Japan-S. Korea Export Control Dispute: Status Update
On 13 May, the South Korean government called on Japan to express an official position on its export restrictions and white list by month’s end. This request was the culmination of a nearly year-long trade control dispute between the two nations which began in summer 2019.
Organizational changes are in the offering from South Korea, including a serious reform of its export control system.
Commodities at Issue
The export control dispute arose in July 2019 when Japan restricted exports of three key semiconductor components to South Korea (see Figure 1). Tensions heightened with the removal of South Korea from Japan’s export whitelist that August. September saw South Korea remove Japan from its own whitelist in response.
Each state ratcheted up licensing scrutiny on the other. Industries in both countries feared the issue would become a more significant problem.
Figure 1. Restricted Japanese Exports to South Korea

Institutional efficacy mixed with historical enmity and uncertainty over regional security set the stage for the dispute.
Japanese concerns were threefold: (1) a three-year gap in bilateral policy dialogues, (2) uncertainty regarding South Korea’s catch-all provision, and (3) a lack of staff and organization in South Korea’s export control system.
In the background, the rise of China’s semiconductor manufacturing capacity raised the stakes for both South Korea and Japan. As if that pressure was not enough, COVID-19 pandemic added another layer of urgency.
Dialogue Ongoing
Despite the tension, the ongoing trade control dispute has not scuttled bilateral dialogue.
In December 2019, the Seventh Japan-Korea Export Control Policy Dialogue was held where both sides agreed on the necessity of “promoting effective export controls”.
Talks continued in March 2020 at the Eighth Japan-Korea Export Control Policy Dialogue with South Korea calling for further easing of export restrictions and a mutual welcoming of “recent plans to improve legal basis and institutional capabilities in both countries, including latest developments in the Republic of Korea.”
A Ninth Japan-Korea Export Control Policy Dialogue is planned to be held in South Korea, but a final date has not yet been set.
Recent Revisions to South Korean Export Control
South Korea’s first legislative change arrived in March as an amendment to its Foreign Trade Act “to clarify its control over conventional weapons” with changes slated for a June implementation. The amendment sought to address Japanese concerns over South Korea’s catch-all provision.
The second change occurred in May, when South Korea’s Ministry of Trade, Industry and Energy (MOTIE) was expanded and reorganized (see Figure 2). Trade Minister Lee Ho-hyun characterized MOTIE’s organizational reform as more than a hiring spree, saying it has “unified the trade security business, such as preventing strategic material and technology leakage, and strengthening its expertise.”
Figure 2. Reorganization of MOTIE’s Office of International Trade and Investment

MOTIE’s existing Export Control Policy Division has been joined by two new divisions (the Export Licensing Division and the Technology Control Division). All three divisions are under the administration of the newly created Director General for Trade and Security. The revised responsibilities and duties of the now three export control divisions allude to South Korea’s aim for rapprochement (see Figure 3).
Figure 3. Post-Reform Responsibilities & Duties for MOTIE’s Export Control Divisions

The way Japan responds at the end of May will be the clearest indication yet of how prolonged the export control dispute will be.
With South Korea’s export control revisions, the prospects for dispute resolution are better than before. Willingness to engage in bilateral dialogue is encouraging. We expect a positive reception from Tokyo, but how soon restructuring will yield tangible results is unclear.
NOTE: For Figures 2 & 3, English organization names and responsibilities & duties are not yet finalized.
Compliance in the Cloud
Companies are increasingly moving to utilize cloud storage and services, especially with many working from home during the COVID-19 pandemic. Seeing this trend, governments are seeking to issue guidance and regulations on cloud export controls and other intangible technology transfers. As with traditional export controls, national requirements, both varying and competing, can leave companies vulnerable to major cloud compliance violations.

United States
The most recent export control update to the “encryption rule” (in force as of 25 March 2020) brings ITAR cloud controls more in line with the EAR. Whereas previously companies had to ensure their ITAR controlled technology/data would only be stored on U.S. servers, now both EAR and ITAR technology can be stored on cloud platforms hosted anywhere in the world – the exception being intentionally storing ITAR technology in countries proscribed in 22 CFR §126.1 (see Figure 1), or EAR technology in countries listed in Country Group D:5.
Figure 1. Countries subject to certain prohibitions per 22 CFR §126.1

The technology must also be encrypted according to Federal Information Processing Standards Publication 140-2 (FIPS 140-2) and must be encrypted from the point at which it leaves the sending company’s “boundary” to where it enters the receiving company’s “boundary”. Boundary-to-boundary encryption allows for data to be encrypted and decrypted once it is on a company’s router, rather than at the sending and receiving computers as with end-to-end encryption (see Figure 2).
Figure 2. Boundary to Boundary Encryption

