EXPORT CONTROLS: ANALYSIS OF ECONOMIC COSTS

EXPORT CONTROLS: ANALYSIS OF ECONOMIC COSTS

Order Code RL30430
CRS Report for Congress
Received through the CRS Web
Export Controls: Analysis of Economic Costs
February 10, 2000
Craig K. Elwell
Specialist in Macroeconomics
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

Export Controls: Analysis of Economic Costs
Summary
The Export Administration Act (EAA) of 1979 governs the licensing for export
of “dual-use” items (i.e. civilian goods that have a possible military application). That
act expired in 1994 and continues to be enforced under national emergency authority.
Many argue that a new EAA is needed, but disagree over the form revamping should
take. Some see the need for substantial liberalization in the export control process to
remove unnecessary burdens from American industry. Others see the need to
reinvigorate the control regime to counter new and important national security
threats. Unable to reconcile these opposing positions, several previous attempts to
reauthorize the EAA have failed.
The national security goals of the EAA come at some economic cost. An open
question is whether those costs are consistent with the national security and foreign
policy benefits gained by the U.S. export control system. There may be some
confusion, however, about what the magnitude of those costs is. While estimates of
lost export sales are often cited as an approximation of economic costs, they may be,
by themselves, an inaccurate measure of the full economic consequences of this
impediment to free international exchange.
The economic costs of export controls to the U.S. economy is the value of lost
“gains from trade” caused by the controls reducing U.S. export sales and reducing
inflows of desired imports. That value will most often be a fraction of the value of lost
export sales. It is estimated that in recent years this so-called static loss has been
between $500 million and $14 billion. Some would increase the estimate of the
economic cost by including possible negative effects of export controls on the U.S.
rate of long-run growth. This so-called dynamic loss is far more uncertain, however.
Current legislative initiatives for the most part endeavor to liberalize the export
control process, and remove significant impediments to U.S. exports. S. 1712, the
Export Administration Act of 1999, is a comprehensive revamping of the export
licensing regime. That bill places great stress on the criterion of “foreign availability”
in determining what items should need an export license, with the expectation that
diligent application of that criterion will greatly reduce the number of dual-use items
needing an export license. S. 798 and HR. 850 deal specifically with the licensing
requirements for encryption technology.
However, it remains unclear how sizable a change these legislative initiatives
would make in current export control processes. Each would likely produce a
moderate nudging towards more liberal controls, inducing a moderate increase in U.
S. exports and an even more moderate boost to U.S. economic welfare.
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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Economic Cost of Export Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Economic Impact of Pending Export Control Legislation . . . . . . . . . . . . . . 7
The Senate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The House . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
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Export Controls: Analysis of Economic Costs
Introduction
The 106th Congress has shown interest in reforming and reestablishing the
Export Administration Act (EAA) of 1979. That act expired in 1994, but continues
to be implemented by executive order under national emergency authority.1 Both
houses have held hearings. The Senate Banking, Housing, and Urban Affairs
Committee on October 8, 1999 reported a bill, S. 1712, the Export Administration
Act of 1999.
In addition, legislation specifically aimed at the export of encryption technology
has been reported from both the House and Senate. H.R. 850, the Security and
Freedom Through Encryption (SAFE) Act, was reported by the House Judiciary
committee on April 27, 1999( H.Rept. 106-117, pt. I); Commerce on July 2 (pt. II);
International Relations on July 19 (pt. III); Armed Services on July 23 (pt. IV); and
Intelligence on July 25 (pt. V). S. 798, the Promote Reliable Online Transactions to
Encourage Commerce and Trade (PROTECT) Act, was reported by the Senate
Committee on Commerce , Science, and Transportation on Aug. 5, 1999 (S.Rept.
106-142).
Several previous attempts to reauthorize the EAA have come to naught, due, in
part, to the competing interests of the two principal groups of stakeholders in the
export control process. On one side are those who want to reduce the burden of the
EAA on American exporting industries. On the other side are those who support more
rigorous export controls on certain products to protect national security.
