Regulatory Symbolism in the "China Catch-All" Proposal

Jan. 24, 2007
BY DR. PAUL FREEDENBERGVice President-Government Relations AMT - The Association For Manufacturing Technology The comment period on the proposed "China Catch-All" regulation has just been completed. The preliminary results are in, and the consensus of ...

Vice President-Government Relations AMT - The Association For Manufacturing Technology

The comment period on the proposed "China Catch-All" regulation has just been completed. The preliminary results are in, and the consensus of dozens of analytical comments submitted by the business community is that it would be a very bad idea to go ahead with the process of putting these regulations into the federal code.

The key industry concerns about the proposed regulation revolve around two problems:

First, as they are written, the regulations would be unilateral.

Second, given the lack of allied cooperation, there will be ample foreign availability of all the products and technologies that the new regulation seeks to cut off to the Chinese military.

Thus their impact on China will be symbolic rather than substantive.

The National Foreign Trade Council summed up industry concerns as follows: "The proposed regulation is hard to reconcile with broader U.S. policy toward China and other U.S. strategic goals...We believe that the regulation could well have a deleterious impact on significant political, military and foreign policy well as the bilateral economic relationship."

Predictably, the Chinese government has already stated that it finds these proposed new regulations " disappointing." Indeed, such a position is understandable, since these regulations will be introduced after a recent series of Chinese government commitments to improve their own export control cooperation with the United States, with the Wassenaar Arrangement and with the Nuclear Suppliers Group of countries.

Thus far, none of the other Wassenaar (the international export control organization) members have come forward to announce that they will adopt similar regulations. Indeed, the European Union has made it clear that it does not feel itself bound by the Tiananmen Square sanctions, which means that the EU would not view any export controls modeled on the new U.S. regulation as applicable to China. So, the U.S. stands alone in this new initiative. Moreover, it has diminishing leverage with which to influence Chinese policy.

For example, in the machine tool sector, U.S. companies have lost 38.8 percent of their market share in China over the past decade. That loss occurred during a period when China's machine tool consumption (the total purchased from all sources) soared. To get an idea of the enormity of this lost market share, consider that in 2000, China consumed half as many machine tools as the U.S. By 2002, China had drawn even. By 2004, China had doubled U.S. consumption. Last year, it is likely that China's consumption of machine tools was triple that of the United States.

While U.S. companies once had a piece of the China pie that approached 9 percent, we now hold barely 5 percent of that machine tool market. Five percent of the market certainly won't carry much weight with the Chinese Government, especially when no U.S. competitor nation appears willing to follow our lead in denying the Chinese advanced machine tools.

With regard to foreign availability, as I have discussed in earlier columns, the Chinese now possess ample numbers of five-axis machine tools, most of which have accuracies that are competitive with Westernproduced products. They also have multiple domestic suppliers of five-axis-enabling CNC controls. To further enhance Chinese technology, the Taiwanese have so integrated their machine tool technology with that of mainland Chinese companies that it would be difficult to distinguish between the two. Last year Taiwan passed the United States in machine tool production, so its industry has to be considered world class.

The Chinese most likely would take the announcement of the new "China Catch-All" regulation as a further indication of the unreliability of U.S. vendors, and as one more reason that goods and technology purchased from the United States are likely to be delayed or denied.

Is this the signal that we want to send, particularly when the effect of the new regulation would be to deny the Chinese military virtually nothing that they cannot obtain from other Western sources or make themselves? In international relations it is always important to make gestures that will be interpreted as signs of strength rather than of weakness.

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