Companies Say Decades-Old National-Security Policies Hurt Sales

Rob Smith’s Pennsylvania company, Acutec Precision Machining Inc., makes inch-long fasteners that are used in the wings of airplanes. In 2006 he tried selling them abroad for the first time.

The deal with an English company was worth a total of $897, and it could have landed him in jail. It turned out that unbeknownst to Smith, the buyer planned to sell the fasteners to the Romanian air force, Bloomberg Businessweek reports in its May 13 issue.

By failing to report that to the U.S. government, Smith violated the 1976 Arms Export Control Act, which strictly controls sales of even the tiniest parts used in military equipment. Two years and $10,000 in legal fees later, Smith finally convinced officials that Acutec had meant no harm.

“It was a stunner,” he says. “The U.S. government is treating the simplest nuts and brackets as if they were space-age software.”

The U.S. Department of State requires manufacturers to get a license every time they want to export an item covered by the U.S. Munitions List.

Hundreds of thousands of items are covered: Bolts, screws, seat belts, and toilet covers are lumped together with missile launchers and jet fighters.

When it comes to airplanes, “any component, part, accessory, attachment, and associated equipment” is subject to the rules, the list states.

Paperwork Delays

Assembling the required paperwork for a sale, and getting the State Department to approve it, can take a month and costs $2,250 in upfront licensing fees.

For manufacturers selling to foreign military customers, or to overseas suppliers who themselves have foreign military customers, there are more hoops to jump through: Every time the customer wants to buy a replacement part or sell a U.S.-made part to another foreign government, the U.S. manufacturer has to go back to the State Department and ask for permission again.

Cutting corners can bring a prison sentence of as long as 10 years and criminal fines of as much as $1 million.

Back in the 1970s and ’80s the rules made sense. The U.S. had a near monopoly on aerospace parts and could use the export system to keep its adversaries in check, says Remy Nathan, a vice president at the Aerospace Industries Association, based in Arlington, Virginia.

“The Iranians had F-14s that we sold them before the fall of the shah” in 1979, says Nathan. “By controlling the parts, we made absolutely sure that the Iranians had no way of getting the spare parts they needed to keep them in the air.”

Competitors Worldwide

Nowadays, the rules can backfire.

U.S. companies have competitors all over the world, many in countries far more easygoing about selling to foreigners. That means it’s often easier for U.S. allies to take their business elsewhere.

Some foreign manufacturers even advertise their products as free of U.S. content. “Eurocopter is saying, ‘Why should I go through all this for a $35 widget?’ ” says Acutec’s Smith.

Now the Obama administration is putting the finishing touches on rules to make it easier -- or at least less frustrating -- for U.S. companies to sell parts to 36 designated U.S. allies by revamping the “antiquated, Cold War system,” says Brian Nilsson, the White House’s director of nonproliferation.

Still, sorting out what counts as proliferation has been complicated. Officials at three agencies have haggled for three years over just what makes a part sensitive.

Airplane Headlight

Take an airplane headlight. “Does it reflect in the middle of the night in a way that makes it unique for war?” asks Michael Laychak, director for licensing at the Department of Defense.

Congress has signed off on some of the proposed rules -- tiny components for airplanes will be rid of the old restrictions by October -- and the White House wants lawmakers to agree to its other changes by the end of the year. The plan is to cut the number of licenses State has to approve every year to 40,000 from about 80,000.

The overhaul doesn’t mean companies shipping tiny parts overseas won’t have to fill out some paperwork: The Department of Commerce will still have to sign off on an export request to be sure a manufacturer isn’t shipping something to countries that aren’t U.S. allies.

Smith says the changes are a good start.

“It’s going to take years to undo,” he says. “We always joke that it takes five years to get a customer in this industry. There’s no instantaneous fix.”

To contact the reporter on this story: Elizabeth Dwoskin in Washington at edwoskin@bloomberg.net

To contact the editor responsible for this story: Wes Kosova at wkosova@bloomberg.net

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