December 08, 2020

Rethinking Export Controls: Unintended Consequences and the New Technological Landscape

Executive Summary

Export controls can be a formidable tool to protect technological advantage and to deter illiberal and dangerous use of technologies. Used properly for their intended purpose—to affect the military potential of a foreign country, to advance major foreign policy objectives, or to fulfill international obligations—export controls can bolster U.S. national security. Their utility is beginning to erode, however. U.S. export controls were designed for an era when the United States enjoyed overwhelming technological dominance. U.S. policymakers often wield export controls as if that is still the case. As a result, current export control implementation often compounds unintended consequences that harm U.S. economic and technological competitiveness.

The United States must change its approach to export controls to reestablish their power as an effective instrument in foreign and national security policymaking. While the United States is still the world’s technology leader, it is no longer the global juggernaut. Global research and development (R&D) spending is distributed more evenly than even 20 years ago. Technological know-how is also more diffused, with middle powers having significant prowess in select areas of technology, opening up alternative technology acquisition pathways. Concerningly, China is a near-peer in many technology areas, and perhaps at parity or ahead in some, meaning that opportunities for effective export controls are growing scarcer.

The United States must change its approach to export controls to reestablish their power as an effective instrument in foreign and national security policymaking.

These trends have important implications—applying export controls with inadequate consideration of the shifts in the global technology landscape means amplifying unintended consequences that can cause lasting damage to U.S. firms and industries and pose avoidable hurdles to technology cooperation with allies and partners. To be sure, export controls still function reasonably well as it pertains to the movement of dual-use goods, and when applied multilaterally, such as through the Wassenaar Arrangement. In the case of a rising, technologically capable China, however, U.S. export controls would be more effective if wielded as part of a comprehensive national security and economic statecraft that safeguard U.S. technological advantages, rather than as a traditional non-proliferation tool. End-use controls, such as for human rights violations, remain an important exception and should continue.

To revamp export controls for this new era—a global strategic competition with technology at its core—U.S. policymakers should focus on three tenets for implementation.

  1. Work with allies. Export controls should be crafted and upheld in concert with relevant tech-leading democracies in most cases. The United States rarely has the clout to act unilaterally and be fully effective.
  2. Raise the threshold. The most effective export controls are ones tailored to undermining a foreign actor’s technology indigenization efforts. This requires understanding American technological advantages—and how to sustain and amplify them—and knowing where the technological chokepoints are. Export controls should then only be used if no viable alternative technology acquisition pathways exist.
  3. Reframe the goal. The Trump administration has increasingly used export controls as a haphazard and blunt tool of economic statecraft; any results are likely to prove tactical and ephemeral. For strategic and enduring impact, export controls need to be considered in the context of national technology and economic statecraft strategies. In the context of a rising China and a global technology-centered strategic competition, this means protecting select U.S. areas of technological advantage.

An Export Control Approach Designed for a Different Era

Export control authorities have not kept pace with rapidly evolving technologies—and their growing uses in ways that may threaten U.S. national security interests—nor do they reflect the current conditions. Three main trends underscore how the tech landscape has changed since the mid-20th century.

  1. The United States doesn’t dominate global research and development (R&D) as it did in decades past. Technology is an enabler of economic, military, and political power. American technological leadership is increasingly significant to national security but also increasingly fragile—two trendlines that are concerning. Today’s science and technology landscape is a more level playing field internationally than in the past. The U.S. share of global R&D has fallen from 69 percent in 1960 to 28 percent in 2018. This shift happened despite overall U.S. spending on R&D holding steady at around 3 percent of GDP over this time period; other countries, China in particular, greatly increased overall spending. Year-over-year R&D spending growth rates are also higher in many countries, meaning that the U.S. global share will continue to shrink. Defense-related R&D is on the same track. In 1960, the United States accounted for 36 percent of global spending. By 2016, U.S. defense R&D was down to 3.7 percent of the world total.

