House Hearing, 114TH Congress - Export Control Reform: Challenges For Small Business? (Part Ii)

EXPORT CONTROL REFORM: CHALLENGES FOR
SMALL BUSINESS? (PART II)
HEARING
BEFORE THE
COMMITTEE ON SMALL BUSINESS

UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
HEARING HELD
FEBRUARY 11, 2016
Small Business Committee Document Number 114043

Available via the GPO Website: www.fdsys.gov
U.S. GOVERNMENT PUBLISHING OFFICE

98595 WASHINGTON : 2016
For sale by the Superintendent of Documents, U.S. Government Publishing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 5121800; DC area (202) 5121800
Fax: (202) 5122104 Mail: Stop IDCC, Washington, DC 204020001
SBREP-219 with DISTILLER
Congress.#13
VerDate Mar 15 2010 11:05 Jul 15, 2016 Jkt 000000 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 C:\USERS\DSTEWARD\DOCUMENTS\98595.TXT DEBBIE
HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
CHRIS GIBSON, New York
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
CARLOS CURBELO, Florida
MIKE BOST, Illinois
CRESENT HARDY, Nevada

NYDIA VELAZQUEZ, New York, Ranking Member
YVETTE CLARK, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRENDA LAWRENCE, Michigan
ALMA ADAMS, North Carolina
SETH MOULTON, Massachusetts
MARK TAKAI, Hawaii
KEVIN FITZPATRICK, Staff Director

EMILY MURPHY, Deputy Staff Director for Policy
JAN OLIVER, Deputy Staff Director for Operation
BARRY PINELES, Chief Counsel
MICHAEL DAY, Minority Staff Director
(II)
CONTENTS
OPENING STATEMENTS
Page
Hon. Steve Chabot ................................................................................................... 1
Hon. Nydia Velazquez ............................................................................................. 2
WITNESSES
Hon. Kevin J. Wolf, Assistant Secretary of Commerce for Export Administra-
tion, Bureau of Industry and Security, United States Department of Com-
merce, Washington, DC ....................................................................................... 4
Hon. Brian Nilsson, Deputy Assistant Secretary for Defense Trade Controls,
Bureau of Political-Military Affairs, United States Department of State,
Washington, DC ................................................................................................... 6
APPENDIX
Prepared Statements:
Hon. Kevin J. Wolf, Assistant Secretary of Commerce for Export Adminis-
tration, Bureau of Industry and Security, United States Department
of Commerce, Washington, DC .................................................................... 24
Hon. Brian Nilsson, Deputy Assistant Secretary for Defense Trade Con-
trols, Bureau of Political-Military Affairs, United States Department
of State, Washington, DC ............................................................................. 31
Questions for the Record:
Questions from Hon. Steve King to Hon. Kevin J. Wolf and Hon. Brian
Nilsson and Responses from Hon. Kevin J. Wolf and Hon. Brian
Nilsson from Hon. Steve King ..................................................................... 36
Additional Material for the Record:
None.
(III)
EXPORT CONTROL REFORM: CHALLENGES
FOR SMALL BUSINESS? (PART II)
THURSDAY, FEBRUARY 11, 2016
HOUSE OF REPRESENTATIVES,
COMMITTEE ON SMALL BUSINESS,
Washington, DC.
The Committee met, pursuant to call, at 10:00 a.m., in Room
2360, Rayburn House Office Building. Hon. Steve Chabot [chair-
man of the Committee] presiding.
Present: Representatives Chabot, Huelskamp, Brat, Curbelo,
Velazquez, Meng, Moulton, and Payne.
Chairman CHABOT. Good morning. I call this meeting to order.
I want to thank you all for joining us today for our Committee
on Small Business hearing on the Export Control Reform Initiative
(ECRI). This is part of our hearing series on the ECRI. Yesterday,
the Subcommittee on Agriculture, Energy, and Trade held a hear-
ing where members heard directly from small businesses and trade
compliance specialists on their firsthand experiences with the new
Export Control System. I will mention we heard some good things
about the current status of the ECRI, and perhaps unsurprisingly,
we heard some bad things. And now that we have identified some
of the challenges Americas small businesses face when navigating
the Export Control System, I hope we can take the opportunity
that this hearing presents to address some of these concerns and
figure out just how the administration plans to better assist small
businesses engaged in trade.
As a longtime member of the House Foreign Affairs Committee
and current chair of the Committee on Small Business, inter-
national trade has continued to be one of the topics that I am very
passionate about, and I will also note that I understand the impor-
tance of the United States Export Control System and the under-
lying implications for our national security goals, foreign relations,
and economic growth. Defense materials and products and services
that serve a civilian and military purpose, also known as dual-use
items, should undoubtedly be scrutinized when they are leaving the
country and being sold to a foreign buyer. However, small busi-
nesses should not carry the burden of navigating a complex Export
Control System, and since the administration has moved to imple-
ment the ECRI, it looks like they agree.
As I mentioned, we heard yesterday from some small businesses
directly engaged in the Export Control System. They all agreed
that while the goal of improving the Export Control System is a
good one, government agencies are asking too much of the export-
ers, particularly small business exporters. These businesses are
(1)
2
often discouraged from exporting due to their limited time and re-
sources that cannot be redirected to navigating the complexities of
the Export Control System. I recognize that, generally, the ECRI
has been met with broad support from American businesses, and
good or bad, change is hard. I believe there is a certain level of re-
sponsibility on the government to ensure that this transition does
not overburden small businesses, and I am concerned with the gov-
ernments somewhat lackluster outreach efforts.
Additionally, we have heard that the export control lists are not
completely synchronized, and that is creating some confusion.
There are also valid concerns about the long delays in the agencys
licensing approval processes and the cumbersome paperwork re-
quirements, so clearly, much work still remains to be done. I think
we all look forward to hearing from our administration witnesses
about what progress the ECRI is making in the simplification of
export controls, but I am more interested in hearing about how the
administration is alleviating pressures on small business exporters.
I want to thank you again and thank everyone for being here
today, and I would now like to yield to the ranking member for her
opening statement.
Ms. VELA ZQUEZ. Thank you, Mr. Chairman, and thank you for
holding this valuable hearing.
With small and mid-size firms accounting for 98 percent of U.S.
exports, Americas small businesses have a great stake in how our
export licensing regulations function. Not only do small manufac-
turers stand to benefit as we improve this system, but entire re-
gional economies rely on robust U.S. exports. In New York, for ex-
ample, about 400 million tons of cargo move through the citys port
system and volume is expected to increase 48 percent by 2040.
Numbers like this make it clear that a well-run export licensing
system is vital to sustaining and creating good jobs, especially in
places like Brooklyn and New York City where local ports generate
significant economic activity. There is a long history of restricting
certain types of products for export from the United States, specifi-
cally those related to defense or items that have both military and
civilian uses.
We all understand the importance of these regulations. It is vital
to our national security and diplomatic relations that appropriate
export control mechanisms are in place.
At the same time, this system has become increasingly cum-
bersome. As we have seen in many other instances, when federal
requirements become overly complex, small firms suffer the most.
Often, they do not have the same resources that larger competitors
utilize to navigate these processes. These concerns were one driving
force behind the administrations interagency review of the U.S.
Export Control System. These changes are welcome, and so far we
have heard positive feedback from the small business community.
The 2010 reforms are an important example of the administrations
working to reduce regulatory burdens on the private sector. It is
clear from small business survey data that this review and these
reforms are necessary. Fully three-quarters of businesses report
time-consuming difficulties when trying to work with our Export
Control System. More than half noted problems from dealing with
multiple regulatory agencies. This should be no surprise. Seven de-
3
partments share jurisdiction over the export control process. Add to

this a responsibility of companies to know exactly what components
in their products are regulated by which department and you have
a recipe for a serious bureaucratic mess.
These hurdles create challenges for even the most experienced,
sophisticated exporters. For a small manufacturer who is looking
to enter foreign markets for the first time, these difficulties may
seem unsurmountable. I am particularly concerned that if our ex-
port control is not fully modernized, we will hinder growth among
firms that show the greatest promise for innovation. We have
heard entrepreneurs that manufacture wind turbines, solar panels,
and energy efficiency devices are losing opportunities to foreign
competitors due to our export licensing procedures. Similar pro-
grams are reported in other high technology and rapid growth sec-
tors. This is distressing as these are the very same industries we
are counting on for job creation in coming years.
In a few weeks, this committee will visit New York for a field
hearing where we will hear from local manufacturers. During that
session, I intend to ask our witnesses about their experience with
U.S. export licensing controls.
Mr. Chairman, I think all of us share the goal of ensuring our
export licensing procedures function effectively, protecting our dip-
lomatic and national security interests, while also ensuring U.S.
small businesses are not needlessly burdened. I believe this goal is
something we can achieve by working together. In that regard, I
thank our witnesses for being here and offering their insight.
With that, I yield back.
Chairman CHABOT. Thank you. The gentlelady yields back.
If Committee members have opening statements, I would ask
that they be submitted for the record.
I will take just a moment to explain our lighting system for our
witnesses. You are probably familiar with it, but we basically oper-
ate under the 5-minute rule here, and there is a lighting system
to help you in that. The green light will be on for 4 minutes; the
yellow light will come on to let you know you have about a minute
to wrap up; and the red light, we would ask you to complete your
testimony by that time, if at all possible. We will give you a little
flexibility, but we would ask you not to abuse the process. And we
operate under the same rules ourselves, so we limit ourselves to 5
minutes as well.
I would now like to introduce the panel today which sometimes
is four witnesses; today, only two. Our first witness is the Honor-
able Kevin Wolf, Assistant Secretary of Commerce for the Export
Administration at the Department of Commerce. Mr. Wolf was
sworn in on February of 2010 and assists and advises the Under
Secretary on the development of policies pertaining to Export Ad-
ministration issues. And we thank you for being here.
Our other witness today is the Honorable Brian Nilsson, Deputy
Assistant Secretary for Defense Trade Controls at the State De-
partment. Mr. Nilsson was appointed to this position on October of
2015 and provides overall policy guidance regarding the transfer of
defense technologies to other countries. And we thank you very
much for being here.
And Mr. Wolf, you are recognized for 5 minutes.
4
STATEMENTS OF THE HONORABLE KEVIN J. WOLF, ASSISTANT
SECRETARY OF COMMERCE FOR EXPORT ADMINISTRATION,
BUREAU OF INDUSTRY AND SECURITY, U.S. DEPARTMENT
OF COMMERCE; BRIAN NILSSON, DEPUTY ASSISTANT SEC-
RETARY OF DEFENSE TRADE CONTROLS, BUREAU OF POLIT-
ICAL-MILITARY AFFAIRS, U.S. DEPARTMENT OF STATE
STATEMENT OF KEVIN J. WOLF

