(SBU) U.S. EXPORT CONTROLS: U/S MCCORMICK'S

UNCLAS SECTION 01 OF 06 BEIJING 011499

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SENSITIVE
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USDOC FOR 532/BIS/DMCCORMICK/MFOULON/DWJACKSON/BKRITZER
USDOC FOR 532/BIS/MDIPAULACOYLE/MGINSBERG
SECSTATE FOR EAP/CM
SECSTATE FOR EB/ESP
SECSTATE FOR ISN
SECSTATE PLASS USTR FOR STRATFORD/WINTER/ALTBACH

E.O. 12958: N/A
TAGS: BEXP CH ECON ETRD ETTC PREL
SUBJECT: (SBU) U.S. EXPORT CONTROLS: U/S MCCORMICK'S
DISCUSSION WITH NDRC OFFICIALS, MAY 23, 2006


1. (U) This cable is SENSITIVE BUT UNCLASSIFIED; please
protect accordingly. Not for internet release, dissemination
or publication.

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SUMMARY
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2. (SBU) Commerce Under Secretary for Industry and Security
David McCormick briefed National Development and Reform
Commission (NDRC) Vice Chairman Bi Jingquan about
contemplated changes to U.S. export controls intended to
facilitate high tech trade while tightening restrictions on
items for military end-uses. The United States is committed
to working with China to have a candid and cooperative
relationship on export control matters. The contemplated
changes should reduce the administrative burden for
legitimate civilian trade. U/S McCormick urged NDRC to share
a copy or details of its study on the effects of U.S. export
controls, which Vice Chairman Bi and High Technology
Industries Director-General Xu Qin said pointed to USD 20
billion in opportunity costs for the United States. U/S
McCormick repeatedly underscored that the High Technology and
Strategic Trade Working Group recently established under the
Joint Commission on Commerce and Trade (JCCT) presents an
appropriate venue in which to continue export control
discussions with appropriate Chinese officials and build
cooperation and trade in the high technology sector. He also
reinforced the point that the trade numbers make clear, that
export controls are not the cause of the trade deficit.


3. (U) Vice Minister Bi complained that U.S. export controls
on China, a Nuclear Suppliers Group member, are improper and
discriminatory. Bi said that modernization of China's
military is inevitable but not on a collision course with U.S
interests, and that the U.S military should not have concerns
in this sector if Taiwan's Chen Shui-bian does not engage in
independence activities. Bi argued that U.S. licensing
procedures themselves deter Chinese companies from buying
from the United States, that the United States should reduce
the scope of goods considered to have military uses, and that
the United States should provide more policy loans to U.S.
exporters to facilitate U.S. exports to China. END SUMMARY.


4. (U) Vice Chairman Bi Jingquan welcomed U/S McCormick to
NDRC and explained that he was hosting the meeting in lieu of
the scheduled Vice Chairman ZHANG Xiaoqiang, who had to be
outside of Beijing that day. After introductions of the two
delegations (names at paras 24-25),U/S McCormick provided an
overview of the purpose of his visit to China, his day
earlier meetings with Ministry of Commerce senior officials
and other recent developments in U.S. export controls.
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Committed to Work Together on Export Control Issues
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5. (SBU) U/S McCormick began by recalling that U.S. export
controls had been a subject of discussion in the April 2006
meeting of the Joint Commission on Commerce and Trade,
including in remarks made by Vice Premier Wu Yi. The United
States is committed to working with China to have candid and
cooperative relations on export control matters. Export
controls help facilitate high-tech trade. Ensuring a
foundation of confidence built on export controls can
increase U.S. high-tech exports to China, he stressed.
Ministry of Commerce (MOFCOM) Vice Minister Wei and the Under
Secretary's predecessor had already made real progress in

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cooperating on U.S. export control matters. The progress and
cooperative relationship were exemplified in a number of
developments:

-- U.S. high-tech exports to China increased 50 percent from
2003 to 2005;

-- the United States reduced restrictions on exports of items
such as general microprocessors to civilian end-users; and

-- China's meteorological center uses an IBM supercomputer to

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track worldwide weather developments (the export of that
equipment was subject to U.S. export controls).

He also reinforced the fact that export controls are not a
significant case of the trade deficit.


