Strategic Analysis

Strategic Analysis:
A Monthly Journal of the IDSA

October 1999 (Vol. XXIII No. 7)


Economics of Export Controls: A Study of US Export Control Mechanism
By P.R. Rajeswari *


US export control policy is one of the most important tools available to further the national security and foreign policy interests of the United States and its allies. 1   US dual-use export control policy has undergone a fundamental change since the end of the Cold War and the disappearance of the Soviet Union. The Cold War policy of containment, though it provided the essential rationale for national security export controls, has been superseded by a non-proliferation policy aimed at preventing the proliferation of weapons of mass destruction. These export controls are quite an effective means to achieve the national security and foreign policy goals of the United States. With regard to US strategies on the issue of non-proliferation, President Clinton has said that there are three primary elements:

Most of the nations of the world today have signed various agreements [the nuclear Non-Proliferation Treaty (NPT), the Biological Weapons Convention (BWC), and the Chemical Weapons Convention (CWC)] to put a halt to the further spread of nuclear, biological and chemical weapons, which pose great danger to international security. Almost all the nations able to supply dual-use goods and technology needed for the production of these weapons have agreed to control exports from their territories as a non-proliferation measure.

Export controls on dual-use goods, technology and software, thus, have been one of the most important tools in the US efforts to stem the proliferation of weapons of mass destruction (WMD) and missiles that can deliver them. The effectiveness of these export controls in slowing proliferation depends on the nature and characteristics of the weapons of concern, the capabilities of the target countries and their programmes, the controllability of the designated commodities and technology, the degree of international cooperation and the intensity of enforcement. 3

In many cases, the foreign policy objectives have a predominant role in the export control policy of the United States. Though political and military considerations often play the major role in decisions to impose export controls, economic factors are not unimportant. Export controls that make a political statement are most effective when they impose high costs on the sanctioned country. Those countries that are in favour of strict export controls argue that they are essential tools for limiting the military capabilities of potential enemies, to restrain the spread of goods and technologies that could contribute to the proliferation of weapons of mass destruction, and to prevent certain regimes (such as Iran, Iraq, Libya, North Korea), terrorists, or drug traffickers from acquiring goods and technologies that would allow them to further their aims. 4   The ultimate aim is to see whether it is possible to liberalise export controls while countering efforts by certain countries or groups to acquire weapons of mass destruction.

All exports of nuclear facilities, components and materials require prior licence from the Nuclear Regulatory Commission (NRC). Exports of nuclear-related dual-use items such as computers are licensed by the US Department of Commerce. Since there are very few technologies useful to proliferant weapons programmes that the United States produces uniquely, international cooperation among potential suppliers or trans-shippers is essential for effective export controls.

Export controls cannot completely block such proliferation. However, it makes a proliferant’s task harder; by increasing the cost and the difficulty of weapon programmes, they can buy valuable time for broader non-proliferation efforts to take effect.

Here, the difficult task for both Congress and the executive branch has been to design an export control system that not only serves US security interests but also takes due account of economic interests and fairness to regulated exporters. Even in the absence of export controls, companies may find it worthwhile to monitor the nature and actions of their buyers, as most companies prefer not to violate the US and international norms on non-proliferation. It is, indeed, very difficult to assess the indirect loss in business due to export controls.

The export control policy of the US made its appearance through the Export Administration Act of 1949 which was superseded by the Export Administration Act (EAA) of 1969 and 1979. The objectives, as spelt out, included:

National security export controls of the US are essential aspects of its foreign policy. These export controls are procedures that are designed to regulate the transfer of such items that might adversely affect US military potential or reduce its superiority. There have been a few other broader threats to national security, such as the proliferation of nuclear, chemical, biological and advanced conventional weapons and missile delivery systems. Control of exports relating to some of these threats has traditionally been dealt with by the foreign policy export controls. These are restrictions, imposed on the export of general classes of items to one or more specified countries in order to further the foreign commitments and interests of the United States or to fulfil its international obligations. 6

To look at the origin of the export control policy, it is unchanged in its basic structure from what was originally granted by Congress in 1940 as an extraordinary war power. Two laws provide the primary statutory mandate. The Arms Export Control Act of 1976 requires government approval for the import and export of military weaponry and services. The Export Administration Act (EAA) of 1979, as amended, controls dual-use goods and technologies that could make a significant contribution to the military capabilities of a potential adversary. The EAA, which is implemented by the Department of Commerce through the Export Administration Regulations (EAR), also authorises controls that may be necessary to serve US foreign policy goals and to ensure the domestic availability of resources in short supply.