In the Netherlands, controlled goods may be uploaded to the cloud without any country restrictions as long as the data is encrypted and access is controlled. A license is required only if the technology is or can be accessed from outside the country and if a general export authorization is unavailable. No one at the cloud service provider, including employees and IT administrators, outside of the Netherlands may access the data unless authorized by permit. Failure to upload data to an adequately secured and encrypted cloud environment is considered making the data public and therefore prohibited.
Per recently updated guidance on intangible tech transfers (ITT), in order to store export controlled data on foreign servers, the servers must be encrypted and access restricted to people within Switzerland. Otherwise, a license is required. Persons in Switzerland who store controlled data and allow access to it by persons abroad must first obtain an export license.
Under the Defence Trade Controls Act, Australian citizens or residents do not need a permit to access controlled data on a cloud, regardless of their location. Therefore, individuals can access their controlled data from overseas and companies can provide access to their employees overseas, all without a permit. A permit is required once a foreign overseas person is given access to the data in the cloud for the first time. If the foreign person were in Australia when they first accessed the cloud and then accessed it again overseas, no permit is required. Unless the data is classified, there are no requirements to encrypt it in the cloud, nor control access to it by the cloud service provider.
Controlled technology may be stored on foreign servers if the data is encrypted and access is limited only to the Japanese company. In the company’s contract with the cloud service provider, a clause must explicitly state who has access to the data. The only acceptable reason for the service provider to give access to others is a court order. Providing access to controlled technology is considered an export when it is accessed outside of Japan or by non-residents within Japan.
South Korea
Under Article 26 of the Public Notice on Strategic Material Exportation and Importation, there is an exemption for an individual license requirement if transfers of technology are made via the cloud if they use end-to-end encryption up to the KCMVP encryption standard. The encryption must be verified by the head of the National Intelligence Service, per the Enforcement Decree of the E-Government Act. The decryption method or key should never be sent electronically, encrypted or not.
The cloud services market is expected to grow over 16% annually for at least the next 7 years. As the use of the cloud becomes more commonplace for handling and exporting controlled data and technology, governments will continue to institute more detailed export control requirements on the space. It is critical for companies using cloud services to be aware of export controls related to cloud services and storage in all relevant jurisdictions.
Don’t let your compliance fail on the ground when your data is in the cloud.
Will the Pandemic Ease U.S. Sanctions?
In just three short months, the COVID-19 pandemic has forced a drastic reassessment of many elements of conventional political wisdom. The virus’ disruptive influence has been most evident in domestic politics, where governments scramble to push through record-setting stimulus and bailouts to lessen the blow of an exponential infection rate on quarantine-stricken economies. However, this new reality has yet to fully trickle up to the epicenter of U.S. foreign policy: the White House. The question now is whether the pandemic will pave the way for détente in sanctions policy or a ruthless doubling down to leverage the resulting chaos. Recent history and mixed messaging leave little expectation of relief.

Compassion by Coronavirus
In late March, thirty-two Democratic lawmakers addressed a letter to Secretaries Pompeo and Mnuchin imploring a reconsideration of sanctions on “major sectors of the Iranian economy, including [on] civilian industries, Iran’s banking sector and exports of oil”. The lawmakers’ concern mixed compassion with realpolitik: highlighting not only the adverse effects on ordinary Iranians but also the “economic and security interests of the U.S. and our allies” in the region. Presidential candidate Joe Biden echoed this in a 2 April statement, when he called for regulatory reprieves like “broad licenses” for pharmaceutical and medical device companies, a “dedicated channel for international banks”, and “new sanctions guidance” for exporters to provide assistance without fear of penalty.
International calls for a reexamination of sanctions began earlier. On 24 March, U.N. High Commissioner for Human Rights Michelle Bachelet argued that “in [the] context of global pandemic, impeding medical efforts in one country heightens the risk for all of us.” Her solution was that “sectoral sanctions should be eased or suspended.” Another dire warning came from Hilal Elver, U.N. special rapporteur on the right to food, who outlined in a 31 March statement that “the continued imposition of crippling economic sanctions on Syria, Venezuela, Iran, Cuba, and, to a lesser degree, Zimbabwe…severely [undermines] the ordinary citizens’ fundamental right to sufficient and adequate food.” A second U.N. special rapporteur, as well as the U.N. Secretary General have since issued calls for waiving unilateral sanctions.
