I think you overdid it with the introduction, Senator [Sam Nunn]. Thank you. I'm very grateful to be here. As you indicated, this is probably the last thing I will do outside of the Department before I become a permanent lame duck. I'm delighted to be here, although I'm startled that you invited me to come when it's so obvious that I don't count for that much anymore.
I must say, coming down here -- especially when I found out I was going to share part of the day with Bill Reinsch [Under Secretary of Commerce] and John Holum [Senior Advisor to the President], my very worthy counterparts and oft-time adversaries in the process -- reminded me of something that Russell Long once said. He had two communities in Louisiana that were vying to get the same federal project. Unfortunately, the scheduling secretary mixed things up and arranged for both of the groups to come to his office at precisely the same time. It was an awkward moment, and finally Senator Russell said, "Look, if you all want me to agree with you, you're all going to have to come here separately." [Laughter.]
Unfortunately, you've created precisely the same conditions today, Senator. [Laughter.] I suspect we're not going to be able to get agreement on a lot of matters. That's because we're coming to the table with different perspectives, and I honor those different perspectives. That's what American democracy is about. Also, progress in our system requires this dialectic back and forth as we try to find the common good as we look to this new era. So I thank you for it. I thank you for this opportunity.
Last week I was over in England to wrap up some business, and I had the occasion to address an organization called the Defense Export Support Organization. I told them that from the United States’ perspective, we've been thinking about technology exports for a very long time, for virtually the life of our Republic. After all, we sing about it all the time. You know, our national anthem, which was about the battle at Fort McHenry, has that first verse which talks about the bombs in mid-air and the rockets red glare. Those were from Royal Ordnance. [Laughter.] [They were] one of the first exports that we didn't appreciate.
Of course, the irony is that Royal Ordnance is now part of British Aerospace or BAE Systems, which is now America's fifth largest defense contractor. It's a very interesting new world we're living in.
This last year had many lessons in it and I go back many times to think about what's happened in Kosovo. It was a remarkable event, on many fronts. But it was remarkable in no small measure because it was the first time that NATO ever went to war. It was a remarkable success from the perspective of the alliance being able to undertake something no one had really thought would be possible.
There's an awful lot of second-guessing that's going on now, of course, but it was truly a testament to the fact that democracies for a period of 50 years shared their values and shared a process for transparency among their militaries that led to the fact that they could stay together and fight a war together under remarkable and difficult circumstances. With all of the centrifugal forces that are alive inside the alliance, it held together. We should celebrate that.
I also think it’s obvious that it's harder for this alliance to fight together. We're growing apart technologically. We saw that quite vividly during Kosovo. The United States provided 85 percent of all of the combat sorties because our allies were not able to operate at night and with the kind of precision that was required for this air operation.
I've been in countless plenary sessions during the last three years as Deputy Secretary where we have talked about this widening technology gap between the United States and its allies. We lament it, we worry about it, we talk about it, we commit ourselves to stopping it, and yet it seems to be proceeding quite regularly.
Why? What's happening? Why is it occurring? I think there are three reasons. First, to be blunt, our allies aren't spending enough money on defense. The United States this year will spend $290 billion on national defense, and our European allies altogether will spend about $190 billion. More dramatic is what we spend on research and development. In the United States we will spend $38 billion this year on research and development, and all of our allies together in NATO will spend about $6 billion. So we'll spend five to six times more in the United States on research and development than all of our allies combined. Now, we have about 115 institutions that we spread that [research and development spending] across, but in Europe they have 78. Inefficiencies amplify this technology gap.
I think a second factor is the fact that our European allies have not yet tackled the consolidation of the defense industry. [The United States is] well along the way to doing that, and of course [Europe] is just starting now. But that means there's still a fair amount of excess overhead that's consuming the purchasing power of their budgets that now has to be worked out.
But the third factor, and the factor that I really want to spend the most time talking with you about today, is the fact that the United States has been quite hard in sharing its technology with our allies.
I personally believe that our approach to export controls, and especially export controls of military-related equipment, is now becoming increasingly counterproductive in protecting America's security.
Let's not mistake ourselves. The world is still filled with bad people that want America's military technology. That's not an issue. But the way that we're proceeding with trying to protect it is now becoming counterproductive in our ability to protect our security. As I said, it's driving a wedge between us and our allies.
I was embarrassed during the Kosovo air operation when the Dutch Ambassador came to me and he said, "Can't you help me get approval . . ." By the way, this isn't to blame the State Department. DoD was having the problem. [He said] "Can't you help me get approval so that I can buy some equipment so that my airplanes can still fly with the air operation in Kosovo?" I found that deeply embarrassing.
We go out and ask for our allies to help us undertake the operation, and then they have to come and say, "Can't you please find some way to let us buy from you what it takes for us to participate in the air operation."