The EAA of 1979 (as amended from the Arms Export Control Act of 1976) has been the legislative backbone for US export controls on dual-use items—goods and services with civilian applications that could in principle be used for military purposes. And the Nuclear Non-Proliferation Act of 1978 forms the basis for control of nuclear-related dual-use items. The EAA contains two broad categories of dual-use item control: “national security” (established by section 5 of the Act) and “foreign policy” (section 6). To establish the national security objective, the president has to maintain a list of countries and a list of commodities and technologies controlled for reasons of national security. The decision about the targetted countries would be based on:

  1. the extent to which a particular country’s policies are adverse to the national security interests of the United States;

  2. whether the nation is Communist or non-Communist;

  3. the nation’s current or potential bilateral relationship with the United States, and countries that are hostile to the United States;

  4. the nation’s nuclear weapons capability and its record of compliance with nuclear weapons agreements (the NPT, etc) to which the United States is a party; and

  5. any other factors that the president may deem appropriate. 7

National security export controls are procedures to regulate the transfer from one country to another of items that would make a significant contribution to military potential that could prove detrimental to the United States. 8   They are primarily those controls on items formerly in the COCOM Industrial List, originally intended to preserve Western technological superiority by reducing the flow of advanced dual-use technolgy from Western industrial nations to the Soviet bloc and other Communist nations. The United States, like COCOM, separates controlled items into lists of munitions, industrial and nuclear-related items. The US lists are the Munitions List (ML), the Commodity Control List (CCL), and the Nuclear Referral List (NRL). The Department of State, in consultation with Department of Defence, generates and administers the ML, and the Department of Commerce, in consultation with the Department of Defence and other agencies, generates and administers the CCL. The Departments of Commerce and Energy, with assistance from the Nuclear Regulatory Commission make the NRL.

Some of the important control groups are the Australia Group AG—biological and chemical weapons), and the Missile Technology Control Regime (MTCR—missile technology). Table 1 gives a clear picture of the existing national security controls and the items under control. There is also a great control on the high-performance supercomputers and certain dual-use items, either through the Bureau of Export Administration, Departments of Commerce, Defence, State and other agencies of the Administration.

The regulations implementing the national security export control regimes are vast and complex. There are many federal departments and agencies that share the responsibility in the implementation process. In general, the Commerce Department regulates exports of commercial equipment and technology, while the State Department controls exports of military equipment and technology. The Department of Defence advises both agencies on the strategic significance of commercial and military exports. The Department of Commerce and the US Customs Service share responsibility for enforcement of national security export controls.

The list maintained by the Department of Defence, the Militarily Critical Technologies List (MCTL), serves a limited purpose within the department as a reference document for developing control proposals and informing licensing decisions. It is also useful for identifying those goods and technologies that have dual-use potential.

Other Western nations too maintain similar controls on the import and export of munitions. For most of the nations, munitions controls are relatively straightfoward and the control system for dual-use products and technologies is more complex.

A major EAR component is a list (i.e., the US Control List) specifying the characteristics of each commodity subject to control. It is divided into 10 categories:

  1. Metal-working machinery.
  2. Chemical and petroleum equipment.
  3. Electrical and power-generating equipment.
  4. General industrial equipment.
  5. Transportation equipment.
  6. Electronics and precision equipment.
  7. Metals, minerals, and their manufactures.
  8. Chemicals, metalloids, petroleum products, and related materials.
  9. Rubber and rubber products.
  10. Miscellaneous. 9

The commodity classifications also have different levels of restrictions, depending on the military significance of items and also ultimate destination of those items and, in a few cases, depending on the dollar value of the shipment. For control purposes, Export Administration divides the nations of the world except Canada, into country groups. Of particular importance with regard to national security export controls are country groups W (Hungary and Poland), Y (other Eastern European nations and the USSR) and Z (North Korea, Vietnam, Cambodia, and Cuba). (See Fig. 1)

When one analyses the export control policy of the United States, one sees the following underlying objectives:

These export control mechanisms have been engaged in an effort to deny certain Western technology to the Soviet Union and its allies. This effort has limited the access of Soviet bloc countries to technology, which could have upgraded their military capabilities. This effort of denial did not prevent the Soviets from fielding capable and effective weapons systems, it only caused them to rely on less sophisticated technology, and forced them to invest enormous resources in military-related research and development which might otherwise have been used for civilian purposes.

