Executive Summary
In mid-October, the U.S. Commerce Department began to implement a new program to reduce controls on the sale of militarily useful American products to China. For the first time, certain companies in China are being allowed to receive such products from the United States without obtaining an export license that would otherwise be required. The Commerce Department is selecting beneficiaries of this program in China on the ground that they are trustworthy–that is, that they are exclusively civilian and can be trusted to confine to peaceful use items that are also highly useful for military production or for making weapons of mass destruction. Freed from the requirement of an export license, the companies, known as “Validated End-Users,” will be able to import a range of controlled U.S. goods more quickly and easily, since U.S. officials will no longer review these shipments before they go out.
Of the first five companies approved, however, two (forty percent of the total) do not meet the selection criteria. They are affiliated closely to China’s military industrial complex and to companies that have been punished by the U.S. government for proliferation or other improper export behavior. Reducing controls on exports to such companies increases the risk that American goods will help China improve its armed forces, and that American goods will be sent illicitly to Syria or Iran.
One of the five companies is Shanghai Hua Hong NEC Electronics Company, Ltd. (HHNEC). This company is majority owned through a corporate chain by China Electronics Corporation (CEC), a Chinese government-owned conglomerate that produces a large array of military equipment, in addition to consumer electronics. In 2006, the U.S. Justice Department described one of CEC’s subsidiaries as a “technology procurement arm of the People’s Liberation Army,” and in 2004, the U.S. Defense Department described the subsidiary as a “critical element of the PLA’s C4I [command, control, communications, computers and intelligence] modernization effort.” Also in 2006, the U.S. State Department punished another CEC subsidiary for proliferation to Iran and/or Syria. 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.
A second company the Commerce Department approved is BHA Aerocomposite Parts Co., Ltd. It is partially owned by AVIC I, an instrumentality of the Chinese government that produces fighters, nuclear-capable bombers, and 90% of the aviation weapon systems used by the People’s Liberation Army. AVIC I’s 50% subsidiary and import-export arm, CATIC, is currently under State Department sanctions that punish proliferation to Iran and/or Syria–one of four such sets of penalties imposed on the firm since 2002 for proliferation to Iran or Syria. A second co-owner of BHA is the Boeing Company, which was fined last year after the State Department accused it of exporting controlled navigation equipment usable in aircraft and missiles to China without the required authorization (the fourth such fine since 1998). The third co-owner is Hexcel Corporation, fined last year by the Commerce Department after allegedly supplying controlled carbon fabric to China without an export license. In 2007, Hexcel was also fined after charges that it knowingly used defective fiber in bulletproof vests sold to U.S. law enforcement officers. It is difficult to see how these three owners of BHA can be trusted to obey U.S. export control laws.
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. CEC, through a firm that it controls, will be able to more easily acquire advanced equipment for manufacturing semiconductors, an essential technology for modern weaponry, that would greatly aid its ongoing production of radar systems for the People’s Liberation Army and its production of communications electronics for China’s air force and navy. CEC will also be able to more easily receive pressure transducers, which can help make semiconductors, but are also needed in large quantities for gas- centrifuge uranium enrichment. If CEC shifts some of these items to its subsidiary that has been supplying Iran, they could wind up at Iran’s uranium enrichment plant at Natanz, which the United States and its allies fear is moving Tehran closer to a nuclear weapon capability.
AVIC I, through a firm that it partially owns, will gain freer access to carbon fibers and composite structures, products that could aid its ongoing production of military aircraft, unmanned aerial vehicles, and other weapon systems. It will also gain greater access to high-performance machine tools, which could aid its production of China’s new Jian-10 fighter and its effort to improve China’s nuclear-capable B-6 (Hong-6) bomber.
Reducing the regulatory “burden” of export licensing—both for the government and for U.S. exporters—is a key motive for the Validated End-User program. When the Commerce Department announced the names of the first five companies approved, it remarked that they had accounted for eighteen percent of the total exports licensed to China in 2006. This factor may help explain why two companies as risky as HHNEC and BHA could be certified as “trusted customers” at the outset of a new program.
In view of the failure of the selection process to safeguard U.S. national security, the Commerce Department should suspend the Validated End-User program pending a Government Accountability Office (GAO) investigation. The program should not resume until an improved review process is in place, one that takes into full account the activities of companies associated with the firm under review, and one that rejects risky candidates such as HHNEC and BHA.
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In China We Trust? Lowering U.S. Controls on Militarily Useful Exports to China