy has significantly slowed li-cense processing. Be that as it may, the valueof approved high-technology exports to East-ern Europe increased from $127 million in1979 to $340 million in 1980.16

In September 1982 a new interagency groupon policy towards Eastern Europe affirmedthe practice of differentiating U.S. relationswith the countries of Eastern Europe. How-ever, one sphere in which the Reagan adminis-tration’s policy differs from that of its prede-cessor is on the question of technology trans-fers to non-Soviet Warsaw Pact nations. Thecurrent program involves tightening, in con-sultation with our allies, export controls acrossthe board in order to guard against diversionto the Soviet Union.17 The following factors are

14 Romatia’s recent imposition of an education tax on prospec-tive emigrees may possibly lead to the suspension of its MFNstatus, It is also possible that license applications for exportsto Romania will now be reviewed more strictly.

“45 FR 37183-37184.“GAO Report, op. cit., p. 33.“Reprinted in U.S. Congress, House Committee on Foreign

Affairs, Subcommittee on Europe and the Middle East, Devel-opments in Europe August 1982, hearings, 97th Cong., 2d sess.,Aug. 10, 1982 (Washington, D. C.: U.S. Government PrintingOffice, 1982), p. 23.

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

now considered in licensing exports to EasternEurope:

●

●

m

For all items controlled for security 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 domestic policies, particularlyRomania and Hungary.]’

The administration distinguishes betweentechnology and products, assuming that theformer is more likely to be made available tothe Soviet Union by East European importers.

In order to prevent possible diversion of em-bargoed items to the U. S. S. R., in June 1982the Reagan administration 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. 19 In 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-ment 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-trol purposes.

T h e M i l i t a r i l y C r i t i c a lT 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 adminis-tration has been using the MCTL and the in-formation obtained in preparing it in itsCoCom 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 these revisions. The MCTL is discussed fur-ther in chapter VI.

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

ADMIN ISTRATIVE ISSUES

L I C E N S I N G

The export licensing system has long beencriticized as being too cumbersome, 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 many 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

38 ● Technology and East-West Trade. An Update— ..—

no licenses were granted in fiscal years 1980through 1982 for reasons of foreign availabil-ity.21 DOC officials have conceded in congres-sional testimony that this has been the case,but point out that Congress made no appropri-ation for staffing and that external researchfunds were impounded until fiscal year 1982.DOC has now established a foreign availabilityassessment program. This subject is discussedfurther in chapter VII.

Similarly, the creation of the Qualified Gen-eral License (QGL) has resulted in little effec-tive change in the administration of exportlicenses. Regulations establishing proceduresfor the use of the QGL were published in theFederal Register in July 1980.22 To be eligiblefor a QGL, the exporter must “reasonably ex-pect” that it would replace at least 10 vali-dated licenses annually to eligible countries.In addition, the foreign consignee must be theend user. Initial licenses are valid for a year,and may be extended for two more. But de-spite the language in EAA encouraging theuse of QGLs wherever possible, only four suchlicenses had been issued through September1982. The Reagan administration now pro-poses eliminating this license entirely from thenew EAA.

Other measures to speed or improve the li-censing process have fared better. The Com-modity Control List was reformatted for easieruse during 1982; the staff of DOC’s Office ofExport Administration has been increased;and the installation of a computer system totrack license applications and provide enforce-ment information has met with some success.The elimination of the requirement that li-censes be obtained to reexport items inCoCom-approved transactions has also re-sulted in some paperwork reduction.

Reagan administration officials have re-ported to Congress that the interagency licens-ing system has also been revitalized, although

~1 ~.’xp{>r( ‘.~dministr~tion Annual Reporf F}’ 1980, ~~. 1 ~- 14 ~Export .4dministration .hnual Report F1’ 1981, p. 18, and bLx-port Administration .4nnual Report b’)” 1982, p. 16.

“45 FR 45891-45898, R[~g-ulations implementing the new li-(.ensing procedures requir~>d by the ac>t were also issued. Bothwent into effect on ,June 1, 1980, the deadline specified in the act

bureaucratic tugs of war between the agenciesinvolved have by no means been eliminated.In addition to the formal interagency reviewprocess described in detail in chapter VII ofTechnology and East-West Trade, Senior In-teragency Groups have been formed to providean additional arena for issue resolution. Whilea large number of referrals to such groupsmight tend to slow the licensing process, andcould potentially contradict the intent of Con-gress stated in the 1979 EAA that “a deter-mination with respect to any export license ap-plication be made to the maximum extent pos-sible by the Secretary [of Commerce] withoutreferral of such application to any other de-partment or agency, there is little evidencethat this process is much used. Defense con-tinues to review a relatively large number ofapplications, but only a few receive a formalinteragency review. Of the 6,635 applicationsto export items controlled for national securitypurposes to proscribed countries received byCommerce in 1982, 1,800 were referred toDOD; interagency discussions were requiredfor fewer than 200; and fewer than 20 werereferred to the Assistant Secretary level orhigher.’”

Administration policies adopted after 1979have undoubtedly placed additional strains onan already overburdened licensing system.Among these were the Afghanistan-relatedreview of previously issued validated licenses;the new guidelines for exports to the SovietUnion (see above) and China (see appendix),which increased the number of cases for whichthere were no precedents; and more carefulchecking for the possibility of diversion to theSoviet Union of exports to Eastern Europe, ’4Officials have reported success in eliminatingthe backlog of unprocessed applications andmeeting statutory deadlines, and the export

“‘Statement of I,ionel H, olrner, Under Se(’retar\’ for Inter-naLiona] Trade, U, S. l)epartrnent of (’ommerce, before theSenate Banking (’(lmmittee, F’eb. i], 1983, mimtw,, pp. 1-2.

“%> t.estimon~r h~’ representati~.es of (’ommerc~~ and I)efcnseIn (1, S. (’ongress, I louse Committee on Foreign Affairs, Suh-{’on~mittee on 1 nternational l~;conomic Policy and Trade, lj.Y-port Administration Amendments .4ct of 1.981, hearings, 9i’th(Y{)ng., 1 SL SI?SS,, hfar. ’26; Apr. 14 , 2H: NI al 1 ~1, 1 !4/! 1 [}l’ashing-ton, 1). (’,: [ 1.S. ( ;ok’t~rnment l>rinLin~ ( )ffi(w, 19H 1 ), pp. \);] -f).j,1 ‘20-12 I .

Table 2.—Time Required To Process Licenses,Fiscal Year 1982

●

●

At the request of Senators Jake Garn andHarry Byrd, in February 1980 the Gen-eral Accounting Office (GAO) studied theU.S. export control system. Part of thisreport, published on May 26, 1982, dealswith enforcement problems.An inter-agency working group was formedin June 1980 at the request of PresidentCarter to investigate enforcement efforts.1 t concluded that “much needed to be

●

●

done to strengthen our combined effortsin this area. 25

Congress’ perception that compliance byU.S. firms and cooperation among agen-cies with enforcement responsibilitiesneeded improvement was reflected in theExport Administration Amendments Actof 1981 ( see below ).Two 1982 studies by DOC‘S Inspector

O v e r v i e w o f U . S .Enforcement Efforts

Major responsibility for enforcement of the1979 EAA lies in the Office of Export Enforce-ment (OEE), recently created by reorgainiza-tion and expansion of the former ComplianceDivision (CD) of the Officc of Export Admininis-ration. However, the Trensury Department'sCustoms Service and the Federal Bureau ofInvestigation (FBI) also have responsibilitiesin this area. Until the fall of 1981, the CustomsService’s contribution primarily consisted ofconducting searches under warrant. seizingcargo, and making arrests--activities for whichDOC staff have no legal authority. In addition.Customs has undertaken its own domestic andoverseas investigations and, with the launch-ing of Project Exodus in fiscal year 1982, Cus-stoms has become more actively involved inenforcement.

The purpose of Operation Exodus is “toboth assess the threat of technology loss tothe security of the United States and activelydisrupt the illicit flow of technology out of t 11(1United States."26 Exodus has begun with amassive cargo inspection program. This repre-sents a major policy change, as the UnitedStates previously mounted only token cargo

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

inspection efforts. Other stages will focus oninvestigations and the active involvement ofCustoms’ agents stationed overseas 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 Customs Service’s report onOperation Exodus acknowledges these com-plaints, but contends that delays “should di-minish substantially in the near future” 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 determiningg whether a giv-en shipment requires a license,the trend towards containerization, andthe fact that some exports do not becomeillegal until 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). ., . . . . . . 3-5SOURCE Operafion Exodus—FY 1982 Report, p 6

as far upstream as possible produce the bestpossible results.”28 Similarly, although theratio of detentions to seizures is high, and hastherefore been criticized, Customs asserts thatthe increase from the 196 seizures 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 enforcement. Although the FBI hasno 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 intelligence agencies provide informa-tion to DOC and Customs, and if the case hasinternational aspects, the State Departmentmay become involved.29 State 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,. reporting on potential diversions,. service of legal papers, as permitted by

local law,. liaison with local enforcement authorities,

and. informing U.S. and local businessmen of

U.S. export controls.

EDO’s and Foreign Commercial Service per-sonnel appear to be the major implementorsof DOC investigations overseas. When the

*“’Prepared Statement of Theodore Wai Wu, Deputy Assist-ant Secretary for Export Enforcement, International Trade Ad-ministration, Department of Commerce, before the Subcommit-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, ” rnimeo, pp. 3-4.

““Prepared Statement of Harry Kopp, Deputy Assistant Sec-retary of State for Economic and Business Affairs, Departmentof State, in Export Administration Amendments Act of 1981,op. cit., pp. 34-37.

Ch. 111—implementation of the Export Administration Act of 1979 ● 41

State Department receives information on anattempted or actual diversion, it tries to deter-mine whether U.S.-origin goods are involved.If so, State refers the case to DOC or to theCustoms Service. If the goods are not thoughtto be of U.S.-origin, the case is referred to ahigh-level interagency committee in theUnited States, which may refer it to the ap-propriate foreign government.

C r i t i c i s m s o f D O C ’ sE n f o r c e m e n t E f f o r t

Most criticisms of U.S. enforcement effortshave targeted DOC. In April 1982 the Officeof the Inspector General of the Commerce De-partment investigated the DOC’s ComplianceDivision, and identified a number of deficien-cies in its operations:

no comprehensive appraisal of or effectiveoverall strategy to address the Nation’stechnology leakage problem;insufficient trained personnel;inadequate management direction andoversight;failure to use modern, state-of-the-art in-telligence, investigative, and enforcementtechniques and systems;lack of strong leadership and clear linesof organizational responsibility withinOEE/CD;unwarranted interference in the detailedconduct of OEE/CD investigative opera-tions by the Deputy Assistant Secretaryfor Trade Administration;inadequate cooperation and coordinationwith the U.S. Customs Service and vitalinformation sources in the U.S. intelli-gence community;inadequate travel funds, law enforcementequipment, and other support resources;anduse of antiquated or inefficient internaladministrative and management systemsand procedures.

These deficiencies may partially reflect a con-flict between DOC’s dual roles of promotingand controlling exports but, as the Interagen-cy Group concluded, this is not a full explana-tion of the difficulty:

1 9–961 0 – 83 – 7 : OL 3

It is clear, however, that the Department’sfailure to provide adequate resources, policyguidance and management direction has im-peded the compliance effort and produced atvery least the perception of a de facto suprem-acy of the trade promotion mission over theDepartment’s export control function.

