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 TIME on politics Congressional Quarterly CNN/AllPolitics CNN/AllPolitics - Storypage, with TIME and Congressional Quarterly

PRC Acquisition of U.S. Technology

page 8

The more relaxed controls on the export of militarily-sensitive technology to Hong Kong have been allowed to remain in place even though Hong Kong was absorbed by the PRC and PLA garrisons took control of the region on July 1, 1997. The U.S. Customs Department reports that no inspections by the Hong Kong regional government nor by any other government, including the United States, are permitted when PLA vehicles cross the Hong Kong border.

Various U.S. Government analyses have raised concerns about the risk of the diversion of sensitive U.S. technologies not only to the PRC, but to third countries as well through Hong Kong because of the PRCs known use of Hong Kong to obtain sensitive technology.108 Some controlled dual-use technologies can be exported from the United States to Hong Kong license-free, even though they have military applications that the PRC would find attractive for its military modernization efforts.

The Select Committee has seen indications that a sizeable number of Hong Kong enterprises serve as cover for PRC intelligence services, including the MSS. Therefore, it is likely that over time, these could provide the PRC with a much greater capability to target U.S. interests in Hong Kong.

U.S. Customs officials also concur that transshipment through Hong Kong is a common PRC tactic for the illegal transfer of technology.109

PRC Incentives for U.S. Companies to Advocate Relaxation of Export Controls

U.S. companies in the high-technology sector are eager to access the PRC market. The PRC often requires these U.S. firms to transfer technologies to the PRC as a precondition to market access. U.S. export regulations can be seen as an impediment to commercial opportunities.110

Executives wishing to do business in the PRC share a mutual commercial interest with the PRC in minimizing export controls on dual-use and military-related commodities. The PRC has displayed a willingness to exploit this mutuality of interest in several notoriously public cases by inducing VIPs from large U.S. companies to lobby on behalf of initiatives, such as export liberalization, on which they are aligned with the PRC.

The PRC is determined to reduce restrictions on the export of U.S. communications satellites for launch in the PRC. From the perspective of the PRC, provision of such launch services creates a unique opportunity to consult with U.S. satellite manufacturers, access information regarding U.S. satellite technology, and obtain resources to modernize their rockets.111 U.S. satellite manufacturers are, in turn, anxious to access the potentially lucrative PRC market, and realize that launching in the PRC is a potential condition to market access.112

By agreeing to procure numerous satellites from Hughes Electronics Co. (Hughes) and Space Systems/Loral (Loral) in the early 1990s, the PRC created a mutuality of interest with two companies well-positioned to advocate the liberalization of export controls on these platforms.

For example, Bernard L. Schwartz, Chairman and CEO of Loral Space & Communications, Ltd., the parent company of Loral, met directly on at least four occasions with Secretary of Commerce Ron Brown after 1993, and accompanied him on a 1994 trade mission to the PRC.113

C. Michael Armstrong, the former Chairman and Chief Executive Officer of GM Hughes Electronics, the parent company of Hughes, has served as Chairman of President Clintons Export Council since 1993, working with the Secretary of State, the Secretary of Commerce, and others to "provide insight and counsel" to the President on a variety of trade matters.114 Armstrong also serves or has served as a member of the Defense Preparedness Advisory Council, the Telecommunications Advisory Council, and the Secretary of States Advisory Council.115

Both Armstrong and Schwartz, as well as other executives from high-technology firms, advocated the transfer of export licensing authority from the "more stringent control" of the State Department to the Commerce Department. Armstrong met with the Secretary of Defense, the National Security Advisor, and the Secretary of State on the matter, and both Schwartz and Armstrong co-signed a letter with Daniel Tellep of Lockheed Martin Corporation to the President urging this change.116 The changes they advocated were ultimately adopted.

