E XPORT C ONTROLS ,

T ECHNOLOGY T RANSFER
R EGULATION AND THE U.S.
S PACE I NDUSTRIAL B ASE
R O N A L D A. C A S S AND JOHN HARING*

PREPARED FOR THE

U.S. DEPARTMENT OF DEFENSE’S
SPACE INDUSTRIAL BASE STUDY (“SIBS”),
OFFICE OF THE UNDERSECRETARY OF DEFENSE
FOR ACQUISITION, TECHNOLOGY & LOGISTICS
(GENERAL CONTRACTOR: BOOZ ALLEN &
HAMILTON)

February 29, 2000

* Ronald A. Cass is dean and Melville Madison Bigelow Professor of Law at

Boston University. He formerly served as a member and vice chairman of the U.S.
International Trade Commission. John Haring is a principal in Strategic Policy
Research, Inc. (“SPR”), an economics consultancy based in Bethesda, Maryland. He
formerly served as chief economist of the Federal Communications Commission and
as chief of the Commission’s Office of Plans and Policy.

7979 OLD GEORGETOWN ROAD 7TH FLOOR BETHESDA, MARYLAND 20814-2429

301-718-0111 FAX – 301-215-4033 EMAIL – spri-info@spri.com WEBSITE: www.spri.com
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Table of Contents

1. INTRODUCTION 1

2. EXPORT AND TECHNOLOGY TRANSFER CONTROLS: WEIGHING

BENEFITS AND COSTS 4

2.1. CONTROL OBJECTIVES 4

2.2. COSTS/ADVERSE CONSEQUENCES OF CONTROLS 5
2.3. ISSUES AND INSTITUTIONS 6
2.4. CAN CONTROLS CONTROL? 7
2.5. COMMENTARY 9

3. IMPORT OF CONTROL REGIME FOR THE SPACE INDUSTRIAL

BASE 11

3.1. THEORETICAL FRAMEWORK 11

3.2. SPACE INDUSTRY PRODUCTION CHARACTERISTICS 14
3.3. IMPACT ASSESSMENT 16

4. POLICY IMPLICATIONS 18

4.1. RECALIBRATING CONTROLS 18

4.2. IMPROVING THE CONTROL REGIME 19

APPENDIX

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1. INTRODUCTION

As part of a larger, in-depth assessment of the U.S. space industrial base,1 Booz-
Allen & Hamilton (BAH) have asked us to analyze the likely economic effects of
export controls and other technology transfer regulations on future U.S. supply
capabilities in this industrial sector. In this paper we explain the economic basis for
our conclusion that these types of regulations are, in general, likely to exert a negative
influence on relevant U.S. supply capabilities (viz., reduced supplies, higher costs, less
competition, less innovation, etc.). How significant a negative influence will depend
on the stringency with which the control system operates.

While we have not been asked to supply and do not offer an assessment of the
efficacy of controls, our conclusion is relevant to such an assessment and has
implications for the efficient design and implementation of a control regime. An
optimal control regime carefully balances tradeoffs among various beneficial and
adverse consequences of controls to optimize benefits from achievement of all
decision-relevant objectives. Adverse consequences in terms of the adequacy of the
space industrial base and any foregone benefits associated therewith are a “cost” of
controls—i.e., of achieving control objectives. As such they need to be suitably
factored in deciding how tightly a control regime should be calibrated. They may
also motivate a search for ways to reconcile conflicting objectives more effectively to
improve the terms of tradeoffs among different goals. Improvements in the control
regime that permit security objectives to be achieved at a lower cost in terms of
foregone export sales (and related, otherwise foregone benefits in terms of the
quality of the industrial base), at least conceptually, supply means to “eat the cake
and still have it.”

The paper is organized as follows: We begin with a brief analysis of controls that
examines their objectives, the costs and adverse consequences associated with their
operation and various issues that have arisen with regard to their efficacy and
effectiveness. While controls carry costs and for a variety of reasons appear
increasingly less likely to achieve security policy objectives as the future unfolds, it
nevertheless seems likely that government authorities will (continue to) impose them.
They will likely decide that perceived benefits of controls in some instances warrant
their imposition and assumption of any related cost burdens. This strikes as a
realistic assumption for the timeframe relevant to this forward-looking assessment
(15 years), particularly to the extent that the locus of relevant decision-making

1 Assessing The Space Industrial Base. The task is “to conduct a study of the U.S. space industrial base to assess
sufficiency and competition and, if warranted, identify deficiencies and potential areas for investment.”

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authority within the government now probably resides closer to the “Guardian” end
of the “Merchant-Guardian” spectrum as a result of the China-Loral satellite
controversy.2

Given the probable reality of controls, what difference are they likely to make for the
space industrial base? In the next section of our paper we describe the economic
frame and factual premises relevant for economic evaluation of this question.
Economic evaluation rests on analysis of basic conditions of supply and demand.
Given the basic conditions of supply that typify this industry sector (notably, the
prevalence of significant volume effects that imply lower per unit costs with
increases in outputs), economic analysis suggests that controls that effectively limit
demands will likely reduce relevant supply capabilities along a variety of salient
dimensions.

In the final section of the paper, we examine some potential policy implications of
our findings. Given the likelihood that controls will continue to be applied, indeed,
perhaps somewhat more aggressively in response to the satellite controversy (and the
politicization thereof), and that their imposition will carry costs, including some
adverse consequences for the U.S space industrial base, we think it would behoove
the government to reevaluate the control regime and search for ways to reconcile
conflicting policy objectives more efficiently. “Technical advance” in the control
regime, while perhaps difficult to achieve, does offer the promise of making
everyone, if not happy, at least somewhat happier. We think it would make good
sense for the government at this juncture to undertake a careful reassessment to
identify ways to improve the existing control regime in light of new economic and
geopolitical realities.

