United States Department of State
Defense Trade Advisory Group

Minutes of the Plenary Session
December 5, 1996
Dean Acheson Auditorium
U.S. Department of State
Washington, DC

The Defense Trade Advisory Group held a plenary session on Thursday, 5 December 1996, at the Dean Acheson Auditorium at the U.S. Department of State, Washington, DC. William Schneider, Jr., the DTAG Chairman, opened the meeting and welcomed the DTAG members.

A copy of the information package provided to the members at the meetings is provided at Attachment 1. The DTAG attendance list is at Attachment 2.

Business Meeting
Mr. Schneider opened the DTAG Business Meeting which addressed the overall status of the group. The last Congress eliminated the Defense Policy Advisory Committee on Trade (DPACT) which may result in a number of issues that may now be taken up by DTAG. DTAG would not replace DPACT but may serve as a forum to continue some of the work already begun at the CEO level of DPACT's defense high technology company members. Mr. Schneider was interested in observations or comments on how this can be employed .

Members raised several discussion points. One asked if the President's Export Council (PEC) covered the former DPACT functions. Mr. Schneider responded that PEC because primarily covers general trade and is involved with commercial issues. DPACT dealt with defense trade and, therefore, foreign policy issues. Another member asked whether one meeting each year could be a CEO meeting. The day's agenda was exciting and an example of the type of issues that could be used for a CEO meeting. This suggestion elicited considerable discussion, and Mr. Schneider agreed to take it under consideration.

Another point of business was an earlier discussion between Mr. Schneider and Amb. McNamara requesting that DTAG review and consider the impact of various USG sanctions regimes. This issue would be discussed in more detail during Amb. McNamara's afternoon presentation.

Ms. Mona Hazera, the Vice Chairman, summarized several of the DTAG activities for the year and commented that 1997 would be a year of change for the DTAG, not only its structure, but in crease in activity. Important issues which the DTAG will address in 1997 include clarification of certain regulations addressing the export of defense services in support of EMS programs; reviewing technology transfer in terms of protecting intellectual property rights of U.S. industry; continuing review of reporting requirements related to agents and consultant fees; and continuing to provide input and monitor regional policy issues such as Latin America and China; and review the regulatory impacts on acquisitions and mergers.

Report of the Regulatory Working Group
Jerry Filer, Regulatory Working Group, announced that he had retired from the Northrop Grumman Corporation and was resigning from the DTAG since his post-retirement activities would involve him in other areas of business. He presented reports on the RWG Task Forces.

Chairman George Rao of the Offshore Procurement Task Force provided recommendations to the Office of Defense Trade Controls in early November (Attachment 3). The Part 130 Working Group, chaired by Giovanna Cinelli had been meeting and had developed language clarifying certain aspects; however, the job turned out to be more complicated than anticipated. The AES (Automated Export System) Working Group chaired by Steve Story had been monitoring and providing recommendations to the U.S. Customs Service on the AES (Attachment 4). Rich Colton introduced a new initiative regarding the requirement to obtain Technical Assistance Agreements for services provided under the Foreign Military Sales (EMS) program and was subsequently designated chairman of the new task force (Attachment 5).

Bill Schneider discussed the deactivation of the TWO and reassignment of members of the PWG and RWG. The increased number of members calls for the addition of a vice chair in each working group as well as a new chairman for the RWG. This will be accomplished in the near future in consultation with the Department of State.

Technical Working Group
Chairman Mike Richey explained that his group had addressed all the issues brought forth to them. However, they had reached the conclusion that their technical expertise was best suited in support of policy or regulatory issues, such as the work accomplished under the Commercial Communications Satellite Task Force comprised of members from the three working groups.

Mr. Hugh G. Hamilton, Jr.
Director, PM/ATEC

Mr. Hamilton said that DTAG was State's advisor on defense trade matters. Downsizing was a real issue for the Department and ATEC had also been affected. However, his office would maintain DTAG support and a new team would be formed to manage and support DTAG. Although the DPACT had been eliminated by Congress, the Department continued its strong support for DTAG and there was no substitute for it. The hierarchy present that day from State was an indication of strong support.

