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United States General Accounting Office:
GAO:
Report to the Ranking Minority Member, Committee on Governmental
Affairs, U.S. Senate:
April 2002:
Export Controls:
Rapid Advances in China's Semiconductor Industry Underscore Need for
Fundamental U.S. Policy Review:
GAO-02-620:
GAO Highlights:
Highlights of GAO-02-620, a report to the Ranking Minority Member,
Committee on Governmental Affairs, U.S. Senate.
Why GAO Did This Study:
The United States controls the export of certain technology, including
some of the equipment and materials used to make semiconductors, or
computer "chips," to sensitive destinations such as China for national
security or foreign policy reasons.
In light of China's efforts to acquire modern semiconductor
manufacturing technology, GAO was asked to assess (1) advances in
China's manufacturing capability, and (2) U.S. export control policy
for this technology and its analytical basis.
What GAO Found:
Since 1986, the gap between U.S. and Chinese semiconductor
manufacturing technology has rapidly narrowed (See chart). Today,
China's advanced manufacturing facilities can make chips that are less
than one generation behind the current, commercial state of the art.
[Figure: refer to PDF for image: vertical bar graph]
Year: 1986;
Feature size:
China: 5;
U.S.: 1.
Year: 1994(5);
Feature size:
China: 3;
U.S.: 0.35.
Year: 1997;
Feature size:
China: 0.8;
U.S.: 0.25.
Year: 1999;
Feature size:
China: 0.35;
U.S.: 0.18.
Year: 2001(2);
Feature size:
China: 0.18;
U.S.: 0.13.
The gap between U.S. and Chinese semiconductor manufacturing
technology, as measured in the feature size of the semiconductors
produced, rapidly diminished in recent years. A semiconductor's
feature size is measured in microns and is used to define the current
level of technology.
[End of figure]
U.S. policies and practices to control the export of semiconductor
technology to China are unclear and inconsistent leading to
uncertainty among U.S. industry officials about the rationale for U.S.
government licensing decisions.
* While export regulations restrict certain sales that would make a
direct and significant contribution to China's military capabilities,
the United States generally approves most exports of semiconductor
manufacturing equipment and materials to China.
* Although the stated practice of U.S. export agencies has been to
keep China two generations behind state of the art semiconductor
production capabilities, U.S. regulations do not describe the level of
allowable technology that can be exported to China relative to the
commercial state of the art.
* The Departments of Commerce and Defense have not conducted recent
national security and economic assessments to form a sound analytical
basis for exporting semiconductor technology to China.
What GAO Recommends:
GAO recommends that the secretaries of commerce, defense and state
reassess, document, and update as necessary U.S. policy and practices
on exporting semiconductor manufacturing equipment and materials to
China.
The agencies disagreed with this recommendation stating that their
current policies and practices are sufficient for making export
licensing decisions to China.
We disagree. U.S. export regulations governing China contain inherent
inconsistencies and are based on outdated government assessments of
the availability of technology from non-U.S. sources. Accordingly, our
recommendations remain unchanged.
This is a test for developing Highlights for a GAO report. The full
report, including GAO's objectives, scope, methodology, and analysis
is available at [hyperlink, http://www.gao.gov/products/GAO-02-620].
For additional information about the report, contact Joseph Christoff
at (202) 512-8979. To provide comments on this test Highlights,
contact Keith Fultz (202-512-3200) or e-mail HighlightsTest@gao.gov.
[End of section]
Content:
Letter:
Results in Brief:
Background:
Rapid Advances in Semiconductor Manufacturing Capability Have Improved
China's Commercial and Defense Industrial Base:
Wassenaar Arrangement Has Not Affected China's Ability to Acquire
Advanced Semiconductor Manufacturing Equipment:
Export Controls on Advanced Semiconductor Manufacturing Technology to
China Lack Analytical Basis:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Scope and Methodology:
Appendixes:
Appendix I: Reasons for Controlling Dual-Use Goods and Technologies:
Appendix II: Wassenaar Reporting Commitments by List:
Appendix III:Comments from the Department of Commerce:
GAO Comments:
Appendix IV: Comments from the Department of Defense:
GAO Comments:
Appendix V: Comments from the Department of State:
GAO Comments:
Appendix VI: GAO Contact and Staff Acknowledgments:
GAO Contact:
Acknowledgments:
Tables:
Table 1: Newest Semiconductor Manufacturing Facilities in China (as of
February 2002):
Table 2: Commerce Control List Categories:
Table 3: Commerce Control List Category Groups:
Table 4: Frequency of Reasons for Control of Category 3 (Electronics)
Items:
Table 5: Description of Semiconductor Manufacturing Equipment and
Materials Requiring Export License to China:
Figures:
Figure 1: Semiconductor Manufacturing Technology Gap Between China and
the United States (feature size measured in microns):
Figure 2: Shanghai Hua Hong NEC Semiconductor Manufacturing Facility
(Completed in 2001:
Figure 3: German Metal Organic Chemical Vapor Deposition Equipment at
the Institute of Semiconductors, Beijing:
Figure 4: Controlled Arsine and Phosphine Gases in Use at the
Institute of Semiconductors, Beijing:
Figure 5: Reasons for the Control of Dual-Use Goods and Technologies:
[End of section]
United States General Accounting Office:
Washington, D.C. 20548:
April 19, 2002:
The Honorable Fred Thompson:
Ranking Minority Member:
Committee on Governmental Affairs:
United States Senate:
Dear Senator Thompson:
The United States controls the export of certain technology, including
some of the equipment and materials used to make semiconductors, to
sensitive destinations such as China for national security or foreign
policy reasons. Semiconductors, commonly referred to as computer
"chips," are key components in computers, communications equipment,
and weapons systems. U.S. policy on the export of such "dual-use"
items—goods and technologies that have both civilian and military uses—
is a subject of continuing debate. This policy strives to balance the
need to protect U.S. national security and foreign policy interests
with the objective to promote U.S. trade and competitiveness. As part
of its efforts to control exports of sensitive dual-use technology,
the United States is a member of the Wassenaar Arrangement—a forum of
33 countries established in 1996 to reach multilateral agreements
about which dual-use goods merit special scrutiny and reporting.
[Footnote 1]
Because of your concerns about whether the United States' national
security and foreign policy interests are being adequately protected,
particularly in light of the pace at which China has been acquiring
modern semiconductor manufacturing technology, you asked that we:
1. describe advances in China's semiconductor manufacturing capability
and the impact of these advances on its industrial base;
2. analyze how the Wassenaar Arrangement has affected the transfer of
semiconductor manufacturing technology to China; and;
3. describe U.S. policy and practice regarding the export of this
manufacturing technology to China and assess its analytical basis.
To address these issues, we spoke to more than 170 representatives
from academia, industry, and U.S. and foreign governments. In
addition, we collected and analyzed information from the U.S.
Departments of Commerce, Defense, and State; and from various industry
and trade associations. Our work focused on China and its newest
semiconductor manufacturing facilities. We visited manufacturing
facilities, government agencies, and research organizations in China.
Further, we analyzed Commerce Department licensing review and approval
data and analyzed export reporting and proposal acceptance and
rejection data provided by the Wassenaar Arrangement Secretariat in
Vienna, Austria.[Footnote 2]
Results in Brief:
Since 1986, China's efforts to improve its semiconductor manufacturing
capability have narrowed the gap between U.S. and Chinese
semiconductor manufacturing technology from between 7 to 10 years to 2
years or less. According to our analysis of information obtained from
semiconductor manufacturing facilities in China and industry experts,
China's most advanced commercial manufacturing facilities can produce
chips that are only one generation behind current, commercial state-of-
the-art technology. China has made improving its semiconductor
manufacturing capability a priority for national and economic security
reasons and plans to build as many as 20 multibillion-dollar
manufacturing facilities over the next 5 to 10 years with substantial
levels of foreign investment. The growing sophistication of China's
semiconductor manufacturing facilities, which has improved its ability
to develop more capable weapons systems and advanced consumer
electronics, has been fueled by China's success in acquiring
manufacturing technology from abroad.
The multilateral Wassenaar Arrangement on Export Controls for
Conventional Arms and Dual-Use Goods and Technologies has not affected
China's ability to obtain semiconductor manufacturing equipment
because the United States is the only member of this voluntary
arrangement that considers China's acquisition of semiconductor
manufacturing equipment a cause for concern. The arrangement deems
only one type of semiconductor manufacturing equipment to be
sufficiently sensitive to warrant greater information sharing among
arrangement members—-no export information is shared for 97 percent of
all electronics-related items covered by the arrangement.
Transparency, through exchanging information and sharing views, is the
sole means by which the arrangement tries to achieve its goals. Over
the past several years, fewer items have been subject to the Wassenaar
Arrangement, particularly electronics-related items.
U.S. policies and practices to control the export of semiconductor
technology to China are unclear and inconsistent, leading to
uncertainty among U.S. industry officials about the rationale for some
licensing decisions. Under the Export Administration Regulations
pertaining to China, the general licensing policy is to approve
applications, except those items that would make a direct and
significant contribution to specific areas of China's military. We
found that the United States approves most licenses for exports of
semiconductor manufacturing equipment and materials to China. Although
U.S. practice has been aimed at keeping China at least two generations
(about 3 to 4 years) behind global state-of-the-art semiconductor
manufacturing capabilities, the regulations make no reference to the
level of technology that can be exported to China relative to the
current commercial state of the art. Further, U.S. agencies have not
conducted the analyses, such as assessing foreign availability of this
technology or the cumulative effects of such exports on U.S. national
security interests, necessary to justify such a practice or serve as
the basis for licensing decisions. Consequently, the executive branch
does not have a sound, well-documented basis for making export-
licensing decisions to China.
In this report, we are recommending that the secretary of commerce, in
consultation with the secretaries of defense and state, reassess and
document U.S. export policy on semiconductor manufacturing equipment
and materials to China. Specifically, we are recommending that these
agencies complete the analyses needed to serve as a sound basis for an
updated policy; develop new export controls, if appropriate, or
alternative means for protecting U.S. security interests; and
communicate the results of these efforts to the U.S. Congress and
industry.
In commenting on a draft of this report, the Departments of Commerce,
Defense, and State said that our report was based on an invalid
assumption that the goal of U.S. export control policy is to keep
China's industry two generations behind U.S. industry. These agencies
said that U.S. policy for why and how these items should be controlled
can be found in the Export Administration Regulations and is based on
a sound analytical framework.
We agree with the Departments of Commerce, Defense, and State that a
description of the U.S. government's export control policy toward
China is found in the Export Administration Regulations. We added some
additional information to the report to better describe this policy
and to make a clearer distinction between policy and practice as the
current regulations make no reference to the level of semiconductor
manufacturing technology that can be exported to China relative to the
current commercial state of the art. We found that the executive
branch practice was aimed at keeping China two generations behind the
U.S. semiconductor manufacturing industry. On March 1, 2001, the under
secretary for export administration (a policy-level official),
described this practice and reconfirmed it in a follow-up January 2002
meeting with GAO after he left office.
Moreover, in commenting on our draft report, the Commerce Department
described this practice, noting that "certain exports of semiconductor
manufacturing equipment to China are limited to two generations behind
state-of-the-art levels to address national security, or other
concerns related to a particular transaction."
Regarding the Departments of Commerce, Defense, and State's comments
that the current export licensing process is based on a sound,
analytical framework, we found that a U.S. government foreign
availability analysis of semiconductor manufacturing equipment has not
been completed since 1987. Further, the U.S. government has not
conducted studies of the cumulative effect of the export of advanced
semiconductor manufacturing equipment and materials to China on U.S.
national security.
The findings, conclusions, and recommendations of our report remain
unchanged.
Background:
Semiconductors or "computer chips" are critical components in
everything from automobiles to weapon systems.[Footnote 3] They
contain millions of transistors and other components that are smaller
than 1/100 the width of a human hair. The manufacture of integrated
circuits involves a complex, 250-step process utilizing hundreds of
millions of dollars in technologically advanced equipment and purified
materials.
An integrated circuit's component size—or feature size—is measured in
microns; modern chips range from 0.35 micron to 0.13 micron.[Footnote
4] Smaller feature size allows for more components to be integrated on
a single chip, thus creating more powerful chips. The semiconductor
industry also uses feature size to define the current level of
integrated circuit technology: Each reduction in feature size, for
example, from 0.35 micron to 0.25 micron, is considered a move to a
new generation of technology.[Footnote 5]
According to Semiconductor Equipment and Materials International, the
$76 billion global semiconductor equipment and materials industries
($48 billion and $28 billion, respectively) serve as the foundation
for the $204 billion semiconductor industry, which in turn supports
many other industries including the $1.1 trillion electronics
industry.[Footnote 6] The equipment and materials industries produce a
variety of equipment, chemicals, gases, films, and other materials
critical to manufacturing integrated circuits. U.S. companies created
and dominated the semiconductor equipment and materials industries
until the early 1980s, when Japan increased investment and Japanese
companies gained a greater market share in several critical equipment
and materials technologies. During the 1990s, U.S. companies regained
market share and currently share worldwide leadership with Japan,
although Japan still dominates the key silicon manufacturing and
lithography markets.[Footnote 7]
The global semiconductor equipment and materials industries comprise
more than 2,400 small to medium-sized companies located primarily in
the United States, Japan, and Europe. Typically these companies
manufacture equipment or materials required for just one or two of the
numerous processes for making integrated circuits. In 2000, 10
companies accounted for approximately 63 percent ($30.3 billion) of
the equipment industry's $48 billion revenue.[Footnote 8]
One of the reasons semiconductor equipment and materials are
controlled is their potential role in improving a nation's military
capabilities. The Export Administration Act of 1979,[Footnote 9] as
amended, and the implementing Export Administration Regulations
authorize the Commerce Department to require firms to obtain licenses
for the export of sensitive items that may pose a national security or
foreign policy concern.[Footnote 10] The Departments of Commerce,
Defense, and State and others review export license applications. The
Commerce Control List provides detailed specifications for about 2,400
dual-use items that require export licenses to particular destinations
for largely national security and foreign policy reasons. (See
appendix I for additional information on the Commerce Control List.)
Semiconductors and related equipment and materials fall under the
list's "Category 3" (electronics), with manufacturing equipment and
materials placed in Category 3B (test, inspection, and production
equipment) and 3C (materials), respectively.[Footnote 11] Category 3
goods and technologies are controlled primarily as a tool of U.S. anti-
terrorism policy, but also to meet nuclear nonproliferation policy
objectives, control the spread of missile technology and crime, and
address general national security concerns.[Footnote 12] The primary
control concern regarding China is national security. In many cases,
items on the Commerce Control List will require a license only if they
are going to a particular country. However, some products will require
a license because (1) there is a risk of diversion to an unfriendly
destination; (2) the nature of the product makes it sensitive; or (3)
the end use or end user of the product triggers concerns.[Footnote 13]
As part of its efforts to control exports of sensitive dual-use
technology, the United States is a member of the Wassenaar
Arrangement. The Wassenaar Arrangement, the successor regime to the
Coordinating Committee for Multilateral Export Controls, came into
existence in July 1996.[Footnote 14] It is built on a broad
international consensus that new threats to global security from the
spread of weapons of mass destruction and their delivery systems make
multilateral export controls on dual-use items necessary. The
Wassenaar Arrangement was designed to complement and reinforce,
without duplication, the other existing international export control
regimes for weapons of mass destruction and their delivery systems.
[Footnote 15] The arrangement was explicitly charged in its founding
documents to prevent "destabilizing accumulations" of dual-use goods
and technologies that may be used to contribute to the development or
enhancement of military capabilities that would undermine regional
security and stability.[Footnote 16] Transparency, through exchanging
information and sharing views, is the sole means by which the
arrangement tries to achieve its goals. According to a senior State
Department official on detail to the Wassenaar Secretariat and
Wassenaar documents, members of the arrangement make a threefold
political commitment to: control exports of selected advanced dual-use
goods and technologies; refrain from exporting dual-use items that
may, according to national judgment, contribute to weapons
proliferation or regional or international instability; and inform
other Wassenaar member governments of selected approvals and denials
of export licenses for these items.
These commitments may or may not lead a member state to deny an export
license. The "control" aspect of the arrangement resides entirely in
the discretion of national governments that commit only to scrutinize
selected dual-use goods and technologies. Members have no power to
veto other members' sales. Like its predecessor regime, the
arrangement does not enjoy formal treaty status. The Wassenaar
Arrangement is not directed against any state or group of states.
Although there is an informal understanding that exports to Iran,
Iraq, Libya, and North Korea bear special scrutiny, no countries are
specifically named as targets of the arrangement. Even this informal
understanding does not hold in all cases among all Wassenaar members.
The Russian representative to Wassenaar, for example, noted that for
export control purposes the Russian government considers Iran a
"normal country."