Mr. WOLF. Sure. Thank you, Chairman Chabot and Ranking
Member Velazquez.
The purpose of export controls is to put a regulatory net over the
export, re-export, and transfer of particular items, software, and
technology to various destinations, end uses, and end users for a
wide variety of foreign policy and national security reasons. If the
exporters and re-exporters do not understand these rules and how
to comply with them, then the national security and foreign policy
objectives of the controls are not met. I want to thank you, this
Committee and the members, for having hearings like this and
helping bring attention to the topic to help us get the word out to
enhance overall compliance. Thank you for that.
As with most areas of regulations, export controls are inherently
complex. There are different items of different sensitivities. There
are countries of different levels of concern. End uses and end users
are of different concerns. Foreign policies and national security pri-
orities change over time. Technologies evolve. What was once very
advanced and sophisticated and spooky becomes quite widespread
and commercial. Slightly different fact patterns and particular ca-
pabilities of an item can have very different outcomes. The rules
that exist today are the result of decades of legislation and regu-
latory decisions made by hundreds of individuals that fit into a
multilateral export control regime system of like-minded countries.
These countries try to align their controls all in a system that tries
to take into account the various equities of the law enforcement
side, the export and economic security side, national security folks,
et cetera. All of these equities are all pulled in together to make
what is inherently a complex system.
In the extreme, there are two ways in which to have a radically
more simple system. You can have a system that imposes controls
on everything equally everywhere all the time, and therefore, there
is not much analysis required in terms of what requires a license,
where, and to what destinations, a system that does not require a
license anywhere, anytime, except when a company is specifically
told about it. The former, of course, would impose a massive regu-
latory burden on U.S. companies and require a tremendously larger
U.S. export control system to be able to accommodate that one. The
latter, of course, does not satisfy the national security or foreign
policy objectives of why the controls exist in the first place.
What this Administration has tried to do since the President an-
nounced the Export Control Reform Initiative in 2009, and then as
better laid out by Secretary of Defense Gates in the early part of
2010, is to modernize and update the system. This effort had really
been tried and announced several times over the decades, but
never really accomplished, seeks to take into account different lev-
5
els of sensitivity for different countries of control in order to in-

crease interoperability with NATO and our other close allies.
The hearing yesterday was an example, by the way, of all the
points that I just described. You had a manufacturer that was say-
ing please do not control my item on the ITAR. Please allow me
to have the regulatory flexibility of the Commerce Department reg-
ulations so I can stay competitive with my non-U.S. counterparts
in this area and have fewer regulatory burdens. Then a freight for-
warder saying it would be much easier if everything required a li-
cense everywhere and there were not country specific designations
or differences and all items were treated equally all the time. Your
panel yesterday was a good description of the inherent tension of
export controls.
One of the things that we have done as part of the reform effort
is to take into account the realities of the rules that have been in
place for a couple of years. These are two pivot blocks. I heard the
members like props, so I brought props that we have been using
for a long time. But these two actually summarize this entire mas-
sive multiyear export control reform effort really quite well. All
they do is hold brake assemblies together on large vehicles. One of
these was developed, specifically modified for a military vehicle,
and the other one was developed for a dump truck. They both serve
exactly the same function, have exactly the same basic holes. The
only difference is that this one is for metric because the Marines
like a metric system and the dump truck people like a standard di-
mension.
Under the old system, prior to the reform effort, it was simple.
This required a license everywhere, all the time, as a statutory re-
quirement under the regulations of my friend over here, and if a
French company were to buy this and install it into a fire truck,
then that French company making fire trucks would forever need
a license from his department as a statutory requirement every-
where that fire truck was exported. And so that created a disincen-
tive under the old regulatory system. It was simple to apply for
non-U.S. companies to buy relatively simple items largely made by
small- or medium-size companies. The regulatory burden that
would go along with something having once been originally modi-
fied for military application that has now found its way into wide-
spread commercial applications created the disincentive. This one,
designed for the dump truck, could be exported worldwide without
any requirements except for the embargoed countries.
What we have done with the reform effortand I have literally
hundreds of thousands of examples I could have brought with me
todayis to take items that are less sensitive and to no longer reg-
ulate them on the State Department list, but to move them over
to the Commerce Department list. They are now relatively similar
in control so that you do not have this regulatory burden that I
was describing that creates a disincentive for non-U.S. companies
to buy U.S. origin items for less sensitive military or for commer-
cial applications.
Now, the upside of that is that there could be fewer regulatory
burdens. The downside of that, as described yesterday, is now peo-
ple have to go through and decide am I exporting a pivot block or
6
a sensitive foreign missile component and everything in between.

That is where education and outreach and training is so critical.
The controls still exist for these items as military items to em-
bargoed countries and for bad end uses and bad end users, which
also adds to the level of burden in that sense. If a company is ex-
porting this to France or England, the burden is less, but if it is
to a country subject to an arms embargo or for bad end use, the
burden is increased in making those determinations.
We have at BIS, Bureau of Industry and Security, an entire of-
fice that does nothing but education and outreach. We estimate
that we were able to contact almost 100,000 individuals by one
means or another. Last year, we conducted or held or participated
in over 350 seminars. I, Kevin, the Assistant Secretary, answer
every question that comes in to BIS about the export control rules
and the reform on a free conference call that anybody can dial in
to every Wednesday at 2:30. This has been a terrific benefit for ex-
porters in that they can get answers to their questions free and of
benefit to everybody else who may be dialing in.
Chairman CHABOT. Mr. Wolf?
Mr. WOLF. Yes.
Chairman CHABOT. I have to cut you off.
Mr. WOLF. Sure.
Chairman CHABOT. We will get around to you in the questions.
Mr. WOLF. Oh, I have just passed my 5-minute line.
Chairman CHABOT. You did. You went a little over the allotted
time.
Mr. WOLF. I got really excited there.
Chairman CHABOT. You went over the allotted time, but you
brought such excellent props that we are going to forgive you.
Mr. WOLF. I apologize. I was thinking I had 2 minutes left, so
never mind. Thank you.
Chairman CHABOT. We will get around to you in the questions.
Thank you very much.
Mr. Nilsson, you are recognized for 5 minutes.
STATEMENT OF BRIAN NILSSON
Mr. NILSSON. Great. Thanks very much.
Good morning, all, and Mr. Chairman and Ranking Member
Velazquez and other members of the Committee. Thanks very
much for having the hearing with us today. I have been working
on the Export Control Reform Initiative since its inception. We are
very enthusiastic about it, and we very much appreciate the oppor-
tunity to speak about it. We would not be where we are today, as
far down the path in doing reforms, if it had not been with the help
and assistance of a lot of people across the departments, and across
Congress. This Committee helped us in partnering us with the
Small Business Administration and others, so we very much appre-
ciate the help and support that we have gotten to get as far as we
have gotten so far.
ECR is, first and foremost, a national security review. It has
three core objectives: better using our resources, improving inter-
operability with our allies, and bolstering the health and competi-
tiveness of our industrial base, which includes the second and third
tier suppliers, which are predominantly smaller and medium-size
7
businesses. The system that we had been operating under, the pre-
ECR system, was based on a premise that the United States has
exclusive ownership of all the technologies that we need for our in-
dustrial base and that we actually procured enough to where we
sustain our industrial basis without the need for exports. That has
changed, and so the reality is now that we do joint development
programs with our allies and we do not procure enough, even
among those for the items that we do procure, to be able to really
sustain the health of the industrial base, particularly at the second
and third tiers of supply.
And so we have been systematically going through a process so
that we can make it easier for the small- and medium-size compa-
nies who constitute the second and third tiers of supply, so that
they can actually do the aftermarket sales and support for the larg-
er systems that we have already exported without the need for hav-
ing to come in for individual licenses. The goal is to make sure that
we maintain the health and competitiveness of our industrial base
and to keep that manufacturing in the United States so that they
are there when we need them for current and future national secu-
rity needs.
The cornerstone of the effort that Kevin has referenced is really
looking at the Department of States Munitions List, USML. The
USML is comprised of 21 categories of items. Pre-ECR, it was not
really a list, per se. The categories listed broadly what end items
were in a given category. For example, Category VIII controls air-
craft, helicopters, drones, and then within that category, it also had
very broad, nonspecific catchall language, and it said that we con-
trolled anything specifically designed, adapted, modified, or config-
ured for anything that is in this category. And so as a result of
that, it created sweeping controls without prioritization. And so not
only would I control a fighter aircraft on my list, I would control
every part, every nut, every bolt, every screw, the seatbelt, the
windshield wiper, the clips, all the things that I have now trans-
ferred over to Kevin, without prioritization. That is like Lucy and
Ethel in the chocolate factory where the things are coming down
the production line and we are not able to prioritize those items
that warrant the greater scrutiny because we are spending so
much time on all the lower level items. The reality is that we need
to control them but we want to make them to be able to go more
easily to our allies and make it easier for small- and medium-sized
companies to be able to export.
What we have done is in 2012, using the aircraft example, we did
over 22,000 export licenses just in that 1 of 21 categories on the
Munitions List, and over 76 percent of those were for these
unnumerated, unspecified items that are caught by this specifically
designed, adapted, modified, or configured for any military use. As
a result of that, we have taken a 6-year, painstaking, interagency
process led by the Department of Defense where we have actually
opened every category and looked at what is inside each of these
categories that provides the United States with the critical military
intelligence advantage. And if it does not meet that standard, we
should move it over to Kevins list to make it eligible for export
under more flexible authorities.
8
And so on aircraft alone, last year our licensing dropped to about

6,800 licenses, which is about a 70 percent drop from what we had
seen pre-ECR. And instead of that unemunerated list specifically
designed, adapted, modified, or configured for military applications,
we now have a relatively short list of specific items that warrant
control, and everything else is moved over to the Commerce list.
We have seen an 83 percent reduction in licensing for the items
that are like this that are now moved over to Kevins jurisdiction.
Where we are in the effort now? We have completed the work on
18 of thewe have published proposed rules for 18 of the 21 cat-
egories on the list. Of those 18, we have published final rules for
15 categories, and so those have gone into effect. And we are doing
this through a series of proposals and then final rulemaking so
that the public has an opportunity to provide input, which has been
instrumental in the work that we have been doing.
That leaves me with six more categories on my list. Three of
those categories we have published in proposed form: for Category
XII, which is night vision and thermal imaging cameras; Category
XIV, toxicological agents; and then Category XVIII for directed en-
ergy weapons. Category XII and XIV are among the most difficult
we have had. We have had interagency struggles over what the
right controls have been for probably 15 to 20 years, and so we are
working through those now. Based on the public input on Category
XII, we are in the process of going out for a second pair of proposed
rules because we did not quite get it right based on the industrys
input. So we are redoing and moving forward with those now.
The prioritization now is to get Category XII out again. We are
then working towards doing final rules for XIV and XVIII, for di-
rected energy weapons and for toxicological agents. That leaves my
final three categories, which are firearms, big guns, and ammuni-
tion. Those are next among the priorities, and we are turning to
those next as we get these others out the door. We are committed
to proceeding with finalizing our initial review of the entire USML
by the end of this year, so we are looking at finishing or looking
at having proposed rules for all six categories by the end of this
year.
Other things I could talk about very briefly, we can talk about
our IT infrastructure. I am happy to answer questions about that.
Outreach and partnership, as I said at the out start, we would not
have done this and not have gotten this far if it had not been for
the instrumental input that we have gotten from everyone in-
volved. Pre-ECR, the State Department did not do proposed rules.
We claimed a foreign policy exemption. We were in charge and we
published rules and the rules were the rules. Now what we do is
we do proposed rulemakings. We do dialogue with industry, with
our partners, with our allies, with the Congress. If we do not get
it right, we put it out again for another proposed rulemaking.
This past year, we have participated in over 700 events where
we do training and outreach. We have a dedicated team that is just
answering questions from industry. We have done about 19,000
phone calls last year to answer questions. We did over 22,000
emails where we were answering and following up. We also have,
everything that we do, facts, Q&As, we actually have decision trees
9
to help exporters walk through the regulations that we have on our

