Key Findings
Honolulu, Hawaii, USA

The Pacific Forum with support from the US State Department’s Export Control and Related Border Security Program held an Experts Planning Meeting Feb. 5-7, 2020 in Honolulu, Hawaii. Fifteen experts, primarily from research institutions and industry, participated. Discussions centered on Strategic Trade Control (STC) implementation in Southeast Asia, CSCAP Memo No. 14, strengthening ASEAN regional cooperation on STC, the economic effects of STC implementation in Southeast Asia, and industry perspectives on STC. Key findings and recommendations from the meeting are described below.

The Southeast Asian region as a whole has been making progress on STC. Singapore, Malaysia, Philippines, and Thailand have recently implemented new or updated regulations. Indonesia has shown a greater interest in STC. Myanmar and Laos are making progress with the support of partner countries. Yet Vietnam, Cambodia and Brunei still lag behind.

To different degrees, countries in the region remain skeptical about STC given factors such as the region’s history with the non-alignment movement and having had export controls applied against them. Some still see STC as a form of technology denial rather than a licensing requirement. There is also a general lack of understanding of the usefulness of STC. Southeast Asian policymakers prioritize economic growth over political requirements. As a result, varying levels of enthusiasm for STC can be found across Southeast Asian ministries and policy makers. Frequent changes in ministerial leadership and licensing personnel further complicates the issue. States would do well to refrain from frequently changing those who wield responsibility for licensing. They need to allocate adequate budgets at the ministerial level toward STC development or implementation. The Association of Southeast Asian Nations (ASEAN) will also do well to learn lessons from other regions. In addition to the benefits of implementing STCs, individual states should be aware of the costs and dangers they face from not implementing STCs. A tailored, bespoke approach is required to encourage STC development in ASEAN states.

Experts generally agreed on the usefulness of the Council for Security Cooperation in the Asia Pacific (CSCAP) Memorandum No. 14 “Guidelines for Managing Trade of Strategic Goods,” which was published in 2009. They suggested several changes to bring it up to date. For example, the export control language could be changed to “Strategic Trade Management.” Also, dual-use research and development at companies and in academia could be specifically called out. Language pushing for the automatic updating of control lists and emphasizing harmonization—while acknowledging the challenges inherent to such a goal—could also be included. An updated memo could further include a maturity model to better illustrate the progression of STC implementation, helping compartmentalize the challenge of implementation. Overall, revision of the CSCAP Memo could be used to reinvigorate discussion on STC in the region.

Participants contrasted the role of the ASEAN Secretariat to the European Commission with regard to STC implementation. The Commission coordinates and centralizes information related to the EU dual-use regulation, but many aspects of implementation are left to member states. The Commission can amend control lists directly, as opposed to going through a legislative process as previously, which took more time. It can also provide guidance for implementation such as on establishing Internal Compliance Programs for academia. The ASEAN Secretariat, however, is skeptical that it could play a role similar to that of the European Commission.

The ASEAN Secretariat needs to be convinced of the necessity of regional STC implementation. Even before that, individual countries need to be convinced about the benefits of regional coordination on this issue. Questions surround the practicality of having a regional oversight committee. Some participants argued that basic STCs must be in place in all ASEAN states before even approaching issues such as a regional STC secretariat or “No-Undercut” principle. Still, ASEAN aspires to the EU model due to the economic benefits of intra-regional trade, so it should find the EU’s approach relevant.

The World Customs Organization (WCO) has become highly engaged with Strategic Trade Control Enforcement (STCE) since the enactment of United Nations Security Council Resolution (UNSCR) 1540 in 2004.  STCE Guidelines were first published in 2014 and updated in 2019. The Guidelines were written for Customs but recognizes that Customs cannot manage STC alone. Yet in many countries in the region, Customs often leads on STC—for example, in Thailand, Vietnam and Singapore. Customs can therefore serve as a pro-STC resource across countries. The “handcuffs” on WCO are that it can only work directly with Customs agencies. Participants asked—if we accept that Customs will largely lead in ASEAN states—how other governmental institutions can be convinced to contribute to implementation and enforcement of a Customs-led system.

ASEAN is a late entrant to the concept of free trade zones and regional integration, yet the idea is moving along because a primary goal of ASEAN is to attract investment. Relaxed oversight is the biggest problem with free trade zones. They are susceptible to smuggling, transit/transshipment issues, criminal networks, and lack of transparency. That said, exporting strategic goods outside free trade zones still requires a license. Rather than trying to incorporate STC into free trade zones, some participants suggested considering connecting STC with the WCO’s Authorized Economic Operator (AEO) scheme, which is concerned with secure trading hubs and supply chains. An AEO can exist without a national STC system. Currently, AEOs do not always have STCs in place.

The ASEAN Economic Community was supposed to start in 2015 but may take another 10-20 years. The ASEAN Single Window is also a way off. Countries are still developing their National Single Windows, which will take 3-5 years. It would be useful to have some mechanism to prevent undercutting and for voluntary sharing of denials in the region. There is an economic incentive for STC harmonization, which would prevent anti-competitive license shopping. Yet it is currently unclear to whom to pass such information.

Existing studies have shown that there is no negative effect of passing an STC law on measures of economic growth. But issues with existing studies include data limitations and less-than-ideal methodological choices. Additionally, case studies and anecdotes seem to resonate more at the outreach level than statistics-based reporting. In fact, participants argued that the biggest impact of STCs for developing countries seem not to be on exports, but on shifting toward high-tech imports, gaining access to Western markets for high-tech parts and components, and garnering trust of technology suppliers. Countries that are interested in shifting their economies up the value chain should see STC as a necessary (but not sufficient) piece—relevant business-friendly policies also need to be in place.

