Decontrol Freaks.

How Clinton won the Cold War at the Commerce Department and saved Silicon Valley

WHEN PRESIDENT BILL CLINTON took office in 1993, the Cold War had already logged three years in the history books, but it was raging on in some halls of the U.S. government. Thanks to a national security establishment obsessed with keeping American technology out of the hands of the Evil Empire, no company in the United States could export a computer more sophisticated than the ancient IBM 486 without fulfilling smothering license requirements from the U.S. Department of Commerce and passing endless reviews by the Department of Defense.

While the old 486 couldn't even play Solitaire, congressional hawks and White House Luddites were convinced that, if exported, it would rev up nuclear weapons plants from Beijing to Baghdad. As a result, the East-West thaw had done nothing to loosen the export-control policies of Clinton's predecessor, George Bush. As Soviet satellite states drifted into their own orbits, the Bush administration acted as if Mikhail Gorbachev had been readying a new shipment of missiles for Cuba. The free-trade bent of the Clinton administration, though, has since banished the export-control hysteria of the Bush years, shelving it alongside relics like bomb shelters.

Despite his frequent capitulation to the Pentagon and national security hawks over foreign policy, Bill Clinton stared down both of them to loosen the reins on the country's burgeoning high-tech industry. With a series of targeted decontrols for computers, chips, and encryption software, Clinton's Commerce Department unleashed the U.S. info-tech industry on export markets from South Korea to Argentina, contributing in no small way to this country's recent unbridled economic growth.

No-Flow Chart

Where Republicans usually fight for reducing regulation and getting government off the back of business, when they turn their attention to export controls, they act like red-tape-loving Democrats. Over the years, Republicans have worked to throw up all sorts of obstacles to selling U.S. products abroad, arguing that sophisticated U.S. products might end up aiding some of our most ruthless enemies. Several decades of such Cold War obsessions have created an export-control system designed to torture anyone wishing to do business overseas. Here's how it works:

If you export high-tech commercial items, you must comply with regulations administered by the Commerce Department's Bureau of Export Administration. If you export munitions items--or commercial items that the government has classified as munitions--you must deal with the licensing requirements maintained by the State Department's Office of Defense Trade Controls. Nuclear-related items? Try the Nuclear Regulatory Commission or the Energy Department. Shipments to embargoed nations? Direct all inquiries to the Treasury Department's Office of Foreign Assets Control. And sitting in the middle of it all is the Defense Department, which reviews just about every strategic export license application received by the U.S. government.

The interagency patchwork developed shortly after World War II, when the United States and its allies erected the Coordinating Committee for Multilateral Export Controls (CoCom), an export control alliance commonly referred to as NATO's economic arm. Although CoCom controls applied exclusively to the Soviet bloc, the U.S. created parallel alliances to curb the spread of weapons of mass destruction--nuclear bombs, chemical warheads, and missiles--to developing countries. The trick that CoCom and Co. tried to pull off--and one that has bedeviled Washington policy makers for decades--was how to balance the national security dimension of export controls with the imperatives of free trade and the competitiveness of U.S. industry.

In the security-crazed Cold War years, export control decisions almost always trumped corporate wishes--and in some cases, with good reason. However, with help from hawks in the White House and Congress, export-control policies allowed the self-perpetuating bureaucracy to wrap its tentacles around every last container awaiting shipment at U.S. ports and excesses pop up everywhere in the U.S. Code:

* When Rwandans took to slaughtering each other with primitive weapons in the mid-1990s, the U.S. added machetes to its control lists.

* When Iranian terrorists attacked Persian Gulf oil platforms in the late 1980s from rubber boats, the U.S. imposed export licensing restrictions on inflatable rafts. Scuba gear, helpful to mine-planting Iranian divers, also became a strategic commodity.

* Earlier this year, Kodak learned that its "Fun Saver 35" submersible camera, designed for photo-ops in backyard pools across the country, was in fact subject to special anti-terrorism controls. Even though the camera implodes at depths greater than 12 feet, the government fears that the bad guys will use it to take pictures of U.S. surveillance equipment on the ocean floor.

The export-control establishment also specializes in tacking crazy conditions onto export licenses issued to U.S. companies. The most creative examples come from the Defense Department, which discerns a conspiracy behind even the most innocuous transactions. A few years back, for instance, Defense reviewed an application from a U.S. company to export computers to a chocolate factory in Brazil. Before Defense would consent to the shipment, it required assurances from the company that the computers would not be diverted for nuclear weapons applications.

