Order Code RS20757
Updated August 29, 2001
CRS Report for Congress
Received through the CRS Web
Defense Trade Security Initiative:
Background and Status
nae redacted
Analyst in National Defense
Foreign Affairs, Defense, and Trade Division
nae redacted
Research Associate
Foreign Affairs, Defense, and Trade Division
Summary
In response to complaints voiced by the U.S. defense industry and foreign
customers about the unwieldiness of the defense export licensing review process, the
Department of State, with the Department of Defense, developed a set of seventeen
reform proposals. Referred to as the Defense Trade Security Initiative (DTSI), it was
announced by the Secretary of State during May of 2000. This report gives the
background on the DTSI and discusses associated congressional actions that are
reflected in the Security Assistance Act of 2000. It also gives the current status of each
of the proposals. It will be updated as necessary.
Background
The licensed commercial sale of defense articles and services to foreign governments
and international organizations is supervised by the Department of State in accordance
with the International Traffic in Arms Regulations (ITAR, 22 C.F.R. Parts 120-130). The
process by which required export licenses are granted originated in the mid-1950s and
developed over the ensuing several decades. Complaints about the license review process
rose in frequency and severity during the late 1990s. U.S. companies, particularly those
in the aerospace sector, asserted that delays in the licensing process had handicapped their
efforts to compete effectively with foreign firms.1
1 According to data collected by the Satellite Industry Association, representing U.S. space and
communications companies, the U.S. share of the world satellite market dropped from a 10-year
average of 75% to 45% during 2000, the first complete year after licensing responsibility was
(continued...)
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In mid-1998, the Department of Defense began studying ways to streamline licensing.
A joint State/Defense working group undertook a more comprehensive revision of the
process late in the following year. On May 24, 2000, at a NATO ministerial meeting in
Florence, Italy, the Secretary of State announced a set of seventeen measures, known
collectively as the Defense Trade Security Initiative (DTSI), that was intended to not only
improve the international competitiveness of U.S. companies, but also to promote
international business arrangements, improve the interoperability of U.S. forces with allies
in coalition warfare, and reduce the technological gap between U.S. and other NATO
militaries.
The DTSI can be broken into four general categories: reduction of the number of
export licenses needed to conduct business; encouragement of better utilization of existing
licenses; streamlining of the license-granting process; and modernization of the list of
goods requiring licenses for export. (A table listing each of the seventeen proposals and
the status of their implementation is provided at the end this report.)
Most of the proposals are uncontroversial. One proposal would single out for
expedited review those license requests NATO allies submit as part of the Defense
Capabilities Initiative (a program begun in 1998 to close the technology gap between U.S.
and other-NATO forces). Another promises to streamline the licensing process for
commercial communications satellite components. A third would create a single
comprehensive export authorization permitting the exchange of broad-ranging technical
data between U.S. and foreign companies needed to forge a variety of business
arrangements, such as joint ventures and product teams. The enhancement of computer
connectivity to enable electronic transmission between the State and Defense Departments
of the voluminous data required to justify license requests is also proposed. This process
is currently transacted in paper format.
Congressional Concerns and Action. When the provisions of the DTSI were
made known to the committees in Congress, Members expressed general satisfaction with
its intent and with the manner in which the licensing process would be revised. However,
one proposal was singled out for special concern because of its potential implications for
technology security and diversion of shipments. This proposal was entitled “Extension of
International Traffic in Arms Regulations (ITAR) Exemption to Qualified Countries.”2
Under this proposal, the Administration offered to create broad exemptions under which
unclassified defense items (equipment and intellectual materials) could be exported license-
1 (...continued)
transferred from the Department of Commerce to the Department of State. German firm
DaimlerChrysler Aerospace announced last year that it would begin seeking non-U.S. satellite
component suppliers because of the lengthy time required for State Department licenses. See
Bruce A. Smith, “In Orbit.”
Aviation Week and Space Technology 154/20, May 14, 2001, and
Vago Muradian, “State Dept. to Implement Export Control Reforms Over Coming Weeks.”
Defense Daily International, June 2, 2000.
2 Proposal 10 in the table at the end of this report. The ITAR is the set of regulations that governs
the export of military-specific goods and services from the United States to foreign customers. It
designates the officials within the United States government responsible for administering the
export licensing process, details the process itself, and lists the specific types of goods and services
that the regulations cover (22 C.F.R. Parts 120-130).
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free to selected companies in some foreign countries. In order to qualify for the exemption,
a foreign government would have to execute with the United States a bilateral agreement
ensuring that both states share congruent and reciprocal policies in export controls,
industrial security, intelligence, law enforcement, and market access.
The President is authorized to administer defense export controls through regulations
issued under authority delegated in the Arms Export Control Act (AECA). Recently, the
Administration has used this authority to allow license-free trade in defense articles and
services with Canada – the so-called “Canada exemption.” Congress encouraged this
exchange in light of the unique relationship enjoyed by the two countries in defense, law
enforcement, general commercial trade, intertwined industrial bases, and geographical
contiguity.
