[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
EXPORT CONTROL REFORM: CHALLENGES FOR SMALL BUSINESS? (PART I)
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HEARING
before the
SUBCOMMITTEE ON AGRICULTURE, ENERGY AND TRADE
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
FEBRUARY 10, 2016
__________
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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U.S. GOVERNMENT PUBLISHING OFFICE
98-594 WASHINGTON : 2016
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Small Business Committee Document Number 114-041
Available via the GPO Website: www.fdsys.gov
HOUSE COMMITTEE ON SMALL BUSINESS
STEVE CHABOT, Ohio, Chairman
STEVE KING, Iowa
BLAINE LUETKEMEYER, Missouri
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
CHRIS GIBSON, New York
DAVE BRAT, Virginia
AUMUA AMATA COLEMAN RADEWAGEN, American Samoa
STEVE KNIGHT, California
CARLOS CURBELO, Florida
MIKE BOST, Illinois
CRESENT HARDY, Nevada
NYDIA VELAZQUEZ, New York, Ranking Member
YVETTE CLARK, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRENDA LAWRENCE, Michigan
ALMA ADAMS, North Carolina
SETH MOULTON, Massachusetts
MARK TAKAI, Hawaii
Kevin Fitzpatrick, Staff Director
Emily Murphy, Deputy Staff Director for Policy
Jan Oliver, Deputy Staff Director for Operation
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Carlos Curbelo.............................................. 1
Hon. Brenda Lawrence............................................. 2
WITNESSES
Ms. Andrea Appell, Director, BPE Global, San Francisco, CA....... 4
Ms. Jennifer Robertson Ahrens, President, Robertson Forwarding
Company, Miami, FL............................................. 6
Mr. Craig T. Ridgley, Vice President and Managing Partner, Trade
Compliance Group, Washington, DC............................... 8
Greg Quarles, PhD, Chief Scientist, The Optical Society,
Washington, DC................................................. 9
APPENDIX
Prepared Statements:
Ms. Andrea Appell, Director, BPE Global, San Francisco, CA... 20
Ms. Jennifer Robertson Ahrens, President, Robertson
Forwarding Company, Miami, FL.............................. 24
Mr. Craig T. Ridgley, Vice President and Managing Partner,
Trade Compliance Group, Washington, DC..................... 26
Greg Quarles, PhD, Chief Scientist, The Optical Society,
Washington, DC............................................. 31
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
None.
EXPORT CONTROL REFORM: CHALLENGES FOR SMALL BUSINESS? (PART I)
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WEDNESDAY, FEBRUARY 10, 2016
House of Representatives,
Committee on Small Business,
Subcommittee on Agriculture, Energy and Trade,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:04 a.m., in
Room 2360, Rayburn House Office Building, Hon. Carlos Curbelo
[chairman of the Subcommittee] presiding.
Present: Representatives Curbelo, Luetkemeyer, Gibson, and
Lawrence.
Chairman CURBELO. Good morning. I call this hearing to
order. Thank you all.
Thank you all for joining us today for our Subcommittee
hearing on the Export Control Reform Initiative, ECRI. This is
part one of a two-part series on the ECRI. Tomorrow, the full
Committee will hold our second hearing, with administration
officials, where members will be given an opportunity to use
what we learn here today. I hope that through this hearing the
Committee can identify some of the biggest remaining hurdles
facing small businesses trying to navigate the United States
export control system.
The U.S. has a long track record on controlling exports of
defense materials and products and services that serve both a
civilian and military purpose, also known as dual-use items.
The reasons for doing so are sound. Export controls help to
ensure our national security, aid our diplomatic relations, and
maintain sustainable economic engagement around the world.
However, over the years, the U.S. export control structure
morphed into an onerous and complicated system comprised of
multiple agencies with differing jurisdictions. Eventually, the
modernization of manufacturing and technology outpaced the
export control system's usefulness.
The export control system's inefficiencies burden American
businesses. Small businesses, in particular, have been
discouraged from exporting because the time and resources
required to navigate the complexities of the export control
system often appeared to outweigh the benefits.
So, several years ago, the administration decided to
undertake a massive overhaul of the export control system. This
reform was supposed to have helped American small businesses
make better use of the system. However, experts and
policymakers alike have observed from the very beginning that
these businesses would also have the most difficult time
adapting to the new export control system.
Now, it is my understanding that, for the most time, the
ECRI has been met with broad support from America's private
sector. However, that does not mean that the transition has
been without its challenges and shortcomings, particularly for
small businesses. Export control professionals continue to
stress the importance of effective outreach efforts to small
businesses, and the harmonization of the export control lists
is still not complete. Additionally, much work still remains in
reducing the licensing and paperwork requirements that often
burden small businesses.
I look forward to hearing from our small-business
witnesses, who specialize in exports, about their firsthand
experience with the new export control system, and from their
perspective what progress the ECRI is making in the
simplification of export controls.
I am also eager to hear from our witnesses about what
hurdles still exist for small-business exporters and what
recommendations they might have on how the administration can
continue to encourage small businesses to navigate the United
States export control system and engage in international trade.
After all, 98 percent of all goods-exporting firms are small
businesses. We must do everything we can to help them succeed,
because their success ensures the United States will remain the
leader in international trade in the world.
Thank you again.
And now I yield to the ranking member, Mrs. Lawrence, for
her opening remarks.
Mrs. LAWRENCE. Thank you, Mr. Chairman.
I want to thank the witnesses for coming here today.
The strength of America's small business is unquestionable.
They drive American exports, with 97 percent of U.S. exporters
being small and midsize companies. With over 70 percent of the
world's purchasing powers located outside of the U.S., it makes
sense for American businesses to sell abroad. However, small
businesses are responsible for only 30 percent of all export
revenues. Additionally, more than half of all small-business
exporters ship goods to just one foreign partner.
If we are to achieve the goals set forth in the National
Export Incentive of doubling exports and creating new jobs, we
must remove existing burdens which constrain the success of our
small businesses. Those burdens include the overly restrictive
and sometimes confusing export control system. Additionally,
the application process is often long and drawn-out, leading
foreign customers to look outside of the United States for
products.
Small firms have been hurt in the past and put in a
competitive disadvantage. The National Small Business
Administration survey found that 75 percent of these businesses
reported difficulties when navigating the system currently in
place. The administration launched the ECR Initiative to
minimize those difficulties. In the extent of small exporters,
this meant involving coordination between the agencies. It also
meant updating outdated regulations and clarifying licensing
policies.
While the ECR Initiative undoubtedly represents a step in
the right direction, much more must be done to assist our small
exporters. Breaking down those barriers must be a priority in
every agency that seeks to provide export assistance to our
small firms.
Today's hearing will give us the opportunity to learn
whether reforms have helped and what more needs to be done to
further improve the export control system. I would like to
thank the witnesses again, in advance, and I look forward to
hearing your testimony.
I yield back my time.
Chairman CURBELO. I thank the ranking member.
If Committee members have an opening statement prepared, I
ask that they be submitted for the record.
I would like to take a moment to explain the timing lights
for you. You will each have 5 minutes to deliver your
testimony. The light will start out as green. When you have 1
minute remaining, it will turn yellow. Finally, at the end of
your 5 minutes, it will turn red. Do the best you can to adhere
to the time limits.
Our first witness is Andrea Appell, a director for BPE
Global in San Francisco, California. She has been working in
the field of trade compliance since 1997.
I will go ahead and introduce all the witnesses and then we
will start with Ms. Appell.
Our second witness today is Jennifer Robertson-Ahrens,
president of Robertson Forwarding Company in Miami, Florida, my
home. She has managed the firm's compliance program, training,
and implementation since 2001.
Our third witness is Craig Ridgley, vice president and
managing partner of the Trade Compliance Group in Washington,
D.C. There he performs trade compliance assessments with many
of the export control agencies.
Now I would like to yield to the distinguished ranking
member to introduce our final witness.
Mrs. LAWRENCE. It is my pleasure to introduce Dr. Gregory
Quarles, the chief scientist of The Optical Society.
Prior to joining the society, he was the cofounder and
managing partner of EdgeLight Incorporated, a startup
enterprise pioneering wearable light therapy. He was also the
CEO at B.E. Meyers & Co., Inc., a manufacturer of optical
electronic technology-related products used by defense and law
enforcement applications.
Dr. Quarles has been awarded five patents and has been
recognized with numerous awards, including the Department of
Navy Exceptional Performance Award.
Welcome, Dr. Quarles.
Mr. QUARLES. Thank you.
Chairman CURBELO. Thank you very much.
Ms. Appell, you are now recognized for 5 minutes.
STATEMENTS OF MS. ANDREA APPELL, DIRECTOR, BPE GLOBAL, SAN
FRANCISCO, CA; MS. JENNIFER ROBERTSON-AHRENS, PRESIDENT,
ROBERTSON FORWARDING COMPANY, MIAMI, FL; MR. CRAIG T. RIDGLEY,
VICE PRESIDENT AND MANAGING PARTNER, TRADE COMPLIANCE GROUP,
WASHINGTON, DC; AND GREG QUARLES, PHD, CHIEF SCIENTIST, THE
OPTICAL SOCIETY, WASHINGTON, DC
STATEMENT OF ANDREA APPELL
Ms. APPELL. Mr. Chairman and members of the House
Committee, thank you for inviting BPE Global to testify before
you today. My name is Andrea Appell, and I am director at BPE
Global.
