12 July 1997
Source: http://www.bxa.doc.gov/hamilton.htm

Greetings

Good morning. It is a pleasure to be here. I want to thank Bill Reinsch, the Under Secretary of Commerce for Export Administration, and Roger Majak, the Assistant Secretary-designate, for inviting me to join you today.

Bill Reinsch has provided superb leadership in the Commerce Department during an important transitional period for U.S. export control policy. We are fortunate that Bill and Roger are where they are today, because both are very knowledgeable about Congress, understand the sensitive issues at the juncture of national security and trade policy, and have a sophisticated sense of what is needed to balance U.S. economic and security interests.

I understand that Roger Majak's nomination now sits with the Senate and that he expects to have a hearing soon. I am confident that he will be confirmed, and I wish him well in his important new post.

Trade and Export Control Policy

I have been asked to try to provide a congressional perspective on several trade and export control issues.

The operative word here is "a" congressional perspective. There are, of course many -- not 535, but close to it -- congressional perspectives on trade and export control issues.

These are issues of enormous complexity and controversy. They are receiving increasing scrutiny on Capitol Hill. Policies that you care about are being pushed in new directions -- some that you may favor, some you may not. Because you are well-acquainted with these issues, I will only try to give you a sense of the political and legislative state of play on each of the issues I will address.

I begin by talking about several key trade policy issues before the 105th Congress: fast-track, U.S.-China trade relations, and unilateral economic sanctions.

It is striking how trade and export issues have moved to the top of the foreign policy agenda in recent years. Each of these issues is vitally important not only to the future of the American economy, but to the success of American foreign policy.

First, fast-track.

I support fast-track. Fast-track will empower the President to open foreign markets, and it will help him turn our trade leadership into foreign policy leadership. Without fast-track, the President's ability to promote U.S. foreign policy and economic interests will be substantially diminished.

Under fast-track, Congress agrees to consider without amendment trade agreements negotiated by the President, and to do so on an expedited basis. Without fast-track, the President cannot conclude any significant agreements, because other governments won't cut deals that can be modified later by Congress.

Fast track died in 1995 because the President and Congress couldn't agree on how to address labor and environmental issues in trade negotiations. The same issue has been holding up fast-track legislation this year:

• Some believe poor labor and environmental conditions give developing countries an unfair competitive advantage that threatens American jobs. They want agreements negotiated under fast-track to include enforceable provisions that reduce labor and environmental disparities.

• Others insist that trade abreements should cover only matters that impact international commerce.

A solution to this deadlock could be found somewhere between these two positions, but it will take considerable effort, skill, and good will to find it.

This effort is essential, because fast-track is not just some technical trade policy device: it will be nothing less than a critical foreign policy tool for the President of the United States during the coming decade.

Fast-track, and the agreements that may flow from it, will be defining issues of the President's second term.

Importance of Fast-Track

First, progress on open trade is an absolute prerequisite for stronger U.S. relations with Latin America. Increased trade with the United States would solidify democracy, reinforce reforms, and enhance diplomatic cooperation.

Second, trade liberalization within APEC -- also dependent on fast-track -- will help maintain America's political leadership role in Asia. For many of our closest friends in the region, APEC's most important purpose is to keep the United States anchored in Asia.

Third, fast-track is essential to U.S. leadership of global trade liberalization. U.S.-led multilateral agreements have produced a massive expansion of trade since World War II. Expanded trade has boosted international prosperity and stability. Without U.S. leadership, world trade growth will slow.

But fast-track is also, of course, critical to U.S. economic success.

Our prosperity increasingly depends upon our success in finding new foreign markets for our goods and services.

In recent years, exports have been responsible for more than one-third of U.S. economic growth and one in eight new jobs. With fast-track in hand, the President can negotiate trade agreements that help these exports find new markets. Opponents of fast-track have no better ideas for creating jobs.

Fast-track made possible every major trade-expanding agreement of the past two decades: the Tokyo Round of the GATT; the U.S.-Israel and U.S.-Canada Free Trade Agreements; NAFTA; the Uruguay Round; and the recent agreements on information technology and telecommunications.

