Questions have been raised over the years about the will and ability of China’s governmental and industry actors to comply with national and multilateral trade regulations. More than ever before, Beijing has been responding to those questions, particularly in recent months and years. High-ranking officials have vowed and – more importantly – taken actions to strengthen China’s export control system and industry compliance.
At the same time, the effectiveness of the Chinese government and industry efforts and the extent of progress are difficult to judge in the short term. The threat of illicit exports is always there. Even developed countries like the United States – countries that take nonproliferation seriously and have had considerable experience with export controls – are regularly embarrassed by violations on their soil. Controlling illicit trade everywhere – including China and the United States – remains a work in progress.
So although we can expect violations of export controls in China and elsewhere, what we are looking for is progress in law, commitment, compliance, enforcement and prosecution. My research and experience in China suggests that considerable progress is being made.
The development of Chinese export controls under market socialism began in the mid-1990s. This resulted from the continuing opening and reform of the Chinese economy. If China was to participate in high-tech and defense-related trade, and take on international responsibilities to match its economic ambitions, it was becoming clearer to officials that they would have to become more involved in international export control and compliance. They would also want to develop their own national export control system.
China promulgated formal export control regulations in 1995. More specific regulations followed regularly in subsequent years. Nuclear trade-related export control regulations were instituted in 1997 and 1998. The Chinese government issued its first set of arms export control regulations in 1997. In 2002, China promulgated a series of new or amended regulations covering a host of strategic commodities and technologies, including chemical, biological, missile and munitions. These regulations included controls that were reflective of the multilateral export control arrangements, such as the Nuclear Suppliers Group. Further, in 2004, the National People’s Congress passed an amended Foreign Trade Law that under-girded China’s domestic system of export controls and included a wider range of criminal and administrative penalties for violations than had existed previously.
These initial steps were promising, but questions remained about the political will and commitment required to implement the new regulations. While implementation challenges continue, indications are that the Chinese government has worked conscientiously to implement its national control system in this decade. It has also sought to integrate China into multilateral export control regimes. China has now joined the Nuclear Suppliers Group and begun membership talks with the multilateral Missile Technology Control Regime, the Australia Group and the Wassenaar Arrangement.
During this decade, China has issued regular white papers on nonproliferation emphasizing the importance of export controls. It is my distinct impression that they are committed to seeing their ideas turned into practice. Clearly, high level officials have made the strategic choice to be among the advanced industrial countries working to integrate the needs of both trade and security. The Chinese obviously want to continue to promote international commerce. They also realize that in order to do so, they must become more vigilant in controlling commerce that could jeopardize national and international security.
To balance and pursue these trade and security interests, the Chinese government began a series of outreach and training exercises for its Customs service and major strategic enterprises. It has instituted an electronic export licensing system. It is also now demanding that internal export control compliance systems be implemented in its export-oriented enterprises.
Among the regulatory developments, the Ministry of Commerce (MOFCOM) issued Circular No. 548 in December 2005 on Reform of the Administrative Approval System for the Import and Export of Sensitive Items and Technologies. This circular commissioned China’s provincial and municipal governments and other local entities to serve as the initial reviewers of export permit applications for dual-use goods and technologies. By year’s end MOFCOM and GAC (General Customs Administration) issued the most comprehensive regulation to date, Order No. 29 on Measures for the Administration of Import and Export Licenses for Dual-Use Items and Technologies. These measures created a comprehensive national control list, expanded the scope of “catch-all” and transit/transshipment controls, and laid the foundation for broader coverage of technology transfers. These and other developments have convinced me that Chinese authorities are serious about export control and about trying to integrate the concepts of trade and security.
The Chinese government took specific actions to strengthen Chinese export controls during this period. In July 2006, Notice No. 50 applied dual-use export licensing and clearance procedures to a list of graphite-related items with potential nuclear application. MOFCOM also released an updated Dual-use Biological Agents and Related Equipment and Technologies Export Control List that subjected new bio-related items to control. These new Chinese bio-related regulations reflected growing international concerns about the threat of bio-terrorism and developments within the related multilateral export control arrangement-the Australia Group. This provided further evidence that China was striving to be more in line with international standards and arrangements.
In August 2006, Chinese authorities established requirements related to specific civil aviation parts with potential missile dual-use application. In September 2006 they issued new regulations on the import and export of precursor chemicals. In December they promulgated and amended regulations on the control of nuclear exports, aligning themselves more closely with the multilateral Nuclear Suppliers Group. On the last day of 2006, the GAC and MOFCOM issued the latest version of China’s control list. In 2007, China continued its regulatory enhancement efforts by amending and strengthening its controls on nuclear dual-use items and technologies, and issued another update to its national dual-use control list.