In late June of 2000, the Secretary of Defense communicated to the chairman of the
Senate Foreign Relations Committee his intention to negotiate a Canada-like exemption
with the governments of the United Kingdom and Australia.3 At the same time, he assured
the Committee that such agreements would be made legally binding on the recipient states
in order to safeguard shipments from diversion en route or illegal re-export to third-
country destinations.
While this stipulation to render U.S.-style export controls and technology security
measures legally binding went beyond the language incorporated in the original DTSI,
Members expressed concern that it did not go far enough in its safeguards, given the
potential breadth of license-free trade likely to ensue under an agreement modeled on the
Canada exemption. This concern centered on possible third-party sales to undesirable
buyers or diversion of defense shipments to unintended destinations.
Enactment of the Security Assistance Act of 2000. Because of these policy
concerns, Congress passed the Security Assistance Act of 2000 (P.L. 106-280, enacted
October 6, 2000). One section of this legislation provides that no exemption from U.S.
licensing requirements can be granted unless and until a foreign government binds itself to
impose the full range of United States export controls and laws, regulations, and policies
befitting the level of sensitivity of the exported items.
This Act expressly requires that, before an exemption can be granted, the U.S.
Government must conclude a legally binding bilateral agreement which contains, among
other provisions, specific stipulations regarding the ability to verify the identity of the end
user, the specific use to which the item will be applied, the control of subsequent re-export
of the item, and the establishment of a list of controlled defense articles to include all those
covered by the exemption. The Act directs the President to certify that the agreement
meets these requirements and that the foreign country has, in fact, promulgated the
3 The original list of potential ITAR-exempted states included NATO members, Australia, and
Japan. Late in 2000, State Department negotiations with both the U.K. and Australia appeared to
have bogged down, and DOD began preliminary discussions with the Netherlands as a potential
alternative country interested in the ITAR exemption. However, in July of 2001 the ITAR was
amended instead to extend the exemption to Sweden. See Amy Svitak, “U.S. Turns to Smaller
Nations as ITAR Exemption Talks Stall,”
Defense News, December 18, 2000, p. 10, and ITAR
22 CFR Parts 124, 125, 126, July 10, 2001.
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necessary policies and regulations and enacted changes to its domestic law to bring them
into compliance with U.S. practices before the exemption can be implemented.
Congressional oversight is ensured by the Act’s requirement that the President
continue to notify Congress of the details of specific defense exports made, regardless of
the existence of any license exemption for the recipient. Through enactment of the Security
Assistance Act of 2000, Congress has given the President and the defense industry a clear
set of boundaries within which to craft licensing relief. In the report of the conference
committee on this bill, the Managers expressed approval of the overall thrust of the DTSI,
noting that it incorporated several recommendations made previously by the House and
Senate committees of jurisdiction.
Current Status of the DTSI
Fifteen months after the adoption of DTSI, most of the proposals have been put into
effect. The State Department has published a list of NATO-specific projects to receive
expedited license review. The State and Defense Departments have reviewed five of
nineteen active USML categories. ITAR changes designed to encourage the creation of
international defense business arrangements have been published in the Federal Register.
Work has begun to increase State and Defense Department export data connectivity. In
the conference report accompanying the Security Assistance Act of 2000, Managers stated
their expectation that the President will continue to keep the Congress abreast of progress
in bilateral negotiations with candidate countries, including discussions on whether the
resulting agreements should be treaties subject to Senate approval. Such negotiations are
ongoing with the United Kingdom and Australia. In July 2001, the Commerce and State
Departments resolved jurisdictional disputes for sixteen categories of space-qualified items
controlled under the Commerce Control List (CCL).4 This is expected to expedite the
licensing review process of commercial satellites and their components.
Despite these advances, defense industries have expressed concern that the State
Department has not fully implemented the initiatives and that more changes are warranted.
A growing concern has been a decline in U.S. market share of defense items. Some
industry analysts believe that an expeditious realization of these initiatives would increase
U.S. market share for defense items and help maintain technological superiority.
According to the Aerospace Industries Association, reforms have not yet made a
significant impact on expediting licensing or streamlining the process. They argue that the
State Department needs to establish clear guidelines, regulations, and administrative
procedures before defense industries can take advantage of these new licensing measures.
The table at the end of this report lists each of the DTSI proposals along with its
current status. This report will be updated as required to keep current the information
presented.
4 Two of the sixteen space qualified items were removed from the list altogether, six will be
included on the USML, four will be included on the CCL, and four will be shared by both
Commerce and State. See Amy Svitak, “U.S. State, Commerce Reconcile Export Control
Dispute,”
Defense News, August 10, 2001.
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Defense Trade Security Initiative
Initiative
Summary
Issue
Status
Congressional Role
1. Major Program License
Single 8-year license covers entire project where U.S. firm is
Cut number of
Change effective
None, regulatory change
prime contractor, includes commercial development of defense
licenses
Sept. 1, 2000
articles.
