New BIS Director Must Address PRC Increasing Sophistication in Nuke & Space Tech

The Pentagon’s 2021 Report to Congress shows the grimmest picture yet of the military and security developments in the People’s Republic of China (PRC). The PRC has “intelligentized” its military so that it can conduct simultaneous land, air, sea, cyber, and space operations to fight and win wars against a “strong enemy” like the U.S., coerce Taiwan, counter peripheral threats, and project global power. Its development in space is impressive and includes rocket launches, sophisticated satellite operations (including navigation integration with the Belt and Road Initiative to create a “Space Information Corridor”), and testing dual-use technologies for potential counterspace missions. The PRC’s space developments are integrated with hypersonics, including the recent feats of a missile circumnavigating the globe and then reaching a target, as well as spaceplanes. While speaking at the Reagan National Defense Forum (see also CNN, Washington Times), Space Force Gen. David D. Thompson warned of the PRC’s acceleration in the space domain, noting that it is on track to surpass the U.S. in capabilities by 2030.

It took the PRC 37 years to launch its first 100 Long March rockets, but the most recent 100 Long March launches were completed in less than three years, notes Space.com. With some 40 launches, 2021 is a record-breaking year for the PRC. The expendable Long March rockets are named for the infamous 1934 trek by the Red Army during the Chinese Civil War. The key question is how and why the PRC, after struggling for years, has sudden expertise in space. Is it indigenous development, tech transfer from foreign aerospace firms working in China, theft of critical tech, licensing critical U.S. technologies, or a combination thereof?   

Historically much of the PRC’s space development was undertaken by explicit government agencies. This makes it easy to identify and restrict sales of critical technologies, though the China Aerospace Science and Technology Corporation (CASC) was only added to Bureau of Industry and Security (BIS) Entity List in 2019, along with its aliases the Shanghai Academy of Spaceflight Technology, Shanghai Institute of Space, and the Shanghai Space Tower. Indeed aerospace and propulsion is a long-standing and sizable category in BIS’s Commerce Control List. This includes space launch vehicles, spacecraft, buses, payloads, and on-board systems and equipment, specially designed for spacecraft.

In recent years startups have taken an increasing role in space innovation in the PRC. These entities are more nimble and can fly below the radar of controls meant to restrict technologies from military end users and uses. Recent research by the Center for Security & Emerging Technology showed how hundreds of artificial intelligence startups in the PRC have been able to avoid the BIS tripwire while contributing to the PRC military. It would not be surprising to find the same dynamic in space tech, and this presents an important challenge for the next BIS Director, a position that has been without confirmed leadership for 4 years.

Alan Estevez is the nominee for the position and is considered an interesting choice for his defense, security, and supply chain background. His selection could signal a greater emphasis on security at the agency.

Christian Zur who led the U.S. Chamber of Commerce Procurement and Space Industry Council for more than decade observes, “Few people are as well-positioned as Estevez to step into the BIS position and tackle the enormity of challenges posed by China’s use of U.S. technology for military and space applications. In particular, many Chinese commercial space start-ups maintain ties to governmental entities which only serves to underscore the strategic trade-offs ahead for Estevez should he assume the helm at BIS.”  

Stay tuned for a follow up post with observations from other experts on Estevez’s nomination and the Future of BIS.

BIS Policy Recommendation: Strengthen Export Control Enforcement to Deter Violations

Today, China Tech Threat released the first in a series of policy recommendations meant to help leaders at the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) prevent adversaries from acquiring and weaponizing sensitive U.S.-made technologies.

·       BIS Agenda Recommendation 1: Strengthen Enforcement to Detect, Identify and Deter Export Control Violation

Export controls provide a primary defense to keep sensitive dual-use and emerging technologies out of the hands of adversaries, like the People’s Republic of China (PRC), that seek to apply them against U.S. national security and economic interests. However, the tools to enforce compliance are relatively weak and may not fit the seriousness of threats posed by violators.

Export controls are one of the few frontline defenses to maintain U.S. advantages in key technologies. Yet, it’s unclear how many violations (and violators) authorities may be missing or how well aligned the BIS’ enforcement workforce and penalty regime are.

The next BIS Director should consider increasing export control violation penalties, which he or she has significant leeway to do, up to twice the value of an applicable transaction. The next Director should also consider adding more enforcement officers and tools available to them to better identify, evaluate and deter export control violations.

