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Hearing of the Terrorism, Nonproliferation and Trade Subcommittee of the House Committee on Foreign Affairs - Export Controls on Satellite Technology

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Location: Washington, DC


Hearing of the Terrorism, Nonproliferation and Trade Subcommittee of the House Committee on Foreign Affairs - Export Controls on Satellite Technology

CHAIRED BY: REP. BRAD SHERMAN (D-CA)

WITNESSES: LARRY M. WORTZEL, PH.D., VICE CHAIRMAN, U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION; PIERRE CHAO, SENIOR ASSOCIATE, CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES; PATRICIA COOPER, PRESIDENT, SATELLITE INDUSTRY ASSOCIATION

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REP. SHERMAN: (In progress) -- well know, and that is the 1990s, we experimented briefly with controlling satellites not as munitions under the State Department jurisdiction but, rather, as dual-use items under Commerce Department jurisdiction.

Soon after that change was made, there was a breach of security in which the Chinese military was provided with classified information after a failed launch of a U.S.-built satellite. The response was to reclassify satellites as munitions. This is what we tend to do in Congress: When a horse escapes a barn, after that we close the barn door and we tend to close only the barn door that that horse escaped from, not concerning ourselves with any other barn doors.

Keep in mind, those involved in the 1990s incident provided information because they had a financial stake in the future success of the Chinese launch program. Well, we certainly have not prevented American companies with technical knowledge -- technological knowledge from having such a stake. We have just prohibited them from having a stake as owners of the satellite or builders of the satellite.

It continues to be legal for American companies to ensure a satellite being launched on a Chinese launch vehicle or to sell derivatives based on the success of the Chinese program or its failure or to take any other action that might tempt them to be rooting for, and perhaps adding to, the success of the Chinese launch program.

Most people aware of our restrictions on satellite exports would assume that it's to protect the content of the satellite, to prevent people from looking inside the box. There are ways to prevent countries from looking inside the box without treating the satellite itself as a munition.

Now, we have in effect an embargo on U.S. satellites or satellites containing U.S. components from being launched with Chinese rockets because we have a law against the export of munitions to China. And what we ought to have is an overall system that balances our interests first in protecting our satellite technology and then in protecting our technology for our launch applications from going to the wrong places. This can be done, in the case of the contents of the satellite, through an appropriate monitoring system, monitoring until launch.

And with regard to the launch technology, we either have to trust people with a financial interest in the success of the Chinese launch system to not reveal information because it's classified, and frankly, the big headlines of the 1990s by themselves may have closed that door. I don't think anyone in the future could say, "Oops, I slipped," and avoid prosecution, should they repeat pretty much the same fact pattern we saw in the early '90s.

But we can, if we wish, go to the point of saying no U.S. company that has any technological capacity, whether it's an insurance company, whether it's an investment bank selling derivatives, whether it's a company that has contracted to own the satellite only after it is launched, whether it is a communications firm that has a favorable contract to use the satellite, whatever, that no company can have a stake in the success of a Chinese launch.

Now, the space industry has made credible arguments that the International Traffic in Arms Regulations, known as ITAR, have hurt business and the space industrial base. This claim is echoed, in private at least, by the intelligence community who sometimes find it more and more difficult to source satellite and related equipment domestically. ITAR has hurt the industry to some degree.

Part of the perceived harm arises from the fact that the use of controlled American parts or technology in a product means that American laws follow that entire product. This has hurt second- and third-tier suppliers. Europeans and other buyers would rather just avoid U.S. regulations. They, therefore, have focused on ITAR-free movement. European satellite maker Thales Alenia is now promoting satellites and satellite components that are, quote, "ITAR-free."

What does ITAR-free mean? It means that the product has been put together carefully discriminating against U.S. suppliers. I would wonder whether the United States military should, except when absolutely necessary, do business with a company that has announced it's -- a policy of discriminating against U.S. suppliers whenever it can. Perhaps we should discriminate against that supplier whenever we can. This is especially true when the discrimination against the U.S. suppliers not only hurts us economically and violates the spirit of free trade but is also specifically designed to thwart U.S. foreign policy.

Now, at the core of this problem is that the Chinese have the Long March rocket, not a big winner in terms of reliability but a big winner in terms of cost. This Long March rocket technology is a result of Chinese government subsidies and one clear response for us is to simply subsidize our own launch capacity, keep those jobs, that technology and the national security aspects all in the United States -- that is to say the national security knowledge in the United States.

So we do have, I think, a need to legislate. One way is to kick this back to the executive branch and allow satellites to be on the munitions list or not on the munitions list, subject to the administrative process as other similar goods. We have to remember, though, that the last time this happened we saw it explode in the headlines.

So I look forward to getting new ideas about how to balance our economic interests and also the national security interests in a thriving economic space industry with our national security interest in a way that is logical, that prevents the Chinese and others from knowing what's inside the satellite and prevents U.S. persons from having an incentive to provide technical knowledge to the Chinese or others who should not receive it.

Now, I want to turn this over for an opening statement to a gentleman who has demonstrated his patience by watching me go well over the five-minute limit, our ranking member, Mr. Royce.

REP. EDWARD ROYCE (R-CA): Thank you, Mr. Chairman. Thank you also for calling this hearing today. And I think you're continuing the work on export controls that this subcommittee began in the last Congress.

This effort, I think we should note, spurred the previous administration into some reform. But more is needed and I look forward to exploring how satellite technology might be better handled.

Many are warning that the U.S. export control system is broken, that it's a relic from a past economic and business era. Numerous GAO reports have concluded this. We will hear today that satellite export controls needlessly target items that are readily available anyway on the world market, that they unduly restrict international cooperation and that they frustrate access to needed foreign technology.

Several other countries are making impressive technological breakthroughs. France, for example, Russia, China and others have built and they've orbited satellites using their own launch capabilities. The playing field for this $120 billion a year industry clearly is more crowded and it's more competitive than it's ever been before, and our export control system has poorly responded.

The economic impacts of export controls are tough to measure. The Pentagon, though, has found that satellite export controls have hurt U.S. aerospace companies, their business and long-term ability to innovate in those businesses. Several factors are at play, but it's fair to ask if Congress's toughening of satellite licensing 10 years ago has played a role in reducing American leadership in satellite communications.

Our economic competitiveness is tied to our national security. Simply put, we will not remain a military superpower without a world- class technology base, including satellites.

A top U.S. military official recently testified to Congress that U.S. export controls are hurting the space industrial base, threatening national security. His view should carry considerable weight. Any system, especially one originally devised to counter the former Soviet Union, requires constant reform. No doubt, a bureaucratic culture is a poor match for a world of ever-rapidly evolving technology. The tendency in a bureaucracy is to play it safe. But bureaucratic safety does not promote national security if it is stifling innovation.

We'll hear about the licensing system's shortcomings, including delays, redundancies, inconsistencies and static control lists. And many of these are valid charges. So let's hear from our witnesses on the reform proposals. But we should keep in mind that while the growing complexity of satellite technology and production does complicate regulation, complexity in and of itself does not argue for liberalization.

China is central to this debate. As one witness will testify, China's strategic intentions and proliferation record and the PLA's rapid growth and potential to improve its missile force through international cooperation factored into the decision to further restrict satellite exports. And so that witness is right on that point.

Today China's satellites direct a "kill weapon," a sophisticated missile targeted at our naval fleet. Unfortunately, our allies are eager -- only too eager to provide China with advanced satellite technology. My concern is that the State and Commerce departments, frankly, are naive about China. Misguided faith in the validated end- user program is one example. Chinese spying is pervasive. We knew that here a year ago. The whole world knows it today. Chinese spying is pervasive. Export control reforms should be made with a very clear-eyed view of Chinese capabilities and intentions.

Mr. Chairman, satellites are essential to our national defense, so I look forward to working with you beginning today to find the way to control this critical technology that maximizes our security. Thank you.

REP. SHERMAN: Thank you, Mr. Royce, and thank you for pointing out that this hearing builds on prior hearings and that those prior hearings, I think, have been successful in getting the State Department to move more quickly on these applications. But I think we have more to do if we're going to strike the right balance and help our economy.

I know -- I want to acknowledge former Senator Warner of Virginia who is here with us today and thank him for his attendance. We have a member of the full committee who is not a member of the subcommittee, but given his interest, probably should be. Completing our full California -- Southern California panel is Dana Rohrabacher, who I know wants to make a brief opening statement.

REP. ROHRABACHER (R-CA): I got that brief part, there. (Laughter.)

Mr. Chairman, first of all, I am a member of the Foreign Affairs Committee and I have been for, you know, 18 years now. But let me also note that I am a senior member of the Science Committee and served as chairman of the Space Subcommittee of Science for eight years. So I know about this issue. I have followed it. I take it very seriously, and so let's be frank. Let's not beat around the bush about what we're really talking about here.

If you don't want export control reform to focus on China -- if you do want to focus on China, that's fine, but if you don't want us to focus on China and you want to focus on how we can reform export controls generally, well, then you take China right off the table right off the bat.

So any reform that's going to be really effective I think is going to -- and that will have a chance of succeeding -- has got to be a two-tiered approach. It's as simple as that. It's been -- and that has been something that the industry has been unwilling to accept and to take seriously, because what's happening in China and the threat that China poses is something that we cannot ignore, yet that should not be the controlling factor of how we regulate high-tech -- and especially our policies dealing with satellites -- and our dealings with all of the other countries of the world.

