United States General Accounting Office

GAO Report to Congressional Requesters

January 1997 EXPORT CONTROLS

Change in Export

Licensing Jurisdiction

for Two Sensitive

Dual-Use Items

GAO/NSIAD-97-24

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-272258 

January 14, 1997

The Honorable Floyd Spence

Chairman

The Honorable Ronald V. Dellums

Ranking Minority Member

Committee on National Security

House of Representatives

The U.S. export control system for items with military applications is

divided into two regimes. The Department of State licenses munitions

items, which are designed, developed, configured, adapted, or modified for

military applications, and the Department of Commerce licenses most

dual-use items, which are items that have both commercial and military

applications. Although the Commerce licensing system is the primary

vehicle to control dual-use items, some dual-use items are controlled

under the State system. In March 1996, the executive branch announced a

change in licensing jurisdiction for two items—commercial jet engine hot

section technology and commercial communications satellites—from

State to Commerce.1

 In October and November 1996, Commerce and State

published regulations implementing this change, with Commerce defining

enhanced export controls to apply when licensing these two items.

Commerce’s regulations are interim regulations, effective on publication,

and Commerce allowed for a 45-day public comment period on its

regulations.

In response to your request, we reviewed the implications of this change in

export licensing jurisdiction. Specifically, we (1) assessed the military

sensitivity of the two items, (2) determined the executive branch’s

rationale for the change in jurisdiction, (3) compared the licensing systems

that the two Departments use to control exports, and (4) analyzed

proposed changes in Commerce controls for these two items.

Background The Department of State controls munitions items under the authority

provided in the Arms Export Control Act. State promulgates the

International Traffic in Arms Regulations (ITAR) and establishes, with the

concurrence of the Department of Defense, the U.S. Munitions List. State

and Defense can include a dual-use item on this list, as provided by the

ITAR, if it “is specifically designed, developed, configured, adapted, or

1

Hot section technology is the technical information required for the design, production, manufacture,

maintenance, or modification of the engine hot section.

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modified for a military application, and has significant military or

intelligence applicability such that control under [the ITAR] is necessary.”

The Department of Commerce controls dual-use items under a system

established under the Export Administration Act.2

 Commerce imposes

export controls on the items within its jurisdiction through the Export

Administration Regulations and establishes the Commerce Control List in

consultation with other agencies and in parallel with U.S. commitments in

international control regimes. In arriving at a licensing decision,

Commerce provides license applications for the review of other agencies,

including Defense, State, the Department of Energy, and the Arms Control

and Disarmament Agency. A December 1995 executive order states that

Commerce may refer all applications for a validated license to these

agencies for review.3

 If an agency disagrees with Commerce’s initial

licensing decision, it can appeal the decision to interagency review

committees.

In March 1993, we reported that jurisdiction over commercial jet engine

hot section technology and space-related items, such as communications

satellites, was a long-standing issue between State and Commerce.4

 In

November 1990, the President ordered the removal of dual-use items from

the U.S. Munitions List and State’s licensing controls, unless significant

national security interests would be jeopardized. Pursuant to this order,

State led an interagency review, including officials from Defense,

Commerce, and other agencies, to determine which dual-use items should

be removed from the munitions list and transferred to Commerce’s

jurisdiction and which warranted retention on the munitions list. This

review was conducted between December 1990 and April 1992. As part of

this review, an interagency working group identified and established

performance parameters for the militarily sensitive characteristics of

communications satellites. If a satellite met or exceeded these parameters,

the satellite would be controlled by State, otherwise it would be licensed

by Commerce. As a result of the interagency review, over two dozen

2

Although the Export Administration Act lapsed on August 20, 1994, Commerce is currently acting

under the authority conferred by Executive Order 12924 of August 19, 1994. In the executive order, the

President invoked his authority, including authority under the International Emergency Economic

Powers Act, to continue the system of controls that the United States had maintained under the Export

Administration Act. This has been extended by two presidential notices issued in 1995 and 1996.

3

Many items on the Commerce Control List can be exported under a general license to particular

destinations. Commerce is not notified of and does not review these exports. Selected items require

that exporters obtain Commerce approval through an individual validated license for each export.

4

Export Controls: Issues in Removing Militarily Sensitive Items from the Munitions List

(GAO/NSIAD-93-67, Mar. 31, 1993).

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dual-use items were removed from the munitions list and placed under

Commerce’s jurisdiction, including approximately half of the commercial

communications satellites. Jurisdiction for hot section technology,

however, was not resolved as a result of the interagency review.

