For Immediate Release: February 20, 2008
Thank you for the opportunity to speak with you today about the genesis, evolution, and particulars of our dual-use export control policy with respect to China.
Because of its importance and complexity, this is an area of policy that can’t be discussed enough, or with enough care, precision and nuance.
In some respects, the topography of the export control stakeholder map makes even a general discussion of export controls daunting. For all of their patriotism and concern for our nation’s security, U.S. exporters aren’t exactly fond of export controls, much less clamoring for more. And while most national security professionals will earnestly tell you that healthy export markets contribute to long-term U.S. national security, rarely will this translate into actual support for even modest liberalization. If you add to this mix the passionate and widely divergent views that exist in our country about China, you can understand why any China export control policy is bound to elicit forceful opinions.
My basic message to you today is this:
First, the Department of Commerce’s Bureau of Industry and Security, the bureau I have the great privilege to lead, is committed to vigorously and intelligently controlling the export of sensitive U.S. dual-use technologies to China-- and elsewhere around the world. For this reason, this Administration strongly supports the reauthorization of the Export Administration Act—our nation’s bedrock dual-use export control law. And, I would like to take this opportunity to urge Congress to follow Chairman Dodd’s lead and pass this vital legislation as soon as possible;
Second, our China export control policy is not ad hoc or made in a vacuum, but is driven by, supports, and is best understood by reference to our nation’s larger foreign policy toward China; and
Finally, our export controls do not, in a strict sense, “balance” trade and security. I can’t put too fine a point on this, or emphasize this enough. As a national security bureau within an economic agency, our most solemn obligation is to protect the security of the nation. And there is nothing of comparable (or near comparable) worth against which we “trade-off” U.S. security. Instead, our export control policy is designed to enhance U.S. national security by addressing the multiple strategic risks we must contend with, including those that arise as a function of our complex relationship with China, and, more broadly, those that are a result of tectonic changes in the international system.
U.S. Foreign Policy and China
For seven consecutive Presidential administrations, our nation’s foreign policy toward China has endeavored to reflect the remarkable complexity of our bilateral relationship. From our first tentative contact in 1971 to China’s recent emergence as a global economic power, it has been longstanding U.S. policy to encourage China’s political and economic integration with the world as a responsible stakeholder, while hedging against alternative Chinese futures.
This policy toward China was reaffirmed by President Bush in the 2006 National Security Strategy of the United States. In it, the President described the essence of our approach when he wrote that: “(O)ur strategy seeks to encourage China to make the right strategic choices for its people, while we hedge against other possibilities.”
U.S. Export Control Policy toward China
In July 2006, following extensive consultation with our national security colleagues in the executive branch, the Bureau of Industry and Security (BIS) published a proposed update to our China export control policy to assess whether our system of controls was still properly aligned with our nation’s broader foreign policy toward China. In this task, BIS, together with the Departments of Defense, State, Energy, the National Security Council and the intelligence community, essentially asked two basic questions:
This policy review generated enormous interest, and ran over a period of approximately 11 months. During that time, the Department of Commerce worked closely with its interagency partners to ensure that the review was thorough, fact-based and analytically rigorous. As part of the process, we took the time to consult with our friends and allies around the world, and had the good fortune to receive more than 1,000 pages of formal public comment. Most of all, we listened. And, in every case, we were grateful for the constructive, if often sharply conflicting, feedback we received.
As a result of this lengthy review, the Department of Commerce, with the support of our colleagues at the Departments of Defense, State, Energy, and at the National Security Council, updated our China export control policy in June 2007.
First, we imposed new, targeted export controls on certain items to China identified by the Department of Defense to be particularly important to control. These items included:
We imposed these new controls because we felt that augmenting our existing controls with these new controls would help provide a better hedge against China’s military build-up.
We also implemented the “Validated End User,” or VEU, program. The VEU program permits pre-screened civilian companies in China who pass a rigorous national security review and agree to strict follow-on compliance obligations to receive under a VEU-specific authorization the same U.S. items they could receive under individual Department of Commerce licenses.
These two changes—additional, targeted controls and VEU—were implemented to sharpen our overall China export control policy. VEU, in particular, accomplishes this in three ways. First, by making routine transactions to screened customers faster and less bureaucratic, VEU responsibly effectuates long-standing U.S. policy to constructively engage China.
Second, by providingfirms in China who responsibly and carefully handle controlled U.S. civilian technology with more efficient access to those products, it creates a powerful market-based incentive for compliance with our export control laws. With VEU, firms who are competitors of VEU companies in China may be interested in having the same advantages, and might be encouraged to improve their own compliance with U.S. export control laws.
Finally, by making informed, risk-based distinctions, VEU enables the U.S. government to devote less time to routine transactions to customers we know a great deal about, and more time and attention to customers and transactions in China we know less about. In this way, VEU both facilitates legitimate civilian trade in China and enhances U.S. national security. This latter, national security benefit is a core rationale of the VEU program.
The VEU Program: Certification, Compliance, and Monitoring
Of course, VEU is still in its infancy. Since June 2007 when the program was announced, there have been only five companies that have been granted VEU status. And each of these companies was unanimously approved for inclusion into the program by the government agencies with dual-use export control responsibilities, including the Departments of Defense, State, Energy and Commerce.
And, as you will find out in a moment, this process is no rubberstamp.