Participants also discussed the potential risks or costs to countries that do not have STCs in place. For example, the United Arab Emirates acted as a hub for the A.Q. Khan nuclear proliferation network. If the United States labeled the UAE as a “destination of diversion concern,” the UAE would receive no nuclear assistance from the US or other NSG member countries. With this realization, the UAE government passed a Dual-Use Law (2007) and Nuclear Law (2009), signed a pledge not to domestically enrich uranium or reprocess plutonium as part of its bilateral 123 agreement with the United States, and strengthened its STC policy and implementation infrastructure. These steps enabled the Emirati government to give a contract to South Korea to build four nuclear power reactors in the UAE. Therefore, as this case exemplifies, there are not only benefits but potential risks and economic costs of not implementing STC or managing technology transfer that should be communicated to partners.

The meeting also delved into the industry perspective on STCs. The dominant perspective seems to be that STCs will hinder profitable trade and competitiveness, limit access to technology, and negatively affect innovation. STCs may also impose high transaction costs, and screening tools can be expensive (sometimes prohibitively). Noncompliance can result in severe monetary and criminal penalties. There may be long delays for export authorization. Asymmetric or unilateral controls put local industry at a disadvantage. For these reasons, it has been difficult to find smaller companies interested in STCs. The relative burden of STC implementation is quite high for small and medium-sized enterprises compared to multinational corporations.

Yet companies face reputational risks if they inappropriately export WMD-sensitive material. Once a national STC system is in place, they are also subject to penalties for noncompliance. Compliance with STCs is thus a form of cost avoidance. Companies may find the concrete monetary value of brand damage and opportunities lost to be compelling and should calculate this amount when considering transactions of high-end items to end-users whose credentials may not be easily verifiable.

In fact, having STC compliance in place can enhance business opportunities—for example, freight forwarders can use bulk licenses for customers that do not have them; logistics companies can charge fees for strategic goods declarations; manufacturing can use bulk licenses to help deliver things on time; and cybersecurity companies can use STC to guarantee safety and security, inclusive of supply chains. Having an STC system also means more demand for trade professionals. Companies can see setting up Internal Compliance Programs (ICPs) as an investment in their companies for reputational gain, to protect their brand, and to prevent fines and penalties. Moreover, the cost of setting up an ICP is only a fraction of annual revenue but allows access to a wider pool of technology, trade, and consumers.

Importantly, industry concerns can be ameliorated or improved through government policy and incentivizing programs such as bulk permits. Also, companies who import from the EU or the US but are not major suppliers can access higher technologies if they have suitable safeguards, ideally by establishing ICPs.

Outreach partners should acknowledge that for both industry and government, implementing an STC system entails certain costs. It is therefore incumbent upon external partners and assistance providers to demonstrate in concrete terms that the benefits of having a national STC system in place outweigh the costs. In short, in a globalized and increasingly high-tech economy, STCs are an investment in the national government, companies, and economy as a whole.

Participants discussed at length the utility of an “STC scorecard” in outreach and capacity building. Experts raised concerns about such a scorecard and its purpose. An opportunity was seen to carry out some baseline measurements in Southeast Asia, which, if implemented appropriately, could help with academic discussion as well as assistance and programming. Measurements in the region would supplement the UNSCR 1540 qualitative self-assessments and the Institute for Science and International Security’s Peddling Peril Index. Some participants suggested that a country’s time series self-comparison is more beneficial to improving STC implementation than comparison across states. An STC measurement system could learn from the tiering and country profiling of the Financial Action Task Force and/or the World Customs Organization’s maturity model. Participants agreed that any kind of scorecard or measurement system needs to be a cooperative project with metrics that are of direct relevance to STC implementation, with easy-to-understand criteria and a focus on outcomes rather than process. Such an effort must take into account the different conditions and social imperatives states face. Ultimately, a scorecard or the like would encourage states to do their best rather than pinpointing wrongdoing; and rather than assess how well a system works on paper, understand how well it works in practice (e.g., with measurements of senior-level commitment). A scoring system could help states identify what interventions they actually want and need. There are many donors in the region, so such an approach could be a way for donors and recipients to think about, communicate, and match needs.

The discussion also touched on the difficulties with controlling “emerging” technologies, and issues with different controls on such technologies across countries. Some participants wondered whether emerging technology should be discussed in the context of “strategic trade” or “dual-use” items at all. They highlighted the overarching theme of a blurring of the lines between strategic trade and dual-use technologies, occurring in parallel with military, civil, and university collaboration on technology development. It was noted that the United States is moving toward protecting its strategic (military/economic) interests in the multilateral regimes and pushing EU thinking on technology controls to include national security, economic security, and defense. Meanwhile, ASEAN is concerned about “regression” to a Cold-War era style of export controls.

Finally, participants debated the appropriateness of using the term “Strategic Trade Management” versus “Strategic Trade Controls.” Some argued that “management” better captures the intent of the programs—which is not to prohibit trade, but rather to regulate, manage, and license. ASEAN policy makers tend to interpret “control” as “deny.” Therefore, both government and private sectors in the region tend to prefer “management” to “control.” Yet others were concerned that “management” implies an economics-first approach, while “control” is more focused on political and security concerns such as regional stability, WMD proliferation and terrorism.

For more information, please contact Crystal Pryor. The findings reflect the view of the organizers; this is not a consensus document.