Export Controls
Challenges with Commerce's Validated End-User Program May Limit Its Ability to Ensure That Semiconductor Equipment Exported to China Is Used as Intended Gao ID: GAO-08-1095 September 25, 2008Semiconductors are key components in weapons systems and consumer electronics. Since semiconductors have both civilian and military applications, U.S. export control policy treats the equipment and materials used to manufacture semiconductors as "dual-use" items, and controls the export of these items through licensing requirements to sensitive destinations such as China. You requested that we update our 2002 report on China's semiconductor manufacturing capabilities to address the (1) evolution of China's capabilities since 2002, (2) changes to U.S. export control policies over the sale of semiconductor manufacturing equipment and materials to China since 2002, and (3) the advantages and limitations of these changes.
The gap between U.S. and Chinese commercial semiconductor manufacturing capabilities, as measured by the feature size of the semiconductors produced, rapidly narrowed between 1994 and 2002. Since 2002, China's semiconductor manufacturing capabilities have continued to advance but remain one generation behind state-of-the-art semiconductors produced in the United States. China's most advanced semiconductor manufacturing companies continue to rely on equipment and materials from the United States, Europe, and Japan to improve their manufacturing capabilities. However, China has developed an indigenous capacity to build some types of advanced semiconductor manufacturing equipment, which may soon provide companies in China with a domestic source of equipment capable of producing semiconductors that are close to state of the art. Since 2002, U.S. export control policies over semiconductor equipment and materials to China have become more "end-user" focused, with the introduction of the Validated End-User (VEU) program, a parallel licensing framework that allows select pre-screened Chinese end-users to receive controlled items, including some semiconductor equipment and materials, without a license. The Department of Commerce anticipated that the VEU program would facilitate trade to China and enhance U.S. security; however, challenges with program implementation may limit Commerce's ability to ensure items are being used as intended. Specifically, Commerce has not reached a VEU-specific agreement with the Chinese government for conducting on-site reviews of validated end-users, a mechanism cited by Commerce as critical for ensuring program compliance. Instead, as a stopgap measure, Commerce is attempting to conduct VEU on-site reviews under a 2004 agreement. In addition, Commerce lacks procedures for conducting on-site reviews, though the validated end-user program was introduced in June 2007.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-08-1095, Export Controls: Challenges with Commerce's Validated End-User Program May Limit Its Ability to Ensure That Semiconductor Equipment Exported to China Is Used as Intended
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Report to the Committee on Foreign Affairs, House of Representatives:
September 2008:
Export Controls:
Challenges with Commerce's Validated End-User Program May Limit Its
Ability to Ensure That Semiconductor Equipment Exported to China Is
Used as Intended:
GAO-08-1095:
GAO Highlights:
Highlights of GAO-08-1095, a report to the Committee on Foreign
Affairs, House of Representatives.
Why GAO Did This Study:
Semiconductors are key components in weapons systems and consumer
electronics. Since semiconductors have both civilian and military
applications, U.S. export control policy treats the equipment and
materials used to manufacture semiconductors as ’dual-use“ items, and
controls the export of these items through licensing requirements to
sensitive destinations such as China.
You requested that we update our 2002 report on China‘s semiconductor
manufacturing capabilities to address the (1) evolution of China‘s
capabilities since 2002, (2) changes to U.S. export control policies
over the sale of semiconductor manufacturing equipment and materials to
China since 2002, and (3) the advantages and limitations of these
changes.
What GAO Found:
The gap between U.S. and Chinese commercial semiconductor manufacturing
capabilities, as measured by the feature size of the semiconductors
produced, rapidly narrowed between 1994 and 2002. Since 2002, China‘s
semiconductor manufacturing capabilities have continued to advance but
remain one generation behind state-of-the-art semiconductors produced
in the United States. China‘s most advanced semiconductor manufacturing
companies continue to rely on equipment and materials from the United
States, Europe, and Japan to improve their manufacturing capabilities.
However, China has developed an indigenous capacity to build some types
of advanced semiconductor manufacturing equipment, which may soon
provide companies in China with a domestic source of equipment capable
of producing semiconductors that are close to state of the art.
Figure: U.S. and Chinese Semiconductor Manufacturing Capacity, 1994
through 2007:
[See PDF for image]
Source: GAO analysis of data provided by Semiconductor Manufacturing
International Corporation and other semiconductor manufacturing
facilities in China, Intel Corporation, and the International
Technology Roadmap for Semiconductors.
[End of figure]
Since 2002, U.S. export control policies over semiconductor equipment
and materials to China have become more ’end-user“ focused, with the
introduction of the Validated End-User (VEU) program, a parallel
licensing framework that allows select pre-screened Chinese end-users
to receive controlled items, including some semiconductor equipment and
materials, without a license.
The Department of Commerce anticipated that the VEU program would
facilitate trade to China and enhance U.S. security; however,
challenges with program implementation may limit Commerce‘s ability to
ensure items are being used as intended. Specifically, Commerce has not
reached a VEU-specific agreement with the Chinese government for
conducting on-site reviews of validated end-users, a mechanism cited by
Commerce as critical for ensuring program compliance. Instead, as a
stopgap measure, Commerce is attempting to conduct VEU on-site reviews
under a 2004 agreement. In addition, Commerce lacks procedures for
conducting on-site reviews, though the validated end-user program was
introduced in June 2007.
What GAO Recommends:
To enhance oversight, Commerce should suspend the VEU program to China
until an amended or new agreement is reached to conduct on-site reviews
and VEU-specific procedures for conducting on-site reviews are
established.
Commerce disagreed with our recommendation, stating that it can use a
classified 2004 agreement with China to conduct on-site reviews.
However, use of the agreement imposes an additional burden on validated
end-users. Commerce also maintains it has procedures for on-site
reviews, but they are still in draft form and have not cleared the
interagency review.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-1095]. For more
information, contact Joseph A. Christoff at (202) 512-8979 or
christoffj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
China's Semiconductor Manufacturing Capability Has Steadily Advanced:
Commerce's VEU Program in China Marks a Shift toward an End-User-Based
System of Export Controls for Semiconductor Equipment and Materials:
Challenges with VEU Program Implementation May Limit Commerce's Ability
to Ensure That Semiconductor Equipment and Materials Are Used as
Intended:
Agency Actions to Address Prior GAO Recommendations:
Conclusions:
Recommendations:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Commerce Control List Categories and Groups:
Appendix III: Semiconductor Manufacturing Equipment and Materials
Requiring an Export License to China:
Appendix IV: Comparison of Individual and Special Comprehensive
Licenses, and Validated End-User Authorization:
Appendix V: Comments from the Department of Commerce:
Appendix VI: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Commerce Control List Categories:
Table 2: Commerce Control List Groups:
Figures Figures:
Figure 1: End Markets for Semiconductor Equipment and Materials:
Figure 2: U.S. and Chinese Semiconductor Manufacturing Capability, 1994
through 2007:
Abbreviations:
BIS: Bureau of Industry and Security:
CIA: Central Intelligence Agency:
Commerce: Department of Commerce:
DOD: Department of Defense:
DOE: Department of Energy:
EAR: Export Administration Regulations:
ERC: End-User Review Committee:
IVL: Individual Validated License:
OTE: Office of Technology Evaluation:
PSV: postshipment verification:
SCL: Special Comprehensive License:
SEMI: Semiconductor Equipment and Materials International:
SMIC: Semiconductor Manufacturing International Corporation:
State: Department of State:
VEU: Validated End-User (program):
EUVU: 2004 End Use Visit Understanding:
Letter September 25, 2008:
The Honorable Howard Berman:
Chairman:
Committee on Foreign Affairs:
The Honorable Ileana Ros-Lehtinen:
Ranking Member:
Committee on Foreign Affairs:
House of Representatives:
For nearly five decades, the semiconductor industry has served as the
foundation of the U.S. high-tech economy and, in turn, provided the
United States with a strategic military advantage. However, as
semiconductor production and its supporting industries move overseas to
countries such as China, the ability of the United States to maintain
this advantage may be threatened. Semiconductors, commonly known as
integrated circuits or computer "chips,"[Footnote 1] are often used in
weapons systems as well as consumer electronics such as computers, cell
phones, and televisions. The manufacture of semiconductors takes about
2 months, requires a complex process involving more than 250 steps, and
uses hundreds of millions of dollars in sophisticated equipment and
materials. Since semiconductors have both civilian and military
applications, U.S. export control policy treats semiconductor equipment
and materials as "dual-use" items, and controls the export of these
items through licensing requirements to sensitive destinations such as
China. According to the Department of Commerce, this policy is
consistent with the objective of facilitating high-technology trade
with civilian customers, while hedging against China's rapid military
modernization.
In 2002, we reported that China had narrowed the gap between the
capabilities of its semiconductors and state-of-the-art U.S.-made
semiconductors from 10 years to 2 years.[Footnote 2] Moreover, we found
that the growing sophistication of China's semiconductor manufacturing
facilities had improved its ability to develop more capable weapons
systems and advanced consumer electronics. Since 2002, China has
continued efforts to develop its domestic semiconductor industry.
Concurrently, the United States has made adjustments to its policies
and procedures governing the sale and transfer of semiconductor
equipment and materials to China.
In light of these developments, you requested that we update our 2002
report to address the (1) evolution of China's semiconductor
manufacturing capabilities since 2002, (2) changes to U.S. export
control policies over the sale of semiconductor manufacturing equipment
and materials to China since 2002, and (3) advantages and limitations
of these changes to U.S. export controls. In addition, this report
describes progress the Departments of Commerce and Defense have made to
address our prior recommendations.
To conduct this review, we analyzed the relevant statutes, regulations,
and presidential directive pertaining to export controls for China;
interviewed officials in Washington, D.C., from the U.S. Departments of
Commerce (Commerce), Defense (DOD), Energy (DOE), and State (State);
analyzed Commerce licensing data; and reviewed information provided by
Commerce on end-use checks in China. We interviewed representatives and
reviewed information from the U.S. and Chinese semiconductor and
semiconductor equipment and materials industries, officials from the
trade associations representing each industry, academics with expertise
in China's semiconductor industry, and members of the intelligence
community. We traveled to Beijing and Shanghai, China, and visited
companies that have been approved to receive semiconductor equipment
and materials under the Validated End-User program or have received
these items under export licenses. We also attended SEMICON China--a
semiconductor industry trade show with more than 900 U.S., Chinese, and
other foreign companies represented--and met with three Chinese
companies involved in semiconductor manufacturing. We determined that
the data presented in this report are sufficiently reliable for the
purpose for which they are presented.
We conducted this performance audit from October 2007 to September
2008, in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives. Appendix I
contains a more detailed description of our scope and methodology.
Results in Brief:
Since 2002, China's ability to manufacture semiconductors has steadily
advanced, but semiconductors produced commercially in China remain
approximately one generation, or about 1 to 2 years, behind state-of-
the-art semiconductors produced in the United States.[Footnote 3] As of
July 2008, China's most advanced semiconductor manufacturing company
can produce integrated circuits with a feature size of 65
nanometers,[Footnote 4] compared with U.S. companies that are producing
semiconductors with 45-nanometer feature sizes.[Footnote 5]
Nonetheless, according to Semiconductor Equipment and Materials
International,[Footnote 6] most of China's semiconductor production is
for integrated circuits that are four to seven generations old, and
approximately 7 percent of integrated circuits produced in China are
one generation or less behind current state of the art. China's most
advanced semiconductor companies continue to rely on equipment from the
United States, Europe, and Japan to enhance their manufacturing
capabilities. China also has developed an indigenous capacity to build
some types of advanced semiconductor manufacturing equipment, which
soon may provide companies in China with a domestic source of equipment
capable of producing chips that are close to state of the art.[Footnote
7] Despite these advances, significant gaps remain in China's ability
to produce all the specialized equipment necessary for state-of-the-art
production. In addition to advanced equipment available from foreign
and domestic sources, China can obtain older equipment on the used
market to increase its capacity to produce integrated circuits. The
used equipment market potentially could enable production of integrated
circuits for China's military, as weapons systems are generally
designed around older technology.