Typically, the economic tradeoffs in this area have been cast in terms of security
versus commercial interests,3 but security interests are themselves diverse. The
government sometimes wishes to deny or delay access to sensitive technology to a

2 See Scott Pace, “Merchants and Guardians: Balancing U.S. Interests in Space Commerce,” in Merchants and
Guardians, (John M. Logsdon and Russell J. Acker, eds.), International Space Policy Forum, Space Policy Institute,
Elliott School of International Affairs, The George Washington University (May 1999). The term “Guardians”
refers to members of the political class with responsibilities for governance; the term “Merchants” represents the
entrepreneurial, energetic, risk-taking culture of international business and, to a lesser extent, international
science. Examples of Guardians include career civil servants, military officers, political appointees and
Congressional staff. Examples of Merchants are mostly found in business, but sometimes in government, the
military and academia. On the satellite controversy, see “Clinton-Loral: Anatomy of a Mutually Rewarding
Relationship,” The New York Times (May 24, 1998). Loral got export authorization for a satellite system after the
president transferred satellite export approval to the Commerce Department, overruling a recommendation by
the Secretary of State expressing concern that American security could be compromised, and notwithstanding an
investigation of charges that Loral had given unauthorized assistance to China’s ballistic missile program. Loral
had earlier informed the U.S. government that a report with technical data had been given to the Chinese as part
of the Chinese effort to figure out why an earlier 1996 launch had failed.
3 I.e., “Guardian” interests versus “Merchant” interests.

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perceived adversary, but it also wishes to acquire supplies of different goods and
services at low costs and from strong suppliers who confront at least a modicum of
competition.4 The point of our analysis is that the former and the latter goals may,
to some extent, conflict and thus require a balancing of (the government’s own
conflicting) interests.5 That type of balancing exercise may often prove to be
exceedingly difficult, entailing tough choices (and no doubt some discomfiting
second-guessing) and perhaps even engendering “decidophobia.”6

Failure to optimize relevant tradeoffs implies failure to maximize payoffs. Efforts to

improve the terms of relevant tradeoffs—to discover ways to offer decision-makers
“better choices”—strike us as one way to address the tradeoff issue proactively.
Conflicting objectives imply the need to choose carefully, but if means can be found
to reduce conflicts/reconcile conflicting objectives, the choices that need to be made
will not be quite as tough.

We briefly address the related matter of import controls in an appendix. We are

skeptical about the government’s ability to exploit favorable economic conditions,
where they are (perhaps erroneously) perceived to exist, through the imposition of
import controls. Indeed, “the problem of the interests” implies that there will
usually be too much import control without any added security rationales for further
government intervention. Import controls also pose serious “moral hazard”
problems as competition may become less vigorous in the absence of foreign
competition. We note that the kinds of conditions posited to make out a case for
import controls are precisely the ones that suggest that export controls will have the
kinds of adverse consequences we predict (viz., higher costs resulting from failure to
realize economies of scale, scope and learning). On the principle of “first do no
harm,” we think there is a stronger case for relaxation and rationalization of the
export control regime than there is for affirmative intervention to impose more
import restraints that could easily prove inapt and counterproductive.

4 See Jacques S. Gansler, The Defense Industry (MIT Press, 1980); Affording Defense (MIT Press, 1989); and Defense
Conversion (MIT Press, 1996).
5 Viz., at the margin, a little more security from prevention of harmful exports may mean a little less viable/less

competitive/less progressive space industrial base—other desired security objectives.

6 Decidophobia is the inability to choose when confronted with a decision involving a high payoff, but also a high

(opportunity) cost. If A and B are each highly desired, but choosing one means sacrificing the other, a
decidophobic cannot choose. See Walter Kaufmann, Without Guilt and Justice: From Decidophobia to Autonomy (New
York, 1973).

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2. EXPORT AND TECHNOLOGY TRANSFER

CONTROLS: WEIGHING BENEFITS AND COSTS 7

2.1. CONTROL OBJECTIVES

Controls are, in general, adopted to serve all or a subset of four principal public
policy objectives: denial, delay, cost raising and signaling. The first goal, denial, aims
to prevent the target nation(s) from acquiring the restricted good. The second goal,
delay, is more modest, seeking to use restrictions simply as a means to maintain some
temporal advantage in access to the restricted good.8 Delay may buy the time
required to develop new superior capabilities, so that when the target nation
eventually acquires the restricted good, it will still operate at a comparative
disadvantage.

The third goal, cost raising, is more modest yet, aimed less at denial or delay than at
increasing the costs the target nation must incur to acquire the restricted capability.
Some observers think this was the principal effect of the multilateral control regime
(“COCOM”)9 that operated for most of the post-WWII period (i.e., to increase
Soviet expenditures for technology, including expenditures on espionage and bribery
to acquire technology from the West and expenditures of less efficient production of
similar technology at home).10

Finally, controls, even if utterly ineffective in achieving any of these goals, may
nevertheless possess value simply as a means to signal displeasure with another
government’s conduct, both to that government and others. Restricting exports is a
stronger, more tangible signal than diplomatic language, but less dangerous than
military actions. Some U.S export restrictions are probably best understood on this
ground.11

Within a cost/benefit framework, the benefits of controls may thus be reckoned in

terms of their perceived value in preventing or, more realistically, delaying or
increasing the costs of a target country’s acquisition of particular security-sensitive

7 Our treatment of controls sketches the more thoroughgoing analysis contained in our book: International Trade in

Telecommunications (MIT/AEI Press, 1998), Chapters 3, 4 and 9.

8 This goal is sometimes derided since it may only entail being eaten by the alligator more slowly. Sometimes that

may, of course, be a preferred alternative, e.g., when more or less slowly are the only alternatives.
9 I.e., the Coordinating Committee for Multilateral Export Controls.
10 See, e.g. Daniel E. McDaniel, United States Technology Export Control: An Assessment (Praeger, 1993) at 117; Igor E.

Artemiev, “Global Technology Markets and Security Issues,” in Technology Controls and Prospects for Change in the
1990s (D.M. Kemme, ed., New York University Press, 1991) and Martin J. Hillenbrand, “Export Control Policy
in the 1990s: The Diplomatic Perspective,” in Export Controls in Transition: Perspectives, Problems and Prospects (G.K.
Bertsch $ S. Elliot-Gower, eds., Duke University Press, 1992) at 68.
11 See Cass & Haring at 74-80.

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capabilities. In addition, controls are sometimes perceived to possess value as a

means of delivering a message calibrated to communicate a certain level of
displeasure with the target country’s behavior both to that country and to others.
Against these putative benefits of controls are to be weighed a variety of different
types of costs.