6. (SBU) The JCCT had outlined a new process for cooperating
on export control matters, U/S McCormick continued. MOFCOM
Vice Minister MA and U/S McCormick had exchanged letters
creating a High-Tech and Strategic Trade Working Group under
the JCCT. This new Working Group will focus on strengthening
high-tech trade. The U/S informed Vice Chairman Bi that in
his May 22 meeting with MOFCOM Vice Minister Wei, the two
sides had agreed that the first meeting of this new JCCT
Working Group will be convened in September of this year.

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U.S. Export Control Policy Changes Contemplated
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7. (SBU) The United States is now considering changes to its
export control policy that would allow reductions in the
administrative burdens placed on legitimate civilian trade,
the U/S explained. The United States will continue and
expand restrictions on trade for military end-use items. The
U.S. is confident that it can support both these aims at the
same time, while developing great relations with MOFCOM and
with China. MOFCOM has day-to-day responsibilities for
handling export control matters of the United States within
China, but given the importance of the issue, the Under
Secretary had wanted to personally meet officials at the

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Foreign Ministry and NDRC to brief them on these developments.

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Bi: U.S. Export Controls Cause Big Losses for U.S. Firms
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8. (SBU) Vice Chairman Bi affirmed the importance of U.S.
export controls to China and to the NDRC. The NDRC had
previously taken note of the U.S. relaxation of export
restrictions on high-performance computers, and is pleased to
learn that MOFCOM and the United States have established a
JCCT Working Group to discuss U.S. export control policy.
The NDRC is the Chinese Government agency responsible for
high-tech development in China, Bi continued, and thus the
NDRC deeply feels the impact of U.S. export controls. He
said that the NDRC's Department of high Technology
Industries, led by Director-General Xu Qin (attending this
meeting),had led a group to study the impact of U.S. export
controls on bilateral trade relations and on China's
high-tech sector. That study had concluded that U.S. export
controls result in lost opportunities for U.S. companies
amounting to USD 20 billion per year. Trade in U.S.-made
goods such as integrated circuits, high performance
computers, numerically controlled machine tools,
semiconductors, satellites, propulsion equipment and other
items are affected by U.S export controls. Bi averred that
China sees no direct relationship between those goods and
military end uses or military products. He urged further
consideration of how to define which goods have military
uses. He rhetorically asked whether cotton imported from the
United States for manufacturing of clothing in China, some of
which might be used in the manufacture of military uniforms,
should be subject to U.S. export controls.


9. (SBU) Bi said that China is happy to see that the united
States has noted the negative impact of its high-tech export
controls policy, which Vice Premier Wu Yi had raised as long
ago as the fifteenth (2004) meeting of the JCCT. He praised
establishment of the JCCT Working Group to discussing lifting
U.S. export control restrictions and said that the NDRC would
happily cooperate in discussing these issues with the U.S.
side.

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Bi: An Equal Nuclear Suppliers Group Member
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10. (SBU) Bi stressed that China is now a member of the
Nuclear Suppliers Group (NSG),fulfilling its obligations and
responsibilities therein. However, China does not enjoy the
license-free treatment that other NSG members do. China
thinks this different treatment is improper, discriminatory,
and difficult to understand o accept.

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U/S: Study Would Facilitate Discussion
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11. (SB) U/S/ McCormick rejoined that the impact of exort
controls is an interesting topic of analysis. U.S. studies of
this issue have suggested that the impact is far smaller and
that export controls are not a significant cause of the trade
deficit. The United States would welcome the opportunity to
see NDRC's analysis - indeed, a translation of the study
could become the basis of discussion with NDRC or in the new
JCCT Working Group. With respect to definitions of dual-use
technology, some cases are difficult but usually they are
quite clear-cut, such as technologies with applications for
military munitions.

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Military Modernization - and Taiwan's Chen Shui-bian
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12. (SBU) The purpose of the new JCCT Working Group is not to
eliminate trade restrictions but to both make them more
effective and to increase legitimate civilian trade.
President Bush has said that U.S. policy is to engage China,
strengthen our relationship with China and cooperate with
China. In candor, several areas of concern about China remain
Modernization of China's military is one such area, and that
is the basis for the U.S. decision not to export technologies
that could be used for military purposes. The U.S and china
agree in many areas, and this may be one area in which they
disagree. Vice Chairman Bi noted that military modernization
is not within the NDRC's area of responsibility, but
modernization of China's military is an inevitable trend.
However, China thinks that its military modernization is not
in collision with U.S interests. The U/S noted that military
modernization is not within USDOC's portfolio, either.