Between 1993 and January 3, 1999, Loral and Hughes succeeded in obtaining waivers or export licenses for an aggregate of five satellite projects.117

Another example of the incentive to advocate the relaxation of export controls involves the Charoen Pokphand Group (CP Group), Thailands largest multinational company and one of the largest investors in the PRC. CP Group executives have served as economic advisors to the PRC Government and were chosen to sit on the committees dealing with the absorption of Hong Kong.118

The CP Group was a founding member of Asia Pacific Telecommunications Satellite Holdings, Ltd. (APT), a consortium run by PRC-controlled investment companies, including China Aerospace Corporation. APT imports satellites manufactured by Hughes and Loral as part of the Apstar program for launch in the PRC by China Great Wall Industry Corporation.119

On June 18, 1996, several CP Group executives attended a coffee with President Clinton at the White House. These executives included Dhanin Chearavanont (CP Chairman and Chief Executive Officer), Sumet Chearavanont (Vice Chairman and President), and Sarasin Virapol (employee and translator). The CP executives were invited to the coffee by their Washington, D.C., lobbyist, Pauline Kanchanalak.120

According to one participant, Karl Jackson of the U.S.-Thailand Business Council, the CP executives "dominated the conversation at the coffee." The discussion included U.S.-PRC relations, Most-Favored-Nation trade status for the PRC, and U.S. technology. Jacksons characterization of the role that CP executives played at the event is corroborated by other participants.121

The PRCs Efforts to Assimilate Advanced U.S. Military Technology

The PRCs approach to U.S. technology firms proceeds from the premise that foreign firms should be allowed access to the PRC market only because such access will enable the PRC to assimilate technology, and eventually to compete with or even overtake U.S. technology. The PRC thus views foreign firms as a short-term means to acquire technology.

In theory, as the PRC is increasingly able to develop its own technology, it will need less and less foreign help. In practice, however, the PRC faces numerous challenges in integrating foreign technology into both its civilian and military industrial bases.

Among the areas in which the PRC is particularly dependent upon U.S. technology are computer hardware and microelectronics, telecommunications, commercial aircraft, and machine tools. The PRC, therefore, will most likely continue to rely heavily on joint ventures with foreign firms to provide advanced technology in

these areas.

There are several reasons that the PRC has absorbed and assimilated only some, and not other, U.S. military and civilian technologies:

  • CCP members who sit on the boards of State enterprises usually have the clout to interfere with restructuring that may impact them.
  • The PRCs funding of technology development, especially in applied sciences, conflicts with other priorities, including supporting PRC state-owned enterprises as they restructure.
  • While the PRC has targeted very sophisticated U.S. military technology, including aerospace and electronics technology, it has not achieved the levels of training and maintenance necessary to absorb it. But the emphasis on acquiring the most sophisticated technologies continues, even as some senior PRC officials call for a greater focus on "building block" technologies.
  • The PRC has a reputation for violating intellectual property rights, making some foreign investors hesitant to transfer their most advanced technology.
  • There is a tendency of CCP and PLA officials to look toward their personal gain and aggrandizement first, and only second to use State assets for the benefit of the PRC.

The PRC has benefitted from advanced U.S. and Western military technology in several areas, including ground force weapons, communications, remote sensing, and tactical and strategic systems. A 1995 study by the Office of Technology Assessment found that the PRCs joint ventures with the United States in commercial aircraft production appear to have enabled the PLA to machine smoother skins on its fighter aircraft.122 Other PRC military products, such as air-to-air and surface-to-air missiles, submarines, and short-range ballistic missiles, also appear to have benefitted from foreign technical help.123

The PRC has also succeeded in reverse-engineering military hardware acquired from the United States and other countries, thereby defraying the high cost of weapons development. For example:

  • During the 1980s and 1990s, the PRC is presumed to have diverted U.S. military technology through civilian programs. In 1983, the PRC is presumed to have exploited the CFM-56 jet engine technology from a civilian program. The CFM-56 contains the same core section as the engine used in the B-1B bomber.
  • The PRC developed its Z-11 helicopter by reverse-engineering the French Aerospatiale AS-350 Ecureuil helicopter.124
  • The PRCs C-801 anti-ship cruise missile is believed to be a copy of the French Exocet anti-ship cruise missile.125

PRC scientists have been pressured to reverse-engineer U.S. high technology rather than purchase it, even though this means that it may be difficult to maintain because of the lack of service, training, and documentation.

