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Manufacturing Processes

page 2

Summary

Export Controls on Machine Tools

The PRC╠s access to foreign multi-axis machine tools and controllers has increased rapidly with liberalized international export controls.10

During the Cold War, the Coordinating Committee for Multilateral Export Controls (COCOM) established multilateral controls on exports to the Warsaw Pact allies and the PRC of machine tools that restricted linear positioning accuracy below 10 microns.11 However, the consensus for relatively strict export controls dissolved after the Soviet Union╠s collapse.

The post-Cold War control regime is embodied in the 1996 Wassenaar Arrangement, and the 1978 Nuclear Suppliers Group Agreement (NSG) governing the export of machine tools that can be used for nuclear weapons development. This current regime has a different focus, as indicated in the following table.

 

Table 2: Comparison of COCOM, Wassenaar Arrangement and NSG

Feature

COCOM

Wassenaar

NSG

Purpose

Control high-technology transfers to Communist countries.

Prevent destabilizing accumulations of arms and dual-use goods. Focus on threats from transfers of armaments and dual-use goods to destinations where the risks are judged greatest. Sometimes summarized by the phrase "preventing future Iraqs."

Restrict exports or reexports of items with nuclear applications

Extent of Export Controls

Communist Bloc

Countries of Concern

Non Members

Export Approval

Multilateral Consent

National Discretion

National Discretion

 

The Wassenaar and Nuclear Suppliers Group Agreement regimes have adopted similar control parameters for machine tools. Generally speaking, lathes and milling machines must be licensed for export if their accuracy exceeds six microns. Grinding machines are controlled at four microns. The Wassenaar Arrangement controls all machine tools capable of simultaneous, five-axis motion, regardless of machining accuracy. The Nuclear Suppliers Group Agreement exempts certain machines from this restriction.12

The PRC is not a proscribed destination for machine tools and other commodities under the Wassenaar Arrangement. This means that Wassenaar regime members treat exports to the PRC according to their individual national discretion. On the other hand, exports to the PRC of Nuclear Suppliers Group Agreement-covered items require individual validated licenses.13

Export Administration Regulations

The Wassenaar and Nuclear Suppliers Group Agreement parameters for machine tool controls have been incorporated in the U.S. Commerce Department╠s Commodity Control List of dual-use items (the list appears in the Export Administration Regulations).14 Machine tools are listed under Category 2 (Material Processing), Group B (Inspection and Production Equipment).15

The Commodity Control List further classifies machine tools █ as it does other dual-use items █ by an Export Control Classification Number that reflects the item╠s category, group, types of associated controls, whether the item is controlled for unilateral or multilateral concerns, and a sequencing number to differentiate among items on the Commodity Control List.16

The PRC╠s Machine Tool Capabilities and Foreign Acquisitions

Observers of the PRC╠s machine tool capabilities do not believe that the PRC can indigenously produce high precision, five-axis machines that approach the quality of Western products.

The U.S. General Accounting Office estimates that the PRC has the capability "to manufacture less sophisticated machine tools, but cannot currently mass produce four- and five-axis machine tools that meet Western standards." 17

According to a 1996 Defense Department assessment, however, the PRC╠s indigenous machine tool production capability is increasing markedly.18

The PRC has long sought to compensate for its deficiencies in machine tool technology by importing foreign systems. This approach has been facilitated by COCOM╠s dissolution and the resulting international relaxation of controls on machine tool exports.

Since the end of COCOM in March 1994, PRC military industries have acquired advanced machine tools that would be useful for the production of rocket and missile guidance components, and several five-axis machines for fighter aircraft and parts production. Five-axis machines were controlled under COCOM and are purportedly controlled by Wassenaar.19 U.S. industry sources note that:

China has proved able to buy [machine tools] from a variety of foreign makers in Japan and Europe. Between 1993 and 1996, fifteen large, 5-axis machine tools were purchased by Chinese end users █ all fifteen were made by Western European manufacturers.

Furthermore, Shenyang Aircraft purchased twelve 5-axis machine tools [in 1997]. These machine tools came from Italian, German and French factories.20

In addition, the PRC may be enhancing its ability to produce advanced machine tools through license production arrangements with Western manufacturers.

Other countries developing nuclear weapons and missiles have also apparently benefited from the PRC╠s ability to acquire advanced machine tools on the world market. As one recent Defense Department assessment noted, the PRC╠s "recent aerospace industry buildup and its history of weapons trade with nations under Western embargoes makes this increase in key defense capacity of great concern." 21

The Clinton administration has determined that specific examples of this activity cannot be publicly disclosed.

 

CASE STUDY: McDonnell Douglas Machine Tools

Findings of the U.S. General Accounting Office

The Select Committee has determined that the U.S. Government is generally unaware of the extent to which the PRC has acquired machine tools for commercial applications and then diverted them to military end uses.

The McDonnell Douglas case illustrates that the PRC will attempt diversions when it suits its interests.