Every candidate for VEU status must pass and continue to adhere to the strict requirements of the VEU program. This program has three components: (i) a multi-agency national security certification process; (ii) mandatory follow-on compliance obligations; and (iii) an ongoing U.S. government monitoring and review process.
First, for every VEU applicant, a comprehensive compliance assessment is conducted. During this stage in the certification process, the Department of Commerce thoroughly reviews the applicant’s business, corporate information, and export control licensing history. Among other things, our team looks at past transactions to ensure that the VEU candidate has a demonstrable history of using controlled U.S. technology responsibly, especially by not diverting U.S. controlled technology to other parties, including its own corporate affiliates. Our staff also looks at proprietary information provided to us by the applicant, publicly available information, other 3rd party independent sources, and classified intelligence reports to cross-check critical data, confirm ownership interests and corporate structure, and to otherwise make a thorough assessment about an applicant’s fitness for the VEU program.
Next, the Department of Commerce conducts a separate law enforcement review, much like we do when individual licenses are granted. At this stage in the certification process, our special agents verify, using standardized criteria, the applicant’s law enforcement history. For reasons that are beyond the scope of this presentation, this is an analytically distinct assessment from the compliance review I just described, and provides an additional sift to assess a particular candidate’s fitness for the VEU program.
Third, our specialist engineers also conduct a technical analysis of the item or items that a VEU applicant has requested for inclusion in the general authorization. This review supplements the compliance and law enforcement reviews by confirming, as a technical matter, the variety, plausibility and associated risks of various possible end-uses in light of all the information known about the applicant. Because VEU status is NOT a blank-check to receive any, much less all, controlled items, but only those items for which a company has requested and received an affirmative authorization, this technical analysis provides additional comfort that our technology will be used as specified, and not in a manner contrary to our nation’s security.
All of this happens before the VEU application ever leaves the Department of Commerce. If the candidate has made it this far, the application package is then submitted to the interagency for separate review and consideration by each of the Departments of Defense, State, Energy, and the intelligence community.
But while passing this multiagency national security certification process is necessary, it is not sufficient for achieving VEU status.
A VEU candidate must also affirmatively agree to mandatory follow-on compliance requirements, including mandatory disclosure obligations and on-site visits by U.S. government personnel. On this particular point, the Department of Commerce has been very clear: as we assess the VEU program over time in China, the ability to conduct meaningful on-site visits will be a critical factor to our long-term support of the program.
Finally, out of an abundance of caution, the VEU program builds-in automatic, periodic U.S. government reviews to ensure that our initial VEU certification is still appropriate. This is not a “fire and forget” process, but a dynamic and intelligent one that builds in automatic reviews to test our initial judgments over time. Of course, were we to become aware of any new information about a VEU candidate or company within or outside the formal VEU monitoring program that raises concerns, we would revisit our determination as circumstances warrant.
Keep in mind that the entire VEU program—from national security certification, to mandatory follow-on compliance, to ongoing government monitoring--serves a single purpose: to support our broader foreign policy toward China by facilitating legitimate, civilian trade consistent with our national security interests. Nothing more, and nothing less.
At this point, some of you may be wondering why go through all this trouble? If part of our stated policy is to hedge against risk, why have technology trade with China at all, much less facilitate it? Wouldn’t it be more prudent to impose more export controls and discourage civilian technology trade?
The short answer is that this clear-eyed approach better reflects our broader foreign policy toward China, a foreign policy which has, on balance, served our country well through the years.
The more complete answer is that dramatic changes in the global economic landscape, including the rise of world-class economic competitors, the diffusion of technology and talent, and globalization generally, have (i) challenged the core assumption of our export controls—that we have something that others do not, (ii) complicated the political economy of our national security, and (iii) further elevated the salience of U.S. technology and economic leadership.
One of the vexing ironies of our time is that changes in the international security landscape have made it more urgent to control the diffusion of sensitive technologies generally, while changes in the international economic landscape have made it more difficult to do precisely that.
In this strategic environment, one which is altering the structure of our industrial and innovation base and reshaping the technological environment in which our military must compete, we can no longer rely exclusively on export controls—in effect, a denial strategy-- to maintain our strategic technology leadership. Instead, we need to complement smart and effective export controls with an affirmative strategy to “outdistance” our competitors, to remain the most innovative and competitive economy in the world.
And we would significantly hamper our ability to do this if we did not have healthy export markets worldwide, including in China. The significance of China’s emergence onto the global economic scene is hard to overstate. China is a large—and growing—market, whose appetites are helping to reshape global industrial geographies and to reorder competitive positions within given industries. In many industries, competitive success in China augurs well for industry leadership in other markets; the opposite is often also true.
Put another way, our China policy makes sense because it helps us contend with the two different types of strategic risks I alluded to earlier.
First, by imposing new, targeted export controls and the requirements for VEU, our updated China export control policy reduces the “transaction risk” associated with any given technology transaction with China.
And, by responsibly facilitating secure, civilian trade with a large and important foreign market, this policy enhances overall U.S. competitiveness, helps strengthen our industrial and innovation base, and reduces “systemic risk,” or the broader risk of undermining the political economy of our national security, the foundation of our long-term technological and military pre-eminence.
If we are to be faithful to our most solemn obligation—to protect the security of the nation-- we must address both risks, and not just the obvious ones. And we at the Bureau of Industry and Security are committed to working constructively with our stakeholders in government, in the academy, and in the private sector to do exactly that.
Thank you, again, for your gracious hospitality and for giving me the opportunity to speak with you today.
I would be delighted to take a few questions.