Technology Transfer to China

July 1987

NTIS order #PB86-113008 Recommended Citation: U.S. Congress, Office of Technology Assessment, Technology Transfer to China OTA-ISC-340 (Washington, DC: U.S. Government Printing Office, July 1987).

Library of Congress Catalog Card Number 87-619823

For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, DC 20402-9325 (order form on p. 245) Foreword

Momentous changes continue to occur in China. The high priorities now accorded economic modernization and improved global relationships present a sharp contrast to the years of the Cultural Revolution and earlier. Yet there is great uncertainty over China’s future course. China may be a constructive trading and strategic partner, or it may choose a more divergent path. U.S. decisions on technology transfer will be an important determinant of which path is followed and the implications for the world. This report responds to requests from the House Committee on Energy and Commerce and the Senate Committee on Banking, Housing and Urban Affairs for an assessment of the economic and strategic implications of technology transfer to the People’s Republic of China and of Congressional actions that would affect it. In addition, the Senate Select Committee on Intelligence endorsed the study request. The first phase of this study focused on energy. A Technical Memorandum, Energy Technology Transfer to China, was released in September 1985, and proved useful in the Congressional debate on the nuclear cooperation agreement. This document analyzes the factors in China that affect technology transfer and will be affected by it. The experiences of U.S. and foreign companies in the China market are described. We discuss the evolution of China’s economy, polity and foreign policy, and how different expectations suggest different policies for the U.S. Government. In the course of this assessment, OTA drew on the experience of many organizations and individuals. We appreciate the assistance of the project contractors who prepared much of the background analysis, the U.S. Government agencies and private companies who provided much valuable information, the Chinese institutions which facilitated the visits of our researchers, the project’s advisory panel and workshop participants who provided guidance and review, and the many additional reviewers who helped ensure the accuracy and objectivity y of this report.

Director

///.,. International Security and Commerce Program Technology Transfer to China Advisory Panel

Robert Dernberger, Chairman Director, Center fo~Chinese Studies The University of Michigan

A.DoakBarnett Arthur A. Klauser Professor, School for Advanced Senior Vice President International Studies Mitsui & Co. (USA) Inc. The Johns Hopkins University Stanley Lubman, Esq. Gareth Chang Heller, Ehrman, White & MacAuliffe President Charles Lucy McDonnell Douglas China Inc. Director, International Operations Chauncey Chu Corning Glass Works Vice President of Manufacturing Bruce Lusignan Wang Laboratories, Inc. Professor of Electrical Engineering Bo Denysyk Stanford University Vice President, International Affairs Leo A. Orleans Global U. S. A., Inc. China Consultant Basil K. Fox Library of Congress Bechtel China Inc. Professor William Parrish Admiral Thomas Hayward, USN (ret.) Director, Center for Far Eastern Studies President University of Chicago Hayward Associates Vaclav Smil Richard Holton Professor of Geography Professor, School of Business University of Manitoba Administration Roger Sullivan University of California President Morton Kaplan National Council for U.S.-China Trade Professor, Department of Political Science University of Chicago

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members. The panel does not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the report and the accuracy of its contents.

iv OTA Project Staff

Lionel S. Johns, Assistant Director, OTA Energy, Materials, and International Security Division

Peter Sharfman, International Security and Commerce Program Manager

Alan T. Crane, Project Director

Eric O. Basques: U.S. Commercial Experiences, Military Technology Martha Caldwell Harris: U.S. Policy, Multinational and Strategic Issues Richard Peter Suttmeier: China’s Context, Trends, and Foreign Policy

Contributors Craig Allen Matthew J. Bryza Joanne Seder Alan Shaw Franklin Zweig Administrative Staff Jannie Coles Cecile Parker Jackie Robinson

In Memorium Dottie Richroath

Contractors Thomas Fingar William A. Fischer Paul Folta Thomas W. Robinson Denis Simon Kathryn Van Wyk China Business Development Group Global Associates, Ltd. Midwest China Center Rock Creek Research, Inc. Science Applications International Corp. Workshop on China’s Future Course, July 28-29, 1986

Parris Chang Martin Lasater Professor of Political Science Director, Asian Studies Center Pennsylvania State University The Heritage Foundation John Davie Bruce Lusignan Economic Analyst Professor of Electrical Engineering Central Intelligence Agency Stanford University David Denny Ramon Myers Assistant Director of Research Curator/Scholar, East Asian Collection National Council for U.S.-China Trade Hoover Institution Professor June Teufel Dreyer Douglas H. Paal Director of East Asian Programs Director of Asian Affairs Graduate School of International Studies National Security Council University of Miami, Coral Gables Melvin Searles Michael Field Deputy Assistant Secretary for East Asia and Central Intelligence Agency the Pacific U.S. Department of Commerce Thomas Fingar U.S. Department of State James Stoll Defense Intelligence Agency Harry Harding Senior Fellow Jeffrey R. Taylor The Brookings Institution Chief Economist, China Branch Center for International Research Ambassador Arthur W. Hummel (ret.) U.S. Bureau of the Census Consultant Lt. Col. Eden Y. Woon, USAF Albert Keidel Office of Joint Chiefs of Staff President U.S. Department of Defense Rock Creek Research Acknowledgments Government Agencies Institutes The Department of Commerce The Committee on Scholarly Communication The Department of State with the Peoples’ Republic of China The Department of Defense The National Council on U.S.-China Trade The Department of Transportation The East-West Center The Export-Import Bank The American Society of Mechanical Engineers The Congressional Research Service The General Accounting Office Embassies and Foreign Governments The People’s Republic of China Companies Japan General Electric Federal Republic of Germany RCA-Astro Electronics France American Motors Corp. United Kingdom Hewlett Packard Control Data Corp. Foxboro Co. McDonnell Douglas Corp. The many companies which responded to the OTA survey.

vi Contents

Chapter Page I. Summary ...... 3 2.The Chinese Context for Technology Transfer: The Economic Issues . . . . 21 3. The Chinese Context for Technology Transfer: Strategies and Issues for Technology Imports ...... 39 4.The Role of the United States in Technology Transfer to China ...... 69 5. Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ...... 115 6. China’s Economic and Political Trends ...... 147 7. Strategic Implications of a Modernizing China ...... 167 8.U.S. Policy Choices...... 197

vii Chapter 1 Summary

Photo credit: Er{c Basques Bronze Crane in the Forbidden City in Beijing. The crane is a legendary symbol of long life, CONTENTS

Page China’s Need for Technology ...... 4 The U. S. Role in Technology Transfer ...... 6 Economic and Political Implications ...... 9 Strategic Implications ...... 10 U.S. Policy Choices...... 13

Figures Figure No. Page I. Processing Time For Referred (Closed Out) Cases ...... 15 Z. Average Processing Times: China Nonreferred All China Cases ...... 15

Table Table No. Page l. Anti-Submarine Warfare Technology ...... 12 Chapter 1 Summary

A billion people! If they each buy just one . . . If we give them technology, they’ll be just like Japan . . . In a country that can launch satellites, why is the plumbing so bad . . . All they want is technology, and they expect miracles from it . . . It’s completely different now. It’s hardly even Marxist . . . So where are all those Red Guards now? Aren’t they just waiting . . . If we don’t sell it to them, France or Japan will . . . They’ll pin down the Russians on the Eastern front . . . How do we know they won’t use it against Taiwan-or us . . . There’s a lot we can learn from them . . .

China evokes countless, often contradictory, ize and expand its economy. This need was one expectations and impressions. What is clear of the main reasons for ending its self-imposed is that China will become increasingly impor- isolation and for opening itself to the West in tant to the United States over the next sev- the 1970s. The United States benefits insofar eral decades. Its impressive economic growth as China is a strategic asset, if not an ally, in in recent years, if continued, will propel it into the global competition with the Soviet Union. the ranks of the newly industrialized economies Technology transfer helps build these ties and of Asia—Taiwan, South Korea, Hong Kong, increases China’s strength vis-a-~vis the Soviet and Singapore—but eventually on a much Union. It also can lead to important commer- larger scale. International trading patterns are cial ties and to the export of American prod- likely to change dramatically as China in- ucts. In addition, China is still a very poor creases both imports and exports. China will country, and technology transfer can be an im- also acquire increasing political influence in portant element in humanitarian efforts to help world affairs as its economic, technological, a billion people move out of poverty. and military strengths grow. U.S. interests in U.S. policy toward China for the past 10 Asia will be profoundly affected by China’s in- years has been predicated on the assumption ternational role, including its relations with the that closer relations are generally beneficial Soviet Union, Taiwan, and other neighbors. but that caution must be exercised in the trans- As important as these developments are, fer of advanced, sensitive technology. This pol- the U.S. ability to influence them is limited. icy has had some success: China has played China’s economic growth is much more depen- a more constructive international role, and dent on internal Chinese factors than on any many areas of common interest (reportedly in- U.S. actions, and China will play its interna- cluding sensitive intelligence gathering) have tional role on the basis of its own perceived been found. Trade has also become significant. best interests. What the United States can do With so much gained, some ask whether fur- is reinforce China’s constructive choices and ther steps are warranted—in particular, trends, and protect itself against the risk that whether the United States should make greater Sine-American interests will again diverge. efforts to help China modernize through technology transfer. One of the most important influences that the United States has is technology transfer. China However, the reasons for caution have not recognizes the need to acquire new technology been eliminated, and some observers feel that and new capabilities in its efforts to modern- U.S. policy has gone too far: that China is a

3 4 ● Technology Transfer to China — potential adversary, with an alien ideology and to design or produce goods or services. It may an unstable, unpredictable political system. or may not involve the sale of equipment, but Others see China as a newly industrializing it almost always involves exchanges of infor- country that is rapidly upgrading its produc- mation between people. Technology transfer tion technology and aggressively seeking inter- may involve the transfer of sophisticated national markets, becoming another, poten- equipment, training in its use and mainte- tially much more powerful, Japan or Korea. nance, and information on design or manufac- Both views suggest great caution with respect ture. Indirectly, it may include the teaching to technology transfer. of technology and management in universities. Commercial technology transfer can be accom- It is the intent of this assessment to put plished through sales of equipment or exper- these views into perspective and to contrib- tise, licensing agreements, direct sales of in- ute to a reexamination of U.S. policy toward formation, or investments in China. The U.S. China. The assessment evaluates the economic, Government transfers technology by granting political, and strategic implications of technol- access to information (e.g., the U.S. National ogy transfer to China in the context of China’s Technical Information Service) and through capabilities and evolution. It reviews the U.S. agency-to-agency agreements. commercial and governmental role in technology transfer, and the policies and practices of Technology transfer can provide some of the other countries. It asks whether the applica- keys China needs to meet its modernization tion of U.S. policy has been consistent with goals. Modernization, in turn, will enhance the overall guidelines, and analyzes policy op- China’s position as an exporter and will even- tions for Congress in the areas of export control, tually enhance China’s military strength. The trade promotion, and military cooperation. positive and negative implications for the United States can be estimated only imper- As used in this assessment, technology trans- fectly. The following sections summarize the fer is a process whereby a government, com- critical factors. pany, or institution provides the information necessary for China to improve its capability

CHINA’S NEED FOR TECHNOLOGY China has considerable technological capa- stantial impact on civilian production and bility already, especially compared with that exports. of other developing countries, but progress has been very uneven. Military industries in par- Much of China’s civilian technology is out- ticular have been favored with priorities for of-date, if not obsolete. The Seventh Five-Year investments and personnel. Some of these in- Plan (1986-90) has set the acquisition of tech- dustries have developed “pockets of excel- nology as a high priority, especially in the fields lence” that can compete in world markets. For of transportation, electronics and computers, example, China has built and launched its own telecommunications, and energy. The plan calls experimental communication satellites and has for importing much of this technology. One of offered to launch foreign satellites. The mili- the “Four Modernizations”- the policy pro- tary sector has now been ordered to help the gram for development–was to raise the level civilian sector, especially since many military of science and technology. The others—agri- factories are underutilized because of the re- culture, industry, and defense—also to a large cent lowering of defense budgets. If this ex- degree depend on improvements in technology. pertise can be used effectively, it may have a sub- Some of these improvements could be accom- -.

Ch. 7 —Summary ● 5 plished by the purchase of modern equipment pattern of decisionmaking that discourages without technology transfer, but China has efficiency and innovation, and gives the man- limited funds for imports. China could develop agement of a productive enterprise few incen- some technologies independently, but in gen- tives to improve. The economic reforms that eral this would be much slower and less effi- have been initiated since the Cultural Revolu- cient than acquiring them from abroad. tion have been directed at providing workers and management with incentives to increase China has ambitious goals, including a quad- output and quality and to improve economic rupling of the 1980 industrial and agricultural decisionmaking. Measures taken include in- output by year 2000. Progress so far has been creasing the autonomy of enterprises, allow- above that rate (about 7 percent), primarily being them to retain and reinvest earnings, free- cause a loosening of controls has freed a latent ing up some markets, loosening price controls, strength in the economy. New technology has and reducing the role of the Chinese Com- made only a minor contribution but will be of munist Party. Reforms have been successful increasing importance in the future. Goals for in agriculture but less so in industry. Delays economic growth will not be met without im- in price reform and opposition by those fear- proved technology to modernize industry and ing loss of their power have slowed improve- to alleviate constraints in energy, transporta- ments in efficiency. tion, and communications. China’s “Open Door” policy is closely related Technology transfer can foster not only an in- to economic reforms and is intended to facili- crease in production, but also an increase in the tate technology transfer and trade. Under this quality of products. Modern industrial equip- policy, economic zones and coastal cities have ment can easily surpass the quality levels of been opened to foreign investment, and joint the antiquated equipment typical of Chinese ventures and cooperative manufacturing have factories. Exposure to modern management been encouraged. practices, which technology transfer often entails, broadens the Chinese manager’s concepts To date, however, the results have been of what can be accomplished and how. Coupled somewhat disappointing. Investments have with these new tools has been the realization been lower than expected, and many problems of the need for quality in products if China is have been encountered, including high costs, to compete well enough in world markets to shortages of skilled workers and supplies, and earn the foreign exchange to continue buying unfamiliarity with quality and scheduling re- technology. quirements. Moreover, most enterprises are risk-averse, and the incentives for new capa- However, China’s modernization does not bilities may be weak if other constraints (e.g., yet appear to have reached the point where im- energy or materials) limit production in any provements in one sector lead to improvements case. Delays and uncertainties caused by the in- in others. There have, of course, been many tricacies of Chinese bureaucracy have been par- examples of successful assimilation of specific ticularly frustrating for outsiders trying to do technology transfers, but there have also been business. Although the Ministry of Economic many cases of failure or incomplete success. Relations and Trade (MOFERT) was estab- For instance, computers and other modern lished to facilitate trade, the process is still equipment sometimes remain unused because cumbersome and full of pitfalls. If new tech- of a lack of expertise or an adequate supply nology is sought, approval maybe needed from of a necessary input, such as electricity. both the local authorities and several agencies of the central government, depending on the The question is not whether China is capable enterprise, the priority of the technology, and of modernization, but whether it is willing to the cost. make enough of the changes required for continued, rapid modernization. Like other cen- The shortage of foreign exchange has become trally planned economies, China developed a critical over the past year, Unlike many de- 6 ● Technology Transfer to China — veloping countries, China has refused to go exports, even though infrastructure (e.g., elec- heavily into debt, and it has had many com- tric power, transportation, communications) peting requirements for its declining foreign inadequacies have been much more of a con- exchange reserves. Decisions on which tech- straint on the economy. nologies to import are now frequently biased Despite many problems, China’s economy by considerations of how much foreign ex- is growing very rapidly and that is likely to change can be earned rather than by how much continue. There is also evidence that the tech- the Chinese economy would benefit. Petroleum nology transfer process is improving, and that technologies have been particularly favored be modernization will benefit considerably. cause petroleum is one of the most important

THE U.S. ROLE IN TECHNOLOGY TRANSFER

Most technology transfer from the United for 2 months, though a compromise has States is from private companies. Although allowed restart. most U.S. firms approach the China market McDonnell Douglas has started coproduc- with the intent to sell products, many find they tion of 25 MD-82 twinjet transports with must include technology transfer if they wish the Shanghai Aviation Industrial Corp., to gain access to the China market. The varie- following a sale of 5 to China. The planes ty of experiences are illustrated by the fol- are being produced partially under the lowing examples: direction of Americans, with the first plane expected to fly in 1987. Training will ● General Electric won two large orders for also be provided for the Chinese in the locomotives in part by a willingness to United States. The planes are to be certi- transfer the technology of materials and fied for airworthiness by the U.S. Federal manufacture. G.E. is not setting up any Aviation Administration, which provides manufacturing facilities in China, though an explicit standard for quality control. an important part of the contract stipu- There have been no commercial satellite lated that China would produce several of telecommunication sales despite two sets the parts for the locomotives. The first of proposals by U.S. and European com- contract took several years to negotiate. panies. The Chinese received considerable The second needed only a few months, technology transfer for free as a result of largely because trust had developed these proposals, but that probably was not among the participants. G.E. was also their intent. Rather, China’s conflicting flexible in tailoring the locomotive design priorities and bureaucratic power strug- to Chinese requirements. gles, combined with the shortage of for- ● American Motors established a joint ven- eign exchange, have delayed a decision. ture with the Beijing Automotive Works China has launched two geosynchronous to produce AMC’S Cherokee model. Ini- communication satellites of its own de- tial production has used parts sent from sign, but both were relatively unsophisti- the United States. The intent was to in- cated. It is unlikely that China’s own crease the local content as rapidly as pos- products will be competitive for several sible, but China has been unable to pro- decades, even with imported technology. duce parts and supplies in the quantity The parallel effort on rockets is much more and quality required. As a result, costs are competitive, especially since the U.S. and high and export of the Cherokees has been European programs are temporarily in- impractical. China’s foreign exchange cri- operative because of accidents. sis interfered with the purchase of U.S. IBM has been very successful in selling parts, leading to a shutdown of the plant computers to China, but has not yet initi- Ch. l—Summary ● 7

Photo credft General E/ectr/c

A General Electric Co. locomotive pulls a train near the Great Wall. GE’s locomotive contracts have included technology transfer in the form of training and information

ated any manufacturing. Technology trans- One hallmark of these cases is the lengthy fer has been largely limited to training in negotiations. Wang started in 1980, and ne- the use of computers. IBM may be in a gotiations are only now coming to a conclu- unique situation to resist pressures for sion. The McDonnell Douglas agreement took investment in China because of its domi- 10 years. The satellite proposals started in the nant role in the international computer in- late 1970s, with no commercial results yet. dustry. China’s shortage of foreign exchange has be- Wang Laboratories is preparing at least come a critical problem in cases such as AMC one joint venture for the assembly and joint venture. The import of supplies and the eventual manufacture of microcomputers. repatriation of profits are difficult. Recent Chi- Included would be engineering, manage- nese regulations require foreign ventures to ex- rial and manufacturing expertise, soft- port or supply advanced technology in return ware diagnostics, and after-sales tech- for access to China’s market. In many cases, niques. This effort would complement however, the quality of the goods produced is Wang’s sales to China and its manufac- not up to international standards, which turing in other countries. However, Wang greatly limits exports. is concerned about China’s lack of experience with large-scale production and the In addition, taxes and unexpected expenses difficulty of maintaining quality control. have made China one of the most expensive places in the world in which to do business. A U.S. Government agencies are also involved company usually cannot hire its own employ- in technology transfer as part of an overall ef- ees; they are supplied by the state at a cost fort to cooperate with China and improve re- far higher than their actual salaries, and they lations. Abroad agreement on science and tech- cannot easily be replaced if they are incompe- nology cooperation was signed in 1979, and 25 tent or are transferred by the state. One of the protocols implementing the agreement in spe- main advantages of manufacturing in China— cific areas such as telecommunications, agri- low-cost labor—is thus lost. Chinese managers culture, space, environmental protection, also tend to be very cautious and frequently transportation, and student/scholar exchange seem to lack a spirit of innovation. have been signed. Three more are pending. High costs and bureaucratic rigidities are These contacts have facilitated commercial transactions and improved political contacts. particularly difficult for small companies to manage. Few can afford to have a representa- The presence of 17,000 Chinese students and tive in China or continue negotiations for ex- scholars (half of those sent abroad) in American tended periods. Small companies are also par- universities has been one of the most effective ticularly disadvantaged by complex export forms of technology transfer. Most students are controls. However, some small companies have in science or engineering courses. It appears established profitable niches, particularly in that most students leave with friendly personal the sale of specialized equipment. ties as well as an education, but it is not yet Overall, businesses report mixed results in clear whether this will lead to commercial or China. Some have lost money on early ven- political benefits for the United States. tures, in the hope of building a profitable, long- The United States has many advantages in term relationship, only to find China turning competing for the Chinese market (e.g., a repu- to competitors or dropping those imports al- tation in China for advanced technology, con- together. The investment climate is particularly nections through many Chinese-Americans, the poor. Foreign investment dropped by over 20 popularity of the English language in China) but percent in 1986. China’s leaders have recognized other countries seem to be doing relatively bet- that foreign companies are being deterred by ter in trade. Japan exports twice as much to many regulations and costs over which the Chi- China, and the nations of Western Europe col- nese Government has control, as well as by lectively exceed the U.S. level. There are sev- more intractable deficiencies in skilled man- eral reasons for this: American companies power, infrastructure, and resources. Signifi- historically have been less concerned with ex- cant steps have been taken to improve the ports, which have been very difficult during atmosphere for foreign business (e.g., preferen- the last few years because of the high dollar. tial tax treatment), but it remains to be seen However, government trade policy is also a di- whether these will be adequate. rect influence. U.S. export controls are time- It should be noted that some U.S. compa- consuming and laborious compared with those nies are doing quite well in China, particularly of other countries, and appear to be applied more those that are not involved in joint ventures rigidly. Moreover, Japan and West Germany or other manufacturing investments. Two-way have extensive foreign aid programs in China trade is over $8 billion and is still rising. Some that lead to considerable trade. Japan, France, companies recognize that it takes a long time Italy, and others provide extensive official to get established but are convinced that even- financing for exports. As discussed below, the tually the Chinese market will justify their pa- United States does not necessarily have to tience. Others are waiting for other markets emulate these tactics, but changes could be to improve, and anything sold to China will considered to improve the competitiveness of help bridge a gap, even if at little or no profit. American companies. . . —— —.

Ch. I—Summary ● 9

ECONOMIC AND POLITICAL IMPLICATIONS Technology transfer will have profound long- term impacts on China’s economic and political future. Some sectors such as consumer electronics will benefit considerably because the industry has a head start or because the technology is more easily assimilated. Past experiences suggest that others will find foreign technology to have little effect because the industry is unprepared. Dissemination of the management concepts of quality, efficiency, and timeli- ness may be the most important result of technology transfer. Improvement in the quality of Chinese products (necessary for them to compete in international markets) maybe the first general impact of technology transfer to be visible. It appears quite probable that China’s economic growth will remain high (above 5 percent and possibly over 7 percent). The goal of quadrupling the 1980 output by year 2000 should be attainable, though several factors could interfere. Foreign exchange limitations, energy constraints, and political instability could all limited markets for them in the West, and hold the growth rate down. China may have to turn to the Soviet bloc for trade and credit, a trend that is already ap- China’s exports should also rise rapidly over pearing. the next 15 years, but the competition with American products will not be great. The newly There is a strong relationship among mod- industrializing economies, including Korea, ernization, economic reforms, political changes, Taiwan, Mexico, and Brazil are more likely to and technology transfer. As long as modern- feel the competition. Direct competition with ization is a prime goal (as it has been for the either industrialized countries or less devel- last 10 years), most economic reforms made oped countries is less likely because the prod- to date will be retained. Modernization depends uct mix will be different. One exception may on technology transfer to achieve more effi- be American agricultural exports to Asia, which cient production, and further economic reforms could be hurt by rising Chinese surpluses. On will be needed to assimilate technology. How- the whole, however, China’s increased role in ever, the economic reforms are straining the the international economy should be beneficial political system, as evidenced by reactions to for the United States. recent public demonstrations. If political reforms do not reinforce economic reforms, mod- Several factors may slow China’s export ernization is likely to be slow. growth: rising protectionism in the developed countries may preclude growth in sectors, such Some of the more difficult economic reforms as textiles, where China is strong. Diminish- have yet to be implemented. Price decontrol is ing foreign exchange reserves could limit essential for rational economic decisionmak- China’s ability to invest in new productive ing, but it strikes at the heart of the concept capacity. If the quality of China’s products of the planned economy. Mobility of labor doesn’t improve sufficiently, there will be would increase productivity but would bring 10 ● Technology Transfer to China —————. unaccustomed social dislocations. Recent de- Taiwan and Korea. China would also be a less velopments suggest that there is a strong re- valuable trading partner for the West and sistance to reforms such as eliminating the con- could move closer to the Soviet bloc which trol of Communist Party cadres over factory presents fewer demands for hard currency and operations. If China insists on making ideol- quality products. ogy preeminent, it is unlikely to greatly im- However, successful reforms will create their prove its economic efficiency. own problems. Rising expectations of the pop- The leadership succession to Deng Xiaoping ulation and critical environmental problems is one of the most crucial questions. Virtually will make enormous demands on the leader- all of China’s leaders support economic reform, ship. Economic and political changes are cre- but there are major differences of opinion over ating an environment that will encourage a how fast and far it should proceed. Promoting pluralism of ideas and a liberalization that is technology transfer benefits the United States incompatible with traditional Communist Par- by strengthening the hand of reform-minded ty control. It remains to be seen whether the leaders who have favored opening up to the party can accommodate itself to these changes West, largely to obtain technology. and define a new social role, or whether it will attempt to slow modernization to preserve its If China’s modernization program turns out control. The present problems of the reform to be even a partial failure, there are likely to movement indicate that the party conserva- be negative implications for the United States. tives still have considerable power, but China’s A society disappointed and frustrated from un- political evolution is likely to exhibit many un- met expectations of economic improvement predictable shifts. would be more susceptible to political extremism, which could easily have ramifications for

STRATEGIC IMPLICATIONS Technology transfer will assist China’s mili- China’s military can benefit from foreign tary. The important questions are how much it technology in three ways: it can buy military will help and how much that matters to the technology directly, obtain civilian technology United States or its allies. The first question that has military applications, or develop its involves China’s military needs and internal own modern weapons systems as its economy capabilities, the second involves China’s for- as a whole modernizes. eign policy. The United States and other nations have At present, China’s military is large but un- offered to sell military equipment to China, in- sophisticated technologically. It has a great cluding the avionics package for the F-8 many tanks and planes, some missiles, nuclear fighter, but there have been few contracts be- warheads, and ships, and even a few nuclear cause China apparently cannot afford to buy submarines, but all are outdated and much less many weapons systems. Acquiring modern effective than U.S. or Soviet equivalents. China weapons would be the fastest way to a modern- is not a major power even regionally, as dem- ized military, but China does not feel the need onstrated by its ineffectual excursion into Viet- to be pressing enough to sacrifice its economic nam in 1979. China’s military capability is im- priorities. Instead, it prefers to import tech- proving, especially in the strategic forces nology rather than equipment, a rationale par- needed to deter a Soviet attack and in nontech- ticularly compelling for the military, which nical ways such as command structure and pro often needs very large quantities of each piece fessionalism, but the process will be gradual. of equipment. Ch, 1—Summary ● 11

The transfer of dual-use technologies has in- technologies, such as spectrum analyzers, the creased rapidly. While it is reasonable to assume electronic instruments used to identify the that China’s military has access to such tech- source of noise by analyzing the acoustic nology if it demands it, that does not mean that patterns. the military will be able to use it effectively. Un- Spectrum analyzers are sold frequently to til recently, civilian and military enterprises China, including sophisticated models that were kept separate, with the military being would be useful in ASW (though they would given priority on resources and talent. Mili- not play a prime role in U.S. ASW). However, tary factories were significantly more sophis- this technology would be extremely difficult ticated than civilian ones. This has changed over the past few years. Civilian factories have to reverse engineer. Moderate relaxation of enjoyed much more technology transfer and controls over exports of spectrum analyzers would give China access to more equipment appear to be modernizing faster. Both have ex- hibited considerable difficulty in assimilating to upgrade its ASW, but would not in itself seriously effect U.S. security interests. How- new technology. For instance, the United King- ever, any such decision has to be considered dom transferred the Spey jet fighter engine in the context of other technologies that are technology, but the military factory never was being made more available, China’s growing able to manufacture it successfully. Examples of successful reverse-engineering are very few. technological capabilities, its political intentions and the impact on U.S. allies. Chinese military factories produce large quantities of unsophisticated weapons that sell well It is likely that military needs are consid- in the Third World, but their production of so- ered when foreign technology is sought. The phisticated systems is very limited. Chinese National Defense Science, Technology, and Industry Commission reviews requests to Modern military systems are complicated and demanding. They must be designed by determine priorities, but no pattern of technology targeting is apparent. The civilian tech- teams of talented and experienced engineers and scientists representing a variety of dis- nology that China seeks has justifiable commercial uses. Considering China’s great need ciplines. Their manufacture calls for additional expertise and the availability of precision pro- for most technologies, the Soviet practice of targeting militarily significant technologies duction equipment and high-quality supplies. would seem to be irrelevant. There is little evi- China’s difficulty in assimilating advanced technologies suggests that more could be transferred dence that imported dual-use technology has without incurring much risk that China will use been a significant factor in China’s military them to produce sophisticated weapons systems, modernization. but this risk will grow over the years as China’s If China is to become a major power, it will technological capability improves. be through developing its own capabilities throughout the economy. Thus, in the long term, For instance, table 1 shows the major components and technologies involved in anti- technology transfer will have a great military submarine warfare (ASW), one of the key mis- effect if it spurs innovation, modernized thinking, research and development, and economic sion areas which would significantly enhance growth generally. However, China will not have China’s overall military capability. Critical ASW technologies should not be transferred the economic depth to become a superpower for unless there is an explicit political decision that several decades, especially considering the progress the United States and the Soviet Union will this would be in the U.S. national interest. Those technologies that are unique to ASW also be making. are clearly critical. Others are so readily avail- U.S. policy includes the principle of military able for commercial uses that no purpose would cooperation, but within certain limits. Many be served in trying to contain them. The diffi- dual-use technologies have been transferred be culty comes with the intermediate, dual-use cause any gains to Chinese defensive power 12 ● Technology Transfer to China — ..—

Table 1 .–Anti-Submarine Warfare Technology

Anti-submarine warfare (ASW) is the detection, identification, and destruction or disabling of an enemy submarine. ASW can be conducted from any suitable “platform” from the air, sea surface, or from another submarine, The basic functions needed to successfully conduct the ASW mission are the same for each platform: 1, Detection: by either acoustic or nonacoustic methods. 2. Classification: determination of the type of target. 3. Localization: target motion analysis and contact management. 4. Approach to the Target: closing in on the submarine to within range of one’s own ship or aircraft weapons. 5. Weapon Deployment (Launch): actual attack. 6. Evasion and Reattack: performed if necessary. 7. Related Functions: tactics such as mine avoidance, mine deployment, and surveillance performed as necessary. Although the basic required ASW functions listed above are always the same, the complexity and difficulty of each of these elements varies from case to case and from platform to platform. There is no one ASW technology. These functions require the implementation of many different technologies, and capabilities are required across a broad spectrum of engineering and science. Some technologies are critical in the sense that if their performance is substandard, the whole ASW system is significantly affected. Each increased level of sophistication will have a higher level of success in ASW, but there are many different levels that can be successful. Following are the critical technologies, grouped by commercial availability. a. Critical technologies not commercially available (easily Beamformer techniques controlled): Local area network design Propulsion design Spectrum analyzer design Low-noise machinery design Microelectronic design Sonar dome Beamformer design Transducer design High-speed graphic techniques Classification techniques/algorithms Color/bit plane graphics Acoustic correlation algorithms Shape charge techniques Contact motion analysis Fusing design Tracker design algorithms Magnetic anomaly detection Passive ranging techniques c. Critical technologies readily available commercially Weapon guidance (controls futile): High-density power-pack design Corrosion resistance Small-size high-power train design Ceramic design Exotic fuel design Elastomer technology Power engineering Machinery isolation Multipath processing techniques Spectral analysis algorithms b. Critical technologies with less sophisticated versions Acoustic performance prediction techniques available commercially (control is complex): Environmental sampling techniques Low-speed turbines High-speed math processor design Bearing design Minicomputer design Baffle design High-explosive technology

SOURCE Adapted from “Assessment of ASW Technology Transfer to the People ‘s Republ(c of Chtna, ’ contractor report prepared for OTA by G Iobal Associates, Ltd Alexandria, VA, December 1986 are likely to be of greater Soviet than U.S. con- ing the United States, it also has compelling cern. Military cooperation has been seen as a reasons not to launch them. However, other natural part of the growing relationship, but U.S. interests could be threatened more eas- concrete steps toward cooperation have been ily. In particular, as a regional power, China tentative. U.S. arms sales to China, while in- would be capable of putting great pressure on creasing, remain well below the level of sales U.S. allies in East Asia. elsewhere in Asia, such as to South Korea and Asia has been a region of relative stability Taiwan. and peace since the end of the Vietnam war, At worst, the current policy of technology with the exception of the Kampuchean prob- transfer to China entails only moderate direct lem. There are, however, tensions and several risk to the United States. China will not have potential flashpoints, specifically Korea and the strategic strength for serious threats for Taiwan. Military outbreaks could become of several decades. While China has a few inter- global significance, especially considering the continental ballistic missiles capable of reach- U.S. and Soviet interests in the area. The large- Ch. 1—Summary ● 13 .

scale Soviet military buildup and political initiatives are the greatest concerns to the United States. China shares this perception, which has become the basis for de facto military cooperation, though China is very unlikely to jeopard- ize its status as self-appointed Third World spokesman by an overt alignment. Some of China’s neighbors, however, may see China as a potential threat. Asian attitudes toward China are complex and vary from country to country. All share China’s desire to see a Vietnamese withdrawal from Kampuchea and are relieved to see China focusing on economic growth rather than exporting revolution. However, there are misgivings about the effects of U.S. technology transfer on China’s economic competitiveness and concern about China’s growing influence. Many Asian countries have large Chinese populations, com- pounding the uneasiness. Such feelings may be inevitable, considering China’s size, but special sensitivity by the United States may help minimize future problems. For instance, consultations with these countries on U.S. relations with China may provide reassurances of U.S. intentions. Photo credit: X/nhua News Agency A Chinese-developed communications satellite, which was launched into geosynchronous orbit in February 1986 on the Long March 3 rocket, China’s satellite technology is progressing rapidly, but it is still well behind that of the United States or Europe.

U.S. POLICY CHOICES U.S. policy currently supports the transfer cipient, the conditions of the sale, and other of technology to China, but within certain factors. limits set by national security considerations. The fundamental rationale for this policy, sup- The flexible approach has permitted the reported by four U.S. administrations, is that laxation of controls as relations have improved assisting China in its modernization will serve and has brought significant benefits to the U.S. interests. This general framework repre- United States. However, case-by-case export sents a compromise between optimism and controls are complex to administer (delays in caution, and permits a flexible approach to spe export licensing are often the result) and can cific policy choices. For example, advanced yield inconsistent decisions. dual-use technologies and arms can be ex- U.S. policy also includes some promotional ported on a case-by-case basis, depending on programs to foster exports of nonsensitive the nature of the technology, the Chinese re- equipment and technologies, but these pro- 14 ● Technology Transfer to China

grams are much less extensive than those of research confirmed that other countries are Japan, France, and other countries. There is generally able to reach a decision on even so- no U.S. aid program and government financ- phisticated dual-use exports in a few weeks, ing of exports is quite limited relative to other while the United States frequently requires countries. months or even years. In addition, only the United States unilaterally imposes controls on There is a broad consensus that overall pol- items not on the list of COCOM controlled icy is on the right track, but changes in empha- items, and requires that exports to allied coun- sis could be considered to improve the benefits tries, if m-exported to third countries, be again for the United States. One alternative theme subject to the original licensing. The latter re- would emphasize a more activist strategy of quirement has also caused considerable discord technological cooperation: explicitly using between the United States and other COCOM technology transfer to improve relations and members. trade. Another possibility would be to make better use of technology transfer as a bargain- It is difficult to quantify sales lost due to ing chip in U.S.-China relations. A third would export controls, because so many factors affect be to emphasize the multilateral aspects of ex- the competitiveness of U.S. firms in the China port control and trade with China. market. The green zone (items likely to be approved for export) has been expanded to cover It would of course be possible to pull back items in 30 categories on the Commodity Con- and further restrict technology transfer. How- trol List. Today, U.S. controls on exports to ever, in the current climate of improved U. S.- China affect primarily a few key advanced tech- China relations, such an approach would ap- nology sectors such as computers, telecommuni- pear to be counterproductive. It would alien- cations, precision instruments, and advanced ate China without denying it access to ad- manufacturing equipment—areas where the vanced technology, given the availability from United States might otherwise have a signifi- many other suppliers. If the worst fears are cant competitive advantage. In 1986, comput- realized, and China does revert to hostility, the ing equipment alone made up almost 80 per- present system can adapt to the change. cent of the value of export licenses approved. Regardless of whether or not a more explicit Thus, while U.S. controls are not the critical strategy is developed, a number of specific is- factor determining the overall volume of trade sues will be addressed by Congress. Most at- with China, delays can considerably affect tention has been focused on export controls. the advanced technology exports that China For advanced exports with military signifi- wants. cance, the United States maintains a system In recent months there have been signs of of extensive reviews to ensure that U.S. na- improved efficiency in license review. Average tional security is preserved. The Department processing time for China cases has declined of Commerce (DOC) is the lead agency, but the to 57 days in April 1987. However, referred Departments of State and Defense also par- China cases (those reviewed by agencies in ad- ticipate. Multilateral review through COCOM’ dition to DOC) continues to take almost 6 is also required on many such exports. months on average including COCOM review. U.S. industry has been critical of China ex- OTA found that 134 China cases valued at port controls, protesting lengthy reviews and $145 million had been in the system for more contracts lost to firms from other countries as than 1 year as of January 1987. Figures 1 and a result of more stringent U.S. controls.2 OTA’S 2 show the trends in processing time for re-

IThe Coordinating Committee for Multilateral Export Con- trols, an informal organization of the NATO countries plus Ja- the impact of U.S. national security export controls as they af- pan, which seeks to harmonize export controls. fect global competition: Balancing The National Interest: U.S. 20TA’s analysis focuses on controls on exports to China. A NationaJ Security Export Controls and Global Economic Com- recent study by the National Academy of Sciences examines petition (Washington, DC: National Academy Press, 1987). Ch. l—Summary ● 15

Figure 1.—Processing Time for Referred that are now controlled might endanger U.S. (Closed Out) Cases or allied security. For the near term, there are z few dual-use technologies that would make a big ~ g 200 Referred China cases difference in China’s military capability if trans- E .-.Z ferred. The discussion of ASW and spectrum L 150 :(U analyzers above illustrate how many technol- “: z Referred cases to all countries ~ ~ 100 - ogies must be mastered and coordinated to pro c)~ duce usable, sophisticated military systems. ~ %L 50 a) Supercomputers are one of the exceptions. & 1 1 I I i 1 1 I 1 Decisions about such a transfer must take into 1/85 3/85 6185 9/85 12/85 3/86 6/86 9[86 12/86 3/87 account abroad array of factors. A supercom- SOURCE Off Ice of Technology Assessment, 1987 puter is useful in a number of defense applications, such as satellite imaging, acoustical intelligence, and nuclear weapons design. China Figure 2. —Average Processing Times: has indigenously developed a supercomputer. China Nonreferred and All China Cases It appears to be significantly less capable than the Cray-2 or Cyber 205, but it indicates that China has the expertise to make use of ad- [ Green zone (nonreferred) China cases vanced computer technology. However, if an American supercomputer were exported, the Chinese would also need sophisticated software. Programs to simulate weapons design, for example, would not be transferred. Chinese scientists could produce usable software, but 1/85 3/85 6/85 9/85 12/85 3186 6186 9/86 12/86 3/87 a Average for (referred and non referred) all China cases they would probably be unable to produce such SOURCE Off Ice of Technology Assessment 1987 sophisticated software as that used in advanced U.S. weapons design. An American (or ferred and nonreferred cases. China cases com- Japanese) supercomputer would eventually be prise about one-third of the total for all coun- a significant asset for China for improving its tries pending over statutory limits in 1986.3 own technology and for solving problems, say, in missile accuracy. If China is allowed to buy There are several steps the U.S. Government a supercomputer (perhaps for weather forecast- could take to clarify export control guidelines ing as authorized for India), conditions could and improve licensing administration. The be applied, such as limiting access to the facil- process of license review could be made more ity or maintaining some U.S. control to pre- consistent by expanded use of computerized vent uses detrimental to U.S. interests. information on precedent-setting cases. Addi- tional technical analysis could be applied to de- Following the COCOM member country velop U.S. positions for an expanded green zone agreement to a liberalization of controls on spe and to develop sectoral approaches for technol- cific types of exports to China, the number of ogy transfer to China. At a broader level, im- U.S.-China cases submitted to COCOM de- proved mechanisms for resolving disputes clined from 287 in January 1986 to 187 in April among executive branch agencies would reduce 1987. However, the approaches to export con- processing times for referred cases. trols differ among the COCOM countries, and there is leeway for different interpretations of If policy makers wish to relax controls, the the China regulations within the discretion per- key question is whether exports of technologies mitted COCOM members. OTA’S research ‘Congress has established deadlines for license processing in indicated a need for further harmonization of the Export Administration Act. COCOM country policies. 16 ● Technology Transfer to China — — —.