During the discussion period, Mr. Hamilton commented on the proposed initiation of a CEO meeting with the Secretary, and he believed it would be a challenge to host a dialog with so many CEOs and the varied and numerous issues they would introduce. However, the proposal merited further review.

On sanctions, he commented that each new law takes away more discretionary authority from State in its effort to execute foreign policy.

Mr. Hamilton also discussed the function of ATEC and explained that the of lice is involved in the policy review of commercial sale of arms; provides policy advice on difficult cases; serves as the central office for EMS review; and coordinates State Department involvement in dual-use licensing. Additionally, the office is involved in export control policy toward countries where weapons of mass destruction and related transfers are an issue. The former USSR and four nuclear successor states pose the greatest potential sources for illegal transmission of these articles to terrorist groups or states.

Mr. Arthur L. Money
Assistant Secretary of the Air Force for Acquisition

Assistant Secretary Money gave a presentation addressing international sales in the USAF acquisition strategy (Attachment 6). From a historical perspective, he stated that the USAF was formed in 1947 and would celebrate its fiftieth anniversary in 1997. There were more people in the Air Force in 1947 than today, and money and personnel continue to decrease. It is important to export more from the U.S. because most military operations and exercises today tend to be multi-national and it is critical to have greater interoperability. Exports are also critical so that some production lines can remain open and USAF can tap into them for replacements. Additionally, exports make it less costly to procure equipment and, with the continuing decrease in procurement funding, this is very important. As coalition warfare is the future of warfare, armament cooperation is critical.

At the end of the presentation, Mr. Money opened for questions and comments. One member stated that foreign countries are leery of working with the U.S. because of constantly changing policies. Other members asked questions regarding large programs, such as AWACS, and Mr. Money replied that interagency involvement, foreign policy, and technology transfer issues should be addressed early on. Another member asked whether C-130s had been sold to Romania and, if so, whether via EMS or direct commercial sale. (Mr. Money provided an answer later that afternoon which was faxed to all DTAG members. Attachment 7)

Another member asked, if the U.S. inventory was being reduced from $100B to $50B, what part of those sales would be made to foreign countries as part of inventory reduction, and would industry play a role as intermediary? The discussion continued with questions regarding the process for discarding of excess equipment. Mr. Money replied in the faxed response.

Another member commented on the sale of "demilitarized" equipment and mentioned the U.S. News and World Report article on such sales reporting that sensitive equipment could be sold to anyone.

In reply to a question regarding the sale of defense services and USG reluctance to sell satellites but instead have foreign customers buy services, Mr. Money said there had been no clear resolution but the question remained under consideration.

Mr. John W. Douglass
Assistant Secretary of the Navy for Resources Development and Acquisition

Mr. Douglass spoke on acquisition reform. In 1995 the Navy bought the fewest annual number of ships since the Depression year of 1933. Today the Navy has the lowest total number of ships since 1937. Based on those dwindling numbers, our acquisition strategy must include exports as a means of keeping the U.S. shipbuilding industrial base alive. The Navy cannot depend on foreign yards for this critical requirement because maintaining the industrial base is a national security issue. In the last 20 years, the number of major U.S. shipyards has gone from twenty two to six. Naval shipbuilding requirements cannot support all six of those shipyards.

Mr. Douglass is encouraging U.S. shipyards to expand into the cruise ship market as a means to help keep the six major shipyards open. He noted that almost 85% of cruise ship tickets are bought by Americans, yet none of those cruise ships are built in U.S. shipyards. The Navy will make every effort to assist. For example, under a National Defense Features proposal, the U.S. Navy would add special features for troop transport on cruise ships to help the shipyards if the shipping industry is interested.

Historically, federal spending on R&D dominated commercial R&D spending. Now the trend is reversed. Tapping into commercial R&D, particularly for Command and Control and electronics, is providing the Navy with relatively inexpensive leaps in state-of-the-art technology. Buying Commercial off-the-shelf (COTS) equipment is both cheaper and a faster route to the fleet. The commercial area has become a very important aspect of Navy acquisition policy.

During the Q&A session, a member commented that encouraging exports as one side of the Navy acquisition strategy to promote savings is a threat to U.S. industry. Another issue is that foreign buyers want U.S. electronics in foreign hulls. How can the U.S. support export of hulls and not exports of equipment for use in foreign hulls--one industry and not another?