Since 2002, U.S. export controls have become increasingly focused on
the recipients or "end-users" of items, resulting in the introduction
of the Validated End-User (VEU) program in June 2007. The VEU program
is a parallel export licensing framework that allows select "trusted"
Chinese end-users to receive controlled items, including some
semiconductor equipment and materials, without a license. Most U.S.
exports of semiconductor equipment and materials to China require an
export license, which authorizes the sale or transfer of a specified
item or items from a single U.S. entity to a specified end-user in
China. Under this licensing system, an interagency panel reviews each
application, scrutinizes the item and end-user, and if it approves the
license, often attaches conditions to the license stipulating how the
item may be used. Commerce may conduct a check after the item has been
shipped to China, also known as a postshipment verification check, to
ensure that items are being used in the correct location and for the
purpose stated on the license. Under the new VEU program, Commerce
allows U.S. exporters to ship eligible items to certain pre-screened
end-users in China, including three companies authorized to receive
semiconductor equipment and materials, without a license. Instead of
requiring a postshipment verification check to ensure that the
equipment is being used in accordance with the terms of the
authorization, validated end-users must agree to periodic records
reviews and discretionary "on-site reviews" by U.S. government
personnel.
The introduction of the VEU program has yet to produce the advantages
anticipated by Commerce, and challenges with program implementation may
hinder Commerce's ability to ensure that items are being used as
intended. Commerce anticipated that the VEU authorization would
facilitate trade in controlled items to China by reducing the number of
exports requiring licenses. Commerce also expected that, through the
reduction in the number of license applications requiring review, it
could redirect resources to increase scrutiny over lesser-known end-
users in China, thus enhancing U.S. security. However, as of June 2008,
only one of three validated end-users authorized to receive
semiconductor manufacturing equipment had received such items under the
VEU program. In addition, problems with Commerce's implementation of
the VEU program limit its ability to ensure that semiconductor
equipment and materials exported to China are used as intended.
Specifically, although negotiations are ongoing, Commerce has not
reached a VEU-specific agreement with the Chinese government for
conducting on-site reviews of validated end-users, a mechanism cited by
Commerce as critical for ensuring program compliance. In lieu of a VEU-
specific agreement, Commerce is attempting to conduct on-site reviews
under a 2004 agreement as a stopgap measure. Commerce also has not
developed specific procedures for selecting and conducting on-site
reviews of validated end-users.
The Departments of Commerce and Defense have not implemented the
recommendations from our 2002 report to conduct both a formal foreign
availability assessment[Footnote 8] for semiconductor equipment and
materials and an assessment of the impact exports of these items have
on U.S. economic and national security. However, Commerce has met the
intent of our recommendation by using information on foreign
availability to determine what items to control and to make licensing
decisions. We believe these efforts sufficiently address our
recommendation. For example, Commerce reduced the number of items
controlled under its China Military End-Use rule[Footnote 9] from 47 to
31, in response to a variety of information, including foreign
availability, it had sought from the public. Commerce also established
an Office of Technology Evaluation in 2006, which conducts foreign
availability studies. Finally, DOD has not conducted annual cumulative
effects studies; however, the requirement was recently eliminated in a
new DOD instruction.
To better promote the VEU program's objective of facilitating trade and
to enhance oversight of semiconductor equipment and materials exported
to China, we recommend that the Secretary of Commerce suspend the VEU
program to China until Commerce negotiates a VEU-specific agreement
with China or the 2004 End Use Visit Understanding (EUVU) is amended to
include the VEU program, and develops operating procedures for
selecting and conducting on-site reviews that are applicable to all
validated end-users.
In commenting on a draft of this report, Commerce disagreed that no
mechanism exists to provide oversight of exports of semiconductor
equipment under the VEU program. Specifically, Commerce stated that (1)
a classified 2004 EUVU with China provides a framework for all
inspections related to export controls in China, and (2) procedures for
conducting end-use checks exist and will be used for on-site reviews as
applicable. We amended the report to acknowledge that Commerce
anticipates using the EUVU agreement to conduct on-site reviews under
the VEU program until it is amended or a new agreement is concluded.
However, the EUVU procedures, specifically the EUVU requirement to
obtain End-User Statements for shipments, imposes an additional burden
on validated end-users. Obtaining an End-User Statement is not a VEU
program requirement, and runs counter to the trade facilitating
objectives of the program. Therefore, an amended or new agreement is
needed. Furthermore, Commerce asserts that it has procedures for
selecting on-site reviews and conducting end-use checks. We disagree.
First, as noted in this report, the procedures for selecting which
validated end-users will receive on-site reviews are still in draft
form and have not been cleared by the interagency process. Second,
Commerce's general procedures for conducting end-use checks are not
specific to the VEU program. Instead, they were designed for pre-
license and postshipment verification checks of items shipped under
individual licenses. End-use checks focus on ensuring that an item is
being used for the purposes stated on the license, whereas on-site
reviews are more comprehensive.[Footnote 10] Finally, we agree that
Commerce needs additional case-by-case guidance for on-site reviews to
ensure that the review is tailored to a particular validated end-user.
However, the department also needs general procedures for VEU on-site
reviews to ensure that they are conducted in a consistent manner.
The Departments of Commerce and Energy also provided technical
comments, which are incorporated as appropriate throughout this report.
The Departments of Defense and State did not have any comments on this
report.
Background:
The semiconductor manufacturing equipment and materials industry
produces a variety of equipment, chemicals, gases, films, and other
materials critical to manufacturing integrated circuits. According to
Semiconductor Equipment and Materials International (SEMI), the $86
billion global semiconductor manufacturing equipment and materials
industry provides the equipment necessary for a $256 billion
semiconductor manufacturing industry (see fig. 1). This industry in
turn produces the computer chips needed by many other industries,
including a $1.6 trillion electronics industry. Semiconductors are
devices that enable computers and other products such as cell phones to
process and store information. Producing semiconductors is a multistep
sequence of photographic and chemical processes during which electronic
circuits are gradually created on a wafer made of pure semiconducting
material, most commonly silicon. For example, the equipment used to
manufacture semiconductors performs tasks such as depositing a thin
chemical film on wafers, and selectively removing the film by etching
it away, creating microscopic transistors.[Footnote 11]
Figure 1: End Markets for Semiconductor Equipment and Materials:
This figure is a diagram showing end markets for semiconductor
equipment and materials.
[See PDF for image]
Source: Semiconductor Industry Association, Semiconductor Equipment and
MAterials International, and Henderson Ventures, March 2008.
[End of figure]
The technological complexity of semiconductors is indicated by the
feature size (the density of the etched lines) on the wafer. Smaller
feature sizes measured in nanometers allow for more components to be
integrated on a single semiconductor, thus creating more powerful
semiconductors. Each reduction in feature size--for example, from 90
nanometers to 65 nanometers--is considered a move to a greater level of
technological sophistication, or a move to the next "generation" of
manufacturing technology.
Consistent with multilateral export controls, the U.S. government
classifies semiconductor manufacturing equipment and materials as dual-
use items because they have both commercial and military uses. Under
the authority granted in the Export Administration Act of
1979,[Footnote 12] Commerce's Bureau of Industry and Security (BIS)
administers export controls for dual-use items through the requirements
contained in the Export Administration Regulations (EAR).[Footnote 13]
Under these regulations, exporters are to either obtain prior
government authorization from BIS in the form of a license, general
authorization, or license exception, or determine that a license is not
needed before exporting dual-use items.[Footnote 14] The EAR
establishes a framework for regulating the export of dual-use items by
identifying the characteristics and capabilities of items that may
require export licenses. These characteristics and capabilities are
contained in the Commerce Control List, which provides detailed
specifications for about 2,400 dual-use items, divided into 10
categories (see app. II for a list of the 10 categories). Each category
is subdivided into five groups designated by letters A through E (see
app. II for a list of the five groups). For example, semiconductors and
semiconductor manufacturing equipment and materials fall under Category
3 (electronics), with manufacturing equipment placed in Category 3B
(test, inspections, and production equipment) and materials placed in
Category 3C (materials).
Exports of semiconductor manufacturing equipment and materials to China
are primarily controlled for national security and antiterrorism
reasons.[Footnote 15] Appendix III describes the specific equipment and
materials that require a license for export to China. For these items,
the overall policy of the United States is to approve exports for
civilian end uses but generally to deny exports that will make a direct
and significant contribution to Chinese military capabilities.
Semiconductor manufacturing equipment and materials, as well as other
sensitive dual-use items, also are controlled under the multilateral
Wassenaar Arrangement.[Footnote 16] Forty countries are signatories to
the arrangement, including Germany, Japan, The Netherlands, and the
United States. Formed in 1996, the Wassenaar Arrangement succeeded the
Coordinating Committee for Multilateral Export Controls.[Footnote 17]
Most advanced semiconductor equipment and materials are included on the
Wassenaar Arrangement's Basic List, which controls items that are
"major or key elements for indigenous production, use, or enhancement
of military capabilities." One type of equipment, metal organic
chemical vapor deposition (MOCVD) reactors, which may be used to
produce radiation-hardened electronics for use in commercial and
military applications, is included on the Wassenaar Arrangement's
Sensitive List.[Footnote 18] No semiconductor equipment or materials
are included on Wassenaar's Very Sensitive List. One of the
arrangement's principal goals is to prevent "destabilizing
accumulations" of advanced dual-use items and technologies through the
reporting of export information by its members. The Wassenaar
Arrangement lacks a "no undercut" rule, under which a member would
agree not to permit the export of any listed item or items that had
been officially denied an export license by another member. Rather than
having a no undercut rule, Wassenaar members exchange information on
denied transactions as the sole means of trying to achieve its goals.
Although the United States may not authorize a license for a specific
piece of semiconductor manufacturing equipment to China, other
Wassenaar members are not restricted from selling that same item
themselves.
China's Semiconductor Manufacturing Capability Has Steadily Advanced:
Since 2002, China's ability to produce commercial semiconductors has
steadily advanced but remains approximately one generation behind the
United States. As of July 2008, China's most advanced semiconductor
manufacturing company can produce integrated circuits with a feature
size of 65 nanometers, compared with U.S. companies that are producing
semiconductors with 45-nanometer feature sizes. China's ability to
produce advanced integrated circuits continues to depend on whether it
can obtain equipment, manufacturing technology, and materials from
other countries. However, China has begun developing an indigenous
capacity to build some types of advanced semiconductor manufacturing
equipment, which may enable it to reduce its dependence on some foreign-
sourced equipment. Lastly, China also can obtain semiconductor
manufacturing equipment on the used market. Although this equipment
cannot be used for state-of-the-art production, it nonetheless
contributes to China's production capacity.
U.S. and Chinese Manufacturing Capabilities Continue to Advance:
In 2002, we reported that, between 1986 and 2001, China had narrowed
its technology gap from a span of five generations (or 10 years) behind
U.S. commercial state-of-the-art production to approximately one
generation (1 to 2 years).[Footnote 19] Since 2002, commercial state-
of-the-art production has continued to advance. Companies in the United
States now produce integrated circuits with a feature size of 45
nanometers, while the most advanced company in China is producing
integrated circuits with a feature size of 65 nanometers--approximately
one generation apart. Companies in China produce different types of
integrated circuits, including microprocessors and various types of
memory. Figure 2 shows the advances made by companies in the United
States and China from 1994 through 2007.
Figure 2: U.S. and Chinese Semiconductor Manufacturing Capability, 1994
through 2007:
[See PDF for image]
Source: GAO analysis of data provided by Semiconductor Manufacturing
International Corporation and other semiconductor manufacturing
facilities in China, Intel Corporation, and the International
Technology Roadmap for Semiconductors.
Note: We use a logarithmic scale on the y-axis to best illustrate
changes in U.S. and Chinese semiconductor capabilities from 1994
through 2007.
[End of figure]
Although companies in China are capable of producing near-state-of-the-
art commercial integrated circuits, they mainly produce integrated
circuits that are several generations old and are used for internal
consumption in China's consumer electronics industry. These integrated
circuits are used in products such as cell phones, TVs, DVD players,
and personal computers. In 2006, SEMI estimated that 82 percent of
China's production capacity produces integrated circuits that are four
to seven generations (ranging from 500 to 180 nanometers) behind state-
of-the-art manufacturing, and approximately 7 percent of integrated
circuits produced are one or less generations (90 nanometers and below)
behind current state-of-the-art capabilities.
