Rising hopes on high-tech trade

Published : Jan 02, 2004 00:00 IST

The ongoing talks under the Indo-U.S. High Technology Cooperation Group give rise to expectations of a relaxation of controls on the export to India of dual-use goods from the U.S.

THE recent visit to India by United States Under Secretary of Commerce Kenneth I. Juster, to participate in the second round of talks under the Indo-U.S. High Technology Cooperation Group (HTCG), evoked a great deal of interest in official and business circles as well as the media. Part of the reason for the enthusiasm was the name of the forum - it includes the phrase "high technology", notwithstanding the general perception that the U.S. export control regime inhibits high technology trade, particularly in the so-called dual-use goods, items that have both military and civilian use.

The broad and evidently irrational sweep of the Entity List (EI) that took effect in the wake of the May 1998 nuclear tests by India only strengthened the perception. Though embargoes on most of the entities were lifted on October 1, 2001, and the controls on the remaining ones were significantly relaxed, the Indian side wants greater access to U.S. dual-use goods and increased strategic trade. The ongoing HTCG negotiations, it is expected, will pave the way for the relaxation of export controls. But this posture is dictated more by foreign policy agenda than by a quantitative analysis of the real requirements of Indian agencies and the actual imports from the U.S. The chief reason for this is the lack of relevant, centralised data with the government.

However, there appears to be sincere political will among the lead negotiators, outgoing Indian Foreign Secretary Kanwal Sibal and Juster, to achieve tangible progress. One of the stated objectives of the HTCG is to move forward in what has been termed as the "trinity" of issues - trade in dual-use goods and cooperation in the areas of civilian nuclear technology and space technology. Indeed, following the open Indian support to the U.S. National Missile Defence programme, some commentators have even spoken of enlarged scope for the ongoing dialogue, covering a "quartet" of issues, including missile defence.

While it is too early to expect a perceptible movement forward given the complex web of regulatory, foreign policy, bureaucratic and administrative issues to be sorted out on both sides, there is palpable hope and optimism that it will lead to a positive outcome. The question is what kind of progress in high technology trade can the HTCG talks achieve.

On the non-trade front, some progress is evident. India and the U.S. have initiated five safety-related projects for nuclear facilities. Exchange of visits by U.S. and Indian nuclear regulatory officials has also commenced. In the area of space, the two sides have renewed the Memorandum of Understanding (MoU) on cooperation in the earth and atmospheric sciences. The U.S. has offered to resume cooperation in space applications for sustainable development, weather research missions, tele-medicine, tele-education and disaster management. Cooperation in areas such as Information Technology, life sciences, nano-technology and defence technology is being initiated.

The HTCG had its origins in the meeting between President George W. Bush and Prime Minister Atal Bihari Vajpayee in November 2001, when they agreed to stimulate bilateral high-technology commerce towards "quantitatively transforming Indo-U.S. relations". This was reinstated during their subsequent meeting in New York in September 2002 when the two leaders agreed to explore possibilities of expanding cooperation in space, diverse forms of energy, high-technology commerce, and science. Towards realising this goal, a U.S. delegation led by Juster visited India a year later and reviewed bilateral high-technology trade, including dual-use items controlled by U.S. Export Administration Regulations (EAR). This led to the decision to create an India-U.S. HTCG to find ways of enhancing trade in high technology. The HTCG became the new totem of the emerging new relationship and professed common strategic interests between the two countries.

The initiative took a concrete shape in February with the signing of a joint Statement of Principles in Washington by Sibal and Juster. In the joint statement, which comprised 16 principles, the two governments recognised "the untapped potential for U.S.-India high-technology commerce, the need to address economic and systemic issues inhibiting such trade (including tariff and non-tariff barriers), the need to engage in outreach and trade promotion to U.S. and Indian industry on market opportunities and the central role of the private sectors in generating increased bilateral high-technology commerce". The two countries agreed to prevent the proliferation of sensitive goods and technologies.

Significantly, the statement said that the facilitation of high-technology trade, particularly in dual-use goods and technologies, greater access to which is important to the Indian government, will be consistent with domestic laws and national security and foreign policy objectives, including compliance with international commitments. The joint statement includes a commitment by the U.S. to do its utmost towards relaxing controls and ensuring transparency in the export licensing process within the above-mentioned constraints.