Each of these deals generated significant new opportunities for U.S. firms and workers.

Without Fast-Track

But the importance of fast-track becomes most clear when one considers what the President will not be able to do without it. Fast-track is not just about bringing Chile into NAFTA. Without fast-track:

• The United States won't be able to leadt planned global talks on agriculture and services, two sectors in which U.S. producers dominate world trade but are hurt by widespread foreign trade restrictions.

• We won't be able to launch a new multilateral trade round

• European and Japanese firms will boost their market shares in Latin America and Asia -- at our expense

• New deals in key industrial sectors -- like the information technology agreement -- will remain out of reach.

NAFTA and Free Trade

Despite the power of these arguments, everybody here is aware of the political reality that fast-track won't be approved unless its supporters can effectively address the concerns many Americans have about the impact of free trade on jobs.

These concerns have been heightened, of course, by NAFTA.

Cheap imports and the relocation of plants to Mexico have hurt some American workers, and the pain associated with trade, not the gains, are what have political significance.

Plant closings that can be blamed -- rightly or wrongly -- on NAFTA have occurred in just about every congressional district. The fact that U.S. exports to Mexico have grown substantially is rarely noted, however.

Many members may also feel that they cast the one "free-trade" vote they can afford this year for MFN for China, and may be inclined now seek to "balance" that vote with a vote against fast-track.

Outlook

To win the fast-track debate, the President and his top trade and foreign policy advisers will need to step up to the plate and explain why NAFTA has been in the U.S. interest. This debate is likely to begin in the next several days, when the Administration releases a major report on NAFTA's first three years.

The President will put forward a fast-track legislative proposal this fall. That won't leave much time to pass a bill before the election season begins early next year. He can probably get fast-track authority, if he makes a very strong effort to get it.

The battle in the House will be especially tough. It is not clear whether a legislative formula can be found that will be acceptable to large numbers of members on both sides of the aisle. If that appears to be the case, the President will face a tough decision: whether to pursue a bipartisan coalition of free trade-oriented members, a strategy that would mean alienating a large number of members from his own party.

U.S.-China Trade Relations

The House made the right decision last month when it voted, 259 to 173, to continue China's Most-Favored-Nation trading status. I will not dwell on this issue except to make a few quick comments.

First, what the MFN debate was really all about: do we pursue a policy of engagement with China, or one of isolation?

• A policy of engagement with China -- rather than isolation, confrontation, or containment -- is most likely to promote American interests in the region and around the world.

Second, there is great frustration in the Congress with China.

• Many members want to register that frustration, and the annual vote on our trade relationship offers an opportunity to do so.
  
• But in the end, most Members recognize this year that givin voice to their frustration by ending normal trade relations with China would not be an effective policy, and voted, albeit with some reluctance, to renew China's MFN status for another year.

Third, the question of China's World Trade Organization (WTO) accession raises a tougher problem.

• As you may know, the United States recently completed a new round of WTO negotiations with the Chinese. Progress was made. China appears finally to be making the kind of market-opening commitments necessary to demonstrate that it is serious about trade liberalization.

• At the same time, I am impressed by the hurdles that remain before China is ready for WTO membership.

• Some of the toughest issues -- market access for agricultural products and financial services, the phasing out of non-tariff barriers, and the closing of state-owned enterprises -- have barely been addressed.

• At the end of the day, it is very much in our interest that China should become a full-fledged member of the WTO. But only after it agrees to abide by the same rules that govern the behavior of all other WTO members.

• It probably makes sense for us to show a little flexibility on how quickly we expect China to conform fully to WTO standards, but there should be no backsliding from the principle that China must operate under the same rules that other nations do.

Finally, I would just add one word of warning: If we treat China as an enemy, that is the best way to ensure that China will become an enemy.

• If, on the other hand, we treat China with a combination of respect, firmness, and a hand open in friendship -- if, above all, we seek common solutions to shared problems -- then I think that it's a reasonable bet that our patience will be rewarded, and our country's political and economic interests will be advanced.

Unilateral Economic Sanctions

Now let me turn to a final trade issue that has significant implications for U.S. export control policies: unilateral economic sanctions.

