A Shell Game in the Arms Race

The New York Times
February 25, 2005

Washington – President Bush has enjoyed a surprisingly jovial reception in Europe this week, but there has been a serious point of contention: the desire of European countries to lift the 15-year ban on arms sales to China. Given concerns that the Chinese are willing to sell military, and perhaps even nuclear, technology to the highest bidder, Mr. Bush’s stance seems admirable. Unfortunately, his reasonable skepticism about China’s intentions hasn’t translated into a solid commitment.

For example, earlier this month Under Secretary of State John Bolton scolded China for allowing its companies to spread weapons technology, saying the embargo was just as important “today as it was in 1989.” Yet such talk is undermined by the State Department’s own failure to check Chinese companies’ reckless sales, and by weaknesses in American trade laws. In the end, China knows it has little to fear from Washington.

Case in point: Sinopec, China’s state-owned oil and gas giant, has subsidiaries that the State Department has hit with sanctions four times since 1997 for selling to Iran materials that could be used to make chemical weapons. However, because these subsidiaries do little or no business with the United States, the punishments – curbs on trade with America – were purely symbolic.

Sinopec itself has extensive ties with American companies, dealings Washington could block. Yet we refuse to punish it for anything its offshoots do. The reason is simple: American sanctions laws were written so that the government can hold a parent company responsible only if it “knowingly” assists a sale by its subsidiary, a burden of proof our intelligence agencies can rarely meet. Why? Because our government is largely unwilling to hurt the financial interests of American firms that do business with companies like Sinopec.

This laxity on our part leaves Sinopec free to sell whatever it likes to Tehran. In 1997, the same year the State Department first cited subsidiaries of Sinopec for “knowingly and materially contributing to Iran’s chemical weapon program,” Iran promised to increase oil exports to China by 40 percent. The following year, Iran chose the Chinese company over a host of European rivals to renovate oil refineries in Tehran and Tabriz, and to construct an oil terminal on the Caspian Sea. In 2001, when the State Department again censured a subsidiary for continuing sales to Iran of products useful for poison gas production, Sinopec won the right to explore Iran’s Zavareh-Kashan oilfield.

Then, last October, Sinopec pulled off its biggest coup: a $70 billion deal in which the Chinese company will buy hundreds of millions of tons of liquefied natural gas and will help Iran develop its Yadavaran oil field.

The fact is, the United States could lower the boom on Sinopec by cutting its ties to the American economy. In 2000, Sinopec raised some $3.5 billion by selling shares on the New York Stock Exchange, with Exxon-Mobil buying a large stake. Halliburton has since provided Sinopec a design for a new chemical plant; Bechtel has helped it build a petrochemical complex in China; and ConocoPhillips has aided it in oil and gas exploration.

And, believe it or not, in 2002 Sinopec received a $429,000 grant from the United States Trade and Development Agency. The purpose was to help an import-export subsidiary to develop an electronic procurement system. No matter that another Sinopec subsidiary, the awkwardly named Jiangsu Yongli Chemical Engineering and Technology Import/Export Corporation, was under sanctions for sales to Iran, or that Sinopec ranked among the 100 richest firms in the world according to Fortune magazine. Uncle Sam still wanted to help it market its products.

Sinopec is hardly the only beneficiary of American kindliness. Our weak laws have spared Sinosteel, China Aviation Industry Corporation I and II, and China North Industries Group Corporation, even though subsidiaries of these state-owned conglomerates have been sanctioned for selling missile technology to Iran and Pakistan. In large part, we can lay the blame for this charade on a compliant government and on political pressure from American companies, whose lobbyists work to ensure that federal sanctions laws are written to protect their corporate interests. This is a travesty, because cutting off access to our economy is the most powerful leverage we have, and our failure to use it shows we aren’t serious about punishing rogue states and their corporations.

Our laws need to be rewritten so that Sinopec and other companies that abet the spread of weaponry through their subsidiaries are kicked out of American capital markets, forbidden to deal with our companies and denied access to American goods and technology. Only then will they have an incentive to change their ways, and only then can our government honestly claim that it is trying to shut down the global arms bazaar.

Matthew Godsey and Gary Milhollin are, respectively, a research associate and the director of the Wisconsin Project on Nuclear Arms Control, which produces iranwatch.org.