VEU Inspection Agreement In Limbo As Bush Term Nears End

The Commerce Department’s Bureau of Industry and Security (BIS) is threatening to suspend a new program to ease dual-use export controls on certain high-technology exports to companies in China that BIS deems to be trusted, because China and the U.S. have not completed negotiations for a program-specific inspection agreement.

The Validated End User (VEU) program, operated by BIS, is in danger of being suspended prior to the end of the Bush administration, said Commerce Department Assistant Secretary Christopher Wall in a Dec. 17 interview. The threat arose because China would not agree to a VEU-specific inspection regime which included statements from the Ministry of Commerce(MOFCOM) on the end use of the dual-use technology exports covered by the program, Wall said. The two countries are currently in negotiations on the new language, Wall said.
He declined to lay out any U.S. proposals, but did say that the bilateral negotiations have “moved to an advanced point.”

Additionally, Wall predicted that the completion of the agreement is “possible” before the end of the Bush administration, but added that “I’m not able to speak for the Chinese on that. It’s amatter for them to decide.” The consequences of a failure to complete such an agreement under the Bush administration include the possible suspension of the program for China before President George W. Bush leaves office, Wall said. However, Wall and another U.S. official both insisted that India’s VEUprogram would continue to move forward. According to the other U.S. official who spoke earlier in the day, the U.S. was waiting to see if China would “ink” a deal before it officially accepted any language itself.

The VEU program currently grants U.S. exporters a standing license to export specified controlled high-technology goods to the five Chinese firms that have been approved for the program. Currently, VEU companies are inspected under the 2004 End User Verification Understanding, Wall said. Those inspections are still carried out, Wall said. “There has been no breakdown in the program at all,” he insisted, denying another U.S. official’s claim that China this year backed away from a 2008 deal to allow inspections of VEU companies under the EUVU. Instead, BIS wants a VEU specific program to “specifically address VEU issues and obtain enduse statements from MOFCOM,” Wall said. BIS wants these statements included in the agreement to reduce the administrative burden for Chinese companies that import goods underthe VEU program. “That doesn’t go to the issue safety; that goes toward trade enhancement,” Wall said.

The head of BIS, Undersecretary of Commerce Mario Mancuso, has “long said” the VEU program will not be a “gray area” when the Bush administration leaves office on Jan. 20, the official said. If the U.S. and China are not able to reach an agreement on end-user inspections,“we will resolve it for them” by suspending the program, the official said.
The U.S. official said media reports that the VEU program had already been canceled were“premature,” and noted that U.S. companies and their Chinese partners currently under the VEU program could continue to ship approved items. A GAO oversight report released in October recommended the Commerce Department suspendthe VEU program, until it can amend or reach a new agreement that allows the conduct of VEU specificon-site reviews in China to protect against diversion of semiconductor equipment and materials to unintended uses (Inside U.S. Trade, Nov. 14) The Chinese may be incorrectly assuming they can successfully push for more decontrolled high-tech exports under the incoming Obama administration, one informed source suggested onDec. 17. “I hope they are not thinking they can just get a better deal while waiting for a newadministration,” this source said. “That’s a misreading of the situation; this is not a partisan question. These are fundamental national security concerns that [the Bush administration] inherited from the Clinton administration.”

(Source: INSIDETRADE-26-50-4)