Another member asked whether foreign countries would be forced into EMS channels for procurement, and which would be the Navy's preference. Admiral Sutton responded that the strict DoD position is that there be no competition between EMS and commercial sales.

A member mentioned the work of the NATO Industrial Advisory Group (NIAG). International cooperative programs can be fruitful, but the devil is in the details. NIAG supports their industries performing the work but using U.S. technology. Mr. Douglass responded that the U.S. is not as sophisticated when it comes to working on multinational cooperative programs. U.S. industry does not look at itself as integrated with European security whereas Europe is united in security. Integrated industry means strong intellectual property rights, extraterritoriality and retransfer issues.

A member asked who would ultimately control export policy on technology resulting from cooperative programs? Mr. Douglass and Adm. Sutton explained that the retransfer issue was addressed up front in the MOU section regarding third-country transfers.

Mr. Schneider commented that in promoting exports, U.S. industry needed more cooperation with State and DoD in technology transfer issues in the embryonic phases. The USG must be more responsive to acquisition and foreign policy concerns. Mr. Douglass agreed.

Dr. Lynn Davis
Under Secretary of State for Arms Control and International Security Affairs

Dr. Davis spoke on the accomplishments of the Department at the DTAG luncheon held in the Martin Van Buren Dining Room on the 8th Floor of the Department. (A copy of the charts she presented is at Attachment 8) She reported that on the issue of Chinese non-proliferation the situation had improved but much remained yet to be accomplished. The Partnership for Peace enhancements to unite Europe were providing successful results as was the $100 million in DoS/DoD assistance to the Warsaw Initiative. Grants to the Czech Republic and others with fewer resources were continuing and, overall, our foreign policy objectives in Europe are on track.

On Latin America, the USG is in agreement on our overall goals to enhance democracy, promote regional stability, and encourage transparency. The USG supports modernization programs to address legitimate defense needs such as counter-narcotics, border protection, and peacekeeping. To date, Latin American countries have undertaken only moderate efforts to modernize their forces. Modernization will be required over the next 5-10 years, but the USG wants to control any potential arms race and will address the question of release of sophisticated aircraft.

Dr. Davis explained that the first plenary meeting of Wassenaar would take place the week of December 9. Among the issues to be addressed was updating the CCL/dual-use list to assure continuity with the Wassenaar list. The new list would be released by Gerry Hamilton within the next few weeks. Exporters must also supply information for transparency purposes under Wassenaar.

The first question from the audience was a request for clarification of the differences between COCOM and Wassenaar. Dr. Davis explained that Wassenaar is a nonproliferation regime and focuses on coordinating national policies to prevent dangerous buildups of arms and arms-related technologies, not COCOM-type controls. Wassenaar is based on a different premise; not on one overarching threat but on a world of diffuse threats--which include Iran, Iraq, Libya, and North Korea -- to which multilateral controls are the proper response. A member asked about the restoration of export activity with Armscor in South Africa. Dr. Davis said progress was being made but the Department of Justice was leading the investigation.

A question was asked noting that 69 countries had so far ratified the CWC and that 29 April 1997 is the implementing date; however, the U.S., Russia, and China must still ratify by that date. Dr. Davis said she was hopeful that the U.S. will ratify by that date, especially since the U.S. was one of the principal initiators.

During a discussion of when the decision to release aircraft to Latin America would be made, Dr. Davis said the issue was still under review. Several members were concerned that with continued reluctance by the USG to make a decision, foreign manufacturers not under similar constraints would not only win the upgrade market but also the new aircraft market. If that happened, the U.S. would lose the ability to control configuration and level of sophistication. It would also result in a lost opportunity for the U.S. in terms of military cooperation and a loss of influence overall. Examples cited were the MiG-29 sale to Peru and the Kfir sale to Ecuador, which included U.S. parts, primarily the J-79 engine and the USG retransfer authorization for the engine.

A member asked about transfers to Taiwan. Dr. Davis said she had explained to the-PRC about the annual review of defense systems to Taiwan, which has been standard practice since 1979. On the "bucket issue," the PRC may interpret the Communique as it wishes, but the fact remains that Taiwan must replace its obsolescent equipment.

