Early Returns: U.S. Export Control Reform Positive

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For decades, U.S. export control regulations have been a target of frustration for industry and government, both within and outside the country. The frustration led to episodic discussions by presidential administrations of reforming the system, followed by little action. Those whose careers have taken them to foreign shores to sell U.S. electronics have encountered exasperated if not furious customers promising never to buy another component requiring a U.S. export license. Others who have engaged the Departments of State or Commerce seeking a license — often beginning with the question of which agency had jurisdiction for a product — can likely tell stories of Kafkaesque experiences with ITAR, commodity jurisdictions, EAR99, end use and dual use.

Those who have experienced this history might find the “export control reform” that ushered in 2015 hard to believe, even miraculous. Yet, teams from the Departmentsof Defense, State and Commerce have patiently and steadfastly fashioned a major and encouraging reform.

Genesis

April 20, 2010. U.S. Secretary of Defense Robert Gates stood before the 400-member Business Executives for National Security (BENS) and outlined his vision for export control reform,¹ one piece of his broader mission to “adapt and reform America’s national security apparatus.” Gates wasn’t acting alone. The prior August, President Barack Obama made export control reform one of the initiatives of his administration.

Saying that the U.S. had one of the most stringent export control regimes in the world, Gates added “stringent is not the same as effective.” He said that what was being controlled with the existing policy was too broad, quoting Frederick the Great that “he who defends everything defends nothing.” The multi-agency bureaucracy for export control that was created to provide checks and balances was inefficient. Which agency had the authority and jurisdiction for a particular license was often confusing, both to exporters and government officials. Perhaps the worst issue was the friction the system caused with U.S. allies. “Finally, the current export control regime impedes the effectiveness of our closest military allies, tests their patience and goodwill, and hinders their ability to cooperate with U.S. Forces,” Gates said.

He was preaching to the choir. The audience knew the issues. They wanted to hear what he would do to fix the problems. The solution the Secretary of Defense outlined had been agreed upon by his counterparts at State, Commerce and Homeland Security as well as the Director of National Intelligence and the National Security Advisor. Although it would also require congressional action, presumably the heads of these agencies could make it happen — unlike the initiatives under previous administrations.

The ultimate export control reform objective articulated by Secretary Gates that day had four elements: creating a single export control list, using a single information technology (IT) system, issuing licenses through a single agency and coordinating enforcement through a single agency. In Gates’ view, “A single export control list will make it clear to U.S. companies which items require licenses for export and which do not.” He added that the single licensing agency “which will have jurisdiction over both munitions and dual-use items and technologies, will streamline the review process and ensure that export decisions are consistent and made on the real capabilities of the technology. This single entity would also reduce exporters’ current confusion over where and how to submit export license applications, as well as which technologies and items are likely to be approved.”

Figure 1 Export license decision tree, prior to export reform.

Gates said the process of export control reform would occur in three phases. Acting within its existing authority, the Executive branch would begin the transition to a single control list and licensing agency. Completing the effort would require legislation by Congress, which would be the third phase. The middle step would implement the single IT system to support the unified export control list and licensing system. While the vision of a single list and agency is not yet reality, significant change is occurring within the existing structure.

Export 101

Prior to reform, a company wishing to export a product (or service or technical data) first classified it as either 1) defense or 2) commercial or “dual-use.” The defense category captured products designed or modified for a military system or application, like the F-35 fighter. These “defense articles” were identified on the United States Munitions List (USML). The second category encompassed products developed for purely commercial markets, such as mobile phones, or products that could be used in either military or commercial applications (dual-use). A transistor is one example of a dual-use product.

The export of defense articles required a license issued by the Directorate of Defense Trade Controls (DDTC) of the Department of State and governed by the International Traffic in Arms Regulations (ITAR). The export of commercial and dual-use products was governed by the Bureau of Industry and Security (BIS), part of the Department of Commerce, per the Export Administration Regulations (EAR). BIS maintained a Commerce Control List (CCL) of products that, along with the purchaser and destination country, determined if the product could be exported and, if so, whether an export license was required.