Penalties for export control violations are determined by the BIS’ Office of Export Enforcement (OEE), which assess the gravity of infractions based on a set of “aggravating factors.” The maximum criminal penalty for willful violations is $1 million and up to 20 years in prison for individuals. The maximum civil penalty is $300,000 or twice the value of the applicable transaction, whichever is greater.

According to the agency’s 2020 Annual Report, BIS investigations produced 36 criminal convictions last year for export control violations. This resulted in just more than $2,141,000 of combined restitutions, forfeitures and fines and 615 months of imprisonment—or less than $60,000 of financial penalties and 15 months of jail time, on average.

The penalty regime was updated in 2016 and codified by the Export Control and Reform Act of 2018—a process that generated an important debate about the structure and level of fines. While fines equal to twice the value of a transaction may seem sufficient to deter potential bad actors, many dual-use items have a low dollar value but can inflict a high level of damage when deployed in military use.

While the BIS is recognized as a critical national security agency, its importance is not duly reflected in the agency’s annual budget. The BIS employs about 450 full-time staff—about a quarter of which are dedicated to enforcement—with a yearly budget of approximately $122 million (compared to the full Commerce Department annual budget, ~$10 billion).

U.S. export control enforcement “by far exceeds all other countries combined,” says Kevin Wolf, former Assistant Secretary of Commerce for Export Administration. Yet, as he has testified before Congress, Mr. Wolf believes greater resources are needed to ensure fairness for companies that act in good faith to comply with BIS restrictions and expand the playing field for legitimate, lawful trade—while still reliably deterring potential violators.

Coming This Week: CTT Launches Policy Recommendation Series for Incoming BIS Leaders

The Department of Commerce’ Bureau of Industry and Security (BIS) is the most important government agency most Americans have never heard of. Responsible for setting export control policies, enforcing treaty compliance and supporting U.S. technological leadership, the BIS plays a key role in maintaining the balance among U.S. innovation, commerce and national security interests.

This once obscure office has taken on a prominent role as the United States’ competition (and tensions) with China has escalated. As Martijn Rasser and Meghan Lamberth penned recently, “As the enforcer of export controls, [BIS] has become ground zero of the technology competition with China… Export controls, investment reviews, and technology trade restrictions are now key levers in national security strategy.”

President Biden has nominated Alan Estevez and Thea Kendler to serve as Under Secretary of Commerce for Industry and Security (BIS Director) and Assistant Secretary for Export Administration, respectively. Collectively, Mr. Estevez and Ms. Kendler bring unparalleled national security experience to BIS at one of the most critical junctures in the agency’s history.

Because the BIS and the U.S. export control regime will be play in a key role in shaping U.S.-China trade policy—and could very well determine the outcome of the United States’ competition with the PRC—China Tech Threat will introduce a series of policy recommendations for BIS and its leadership to focus and strengthen the agency’s agenda, streamline and improve export control policy, and better ensure U.S. national security interests.

China Tech Threat will publish the first paper in the series later this week. Please check back here for more.

BIS Adds 12 Chinese Companies to the Entity List

Last week, the Bureau of Industry and Security (BIS), within the Dept. of Commerce, added a dozen Chinese companies on the Entity List over national security and foreign policy concerns. The action comes as we await confirmation of Alan Estevez to assume leadership of the relatively unknown, but increasingly crucial agency.

One of these companies is semiconductor maker New H3C Technologies (H3C), which is partly owned by U.S. company Hewlett Packard Enterprise. For its 2020 fiscal year, HPE recorded about $737 million in sales to H3C. This is equal to about 3% of total HPE revenues – as well as purchases amounting to roughly $215 million.

Additionally, HPE’s Chinese partner is H3C, Tsinghua Unigroup, which CTT has repeatedly flagged as a supplier of the People’s Liberation Army (PLA). Further Tsinghua Unigroup partially owns Yangtze Memory Technologies Co. (YMTC), which China Tech Threat has also raised, concerns about citing its contribution to the PLA and alarming uses of state subsidies to support espionage and anticompetitive practices against competitors.

While “HPE says the New H3C Semiconductor Technologies subsidiary was set up about two years ago for research-and-development purposes and that it does not conduct business in the US market,” it is yet another sign of dangerous Chinese ties that are spread far and wide in the U.S. market, often without consumers knowledge.