13. (SBU) Vice Chairman Bi said that China understands the
U.S. military's concern. If Chen Shui-bian (note: Taiwan's
president) does not engage in independence activities, there
will not be grounds for U.S. concerns in this regard.

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Military End-Use Control
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14. (SBU) Bi then said china has heard that the United States
will make stricter export controls under the Wassenaar
Arrangement. If true, China is concerned that such a move
would bring a larger negative impact on bilateral trade.


15. (SBU) U/S McCormick replied that the military end-use
control that resulted from the 2003 Wassenaar Statement of
Understanding had been discussed in some detail in his May 22
meeting with MOFCOM Vice Minister Wei (septel). Two
components are under consideration. The first would increase
high-tech trade and reduce the burden of licensing procedures
on U.S. and certain trusted Chinese companies. Chinese
companies and importers with a long track record of using
technologies for civilian purposes would be identified, and
those so identified would face fewer licensing requirements
or even see such requirements eliminated. This approach is
consistent with the shared objective of increasing U.S.
high-tech trade with China.


16. (SBU) The second component under consideration would
place further restriction on certain technologies. These
technologies currently do not require license, but if used
for military purposes, have significant military utility.
These technologies would only be restricted and would not
need a license when going to military end-uses. The U/S

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provided a hypothetical example of a technology that might
have health care applications in a military hospital and not
be restricted, but would be restricted if that same
technology were instead destined for use in fighter aircraft
production. Such adjustments would be consistent with the
guidelines for the new JCCT Working Group and for promoting
high-tech trade. The U/S noted that the policy adjustments
are not yet finalized but are currently under consideration.

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Bi: Four Points on U.S. Export Controls
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17. (SBU) Vice Chairman Vi said he hopes that U.S. export
control policy adjustments will be conducive to bilateral
trade, especially trade in the high-tech sector. Regarding
U/S McCormick's recommendation that NDRC's study on the
impact of U.S. export controls be shared with the USG, Bi
said further exchanges on that topic would be possible. Bi
then offered four points (referring to a document he had
brought to the meeting) on U.S. export controls.


18. (SBU) First, due to U.S. export controls, Chinese
entities no longer apply for many civilian use goods. In 2004
and 2005, for example, China had purchased two satellites
from France instead of the United States, impacting U.S.
trade by some USD 150 million to USD 300 million. (NOTE:
Congress has designated satellites as munitions items under
State Department licensing jurisdiction. Because of Tiananmen
Square sanctions, a State Department license and Presidential
waiver is required for U.S. exports of satellites to China.)


19. (SBU) Second, the process for Chinese entities to apply
for required licenses is very difficult, so many have stopped
applying for licenses. Bi said this is reflected by the fact
that Chinese imports of integrated circuits in 2005 amounted
to USD 81.1 billion, but only USD 4 billion - about 6 percent
of China's import of this type of product, came from the
United States. Similarly, less than 10 percent (USD 1.6
billion of a total USD 16.5 billion) of China's imports of
numerically controlled machine tools came from the United
States. In both these areas, Bi said, the United States has
world-leading technology and is highly competitive. Total
Chinese imports of these goods amount to about USD 100
billion. If U.S. firms could supply one-third of China's
demand, U.S. exports in these two categories alone would
climb to USD 30 billion.Bi clarified that he was not saying
that the United States does not allow these goods to be
exported to China, rather that the approval procedures are
too complicated and make relevant agencies' responsiveness so
untimely as to make Chinese importers not even try to
purchase these goods from U.S. firms. Chinese firms are
reluctant to even approach USG agencies about export control
matters, and see the difficulties encountered in getting a
necessary license in a timely fashion as a trade barrier
established by the USG. Thus the NDRC is pleased to hear that
the new JCCT working group will work to make U.S. export
controls more effectiveness, and those that are retained
should be made more transparent. More timely issuance of U.S.
export licenses would create a more predictable market
environment, which surely could lead to an increase in
Chinese imports of U.S.-made integrated circuits and
numerically controlled machine tools.


