SUBJECT: U.S.-CHINA HIGH TECHNOLOGY AND STRATEGIC

C O N F I D E N T I A L SECTION 01 OF 06 BEIJING 003207 SIPDIS SENSITIVE SIPDIS USDOC FOR 532/BIS/OUS/MFOULON/ELEE USDOC FOR 532/OEA/CPADILLA/MBORMAN/BKRITZER USDOC FOR 532/OEE/DJACKSON/WWYSONG/JSONDERMAN STATE FOR EAP/CM STATE FOR EB/ESP TREASURY FOR ALAN HOLMER AND TAIYA SMITH CHINA POSTS COLLECTIVE E.O. 12958: DECL: CESSATION OF ALL EXPORT CONTROLS TO CHINA. TAGS: TAGS SUBJECT: SUBJECT: U.S.-CHINA HIGH TECHNOLOGY AND STRATEGIC TRADE WORKING GROUP CONCLUDES GUIDELINES FOR DEVELOPING BILATERAL HIGH-TECH TRADE AND DISCUSSES THE PROPOSED CHINA RULE REF: REF A: USDOC 5573 REF B: BEIJING 2944 BEIJING 00003207 001.2 OF 006 Classified By: Deputy Chief of Mission Daniel Piccuta. Reasons 1.4 (b/d ). Summary -------------- ¶1. (FOUO) The April 17-18 U.S.-China High-Technology and Strategic Trade Working Group (HTWG) meeting in Hangzhou set a positive tone for the high technology and export control dialogue. The delegations agreed on &Guidelines for U.S.-China High-Technology and Strategic Trade Development8 (reprinted in full in para. 23),debated ways to improve implementation of the End-Use Visit Understanding (EUVU),and discussed measures to increase trade in high-potential sectors. The U.S. delegation briefed extensively on the limited scope of U.S. dual-use export controls. Following the U.S. presentation on revisions to the proposed China rule, the Chinese side expressed reluctance to support the Validated End User (VEU) program until its procedures and impact on China were clarified. The results of the HTWG will feed into the upcoming Strategic Economic Dialogue (SED),but it is too soon to know if the generally positive tone will carry over. End Summary. Review of Bilateral Cooperation To-Date -------------- ¶2. (U) The second meeting of the U.S.-China High Technology and Strategic Trade Working Group was held in Hangzhou, April 17-18, and began with a review of bilateral cooperation to promote high tech and strategic trade. Ministry of Commerce (MOFCOM) Director General Wang Qinhua described the 2004 EUVU as a hallmark for cooperation that has helped expand bilateral high-technology trade. Since 2004, she said over 140 end-use visits had been completed, including 18 from January to March of 2007. The first HTWG in September 2006 had resulted in a successful bilateral industry outreach seminar in Shenzhen in January 2007, with over 300 government and industry participants. ¶3. (U) Acting Under Secretary Mark Foulon expressed hope for continuing the positive tone of the HTWG dialogue by moving to a forward-looking phase of the relationship that would include a discussion on reciprocal steps to increase civilian high-technology and strategic trade. Guidelines for U.S.-China High Technology and Strategic Trade Development -------------- ¶4. (U) At the first HTWG, it had been agreed that the United States and China would develop Guidelines for facilitating bilateral high technology trade. At the HTWG in Hangzhou, the two sides agreed upon Guidelines for U.S.-China High-Technology and Strategic Trade Development (reprinted in full in para.23) for unveiling at the SED. Both sides praised the Guidelines as a positive step which provides a framework for future cooperation. Implementation of End-Use Visit Understanding -------------- ¶5. (C) Foulon reiterated the importance of end use visits in increasing confidence and facilitating the licensing process. He welcomed progress on end-use visit cooperation to date, including the large number of end-use visits and the fact that no undisputed visits were overdue. However, he pointed out that there was still room for improving end-use visit cooperation, and, in that context, he raised four issues: -- Timeliness of end-use visits: The EUVU requires end-use visits to be completed within 60 days of request. Since 2005, however, only 35 percent of the EUVs have been completed within the required timeframe. -- Outstanding end-use visit requests: Two types of requested end-use visits were in dispute and overdue. The first BEIJING 00003207 002.2 OF 006 involves end-use visits for exports of U.S. goods that do not list the United States as the country from which the export took place on the MOFCOM end-user statement. The second is for requests submitted more than six months after items have shipped. Foulon explained that, with respect to the first type, under U.S. law, the item's origin is determinative, not the nationality of the exporter. That is why the English text of the EUVU does not specify the exporter,s nationality as a criterion for conducting end-use visits. -- Improving end-use visits: The BIS Export Control Officer (ECO) should be allowed to take photographs when that would improve the accuracy of an end-use visits; bring other Commerce officials on end-use visits, as is already provided for by the EUVU with MOFCOM approval, when doing so would support the expansion of trade; and be able to conduct checks on intermediary consignees. -- Consultative Process: Pursuant to EUVU Article III paragraph 2, the United States will request