Figure 1 shows the process a company would follow to determine whether a license was required to export a product. Confused? If so, companies could request a Commodity Jurisdiction (CJ) from the DDTC, which would determine if the product fell on the USML and was subject to ITAR. After ruling out the USML, a company could request a commodity classification from BIS, which would determine whether the product was governed by the EAR and then its Export Control Classification Number (ECCN). However, BIS could not say whether an item was on the USML.

Figure 2 Export license decision hierarchy following export reform.

More frustrating than the uncertainty of which agency had jurisdiction for a product was the inflexibility of the ITAR. The regulations treated the components of a system the same as the system. Exporting a bolt designed for a fighter was controlled essentially the same as the fighter. While the likelihood of getting an export license for a bolt would presumably be greater, the process was the same. This flood of licenses clogged the system, consuming resources that should have been focused on licenses truly important to national defense.

The first step to reform the export licensing system has been to pare the USML to only the defense articles that are deemed most important to U.S. national security. DDTC retains responsibility for issuing the export licenses for these items. Not-as-critical defense items have been transferred to BIS and categorized on a newly created group of export control numbers called the “600 series” on the CCL (and 9×515 for satellite items). BIS is responsible for issuing licenses for these transferred items. Figure 2 illustrates the control hierarchy post reform.

The USML comprises 21 categories, spanning ammunition to ships, directed energy weapons to toxicological agents.² By the end of last year, 15 of the 21 had been revised to move the not-as-critical items to the CCL. Two of the categories on the USML are relevant to the RF/microwave industry, and both have been updated: military electronics (category XI) and spacecraft and related articles (category XV). In paring the USML to just the defense articles that provide the United States with a critical military or intelligence advantage, the lists contain specific products and avoid, with some exceptions, “catch all” phrases.

The revised military electronics category identifies systems such as radar; electronic combat; command, control and communications; direction finding equipment; and equipment specially designed to test these systems. Below the system level, the USML logically captures application specific integrated circuits (ASIC) and programmable logic devices (PLD) that are programmed for these systems as well as printed circuit boards and multi-chip modules where the layout is “specially designed” for the system.

The list also identifies a few RF components as defense articles:

Circulators where the isolation is greater than 30 dB and any dimension is a quarter-wavelength or smaller at the highest operating frequency
Transmit or transmit/receive (T/R) modules that incorporate monolithic microwave integrated circuits (MMIC) or discrete RF power transistors, have electronically variable phase and a size small enough to enable a phased array
Digital radio frequency memory (DRFM) with better than 400 MHz instantaneous bandwidth and four bits or greater resolution
Certain vacuum electronics devices with multiple or sheet electron beams or cross-field amplifiers.

The revision includes a provision that “developmental electronic equipment or systems funded by the Department of Defense” will be on the USML beginning July 1, 2015. There are a couple of exceptions to this: if the contract identifies the product as “being developed for both civil and military applications” or a CJ determines that the EAR governs the product.

In category XV, pertaining to satellites and spacecraft, only two space-qualified components remain on the USML:

Certain MMICs that integrate a T/R module on a single die and
Low phase noise oscillators for space-based radar.

MMICs and Discrete Microwave Transistors

Exporting MMIC power amplifiers and microwave power transistors has long been a concern to the Department of Defense (DoD). In the 1980s and ‘90s, the DoD funded the early development of GaAs MMICs as an enabling technology for active phased array radar. DoD also invested in gallium nitride (GaN) to achieve even higher power than available with GaAs. Active phased arrays have revolutionized radar; they provide a strategic military advantage, and, understandably, the DoD wants to retain U.S. technology leadership. Restricting exports has been a bulwark of their strategy. U.S. industry and the DoD have long debated the best way to protect national security interests while not hindering the industry’s competitiveness in global commercial markets. Commercial markets for MMICs dwarf military applications, and GaAs and GaN process technology are found worldwide, in Europe, Japan, Taiwan and mainland China. Where to draw that line has been an interesting eddy in the wider current of export control reform.

Table 1

To govern commercial and dual-use products, the EAR has categories for “microwave monolithic integrated circuits” (3A001.b.2) and “discrete microwave transistors” (3A001.b.3). Historically, the requirement for an export license from BIS was determined by the operating frequency and average output power. Average power proved to be confusing, as the application (e.g., pulsed or continuous wave) really determined the average power, not the device.