2.2. COSTS/ADVERSE CONSEQUENCES OF CONTROLS

The costs/adverse consequences of controls fall within four principal categories:

administrative costs, economic distortions, trade diversion and related indirect costs.
Administrative costs are the direct costs involved in operating the regulatory system
itself, including the costs of government and costs borne by private parties who must
provide information to the licensing authorities. Although the costs of government
are probably small, the costs to industry in time and money of learning about,
adapting to and complying with export licensing requirements are estimated to be
quite large (i.e., in the many billions of dollars).12

The second cost category covers costs that arise as a consequence of distortions in
domestic economic activity within the country imposing controls. These distortions
occur when export opportunities are lost that would have been available without the
controls or when the costs associated with controls depress the value of export-
related activity (production of goods for export markets together with other
operations necessary to export) sufficiently to shift economic activity to other ends.
In those cases, controls alter the private values that attach to economic activity and
change the mix of activity, for example, by shifting productive resources from high-
technology products that face export impediments to lower-technology goods that
can be marketed at home or exported without difficulty. The proper cost measure
for this type of distortion is not lost export sales, per se, but the net economic losses
arising from controls.13 Estimates of distortion costs vary substantially, but even the
lowest estimates are certainly non-negligible (estimates range from low single- to
double-digit billions of dollars).14

12 J. David Richardson reports that a single high-technology firm with annual sales of $14 billion (about one-third

from exports) employs more than 100 people whose full-time job is export licensing. “Overall costs of
maintaining this department annually are in the tens of millions of dollars, “verging toward $100 million” for the
firm described here.” See Sizing Up U.S. Export Disincentives (Institute for International Economics, 1993) at 37.
This figure would have to be multiplied many times to account for the costs incurred by the many companies
subject to export licensing requirements. Even if the particular cost estimate Richardson gives is off by an order
of magnitude, the resulting number will be very large.
13 This presumes that relevant resources would not remain completely idle with controls imposed. The difference

between the higher value they could have produced and the lower value they actually produce is the proper
measure of distortion costs.
14 The National Academy of Sciences estimated an annual cost of more than $17 billion from export controls

(principally distortion costs) based on data from 1985, although this figure is not rigorously supported. See
Balancing the National Interest (National Academy Press, 1987).

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Even if economic activity in the home market is relatively unaffected by the

operation of controls, there may yet be a third type of cost associated with trade
diversion. In some cases the principal effect of export controls is to shift sales
among country markets rather than to shift activity within any country. Suppose the
imposition of new export controls in the U.S. results in substitution of U.S.
production for foreign imports to the U.S., while foreign sources that formerly
supplied part of the U.S. demand increase sales to other markets formerly served by
U.S. firms. Insofar as these types of substitutions are induced solely by the
imposition of controls, there will be some effect on activity levels and some
diminution in wealth because the substitutions are judged inferior by customers.15

Finally, there are indirect costs associated with export controls, primarily the costs of
increased risk (viz., a higher cost of capital reflecting a higher risk premium) from
investing in commercial activity with the expectation of returns from exporting.
Export licensing necessarily causes delay in the economic activity it affects and
introduces an additional uncertainty into the calculation of potential markets and
revenues. That greater degree of uncertainty and risk prompts capital investors to
demand higher compensation for the use of investment funds. The higher required
rates of return (capital costs) are indirect costs of controls that increase costs of
doing business in much the same way as the administrative burdens would-be
exporting firms must bear to comply with the requirements of a control regime.

2.3. ISSUES AND INSTITUTIONS

Debate over the imposition of export controls focuses, in the first instance, on the
appropriate characterization of goods for which export approval is in doubt. The
problem of characterization involves both factual and predictive questions: What
will a particular product do and what harm can it cause? How much more difficult is
the completion of a particular task (e.g., building a weapon or a weapon delivery
system) with the product available than without? With complex equipment, and
especially with complex equipment that is dangerous only as a part of an even more
complex network of other equipment, the factual problem can be substantial.

The predictive questions focus on the use that will actually be made of the product at
issue—or the probable use. An extraordinary range of products can be used in ways
that are threatening as well as in a non-threatening manner. Consider, for instance,
the consequences of selling hammers to an enemy: the enemy may simply throw
them back at us or, alternatively, may use them to construct a better society in whose
survival the enemy has a greater stake and thus one perhaps more favorable to our
national interests. Other difficult questions require judgments about whether the
15 The new configuration of trade activity could have been, but was not, freely selected in the absence of controls,

implying a lower level of economic welfare (e.g., entailing higher transportation costs, a less-preferred product
mix, etc.).

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imposition of controls will stifle or promote development of foreign supply

capabilities. In response to imposition of controls, a target country might deploy its
own capability. The country imposing controls might be better off supplying the
target and maintaining some degree of control through superior knowledge and
control of access to replacement parts, maintenance capabilities, complementary
goods and services, upgrades, etc. Controls may be subject to the law of unintended
consequences: their application may pose risks of loss of control and loss of
economic and technical dominance.

The problem of predicting the applications of dual-use technology and the dynamic
consequences of imposing controls is long-standing, and it is embedded in the
history of export controls. The basic framework for ongoing U.S. export and
technology controls was set in the aftermath of WWII. In addition to separate
national control regimes, the U.S., France and the U.K. initiated a multilateral effort
to restrict strategically important exports to the Soviet Union and its allies that
resulted in the formation of COCOM. COCOM maintained three lists of controlled
goods for weapons, nuclear material and technology, and dual-use technology. The
extent of restrictions on exports can be seen from the size of the restricted lists—
one estimate reckons 150,000 to 200,000 items.16

Although COCOM has disintegrated, the U.S. and most other former members
maintain restrictions similar in kind. The current Commodity Control List places
restrictions on more than 200 different categories of products and technologies and
restricts their export to nations grouped in seven different classes. To give some
sense of perspective on the scope and magnitude of control coverage, in 1993 the
late Secretary of Commerce Ronald Brown opined that reduced impediments to
high-technology exports could expand such exports by $300 billion to $500 billion
over six years.17

2.4. CAN CONTROLS CONTROL?

Analysis of the effectiveness of export restrictions in controlling supply of a given

product to a disfavored recipient is a special case of the economic analysis developed
to address the likelihood of a successful restriction of market output via collusion (as
in an antitrust context where results of collusion are regarded as harmful rather than
beneficial). The problem for collusive actions is that parties (say, members of the
OPEC cartel) benefit not only from collective restriction of supply (of oil), but also
from cheating on the agreement to restrict supply and selectively expanding output.

16See McDaniel at 14.

