Photographer: Ty Wright/Bloomberg

Obama administration still pushing on export control reform

December 1, 2015 Robert Levinson

The federal government is moving toward the final phase of an export control reform (ECR) effort begun by the Obama administration in 2009, aimed at modernizing an archaic system for licensing exports, according to Brian Nilsson, the newly appointed deputy assistant secretary of State for Defense Trade Controls.

At the end of the third and final phase of ECR, Nilsson wants a single control list, a single licensing agency, a single application form, a unified information technology system for all agencies involved, and an enforcement coordination center.

Even if phase three is delayed, more rapid change than in the past is inevitable, he said, because the process of routinely reviewing export control lists has become institutionalized.

Nilsson isn’t new to the ECR effort. Before being appointed in October, he was the National Security Council’s director for Non-Proliferation-Export Controls, where he led the multi-agency task force that began reforming export controls in November 2009.

Bloomberg Government Senior Defense Analyst Robert Levinson sat down with Nilsson to discuss the progress and prospects of export control reform.

Why It Matters

“Nearly 30 percent of gross domestic product (GDP) growth over the last five years has been the result of export growth,” according to a Commerce Department report published in May 2014. That makes export control decisions critical to economic policy in Washington D.C. — though few people understand the details.

In 2010, about $100 billion worth of goods and services, representing about 5.5 percent of total U.S. exports that year, required a U.S. government license, according to Nilsson. The products that need a license can include weapons, ammunition and chemicals. Some states depend far more on licensed exports. In Pennsylvania and Idaho, more than 30 percent of total exports that year were covered by some sort of license.

President Barack Obama supports more exports, but the reform effort won’t be finished before his administration ends in January 2017.

The initiative has strong bipartisan support on Capitol Hill and backing from industry. Regardless of who wins the next presidential election, the process of reform will probably continue.

Who Issues What?

The reform effort is the first major overhaul of the complex, interagency defense export control system undertaken since the end of the Cold War — and in some instances even longer.

The export license process is designed to ensure that the export of items with military applications serves larger U.S. foreign policy objectives, such as preventing the proliferation of sensitive technologies and maintaining the military balance in a particular region.

The licenses, which essentially give permission to export, are issued by the departments of State, Commerce or Treasury. The departments of Defense, Justice, Homeland Security and the intelligence community are also involved. The Department of Energy and the Nuclear Regulatory Commission issue licenses related to nuclear technology and are not part of the ECR effort.

Most of the export control effort so far has focused on moving items that are covered on the U.S. Munitions List (USML) to the Commerce Control List (CCL). The munitions list covers items, such as weapons and ammunition that are military in nature. The CCL covers items such as chemicals or computers that are commercial, but have the potential to be used for defense purposes.

Licenses for items on the USML are issued by the State Department. Items on the CCL are licensed by the Commerce Department. Treasury issues licenses for items exported to countries or entities under various sanctions, such as Iran and Sudan.

The licensing policy for items on the USML generally controls everything equally, and Commerce has more flexibility with items on the CCL.

According to Nilsson, 18 of the 21 categories on the USML have been revised and published for public comment, and 15 have been published as final rules. Nilsson expects all category revisions to be published by the end of 2016.

Moving to Phase Three

Upon completion of the revisions, export control reform will move into phase three. The goals of this phase are to create a single control list, a single licensing agency, a single application form, a unified information technology system for all agencies involved, and an enforcement coordination center.

Some components of phase three are already under way. The departments of State, Defense, Commerce and Energy are using a common classified IT system known as USXPORTS. Treasury, while not yet integrated with the system, can dump data into it.

By the end of phase three, the licensing IT system should be interoperable with the International Trade Data System (ITDS), which U.S. Customs and Border Protection and other agencies use to track the movement of goods in and out of the U.S.

The entire USEXPORTS system is owned and run by the government, and will be migrated to the agency that’s selected to control the consolidated export list, according to a sources sought notice released on May 5 by the Defense Technology Security Administration (DTSA).

DTSA is looking for IT services “enhancements and transitions to ’production status,’ for multiple DTSA developed, owned, and operated systems,” including USXPORT.

Indiana Jones’s Warehouse

In addition to issuing licenses, the State Department must enforce export violations and register producers and brokers of items on the USML. Currently 12,503 companies are registered, and registrations must be renewed annually.

Nilsson’s new CIO, Karen Wrege, is developing the requirements for an IT system to automate the antiquated registration process still largely done using paper.

At State, people still open envelopes, record checks for registration fees, and scan documents. The documents are sent to an off-site storage location that Nilsson describes as resembling the warehouse depicted at the end of the film “Raiders of the Lost Ark.”

Bloomberg Government was shown where registration and enforcement activity takes place. For easy access, rows of color-coded binders in cabinets are stacked one on top of another, each containing either voluntary disclosures of export violations or sometimes multimillion-dollar consent agreements bringing companies into compliance.

The planned phase-three IT system will facilitate a single application form for a license for any company and any potential export item. The current system uses 13 different forms, but a pilot single form has been developed and is under evaluation.

Some Legislation Required

A major piece of legislation will be necessary to establish a single regulatory agency and a single control list, Nilsson said. Through phase two, most export control reforms have been accomplished through administrative and regulatory fixes, though some legislative changes and revisions to executive orders have been required.

Participants in the export control reform process started drafting legislation back in 2010, which served as a discovery process to determine just how much change was required. They found that existing laws and executive orders regulating the process were as many as 40 years old, and some mandated approvals by entities whose responsibilities had changed.

New legislation was put on hold until the difficult and highly technical process of revising the control lists was complete. For each of the proposed changes, the State and Commerce departments received hundreds of comments, many of which have been incorporated into the final rules.

Congressional committees with oversight of export control and the agencies involved have been regularly briefed and approved of the actions thus far, Nilsson said. He’s optimistic that Congress will eventually take up an export control reform bill.

They Expect Results

Nilsson says that industry’s feedback on efforts so far has been positive, and industry leaders are cautiously optimistic.

Yet to quote Dan Aykroyd in “Ghostbusters,” “I’ve worked in the private sector. They expect results.”

Industry wants the new process to be easier, cheaper and faster, while recognizing that national security interests must be protected.

Retired Major General Arnold Punaro, chairman of the National Defense Industrial Association’s executive committee, wrote in e-mail to Bloomberg Government that the ECR effort thus far has “had some positive effects but it’s not how far we come, it’s how far we still have to go to reach the President’s directive to have ’higher walls around fewer things.’”

The National Association of Manufacturers’ Director of Trade Facilitation Policy, Lauren Wilk, said in an interview with Bloomberg Government that “while the administration has made great strides in reconciling the separate control lists, we are eager to see that process completed,” and that “there’s still a lot on the ’to-do’ list to get to a truly modern export control system.”

Remy Nathan, vice president of international affairs at the Aerospace Industries Association, wrote in an e-mail that “the benefits of ECR are continuing to grow even while both U.S. companies and our foreign partners and customers are incurring short-term costs understanding and complying with the new system.”

Institutionalizing the Process

Export control reform appears to have institutionalized a process of continuously examining and updating export rules. In some cases, changes to the lists are already undergoing second revisions, based on industry feedback and changing technology, according to Nilsson.

Given the accelerating pace of technological change, establishing a set of rules and then allowing them to grow stale over decades without revision is no longer sufficient to protect national security interests or promote U.S. business, he said.

Nilsson said his dialogue with industry leads him to believe that while there is some adjustment and a learning curve required to adapt to new rules, the ultimate goal of a more streamlined and efficient process is worth any short-term cost.

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