China Still Relies on Imports of Foreign Equipment, Materials, and
Partnerships with Foreign Entities to Fuel Technology Advances:
Commercial Chinese semiconductor manufacturing companies are still
largely dependent on foreign sources of equipment and materials to fuel
technology advances. Currently, European, Japanese, and U.S. companies
are the leading suppliers of semiconductor manufacturing equipment for
facilities producing advanced integrated circuits. Additionally, to
advance its technological capacity, China has partnered with foreign
companies or created incentives for foreign companies to locate to
China.
China continues to rely on imports of semiconductor manufacturing
equipment from Europe, Japan, and the United States for production of
advanced integrated circuits. The demand is being driven by several
advanced integrated circuit manufacturers, including Semiconductor
Manufacturing International Corporation (SMIC), Hua Hong NEC, and Hynix-
ST. In 2006, spending in China on semiconductor equipment from foreign
sources was approximately $1.6 billion, according to SEMI.[Footnote 20]
This accounted for nearly 97 percent of the value of all equipment
purchases from foreign and domestic sources. China also relies on
foreign material imports, including gases and chemicals, to manufacture
semiconductors. Although China produces these items, according to
industry experts, it does not produce them in sufficient quantity or
quality to meet its domestic demand. As China increases its integrated
circuit production capacity, its materials consumption also grows,
increasing its reliance on imported materials.
China also relies on partnerships with foreign companies to fuel its
technology developments. Through joint ventures or incentive programs
to encourage international companies to locate to China, China has
gained access to more advanced technology than it previously had or
could produce on its own. In 2002, we reported that five of China's
eight newest major integrated circuit manufacturing facilities were
established through joint ventures and the other three were wholly
owned foreign companies. One of the five facilities, a semiconductor
manufacturing facility owned by Motorola, a wholly owned U.S. company,
was sold to SMIC in 2003. The foreign-owned and publicly traded SMIC is
the largest and most advanced integrated circuit company in China.
China has continued to acquire advanced technology through
partnerships. For example, SMIC obtained advanced manufacturing know-
how on the production of integrated circuits specifically for memory
through a cooperative arrangement with a German company, Infineon, in
2006. Moreover, in December 2007, SMIC obtained a license from IBM, a
U.S.-based company, to use its 45-nanometer manufacturing technology in
the production of integrated circuits for mobile applications such as
cell phones.[Footnote 21] Likewise, HynixST, another new facility in
China established in 2006, which is a joint venture between Korea's
Hynix and Switzerland's STMicroelectronics, also provided China with
advanced commercial integrated circuit memory technology.
China Is Developing Domestic Capacity to Build Some Types of
Semiconductor Manufacturing Equipment:
China is developing the domestic capability to build some types of
semiconductor manufacturing equipment, which might eventually reduce
its dependence on foreign-sourced equipment. Currently, China has more
than 50 companies that produce equipment for semiconductor
manufacturing, 2 of which, Advanced Micro-Fabrication Equipment and
North Microelectronics, produce equipment to manufacture advanced
integrated circuits, according to SEMI. Equipment made by these
companies is found in some of China's most advanced fabrication
facilities such as SMIC, although the equipment is being tested still
and is not being used to manufacture integrated circuits for commercial
purposes. Chinese-made equipment constitutes a small but growing share
of domestic equipment purchases. In 2006, SEMI estimates that
semiconductor manufacturers in China purchased $56 million in
domestically produced equipment, about 3 percent of all equipment
purchases by Chinese manufacturers, but more than double the value of
domestic equipment purchases made in 2003.
Despite recent advances, China cannot domestically produce all of the
equipment needed to manufacture advanced semiconductors. For example,
China lacks a domestic source of lithography equipment, which is used
to imprint circuits on semiconductor materials and is necessary to
advance reductions in feature size. The United States also lacks a
domestic source of state-of-the-art lithography equipment. The last
remaining competitive U.S. manufacturer, Silicon Valley Group, was sold
to a Dutch company in 2001. Japan and The Netherlands are currently the
global leaders in the manufacture of lithography equipment.
China's Purchases of Used Equipment Expand Its Production Capacity:
China is able to expand its capacity for manufacturing integrated
circuits through used semiconductor manufacturing equipment purchases.
Although purchases of used equipment do not enhance China's ability to
produce advanced integrated circuits, they do provide China with an
ongoing source of equipment to expand its production capacity.
Additionally, used equipment may enable the production of integrated
circuits for China's military since military systems generally are
designed around older technology, not state-of-the-art semiconductors.
For instance, we reported in 2002 that China's most sophisticated
production facilities, although about 2 years behind U.S. state of the
art, were nonetheless capable of producing integrated circuits that
were more advanced than those used in some of the most advanced U.S.
weapons. Both U.S. and Chinese production capabilities have advanced
since 2002, but the same paradigm--military systems generally are
designed around older technology--still exists. Thus, China's ability
to manufacture less sophisticated chips through purchases of used
equipment potentially enhances its military capabilities.
Commerce's VEU Program in China Marks a Shift toward an End-User-Based
System of Export Controls for Semiconductor Equipment and Materials:
Before the introduction of the VEU program, export licenses provided
the only mechanism by which U.S. companies could ship most advanced
semiconductor manufacturing equipment and materials to China.[Footnote
22] Export licenses are assessed individually by an interagency team
based on such factors as the item, its intended end use, and the end-
user. A license also may contain conditions, including the requirement
for postshipment verification, to ensure the item is used as intended.
The VEU program, introduced in June 2007, marks a shift toward a more
end-user-based system of export controls by allowing select, pre-
screened Chinese entities to receive certain controlled items,
including semiconductor manufacturing equipment and materials, without
a license. The program established recordkeeping requirements to
provide assurance that items exported under the VEU program are being
used as intended, and recipients must agree to host discretionary on-
site reviews by U.S. government personnel.[Footnote 23]
Export Licenses Provided the Only Means to Export Advanced
Semiconductor Equipment and Materials to China before Introduction of
the VEU Program:
Before Commerce introduced the VEU program in 2007, export licenses
provided the only means for U.S. companies to export most advanced
semiconductor equipment and materials to China.[Footnote 24] An export
license authorizes the export, reexport, or transfer of a specific item
or items to a specified recipient.[Footnote 25] Commerce administers
the export licensing system for dual-use exports, including
semiconductor equipment and materials, with input from DOD, State, and
DOE.[Footnote 26] Each agency makes a recommendation to approve, deny,
or return a license application without action.[Footnote 27]
Disagreements over the disposition of a license are resolved through a
dispute resolution process.[Footnote 28] The intelligence community can
provide information to the interagency review team on prospective end-
users, although they do not make licensing recommendations.
Interagency reviewers consider a number of factors in evaluating export
license applications for semiconductor equipment and materials to
China, including the type and quantity of items to be shipped, the end-
user and stated end use, and foreign availability. To establish the
identity and reliability of prospective recipients, reviewing agencies
may request that Commerce check the "bona fides" of the recipient of
the technology prior to shipment, also known as a prelicense check.
They also may condition approval of a license on the exporter or end-
user meeting certain conditions. For instance, a license condition
might specify how an item should be used or require that Commerce
conduct a postshipment verification check on the recipient of the
item.[Footnote 29]
The VEU Program Allows Export of Some Semiconductor Equipment and
Materials to China without a License:
The VEU program, announced by Commerce in June 2007, marks a shift to a
more end-user-based system of export controls for semiconductor
equipment and materials by allowing the export of some items to China
without a license. The VEU program operates in parallel to the existing
export control framework and is designed for "trusted" Chinese
companies with a long licensing history and a record of using U.S.-
controlled items for civilian end uses. Among the first five companies
certified as validated end-users in October 2007, three are authorized
to receive semiconductor equipment or materials.[Footnote 30]
Prospective validated end-users, or others applying on their behalf,
must submit an application to Commerce that includes, among other
things, a list of items they wish to receive under the VEU
authorization, the locations where these items will be received, and a
commitment to accept on-site visits by U.S. government
personnel.[Footnote 31] In evaluating applications, Commerce conducts a
four-part internal review that includes:
* Compliance. Verifies whether the applicant has met all the regulatory
requirements specified in the EAR, confirms the applicant's ownership
and organizational structure, reviews the candidate's licensing and
compliance history, and assesses the candidate's proposed compliance
plan.
* Enforcement. Confirms whether information presented in the
candidate's application materials is consistent with its licensing and
enforcement history and whether there is any adverse enforcement
information on the applicant.
* Item and end use. Analyzes the items requested by the applicant and
their appropriateness given the stated end use and the company's
business activities.
* Intelligence. Vets parties to the application through the
intelligence community.
Once Commerce's internal review has been completed, applications are
reviewed by an End-User Review Committee (ERC), which is comprised of
representatives from the Departments of Defense, Energy, and State
(generally the same agencies that review export license applications),
and other agencies as appropriate. In reviewing an end-user for
eligibility, the ERC considers a range of factors, such as the entity's
exclusive engagement in civil end-use activities, its record of
compliance with U.S. export controls, its ability to meet the VEU
program's recordkeeping requirements, its relationship with U.S. and
foreign companies, and its willingness to host on-site reviews by U.S.
government personnel to ensure program compliance. According to a
Commerce official, applicants need to demonstrate that they either have
or will have the requisite controls and data collection systems in
place to ensure compliance with the terms of the VEU program. Such
controls would provide Commerce with a high degree of confidence that
on-site reviews will yield useful information. Validated end-users
should also have systems in place to demonstrate that items imported
under the VEU program are used for civilian purposes. For example,
validated end-users may have systems in place that are capable of
tracking customer orders so that Commerce can verify customer lists
during on-site reviews. Commerce allows VEU applicants the flexibility
to determine how they will demonstrate that they are capable of meeting
these internal control and recordkeeping requirements.
If necessary, the ERC also may request a preapproval visit to assess an
entity's suitability for validated end-user status. According to
officials from Commerce, no preapproval visits were conducted for the
first five Chinese entities approved for validated end-user status
because members of the ERC were already familiar with the companies
through their extensive licensing history. A unanimous vote is required
by the ERC to approve validated end-user status or add items to an
existing authorization.[Footnote 32] Revocation of an authorization or
removal of items from an existing authorization is by majority rule.
Disagreements among agencies on the ERC are managed through a dispute
resolution process similar to the procedures used for export license
applications. For a comparison of the similarities and differences
between a license and the VEU authorization, see appendix IV.
The Individual Licensing System and VEU Program Use Different
Approaches to Ensure That Equipment Exported to China Is Used as
Intended:
The individual licensing system and VEU program employ different
approaches to ensure that U.S. exports of semiconductor equipment and
materials to China are used as intended. Under the individual licensing
system, Commerce scrutinizes each individual application for the
appropriateness of the item and the end-user, often attaches conditions
to the license stipulating how an item may be used, and conducts
postshipment verification (PSV) checks. Under the VEU program, Commerce
ensures that items are used as intended by vetting validated end-users,
stipulating conditions to approved entities, and confirming compliance
with these conditions through periodic records checks and discretionary
on-site reviews.
Under the individual licensing system, most licenses for semiconductor
manufacturing equipment are issued with conditions that require the
recipient to abide by certain requirements. For example, a license
authorizing the export of semiconductor manufacturing equipment to a
Chinese entity might restrict the equipment to civilian end-uses or
prohibit the equipment from being used to produce integrated circuits
with components smaller than a certain feature size. Because U.S.
exporters are the licensees under this system, they are required to
communicate the specific license conditions to Chinese recipients or
other parties to whom the conditions may apply.
To verify compliance with license conditions and prevent the diversion
of equipment and materials to unauthorized end-users, the United States
also conducts PSV checks on a case-by-case basis in China. According to
Commerce officials, several criteria are used to determine which
entities will be subject to PSVs, including information on the exporter
and end-user, the sensitivity of the item, and the quantities in
question.[Footnote 33] During PSV checks, Commerce special agents or
other U.S. government personnel visit importers or end-users to confirm
the use and location of the items listed on the license. Commerce's PSV
guidelines require that the agent physically inspect the items or the
records that detail their disposition, verify that the items are
located at the specified facility, and confirm that the equipment is
being used for the purposes stated on the license. Agents also are
instructed to document cases where there are indications of impropriety
or whether the company's answers to questions are evasive.