There is no doubt that the national security goals of the EAA come at some U.S.
economic welfare loss. An open question is whether those costs are more or less than
the national security and foreign policy benefits gained by the U.S. export control
system. There may be some confusion, however, about what the magnitude of those
costs is. Lost export sales are often cited as an approximation of economic costs.
Estimates of lost sales by themselves are likely to be an inaccurate measure of the
economic burden of export controls on free international exchange. There are other
economic effects, both positive and negative, that must also be tallied into any
estimate of economic costs.
This report provides a general framework within which to evaluate the
economic costs of export controls. This framework builds on the concept of “gains
from trade” and encompasses effects on both producers and consumers of changed
levels of both exports and imports. In addition, an estimate of the range of probable
1 See: “Continuation of Export Controls,” Executive Order 12924, 59 Fed. Reg. 43437 (Aug.
19, 1994).
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economic costs of current U.S. export controls is given. The report also attempts to
judge whether current legislation would raise or lower the economic cost of export
controls.
Background
The EAA authorized the Department of Commerce to regulate the export of
“dual use” items, that is, civilian goods and technology that also have the potential for
military application. Currently the list of controlled items, called the commerce control
list (CCL), numbers about 2,500 entries. Moreover, in recent years the Bureau of
Export Administration (BXA) has processed 10,000-12,000 export license
applications annually. The processing time for an export license may take several
weeks, but it is often a period of several months. The time spent on acquiring an
export license can be a impediment to timely marketing of products to international
markets, and, therefore, a substantial competitive disadvantage, particularly if foreign
producers are not similarly constrained. Of course, export controls create an effective
barrier if a license is denied.
Products subject to U.S. export licensing regulations include many high-tech
items, such as high-performance computers, encryption software, telecommunications
equipment, precision machine tools (especially computer assisted machines), guidance
technology, and synthetic materials (especially high strength and light-weight
products). These are all items with which the United States likely has significant
commercial advantages, but they are also items with clear military applications.
Evolution of U.S. Export Control Policy. The current EAA has its roots in
legislation passed in 1949 at the beginning of the Cold War. The goal at that time was
to block nearly all exports to the Soviet Union, but, as the program evolved, a critical
emphasis was placed on denying to the Soviets superior western technology, that
effectively countered the Soviet’s numerical military superiority.
Beginning in the late 1960s, political pressure to liberalize export controls grew
in response to the argument that the system needed to accommodate the growing
importance of trade to the U.S. economy, including the importance of trade for
sustaining the pace of domestic technological advance. Moderate liberalization of the
EAA, to assuage commercial interests, continued in subsequent renewals of the act
in the 1970s and 1980s.
After the collapse of the Soviet Union and the associated diminishing of its
military threat to the United States, pressure grew to reduce further the burden of
export controls on American international commerce. Over the course of the Bush
and Clinton Administrations, the export control system has been reduced in scope
and streamlined, but the basic Cold War structure remains in place. Many argue that
the EAA needs to be revamped, but disagreement arises over whether the objective
of reform should be to remove impediments to exports or to more effectively address
important current national security threats.
The push by commercial interests for further liberalization of U.S. export
controls has intensified in recent years as those controls have come to be seen as
increasingly unilateral in nature and, in turn, increasingly unfair to American industry.
The Cold War export control regime was an effective multilateral effort, with U.S.
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allies imposing a similar high level of restrictions on “dual-use” items. That
arrangement, called the Coordinating Committee on Multilateral Export Controls
(COCOM), was dissolved in 1996, in part because U.S. allies no longer wanted to
carry the economic burden of its trade restriction.
The successor to COCOM, the Wassenaar Arrangement, is relatively loosely
structured, allowing a much wider variance between the items the United States
controls and the items other members of the Wassenaar Arrangement control. More
liberal export controls among U.S. allies raise the probability of “foreign availability”
of some items controlled by the United States. This situation can render U.S. export
controls ineffective, nullifying any benefit to national security. Also, it imposes
significant added costs on affected American industries, which struggle to compete
against foreign rivals that are not similarly encumbered.