BPE Global is an 11-year-old San Francisco-based
professional services firm specializing in export, customs, and
security compliance. BPE Global is a women-owned and operated
small business with five employees. BPE Global assists
exporters in facilitating trade under the Export Administration
Regulations, the EAR, and the International Traffic in Arms
Regulations, the ITAR.
Through BPE Global, I assist companies of all sizes, from
Fortune 50 companies to small family-owned businesses engaged
in international trade. In addition, I am extremely active in
the trade community as a member of the American Association of
Exporters and Importers, CompTIA, and a number of other trade
groups, including a 5-year term on the Board of Directors of
Women in International Trade, northern California, three of
which as vice president of the organization.
I thank you again for the opportunity to participate in
this forum. My testimony will focus on the area of facilitating
U.S. exports.
First, I would like to recognize Eric Hirschhorn and Kevin
Wolf for their leadership in the Export Control Reform. BPE
Global strongly supports the reform, and we are appreciative of
the huge undertaking and the accomplishments to date to
modernize the U.S. export control system.
It was only a few years ago that an interagency review
determined that the former system was overcomplicated,
inefficient, and could not keep pace with the constant
evolution of technology. Exporters of all sizes, including our
clients, were losing competitiveness in the global marketplace.
BPE Global strongly supports the administration's efforts
to facilitate exports while fulfilling its national security
mission, and we have participated in many outreach events to
educate, prepare, and facilitate the transition to Export
Control Reform.
The administration is implementing export reform in three
phases. During Phase I, we reviewed our clients' products and
provided assessments on the impact of reform on our customers.
We submitted comments regarding the impact of proposed rules on
our customers to BIS as part of industry groups. During Phase
II, we reviewed the export jurisdiction and classification of
our clients' products. In some instances, this represented tens
of thousands of items. The creation of a positive list has
greatly improved our ability to more efficiently classify
products, software, and technology.
As of today, we and our clients must understand both the
ITAR and the EAR and be able to classify items under both the
U.S. Munitions List, USML, and the Commodity Control List, CCL.
For our clients who were subject only to the ITAR, some of the
products have moved to the EAR, and they can now ship under
expanded license authorizations instead of always having to
obtain a Department of State license.
While the movement of products and technology from State to
Commerce has been advantageous, it has not come without some
drawbacks related to determining the level of control on a
product and timeliness related to license requests. When an
exporter moves from being subject to only the ITAR to a
business subject to both the EAR and the ITAR, regulatory
complexity and administrative burden increases. For example,
under the EAR, exporters must provide information on end users
and end use that they previously did not have to do under the
ITAR. Another example is that the audit trail for export
classifications has been expanded to include the order of
review and a 600 and 500 series review detail.
Though a majority of our clients have benefited from the
reform effort, moving their products to the CCL, a few have
actually moved from Commerce Department's jurisdiction to State
Department's jurisdiction.
To further explain the complexity under the EAR, exporters
must consult several different sections of the EAR in order to
determine if the commodity is subject to the EAR, assigned the
ECCN classification, check if general prohibitions apply,
identify the reason for control, assess whether or not the
reason for control triggers a license requirement, and finally,
determine if a license exception is available.
The ability to read and interpret multiple sections of said
regulations requires exporters to be comfortable with legal and
regulatory language and ultimately become self-taught experts
on the classification and controls related to the products and
technologies with which they work. Because mastery of the new
set of regulations is now incumbent on those same exporters, we
have found that companies prefer the pain they are most
familiar with, licensing products under the much more
straightforward administration of the ITAR.
So if, during the review of regulatory requirements, an
exporter determines that a license is required to export the
commodity, the turnaround time for response from either State
or BIS delays the export of items, especially when requests are
volleyed between two agencies and the other agencies they
consult. Delays are troublesome for companies of all sizes, but
particularly hard for small businesses to absorb.
Fulfillment of orders of small businesses is key to their
survival. If small businesses are unable to meet their
contracted demands, they face not only a financial risk, but
the risk of losing the valuable business to another, often
larger U.S.-based supplier, or potentially to a foreign
provider.
Other areas where our clients struggle are with missing,
incomplete, or contradictory definitions of underlying export
principles. This work I know is still in progress. The lack of
clear definitions can create a roadblock for export, which
results in assigning a classification which is overly
conservative and accompanied with higher controls.
BPE Global supports continued outreach by BIS on consulting
and understanding the EAR to guide businesses through obstacles
related to exporting, ease the transition from the ITAR to the
EAR, and encourage competitiveness in the global marketplace.
Again, I wish to thank BIS for its work on export reform.
In general, the reform seeks to provide increased
competitiveness, predictability, and efficiency for the export
communities. We share these objectives and welcome the
opportunity to be a partner as the process moves forward.
Thank you for the opportunity to speak to you today. I
welcome any questions.
Chairman CURBELO. Thank you for your testimony.
STATEMENT OF JENNIFER ROBERTSON-AHRENS
Now, Ms. Robertson-Ahrens, you are recognized for 5
minutes.
Ms. ROBERTSON-AHRENS. Thank you, Chairman and Subcommittee.
I appreciate the opportunity.
I am Jennifer Robertson-Ahrens. Robert Forwarding is a very
typical small business, as many freight forwarders in the
industry are. Our industry makes up about--85 percent of our
businesses are small business with about six or seven
employees, bringing about 2 million a year from maybe two or
three contractors. The way freight forwarders differentiate
themselves is in expertise, whether it be by commodity or
vocation to which they ship back and forth from.
Robertson Forwarding is unique. In the mid-1990s, we became
a government contractor working with INL and the U.S.
Department of State moving aviation parts throughout the world,
mainly Central and South America. I would believe that we were
one of the first companies dealing with ITAR-regulated freight
back in those times. In about 2001 is when I got into the
industry and started focusing on DDTC regulations and became an
export compliance officer.
One of the things that I have noticed with Export Control
Reform, though I believe the initiative is truly helpful and it
is a direction that we should be going in, as a DDTC Response
Team member once said to me, it is like a giant pool where you
drop a boulder and the ripples are going to be for a while.
And what I have seen that has happened with us is that it
is hard to train my staff on ECCNs. When it comes to the ITAR,
it is very self-explanatory what to do with the DSP-5. When it
comes to using an ECCN, depending what the classification is
and depending what country we are going to, it really depends
on what regulations and what government restrictions you have
per country. If a shipper does not give us this information
correctly, we are liable to civil and criminal prosecution for
improper exports.
We are noticing that manufacturers and shippers are
reluctant to self-classify and obtain commodity jurisdictions
as the supply chain grows and grows and grows between overseas
manufacturers with shippers in the United States creating
products and then selling them on to larger companies to then
fulfill their contractual agreements in foreign countries. We
are noticing that there is confusion between USML and how they
relate to their current ECCN classifications; with
identification of ECCN licensing requirements. It is leaving
exporters vulnerable to possible export violations due to lack
of training and a constantly fluctuating process as Export
Control Reform moves on.
Contracts and items are sometimes procured 2 years in
advance. You already identify how you are going to ship them
from the second that you procure them, the second that you sign
that contract. As this goes on every 6 or 7 months with the
evolution, it is changing how we are working, and it is
delaying our processes. We are seeing some of our customers up
to $150,000 on small contracts in just delays, fines,
penalties, improper shipments. We have some legal people here
who know that if I do something like that, I have to go and get
a voluntary disclosure. Those things are not cheap, nor are
they free. So it is quite dramatic what is happening.
As a freight forwarder, we are under enforcement agencies,
we are considered the last line of defense for U.S. Border
Protection, for the Office of Foreign Asset Control, Bureau of
Industry and Security, TSA, Transportation Security Authority,
and the Federal Maritime Commission. We have a lot of people to
answer to. So regulations that are clear and laid out clearly
towards us make a huge difference on how we are able to execute
our work.
One of the other issues that I have noticed coming forward
is there is a movement of--my staff is a group that usually, in
the freight forwarding industry, maybe has a bachelor's degree.
It is a great small-business initiative for hiring people with
what the government wants. You want more people working. You
want people coming directly up from the ranks.
Once this starts to push down between the shipper's
procurement into classifications, and it comes to us before
shipping, my staff has been asked by shippers to basically
classify their commodities for them because of the pushback.
People are nervous. People are scared. They are throwing it on
us.
Some of these items, whether they are EAR or ITAR, are all
based on algorithms or how they are done by the engineers. It
is an engineering response. I am not seeing the pushback
happening to manufacturers and shippers. I am seeing it as the
last line of defense as my firm. We are the ones who are able
to be audited quickly. We are the ones with five different
organizations that can come in at any time and review our audit
and our documents.
So what I would like to see is--we have been through this
before as freight forwarders when TSA came into full force. The
training, the outreach. CBP needs more training per different
export region, whether it is Dulles or MIA. They have to play
by the same rules. They are not. They are leaving it up to the
different CBP directors to decide how they train their staff.
it varies very much.
We also have, where we notice that--sorry, I am off the
cuff. Well, long story short, when TSA came into play, it was
every 2 years you received an update, and we all knew when we
had to get to that update. It wasn't happening so fluidly as it
is with Export Control Reform. You knew where you were playing.
You knew where the field was. You knew what you had to get up
to speed with. So Export Control Reform has been coming down
the pike for a long time. Its outreach is not. BIS has not been
nearly as active as it needs to be for freight forwarders and
exporters in training, offering very few outreach programs.