Before 2004, the United States was able to conduct only a limited
number of PSV checks on semiconductor equipment and materials in China
because the Chinese government restricted the number and scope of PSV
checks that it would allow. In 2004, the United States and China signed
an EUVU that established protocols for PSV checks and expanded the
number of checks that the United States would be allowed to conduct.
Nevertheless, PSV checks on semiconductor equipment and materials in
China remain limited. From fiscal years 2002 through 2007, Commerce
approved 1,466 licenses for the export of semiconductor equipment and
materials to China. Nine hundred-three, or about 62 percent, of these
licenses contained a condition requiring Commerce to conduct a PSV
check. Commerce restricted GAO from reporting the number of PSV checks
conducted in China overall and for semiconductor equipment and
materials in China, for the purposes of this report. Although this
information has previously been available in public sources, Commerce
asserted that publicly disclosing this data would give export violators
or potential violators, both in the United States and abroad, sensitive
information, including information revealing Commerce's focus within
particular countries and on the kinds of items it checks most often.
In contrast, under the VEU program, Commerce intends to ensure that
semiconductor equipment and materials are used as intended by requiring
that validated end-users maintain a record of transactions, conducting
periodic reviews of recorded exports under the VEU authorization, and
undertaking discretionary on-site reviews to verify compliance with the
terms of the program. Unlike individual export licenses, validated end-
user status is awarded directly to entities in China, and these
entities are responsible for meeting the program's requirements. The
EAR requires that all validated end-users legally certify that items
obtained under the VEU program will be used only at approved facilities
and exclusively for civilian end-uses.[Footnote 34] Furthermore, the
advisory opinions issued by Commerce to each validated end-user
stipulate additional requirements that are similar to license
conditions.[Footnote 35] For example, advisory opinions may detail
specific recordkeeping, reporting, and customer screening requirements,
or restrict the type and technical parameters of semiconductors that
can be manufactured using equipment or materials shipped under the
authorization.
To ensure compliance with the terms of the VEU program as outlined in
the EAR and individual advisory opinions, the Commerce official
responsible for the VEU program stated that the department is already
conducting or plans to conduct three layers of reviews. First, Commerce
is conducting mandatory, semiannual reviews of each validated end-user.
The information for the review is obtained from a variety of sources
including public data, mandatory reporting by the validated end-user,
and assessments provided by the intelligence community and BIS's
enforcement unit. Second, Commerce is conducting an additional review
of each validated end-user 6 months after it receives its first
shipment under the VEU program and for every 6 months going forward.
This review includes the same elements as the first review, but also
includes an examination of data obtained from the Census Bureau's
Automated Export System and U.S. exporters on transactions under the
VEU authorization.[Footnote 36] Third, based on the results of these
two reviews, the ERC may decide to conduct an on-site review with the
validated end-user. According to Commerce, the procedures for on-site
reviews will be determined on a case-by-case basis, as dictated by the
specific circumstances of the validated end-user.
Challenges with VEU Program Implementation May Limit Commerce's Ability
to Ensure That Semiconductor Equipment and Materials Are Used as
Intended:
The VEU program has yet to produce the advantages anticipated by
Commerce, and challenges with program implementation may limit
Commerce's ability to ensure that items shipped under the program are
being used as intended. Commerce has yet to realize trade gains and
enhanced national security because few U.S. exporters have taken
advantage of the VEU program. Moreover, Commerce has not reached a VEU-
specific agreement with the Chinese government for conducting on-site
reviews of validated end-users, a key mechanism for ensuring program
compliance. Instead, as a stopgap measure, Commerce is attempting to
conduct VEU on-site reviews under a 2004 agreement. Commerce also lacks
procedures for selecting and conducting on-site reviews, though it
introduced the VEU program in June 2007.
Anticipated Advantages Have Not Yet Been Fully Realized Due to Limited
Use of the VEU Program:
Commerce anticipated that one of the advantages of the VEU program is
that it would facilitate trade in controlled items to China by removing
licensing requirements for the export of certain items to "trusted"
Chinese customers with a history of using exports responsibly.
According to Commerce, the program would foster trade by reducing the
administrative burden associated with seeking an export license for
U.S. exporters and enabling validated end-users to obtain items more
easily than their domestic competitors. Two companies that received
validated end-user authorization stated that the program facilitates
long-term planning by eliminating some of the uncertainties associated
with obtaining an export license from the U.S. government and other
administrative requirements. Additionally, the program allows validated
end-users to obtain certain equipment from U.S. companies without
having to rely on the exporter to obtain a license, according to a
validated end-user.
Commerce also anticipated that the VEU program would reduce the volume
of licenses required for transactions involving known end-users. In
turn, this would enable Commerce to dedicate more resources to
transactions and end-users that are less well known, and thus enhance
security. However, according to the Director of Commerce's Office of
Technology Evaluation, the department has a finite amount of resources
and an increasing number of export licenses to process from year to
year. Thus, he noted that it is unclear whether a potential reduction
in licensing volume resulting from increased shipments under the VEU
program would allow Commerce to increase scrutiny over lesser-known end-
users or merely enable Commerce to maintain current levels of
oversight. In addition, although Commerce anticipated that one of the
program's benefits would be to increase scrutiny over lesser known end-
users, according to the Chairperson of the ERC, it was unclear whether
increased shipments under the VEU program would coincide with
additional PSV checks for end-users that receive items under individual
export licenses due to the multiple considerations involved in
scheduling and carrying out PSV checks.
The advantages of the VEU program anticipated by Commerce have not yet
been realized because few U.S. exporters have shipped items to China
under the authorization. Commerce's ability to realize the anticipated
benefits of the VEU program hinges on whether or not exporters choose
to use the VEU authorization rather than an individual license.
Recognizing the high volume and dollar value of U.S. exports to certain
companies in China, Commerce designed the VEU program with the goal of
reducing the number of licenses to these types of companies. For
instance, according to Commerce, the first five companies designated as
validated end-users accounted for 18 percent of the value of licensed
trade with China in 2006. Commerce anticipates that approval of a
second set of five companies could increase that number to 40 percent.
However, as of June 2008, only one of the three validated end-users
authorized to receive semiconductor equipment and materials had
received any items under the program. Furthermore, according to
Commerce, since the first validated end-users were authorized in
October 2007, approximately 6 percent of the total exports of
semiconductor manufacturing equipment to China have taken place under
the VEU program, whereas 94 percent were conducted under an export
license. In addition, according to the Chairperson of the ERC, since
the VEU program was authorized, three licenses were issued for items
that could have been shipped under the VEU program.
Company officials that received validated end-user status offered
several reasons for not yet fully using the authorization. One company
official stated that they were upgrading their administrative systems
and planned to switch from their Special Comprehensive License to the
VEU program in the fall of 2008. Another validated end-user cited a
global economic slowdown in their industry as a reason for not taking
advantage of the VEU program. Finally, another company official with
validated end-user status noted that some of its suppliers have elected
to use existing individual or special comprehensive licenses to avoid
the administrative burden and time requirements associated with
obtaining an additional End-User:
Statement[Footnote 37] from the Chinese government, as recently
requested by Commerce. The EAR does not require that validated end-
users obtain End-User Statements for shipments received under the
authorization.[Footnote 38] However, in April 2008, Commerce requested
that the first five validated end-users seek End-User Statements from
the Chinese government to facilitate on-site reviews.
Challenges with VEU Implementation May Limit Commerce's Ability to
Conduct On-site Reviews:
Commerce may not be able to ensure that semiconductor equipment and
materials exported to China are used as intended because it has not
negotiated a VEU-specific agreement with the Chinese government for
conducting on-site reviews under the VEU program and lacks specific
procedures for carrying out these reviews. On-site reviews are not a
mandatory program requirement; rather, they are discretionary based on
an assessment of each validated end-user by the ERC. Commerce has
stated though that on-site reviews are a key mechanism for ensuring
that validated end-users comply with the terms of the authorization and
that the ability to conduct meaningful on-site reviews will be a
critical factor in Commerce's long-term support of the program.
However, Commerce may be limited in its ability to conduct on-site
reviews of validated end-users because it has not negotiated a VEU-
specific agreement with the Chinese government for conducting these
reviews. In October 2007, the Chinese Ministry of Commerce announced
that Chinese entities were prohibited from hosting foreign governments,
including the U.S. government, for interviews or investigations related
to export controls without its permission. The Chinese government has
also asked that Commerce refrain from approving any new, additional
validated end-users until the two sides can agree on terms for
conducting on-site reviews of validated end-users. A senior official
from the Chinese Ministry of Commerce stated to us during a March 2008
meeting that the Ministry wants on-site reviews to be conducted either
according to the terms of the 2004 EUVU, or under a newly negotiated
U.S.-China agreement specific to the VEU program. In the absence of a
new agreement specific to the VEU program, Commerce has requested to
conduct one on-site review pursuant to the terms of the 2004 EUVU as a
stopgap measure. However, to conduct on-site reviews under the 2004
agreement, Commerce relies on the voluntary compliance of validated end-
users to obtain End-User Statements from the Chinese Ministry of
Commerce, as this requirement was not included in the regulations
establishing the VEU program. According to Commerce, Chinese officials
were receptive to its request for an on-site review, but MOFCOM and
Commerce have agreed to postpone the check under the existing EUVU
mechanism, as negotiations on the VEU-specific protocol are still in
progress.
Commerce's ability to ensure that items shipped under the VEU program
are being used as intended is further limited by a lack of procedures
for selecting and conducting the on-site reviews. Commerce officials
stated that criteria that could be considered for on-site review
selection include the volume of items shipped, the geographic location
of the validated end-user, the civil or military utility of the
authorized items, foreign or U.S. company ownership, the facility's
licensing history, and intelligence reporting. In April 2008, 10 months
after Commerce approved the VEU program, draft procedures for selecting
end-users for on-site reviews were disseminated to ERC members.
However, as of September 2008, interagency agreement on these
procedures had not been reached. Moreover, Commerce has not developed
procedures for conducting on-site reviews. During our field work in
March 2008 in China, Commerce's export control officer in Beijing noted
that it was unclear how on-site reviews would be conducted because she
was unaware of procedures governing them. Thus, even if the Chinese
Ministry of Commerce grants permission to conduct an on-site review, it
is unclear how the review would be conducted in the absence of any
final procedures. Commerce asserted that it plans to develop on-site
review procedures on a case-by-case basis to ensure that each on-site
review is tailored to a particular validated end-user.
Agency Actions to Address Prior GAO Recommendations:
We assessed progress that the Departments of Commerce and Defense have
made to address the recommendations from our 2002 report. In 2002, we
recommended that Commerce and DOD conduct a foreign availability
assessment to determine if semiconductor equipment and materials of
comparable quality are available in quantities that would render U.S.
export controls on these items ineffective. We also recommended that
Commerce and DOD assess the cumulative effects that exports of
semiconductor equipment and materials to China have had on the U.S.
economy and national security. Although Commerce and DOD have not
formally assessed the foreign availability of semiconductor equipment
and materials, Commerce has taken some steps to meet the intent of our
recommendation by using information on foreign availability to inform
export controls and make licensing decisions for these items. Neither
Commerce nor DOD has conducted assessments on the cumulative effect of
U.S. semiconductor-related exports to China.
Commerce Evaluates Foreign Availability When Assessing Controls and
Making Licensing Decisions:
Commerce and DOD have not conducted a formal foreign availability
assessment for semiconductor manufacturing equipment and materials, but
Commerce does use the information on foreign availability that it
obtains from other sources to inform export controls and licensing
decisions for these items, and thus met the intent of our
recommendation. Commerce stated that the key reason for not conducting
a foreign availability assessment of semiconductor manufacturing
equipment and materials is that semiconductor equipment manufacturers
have not requested one. Commerce also noted that there is substantial
public information on foreign availability of semiconductor
manufacturing equipment and materials in China. In response to our
prior recommendation, Commerce noted that, while the EAR allows the
U.S. government to initiate a foreign availability assessment, this
provision is intended primarily to be used by industry to challenge
overly restrictive or ineffective export controls.