Last week the heads of the world's largest satellite operators said that they want to launch their satellites on Chinese rockets. They want to do that because it's cheaper. In fact, every time these satellite operators are given the chance to discuss ITAR reforms, they always tell us that they want permission to launch on the Long March rocket.

Well, it doesn't take a rocket scientist to deduce that the leading edge of reform efforts, in terms of ITAR then, is actually an effort to permit satellites to be launched on Chinese military rockets. Is that what the debate is really all about? Because you can count on me to be working with all of you and to try to make sure that we decrease the regulations on America's ability and other people's ability to sell our technology to other countries.

But let's be serious and talk about China. It is somewhat offensive for me to hear the SES, whose holding company I might add, is in Luxembourg, or Telsat, which is a Canadian company or Eutelsat, which is French, of course, and then Intelsat, which of course pays its taxes in Bermuda -- it's kind of disturbing to hear all these people lecture us about how we're trying to save jobs in the United States by letting foreign companies take advantage of cut-rate military launches.

First of all, these people aren't concerned about jobs in the United States. But what about the jobs in the United States? Don't they count? What about the people who work in our industry, our launch industry? They should be part of the equation when we're talking about this.

Now, as a Republican and a believer in free markets, I do not begrudge satellite operators, who are making millions of dollars of profit, I don't begrudge them that profit. But the fact is that we should not be compromising the security -- long-term security interests of our country for that short-term profit. And that's why we have to focus on China.

Benjamin Franklin is quoted as saying, "Sir, please don't burn down my barn to cook your eggs." Well, we have Eutelsat basically asking us to endanger our national security in order to fatten profits. And Eutelsat, as I say, is making a profit. So let's take a look at what policies we should have about China and let us not forget that the reason why there are the restrictions on China that we've got is because China remains a vicious dictatorship. It is the same Chinese regime today that did what -- that massacred the reform movement in China at Tiananmen Square and that's why these restrictions were put on in the first place.

So I would suggest that those who are very serious about trying to make sure that we pay attention to the cumbersome restrictions that ITAR puts on high-tech companies -- I suggest let's talk about setting up a two-tier system where they are freed from those restrictions and have a realistic policy towards China.

Thank you very much, Mr. Chairman.

Mr. Chairman?

REP. SHERMAN: Yes?

REP. ROHRABACHER: If I could indulge you, just -- I noticed that the administration is not represented here today and I have a series of questions that I would like to submit for the record that we would like the administration to answer in terms of this issue.

REP. SHERMAN: They will, without objection, be made part of the record. Whether those who are not here have an obligation to answer, I leave to the parliamentarian, but certainly I would urge you to send those to the administration in the form of a letter, and often the administration takes seriously the obligation to respond to such letters.

We now have been joined by Congressman Connolly of Virginia, who not only will be making an opening statement now but will be chairing these hearings at 2:00 to about 2:15 when I have to go vote in the Financial Services Committee.

The gentleman from Virginia is recognized.

REP. GERALD CONNOLLY (D-VA): I thank the distinguished chairman and thank you for holding today's hearing. I also want to join in welcoming my friend, the former senior Senator from Virginia, John Warner. Delighted to see Senator Warner here today.

I believe the subject of this hearing highlights once again the law of unintended consequences. Here we have a case in which a previous Congress, well intentioned as it might have been, imposed tighter export restrictions on the commercial communications satellite industry in the interest of protecting national security based on accusations of improper technology sharing with China.

I appreciate and support the need to safeguard the propriety of our military technologies. However, the practical effect of the International Traffic in Arms Regulations appears to have been to stifle innovation and America's competitive edge in the global satellite marketplace.

The U.S. share of worldwide satellite manufacturing revenue has fallen by one-third since these restrictions became law. A DOD survey showed the industry attributes more than half a billion dollars in annual loss revenue due to administrative problems in the changes in regulation.

According to the industry, the technology beaming the deliberations of this legislative body to television sets back home is now more regulated than those industries developing new weapons. During the last decade, competitors in other nations stepped in to fill the void left by the shrinking U.S. commercial satellite industry. While their technology may not be quite on par with American products, it comes with none of the restrictions in selling to unfriendly nations.

So while we succeeded in preventing American companies from inadvertently providing technology to China or other restricted nations, we also help fuel our global competitors, some of whom do not share our concerns for supplying unfriendly regimes. As if this dynamic were not enough to warrant a fresh review by the new administration, we're now hearing from leaders within our defense and intelligence agencies who believe the American satellite industry has been so weakened that it is now threatening the sustainability of the very security we're trying to protect.

Mr. Chairman, this is a sobering reminder that good intentions are not enough. Whether it is the overly rigid parameters of No Child Left Behind, the lack of regulation for derivatives and default swaps, which I was just talking about in the Government Oversight and Reform (sic/Oversight and Government Reform) Committee, or the oversight of commercial satellites, it seems to me that it's incumbent upon those of us writing the laws to ensure they are more than the enshrinement of good intentions. They must be focused on efficacy.

In this particular case, I would say we are overdue for revisiting this export policy. The start of a new administration and our upcoming review of the State Department budget provide just such an opportunity. I hope today's hearing will be the start of that important discussion and I thank you for holding it.

REP. SHERMAN: I thank the gentleman from Virginia.

I'm about to recognize our witnesses. I will ask them, in kind of reference to the comments of Mr. Rohrabacher, if they can weave into their opening statements whether there's a way to achieve the jobs objective if we completely shut out China but otherwise make changes and, second, whether we're talking here not just about opportunities for the companies, but try to tell us whether we're creating U.S. jobs, rather than just profits for U.S. companies.

Without objection, we will enter into the record the opening statement submitted by Mr. Manzullo, who is a member of this subcommittee, and also a copy of today's New York Times article on the subject of these hearings.

With that, let us welcome our first witness, Pierre Chao, senior associate with the International Security Program of the Center for Strategic and International Studies. Mr. Chao was a co-chair of the Working Group on the Health of the U.S. Space Industrial Base and the Impact of Export Controls.

Mr. Chao?

MR. CHAO: Mr. Chairman, Mr. Royce, members of the subcommittee, thank you for inviting me to testify before you. If I can have my written testimony and a copy of that study included for the record, I'd be grateful.

I was asked to talk about this study that we undertook in 2007- 2008. A lot of the conclusions and findings I'm hearing quoted, so from that perspective that's a good thing. At the time, I was a full- time employee of the Center for Strategic and International Studies. I am now a nonresident senior associate at CSIS.

The study started because -- in response to mounting concerns on the part of the national security space community about the health of its industrial base and the rumblings that space-related export controls was causing problems within the industry. We put together a working group that we thought was very well balanced, that represented all the different constituencies, because there's multiple viewpoints. So we made sure we had on that working group people from the Defense Department, people from the State Department, people from large companies, small companies, people from -- with congressional experience, people from the new space community.

And we were also able to leverage some outstanding data analysis that was generated by the Bureau of Industry and Security. It was a survey done of the industry, the first time anybody had done it. And the fact that your CEO would go to jail if they didn't answer it made sure we had 100 percent response rate. So we had a lot of good data related to it.

We also approached the problem with a few -- couple of key principles. First, leadership in space is critically important to U.S. national security. Two, there's deep interdependencies between the defense space, intelligence space, civil space and commercial space communities. Weakness in one represents a weakness in all because we share the same industrial base. Third, it's important to have a strong industrial base. Fourth, a prudent export control policy is important and necessary. And finally, we also looked at this whole issue through the lens of national security. It was very clear in that '99 legislation -- the intent of the Congress was very clear. It said that national security trumps economics in this case. And so therefore, we examined everything from a national security lens to see are we meeting the goals we wanted.

So what were some of our findings? One, the overall health of the industry is "good." We put quotes around the word good because there's a certain amount of fragility to it. There's a lot of capacity, not enough work. And we did notice some very noticeable weaknesses in the second and third tier of the industries, where there's the beginnings of single points of failure, which should be of concern.

Two, the U.S. space industrial base has returned to being very dependent and tied to the defense market.

Where once upon a time it was more broadly based, now 60 percent of the revenues are related to defense, 90, 95 percent are related to U.S. government. We're arsenalizing the industry.

Now, that is -- philosophically you can make a policy decision and say, that's the way I want to do it. But there is a price to pay for that and we have to be honest about the price in order to keep it as part of an arsenal. Or we let it compete more broadly in the global marketplace and diversify and broaden its competitiveness.

Third set of findings: space capabilities continue to proliferate globally. Mr. Chairman, you talked about that. And we are rapidly losing the ability to control that proliferation. Many of the countries that have gained capability in space got it from the Russians or from others. And so, from that perspective, the intent of the space export control system has not prevented the rise of these other powers. It may have slowed them down. It may have increased the cost of achieving those capabilities. But it has certainly not stopped the arrival of other players.

In fact, in some of the more striking findings, we found that the export control regime had a perverse -- to use your word -- the perverse unintended consequence of encouraging others to develop indigenous capabilities when they told us they would have been more than happy to buy American equipment because it is far better, but because of the friction in the system, they couldn't rely on American components. So we were very much struck by that.