website, on Kevins website.
The administration has a single website where all the depart-
ments who are participants in this put everything they are includ-
ing: our proposed rules, all the public comments that we receive.
So it is very transparent. Industry can sign up for that and they
can get e-notices so they know what is happening and when.
Chairman CHABOT. Thank you. I think we will get to the rest
of your testimony maybe through the question process.
Mr. NILSSON. Okay, thank you.
Chairman CHABOT. Thank you very much for your testimony,
and we are giving Mr. Wolf credit for his excellent props, and we
will give you credit for an I Love Lucy, reference. I think that is
the first time since I have been chair. That is a great episode if you
have not seen it, by the way, when Ethel and Lucy are trying to
take care of the chocolate machine. It is a classic.
So, of course, this is a Small Business Committee, so most of our
concerns are with reference to small business, and I will recognize
myself for 5 minutes to get into some of those.
My first question would bethis would probably be more di-
rected to you, Mr. Wolfmost industry experts seem to agree that
export controls disproportionately impact small business folks.
What effort is the administration making to help narrow the gap
between larger and small business when it comes to navigating the
Export Control System?
Mr. WOLF. Sure. There are two ways to approach that. One is
from the structural regulatory changes we are making, and second,
from the length and the type of outreach that we do. On the struc-
tural changes, it goes back to my pivot blocks. I mean, small and
medium size companies, prior to the reform effort, if they were the
maker of one of these types of items to export, as a military item,
they would have been required to register with the State Depart-
ment. They would have been required to pay fees. They would have
been required to get purchase orders before every individual ship-
ment. The foreign parties that bought these would be forever re-
quired to get permission from the State Department even when
they were incorporated into commercial or other items for allied
countries. They would have required these very lengthy manufac-
turing license agreements and technical assistance agreements in
order to be able to transfer data or to do services overseas. They
would have required permission to perform services on these items.
There are requirements on importing these items back into the
United States. There were precious few license exceptions available
to be able to transfer these and related items and technology for
repair or for government end users or for NATO countries. Under
the reform effort, all of those burdens, all of that massive regu-
latory structure that I have just describedwhich is massive, trust
mefor items that have moved over to our Commerce list after the
six years of work that Brian was just describing, have disappeared.
So from the regulatory structural perspective, we have made
massive changes to the requirements for trade largely with NATO
and other friendly countries that have radically reduced the overall
regulatory burden for primarily small- and medium-size countries.
So that is baked into the system.
10
So when you bring about a change like that, whenever you go

from something that forever before this required a license every-
where all the time and the small company never had to think
about what country, what end use, what it was going into, just get
a license for everything, that raises all the difficulties and the bur-
dens described in the testimony presented to your panel yesterday
and today. And that is where our education and outreach efforts
come in. Every available resource that we have in our entire office
is dedicated to nothing other than to conduct panels to go out and
visit companies, to do online training resources, everything that we
can think about to solve that.
Chairman CHABOT. Thank you.
Mr. NILSSON. Once the changes get baked in, then it becomes
easier.
Chairman CHABOT. Let me move on to anotherthank you.
As I had mentioned before, and as you are aware, one of our Sub-
committee hearings met yesterday and we had some small business
folks commentating and giving us their experience on this. And in
the testimony that the Subcommittee received yesterday, we heard
that some clients struggle with missing, incomplete, or contradic-
tory definitions of underlying export principles. What effort is the
administration making to address these issues? And either one of
you are welcome to answer the question.
Mr. WOLF. You are going to love what we are going to publish
here in the next couple of months because we have been, over the
last couple of years, working on a large rule to largely harmonize
all of the underlying and structural definitions between my set of
regulations and his set of regulations. The final rule will be out in
the next few months, and we have been making changes in that
regard. The two sets of regs evolved differently in different orbits
for the last 40, 50 years, and they are either Latin or Greek. I com-
pletely acknowledge and agree with everything that was said yes-
terday about the difficulties in comparing between the two sets of
regs, but in about two or three months, you are going to see a very
large regulation that is going to take the same words, the same
phrases, and largely the same structures between his regs and my
regs, and to the extent that they warrant being made the same,
will be made the same. And this all leads to the ultimate objective,
which neither Brian nor I gotactually, why do you not do the ul-
timate objective since I have been talking so much about where we
are leading.
Mr. NILSSON. Yeah. The ultimate objective of this is all the
work that we are doing is a prerequisite, a prerequisite to the even-
tual nirvana in export controls where our agencies would merge
and we would have a single export control agency that has a single
export control list. I mean, actually, in the early days of ECR, at
the request of Representatives Berman and Ros-Lehtinen, the GAO
did an assessment and did a comparison of our five closest allies
for how are their Export Control Systems are structured and how
it compared with our vision of a single licensing agency, a single
control list, a single primary enforcement agency, and a single IT
system to rule them all. The answer was that everyone else and
our closest trading partners, the British, the Canadians, the Japa-
nese, the Swedes, and the
11
Mr. WOLF. Other friendly countries.

Mr. NILSSON. One otherI forgethad all separately come to
the same common sense conclusion. All of the work that we are
doing is tailored toward that because all the stuff, while I gave him
my pivot blocks, eventually we should be able, the way we have
structurally done this, to merge the list together to where these
will still be treated as less sensitive. It will be easier to export
those. For the items that are the most sensitive items that provide
us with a critical military intelligence advantage, they would still
be warranting the level of control that I am required to do by stat-
ute on the Arms Export Control Act.
Chairman CHABOT. Thank you. Thank you. My time has ex-
pired.
The ranking member is recognized for 5 minutes.
Ms. VELA ZQUEZ. Thank you, Mr. Chairman. You know, we hold
a lot of hearings on this Committee and focus on improving the cli-
mate for small businesses to really thrive. And I can say today that
I like what I hear. It sounds good. Execution, of course, is very im-
portant, and to that point I would like to address my first question
to both of you. While coordination and cooperation among agencies
is a primary goal for improving the system, we heard some com-
plaints from freight forwarders about the role CBP has in this proc-
ess and how delays due to their own confusion hinder their compa-
nies. What kind of outreach and education are you doing for gov-
ernment employees to expedite approvals and, of course, to reduce
confusion?
Mr. WOLF. That was a terrific comment yesterday. We did, at
BIS, a whole tour of several Customs and Border Protection offices
over the course of last year, but there is always a great deal of
turnover and it is a very large agency, so that comment yesterday
and your comment just now reminds us that we need to make sure
to keep doing that over the course of this year and follow-on years.
When you have any sort of change that is as massive as what we
have done, you have to spend a lot of time educating not only the
exporters, but other parts of the U.S. Government so that they are
comfortable as well. Because, remember, the system had been
baked in for about 40 or 50 years, and given the absence of a lot
of definitions on key terms, exporters and government officials had
largely made up their own rules. So what we are trying to do is
shake things up to get everybody on the same page. And your point
is very well taken. I can give you the numbers later on the number
of Customs officials that we educated and trained last year, and
sometime over the course of 2016, we will be doing the same, but
your comment is a reminder that we need to keep doing that on
a very regular basis.
Ms. VELA ZQUEZ. Thank you. Mr. Wolf, the BIS requested $115
million for Fiscal Year 2016, an increase of over $12 million over
the Fiscal Year 2015 enacted level, and received $112.5 million. Is
any of this additional funding spent on better assisting small busi-
ness exporters in any way?
Mr. WOLF. Well, not yet. It has only been about a month since
the budget has come into being. And it has gotten us back to the
level of giving us enough resources to be able to fill many unfilled
positions, some of which were in our education and outreach office.
12
So absolutely, a significant portion of that will be to education and

outreach. Yes, thank you.
Ms. VELA ZQUEZ. And Mr. Wolf, yesterdays panel of private
sector witnesses explained that many businesses under the ITAR
system are now getting lost in the ECR system and experiencing
significant complications. Are you doing anything to ease their
transition to operating under a new system?
Mr. WOLF. In two ways. Structurally, what we have done is that
we have had significant grandfathering periods of several years for
companies to get used to the new system before they were required
to transfer over to it. A company can have two and sometimes four
years before they have to go into the new system. With every one
of the rules we, as Brian described, have done as proposed rules
asking for massive industry output, the weekly conference calls,
and the hundreds of seminars and conferences that we have sup-
ported as well in order to educate people. And so, yes, we have
been doing it in two ways: one, structurally with significant delays
and implementation, allowing people to transition over; and then
second, education and outreach.
And then third, just a complete recognition, and we ask compa-
nies about this at the beginning where we said if we were going
to do this very large transition in the system, it is going to be very
hard for several years. You are going to have to completely rethink
everything that you got used to over the last 50 years in how ex-
port controls work. Is the long-term gain of the reduced regulatory
burden and the simplified system worth the short-term pain in get-
ting used to what those new rules are and getting off of old prac-
tices? And almost overwhelmingly exporters said yes. So that is
why we have done what we have done for the national security ob-
jectives that Brian laid out very well in his opening.
Ms. VELA ZQUEZ. Thank you.
Mr. Nilsson, in July 2013, the State Department successfully
transferred its export licensee database and software platform to
the one used by the Department of Defense. The Department of
Commerce was scheduled to begin using it in early 2014. As a re-
sult, the three largest departments involving export licensing are
now on a single IT platform. Can you describe whether the creation
of a single IT platform allowed the Departments of State, Com-
merce, and Defense to more effectively administer the Export Con-
trol System?
Chairman CHABOT. And the gentleladys time has expired, but
you can answer the question.
Ms. VELA ZQUEZ. Thank you, Mr. Chairman.
Mr. NILSSON. Yes. I can report that the transition took us
longer than we had anticipated. We actually did not fully transi-
tionthe Commerce Department, Department of Energy and the
other parts of the State Department did not fully transition to EX-
PORTS database until October 2015. But the beauty of us all being
on one system is that previously we were all on separate IT sys-
tems, and so I could never see what Kevin had approved and I
could never see what Kevin denied, which is also even of more con-
cern, and vice versa. And so now by having everybody on the same
IT system, we as a whole government can tell collectively what the
U.S. Government has approved and not approved for export.
13
The beauty also of us now up on a single platform is that now

we are able to turn our attention to creating a single portal so that
exporters would only have to go to one place to be able to file a li-
cense application or any other of these types of authorizations or
determinations that they seek from the government. We had done
some preliminary work on that in 2010, but then realized we need-
ed to wait until we had everybody on the IT platform first. We
have returned to that work now. We are in the early days, but it
is ongoing, and the beauty of that will be particularly helpful for
the small- and medium-size companies because as you come in
through a single portal, it will guide you as you fill out your appli-
cation for where you need to go. Therefore, they do not have to fig-
ure out if they are filing at the wrong agency. We will be able to
sort that out electronically for them.
Chairman CHABOT. Thank you very much. The gentleladys
time has expired.
The gentleman from Kansas, Mr. Huelskamp, who is the chair-
man of the Subcommittee on Economic Growth, Tax, and Capital
Access is recognized for 5 minutes.
Mr. HUELSKAMP. Thank you, Mr. Chairman. I appreciate you
holding this hearing. Gentlemen, thanks for joining us today and
trying to get a very quick up-to-speed understanding of export con-
trol reform. I know you have been working on this a long time, 5
or 6 years initiative of the administration. I appreciate the efforts.
My question though is what is taking so long in Categories I, II,
and III? And I see from your website or the government website
absolutely no effort is reported on that. So, and that would be the
firearms, guns, and ammunition categories. I will note for those lis-
tening that you have completed the missiles portion, IV; explosives,
V. Satellites, nuclear, chem bios made some progress as well, but
for some reason, Categories I, II, and III have been sitting out
there for 2 or 3 or 4 years. I do not know who would answer that
and explain what the reason is for the delay.
Mr. NILSSON. Sure. I own those categories so I will answer the
question. The prioritization of the categories was really based on
the remarks from Secretary of Defense Gates when we did the roll-
out in April 2010, where he saidI have outlined the three objec-
tives of the reform initiativebut the SecDefs view was that we
needed to prioritize based on interoperability with allies. And so
the categories that we have been doing are based on those that pro-
vide the best benefit for interoperability with our key allies. We
have also systematically been working through those. We have not
come to Categories I, II, and III yet. We have done some prelimi-
nary work on them, but we are committed to finalizing the initial
review of all the categories this year.
Mr. HUELSKAMP. Is there an interagency group recommended
to move forward on that?
Mr. NILSSON. Yes. It is the same seven departments that have
been working on all of the categories, and so we have done work
on all 21 categories from the start. We are just not quite there for
publishing proposed rules.
Mr. HUELSKAMP. Exactly why are those categories not making
progress, and when will we make progress?
14
Mr. NILSSON. Well, we are committed to publishing, finishing