I would like to finish my statement by saying I really
believe that the initiative is correct. I believe the
initiative is what businesses need. But there has got to be
another way to encompass training, outreach, communication to
the hundreds and thousands of small businesses, like my own,
that need to be able to repair ourselves. Thank you.
Chairman CURBELO. Thank you, Ms. Robertson-Ahrens. I
apologize for mispronouncing your name earlier.
Ms. ROBERTSON-AHRENS. It is okay.
Chairman CURBELO. And I thank you for going off the cuff.
We appreciate that.
Ms. ROBERTSON-AHRENS. I love off the cuff.
Chairman CURBELO. Now, Mr. Ridgley, you are recognized for
5 minutes.
STATEMENT OF CRAIG T. RIDGLEY
Mr. RIDGLEY. Mr. Chairman, thank you for this opportunity
to speak before your Committee and your colleagues on ECR.
My name is Craig Ridgley, as you pointed out. I am the
managing partner and vice president of the Trade Compliance
Group, formerly known as MK Technology, which is the oldest
trade compliance consulting company in the country. We started
in D.C. back in the mid-1980s.
With regard to ECR, it is very much an open question as to
the impact of ECR as it relates to small businesses or SMEs. We
don't have a definitive answer, but we would like to pose some
questions that might lead Congress and the Obama administration
in the right direction. We also have some modest suggestions
that would help to ensure that the interests and concerns that
are at the center of the ongoing reform process are listened
to.
We start by asking BIS and DDTC to survey SME exporters,
ask them which elements of the ECR Initiative have been
beneficial and which have not. How should the ECR initiative be
altered to take into account their concerns? Are there any
recent surveys conducted by companies or business associations
on the potential impact of reform efforts on SME suppliers and
vendors?
SMEs are widely seen as disproportionately disadvantaged by
the export control system. SMEs could not then and cannot now
afford large compliance staff or a Washington liaison office.
Consequently, the overwhelming majority has less access to
government licensing authorities than those enjoyed by large
companies.
Long licensing times and opaque regulations are continuing
concerns. Further, due to the significant increase in BIS
classification requests and DDTC commodity jurisdictions, the
cycle time for those services has now reached the point of near
irrelevance. It is not useful to wait 8 months for commodity
jurisdiction. You have to find other ways of doing your
business. You can't wait 8 months at a time.
To be sure, the progress has been made in streamlining the
regulations and increasing the clarity and objectivity of USML.
For every commodity-related and related software and technology
that is moved from the USML to the Commerce Control List, the
exporter no longer has to be concerned about defense services,
brokering, registration, and registration fees. Also, he can
now take advantage of a de minimis rule, a less burdensome
direct product rule, and no purchase order requirement.
In short, there are some definite advantages derived from
the ECR Initiative and relative to the USML and the transfer of
thousands of items from the USML to the CCL.
With the laudable goal of improving the export control
system, government agencies have asked a lot of our exporting
community, including the expenditure of thousands of man-hours
and millions of dollars for compliance with new classification
designations. For many companies, including SMEs, they have had
to learn a whole new compliance language moving from the ITAR
to the CCL.
Classification processes, which have heretofore essentially
been black and white, are now depending upon end use
information that has traditionally not been relevant to
classifications and for the SME is now extremely difficult, if
not impossible, to obtain.
In some conferences that I have attended, and in training
sessions that I have conducted, the pain of ECR is almost
palatable. Significant time and company resources are being
invested in the cost of transitioned items in the overall
implementation of the ECR Initiative.
For example, an SME vendor of minor components may have
tens of thousands of drawings previously subject to the ITAR.
Post-ECR, those thousands of drawings must be all reviewed in
light of the new definition of ``specially designed.''
Application of the ``catch and release'' process on those tens
of thousands of drawings is financially prohibitive and in some
cases impossible if there is a gap in the original supply
chain, leading to assumptions and guesswork.
Additionally, DDTC and BIS should issue guidance on the
changes needed with regard to the Foreign Military Sales, the
FMS program, to promote the objectives of the ECR Initiative.
FMS activity remains under the jurisdiction of the Department
of State while associated parts and components have been
transitioned over to the jurisdiction of the Commerce
Department.
Guidance is needed as to the conflicting jurisdictional
authorities. For example, licenses are still required for the
reexport or transfer of parts and components related to items
related to decades-old aircraft, such as the C-130.
Thank you for the opportunity, and I would be glad to
answer questions.
Chairman CURBELO. Thank you very much.
Now we would like to recognize Dr. Quarles for 5 minutes.
STATEMENT OF GREG QUARLES
Mr. QUARLES. Chairman Curbelo and members of the
Subcommittee, thank you very much for allowing me to testify
before you today on the challenges that export control poses
for small businesses.
As Congresswoman Lawrence stated, my name is Craig Quarles.
I am chief scientist for The Optical Society here in
Washington, D.C. I am also a former small-business executive
for the past 20 years dealing with companies that were working
with compliance of export controls.
A little bit about The Optical Society. We are the leading
professional organization for scientists, engineers, students,
and entrepreneurs who fuel discoveries, shape real-life
applications, and accelerate achievements in the science of
light. This includes development of new medical imaging
devices, fiber optics, wireless Internet, and spanning medical
to military lasers. 2016 is our hundredth anniversary for the
society, with over 19,200 members globally. We also have 250
corporations that are members, and 90 percent of those are
small businesses. So we have a good sample set to talk about
these issues with.
We find that it is vital that Subcommittees such as yours
look at how export control is impacting small businesses,
because we want them to have the same equal footing to compete
globally. We want them to be able to reach all the consumers
that you had identified previously so that global competition
is allowed to be sold and bartered.
The Optical Society stands ready to partner with the
Federal Government to assist small businesses to export more
U.S.-manufactured products abroad.
So what are some of the major concerns of our constituents
with The Optical Society? Number one is what all of our other
panelists have talked about, the export reform changes taking
place that were launched in 2009. The Department of State is
amending the International Traffic in Arms Regulations,
provides the U.S. Munitions List, and especially Category XII,
which is under scrutiny currently, which implies military
electronics, military optics, and lasers.
This would regulate the dual use and sale of optics and
photonics products that were previously military and security
almost exclusively, and now a portion of those are going to the
Commodity Control List. We find that compliance is going to be
a challenge for the small businesses in The Optical Society
because of the regulatory complexity of looking at these
devices and where they sit.
We are recognizing potential negative impact not only on
our members, but the industry as a whole, and so we have
partnered with two other groups, the Semiconductor Industry
Association and SPIE, in educating our congressional
delegations about the negative impacts on small business,
particularly in the optics and photonics industry.
I have tried to identify three primary concerns, some of
which have already been echoed today, with the export control
as it stands. The first one is impact on time to market. Second
is cost of compliance. And the third is a gap and a need for
enhanced government export assistance resources, especially for
the small businesses that don't know how to navigate the
movement of these two lists.
Going to point one, to the time to market. We have talked
to members from The Optical Society, and to get a CCL license,
it should be a standard 20 days. Some of these companies have
sold product to the same companies for the past 3 to 4 years,
same delivery, same product, and it is taking 60 days to get
licenses currently. Sixty days is a delay that can cost orders
for these small businesses. Foreign competitors can use this
seemingly very brief window of time as an opportunity to come
in, undercut a sale, and win the business from the U.S.
companies and take them completely out of the loop.
The cost of compliance is another concern point and one
that I am very aware of. We have broad support here. A Small
Business Administration summary previously showed that it is
really a fixed cost for compliance for small business up to
from 5 to 500 individuals, but the cost per employee in small
businesses, according to this report, is 36 percent higher than
it is for the large companies, and that really puts small
businesses facing a substantial cost disadvantage when having
to deal with compliance, regulations, and the fees compared to
their larger counterparts. Large companies already assume this
large fixed cost spread out over a large numbers of employees
and can compete and win these orders and keep small business
out of the way.
From my prior experience as the CEO of a company selling
lasers to the military and homeland security, our cost annually
was well over $500,000, a half a million a year, for small a
mom-and-pop business just to stay compliant with CCL and our
ITAR regulations. That didn't include our Washington support.
What choices do the business owners have? Spend hundreds of
thousands of dollars to remain in compliance? Worry about
fines, worry about potential jail time? These regulations make
it very costly to compete if you don't have subject matter
experts onboard.
Then finally, I think we see a trend for needing to
strengthen government export assistance, especially for small
businesses. Regulations are an important part of enabling our
national security, as the chairman pointed out, and The Optical
Society fully supports that. We don't want to harm our security
or limit U.S. competitiveness. However, the government must
provide resources for our businesses to comply without
burdensome expenses.
Surveys for the Small Business Administration, spanning
2010 to 2013, show the sharp decline in the level of
interaction between small businesses and the Export Assistance
Centers that Commerce has. In this timeframe, awareness of the
centers dropped 20 percent, and the useful resources there
dropped 50 percent. Does this really make the most effective
assistance that we can offer a small business? I would say no.
The Optical Society acknowledges and applauds the cross-
agency coordinated initiatives the administration has set forth
to assist small businesses, but more needs to be done to
educate the businesses with export controls. Just as a point of
view, it is not just small businesses. We do have a large
number of university professors that are part of The Optical
Society, and they have to worry about the ITAR, foreign
graduate students, and now export control from the Commerce
side.