OTA found widespread misunderstanding tinued differences over Taiwan may limit among businessmen in the United States and U.S.-China military cooperation in practice. abroad about multilateral controls. There is a tendency for all to suspect their competitors The United States has several promotional of circumventing the rules, but OTA found lit- programs that support trade with and technol- tle hard evidence to support claims that foreign ogy transfer to China, although these programs (COCOM) country governments are doing so. are not extensive nor coordinated into a comprehensive strategy as are those of Japan, for A major issue for the future will be whether example. These protocols for science and tech- to remove China exports from COCOM con- nology cooperation help set the stage for ex- sideration. This would announce full accept- panding commercial interaction. The Foreign ance of China as a Western trading partner, Commercial Service in the Department of Com- although the commercial implications for U.S. merce provides information and assistance to firms are uncertain. If China’s current trends U.S. businesses and helps potential buyers continue, this issue will be given serious con- learn of U.S. goods and services. The Dalian sideration. However, COCOM members will Management Center, a training program for be cautious because once review is ended, it Chinese managers, is supported by DOC. The would be awkward to reinstitute if China’s pol- U.S. Government also tries to provide a favora- icies later change. ble environment for trade and technology transfer through U.S. official discussions. Some exporters have complained that their dual-use technologies are subjected to more U.S. financing programs, including those of stringent controls and take longer to gain ap- the Export-Import Bank, have been compara- proval than military technologies. Sophisti- tively limited and have been guided by the gen- cated, state-of-the-art systems such as the F- eral principle that the private sector should fi- 8 avionics package embody some technology nance exports unless the project is of great that will be useful to China even if sold as an national interest or unless a competing foreign end product, with no intentional technology bidder is assisted by a national government transfer. Since the United States has made a with subsidized loans. The Overseas Private policy decision to help China’s military to this Investment Corporation (OPIC) has insured degree, dual-use exports should be judged by more than 20 U.S. investments in China the same standards. against political risk. Programs of both the Export-Import Bank and OPIC are, however, OTA finds that approvals of military and dual- being scaled back in some areas because of bud- use technology have not been inconsistent. The getary constraints. actual number of munitions cases reviewed has The Trade and Development Program (TDP) been much smaller than those reviewed for has been well received in China. TDP provides dual-use exports, and the rate of denial higher. project planning services, including feasibil- Inconsistency could be a problem in the future ity studies. These relatively modest invest- unless the two sets of reviewers are more aware ments can yield significant results. In 1982, of what their counterparts are doing. Informa- for example, a $440,000 TDP feasibility study tion about recent arms sales, for example, could of a hydropower project led to $20 million in be useful to those involved in review of related U.S. exports. types of dual-use cases. Since the United States has no formal aid pro- A number of factors suggest that U.S.-China gram to China and because of opposition by some military cooperation will continue to develop to the use of “mixed credits,” which combine offi- slowly. Taiwan is one of those factors. China cial credits and confessional financing, low-cost continues to object to U.S. arms sales to Tai- programs such as those of TDP provide an im- wan, while supporters of Taiwan carefully scru- portant tool for U.S. Government support at im- tinize the more limited U.S. sales to China. Con- portant early stages of projects. Ch. 1—Summary ● 17

China is a good test case for U.S. exports, —require clearer guidelines for prohibited and the U.S. Government could provide more dual-use exports; support. U.S. exports to China were lower in —require the development of plans for an 1986 than in 1980. Increases in exports of ma- enlarged green zone; chinery and equipment were more than offset —improve information exchange bet ween by decreases in agricultural products. Congres- munitions and dual-use reviewers; and sional debates focus on whether the United —establish a distribution license pro- States can maintain a policy directed at pro- cedure. moting free trade or whether protectionist re- 3. ensure that U.S. controls are in line with sponses will be forthcoming. Still another pos- COCOM allies, even if that means drop- sibility would be to develop special bilateral ping unilateral controls. understandings with China. U.S. policies af- Potential congressional actions on trade pro- fecting trade and technology transfer to China, motion include the following: however, must be part of an overall U.S. trade policy strategy to be effective over the long 1. expand existing programs, including TDP, term. Technology transfer is a long-term rela- the Foreign Commercial Service, and offi- tionship, and the participants could benefit cial financing; from clear and consistent signals about the 2. modify existing policy to: direction of government policies. —encourage the development of sectoral trade strategies, Specific actions on export control that Con- —review the science and technology progress could consider include the following: tocols and revise government support 1. improve the efficiency of export control as appropriate; and administration: 3. initiate an official development assistance —require Operating Committee reports to program for China. Congress on greatly delayed cases; Technology will continue to be a key element —require more timely information on case in the expanding U.S.-China relationship, yet status and types of exports approved; one not easily manipulated by governments. —support automated systems to improve Technology transfer can help create a construc- the efficiency of review; and tive, long-term partnership, but it can also cre- —set goals for faster licensing (e.g., 6 days ate new and, in some cases, unanticipated prob- for green-zone cases). lems. Policies aimed narrowly at either the Z. modify existing export control policy: control or promotion of technology transfer to —give DOC authority to approve licenses China without consideration of the larger con- unless formally appealed to the Presi- text of U.S.-China relations and Asian secu- dent, with automatic approval if cases rity could prove counterproductive. back up for too long; Chapter 2 The Chinese Context for Technology Transfer: The Economic Issues

Photo credit: Eric Basques

Shanghai-looking down at the Wusong River which leads into the all important Huangpu River. Shanghai, which means “up from the sea” is presently China’s busiest port with about half of all Chinese exports passing through this important trading and commercial center. CONTENTS

The Cultural Revolution’s Legacy ...... 21 The Chinese Economy ...... 23 Economic Structure...... 23 Economic Reforms...... + . +...... 26 The Seventh Five-Year Plan ...... 28 Economic Challenges...... 29 The Open Door Policy ...... + ...... 31 Chapter 2 The Chinese Context for Technology Transfer: The Economic Issues

China’s economic performance since 1949 Important changes in policies were begun has been characterized by both notable achieve- in the late 1970s, including the pursuit of mod- ments and serious failures. The China of 1949 ern technology from abroad. Since then, many was impoverished and in economic disarray af- Chinese policymakers have come to realize that ter years of foreign invasion and civil war. the development of technical capabilities faces Building an industrial economy with the full systemic problems that cannot be solved sim- spectrum of industries and achieving an aver- ply by changing the R&D apparatus or by image growth rate of 6 percent for 30 years were porting more foreign technology. Rather, major accomplishments. In addition, China changes on a number of different fronts are raised the average life expectancy from 36 to required. 67 years and feeds 22 percent of the world’s More recent policy changes have included population with 7 percent of the world’s ara- major reforms in the economy. China’s rela- ble land. However, major setbacks from eco- tionships with the international environment nomic mismanagement have also been experi- have changed dramatically with the initiation enced. China’s future economic growth will of the open door (kai fang) policy and the ef- depend at least as much on avoiding these forts it entails to attract technology and in- problems as on achieving great successes. vestment from abroad. Operational objectives Scientific knowledge and technical know- for technical capabilities have been redefined, how are key elements in China’s efforts to mod- and a number of other measures for altering ernize its economy and enhance national secu- the policy and managerial environment have rity. Technology played a role from the 1950s been taken. through the 1970s in the development of a com- Together, these initiatives, and the problems prehensive (albeit, not technically progressive) they are intended to address, constitute the industrial economy and an extensive research Chinese context for technology transfer. In this and development (R&D) system. By the late and the following chapter, the elements of 1970s, however, the Chinese were prepared to China’s quest for enhanced technical capabil- acknowledge that many problems with their ity are examined and analyzed. industrial and R&D systems were inhibiting the further development of the nation’s technical capabilities.

THE CULTURAL REVOLUTION’S LEGACY All Chinese leaders since the turn of the cen- the Maoist era (1949-76) of “socialist construc- tury, Communist or non-Communist, have tion. After decades of relative isolation from shared a desire to make China a strong world the capitalist world, China now seeks to par- power. However, the means to this goal have ticipate in the international economy, to invite changed radically. Since the end of the Cultural capitalist participation in Chinese moderniza- Revolution (1966-76), Chinese leaders have in- tion programs, and to secure access to the tech- troduced major modifications to the political nology of capitalist countries, all while retain- and economic institutions that evolved during ing its basic socialist character. These

21 22 ● Technology Transfer to China near-revolutionary changes in policy have been largely directed into capital construction in the implemented despite formidable obstacles, heavy industry sector, with the metallurgical, most of which were created or exacerbated by energy, and machine building industries receiv- the Cultural Revolution. In particular, the new ing about 65 percent of industry’s shares How- leadership had to deal with widespread politi- ever, the 6 percent average annual growth of cal disillusionment and remove from office the economy was not commensurate with these thousands of cadres who had risen to positions investments. Clearly, the Chinese had not of influence during the Cultural Revolution. gained the productivity benefits from investment that other countries realized. Returns on As economic growth and technological prog- investment were one-third of those in Japan ress again became high priorities, the post- and labor productivity was one-tenth. Energy Cultural Revolution leaders have had to con- consumption per unit of output was as much front long-standing problems. In particular, as five times greater than that in the advanced economic productivity was low and the rate countries, and while machinery exports made of growth declining. According to one report: up from 40 to 60 percent of the total exports . . . national income produced per 100 yuan of the latter, they were only about 5 percent of fixed assets averaged 34 yuan during the of Chinese exports.4 1976-79 period, compared with 52 yuan during the First Five Year Plan. Over one-third Thus, Chinese economic growth has been due of all state-owned enterprises were running largely to very high rates of investment infixed at a loss in 1976. In 1978, 43 percent of the capital over the years rather than productivity quality and 55 percent of the consumption improvements. Consumption and per capita norms in industry could not meet the best income remained low. There were, in short, im- levels set in the 1960s. ’ peratives for taking an approach that would result in more efficient use of inputs and Rates of productivity increases declined dra- 5 matically after 1965 and began to rise again progressive technological change. 2 only in the 1980s. The causes of this decline Another legacy of the Cultural Revolution are complicated. They include a poor incentive was the stagnation of the R&D and educational system for labor and management, rigid eco- systems. China’s research organizations, nomic planning, and serious problems in foster- universities, and science policy and manage- ing technological innovation. To some extent, ment agencies were terribly disrupted by the these factors are inherent to centrally planned Cultural Revolution. Training of new scientists economies, as discussed below. However, the essentially ceased, trained scientists were not Cultural Revolution not only disrupted prog- properly employed, and the infrastructure for ress that might have been made in that dec- research was neglected. This situation exacer- ade, it also induced in many educated Chinese bated the separation of research from produc- (those best equipped to solve the problems) an tion, a problem that had plagued Chinese R&D enduring fear of standing out by being too suc- since it was organized along Soviet lines in the cessful. 1950s. Although technological achievements Declining gains in productivity were not at- had been made, especially in the national de- tributable to a lack of investment. In fact, be- fense sector, the incorporation of new technol- tween 1949 and 1979 the average annual rate ogy into serial production was not widespread, of investment was 11.4 percent, which was and the strict separation of military-related ‘Ibid. ‘Elizabeth J. Perry and Christine Wong (eds.), The Political ‘Sun Zhenhuan, “A Study on the Question of an Integrated Economy of Reform in Post-Mao China (Cambridge, MA: Council Military-Civilian Industrial System, Jingji Yanjiu 5, May 20, on East Asian Studies, Harvard University, 1985), p. 4. 1985. In JPRS-CEA-85-080 Sept. 3, 1985, pp. 2-3. ‘Robert F. Dernberger, “China’s Development Strategy: In- ‘For a more complete analysis of these productivity problems, vestment Financing Needs and Sources, ” paper presented to See Gene Tidrick, Productivity Growth and 7’ecfmological the Fifteenth Sine-American Conference on Mainland China, Change in Chinese Industry, World Bank Staff Working Papers, Taipei, June 1986. No. 761 (Washington, DC: The World Bank, 1986). Ch. 2— The Chinese Context for Technology Transfer: The Economic Issues ● 23 . — — work from the civilian economy prevented the regional environment. Instead, new forms of latter from benefiting from the most advanced economic integration, which presumably would technology. be more economically rational, were possible.7 Moreover, as Chinese scientists traveled China in the late 1970s was thus experienc- abroad more widely in the early 1970s, they ing a convergence of forces for major redirec- began to realize how much further they had tion of policy. In this context China began fallen behind during the Cultural Revolution, experimenting with extensive reforms in the a very dynamic period for world science. economy, and the major opening to the out- China’s leaders found that they could not look side world that has become known as the open to the archaic R&D system to be the source door policy. This opening was based on the as- for new technology needed by Chinese indus- sumption that China’s modernization could not try or even the knowledge base for the effec- be realized without such interactions, an as- tive assimilation of imported technology.G sumption that differs markedly from Maoist self-reliance. Other factors also contributed to China’s readiness to experiment. Deng Xiaoping, who The combination of domestic reform and the emerged as China’s senior leader, clearly open door policy has profound impacts on tech- wished to see progress toward the achievement nology transfer to China. The open door has of the goals of the four modernizations policy entailed the invitation of foreign economic par- (with which he had been closely associated ticipation in Chinese development, and has led since 1975) in his lifetime. Second, China’s po- both to a major expansion of the amount and litical leaders could not ignore the successful variety of technology going to China and to economic performance of the Asian newly in- an increase in the variety of modes of trans- dustrialized countries (NICS) in the 1970s. fer. It has also allowed more than 35,000 stu- Third, the relative peace in Asia-combined with dents and scholars, mainly in technical fields, the evolving new relationship with the United to travel abroad.8 Because the reform program States- offered China the opportunity to re- makes it more likely that in the long run the think its domestic economic structure. In par- technology being imported will be effectively ticular, it offered the possibility to move away utilized, the open door policy and economic re- from the Maoist idea of organizing the econ- form reinforce each other. omy according to regional self-sufficiency, a strategy dictated by national defense considerations and perceptions of a threatening Asian —— . — .— ‘Perry and Wong, op. cit., pp. 4-5. ‘See Richard P. Suttmeier, “Overview: Science and Technol- 8For an analysis of China educational relationship with the ogy Under Reform, ” in U.S. Congress, Joint Economic Com- United States, see Committee for Scholarly Communications mission, China Economy Looks Toward the Year 2000, vol. with the People’s Republic of China, A Relationship Restored: 2 (Washington, DC: U.S. Government Printing Office, 1986), Trends in U.S.-China Educational Exchanges, 1978-1984 (Wash- pp. 199-215. ington, DC: The National Academy Press, 1986).

THE CHINESE ECONOMY Economic Structure agriculture. The greatest anomaly, however, is the service sector, which is relatively smaller The old development strategy left the econ- than that of almost any other country.’ omy unbalanced. China is a low-income country with a very large agricultural sector of low As Chinese leaders implemented their new productivity. Its industrial output per worker policies, they found that inadequacies in eco- is that of a middle-income country, largely be- nomic performance were traceable to funda- cause of massive investments in heavy indus- ‘The World Bank, China: Long-Term Issues and Options try, but this sector is still small compared with (Washington, DC: 1985). 24 Technology Transfer to China mental problems with the economic structure led to a more active role in economic manage- as well as to the disruptions caused by the Cul- ment for local Communist Party committees. tural Revolution. In the 1950s, the Chinese Policies followed during the Cultural Revo- economy was modeled on that of the Soviet lution cemented a significant role for local au- Union, and many of the features of a centrally thorities in the operation of much of the econ- planned economy (CPE) are still prominent. Thus, while many Chinese enterprises Three defining characteristics of such an economy. are under the supervision of the central gov- omy are that most of the means of production ernment, many others are under units of local (especially in industry) are owned either by the government. In some industries, strong compe state or by collectives, that the allocation of tition has developed between local and central resources is accomplished mainly by the deci- control. Shanghai’s competition with the Min- sions of central planners, and that prices there istry of Electronics over leadership in comput- fore have a secondary role in resource alloca- 4 ers and microelectronics is a prime example. 1 tion. The legacy of experiments with decentral- These characteristics, as in other CPES, be- ization and recentralization has had profound came translated into characteristic economic effects on the structure of and distribution of organizations of the state. Central planning influence within the Chinese economy. A large bodies (in China, the State Planning and Eco- component of the economy outside the state nomic Commissions) in principle oversee a plan is controlled by local authorities who have large number of specialized government min- 6 access to their own investment funds.1 This istries such as the Ministries of Machine Build- nonplan sector includes collective enterprises ing, Electronics, Astronautics, and Railways, and village industry. In recent years it has discussed later in this report, with responsi- grown more rapidly than the planned sector bilities for operating the economy. Under the and has come to represent between onefourth ministries are the enterprises, factories, and and onethird of the value of industrial output. transport and commercial organs that are the loci of the economic activity. To function ef- Even that part of the economy more clearly fectively, central planners must have abundant under the control of the central government and accurate information, the capacity to proc- fails to meet the ideals of central planning. In ess the information, and the confidence that particular, the production ministries have, over their decisions will be implemented without the years, accumulated powers over the con- distortions. However, neither China nor any trol of substantial material and human re- other CPE has met these conditions. In prac- sources (outside the national budget) that make tice, China’s CPE does not run as the formal direction and coordination by central planning design would suggest.~1 bodies difficult. The entrenched power of the ministries and the access to substantial re- China began experimenting with the opera- sources (which are outside the national bud- tion of a CPE in the late 1950s mainly by decen- get) enjoyed by local authorities make the goal tralizing decisionmaking to units of local gov- of coordinated central planning and plan im- ernment and taking a more collective approach plementation quite difficult. to factory management.12 These changes also locf. Robert F. Dernberger, “Economic Policy and Perform- ance, in U.S. Congress, Joint Economic Committee, China “Christine P.W. Wong, “Ownership and Control in Chinese Economy Looks Toward the Year 2000 (Washington, DC: U.S. Industry: The Maoist Legacy and Prospects for the 1980s, ” Government Printing Office, 1986), pp. 21 ff. China’s Economy Looks Toward the Year 2000, vol. 1, pp. “Cf., Ed A. Hewett. “Reflections on a December, 1984 Trip 571-604. to the PRC, ” in Janet A. Cady (cd.), Econom”c Reform in China, 14 Denis Fred Simon, “China’s Evolving Computer Industry: Report of the American Economists Study Team to the Peo- The Role of Foreign Technology Transfers, ” app. 2 in vol. 11 ple’s Republic of China (New York, NY: National Committee of this report, May 1986. on U.S.-China Relations, n.d.) pp. 33-39. 2 “Barry Naughton, “The Decline of Central Control Over In- ‘ A perennial issue in Chinese decentralization has been vestment in Post-Mao China, ” in M.D. Lampton (cd.), PoA”cy whether to decentralize to the factory or enterprise level (the Implementation in Post-Mao China (Berkley, CA: University intent of the current reforms) or to the level of local government. of California Press, forthcoming). See also, Wong, op. cit. —

Ch. 2—The Chinese Context for Technology Transfer: The Economic Issues ● 25

Photo cred(t Er/c Basques One of the many storage yards at the Dalian diesel locomotive factory-note the diesel engine crankshafts at the lower right. The Dalian plant produces the Dongfeng locomotive, regarded as China’s best,

It is therefore useful to think of the struc- for instance, has tended to place the immedi- ture of the economy in political terms, with ten- ate interests of the workers ahead of economic sions existing between central planners and efficiency. The Chinese enterprise has thus the ministries and between central and local been not only an economic unit, but also a unit authorities, Although it would be a mistake of government and a welfare institution. Not to underestimate the ultimate powers of the surprisingly, the emergence of modern enter- central planning authorities, there have clearly prise management has been slowed, with the been much less effective central direction, con- result that managerial deficiencies are now a trol, and coordination in the routine operation major obstacle to the realization of economic of economic institutions than had been as- objectives. 16 sumed. The Chinese bureaucratic morass and The case for new directions in economic pol- the delays in decisionmaking that inform the icy and changes in economic institutions, there tales of frustration told by foreign business fore, has been seen by Chinese leaders as a representatives must be seen in light of this compelling one. These changes, called a new institutional setting. “development strategy, ” include new sectoral Other effects of the economy during the Maoist period are also still being felt. The tra- “William A. Fischer, “The Transfer of Western Managerial dition of collectivism in factory management, Knowledge to China, app.” 5 in vol. I I of this report, May 1986. 26 ● Technology Transfer to China —. priorities, new sources of growth, and changes 5. Reforming prices gradually to reflect scar- in economic institutions and behavioral rules city values. that are part of the reform program. ’7 6. Reforming the banking system to make it more of an instrument for macroeco- Economic Reforms nomic control; the financing of enterprise activities is to be done through banks The reform of China’s industrial economy rather than through state appropriation. has its official expression in the “Decision on 7. Reducing the role of party committees in the Reform of the Urban Economy” announced economic management. at the Third Plenum of the Twelfth Party Con- gress in October 1984. However, the current Although official reports from China on the reform experience in Chinese industry has its reforms are quite positive, and reflect a com- origins in reform experiments begun follow- mitment by the leadership to continue its ing the Third Plenary Session of the Eleventh course, the implementation of reforms in in- Party Congress in December 1978. In addition, dustry has clearly been more difficult than in reforms in agriculture preceded the current in- agriculture. For instance, it is more difficult dustrial reforms and have enjoyed much suc- to provide incentives for greater individual ef- cess and popular support. fort in industry, and there are many more sources of opposition to reform. The intent of the economic reform efforts is to make workers, managers, and enterprises Without a rational price system, the efforts more accountable for their work and to increase to give enterprises more autonomy have led the quality of economic decisionmaking. Ac- to macroeconomic (as well as macroeconomic) cordingly, the reform measures adopted have distortions that have troubled the central gov- been aimed at the incentive structures at work ernment, which recognizes the importance of and at altering the loci of decisionmaking. The price reform but also understands that the key elements include: transition from administered prices to market prices is fraught with political dangers. Stu- 1. Increasing the autonomy of enterprises dent demonstrations in late 1985, ostensibly for making decisions about what to pro- directed at Japanese trading practices, were duce and how to produce it. also a reflection of the discontent felt by many 2. Allowing enterprises to retain more of urban residents with the increases in living their earnings, which can be used for in- costs occasioned by price reform. The regime vestment, for bonuses, and for improving therefore approaches the pace of price reform living and working conditions for workers. with some caution, anticipating at least a 5- 3. Allowing enterprises to buy more of what year period of price reform implementaion. they need and sell more of what they produce in marketplaces instead of through According to one recent analysis, the most state-administered commercial channels. dramatic changes in China have occurred out- The role of central planning will thus be side of the formally planned economy. This sec- changed, with some sectors of the econ- tor outside the plan has always existed in omy removed from the planning system China, but the reforms have encouraged its and the substitution of ‘guidance plans vigor and enlargement. I* Reportedly, growth for mandatory plans. in the rural industry sector in 1984 was 40 per- 4. Making enterprises responsible for meet- cent, climbing to more than 50 percent (if an- ing obligations to the state through the nualized) during the first half of 1985 (when payment of taxes instead of measuring overall industrial growth was more than 23 per- their performance and collecting their cent). Indeed, growth at this rate has become remissions to the state through shares of very troublesome for central policy makers be- profits. cause it has led to distortions in national in- “Dernberger, “China’s Development Strategy, ” op. cit. ‘“B arry Naughton, ‘‘Summary of Findings, in Cady, op. cit. Ch. 2— The Chinese Context for Technology Transfer: The Economic Issues ● 27 vestment and to the waste of raw materials. to local governments and relatively uncontrol- Central authorities have therefore attempted lable by the central authorities. Local levels to limit the rate of growth. have a strong inclination to use these resources to grow extensively. Thus, even though the Reforms have had much less success within central authorities have been able to curb in- the planned sector, particularly with regard vestment financed from the state budget, the to price reform. Overall, Chinese reform must level of total investment in the economy in be seen as involving these two sectors, with 1984 was 42 percent higher than in 1979, owing the outside-the-plan economy realizing many largely to investments made by local author- of the benefits of liberalization and putting g ities with extra-budgetary funds.l pressure on the within-the-plan economy to change. A crucial issue is how China manages Third, the experience of the Sixth Plan period the transitional period. It must keep pressure shows the need for strong central controls of on the within-plan sector to change, but until the economy. Given the institutional features then, there will be both increasing imbalances of the Chinese economy, its underdeveloped in the supplies of energy and raw materials go- market mechanisms, traditions of decentral- ing to the two sectors and uneven changes in ization, and irrational price system, rational wages and the supply of consumer goods, with economic behavior at the micro level can be the danger of serious inflation. Such dangers and often is irrational at the macro level. This invite the reassertion of central controls that, is particularly true given the shortages of if done clumsily, could vitiate the reforms. energy, raw materials, transport, and communications infrastructure. It should be reiterated that the efficacy of comprehensive central financial controls al- During 1986 the leadership backed away ways remains in doubt. Abundant resources from vigorous implementation of the reform remain in the hands of local authorities, giv- package. The retrenchment was undertaken to ing them the power to pursue investment strat- consolidate the reforms to date and to adjust egies that may not be in China’s best overall to the economic problems of 1985—the over- interests. These “extra-budgetary funds” have heating of the economy, difficulties in foreign over the years, made possible a close, but not trade occasioned by the rapid drawing down necessarily economically rational, relationship of foreign exchange reserves, and the drop in between local governments and the enterprises world oil prices, which exacerbated the foreign under their jurisdictions. Such relationships exchange problem. frustrate not only the center’s desires for These unexpected economic difficulties made greater macro-economic coordination, but also the politics of reform more complicated, the objectives of central reformers for greater strengthened the voices of the more conserva- enterprise autonomy. Viewed in this way, the tive members of the leadership who call for a reforms can be understood to be both centraliz- more cautious approach to reform, and pointed ing (to achieve more effective central control) to the possibility that the more difficult chal- and decentralizing (to provide for greater enter- lenges of reform have yet to be faced. Carry- prise autonomy and to free the economy of po- ing the reforms further for instance, through litical interventions from local governments). loosening controls over labor and capital will Thus, the experience of the Sixth Plan period be necessary to solve some of the problems the indicates three things about the Chinese econ- reforms have encountered. However, further omy. First, there is enormous energy residing reforms of this sort are also likely to engender in the economy that can be released with the more active political opposition, since they cut right incentives, but this energy is more read- more closely to the essence of a Marxist-Lenin- ily apparent in the outside-the-plan part of the economy. Second, there are very large amounts of financial resources in the economy available “Dernberger, “China’s Development Strategy, ” op. cit. 28 ● Technology Transfer to China ist regime.zo The conflicts in Beijing in early of 6.7 percent per annum, or an average an- 1987 appear to be over precisely these issues. nual growth in gross national product of 7.5 Further reform, therefore, becomes a challenge percent (which includes an average increase of to Chinese politics, and makes the question of 11.4 percent per year in the service sector). La- the future strength of the reform coalition a bor productivity is to grow at an average an- matter of importance. This question is further nual rate of 3.8 percent.23 discussed in chapter 6. The plan has a number of implications for technology transfer and foreign investment. The Seventh Five-Year Plan First, it sets economic priorities that will en- Economic policies initiated in the early 1980s tail the importation of technology. Major in- have clearly stimulated economic growth. In- vestments are called for in transportation, deed, the pace of growth has been such that telecommunications, energy, and semi-finished in 1985 central officials feared that the econ- and raw materials. omy was overheating. The new 5-year plan (the The plan also calls for the acceleration of the seventh) thus calls for more moderate growth development of new high-technology industry, while pushing for the full implementation of especially electronics and computers, and the the reform program. modernization of large, established industries, As proposed by the Central Committee of such as the automobile industry. The severity the Communist Party in September 1985,2’ and of the need for technological transformation approved by the National People’s Congress of established industry is reflected in one rein April 1986,22 the plan differs from earlier cent report: plans in deemphasizing specific quantitative . . . only 20 percent of the industries in China targets for the economy. Instead, it contains can measure up to standards of developed general principles for action and identifies countries in the past decade. Sixty percent areas for special attention. It is usefully seen are so obsolete that they need to be replaced as a plan for a transitional period, one that or upgraded. This explains the wide gap be- builds on the achievements of, and attempts tween China and developed countries in eco- to compensate for, the weaknesses of the Sixth nomic efficiency and productivity. Plan while looking ahead to the needs of the China consumes 210,000 tons of coal per 1990s. $10,000 in gross national product; the Soviet Union 120,000 tons, the United States 91,000 Thus, the Seventh Plan calls for the con- tons and Japan 37,000 tons .. .24 tinued implementation of reforms throughout the plan period. It calls for continued improve- The Chinese have placed great hope in the ment in living conditions and an increase of industrial use of microelectronics technology 4 to 5 percent in the average annual per capita (for control systems) for the technical trans- level of consumption. It is premised on a com- formation of industry. Altogether, there will prehensive rate of growth in Gross Value of be 600 major projects for the technological Industrial and Agriculture Output (GVIAO) transformation of existing industries. Priority in importing technology will be given to the technologies for infrastructure development, ‘“The dilemmas of incomplete reform, or partial marketization, in socialist systems are explored in Jan S. Prybyla, “Main- for establishing new industries, and for trans- land China and Hungary: To Market, To Market . . .,” paper formation projects that will contribute to presented to the Fifteenth Sine-American Conference on Main- China’s ability to earn foreign exchange. land China, Taipei, June 8-14, 1986. l ‘ See “Proposal of the Central Committee of the Chinese Com- The plan reaffirms the continuation of the munist Party for the Seventh Five-Year Plan for National Eco- nomic and Social Development, Xinhua (Beijing: Sept. 25, open door policy, assumes the continuation of 1986). In FBIS, Sept. 26, 1986, pp. K1-K32. “See “Excerpts From China’s Seventh Five-Year Plan (1986- 1990), ” Xinbua (Beijing: Apr. 14, 1986). In FBIS (Apr. 18, 1986), “Ibid. pp. K1-K37. “China Daily, Oct. 22, 1985. Ch. 2—The Chinese Context for Technology Transfer: The Economic Issues ● 29 foreign investment, and predicts a 40- to 50- midable. An enduring issue is the lack of in- percent increase in foreign trade over the plan novativeness in the Chinese industrial econ- period. China expects to increase exports in omy, a problem with clear implications for areas of current strength (textiles, petroleum, productivity. The shortage of available energy coal, nonferrous metals, farm sidelines, and remains a fundamental constraint on growth. traditional handicrafts) and hopes to increase The underdevelopment of transportation and its activities in the area of finished manufac- communications is severe. tures (especially machine tools, electrical prod- In 1981 the Chinese announced their inten- ucts, apparel, and processed foods). Exports tion to quadruple the size of the economy, are predicted to rise slightly more rapidly (8.1 measured in GVIAO, over the 1980 level by percent) than imports (6.1 percent). 2000. In addition, they called for raising the Clearly discernible in the language of the national income per capita by approximately plan is a sense of the interrelatedness of im- 5 percent per year, from $300 in 1980 to $800 porting technology and exporting products. by 2000. Two important issues are the sources Exports are necessary for paying for imports, of growth (extensive, through further heavy and China realizes that its export performance investment, versus intensive, through techno- in price, quality, and value added will depend logical change) and the constraints on growth on its ability to acquire and assimilate new (primarily, limited investment, energy, and technologies. transport and communications resources). The final area where the Seventh Plan’s con- In its recent analysis, the World Bank has tents pertain to technology transfer is the explored the growth prospects of the Chinese stress placed on the development of indigenous economy for the remainder of the century.2G scientific and technological capabilities (dis- While accepting that China may reach its quad- cussed in ch. 3) and the emphasis on human rupling goal, the bank study also considered resource development. The manpower devel- two other scenarios. In the first, constraints opment projections call for the graduation of on growth from energy, raw materials, and in- 2.6 million young people from regular institu- frastructure shortages and from managerial tions of higher education (as opposed to radio, difficulties hold growth below the quadrupling TV, correspondence, and night schools, which rate. The second alternative places less empha- are also to see significant increases) and of sis on physical constraints and foresees a ma- some 180,000 from graduate programs during jor expansion of the service sector. In this sce- the plan period. These figures represent in- nario, even though the GVIAO quadrupling creases of approximately 70 percent and 400 goal is not quite met, the per capita income percent, respectively, over the Sixth FiveYear goals are reached. The appeal of this balanced Plan period. In addition, there is to be a 110- scenario is that by bringing the service sector percent increase in the numbers trained in poly- more in line with that of other countries, China technic and vocational schools over the previ- can more efficiently create national wealth ous plan period.25 This ambitious human re- while requiring fewer of the scarce inputs sources development plan eventually should needed for the quadrupling approach. ease China’s shortage of trained personnel, a Chinese authorities have not publicly altered major obstacle to China’s ability to absorb the quadrupling goal in response to the World technology and foster domestic innovation. Bank analysis. However, they have called for a more active service sector, and the drift of Economic Challenges the reform program is supportive of service In spite of the promises of the Seventh Plan, expansion. At the same time, major efforts will China’s developmental problems remain for- be made to remove the main obstacles to the

15EXC~~Pt~ from china’s Seventh Five-Year plan. “The World Bank, op. cit. 30 ● Technology Transfer to China

Photo credit Er/c Basques

Slogans promoting increased worker productivity are visible at many Chinese plants. This one can be found at the Beijing Jeep Corp. joint venture plant in Beijing. quadrupling goal: inefficient management, assistance from foreign sources, China has in shortages of materials and infrastructure defi- recent years benefitted from loans from the ciencies. World Bank and foreign governments. In addition, from the late 1970s to 1984, China accu- China’s movement toward the quadrupling mulated a large foreign exchange reserve. As goal has so far been impressive. Quadrupling a result of a decentralization of control over the GVIAO by 2000 will require annual rates foreign exchange, however, reserves were of growth of 7 percent. During the Sixth Five- drawn at an alarming rate in 1985, leading to Year Plan period (1980-85), the economy grew a recentralization of controls and some rethink- at a substantially faster pace (averaging 11 per- ing of technology transfer strategy (discussed cent per annum between 1981 and 1984). Sub- below) in late 1985. Since exports of petroleum stantial growth has resulted from reforms in have been China’s leading foreign exchange the agricultural sector, not only leading to in- earner in recent years, the decline in world oil creases in the value of agricultural output, but prices in the first half of 1986 exacerbated the also stimulating new activities in sideline and foreign exchange problem and made it one of small rural industrial production. The more the more formidable constraints on growth in general relaxation of economic controls has the short run. also led to a boom in construction, to growth in other forms of local industry, and to the China will address these problems with a con- appearance of new forms of private and col- tinuation of the trend toward new techniques lective enterprise. of finance—such as an increasingly intimate relationship with foreign commercial banks China also faces the problem of finding the and the further encouragement of foreign financial resources, particularly foreign ex- investment—and a technology acquisition change, required to accomplish its develop- strategy. By the end of 1985, the foreign ex- ment goals. Having decided to seek financial change problem, the search for foreign invest- --

ChI. 2— The Chinese Context for Technology Transfer: The Economic Issues ● 31 ment, and the strategy for technology acqui- rupted if they are denied access to the foreign sition had become increasingly intertwined. exchange they expect. The increasing number of such occurrences in early 1986 led foreign In the face of the drawdowns on foreign ex- firms to question the attractiveness of invest- change, the allocation of foreign exchange to ments in China. Chinese organizations and enterprises increasingly became a function of their ability to earn China’s formidable economic problems it. This meant that some sectors, such as the would be extraordinarily difficult to resolve petroleum industry, had a greater claim on without technology and investment from scarce foreign exchange than did, for instance abroad. The importance of the open door pol- the electric power industry. This new foreign icy, therefore, is not likely to diminish in the exchange norm also created problems for Sino- short run, and the Chinese seem willing to con- foreign joint ventures, which the Chinese tinue to modif y the policy to improve the busi- hoped would bean important vehicle for tech- ness climate in China. Whether they are pre- nology transfer. Joint ventures typically must pared to take these modifications as far as the import equipment and components for a period foreign businesses would like remains to be of time after they start up, and may not be seen. It is important to consider some of the in a position to earn foreign exchange through features of the open door policy, and some of exports for quite some time. The operations its problems, in greater detail. of these enterprises can easily be seriously dis-

THE OPEN DOOR POLICY China’s open door policy and its reform pro- agement schemes, wholly owned foreign gram are mutually reinforcing. The political, enterprises, and compensation trade ar- economic, and science and technology reforms rangements; noted above will help China select and as- ● cooperative schemes with foreign interests similate foreign technology. Yet, the implemen- in natural resource surveys and exploita- tation of the reforms is clearly incomplete, tion; and and many problems remain with technology ● the gradual modernization of an infra- transfer. structure for interacting with the outside world, including changes in the banking Since the beginning of the open door policy system and the creation of new institu- in 1978, China has initiated a multifaceted tions such as the China International strategy to open itself to the outside world. Trust & Investment Corp. (C ITIC) and the The measures adopted include: China Coordinating Center for Business Cooperation, under the State Economic the establishment of four “special economic zones’ in which foreign investment Commission. is encouraged; To create an environment conducive to for- plans to make the the Fujian, Yangtze, eign investment and technology transfer, the and Pearl River deltas ‘‘economically Chinese authorities have also attempted to open’ regions; establish an entirely new legal framework for the acceptance of foreign investment and foreign participation in the economy. Laws loans from international organizations have been passed pertaining to joint ventures, (especially the World Bank), foreign gov- foreign contracts, company registration, labor ernments, and commercial sources; management, special economic zones, foreign the approval of a variety of forms of for- enterprise taxation, exchange control, offshore eign participation in the Chinese economy, petroleum exploration, marine environment including joint ventures, cooperative man- protection, trademarks, patents, and, most re- 32 ● Technology Transfer to China —.

