DOD

High Cost of the Magic DoD Dollar

A recent study by the Center for a New American Security (“CNAS”) found that the U.S. defense industrial base must increase its participation in foreign markets and adopt commercial practices in order to maintain its competitive edge. [F/N 1] This finding is consistent with an unclassified memorandum issued by Former Secretary of Defense William Perry some twenty years ago, known as the “Perry Memo,” which noted:

“To meet future needs, the Department of Defense must increase access to commercial state-of-the-art technology and must facilitate the adoption by its suppliers of business processes characteristic of world class suppliers. In addition, integration of commercial and military development and manufacturing facilitates the development of dual-use processes and products and contributes to an expanded industrial base that is capable of meeting defense needs at lower costs.”

Pursuant to the Perry Memo, the Department of Defense has a significant national security interest in supporting the integration of commercial technologies into military applications. However, contrary to this goal, the Department of Defense regularly seeks imposition of restrictive export controls on commercial technologies that it considers useful to the warfighter. This strongly incentivizes commercial companies not to do business with the Department because foreign markets offer very significant sales opportunities.

While President Obama’s Export Control Reform Initiative (“ECR”) is transferring many items from export control restrictions under the Department of State’s International Traffic in Arms Regulations (“ITAR”) to the Department of Commerce’s Export Administration Regulations (“EAR”), ECR is not about decontrol. Rather, ECR has already imposed new controls on emerging technologies with imposition of the 0Y521 EAR Commerce Control List Export Control Classification Number series and by expanding the scope of ITAR controls on emerging technologies under U.S. Munitions List Category XXI (formerly titled, “Miscellaneous Articles”). [F/N 3] With these changes, the U.S. Government can now apply export restrictions to any commercial technologies that it feels provides a “significant” military or intelligence advantage under 0Y521 or a “critical” military or intelligence advantage under Category XXI.

ECR has also imposed ITAR control over a variety of otherwise commercial technologies merely because they receive U.S. Department of Defense funding, no matter how small – an ECR codification referred to by many as the “Magic DoD Dollar.” [F/N 4]

The CNAS report discusses ECR and correctly notes there are no indications that the U.S. export control system will be amended anytime soon to accommodate the demands of emerging commercial technologies. There is substantial evidence to support this and other findings of the CNAS study. Moreover, although the CNAS report does not directly discuss the Perry Memo, the fact that the Department of Defense has independently come to the same conclusion as the CNAS study validates much of the study’s findings.

Considering how many current Department of Defense export control positions continue to controvert the intent of the Perry Memo, the CNAS report is unlikely to substantially influence the Department of Defense’s tendency to seek the imposition of restrictive export controls on many emerging commercial technologies. Still, the report is a good read and is available for free download at the CNAS website in PDF, Kindle, and iBooks formats.

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[F/N 1] Ben FitzGerald and Kelley Sayler, “Creative Disruption Technology, Strategy and the Future of the Global Defense Industry,” Center for a New American Security, June 2014, available at: http://www.cnas.org/tech-strategy-future-global-defense-industry

[F/N 2] “Military Standards Conversion: A New Way of Doing Business,” Former Secretary of Defense William J. Perry, June 29, 1994. N.B. Later Department of Defense memoranda later eliminated some of the Perry memo requirements, but the provisions for integration of commercial technologies (i.e., the “New Way of Doing Business”) were expressly maintained in later instructions.

[F/N 3] See previous Defense Trade Law Blog post on “The Impact of Export Control Reform on Emerging Technology,” available at https://defensetradelaw.com/2014/01/30/1146/

[F/N 4] See e.g., “Amendment to the International Traffic in Arms Regulations: Revision of U.S. Munitions List Category XV,” 79 Fed. Reg. 27,180 (May 13, 2014); “Amendment to the International Traffic in Arms Regulations: Third Rule Implementing Export Control Reform,” 79 Fed. Reg. 34 (January 2, 2014); “Amendment to the International Traffic in Arms Regulations: Continued Implementation of Export Control Reform,” 78 Fed. Reg. 40922 (July 8, 2013); “Amendment to the International Traffic in Arms Regulations: Initial Implementation of Export Control Reform,” 78 Fed. Reg. 22740 (April 16, 2013).

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*The above is not intended as an exhaustive list of restrictions that may apply to a particular transaction nor advice for a specific transaction because the specifics of an individual case may implicate application of other U.S. laws as well as foreign laws that carry added or different requirements.  In addition, U.S. export control and sanctions laws are frequently subject to change.  Such changes can affect the continued validity of the information above, which is based on U.S. law existing as of June 9, 2014. For these reasons, assistance from a qualified attorney competent to advise on such matters is highly recommended.

Matthew A. Goldstein is an International Trade Attorney in Washington D.C. licensed to practice in the District of Columbia.  He can be reached at (202) 550-0040 and Matthew@GoldsteinPLLC.com.