17 As previously remarked, this type of estimate is a gross measure and likely significantly overstates the
magnitude of the costs of control-induced distortions. Nevertheless, with monies of these magnitudes one can
easily see that there is a lot at stake and why there is often conflict over the imposition of controls. See “Special
Report: Clinton Unveils TPCC Export Plan,” BNA International Trade Reporter (Sept. 29, 1993).

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That does not mean that cartels cannot work, but it does mean that in many
circumstances tensions within a cartel reduce its effectiveness and can, in the limit,
completely undermine it.

The economic theory of collusion focuses on the benefits and costs of collusive
behavior and predicts that collusion is more likely to occur (and to succeed) where
prospective benefits of collusion are great and costs of policing and enforcing a
collusive agreement (explicit or tacit) are low. Conditions affecting entry and the
prospects for expansion of supply are important considerations affecting both the
costs and prospective benefits of collusion. Where conditions do not inhibit entry
and prospects for expansion are favorable, there is a lesser likelihood of cartel
success as any attempted restriction of output is likely to prove unavailing in actually
restricting market output. What one set of suppliers does not produce another will.

Analogously, in evaluating the efficacy of export controls, possibilities for developing

new or substitute sources of supply, including sources within the nation that is the
target of controls, need to be weighed carefully. Consider, for example, that after the
U.S. refused an export license that would have allowed India to purchase a U.S.-
made supercomputer, India quickly developed its own model and has now sold a
substantial number of supercomputers to buyers in other nations. If target countries
have alternatives to U.S. supply, including self-supply, the use of controls to limit
access can prove at best only an “incomplete success.” Indeed, short-term success
can lead to long-term failure if target nations develop their own capabilities and these
undermine U.S. technological preeminence.

From 1949 to 1994, NATO nations and their close allies operating through
COCOM had an incentive to operate in tandem, so far as the most restrictive entity
(the U.S.) maintained some policing power over its partners. Now, with the demise
of COCOM and less sense of a common external security threat to a group of
closely allied nations, there is greater reliance upon decisionmakers within each indi-
vidual nation to set export policy. That means both that the prospect of creating a
successful embargo cartel is diminished and that the officials charged with decisional
authority are more exposed to challenge for their decisions—whether to restrict or to
export. Whatever its prior salience, “COCOM made me do it” is no longer an
acceptable excuse. At the same time, decisionmakers in different countries may have
different perspectives on the wisdom of sales to prospective targets (Cf., for example,
differences between the U.S. and, say, France regarding the embargo of Iraq.).

Even within the U.S. control regime, officials have different constituencies and
weigh risks differently. For example, the Department of State is reportedly sensitive
to the positive effects of trade on relations with nations it believes can be induced to
make concessions on issues important to U.S. foreign policy goals. Although the
same officials are quite willing to use export controls—even in settings where the
controls are unlikely to restrict supply to the target nation—when they believe that it

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is important to “send a message,” State Department officials often are reportedly

more willing to soften controls than officials from the Department of Defense or the
National Security Agency (“NSA”).

The Clinton administration—like other administrations before it—has been em-

broiled in internal disputes among the NSA and the Departments of Defense,
Commerce, and State over the question of appropriate policies to regulate exports of
sensitive, high-technology equipment. In those disputes Commerce Department
officials reportedly have supported liberalization, while representative of the defense
agencies and State Department apparently have been reluctant to deregulate such
exports and, in particular, would retain unilateral export controls.

Take, for instance, the imbroglio that ensued when AT&T’s application to export
fiber-optic transmission equipment to China, Russia, and other former Soviet bloc
nations was approved by the Department of Commerce. Commerce officials saw no
point in denying permission to export, as they found that the equipment was
available to the export markets from an Israeli supplier. Following that decision,
NSA officials assertedly asked President Clinton to override the Commerce
Department’s decision. When subsequent efforts to persuade Israeli officials to
restrict their supplies proved unavailing, NSA’s representative continued to argue in
favor of unilateral restriction by the U.S.18

2.5. COMMENTARY

Implementation of export and technology transfer controls involves a balancing of

risks.19 Complaints over the operation of the U.S. regime in the post-COCOM era

18 See “AT&T Scores Major Victory on Exporting Fiber Optics to China,” Washington Telecom Week (Dec. 17,

1993); “NSA Pressing Clinton to Scrap Ruling Allowing Fiber Optic Exports,” Washington Telecom Week (Jan. 7,
1994); and “Commerce Finding Fails to Persuade U.S. to Decontrol Fiber Optics—U.S. Wants to Control
Exports Despite Key Ruling,” Washington Telecom Week (Jan. 14, 1994).
19 In recent testimonies before the Senate Committee on Commerce, Science, and Transportation and the Senate

Select Committee on Intelligence, Katherine V. Schinasi, Associate Director for Defense Acquisition Issues in
the General Accounting Office observes that:
The U.S. export control system—comprised of both the Commerce and State systems—is
about managing risk. Exports to some countries involve less risk than to other countries
and exports of some items involve less risk than others. The planning of a satellite
launch with technical discussions and exchanges of information taking place over several
years involves risk no matter which agency is the licensing authority. Recently, events
have focused concern on the appropriateness of Commerce jurisdiction over communi-
cation satellites. This is a difficult judgment. By design, Commerce’s system gives
greater weight to economic and commercial concerns, implicitly accepting greater
security risks. And by design, State’s system gives primacy to national security and
foreign policy concerns, lessening—but not eliminating—the risk of damage to U.S.
national security interests.
See “Issues Related to Commercial Communications Satellites” (GAO/T-NSIAD-98-208) and “Change in
Licensing Jurisdiction for Commercial Communications Satellites” (GAO/T-NSIAD-98-222).

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reflect the view that controls are, for a variety of reasons, no longer capable of
producing the benefits they once did. The identity of perceived adversaries and the
nature of perceived security threats have changed. Coordinated restriction of supply
is increasingly more difficult to achieve as nations pursue their national interests on a
more unilateral, less collegial basis. Economic growth and the spread of knowledge
globally have in some cases made it easier for target countries to overcome supply
restrictions. At the same time, the administrative and trade distortion costs of the
control regime are substantial, and globalization of markets is increasing competitive
rivalries and pressures. Support for controls within the U.S. is being undermined as
suppliers in other countries exploit opportunities operation of the U.S. control
regime affords them—a cause of significant frustration to U.S.-based businesses. To
the extent enforcement of controls appears arbitrary and capricious, support for the
control regime dissipates.