So in conclusion, better streamlining of the regulations,
especially for small businesses, is important and it is making
progress. We are going down the right path. Faster approvals
need to be put into place, ways to get licenses and
exportability more rapidly to compete globally, and then
finally, looking for ways to have better outreach and education
to the public as we go to these expanded lists. There is going
to be chaos and confusion, and the government could do very
well by stepping in and offering assistance to the export
compliance officers at universities and with small businesses.
The Optical Society and our memberships that we represent
thank you for the opportunity to testify today, and we are
ready to partner in any way we can, especially on the education
front. Thank you.
Chairman CURBELO. Thank you. Thank you, Mr. Quarles.
And thank you all for your testimony. I know many members
have other commitments and hearings today, so I am going to
defer immediately to them, beginning with the ranking member,
Mrs. Lawrence.
You are recognized.
Mrs. LAWRENCE. Thank you so much.
And thank you, again, for your testimony.
Dr. Quarles, it seems a common theme of the time that it
takes to get a license. I think you mentioned 60 days.
Where do you see the bottleneck? Is it the staff time that
it takes to process it? Give me a sense of how we can improve
that. With the licensing happening, you said around 60 days,
how does that directly impact you as a company?
Mr. QUARLES. The first part of the question, the
bottlenecks, as I see it, are really from staff internal trying
to decide, is this a commerce item, is this ITAR? Especially
with the division of some of these areas and some of the
overlaps, we are looking at making sure it goes to the right
place. If it doesn't go to the right place and comes back with
questions, that just adds more time onto the licensing portion
of the request.
I think it is just manpower in the licensing staffs
themselves. I think we may get something in within 2 days of
receiving a request for a quote in the previous company I was
with, and it is still 60 days before a response ever comes out
of the government on whether the license is going to be granted
or if more information is needed.
I think there is confusion moving forward with where this
stands, and on the other end, maybe shortage of manpower.
Your second question about the small-business side, I think
the costs are just prohibitive.
Can you refresh me on what the rest of the second question
was?
Mrs. LAWRENCE. How does that directly impact you when it
takes 60 days?
Mr. QUARLES. Thank you very much. Yes.
So if it takes 60 days, in most cases, some of these
technologies are available from most of our allies with NATO,
from companies scattered all across the NATO countries, and
they can potentially turn this around in 30 days and make the
sale. If you are waiting 60 days for a license, you have two
choices. You either start manufacturing and hope you get the
license, and if you don't, then you are sitting on product that
is going to be on the shelf that you have already put labor and
time into; or you wait to get the license, and by time that
they may come back and say, sorry, we have already awarded the
contract to someone else.
So you are in a predicament either path you take. It is a
burden on a small business.
Mrs. LAWRENCE. Thank you.
Ms. Robertson-Ahrens, one of the main issues that most
small businesses face when it comes to the ECS is understanding
exactly what the shipped items are covered, and you outlined
that, by Federal regulation. You even stated the ripple effect
that it has on the small business.
What can be done to make the existing system put small
businesses on a level playing field by this understanding,
exactly? Because you have mentioned that sometimes the burden
is placed on you to define what that is. Can you just dig a
little deeper on that, please?
Ms. ROBERTSON-AHRENS. I will give you an example of the
burden being placed. Everybody in this room is, I think,
familiar with the DSP-61. It is a license that freight can go--
oh, 73, actually--the license can go--the freight goes out as
ITAR and it comes back to the United States if it is not sold
or if it is whatever, however the contract is.
During Export Control Reform, a lot of the items that went
out on this DSP-73 coming back into the United States is now
under an ECCN. Large corporations--I am representing a large
corporation in this factor--upon importation did not take the
initiative to assign the ECCNs to the commodity. I cannot bring
this back into the United States midstream without it moving
from the ITAR to the EAR, where it applies now.
As a forwarder, how can this be my responsibility? How can
you push this down the chain? I have seen it with our large
manufacturers with some highly technical goods, that things are
bundled into one USML. But when we have to go and then do the
licensing--I mean, I will do the AES, which is what we do, it
is now moving to AES--they don't break down the bundle. You
have to sit there as a forwarder now and go back to your
shipper to try to comply. It has added a lot of burden. There
is quite a bit of back and forth.
Training, as far as my staff goes, with BIS, AES, and all
the additional initiatives that are coming forward right now,
is kind of few and far between. There are some webinars. But
really, we need outreach. We need people coming to the ports to
meet with us. It shouldn't cost a crazy amount of money. I have
seen seminars. They are done by private firms that, I know,
know no more than I do from the same webinar that I watched
charging between $500 to $600 per person, and then they are
going to do it someplace about 4r hours away, and that is the
only one coming down range.
If it is a government initiative, and we are private
citizens, then the government has to take the initiative to
provide training each port at a rate that is affordable for
every small business.
Mrs. LAWRENCE. Thank you.
My time is up, but thank you so much.
Chairman CURBELO. I thank the gentlewoman.
And now I would like to recognize Mr. Luetkemeyer.
Mr. LUETKEMEYER. I thank the chairman.
Let me just follow up on your comments, there, Ms.
Robertson-Ahrens. For clarification, you are talking about a
company that exports some goods, and then some of those goods
come back to this country, they either didn't want it, or they
were--what?
Ms. ROBERTSON-AHRENS. U.S. defense contractors, aviation
parts return and repair, sales of U.S. products for the C-130
and other, F-16s.
Mr. LUETKEMEYER. So there is a process to get them be
processed back into this country?
Ms. ROBERTSON-AHRENS. If they have moved from the ITAR to
the EAR during this time of Export Control Reform, you do have
to identify them.
Mr. LUETKEMEYER. Really? You can't get them out and you
can't get them in, huh?
Ms. ROBERTSON-AHRENS. If you get them out, you have to get
them back in.
Mr. LUETKEMEYER. Okay. That sounds like the government,
doesn't it? Wow, only here.
Interesting discussion also with you, Mr. Quarles. I was
curious, the cost to comply, you had a half a million dollars
is what it cost. I know it differs from company to company. But
have you got an average that it would take for the average
company? They are probably dealing mostly in the same kind of
products that I am looking here, it is stuff that is highly
regulated, it could be military hardware and equipment things
like that. I am assuming it is all probably in the same
ballpark.
Is half a million dollars, is that a normal figure.
Mr. QUARLES. I think the experience I have in talking to
our members over the last 2 weeks about this, it has ranged
anywhere from $150,000 for a few members that are focused on
one or two products that are going into select markets overseas
to some of the small businesses that are doing multiple
licenses with both Commerce and with ITAR spanning 500,000 to
750,000. It is in that range of a quarter million to three
quarters of a million dollars for a small business that has got
over 50 percent of their business in those areas.
Mr. LUETKEMEYER. What happens when you have a company that
is working sort of hand in glove with a country overseas for a
particular product? You still have to go through this process?
Mr. QUARLES. You still do, because a lot of times what ties
into that also is if you are working with someone overseas, now
you have to start looking at these technology assistance
agreements, TAAs, which are even more burdensome. You have to
start define specifically what can be said, what can be
exchanged, what is not technical data, what is technical data
so you don't get an ITAR violation.
So it is very difficult. Once you have it in place, it is
pretty seamless, just waiting on the licenses. But just getting
those conversations up and going and getting approval for both
parties to meet and consume product is a costly challenge.
Mr. LUETKEMEYER. I really understand the concern. I mean,
you are selling very technical, very unique products that are
something probably our military is involved with, and it is
proprietary probably in a lot of instances. So I am looking at
a list of things here, you look at missiles, explosives,
vessels, vehicles, aircraft. But it is interesting here, we
have got firearms, guns, and ammunition that haven't had any
sort of proposed rule, final rule made. What is the problem
there?
Mr. QUARLES. I will defer to one of the others if they
would like to answer before me.
Mr. LUETKEMEYER. Mr. Ridgley.
Mr. RIDGLEY. I think in all honesty it is politics. I use
that term generally, without----
Mr. LUETKEMEYER. Well, I appreciate honesty, because that
is what we need a lot more of around here. Because, to me, you
are looking at some really sophisticated stuff here. You have
got missiles, explosives, high-tech vehicles, aircraft, and now
we are looking at guns, ammunition, and firearms. I mean, there
are a lot of places in the world that can build a bullet, and
yet we are not allowing that to be done.
I am curious as to, if it is politics, I mean, I was
guessing it was, but I mean, if there is something else there,
I would like to know what the concerns would be.
Ms. ROBERTSON-AHRENS. Well, again, as a forwarder and
importer, I find a lot of people don't understand that one of
the roles that you play in this game of world trade is about
trade. And it is about U.S. technology and capabilities being
copyrighted and taken over by other countries and then them
making the products themselves. So that, I think we understand
where the concern is. I guess it is the execution.
Mr. RIDGLEY. I think it is more fundamental than that. I
think it is we need a period of time without a Sandy Hook,
without a San Bernardino, we need a period of time without a
Paris. We need a less sensitive period of time without
something related to guns, ammunition, and the other. I think
that is what is stalling that, those categories, is we just
need a less sensitive time. That is my belief anyway.
Mr. LUETKEMEYER. I appreciate that. Thank you.
My time is up. I yield back.
Chairman CURBELO. Mr. Gibson, you are recognized for 5
minutes.
Mr. GIBSON. Well, thanks, Mr. Chairman and the ranking
member. Thanks for your leadership.