I wish that was the only example of the problems we have. And by the way, I'm going to largely cite problems in DoD. I know that it's commonplace now in Washington to say there's a range war going on between the Department of Defense and the Department of State and I avoid that at all costs because John Holum's brother, Bob Holum, is my pastor. [Laughter.] And every week if I want absolution, I have to be nice to John, so I am not picking fights with John Holum or with my friends in the State Department. Many of the problems are inside DoD. Let me share an example.
I received a phone call from my counterpart from the Netherlands, who's name was Jan Meijling. He was calling me from a pay telephone outside of the McDonnell helicopter plant where he was not allowed to go in and look at the helicopters that he had just bought and that were being built for him. Now that's embarrassing, and maddening, I might add, at the same time. In this case, a Department of Defense security officer said he was not allowed to go in and look.
This sort of activity which is, I hate to say it, completely rife inside our approach right now, is driving a serious wedge between us and our allies. It's making it much, much harder for us to share the technology so that our best friends can stay current with us technologically so we can fight together when we have to go to war.
This approach, frankly, is also creating very negative incentives. I teased Manfred Von Nordheim [President, North American Operations, DASA] on the way in here. I said, Manfred, "Why are you here? You're no longer buying anything from the United States." DASA, the company that he currently represents, gave instructions to their engineers to design out U.S. components from their satellite systems because it was taking too long to get licenses approved.
All of the words that we promised to each other at the NATO 50th Summit about cooperation go down the drain if engineers are now told by their business managers to design out U.S. components because it's too hard to get a license. This is a problem. This is a problem for our security over time.
We're not going to be stronger in our ability to fight with our allies if we have this sort of a problem that's plaguing us, and we're unfortunately creating incentives for American companies to find ways around this process.
When we had the very long and bitter fight over encryption, there was more than one American company that decided to export its product overseas and to have the encryption package attached to it so that it could get around U.S. export controls on encryption. This is now becoming counterproductive to our security, so we need to do something about that.
We need a new system. We don't need to make the current system work better, because I personally believe that the underpinnings of the current system have become outdated by time. The current system that we have was really put in place during the Nixon Administration, at a time when American technology was leading the world and when the manufacturing process was largely still parochial or contained in a geographical region. Back then you would have to build an airplane in one place with the engineers close by to the production site because you were confronting problems all the time. You had to go down and fix it on a nearly real-time basis.
Now, with today's modern techniques for computer design, and the F-22 is an example of this, the fuselage, the wings and the cockpit are all manufactured in three different locations: here in Georgia, down in Texas, and out in Seattle. And when they were brought together for the first time to be mated, they were mated in four hours. It was unbelievable. Now it's possible to do that not just in the United States. You can have components made all around the world and then be brought together.
The Global Star Satellite telephone system is a good example. The satellite bus is manufactured in Italy, the transponders are made in France, the power control system and the solar panels are made in Germany, the control station is made in the United States, the telephone handsets are made in Thailand, the computer chips were made in China, it was launched in Russia, and we call this an American telephone system. [Laughter.] This is the nature of the manufacturing enterprise in the 21st Century. It's global. It's transcontinental.
The revolution in information technology and the revolution of transportation now makes it possible to make the most complex product on a distributed basis around the world, and yet we have an export control system that still revolves around the parochial, territorial, physical boundary conditions that were defined in the '60s and the '70s. It wasn't that those were bad at that time, it's that the world has changed so dramatically and we now need to adapt ourselves to design a new system that works in the new world.
Now this is, as I say, not the case where the world has no bad guys anymore. Frankly, there are more than we've ever had. There still are people that are seeking to get and use American technology against us in evil ways, and we have to protect ourselves against that.
How do we do that in this era when we have these transcontinental business practices and corporations? I think there are three features to a new system. Again, our goal here is not to weaken export controls but to strength them. It's not to streamline for the sake of making it easier for people to do things. It's actually to try to strengthen our ability as a country to protect what's truly important. After all, bad guys don't apply for licenses, and American companies don't submit licenses knowing they've got bad guys that are trying to get it. Yet that tends to be the centerpiece of our thinking about it.
So what are these elements of a new system? First, I think that we need to transform the nature of the security structure that undergirds the export control process. As I said before, it is one that is largely grounded on the parochial authorities of a government and the way it controls its physical borders which is increasingly obsolete in this era. Here is a very sharp point of disagreement between us and our friends in the State Department.
I think there is a model of how we need to adapt what we have, and that's adopt the model that Canada has with the so-called Canadian waiver for the International Traffic and Arms Regulation (ITAR) regulation. In this sense, we and Canada share a larger security perimeter, and we both use our controls to share this wider perimeter so that good things don't go out to the hands of bad people beyond our shared border. But between us we allow relatively unencumbered exchange of goods and services without licenses.
