From: / Will Leahy, Manager, China Policy
To: / Asia Task Force, China AmChams
I) Export Control Update
Please find below a memo from Bill Reinsch of NFTC and Ed Rice of CEE providing a comprehensive update on the latest progress of the proposed China export control regulation.
MEMORANDUM
MAY 24, 2007
TO:
FROM: BILL REINSCH, NFTC
ED RICE, CEE
SUBJ: UPDATE ON CHINA EXPORT CONTROL REGULATION
The Administration’s China export control regulation has entered the end-game in the interagency process. The interagency process is essentially completed, having produced a number of changes in the regulation. Work is now underway to finish a draft of a final rule for submission to OMB for its review as a “significant regulatory action” under E.O. 12866. A final rule will be promulgated no earlier than mid-June, possibly later.
U.S. officials planned to brief some members of the Chinese delegation who are in Washington this week for the Strategic Economic Dialogue. The U.S. expects senior Chinese officials to continue public criticisms of U.S. export controls, but there has been a change in tone at the working level, with Chinese export control specialists focusing increasingly on implementation details.
CHANGES TO PROPOSED RULE
While the structure of regulation remains the same, several changes have been made that narrow the scope and reduce the compliance burden for U.S. exporters. Following is a quick rundown.
1) The list of re-controlled ECCNs has been narrowed significantly, to take into account industry-supplied information on foreign availability, indigenous Chinese production and volume of past U.S. exports to China. In addition, there was closer scrutiny of military utility. In particular, the list has been narrowed in the telecommunications, electronics, chemicals, composites, aircraft parts, encryption and machine tools sectors.
The ECCNs to be re-controlled fall mainly affect: aircraft and engines, underwater navigation, lasers, depleted uranium, carbon fiber composites and specialized telecommunications equipment, primarily relating to space communications.
2) The definition of military end-use has been revised by dropping the expansive list in the proposed rule and substituting an existing definition in the EAR at Sec. 744.17(d), promulgated several years ago for semiconductors. This will limit military end use to “use, development, production, or deployment” of USML, IML or A018 items. The term “deployment” will apply only to aircraft ECCNs.
3) The proposed scope of what constitutes “support of an export” has essentially been dropped. This would eliminate application of the regulation to financing, transportation and freight forwarding.
4) The requirement for a Chinese end-user certificate has been reduced, largely by increasing the threshold to $50,000, from the originally proposed $5,000 level. Nevertheless, the lower threshold will continue to apply to high performance computers (4A03), as required by statute, and to certain high-end thermal imaging cameras (6A03). Additionally, certificates will be required for certain chemicals. The intent of this change is to have no net overall increase in the number of certificates required from MOFCOM.
5) The criteria for requiring a national security review of a proposed export has been narrowed to apply only when an export would make a “direct and significant contribution” to Chinese military capability, as opposed to the proposed “material contribution” in the proposed rule.
Further, “military capability” has been specified to refer to terms on the U.N. arms register.
6) The validated end user section has been modified to establish a more specific process for application reviews, including a new U.S. interagency committee that already has begun operating under a 30-day time frame for decisions, with escalation, if necessary, to the ACEP. In addition, the criteria for approval have been narrowed to largely eliminate the initially-proposed open-ended compliance with U.S. foreign policy and export controls.
REMAINING ISSUES
Clearly, good progress has been made in addressing many of the concerns that U.S. industry raised about the proposed rule. However, some issues remain, including:
1) Most significantly, the final rule continues to apply to re-exports, greatly complicating the compliance burden for those U.S. companies whose products and services are covered.
2) The “knowledge standard” remains the same as proposed.
3) U.S. exporters still will be responsible for identifying possible military end-uses and for identifying relationships between Chinese entities and the Chinese military and security agencies, as an indication of potential military end-use.
4) The validated end-user approval process still carries a risk of denial of some Chinese entities, with consequent fallout for U.S.-Chinese business relationships. Chinese entities that are part of the PRC military-industrial complex probably will not be eligible for VEU status and will receive added scrutiny for any specific license application.
5) End-user certificates still will be required in some instances, without any assurance yet that the Chinese Commerce Ministry will be able, or willing, to certify to civilian-only end-use.
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