Apart from an appropriate environment that would spur high-tech exports from the U.S. and ease barriers to such commerce, the U.S. would like to see a strengthened Indian export control system to prevent diversion and proliferation of sensitive goods and technologies. India does have an export control system in place but as the recent instance of export of chemicals used in the production of chemical weapons to West Asia - brought to the notice of the Indian authorities by the U.S. - has highlighted, it is weak. The U.S. has offered to cooperate in strengthening and enforcing export controls in accordance with modern standards.

A growing concern for the U.S. is the past decade's widening trade gap between the two countries with the balance of payment (BoP) being in favour of India. In the calendar year 2002, U.S. exports to India stood at $4.09 billion against imports from India (including services, arising mainly from business process outsourcing) worth $11.81 billion. From a near-stagnant value of $3.2 to 3.5 billion, U.S. exports have crossed the $4 billion mark after about six years. Referring to this flat growth, the 2003 report of the U.S. Trade Representative (USTR) says: "India continues to maintain a broad range of trade restrictions. In particular, the multi-tiered tariff structures have kept U.S. exports to India flat for over five years. Lack of transparency as well as complex, broad and discriminatory governmental powers, all combine to impede trade. Serious deficiencies in IP [Intellectual Property] rights protection continue to persist".

The U.S. enjoys a competitive advantage as compared with other countries with regard to armaments and agricultural and high-technology goods. With agriculture ruled out, the U.S. can look to only the other two areas for shoring up its exports. Of late, India has shown some interest - albeit somewhat reserved owing to apprehensions about spares and components - in U.S. armament sales. There would be no serious problems of controls on defence exports as these are governed by the U.S. Munitions List of the International Trade in Arms Regulations (ITAR). Indeed, negotiations on the defence sector are pursued on a parallel track.

Alongside the increasingly visible military-to-military ties, U.S. arms sales to India have also taken place. Last year, the sale of 12 counter-battery radar sets (or "Firefinder" radars) valued at more than $150 million was negotiated, and 10 of them have already been supplied. The U.S. State Department has authorised Israel to sell to India the jointly developed U.S.-Israeli Phalcon airborne early warning system valued at over $1 billion. Apparently the Indian shopping list of U.S.-made weapons is extensive and includes P-3 Orion maritime patrol aircraft, Patriot (PAC-3) anti-missile systems, and electronic warfare systems. According to a Congressional report, the U.S. is prepared to provide Indian security forces with sophisticated electronic ground sensors to combat militancy in various affected areas.

AS for high technology, most of India's imports from the U.S. are uncontrolled goods, which do not require a licence for export. Indeed, licensed exports from the U.S. is around 1 per cent of the total exports from that country to India in comparison to a share of 15 per cent in the case of China. This should not be interpreted to mean that the controls are weaker in the case of China; in a sense, they are stronger. China appears to have a far greater demand for dual-use goods and consequently there are a greater number of applications for these from that country. Export of controlled or dual-use goods to India is mainly to the triad of strategic departments - Atomic Energy, Space and Defence Research - with the Department of Space accounting for a major share. Licensed exports to Indian industry, particularly the private sector, are not very significant.

So, while the negotiation for increased access to dual-use goods is valid as a foreign policy instrument, it cannot be expected to address U.S. concerns regarding the trade gap. The uncontrolled high-technology goods, such as electronic and telecommunication goods and biotechnology-related products, are produced largely by small and medium enterprises (SMEs) in the U.S. And the U.S. position is that trade barriers affect the export potential of SMEs. It is for this reason that one component of the U.S.' negotiating stance under the HTCG (which also figures prominently in the agreed principles) has to do with "facilitating high technology trade by lowering trade barriers", in particular IP rights for medical and biotechnologies, and easing other regulatory controls.

Of course, this element of the HTCG is probably viewed by the Indian side as nothing different from the demands often made by the numerous business delegations coming to India. Progress on this front will happen in due course in accordance with India's domestic policy considerations and the commitments made to the World Trade Organisation (WTO). For example, in the case of electronic and telecommunication goods, which constitute a large fraction of uncontrolled high-tech goods from the U.S., India has been lowering tariffs at a faster rate.

