Walk the Line

February 3, 2020

The usually obscure issue of export controls made the news the past two weeks as rumors of internal administration disagreement on a significant rule change leaked out. Fair warning: this is complicated, and a bit of background is required.

U.S. export control laws are extraterritorial. That is, they seek to control exports from third countries to controlled destinations if those exports contain some U.S. content. This is a general rule, but the immediate issue involves Huawei, and it is easiest to explain things using that company as an example. Last May, the government (via the Commerce Department) put Huawei on what is known as the Entity List. That means that all exports to the company require an export license. The government immediately issued a general license that permitted exports of a variety of low-level items, and it has been slowly acting on license applications for other more sophisticated items.

Meanwhile, manufacturers realized that exports to Huawei from other countries were only covered by our rules if more than 25 percent of their national security content (that is, content that we control for national security reasons) was U.S content. Items with a lower amount of U.S. controlled content were considered foreign products—not subject to our rules. Since companies often manufacture in multiple locations, this requirement, known as the de minimis rule, was effectively a loophole. Exports could continue to Huawei from non-U.S. locations so long as the content ceiling was not breached. Concern about that led to an internal administration effort to plug the loophole by reducing the content requirement from 25 percent to 10 percent and by applying it to all U.S. content and not just controlled content.

The interesting thing about this episode, which remained unresolved at the end of last week, was the position of the combatants. Historically, this is the kind of thing the Defense Department would be arguing vigorously for, and the Commerce Department would be objecting to. This time, however, positions were reversed. On the Commerce side, the switch appears to be the result of the secretary being persuaded to override the position of the Bureau of Industry and Security (BIS), which currently lacks permanent leadership at the senior level. The Defense side, in contrast, reflects a sophisticated understanding of what is most in the military's interest and a recognition that sometimes the right answer will appear counterintuitive.

The Pentagon's evolution began more than 25 years ago, as accelerating technological change began to transform the nature of warfare. We were rapidly moving into an era of "smart" weapons, which depended on electronic components, especially semiconductors, and ever more sophisticated software, and where real-time information about the enemy and the ability to communicate it to the battlefield were crucial. Bill Perry, who began as defense under secretary and later became secretary, was quick to see that this revolution in the nature of warfare made the military more dependent on the latest generations of information and communications technology, which were all being developed by the private sector. That meant that the health of our high-tech sector was critical to a modern military. The challenge was that military sales were only a small part of these companies' revenue, so that keeping them healthy meant letting them export because that was where an increasing part of their revenue was coming from.

That logic change turned thinking about export controls on its head. Denying export licenses could mean dooming companies to second or third place as foreign competitors captured markets, made money, and moved ahead. That, in turn, forced export control authorities to walk a fine line. Controls that were too lax would result in adversaries getting stuff we did not want them to have. Controls that were too tight would both make our companies weaker by cutting into earnings and giving our opponents an incentive to try to develop sophisticated weaponry on their own. Walking that line was a challenge in the Clinton administration when I was doing it because not everyone had gotten the memo and figured out the new reality. Succeeding administrations seemed to "get it" and did their best to walk the line even as further technological advances made it more difficult by developing products that were so clearly "dual use" (civilian and military) that any decision was likely to have negative consequences. I thought my job was hard, but it was nothing compared to what my successors face today.

Now it appears that these old battles are going to be re-fought because once again, we have people in the government who have not been paying attention to how technology has changed. Rob Atkinson of the Information Technology and Innovation Foundation (ITIF) recently wrote a thoughtful piece on what the right answer in the particular case of Huawei ought to be. Today's column is focused more on the nature and history of the argument since it appears that what had been decided policy is once again open to debate. And that debate is not much different than it has been for the past 25 years, although some of the players seem to have switched sides. The right answer, however, remains the same.

William Reinsch holds the Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.

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