Mr. Chairman and Distinguished Commissioners:

I am pleased to testify today before the U.S.-China Commission on the issue of export controls. In my brief comments, I hope to give the Commission an understanding of U.S. dual-use export control policy toward China, the licensing process, the volume and make-up of controlled trade with China, and finally, ways to improve the effectiveness of the export control system generally.

Before turning to the specific issue of China, however, I would like to briefly discuss the Bureau’s approach to dual-use export controls generally. The Bureau of Export Administration (BXA) administers and enforces controls on the export of sensitive dual-use items and technologies for national security and foreign policy reasons. BXA’s mission is to implement an export control system that prevents the diversion of sensitive technologies that could jeopardize national security, while at the same time protecting U.S. economic security by allowing U.S. companies to compete for legitimate commercial sales on an equal footing with their foreign competitors.

As you know, free and open trade is a fundamental component of the Bush Administration’s economic and foreign policy. The President strongly supports trade promotion authority and, as it relates to this Commission’s work, normalizing trade relations with China, which includes support for China’s entry into the World Trade Organization.

While some may view export controls as an impediment to trade, we believe that the work of BXA supports the Administration’s free trade agenda. Effective export controls reduce the likelihood of terrorist acts and the proliferation of weapons of mass destruction that disrupt the conditions necessary for a safe and secure global economy–conditions necessary for free trade.

Similarly, effective export controls are an integral component in maintaining the political support for a free trade agenda, and economic globalization generally. Obviously, the American public would not support a trading system that results in the United States arming terrorists or other potential adversaries. Export controls, then, are a necessary element in sustaining both the political support for free trade and the commercial environment in which free and open trade can exist.

China, itself, can be viewed as a microcosm of the challenges we face as export control officials. On one hand, China is the fastest growing market in the world for foreign trade and investment, particularly in the technology sector. China’s membership in the World Trade Organization should create even greater opportunities for U.S. exporters. If U.S. producers are not allowed to compete along side their foreign competitors in the China market, the implications could include the loss of American jobs and a stifling of technological innovation in certain sectors. On the other hand, China remains a proliferation risk, as others here today will discuss in greater detail. We must recognize both of these facts as we continue to develop and update U.S. export control policy.

Licensing Policy for Exports to China

With this background in mind, I’d like to spend a few minutes outlining the licensing policy for U.S. exports of controlled goods to China.

The United States maintains export controls on dual-use items to every country in the world. The level of control differs, however, based on a number of factors, including the country’s membership in nonproliferation regimes, the nonproliferation credentials of that country, the technical sophistication of the item to be exported, and the proposed end use and end user. One way we distinguish among countries is through the use of license exceptions. For example, few licenses are required to export to a NATO ally who is a member of a nonproliferation regime – say the U.K., France or Germany – while a virtual embargo is maintained on trade in controlled goods with countries such as Iraq, Iran or Libya.

China is afforded very few such license exceptions. This means that BXA requires a license for a greater number of items exported to China than for most other destinations. In fact, over the past few years, China has accounted for BXA’s highest volume of export license applications.

There are other specific licensing policies which apply to China that bear mentioning:

Nuclear Nonproliferation

The export of any item that would make a direct and significant contribution to nuclear weapons and their delivery systems in China is prohibited. The U.S. Government will review applications to export nuclear proliferation-controlled items to a non-nuclear end use or for a commercial end use on a case-by-case basis, with a high level of scrutiny.

Missile Technology

Applications to export items to China that are controlled for missile technology reasons are reviewed with a high level of scrutiny, on a case-by-case basis, to determine whether the export would make a material contribution to the proliferation of missiles. If a material contribution is found, the license will be denied. If no material contribution is found, and the application is approved through the interagency process, the President must, prior to the license being granted, certify to Congress that:

(1) the export is not detrimental to the U.S. space launch industry; and
(2) the equipment, including any indirect technical benefit that could be derived from the export, will not measurably improve China’s missile or space launch capabilities.

As a result of both the careful scrutiny we give to these items and the presidential certification requirement, applications for the export of missile technology-controlled items to China are approved infrequently. In fact, since 1999, only two such exports have been approved, although several applications are currently pending.

High Performance Computers

For high performance computers, countries are grouped into three general categories. China is a Tier 3 country, meaning exports of computers up to 85,000 MTOPs can be shipped without a license. Exports of computers performing above that level are reviewed on a case-by-case basis. On January 2, 2002, President Bush announced that the current Tier 3 licensing threshold of 85,000 MTOPS will be raised to 190,000 MTOPS. As the White House stated, these changes reflect the President’s ongoing effort to update the U.S. export control system so that it protects U.S. national security, while at the same time, allows America’s high tech companies to innovate and compete in today’s marketplace.

Chemical and Biological Controls

The export of items that would make a material contribution to the design, development, production, stockpiling, or use of chemical or biological weapons is prohibited. Applications for the export of other items will be reviewed on a case-by-case basis. In addition, China is one of only 34 countries to which we require a license to export chemical and biological-related equipment.