Rapid Advances in Semiconductor Manufacturing Capability Have Improved
China's Commercial and Defense Industrial Base:
Since 1986, China's efforts to improve its semiconductor manufacturing
capability have resulted in a narrowing of the gap between U.S. and
Chinese semiconductor manufacturing technology. Today, China's most
advanced semiconductor manufacturing facilities can produce integrated
circuits that are only one generation or less behind the current state
of the art. Acquiring semiconductor technology and know-how is a
priority of the Chinese government.[Footnote 17] The country's
improvements in semiconductor manufacturing capability are the direct
result of the involvement of European, Japanese, and U.S. integrated
circuit manufacturers in China, typically through joint ventures or
wholly foreign owned manufacturing facilities. Currently, China has
eight major integrated circuit manufacturing facilities with
substantial levels of foreign investment or ownership. The country's
rapid advances in this sector have integrated China into the global
semiconductor industry, improved China's commercial and defense
industrial base, and created a potential new source of sophisticated
integrated circuits for China's industry and military.
Technology Gap Between United States and China Is Narrowing Rapidly:
Fifteen years ago, China was five generations of technology behind the
United States' then-current commercial production capability,
according to industry experts we interviewed. Today, China has
narrowed this technology gap. Although the equipment in China's newest
manufacturing facilities is designed to produce integrated circuits
with 0.25-0.18 micron feature sizes, it can be fine-tuned to produce
integrated circuits with 0.18-0.13 micron feature sizes or less in
some cases, according to semiconductor manufacturing experts with whom
we spoke.[Footnote 18] Consequently, the most advanced semiconductor
manufacturing facilities in China today can produce integrated
circuits that are one generation or less behind current state of the
art.[Footnote 19] Figure 1 shows how the technology gap between the
United States and China has narrowed since 1986.
Figure 1: Semiconductor Manufacturing Technology Gap Between China and
the United States (feature size measured in microns):
[Refer to PDF for image: vertical bar graph]
Year: 1986;
Feature size:
China: 5;
U.S.: 1.
Year: 1994(5);
Feature size:
China: 3;
U.S.: 0.35.
Year: 1997;
Feature size:
China: 0.8;
U.S.: 0.25.
Year: 1999;
Feature size:
China: 0.35;
U.S.: 0.18.
Year: 2001(2);
Feature size:
China: 0.18;
U.S.: 0.13.
Note: Complete data for the period between 1986 and 2002 were not
available. The time scale was altered to show the years where data
were available. Data for 2002 based on estimates. Data points for the
years listed are as follows: China--5.00, 3.00, 0.80, 0.35, and 0.18
micron; United States--1.00, 0.35, 0.25, 0.18, and 0.13 micron.
Source: GAO analysis of data provided by semiconductor manufacturing
facilities in China; the director of the Computer Aided Life Cycle
Engineering Electronics Products and Systems Center, University of
Maryland; Intel Corporation; and the International Technology Roadmap
for Semiconductors.
[End of figure]
Acquiring Semiconductor Technology and Related Know-How Is a Priority
of the Chinese Government:
China's stated goal is to become self-sufficient in the production of
semiconductors for its domestic market and to develop technology that
is competitive on the world market. This goal is being pursued for
economic and national security reasons and is directed by a series of
5-year economic plans, and projects focused on high-technology
industries. China has pursued a number of strategies to acquire the
technology to meet its current and future semiconductor needs,
including procuring semiconductors on the open market for both
commercial and military uses and developing a domestic manufacturing
capability. China also recognizes the importance of foreign investment
and has instituted numerous incentive programs, which include free use
of land and low taxes, to attract some of the world's leading
semiconductor manufacturers and equipment suppliers. To encourage
domestic innovation, China has constructed 53 "Silicon Valley"-style,
high-technology development zones. In addition, China is cultivating
the human capital to operate and manage semiconductor design and
manufacturing facilities, in part from students returning to China
after earning degrees at U.S. universities in semiconductor-related
subjects. It also is acquiring expertise from foreign semiconductor
manufacturers who provide their Chinese employees with advanced
training and establish research and development facilities in China.
Foreign Partners Improve China's Integrated Circuit Manufacturing
Capability:
The narrowing gap between U.S. and Chinese technology stems from both
the Chinese government's concentrated effort to develop its
semiconductor manufacturing capabilities and the direct involvement of
foreign integrated circuit manufacturers. Since 1995, China has
substantially increased its semiconductor manufacturing capabilities
through joint ventures and foreign direct investment. Five out of
China's eight newest major integrated circuit manufacturing facilities
were established as joint ventures; the other three are wholly-owned
entities funded with foreign capital. (See table 1 for details on the
level of technology incorporated at each facility and the level of
Chinese ownership.)
Table 1: Newest Semiconductor Manufacturing Facilities in China (as of
February 2002):
Facility: Advanced Semiconductor Manufacturing Corporation;
Year founded: 1988;
Minimum feature size in micron: 0.6;
Wafer size (diameter): 5" & 6";
Approximate wafers/month: 40,000;
Foreign/Chinese partner: Philips (Netherlands)/Chinese government;
Percent Chinese ownership: 62%.
Facility: Shanghai Belling;
Year founded: 1988;
Minimum feature size in micron: 0.8;
Wafer size (diameter): 4" & 5";
Approximate wafers/month: 13,300;
Foreign/Chinese partner: Alcatel (Belgium)/Shanghai Bell & Shanghai
municipal government;
Percent Chinese ownership: 64%.
Facility: Shougang NEC;
Year founded: 1991;
Minimum feature size in micron: 0.35;
Wafer size (diameter): 6";
Approximate wafers/month: 8,000;
Foreign/Chinese partner: NEC (Japan)/Chinese government;
Percent Chinese ownership: 51%.
Facility: Motorola Corporation;
Year founded: 1996;
Minimum feature size in micron: 0.25;
Wafer size (diameter): 8";
Approximate wafers/month: 24,000[B];
Motorola (U.S.)/none;
Percent Chinese ownership: 0.
Facility: Shanghai Hua Hong NEC;
Year founded: 1996;
Minimum feature size in micron: 0.35;
Wafer size (diameter): 8";
Approximate wafers/month: 20,000;
Foreign/Chinese partner: NEC (Japan)/Shanghai and Chinese government;
Percent Chinese ownership: 71%.
Facility: Central Semiconductor Manufacturing Corporation;
Year founded: 1997;
Minimum feature size in micron: 0.3;
Wafer size (diameter): 5" & 6";
Approximate wafers/month: 12,000;
Foreign/Chinese partner: CSMC (Hong Kong)/Chinese government;
Percent Chinese ownership: 49%.
Facility: Grace Semiconductor Manufacturing Corporation[A];
Year founded: 2000;
Minimum feature size in micron: 0.25;
Wafer size (diameter): 8";
Approximate wafers/month: 25,000[B];
Foreign/Chinese partner: International/none;
Percent Chinese ownership: 0.
Facility: Semiconductor Manufacturing International Corporation[A];
Year founded: 2000;
Minimum feature size in micron: 0.18;
Wafer size (diameter): 8";
Approximate wafers/month: 45,000[B];
Foreign/Chinese partner: International/none;
Percent Chinese ownership: 0.
[A] Both Grace and Semiconductor Manufacturing International are
managed by Taiwanese nationals. Funding for these companies comes from
multiple international sources.
[B] These are planned production levels; none of the companies are
currently producing at full capacity.
Source: Semiconductor manufacturing firms listed in the table.
[End of table]
These joint ventures and wholly foreign owned semiconductor
manufacturing facilities provide China with access to more advanced
technology than it previously had or could produce on its own. U.S.
companies have participated in these joint ventures. This trend in
joint ventures and foreign direct investment is likely to continue
since there are plans to construct an additional 10 to 20 advanced
semiconductor manufacturing facilities in China by 2005 at an
estimated cost of over $1 billion per facility. The Semiconductor
Industry Association estimates that China will become the world's
second largest market for integrated circuits by 2010, and that the
market for semiconductor manufacturing equipment in China will grow to
$7 billion by 2003. Applied Materials, which is based in Santa Clara,
California, and is the world's largest manufacturer of semiconductor
equipment, estimates that 20 percent of its revenue in the next decade
will be derived from sales to China.[Footnote 20] Moreover, since the
quality of semiconductor manufacturing equipment produced in China is
not high enough to use in modern facilities, Chinese companies have
established joint ventures with foreign semiconductor equipment
manufacturing companies in an effort to improve the semiconductor
manufacturing equipment constructed in China. Figure 2 shows one of
China's newest semiconductor manufacturing facilities, Hua Hong NEC in
Shanghai.
Figure 2: Shanghai Hua Hong NEC Semiconductor Manufacturing Facility
(Completed in 2001):
[Refer to PDF for image: photograph]
Source: Shanghai Hua Hong NEC.
[End of figure]
In addition to improving China's semiconductor manufacturing
technology, the joint ventures and wholly foreign owned facilities
have increased the overall volume of integrated circuits produced in
China by supporting the country's migration to larger silicon wafers.
[Footnote 21] This shift allows China to produce greater numbers of
integrated circuits and thus reduce their cost per unit. Grace,
Semiconductor Manufacturing International, and Motorola will add an
additional 94,000 8-inch wafers per month to China's overall
production capacity once their facilities are fully operational in
early 2002. According to the State Department, when these new
fabrication facilities are operational, they will "multiply by several
times China's current production capacity, putting [it] on the map
both technologically and in terms of capacity in the global market.
[Footnote 22] Further, several of these modern manufacturing
facilities are designed to produce custom-made semiconductors for any
customer. Consequently, they provide China's industry and military
with a new source of custom-made integrated circuits that are not
subject to foreign export controls.[Footnote 23]
Improvements in Semiconductor Manufacturing Industry Assist China's
Military Modernization:
According to a senior Defense Department official, a cutting-edge
domestic semiconductor industry supports military modernization in
China.[Footnote 24] According to this official, China's military
modernization program appears to be focusing on 'pockets of
excellence,' where advances in select technologies can be leveraged
for disproportionate benefit in a potential conflict. Several such
'pockets' include: preemptive long-range precision strike
capabilities; information dominance; command and control; and
integrated air defense. In support of these efforts, Beijing has
identified the development of an indigenous semiconductor industry as
one of its highest priorities. This official added that China's
increasing emphasis on the development of integrated circuits "will
have direct application in future military systems, for example,
advanced phased-array radar."[Footnote 25]
Moreover, advanced semiconductor production facilities improve China's
military industrial base by providing a conduit for technology
transfer, including transfer of technical specifications, production
and process technology, and management and marketing skills that can
aid indirectly in military production. According to the Defense
Department experts we consulted, these facilities provide China with a
domestic supply of integrated circuits that are useful in a broad
range of applications including command, control, communications,
surveillance, and missile guidance equipment that is less vulnerable
to foreign disruption during a protracted conflict.
The most sophisticated facilities in China are capable of producing
semiconductors with feature sizes that are more advanced than those
used in some of the United States' most advanced weapons.[Footnote 26]
For example, the U.S. Air Force's new F-22 advanced tactical fighter
is now undergoing preproduction testing after a decade of development.
The aircraft's avionics[Footnote 27] rely on an Intel i960MX
microprocessor that has a feature size of 0.8 micron. In terms of
feature size, the i960MX processor is at least four technology
generations behind the integrated circuits that China is capable of
producing today.[Footnote 28]
According to defense experts, the semiconductor manufacturing
technology China has acquired will enable it to produce components to
enhance current and future weapon systems. However, having the
components does not guarantee that China will be able to produce
complete weapons systems. The experts note that China has experienced
problems translating theory and design into reliable weapons systems.
They also note that China's defense industry faces technical,
structural, and other barriers that impede its ability to absorb and
utilize advanced technologies for weapons production. For example,
China's defense industry lacks many of the basic skills, such as
making complex systems work together, necessary to fully utilize
acquired technologies. These experts also note that the highly
compartmentalized and risk-adverse hierarchical structure of China's
defense industry make it difficult for various branches of the
industry to collaborate on weapons design or extract greater benefits
from technology.
Wassenaar Arrangement Has Not Affected China's Ability to Acquire
Advanced Semiconductor Manufacturing Equipment:
The Wassenaar Arrangement on Export Controls for Conventional Arms and
Dual-Use Goods and Technologies has not affected China's ability to
obtain semiconductor manufacturing equipment primarily because the
United States is the only member of the Wassenaar Arrangement that
considers China's acquisition of semiconductor manufacturing equipment
a cause for concern. One of the principal goals of the arrangement is
to prevent "destabilizing accumulations" of advanced dual-use goods
and technologies through the reporting of export information by its
members. Transparency, through exchanging information and sharing
views, is the sole means by which the arrangement tries to achieve its
goals. Yet, under existing Wassenaar agreements, there are no
commitments to provide information on exports for 97 percent of all
electronics-related items, including semiconductor manufacturing
equipment, covered by the arrangement. In addition, a large-scale
decontrol of these items has occurred since the end of the cold war.
United States Is the Only Member Concerned About China:
There is a broad consensus among Wassenaar members that the export of
an item covered by the arrangement should be denied only if it is
critical for military purposes and destined for a state whose actions
may undermine regional or international security and stability. The
United States is the only member that considers the relationship
between semiconductor manufacturing equipment and military end uses
sufficiently critical and considers China's acquisition of this
technology a potential threat to regional or international stability.
We found that European, Japanese, and U.S. export control authorities
license sales of semiconductor manufacturing equipment to China that
is at least two generations more advanced than the threshold
stipulated in the Wassenaar and Commerce lists (0.50 micron) and three
generations more advanced than what the Defense Department considers
military critical (0.70 micron).
Wassenaar Reporting Does Not Provide Enough Information to Assess
Accumulations:
Member states have agreed to exchange only limited information on
items covered by the Wassenaar Arrangement. Thus, arrangement
reporting data do not provide sufficient information to determine
whether countries are accumulating advanced dual-use semiconductor
manufacturing goods and technologies.[Footnote 29] The Wassenaar
Arrangement's activities focus on the regular review and updating of
technical parameters for three lists of dual-use items-—basic,
sensitive, and very sensitive—-for which there are varying reporting
commitments. In general, no export information is shared for 76
percent of all listed items. No export information is shared among
members for 97 percent of the electronics-related items covered by the
arrangement.[Footnote 30] (See appendix II for information on
Wassenaar reporting commitments.) Metal organic chemical vapor
deposition equipment is the only type of semiconductor manufacturing
equipment that is defined as sensitive and thus subject to arrangement
reporting commitments for approved exports. This equipment has a wide
range of capabilities, some of which are applicable to military uses.
However, we found that the reporting information on approvals for such
equipment lacks enough detail to shed much light on its capabilities
or intended end use and is of little practical use for determining the
semiconductor manufacturing capability of the country to which the
equipment is exported.
In addition, the time lapse between exports of items and the reporting
of these transfers further reduces the value of the minimal reporting
information. Aggregate sensitive and very sensitive item approval
information is reported twice a year.
The Arrangement Does Not Have a "No Undercut" Rule:
The Wassenaar Arrangement lacks a "no undercut" rule, under which a
Wassenaar member would agree not to permit the export of any listed
item(s) that had been, within a specified period, officially denied an
export license by another member. According to a senior Wassenaar
Arrangement official, implementing a no undercut rule would be the
only realistic way to relieve competitive pressures to approve certain
exports. For example, the United States denied the sale of an advanced
metal organic chemical vapor deposition machine-—which can be used to
manufacture compound semiconductors for advanced military systems such
as missiles and satellites-—to the Hebei Semiconductor Research
Institute in China in May 1998 because of concerns about its possible
diversion for military uses.[Footnote 31] A German company sold
equivalent equipment to the same end user. The practical effect of the
U.S. denial was the loss of a multimillion-dollar sale by Emcore
Corporation and the gain of a sale by Germany-based Aixtron GmbH.
[Footnote 32] In response to this situation, the United States
formally registered its displeasure with the German government through
a diplomatic demarche.[Footnote 33]
Our work identified other examples of equipment and materials being
sold to end users to whom the United States had previously denied
export licenses. For example, the Institute for Semiconductors in
Beijing (see figure 3) and the Nanjing Electronic Device Institute
both have German-made metal organic chemical vapor deposition
equipment.[Footnote 34] The U.S. government has determined that
exports of semiconductor manufacturing equipment and materials to
these institutes are detrimental to U.S. national security interests.
Figure 3: German Metal Organic Chemical Vapor Deposition Equipment at
the Institute of Semiconductors, Beijing:
[Refer to PDF for image: 2 photographs]
Source: GAO.
[End of figure]
The United States has also denied the sale of arsine and phosphine
gases to the Institute of Semiconductors in Beijing for national
security reasons.[Footnote 35] However, as shown in figure 4, during
our visit to the institute we found that the institute was using these
same gases in its manufacturing process.