At the request of Congress, the U.S. General Accounting Office in March 1996 initiated a review of the facts and circumstances pertaining to the 1994 sale of McDonnell Douglas machine tools to CATIC. The GAO issued its report on November 19, 1996.

The report can be summarized as follows:

    • In 1992, McDonnell Douglas and China National Aero-Technology Import and Export Corporation (CATIC) agreed to co-produce 20 MD-82 and 20 MD-90 commercial aircraft in the PRC. Known as the Trunkliner Program, the aircraft were to serve the PRC╠s domestic "trunk" routes. In late 1994, a contract revision reduced the number of aircraft to be built in the PRC to 20, and added the purchase of 20 U.S.-built aircraft.
    • CATIC is the principal purchasing arm of the PRC╠s military as well as many commercial aviation entities. Four PRC factories, under the direction of Aviation Industries Corporation of China (AVIC) and CATIC, were to be involved in the Trunkliner Program.
    • In late 1993, CATIC agreed to purchase machine tools and other equipment from a McDonnell Douglas plant in Columbus, Ohio that was closing. The plant had produced parts for the C-17 transport, the B-1 bomber, and the Peacekeeper missile. CATIC also purchased four additional machine tools from McDonnell Douglas that were located at Monitor Aerospace Corporation in Amityville, New York, a McDonnell Douglas subcontractor.
    • The machine tools were purchased by CATIC for use at the CATIC Machining Center in Beijing █ a PRC-owned facility that had yet to be built █ and were to be wholly dedicated to the production of Trunkliner aircraft and related work. McDonnell Douglas informed the U.S. Government that CATIC would begin construction of the machining center in October 1994, with production to commence in December 1995.
    • In May 1994, McDonnell Douglas submitted license applications for exporting the machine tools to the PRC and asked that the Commerce Department approve the applications quickly so that it could export the machine tools to the PRC, where they could be stored at CATIC╠s expense until the machining facility was completed. Following a lengthy interagency review, the Commerce Department approved the license applications on September 14, 1994, with numerous conditions designed to mitigate the risk of diversion.
    • During the review period, concerns were raised about the possible diversion of the equipment to support PRC military production, the reliability of the end user, and the capabilities of the equipment being exported. The Departments of Commerce, State, Energy, and Defense, and the Arms Control and Disarmament Agency, agreed on the final decision to approve these applications.
    • Six of the machine tools were subsequently diverted to Nanchang Aircraft Company, a PRC facility engaged in military and civilian production over 800 miles south of Beijing. This diversion was contrary to key conditions in the licenses, which required the equipment to be used for the Trunkliner program and to be stored in one location until the CATIC Machining Center was built.
    • Six weeks after the reported diversion, the Commerce Department suspended licenses for the four machine tools at Monitor Aerospace in New York that had not yet been shipped to the PRC. Commerce subsequently denied McDonnell Douglas╠s request to allow the diverted machine tools to remain in the unauthorized location for use in civilian production. The Commerce Department approved the transfer of the machine tools to Shanghai Aviation Industrial Corporation, a facility responsible for final assembly of Trunkliner aircraft. The diverted equipment was relocated to that facility before it could be misused.
    • The Commerce Department did not formally investigate the export control violations until six months after they were first reported. The U.S. Customs Service and the Commerce Department╠s Office of Export Enforcement are now conducting a criminal investigation under the direction of the Department of Justice.22

    The U.S. Government╠s Actions in Approving the Export Licenses

    On December 23, 1993, the China National Aero-Technology Import and Export Corporation (CATIC) reached an agreement to purchase machine tools from McDonnell Douglas. CATIC officials signed the purchase agreement with McDonnell Douglas on February 15, 1994.

    A May 27, 1994 e-mail message to Assistant Secretary of Commerce for Export Administration Sue Eckert from Deputy Assistant Secretary for Export Administration Iain Baird noted:

    We received 23 applications covering all of the material involved in this project two days ago. [McDonnell Douglas] plans on shipping to CATIC.

    We have a long history with CATIC, which has been the consignee on numerous occasions █ approved and denied based on licensing policies in effect at the time. CATIC was also the entity that attempted to buy the Machine Tool plant in the Northwest that was "denied" under the CFIUS process.

    . . . .

    Because of the sensitivity of this case, I think we should get it

    to the ACEP [Advisory Committee for Export Policy] ASAP. We are going to suggest to the other agencies that we forgo the 60-90 [day] review process and, instead, bring together all the relevant experts in a special [Operating Committee] meeting in 2-3 weeks to make a recommendation.

    If it is not agreed to approve the transaction at that point (and it won╠t be),

    we╠ll get the issue before the next ACEP.

    Stay tuned. 23

    Subsequently, according to a June 8, 1994 memorandum to Deputy Assistant Secretary of Defense for Counterproliferation Policy Dr. Mitchel Wallerstein from Acting Director of the Defense Technology Security Administration Peter Sullivan:

    An interagency meeting was held 7 June 1994. Defense, State and Commerce were in attendance; Energy and CIA were invited but did not attend.