Great Leap Forward 

The export bureaucracy was playing its usual stall game when President Clinton took office in January 1993. At that time, export-licensing thresholds for computers--the most commercially significant commodity subject to controls--were pegged to 1990 technology. Under Commerce Department export control terminology, any computer exceeding a "composite theoretical performance" of 12.5 million theoretical operations per second (MTOPS) required a license for shipment. In layman's terms, a 12.5 MTOPS computer was a commonly available machine running on the now-ancient Intel 486 chip.

In a pattern that would repeat itself throughout the decade, computer techies spat out new chips that made the 486 obsolete in a hurry. By midsummer 1993, computer firms were preparing to mass-produce computers incorporating the first-generation Intel Pentium chip and Digital Equipment Corp.'s Alpha AXP chip, which would launch performance levels to 200 MTOPS, or 16 times the existing licensing threshold.

Yet export control agencies snoozed through those projections. Stuck in their Cold War habits and accustomed to decontrolling just enough technology to keep licensing officers busy, the bureaucracy tweaked the licensing level only to 67 MTOPS in August 1993. When industry protested, the agencies discussed another marginal deregulation, perhaps to 110 MTOPS. While the agencies spun their wheels, U.S. computer exports got stuck in the gears. Of the $30 billion in annual overseas computer sales in 1992, more than one-third was subject to Commerce licensing requirements and exhaustive multi-agency reviews.

On the campaign trail a year earlier, Clinton had promised Silicon Valley that he would ease its export licensing burden. Like exporters in other tightly regulated sectors, computer and chip makers argued that the restrictions not only posed a massive administrative hassle but also caused months-long shipping delays that damaged their reputation as reliable suppliers. Clinton was sympathetic to their arguments, in large part, because he understood the implications of the coming technological revolution.

There was a time--perhaps in the mid-1950s--when the U.S. held a virtual worldwide monopoly on militarily critical technologies, particularly in cryptography. Back then, it made sense to orchestrate selective embargoes to keep the Soviets and other rogues from enhancing their weapons systems and to maintain U.S. dominance.

Clinton never argued that some exports controls weren't necessary--indeed, exports of munitions and high-tech weaponry should be restricted and are tightly controlled today--but the products at the heart of the export debate were mostly consumer goods, products central to the growth of our information technology infrastructure.

And what Republican technophobes didn't realize was that computer technology had grown too fast for the U.S. to keep a lid on it. Not only could the high-speed microprocessors be carted out of the country in a bubble-gum wrapper, the U.S. no longer had a monopoly on computer, chip, and software development. The Japanese, Germans, and even the Chinese were rapidly developing homegrown tech sectors.

Even if the U.S. never sold a single 486--or Pentium III chip--outside its borders, rogue states would have no trouble obtaining them elsewhere. The technology was, in effect, uncontrollable. Realizing that export restrictions were merely suffocating American industry and leaving the U.S. at risk of one day having to import most of its technology, Clinton made a bold move: In September 1993, the White House announced a new licensing level for computer exports of 500 MTOPS.

Industry rejoiced, but national security hard-liners were outraged--and worried about the loss of U.S. superiority in key defense technology. Kenneth Timmerman, a critic of U.S. export sales to Iraq prior to the Persian Gulf war, called the deregulation "an open invitation to proliferators everywhere." Washington Post columnist Lally Weymouth wrote, "The new U.S. policy on export controls is good news for Syria, Iran, and North Korea--rogue states that have close working relations with one another." The right wing, moreover, fulminated in condemnations of a traditional ally in the trade control fight: the Defense Department.

Defense Secretary William Perry, a longtime proponent of lifting export controls, and his progressive deputies infuriated mid-level Pentagon employees, who had fought their entire careers against the very wholesale changes that the administration was pushing. But no force--not obstructionist bureaucrats, and certainly not the Republican Congress--could undercut the administration's determination to keep export controls ahead of technology. Over the past seven years, the Commerce Department has promulgated four additional computer decontrols as well as a deregulation of data encryption products.

Even if proliferation activists turned up IBM super-computers at Indian and Pakistani missile installations, the administration wouldn't likely backpedal on its liberal export-control policy. That's because it fears the collapse of the U.S. computer industry, which supplies critical equipment to the military, more than a few errant shipments of U.S. technology.

"The Pentagon needs [the high-tech industry] more than they need the Pentagon," says Commerce Department Under Secretary for Export Administration William Reinsch. "And in order to keep the industry healthy, you gotta let them export. That's a revolution in thinking about export controls."

