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: Published: Sep 25, 2008. Publicly Released: Oct 27, 2008.

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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.

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.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In response to GAO recommendations, Commerce reached an agreement with China in January 2009 regarding on-site reviews (the agreement is classified). Commerce officials told us they began such reviews of facilities in the Validated End-User program to confirm their compliance with the program requirements. On January 13, 2009, Commerce announced full implementation of the Validated End-User program for the People's Republic of China. With agreement on procedures to ensure the program?s secure and efficient operation, civilian and U.S.-China high-technology trade will benefit from the continue export of certain products to VEU-approved companies without individual licenses.

    Recommendation: 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 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.

    Agency Affected: Department of Commerce

  2. Status: Closed - Implemented

    Comments: In response to GAO recommendations, Commerce reached an agreement with China in January 2009 regarding on-site reviews (the agreement is classified). Commerce officials told us they began such reviews of facilities in the Validated End-User program to confirm their compliance with the program requirements. On January 13, 2009, Commerce announced full implementation of the Validated End-User program for the People's Republic of China. With agreement on procedures to ensure the program?s secure and efficient operation, civilian and U.S.-China high-technology trade will benefit from the continue export of certain products to VEU-approved companies without individual licenses.

    Recommendation: 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 develop procedures for conducting on-site reviews that are applicable to all validated end-users.

    Agency Affected: Department of Commerce

 

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