Mr. Chairman, also thanks for your thoughtfulness. Indeed,
I am going to have to leave after this to another hearing. So I
just to note that as a matter of personal courtesy, I am very
thankful.
I actually want to build on the comments by my colleague
Mr. Luetkemeyer here just for a moment, and say that, clearly,
exports are a key piece of our economy. In fact, the
administration in 2011 expressed a goal to double our exports,
which is something I strongly support. And even though it is
broader than the purview of this hearing, I guess my first
question is, does anybody have a sense on where we are on that
goal?
Ms. APPELL. Well, thank you.
I didn't come prepared with any statistics, but I can speak
from the basis of our clients, that the export reform is
working, right? It is making things easier. It is facilitating
exports.
There are some tweaks that need to be made, and I think
that is why we are all here. We come from a different
perspective on what needs to change.
But it is working. And I think with continued outreach, to
build upon Ms. Robertson-Ahrens comments, again, I will commend
BIS for their outreach. They have done a great job of providing
seminars, being accessible, being ready to answer questions.
I do look to State to increase in that capacity. For
certainly our customers, State has been a little bit of a
closed book, and we look to them, to partner with them, to
encourage the communication between government and the private
sector.
Mr. GIBSON. Well, thank you. And just to follow on here. As
you know, in the consolidated appropriations bill enacted last
year with bipartisan support and the President of the United
States' signature, the Bureau of Industry and Security received
an additional $10 million over previously enacted funding
levels. That House report that accompanied the Commerce,
Justice, Science, and Related Agencies appropriations bill made
clear that the increased funding was to allow, quote, ``BIS to
continue its efforts to protect national security while coping
with an increased workload of export license applications,''
that is close quote.
In part, this funding was provided in anticipation of the
increased workload expected at BIS in order to move USML
Categories I, II, III over to BIS. However, despite the fact
that these funds were provided for in this current fiscal year,
that transition has not occurred. I mean, that was sort of the
question that was alluded to here. But I just wanted to put it
on the record, that that is something that was enacted. I mean,
we worked together to get that done. So really now it is a
matter of compliance. It is a matter of law.
So I don't know if anybody else wants to make an additional
comment on that.
Ms. APPELL. May I add a comment?
Mr. GIBSON. Yes, please.
Ms. APPELL. I think that is fantastic. I think what also
could be done that doesn't cost money is when State responds to
licensing requests, something very simple, an analysis of their
legal reasoning or even something as simple as your goods may
be subject to export reform, please see, you know, one, two,
three sources. I think that would really help the exporters,
and I think it would be very easy for them to do.
Mr. GIBSON. Well, I thank the panelists. This is the first
of two different hearings. Obviously, we are going to get the
rest of the story here, or at least in terms of the testimony
later on in the week. But I just want to thank you for what you
do to try to keep our economy strong, making sure our goods
move, and essential part, as I said, to a thriving and
flourishing economy.
With that, Mr. Chairman, I yield back.
Chairman CURBELO. Thank you, Mr. Gibson.
I recognize myself now for questions.
Our goal here is to make sure that America's small
businesses are treated fairly and given a shot to succeed,
well, for many reasons, because small businesses hire a lot of
people who wouldn't get a job otherwise or would struggle to
get a job at a larger corporation.
So what I would like to ask you all of you or anyone who
would like to answer is, under the ECRI, do you feel that the
playing field between larger and smaller companies will be
leveled? I understand that under the existing paradigm, if you
have a big team of lawyers or compliance officers, you are
going to be at an advantage. Do you see that being mitigated or
significantly improved under this new paradigm that is being
developed?
Mr. QUARLES. From our perspective at The Optical Society, I
think that it will be improved. I think we are going to see a
blip to begin with, with the confusion that is going to cause
it to be swinging the other way to large business until the new
rules and regulations are well understood and conveyed to the
small-business community. I think once that happens, there are
improvements that are going to be moving into place, and it
will make it easier across the board. But you have to get past
that gap and that first initial response to the changes that
are happening.
Chairman CURBELO. Sure. Any other thoughts on that?
Mr. RIDGLEY. Yes. My experience with my small clients is,
particularly those that were ITAR shops that now have to deal
with EAR, it really is a struggle for them.
From a level playing field perspective, maybe in the long
run it will level out, but right now my business has increased
dramatically because of ECR. More OF the small businesses are
coming to me and saying, ``Craig, we need help. I don't
understand this stuff. Please come do training.'' So on and so
forth. I am very thankful for ECR for what it has done for my
consulting practice.
But as far as IT leveling the playing field for small
businesses, I don't think it has. I think they are burdened
with--even EAR shops are burdened with new license exceptions
that almost make it impossible to do what they need to do.
STA specifically is a license exception that was created to
support ECRI. The first 60 percent of STA tells you what you
can't ship with STA. Even to the A-5 countries, which are our
closest allies, you can't--I have clients that are in
aerospace. You can't ship hardly any 9.E technology under STA.
A lot of my clients in that aerospace field are small business.
I mean, there are 12-man shops, there are 100-man shops. I
would like to see how it could level the playing field, but
right now the big companies have the legal staff, they have the
compliance people to be able to deal with them, and the small
shops have to call me. So----
Ms. APPELL. If I may?
Chairman CURBELO. Please.
Ms. APPELL. I would like to sort of echo what Mr. Ridgley
has said. It used to be under the old system that if it was
loosely described in the ITAR, it was in the ITAR. And that was
very easy for an ITAR-focused business, right? They would
submit their license, a description of the products, and they
would either to get a license or they wouldn't. It is very
straightforward.
Under the new system, just as he is saying, when you move
over to the EAR, it is a little more flexible, right? You have
these license exceptions that you can qualify for, like STA.
And the small businesses, most of them have never looked at the
EAR if they were an ITAR shop, and navigating that is quite
difficult. And, again, to sort of add to that cost of
compliance, right, they don't have the in-house staff. They
have to look outside to consultants, attorneys, or whoever to
help them guide that through that process.
Ms. ROBERTSON-AHRENS. So I can only speak from our
perspective. Again, it comes down to training, everything that
is being said pretty much across the board. They are dealing
from the shipper's side, they are dealing from the
manufacturer's side. We then end up hitting it down at the
bottom when you get to you are telling me exactly how to ship.
If it doesn't gel, if what people are saying doesn't make
sense, and then CBP also has a different perspective, the
shipment won't move.
Right now it just seems too nuanced. Is that the right way
to say it? It is just seems too nuanced for it to be a really
smooth supply chain.
Chairman CURBELO. Thank you.
Mrs. Lawrence, you are recognized.
Mrs. LAWRENCE. Just briefly. This will be my last question,
to Mr. Ridgley.
Right now, according to the White House, the enhanced
export enforcement is a critical element of the ECR Initiative,
which includes the enhanced coordination of all exports by a
multidepartment enforcement center, and this began in 2012. And
we know that the Homeland Security and FBI are the enforcers of
the U.S. export controls.
So the existing export licensing requirement, which we have
been told repeatedly has its glitches, for many items to move
forward we have to balance that with oversight of the
Department of Homeland Security and the Department of Commerce.
Is there evidence to suggest that these enhanced enforcement
measurements have hindered or interfered with the export
production?
Mr. RIDGLEY. On the Commerce Department side, no, I don't
think so. I don't think there is a practical implication there.
I think that maybe a license takes a little bit longer, maybe a
week. Six to 8 weeks has been my experience for the past two
decades. Maybe it is going to 9 weeks now.
On the State Department side, it is much longer, I don't
know why, both in terms of licensing and in commodity
jurisdictions. I had a client who had a gold-plated EMI ring
that we wanted a commodity jurisdiction for because it was part
of the International Space Station, at least that is when we
submitted it. In the interim, the space station went from State
to Commerce. Finally we got a CJ back that said, well, no it is
an ECCN now. But that took 8 months to get that CJ back with
that determination that it was ECCN under the CCL.
So I think the main impact is all those ITAR people who are
now lost in the land of EAR, and they are going back to State
with CJ after CJ after CJ. I think that is where the real
impact is.
Mrs. LAWRENCE. Okay. Thank you.
Chairman CURBELO. Thank you, Mrs. Lawrence.
And I want to thank all of you for your presence here
today. It does make a difference. It does matter. It will
inform our work on this topic. And we work very well together
on this Committee, and our goal in this case is to make sure
American small businesses can sell their products abroad so you
can create more wealth here at home and hire more Americans
needing jobs.
I ask unanimous consent that members have 5 legislative
days to submit statements and supporting materials for the
record. Without objection, so ordered.
This hearing is now adjourned.
[Whereupon, at 11:03 a.m., the Subcommittee was adjourned.]
A P P E N D I X
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Congress of the United States
US House of Representatives Committee on Small Business
Good Morning, I am Jennifer Robertson-Ahrens the President
of Robertson Forwarding Company, a 47-year-old African-
American, Woman-Owned, and HubZone firm located in Miami
Florida's 24th Congressional District.
I want to thank Chairman Chabot and the Subcommittee on
Agriculture, Energy, and Trade for allowing me to testify today
on the effects of Export Control Reform (ECR) on my business.
It has been a very difficult couple of years for my small
business which specializes in the importation and exportation
of aircraft parts and other sensitive military equipment. I
attribute the difficulties experienced over the last two years
to a lack of clarity spanning across the exporting industry.