cently, the activities of wholly owned foreign Despite these notable changes, reservations firms operating in China. Greater autonomy by foreign interests about the Chinese busi- for approving foreign investments has been ness environment have become more numer- given to local governments, and restrictions ous and more serious. Frequently mentioned on foreign banking operations have been loos- disincentives operating on foreign firms, ened.27 according to the U.S. Commerce Department, include: Thus, much has changed in China’s interactions with the world economy since 1978. . . . foreign currency restrictions making the Whereas China’s exports represented only 0.75 repatriation of profits uncertain, the over- percent of the world’s exports in that year, they valuation of the Chinese contribution to Sino- had grown to 1.25 percent in 1984, moving foreign enterprises, inflated labor costs, poor China from 32nd position to 16th in value of labor discipline, high manufacturing costs, exports. From the end of 1978 to the end of unpredictable customs treatment, undepend- able supplies of local materials, inadequate 1984, China received more than $17 billion in energy, transportation, and communications, foreign capital (of which $4 billion were direct a cumbersome bureaucracy, still unfavorable investments), which represented about 10.5 tax and accounting policies, an irrational pric- percent of the total investment in capital con- ing structure, uncertain access to a poorly destruction during the same period. The use of fined domestic market, a marginal return on foreign capital is expected to increase during investment, and difficult expatriate living the Seventh Five-Year Plan period, during conditions .31 which China expects to absorb US$30 billion, The ongoing economic reforms themselves $5 to $7 billion of which is to be foreign invest- 28 introduce uncertainties that make planning ment . more difficult for foreign investors now than The open door has also led to a substantial in 1979, when joint ventures were first author- increase in China’s acquisition of foreign tech- ized. Furthermore, the new laws are often very nology. Although significant questions remain general and ambiguous, largely untested, and about absorption and about how to measure inconsistently administered by bureaucrats flows of technology into China, there is little who have not prized legality highly in the past. doubt that technology transfer to China has A framework maybe in the making, but as yet been substantial. Between 1981 and 1985, for it is both fragile and incomplete.32 Foreign in- instance, China spent approximately $9.6 bil- vestments and technology transfers are less lion to import full sets of equipment and other than the Chinese expected. From 1979 to 1985, advanced technology. This represented a 69- the Chinese realized only 36.4 percent of the percent increase over the previous 5-year plan foreign investment pledged, in contrast to 70.8 period.29 Between January and June of 1985, percent of the foreign loans pledged during the 318 technology import contracts were ap- same period.33 proved by the Ministry of Foreign Economic To improve the investment climate, the Chi- Relations and Trade, more than double the nese promulgated new investment regulations number from the same period in the previous in October 1986.34 The regulations grant a priv- year. In dollar terms, the first 6 months of 1985 ——-— saw contracts worth $2.05 billion, compared “U.S. Department of Commerce, “People’s Republic of China, ” 30 Foreign Economic Trends and Their Implications for the Um”ted to $339 million from the previous year. States, FET 86-85 (Washington, DC: U.S. Government Print- ing Office, September 1985). ‘7Teh-pei Yu, “Foreign Capital in Mainland China, ” paper pre- ‘zSee, for instance, Ellen R. Eliasoph and Jerome Alan Co- sented to The Fifteenth Sine-American Conference on Main- hen, “China’s New Technology Import Regulations, ” The Ch”na land China, Taipei, June 8-14, 1986. Business Review, vol. 12, No. 6, November-December 1985, pp. 28Teh-pei Yu, “Foreign Capital, ” op. cit., p. 9. 36-40. ‘g’’ Foreign Trade Minister Views Trade Situation, ” FBIS, 33Teh-pei Yu, “Foreign Capital, ” op. cit., p. 17. June 10, 1986, p. K8. “’’Provisions of the State Council of the People’s Republic 3(’Xinhua, Aug. 18, 1985. In JPRS-CEA-85-088, Oct. 2, 1985, of China for the Encouragement of Foreign Investment’ p. 81. (promulgated on Oct. 11, 1986), China Dm”ly, Oct. 14, 1986, p. 2. Ch. 2— The Chinese Context for Technology Transfer: The Economic Issues 33 ileged position to export oriented and techno- port of it after 1960) to support domestic in- logically advanced enterprises established with dustrial development, and the strong emphasis foreign investment, and attempt to eliminate on self-reliance are all more consistent with an the arbitrariness that has surrounded the sup- import substitution approach than one that plies of inputs to foreign-invested firms and is export driven. the labor and rental rates that have been levied. However much China might want to emu- Although the views of the foreign business late the export promotion approach of the community were actively solicited in prepar- Asian NICS, there are reasons to doubt it will ing the regulations, some of the important con- happen soon. China is a large country with a cerns of the foreign investor—especially the historic internal focus and enormous domes- questions of access to the Chinese domestic tic needs and problems. China’s past strategy market and the repatriation of profits—have of self-reliance and regional self-sufficiency led apparently not been alleviated by the issuance to a dispersion of industrial projects. Poor of the regulations. transportation and communications hinder the Thus, from the foreign perspective, there re- access of the products of this inland economy main reasons to doubt just how open the open to the international trading centers on the door actually is. Import restrictions, bureau- coast. China’s politically powerful basic indus- cratic red tape, domestic subsidies, and un- tries, including machinery suppliers, regard the favorable tariffs combine to make a formida- Chinese domestic market as their preserve. ble protectionist regime. In part, the existence While they are not necessarily opposed to some of this regime reflects the legacy of China’s form of new economic internationalism, they past, the consequences of the interactions of have insisted that the definition of the open a closed economy modeled on the Soviet Union, door be on their terms. Furthermore, most Chi- Maoist principles of self-reliance, and the tur- nese products lack the quality and design to bulence of the Cultural Revolution. However, be competitive on world markets. it also reflects underlying contradictions in Finally, the most favorable era for pursuing China’s conception of the open door and am- an export-oriented development strategy may biguous attitudes toward the international have passed, at least for the immediate future. economy in general and foreign technology in China’s desire to expand its exports has al- particular (a subject pursued in greater depth ready caused trade friction, and the projections in ch. 3). of future Chinese exports would suggest that These underlying problems have several these may intensify. Unlike the Asian NICS, components and are inseparable from the often which were able to take advantage of especially irrational operation of domestic institutions .35 open markets in an industrialized world enjoy- First, there is a basic ambiguity about China’s ing exceptional prosperity, the Chinese inter- overall development strategy. Is it to be an est in an export-led development approach export promotion or import substitution strat- comes when the Western economies are shaky egy?sG Or is it to involve both, as the new in- and their domestic markets are increasingly vestment regulations seem to imply? Chinese subject to protectionist pressures. development since the founding of the People’s A range of policies pertaining to exchange Republic of China has clearly not followed the rates, tariffs, prices for export items, subsidies export promotion strategy. The relatively and export credits, import licenses, and tax ad- small export sector of the past, the use of for- vantages are involved in the shift from import eign technology (and the relatively little im- substitution to export promotion. The Chinese have begun to implement policies pertaining “Cf., Huang Fangyi, “ Analysis and Suggestions on China’s to most of these areas to accelerate export ex- Introduction of Foreign Technology and External Trade, ” op. cit. pansion. However, many of these are likely to ‘See, John B. Sheahan, “Alternative International Economic Strategies and Their Relevance for China, ” World Flank Staff cause negative reactions from China’s trading Working Papers, No. 759, 1986. partners and will complicate the question of 34 ● Technology Transfer to China

Photo credit Er/c Basques A Jeep Cherokee being assembled at the Beijing Jeep Corp. plant, a joint venture between the American Motors Corp. and the Beijing Automotive works. This modern assembly line serves as a model for efficient production techniques and improved quality control.

China’s re-admission to the General Agree- of this dilemma. Thus, relaxation of central ment on Tariffs and Trade. controls over foreign economic activity in the recent past has led to the rapid dissipation of A second major component of the open door foreign exchange holdings. At times, as dis- dilemma is the uncertain mixture of decentral- cussed in the following chapter, it has also led ization and centralization of foreign economic to irrational, duplicative technology imports. decisionmaking. This is related to, but not syn- onymous with, the uncertainties about the mix- The problem of policymaking for importing ture of market and planning elements, which foreign technology has both institutional and is one of the uncertainties of the economic re- conceptual dimensions. Chinese institutions form program. Chinese experience with the for the conduct of foreign economic relations open door policy and with decentralizing mar- reflect both the legacy of socialist foreign trade keting reforms since the late 1970s has pointed and the results of the decentralizations intro- to the danger of a loss of control over macro- duced since the late 1970s. This institutional economic policy as a concomitant of reform. legacy has locked China into an alternating On the other hand, the Chinese are also aware pattern of either too much centralization or too of the stifling of economic activity resulting little central control exercised in the national from certain forms of centralization. The say- interest. China has yet to find a formula for ing ‘giving rise to rigidity as soon as we exer- institutions that are able to set and enforce cise centralization, and giving rise to disorder a foreign economic policy that both serves as soon as we relax control’ captures the sense basic national interests (e.g., maintaining Ch 2— The Chinese Context for Technology Transfer The EcofIormc Issues ● 35 responsibility for the nation’s foreign exchange lack of a decisionmaking strategy for intrasec- holdings) and allows for decentralized decision- toral or intraindustry technology transfer. ” making in the service of economic dynamism. Such an intellectual formulation would then The institutional problem has a conceptual serve as a conceptual framework for the myriad or intellectual analog. China is, in effect, search- analyses, feasibility studies, and decisions ing for the intellectual foundations of an in- China must make about how to use its limited dustrial policy. Such an intellectual formula- resources to extract the maximum benefit from tion would spell out which sectors of the its interactions with the world economy. At economy deserve priority for export promotion present, although the Chinese recognize the or for the import of technology. Should priority need, such a formulation or strategy does not go to industries with high immediate export exist. potential (e.g., textiles or consumer elec- The following chapter discusses how some tronics), to basic industries such as steel or of these issues surrounding the open door pol- transportation, or to industries (e.g., advanced icy pertain more specifically to the technology electronics, robotics, communications) that transfer phenomenon. would allow China to leapfrog over phases of the product cycle (ignoring perhaps compara- —— tive advantage) and compete in high value- “See Geoffrey Oldham and Al~son M’at-hurst, TechnoloA:\r Transfer to the Chinese offshore Oil Industrj-, unput)Iish(d rt)- -added goods and services? The problem of an port, University of Sussex, Science Policy Research (1 nit. no intellectual formulation is also evident in the date. Chapter 3 The Chinese Context for Technology Transfer: Strategies and Issues for Technology Imports

Photo credit: Eric Basques Yu the Mandarin’s Garden in Shanghai is characteristic of the architectural style of the Ming and Qing Dynasties. The garden is divided into three parts, each separated by a white brick wall the top of which forms an undulating gray dragon. CONTENTS

Page Goals for Technological Modernization ...... 39 The Experience with Technology Transfer ...... 40 Indigenous Capabilities: The Example of the Defense Industry...... 42 The Decisionmaking System ...... 46 Perspective of the Enterprise ...... 48 The Government Perspective ...... 49 Financial and Trade Organizations ...... 52 Foreign Firms ...... 52 The Foreign Exchange Constraint ...... 54 The System in Practice...... 54 Issues of Assimilation and Diffusion ...... 58 Technical Manpower ...... 59 Management...... 60 Research and Development ...... 60 The Supply System ...... 61 Internal Diffusion ...... 62 The Prospects for Assimilation ...... 63 Conclusion ...... 64

Box Box Page A. The Structure of the Machine Building Industry ...... 43

Figure Figure No. Page 3. The Acquisition of National Technical Capabilities: A Revised View of the Elements Involved ...... 65 Chapter 3 The Chinese Context for Technology Transfer: Strategies and Issues for Technology Imports

In the post-Mao period, the Chinese leader- technology. The challenge for Chinese planners ship has consistently stressed the central role has thus been to develop a workable strategy of science and technology for China’s modern- and consistent plan for scientific and techno- ization. In 1982 Premier Zhao Ziyang said that logical development. After some false starts it would be impossible to reach China’s over- in the late 1970s, a coherent set of objectives all economic goals by year 2000 without ma- began to take shape in the early 1980s. jor contributions from modern science and

GOALS FOR TECHNOLOGICAL MODERNIZATION China has four categories of goals for tech- tation, and resource exploitation are targeted nology. The first is for Chinese industry to for acquisition and development. This part of reach at least the present Western level of tech- the strategy, by necessity, involves the activ- nology by year 2000. This will require a major ities of many Chinese agencies. effort at revitalizing established industries, in- Finally, the Chinese have identified a num- cluding a special, well-funded program of ber of technologies that they believe will be ‘‘technological transformation’ ~ishu gzu”zao), which is being administered by the State Eco- the basis for new high-technology industries— nomic Commission (SEC). electronics and computers (including advanced software applications such as CAD/CAM), bio- The second objective is to ensure that mod- technology, materials, robotics, lasers, and ern technologies are diffused to China’s rural space and ocean technologies. The Chinese ex- areas. The interest here is not only to continue pect these technologies will lead to major in- with the technological transformation of agri- dustrial advances and have targeted them for culture, but also to provide a modern techno- special attention in the hope of becoming com- logical foundation for burgeoning rural indus- petitive. try. China expects that the coming decades will see major movements of the labor force out The achievement of these goals will require the modernization of the domestic research and of agriculture and into rural industry and services. A special project, the Spark program, development (R&D) system. But the Chinese administered by the State Science and Tech- also realize this cannot be achieved without nology Commission, is designed to provide the transfer of foreign technology to China. It technological inputs into this major shift in is important to note, however, that the vari- the occupational structure. ous goals entail different approaches for acquiring the appropriate technology. Whereas A third objective is to give priority to the much of the technology desired is in the hands technologies needed to develop the country’s of foreign companies, some of it (e.g., trans- infrastructure and natural resource industries. portation and telecommunication technologies) Thus, a wide variety of technologies pertain- is in the hands of foreign governments or pub- ing to energy, telecommunications, transpor- lic corporations. In addition, the Western

39 40 ● Technology Transfer to China — university is the locus of much of the knowl- To gain access to these sources of technol- edge needed to launch high-technology or sci- ogies and use them effectively, the Chinese encebased industries. The sending of students have initiated programs of domestic reform and older scientists abroad to a Western uni- and have made extraordinary changes in their versity for advanced training, therefore, can approaches to foreign relations. This chapter be seen as an important channel for technol- examines the Chinese experience with technology transferal ogy transfer more specifically, beginning with an overview of China’s past history of tech- IThis issue has been explored in Leo A. Orleans, “Chinese Stu- dents and Technology Transfer, ” Journal of Northeast Asian nology transfer. Studies, vol. 4, No. 4, winter 1985; and in Richard P. Suttmeier, “Academic Exchange: Values and Expectations in Science and Engineering, ” unpublished paper presented at the Conference on Sine-American Educational and Cultural Exchange, Hono- lulu, HI, The East-West Center, Feb. 18-22, 1985.

THE EXPERIENCE WITH TECHNOLOGY TRANSFER Chinese experience with technology trans- Soviet relationship soured, and Soviet techni- fer in the 1980s is shaped not only by the cur- cal assistance was withdrawn. rent technology objectives discussed above The scientific and technical infrastructure and the overall economic modernization objec- developed rapidly in the 1950s, but then the tives examined in the previous chapter, but Chinese were forced to rely largely on their own also by historical experience. Since the late 19th century, the Chinese have realized the im- efforts for the further industrial development portance of modern technology from the West of the country until the opening to the West in the late 1970s. (Some foreign technology, but have been unable to reach an intellectu- 3 mostly for whole plants and equipment, came ally and culturally congenial relationship with from the capitalist countries after the Sino- it. As characterized by one foreign trade offi- Soviet split.) Some of the productivity prob- cial, who was trying to dispel these attitudes, lems noted in chapter 2 resulted from this ex- Chinese thinking often goes as follows: treme self-reliance, but another result was the After the Opium War, imperialist powers development of indigenous technical capa- carved up China. Our political and economic bilities. lifelines were controlled by foreigners, our markets were flooded with foreign goods, and From 1950 to 1960, China imported technol- our national industry was severely devas- ogy from the Soviet Union and Eastern Eur- tated. Such a period of national humiliation ope in support of 156 major industrial projects. is still fresh in our memory. Therefore people These were concentrated in such basic indus- always associate imports with the protection tries as metallurgy, machine building, trucks, of our national industry, and tend to think 2 coal mining, electric power, and petroleum. that the less imported the better. Some 400 items of technology were introduced, Also of concern has been the danger of over- with an approximate value of $2.66 billion. reliance on foreign help. The saliance of this These transfers were indispensable for the historic concern was reinforced at the end of timely establishment of new industries and the 1950s, when, after the Chinese allowed contributed to the rapid economic growth ex- 4 themselves to become quite dependent on So- perienced at the time. viet technology during the 1950s, the Sino- 3Huang Fangyi, “Analysis and Suggestions on China’s In- troduction of Foreign Technology and External Trade, ‘“ Asian Survey (forthcoming). ‘Ibid. Also, Robert F. Dernberger, “Economic Development ‘Wei Yuming, “On Open Door Policy, Trade With Japan, ” and Modernization in Contemporary China: The Attempt To Xinhua, Oct. 25, 1985. In FBIS, Oct. 29, 1985, p. A4. Limit Dependence on the Transfer of Modern Industrial Tech- (continued on next page) Ch. 3— The Chinese Context for Techrtology Transfer: Strategies and /ssues for Technology /mporfs ● 41

From the withdrawal of Soviet assistance in icy has discouraged the acquisition of complete 1960 to the outbreak of the Cultural Revolu- plants and equipment and has stressed the tion in 1966, the Chinese began relying more acquisition of know-how: “acquiring the hen on Japan and Western Europe for technology. and not just the egg, “ as the Chinese put it. Some 84 major contracts worth $280 million Thus, modes of technology transfer that offer were signed in this period. Industries targeted more intimate interactions with foreign tech- were metallurgy, chemicals and chemical fi- nical personnel have come to be preferred. A bers, and synthetic textiles. wide variety of instruments of transfer, including licensing, joint ventures, cooperative ven- From the early 1970s to 1978, China signed tures, wholly foreign-owned ventures, compen- some 300 contracts for foreign technology, sation trade, and the use of consultants and worth $9.9 billion. The emphasis in this period the procurement of technical services are be- was on complete plants in such industries as ing used. Much emphasis is being placed on steel, petrochemicals, and chemical fibers. foreign provision of training in contract nego- Many of the contracts from this period were tiations of SinO-foreign technology transfer. As concluded in great haste in late 1978 and were 5 a result of this change, a much greater propor- subsequently canceled or postponed. tion of the technology imported since the end It is interesting to note that China’s tech- of the 1970s has been “unembodied” technol- nology transfer experience with the Soviet ogy, or pure know-how.G Union was intimate in that it involved a whole In addition, China spends a greater percent- range of transfer experiences (including the image of its resources on importing technology portation of whole plants, the supply of Soviet than it did in the past. In the sixth Five-Year blueprints, the presence of Soviet technical ad- Plan period, for instance, $9.7 billion, or 15 per- visors in China, and the training of Chinese cent of the investment funds provided for in in the Soviet Union). China’s subsequent ap- the plan, went for foreign technology. ’ Two proaches to technology acquisition in the 1960s other changes are notable in this fourth period and 1970s were more at arm’s length, focus- of technology imports: Whereas past empha- ing on the importation of complete plants and sis was on technologies supporting the estab- sets of equipment without due attention given lishment of new enterprises, the emphasis since to the software, training, and advisory serv- the early 1980s has been on technologies to up- ices that often contribute to successful assimi- grade or renovate existing enterprises. Finally, lation. the locus of decisionmaking on technology A number of changes in China’s approach transfer has changed. As part of the reformist to technology transfer have been made since decentralizations, the central ministries and 1978. The Chinese came to the conclusion that a single foreign trade corporation are no longer the arms-length, whole-plant mode of trans- the principal decisionmakers. Instead, many fer was too costly and did not yield the know- other players have become active, including how they expected. Since then, Chinese pol- enterprises, local governments, and a myriad —.- —— —— of new trading corporations. rmlogy From Abroad and to Control Its Corruption of the Maoist Socialist Revolution, Technology and Communist Culture: The Socio-Cultural Impact of Technology Under Socialism, Frederic Fleron (cd. ) (New York: Praeger, 1977). ‘Ibid. ‘l{uang Fangyi, op. cit. ‘Ibid. 42 ● Technology Transfer to China

INDIGENOUS CAPABILITIES: THE EXAMPLE OF THE DEFENSE INDUSTRY The context for technology transfer cannot more than 200,000. In addition, the best facil- be understood without recalling the existence ities and equipment went to the national de- g of significant technological capabilities in- fense industry. digenous to China. These include an extensive Until the late 1970s, however, this privileged network of over 9,000 R&D institutes, includ- sector had been largely insulated from the ci- ing almost 120 in the Chinese Academy of Sci- vilian economy and civilian R&D system. It ences, a large capital goods industry, and a thus had little impact on the latter in spite of military-industrial complex that has enabled technological achievements in the defense sec- China to develop nuclear weapons and launch tor. China has produced military planes for 30 satellites. years but is only now starting to produce ci- Over the years, Chinese industrial invest- vilian air lines. It has designed and launched ment has been strongly biased toward heavy its own military satellites, but its telecommu- industry, resulting in the establishment of a nications satellites are still experimental. It large and comprehensive capital goods indus- mastered nuclear weapons technology in the try supported by a network of R&D institutes.8 1960s, but the first nuclear power station is At the center of the capital goods sector is the still under construction. vast machine building industry, the main do- In the post-Mao era, this situation has been mestic supplier of industrial technology and changing. As the Chinese contemplated the equipment and the chief alternative to foreign modernization of national defense, they con- technology. Included in the machine building cluded that over the long run the nation’s secu- industry (see box A) are China’s industrial as- rity could not be achieved without a vigorous sets for military production. and modernized civilian industrial economy. As part of the package of economic reforms, Defense modernization was therefore accorded the Chinese have initiated a significant policy the lowest priority position of the four mod- shift regarding the national defense industry. ernizations. Cutbacks in defense procurement The latter had for many years been the benefi- resulted in significant underutilization of de- ciary of priority investments of material and fense factories. The latter therefore have been human resources. Commenting solely on the instructed to turn at least some of their pro- ordnance and aeronautics industries (just two ductive assets to the service of the civilian of six main defense industry sectors), for in- economy. stance, two Chinese observers noted: The defense industry has become a vast em- In the 1950s and 1960s . . . the State as- pire of research and production units, but it signed the university graduates and the most is difficult to define their economic significance. outstanding scientific and technological work- Until recently, the Chinese rarely provided iners to the departments in charge of the na- formation on the defense industry, but as part tional defense industry, with the result that of the ‘‘civilianization’ program, more is com- there was a concentration of talented people ing to light. The extensiveness and degrees of in the industry. At the same time, the Minis- vertical integration of the defense plants is try of the Aeronautics Industry and the Min- depicted in a recent account of the “012 En- istry of the Ordnance Industry jointly owned a scientific and technological work force of terprise Group, ” an industrial complex of the —— ‘A useful analysis of the capital goods industry, including ‘Chen Siyi and Gu Mainan, “China’s National Defense In- its technological capabilities, is found in Zhang Renyu, ?’ech- dustry Faces an Historic Turning Point-Sidelights on Zhao nology Issues in the Capital Goods Sector: The Experience of Ziyang’s Meeting With National Defense Industry Specialists, the People Republic of China, United Nations Conference on Liaowtmg Overseas Edition, No. 6-7, Feb. 10, 1986. In F131S, Trade and Development, UNCTAD/TT/57, 1984. Mar. 5, 1986, p. K14. Ch 3— The Chinese Confext for Technology Transfer: Strategies and Issues for Technology Imports 43

Box A.—The Structure of the Machine Building Industry

The machine building industry has been reorganized to reflect its changing military and civilian responsibilities. The former Ministry of Machine Building has been combined recently with the Ministry of the Ordnance Industry (which also includes the China Northern Industries Corp. and produces instruments and meters, precision metal cutting and forging tools, diesel engines, bicy- cles, clocks, washing machines, sewing machines, oil equipment, magnetic heads, tapes, and discs) into the State Commission of the Machine Industry. In addition, there are special ministries of machine building (formerly numbered, but now renamed to reflect their new mixed military and civilian roles) listed below. Each of these has set up one or more of its own corporations to link it to the civilian economy and, particularly, to facilitate its entry into international trade. These ministries. their trade corporations (in parentheses), and their civilian product lines are listed below. The range of sample products gives some idea of the high degree of vertical integration that character- izes these ministries. 1. Ministry of the Nuclear Industry (China Nuclear Energy Industry Corp.). Products include meters and instruments, surveying and mining equipment, optical instruments, mechanical components, nuclear reactors, air filters, valves, and heat exchangers. 2. Ministry of the Aeronautics Industry (China Aero-Technology Import and Export Corp.). Products include transport aircraft, agricultural aircraft, lathes, motorcycles, transducers, switches, optical recorders, washing machines, air-conditioners, and technologies for the auto industry. 3. Ministry of the Electronics Industry (China Electronics Import and Export Corp.). Products include earth stations, navigation equipment, electronic materials, computers and peripherals, radios, TVs, other consumer electronics, and integrated circuit technologies. 4. Ministry of the Astronautics Industry (Great Wall Industry Corp., China Precision Machin- ery Corp., China Communications Satellite Corp.). Products include expendable launch vehicles, communications equipment, weather and earth resources satellites, telemetry, tracking and control equipment, microelectronic devices, and dishwashers. 5. China State Shipbuilding Corp. (China Shipbuilding Trading Corp.). Products include bulk carriers, container vessels, marine engines, seismographic and meteorological support services for offshore prospecting, yachts, and pleasure craft. SOURCE: Adapted from Wendy Frieman, “National Security Risks of Dual-Use Transfers to China,” app. 6, vol. 11 of this report. July 1986. aviation industry located in Shanxi Province. ’” of the largest assembly workshops of its kind The complex comprises of over 20 factories and in Asia. ’l empIoys more than 30,000 people, including Such complexes have been assumed by out- 4,1000 engineers and technicians. Included also siders to be characterized by a high degree of are 10,000 major pieces of equipment and one vertical integration. The full extent of inte- ——. . grated industrial capabilities is evident from )(1M &y o–f the defenserela~ facilities established in the 1960s and early 1970s were located in mountainous regions in the in- the diversity of industries to which the 012 terior, for national security reasons. This industrial location pol- complex now supplies goods and services under icy, sometimes referred to as the “third front construction’ pol- the current policy of aiding the civilian econ- icy, leaves China with a spatial distribution of important industries that is not economically rational under the current policies of integrating the defense industry with the civilian economy, The Chinese are taking special action to deal with these ‘‘Quan Zong, “China’s Large-Scale Aviation Industry Base third-front enterprises; a special office for them has been estab- Deep in the Mountain s-A Visit to the 012 Enterprise Group. ” lished under the State Council, and there is special mention of Liaowang Overseas Edition, No. 26, June 30, 1986. In F’BIS, them in the Seventh Five-Year Plan. July 15, 1986, p. K21, ff. 44 . Technology Transfer to China

Photo credft ” Eric Basques Assembly of the BJ-212 jeep at the Beijing Automotive Works. This Soviet designed jeep has been produced for decades— annual output is set at 24,000 units. The assembly line has been shut down while these workers are on their lunch break, which in China is often 2 hours. omy. Although one of the main products of the tics (MOA), not solely in the Ministry of complex is the Yun-8 transport aircraft, mem- Electronics Industry, where one might expect ber factories have produced such diverse prod- it. According to one report: ucts as light industrial goods (including copying Great progress has been made in the manu- machines), processing machinery, instruments facture and application of computers used in and meters, home appliances, and farm ma- rockets, satellites . . . All special-purpose com- chinery. The complex also cooperates with the puters for military use are made by China, textile, plastics, and food processing indus- Some computers have reached the advanced tries. A cooperative venture with the No. 2 Au- level of the early 1980s. At present this min- tomobile Factory has been begun to produce istry (MOA) has developed a system that minicars. incorporates research, production, and application of integrated circuits, whole sets of com- The degree of vertical integration in the de- puters, and peripheral equipment and soft- fense industry and the privileged quality of this ware. It is now capable of annually producing sector in the past may mean that there are 5,600 microcomputers, and small and medium- “pockets of excellence’ ‘or special competence sized computers, as well as 5 million integrated which will, under the new policies, begin to circuits. It has established three bases for pro- have more of an impact on the economy.’2 For ducing integrated circuits, and has put more instance, some of China’s more advanced tech- than 2,000 computers into operation. ’3 nological competence in computers and elec- “Beijing, Xinhua, June 13, 1986. In FBIS, June 30, 1986, tronics may be in the Ministry of Astronau- p. K33. In January 1986, a U.S. delegation attending a science policy conference in China, which included a member of the OTA 12 Denis Simon, “The Challenge of Modernizing Industrial staff, visited a MOA facility in Lishan, Shaanxi province, where Technology in China: Implications for Sino-U.S. Relations, ” 3-micron circuits were being produced. The facility was in tran- Asian Survey, vol. 26, No. 6, April 1986, pp. 420-439. sition to civilian commercial sales. — —

Ch. 3—The Chinese Context for Technology Transfer: Strategies and /ssues for Technology Imports 45

MOA computer and electronic products are but since they are very expensive, we can only now being marketed throughout China and in introduce what we most need. Moreover, the 20 countries abroad. ” most advanced technology is usually unable to be introduced into our country. The trans- Clearly, such plants as the 012 Enterprise fer of defense industry technology to civilian Group and the facilities of the MOA, as well enterprises has no such limitations. Therefore, as other parts of China’s military industrial we must energetically encourage this trans- complex, have considerable technological po- fer. The more and the faster the transfer the tential that must be considered in assessing better. ” the prospects for technology transfer to China. Some of these ministries have made an ag- The domestic suppliers of technology associ- gressive entry into the civilian market. It is ated with the defense industry, and the ma- likely that this will continue and that the machine building industry more generally, have chine building ministries will have a more the competence to meet many of China’s tech- prominent role as exporters of goods, services, nological needs, albeit not always as well as and technology during the remainder of the foreign technology. Nevertheless, the machine century. In the past, machinery and electrical building industry consistently promotes itself products accounted for a small fraction of and its capabilities as alternatives to foreign China’s exports, representing only 4.7 percent suppliers of technology, as the account of the in 1985. Current thinking, however, predicts 012 complex makes clear: a volume of machinery exports by 1990 worth In the past, the Wuhan Iron and Steel Com- US$l billion, or a 240 percent increase over plex imported spare parts for the cylinders of 1985. ’7 the hydraulic pressure systems of its rolling The Chinese are also striving to become ex- mills, The No. 572 factory under the 012 En- terprise Group undertook the task of the re- porters of technology and high-technology search and manufacture of the R2 main shaft services. In April 1986 they convened their balance cylinder. The balance cylinders it first technology export fair in Shenzhen, at produced have been installed for trial use and which the defense industries were well repre- proved to have a life of over 3 years, far longer sented.1 8 China’s offers to provide satellite than the 6-month life of the imported ones. ” launch services to overseas parties and the marketing of the diverse services of the nuclear Further evidence that the Chinese see the industry are two of the more prominent exam- military industries and R&D institutes as im- ples of possible future exports of services from portant factors in the national technology the military industry. While technology ex- transfer strategy is seen in the following ports from China are unlikely to be exclusively editorial comment in People Daz”ly: from the defense sector, many will be. Ironi- At present, many enterprises have already cally, given the production and managerial attached importance to introducing advanced problems that have inhibited the actual em- foreign technology. However, less attention has been attached to transferring our own ‘eCommentator, “A Shortcut To Enhancing Technological defense industry technology to civilian en- Progress-On the Necessity of More Quickly Transferring More terprises. Transferring defense industry tech- Defense Industry Technology to Civilian Enterprises, Renmin nology to civilian enterprises is a shortcut Ribao, Aug. 27, 1985. In FBIS, Sept. 5, 1985, p. K2. to enhancing technological progress, which “’i Interview t$’ith He Guangyuan. Vice Minister of the hla- should be accelerated. chine Building Industry, ” Beijing Domestic Television Ser\’- ice, June 6, 1986. In FBIS, June 16, 1986, p. K 16. Introducing foreign technology is certainly 18Chen Zhiqiang and Yu Fengyuan, “Chinese Technology a demand of the four modernizations. How- Moves Towards the World, ’ Renmin Ribao O\’erseas Edition, ever, it has many limitations. We need to in- Apr. 22, 1986. In JPRS-CST-86-025, pp. 17 ff. See also, a report on China’s seeking patent protection services in Hong Kong troduce many types of advanced technology, for its technology exports in the South China Morning Post (Business .Vewrs supplement). Apr. 1, 1986; and Huang Zhiping, ‘{Ibid. “Chinese Technology Seeks Overseas Markets. Zntertrade, Jan- “Ibid., p. K22 uary 1986, p. 29. 46 . Technology Trarisfer to China ployment of new technologies in civilian indus- defense sector available to the civilian econ- tries, it may be easier for the Chinese in the omy, but also creates the possibility that the short run to sell technology developed in the defense sector will become more innovative as defense industries than to sell products made it faces market demands, as it gains access to in China employing that technology. technology available in the civilian economy, and as it enters into cooperative technology Products from the defense industry are likely transfer ventures with foreign firms. to become an increasingly important part of China’s exports. China is already a major arms Despite frequent statements from China exporter (see ch. 7), and recent reports indicate that the technologies of the defense industries a desire to move to higher technology in its can often substitute for foreign technology, it military exports. In some cases, this will be is clear that the defense industries also see their done with foreign help. For instance, China and current role as improving their technology Italy have entered into an agreement to up- through cooperative international civilian grade the electronics and fire control system projects.’” Thus, it is likely that the new pol- for the A-5M attack aircraft. ’g icy on the defense industry will not only contribute to domestic transfers of technology to China’s new policy toward the relationships the civilian sector, but also lead to the upgrad- between the defense industries and the civil- ing of the technology and the management of ian economy not only has the potential for mak- the formerly exclusively military sector of the ing the considerable technical resources of the Chinese economy. “See, Xinhua, Nov. 6, 1986, In FBIS, Ncn’. 7, 1986, pp. K5- — —.. . K6; and Daniel Sutherland, “China Plans To Expand Arms ‘(’For one account of the activities of the a~iation industr~, Sales, ” The J1’ashington Post, NoI’. 12, 1986. See Intertrade, December 1985.