Crime Control

Pursuant to the Tiananmen Square sanctions, the export of crime control items to China is prohibited. This includes items such as fingerprint identification systems and shotguns.

National Security Controls

Other applications to export to China are reviewed on a case-by-case basis to determine whether the item would make a direct and significant contribution to China’s military capabilities.

EPCI and the Entity List

In addition to commodity-based licensing requirements, another way BXA ensures that strategic goods are not diverted to unauthorized end use in China and elsewhere is through implementation of the Enhanced Proliferation Control Initiative (EPCI). EPCI provides authority for the government to block any export in cases where there is an unacceptable risk of diversion to proliferation activities.

One way EPCI is implemented is through the publication of the Entity List. The Entity List identifies specific end users that pose a proliferation risk. The Entity List is developed through an interagency process and is based on specific information on a particular entity. Currently, there are 19 Chinese entities on the list. A license is required to export to these entities items on the Commerce Control List and, in some cases, low-level items that are not controlled for other purposes. The Entity List is one of the important ways the U.S. Government informs exporters about proliferation concerns under the EPCI provisions.

Licensing Process and Statistics

Although the Commerce Department is the primary licensing authority for dual-use items, virtually all licensing decisions are subject to the interagency process outlined in Executive Order 12981. For China, this means that the Departments of State and Defense review and make recommendation on essentially all licenses and, in addition, the Energy Department reviews all nuclear related license applications. Input from the intelligence community is also a necessary and critical component of this review. Finally, when it is warranted, the interagency review is supplemented by a pre-license check, conducted in-country, by an export enforcement attache assigned to the U.S. Embassy.

Because of the relatively high level of controls on exports to China and the strict level of scrutiny given to these transactions, China typically accounts for BXA’s highest volume of export license applications and longest licensing times. In 2001, the average processing time for a license application to China was 73 days, compared with an average processing time of 44 days for all licenses subject to interagency review.

In 2001, BXA processed approximately 11,000 export license applications. About 1,300 license applications (or 12 percent) were for exports to China. However, 46% of these applications, were for domestic transfers of technology, known as “deemed exports,” to Chinese foreign nationals working for U.S. companies. Of all license applications for China, 936 were approved (72 percent), 30 were denied, and 325 were returned to the exporter without further action. Applications are returned to exporters for a number of reasons, including instances where no license is required, when the exporter provides insufficient information to process the license, or when the item falls under State Department licensing jurisdiction. In any given year, the value of approved exports to China ranges from about $175 million to $500 million, which represents only a fraction (less than one percent) of total U.S. exports to China.

I want to make three brief points about these licensing statistics. First, while the majority of license applications to China are approved, every license issued contains a number of strict conditions to which companies must adhere when exporting under the authority of that license. For example, a typical license restricts the ability of the exporter or end user from using the item for any purpose other than its authorized use, from transferring the item to another end user, or reexporting the item to another country. One such condition, when warranted, is a post-shipment verification (PSV). A PSV not only allows BXA to verify the use and location of the exported item, but also provides us with information for future licensing decisions with respect to that particular entity or item.

Second, U.S. nonproliferation objectives can often be advanced by authorizing the U.S. sale of a particular item. There are many companies in Europe and Asia willing to sell to the highly competitive China market. In many sectors, U.S. industry no longer holds a significant technological edge over its foreign competitors. Therefore, the choice for export control officials is often whether to allow a U.S. company to export an item, which in turn allows the U.S. government to strictly condition or limit its end use and monitor compliance with such conditions, or to allow a foreign competitor to sell the same item and relinquish the ability to further control or monitor its use.

Finally, one should also not underestimate the deterrent effect of the export licensing system itself. Exporters generally do not apply to export an item that is subject to a licensing policy of denial. The statistics relating to license denials include very few cases – if any – related to crime control items, for instance, or items that could support China’s nuclear program. On the contrary, those license applications are never submitted – and the exports not made – because of the policy prohibiting such exports.

Looking Ahead

I hope this gives the Commission a better understanding of current U.S. export control policy toward China. As I said at the beginning of my testimony, China will continue to present a significant challenge for U.S. policy makers. In closing, I would like to highlight three ways to improve U.S. export controls on China, and more generally.

The first is for Congress to approve a new Export Administration Act. Relying on emergency authorities, as we do today, is not the most effective means of implementing export controls on China or anyone else.

Second, we must strengthen the existing multilateral export control regimes. As you know, many of our regime partners do not view China the same way we do. We should attempt to harmonize licensing policies to a greater extent in order to close some of the gaps in the international export control system.

Third, we must improve the interagency licensing process by enhancing cooperation and information exchange among the agencies, and with the intelligence community. The agencies represented here today are partners in the export licensing process and the unique perspective that each of us brings to the table is essential to ensuring that the decisions we make are in the best interests of the American people.

Thank you for the opportunity to testify today. I look forward to working with the Commission and with Congress to continue to strengthen our export control system.