During 2012 and 2013, BIS solicited industry feedback on a proposal to change from average to “peak saturated power.” They also subdivided the prior frequency range into more bands covering 2.7 to above 90 GHz. These revisions were proposed to the Wassenaar Arrangement, a consortium of 41 nations that harmonize export controls.³ In December 2013, the Wassenaar Arrangement formally adopted and incorporated these changes to their list of dual-use goods and technologies.

As the same changes were working their way through the U.S. bureaucracy to be incorporated in the EAR, a multi-agency team was developing the criteria for the new 600 series control for military electronics − ECCN 3A611 – that would result from revisions to the USML. The team added efficiency to the usual parameters of power, frequency and bandwidth to define which devices would fall on the Commerce munitions list. Assuming military applications demand higher efficiency, efficiency would be a clear differentiator to protect critical technology. The proposed thresholds for MMICs (ECCN 3A611.c) and microwave power transistors (3A611.d) were issued on July 1, 2014 and scheduled for implementation on December 30, 2014.

The 3A611 proposal was viewed with alarm by several MMIC suppliers and at least one commercial telecommunications system manufacturer. In response, representatives from several U.S. companies gathered in Washington to meet with government officials from BIS, DDTC, the Defense Technology Security Administration (DTSA), and other DoD organizations on August 15, 2014. The forum hosted by BIS allowed industry to provide feedback on the proposed 3A611 criteria. The industry group said that the efficiency requirements of commercial applications are often as great — even greater — than those of military systems. Further, they explained that efficiency is a nebulous specification, with multiple definitions and values that vary with how the device is biased and driven. If the new 3A611 guidelines were implemented, industry argued that exports for bona fide civil applications would be required to follow the more stringent licensing requirements. Cellular and WiMAX base stations, point-to-point radio for backhaul, satellite ground terminals, test equipment for communications and civilian radar were cited as markets that would be adversely impacted. One semiconductor company said that 39 products that previously did not require a license (i.e., classified as EAR99) would require licenses. All 39 of the products were sold internationally to commercial customers, some for more than a decade. The system manufacturer said the lack of a de minimis provision in 3A611 would force a redesign to use non U.S. MMIC suppliers. The government team asked each company to provide data on the specific products and associated revenue that would be affected, allowing them to understand the economic impact.

Table 2

On December 23, just a week before the 3A611 categories for MMICs and microwave power transistors were to become effective, BIS published a final rule in the Federal Register that eliminated 3A611.c and .d. The ruling stated “BIS did not adopt changes to the control based on fractional bandwidth, peak saturated power output, and/or power added efficiency because the agency found that attempting to designate some MMIC power amplifiers and discrete microwave transistors as civil and others as military based on those characteristics is impractical, and any resulting classification would not accurately reflect real world applications for those devices.”

However, the final rule added “national security” and “regional stability” controls to the existing 3A001.b.2 and b.3 ECCNs, except for civil telecommunications applications. This restricts the license exceptions for MMICs and discrete microwave transistors that are being exported for applications other than civil telecommunications. As explained in the ruling “These actions will allow the U.S. Government to examine in advance the exports and reexports of MMIC power amplifiers and discrete microwave transistors that pose the greatest risk of diversion or enhancement of potential adversaries’ military capabilities without imposing unnecessary licensing requirements on low risk transactions.”

Table 1 summarizes the performance thresholds for MMICs that require an export license (ECCN 3A001.b.2). Table 2 contains the same information for discrete microwave transistors (ECCN 3A001.b.3). Both tables are taken from the CCL as of December 30, 2014.

Friendly Licensing Officers

Kevin Wolf is the Assistant Secretary of Commerce for Export Administration (see Figure 3). He joined the Obama administration after spending 17 years with a Washington law firm that focused on export cases. Sworn in two months before Robert Gates spoke at the BENS conference, Wolf became the regulator and the export control reform champion at BIS.?As he has done dozens of times since 2010, Wolf rattles off the list of benefits spawned by export reform. “Commerce allows license exceptions,” he begins, the biggest being provisions associated with the 36 strategic trade authorization (STA) countries. These include replacement parts, limited value shipments and temporary exports. Unlike ITAR, the EAR has a de minimis provision that allows exports where the value of the product is less than 25 percent of the total value of the end equipment, so long as the ultimate end use is not in an embargoed country. BIS doesn’t require separate licenses for manufacturing, technical assistance agreements or proposals. Congressional reporting, registration and import are all simpler, and BIS doesn’t charge for licenses. He concludes that Commerce is very flexible, meaning they can tailor licenses, and adds “we have very friendly licensing officers.”