THE DECISIONMAKING SYSTEM

Without a clear national consensus on the government and the science and technology proper course for technology transfer, differ- commissions. 2* ent perspectives and interests have led to a The Chinese in recent years have sought to fractured decisionmaking system in China. In- rationalize their decisionmaking for technol- deed, organizational complexity is often a dom- ogy import policy, with mixed success. China’s inant factor in China’s relations with Western problems are in part a function of reconciling enterprises and is a major obstacle to China’s modernization. the many domestic bureaucratic interests in foreign technology into a coherent position, China’s record of choosing, importing, and A related problem is that of reorganizing a assimilating technology has been much influ- foreign trade bureaucracy that was set up origi- enced by the operation of its decisionmaking nally to conduct trade with other socialist coun- institutions, and particularly by the overlap- tries. In the original scheme, a centralized Min- ping central and regional jurisdictions that istry of Foreign Trade (MFT), which existed characterize the decisionmaking system. For instance, coordination between the central min- until 1982, was chiefly responsible for the conduct of trade and for the centralized allocation istries and between decisionmakers in Beijing 22 of scarce foreign exchange. China’s former and those at the province and enterprise levels has not always been good. Decisionmakers in Beijing who make purchasing decisions about 2]Song Jiwen, “Digestion and Absorption of Imported foreign technology have not always had a good Technology-A Shortcut to Technological Progress, ” Jingji Guanfi, Sept. 5, 1985. In FBIS, Nov. 4, 1985, p. K24. understanding of the technical problems in the z ‘ Samuel P.S. Ho and Ralph W. Huhnemann, China Open field. There is a lack of coordination between Door Poficy (Vancouver: University of British Columbia Press, the economic commissions at various levels of 1984), p. 34. Ch, 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology /reports 47

MFT oversaw eight national foreign trade cor- has been a drift toward a more decentralized, porations specializing in different commodi- market-driven approach to technology acqui- ties. As trade expanded rapidly in the 1970s sitions. This trend and the attendant fear that (from $4.59 billion in 1970 to $20.64 billion in the center will lose all control over technology 1978), the old system was not able to handle imports have led to decentralizing technology this increase and became an obstacle to fur- transfer policy and foreign exchange controls, ther growth in trade. Gradually, foreign trade including the 1985 regulations described below. corporations were set up under other minis- 23 The Chinese system for decisionmaking on tries, not directly under the MFT. Further technology imports is very complex and, at complicating the situation was the granting least for outsiders, uncertain. In the cases con- of greater trade autonomy to local govern- sidered for this report, OTA saw considerable ments as part of the decentralization experi- confusion about how decisions are made. There ments. To bring some coherence to this sys- was also evidence of decisions being changed, tem, the old MFT was combined with three sometimes because of changed circumstances, other central trade agencies in 1982 to form but also because of the underlying fluidity of the Ministry of Foreign Economic Relations the decisionmaking system itself. and Trade (MOFERT). Decisionmaking procedures vary according Yet uncertainties remain about how the sys- to the size of the project and the type of con- tem works largely as a result of a series of cen- trol over the project (central or local). Often, tralizations and decentralizations of foreign but not necessarily, these variations can be ex- trade decisionmaking authority .24 For both ec~ plained by the type of industry involved. The nomic reforms generally and for technology im- electronics industry, for instance, has experi- ports, the Chinese are still searching for the enced considerable decentralization in recent right balance between centralization and de- years, while the energy industry has retained centralization and between the achievement 25 greater centralization. Decisionmaking also of centrally determined values for the whole varies according to the mode of transfer be- economy and the encouragement of local ini- ing used; decisions concerning joint ventures, tiative. for instance, will involve different procedures The foreign trade apparatus also shows a ten- and regulations from those involving licensing. sion between the influence of the planning sys- A further complication is the relationships tem and the play of the market. China clearly that exist between the end user of the tech- plans some of its technology procurements. For nology and the (often multiple) organizations instance, the SEC had an import plan for the that have jurisdiction over the end user. In 1983-85 period that contained some 3,000 addition, the making of a decision can be items of technology for its national effort to thought of as having stages—consultation, ne- renovate small and medium-sized enterprises. gotiation, ratification, implementation, evalua- Planning targets for other types of projects tion—that often involve different partici- were also established. pants. ’6 Finally, the system is complicated In recent years, however, as enterprises have precisely because in basic ways it is changing. been allowed to retain foreign exchange, there

‘] Ibid, p. 35. “Cf., Denis Fred Simon and Detlef Ilehn, “Understanding “Foreign trade reforms begun in 1980 opened the way for more the Electronics Industry, ” The China Business Re\’ieu, Chinese companies-those under both central and local control– March/April 1986, pp. 10-15; Oksenberg and I.ieberthal. Bu- to participate in foreign trade. Companies wishing to enter into reaucratic Politics and Chinese Energ-j Det’elopment, report foreign trade must get the permission of It! OFERT, or a local prepared for the U.S. Department of Commerce, International government, and then must register with and get a license from Trade Administration, August 1986. the State Administration of Industr~ and Commerce. Once %ee, Roy F. Grow, ‘Transferring Foreign Technologies: Steps licensed, they ma~’ open foreign exchange accounts. Import in the Chinese Decision Making Process, unpublished paper licenses are required for 42 categories of goods. and export presented at the conference on China ,\rew Technological Rei- licenses are needed for ’235 categories. oiution, Har\,ard University. Ma}” 9-11, 1986. 48 ● Technology Technolgy.Sfer tochina

For instance, until recently, the role of the Furthermore, the international environment banking system was not central. However, with must be considered. Is the technology available economic reform, which has increased the role internationally, and are there agents (compa- of the banks in the running of the economy gen- nies, governments) willing and able to trans- erally, banks-especially the Bank of China— fer it? What mode of transfer is most appropri- have also become important in foreign trade ate for the technology, and is the adoption of and technology imports. that mode feasible? In this international context the importance of export controls comes Perspective of the Enterprise in. An enterprise may not always wish to incor- Hidden factors exacerbate delays from the porate new technology into its operations. In enterprise perspective. Once a decision is made an economy of shortages, as has been the case to import technology, which can be a lengthy for some time in China, producers can sell what- process, the decision has to be approved by ever they produce, giving them little incentive higher authorities to assure consistency with to assume the risks and costs of technological national policies, particularly those pertaining change. to types and levels of technology and to the expenditure of foreign exchange.28 Thus, well If a decision is made to acquire new technol- before a contract would actually be signed, and ogy, several practical decisions must follow. indeed in some cases well before negotiations How quickly can the technology be procured? with foreign firms begin, the enterprise would How easily will it be absorbed or assimilated? have gone through considerable negotiations What level of technology should be chosen? within its own system; anywhere from 6 to 18 How will it be paid for? Should it be procured months would already have passed. If the en- domestically or internationally? The economic terprise must then wait for a protracted ex- and technical reasons for importing technol- port license decision, it could face delays of 2 ogy include domestic market competition and, years or more before the technology arrives. increasingly (as a result of government pres- Given the complexities at the enterprise level, sures to export), international market compe- it is unlikely that there would be a simple, con- tition. Foreign technology generally results in sistent set of benefits for choosing one tech- better products. In addition, it clearly carries nology over another. a great deal of prestige. An increasing number of Chinese firms are establishing ‘technology The willingness of decisionmakers to take introduction offices” to aid in acquisition de- risks is also an important factor. China’s eco- cisions. nomic system over the years has structured incentives in such a way that decisionmakers Apart from the central question of what mar- are often risk averse. Risk aversion has been ket exists for the enterprise’s products, the Chi- further encouraged by the history of unpredic- nese environment has to be considered. Is the tability in Chinese politics, which has made technology available in China? Has it been tar- managers unwilling to take individual actions geted as a high priority by the Chinese Gov- that could expose them as targets of a future ernment? Will it be addressed by the nation’s radical political campaign. Foreign partners R&D system? How much pressure does the en- in joint ventures have reported risk aversion terprise feel to increase its exports? What kind and a lack of initiative among middle managers of access does it have to foreign exchange? Can as factors slowing the absorption of technol- the enterprise get special benefits from the ogy at the enterprise level. The present uncer- state by procuring the technology? The enter- tainties are likely to aggravate this timidity. prise must also anticipate that these issues will be assessed by the layers of bureaucracy (lo- Perhaps the most crucial factor in decisionmaking during the last few years is the avail- cal or national, and sometimes both) that must approve the enterprise’s project.27 ability of foreign exchange. Despite severe “Simon and Rehn, op. cit. ‘nIbid. ‘- Ch. 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology /reports ● 49 —— . foreign exchange regulations, there are an in- The Government Perspective creasing variety of viable strategies for obtaining foreign exchange. Some enterprises, for a Chinese authorities in recent years have tried variety of reasons, will be more privileged in to bring central policy guidance and coherence their access to foreign exchange than others, to the business of importing technology, issu- and the technologies they demand will there- ing a variety of new policy statements and reg- fore tend to have a high priority. Central au- ulations. From the perspective of the central thorities are therefore challenged to ensure government, the main principles for choosing that the country’s foreign technology needs foreign technology include the following. Tech- are not determined by the pattern of availabil- nology to be imported should: ity of foreign exchange; what is best for China 1. be above the level of that which is avail- may not be what is best for the enterprise with able in China; foreign exchange. 2. be of practical use; The foreign exchange constraint also has a 3. contribute to China’s eventual self-suffi- more indirect and often detrimental effect on ciency; technology transfer behavior. Because of its 4. foster economic and social development; shortage, foreign exchange is rationed. When and projects are approved, but not necessarily be- 5. be useful for generating foreign exchange. fore a foreign vendor is chosen and contracts are signed, enterprises are given quotas for use Judgments about how to apply criteria such in going ahead with the project. There are some as these become part of the technology import indications that the technology transfer strat- decisionmaking process, and periodically vari- egies of Chinese enterprises are determined ous agencies, particularly the State Science and more by considerations of how to use the quota Technology Commission (SSTC), are called than by how to save foreign exchange and upon to interpret these guidelines in specific make the introduction of the technology part cases. of an economically progressive decision. As part of an effort to protect both China’s In one case, an American firm that took interests (particularly regarding restrictive pains to package a sale with a selling price fac- business practices by foreign firms) and the tored in both hard and Chinese currency (in proprietary interests of foreign suppliers of order to help the Chinese save on foreign ex- technology, the Chinese State Council on May change) lost the sale to a Japanese firm that 24, 1985, promulgated new “Regulations of the offered a somewhat lower total price but in- People’s Republic of China on Administration sisted on hard currency for all of the settle- of Technology Acquisition Contracts. These ment. The foreign exchange cost to China was regulations call for their administration by thus higher, although the sale price to the en- MOFERT, which subsequently drew up its terprise was lower. Since the enterprise had “Measures for the Examination and Approval a quota that had to be used (or lost), it had of Contracts for the Import of Technology, no incentive to save on foreign exchange. In which took effect on October 1, 1985. other cases, the Chinese foreign exchange allocation system seems to have led to the over- The regulations set criteria for the kinds of valuing of hardware transfers relative to soft- technology to be imported, limit the normal ware, despite policy to the contrary. In ac- life of the technology transfer contract to 10 counting for the use of foreign exchange to years, offer protection to foreign technology procure technology, it is easier to point to a that falls outside the patent system, and piece of equipment than to something as amor- charge MOFERT with establishing a system phous as know-how. Foreign exchange limita- for reviewing and approving technology trans- tions at the enterprise level also keep enterprises fer contracts. As of this writing, it is still too from buying all the support items necessary early to judge the longer term effectiveness for making the projects work. and the consequences of these new procedures. so ● Technology Transfer to China

Photo credit’ Erfc Basques This sign is posted on the grounds of the Beijing Jeep Corp.

Some of their ambiguities have been noted,zg addition, the ministries having cognizance over and complaints have been heard that demands the technology in question also play an impor- by MOFERT for guarantees that the technol- tant role. For very large projects or projects ogy transfer will be successful place a heavy of special national importance, decisions would burden on the foreign supplier and lead to be elevated above the SPC level to an appro- higher costs.’” priate level, such as the Leading Group for the Invigoration of the Electronics Industry, or The regulations do seem to strengthen the the Science and Technology Leading Group, hands of the central government over enter- 3 or perhaps to the State Council itself. 1 prises and localities. It also seems that the regulations were inspired by China’s examination The role of the SPC in the Chinese economy of the experiences of other developing coun- is to prepare 1- and 5-year economic plans and tries that tried to centralize authority over to assure that financial, material, and human technology transfers to protect national inter- resources are made available for the execution ests from the economic power of multinational of projects included in the plans. This includes enterprises. annual authorizations to expend foreign exchange. Since the SPC can give only limited The most important organizations for tech- attention to specific project proposals for im- nology transfer decisionmaking in the central porting technology, it focuses on strategic government are the State Planning Commis- commodities 32 and technology transfer proj- sion (SPC), SEC, MOFERT, and SSTC. In ects with a value of US$5 million or more. There are exceptions to this $5 million figure, g ‘ Ellen R. Eliasoph and Jerome Alan Cohen, “China’s New however. The central government has dele- Technology Import Regulations, ” The China Business Review, vol. 12, No. 6, November-December 1985, pp. 36-40. ‘°Foreigners also complain about the lack of transparency in 3] For a good overview of Chinese central government deci- decisions about what kinds of preferences the Chinese are pre- sionmaking, and the responsibilities of the key central agen- pared to grant or withhold in contract language, and call for cies, see, Oksenberg and Lieberthal, op. cit. more standardization on the contract language. 321 bid., p. 37. Ch 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology /rnports ● 51 . gated to the Shanghai municipal government, of its Technology Import and Export Depart- for instance, the power to approve projects up ment, it provides policy advice on China’s to the limit of US$10 million and the power needs for a given technology, its ability to ab- to approve joint venture projects up to $30 mil- sorb the technology, and the likely overseas lion (selected other cities have approval powers sources .35 MOFERT also approves the lan- 3 over joint ventures up to $10 million). ~ guage of technology transfer contracts to ensure that it conforms with the country’s regu- The SEC has traditionally implemented the lations, and it takes the lead in proposing new plans. In recent years, the SEC has also as- regulations or revisions and clarifications of sumed both the leading role in implementing existing regulations. It also serves as the co- the economic reform program and the respo- operating partner with the U.S. Trade and De- nsibility for introducing modern management velopment Program. In addition, it certifies to Chinese enterprises. Its most direct role in Chinese end users of sensitive high-technology technology transfer decisionmaking, however, transfers in keeping with understandings is related to its responsibility to see to the tech- reached with the Coordinating Committee for nological transformation Jishu gaizao) of Multilateral Export Controls (COCOM) as part established Chinese enterprises. of the latter’s liberalization of exDort controls. L The SEC has a special office, the Technical The SSTC does not have a direct ongoing Transformation Bureau, and a special budget role in decisionmaking for the import of com- for technological transformation, including a mercial technology, but is an important par- foreign exchange account for importing tech- ticipant nonetheless. It is centrally involved nology that contributes to jishu gazao. Dur- in importing technology for the national re- ing the Sixth Five-Year Plan, the SEC had search and technological development projects responsibility for 3,000 transformation it controls and can also play a decisive role in projects; another 3,000 are included in the Sev- providing technical assessments of important enth Plan. During the last 2 years of the Sixth pieces of technology to be imported. Further, Plan, some US$5 billion per year was spent the SSTC plays a key role in setting national on enterprise renovation; the total number of technology policy. This includes statements technology import projects for the whole plan 34 of priority about which technologies China was 14,000. The Chinese expect that this ef- should expect to have by the end of the cen- fort will be surpassed during the Seventh Plan. tury and whether these will be acquired by im- Thus, technology import projects that fall porting technology or by developing it indig- under the category of technological transfor- enously. These statements of policy serve as mation are approved by the SEC unless they points of reference for the SSTC’S own assess- exceed the $5 million-value limit. Ministries ments of proposed projects and also guide the and enterprises wishing to undertake techno- decisions of other participants in the system. logical transformation projects using imported Many enterprises in China are local rather technology submit feasibility studies to the than under central control. The local govern- SEC or to economic commissions of local gov- ment level has counterparts to the central governments. ernment decisionmakers discussed above. The mission of MOFERT is to plan and ad- These include planning, economic, and science minister foreign trade. Through the activities and technology commissions; a bureau of foreign trade; and enterprise bureaus for differ- ~ 11 n spite of the delegation of decisionmaking authority to ent industries. In some cases, as with the cen- local governments on the basis of the value of projects, the central authorities remain more involved in decisions than the rules tral government, a corporate organization may of delegation would suggest. See, Simon and Rehn, op. cit. exist between the enterprise and the industrial ‘“Sun Zonghao, Director, Technical Transformation Bureau, ( bureau. The level of decision will depend on SEC, ‘ China’s Technological Imports and Vistas for Develop- ment, unpublished paper presented at the MIT Seminar on Technology Transfer, April 1986. “)oksenberg and I.ieberthal, op. cit., p. 90. 52 ● Technology Transfer to China -- the value of the transaction. In all cases, how- tract with a foreign company, and they are at ever, the contract must be approved by the for- times tasked by the end users, who help iden- eign trade bureau.3G tify possible vendors of technology. In this sense, they act as middlemen. In recent years, however, there has been much more direct Financial and Trade Organizations interaction between the end user and the for- The Ministry of Finance has attempted to eign vendor, even in cases where the trading make technology import policy sensitive to the company still actually signs the contract. costs of technology transfer, with regard not only to the direct procurement costs, but also Foreign Firms to the costs of absorption.37 The Ministry of Foreign firms differ in their motives and Finance has also attempted to establish the strategies for transferring technology. Some principle that technology imports should lead firms approach technology transfer as the sale to expanded exports. of a commodity without presuming any equity The Bank of China has become the key fi- participation in the Chinese economy. The ap- nancial institution responsible for the distri- peal of the transaction may be tied to other bution of foreign exchange and has an institu- corporate objectives, but basically it is a sales tional interest in the financial soundness of relationship. technology import projects. The bank’s role For other firms, China is seen as an export has been enhanced by the increasing reliance platform and source of supply for components on the banking system, instead of the state and finished goods. Such firms can be expected budget, for investment. When projects are ap- to transfer technology needed to accomplish proved by the SPC or the SEC (or their local those business objectives. In these cases the counterparts), a foreign exchange quota (e du) firms can be expected to be earners of foreign is established with the bank, which the enter- exchange for China, although, as the Beijing- prise can then draw on. The bank, however, Jeep case demonstrates, they may also require reserves the right to conduct its own feasibil- substantial amounts of foreign exchange dur- ity y studies before dispensing moneys from the ing the startup period. e du if it is dissatisfied with the feasibility studies that have already been done. In some Other firms may be more interested in China cases, the bank also sits in on discussions much as a source of raw materials. They too can be earlier in the project approval process.38 expected to be earners of foreign exchange, and may, if required by the Chinese, be willing to Other important participants in the decision- transfer technology. The foreign oil companies making system are the foreign trade corpora- that have participated in Chinese offshore oil tions (FTCS). Some of these, such as the China development fall into this category. In this National Technical Import Corp., which spe- case, a great deal of the technology is in the cializes in technology imports, and the China form of the experience of the personnel of the National Machinery Import and Export Corp. companies, something that cannot be trans- are under the control of MOFERT. Others are ferred readily except imperfectly via training. under the control of the various industrial min- A small portion of the technology of the oil istries. The trading companies are often the companies, such as exploration technology, is bodies that negotiate and actually sign a con- highly valued and highly perishable proprietary information that companies normally 3’According to Oksenberg and Lieberthal, in the late 1970s, the Ministry of Finance calculated that China should be pre- refuse to transfer. The Chinese have been con- pared to spend fouryuan of renmin bi on absorption, for every siderably disappointed over the implementa- one US dollar’s worth of technology and equipment imported, tion of the technology transfer provisions in Ibid., p. 62. “Ibid., p. 97. the offshore oil development case because of 3“CF., Simon and Rehn, op. cit. Chinese misunderstanding about the nature Ch. 3— The Chfnese Context for Technology Transfer: Strategies and /ssues for Technology /reports 53

Photo credft Eric Basques A jet airliner prepares for passenger boarding at the Beijing International Airport, The truck is a model produced until recently that was based on Russian technology of the 1950s. of the technology and a failure of the oil com- for the Chinese market and to repatriate prof- panies to understand Chinese expectations. its. It also requires Chinese partners who have the organizational flexibility to respond to rap- Other industries have different dynamics. idly changing technologies and business op- In some areas of high technology where the portunities. Chinese have a keen interest, the very iden- tity of the foreign firm is tied to its technol- There are some signs that China is coming ogy. In these industries—electronics, materi- to appreciate this diversity of motives and als, telecommunications, biotechnology-there strategies among foreign firms. The new in- is great expense involved in product develop- vestment regulations, for instance, recognize ment and a rapid rate of product obsolescence. the difference between export-oriented and Markets must be expanded to distribute costs. technologically advanced firms that need ac- In such highly competitive cases, technology cess to the domestic market. However, there is not viewed as a commodity to be sold, and is still much in the nature of Chinese policies there is great reluctance to transfer technol- and in the Chinese economic and political sys- ogy unless it will lead to a long-term presence tems that makes it difficult to accommodate in China with opportunities to design products the diversity of technology transfer issues. 54 ● Technology Transfer to China

The Foreign Exchange Constraint Enterprises can also earn foreign exchange themselves. The tight restrictions on foreign Since the end of 1985, concern over the avail- exchange imposed by the state in the last 2 ability y of foreign exchange has become an even years can be thought of as an incentive for en- more important element in decisionmaking terprises to become more active foreign ex- about technology imports. The officially pre- change earners, though they are allowed to ferred way of making a decision to import tech- keep only a fraction of their earnings and may nology has been to fold it into the normal plan- need permission to spend even that. The en- ning process. If a positive decision is made on terprise can also approach the local govern- a project, then in principle the necessary for- ment or the supervising ministries for out-of- eign exchange to implement it will be provided. plan foreign exchange, although the accounts However, it is precisely because foreign ex- held by these entities may not be large. Bei- change costs are a factor in judging the desira- jing, for instance, had only $100 million at its bility and feasibility of the project that deci- disposal. sionmaking through the planning system has in recent years been biased toward projects In addition, the enterprise can attempt to that promise to earn foreign exchange quickly. buy foreign exchange from other units using Thus, until recently, petroleum and coal proj- local currency (renminbi) at a rate set by the ects promising to produce exportable com- Chinese Government. Or foreign exchange can modities have enjoyed a privilege denied to be borrowed from the Bank of China if the bank electric power. approves of the project. In such cases, repayment is usually made in foreign currency. Other This bias of the planning system is one rea- agencies, such as the China International Trust son why enterprises, corporations, ministries, and Investment Corp. (CITIC), which have and local governments might find it in their floated loans from foreign banks, are also pre- interest to have decisions made outside of the pared to lend foreign exchange. planning system. There are also two other reasons. First, receiving formal plan approval can It is clear that changes are occurring in the be time consuming if decisions on new projects allocation of foreign exchange, just as in the are desired at a time out of phase with the plan- economy as a whole. This does not necessarily ning cycle. In addition, present economic re- mean that there is less overall central control forms are creating an environment in which over the total amount of foreign exchange ex- enterprises often (though not always) wish to pended. Within that total, new mechanisms for practice as much of their new autonomy as pos- allocation are appearing, which may lead to sible. To a considerable extent, they can do this more efficient use of the foreign exchange avail- if they have access to foreign exchange. The able. These new mechanisms complicate the question of access to foreign exchange there- task of trying to understand how the decision- fore becomes quite important for understand- making system actually operates, however. ing decisionmaking. As noted above, the SPC has the major role The System in Practice in allocating the right to expend foreign exchange to ministries, enterprises, and local gov- The decisionmaking system is supposed to ernments. For the enterprise that wishes to operate as follows: Proposals for the import import technology, therefore, one source of for- of technology originate in an enterprise under eign exchange is that which is provided in the one of the central ministries or units of local plan. For projects that have been included in government. The enterprise, however, is work- the plan, provision is made, in principle, for ing under control figures that have already the foreign exchange necessary to carry it out. been supplied by the SPC (or local authorities) This solution may not be optimal for more com- as a guide to enterprise planning. In develop- plex joint venture projects, where foreign ex- ing the proposal, the enterprise typically must change needs may be very fluid. demonstrate the feasibility of the project —

Ch 3— The Chinese Context for Technology Transfer: Strategies and /ssues for Technology Irnports . 55 — -. through a feasibility study. The project must The criticism from outside, discussed in chap- then be submitted to the ministry or local enters 2 and 4, focuses on the impediments to terprise bureau (or in some cases, a corpora- doing business in China. The criticism of the tion under a ministry of which the enterprise current system from within China focuses more is a part) for approval. The approving author- on whether the current system for technology ity at this level may also conduct its own in- transfer serves Chinese interests. Apart from dependent feasibility study. For local enter- those criticisms inspired by desires to protect prises, the project must then be approved by domestic industries and R&D facilities from the local planning committee. If the project foreign competition, the more disinterested (whether from a locally or centrally controlled commentaries on the current situation focus enterprise) exceeds $5 million, sg it must be sub- on three main issues: the problems of duplica- mitted to the SPC for approval, and the SPC tion of imports, the negative consequences of may also do its own studies as to the desira- decentralization, and the problem of assimila- bility and feasibility of the project. tion. 40 For projects pertaining to the technological The problem of duplicative technology im- transformation of industry, the proposal would ports has been particularly evident in con- go to the SEC. For projects below the $5 mil- sumer-oriented light industry. Reportedly, lion level that do not pertain directly to tech- over 100 color television assembly lines were nological transformation, the approval decision imported since the late 1970s. If all were put would be made at the level of the ministry, a into operation, they would more than saturate national corporation, or a local government. the market. To make matters worse, many of the components could not be made in China After substantive approval by one of the and had to be imported, resulting in a waste bodies mentioned above, a contract defining of foreign exchange. Similar problems were en- an agreement with a foreign partner must be countered with other consumer appliances, submitted for MOFERT (or local foreign trade such as refrigerators and washing machines. bureau) review, which involves a comparison Strong local interest in the production of floppy of the terms of the contract with criteria ex- disks for computers has led to the prolifera- pressed in policy regulations. tion of small plants to produce them, thus los- It is difficult to say with confidence that the ing economies of scale.41 decisionmaking actually works the way it is A related example is the field of optical tele- designed to. Furthermore, the system is chang- communication technologies. In this case, ing as reforms in the economy progress and three different Chinese organizations have as new approaches and new participants ap- been negotiating with three different foreign pear. 13anks have clearly emerged as more im- companies, from the United States, Japan, and portant parties, and relatively new organiza- Europe. Instead of coordinating their efforts, tions, such as CITIC, also influence the way they are all going separate ways, with the pos- the system operates. In addition, the decision- sible result of duplication and excess capac- making system is embedded in an environment ity. Since this area of technology has been iden- of bureaucratic struggles and shifting alli- tified as a national priority, two units of the ances, making the decision process, as well as central government have been charged with the outcome of a decision, difficult to predict. Despite much serious effort to establish pol- ‘“This discussion is drawn from a three part article b~’ Cao icies and institutions for importing technology, Jiarui entitled, “The Present Condition of, and Problems in China’s Technological Imports, ” published in the o~’erseas edi- the current Chinese system has become the ob- tion of the journal, Ziaowang. Part 1 appeared in No. 18, May ject of criticism from outside and inside China. 5, 1986, and was translated in FBIS, hlay 16, 1986, p. K5 ff. .— Part 2 appeared in No. 19, Ma3 12.1986, translated in FBIS, ‘qklxcept in those jurisdictions, such as Shanghai, which ha~’e hla~’ 22, 1986, p. K1O ff. Part 3 appeared in No. 20, hlay 19, been delegated authority to make decisions on higher \alued 1986, translated in FBIS, Nlay 30, 1986, p. K13 ff, projects. 4’Cao Jiarui, Part 1, op. cit. 56 Technology Transfer to China

overseeing the importing of this technology. mittee gave the plant approval to proceed However, because these central authorities are again, seemingly in violation of central policy .44 linked to the organizations involved with the Information is not available on the techni- negotiations, they are unlikely to be disin- 42 cal differences on whether the plant, the branch terested arbiters and eoordinators. bank, or the provincial economic committee The current critiques of the decisionmaking were unaware of the State Council directive system for technology imports reflect the or simply chose to ignore and circumvent it. underlying problems of Chinese institutional Nor is it known whether the plant and provin- weaknesses and jurisdictional confusion seen cial authorities genuinely believed that the elsewhere in this report. A recently reported foreign technology was most appropriate, case involving continuous casting technology whether they were attracted to the foreign used in steel plants illustrates this point. In technology simply because they assumed it this case, china imported the technology from was best because it was foreign, whether there West Germany in 1980 under a cooperative was some form of corruption involved, or production arrangement. The technology was whether the authorities were simply incompe- assimilated to the extent that the Chinese tent to evaluate the proposed transfer in light reproduced and employed the technology suc- of China’s own capabilities. Any or all of these cessfully in other steel mills. As is often the explanations are possible, given a variety of Chinese custom, the achievement was publi- reports from China in recent years. What is cized as a case of how foreign technology can clearer, however, is that from the central gov- help China and how successful assimilation can ernment perspective, this is the kind of experi- be accomplished. On the basis of this success, ence that leads to duplicative imports that un- the State Council issued a directive in 1981 to necessarily drain foreign exchange reserves. the effect that in the future, if steel plants need Would the decision have been more in keep- this type of continuous casting machinery, 43 ing with the national interest if there had been they should first try to acquire it in China. greater centralization? The answer to this ques- In 1985, by which time the decentralizing tion is not certain. The answer would almost of decisionmaking on technology imports had certainly be positive if the center had a limited been implemented, a Chinese steel plant was number of such cases to decide and could de- in need of a continuous casting machine of the vote the necessary resources to information type that had by then been successfully pro- gathering and analysis. However, the number duced in China using the original German tech- and variety of technology import cases clearly nology. Instead of looking for a Chinese sup- are far greater than the central authorities can plier, however, the plant decided to import the handle. Central planner incompetence and ig- machinery, in violation of at least the spirit norance of local particularities is precisely the of the State Council directive. The justifica- weakness of centrally planned economies, and tion for going to the foreign supplier was that the main justification for decentralization. the foreign equipment had certain technical While the central authorities can and do rec- characteristics allegedly not available in China. tify grievous mistakes, as they have now done in the TV, refrigerator, and washing machine To proceed with the purchase, the plant had cases, routine and efficient central direction to secure the approval of the provincial author- of technology imports is seemingly beyond the ities only. The first step was to conduct its own capacity of the system. feasibility study. This was then followed by an approach to the provincial branch of the China has had difficulty finding an institu- bank, which conducted its own assessment and tional formula that would allows effective cen- report. Finally, the provincial economic com- tral policymaking, the observance of these pol-

4’Ibid. 4’Ibid. 441bid. Ch, 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology imports ● 57 — -— — icies in their implementation, and the flexibility as water and electricity. From the view of cen- of decentralized decisionmaking. The problem tral planners and high-level economic and tech- is the one alluded to in the previous chapter, nology policy makers, on the other hand, the that of the legacy of past decentralizations that impression is one of fragmentation, with au- empowered local (especially provincial) gov- thority dispersed among ministries and re- ernments. gions.4G The Chinese sometimes refer to the struc- The current economic reforms and efforts at ture of economic authority in China as a check- political institutionalization would seem to erboard, meaning that vertical authority ema- promise some improvement in decisionmaking. nating from the central government through However, the record to date is mixed. For in- ministries and commissions is crosscut by the stance, management of Chinese industry has horizontal interests of local or regional author- in many cases been removed from government ities. This system is sometimes also referred ministries and vested in new corporate enti- to as tiao tiao kuai kua”, literally “branches ties, which in principle are to run as profit- and lumps, ‘‘ in which the central ministries and making organizations. However, these have commissions are the “branches” and the not always been able to escape the heavy hands “lumps” are formed when these are crosscut of party cadres, who want to maintain old ways by regional authorities. As one commentator of doing things even as the forms of organiza- put it. “The crucial point of our existing sys- tion change. Efforts are being made through- tem is the division of departments (read min- out the government and the economy to pro- istries) and regions, which develops into a se- mote younger, more technically qualified, and ries of complicated contradictions between more entrepreneurial individuals into mana- different departments (ministries), between de- gerial positions. On the other hand, the eco- partment and region, and between different re- nomic system still does not generate the eco- gions.’’” nomic information on which managers can base sound technology transfer decisions, nor the This system of institutions has the effect of incentives for managers to assume the risks constraining the decisionmaking effectiveness of innovation. of all parties and explains why even in periods of greater centralization, central authority is The now-standard insistence on feasibility not necessarily determinative even on high- studies for technology import decisions is in- priority matters. tended to inject additional technical judgments into decisions and to force the attention of more Not surprisingly, Chinese perceptions of in- interested parties on assimilation problems. stitutional deficiencies differ. From the per- The mechanisms for horizontal technical com- spective of the production enterprise, decen- munication, noted in the next section, also aid tralization has not gone far enough, since the in Chinese decisionmaking. Although this was enterprise’s own autonomy is constrained. If not true in the late 1970s, decisions about im- the enterprise is under the jurisdiction of a local government, it is constrained by the inter- porting technology are often informed by some of the best technical judgments in China. This ests and prerogatives of the latter, as well as by national policy. If the enterprise is under is largely a result of the growth of consulting and advisory services. the jurisdiction of a central ministry, it is constrained by the interests and practices of the However, the best technical judgments do ministry and by overall national policy. How- not necessarily result in the the most appropri- ever, it is also subject to the discretion of the ate technology decisions, and it seems that the local authorities, who typically would have a full integration of technical, economic, and po- say in the management of the enterprise’s per- litical criteria remains something of an ideal. sonnel matters and in the supply of such goods There are some reports, for instance, that fea-

451 bid. 4’Cao Jiarui, Part 3, op. cit. 58 ● Technology Transfer to China sibility studies are not always taken seriously policy, and much Chinese reform experienced and are used for manipulative purposes. The since 1979 provides evidence for it. prevalence of this practice, not unheard of in The pessimistic interpretation is that the other countries, is not known. system is stymied, stuck between the impera- A summary assessment of China’s decision- tives of centralization and decentralization, of making system for technology imports is dif- market and plan. In this view, the inertia of ficult. The system is composed of elements of the established institutional setting is so great, centralization and decentralization, of market and its power so entrenched, that reform pol- principles and planner influences. An optimis- icies cannot be fully implemented. Instead, re- tic interpretation is that it can be thought of form impulses from the center will be distorted as a transition to a more market-driven, de- at various points in the system, producing un- centralized system. This interpretation is desirable and unanticipated consequences of clearly consistent with the intent of current the types noted above.

ISSUES OF ASSIMILATION AND DIFFUSION Acquiring technology is only half of China’s However, it is also useful to recall the various problem. Once transferred, the technology periods of Chinese technology imports, since must be assimilated and diffused effective- assimilation experience has varied somewhat ly if China’s modernization goals are to be from period to period. achieved. The Chinese seemingly did better at assim- The question of assimilation is linked to the ilating all three types of technology during the underlying issue of technological dependency 1950s than in the subsequent two periods. So- on the foreign suppliers of technology. Since viet provision of blueprints, technical advisors, the end of the 1950s, China has been particu- and training programs undoubtedly contrib- larly sensitive to this issue of dependency and uted to this success. On the other hand, the has striven to avoid it. Ironically, however, the technology transfer experiences of the 1960s policies and institutions established in the past and 1970s were not notably successful in terms to foster self-reliance are now obstacles to the of thorough assimilation. ’g full assimilation of technology under the new China’s past history of importing technol- assumptions of the open-door policy. The risk ogy suggests that many factors influence ef- of dependency thus increases as the problems 47 fective assirnilation.’” Choosing the right tech- of assimilation remain unsolved. nology at the outset is clearly important. Many In discussing the assimilation of technology, of the cases of unsuccessful assimilation were it is useful to distinguish between production due to procurement decisions made by techni- (using the imported technology), manufactur- cally unqualified people, which resulted in the ing (replicating the import), and design (the ca- import of technology having the wrong prop- pability to redesign the technology) .48 Overall, erties for the intended task. Also, the Chinese China’s ability to assimilate production tech- underestimated the value of expertise relative nology has been greater than its ability to ab- to hardware, and neglected the support items sorb manufacturing or design technologies. necessary to make assimilation successful. 4’Zhang Shihong, “A Noteworthy Issue: Digestion, Absorp- A second concern has been that managers tion and Renewal in Technology Importation as Viewed From have not been willing to make the effort to fully Shanghai, ” Renrnin Ribao, May 3, 1985. In JPRS-CST-85-027. Aug. 22, 1985. p. 62. absorb the technology. That is, they have been ‘8K.C. Yeh, “China”s Assimilation of Foreign Technology, . 1950-1985, ‘paper presented at the conference on China New ‘gIbid. Technological Revolution, Harvard University, May 9-11, 1986. 50 This discussion is drawn from Ibid. Ch 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology Imports ● 59 — more interested in expanding output by ex- disadvantages in dealing with technology from ploiting the production technology without the international economy. During the last 2 attending to the acquisition of the underly- years, the Chinese have come to realize the im- ing manufacturing and design know-how. Im- portance of paying special attention to the ported technology has been seen as a shortcut problems of assimilation. Current discussions to technical progress. Yet, effective assimila- of assimilation, however, indicate that the tion requires focused attention to the problems problems that troubled the assimilation proc- of absorption. In addition, it requires commu- ess in the past have by no means been over- nication and cooperation among a variety of come. An examination of current assimilation organizations, such as enterprises, research problems points to the following problems. units, government agencies, and universities. China’s segmented society has often frustrated Technical Manpower the meeting of this requirement. A first constraint facing many developing Another problem has been the lack of ade- countries is a shortage of qualified technical quate managerial know-how to employ the and managerial manpower and a lack of scien- technology fully. This was less of a problem tific tradition. In absolute terms, China has in the 1950s since the Chinese imported So- a large pool (approximately 2.4 million) of sci- viet management along with the technology entists and engineers.52 Even though the qual- and had the services of Soviet advisors. In sub- ity of training received by those in the pool sequent periods, however, Chinese managerial varies a great deal, and the distribution of tal- backwardness became a hindrance. ent by region and economic sector is unbal- China’s past experience also points to the anced, China does have a cadre of technical importance of having domestic R&D resources specialists to facilitate technology transfers. committed to the tasks of assimilation. As the China is also rapidly expanding its techni- Chinese currently see it (which is in keeping cal manpower ranks through its own new edu- with international analyses as well), much of cational policies and by taking full advantage the Japanese success in assimilation was due of educational and training opportunities to the attention given to adaptive engineer- offered abroad by institutions of higher edu- ing and R&D in support of absorption, with cation, companies, and foreign governments. expenditures on the latter running five to seven Thus, while manpower inadequacies do appear times those of the purchase of the technology.” in the context of technology transfers, foreign Although China’s R&D resources are not in- firms seem to agree that the Chinese are mov- substantial, they have often been poorly de- ing up the learning curve effectively. ployed and misused; China’s best talent, for Manpower limitations affecting the assimi- instance, is typically employed in centralized lation of foreign technology are exacerbated research units not physically proximate to the by two characteristics of the Chinese techni- enterprise importing the technology. Further- cal community. The first is the misuse and mal- more, Chinese R&D personnel have been com- distribution noted above. Too much of China’s partmentalized, keeping researchers and engi- technical manpower is concentrated in central- neers from the academies, the universities, and ized research institutes, which have historically the production ministries from working to- not been well connected to production enter- gether on assimilation tasks. prises. Meanwhile, at the level of the enterprise, China has many of the same problems of as- there is often a severe shortage of engineers. similation that other developing countries re- “See, I.eo A. Orleans, The Training and Utilization of Scien- ceiving transferred technology experience. Yet, tific and Engineering Manpower in the People’s Republic of China also has both distinctive advantages and China, U.S. House of Representatives, Committee on Science and Technology, October 1983: and Orleans, “Graduates of Chi- nese Universities: Adjusting the Total, The China Quarterly 51 Ibid. (forthcoming). 60 ● Technology Transfer to China

Limitations on the mobility of technical per- risks and to adopt a timeframe that sees the sonnel also hinder both the assimilation and value of the technology over the longer run. diffusion of technology. The tendency of en- It also requires an understanding of the for- terprises and research institutes to regard tech- ward and backward linkages needed for the ef- nical personnel as the propert y of the unit has fective deployment of the technology. As noted been a major obstacle to labor mobility. A va- above, these are not traits that were instilled riety of new approaches to stimulate the move- in Chinese managers by the old system, which ment of technical personnel have been intro- put immediate production targets foremost in duced since the early 1980s. Although these the manager’s mind and made risk avoidance have had some positive results, the problem a rational individual strategy. remains serious.53 The Chinese government is well aware of the Second, problems with the educational sys- limitations of the present enterprise managers. tem affect the seriousness of the manpower Modernization in management has been en- constraint. Two deficiencies in particular stand couraged by policy changes such as decentral- out. First, the typical Chinese graduate is usu- ization of authority, institution of managerial ally stronger in theory than in hands-on ex- accountability, provision of incentives and perience relevant to the tasks of technology flexibility in organizational design. The most absorption. Second, the educational system, effective improvements have resulted from di- especially in engineering, has focused too much rect contact with modern managerial tech- attention on training narrow specialists who niques—through joint ventures and other are often ill-equipped to deal with problems reforms of technology transfer and in training quiring interdisciplinary approaches. In addi- centers, such as the Dalian Institute sponsored tion, the failure of the educational system to by the U.S. Department of Commerce. The produce economists who are familiar with the number of managers that can benefit directly economics of the industries in which the trans- from such contact is minute compared to the fers are occurring is a hindrance to effective total need in China, but the effect appears to decisionmaking. 54 be multiplied by the dissemination of information from the centers and by learning from the Management example of the now more effective managers. Since managerial inadequacy is one of the most China’s lack of personnel with modern man- severe constraints, special attention is war- agement capabilities may be of greater imme- rented if technology transfer and China’s mod- diate importance for assimilation than the ernization are to be supported.55 shortage of scientists and engineers. Although often capable and experienced in working un- Research and Development der conditions of static technology and the dic- tates of a planned economy, China’s managers In contrast to many developing countries, now face a very different environment. China has a comprehensive industrial struc- Effective technology assimilation requires ture and an extensive R&D network. Yet Chi- a systemic understanding of how the technol- nese R&D has had many problems and, like the economy as a whole, is now the target for ogy will fit into the social system to which it 5G extensive reforms. is being transferred and a willingness to take — Most sectors of the industrial economy have “See, Leo A. Orleans, “Reforms and Innovations in the Utili- research, design, and educational institutes. zation of China’s Scientific and Engineering Manpower, ’ paper presented at the conference on China New Technological Revolution, Harvard University, May 9-11, 1986. Sbwillim A. Fischer, “The Transfer of Western Managerial 54Geoffrey Oldham and Alyson Warhurst, “Technology Trans- Knowledge to China, ” app. 5 in vol. I I of this report, May 1986. fer to the Chinese Offshore Oil Industry, ” unpublished report, “See, Richard P. Suttmeier, “New Directions in Chinese Sci- University of Sussex, Science Policy Research Unit, no date, ence and Technology, ” in: The Asia Society, China Briefing: p. 43. 1985 (Boulder, CO: Westview Press) 1986. Ch, 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology /reports 61