What is also clear, from the findings in thisreport, is that the Department of Commercehas not taken a bold lead in forging an ag-gressive multiagency effort to halt the illicitexport of controlled products.30

The staff of the Senate Permanent Subcom-mittee on Investigations (PSI) found many ofthe same deficiencies in the Compliance Divi-sion. Its report included findings that CD wasunderstaffed and poorly equipped; that someof the staff were poorly trained; and that therewas a backlog of cases in the Investigationsand Intelligence Branches. The PSI report alsonoted a lack of good working relations betweenthe Compliance Division and Customs, whichit attributed to DOC’s strict interpretation ofEAA provisions on release of proprietary in-formation and to concern on the part of Cus-toms agents that the Compliance Division’s“inexperienced personnel were involvingthemselves improperly in Customs’ foreignwork . . . . The PSI staff also found that DOCwas “not comfortable” with controlling ex-ports because it focused on export promotionand that Commerce had a “limited traditionand expertise in traditional law enforcement.They concluded, in short, that:

Understaffed, flagrantly short of resources,the Division cannot do the job effectively; but,by its very presence, prevents other com-ponents of government from taking on thetask. 31

——..————30U.S. Department of Commerce, Office of Inspector General,

Office of Investigation, Report on Inspection, (%mpknce Di\’i-sion, Offi”ce of Export Administration. Reprinted in U.S. Con-gress, Senate Permanent Subcommittee on Investigations,Thnsfer of United States High Technology to the %viet Unionand Soviet Bloc Nations, hearings, 97th Cong., 2d sess., May4, 5, 6, 11, and 12, 1982 (Washington, D. C.: U.S. GovernmentPrinting Office, 1982), pp. 606-637.

“U.S. Congress, Senate Committee on Governmental Affairs,Permanent Subcommittee on Investigations, Transfer of UnitedStates High Technology to the Soviet Union and Soviet BlocNations, Report No. 97-664 (Washington, D. C.: U.S. Govern-ment Printing Office, 1982), pp. 36-40.


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 the effectiveness of itsenforcement activities, and it has now in-troduced or planned several measures to im-prove them. They included an organizationalchange in which the Compliance Division wasupgraded to become the Office of Export En-forcement, and the appointment of a DeputyAssistant Secretary for Export Enforcement.Perhaps more importantly, DOC has now de-voted more resources to enforcement by shift-ing funds from other offices within the Inter-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 ofCommerce has issued blanket authority forrelease of proprietary data. In addition, thetwo agencies are negotiating a Memorandumof Understanding, setting out the respon-sibilities of each. In sum, in the words of Com-merce’s Inspector General,

. . . 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 coursenot. The operative word is “evolve, “32

DOC officials have assured Congress thatDOC does have an enforcement strategy andhas made considerable progress. They reportthat OEE was the sole or primary investigatoror initial referee of 16 of the 23 cases involv-ing possible criminal violations referred to theJustice Department since July 1, 1982. Table4 presents statistics comparing Commerce’sand Customs’ cargo inspection programs.

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

It has been charged that action is taken 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.33 Third, 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, ” inExport 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—Commerceb . . . . . . . . . . . . . . . . 167 81 48.5FY 83—Customsb OPEXODUS . . . . . . 809’ 286C 35.3aAccording 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

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

of foreign nationals is extremely difficult un-less they are arrested in the United States.Few countries view export control violationsas seriously as does the United States, andmany countries are hesitant to permit extra-dition. Fourth, GAO has found that due to thelength of investigations and a growing backlogof cases, DOC is closing a high percentage ofcases 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 are carried out by both Com-merce and Customs. GAO has criticized DOCfor conducting their activities through em-bassy officials instead of relying on Customs.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.

LEGISLAT IVE DEVELOPMENTS

Export administration, and particularly thePresident’s use of foreign policy controls, wasa controversial issue in the 96th and 97th Con-gresses. Many in Congress supported bothPresident Carter’s and President 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 agricultural export contracts and requir-ing compensation for farmers in the event ofa 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.

EXPORT ADMINISTRATIONAMENDMENTS 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, theExport Administration Amendments Act of1981 (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, and Customs—were not cooperat-

ing in investigating suspected violations of the1979 EAA, the drafters included a provisionrequiring responsible agencies to share infor-mation relevant to enforcement in a mannerconsistent with the “protection of intelligence,counterintelligence, and law enforcementsources, methods, and activities. ’ ’34 This pro-vision does not apply 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 penalties 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 committees of jurisdiction and, subjectto certain restrictions, to GAO. The impetusfor this provision was the delay GAO experi-enced in obtaining information from DOC fora congressionally mandated study .35

Reflecting widespread concern that theSoviet Union might invade Poland to crush

“Senate Report No. 97-91, p. 2.“Ibid.

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

Solidarity, the act includes a provision thatno legislation should be construed 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 fromimposing 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 DF 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 concernon the issue of agricultural embargoes which,many felt, had not been adequately addressedin the Export Administration AmendmentsAct. It did not directly limit the President’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 allexports.

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 ofloans 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 GA C T O F 1 9 8 2

Congressional concern that the sanctity ofexisting 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 national emergency declared by thePresident. 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.

DEVELOPMENTS IN COCOMThe 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 ofCoCom was capsulized in the testimony of a

high-ranking Commerce official, who told Con-gress, “Quite frankly, CoCom needs rejuvenat-ing. Even the strategic criteria on which theinstitutional structure rests may require ex-amination. 36

“U.S. Congress, Senate Committee on Foreign Relations, Sub-committee on International Economic Policy, East-WestEconomic Relations, hearings, 97th Cong., 1st sess., Sept. 16,1981 (Washington, D. C.: U.S. Government Printing Office,1981), p. 9.

Ch. III—Implementation of the Export Administration Act of 1979 ● 4 5

In general terms, the Reagan administra-tion’s approach to CoCom has consisted ofstressing the following elements:

tighter controls on exports of goods andtechnology to the Soviet Union,improved enforcement by members of na-tional and multilateral export controls,“harmonization” of members’ licensingprocedures,greater involvement of other members’military establishments in export policy,andincorporation of the critical technologiesapproach into CoCom’s licensing criteria.

By “harmonization” the administration seemsto mean ascertaining that the licensing proc-esses of member countries are such as to en-sure a thorough review of proposed transac-tions, and encouraging the participation offoreign defense ministries in licensing deci-sions. Achievement of the fourth goal wouldbring allied practice more in line with that ofthe United States, where DOD plays an im-portant role in licensing decisions. Con-comitantly, the Reagan administration ap-pears to be trying to involve NATO in the ex-port control process.

Efforts to incorporate the critical technolo-gies approach and to tighten controls on ex-ports to the Soviet Union did not originateunder the Reagan administration. Like itspredecessors, the Carter administrationsought the inclusion of new items on the list.In addition, it began the work on the criticaltechnologies approach and, following the in-vasion of Afghanistan, persuaded the othermembers of CoCom to agree to the no-excep-tions policy for exports to the Soviet Union.

The Reagan initiative started publicly at theOttawa summit in July 1981, where the Presi-dent raised U.S. concerns about CoCom’s op-erations and emphasized the importance of theissue to the United States. The communiqueissued at the end of the summit made a vaguereference to “ensur[ing] that, in the field ofEast-West relations, our economic policiescontinue to be compatible with our politicaland security objectives. ” Presumably, the lack

of details indicated the persistence of differ-ing views, but the United States did obtainthe participants’ agreement to “consult to im-prove the present system of controls on tradein strategic goods and related technology withthe U. S. S. R.”37 This agreement resulted in thescheduling of a high-level CoCom meeting forJanuary 1982 in Paris.

U.S. officials billed the high-level meetingas “the first broad reconsideration of our tech-nology control system in nearly thirtyyears. ”38 In large measure, U.S. officialsrespected CoCom’s tradition of confidentiali-ty in describing both the specifics of U.S. pro-posals and the results of the meeting. None-theless, some of the details have been madeavailable. According to press reports, theUnited States proposed tighter controls on ad-vanced computers, other electronics, fiber op-tics, semiconductors, and certain metallurgicalprocesses; and restrictions on turn-key plantsin military-related industries and on trainingprograms for Soviet bloc nationals in military-related technologies. The U.S. delegation mayalso have reiterated an earlier proposal thatCoCom review all contracts worth over $100million and proposed a moratorium on excep-tions requests for the entire Soviet bloc.39

Under Secretary of State James L. Buckley,who led the U.S. delegation, has testified that

. . . there was a concrete consensus that themember governments should increase their ef-fort to improve CoCom’s effectiveness. Wehave been encouraged by what appears to bea new and more constructive attitude of otherCoCom governments and feel that this meet-ing forms a basis for a revitalization of theCoCom system.40

3711.eprinti-in Department of State Bufletin, vol. 81, No. 2053(August 1981),

“Caspar W. Weinberger, “Technology Transfers ta the SovietUnion, ” Wall Street Journal Jan. 12, 1982, p. 32.

‘gPaul Lewis, “Allies Discuss More Curbs on Sales to SovietBloc, ” New York l’ime~ Jan. 20, 1982, p. A8; “U.S. Allies Agreeto Redefine Rules on Sales to Soviets, Wall Street JournaLJan. 21, 1982, p. 31; and Paul Lewis, “Soviet Pipeline CalledVulnerable, ” New York Thnes, Jan. 21, 1982, p. A4.

‘“’’Statement of James L. Buckley, Under Secretary forSecurity Assistance, Science, and Technology, Department ofState, ” in Transfer of United States Technology (hearings), op.cit., p. 158.


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 the Soviet bloc until the 1982/83 listreview had been completed.41

In a communique issued at the end of the1982 Versailles summit, participants pledgedto continue work on improving the CoComcontrol system and members’ 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 includeoil 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 months, concluding in February 1983; thesecond 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 and Lewis, “Soviet Pipeline Called Vulnerable. ”The former followed up on an agreement to add specific refer-ences to technology as well as to products to the CoCorn stra-tegic criteria and to include controls on technology in the CocomList itself rather than as an “administrative principle” appendedto the List, which was proposed by the Carter administrationduring the 1978/79 List review.

“For the text of the Communique, see Department of StateBulletin, vol. 82, No. 2064 (July 1982), pp. 7-9.

ly uncovered priority industries, ”43 includingthe following: gas turbine engines, large float-ing dry docks, certain metallurgical processes,electronic grade silicon, printed circuit boardtechnology, 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 specificitymay reflect their observance of confidentiali-ty. Many observers, however, suspect that italso reflects persistent differences within theorganization. Members of the administrationconcede 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 proceedings and in using informationobtained from the Defense Intelligence Agen-cy and other intelligence sources to 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~msfer of Unj&d States Technology, OP. cit., PP. 158-59.

SUMMARY AND CONCLUSIONSSince 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 Union and employed a number of con- tural commodities from being singled out fortroversial foreign policy controls in response use as a foreign policy tool and to guaranteeto Soviet actions. Particularly controversial the sanctity of agricultural export contracts.

Ch. Ill—implementation of the Export Administration Act of 1979 ● 4 7—-— —

The latter elicited strong negative reactionsboth at home—in Congress and in the businessworld—and abroad.

Allied support for the new U.S. policies hasbeen mixed. The allies pledged not to takecommercial advantage of the U.S. restrictionson grain and high technology. However, in-creased exports of grain and the fact thatEuropean companies obtained several majorcontracts that U.S. companies were barredfrom fulfilling have led many observers to con-clude that Europe and Japan are following apolicy of “business as usual. ” Allied supportfor tighter CoCom controls is said to be grow-ing, but many remain skeptical of the pros-pects for timely or comprehensive results.

Another major development has been a re-newed focus on the enforcement of export con-trols. This concern was reflected in the ExportAdministration Amendments Act of 1981, andin efforts by the Reagan administration to im-prove compliance and to persuade other mem-bers of CoCom to make similar efforts. Exten-sive criticism has been directed at DOC, whichhas primary responsibility for enforcementand compliance, and increased attention isnow being devoted by the Customs Service toexport licensing violations. The implicationsof these events for the U.S. economy, its po-litical relations, and its national security posi-tion are discussed in the chapters which follow.