In recent years, semiconductor equipment manufacturers have not
requested Commerce to conduct a foreign availability assessment because
the assessments require a significant amount of effort, and previous
efforts have not resulted in the decontrol of any equipment. For
instance, SEMI indicated that it submitted, for the United States to
discuss at Wassenaar, a number of proposals to decontrol items, which
were unsuccessful. Furthermore, SEMI indicated that the scope of the
issue regarding controls over semiconductor manufacturing equipment is
too large for them to undertake without a serious commitment from the
U.S. government.
Commerce has taken steps to address our 2002 recommendation, however,
by evaluating foreign availability when assessing export controls and
making licensing decisions related to semiconductor manufacturing
equipment and materials. Information provided by a number of sources--
including technical advisory groups,[Footnote 39] the public, and
reviews of license applications--informs both export controls and
licensing decisions. For example, Commerce receives information about
foreign availability from its technical advisory committee and uses
this information to develop proposals during multilateral discussions
and for Commerce Control List reviews. The proposals could result in
the addition or elimination of a control. For example, according to
Commerce, a number of adjustments or liberalizations to controls for
semiconductor manufacturing equipment and materials have occurred as a
result of this input.
Commerce also seeks information regarding foreign availability from the
public. For example, during the development of the China military end-
use rule, Commerce originally planned to control 47 items. Commerce
published a notice in the Federal Register seeking information,
including whether or not the items they were seeking to control were
available in foreign markets.[Footnote 40] In response to the feedback
it received and analysis it conducted, Commerce reduced the list of
items controlled from 47 to 31.[Footnote 41] Included among the items
were several types of lower-level semiconductor manufacturing equipment
that Commerce determined were available from sources outside Wassenaar.
Commerce also noted that, as China has emerged as a significant
semiconductor manufacturer over the past decade, U.S. export control
officials have become knowledgeable about different "players" in China
as well as the various sources of supply for controlled semiconductor
manufacturing equipment. According to Commerce, officials incorporate
this information into the licensing review process. Commerce also
stated that a formal foreign availability study would reveal limited
additional information that Commerce does not already have access to
through existing sources.
We believe that Commerce's efforts are sufficient to address our 2002
recommendation. Although Commerce has not conducted a formal foreign
availability study to determine whether there are comparable foreign
sources of semiconductor equipment and materials, it has used other
sources--including technical advisory committees, end-use visits, past
licensing history, and the public--to obtain similar information.
Provided that Commerce continues to be able to access this information,
we do not believe that an additional foreign availability study is
necessary at this time.
Commerce and DOD Have Not Conducted Studies on the Effects of
Semiconductor Manufacturing Equipment Transfers to China:
Neither Commerce nor DOD have addressed our recommendation to conduct
assessments on the economic and security effects of U.S. semiconductor
manufacturing equipment exports to China. In September 2006, Commerce
established the Office of Technology Evaluation (OTE) to help gauge the
effectiveness of U.S. export controls by conducting studies on the
cumulative effects of transfer of certain key technologies, among other
studies. In its Fiscal Year 2006 Annual Report, Commerce announced that
it planned to conduct two studies related to the semiconductor and
semiconductor manufacturing equipment industries. First, Commerce
stated that it planned to conduct an industrial base assessment on U.S.
integrated circuit design and manufacturing capability. According to
the Director of OTE, Commerce has initiated this study, and it is
nearing completion. Second, Commerce announced plans to conduct an
evaluation of the health and competitiveness of U.S. industry engaged
in developing critical semiconductor manufacturing equipment
technology. However, OTE decided not to conduct the evaluation;
according to the former Director of the Office of National Security and
Technology Transfer Controls, BIS discussed the possible study with
representatives from the semiconductor manufacturing equipment
industry, and they collectively decided that it was not needed.
We also noted in 2002 that Directive 2040.2 required DOD to "assess
annually the total effect of transfers of technology, goods, services,
and munitions on U.S. security regardless of the transfer mechanisms
involved."[Footnote 42] However, the directive had not been updated
since July 5, 1985, and no such studies had been completed since the
issuance of the original directive. In July 2008, DOD released a
revised "instruction" that addresses the need for cumulative effects
studies but eliminates the specific requirement to do a study and the
annual requirement.[Footnote 43] The instruction instead calls for the
Director of the Defense Intelligence Agency to provide intelligence
concerning the total effect of transfers of dual-use and defense-
related technology, articles, and services on U.S. security. However,
no such studies have been completed to date, and the impact of exports
of semiconductor manufacturing equipment on U.S. national security thus
remains unclear.
Conclusions:
U.S. export control policy aims to balance two competing interests--
promoting trade to civilian end-users and denying trade in sensitive
technologies to end-users engaged in activities detrimental to national
security interests. The migration of commercial semiconductor
production to China and continued advances in China's domestic
manufacturing capabilities illustrate the challenges inherent in
meeting these dual goals. Integrated circuits, for example, are not
only inputs to consumer products but are often used in weapons systems.
Although the VEU program is aimed at facilitating trade, Commerce built
in various "safeguards" to ensure that items are used as intended and
not to enhance military capabilities. Although the companies authorized
under the VEU program have a long history of using exports responsibly,
Commerce included a requirement for end-users to commit to accept on-
site reviews to ensure that items are used as intended and indicated
that the ability to conduct these reviews is a critical factor in its
long-term support of the program.
Commerce, however, established the VEU program in June 2007 and
authorized the first five companies in October 2007, without
negotiating a VEU-specific agreement or amending the 2004 EUVU with
China to conduct the reviews. Additionally, Commerce instituted the
program without some basic mechanisms to ensure compliance with program
requirements, including criteria for selecting on-site reviews and the
procedures for conducting them. As a result, Commerce now relies on the
EUVU procedures, which require an End-User Statement, burdening
validated end-users and hindering trade facilitation. Additionally, if
validated end-users do not voluntarily seek an End-User Statement,
Commerce may not conduct on-site reviews and therefore will not be able
to provide assurance that exported items are being used as intended.
Recommendations:
To better promote the Validated End-User program's objective of trade
facilitation and enhanced oversight, the Secretary of Commerce should
suspend the Validated End-User program to China until a VEU-specific
agreement and procedures are established for on-site reviews.
Specifically, Commerce should (1) negotiate a VEU-specific agreement
with the Chinese government to conduct on-site reviews or amend the
2004 EUVU to include the Validated End-User program, and (2) develop
procedures for conducting on-site reviews that are applicable to all
validated end-users.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Departments of Commerce,
Defense, Energy, and State for their review and comment. Commerce
provided written comments, which are reprinted in appendix V. Defense
and State did not provide comments. Commerce and Energy's National
Nuclear Security Administration also provided technical comments, which
we incorporated as appropriate throughout this report.
Commerce disagreed with our recommendations, stating that the report's
premise--that the VEU program has no adequate mechanism to oversee
exports of semiconductor equipment to China--is incorrect. Commerce
stated that on-site reviews could be conducted under the 2004 EUVU or a
VEU-specific addendum to the EUVU, which it is currently negotiating
with the Chinese government.[Footnote 44] Commerce also asserted that
procedures for selecting on-site reviews exist, that general procedures
for end-use checks are in place, and that specific guidance for on-site
reviews must be developed on a case-by-case basis.
We have modified the report to acknowledge that Commerce intends to use
a stopgap mechanism, the 2004 EUVU, which may enable it to conduct on-
site reviews for items exported under the VEU program to China.
However, this agreement requires companies to obtain an End-User
Statement from the Chinese government. This statement is not required
under the VEU program and thus imposes an additional burden on
validated end-users, running counter to the trade-facilitating
objectives of the program. To achieve the intended benefits of the VEU
program, Commerce needs to negotiate a VEU-specific agreement or amend
the 2004 EUVU to accommodate the distinct features of the VEU program.
We disagree with Commerce's assertion that it has sufficient procedures
for selecting on-site reviews and conducting end-use checks. Commerce
has consistently stated that on-site reviews for validated end-users
and end-use checks for individual licenses are distinct activities
serving different purposes. End-use checks focus on ensuring that an
item is being used for the purposes stated in the license, whereas on-
site reviews are more comprehensive. Additionally, the procedures for
selecting validated end-users for on-site reviews are still in draft
form as of September 2008, and have not been cleared by the interagency
process as Commerce implied in its comments. Commerce would not provide
us with a copy of these draft procedures. Finally, we agree that
Commerce needs additional case-by-case guidance for on-site reviews to
ensure that each review is tailored to the particular validated end-
user. However, the department also needs general procedures to ensure
that on-site reviews are conducted in a consistent manner.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no distribution until 30 days from the
report date. At that time, we will send copies of this report to
interested congressional committees. We will also make copies available
to others upon request. In addition, this report will be available at
no charge on the GAO Web site at [hyperlink, http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact me at (202) 512-8979 or c [Hyperlink, christoffj@gao.gov]
hristoffj@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. GAO staff who made major contributions to this report are
listed in appendix VI.
Signed by:
Joseph A. Christoff:
Director, International Affairs and Trade:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
This report discusses the (1) evolution of China's semiconductor
manufacturing capabilities since 2002, (2) changes to U.S. export
control policies over the sale of semiconductor manufacturing equipment
and materials to China since 2002, and (3) the advantages and
limitations of these changes to U.S. export controls. In addition, this
report describes progress the Departments of Commerce and Defense have
made to address our prior recommendations.
To describe how China's semiconductor manufacturing capabilities have
evolved since 2002, we reviewed available literature; interviewed
government officials, industry representatives, and academics; and
reviewed information from the U.S. and Chinese semiconductor and
semiconductor equipment and materials industries. We also traveled to
China and met with companies involved in manufacturing semiconductors.
We met with officials from the U.S. Departments of Commerce (Commerce),
Defense (DOD), Energy (DOE), and State (State), as well as members of
the intelligence community. We also visited three DOE National
Laboratories, including Lawrence Livermore in Livermore, California;
Kansas City in Kansas City, Missouri; and Sandia in Albuquerque, New
Mexico. We interviewed representatives from two U.S. semiconductor
manufacturing companies--IBM and Intel. We met with officials from the
Semiconductor Equipment and Materials International (SEMI) and
Semiconductor Industry Association--the trade associations representing
each industry--in San Jose, California; Washington, D.C; and Shanghai,
China. We also interviewed academics with expertise in China's
semiconductor industry and semiconductor manufacturing at the
University of Maryland's Center for Advanced Life Cycle Engineering and
the University of California, Berkeley's Microfabrication Laboratory.
We obtained trade reports on China's semiconductor and semiconductor
manufacturing equipment industries from SEMI and met with the reports'
authors in Shanghai, China, to discuss their methods and findings. We
determined that the data collected and analyses conducted were
sufficiently reliable for our use in this report. In addition, we
visited three companies--Applied Materials China, Hua Hong NEC, and
Semiconductor Manufacturing International Corporation--that are
involved in manufacturing semiconductors in China and have received
semiconductor manufacturing equipment and materials from U.S. exporters
under export licenses and the Validated End-User authorization. We also
attended SEMICON China--a semiconductor industry trade show with more
than 900 U.S., Chinese, and other foreign companies represented. During
SEMICON China, we met with an indigenous Chinese semiconductor
equipment manufacturer, Advanced Micro-Fabrication Equipment, Inc., and
obtained information from two other indigenous equipment manufacturers--
Beijing Seven Star HuaChuang Electronics Company, Limited, and North
Microelectronics Company, Limited.