Many of these had experience with technology tended to bring attention to the need to forge transfers from the Soviet Union in the 1950s, this link, but a lasting solution to the problem and all of them have had experience with tech- is not likely to be found in central policy direc- nological self-reliance since 1960. This R&D tives. More likely, the solution will depend on system was terribly disrupted during the Cul- the course of the reforms of the economic and tural Revolution, and its capabilities were re- the science and technology systems, with their duced. Nevertheless, it is important to recall emphases on enterprise autonomy and the the evolution of this system since 1949, its strengthening of enterprise R&D. many achievements, and the renewed support it enjoys in the post-Mao period. It is a sig- The Supply System nificant resource that could aid China in assimilating foreign technology and avoiding China’s ability to absorb and assimilate tech- technological dependency. China’s technical nology is influenced by problems in the domes- community needs to be brought up to world tic economy. Many characteristics of the econ- levels, but it does not have to be created anew. omy that inhibit domestic innovation in China also affect the assimilation of foreign technol- Ironically, the existence of an established in- ogy. The inability of the economy to supply dustrial structure and R&D system at times high-quality inputs reliably-up to the tech- works against technology transfer. Because do nical standards required by the foreign tech- mestic industry and the R&D establishment nology-to enterprises engaged in the impor- have interests in domestic supply, China is tation and assimilation of technology is one faced with make-or-buy questions that would of the more serious of these problems. not trouble other developing countries. In addition, China’s domestic industry has had trou- One example is the well-publicized case of ble converting the results of its research into the Wuhan steel mill, which imported ad- serially produced new products. These prob- vanced German technology but found that the lems, and the more general relative technologi- machinery in which it was embedded could only cal backwardness of the domestic industry, be used for a fraction of the designed time. The provide opportunities for the foreign suppliers electronic control technology of the imported of technology. It is likely, however, that effec- mill presumed the supply of a reliable source tive international technology transfers will also stimulate the domestic industry to improve its capacity for indigenous innovation. Like the manpower problem, the R&D system has historically been compartmentalized, and R&D has been concentrated in centralized institutes rather than at the level of the enterprise that needs the technology. The current reforms in China’s science and technology management system are intended to change this situation, but it is likely that the strengthening of R&D at the enterprise level will take time. A second problem is that R&D supportive of technological assimilation has not received priority attention and adequate funding. The Photo credll Eric Basques linking of R&D plans to technology import This ginger root salesman is completing a sale in the plans is a recent development. The new policy Changchun agricultural “free market. ” Produce In emphasis being given to assimilation is in- excess of government quotas can be sold for what the market will bear. 62 Technology Transfer to China of electric power, which the city of Wuhan did transferred to another. China’s new patent law not have. In other cases—the Shanghai Fox- and other recent policies designed to encourage boro and Beijing-Jeep joint ventures, for in- technology transfer, should help alleviate some stance-the supply problem is also seen in the of these concerns. A separate question, how- supply of raw materials, semi-processed ma- ever, is the capability of the Chinese system terials, and finished intermediate goods. for internal technological diffusion. The uncertain availability of these inputs Chinese organizations are excessively bu- slows the full assimilation of the technology, reaucratic and compartmentalized. Contrary prolongs reliance on foreign suppliers, and thus to the principle of communalism embedded in increases the demands for foreign exchange. official ideology, Chinese enterprises and re- Scarce supplies have been a particular irritant search institutes often act as if they have pro- to joint ventures. In some cases, the best hope prietary claims on technology and, more im- is to go to enterprises from the military indus- portantly, on the technical manpower they tries that are now instructed to serve the ci- employ. The clarification of property rights vilian economy. These enterprises are often pertaining to knowledge is an important ele- able to meet the quality standards required, ment in current reforms of the science and tech- but they may not have the incentive to link nology system. Yet the Chinese continue to la- up with the joint ventures. Undercurrent eco- ment what they refer to as departmentalism, nomic conditions and policies, they often find and the lack of effective horizontal, interor- it more profitable and less demanding to pro- ganizational communication. Instead, commu- duce for the Chinese domestic market. nications follow the strong vertical orientations along which Chinese organizations were The response of Chinese enterprises to the designed. uncertainties of the supply system has been to pursue vertical integration, creating a tech- For example, world-class bicycle-manufac- nological system different from those in capi- turing machinery is produced by the Shang- talist countries, in which components for tech- hai Bicycle Co. (SBC), one of China’s leading nologies are often sourced from many different bicycle makers, for its own production. The supplier companies. This systemic difference company has no interest in, nor incentives for, influences Chinese choices of technology and the production and marketing of its manufac- assimilation. The Chinese often expect more turing equipment. The Shanghai Light Indus- technology transfer than the Western firm can try Bureau had to establish a specialized fac- supply, since some of the component technol- tory for the production of bicycle-making ogies are the property of other firms. The full machinery. While the new plant is able to use assimilation of the technology supplied to the designs and manuals of the SBC’S equip- China may therefore be blocked because the ment, the personnel from SBC who possess the supporting, component technologies are nei- know-how have not been deeply involved in the ther available to nor being supplied to China. diffusion.” The Chinese have attempted to overcome the Internal Diffusion problems of technological departmentalism by The question of how effectively foreign tech- creating mechanisms for crosscutting techno- nology is diffused within China remains uncer- logical communications. The first of these are tain. This issue is particularly pertinent for the the professional societies organized around transfer of dual-use technologies to civilian en- academic disciplines and industrial technol- tities. U.S. national security implications arise ogies. The professional societies draw individ- if these technologies diffuse to the military. uals from different vertical systems (different Foreign firms have also been concerned that without effective patent protection, technol- “The World Bank, China: Long-Term Issues and Options: The ogy licensed to one enterprise may be illicitly Mm”n Report (Washington, DC: 1985), p. 172. Ch. 3— The Chinese Context for Technology Transfer: Strategies and /ssues for Technology /reports 63 ministries, academies, and universities) into The climate for the diffusion of technology a common forum. A second mechanism is a net- has improved markedly in recent years even work of scientific and technical information though the inherited structure of the Chinese services which was developed with the coop- economic and research systems still inhibits eration of the U.S. National Technical Infor- it. Current Chinese thinking calls for the at- mation Service. In addition to these two mech- traction of foreign technology to the more de- anisms, a large number of technical consulting veloped coastal cities and the subsequent dif- organizations have been formed in recent fusion to the interior and throughout the years, and other organizations, including pro- economy. This strategy is becoming increas- duction enterprises, universities, and research ingly likely to be successful. The problems institutes, have been active in establishing con- associated with the power of individual work sultancies, as well. Recent policy has also sanc- units to make proprietary claims on technol- tioned consulting by individuals. ogy and technical personnel, however, are formidable. Most importantly, however, the economic reform program is designed to alter the strong vertical, bureaucratic orientations of the econ- The Prospects for Assimilation omy by creating the conditions for horizontal The financial, manpower, decisionmaking, market exchanges. This is true in the area of and economic problems noted above make it technology as well. With the initiation of tech- likely that assimilation will not go as smoothly nology markets for the buying and selling of as the Chinese and their foreign commercial technology, the regime has, in effect, recog- partners might like. It is important to remem- nized the de facto proprietary claims to knowl- ber, however, that China also has capacities edge that had been made by enterprises and that make it likely that some of these limita- research institutes as they resisted the shar- tions could be overcome in the relatively near ing of technology without appropriate compen- future. These include an expanding pool of sation. Thus the leadership now encourages the trained personnel; an established, extensive view that technology be considered a com- R&D system; and new policies to encourage modity to be bought and sold in a market foreign investment and technology transfer, rather than a free public good to be allocated as well as those for economic, administrative, by the state. and educational reform. China’s leaders, fur- The Chinese are also trying to allow greater thermore, have incentives to maintain an envi- mobility of technical personnel. To create these ronment favorable to technology transfer and conditions, the Chinese have had to modify es- absorption. tablished practices of administratively assign- As these policies have been refined, the im- ing technical personnel to jobs and have at- portance of the assimilation issue has come tempted to establish, on a trial basis, a limited into focus. China clearly seeks technology labor market for scientists and engineers. transfer agreements that will facilitate assimi- It is difficult to assess how effective this relation and include as much of the manufactur- form has been, but there are a number of indi- ing and design know-how, as well as the pro- cations that its impact has been dulled by the duction technology. Western firms however, unwillingness of work units to allow their per- have diverse motivations in their dealings with sonnel to leave. Since most social services, in- China and in their uses of technology transfer cluding housing, are only available through the in corporate strategies. The behavior of the work unit, individuals may be reluctant to seek supplier of the technology, considered in the opportunities to move.5g following chapters, can also influence China’s assimilation ability, thus adding another vari- able to any analysis of likely assimilation ex- “’’Cf., orleans. “Reforms and Inno\rations ., . ‘“ periences. 64 ● Technology Transfer to China

CONCLUSION China has ambitious expectations about the As depicted in figure 3, the underlying chal- role technology will play in its modernization lenge the Chinese face in creating technical ca- and has set a course both to acquire technol- pability is to realize change on a number of ogy abroad and to increase its domestic capa- fronts simultaneously. An enhanced capabil- bilities for producing technology. There is ity for technological innovation entails changes much to be said for the course chosen; there in both the R&D system and the economy. are also significant problems of decisionmak- Economic reform and changes in the policy en- ing, of assimilation, and with basic economic vironment are necessary for improving the cli- institutions; problems that must be solved if mate for foreign investment. Effective absorp- the full economic value of technology transfer tion of foreign technology requires not only a is to be realized. Reforms under way should policy environment conducive to the operation contribute to the solution of these problems, of foreign businesses, but also further economic but the solutions will take time. Cases of China reform and changes in the domestic R&D choosing inappropriate technologies and hav- system. ing difficulty with their assimilation are likely While the Chinese realize the significance of to be seen in the future, but they are likely to the systemic nature of the technology trans- become fewer. fer phenomenon, and while their moderniza- China’s larger quest for modern technical cation policies are intended to bring the elements pabilities involves much more than interac- of the system into greater harmony, the very tions with the foreign suppliers of technology. complexity of the system makes it likely that It is also shaped by the operational objectives there will continue to be problems with tech- of technology policy, by the nature of the do- nology transfer. The wider significance of these mestic economic and R&D systems, by the problems is explored in chapter 6. quality of management, and by the policy environment. The complexity of this context for technology transfer can be seen in figure 3. Ch. 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology /reports 65 .

Figure 3.— The Acquisition of National Technical Capabilities: A Revised View of the Elements Involved k f

Management

1. Modernization of existing enterprises

Issues of innovation Issues of assimilation make-or-buy issues

The international The economy I environment I

Issues of business climate / and the assimilation of technology

SOURCE Office of Technology Assessment, 1987 Chapter 4 The Role of the United States in Technology Transfer to China —— ..——— -

CONTENTS

Page Factors Affecting U.S. Companies in the China Market ...... 69 The Investment Environment ...... 72 Schedule Delays, Taxes, Other Costs ...... 73 Intellectual Property...... 76 Local Sourcing, Employment, Export Marketing ...... 76 Foreign Exchange Concerns ...... 78 Management Styles, Training, Language, and Cultural Considerations.. 78 Comparative Investment Environments...... 79 Case Studies ...... 80 Transportation...... 80 Satellite Telecommunications ...... 87 Computers and Electronics ...... 94 The Role of the Small-to-Medium-Size Firm ...... 101 Government and Institutional Technology Transfer ...... 102 The U.S. Government-Supported Programs. .,...... 102 Bilateral Agreements ...... 104 Student Exchange ...... 104 Private Programs ...... $ . . $ ...... 105 Conclusion ...... 105 Appendix A: Provisions of the State Council of the People’s Republic of China for the Encouragement of Foreign Investment ...... 107 Appendix B: Protocols and Memoranda of Understanding Under the U.S.-PRC Agreement on Cooperation in Science and Technology...... 109

Figures FigureNo. Page 4. China’s Railroad System and Placement Improvements ...... 81 5. China’s Vehicle Production Levels ...... 84 6. China: Satellite Telecommunications Technology Transfer ...... 91

Tables Table No. Page 2. Commodity Composition of U.S. Exports `to China, 1980-86 ...... 70 3. Commodity Composition of U.S. Imports From China, 1980-86...... 71 4. A Sample of Functional Management Knowledge Apparently Lacking in the Chinese Management Community ...... 78 5. Chinese Production by Vehicle Category ...... 83 6. Satellite Telecommunications Development in China: A Chronology of Important Events ...... 89 7. Major Achievements in China’s Computer Industry, 1977-85 ...... 96 8. U.S. Computer and Related Equipment Sales to China ...... 96 Chapter 4 The Role of the United States in Technology Transfer to China

Although the U.S. Government sets regu- China’s interests in U.S. investment are pri- lations and establishes programs that directly marily to improve its technology base and to affect technology transfer to China, the actual earn foreign exchange. Foreign exchange de- transfer of technological information and ca- rives from various charges to the U.S. firms pabilities is generally performed by U.S. com- (taxes, payments for services, labor rates) or panies through direct investment, joint ven- through exports of goods created through im- tures, coproduction agreements, or license proved technology. These often divergent in- agreements. Corporate reasoning by U.S. firms terests of the U.S. firms and the Chinese can for transferring technology to China includes be the basis for mutually beneficial relationships “getting a foot in the door” of the potentially —or a great deal of friction. The case studies immense China market, having access to in- in this chapter illustrate how well the U. S.- expensive labor, and having a presence in the China relationship works in actual practice. Asian Pacific region for manufacturing, marketing, and distribution.

FACTORS AFFECTING U.S. COMPANIES IN THE CHINA MARKET When the Chinese market opened to West- China moved up three places to 16th among ern business in the late 1970s, foreign compa- U.S. trading partners. Table 2 lists Depart- nies were elated. China was a country needing ment of Commerce statistics on the composi- almost everything. It had a huge supply of po- tion of U.S. exports to China from 1980 to tential customers and inexpensive workers, 1986. Machinery and transport equipment was and was ruled by an apparently honest and a major U.S. strength, accounting for almost dedicated new (albeit Communist) leadership. $2 billion in sales to China in 1985 and over The economies of the United States and China $1 billion in the first half of 1986. were also often viewed as complementary. It was hoped that American high-technology Table 3 lists statistics for U.S. imports from products, capital goods, and industrial mate- China for 1980-86. Most U.S. imports in this rials would help China’s development, while table are in the category of “miscellaneous the United States would be a growing market manufactured articles” (which includes arti- for Chinese goods. cles of apparel and clothing accessories), representing almost $1.2 billion of trade in just In fact, in 1985 the United States accounted the first half of 1986. Basic manufactures for about 10 percent of China’s imports and (mostly textiles, yarn, and fabrics) and crude 12 percent of China’s exports. ’ The United materials (mostly petroleum and petroleum States ranked as China’s third-largest trading products) also represent significant imports by partner after Japan and Hong Kong,’ while the United States. ‘Nai-Ruenn Chen, “U.S.-China Trade Patterns: The Outlook for Two Countries J4’ith a I,ot to Share, ” The China Business China’s Seventh Five-Year Plan (1986-90) en- l?e~piewr, September-October 1986, pp. 16-20. visions a 40-percent increase in the total vol- ‘Japan had a 28,3 percent market share of China’s imports in 1986, Hong Kong 12.7 percent,, and the United States 10.2 ume of China’s imports and exports by 1990, percent (U.S. Department of Commerce, February 1987), with the Chinese projecting imports growing 69 70 ● Techno/ogy Transfer to China

Table 2.—Commodity Composition of U.S. Exports to China, 1980-86 (million dollars) -- Jan.-June 1980 1981 1982 1983 1984 1985 1986 Foodstuffs ...... : ...... 1,265 1,334 1,239 541 580 104- 16 Cereal and cereal preparations ...... 1,264 1,332 1,236 536 578 97 6 Crude materials ...... 1,258 1,128 597 298 467 570 224 Hides, skins, and furskins, raw ...,...... ,....,.. 13 7 11 4 22 30 12 Oil-seeds and oleaginous fruit ...... 156 130 63 0 a 13 19 Crude rubber (including synthetic and reclaimed) .., 5 5 3 5 9 9 9 Cork and wood...... ,...... ,...,...,...... 41 99 217 234 287 328 123 Pulp and wastepaper...,...... ,...... 67 69 18 21 18 19 10 Textile fibers and their waste ...... 895 791 273 31 99 122 25 Metal liferous ores and metal scrap ...... 5 a a a 21 43 16 Animal oils and fats ...... 16 2 6 o 0 0 a Fixed vegetable oils and fats ...... 58 20 0 0 7 a o Chemical s ...... ,. ..,, 381 406 496 353 644 514 197 Organic chemicals ...... 40 44 38 25 71 87 39 Inorganic chemicals ...... 22 6 9 20 20 12 16 Fertilizers, manufactured ...... 153 131 147 168 267 152 18 Artificial resins and plastic materials ...... 120 170 237 92 234 228 109 Chemical materials and products...... 46 53 61 46 46 23 9 Basic manufactures ...... 428 447 275 220 189 370 91

Leather, Ieather manufactures, n.e.sv and dressed furskins ...... 49 64 65 26 39 63 13 Paper, paperboard, and articles ...... 130 61 36 41 32 27 11 Textile, yarn, fabrics, made-up articles, and related products...... 134 284 128 17 46 141 42 Iron and steel ...... 42 8 10 7 4 12 7 Nonferrous metals ...... 24 10 23 94 34 54 3 Manufactures of metals, n.e.s, ...... 42 20 7 31 29 67 10 Machinery and transport equipment ...... 358 212 217 587 910 1,958 1,070 Power generating machinery and equipment ..,..., 14 11 8 56 29 88 54 Machinery specialized for particular industries . . . . . 63 67 71 89 196 482 201 Metal-working machinery ...... 7 4 3 25 23 55 60 General industrial machinery and equipment, n.e.s. and machine parts n.e.s...... 35 34 34 47 61 153 83 Office machines and automatic data processing equipment ...... 31 22 36 51 102 190 98 Telecommunications and sound recording and reproducing apparatus and equipment, ,...... 8 16 12 18 26 44 32 Electrical machinery, aparatus and appliances, n.e,s. and electrical parts, thereof...... , ...... 18 21 25 43 53 101 67 Road vehicles ...... 18 7 9 22 63 99 65 Other transport equipment ...... 164 29 19 236 356 745 409 Miscellaneous manufactured articles ...... 56 71 78 166 202 319 166 Professiona~ scientific, and controlling instruments and apparatus, n.e.s...... 46 55 65 145 182 282 129 Photographic apparatus, equipment and supplies, and optical goods, n.e.s., watches and clocks.,. 2 5 4 5 4 8 5 Miscellaneous manufactured articles, n.e.s,. ..,.... 6 8 8 16 12 27 28 Total ...... 3,746 3,598 2,902 2,165 2,992 3,835 1,764 ‘Less than $500,000 n e s —not elsewhere speclfled SOURCE US Department of Commerce statwtlcs, SITC classlflcatlons Ch. 4—The Role of the United States in Technology Transfer to China ● 71

Table 3.—Commodity Composition of U.S. Imports From China, 1980-86 (million dollars)

Jan. -J-une 1980 1981 1982 1983 1984 1985 1986 Foodstuffs ...... 65 108 135 129 162 182 109 Fish, crustaceans and mollusks, and preparations, thereof ...... 7 25 19 12 21 32 35 Cereal and cereal preparations ...... 3 4 4 5 5 6 3 Vegetables and fruit ...... 25 44 59 58 77 75 33 Sugar, sugar preparations, and honey . . . 8 9 8 9 6 8 8 Coffee, tea, cocoa, spices, and manufactures, thereof ...... 15 19 37 34 40 47 23 Beverages ...... 2 2 3 5 5 4 5 Crude material s...... 300 657 774 589 794 1,204 524 Crude fertilizers and crude minerals ...... 41 53 60 47 57 53 17 Metal liferous ores and metal scrap ...... 37 52 25 11 17 32 17 Crude animal andvegetable material s,n.e.s. . . . . 56 49 42 35 39 41 Petroleum, petroleum products, and related materials ...... 149 321 615 468 656 1,052 457 Chemical s ...... 107 134 143 145 171 177 100 Organic chemicals ...... 16 26 26 34 45 36 23 Inorganic chemical s ...... 33 39 38 17 33 41 17 Medic ine and pharmaceutical products ...... 10 20 20 26 23 28 13 Essential oil and perfume materials, toilet, polish ing, and cleaning preparations ...... 14 11 14 16 16 15 8 Explosives and pyrotechnical products ...... 26 28 36 33 35 42 30 Chemical materials and products, n.e.s...... 8 9 8 13 10 10 5 Basic manufactures ...... 246 394 407 425 607 665 357 Leather, leather manufactures, n.e.s., and dressed furskins ...... 1 3 2 3 6 3 2 Cork andwood manufactures (excluding furniture) 5 6 6 8 8 10 4 Paper, paperboard, and articles of paper pulp, of paper or of paperboard ...... 2 3 3 3 4 11 3 Textile, yarn, fabrics, made-up articles, and related products ...... 149 252 239 255 392 399 251 Nonmetal lic mineral manufactures, n.e. s...... 19 33 40 50 65 59 31 Iron and steel, ...... a 6 7 3 3 3 5 Nonferrous metals ...... 44 44 45 31 35 80 18 Manufactures of metals, n.e.s...... 26 46 63 73 91 97 42 Machinery and transport equipment ...... 6 44 48 46 71 97 52 Machinery specialized for particular industries . . a a 5 6 7 7 3 Metal -working machinery ...... 1 4 5 5 4 3 2 General industrial machinery and equipment, n,e.s. andmachine parts n.e. s...... 2 30 20 14 16 14 7 Telecommunications and sound recording and reproducing apparatus and equipment ...... a 4 6 10 29 36 16 Electrical machinery, apparatus and appliances, n.e. s. and electrical parts, thereof. . . . . 2 3 5 3 8 20 15 Miscellaneous manufactured articles ...... 417 650 916 1,133 1,552 1,855 1,197 Furniture and parts thereof ...... 10 19 29 34 38 44 23 Travel goods, handbags, and similar containers . . . . 3 16 30 45 101 154 90 Articles of apparel and clothing accessories . . . . . 278 434 657 840 999 1,050 768 Footwear. ., ...... 21 37 42 38 48 61 41 Miscellaneous manufactured articles, n.e.s...... 103 140 154 169 355 532 267 Total ...... 1,141 1.987 2,423 2,467 3,357 4,180 2,339 aLess than $500,000 n e s — not elsewhere spec!f!ed SOURCE U S Department of Commerce statistics SITC class lflcat{ons 72 . Technology Transfer to China at an average annual rate of 6.1 percent and and tariff levies, inadequate labor, and numer- exports at 8.1 percent annually. Recent figures ous other annoy ances.G As U.S. Ambassador indicate that U.S.-China trade reached $8.3 bil- to China Winston Lord said in a May 28,1986, lion in 1986, a 33-percent increase over 1985 speech, “Many business people are frustrated levels.3 The growth in this bilateral trade was by high costs, price gouging, tight foreign- import driven, however, with U.S. imports exchange controls, limited access to the Chi- from China setting a record at $5.2 billion, a nese market, bureaucratic foot-dragging, lack 24-percent increase over 1985. U.S. exports of qualified local personnel, and unpredictabil- totalled $3.1 billion for 1986, a 19-percent drop ity. ” Some U.S. companies are making money from 1985 levels, the first decrease since 1983. in China, but they are reluctant to talk about The U.S. trade deficit with China reached an it for competitive reasons. This is partly due historic high of $2.1 billion in 1986, primarily to not wanting to let their competition know due to China’s hard currency shortage and the of a good opportunity, and partly because they boom in U.S. imports in the light industrial fear the Chinese would feel justified in raising sector and in clothing, textiles, yarns, and their taxes and other local costs. fabrics. 4 Future trade between the United States and The Investment Environment China should come into closer balance. The po- Foreign investment in China from January tential is there since the United States holds 1986 to August 1986 fell by 20 percent (to con- a strong competitive position in the energy, tracts worth $1.24 billion) compared with the telecommunications, electronics, and transpor- same period in 1985, confirming perceptions tation sectors—all priority areas in the Chinese that the investment climate had been deterio- Seventh Five-Year Plan. For example, despite rating. Less than one-third of the 2,600 joint the drop in total exports from the United venture companies listed so far have actually States to China in 1986 compared with the pre- gone into business. Of the remainder, many vious year, some big gainers for the LTnited have been scaled down or dropped completely States were exports of high technology, such owing to high costs, unfavorable returns, and as computers and telecommunications equip- management problems.7 ment, as well as metalworking equipment (which more than doubled the previous year’s level), A fundamental problem with joint venture heating and cooling equipment, and railway arrangements, according to foreign business- vehicles and equipments men, is that the foreign partner usually contributes foreign exchange and technology, while The U.S. sales to China described above have the Chinese contribute property, equipment, been significant and probably will continue to and services (such as electricity and water) on be. China is more interested in investments which they place an unrealistically high value. than direct sales because they promote tech- The Chinese have recently stated that they will nology transfer. However, after rushing in with try to remedy this situation. A correlative many business proposals when China initiated problem is that the Chinese tend to undervalue its open door policy, few U.S. businesses have the technology contributed by the foreign in- seen their overtures come to profitable frui- vestor.8 Trying to find a solution to this basic tion. Many U.S. firms feel that the bloom is problem is critical and is much more difficult off the rose. Indeed China’s investment climate, many foreign businessmen say, has steadily deteriorated at least until recently. ‘James P. Sterba, “Great Wall-Firms Doing Business in China Are Stymied by Costs and Hassles–They Complain of They complain of soaring costs, arbitrary tax Red Tape, Poor Access to Markets, Even a Shortage of Labor, ” -— The Wall Street Journal, July 17, 1986, p. 1. ‘Us Department of Commerce data, February 1987. 7’4Joint-Venture Bliss Ends in China, The EcorIom”st of Lon- ‘Japan had a $4.9 billion trade surplus with China and Hong don appearing in The Washington Times, Aug. 20, 1986, p. 3D. Kong a $3.6 billion surplus in 1986. ‘See, for example, Cao Yan, “Analysis on ‘Free’ Technology ‘U.S. Department of Commerce, February 1987. Imports,<’ JISHUSZ-ZICHANG BAO (Tianjin), Oct. 7, 1986, p. 3. Ch. 4— The Role of the United States in Technology Transfer to Chfna ● 73 than solving the problem of overvalued Chi- ing, training, and others that are also serious. nese properties or services. The joint ventures are struggling toward different solutions to these fundamental problems.13 In an effort to improve the investment climate, the Chinese Government adopted “The The latest attempt by the Chinese to improve Law of the People’s Republic of China on En- the investment climate came in the 22 articles terprises Operated Exclusively with Foreign listed under “Provisions of the State Council Capital ”in 1986. This law stipulates that com- of the People’s Republic of China for the En- panies that bring in advanced technology or couragement of Foreign Investment, ’ listed export the bulk of their production, can estab- in Appendix A. The intent is “to improve the lish wholly foreign-owned enterprises in China.g investment environment, facilitate the absorp- These enterprises may also apply for preferen- tion of foreign investment, introduce advanced tial tax treatment. Once approved by the Gov- technology, improve product quality, expand ernment, these ventures will also be protected exports in order to generate foreign exchange under Chinese law from nationalization and ex- and develop the national economy. The arti- propriation, except under “extraordinary cir- cles spell out various conditions and fees ap- cumstances; and if such action is necessary, plied to foreign ventures to reduce the uncer- ‘‘legal procedures will be followed and reason- tainty involved. These new regulations benefit able compensation will be made. mostly export-oriented and high-technology firms but fall short of meeting some basic in- It is expected that foreign exchange receipts vestor concerns. Foreign executives were cau- will balance any foreign exchange payments. tious at first, taking a “wait and see” attitude Income tax refunds will be granted when after- 5 toward the new regulations,1 but recently, re- tax profits are reinvested in China, but legiti- newed interest in certain joint ventures has mate profits may be remitted abroad. II The def- G inition of what constitutes a legitimate profit been evident.l is, however, still not clear. Schedule Delays, Taxes, Other Costs It was recently announced that the Bank of China is going to relax its tight credit policies Foreign firms in China have complained that to give loan priority to enterprises that involve the Chinese do not seem to understand that foreign investment. The bank will, in particu- time is money. An example is the McDonnell lar, extend help to technology-intensive com- Douglas venture (covered later in this chap- panies and manufacturers of products for ex- ter), which took 10 years to finalize. Eventu- port. Wong Deyan, the bank’s president, said ally McDonnell Douglas won a contract for 30 that the central bank will amend regulations MD-82s, with a price averaging out to about on the issue of credit for enterprises with for- $25 million per plane. Five have been delivered eign funds in a bid to create better conditions and are in operation. Twenty-five more will be for their development.lz built in Shanghai. Foreign businessmen reacted cautiously to McDonnell Douglas persevered because it these statements of relaxed policies, however, hopes to be involved in the development of a since they do not work toward resolving day- 100-passenger propfan aircraft to be built in to-day management problems of wages, hir- ——— “’’Joint-Venture Bliss Ends in China, ” op. cit. “’Foreign Investor Ruling, ” China Business and Trade, Apr. “U.S. Department of Commerce, February 1987. 23, 1986, p. 3. The regulations themselves appeared in China “James R. Schiffman, “Foreign Executives Wary of China’s Daile}’, Apr. 15, 1986. It should be noted, however, that just be- Pledge to Investors, ” The Wall Street Journal, Aug. 11, 1986. cause an enterprise is wholly foreign-owned does not mean that “Roger W’. Sullivan, “The In\’estment Climate, ” The China it will be free of the problems described previously. Business Review, January-February 1987, pp. 8-10. See also “’’’Foreign Investor Ruling, ” op. cit. Barry Kramer, “Beijing’s Course: The Chinese Economy Ap- ‘1 Ibid. pears to be Firmly on the Reform Path—But the Pace of Change ‘” ‘China to Ease Credit for Joint Ventures, Financiai Times, Slows After Resignation of Hu; Political Reforms on Hold, ” Aug. 8, 1986, p. 4. The J4{all Street Journal, May 14, 1987, p. 1. 74 Technology Transfer to China

Photo credtt A4cDonne// ~oug/as

Portions of a McDonnell Douglas MD-82 fuselage are shown being assembled at Shanghai Aviation Industrial Corp. facilities. Part of the coproduction contract involves extension of Douglas’ Federal Aviation Administration production certificate to the Shanghai facility.

China.17 The potential market is 500 to 1000 “postponed,” these companies were disen- planes over a period of more than 10 years. chanted with the Chinese market and might Thus the McDonnell Douglas effort is meas- refrain from bidding if the opportunity arises ured in a few decades, not a few years. McDon- again. nell Douglas hopes that its patience and long- The satellite postponement story is not atyp- term view in the China market will be rewarded. ical. European nuclear companies had once As another example, U.S. companies com- estimated the nuclear technology market in peting for China’s proposed purchase of satellites spent large sums of money and devoted much company time to pursue what promised to be both a very substantial sale and a chance -——. — $300,000. See Karen Berney, CBR, March-April, 1981. RCA- to establish a firm lodging in a promising mar- Astroelectronics (now called GE Aerospace-Astrospace Divi- ket. ’8 When the two proposed purchases were sion) reportedly spent over $1 million in courting the Chinese .— satellite contracts. 17’’ First ChineseAssembled MD-82 Nears Completion in SAIC ‘These types of problems occur in countries other than China [Shanghai Aviation Industrial COW.] Facilities,” Aviation Week too, of course. For example, Argentina has been negotiating and Space Technology, June 1, 1987, pp. 34-35. several years for the purchase of satellites from a U.S. firm. - for lflHughe9 was estimated to have spent $500,000 on the 1979 Bureaucratic infighting and the country’s financial problems 80 projected sale alone. GE expenditures were estimated at have kept Argentine officials from making a decision. Ch. 4—The Role of the United States In Technology Transfer to China ● 75

China to be worth up to $20 billion.’” 2’ How- the “Corporate Income Tax Law for Chinese- ever, in the past months, the Chinese Govern- Foreign Joint Ventures” of 1980, and the 1981 ment has scaled down ambitious plans for 10 “Income Tax Law for Foreign Enterprises. ” nuclear power stations by the end of the cen- As for investments in Special Economic Zones tury. The only firm plan for an imported plant (SEZS), the “Special Economic Zones Regula- is the 1,800-megawatt Daya Bay plant near tions for Guangdong Province’ of 1980 stipu- Hong Kong, for which Framatome of France, lates a preferential income tax rate. Electricite de France, and General Electric Co. of Britain have contracts to supply equipment All of these tax laws provide tax reduction and assistance totaling $1.7 billion. All other or exemption for projects that require a large plans have been postponed indefinitely, to the amount of capital, involve sophisticated tech- frustration of Framatome and Kraftwerk Union nology, or are located in remote areas. More- over, companies that invest in opened, coastal of West Germany, which had spent several years negotiating with the Chinese.” cities or opened points in several deltas are offered preferential treatment to various de- By its nature, international business is risky, grees. Furthermore, to speed up port develop- and overall, China is probably no riskier than ment, China has announced that projects in other countries.23 However, businessmen export development will be exempt from taxes pect a profit commensurate with the risk, and for 1 to 5 years, and will enjoy a 50-percent many companies have found little or no profit reduction in taxes from the 6th through the in their China business. Especially in very com- IOth year. Imported construction materials petitive areas, such as nuclear power, China and equipment are exempt from customs and has been able to play companies and countries the industrial and commercial unified tax. All off against one another to get very low-cost of these SEZS, the 14 open cities, and the eco- contracts. China maintains that companies nomic development areas like Liaodong Penin- should accept a low profit margin in recogni- sula have an array of special incentives for for- tion of the potential size of the Chinese mar- eign investment and for the importation of ket. Some companies such as General Electric technology for the establishment of new enter- (GE) accept this approach, hoping to gain a prises and the rehabilitation of existing plants. foothold and do well over the long haul. It is not yet clear how many companies will bene- Despite these tax breaks and tax exemp- fit from this strategy, but many U.S. compa- tions, however, foreign businessmen feel that nies are likely to lack the patience even to try. they are being taken advantage of. For many As has often been noted, American companies foreign businessmen who have been involved tend to focus on opportunities offering quick in trade with China over the past few years, profits, in contrast to Japanese companies, doing business in China has not gone as well which are prepared to wait. or been as profitable as they had hoped. One reason for this, they say, is that the tax bur- Since adopting the open door policy, China den of an investor is not limited to the income has drawn up a multitude of preferential tax taxes listed above. The total burden also in- laws to woo foreign investors.24 These include cludes corporate income tax, local income tax, *“Robert Thompson, “Chinese Studying Nuclear Technology, ” commerce and industry tax, residence tax, per- Toronto Globe and Mm”l, May 7, 1986, p. B-23. sonal income tax,25 and tax on bonuses paid “ U.S. Congress, Office of Technology Assessment, Energy Technology l%msfer to China, A Techm”cal Memorandum (OTA- to Chinese workers. TM-I SC-30, Washington, DC: U.S. Government Printing Of- fice, September 1985). Apart from taxes, people who do business “Thompson, op. cit. in China must also pay several types of charges “See for example, Jackson Diehl, “East Bloc Ventures Face and fines, including local or unit levies, which Uncertainties: Currency, Market Issues Plague Joint Efforts with Western Firms, ’ The Washington Post, Mar. 1, 1987, p. H3. businessmen say are often capricious. ““J$’hy Foreign Businessmen Feel They Are Being Milked, ” JPRS, Feb. 20, 1986, pp. 48-51, article by Yuan Liu, “The Hid- den Burdens of Doing Business in China, ” Chiu Shih Nien Tai “Personal income tax is payable by an indi~’idual who has [The Nineties] in Chinese, No. 12, Dec. 1, 1985, Hong Kong, been in China for more than 90 days. The incidence of tax is pp. 64-65. affected by the U.S.-Chinese treaty on double taxation. 76 . Technology Transfer to China

A joint venture or a foreign enterprise is re- actual conditions and international practice. sponsible for all its workers’ wages, allowances, Its aim is to encourage and popularize inven- and the social security the state provides the tions and speed up scientific and technologi- workers when they become sick, grow old, or cal development and the modernization drive. ’28 die. One joint venture for a major hotel in The Trademark Office of the State Admin- Guangzhou paid wages, bonuses, diligence istration of Industry and Commerce is respon- awards, allowances for dependents, social secu- sible for the registration and control of trade- rity, state subsidies, medical expenses, retire- 2G marks throughout China. For certain classes ment, accident compensation, and food. Be- of goods, the Trademark Office may prescribe sides these wages and allowances, regulations that they should bear a trademark. In this case, also provide for legal holidays, official holidays, no goods within that classification may be sold annual leave, sick leave, leave for visiting rela- unless they carry a registered trademark. At tives, maternity leave, and wedding leave. present, this applies for all pharmaceutical Thus, to run an enterprise in China, the for- goods. eign investor has to pay several times the nomi- nal wage rate in addition to numerous taxes The value of the patent and trademark meas- and fees. The high rates and many charges for ures in protecting foreign companies has not joint ventures are meant to maximize short- yet been tested in the courts. Several commen- run foreign exchange earnings. tators have expressed skepticism on their protection value.zg For example, China’s patent Intellectual Property law fails to provide protection for pharmaceuticals, chemical formulas, or trade secrets. Almost as soon as China opened its doors There is no copyright regime to protect pub- to Western technology, U.S. companies be- lished works, computer software, or semicon- came concerned about the lack of legal protec- ductor designs. It would also be very difficult tion for much of their proprietary technology. for a company to find out if its patent were In certain cases it was reported that advanced being violated because of the lack of access to technology would not be transferred to China most of the Chinese market. until there was some form of patent and licensing protection. The Chinese Government, on Local Sourcing, Employment, the other hand, did not want to be stymied by Export Marketing what it considered unfair restrictions on indigenous technology development. Realizing Manufacturing facilities must generally ob- the importance placed by foreign companies tain many parts, supplies, and services locally on legal protection, Chinese Government offi- to operate efficiently, but in China the quan- cials, after several years of internal discussion, tity and quality of local content is a major prob- formulated the first Chinese Patent Law, which lem. This is especially evident in the Beijing went into effect on April 1, 1985.27 Depart- Jeep joint venture of American Motors Corp. ments are now formulating detailed rules and (AMC), discussed below. The Chinese have am- training patent agents. The special features bitious goals for developing a supplier base for of the new patent law, according to the Chi- the jeep. Domestic content in the jeeps is cur- nese, are that “it absorbs the spirit of patent rently in the range of 10 to 15 percent, but policies in other countries and allows for China’s about 75 percent is needed for profitable exports.30 The Chinese went into this venture 2’” Why Foreign Businessmen Feel They Are Being Milked, ” op. cit. “For a detailed discussion on intellectual property issues in 28 The China Daily, “Legal Advisor: Your Patent Queries An- China see Tek Ling Chwang and Richard L. Thurston, “Tech- swered, ” Feb. 4, 1986, p. 4. nology Takes Command: The Policy of The People’s Republic “Nigel Campbell, China Strate~”es-The Inside Story, Univer- of China with Respect to Technology Transfer and Protection sity of Manchester/University of Hong Kong, 1986, p. 115. of Intellectual Property. ” The International Lawyer, vol. 21, ‘“Richard Johnson, “AMC, Chinese Move to Save the Beij- No. 1, Winter 1987, pp. 129-167. ing Jeep, ” Automotive News, June 2, 1986, p, 6. Ch, 4—The Role of the Unifed States in Technology Transfer to China . 77

Photo cred{f General E/ectr)c

Contract negotiations can be cumbersome. The lone GE representative faces whole teams of Chinese in talks leading to the first contract for locomotives.

wanting technology as well as the potential for charges, wages set by FESCO are higher than exports, and thus would like to achieve domes- those in most Asian economies. The worker tic content of 80 to 90 percent in 5 to 7 years. does not draw this wage–as much as 85 per- AMC, however, says this goal cannot be achieved cent of it, as well as most of any incentive bo- without strong backing from the Chinese Gov- nuses, goes back to FESCO. The U.S. Embassy ernment. cites an extreme case in which a French oil company reportedly paid $9,000 a month for a One aspect of dealing in China that is diffi- highly trained technician. The technician’s cult for foreign investors to fathom is that la- 33 monthly take-home pay, however, was $51. bor shortages can exist in a country with over one billion people. Yet, Chinese bureaucracy Foreign firms may be allowed to bring in ex- has created labor shortages. Foreign compa- patriate staff, but that is also expensive. Beij- nies cannot simply advertise for a needed ing is already among the costliest places in the worker, such as a secretary or an engineer. In- world in which to maintain expatriate staff: stead, they must go through the Foreign En- $150,000 to $ZOO,OOO per year.34 This does not terprises Service Corp. (FE SCO), which mo- include office rent, which ranges from $50,000 nopolizes Chinese workers and assigns them a year at the not very luxurious Beijing Hotel to foreign companies.31 The workers are polit- to $125,000 at the Great Wall Hotel.35 ically screened and trained to keep a watch on 32 Lack of labor mobility can also cause difficul- the foreign business. Since FESCO cannot ties. Getting specialized staff can be a prob- meet the demand for workers, the waiting lists lem because other companies are reluctant to are long, and the foreign firms must make do lose their best workers and often prevent their with whoever is finally assigned to them. FESCO can also pull away workers at any ‘sJames P. Sterba, “Great Wall-Firms Doing Business in time. China . . . “ This assertion about the technician pay has been disputed by a Chinese official in a letter to the Wall Street In keeping with China’s desire to make as Journal. 34 much foreign exchange as it can from labor Andrew Ness, ‘‘Price Hikes and the Foreign Business Comm- unity,” The China Business Review, March-April 1986, p. 52.

