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FM AMEMBASSY BEIJING
TO RUEHC/SECSTATE WASHDC 9427
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INFO RUEHCN/AMCONSUL CHENGDU 6567
RUEHGZ/AMCONSUL GUANGZHOU 0842
RUEHHK/AMCONSUL HONG KONG 7665
RUEHGH/AMCONSUL SHANGHAI 4981
RUEHSH/AMCONSUL SHENYANG 6378

UNCLAS SECTION 01 OF 07 BEIJING 012788 
 
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- 
 
BEIJING 00012788  002 OF 007 
 
 
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 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 
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 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 
 
BEIJING 00012788  003 OF 007 
 
 
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 
------------------------------------------- 
 
¶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 or accept. 
 
-------------------------------------- 
U/S: Study Would Facilitate Discussion 
-------------------------------------- 
 
¶11. (SBU) U/S/ McCormick rejoined that the impact of export 
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 
 
BEIJING 00012788  004 OF 007 
 
 
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 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 
 
BEIJING 00012788  005 OF 007 
 
 
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. 
 
--------------------------------------------- ------ 
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 
 
BEIJING 00012788  006 OF 007 
 
 
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 
 
BEIJING 00012788  007 OF 007 
 
 
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 
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