To describe changes to U.S. policies and practices for the export of
semiconductor equipment and materials to China since 2002, we reviewed
the relevant statutes, regulations, Presidential and DOD Directives and
DOD Instruction pertaining to export controls to China and interviewed
officials from the Departments of Commerce, DOD, DOE, and State. We
also interviewed representatives of semiconductor and semiconductor
equipment companies--including Applied Materials, IBM and Intel in the
United States, and Applied Materials China, Hua Hong NEC, and
Semiconductor Manufacturing International Corporation in China--that
received controlled items under U.S. export licenses and the Validated
End-User authorization. We analyzed export licensing data provided by
Commerce to describe the number of licenses approved for semiconductor
equipment and materials to China, as well as the number of licenses
containing the requirement to conduct postshipment verification (PSV)
checks, from fiscal years 2002 through 2007. We determined that these
data were sufficiently reliable for the purposes for which they are
presented in this report. We also reviewed reports provided by Commerce
on the number and outcomes of end-use checks, including prelicense and
PSV checks in China. Although Commerce provided GAO with data on end-
use checks, it restricted us from publicly reporting the number and
outcomes of PSV checks conducted in China on shipments of semiconductor
equipment and materials. According to Commerce, publicly disclosing
this data would give export violators or potential violators, both in
the United States and abroad, sensitive information, including
information revealing Commerce's Bureau of Information and Security's
(BIS) focus within particular countries and on the kinds of items the
BIS checks most often.
To assess the advantages and limitations associated with changes to
U.S. export control policies and practices, we reviewed the
regulations, guidelines, and procedures governing export licenses and
the VEU program. We also interviewed U.S. government officials in the
United States and China, including Commerce's export control officers
in Beijing and Hong Kong responsible for conducting end-use checks. We
interviewed representatives from Applied Materials China, Hua Hong NEC,
and Semiconductor Manufacturing International Corporation, three of the
five companies that received the validated end-user authorization and
the only entities that are permitted to receive semiconductor equipment
and materials under the authorization. Additionally, we met with and
interviewed officials from China's Ministry of Commerce in Beijing,
China.
Finally, to determine whether or not DOD and Commerce addressed our
2002 recommendations to conduct assessments related to foreign
availability and the cumulative effects of semiconductor manufacturing
equipment exports on U.S. national security, we interviewed officials
from both agencies, and reviewed regulations, directives, and an
instruction, as well as documentation related to conducting these
activities. We also discussed the topic of foreign availability with
industry representatives including SEMI, Applied Materials, and Intel
to ascertain if foreign availability continues to be a concern, as it
was in 2002.
We conducted this performance audit from October 2007 to September
2008, in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
[End of section]
Appendix II: Commerce Control List Categories and Groups:
Table 1: Commerce Control List Categories:
0;
Nuclear materials, facilities, and equipment and miscellaneous.
1;
Materials, chemicals, "microorganisms," and toxins.
2;
Materials processing.
3;
Electronics.
4;
Computers.
5;
Telecommunications and information security.
6;
Lasers and sensors.
7;
Navigation and avionics.
8;
Marine.
9;
Propulsion systems, space vehicles, and related equipment.
Source: 15 C.F.R. §738.2.
[End of table]
Table 2: Commerce Control List Groups:
A;
Equipment, assemblies, and components.
B;
Test, inspection, and production equipment.
C;
Materials.
D;
Software.
E;
Technology.
Source: 15 C.F.R. §738.2.
[End of table]
[End of section]
Appendix III: Semiconductor Manufacturing Equipment and Materials
Requiring an Export License to China:
List number[A]: 3B001.a.1;
Description: Semiconductor manufacturing equipment: Thin layer
deposition equipment;
National security significance: Semiconductor manufacturing equipment:
Radiation- hardened electronics, space-qualified solar cells, high-
power radio- frequency devices, infrared focal plane arrays;
Primary supplier countries: Semiconductor manufacturing equipment:
Japan, United States.
List number[A]: 3B001.a.2;
Description: Semiconductor manufacturing equipment: MOCVD[B];
National security significance: Semiconductor manufacturing equipment:
Radiation-hardened electronics, space- qualified solar cells, high-
power radio-frequency devices, infrared focal plane arrays;
Primary supplier countries: Semiconductor manufacturing equipment:
Germany, United States.
List number[A]: 3B001.a.3;
Description: Semiconductor manufacturing equipment: MBE[C];
National security significance: Semiconductor manufacturing equipment:
Radiation-hardened electronics, space- qualified solar cells, high-
power radio-frequency devices, infrared focal plane arrays;
Primary supplier countries: Semiconductor manufacturing equipment:
United Kingdom, United States.
List number[A]: 3B001.b;
Description: Semiconductor manufacturing equipment: Ion implantation
equipment;
National security significance: Semiconductor manufacturing equipment:
Used for radiation-hardened circuitry and state-of-the-art integrated
circuits;
Primary supplier countries: Semiconductor manufacturing equipment:
Japan, United States.
List number[A]: 3B001.c;
Description: Semiconductor manufacturing equipment: Plasma dry etching
equipment;
National security significance: Semiconductor manufacturing equipment:
Needed for all state-of-the-art commercial and military electronics.
Enables the production of controlled analog-to-digital converters
(ADCs), field programmable logic devices (FPLDs), and application
specific circuits (ASICs);
Primary supplier countries: Semiconductor manufacturing equipment:
Japan, United States.
List number[A]: 3B001.d;
Description: Semiconductor manufacturing equipment: Plasma enhanced
chemical vapor deposition;
National security significance: Semiconductor manufacturing equipment:
Needed for all state-of-the-art commercial and military electronics.
Enables the production of controlled analog-to-digital converters
(ADCs), field programmable logic devices (FPLDs), and application
specific circuits (ASICs);
Primary supplier countries: Semiconductor manufacturing equipment:
Japan, United States.
List number[A]: 3B001.e;
Description: Semiconductor manufacturing equipment: Cluster tool;
National security significance: Semiconductor manufacturing equipment:
Needed for all state-of-the-art commercial and military electronics.
Enables the production of controlled analog-to- digital converters
(ADCs), field programmable logic devices (FPLDs), and application
specific circuits (ASICs);
Primary supplier countries: Semiconductor manufacturing equipment:
Japan, United States.
List number[A]: 3B001.f.1;
Description: Semiconductor manufacturing equipment: Photo-optical or X-
ray lithography equipment;
National security significance: Semiconductor manufacturing equipment:
Needed for all state-of-the-art commercial and military electronics.
Enables the production of controlled analog-to-digital converters
(ADCs), field programmable logic devices (FPLDs), and application
specific circuits (ASICs);
Primary supplier countries: Semiconductor manufacturing equipment:
Japan, The Netherlands, United States.
List number[A]: 3B001.f.2;
Description: Semiconductor manufacturing equipment: Imprint lithography
systems;
National security significance: Semiconductor manufacturing equipment:
Needed for all state-of-the-art commercial and military electronics.
Enables the production of controlled analog-to-digital converters
(ADCs), field programmable logic devices (FPLDs), and application
specific circuits (ASICs);
Primary supplier countries: Semiconductor manufacturing equipment:
Japan, The Netherlands, United States.
List number[A]: 3B001.f.3;
Description: Semiconductor manufacturing equipment: Mask lithography
Equipment;
National security significance: Semiconductor manufacturing equipment:
Needed for all state-of-the-art commercial and military electronics.
Enables the production of controlled analog-to-digital converters
(ADCs), field programmable logic devices (FPLDs), and application
specific circuits (ASICs);
Primary supplier countries: Semiconductor manufacturing equipment:
Japan, Sweden, United States.
List number[A]: 3B001.g;
Description: Semiconductor manufacturing equipment: Masks and reticles;
National security significance: Semiconductor manufacturing equipment:
Needed for all state-of-the-art commercial and military electronics.
Enables the production of controlled analog-to-digital converters
(ADCs), field programmable logic devices (FPLDs), and application
specific circuits (ASICs);
Primary supplier countries: Semiconductor manufacturing equipment:
Japan, United States.
List number[A]: 3B001.h;
Description: Semiconductor manufacturing equipment: Multi-layer masks;
National security significance: Semiconductor manufacturing equipment:
Needed for all state-of-the-art commercial and military electronics.
Enables the production of controlled analog-to-digital converters
(ADCs), field programmable logic devices (FPLDs), and application
specific circuits (ASICs);
Primary supplier countries: Semiconductor manufacturing equipment:
Japan, United States.
List number[A]: 3B001.i;
Description: Semiconductor manufacturing equipment: Imprint lithography
templates;
National security significance: Semiconductor manufacturing equipment:
Needed for all state-of-the-art commercial and military electronics.
Enables the production of controlled analog-to-digital converters
(ADCs), field programmable logic devices (FPLDs), and application
specific circuits (ASICs);
Primary supplier countries: Semiconductor manufacturing equipment:
Japan, United States.
List number[A]: 3B002.a;
Description: Semiconductor manufacturing equipment: S-parameter
testers;
National security significance: Semiconductor manufacturing equipment:
Needed for all state-of-the-art commercial and military electronics.
Enables the production of controlled analog-to-digital converters
(ADCs), field programmable logic devices (FPLDs), and application
specific circuits (ASICs);
Primary supplier countries: Semiconductor manufacturing equipment:
Japan, United States.
List number[A]: 3B002.c;
Description: Semiconductor manufacturing equipment: Integrated circuit
testers;
National security significance: Semiconductor manufacturing equipment:
Needed for all state-of-the-art commercial and military electronics.
Enables the production of controlled analog-to-digital converters
(ADCs), field programmable logic devices (FPLDs), and application
specific circuits (ASICs);
Primary supplier countries: Semiconductor manufacturing equipment:
Germany, Japan, United States.
List number[A]: 3C001;
Description: Semiconductor manufacturing materials: Hetero-epitaxial
materials;
National security significance: Semiconductor manufacturing materials:
The products of MOCVD and MBE deposition used to make integrated
circuits;
Primary supplier countries: Semiconductor manufacturing materials:
Europe, Japan, Taiwan, United States.
List number[A]: 3C002;
Description: Semiconductor manufacturing materials: Resist materials;
National security significance: Semiconductor manufacturing materials:
Needed for all state-of-the-art commercial and military electronics.
Enable the production of controlled analog-to-digital converters
(ADCs), field programmable logic devices (FPLDs), and application
specific circuits (ASICs). These end items are controlled under the
Export Administration Regulations in ECCN 3A001 and ECCN 3A101, or
under the International Traffic in Arms Regulations Category XI;
Primary supplier countries: Semiconductor manufacturing materials:
Europe, Japan, United States.
List number[A]: 3C003;
Description: Semiconductor manufacturing materials: Organo-inorganic
compounds;
National security significance: Semiconductor manufacturing materials:
Gas sources for MOCVD;
Primary supplier countries: Semiconductor manufacturing materials:
Europe, Japan, United States.
List number[A]: 3C004;
Description: Semiconductor manufacturing materials: Purified gases;
National security significance: Semiconductor manufacturing materials:
Gas sources for MOCVD;
Primary supplier countries: Semiconductor manufacturing materials:
Europe, Japan, United States.
List number[A]: 3C005;
Description: Semiconductor manufacturing materials: Silicon carbide
wafers;
National security significance: Semiconductor manufacturing materials:
High-power radio-frequency devices, power electronics;
Primary supplier countries: Semiconductor manufacturing materials:
Europe, Japan, United States.
Source: Department of Defense and the Commerce Control List.
[A] Commerce Control List, Category Three - Electronics. 15 C.F.R.
Supplement No. 1 to Part 774.
[B] MOCVD - metal organic chemical vapor deposition reactors.
[C] MBE - molecular beam epitaxy equipment.
[End of table]
[End of section]
Appendix IV: Comparison of Individual and Special Comprehensive
Licenses, and Validated End-User Authorization:
Recipient of license or authorization;
Individual Validated License (IVL): Exporter;
Special Comprehensive License (SCL): Exporter;
Validated End-User (VEU) Authorization: End-User.
Description;
Individual Validated License (IVL): An export license authorizing a
transaction or series of transactions between a single exporter and
recipient;
Special Comprehensive License (SCL): An export license authorizing
multiple exports and re-exports between a single exporter and
recipient, without review and approval of each transaction;
Validated End-User (VEU) Authorization: An authorization that permits
the export, re-export, and transfer to validated end-users of any
eligible items that will be used in a specific, eligible destination.
Validity period;
Individual Validated License (IVL): Generally 2 years;
Special Comprehensive License (SCL): 4 years;
may be extended for an additional 4 years;
Validated End-User (VEU) Authorization: VEU authorizations are valid in
perpetuity unless revoked.