The executive branch’s recent decision to change the export licensing

jurisdiction for commercial jet engine hot section technology addresses a

long-standing disagreement as to whether State or Commerce should

control its export. Until this decision, Commerce had claimed jurisdiction

over hot section technology of commercial engines not derived from

military technology, while State and Defense had maintained that hot

section technology for commercial engines that is derived from military

engines is the same technology used in military fighter engines and is of

such sensitivity that ITAR control was appropriate. Now, all hot section

technology for commercial engines, including certain civil and military

engines that share the same hot section technology and are evolving

together, will be controlled by Commerce. All commercial

communications satellites, including those with militarily sensitive

characteristics, will be licensed by Commerce.

Results in Brief The items transferred to Commerce’s control, commercial jet engine hot

section technology and commercial communications satellites, are

militarily sensitive items. Hot section technology gives U.S. fighter aircraft

the ability to outlast and outperform other aircraft, a key element in

achieving air superiority. Because of the military significance of this

technology, State does not allow the export of the most advanced hot

section technology for either military or commercial use. Commercial

communications satellites being transferred to Commerce’s jurisdiction

contain militarily sensitive characteristics, such as crosslink capabilities

that transmit data from one satellite to another without going through a

ground station and thus permit very secure communications. Defense and

State officials expressed concern about the potential for improvements in

missile capabilities through disclosure of technical data related to

integrating the satellite with the launch vehicle and the operational

capability that specific satellite characteristics could give a potential

adversary. State has approved the export of commercial communications

satellites for foreign launch with conditions for safeguarding sensitive

technologies for certain destinations such as China.

The executive branch’s decision to transfer licensing jurisdiction reflects

Commerce’s position that all hot section technology and communications

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satellites for commercial use should be under Commerce’s jurisdiction.

Transferring jurisdiction also makes U.S. national controls for these items

consistent with international trade commitments to control them as

dual-use items. Jet engine and satellite manufacturers support the change

in jurisdiction, viewing the Commerce system as more responsive to the

needs of business.

The State and Commerce export control systems differ. State has broad

authority to deny a license, and it can deny simply with the explanation

that it is against U.S. national security or foreign policy interests.

Commerce controls items to achieve specific national security and foreign

policy objectives. National security controls are aimed at preventing items

from reaching certain destinations such as China and Russia. Foreign

policy controls are aimed at achieving specific objectives, including

antiterrorism, regional stability, and nonproliferation.

In recognition of the military sensitivity of these items, Commerce is

implementing new and expanded control procedures. These changes

include establishing a new foreign policy control known as a “significant

item” control. These new control procedures are intended to allow

Commerce to control and deny, where appropriate, exports of the two

items to all destinations. This is particularly important for control of hot

section technology—exports of the most sensitive hot section technology

have not been permitted, even to close allies.

According to Commerce and other executive branch officials, the change

in jurisdiction is not intended to change U.S. licensing policy—that is,

what destinations and end users the United States will approve export

licenses for. Rather, it is intended only to change the procedures under

which licensing decisions will be made. Whether the current licensing

policy will be maintained with the change in jurisdiction is uncertain. The

underlying objectives of the two systems differ. The Arms Export Control

Act gives State the authority to use export controls primarily to protect

U.S. national security without regard to economic or commercial interests.

Under the Export Administration Act, on the other hand, Commerce

weighs economic and trade interests along with national security and

foreign policy concerns. These differences in the underlying basis for

decisions create uncertainty as to whether the changed procedures for

making licensing decisions will result in changes in licensing policy.

Uncertainty is also created by the newness of the “significant item” control

because it is not clear how it will be applied.

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The Two Items Are

Militarily Sensitive

Commercial Jet Engine

Hot Section Technology

A jet engine is composed of three sections: the cold section, or the fan and

compressor, which is where the air enters the engine; the hot section,

comprised of the combustor and portions of the turbine, which are the

components exposed to combustion gases; and the warm section, or

exhaust nozzle, which is where the exhaust gases leave the engine. The

turbine is one of the more critical components of jet engines because it

extracts energy from combustion gases and converts it into the engine’s

mechanical force. Hot section gas turbine technology that is used to

manufacture military engines incorporate advanced design concepts,

materials, and manufacturing processes that help keep the turbine cool

while the engine operates at extremely hot temperatures.

The key to achieving greater engine performance is to increase the

temperature of operation within the engine’s hot section. Increased engine

effectiveness enhances the performance of the aircraft and leads to

improved survivability, lethality, reliability, and sustainability. According

to Defense officials, the U.S. military has air superiority over other

countries in large part because of the advanced technology used to build

hot sections for military engines. U.S. fighter aircraft have the ability to

outlast and outperform other foreign-built aircraft, which translates into a

significant combat advantage over possible adversaries.