Figure 3 Kevin Wolf

Figure 3 Kevin Wolf, Assistant Secretary of Commerce for Export Administration.

Although it’s early in the process, Wolf is pleased with the initial results. DDTC is seeing a significant reduction in license applications and CJs, “especially for lower-level items.” That’s the intent. Although they hoped to have purely objective criteria for each of the products, it wasn’t possible with MMICs. They recognized that efficiency was not an effective discriminator between commercial and military so adopted an end-use definition, carving out civil telecommunications to minimize the adverse impact on industry. Even so, Wolf is “very grateful for the clarity,” which is better than before.

The view from industry is similar to Kevin Wolf’s. James Klein (see Figure 4) is president of the Infrastructure and Defense Products (IDP) business of Qorvo, the combination of TriQuint’s IDP business unit and RFMD’s Multi-Market Products Group (MPG). Qorvo is likely the largest RF/microwave semiconductor supplier with a portfolio in both defense and commercial markets. TriQuint’s Richardson, Texas facility is a “trusted source,” first accredited by DoD in 2008, and the company’s GaN technology has been developed with significant R&D funding from DoD. Qorvo is also a major supplier of MMICs for base station, point-to-point radio and optical markets.

Export control reform has been positive, according to Klein, although the change just occurred at the beginning of 2015. They saw 37 products move from the 3A001 classification to EAR99, due to the change from average to peak power; a few moved the other way. They are still learning about the Commerce licensing process for products that are not classified as civil telecommunications, such as automotive radar. He feels it’s premature to judge whether the changes will increase their international defense business. “It’s too early to tell.” If he has a concern, it’s that the initial rollout has been a little conservative, meaning the export thresholds don’t recognize the fast-moving trends in the commercial markets that push frequencies and power levels higher. As examples he notes LTE-Advanced and 5G, the latter moving to adopt millimeter wave spectrum for very high data rate links.

Klein sees Qorvo’s responsibility as helping government officials keep up to date with the market and international suppliers. “Qorvo has a broad portfolio of products, serving a wide range of commercial and defense-related markets. The new export regulations have been positive for products that are applicable to the civil telecommunications industry, which is a very important market for us. We will continue to work with the Department of Commerce to understand how the new rules are applied for defense and aerospace, and we are hopeful that we will see improvements in licensing speed and availability for that market segment going forward.”

Figure 4 James Klein

Figure 4 James Klein, president of the Infrastructure and Defense Products business at Qorvo.

Speaking unofficially, because he was not authorized to speak for his company, an executive with a manufacturer of vacuum electronics products sees the changes in export control as “overall positive.” Their non-classified defense products have moved from the USML to the 600 series category governed by BIS. “ITAR was a hazy, gray area subject to interpretation. It’s more predictable now, and I’m feeling much more comfortable.” The change has opened up their sales process, since they can submit most proposals under a license exception. “I’m loving that aspect of it,” he says. However he is concerned with the stipulation in the USML that products developed with government funding could be ITAR controlled. That may cause them to avoid some government development programs.

Everyone agrees that it’s too early to judge the success of the changes, despite the initial positive signs. In another year companies and government regulators will have considerable experience to judge what is working well, where the bottlenecks lie and further changes that are warranted. Kevin Wolf says the government’s mantra with export control reform has been “flexibility, adaptability and transparency,” and he encourages industry to communicate with the agencies.

Speaking at the annual BIS export conference held in July 2014, Wolf reflected on the progress since the administration committed to export reform. “This is all moving us closer to one of my personal goals for the limited time I have in government, which is that the export control agencies think of themselves as part of one system, one administration, bound by the rules, but willing and able to change those rules in a transparent, regularized process as foreign policy and national security considerations change, and as technology evolves.”⁵

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