Ever Wonder Why Our Trade Deficit With China Is $202 Billion?

Ever Wonder Why Our Trade Deficit With China Is $202 Billion?

Apparently the U.S. government has decided to go ahead with its decision to impose new restrictions on trade with China. As I reported in July, the Commerce Department has issued proposed new regulations known as the "China Catch-All." The objective of the new regulations is to ensure that U.S. exporters do not sell products or technology to the Chinese military.

Even under current rules, it is likely that any export license application that stated that the intended end user was the Chinese military, or a factory that supplied the Chinese military, would be denied. The new regulations would clarify the current policy on military end users and, moreover, it would lower the threshold of items that would be subject to license if they were intended for military end use. The industry has four months to comment on these regulations before they are put into effect.

AMT plans to issue written comments, as do dozens of individual companies and trade associations. There are many problems with these proposed regulations that would make them extremely difficult to comply with. Among other things, the definitions of "military end use" and "support" for the military are too broad and expansive and could create unintended liability for a broad range of industries.

In addition, the knowledge standard is too broad. It is extremely difficult for U.S. companies to "know" the ultimate customers of products that they export to China. Earlier drafts of the regulation took this difficulty into consideration, but this penultimate regulation returns to essentially a "reason to know" standard that will intimidate many exporters and eliminate others who simply worry about the liability inherent in the new standard. It is also likely to increase the burden on freight forwarders and other facilitators, causing further delays and costs for U.S. companies.

Most importantly, the regulation is likely to be unilateral, or nearly so. Our allies have already made it clear that they do not feel bound to follow the U.S. lead and are highly unlikely to do so. This means that there will be widespread foreign availability of any new products caught by these regulations. Sixty years of experience with export control regimes tells us that any new control that is unilateral is certain to be ineffective, with new sources ready to move into any market that U.S. exporters are forced to abandon.

If the aim of the new regulations is to morally distance the U.S. companies from the Chinese military, such a result will come at a very high price. The Chinese government has already said that it finds these regulations "disturbing." The regulations are likely to further alienate the very Chinese government whose cooperation we need in order to process the new "end-user certificates" required in the new export regime. The Chinese would have to hire new officials to process the increased paperwork associated with the regulations if they want high technology exports to continue to move efficiently.

Inadequate personnel, however, is a minor issue, compared with the symbolic aspects of this new export regime. These regulations symbolize the movement of the U.S. government toward a more stringent export control regime at the very time when the European Union countries will be moving in the opposite direction. Inevitably, U.S. vendors are likely to be less attractive to Chinese companies in need of reliable suppliers.

Export controls are not the sole reason for our $202 billion deficit with China last year. But I think that the Bush Administration has to ask itself if these proposed regulations fit into our overall objectives in dealing with China. I think that they are unlikely to achieve their announced goal and that they are likely to further alienate the Chinese, both economically and politically. Is this really what we want to do at a time when we need Chinese economic and foreign policy cooperation more than ever?

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