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

UNCLAS SECTION 01 OF 07 BEIJING 012788

SIPDIS

SENSITIVE
SIPDIS

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.

--------------
SUMMARY
--------------


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.
-------------- --------------
Committed to Work Together on Export Control Issues
-------------- --------------


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-

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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 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
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.

-------------- --
U.S. Export Control Policy Changes Contemplated
-------------- --


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 Foreign Ministry and NDRC to
brief them on these developments.

-------------- --------------
Bi: U.S. Export Controls Cause Big Losses for U.S. Firms
-------------- --------------


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

BEIJING 00012788 003 OF 007


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.

--------------
Bi: An Equal Nuclear Suppliers Group Member
--------------


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 or accept.

--------------
U/S: Study Would Facilitate Discussion
--------------


11. (SBU) U/S/ McCormick rejoined that the impact of export
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.

-------------- --------------
Military Modernization - and Taiwan's Chen Shui-bian
-------------- --------------


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

BEIJING 00012788 004 OF 007


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.

--------------
Military End-Use Control
--------------


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 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.

--------------
Bi: Four Points on U.S. Export Controls
--------------


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

BEIJING 00012788 005 OF 007


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.

-------------- --------------
U/S: Look to Working Group for Detailed Discussions
-------------- --------------


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

BEIJING 00012788 006 OF 007


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.

-------------- --------------
Export Controls One of Reasons for the Trade Imbalance
-------------- --------------


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

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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
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.


RANDT