31 “Rents for office space in Beijing’s four joint venture hotels Sterba, op. cit. now average $11.80 per square foot per month according to a ~zlj ~ploYee~ for joint ventures are often recruited t~.rough March 1986 report by the U.S. Embassy in Beijing. This makes local labor bureaus which are not the same as FESCO, which space in Beijing much more costly than the equivalent space is a Beijing entity. Thus, they may not be quite so indoctrinated. in Hong Kong Central. 78 . Technology Transfer to China —

leaving. Official reports show that 4,000 of strict prohibitions against organizational di- Shanghai’s skilled workers recently asked for versification, and limited economic rational- transfers to more suitable jobs, but fewer than ity (as we know it in the West) regarding per- 350 of them were actually transferred.3’ At the formance evaluation and reward.” One of the Shenda Telephone Co., a joint venture between significant consequences of this situation is a Cable and Wireless (U. K.) and its Chinese part- widespread lack of many of the specific func- ners in Shenzhen (a special economic zone on tional management skills commonly associated the border of Hong Kong), Cable and Wireless with the concept of modern management. decided to pay for the education of three po- Many of these apparent management skill defi- tential employees under a Ministry of Educa- ciencies in Chinese managers are identified in tion program. “Buying” staff in this way table 4. In a more general management con- means extra cost and delays but enables the text, the average Chinese manager perceives foreign company to plan ahead.37 his role as being more of an information conduit from the top of the economic hierarchy Foreign Exchange Concerns —— “Appendix 5, Vol. II, “The Transfer of Western Managerial Foreign exchange concerns permeate every Knowledge to China, ” by William A. Fischer, May 1986. deal in China. For example, the Beijing Jeep Corp., Ltd. (BJC) was recently in a crisis, due primarily to foreign exchange problems. The Table 4.—A Sample of Functional Management 3-year-old joint venture began to assemble Knowledge Apparently Lacking in the Cherokee Jeep kits in the fall of 1985. New Chi- Chinese Management Community nese Government restraints on using convert- Marketing: ible currency quickly undermined production Market research plans, however. AMC received a license for im- Advert i sing porting Cherokee kits, but shipment was held Product design Industrial marketing up because of monetary disputes. Delays in Consumer marketing dollar-based payments for these complete- Manufacturing: knockdown (CKD) kits (unassembled parts) re- Total quality control sulted in a 2-month suspension of production Managing high-volume/high-variety operations Value analysis in mid-1986. The impasse on the kits ended Inventory management when AMC agreed to accelerate local content Manufacturing information systems in Beijing-built Cherokees in return for dollar- Distribution systems denominated (hence potentially more easily Ethics and comparative management repatriated) payments by the Chinese for Contract law North American-sourced knockdowns.’a Human resources: Motivation and incentives The concept of directorship Management Styles, Training, The role of the manager Executive compensation Language, and Cultural Considerations Organizational design Leadership styles It has been suggested that a useful charac- Finance: terization of the typical Chinese manager is Investment analysis that of a technically trained, operationally ex- Methods of financing perienced individual whose career and profes- International finance Accounting: sional skill development have evolved during Establishment of control systems a period of limited or no market interaction, Auditing Public accounting “’’Shanghai-The Ugly Daughter Repents, The Econom”st, Management of science and technology: Aug. 9, 1986, pp. 27-28. Anticipating technological change 37’’ Joint-Venture Bliss Ends in China, “ op. cit. Managing innovation and creative groups 3R Johnson, op. cit. SOURCE Off Ice of Technology Assessment, 1987 .

Ch, 4— The F/o/e of the United States in Technology Transfer to China ● 79

to the workers below than a decisionmaker/ the procedures, which leads to decisions risktaker. being made slowly. The usual arguments in Chinese joint The coproduction of MD-82s in China by ventures over quality were eliminated McDonnell Douglas (described below) demon- once the Chinese realized that approval strates the management challenges that can 40 for the finished aircraft from the FAA occur when starting a venture. The challenges hinged on meeting explicit, stringent included the need to bridge cultural gaps and standards. to meet the rigors of budget restraints and reg- ● 4 Thousands of manufacturing drawings ulatory requirements. 1 Budget pressure was and pages of technical literature had to imposed because the project was commercial be translated into Chinese. and not a military coproduction program. Reg- ulatory requirements were imposed to assure Another management concern has been train- that U.S. Federal Aviation Administration ing, which has turned out to be very difficult. (FAA) certification standards were preserved Chinese engineers have educational backgrounds during manufacturing. and work habits very different from those of their U.S. counterparts. The Chinese tend to Management difficulties arose in the Mc- be specialists, whereas the Americans are more Donnell Douglas joint venture for several rea- 42 generalists. The high standards demanded by sons. These included: the MD-82 manufacture had to be made quite . Trying to introduce untrained Chinese clear to the Chinese. To help meld the two workers to the “grid” system of manage- groups, 150 Chinese employees are being trained ment used by McDonnell Douglas, a sys- at Long Beach, California, for management po- tem that holds that information and author- sitions in the program. About 30-40 senior ity flow in different directions depending McDonnell Douglas people are onsite at Shang- on the problem to be solved. This system hai as advisors and comanagers to their Chi- is different from the Maoist “struggle ses- nese counterparts; this group will eventually sions” that replaced productive work dur- grow to about 100. About 1,000 people are em- ing China’s Cultural Revolution (although ployed on the MD-82 program at present, and in theory Maoist objectives could be com- the peak is expected to be 3,000. patible with this system). Other, less tangible, management problems . Because of the complexity and quality must also be faced. Philosophically, the Chi- control requirements of aircraft manufac- nese place much emphasis on human values, ture, McDonnell Douglas U.S. operations whereas the Americans are concerned about have developed over 600 inhouse manuals productivity and “the bottom line. Managers of standard procedures (of which only 200 must learn to emphasize both. Neither Amer- have been translated into Chinese so far). ican nor Chinese managers have been prepared These procedures sometimes go against for the differences in the concepts of trust and the Chinese way of doing things. In addi- 43 respect. tion, some Chinese are now frightened of doing anything that is not laid down in Comparative Investment Environments To appreciate more fully the nature of the ‘“See also Steven R. Hendryx, “Implementation of a Tech- nology Transfer Joint Venture in the People’s Republic of China: Chinese investment environment, it is appro- A Management Perspective, ” The Columbia Journal of WorM priate to examine its main features from a Business, Volume XX 1, Number 1, Spring 1986, pp. 57-66, which comparative perspective. In most categories, deals with Otis Elevator Company of the U.S. and the Tianjin- Otis joint venture. especially in business facilitation, China’s in- 41 Richard G. O’Lone, “MD-82 Aircraft Production in China Presents Management Challenges, ” Aviation 1$’eek and Space

Technology, Feb. 24, 1986, pp. 42-45. 4’ Gareth C. C. Chang, President, McDonnell Douglas China, “’’Joint-Venture Bliss Ends in China, ” op. cit. Inc., Personal communication, September 1986. 80 . Technology Transfer to China — — vestment climate stands in sharp contrast to projects are much less subject to government the existing situation in places such as South control than in China. Korea, Taiwan, Singapore, and Hong Kong, For all of these reasons, China is less com- all of which have developed very specialized petitive in attracting investment. In some and focused organizations to promote, proc- respects, many of the firms that began their ess, and administer foreign investment proj- Asian operations in places such as Taiwan and ects. In Taiwan, for example, an “industrial South Korea seem to anticipate a similar evo- development and investment center” was cre- lution in China. China has gone much further ated to link the island’s development needs than other socialist countries in allowing with the interests of potential foreign inves- equity-based investments, even to the point tors. Because of the strategic role attached to of accepting wholly foreign-owned projects. foreign investment, special consideration was However, the general consensus remains that given to addressing the specific needs of over- the process of change in China will be slow and seas firms in areas such as foreign exchange that the emphasis on strong control w-ill remain remittance, profit repatriation, import of com- a part of the Chinese investment setting. Do- ponents, labor costs, and overseas training. ing business with the socialist managers of In addition, foreign firms usually complete China’s nonmarket economy will never be as necessary negotiations in a relatively short easy as doing business in the market economies period of time in these other markets, and their of Singapore, Taiwan, or Hong Kong.

CASE STUDIES This section reviews the technology trans- existing major trunk lines. 44 The new-line confer endeavors in China by various U.S. firms struction between Datong and Qinhuangdao in the fields of transportation, satellite telecom- is the largest in scale, with investment total- munications, and computers and electronics. ling over 4 billion yuan. The Seventh Five-Year The U.S. companies involved in China have Plan proposes the construction of 3,600 km of ranged from very large diversified companies, new lines, the doubletracking of 3,300 km, and such as GE and IBM, to small firms selling the electrification of 4,000 km of existing in specific market niches. The technologies in- lines.45 volved range from manufacturing simple cir- China plans to replace steam engines with cuit boards to establishing satellite telecom- electric and diesel versions. By the year 2000, munications networks. The case studies that China hopes to have 20,000 km of electrified follow cover sales (with a technology transfer railway. China’s railroad system is not under component), joint ventures, and coproduction, the Transportation Ministry but under its own and give an indication of how things work in Railroad Ministry, which sets development pri- practice. orities. China’s present rail system and ambitious planned improvements are shown in fig- Transportation ure 4. Locomotive Sales by General Electric “see for example “Electrification Planned for 3000 km of Rail- China places particular importance on its ways XINHUA, Apr. 12, 1986 or “Modernization of Guangzhou- railroads. Priority projects presently under Shenzhen Railroad, ” by Dai Quan and Li Zhenxing in 7’IEDAO way are largely related to coal transport from ZEflSHI [Railway Knowledge], No. 4, July 28, 1985. 45Seiichi Nakajima, “China’s Priority Projects and the 7th Shanxi Province to other provinces and ports, Five Year Plan, ” China Newsletter, No. 63, JETRO, 1986, pp. and to electrification and double-tracking of 13-16. Ch. 4—The Role of the United States in Technology Transfer to China . 81 —— ——

/ LA

\ 82 ● Technology Transfer to China —

China began to import locomotives in 1958, Throughout the entire negotiation process, most of them from Hungary. In the years that GE worked with the same Chinese officials, followed, China bought locomotives from the who represented the Railways Locomotive Bu- United States, the Federal Republic of Ger- reau, the Railways General Industry Bureau, many, France, the Soviet Union, Romania, and and the China National Machinery Import/Ex- the German Democratic Republic. At present, port Corporation. Over the years, a good rela- China’s Dalian Locomotive and Car Works pro- tionship developed, so the second contract took duces 130 locomotives a year, and its Zhuzhou much less time to negotiate. Electric Locomotive Works produces 80 elec- The first contract stipulates that the tech- tric locomotives a year. China has two other nology transfer portion is for a period of 4 years factories that build passenger trains. However, and includes manufacturing and materials China’s need for locomotives and related equipment is far from being met by domestic pro- technology for certain components of the loco- 4 motive, but not design methods. So far the Chi- duction and imports combined. ’ The United nese have not asked for a particular technol- States has become the largest locomotive supplier to China. In March 1985, 220 GE diesel ogy that was not appropriate to their needs. locomotives of 4,000 horsepower each were de- The second China contract stipulates that livered, with 200 more locomotives on order. GE will train Chinese personnel to overhaul locomotives and will provide a factory man- The first contact between GE and the Chi- agement training course. Training will be done nese occurred in 1976, when GE conducted a both in China and in the United States using seminar on diesel locomotive technology in computers such as IBM personal computers China. Another seminar was given in 1978, af- (PCs). Language problems had some impact ter which a Chinese delegation visited U.S. on the technology transfer process, but the diesel locomotive plants as part of a worldwide problems were surmountable. tour. As a result of these seminars and tour, the Chinese invited GE to discuss possible GE apparently had no need for U.S. Gov- diesel locomotive sales.47 Negotiations began ernment assistance. They felt that they had in 1979 but were not completed until 1983, prepared themselves well and knew whom to when locomotives were given a high priority contact and how to keep negotiations running by the Chinese in a ranking of major projects. smoothly. However, GE feels that several factors affected by U.S. Government policy are Right from the start, technology transfer important: was a prerequisite of Chinese negotiations for any purchase of locomotives. GE purchase The high value of the dollar at the time of locomotive components from China was also of the negotiations hurt U.S. companies’ very important in negotiating the two con- competitiveness in China, just as it did tracts. This type of countertrade will probably elsewhere. The exchange rate when nego- become more and more important as Chinese tiations began on the first GE contract foreign exchange reserves decrease. was 1.80 yuan to the dollar. Today, it is over 3.69. --— - - — . . . The importance of Export-Import Bank “For a detailed look at several rail technologies needed by financing should be recognized-it is al- China see “A Report Covering the Railroads of the People’s most the only leverage the U.S. Govern- Republic of China. Operations, Rolling Stock, Standards and ment has to support U.S. industry. GE Plannin g. Effects of Interface and Technology Transfer Between North American Railways, Railway Supply Companies and the believes that other governments provide Association of American Railroads, ” prepared by David G. financial subsidies to companies doing Blaine and William J. Harris, Jr., May 1986 (app. 4, vol. II of this report). business in China. Financing was not a fac- 47The Chinese use of delegations (both to and from China), tor in these GE negotiations since China technical seminars, conferences, and exhibits are a common in- paid cash, but the availability of official formal technology transfer mechanism. Foreign technology seminars in China have been used a great deal and with apparent (but unsubsidized) financing could be cru- effectiveness. cial in the future. Ch. 4—The Role of the United States in Technology Transfer to China ● 83

● U.S. Government promotion should focus Table 5.—Chinese Production by Vehicle Category on products in general rather than on (Unit: 1,000 units) company-specific products. It might be 1981 ‘1 983 useful for the Department of Commerce Trucks. ., ...... 108.3 (61 .6°/0) 148,0 (61 .7°0) or other appropriate Government agencies Jeeps ...... 15.5 (8.8”/0) 18.0 (7,5 ”/0 ) to analyze the Chinese Five-Year Plan and Passenger cars . 3.4 (2,0 “/0 ) 5.6 (2.30/o ) match Chinese needs with U.S. strengths. Buses . . 1.7 (1 .00/0) 4.4 (1 .8°/0) Others...... 46.8 (26.6°/0) 64.0 (26.70/o) O The protocol between the Ministry of Rail- TOTAL ...... 175.7 (lOO.O /o) 240.0 (1 OO.O”IO) NOTE Trailers are Included under Others f they were Included with Trucks ways and the U.S. Government was not par- the percentage for trucks would reach 85 percent ticularly useful, but it did not hurt, either. Thus SOURCE Makota Iwagakl, ‘The State of China s Automobde Industry China far, export controls have not affected the ex- Newsletter No 63, JETRO, 1986 port of locomotives and locomotive technology to China. to achieve economies of scale, even for components. In addition, Chinese motor vehicle tech- GE was particularly interested in the Chi- nology is over 20 years old, which affects ve- nese locomotive market because it had spent hicle production, fuel efficiency, maintenance $500 million modernizing its locomotive plant needs, and pollution control. in Erie, Pennsylvania. At present, the market for locomotives in the United States is poor. China seeks joint ventures, improved tech- The two China contracts, even if they produce nology, specialization, and mass production, little or no profit, allow GE to refine techno- giving special emphasis to heavy-duty trucks logical and design advances while the plant and sedans. The China National Automotive operates. When demand returns, GE will be Industrial Corporation, founded in May 1982, well placed competitively .48 has actively sought links with foreign companies. It has hosted foreign delegations from Beijing Jeep Joint Venture with AMC auto companies, has sent technicians abroad China’s automobile manufacturing began in for research and technical exchange, and has 1956 with the production of Liberation trucks been involved in joint production agreements. at the Changchun No. 1 auto plant. These 4- In the last few years, the company has intro- ton trucks were manufactured using Soviet duced advanced technology from the United equipment and technology. The production of States, Japan, Italy, France, Britain, and West Liberation trucks kindled an interest in sev- Germany. In addition to BJC, the Shanghai- eral types of motor vehicles required to satisfy Santana is a sedan produced jointly by Shang- China’s burgeoning needs. In Shanghai, Nanj - hai and the German Volkswagen Corp. The ing, and Jinan, a variety of models were pro- Tianjin-Dafa van is produced jointly by Japan duced including the Yellow River and the Leap and China. Forward trucks, the Red Flag limousine, and The rising Chinese demand for automobiles Shanghai sedans. Today, more than 50 kinds had previously been met largely by imports. of vehicles in six categories—vans, cross-country However, the large-scale importation of vehi- vehicles, dump trucks, tractors, buses, and cles ended in 1986 with a clamp-down on for- sedans-are in production, with more than 300 eign exchange expenditures. It should be noted 49 types refitted for special purposes. Produc- that direct sales of cars and trucks do little tion by vehicle category is given in table 5, and for technology transfer–the backward state total automobile production levels are given of China’s own industry necessitated imports, in figure 5. Production levels are still too small and the Chinese are making efforts to remedy the situation as described below. ‘“Peter Petre, “What Welch has Wrought at GE, ” Fortune, July 7, 1986, p. 45. See also Barnaby J. Feder, “GE Costly AMC and the Beijing Automotive Works Locomotive Gamble, ” The New York Times, Jan. 25, 1987. 4’Makoto Iwagaki, “ The Stat,e of China’s Automobile Indus- formally inaugurated their joint venture (BJC) try, ” China Newsletter, No. 63, NETRO, 1986, pp. 9-11, 16. to produce four-wheel-drive Jeep Cherokees in 84 . Technology Transfer to China

Figure 5.—China’s Vehicle Production History 500 Open doolr .

400 Hua Guofeng% Second 10-year adjustment z Reconstruction plan period : 300 following n~ : establishment r of PRC .—c .g 200 Cultural Gang of four revolution 5 First Great adjustment leap period — 100 forward 1 1

I I ,

0 1960 1965 1970 1975 1980 1985 Year SOURCE Zhorrgguo Tong// N/an//an (China Statlstlcs Yearbook), from Makota Iwagakl, “The State of China’s Automobile Industry, China News/efter - No 63, JETRO, 1966

Beijing in October 1985. AMC owns 31.3 per- state agencies and enterprises. Other buyers cent of the joint venture. So far, AMC has in- include the Mongolian police department and vested nearly $16 million in capitalization, pro- several foreign companies stationed in China. duction equipment, and living expenses for the 50 Some problems with the joint venture de- expatriate staff. veloped early .52 The original 1983 contract The first phase is the assembly of CKD Cher- called for a $10,000 portion of each $19,000- okee kits shipped from the United States. This Cherokee sold in China to be paid in dollars. will be done at a plant that for many years has When the Chinese Government clamped down manufactured a modified Soviet-designed jeep, on foreign exchange outlays, however, BJC vehicles that are fuel inefficient and, on aver- was left with a $2 million foreign exchange debt age, have major drive train failures within their from the State Materials Bureau and an insis- first 12,500 miles. The Chinese are hoping that tence by Beijing that remaining vehicles be their experience in assembling Cherokees will ——— teach them how to improve this vehicle. In par- “Some ~bservers believe that the original contract was poorly conceived and that AMC should take much of the blame for ticular, the improved quality control of assem- this. Subsequent problems they believe stem as much from in- bly and locally sourced parts will be impor- adequate financial plannin g and unrealistic capitalization as they tant.5’ do from any problem inherent in doing business in China. (Steven R. Hendryx, “The China Trade: Making the Deal Work, ” Har- AMC has shipped almost 2,000 Cherokee vard Business Review, July-August 1986, pp. 75-84. ) The venture’s experience to date suggests that timetables calling for kits to China, 1,782 of which had been assem- 80 percent local content by 1988 and 10,000 exported vehicles bled by January of 1987. The largest single in 1990 were unrealistic. Also, many foreign observers point buyer of Cherokees is the State Materials Bu- out that AMC’S initial cash contribution of $8 million was very small in relation to its goal of building an export-quaIity jeep reau, which purchased 200 of the first 500 ve- in China. (“Problems at Two Joint Ventures—Fundamental hicles sold, mostly for distribution to other Problems Plague AMC Joint Venture/If Things Go On Like This, — There’ll Never be a Chinese Detroit, ” The China Business Re- 50’’ Cas~Shortage Forces AMC to Review Cherokee Produc- view, July-August 1986, pp. 34-35. The second joint venture tion in China, ” China Business and Trade, Apr. 23, 1986, p. 3. referred to in this article is that of Shanghai-Volkswagen Au- ‘] Visit by OTA staff to Beijing Jeep Corp., Jan. 28, 1986. tomotive Company Ltd. producing Santana sedans. ) Ch, 4— The Role of the United States in Technology Transfer to China ● 85

Photo credit Er/c O Basques

The Beijing Automotive Works produces two types of jeeps in parallel assembly lines. The BJ-212 pictured on the right is a Soviet-designed jeep that has been produced since the 1950s. The Cherokee Jeep on the left is a product of the Beijing Jeep Corp. Ltd., a joint venture formed with American Motors Corp. bought only with Chinese currency. Produc- obtain this much-needed assistance from the tion of Cherokees dropped to seven vehicles highest levels. Recent reports indicate that a day, about one-half the output rate hoped many of the problems have been solved. for. The original 1986 production target of 1,000 was thus lowered to less than 2,000. McDonnell Douglas MD-82 Commercial Aircraft Coproduction This joint venture came very close to fail- ing, primarily because of these foreign ex- China is one of the few countries in Asia to change problems, with AMC threatening to have developed its own combat aircraft.” The walk away from the deal. However, the joint Chinese developed the Shenyang J-8 Fin back venture is too large and symbolically impor- fighter, which made use of technology acquired tant for either side to let it fail. The importance from the manufacture under license of Soviet was underscored by the extensive discussions aircraft such as the MiG-21. The Chinese F-8- of AMC with the China National Automotive Industrial Corp.,53 the State Economic Com- “The Beijing Jeep Corp. Ltd. recentl~’ held an exhibition on mission, and the State Planning Commission its three-year anniversary. The joint Y.enture has so far produced on the joint venture’s problems. Some feel that 1,782 Cherokee Jeeps with domestic content reportedl~ account- the much-publicized difficulties of this joint ing for one-sixth of the jeeps to~al cost. I)i\idends were shared by ANIC and the Chinese for the first time in 19/+6. The Chinese venture in the international press helped AMC and American managers agreed to reintest $101.25 million in the expansion of production during the count r~’ Se\’enth Fi\re- -. Year period (1986-1990). (“Joint \’enture on ,Jeeps Marks ,4n- ‘>’ The go~’ernment has recently replaced the China National niversary, ” XIN}IUA, Jan. 15, 1987.) - Automotive Industrial Corp. (CNA IC) with a federation which “’The Chinese have announced plans to display four of their will provide China’s more than 2,000 automobile and motorcy- aircraft at the 1987 Paris Air Show which starts (June 12, 198’7 cle manufacturing enterprises with consulting services and guid- in I,eBourget, France. This is China first aircraft presenta- ance in order to help coordinate the automobile industry, The tion at this biennial salon. The four aircraft are the Nanchang reason for the demise of Ch”AIC, which started in 1982 with A-5 and Xian FT-7 fighters, the Harbin Y-12 twin-turboprop high hopes for automobile production coordination, was that utility transport, and the Northwestern Polvtechnical Uni\’er- its excessi~’e power stifled the initiati~’e of indi~.idual enterprises. sity’ 1)4 RD remotely’ piloted vehicle. (‘‘Chinese Plan to Displa~’ (China Business and Trade, Yfol. VI 11, Issue 17, illar, 23, 1987, Aircraft at Paris Air Show, ” A ~iation t~”eek and Space Twh- p. 4.) nofo~’, ,Jan, 19. 1987, p. 21, ) 86 ● Technology Transfer to China

2 is a Mach 2.2, delta-wing, air-superiority Administration of China (CAAC), the umbrella fighter derived from the J-8 fighter.5G Chinese organization that oversees all aspects of aviation, has agreed to acquire the 25 MD- China also laboriously (and expensively) built 82s. The five other MD-82s have already been two prototype airliners in the Boeing 707 cat- put into service by regional carriers in Shang- egory, designated as the Y-10 or, as some hai and Shenyang. termed it the “708. ’57 This airliner was extensively reverse engineered from the Boeing 707s Thirty-eight engineers and specialists from bought by the Chinese. The engines of the Y- the United States are staying at the McDon- 10 were of U.S. manufacture. The first Y-10 nell Douglas coproduction facility in Shang- was used for structural tests, and the second hai, run by the SAIC. They stay from 2 months was for actual flying tests for airworthiness. to up to 2 years. The contract also specifies The second plane began flight testing in Sep- that approximately 220 Chinese will travel to tember 1980 and flew successfully for a total the United States for training, most of them of about 300 hours.58 One major problem with in planning, engineering, and assembly. Of the plane was the integrity of its fuel tanks— these 220, approximately 90 percent will be the Chinese were accustomed to the Soviet engineers and 10 percent technicians. In 1987 style of aircraft building, which uses bladders they intend to coproduce 2 planes. The post or tanks for the fuel, not the U.S. style, which 1987 timetable is not definite, but they hope uses “wet wings” (the aircraft wing itself is to assemble four planes in 1988, seven in 1989, a fuel tank). Such problems and doubts about eight in 1990, and four in l991. obtaining international acceptance led to a de- The McDonnell Douglas coproduction agree cision not to manufacture the Y-10, but to join ment is complex, with 500 pages (in both Eng- instead with McDonnell Douglas. lish and Chinese) five parts covering: In April 1985, McDonnell Douglas and Shang- 1. licensing details hai Aviation Industrial Corp. (SAIC) signed 2. delivery of aircraft to CAAC and after- an agreement providing for the coproduction sales service, of 25 MD-82 twinjet transports, with an op- 3. offtrade (countertrade) agreements, tion for 15 more. The agreement took 10 years 4. new joint development of aircraft, and to finalize. The Chinese had earlier produced 5. discussion of a new joint management landing-gear door subassemblies for McDon- system. nell Douglas commercial airliners. McDonnell Douglas was satisfied with the quality of the The total deal covers a period of about 10 years. work on the over 200 doors assembled and A major step for the Chinese is now com- decided to go forward with a proposal to copro- pleted with the signing of the “Memorandum duce 25 MD-82 commercial airliners in Shang- of Agreement for Technical Cooperation in the hai with the Chinese.’g The Civil Aviation Field of Civil Aviation” between the FAA and 5’The U.S. Air Force and the People’s Republic of China signed the CAAC.G1 This agreement, along with its a $501 million contract in October 1986 to upgrade the F-8 fighter with U.S. made avionics equipment. A draft request for pro- Annex 1, certifies FAA airworthiness to the posals has been issued by the Air Force and a formal RFP will MD-82s being assembled in Shanghai and is go out in early March 1987 with a contract award planned for essentially an extension of the airworthiness August. Delivery of the first 50 kits and five spares is scheduled for 1991. The kits will include new radars, inertial naviga- certificate given to the MD-80 series of aircraft tion equipment, head-up displays, air data computers, and a manufactured in McDonnell Douglas’ Long new data bus. (“Chinese F-8-2 Fighter Configured for All- Weather Day/Night Missions, ” Aviation Week and Space Tech- nology, Jan. 19, 1987, pp. 42-43. ) ‘Visit by OTA staff to the Shanghai Aviation Industrial Corp. “See, for example, E. E. Bauer, China Takes Off: Technology plant, Shanghai, February 4, 1986. Transfer and Modernization, University of Washington Press, ‘l’’ Memorandum of Agreement for Technical Cooperation in 1986, concerning several interesting technology transfer his- the Field of Civil Aviation between the United States of Amer- tories. ica Department of Transportation, Federal Aviation Adminis- ‘nVisit by OTA staff to the Shanghai Aviation Industrial Corp. tration and the People’s Republic of China, Civil Aviation plant, Shanghai, Feb. 4, 1986. Administration of China, ” signed Mar. 14, 1986 and “Annex ‘gShanghai site visit by OTA staff, Feb. 4, 1986. 1 to the Memorandum of Agreement” signed Mar. 15, 1986. Ch, 4—7 The Role of the United States In Technology Transfer to China ● 87

Beach facilities. With this certification the MD- sized for regional markets. In this respect, 82s assembled in China can be flown or sold China can be compared only with the United anywhere in the world. McDonnell Douglas ac- States and the Soviet Union.G’ tually monitors the Chinese work in assembling the SKD (semi-knockdown) units to Satellite Telecommunications make sure that the completed aircraft are in compliance with FAA requirements. FAA in- Background spectors from Long Beach also go to China ap- According to a recent Department of Com- proximately every 3 months to check for commerce Industry Sector Analysis for Telecom- pliance in May 1986, Annexes 2, 3, and 4 munications in China, “China recognizes that were drafted and sent to the Chinese. These telecommunications is one of two or three in- annexes deal with controlling air traffic, main- dustries upon which the fate of its entire mod- taining airworthiness, and developing an air ernization rests. The principal focus is on rapid traffic control system plan. The Chinese have improvement of what can only be described expressed an interest in these but do not want as an appalling telephone system. ’66 Only 1 to commit foreign exchange to them at this person in every 200 has a phone, placing China time. among the lowest six countries in the world The MD-82 production line started as planned in phone density. Long waits for connections, on April 1, 1986, with the first plane completed poor line quality, and lack of service are con- in June 1987, 1 month ahead of schedule.63 This tinual problems. Much of the equipment dates plane will be test-flown to see that it is air- back to the 1930s and 1940s. Chinese interna- worthy and operates to FAA specifications, tional telecommunications capacity has been with delivery in July. Subsequent planes will developing at a rate of 30 percent a year (al- then be essentially replicas of this first one. beit from a small base), mostly through increasing communications by satellite. China can pro- China’s aircraft industry is developing new duce several types of equipment, including types of 100-seat jet planes in cooperation with ground stations (particularly C-band) and tele- Messerschmitt-Bolkow-Blohm (MBB) of West phone transmission lines, but these are gener- Germany and McDonnell Douglas. This coop- ally not technically sophisticated. erative arrangement was signed in April 1985. China has sent over ’200 senior specialists from Satellite telecommunications is a very appro- its aircraft industry to West Germany and the priate high-technology sector for China. China’s United States to help design and produce the large population, spread over vast land masses new aircraft.64 with extreme variations in climate and terrain, makes this an ideal technology- better even One reason for so much interest by foreign than microwave transmission, in most cases. firms is that the potential market for aircraft Fiber optics would be a contender only on high- in China is enormous. Unlike other countries volume trunk lines between major cities or for in the region, China contains a home market military uses requiring a high degree of secu- for aircraft that, by itself, is large enough to rity. The Chinese realize that telecommunica- justify at least the development of aircraft tions is an extremely important part of their national infrastructure, and many of their am- “’’Chinese MD-82 Procedures Under Review, ” Aviation M’eek bitious development plans are closely tied to and Space Technology, May 25, 1987, p. 29. it. They also realize that there is military and “See Bruce A. Smith, “Chinese Join Wings, Fuselage of First Coproduced MD-82, ” A}’iation Week and Space Technology, propaganda value to increased telecommuni- Dec. 15, 1986. pp. 41-43 and “First Chinese-Assembled MD-82 ,Nears Completion in SA IC [Shanghai Aviation Industrial Corp. ] Facilities, ” A\iation M’eek and Space Technology, June 1, 1987, ‘i5Pierre Condom, “The Far East—Toda~’s Customer “ Ja- pp. 34-35. pan, of course, despite being a small countr~’, also has strong “’’[Chinese] Aircraft Industry Cooperating with U. S., FRG, ” reasons for developing its own aircraft. Xinhua, Nov. 21, 1985, reported in JPRS-CEA-85-1 12, Dec. 20, “’’Telecommunications in China— Industry Sector Anal~sis, ” 1985. U.S. Department of Commerce, W’ashin@on, D. C., 1985. 88 ● Technology Transfer to China cations capabilities. However, with limited resources, telecommunications development has come and will probably continue to come after agriculture, transportation, and energy development. China has three options for achieving satellite telecommunications capability: It can lease the capacity on existing satellites, buy satellites from other countries, or develop its own capabilities. China is actually pursuing all three options. INTELSAT (International Telecom- munications Satellite Organization) has provided transponder capacity to China, and this was expanded with the purchase by China in 1986 of two transponders from the satellite at 66 degrees East longitude. One of the transponders is used for educational programming, and the other for news and cultural programming.’ 7 China has also investigated the purchase of satellites, as discussed below. Purchase or lease of a system for complete coverage of the entire country would be prohibitively expensive, however, considering China’s great needs.’8 China has significant expertise in both scientific satellites and rockets (see table 6 for a chronology), but its communication satellites in particular are far behind the best Western technology. 69 Technology transfer is probably the best compromise. China can buy several satellites and associated technology from the United States or Europe, and it can use this to greatly speed up its own development.

Satellite Telecommunications Technology Transfer China requested foreign proposals for substantial development of its satellite telecommunications capabilities in the late 1970s and Photo crecflt China Greaf kVa// /rxfustry Corp

7 ‘ Radhakrishna Rae, “China’s Space Plan, ” Satellite Com- The main thrust of the Chinese drive for commercial munications, February 1987, pp. 25-27. 58 launch business is the Long March 3, shown above at Leasing of one communications satellite transponder costs the Xichang launch site. This vehicle is essentially a about $30 million per year. This does not include ground equip- Long March 2 with the addition of a new cryogenic third ment. Depending on the type, central ground stations cost from stage which boosts the payload into a geostationary 0.5 to 4.0 million dollars apiece. Buying an entire satellite com- transfer orbit. The Long March 3 has been launched munications system (which would have several transponders) three times with the latter two being successful. could cost 120 to 150 million dollars with the satellite lasting 9 to 14 years. The U.S. civilian sector presently has 150 to 200 active transponders. INTELSAT has about 330 to 340 trans- again for 1984-85. In the earlier case, the re- ponders available for use and is presently operating at about spondents to the request for proposal (RFP) 50 percent of capacity. g were Hughes Aircraft, GE, and RCA-Astroelec- ‘ China’s particular needs are in increasing communications satellite power and longevity and in improved satellite stabili- tronics of the United States, MBB from West zation and control. Germany, and British Aerospace Dynamics. Ch, 4—The Role of the United States in Technology Transfer to China c 89

Table 6.—Satellite Telecommunications Development in China: A Chronology of Important Events — 1956 Chinese Astronautics industry development begins. 1960 USSR technicians depart, thus ending technical assistance in production of liquid fuel rockets, 1965 Beginning of research and design of first satellite and carrier rockets. 1968 China Academy of Space Technology formed to coordinate space program. 1970 Chirrasat 1. April 24, 173 kg. China becomes fifth country to develop launch capability and launch its own satellite, Tracking, telemetry, and command network of seven stations i n place. SatelIite circled the Earth every 114 minutes, broadcast “The East is Red. ” 1971 Chinasat 2. March 3.221 kg. Experimental-scientific. 1972 RCA Globcom erects first satellite earth station in Shanghai. 1974 Long March 2—launch failure. 1975 Chinasat 3, July 26. 1750 kg. Scientific satellite. Chlnasat 4, November 26. 1750 kg. Reconnaissance satellite. Returned to Earth December 2, China is third country to master satelllte return technology. Long March 2 problem corrected and all subsequent launches with this rocket are successful. Chinasat 5. December 16. 1750 kg. Meteorological satellite. 1976 Chinasat 6, 7. China becomes member of Intelsat. Leases 60 half-way International telecommunications circuits 1977 China Academy of Sciences organizes Space Science & Technology Center for space research, 1978 Chinasat 8. January 26. Conducted scientific experiments. Begin negotiations with U.S. companies for import of direct broadcast satellite, Joint tests with France and Germany on European satellite. Joint tests with U.S. (RCA) on Marisat. First Chinese aerospace delegation to the U.S.—NASA Invitation. 1979 NASA and AIAA visits to China, Cryogenic fuels development revealed, China only third country to use cryogenic third-stage rocket. Deng Xiaoping visits Johnson Space Flight Center in Houston. 1980 China begins astronaut training (later abandoned). Satellite purchase postponed on grounds of “economic readjustment “ 1981 Chinasat 9, 10, 11. China (CAST) begins discussions with NASA for science and technology exchanges. 1982 Chinasat 12. September 9. Scientific experiment. 1983 Chinasat 13. August 19, Scientific satellite. China-Italy joint tests with Italian Sirius satellite. U.S. Government issues more liberal guidelines for licensing of technology exports to China. Landsat ground station finally approved. 1984 Chinasat 14. January 29. First successful launch with Long March 3 (CZ-3). Gas generator burnout prevents proper payload positioning. First liftoff from new spaceport in Sichuan Province. Chinasat 15. April 8, Successful launching of communications (test) satellite on CZ-3, Geosynchronous equatorial orbit. Chinasat 16. September 12. United States sends “presidential” aerospace trade mission to China. China and Germany sign agreement for space technology cooperation Including joint development and manufacture. Canada’s Spar Aerospace sells China ground station package valued at over $24 million (Canadian). In August, RFP for Direct Broadcast Satellite (DBS) issued 1985 Chinasaf 17. October 21, Resource survey. China Dai/y on June 13 announces that China is ready to market space products and services. At Stockholm International Aeronautical Federation Congress, China describes launch failures, provides launcher details. China opens new space launch complex to potential customers. People to People, NASA, AlAA groups of US aerospace technicians visit China. On July 15, China postpones RFP for DBS. August 1. China begins 3 months of free trial on Intel sat satellite for educational T.V. 1986 Chinasat 18. February 1. CZ-3 launch of “operational” commercial satellite, Geosynchronous orbit. Several Western companies make launch reservations with the Great Wall Industries Corp. which markets Chinese launch services, SOURCE Off Ice of Technology Assessment 1987 90 . Technology Transfer to China

72 In the later case the respondents were RCA- had been the subject of the RFP. 73 The con- Astroelectronics (now GE Aerospace-Astro- flict had resulted largely from the different space Division), Matra of France, and MBB communications needs of several Chinese min- teamed with Ford Aerospace (United States). istries and the military .74 The complexity of In neither case did the Chinese sign a contract. the bureaucratic structure involved in the selection, production, and application of space The amount of technology transfer offered communications technology is shown on the by the foreign companies was an important organization chart of figure 6. This complex- bargaining point in both cases. The Chinese ity typifies much of the Chinese bureaucracy, reportedly were quite skillful in playing off the and is largely responsible for the delays in deci- competing companies against one another. As sionmaking. it turned out, the Chinese received a great deal of technological information, essentially for Chinese Satellite Expertise free, from these two aborted satellite telecommunications RFPs. Some feel that the first China launched its first geosynchronous sat- round immensely helped the Chinese and led ellite in 1984 and a second in February 1986, to their space successes in the early 1980s.70 demonstrating an ability to move rapidly in Most people feel, however, that the Chinese areas of particular interest. However, in most bargained in good faith: a lack of foreign ex- aspects of satellite telecommunications tech- change and bureaucratic infighting over the nology, the Chinese are 20 years behind the type of satellite system China should have were United States and Western Europe.” These the real problems.” satellites have worked, but they are heavy (considering their low power) and will probably be Eventually, China resolved the systems is- short-lived. In addition, the Chinese have, un- sue with the selection of the low-power C-band til recently, had little use of the satellites, since instead of the higher power Ku-band, which the ground-based infrastructure was largely nonexistent. ‘(’Satellite telecommunications demonstrates the Chinese capability to advance through informal technology transfer. The The Chinese have a great deal of the theo- Chinese developed a great deal of satellite and launch capability on their own and through study of technical literature. Al- retical, or ‘‘academic, expertise required for though development cannot be achieved across-the-board successful development of sophisticated sat- through such methods, it is interesting that the Chinese were ellite telecommunications equipment. But, able to move ahead in these areas despite the overshadowing of scientific effort by the Cultural Revolution. Part of the push with the exception of ground antennas, they in this field came from military desires, of course. have not had the practical experience of de- “’An unsuccessful early bid, however, does not prevent a sub- signing, building, and operating viable, effi- sequent successful bid in a related area. For example, France’s Matra was not successful in its proposal to China for a telecom- cient systems. Satellite attitude control and munications satellite system. However, the Chinese were interested in the satellite control center portion of their proposal and out of this came an agreement for supply of data process- “C-band operates at a frequency of 6 Gigahertz (G Hz) uplink ing centers at two Chinese ground stations valued at $8-10 mil- from the sender to the satellite and 4 GHz downlink from the lion. (“France to Supply China with Data Processors, ” Avia- satellite to the earth station. Ku-band operates at 14 GHz up- tion W’eek and Space Technology, July 21, 1986, p. 25. ) Matra link and 12 GHz downlink (1 GHz =91 billion cycles per sec- hoped to sign the final contract in October 1986 with deliveries ond). See the OTA Case Study contractor report “Satellite beginning in 1987. The processing centers will be based on Dig- Telecommunications Technology Transfer to China” by China ital Equipment Corp. VAX computers, which were specified by Business Development Group, Alexandria, Virginia, July 1986 China. The contract was signed in December 1986 for $7.8 mil- (Appendix 3, Vol. I I), for an extensive discussion of the relative lion (’*Matra Will Supply Data Processing Equipment to China, ” strengths and weaknesses of the two systems. A\’iation 14’eek and Space Technology, Dec. 8, 1986, p. 27. The “It is unknown, at this point, whether they will issue a 3rd DEC Model 8500 was originally specified, but the Chinese have RFP or decide to proceed on their own. now specified the improved technology Model 8700, partly be- “Primarily the Ministry of Astronautics, Ministry of Elec- cause the 8500 is being phased out in 1987 by Digital Equip- tronics, Ministry of Radio and Television, and the State Edu- ment Corp. A request based on the changeover to the 8700 com- cation Commission. For the interested reader, an extensive dis- puter has been filed with COCOM with approval expected in cussion of this matter is contained in the OTA Case Study the next several months. (“New Computers Selected for Chi- contractor report *’Satellite Telecommunications Technology nese Stations, ” Aviation 11’eek and Space Technology, May 11, Transfer to China, ” July 1986 (app. 3, vol. I I of this report). 1987, p. 33. “’Ibid. C/J. 4—The Role of the United States In Technology Transfer to China ● 91

Figure 6.—China: Satellite Telecommunications Technology Transfer

Chinese agencies responsible for selection, production, and application of space communications technology

I I I -- Science and Technology Leading Group

I State Planning Commission

I Science and Technology Planning Bureau

Launch sites (Xichang. Northwest Industrial Space Science and and Technology Shuangchengtze) Beijing College Technology Center Society of Space Research Rocket Test Ce, ~ter. Telecommun icat ions Society of Astronautics Weinan Grd. Stat Ion Englneerlng Institute

Ministry of Ministry of Astronaut ics Electronics

1 I 4 I - Great Wall Industry Corp. China Broadcast Satellite Corp. China Academy of Space Technology Institutes, ground stations, engineering centers, test facilities, control centers.