We have not been asked and are not, in any event, in a position to assess the merits
of the current U.S. export/technology transfer regime. Given greater reliance on
unilateral undertakings, increasingly disparate views in different countries about the
desirability of imposing controls and the increasing global diffusion of intellectual
capital (know-how), the capacity of export controls to work has, generally speaking,
been significantly compromised compared to what might have been feasible, say,
thirty years ago. We are thus somewhat skeptical about the likely net benefit of
export licensing. At the same time, given the inherent uncertainties and complexities
of the full social calculus necessary to assess the question that ultimately should
inform a decision to retain or remove such controls (in particular settings)—and the
fact that information about possible risks is well beyond our ken—we are not
prepared to say export controls never make sense.

For purposes of our current assignment, three points about the export control
regime are worth making:

„ Changes in the operating environment may well argue for

reassessment and perhaps recalibration of the control regime to
reflect changed conditions. As we suggested at the outset, security
interests, narrowly construed, may themselves argue for a somewhat
more liberal policy, particularly in light of constrained military
budgets and a shrinking supplier base. As the balance of costs and
benefits changes, the optimal level of governmental restraint on the
export/transfer of technology also changes. Failure to calibrate the
control regime to reflect accurately the true tradeoffs among

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conflicting objectives will result in suboptimization.20 We return to

this point later in drawing policy implications from our analysis;
„ As we later discuss in greater detail, there may also be opportunities
to improve the technical efficiency with which the control regime
operates. If such opportunities exist and can be economically
exploited, the tension between achievement of security-related
control objectives and other objectives (economic, diplomatic,
different security objectives, etc.) need not be as great;21
„ Notwithstanding efforts expended in either of these directions, for
purposes of industrial base assessment, we think it would be
unrealistic to assume that controls are not going to continue to exert
a significant constraining effect for the foreseeable future. Indeed, in
the short run restraints may become more severe as the civil servants
who implement controls respond to political pressures for closer
scrutiny stemming from the satellite controversy.

3. IMPORT OF CONTROL REGIME FOR THE SPACE

INDUSTRIAL BASE

3.1. THEORETICAL FRAMEWORK

The economic framework relevant for analysis of effects on the industrial base is
almost as old as the study of economics itself. It was Adam Smith who, in The
Wealth of Nations, famously remarked that “the division of labor is limited by the
extent of the market.”22 The major thrust of Smith’s argument is that economic
growth is driven by technological advance grounded in productive specialization, and
that the size of the relevant market is what principally limits such specialization.
Thus Smith, the ultimate “free trader,” argues that removal of trade barriers and
expansion of trade would increase the wealth of nations by extending market
boundaries, thereby permitting greater division of labor, lower costs of production

20 In particular, at the margin, the security benefits controls purchase may not be worth the adverse consequences

for the industrial base their imposition, in effect, costs.

21 Thus, in contrast to point one, this approach would not necessarily entail a rational (i.e., calculated)

compromise of one set of objectives, perceived to be of reduced expected value, to increase realization of a
different set of objectives, perceived to be of greater value. It is, rather, a matter of attempting to “eat the cake
and still have it”—to achieve security objectives at lower cost in terms of foregone export sales and related payoffs
through “technical” improvements in the operation of the control regime.
22 (Modern Library Edition, 1937) at 17. “As it is the power of exchanging that gives occasion to the division of

labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by
the extent of the market.” Earlier (at 3), Smith begins by stating that “The greatest improvement in the
productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where
directed, or applied, seem to have been the effects of the division of labour.”

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and increased outputs. The imposition of trade barriers, as in the case of export
controls, might thus be anticipated to work in reverse fashion: limiting the extent of
the market, thwarting productive specialization, raising costs of production and
reducing outputs.

Economists have subsequently refined and expanded Smith’s analysis, supplying a

variety of specific reasons to anticipate that expansion of market size will often
produce economic benefits in the form of lower costs of production, greater scope
for competition (viz., more “room” for competitors) and greater technical
progressivity. Of particular relevance to our discussion are the existence of so-called
“volume effects”—decreases in marginal and average costs per unit that occur as the
total volume of output produced expands. Volume effects derive mainly from
economies of scale and scope in production and economies associated with
“learning-by-doing.”23

Suppose different production techniques enable large volumes of output to be

produced less expensively than the techniques that would be efficiently adopted to
produce small volumes.24 Adam Smith used the example of pin manufacture. If
only a small number of pins were to be produced, the efficient method of
production might entail a single worker’s measuring out lengths of metal, clipping
them, flattening one end and sharpening the other. If manufacture of a large volume
of pins were contemplated, (Smith argued that) it would be less costly to hire several
workers with each specializing in one of the separate activities.25 But note that it
would be more expensive to utilize this approach if only a small volume of pins were
to be produced. The technique that can be used economically for large volumes may
not be economical for small volumes. The small-scale technique can be scaled-up,
but the large-scale technique cannot be scaled-down.

The simplest and a primary source of scale economies is a high “initial setup” cost.
In the modern economy, this type of cost frequently involves technical know-how or
intellectual input. To produce a particular good or service requires, in the first
instance, an investment in the required know-how. Once the know-how has been
acquired, its cost can be spread over actual units of production and will decline on a
per-unit basis as the volume of output expands. Stated differently, having incurred
the cost of acquiring the knowledge necessary to produce the first unit, the

23 Our treatment follows the discussion in Economic Nobelist Armen Alchian’s “Costs and Outputs” in The

Allocation of Economic Resources (M. Abromavitz, ed., Stanford University, 1959). Much of Alchian’s prize-winning
work was undertaken with the Rand Corporation and grew out of his statistical work with the U.S. Army Air
Forces.
24 Economies of scope occur when larger combinations of outputs can be produced less expensively than smaller

output sets.
25 While he offered them as an example of gains from productive specialization, in Smith’s pin manufacturing

example productivity gains, strictly speaking, stem from learning effects rather than division of labor, per se.

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knowledge necessary to produce additional units is zero (i.e., free).26 For technically
complex goods embodying large amounts of applied technical know-how, there are
likely to be significant cost-volume effects grounded in the spreading of this type of
fixed cost. In addition, per-unit costs of production processes utilizing capital
equipment (or other resources) with large fixed costs typically decline until the
capacity of the equipment (operation) is exhausted.