2. Major Project License
Single licence for major commercial sale to NATO, Australia,
Expedite licensing
Change effective
None, regulatory change
Japan, and Sweden d expedites processing of associated exports
Sept. 1, 2000
3. Global Project License
Single license for exports associated with government-to-
Reduce number of
Change effective
None, regulatory change
government-agreed cooperative project
licenses
Sept. 1, 2000
4. Technical Data Exports for
Single authorization to exchange technical data between
Encourage and speed
Change effective
None, regulatory change
Acquisitions, Teaming
qualified firms in the U.S., NATO countries, Japan, Australia,
international
Sept. 1, 2000
Arrangements, Mergers, Joint
and Sweden d for assessing depth and transparency for business
business ventures
Ventures, and Similar
ventures
Arrangements
5. Enhance the Use of
Increase use of existing license category for U.S. firms to
Establish
de facto
Ongoing
None
Multiple Destination Licenses
market specific products to specified end-users for specified
sales territory
end-uses
6. Enhance the Use of
Increase use of agreements, permitting quantity export of items
Establishes regional
Ongoing
None
Overseas Warehousing
(e.g., spare parts) for further shipment to pre-approved end-
suppliers for U.S.
Agreements
users for specified end-uses
products
7. Expedited License Review
Expedite review of export licenses for DCIa projects or
Increase U.S.
Projects list
None, procedural change
for NATO
programs
competitiveness for
effective Oct.
NATO customers
30, 2000
8. Special Embassy Licensing
Expedite license reviews submitted by NATO countries, Japan,
Speed sales to
Change effective
None, procedural change
Program
Australia, and Sweden d through their Washington embassies
selected end-user
May, 2000
countries
9. Interagency Export
Enhance connectivity and compatibility of license-related
Reduce paper, speed
USXPORTS
None, interagency
Licensing Electronic Control
databases maintained by Departments of State and Defense
license reviews
opened Jan 16,
implementation
Process
2001b
10. Extension of ITAR
Canada-like exemptions extended to countries with export and
Exemption from
Negotiation
Set baseline (Security
Exemption to Qualified
security controls congruent with those of U.S. after
some ITAR licensing
under way with
Assistance Act of 2000)
Countries
internationally enforceable bilateral commitments are executedc
requirements
U.K. and
Australia
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Initiative
Summary
Issue
Status
Congressional Role
11. Defense Services
New ITAR exemption for maintenance services and training
Reduce number of
Change effective
None, regulatory change
Exemptions for Maintenance
for existing arrangements in NATO countries, Japan,
required licenses for
Sept. 1, 2000
and Maintenance Training
Australia, and Sweden d
extending services
12. Exemptions for
Removes licensing for some technical data and services
Enhance bidding
Change effective
None, regulatory change
Department of Defense Bid
supporting DOD bid proposals
competitiveness
Sept. 1, 2000
Proposals
13. More Effective Use of
DOD clarifies improvements in its use of existing exemptions
Ensure advantages of
Ongoing
None
Existing ITAR Exemptions by
current exemptions
DOD
are used
14. Streamlined Licensing for
Streamline licensing for commercial communications satellite
Minimize licensing
ITAR change
H.R. 1707 was introduced on
COMSAT
parts, components, and technical data
for bidding on and
effective July 1,
May 3, 2001 to return export
Components/Technical Data
insuring satellite
2000
licensing authority for
components
commercial communications
satellites to the Commerce
Department
15. ITAR Exemption for
Permit license-free export of technical data and defense
Eliminate licenses
Change effective
None, regulatory change
Foreign Military Sales
services for duration of executed Letter of Offer and
for specific category
Sept. 1, 2000
Defense Services
Acceptance (LOA) and contract with U.S. company
of services
16. Advance Retransfer
Permit retransfer of some items between NATO countries,
Eliminates licenses
Change effective
None, regulatory change
Consent for Items Sold or
Japan, Australia, and Sweden d if first sold by U.S.
for some item
May 26, 2000
Granted by the U.S.
Government
transfers between
Government
U.S. allies
17. Review/Revise the U.S.
Examine one quarter of USML each year to comport with
Conform restricted
One quarter of
None, interagency initiative
Munitions List
Military Critical Technologies List
product lists with
the USML was
one another
reviewed
a The Defense Capabilities Initiative (DCI) is a NATO program to reducing the technological gap between the equipment fielded by U.S. military forces and those of the other allies.
It was initiated in the aftermath of the NATO air campaign over Kosovo during mid-1999.
b The U.S. Export Systems Interagency Program Management Office (USXPORTS IPMO) is a major DoD acquisition program to create an interoperable electronic export license
review system among the Departments of Commerce, State, Defense, and other agencies. The concept originated during the summer of 1998, thereby predating the DTSI. It
is funded through DoD.
c The “Canadian exemption” permits unlicensed export of unclassified equipment or technical data for end-use in Canada by Canadian citizens or return to the United States, or
temporary import of Canadian-origin items for end-use in the United States or return to Canada for a Canadian citizen.
d Amended to add Sweden on June 14, 2001.
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