Volume 22, No. 47 -- December 2, 2002

Posted Monday, December 2, 2002 12:00 am

In This Issue:

* Space-Qualified Rules Poised to Capture Commercial Semiconductors
* Defense Trade Review May Do Little to Help Licensing
* State Official Claims Licensing Process Is Already Improving
* Night Vision Firms Seek Change in Munitions List
* U.S. Tariff Proposal Will Change Existing Trade Relationships
* Tariff Proposal May Force Change in WTTL Name
* Briefs: ML, Yugoslavia, Mexican Trucks, Cargo Manifests

SPACE-QUALIFIED RULES POISED TO CAPTURE COMMERCIAL SEMICONDUCTORS

The improving technology and decreasing size of integrated circuits are about to bring large numbers of commercial semiconductors under Munitions List (ML) controls because they meet the criteria for radiation hardened devices. Changes made in 1999 to ML Category XV, when licensing jurisdiction for commercial satellites moved to State from Commerce, could turn such commercial products as cell phones, watches and computers into military items because they contain semiconductors that fall under the licensing conditions in State's regulations, IBM's Thomas DiVincenzo told the department's Defense Trade Advisory Group (DTAG) Nov. 26.

When Category XV(d) was revised, the words "specially designed or rated" for military use were deleted from the section, DiVincenzo noted. As a result, chips that meet the conditions in the category could be considered military items even though they are not intended for military or space use. DiVincenzo recommended that those words be put back into the section.

"It is possible that with ever decreasing, smaller dimensions of future process technology that future integrated circuits could inadvertently pass all five major radiation-hardening criteria," DiVincenzo told DTAG. Although the rules were changed in 1999, not many commercial semiconductors met those criteria then; now an increasing number can or will soon, he noted.

Moreover, because the international ML continues to limit controls to chips "specially designed" for military use, companies in other Wassenaar Arrangement countries don't face the same restrictions as U.S. companies. Chip makers in such non-Wassenaar countries as Taiwan also escape these controls and are major competitors for U.S. exporters, he pointed out.

Similar problems are being encountered by other industries that make products that could come under ML controls because of improving technology, the DTAG was told by other attendees at the meeting. To reduce crosstalk and interference, newer cell phones may meet TEMPEST standards for communications systems in ML Category XI. Some printed circuit boards and miniature microcircuits also are advancing technologically toward ML controls.

DEFENSE TRADE REVIEW MAY DO LITTLE TO HELP LICENSING

White House plans for reviewing defense trade policies appear to be aimed at selling more military systems to NATO allies rather than changing the Munitions List (ML) licensing process at State. Initial export community excitement about the Bush administration's announcement may cool as the scope of the review becomes clear.

The review, which was announced while President Bush was in Prague for the NATO Summit Nov. 22, is intend to meet NATO's goals for increasing the interoperability of allied forces and closing the gap in war-fighting capabilities between the U.S. and other members of the pact, according to Lincoln Bloomfield, assistant secretary of State for political-military affairs (see WTTL, Nov. 25, page 1). "The mother's milk of closing that gap is defense spending," Bloomfield told WTTL.

NATO nations have claimed they would spend more on defense, if they could get access to higher levels of technology. "I think the president was really talking both to the NATO secretary general and to the NATO allies," Bloomfield said. "That announcement should be seen in that context," he said.

The newly announced defense trade review comes as the administration also is updating the National Security Policy Directive (NSPD), which sets U.S. arms export policies. While the review will look for ways to ease the export of ML goods and technology to NATO members, it is not intended to significantly change State's export licensing procedures, Bloomfield indicated. "My message is that there is no agenda to move us from where we stand in terms of our foreign policy compass into some radical direction. I would discourage that view," he said.

"That's not what this is about. In fact, the part that I think is of most interest to the companies, from DTC=s (Office of Defense Trade Controls) standpoint in the process, is that the fixes are already in the mail," Bloomfield said. "What we are doing about NSPD is more about policy not practice," he added.

"To the extent to which we consider some adjustment in the sensitivity of what we think we must license, the question is: 'What then?'" he said. The Bureau of Industry and Security's (BIS) role in this process will be to provide State and Defense assurance that anything taken off the ML will be adequately controlled under the Export Administration Regulation, he suggested.

