The semiconductor manufacturing equipment and materials industry produces a variety of equipment, chemicals, gases, films, and other materials critical to manufacturing integrated circuits. According to Semiconductor Equipment and Materials International (SEMI), the $86 billion global semiconductor manufacturing equipment and materials industry provides the equipment necessary for a $256 billion semiconductor manufacturing industry (see fig. 1). This industry in turn produces the computer chips needed by many other industries, including a $1.6 trillion electronics industry. Semiconductors are devices that enable computers and other products such as cell phones to process and store information. Producing semiconductors is a multistep sequence of photographic and chemical processes during which electronic circuits are gradually created on a wafer made of pure semiconducting material, most commonly silicon. For example, the equipment used to manufacture semiconductors performs tasks such as depositing a thin chemical film on wafers, and selectively removing the film by etching it away, creating microscopic transistors. The technological complexity of semiconductors is indicated by the feature size (the density of the etched lines) on the wafer. Smaller feature sizes measured in nanometers allow for more components to be integrated on a single semiconductor, thus creating more powerful semiconductors. Each reduction in feature size—for example, from 90 nanometers to 65 nanometers—is considered a move to a greater level of technological sophistication, or a move to the next “generation” of manufacturing technology. Consistent with multilateral export controls, the U.S. government classifies semiconductor manufacturing equipment and materials as dual-use items because they have both commercial and military uses. Under the authority granted in the Export Administration Act of 1979, Commerce’s Bureau of Industry and Security (BIS) administers export controls for dual-use items through the requirements contained in the Export Administration Regulations (EAR). Under these regulations, exporters are to either obtain prior government authorization from BIS in the form of a license, general authorization, or license exception, or determine that a license is not needed before exporting dual-use items. The EAR establishes a framework for regulating the export of dual-use items by identifying the characteristics and capabilities of items that may require export licenses. These characteristics and capabilities are contained in the Commerce Control List, which provides detailed specifications for about 2,400 dual- use items, divided into 10 categories (see app. II for a list of the 10 categories). Each category is subdivided into five groups designated by letters A through E (see app. II for a list of the five groups). For example, semiconductors and semiconductor manufacturing equipment and materials fall under Category 3 (electronics), with manufacturing equipment placed in Category 3B (test, inspections, and production equipment) and materials placed in Category 3C (materials). Exports of semiconductor manufacturing equipment and materials to China are primarily controlled for national security and antiterrorism reasons. Appendix III describes the specific equipment and materials that require a license for export to China. For these items, the overall policy of the United States is to approve exports for civilian end uses but generally to deny exports that will make a direct and significant contribution to Chinese military capabilities. Semiconductor manufacturing equipment and materials, as well as other sensitive dual-use items, also are controlled under the multilateral Wassenaar Arrangement. Forty countries are signatories to the arrangement, including Germany, Japan, The Netherlands, and the United States. Formed in 1996, the Wassenaar Arrangement succeeded the Coordinating Committee for Multilateral Export Controls. Most advanced semiconductor equipment and materials are included on the Wassenaar Arrangement’s Basic List, which controls items that are “major or key elements for indigenous production, use, or enhancement of military capabilities.” One type of equipment, metal organic chemical vapor deposition (MOCVD) reactors, which may be used to produce radiation- hardened electronics for use in commercial and military applications, is included on the Wassenaar Arrangement’s Sensitive List. No semiconductor equipment or materials are included on Wassenaar’s Very Sensitive List. One of the arrangement’s principal goals is to prevent “destabilizing accumulations” of advanced dual-use items and technologies through the reporting of export information by its members. The Wassenaar Arrangement lacks a “no undercut” rule, under which a member would agree not to permit the export of any listed item or items that had been officially denied an export license by another member. Rather than having a no undercut rule, Wassenaar members exchange information on denied transactions as the sole means of trying to achieve its goals. Although the United States may not authorize a license for a specific piece of semiconductor manufacturing equipment to China, other Wassenaar members are not restricted from selling that same item themselves. Since 2002, China’s ability to produce commercial semiconductors has steadily advanced but remains approximately one generation behind the United States. As of July 2008, China’s most advanced semiconductor manufacturing company can produce integrated circuits with a feature size of 65 nanometers, compared with