In his drive to free high-tech companies from the export-control straitjacket, Clinton has forged a new consensus on the instrumentality of computer technology in weapons projects: Sure, computers may be integral in designing weapons, but they're also integral in tracking inventory at Wal-Mart or storing records at the municipal courthouse. And hard-liners' contentions on the lethality of computers lose currency with each passing day. For eight years, the international nuclear weapons club has remained stable, despite the glut of American-made computer technology at ports everywhere.

"Computers aren't a chokepoint," says Reinsch. "If you want to prevent nuclear proliferation, you control enriched uranium and centrifuge technology."

Computers are merely emblematic of the Clinton administration's successes in modernizing U.S. export-control policy across the board. Twelve years of national security obsession in the Reagan and Bush administrations had also left telecommunications companies, encryption software firms, and machine tool producers laboring under unreasonable licensing parameters. Loosening those restrictions met with varying degrees of resistance, depending on the product in question. It wasn't until January 2000, for example, that the administration finally removed most controls on commonly available encryption software.

The sluggishness of decontrol in this area is traceable to the rich history of U.S. leadership in code-breaking technology--an asset that the national security establishment has been loath to hand over to our overseas enemies. With the advent of the Internet, however, robust encryption software is produced by foreign companies and it can be downloaded by techies in suburban Detroit as well as in suburban Baghdad. Even the National Security Agency, the government's proprietary eavesdropper, agreed that it no longer made sense to control the uncontrollable.

Although national security types have trouble documenting the harm done by Clinton administration export control policies, industry has some hard figures on the asset side. From 1993 to 1999, high-tech exports from the U.S. jumped from $97 billion to $181 billion; the computer sector accounted for a sizable chunk of that growth, spurting from $31 billion in 1993 to $49 billion in 1999, according to figures supplied by the American Electronics Association. Computer industry jobs grew from 266,000 to 362,000 in the same period.

Quantifying just how much sales growth derives from liberalized export-control policies has tied congressional hawks and industry lobbyists in knots for years. But when you consider that computer sales rank among the top three U.S. exports, and that overseas customers--like all of us--want state-of-the-art equipment, adjusting the control levels takes on a bottom-line dimension.

Satellite

Clinton's accomplishments in the export-control arena seem even more significant if you match them up against what the Republicans in Congress have done on the issue over the past few years. Take, for instance, satellite exports.

Following allegations that U.S. satellite firms Loral and Hughes gave strategic technology to Beijing, the Republican-led Congress pushed through an amendment to the 1999 National Defense Authorization Act to damp down on satellite exports. Specifically, the legislation transferred authority for controlling commercial satellite exports from Commerce to the State Department, where satellites are categorized as a munition. Rep. Duncan Hunter (R-Calif.), who sponsored the change, aimed to keep U.S. companies from shipping satellites to China, a military power whose sophistication in missile propulsion grows with each satellite launch.

On that basis, at least, Hunter has succeeded: No U.S. company has exported a satellite to China since the law took effect in March 1999. And although Hunter never proposed crippling the U.S. satellite industry, he's doing that as well. According to Clayton Mowry, executive director of the Satellite Industry Association, the U.S. satellite firms' world market share has dropped from 75 percent to 42 percent in the first nine months of this year--a drop that exceeds all cyclical variations from previous years.

At the root of the plunge, say industry execs, lies the hesitancy of foreign firms to do business with overregulated U.S. companies. China these days is a hot market for satellites, and European firms hesitate to team up with American companies because the end product may well be subject to U.S. munitions export-control requirements. "This has scared away U.S. companies from bidding on satellites for companies with any ties whatsoever to China," says Mowry. "U.S. companies are worried that they would never get a license."

And to the everlasting astonishment of Congress, the Chinese satellite/missile industry marches on--even without U.S. participation. In November 1999, the Chinese claimed their "crowning moment" with the successful launch of the manned spacecraft Shenzhou-1, according to Spaceflight Now magazine. "Their space program is stronger now than when we started all this," says Jim Lewis, who just left a job as the Commerce Department's director of strategic trade and is now director of technology policy at the Center for Strategic and International Studies.

The satellite story essentially vindicated the Clinton administration's policies over the past eight years, which have effectively silenced the country's last Cold War relics--at least when it comes to international trade. "The hard liners have failed to deliver," says Lewis. "They said, `Do these things to affect weapons proliferation,' and we did these things and the only ones affected were U.S. industries."

ERIK WEMPLE, is the editor of The Export Practitioner and the Washington correspondent for Inside.com.