Issues faced:
Manufactures and shipper's reluctance to
self-classify or obtain a commodity jurisdiction for
their product.
Confusion surrounding previously USML items
and how they relate to their current ECCN
classification.
Identification and application of ECCN
licensing requirements. Exporters are forced to
navigate a confusing regulatory landscaped based on
country specificity, end user, and trade agreements.
Leaving the export industry vulnerable to possible
export violations.
Delays at US Customs and Border Protection,
due to export officers unsure of the requirements for
the ECCNs, 600 series products, and the use of export
codes per country and end user submitted to them by
industry in Electronic Export Information (EEI)
filings. CBP's approval of these filings is required
for export from the US. For exporters time is a
critical component to our performance matrix and delays
of any sort is costly.
Legislators need to appreciate that Freight Forwarders like
myself are the ``low-hanging fruit'' for multiple enforcement
agencies.
Examples of enforcement agencies:
US Customs and Border Protection
Office of Foreign Asset Control
Bureau of Industry and Security
Transportation Security Agency
The Federal Maritime Commission
Regulatory uncertainty and lack of available training
leaves companies like mine in fear of financial retribution and
possible criminal indictment for improper export classification
provided to us by shippers/vendors.
This year I have witnessed a trend in manufactures and
shippers who are undoubtedly the US Principle Party of Interest
pushing licensing of their equipment for export to third
parties without support for classification.
Examples:
DOD contractor customer spent $175,000 in
fees due to delays in licensing between 2014-2015
Licensing at DDTC delayed over 90 days
Kickback of classifications between DDTC and
BIS delays licensing up to three weeks.
As a US Export Compliance Officer I allocate a significant
portion of our budget to training in order to keep Robertson
Forwarding Company staff up to date with the regulations
effecting my clients' freight. Export Control Reform has been
on my radar for the last four years. I have trained and
provided training to folks on the changing landscape throughout
this time. With all of this said, I still had the most
challenging and costly years in my professional career due to
industry insecurity, confused and nervous shippers/
manufactures, and government re4gulatory agencies not
understanding the regulations resulting in unnecessary delays
and cost for the industry.
In closing, I understand the motive of ECR but believe its
implementation lacked sensitivity to business concerns. I
believe the implementation of ACE and Export Control Reform
should have been handled in a similar manner to the
implementation of the TSA's Indirect Air Carrier Program in the
90's. There were multiple outreach programs provided at every
major port, training by community liaisons, and web-based
manuals. Updates phased in annually with notification of
upcoming changes as well as implementation grace periods. This
allowed industry to prepare and adapt to changes through
training. Training was provided by the regulators themselves,
allowing them to see how the practical implementation of
regulations was effecting the industry and this information was
then used to inform the upcoming annual or bi-annual changes.
Thank you for this opportunity.
Jennifer Robertson-Ahrens
President of Robertson Forwarding Company (d.b.a. RFC
Logistics)
Subcommittee on Agriculture, Energy and Trade
House Committee on Small Business
2360 Rayburn House Office Building
February 10, 2016
Export Control Reform:
Challenges for Small Business?
Part I
Testimony of
Mr. Craig T. Ridgley
Vice President and Managing Partner
Trade Compliance Group
Mr. Chairman, I am very pleased to appear before you and
your colleagues this morning to discuss the ongoing Export
Control Reform, ECR, Initiative and its impact on small and
medium sized enterprises, SMEs.
The Trade Compliance Group, formerly known as MK
Technology, has been advising large corporations and SMEs
regarding export control policies and procedures since 1986. We
offer a comprehensive array of export compliance services and a
broad range of compliance education and training services
including custom training programs, instructional videos, and
online export controls learning programs.
I am its Vice President and Managing Partner performing
trade compliance assessments and developing compliance programs
under the Bureau of Industry and Security Export Administration
Regulations and the Directorate of Defense Trade Controls
International Traffic in Arms Regulations. I have experience in
both managing export control teams in many large companies and
in advising scores of SMEs struggling to comply with a complex
regulatory environment.
It is very much an open question as to the impact the ECR
Initiative has had on SMEs. We don't have a definitive answer,
but we would pose some questions that might lead Congress and
the Obama Administration in the right direction. We also have
some modest suggestions that would help to ensure that their
interests and concerns are at the center of the ongoing reform
process.
We would start by asking BIS and DDTC to survey SME
exporters. Ask them which elements of the ECR Initiative have
been beneficial and which have not been. Has it altered their
plans to market their goods and services in certain markets and
regions around the world? How should the ECR Initiative be
altered to take into account their concerns? Are there any
recent surveys conducted by companies or business associations
on the potential impact of the reform effort on SME suppliers
and vendors?
In 2010, the Milken Institute and the National Association
of Manufacturers issued a study entitled, ``Jobs for America:
Investments and Policies for Economic Growth and
Competitiveness'' concluding that modernizing U.S. export
controls could increase exports in high-value areas. By 2019,
an enhanced regulatory environment could increase GDP by $64
billion, create 160,000 manufacturing jobs, and heighten total
employment by 340,000.
More than five years into the ECR Initiative, your
Committee should ask the Milken Institute and the National
Association of Manufacturers to revalidate their study's
conclusions to see if we are still on track for the GDP and job
growth projections.
In 2009, prior to the Administration's announced launch of
the ECR Initiative, MK Technology, together with the Thales
Corporation, released its ``Best Practice Project for the
Export of Controlled Material'' based on interviews with
corporate officials with export control responsibilities in
large and small companies. Among its conclusions, it found that
``Care should be taken to manage the small supplier
relationship especially in light of the fact that some are not
well equipped to handle their own export compliance
responsibilities''. As relevant today as it was then, this
small supplier role needs close scrutiny with many large
companies divesting themselves of any compliance advisory or
training role for their suppliers and sub-contractors.
SMEs were/are widely seen as disproportionately
disadvantaged by the export control system. SMEs could not then
and cannot now afford a large compliance staff or a Washington
liaison office. Consequently, the overwhelming majority have
less access to government licensing authorities than those
enjoyed by large companies. Long licensing times and opaque
regulations are continuing concerns. Further, due to the
significant increase in BIS classification requests and DDTC
commodity jurisdictions, the cycle time for those services has
now reached the point of irrelevance.
To deal with these concerns, BIS and DDTC (as well as the
Treasury Department's Office of Foreign Assets Control) should
set up a Working Group to determine how exporter services can
be made more accessible, responsive and user-friendly to SMEs.
Also, these agencies should take steps to ensure that licensing
officers and other agency personnel are fully trained regarding
all SME export issues.
To be sure much progress has been made in streamlining
regulations and increasing the clarity and objectivity of the
U.S. Munitions List, and for every commodity and related
software and technology that has moved over from the USML to
the Commerce Control List the exporter no longer has to be
concerned about defense services, brokering, registration, and
registration fees. Also he can now take advantage of a de
minimis rule, a less burdensome direct product rule and no
purchase order requirements. In short, there are some definite
advantages derived from the ECR Initiative and the transfer of
thousands of items from the USML and the CCL.
While the ECR Initiative has begun to meet the expectations
of the exporting community more progress needs to be made, its
specific impact on SMEs has not received the attention it
deserves. At this stage in the review process, it is time for
the relevant agencies and industry associations to conduct
surveys on the impact of the ECR Initiative on SMEs. Are small
businesses sharing in any related job growth?
With the laudable goal of improving the export control
system, government agencies have asked a lot of our exporting
community including the expenditures of thousands of man hours
and millions of dollars for compliance with new classification
designations. For many companies, including many SMEs, they
have had to learn a whole new compliance language moving from
the ITAR to the CCL. And classification processes, which have
been heretofore essentially black and white, are now dependent
upon end-use information that has traditionally not been
relevant to classification, and for the SME, is now extremely
difficult if not impossible for the exporter to obtain.
In some of the conferences I have attended and the training
sessions I have conducted the pain of ECR is almost palpable.
What are the ways to promote the adoption of the regulatory
changes required under the ECR Initiative? One approach BIS
should consider is the creation of a `compliant exporter of the
year award' similar to the exporter of the year awards now in
place across a number of industry groups. Why not target SMEs
for recognition particularly in the high tech sectors intended
to be the beneficiaries of the export control reform process?
BIS should also consider directing the Regulations and
Procedures Technical Advisory Committee, RPTAC, to review the
impact of the recent changes in the Export Administration
Regulations resulting from the implementation of the ECR
Initiative. The focus should be on SMEs addressing their export
competitiveness and as well as any reduced propensity to export
or manufacture ITAR items.
With SME participation, the RPTAC could also help to advise
regulators in developing a new common set of standards where
the two control lists, the Commerce Control List and the United
States Munitions List, would be merged into one.
DDTC's counterpart to the TACs is the Defense Trade
Advisory Committee, DTAG. It advises the Department in the
regulation of defense trade helping to reduce unnecessary
impediments to legitimate exports while supporting defense
requirements of U.S. friends and allies. In January of 2014,
the DTAG Export Control Reform Working Group issued a number of
findings on the progress and the problems associated with the
reform effort.