First, the United States needs to have economic sanctions in its foreign policy toolkit.

Americans want their government to respond to many international problems and crises. Economic sanctions can be an attractive option when force is not justified but diplomacy has failed.

Second, the United States has been turning to unilateral sanctions much too frequently in recent years. We've also broadened the scope of our sanctions: we're using a wider range of restrictions to target a wider range of foreign conduct.

Many of our friends are especially concerned about the latest departure in U.S. sanctions policy: the enactment last year of two laws that seek to penalize foreign firms for commercial activity in third countries: the Helms-Burton and Iran-Libya Sanctions Acts.

In a vote later today, in fact, the House is likely to approve another unilateral sanctions proposal -- a bill that would ban all commercial transactions with the governments of countries on the State Department's terrorism list.

Third, I have several concerns about this proliferation of new and more aggressive sanctions measures.

• The economic costs of unilateral sanctions are high.
  • Unilateral measures almost always cost U.S. exports and profits. The Institute for International Economics concluded earlier this year that export sanctions alone are costing U.S. firms $15-20 billion annually in lost sales.

  • Sanctions also impose opportunity costs for U.S. firms. Foreign firms and governments are steering clear of U.S. firms when making procurement decisions.

  • Those lost exports mean lost jobs. Fifteen to twenty billion dollars in export sales could support over 200,000 jobs.

  • Unilateral sanctions can harm other U.S. interests. Third-party measures like the Iran-Libya and Helms-Burton sanctions are particularly damaging to U.S. relations with many of our closest friends.

• Unilateral sanctions are also usually ineffective.
  • Unilateral sanctions don't work because the world economy has become too interdependent. When we deny a country access to our products or our markets, it has plenty of alternatives. Often only U.S. firms and workers pay a price.

    In light of these concerns, one of the most alarming aspects of U.S. sanctions policy is the weak information base upon which sanctions decisions are typically made.

• Several dozen U.S. laws grant the President the authority to impose sanctions. So far as I am aware, not one of these laws requires a cost and benefit assessment of a proposed sanction before or after it is imposed.

  It should be a routine part of U.S. sanctions policy to ask:

  • Whether a proposed sanction is likely to achieve its intended objectives;

  • What impact it may have on other U.S. interests; and

  • What it may cost American firms and workers.

  Our policy should be to have in hand the answers to these questions before a new sanction is imposed.

Now let me turn to export control issues.

Export control policies for military products are straightforward, and usually not controversial: we only sell weapons or military technologies to our friends. We generally don't sell them to hostile countries or to countries pursuing dangerous weapons programs, even if comparable weapons are available from other sources.

The Necessary Balance

But export control policies for dual-use items are more complicated, and often controversial. An effective dual-use export control policy requires a continual and difficult balancing of foreign policy and economic interests.

• Dual-use controls that are more restrictive than necessary hurt U.S. profits, jobs and wages:
  • And if they hurt the competitiveness of certain industries, excessive controls can even harm our security. According to some analysts, for example, overly restrictive export controls allowed European and Japanese firms to overtake U.S. firms as the world's leading manufacturers of precision machine-tools.

• On the other hand, lax export controls can make us less secure. Export controls can be a useful tool in the effort to limit the military capabilities of a potential enemy.
  • Even if a product with a military application is available from foreign sources, there may be times when the United States will want to maintain controls on its export.

The effort to balance economic and security interests -- always difficult even during stable periods -- has become even more difficult in these first few years after the Cold War.

For the past few years, U.S. export control policy has been trying to adapt to two post-Cold War realities:

• First, the target countries of our export controls have changed dramatically.

• Second, dual-use items for which the United States was once the only producer are now widely produced abroad.

The Administration has done a commendable job of addressing these new realities:

• Its decisions on export control policy have demonstrated a sophisticated understanding of the world market, technological trends, and national security requirements. I understand that U.S. high-tech exporters are generally pleased with the Administration's export control liberalization initiatives.