    Another key shift occurred in the makeup of U.S. R&D spending, with U.S. government investments increasingly taking a back seat to private industry. U.S. business-funded R&D rose from 33 percent of total U.S. R&D spending to 70 percent in 2018. This is a concerning development because the U.S. government remains the largest funder of basic research, the efforts where major technological breakthroughs are most likely to happen. Technological achievements that are the backbone of the modern economy and foundational to U.S. military power—semiconductors, the global positioning system (GPS), and the early internet—are rooted in federally-funded research efforts in the 1960s and 1970s. Inattention to basic research today could shortchange American technological prowess for decades, with major implications for U.S. national security.
  2. Technologies and their associated know-how are increasingly diffused. Rarely does any single country hold all the keys for any specific technology area. Nor does any one company have full control over the necessary raw materials and components. Highly globalized supply chains mean that U.S. multinational firms increasingly act as coordinators of networks, orchestrating a complex set of elements such as R&D, design, manufacturing, and distribution, usually in multiple countries on several continents. While such arrangements typically result in higher economic productivity and efficiency, they also introduce vulnerabilities such as dependence on foreign sources for key supply chain inputs and, particularly with China, increased susceptibility to economic coercion.

    For example, the U.S. technology company Apple is headquartered in California, which is home to most of its R&D functions and where one of its most iconic products—the iPod portable music device—was designed. Japanese firm Toshiba, however, designed the iPod’s hard drive and built it in factories in China and the Philippines. Another U.S. firm designed the device’s controller chip of which production was outsourced to third parties in Taiwan and the United States. Other iPod components were made in Japan, Thailand, Taiwan, Korea, and Singapore. Final assembly was in China by Taiwan-owned firms. This supply chain is relatively simple compared to those of semiconductors.

    The semiconductor industry offers a high-level view of the intricate complexity of globalized supply chains. The United States continues to lead the world in semiconductor design and R&D. It also dominates sales of logic and analog semiconductors. South Korea, on the other hand, has two-thirds of global market share for memory semiconductors, while Europe accounts for almost half of discrete semiconductors. A handful of firms in the United States, Japan, and the Netherlands control nearly two-thirds of global market share for semiconductor manufacturing equipment. Asia accounts for 80 percent of the world’s semiconductor foundries and assembly/test operations. China provides 16 percent of the world’s microchip supply and is also an important customer for semiconductors.

    Defense supply chains also have critical dependencies on foreign entities. A report by data analytics firm Govini found that the Department of Defense has dozens of Chinese companies in its IT supply chains. The defense industrial base is in many cases completely dependent on foreign sources for specialty chemicals, critical minerals, and unique carbon fibers that are essential raw materials for defense items. For example, each F-35 fighter aircraft requires 425 pounds of rare earth elements, minerals with unique properties used in applications such as missile guidance systems. China has a near lock on the mining and processing of rare earths.
  3. Licit and illicit transfers often effectively circumvent export controls. The fact that most technologies have civilian and military end uses makes entity-specific export controls difficult to enforce. That technologies and related know-how are often available from multiple sources makes unilateral export controls less effective. The broader context in which such actions occur must also be considered. A country seeking to attain high-end technological capabilities often does so using a techno-nationalist strategy, which comprises three thrusts: “indigenizing foreign technology and related processes; diffusing that know-how throughout [its] economy; and boosting its capacity for innovation and manufacturing.” Japan pursued a techno-nationalist strategy in the decades after World War II; South Korea, Singapore, and Taiwan from the 1960s–1990s; and China continues to do so today, with particular emphasis on technology transfer methods such as industrial espionage, cyber theft, academic exchanges, and open source data mining.

    China’s military aviation industry took a “buy, build, or steal” approach, which included co-production and reverse engineering, to attain technological capabilities in areas subject to export controls including avionics, airframe design, fire control radars, and composite materials. Many gains were the result of successful “spin-on” of dual-use technologies to military applications. More broadly, China’s military-civil fusion strategy supports and encourages “illegal transfers of dual-use technology … from the commercial and academic sectors to the [People’s Liberation Army].”

