SPEAKING
FREELY US blunders on with
China military-export rule 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 - On July
6, the US Bureau of Industry and Security (BIS)
published for 120-day public comment the
problematic "China Military Catch-all Rule". As we
described in our previous article (Turning the screws on US-China
exporters, Asia Times Online, August
3), this proposed regulation, if
published as a final rule,
will dramatically and adversely impact trade and
finance between China and both the United States
and its allied trading partners.
Not so
curiously, BIS has been scooting around the United
States and the Internet trying to quell the fears
of industry that the proposed rule is a "liability
bomb" and signals a major impediment in US-China
Trade. At public and closed meetings, and in
webinars with industry groups, senior BIS
officials have tried to answer both general and
technical questions from industry trade
administrators and their lawyers about significant
aspects of the proposal that either have no
definition or run counter to procedures elsewhere
in the US export regulations.
Sadly, with
each session, it becomes more evident that this
proposed rule has not been thought through, and in
response to specific questions, the BIS officials
either provide "new" interpretations of the
language of the regulations or ask industry for
"their" interpretations for evaluation in the
comment period.
To experienced observers,
this is clearly making up a regulation on the fly,
a rather dismal prospect. But more important: as
the form and substance of the regulation are
changing by the day, the industry is faced with an
inscrutable moving target in the preparation of
meaningful comments. What exactly are they
commenting on?
This is not exactly a
comforting prospect when vast liability and
disruption of important trade relations with
Chinese customers and Western trading partners are
at stake.
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 musical equipment) for
potential "military use" in China. Heretofore,
these commodities had freely flowed to China
without a license.
The US is concerned
that China is modernizing its military by using
commercially available commodities and
technologies - ironically comparable to the US
congressional mandate of two decades ago that
commercial-off-the-shelf (COTS) be the standard
for US defense procurement.
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 industry and government alike (see New US export controls threaten
China trade, Asia Times Online, January
11). Notwithstanding this cautionary warning, BIS
has charged ahead, despite the fact that a sister
initiative, which sought to restrict access to
restricted 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 US-China export licensing
policy to pre-1981 Cold War levels. The rule
restricts commodities widely available from Asia,
Europe, Israel and even China itself, coupled with
a remarkable liability chain that 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, consultants and the like.
Thus the proposed rule seriously raises
the stakes for US firms addressing the Chinese
market, as well as European and Asian firms who
trade with China and use US-origin systems, parts
and components in their products or services.
Allied nations are dusting off their blocking
statutes to stem the extraterritorial impact of
this rule on their domestic companies.
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
country's munitions licensing agency.
The
purported benefits are illusory. A new
"authorization" called "validated end user" (VEU)
is proposed presumably to speed exports in certain
authorized categories and end-uses without an
individual validated license to properly qualified
China entities. In reality, it is a renamed
version of a discredited mechanism promoted by the
Defense Department in the mid-1980s and flatly
rejected.
Featuring significant paperwork
obligations for all parties, intrusive and
extensive information requirements, high
compliance costs, audit exposure, on-site
inspections, and open-ended never-ending 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 staffing levels in the US and
in China's Ministry of Commerce (MOFCOM) and
conflicted US interagency review to get the VEU
evaluation process up and smoothly running.
Finally, there is no description of what benefits
would flow to any entity dubbed by BIS with this
vaunted status. BIS publicly admits that "the
details have yet to be worked out".
Yet
this hasn't stopped BIS from 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
grievously impacted by this unilateral action,
which does not find favor with allies in the
Wassenaar commercial export control group. A quick
sartorial check on the emperor's wardrobe is
urgently called for.
The shock waves from
this tsunami of unilateralism will be felt on many
shores, but the most impact will be upon US firms
in the Chinese market, which well know of its
unforgiving competitive momentum that, 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 (a
"brown envelope" to US officials alleging military
ties by the Chinese customer could derail a deal
at any stage), the adverse impact on the full
range of sales, manufacturing, technology
licensing ventures, project and trade financing
with the People's Republic of China could be
adverse.
Chinese reaction to the proposed
rule has been muted but adverse, as can be
expected. Citing previous agreements to enhance
trade, MOFCOM spokesman Chong Quan noted on July
12 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 "should give up
its Cold War mentality".
Sadly, the US
administration is committed to imposing this
flawed piece of regulation upon US exporters and
trade with China to further its ever-deepening
hostility toward China in some quarters of the
White House and Congress (the latest gauntlet was
last week's emergency regulation banning any
Department of Defense procurement of goods or
services from Chinese firms linked to China's
military).
But the Chinese continue to
remind the US that the dangerous trade imbalance
they hold over the United States (which set yet
another record this month) will grow unless and
until the US permits China to purchase high-value
equipment, a sector where the US still maintains
some competitive advantage, but an area where the
US is turning the export screws. US Treasury
Secretary Henry Paulson will hear this message
with clarity during his current visit in China.
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
A 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 A 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.