The other principal source of reduced unit costs with larger volumes of output are
so-called “learning” effects. The idea of the “learning curve” or “experience curve”
is that knowledge increases as a result of production, enabling costs to be lowered as
a result of improved knowledge. There is an extensive literature on this
phenomenon as it manifests itself in industry. Learning effects often occur in
managerial functions, production scheduling, job layouts, material-flow control, on-
the-job learning and physical skills. Some learning effects have the character of an
economy of scale or scope. Suppose one were able to design a particular product
component more quickly, having previously designed a comparable component for
another product. Whether this advantage is said to derive from “experience” or
from a broader “scale” (suppose the “previous” product were an earlier model) or
“scope” (suppose the “previous” product involved a different product) of activity is
not important; what is important are the conditions/particular circumstances that
lead to its realization.

In addition to volume effects, there are two other economic considerations that are
relevant for assessment of control impacts. First, while it is impossible to generalize,
it has been conjectured that the ongoing worldwide revolution in communications
capabilities may be increasing the efficient size of firms at the same time it is
globalizing many markets. While small businesses are proliferating, the existence of
many small “specialist” businesses may enable some firms to get bigger (i.e., operate
more efficiently at larger scales). With new means of communication, it has become
easier to contract out (i.e., outsource) for many services because transactions costs
are reduced. By contracting out, firms can expand their core businesses without
taking on tasks related to expansion that might otherwise serve as a drag on
expansion.27 If the optimal firm size of a defense contractor is growing, security-
related limitations on firm size may limit the transactional efficiencies that can be
realized.

26 For example, consider that, once the first copy of a CD has been recorded, the marginal costs of additional

copies consist simply of the material and duplication costs. For this type of good (CDs, books, TV shows, etc.),
the “initial setup” costs are often referred to as “first-copy” costs. After the first-copy costs have been incurred,
the marginal cost of additional units is low.
27 See “Talking About Tomorrow with Nobel Prize Winner Ronald Coase,” The Wall Street Journal, (Jan. 1, 2000) at

R36.

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Besides communications-derived reductions in transactions costs, it is also important

to recognize the often critical technological dimension of competition as well as the
extent to which technology competition depends on the existence/maintenance of
adequate investment incentives. The competition that is important in high-tech
industries is not so much (or only) a matter of shaving price-cost margins on
standardized goods (as in, say, the market for long-distance telephone calls), but
(also) competition to develop and produce new, more advanced products and
services. Industrial dynamism and technical progressivity depend on investments in
research and development. Private investments directed toward the discovery of
new inventions and the innovation of new services are, of course, driven by
identification of appropriable payoffs. Where payoffs are constrained or their
realization rendered more uncertain by controls, incentives to make the investments
required to fund R&D will be attenuated. This kind of effect may assume greater
significance in an environment where government funding is more limited.

3.2. SPACE INDUSTRY PRODUCTION CHARACTERISTICS

Space commerce involves products and services that are both highly know-how and
capital intensive and on the cutting edge of technological development. They thus
exhibit precisely the kinds of characteristics previously described that make for
significant economies of larger scale operations. There is also evidently significant
and increasing competitive rivalry among suppliers based in different countries. This
competition not only undercuts the potential utility of controls as a means of limiting
access, but it also suggests that controls—to the extent that they limit competitive
effectiveness—may reduce the quality of the domestic space industrial base. If the
relevant economic markets are global and U.S. competitors are significantly restricted
in their ability to tap them, they may be rendered somewhat less formidable suppliers
than they would otherwise be—less able to exploit potential economies and attract
capital resources to develop new capabilities.

Space commerce embodies a number of different economic activities including

commercial space launch vehicles and launch services, satellite remote sensing
services, space insurance and a catch-all category of evolving markets for
microgravity research and manufacturing, solar power, waste removal and even space
tourism. Competitors include countries that have had an historical interest in space
(U.S., France and other European nations, Russia and Ukraine, China, Japan,
Canada) and now a new, rapidly expanding wave of private entrepreneurial firms.

We have not undertaken an extensive analysis of the production technologies and

cost functions involved in space commerce activities, but even a cursory examination
reveals that there are important volume effects and that technology competition is
the name of the game. Consider the following illustrative examples:

„ Virtually all space commerce activities entail substantial investments

in “know-how” inputs and are likely to experience important learning

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effects from expanded production. Consider the know-how involved

in designing and developing a new launch vehicle or the technical
platform needed to run a launch service. Developing and figuring
out ways to apply new technologies productively is the essence of
what many of these (new) businesses are (prospectively) about. The
more output that can ride on these investments in intellectual capital,
the lower the per-unit costs as these fixed burdens are spread more
widely.
„ Production processes involve substantial initial set-up costs that can
then potentially be spread over increases in output. Launch pads can
be reused; many companies are now developing reusable launch
vehicles that will permit greater resource sharing and per-unit cost
reductions. Once a remote-sensing capability is developed and
deployed, the marginal costs of additional images are small. More
units of output provide a way to recover fixed costs and spread them
more widely. Similarly, costs of communications capabilities decline
as the transponders on individual satellites are employed to full
capacity and new ways are found to increase the information that can
be communicated via a given pathway.
„ Intensive efforts are underway to identify and develop new, more
efficient methods for delivering current services and to create new
lines of business. In addition to new launch vehicles and methods of
launch, there is intense competition among software engineers to
design new and better programs to provide more valuable imaging
services and more efficient communications capabilities. According
to the Commerce Department, discoveries about the usefulness of
microgravity for scientific research and the development of
pharmaceuticals, semiconductors, and new materials are driving the
demand for the commercialization of space assets.28
Especially in an environment characterized by budgetary restraint, it presumably
makes sense for government to try to “piggyback” on developments in the private
sector that are complementary to or have public-sector applications. And we gather
that this is one of the important directions being pursued in terms of the acquisition
of security-related capabilities in the world of tight budgetary constraints. While
there may be good reasons for controls on the export or transfer of some security-
sensitive capabilities, the government should be careful not to overdo it, lest it
degrade the capabilities it wishes to exploit.

28 See “Space Commerce,” U.S. Industry and Trade Outlook ’99 at 29.1.

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3.3. IMPACT ASSESSMENT

The intended effect of export and technology transfer controls is to limit/constrain/

condition demand for controlled goods and services supplied by producing firms
subject to the controls. If the intended effect is the actual effect (i.e., restrictions on
the extent of prospective markets for security-sensitive goods), the preceding analysis
suggests that controls will, as a general proposition, likely reduce future supply
capabilities construed in a variety of important ways. The scope and magnitude of
such impacts will depend on the specific content and effectiveness of controls.