the initial review, and having those categories done this year. The
primary reason
Mr. HUELSKAMP. This year
Mr. NILSSON. Yes, in 2016.
Mr. HUELSKAMP. Well, this administration is going to run out
of time.
Mr. NILSSON. Yes.
Mr. HUELSKAMP. Again, there is absolutely no progress. You
have got proposed rules in 2011, 5 years ago, for like Category
VIII, and it is glaring. I just do not understand why those three
have absolutely no progress. In terms of this sheet, even though
there have been recommendations from the interagency group that
you move forward. When was that recommendation made?
Mr. NILSSON. We were working on rules in 2012 on all 21 cat-
egories. Again, it has been a prioritization for those categories
meeting the Secretary of Defenses priority for those that contribute
to interoperability. In the final category
Mr. HUELSKAMP. And he has not been the Secretary of Defense
for a while now.
Mr. NILSSON. Yes.
Mr. HUELSKAMP. But my question is, I still do not understand
why these three categories do not have any progress on them.
Mr. NILSSON. Primarily because we are prioritizing those that
are key for interoperability with allies. In our firearms category,
that category warrants reform just as all the other categories. But
over 90 percent of what I control in that category are not being ex-
ported to governments or militaries, so there is not an interoper-
ability issue with regard to those. But that begs the question that
they certainly warrant going through reform just as all other sec-
tors warrant going through reforms. And so some industries have
not benefited yet from reform, that is firearms, that is large manu-
facturers of things like howitzers. It is people that do toxological
agents, do chemicals. We will finish the job.
Mr. HUELSKAMP. Those are all in Categories I, II, and III?
Mr. NILSSON. Those are all in the categories that have not yet
been deployed and finalized.
Mr. HUELSKAMP. Okay. Well, some of those are not I, II, and
III, obviously.
Mr. NILSSON. That is right.
Mr. HUELSKAMP. But you have made a proposed rule on a
number of those already. My question is Categories I, II, and III.
When can I expect
Mr. NILSSON. This year.
Mr. HUELSKAMP. This year?
Mr. NILSSON. This year.
Mr. HUELSKAMP. This administration?
Mr. NILSSON. We will finish. We are going to finish the USML
this year.
Mr. HUELSKAMP. Have the rules not been almost approved all
the way up the chain and proposed those?
Mr. NILSSON. They have not been finalized yet. So, again
Mr. HUELSKAMP. Who has not signed off on them? I am just
trying to get
15
Mr. NILSSON. The seven departments have not signed off on

them for what the rules would propose. But we are committed to
doing proposed rules on those categories as all other categories.
Mr. HUELSKAMP. Well, there are firms that are waiting on this
and have been waiting years trying to fix
And you were given, I think, $10 million additional to finish
some of these things in the current fiscal year. So are we going to
get done in the current fiscal year, or are you talking about next
fiscal year before we even get done? When you say current
year,
Mr. NILSSON. Well, we need to go throughthe way the process
works is we do proposed rules. We digest the public comments on
those to see what adjustments we need to make, and then at that
point, then we would draft final rules, and then we would publish
final rules.
Mr. HUELSKAMP. Sure.
Mr. NILSSON. Then there is a delayed effective date to allow
each affected industry to be able to have time to transition to the
new rules. That is the process for every category. So that process
will run for Categories I, II, and III, just as we are in the midst
of Categories XII, XIV, and XVIII.
Chairman CHABOT. The gentlemans time has expired.
Mr. HUELSKAMP. Thank you, Mr. Chairman.
Chairman CHABOT. Thank you.
Mr. HUELSKAMP. I had a prop if that would help last longer.
Chairman CHABOT. We like props.
Mr. HUELSKAMP. Thank you, Mr. Chairman.
Chairman CHABOT. The chair would just note that there is con-
siderable, I think, suspicion by many members, at least probably
half the members on this Committee, that this administration, be-
cause it is not particularly considered to be a friend of guns or
ammo, that this is sort of a willful neglect on their part at least,
and the irony is that because of this attitude towards concern
about the administrations attitude towards guns, there has been
a boon in sales of guns and ammos during the administration. So
I think that is probably the underlying sentiment of my colleagues
questioning there.
I would now like to recognize the gentleman from New Jersey,
Mr. Payne, for 5 minutes.
Mr. PAYNE. Thank you, Mr. Chairman.
Let us see. I am just trying to gather myself after that. Thank
you, Mr. Chairman.
Mr. Wolf, in the 2014 budget, the Bureau of Industry and Secu-
rity processed 30,953 export license applications. BIS approved 83
percent of the applications, returned 16 percent without action, and
denied 1 percent of them. Can you tell us, can you take us inside
the BIS review process and explain how you make a determination
on each application and what industry and sector had the highest
denial rate?
Mr. WOLF. Sure. The wayfor items that are subject to the
Commerce regulations, and our volume has not quite doubled, but
moved from about 23,000 to about a little over 36,000 since the be-
ginning of the reform effort for items that are on longer subject to
their regulations. A company will submitwell, first, it will go
16
through the analysis of determining whether their item is subject

to our regulations and determining whether a license is required
for that destination. So that is the first step, because under our
regulations the answer is that it depends upon what country you
are shipping to about whether a license is required. Then, if a li-
cense is required to that destination, the regulations say to the ex-
porter, you can go through and see if one of our exceptions apply.
If it is an export to a friendly country for a certain item, then you
will not need a license if you follow these conditions. And so, for
example, under license exception Strategic Trade Authorization,
which is one of the hallmarks of the reform effort, there have been
over 23,000 shipments of items where exporters have determined
a license is not required where prior to the reform effort a license
was required.
So let us say they get to the point where an exception is not
available but a license is required, they, through an electronic sys-
tem, send in information about end use, end-user destination,
value, country, what the end use is going to be, and a description.
We, Commerce, will go through that and determine if all the infor-
mation is there and sufficient, and then we forward it out to the
Department of State, the Department of Defense, and Department
of Energy for them then to further defer out to other parts of their
agencies for review as to whether is a national security or foreign
policy issue with the approval, denial, or conditioning of that li-
cense. Within a set period, roughly 30 days, under an executive
order, they will get their answers back in to us. In most cases, all
of the agencies agree and we will send back an approval or a denial
or an approval with conditions limiting what they had asked for
initially. In those very rare cases where there is a disagreement,
we have an escalation process up to the Assistant Secretary and
beyond, a process within the government to resolve disputes among
the agencies. Once the disputes are resolved, then electronically a
document goes back saying you have permission to export to these
end users for these end uses. That is the essence of how the process
works.
Mr. PAYNE. Okay. And what was the denials? What is the larg-
est sector of denials?
Mr. WOLF. So given that the largest volume of what we are
dealing with now is in the aircraft and engines category in absolute
numbers, those tend to be among the higher either denial or RWA
rates just based on absolute numbers. In terms of percentage deni-
als, it would be in areas of night vision and optics where there are
significant limitations or conditions about how those commercials
items would be used overseas that could be potentially used for a
bad end use. So the answer depends if it is an absolute or a per-
centage-based number.
Mr. PAYNE. Okay. Well, I appreciate your testimony today. It is
very refreshing to have an entity come before us and are really
working to reduce the bureaucracy and meld together and, you
know, I wish you continued success in that effort.
Mr. WOLF. Thank you.
Chairman CHABOT. Does the gentleman yield back? Okay,
thank you. The gentleman yields back.
17
The gentlelady from New York, Ms. Meng, who is the ranking
member of the Agricultural, Energy, and Trade Subcommittee who
held the hearing yesterday, is recognized for 5 minutes.
Ms. MENG. Thank you, Mr. Chairman and to our Ranking Mem-
ber Velazquez, and to our witnesses for being here and for the
great presentations.
I know that, Mr. Wolf, you spoke a little bit about education and
outreach initiatives through BIS, and I would love to hear some
more. Mr. Nilsson, I am wondering how you provide such assist-
ance, specifically regarding the U.S. Munitions List. How do you
work with the SBA Export Assistance offices? And do you have
staff in these offices who can assist a potential small business ex-
porter who has a USML classified technology product and has
never exported before, and just how this process works?
Mr. NILSSON. Yeah. The State Department, we actually do not
have staff who are in the SBA export centers. We do, in partner-
ship with the Commerce Department though, coordinate our regu-
lations so that they are actually shared with the SBA and shared
with the Export Assistance Centers, so they see the rules rather
than having to just rely on seeing them in the Federal Register or
relying on our websites. But we do have them on our websites. We
do outreach and training. We actually work closely with a number
of organizations around the country, particularly with the Society
for International Affairs, which is a nonprofit organization which
hosts tailored export control sessions around the country on the
U.S. Munitions List.
We also, you know, I think we mentioned earlier, we have a
number of decision tools and guidelines so that you can walk
through a decision tree for how to engage our controls that we have
on our website. We also have a dedicated team that does nothing
but talk to people on the phone and answer questions. Last year
we did a little over 19,000 phone call counseling sessions with com-
panies. We also answered a little over 22,000 emails of people com-
ing in and asking questions. We also coordinate with the other six
departments, and we have a single website that is an administra-
tion-wide website where everything that we do is in one spot, so
it is sort of a one-stop shop that is intended to guide and help pro-
vide assistance to companies. Then we participate with our sister
agencies, with regional organizations, to do outreach and training.
We did a little over 700 last year.
Mr. WOLF. So a few other points. Prior to the reform effort,
there were about a dozen different parts of the U.S. Government
that maintained lists of individuals and companies against which
there were sanctions or prohibitions or limitations on dealing with.
These came from different parts of Commerce, from State, from the
Treasury Department and elsewhere, and one of the early things
that we did in the reform effort at the Commerce Department is
that we took on the responsibility for consolidating all these var-
ious lists that are pumped out on a daily basis by the U.S. Govern-
ment of entities and persons against which there are some sort of
sanctions or limitations, and we have consolidated that all into one
list administered by Commerce that we make free and available in
a downloadable format for exporters. Tat has been a significant im-
provement for exporters.
18
As I mentioned, the 300 or so conferences that we did last year,

