AUS government move to curb China’s military growth by limiting high-tech exports has angered not only China’s businesspeople and entrepreneurs but also Americans on both sides of the Pacific.
Proposed changes to licensing requirements for high-tech exports to China published for public comment on July 6 by the US Bureau of Industry and Security (BIS) affect 47 categories of exports, re-exports or product transfers that China could use for military purposes.
The US business community in China has kept much of the debate on the proposed changes behind closed doors to keep tensions at a minimum, but other critics have not been so circumspect.
"I can’t come up with a metaphor stupid enough to neatly encapsulate the crass stupidity of this effort. It’s insane," said Donald Weadon, a Washington-based lawyer specialising in international trade.
Many US businesspeople in China are hoping the revisions will befall the same fate as the controversial 2005 "deemed export" proposal that sought to scrutinize and license technology access for all individuals of Chinese birth. The proposal was quietly shelved after an angry backlash from industry and academia.
"I expect that after three and a half months of industry contemplating this piece of garbage, the comments will be numerous and truly hostile," Wheadon said. "What may happen is that this proposed rule will never see the light of day, just like the proposed deemed export rule. I would be amazed if there weren’t 500 or 600 really angry comments."
Beijing, for one, was not amused. Making matters worse, the majority of the new categories were already on the US export control list but required export licenses only if they were being shipped to countries deemed supportive of terrorism.
The new policy, in effect, lumps China with Iran, Iraq and North Korea.
"We hope the US will get rid of the conception of a Cold War and will take constructive measures to promote two-way high-tech trade, to help solve the trade imbalance between our two countries," Chinese Ministry of Commerce spokesman Chong Quan told state media when the proposal was announced.
Export controls are already under attack. Chinese authorities and the US Chamber of Commerce in China both claim such measures harm the interests of US exporters and add to the growing bilateral trade gap. US high-tech exports to China amounted to only US$12 billion last year, compared to US$41.8 billion worth of imports, according to US customs statistics. The shortfall accounted for around 15% of the US$202 billion trade deficit in 2005.
Protest too much
US Undersecretary of Commerce for Industry and Security David McCormick argues that government critics have overstated the effect of export controls.
Less than 6% of US exports to China in 2005 required government approval and only US$12.5 million worth of proposed exports were denied, far less than 1% of the total US deficit. But this argument does not take into account opportunities lost. Chinese companies have become unwilling to risk having an order vetoed by Washington or cannot afford to allow the approvals process to delay the order of vital components for their product lines.
Wang Haisheng, president of Shanghai Technology Transfer and Exchange, said supply uncertainty could see domestic manufacturers shift away from US-sourced components if the rule is passed.
"US enterprises won’t be able to compete fairly with other countries to access the Chinese market," Wang said. "These controls can’t reinforce US national security but will damage the US economy."
It is not just US trade with China that will be affected, said Carol Kalinoski, a Washington-based lawyer who chaired the BIS Operating Committee, the principal US government export-control dispute-resolution panel, for nearly nine years.
The proposed rule will also cover US components that are re-exported or transferred to China so third-country companies that produce for the Chinese market are also looking to "design out" US parts and components.
"A shift away from US manufacturers may already be going on because we are deemed to be unreliable suppliers because of a fickle export control policy that can switch overnight," she said.
John Larkin, a former special agent at BIS and now the president of strategic trade consultants LTI Associates, said it is still uncertain what effect the proposed rules would have on trade volumes.
Much depends on how certain provisions are interpreted. For example, a controlled item exported for military end use could still be licensed if it can be proved to not make a "material contribution" to China’s military capabilities.
"The big question mark is what is a ‘material contribution’ to the military capabilities of the PRC," said Larkin. If availability in international or domestic markets is taken into account in determining "material contribution", he does not predict much change.
"If it’s already here, how can you say it is making a material contribution? From what I understand, that will be taken into account but we just have to wait and see."
Larkin contends the draft rule is not in its final form. While not predicting it will disappear like the deemed export rule, he is certain the government is prepared to listen to industry concerns during the public comment period that closes November 3.
"I think feedback can make a difference. The rule is going to come out in some form but I don’t think this is the final form. I think they are going to listen if you make a good argument."
What is certain is that US exporters and their offshore competitors will be keeping a close eye on the outcome of those arguments, knowing that the stakes are huge.
As one US businessman put it: "Chinese importers aren’t stupid. They know what they can and can’t get export licenses for; the rest they source elsewhere."