Figure 4: Controlled Arsine and Phosphine Gases in Use at the
Institute of Semiconductors, Beijing:
[Refer to PDF for image: photograph]
Source: GAO.
Note: Highlighted areas indicate gas mixtures (arsine on the left and
phosphine on the right) currently being used in the production of
semiconductors.
[End of figure]
According to an institute official, due to U.S. export controls, the
gases the institute uses are purchased from European and Japanese
companies. GAO did not independently verify this statement. It should
be noted that the Commerce Department has charged a company for
illegally exporting chemicals to China, including the chemicals in
question.
Large-Scale Decontrol Raises Questions About Relevancy:
Since the end of the cold war, there has been a trend toward the large-
scale decontrol of dual-use goods and technologies, including
semiconductor manufacturing equipment and materials, which has raised
questions within government and industry about the Wassenaar
Arrangement's relevance as an export control mechanism. For example,
50 percent of the adopted proposals from 1997 through 2000 for
Categories 3B and 3C liberalized controls on items or decontrolled
items. Only 33 percent of the proposals added new controls. The
remaining proposals clarified the text of the lists of controlled
items.
The increasingly blurred lines between civilian and military
technology are an important factor leading to more decontrol,
according to officials we interviewed. More and more advanced goods
and technologies are considered dual-use. For example, gallium
arsenide-based integrated circuits used in devices with high frequency
and power requirements had only aerospace and military applications in
the past. They are now used widely in common consumer devices such as
mobile phones.
Export Controls on Advanced Semiconductor Manufacturing Technology to
China Lack Analytical Basis:
Under the Export Administration Regulations pertaining to China, the
general licensing policy is to approve applications, with some
exceptions. The regulations also state that each license application
is to be considered individually, which allows for some assessment of
the semiconductor equipment being exported and of end users and end
uses. Although the regulations make no reference to the level of
technology that can be exported to China relative to the current
commercial state of the art, according to policy officials, U.S.
practice has been aimed at keeping China at least two generations
(about 3 to 4 years) behind global state-of-the-art semiconductor
manufacturing production capabilities. However, U.S. agencies have not
used the available analytic tools to serve as a basis for this
practice or to make decisions on export licenses. Despite the two-
generations-behind objective, we found that the United States approves
most licenses for exports of semiconductor manufacturing equipment and
materials to China. Although these licenses contain a number of
conditions stipulating how such equipment can be used, we found that
the Commerce Department has not conducted any "end-use" checks on the
U.S. semiconductor equipment exported to China to determine whether
licensing conditions are being met.
Industry Notes Lack of Clarity in Current Export Regulations:
U.S. export licensing control policy toward China is broadly described
in title 15, sections 742.4(a) and 742.4(b)(7) of the Export
Administration Regulations, which state:
* It is the policy of the United States to restrict the export and
reexport of items that would make a significant contribution to the
military potential of any other country or combination of countries
that would prove detrimental to the national security of the United
States. (742.4(a))
* For the People's Republic of China, the general licensing policy is
to approve [license] applications, except that those items that would
make a direct and significant contribution to electronic and
antisubmarine warfare, intelligence gathering, power projection, and
air superiority receive extended review or denial. Each application
will be considered individually. Items may be approved even though
they may contribute to Chinese military development or the end user or
end use is military. (742.4(b)(7))
Although the regulations broadly describe U.S. export policy to China,
they do not describe the level of technology that can be exported to
China relative to the current commercial state of the art. In March
2001, the Commerce Department's undersecretary for export
administration and the director of the Technology and Security
Directorate of the Defense Threat Reduction Agency told us that the
U.S. government's practice, while undocumented, has been to use export
controls on semiconductor manufacturing technology to keep China's
semiconductor manufacturing industry at least two generations behind
commercial state-of-the-art production capabilities. In commenting on
a draft of this report, officials from the Departments of Commerce,
Defense, and State said this is not U.S. policy. However, in its
detailed comments, the Commerce Department contradicted this assertion
and stated that certain exports to China are limited to two
generations behind state-of-the-art levels to address national
security or other concerns related to a particular transaction.
Industry officials we interviewed confirmed that this practice exists.
They stated that the lack of clear criteria has created a great deal
of uncertainty about the export licensing process and raises questions
about the rationale for some U.S. government licensing decisions. We
found that European, Japanese, and U.S. companies have all exported
advanced semiconductor manufacturing equipment to China that allows
manufacturing facilities to produce semiconductors that are less than
two generations behind commercial state-of-the-art technology.
Analysis on Which to Base Policy Objective Is Lacking:
We also found that neither the Department of Commerce nor Defense had
conducted the analyses that could serve as the basis for an export
control policy objective, related export licensing decisions, or U.S.
proposals to the Wassenaar Arrangement.
* The Commerce Department has the authority to initiate "foreign
availability" assessments that identify foreign sources of items
subject to U.S. national security export controls, such as
semiconductor manufacturing equipment. These assessments determine if
items of comparable quality are available in quantities that would
render U.S. export controls on the items ineffective. Commerce
Department officials and Semiconductor Equipment and Materials
International representatives stated that a foreign availability study
has not been conducted since 1987. Industry officials told us that
they had not requested these studies, as allowed by the regulations,
because the government's prior effort to complete a study took several
years and was outdated at issuance. Industry officials told us that if
new studies were conducted and completed in a timely manner, the
results would indicate that U.S. export controls on the items studied
have been ineffective since all the equipment necessary to manufacture
semiconductors can be purchased from non-U.S. sources.
* The Commerce Department conducts studies of the impact of U.S.
export controls and sanctions on particular industries and overall
U.S. global trade. It conducts these studies because U.S. economic
interests are major factors in export control decisions, along with
national security and foreign policy concerns. However, we found that
the Commerce Department has not studied the impact of export controls
on the U.S. semiconductor manufacturing equipment and materials
industries.
* The Commerce Department researches technology transfer issues in
order to enhance long-term U.S. economic security. In addition,
Department of Defense Directive 2040.2 states that the department
shall "assess annually the total effect of transfers of technology,
goods, services, and munitions on U.S. security, regardless of the
transfer mechanisms involved."[Footnote 36] We found that neither the
Departments of Commerce nor Defense has conducted assessments of the
cumulative effect of semiconductor-related technology transfers to
China. Further, Department of Defense Directive 2040.2 has not been
updated since July 5, 1985, and many of its provisions are centered on
the Coordinating Committee for Multilateral Export Controls, the
predecessor to the Wassenaar Arrangement.
* The Export Administration Act of 1979 calls for the Defense
Department to compile a list of military critical technologies.
[Footnote 37] The Military Critical Technologies List describes the
performance parameters of critical technologies that the United States
needs to ensure superiority of U.S. military systems.[Footnote 38] The
list is intended to serve, among other purposes, as the technical
foundation for U.S. negotiators in the Wassenaar Arrangement, and as a
technical reference guide for the Departments of Commerce, Defense,
Energy, State, and Treasury licensing and export control staff. In
developing the list, defense and intelligence analysts also make
related foreign technology assessments that describe foreign
countries' capabilities to produce each of the listed technologies.
[Footnote 39] Despite major advances in semiconductor-related
technology in the United States and in foreign countries, the Defense
Department has not substantively updated the Military Critical
Technologies List pertaining to semiconductor equipment and materials
since 1996.
Without these analyses and assessments, the Departments of Commerce,
Defense, and State are making licensing decisions and U.S. proposals
to Wassenaar without complete and up-to-date information. According to
the Departments of Defense and State, the export licensing community
is kept informed by frequent industry briefings, intergovernmental
contacts, the international press, and information exchanges among
Wassenaar Arrangement members. Although the information obtained
through these methods is useful, it is not an adequate substitute for
formal agency analysis.
Most Export Licenses for Semiconductor Manufacturing Equipment and
Materials Are Approved:
We found the majority of export license applications for semiconductor
manufacturing equipment and materials for China are approved. From
fiscal year 1997 through fiscal year 2000, 64.6 percent of export
licenses for semiconductor manufacturing equipment (Category 3B) were
approved, and 78.3 percent of export licenses for semiconductor
manufacturing materials (Category 3C) were approved. Other data
indicate that export license denials have not had a major economic
impact on the industry.[Footnote 40] The U.S. government reviewed
nearly $1.6 billion worth of semiconductor manufacturing equipment and
materials licenses for export to China from fiscal year 1997 through
fiscal year 2000; only 0.4 percent and 0.5 percent of equipment and
materials licenses, respectively, were denied as measured by dollar
value.[Footnote 41]
The approved licenses typically contain a number of conditions that
stipulate the characteristics (such as feature size) of the integrated
circuits that can be produced, the types of integrated circuits that
equipment should not be used to produce, and the customers who can or
cannot purchase the integrated circuits produced with the licensed
equipment, among other things. The conditions are designed to deter
the end user from using the equipment inappropriately. Without
periodic monitoring, there is no way to verify compliance. Although
monitoring is supposed to be accomplished through end-use checks
conducted by U.S. government personnel, we found that the U.S.
officials in China tasked with this job have not conducted any of
these checks on semiconductor manufacturing equipment in the last 5
years. In testimony before the U.S. China Commission on January 17,
2002, the Commerce Department's assistant secretary of export
enforcement stated that the schedule for conducting end-use checks is
dictated by the Chinese government.[Footnote 42] This situation has
caused a number of problems. Specifically, most of the end-use checks
that the United States has been allowed to conduct have been on high-
performance computers that are no longer controlled due to the
liberalization of export controls. In addition, due to delays caused
by the Chinese government's scheduling, 700 outstanding checks remain
to be completed, checks on items other than high-performance computers
continue to "languish," and the Commerce Department is unable to focus
its efforts on the checks it considers the most strategic.
Despite the overall high approval rates for electronics goods and
technologies, there are a few cases where licensing denials did cost
some U.S. companies sales worth several million of dollars. We asked
companies that are members of the semiconductor equipment and
materials trade association to provide examples of cases where export
license denials resulted in sales lost to foreign competitors. Of the
six cases they identified, we were able to verify two. In May 1998,
the Commerce Department denied an export license to Emcore Corporation
of Somerset, New Jersey, to sell a metal organic chemical vapor
deposition machine to the Hebei Institute of Semiconductors. The
institute later purchased a similar machine from Aixtron GmbH of
Aachen, Germany.[Footnote 43] In 2001, Hayward, California-based ETEC
lost the sale of a mask pattern generating machine (ALTA 3000) to
Shanghai-based Semiconductor Manufacturing International Corporation.
Due to delays in the license approval process, the firm canceled its
ETEC order and purchased a machine from Micronic of Taby, Sweden. The
Commerce Department later approved the sale of a more advanced machine
(ALTA 3500) to Semiconductor Manufacturing International Corporation.
[Footnote 44]
Conclusions:
The current export control system has not effectively slowed China's
ability to obtain billions of dollars worth of advanced semiconductor
equipment as part of its national strategy to modernize its
semiconductor industry and thus needs to be reexamined. The success of
export controls is predicated on a nation's ability to control a
particular form of technology or to multilateralize binding controls.
However, U.S. agency efforts to control this technology have been
complicated by the globalization of the industry and foreign
competitors' views that transfers of this technology to China are not
a matter for concern. In addition, Wassenaar Arrangement reporting
does not provide enough information to allow member countries to
assess whether destabilizing accumulations of these and related dual-
use goods and technologies are occurring. While U.S. export
regulations broadly describe export licensing policy to China, they
lack criteria describing the level of semiconductor manufacturing
technology that can be exported to China relative to the current state
of the art. This has led industry to perceive that semiconductor
manufacturing equipment sales to China are subject to an ad hoc system
of controls. Under the current approach, the U.S. government continues
to require licenses for semiconductor manufacturing equipment without
1) adequate consideration of the impact of the global market forces
that are undermining its ability to control this technology, 2) the
cumulative effect of the transfer of this technology on U.S. national
security, and 3) clear justification for why the current control
parameters are maintained or how they contribute to slowing the
transfer of this equipment to China. Without an updated assessment,
U.S. policymakers may find it increasingly difficult to justify
licensing decisions and to strike the appropriate balance between
national security risks and the economic interest in promoting sales
of high-technology goods to China.
Recommendations for Executive Action:
To improve the effectiveness of the U.S. export control system, we
recommend that the secretary of commerce work with the secretary of
defense and the secretary of state to reevaluate, clarify, and
document export policy on semiconductor manufacturing equipment and
materials. These actions should include:
1. conducting assessments of foreign availability, the technical
parameters necessary to ensure critical U.S. military capabilities,
the impact of export controls on U.S. industry, and the overall
national and economic security implications of China's ability to
import, produce, and develop advanced semiconductor-related
technology;
2. developing new export controls if the technology needs to and can
be controlled, and updating related regulations and policy documents
including the Military Critical Technologies List and Department of
Defense Directive 2040.2. If the technology cannot be controlled using
export controls, develop alternative means for protecting U.S.
security interests; and;
3. communicating the results of the assessments and the options for
controlling the technology and protecting U.S. security to the U.S.
Congress and industry.
Agency Comments and Our Evaluation:
We received written comments on a draft of this report from the
Departments of Commerce, Defense, and State that are reprinted in
appendixes III, IV, and V.
The Departments of Commerce, Defense, and State disagreed with our
analysis and conclusions and said our report is based on a flawed
premise that U.S. controls on semiconductor manufacturing-related
items exported to China stem from a policy of trying to keep Chinese
industry at least two generations behind state-of-the-art
semiconductor manufacturing facilities. These agencies said that U.S.
policy for why and how these items should be controlled can be found
in the Export Administration Regulations and that this policy
specifies a case-by-case review. The Commerce Department said that no
policy-level official at the Commerce Department informed GAO of the
two-generations-behind policy. The State Department also asserted
that, contrary to our report findings, the current U.S. export
licensing process does consider the nature and extent of foreign
availability of semiconductor manufacturing equipment and the
cumulative effect of those exports to China, as well as the potential
risks to U.S. national security. The State Department asserted that
these efforts are sufficient to meet the intent of the draft report's
recommendations concerning establishing a sound, analytical basis for
current policy. The Commerce Department also noted that no
semiconductor equipment producer or industry association has requested
a foreign availability assessment.
We agree with the Departments of Commerce, Defense, and State that a
description of the U.S. government's export control policy toward
China is found in the Export Administration Regulations. We added some
additional information to the report to better describe this policy
and to make a clearer distinction between policy and practice as the
current regulations make no reference to the level of semiconductor
manufacturing technology that can be exported to China relative to the
current commercial state of the art. We found that the executive
branch practice was aimed at keeping China two generations behind the
U.S. semiconductor manufacturing industry. On March 1, 2001, the under
secretary for export administration (a policy-level official)
described this practice and reconfirmed it in a follow-up January 2002
meeting with GAO after he left office.
Moreover, in commenting on our draft report, the Commerce Department
described this practice, noting that "certain exports of semiconductor
manufacturing equipment to China are limited to two generations behind
state-of-the-art levels to address national security, or other
concerns related to a particular transaction. On a number of
occasions, however, exports of more sophisticated equipment to wholly-
owned subsidiaries of U.S. companies located in China have been
approved." In a January 17, 2002, hearing before the U.S.-China
Commission, the president of the Semiconductor Industry Association
also discussed this practice. He testified that "As a result of the
ready availability of SEM [semiconductor production equipment and
materials] globally, the U.S. policy objective of using export
controls to keep China's indigenous semiconductor production two
generations behind the state of the art is not being met, yet the
controls remain, hampering U.S. SEM suppliers and their ability to
remain global leaders." U.S. industry officials complain that the lack
of clearly articulated criteria creates uncertainty about the export
licensing process and raises question about U.S. export policy toward
China. That is why we are recommending that this issue be reevaluated,
clarified, and documented. We are not suggesting that the "two-
generations-behind" objective is the appropriate criterion; rather, we
are recommending that the executive branch devise appropriate criteria
once the supporting analysis has been completed and documented.
Regarding the Departments of Commerce, Defense, and States' comments
that the current export licensing process is based on a sound,
analytical framework, we found that a U.S. government foreign
availability analysis of semiconductor manufacturing equipment has not
been completed since 1987. Further, the U.S. government has not
conducted studies of the cumulative effect of the export of advanced
semiconductor manufacturing equipment and materials to China on U.S.
national security.
The Department of Defense also questioned whether China's
semiconductor industry has advanced as far as our analysis suggests.
In particular, the department disputed our analysis indicating that
China is one generation of technology behind the United States. The
Defense Department cited a November 2001 press release issued by the
Semiconductor Manufacturing International Corporation (SMIC) to
support its conclusion. We met with the senior management team of this
corporation during our visit to China in June 2001 and verified the
information we presented in our report in follow-up discussions with
company officials. The Department of Defense also cited a 2001 RAND
Corporation study that discusses developments in China's
microelectronics industry to support its assessment of China's current
semiconductor manufacturing capabilities. The study was based on
secondary sources utilizing 1997 industry data. Our analysis was based
on 2001 primary data collected directly from semiconductor
manufacturing industry officials in China.