Hot section technology required for military aircraft also has applications

for engines used on commercial aircraft. Commercial engines require

different performance parameters than military engines, but higher

operating temperatures provide greater fuel efficiency. According to

officials at Commerce, Defense, and State and industry representatives,

the core elements of hot section technology are similar for both military

and commercial jet engines. Although all agree that it is almost impossible

to distinguish between military and commercial hot section technology,

they differ in opinion on the applicability of commercial hot section

technology to military uses. Defense and State officials informed us that

exporting commercial hot section technology gives a foreign manufacturer

information allowing it to build either a commercial or military engine if it

is willing to make certain trade-offs in manufacturing, such as sacrificing

durability to achieve higher performance and temperatures. Commerce

officials maintain that if a foreign manufacturer decides to adapt

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commercial hot section technology to military use, it can make a military

engine, but it will not have sufficient experience to allow it to make an

engine equal to or exceeding U.S. military capabilities. Engine

manufacturers agree that selected hot section technology for commercial

engines should be protected for both competitive interest and national

security, but they believe that certain technical data transfers to foreign

partners facilitate cooperative engine development, production sharing,

operational maintenance, and repair.

Because of the military importance of hot section technology and the

similarity between commercial and military technology, Defense officials

are concerned about the diffusion of technology and availability of hot

section components that could negatively affect the combat advantage of

U.S. aircraft and pose a threat to U.S. national security concerns. To

protect national security interests, Defense officials review applications

referred by State to determine whether the export would undermine the

U.S. lead in hot section technology and, consequently, U.S. air superiority.5

Defense and State have not approved the export of the most advanced hot

section technology for either military or commercial use, although certain

exports have been allowed under government-to-government agreements

with U.S. allies that restrict transfer beyond the government.

In addition to protecting the export of state-of-the-art hot section

technology, Defense also makes recommendations on the advisability of

exporting selected individual parts that make up the hot section (i.e., the

blades, discs, and combustor lines). These parts are exposed to

combustion gases and, in state-of-the-art engines, they must have the

ability to sustain very high temperatures. According to Defense officials,

allowing the export of the most advanced components would allow

foreign manufacturers to assemble hot sections that match the capabilities

of U.S. engines used in fighter aircraft. State defers to Defense’s

recommendations on license applications for these parts. Licensing of

these components is not affected by the change in jurisdiction and remains

with State.

Communications Satellites Commercial communications satellites are intended to facilitate civil

communication functions through various media, such as voice, data, and

video. Commercial satellites often carry Defense data as well. In contrast,

military communications satellites are used exclusively to transfer

5

Pursuant to the December 1995 executive order stating that Commerce may refer license applications

to Defense and other agencies, Defense also reviews applications received by Commerce.

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information related to national security and have characteristics that allow

the satellites to be used for such purposes as providing real-time

battlefield data and relaying intelligence data for specific military needs.

Satellites used for either commercial or military communications may

contain one or more of nine militarily sensitive characteristics. A

description of the characteristics is provided in table 1. Satellites with

characteristics exceeding certain parameters are considered militarily

sensitive.

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Table 1: Militarily Sensitive Characteristics Integrated in Commercial Communications Satellites

Characteristic or component Definition

Military sensitivity of characteristics

exceeding certain performance

parameters

Antijam capability Antennas and/or antenna systems with the

ability to respond to incoming interference

by adaptively reducing antenna gain in the

direction of the interference.

Ensures that communications remain open

during crises.

Antenna Allows a satellite to receive incoming

signals.

An antenna aimed at a spot roughly 200

nautical miles in diameter or less can

become a sensitive radio listening device

and is very effective against ground-based

interception efforts.

Crosslinks Provide the capability to transmit data from

one satellite to another without going

through a ground station.

Permit the expansion of regional satellite

communication coverage to global

coverage and provide

source-to-destination connectivity that can

span the globe. It is very difficult to

intercept and permits very secure

communications.

Baseband processing Allows a satellite to switch from one

frequency to another with an on-board

processor.

On-board switching can provide resistance

to jamming of signals.

Encryption devices Scramble signals and data transmitted to

and from a satellite.

Allow telemetry and control of a satellite,

which provide positive control and deny

unauthorized access. Certain encryption

capabilities have significant intelligence

features important to the National Security

Agency.

Radiation-hardened devices Provide protection from natural and

man-made radiation environment in space,

which can be harmful to electronic circuits.

Permit a satellite to operate in nuclear war

environments and may enable its electronic

components to survive a nuclear explosion.

Propulsion system Allows rapid changes when the satellite is

in orbit.

Military maneuvers require that a satellite

have the capability to accelerate faster

than a certain speed to cover new areas of

interest.

Pointing accuracy Provides a low probability that a signal will

be intercepted.

High performance pointing capabilities

provide superior intelligence-gathering

capabilities.

Kick motors Used to deliver satellites to their proper

orbital slots.

If the motor can be restarted, the satellite

can execute military maneuvers because it

can move to cover new areas.

Source: Departments of Commerce and Defense.

