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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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