Richard A. Boucher - Speeches and Remarks

E-Commerce, E-Security, and E-Competitiveness

Remarks by U.S. Consul General Richard A. Boucher
To the Hong Kong Information Technology Federation
April 28, 1999

(As Prepared for Delivery)

Thank you very much. As someone who sacrifices a few hours of sleep each night to explore the internet - reading the news, ordering books, or searching Hong Kong Telecom's website to find out when its broadband network will reach my house -- it's really a pleasure to be able to address a group of people who work every day in what has to be the most exciting industry in the world.

I was asked to talk today about U.S. policy on the export of encryption technology. I promise I'll discuss that, but first I want to put the encryption issue into the broader context of U.S. policy on promoting electronic commerce and preventing the diversion of sensitive technologies. I also want to throw out a few thoughts about the essential elements of promoting U.S.-Hong Kong digital business.

You know, probably better than I do, how important the information technology sector in general, and electronic commerce in particular, is to the U.S. economy. Our domestic information technology industry has accounted for one-third of U.S. economic growth over the past five years, and now accounts for 20 percent of our economic output. The industry employs millions of people in high-wage jobs with salaries that, on average, are 60-70 percent higher than other private sector salaries. That's not to mention the thousands - even millions - of people who have become wealthier as a result of investments in information-technology stocks. Even more important, the growing use of information technology has contributed directly to substantial increases in productivity throughout the economy. Computers have made us more productive, and richer.

To promote electronic commerce and, more broadly, the information technology sector within the United States, the U.S. Government has provided funding for research and has sought to create the best possible macroeconomic and regulatory framework for industry. Our guiding principle, however, has been to let the private sector take the lead as much as possible.

Globally, we are working to create the best possible environment for electronic commerce, based on the belief that a global electronic marketplace unfettered by unnecessary taxes, regulations, and trade barriers can substantially increase productivity and prosperity throughout the world. We want to do all we can to ensure that electronic commerce grows as fast as we think it can, delivering benefits to companies and consumers in the U.S. and around the world.

In the World Trade Organization and elsewhere, we have promoted five broad principles: (1) the private sector should lead, (2) governments should avoid undue restrictions and taxes on electronic commerce, (3) where government involvement is needed, its aim should be to support and enforce a predictable, minimalist, consistent and simple legal environment for commerce, (4) in formulating regulations, governments should recognize the unique qualities of the internet, and (5) electronic commerce over the internet should be facilitated on a global basis.

We are working in several international organizations to achieve agreements that we believe will advance these principles. For example, we have led efforts in the World Trade Organization to reach an agreement to keep international commerce over the Internet free from discriminatory taxes. We have pressed for improved intellectual property rights protection, supported a uniform commercial code for electronic commerce, and promoted competitive telecommunications regimes that ensure that online service providers can reach end-users on reasonable and nondiscriminatory terms.

In promoting electronic commerce, as with promoting trade in general, we have to balance our economic and commercial interests with the need to protect global and national security. In many areas of trade, the U.S. and other governments - including Hong Kong -- impose controls on the export of certain sensitive technologies and products to ensure they are not used to develop weapons of mass destruction or in otherwise dangerous and harmful ways. There is an economic and commercial price to be paid for these controls, but that price pales in comparison to the potential cost - in terms of individual, national, and global security -- of not maintaining such controls.

For electronic commerce, the issue of "trade controls" comes down to encryption technology. You know better than I do that electronic commerce cannot thrive without security. The disturbing increase in computer crime and electronic espionage has made people and businesses wary of posting their private and company proprietary information on electronic networks if they believe the infrastructure is not secure. A robust secure infrastructure -- i.e., strong encryption -- can help allay these fears and allow electronic commerce to continue its explosive growth.

On the other hand, there is a legitimate need - in terms of protecting national security, foreign policy, and law enforcement interests - to control the export of strong encryption technology. As you know, terrorist cells, organized criminal elements, and others could use strong encryption to hide their communications - and hence their plots and plans -- from national and international authorities charged with enforcing the law and preventing terrorist and criminal acts.

