Selling a bubble

The Research Reactor CIRUS at the Bhabha Atomic Research Centre in Trombay. Units under BARC will remain on the Entity List after the current round of removals takes effect.-V.V. KRISHNAN

The removal of Indian space and defence entities from the Entity List will not make much of a difference to the import of dual-use goods.

AN unwarrantedly hyped component of the Partnership on Export Controls and Non-Proliferation that was announced following the visit of United States President Barack Obama is the removal of India's defence and space-related entities from the U.S. Entity List (EL). Another component, which has also been given much publicity by the media, is the realignment of India in the U.S. export control regulations for dual-use goods. Of course, much of the Indian media, particularly the TV channels, got it all wrong by terming the entities' removal as the removal of restrictions on export of dual-use goods from the U.S. altogether. However, the removal of entities from the EL does not amount to a removal of restrictions on high-tech goods and will hardly have any impact on India-U.S. high-tech trade.

The Export Administration Act (EAA) of 1979 forms the legislative basis for export controls in the U.S. on dual-use goods. Its provisions are implemented through the Export Administration Regulations (EAR) administered by the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce (DoC). To enforce the controls through a licensing mechanism, the BIS maintains a list, as required by the EAA, which includes goods and technologies subject to EAR broadly termed as dual-use. This is the Commerce Control List (CCL) and is divided into 10 categories. Each item on the CCL has an Export Control Classification Number (ECCN) along with specified reasons (one or more) for control. ECCN is a five-character (XXXXX) number where the second character is one of the first five letters of the alphabet and the rest are digits 0 to 9.

There are five categories of reasons for controls on dual-use goods: (1) National Security (NS) reasons; (2) Missile Technology (MT) reasons; (3) Nuclear Non-proliferation (NP) reasons; (4) Chemical & Biological Weapons (CB) reasons; and (5) Anti-terrorism (AT), Crime Control (CC), Regional Stability (RS), Short Supply (SS), U.N. Sanctions, and so on.

Of these, the following are multilaterally controlled as well by different export control regimes: MT under the Missile Technology Control regime (MTCR), NP under the Nuclear Suppliers Group (NSG), CB by the Australia Group (AG) and NS under the Wassenaar Arrangement (WA). Also, since reasons for control are not mutually exclusive, an item may be controlled for more than one reason, for example, for NS and MT or NP reasons. At present the CCL includes 507 entries of which 374 are controlled for one or more reasons from among NS, MT, NP and CB. The remaining 133 are for the last category (AT, etc.), which are unilaterally controlled. Of these, 86 are controlled for AT reasons alone and hence are not controlled for all destinations in India. The remaining 47 are controlled for other reasons in the fifth category and are controlled for India.

Items listed in the CCL require a licence for export unless they fall under licence exception rules, which are destinations-specific. Items subject to the EAR but not listed in the CCL, and therefore not given an ECCN, are classified as EAR99 items. These constitute a basket of generally low-tech items (such as capacitors, resistors, RF tubes and amplifiers, pumps and piping valves) that do not warrant any controls and, therefore, do not normally require a licence for export unless specially notified, which the BIS can choose to do for specific reasons. Thus dual-use goods that would not normally require a licence for export to India are the 86 mentioned above and the EAR99 items.

The concept of an EL evolved as part of the Enhanced Proliferation Control Initiative (EPCI) that began in November 1990 under President George Bush (Sr). In implementing this, the EAR has incorporated an export restriction, which prohibits the export of items subject to EAR to certain end-users or end-users without a licence. Pursuant to this, the BIS maintains an EL to inform exporters of entities of concern arising from the EPCI's aim to stem the spread of missile technology as well as nuclear, chemical and biological weapons. The EL thus includes the names of certain entities including businesses, research institutions, government and private organisations, individuals, and other types of legal persons that are subject to specific licence requirements for the export, re-export and/or transfer (in-country) of specified items.

In effect, the BIS can impose licensing requirements on exports and re-exports of even normally uncontrolled goods and technology (EAR99 goods) where there is an unacceptable risk of use in or diversion to activities relating to weapons of mass destruction (WMD) and missile development. Even though EAR99 items themselves are not directly linked to missile or nuclear proliferation activities, and the primary end-users of these may not be related to weapons activities, licensing requirement can be imposed on them following the catch-all provision of the EPCI initiative that seeks to target all entities with any links to entities of proliferation concern. The EL specifies these specific licensing requirements it imposes on each entity. On an entity-by-entity basis, the entities on the EL are subject to licensing requirements and policies additional to those found elsewhere in the EAR.

The EL came into prominence in the Indian context when the U.S. administration imposed a set of economic sanctions on India in the wake of the Pokhran-II nuclear tests of May 1998. The sanctions included export restrictions on EAR-controlled dual-use goods to over 200 governmental, parastatal and private organisations determined to be involved in nuclear and missile activities. All these identified organisations were included in the EL. The EL, which includes entities from all over the world, is maintained by the BIS, and entities are added to or removed from it depending upon the imposition or removal of export sanctions. Even while continuing to be on the EL, the additional licensing requirements and policies for a particular entity can change (relaxed or tightened) over time.

