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

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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

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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.


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-- 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
--------------


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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

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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