The Departments of Commerce and Defense also said that, due to
confidentiality provisions of current law (e.g., section 12(c) of the
Export Administration Act of 1979, as amended), public disclosure of
information regarding individual license applications is not
authorized. We discussed these issues with agency officials and
assured them that all company-specific examples we used in our report
were obtained from public sources or the companies and organizations
mentioned in the report.
The Departments of Commerce, Defense, and State also commented that
the report presented no evidence that the semiconductor manufacturing
facilities constructed in China provided any benefit to China's
military. However, in a January 17, 2002, hearing before the U.S.-
China Commission, the deputy undersecretary of defense for technology
security and counterproliferation affirmed our observation. This
official noted that "China's modernization program appears to be
focusing on pockets of excellence, where advances in select
technologies can be leveraged for disproportionate benefit in a
potential conflict. Several such pockets include: preemptive long-
range precision strike capabilities; information dominance; command
and control; and integrated air defense. In support of these efforts,
Beijing has identified the development of an indigenous
microelectronics industry as one of its highest priorities. A cutting-
edge domestic microelectronics sector will support both military and
commercial modernization in China. China's increasing emphasis on the
development of very large-scale integrated circuits will have a direct
application in future military systems, for example, advanced phased-
array radars."
Additional information was added to the report to clarify specific
points. However, the comments provided by the Departments of Commerce,
Defense, and State provide no basis for altering the findings,
conclusions, or recommendations contained in the report.
Scope and Methodology:
To describe China's present semiconductor manufacturing capability, we
met with and reviewed studies and analyses prepared by experts from
academia, industry, the intelligence community, and the Departments of
Commerce, Defense, and State in Washington, D.C., and Beijing, China.
In addition, we met with officials from Advanced Semiconductor
Manufacturing Corporation, Central Semiconductor Manufacturing
Cooperation, Grace Semiconductor Manufacturing Corporation, Motorola
Tianjin, Semiconductor Manufacturing International Corporation,
Shougang Electronics NEC, Hua Hong NEC, and DuPont Photo Masks
Incorporated in China. As part of this work, we toured the
manufacturing facilities of Advanced Semiconductor in Shanghai, China,
and Motorola in Tianjin, China. Finally, we met with officials and
toured the facilities of the Chinese Academy of Sciences' Institute of
Semiconductors in Beijing, China. In addition, to further understand
semiconductor research and development and associated manufacturing
processes and applications, we visited Semiconductor Materials
Technology International in Austin, Texas, and the Sandia and Lawrence
Livermore National Laboratories in Albuquerque, New Mexico, and
Livermore, California, respectively; the Naval Research Laboratory in
Washington, D.C.; the Defense Microelectronics Activity in McClellan,
California; the Defense Advanced Research Projects Agency in
Arlington, Virginia; and BAE Systems in Manassas, Virginia.
To analyze how the Wassenaar Arrangement has affected the transfer of
semiconductor manufacturing equipment and materials to China, we met
with representatives of the Departments of Commerce, Defense, and
State and an export control expert from the Center for International
Trade and Security in Washington, D.C. In China, we met with officials
from the Ministry of Foreign Trade and Economic Cooperation in Beijing
and the Trade and Industry Department of the government of Hong Kong.
Further, we spoke to the director of the New York office of the Japan
External Trade Organization in Washington, D.C. We also met with
officials from the U.S., Russian, and Japanese Missions to the
Wassenaar Arrangement and staff members of the Wassenaar Arrangement
Secretariat in Vienna, Austria. We analyzed information provided by
the Wassenaar Arrangement's Secretariat, including the Wassenaar
Arrangement's Initial Elements, controlled items lists, and export
approval and denial reports, to determine whether the arrangement's
reporting mechanisms could be used to identify trends in the export of
semiconductor equipment and materials and other dual-use technology
from 1996 through 2000. Finally, we analyzed trend data describing the
disposition of proposals from the United States and other members of
the Wassenaar Arrangement for 1996 through 2000. We did not verify the
data obtained from the Wassenaar Arrangement's Secretariat.
To assess the analytical basis for U.S. export control policy
pertaining to the export of semiconductor equipment and materials to
China, we met with officials from the Departments of Commerce and
State in Washington, D.C., and Beijing, China, and the Defense
Department in Washington, D.C., and with officials at the American
Institute in Taiwan in Taipei. In addition, we convened panels of
representatives from the semiconductor and semiconductor equipment and
materials industries in San Jose, California; Hsinchu, Taiwan; and
Beijing, China, to obtain their views on U.S. export controls on
semiconductors and semiconductor manufacturing equipment and
materials. These panels included representatives from Advantest,
Applied Materials, Emcore, ETEC, Hermes Systems, Hewlett-Packard,
Intel, International Business Machines, KLA-Tencor, National
Semiconductor, NEC, Novellus, Texas Instruments, Ultratech Stepper,
and Varian Semiconductor Equipment. In addition, we met directly with
major U.S. and Taiwanese firms including Advanced Micro Devices,
Applied Materials, Intel, Motorola, Silicon Laboratories, Silicon
Valley Group, Taiwan Semiconductor Manufacturing Company, United
Epitaxy Company, United Microelectronics Corporation, and VIA
Technologies Incorporated. We also met with representatives of the
Semiconductor Industry Association in San Jose, California;
Semiconductor Equipment and Materials International in Washington,
D.C., San Jose, California, and Hsinchu, Taiwan; the Taiwanese
Semiconductor Industry Association in Hsinchu, Taiwan; and the United
States Information Technology Office in Beijing, China; and the
attorneys for the industry associations—-Dewey Ballantine in
Washington, D.C. In addition, we analyzed license processing and
approval information from the Commerce Department's Export Control
Administrative Support System. Finally, we attended Commerce
Department Information System Technology Advisory Committee meetings
in San Diego, California, and Washington, D.C. Statements in the
report about foreign laws and regulations were derived from secondary
sources.
We performed our work from February 2001 through January 2002 in
accordance with generally accepted government auditing standards.
Please contact me at (202) 512-8979 if you or your staff have any
questions concerning this report. Other GAO contacts and staff
acknowledgments are listed in appendix VI.
Sincerely yours,
Signed by:
Joseph Christoff:
Director:
International Affairs and Trade:
[End of section]
Appendix I: Reasons for Controlling Dual-Use Goods and Technologies:
Export controls on dual-use items are maintained for national security
and foreign policy reasons.[Footnote 45] Each export control
regulation is governed by at least 1 of 13 specific concerns. (See
figure 6 for a list of the 13 reasons for controlling dual-use goods.)
Figure 5: Reasons for the Control of Dual-Use Goods and Technologies:
[Refer to PDF for image: list]
Reasons for Control:
* Antiterrorism;
* Chemical and biological weapons;
* Crime control;
* Chemical Weapons Convention;
* Encryption items;
* Firearms Convention;
* Missile technology;
* National security;
* Nuclear nonproliferation;
* Regional stability;
* Short supply;
* Computers;
* Significant terms.
Source: 15 CFR section 738.2.
[End of figure]
The Export Administration Regulations establish the framework for
regulating the exports of dual-use items by identifying the
characteristics and capabilities of items that may require export
licenses. Exports are restricted by item, country, and entity. 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 table 2 for a list of the 10
categories); each category is subdivided into 5 groups designated by
the letters A through E (see table 3 for a list of the 5 groups).
Table 2: Commerce Control List Categories:
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. section 738.2.
[End of table]
Table 3: Commerce Control List Category Groups:
Commerce Control List subcategories:
A: Equipment, assemblies, and components.
B: Test, inspection, and production equipment.
C: Materials.
D: Software.
E: Technology.
Source: 15 C.F.R. section 738.2.
[End of table]
Semiconductors and semiconductor manufacturing equipment and materials
fall under Category 3 (electronics), with manufacturing equipment
placed in Category 3B (test, inspection, and production equipment) and
materials placed in Category 3C (materials).[Footnote 46] These goods
and technologies are controlled most frequently as a tool of U.S.
antiterrorism policy, but also, as shown in table 4, to meet nuclear
nonproliferation policy objectives, control the spread of missile
technology and crime, and address general national security concerns.
[Footnote 47] Exports of semiconductor manufacturing equipment and
materials to China are controlled for national security reasons. Table
5 describes the specific equipment and materials that require a
license for export to China.
Table 4: Frequency of Reasons for Control of Category 3 (Electronics)
Items:
Subcategory: A;
National security: 2;
Missile technology: 2;
Antiterrorism: 17;
Nuclear nonproliferation: 11;
Crime control: 2.
Subcategory: B;
National security: 2;
Missile technology: 0;
Antiterrorism: 4;
Nuclear nonproliferation: 0;
Crime control: 0.
Subcategory: C;
National security: 4;
Missile technology: 0;
Antiterrorism: 5;
Nuclear nonproliferation: 0;
Crime control: 0.
Subcategory: D;
National security: 3;
Missile technology: 2;
Antiterrorism: 7;
Nuclear nonproliferation: 0;
Crime control: 1.
Subcategory: E;
National security: 2;
Missile technology: 3;
Antiterrorism: 8;
Nuclear nonproliferation: 3;
Crime control: 0.
Subcategory: Total;
National security: 13;
Missile technology: 7;
Antiterrorism: 41;
Nuclear nonproliferation: 14;
Crime control: 3.
Source: C.F.R. 15, Parts 300 to 799, Commerce and Foreign Trade, 2001.
[End of table]
Table 5: Description of Semiconductor Manufacturing Equipment and
Materials Requiring Export License to China:
List number[A]: 3B001.a.1;
Description: Thin layer deposition equipment;
National security significance: Radiation-hardened electronics, space-
qualified solar cells, high power radio-frequency devices, infrared
focal plane arrays;
Primary supplier countries: U.S., Japan.
List number[A]: 3B001.a.2;
Description: Metal organic chemical vapor deposition reactors;
National security significance: [Empty];
Primary supplier countries: U.S., Germany.
List number[A]: 3B001.a.3.
Description: Molecular beam epitaxy equipment;
National security significance: [Empty];
Primary supplier countries: U.S., United Kingdom.
List number[A]: 3B001.b;
Description: Ion implantation equipment;
National security significance: Used for radiation hardened circuitry;
Primary supplier countries: U.S., Japan.
List number[A]: 3B001.c;
Description: Plasma dry etching equipment;
National security significance: Needed for all state-of-the-art
electronics, commercial or military, enable production of controlled
analog-to-digital converters, field programmable logic devices, and
application specific integrated circuits[B];
Primary supplier countries: U.S., Japan.
List number[A]: 3B001.d;
Plasma enhance chemical vapor deposition;
National security significance: [Empty];
Primary supplier countries: U.S., Japan.
List number[A]: 3B001.e;
Description: Cluster tools;
National security significance: [Empty];
Primary supplier countries: U.S., Japan.
List number[A]: 3B001.f.1;
Description: Lithography systems;
National security significance: [Empty];
Primary supplier countries: U.S., Netherlands, Japan.
List number[A]: 3B001.f.2;
Description: Mask lithography systems;
National security significance: [Empty];
Primary supplier countries: U.S., Japan, Sweden.
List number[A]: 3B001.g;
Description: Masks;
National security significance: [Empty];
Primary supplier countries: U.S., Japan.
List number[A]: 3B001.h;
Description: Multilayer masks;
National security significance: [Empty];
Primary supplier countries: U.S., Japan.
List number[A]: 3B002.a;
Description: S-parameter testers;
National security significance: [Empty];
Primary supplier countries: U.S., Japan.
List number[A]: 3B002.b;
Description: Integrated circuit testers;
National security significance: [Empty];
Primary supplier countries: U.S., Japan, Germany.
List number[A]: 3B002.c;
Description: Microwave integrated circuit testers;
National security significance: [Empty];
Primary supplier countries: U.S., Japan, Germany.
List number[A]: 3C001.a;
National security significance: Description: Epitaxial silicon wafers;
Potential starting material for devices outlined in metal oxide
chemical vapor deposition and molecular beam epitaxy equipment;
Primary supplier countries: U.S. Japan, Europe, Taiwan.
List number[A]: 3C001.b;
Description: Epitaxial germanium wafers;
National security significance: [Empty];
Primary supplier countries: [Empty].
List number[A]: 3C001.c;
Description: Epitaxial wafers of III/IV compounds;
National security significance: [Empty];
Primary supplier countries: [Empty].
List number[A]: 3C002;
Description: Photo resists;
National security significance: Same as for 3B001.c;
Primary supplier countries: U.S., Japan, Europe.
List number[A]: 3C003;
Description: Purified metal organics;
National security significance: Gas sources for metal oxide chemical
vapor deposition;
Primary supplier countries: U.S. Japan, Europe.
List number[A]: 3C004;
Description: Purified gases;
National security significance: [Empty];
Primary supplier countries: [Empty].
[A] Category number in the Commerce Control List. Some items have been
consolidated under one heading for clarity.
[B] These items are controlled under Export Administration
Regulations, Part 774, 3A001 and 3A101 or under the International
Traffic in Arms Regulations Category XI.
Source: Department of Defense, Commerce Control List.
[End of table]
[End of section]
Appendix II: Wassenaar Reporting Commitments by List:
Category/percentage of items within each category:
Type of information: Approval information;
Basic/76.3 percent: None;
Sensitive/19.3 percent: Aggregate:
* Exporting country;
* Destination country;
* Control List item number;
* Brief description of the item;
* Number of units;
Very Sensitive/4.4 percent: Aggregate:
* Exporting country;
* Destination country;
* Control List item number;
* Brief description of the item;
* Number of units.
Type of information: Denial information;
Basic/76.3 percent: Aggregate:
* Exporting country;
* Destination country;
* Control List item number;
* Brief description of the item;
* Number of licenses denied;
* Number of units;
* Reason for the denial (usually formulaic, not specific or detailed);
Sensitive/19.3 percent: Individual:
* Exporting country;
* Destination country;
* Control List item number;
* Brief description of the item;
* Number of units;
* Intermediate consignee (name and address);
* Ultimate consignee (name and address);
* Stated end-use;
* Reason for denial;
* Other relevant information
Very Sensitive/4.4 percent: Individual:
* Exporting country;
* Destination country;
* Control list item number;
* Brief description of the item;
* Number of units;
* Intermediate consignee (name and address);
* Ultimate consignee (name and address);
* Stated end-use;
* Reason for denial;
* Other relevant information.
Type of information: Reporting frequency;
Basic/76.3 percent: Denials: Biannually;
Sensitive/19.3 percent:
Approvals: Biannually;
Denials: “Preferably” within 30 days but no later than within 60 days;
Very Sensitive/4.4 percent:
Approvals: Biannually;
Denials: “Preferably” within 30 days but no later than within 60 days.
Source: GAO analysis of Wassenaar Initial Elements and the December 1,
2000 list of Dual-Use Goods and Technologies.
[End of section]
Appendix III: Comments from the Department of Commerce:
Note: GAO comments supplementing those in the report text appear at
the end of this appendix.
The Secretary Of Commerce:
Washington, D.C. 20230:
January 16, 2002:
Mr. Joseph A. Christoff:
Director:
International Affairs and Trade:
U.S. General Accounting Office:
Washington, D.C. 20548:
Dear Mr. Christoff:
Thank you for the opportunity to comment on the draft General
Accounting Office (GAO) report entitled, "Rapid Advances in China's
Semiconductor Industry Underscore Need for Fundamental U.S. Policy
Review."
After careful review, we believe that the report accurately highlights
a number of the challenges associated with multilateral controls on
semiconductor manufacturing equipment and technology. However, the
report does not accurately portray the U.S. Government's policy for
controlling the export of semiconductor manufacturing equipment and
technology to China. Contrary to the report's assertion, the U.S.
Government does not seek to use the export licensing process to keep
China at least two generations behind global state-of-the-art
semiconductor manufacturing capabilities. The U.S. Government's policy
for exporting controlled items to China, including semiconductor
manufacturing equipment and technology, is clearly set forth in the
Export Administration Regulations (15 C.F.R. Section 742.4) and
specifies a case-by-case determination of license applications based
on specific facts. There is no mention of keeping China two
generations behind in semiconductor manufacturing capability.
Enclosed are more detailed comments on the report, including
identification of information currently contained in the draft report
that may not be publicly released because it is subject to section
12(c) of the Export Administration Act of 1979, as amended.
Thank you again for requesting the Department of Commerce's views on
the draft report.