The international community has recognized the need to balance promotion of secure electronic commerce with legitimate national security and law enforcement needs. Last December, the 33 member nations of the Wassenaar Arrangement - which was established in 1996 as the successor to COCOM - agreed to changes on encryption control policy that go a long way toward increasing international security and public safety by providing countries with a stronger regulatory framework for managing the spread of robust encryption. Specifically, the members agreed to remove controls on all encryption products at or below 56 bit and, more importantly, to review the export of any encryption product above 64-bit to ensure it does not pose a security threat.

On its own, the U.S. has been consulting closely with industry and its customers to develop a policy that balances our desire to promote secure electronic commerce with our need to protect important law enforcement and national security interests. Based on our consultations and our review of international market trends and realities, we made several changes to our encryption policy in late 1998. The details of the revised policy are available on the Web - we have a handout here to tell you where to look. Let me briefly mention the two most important revisions.

On September 22, 1998, we announced a decision to allow the export, under license exception, of unlimited strength encryption to banks and financial institutions located in countries - including Hong Kong -- that are members of the Financial Action Task Force or that have effective anti-money laundering laws. The direct result of this policy change is that over 100 of the world's largest banks and almost 70 percent of the international financial institution market is now eligible for strong American-made encryption.

On December 31 last year, the U.S. published regulations that significantly streamlined government export controls on encryption. We liberalized controls on 56-bit products, and ended the requirement for individual licenses for powerful encryption products to U.S. subsidiaries and to health care and insurance companies, as well as on-line merchants, in a number of locations, including Hong Kong. The new regulations also allow for approval under a kind of bulk license of exports of "recovery capable" or recoverable encryption products to recipients in a number of countries.

With these revisions, we have sought to permit exports of strong encryption, with or without key recovery, to protect electronic commerce, while also minimizing the risk to national security and law enforcement by limiting our approval policy to a list of countries or end users. We are continuing our dialogue with industry and users and remain open to additional changes to ensure our encryption policy continues to balance commercial and national security interests.

What does this mean for Hong Kong? Let me begin by stressing that, under the 1992 Hong Kong Policy Act, the U.S. has continued to treat Hong Kong as a separate and distinct entity for export control purposes. In other words, we continue to treat Hong Kong as Hong Kong, not China, for export control purposes. In practical terms, that means that many products that would require a license for export to China can be exported to Hong Kong under a general license exception. Other products that might not be licensed at all for export to China can be licensed to legitimate end-users in Hong Kong.

This policy applies to the export of encryption technology, as well. As I noted above, Hong Kong is one of the places that will benefit from last year's liberalization of restrictions on the export of encryption products. The U.S. has also demonstrated its willingness to approve applications for the export of key recoverable strong encryption products to Hong Kong on a case-by-case basis. I am pleased to report that the Department of Commerce recently approved at least one application for the export of 128-bit encryption to a major Hong Kong non-financial entity for an important upcoming project.

I want to emphasize that our ability, under U.S. law, to treat Hong Kong distinctly from China for export control purposes depends on Hong Kong's maintenance of an autonomous and effective strategic trade control regime. In our view, Hong Kong's regime is world-class, autonomous, and effective. However, Hong Kong's system is going to be subject to intense scrutiny in the coming months, so it will be important that the government continue to look for ways to strengthen and improve the system. For our part, we will continue to work with the Hong Kong government in this area, including by sharing information on developments in the international regimes responsible for controlling proliferation. We also rely on Hong Kong and U.S. businesses here to understand that their own systems for ensuring that their purchases stay where they are intended are essential to continuing their access to high technology.

Our export control policy toward Hong Kong is just one part of our broader effort to support Hong Kong's autonomy and to build on our already-strong commercial ties. Hong Kong and the United States share a commitment to market economics, free trade, minimal government intervention, and a level playing field based on rule of law. That shared commitment, I think, helps explain the enormous amount of trade and investment between our two economies.

Looking ahead, I see enormous potential for increased U.S.-Hong Kong business in information technology. In reviewing investment opportunities here, U.S. - and, I would argue, other -- companies will certainly look at the benefits deriving from projects such as the Cyberport, Electronic Services Delivery, and the setting up of a Certification Authority.

In the end, however, the decisive factor for most U.S. companies - and arguably for Hong Kong's success in becoming an electronic commerce hub - will be the broader environment here. I cite here the example of U.S. internet giant UUNET, which recently established its regional headquarters here. UUNET was not approached by the government, was not offered a spot in the Cyberport, and did not receive any subsidies or other "breaks." This is good. UUNET decided to establish its office here because, in the company's view, Hong Kong offered the best overall environment for the type of business they wanted to do. For them, Hong Kong is a wired city with a liberalizing market at the center of the action. In other words, people and companies in the information technology field will come here if they think this is the best overall place to do business.

