Tuesday, May 15, 2007

U.S. Export Control Policy Hurts American Interests in China

American insistence on enforcing the existing export control policy can only damage the interests of the American high tech industry and not improve national security.

This is because the U.S. is no longer the sole source for much of the high technology. If other nations will not follow the U.S. on restricting exports to China, then the policy can not be effective. Unilateral control by the U.S. only shackles American high tech firms from being able to compete in China.

In 2000, China’s market for semiconductors was a mere one-fifth the size of the U.S. market. In 5 years, China has overtaken the U.S. to become the world’s largest market representing more than 21% of the market. In another five years by 2010, China will be buying $124 billion worth of integrated circuits equivalent to 40% of the world consumption.

Where is the growth coming from? The obvious answer is that China has become the preferred electronics factory of the world. Semiconductor chips are put into the laptops, camera phones, MP3 players, digital cameras, flat panel TVs, DVD players and many other consumer electronics made in China. In 2005, China exported over $137 billion worth of electronic goods, 88% of this coming from foreign invested factories.

China needs to greatly increase their semiconductor fabrication capacity in order to meet this demand, but the U.S. export control process keeps American companies from being competitive in this fastest growing market for semiconductor equipment. Everybody in China knows that they can buy equivalent equipment from European or Japanese supplier much more readily than from the American supplier.

Sam Wang, the Silicon Valley based senior executive for SMIC of Shanghai, said at a luncheon forum that for their first fab in China, they knew that if they ordered a piece of equipment from Europe, they can get it in 2 weeks; if from Japan, in two months. But if the source was from the U.S., they would not know if the order will be honored even after six months.

Washington officials have pointed out that the value of orders subject to export approval is barely 1% of the total trade deficit between China and the U.S., inferring that export control has little impact on bilateral trade. According to China’s own trade statistics, they imported $247 billion worth of high tech products in 2006. The U.S. share of China’s import was barely 8% of that total behind EU and S. Korea and well behind Japan, Taiwan and the ASEAN countries. Our success in China should not be measured by the value of orders submitted for export approval but by opportunities lost to suppliers from other countries.

Recently, the Bureau of Industry and Security of Department of Commerce has proposed to broaden control by including some 47 categories of “dual use” goods and technology. Industry responded that most of the products are available from other countries without restraint. In some cases, China has been making technologically more advanced versions than those being considered for restricted export.

The U.S. government defines dual use as any product and technology that could find military as well as civilian application. The problem with such a definition is that virtually any technology based products could conceivably have military use. A far more important but overlooked question should have been: “Is dual use relevant?” All the other countries that compete with American companies in China do not think so.

Indeed, the Government Accountability Office of Congress and experts that testified before Congress have stated on numerous occasions that dual use items do not affect China’s military prowess and are irrelevant to perceived national security of the U.S.

While the existing export control process cannot impact national security, it can hurt American firms’ ability to compete for business. The $50 billion a year semiconductor equipment industry is case in point. This is one industry created and owned by the Americans. Today, American companies’ market share in China is less than 45% and falling.

Clearly, U.S. government’s export control policy is in need of serious reform. As it currently exists, the policy and practice work against our own national interest rather than enhance national security.
A version of this commentary appeared in July 19, 2007 issue of Electronic Design.

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