Great Wall of America (China)

American companies are crying 'Foul.' As they rush to sell more hi-tech goods to China, some have hit a wall thrown up by a U.S. government worried about national security and suspicious of Chinese intentions. And critics say the strategy isn't even working

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IT WAS EARLY 2001 and Semiconductor Manufacturing International Corp. was scrambling to get its $1.5 billion chip-making plant in Shanghai up and running. Suddenly, the China-based corporation hit an unexpected obstacle: The newly arrived Bush administration froze an export licence that had been granted in the final days of the Clinton administration for two electron-beam systems that SMIC had ordered from Applied Materials in California.

In the next six months, while a committee made up of representatives of the departments of Defence, Commerce and State reviewed the licence, the Applied Materials deal became another American casualty of Washington's effort to control technology going to China.

The justification for vigilance is simple: national security. By controlling exports of items considered to have both civilian and military applications--powerful computers, hi-tech telecommunications gear, equipment used in semiconductor manufacturing, and sophisticated machine tools--the U.S. believes it can prevent other countries from upgrading their weapons capability.

What's more, the new administration believes it can do it better than the last, which was perceived by Republican hawks as lax on export controls. U.S. companies say that since Bush took office, and particularly since the terrorist attacks on the U.S. nearly one year ago made national security a driving force in decision-making in Washington, they have faced longer delays, more scrutiny, and more rigorous conditions placed on licences that are approved.

U.S. businesses, struggling to boost global sales in the midst of an economic downturn, complain privately that for every unexpected day spent waiting for an export licence, money is lost. Furthermore, say corporate representatives and former U.S. officials, restrictions don't keep technology out of Chinese hands: They just allow rivals to snare sales from American firms.

"It's difficult to quantify how much our companies are losing to foreign competition," says Jennifer Greeson of the Computer Coalition for Responsible Exports, which lobbies on behalf of the computer hardware industry for such heavyweights as IBM, Hewlett-Packard and Sun Microsystems. "You're not just selling a box, but a system, a service, building client relations and gaining a reputation. If a Chinese company has to wait six months to get a U.S. licence, the company may decide to deal with a German company or a Japanese company instead."

U.S. companies fear they will lose market share to competitors in what is already the world's largest mobile phone market, the third-biggest personal computer market and what will become the second-largest semiconductor market by 2010.

For SMIC, by the time the U.S. interagency committee that reviews export licences unanimously approved its request, the company had cancelled one of two orders from Applied Materials and replaced it with a similar machine from a Swedish firm. SMIC senior adviser Chris Chang says that in the rush to get the Shanghai semiconductor fab up and running, "we just couldn't take those kind of delays. We had a schedule." Other American orders are lost even before they're made, as Chinese companies, anticipating delays, turn elsewhere.

This is certainly not music to the ears of the Bush administration, which is perceived as pro-business. Says a senior Commerce Department official, "We at Commerce are sensitive to the need for U.S. companies to have a level playing field internationally."

No one in the Bush administration has declared that the U.S. government has tightened its licensing procedures for exports to China over the past 19 months. "We have no standing policy that we should pay more attention to China," says the Commerce official. Licences to China have for years taken longer than for exports to other places, simply because "China often has more complex issues," he says.

Another U.S. official suggests that the conflict is cyclical; that when the security environment ramps up scrutiny of exports to China, corporate lobbying will eventually force a climb-down. A similar row escalated in 1999 after a congressional committee issued a hard-hitting report that China was stealing military technology from the U.S. "It's all about the atmosphere right now in Washington," says the official.

In this climate, "we're seeing longer unpredictable delays and more conditions put on licences" that are approved, says James Lewis, a technology policy analyst who served as an arms control official in the previous Bush and Clinton administrations. "The problem is the uncertainty. If you can't tell a customer when you can deliver, he will go somewhere else. Everyone is feeling the chill."

Some companies exporting to China say the Bush administration is rejecting more of their export licences, while others believe their approval rate is about the same as under Clinton. All agree that license approvals now take longer and

that officials ask more questions and often attach more rigorous conditions to licences that are approved.

"Some licences say certain things have to be reported after the fact or that certain people can't have access to the technology," says a computer executive. In some cases, Washington has insisted that the company post an American representative to the project site or conduct quarterly inspections along with written reports on how the technology is being used.

"Licences have gotten tighter with the new administration," says an executive of a U.S. telecoms giant who, like most of the representatives of the 18 U.S. companies and industry associations interviewed for this story, asked not to be identified. "The operating committee is raising questions about commercial products that have long been sold and transferred into China. The nature of these questions indicates that they are throwing up every obstacle they can at us." Spokespersons at the departments of State and Defence have not responded to questions for this article.

