SPEAKING FREELY New US export controls
threaten China trade By Donald
Alford Weadon Jr and Carol A Kalinoski
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
contributing.
WASHINGTON - To many
US policymakers and regulators, China has evolved
from a significant commercial competitor to a
geopolitical threat. For them, Beijing's incessant
thirst for ever-increasing levels of energy and
technology to fuel its economy and military
modernization - and the tactics by which it has
sought to obtain this technology - necessitate
tougher controls on the access to US technology
and commodities.
In
early 2005, the administration of US President
George W Bush proposed an expansion of the "deemed
export" rule to scrutinize and license technology
access for individuals of Chinese and foreign
birth, even if they had been citizens of allied
nations since their youth. Industry and academia
violently reacted to this proposal, in essence
faulting it for useless overreaching that would
damage the access of industry and academia to
talent, and thus adversely impact US innovation.
More than 315 lengthy negative comments were
lodged.
Now, as an additional bulwark to
stem technology loss to China, the US
administration will soon propose a much heralded
"military catch-all" rule. This rule is in
operative conflict with a 2003 multilateral
Statement of Understanding (SoU) among US-allied
nations, which has little likelihood of stemming
the flow of commercial commodities to China for
use in military programs.
Additionally,
the rule will have a serious impact on US industry
while allowing other nations to supply China
basically unfettered. The US economy will be
damaged as firms, including other US companies
that manufacture in China, opt for "designing out"
US parts and components to avoid dangers to their
supply chains arising from the enforcement of the
rule.
The actual regulation has yet to be
published, but the US Bureau of Industry and
Security (BIS) has been sharing drafts. In sum,
the rule requires any US exporter of commercial
goods who "knows" or is "informed" that the
commodity is intended for "military end use" in
any country subject to an arms embargo (either
international, regional or unilateral) to seek a
US export license - or not undertake the
transaction.
For exports and re-exports
where the transaction would make a "direct and
significant contribution" (as yet undefined) to
the military capabilities of the embargoed nation,
such license applications would be denied. The
rule would also establish new restrictions on the
activities of US persons who knowingly support a
military end use in China.
In essence, the
rule is a disfavored unilateral control in
"multilateral control" clothing, since no other
allied nations implement the SoU comparably, and
none implement the SoU against China. Moreover,
the facilitation or transfer provisions of the
rule directly apply to banks, freight forwarders
and others in the logistics chain, and when viewed
through the lens of the corporate-knowledge
doctrine, the opportunities for serious liability
exposure abound for service providers as well.
The rule also provides no reasonable
avenues of due diligence where one could limit
exposure to liability. Based on the current
compliance environment, even approvable licenses
will be seriously delayed for want of resources,
lack of definitional clarity and the lack of a
published list of entities or projects that would
trigger the rule's prohibitions.
All
potential non-US competitors are not similarly
restricted and could supply most goods straight
away. The prospect is the loss of commercial
opportunity for US firms in a highly competitive
global market, without the intended negative
impact upon a Chinese military entity or its
projects.
The impact of the rule on
third-party transactions, licensed foreign
manufacture arrangements, joint ventures, and the
like is not yet firmly understood, but at this
preliminary stage it appears to be substantial and
commercially disruptive. Even distribution
arrangements may be adversely affected. Some
expect the direct fallout from this rule to be the
triggering of an array of potent foreign blocking
statutes among European nations. US companies and
their foreign entities might also face risks under
the laws of China when they seek or otherwise
provide information on military end users to the
US government to obtain export authorizations.
Will exasperated US companies disinvest in
the United States and shift production abroad to
protect their shareholders' equity in the growing
China marketplace? Will there be adverse action by
China whereby US suppliers are forced to slow or
stop meeting sales commitments or contractual
requirements under existing sales or licensing
agreements? Will there be retaliatory threats of
impairment of intellectual-property protections by
the Chinese authorities? Time will tell.
Ultimately, the rule is evidence that the
US has lost the industry-government consensus on
export controls that has been the foundation of
sound export control law and practice for the past
three decades, thus allowing problematic ad hoc
initiatives that violate sound policies laid down
by expert industry-government panels in the past.
But the dire consequences of the rule seem
not to faze threat-obsessed US regulators, who
have yet to articulate the nature and size of the
Chinese threat they perceive, despite evidence
that present export regulations provide
more-than-adequate tools to stem any meaningful
support of disfavored Chinese military projects or
programs. The proposed rule places US firms (and
their Chinese customers) in a clearly
disadvantageous position, without any meaningful
enhancement of US national security.
Donald Alford Weadon Jr is a
Washington, DC-based international lawyer. An
expert in trade controls and China trade, he has
counseled firms in export controls and customs
issues for nearly three decades, and can be
reached atdweadon@weadonlaw.com.
Carol Kalinoski chaired the BIS
Operating Committee, the principal US government
export-control dispute-resolution panel, for
nearly 10 years. She practices law at Carol A
Kalinoski & Associates in Washington, DC, and
can be contacted atkalinoski2003@yahoo.com.
(Copyright 2006 by Donald Alford Weadon Jr
and Carol Kalinoski. Used by permission.)
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
contributing.