Given the level of technology in the Indian private sector, by and large, it is a poor consumer of high-end technology goods such as controlled dual-use goods. So, engaging the private sector as a partner in the talks - a stated objective in the HTCG's guiding principles - can be expected to increase trade only in uncontrolled and unlicensed (non-dual-use) goods. It does not require a policy-level initiative or intervention on the part of the U.S. government, unlike increased access to dual-use goods does. Therefore, while progress on the dual-use goods front would be important from the perspective of foreign policy, its share in high-technology trade is small.

The EAR controls dual-use goods for a variety of reasons - nuclear proliferation (NP), missile technology (MT), chemical and biological weapons (CBW), national security (NS), foreign policy (FP), anti-terrorism (AT), crime control (CC), encryption (EI), regional stability (RS), United Nations (U.N.) sanctions and short supply (SS) - through what is called the Commerce Control List (CCL). Each item has a specific Export Control Classification Number (ECCN) along with one or more specified reasons for being controlled. For example, an item can be controlled for NP and NS reasons or CBW and AT reasons and so on. These controls are supposed to reflect the U.S.' commitment to multilateral agreements. For example, some goods controlled for NP reasons could correspond to the Dual Use Annex and Trigger List of the 40-nation Nuclear Suppliers Group (NSG), some items controlled for CBW reasons could correspond to the Australia Group (AG) controls, some items controlled for NS reasons such as night vision devices or sensors could correspond to the Dual Use List of the multilateral Wassenaar Arrangement, an agreement among the Western allies.

There is also a basket of items - generally low-end items - that are controlled for other non-specific contextual reasons. Normally, these do not require an export licence. These are called EAR99 items. They do not figure in the CCL and do not have EECNs, or specified reasons for control, but the U.S. Department of Commerce reserves the right to control their exports. Under the "catch all" provision of the Enhanced Proliferation Control Initiative (EPCI), an end-user may be denied licence for an EAR99 item if the importer is perceived to be linked to nuclear, missile or CBW programmes. For instance, in the wake of the post-Pokhran embargoes, licence was required for the export of all items under EAR, including EAR99 items, to all the sanctioned entities in the initial Entity List with a presumption of denial. However, in the revised EL of October 2001 - which includes essentially only the strategic agencies of the Department of Atomic Energy (DAE), the Indian Space Research Organisation (ISRO) and the Defence Research and Development Organisation (DRDO) - though licence is required for all controlled items, there is a presumption of approval for EAR99 items for entities that are still on the list.

There is also what is known as licence exception for some of the items on the CCL and when this provision is available, no licence is required even though it has an ECCN and has specific reasons for control. For example, no licence is required for high performance computers (HPCs) with a fairly high performance rating - which are otherwise controlled for NS reasons - because of a licence exemption provision under the HPC initiative of President Bill Clinton. Computers capable of up to 190,000 million theoretical operations a second (MTOPS) do not require any licence for export to countries such as India, which fall into the country classification Tier-3. It may be recalled that the 1984 Indo-U.S. MoU had to do largely with easing the import of goods controlled for NS reasons, a large component of which was high speed and super-computers.

Nearly all the computing requirement of the country's scientific establishments is covered by the current limit except for a few end-uses such as oil reservoir simulation at the Oil and Natural Gas Corporation (ONGC) or weather-modelling at the India Meteorological Department (IMD) or protein folding research at the Indian Institute of Science (IISc), which may require HPCs with a capacity higher than 190,000 MTOPS of capacity. Indeed, in the past couple of years few licensed imports of HPCs have occurred. Similarly, licence exemption is available for encryption equipment and software, which are otherwise controlled for NS reasons. So there is not a great deal to be gained on the HPC front as a result of the HTCG initiative.

A look at the table will convey the profile of applications for the export of dual-use goods to India. The higher number of applications in FY2001 (October 2000-September 2001) has to do with the large number of entities who had to apply for licence for all EAR-controlled goods, including EAR99. As a result of the October 2001 revision of the EL, the number of applications in FY2002 has come down drastically as the large number of entities removed from the EL did not require licences for EAR99 goods any longer. This is also seen from the corresponding enormous increase in the value of applications returned without action (RWA) in FY2002. Even in FY2003 nearly three-fourths of RWA applications were returned for reasons of `no licence required' (NLR). This is also indicative of the fact that a large fraction of imports of dual-use goods by Indian agencies belongs to the EAR99 category. According to post-2001 data, applications from ISRO - most of whose units continue to be on the EL - account for between 20 and 25 per cent of the total number of applications. Of these, a large fraction - 60 to 70 per cent - is for EAR99 items. The FY2003 data can be taken to give a fairer picture of Indian imports after one year of transition following the relaxation of sanctions and the pruning of the EL.