CHAPTER IV

The Impact of ExportAdministration Policy on

the U.S. Economy

Contents

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

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

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


TablesTable No. Page5. 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

FigureFigureNo. Pagel. OECD Countries’ Trade With Soviet Union and East European

CMEA and U.S. Share.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

CHAPTER IV

The Impact of ExportAdministration Policy on

the U.S. Economy

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 and importance have been controver-sial. This impact cannot be measured solelythrough balance-of-trade statistics. Importantcomponents of the foreign trade balance sheetare indirect and unquantifiable, and weighingtheir importance relative to the political and

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 ofthe implementation of U.S. export control pol-icies under the 1979 Export AdministrationAct.

U.S.-SOVIET TRADE, 1979-82Trade with the Soviet Union has never con-

stituted a major share of U.S. foreign trade.As table 5 indicates, the absolute level of thistrade and its percentage of total U.S. trade areboth small. Even including all of EasternEurope, since 1978 the 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 agricultural commodities. This is il-lustrated in table 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 Domestic exports 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

52 ● 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 791980 ......, . . . . . . . . . . 1,509.7 1,047.1 691981 . . . . . . . . . . . . . . . . 2,338.6 1,665.0 711982 . . . . . . . . . . . . . . . . 2,589.1 1,855.0 72SOURCE U.S. International Trade Commission and Department of Agriculture.

tively minor role in the Soviet bloc, where over-all levels of East-West trade have 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, important is the fact that for bothpolitical and economic reasons Japanese andWest European governments have pursuedpolicies designed more to encourage than toinhibit trade with the Soviet bloc. The samecannot 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 trading relations such asextension of most-favored-nation status(MFN), andU.S. export controls.

In OTA’s judgment, the first of these was themost important:

[T]he primary obstacle to rapid growth oftrade 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 have shown thatuse 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 trade and U.S. market shares in 1980was the direct result of the grain and technol-ogy embargoes imposed after the invasion ofAfghanistan. 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 the U.S.S.R. finding temporary or perma-nent alternative suppliers for the grain andequipment it had purchased from the UnitedStates. In any case, the U.S. Department ofCommerce (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. are far too 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-stitute in Washington, 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 lltIst-U”est ‘Trade (Washington, D. C.: U.S.Congress, Office of Technology Assessment, OTA-ISC-101”,No\’ember 1979), pp. 5-6.

W’illiam Cooper, “Modest ‘1’rade Growth May Follow I.if~ingof Sanctions, ” Business America, k’eh. 21, 1983, p. !21.

Ch

. IV—

T

he Im

pact of

Export

Adm

inistration P

olicy on

the U

.S.

Econom

y ●

53

Figure 1.-0ECD Countries' Trade With Soviet Union and East European CMEA8 and U.S. Share

f/)

ro "6 "0

0 f/)

c <:2

0)

40

30

20 I

OEeD Imports

OEeD exports

10.7 12.0

1968

NOTE: % U.S. imports/exports 36/4.2

1969

3.3/4.2

u.s.

13.9

1970

33/51

} Total OEeD

15.4

1971

2.9/50

19.3

1972

3.6/7.9

28.2

1973

40/11.8

aExports fob Imports C.I f except for US .. Canadian. and Australian Imports. which are fob b Jan..Sept. only Calculated from monthly average data from OECD

39.5

1974 4.8/6.8

52.0

46.9

1975 1976 3.8/102 381120

54.5

1977 3.718.6

1978 5.3/10.6

80.1

1979 4.8/13.8

~:U.U

1980 :3.1/8.4

84.91

1981 36/10.3

SOURCE. US. Department of State. Bureau of Intelligence and ResearCh. Trade Patterns 01 the West. various Issues anet OEeD Monthly Statist ICS ot Foreign Trade. Series A. January 1983

56.0

1982 b 2.9/11.2


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 trade that 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, Senate Committee on Foreign Relations, Sub-committee on International Economic Policy, Economic Rela-tions with the Soviet Union hearings, 97th Cong., 2d sess., July30, Aug. 12-13, 1982 (Washington, D. C.: U.S. GovernmentPrinting Office, 1982), p. 199.

IMPACT OF FOREIGNON THE 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 caused “only rather modest damage toproducers and exporters here in the UnitedStates. ”4 This analysis does not challenge thefact 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. Paarlberg, Assistant Professor, POlitical Science Wellesley College, ” in U.S. Congress, SenateCommittee on Agriculture, Nutrition, and Forestry, Subcom-mittee on Foreign Agricultural Policy, Economic Impact ofAgricultural Embargoes, hearings, 97th Cong., 2d sess., Feb.3 and 5, 1982 (Washington, D. C.: U.S. Government PrintingOffice, 1982), pp. 23-24,

This position gives secondary weight to twokinds of economic impacts. First, exports 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 boththe micro and macro 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 present administration.

POLICY CONTROLSE 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 UnitedStates and the Soviet Union. While the U.S.share of the Soviet market declined, its shareof the world market was actually 2 percentagepoints higher in the 1980-81 marketing 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 argue that the embargo was afailure because it inflicted larger costs on theUnited States than on the Soviet Union. Stillothers believe that there was little impact on

————“’Effects of the 1980 and 1981 Limitations on Grain Exports

to the U.S.S.R. on Business Activity, Jobs, Government Costs,and Farmers, “ in the above, prepared by Schnittker Associates,pp. 113-125.

——

Ch. IV— The Impact of Export Administration Policy on the U.S. Economy ● 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 ofthe embargo on the Soviet Union was not asgreat 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 ofmeat. In contrast, the Carter administration,the State Department, and others, held thatthe embargo did impose significant costs onthe Soviet Union. Since most protagonists relyheavily on the same U.S. Department of Agri-culture (USDA) statistics, any assessment ofthis issue rests on the definition of “signifi-cant .

Before the embargo, USDA had estimatedthat 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 anddrawing 16 MMT of grain from its own grainstocks. In January 1980, USDA forecast thatthe embargo would deny the Soviet Union 11MMT of U.S. grain, but that 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 percent in Sovietfeed grain usage and the drawing of an addi-tional 3 MMT out of reserves.6 Administrationofficials 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 grainimports reached a record 31 MMT during themarketing year, leaving a gap of about 3 to

‘U.S. General Accounting Office, Lessons To Be LearnedFrom Offsetting the Impact of the Sotriet Grain Sales Suspen-sion, July 27, 1981, pp. 46-47.

6 MMT, depending on how intended Soviet im-ports are estimated.7 In sum, the Soviet Unionreplaced about half of the grain embargoed bythe United States during the first half of 1980and virtually all of the embargoed grain dur-ing the second half of the years The additionalsales by other nations were considered ‘in ac-cordance with the countries’ statements of co-operation.

The embargo did not result in distressslaughter. In fact, Soviet livestock inventorieswere higher on January 1, 1981, than the yearbefore, although the rate of inventory 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 have concluded that the de-cline was “simply the continuation of a trendalready in progress. “10 In any case, the Sovietsacted 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 have noted that any premiumprices were largely offset by lower prices paidfor part of the grain imports. In addition, theU.S.S.R. incurred unquantifiable costs throughinconvenience and disruption of shippingschedules. While conceding that the U.S.S.R.

—.‘The gap is 6 MMT if USDA’s revised estimate that the

Soviets intended to import 37.5 MMT is accepted. But manyanalysts view it as too high. Their estimates of the import gaprange from 2.5 to 4 MMT. See, for example, U.S. Departmentof Agriculture Economics and Statistics Service, ‘i”he U. S SalesSuspension and Soviet A@”culture: An (ktober Assessment,Supplement 1 to WAS-23, prepared by Angel O. Byrne and An-ton F. Malish, Washington, D. C., p. 12; and Robert L. Paarlberg,“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 AgriculturalEmbargoes, 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, actual sales were 13.4 MMT during the 1979-80 marketingyear.

‘“Economic Impact of Ap”cultural Embargoes, op. cit., p. 23.1 ~~ssons T. Be L.earne~ Op. cit.+ P. 49.


did have to arrange for imports from a largenumber of suppliers, which disrupted shippingschedules and caused port congestion, and hadto purchase nontraditional feeds, critics of theembargo do not consider the inconvenience amajor 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 preembargo levels only some 9 monthslater. 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 upwardpressure 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.13 But farmers and farm organizationsgenerally single it out as the major cause ofdeclines. Secretary of Agriculture John R.Block described the impact of the embargo 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 comparedwith other factors influencing supply and de-mand. He estimated that due to the Govern-

12 Assessment of Afghanistan Sanctions, op. cit., pp. 45-46.lg~ssons TO & Learned oP. ~t.? P. 8“I iEconomic Impact 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 UnitedStates, though it is not a final estimate sincethe Government still holds grain acquiredthrough the price support program.16 Anothercost of the embargo is the decline in the U.S.share of the Soviet market (see table 7).

There is virtually no disagreement thatwhere the United States 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 forother grain-exporting nations such as Argen-tina, Canada, Australia, and members of theEuropean Economic Community, 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 the United States retainsits share of the world market.17

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

“U.S. Congress, Senate Canm.itt.ee on Banking, Housing, andUrban Affairs, Suspension of United States Exports of HighTechnology and Grain to the Soviet Union, hearings, 96thCong., 2d sess., Aug. 19 and 20, 1980 (Washington, D. C.: U.S.Government Printing Office, 1980), p. 108.

“Economic Impact 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 44.21975-76 . . . . . . . . . 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,

— —— —

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

it has given the United States the reputationof being an unreliable supplier, and that othercountries are now doubtful of the certainty ofU.S. agricultural supplies. For instance, Mex-ico, which signed a grain supply agreementwith the United States in 1980, is reportedlynow considering signing long-term supplyagreements with other countries.18 In additionto seeking alternative sources of supplies, im-porting countries may also be encouraged tobecome more self-sufficient in grain or findsubstitutes. 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 TA N D T E C H N O L O G Y

Assessment of the cost to U.S. firms of thisset 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 under general 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 to assess the value of can-celed contracts in terms of both revenues andjobs. This kind of analysis was provided to theSubcommittee on International Economics ofthe Senate Committee on Foreign Relations,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 this kind from a number of companies wascompiled to reach the U.S. Government’s offi-cial estimate that the controls on oil and gas

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

‘gIbid., pp. 12-13.‘“See, for example, testimony by Cook and 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 theeconomy as a whole; it is more significantwhen concentrated in a small number of firmsin a few industries.

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 ofthe 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 EconomicRelations With the Soviet Union, p. 11.


abrogate legal contracts. In the view of onelawyer studying this subject, the practice ofinterfering with exports can cause serious dis-ruptions in the buyer-seller relationship:

Since major export sales often lead to andgrow 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 reasons, they may come to think ofAmerican firms as unreliable suppliers andmay consequently consider third country ordomestic suppliers more favorably. Even ifalternative products are more expensive or ofpoorer quality, concern over American exportpolicy can render them equivalent in theminds of buyers. Although the effect may bemore pronounced in nations already subjectto 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 relativeeconomic 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 had won an order to supply 500 pipelayersworth $210 million to the U.S.S.R. Caterpillarexpects its market share to be permanentlyaffected.

The second indirect cost of retroactive 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 make:

Concern over possible interruption of futuretransactions 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-porters’ concerns are heightened when li-censes appear to be denied because a foreignpolicy gesture is needed, when controls areissued retroactively or without opportunityfor prior public comment, and when licensesare suspended or revoked or consideration ispublicly given to doing so. In the view ofmany 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 and licensees of U.S. firms as muchas $1.6 billion in business with the U.S.S.R.over 3 years.24 Again, these are presumablyestimates of direct costs, measured in termsof canceled contracts. It is not known whetherprobable spinoffs to those contracts for main-

**Kenneth W. Abbott, “Linking Trade to Political Goals: For-eign Policy Export Controls in the 1970s and 1980s, ” MrmesotaLaw Review, vol. 65, No. 5, June 1981, pp. 827-828.