• But I also think it is accurate to say that the Defense Department is now more formally involved in export control policy and licensing decisions than it was under previous Administrations. Recent debates on the Export Administration Act and on export controls on supercomputers and encryption software suggest, however, that the post-Cold War effort to rebalance U.S. export control policy is not yet finished.

Let me take up each of these issues in turn.

Export Administration Act (EAA)

About the Export Administration Act there is not much to say.

It expired in 1994. A presidential executive order, not a statute, now governs the U.S. dual-use export control system today. This is not a desirable state of affairs. It jeopardizes our government's ability to enforce export controls. It also prevents us from fully reorienting our controls to the new commercial and security environment of the post-COCOM era.

But after three unsuccessful tries this decade, I find little enthusiasm in the Congress for another effort to reauthorize the Export Administration Act.

We developed a solid EAA bill last year. I know it did not meet the expectations of some exporters, but it was acceptable to the Administration and would have provided a more sound and predictable foundation for U.S. export control policy.

For the first time in a number of years, this bill passed the House. Unfortunately, we could not persuade the Senate to take up the bill last fall.

I am doubtful that the House leadership will set aside time to produce an EAA bill until there is a clear indication of Senate interest. My understanding, however, is that the Senate Banking Committee has no plans to work on EAA this year.

Supercomputer Export Controls

Supercomputers are controlled because of their strategic and proliferation significance.

New Policy

Last year, the Administration reached two important conclusions about high-performance computers.

• First, these comoputers will soon be widely available from numerous foreign suppliers.
  • They once were easily controlled because they were predominantly of U.S. origin. But today all but the most powerful computers are widely available.

• Second, only the most powerful computers -- machines that perform above the 7,000 MTOPS level -- have potentially serious military applications.

The Administration decided to permit computers below that militarily critical level to be exported without individual licenses to civilian customers in most countries. Sales to military customers in 50 countries of concern still have to be individually licensed, a process that requires Defense Department approval.

Concerns on Sales to Russia and China

We learned earlier this year that a U.S. firm sold high-performance computers to two Russian nuclear weapons labs. Last week we learned that a high-performance computer sold to China was diverted to an end-user involved in weapons-related research. All of these sales should have been individually licensed.

Congress reacted strongly to this news. During consideration of the Defense Authorization bill last month, the House voted, by a margin of 332 to 88, to reimpose individual licensing requirements on computers in the 2000-7000 MTOPS range sold to any of the 50 countries of proliferation concern. A similar amendment will be offered to the Senate Defense bill this week.

I do not believe the facts assembled thus far justify a costly reversal of U.S. policy on the control of high-performance computer exports.

These amendments seek to fix a policy that no one has proved is broken. In fact, it can be argued that our policy has worked well so far:

• Apparent violations of U.S. export control policy have been detected.

• The Commerce Department and the Justice Department are investigating.

• The United States is seeking either the return of the computers or an opportunity to verify whether or not they are being used for military purposes, and there is reason to be optimistic that this cooperation will be forthcoming.

• There is no evidence that more than a couple of the more than one thousand high-performance computers exported under the new policy have ended up in the wrong hands.

• Nor is it yet clear that these computers pose any threat to the United States.

Instead of legislation that hurts our computer industry and the people it employs, industry and government should take steps together to decrease the chances of future diversions or sales to disguised military end-users:

1. First, companies need to know their customers better. I have no sympathy for firms that fail to make a good-faith effort to vet their customers. Those companies are subject to civil and criminal penalties, and no one in Congress will protect them from themselves.

2. Second, our government can do a better job of helping companies spot the bad guys. Two weeks ago the Commerce Department updated its public list of end-users known to be engaged in proliferation-related activities. I applaud this practice, and I hope it will continue.

3. Third, there is no substitute for communication and a continuous dialogue between industry and the Commerce Department. The lifting of export controls should never mean that companies believe that they no longer need to talk to the Commerce Department. Whenever questions arise, it is incumbent on all parties to talk to each other as early as possible -- before problems arise, not after.

This issue is far from resolved, however. There is a real chance that computer export controls could be rolled back this year. The outcome will depend in part on what the Administration does to address the concerns raised by these sales. I think the Administration's initial steps have been sound.