The EL was issued for the first time in February 1997, a year before the Pokhran tests. It included the Bhabha Atomic Research Centre (BARC), the Indira Gandhi Centre for Atomic Research (IGCAR) in Kalpakkam, and some Russian and Israeli entities. The list was expanded in June 1997 to include Bharat Electronics Ltd (BEL) of the Ministry of Defence and Indian Rare Earths Ltd (IREL) of the Department of Atomic Energy (DAE). In September 1997, following high-level intergovernmental talks, the EL was amended to include only the Hyderabad and Bangalore wings of BEL. However, in the post-Pokhran-II EL, sanctions were again imposed on the entire operations of BEL. At present (until the announced removal of Indian space and defence entities by Obama comes into effect through a Federal Register notification), there are about 300 entries (including subordinate entities) from 24 countries.

In its inclusion of Indian entities in June 1998 after the Pokhran tests, the EL was extremely wide in its sweep and seemed quite arbitrary and irrational. Besides all wings, laboratories and units of the DAE, the Defence Research & Development Organisation (DRDO) and the Indian Space Research Organisation (ISRO), the EL included about 40 companies (15 from the private sector), academic institutions under the DAE and the ISRO such as the Tata Institute of Fundamental Research (TIFR), the Saha Institute of Nuclear Physics (SINP) and the Physical Research Laboratory (PRL), the departments of aerospace engineering and space technology of the Indian Institute of Science (IISc), IIT Madras and IIT Bombay, the National Aerospace Laboratory (NAL) of the CSIR, and R&D institutions like the Centre for Development of Advanced Computing (C-DAC).

In October 1999, the U.S. Congress called for targeted sanctions, meaning that the EL should include only those entities that made direct and material contribution to WMD and missile programmes and export sanctions be applied only to those items that can contribute to such programmes. As an immediate consequence, the EL was revised in respect of Indian entities twice, in December 1999 and in July 2000. The first revision removed 51 entities (mostly ordnance factories and the TIFR and the SINP) and the second removed two (the Uranium Recovery Plant of the DAE and the Nuclear Science Centre of the UGC) and added one (ISRO's Telemetry, Tracking and Command Network, or ISTRAC).

In September 2004, the ISRO headquarters was removed from the EL. The last revision was in August 2005, following the Singh-Bush Next Steps in Strategic Partnership (NSSP) in July 2005. Six entities were struck off the EL: ISTRAC; the ISRO Inertial Systems Unit (IISU), Thiruvananthapuram; the Space Applications Centre (SAC), Ahmedabad; and the DAE's nuclear plants under safeguards, namely, TAPS (1&2) and RAPS (1&2) and the under-construction Kudankulam (1&2).

Five years down, another revision is announced. The Indian entities that were still on the EL before the current round of removal were Bharat Dynamics Ltd (BDL) of the Ministry of Defence; four subordinate units of the DRDO (the Armament Research and Development Establishment (ARDE); the Defence Research and Development Laboratory (DRDL), Hyderabad; the Missile Research and Development Complex; and the Solid State Physics Laboratory (SSPL)); four subordinate units of ISRO (the Liquid Propulsion Systems Centre (LPSC); the Solid Propellant Space Booster Plant (SPROB); the Sriharikota Space Centre (SHAR); the Vikram Sarabhai Space Centre (VSSC), Thiruvananthapuram; and, BARC, IGCAR, IREL and nuclear reactors (including power plants) not under IAEA safeguards (excluding Kundankulam 1&2), fuel reprocessing and enrichment facilities, heavy water production facilities and their collocated ammonia plants of the DAE. All the entities except those under the DAE will now stand removed from the EL once the Obama announcement takes effect.

The BIS clearly states: The removal of an entity from the Entity List removes only the additional licence requirements imposed by the entity's listing on the Entity List, and does not modify the licence requirements that may be applicable under the EAR as a result of an item's classification on the CCL and the proposed country of destination for the export, re-export or transfer (in-country) of the item. Additionally, if you know or have been informed that the item proposed for export, re-export or transfer (in-country) will be used in a WMD or missile delivery system program, you must seek a licence pursuant to the requirements found in part 744 of the EAR (emphasis added).

Along with the removal of entities at various instances mentioned above, there also has been relaxation of the licensing requirements from what were originally imposed in 1998. In the beginning, the sanctions imposed were such that a licence was required for all items subject to the EAR (including EAR99 items) with a presumption of denial, except for military establishments like ordnance factories, which were exempt from licence requirement for EAR99 goods. In March 2000, after the first instance of entities removal, the licensing policy towards Indian entities was changed with regard to EAR99 items, with presumption of denial turned into presumption of approval. Further, in September 2001, the presumption of denial policy for controlled items was relaxed to a case-by-case review policy for all non-MT, non-NP controlled items.

In the September 2004 revision, the licensing policy was relaxed to a case-by-case review for all controlled items. For ISRO units on the EL, the policy was further relaxed: all EAR99 goods and items having ECCN with the digit 9 in the third to the fifth characters (XX999) could be exported without a licence. (XX999 items are a subset of formerly EAR99 items that were deemed to be potentially useful for nuclear proliferation activities in North Korea. These are now controlled for AT reasons.)