In addition to H3C, there were 11 other Chinese companies added to the Entity List. A press release noted that these entities were being added to the list “as part of the Department of Commerce’s efforts to prevent U.S. emerging technologies from being used for the PRC’s quantum computing efforts that support military applications…these PRC-based technology entities support the military modernization of the People’s Liberation Army and/or acquire and attempt to acquire U.S. origin-items in support of military applications. Today’s action will also restrict exports to PRC producers of electronics that the support the People’s Liberation Army’s military modernization efforts.”

U.S. Secretary of Commerce Raimondo noted: “Global trade and commerce should support peace, prosperity, and good-paying jobs, not national security risks. Today’s actions will help prevent the diversion of U.S. technologies to the PRC’s and Russia’s military advancement…The Department of Commerce is committed to effectively using export controls to protect our national security.”

“This is a sensible move and an important reminder of the scope and scale of China’s efforts to achieve technological breakthroughs that erode US national security,” CNAS’ Martijn Rasser noted. Mr. Rasser has also noted the “strong case” for YMTC to be added to the Federal Communications Commission’s (FCC) Covered List for similar concerns around national security.

China Tech Threat applauds BIS’ action against these dangerous companies and urges that this effort to root out and punish other Chinese companies contributing to the PLA continues and expands to include other key entities, such as YMTC and CXMT, another Chinese semiconductor fab. Without clear action against these companies, the U.S. greatly risks cutting edge technologies being used against us when incorporated in the PRC weaponry.

China’s AI startups face few barriers to buy American tech; BIS, DoD, and Treasury on the sidelines

An explosive new report, Harnessed Lightning: How the Chinese Military Is Adopting Artificial Intelligence, from the Center for Security & Emerging Technology (CSET) is a wake-up call to America’s national security and strategic trade control policymakers. The report demonstrates how thousands of Chinese artificial intelligence (AI) startups can access American technologies, including advanced DRAM semiconductors. Of the 273 AI suppliers to the Chinese military identified in this study, less than two dozen are named in U.S. export control and sanctions regimes, whether the Entity List published by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS), the Chinese Military-Industrial Complex Companies List published by the Department of the Treasury’s Office of Foreign Assets Control, or the List of Chinese Military Companies (NDAA Sec. 1260H List). Notably these AI companies may acquire U.S. tech which is subsequently sold and packaged for a military contract under a larger entity such as the Aviation Industry Corporation of China (AVIC) or China Aerospace Science and Technology Corporation (CASC), both restricted by DoD.

More largely the report describes China’s goal to create asymmetric advantage against the U.S. in the Indo-Pacific, to develop systems to jam and blind U.S. sensor and information networks and the country’s military-civil fusion (军民融合) development strategy to acquire the technology to fulfill these goals. A typical AI startup is founded by STEM graduates from a leading Chinese university, headquartered in a commercialization enclave or government-run innovation, engaged with researchers at defense-affiliated universities and research laboratories, and in receipt of contracts from the Chinese military, police, state-owned enterprise, or other authority.

From this impressive report, Senators Marco Rubio (R-FL), Tom Cotton (R-AR), Roger Wicker (R-MS), Bill Hagerty (R-TN), and Bill Cassidy (R-LA) wrote to Secretary Gina Raimondo. They asked her to blacklist Chinese AI companies that help arm the People’s Liberation Army. “Despite the pressing need to restrict the PLA’s advancement in key technology areas, our government has done little to impede the flow of U.S. exports and investment to Chinese AI companies with PLA ties,” the senators wrote.

They urged the Secretary to answer the following questions:

  1. If the intelligence community can identify core technologies vital to the United States’ competition with China, why has BIS failed to identify foundational technologies and a comprehensive range of emerging technologies, as required by law?
  2. Why weren’t all of the PLA’s 273 AI suppliers listed in the CSET report already on the Entity List, given that these companies’ ties to the PLA were apparently open-source information?
  3. Now that these PLA AI supplier firms have been identified, will BIS add these Chinese AI companies to the Entity List?

Presently China is dependent on the U.S. for as much as 90 percent of its high-end chips and despite much high-profile policy, it appears that all but a few of the AI startups have difficulty obtaining U.S. equipment, information, and capital. Processors from NVIDIA and Xilinx make their way to restricted entities with military end uses through intermediary companies. Indeed U.S. companies partner on AI-research projects with Chinese businesses that supply the PLA with AI systems and equipment.