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

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 tradebetween the United States and Western Eu-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 the possibility that the U.S. Govern-ment at some point in the future for foreignpolicy 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 implemented the President’s June 1982embargo covered a wide variety of goods andservices with no necessary connection to theUnited States or even to the West Siberian gaspipeline; and they entangled a wide variety ofpersons, entities and business relationshipsworldwide in a complex and largely untestedportion of U.S. export control law. In the opin-ion of a lawyer who has studied these issues,the regulations were so drafted as to cover thefollowing cases:—. —.

“Edward A. Hewett, in Economic Relations IIrith theU.S.S.R, p. 60.

25This section is based on Stanley J. Marcuss, in Library ofCongress, Congressional Research Service, The Premises ofEast-West (%mmercial Relations: A 14’orkshop Sponsored bythe Committee on Foreign Relations, United States 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 attempts in the courts to define theirscope. Thus, the potential scale of the impactof U.S. export controls remains largely un-defined.

It is, of course, disingenuous of U.S. firmsto assert or imply that U.S. export control lawis likely to be applied in cases like those 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. Multilateraldeals are highly intricate, potentially involv-ing multifarious second and third order rela-tionships in several nations. Extraterritorialcontrols can therefore have many unantici-pated and undesirable consequences as theirimpact spreads in a ripple-like effect to numer-ous and varied interested parties.

—“Ibid., ‘p. 55.


SUMMARY AND CONCLUSIONSAlthough the magnitude of U.S. trade with

the U.S.S.R. has never been great enough tohave a significant impact on the economy asa whole, it is economically significant in threerespects. First, it can be extremely importantto the strength or even to the survival of spe-cific firms or product lines. Second, the indi-rect impacts of restricting East-West trade arepotentially many times greater than the directcosts, depending on what restrictions are im-posed and how they are implemented. Finally,East-West trade is not conducted in isolation;exporters are involved in a complex web of in-ternational commercial relationships. Govern-ment actions aimed at one part of these rela-tionships risk damaging other aspects, andthereby inflicting unintended and unantici-pated harm to the competitiveness of U.S.firms in international markets.

These effects are real, but they are largelyunquantifiable. Assessing their importancerelative to the political and military conse-quences of trade and export control is bothsubjective and controversial. As would be ex-pected, the business and defense communitiesin the United States have taken opposite posi-tions on the question of where the benefit ofthe doubt should lie-on the side of trade orthe side of control. Although no such determi-nation can be made here, it would seem thatimproving the predictability of export admin-istration policy, regardless of the strictness orleniency of that policy, would go a long waytoward ameliorating some of the negative im-pacts of U.S. export controls on the U.S.economy.

TheImplications

CHAPTER V

Foreign Policyof U.S. Export

Administration PolicyToward the U.S.S.R.

Contents

Page

U. S. ALLIED RELATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Disagreements Over East-West Trade Policy . . . . . . . . . . . . . . . . . . . . . . . . 64Costs and Benefits of U.S. Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

U.S.-SOVIET RELATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

Economic Impact on the Soviet Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69Political Costs and Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

SUMMARY AND CONCLUSIONS. . . . . ..., . . . . . . . . . . . . . ,, 72

C H A P T E R V

Theus.—

Foreign Policy Implications ofExport Administration Policy

Toward the U.S.S.R.——. .— —— -—_-——

One of the enduring debates in the area ofAmerican export administration policy hasbeen over the propriety and effectiveness ofusing controls on trade as instruments offoreign 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 forthe United States of the actions taken in ad-ministering the 1979 Export AdministrationAct (EAA) The chapter 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. -ALLIED RELATIONS1

It is by now commonplace to point out thatAmerica’s CoCom allies in Western Europeand 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 the publication of the latter report.the policies of America’s allies toward tradewith, and more particular}” 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:

● Trade with the U.S.S.R. has been far moreimportant for the economies of most ofAmerica’s CoCom allies than it has beenfor the United States.

● There is widespread skepticism in Europeand Japan over the utility of trade sanc-

tions in achieving political objectives vis-à-vis the 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 toEAA to provide legal mechanisms forsuch controls.The United States and its allies had dif-ferent expectations from detente andtherefore different evaluations of itsresults. In general, West Europeans havecounted the gains of detente in terms ofnormal trading relationships and a con-tinuing dialog with Moscow, both ofwhich contribute to maintenance of theEuropean status quo. In the case of WestGermany, detente has also become ameans of significantly improving rela-tions with East Germany. Soviet activi-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


Given the constraints under which it op-erates, CoCom works well. It is an 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 function well where this kind ofconsensus is lacking.All CoCom partners agree that exports tothe U.S.S.R. of equipment and technologywith direct military relevance should becontrolled for reasons of national 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 theSoviet Union as a positive factor in East-West relations.Western Europe and Japan 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 stimulatingequipment 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 short-sighted and dangerous to

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-particularlytheir export dependent economies and theirproximity to the U.S.S.R. They also resent at-tempts by the United States to dictate 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 ofmutual recrimination is well illustrated by thechain of events following the Versailles sum-mit meeting.

D I S A G R E E M E N T S O V E RE 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 June 1982 stated that the partici-pating countries would approach East-Westeconomic relations ‘‘in a prudent and diversi-fied manner consistent with our political andsecurity interests. ” The signatories also agreedto observe “commercial prudence” in grantingexport credits to the Communist world, andto 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 the U.S. delegation,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 greater detail in the appendix. )

It took only about a week for the basic 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-

——

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

sion of a unified Western commercial policyon East-West trade. The fact that the U.S. ad-ministration had publicly heralded the state-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 States to accept and work within thoselimits.

There are several interpretations of the rootsof the controversy which followed the Ver-sailles declaration. To some it is an exampleof the propensity of European nations to paylip service to policies they have no intentionof carrying out. To others, it is an example ofAmerica’s failure to accept European nations’views of their own political and security inter-

ests. According to this view, the contretempsarose over the simultaneous unwillingness ofthe French to appear to make public policyconcessions in the face of U.S. pressure, andthe failure of the United States to appreciateboth 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 situation was serious-ly exacerbated by President Reagan’s an-nouncement, hard on the heels of Mitterrand’sstatement, that the United States would ex-tend its foreign policy controls 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

66 ● Technology 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 FrenchGovernments 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 Germany, and Italy which had defied theU.S. embargo. Extensive as this ban was, itactually represented a relaxation of the Gov-ernment original order which would have prevented the export of all U.S.-origin goods anddata to the affected companies. *

The resolution of this situation took near-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 onstrategic exports. The participants 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 energymarkets has for the present significantly di-minished West European demand for Siberiangas.

Some confusion still exists as to whether allparties explicitly committed themselves to un-dertake the studies as a public quid pro quo

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

for the lifting of U.S. sanctions. Obvious assuch an arrangement might have seemed toobservers, the issue was still controversialenough within the French 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 SO F U . S . P O L I C Y

As in the aftermath of the Versailles 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 thebasic lack of communication between theUnited States and its closest allies on an issueof vital importance to the continued 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 studies announced 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 Japanare represented in OECD, IEA, and CoCom.Japan, while not a member of NATO, is par-ticipating informally in the latter exercise

Ch. V -- The Foreign Policy Implications of U.S. Export Administratlon Policy Toward the U S S R ● 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. (government has hailedthese studies as concrete evidence that theallies have ‘‘reached agreement on taking afirmer stance toward trade with the SovietUnion. ” Indeed, the President made them thesubject of his November 13 radio address tothe Nation, declaring that the industrializeddemocracies had ‘‘reached substantial agree-ment on a plan of action. But this interpreta-tion is not universal, even within the 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 alreadyon the shelf. Indeed, given the time con-straints and the sensitivity that this kind ofmultilateral study has engendered in the past,any other result would be remarkable. 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 formalcommitment as to the status of the completereports. They could be endorsed by the 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 there general agreement on thequestion of what the studies will ultimatelyproduce-concrete and specific “rules” towhich sovereign governments will agree toadhere; nonbinding general guidelines; a basisfor ongoing negotiations; or any combinationof these.

‘Ilu<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-ticipants in their perceptions of the meaningand utility of these studies. The ‘‘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.

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 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-ministration contends that 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-tating a new awareness of the dangers of East-West trade in the Western alliance. Evidenceof 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-nals , 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 specificWestern 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-


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 that the 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 and that progress will continue tobe 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 inherent in the 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 ofthe West Europeans themselves. The WestGerman position, for instance, is that the

pipeline is “a project considered by the Euro-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 ofState for Security Assistance, Science, andTechnology, “ill-advised and potentially harm-ful to our joint security interest. ”4 It wouldappear 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 particular.

In the end, future allied trade relations withthe U.S.S.R. are more likely to be shaped bydomestic imperatives in Europe and Japanand worldwide economic forces than they 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 state of the worldcredit and energy markets.

—.

‘Letter from the German American Chamber of Commerceto Sen. Charles McC. Mathias, in U.S. Congress, Senate Com-mittee on Foreign Relations, Subcommittee on InternationalEconomic Policy, Economic Relations With the Soviet Union,hearings, 97th Cong., 2d sess., July 30, Aug. 12-13, 1982 (Wash-ington, D. C.: U.S. Government Printing Office, 1982), p. 69.

“’Statement of Hon. James F. Buckley, ” in the above, p. 15.

U.S.-SOVIET RELATIONSSeveral 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 to inhibit any noticeable improvementinvaded Afghanistan and relations between in U.S.-Soviet relations. The White Housethe United States and the Soviet Union cooled views export controls as important 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-

—

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 NT 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; the degree to which the U.S.S.R. isdependent on Western exports for its eco-nomic development; and the maximum impactthat denial of Western goods and technologiescould have on the Soviets. One feature of theadministration’s view of the U.S.S.R. is thatwhile 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 suggestedthat the 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 assume that political mod-eration inevitably follows the establishmentof a free market economy, and therefore thatit is not in the interests of the United Statesfor the Soviet Union to improve its economicefficiency. This is a highly debatable point. Bethat as it may, there is a substantial body ofopinion 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,

70 ● Technology and East-West Trade An Update

the Central Intelligence Agency presented thefollowing evaluation of the Soviet economy:5

●

●

●

The Soviet economy is undeniablyplagued with many problems, and Sovieteconomic performance can accurately bedescribed as poor by Western standardsand “deteriorating” in its own terms. Yet,an economic collapse—i.e., a sudden andsustained 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 greaterthan that of most, possibly all, other in-dustrialized economies. Consequently, thesusceptibility of the Soviet Union to 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 SovietUnion 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 that through 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 Securit~’ I+jconomics. I)ec. 1, 1982.

“Reprinted in lhmi.w.~ of fi;a.st- tl-est {’commercial Relations,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 ofthis policy are discussed in detail in Tech-nology and East-West Trade and Technologyand Soviet Energy Availability. The conclu-sion of both reports is that first, it has yet tobe convincingly demonstrated–indeed itwould be virtually impossible to prove—thatthe U.S.S.R. has ever moderated its policiesin response to threats or actual imposition oftrade sanctions: 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 questionor to elicit broad cooperation from alternativesuppliers willing to participate in the embargo.In other words, trade leverage can only workunder 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 Sovieteconomy. Soviet agricultural productivity isnotoriously poor, and problems in this sectorhave been exacerbated by bad weather and aseries of poor harvests. The pipeline is beingbuilt largely with imported Western equip-ment and its importance to Soviet economicplans in the 1980’s can hardly be overesti-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 this view, while the embargoes in-flicted some costs on the U.S.S.R. (perhapssmaller 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-

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 suggested that the project will notbe completed. [J. S. sanctions and embargoeshave hurt the U. S. S. R., hut it is debatablewhether they have hurt enough to make a realeconomic difference, at least in the short andmedium term.