U.S. company representatives and government officials say of the three agencies involved in approving licences, Defence raises the most questions. The Pentagon's Lisa Bronson, deputy undersecretary of defence for technology security policy, spoke earlier this year about tension in policy-making between concern about China as "a problematic proliferator" of weapons, and interest in the country as "the largest potential future market."

"The challenge for China is striking the balance between the desire to successfully compete in a vast untapped market and the need to protect national security," Bronson told a January hearing of the congressionally appointed U.S.-China Security Review Commission. "Striking the right balance with respect to China is especially difficult, and questions of China's intentions, capabilities and conduct weigh heavily."

As recently as July, the U.S. sanctioned eight Chinese companies and a Chinese citizen for the transfer of goods and technology that the U.S. says contributed to the efforts of Iran and Iraq to acquire chemical weapons and advanced conventional weapons. The sanctions did not apply to the Chinese government.

Many corporate executives interviewed for this article believe that licences are being blocked by officials broadly opposed to engagement with China.

U.S. businessmen also complain that government regulations don't keep up with the rapid pace of technological innovation, effectively tightening licensing requirements. "This administration is very sensitive to this," says the Commerce Department official, noting that early this year the U.S. began to allow much faster computers than before to be exported without a licence.

What's more, according to an April report by the General Accounting Office, the investigative arm of the U.S. Congress, the U.S. is alone among its allies in considering China's acquisition of semiconductor-manufacturing equipment "a potential threat to regional or international stability."

The U.S. expects at least 32 other countries to agree because they are members of the Wassenaar Arrangement, a grouping established in 1996 to control the dissemination of sensitive technology. Members have indeed agreed to control exports of a long list of sensitive technology and to inform the other members about any sales. But the grouping and its regulations aren't formally binding, and each country decides on its own what it will sell to whom.

Last year, the Department of Commerce received 1,294 applications for hi-tech exports to China, of which 72% were approved, 3% were denied and 25% were returned to the applicant without action. Compared to 2000, the number of approvals fell 2%, while the number of denials dropped 1% and those returned without action rose 3%. But the average licence took 77 days to process in 2001, or 14 days longer than during 2000.

Corporate officials say the actual number of licence denials is quite low because they sound out licensing offices about a licence's chances of approval before actually submitting an application. They also say the average time for an approval is actually three months to one year, with many hi-tech licences taking closer to one year. The Commerce Department shows a quicker turnaround time because it stops the clock when it returns an application to a company for additional information, company officials say.

In contrast, the Japanese government approves a hi-tech export licence to China in two to three weeks, with a maximum of one month. Germany's maximum is 30 days. Both countries have agreed to control exports of dual-use technologies to China under the Wassenaar Arrangement.

U.S. corporations insist that the tight American licensing regulations aren't effective in keeping the latest technology out of Chinese hands, because they can still buy the equipment from other countries. "Thirty or forty years ago when most technology was developed in the U.S., unilateral controls may have been effective," says a senior official of a telecoms firm that exports to China, "But that's no longer the case." The General Accounting Office says that despite U.S. export controls, Chinese semiconductor-manufacturing technology is now only two years or less behind that of the United States.

In fact, many analysts question whether the export controls actually work. Lewis, the former official in the State Department's military affairs department, told the U.S.-China Security Review Commission in January that export controls are "irrelevant to Chinese military modernization," adding that "efforts to restrict hi-tech trade are more likely to damage than improve U.S. national security." Because China can get the technology from other countries, Lewis said, the U.S. loses more than corporate sales: It also gives up access and the intelligence-gathering opportunity that comes with it.

And once the technology gets to China, according to the General Accounting Office, the U.S. does little to monitor its use. "We found that the U.S. officials in China tasked with this job have not conducted any checks on semiconductor manufacturing equipment in the last five years," the GAO report says.

Experienced companies, meanwhile, learn to adapt. Today, Chang of SMIC says he hasn't had to cancel any other orders from U.S. companies because his firm is now better able to gauge how long it will take to process an application. "We do our planning right," Chang says.

Despite their frustrations, U.S. companies have been reluctant to take their complaints public. Their reasons are twofold: first, they don't want to worsen their working relations with government officials. "We may not like the process, but we have to be careful how vociferously we complain because we have to keep working with these people," says an official with a hi-tech trade association.

The second reason that business isn't protesting loudly is anxiety about being condemned for putting profit above national security. "When the Defence Department comes to the table with security concerns, it's hard for others to fight back," another trade association representative says. "No one wants to be the person who sells something to China and then becomes responsible for [military] proliferation."