Another set of findings related to the fact that the export control regime makes it very difficult to engage in cooperation with our close allies, in some cases, contrary to what the U.S. national space policy is, which says to encourage international cooperation. And again, there's a friction in place.

And then the last set of findings we found is that regardless of what study you look at, and I don't care which one you find, the U.S. satellite industry has been losing global market share over the last couple of years. And in particular, the biggest burden has landed on the second and third tier of the industry that don't have the resources, the big guys, to wind their way through the export control system, that really rely on being able to participate in the global marketplace in order to generate the profits to invest back in plants and research and development.

So we came up with a series of recommendations and I'd like to highlight a couple of key ones. One, it's time for the administration and the Congress to sort of review and reconcile the strategic intent of these goals; two, take the technologies and identify the components that you want to restrict, for China or for anybody else, because that's what we want to get at, rather than putting the entire satellite on it, which turned out to be an extremely blunt instrument, because once you put a satellite on a munitions list, every component down to the simplest bolt becomes a munition. So let's stop what we want to stop going out, which is the critical technology componentry, allow the overall satellite to be moved back. And if someone doesn't want to put critical technologies on it, they don't have to and they can sell it, and we're still protecting technology while generating jobs in the grand scheme of things.

You need an annual review. This committee has talked about that in prior reform. Why? Because the technology changes quite a bit. And finally, there are other amendments or changes that you can do of time of licenses, et cetera, that you've referred to in other reform legislation that you've actually -- because you have a piece of legislation related to the space industry insert related to this topic.

So I thank you for allowing me to present our study and thank you for taking up this very important topic. And I look forward to your questions.

REP. SHERMAN: I thank you for that presentation. I would note that the reason Congress prohibited -- you know, put satellites on the munitions list, had, believe it or not, nothing to do with the component of a satellite and everything to do with preventing any U.S. entity from having an interest in the success of the program. So it wouldn't really matter whether it was great technology or poor technology inside the satellite. If you bought the rationale for the law we passed in the '90s, you would maintain it.

With that, let us go to Dr. Larry Wortzel, vice chairman of the U.S.-China Economic and Security Review Commission. He is a retired U.S. Army colonel with extensive experience in technological security and counterintelligence. He served two tours of duty as a military attache at the American embassy in China.

Dr. Wortzel.

MR. WORTZEL: Thank you, Mr. Chairman.

Chairman Sherman, Ranking Member Royce, satellites form a really major part of military command, control, communications, information gathering and targeting systems, or C4ISR systems. I'm going to draw from some of the conclusions in the annual reports of the U.S.-China Economic and Security Review Commission and I'll provide you with some of my own views in discussing how satellite exports bear on the strength of the Chinese People's Liberation Army, or the PLA.

Now, the Strom Thurmond National Defense Authorization Act for fiscal year 1999 turned control over satellite export licensing to the State Department under the Arms Export Control Act. Actors driving Congress to make this change were concerns about the rapid growth of the PLA, China's strategic intentions, potential threats to the United States, and the potential for proliferation of weapons and delivery systems by China.

Now, Congress also expressed concerns that cooperation with China in space and missiles could improve accuracy in Chinese missile programs, assist with the development of multiple independently targeted re-entry vehicles and assist with the development of submarine-launched ballistic missiles. I see no reason to change the decision to have satellite exports remain on the munitions list. Satellites are now an integral part of China's military architecture. They're used to support intelligence collection, control forces, direct precision missile strikes and for data transfers that improve combat effectiveness.

The PLA has research that suggests using ballistic missiles with maneuvering re-entry vehicles to attack U.S. aircraft carrier battle groups. A sensor architecture, based on satellites, would guide such attacks. Right now, the PLA has only two tracking and data relay satellites in orbit. That's not enough to give them a real-time global intelligence collection capability, but it's more than adequate to support their plans to target American aircraft carrier battle groups, with both hypersonic cruise missiles and those maneuvering ballistic missile warheads.

Now, given the way that satellite programs are being used in China, exports of dual-use technologies that would improve China's remote sensing satellite capabilities still require careful control. Our commission's 2006 annual report concluded that China has recognized the effectiveness of force multipliers like C4ISR and it's enhancing its own capabilities to make its military a more formidable fighting force. Now, these improvements depend directly on satellites.

In 2007, the commission's annual report concluded that China has developed an advanced anti-satellite program that consists of an array of weapons that could destroy or incapacitate enemies' satellites.

Now, my own research shows that China's military strategists see the United States as the most likely potential adversary. Now, a research paper that I did for the American Enterprise Institute documents that PLA strategists contemplate using maneuvering satellites in space, among other measures, as a means to degrade an adversary's C4ISR program.

Mr. Chairman, I ask that a copy of my research be ordered part of the record.

Although China has not yet --

REP. SHERMAN: Without objection, it is so ordered

MR. WORTZEL: -- thank you -- has not yet successfully tested a submarine-launched ballistic missile, it has fielded two new ballistic missile submarines. A decade ago, the House expressed concern that satellite cooperation with China could improve its submarine-launched ballistic missile program.

I also recommend examining more closely how the United States controls the dual-use satellite-related technology.

China's working with Iran on space and satellite programs, plus other countries. Last week, Dr. Eugene Arthurs, who is the CEO of the International Society for Optical Engineering, told our commission that technologies used in satellites, such as high-powered ships that support lasers, can be part of a space-based weapon.

I urge you to keep satellite exports control in the Department of State and also to look into implementing some of the findings of the Beyond Fortress America report related to ensuring that export control processes are timely, distinguish among technologies and that regulations are updated to account for advances in technology and development.

And I'd note in response to Mr. Rohrabacher's concerns that in FY 2000 the Congress, despite where satellite controls were placed, decided they wanted to move forward and push satellites and space cooperation with Russia and, through executive decisions, were able to do that, regardless of where the system was administrated.

Thank you very much for the opportunity to be here to testify.

REP. SHERMAN: Thank you.

Our third witness is Mrs. -- or Ms. Patricia Cooper, the president of the Satellite Industry Association, a Washington D.C.- based trade association, representing global satellite operators, service providers, manufacturers and launch service providers. Ms. Cooper has spent more than 17 years working in the satellite industry and in government.

Ms. Cooper, please proceed.

MS. COOPER: Thank you, Mr. Chairman, Mr. Royce, members of the subcommittee, Mr. Rohrabacher. Thank you for inviting me to testify today on the critical issue of U.S. satellite export controls. As president of the Satellite Industry Association, I speak here as the unified voice of leading satellite manufacturers, launch providers, satellite operators and service providers.

While the satellite industry is by no means monolithic, SIA speaks when the industry has a common view on policy, regulatory and legislative issues that affect its business. We hold such a common view on U.S. export policies for satellites and space-related products.

The commercial satellite industry endorses strong, sensible and effective export controls which prevent the most advanced technologies from falling into the hands of our adversaries. But we believe the time is right for Congress to review its decision of more than 10 years ago to mandate by legislation that exports of all satellites and related technologies be controlled by the State Department and licensed pursuant to ITAR. Notwithstanding their original intent, SIA believes that the current rules governing satellite exports have resulted in overly broad regulation that disadvantages U.S. spacecraft and component manufacturers in the global marketplace without necessarily having accomplished their desired intent.

The broader U.S. space industry has also been impacted, raising concerns about the health of the underlying space industrial base that supports the defense, intelligence and civil space communities. The satellites are the only commodities included on the U.S. munitions list by congressional mandate versus regulation. As a result, the executive branch wields limited discretion authority over satellite exports.

SIA questions fundamentally whether commercial satellite technology merits this extraordinary and unique position of legislative oversight compared with all other sensitive technologies in the USML.

SIA's also concerned about the U.S. satellite manufacturing sector's ongoing competitiveness. Until recently, most satellites manufactured anywhere in the world required the inclusion of U.S. componentry or subsystems regulated under the ITAR; in other words, virtually all satellites had some measure of U.S. export control no matter where they were made, so that the added time, cost and uncertainty stemming from ITAR compliance fell in some measure on every manufacturer. This is no longer the case. In the past few years, European manufacturers have developed the capability to produce the requisite parts and components for a spacecraft without any U.S. content. One European manufacturer, as mentioned by the chairman, Thales Alenia Space, has actually begun to market an ITAR-free satellite.

Because European countries do not regulate satellites as munitions as does the U.S., these ITAR-free satellites are traded as commercial dual-use products under far less stringent export controls. We know of at least six such ITAR-free satellites sold by Thales to date, initially to Chinese and Hong Kong customers and more recently to Indonesian, Egyptian and European satellite operators.

U.S. export policy now has joined price, quality and technical capabilities as a factor when customers consider buying U.S.-made satellites. Whether for real or perceived reasons, many prospective international satellite customers maintain the belief that U.S. export controls are unpredictable, excessively stringent and time consuming. As a result, U.S. companies face an added constraint in winning international business.

Our efficiency and competitiveness directly affects our ability to retain and grow the quarter of a million high-quality, high-paying satellite jobs now within the United States.

Addressing this challenge requires action on two fronts. First, redouble the State Department's ongoing efforts to make the ITAR licensing process more efficient, timely and predictable. Second, SIA encourages Congress to adopt legislation that would return the authority to set export licensing policy for satellites to the executive branch, where it resides for all critical technologies on the USML.