Bloomfield reacted negatively to proposals offered by a federal commission on the future of the aerospace industry, which recommended changing export licensing procedures to a systems-based approach from its current export-by-export review system. Few companies that have been investigated by State have the clean records that would warrant such treatment, he argued.

"To the extent that companies want to make life easier for us in the compliance and enforcement arena, I would like to see a conclave of general counsels of major defense corporations work up some kind of a confidence building plan so that you could see there is good in-house corporate hygiene being exercised to give us confidence," Bloomfield told WTTL. "If we are to manage risk, as opposed to having zero risk, then it falls to companies to show us why we should feel confident that there is nothing untoward. That's a real challenge," he declared.

STATE OFFICIAL CLAIMS LICENSING PROCESS IS ALREADY IMPROVING

A combination of increased staff, a management realignment and the reengineering of the process have contributed to major improvements in State's export licensing system, contends the Lincoln Bloomfield Jr., the department's assistant secretary for political-military affairs. Although the Bush administration has launched a new review of defense trade policies, exporting industries subject to Munitions List (ML) controls should not expect much further improvement in the process, he told State's Defense Trade Advisory Group (DTAG) Nov. 26.

"It's my view that, in large measure, the remedies in the process are already in train as we speak," Bloomfield said. He admitted, however, that all the improvements "may not become fully mature for another year or so."

Due to legislation in the last couple of years, State's Office of Defense Trade Controls (ODTC) has had a significant boost in personnel and is now close to full strength. In preparation for moving the licensing process to a fully electronic system, ODTC is undergoing a reengineering exercise that is documenting and reviewing each step of its licensing procedures, Bloomfield reported.

In addition, PM has added a deputy assistant secretary and realigned its management to separate urgent licensing requests for the war in Afghanistan and against terrorism from normal trade, he noted. Under one deputy, the staff that handles war-related exports now operates 24-hours a day. A new third DAS handles policy and management issues.

While State has received lots of suggestions for improving the licensing system, Bloomfield invited the DTAG to make additional recommendations based on the experience firms have had dealing with international competition. He cautioned, however, that firms will have to make the case why a change is merited. "You'll have to run the traps, the gamut of defense trade controls criteria. This isn't about trying to increase revenues from exports. That is not where the department or the secretary of State is coming from," Bloomfield declared.

One area the department is seeking advice on from industry is what information should be requested on export license applications. Bloomfield conceded that the Pentagon often asks for more information and may deal directly with exporters. "I think that sometimes our friends in the services have an insatiable appetite for information," he said. State wants "to guard against any excess" where a service can keep coming back for more and more information, he added.

NIGHT VISION FIRMS SEEK CHANGE IN MUNITIONS LIST

Frustrated trying to get quicker interagency clearance of export licenses for products on the Commerce Control List (CCL), firms that make thermal imaging products made a pitch Nov. 26 for a change in the source of their problems, State's Munitions List (ML). Industry representatives urged State's Defense Trade Advisory Group (DTAG) to support a proposal to revise ML Category XII(c) to clarify the distinction between infrared focal plane arrays intended for military use and those for commercial use.

Also urging the change were members of the newly formed American Council for Thermal Imaging (ACTI), which represents 16 companies making these products for the commercial market. ACTI was created because its members felt they didn't have the same political clout as the computer and encryption industries, which successfully lobbied to get export controls on their products eased.

ACTI members complain that jurisdiction fights between State and BIS, along with Defense's concerns about proliferation of night vision products, have slowed their exports and hurt their international competitiveness. "Our biggest concern right now, quite frankly, is that this industry will be shut down in this country and we will be losing the technological advantage that we have been building over the years simply because the issue of foreign availability is not being recognized by a number of agencies," said Larry Konsin of MSA. Firms in China, Israel and France are soliciting customers for the focal plane arrays they can produce, and China is making fully integrated camera systems, he told the DTAG.

Commercial thermal imaging products, including those in cameras and firefighting or rescue equipment, are inappropriately classified under the International Traffic in Arms Regulation (ITAR), said Raytheon's Stan Kummer. The current language in XII(c) classifies second and third generation image intensification tubes and military infrared focal plane arrays as CCL items, if they are "a part of a commercial system."