But many of you will need to be more actively engaged in the legislative process. If members of Congress don't hear persuasive arguments from the private sector about the cost of a control roll-back, they will take the politically cautious route, and support tighter controls.

Encryption Export Controls

Encryption export controls pose a similar policy challenge. The policy debate has been centered on two related questions for several years: What access should government have to encrypted data and electronic communications for law enforcement and national security purposes; and to what extent can Cold War-era controls be relaxed to accommodate developments in technology and the international market?

With encryption products the policy challenge has proven extremely difficult. That is largely because the constituencies both for maintaining and for loosening current controls are more complex, and they are firmly dug in to their positions.

• Supporters of looser controls include not only the manufacturers of hardware and software with encryption capabilities, but also firms and individuals that rely on electronic communications or data bases to conduct their overseas business.

• Support for maintaining strict controls comes not only from U.S. intelligence and military agencies, who are concerned about the impact of encryption exports on intelligence collection, but also from the law enforcement community.

New Administration Policy

The Administration's policy, which was adopted last fall, is to promote the use of strong encryption, here and abroad, so long as it is designed with key recovery features -- features which permit users and authorized law enforcement agencies access to spare keys.

This policy acknowledges what many in the software industry have argued for several years: that U.S. export controls cannot alone prevent the worldwide spread of encryption products.

Rather than try to contain technological and market forces beyond its control, the U.S. government is now trying to channel their development in the direction of key recovery, which will enable law enforcement and national security agencies to continue to do their jobs.

Here is what the new policy does:

• In exchange for a commitment to implement key recovery in their products, computer firms will be permitted over the next two years to export encryption products with 56-bit keys.

• Products that already employ key recovery may be exported with keys of any length, following a one-time review by the government.

• Private sector entities, not government agencies, will hold spare keys and manage the key recovery infrastructure, but law enforcement agencies will insist on court-authorized access to keys as part of criminal investigations.

Some exporters have endorsed the new policy. Several have come forward with key recovery plans and sought approval for exports of 56-bit products.

But I know that many other firms -- especially in the software industry -- have deep misgivings about the new policy. They object to the maintenance of control ceilings and to the requirement that they adopt key recovery in order to obtain permission to export more powerful encryption products -- products they claim are widely available from non-U.S. sources.

Legislative Picture

The depth of the software industry's dissatisfaction helps explain the extraordinary momentum gathered by a House bill, H.R. 695, that would eliminate controls on exports of software with encryption capabilities.

As many of you know, this bill has been approved by the Judiciary Committee and is now pending before my Committee, International Relations, where about half of our members are co-sponsors. We have a July 25 deadline to act on the bill.

Even if this bill were to be approved by my Committee without many changes, its chances of enactment in its current form would be slim:

• The National Security and Intelligence Committees may both seek referrof of the bill.

• The Senate version of the bill, appears to have stalled.

• And, most importantly, the President is likely to veto the House bill if it reaches his desk.

My sense is that many computer industry people recognize that the bill will be modified, so they are angling for the best possible outcome.

The Administration has responded favorably to another bill that has recently begun to pick up steam in the Senate. This bill, S. 909, appears to offer something of value both to government and to industry. My impression is that it will strike many members as a reasonable compromise.

I am aware that many firms consider this bill unsatisfactory, but it appears to stand a good chance of being approved by the Senate.

Needless to say, supporters of the House bill have their work cut out for them.

The encryption export issue has dogged us for four years now. Both sides have legitimate concerns.

In the past, when members of Congress were confronted with an issue like this, which appears to involve a conflict between national security and economic objectives, they would usually err on the side of national security. That is clearly what happened in the debate on supercomputer export controls in the House several weeks ago.

But this year's encryption debate, especially in the House, suggests that members are more willing to submit national security claims to closer scrutiny when they appear to challenge important economic interests. There is also a growing recognition that the health of certain U.S. industries is, itself, a national security issue.

These are important and welcome developments, and many of you in this audience deserve credit for helping bring them about.

We will simply have to keep trying in our export control policies to find the appropriate balance, protecting as best we can both the security and the economic interests of the country.

Thank you!

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