Unintended Consequences of Export Controls

Export controls have downsides. By definition they constrain U.S. competitiveness, a cost that policymakers theoretically accept when they implement these policies. More often than not, and especially in the way these policies have been applied over the last several years, however, there are unintended effects that harm national competitiveness. While this impact has been studied for decades, the trajectories of waning U.S. clout in global R&D, greater technology diffusion, more effective licit and illicit tech acquisition pathways, and U.S. attempts to control new types of technologies, are amplifying the severity of unintended consequences of export controls. Understanding their growing impact is essential to revising export control policy to simultaneously promote U.S. technological advantages and ensure the competitiveness of U.S. companies in an era of technological competition. There are six major consequences to consider.

  1. Eroding U.S. company competitiveness and market share. Export control compliance can be onerous both in terms of the cost associated with navigating the process successfully and the time it takes to do so. The waiting period and complex administrative procedures required to receive approval for a sale can be such that opportunities are lost to foreign competitors, putting downward pressure on employment growth. Smaller companies may forego producing export-controlled goods altogether because the cost of doing business is too high.

    The impact of export controls can extend to entire industries. The U.S. space industry was likely impaired due to export controls. Before the establishment of new rules in 1998 pertaining to satellites in the U.S. International Traffic in Arms Regulations (ITAR), a regulatory regime that restricts the export of military- and defense-related technologies, U.S. global market share was about 75 percent. By 2012, the U.S. share was less than half the world total. A survey that the Department of Commerce’s Bureau of Industry and Security conducted found that 35 percent of nearly 1,000 respondents reported lost sales of space-related products and services due to export control regulations between 2009 and 2012. Respondents specifically noted that ITAR regulations “ensur[ed] that U.S. companies cannot compete” effectively in the global marketplace and that “it is unlikely that the European space industry would have grown so significantly, so quickly.”
  2. Avoiding U.S.-origin items in the supply chain. Foreign entities impacted by U.S. export controls often find ways to sidestep U.S origin restrictions or seek ways to design out U.S. content altogether. Some U.S. export controls hinge on the de minimis rule, where only a certain percentage (typically no more than 25 percent) of a product’s overall fair market value can consist of U.S. controlled technology. Export controls can incentivize end users to manipulate the value of non-U.S. inputs, such as by increasing the cost of foreign labor or materials. It also could prompt U.S. companies to move operations abroad.

    A more drastic step is to design out U.S. technology or components altogether. Chinese telecommunications firm Huawei set out to build smartphones without American semiconductors after the company was targeted with export controls. Companies in allied and partner countries, while not directly targeted, are also affected by U.S. export controls as part of globalized supply chains. They too are considering ways to reduce or eliminate U.S. technology inputs to decrease the risk of collateral damage, although this can be a significant challenge given the complexity of chip manufacturing processes. For example, during an earnings call on October 14, 2020, Peter Wennink, CEO of Dutch photolithography manufacturer ASML, noted that the firm was looking at non-U.S. alternatives for metrology process tools to sidestep export restrictions.
  3. Capitalizing on U.S. export controls. Unilateral U.S. actions to restrict technology present opportunities to foreign competitors. In a 2002 study, the Government Accountability Office determined that U.S. policy on restricting sales of semiconductor manufacturing equipment to China was ineffective, in large part because European and Japanese companies continued selling equipment that was less than two generations behind the commercial state-of-the-art. Similarly, high-performance computer vendors in China, Japan, South Korea, and Taiwan gained market share when U.S. manufacturers were constrained by export control regulations.

    In the space industry, non-U.S. entities promote “ITAR-free” space-related products and services, including specially designed satellites. Such spacecraft are so successful that they often command higher prices than a U.S. equivalent, underlining the competitive headwinds ITAR restrictions create. Similarly, in response to semiconductor-related sanctions, Huawei is seeking to set up a chip plant that would not use American technology.
  4. Posing barriers to joint R&D. Export controls can hinder collaborative research efforts with allies and partners and constrain routine academic activity. ITAR again provides illustrative examples of such hurdles. ITAR’s definition of “defense services” is broad and vague. It also encompasses information out in the public domain. In practice, this means, “U.S. university researchers with prior knowledge of applicable export-controlled technical data” cannot work with foreign counterparts on defense-related projects without securing a license or exemption. Even visits by foreign scholars to a research lab or presenting previously unpublished research at a conference where foreigners may be in attendance requires prior governmental approval.