    McDonnell Douglas representatives outlined their proposal. They would like closure on their license applications by 5 July 1994.

    The possibility of meeting that request seems remote. First, initial staffing within DoD was accomplished 7 June 1994, when we received the required documentation from Commerce. Second, all parties agree that the prospects for escalation within the [U.S. Government] seem high, due to the scope of the proposed program, and the precedence [sic] it may establish. We will keep you informed of additional developments.24

    Within the Defense Department, the McDonnell Douglas license applications were a cause of concern and internal debate. Specifically, the uniformed military services (Joint Staff) initially recommended denial.

    The Joint Staff based its recommendation of denial upon an analysis indicating a high probability that this technology would be diverted for PLA end use.25 Moreover, the Joint Staff noted that, "Even with DoD recommending approval with conditions, this would be a less-than-prudent export to the PRC. This is particularly true in light of Chinese involvement in the world arms market."

    The Staff of the U.S. Commander in Chief, U.S. Pacific Command, agreed, noting in an August 1, 1994 memorandum to the Joint Staff that it "concurs with the Joint Staff position to deny¸"

    The Licensing Officer at the Defense Technology Security Administration who was initially assigned responsibility for the McDonnell Douglas license applications also recommended denial. The Licensing Officer reiterated concerns as to CATIC╠s role in both civilian and military production, and stated that "[n]o quantitative data has been supplied by the exporter, which establishes a clear need for this equipment in China [the PRC]."

    Intelligence Community Assessments

    Because of concerns that the McDonnell Douglas machine tools would give the PRC manufacturing production capabilities in excess of what was required for the Trunkliner Program, the Department of Defense asked for information that would assist it in determining whether these machine tools could be diverted to production of PLA military aircraft.

    A July 27, 1994 Defense Intelligence Agency response to a request from the Defense Technology Security Administration provided an assessment.26 It warned that, while similar machine tools were available from foreign sources, there was a significant risk of diversion. There was also the additional risk that the PRC could reverse-engineer the machine tools, and then use them in other commercial or military production. This would be consistent with the PRC╠s practice of reverse-engineering other Western technology for military purposes.

    On August 9, 1994, the Defense Intelligence Agency provided a supplemental report explaining the results of its thorough assessment of the applicability of the McDonnell Douglas machine tools to three known PLA fighter aircraft programs, each of which incorporated stealth technologies. The report concluded:

    The establishment of an advanced machine tool facility presents a unique opportunity for Chinese military aerospace facilities to access advanced equipment which otherwise might be denied.

    Similarly, placing these machine tools in one facility would reduce the financial outlay needed to acquire duplicate advanced machine tools for multiple military aircraft programs.

    DIA . . . maintain[s] that the production capacity resulting from the McDonnell Douglas sale is above and beyond the requirement necessary for exclusive production of 20 MD-82 and 20 MD-90 McDonnell Douglas [aircraft], which is the stated end use in the export license application.

    In fact, recent press reporting indicates China [the PRC] has dropped plans to build 20 MD-82s and will limit future production to just 20 MD-90 aircraft.27

    The Defense Technology Security Administration had received information from informants in September 1993 █ prior to CATIC╠s agreement to purchase the machine tools, and a full year before the license was granted █ that CATIC personnel had visited McDonnell Douglas╠ Columbus, Ohio plant and videotaped the machine tools in use, a potentially illegal technology transfer.

    The Defense Technology Security Administration reported the information to the U.S. Customs Service, and its agents later paid a visit to the Columbus, Ohio plant. However, following the visit, the U.S. Customs Service determined that no further investigative action was warranted.

    During the interagency licensing process for the machine tools, the Defense Technology Security Administration also sought assessments from the Central Intelligence Agency and from the Defense Intelligence Agency, because of concerns that the PRC could use the McDonnell Douglas five-axis machine tools for unauthorized purposes, particularly to develop quieter submarines. Since the PRC wishes to enhance its power projection capabilities and is making efforts to strengthen its naval forces, the five-axis machine tools could easily be diverted for projects that would achieve that goal.

    The Defense Technology Security Administration received additional information from informants indicating that CATIC had provided the Shenyang Aircraft Factory, an unauthorized location, with a list of the Columbus, Ohio equipment that had been purchased from McDonnell Douglas.28 Circles around some of the items on the list, according to the translation of a note from Shenyang that accompanied the list, indicated that the Shenyang Aircraft Factory was interested in obtaining those items from CATIC.

    The Shenyang list was reportedly obtained from the discarded trash at a CATIC subsidiary in California.

    This list was viewed as proof that CATIC intended to divert the machine tools to unauthorized locations. These concerns were reported to the U.S. Customs Service in the summer of 1994.

    Back  |  Forward


COX REPORT

Overview
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

Recommendations
pages 1 | 2 | 3

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



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