While experts and officials in the United States and abroad increasingly see the pandemic as a time for rapprochement (however temporary), the final say lay with the White House – where mixed messaging has reigned of late.
Give an Inch…
Before COVID-19 consumed the government’s focus, President Trump was preoccupied with Venezuela and Iran. In the past year, the U.S. has ratcheted up the pressure, both economically and militarily; the result of which exacerbated vulnerabilities in their response to the pandemic. While the two countries remain major focal points for Trump’s foreign policy, the continuation of the administration’s sanctions policy has come into question. No doubt there have been acts of incompetence and cover-up the world over, but cracks, however slim, are appearing in the administration’s united front as the pandemic spreads.
One such glimmer of flexibility came from State Department. On 31 March, Secretary of State Pompeo hinted at a shift in the administration’s tone on Iran sanctions, saying “we evaluate all of our policies constantly, so the answer is – would we ever rethink? – Of course.” That a hawkish official like Pompeo was willing to say this publicly was a significant development. While humanitarian assistance has been permitted since early March, sectoral sanctions still weigh heavy.
Another glimmer was the recently revealed Democratic Transition Framework for Venezuela. The framework promises sanctions relief on government officials and the oil sector in exchange for Maduro and Guaidó relinquishing control to a five-member ruling council. But U.S. special envoy to Venezuela, Elliot Abrams, implied no sanctions would be lifted unless all foreign military units left the country. However, Venezuela’s Foreign Ministry quickly dismissed the framework as “tutelage.” It was a non-starter for Maduro, who rejected it outright.
While not the about-face many officials have called for, it appears the administration has opened a narrow window for negotiation. Whether they follow through is another question.
Never Let a Good Crisis Go to Waste
For every lifeline the administration has floated, it has also pulled back. The day after Pompeo’s suggestion of flexibility, Trump tweeted of an Iranian “surprise attack” and threatened “a very heavy price, indeed!” Similarly, the dubious carrot of the Venezuela framework was paired with a familiar stick: “sanctions will remain in effect, and increase, until the Maduro regime accepts a genuine political transition.” Thus, the common thread of mixed messaging returns.
Such doublespeak is due to the administration’s balancing act of placating domestic and international concern while leveraging the instability created by sanctions on Iran, Venezuela and others. There is good reason to believe the administration’s suggestions of flexibility are nothing more than suggestions. The assumption that the U.S. will relax its sanctions during this crisis runs counter to the long-standing Trump doctrine of “maximum pressure” on “malign actors”.
Even if the Trump administration dramatically shifted course, the knock-on effects of its hardline sanctions policy may have constrained meaningful change. For example, banks will remain reluctant to process transactions to sensitive destinations, even with rollbacks, given their risk-averse nature and the administration’s recent history of aggressive enforcement. The impact of open licenses may be limited if banks reflexively regard such transactions as inherently radioactive. De-risking is now fully muscle memorized, and such a Pavlovian response is hard to unlearn. It will take exceedingly clear guidance and open communication from the administration to do otherwise. So far, there has been little evidence of this approach.
The ripple effects of the COVID-19 pandemic will continue to manifest in unforeseen ways. However, for the time being, unilateral U.S. sanctions remain unaffected. The administration’s axiom of “maximum pressure” has not yet bent to the realities of global pandemic, and its mixed messaging offers little concrete insight. While Europe is more open to temporary workarounds, if the U.S. does not retrench, exporters, banks and the sanctioned parties themselves will remain in limbo. Calls to halt unilateral sanctions will grow as the crisis worsens, but so will the United States’ leverage in imposing conditions on countries like Iran and Venezuela. Against the backdrop of billions reorganizing their daily lives to slow the spread of the COVID-19, U.S. sanctions policy remains business as usual.
China Publishes Draft Export Control Law
For the past four years, China has been working on a new omnibus export control law that would bring its system closer in line with international standards. On 28 December 2019, the Standing Committee of China’s National People’s Congress published a second version of the Draft Export Control Law (中华人民共和国出口管制法(草案)). The first draft was released in June 2017 but floundered due to bureaucratic change and worries at the time that it was not responsive to national security concerns.