Given the U.S.' own non-proliferation concerns and its commitment to international obligations such as the NSG Guidelines and the Missile Technology Control Regime (MTCR), the bulk of NP-controlled items, which stem from the U.S. Nuclear Non-Proliferation Act of 1978, and MT-controlled items, which reflect Annex-I and II controls of the MTCR, will continue to be denied. Although a large fraction of NP-controlled items would figure in the NSG's Trigger List (which requires full-scope safeguards) or the NSG's Dual Use List (which requires use only in a safeguarded nuclear facility), there are NP-controls on some items that have been unilaterally imposed by the U.S. Any progress in the nuclear area will at best be limited to export of NP-controlled items that correspond to the NSG's Dual Use List, which can be used in a safeguarded utility, or relaxation of unilaterally imposed NP-controls. For example, in the year 2002, nearly 12 per cent of the total number of applications had to do with certain high-resolution oscilloscopes, which are unilaterally NP-controlled. Many of them were approved and further progress in this direction seems distinctly possible.

But the case of ISRO perhaps offers the best potential for forward movement as far as access to dual-use goods is concerned. As a member of the Indian negotiating team remarked, if ISRO is removed from the EL, the licence applications will come down by 25 per cent. Of course, because of MT controls, launch vehicle and propulsion divisions of ISRO will not be removed from the EL under any circumstance. But the Satellite Applications Centre (SAC), Ahmedabad, and the ISRO Telemetry Tracking and Command Centre (ISTRAC) could be removed if the HTCG were to make such a recommendation. Also, the satellite wing of ISRO will stand to gain if access to U.S. components and devices becomes possible. The bulk of these would be controlled for NS-reasons, but some of them, such as gyros and inertial navigation systems, could be controlled for MT reasons as well. So any progress here will have to tackle complex issues involving EAR and MTCR commitments.

It is true that in the wake of the Pokhran sanctions, ISRO has identified alternative sources for electronic components, radiation-hardened devices and other equipment for satellite fabrication and operation, notably from Europe. However, lack of competing sources has meant that higher prices have to be paid by ISRO. While absence of U.S. sources should not pose any serious problem for ISRO - as is evident in its functioning for the past five years - availability from the U.S. could mean better price and perhaps higher reliability of components.

One of the 16 guiding principles is that the U.S. government would review the licensing process and policies for the export of dual-use goods controlled for AT, CC, EI, NS, RS and SS reasons. Only some of the items controlled for AT and NS reasons are perhaps denied at present. Most of the NS-controlled items might also figure in the Wassenaar Dual List. Some progress on this front is possible although a relaxation of these would require that any licensing policy changes conform to Wassenaar Guidelines. This would be in addition to the limited possible gains on the nuclear and space fronts.

Another area where ISRO could stand to gain if the U.S. relaxes the corresponding controls concerns launches of satellites by third parties on ISRO's launch vehicles. Curiously enough, export of U.S.-made communication satellites or satellites made with U.S.-made components is governed not by the Department of Commerce but by the State Department and communication satellites and many satellite components are controlled by the U.S. Munitions List. So, export of U.S.-made satellites or satellites with significant U.S.-made components for launches from outside U.S. territory requires a licence from the State Department. Unlike in the case of China, this should not, in principle, pose a problem to India. But HTCG negotiations could lead to a bilateral agreement that waives these controls and allows the launch of third-party satellites aboard ISRO launchers.

Of course, nothing concrete has happened so far in terms of any definitive U.S. initiative or even an indication to that effect. There have been two meetings so far. Apart from conferences on trade facilitation with the participation of Indian and U.S. industry, the negotiators have made little progress on dual-use goods trade despite their avowed keenness and commitment. So far only reviews of the nuts and bolts of the licensing process and export controls have been gone over in fine detail to identify the problem areas and their solutions, besides procedural and policy issues that need to be addressed. It will take some more rounds of talks before any tangible progress is made. But informed sources in the Ministry of External Affairs say that Juster is keen to achieve something before he leaves the Department of Commerce.

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