Restoring executive authority for satellite export policy will allow for expert review of individual satellite technologies, ensuring that the USML focuses exclusively on items that merit control -- those products that are critical to our nation's security or competitiveness.

The current satellite chapter remains largely untouched from 10 years ago, including items that may have been cutting edge in the late 1990s but today have limited military or technological sensitivity. Many are now widely available from non-U.S. sources. Careful review and update of all satellite-related USML chapters should be an immediate priority.

Finally, SIA believes that the imperative to review and revise overall U.S. policy on satellite exports is distinct from concerns regarding the launch of such technology on Chinese launch vehicles. Rigorous safeguards govern the export of any U.S. spacecraft or related technology for launch from China. Since 1999, no communications satellite or related technologies have been launched on Chinese vehicles, nor have there been reports of such permissions being sought.

We urge that any consideration of this complex and country- specific issue not impede Congress from timely action and assessment of the appropriateness and effectiveness of its blanket mandate to regulate virtually all satellite technology under the ITAR. The satellite industry remains committed to U.S. export policies that safeguard sensitive technology, but we urge Congress and the administration to consider legislation that supports U.S. satellite exports and the jobs dependent on them by enabling the executive branch to determine the appropriate licensing treatment for exports of U.S. commercial satellites.

It is our belief that the reform of these policies will result in a healthier satellite sector, reinforcing the American industrial position in the global marketplace and at home, and safeguarding both jobs and critical space technology for the nation.

On behalf of the members of the Satellite Industry Association, I again wish to thank you for the opportunity to testify and I look forward to your questions.

REP. SHERMAN: Thank you.

And if we're going to go forward we're probably going to have to have another hearing before we do legislation, where we'll have a chance to hear from the administration, particularly the incredibly qualified, knowledgeable and gifted Ellen Tauscher, who currently serves with us but will be the relevant undersecretary should the Senate do the logical thing, which they should do quickly, and that is confirm her.

Ms. Cooper, what if I let Dana write one section of the bill, because I know what he'd write -- don't let the Chinese do anything -- and I let you write the rest of the bill? Your testimony said well, get away from being country -- don't let the country-specific prevent a good general policy. So you get to write the good general policy, he gets to write the one section that says the Chinese don't get involved.

Does that bill mean more jobs and a stronger satellite industrial base for the United States, or does letting Dana write that one section eviscerate the good that the bill would do?

MS. COOPER: Mr. Chairman, we believe it will retain U.S. jobs and potentially add new jobs. The global satellite market is more than --

REP. SHERMAN: So that's even if we exclude China from everything?

MS. COOPER: The global satellite market is more than just China.

REP. SHERMAN: And the launch -- so we could have Dana write the stuff on China and otherwise allow the administration to decide how to treat satellite and satellite technology, and that would go a long way toward achieving the job objectives and the industrial base objectives that we're trying to achieve.

MS. COOPER: I believe that your question about whether that will aid the industry -- yes, I believe it will. There are plenty of non- U.S. customers that are concerned about the ITAR system when purchasing components or when considering purchasing an overall --

REP. SHERMAN: And these are customers that are not going to use China to do the launch?

MS. COOPER: If it includes U.S. technology, it won't be launched on a Chinese vehicle under current law.

I will note U.S. satellite operators and manufacturers are disadvantaged when they're constrained from access to the same launch vehicles that their competitors are. That having been --

REP. SHERMAN: I didn't say you could write the whole law -- (laughter) -- he gets one section.

MS. COOPER: I do think that's an important point, but at this point the Satellite Industry Association is not asking for changes in the Chinese policy.

REP. SHERMAN: Okay.

Dr. Wortzel, you spoke about how important it was that China and perhaps others not get an advancement in their satellite technology. To what extent would we achieve your purposes if we allowed the Chinese launch vehicles to be used but we had, say, a colonel accompany the satellite, you know, with, you know, 10 American armed guards and whatever to make sure that nobody looked inside it?

Put aside -- and assume we are effective in telling American companies not to give launch technology or propulsion technology to the Chinese. Would that achieve our purposes?

MR. WORTZEL: Thanks for that question, Mr. Chairman.

I think it would achieve part of the purpose. I mean, a very good Air Force colonel who's a friend of mine was actually out there on both those launches, trying to do that, and I think it's important to realize the Chinese satellite launchers and Great Wall Industries didn't crack that satellite open to try and get a look at technology.

Now, there are other concerns about what they might develop in terms of fairings and warheads. The failure in those two cases, the allegations against Hughes and Loral, were the failures of two American engineers.

So I think if you strengthen oversight and --

REP. SHERMAN: So any American engineer going with the satellite would have to be mute.

MR. WORTZEL: Well, certainly they have to be extremely --

REP. SHERMAN: Gagged maybe.

MR. WORTZEL: They'd have to be extremely careful about what (advice ?) they're given.

REP. SHERMAN: Or just don't talk.

MR. WORTZEL: Well, but if you increased the penalties for unauthorized disclosures of controlled information and really put a couple of people in jail and fined them, that helps. Now --

REP. SHERMAN: Well, it's not so much increase the penalties. What happened in that case was inadvertence was a defense. Now, it would be hard just in light of history to use that defense again. We could go further and say for this industry inadvertence is not a defense, at least in dealing with China.

MR. WORTZEL: Well, not with the history of what's gone on. But I think Mr. Chao made some important -- four points that -- well, one point with four parts in his testimony when he talked about looking at satellites in terms of their defense purposes, their intelligence purposes, their civil application or their commercial application.

And when you begin to look at this -- and I really like this Beyond Fortress America approach to updating and changing how we handle a broken export control system, but if you look at those things, you could perhaps begin to parse out technology and satellites, or the uses of satellites, that really are inherently military or intelligence-related, and others that are truly commercial.

REP. SHERMAN: Is there any evidence that China or anyone else has gotten any information about satellite technology as opposed to propulsion and launch technology through any inadvertence of a U.S. company?

MR. WORTZEL: You know, the Chinese have stolen probably --

REP. SHERMAN: Excuse me, I mean --

MR. WORTZEL: -- stolen such information in cyber attacks that I frankly don't know what's gone.

REP. SHERMAN: Let me refine the question. As a result of their capacity to launch satellites, have they gotten any information about what's inside either a European or American satellite that they weren't supposed to get? And speak only of what's only in the public domain -- don't tell me anything classified, obviously.

MR. WORTZEL: No, sir, I know of no instance where they violated the integrity of a satellite they were --

REP. SHERMAN: Yeah, I mean, I'm sure they've got plenty of intelligence operatives trying to hack their way into Ms. Cooper's clients, scurry around the outside perimeter or sneak inside, but nothing we do here is going to affect that.

Now, Ms. Cooper, I'm told that the economics are usually that the satellite is very valuable compared to the launch costs, and yet Newsweek reports that people are willing to pay a 5 or 10 percent premium for an ITAR-free satellite so that they can use the Long March rocket, which is a 20 percent discount compared to an American rocket.

I'm not a rocket scientist. I am an accountant.

You do the math and it looks like these companies not only are undercutting what should be joint Western foreign policy but they're costing themselves money, because paying even 5 percent more for the satellite to get a 20 percent discount on the rocket, in most cases that means you're paying more.

Is the launch vehicle usually only 10 or 20 percent of the cost of the satellite?

MS. COOPER: It depends on the kind of satellite.

REP. SHERMAN: Obviously.

MS. COOPER: Satellites are somewhere between 200 and 500 million dollars, and the launch in most Western or non-Chinese launch vehicles is ballpark around ($)80 million. The Chinese launch vehicles, from our understanding, are around ($)40 million.

REP. SHERMAN: So Newsweek may have it wrong in that the discount by using the Chinese launch vehicle may be as much as 50 percent as compared to using a Western vehicle?

Mr. Chao, Dr. Wortzel, do you agree generally with those numbers, that a Western launch vehicle is going to be 80 (million dollars), the Chinese about 40 (million dollars)?

MS. COOPER: In general, that's what we understand. I will say --

REP. SHERMAN: I'm asking the other two witnesses whether they have an understanding that clashes with that.

MR. WORTZEL: Well, I'll tell you that based on what we've learned at the U.S.-China Economic and Security Review Commission, I'd look at the subsidized launch services. And when that --

REP. SHERMAN: I'm only looking at this from the standpoint of the owner of the satellite. They don't really care whether the Chinese are efficient or subsidized.

MR. WORTZEL: They just want to save money; it makes a lot of sense.

REP. SHERMAN: Right, and I'm saying do you save about ($)40 million on the launch when you go from the European or U.S. launch vehicle to the Chinese?

MR. WORTZEL: That seems to be true.

REP. SHERMAN: And to get it ITAR-free, you're going to be paying another ($)20 million for the satellite at least, so the savings are slight but the fear is there that that's -- well, Ms. Cooper, is an ITAR-free satellite selling at a 5 or 10 percent premium, or does the ITAR-free satellite the same cost as one that's not ITAR-free?

MS. COOPER: We understand that the ITAR-free satellites are more expensive, and I think that range is about right.

I would note that cost isn't the only consideration when choosing a launch vehicle generally. It's also available of timing. The schedule to try and get to orbit is pretty important and that may be a consideration.