end-use visits on two exports to China that were shipped without a license, but the U.S. believes required licenses. Foulon said these requests would be formally submitted on or about April 20 and requested a timely response to them. ¶6. (C) There followed a spirited discussion, in which MOFCOM Deputy Director General Zhou Ruojun initially rejected the U.S. concerns and tried to shift the blame for these difficulties on the United States. Foulong rejected Zhou,s comments as factually wrong and contrary to the spirit of cooperation necessary for the End-use Visit Understanding to succeed. Then, DG Wang agreed that arranging 35 percent of the U.S. requests within 60 days was unsatisfactory and that MOFCOM would make efforts to improve the timeliness of end-use visits. She also agreed to work with the ECO to clarify the procedures for obtaining pre-approval for requests for other Commerce officials to participate in end-use visits. DG Wang also agreed that MOFCOM would be open to further discussion on photography and visits to intermediary consignees. As for the two end-use visit requests for exports that went without a license, MOFCOM will consider the III (2) request. ¶7. (C) The disputed end-use visits were more contentious. DG Wang agreed to develop a methodology for dealing in the future with the small number of end-use statements that do not name the United States as the country from which the export takes place. Foulon warned that the issue was already encompassed by the EUVU and that the two end-use visits in question needed to be completed without delay. Scope of U.S. Dual-Use Export Controls -------------- ¶8. (U) Deputy Assistant Secretary for Export Administration Matthew Borman provided a detailed briefing on the limited scope of U.S. dual-use export controls, reiterating U.S. policy of facilitating U.S. exports to civilian end-users while preventing exports that would contribute to China's military modernization. In 2006, he noted, DOC licenses were required for only $308 million of exports to China (0.6% out of $55.2 billion in total exports). In addition, approximately 95 percent of licenses for exports to China were based on multilateral regime controls, not unilateral U.S. controls. The comparable figure for &high technology trade8 (Census ATP categories) was $231 million (out of $17.6 billion) that needed a DOC license. ¶9. (U) DAS Borman pointed out that DOC processed 1,423 license applications for exports to China in 2006, of which only 45 (worth $17.7 million) were denied. Borman agreed that some exports likely were deterred by the perceived &threat8 of export controls, but argued that this was an &outreach8 problem, not an &export control8 problem. ¶10. (U) DAS Borman explained that, based on overall U.S. policy, there was a likelihood of denial for applications that would advance China's electronic and anti-submarine BEIJING 00003207 003.2 OF 006 warfare, intelligence gathering, power projection and air superiority capabilities, as well as for exports of WMD and missile technology items contributing to proliferation or destined to an entity involved in missile activities. U.S. exports are also restricted by law for crime control reasons. The large number of violations of U.S. export control laws and regulations involving China demonstrate the importance of export controls and enforcement. ¶11. (U) The Chinese delegation welcomed the presentation, but National Development and Reform Commission (NDRC) Deputy Director General Gu Dawei continued to claim that "restrictive" U.S. export controls were affecting bilateral trade. Ministry of Science and Technology Deputy Director General Ma Linying repeated a standard iteration of the traditional Chinese case against export controls. Foulon requested additional supporting detail from China on missed trade opportunities, and urged further study of the U.S. presentation, pointing out that continuing violations of U.S. export regulations would reinforce the necessity for export controls. China's Proposals for Promoting High-Tech Trade -------------- --- 12 (U) NDRC's Gu said that China is considering "active measures" to encourage U.S. exports to China, and identified specific sectors with the most potential for cooperation: energy, environmental protection, scientific research, health/medical care, information technology, and extraction of natural resourcess. China encouraged facilitating those U.S. exports to China in these sectors that are not related to national defense. Gu suggested use of end-use visits to decrease license requirements and the exploration of ways to reduce license processing times. ¶13. (U) Foulon welcomed Gu's suggestions as a positive step and noted the potential for the Validated End-User component of the China policy rule to play a significant role in facilitating trade in those sectors. Borman opined that few items in these categories would require a license and proposed a process to identify license requirements, match suppliers and customers, and perform outreach. Update on Revisions to the China Rule -------------- ¶14. (C) Foulon