Dual-use free trade agreements: the contemporary alternative to high-tech export controls.

Author:Klaus, Michael D.

    In the modern global economy, U.S. export controls crafted during the height of the Cold War (1) are failing to forestall the transfer of advanced dual-use technology (2) to potential adversaries: China secured the necessary equipment to construct semiconductor manufacturing facilities capable of revolutionizing the People's Liberation Army, (3) Russia deployed an extensive fleet of intelligence satellites using its own technology, (4) and with sufficient financial resources, countless other foreign militaries are capable of building competitive communicants, remote sensing, and navigation satellites without U.S. components. (5) Since the U.S. no longer maintains a monopoly on the world's most sophisticated technologies, (6) unilateral restrictions on high-tech exports are more prone to impairing U.S. corporations than protecting national security. (7) Despite intense lobbying campaigns of industry representatives, (8) Congress has repeatedly eschewed substantive revisions to U.S. export administration regulations, (9) thereby prolonging the futile effort to impede the technological advancements of distrusted foreign nations by restricting U.S. exports.

    China's astonishing technological and military advancements lie at the center of the export control debate as U.S. exporters demanding opportunities to sell advanced technology to China's explosive high-tech industries clash with policy analysts apprehensively forecasting strategic concerns in the Taiwan Strait. (10) Favoring the dynamic national security concerns, the U.S. restricts exports of dual-use technology (technology that can be used for commercial or military purposes) to China under U.S. Export Administration Regulations, (11) although few other governments impose such cumbersome rules. (12) Consequently, foreign corporations are securing lucrative high-tech contracts, U.S. exporters are losing billions in sales, (13) and China is rapidly acquiring the advanced technology that it desires to build a formidable modern military. (14)

    While export controls defy the fundamental tenets of the global marketplace, ongoing negotiations for free trade agreements (FTAs) (15) with Chile, Singapore, and Latin America embrace the global competition that is rendering export controls obsolete. (16) The Bush administration's ambitious campaign to negotiate FTAs hails the economic and political benefits for parties to the agreements, (17) but on a global scale, the effects of U.S. free trade agreements on China's developing high-tech sectors must also be considered. Judging by the aftermath of the U.S.-Jordan free trade agreement signed in 2001, (18) as an economic matter, budding high-tech centers in countries with which the U.S. has a free trade agreement attract immediate investments from U.S. companies and once U.S. investment facilitates further development, foreign investment follows. (19) Unlike existing export controls, the secondary result of such a strategic free trade agreement is that increased competition in technology markets siphons some dual-use technology investments from China, thus mitigating the national security risks of burgeoning technology bases in the control of a potential foe without undermining U.S. economic interests. (20)

    To establish a practical frame for the defense trade policy debate, this article begins by presenting the extraordinary growth of China's semiconductor industry and the military applications of China's emerging technologies. After evaluating the relevant technology, Part Two outlines the history of U.S. export controls under the Export Administration Act and surveys the persisting fears concerning China's unprecedented military advances. Finally, Part Two discusses attempts to control dual-use technology exports on an international level during the Cold War era via the Coordinating Committee for Multilateral Export Controls (CoCom) and during the post-Cold War era through the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Technologies.

    Part Three provides anecdotal evidence of the failures of high-tech export controls and analyzes the institutional weaknesses of international agreements designed to impede dual-use technology transfers. Extending the case study of China, the section illustrates the ease at which two of China's largest semiconductor foundries procured the equipment necessary to produce sensitive technology from foreign sources. Additionally, Part Three assesses the lack of enforcement power of the Wassenaar Arrangement and evaluates the practices of foreign governments in monitoring high-tech exports. Part Three concludes by presenting the economic losses of obstructive dual-use export controls for U.S. technology corporations seeking to capitalize on China's expanding business opportunities.