POLITICAL COSTS ANDB 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 diplomaticor 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 the situations with respect to 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 undertake some dramaticmeasures, short of military action, to assurethe 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 hurtthe 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 that just as American actions havesent strong signals to the Western allies, sotoo the political utility of trade sanctions lies

as much in the clear message 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 theirsymbolic value. The impact of these symbolicactions 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 itselfhave benefited from the disruptions in theWestern alliance precipitated by [J. S. policies.

The first of these problems stems from thefact 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 the Soviets, to the allies, or even toitself—the objectives of its policies. The lat-ter point is illustrated by the fact that the gaspipeline sanctions have been justified at var-ious times and by various Government spokes-men as being designed to:

● protest Soviet responsibility for the dec-laration of martial law in Poland;

. 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 development by inhibit-ing a project of great economic’ impor-tance;

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

● protest 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 unclear,

The extent of the second problem can onlybe determined in the context of one’s estima-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


Europeans and Japanese to depart from U.S.policies on East-West relations, then it couldbe argued that the 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 short term. In this view, theWest is going through a necessary, albeit pain-ful, reevaluation which will eventually resultin a stronger and more unified 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 does 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 Union, and that theU.S.S.R. is best restrained by being drawninto normal relations with the Western worldare more likely to look askance at the utilityof trade sanctions in moderating Soviet be-havior.

SUMMARY AND CONCLUSIONSThe past few years have seen an increasing

amount 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 the 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 ofU.S. policy has still to be finally assessed. In

the short term, alliance relations appear tohave been damaged while the U.S.S.R. seemslittle affected. Prospects still exist for longerterm benefits—including the achievement ofa 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.

CHAPTER VI

The National SecurityImplications of ExportAdministration Policy

Contents

Page

AMERICAN TECHNOLOGY AND SOVIET MILITARYCAPABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

SOVIET METHODS FOR ACQUIRING WESTERN TECHNOLOGY 76

Academic and Scientific Exchanges . . . . . . . . . . . . . . . . . . . . . . . . . 77Illegal Technology Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79Purchases Under General and Validated Licenses . . . . . . . . . . . . . . . . . . . . 80

THE CONCEPT OF MILITARY SIGNIFICANCE . . . . . . . . . . . . . . . . 82

TOWARDS A DEFINITION OF MILITARY SIGNIFICANCE . . . . . . . 83

SUMMARY AND CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

C H A P T E R V I

The National SecurityImplications of ExportAdministration Policy

———..—- ——. -——— ——. .. ———. .—

Second, the very nature of technology is suchthat its dissemination is inevitable. Westernpolicies can affect the volume, rate, and costof dissemination, but not the) spread of tech-nology itself.

The present administration has sought tofocus public attention on the magnitude of t heSoviet military threat and the role of Westerntechnology in contributing to this threat. Butdebate persists over the identifiable impact ofWestern technologies on Soviet military prow-ess, and over the measures t hat can or shouldbe taken to minimize this impact. The purposeof this chapter is to reexamine the relationshipbetween Western technology and Soviet mili-tary capabilities in light of new evidence ofSoviet military use of Western technology;and to discuss the legislative implications ofthis relationship.

A M E R I C A N T E C H N O L O G Y A N D S O V I E TM I L I T A R Y C A P A B I L I T I E S

Early in 1981, the U .S. Central IntelligenceAgency (CIA) began assembling informationon selected Soviet military developments,which could be directly linked to acquisitionsof Western technology. At roughly the sametime, Senator Sam Nunn, with the concurrenceof Senator William V. Roth, instituted a re-lated investigation by the Permanent Subcom-mittee on Investigations of the Senate Com-mittee on Governmental Affairs. The subjectof this investigation was the ability of the ex-ecutive branch to enforce export controls ontransfers of high technology to the Soviet bloc.In April 1982, an unclassified version of CIA’sfindings was published under the title, “Soviet

Acquisition of Western Technology.” In May,the Subcommittee held hearings on its ownfindings2 and Admiral Bobby Inman, thenDeputy Director of CIA, testified for theAgency. CIA asserted that:

The Soviets and their Warsaw Pact allieshave derived significant military gains from

‘See U.S. Congress, Senate Committee on ( ;C)t{’rr]rl]t’tll ,11 \ ffa i r s , Permanent Subcommit tee on In\es!igations, Transft’r c)I(;nlted .Stii(t~s iiigh 7’echnolo~’ to the .!!)\iet Union and Sol’ietl)ioc ,?’a[ion.s, h e a r i n g s , 9 7 t h Cong., 2d WSS,, hla~’ 4, f), 6. 11,~lrld ~~, lg~~ (Jfr:ishington, I) (’.: U.S. G(j\er-nmrnt Printing f) f-

fice, 19x2) and [J , S . (’ongmss, Senate (’ommittee on (;o\’ern-rn[’nt al A fftiir~, li[~p( )rt N’ f) 9’7-664, N 011, 15. 19//2 {11’ ash in@ ( )n,1 ),(’ ( 1,S. ( if)~trnnl(~nt I’rinting ( )ffic(’, 19<~21

75


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:

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

● Modernize 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.

● 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, Soviet Acquisition of Mili-taq 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 relatively poor position to capitalizefully 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 methodwhich 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 itselfto build the next generation of the wea-pon. The Soviets would therefore be obli-gated to conduct another successful pieceof espionage to gain access to the plansfor the follow-on weapon.

SOVIET METHODS FOR ACQUIRINGWESTERN TECHNOLOGY

One of CIA’s major findings is that the 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 Information Service (NTIS) documents,est party and governmental levels.”4 The CIA and patent searches; participation 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 generalods 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-

. . ——...

Ch. Vi— The National Security Implications of Export Administration Policy ● 7 7— —

owned companies; and outright theft and espi-onage. Such findings confirm OTA’s 1979 ob-servations:

From Petrine times until the present, Rus-sian statesmen have attempted to compensatefor domestic inability to generate competitiveinnovation by importing know-how fromabroad . . . All levels of Soviet administration—including that of the Communist Party—may provide inputs in the process of foreigntechnology acquisition . . . Decision-makingon individual technology purchases is basedon a coordinated system of collecting andprocessing Western scientific and technical in-formation . . . Nearly all R&D bodies–in par-ticular the engineering-design bureaus–andmany large enterprises collect relevant infor-mation. In addition, each ministry includes atleast one Institute , . . one of the functions ofwhich is to process available Western scien-tific and technical data . . . Western technicalliterature is translated, published, and madeavailable to relevant specialists in a relativelyshort time. Specialists who are sent abroad arerequired to report on Western technologicalachievements. Soviet intelligence services alsoengage in scientific and technical espionage . ..5

Observers of the Soviet economy still disagreeover the efficiency of this technology acquisi-tion program, but such debate is tangential tothe major point here. The significance of themultifaceted nature of the U.S.S.R. programfor U.S. policy makers lies in the fact that dif-ferent transfer mechanisms lend themselvesto very different legislative and administrativeremedies. Any serious attempt to affect tech-nology flows to the U.S.S.R. must carefullyseparate these channels.

Conceptual distinctions must therefore bemade between technology acquisitions whichfall into the following five categories:

I. Legal transfers made possible by theopen nature of Western society, e.g.,through perusal of open scientific liter-ature, and NTIS documents, academicexchanges, trade fairs, etc.

II. Legal transfers of technologies whichare not subject to national security con-

‘Technolo& and East- 14’est fiade, op. cit., pp. 205, 215,217.

] r, - -{. : -, - q ~ - L+ : q 1, 3

III.

IV.

v.

trols on the CCL or CoCom lists, andwhich are therefore obtained under gen-eral license.Legal transfers of technologies underan approved validated license.Illegal transfers through purchase, e.g.,purchases by agents, through thirdcountries or foreign embassies, pur-chases through dummy corporations,etc.Illegal transfer through industrial espi-onage or the theft of materials classi-fied by the U.S. Government.

Different legislative remedies apply to eachof these categories. For instance, legislationdirected at the first, if desirable at all, mustbe crafted with extreme care if it is not to seri-ously affect the ability of Western scientificand industrial communities to function, or tojeopardize first amendment rights of U.S. citi-zens. At the other end of the spectrum, Sovietactivities which fall into the fourth and fifthcategories are already illegal. Government at-tention here must for the most part be focusedon improving enforcement of and compliancewith existing laws. The second and third cate-gories together constitute the area most cen-tral to further legislation and to which impor-tant parts of the Export Administration Actare addressed. The remainder of this sectionwill briefly discuss each category.

ACADEMIC AND SCIENTIFICEXCHANGES

Category I is the subject of a report, Scien-tific Communication and National Security,published in 1982 by the National Academyof Sciences (NAS). This study addressed thedifficult dilemma posed by the apparent con-flict between two important national interests:maintaining and promoting free communica-tion in science and technology; and minimizingas far as possible the role of American scienceand technology in the buildup of Soviet milit-ary strength.

On the one hand, members of the academicand scientific communities have pointed outthe extent to which scientific advances depend

78 ● 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 through 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 that the benefits of scientific communica-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 inthe humanities and 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

Ch. VI— The National Security Implications of Export Administration Policy ● 7 9

scientists who enter programs in advanced sci-ence and technology.6 This disjunction is dueto the fact that the Soviets carefully screenthe exchange students they admit to their owncountry and just as carefully target the stu-dents they send to 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 offoreign 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, andideas’ 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 ofthese, NAS recommends that no restrictionsof any kind limiting access or communicationbe applied to basic or applied university re-search. This conclusion is grounded on theAcademy’s judgments that “in comparisonwith other channels of technology transfer,open scientific communication involving theresearch community does not present a mate-rial danger from near-term military implica-tions,' 7 and that the important economic,political, and military benefits to the UnitedStates of unfettered exchange and communica-tion outweigh the risks. It is also relevant topoint out that many believe that the transferof information through academic and scientificexchange programs is less likely to result in

‘See U.S. Senate, Committee on Governmental Affairs, Per-manent Subcommittee on 1nvesti~ations, Transfer of 7’ech-nolo~’ to the %~’iet Bloc, hearings, 96th Cong., 2d sess., Feb.20, 1980 (Washington, D. C.: U.S. Government Printing Office,1980) pp. 36ff.

‘National Academy of Sciences, National Academy of Engi-neering, and Institute of Medicine, Panel on Scientific Commu-nication and National Security, Committee on Science, Engi-neering, and Public Policy, Scientific (%nrnunication and Na-tional .Securit.}’ (Washington, D. C.: National Academy Press,1982), p. 41. (Emphasis in the original. )

the ability to absorb, diffuse, and improve 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 YT 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 an importantpriority, although opinions as to how enforce-ment efforts should be implemented may dif-fer. Unfortunately, in the rhetoric surroundingexport 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 veritablehemorrhage of U.S. technology. This impres-sion is in turn useful in fostering a climate ofpublic 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 possiblebetween military gains made by the U.S.S.R.through theft and deception, and gains made“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

80 ● Technology and East-West Trade: An Update—— . . . . .

collection operations.”8 Thus, strengthened ex-port controls would affect the majority of theU.S.S.R.’s acquisitions only to the extent thatthey resulted in significantly improved en-forcement and compliance. The fact that muchof the U.S.S.R. Western 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 ofWestern technology far outweigh the West’searnings from the legal sales to the Soviets ofits equipment and technology. “g

Once illegal acquisitions are distinguishedand treated separately, several important im-plications emerge for the formulation of policydesigned to limit future Soviet opportunities.These arise from the fact that there 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 whetherthe primary responsibility for enforcement ofexport 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 discussedfurther in chapter VII. In addition, 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 Transfer of United States High Technology, 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 the United States would wish. The matteris further complicated by the fact that the ex-traterritoriality provision in U.S. law meansthat certain U.S. technologies cannot be reex-ported from foreign firms, which have 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 ofsuch 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 theU.S. and its allies discussed in chapter V per-sist, no quick or easy solution to this set ofenforcement 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 steal is a useful way of focusing at-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 RG 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

Ch. VI— The National

in a variety of fields, with a variety of poten-tial military applications.