pointed to the China policy rule as a model for transparency and consultation in the U.S. regulatory process. He explained how the rule should facilitate trade through the Validated End-User program and described how it reflects extensive consultation with all affected parties. As a result, the rule has evolved to address concerns and incorporate suggestions that enhance the rule,s effectiveness. BIS reviewed almost 60 comments totaling about 1,000 pages and currently is in inter-agency discussions about potential revisions. From a general perspective, Borman clarified four aspects of the policy: -- To address concerns about attaining Validated End-User status, the rule will contain significantly more detail on the criteria and process for inclusion. Firms will need to provide information available in the normal course of business, and to demonstrate that the company is engaged in civilian activity. U.S. responses to requests for Validated End-User status will be provided in a timely manner. -- The revised rule should not greatly increase MOFCOM,s administrative burden. By adjusting the dollar value of items requiring a MOFCOM End-User/End-Use Statement, the number of statements that MOFCOM will have to issue should remain comparable to the current number while addressing nonproliferation concerns consistent with the Exchange of Letters on End-Use Visit Understanding. -- The revised rule clarifies the definition of "military end-use" to meet exporter concerns about any ambiguity. BEIJING 00003207 004.2 OF 006 -- Extensive technical analysis was conducted on the 47 categories of items outlined in the proposed rule, and the revised rule will reflect the outcome of that analysis. ¶15. (C) In response to a question from the Chinese, Borman explained that Validated End-User program will not distinguish between or explicitly exclude any types of firms, whether state-owned enterprises, private firms or subsidiaries of foreign companies. All Validated End-User applicants will have to demonstrate participation in civilian enterprise and show the existence of internal control mechanisms to ensure that U.S. items are used only for civilian purposes. The candidates would also have to agree to supply records or host on-site visits and acknowledge that items obtained under the Validated End-User program would only be used for civilian purposes. The final rule will include templates for the types of information required. Chinese Comments on the China Policy Rule -------------- ¶16. (C) DG Wang said that she appreciated the U.S. briefing which provided a better understanding of the China policy rule and its overall direction. Although China had been pleased with its removal from the initial &rogue countries list8, it was still dissatisfied with the &different treatment8 under the policy which implies problems with China. She stated that China would withhold support for the VEU program until more information was provided on U.S.-China cooperation with respect to its implementation. In marked contrast to his forward-looking and conciliatory remarks from the first day of the HTWG, NDRC's Gu emphasized that China did not generally support the China policy rule, as the impact remains unclear pending further discussion. (COMMENT: DDG Gu left immediately after the last session of day one and did not participate in the official banquet that evening, which was hosted by Director General Wang Qinghua, leading us to surmise that DDG Gu received additional instructions from his leadership during the evening.) ¶17. (U) Foulon explained that ongoing inter-agency discussions prevented more specific discussions on the revised rule or the provision of a copy of the revised rule text. However, he said the unique opportunities and challenges presented by China, along with continuing concerns about violations of U.S. export control laws, necessitated a policy tailored to China with a goal of facilitating civilian high-technology trade under the unique conditions of the Chinese economy. He emphasized the importance of maintaining a positive tone and constructive dialogue to implement the policy rule and the VEU program. Industry strongly supported the Validated End-User Program; the American Chamber of Commerce-Beijing had expressed its support to him the previous Monday in Beijing. (Two subsequent outreach events with industry in China confirmed industry enthusiasm for the Validated End-User program.) In addition, other nations, such as India, were anxious to be included in the Validated End-User Program. Through the Validated End-User program and in other ways, Foulon concluded, the United States is committed to working with China to advance civilian high-tech trade and achieve a win-win situation for both countries. Report to the SED -------------- ¶18. (C) Given the positive outcomes and collaborative dialogue of the HTWG, the delegations agreed to report to their respective ministers outlining the HTWG's achievements. They will outline bilateral efforts to facilitate high-technology trade, especially through agreement on Guidelines for