an entire office that handled about 33,000 phone calls from export-
ers answering generally very basic questions about how the system
works. We are redrafting parts of the regulations and the defini-
tions, as Brian mentioned, so that you do not have to do a sort of
guesswork as to whether something is or is not controlled. I was
a practitioner in this area for a long time before joining the govern-
ment, and it was as much lore as it was law. People could not actu-
ally believe the regulations in front of them because it was done
by reputation or lore, or black magic, as opposed to actual bright
line definitions. In addition to defining the terms, we are defining
them in such a way as that someone can go onto one of these deci-
sion tree tools that Brian and I are creating on our websites, go
through and answer a series of questions, yes or no objective
questions, and always get to the right answer as a matter of law,
and thus, not need expensive outside counsel to be able to go
through and make those determinations. As I said, education and
outreach is absolutely vital to what we do, not just for the sake of
the small companies, but for the mission itself, because if they can-
not understand and comply, then the national security and foreign
policy objectives are not met.
Any other ideas or suggestions or attention that this Committee
could help us bring to that effort or suggestions, you know, we are
all ears, and we are thrilled that you are engaged in participating
and helping us on this.
Ms. MENG. Thank you so much. I know I am just about out of
time, but I just wanted to ask my last question. Lastly, just a note
on the commercial relationship with our closest ally, Israel. In De-
cember 2014, President Obama signed into law the U.S.-Israel
Strategic Partnership Act of 2014, which provides in part that the
administration shall take steps so that Israel may be included on
the Strategic Trade Authorization One list. If I could request that
you advise me in writing what steps have been taken as required
by the law and what more needs to be done in order to fulfill this
requirement. Thank you, and I yield back.
Chairman CHABOT. The gentlelady yields back, and we would
ask that the panel comply with the gentleladys request. Thank
you.
We will move into a second round now, and I will recognize my-
self for 5 minutes.
We heard from one of our small business witnesses at the Sub-
committee meeting yesterday that delays at the Directorate De-
fense Trade Controls sometimes lasted over 90 days and that clas-
sifications were occasionally kicked back between the DDTC and
BIS, resulting in further licensing delays up to 3 weeks. What is
the explanation for this delay, and what effort is being made to ad-
dress these concerns, Mr. Nilsson?
Mr. NILSSON. Sure. That is a good question, so thank you.
We have a process called the Commodity Jurisdiction Determina-
tion Process, and that is where exporters can come in to us and ask
whether or not I have jurisdiction for the item or Kevin has juris-
diction for the item. That is a process that has been in place a long
time. When President Clinton did a reform initiative, he issued
new directives as to how to improve the process. Because of the
19
vagueness and the lack of specificity in the Munitions List, it be-

came increasingly difficult for companies to know whether or not
their items were subject to our list. Then President Bush, in his re-
form initiative, also issued new guidelines for how to run that proc-
ess at the end of his administration.
So where we are now is we actually anticipated that we would
have a surge of such requests as a result of the changes that we
are making just based on companies wanting the comfort of having
something from the government to tell them whether or not their
item is subject to my list. We actually had the most number of com-
modity jurisdiction determination requests we have ever had in
2012. We did 1,367 CJ requests that we processed. Surprisingly,
with the numbers that are coming in, we expected spikes by cat-
egory as we have deployed new categories so that people would
have questions, like when aircraft first went live, we anticipated
getting a lot of commodity jurisdiction requests, and we have not
had that. We have actually had a relatively steady decline in the
number of CJ requests as a result of ECR. So last year we were
down to slightly over 1,000, but we have seen about a 13 percent
decline, and we attribute that because we have taken out that lan-
guage that I mentioned earlier where it says an item is specifically
designed, adapted, modified, or configured for anything above, and
now it is an enumerated list. My list is working as intended as we
are transitioning.
We will always process CJs if someone asks for one, if they want
that clarity and they want that piece of paper to say that, yes, it
falls under Category VIII(h) of the ITAR or not. In that regard, we
think the system is working as intended and we are not having the
spike that we thought we would have.
With regard to license applications, companies have had a his-
tory of coming in to the State Department and asking for author-
ization where they may not specify in great detail what is on that
license application because, again, because of the vagueness of my
own list pre-ECR. Now they do have the challenge of knowing more
specifically about what they are requesting on an export license ap-
plication. In some cases, we will return that application without ac-
tion if it is not my jurisdiction. And in each category, similar to
what I mentioned on CJs, in each category that they have gone
live, we have had a spike in return without actions with people
coming in just for clarification because, again, they wanted a piece
of paper from us coming back to say it is no longer our jurisdiction;
go see the Commerce Department. So it provides them the comfort
level and it provides them the piece of paper so that if a Customs
agent stops them at the border, they have a piece of paper from
me to be able to answer that question.
Chairman CHABOT. Thank you. Let me cut you off there be-
cause I have a little over a minute left and I want to get to one
more question.
This one is for you, Mr. Wolf. Among a broad spectrum of busi-
nesses, particularly amongst small businesses, the staff that they
can devote trade compliance issues and programs oftentimes it is
just not what they would probably like to do because they have so
many other things that they are getting hit with. Does the admin-
istration take this kind of reality of a situation out there in the
20
small business world into consideration when you are working with
these programs?
Mr. WOLF. Oh, absolutely, for the two reasons or ways in which
I described earlier in terms of the structure of what we are doing
and the reduction of the burden of items that move and our philos-
ophy and mindset and the resources that we devote to education
and outreach. Personally, I do every day because that is where I
came from. I was a counselor to large and small companies for 17
years before joining the government, and know very, very well the
difficulties they have and had in complying with these regulations.
Every day I bring that experience in to trying to make the system
more understandable for them. We have not actually completed by
any means, but we have moved a dramatic way in that regard.
Think about this little company that makes the pivot blocks.
Think about all those documents that I described that used to be
required and all those regulatory requirements that used to exist
in order to trade in these items prior to the system. Those largely
no longer exist for the vast majority of trade. The number of times
I talk with a small- and medium-size company where they go from
having to have their compliance staff to administer 100 Manufac-
ture License Agreements and Technical Assistance Agreements,
these large complex agreements, under their system down to a very
small number of pieces of paper under our system is dramatic. I
hear it everywhere I go.
We can always find situations of individual companies where
something is not working or is not clear or they have a 3-month
delay on a classification request or a license, but in the aggregate,
the data are such that the overall regulatory burden structurally
is dramatically reducing.
Chairman CHABOT. Thank you very much. My time is expired.
The gentlelady is recognized for 5 minutes.
Mr. Nilsson, ITAR license application must be reviewed within a
60-day timeframe. On average, how long does it take for this appli-
cation to be reviewed?
Mr. NILSSON. Sure. That requirement comes as part of Presi-
dent Bushs Export Control Initiative where he issued a directive
in SPD 56 in 2008 that required me to process a license within 60
days. Our processing times have actually gone up as a result of
ECR. I would say the last full year before we started making
changes to the list we did close to 90,000 licenses, and our average
processing time was 19 days. Last year we did about 44,600 li-
censes, so it was almost half of what we were doing previously be-
cause I have given all the easy cases to Kevin, and our processing
times have gone up to 27 days. The reason being is because the
pivot block cases were easy, and so these are easy cases to process,
and so it actually helped me keep my average processing times
quite low. When I gave Kevin all the easy cases, that leaves me
with the hard cases. Anyway, yeah, I am not taking jurisdiction
back.
As a result, that actually is sort of the whole point, was that the
items that are left on my list are the most sensitive items, and so
we want our licensing offices within State and the Department of
Defense to have the time to really look at these cases that warrant
21
the level of control. It is the higher wall around a smaller yard that
Secretary Gates often spoke of.
Mr. Wolf, there is evidence to suggest that many foreign compa-
nies actually avoid U.S. companies when searching for products
due to the increasingly strict export regulations. Foreign customers
will often buy a more expensive, non-U.S. source part just to avoid
our Export Control System. This is particularly true when the
international traffic in arms regulations apply. Mr. Wolf, at a time
when we are trying to increase American manufacturing, are there
other reforms or actions that can be taken to ease the burden on
competition?
Mr. WOLF. Well, what you described in your question is the es-
sence of what I have been living for the last six years, the ITAR-
free movement. The Defense Department did a terrific job several
years ago describing the harm to the U.S. satellite industrial base
that resulted from ITAR controls, as required by statute, by the
way, for all commercial satellite spacecraft and related items. That
created the very situation you have described of a disincentive for
non-U.S. companies to avoid U.S. origin content for the very reason
that you described. Fortunately, working with Congress on a bipar-
tisan basis, we were able to get those controls removed and allowed
for a more tailored control for our satellite and space industrial
items.
To answer your question about what next, because what you de-
scribed, again, is the essence of why we are doing what we are
doing for the less sensitive items to the countries that are not sub-
ject to embargos is to continue on, finishing up, revising the re-
maining categories, fixing them over the years as technologies
change, threats change, to correct mistakes that we have made,
and eventually get into the export nirvana of a single agency under
a single list, which is something we will not be able to complete
now, but all of the work that we have done these last 6 years are
all the groundwork to get to that point. This is a multiyear effort
to accomplish the very point that you were describing, again, never
forgetting that these controls exist for a reason, the national secu-
rity and foreign policy reasons of there are some items to some end
users for some end uses we do not want. In getting to that point,
you described the difficulty that was described on the panel be-
cause under the old system it was very easy for the practitioner,
for the freight forwarder to know when a license was or was not
required. The downside is it has the negative effect that you de-
scribed very well. The system thus in tailoring it creates more com-
plexity, but eventually it will achieve the objectives that you just
described.
I yield back.
Chairman CHABOT. Thank you. The gentlelady yields back.
The gentleman from Florida, Mr. Curbelo, who is the chairman
of the Subcommittee on Agriculture, Energy, and Trade that held
the Subcommittee hearing yesterday on this issue is recognized for
5 minutes.
22
Mr. CURBELO. Thank you, Mr. Chairman. Thank you for your
leadership on this issue. Thank you for your hearing, and I thank
the ranking member as well.
Yesterday, we learned a lot from witnesses who have experience
in dealing with all of these complex issues, including a small busi-
ness owner from my district in South Florida. I wanted to ask,
through your agencys collaboration with the SBA, do you consider
the Office of International Trade Staff to be trained well enough to
address many of the questions small businesses have regarding the
complex export control regulations? I want to focus in on this be-
cause it was a recurring theme yesterday where a lot of these peo-
ple just could not find answers.
Mr. WOLF. We would not expect the SBA to be an export control
authority or expert in this, and in my testimony it describes a
great deal of outreach and interaction we have had with the SBA.
Your question reminds me that we need to keep doing that over the
course of 2016 to get to the point that anybody at SBA or any other
small business organization knows enough at least to be able to
refer it to State or Commerce for us to then take it from there. It
really would not be practical to try to deputize effectively other
agencies to come up to speed and become experts on this. I think
the best that we can hope is that they are sensitized to the issues
and the options and the resources that are available within the De-
partments of Commerce and State.
Mr. CURBELO. I think what at least I would request is that
there be a special emphasis on small businesses. Again, the large
corporations, they can figure this out. They can hire teams. They
can hire consultants. It is the small businesses that really get left
waiting for answers and sometimes never figure this out. I think
I would probably speak for most members here on the Committee
and say if there could be a greater emphasis, focus, dedication of
resources to helping referrals from the SBA, for example, that I
think could make a big difference.
Mr. WOLF. I agree. Any other ideas or suggestions or help in
terms of visibility or people to talk to or companies to make sure
are in the loop, I look forward to working with you on that. I com-
pletely agree with everything you said.
Mr. NILSSON. I will add that we have been partnering with
SBA to make sure that they see the rules and the proposals and
the finals as they come through, but one of the things that we can
take back is that Kevin and I both have dedicated staff that do
nothing but outreach and counseling and answering the phones,
and so we can make sure that the folks in SBA know who to call
on what. We can certainly take that back and make sure that that
is happening.
Mr. CURBELO. Thank you.
Thank you, Mr. Chairman.
Chairman CHABOT. Thank you very much. The gentleman
yields back.
And we want to thank our witnesses for their testimony here
today. I think you have shed some light on an area that can be
quite complicated, but nonetheless is extremely important and par-
ticularly to the small business community, and that is obviously
our principal responsibility is to make sure that we are looking out
23
for the small businesses all across America who actually hire 70
percent of the new folks that come into this economy. So we appre-
ciate your testimony.
I would ask unanimous consent that members have 5 legislative
days to submit statements and supporting materials for the record,
and if there is no further business to come before the Committee,
we are adjourned. Thank you very much.
[Whereupon, at 11:13 a.m., the Committee was adjourned.]
24
APPENDIX
Opening Remarks of
Kevin J. Wolf
Assistant Secretary of Commerce for Export Administration
House Committee on Small Business

Hearing
Export Control Reform: Challenges for Small Business?
February 11, 2016
Thank you, Chairman Chabot and Ranking Member Velazquez.