Warm regards,
Signed by:
Donald L. Evans:
Enclosures:
[End of letter]
Comments and Recommended Changes on the Draft GAO Report "Rapid
Advances in China's Semiconductor Industry Underscore Need for
Fundamental U.S. Policy Review"
General Comments:
The U.S. Government's policy for licensing items for export to China,
including semiconductor manufacturing equipment and technology, is set
forth in the Export Administration Regulations (15 C.F.R. Section
742.4(b)(7)). As noted in that section, exports to China will
generally be approved unless the items would make a direct and
significant contribution to specified military applications. Each
license application is reviewed thoroughly by the interagency
community with consideration given to the proposed end-users and end-
uses and the national security implications of each transaction. While
individual agencies may take the state-of-the-art semiconductor level
into account in taking positions on specific applications, no policy
level official at the Department of Commerce has informed the General
Accounting Office (GAO) that it is the U.S. Government's policy to
keep China two generations behind global state-of-the-art
semiconductor manufacturing capabilities. [See comment 1]
The report also fails to recognize that the Department of Commerce's
industry analysts, export control specialists, and technical experts
track trends in the Chinese semiconductor industry and the activities
of foreign competitors in this key sector on an ongoing basis.
Commerce analysts factor the information they collect into interagency
licensing decisions and multilateral export control negotiations. [See
comment 2]
The report recommends that the Department of Commerce undertake a
foreign availability review. While the foreign availability provision
of the Export Administration Regulations authorizes the U.S.
Government to self-initiate a foreign availability assessment, this
provision is intended for use and has principally been used by
industry to challenge overly restrictive or ineffective export
controls. No semiconductor equipment producer or industry association
has requested a foreign availability assessment — a fact the report
does not mention. There are limited sources of these items, and all
producers are members of the Wassenaar Arrangement, so it is unlikely
that the foreign availability process would, in and of itself, lead to
decontrol. While Wassenaar members have differing views on China, it
is a priority of the Administration to do more to harmonize
multilateral export control policies and practices. [See comment 3]
[Paragraph redacted] [See comment 4]
Finally, certain information, which is detailed in the specific
comments below, is subject to section 12(c) of the Export
Administration Act of 1979, as amended. Such information may not be
publicly released. [See comment 5]
Specific Comments:
Highlights page, third paragraph: This paragraph should be revised to
note that U.S. export control policy on licensed exports to China is
set forth in the section 742.4 of the Export Administration
Regulations (EAR). That policy does not mention keeping China two
generations behind. [See comment 6]
Page 3, line 3. Revise to note that the U.S. Government's policy for
all licensed exports to China is set forth in section 742.4(b)(7) of
the EAR. [See comment 7]
Rationale: No policy level official at the Department of Commerce
informed the GAO that it is U.S. policy to try to keep China at least
two generations behind global state-of-the-art semiconductor
manufacturing capabilities. License application for such items are
reviewed individually with consideration given to the proposed end-
uses and end-users and national security implications of each
transaction. Certain exports of semiconductor manufacturing equipment
to China are limited to two generations behind state-of-the-art levels
to address national security, or other concerns related to a
particular transaction. On a number of occasions, however, exports of
more sophisticated equipment to wholly owned subsidiaries of U.S.
companies located in China have been approved.
Page 5, line 5: Insert "of 1979," after "Export Administration Act."
[Now on p. 6. See comment 8]
Page 5, footnote 7: Amend to read: "From August 21, 1994, through
November 12, 2000, the Act was in lapse. During that period, the
President, through Executive Order 12924, which had been extended by
successive Presidential Notices, the last of which was August 3, 2000
(3 C.F.R., 2000 Comp. 397 (2001)), continued the Regulations in effect
under the International Emergency Economic Powers Act (50 U.S.C. §§
1701 - 1706 (1994 & Supp. V 1999)) ("IEEPA"). On November 13, 2000,
the Act was reauthorized and it remained in effect through August 20,
2001. Since August 21, 2001, the Act has been in lapse and the
President, through Executive Order 13222 of August 17, 2001 (66 Fed.
Reg. 44025 (August 22, 2001)), has continued the Regulations in effect
under IEEPA." [Now on p. 6. See comment 9]
Page 15. line 1: Amend to read: "The Wassenaar Arrangement on Export
Controls for Conventional Arms and Dual-Use Goods and Technologies has
not constrained China's ability to obtain semiconductor manufacturing
equipment, nor is this a specific objective of this regime. The United
States is the only member of the Wassenaar Arrangement that considers
China's acquisition of semiconductor manufacturing equipment a cause
for concern. As such, it is not a general objective of Wassenaar to
restrict exports of semiconductor manufacturing equipment to China."
[Now on p. 17. See comment 10]
Page 15, line 11: Amend to read: "...there are no commitments to
provide information on exports for 97 percent of all electronics-
related items, including most semiconductor manufacturing equipment,..."
[Now on p. 17. See comment 11]
Rationale: Individual reporting is required for certain metal organic
chemical vapor deposition equipment controlled by Wassenaar under
3.B.1.a.2. of its List of Dual-Use Goods and Technologies. Therefore,
the word "most" is inserted in the reference to information on
semiconductor manufacturing equipment excluded from reporting.
Page 17, lines 9-10: Delete specific description of machine sought to
be exported. [Now on p. 19. See comment 12]
Rationale: Disclosure of such application-specific information is
precluded under section 12(c) of the Export Administration Act of
1979, as amended.
Page 17, lines 12-13: Delete name of Chinese end-user and date of
denial. [Now on p. 19. See comment 12]
Rationale: Disclosure of such application-specific information is
precluded under section 12(c) of the Export Administration Act of
1979, as amended.
Page 17, line 17: Delete the name of the U.S. company. [Now on p. 19.
See comment 12]
Rationale: Disclosure of such application-specific information is
precluded under section 12(c) of the Export Administration Act of
1979, as amended.
Page 17, lines 23-24: Delete names of Chinese end-users. [Now on p.
19. See comment 12]
Rationale: Disclosure of such application-specific information is
precluded under section 12(c) of the Export Administration Act of
1979, as amended.
Page 17. footnote 30, lines 1-2: Delete information on U.S. company,
specific product description, and date. [Now on p. 19. See comment 12]
Rationale: Disclosure of such application-specific information is
precluded under section 12(c) of the Export Administration Act of
1979, as amended.
Page 18, Figure 3 description: Delete name of Chinese end-user. [Now
on p. 21. See comment 12]
Rationale: Disclosure of such application-specific information is
precluded under section 12(c) of the Export Administration Act of
1979, as amended.
Page 19, line 2: Delete names of gases. [Now on p. 22. See comment 12]
Rationale: Disclosure of such application-specific information is
precluded under section 12(c) of the Export Administration Act of
1979, as amended.
Page 19. line 4: Delete name of Chinese end-user. [Now on p. 22. See
comment 12]
Rationale: Disclosure of such application-specific information is
precluded under section 12(c) of the Export Administration Act of
1979, as amended.
Page 19, Figure 4: Delete names of gases and Chinese end-user. [Now on
p. 22. See comment 12]
Rationale: Disclosure of such application-specific information is
precluded under section 12(c) of the Export Administration Act of
1979, as amended.
Page 20, line 11: At the end of first paragraph, add the following:
"The increased activity to modify controls in this area can be
attributed to rapid technological advances that necessitate frequent
adjustments in levels to maintain controls on that which is
strategically responsible and feasible." [Now on p. 23. See comment
13]
Rationale: Some explanation should follow the statistical data to
explain why there is a relatively high-level effort to modify
Wassenaar export controls in the electronics category. Proposals to
remove electronics-related export controls receive the most support
because of the regime's efforts to make controls in this area more
reflective of current technology. It is important to note that
Wassenaar, unlike other multilateral control regimes, essentially
adopted a control list based on out-dated Cold War era technologies.
As a result, Wassenaar has been struggling over the past five years to
update controls in areas, such as electronics, where technology has
been advancing rapidly. The effects of technological trends is a
predominant factor in the relaxation of electronics-related controls.
Page 21, line 5: Revise to reflect that while some U.S. agency
officials may believe there is a 'two-generation behind' policy, this
is not U.S. Government policy. [Now on p. 23. See comment 14]
Rationale: Section 742.4(b)(7) describes the U.S. Government's policy
on licensed exports to China. No Commerce Department policy official
informed the GAO otherwise.
Page 21, line 19: Same as previous comment. [Now on p. 24. See comment
14]
Rationale: Same as previous comment.
Page 21, line 24: Amend to read: "... said that although this
objective by some in the U.S. Government is "understood" ..." [Now on
p. 24. See comment 14]
Rationale: Same as above.
Pages 22-23: This section generally is based on an inaccurate
understanding of U.S. Government policy. [Now on pp. 25 and 26. See
comment 14]
Page 23, line 27-28: Delete date and name of U.S. company. [Now on
p.28. See comment 15]
Rationale: Disclosure of such application-specific information is
precluded under section 12(c) of the Export Administration Act of
1979, as amended.
Page 24, lines 1-2: Delete name of U.S. company, description of item,
and name of Chinese end-user. [Now on p. 28. See comment 15]
Rationale: Disclosure of such application-specific information is
precluded under section 12(c) of the Export Administration Act of
1979, as amended.
Page 24, line 3: Delete name of Chinese end-user. [Now on p. 28. See
comment 15]
Rationale: Disclosure of such application-specific information is
precluded under section 12(c) of the Export Administration Act of
1979, as amended.
Page 24, lines 5-8: Delete name of U.S. company, description of item
and Chinese end-user. [Now on p. 28. See comment 15]
Rationale: Disclosure of such application-specific information is
precluded under section 12(c) of the Export Administration Act of
1979, as amended.
Page 24: This conclusion is based on an inaccurate understanding of
U.S. export control policy. [Now on p. 28. See comment 16]
Page 25: These recommendations are based on an inaccurate
understanding of U.S. export control policy. [Now on pp. 29 and 30.
See comment 16]
The following are GAO's comments on the letter from the Department of
Commerce dated January 16, 2002.
1. We have modified the text on pages 23 and 24 to better distinguish
between the policy articulated in the Export Administration
Regulations and agency practice. We agree that the regulations discuss
U.S. policy toward the export of goods and technology to China and do
not include a discussion of the "two-generations-behind" objective.
However, in March 2001, senior executive branch officials involved in
making U.S. policy, including the undersecretary of commerce for
export administration and the director of the Technology and Security
Directorate of the Defense Threat Reduction Agency, stated that the
U.S. government's practice, while undocumented, aims at keeping
China's manufacturing capability two generations behind commercial
state of the art. This view was confirmed by the chairman of the
Information Services Technical Advisory Committee—an industry advisory
committee. Further, the Commerce Department said in its detailed
written comments on this report that the "two-generations-behind"
practice has been used in making some export licensing decisions.
2. In discussions with U.S. government officials, we found a lack of
understanding and information about the semiconductor manufacturing
equipment and materials industry. For example, Foreign Commercial
Service officials in Shanghai, the center of China's semiconductor
manufacturing industry, welcomed our visit as an opportunity to learn
more about the industry and meet with industry representatives and
said they had been unable to complete a study of China's semiconductor
industry due to a lack of resources.
3. We have modified the text of the report on page 25 to note that
neither the semiconductor equipment producers nor industry
associations have requested a foreign availability study. However, we
further note in the revised report that industry representatives had
not requested a study because the government's prior efforts to
conduct a study took several years to complete and were outdated at
issuance. Industry officials told us that if new studies were
conducted and completed in a timely manner the results would indicate
that U.S. export controls on the items studied have been ineffective,
since all the equipment necessary to manufacture semiconductors can be
purchased from non-U.S. sources.
4. [Comment redacted]
5. We met with agency officials and explained that all of the company-
specific information cited in the report was gleaned from public
sources or was provided to GAO by the companies mentioned.
6. We have revised the highlights page to include discussion of the
policy as set forth in 15 C.F.R., section 742.4, and the U.S.
government's two-generations-behind practice.
7. Page 24 now discuss the policy as set forth in 742.4 and the U.S.
government's two-generations-behind practice. See also comment 1.
8. "of 1979" has been inserted on page 6 after "Export Administration
Act."
9. No change made. The level of detail contained in the report is
sufficient.
10. No change made. The objective of the Wassenaar Arrangement is
fully described in the report.
11. No change made. The line cited is from the introductory paragraph.
Additional more detailed information follows.
12. See comment 5.
13. Change made. Additional text added has been added on page 23 of
the report.
14. Additional information has been added to page 24 of the report to
reflect the stated U.S. government policy and the differences between
the policy and the U.S. government's practice.
15. See comment 5.
16. Additional information has been added to page 24 of the report to
reflect the stated U.S. government policy and the difference between
the policy and the U.S. government's practice.
[End of section]
Appendix IV: Comments from the Department of Defense:
Note: GAO comments supplementing those in the report text appear at
the end of this appendix.
Office Of The Under Secretary Of Defense:
Policy:
2000 Defense Pentagon:
Washington, DC 20301-2000:
January 17, 2002:
Mr. Joseph Christoff:
Director, International Affairs and Trade:
United States General Accounting Office:
Washington, DC 20548:
Dear Mr. Christoff:
This letter and detailed comments, attached, constitute the Defense
Technology Security Administration's (DTSA) response to the General
Accounting Office's (GAO) draft report entitled, "Export Controls:
Rapid Advances in China's Semiconductor Industry Underscore the Need
for Fundamental U.S. Policy Review," dated December 19, 2001 (GAO Code
320025/GAO-02-151). The Defense Technology Security Administration is
the central point of contact for development and implementation of
export control policies and related matters for the Department of
Defense.
I appreciate the opportunity to comment on the draft report, as well
as the level of effort that clearly has gone into the current product.
Moreover, I would welcome an opportunity for our staffs to work
together in greater detail as you finalize this report. While I
believe the report correctly identifies a number of policy challenges
relating to semiconductors and China, we have extensive concerns about
the accuracy of the current draft as well as more fundamental concerns
about the draft's final recommendations. In particular, the U.S. does
not have a policy of "trying to keep Chinese industry at least two
generations behind the U.S." U.S. policy is contained in the Export
Administration Regulations (EAR). Semiconductor manufacturing related
items are controlled to China for national security reasons.
The attached detailed comments, provide a range of factual corrections
and recommendations for changed emphasis in order to produce a more
accurate final product. 1 appreciate GAO's efforts in this important
area. My staff stands ready to assist you during the revision of the
draft report.
Signed by:
Lisa Bronson:
DUSD, Technology Security Policy and Counterproliferation:
Enclosure: As stated:
[End of letter]
Defense Technology Security Administration Detailed Comments On
GAO Draft Report Dated December 19, 2000 (Gao Code 320025) Gao-02-151:
"Export Controls: Rapid Advances in China's Semiconductor Industry
Underscore the Need for Fundamental U.S. Policy Review"
DTSA Detailed Comments:
Title page: "Rapid Advances in China's Semiconductor Industry
Underscore Need for Fundamental U.S. Policy Review." Recommend that
the title should be revised to read: "Advances in China's
Semiconductor Industry Underscore Need for Continued Review of U.S.
Policy." [See comment 1]
Highlights page, first paragraph (under "What the GAO Found"), line 2
and 3: "rapidly narrowed", "less than one generation behind" should be
revised. [See comments 2 and 3]
Rationale: In fact, China is still closer to two generations behind.
See discussion, below, about the feature size plot and the state of
production at various facilities in China. If the current trends, as
represented in the feature size plot, continue, China's commercial
semiconductor manufacturing industry will match the state-of-the-art
by 2008, consistent with the RAND report, "The Military Potential of
China's Commercial Technology" (Report Number, MR-1292-AF, ISBN 0-
83302939-8, 2001, and available online at www.rand.org). In addition,
there is no U.S. policy to stay two generations ahead of China in
semiconductor production. U.S. export control policies in this and
other areas are codified in various sections of the Export
Administration Regulations.
Highlights page, first paragraph, line 4-7: "The growing
sophistication of China's semiconductor manufacturing facilities... has
improved its ability to develop more capable weapons systems" should
be deleted. [See comments 4 and 5]
Rationale: There is no evidence that these companies - many of which
have not sold any products yet - have produced any controlled
electronics for use by the Chinese military. Although GAO visited
semiconductor production facilities in China, the report does not
provide details on which products are being produced and for which
applications. Licensed semiconductor manufacturing equipment exports
to China from the U.S. are limited to the production of uncontrolled
products by virtue of conditions included in the export license. No
evidence of Chinese end-user's failure to conform to license
conditions has been presented.
Highlights page, third paragraph: Should be substantially revised.
[See comment 6]
Rationale: There is no formal U.S. policy to "keep China... two
generations behind." U.S. policy governing export controls is based on
DoD Directive 2040.2 and the Export Administration Regulations (EAR).