I focus on economics because it's the most important influence in history and the underlying foundation of everything else that goes on, including geopolitics. The primary purpose of the whole Cold War geopolitical affair was, after all, to spread capitalism and the capitalist way of life across the globe. Democracy is merely the means by which Western capitalists "make the world safe for capitalism" (although global capitalists have come to realize only recently from the examples of democratic Brazil, Argentina, Russia, India, Indonesia, and elsewhere that Third World republics aren't the fertile ground of capitalism that their pro-democracy theories told them they would be). Democracy works well in countries that already have majority-middle class populations but is a joke in Third World countries with majority-poor populations and, thus, majority-socialist politicians who oppose any kind of pro-capitalist economic reforms in favor of big-government welfare states (like in India).

Japan's per-capita GDP in the 1950's was no higher than Latin America's at the time. But through exports, Japan grew rich. Other E. Asians followed the same strategy to get rich and, as a result, you had the "E. Asian economic miracle" over the past half-century, where E. Asian Third Worlders transformed into First Worlders over just a few decades. It's fantasy to try to argue that this transformation didn't take place and the E. Asians were well-off to begin with.

Indian governments have an average lifespan of 2 years or so. What you seem to really desire is for India to have a pro-capitalist government that can rule continuously and uninterrupted for the next several decades or so, but what you have then is "one-party" rule, which is exactly what India needs to develop its economy consistently. China already has that, but with India it's a constant struggle for the pro-capitalists because India is a majority-poor republic.

America's political system serves the interests of America's economic system, not vice versa. After all, America's political system gets its funding from taxing the economic system. If the economic system dies, the political system dies. Government isn't the end-all goal of America but is there to serve the economic system and create an environment where individual Americans' livelihoods can continue to prosper.

We won't wish China luck in bringing back the Middle Kingdom; nobody wants it.

Coke, GE, Intel, Microsoft, Boeing, Citigroup, Goldman Sachs, etc. want it and so do their shareholders and 401K investors. America's market is saturated. There's only so many Cokes that an average American can drink. American capitalism requires new markets. And America's political system will allow it to happen because, after all, the purpose of America's political system to ensure that capitalism can keep growing. America's military will allow it to happen, too, because the purpose of America's military is to safeguard America's capitalist interests, now global, which coincide with China's economic interests.

The globalists are not really globalists. They are China-ists.

This is because the globalists all mistakenly convinced most Third World countries to adopt representative democracy prematurely, before they developed a middle class. So their republics are chaotic, dysfunctional jokes characterized by chronic legislative gridlock and neverending parliamentary bickering which scare away rather than attract foreign investors. Thus, foreign investors pour money into China by default.

Without laws there is chaos. Today's Third World republics like Russia have laws, but still there is chaos. Merely imposing a representative democratic political system on a Third World country won't make it suddenly law-abiding or a mirror image of Peoria, IL, overnight. Laws developed in Western society over centuries (English common law, etc.) as a result largely of growing capitalism, which required standardized laws in order for capitalism to grow and become efficient on a large-scale. So the best way to make China or any other country law-abiding is to allow it to have long experience with capitalism, so that the people themselves can gradually over time realize the need for laws and start to respect and obey the law and develop a law-abiding general mindset and culture. Then, if and when a representative democracy is officially adopted, it won't be a crime-ridden joke like Russia or India (which have all the laws in the world but no one obeys them).

China is on the top of the list

China is a lot more open to foreign trade than most of today's Third World republics are. China's tariffs on US-made goods are 2-3 times lower than India's.

Free is good when everyone has the same set of rules.

Every country starts out from a different base. Some are First World, some are Third World. And there's no rule in capitalism that says First World and Third World countries can't trade with each other. Remember, US firms outsource to China because American consumers want low prices. China doesn't force any American to shop at Wal-Mart, but they do so completely voluntarily. And when American workers want maximum wages while American consumer want the lowest prices, something's got to give. Wal-Mart's growth is a testament to the fact that American consumers don't believe there's any rule in capitalism that says they can't buy stuff from China if, at the end of the day, it's going to save them money.

We should not screw up our economics in order to satisfy someone's politics. We should do business the way that is fair and balanced.

Your problem is not with China but with America's bargain-loving consumers.

Geopolitics is a function largely of military strength, but what is the foundation of military strength? It's economics. After all, arms and troops don't grow on trees but cost money to support. The bigger a nation's economy is, the bigger its military can be because, simply, it can afford a bigger military. Taiwan is already having trouble maintaining its military budget and buying US arms because its hi-tech companies, the heart of its economy, are leaving the island in droves for the mainland and will never return. Empires (Roman, British, etc.) rise and fall on the health of their underlying economic systems.

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