Yet, the Soviets and other Warsaw Pact countries have not lacked in any of the sensitive technology. Intelligence information indicated that the Soviet technology acquisition effort was massive, well financed, and frequently effective. In the recent years, it was found that significant military technology flowed from the West to the Warsaw Pact countries through three primary channels:

  1. espionage—the theft of classified information or items of relevance to military systems;

  2. diversion—shipment of militarily significant dual-use products and technology to unapproved end-users, either directly through the export of controlled products without a licence (i.e., smuggling), or indirectly through trans-shipment using a complex chain of increasingly untraceable re-exports (i.e., legal trans-shipment of products or components by firms operating in countries that do not impose controls); and

  3. legal sales—direct trade with the Soviet bloc, usually after receipt of a licence. Such trade may also include some re-exports. 11

An analysis of the past export control policy suggests the following objectives that have been pursued by the US.

The objectives of the export control policy reveal that political and military considerations frequently play the most crucial role in decisions to impose export controls, though economic considerations are not unimportant.

Also, there have been controls on the export of supercomputers or computers of high-performance (HPCs). Controllability of computer technologies has become a central issue. High-performance computers have been subjected to rigorous and cumbersome export controls for years. The use of these computers has been totally controlled in all countries, except the United States, Canada, and Japan, by the Supercomputer Safeguard Plan. The advancing capability of both high-performance and mainstream computing has made established static thresholds for supercomputers obsolete. This, however, does not mean the removal of all controls on computers. Today, with trans-border data flow and network access being very common, demand for network security products, including encryption devices and trustworthy systems, has increased significantly. A fact to be noted in relation to computers is the pace at which a model gets outdated. Computer products usually have a useful life of five to eight years. However, commodity products, such as personal computers, may be superseded by newer models in a span of eighteen months or so. To compensate for this performance upgrade, industry adjusts prices to maintain a competitive price/performance growth curve. For example, at release in 1985, a Sun 3 work station was priced at about $10,000 per million instructions per second (MIPS), whereas in 1990, the new model Sun SPARC station cost less than $750 per MIPS. The same logic applies to supercomputers as well. Parallel processing is leading to considerable price/performance improvements in supercomputers. Thus, what happens is that in most of the technology transfer issues, the developing countries end up getting “sunset” versions of the computers or outdated technologies from the United States and other developed and industrialised nations. The US is never willing to part with the latest technology to any of the developing countries; only the outdated and easy-to-manufacture technologies are transferred. If the US ever feels that the developing countries are developing their own indigenous technology, the immediate reaction is to make slight adjustments and relaxations so that these countries do not make the state-of-the art technologies and become the master of the scene and start giving these to other developing countries.

The US computer industry has lost its competitive lead in this sphere, in the design and manufacture, as many developing countries are developing their own high-performance computers. Hence, the Clinton Administration has taken steps toward revision of the policy. The policy, though relaxed in 1997, has been tightened of late, by the Clinton Administration, towards a number of countries.

While supercomputers are useful for diverse high-speed number crunching applications, they can also be used for designing advanced nuclear weapons and simulating nuclear explosions. The US perceives the access of HPC systems to “countries of proliferation concern” as a national security problem.

In October 1995, President Clinton had ordered a major loosening of the existing controls in export of HPC systems, including supercomputers, urged by computer manufacturers, who were eyeing the emerging markets, especially India, China and Russia. This led to categorisation of states into four major divisions with progressively increasing levels of controls. Tier-1 countries included the US allies with almost no controls; Tier-2 countries could receive HPC systems of Composite Theoretical Performance (CTP) levels up to 10,000 million theoretical operations per second (MTOPS), and included “non-rogue” NPT signatories like Antigua, Barbuda, Bangladesh, Belize, Haiti, Equatorial New Guinea, Nicaragua, Poland, Slovak Republic, Somalia and Togo. Tier-3 controls allowed exports and re-exports of super- computers without individual validated licences (IVLS) of the Bureau of Export Administration (BXA) with ratings up to 7,000 MTOPS to civilian end-users and up to 2,000 MTOPS to military users. 13   Tier-4 implied total prohibition of computer exports for “rogue” states like Iran, Libya, Iraq, and North Korea. Earlier, all shipments, not only military, of computers above 2,000 MTOPS required an IVL. Now, the National Defence Authorisation Act (NDAA) provides the controls, which requires that the exporter first notify the BXA of all shipments of computers above 2,000 MTOPS rating. 14   And, in turn, the BXA would inform all the different agencies of the US government about the shipping. Within ten days of an exporter’s notice, any one of the agencies can raise an objection and insist on the exporter going through the process of IVL.

In June 1997, the policy was relaxed, arguing that such action would only take business away from US companies without promoting US national security because high-performance computers have become so widely available from non-US sources. But again, the Clinton Administration has tightened its export control policy on supercomputers. Now, with the tightening of the controls, US computer exporters have to comply with the new norms of clearance for HPC systems above 2,000 MTOPS. The new legislation is a balancing act between US national security concerns and US commercial interests.