"Generation" issues relate exclusively to very large scale integration
(VLSI) digital complimentary metal oxide semiconductor (CMOS)
technology associated with silicon-based microcircuits. The report
cites cases involving compound semiconductor manufacturing equipment.
These cases do not have a "generation issue."
The statement "This objective has not been documented." should be
deleted, because the objective does not exist. [See comment 7]
The statement "The executive branch does not have a sound, analytical
basis for approving or denying export licenses for this technology"
should be deleted. The report omits references to policy documents
that govern DoD's review of semiconductor manufacturing exports to
China. These documents include 1) DoD Directive 2040.2, which, among
other things, mandates case-by-case review with regard to potential
impact of an export on national security, and 2) the Export
Administration Regulation Section 742.4(b)7, which recommends extended
review or denial for proposed exports that "make a direct and
significant contribution to electronic and anti-submarine warfare,
intelligence gathering, power projection, and air superiority." These
mission areas are of particular concern in reviews of semiconductor
manufacturing export license applications for China. [See comment 8]
The statement that the U.S. requires licenses "without adequately
consideration of global market forces" is incorrect. DTSA personnel
participate in periodic meetings with industry advisory committees. We
are aware of foreign sources and global market forces. U.S. officials
often engage in discussions with foreign governments over concerns
regarding active export cases. [See comment 9]
Highlights page: Plot of feature size versus year (which also occurs
again later in report body) should be revised. [See comment 10]
Rationale: The plot shown should have a semi-log axis for "feature
size" since the pace of improvement is geometric (footnote 4, page 4).
The time scale should be linear. SMIC was only at 0.25 microns (see
press release dated November 22, 2001, at
www.smics.com/newimg/press1122.htm) in 2001. Assuming the 2001 China
data point is based on Table 1, page 11, of the draft report, then the
data point for China in Figure 1 should be corrected from 0.18 to 0.25
microns. Figure 1 would then appear as follows:
Feature size in microns versus year:
[Refer to PDF for image: plotted point graph]
This graph gives a clearer picture of the rate of advancement of China
relative to the U.S. and also shows that China is still closer to two
generations behind the U.S. as opposed to one generation as stated in
the report.
A general concern is that the draft report never defines
"semiconductor manufacturing equipment" subject to export controls
when the destination is China. For information, the following table
summarizes the semiconductor equipment (3B) and materials (3C) subject
to export controls to China. Also included is a brief description of
the national security concern. [See comment 11]
Table: Description of Semiconductor Production Equipment and Materials
Requiring Export Licenses to China:
CCL[A] Paragraph: 3B001.a.1;
Brief Description: Thin layer deposition equipment;
National Security Significance: Radiation-hardened electronics, space-
qualified solar cells, high power radio-frequency devices, infrared
focal plane arrays;
Primary Supplier Countries: US, Japan;
Control Reason: NS[B];
Exceptions: CIV[C];
CCL[A] Paragraph: 3B001.a.2;
Brief Description: MOCVD[D] reactors;
National Security Significance: Radiation-hardened electronics, space-
qualified solar cells, high power radio-frequency devices, infrared
focal plane arrays;
Primary Supplier Countries: US, Germany;
Control Reason: NS;
None.
CCL[A] Paragraph: 3B001.a.3;
Brief Description: MBE[E] equipment;
National Security Significance: Radiation-hardened electronics, space-
qualified solar cells, high power radio-frequency devices, infrared
focal plane arrays;
Primary Supplier Countries: US, UK;
Control Reason: NS;
Exceptions: None.
CCL[A] Paragraph: 3B031.b;
Brief Description: Ion implantation equipment;
National Security Significance: Used for radiation hardened circuitry;
Primary Supplier Countries: US, Japan;
Control Reason: NS;
Exceptions: None.
CCL[A] Paragraph: 3B001.c;
Brief Description: Plasma dry etching equipment;
National Security Significance: Needed for all state-of-the-art
electronics, commercial or military. Enable production of controlled
analog-digital (ADC) converters, field programmable logic devices
(FPLD), and application specific integrated circuits (ASICs). These
items are controlled under the Export Administration Regulations (EAR)
in 3A001 and 3A101 or under the International Traffic in Arms
Regulations (ITAR) Category XI;
Primary Supplier Countries: US, Japan;
Control Reason: NS;
Exceptions: None.
CCL[A] Paragraph: 3B001.d;
Brief Description: Plasma enhanced CVD;
National Security Significance: same as 3B001.c;
Primary Supplier Countries: US, Japan;
Control Reason: NS;
Exceptions: None.
CCL[A] Paragraph: 3B001.e;
Brief Description: Cluster tools;
National Security Significance: same as 3B001.c;
Primary Supplier Countries: US, Japan;
Control Reason: NS;
Exceptions: None.
CCL[A] Paragraph: 3B001.f.1;
Brief Description: Lithography systems;
National Security Significance: same as 3B001.c;
Primary Supplier Countries: US, Netherlands, Japan;
Control Reason: NS;
Exceptions: None.
CCL[A] Paragraph: 3B001.f.2;
Brief Description: Mask lithography systems;
National Security Significance: same as 3B001.c;
Primary Supplier Countries: US, Japan, Sweden;
Control Reason: NS;
Exceptions: None.
CCL[A] Paragraph: 3B001.g;
Brief Description: Masks;
National Security Significance: same as 3B001.c;
Primary Supplier Countries: US, Japan;
Control Reason: NS;
Exceptions: None.
CCL[A] Paragraph: 3B001.h;
Brief Description: Multi-layer masks;
National Security Significance: same as 3B001.c;
Primary Supplier Countries: US, Japan;
Control Reason: NS;
Exceptions: None.
CCL[A] Paragraph: 3B002.a;
Brief Description: S-parameter testers;
National Security Significance: same as 3B001.c;
Primary Supplier Countries: US, Japan;
Control Reason: NS;
Exceptions: None.
CCL[A] Paragraph: 3B002.b;
Brief Description: Integrated circuit testers;
National Security Significance: same as 3B001.c;
Primary Supplier Countries: US, Japan Germany;
Control Reason: NS;
Exceptions: None.
CCL[A] Paragraph: 3C001.a;
Brief Description: Epitaxial Silicon Wafers;
National Security Significance: Potential staining material for
devices outlined in MOCVD and MBE block;
Primary Supplier Countries: US, Japan, European Countries, Taiwan;
Control Reason: NS;
Exceptions: None.
CCL[A] Paragraph: 3C001.b;
Brief Description: Epitaxial Germanium Wafers
National Security Significance: same as 3C001.a;
Primary Supplier Countries: US, Japan, European Countries, Taiwan;
Control Reason: NS;
Exceptions: None.
CCL[A] Paragraph: 3C001.c;
Brief Description: Epitaxial wafers of 111/IV Compounds;
National Security Significance: same as 3C001.a;
Primary Supplier Countries: US, Japan, European Countries, Taiwan;
Control Reason: NS;
Exceptions: None.
CCL[A] Paragraph: 3C002;
Brief Description: Photo resists;
National Security Significance: Same as for 3B001.c;
Primary Supplier Countries: US, Japan, Europe;
Control Reason: NS;
Exceptions: None.
CCL[A] Paragraph: 3C003;
Brief Description: Purified metal organics
National Security Significance: Gas sources for MOCVD;
Primary Supplier Countries: US, Japan, Europe;
Control Reason: NS;
Exceptions: None.
CCL[A] Paragraph: 3C004;
Brief Description: Purified gases;
National Security Significance: Gas sources for MOCVD;
Primary Supplier Countries: US, Japan, Europe;
Control Reason: NS;
Exceptions: None.
[A] CCL: Commerce Control List.
[B] NS: National Security.
[C] CIV: a civilian end use license exception. Only exports to
military end users require export licenses.
[D] MOCVD: Metal Organic Chemical Vapor Deposition.
[E] MBE: Molecular Beam Epitaxy.
[End of table]
Page 2, line 30-32: "The United States is the only member of this
voluntary arrangement that considers China's acquisition of
semiconductor manufacturing equipment a cause for concern." Should be
revised. [Now on pp. 2 and 3. See comment 12]
Rationale: Bilateral discussions are held with other countries that
manufacture this equipment. These countries are always willing to
discuss concerns. Only at most five countries, and primarily just two
(the U.S. and Japan), produce the bulk of semiconductor manufacturing
equipment.
Page 3, line 1: "Fewer items have been subject to Wassenaar's
controls." Should be revised. [See comment 13]
Rationale: This statement is misleading as it references the overall
Wassenaar control list. The following table summarizes changes in
controls for semiconductor manufacturing equipment and materials (3B
and 3C, the entire focus of this report) from 1997 to present (2001
changes have not been finalized by Wassenaar).
Table: Changes to the Wassenaar List in Categories 3B and 3C:
Year: 2000[A]:
Item: 3.B.1.c;
Brief Description: Introduced control for plasma dry etch etching
equipment;
Characterization: New Control.
Item: 3.B.1.d;
Brief Description: Introduced control for plasma enhanced CVD
equipment;
Characterization: New Control.
Item: 3.B.2.b;
Brief Description: Modified application note to clarify that testers
for memories are not controlled;
Characterization: Clarification.
Item: 3.C.1;
Brief Description: Added control for silicon carbide wafers;
Characterization: New Control.
Year: 1999[B]:
Item: 3.B.2.b;
Brief Description: Liberalized pattern rate control for integrated
circuit testers (60 to 333 MHz);
Characterization: Liberalization.
Item: 3.B.2.d;
Brief Description: Removed [obsolete] control for electron beam and
laser beam systems;
Characterization: Decontrol.
1998[C]:
Item: 3.B.1.a.3;
Brief Description: Added control for Molecular Beam Epitaxial (MBE)
growth equipment;
Characterization: New Control.
Item: 3.B.1.b. 1&2;
Brief Description: Liberalized controls for ion implanters;
Characterization: Liberalization.
Item: 3.B.l.f;
Brief Description: Clarified lithography equipment controls to include
direct step and step and scan equipment;
Characterization: Clarification.
Item: 3.B.1.f;
Brief Description: Relaxed controls on lithography equipment
wavelength and minimum resolvable feature size;
Characterization: Liberalization.
Item: 3.C.2.a;
Brief Description: Relaxed wavelength controls on positive resists;
Characterization: Liberalization.
Year: 1997[D]:
Item: 3.B.2.b;
Brief Description: Liberalized pattern rate control for integrated
circuit testers (50 to 60 MHz);
Characterization: Liberalization.
[A] Summary of the changes made to the List of Dual-Use Goods &
Technologies and the Munitions List as of 01 December 2000, Wassenaar
Arrangement web site. www.wassenaar.org.
[B] Federal Register, 65 FR 43130, 12 July 2000.
[C] Federal Register, 64 FR 40106, 23 July 1999.
[D] Federal Register, 63 FR 2452-2555, 15 January 1998.
[End of table]
Since individual items can have significantly different impacts on
national security, tallying these proposals as the report does in its
Figure 5, page 20 is not recommended.
Page 3, line 14-15: "[T]he executive branch does not have a sound,
analytical basis for approving or denying export licenses". Should be
revised. [See comment 14]
Rationale: See DoD Directive 2040.2 and EAR 742.4(b)7.
Page 5, line 17-19: "Category 3 goods and technologies are controlled
primarily as a tool of U.S. anti-terrorism policy." Should be revised.
[Now on p. 7. See comment 15]
Rationale: The primary control concern regarding China is national
security, not anti-terrorism, as expressed in the EAR (it should be
noted that the Wassenaar Arrangement has added "terrorism" to
"security" as a reason for control at its December 2001 Plenary).
Page 6, line 15-16: "Transparency, through exchanging information and
sharing, is the sole means by which the arrangement tries to achieve
its goals." Should be revised. [Now on p. 8. See comment 16]
Rationale: Transparency, while important, is but one method used by the
Wassenaar Arrangement to achieve its goals. The Basic List is reviewed
annually to ensure that it contains items and technology of concern
that should require special scrutiny, i.e., a license, when being
exported. Similarly, the Sensitive List and the Very Sensitive List
are also reviewed. From a policy perspective, the U.S. has supported
Wassenaar Arrangement members adopting "catch all, catch more"
controls that enable countries to prohibit the export of uncontrolled
items of concern when destined to end-users of concern. The U.S.
delegation also took the lead this past year in ensuring that
"terrorism" was added to the considerations of the Wassenaar
Arrangement.
Page 7, title in margin: Should be revised. [Now on p. 9. See comment
17]
Rationale: The Chinese "Defense Industrial Base" is mentioned as having
improved. However, the draft report gives no evidence to support the
conclusion that Chinese military capabilities have been improved
through advances in semiconductor manufacturing.
Page 8: Footnote 16: is awkwardly worded and should be revised. [Now
on p. 9. Now footnote 18. See comment 18]
Rationale: The intent is to indicate that extending the feature size
capability of a particular generation of semiconductor manufacturing
equipment beyond its designed operating range can produce transistors
with smaller feature size and higher performance, but results in lower
yield of functional die (circuits) per wafer and does not
significantly increase the number of transistors per unit area. To do
the latter requires transitioning to the next generation of
lithography equipment.
Page 8: Footnote 17. Recommend that specific references or sources be
identified for the statements in this footnote. [Now on p. 10. Now
footnote 19. See comment 19]
Page 9: The plot of feature size versus year should be revised as
discussed above in the "Highlights" page comments. [Now on p. 10. See
comments 20 and 21]
Page 11: Table 1. Should be substantially revised. [See comments 20
and 21]
Rationale: As noted above, SMIC is not producing at 0.18 micron. In
2001, SMIC, Grace, and Motorola had no production of note from their
Chinese semiconductor manufacturing facilities. The table should be
revised to differentiate companies that are presently manufacturing
versus companies in a planning stage.
Page 12, line 6: "In an effort to improve the semiconductor
manufacturing equipment constructed in China". "Equipment" should be
changed to "facilities." [Now on p. 13. See comment 22]
Rationale: China does not construct semiconductor manufacturing
equipment meeting the Wassenaar Arrangement control specifications.
Page 12: Footnote 18. Should be revised or clarified. [Now on p. 13.
Now footnote 20. See comment 23]
Rationale: Applied Materials has a comprehensive line of equipment.
Most of these items are not subject to U.S. export controls. It is not
clear in the draft whether 2% is the figure associated with equipment
requiring an export license, or associated with total sales to China.
Page 13, line 12-13: "Provide China's military with a new source of
custom made integrated circuits." Should be deleted. [Now on p. 15.
See comment 24]
Rationale: As noted above, the draft report cites no evidence of
controlled integrated circuits produced for civilian or military
applications. Also as noted above, facilities receiving semiconductor
manufacturing equipment or materials under U.S. export license are
subject to license conditions restricting production to uncontrolled
products only.
Page 14, line 12-13: "China's defense industry faces technical,
structural, and cultural barriers that impede its ability to absorb
and utilize advanced technologies for weapons production." Should be
deleted. [Now on p. 17. See comment 25]
Rationale: This assertion is subjective at best, particularly with
respect to "cultural barriers."
Page 15, line 9-10: "Transparency ... is the sole means by which the
arrangement tries to achieve its goals." Should be revised. [Now on p.
17. See comment 26]
Rationale: See comment above relating to transparency.
Pages 15, line 12 & Page 16, line 10: "97 percent of all electronics-
related items" should be revised. [Now on p. 17. See comment 27]
Rationale: If a percentage must be used, it should be a percentage of
all semiconductor manufacturing equipment and materials (Category 3B
and 3C) and not of all electronics (Category 3).
[Paragraph redacted] [Now on p. 17. See comment 28]
Page 16: Footnote 27. "4 out of 127" should be X out of XX where X and
XX are the number of controlled items and total items in 3B and 3C
respectively. [Now on p. 18. Footnote 30. See comment 29]
Rationale: The focus of the report is semiconductor manufacturing
equipment and materials.
Pages 17 and 18: With respect to analysis of individual license
applications, confidentiality provisions in the EAA prevent public
disclosure of such information. [Now on p. 19. See comment 30]
[Paragraph redacted] [Now on p. 23. Now footnote 41. See comments 31
and 32]
[Paragraph redacted] [Now on p. 23. See comments 31 and 32]
Page 21, line 5-6: "United States' policy objective is to keep China
at least two generations (about 3 to 4 years) behind". Should be
deleted. [Now on p. 23. See comments 33 and 34]
Rationale: As previously discussed, this is not a U.S. policy.
Page 21, line 30-32: "[The government] has not defined what 'two
generations' or 'commercial state-of-the-art production' ... means."
Should be deleted. [Now on p. 23 and 24. See comments 33 and 34]
Rationale: There is no "two generation" policy, and therefore it is
not defined in export control regulations or other official documents.
Page 23, line 5: "[T]he Defense Department has not substantively
updated the Military Critical Technologies List pertaining to
semiconductor equipment and materials since 1996." Should be revised.