In general terms, we would anticipate these types of impacts:

„ If the effect of controls is to limit firms’ ability to exploit available

economies associated with larger production volumes or to realize
learning economies in the production of current and future products,
costs will be higher and realized profits lower. Fewer firms may be
viable suppliers in these lines of business.
„ If the effect of controls is to increase uncertainty about the terms and
conditions under which (or whether) foreign buyers will be able to
purchase the security-sensitive offerings of U.S. suppliers, that will
likely induce suppliers of investment funds to redirect some of their
resources to potentially more remunerative ventures in other lines of
business, with adverse consequences for technical innovation and
deployment of productive capacity. Foreign countries and firms may
be led to deploy their own supply capabilities in lieu of reliance on
U.S. firms.29
„ If the effect of controls is to limit the extent (size) of relevant
markets, there will be less “room” for competitors and less
competition than there perhaps would otherwise be. The pool of
potential competitors will shrink compared to the number that might
be feasible in a bigger overall market.
There has recently been a good deal of commentary in both the trade and popular
press regarding the consolidation in the defense supply sector that has occurred with

29 In a recent debate in the House of Lords of the U.K.’s Parliament regarding the desirability of developing

European satellite communications, reference is made by one Member to “the downside of dependence,
particularly on the US, and particularly, as it is run by the Department of Defense, on the continuing good will of
the US military…The unease arises both on security grounds—in terms of how far we want to be totally
dependent on the goodwill of the US military—and on commercial grounds. There are increasingly large markets
with lucrative side-markets in areas such as sensors and transmitters which again currently fall disproportionately
to US suppliers.” Another Lord posed this question: “Bearing in mind the US regime for the export of satellites
and other technological hardware, what steps will the Government and the EU take to ensure that there are
reciprocal exchanges of information and that no surprise restrictions will be applied belatedly by the United
States?”

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the cutback in defense expenditures following the end of the Cold War.30 A good
deal of thinking within the defense community is being directed toward the
ramifications of these changes for how the government should cope. Indeed, this
paper and the larger study effort of which it is a part are, in large measure, motivated
by these and related concerns. Given limited funds, the government is naturally
looking to economize and minimize costs, to find ways to limit the erosion of
competition stemming from shrinkage of the market for defense capabilities, to
exploit commercially available technologies where that is practical and consistent
with achievement of objectives—perhaps in lieu of potentially superior, but more
expensive custom alternatives.31

To the extent that these difficulties are all basically byproducts of shrinking markets
resulting from defense cutbacks, our conclusion that export controls that shrink
markets may exacerbate these problems should come as no surprise. That does not
mean that the government should not impose export controls, but it means that
controls have downsides that perhaps did not loom as largely when there was a
booming market and the loss of an overseas sale—especially one that no one else
was going to make, given concerted collective action among allies—did not amount
to much.

Now the U.S. market is thinner and overseas markets beckon. Those foreign sales
obviously make some contribution to supplier viability (and the viability of
competition); they potentially enable firms to spread overhead setup and fixed capital
costs more widely and to gain potentially valuable experience. Investment capital
will be forthcoming to a greater extent (i.e., on more favorable terms) to the extent
that appropriable rewards from foreign sales are not prospectively circumscribed and
put at risk. Foreign countries may be less keen to deploy their own costly supply
capabilities if they have greater assurance regarding the availability of U.S. supplies
on a timely and economic basis. That may enable U.S. suppliers better to maintain
positions of technical and economic leadership.

The latter are all things that the government presumably values. Because that is so
or to the extent that it is so, their sacrifice at the margin should be reckoned as costs
or downsides of controls. The upside controls produce is that the target country
does not get the controlled good—at least from a U.S. supplier. The downsides are
the economic consequences of the lost sale. These are borne to a large extent by the
businesses that would have made the sales, which is why they battle hard (both in the
marketplace and with government authorities) to make the sales in the first place.
But the government also “suffers” some adverse consequences from lost sales—in

See, e.g., Stan Crock, “Commentary: Reveille for Government Arsenals,” Business Week (Jan. 10, 2000).
30
31See J. Gansler, The Revolution in Military and Business Affairs: Today, Not Tomorrow, Defense Systems Management
College, Ft. Belvoir, VA (May 12, 1998) and Gansler, supra note 4.

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particular, a marginally less viable, economical, technically vibrant, competitive

supplier base.

The negative external effects of foreign trade in security-sensitive goods are what
motivate the imposition of export controls. Our suggestion is that there may be
some positive external effects of such trade as well, particularly in an environment of
limited defense budget funding. When a foreign buyer purchases a security-sensitive
good, they get the benefit of the good. The U.S. seller gets the economic benefit of
the sale, but the U.S. may also benefit to the extent that the sale strengthens the U.S.
defense industrial base. The latter external benefit should “count” too in
formulating and implementing a control regime. It is an offset, albeit perhaps only a
partial one, to the negative external effect of trade in security-sensitive goods.

4. POLICY IMPLICATIONS

4.1. RECALIBRATING CONTROLS

To the extent that the benefit of controls is perceived to be waning as former allies
break ranks and access to advanced technology becomes easier and more
widespread, at the same time that the cost of controls is perceived to be waxing as
limited U.S. acquisition requirements shrink the supply base, there is, in principle, a
case for relaxation of controls at the margin. Without knowing the specifics of
relevant risk/benefit tradeoffs, we are not in a position to specify precise
adjustments. It is not inconceivable, although it strikes us as unlikely, that the
current regime optimizes relevant tradeoffs perfectly, and that there are literally no
additional foreign sales opportunities that are worth the increased security risks they
potentially entail, even when due account is taken of positive side effects on the
domestic industrial base.

That is possible, but we suspect that a careful and thoroughgoing reassessment of

the control regime would lead to at least a modicum of relaxation with some
increased exploitation of foreign sales opportunities at the margin. Given the
sensitivities (not to mention the politics) recently surrounding the issue, this may not
be the best of times to be proselytizing for relaxation of controls, which is not to say
that a cool-headed assessment is not precisely what is called for in the instant
circumstances. The issue of security-sensitive sales can easily lend itself to
demagoguery with opponents able to point to decidedly inframarginal sales—sales
that no one would ever advocate be permitted—as the putative outcome of control
relaxation. To reiterate, our point is that, given changed circumstances, it is plausible
that a level-headed assessment of relevant risks and rewards may well lead to some
relaxation at the margin.

