China Flap Could Hurt High-Tech Exporters

Despite their powerful friends and lobbying prowess, America’s high-tech industries suddenly face an unprecedented challenge to the philosophy that has fueled a decade of growth in exports of militarily sensitive goods.

The burgeoning controversy over President Clinton’s decision to let a U.S. firm contract with China to send American satellites into space has heightened concern about business deals that might enable potential foes to upgrade their military capability.

In the Clinton era, such security concerns often have been overridden by arguments that high-tech exports are enhancing American competitiveness abroad and creating high-paying jobs at home.

But the furor over the China satellite deal almost overnight has elevated the visibility of an unlikely coalition of anti-proliferationists. The critics run the gamut, from liberal lawmakers like Reps. Edward J. Markey (D-Mass.) and Nancy Pelosi (D-San Francisco) to defense hawks like Rep. Duncan Hunter (R-El Cajon) and social conservatives like Gary Bauer, who heads the Family Research Council.

With inquiries gearing up in both chambers of Congress, the controversy has pushed erstwhile advocates of easier export rules, including House Speaker Newt Gingrich (R-Ga.) and Senate Majority Leader Trent Lott (R-Miss.), at least temporarily into the opposite camp.

By reigniting the embers of the 1996 Democratic campaign contribution scandal, the flap could produce damaging political fallout for President Clinton and Vice President Al Gore, a likely presidential nominee who has allied himself closely with technology leaders.

The controversy could have long-lasting repercussions if it gives rise to a comprehensive, critical review of export-control policies that have grown more lenient over the five years of the Clinton administration. Already, House votes to restrict satellite exports to China have jeopardized hundreds of millions of dollars in potential contracts. Industry executives are said to fear that evidence of wrongdoing could provoke a broader reversal of policy.

“This has been the era of no limits--and that’s what’s brought this on,” said Dov Zakheim, a former Defense Department official who is now chief executive of SPC International, a high-tech consulting firm. The congressional moves already taken, Zakheim said, are “going to hurt American exporters, no question.”

The controversy has caught fire in Congress partly because it features a cinematic story line that makes a complicated subject relatively easy to grasp.

Administration Debated Waiver

In February, the Clinton administration approved a special waiver authorizing Loral Space & Communications Ltd. to send a communications satellite to China for launch atop a Chinese rocket. Amid an industrywide boom, U.S. satellite makers have increasingly turned to lower-cost Chinese rockets as an alternative to the overbooked U.S. launch market.

After an internal debate, the White House approved the satellite deal, even though Justice Department officials were still investigating charges that Loral engineers might have illegally provided Chinese space officials with valuable technological secrets in a report analyzing the failed 1996 launch of a Chinese rocket carrying a Loral satellite.

Critics question whether the White House waiver reflected the influence of Loral Chairman Bernard L. Schwartz, who was the Democrats’ biggest individual political donor during the 1996 election cycle. The Clinton administration’s export policy came under renewed attack when former Democratic fund-raiser Johnny Chien Chuen Chung told a grand jury that he had passed $100,000 he received from a Chinese military official to Clinton’s reelection campaign.

The White House has vigorously denied any connection between the Loral satellite waiver and past campaign contributions, and Schwartz on Sunday denied seeking any favors for his company from Clinton. After the campaign fund-raising controversy erupted, the Democrats returned all the money that Chung had contributed to them.

When Clinton arrived at the White House in 1993, the United States had already begun easing rules that limit exports of “dual-use” technologies--goods thought to have potential military as well as civilian use. The old system was clearly antiquated. It barred exports of 1970s-vintage Apple II computers to the East, for example, as well as military-style buttons that could have been sewn onto Warsaw Pact uniforms.

Clinton, citing the end of superpower hostilities and the need to give defense-dependent manufacturers new opportunities, suspended the framework of the old system in 1994. He has unraveled remaining controls gradually in a series of decisions over the following four years.

Rules limiting computer exports were eased three times. Jurisdiction over most satellite deals was shifted from the State Department to the pro-export Commerce Department. Rules also have been loosened somewhat on products that encrypt communications signals.

Some Say Fears Exaggerated

Advocates of expanded exports say that most concerns about trade in high-tech goods are overblown.

Critics, for example, have fretted that U.S.-made supercomputers, which in theory could be used to design nuclear weapons, have ended up in the hands of the Chinese military. Export advocates note that the Chinese military is involved in dozens of nonmilitary and commercial activities and is eager to use advanced computers for such things as weather forecasting and civilian aircraft parts design.

“There’s a lot of gray area here that the critics won’t acknowledge,” said Howard Diamond, an analyst at the private Arms Control Assn. in Washington.

The United States leads the world in high-performance computers. If it fails to use its competitive strength to increase market share overseas, other developed countries will step in and take over, export supporters argue.

Similarly, advocates defend the practice of using Chinese rockets to launch American satellites. They say that such deals enable U.S. companies to compete more effectively in a commercial satellite race that promises to expand dramatically in the next few years. About 35 satellites were sent aloft on U.S., Russian, Chinese and French rockets last year; analysts say that the number could increase tenfold over the next decade.

To be sure, U.S. satellites contain militarily valuable technology, such as encryption products that might enable foes to tamper with Pentagon spy satellites. But the export-control system is designed to limit that risk. For example, U.S. military officials are required to keep watch over satellites while they are in the hands of the Chinese.

In pressing the case for looser export controls, industry officials stress the economic benefits. The growth rate of aerospace exports is three times that of the U.S. economy as a whole, they say, and export-related jobs pay 20% more than other jobs on average.

Precise figures on the dollar value of dual-use exports are not available, although analysts generally agree that it amounts to tens of billions of dollars annually.

In fact, there is no consensus on which goods should be counted as dual use. The potential list contains a bewildering array of computers, communications gear, advanced materials, space equipment and machine tools.

Battle Over Restrictions

U.S. technology firms have been pushing for relaxed trade rules since the end of the Cold War, and their clout with the Clinton administration soon became apparent.

In the fall of 1993, at a point when Clinton was preparing to impose sanctions on China, industry officials played a key role in changing his mind. Hughes Aircraft Co. Chairman C. Michael Armstrong, who had two satellite deals in the balance, told Clinton personally that the move would force the layoff of 5,000 workers and would only prompt China to do business with Europe.

As export policies were gradually relaxed, Congress was stymied by disagreements that kept it from even rewriting the law that governs the export of dual-use technologies.

Behind the scenes, however, representatives of some defense and intelligence agencies tried to slow the trend toward less restrictive rules. Dissident officials, for example, leaked information suggesting that dual-use technology was migrating to Asia and the Middle East and being used to improve the weaponry of rogue states.

Such complaints had little influence on administration policy--or the views of GOP congressional leaders.

Exporters also enjoyed strong support from Republicans such as Gingrich, whose Georgia district includes Lockheed Martin manufacturing operations.

As long ago as the early 1980s, Gingrich was endorsing efforts to allow U.S. firms to sell nuclear reactors to China.

Likewise, with Raytheon and Boeing facilities in Wichita, former Senate Majority Leader Bob Dole (R-Kan.) was attentive to industry arguments.

But the China satellite controversy has scrambled the politics of the issue.

Suddenly, Lott and Gingrich are talking less about sales and more about security.

Industry executives acknowledge that Congress may revisit the rules of dual-use exports if clear evidence of wrongdoing emerges.

Although he believes that congressional leaders “will eventually recover their sanity” and refrain from rash action, Joel Johnson, vice president for international affairs at the Aerospace Industry Assn., said that the pending congressional inquiries could change the equation.

Whether Congress cracks down on exports “depends on what comes out in the investigation.”