    The American-led multi-nation Joint Strike Fighter program, which developed the F-35 aircraft, was plagued by technology transfer problems. The United Kingdom, the United States’ foremost partner in the effort, complained of difficulties in transferring data and technical information due to ITAR restrictions. British access to the plane’s software source code was also an issue. In 2005, frustration mounted such that UK officials seriously considered withdrawing from the program altogether before an eventual agreement was reached.
  5. Accelerating tech indigenization efforts. Restricting access to technologies is likely to increase the urgency for the affected entity to try to end its reliance on foreign inputs. Chinese chipmakers, for example, are doubling down on methods to manufacture semiconductors with homegrown or non-U.S. foreign equipment. While successful technology indigenization is a herculean task—China has spent decades trying to indigenize the manufacture of semiconductors and turbofan engines with limited progress—the drive to do so has spinoff effects that can make China more competitive over the long run.

    Reacting to U.S. policies provides greater focus to technology investment and development. China’s leaders are taking cues from American technology restrictions to guide the country’s technology indigenization strategy. Chinese leaders, for example, point to U.S. policies toward Huawei as the impetus for doubling down on its technology indigenization goals. This strategy likely entails greater spending on STEM education and R&D, greater competition for talent, the potential for more aggressive IP theft and industrial espionage, and ancillary scientific discoveries and engineering capabilities that have broader utility. These developments pose challenges and risks to the United States.
  6. Generating uncertainty for U.S. companies. Unclear and unpredictable export control policies can hinder a company’s ability to conduct long-term planning in a range of areas including R&D, mergers and acquisitions, capital expenditures, and supply chain management. In one case, Micron, a U.S semiconductor firm, noted that the lack of decisions on its license applications for exports to China was hurting long-term sales. At the same time, several of Micron’s U.S. competitors determined their products were not subject to the same export controls and continued supplying products. How a corporation’s lawyers interpreted the vague federal guidelines thus placed certain companies at an immediate competitive advantage.

Tenets to Inform Future U.S. Export Control Policies

Formulating successful 21st-century export control policies will require a rethink of current policy implementation practices. The shifts in the global technology landscape and mounting unintended consequences have wide-reaching implications for how and when to apply export controls as part of a broader economic statecraft strategy. Three overarching principles should guide policymakers in crafting export control regulations that fit the current strategic technology competition.

Tenet 1: Work with allies. Export controls in most cases will require coordination with and participation of one or more allied and partner countries. The United States rarely has sufficient dominance in a technology area to go it alone. In areas where it does, unilateral action puts major burdens on U.S. companies and friendly foreign entities that are part of their supply chains.

  • Export controls, in most circumstances, will have to be implemented on a multilateral basis to have the desired impact. They are increasingly prone to ineffectiveness because the global science and technology landscape is a more level and diffuse playing field. Furthermore, application of unilateral sanctions is likely to encourage and accelerate de-Americanization of supply and value chains, putting U.S. technology sector competitiveness at risk.

Tenet 2: Raise the threshold. Export controls should be applied first and foremost as a strategic imperative to promote and preserve an edge in technological competitiveness, not as a tactic to achieve concessions. Efforts to restrict access to technologies will be most effective if it targets a country’s tech indigenization efforts. Nonetheless, controls with the goal of proscribing specific end uses are feasible when crafted in concert with other relevant countries.

  • Export controls against a single or small number of entities are difficult and costly to enforce. The global diffusion of technological advancements and know-how, and the generally multi-use nature of foundational and emerging technologies, makes it challenging to prevent specific entities from acquiring a capability, or to curtail specific end uses.

Tenet 3: Reframe the goal. Export controls as economic statecraft are generally overused and, under the Trump presidency, wielded as a blunt instrument. These policy approaches increasingly impair the economic competitiveness of U.S. companies and technology sectors. These tactics are also unnecessarily polarizing toward allied and partner countries. A more strategic and sensible approach to export controls is necessary.

  • Export controls are not an end in and of themselves. Investments in R&D of next-generation technologies need to happen concurrently to lay the foundation for continued competitiveness. More broadly, export controls need to be crafted as part of an overarching national strategy for technology and a broader economic statecraft strategy, not as scattershot policy actions.