The purpose of export controls is to create an enforceable regu-
latory net over the export, reexport, and transfer by foreign and do-
mestic persons of specific types of commodities, software, tech-
nology, and services to specific destinations, end uses, or end users
for various national security, foreign policy, and other reasons. Un-
less those affected by the regulations understand them, they cannot
comply with them, and the national security and foreign policy ob-
jectives of the controls will not be met. This is why outreach and
education, particularly of small- and medium-sized companies, is a
vital part of our mission. Hearings such as this and your continued
interest in the topic help us considerably. So, thank you again.
As with most areas of regulation, export controls are inherently
complex. Some items and activities warrant strict controls, many
warrant few controls, and others warrant a mix depending on the
circumstances of a particular transaction. Not all destinations, end
uses, and end users are of equal concern. Foreign policy concerns
and priorities change over time. Technologies evolve. Newly devel-
oped technologies can be extremely sensitive; others morph from
predominant military use to something that is in normal commer-
cial use. Controls are needed on end uses and end users of concern
even if the items involved are widely available or unsophisticated.
Subtle differences in fact patterns or technical characteristics of a
product can have significantly different outcomes in the scope of
control. Most controls reflect compromises in wording and scope
reached by dozens of like-minded countries in multilateral export
control arrangements. All reflect consensus views of the law en-
forcement, national security, foreign policy, and economic security
equities of multiple U.S. government agencies. Finally, the controls
are an aggregation of decades of individual statutory and regu-
latory decisions spread out over multiple government agencies writ-
ten and edited by hundreds of different individuals that have
accreted into the complex system we have today.
25
In the abstract, there are, in the extreme, two ways to make the
system vastly more simplerequire a license everywhere, all the
time, always for all items or all listed items or dont require a li-
cense at all unless specifically informed by the government. The
former, of course, would impose a massive and devastating regu-
latory burden on exports and require the creation of a U.S. Govern-
ment export control infrastructure far larger than what we have
today. The latter would not satisfy the national security and for-
eign policy objectives of the controls. There is thus an inherent ten-
sion in export controls between simple, broad regulations that con-
trol too much and impose an excessive licensing burden, on the one
hand, and tailored, detailed controls that control just the right
amount but are initially more complex to work through, on the
other. This is the daily challenge for export control policy makers
deciding where the lines should be drawn. This Administration has
focused on trying to tailor the controls to reduce the overall regu-
latory burden as much as possible without compromising the na-
tional security and foreign policy objectives of the controls. This
means that education and outreach are vital to the success of the
effort.
Although there are many U.S. government agencies that control
the export of items in one form or another, the two agencies with
the largest portion of the responsibility are represented here before
you todaythe Commerce Departments Bureau of Industry and
Security (BIS), which administers the Export Administration Regu-
lations (EAR), and the State Departments Directorate of Defense
Trade Controls (DDTC), which administers the International Traf-
fic in Arms Regulations (ITAR). I can assure you that both BIS and
DDTC management and staff are committed to administering their
controls in the least burdensome way possible without impairing
the national security and foreign policy objectives of the controls.
These are not just words. The Obama Administration launched
in 2010 the most fundamental reform of the system since World
War II. The reform focuses our controls on those items that must
be rigorously protected while ensuring that our controls do not
drive foreign customers to foreign suppliers and U.S. companies off-
shore. Two significant parts of this plan are nearly complete(1)
the transfer of less sensitive military and commercial satellite
items from the ITAR to the EAR to allow for more flexible controls
over trade with allied countries and (2) the update and harmoni-
zation of key EAR and ITAR terms and principles to reduce inher-
ent regulatory burdens. Once companies learn and adapt to the
new structuresand we recognize that the transition process can
be difficultthe regulatory compliance obligations, particularly for
small- and medium-sized companies, will generally be materially
reduced.
First, the revisions identify more clearly what is actually con-
trolled. For too long, determinations about what was and was not
controlled, and which list governed an item, were, as a practical
matter, more a function of lore rather than law. Over the last six
years, we have engaged in a massive industry outreach effort to
ask for help in re-writing most of the controls in ways that indus-
try can better understand. Every change was proposed for com-
26
mentsome more than onceto ensure that we got it as clear as

possible.
Second, the rebuilding of the control lists movedbut did not de-
controlhundreds of thousands of items, mostly parts and compo-
nents predominantly manufactured by small businesses, and re-
lated technologies from States regulations to the more flexible
Commerce regulations. The transfer to Commerces regulations of
these less sensitive military and commercial satellite and space
items eliminates many regulatory burdens. For example, for the
items that have moved to the Commerce list from the State list:
There are no registration requirements. This eliminates
the expense of paying to register and the burden and expense
of preparing and submitting these forms or fees. For those
companies with a limited product line where all their items
have transferred, this allows for a significant reduction in bur-
den and cost.
There are no fees for submitting license applications. For
small companies exporting products with low margins, this is
a significant advantage.
There are no requirements to get permission merely to
manufacture or to market abroad. The Commerce regulations,
of course, still control the flow of goods, technology, and soft-
ware, but with far shorter and simpler forms than States Man-
ufacturing License Agreements and Technical Assistance
Agreements. Most Commerce authorizations also have signifi-
cantly fewer conditions and regulatory burden requirements
than do States agreements.
There are no per se requirements to have a purchase order
for each application. This means that an exporter can resolve
its licensing obligations before knowing whether it has a sale,
which saves time. It also dramatically reduces the total num-
ber of applications and licenses needed over the duration of a
regular relationship with a foreign customer that will involve
multiple purchase orders.
Except in situations involving military and satellite items
destined to countries subject to embargoes, the Commerce
rules generally do not have a see through rule. This is the
rule that means that an item is always subject to U.S. jurisdic-
tion even when incorporated into foreign-made items or uncon-
trolled items. For trade with non-embargoed countries, the
Commerce regulations have a de minimis rule, which means
that if the value of controlled US-origin content is less than
25%, then the foreign-made item is generally not subject to
U.S. jurisdiction. This change largely eliminates the incentive
for foreign companies in non-embargoed destinations to design-
out U.S. origin items, particularly parts and components. It
thus bolsters the health and competitiveness of the U.S. indus-
trial base because those in non-embargoed countries will gen-
erally no longer need to second source parts and components
elsewhere.
Most importantly, the Commerce regulations have mul-
tiple license exceptions that do not exist in the State regula-
27
tions, and which State is prohibited by law from creating. In

most cases, these exceptions allow exporters to ship their prod-
ucts to allied and other non-embargoed countries without the
need to apply to the government for a license, assuming the
parties are willing to abide by various recordkeeping and other
conditions to help ensure compliance with the exceptions. One
of the exceptions developed as part of the reform effort, License
Exception Strategic Trade Authorization (STA), allows for sig-
nificant reductions in regulatory burdens associated with trade
with NATO and other close allies. It enhances our national se-
curity by making our systems more interoperable.
For all these reasons and others, the Export Control Reform ef-
fort helps small businesses, particularly defense exporters, by in-
creasing the security of supply from small companies that are the
second and third tier suppliers in the defense industry, facilitating
timely and reliable supplier relationships between U.S. exporters
and their foreign customer base, and enhancing their long-term
health and competitiveness. These sectors include aerospace, mili-
tary vehicles, marine vessels, space, satellites, and electronics.
There are many other actions Commerce has taken to make com-
pliance for small and medium-sized companies easier. For many
years, the Departments of Commerce, State, and Treasury have
maintained eleven separate lists of entities that are sanctioned for
various national security and foreign policy reasons, including for
illegally exporting arms or other items, violating US sanctions, en-
gaging in terrorism, and trafficking narcotics. If a company or indi-
vidual appears on the list, U.S. firms must do further research into
the individual or company in accordance with the administering
agencys rules before doing business with them. To ease this review
process, an interagency task force created the Consolidated Screen-
ing List (CSL) in 2009 so that all eleven lists can be accessed in
one place. Further, in July 2015, the Department of Commerce cre-
ated a new web search tool to help US companies easily search the
CSL. This CSL web search tool has Fuzzy Name Search capabili-
ties enabling companies to search the CSL without knowing the
exact spelling of an entitys name. This is particularly helpful when
searching for names on the CSL that have been transliterated into
English from non-Latin alphabet languages. All of these actions
taken together have greatly benefitted U.S. companies by reducing
the time needed to search all eleven lists and by providing a free
alternative to costly third-party software vendors.
We also revised a number of license exceptions, such as those for
temporary exports, exports of replacement parts, and exports to
governments in order to broaden their scope and to make them less
burdensome. They still need work but they are better. Weve in-
creased the license validity periods and greatly expanded, as a mat-
ter of practice, the flexibility of our licenses so that they can be tai-
lored to specific transactions. We revised and significantly reduced
the support document requirementsrequirements that were
among the most complicated sections of the EAR. We have sim-
plified the license conditions on approved licenses.
28
As evidence of how important education and outreach are to our