If passed and implemented, the new law could result in greater Chinese scrutiny of dual-use and high technology exports. This approach recognizes that the United States appears to seek greater decoupling from China in certain areas of strategic technology. Foreign companies operating in China, or dependent upon Chinese high technology or strategic goods, should monitor developments closely and prepare for the eventual implementation of the law.
The law, if passed, would unify a patchwork of regulations (see Figure 1) governing trade in nuclear items, arms, and dual-use goods; and provide for greater interagency coordination amongst the existing licensing bodies for these items (e.g., the Ministry of Commerce (MOFCOM) for dual-use and the State Administration of Science, Technology and Industry for National Defense (SASTIND) for arms). Specifically, the draft law calls for an export control coordination mechanism involving departments under the State Council and the Central Military Commission.
Figure 1. PRC Export Control Legal Architecture

Greater Focus on National Security Objectives and End-User
Although the draft law was originally proposed to help China introduce more comprehensive controls to meet international nonproliferation obligations (even going as far as consulting with the Bureau of Industry and Security during the Obama era) and international standards (e.g., deemed exports and controls over intangible transfers of technology), the latest draft language suggests that the law will also be directed at achieving national security objectives. In particular, the draft law (Article 10) provides for the creation of lists of destinations, specific natural persons, legal persons and other organizations to whom exports of controlled items may be prohibited, and for the temporary restriction of trade of unlisted items to those listed countries or persons. Moreover, among the criteria to be considered in licensing (Article 12) are explicitly “national security” and “destination country.” Clearly, the draft would grant authorities the ability to counter any perceived unilateral or multilateral controls that it deemed unfair. Indeed, the draft law explicitly calls for controls based on “reciprocity.”
Greater Focus on Industry Outreach and Compliance Programs
Consistent with emerging international standards, China is pushing companies engaged in trade of controlled items to adopt internal compliance programs. Even though MOFCOM already published guidelines for such compliance programs in 2007, Chinese authorities have conducted little outreach for implementation outside of some of China’s largest state-owned and private companies where trade compliance programs are few and far between. Over the past two years, MOFCOM has consulted with a handful of Chinese companies about the features of a modern trade compliance program and how to best promote them. The draft law (Article 11) requires the state to provide industry compliance guidelines and outreach. In addition to outreach by MOFCOM and state agencies, the draft law grants authority to trade associations to engage in compliance outreach. The draft law also envisions incentives for companies that introduce compliance systems, in line with other governments who have offered global and general licenses on condition of a compliance program being in place. Incentives for compliance programs would likely be set forth in separate implementing regulations.
Increased Enforcement and Penalties
The draft law provides for significantly enhanced enforcement and heightened penalties. For example, under the draft law, agencies would have broad search and seizure authorities when investigating potential violations. These authorities include the ability to enter business premises, gain access to and copy business records (accounting books, agreements, business correspondence), prevent the loading of suspicious items, order the return by forwarders of items illegally exported, detention of goods, and inquire into bank accounts of operators.
The proposed penalties for violations have also been increased over existing and previously proposed penalties. For example, the penalty for exporting without a license may be a fine from Customs of 500,000 RMB to 5 million RMB. If the case is deemed “severe”, Customs may temporarily shut down the offending company or revoke its ability to export. Customs would also be granted authority to impose monetary penalties on groups who “knowingly” facilitate unlicensed trade in strategic items (e.g. logistics providers, e-commerce platforms).
Foreign companies operating in China should track the export control law closely. The law provides China with authorities to respond to what they perceive as “discriminatory” U.S. and other foreign controls. As such, it is possible, that U.S. companies operating in China, or who are dependent upon Chinese-origin goods, could face controls that limit their ability to export or import critical technologies. It is also possible that Chinese authorities will work to establish controls on “emerging technologies,” especially in areas where China is perceived to have a lead or predominance.[1]
Chinese authorities have become acutely aware of the use of export controls and sanctions by the Trump administration to achieve foreign policy and national economic objectives. Although the original intent of the export control law in China was to meet international nonproliferation obligations that would support integration into additional multilateral export control regimes, the direction of U.S.-Sino relations has prompted a greater focus on countering U.S. export controls.
The direction of the U.S.-China trade war, and more specifically the emerging issues in managing technology trade, is likely to have a profound effect on how the draft law is ultimately implemented. Regardless, multinational companies should be prepared to consider tighter regulations and controls on technologies developed in China over the next two years.
[1] As noted in Article 10: “As per demands for fulfilling international obligations and maintaining the state security, the State’s administrative authorities of export control in concert with relevant departments may, upon approval by the State Council or the State Council and the Central Military Commission, forbid the export of relevant controlled items or the export of relevant controlled items to specific destination countries and regions or the export to specific natural persons, legal persons and other organizations, or temporarily control goods, technologies and services outside of the control lists.”
Japan-South Korea Export Control Dispute
On 2 August 2019, the Japanese Ministry of Economy, Trade, and Industry (METI) announced the removal of South Korea (ROK) from its export control whitelist, which goes into effect on 28 August. The change in South Korea’s status bars it from preferential trade treatment and means transactions will receive additional licensing scrutiny. South Korea plans to respond by removing Japan from its “white list” in September. The growing export control spat adds uncertainty to an already tense East Asia region and highlights the trend of smaller nations using export control and sanctions to benefit their foreign policies at the expense of industry.
What Does This Mean for Business?
South Korea will no longer be listed in Appendix Table III of Japan’s Export Trade Control Order, which permits preferential trade treatment. It will be moved to Group B. As such, exports to South Korea will not be eligible for authorization of General Bulk Export Licenses, and exports and technology transfers to South Korea from Japan will be subject to a catch-all provision, allowing the Japanese government to suspend any export they wish for national security purposes. Furthermore, exports to South Korea of hydrogen fluoride gas, fluorinated polyimide, and photoresists will be restricted initially, and there are plans to expand restrictions to dozens of other products.
Japan produces most of the world’s supply of hydrogen fluoride gas, fluorinated polyimide, and photoresists and thus has significant leverage over South Korean companies regarding their sale and distribution. The export of these chemicals is vital to the manufacture of semiconductors and display panels, and restrictions would have a detrimental effect on firms heavily reliant on Japanese suppliers such as Samsung and LG. As Lindsay Maizland of the Council on Foreign Relations explains “experts estimate that these companies have one to three months of stockpiled materials. If the trade dispute lingers, the global tech industry could feel the sting, since South Korean companies produce more than half of the world’s semiconductors and more than 90 percent of smartphone screens.” This will have dramatic implications for global smartphone sales, memory manufacturing, and CPU fabrication.
What Caused This Spat?
Japan cites a lack of comprehensive South Korean export control policies as its justification for the removal. METI contends that this has resulted in states such as Iran, North Korea, and Syria receiving unauthorized export-controlled goods. Another source of tension is South Korea’s demand that Japanese firms pay reparations for Koreans’ inducement into forced labor and the sexual mistreatment of Korean women during World War II. Finally, the Japanese economy is performing at its weakest since 2010. The removal of South Korea could be an attempt to insulate Japanese firms from regional and global threats. In other words, the spat is a mix of unresolved historical resentments, security concerns and protectionism for Japanese electronics companies.