Jurisdiction over commercial communications satellites that did not have

any of these militarily sensitive characteristics changed to Commerce in

October 1992 as a result of the interagency review begun in 1990. Those

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with any of the nine components remained under State’s jurisdiction, as

did the individual components themselves and all sensitive technology to

design, develop, or manufacture a satellite. The regulations move

commercial satellites with one or more of the nine characteristics to

Commerce, while the export of individual systems and components not

incorporated in a satellite remain under State’s jurisdiction, as does the

technology to design, develop, and manufacture the satellite. Certain kick

motors that are not embedded in satellites, however, will be subject to

Commerce’s jurisdiction when they are to be used for specific satellite

launches, provided that a kick motor is neither specifically designed or

modified for military use nor capable of being restarted after the satellite

is in orbit.

In reviewing export license applications, Defense and State officials

examine the potential for the export of satellite technologies. The process

of planning a satellite launch takes place over several months, and there is

concern that technical discussions between U.S. and foreign

representatives may go beyond that needed for the launch and lead to the

transfer of information on militarily sensitive components. Officials say

they are particularly concerned about the technologies to integrate the

satellite to the launch vehicle because this technology can also be applied

to launch ballistic missiles to improve their performance and reliability.

They also expressed concern about the operational capability that specific

characteristics, in particular antijam capability, crosslinks, and baseband

processing, could give a potential adversary.

State has approved the exports of commercial communications satellites

and established detailed security guidelines and conditions to address

concerns about the disclosure of technologies associated with the launch

vehicle and militarily sensitive characteristics for launches from China and

sites in the former Soviet Union. These conditions require that safeguards

be applied to prevent the disclosure of technology beyond that needed for

integration and launch of the satellite, as provided for in safeguard

agreements between the United States and these countries. For launches

in China and Russia, State also requires a technical assistance agreement,

which is a signed contract between the U.S. firm and the foreign

government that specifies what technical assistance and data can be

provided. In addition, State requires that exporters fund the travel costs of

Defense personnel traveling to oversee the satellite launches. In licensing

communications satellites already under its jurisdiction, Commerce also

places conditions on the export license on the type of technical

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information that can be transferred but does not require exporters to fund

the travel costs of Defense personnel overseeing the launch.

Rationale for

Changing Licensing

Jurisdiction

Export control of dual-use items has been a matter of contention over the

years between Commerce and State. State claimed jurisdiction for both

commercial and military hot section technology because State and

Defense maintained that (1) the technology and manufacturing processes

applied to the hot sections of military and commercial engines are

basically the same and originated in military programs and (2) diffusion of

critical hot section technology for commercial engines would accelerate

other countries’ abilities to design and manufacture engines, including

military engines, of equal capability to those manufactured in the United

States. Commerce claimed jurisdiction for commercial hot section

technology not derived from military technology.

Commerce has argued that since the international Coordinating

Committee for Multilateral Export Controls classified communications

satellites and other space-related items as dual use, the entire category,

except strictly military items, should be transferred to its jurisdiction.6

State and Defense insisted that the decision should be made on an

item-by-item basis as part of the interagency review begun in 1990.

Therefore, an interagency working group comprised of all concerned

agencies was assembled to conduct an item-by-item review. The working

group decided in 1992 to move approximately half the commercial

communications satellites (those that did not have one or more of the nine

ITAR performance characteristics) to the Commerce Control List.

According to Commerce officials, the executive branch’s decision reflects

Commerce’s long-held position that all commercial hot section technology

and commercial communications satellites should be under its

jurisdiction. Commerce argues that both items are, by definition, intended

for commercial end use and are therefore not munitions. This argument

reflects the view that all dual-use items should be subject to export control

under Commerce’s licensing system because most applications of these

items are commercial. Commerce also maintains that transferring

jurisdiction to the dual-use list also makes U.S. controls consistent with

treatment of these items under multilateral export control regimes. In

contrast, State and Defense point out that the ITAR is not based on end use

6

The United States was a member of this committee, which called for member nations to assert control

over munitions, dual-use items, and nuclear items as agreed to by all members. Although this

committee ceased to exist in 1994, communications satellites are still controlled multilaterally as

dual-use items.

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considerations, but on whether an item has been specifically designed for

military applications. The executive branch’s decision is the result of an

interagency review involving State, Commerce, Defense, and the

intelligence community in which the agencies developed a common

recommendation to the President to clarify the licensing jurisdiction of

these items.

Industry Supports the

Change in Jurisdiction

Manufacturers of jet engines and communications satellites we talked with

support the transfer of the items to the Commerce Control List. They cite

the following reasons for favoring Commerce’s control:

• Export licensing jurisdiction should be determined solely by an export’s

commercial application, and since both items are predominantly for

commercial end use, they are not munitions and should therefore not be

subject to State’s licensing process.

• The Commerce process is more responsive to business because time

frames are clearly established, the review process is more predictable, and

more information is shared with the exporter on the reasons for denials or

conditions on the license.