The CSET study reviewed publicly available requests for proposals by the Chinese military from April-December 2020, uncovering 343 AI-related equipment contracts, among some 66,000 documents. Contracts ranged in price from $1,300 (RMB 9,000, for an intelligent sound-and-light alarm detection system) to $3 million (RMB 21 million, for an intelligent UAV data access and management platform), with the average of $240,000 (RMB 1.7 million).

We applaud CSET for this incredibly impressive report. This research is formidable in keeping Americans across the country and world, safe. We also urge Secretary Raimondo and the Dept. of Commerce to act swiftly and respond to the Senator’s letter. Using the tools we have, including the power of BIS th

We applaud CSET for this timely and informative report to keep Americans safe. We also urge Secretary Raimondo and the Dept. of Commerce to act swiftly and respond to the Senator’s letter. Using the tools we have, including the power of BIS through export controls, we can mitigate the serious risk that the PLA and Chinese technology present to the privacy and security of the United States, but we must act now.

WSJ: House Republicans Tell Commerce Dept. to Get Tougher on China

According to an article published today in the Wall Street Journal, Republicans on the House Foreign Affairs Committee are continuing to apply pressure to the Commerce Department to fortify export controls.

In a letter led by Rep. Michael McCaul (R-TX) and a group of top Republicans called for the “strengthening of export controls on semiconductors.” Signers included all other members of the China Task Force, Reps. Liz Cheney (R-WY), Andy Barr (R-KY), Mike Gallagher (R-WI), Michael Waltz (R-FL), Anthony Gonzalez (R-OH), Darin LaHood (R-IL), Guy Reschenthaler (R-PA), Chris Stewart (R-UT), Robert J. Wittman (R-VA), Scott Perry (R-PA), Neal Dunn (R-FL), Mark Green (R-TN), Mike Garcia (R-CA), Austin Scott (R-GA), Diana Harshbarger (R-TN) and Young Kim (R-CA).

This follows a move this month by Republican Sens. Tom Cotton of Arkansas and Bill Hagerty of Tennessee to hold up confirmation of Alan Estevez, President Biden’s nominee to lead the Commerce unit in charge of export controls, the Bureau of Industry and Security.

China Tech Threat has been following Mr. Estevez’s nomination closely and has called for the Biden Administration to fill the position swiftly. In their letter, the House Republicans backed the hold on Mr. Estevez until, they said, Ms. Raimondo acts on their requests because “these actions are critical to stemming the flow of technology into our foremost foreign adversary.”

In their letter to Ms. Raimondo, the Congressmen signaled frustration with Commerce’s failure to create lists of “emerging and foundational” U.S. technologies designated for safeguarding as mandated by a 2018 law, according to the Wall Street Journal. Further, the lawmakers called on the department to further restrict exports to Semiconductor Manufacturing International Corporation (SMIC), China’s largest chipmaker.

This is not the first time Rep. McCaul in particular has urged the Commerce Department to get tougher as it relates to China. In fact, over the summer, he and Sen. Hagerty urged Secretary Raimondo to add YMTC to the entity list, describing it as “the PRC state-owned national champion for memory chips with ties to the CCP military.”

It is imperative the administration continues to apply pressure and use a full range of tools at the country’s disposal to ensure the privacy, security, and prosperity of all Americans. To read more about export controls, Commerce’s role, and Mr. Estevez, please see China Tech Threat’s website www.FutureofBIS.com.

5 Key Takeaways from President Biden’s Export Administrator Nominee

This week the Senate Banking Committee advanced Thea Kendler, President Biden’s nominee to serve as Assistant Secretary of Commerce for Export Administration, for a full Senate confirmation vote later this fall. If confirmed, Ms. Kendler will help shape export control policy, a frontline defense against the People’s Republic of China’s (PRC’s) weaponization of U.S. technologies.

Here are five key takeaways from Ms. Kendler’s responses to lawmakers’ Questions for the Record.

  • The PRC’s technological, military and economic rise poses “one of the greatest” threats to U.S. national security.Asked if she agreed, Ms. Kendler wrote, “Yes.” The PRC’s “diversion of dual-use technologies to military uses; theft of intellectual property; human rights abuses; and anti-competitive, unfair and coercive trade practices… threaten our national security, foreign policy, and economic security.”

