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One sure sign of a rising China is its more assertive stance in bilateral talks with the US. So last year, when US negotiators proposed that China help reduce the bilateral trade imbalance by opening up its markets to US exports, Beijing was ready with a proposal of its own: We’ll buy more American goods, if you scrap restrictions on high-tech exports. The US Cold War-style mentality, they argued, is the main thing standing in the way of more balanced trade.

Most experts consider the Chinese argument to be overblown. They estimate the annual amount of sales to China blocked by US export controls at US$2-3 billion. (The only hard number comes from a 2009 survey by the American Chambers of Commerce based in Beijing and Shanghai, which tallied US$560 million in actual lost sales). This barely puts a dent in China’s $252 billion trade gap with the US for 2010.

Nevertheless, that doesn’t mean Washington should dismiss the issue out of hand. Talk to American business executives in China and they’ll tell you that the restrictions put them at a competitive disadvantage. It may not be a silver bullet that solves the trade gap, but the Chinese do have a point: It’s high time for the US to re-evaluate its outdated system of export controls.

Control mechanism

The existing system dates back to 1949, when the US and 16 of its allies formed the Coordinating Committee for Multilateral Export Controls (CoCom) to prevent the Soviet Union from buying so-called “dual-use” technology from the West that could be converted for military use. Any CoCom member had the right to veto sales by one of its allies. Since CoCom’s members did little trade with the Soviets in any event, they had little to lose, and everything to gain, from casting its restrictive net pretty broadly.

With the collapse of the Soviet Union, CoCom was disbanded and replaced, in 1994, with the much looser Wassennar Arrangement, which is aimed at keeping sensitive military technologies out of the hands of “rogue states” like Iran, Libya, North Korea and Burma.

None of the 40 countries participating in Wassennar have any power of veto. Each ultimately makes its own decision regarding what technologies it’s willing to sell, and to whom.

But what about China? Obviously the US considers China as a potential military adversary, and would prefer to deny it whatever high-tech military advantage possible. But unlike the old Soviet Union, China is a major trading partner that offers a market that no country, including the US, can afford to ignore.

Missed opportunities

That presents Washington with two challenges. First, the cost of not selling to China has to be taken into account. In 2009, nearly 20% of America’s US$69.5 billion exports to China were in high-tech industries like aircraft, electronics, and semiconductors, which are potentially subject to export controls. These are areas where the US has a solid competitive advantage, and incredible growth opportunities. The old system simply has no mechanism for weighing these potentially immense economic benefits against equally real security concerns.

Second, just because the US decides not to sell the Chinese a certain technology, doesn’t mean that somebody else won’t sell it to them instead. CoCom worked because it presented a united front; that consensus is long gone. China isn’t even a “country of concern” under the Wassennar Arrangement. The US can’t control whether China gets its hands on a wide range of advanced “dual use” technologies – it can just deny its own companies the chance to make the sale.

The US$2-3 billion may be insignificant in the grand scheme of things, but US firms worry that export controls cast a broader shadow over their business. They fear that, given the choice, many Chinese buyers opt to work with European or Japanese suppliers rather than deal with the prospect that, somewhere down the road, they won’t be able to get what they want from an American bidder. It’s impossible to quantify how much business might be lost due to such concerns.

A wholesale abandonment of restrictions on high-tech exports in the pursuit of short-term profit would be foolish. But American policy-makers need to recognize that the game has changed, and a smarter approach is now needed for balancing the pros and cons of bringing US high-tech leadership to the Chinese market.

Source: U.S. Should Take New Look at Old Export Controls