[Now on p. 26. See comment 35]
Rationale: The MCTL is published on the internet at
http://www.dtic.mil/mct1/. The electronics section (Section 5) was
last reviewed and updated in March 1999.
Page 23, line 11-14: "70.6 percent of export licenses for
semiconductor manufacturing equipment (Category 3B) were approved and
83.3 percent of export licenses for semiconductor manufacturing
materials (Category 3C) were approved." Should be revised and
clarified. [Now on p. 27. See comment 36]
Rationale: It is unclear whether these figures apply only to exports
to China, or to all destinations during those years. This statement
also fails to consider restrictive conditions that could have been
applied to the licenses to protect U.S. national security interests.
Page 24, line 7-9: "Due to delays in the license approval process, the
firm canceled its ETEC order." Should be deleted. [Now on p. 28. See
comment 37]
Rationale: Due to confidentiality provisions in the EAA, public
disclosure of information regarding individual license applications is
not authorized.
Page 24, line 11-13: "The current export control system has not
effectively slowed China's ability to obtain billions of dollars worth
of advanced semiconductor equipment." Should be revised to include a
discussion of the Chinese military. [Now on p. 28. See comment 38]
Rationale: The report provides no evidence of the Chinese military's
access to controlled electronic components resulting from exports of
controlled semiconductor manufacturing equipment to China.
Page 24, line 26-28: "With no clear justification for why the current
control parameters are maintained." Should be revised. [Now on p. 29.
See comment 39]
Rationale: The rationale and mechanisms for maintaining control
parameters are outlined above.
Page 24 and 25: "Recommendations for Executive Action." Recommend
recommendations be redrafted as follows: [Now on pp. 29 and 30. See
comment 40]
Preamble: "In order to improve the effectiveness of the U.S. export
control system, we recommend that the Secretary of Commerce continue
to work with the Secretary of Defense and the Secretary of State to
reevaluate, clarify, and document export policy on semiconductor
manufacturing equipment and materials. These actions should include:
1. continued assessments of (a) foreign availability and (b) the
technical requirements for protection of critical U.S. military
capabilities, (c) the impact of export controls on U.S. industry, and
(d) the overall national and economic security implications of China's
ability to import, produce, and develop advanced semiconductor-related
technology;
2. continued development of new export controls if a technology
requires such control and in fact can be controlled. If the technology
cannot be controlled using export controls, continue exploring
alternative means for protecting U.S. security interests;
3. continued review of the Wassenaar Arrangement and related regimes
with an eye toward developing additional proposals to strengthen
multilateral export controls; and;
4. continued attention to communication with Congress and industry on
technology security matters, including the results of any assessments
undertaken, or options developed, pursuant to these recommendations.
Rationale: Regarding "documenting export policy," We evaluate
semiconductor equipment sales to China under the guidelines of Export
Administration Regulations (EAR) 742.4(b)7, which recommends extended
review or denial for exports that "make a direct and significant
contribution to electronic and anti-submarine warfare, intelligence
gathering, power projection, and air superiority." These mission areas
rely on electronic components that are export-controlled. The focus of
semiconductor production equipment export controls, with respect to
China in particular, is to prevent the transfer of equipment which
would enhance China's capability in the mission areas identified
above.
Regarding "foreign availability," the Department of Commerce is
already directed to assess foreign availability, in consultation with
the Secretary of Defense, under Export Administration Act (EAA)
Section 5(0(1), "Foreign Availability in Controlled Countries." In
practice, DTSA continuously evaluates foreign availability and
capability through a number of means. For example, the draft report
mentions cases involving metal-organic chemical vapor deposition
(MOCVD) systems. We routinely sends engineers to conferences where
producers of such systems demonstrate new developments and exchange
technical information, a common means of keeping abreast of new
developments in technical fields. In addition, the normal review of
cases provides opportunities to maintain knowledge of foreign
availability in specific product areas.
Regarding "technical parameters," the technical parameters considered
critical to the U.S. military are already reviewed periodically
through the Military Critical Technologies List (MCTL), which is
published on the Internet at http://www.dtic.mil/mctl/. The
electronics section (Section 5) was last updated in March 1999.
Sections 5.2 and 5.3 discuss electronic materials and production
equipment, respectively. The List contains foreign capability
determinations, though the document does not restrict itself solely to
export-controlled items.
Regarding "national and economic security implications of China's
ability to import, produce and develop advanced semiconductor-related
technology," this is an area where discussion is ongoing and
additional impact studies may be useful. The RAND Corporation recently
published a report entitled "The Military Potential of China's
Commercial Technology" (Report Number, MR-1292-AF, ISBN 0-8330-2939-8,
2001, available online at www.rand.org). Section 3 discusses China's
commercial microelectronics industry. This report concludes that China
is 6-8 years behind the state-of-the-art at present and may catch up
in approximately 2008. Some articles from the trade press indicate
that China may become a major producer of some state-of-the-art
semiconductor devices. See, for example, "Floodgates Open to China's
Chip Industry", Solid State Technology, February 2001.
Regarding "developing new export controls," DTSA already develops
proposals for, and participates in, interagency and Wassenaar list
reviews. For example, in calendar 2000, we obtained new controls on
plasma etch and chemical vapor deposition equipment. We regularly
identify new technologies for possible control and continues to
introduce new proposals for interagency consideration. In this regard,
a DTSA-generated proposal to control spin on low-k dielectrics is
currently under review. DoD is also researching other possible control
proposals such as chemical mechanical planarization (CMP) equipment,
which is critical for copper interconnects in integrated circuits.
Regarding "alternative means for protecting U.S. security interests,"
we have already supported bilateral meetings with governments of key
technology-producing countries on alternative mechanisms to control
critical items. For example, the Department is actively pursuing an
anti-tamper program to reduce the risk of technology transfers
detrimental to national security.
The following are GAO's comments on the letter from the Department of
Defense dated January 17, 2002.
1. No change. The analysis and conclusions presented in our report
support the need for a fundamental review of U.S. policy related to
semiconductor equipment and materials exports to China.
2. The data presented in the report on the current state of China's
semiconductor manufacturing capability are based on information we
collected during our visits to Chinese semiconductor manufacturing
facilities in 2001. The data demonstrate that China's most advanced
manufacturing facilities currently contain equipment capable of
producing semiconductors that are only one generation or less behind
the current commercial state of the art. The author of the RAND
Corporation study confirmed that his analysis was based on secondary
information that is at least 3 years old.
3. We have modified the text on page 24 to better distinguish between
the policy articulated in the Export Administration Regulations and
agency practice. We agree that the regulations discuss U.S. policy
toward the export of goods and technology to China and do not include
a discussion of the "two-generations-behind" objective. However, in
March 2001, senior executive branch officials involved in making U.S.
policy, including the undersecretary of commerce for export
administration and the director of the Technology and Security
Directorate of the Defense Threat Reduction Agency, stated that the
U.S. government's practice, while undocumented, aims at keeping
China's manufacturing capability two generations behind commercial
state of the art. The chairman of the Information Services Technical
Advisory Committee—an industry advisory committee—also shared this
view with us. Further, the Department of Commerce stated in its
detailed written comments on this report that the "two-generations-
behind" policy has been applied in making some export licensing
decisions.
4. Additional information has been added on pages 15 and 16 to clarify
the relationship between China's semiconductor manufacturing
facilities and its military capabilities. However, we further note in
the revised report that in testimony delivered to the U.S.-China
Commission on January 17, 2002, the deputy undersecretary of defense
technology security policy and counterproliferation stated that a
"cutting-edge" domestic semiconductor industry supports military
modernization in China. This official testified that "China's military
modernization program appears to be focusing on 'pockets of
excellence,' where advances in select technologies can be leveraged
for disproportionate benefit in a potential conflict. Several such
'pockets' include: preemptive long-range precision strike
capabilities; information dominance; command and control; and
integrated air defense. In support of these efforts, Beijing has
identified the development of an indigenous microelectronics industry
as one of its highest priorities. China's increasing emphasis on the
development of integrated circuits will have direct application in
future military systems, for example, advanced phased-array radar."
5. We modified the report by adding more information on pages 27 and
28 about the conditions typically imposed on approved export licenses.
Although these conditions are designed to deter the end user from
using the U.S. equipment inappropriately, these conditions should be
monitored on a regular basis. As noted in our report, the government
lacks information on whether these conditions are being met. U.S.
officials in China told us that they had not conducted any end-use
checks on semiconductor manufacturing equipment in the last 5 years.
Moreover, in testimony before the U.S.-China Commission on January 17,
2002, the Commerce Department's assistant secretary of export
enforcement noted some problems with these checks and said the
schedule for conducting end-use checks is dictated by the Chinese
government. The official testified that most of the end-use checks
that the United States has been allowed to conduct in China have been
on high-performance computers that are no longer controlled because of
the liberalization of U.S. export controls. In addition, this official
noted that due to delays caused by the Chinese government's
scheduling, 700 outstanding checks remain to be completed and checks
on items other than high-performance computers continue to "languish."
6. See comment 3.
7. See comment 3.
8. See comment 3 and comment 14.
9. In discussions with U.S. government officials, we found a lack of
understanding and information about the semiconductor manufacturing
equipment and materials industry. For example, Foreign Commercial
Service officials in Shanghai, the center of China's semiconductor
manufacturing industry, welcomed our visit as an opportunity to learn
more about the industry and meet with industry representatives and
said they had been unable to complete a study of China's semiconductor
industry due to a lack of resources.
10. We modified figure 1 to give a clearer picture of China's rate of
advancement relative to the United States. However, the data points
used in the chart have not been changed as they are based on primary
data sources including the president of the Semiconductor
Manufacturing International Corporation.
11. We have added information from this table to appendix I, page 39,
to clarify the types of items the report discusses. The report
generally refers to controlled semiconductor manufacturing equipment
and materials (all of Categories 3B and 3C).
12. We agree that countries are willing to listen to U.S. concerns
pertaining to the export of semiconductor manufacturing equipment and
materials to China. The United States is the only member that
considers the relationship between semiconductor manufacturing
equipment and military end uses sufficiently critical and considers
China's acquisition of this technology a potential threat to regional
or international stability.
13. Additional text has been added to page 23 that includes the
Defense Department information pertaining to proposals in Category 3B
and Category 3C. Although the Defense Department's chart shows that
four new controls were added, it also shows that one item was
decontrolled and that controls on five additional items were relaxed.
14. We modified our report on page 24 by adding language from Export
Administration Regulation 742.4(b)(7). This regulation provides a
general statement of U.S. export policy for China. However, as noted
in our report, it does not specify the level of semiconductor
manufacturing technology that can be exported to China relative to the
current state of the art. Although Department of Defense Directive
2040.2 establishes policy, assigns responsibility, and prescribes
procedures for international transfer of defense-related technology,
goods, services, and munitions, it has not been updated since July 5,
1985, and a number of its provisions are centered on the now defunct
Coordinating Committee for Multilateral Export Controls (COCOM), the
predecessor to the Wassenaar Arrangement.
15. We modified page 7 of the report to clarify why this technology is
controlled.
16. No change. The updating of control lists and other efforts to
improve these lists are all aspects of transparency. Adding or
deleting items from the lists simply alters the reporting requirements
for those items.
17. See comment 4.
18. Footnote 18 has been reworded to clarify the information
presented.
19. Footnote 19 has been reworded to clarify the information
presented.
20. See comment 10.
21. See comment 10.
22. No change. The statement made in the report refers to China's
efforts to develop an indigenous semiconductor manufacturing equipment
industry, not to efforts to improve its facilities.
23. No change. The 2 percent refers to the total sales to China.
24. See comments 4 and 5.
25. The text on pages 16 and 17 has been modified to clarify the
characterization of the problems facing China's defense industry. The
information presented was obtained from papers published by defense
experts, GAO interviews with defense experts, and the RAND Corporation
study cited in the Defense Department comments on a draft of this
report.
26. See comment 16.
27. Additional information pertaining to Categories 3B and 3C was
added to footnote 30.
28. [Comment redacted]
29. Additional information was added to footnote 30 pertaining to
Categories 3B and 3C.
30. The information presented in the report pertaining to specific
companies was obtained from the companies or from public sources.
31. [Comment redacted]
32. [Comment redacted]
33. See comment 3.
34. See comment 3.
35. The Internet site does indicate that some revisions were made to
the electronics section in 1999. However, the analyst responsible for
the list stated that the list had not been substantively updated since
1996.
36. Information was added to page 27 of the report to indicate that
the information presented pertains to China.
37. The information presented in the report pertaining to specific
companies was obtained from the companies or public sources.
38. See comments 4 and 5.
39. See comment 3.
40. The report clearly illustrates the contrast between formal U.S.
export control policy articulated in the Export Administration
Regulations and practice. It also reveals the lack of an analytical
basis for export control licensing decisions and proposals for the
Wassenaar Arrangement. The report also highlights the continuing
ineffectiveness of the Wassenaar Arrangement as a means for
controlling the export of semiconductor manufacturing equipment and
materials to China. Meanwhile, China's defense industrial base
continues to obtain benefits from the modernization of China's
semiconductor manufacturing industry that is driven by the acquisition
of advanced semiconductor manufacturing equipment and materials from
foreign sources, including the United States. A fundamental
reevaluation of U.S. policy on export controls on semiconductor
manufacturing equipment and materials to China is, therefore,
necessary to correct weaknesses in the current system.
[End of section]
Appendix V: Comments from the Department of State:
Note: GAO comments supplementing those in the report text appear at
the end of this appendix.
United States Department of State:
Chief Financial Officer:
Washington, D.C. 20520-7427:
January 9, 2002:
Ms. Susan S. Westin:
Managing Director:
International Affairs and Trade:
U.S. General Accounting Office:
Washington, DC 20548:
Dear Ms. Westin:
We appreciate the opportunity to review your draft report, "Export
Controls: Rapid Advances in China's Semiconductor Industry Underscore
Need for Fundamental U.S. Policy Review," GAO-02-151, GAO Job Code
320025.
The Department's comments are enclosed for incorporation, along with
this letter, as an appendix to the GAO final report. Please find
technical comments also enclosed.
If you have any questions regarding this response, please
contact [redacted] Office of Export Controls and Conventional Arms
Nonproliferation Policy, Bureau of Nonproliferation [Redacted].
Sincerely,
Signed by:
Larry J. Eisenhart:
Acting:
Enclosures: As stated:
cc: GAO/IAT - Mr. Christoff:
State/OIG - Mr. Atkins:
[Redacted]
[End of letter]
Department of State Comments on Draft Report: Export Controls: Rapid
Advances in China's Semiconductor Industry Underscore Need for
Fundamental U.S. Policy Review (GAO-02-151, GAO Code 320025):
The Department of State is pleased to have the opportunity to comment
on the draft report. Although the draft report includes much useful
information on China's development of semiconductor manufacturing, we
disagree substantially with its policy analysis and conclusions.
A critical reason for this is because the draft report is based on a
flawed premise: that U.S. export controls on semiconductor
manufacturing-related items to China are supposedly based on a flawed
policy of trying to keep Chinese industry at least two generations
behind the U.S. Continuing on with this flawed premise, the draft report
criticizes the lack of analysis, clarity, and documentation
surrounding the alleged "two generations behind" policy. [See comment
1]
In fact, however, the supposed "two generations behind" policy for
exports to China of semiconductor manufacturing-related items is not
U.S. government policy. That this is not U.S. policy is apparent not
only from the absence of documentation concerning such a policy as
noted in the draft report), but from U.S. export licensing decisions
themselves -- including some decisions mentioned in the draft report
(e.g., the Motorola export noted in Table 1 on page 11). [See comments
1 and 2]
Instead, U.S. policy for why these items should be controlled and how
exports should be reviewed is clearly and formally articulated in the
Export Administration Regulations -- a fact completely overlooked in
the draft report. According to the EAR, semiconductor manufacturing-
related items are controlled to China for National Security reasons.
[See comment 3]
* Section 742.4(a) notes that National Security items such as
semiconductor manufacturing-related items are controlled because "It
is the policy of the United States to restrict the export and reexport
of items that would make a significant contribution to the military
potential of any other country or combination of countries that would
prove detrimental to the national security of the United States."
* The licensing policy for National Security items such as
semiconductor manufacturing-related items is noted in Section 742.4(b)
of the EAR, including the China-specific Section 742.4(b)(7), which
notes "the general licensing policy is to approve applications, except
that those items that would make a direct and significant contribution
to electronic and antisubmarine warfare, intelligence gathering, power
projection, and air superiority receive extended review or denial.
Each application will be considered individually. Items may be
approved even though they may contribute to Chinese military
development or the end-user or end-use is military."
It is clear from the EAR itself, therefore, that the U.S. has clear,
documented reasons for control and licensing policies for
semiconductor manufacturing-related items -- and policies
substantially different from those attributed to the government in the
draft report.