I Ministry of Ministry of Water Resources Coal and Electric Pwr.

SOURCES National Counc(l for U S -China Trade, A v(al~on Week & Space Techr?o/ogy, U S Embassy, Bel)lng, AlAA reports, Nature, November 21 1985 92 ● Technology Transfer to China — — stabilization are presently the two specific sat- into Shuttle or Ariane launch sales.77 Several ellite technology areas of major concern to the customers have recently announced that they Chinese. In a more general sense, lack of tech- are planning to launch their satellites on China’s nology infrastructure hinders China’s satellite Long March rockets, largely because of the un- telecommunications development. The space- availability of other slots and the relatively low based component and telecommunications equip- prices for launches by China.78 Other potential ment manufacturers that provide a large, var- contenders for international launch services ied technical support in the United States and include the Soviet Union, which has already Europe do not exist in China. offered its Proton rocket to launch Inmarsat satellites, and Japan, which may be in the com- China is now offering, on the international mercial launch business in the early 1990s.79 market, satellite launch services to geosynchronous orbit using its Long March 3 vehi- The Chinese space program could eventually cle. China will also alter its Long March 2 become a significant factor in satellite launch rocket (usually used for low-earth orbit (LEO) services. The U.S. Department of Transpor- launches) by stretching the tanks and adding tation estimates that commercial customers four liquid rocket boosters. The new version, will want to launch about 20-25 commercial designated the CZ-2-4L, will lift 1,900 kg into payloads per year in the late 1980s and that geosynchronous orbit with the help of a PAM- U.S. companies could capture 50 percent or D2 (payload assist module) upper stage. It is more of that market.80 It is estimated, how- hoped to be ready by the late 1980s.7’ ever, that the Chinese could have the capability to launch 6-12 geosynchronous satellites Impact on the United States a year by the early 1990s, of which only two Concerns have been expressed that transfer- or three launches would be for their own do- ring satellite telecommunications technology mestic needs. Officials of the China Great Wall to China will assist the development of a com- Industry Corp. (CGWIC), the marketing arm petitor and the military capability of a poten- of China’s Ministry of Astronautics, have ap- tially hostile country. Neither fear seems likely proached 39 companies in 19 nations seeking to be realized. Development of Chinese satellite telecommunications will not pose a threat “See for example, “Chinese Launch Services Executives Guar- to sales of U.S. firms for at least 10-15 years, antee They Can Beat Any Price, Satellite News, vol. 10, No. since Chinese technology will not be good 17, Apr. 27, 1987, p. 1. Launch insurance, an important consideration nowadays, is also offered by the Chinese. See“PRC Firm enough at any price until then. Any satellite [People’s Insurance Company of China] to Insure Launch of U.S. telecommunications will improve the capabil- Satellite, ” XIIVHUA, Feb. 14, 1987 and “Chinese Make Inroads ities of the Chinese military to some extent, on Commercial Launch Market, ” Aviation Week and Space Technology, Mar. 9, 1987, p. 134. but the technology transfer aspects are not ‘“China has won launch reservations for satellites of Pan Am directly very worrisome. Most export control Pacific Satellite Corp. and Dominion Video Satellite (“China concerns related to this technology stem from Wins Launch Reservations for Three More U.S. Satellites, ” Aviation Week and Space Technology, Nov. 24, 1986, p. 20.) miniaturization technology and increased dig- Western Union and Swedish Space Corp. are other customers ital processing and computer capabilities of the of the Long March vehicle. See Liu Jianjun, ‘‘Launching Satel- Chinese, which are likely to come from other lites for Foreign Firms, ” Beijing Review, Jan. 26, 1987, p. 30. In April 1987, China signed its first long-term agreement with sources as well. a U, S. company to market commercial booster launch services. The trade service company selected by Great Wall Industry Launch services, however, if subsidized by Corp. is Becker and Associates of McLean, Virginia. See Gus the Chinese and proven reliable, could well cut Bochanis, “Chinese I.aunch Services to Open Local Office, ” 11’ashington Technology, May 14, 1987, p. 6. “)’’Some Rockets Still Work, ” The Economist, Aug. 16, 1986, “’’International Notes, ” Space Business News, July 14, 1986, p. 57, See also: Natasha Wei, “Launch Wars–With the World p, 1, See also “PRC: Modified ‘Long March’ Launcher, ” FBIS: Space Industry in Disarray, China Hopes for a Shot at the Big Science and Technology Perspectives, vol. 2, No. 6, Apr. 30, Time, ” The China Business Review, September-October 1986, 1987, p. 7-8 and Craig Covault, “New Chinese Heavy Rocket pp. 12-15. Spurs Effort To Win Commercial I.aunch Contracts, ‘Aviation “(’ Phillip M. Boffey, “Science to Carry on in Space, NASA Week and Space Technology, May 4, 1987, p. 22-23, Says, ” New York Times, Aug. 19, 1986. Ch. 4—The Role of the United States in Technology Transfer to China ● 93

85 launch service customers.”’ CGYWC alSO ex- lays. Nonetheless, the Chinese have also an- hibited at the Paris Air Show, June 12-21,1987. nounced that they have begun choosing a team of astronauts for future Chinese space flights, China has been extending itself worldwide although they did not give a date for these in its space efforts. China, Japan, and the flights. The Chinese said that their scientists United States recently held a joint meeting on had developed life support systems and the big- space studies in Beijing, during June 1987, gest centrifuge in Europe or Asia to prepare called the Pacific Basin International Sympo- 8G astronauts for the stresses of space flight. sium on Advances in Space Science and its Ap- Several observers believe, however, despite the plications. This was the first time that China impressive accomplishments of the Chinese has invited a large group of foreign experts on space program, that launching manned Chi- space development from several countries. The nese rockets is presently well beyond their ken. forum was backed by the Chinese State Sci- ence and Technology Commission and was jointly sponsored by private organizations of Computers and Electronics the three countries, namely, the Japanese China’s electronics industry has six major Rocket Society, the American Astronautical product areas: television, radio, and recording Society, and the Chinese Society of Astronau- equipment; computers; radar and communica- tics. Agenda items included: 1. satellite tele- tion equipment; electronic components; profes- communications and development of remote sional and industrial electronics instrumenta- sensing technology in the Pacific area, 2. space tion and equipment; and military electronics.” station research in the Pacific area, and 3. de- The industry is characterized by multiple min- velopment of the next generation of rockets isterial-level organizations with an interest in for launching satellites.” the research, production, and application as- Future prospects for China in space could pects of electronics technology, components, include cooperating with the United States, or equipment. Also of critical importance is a Europe, or Japan in several types of space tech- series of similar research and production units nology.83 China and France’s Matra are pres- under the control of provincial and municipal ently evaluating the feasibility of offering com- authorities. At times, the mere presence of mercial microgravity flight opportunities using these numerous organizations has made for in- recoverable reentry capsules launched by Long tense rivalry and competition because each of March 2 and 3 vehicles.84 Chinese space offi- the respective ministries and localities has cials have also talked in general terms of build- desired to have its own infrastructure for meeting an orbiting space station in the late 1990s ing its electronics needs. and of a shuttle sometime later, but budget There are over 2,600 factories in the coun- imperatives have held back development out- try’s electronics industry, along with over 130 research institutes and 6 dedicated universi- ‘]Craig Covault, “New Chinese Heavy Rocket Spurs Effort ties focused on electronics technology. The to Win Commercial Launch Contracts, ” Aviation 1$’eek and Space Technology, May 4, 1987, pp. 22-23. Ministry of Electronics Industry (ME I) is the ‘“‘Sources Say PRC to Host Space Studies Forum, ” KYODO, most important body. The extent of direct Tokyo, Japan from FBIS-Japan, Aug. 5, 1986. “3’ ‘International Notes–The Chinese and British Agree to an Exchange of Satellite Technicians, ” Space Business News, Dec. ‘l’John F, Burns, “China’s Proud Space Program–It’s Mod- 15, 1986, p. 1, “International Notes–China and Japan Plan to est, But Reliable, ” The New York Times, May 19, 1986, p. D 10. Discuss Cooperating in Space Technology in Coming Months, ” Also see “Chinese Make Inroads on Commercial I,aunch Mar- Space Business News, Aug. 11, 1986, p. 1. Some feel, however, ket, ” Aw”ation Week and Space Technology, Mar. 9, 1987, p. 134. that Japan will be very careful in tying in with the Chinese in “’’China Says it Plans Manned Space Flight ‘Before Long’,” these technology areas. This is because Japanese space tech- New York Times, Sept. 2, 1986, reporting on an article appear- nology is now coming into its own after being hobbled for se\r- ing in The People Dai]IT, Aug. 31, 1986. eral years by a technical agreement with the United States on “’See Denis Fred Simon and Detlef Rehn: “Technological ln - launcher development. no~’ation in China Electronics lndustr~’: The Case of Shan~~- “’’Chinese W’ill Launch French Payloand, ” Atiation }1’eek h~’, ” study funded by the Volkswagen Foundation, FRG (to and Space Technology, May 4, 1987, p. 23. be published by Ballinger Publishers, Cambridge, MA). 94 ● Technology Transfer to China

ME I control over these facilities varies as a and industrial structure containing 130 enter- result of the recent divestment decision in 1985 prises and 26 research units.go A select num- and the degree to which local authorities are ber of key enterprises are still under the di- involved in overseeing the operation of specific rect control of ME I, including those that are units.’8 As presently structured, the MEI is mainly military oriented, though most of their divided into four main departments: broadcast- project money comes from the National De- ing (television and communication), radar and fense Science, Technology, and Industry Com- navigation, electronic devices and components, mission or other military-related organizations. and computers. The computer department is In other cases, the principle of “dual leader- the former State Administration of Computer ship’ is followed; i.e., enterprises are jointly Industry, which was incorporated into the administered by central and local authorities. ME I structure during the May 1982 bureau- (This does not include those enterprises that cratic reform. are collectively owned and controlled.) Accord- ing to one Chinese official, there can be as many A major organizational reform occurred in as 10 different organizational forms involving the computer industry in late 1986 with the different mixtures of local and central control. establishment of the “Great Wall Computer 9 Similar types of organizational arrangements “8 This reform decreased Group Conglomerate. exist under the other ministries mentioned the previously dominant role that MEI had above, such as the Ministry of Space Indus- played in computer R&D and production. The try (MSI), which has a number of branch fac- formation of this conglomerate, which is known tories and research institutes located in cities in Chinese as a‘‘jituan, is part of the general such as Shanghai. Understanding these orga- decentralization of authority in ME I as well nizational principles goes a long way toward as the effort to create better horizontal link- clarifying why decisionmaking in China can ages among units associated with different be so complex and why it is so difficult to carry facets of production. The GWCGC is composed out successful innovation. of 58 existing computer production units, 4 R&D institutes and 5 universities—all drawn Of the major changes in policy and organiza- from ME I, the CAS, and the Beijing munici- tion that have been introduced to overcome pal government. The group will undertake all these difficulties since the early 1980s, the phases of research, manufacturing, sales and most prominent has been the creation of the service, and training. It will operate as an in- “State Council Leading Group for the Revitali- tegrated entity in an effort to foster coordina- zation of the Electronics Industry. ” This group, tion and minimize administrative interference headed by Vice-Premier Li Peng, is designed from the local or central government. The core to ameliorate the coordination problems that of the group will be the China Computer De- have dominated China’s efforts to develop its velopment Corporation, which will be com- electronics industry. It established the frame- posed of 6 smaller computer companies. A sim- workgl for the development of China’s elec- ilar type of organizational effort has taken tronics industry during the Seventh Five-Year place in Shanghai with the formation of the Plan (1986-90) and beyond, and included the Yangtze River Computer Group Conglomerate. following goals:

Heretofore, each department under MEI ● The overall goal of the industry is expanded controlled a series of manufacturing and re- —- ——application of electronics technology in or- search facilities. For example, under the de- ‘“See Denis Fred Simon “China’s Evolving Computer Indus- partment responsible for computers, there was try: The Role of Foreign Technology Transfers, June 1986 (app. 2, vol. II). a fully articulated research and development ‘] See “The Strategy for the Development of China’s Elec- tronics and Information Industries” and Li Peng: “The Elec- “’For details of this divestment effort see China Dw”iy, Aug. tronics and Information Industries Have to Serve the Construc- 2, 1985. tion of the Four Modemizatons, Jingji Ribao (Economic Daily), ~y’ New Computer Giant Eyes Home Market, Beijing Re- Jan. 14, 1985, and Xinhua, Jan. 11, 1985, FBZS—China, Jan. view, Jan. 19, 1987, pp. 5-6. 15, 1985, pp. K25-27. Ch, 4— The Role of the United States in Technology Transfer to China ● 95

Greater attention should be paid to creating a fully articulated and integrated electronics industry, capable of supplying needed components and manufacturing equipment as well as final products. Within this context, the main goal is “to achieve economical, large-scale mass production with good quality and low cost. Special attention will be given to large-scale integrated circuits; the short-term goal will be “to master selected, suitable, and advanced LSI circuits;’ Efforts should be made to establish an effective balance between centralization and decentralization with respect to the management of the electronics industry. Elec- tronics products that require large investment, long production time, and high technology (e.g. LSI) must be produced under unified state planning and unified arrangements in order to avoid blind development and waste of time, manpower, and materials. The Chinese have recently had some major achievements in their computer industry, as shown in table 7. However, present problems in the Chinese computer and electronics indus- Phofo cred(l Xfnhua News Agenci try include lack of experience in the field, tech- Beijing No. 3 Computer Factory, which started nology not up to international standards, and manufacture ng microcomputers I n 1981 Photo shows technicians assembling too little use of Chinese products. To meet their and de bugg! ng microcomputers. plans for national economic development, the Chinese have pushed hard in the last few years to buildup their electronics industry. However, der to better serve the development of the they are not satisfied with their efforts, since national economy and society. The popu- they have imported much technology at con- larization of microcomputers, for exam- siderable cost and their products, especially ple, is to be stressed along with software, computers, are still not up to international especially Chinese character programs; standards. gz For example, mini and mainframe The acquisition and assimilation of foreign computer sales to China have been substan- technology are to be stressed as a means tial as shown in table 8. With appropriate for- of closing the prevailing gap between eign technology transfer, approximately 70 China and the rest of the world. Joint ven- percent of the products of China’s electronics tures and other forms of cooperation are industry could, by the year 2000, achieve the to be encouraged. The aim of these meas- sophistication of today’s products in the in- ures is to complement indigenous R&D dustrialized countries. and manufacturing programs in order to ‘‘speed up the development of China’s elec- United States involvement in the Chinese tronics industry in order to attain advanced computer and electronics market has been sig- world levels sooner and thereby increase 92i’Electronics Poised for Big Ad\ance,” China Dai)~’, Feb. our capacity for self-reliance; 4, 1986. Technology Transfer to China .—

Table 7.–Major Achievements in China’s Computer Industry, 1977-85

1977 Development of China;s first microcomputer (DJS-050). 1979 Development of HDS-9 (5 MIPS) by CAS Institute of Computer Technology. !levelopment of DJS-052 microprocessor (eight bit, one chip). 1983 Development of China’s first supercomputer (“ Yinhe” [“Galaxy”], 100 MIPS) by the S&T University for National Defense in Changsha. Development of the 0520 microcomputer (IBM PC compatible) by the MEI Institute No. 6 and production by Beijing Wire Communications Factory. Development of the “757” 10 MIPS parallel computer by CAS Institute of Computer Technology. Development of a 16-bit desk-top computer (77-II) by the Lishan Microcomputer Corporation. 1984 Development of the 16-bit TQ-0671 microcomputer system by the Tianjin Computer Institute (CPI: MC 68,000), 1985 Development of NCI-AP 2701 floatina ~oint arrav Drocessor bv MEI North China Institute of Computer Technology. Development of NCI-2780 super-min~omputer (32’ bit) by Nort’h China Institute of Computer Technology (Clone ~f DEC VAX 11/780). Development of 8030 computer by East China Institute of Computer Technology (compatible with IBM 370/138). Development of YH-X1 super-minicomputer—. by the S&T University for National Defense in—— Changsha. .— SOURCE Off Ice of Technology Assessment, 1987

Table 8.—U.S. Computer and Related Equipment Sales to China (in thousands of dollars)

Item 1981 1982 1983 1984 1985 Analog and hybrid computers- . . . 163 5,041 1,715 ‘- - 2,082 -- 6,767- Digital computers ...... 5,168 11,337 11,324 25,265 80,062 Digital central processing units ., ...... 5,179 2,169 10,816 32,494 35!411 Random access auxiliary storage ... . 1,052 1,049 1,849 1,519 7,399 Serial access auxiliary storage ., ...... 140 430 680 1,995 5,204 Terminals ...... 699 1,108 2,241 2,261 3,900 Printers ...... , . . 645 626 1,063 1,814 3,454 Communications and peripherals ...... 268 1,644 2,301 8,006 9,175 Parts ...... 3,763 8,376 11,913 20,476 31,710 Microprocessor integrated circuits...... 104 25 4 50 47 Printed circuit boards ...... 258 58 557 1,407 2,245 Cathode ray tubes ...... , . . . . 8 91 22 179 417 SOURCE Office of Chinese Affairs, U S Department of Commerce, 1986 nificant. Noteworthy is that in most catego- become less willing to import microcomputers ries of computer and related equipment sales directly without any explicit technology trans- to China, U.S. sales from the early 1980s to fer element. Each year since 1980, IBM has the present have steadily increased. The ex- been able to sell 20-25 mainframe systems to periences of three U.S. firms-IBM, Wang, and China. In addition, several thousand IBM per- Foxboro–which represent different approaches sonal microcomputers have made their way and goals in technology transfer to China, are into China, some through direct sales, but a presented below. large number through the “gray market. ” IBM has also set up a training facility in China to IBM China support its sales-past, present, and future.94 IBM’s approach to the Chinese market up “Among some of the U.S. computer firms that have focused until now has emphasized sales, not technol- on training are the following: a) IBM, which set up a training 93 institute in Beijing as part of its sales of the IBM 5550 and ogy transfer. This strategy may have to other machines; b) Wang Laboratories, which setup a joint de- change soon, however, since the Chinese have velopment center with the Hubei Radio Factory and a service center in Beijing; c) INTEL, which is working with the Com- puter Bureau of the ME I on establishment of a training center “From Denis Fred Simon, “China’s Evolving Computer In- for 500-700 persons in Beijing; and d) Sperry, which is working dustry: The Role of Foreign Technology Transfers, ” contrac- with the China Computer Technical Services Corporation to train tor report prepared for OTA, June 25, 1986, pp. 55-56, Chinese operators on Sperry equipment. Ch. 4— The Role of the United States in Technology Transfer to China ● 97

In many respects, IBM’s success in China has Several months later it joined forces with the had much to do with the fact that Chinese com- Hubei Radio Factory in Wuhan to establish puter officials have considered IBM products a joint development center for cooperative (along with the Digital Equipment Corp. ’s activities in office automation, software devel- VAX series) to be one of the standards upon opment, and personnel training. Wang’s under- which to develop their own indigenous com- lying approach to China has been a strategy puter industry. emphasizing sales and production of small machines, with the hope that these sales would In 1984, IBM China was established. This lead to purchases of larger machines around gave IBM a formal Chinese presence and sig- which all of the smaller machines could be con- nalled the Chinese Government that IBM was nected and networked. Its major competitive making a long-term commitment to China. advantage in China has been its Chinese-char- IBM China introduced to China the Model acter operating system, known as the VS (idio- 5550, a large microcomputer that was well re- graphic VS) system. ceived not only because of its ability to handle Chinese characters efficiently, but also be- In 1980 Wang began negotiating with China’s cause its processing capabilities are far above ME I about establishing a joint venture in any Chinese mass-produced machine. In 1985, China. Three proposals emerged from these dis- IBM donated 100 of the machines to Beijing cussions: University, Qinghua University, Fudan Uni- 1. a joint venture with the Shanghai Com- versity, and Shanghai Jiaotong University and puter Corporation in Shanghai; began training classes for 40 teachers and stu- 2. a joint venture with the Xiamen Devel- dents in operating the computers. Chinese offi- opment Corporation in Fujian; and cials would like IBM to enter into a joint ven- 3. a joint venture with the Beijing 738 Wire ture in Guangzhou to manufacture the 5550 Communication Factory in Beijing. in China. The idea of entering into such a joint venture, however, runs counter to IBM gen- Initially, the aim was to introduce a CKD oper- eral approach to international marketing. None- ation for its VS system in Beijing, a CKD theless, negotiations are continuing at this operation for the Wang Office Assistant in time. Shanghai, and a CKD operation for the IPC (idiographic professional computer) system in Wang Joint Venture Xiamen. Wang was to provide the machinery Another U.S. computer firm that has been and related equipment as well as cash in on increasingly successful in China is Wang Lab- setting up the production lines. The Chinese oratories, Inc.95 Wang began doing business would provide the manpower, some capital in- in China as early as 1972, though it did not vestment, the buildings, and other infra- really become significant until 1978-79. Ac- structure. cording to the China Daily, Wang has sold In each of the three proposed cases, Wang’s more than 200 small and medium-sized com- major aim was to replicate its existing facil- puters in China, most of which have been han- ities in the United States or elsewhere. Wang’s dled through its sales agreement with Instrim- orientation in setting up joint ventures in pex. In 1985 the company’s revenues from China was to stress consistency with its proven China-related business reached more than $17 operations. For example, in general, Wang 9G million. Along with direct sales, Wang setup would not bring secondhand equipment into a small service center in Beijing in early 1984. China; nor did it anticipate introducing any ———— drastic changes in its mode of operation. Its ‘5 Taken from the OTA contractor case study “China’s Evolv- hope was to use capabilities at its production ing Computer Industry: The Role of Foreign Technology Trans- sites in Ireland, Scotland, Puerto Rico, Aus- fers, ” prepared by Denis Fred Simon, June 25, 1986, pp. 57-61. ~~’ ‘\Vang Starts Computer sales Drive, China D~’1.Y, Feb. tralia, Mexico, and Taiwan to assist with the 21, 1986. startup of its China ventures. Wang expressed 98 ● Technology Transfer to China its willingness to provide four key forms of was felt that local parochialism, combined with technology transfer: manufacturing know-how, bureaucratic infighting, might continue to pre engineering and managerial know-how, soft- elude the emergence of broad perspectives on ware diagnostics, and after-sales service and marketing approaches. Third, Wang officials maintenance techniques. Moreover, Wang feared that China’s current manufacturing stressed to Chinese officials that the equipment techniques and philosophies might interfere intended for use in China was equal to that be- with meeting quality requirements. Moreover, ing used in the Wang facilities in Taiwan. This while the potential return on Wang’s equity fact prevented a major “technology transfer investment in China was of direct concern, the issue” from emerging in the negotiations– most pressing issue was and continues to be though the issue of the value of the technol- the cost of doing business in China until the ogy did present a stumbling block at various venture matures. Under these circumstances points in the discussions. Wang’s initial strategy was to keep its ventures small while minimizing unnecessary ex- A number of other issues also emerged dur- posure and using as few expatriates as possi- ing the course of negotiations between the two ble to prevent a drain on the joint venture’s sides. First, the quantity and cost of training resources. was a major concern to the Chinese. Wang made a special effort to define the number of Since initial discussion began, the three pro- people that would receive training, the tasks posed projects have been restructured, owing and areas of training, and the costs. In keep- to a variety of factors on both sides. For 1986, ing with its policy of consistency, it offered Wang started up its first joint venture in China no more and no fewer training slots than Shanghai. Instead of producing the Office As- it had given to other countries. China wanted sistant at this site, however, the IPC is being as much training as possible. produced. The change was necessitated because the performance of the IPC has gone up Second, the question of foreign exchange and the price has gone down, thus reducing remittance remained unsettled. It was agreed the attraction of the earlier product. The ven- that after the third year, each venture would ture has required extensive renovation of an have an export requirement of up to 25 per- existing facility in Shanghai. The decision to cent of the output. Heretofore, China’s aim had proceed first with the Shanghai venture in been to have foreign firms hold large quanti- China was not without its problems because ties of foreign exchange as an incentive for the ME I felt somewhat concerned about its them to do more local sourcing and train local ability to control events in that municipality. firms to be effective suppliers. And, while The bureaucratic rivalry between MEI and Wang prefers local sourcing and local employ- Shanghai was not something that could be eas- ees, it is also concerned with four key consider- ily dissipated. Nonetheless, in the interest of ations: time, and after taking existing technical ca- 1. quality to meet worldwide standards, pabilities into consideration, ME I acquiesced. especially since the products would be using the Wang trademark; Foxboro Joint Venture 2. overall cost competitiveness; The Foxboro Company of Foxboro, Massa- 3. ability to meet delivery schedules; and chusetts, a world leader in process control tech- 4. ability to meet volume requirements. nology,” knew that China had extensive proc- Overall, Wang’s main concerns with engag- ess control needs and thus could represent a ing in manufacturing operations in China re- ‘“Process control technology generally involves regulation of volved around China’s lack of familiarity with industrial process temperatures, pressures, flow rates, etc. to large-scale, mass production operations. Con- maximize efficient production and maintain quality of the prod- cerns existed about whether operations would uct, This is accomplished by connecting sensors (which measure the state of the system) to computers (which are prepro- ever get large enough to generate sufficient 8- ammed or use adaptive optimal control algorithms) which then economies of scale to be profitable. Second, it feedback to properly adjust the process. Ch. 4— The Role of the United States in Technology Transfer to China ● 99 large market for its products.’” Foxboro offi- Trade visited Foxboro headquarters in Mas- cials felt that an effective strategy for penetrat- sachusetts. Three exploratory visits to China ing the Chinese market would require a long- by Foxboro personnel followed in the 1979-81 term commitment to operations in China and period.l”’ Negotiations during this period re- a willingness to transfer its technology. From sulted in the signing of preliminary agreements the Foxboro perspective, cooperation with in support of a joint venture. A contract estab- China in the production of process control lishing the joint venture was signed in 1982 equipment in China would be part of a larger with the SIC, but it also had to be approved corporate strategy. Having visibility and a in Beijing. ’”’ Subsequently, as problems arose, reliable presence in China, it was thought, there was uncertainty as to which Chinese would facilitate sales to China from Foxboro party had responsibility. directly, from Foxboro’s other overseas affili- Foxboro credits its affiliate in Singapore ates, and from the vendors of large process with the early vision and initiative to involve industry equipment who would incorporate Foxboro in China. But the SFCL case is also Foxboro controls into larger systems. This one where the Chinese took a great deal of ini- strategy has had some success. Quite apart tiative early in the process. The Bureau of the from the question of the profitability of the Instrumentation Industry of the Ministry of joint venture in China, sales to China from Fox- Machine Building knew that China had proc- boro’s European operations, for instance, have ess control needs that could only be met in the been worth US$10 million in recent years. short run with foreign help. In addition to go- The convergence of Chinese and American ing to Foxboro, the Chinese also visited other interests led to the establishment of one of the companies in the United States and Japan first joint ventures under China’s new joint (Honeywell, Bailey, Fisher Control, YEW, venture law, Shanghai-Foxboro Company Lim- Yamataki-Honeywell). According to the Chi- ited (SFCL), in April 1982.99 The partners in nese management of SFCL, the Japanese were the joint venture are the Foxboro Company interested only in selling products and were and the Shanghai Instrumentation Company not willing to transfer technology. (SIC), a company under the Shanghai Instrumen- Foxboro apparently was chosen as a part- tation and Electronics Bureau of the Shang- ner for the following reasons: First, the Chi- hai City government. The joint venture, the nese believed that Foxboro would be willing first involving the transfer of high technology, to transfer technology that was up to world has attracted much attention, and was chosen standards. This had been the company prac- as a site for President Reagan to visit during tice in its other international operations. Sec- his 1984 trip to China. ond, Foxboro gave evidence of being interested The Foxboro-China connection began in 1975 in a long-term arrangement. This was again when a team from Foxboro’s Singapore and consistent with company practices elsewhere. British affiliates presented a technical semi- And third, the Chinese believed that they nar in China that led to sales. ’OO In 1978 a Chi- would have in Foxboro not only a reliable nese delegation composed of representatives source of technology, which they needed, but of the Shanghai Instrumentation and Electronics also a company with considerable technology Bureau (S IEB), the Bureau of the Instrumen- transfer experience, which was indeed the case. tation Industry of the Ministry of Machine The Foxboro technology transfer position is Building, and the then Ministry of Foreign that it is willing to transfer its advanced tech-

““Unless otherwise indicated, the information in this section is based upon intertriew. s conducted in Shanghai and at I:ox- ‘(’’These seminars and t’isits, as mentioned earlier in the (;en - boro headquarters in Foxhoro, Nlassachusetts by OTA staff. eral Electric locomoti~’e case stud~., can he a \rer}’ effectit’e means “ySee Yao ,Jiang-uo, “Iligh-Tech Success Against the odds,’” of informal technology. transf(’r which, in certain cases, has the Beijing Iiebiew, N(). 46, NOI’. 17, 1986, pp. 17-19. potential of leading to more formal agreemen[s and cent rac’ts. ““lntertrade, ,June 1984, p. 46-47. ““Ibid. 100 ● Technology Transfer to China nology if three conditions are met: (1) there is the Chinese management of SFCL believes a market for the leading edge technology; (z) that the lack of trained personnel is one of the its transfer is economically feasible and real- more important limiting factors on the com- istic; and (3) the joint venture is able to receive pany. The U.S. management does not seem to and assimilate it. With regard to the latter, be as concerned about this constraint as it is the key indicator for Foxboro is the availabil- about others. ity y of manpower who not only can understand A second factor is the Chinese supply sys- the principles of the technology, but, more im- tem and the local availability of inputs for man- portantly, have the know-how to ensure that ufacturing. In the Foxboro view, localization the technical infrastructure for the technology- is proceeding too slowly. The mentality of solv- product testing and quality control, installa- ing supply problems through vertical integration, and servicing is established and function, a legacy of the Soviet-style economy, is tioning. deeply entrenched and biases solutions to the Other important aspects of this technology supply problem in the wrong direction. In addi- transfer experience were site visits and train- tion, the Chinese supplier industries are not ing. There had been approximately 100 trips seeking the right technologies. The Chinese to Foxboro, involving 40 individuals, as of Jan- continue to resist the kind of specialization that uary 1986. In addition, there had been some would lead firms to seek product niches and 40,000 person-hours of training at the Shang- search for the right technologies to achieve hai facility.1°3 some sort of comparative advantage. The joint venture is now considered rela- Another type of assimilation problem is the tively successful.1°4 However, during its first difference in language and culture. The lan- 6 months, there were many disappointments. guage problem was attacked early with the The Chinese in particular believed that prog- preparation of an English-Chinese process con- ress was not fast enough and kept asking, trol glossary. The time and effort spent in com- “When are you going to start making com- piling this glossary has been most worthwhile puters?” The Foxboro position was (and is) from the Foxboro perspective. There are now that the Chinese should “learn to walk before standardized meanings for the technical terms learning to run. “ Thus, Foxboro insisted that associated with the technology, and these have the technology transfer start with simple tasks made possible the avoidance of much confu- such as the soldering of circuit boards. sion. The cultural differences may be harder to deal with, especially the risk aversion which A number of important factors pertain to the the American managers perceive among the assimilation of this technology. One is the Chinese at the middle and lower ranks. availability of technical manpower. SFCL em- ploys 328 people (up from 287 at the beginning According to Foxboro, there were also ex- of the joint venture), of whom 120 are reported port control problems at the outset, which the to be engineers. This is an exceptionally high Chinese partners resented. The problem with proportion of technical manpower for a Chi- the U.S. Government was largely an educa- nese enterprise. This relative abundance is a tional one; much effort was required to inform measure of the commitment of the Govern- the Government of what was anticipated in ment to the joint venture and to the impor- Foxboro’s operations in China. The Govern- tance of the process industry. Nevertheless, ment had concerns about the computer embed- ——-— ded in the process control equipment and about 1O’Intertrade, June 1984, p. 47. networking capabilities that might be trans- ‘“’ Its business reached $7.5 million in 1986, a 37 percent increase over 1985. It has been in operation for four years, and ferred. Some of the components used in the in that time the company has sold 140 sets of automatic-control system were also an issue, and there were li- apparatus and meters to power-generating stations and petro- censing delays until Foxboro was able to dem- chemical and metallurgical plants in China. It plans to put three new products into production in 1987. (“Electrical Joint Ven- onstrate that the computer in the system was ture with U.S. Reports Growth, ” x~nh~~, Jan. 31, 1987. ) technically “dedicated” to process control use. Ch. 4— The Role of the United States in Technology Transfer to China . 101

The liberalization of U.S. export controls for ble number of small-to-medium-size firms (firms sales to China in 1983 facilitated the introduc- with less than US$1OO million in annual sales). tion of digital technology to SFCL. While few of these smaller firms have made direct equity investments in China, they have The relative success of SFCL is due to a num- been able to engage in a broad range of activi- ber of factors. Foxboro is a well-run company ties in China, including technology transfer, with a highly regarded product and consider- services, direct sales, and training. able technology transfer experience. Its technology is in great demand in China and has In a survey commissioned by OTA, it was a strategic importance for Chinese moderniza- found that among the smaller U.S. firms in- tion. The initiative for cooperation with Fox- volved in the China market, most tend to be boro came from a powerful ministry, and the driven by short-term prospects and immedi- joint venture seems to enjoy high-level politi- ate sales opportunities; only among larger cal support, as indicated, for instance, by firms was the long-term perspective part of a SFCL’S ability to recruit a high proportion of strategic orientation toward the Chinese mar- educated technical manpower. Top Chinese ket.l”’ Interestingly, however, many of the managers of SFCL were involved with the smaller firms involved in China have also had project from the beginning, and Foxboro’s a significant number of other international establishment of the special China team seems business relationships, thus suggesting that to have been important. “going international” was not new to them. Moreover, despite the difficulties associated From the Foxboro perspective, one of the key with doing business in China, the smaller com- questions for the future of technology trans- panies seemed prepared to expand their level fer is whether the Chinese will become more of activity wherever possible. imaginative in problem solving, more creative, and less risk averse. The Chinese still focus Smaller firms seem to have many advan- too much on the more advanced technology. tages for doing business in China. First, their Foxboro has introduced the Fox 300, a digital size provides them with greater flexibility to machine, into China but has not made it the respond to China’s changing economic and focus of its technology transfer activities. In- technology needs. These firms tend to have a stead, the Foxboro efforts have centered on greater ability to pursue a market niche strat- the transfer and assimilation of the Spec 200, egy in China, carving out a very specialized an analog machine. Foxboro believes that the place in the midst of increasingly strong com- Chinese should concentrate on mastering the petition from both other U.S. firms and for- technology of the Spec 200, which is quite suit- eign companies. Second, within these firms able for their needs, but the Chinese are still themselves, it is often easier to reach a deci- fascinated with the 300. sion on a Chinese business proposal. And third, because of their relatively smaller scale, these The Role of the Small-to- firms are willing to handle a series of smaller Medium-Size Firm sales and related business transactions. Ac- cording to the survey, because of these factors, Heretofore, it has appeared that most firms a number of respondents indicated that over involved in the Chinese market have been large time small firms may have a better chance of in terms of overall personnel, earnings, and succeeding in China than their larger compe- sales. The costs of doing business in China, in- titors. cluding long negotiations, frequent trips to China, and the hosting of numerous Chinese delegations to the United States, is prohibi- tive for many small companies. Nonetheless, ‘“’’’ Survey on Transfer of Technical and Scientific Informa- tion and/or Sales to the People’s Republic of China, ” adminis- analysis of the American business presence in tered for OTA by the Midwest China Center during November China reveals the participation of an apprecia- 1986 (app. 9, vol. II). 102 ● Technology Transfer to China -—

The most significant problems encountered lack the insight to judge its relevance to mili- by small firms had to do with the length of tary applications. In addition, many take a the negotiation process and the process by rigid approach to interpreting the rules regard- which their contacts with China were initiated. ing technology. Most firms, large and small, tended to under- Many firms commented about their need for estimate the time needed to complete a nego- more and better information about China and tiation. Because of their size and personnel the Chinese market both before and after they constraints, smaller firms tend to encounter began business activities in China. In particu- significant opportunity costs when they have lar, they stressed the need for additional in- to send one or two of their key technical or formation about decision making in China. managerial personnel to China for extended Generally, they felt dissatisfied with the qual- periods. They also felt that they were at a dis- ity of the information and support being pro- advantage because their size usually precluded vided by U.S. Government agencies as well as the opening of a permanent office in China to by the respective State agencies responsible represent the company and market its prod- for international business promotion. Trade ucts. Only 35 percent of the small firms had shows were cited as a more useful mechanism some sort of office or representation in China, for obtaining needed information, as were pri- in contrast to 64 percent of the large firms. vate consultants, though locating appropriate The business people surveyed felt that ex- consultants was difficult. port control procedures did affect their abil- Among the small-to-medium-size firms, there ity to compete with firms from other nations. does not seem to be a particular pattern emerg- One large firm has four full-time professionals ing with respect to their industrial or techno- and five secretaries working on licensing reg- logical orientation. Both high-technology and ulations while another uses a total of eight standard technology firms are involved in people–all of which adds to the cost of the China. For example, in a sample of such firms product. When asked whether U.S. Govern- conducted by the Office of Domestic Opera- ment export control procedures had substan- tions of the U.S. and Foreign Commercial Serv- tially affected their business with China, ap- ice, Department of Commerce, the industries proximately one-quarter of the respondents covered included everything from computer said yes, one-half said no, and the remainder software, advanced laboratory analysis equip- said that export controls were not applicable ment, and cardiac monitoring equipment to to their line of business with China. Sugges- providing coal analysis, ice cream production tions for improvement of export controls in- know-how, and the transfer of hog confinement cluded regulatory personnel with the proper techniques and related equipment. technical background. At present many are not able to understand a complex technology and

GOVERNMENT AND INSTITUTIONAL TECHNOLOGY TRANSFER

The U.S. Government-Supported gram between the United States and China and Programs provides the umbrella under which subsequent scientific, technological, and educational ex- Right after the establishment of diplomatic changes have occurred. It covers a wide relations in 1979, President Carter and Deng range of activities, including educational ex- Xiaoping signed the landmark document “Agree- ment on Cooperation in science and technol- ‘“fiA Relationsb’p Restored: Trends in U. S,-China Educational ogy’ in Washington, D.C. This accord is the Exchanges, 1978-1984 (Washington, DC: National Academy major bilateral Science and Technology pro- Press, 1986), p. 62. —

Ch. 4— The Role of the United States in Technology Transfer to China ● 103

w. * Y . .