How Will South Korea Respond?
The South Korean government is responding in a tit-for-tat fashion by announcing on 12 August the decision to drop Japan from its own 29-country “white list” in September. However, South Korea is upping the ante, and plans to create a new downgraded trade designation specifically for Japan. As Reuters reports, Industry Minister Sung Yun-mo said the new category for Japan would reflect that it does not run its system according to “international export control principles.” South Korean exports to Japan will now face a similarly lengthy licensing process.
President Moon has warned Korean firms to prepare for a “prolonged trade dispute” and to attempt to either produce the restricted materials themselves or diversify their supply chains. This was reinforced by the South Korean Finance Minister’s comment that Seoul is “working on comprehensive plans to reduce the country’s dependence on Japan’s materials, components and equipment industries.”
How Will This Impact Companies with a Global Footprint?
For most multinational companies – except those heavily reliant on the South Korean and Japanese markets – the initial impact of this spat will be minimal. However, this case portends a growing international trend of smaller nations taking a tip from Trump’s playbook and using tit-for-tat export control and sanctions to further their foreign policy goals. While mutual pressure may push Japan and South Korea back to the negotiating table in the short term, the historical dimension underlying the spat may portend longer terms effects. Firms and their compliance staff should be following closely the escalations between the neighboring states and should be prepared to build in longer wait times for licenses and, ultimately, more diversified supply chains in case this spat turns into a larger trade war.
Regulating the Future
Concerns over Defining “Emerging Technologies”
On 19 November 2018, BIS published an Advanced Notice on Proposed Rulemaking (ANPRM) seeking public comment on criteria for identifying “emerging technologies” that are essential to U.S. national security in order to develop export controls on presently uncontrolled technologies. This process is being undertaken pursuant to Section 1758 of the Export Control Reform Act of 2018 (ECRA), which mandates the establishment of a regular multi-agency process for identifying appropriate controls on emerging and foundational technologies that are “essential to the national security of the United States” and that are currently subject to no or very limited controls under other existing U.S. export control regimes.[1] This is exercise also supports requirements in the Foreign Investment Risk Review Modernization Act (FIRRMA), which was enacted with ECRA under the National Defense Authorization Act (NDAA) of 2018.
The ANPRM included fourteen broad representative categories of technology from which BIS seeks to determine whether if and which emerging technologies are important to U.S. national security for which effective export controls should be implemented:
1. Biotechnology
2. Artificial intelligence (AI) and machine learning
3. Position, Navigation, and Timing technology
4. Microprocessor technology
5. Advanced computing technology
6. Data analytics technology
7. Quantum information and sensing technology
8. Logistics technology
9. Additive manufacturing (e.g., 3D printing)
10. Robotics
11. Brain-computer interfaces
12. Hypersonics
13. Advanced materials
14. Advanced surveillance technologies
The ANPRM also includes a list of representative examples of such technologies for each of the above categories (e.g., computer vision and national language processing within the AI and machine learning category).[2]
As an unfolding process, there is a dearth of working definitions, sufficient to inform policy in a salutary fashion, of emerging technologies – let alone how to control them. We were curious about the collective thinking on this complex topic. As such, we tried to distill the central themes and concerns across the ANPRM comments. What follows is a basic text analysis thereof.
Figure 1. Comment Contributor By Type
Contributors: The comment submission period ended in January 2019, with BIS publishing a final list of comments in early March. Overall, 232 individuals (51% or 118) and organizations (49% or 114) submitted comments (see Figure 1). Of the organizations, industry/trade associations, technology companies (e.g., semi-conductor and ICT) and universities contributed the majority of comments (~44%). Two foreign governments (France and Japan) also submitted comments.
Figure 2: Country References
Topics: Of the 232 comments submitted, the vast majority (~75%) addressed artificial intelligence (AI), followed by additive manufacturing, robotics, quantum computing, and biotechnology.
China was the only country mentioned to a statistically significant degree (China = 647 references, see Figure 2). The next most cited country was Japan (130), followed by Germany (62), Israel (56), and Russia (53).
In terms of the subject technologies listed in the ANPRM, the leading category was AI, at >45% of the references. Additive manufacturing, robotics, quantum computing, biotechnology, and data analytics represented nearly 80% of the ANPRM list technology references. One category, “Brain-Computer Interfaces” was conflated with AI and Machine Learning. On a related note, most references to “neural networks” – included as subcategories to both AI and Brain-Computer Interfaces – referred to AI as networks and not as “neural controlled.”
Beyond the technology topics, most submission focused on the following major themes:

Research (>1,250 contextual references);
Foreign availability (~305 contextual references); and
Criteria (~300 contextual references).

In both instances, sentiment analysis grouped both themes against concerns about overly restrictive (i.e., “broad” or “general”) controls. In this regard, over ~85% of the comments clustered around “showing concern” about the proposed list-building initiative. “Criteria” was heavily correlated with foreign availability and multilateral control parity. Indeed, sentiment analysis for “criteria” evinced a clear consensus on the exercise of caution in establishing control parameters given the dynamic nature of the technologies addressed.
Figure 3: ANPRM Technology Category Reference
Further text analysis highlighted a number of relationships between terms. For example, a collocation analysis revealed that ‘risk’ was highly collocated with ‘unilateral,’ ‘economic,’ and ‘research.’[3] (See Figure 4).[4] China, as country most cited, was highly collocated with ‘AI,’ ‘Japan,’ ‘Russia,’ and ‘research.’ ‘Collaboration,’ mentioned 243 times, was collocated with ‘development,’ ‘AI,’ and ‘research.’
Figure 4: Collocates of “Risk”
Conclusion: Since the inception of modern export controls, the fundamental question vexing regulators and industry concerns control criteria, as recently noted in ECRA’s admonition on stifling circumscriptions: “avoid negatively impacting U.S. leadership in the science, technology, engineering, and manufacturing sectors.” Predicated upon weapons of mass destruction (WMD) technologies and materials, the known technology universe was well understood and, as a technology class, evolved slowly. While there are civilian applications for maraging steel (e.g., exotic guitar strings), further applications will not revolutionize the economy in any way similar to AI’s impact. The emerging technology phyla, however, includes a range of exponentially developing technologies, defined in the business literature as “disruptive.” The “emerging” set is changing even as while we field comments for definitions. True to form, the dual-use aspect of any control list technology is always in its application as opposed to its constitutive nature. Unlike most of the current Commerce Control List (CCL) entries, the BIS starter kit of 14 technologies are wildly unrestrained in their applicability to current and new economic products and services, as well as to current and future weapons systems.
Apart from the above textual analysis, which merely conveys statistical portraits of clustered themes and word counts, a brute force reading of the comments does provide a more visceral listing of anxieties, complaints, and recommendations. The primary anxiety expressed in the comments concerns the negative economic and security impact of either overly restrictive, and/or futile controls. For example, overly restrictive controls could result in innovation off-shoring (or “innovation arbitrage”)[5], declining technology and ethical leadership, technology islanding or autarky, and a diminished technology reservoir from which the military could draw.
Complaints varied on a continuum regarding the USG approach to defining emerging technologies, arguing that the government should have started with very specific technologies rather than working from general categories. In other words, the onus should be on the government to establish why and how a technology is a national security threat a priori, not the other way around. One commentator succinctly captured this dilemma in the ANPRM process:
The ANPRM notes that, “Certain technologies, however, may not yet be listed on the CCL or controlled multilaterally because they are emerging technologies. As such, they have not yet been evaluated for their national security impacts.” These two sentences are at the heart of the problem of defining emerging technology within an export control framework. The uncertainties and ambiguities around emerging technology make them difficult if not impossible to govern from an export control perspective, and yet this is exactly what the process to be established through this ANPRM is tasked to do.

