The United States should suspend an export program to China involving semiconductors and materials because the Department of Commerce is unable to ensure that the goods shipped are going to Validated End Users, according to a report by the Government Accountability Office.
The report-roundly rejected by the Department of Commerce-found that the VEU program is not verifying that chips and related semiconductor materials shipped to China are being used as intended. Since semiconductors have both civilian and military applications, U.S. export control policy treats semiconductor equipment and materials as "dual-use" items and controls the export of these items through licensing requirements to sensitive destinations such as China.
Most U.S. exports of semiconductor equipment and materials to China require an export license to legally sell or transfer items from a U.S. firm to a specified user in China. However, in June 2007 the Department of Commerce created the VEU program, allowing U.S. exporters to ship eligible products to certain prescreened Chinese entities, including three companies authorized to receive semiconductor equipment and materials without a license.
"The Department of Commerce anticipated that the VEU program would facilitate trade to China and enhance U.S. security; however, challenges with program implementation may limit Commerce's ability to ensure items are being used as intended," the report stated.
Unlike licensed shipments, the VEU program does not require a post-shipment verification check. VEUs agree to periodic records reviews and discretionary on-site reviews by U.S. government personnel. However, the GAO report noted, the Department of Commerce has not reached an agreement with China on conducting on-site reviews.
"The procedures for selecting which Validated End Users will receive on-site reviews are still in draft form and have not been cleared by the interagency process," the report said.
The Department Commerce countered that it can use a classified 2004 agreement with China to conduct on-site reviews.
"The fundamental premise of the report-that no adequate mechanism exists to provide oversight of exports of semiconductor equipment under the Validated End User agreement-is incorrect," Commerce said in a reply letter to the GAO findings. "The general procedures for selecting on-site reviews have been established and guidance for specific on-site reviews must be developed on a case-by-case to ensure the review is tailored to each VEU."
Since the GAO issued a 2002 report on China's semiconductor manufacturing capabilities finding that the United States held a considerable lead, China has moved to the close the gap. According to the GAO, China is now only one generation behind the United States in producing state-of-the-art semiconductors.
"China's most advanced semiconductor manufacturing companies continue to rely on equipment and materials from the United States, Europe and Japan to improve their manufacturing capabilities," the report stated. "However, China has developed an indigenous capacity to build some types of advanced semiconductor manufacturing equipment, which may soon provide companies in China with a domestic source of equipment capable of producing semiconductors that are close to state of the art."