For example, the PRC was able to reverse-engineer a high-performance computer and produce a copy for far less than the U.S. equipment would have cost. By the time they achieved this success, however, a commercially-available desktop computer with the same power could have been purchased for a small fraction of their costs in time, money, and effort. The PRC seems willing to pay this cost in order to avoid long-term dependence on U.S. technology.

The Select Committee judges that at least some of the PRCs statements about its technical progress are distorted so as to increase the PRCs ability to gain access to foreign technology. By claiming substantial indigenous progress in areas ranging from supercomputers to stealth technology, the PRC can allay foreign fears that providing it with advanced technology will improve the PRCs capabilities. This tactic was used, the Select Committee believes, to overcome U.S. and Western objections to transfers of high performance computers to the PRC.

The Select Committees classified report includes further material details and examples of PRC acquisition of advanced U.S. military technology, which the Clinton administration has determined cannot be made public.

U.S. Government Monitoring Of PRC Technology Acquisition Efforts In the United States

Because of the historical counterintelligence focus on the Soviet Union throughout the decades of the Cold War, the U.S. Government has never made the PRCs technology acquisition activities in the United States a priority. Moreover, because of the breadth of the PRCs decentralized collection efforts, the U.S. Government cannot completely monitor PRC activities in the United States.

Neither the Department of Commerce, the Department of the Treasury, the Federal Bureau of Investigation, the Central Intelligence Agency, nor, apparently, the Department of Defense,126 has in place a program, system, or effort specifically tasked with the ongoing collection of information concerning the following:

  • Efforts by the PRC, or by commercial entities owned or controlled by the PRC, to merge with, acquire a controlling interest in, or form a commercial partnership or joint venture with, commercial entities in the United States
  • Efforts by the PRC, or by commercial entities owned or controlled by the PRC, to establish commercial entities in the United States
  • Efforts by the PRC, by commercial entities owned or controlled by the PRC, or by agents thereof, directly or indirectly, to identify, locate, or acquire advanced technologies from U.S. sources
  • Commercial connections or interactions between U.S. companies and commercial entities owned or controlled by the PRC, specifically including connection or interaction involving advanced technologies
  • Commercial affiliations (for example, as officer, director, employee) between PRC nationals and either U.S. or foreign owned or controlled commercial entities

Each of the U.S. Governments departments and agencies with responsibilities in this area has reported to the Select Committee that it is monitoring some aspects of PRC commercial activity in the United States, but that such monitoring is usually narrow in focus or reactive in nature. There is little or no initiative taken; rather, attention is paid to PRC commercial activity only when an allegation, problem, or issue arises that demands attention.

Because the CIA is not authorized to conduct broad collection activities within the United States, it defers to the FBI on the matter of PRC interaction with U.S. companies domestically. But there is little or no coordination within the U.S. Government of counterintelligence that is conducted against the PRC-directed efforts to acquire sensitive U.S. technology.

The Department of Commerce has contracted with private entities to produce an assessment of the PRCs technology acquisition efforts. In addition, three Commerce Department bureaus have duties that relate to PRC commercial activities in the United States. Specific activities in this regard include: 127