  • Ms. Kendler recognizes the danger of the PRC’s Military-Civil Fusion Strategy—what Senator Tim Scott (R-SC) called a “total breakdown between China’s private sector and the Chinese Communist Party and its military.” The PRC seeks “U.S. technologies to further its military modernization,” Ms. Kendler wrote, including “diverting items from civilian to military applications.” “I am deeply concerned.”

  • Securing U.S. leadership in semiconductor capabilities must be a top priority for export-control policy. “It is critical for the United States to have diverse, resilient and secure supply chains in critical areas like semiconductors,” which are an “important component” of U.S. competitiveness, Ms. Kendra wrote.

  • Export controls are a critical tool to stop adversaries from stealing and weaponizing sensitive U.S.-made technologies. “I will appropriately use the tools and authorities available at BIS to protect our cutting-edge semiconductor technology, which is crucial to U.S. national and economic security,” Ms. Kendler stated. She added that she would “prioritize identifying and implementing appropriate [export] controls” to limit “the proliferation of emerging and foundational technologies to foreign countries.”

  • A demur on whether national security interests ought to outweigh industry profits? Asked whether U.S. export controls are strong enough to “dissuade” companies like Huawei from “engaging in export violations,” Ms. Kendler left room for interpretation that companies ought to have greater influence:

    “I believe BIS and its interagency partners strive to enhance the effectiveness of U.S. export controls and sanctions regimes by conducting extensive outreach with industry, academia, and other partners to raise awareness of export control requirements and best practices for compliance.” [Emphasis added]

Ms. Kendler was nominated by President Biden to serve as Assistant Secretary of Commerce for Export Administration, an office with the Commerce Department’s Bureau of Industry and Security (BIS), in July. Her bio is available here.

BIS Nominee “Deeply Concerned” about China’s Military-Civil Fusion Threat

By a voice vote on Tuesday, the Senate Banking Committee endorsed Alan Estevez and Thea Kendler to serve as Under Secretary of Commerce for Industry and Security (BIS) and as Assistant Secretary of Commerce for Export Administration, respectively. The vote advances President Biden’s nominees—who, if confirmed, will play pivotal roles in shaping U.S. export control policy—for consideration by the full Senate this fall.

In response to prepared Questions for the Record, Mr. Estevez stated that the People’s Republic of China (PRC) poses “one of our most difficult challenges related to U.S. national security and foreign policy objectives, including our ability to maintain U.S. technological leadership in critical areas.”

“I am deeply concerned about the People’s Republic of China’s (PRC) efforts to seek U.S. technologies to further its military modernization, such as through diverting items from civilian to military applications (i.e., its military-civil fusion strategy), creating illicit procurement networks, and stealing intellectual property, among other destabilizing activities,” Mr. Estevez wrote. “If confirmed, I [will] appropriately use the authorities of BIS under the Export Control Reform Act (ECRA) of 2018 to protect our national security and foreign policy interests while strengthening our technological innovation and leadership.”

Acknowledging that the PRC’s siphoning of dual-use technologies to military end-users threatens “our values and interests, as well as those of our allies and partners,” Mr. Estevez pledged to secure critical U.S. supply chains, specifically naming semiconductors.

“A vibrant domestic semiconductor manufacturing capability” is critical to American competitiveness, he noted. “I will support the Commerce Department’s work… to tackle near-term bottlenecks in the semiconductor industry and to strengthen U.S. leadership in semiconductor manufacturing.” He added that, if approved, he would direct staff to implement investments authorized by Congress to “shore up” domestic supply chains.

Mr. Estevez did not appear to shy away from applying export controls to prevent adversaries like the PRC from acquiring sensitive U.S.-developed technologies. “I do not see a reason to remove Huawei from the Entity List,” he wrote—a commitment some Republican lawmakers questioned of Commerce Secretary Gina Raimondo after she said “all aspects of the approach to U.S. economic and technological competition are up for review” during confirmation hearings in February.

“I will ensure that BIS adheres to the regulatory requirements for removing any party from the Entity List,” Mr. Estevez continued. “I will prioritize identifying and implementing appropriate controls on exports of emerging and foundational technologies, consistent with the Export Control Reform Act (ECRA) of 2018.”

Whether Mr. Estevez will prioritize stopping the flow of U.S. technology to the PRC and its military over American companies’ sales to China could determine the outcome of the power struggle between both countries. Eric Hirschhorn, BIS director for President Obama, stated it plainly earlier this summer: “You don’t balance national security with sales—you can’t.”