U.S. companies that are producing semiconductors with 45-nanometer feature sizes. China’s ability to produce advanced integrated circuits continues to depend on whether it can obtain equipment, manufacturing technology, and materials from other countries. However, China has begun developing an indigenous capacity to build some types of advanced semiconductor manufacturing equipment, which may enable it to reduce its dependence on some foreign-sourced equipment. Lastly, China also can obtain semiconductor manufacturing equipment on the used market. Although this equipment cannot be used for state-of-the-art production, it nonetheless contributes to China’s production capacity. In 2002, we reported that, between 1986 and 2001, China had narrowed its technology gap from a span of five generations (or 10 years) behind U.S. commercial state-of-the-art production to approximately one generation (1 to 2 years). Since 2002, commercial state-of-the-art production has continued to advance. Companies in the United States now produce integrated circuits with a feature size of 45 nanometers, while the most advanced company in China is producing integrated circuits with a feature size of 65 nanometers—approximately one generation apart. Companies in China produce different types of integrated circuits, including microprocessors and various types of memory. Figure 2 shows the advances made by companies in the United States and China from 1994 through 2007. Although companies in China are capable of producing near-state-of-the-art commercial integrated circuits, they mainly produce integrated circuits that are several generations old and are used for internal consumption in China’s consumer electronics industry. These integrated circuits are used in products such as cell phones, TVs, DVD players, and personal computers. In 2006, SEMI estimated that 82 percent of China’s production capacity produces integrated circuits that are four to seven generations (ranging from 500 to 180 nanometers) behind state-of-the-art manufacturing, and approximately 7 percent of integrated circuits produced are one or less generations (90 nanometers and below) behind current state-of-the-art capabilities. Commercial Chinese semiconductor manufacturing companies are still largely dependent on foreign sources of equipment and materials to fuel technology advances. Currently, European, Japanese, and U.S. companies are the leading suppliers of semiconductor manufacturing equipment for facilities producing advanced integrated circuits. Additionally, to advance its technological capacity, China has partnered with foreign companies or created incentives for foreign companies to locate to China. China continues to rely on imports of semiconductor manufacturing equipment from Europe, Japan, and the United States for production of advanced integrated circuits. The demand is being driven by several advanced integrated circuit manufacturers, including Semiconductor Manufacturing International Corporation (SMIC), Hua Hong NEC, and Hynix-ST. In 2006, spending in China on semiconductor equipment from foreign sources was approximately $1.6 billion, according to SEMI. This accounted for nearly 97 percent of the value of all equipment purchases from foreign and domestic sources. China also relies on foreign material imports, including gases and chemicals, to manufacture semiconductors. Although China produces these items, according to industry experts, it does not produce them in sufficient quantity or quality to meet its domestic demand. As China increases its integrated circuit production capacity, its materials consumption also grows, increasing its reliance on imported materials. China also relies on partnerships with foreign companies to fuel its technology developments. Through joint ventures or incentive programs to encourage international companies to locate to China, China has gained access to more advanced technology than it previously had or could produce on its own. In 2002, we reported that five of China’s eight newest major integrated circuit manufacturing facilities were established through joint ventures and the other three were wholly owned foreign companies. One of the five facilities, a semiconductor manufacturing facility owned by Motorola, a wholly owned U.S. company, was sold to SMIC in 2003. The foreign-owned and publicly traded SMIC is the largest and most advanced integrated circuit company in China. China has continued to acquire advanced technology through partnerships. For example, SMIC obtained advanced manufacturing know-how on the production of integrated circuits specifically for memory through a cooperative arrangement with a German company, Infineon, in 2006. Moreover, in December 2007, SMIC obtained a license from IBM, a U.S.-based company, to use its 45- nanometer manufacturing technology in the production of integrated circuits for mobile applications such as cell phones. Likewise, HynixST, another new facility in China established in 2006, which is a joint venture between Korea’s Hynix and Switzerland’s STMicroelectronics, also provided China with advanced commercial integrated circuit memory technology. China is developing the domestic capability to build some types of semiconductor manufacturing equipment, which might eventually reduce its dependence on foreign-sourced equipment. Currently, China has more than 50 companies that produce equipment for semiconductor manufacturing, 2 of which, Advanced Micro-Fabrication Equipment and North Microelectronics, produce equipment to manufacture advanced integrated circuits, according to SEMI.