REP. SHERMAN: So subsidizing our program might be helpful both in terms of providing more launch vehicles and providing a price that reflects what the Chinese are providing.

At this point the gentleman from Virginia will chair these hearings as I go vote in Financial Services, and he'll be recognizing the most senior Republican member in the room.

You can chair it from your own desk or -- I mean, this one has nifty -- (laughter) --

REP. CONNOLLY: Okay. It's too soon, Mr. Chairman. (Laughter.)

REP. SHERMAN: You'll get there.

REP. CONNOLLY: Yeah. Okay.

Mr. Rohrabacher.

REP. ROHRABACHER: Thank you very much.

I'm wondering if back during the late 1930s we would have decided that it was really cost-effective to contract with the Germans to launch things into space. After all, Hitler had a V-2 rocket which was much more cost-effective than what the Allies had or anybody who was friendly to the United States. Perhaps we should think of that as a comparison here, because perhaps launching something in and of itself doesn't mean that Hitler would have received the benefit of what was in the satellite.

And Colonel, we're not just talking about what's in the satellite, we're talking about the relationship that's established. Will it further the ability of an adversary and potential enemy of the United States if we enter into that relationship?

And I don't think anyone here would be advocating that we start utilizing the V-2 rocket back in 1939 or '40. That would have furthered Hitler's efforts because it would have enabled Hitler to develop that rocket a lot sooner than he did.

What we do know is the last time that we dealt with the Chinese -- and it was almost deja vu all over again when I heard the chairman talking about we're going to have armed guards down there and would this make a difference? And the fact is that I signed on to permitting American satellites to be launched on Chinese rockets with that very same guarantee.

And the minute the relationship was established, all the safeguards disappeared. And the relationship that was established -- let us remember this -- resulted in what? The Chinese now -- the Long March rocket company, by the way, which is a People's Liberation Army- owned company -- so we're talking about the army of communist China, of the regime of communist China, went from a situation where the Long March rocket was relatively ineffective and inefficient because it would blow up all the time. Nine out of 10 flights were -- they couldn't afford to have satellites being launched on it. It went from being the most independable (sic) to being the most dependable rocket launch, all right, under that time when we were having our relationship with them. It went to the point where a Long March rocket before could only launch one in the one out of 10 times they were successful, it had a payload of one, and after our relationship, the Long March miraculously could launch three different payloads.

So one would conclude from that that we basically had, through our relationship, permitted a vicious dictatorship, which still puts religious people in jail, which allows no freedom of speech, no opposition parties and still considers the United States their most likely enemy, that we actually in our relationship permitted them to MIRV their rockets from their military rockets and improve their stage separation -- which is what their major problem was, from what I understand -- improve their stage separation to the point that now they have rockets that succeed in launching rather than fail.

And I might add they also have gyroscopes just miraculously -- you know, gyroscopes used to be huge things like this, and now they're on chips and about "that" big. And miraculously now all the Chinese rockets have the gyroscopes that were developed by hundreds of millions of dollars of research in the United States.

So we aren't just talking about when we're letting the Chinese enter in this relationship. We're not just talking about what they'll get by opening up a satellite, because that's not the worry. But the relationship will increase the potential of a country which is the world's worst human rights abuser who looks at us as their most likely potential enemy.

And until that changes we should have them regulated on a different level than we are regulating how we deal in the relationships that we establish with Brazil or England or Italy or any of these other countries like that.

Now, Ms. Cooper, I was very happy to hear that the satellite industry has recognized that yes, it would be a good thing to reform our system even if it did leave out China, because the rest of the reform package would actually be beneficial as well. So am I correct in assuming that we can all work together now and try to find out what that area of reform is? Because I will let everybody on notice -- if we are going to loosen the controls on this vicious dictatorship and our relationship there, I will fight that and I will make sure that people -- and there's a lot of people who will agree with that.

However, if we can agree on the rest of the world and make things better for you, maybe we should do that.

REP. CONNOLLY: The gentleman's time is expired.

If the panel wants to briefly respond.

MS. COOPER: Yes, Mr. Rohrabacher. Although I've mentioned that satellite manufacturers and operators are disadvantaged when they don't have access to the same resources that their competitors do, we recognize that policy with regards to China includes a different level of complexity, a different set of stakeholders, a different set of allies, a different set of considerations.

As a result, the Satellite Industry Association is not now seeking changes to those unique prohibitions and restrictions on U.S. satellite technology being launched from China. In fact, I would note again the study that Mr. Chao described that seems to indicate that our export rules are actually encouraging the development of comparable technology from European manufacturers which can then be launched from Chinese vehicles without the controls comparable to U.S. ITAR controls.

Thank you.

MR. WORTZEL: Mr. Rohrabacher, I would go a little further than you. I think you have to look at the fact that the chief of China's strategic rocket forces, who also is responsible for some of these satellite launch missiles, has twice visited Brazil and Argentina on space cooperative programs. So you really have to be careful about what you loosen and who's cooperating with who in space.

I'm going to reinforce one of your points by noting that the House Select Committee on U.S. National Security and Military/Commercial Concerns with the People's Republic of China expressed concerns a decade ago that China could improve its submarine-launched ballistic missile program. They just put a new submarine base on Hainan Island, yielded two new ballistic missile submarines, but they don't yet have a missile they can launch from it.

So we really don't want to do anything to help them along with that, either.

REP. CONNOLLY: Mr. Chao, briefly.

MR. CHAO: Yeah, Mr. Rohrabacher, I want to tease out a thing that you mentioned that's very important in what you said to the extent of identifying who, because in many ways I think that's at the basis of what real export control reform can be about today.

We obsess and focus on the what when in the reality, in the end the decision is about the who. And because we focus on the what versus the who, we're treating good allies and friends, like the U.K. and Australia, exactly the same way as we're treating the Chinese. And that's where all the friction is showing up in the system -- if you sort of reversed the lens and focused more on who, I suspect you'd find a lot more flexibility and movement and loosening of the friction in the system because it's meaningless to obsess about whether the Brits are getting, you know, a bolt for an airplane, but on the other hand I want to pay very close attention to certain satellite technology or semiconductor technologies or biotech technologies in terms of who they're flowing to.

REP. ROHRABACHER: Thank you.

REP. CONNOLLY: Thank you. And thank you, Mr. Rohrabacher.

Let me ask the panel, in 1997, U.S. companies controlled 65.1 percent of the world's satellite manufacturing market. By 2007, that was down to 41.4 percent. To what do you attribute this decline?

MS. COOPER: Some of the initial decline was for Chinese customers that U.S. companies could no longer seek, and I think some of the additional changes in the demographics, the market share for U.S. manufacturers, does have to do with the additional constraints placed on ITAR.

I would note, however, that the market share for U.S. companies -- U.S. satellite manufacturers has remained relatively stable at about 40 percent now. We'll be very interested to see statistics in the next year or so when the contrast is between U.S. ITAR-regulated satellites and European non-ITAR-regulated satellites. That contrast hasn't been as clear or apparent in years previous to the development of an ITAR-free satellite.

MR. CHAO: In our study we tried to unpack that data and get behind it. There is a clear drop that you can see when you draw the line. There are lots of factors in it and so people will push back and say well, you can't just blame export controls, and that's a true statement. The European industry has been rising at the same time.

But if we didn't find the smoking gun, we at least got a whiff of gunpowder is sort of the way that I'd put it, to the extent that in specific cases you saw customers saying that I will not buy from America now because of the ITAR, and it's not really the issue of getting to the technology.

In some ways, one of the answers to Chairman Sherman's question about why would you pay 5 percent more, a lot of it has to do with the timing and the uncertainty related to the launch. There's all the lost revenues that if you're late by 60, 90, 180 days, they just cannot stand. And there's that economic component that's fed into it that I think has contributed to that market share loss, much to the frustration of the American industry that provides a fine product, they're just looking for that predictability and visibility that's lacking.

MR. WORTZEL: Mr. Chairman, my understanding is that there's been -- not related to China or these export control restrictions -- such a decline in the American space launch industry that today we don't make our own rocket motors. I mean, we're using Russian rocket motors.

So I think the source of those differences in the data may have a lot more to do with the way the technology and the industry globalized than on export controls. If you can't make a rocket motor, you're not going to have much of an independent industry.

REP. CONNOLLY: One of the things you both were talking about was maybe you could, you know, return to some more sensible kind of export control that would strip out the ITAR-related things or the things that we now consider sensitive that maybe were considered sensitive, as you mentioned, Ms. Cooper, in 1999 but no longer are, and commercialize that and sell it.

And the question, I guess, for you is twofold. One is, is there really such a bright line that we can recognize strictly commercial uses versus something else, and what about the whole issue of dual-use technology? Because I would assume with sophisticated technology, that line gets blurred more often than not.

MR. CHAO: I think you've hit on the key point from -- and again, same thing with Mr. Rohrabacher. If you're watching everything, you're watching nothing, right? And so the issue becomes prioritization of resources, technology, et cetera.

And so we believe there are clear bright lines, and in some of the initial work that we did you can find them. The bolts, the commonly available solar panels, the tubing, the coolant systems that are commonly available -- there's a clear line.

