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DE RUEHBJ #1499/01 1582301
ZNR UUUUU ZZH
R 072301Z JUN 06
FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 7975
RUCPDOC/USDOC WASHDC
INFO RUEHCN/AMCONSUL CHENGDU 6469
RUEHGZ/AMCONSUL GUANGZHOU 0723
RUEHHK/AMCONSUL HONG KONG 7578
RUEHGH/AMCONSUL SHANGHAI 4863
RUEHSH/AMCONSUL SHENYANG 6290

UNCLAS SECTION 01 OF 06 BEIJING 011499 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USDOC FOR 532/BIS/DMCCORMICK/MFOULON/DWJACKSON/BKRITZER 
USDOC FOR 532/BIS/MDIPAULACOYLE/MGINSBERG 
SECSTATE FOR EAP/CM 
SECSTATE FOR EB/ESP 
SECSTATE FOR ISN 
SECSTATE PLASS USTR FOR STRATFORD/WINTER/ALTBACH 
 
E.O. 12958: N/A 
TAGS: BEXP CH ECON ETRD ETTC PREL
SUBJECT: (SBU) U.S. EXPORT CONTROLS: U/S MCCORMICK'S 
DISCUSSION  WITH NDRC OFFICIALS, MAY 23, 2006 
 
¶1. (U) This cable is SENSITIVE BUT UNCLASSIFIED; please 
protect accordingly.  Not for internet release, dissemination 
or publication. 
 
------- 
SUMMARY 
------- 
 
¶2. (SBU) Commerce Under Secretary for Industry and Security 
David McCormick briefed National Development and Reform 
Commission (NDRC) Vice Chairman Bi Jingquan about 
contemplated changes to U.S. export controls intended to 
facilitate high tech trade while tightening restrictions on 
items for military end-uses.  The United States is committed 
to working with China to have a candid and cooperative 
relationship on export control matters.  The contemplated 
changes should reduce the administrative burden for 
legitimate civilian trade.  U/S McCormick urged NDRC to share 
a copy or details of its study on the effects of U.S. export 
controls, which Vice Chairman Bi and High Technology 
Industries Director-General Xu Qin said pointed to USD 20 
billion in opportunity costs for the United States. U/S 
McCormick repeatedly underscored that the High Technology and 
Strategic Trade Working Group recently established under the 
Joint Commission on Commerce and Trade (JCCT) presents an 
appropriate venue in which to continue export control 
discussions with appropriate Chinese officials and build 
cooperation and trade in the high technology sector.  He also 
reinforced the point that the trade numbers make clear, that 
export controls are not the cause of the trade deficit. 
 
¶3. (U) Vice Minister Bi complained that U.S. export controls 
on China, a Nuclear Suppliers Group member, are improper and 
discriminatory.  Bi said that modernization of China's 
military is inevitable but not on a collision course with U.S 
interests, and that the U.S military should not have concerns 
in this sector if Taiwan's Chen Shui-bian does not engage in 
independence activities.  Bi argued that U.S. licensing 
procedures themselves deter Chinese companies from buying 
from the United States, that the United States should reduce 
the scope of goods considered to have military uses, and that 
the United States should provide more policy loans to U.S. 
exporters to facilitate U.S. exports to China.  END SUMMARY. 
 
¶4. (U) Vice Chairman Bi Jingquan welcomed U/S McCormick to 
NDRC and explained that he was hosting the meeting in lieu of 
the scheduled Vice Chairman ZHANG Xiaoqiang, who had to be 
outside of Beijing that day. After introductions of the two 
delegations (names at paras 24-25), U/S McCormick provided an 
overview of the purpose of his visit to China, his day 
earlier meetings with Ministry of Commerce senior officials 
and other recent developments in U.S. export controls. 
--------------------------------------------- ------ 
Committed to Work Together on Export Control Issues 
--------------------------------------------- ------ 
 