In terms of practical recommendations, the comments were generally of the catch-all variety, mentioning the use of the EAR’s pre-existing tool kit of non-listed and end-use and user controls: catch-all, Entity List, and 0Y521. The comments also concluded that the listing exercise would be utterly meaningless in the absence of multilateral consensus. There was almost no mention of specific control examples (e.g., “here’s how you can export control AI….”).
More so than in the recent export control past, the ANPRM has captured the fundamental anxiety of our age: technology governance. The earlier operating system of controls was constructed around a well-established threat, WMD, while emerging technology is rapidly and fundamentally rewriting our security and economic narratives in such ways that the narratives cannot practically congeal around a least common denominator that will define the constituent elements of “essential to the national security of the United States.”
[1] BIS also announced that it will issue a separate ANPRM in the future regarding the identification of “foundational technologies” that may be important to U.S. national security.
[2] Presumably, BIS developed the ANPRM representational list from Congressional testimony and other USG research. While the civilian applications for emerging technologies are relatively well established in the business literature (e.g., “disruptive technology”), there is decidedly les information about prospective “weapon” systems. For an illustrative example of the former, see McKinsey Global Institute, “Disruptive technologies: Advances that will transform life, business, and the global economy,” May 2013 < https://mck.co/2KqDe0z> and World Economic Forum Anja Kapersen, “8 emerging technologies transforming international security,” September 2015
[3] Collocation analysis examines sequences of words or terms which co-occur more often than would be expected by chance, or terms that appear more frequently in proximity to keywords across an entire corpus.
[4] Collates connected to risk are arrayed by distance, with close proximity indicating a high degree of collocation, likewise decreasing with distance.
[5] See, Adam Thierer, “Innovation Arbitrage, Technological Civil Disobedience & Spontaneous Deregulation,” 5 December 2016 < https://techliberation.com/2016/12/05/innovation-arbitrage-technological-civil-disobedience-spontaneous-deregulation/>.
Everybody Sanctions
The New Abnormal of Economic Statecraft
States now reach for economic levers to achieve foreign policy objectives.
This is a working definition of economic statecraft – that emerging global modus operandi – which may hasten what economist Paul Krugman referred to as the “great unraveling.” The latest instance of unraveling and economic statecraft is the curious case of Turkey and its otherwise stalwart treaty ally, the United States.
As a dictum of contemporary international economic practice, states would be wise, to paraphrase Joe Nye, to recognize that “manipulating the asymmetries of interdependence is an important dimension of economic power.” Companies would be wise to recognize their vulnerabilities in such a dynamic.
President Trump greets Turkish President Erdoğan during less turbulent relations.
On 20 August, the Trump Administration imposed sanctions on two Turkish government officials over the detention of an American pastor being held on espionage charges, the immediate effect of which was to further deflate the already enfeebled Lira. President Recep Tayyip Erdogan’s characterization of the sanctions is illustrative of the above-mentioned trend, describing, in a recent speech, the strong United States dollar as among “the bullets, cannonballs and missiles” foreigners are using to wage “economic war” on Turkey.

The United States is the biggest destination for Turkish steel exports, with 11 percent of the Turkish export volume. The Lira fell further after Trump’s tweet. In response to U.S. threats, Erdogan’s government announced that it would be implementing retaliatory tariffs on American cars, alcohol, tobacco, and over 100 other products. Not to be left out of the fun, on 23 August, Congress blocked the proposed sale of 100 F-35s until the Pentagon issues a report assessing the “overall strategic relationship with Turkey.”
Like much about the current Administration, the petulant and profligate use of sanctions and tariffs is unprecedented. The Turkish case is particularly unique insofar as the Administration is not only gut-punching a NATO ally (yes, he’s already threatened the Europeans with similar tariffs and with exiting NATO), but doing so to curb Ankara’s perceived wayward behavior through economic statecraft rather than the traditional diplomatic means. This, of course, has downstream consequences.
The list of aggrieving behavior includes Turkish support of jihadist groups in Syria, cultivating closer relations with Iran, and contracting to purchase S-400 surface-to-air missiles from Russia, the use of which would compromise the strategic integrity of the aforementioned F-35s. Foreign economic policy is also most likely being used for domestic political purposes: as red meat to the evangelical vote, the Administration is turning the economic screws on Ankara to free the American cleric in the lead up the November mid-term elections.
On 15 August, President Trump tweeted the following:

