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October 27, 2008 

GAO Recommends That China Validated End-User Program Should be Suspended

The Government Accountability Office (GAO) today publicly released a report (pdf) on U.S. export controls on the sale of semiconductor manufacturing equipment and materials to China and the state of China's semiconductor manufacturing industry. In its report, the GAO recommends that the Secretary of Commerce suspend the Validated End-User (VEU) program until the Commerce Department can conduct on-site reviews in China to ensure that the items shipped to the VEUs in China are used as intended.

Representatives Howard Berman (D-CA) and Ileana Ros-Lehtinen (R-FL), the Chairman and Ranking Member, respectively, of the House of Representatives Committee on Foreign Affairs, requested the GAO to update its 2002 report in order to learn of changes in the Chinese semiconductor manufacturing sector and to U.S. export control policies over the sale of semiconductor manufacturing equipment and materials to China.

At the outset, the report notes that since 2002, "China’s ability to manufacture semiconductors has steadily advanced, but semiconductors produced commercially in China remain approximately one generation, or about 1 to 2 years, behind state-of-the-art semiconductors produced in the United States." The report also states that China continues to rely on imports of new and used semiconductor manufacturing equipment from Europe, Japan and the United States for production of integrated circuits.

Next, the report discusses changes in U.S. export control laws on the sale of semiconductor manufacturing equipment and materials to China since 2002, including the Validated End-User (VEU) program for China that was introduced by the Bureau of Industry and Security (BIS) in June 2007.

The GAO's assessment found problems and deficiencies in the VEU program, including:

  • The advantages of the VEU program anticipated by Commerce have not yet been realized because few U.S. exporters have shipped items to China under the Authorization VEU. As of June 2008, only one of the three validated end-users authorized to receive semiconductor equipment and materials had received any items under the program. In addition, only 6% of the total exports of semiconductor manufacturing equipment to China have taken place under the VEU program. The remaining 94% were exported under an export license.
  • BIS may not be able to ensure that semiconductor equipment and materials exported to China are used as intended because it has not negotiated a VEU-specific agreement with the Chinese government for conducting on-site reviews under the VEU program and lacks specific procedures for carrying out these reviews.
As a result of its review of the VEU program, the GAO recommended that in order to better promote the VEU program’s objective of trade facilitation and enhanced oversight, the Secretary of Commerce should suspend the VEU program to China until a VEU-specific agreement and procedures are established for on-site reviews. Specifically, the GAO said the Commerce Department should:
  • Negotiate a VEU-specific agreement with the Chinese government to conduct on-site reviews or amend the 2004 End Use Visit Understanding (EUVU) to include the Validated End-User program; and
  • Develop procedures for conducting on-site reviews that are applicable to all validated end-users.
The report notes that the Commerce Department disagreed with the GAO's recommendations, stating that the report’s premise— that the VEU program has no adequate mechanism to oversee exports of semiconductor equipment to China—is incorrect. Commerce first contends that on-site reviews could be conducted under the 2004 EUVU or a VEU-specific addendum to the EUVU, which it is currently negotiating with the Chinese government. Commerce also asserted that procedures for selecting on-site reviews exist, that general procedures for end-use checks are in place, and that specific guidance for on-site reviews must be developed on a case-by-case basis.

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