¶5. (SBU) U/S McCormick began by recalling that U.S. export 
controls had been a subject of discussion in the April 2006 
meeting of the Joint Commission on Commerce and Trade, 
including in remarks made by Vice Premier Wu Yi. The United 
States is committed to working with China to have candid and 
cooperative relations on export control matters.  Export 
controls help facilitate high-tech trade. Ensuring a 
foundation of confidence built on export controls can 
increase U.S. high-tech exports to China, he stressed. 
Ministry of Commerce (MOFCOM) Vice Minister Wei and the Under 
Secretary's predecessor had already made real progress in 
 
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cooperating on U.S. export control matters. The progress and 
cooperative relationship were exemplified in a number of 
developments: 
 
-- U.S. high-tech exports to China increased 50 percent from 
2003 to 2005; 
 
-- the United States reduced restrictions on exports of items 
such as general microprocessors to civilian end-users; and 
 
-- China's meteorological center uses an IBM supercomputer to 
 
BEIJING 00011499  002 OF 006 
 
 
track worldwide weather developments (the export of that 
equipment was subject to U.S. export controls). 
 
He also reinforced the fact that export controls are not a 
significant case of the trade deficit. 
 
¶6. (SBU) The JCCT had outlined a new process for cooperating 
on export control matters, U/S McCormick continued. MOFCOM 
Vice Minister MA and U/S McCormick had exchanged letters 
creating a High-Tech and Strategic Trade Working Group under 
the JCCT. This new Working Group will focus on strengthening 
high-tech trade. The U/S informed Vice Chairman Bi that in 
his May 22 meeting with MOFCOM Vice Minister Wei, the two 
sides had agreed that the first meeting of this new JCCT 
Working Group will be convened in September of this year. 
 
--------------------------------------------- -- 
U.S. Export Control Policy Changes Contemplated 
--------------------------------------------- -- 
 
¶7. (SBU) The United States is now considering changes to its 
export control policy that would allow reductions in the 
administrative burdens placed on legitimate civilian trade, 
the U/S explained.  The United States will continue and 
expand restrictions on trade for military end-use items.  The 
U.S. is confident that it can support both these aims at the 
same time, while developing great relations with MOFCOM and 
with China.  MOFCOM has day-to-day responsibilities for 
handling export control matters of the United States within 
China, but given the importance of the issue, the Under 
Secretary had wanted to personally meet officials at the 
 
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Foreign Ministry and NDRC to brief them on these developments. 
 
--------------------------------------------- ----------- 
Bi: U.S. Export Controls Cause Big Losses for U.S. Firms 
--------------------------------------------- ----------- 
 
¶8. (SBU) Vice Chairman Bi affirmed the importance of U.S. 
export controls to China and to the NDRC. The NDRC had 
previously taken note of the U.S. relaxation of export 
restrictions on high-performance computers, and is pleased to 
learn that MOFCOM and the United States have established a 
JCCT Working Group to discuss U.S. export control policy. 
The NDRC is the Chinese Government agency responsible for 
high-tech development in China, Bi continued, and thus the 
NDRC deeply feels the impact of U.S. export controls.  He 
said that the NDRC's Department of high Technology 
Industries, led by Director-General Xu Qin (attending this 
meeting), had led a group to study the impact of U.S. export 
controls on bilateral trade relations and on China's 
high-tech sector.  That study had concluded that U.S. export 
controls result in lost opportunities for U.S. companies 
amounting to USD 20 billion per year. Trade in U.S.-made 
goods such as integrated circuits, high performance 
computers, numerically controlled machine tools, 
semiconductors, satellites, propulsion equipment and other 
items are affected by U.S export controls. Bi averred that 
China sees no direct relationship between those goods and 
military end uses or military products.  He urged further 
consideration of how to define which goods have military 
uses.  He rhetorically asked whether cotton imported from the 
United States for manufacturing of clothing in China, some of 
which might be used in the manufacture of military uniforms, 
should be subject to U.S. export controls. 
 