There's a very clear line on the other side of some very sensitive things you actually do not anybody to get, even our closest friends, you know, that you would not -- but by doing that what it would leave is the resources of the export control system to then focus on the difficult questions, and that's where you want to be putting your brain power and all the intellectual capital rather than trying to track everything.

So we think what you want to do is get the common stuff off, the bright line never shifted away, and then let's spend our time figuring out the really hard parts.

MS. COOPER: I would concur with that. I believe that the current legislative mandate doesn't give the executive branch the permission or the sense of permission to do that evaluation, and I expect that the experts in the Department of Defense, the intelligence community, civil space and the State Department and Commerce Departments can come up with a very clear list of those that should be in and those that ought not to be in.

And there may be a gray area in between that would merit discussion, but the current legislative mandate of one size fits all simply doesn't permit that differentiation.

I would just note that I too like the conclusions within the Fortress America report and would echo the phrase brought out by my colleague Dr. Wortzel saying distinguish among technologies. As Mr. Chao said, what?

REP. CONNOLLY: Dr. Wortzel?

And then my time is expired, Mr. Chairman.

MR. WORTZEL: Sir, I think you can distinguish among some of the technologies, but I just can't overemphasize the fact that whether you control it on a munitions list or on a commodities control list, the export control system is bureaucratic, and they really make that case very well in this report, that it's broken.

You have engineers that have never seen a production line trying to make decisions off a list about what the state of global production on a technology is. You have government bureaucrats who mean very well -- good counterintelligence guys that say we're just not going to do this, that don't know what's available, so that you really have to look at improving government industry panels that can develop an appellate process, that can do it rapidly, and that can really review what is cutting-edge technology that matters and what you can buy at Ace Hardware.

REP. SHERMAN: (Off mike) -- gentleman is expired.

We'll now recognize the gentleman from California.

REP. ROYCE: Thank you, Mr. Chairman.

I was going to ask, does the State Department regulate and monitor the use or follow the content of ITR-licensed satellites? Do they monitor that? Do you think it's monitored?

MR. WORTZEL: Yes, I believe that they do look at the content of the satellites, and I think that they do that in coordination with the Department of Defense and the intelligence community, sir.

REP. ROYCE: And that's regulated by them? Because one of the --

MR. WORTZEL: They must do that, because the satellites are on the munitions list. They're ITAR-controlled.

REP. ROYCE: Yeah, okay, because one of the questions that one of my staff members had was was it possible to prevent the Chinese military from utilizing the services of ITAR-licensed satellites operated by foreign companies?

MR. CHAO: If it has a U.S. component it's (followed ?).

One of the other things that the legislation did and that the regulation has done, if you're going to go overseas you're required to actually pay to have somebody follow that satellite along with it.

REP. ROYCE: Pardon? Pardon?

MR. CHAO: You're actually required to pay somebody to monitor and follow along that satellite as a satellite service provider in order to safeguard it.

REP. ROYCE: I see, I see.

Well, let me ask Ms. Cooper a question. You advocate that we redouble our ongoing efforts to make the licensing program, the ITAR licensing program, more efficient and predictable and timely, and I was wondering what grades you'd give the reform efforts made by the late Bush administration in this.

MS. COOPER: My members tell me that the licensing time has improved and that the process has -- the efforts more recently to improve the process have borne fruit. I would note that the kinds of licenses that satellite manufacturers require for trade are more complex, so they take a little bit longer than some of the other kinds of export licenses that may not be program licenses but specific product exchanges.

I think there's probably more streamlining that can be done for those many licenses that an individual strategic program requires -- as many as six licenses for the transfer of one spacecraft.

REP. ROYCE: Are you suggesting in your testimony here that the commercial availability of satellite components from non-U.S. sources is not considered in current reviews of the munitions list? Give me your view of what's going wrong there, and pull the microphone closer to you, if you will.

MS. COOPER: I don't believe foreign availability is a consideration at all.

REP. ROYCE: Pardon?

MS. COOPER: I don't believe foreign availability is a consideration in the current U.S. munitions list.

REP. SHERMAN: Excuse me, let me interrupt for a second. I'm going to leave because we have one vote; I'll be back. Diane Watson will chair the hearings as long as she's in the room. When she's out of the room, the hearings are adjourned until such time as I'm back.

REP. ROYCE: Let me ask you then, what's your position in general on doing business with China? In other words, what does the industry desire really is the question here, and how do you view China's strategic objectives as they pertain to satellite technology?

MS. COOPER: The satellite manufacturers, operators and launch providers haven't done business with China since 1998, so I don't know what their intentions are to resume that activity. What we have had is internal discussions of great vibrancy with respect to our current request, and our current request is that no change be instituted for the current prohibitions.

I do think that the competitiveness of satellite manufacturers and operators is affected when there's a considerable difference in their availability of resources like launch vehicles, but we are not asking for changes now.

REP. ROYCE: What is the relevance, in your view, if any, to China's anti-satellite efforts to your policy recommendations? Is that why the recommendation is no change? Or give me your view. And please pull that microphone close.

The acoustics in here for me are not very good and I can't hear you.

MS. COOPER: Okay. The ASAT test has not been a consideration in that factor except to add to the conclusion that any attempt to create a coalition of interests to change Chinese launch policy would be a different track of policy and requests -- a completely different ball of wax.

REP. ROYCE: Okay.

MS. COOPER: And so the ASAT test certainly changes the environment and the level of concern, but we feel that the changes that we're asking for here have an immediacy to them and we don't see any change in China policy anything near an immediate time frame.

REP. ROYCE: Thank you, Ms. Cooper.

My time's expired, Chairwoman.

REP. DIANE E. WATSON (D-CA): Yes, I'm going to ask one question and then we're going to recess for the chair to come back so that we can all go and vote.

And I'll address this to Ms. Cooper. What measures has the Defense Department taken to effectively monitor and prevent unlicensed technology from occurring in the investigation of satellite launch failures?

MS. COOPER: For every U.S. satellite that is launched on a non- U.S. launch vehicle, DOD monitors are required. And as Mr. Chao mentioned, they are paid for by the satellite operator. So that's a part of the activity understood in every non-U.S. launch.

REP. WATSON: Great.

I'll have other questions, but we'll wait until after the recess. And I would suggest that we'll probably be back around 3:00 if the audience and if the witnesses can wait -- (off mike). Yeah, maybe quicker than that; we just have one vote on the floor. Thank you very much; we'll go into recess now.

(Recess.)

REP. SHERMAN: We'll reconvene the hearing. I will try to drag out my questioning for this second round long enough for my colleagues to return. If they don't return, then we'll gavel the hearing down.

Ms. Cooper, these ITAR-free satellites, are they exclusively using the Long March rocket or are there people bothering to buy ITAR- free and then launching them on American or French or Russian rockets?

MS. COOPER: To date, the ITAR-free satellites that we're aware of have all been either launched on the Chinese Long March vehicle or are slated to be launched on that vehicle, yes.

REP. SHERMAN: Do the current rules of imposing ITAR prevent somebody from buying a satellite made in the United States and launching it on a Russian vehicle? If it's classified as a munition, does that mean it can't go to Moscow?

MS. COOPER: It is not prohibited from being launched on a Russian vehicle, no.

REP. SHERMAN: Dr. Wortzel, I see your -- how do our laws with regard to satellites today, listing them as munitions, what is the practical effect with regard to launching in Russia?

MR. WORTZEL: That's really part of the regulation and not the legislation, as I understand it, and it's the way the regulation is administered by the Department of State and the Department of Defense.

And in fact as I mentioned earlier, sir, it was the FY 2000 Defense Authorization Act that specifically encouraged work with Russia on satellites and space programs, so that was one of the points I tried to --

REP. SHERMAN: And so we don't have a blanket prohibition on selling munitions to Russia; we do have such a blanket prohibition on the transfer of munitions from China.

MR. WORTZEL: That's correct. That's because of the Tiananmen sanctions, post-1989 Tiananmen sanctions. But the president has waived those in a couple of cases and we sold munitions list items to China prior to the Olympics and during the Olympics.

REP. SHERMAN: Okay. Let me take a moment to announce that we will leave the record open for 10 days to accommodate all members who wish to make submissions and likewise those of our witnesses that wish to make submissions.

Now, this is really a debate over which of two agencies is going to be handling things. As Dr. Wortzel points out, you can go to State and get a license to export a munition to China, and that could very well be a satellite.

And to some degree as a result of the hearings in this subcommittee the average processing time for a license of a category 15 item, which includes satellites, has gone down from 76 days to 23 days.

Ms. Cooper, what's 23 days among friends? Why not just keep the law the way it is, and if somebody wants an ITAR-laden satellite to go up on a Chinese rocket, apply for a license?

MS. COOPER: Well, let me make two --

REP. SHERMAN: Which I assume would be conditioned on that mythical colonel that I talked to Dr. Wortzel about accompanying the satellite, but I'm sure you're willing to do that.

MS. COOPER: First is perhaps a nuanced clarification, which is that launch of U.S. technology from China is not actually prohibited. There are requirements that are effectively prohibitive; a process that is complicated and a high enough level of complexity that no one has sought it since they've been imposed, but there's not actually a prohibition, to be clear.

And the difference is perhaps not 23 days; the difference is, for technical assistance agreements and the kinds of authorizations that typically are required for satellite programs, they do take quite a lot longer.