• Under State’s jurisdiction, commercial products become subject to certain

mandatory sanctions and embargoes that require denial of exports. Some

sanctions and embargoes apply only to items on the munitions list and not

to items on the Commerce Control List.

• Exports under State’s jurisdiction that exceed certain dollar thresholds are

subject to congressional notifications, and exporters say this can delay the

process. Satellite exports exceed these thresholds.

• The competitive market for commercial aircraft creates the need to

establish foreign overhaul and repair facilities and to use foreign expertise

to develop and manufacture current and new commercial aircraft engines.

Although the jet engine industry agrees in principle that selected high

technology know-how should be protected for both competitive and

national security reasons, manufacturers believe certain technical data

transfers to foreign partners facilitate cooperative engine development,

sharing of production, and operational maintenance.

• China is seen as a large and growing market for commercial aircraft

engines. Competing in the China market for the 100-passenger airliner

requires transfer of technology for the maintenance and production of hot

section components of an engine for such an aircraft .

• Some of the militarily sensitive systems or characteristics of

communications satellites are no longer unique to military satellites.

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Commerce’s and

State’s Licensing

Systems Differ

State and Commerce implement different laws to control exports of

military and dual-use items. The underlying objectives of these laws differ.

State controls munitions items to further the security and foreign policy of

the United States. Commerce, on the other hand, weighs U.S. economic

and trade interests with national security and foreign policy interests.

Commerce controls the export of dual-use items under the Export

Administration Act, as implemented under the Export Administration

Regulations. The key provisions of its export control system are discussed

in table 2.

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Table 2: Key Provisions of Commerce’s Export Control System

Provision Definition

License categories An individual validated license authorizes the export of a specific item during a specified

period to a designated consignee. A general license requires no application and permits

export within the provisions of the Export Administration Regulations. A special

comprehensive license consolidates five types of special licenses for such purposes as

large-scale exports of a wide variety of items for specified activities, certain multiple

exports and re-exports, and other purposes.

Reasons for control National security controls restrict the export and re-export of strategic items worldwide to

prevent their diversion to certain destinations, such as China and Russia. Foreign policy

controls restrict the export of items to prevent them from reaching countries for reasons

that include antiterrorism, regional stability, and nonproliferation.

Permanency of controls Foreign policy controls are not permanent and must be renewed annually by the

Secretary of Commerce, as delegated by the President, and reported to Congress.

Foreign availability A determination that an item is comparable in quality to an item subject to U.S. national

security export controls and is available from a non-U.S. source in sufficient quantities to

render the U.S. export control of that item or the denial of a license ineffective. This

determination results in mandatory decontrol of items controlled solely for national

security reasons. This provision does not apply to items controlled for foreign policy

reasons.

De minimis thresholds Under the Export Administration Regulations, prior written approval from Commerce is

not required for the re-export of a foreign-made product incorporating materials of U.S.

origin if the U.S. content value is less than 10 percent or 25 percent, depending on the

destination, of the product.

Judicial review The Export Administration Act provides for limited administrative review of license

denials, but it precludes judicial review.

Contract sanctity If Commerce imposes a new foreign policy control and a contract to manufacture a

product for which an exporter has obtained an export license is underway, the contract

generally does not have to comply with the new control and the exporter can export the

product.

Congressional notification Items are not subject to mandatory congressional notification with the exception of items

subject to controls for antiterrorism.

Enforcement of sanctions Although Commerce does not allow the export of certain dual-use items to certain

countries when the United States imposes sanctions on those countries, if these items

are embedded within larger items that are not subject to sanctions, the larger items can

be exported to sanctioned countries.

While the Export Administration Act provides broad authority to control

exports, the national security and foreign policy controls that Commerce

has put in place through the Export Administration Regulations provide

for control of exports to specific destinations to achieve specific

objectives. National security controls are to ensure that exports do not

make a contribution to the military potential of specified countries such as

China and Russia. Foreign policy controls can be imposed on all

destinations and include the regional instability control and missile

technology control. Exports controlled for regional instability reasons are

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reviewed to determine whether the exports could contribute directly or

indirectly to any country’s military capabilities in a manner that would

alter or destabilize a region’s military balance contrary to the foreign

policy interests of the United States.

State controls munitions items under the Arms Export Control Act. State

requires individual licenses for all exports under its jurisdiction, with the

exception of certain Defense exports. State has broad authority to deny a

license, and it can deny simply with the explanation that it is against U.S.

national security or foreign policy interests. State’s controls are permanent

and do not need to be renewed periodically, and there are no provisions

for foreign availability findings or re-exporting under de minimis

thresholds. The Arms Export Control Act does not preclude judicial

review of a licensing decision but no court has reversed a licensing

decision by State. State has the authority to revoke a license for an export

if it believes it to be against U.S. national security interests, even after a

contract to manufacture the product to be exported is underway. All

applications to export items that exceed certain values, including all

commercial communications satellites, are subject to congressional

notification prior to approval.

