The Unintended Impacts of the U.S. Export Control Regime on U.S. Innovation
By: Hideki Tomoshige
Export controls are an important tool in the United States’ economic statecraft repertoire but deploying them may harm the nation’s innovation system. This tradeoff is of significant consequence, as the United States seeks to coordinate with like-minded countries to prevent Russia from obtaining any dual-use technologies – technologies having both commercial and military or proliferation applications — that it could deploy in its invasion of Ukraine. Economic sanctions have hurt Russia's ability to sustain its military power, particularly its capacity for manufacturing and acquiring semiconductors that are critical to the function of its defense technologies. However, imposing unbridled export controls on foreign adversaries burdens U.S. private firms by creating disruptions in global investments, production chains, and the circulation of skilled workers.
The globalization of skills, technological innovation, and production means that the deployment of export controls on third countries can have negative domestic repercussions that must be included in U.S. strategic calculus.
Export Controls in U.S. Economic Statecraft
Conceived roughly 30 years ago by David. A Baldwin, a Senior Political Scientist at Princeton University, economic statecraft is a policy framework for deploying economic tools designed to advance a nation’s foreign policy goals. Export controls refer to a legal system that allows a country to restrict exports of weapons or dual-use technologies to specific countries or actors such as terrorist groups for national security purposes. In the United States, export control policy is codified into law at two different levels: through national export regulations and in terms of international conventions under which the U.S. and other countries coordinate their export control regimes.
The cornerstones of U.S. export control are the International Traffic in the Arms Export Control Act, which regulates arms items, and the export of dual-use items. In recent years, the United States has also sought to limit the scope of technological cooperation with China to limit the impact of Chinese mercantilism. The Holding Foreign Companies Accountable Act, passed in 2020, requires Chinese companies to prove to the Securities and Exchange Commission (SEC) that they are not under the control of the Chinese government or the Chinese Communist Party before being listed on the U.S. stock market.
On the international stage, the United States is a signatory to treaties regulating nuclear, biological, and chemical weapons. In addition, the Wassenaar Arrangement, developed in 1996 as the successor to the Cold War-era Coordinating Committee on Multilateral Export Controls (COCOM), regulates exports of dual-use items used by member countries, including the United States, to develop conventional weapons and weapons of mass destruction. Members of the Wassenaar Arrangement voluntarily agree to implement export controls in accordance with regulations for items on the banned export items list and their domestic laws.
However, Wassenaar is not legally binding, and does not provide a way for signatories to ban each other’s exports. These limits have been exposed in the response of the U.S. and its NATO allies to Russia’s invasion of Ukraine, as the U.S. works bilaterally and multilaterally with like-minded countries outside of the Wassenaar Arrangement to coordinate export controls on Russia.
In response, Kevin Wolf, a former Assistant Secretary of Commerce for Export Administration, and Emily Weinstein, a research fellow at the Center for Security and Emerging Technology, have called for developing a new international export control regime to replace the Wassenaar Arrangement. To support his argument, Wolf quotes a section of the Export Control Reform Act (ECRA), a law passed in August 2018 which increased the U.S. government's ability to control exports of emerging technologies that are critical to U.S. national security. The section of the ECRA that Wolf quotes emphasizes the need for the U.S. to coordinate its export controls with other countries: export controls that are multilateral are most effective and should be tailored to focus on those core technologies and other items that are re-capable of being used to pose a serious national security threat to the United States and its allies.
According to Wolf, a new export control regime should bring U.S. allies and partners together to identify goods, software, technology, and end-users in order to address common national security, economic, and human rights concerns — where these concerns cannot be resolved under existing multilateral export control regimes. For example, under the Wassenaar Arrangement (of which Russia is a member) there is no way for multiple countries to address shared threats by coordinating export controls against a common adversary.
Unintended Consequences for U.S. Firms
While the logic of denying aggressors critical technologies is evident in theory, the global integration of research, development, and manufacturing of advanced technologies means that limiting these technologies is difficult in practice. Moreover, as the boundaries between military and civilian technologies continue to blur, the list of industries deemed critical to national security is growing, making it difficult to distinguish one from the other. As a result, more U.S. firms than ever face uncertainty as they attempt to navigate cumbersome export control regulations that burden their talent acquisition and jeopardize business opportunities.
Human capital loss. Immigrants and foreign nationals, many of whom make significant contributions to the U.S. innovation economy, hail from countries that are subject to U.S. export controls. Small and medium enterprises — many of whom may lack the scale or sophistication to steer through complex export regulations — may be hesitant to collaborate with scholars associated with companies in the BIS Entity List and are therefore subject to specific license requirements for the export, reexport, and/or in-country transfer of specified items. They are keen to avoid being targeted by the U.S. government for providing a “deemed export,” such as the release or transfer of sensitive technology or source code, to an adversary.
Capital flight. Export restrictions may force U.S. companies to reroute their supply chains. Forced to find alternative suppliers on short notice, firms could be faced with high unexpected costs. For example, the Uyghur Forced Labor Prevention Act passed in 2020 prohibits imports of products into the United States until the exporting companies can prove that their supply chain does not involve slavery or forced labor practices believed to exist in the Xinjiang region of China. According to Alan Bersin, a former U.S. Customs and Border Protection Commissioner, "the impact of this [disruption] on the global economy and on the U.S. economy is measured in the many billions of dollars, not the millions of dollars."
In other cases, U.S. firms lose a significant amount of market share due to the impact of government export controls. Research by ITIF, has shown, for example, that the U.S. market share of commercial communications satellites dropped by 19% as a result of Congress imposing export controls on satellites in 1998, with $2.4 billion in lost sales directly attributable to export restrictions between 2003 and 2006. Almost one-third of U.S. companies affected by this restriction have changed their research and development spending to avoid supporting the development of regulated technologies.
Domestic business opportunity loss. The U.S. defense community also recognizes export controls as an obstacle to international collaboration. In particular, ITAR strictly regulates and controls equipment and data that may be related to defense and military technology. William Greenwalt in a report published by the Atlantic Council, describes the case of a British submarine that was exposed to potential hazards at sea and could not immediately receive contractor servicing because some of the non-sensitive components on the submarine were of U.S. origin and regulated under ITAR. As a result, the submarine could not dock for servicing until it received the U.S. Department of State’s approval for a license, delaying the maintenance and redeployment of an allied submarine. This delay negatively impacted the United Kingdom’s national security and could have incentivized the United Kingdom to contract with firms in other countries instead of in the U.S.
Strict ITAR regulations also incentivize U.S. companies to conduct critical research and development abroad instead of at home, causing the U.S. to lose out on domestic job creation and business opportunities. For instance, according to an article published by Breaking Defense, ITAR led Boeing to develop the Ghost bat drone in Australia rather than in the United States.
In short, while export controls can be an effective tool in depriving adversaries of critical technologies, they can also harm U.S. interests. While there is bipartisan consensus for deploying export controls to help manage competition and conflict with adversaries such as China and Russia, the U.S. needs to employ this policy tool carefully to avoid inadvertently disrupting U.S. companies' supply chains, business strategies, and access to foreign talent from countries that the U.S. government is considering applying export controls on, as sudden shifts in U.S. policy could lead to unexpected outcomes for U.S. firms.
Hideki Tomoshige is an intern with the Renewing American Innovation Project at the Center for Strategic and International Studies in Washington, DC.
The Perspectives on Innovation Blog is produced by the Renewing American Innovation Project at the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).