On the other hand, experts point out that significant national security threats to
the United States still exist. There are aggressive countries and sub-national groups
that seek weapons of mass destruction to expand their influence, intimidate their
neighbors, and destabilize the international environment. These new and more varied
threats raise important issues relating to proliferation of items with a potential national
security impact. From this viewpoint, the current export control process is already
too porous, and further liberalization would only exacerbate the threat to national
security. Some believe the system needs to be reformed to make controls more
effective, not more liberal. In addition, it is argued that the often unilateral nature of
many U.S. controls is a necessary aspect of a process, with the United States
assuming a leadership position of moving other countries, by negotiation, toward the
multilateral export controls needed to achieve important national security goals.
Failure to agree on how the EAA should be revamped has meant that attempts
at reauthorizing the lapsed act have failed repeatedly over the last seven years. In the
104th Congress, H.R. 361, the Omnibus Export Administration Act of 1996 was
generally seen to represent a liberalization of U.S. export controls, preferring export
controls in compliance with multilateral regimes and establishing strict conditions on
the use of unilateral export controls, forcing stricter adherence to true multilateral
efforts and mandating stricter rules for imposing unilateral controls. H.R. 361 was
passed by the House in July of 1996 and referred to the Senate. The Senate Banking
Committee held hearings, but no further action was taken.2
The Economic Cost of Export Controls
The argument is made that the U.S. economy is damaged by export controls that
cause U.S. high-tech companies, farmers, and others to lose overseas sales. The
economy suffers a loss of global competitiveness, decreased ability to develop new
products and services, and the loss of profits and jobs.
2 For a discussion of the U.S. export control process and legislative efforts to revamp that
program see: U.S. Library of Congress, Congressional Research Service. Export
Administration Act of 1979 Reauthorization. CRS Report RL30169 by Helit Barel, Robert
Shuey, Craig Elwell, and Jeanne Grimmett.
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While export controls have some impact on the economy, the effect may be
somewhat overstated by affected groups. This section of the report outlines a
framework for evaluating the economic costs of export controls.
Static Losses. Trade occurs because it is mutually enriching, raising economic
efficiency and allowing trading economies to reach a higher level of output and
consumption from an unchanged endowment of scarce productive resources. This
benefit is called the “gains from trade.” These gains arise from trade giving an
economy increased scope for specialization in the production of goods for which the
economy has a relative efficiency advantage, and from improved ability to trade for
those goods for which an economy has a relative efficiency disadvantage. Exports are
the vehicle for acquiring desired imports and are central to the enriching process of
trade. Therefore, one would expect that export controls, by impeding exporting, to
reduce trade, result in a less efficient allocation of a nation’s productive resources,
and cause a decrease in a nation’s gains from trade.
The economic cost of export controls is often expressed as the estimated value
of lost export sales. Such a measure may be a good indicator of the cost to a
particular industry or sector. By itself it is a measure that, while being an element
entering into a calculation of economy- wide cost, likely overstates the true economic
cost of this trade impediment.3 Standard economic analysis indicates that the total
economic loss associated with imposing export controls would be the net outcome of
several opposite effects. These effects can be positive or negative, depending on
whether one is a producer or consumer and whether one’s economic circumstances
are linked to exports or imports.
Consider first the direct effects of reducing exports. One obvious effect is an
unfavorable impact on domestic producers who export. This occurs because
producers are unable to sell as much of the controlled good as an export at the more
favorable world price and must settle for the lower domestic price. Lower product
prices reduce the economic welfare of domestic producers. There is, however, a
favorable economic effect on domestic consumers. This arises because the formerly
exported goods, and the resources that produce them, are not lost to the economy,
but are absorbed into the domestic economy via a fall in prices. Lower product
prices improve the economic welfare of domestic consumers of the exported product.
In most circumstances the strong expectation is that the loss to domestic producers
of exports will exceed the gain to domestic consumers of the exported good, leading
to a “net” economic loss for the whole economy directly attributable to diminished
export sales.