Review process;
Individual Validated License (IVL): Representatives of the Departments
of Commerce, Defense, State, and Energy review each license unless a
reviewing agency has delegated its reviewing authority back to
Commerce;
Special Comprehensive License (SCL): Same as IVL;
Validated End-User (VEU) Authorization: A committee of representatives
from the Departments of State, Defense, Energy, Commerce, and other
agencies, as appropriate, approves the VEU authorization.
Dispute resolution process;
Individual Validated License (IVL): Yes, any agency that disagrees with
a licensing decision may escalate a case;
Special Comprehensive License (SCL): Yes, any agency that disagrees
with a licensing decision may escalate a case;
Validated End-User (VEU) Authorization: Yes, any agency that disagrees
with a VEU authorization decision may escalate a case.
Factors considered in granting a license or validated end-user
status[A];
Individual Validated License (IVL): For items controlled for national
security reasons, type and quantity of the item;
intended end- use of the item (military or civilian);
foreign availability;
and destination country;
Special Comprehensive License (SCL): Proposed end-use and end-users;
past licensing history; evidence of continuous large volume of exports;
and compliance with U.S. export controls;
Validated End-User (VEU) Authorization: Involvement only in civilian
activities; previous compliance with U.S. export controls; agreement to
"preapproval" visit and on-site reviews; and ability to comply with
program requirements.
License conditions;
Individual Validated License (IVL): Commerce may place conditions on
the use of an IVL;
Special Comprehensive License (SCL): Commerce may place conditions on
the use of an SCL;
Validated End-User (VEU) Authorization: Commerce may specify conditions
on the use of VEU authorization.
Internal controls;
Individual Validated License (IVL): Formal internal control program not
required;
Special Comprehensive License (SCL): Internal control programs are
required for the exporter and consignee;
Validated End-User (VEU) Authorization: Although a formal internal
control plan is not required, the applicant must describe the system
that is in place to ensure compliance with VEU requirements.
Recordkeeping and reporting requirements;
Individual Validated License (IVL): IVL holders generally are required
to retain all records supporting their license applications for 5
years;
IVL holders have no reporting requirements unless imposed by a
particular license. However, the records of their exports are subject
to inspection at Commerce's request;
Special Comprehensive License (SCL): SCLs include record-keeping
requirements for SCL holders and consignees;
SCL holders must report semi-annually exports of certain items
controlled multilaterally under the Wassenaar Arrangement. In addition,
the records of their exports are subject to inspection at Commerce's
request;
Validated End-User (VEU) Authorization: Re-exporters are required to
submit semi-annual reports to Commerce, and exports under the VEU
program of certain items controlled multilaterally under the Wassenaar
Arrangement must be reported semi-annually. Exporters and validated end-
users are required to retain records but do not have reporting
requirements unless otherwise specified by Commerce.
End-use visits;
Individual Validated License (IVL): Yes, end-use visits may be
conducted under a 2004 agreement between the United States and China;
Special Comprehensive License (SCL): Yes, end-use visits may be
conducted under a 2004 agreement between the United States and China;
Validated End-User (VEU) Authorization: Validated end-users agree to
host on-site reviews. Commerce plans to conduct these reviews under a
2004 agreement between the United States and China until an addendum to
this agreement or a new, VEU-specific agreement is reached.
Source: GAO analysis of information from the Export Administration
Regulations.
[A] Not all factors considering in granting a license or validated end-
users are included here. Among the other factors considered in granting
a license or VEU status are those included in 15 C.F.R. § 742.4(b)(3)
(licenses for national security items), 15 C.F.R. § 758.2(d) (Special
Comprehensive Licenses), and 15 C.F.R. § 748.15(a)(2) (Validated End-
Users).
[End of table]
[End of section]
Appendix V: Comments from the Department of Commerce:
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
United States Department Of Commerce:
Assistant Secretary for Export Administration:
Washington, D.C. 20230:
September 5, 2008:
Joseph Christoff:
Director; International Affairs and Trade:
Government Accountability Office:
441 G Street, NW:
Washington, D.C. 20548
Dear Mr. Christoff:
This is in response to your request for comments on the Government
Accountability Office (GAO) report entitled Export Controls: Commerce
Lacks the Ability to Ensure that Semiconductor Equipment Exported to
China Is Used as Intended under the Validated End-User Program. GAO-08-
1095. We appreciate the GAO's work in preparing the report and the
opportunity to review this draft.
The fundamental premise of the report – that no adequate mechanism
exists to provide oversight of exports of semiconductor equipment under
the Validated End-User (VEU) Program – is incorrect. The report itself
notes the Chinese view that reviews could he conducted under the
existing 2004 End Use Visit Understanding ("EUVU) or under a VEU-
specific addendum to the EUVU being negotiated by the Bureau of
Industry and Security (BIS) and China's Ministry of Commerce. In
addition, the general procedures for selecting on-site reviews have
been established. procedures for end-use cheeks have been in place, and
guidance for specific on-site reviews must be developed on a case-by-
case basis to ensure the review is tailored to each VIA`.
BIS's specific comments on the draft report are enclosed.
Our point of contact on this report is Julissa Hurtado. Ms. Hurtado can
be reached at (202) 482-8093. Please feel free to contact us if you
would like to discuss any aspect of these comments.
Sincerely,
Signed by:
Christopher R. Wall:
Enclosure:
U.S. Department of Commerce Comments on the Government Accountability
Office Report: Commerce Lacks the Ability to Ensure That Semiconductor
Equipment Exported to China Is Used As Intended Under the Validated End-
User Program GAO-08-1095:
Recommendation: In order to ensure that Department of Commerce has the
necessary oversight mechanisms in place, the Secretary of Commerce
should suspend the validated end-user program to China until it has
taken the steps necessary to ensure that it will be able to carry out
on-site reviews. These steps include (1) negotiating an agreement with
the Chinese to conduct on-site reviews and (2) developing procedures
for conducting on- site reviews.
Response to Recommendation:
The fundamental premise of the report – that no adequate mechanism
exists to provide oversight of exports of semiconductor equipment under
the Validated End-User (VEU) program – is incorrect.
See comment 1.
Inspections of items shipped under the VEU program can be made under
the 2004 End Use Visit Understanding (EUVU). The report itself notes on
page 23 that this is also the view of the Chinese government. While the
specific details of the inspection mechanism are classified, the 2004
EUVU provides the framework for all export control-related inspections
in China, including for shipments made under the VEU program. BIS has
offered to make this classified EUVU available to GAO for its review
and consideration.
The report correctly notes that BIS is negotiating the terms of an
agreement to conduct on-site reviews that is specific to the VEU
program. These negotiations with China's Ministry of Commerce (MOFCOM)
have been ongoing and are nearing completion. However, because the
report's fundamental premise is incorrect, the report misunderstands
the reason for pursuing a separate, VEU-specific addendum to the 2004
EUVU. It is not the case that BIS does not have adequate means to
inspect shipments made under the VEU program. Rather, the EUVU
procedures, specifically the EUVU requirement to obtain End-Use
Statements for shipments, are cumbersome in light of the trade
facilitating objective of the VEU program. BIS is pursuing a VEU-
specific addendum to ensure that VEU on-site reviews are tailored to
the VEU program so that U.S. exporters will be able to fully capture
the trade-enhancing benefits of the program.
See comment 2.
The report also erroneously asserts that general procedures for
selecting and conducting on-site reviews do not exist. General
procedures for end-use checks exist and will be used for on-site
reviews as applicable. However, specific guidance for conducting
individual on-site reviews must be developed on a case-by-case basis to
ensure the review is tailored to each VEU.
See comment 3.
Overall Comments:
In addition to the incorrect fundamental premise of the report, there
are several other overall issues that need to be accurately addressed.
First, the report asserts, without evidence, that semiconductors
provide the United States with a strategic military advantage. While
semiconductors are used in a variety of military applications,
semiconductor manufacturing equipment is controlled only on the
Wassenaar Arrangement's Basic List, which generally includes
commercially applied materials and components. They are not on the
Wassenaar Arrangement's Sensitive or Very Sensitive List. Moreover,
general purpose microprocessors – the kind made by the equipment
covered by the report – were significantly decontrolled in 2003.
See comment 4.
Second, the report should make clear that it describes capabilities of
companies in China rather than those of the government. For example, in
the Highlights section, the text should read "The gap between the
semiconductor manufacturing capabilities of companies in the U.S. and
China, as measured by ." Describing capabilities as China's
capabilities implies that they are capabilities of the government, and,
as such, could be used for military activities. However, the report
does not provide a basis for this assertion. Licensing decisions are
based on a determination that the exports involved will not support
China's military activities but will be used only for civilian
purposes.
See comment 5.
Third, the report implies that most, if not all, controlled
semiconductor manufacturing equipment and materials are exported to
China under the VEU program. This is not the case; in fact, it is the
reverse. During the first nine months of the VEU program, approximately
94% of the total exports of semiconductor manufacturing equipment to
China took place under individual and special comprehensive licenses
and only about 6% took place under VEU authorization.
See comment 6.
Fourth, there should not be any references to "trusted" entities, as
this implies that VEU relies on `trust' as the reason for removing
individual license requirements. This does not accurately reflect the
rigorous application and screening process that companies are required
to undergo before being approved for VEU. Companies approved for VEU
status should be referred to as "pre-screened" or "authorized".
See comment 7.
Finally, there should not be any references to "Chinese companies" or
"Chinese end- users." In principle, VEU is not limited to Chinese
companies and, in fact, none of the five currently authorized VEUs is a
"Chinese company." Two are Chinese subsidiaries of U.S. companies, two
are joint ventures with partial Chinese ownership, and one is a public
company traded on the New York and Hong Kong stock exchanges. These
companies should be referred to as "companies in China," which more
accurately reflects the international ownership of the companies that
have already been approved and others that may eventually apply. 2
See comment 8.
The following are GAO's comments on the Department of Commerce's letter
dated September 5, 2008.
GAO Comments:
1. We have modified our draft report to indicate that Commerce intends
to use the 2004 End Use Visit Understanding (EUVU) as a stopgap measure
to conduct on-site reviews under the VEU program. However, as we note
in the following comment, this stopgap measure imposes an additional
burden on VEU-authorized companies. Moreover, the Chinese government
has not always agreed with this approach. In 2007, China's Ministry of
Commerce issued a decree prohibiting Chinese entities from accepting on-
site reviews conducted by foreign government personnel without its
permission. The Chinese government also requested that the United
States refrain from approving any new validated end-users until the two
countries agreed on the terms for conducting these reviews.
2. We understand that the intent of the VEU program is to enhance and
facilitate trade between the United States and China. Our report notes
that the VEU program would foster trade by reducing the administrative
burden associated with seeking an export license for U.S. exporters and
enabling VEU-authorized entities to obtain items more easily than their
domestic competitors. Commerce asserted that it can use the EUVU
procedures for inspecting shipments made under the VEU program, but it
can only do so by requesting validated end-users to voluntarily obtain
End-User Statements from the Chinese government.[Footnote 45] Such
statements are required for all exports of controlled items to China
under individual export licenses that exceed $50,000. However, these
statements were not required under the VEU program and impose an
additional burden on VEU-authorized companies. Commerce notes that the
procedures for obtaining these statements are cumbersome and conflict
with the trade facilitating objective of the VEU program. Until VEU
negotiations with the Chinese government are completed, the trade-
enhancing benefits of the program may not be realized.
3. We disagree with Commerce's assertion that general procedures for
selecting and conducting on-site reviews do exist. First, as noted in
this report, the procedures for selecting which validated end-users
will receive on-site reviews are still in draft form as of September
2008 and have not been cleared by the interagency process. Commerce
would not provide us with a copy of these draft procedures. Second,
Commerce's general procedures for conducting end-use checks are not
specific to the VEU program. Instead, they were designed for pre-
license and postshipment verification checks of items shipped under
individual export licenses. End-use checks focus on ensuring that an
item is being used for the purposes stated in the license, whereas on-
site reviews are more comprehensive. In the course of our work,
Commerce repeatedly asserted that end-use checks for individual
licenses and on-site reviews under the VEU program are distinct
activities that serve different purposes. Finally, we agree that
Commerce needs additional case-by-case guidance for on-site reviews to
ensure that the review is tailored to a particular validated end-user.