No law can delineate these technologies.Rather, it is the task of the legislator to man-date and allocate adequate resources for thecreation of an administrative framework with-in which flexible and farsighted evaluation ofthe direction of technological change 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 thefuture.

One aspect of this problem involves lead-times. Today’s emerging technologies may beat the center of export licensing controversies5 years hence. It is therefore vital that 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 inwhich development in the military sector lagsthat of the civilian. The same problem applieshere as in the situation described above: therelevant technologies must be identified, and

Security Implications of Export Administration Policy ● 8 1

a convincing case must be made for their pro-tection.

Category III addresses procedural issues,i.e., the functioning of the 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 elaborate interagency 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 mutually exclusive–for improving them. The problem is thatwhile it is relatively easy in the clear light ofhindsight to identify licensing decisions thatnow seem to have contributed to Soviet mili-tary capabilities, it is by no means obviousthat:

economic or political considerations at thetime were not considered by high-leveldecisionmakers to outweigh the militaryrisks;these military applications could havebeen anticipated at the time;denial of a U.S. license would have with-held the technology from the U. S. S. R.;and/orany other licensing mechanism would nec-essarily result in fewer such “mistakes.”

This is not to suggest that it is impossibleto improve the licensing process, or that 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 ofthe basic assumptions which guide it. Thetechnical and logical criteria for including tech-nologies in the export licensing process andthe “case law” which provides the grounds forgranting licenses in disputed cases togetherreflect the prevailing understanding of the con-cept of “military significance. ”

82 Technology and East-West Trade: An Update

THE CONCEPT OF MILITARY SIGNIFICANCEThe largely interchangeable terms–’’mili-

tary significance, “ “military utility,” and “mil-itary risk’ ’—which lie at the heart of exportcontrol policy have been subject to widely var-ied interpretations. At times their definitionhas been colored by the prevailing politicalclimate. Just as there was a tendency to ex-tend export controls to items of only indirectmilitary utility during the Cold War period,a counter-trend during detente 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 dual use technologies. 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 assessed the impact 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 military risk which rests 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 theBucy 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 militarilycritical item or process to the U. S. S. R., no mat-ter what the political demands of the moment.

Congress felt the creation 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; andgoods 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 to allay the debate over the boundaries ofmilitary 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 than present ones; there is fear, inother words, that reluctance to decontrolitems 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 ofCoCom. 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 isclassified, is said by some to be so voluminousthat it constitutes a “Modern TechnologiesList. ” This view may at least partly rest onmisperceptions arising from the fact that rela-

——— —‘“Technology and East-West Trade, op. cit., p. 94.

Ch. VI— The National Security Implications of Export Administration Policy ● 8 3

tively few individuals have been cleared to ac-tually study the List. But it is also true thatthe Department of Defense’s (DOD) view ofthe scope of military criticality is controver-sial. The business community is understand-ably alarmed at the prospect of a significantlylonger list of national security controls and theDepartments of Defense and Commerce haveso far been able to agree on the incorporationof only selected parts of the MCTL. Further-

more, DOD has taken the position that theMCTL should be adopted by CoCom. Giventhe climate of opinion described in chapter V,the chances for the wholesale inclusion of anarray of items and processes covering the tech-nological universe would seem small. On theother hand, the detailed technical analysis ac-companying the MCTL has reportedly beenuseful in supporting U.S. positions in CoComon a case-by-case basis.

TOWARDS A DEFINITION OFM I L I T A R Y S I G N I F I C A N C E

On the evidence of the historical precedentfor changes in the prevailing interpretation ofthe concept of military significance, and of thelongstanding difficulties surrounding the Crit-ical Technology Exercise, it is unlikely thatcontroversy in the export licensing communityover the boundary between acceptable andnonacceptable military risk will be quickly orpermanently laid to rest. The grounds of thedebate may be clarified, however, by distin-guishing among the various categories of mil-itary significance.

Items of potential military value which theU.S.S.R. might wish to purchase from theUnited States fall into four groups:

I. High-technology items which have a di-

11

rect military utility -i.e., their sole useis that they can be embodied in a weap-on; or their sole use is in the productionprocess for a weapon. Access to thesetechnologies would allow the acquisi-tion of military capabilities otherwiseoutside the realm of the recipient’s tech-nical competence within the same timeframe.

Low-technology items which have cleardual use capabilities in the area of mili-tary support. For example, automotivetechnology, which is widely availableand has legitimate civilian applications,but which can be used to produce mili-tarv trucks../

III

IV.

High-technology items which have dualuses, i.e., they may be embodied in orused directly in the production of weap-ons or military support, but they alsohave applications that will improve in-dustrial productivity generally. Themost important areas here are comput-ers, semiconductors, machine tools, in-strumentation, and telecommunica-tions.Low-technology items which are in-arguably destined for the civilian sec-tor, e.g., grain or pipelayers.

There is little dispute, either within theUnited States itself or in CoCom, that technol-ogies in category I should be stringently con-trolled. Similarly, our CoCom allies vigorouslydisavow the wisdom or utility of engaging inthe kind of economic warfare implied by denialof items in category IV. But although the leg-islative history of EAA shows a clear intenton the part of Congress to move away frompolicies of economic warfare, items in categoryIV have been controlled by the United Statesfor foreign policy purposes. Moreover, somewould make the case for controls on categoryIV for national security reasons. These argu-ments for the extension of export controls tolow technology goods inarguably destined forthe civilian sector have been based on severalgrounds:

● that such exports generally strengthenthe Soviet economy and that the strength


●

●

of the economy is directly related to theU. S.S.R.’s military capabilities;that exports “free” resources for the mili-tary sector which the U.S.S.R. wouldotherwise have to devote to nonmilitaryuses; orthat the exports will help to generate hardcurrency which the Soviets will use to buymore advanced Western technology ofmilitary relevance.

Such arguments aside, the present adminis-tration has repeatedly disavowed any conceptof military significance wide enough to encom-pass non-high-technology exports to the Sovi-et civilian sector, even if these allow theU.S.S.R. to avoid economic hardship or diffi-cult choices in the allocation of its own re-sources. Nevertheless, the administration

clearly seeks to broaden the definition of milit-ary significance to include items in categoriesII and III–perhaps even extending these cat-egories to reach lower levels of technologythan are presently subject to license. Adminis-tration officials stress the magnitude of theSoviet military threat and the extent of theWestern contribution to the Soviet militarybuildup. They are widely perceived to favorthe extension of export controls to items notpresently included on the CoCom lists, and toseek the denial of more export license applica-tions, both in the domestic licensing andCoCom exception processes. Categories II andIII therefore constitute the “battleground”over which export licensing decisions havebeen and will continue to be fought out caseby case.

SUMMARY AND CONCLUSIONSThere are severe constraints on the power

of U.S. export licensing to deny the SovietUnion access to the Western technologies itmost wants. These constraints include the ex-tent to which Soviet efforts to acquire Westerntechnology encompass illegal methods, U.S.inability so far to obtain complete allied agree-ment on a more strenuous multilateral exportcontrol policy, the difficulties inherent in iden-tifying in advance which technologies willhave important military payoffs, and the in-creasing worldwide diffusion of technology.Thus, it is foolhardy to expect that even dras-tic changes in U.S. export control policy couldmaterially alter the fact that the U.S.S.R.benefits militarily from Western technology.On the other hand, it is extremely rare to findexamples of military technologies obtainedfrom the West which the U.S.S.R. could not

have produced itself, albeit later and at addi-tional expense.

Given this situation, it is important that theUnited States not lose sight of the primary ob-jectives of an effective and realistic export con-trol program. Such a program cannot be ex-pected to permanently deny the Soviet Unionaccess to particular technologies. It is success-ful to the extent that it increases the cost tothe U.S.S.R.–in time, money, effort, and effi-ciency—of obtaining the technologies it de-sires; and to the extent that the roadblocks itcreates limit the rate and volume of Soviettechnological acquisitions. In the long run,technological leads can only be maintainedthrough effective research and developmentefforts.

CHAPTER VII

Options for U.S. Policy

——.

Contents

PageEXPORT ADMINISTRATION POLICY ORIENTATIONS . . . . . . . . . . . 87

The National Security Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87The Foreign Policy Perspective. , . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . 88The Efficiency Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88The Trade Promotion Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

EXPORT ADMINISTRATION POLICY OPTIONS . . . . . . . . . . . . . . . . . 89

Proposals Designed to Strengthen National Security Controls . . . . . . . . . . 89Proposals Designed to Promote East-West Trade . . . . . . . . . . . . . . . . . . . . 94Proposals Designed To Improve the Enforcement of U.S. Export

Control Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9?

A FINAL NOTE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

TableTable No. Page8. Relationships Between Policy Objectives . . . . . . . . . . . . . . . . . . . . . . . . . 89

CHAPTER VI I

Options for U.S. Policy

EXPORT ADMINISTRATIONPOLICY ORIENTATIONS

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.Indeed, one informed observer of the legisla-tive process has predicted that measures 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, CongressmanBonker’s bill would lift many of the burdensplaced on exporters by existing control poli-cies. Bills sponsored by Senators Gain, Heinz,and Nunn and Representatives Byron and Roefall within these two extremes.

Examination of these proposals and of thearguments advanced in their support revealsthat while this dichotomy of views accuratelycaptures the basic concerns of many of the protagonists in the export administration policydebate, there exists a more complex matrix ofpolicy goals. In fact, the debate over U.S. ex-port administration policy toward theU.S.S.R. centers on how to simultaneouslypursue and to balance four different objec-

‘1~. R. 1566.‘Paul Freedenberg, “U.S. Export Controls: Issues for High

Technology Indust r ies , ” ,Vational JournaL Dec. 18, 1982, p.2190.

tives. In the past, the relative emphasis ac-corded these elements has 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 YP E R S P E C T I V E

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-orat least relatively long-lasting—controls onitems, based on technical evaluation of theirproperties and capabilities.


Adherents of this perspective believe that:●

●

●

●

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 the economic costs of foregone ex-ports; andthat sustained U.S. pressure can bringAmerica’s allies closer to its own positionon these matters.

87

88 ● Technology and East-West Trade: An Update-- — —

T H E F O R E I G N P O L I C YP E R S P E C T I V E

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 the power to apply controls to itemswhich 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:

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 the President can reward or punishSoviet actions where no suitable alter-native instruments to manipulation oftrade 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 ahead and to retain or acquirereputations as reliable suppliers. A secondarygoal is to encourage 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 ofthis perspective tend to believe that foreignpolicy controls are highly disruptive of tradebut unlikely to cause changes in policiesabroad. Some hold that such controls are ap-propriate only when there is a general consen-sus in CoCom on their appropriateness. Sim-ilarly, some proponents of this position holdthat complex licensing procedures place un-necessary burdens on U.S. businessmen andtaxpayers 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 NP E R S P E C T I V E

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 the widest possiblevariety of civilian goods and technologies any-where in the world. Therefore, controls shouldbe tightly limited in scope and administeredin 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 controls nearly always fail to alter thebehavior 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

future sales. Third, export controls are costlyto the United States and should be used to theminimum extent necessary. This view is basedon the perceptions that the United States isincreasingly becoming a trading nation, thatits 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 andthose which promote flexibility for imposingforeign policy controls on trade. Similarly, at-tempting to maximize the efficiency and 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 into the export licensing system, which

Ch. VII— Options for U.S. Policy ● 89——————— —— —

works against both efficiency and trade promo-tion. Administration 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 relationships between basic 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 basicperspectives described above. While they arereviewed 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-Communist nations, while at thesame time seeking to improve the 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 t

Il. Foreign Policy Consistent — InconsistentIll. Efficiency Consistent Inconsistent —IV. Trade Promotion Inconsistent Inconsistent ConsistentSOURCE Office of Technology Assessment.