This is only half the story, however. The nature of trade is the exchange of
exports for imports. If exports are reduced, then, ultimately, so must the imports that
they are traded for. This induced reduction of imports will also have positive and
negative impacts on economic welfare. Domestic producers, who compete against
imports, will see their sales and economic well-being rise. Consumers of imports, on
the other hand, are made worse off as their opportunities to buy the preferred lower-
price foreign goods are reduced. In this case, the strong expectation is that the
3 For a fuller discussion of the economic case for and against free trade, see: U.S. Library of
Congress. Congressional Research Service. Trade, Trade Barriers, and Trade Deficits:
Implications for Economic Well-Being. CRS Report RL30226 by Craig Elwell.
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economic loss to domestic consumers of imports will exceed the economic gain of
producers of import-competing goods, leading to a net loss to the economy directly
attributable to reduced imports.
The combined effect of a net loss from diminished exports and a net loss from
diminished imports must be an unambiguous economic loss to the overall economy.
This is a logical outcome, for if trade is reduced, the “gains from trade" are also
reduced and national economic welfare will be smaller than it would be without
export controls. This total loss, however, is likely to be a fraction of the initial
reduction of export sales, because the resources that produced those exports are not
lost to the economy. They are used less efficiently, but can still be used to produce
other exports or other import-competing goods that improve economic well-being.
This less efficient allocation of economic resources and associated reduction of
the gains from trade, induced by an impediment to exporting, leads to a onetime
reduction of national income. This lowering of national income is called a static loss
and is the standard measure of the economic costs to the economy of a trade barrier.
Estimating the Economic Costs of the EAA. The analytical framework outlined
above suggests, however, that while reduced export sales are the initial effect of
export controls, the ultimate cost (i.e, static loss) to the U.S. economy from export
controls is likely to be a fraction of the value of lost export sales. The size of this
fraction is a function of the relative changes in producer and consumer gains and
losses which, in turn, are determined by the underlying characteristics of demand and
supply in the markets affected.
Evidence from other trade liberalization or trade restriction initiatives can
suggest the probable range within which the EAA’s impact lies.4 These studies show
that multilateral policies, which affect many economic sectors and many trading
partners have typically had the largest impact on economic well-being, with the
national income changing as much as 35% of a given dollar change in the value of
exports. A smaller welfare effect on economic well-being is found for unilateral
policies that work across a narrower spectrum of trading partners, typically generating
welfare changes of between 10% to 20% of the associated change in export sales. At
the low end, one recent study of a variety of unilateral economic sanctions against a
few small economies found that the U.S. welfare loss was only about 5% of lost
export sales.
It seems unlikely that the affect of export controls on U.S. economic well-being
is most similar to that of a large multilateral trade policy, but neither is it clear that
they would be more like unilateral export sanctions. Absent more direct evidence, a
reasonable conjecture about the static welfare loss to the U.S. economy caused by U.
S. export controls would be a loss of 5% - 35% of the value of lost export sales, with
the more probable effect in the middle of that range rather than at the extremes.
To estimate the dollar value of the welfare loss associated with export controls
would also require an estimate of the magnitude of lost export sales caused by that
4 The welfare effects of selected trade policies are summarized in: U.S. Congress.
Congressional Budget Office. The Domestic Costs of Sanctions on Foreign Commerce.
Washington DC. 1999. Pp. 77-83.
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policy. A study done in 1995 judged that export controls could have caused as little
as $10 billion or as much as $40 billion in forgone export sales, but the greatest
probability was attached to a central range of $21 to $27 billion.5 (To help judge the
relative magnitude of this estimated effect, in 1995 total U.S. exports were valued at
$819 billion.)
Combining these two sets of data gives an estimated range for the static
economic welfare loss of U.S. export controls. That range would extend from a low
of $500 million (0.05 x $10 billion) to a high of $14 billion (0.35 x $40 billion), but
with the greatest probability attached to a central range of about $2 billion ( 0.10 x
$20 billion) to $4 billion ( 0.15 x $27 billion). It may help to put these loss estimates
into perspective if one considers them in relation to GDP. In 1995 U.S. GDP was
valued at $7,269 billion, putting the estimated static economic losses(costs) of export
controls in a range from 0.007% to 0.2% percent of U.S. GDP.