In answer to a question about the use of Defense Export Loan Guarantees (DELG) to Central Europe, Dr. Davis said it was now possible to use DELG for those purposes. Dr. Davis was then asked whether fees for DELG could be paid for with FMF. There was some discussion by PM/ATEC staff, but the reply was that as State interprets the legislation FMF cannot be used to fund DELG fees.

A member asked Dr. Davis to expand on China and its sales of -- M-11 missiles to Pakistan. She replied that the Chinese made commitments regarding sales of missiles and missile technology in October 1994 but had yet to pass legislation necessary to implement export controls and a system of review. Therefore, the M-1 1 issue remains in a "watch and review" status.

Dr. Davis confirmed that the Administration planned a sale to Indonesia of F-16s purchased by Pakistan but later embargoed.

A follow-up question noted that poor countries sometimes cannot comply with the controls approach. Dr. Davis responded that in some instances arms exports do constitute an important part of the economy but that this does not absolve them of their obligation to behave responsibly.

In another question on Wassenaar, a member asked about the prior notification provision. Dr. Davis cited transparency as a key aspect of Wassenaar but noted that there is no veto capability. The U.S. supports the "no undercutting" provision. A country which denies a sale must notify the Wassenaar Group. If another country steps in to make the sale, it must also notify the group. At that point, only diplomatic pressure may be brought against that country.

A member asked about export of technical data over the Internet. Dr. Davis said she was not aware of any change but would look into it. [Note: Since then Judge Patel has ruled it was an infringement of free speech.]

Mr. Thomas J. Murtagh
Office of the Deputy Under Secretary of Defense for International and Commercial Programs

Mr. Murtagh presented a brief outline of the Defense Export Loan Guarantee (DELG) program and introduced DELG team members, Messrs. Robert Hertzfeld, Jay Mandelbaum, and Andy Gilmour before turning the briefing over to Mr. Hertzfeld (Attachment 9).

Under the implementing legislation, the DELG is administered by DoD and applies to both EMS and direct commercial sales. The program was built on the Export-Import Bank model; however the briefing outlined a number of differences.

A member asked if defense services were eligible. Mr. Hertzfeld said services are eligible including services performed in the U.S. Costs covering moving U.S. employees overseas and their related housing costs, cars, etc. are eligible and are being handled case by case. DoD policy will be consistent with the Ex-Im Local Costs policy.

Another member asked if the requirement for a signed contract prior to the DELG commitment was risky for the buyer. Mr. Hertzfeld said there will not be a final DELG commitment before the USG makes a final decision allowing the sale through the issuance of an export license or other authorization (like an LOI). Furthermore, Ex-IM requires a contract before issuing a Final Commitment.

A member asked for examples of country risk ratings and related exposure fees. Mr. Hertzfeld stated that the lower the rating, the lower the exposure fee. For example, Hungary is a 5, the Czech Republic is a 3, and Turkey is a 6. For the same 5-year disbursement schedule, with a 5-year repayment, the respective exposure fees would be approximately 19.6% for Hungary, 8.9% for the Czech Republic, and 27.5% for Turkey.

Further discussion covered EMS administrative costs, front-loaded costs, and the possibility of borrowing up-front money from other sources. A question was also posed about the eligibility list and if other countries were recently added to the list. Mr. Hertzfeld responded that adding new countries beyond those currently on the list would require new legislation.

Mr. Michael Lemmon
PM Deputy Assistant Secretary for Regional Security

Mr. Lemmon began his remarks by addressing Latin America and South Asia. He noted that questions regarding modernization of Latin American defense equipment are based on reinforcing USG policy of reinforcing democracy and civilian control over the military and enhancing regional stability, noting that the events in Peru regarding the sale of the MiG-29 were not helpful. A member commented on the protracted period of review on Latin America and that the DTAG had been working issues that it thought were the relevant issues. What problems were elongating the review process? Were policymakers waiting for an event and, if so, what was it?

Mr. Lemmon pointed out that the issue was very complex with the public debate reflecting three schools of thought. First, any decision to move to a more open sales policy would hinder gains of democratization and civilian control over the military and launch an unaffordable arms competition. Second, the region has fundamentally changed, and a move to a more mature relationship is in order, to include selective military modernization and replacement. Third was to take off all constraints and sell whatever is requested. He though the DTAG membership was likely more attracted to the second school of thought.