Here, as I have said before, I think there are a few areas where Hong Kong can make itself more attractive. First, Hong Kong ought to continue to develop and push forward on the fundamentals that have made it such an attractive business location: freedom, rule of law, democratization, free and fair markets, local autonomy, and the free flow of information. The people of Hong Kong and the friends of Hong Kong expect it to develop further its free society as well as its free markets.

Second, Hong Kong needs to address its high costs and a worsening physical environment. I don't have to tell you how expensive Hong Kong is; the high costs here clearly affect business and investment decisions, and reduce Hong Kong's competitiveness. U.S. information technology companies considering investments - or other business - here will compare Hong Kong's costs with costs elsewhere. They will also compare Hong Kong's environment - particularly the levels of pollution - and quality of life with those elsewhere. The more Hong Kong can address these concerns, the more U.S. and other companies - including those in your sector - will be inclined to do business here.

Hong Kong also has an opportunity to improve its markets. Better regulation ensuring fully competitive markets will make Hong Kong more attractive to investors. We applaud the government's efforts to update its regulation of the securities market, for example, and to open a second board based on extensive transparency. Many have suggested that Hong Kong also needs to review some of its services sectors where a lack of competition has raised costs, reduced choice, and hindered efficiency.

Let me talk specifically here about the telecommunications market. As you know, electronic commerce can only thrive where companies have access to a world-class broadband network at a reasonable cost. In our view, the best way to ensure such access is by allowing unfettered competition. We have welcomed Hong Kong's significant efforts to liberalize the telecommunications - as well as the broadcast - market, and we hope the government doesn't stop now, when it is so close to completing the process. I can think of few things that would do more to convince America's information technology companies of Hong Kong's attractiveness as an electronic commerce hub than an announcement that the government will open the external facilities and local fixed network markets to additional competition. You want to tell companies all over the world to come here to try things out and to adapt their new ideas and services to Asia. To do that, you need to be fully open to all ideas and entrants.

Another way to improve Hong Kong's free market system is through enhanced protection of intellectual property rights. We recognize and applaud Hong Kong's efforts and achievements in combating piracy of software, movies, and music. Nonetheless, the problem remains severe, and has the potential to derail Hong Kong's own prospects to develop information-based industries.

One more point: We should remember that electronic commerce involves not only delivering services and products electronically, but also electronically marketing and selling products that have to be delivered the old-fashioned way - by air, sea, and land. Companies like Amazon.com have managed to flourish in the U.S. because they can guarantee quick and inexpensive delivery of their products. Hong Kong has the entrepreneurial and creative talent to develop dozens if not hundreds of Amazon.com-like companies, and to become the regional hub for both electronic marketing/sales and physical delivery. Success, however, will require an open aviation regime that allows air cargo companies to provide the same level of services we now enjoy in the U.S. In fact, I was just reading a study the other day that concluded that hub airports act as a magnet for high technology development. Success will also require regional elimination of cumbersome tariff and non-tariff barriers that currently make it impossible to guarantee rapid and inexpensive delivery of products through the region. As a regional and global model of free trade, Hong Kong is well placed to lead this effort. I think Hong Kong has a lot of potential to become an important player in the information technology and electronic commerce market for entertainment and for goods.

Looking ahead, the U.S. will continuing to treat Hong Kong as the vibrant, autonomous, free-market friend it has long been, to export worldclass technology to appropriate end-users here, and to support the company-to-company partnerships that are the heart of the bilateral relationship.

In the end, of course, Hong Kong's future depends on you. If you work to ensure that Hong Kong further develops its strengths, improves its markets to ensure unfettered competition, and maintains a strong and autonomous trade control regime, this city is well positioned to take full advantage of the electronic commerce explosion and to become a competitive supplier of information services and multimedia content.

The U.S. has a great interest in Hong Kong's success, and U.S. companies can be important partners in your efforts to make Hong Kong a leading "digital city." Although separated by thousands of miles, we are - after all - only a "click" away. Thank you.

*     *     *     *     *