bureau. I would like to give you some representative examples. In
Fiscal Year 2015, we estimate that our outreach programs resulted
in over 100,000 interactions with U.S. and foreign persons. We con-
ducted over 350 events for industry, including the weekly telecon-
ferences that I host on specific Export Control Reform topics, the
seminars that are held throughout the country and overseas, the
industry group meetings at which we speak, our Technical Advi-
sory Committee meetings, the small- and medium-sized business
conferences that we attend, and the webinars we produce. We con-
ducted outreach events in 18 states and ten foreign countries.
Weve conducted or participated in 51 seminars in the United
States.
Our seminars and online services are an effective way for small-
and medium-sized exporters to understand their responsibilities as
members of the regulated community. We have published several
blog posts on the Commerce Department website on how export
control reform benefits small businesses and entrepreneurs, and we
worked with the Small Business Administration (SBA) to share
this information through their social media networks. We have
added over 6,700 new users to SNAP-R, our electronic license ap-
plication system, bringing the total number of users to over 36,400.
The on-line interactive decision tools we have developed received
over 33,000 hits. The BIS website has additional tools and re-
sources in our Exporter Portal. In addition, our Office of Exporter
Services counseling line provides exporters with free counseling via
telephone. Our export counseling staff has answered over 33,000
telephone and e-mail inquiries.
We have partnered with SBA on a number of efforts. For exam-
ple, BIS Under Secretary Eric Hirschhorn conducted a training ses-
sion for SBA international trade staff from 68 district offices and
20 export assistance centers across the country. The training was
designed to help SBA staff identify companies who may be covered
by export control regulations and direct them to BIS resources.
Through such sessions, BIS utilizes SBAs network to help inform
small- and medium-sized businesses.
BIS has also collaborated with SBA and other organizations rep-
resenting the interests of small and medium-sized enterprises at a
number of conferences. At our annual Update conference, we
partnered with SBA, the National Small Business Association, the
Maryland Small Business Development Center (MDSBDC), and the
Minority Business Development Agency. In 2015, BIS sent out-
reach, regulatory policy, and compliance staff to the Association of
Small Business Development Centers (ASBDC) annual conference
in San Francisco and counseled approximately 150 SBDC advisors.
BIS representatives spoke at four programs sponsored by ASBDC
in collaboration with the Bureau of the Census to educate exporters
and freight forwarders on properly reporting required information
in the Automated Export System. As a result of this partnership,
ASBDC has increased the number of export control-related work-
shops and exhibitors at its annual conference, and begun to offer
a certificate in international trade and related-regulations to its
membership.
29
BIS has held open fora on SME comparative trade issues and
participated in state-level trade conferences to facilitate trade. In
2015, the Presidents Export Council Subcommittee on Export Ad-
ministration, one of BISs industry advisory committees, prioritized
its work with the National Institute of Standards and Technologys
ExportTech program, a national export assistance program that
targets small- and medium-sized businesses. BIS representatives
participated in a webinar sponsored by FedEx that was intended
to reach FedExs small- and medium-sized exporting customers.
For this year, we plan to sponsor or co-sponsor 23 seminars, in-
cluding the annual Update conference and the West Coast Export
Control Forum, in thirteen different states. We will develop and
conduct many new webinars and will post additional new edu-
cational videos on our website. BIS staff, including the Under Sec-
retary and I, will continue attending as many compliance con-
ferences and company training events as possible. I will also con-
tinue to answer, every Wednesday at 2:30 over an open, free con-
ference call, every question that comes into BIS. These calls have
been highly popular, particularly with small- and medium-sized
companies, which generally do not have large legal teams or com-
pliance staffs.
In addition to the short- and near-term rationalization benefits
for small- and medium-sized companies, this work has established
the framework for what could be an even more significant rational-
ization and simplification of the system, which is the creation of a
common set of export control regulations and then, eventually, with
the help of Congress, a single export licensing agency that would
administer a single set of regulations with a single list of controlled
items. In addition, now that the internal work on a common IT sys-
tem for interagency review of Commerce license applications is al-
most complete, were renewing the effort we started a few years
ago to complete a common Internet-based license application portal
for both Commerce and State and a single license application form
common to both the EAR and the ITAR. We will need a lot of in-
dustry input and advice as we move to this next step to make sure
it is modern and effective.
Additionally, under ECR, the President established the Federal
Export Enforcement Coordination Center, to which the Commerce
Department contributes several personnel. Among its mandates,
the Center will coordinate law enforcement public outreach activi-
ties related to U.S. export controls. In the current U.S. export con-
trols system, there are several federal regulatory (including Com-
merces BIS and States DDTC) and enforcement agencies (BIS Of-
fice of Export Enforcement and U.S. Immigration and Customs En-
forcements Homeland Security Investigations), involved in out-
reach to industry often targeting the same exporters or industry
sectors, leading to confusion regarding proper reporting or disclo-
sure to government agencies. Coordination of these efforts will re-
sult in a more seamless, efficient, and holistic U.S. government ap-
proach to private sector outreach to include small businesses.
In conclusion, the ECR goal of creating a new export control sys-
tem defined by what we called the Four Singularitiesa single
30
control list, a single licensing agency (SLA), a single IT, and a pri-
mary export enforcement coordination agency was structured with
the issues of small- and medium-sized companies in mind. We rec-
ognized that small firms account for more than 99 percent of all
employers, 98 percent of all exporters, and a third of the annual
value of U.S. exports. They are the engine of technological innova-
tion and it is thus in our national and economic security interests
to ensure that these small businesses can successfully navigate the
nations export control system. We understand that getting used to
the new system can be a burden. This is why we have stretched
the implementation of the changes out over a number of years,
with significant delayed effective dates and multiple opportunities
for industry to comment on the proposed rules years before they be-
came effective. I am completely confident, however, that once the
essence of the reform effort is in place and companies have adapted
to it, it will properly implement the national security and foreign
policy objectives of the controls in the least burdensome way pos-
sible. I look forward to your ideas, suggestions, and help for this
part of our mission. Thank you.
31
Testimony of Deputy Assistant Secretary of State for Defense
Trade Controls Brian Nilsson at the House Small Business
Committee Hearing on Export Control Reform
February 11, 2016
Good morning Chairman Chabot, Ranking Member Velazquez

and members of the committee. I welcome the opportunity to speak
with you today about the Administrations Export Control Reform
(ECR) initiative. Export controls are a key tool in our national se-
curity and foreign policy toolkit yet they historically have not re-
ceived the attention that they deserve largely because of their de-
tailed, technical nature. The Administrations early and regular en-
gagement with the Congress, and in particular this committee,
since the beginning of the reform initiative helped us administer a
transparent reform effort in which many companies, large and
small, actively participated. This committee in particular helped us
develop the partnership with the Small Business Administration
that Assistant Secretary Wolf mentioned, so again let me thank
you for your continued interest and support.
The U.S. Export Control System is distinct from many of our al-
lies in that we have had two licensing agencies, one for munitions
items administered by the Department of State and the other for
dual-use items administered by the Department of Commerce. This
structure made sense when governments relied heavily on tech-
nology that was uniquely developed for military use. Generally, it
took a significant amount of time for defense technologies to mi-
grate into commercial use. By design and by the nature of their de-
velopment, the commercial and defense technology realms did not
intersect as much as they do today.
During this time the United States also was largely self-suffi-
cient: we almost exclusively owned the technologies we needed to
meet many of our defense needs and we procured enough for our
own military to sustain a robust defense industrial base, both the
prime contractors and the many small- and medium-sized busi-
nesses that supported them. The threats we faced were also more
easily defined, with a largely bi-polar world. These realities were
reflected in our export control laws and our implementing regula-
tions, and they served us well.
But these realties have changed. The Berlin Wall came down; the
Warsaw Pact was dissolved, closely followed by the end of the So-
viet Union. Within a few years, the Pentagon started to procure
more off-the-self commercial items. The threats we face today are
more diffuse and often come not from nation states but from non-
state actors. Our export control system did not evolve sufficiently
to meet these new threats.
At the beginning of the Administrations reform initiative in
2009, the Intelligence Community was tasked with assessing the
current and anticipated threats facing the United States, to help
32
inform our deliberations on what we should control and how. That

assessment concluded that by 2025, virtually all next generation
technologies would come from the commercial sector and then find
their way into defense applications. That means an almost 100 per-
cent reversal of the development trends that justified having two
different export control systems.
As a result of these new realities, our separate systems increas-
ingly collided, with similar items on both export control lists based
on subjective design-intent criteria. This resulted in increased am-
biguity, complexity, and costs to all involved. Large companies
could afford Washington lawyers to help them navigate the system;
most small- and medium-sized firms could not. The clash was exac-
erbated by other fundamental changes: the United States no longer
exclusively owns most technologies; many of our defense needs,
both in developing systems and in fielding them, are done jointly
with our allies; and we no longer procure enough ourselves to suffi-
ciently sustain our industrial base to ensure our companies remain
viable at all tiers of supply to meet new or future national security
needs.
The cornerstone of the Administrations effort to address these
changes has been to re-write the Department of States United
States Munitions List (USML), as the scope of the USML has the
greatest impact on the regulated community and what we control
drives all other aspects of the export control system. Prior to re-
form, the USML was a relatively short list of 21 categories of con-
trolled itemslike aircraft, helicopters, drones, and lighter-than-air
aircraftnot based on specific technical parameters but on whether
they were specifically designed, modified, or equipped for military
purposes. This design-intent was also applied to all the parts, com-
ponents, accessories, attachments, and associated equipment for
these aircraft without enumeration. That meant we controlled mili-
tary aircraft, as well as very nut, bolt, screw, windshield wiper, and
seat belt buckle on that aircraft.
The aircraft category has typically constituted the largest num-
ber of export license applications we process every year, with over
22,000 export licenses in 2012, that last full year before our re-
forms began to take effect. Of these regulations, about 76 percent
were for these unidentified parts, components, accessories, attach-
ments, and associated equipment, typically manufactured or sup-
plied by small- and medium-sized businesses.
We have been engaged in a multi-year, labor-intensive technical
review led by the Department of Defense to open each category of
the USML and to enumerate those items that provide the United
States with a critical military or intelligence advantage. Those less
sensitive military items that do not meet this standard are being
systemically moved to the Department of Commerces jurisdiction
to allow them to be exported to our allies under less rigorous re-
quirements. This prioritization allows us to better focus our limited
resources on the items, destinations, end-users, and end-uses of
greatest concern, while improving interoperability with allies and
bolstering our defense industrial base by allowing our parts and
components manufacturersmany small- and medium-sized busi-
33
nessesto more easily support systems we have already entrusted

to our allies and partners.
In my aircraft example, I can report that since our new controls
went into effect for this category and the gas turbine engine cat-
egory in October 2013, we have seen an 83 percent reduction in li-
cense applications for parts, components, accessories, attachments,
and associated equipment. That means that most of those compa-
nies making or supplying those items, may no longer need to reg-
ister, pay annual registration fees of at least $2,250, pay per-li-
cense application fees as may be required, no per-purchase order
licensing requirements, no agreement licenses, and generally no
see through rule that requires subsequent Department of State li-
censes for exports, re-exports, or re-transfers for their items incor-
porated into other items, until those other items permanent impor-
tation into the United States or their ultimate destruction.
These reforms are only effective if we keep them current. Prior
to ECR, the Department of States control list was largely static.
As a result of ECR and as part of our business practices going for-
ward, the Department of State has fundamentally changed how we
do business.
First, we can best keep our list current in partnership with all
involved in the systemour interagency partners, the Congress,
our allies, and industry. It is our companies, large and small, that
are our front line of defense. They must be able to clearly under-
stand and implement our rules, if they are to be effective, to pro-
vide for our collective security. We have put in place a process so
they can advise us on proposed changes that we are contemplating,
to tell us if we got it right and equally important, if we got it
wrong. They can also advise us as technology evolves in their sec-
tors, so we can make continuous improvements to our list.
Thus far, we have published proposed rules for 18 of our 21 cat-
egories. We received significant public input on which we relied in
part to publish final rules revising 15 categories that have now
gone into effect. As a result, the Department has seen a 56 percent
reduction in licenses for these categories. By our most recent tally,
based on the volume of license applications received, the largest
categories are categories I (Firearms), XII (night vision equipment),
XI (Military Electronics) and VIII (Aircraft)/XIX (Space and Mis-
sile), with approximately 10,000; 8,000; 8,000 and 7,000 licenses re-
spectively. Of these, Categories I and XII have not yet been pub-
lished in final form. The revised categories with the largest vol-
umes are Military Electronics and Aircraft.
Of the remaining six categories, we have published three for pub-
lic comment. Two of these three, for Category XII (night vision
equipment) and for Category XIV (toxicological agents), are our
most complicated, and for the night vision equipment category, we
are finalizing a second proposed rule to publish for public comment,
to ensure that we get it right. We will then turn to preparing final
rules for the other two. This leaves three categories that cover fire-
arms, large guns, and ammunition to publish for public comment.
We plan to turn to these categories once we complete our work on
the current three that are in process. The Department is working
34
towards reviewing the remaining USML categories, and is com-