The advisory group members noted that significant time and
company resources were/are being invested in the cost of
transitioned items and in the overall implementation of the ECR
Initiative. They focused on the direct costs tied to industry
supply chains, procurement and engineering program in learning
and complying with the new regulations including ongoing
reclassification and jurisdictional changes. For example, a SME
vendor of ``minor components'' may have tens of thousands of
drawings previously subject to the ITAR. Post ECR, those
thousands of drawings must all be reviewed in light of the new
definition of ``specially designed''. Application of the
``catch and release'' process on tens of thousands of drawings
is financially prohibitive and, in some cases, impossible if
there is a gap in the original supply chain, leading to
assumptions and guesswork.
And they reviewed the indirect costs as well that are tied
to administering and establishing the processes to support the
regulatory changes. Specifically, these included employing
additional staff, diverting existing staff from other tasks,
making changes in production processes, employing consultants
or other sources of expertise to assist in the regulatory
changes, and compiling and storing information required under
new reporting requirements. They noted that the costs were
substantial enough to as to negate lower unit costs and to
blunt their competitive edge.
Among their other observations: trade compliance programs
are typically understaffed across a wide spectrum of companies
and many corporate officials have difficulty finding the time
to read proposed rules particularly if they are not directly
related to the company's products and services. In sum,
industry doesn't have the luxury of not getting it right.
An expanded and more inclusive Defense Trade Advisory Group
could make its own recommendations to ensure that they are
adequate resources at DDTC for taking on new responsibilities,
including the flexibility to use existing resources, without
increasing any fees. Taking into account the views of the SMEs,
the focus should be on fee mitigation. Currently, DDTC
registration fees range from $2,250 to $2,750 depending on the
number of license applications or requests for authorizations
during a 12 month period. SMEs could be considered for some
kind of fee remediation.
Both DDTC and BIS should create new SME-dedicated portals
on their respective websites that would provide useful
compliance information and templates geared to the needs of the
small business exporter.
And DDTC and BIS should issue guidance on the changes
needed in the Foreign Military Sales, FMS, Program to promote
the objectives of the ECR Initiative. FMS activity remains
under the jurisdiction of the Department of State; however,
associated parts and components have been transitioned over to
the jurisdiction of the Commerce Department. Guidance is needed
as to the conflicting jurisdictional authorities and licenses
are still required for the re-export or transfer of parts,
components and related items related to decades-old aircraft
such as the C-130. Many SME aircraft parts and components are
being disadvantaged by the current licensing requirements.
Any progress in reducing the licensing burden and in
simplifying forms and procedures will be especially welcomed by
SMEs. In this regard DDTC and BIS need to establish a single
entry portal and a single form for use with electronic
interface through which all license applications can be
submitted and redirected to the appropriate agency. Further
reductions need to be made in the number of licenses for items
remaining on the U.S. Munitions List, particularly for those
items being exported to U.S. allies and partners for the
replacement or repair of parts and components supporting U.S.
government activities abroad.
Thank you for your attention and I look forward to
answering any questions you might have.
Dr. Gregory Quarles
Chief Scientist
The Optical Society
Testimony
Subcommittee on Agriculture, Energy, and Trade
House Committee on Small Business
February 10, 2016
Chairman Curbelo, Ranking Member Meng, and members of the
committee, thank you for allowing me to testify before you
today on the challenges that export control reform poses for
America's small businesses. My name is Dr. Gregory Quarles,
Chief Scientist for The Optical Society (OSA). I have also
served as a CEO and COO of two small businesses and served on 8
corporate and non-profit boards. Among my research and business
pursuits has been the development of new optical components and
laser devices for medical, military and industrial
applications.
With 95 percent of the world's consumers living abroad, and
nearly three quarters of the world's purchasing power being
leveraged by nations outside the United States, it is vital
that American small businesses be afforded equal footing to
compete in the global arena to effectively ensure continued
growth for the U.S. economy. The Optical Society stands ready
to partner with the federal government to assist small business
to export more U.S. manufactured products abroad.
I will explain the three primary areas of concern impacting
Small Businesses from Export Control Regulations which
regulates optics and photonics technologies, such as lasers,
infrared imaging systems, electro-optic subsystems, optical
material accessories, and partnerships with global partners
which might involve the exchange of technical data. These are:
Impact on time to market for regulated products and components,
cost of compliance, and the need to enhance government export
assistance resources, particularly for small businesses.
The Optical Society is the leading professional
organization for scientists, engineers, students and
entrepreneurs who fuel discoveries, shape real-life
applications and accelerate achievements in the science of
light. Through world-reowned publications, meetings and
membership initiatives, OSA provides quality research,
networking opportunities and dedicated resources for its
extensive global network of optics and photonics experts.
Optics and photonics are highly specialized fields of physics
and engineering known as the ``science of light,'' which makes
possible everything from life-saving medical imaging devices
and solar energy to high-speed Internet connections, computer
chips and Light Emitting Diodes, to lasers for military and
commercial applications. Globally, optics and photonics annual
revenues amount to more than $400 billion according to an
analysis by OSA Industry Development Associates. In short,
optics and photonics are essential to solving problems,
enabling innovation, facilitating economic growth and improving
lives.
2016 marks an especially important year for The Optical
Society and optics. It is our 100th anniversary. Originally
founded in Rochester, New York with 10 scientists from industry
and academia, OSA now spans 177 countries and brings together
more than 19,000 individual members and more than 250 U.S.
corporate members--from global organizations like IBM
Corporation to manufacturers like Optimax in Rochester, New
York, or Bechman Coulter, Inc. in Miami, Florida.
Over 90 percent of The Optical Society's corporate members
are small businesses that look to OSA to be their voice on
issues, such as International Traffic in Arms Regulations
(ITAR) that could adversely affect their ability to sell
products aboard.
Related to the small business technology companies that The
Optical Society represents, we believe that the U.S. government
needs to conduct more educational outreach to potential
exporting small business industry sectors on export control
compliance and licensing requirements. Small companies, start-
up companies--those without in-house in-depth export compliance
expertise--are often challenged to sell export controlled
products outside of the United States. U.S. small business
companies at times due to the expense and complexity of export
licensing decide against exporting. This issue needs to be
addressed. The Optical Society is committed to work with the
U.S. government on this endeavor.
The Optical Society (OSA) also wants to share with the
committee the impact of export control on small business,
related to the pending revisions in the ITAR, U.S. Munitions
List (USML) Category XII, proposed under the Obama
Administration's Export Control Reform (ECR) initiative.
Category XII rules regulate export control compliance for
optical and photonic-enabled devices. Even though these broad
ECR changes have been ongoing since 2009, the final category
for amending, Category XII, was saved for last due to its
critical nature, overall complexity, and broad impact.
Recognizing the potential negative impact on not only our
members but the industry as a whole, we have partnered with two
other groups, the Semiconductor Industry Association and SPIE,
in educating Congress about the negative impacts on business
and the optics industry.
Category XII revisions cover many of the commercially
developed and manufactured optical and photonic components, as
well as the potential impact of changes that extend to the
three main constituents of The Optical Society, that being
academia, industry and government researchers. Industry with an
emphasis on small business and academia will need to be
educated by government regulating agencies on the final rule
changes to Category XII.
I have had the opportunity to speak with several leaders
from the optics and photonics industry leading up to this
Subcommittee Hearing. I have found their input to be
enlightening, and paralleling much of my experience in research
and development and the production of optical and photonics
commodities and components. As scientists and business leaders,
many of us are also familiar with U.S. government export
control regulations related to selling controlled products
abroad and the ability to recruit international students for
research endeavors that may be affected by export control
regulations. The input shared by these OSA colleagues has been
a well-defined path of obtaining their graduate degrees and
opening a start-up or going to work in an industrial lab. Then,
as they develop products for their customers, they are met with
the requirement to review multiple export control requirements
before shipping, which can sometimes lead to canceled sales.
Allow me to delve more deeply into the first major impact--
compliance causes delays, which can mean lost revenue
opportunities.
Generating Revenue/Time to Market:
Compliance with Export Control regulations for products and
components that are available from non-U.S. vendors adds time
to the sales process--making U.S. businesses less competitive
and impairing U.S. industry growth.
As all business development managers dealing with overseas
sales will share, there are three critical components to
booking a sale: price, lead-time, and ability to deliver (and
receive an export license if necessary). One of the frustrating
aspects with developing Intellectual Property and then trying
to sell a product globally is the uncertainty of export
licenses being approved and the lead-time involved. Many times
a company will quote a product to a customer, with the caveat
that they will deliver in 60 days, IF an export license is
granted. After speaking with two colleagues in New York that
routinely sell the same product, multiple times annually to
repeat customers, the lead time for these licenses is averaging
between 30-60 days for both Commerce Department Bureau of
Industry and Security licensing for duel use technology exports
and the Department of State Directorate of Defense Trade
Controls on military technology export licensing.
The result? Foreign competitors can use this seemingly
brief window of time as an opportunity to undercut a sale and
win business from U.S. companies--regardless of product quality
and in some instances price. It may be cliche, but time is
money and U.S. businesses lose when regulatory compliance
increases the time to purchase for the buyer.
When U.S. small businesses are competing with U.S.
companies that have relocated subsidiaries overseas or with
foreign entities that are not restricted by U.S. government
export control regulations, there is a strong probability that
you cannot even compete for these orders. Many foreign
corporate competitors advertise products as being ``ITAR-free''
or ``non-ITAR'' meaning purchase from a U.S. export control
regulated company and you will have delay times or
cancellations in securing your needed product. Many prospective
buyers from outside of the U.S. will not even ask for a quote
when they learn about the delay or uncertainty in obtaining an
export license. U.S. businesses aren't competitive.