Commerce and State enforce several types of unilateral U.S. sanctions on

exports, including two domestic laws with particular significance for

exports of commercial communications satellites and jet engine hot

section technology. These are (1) the amendments to the Export

Administration Act and Arms Export Control Act made by the National

Defense Authorization Act for fiscal year 1991 (P.L. 101-510, Title XVII)

regarding sanctions for activities related to specified trade in items on the

Missile Technology Control Regime annex and (2) the sanctions in effect

since 1990 on exports of munitions to and satellites for launch in China as

a result of the Tiananmen Square incident that are published in the

Foreign Relations Authorization Act for fiscal years 1990 and 1991 (P.L.

101-246, Title IX, as amended.

The United States is a member of the Missile Technology Control Regime,

a group formed in 1987 whose members coordinate their national export

controls to limit the proliferation of missiles “capable of delivering nuclear

weapons.” This group is composed of the United States and 27 other

countries. The United States implements its export control policies partly

based on the regime’s annex, which lists 20 items of missile-related goods

and technologies, divided into two categories. Category I covers missile

systems and their major subsystems and production equipment, and

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category II covers materials, components, production, and test equipment.

Under the missile sanctions amendments to the Export Administration Act

and Arms Exports Control Act, State determines whether sanctionable

trade in items within category I or II of the Missile Technology Control

Regime annex has occurred.

If the sanctionable trade was in category I items, the laws require

Commerce to deny the export of all items controlled under the Export

Administration Act and State to deny the export of all items controlled

under the Arms Export Control Act, in addition to certain other sanctions.

If the sanctionable trade was in category II items, the laws require

Commerce to deny the export of items listed in the annex that are

controlled under the Export Administration Act and State to deny the

export of items listed in the annex that are controlled under the Arms

Export Control Act. In addition, the sanctions for trade in category II items

permit the denial of exports of items not listed in the annex. An example

of such an item is comercial communications satellites, which contain

items listed in the annex. The National Security Council left the decision of

how to treat such exports to Commerce and State. Thus, when the United

States imposed category II sanctions on China in 1993, exports of

commercial communications satellites controlled by State were not

approved while exports of those satellites controlled by Commerce were

not affected.

The Tiananmen Square sanctions include prohibitions on the export of

items on the munitions list and the export of satellites for launch from

launch vehicles owned by China. The President can waive these

prohibitions if such a waiver is in the national interest.7

 Waivers have been

granted allowing Commerce and State to approve the export of

commercial communications satellites for launch from Chinese launch

vehicles. Exports of hot section technology controlled by State are

prohibited by the Tiananmen Square sanctions, while exports of hot

section technology controlled by Commerce are not prohibited.

Items Transfer to

Commerce Licensing

Jurisdiction

In October and November 1996, Commerce and State published changes to

their respective regulations transferring licensing jurisdiction for

commercial jet engine hot section technology and commercial

communications satellites to Commerce. Commerce’s interim regulations

provide enhanced controls for the items. Additional controls are being

7

Missile sanctions are also subject to certain exceptions and waivers.

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implemented through an executive order and a presidential decision

directive issued in October 1996.

As a result of the change in licensing jurisdiction, State returned four

applications for exports of commercial communications satellites without

action. Two of these applications involved launches in China, one involved

a launch in French Guiana, and the fourth involved a launch from a

Russian-controlled facility in Kazakhstan. The exporters were advised by

State to resubmit their license applications to Commerce and, in two

cases, to request a separate license from State for items remaining subject

to State licensing (e.g., rocket fuel).8

 As a result of the change in

jurisdiction, these exports will not be subject to certain sanctions or to

congressional notification requirements. They will be subject to the

controls put in place through Commerce’s interim regulations.

Commerce’s new controls make the following changes for commercial jet

engine hot section technology and commercial communications satellites:

• The items must be exported under individual validated licenses and will

not be eligible for special comprehensive licenses or general licenses.

• Pursuant to the December 1995 executive order, Commerce may refer

license applications to Defense, State, and other agencies for review.

According to Commerce officials, all applications for the two items will be

subject to full interagency review.

• The items will be controlled for national security reasons to all

destinations. National security controls have been focused on preventing

exports to certain destinations.

• A new “significant item” control will be created for these two items. This

new foreign policy control will require a license for all destinations, except

Canada. Although most foreign policy controls define specific and limited

policy objectives, the policy objective for this control—consistency with

U.S. national security and foreign policy interests—is broadly stated.

Commerce officials stated that this control gives them broad discretion to

deny an export.

• Technical information that can be transferred under a satellite license is

more clearly defined.