¶9. (SBU) Bi said that China is happy to see that the united 
States has noted the negative impact of its high-tech export 
controls policy, which Vice Premier Wu Yi had raised as long 
ago as the fifteenth (2004) meeting of the JCCT.  He praised 
establishment of the JCCT Working Group to discussing lifting 
U.S. export control restrictions and said that the NDRC would 
happily cooperate in discussing these issues with the U.S. 
side. 
 
------------------------------------------- 
Bi: An Equal Nuclear Suppliers Group Member 
------------------------------------------- 
 
 
BEIJING 00011499  003 OF 006 
 
 
¶10. (SBU) Bi stressed that China is now a member of the 
Nuclear Suppliers Group (NSG), fulfilling its obligations and 
responsibilities therein. However, China does not enjoy the 
license-free treatment that other NSG members do. China 
thinks this different treatment is improper, discriminatory, 
and difficult to understand o accept. 
 
-------------------------------------- 
U/S: Study Would Facilitate Discussion 
-------------------------------------- 
 
¶11. (SB) U/S/ McCormick rejoined that the impact of exort 
controls is an interesting topic of analysis. U.S. studies of 
this issue have suggested that the impact is far smaller and 
that export controls are not a significant cause of the trade 
deficit. The United States would welcome the opportunity to 
see NDRC's analysis - indeed, a translation of the study 
could become the basis of discussion with NDRC or in the new 
JCCT Working Group.  With respect to definitions of dual-use 
technology, some cases are difficult but usually they are 
quite clear-cut, such as technologies with applications for 
military munitions. 
 
--------------------------------------------- ------- 
Military Modernization - and Taiwan's Chen Shui-bian 
--------------------------------------------- ------- 
 
¶12. (SBU) The purpose of the new JCCT Working Group is not to 
eliminate trade restrictions but to both make them more 
effective and to increase legitimate civilian trade. 
President Bush has said that U.S. policy is to engage China, 
strengthen our relationship with China and cooperate with 
China. In candor, several areas of concern about China remain 
Modernization of China's military is one such area, and that 
is the basis for the U.S. decision not to export technologies 
that could be used for military purposes. The U.S and china 
agree in many areas, and this may be one area in which they 
disagree. Vice Chairman Bi noted that military modernization 
is not within the NDRC's area of responsibility, but 
modernization of China's military is an inevitable trend. 
However, China thinks that its military modernization is not 
in collision with U.S interests. The U/S noted that military 
modernization is not within USDOC's portfolio, either. 
 
¶13. (SBU) Vice Chairman Bi said that China understands the 
U.S. military's concern. If Chen Shui-bian (note: Taiwan's 
president) does not engage in independence activities, there 
will not be grounds for U.S. concerns in this regard. 
 
------------------------ 
Military End-Use Control 
------------------------ 
 
¶14. (SBU) Bi then said china has heard that the United States 
will make stricter export controls under the Wassenaar 
Arrangement. If true, China is concerned that such a move 
would bring a larger negative impact on bilateral trade. 
 
¶15. (SBU) U/S McCormick replied that the military end-use 
control that resulted from the 2003 Wassenaar Statement of 
Understanding had been discussed in some detail in his May 22 
meeting with MOFCOM Vice Minister Wei (septel). Two 
components are under consideration. The first would increase 
high-tech trade and reduce the burden of licensing procedures 
on U.S. and certain trusted Chinese companies. Chinese 
companies and importers with a long track record of using 
technologies for civilian purposes would be identified, and 
those so identified would face fewer licensing requirements 
or even see such requirements eliminated. This approach is 
consistent with the shared objective of increasing U.S. 
high-tech trade with China. 
 