REP. SHERMAN: Why would there need to be technology assistance to the Chinese just if they're launching the rocket?

MS. COOPER: This has nothing to do with China, this is just the authorizations that are required to export satellite information, marketing data, eventually the design material to describe it to a customer, the actual export of a satellite upon launch, if it's being launched from a non-U.S. --

REP. SHERMAN: So one alternative here is not changing the law but asking the new undersecretary to come in here and expressing our view that she ought to take what is it, a 17-step program and turn it into a seven-step program.

I'll ask first Mr. Chao and then Dr. Wortzel, if we left the law the same and redid that 17-step program to something more practical, could we do something that was both feasible for the industry and protected our national security?

Mr. Chao?

MR. CHAO: There's yet another subtlety which is more than just, you know, the differences between two organizations. It's two entirely different regimes. I mean, the mere fact that under the ITAR the instant you declare something a munition anything that touches it or is a component of it is also a munition, while on the commerce sort of dual-use side you have the ability to designate different gradations.

Therefore, a chip of certain technology, of teraflops or a solar panel of certain power can be restricted while others are deemed to be commercial. You have none of that flexibility on the munitions side. So once designated a munition in --

REP. SHERMAN: But we've got this 17-step process which is burdensome.

If I left the law the same and had you and Ms. Cooper changed the 17 steps down to seven steps, could we achieve both our national security objectives and our commercial objectives?

MR. CHAO: If somebody believed you could do that and get it down to -- and the key thing is not -- the date 23 days versus 90 or whatever is not the real trigger; the trigger is how does that compare to the business cycle? So if a request for a proposal has to be answered in 15 days, it doesn't matter if I've got 23 days. I now need to be under that level in terms of how rapidly the export control system responds.

If you can get it down to a reasonable date with certainty and visibility, the three things that the industry asks for, people wouldn't be complaining.

REP. SHERMAN: Dr. Wortzel, what if I let you redraw the 17 steps, would we achieve our objective?

MR. WORTZEL: I think you must address the complexity of the approval process for licensing. But to be completely candid I'm not certain that if you went in for a commodity control list dual-use license and you move satellites there it would go that much faster.

I mean, because of the embedded technologies and the use of the satellite, that's why these distinctions between defense and intelligence.

REP. SHERMAN: Well, I mean, there are two aspects to whether it's State or Commerce is going to control. One is, and I wouldn't have even thought of this until it happened, the U.S. company has an incentive to get the rocket off the pad and that might cause them to slip and provide information.

What most of your testimony is focused on is the technology inside the satellite, and we've had our mythical colonel. Why wouldn't commerce just look at it say, we don't care what's inside the satellite because the Chinese are never going to see what's inside the satellite?

And then you tell me why we can't let China know what's inside the satellite. If we've got a colonel with the satellite, why doesn't that make State or Commerce or Congress feel secure?

MR. WORTZEL: Well, I think Mr. Rohrabacher effectively made that case when he went through the fact that the variability and the technical assistance provided to China so it could release two or three satellites in space moved them forward on multiple independent re-entry vehicles.

They don't use fairings, and this comes from the Cox commission report, on their Long March vehicles, but Cox commission was concerned that they would learn how to use fairings more effectively.

REP. SHERMAN: Fairings?

REP. ROYCE: Fairings are things you put over the nose of a missile and that's why they can't master a submarine-launched ballistic missile, because they still haven't mastered the fairings that go over it.

REP. SHERMAN: Let me interrupt --

MR. WORTZEL: Mr. Rohrabacher expressed those concerns --

REP. SHERMAN: -- your answer and go to -- Ms. Cooper, let's say your industry was told if you're going to launch on a Chinese rocket you can tell the Chinese how much it weighs, you can send them a clay mock-up if they care to know what shape it is, and aside from that you cannot talk to them except about price, date of launch.

But you can't tell them that more of the weight is in the left part of the satellite or the right part of the satellite, looked at at a particular view, and more importantly you can't talk to them about well, what kind of fairing you're going to have -- anything else.

In effect, you just don't let American engineers talk to the Chinese. You just let accountants talk to the Chinese. Trust me -- they could torture me, they wouldn't learn anything about the rocket program.

So what if we had a rule that only accountants could talk to the Chinese? Would that impair the ability of this tenuous partnership between a U.S. satellite maker and a Chinese launch to be effective? Or do you have to have the engineers talk to each other for this to work?

MS. COOPER: I don't know.

REP. SHERMAN: That's a great answer.

MS. COOPER: The hypothetical sounds good. I don't --

REP. SHERMAN: Dr. Wortzel, you're acting as if you might know.

MR. WORTZEL: I think I know. They do have to talk --

REP. SHERMAN: If we just had a rule that only accountants who know nothing about rocketry are allowed to talk to the Chinese -- and, you know, accountants can talk about well, when are you going to put it up? We can --

MR. WORTZEL: You would never find an insurer to underwrite that satellite launch if you didn't allow some kind of technical data exchange --

REP. SHERMAN: So there has to be technical data exchange for it to work.

MR. WORTZEL: I believe so. I'm not a rocket scientist and I didn't sleep at a Holiday Inn Express -- (laughter) -- but I'm pretty sure -- (laughs) -- there's got to be technical data exchanged.

MR. CHAO: Can I deconstruct the question?

REP. SHERMAN: Yes, yes, Mr. Chao. I don't know if you're a rocket scientist either, but --

MR. CHAO: I went to MIT, but I wasn't a rocket scientist. There are two sets of the industry I think that we care about: the satellite manufacturers, and most of the questions you've been asking about relate to the sale of satellites, but there's an entire other constituency, which is the manufacturer of the parts, that all of the workarounds and the things we're talking about in relation to China and how to accommodate those concerns is again, once again, as long as we're using the blunt instrument of the ITAR in controlling that, it does nothing for the parts components guys who are just as interested in selling their parts into an American satellite as they are into a European satellite being sold back to an American, which today they cannot do. Or they can, but they find it --

REP. SHERMAN: I think you're a little off my question. The question is it doesn't matter whether the whole satellite is made in the United States or whether a component is made in the United States. Under the regime I was putting forward, nobody on the Western side of the transaction could talk in engineering talk to anybody on the Chinese side of the transaction.

The purpose from a national security perspective is to prevent the Chinese from learning anything about rocketry. The impediment is that therefore, those engineers involved with the satellite on the Western side couldn't share useful information.

Do you have any insight as to whether that would be practical?

MR. CHAO: I think Dr. Wortzel's right -- no insurance company would insure that satellite launch.

REP. SHERMAN: Okay, so as a practical matter --

MR. CHAO: A practical matter.

REP. SHERMAN: -- we want to prevent anybody who knows more about rocket science than the Chinese do from talking to the Chinese, and this system is designed to prevent not only American companies but any European company that is dependent upon American parts from talking rocket science to the Chinese.

What is interesting is that we have this giant hole and that is we're doing nothing to discourage insurance companies from talking to the Chinese, and the insurance company -- I mean, I could think that sometimes, just maybe, somebody who owns the satellite is hoping it blows up on the pad, providing the insurance company is not AIG. (Laughter.)

But the insurance company is always rooting for the satellite to make it into space, and do the insurance companies know enough about rocketry to be dangerous to our national security?

Mr. Chao.

MR. CHAO: So again, this is where your point about the financial interests comes into play, and part of the issue back in 1999, my understanding, it was partly driven by the insurance company saying you'd better have those guys figure out what's going on because I don't want to blow up another -- I don't want to pay --

REP. SHERMAN: So the insurance companies may not understand engineering and they may not know anything about rocketry, but they do know what I've just learned here and that is the engineers at the satellite company need to talk to the engineers at the launch company for the launch to be successful, and once you have engineers talking to each other somebody may slip and reveal some engineering information we don't want revealed.

Dr. Wortzel, I don't know if you had a -- you look like you have an additional comment. I don't know if you do.

MR. WORTZEL: Well, in the Hughes and Loral cases, apparently the Chinese technicians just weren't getting it. You know, these were not Americans that were out to do harm to the United States. They just realized that this wasn't going to work unless they told them how to solve a couple of problems. And that's, again, where Mr. Rohrabacher's problems come in.

REP. SHERMAN: The natural tendency is for people to root for their partners and try to be helpful to their partners, and if you're in -- if American companies are in partnership with China to launch vehicles, it is against human nature -- it's usually successful. Ninety-nine times out of 100 the Loral engineer doesn't reveal any information. But it is against human nature to say don't help your partner.

MR. CHAO: To your point about barn doors being closed, that issue was very specifically addressed in the legislation to the extent -- it's called anomaly resolution, right, where it requires all kinds of additional licensing in order to do that.

The unintended consequence of the licensing related to anomaly resolution, and a NASA administrator testified to this, is on normal cooperative -- Western cooperative civilian satellites it's become so hard to do anomaly resolution amongst friends that again, they're afraid of putting our components on board scientific missions for risk that I can't get a license fast enough if the satellite's about to tumble out of the sky or I need an answer in three hours.

I actually have to go through a licensing process to be able to talk to somebody about that. So it's another case where once again where in trying to stop something we've caused some unintended consequences in other places.

MS. COOPER: If I could --

REP. SHERMAN: Yes.