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4.2. IMPROVING THE CONTROL REGIME

It may well be naïve to credit seriously the possibility or significant likelihood of

control relaxation in the current political environment, although a change in
executive administration may afford an opportune moment for reevaluation. There
remains, however, an alternative reform path that could produce significant benefits.
Whatever the stringency of control the government decides represents an optimal
balance of relevant risks and rewards, it is important that the control regime itself
produce that degree of control efficiently, i.e., at minimum cost. Thus, it may be
worthwhile to search for ways to improve the terms of tradeoffs between “guardian”
and “merchant” objectives (and, as we have argued, tensions among different
security objectives).

By developing better means of discriminating between threatening and non-

threatening transactions, conditioning transactions to reduce security-related
concerns and minimizing administrative burdens and their adverse consequences for
commercial enterprises, it may be possible reconcile objectives to a greater extent
and reduce conflicts. “Technical advance” need not be limited to production
processes; applied to the implementation of controls it can make for a more efficient
(less burdensome) operation, one that does not entail as great a cost burden along
the various dimensions earlier detailed. Finding ways “to have the cake and eat it”
may offer a more palatable and realistic way forward than simply trading off security
concerns at the margin—a tack that risks easy, even if unfounded criticism.

There is, of course, nothing new under the sun, and we are aware from our research
of previous suggestions along these lines. In his discussion of “Merchants and
Guardians,” for example, Pace remarks and offers several (at least what strike us as)
sensible suggestions for rationalizing regulation of commercialization of remote-
sensing capabilities. He (at 38) recommends, inter alia, a greater “routinization” of
process, avoidance of capricious limitations, advanced warning arrangements and the
definition of pre-set areas for exclusion. It ought not to be difficult through
consultation with regulators and commercial interests to determine whether
opportunities for practical, productivity-enhancing advances are possible and to
identify possible improvements.

While we certainly could be mistaken, we suspect identification of concrete steps to

improve the efficiency with which the control process operates might proceed
without too much difficulty, much in the same way that specifying fixes for the
budget deficit (when it was a problem) or social security funding is not that hard.
The real problem is not so much identifying solutions as implementing them.
Improvements in the control regime are unlikely to prove the exception in this
regard. As we earlier noted, parties to the process “march to the beats of different
drums.” They have different objectives and incentives. Unless means can be found
to align incentives more consistently, process improvements are likely to come to

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naught. There needs to be an effective will to change the way “control business” is
done and transform the structure of incentives decisionmakers confront.

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IMPORT CONTROLS

Commentators in the “strategic trade theory” school have argued that government
trade restriction can advance national economic welfare given large enough
economies of scale. In particular, they argue that firms alone may not be able
achieve as beneficial a division of industry profits as firms acting in concert with
their government.32 Assume, for purposes of argument, that production of a
particular good is, in fact, characterized by large scale economies. If firm A’s
government restricts imports of the good, it lends credibility to firm A’s expansion
plans—whatever share of A’s domestic market firm B previously enjoyed now can
be added to A’s share. That means that A can produce more, can produce at lower
cost (given scale economies) and also can compete more effectively in B’s home
market (assuming it is still permitted to compete after A’s government imposes
import restrictions; i.e., there is no retaliation). These advantages may enable A to
compete more effectively, perhaps even to gain a position of economic dominance
and win the lion’s share of the profits.

Although this argument is valid given its premises, its premises are open to question.
For example, insofar as economies of scale result from learning effects, the argument
for trade protection rests on a questionable assumption: that protection does not
induce slack. That flies in the face of common experience; in general, firms
protected from competition exhibit less zeal for increased efficiencies.33 Indeed, to a
significant extent, that is the lesson gleaned from comparison of Western Europe
with Central and Eastern Europe over a period of four decades.34

We have argued that foreign trade in security-sensitive goods may generate positive
external effects for the industrial base, in addition to the negative external effects that
motivate the imposition of controls. The idea is that tapping foreign demands will
enable domestic suppliers (à la Adam Smith) to realize productive advantages, attract
more capital and become more viable, thereby lowering costs, increasing innovation
and enhancing competition. One could argue that import controls might potentially

32 See, e.g., James A. Brander & Barbara J. Spencer, “International R&D Rivalry and Industrial Strategy,” Review
of Economic Studies (1983) and “Tariff Protection and Imperfect Competition,” in Monopolistic Competition and
International Trade (H. Kierzkowski ed., Clarendon Press, 1984). See also Paul Krugman, “Import Protection as
Export Promotion,” Ibid.
33 See Jagdish Bhagwati, Protectionism, (MIT Press, 1988).
34 See, e.g., David Lipton & Jeffrey Sachs, “Privatization in Eastern Europe: The Case of Poland,” Brookings Papers

on Economic Activity (Washington D.C., 1990).

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serve similar ends by increasing demands for the outputs of domestic suppliers. The
argument is that by constraining the purchase decisions of U.S. firms and, in
particular, limiting them to the offerings of domestic suppliers, U.S suppliers will
become more formidable competitors because they will be better able to exploit the
prospectively available economies. Limiting contractual freedom purportedly
internalizes externalities associated with consumption of domestic suppliers’ outputs.

We have addressed the strategic rationale for import restrictions at length

elsewhere.35 For purposes of this paper a couple of points are worth making:

„ If the premises necessary for import restriction to work exist (viz.,

significant economies), they imply that export restrictions that
materially affect demands may have a significant cost—which is what
we have argued. Thus, a case for imposition of import controls also
makes out a (partial) case for relaxation of export controls;36
„ It strikes us that there is a difference in kind between advocacy of
imposition of restraints on commercial freedom and advocacy of
relaxation of restraints on commercial freedom as means to
internalize positive trade externalities to a greater extent. Consider
the “moral hazard” problem to which we have alluded above:
Imposition of restraints may not lead to effective internalization if
suppliers become less efficient when afforded protection from
foreign competition. In contrast, to the extent export controls are
binding constraints, their relaxation can be expected to result in
realization of internalization objectives as firms pursue their
commercial interests and expand output. There is, for this and other
reasons and apart from important considerations of economic
freedom, likely to be a significant difference in the instrumental utility
of the two approaches in internalizing positive external effects.

35 See Cass & Haring, at 24-44.

36 Benefits of relaxation must, of course, still be balanced against costs.