Conclusion and Questions for Further Consideration

Current export controls are increasingly counterproductive to U.S. national security. They are in need of reevaluation and redesign. The implications of global technology-related trends and growing impact of unintended consequences as a result of export controls mean that changes are in order.

Policymakers in the United States will be well-served by initiating a formal, multi-stakeholder process to evaluate a series of questions, the answers to which should guide export controls of the future. These questions should include:

  • How much economic harm to U.S. technology developers and manufacturers is tolerable in the service of U.S. national security?
  • At what point would such harm undermine U.S. national security by fundamentally eroding U.S. technological advantages?
  • In what ways can the United States work with like-minded nations to coordinate investments in, and regulatory, tax, and policy support for, technology entrepreneurship and competitiveness?
  • What are the particular technology areas or types of technology services that the United States should target with proactive investments in order to increase U.S. competitiveness?
  • How should the United States coordinate with like-minded tech-leading countries to manage technology transfers that might threaten their shared security interests?
  • What new legal arrangements and compliance architecture will such coordination require and how should the United States best support its partners in its development?

In answering these questions, U.S. policymakers and stakeholders will craft a contemporary approach to collaborative technology statecraft and update what international technology and security partnerships are essential to U.S. national security.

Regardless of the specific outcomes of this inquiry, policymakers must bear in mind that crafting multilateral approaches to technology restrictions should be their first priority. Furthermore, export controls should also be used more sparingly and more strategically. By adapting U.S. export control policy to the current geopolitical context and to the realities of today’s technology landscape, policymakers can assure that export controls remain an effective tool to achieve U.S. foreign policy goals and to safeguard U.S. national security.

About the Author

Martijn Rasser is a Senior Fellow in the Technology and National Security Program at the Center for a New American Security (CNAS). Mr. Rasser served as a senior intelligence officer and analyst at the Central Intelligence Agency. Upon leaving government service, he was Chief of Staff at Muddy Waters Capital, an investment research firm. More recently, he was Director of Analysis at Kyndi, a venture-backed artificial intelligence startup. Mr. Rasser received his BA in anthropology from Bates College and his MA in security studies from Georgetown University.

Acknowledgments

I am indebted to Elizabeth Rosenberg for her substantive contributions, to Kevin Wolf for his invaluable feedback, and to Ainikki Riikonen and JJ Zeng for their research assistance. Thank you to my CNAS colleagues Maura McCarthy, Melody Cook, and Emily Jin for their role in the review, production, and design of this commentary. Any errors or shortcomings that remain are my responsibility alone.

As a research and policy institution committed to the highest standards of organizational, intellectual, and personal integrity, CNAS maintains strict intellectual independence and sole editorial direction and control over its ideas, projects, publications, events, and other research activities. CNAS does not take institutional positions on ​policy issues and the content of CNAS publications reflects the views of their authors alone. In keeping with its mission and values, CNAS does not engage in lobbying activity and complies fully with all applicable federal, state, and local laws. CNAS will not engage in any representational activities or advocacy on behalf of any entities or interests and, to the extent that the Center accepts funding from non-U.S. sources, its activities will be limited to bona fide scholastic, academic, and research-related activities, consistent with applicable federal law. The Center publicly acknowledges on its website annually all donors who contribute.

About This Commentary Series

CNAS launched a new project in 2020 on export controls that will run through the beginning of 2021. This project examines the policy goals of U.S. export controls, their effectiveness, the role of allies and partners, and the potential unintended consequences of America’s growing use of export controls. As a part of this project, CNAS asked a group of experts and policymakers to offer their perspectives on the policy goals that U.S. export controls should serve, and how and under what circumstances U.S. export controls can effectively achieve those policy goals. This paper is published as one of the project’s commentaries.

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Author

  • Martijn Rasser

    Former Senior Fellow and Director, Technology and National Security Program

    Martijn Rasser is the former Senior Fellow and Director of the Technology and National Security Program at CNAS. Prior to joining CNAS, Rasser served as a senior intelligence ...

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