Trade -

Promotion

InconsistentInconsistentConsistent

EXPORT ADMINISTRATION POLICY OPTIONSP R O P O S A L S D E S I G N E D T O simultaneously responsible for the promotionS 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 S cases this may result in neither function 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 yprimarily 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 e it should be in applying and expanding na-tional security controls on exports to the

Critics of the export licensing system have U.S.S.R. Two- kinds of legislative remediesobserved that the Department of Commerce have been proposed: to assign primary respon-(DOC) plays an ambivalent role because it is sibility for export control to the Secretary of


Defense; or to create an entirely new and in-dependent body with sole responsibility for ex-port control.

The first of these suggestions appeared intwo bills introduced in January 1983 in theHouse of Representatives.’ In 1979, OTA re-viewed similar proposals and observed thatsuch a shift might have 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 as a signal to 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 Department whose principal trade func-tion is promotional, and that a high-level OSTwould ‘‘be able to attract top quality 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 commensuratewith the magnitude of the 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 an agency with direct access to the Na-tional Security Council, and through it to thePresident.’ 4

Compelling as this argument may be, theconcept of an OST has 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 may be subordinated to the prevail-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 the status of theOffice 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 Senator Garn’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 andtechnologies be periodically deleted from theCommodity Control List (CCL) as they “be-come obsolete with respect to the nationalsecurity of the United States. ” Indexing hasbeen opposed by those who see in it the dangerthat items obsolete in terms of Western stateof the art, but still able to significantly im-prove existing Soviet military capabilities, willbe decontrolled. On the other hand, the busi-ness community has charged that the CCLstill contains items which are trivial 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 automatic nature of this provision byrequiring that the 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 fT 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:

Ch. VII— Options for U.S. Policy ● 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 array of hardware and software,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 portableand 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 nA 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 “comparable quantity orquality, ” a term which includes the followingfactors:

. . . cost, reliability, the availability and reli-ability of spare parts and the cost and quali-ty thereof, maintenance programs, long-termdurability, scale of production, ease 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 comparablequantity or quality. The administration’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 conceptualissues; the practical problems 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-tre of the U.S. Government’s engaging in in-dustrial espionage in allied nations. OTA con-cluded that ascertaining foreign availabilitywould be “expensive, time-consuming, andperhaps intrusive;” and that since DOC’s for-eign availability activities had yet to becomefully operational, it could not be determinedwhether foreign availability could be assessedin a cost-effective manner.

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, among other things, 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-


sessment program; additional slots have beenauthorized but not filled. It is difficult to im-agine how the enormous task mandated byCongress can be accomplished at this level ofeffort. The degree to which foreign availabili-ty has been ignored or neglected is reflectedin the fact that few validated licenses havebeen granted on these grounds. Any attemptto establish a serious foreign availabilitycapacity would require a large appropriation,active cooperation by industry, willingness onthe part of the executive branch to administerthe law, and sustained congressional over-sight.

M o v e Q u i c k l y t o S u b j e c t I t e m son the Mi l i tar i ly Cr i t ica lT e c h n o l o g i e s L i s t ( M C T L ) t oN a t i o n a l S e c u r i t y C o n t r o l s

This proposal is already part of existing law.Chapter VI discussed the problems whichhave accompanied the Critical TechnologiesExercise and the difficulties encountered in ab-sorbing its results into the CCL. So long asthe Departments of Commerce and Defensecontinue to disagree over the optimal degreeof inclusiveness of the CCL and over the prop-er scope of the MCTL, it is unlikely that fur-ther progress will be quickly made. Moreover,so long as the MCTL remains classified, its ex-istence is likely to engender both ill will andapprehension—perhaps misplaced but none-theless real-in the business community,which believes that in its present form it is soover-inclusive that it poses a serious threat tothe ability of U.S. firms to compete effective-ly, not only in the U. S. S. R., but in free worldmarkets as well.

M a i n t a i n a n d T i g h t e n L i c e n s i n gR e q u i r e m e n t s f o r E x p o r t s t oN o n - C o m m u n i s t N a t i o n s

At present, a number of dual-use technolo-gies require validated licenses for export toallied countries. Applications for such licensesare routinely “rubber-stamped” in DOC, andthe General Accounting Office (GAO) has rec-ommended that these licensing requirementsbe eliminated. The Department of Defense

(DOD), on the other hand, opposes discontinu-ing this practice and furthermore seeks bet-ter access to the information contained in theapplications. In addition, DOD is consideringproposals to control the transfer of items onthe MCTL anywhere in the world, an effortwhich would significantly raise the level ofcontrol on West-West technology and techni-cal data transfers.

These proposals are realistic in acknowledg-ing the worldwide diffusion of technology andthe potential threats to American securityfrom many countries outside the Soviet bloc.They also acknowledge the fact that manyother nations—Western and non-Western—have export licensing policies which providethe U.S.S.R. access to the equipment and proc-esses it cannot obtain from the United States.Attempts to tighten West-West controls arecertain, however, to meet with determined re-sistance from the business community, which,would find them an additional impediment toengaging in international business. The licens-ing of data would be especially burdensomefor multinational corporations, who wouldhave to obtain individual transaction licensesfor routine communication with foreign na-tional employees and business partners; andoverseas subsidiaries, licensees, and subcon-tractors.

A t t e m p t t o S t r e n g t h e n C o C o m

Proposals here reflect two different butrelated goals: making CoCom a more effectiveimplementor of allied consensus where it doesexist; and attempting to use CoCom as a vehi-cle for bringing allied East-West trade policyin line with that of the United States. Specificmeasures in these areas have been proposedby the administration and include working to-ward formalizing the organization in a treaty;improving the enforcement and monitoring ofCoCom decisions and/or instituting sanctionsagainst transgressing members; expandingand strengthening the CoCom list so that itincludes items now unilaterally controlled bythe United States; attempting to remove for-eign availability where it currently exists inmember nations; and raising the level of fund-ing for America’s CoCom activities.

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 the North Atlantic Treaty Organization andare probably endemic to international organi-zations.

A more serious difficulty stems from thefundamental differences between the UnitedStates 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 ofitems than the other members. This was trueeven 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 that it can be made to workin practice and are 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 positivemovement 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 cE x c h a n g e P r o g r a m s a n d A c c e s st 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 this discussion are that first, it hasnot 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 channels of communication with theU.S.S.R. Second, it is generally believed thatsuch passive mechanisms of technology trans-fer are less likely to result in Soviet ability toabsorb, diffuse, and improve on technologicalacquisitions than are more active, commercialchannels.

While few would suggest that the U.S. Gov-ernment attempt to control scientific journals,there have been calls for restricting 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 research. It is true that Soviet cit-izens can easily and legally obtain 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.

94 ● 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 st o F o r e i g n E m b a s s i e s

The administration favors granting thePresident authority to prohibit sales withinthe United States of goods and technology toembassies 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 this provision would eliminate 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 OP 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 so n T r a d e

Perhaps no trade control issue has so gal-vanized the U.S. business community as therecent 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, have beendiscussed elsewhere in this report. Fear ofthese 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-tually unlimited powers in this 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 policycontrols 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 orrequiring that export controls be accompaniedby other measures. Thus, the “Export Admin-istration Act Amendment of 1983” (S. 397) in-troduced by Senator Heinz contains a sancti-ty of contract provision, meant to ensure thatfinalized contracts and other agreements notbe abrogated by foreign policy controls im-posed after the fact. Also in this category aresuggestions to eliminate or curtail extrater-ritorial controls, and to require that controlsbe 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 priornotification of Congress, including a showingof need, effectiveness, and foreign unavailabili-ty; prior assessment by the administration ofthe 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 reappearance is a reflection ofthe 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 the lack of faith in futureexecutive self-restraint.

However, this class of proposals raises sev-eral difficult problems. Foremost is that theability 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 avariety of responses, short of military action.Moreover, denying the President formal ac-cess to foreign policy controls 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-

.. ----

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 national emergency and thus perhaps es-calating the importance of the situation. 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 counter to the desires and expectations ofthose 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 thatmeasures 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 thatinsurance 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 thereputation 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-retary of State Schultz when he was Presidentof 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 controls or ameliorate their impact on ex-isting contracts. The administration bill wouldprotect only those contracts requiring deliverywithin 270 days of the imposition of controls,and even these contracts could be set aside ifthe President deemed it in the national interestthat such exports be prohibited. By contrast,the existing contract sanctity provision foragricultural goods can be set aside 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 nationals 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 fundamentally as the proposals 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 gE 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 theextent 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-tronic toys —are controlled simply becausethey included this so-called embedded technol-ogy. The embedded technology debate reflectsthe 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.


E a s e F o r e i g n A v a i l a b i l i t yC 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 alternative to undertaking this difficulteffort would be to accept potential exporters’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 UnitedStates imposes unilaterally, as there are 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 the U.S. national security control 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 militarilycritical 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 States that subject them to rulessimilar to those observed by CoCom members.

As was observed above, adoption of theseproposals would significantly reduce thepaperwork routinely processed by DOC. Fur-thermore, it would reduce burdens on firms,especially multinationals, which regularly sendlarge quantities of equipment and data 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 anyway by the Departments of Commerce or De-fense. On the other hand, these proposals relyon the dual assumptions that a small subsetof militarily critical technologies can be readilyand consensually identified, and that CoComand bilateral agreements can be relied on toprotect 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 yf 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 the establishment of a ComprehensiveOperations License (COL) which would be usedfor the transfer of militarily critical technol-ogy by firms with substantial 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-nificantly reduced. However, this proposal isbound to arouse the opposition of those whobelieve that U.S. security would not be wellenough protected by controls which would beessentially self-imposed and self-patrolled byprivate companies.

Ch. VII—Options for U.S. Policy ● 9 7

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 agree-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, specific suggestions on how best toenhance enforcement activities vary greatly.One issue which can be expected to receiveprominent attention, for instance, is thatgreater 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 the primary respon-sibility for export control enforcement andcompliance should rest. The three leading sug-gestions are that it remain with DOC; that itbe moved to Customs; or that it become partof 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 improvements in recent months. Some ofthose who have investigated enforcement andcompliance activities (notably the Senate Per-manent Subcommittee on Investigations)have recommended that the responsibility beassumed by the Customs Service. Their rea-soning, as presented in chapter 111, is thatCustoms has better domestic and foreign re-sources for and experience in investigating ex-port control violations; and that DOG enforce-ment activities can hardly help but be weak-

ened by the Department’s dual 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 onthe 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 the compliance function inCommerce, but would authorize DOG em-

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 totransfer enforcement to the Customs Servicehave also recognized existing limitations in thepowers and flexibility of investigators. Theseproblems are addressed in Senator Nunn’s bill,the “Export Administration Enforcement Actof 1983 (S. 407) which gives Customs officersbroad power to search persons, vehicles, ves-sels, packages, and containers where there isreasonable cause to suspect that goods or tech-nology will be illegally exported.

These provisions address the problem thatexisting law inhibits the conduct of export con-trol-related investigations by constrainingagents’ intervention. But increasing searchand seizure powers too far is likely to meetwith resistance. One response to complaintsthat Operation Exodus has seriously inter-fered with routine shipment of goods, for in-stance, is a proposal by Mr. Bonker that ran-dom inspections in the enforcement of exportcontrols be prohibited, and searches limitedto cases where specific information of possi-ble violations has been received.