    Once the futility of export controls is delineated, Part Four considers the strategic possibilities and implications of free trade agreements. The section begins by reviewing the strategic trade theories underlying FTA negotiations; by eliminating barriers to trade between contracting parties, FTAs divert investment from the most efficient countries to less efficient countries. (21) In instances in which it is politically desirable, the U.S. can manipulate FTAs to support market reforms in developing countries and construct a template for broader trade agreements. (22) To broaden the strategic trade theories, the section cites evidence from the North American Free Trade Agreement (NAFTA) and the U.S.-Jordan Free Trade Agreement to posit that when FTAs guide dual-use technology investments, FTAs also advance national security interests. Finally, in Part Five, a conclusion is reached that an entirely new paradigm for defense trade policy must replace insular appeals for export control reforms. By accommodating and leveraging the global competition inherent in today's marketplace, FTAs protect U.S. corporate interests and serve as a valuable tool for addressing the national security concerns of China's technology-driven military modernization.


    1. China's Explosive High Tech Industry

      The rapid growth in China's semiconductor (computer chip) industry (23) elicits widespread trepidation and affords a practical basis for critiquing the role of export controls in managing national security concerns. (24) As global economic integration facilitates access to foreign markets, technology companies such as Motorola, Dell, and Texas Instruments are increasingly outsourcing manufacturing of semiconductors to foundries, (25) which produce semiconductors on a contract basis and allow their customers to concentrate on research and development. (26) Offered generous tax incentives and government-funded technology parks, (27) international investors are flocking to China to establish semiconductor foundries that can serve the needs of manufacturers of devices ranging from helpful hearing aids to alarming laser-guided missiles. (28) In turn, the semiconductor foundries throughout East Asia rely heavily upon U.S. semiconductor equipment to produce the chips, as U.S. companies supply 55% of the world's semiconductor equipment and possess the most advanced technologies. (29)

      While foreign investment pours into their technology parks, Chinese leaders tout the "importance of developing "independent, proprietary high-technology capabilities as a means to boost China's economic and military prowess to counter 'hegemonic' actions of the United States." (30) Since semiconductors have direct military applications, Roger Cliff from Rand Corporation speculates, "China's grand strategy is to develop a world-class electronics industry and draw on it for military applications if needed." (31) Indeed, the semiconductor industry is designated as a "pillar industry" in China's Tenth Five-Year Plan (2001-2005). (32) Under the Plan, the Chinese government pledges to invest US$18 billion in the sector and aspires to attract $10 billion from foreign corporations in order to construct twenty-five new semiconductor plants by 2005. (33) Additionally, in the past decade, China's State Development Planning Commission (SDPC) has granted $725 million to eighty-four state-sponsored research centers (34) in an effort to expand Shanghai's semiconductor output from $2 billion in 2000 to $24 billion in 2010. (35)

      Seeking electronic components capable of executing multiple functions, the military established the foundation for today's advanced semiconductors in 1959 with the invention of the integrated circuit (IC). (36) Since that time, applications for semiconductors have expanded far beyond the domain of the military; (37) semiconductors are considered the 'crude oil' of the twenty-first century, fueling everything from cheap toys to military surveillance satellites. (38) Before the U.S.-China Economic and Security Review Commission, (39) an industry expert testified, "the ability to produce integrated circuits is now a widespread commercial prospect, with military meeting its needs through off-the-shelf procurement rather than through designing chips for special military applications." (40)

      Although China (and other potentially hostile regimes) would be able to produce adequate military technology with readily available, past-generation semiconductors, (41) the cutting edge 0.13-micron semiconductors (42) manufactured in China's leading foundries are essential for critical defense technology such as synthetic aperture radar, electronic warfare, and image compression and processing. (43) On a broader scale, policy analysts predict, "advantages will go to states that have a strong commercial technology sector and develop effective ways to link these capabilities to their national defense industrial base." (44) Observing China's ominous military modernization, (45) in the U.S. and Taiwan, anxiety abounds (46) as the tiny circuitry of 12-inch, sub-0.18-micron semiconductor...

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