¶16. (SBU) The second component under consideration would 
place further restriction on certain technologies. These 
technologies currently do not require license, but if used 
for military purposes, have significant military utility. 
These technologies would only be restricted and would not 
need a license when going to military end-uses. The U/S 
 
BEIJING 00011499  004 OF 006 
 
 
provided a hypothetical example of a technology that might 
have health care applications in a military hospital and not 
be restricted, but would be restricted if that same 
technology were instead destined for use in fighter aircraft 
production. Such adjustments would be consistent with the 
guidelines for the new JCCT Working Group and for promoting 
high-tech trade. The U/S noted that the policy adjustments 
are not yet finalized but are currently under consideration. 
 
--------------------------------------- 
Bi: Four Points on U.S. Export Controls 
--------------------------------------- 
 
¶17. (SBU) Vice Chairman Vi said he hopes that U.S. export 
control policy adjustments will be conducive to bilateral 
trade, especially trade in the high-tech sector. Regarding 
U/S McCormick's recommendation that NDRC's study on the 
impact of U.S. export controls be shared with the USG, Bi 
said further exchanges on that topic would be possible. Bi 
then offered four points (referring to a document he had 
brought to the meeting) on U.S. export controls. 
 
¶18. (SBU) First, due to U.S. export controls, Chinese 
entities no longer apply for many civilian use goods. In 2004 
and 2005, for example, China had purchased two satellites 
from France instead of the United States, impacting U.S. 
trade by some USD 150 million to USD 300 million. (NOTE: 
Congress has designated satellites as munitions items under 
State Department licensing jurisdiction. Because of Tiananmen 
Square sanctions, a State Department license and Presidential 
waiver is required for U.S. exports of satellites to China.) 
 
¶19. (SBU) Second, the process for Chinese entities to apply 
for required licenses is very difficult, so many have stopped 
applying for licenses. Bi said this is reflected by the fact 
that Chinese imports of integrated circuits in 2005 amounted 
to USD 81.1 billion, but only USD 4 billion - about 6 percent 
of China's import of this type of product, came from the 
United States. Similarly, less than 10 percent (USD 1.6 
billion of a total USD 16.5 billion) of China's imports of 
numerically controlled machine tools came from the United 
States.  In both these areas, Bi said, the United States has 
world-leading technology and is highly competitive.  Total 
Chinese imports of these goods amount to about USD 100 
billion. If U.S. firms could supply one-third of China's 
demand, U.S. exports in these two categories alone would 
climb to USD 30 billion.Bi clarified that he was not saying 
that the United States does not allow these goods to be 
exported to China, rather that the approval procedures are 
too complicated and make relevant agencies' responsiveness so 
untimely as to make Chinese importers not even try to 
purchase these goods from U.S. firms. Chinese firms are 
reluctant to even approach USG agencies about export control 
matters, and see the difficulties encountered in getting a 
necessary license in a timely fashion as a trade barrier 
established by the USG. Thus the NDRC is pleased to hear that 
the new JCCT working group will work to make U.S. export 
controls more effectiveness, and those that are retained 
should be made more transparent. More timely issuance of U.S. 
export licenses would create a more predictable market 
environment, which surely could lead to an increase in 
Chinese imports of U.S.-made integrated circuits and 
numerically controlled machine tools. 
 
¶20. (SBU) Third, regarding dual-use or military-use items, Bi 
stated that the United States does not permit export to China 
of dual-use or police-use items or low-end military goods, 
such as large helicopters, high performance computers, fine 
processors and navigation equipment. So Chinese firms do not 
apply for USG licenses for such items. 
 
¶21. (SBU) Fourth, the United States places many limitations 
on policy loans that could support U.S. export sales. Bi 
urged the U/S to place attention on this matter, as policy 
loans could support increased exports of U.S.-made power 
generation equipment, medical equipment and other high-tech 
goods. Lifting restrictions on U.S. policy loans would be 
conducive to bilateral trade as a whole. 
 