At this stage, one should analyse its relevance on India. This legislation requires the Clinton Administration to give 180 days’ notice before relaxing computer controls further, and 120 days’ notice before exempting any one of the 50 countries of the Tier-3 control category. Any move to remove India from the Tier-3 list would be a possibility towards a possible detente. But whether there would be any such move made or acceptable is a big question considering the traditional US attitudes, particularly with regard to India’s stance on nuclear and missile issues. Indeed, in a testimony before the House National Security Committee on November 13, 1997, Under Secretary for Export Administration, William Reinsch said:

While it ostensibly gives the president flexibility to change the list of countries in Tier-3... Russia, China, India, Israel and Pakistan could not be removed...this provision will seriously damage our relations with them. 15

The latest development relating to the export of supercomputers has been the relaxation of the unilateral US export control regulations. On July 7, 1999, President Clinton asked Congress to ease strict controls on US computer exports to a number of countries in various categories. In a July 1 written statement, Clinton proposed relaxing unilateral controls on high-performance computers and semiconductors for the 50 countries in the export category called Tier-3, which comprises India, Pakistan, all Middle East/Maghreb countries, the former Soviet Union, China, Vietnam and part of Eastern Europe. 16

Under the present regulations, US suppliers can export to those countries computers capable of up to 7,000 MTOPS for civil end-users and 2,000 MTOPS for military end-users. Now under the Clinton proposal of relaxation, these thresholds will increase to 12,300 MTOPS for civil end-users and 6,000 MTOPS for military end-users. 17

Further, the Administration relaxed controls on exports to about 100 Tier-2 countries, comprising Latin America except Brazil, South Korea, other South-East Asian countries, Slovak Republic, Slovenia, and South Africa. For these countries, the threshold has been raised from 10,000 to 20,000 MTOPS immediately. 18   Also, the government is moving Poland, Hungary, the Czech Republic and Brazil up to a group called Tier-1, essentially decontrolling computer exports to them. 19

White House Chief of Staff John Podesta said that rapid increases in computing power and rising foreign availability necessitated these changes. 20

Analysing the export control policy of the United States, one finds that it is the Departments Commerce and State, which regulate the exports of commercial equipment and technology and exports of military equipment and technology respectively. And the Department of Defence has a key advisory role for both of these exports. Besides these departments, there are a number of other government bodies that have great interest in the transfer of militarily important technology; and these include the Departments of Treasury, Energy and Justice, as well as NASA, the Nuclear Regulatory Commission, and the intelligence agencies.

The responsibility for the enforcement of these controls lies with the Department of Commerce and the US Customs Service. Although the Department of Commerce exercised an upper hand in deciding export control issues for dual-use commodities and technologies, recently the Department of Defence has dominated the national security aspect of the procedure.


Economics of Export Controls

The issue of export controls also has an economic side of the commercial angle too. The US Westinghouse Electric, General Electric and other US reactor firms lobbied strongly for permission to sell reactors to China. According to Xinhua reports, the sales would amount to billions of dollars. 21   Also, the opening of the markets and economic liberalisation has enabled free flow of technology between the supplier and the recipient countries, either directly or indirectly. Once again, this depends very much on the vested interests of each nation.

The highest achievement the export controls could have gained is only to delay the projects for which the exports have been sought. While the delays have their own gains and losses, the proponents of these controls boast that in the process of these delays, the targetted countries give up the aim of weaponisation plans. This is not true in most of the cases. One good example is India’s cryogenic engine deal with the erstwhile Soviet Union, which was totally curbed by the United States. But India did not leave it at that, and instead took it as a challenge and became self-reliant. Another very good example has been that of the supercomputer deal with the United States. India, in 1997, developed its own supercomputer—Param 9000. Hence, delays do not wind up projects absolutely, it only takes up more time before it conducts its own research & development (R&D), develops its own technology indigenously and becomes self-reliant in the high technology sector.

If technology is viewed as an essential precursor to development, and if sophistication and scale of technology pervasiveness distinguishes the developed North from the developing South, then technology denial regimes only lead to perpetuating this divide and sustaining the distinction. And also, while liberalising the economic system and opening its commercial markets, the South does not receive any competitive technologies, but only the sunset equipment and technologies.

It is thus believed that the United States has long been using the “technology whip” to tame the countries of the South, India being one among them, with a view to have a decisive advantage either in the economic cum-commercial sphere or other sectors that are upcoming for the developing nations. In India’s case, a certain sense of urgency has been felt to attain a sophisticated level of technology and its development, which is home-based. India has also gradually achieved significant defence-related technology. But its achievement is far from satisfactory when one compares it with the highly sophisticated technology of the United States in this area. The military-industrial complex of the US has had an illustrious benchmark in its long technology development. As a result, Washington has enjoyed the vortex point of its technology vis-a-vis the rest of the world.