We in the Defense Department believe that we should extend this ITAR waiver arrangement to other countries for which we have trusted security arrangements. That was what was in our mind when we started talking to the United Kingdom a year ago, which resulted in the Declaration of Principles that was signed by Secretary Cohen and Secretary Hoon at the Wehrkunde Conference [on Security Policy] about three months ago.
In this instance, we say that we share the common goal of protecting the things that are truly important to our respective security. We have strong patterns of collaboration between our two countries when it comes to intelligence sharing and law enforcement, customs, etc. We believe that it makes sense, all the sense in the world, to extend the same kind of waiver that we have with Canada to the United Kingdom, so that we now have a larger transcontinental security perimeter and we lower the transaction barriers between our two countries.
Now I should say 20 percent, I believe, 22 percent of all of the licenses that go through the United States -- the State Department managed licenses for munitions items -- go to the United Kingdom. We could dramatically streamline the process and help our companies if we can have a backdrop of security where we put a larger security perimeter around the transaction.
More importantly, it creates the right incentives for governments to want to work with us. I've had many different countries, and companies in other countries, come and say, "How do we take this step?" I say, "It's very simple. You have to start having the same sort of constructive security arrangements with us that we have with the United Kingdom. And if that isn't in place, of course we wouldn't be able to extend these sorts of waivers to you."
So we're creating the sort of incentives for democracies to work together to share in a common way the burden of protecting technology in this very porous and, I still say, dangerous world. That's the first thing I think we need to do.
Senator Nunn referred to the second thing I think we need to do in one of his "out of the box" questions. I think we need to shift the nature of the licensing process away from a transaction basis and more to a process basis. Here I think the model is one that was set by the auditors about 25 years ago. Twenty-five or 30 years ago when a company wanted to have an audit of its books, auditors would come in and they'd go through, randomly look through every 100th or every 50th transaction and track it back to see what happened and this sort of thing. That isn't how they do it at all anymore.
Now they come in and they audit the internal controls of the company and ask whether the internal controls are in place so that the books adequately reflect the real business that's going on in the company.
I think we ought to adapt a similar process for exports so that you go to a company and you look and examine and challenge them. You put standards out for them about what a good internal control system would be like for technology control, and you audit that process. Then, if it meets the standards, you say the company is hereby authorized now to transact without further licensing requirements, exports to the following countries. And it's possible to define the conditions that you would put around that. But this would lower the cost of having a license for every transaction.
The problem is that we're always going to have somebody that does something wrong. Well in that sense, we shouldn't go out and shoot everyone on the battlefield who's still alive. We ought to figure out who did the bad thing and then punish them for it, but don't abandon a process that really would lower the transaction costs for all of our companies and still be, I think, a better form of protection for the country.
Finally, I think that we, the government, need to find ways to help us do a better job of trying to find the bad actors, rather than rely on a licensing process. After all, I think 98, 99 percent of all the licenses that come in are approved. So it's clear that this isn't a system that's really catching anybody. We need to find a device and a method, an approach, where we find or look for the suspect transactions and then spend our efforts trying to focus on those suspect transactions.
This means that the various branches and departments of the federal government need to collaborate more intensively in sharing information and in using modern data mining techniques to look for those troubling transactions that could be in our future and then focus our energy to stop those.
I use as an analogy to our export control process the bear that stands on the side of the river pawing at every fish that swims by just hoping to catch something. What we really need is the ability to target the barracuda that's coming downstream and catch the one that is a problem, and not to trouble ourselves with the countless other fish that are swimming by that are innocent and productive.
These are important times, and it's important to have a forum like this to try to ventilate these ideas. We do not have a consensus in the government on how to proceed. We have a view in the Defense Department, and there's just as important and valid a view in the Department of the State and the Department of Commerce. That's what this conference is about; for us to talk this though. But I hope that through this we can gain a consensus that we do need to make some changes in this country not just to make things easier, but to make things better, to make a technology control regime that's stronger, one that really reflects the complexity of 21st Century manufacturing, 21st Century commerce.
America is now such a porous and dynamic society, we have to invent new tools to provide the protection that we had been counting on for the last 30 years through a previous process which, as I said, now has become almost counterproductive to providing our security.
Let me thank you and thank the University of Georgia. Thank you, Senator Nunn, for your vision and foresight to see this as being such an important task for the country. It won't be done while I'm in office. I regret that. But this is such a large and complex problem that all we could do was to get it started and provide an alternative for people to consider.
I will in a future life still want to be a participant with all of you in working on these problems because I think nothing is of comparable importance when we think about how America protects itself in a globalized society and a globalized economy. It will take all of our imaginations and all of our efforts to make this work.
So to have a conference of this quality certainly is a signal event, and this level of representation indicates how important it is for us to find a new pattern for the 21st Century for our export controls.
Thank you very much. [Applause.]