By Karen Freifeld and Alexandra Alper
NEW YORK/WASHINGTON (Reuters) – The Trump administration is tightening rules to prevent China from obtaining advanced U.S. technology for commercial purposes and then diverting it to military use, several sources told Reuters.
Three measures agreed to by senior U.S. officials in a meeting last Wednesday, but not finalized, would introduce hurdles that could be used to stop Chinese companies from buying certain optical materials, radar equipment and semiconductors, among other things, from the United States.
The moves are advancing as relations between the United States and China, a key customer for U.S. technology, sour over the deadly coronavirus pandemic, which originated in Wuhan, and tit-for-tat expulsions of journalists from each country.
They are also a sign of growing nervousness within the U.S. government over China’s “civil-military” fusion promoted by President Xi Jinping, which aims to build up its military might and super-charged technological development in tandem.
China hardliners within the administration say it is time to update U.S. rules in light of the Chinese policy, since some U.S. shipments abroad are authorized based in large part on whether they will be used for civilian or military applications.
Since “the Chinese have said to us, ‘anything you give to us for a commercial purpose is going to be given to the military,’ what point is there in maintaining a distinction in our export control regulations?” said former White House official Tim Morrison, who was involved in drawing up the changes, which have been in the works since at least last year.
It was not clear if President Donald Trump would sign off on them, despite the decision last week to press ahead with their roll-out.
Industry fears the new rules, which include withdrawing license exceptions, could drive Chinese consumers into the arms of foreign rivals.
“There’s a chilling effect when they start taking away the availability of these license exceptions for particular exports,” said Washington trade lawyer Eric McClafferty. “It makes people more nervous to export to China.”
The White House and the Commerce Department did not respond to requests for comment.
“We urge the U.S. to stop this purposeful slandering and look at China’s policy in an objective way and do more for the cooperation between our two sides,” Chinese foreign ministry spokeswoman Hua Chunying told a daily briefing on Thursday when asked about the plans for tighter restrictions.
One change would do away with the civilian or “civ” exemption, which allows for the export of certain U.S. technology without a license, if it is for a non-military entity and use, sources said. The exception, which eases the export of items like field programmable gate array integrated circuits, would be eliminated for Chinese importers and Chinese nationals.
FPGA circuits are made by several companies, including Intel Corp <INTC.O> and Xilinx <XLNX.O>.
A Xilinx spokesperson said in a statement: “Xilinx is aware of the proposed increased export restrictions to China and is monitoring the situation closely. We will comply with any new U.S. Department of Commerce rules and regulations if/when they are enacted.”
Intel declined to comment.
Doug Jacobson, another Washington lawyer who specializes in trade, said that several of his clients were concerned about the elimination of the civilian exemption, mainly companies involved with electronics.
“It could be significant for certain companies,” Jacobson said. “In terms of whether that would lead to (license) denials, who knows? But it would be an additional hurdle to jump through for a U.S. company to sell to commercial end users in China.”
Another change would stop China’s military from obtaining certain items without a license even if they were buying them for civilian use, such as scientific equipment like digital oscilloscopes, airplane engines and certain types of computers.
If implemented, the measure could block certain shipments to Chinese military importers like the People’s Liberation Army, even if they said the item would be used in a hospital, for example.
A final change would force foreign companies shipping certain American goods to China to seek approval not only from their own governments but from the U.S. government as well.
The Trump administration’s concern, one person said, is that a lot of U.S. allies are not as worried about China’s civilian and military fusion.
Industry has already expressed concern about some of the proposed regulatory changes, which were published last year.
At the same meeting last week, senior officials in the Trump administration agreed to new measures to restrict the global supply of chips to China’s Huawei Technologies.
(Reporting by Karen Freifeld and Alexandra Alper; Additional reporting by Mike Stone and Tom Daly; Editing by Chris Sanders, Sonya Hepinstall and Muralikumar Anantharaman)