developing high-tech trade and discussion of key sectors for increased cooperation. Foulon also stressed the importance of reflecting the detailed briefing of export controls and data review conducted by DAS Borman. Next Meeting of the HTWG -------------- BEIJING 00003207 005.2 OF 006 ¶19. (U) The delegations agreed to hold the next HTWG in the United States in the fall of 2007. Possible discussion topics include EUVU implementation, cooperation in key sectors to facilitate high-technology trade, and the Validated End-User program. Comment -------------- ¶20. (C) Comment: A key U.S. goal for the HTWG was to improve the tone of the dialogue and shift the focus from &dueling statistics8 to cooperative efforts to facilitate high-technology and strategic trade. The tone was in fact largely positive, although there were instances of a return to extreme Chinese criticism of the basis for U.S. export controls. The Guidelines and Chinese list of priority sectors offer hope for a constructive dialogue at SED II, but ongoing Chinese concerns over the policy rule hold open the possibility for a more negative exchange in May. Commerce/BIS will work to defuse Chinese concerns about VEU before the SED, but it is &too soon to tell8 what the result will be. End Comment. ¶21. (U) The delegation cleared this cable. ¶22. (U) Participants: United States: Acting U/S Mark Foulon, Commerce Department DAS Matthew Borman, Commerce Department Barry Friedman, Commercial Minister Counselor Robert Luke, Economic Minister Counselor Eugene Lee, Senior Advisor, Commerce Department Mark Tesone, Political Officer (notetaker) Jeannette Chu, Export Control Officer Francis Peters, Commercial Officer, Consulate Shanghai Mark Erickson, Economic Officer, Consulate Shanghai Peining Zhao, Commercial Specialist China: Wang Qinhua, DG, Mechanic, Electronic and High-Tech (MEHT) Department, MOFCOM Gu Dawei, DDG, High Tech Industry Department, NDRC Ma Linying, DDG, International Cooperation Department, Ministry of Science and Technology Chen Ying, DDG, Electronic Information Product Management Department, Ministry of Information Industry Zhang Shibao, DDG, China National Space Administration Zhou Ruojun, DDG, MEHT Department, MOFCOM Jiang Qianliang, Director, MEHT Department, MOFCOM Fan Xingmin, Director, China National Space Administration Liu Haiyan, First Secretary, American and Oceania Affairs Department, MOFCOM Zhou Quan, Deputy Director, MEHT Department, MOFCOM Tan Sui, Official, NDRC Li Xin, Official, International Cooperation Department, Ministry of Science and Technology Jiang Fang, Official, MEHT Department, MOFCOM ¶23. (U) Text of the Guidelines for U.S.-China High-Technology and Strategic Trade Development. BEGIN TEXT The Ministry of Commerce of China and the Department of Commerce of the U.S. (hereinafter referred to as "the two sides") recognize the great potential in China-U.S. civilian high-technology and strategic trade. The two sides have agreed on the following guidelines to strengthen cooperation and promote the development of bilateral high technology and strategic trade. ¶1. The two sides will endeavor to promote bilateral civilian high technology and strategic trade by sharing information on market opportunities, identifying and eliminating unnecessary barriers to such trade. ¶2. The two sides recognize that full implementation of the BEIJING 00003207 006.2 OF 006 2004 Exchange of Letters on End-Use Visit Cooperation (hereinafter referred to as the End-Use Visit Understanding, or EUVU) is of critical importance to promoting China-U.S. civilian high technology and strategic trade. Therefore, the China-U.S. High Technology and Strategic Trade Working Group will review EUVU implementation and other issues relating to China-U.S. civilian high technology and strategic trade. ¶3. The two sides shall work together to identify promising sectors in civilian high technology and strategic trade, and to formulate and implement phased plans and specific measures that each side or both sides can take to develop trade in these sectors. ¶4. The two sides believe that trade in controlled dual-use items holds an important place in China-U.S. civilian high technology and strategic trade. The two sides shall exchange views on issues affecting bilateral civilian high technology and strategic trade in a frank and open spirit. They shall seek through dialogue and cooperation to clarify misunderstandings and resolve differences in order to promote the rapid development of civilian high technology and strategic trade. The two sides will actively foster the formulation of policies, with regulations, to promote such trade. ¶5. The two sides shall review the functioning of the U.S. dual-use export licensing process with respect to China and the status of cooperation on end-use visits to identify measures, as appropriate, to streamline export license application procedures and shorten export license processing time to promote the development of bilateral civilian high technology and strategic trade. ¶6. Upon mutual agreement, these guidelines may be modified. END TEXT RANDT