To complement its regulatory efforts, China has expanded its industry outreach initiatives. Numerous workshops, seminars and conferences have been organized and implemented in various industry sectors throughout many regions of the country. This training and outreach is increasingly offered in China’s provinces and localities, not just in major centers like Beijing and Shanghai. Increasing information about export controls, in both Chinese and English, is being made available on Chinese government agency websites. Public information and industry awareness is critical to regulatory compliance. Chinese officials are now making significant efforts to keep relevant industries and exporters informed. To lay a foundation for the promotion of industry compliance, the Chinese Ministry of Commerce issued guidance on the development of internal export control programs for Chinese industry in August 2007.
Despite the increase in industry export control outreach, numerous Chinese companies have been sanctioned in this decade by the United States government for not abiding by U.S. law and international norms relating to trade and security. While these sanctions relate to a diverse and complicated set of cases and issues, their imposition was not entirely surprising. Among other things, it is clear that the Chinese search for markets and trade has been aggressive. The growing level of commerce pushed the limits in various areas and was bound to run afoul of U.S. hopes and expectations in various areas. What will be of significance is what was and is being done by firms that were sanctioned.
Let me describe my personal observations concerning one of these companies-China North Industries Corporation. NORINCO is the import/export marketing company under one of China’s top state-owned defense holding companies, China North Industries Group Corporation (CNGC). Research and manufacturing companies under CNGC produce both civilian and military items, including arms, machinery, optical-electronic products, oil field equipment, chemicals, and light industrial products. CNGC operates over 150 large- and medium-sized companies employing approximately 800,000 people.
In the early part of this decade, the NORINCO division of CNGC was the subject of several government sanctions. The first sanctions were imposed in 2003 for exports that “could assist the Iranian missile program.” Few details were provided by U.S. authorities, but they did raise the company’s behavior as evidence that the Chinese export control system was still deficient. Beginning in 2004 and 2005, NORINCO officials decided to begin developing an internal compliance program. NORINCO’s corporate leadership has issued a clear and unmistakable commitment to building a responsible corporate export control program. Both the corporate leadership and mid-level officials have worked diligently to set up an effective internal compliance program to inform and educate their workforce about the program and the need for export controls.
NORINCO has made a great deal of progress. No new sanctions have been imposed upon NORINCO in recent years. The NORINCO experience is being closely watched, and followed, by other Chinese firms. Key enterprises among China’s nuclear, aerospace, aviation and electronics industries have taken note. It is my impression that an increasing number of large Chinese enterprises are recognizing that informed corporate officials, responsible export behavior, and an effective internal compliance program will be good for business. Rather than limiting exports, responsible export controls in line with international standards can be “trade enabling.” Companies that have a responsible corporate culture and internal export control compliance program will be more likely to avoid sanctions and be competitive in more markets.
Yet much work remains to be done in China. Some of China’s exporters are slow to recognize the need for compliance and the opportunities before them. Some feel that internal compliance programs are an unnecessary cost and unacceptable distraction and burden. Some believe that they can avoid the responsibilities and that the growing focus on industry compliance will blow over. Many of China’s smaller and medium-sized companies remain in dire need of export control information, training and help in raising awareness to develop internal compliance programs. In addition, there are still deficiencies in the overall Chinese export control system. The current system remains without comprehensive controls on brokering activities, intangible technology transfers, and conventional dual-use items and technologies. China is not fully integrated into the Missile Technology, Australia Group, and Wassenaar multilateral export control arrangements.
Clearly, Chinese compliance with national and international trade regulations remains a work in progress. However, my experience demonstrates that significant progress is being made in the area of export controls. This progress should not be ignored. It is real, and should be recognized and lauded. It will have many benefits for China, the United States and the world. Among other things, export control development and compliance build an environment allowing expanded trade and technological relations. Here in the United States, we often complain about the China-U.S. trade imbalance. If China develops effective export controls, the U.S. government will likely recognize this and develop greater confidence in Chinese trade behavior. This may lead to a relaxation in U.S. controls on high technology exports to China. For example, if U.S. authorities have confidence that U.S. high-tech exports will remain with recognized and responsible end-users, and will not be diverted to military-related uses or to other states, the present U.S restrictions are more likely to be relaxed. At a minimum, Chinese and U.S. authorities should continue to build on the areas of common interest in the nonproliferation area and the expanding strategic economic dialogue to explore avenues of increased cooperation in export control and compliance.
The opening, reform and development of the Chinese economy over the last thirty years is one of the most significant events on the world stage. Chinese willingness and ability to comply with evolving national and international regulations and norms will be one of the major factors affecting China’s overall success over the next 30 years. My study and experience have convinced me that the benefits of trade compliance in a global economy are significant. Some are already being realized in the U.S.-China commercial and other bilateral and multilateral trade relationships. Continued Chinese development in, and commitment to, nonproliferation, export controls and industry compliance will bring more benefits. China, the United States and the global community can increasingly find themselves in win-win situations. Continued progress in this field will support peace, prosperity and security in the 21st century.