• The two items transferring to Commerce’s jurisdiction will not be subject

to mandatory decontrol or licensing as a result of a foreign availability

finding, as is normally the case for items controlled solely for national

security reasons. Commerce officials stated that mandatory licensing and

decontrol do not apply to items controlled for foreign policy and that the

8

According to Commerce officials, a separate license from State will not be required.

Page 16 GAO/NSIAD-97-24 Export Controls
B-272258 

provisions of the Export Administration Regulations requiring mandatory

decontrol or licensing of items controlled for national security can be

waived if the President determines that such a waiver is in the national

interest. Rather than seek a presidential waiver on a case-by-case basis, a

presidential decision directive has been issued saying that, in advance,

mandatory decontrol or licensing is not in the national interest.

Regulations providing the exporter with the ability to request a foreign

availability finding and consideration of foreign availability in arriving at

licensing decisions will still apply to these items.

• De minimis provisions will not apply to the two items. In the case of hot

section technology, the de minimis provision provides that any technology

prepared or engineered abroad for the design, construction, operation, or

maintenance of any plant or equipment that uses U.S.-origin hot section

technology will be subject to U.S. export control regulations.

• Contract sanctity provisions will not apply.

In addition, procedures for interagency review of Commerce’s initial

decisions on individual licenses have been modified for these items. These

procedures provide for participation by reviewing agencies, including

State and Defense. Commerce makes initial licensing decisions unless

reviewing agencies are not in agreement. In those cases, decisions are

made by an interagency group known as the Operating Committee, which

is chaired by Commerce and includes representatives from Defense, State,

Energy, and the Arms Control and Disarmament Agency. Under normal

procedures, the chair of the Operating Committee, a Commerce official

appointed by the Secretary of Commerce, decided to approve or deny a

license and to include conditions on the license, after considering input

from other committee members.9

Under revised procedures for these two items, the decision to deny or

approve a license, and conditions for approval, will be made by a majority

vote of the members of the Operating Committee. The executive order that

establishes procedures for interagency review of Commerce license

applications was revised in October 1996 to implement this procedural

change.

9

An agency disagreeing with a decision made by the Operating Committee can appeal it to the Advisory

Committee on Export Policy, which is composed of members at the assistant-secretary level from the

same agencies represented in the Operating Committee and makes its decision based on majority vote.

If the dissenting agency disagrees with this decision, it can be appealed to the Export Administration

Review Board, which is composed of the secretaries of the same agencies represented in the Operating

Committee and also makes its decision based on majority vote. If the dissenting agency still disagrees

with the decision, it can then be appealed to the President. In practice, decisions are rarely escalated

beyond the Advisory Committee on Export Policy.

Page 17 GAO/NSIAD-97-24 Export Controls
B-272258 

Implications of Change Are

Uncertain

These regulatory and procedural changes are intended to allow Commerce

to control and deny, when appropriate, exports of the two items to all

destinations. This is particularly important for control of hot section

technology. Exports of the most sensitive hot section technology have not

been permitted, even to close allies. State approved exports of commercial

communications satellites with conditions on the safeguard of the satellite

and associated technology. According to Commerce and other executive

branch officials, the change in jurisdiction is not intended to change U.S.

licensing policy—what destinations and end users the United States will

approve licenses for—but only the procedures under which licensing

decisions will be made.

Whether the current licensing policy will be maintained with the change in

jurisdiction is uncertain. The underlying objectives of the two systems

differ. The Arms Export Control Act gives State the authority to use export

controls primarily to protect U.S. national security without regard to

economic or commercial interests. Under the Export Administration Act,

on the other hand, Commerce weighs economic and trade interests along

with national security and foreign policy concerns. The importance

attached to economic and commercial interests is reflected in Commerce’s

role in the process as the representative of commercial interests. Defense,

as the voice for national security concerns, is one of several agencies in

Commerce’s licensing system. Under State’s licensing system, Defense is

one of two agencies involved in licensing decisions. According to State,

State denies an export if Defense raises significant national security

concerns.

These differences in the underlying basis for decisions create uncertainty

as to whether the changed procedures for making licensing decisions will

result in changes in licensing policy. Uncertainty is also created by the

newness of the “significant item” control because it is not clear how it will

be applied.

Agency Comments

and Our Evaluation

The Departments of Defense and Commerce provided written comments

on a draft of this report (see apps. I and II, respectively), and the

Department of State provided oral comments. Both Defense and State said

they had no objections to the report. State also commented that the report

fairly and accurately laid out the issues associated with State’s position in

these matters. Commerce stated that the President’s decision to transfer

jurisdiction of the two items discussed in this report was based on the

unanimous recommendation of Defense, Commerce, and State. Commerce

Page 18 GAO/NSIAD-97-24 Export Controls
B-272258 

cited major factors involved in the recommendation and decision:

(1) changed military and industrial environment after the Cold War, (2) all

U.S. allies treat these items as dual-use goods rather than munitions,

(3) since December 1995 all agencies have had the right to participate fully

in licensing deliberations, and (4) it made good business sense. Commerce

suggested that our characterization of Defense’s and State’s positions was

based on the views of junior staff members at these agencies and ignored

the consensus that was ultimately achieved.

