US Tightens Congressional Oversight on Sensitive Exports to China

Posted by Wang, Yi on October 13, 2020

Leading US national security senators raised “grave concerns” on October 5, 2020 to block the approval by US Department of Commerce (DOC), of “export of over 227 tons of sensitive material critical to building missiles to China.”  The senators also stressed the lack of detailed justification and alleged deviation from both the spirits and mandates concerning missiles and satellite exports under the Strom Thurmond National Defense Authorization Act for Fiscal Year 1999 enacted on October 17, 1998 (P.L. 105-261) (“Strom Thurmond NDAA for FY1999”).

Under the Strom Thurmond NDAA for FY 1999, “it is the sense of the Congress that US business interests must not be placed above US national security interests…. the United States should pursue policies that protect and enhance the US space launch industry.”  It further requires that:

• U.S. government (USG) needs to ensure that the “missile equipment or technology” exports (including “any indirect technical benefit”) are “not detrimental” to the U.S. aerospace and military industries; 
• Nor should such exports “measurably improve” China’s missile or space launch capabilities, directly or indirectly. (Sections 1511-1522 of Strom Thurmond NDAA for FY1999)

The signing senators are: Robert Menendez (D-NJ), Senate Foreign Relations Committee Ranking Member, Charles Schumer (D-NY), Chuck Schumer, Senate Minority Leader, Sherrod Brown (D-Ohio), Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs, Jack Reed (D-RI), Ranking Member of the Senate Armed Services Committee, and Richard Durbin (D-Ill), Senate Democratic Whip.  These national security senators urge that:

“With its potentially dangerous end-use as a component in these systems, there are serious questions regarding this decision, especially as your letter to Congress gave no mention of the exporter, the end-user, or end-use function—other than for the production of electronic discharge machines—for this sensitive material.”

The letter to Commerce Secretary Wilbur Ross also refer to Department of Defense report, Military and Security Developments Involving the People’s Republic of China 2020, released on September 1, 2020 (“DoD China 2020 Report”).  DoD highlights 3 sectors where China has achieved or exceeded parity with US:

• Shipbuilding
• Land-based conventional ballistic and cruise missiles
• Integrated air defense systems

In particular, DoD has raised concern that the statutory military-civil fusion programs (MCF) designed for legitimate national rejuvenation goals also mean “there is not a clear line between the PRC’s civilian and military economies, raising due diligence costs for U.S. and global entities that do not desire to contribute to the PRC’s military modernization”, under the “legal framework for the Party’s national security concepts.” (Read more on the full report)

In June this year, 20 years after the mandate of Strom Thurmond NDAA for FY1999, DoD identified 24 companies as “Communist Chinese military companies” who are major SOEs (state-owned enterprises) in telecom, nuclear, shipbuilding, aero/aviation sectors, along with Huawei and HiVision.

Both the senators’ letter and DoD reports remain silent on the market-opening prong of the Strom Thurmond NDAA for FY1999, which arguably limits to “export of satellites” but nonetheless in its integral part, was indicative of solution and policy change:

“The impact of the proposed export on … opening up markets to US-made products … reducing trade barriers to US exports or foreign direct investment in China by US nationals ….the willingness of China to reduce formal and informal trade barriers and tariffs, duties, and other fees on US-made goods and services.” (Section 1515, Strom Thurmond NDAA for FY1999)

Depending on specific grade and composition (undisclosed), graphite products may constitute dual-use items under US export control regime and will face more stringent scrutiny if not denied moving forward.  Graphite has wide civil/military applications, from conductive / insulating materials, wear-resistant lubricants, to inputs/parts in the nuclear energy, military applications, as well as parts in aerospace sectors.

Please refer to a more technically oriented analysis into MCFs and FCPA/trade implication at this alert.