mitted to finalizing an initial review of the entire USML in 2016.
Going forward, we will routinely solicit public input on a cat-
egory-by-category basis and, drawing upon our own interagency ex-
pertise and the public comments, will publish proposed rules to up-
date each category. Earlier this week, on February 9, the Depart-
ments of State and Commerce published proposed rule of updated
controls for the aircraft and gas turbine engine categories, with
public comments due by March 25, 2016, and the public input pe-
riod for four more categories concluded on December 6, 2015.
We will continue this transparent process going forward. The
Arms Export Control Act requires the President to conduct a peri-
odic review of the list and to remove those items that no longer
warrant control. This requirement is fully consistent with regu-
latory reform, one of this committees top priorities. The President
has also provided further guidance in Executive order 13563 of
2011 on requirements for improving regulations and the regulatory
review process.
Second, we are committed to continued enhanced engagement
with the exporting community. All our notices, proposed rules, final
rules, decision trees, and fact sheets are published on our website,
as well as the Administrations central ECR site. We have also ex-
panded our outreach efforts. In Fiscal Year 2015, we organized or
participated in over 700 events, ranging from conferences and
webinars to end-use monitoring checks and individual company vis-
its. Our response team fielded over 19,000 phone calls and 22,000
e-mail inquiries. These actions were all done in addition to fre-
quent meetings we hold with industry.
Third, we are changing how we manage our controls. Prior to
ECR, each of the licensing agencies and the departments and agen-
cies participating in the license application review process were all
on independent information technology (IT) systems, or had no IT
system at all. A key decision in phase one of the reform initiative
was the selection of the secure Department of Defense internal li-
censing database, called USXPORTS, as the single licensing data-
base. Moving to this system would ensure that each licensing agen-
cy has full information on what the United States Government has
collectively approved or denied for export to ensure that current
and future licensing decisions are fully informed ones. The Depart-
ment of State moved to USXPORTS for processing munitions ex-
port license applications in July 2013 and for considering Depart-
ment of Commerce export license applications in October 2015.
To aid industry, particularly small- and medium-sized compa-
nies, in compliance efforts, the Departments of State, Commerce,
and the Treasury deployed a consolidated screening list comprised
of all three departments various public screening lists that can be
downloaded by exporters to self-screen parties to proposed trans-
actions to facilitate compliance. When the initial list was deployed
in December 2010, it contained over 24,000 line items of names, in-
cluding variant spellings and pseudonyms, and was downloaded on
average about 32,000 times per month. Since that time the Admin-
istration has deployed incremental improvements to this tool, in-
35
cluding automated updates any time a department makes a change

to one of its lists, a fuzzy logic search function, and new options
for downloading for use with existing screening programs. The list
is now being used to conduct more than 100,000 screens per day.
These improvements were prerequisites to building a single por-
tal through which exporters can submit requests and receive li-
censes and other guidance documents. Preliminary work on a sin-
gle portal in 2010 was placed on hold pending completion of the li-
censing agencies transition to USXPORTS. The development of the
single portal has now resumed, with the goal of deploying a smart
single interface through which exporters can submit all requests
and the system will guide them through the process to correctly
route the request to the appropriate licensing authority. This
should be of particularly benefit to small- and medium-sized com-
panies.
To support these significant changes, the Department of State
last year created and filled a new Chief Information Officer posi-
tion within the Directorate of Defense Trade Controls to oversee
the Department of States collaboration with these IT projects and
to undertake a comprehensive review to modernization all aspects
of the organizations work. This effort is underway and, when com-
pleted, the core aspects of our business will be fully automated. Im-
plementing these modern business tools and practices is antici-
pated to significantly improve our administration of the munitions
export controls.
Fourth, the Department of State will continue to provide foreign
policy oversight of our export control system for all controlled items
whether administered by the Department of State or Commerce.
The export of less sensitive military items moved to Commerce ju-
risdiction will continue to be guided by all aspects of the Conven-
tional Arms Transfer policy including human rights reviews. These
changes will also not diminish the key role that the Department of
Defense plays in considering exports to ensure they are consistent
with our national security interests. ECR is not a decontrol of these
less sensitive military items but a prioritization of how the Execu-
tive Branch mitigates risks. Export controls are about risk mitiga-
tion.
Export Control Reform has improved how the export control com-
munity inside and outside the government interact, allows us to
prioritize our controls to better focus our resources of the threats
that matter most, improve interoperability with allies, and bolster
the health and competitiveness of the U.S. defense industrial base,
particularly small- and medium-sized companies. ECR began as an
initiative and is now a process. That process could best be adminis-
tered going forward by the eventual consolidation into a single ex-
port control agency with a single control list. This is the logical
conclusion of the initiative.
We look forward to continue working with Congress in admin-
istering our new export control system. I look forward to your ques-
tions. Thank you.
36
Responses to Questions for the Record from Rep. King
Departments of State and Commerce
Q1. On what specific date does the administration plan on pub-

lishing the proposed rule to move US munitions List (USML) Cat-
egories I, II and III (guns and ammo) over? What is taking so long?
Wasnt the interagency work completed more than three
and a half years ago?
Hasnt the interagency group recommended to the admin-
istration that it publish the agreed upon proposed rules in the
Federal Register?
How long did it take the other categories to move after the
interagency work was completed?
Why are these three Categories taking so long?
During the House Small Business Committee hearing you
testified that the reason Categories I-III have not moved for-
ward is because of prioritization by Secretary Gates in 2010.
However, is it not true that the rules for Categories I-III were
ready to be published as early as 2012 but were delayed by the
Administration? What was the reasoning for the delay? Was it
for political purposes before the 2012 Presidential Election?
A1. In terms of priority in publishing rules, the Departments
focus, as well as that of our interagency partners, is to finalize the
significant number of proposed rule-makings currently in process,
which include revisions to U.S. Munitions List (USML) Categories
XII (lasers and sensors); XIV (biologics and toxins); and XIII (di-
rected energy weapons). In addition, to focusing on the review of
the USML, the Departments of State and Commerce are also fo-
cused on completing final rules harmonizing the definitions in the
export control regulations administered by both departments. The
schedule for publishing ECR rules is based on the ECR priorities,
which include increasing interoperability with our allies while en-
hancing their ability to acquire the technologies needed to address
our mutual security interests, reduce unwarranted regulatory bur-
dens, improve the competitiveness of our defense industrial base,
and establish an adaptive control system.
Although important, revisions to export controls on non-military
firearms are not squarely within the scope of the national security
objectives of the reform effort. So although policy discussions began
and drafts were written in 2012, we suspended those efforts to turn
our attention to Categories more central to our ECR reform objec-
tives, as the export of firearms has a separate and unique set of
export control considerations. Moreover, upon reflection and in cal-
culating the time remaining in the second term, we decided to keep
work going on an aggressive schedule to publish proposed and then
final revisions on the remaining military categories so that the re-
visions on the military categories could be completed before the end
of 2016.
37
The Departments thus decided to set work on proposed revisions

to non-military firearms and ammunition categories aside in favor
of completing the work on the military categories. The depart-
ments plan was to re-engage on the review of Categories I, II, and
III when it was clear that they would be able to finish the work
on the military categories. When comparing the firearms rules to
the length of time it takes on other categories the answer varies.
Some of the categories were completed within 1 year and other cat-
egories (e.g., Category XII) has been subject to interagency work
and policy discussion for at least five years. Based on the current
schedule, our goal would be to finish the initial review of the ECR
Categories in 2016.
Q2. In the consolidated Appropriations bill passed by Congress
last year, the Bureau of Industry and Security (BIS) received an
additional $10 million over previously enacted funding levels,
$112,500,000. The House report that accompanied the Commerce,
Justice, Science and related agencies (CJS) appropriations bill
read, The increase for the Bureau of Industry and Security (BIS),
while not quite up to the Presidents request, will allow BIS to con-
tinue its efforts to protect national security while coping with an
increased workload of export license applications. Anticipation of
moving USML Categories I, II and III over to BIS was part of the
expected increased workload the Appropriations Committee was
referencing when it provided this increase. That has not happened,
yet. These funds were provided for the current fiscal year. It ap-
pears that your department has willfully disregarded the guide-
lines put forth by the United States. Why havent you used the in-
crease in funds for their intended purposes?
Commerce Department Response:
A1. We respectfully disagree with the observation that the de-
partment has willfully disregarded the guidelines put forth by the
United States Congress. The Bureau is using the appropriated
funds precisely as it described it would in its budget submission.
Moreover, during the hearing, Members made it clear that such
funds should be used to the extent possible for outreach and edu-
cation of small and medium-sized companies, which the bureau
fully intends to do in addition to its other requirements. These re-
quirements include the processing of nearly twice as many license
applications and related transactions that the Bureau has assumed
responsibility for as a result of the reform effort.
As described above, there is a schedule for addressing the export
controls on non-military firearms and such schedule follows the na-
tional security objectives of the Export Control Reform effort. With
the funding that BIS has received, it will have the resources to con-
tinue its work on the reform effort, which includes a substantial in-
crease in its licensing and related responsibilities and its education
and outreach efforts.
38
State Department Response:

A2. I defer to the Department of Commerce, Bureau of Industry
and Security on its use of appropriate funds.


House Hearing, 114TH Congress - Export Control Reform: Challenges For Small Business? (Part Ii)

Uploaded by

Document Informationclick to expand document information

Copyright:

Available Formats

House Hearing, 114TH Congress - Export Control Reform: Challenges For Small Business? (Part Ii)

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

House Hearing, 114TH Congress - Export Control Reform: Challenges For Small Business? (Part Ii)

Uploaded by

Copyright:

Available Formats

EXPORT CONTROL REFORM: CHALLENGES FOR

SMALL BUSINESS? (PART II)

COMMITTEE ON SMALL BUSINESS

Small Business Committee Document Number 114043

U.S. GOVERNMENT PUBLISHING OFFICE

For sale by the Superintendent of Documents, U.S. Government Publishing Office

KEVIN FITZPATRICK, Staff Director

THURSDAY, FEBRUARY 11, 2016

partments share jurisdiction over the export control process. Add to

STATEMENT OF KEVIN J. WOLF

els of sensitivity for different countries of control in order to in-

a sensitive foreign missile component and everything in between.

And so on aircraft alone, last year our licensing dropped to about

to help exporters walk through the regulations that we have on our

So when you bring about a change like that, whenever you go

Mr. WOLF. Other friendly countries.

So absolutely, a significant portion of that will be to education and

The beauty also of us now up on a single platform is that now

Mr. NILSSON. Well, we are committed to publishing, finishing

Mr. NILSSON. The seven departments have not signed off on

through the analysis of determining whether their item is subject

As I mentioned, the 300 or so conferences that we did last year,

vagueness and the lack of specificity in the Munitions List, it be-

House Committee on Small Business

February 11, 2016

Thank you, Chairman Chabot and Ranking Member Velazquez.

mentsome more than onceto ensure that we got it as clear as

tions, and which State is prohibited by law from creating. In

As evidence of how important education and outreach are to our

February 11, 2016

Good morning Chairman Chabot, Ranking Member Velazquez

inform our deliberations on what we should control and how. That

nessesto more easily support systems we have already entrusted

towards reviewing the remaining USML categories, and is com-

cluding automated updates any time a department makes a change

Responses to Questions for the Record from Rep. King

Departments of State and Commerce

Q1. On what specific date does the administration plan on pub-

The Departments thus decided to set work on proposed revisions

State Department Response:

You might also like