Delay time in securing export control licenses has a
greater impact on small companies related to generating revenue
compared to larger established U.S. companies. Delays or loss
of foreign sales because of export control compliance
timeliness to secure a license can equate to layoffs and or the
small business' long-term viability to continue operations
while foreign corporations to earn higher revenues, and
subsequently invest these revenues back into their corporate
research and development programs and creating the opportunity
for more rapid growth.
Further, the lack of U.S. growth can affect the research
enterprise by discouraging bright young scholars from pursing
science and technology degrees. This leads to a shortage of
qualified applicants for the high paying, high technology jobs.
The final part of this negative cycle is that if U.S. companies
developing these state-of-the-art technologies cannot achieve
growth in their sales globally due to export control, then
investment, by individuals or the corporations themselves, will
diminish, leading to a decreasing opportunity to generate
technology-based revenues sufficient to sustain operations.
Cost of U.S. Government Export Control Compliance:
Compliance is a necessary cost of doing business. However,
it shouldn't be burdensome for small businesses.
A study by N.V. Crain and W.M. Crain of Lafayette College
for the Small Business Administration summarized the compliance
cost very well--it is essentially a ``fixed-cost'' regardless
of the size of the company. Their comparisons were for
companies ranging from five employees to 500 employees Large
corporations see a lower cost per employee, and the cost per
employee in small business are 36 per cent higher than those in
companies greater than 500 employees. Thus, small businesses
face a substantial cost disadvantage when having to deal with
export compliance regulations and fees when compared to their
larger counterparts. The industrial sector of The Optical
Society membership base is particularly concerned with the loss
of potential revenue due to limitations to freely sell
technologies that are sold as dual-use in open markets by many
of our allies globally.
I can also speak from my prior experiences as CEO of a
laser and opto-electronic corporation, which was a small
business selling products that were export controlled by
Commerce Department Bureau of Industry and Security licensing
for duel use technology exports and the Department of State
Directorate of Defense Trade Controls of USML/ITAR regulated
licensing. The cost annually for personnel just to manage the
compliance and export control team, exceeded $500,000 annually.
This excludes the cost for outside legal counsel and
consultants for pursuit of problematic Technology Assistance
Agreements (TAAs) or license challenges. The TAAs are the
``rules'' for working with international students and
colleagues on export-controlled products. However, these rules
limit collaboration and can often create confusion.
But what choice do business owners have? Spend tens of
thousands of dollars on experts or risk fines of a million plus
dollars--or even jail time? Regulations make it costly to
compete. While discussing the impact of export control, I must
also weigh in on behalf of the academic community, which makes
up nearly 60 percent of the membership at The Optical Society.
Export Control has been put into place to protect only the
technology, but national security, which should enhance the
safety and position of the United States globally. However,
restrictions as such are inconsistent with many mission
statements for universities. The university experience is
fundamental to provide a learning environment for all students,
staff and faculty members where they are afforded the
opportunity to pursue open inquiries, examine critically, and
carry out research and teaching in an unrestricted environment.
In the optics and photonics fields, that can be a challenge if
a professor feels restricted by export control regulations that
force them to limit interactions with non-U.S. citizen
scientists and graduate students, or potentially face the
threat of personal liability for possible violations.
Stregthening Government Export Assistance Resources
(emphasis small business companies):
Regulations are an important part of ensuring sensitive
technology does not harm our national security or limit U.S.
competitiveness. However, the U.S. Government must provide the
resources for small businesses to comply without burdensome
expense.
An evaluation of surveys jointly conducted in 2010 and 2013
by the National Small Business Association (NSBA) and the Small
Business Exporters Association (SBEA) indicates a sharp decline
in the level of interaction U.S. small business exporters had
with Small Business Administration (SBA) operated Export
Assistance Centers. The surveys show that between 2010 and
2013, awareness of SBA Export Assistance Centers among small
U.S. exporters declined from 18 percent to 15 percent. Fewer
than one in five businesses are aware of export assistance.
Furthermore, the surveys found that while in 2010, 26
percent of small U.S. exporters had taken advantage of a U.S.
located Export Assistance Center, in 2013, the amount of small
U.S. exporters claiming to have been advantaged by an
assistance center fell to a mere 10 percent.
The Optical Society acknowledges and applauds the cross-
agency coordinated initiatives the Administration has set forth
to assist small businesses offset the complexities of export
compliance. While these services demonstrate the government's
vested interest in supporting U.S. businesses, there remains
opportunity to ensure resources are made aware and directly
available to U.S. small businesses.
Analysis of the impact of Export Control on Small Business
should also include suggestions for areas where the government
can assist or provide resources, especially with the proposed
changes forthcoming. The SBA has already established 103 Export
Assistance Centers across 48 states. This is a good start, but
more needs to be done. As shared by The Optical Society
companies that I spoke with, this is an excellent resource for
small business to start learning the basic requirements for
export control compliance. These centers primarily have general
knowledge in the Department of Commerce regulations.
However, numerous Optical Society members did reference
that their local centers would search for Department of State
and USML/ITAR general experts outside of the Export Assistance
Center office for referrals. Most of the input stated that
these employees were good for assisting beginners and novices,
but detailed challenges were likely beyond their knowledge
base. In order to engage highly qualified subject matter
experts, it typically requires that a company create small
businesses export control department or hire multiple
consultants to help them navigate the challenges of export
compliance. Either scenario is expensive and prohibitively so
for many small businesses that could otherwise export their
product overseas.
This is not an inexpensive path, nor is it guaranteed to
win sales in the global market. It would be useful if those
responsible for CCL/USML/ITAR regulations would establish and
employ experts at these EACs to assist small businesses with
their questions and education as they attempt to navigate the
export control pathway. This seems to be a deficiency that
causes some small businesses to shy away from manufacturing
ITAR-controlled technologies utilizing optics and photonics.
Finally, with the upcoming export control rule changes to
be finalized ITAR, U.S. Munitions List (USML) Category XII, we
can expect massive confusion that will undoubtedly follow these
rules changes being announced. It would be very proactive for
the Department of Commerce, State and local Export Assistance
Centers to start working with their various constituents to
schedule seminars to highlight the changes, make clear the new
definitions, and educate both university and industrial
compliance officers on the nuances of the new regulations,
There will obviously be an expense associated with this, but
the investment into being proactive could infuse a confidence
in these high-tech based small businesses to expand their
revenues and pursue global sales with less fears and confusion.
Conclusion:
As Export Reform takes place, these reforms simplifying the
regulatory process will allow small businesses and industry to
comply with negative impact on their competitiveness globally.
Also, the U.S. Government should strengthen its export
assistance resources, particularly for small businesses.
Outreach and education will be required to increase the
awareness of end-users, manufacturers, and compliance officers,
and to prevent a drastic rise in export control violations.
Providing low-cost or free webinars, training, and continuous
education to compliance officers, at both universities and for
small businesses likely will help to minimize future
violations, especially with upcoming changes to the regulating
licensing requirements for dual use and ITAR/USML compliance.
The Optical Society is committed to partnering with the federal
government related to export control education and outreach
with U.S. industry in the photonics and optics markets.
On behalf of The Optical Society and the membership that we
represent, thank you for the opportunity to testify today.
References:
(1) Private communications, OSA member survey--with 8
CEO's, scientists, business development directors, and
export compliance directors at companies that are in
the optics and photonics fields.
(2) Obama Administration ECR Revisions--http://
www.export.gov/ecr/
eg--main--047329.asp (October 22,
2012)
(3) Brotherton, S. Beyond reach? How to develop ITAR-
free systems--http://worldcr.com/wp-content/uploads/
2012/07/ITAR-download-article.pdf (March 1, 2011)
(4) U.S. Space Industry ``Deep Dive'' Assessment:
Impact of the U.S. Export Controls on the Space
Industrial Base--US Dept. of Commerce, Bureau of
Industry and Security (2014).
(5) The Impact of Regulatory Costs on Small Firms,
N.V. Crain and W.M. Crain, for the SBA Office of
Advocacy, contract # SBAHQ-08-M-0466 (2010).
(6) The Key Elements of an Effective OFAC Compliance
Program, by Export Compliance Solutions (2015): (http:/
/exportcompliancesolutions.com/blog/2015/12/07/the-key-
elements-of-an-effective-ofac-compliance-program).
(7) Holsinger, D. For New Exporters: How ITAR/EAR
Could Impact your Business--htpp://content.piers.com/
blog/itar-for-the-new-exporter (January 24, 2014)
(8) Dwyer, Morgan, Gwen Gettliffe, Whitney Lohmeyer,
Annie Marinan, Erik Stockham, Annalisa Weigel, and
Kerri Cahoy ``The Global Impact of ITAR on the For-
Profit and Non-Profit Space Communities.'' 25th
Symposium on Space Policy, Regulations and Economics,
IAC-12. International Astronautical Federation, 2012.
URI: http://hdl.handle.net/1721.1/80837.
(9) National Small Business Association (NSBA) and
Small Business Exporters Association (SBEA), 2010 Small
Business Exporting Survey, 2010, pp. 4 and 7, at http:/
/www.nsba.biz/docs/
2010--small--business--
exporting--survey--001.pdf; and
2013 Small Business Exporting Survey, 2013, pp. 5 and
6, at http://www.nsba.biz/wp-content/uploads/2013/06/
Exporting-Survey-2013.pdf
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