20. (SBU) Third, regarding dual-use or military-use items, Bi
stated that the United States does not permit export to China
of dual-use or police-use items or low-end military goods,
such as large helicopters, high performance computers, fine
processors and navigation equipment. So Chinese firms do not
apply for USG licenses for such items.


21. (SBU) Fourth, the United States places many limitations
on policy loans that could support U.S. export sales. Bi
urged the U/S to place attention on this matter, as policy
loans could support increased exports of U.S.-made power
generation equipment, medical equipment and other high-tech
goods. Lifting restrictions on U.S. policy loans would be
conducive to bilateral trade as a whole.

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U/S: Look to Working Group for Detailed Discussions
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22. (SBU) U/S McCormick thanked Vice Chairman Bi for his
views and points. He reiterated interest in receiving the
valuable insights that the NDRC analysis of the impact of
U.S. export controls could provide. The JCCT Working Group on
High-Tech and Strategic Trade will be an effective forum for
addressing questions about the effectiveness, procedures,
transparency and predictability of U.S. export licensing
procedures. USDOC's Bureau of Industry and Security does not
have responsibility for loan issues, but the U/S anticipated
having opportunity to pass on the Vice Chairman's comments to
the head of the U.S. Export-Import Bank at a meeting during
the week of May 29.

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Export Controls One of Reasons for the Trade Imbalance
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23. (SBU) Vice Chairman Bi replied that if the U.S. made
efforts to lift export controls on high-tech items, bilateral
trade could see a great development conducive to relieving
the trade imbalance between our two countries. U/S/ McCormick
said that many factors create the trade imbalance, and
candidly, export controls are not one of them. But there is
much the two sides can do together in this area and the
United States is committed to do its part.


24. (SBU) Vice Chairman Bi ascribed the trade imbalance to
globalization and the global division of labor. Many U.S.
high-tech companies, such as Intel, Microsoft,
Hewlett-Packard and Motorola, are setting up factories in
china which export to the United States. Furthermore, many
Asian companies are shifting their exports to the United
States from factories in their home countries to their
factories in China. These developments definitely increase
the U.S. trade deficit with China, but are an inevitable
trend, Bi said. But many of the benefits of that trend accrue
to U.S. companies and U.S. consumers, Bi asserted. He said he
had visited a company in the Shanghai area which manufactures
thirteen million laptops per year. For every USD 100 in
exports by that company, the company has imported USD 45 in
parts, usually from Japan, South Korea, Hong Kong, Taiwan or
the United States. Five dollars have been incurred in labor
costs for each USD 100 in exports, and the company has five
dollars in profit and depreciation. Only USD 45 of each USD
100 in exports in Chinese parts content. However, U.S.
companies like Intel, Compaq, and Dell sell the final product
in the Untied States under their own trademarked names at a
50 percent mark-up, Bi claimed.


25. (SBU) China does not purposely seek a large trade
imbalance with the united States, and China expects that its
imports will continue to grow. China expects the United
States to adjust its export control policies so as to
increase U.S. exports to China. U/S McCormick's visit to
China is highly significant, and with joint efforts, China
hopes cooperation and trade in the high-tech sector can be
promoted, Vice Chairman Bi concluded.


26. (SBU) U/S McCormick agreed that there is opportunity to
grow high-tech relations in a way that is still consistent
with U.S. policy not to support military modernization, and
much on both sides can be done to facilitate that. The JCCT
High-Tech and Strategic Trade Working Group is the forum in
which to continue this discussion. The U/S said he looked
forward to working with MOFCOM Vice Minister Wei and his team
and with NDRC officials on these matters.


27. (U) National Development and Reform Commission
participants in this May 22 meeting were:

Vice Chairman BI Jingquan
Director-General XU Qin, Department of High Technology
Industries

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Deputy Director-General LI Bin, Department of Foreign Affairs
Division Director LI Fang, Department of Foreign Affairs
Interpreter


28. (U) USG participants were:

Under Secretary of Commerce for Industry and Security David
McCormick
Special Assistant to the Under Secretary Michael DiPaula-Coyle
Minister-Counselor for Commercial Affairs Craig Allen
Jeannette Chu, Export Control Attache, Commercial Section
Economic Section Deputy Chief Christopher Beede
Interpreter


29. (U) The Under Secretary's delegation has cleared this
report.
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