India is still far behind in this technology game. As a result, dependence on US advanced technology in certain sectors may persist for quite some time. Although dependence on the US in certain domestic technology sectors is not necessary, it nevertheless would have its own ramifications in other sectors. To that extent, Indo-US technology cooperation/collaboration would constitute essential parts of the two foreign policies.

The domestic sectors of India like agriculture, commerce, industries and vital areas such as defence and space will have the necessary bearings on Indo-US technology-related areas of interest. The only solace for India is that it has a vast potential of human resource development as well as market perimeters.



*: Researcher, The Institute for Defence Studies and Analyses (IDSA).  Back.

Note 1: The foreign policy linkage with export controls has been dealt in Balancing the National Interest: US National Security Export Controls and Global Economic Competition (Washington, DC: National Academy Press, 1987) and Finding Common Ground: US Export Controls in a Changed Global Environment (Washington, DC: National Academy Press, 1991). Back.

Note 2: James Steinberg, “US Non-Proliferation Strategy: ‘No Higher Priority’”, Arms Control: The US Perspective, (US Foreign Policy Agenda, USIS, October 1997). Back.

Note 3: US Congress, Office of Technology Assessment, Export Controls and Nonproliferation Policy (Washington, DC: US Government Printing Office, 1994), p. 1. Back.

Note 4: Glennon J. Harrison, “The Economics of Export Controls,” CRS Report for Congress, updated on January 15, 1997. Back.

Note 5: Section 3.2(c), 3.2(a), and 3.2(b), respectively, of the Export Administration Act, in National Academy of Sciences, National Academy of Engineering, Institute of Medicine, Finding Common Ground: US Export Controls in a Changed Global Environment (Washington, DC: National Academy Press, 1991). Back.

Note 6: Ibid., p. 12. Back.

Note 7: Ibid., p. 63. Back.

Note 8: Ibid., p. 12. Back.

Note 9: Ibid., p. 81. The commodity specifications given, ranging from the very specific (e.g. pulse modulators capable of providing electric impulses of peak power exceeding 20 MW or of a duration of less than 0.1 microsecond, etc.) to the very general or “basket” categories serve to “catch” new products with important characteristics not yet reflected on the US Control List. They also ensure that no exports are made to certain countries such as Cuba, North Korea, Cambodia and Vietnam without specific US government approval. Back.

Note 10: Ibid., p. 3. Back.

Note 11: National Academy of Sciences, National Academy of Engineering, Institute of Medicine, Balancing the National Interest: US National Security Export Controls and Global Economic Competition (Washington, D.C.: National Academy Press, 1987), p. 4. A lot of information available to the intelligence called the “Farewell Papers”, which are actual Soviet documents obtained by French intelligence services in 1981, detailed the plans, organisation, and financing for technology acquisition efforts in the West and indicated that, by the Soviet’s own estimates, approximately 70 per cent of the items they target and eventually acquire in the West are subjected to some form of national security export control. Back.

Note 12: Ibid., p. 3. Back.

Note 13: Tier-3 countries numbered 50 and they are Afghanistan, Albania, Algeria, Andorra, Angola, Armenia, Azerbaijan, Bahrain, Belarus, Bosnia and Herzegovina, Bulgaria, Cambodia, China, Comoros, Croatia, Djibouti, Egypt, Estonia, Georgia, India, Israel, Jordan, Kazakhstan, Kuwait, Kyrgyzstan, Laos, Latvia, Lebanon, Lithuania, the former Yugoslav Republic of Macedonia, Mauritania, Moldova, Mongolia, Morocco, Oman, Pakistan, Qatar, Romania, Russia, Saudi Arabia, Serbia and Montenegro, Tajikistan, Tunisia, Turkmenistan, Ukraine, United Arab Emirates, Uzbekistan, Vanuatu, Vietnam and Yemen. Back.

Note 14: Business India, January 26-February 8, 1998, pp. 157-9. Back.

Note 15: Ibid. Back.

Note 16: USIS, “Text: Clinton Statement on US Computer Export Controls”, Wireless File, July 2, 1999. Back.

Note 17: Ibid. Back.

Note 18: Ibid. Back.

Note 19: USIS, “Transcript: Administration Officials on Computer Export Controls” Wireless File, July 2, 1999. Back.

Note 20: Ibid. Back.

Note 21: Nucleonics Week, December 12, 1996. Back.