  • Commerce contracted with DFI International to do research and write a report on the issue of technology transfers to the PRC through commercial joint ventures.
  • Commerce also contracted with DFI International to establish a database of information on technology transfers from U.S. and foreign firms in the aerospace and telecommunications industries. This project will produce periodic reports summarizing trends and analyzing implications of technology transfer on national security and international trade policy.
  • The Bureau of Economic Analysis collects and publishes significant data for statistical purposes regarding foreign direct investment in the United States. More specifically, BEA collects data needed to prepare the U.S. balance of payments and international investment position, financial and operating data regarding foreign-owned U.S. companies, and data on U.S. businesses that have been newly-acquired or established by foreign investors. BEA does not have any direct information on the acquisition of advanced technologies by the PRC.
  • The Bureau of Export Administration controls the licensing of exports of dual-use goods and technologies pursuant to the Export Administration Act and the Export Administration Regulations. The Bureau develops export control policies, issues export licenses, and prosecutes violators. The Bureaus controls include the regulation of the export of specified goods and technology to the PRC, including the transfer of controlled technology to PRC nationals in the United States.
  • The Bureau of Export Administration, along with the Customs Service, is also responsible for investigating possible violations of the Export Administration Act and the Export Administration Regulations, including possible improper transfers of technology to PRC nationals in the United States. While the Bureau may obtain information during an investigation concerning commercial activities of PRC nationals, that information is not the focus of the investigation and is not collected in a manner that permits aggregation of data.128

The Treasury Department has an indirect role in monitoring PRC commercial activities in the United States. Through the Customs Service, Treasury investigates violations of U.S. export laws. These investigations are not part of a PRC-specific monitoring process, but are carried out based on specific facts indicating a violation of U.S. laws.129

In addition, any commercial entity, whether from the PRC or any other country, that wants to acquire control of a savings-and-loan or a national bank must file an application with Treasurys Office of Thrift Supervision or the Office of the Comptroller of the Currency.130

Treasury also chairs the Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee to which the President has delegated the authority to review and investigate foreign investment transactions and conduct investigations pursuant to the Exon-Florio provision of the Omnibus Trade and Competitiveness Act of 1988. CFIUS membership includes the Secretaries of the Treasury, Commerce, Defense, and State, as well as the Attorney General, the United States Trade Representative, the Chairman of the Council of Economic Advisors, the Director of the Office of Management and Budget, the Director of the Office of Science and Technology Policy, the Assistant to the President for National Security Affairs, and the Assistant to the President for Economic Policy. Other agencies are asked to participate when a transaction falls within their areas of expertise.131

Notification to CFIUS of a proposed transaction is voluntary. The statute does not provide for the targeting of specific countries. If the transaction involves a foreign entity that is controlled by or is acting on behalf of a foreign government and the transaction could affect national security, a formal 45-day investigation is required. At the conclusion of an investigation, CFIUS submits a report and recommendations to the President.

The Securities and Exchange Commission collects little information helpful in monitoring PRC commercial activities in the United States. This lack of information is due only in part to the fact that many PRC front companies are privately-held and ultimately - if indirectly - wholly-owned by the PRC and the CCP itself. Increasingly, the PRC is using U.S. capital markets both as a source of central government funding for military and commercial development and as a means of cloaking U.S. technology acquisition efforts by its front companies with a patina of regularity and respectability.132

Back  |  Footnotes  |  Forward


pages 1 | 2 | 3 | 4

PRC Acquisition of U.S. Technology
pages 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9

PRC Theft of U.S. Nuclear Warhead Design Information
pages 1 | 2 | 3 | 4 | 5

High Performance Computers
pages 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10

PRC Missile and Space Forces
pages 1 | 2 | 3 | 4 5 | 6 | 7 | 8 | 9

Satellite Launches in the PRC: Hughes
pages 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9

Satellite Launches in the PRC: Loral
pages 1 | 2 | 3 | 4 | 5 | 6

Launch Site Security in the PRC
pages 1 | 2 | 3 | 4 5 | 6

Commercial Space Insurance
pages 1 | 2 | 3 | 4

U.S. Export Policy Toward the PRC
pages 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9

Manufacturing Processes
pages 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10

pages 1 | 2 | 3

pages introduction | A | B | C | D | E | F

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