Left On The Launch Pad

It takes a leap of imagination to think of Canada, that innocuous land of Joni Mitchell, Molson beer and occasional cold fronts, as a national-security threat. Unless, of course, you are the U.S. State Department, and the issue is satellite sales. That's what Mark Bitterman learned late last year when his Dulles, Va.-based company, Orbital Sciences, lost an $80 million contract to build part of a radar satellite for the Canadian government. Though Ottawa just wanted to monitor the movement of ice floes--not troops--the part was considered sensitive military equipment. And State, saddled with huge new export-licensing responsibilities for high-tech goods, dithered over the licensing for a year, says Bitterman, a senior VP. Under U.S. law, Orbital's engineers couldn't even talk details with their own subsidiary handling the deal across the border. Finally the Canadians gave up and delivered the contract to an Italian firm. "Our reaction," says Bitterman, "was disbelief."

When Congress legislates, the law of unintended consequences is often the result. Today the blowback from a law passed a year ago is punishing the U.S. defense industry, critics say. And it's happening at the worst moment, when defense firms are getting hammered by Wall Street for poor earnings.

U.S. companies have long complained of reams of red tape from cold-war-era export-licensing laws. But their problems grew acute after a 1998 scandal. Allegations that two companies, Loral and Hughes, passed sensitive missile information to Beijing after failed Chinese satellite launches led to a major shift of license authority for satellites from the fast-track Commerce Department to the cautious bureaucrats at State. The scandal died down, but the climate of fear over exports of many "dual use" goods--high-tech items with both commercial and military uses--hasn't. Companies say even friendly neighbors like Canada and other NATO allies are treated with suspicion.

Congress insists it intended only to target China, and State argues that Foggy Bottom is understaffed and overburdened. But insiders in both the industry and the Clinton admininstration think the government's over-reaction to the scandal is hurting national security -- by threatening a key defense industry--more than the scandal ever did. Last December, 16 NATO ambassadors wrote a letter to Secretary of State Madeleine Albright complaining of a "serious impediment to defense cooperation." Meanwhile DASA, the German aerospace giant, ordered its purchasers to look for non-U.S. suppliers. The Japanese, with whom the United States is also strengthening its defense relationship, are worried about joint production as well.

The export numbers tell a bleak story that is getting worse. Satellite sales abroad have dropped 40 percent in the last year, says John Douglas, head of the Aerospace Industry Association. Some of that may be cyclical. But Douglas says that with license approval taking three to four months--more than triple the time it used to--he believes "the bulk of it is due to export-licensing problems." U.S. share of the global market dropped from 72 percent to 65 percent in the year ending in December. "I can't remember a year when the U.S. dropped this precipitously," says John Harbison, a defense analyst at Booz Allen & Hamilton. State's licensing chief, Pamela Frazier, says she's got just 14 people to oversee 48,000 licenses a year. She adds that she now has money to hire 17 more. But things may soon get worse: administration officials reviewing the 1998 law say it may require all space-related parts to be licensed by State.

John Hamre, the deputy secretary of Defense, says exports to countries like China need to be monitored. But he concedes that the entire Soviet-era licensing regime is obsolete. "The overall [system] is what's really broken," he told NEWSWEEK. Congress has failed to appreciate that, in an era when the Pentagon's procurement is way down, most U.S. defense firms depend on the commercial export market and overseas partnerships for their health. That in turn bolsters U.S. national security. "We have to confront the fact that America's defense industrial base is now global," he says. The licensing laws, it seems, are not.