Dynamic Losses. Some economists argue that, in addition to the loss of static
gains from trade, one should add in the loss of dynamic gains from trade caused by
export controls. In general, dynamic losses could result from a trade barrier causing
a sustained reduction of the economy’s long-run rate of economic growth. Because
a change in the growth rate has a cumulative effect on national income (in contrast
to the one-time impact of a static loss), dynamic effects could, with only a small
annual decrement to the long-run growth rate, add up to a very large long-run loss.
If present, dynamic losses, perhaps many fold the size of associated static losses,
could raise substantially the total domestic economic costs of U.S. export controls.
In general, proponents of the existence of dynamic impacts argue that
impediments to trade cause a degrading of the environment for investment and
innovation in exporting industries. This eroding of economic incentives would likely
be particularly important for firms at the technological forefront, whose success may
be tied to capturing large global markets to help spread the costs of enormous R&D
budgets and to generate more opportunities for realizing productivity gains through
“learning by doing.” More specifically, these are the types of firms whose products
carry a significant “dual-use” potential, and would likely be significantly affected by
U.S. export control policies.
The existence and size of such dynamic effects, however, are more uncertain
than the existence of static efficiency effects. Mainstream models of economic growth
suggest that the engine of long-run economic growth is the pace of improvement in
technical knowledge and that such improvement moves at a speed and with a caprice
that is substantially unrelated to economic policies. Despite changes in a variety of
economic policies, including trade policies, the trend growth rate for the U.S.
economy has shown little variation over the last 125 years, with GDP per capita rising
at a very steady trend of 1.8% per year. Trade restrictions and other policies can
lower the level of income, but, according to mainstream economic models, they do
not permanently change the rate of long-run growth.
The empirical literature on the trade and growth linkage should be interpreted
cautiously. Many studies have found there to be a relation. But, others have offered
5 See: Richardson, J. David. Sizing Up U.S. Export Disincentives. Washington DC: Institute
for International Economics. pp. 127-131.
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good reasons to think that the relationship may not be particularly robust. In light of
all of this, reliance on projected economic losses derived from a trade barrier’s
possible dynamic effects may risk overstatement.6
Sectoral Costs. As suggested above, the direct cost of export controls to
particular firms, industries, and sectors is larger than the net cost to the overall
economy. The open and flexible nature of the U.S. economy helps to minimize such
costs, although, significant burdens may still remain. Estimates of lost export sales are
relevant to an evaluation of the U.S. export control regime. Lost sales provide some
insight into possible adjustment costs and other social costs associated with export
controls. They may also become useful in any discussion of equity of burden. In
theory, the federal government can provide compensation to ameliorate the domestic
burden of export controls.
Economic Impact of Pending Export Control Legislation
This section provides a summary of current bills aimed at revamping U.S. export
control law as well as an observation about of each bill’s likely economic impact.
The Senate.
S. 1712, the Export Administration Act of 1999. As reported by the Senate
Banking Committee, this bill attempts to strike a new balance in the U.S. export
control regime between national security and commercial concerns. S. 1712 would
focus controls on current threats to national security, such as terrorism and
proliferation of weapons of mass destruction, rather than on the former threat of
communism.
This bill would seek to reduce the items that could be controlled for national
security purposes; items that are available from foreign sources or have a mass-market
status would generally not be controlled. The bill charges the Secretary of Commerce
with determining on a continuing basis whether any item currently subject to export
control meets specified criteria for foreign availability or mass market status. If it
does, the item would be removed from the list of controlled items.
S.1712 would also place several requirements and prohibitions on the use of
export controls for foreign policy purposes. These include prohibiting the control of
re-exports, prohibiting the control of items subject to a binding contract, requiring
45 days notice and consultation before imposing a control, requiring clearly stated
objectives and criteria for controls and reporting them to Congress, and requiring the
President to review controls every two years. The bill also streamlines the process by
which regulations for the export of super computers are periodically updated.
It is possible that a more vigorous pursuit of “foreign availability” status will
reduce the number of items on the CCL. It remains unclear, however, how
significantly this bill would upgrade and expand, relative to current provisions, the
use of the “foreign availability” criterion for national security purposes. Controls for
6 For a fuller discussion of the possible linkage between trade and growth see: U.S. Library
of Congress. Congressional Research Service. Does Trade Liberalization Affect the U.S.