A question was asked regarding South Asia, specifically Pakistan, and whether the Brown Amendment affects the Pressler Amendment. Mr. Lemmon noted it was a one time effort to allow delivery of military equipment--but not F-16s--that Pakistan had paid for but which had been kept in storage because of Pressler. Separately, the USG was attempting to deliver on President Clinton's commitment to Prime Minister Bhutto to sell the F-16s to a third country and return the proceeds to Pakistan. We were doing our best in a difficult aviation market. Further progress with Pakistan was unlikely without some agreement on proliferation issues.

Regarding India, we need to be careful not to exacerbate the balance already in favor of India, and moving to a more expansive arms sales policy with India could be used by those in Pakistan who say the only solution for Pakistan is to continue with (nuclear) weapons of mass destruction programs. The U.S. will not be the first country to deliver advanced weapons into a region. The U.S. is working on a GSOMIA with India, but its bureaucratic structure is complex and therefore slow.

The questions continued on why Pakistan is treated so poorly when India also has a nuclear program. Mr. Lemmon responded that Pressler picked on Pakistan because it procured the technology externally, as opposed to India which developed its capabilities internally.

Ambassador Thomas E. McNamara
Assistant Secretary of State for Political Military Affairs

Amb. McNamara began his remarks by expressing his appreciation for the work accomplished by DTAG and said he believed 1997 would be fuller and even more interesting, commencing with his requests for input on certain issues he outlined during his presentation.

The first issue addressed dual use controls. In 1995 and 1996, more items were added and/or transferred to the Commerce Control List (CCL). Amb. McNamara asked whether or not the Department of State had adequately addressed certain areas of technology and what more remains to be done.

He acknowledged that export licensing moves more quickly at the Department of Commerce than at the Department of State, with less control and a continuing deregulation process. However, the potential for diversion and inaccurate categorizing of the articles brings a greater risk to the exporter.

By obtaining a license through State, industry knows that the license is an insurance policy and it will not get into trouble. He acknowledged that State has more limited resources for reviewing export licenses. Commerce reviewed approximately 5,000 in 1996 while State reviewed more than 50,000 with a smaller staff. Even in this environment, however, a number of sensitive items have been exported commercially with subsequent problems resulting for the exporting companies.

Amb. McNamara said he would like DTAG to address the advantages as well as the detrimental effects of moving dual use articles to the CCL.

The second issue dealt with sanctions, specifically export control sanctions related to non-proliferation. Currently, sanctions are established under varying sets of criteria and enforced by a multitude of different agencies. Is industry concerned with the proliferation of sanctions, criteria, and enforcement agencies? Does that present a hindrance to trade, especially defense trade? Is there a manner by which this issue can be rationalized?

The final issue was that recently commercial communications satellites (Comsats) and engine hot sections were transferred to the Department of Commerce through Federal Register notice. This movement should provide U.S. industry greater ability to market Comsats. However, the Federal Register language is not clear in its process. Since DTAG was involved in the original study in 1995, would DTAG take this issue under consideration and propose clarifying language? The starting point would be Department of State proposed language which was not used by the Commerce Department, thereby causing some confusion.

Dr. Martha C. Harris
PM Deputy Assistant Secretary for Export Controls

Countries around the world have legitimate security concerns. War is not imminent, but there are regional and internal tensions that have the potential for conflict. Concern that the United States may decrease its global presence exacerbates suspicions some countries have with respect to their neighbors, and feeds speculation about potential threats from regional powers. Many countries are also concerned about their dependence on open sea lanes to preserve and expand their export-oriented economies. Many of these are emerging countries with thriving economies that will have the financial resources, as well as the need to protect themselves.

The common theme that runs throughout U.S. conventional arms transfer policy is the need for balance. U.S. policy promotes restraint, both by the U.S. and other suppliers, in transfers of weapons systems that may be destabilizing or damaging to peace in the region. The challenge is to support the needs of our friends and allies and other U.S. national interests, while not transferring advanced technologies that exceed these requirements, thereby threatening regional stability, contributing to arms races, or depleting scarce fiscal resources.