While not exactly correct in the broader U.S. economy sense, the President is correct with respect to government revenue, at least until 1913 with the institution of income tax (the 16th Amendment). Since the end of WW2, the U.S. has promulgated and sponsored at considerable effort a free trade agenda (i.e., tariffs ‘hugely’ bad), with sanctions serving as a non-military, discrete adjunct to foreign policy.
Now, tariffs and sanctions are indiscriminately, inconsistently applied to a range of political and economic issues. The forsaking of its custodial responsibilities over the system it helped construct sets a larger tone and creates a leadership vacuum. If the emerging tools of contemporary statecraft are tariffs and sanctions, expect more and novel engagements between allies, frenemies and adversaries.
States must become, in the words of Japanese scholar Toshifumi Kokobun, “sensitized to and creative in the use of such statecraft.” Companies should strap in for a wild ride.
When a License Denial Means Bankruptcy
The Case of CybAero
Can a denial of an export license make or break your business?
For Sweden’s largest military drone company CybAero AB and its line of dual-use helicopter drones, a license denial meant bankruptcy.
In its short history, CybAero had developed valuable collaborations with organizations such as Saab and the US Navy’s Naval Research Laboratory, and garnered widespread interest from China, Norway, Pakistan, Spain, and the United Arab Emirates. Yet the company ultimately declared bankruptcy in June 2018 after a multi-year battle to secure export licenses for an eight-figure deal.
CybAero had signed a joint venture deal with Chinese state-owned Aviation Industry Corporation of China (AVIC) group in July 2014 to supply 70 drones (worth 78-89 million USD) over 8 years. When the deal was announced, CEO Mikael Hult stated the company’s goal was to control 30% of the global drone market. That dream ended only 4 years later.
A drone manufactured by Austrian drone company Schiebel, who was the target of an Austrian parliamentary inquiry for export violations to China in 2013.
The entire AVIC deal rested on the presumption that CybAero would be granted an export license by the Inspectorate of Strategic Products (ISP) — the Swedish export control agency. The company was confident the license would be granted, and CybAero had precedence on their side. Just a few months prior their deal with Chinese Customs for the sale of three advanced drones via an intermediary had been approved.
The first trouble for the CybAero deal came when ISP denied the license for the 70 drone AVIC deal in October 2014. CybAero explained the denial as the result of applying for all 70 drones in one license, notwithstanding the fact that ISP only grants licenses for two-year periods when the AVIC deal was over eight years.
On reapplication CybAero received a positive advanced notice in November 2014 for delivery of the first 10 systems. Advanced notices are not final and require final approval once delivery is to be made. This is key, as the reason for the previous rejection was lack of clarity on the drones’ end-users.
In March 2015, CybAero received the first order from AVIC: five APID ONE Ranger drones designed for commercial purposes such as infrastructure monitoring and environmental mapping. Though CybAero lacked a license at the time, the company stated they were in constant communication with ISP and expected delivery in late 2015. In April, ISP gave CybAero a license for temporary export for demonstration purposes, and the demonstrations were conducted in multiple locations in China in August 2015.
In the less than two years between August 2015 and February 2017, CybAero had two temporary export licenses denied, and one revoked after being granted. CybAero was never able to export even the first five drones to AVIC and began suffering financial problems after years of continued losses.
In early 2018 the newspaper Svenska Dagbladet ran two articles claiming that CybAero had knowingly exported military technology to China in their Chinese Customs deal, despite the EU arms embargo on the country. This drew a response from ISP, which stated that drones can be military or dual-use technology, and that the licenses issued to CybAero were for dual-use technology.
CybAero was in financial trouble, despite multiple new investors, and their listing on the First North exchange was removed.
Following the inability to resume trading, CybAero opted to declare bankruptcy in June 2018, ending the dream of controlling 30% of the global drone market they declared just four years before. Had they fulfilled the AVIC contract, CybAero may have survived. In the end, consecutive years of losses proved too much to overcome.
This case demonstrates the importance of assembling an experienced and well-supported export compliance team that possesses a complete understanding of regulatory requirements in operational markets. It also shows the detrimental effects a license denial can have on smaller companies.
CybAero’s 2014 application for an export license for all 70 drones over 8 years shows they may have misjudged Swedish and EU regulations. It is critical to understand the differences in applying for a license for a one-time export, compared to a multi-year project. Additionally, not knowing end-user information when applying for a license would be a critical flaw in any application. Despite CybAero intentionally avoiding the risks of US components in their products, it was ultimately Swedish controls that sunk their largest deal and ultimately their company.
Countries around the world are placing increasing importance on export controls and protecting technology. Global compliance requirements should not be an afterthought.
The Bear Bites Back?
Russian Countermeasures and Criminal Penalties
For Western companies doing business in Russia, sanctions compliance may get even more complicated. The United States and Russia appear to be back to Cold War era tit-for-tat policies.
On 23 May, the Russian State Duma (lower house of parliament) passed Bill No. 441399-7 in retaliation for the 6 April United States sanctions on Russia. The Draft on Countermeasures titled “On Measures (Countermeasures) in Response to Unfriendly Actions of the USA and (or) other Foreign States” has the potential to disrupt operations by foreign-owned companies in Russia and to tighten Russian export control.
While the draft bill singles out the United States directly, it states the countermeasures may apply against foreign countries who commit “unfriendly” acts against the Russian Federation. U.S. and E.U. companies are now on notice.