The industry wants that wording amended to include items "for incorporation in" commercial systems, Kummer explained. Category XII(c) also should be changed so replacement parts are controlled under the same rules as the original export, rather than under the ML as they now are, he said.

U.S. TARIFF PROPOSAL WILL CHALLENGE EXISTING TRADE RELATIONSHIPS

While U.S. Trade Representative (USTR) Robert Zoellick has portrayed the bold U.S. proposal for eliminating all tariffs on industrial and consumer goods by 2015 as a major concession by the U.S., Washington may have to offer more sweeteners to get the rest of the world to accept the idea (see WTTL, Nov. 25, page 1). Announcement of the plan, which the U.S. will present to Doha Round negotiators in Geneva the week of Dec. 2, has revealed the extent to which tariffs remain the core of the economic, industrial and trade policies of many nations.

During phase one of the two-stage U.S. plan, from 2005 to 2010, all tariffs of 5% or less worldwide would be eliminated, negotiations would seek to eliminate tariffs in other key industrial sectors, and all other tariffs would be cut to 8% or less. Phase two would bring all remaining tariffs to zero between 2010 and 2015.

For many countries, especially in the Caribbean and Africa, tariffs remain an important source of government revenue. Developing countries also depend on tariff preferences, such as the Generalized System of Preferences and the Caribbean Basin Initiative, to compete against more advanced economies. To give their support to the U.S. proposal, these nations are likely to demand new benefits to compensate for what they will give up. The U.S. and other developed countries, therefore, will be pressed to offer more economic aid, debt relief and easier access to drugs to fight the catastrophe of HIV/AIDS and other epidemics.

If the U.S. succeeds in getting the WTO to adopt its proposal, the elimination of tariffs will test the viability of the classic economic theory of "comparative advantage." In an age of globalized markets, computerize manufacturing and massive flows of foreign direct investment, few developing countries have natural comparative advantages in the industrial sector. For example, the proposed schedule of tariffs cuts would come just as the global system of textile quotas will be coming to an end on Dec. 31, 2004. Many countries have been in the textile and apparel business over the last forty years only because they hold a share of those quotas.

Moreover, U.S. trading partners know that the elimination of tariffs won't immunize them from other high duties imposed under U.S. antidumping, countervailing duty and safeguard actions. Thus, they will demand changes in U.S. trade laws to make such sanctions harder to impose.

TARIFF PROPOSAL MAY FORCE CHANGE IN WTTL NAME

If the World Trade Organization (WTO) accepts the U.S. proposal for eliminating all tariffs by 2015, Washington Tariff & Trade Letter may have to change its name, USTR Robert Zoellick has suggested. "We're going to put you out of business on the tariff part," Zoellick said during a response to a WTTL question at a Nov. 26 press conference where he unveiled the U.S. proposal. "You're just going to be the Washington Trade Letter," he said.

* * * BRIEFS * * *

MUNITIONS LIST: State in Nov. 27 Federal Register published changes to ML Categories V and XIV, including shifting export controls for some items in these categories to BIS jurisdiction. Among items moving are fluorine, liquid pepper, chloropiricrin, nitroguanidine, guanidine nitrate. Items mixed or compounded with ML articles remain under ML controls.

YUGOSLAVIA: BIS Nov. 25 revised EAR to reflect UN's lifting of arms embargo on Yugoslavia. Other changes clarify UN sanctions on Rwanda.

MEXICO: U.S. Department of Transportation Nov. 27 began processing applications from 130 Mexican truck companies seeking to carry cargo from Mexico into U.S. beyond 20-mile commercial zone along U.S.-Mexican border. While approvals aren't assured, department says its action fulfills U.S. obligation under NAFTA to allow cross-border trucking.

CARGO MANIFESTS: Customs in Nov. 26 Federal Register published schedule for meetings in January to hear industry comments and to explain its plans for implementing provisions in Section 343(a) of 2002 Trade Act, which requires advance electronic filing of cargo information before exporting or importing (see WTTL, Sept. 23, page 1). Meetings in DC will be Jan. 14 for air cargo, Jan. 16 for trucks, Jan. 21 for rail cargo and Jan. 23 for sea cargo.