There is a growing trend of countries seeking--and suppliers agreeing to--transfers that exceed legitimate defense needs. Dr. Harris asked members to consider the rising advanced technology component of U.S. arms exports. The global arms market has shrunk considerably since the height of the Cold War, and there has been a dramatic increase in pressure on the major suppliers to export arms and sensitive dual-use items as a means of preserving national industries and prestige while funding development of next generation systems. Buyers demand and regularly receive increasingly sophisticated technology, as well as financial concessions. Buyers may also seek the prestige that accompanies ownership of advanced weapons systems and may wish to minimize the need for future upgrades and new purchases by buying the most advanced technology available.

State must fully consider the global implications of any particular transfer. Once a particular technology has been transferred, even countries in other regions will make the case that they should be able to acquire it, and may even judge their relationship with the United States on our willingness to release it.

One factor that reflects the new economic imperatives at the heart of technology transfer issues is foreign availability. Other suppliers are increasingly offering incentives to buyers--bribes and kick-backs, offsets, release of production technology, transfers of state-of-the-art systems--to try to cut into U.S. market share. As a result, the United States is often faced with the dilemma of either releasing technology that, in the absence of competition, we would prefer not to release, or seeing another supplier transfer a comparable system.

We need to signal there are limits to how far we are willing to go. Failure to do so only encourages foreign countries to continually pressure us, in the context of international competition, to release our most advanced technologies. Dr. Harris asked for input from DTAG members who can help to assess the defense needs of foreign buyers, their ability to absorb state of the art systems, and long-term, cumulative impacts of transfers on regional stability.

Fortunately, most countries able to afford sophisticated weapons systems are friends or allies. With Europe increasingly turning inward for arms procurement, many argue that the Middle East and East Asia and the Pacific are ideal places for the U.S. to transfer advanced conventional weapons as a means of reducing unit costs for the U.S. military and providing funds for the next generation of weapons.

There has been a change in the nature of the arms transfer requests coming to the Department of State for final approval. It includes interest within the USG--including parts of Congress--in approving transfers to non-allies of advanced systems even before they have become operational as a means of sharing development costs to make up for reduced defense procurement budgets as well as a dramatic increase in technical assistance and manufacturing cooperation agreements.

Today, the defense industrial base is increasingly international. A strong defense industrial base is essential to our own national security, but indiscriminate sales to support industry will hurt our national security in other ways. Although State is more than willing to support U.S. firms in making a sale once a decision has been made that a proposed transfer is in U.S. national security and foreign policy interests, each sale must be judged by its contribution to global U.S. foreign policy and national security goals and objectives, and to enhancing international peace and stability.

We must balance our goals of enhancing the ability of the U.S. defense industrial base to meet U.S. defense requirements while ensuring that our military forces can continue to enjoy a technological advantage over potential adversaries. We cannot assume friendly countries will be friends forever or that technology will not get into the wrong hands. We must recognize that countries may feel threatened by acquisitions of advanced weapons systems by their neighbors and that an inappropriate use of resources--buying weapons that exceed both a country's needs and means may contribute to internal instability. We must ask whether a region's security is enhanced by a transfer, what the impact will be on neighbors' desires, and what we think the regional force structure and power balance will look like in the years ahead. We also need to consider our own technological leads and how to maintain them and look for opportunities to tap into foreign technology and establish partnerships that allow others to contribute and share responsibilities.

As our foreign assistance--particularly our security assistance--budget is reduced, we have less influence over the behavior of foreign governments. There are regional players whose interests do not necessarily coincide with those of the United States and over whom we exert minimal influence. Recognizing that there is usually a direct correlation between a country's security needs and the number and type of advanced conventional weapons it seeks to acquire, we must work to reduce tensions and insecurities if we hope to set limits on the levels of technology being transferred. We cannot succumb to short-term thinking that will inevitably adversely affect our long-term interests and security.

Dr. Harris closed by asking DTAG members to bring their expertise to bear on the arms transfer review process--not only on U.S. war fighting capabilities and technical aspects of weapons proposed for transfer, but on regional dynamics, including countries' insecurities, perceptions, agendas, motives, and needs. She proposed a constructive dialogue on advanced technology and U.S. arms transfer decisions that looks to the future and takes into account the trends in the global security environment, as well as in the global arms and technology marketplace.

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