U.S. controls on exports to China of semiconductor manufacturing-
related items have, in fact, supported the stated policy objective of
"restricting... items that would make a significant contribution to the
military potential... that would prove detrimental to the national
security." Indeed, the draft report does not identify any licensed
U.S. exports of such items to China that made such a "significant
contribution." This is due in substantial part to the government's
thorough reviews of applications to export semiconductor manufacturing
in China, and the extensive license conditions imposed to minimize
national security concerns -- something also overlooked in the draft
report, which implicitly assumes that any exported items are freely
available to China for unlimited military use. In our view, the draft
report does not provide a national security rationale for its
recommendation that new U.S. export controls or alternatives to export
controls are needed. [See comments 4 and 5]
Furthermore, contrary to implications in the draft report, the U.S.
export licensing process does in fact consider the nature and extent
of foreign availability of manufacturing equipment as well as product
(chips), and the cumulative effect of those exports to China of which
we are aware, as well as the potential risks to U.S. national
security. Disturbingly, the draft report downplays the extent to which
the U.S. dual-use export licensing community is informed -- largely by
frequent, detailed industry briefings, but also by intergovernmental
contacts, the international press, and information exchanges in the
Wassenaar Arrangement -- of Chinese semiconductor manufacturing
capabilities. The efforts already undertaken are, in our view,
sufficient to meet the intent of the draft report's recommendation
concerning assessments of foreign availability and other factors
related to export control of semiconductor manufacturing-related
items. [See comment 6]
As to the controls exercised collectively by the 33 countries of the
Wassenaar Arrangement, the draft report has not identified any exports
by the U.S. or other Wassenaar countries of semiconductor
manufacturing-related items to China that were inconsistent with the
purposes of the Arrangement -- i.e., that contributed to military
capabilities that undermine regional and international security, or
the prevention of destabilizing accumulations of conventional arms and
dual-use goods and technologies. Even exports by Wassenaar countries
contrary to the alleged "two generations behind" policy were not
characterized by the draft report as being contrary to the purposes of
the Arrangement. [See comment 7]
In its criticisms of the effect of the current export control system
on China's acquisition of sophisticated semiconductor manufacturing
equipment, the draft report doers not consider the consequences of
having no U.S. or Wassenaar export controls over such items. It is
almost axiomatic that, without such controls, China would have
more effectively obtained even more advanced semiconductor equipment,
at an earlier date, with fewer restrictions on its use, than it has
managed thus far. Certainly, unconstrained exports would have had a
much greater negative effect on U.S. national security -- and, after
all, it is the effect on national security rather than the numbers of
licenses granted or chip plants built that is the reason behind the
export controls. [See comment 8]
Finally, the draft report is replete with Wassenaar Arrangement
information that the U.S. government is committed internationally to
keep confidential (in particular, pages 15, 17, 19-20, 26, 31 and
footnote 30). In its current form, the draft is classified Sensitive
But Unclassified and therefore cannot be released publicly. We will be
happy to look over the next version of the draft -which we hope will
take into account the above comments, as well as the attached set of
more focused comments -- to replace or remove protected language if
you wish for the final report to be unclassified. [See comment 9]
The Department of State again notes its appreciation for being able to
comment on the draft report, and remains prepared to work with GAO on
this and related issues.
The following are GAO's comments on the letter from the Department of
State dated January 9, 2002.
1. We have modified the text on page 24 to better distinguish between
the policy articulated in the Export Administration Regulations and
agency practice. We agree that the regulations discuss U.S. policy
toward the export of goods and technology to China and do not include
a discussion of the "two-generations-behind" objective. However, in
March 2001, senior executive branch officials involved in making U.S.
policy, including the undersecretary of commerce for export
administration and the director of the Technology and Security
Directorate of the Defense Threat Reduction Agency, stated that the
U.S. government's practice, while undocumented, aims at keeping
China's manufacturing capability two generations behind commercial
state of the art. This view was confirmed by the chairman of the
Information Services Technical Advisory Committee—an industry advisory
committee. Further, the Department of Commerce said in its detailed
written comments on this report that the "two-generations-behind"
practice has been used in making some export licensing decisions.
2. During our visit to the Motorola facility in Tianjin, China, we
found that the U.S. government approved export licenses allowing the
sale of 0.25-micron equipment. The equipment in the Motorola facility
is two generations behind commercial state of the art, which is 0.13
micron.
3. We modified the report to clarify existing export control policy
for semiconductor manufacturing-related items on page 24. We also
describe the reasons for controlling dual-use goods further in
appendix I, page 36.
4. We agree that no single piece of semiconductor manufacturing
equipment exported to China will make a "significant contribution" to
China's military. Rather, it is the cumulative effect of these exports
that raises national security concerns. According to defense experts,
the newest semiconductor manufacturing facilities constructed in China
represent a significant improvement to China's military industrial
base. It is the cumulative effect of exports of semiconductor
manufacturing equipment from the United States and other Wassenaar
members that has allowed China to improve its military industrial
base. This is a scenario that was overlooked in the State Department's
comments.
5. We modified pages 27 and 28 by adding more information about the
conditions typically imposed on approved export licenses. Although
these conditions are designed to deter the end user from using the
U.S. equipment inappropriately, these conditions should be monitored
on a regular basis. As noted in our report, the government lacks
information on whether these conditions are being met. U.S. officials
in China told us that they had not conducted any end-use checks on
semiconductor manufacturing equipment in the last 5 years. Moreover,
in testimony before the U.S. China Commission on January 17, 2002, the
Commerce Department's assistant secretary of export enforcement noted
some problems with these checks and said the schedule for conducting
end-use checks is dictated by the Chinese government. The official
testified that most of the end-use checks that the United States has
been allowed to conduct in China have been on high-performance
computers that are no longer controlled because of the liberalization
of U.S. export controls. In addition, this official noted that due to
delays caused by the Chinese government's scheduling, 700 outstanding
checks remain to be completed and checks on items other than high-
performance computers continue to "languish."
6. In discussions with U.S. government officials, we found a lack of
understanding and information about the semiconductor manufacturing
equipment and materials industry. For example, Foreign Commercial
Service officials in Shanghai, the center of China's semiconductor
manufacturing industry, welcomed our visit as an opportunity to learn
more about the industry and meet with industry representatives and
said they had been unable to complete a study of China's semiconductor
industry due to a lack of resources. Furthermore, the information
sources mentioned by the State Department, such as information
exchanges and international press articles, are not adequate
substitutes for a formal, comprehensive study.
7. As our report notes, weaknesses in Wassenaar reporting make it
difficult to assess whether any exports covered by the arrangement
were "contrary to the purposes of the Arrangement." Also, since all
export control decisions of Wassenaar members are based on the
national discretion of member countries, judgments of whether
particular exports are contrary to the purposes of the arrangement are
matters subject to a member state's interpretation.
8. The report discusses some of the overall weaknesses in U.S. export
control policy and practice, of which the Wassenaar Arrangement is one
part, and recommends that the executive branch consider new ways of
controlling this technology, if appropriate. It is not appropriate to
speculate on the consequences of not having U.S. export controls or
the Wassenaar Arrangement.
[End of section]
Appendix VI: GAO Contact and Staff Acknowledgments:
GAO Contact:
Stephen Lord (202) 512-4379.
Acknowledgments:
In addition to the individual named above, David M. Bruno, Janey
Cohen, Julie Hirshen, Richard Seldin, Kevin Tarmann, and Hai Tran made
key contributions to this report.
[End of section]
Footnotes:
[1] The 33 participating states of the Wassenaar Arrangement are:
Argentina, Australia, Austria, Belgium, Bulgaria, Canada, Czech
Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland,
Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Poland,
Portugal, Republic of Korea, Romania, Russian Federation, Slovak
Republic, Spain, Sweden, Switzerland, Turkey, Ukraine, United Kingdom,
and the United States.
[2] We issued a separate For Official Use Only version of this report
in February 2002. U. S. General Accounting Office, Export Controls:
Rapid Advances in China's Semiconductor Industry Underscore Need for
Fundamental U.S. Policy Review, [hyperlink,
http://www.gao.gov/products/GAO-02-151] (Washington, D.C.: Feb. 19,
2002). Agency comments in this report containing information
designated For Official Use Only have been redacted.
[3] Semiconductor materials, such as silicon, can be used as both a
conductor and insulator of electricity. Almost all of today's computer
chips are constructed on wafers made of 99.9999 percent pure silicon,
although other materials such as gallium arsenide may also be used for
specific applications. The term "semiconductor" also refers to devices
that are manufactured from semiconductor materials. Semiconductors
include discrete devices, such as transistors, and integrated circuits
comprising millions of transistors and other components. For the
purposes of this report, the terms semiconductor, integrated circuit,
and computer chip are used interchangeably.
[4] One micron is one-millionth of a meter or 1/100th the width of a
human hair.
[5] Each new generation of technology represents a reduction of
approximately 28 percent of the previous generation's feature size.
This term applies exclusively to silicon-based, very large-scale
integrated circuit technology (that is, circuits with 100,000 to 1
million components).
[6] Semiconductor Equipment and Materials International is the trade
association serving the global semiconductor equipment, materials, and
flat panel display industries.
[7] Lithography is a manufacturing process used to imprint circuits on
semiconductor materials.
[8] The top 10 materials companies accounted for approximately 42
percent ($11.7 billion) of the industry's $28 billion revenue in 1999-—
the last year for which complete information was available.
[9] Since August 20, 1994, when the Export Administration Act of 1979
was terminated, several executive orders and one law have extended
application of the act. Most recently, application of the act has been
extended by Executive Order 13222, Aug. 17, 2001 (66 Fed. Reg. 44025).
[10] 50 U.S.C. App. sections 2401 and following and 15 C.F.R. sections
730 and following.
[11] Group B and C items are described in 15 C.F.R., Part 774, Supp.
1.
[12] See C.F.R. 15 Part 774.
[13] The U.S. government controls some items unilaterally to
particular countries for specific purposes. For example, some items in
Category 3B are controlled multilaterally through the Wassenaar
Arrangement but are controlled more strictly to particular countries
by the United States for antiterrorism purposes.
[14] 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 goods and technologies to Soviet bloc
countries and China and to obtain unanimous preapproval for any
nonprohibited exports.
[15] Each of the other existing regimes focuses on one general
category of weapons of mass destruction. The Nuclear Suppliers Group
aims to tightly control access to nuclear exports to reduce the
possibility that such transfers could be diverted to nuclear explosive
or unsafeguarded nuclear fuel cycle activities. The Australia Group
seeks to control the spread of chemical and biological warfare agents.
The Missile Technology Control Regime seeks to control the export of
missiles or related equipment that can be used to produce a missile
with a range of at least 300 kilometers capable of delivering any
payload.
[16] The arrangement also provides for the exchange of information
among its members on exports of conventional munitions. We did not
review this aspect of the arrangement because it is not relevant to
semiconductor manufacturing technology.
[17] This goal was first stipulated in China's Eighth 5-year Economic
Plan (1991-1995).
[18] Fine-tuning the equipment to produce integrated circuits with
smaller features decreases the size of the integrated circuits and,
therefore, increases the number that can be produced on a given wafer.
However, this can only be carried so far before decreasing yields (due
to small feature size) lead to increasing overall costs. The ability
to produce smaller feature sizes by fine-tuning equipment is dependent
on the semiconductor manufacturing process used and the capability of
the engineers operating the equipment.
[19] A microelectronics expert at the Naval Research Laboratory stated
that worldwide state-of-the-art commercial production was 0.18 micron
in 2001. Industry considered 0.13 micron state of the art in 2001.
Although China is now capable of producing close to state-of-the-art
technology, its current domestic demand for these integrated circuits
is low (about 13 percent of China's demand is for semiconductors with
feature sizes between 0.18 and 0.5 microns, while 87 percent is for
older technology between 0.6 and 6 microns).
[20] Applied Materials' total revenue in 2001 was $7.34 billion.
Approximately $147 million or 2 percent of this revenue was generated
by sales to manufacturing facilities in China.
[21] Approximately twice as many integrated circuits can be produced
on a silicon wafer with an 8-inch diameter compared to a 6-inch wafer;
2.5 times the number of integrated circuits can be produced on 12-inch
wafer compared to an 8-inch wafer.
[22] The new fabrication facilities primarily use 8-inch wafers. In
contrast, the majority of China's older manufacturing facilities use 4-
inch, 5-inch, and 6-inch wafers.
[23] Manufacturers we spoke to in Taiwan and China stated that they
would manufacture small numbers of wafers (3-25) for a single
customer.
[24] January 17, 2002, statement of the deputy under secretary of
defense for technology security and counterproliferation before the
U.S.-China Commission.
[25] Phased-array radar uses a set of many small stationary radar
antennas configured to create a narrow radar beam that can be
electronically steered in any direction in a fraction of a second to
track missiles.
[26] The Department of Defense considers semiconductor manufacturing
capability more advanced than 0.7 micron to be military critical.
[27] Avionics refers to three major classes of airborne equipment—-
communications, navigation, and interrogation. The integrated avionics
system is a major feature of the F-22, permitting the pilot to have
substantially better control of the information regarding the
surrounding environment.
[28] The i960MX processor went out of commercial production in 1999.
It has a rating of 5 to 10 million theoretical operations per second
and runs at a speed of 20 megahertz.
[29] The Final Report issued in April 2001 by the Study Group on
Enhancing Multilateral Export Controls for U.S. National Security, a
joint project of the Henry L. Stimson Center and the Center for
Strategic and International Studies, came to a similar conclusion. A
Department of Commerce study, U.S. Commercial Technology Transfers to
the People's Republic of China, January 1999, also concluded that
export control reporting systems are an ineffective mechanism for
tracking accumulations of technology and capabilities.
[30] There are nonbinding arrangements to report export information
for just 4 out of the 127 items (3.1 percent) in Category 3
(electronics). More specifically, there are nonbinding arrangements to
report export information for just 1 out of 26 items or 3.8 percent in
Category 3B (equipment) and no arrangements to report information on
any Category 3C (materials) items.
[31] Information provided by Somerset, New Jersey-based Emcore
Corporation.
[32] Emcore Corporation's application to sell metal organic chemical
vapor deposition equipment to China was denied by the U.S. government
on May 9, 1998.
[33] A demarche is a diplomatic protest or representation. The United
States has demarched the Germans several times on this issue.
[34] Information obtained from the institute in Beijing and the
suppliers of the equipment. The operating parameters of the German-
made equipment at these facilities exceed the parameters deemed
military critical on the Department of Defense Military Critical
Technologies List. The United States has also licensed the sale of
equipment with similar operating parameters to other Chinese entities.
[35] These gases are controlled by 15 C.F.R., Part 774, Supp.1,
Category 3C of the Commerce Control List. Information on the denial of
the license was provided by the exporter of the gases.
[36] Department of Defense Directive Number 2040.2, sections 5.1.7 and
7.1.15, January 17, 1984, reissued incorporating Change 1, July 5,
1985.
[37] 50 U.S.C. App. section 2404(d)(2).
[38] The technology list covers 18 categories including electronics,
under which semiconductors and semiconductor manufacturing equipment
and materials fall.
[39] The technology assessments are foreign capability assessments and
do not constitute findings of foreign availability covered by Commerce
Department foreign availability assessments.
[40] Semiconductor Equipment and Materials International maintains
that as license applications for China increase, the inability to
quickly and predictably obtain license approvals could have a
significant negative impact on the industry.
[41] Licenses can also be returned to applicants without action. An
export license application is returned without action if the applicant
does not respond to Department of Commerce requests for additional
information within 20 days. During the fiscal year 1997 through fiscal
year 2000 period, 26.1 percent of Category 3B and 13 percent of
Category 3C license applications were returned without action. As
measured by dollar value, 0.8 percent of Category 3B and 27.8 percent
of Category 3C license applications were returned without action.
[42] End-use checks in China are conducted based on an end-use visit
arrangement negotiated between the U.S. and Chinese governments in
1998.
[43] Information on the denial of this license was provided by Emcore.
[44] The ALTA 3000 is used to manufacture products with a feature size
of 0.35 micron, while the ALTA 3500 manufactures products with a
feature size of 0.25 micron. All information concerning ETEC,
Semiconductor Manufacturing International Corporation, and Micronic,
including dispositions of licenses, was provided by ETEC and
Semiconductor Manufacturing International Corporation.
[45] 15 C.F.R. Part 734.2, Scope of the Export Administration
Regulations.
[46] Category 3B and 3C items are described in 15 C.F.R., Part 774,
Supp. 1 of the Commerce Control List as test, inspection, and
production equipment and materials, respectively.
[47] See C.F.R. 15 Part 774—-The Commerce Control List.
[End of section]
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