However, the department also needs general procedures to ensure that on-
site reviews are conducted in a consistent manner.
4. Commerce's comment is perplexing since the department appears to be
contending that semiconductors do not provide the United States with a
strategic military advantage. As evidence, Commerce notes that
semiconductors are included on the Wassenaar Arrangement Basic List,
rather than its Sensitive or Very Sensitive List. However, Commerce
understates the military significance of items on Wassenaar's Basic
List. According to Wassenaar's Basic List criteria, items to be
controlled are those which are "major or key elements for the
indigenous production, use, or enhancement of military
capabilities."[Footnote 46] Furthermore, semiconductor manufacturing
equipment is not only controlled on the Basic List. One of the first
validated end-users was authorized to receive metal organic chemical
vapor deposition reactors (MOCVD), an item included on Wassenaar's
Sensitive List, under the VEU program in China. This equipment may be
used to produce radiation-hardened electronics, for use in commercial
and military applications.
5. Commerce noted that we needed to make clear that the report
describes the capabilities of companies in China rather than those of
the government. We agree and have made changes to the report to reflect
this distinction.
6. We have revised the report to clarify that, before the introduction
of the VEU program in 2007, export licenses provided the only mechanism
by which U.S. companies could ship most advanced semiconductor
manufacturing equipment and materials to China. We also note that since
the introduction of the VEU program, the majority of semiconductor
manufacturing equipment exported to China continues to be made under
individual export licenses. We added export data to the report showing
that, according to Commerce, during the first 9 months of the VEU
program, 94 percent of the total exports of semiconductor manufacturing
equipment to China were approved under individual or special
comprehensive licenses while 6 percent were authorized under the VEU
program.
7. We used the term "trusted" entities because Commerce officials used
the same language in discussions with us to describe companies that
would be approved as validated end-users. Moreover, Commerce has used
the 'trusted" term in public statements describing the program,
including as recently as April, 2008, in testimony before Congress.
8. We have revised our reference to Chinese companies and now refer to
these companies as companies or entities in China.
[End of section]
Appendix VI: GAO Contact and Staff Acknowledgments:
GAO Contact:
Joseph A. Christoff at (202) 512-8979 or c [Hyperlink,
christoffj@gao.gov] hristoffj@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Anthony Moran, Assistant
Director; Nabajyoti Barkakati; Lynn Cothern; Julie Hirshen; Drew
Lindsey; Grace Lui; and Mark Speight made key contributions to this
report. David Dornisch, Etana Finkler, and Minette Richardson also
provided assistance.
[End of section]
Footnotes:
[1] For the purposes of this report, the terms semiconductor,
integrated circuit, and computer chip are used interchangeably.
[2] GAO, Export Controls: Rapid Advances in China's Semiconductor
Industry Underscore Need for Fundamental U.S. Policy Review, GAO-02-620
(Washington D.C.: Apr. 19, 2002).
[3] In 2002, GAO reported that semiconductors made in China were
approximately one generation behind U.S.-made state-of-the-art
semiconductors. Since 2002, the sophistication of Chinese and U.S.
semiconductors has advanced at the same rate, and Chinese
semiconductors therefore remain one generation behind the U.S.-made
state of the art.
[4] A nanometer is one billionth of a meter, or 1/100,000 the width of
a human hair. The feature size, or size of the transistors and other
components, of semiconductors is measured in nanometers. Feature size
also is used to define the current level of semiconductor technology.
[5] Each reduction in feature size--for example, from 65 to 45
nanometers--is considered a move to a new generation of technology, and
each new generation represents a doubling of the number of transistors
on a silicon wafer.
[6] Semiconductor Equipment and Materials International is the trade
association serving the global semiconductor equipment, materials, and
flat panel display industries.
[7] These companies also sell their equipment outside China.
[8] According to the Export Administration Regulations, a foreign
availability assessment includes a determination as to whether an item
is available in fact, in sufficient quantity, of comparable quality,
and from a non-U.S. source. See 15 C.F.R. §768.6.
[9] The China Military End-Use rule was published on June 19, 2007, and
added a unilateral license requirement for military end-uses in China
for items that previously did not require a license for export to China
unless they were to be reexported to a terrorist supporting country.
See 72 Fed. Reg. 33646 (June 19, 2007).
[10] Advisory opinions, which are issued by Commerce and authorize
entities as validated end-users, also specify activities that on-site
reviews may include. Commerce has deemed advisory opinions to be
protected under section 12(c) of the Export Administration Act, as
amended. Consequently, the information contained in the advisory
opinions is prohibited from disclosure absent a determination by
appropriate authorities that release of the information is in the
national interest. See 50 App. U.S.C. § 2411 (c).
[11] Manufacturing semiconductors involves four main processes:
deposition, photolithography, etch, and implantation. Deposition
equipment is used to lay a thin chemical film on a semiconducting
material, such as silicon; photolithography equipment is used together
with a "mask" to selectively expose film to a light source; etch
equipment removes the material not protected by the light source; and
implantation equipment is used to add conductivity to certain parts of
the semiconductor.
[12] 50 U.S.C. App. §§ 2401-2420. The Export Administration Act is not
permanent legislation. Authority granted under the act lapsed in August
2001. However, Executive Order 13222, Continuation of Export Control
Regulations, which was issued in August 2001, and extended most
recently by Presidential Notice on July 23, 2008, under the authority
provided by the International Emergency Economic Powers Act (50 U.S.C.
§§1701 et seq.), continues the controls established under the act and
the implementing EAR. See 73 Fed. Reg. 43603 (July 25, 2008).
[13] 15 C.F.R. parts 730-774.
[14] BIS controls exports of dual-use and civilian commodities, which
are collectively referred to as "items" in this report. See 15 C.F.R. §
730.3.
[15] See 15 C.F.R. Supplement No. 1 to Part 774 and 15 C.F.R. § 742.4.
[16] The Wassenaar Arrangement is one of four principal multilateral
export control regimes. The others are the Australia Group, which
focuses on trade in chemical and biological items; the Missile
Technology Control Regime; and the Nuclear Suppliers Group. The United
States is a member of all four regimes.
[17] The Coordinating Committee for Multilateral Export Controls was
established early in the Cold War and included all NATO countries
except Iceland, plus Japan and Australia. Members agreed not to export
specified, listed dual-use items and technologies to Soviet bloc
countries and China and to obtain unanimous preapproval for any
nonprohibited exports.
[18] The Wassenaar Arrangement controls dual-use items on one or more
of three lists: the Dual-Use List (commonly referred to as the
Wassenaar Basic List), Sensitive List, and Very Sensitive List.
Wassenaar Arrangement Sensitive List items are items from the Basic
List, which are key elements directly related to the indigenous
development, production, use, or enhancement of advanced conventional
military capabilities whose proliferation would significantly undermine
the objectives of Wassenaar. The Very Sensitive List includes items
from the Sensitive List that are key elements essential for the
indigenous development, production, use, or enhancement of the most
advanced conventional military capabilities whose proliferation would
significantly undermine the objectives of the Wassenaar Arrangement.
[19] In 2001, U.S. commercial state-of-the-art production was
considered 130 nanometers, whereas China produced semiconductors with a
feature size of 180 nanometers.
[20] This total includes only semiconductor equipment purchased for use
in "front-end" manufacturing.
[21] Although SMIC obtained the manufacturing technology from IBM to
produce at 45 nanometers, it is currently producing at 65 nanometers
and does not expect to begin commercial production at 45 nanometers
until 2009.
[22] Export licenses cover all controlled items exported to China, not
exclusively semiconductor manufacturing equipment and materials. See 15
C.F.R. Supplement No. 1 to Part 774 and Supplement No. 1 to Part 738.
[23] 15 C.F.R. § 748.15.
[24] Some lower-level semiconductor manufacturing equipment does not
require a license to China because it is widely available from sources
outside the Wassenaar Arrangement, including the used equipment market
and several companies based in China. There also is a license exception
for the export of some deposition equipment to China, provided that the
equipment will be used for civilian end uses.
[25] Licenses include both Individual Validated Licenses (IVL) and
Special Comprehensive Licenses (SCL). IVLs are valid for a specific
transaction between a U.S. exporter and a single entity. SCLs authorize
a series of transactions between a U.S. exporter and one or more
entities overseas.
[26] An agency may delegate its reviewing authority to Commerce for
licenses it chooses not to review.
[27] Licenses may be returned without action if an applicant requests
it, an export license is not required, BIS has not received adequate
information about the transaction, or BIS is unable to contact the
exporter to obtain additional information.
[28] An Operating Committee (OC) of the Advisory Committee on Export
Control Policy (ACEP) reviews any license for which the reviewing
agencies are not in agreement, and the OC Chair makes a decision based
on agency recommendations and statutory licensing standards. If an
agency disagrees with the position of the OC Chair, it can request that
the application be escalated to the ACEP. Decision making in the ACEP
is by majority vote. If there is disagreement over the ACEP decision,
an agency may further escalate the application to the Cabinet-level
Export Administration Review Board. Decision making is again by
majority vote. Further disagreements are escalated to the President.
[29] Licensing officers may select from a number of standard license
conditions, or they may create new, "customized" conditions within the
limits of the EAR.
[30] The three companies authorized to receive semiconductor equipment
or materials include Applied Materials China, Ltd., Semiconductor
Manufacturing International Corporation, and Shanghai Hua Hong NEC
Electronics Company, Ltd. Two other companies, BHA Aerocomposite Parts
Co., Ltd., and National Semiconductor Corporation, were authorized to
receive other items. See 15 C.F.R. Supplement No. 7 to Part 748.
[31] See 15 C.F.R. § 748.15 and Supplement No. 8 to Part 748.
[32] 15 C.F.R. Supplement No. 9 to Part 748.
[33] In fiscal year 2007, Commerce initiated a new process used to help
select entities for PSV checks that scores export license applications
according to several criteria, such as the parties to the transaction,
the items, and the countries involved. However, Commerce officials
noted that the result of this process is not the sole determinant of
which entities it decides to inspect.
[34] 15 C.F.R. Supplement No. 8 to Part 748.
[35] Advisory opinions are the method by which Commerce communicates
specific, unique requirements to the validated end-user.
[36] The Automated Export System is the system administered by the U.S
Census Bureau that is used by U.S. exporters to electronically declare
their international exports to U.S. Customs and Border Protection. BIS
has a memorandum of understanding with the Census Bureau to receive
regular data extracts from the Automated Export System that provide
information on licensed exports and exports under the VEU program.
[37] The EAR requires exporters to obtain End-User Statements from the
Chinese Ministry of Commerce for certain items requiring a license for
export and valued above $50,000 to facilitate U.S. government end-use
checks. 15 C.F.R. § 748.10.
[38] See 15 C.F.R. §748.10; 72 Fed. Reg. 33646, 33651.
[39] Technical advisory committees are made up of industry
representatives. Specifically, the Information Systems Technical
Advisory Committee advises the Office of the Assistant Secretary for
Export Administration on technical questions that affect the level of
export controls applicable to information systems equipment and
technology. Semiconductor manufacturing equipment is covered by this
technical advisory committee.
[40] See Revisions and Clarification of Export and Reexport Controls
for the People's Republic of China (PRC); New Authorization Validated
End-User, 71 Fed. Reg. 38313 (July 6, 2006).
[41] The military end-use rule does not include restrictions on exports
of semiconductor manufacturing equipment and materials that are only
subject to unilateral U.S. controls. Exports of multilaterally
controlled semiconductor manufacturing equipment and materials were not
changed by the military end-use control.
[42] Department of Defense Directive Number 2040.2, sections 5.1.7 and
7.1.15, Jan. 17, 1984, reissued incorporating Change 1, July 5, 1985.
[43] Department of Defense Instruction Number 2040.02.
[44] The 2004 End Use Visit Understanding is a classified document.
[45] End-User Statements are issued by the Chinese Ministry of Commerce
and include information on a particular shipment, including the names
of the importer and exporter; end-user and end-use; a description of
the item, quantity, and dollar value; and the signature of the importer
and date.
[46] Wassenaar Arrangement, Criteria for the Selection of Dual-Use
Items (updated at the December 2005 plenary in Vienna Austria).
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