- The Washington Times - Wednesday, December 17, 2008

EXCLUSIVE:

The U.S. government is taking steps to suspend a program that allows five companies in China to obtain sensitive U.S. technology without an export license, according to documents and interviews.

The move is driven by concerns that existing safeguards are inadequate to keep Beijing from gaining access to strategic military equipment.

The Commerce Department’s Bureau of Industry and Security recently drafted a new regulation, obtained by The Washington Times, that would suspend the so-called Validated End-User program. Since October 2007, the program has granted “trusted status” to select companies doing business in China.

The program allowed the companies to obtain dual-use technologies without the formal security checks required for an export license. Congressional investigators recently raised concerns that the program lacked safeguards, and that the Beijing government is refusing to allow U.S. officials to conduct full inspections at Chinese facilities to see whether companies are diverting U.S. high technology to the military.

A Commerce Department official, who spoke on the condition of anonymity because of ongoing diplomatic negotiations, told The Times that the Bush administration plans to suspend the program unless it can impose safeguards before it leaves office next month.

“This program will either be fixed or ended before Jan. 20,” the official said, adding that a decision will be made “in days, not weeks.”

China could avoid a suspension of the program by agreeing to U.S. demands for on-site inspections. The official said, however, that it does not appear likely that Beijing will make concessions before the Bush administration leaves office.

Chinese Embassy spokesman Wang Baodong did not address the end-user issue directly, but said China generally favors looser export controls in the interest of expanding trade cooperation with the United States.

“We believe that the U.S. releasing controls on exports to China conforms with the common interests of the two sides, particularly against the backdrop of the deepening and extending international financial crisis and the slowdown of the world economy,” Mr. Wang said in an e-mail.

The draft order states that the five companies are not to blame for the planned suspension. In fact, U.S. intelligence and security agencies approved the five companies’ participation in the end-user program last year, the Commerce Department official said.

Critics of the program, however, have raised concerns that two of the five companies involved have links to the Chinese military or to other companies that in the past were identified as involved in illicit technology acquisition and arms proliferation.

Government officials close to the dispute said China is refusing to permit on-site inspections by U.S. security officials, viewing it as an infringement of sovereignty. Chinese officials also oppose new on-site inspections because they would undermine Beijing’s effort to force the easing of all U.S. export restrictions, the sources said.

Additionally, China’s government was angered by new export control restrictions imposed last summer on the sale to China of U.S.-made dual-use goods, such as inertial navigation and underwater propulsion technology.

The Commerce Department official said concerns over China’s military buildup and aggressive efforts to obtain U.S. technology for its military prompted a review of the program. “The last thing we want is a program that is not fully backed [with security checks],” the official said.

Congress imposed economic sanctions on China after the 1989 Tiananmen Square crackdown. Those restrictions bar all military-related exports and are the basis for other export restrictions, including those imposed by the Commerce and State departments that limit transfers of dual-use technology that can be used both for military and civilian purposes.

The Designated End User program was designed to make it easier for U.S. businesses to sell products to China by designating companies that do not need to go through the often lengthy export licensing system.

But the Government Accountability Office, the auditing arm of Congress, concluded in a report in September that the program “has yet to produce the advantages anticipated by Commerce, and challenges with program implementation may limit Commerce’s ability to ensure that items shipped under the program are being used as intended.”

Gary Milhollin, director of the Wisconsin Project on Nuclear Arms Control and a critic of the program, said the five designated companies include two firms with ties to major Chinese military manufacturers, including those involved in making strategic bombers. “I think it would be better for our national security if this program didn’t exist,” he said in an interview.

A report by the Wisconsin Project produced in February stated that one of the five companies, Shanghai Hua Hong NEC Electronics Co. Ltd., is part of the Chinese state-run firm called China Electronics Corp. (CEC), which produces both military electronic equipment and consumer goods.

The Justice Department described one of CEC’s subsidiaries, China Electronic Systems Engineering Corp., as a “technology procurement arm of the People’s Liberation Army.” Additionally, the Pentagon in 2004 described the subsidiary as a “critical element of the PLA’s C4I [command, control, communications, computers and intelligence] modernization effort,” the Wisconsin Project report said.

The subsidiary also was sanctioned by the State Department in 2007 under the Iran and Syria Nonproliferation Act after the sale to Iran of a three-dimensional air surveillance radar system, the report said.

“Given this negative record, there is a clear risk that CEC will import sensitive American goods without a license through the subsidiary the Commerce Department has blessed, and then shift the goods to one of its other subsidiaries that is outfitting the Chinese army, or supplying Iran or Syria,” the report said.

A second company in China authorized to buy sensitive U.S. goods without a license is BHA Aerocomposite Parts Co. Ltd., a joint venture of the Aviation Industry of China, known as AVIC, China Aviation Industry Corp. I (AVIC I), the Boeing Co., and the Hexcel Corp.

AVIC produces fighters, nuclear-capable bombers, and 90 percent of aviation weapons systems used by China’s military, the Wisconsin Project report said.

The State Department has linked AVIC to illicit arms sales to Iran and Syria, according to the report.

Spokesmen for Shanghai Hua Hong NEC and BHA did not respond to e-mails seeking comment.

Mario Mancuso, Commerce undersecretary for industry and security, said in a speech Feb. 20 that the Wisconsin Project report made an incorrect “leap of logic” by linking the two companies to Chinese state-run entities that were sanctioned in the past. He said the ties were “very, very attenuated.”

The two companies’ activities and histories were examined in detail, he said. “The entire interagency community, the departments of Defense, State, Commerce, Energy, the National Security Council came to the unanimous conclusion that this was the right decision to make,” he said of the trusted end-user designation.

In defending the end-user program at the time, Mr. Mancuso said “of course we look at corporate affiliations” of Chinese companies and foreign partners. There is “no way to trade in China without interacting with some government affiliate,” he said. But in approving the five companies’ new import privileges, an interagency government review used both classified and unclassified assessments, he said.

The Wisconsin Project said it fears the lack of safeguards could give China a chance to misuse the technology transfers through relationships between the companies and their parents or subsidiaries.

“The new program, as it is being implemented, gives Chinese military parent companies the ability to gain access without an export license to virtually unlimited quantities of American products in categories that have long been restricted because of their military potential,” the report stated.

The GAO report also raised concerns about safeguards. Because China refused to permit on-site inspections, Commerce “as a stopgap measure … is attempting to conduct [validated end-user] on-site reviews under a 2004 agreement,” the GAO auditors noted.

The report said current Commerce end-use checks are inadequate and that more comprehensive on-site reviews are needed.

The GAO noted that China blocked all companies from hosting foreign governments for interviews or investigations related to export controls, without government permission.

Joseph A. Christoff, a GAO investigator who helped produce the report, said that if Commerce ends the program it will be following a GAO recommendation to halt the program until there is an agreement with China on inspections.

“This is the same recommendation that the department vigorously disagreed with when we made it three months ago,” Mr. Christoff said.

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