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PRC Acquisition of U.S. Technology

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Illegal Export of Military Technology Purchased in the United States

The PRC is also taking advantage of the ongoing U.S. military downsizing. In particular, PRC representatives and companies in the United States pursue the purchase of high-technology U.S. military surplus goods.

In a single 1996-1997 operation, the Los Angeles office of the U.S. Customs service seized over $36 million in excess military property that was being shipped overseas illegally. Among the seized U.S. military surplus equipment on its way to the PRC and Hong Kong were:

  • 37 inertial navigation systems for the U.S. F-117 and FB-111 aircraft
  • Thousands of computers and computer disks containing classified Top Secret and higher information
  • Patriot missile parts
  • 500 electron tubes used in the U.S. F-14 fighter
  • Tank and howitzer parts
  • 26,000 encryption devices93

PRC representatives have been the biggest buyers of sensitive electronic surplus material. Defense Department investigators have noted a trend among the PRC buyers of this equipment: many had worked for high-technology companies in the PRC or for PRC Government science and technology organizations.94

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The PRC has been able to purchase these goods because, in its rush to dispose of excess property, the Defense Department failed to code properly or to disable large amounts of advanced military equipment, allowing PRC buyers to pay for and take immediate possession of functional high-tech equipment. Often this equipment was purchased as "scrap," for which the buyers paid pennies on the dollar.95

According to the U.S. Customs Service, many PRC companies that bid on military surplus technology intentionally used "American-sounding" names to mask their PRC affiliation.96

The PRC also has been able to exploit U.S. military downsizing by purchasing advanced technology, in the form of machine tools and production equipment from decommissioned U.S. defense factories, through industrial auctions.

For example, a multi-axis machine tool profiler, designed to build wing spans for the U.S. F-14 fighter, originally cost over $3 million but was purchased by the PRC for under $25,000.97

According to one industrial auctioneer, the PRC frequents industrial auctions because they offer accurate, well-maintained equipment at bargain prices and with quick delivery.98 Moreover, once the PRC obtains this equipment, there are ample resources available in the United States to upgrade the equipment to modern standards.

A California company specializing in refurbishing machine tools, for example, was approached in recent years by representatives of CATICs El Monte, California office. The CATIC representatives reportedly inquired about the scope of the companys refurbishment capability, including whether it could train CATIC people to rebuild and maintain the machines and whether the company would be willing to assemble the machines in the PRC. The CATIC personnel also reportedly asked if the company could convert a three-axis machine tool to a five-axis machine tool. They were told this was possible for some machines, and very often only requires replacing one computer controller with another.99

The U.S. company noted, however, that such a converted machine would require an export license. In response, the CATIC personnel reportedly said, rather emphatically, that they would have "no problem" with the export. The CATIC inquiries came at about the same time CATIC was negotiating the purchase of machine tools from the McDonnell Douglas Columbus, Ohio plant.100

CATICs discussions with this particular U.S. company did not result in either the training of CATIC personnel or the conversion of any machine tools. It is unknown, however, what other U.S. companies were approached with similar inquiries or whether any such inquiries resulted in technological assistance to CATIC or the PRC.

The Select Committee reviewed evidence from the mid-1990s of a PRC company that obtained U.S. defense manufacturing technology for jet aircraft, knowingly failed to obtain a required export license, and misrepresented the contents of its shipping containers in order to get the technology out of the country. The Clinton administration has determined that further information on this case cannot be made public.

PRC Purchase of Interests in U.S. Companies

A more recent method used by the PRC to obtain advanced technology from the United States is through the purchase of an interest in U.S. high-technology companies or U.S. export facilities. While this method does not yet appear to be prevalent, it has been identified in at least three instances.

In 1990, CATIC acquired an interest in MAMCO Manufacturing, a Seattle, Washington, aircraft parts manufacturer. In a highly-publicized decision that year, President George Bush exercised his authority under section 721 of the Defense Production Act of 1950 (also known as the Exon-Florio provision) to order CATIC to divest itself of the MAMCO interest based on the recommendations of the Committee on Foreign Investment in the United States (CFIUS), an inter-agency committee chaired by the Secretary of Treasury and tasked to conduct reviews of foreign acquisitions that might threaten national security.101

CFIUS concluded that:

  • Some technology used by MAMCO, although not state-of-the-art, was export-controlled
  • CATIC had close ties to the PLA through the PRC Ministry of Aviation (now known as Aviation Industries Corporation, or AVIC)
  • The acquisition would give CATIC unique access to U.S. aerospace companies

It is likely that the PRCs strategy in acquiring MAMCO was to give CATIC a venue from which to solicit business with U.S. aerospace firms, both to yield revenue and to gain access to aerospace technologies, in as much as CATIC has conspired to illegally acquire U.S. sensitive technology in the past. In addition, according to public reports, CATIC has been used for PRC arms sales to countries such as Iran.