BEIJING 00011499  005 OF 006 
 
 
 
--------------------------------------------- ------ 
U/S: Look to Working Group for Detailed Discussions 
--------------------------------------------- ------ 
 
¶22. (SBU) U/S McCormick thanked Vice Chairman Bi for his 
views and points. He reiterated interest in receiving the 
valuable insights that the NDRC analysis of the impact of 
U.S. export controls could provide. The JCCT Working Group on 
High-Tech and Strategic Trade will be an effective forum for 
addressing questions about the effectiveness, procedures, 
transparency and predictability of U.S. export licensing 
procedures. USDOC's Bureau of Industry and Security does not 
have responsibility for loan issues, but the U/S anticipated 
having opportunity to pass on the Vice Chairman's comments to 
the head of the U.S. Export-Import Bank at a meeting during 
the week of May 29. 
 
--------------------------------------------- --------- 
Export Controls One of Reasons for the Trade Imbalance 
--------------------------------------------- --------- 
 
¶23. (SBU) Vice Chairman Bi replied that if the U.S. made 
efforts to lift export controls on high-tech items, bilateral 
trade could see a great development conducive to relieving 
the trade imbalance between our two countries. U/S/ McCormick 
said that many factors create the trade imbalance, and 
candidly, export controls are not one of them. But there is 
much the two sides can do together in this area and the 
United States is committed to do its part. 
 
¶24. (SBU) Vice Chairman Bi ascribed the trade imbalance to 
globalization and the global division of labor. Many U.S. 
high-tech companies, such as Intel, Microsoft, 
Hewlett-Packard and Motorola, are setting up factories in 
china which export to the United States. Furthermore, many 
Asian companies are shifting their exports to the United 
States from factories in their home countries to their 
factories in China. These developments definitely increase 
the U.S. trade deficit with China, but are an inevitable 
trend, Bi said. But many of the benefits of that trend accrue 
to U.S. companies and U.S. consumers, Bi asserted. He said he 
had visited a company in the Shanghai area which manufactures 
thirteen million laptops per year. For every USD 100 in 
exports by that company, the company has imported USD 45 in 
parts, usually from Japan, South Korea, Hong Kong, Taiwan or 
the United States. Five dollars have been incurred in labor 
costs for each USD 100 in exports, and the company has five 
dollars in profit and depreciation. Only USD 45 of each USD 
100 in exports in Chinese parts content. However, U.S. 
companies like Intel, Compaq, and Dell sell the final product 
in the Untied States under their own trademarked names at a 
50 percent mark-up, Bi claimed. 
 
¶25. (SBU) China does not purposely seek a large trade 
imbalance with the united States, and China expects that its 
imports will continue to grow. China expects the United 
States to adjust its export control policies so as to 
increase U.S. exports to China. U/S McCormick's visit to 
China is highly significant, and with joint efforts, China 
hopes cooperation and trade in the high-tech sector can be 
promoted, Vice Chairman Bi concluded. 
 
¶26. (SBU) U/S McCormick agreed that there is opportunity to 
grow high-tech relations in a way that is still consistent 
with U.S. policy not to support military modernization, and 
much on both sides can be done to facilitate that. The JCCT 
High-Tech and Strategic Trade Working Group is the forum in 
which to continue this discussion. The U/S said he looked 
forward to working with MOFCOM Vice Minister Wei and his team 
and with NDRC officials on these matters. 
 
¶27. (U) National Development and Reform Commission 
participants in this May 22 meeting were: 
 
Vice Chairman BI Jingquan 
Director-General XU Qin, Department of High Technology 
Industries 
 
BEIJING 00011499  006 OF 006 
 
 
Deputy Director-General LI Bin, Department of Foreign Affairs 
Division Director LI Fang, Department of Foreign Affairs 
Interpreter 
 
¶28. (U) USG participants were: 
 
Under Secretary of Commerce for Industry and Security David 
McCormick 
Special Assistant to the Under Secretary Michael DiPaula-Coyle 
Minister-Counselor for Commercial Affairs Craig Allen 
Jeannette Chu, Export Control Attache, Commercial Section 
Economic Section Deputy Chief Christopher Beede 
Interpreter 
 
¶29. (U) The Under Secretary's delegation has cleared this 
report. 
RANDT 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
RANDT