SPEAKING
FREELY Turning the screws on US-China
exporters By Donald Alford
Weadon Jr and Carol Kalinoski
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
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WASHINGTON - The
great geopolitical game being played out between
the China and the United States took yet another
ominous turn on July 6 when the US Bureau of
Industry and Security (BIS) published for public
comment the highly problematic "China Military
Catch-all Rule", which, if made final, will
dramatically and adversely impact trade and
finance between China and the United States and
its allies.
The proposed rule seeks to
block modernization of the Chinese military by
imposing new licensing requirements on exports,
re-exports or transfers of US-origin commercial
commodities or
technology in 47 fairly
expansive categories (from machine tools to
medical chemicals, from microprocessors to music
equipment) for potential "military use" in China.
Heretofore, these commodities had freely flowed to
China without a license.
Washington is
concerned that China is modernizing its military
by utilizing commercially available commodities
and technologies. But industry observers note that
the proposed rule will not achieve the desired
result, and its publication is triggering
protective measures by allied nations, which
include recommendations to "design out" US parts
and components in large and expensive civilian and
military projects with long lead times.
When originally floated late last year,
the proposed rule generated significant adverse
comments from industry, academia and the BIS
Technical Advisory Committees manned by experts
from both industry and government alike (see New US export controls threaten
China trade, January 11).
Notwithstanding these warnings, the BIS has
charged ahead, despite the fact that a sister
initiative, which sought to restrict access to
certain technologies by individuals born in China
but who held nationality in another country, was
shouted down this spring by a chorus of 315
adverse comments from industry and academia.
The new proposed rule signals a
breathtaking rollback of export licensing policy
to Cold War levels. The rule restricts commodities
widely available from Asia, Europe, Israel and
even China, coupled with a remarkable liability
umbrella, which includes the US exporter, the
Chinese importer, all companies in the chain of
title, shippers, forwarders, financial
institutions (eg letters of credit, project
finance, mergers and acquisitions), accountants,
lawyers and the like.
Thus the proposed
rule seriously raises the stakes for US firms
addressing the Chinese markets, and European and
Asian firms that trade with China and use
US-origin systems, parts and components. US-allied
nations are dusting off their blocking statutes to
stem the extraterritorial impact of this new rule
on their domestic companies.
The proposal
is rife with contradictions and loose language.
The operative term "military use" lacks clarity,
as many items made to military specifications are
not addressed, and the status of the system or
program being supplied as being military in nature
may be difficult to establish because of backlogs
and dysfunction at the US State Department's
Directorate of Defense Trade Controls, the federal
munitions-licensing agency.
Moreover, the
supposed benefits are illusory. A new
"authorization" called "validated end user" (VEU)
is proposed to speed exports in certain authorized
categories without a validated license to properly
qualified Chinese entities; in reality, it is a
renamed version of a discredited mechanism
promoted by the Defense Department in the
mid-1980s and soundly rejected.
Featuring
significant paperwork obligations for all parties,
intrusive and extensive information requirements,
high compliance costs, audit exposure, and
open-ended annual reporting obligations, the VEU
has yet to be perceived as any sort of benefit.
The interagency process to obtain VEU
authorization does not yet exist, and it would
take at least a year under present US and Chinese
Ministry of Commerce (MOFCOM) staffing levels and
conflicted interagency review to get the VEU
evaluation process up and running.
Finally, there is no description of what
benefits would flow to any entity dubbed by the
BIS with this vaunted status. The BIS publicly
admits that "the details have yet to be worked
out".
Yet this hasn't stopped the BIS
regularly proclaiming to the press and the export
community that the proposed rule is a "win-win"
proposition that would advance both "US security
and economic interests", described as "pragmatic
hedging". Observers counter that the ubiquitous
availability of the newly restricted commodities
makes this claim empty at best. US economic
interests will be gravely impacted by this
unilateral action, which does not find favor with
allies in the Wassenaar commercial export-control
group.
The shock waves from this tsunami
of unilateralism will be felt on many shores, but
most impact will be on US firms in the Chinese
market that understand how competitive momentum,
once lost, can never be regained. With no
reasonable avenues for liability-limiting due
diligence provided, and the clear prospect of
commercial mischief by companies that fail to win
major contracts, the adverse impact on the full
range of sales, manufacturing,
technology-licensing ventures and trade financing
with China could be adverse.
To stem
industry unrest, the BIS held an unprecedented
public meeting in Washington last month to
"explain" the rule to a dubious public. The
meeting was crowded and contentious. The BIS
implied that it was "making it up as they went
along", and attendees left with the stunning
realization that the procedural underpinnings of
this proposed initiative are not yet fully
conceptualized. Industry dissatisfaction has
prompted BIS management to withdraw from industry
events to explain the rule. This initiative is not
yet ready for "prime time".
Chinese
reaction to the proposed rule has been muted but
adverse, as could be expected. Citing previous
agreements to enhance trade, MOFCOM spokesman
Chong Quan noted that the proposal "was
unfavorable for benefits of enterprises ... and
the healthy development of Sino-US trade and
economic relations". He also expressed his desire
that the US "could give up its Cold War
mentality".
Sadly, the administration of
President George W Bush is committed to imposing
this flawed piece of regulation on exporters to
further the ever-deepening hostility toward China
held in some quarters of the White House and
Congress. But the Chinese continue to remind the
US that the dangerous trade imbalance they hold
over the United States will continue to grow
unless and until the Washington permits China to
purchase high-value equipment, a sector where the
US still maintains some comparative advantage, but
an area on which the government is turning the
export screws.
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 at
dweadon@weadonlaw.com. Carol Kalinoski
chaired the BIS Operating Committee, the principal
US government export-control dispute-resolution
panel, for nearly nine years. She practices law at
Carol A Kalinoski & Associates in Washington,
DC, and can be contacted at
kalinoski2003@yahoo.com.
(Copyright 2006
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.