Long-run Rate of Growth?. CRS Report RL30377 by Craig K. Elwell
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foreign policy purposes, under current regulations, must satisfy explicit criteria,
relating to probable impact and prospect for success, before they are imposed. It is
unclear how much this appreciably raises the threshold for requiring an export
licence.
S.1712 would likely move toward continued liberalization of export controls.
If the provisions of the bill have a differential impact relative to current rules, it would
likely be to reduce the number of items subject to U.S. export controls, increase
U.S. exports, and raise national income (by a fraction of the value of those increased
sales). But, the magnitude of these effects is problematic.
S. 798, the Promote Reliable On-line Transactions to Encourage Commerce
and Trade(PROTECT) Act. As reported by the Senate Commerce Committee S.
798 authorizes the export without export license of any encryption product that
utilizes a key length of 64 bits or less. Provision is also made for a periodic review
and update of the 64-bit standard so it can change in step with with technological
advances. For encryption products that require a standard license, the bill provides
easier conditions for exporting due to a streamlining of the license application
process, including, an expanded scope for granting license exceptions (i.e., exporting
without a license), one-time technical review, and a short 15-day license processing
period.
This bill is a significant liberalization of export controls over a subgroup of
controlled items. It would likely expand U.S. export sales and raise national income
by a fraction of the export sales increase. From the standpoint of the national
economy, the magnitude of these economic effects would likely be modest.
The House.
H.R. 850, the Security and Freedom Through Encryption (SAFE) Act. The
five reported versions of H.R. 850 differ in their treatment of export controls on
encryption products. As initially reported out of the Judiciary Committee, this bill
would have limited greatly the President’s authority to control the export of
encryption products. In that version of the bill, encryption products with a key length
of 64 bits or less would be subject to more liberal treatment by export control
authorities. These products would be eligible for an export license exception subject
to a one-time technical review, with the whole application process to be completed
within 45 days. Export license exceptions would be available for encryption products
that exceed the 64-bit standard, subject to national security goals. (Versions of H.R.
850 reported by the Commerce and International Relations Committees are similar to
Judiciary’s version.) In contrast, the Intelligence and Armed Services Committees’
versions of H.R. 850 would not explicitly move toward more liberal export controls
on encryption products. Those versions increase presidential authority by allowing
the executive to specify the key length that would be the threshold for waiving export
controls. Products at or below that key length would be eligible for a license
exception, subject to a one-time technical review. Encryption products above the
threshold key length would be subject to normal EAA export license requirements.
The House Judiciary Committee version of H.R. 850 would liberalize U.S.
export controls on encryption products, raising exports and national income. From the
standpoint of the national economy, the magnitude of these economic effects would
likely be small. The economic impact of the Armed Services and Intelligence
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Committees’ versions of H.R. 850, that do not expressly liberalize or tighten
encryption export controls, would depend on rule changes implemented at the
discretion of the President.
Administration Actions. On Sept. 16, 1999, the Administration announced
further liberalization of export controls on encryption products. Encryption products
of any length can now be exported under a license exception after a technical review.
Export of any product with a key length of more than 64 bits requires post-export
reporting, however. The prior policy had been to allow export only of encryption
devices with up to 56-bit keys under a license exception after a one-time technical
review.
Conclusion
The estimates presented above suggest that the economic costs (i.e., static
losses) of current export control regulations are modest in relation to the overall
economy. Nevertheless, the full significance of that cost, however small the absolute
value, must be accessed relative to the national security and foreign policy benefits
derived from those controls. The benefit of U.S. export controls remains a sharply
contested issue and must be evaluated on more grounds than economics.
Pending legislation on export controls generally takes the perspective that
controls are too restrictive on U.S. international commerce, and aim to liberalize the
export control process. That legislation, if enacted, does not seem likely to cause a
great deviation from current export control administration, however. That would
suggest that the increase in U.S. exports and improvement of domestic economic
well-being derived from the legislation would be small in magnitude.
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