The PRCs efforts to acquire MAMCO did not end with President Bushs divestiture order. CATIC requested CFIUS approval to satisfy the concerns expressed in President Bushs divestiture order by selling its MAMCO interest to the China International Trust & Investment Corporation (CITIC).

CFIUS noted that CITIC reported directly to the highest level of the PRC Government, the PRC State Council, and that CITIC did not have any colorable business rationale for wanting to acquire MAMCO. When CFIUS began questioning CITICs business purposes and its ties to the State Council, CATIC withdrew its request.

CATIC then filed another request, this time proposing that it meet President Bushs divestiture order by selling its MAMCO interest to Huan-Yu Enterprises, a PRC company that was owned by a PRC provincial government and reported to the PRC Ministry of Electronics Industry (now known as the Ministry of Information Industry), which in turn reported directly to the PRC State Council.

A CFIUS investigation concluded that Huan-Yu was a consumer, not a producer, of aerospace parts and had no legitimate reason to acquire MAMCO. The proposed divestiture looked to CFIUS like a "sham acquisition." Faced with intense CFIUS interest, CATIC again withdrew its filing.

In 1996, Sunbase Asia, Incorporated purchased Southwest Products Corporation, a California producer of ball bearings for U.S. military aircraft. Sunbase is incorporated in the United States, but is owned by an investment group comprised of some of the PRCs largest state-owned conglomerates as well as a Hong Kong company. According to a Southwest executive, the purchase will "take [Sunbase] to the next level" of technology.102 The Clinton administration has determined that additional information on this transaction cannot be made public.

China Ocean Shipping Company (COSCO), the PRCs state-owned shipping company which operates under the direction of the Ministry of Foreign Trade and Economic Cooperation and answers to the PRC State Council,103 attempted to lease port space that was being vacated by the U.S. Navy in Long Beach, California. The lease proposal led to a heated debate between Congress, which wanted to prevent the lease based on national security concerns, and President Clinton, who supported the lease. Legislation passed by both houses of Congress in 1997 barred the lease and voided the Presidents authority to grant a waiver.104

Other information indicates COSCO is far from benign. In 1996, U.S. Customs agents confiscated over 2,000 assault rifles that were being smuggled into the United States aboard COSCO ships.105 "Although presented as a commercial entity," according to the House Task Force on Terrorism and Unconventional Warfare, "COSCO is actually an arm of the Chines military establishment." The Clinton administration has determined that additional information concerning COSCO that appears in the Select Committees classified Final Report cannot be made public.

Methods Used by the PRC to Export Military Technology from the United States

Once the PRC acquires advanced technology in the United States, it requires secure means to export the information or hardware out of the country. Weaknesses in U.S. customs can be exploited to smuggle classified or restricted U.S. technology.

Diplomatic pouches and traveling PRC diplomats offer another avenue for illegal technology exports. Almost every PRC Government commercial and diplomatic institution in the United States has personnel who facilitate science and technology acquisitions.

The Select Committee believes that these means of communicating with the PRC could have been exploited to smuggle nuclear weapons secrets from the

United States.

These are some of the further means that have been used to illegally ship sensitive technology to the PRC:

  • In 1993, Wu Bin, a PRC national, was convicted of transferring night-vision technology to the PRC. Wu used the U.S. postal system to get technology back to the PRC. He mailed the technology he collected directly to the PRC, mostly through an intermediary in Hong Kong.106
  • The PRC uses false exportation documentation and has falsified end-user certificates. In one case reviewed by the Select Committee, the Department of Commerce reported that a U.S.-subsidiary of a PRC company used a common illegal export tactic when it falsely identified the machine tools it was exporting. The U.S. Customs Service also indicates that the PRCs use of false bills of sale and false end-use statements are common illegal export tactics.
  • The PRC has used at least one commercial air carrier to assist in its technology transfer efforts. In 1996, Hong Kong Customs officials intercepted air-to-air missile parts being shipped by CATIC aboard a commercial air carrier, Dragonair. Dragonair is owned by China International Trade and Investment Company (CITIC), the most powerful and visible PRC-controlled conglomerate, and the Civil Aviation Administration of China.107
  • A common PRC method for transferring U.S. technology to the PRC uses Hong Kong as the shipment point. This method takes advantage of the fact that U.S. export controls on Hong Kong are significantly less restrictive than those applied to the rest of the PRC, allowing Hong Kong far easier access to militarily-sensitive technology.

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