Other suggestions may be found in the ad-ministration’s bill. It contains a criminal for-feiture provision authorizing the Governmentto seize any proceeds of a violation of nationalsecurity controls. This provision aims to re-duce the monetary incentives to violate exportcontrols. The administration’s bill would alsoauthorize the President to prohibit foreign vio-lators of U.S. national security controls from


exporting to the United States. 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 as various kinds of intelligenceand 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 depends for its success on the coopera-tion of foreign officials. The degree of thiscooperation may partly reflect the scope ofU.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 serious deterrent, but it should also recog-nize some point beyond which the cost/benefitratio produces diminishing returns. The verynature of sensitive technology -e.g., the sizeof microprocessors; the portability of data; thevolume and variety of computer software—makes much of it relatively easy to carry un-detected and/or extremely intractable to well-defined control guidelines.

A F INAL NOTEFew of the policy options discussed in this

chapter are new. Similarly, the basic policyorientations have long constituted the centralthemes of the export control debate, and it ishighly 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 as far as possible that the 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 stakes are now higher forall parties interested in U.S.-Soviet trade.

Appendix

Other East-WestTrade Issues

Appendix

Other East-West Trade Issues

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 CO 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 AfghanistanSanctions: Implications for Trade and Diplomac.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.2 Thechange was justified on the basis of the differinggrounds on which the identification of exports det-rimental to U.S. security is carried out in the casesof China and the Warsaw Pact countries. Thesedifferences were reflected in the approval oflicenses for secure communications equipment forChinese diplomatic facilities in the United States,computers for use in metal refineries, peripheralenhancements 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:

●

●

●

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 ofthe 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 $1,142.191979 . . . . . . 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 5,188.24SOURCE U S Department of Commerce

101


controls, to make China eligible to purchase mili-tary equipment, and to ask Congress to removerestrictive clauses from the legislation that pro-vide for equal treatment of the PRC and the SovietUnion. In July 1981, the Department of Commerce(DOC) announced more specific guidelines, statinga “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 Department 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, 1981.5 According to theFederal 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.“6

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 UnitedStates and the Nonmarket 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.9

‘Michael Weisskopf, “Chinese Trade Issues Seen Snagging Shultz, ”Washington Posk Jan. 31, 1983, p. A12.

“Chris Brown, “The problems With Country Group P,” Ctia 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 the original.)

—..

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 at U.S. licensing policy, particularly 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 station are 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 ofhard currency. On October 8, 1982, the Reagan ad-ministration announced that it was prepared toconsider applications to export satellite groundstations and notified potential sellers that tech-nical and procedural guidelines were available.11

On January 17, 1983, China announced 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-tation in international politics and about 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 ofnuclear 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 efforts by both the Carter andReagan 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 Easterncountries’ 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 lendingpolicies.

O f f i c i a l C r e d i t s t o t h eS o v i e t U n i o n

Under the Carter administration, the UnitedStates launched a dual effort to curb or raise 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 fromthe levels set in 1978 in the Arrangement 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.l2 A second—

“Besides the United States, the participants in the Arrangement arethe European Economic Community, Australia, Austria, Canada, Fin-land, Japan, New Zealand, Norway, Portugal, Spain, Sweden, andSwitzerland.

‘“Quoted in Weisskopf.1147 FR 44595.


effort focused directly on credits to the SovietUnion.

Reducing subsidized credit to the Soviet Unionposes technical and political difficulties for theUnited States. The former involve the problem ofdefining and measuring subsidies. There are atleast two ways of defining a subsidy.13 The firstis Government actions to reduce the cost of fundsto the borrower, including direct payment of a per-centage of the interest rate on credits offered bycommercial banks, official credits at less than mar-ket rates, and reimbursement of officially backedcredits in the case of a default. In the past, guar-antees on loans to the Soviet Union would not nec-essarily have lowered the effective rate of interestsince the U.S.S.R. has been a good credit risk. Asecond definition of subsidy is the net transfer ofresources from tax receipts from the lender coun-try to the borrower.

The difficulties raised by these various defini-tions are illustrated by the disagreement onwhether the West German Government subsidizescredit to the Soviet Union. West Germany doesnot extend direct credits, but guarantees exportfinancing through the Hermes insurance program.Many in the United States consider Hermes guar-antees to be subsidies, but the Germans argue thecontrary. 14

A more serious source of difficulties on the sub-sidy issue is the divergence of Western views. TheReagan administration prefers to allow marketforces to set credit rates. But most other countries’normal credit policies toward all sovereign borrow-ers, including the Soviet Union, could be termed“preferential. 15

Following the invasion of Afghanistan, the Car-ter administration requested that its allies halveofficial credits and guarantees to the Soviet Unionand end their credit subsidies. This effort yieldedmodest results: The Common Market agreed inFebruary 1980 not to offer long-term credits to theSoviet Union at rates lower than the 7.75 percentspecified in the Arrangement. The Italian Gover-nment delayed negotiating a credit agreement withthe U. S. S. R.; the British Government decided notto renew a line of credit (but many observers notedthat the Soviet Union had not used all of it); andthe Japanese Government delayed issuing new

l~u,s, Libr~y of Convess, Congressional Research Service, ThePremises of East-West Commercial Relations: A Workshop ~onsoredby the Gxmnittee on Foreign Relations, United States Senate(Washington, D. C.: U.S. Government Printing Office, 1983), pp. 68-70.

‘See, for example, Axel Lebahn, “Financing German Trade With theEast, ” Aussenpolit& vol. 33, 1982, p. 129,

“premises of East- West Commercial Relations, op. cit., pp. 70-71.

credits for joint projects with the Soviet Union forseveral months.l6

In addition, the Carter administration urged in-creases in OECD Arrangement rates. The partici-pants agreed on slight increases, effective July 1,1980, and on further negotiations in the fall. Butthe fall negotiations failed, despite agreement inthe North Atlantic Treaty Organization (NATO)ministerial meeting and at the Venice Summit thatan acceptable means of bringing the rates “closer”to market terms should be reached by December1, 1980. At French insistence, the Common Marketoffered only a small increase, which the U.S.termed “grossly inadequate. ” Japan-justifiablyin the U.S. view—declined to accept the agree-ment, which would have forced it to charge abovemarket rates.17

The Reagan administration believes that West-ern governments should not offer any subsidies oncredits to the Soviet Union, which after all, isresponsible for rising Western defense expendi-tures. In the administration’s view, the slowdownof Soviet economic growth and hard currency earn-ings in the 1980’s will have the effect of makingthe U.S.S.R. less creditworthy and more eager toborrow from the West, especially at rates subsi-dized by Western governments. The administra-tion is also concerned about the possibility ofreverse leverage.18

The Reagan administration pressed for increasesin the OECD rates on the grounds that the Ar-rangement allowed for an estimated $5.5 billion insubsidies in 1980.19 At the initiative of the UnitedStates, the participants agreed to raise the min-imum interest rate from 7.5 to 10 percent, effec-tive November 16, 1981.

During the spring of 1982, the administrationalso attempted to persuade the allies to reduce orraise the cost of official credit to the Soviet Union.Several U.S. delegations visited West Europeancapitals reportedly with the following agenda:

“U.S. Congress, House Commi ttee on Foreign Affairs, Subcommitt-ee on Europe and the Middle East, An Assessment of the AfghanistanSanctions: Implications for Trade and Diplomacy in the 1980s, Com-mittee Print, 97th Cong., 1st sess., April 1981 (Washington, D. C.: U.S.Government Printing Office, 1981), pp. 106-108.

“U.S. Congress, Senate Committee on Barking, Housing, and UrbanAffairs, Subcommittee on International Finance and Monetary Policy,International Affairs Functions of the Treasury and the Export Ad-ministration Act hearings, 97th Cong., 1st sess., Apr. 30, 1981 (Wash-ington, D. C.: U.S. Government Printing Office, 1981), pp. 19-21.

“’’Testimony of Ernest B. Johnston, Deputy Assistant Secretary ofState for Economic and Business Affairs, before the House Committeeon Foreign Affairs Subcommittees on International Economic Policy,and Trade and on Europe and the Middle East, May 25, 1982, rnimeo.,p. 12.

IBZn~rnatjona] Affa&s Functions, op. cit., p. 18. The estimate is bythe OECD staff.

Appendix—Other East-West Trade issues . 105—

●

●

●

●

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. 20

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:

. . . taking into 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, including also the need for commercialprudence in limiting export credits. (Emphasisadded.)

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 achievedhere was challenged less than 2 weeks later byFrench President Mitterrand, who rejected theidea of limiting credits to the Soviet Union.

Mitterrand’s statement notwithstanding, 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 to Business as Usual, ”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/A c

Intermediate b . . . . 10.85 11.35 N/A c

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 ineligtble for 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 the 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 early January1982, the NATO ministers agreed not to resched-ule these debts, which are thought to total about$10 billion, until the situation in Poland 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3.152SOURCE U S Department of Treasury Off Ice of East-West Economic Policy


ernment’s decision to lift martial law in December1982 sufficient, particularly since many martiallaw restrictions were added to the legal code. WhilePoland’s official debts for 1982 have not been re-scheduled, it did reach a rescheduling agreementwith commercial banks for debts falling due in1982.

To avoid a formal default on the loans guaran-teed by the Commodity Credit Corporation (CCC),the Reagan administration issued emergency reg-ulations on January 29, 1982. Under the old CCCregulations, a bank seeking reimbursement for anagricultural credit guaranteed by the Corporationhad to issue a “notice of default. ” Under the newregulations, CCC could reimburse the bank with-out this notice. Without a formal declaration ofdefault, other holders of Polish debt would not beable to invoke the cross default provisions of theirloan agreements or to start legal proceedings toseize Polish assets. Some Members of Congressand others criticized both the manner in which thechange was introduced and the Reagan adminis-tration’s decision not to declare an immediatedefault.

Advocates of forced default have charged thatallowing CCC to cover loan guarantees amountsto a “bail out” of bankers who made unwise loansand a subsidy for a repressive regime. In theirview, a declaration of default on CCC obligations,which would probably be followed by a default onall Polish debts, might compel the Soviet Unionto cover Poland’s debts. In this case, the resultmight well be fewer resources available for theWarsaw Pact. Those officials opposed to forcinga default argue that Poland is under more pressuresince it is making some, albeit small, repaymentsand that it would have no incentive to repay if aformal default were declared. In their view, the lat-ter situation would effectively vitiate Western in-fluence in Poland and might have serious financial

repercussions for West European banks and forWestern governments, which would have to paybillions on guaranteed loans. They also argue thatunilateral action by the United States would prob-ably compromise U.S. efforts to forge allied con-sensus on the issue and might well strain the alli-ance. 2 1

A test of congressional opinion on forced defaultcame during the summer of 1982, when congres-sional advocates of forced default succeeded inadding a provision to the Supplemental Appropria-tions Act of 1982 (Public Law 97-257), which pro-hibits the use of funds to reimburse U.S. banks forloans guaranteed by the Government unless it de-clares Poland in default or unless the Presidentprovides Congress with a monthly written ex-planation of how not declaring Poland in defaultadvances the U.S. national interest. This provi-sion, which was introduced by Senator Helms, ap-plies to fiscal year 1983. It represents a continua-tion of a similar amendment to the Urgent Sup-plemental Appropriations Act of 1982 (Public Law97-216), which was introduced by Senator Kastenand applied to fiscal year 1982.

The Polish debt issue is only temporarily inabeyance. Absent liberalization by the Polishregime or a change in Western policy, Poland’s of-ficial debts falling due in 1982 and 1983 will notbe rescheduled. Thus, formal default remains apossibility, although pressures to reschedule arelikely, especially if the Polish regime shows signsof liberalizing its policies. Some argue that re-scheduling could benefit the West if economic orpolitical conditions were attached.

*’For a more detailed analysis of the arguments pro and con, see U.S.Library of Congress, Congressional Research Service, Office of SeniorSpecialists, Rescheduling the Polish l?eb~ Issue Brief No. 82082, Jan.27, 1983 ~repared by John P. Hardt and Donna L. Gold], pp. 5-6.

U . S . GOVERNMENT PRINTING OFFICE : 1983 0 - 19-961 : QL 3