The licensing requirements for the 12 entities and unsafeguarded reactors that were on the EL after the August 2005 revision and before the latest removal were as follows:

BDL: Licence required for all items subject to EAR with case-by-case review for all items on the CCL and presumption of approval for EAR99 items.

Subordinate units of DRDO: Licence required for all items subject to EAR with case-by-case review for all items on the CCL and presumption of approval for EAR99 items.

Subordinate units of DAE: Licence required for all items subject to EAR with case-case-by review for all items on the CCL and presumption of approval for EAR99 items.

Subordinate units of ISRO: For all items subject to the EAR having a classification other than (1) EAR99 or (2) a classification where the third through fifth digits of the ECCN are 999, example, XX999 and case-by-case review for all items on the CCL.

Thus, the status of licensing requirements for the entities on the EL (before the latest revision) were virtually the same as the normal licensing procedures that were in place before the Pokhran tests, except for the licence requirement for EAR99 goods for the defence, DRDO and DAE units. As for ISRO units, even this restriction was not there. So, after the current revision of the EL comes into effect, the only tangible change relating to trade in dual-use goods would be the removal of the burden for the U.S. exporter of applying for licences to export EAR99 goods to defence and DRDO units; the delay in their imports here, which would have occurred otherwise, can now be avoided. For all other items on the CCL, the normal controls and licensing procedures will still be in place.

There is a caveat with regard to EAR99 goods, too. Even though entities may be off the EL, catch all controls will continue to be there for all exports to these entities. Further, the removal of entities does not relieve exporters of their obligation to know your customers. According to Part 744 of the EAR, an export licence is required, even if it were not otherwise necessary, if an exporter knows, has reason to know, or is otherwise informed by the BIS that the item may be used in activities relating to WMD. To be on the safe side, therefore, an exporter is likely to continue to apply for a licence even for EAR99 and other goods not normally requiring one. So, even with regard to EAR99 goods, the situation may not change all that drastically, at least in the short term. Given the above scenario, post-2006 data of BIS on export of dual-use high-tech goods to India should give a fairly good indication of the current level of trade in controlled goods with India. The table gives data for 2007 and 2008.

The data show, one, that denials meet only a small fraction of the total applications for licences. Secondly, they show that a large number of applications are returned without action (RWA) mainly because no licence was required in those cases. Because of the red flag on Indian end-users who were once on the EL, exporters were perhaps being overcautious and applying for licences even if they were not required. Thirdly, EAR goods continue to constitute a significant fraction of the applications, and some EAR99 applications are denied perhaps owing to the catch all provision. Most importantly, a large fraction of approvals belong to the controlled categories of NS, MT, NP and CB controls. The only perceptible change that could result after the removal of all but the DAE units from the EL is that applications for EAR99 items will fall, but slowly, because of the catch-all provision.

No significance in real economic terms

In effect, therefore, the removal of entities will not alter the scenario with regard to the import of dual-use high-tech goods into India. Since, as pointed out earlier, nearly three-fourths of the controlled items are also multilaterally controlled, the U.S. cannot unilaterally dismantle these controls for India regardless of the growing strategic partnership. So controls on dual-use goods will continue to be there and may perhaps ease if India becomes party to the multilateral regimes with U.S. help. Trade in dual-use goods constitutes less than 1 per cent of India's imports from the U.S. So, in real economic terms too, the move is hardly of any significance. But it has definitely become the totem of India's growing reliance on and alliance with the U.S.

As for the U.S. intention to realign India in its dual-use export control policies, it would only become clear when a Federal Register notification is issued in this regard. The statement that such realignment would effectively treat India like close allies of the U.S. is misplaced because Israel, despite being a close ally, is slightly worse off than India in terms of nuclear goods controlled unilaterally by the U.S. According to the U.S. Fact Sheet on Partnership on Export Controls and Non-Proliferation', the realignment will remove India from categories within the dual-use regulations that connote India as a country of concern'. In return, India will harmonise its national control list with the multilateral regimes and incorporate re-export controls on certain U.S.-origin items to address the potential transshipment of these items. Clarity on this statement must wait until the Federal Register notification is issued.

The EAR has classified countries into groups (A, B, D and E) for licence exception purposes. Group A includes countries that are members of the multilateral export control regimes. Group B countries are those that can be generally termed as friendly to the U.S. and to whom the exports are less restricted. Group D includes countries of concern and Group E includes terrorist supporting countries. Thus a country can figure in A and B (for example, Japan and Poland) or B and D (for example, India and Pakistan) or in A and D (for example, Russia and Ukraine). Since India figures both in B and D, it can be upgraded only by moving it into Group A. This can happen only if India becomes a multilateral export control regime member. This can only happen if the regimes alter their membership criteria in India's favour (perhaps with U.S. help, as assured in the joint statement) and India takes measures to harmonise its export control system with the multilateral regimes. Given that this is unlikely to happen in the short term, the possibility of realignment is also likely to be distant.