Our presentation of the Defense and State positions is based on

discussions with senior level officials in these agencies, including

Defense’s Director of the Defense Technology Security Administration and

State’s Director of Defense Trade Controls. Neither State nor Defense

raised any objections to our presentation of their positions in the draft

report and State commented that the report fairly and accurately reflected

its position. Further, with respect to Commerce’s comment that the

transfer of jurisdiction was based on the unanimous recommendation of

Defense, Commerce, and State, it should be noted that an interagency

group reviewing licensing jurisdiction for commercial communications

satellites had recommended that commercial communications satellites

with militarily sensitive characteristics continue to be licensed by the State

Department. It also recommended further adjustments in the

characteristics defining militarily sensitive commercial communications

satellites. The Secretary of State upheld these recommendations. It was

only after Commerce appealed the Secretary of State’s decision to the

President, and the President decided to transfer jurisdiction for both

commercial communications satellites and commercial jet engine hot

section technology to the Department of Commerce that unanimous

support for the transfer of jurisdiction came about.

Scope and

Methodology

To assess the military sensitivity of the two items, we interviewed and

obtained analyses from officials in the Air Force, the Navy, the Office of

the Deputy Under Secretary of Defense for Space, the Defense Technology

Security Administration, the National Security Agency, the Defense

Intelligence Agency, and the Department of State. We also analyzed license

applications for the two items submitted to State and referred to Defense

to gain an understanding of the concerns at Defense and State related to

the export of the items.

To determine the executive branch’s rationale for the change in licensing

jurisdiction, we interviewed officials at Commerce and State. We also

Page 19 GAO/NSIAD-97-24 Export Controls
B-272258 

interviewed and obtained documents from representatives of the

Aerospace Industries Association, The Boeing Company, General Electric,

The Hughes Corporation, Lockheed Martin, and United Technologies

Corporation. The Aerospace Industries Association represents

manufacturers of engines and spacecraft. Boeing purchases jet engines for

its commercial and military aircraft. General Electric and United

Technologies are two major engine manufacturers, and Hughes and

Lockheed Martin are two major commercial satellite manufacturers. In

addition, we reviewed documents at Commerce, Defense, and State

related to the development of the interim regulations and analyses done by

industry advisory groups.

To evaluate the differences between Commerce’s and State’s export

licensing jurisdictions for the two items, we interviewed and obtained

documents from officials at Commerce, Defense, and State. We compared

the provisions in the Export Administration Act and the Export

Administration Regulations to those in the Arms Export Control Act and

the International Traffic in Arms Regulations. In addition, we reviewed the

interim final rule changing the jurisdiction to Commerce to evaluate the

new controls that Commerce plans to implement to control the two items.

We performed our review from June to November 1996 in accordance with

generally accepted government auditing standards.

As arranged with your offices, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 10 days after its

issue date. At that time, we will send copies to the Secretaries of Defense,

the Army, the Navy, and the Air Force and other interested congressional

committees. Copies will also be made available to others upon request.

Please contact me at (202) 512-4841 if you or your staff have any questions

concerning this report. Major contributors to this report are listed in

appendix III.

Katherine V. Schinasi

Associate Director, Defense Acquisitions Issues

Page 20 GAO/NSIAD-97-24 Export Controls
Page 21 GAO/NSIAD-97-24 Export Controls
Contents

Letter 1

Appendix I 

Comments From the

Department of

Defense

24

Appendix II 

Comments From the

Department of

Commerce

25

Appendix III 

Major Contributors to

This Report

27

Tables Table 1: Militarily Sensitive Characteristics Integrated in

Commercial Communications Satellites

8

Table 2: Key Provisions of Commerce’s Export Control System 13

Abbreviations

ITAR International Traffic in Arms Regulations

Page 22 GAO/NSIAD-97-24 Export Controls
Page 23 GAO/NSIAD-97-24 Export Controls
Appendix I 

Comments From the Department of Defense

Page 24 GAO/NSIAD-97-24 Export Controls
Appendix II 

Comments From the Department of

Commerce

Page 25 GAO/NSIAD-97-24 Export Controls
Appendix II 

Comments From the Department of

Commerce

Page 26 GAO/NSIAD-97-24 Export Controls
Appendix III 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Karen S. Zuckerstein

Maria J. Santos

Maria B. Boyreau

Office of General

Counsel

Raymond J. Wyrsch

(707174) Page 27 GAO/NSIAD-97-24 Export Controls
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