MS. COOPER: I think Mr. Chao's comment is well founded. If you look at the percentage of Chinese launches compared to the overall number of orbital launches from last year, the Chinese launched 11 and there were 69 orbital missions last year.

There are a number of other commercial transactions and launch considerations that we're not focusing on here because we're spending our time talking about China -- not to say we shouldn't be evaluating that -- but I think there's a larger impact.

REP. SHERMAN: Okay, we talked about a bill that you and Dana would write. I know what is going to be in his part. Dealing with the non-China universe, what should be the description, and then how do you make sure that any knowledge that we impart to the French doesn't then go to China?

MS. COOPER: First we would return export licensing authority to the executive branch. We would encourage --

REP. SHERMAN: Well, you mean to Commerce. It's in the executive branch.

MS. COOPER: The State Department and Defense departments do not believe that they've got the authority to evaluate the U.S. munitions list.

REP. SHERMAN: Well, yes, we -- in other words, return the authority to determine which satellites and satellite components are munitions and which are not to the executive branch.

MS. COOPER: Correct.

REP. SHERMAN: Go ahead.

MS. COOPER: Remove the block.

REP. SHERMAN: Right.

MS. COOPER: Request an immediate and thorough technical review of the products that are in the U.S. munitions list so that you can focus the controls on those products that are actually technologically sensitive. It's not clear at this point, we haven't done that review, whether there are technologies that would allow us to have a non-ITAR satellite -- I don't know because we haven't done that review. But the products that have no military or technological sensitivity should be export licensed by Commerce.

REP. SHERMAN: Well, you know, if the satellites launched in the '90s by the Chinese actually were just pure junk, it wouldn't have mattered. It's not what was inside the box. So to say that a widget that's used in a satellite should be on one list but a super-widget should be on another list makes sense if you think the Chinese are going to look in the box and see how the super-widget is made.

MS. COOPER: But it has an economic impact on the overall trade -- the component manufacturers, subsystems manufacturers and the practical licensing requirements for prime manufacturers and launch providers/operators all are subjected to. It narrows the focus to those products that we care about.

REP. SHERMAN: Now, let's say you're a U.S. satellite manufacturer. Does this ITAR rule prevent you from offshoring the creation of one of the components? Let's say you're a U.S. satellite manufacturer, you've already booked space on a U.S. rocket. In the past you've done everything in the United States and so you're not importing or exporting anything.

And now all of a sudden somebody comes to you and says, "You know, there's a European company that can make the 'wadget' for us." Does our law have the unintended benefit of making it -- or detriment, depending upon your point of view -- for this U.S. satellite maker to import the "wadget" from France or Britain or China or whatever?

MS. COOPER: I think U.S. manufacturers do import certain components from European suppliers.

REP. SHERMAN: And the fact that we call it a munition, does that mean that we in any way restrict imports in a way that we wouldn't if it was a dual-use item?

MR. CHAO: It does. There are a couple of anecdotal evidences where there was a particular technology developed by Europeans who would not give it to us for fear that once they gave it to us it would be come ITAR-controlled and they couldn't get it back out again.

REP. SHERMAN: Oh, so this was a case where they had an item for a satellite, they wanted to send it to the United States for integration or processing and then send it back to Europe, and --

MR. CHAO: And the instant that it touched our shores and our satellite, and so they said, "Whoops, nope, we'd rather not sell it to you."

REP. SHERMAN: Yes. I mean, the point of my question is to what extent does our current morass of regulations actually protect U.S. jobs from outsourcing?

Dr. Wortzel, can you -- well, do you see a circumstance in which this U.S. satellite manufacturer would just as soon not import one of the components?

MR. WORTZEL: Well, in my view what has happened to American manufacturing and industry in general makes your case -- that if you can get it cheaper by offshoring it and there's no policy support for maintaining and industrial base of that type in the United States, they're going to buy it cheaper.

REP. SHERMAN: What I'm asking is do our regulations add a lot of red tape to the effort to import a satellite component from abroad?

MR. WORTZEL: I do not know the answer to that, sir.

MR. CHAO: It does, and in our study we were also able to get and quantify the burden on the second and third tier in order to work your way through the system. It cost them about $60 million as a whole. It cost them two or three percentage points of profit which they could have used to hire other people.

REP. SHERMAN: Yes. I mean, my question is, are we protecting American jobs with these regulations by discouraging American companies from importing components?

MR. CHAO: Not as much as we're damaging in terms of preventing us from exporting. So it's a net loss.

REP. SHERMAN: But there is some -- but it's a netting. We lose these exports but we prevent certain imports.

MS. COOPER: I would just like to address the outsourcing issue. I agree with my colleagues that the ITAR regulatory regime has actually encouraged manufacturing capability to be developed offshore. So in your terms --

REP. SHERMAN: Well, I'm aware that these regulations cause a commercial problem. I'm trying to see whether there's a --

MS. COOPER: But I think those jobs have moved -- some jobs have moved offshore not because they're cheaper but because they evade regulation. Then I think we need to be realistic that not all jobs make sense to be outsourced.

In this world where the technology is highly complex and can't be retrieved or repaired once it's launched 22,000 miles off of the Earth's surface, there's a great deal of caution and conservatism about the sourcing of your componentry. This is not a technology where people take a lot of risks on suppliers. So the flexibility to move jobs to unknown supplier sources with limited initial experience is a high barrier, in my estimation.

REP. SHERMAN: Okay.

I'm drawing to a close here.

Dr. Wortzel, let's say we go with this bill. Ms. Cooper writes all the provisions, Rohrabacher writes the anti-China provision. Do you see a threat to national security to letting some imports and exports and launches from Russia, France, et cetera?

MR. WORTZEL: I think you have to be very careful as you draw up such a bill to look at the multilateral and bilateral space and satellite cooperation programs that China has in some cases with our allies. So if your goal is to sort of cordon off China, then you have to ask, well, what are they doing with Brazil, Argentina, France, and how does that affect the way you've written the legislation?

REP. SHERMAN: Would you be focused on rocket technology or satellite component technology?

MR. WORTZEL: I would focus on rocket technology and the launch aspects of it, because again, they haven't cracked satellites. I mean, Mr. Rohrabacher took me to task for that statement.

REP. SHERMAN: They haven't what?

MR. WORTZEL: They haven't cracked open a satellite to steal the technology in it.

REP. SHERMAN: Okay. Okay, but if we're cooperating with Brazil or France in manufacturing satellites, then the Brazilians and the French are going to learn something and you don't have to crack open a satellite; you just crack open a Frenchman or a Brazilian.

MR. WORTZEL: That's right, and I think there's always the danger that some of that information, if they're in a separate bilateral program with China, is going to get there. The question is, what's the risk to the national security if that happens?

REP. SHERMAN: So certainly any legislation, if it grants to the executive branch this kind of authority, has got to require a review of what technology is going to go to our ally and what controls that ally has to make sure the technology doesn't go anywhere else.

MR. WORTZEL: Yes, sir, and we regularly license technologies to allies and place restrictions on the re-exports of data and information. So usually, they're pretty good about it.

REP. SHERMAN: What about Russia? Does Russia already know as much about rocketry as they're likely to discover by launching American satellites?

MR. WORTZEL: My sense from the FY 2000 Defense Authorization Act where we encouraged all this space cooperation with Russia is it's not just that they're pretty well advanced so there's not much to worry about. But both of us have enough nuclear warheads aimed at each other that it doesn't make a material difference in the national security --

REP. SHERMAN: So Russia might learn something but it doesn't make the material --

MR. WORTZEL: You know, you're going to get 2,000 warheads one way or the other.

REP. SHERMAN: Okay.

Mr. Chao, any comment on that?

MR. CHAO: No. I mean, in all the industries, you know, their space industry has been one of the few that they've been investing in, and in some cases because they invest in it it actually turns out they have the world class technology, much to our chagrin, frankly.

REP. SHERMAN: Okay.

MR. CHAO: Motors, for example, is a good example.

REP. SHERMAN: Ms. Cooper, is there any way to provide tax incentives or subsidies to the launch industry, which is a segment of your organization, to get all, you know, the jobs and all the national security advantages of beating the Long March?

MS. COOPER: I think we'd be interested in working with you on ways to encourage U.S. launch capability. There are new entrants to the U.S. launch industry and I think there's a great deal of work we can do to try and encourage domestic launch capabilities and capacity.

REP. SHERMAN: Well, one approach is tax credits for those who use it. Another approach is to say that those in that particular industry don't have to pay payroll taxes; the U.S. taxpayer would do that for them. One approach is just direct subsidy, and a final approach that I can think of is that the U.S. government act as the launcher, albeit contracting with U.S. companies to make the rocket.

I hope you pursue those, but I hope you'd also come up with some other ideas. It's nice to hear that yeah, there are things we could do, so you're brilliant -- figure them out, bring them back.

MR. CHAO: Subsidized or paid-for insurance, too, would --

REP. SHERMAN: Yeah, that's another way to do that is to either pay for insurance or act as the guarantor -- free insurance.

So, I mean, obviously, if we get -- if the best way to put something in space is to have the Americans put it in space for you, we've solved most of these problems.

I think at this point, we stand adjourned. Thank you.

MR. CHAO: Thank you.

REP. SHERMAN: (Sounds gavel.)


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