The countermeasures included therein are broadly defined, though the bill gives the Russian President and Federal Government the right to determine which sectors, products, materials, individuals, and entities are impacted. Five key measures are outlined below with a sixth dependent on the will of the Russian President:
1. Termination or suspension of international cooperation between Russia/Russian legal entities with hostile foreign organizations, including those directly or indirectly controlled or affiliated with those unfriendly foreign governments
2. Prohibition or restriction on the import into Russia of products/raw materials originating in unfriendly foreign states
3. Prohibition or restriction on the export from Russia of products/raw materials by citizens of unfriendly foreign states
4. Prohibition or restriction on access to public procurement of goods, works, and services
5. Prohibition or restriction on the sale of Federal property to citizens of unfriendly foreign states
6. Other measures in accordance with the decision of the Russian President
Russian lawmakers are bolstering the countermeasures by discouraging Russian nationals’ compliance with foreign sanctions regimes. On 15 May, the Russian State Duma filed Bill No. 464757-7 which threatens up to four years of jail time and fines for individuals or representatives of Russian legal entities that restrict or deny doing business with a Russian citizen due to U.S. or other foreign sanctions. This may limit the ability of Russian national employees of foreign firms to comply with corporate internal compliance programs.
The main question now is: how far will Russia go?
Encouragingly, President Putin on 18 May indicated “any retaliation against U.S. sanctions must not hurt the Russian economy or partners that do business in Russia.” The revised version of the Draft on Countermeasures does partially echo Putin’s sentiment, having reduced the number of countermeasures from 14 to 5, including removing much of the draft bill’s threats to specific industries and sectors. While painful proposed counter sanctions on procurement of foreign technology equipment and software, rare earth metals, medicine, provision of consulting and legal service by foreign firms, and the exhaustion of IP rights among others have been diluted, the current draft is so broad that no one specific industry can be sure they can proceed unscathed. Simply put: the Draft of Countermeasures enshrines a wealth of discretionary power for counter sanctions.
As with all things Russia, the bite of these new countermeasures will be subject to Putin’s discretion. There are signs that Putin is reigning in more comprehensive measures that would isolate Russia economically. However, as evinced by recent U.S.-China trade negotiations, the immediate future of the Russian draft bill may be determined by the unpredictable relationship between Trump and Putin. Until the final text is made available, uncertainty will continue.
TradeSecure will continue to monitor developments as the Draft on Countermeasures moves through the Federation Council.
Leveraging India’s Major Defense Partner Status
The 2017 designation of India as a “Major Defense Partner” of the United States opens new doors for US companies to expand in this dynamic economy of 1.3 billion people. Commerce’s Bureau of Industry and Security (BIS) announced on January 19, 2017, a licensing policy change of general approval for exports and re-exports to India. BIS amended the end-use and end-user provisions of the Validated End-User (VEU) authorization in India to allow items to be used for either civil or military use if such items are not used for nuclear, missile, or chemical and biological weapons activities. This licensing change in addition to Prime Minister Modi’s ‘Make in India’ initiative, which relaxed foreign direct investment (FDI) laws in late June 2016, should expand US-India trade opportunities.

What This Means for the US Defense Industry
The Indian market for US military and dual-use goods became more accessible with the change in US licensing policy. Companies have two primary means to reduce compliance burdens for their exports: (1) being approved as a VEU by BIS, or (2) applying for a one-time license from Commerce.
US licensing changes coupled with Indian relaxation of FDI promises a more attractive environment for establishing overseas facilities. The Modi government is betting that with US companies allowed to retain majority ownership of their facilities and technologies, the domestic manufacturing capability of the world’s largest importer of military weapons will grow. Prime Minister Modi’s “Make in India” initiative will mutually benefit from the licensing change. To obtain a manufacturing license from India in industries requiring government approval (e.g. defense and private security) a company can apply to the Department of Industrial Policy & Promotion.
What Does India Want to Buy?
1. Single Engine Fighter Jets
India desperately needs single-engine fighter jets to supplement its aging fleet of only thirty-three planes. While Lockheed Martin presented a plan for producing an entire fleet of F-16s inside India, the government has yet to accept the terms while considering a separate Grippen production proposal from Saab. Currently Lockheed Martin has a 50/50 chance of winning the contract; aided by Senators Mark Warren and John Cornyn’s joint letter to Secretary of Defense James Mattis and Secretary of State Rex Tillerson calling for the Trump administration to encourage India to accept the deal. This could be a major step forward for US manufacturers.
2. Artificial Intelligence and UAV Technology
The Centre for Artificial Intelligence and Robotics (CAIR), an Indian laboratory under India’s Defence Research and Development Organisation (DRDO), is currently focused on the development of UAVs. Its work on configuring the complex artificial intelligence algorithms needed by new weapon systems has been facing some delays and setbacks. This is a great opportunity for US AI firms. Moreover, the recent $2 billion defense deal with Israel, which included 10 armed drones worth $400 million, clearly suggests that UAV purchases will be an important component of India’s military modernization efforts in the coming decades.
3. Ammunition
India’s Ministry of Defense plans to spend $3 billion on ammunition alone over the next decade, with ammunition procurement to be inked in long-term contracts with domestic private sector manufacturers. Private Indian companies are in initial rounds of talks with overseas suppliers for technology to fulfill such orders. US defense manufacturers should investigate such partnerships.
These examples above demonstrate the growing Indian demand for high technology and foreign investment in the defense sector. As Modi’s “Make in India” initiative expands, India’s private sector will soon be searching for industrial processing equipment, CNC machines, steel fiber, and a variety of dual-use commodities to expand their own operations. US firms should look to turn India’s “Major Defense Partner” status into a major business opportunity for establishing joint ventures or manufacturing subsidiaries or direct sales and service contracts with Indian companies.