Photo credit Erfc O Basques The Dal Ian Management Institute (The National Center for Industrial Science and Technology Management Development) located at the Dal Ian Institute of Technology was established in accordance with the US-PRC Science and Technology Protocols, It IS jointly sponsored by the State Economic Commission, the State Science and Technology Commission and the MI nl nstry of Education on the Chinese side and by the Department of Commerce on the U.S. side. This highly successful management training program started in 1980. change, space technology, high-energy physics, commissions have interests in technology earthquake studies, and telecommunications. transfer arrangements. The earliest agreements started in 1978-79, with new ones being added periodically. The Other programs in China are the Fulbright active agreements and some pending ones as Program and the activities of the National Sci- of June 1986 are listed in Appendix B. ence Foundation. The Committee on Scholarly Communication with the People’s Republic of There are two overarching U.S.-China com- China (CSCPRC) has also been active in this missions that have fundamental responsibil- arena since its founding in 1966 under the joint ity for establishing the basis for U.S.-China sponsorship of the American Council of Learned economic cooperation. The U.S. Treasury De- Societies, the National Academy of Sciences partment is represented on the Joint Economic (NAS), and the Social Science Research Coun- Commission, whereas the Department of Com- cil. The CSCPRC is designated to administer merce is the U.S. representative on the Joint the National Program for Advanced Research Commission for Commerce and Trade. Both and Study in China. In addition to this national 104 “ Technology Transfer to China program they have also run the reciprocal “Dis- space, electronics and telecommunications, tinguished Scholar Exchange Program” since machine building, metallurgy, and building 1979. materials.

Bilateral Agreements Student Exchange The number of bilateral accords in science, Included in the U.S.-China science and tech- technology, or education between Chinese and nology agreement was the previous “Under- U.S. Government agencies grew from 2 to 26 standing on Educational Exchanges, ” signed between 1978 and 1986. It was felt that giv- in October 1978, which provided for the ex- ing major government agencies in each coun- change of undergraduate students, graduate try a stake in improved U.S.-China relations students, and visiting scholars to undertake would help institutionalize the Sine-American research and study in each country. relationship more rapidly. Appendix B shows During the 1985-86 academic year, about that the agreements cover abroad range of sci- 17,000 Chinese students and professors were entific areas, including: agriculture, space tech- enrolled in U.S. universities, mostly in gradu- nology, high-energy physics, medicine and pub- oa ate programs of science and engineering.l Na- lic health, earthquake studies, aeronautics, tionwide, Chinese students were the 11th largest management, nuclear safety, transportation, group of foreign students in the United States and telecommunications. Activities under most during the 1984-85 school year, behind Taiwan, of these agreements are funded under exist- Malaysia, Nigeria, Iran, South Korea, Canada, ing agency budgets, not through special ap- og India, Japan, Venezuela, and Hong Kong. ’ propriations. Thus these agreements have led to varying degrees of activity, depending on Most of the Chinese students coming to the agency priorities. United States under the revived U. S.-China educational exchange program have been con- As of 1985, some of the most intensive activ- centrated heavily in science and other techni- ity was under the aegis of the protocols on cal disciplines. Over two-thirds of those spon- atmospheric science and technology, marine sored by the Government were in the physical, and fishery science and technology, the earth life, health, or computer sciences, mathematics, sciences, earthquake studies, and management and engineering. of industrial science and technology (under which the Dalian Management Center was set About one-half of all Chinese students and up). Interactions under the 1979 “Understand- scholars sent abroad come to the United ing on Agricultural Exchange’ were extensive States. The rapid buildup in the numbers of until November 1983, when activities were sus- students and scholars coming to the United pended because China did not import the quan- States is said to have made the exchanges an tity of U.S. grain called for in a long-term agree important element in China’s effort at mod- ment. 1°7 Activities under this exchange have ernization. How effectively these students’ recently resumed, however. —.——-—- 108Chinese Embassy, Washington, DC, 1986. Under the auspices of the United States- ‘“gInstitute of International Education in New York, figures China Accord on Industrial and Technologi- quoted in the Philadelphia Inquirer, Andrew May Kuth, “Chi- cal Cooperation, the Department of Commerce nese Students Soak Up Technology to Take Back Home, ’ July 4, 1986, p. IB. and China’s Ministry of Foreign Economic Re- 1 IOThe number of U.S. students and scholars going to China lations and Trade have developed a series of under the exchanges has been smaller and in different academic work programs that target U.S. Government fields. An estimated 3500 Americans participated in exchanges from 1978 through 1984 with a majority pursuing short-term trade and investment promotion activities and language study. Of those who performed research, two-thirds U.S. private sector interests on priority devel- were in the social sciences and humanities. opment projects. Work programs exist in aero- ‘llA Relationship Restored: Trendsin U.S.-China Educational Exchanges, 1978-1984 (Washington, DC: National Academy 1071 bid,, p. 64. Press, 1986), p. 62. Ch. 4—The Role of the United States in Technology Transfer to China ● 105 skills are used when they return to China is to return. In the few cases where they sought open to debate.112 Most would agree, however, to stay, however, the Chinese have exerted that Chinese students regard their studies in tremendous diplomatic pressure.1’8 the United States favorably.113 Private Programs Statistics on Chinese students in the United States are very uncertain but about one-third U.S. company support for technology trans- of the students have been financed by relatives fer through training has been demonstrated who live outside of China. However, China may in several instances. One example with great have decided to foreclose this approach.’” The future potential is the Telecommunications majority of the students are funded by grants Training Institute, where training of develop- from the Chinese Government. Increasingly, ing country telecommunications specialists is the Chinese Government funds students for performed on U.S. company premises. Of a only the first year abroad and expects them different nature is a large university-industry to find financial aid to complete their train- ] collaboration between China and the Georgia ing. 15 The U.S. Government does not allow for- Institute of Technology called China/Tech. eign students into the country unless they can This is a Chinese-American joint venture be- prove that they have adequate funds. In addi- tween Technology Exchange Corp., a private tion, acceptance of a nonimmigrant exchange company in Atlanta, and the Technology visitor visa may, in certain circumstances, sub- Clearinghouse of China, a Chinese corporation ject the holder to a 2-year foreign repatriation wholly owned by and operated under the guid- requirement upon termination of status. 116 The ance of CAST (Chinese Association for Science Chinese Government official position is that and Technology). China./Tech will provide a only those students who accept grants from wide range of consulting services to U.S. com- the Chinese Government are required to re- panies that are interested in setting up new turn. ’l’ The Chinese students generally do want ventures or in licensing technology to China. “’See for example, I.eo A. Orleans, ‘iChinese Students and The entire Georgia Tech staff is available for Technology Transfer, Journal of ,Vortheast Asian Studies, vol. consulting services, and the 1.4 million Chi- IV, No. 4, winter 1985, p. 3 ff. 11 ~This establishment of ‘ ‘personal ties’ could be influential nese scientists and engineers who are members in future U.S.-China economic relations. Chinese students trained of CAST will keep China/Tech apprised of in the United States are absorbing preferences for U.S. tech- China’s modernization efforts.’” nology and equipment which may help perpetuate the apparent Chinese preference for U.S. technology. “41.eo A, Orleans, personal communication, June 1987. “’Ibid. ‘ ‘“Foreign ,’VationaZs in the United States–Information Guide– 1986 Edition, Price Waterhouse Center for Transla- tional Taxation, New York, pp. 62-63. ‘‘“The Chinese say that they have sent more than 30,000 students overseas at state expense since 1978. So far about half of them have completed their courses and returned to China. However, of those who went at their own expense, 40 percent of all students abroad, only a small number returned. (” Study 1l’Philadelphia Inquirer, op. cit. Abroad: No Panic, ” Beij@Re\iew, vol. 30, No. 2, Jan. 12, 1987, “gOtis Port, “Georgia Tech Has China on ts Mind, ” Busi- pp. 6-7, ) ness V1’eek. Mar. 31, 1986, p. 70H. CONCLUSION

The Chinese have targeted the energy, trans- eign expertise likely to be in great est demand portation, and communications technology sec- thus include conventional and nuclear electric tors as priority areas in their most recent 5- power production, automobile technology, rail year plan. Large-scale technology transfer from technology, telephone switching systems, fi- industrialized countries is essential for China’s ber optics, and computers. Management ex- continued economic development. Areas of for- pertise is also a critical need for the Chinese. 106 . Technology Transfer to China

The investment climate in China remains un- ing regulations covering specific investor con- attractive for many U.S. companies, and any cerns in March 1987. Also, despite specific changes will come slowly. However, as the Chi- problems of their own (usually involving pro- nese reforms proceed and new benchmarks are prietary rights or foreign exchange), licensing established, the investment climate will prob- agreements will continue to be a common mode ably improve. This is because the Chinese real- of technology transfer for foreign companies, ize that the degree to which China accom- particularly since the Chinese have apparently plishes its modernization goals will depend on agreed to honor patent conventions. If the pa- the importation and application of advanced tience and perseverance of U.S. firms can be technologies throughout the economy. Pros- matched by Chinese pragmatism, U.S. ven- pects for joint ventures may improve since the tures in the Chinese market can truly become foreign investment law of October 11, 1986 was those of “equality and mutual benefit. ” codified with 16 sets of detailed implement- Ch. 4—The Hole of the United States in Technology Transfer to China . 107

APPENDIX A: PROVISIONS OF THE STATE COUNCIL OF THE PEOPLE’S REPUBLIC OF CHINA FOR THE ENCOURAGEMENT OF FOREIGN INVESTMENT (PROMULGATED ON OCTOBER 11, 1986) Article 1. These provisions are hereby formulated and the site use fee are computed and charged in order to improve the investment environment, together, and facilitate the absorption of foreign investment, in- ● not more than three RMB yuan per square troduce advanced technology, improve product metre per year in site areas where the devel- quality, expand exports in order to generate for- opment fee is computed and charged on a one- eign exchange, and develop the national economy. time basis or areas which are developed by the Article 2. The State encourages foreign companies, above-mentioned enterprises themselves. enterprises, and other economic entities or individ- Exemptions for specified periods of time from uals (hereinafter referred to as “foreign investors”) the fees provided in the foregoing provision may to establish Chinese-foreign equity joint ventures, be granted at the discretion of local people’s gov- Chinese-foreign cooperative ventures and wholly ernments. foreign-owned enterprises (hereinafter referred to Article 5. Export enterprises and technologically as “enterprises with foreign investment”) within advanced enterprises shall be given priority in ob- the territory of China, taining water, electricity and transportation serv- The State grants special preferences to the en- ices, and communication facilities needed for their terprises with foreign investment listed below: production and operation. Fees shall be computed ● production enterprises whose products are and charged in accordance with the standards for mainly for export, which have a foreign ex- local state enterprises, change surplus after deducting from their to- Article 6. Export enterprises and technologically tal annual foreign exchange revenues the an- advanced enterprises, after examination by the nual foreign exchange expenditures incurred Bank of China, shall be given priority in receiving in production and operation and the foreign loans for short-term revolving funds needed for exchange needed for the remittance abroad of production and distribution, as well as for other the profits earned by foreign investors (here- needed credit. inafter referred to as “export enterprises”); and Article 7. When foreign investors in export enter- ● production enterprises possessing advanced prises and technologically advanced enterprises re- technology supplied by foreign investors which mit abroad profits distributed to them by such en- are engaged in developing new products, and terprises, the amount remitted shall be exempt upgrading and replacing products in order to from income tax. increase foreign exchange generated by ex- Article 8. After the expiration of the period for the ports or for import substitution (hereinafter reduction of exemption of enterprise income tax referred to as ‘‘technologically advanced en- in accordance with the provisions of the State, ex- terprises’ ‘). port enterprises whose value of export products Article 3. Export enterprises and technologically in that year amounts to 70 percent or more of the advanced enterprises shall be exempt from pay- value of their products for that year, may pay en- ment to the State of all subsidies to staff and work- terprise income tax at one-half the rate of the ers, except for the payment of or allocation of funds present tax. for labor insurance, welfare costs, and housing sub- Export enterprises in the special economic zones sidies for Chinese staff and workers in accordance and in the economic and technological development with the provisions of the State. zones and other export enterprises that already Article 4. The site use fees for export enterprises pay enterprise income tax at a tax rate of 15 per- and technologically advanced enterprises, except cent and that comply with the foregoing condi- for those located in busy urban sectors of large cit- tions, shall pay enterprise income tax at a rate of ies, shall be computed and charged according to 10 percent. the following standards: Article 9. After the expiration of the period of re- ● five to twenty RMB yuan per square metre duction or exemption of enterprise income tax in per year in areas where the development fee accordance with the provisions of the State, tech- 108 . Technology Transfer to China nologically advanced enterprises may extend for security services and may grant loans in Renminbi 3 years the payment of enterprise income tax at to enterprises with foreign investment. a rate reduced by one half. Article 15. The people’s governments at all levels Article 10. Foreign investors who reinvest the prof- and relevant departments in charge shall guaran- its distributed to them by their enterprises in or- tee the right of autonomy of enterprises with for- der to establish or expand export enterprises or eign investment and shall support enterprises with technologically advanced enterprises for a period foreign investment in managing themselves in of operation of not less than 5 years, after applica- accordance with international advanced scientific tion to and approval by the tax authorities, shall methods. be refunded the total amount of enterprise income With the scope of their approved contracts, en- tax already paid on the reinvested portion. If the terprises with foreign investment have the right investment is withdrawn before the period of oper- to determine by themselves production and operation reaches 5 years, the amount of enterprise in- ation plans, to raise funds, to use funds, to pur- come tax refunded shall be repaid. chase production materials, and to sell products; Article 11. Export products of enterprises with for- and to determine by themselves the wage levels, eign investment, except crude oil, refined oil, and the forms of wages and bonuses, and the allowance other products subject to special State provisions, system. shall be exempt from the consolidated industrial Enterprises with foreign investment may, in and commercial tax. accordance with their production and operation re- Article 12. Enterprises with foreign investment quirements, determine by themselves their or- may arrange the export of their products directly ganizational structure and personnel system, em- or may also export by consignment to agents in ploy or dismiss senior management personnel, and accordance with State provisions. For products increase or dismiss staff and workers. They may that require an export license, in accordance with recruit and employ technical personnel, managerial the annual export plan of the enterprise, an appli- personnel, and workers in their locality. The unit cation for an export license maybe made every six to which such employed personnel belong shall pro- months. vide its support and shall permit their transfer. Staff and workers who violate the rules and regu- Article 13. Machinery and equipment, vehicles used lations, and thereby cause certain bad conse- in production, raw materials, fuel, bulk parts, spare quences may, in accordance with the seriousness parts, machine component parts and fittings (in- of the case, be given differing sanctions, up to that cluding imports restricted by the State), which en- of discharge. Enterprises with foreign investment terprises with foreign investment need to import that recruit, employ, dismiss, or discharge staff in order to carry out their export contracts do not and workers, shall file a report with the local labour require further applications for examination and and personnel department. approval and are exempt from the requirement for import licenses. The customs department shall ex- Article 16. All districts and departments must im- ercise supervision and control, and shall inspect plement the “Circular of the State Council Con- and release such imports on the basis of the enter- cerning Firmly Curbing the Indiscriminate Levy prise contract or the export contract. of Charges on Enterprises. ” The people’s govern- The imported materials and items mentioned ments at the provincial level shall formulate spe- above are restricted to use by the enterprise and cific methods and strengthen supervision and ad- may not be sold on the domestic market. If they ministration. are used in products to be sold domestically, im- Enterprises with foreign investment that en- port procedures shall be handled in accordance counter unreasonable charges may refuse to pay with provisions and the taxes shall be made up and may also appeal to the local economic commit- according to the governing sections. tees up to the State Economic Commission. Article 14. Under the supervision of the foreign ex- Article 17. The people’s governments at all levels change control departments, enterprises with for- and relevant departments in charge shall strengthen eign investment may mutually adjust their foreign the co-ordination of their work, improve efficiency exchange surpluses and deficiencies among each in handling matters and shall promptly examine other. and approve matters reported by enterprises with The Bank of China and other banks designated foreign investment that require response and reso- by the People’s Bank of China may provide cash lution. The agreement, contract and articles of —

Ch. 4— The Rcie of the United States in Technology Transfer to China 109 — association of an enterprise with foreign invest- enterprises or technologically advanced enter- ment shall be examined and approved by the de- prises, other articles shall be applicable to all en- partments in charge under the State Council. The terprises with foreign investment. examination and approval authority must within These provisions apply from the date of imple- three months from the date of receipt of all documentation to those enterprises with foreign investments decide to approve or not to approve them. ment that have obtained approval for establish- Article 18. Export enterprises and technologically ment before the date of implementation of these advanced enterprises mentioned in these provi- provisions and that qualify for the preferential sions shall be confirmed jointly as such by the for- terms of these provisions. eign economic relations and trade departments Article 20. For enterprises invested in and estab- where such enterprises are located and the relevant lished by companies, enterprises, and other eco- departments in accordance with the enterprise con- nomic organizations or individuals from Hong tract, and certification shall be issued. Kong, Macao, or Taiwan, matters shall be handled If the actual results of the annual exports of an by reference to these provisions. export enterprise are unable to realize the goal of Article 21. The Ministry of Foreign Economic Re- the surplus in the foreign exchange balance that lations and Trade shall be responsible for interpret- is stipulated in the enterprise contract, the taxes ing these provisions. and fees which have already been reduced or ex- empted in the previous year shall be made up in Article 22. These provisions shall go into effect on the following year. the date of issue. SOUIiCII: Bejjing Re}jewr, No. 43, Oct. 27, 1986. Article 19. Except where these provisions expressly provide that they are to be applicable to export

APPENDIX B: PROTOCOLS AND MEMORANDA OF UNDERSTANDING UNDER THE U. S.-PRC AGREEMENT ON COOPERATION IN SCIENCE AND TECHNOLOGY 1. Agreement: Understanding on Exchange of Students and Scholars Date signed: October 1978, Exchange Letter of January 1979 Date extended: Unlimited U.S. agency: USIA, DOE, NSF, NAS, NEH Chinese unit: MOE, CASS, SSTC 2. Agreement: Understanding on Agricultural Exchange Date signed: November 1978 Date extended: Unlimited U.S. agency: USDA, USGS, and DOI/Fish and Wildlife Service Chinese unit: Ministry of Agriculture, Animal Husbandry, and Fisheries 3. Agreement: Understanding on Space Technology (overall protocol on Space Science Applica- tion and Technology currently under negotiation) Date signed: January 31, 1979 Date extended: Unlimited U.S. agency: NASA Chinese unit: Chinese Academy of Space Technology (under the Ministry of Astronautics) and CAS 4. Agreement: Implementing Accord on Cooperation in the Field of High Energy Physics Date signed: January 31, 1979 Date extended: February 1984 U.S. agency: February 1989 Annexes and dates: Annex June 12, 1979, Joint Committee Reports 1979-1980, 1980-1981, 1982-1983 U.S. agency: DOE Chinese unit: CAS (formerly signed with SSTC) 5. Agreement: Protocol on Cooperation in the Field of Metrology and Standards Date signed: May 8, 1979 110 ● Technology Transfer to China

Date extended: May 8, 1984 Date expired: May 8, 1989 Annexes and dates: Annex (1) May 8, 1979; Annex (2), May 5, 1981 (supersedes Annex (l). (Annexes do not apply to extension.) U.S. agency: DOC (National Bureau of Standards) Chinese unit: State Bureau of Metrology and State Bureau of Standardization 6, Agreement: Protocol on Cooperation in the Field of Atmospheric Science and Technology Date signed: May 8, 1979 Date extended: May 1984 Date expires: May 1989 Annexes and dates: Annex (l), May 1979; Annex (2), May 1979; Annex (3), September 1980; Annex (4), September 1980; Annex (5), November 1981; Annex (6), November 1981 U.S. agency: NOAA, NSF, NASA, USDA Chinese unit: State Meteorological Administration 7. Agreement: Protocol on the Field of Marine and Fishery Science and Technology Date signed: May 8, 1979 Date extended: May 1984 Date expires: May 1989 Annexes and dates: Annex (l), May 1979; Annex (2), Working Group Meeting 1980; Annex (3), Work- ing Group Meeting 1982; Annex (4), Working Group Meeting 1984 U.S. agency: NOAA, NSF Chinese unit: National Bureau of Oceanography and Ministry of Agriculture, Animal Hus- bandry and Fisheries 8, Agreement: Protocol on Cooperation in the Sciences and Technology of Medicine and Public Health Date signed: June 22, 1979 Date extended: Extension under negotiation Date expired: June 22, 1984 Annexes and dates: Annex (l), November 1980; Annex (2), November 1980; Annex (3), January 1982 U.S. agency: HHS (NIH) Chinese unit: Ministry of Public Health 9. Agreement: Protocol on Cooperation in Hydroelectric Power and Related Water Resource Management Date signed: August 28, 1979 Date extended: Expired; no plans for extension Date expired: August 28, 1984 Annexes and dates: Annex (l), March 1980; Annex (2), September 1982 U.S. agency: DOC, DOI (Bureau of Reclamation, Corps of Engineers, Tennessee Valley Au- thority) Chinese unit: Chinese Ministry of Water Resources and Electric Power 10. Agreement: Protocol for Scientific and Technical Cooperation in the Earth Sciences Date signed: January 24, 1980 Date extended: January 24, 1985 Date expires: January 24, 1990 Annexes and dates: Annex (l), Patents, November 1981; Annex (2); Annex (3); Annex (4), Copyrights; Annex (5); Annex (6) Working Group Meeting 1984 U.S. agency: DOI (USGS) and NSF Chinese unit: Chinese Academy of Geological Sciences 11. Agreement: Protocol for Scientific and Technical Cooperation in Earthquake Studies Date signed: January 24, 1980 Date extended: January 24, 1985 Date expires: January 23, 1990 Annexes and dates: Annexes (l-8) U.S. agency: USGS and NSF Chinese unit: Chinese State Seismological Bureau Ch. 4— The Role of Tne united States In Tecnnology Transrer to China ● 111

12. Agreement: Protocol for Scientific and Technical Cooperation in the Field of Environ- mental Protection Date signed: February 5, 1980 Date extended: February 1985 Date expires: February 1989 Annexes and dates: Annexes (l-3) U.S. agency: Environmental Protection Agency Chinese unit: Office of the Environmental Protection Leading Group 13 . Agreement: Protocol on Cooperation in the Basic Sciences Date signed: December 10, 1980 Date expired: December 1985 Annexes and dates: Annex (l), Patents and Copyrights, March 1981 U.S. agency: NSF Chinese unit: CAS and CASS 14. Agreement_,: Protocol on Cooperation in the Field of Building Construction and Urban Planning Science and Technology Date signed: October 17, 1981 Date expires: October 1986 Annexes and dates: Annex (1) U.S. agency: Department of Housing and Urban Development Chinese unit: Ministry of Urban and Rural Construction and Environmental Protection 15. Agreement: Protocol on Cooperation in Nuclear Safety Matters Date signed: October 17, 1981 Date expires: October 1986 U.S. agency: NRC Chinese unit: National Nuclear Safety Administration (formerly SSTC) 16. Agreement: Protocol on Scientific and Technical Cooperation in the Study of Surface Water Hydrology Date signed: October 17, 1981 Date expires: October 1986 Annexes and dates: Annexes (l-4), 1983; Annexes (5-6), 1985 U.S. agency: DOI ([JSGS) Chinese unit: Bureau of Hydrology (under the Ministry of Water Conservancy) 17. Agreement: Cooperation in the Fields of Nuclear Physics and Controlled Magnetic Fu- sion Research Date signed: May 11, 1983 Date expires: May 1988 Annexes and dates: Annexes (l-5), 1985 U.S. agency: DOE Chinese unit: SSTC 18. Agreement: Cooperation in Aeronautical Science and Technology Date signed: May 11, 1983 Date expires: May 1988 Annexes and dates: Annex (l), Copyrights, April 5, 1985; Annex (2), April 5, 1985 U.S. agency: NASA Chinese unit: Chinese Aeronautical Establishment (under the Ministry of Aeronautics) 19. Agreement: Protocol on Cooperation in Science and Technology of Transportation Date signed: May 11, 1983 Date expires: May 1988 U.S. agency: Department of Transportation Chinese unit: Ministry of Communications 20. Agreement: Protocol on Cooperation in the Field of Scientific and Technical Information Date signed: May 8, 1979 Date extended: April 30, 2984 112 ● Technology Transfer to China ——— — —

Date expires: April 1989 Annexes and dates: Annex (l); Annexes2-4), February 8, 1982 U.S. agency: DOC (NTIS) Chinese unit: ISTIC (under SSTC 21. Agreement: Cooperation in the Field of Management of Industrial Science and Tech- nology Date signed: May 1979 Date extended: April 1984 Date expires: April 1989 U.S. agency: DOC Chinese unit: State Economic Commission, SSTC, MOE 22. Agreement: Protocol on Cooperation in Statistics Date signed: July 24, 1984 Date expires: July 1989 U.S. agency: DOC (Bureau of the Census) Chinese unit: State Statistical Bureau 23. Agreement: Memorandum of Understanding on Cooperation in the Basic Biomedical Sciences Date signed: May 11, 1983 Date expires: May 1988 U.S. agency: NIH Chinese unit: CAS 24. Agreement: Protocol for Scientific and Technical Cooperation in Surveying and Mapping Studies Date signed: April 16, 1985 Annexe~ and dates: Annex (l), 1985 U.S. agency: USGS/Defense Mapping Agency Chinese unit: National Bureau of Surveying and Mapping (under SSTC) 25. Agreement: Protocol on Cooperation in the Field of Fossil Energy Research and Devel- opment Date signed: April 16, 1985 Annexes and dates: Annex (l), 1985 U.S. agency: DOE Chinese unit: Ministry of Coal Industry Under negotiation: 1. Agreement: Landsat Ground Station Memorandum of Understanding U.S. agency: DOC (NOAA/NESDIS) Chinese unit: CAS 2. Agreement: Telecommunications U.S. agency: DOC Chinese unit: Ministry of Post and Telecommunications 3. Agreement: Health Memorandum of Understanding between the Center for Disease Con- trol and the China National Center for Preventive Medicine U.S. agency: HHS (PHS and CDC) Chinese unit: China National Center for Preventive Medicine A BB RIJV I AT ION KEY. U.S. ~gmcies: CDC Centers for Disease Control; IX)C Department of Commerce; DOE Department of Energy, D() I I)epartment of the Interior, 11}1S Department of Health and Human Services, NAS National Academy of Sciences; ?NASA National Aeronautics and Space Admmistratmn, NBS N’at]onal Bureau of Standards; NEli X’atlonal Endowment for the Humamtles: NTESDIS National Environmental Satellite Data and Informa- tion %rwce; N 1 F{ National Institutes of Health: !VOAA National Oceanic and Atmospheric Administration; N RC Nuclear Regulator} Commission, NSF’ National Science Foundation; NTIS National Technical Information Service; PHS Public Health Service, [JSDA (J S Department of Agrwul- ture, USGS U S Geological Survey, USIA U S. Information Agency. (’hirwse units C’AS Chinese Academy of Sciences, CASS Chinese Academy of Social Sciences: ISTIC Institute of Science and Technokwr Informa- tion of China, Mokl M mistry of Education: SSTC State Science and Technology Commission SOURCE;. A Relationship Restored. 7’rends m U S.. Ch/na h’ducationid F;xchange, 1978-1984, National Academy Press, M’ashmgton, DC, 1986 Chapter 5 Policies of Other Supplier Countries: Japan, France, West Germany, and Britain

?’

Photo credit: Eric Basques

The old and the new coexist in Hong Kong. Hong Kong will become a special Adrninistratke Zone of China on June 30, 1997, under what Deng Xiaoping calls a “one country/two systems” concept. CONTENTS

Page Foreign Policy Perspectives...... 115 Japan ...... 115 Europe ...... ,..,...... 117 Approaches to Technology Transfer ...... 118 Japan ...... 118 Europe ...... 124 Export-Controls ...... 130 Japan ...... 132 Europe ...... 133 Aid and Export Financing ...... ,...... 135 Development Assistance ...... 136 Other Types of Financing ...... ,,...... 138 The Mixed Credit Controversy ...... 141 Multilateral Policy Challenges ...... ,,...... 142

Tables Table No. Page 9. Composition of Japanese Exports to China 1985 ...... 119 10. Comparison of Selected U.S. and Japanese Exports ...... 120 11. Technology Transfer From Japan to China, 1984-85 ...... 121 12. European Trade With China in 1986 ...... 125 13. European Official Development Assistance to China ...... 139 Chapter 5 Policies of Other Supplier Countries: Japan, France, West Germany, and Britain

Japan and many European countries are ac- Others will require complementary efforts tively assisting China in its modernization pro- by policy makers in the United States and the grams. Firms from these major supplier coun- other supplier countries. An example is the tries can supply virtually all the technologies need to strike a proper balance in assisting that the United States can and share common China in its modernization while preserving Western security interests. Japanese exports Western strategic interests in Asia. Maintain- to China have in recent years far exceeded ing this balance may entail further efforts to those of the United States or any West Euro- harmonize export control policies, a process pean country, raising questions about U.S. ex- that will increasingly depend upon the partici- port performance. pation of other Asian countries such as Sin- This chapter compares the approaches taken gapore. A second challenge is the need to avoid costly competition, propelled by subsidized ex- by these major supplier countries in order to identify opportunities and problems for U.S. ports, and to ensure expanded trade with China policy. OTA finds that while competition while avoiding protectionist responses. On a more positive note, there are also opportuni- among these countries for sale of products and ties for cooperation in development projects technologies to China is generally a healthy process, technology transfers and trade also that require financial and other resources so great that they would strain the capacities of present policy challenges to the United States and to the Western “alliance’ nations collec- any one supplier country. tively. One challenge is to U.S. firms (and to the U.S. Government) to compete effectively in the China market.

FOREIGN POLICY PERSPECTIVES Japan anese experts refer to ‘political-economic cycles in Sino-Japanese trade. Japan’s exports Japan’s official government policy today of machinery and equipment to China show strongly supports China’s economic modern- peaks during periods of improving bilateral re- ization and growing economic relations. Prox- lations and troughs coinciding with political imity to China as well as its historic ties and changes such as the Cultural Revolution.1 technological prowess helped Japan become Japanese business and government leaders China’s number-one trading partner. For Ja- charted a pragmatic policy course that led to pan, now poised for what some see as a larger expanded economic interaction through unoffi- political and strategic role, China offers an un- cial channels before the warming of relations usual opportunity to contribute to the mod- in the 1970s, but at times Chinese stress on ernization of an Asian neighbor. Succeeding political principles was a constraint. in this effort could reinforce Japan’s growing leadership role in Asian trade and security. Sino-Japanese economic relations developed ‘Mitsubishi Sogo Kenkyujo, .Vibe Ki~w no Chugoku Shijo Akusesu to .4jia Ta”hai Chiiki no Kozu [Structure and Access over a bumpy path during the postwar period, by Japanese and U.S. Firms to the Chinese Itlarket], MR1 Pro- however, and significant problems remain. Jap- jection No. 20, May 24, 1985, p. 34.

115 116 . Technology Transfer to China

In 1978 Japan and China opened a new era But despite the considerable progress that in their bilateral relationship by signing a has been made in deepening SinoJapanese ties, Treaty of Peace and Friendship and a Long- serious points of friction became apparent in Term Trade Agreement. The establishment of 1985. Since the mid-1970s, when Japan estab- diplomatic relations between the United States lished itself as China’s prime trading partner, and China in 1979 set the stage for rapidly China’s leaders have complained about trade growing Sino-Japanese interaction.’ deficits with Japan. For years, the two countries attempted to resolve this problem under Japan’s foreign policy toward China is based the rubric of long-term trade agreements that on the proposition that contributing to China’s featured increased Japanese commitments to modernization will allow China to resist Soviet 3 import Chinese oil and coal. By 1985 the trade influence better. China is seen as a socialist deficit had become a prime concern in bilateral country, one quite different from the Soviet relations, as Japan’s surplus reached $6 bil- Union, which poses the greatest threat to lion on a total bilateral trade basis of about Japan’s security. While Japan would be wary $19 billion.’ In late 1985 and early 1986, Chi- of a strong military “alliance” with China that nese officials issued repeated warnings about was perceived as threatening by the Soviet 5 the trade imbalance. Union, Japan has determined that helping China modernize will contribute to China’s Particularly noteworthy was the linkage of peaceful economic and political integration into the trade issue to other points of controversy Asia. According to this view, economic and in the SinO-Japanese relationship. Chinese stu- technical assistance make it more likely that dent demonstrations in late 1985 revealed re- China’s relations with the West expand. sentment over Japan’s trade “invasion,” and Prime Minister Nakasone’s unprecedented A number of other factors, in addition to visit to a shrine to honor war dead awakened U.S.-China rapprochement and Japan’s percep- memories of Japan’s earlier aggression in tion of the role that China can play as a coun- China. While the causes and significance of the terpower to the Soviet Union, underlie the Chinese student demonstrations remain the rapid growth of economic relations since the subject of considerable controversy, those late 1970s. In a climate of growing trade fric- demonstrations previewed a series of attempts tions with the United States and Europe, and by both countries to repair the points of fric- a shrinking Middle Eastern market, China ap- tion. Nakasone announced a cancellation of im- pears to hold at least a commercial prospect. mediate plans for a second visit to the shrine, China also provides a unique opportunity for and Chinese Communist Party leader Hu Yao- Japan to demonstrate its commitment to ex- bang proposed four points aimed at improving pand its official development assistance in friendship, calling on the two governments to ways that contribute to Western security in- “adopt a correct approach to their serious con- terests. The complementarily between China’s flicts of the past. ”G energy, natural, and human resources and Japan’s technological and economic acumen ‘Japan nevertheless registered a trade surplus with China suggests a natural basis for economic ex- every year since 1972, except for 1981 and 1982, when China adopted a policy of restricting imports due to financial difficul- change. Anxious to develop anew style of con- ties. Neither oil nor coal exports met expectations. structive leadership in Asia, Japanese govern- ‘During 1986, Japan ran a $4.2 billion trade surplus, reflect- ment and business find in China a prime testing ing the fact that exports fell 18 percent below the level of the previous year, according to Japanese customs-clearance figures. ground. ‘In March 1986, China’s Ambassador to Japan warned that China was watching the trade picture carefully and was con- ‘During the early postwar period, Japan was in no position cerned about the trade gap. In April 1986, China’s Foreign Min- to establish an independent foreign policy. After the Korean ister Wu on a visit to Tokyo called the trade deficit a big prob- War, worsening U.S.-China relations precluded official Sino- lem. China has repeatedly called upon Japan to open its doors Japanese rapprochement. In the early 1960s, the United States to more imports from China and expanded investments in and and Taipei persuaded Japan not to use Export-Import Bank technology transfer to China. financing to support China trade. See Chae-Jin Lee, ChirIa and ‘See “HU Outlines Framework for Friendship with Japan, ” Japan (Stanford: Hoover Inst. Press, 1984), p. 6. China Dm”ly, Oct. 19, 1985. Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 117 -.

Other constraints stem more from external factors. Prime among these is the need to balance growing ties with China with the desire to preserve good relations with the Associa- tion of Southeast Asian Nations (ASEAN) and other Asian countries. Hence, Japan’s Foreign Ministry has developed an aid strategy explicitly founded on three principles: (1) balancing aid to China with aid to ASEAN (2) cooperating with Western countries, and (3) providing no military aid. This approach embodies Ja- pan’s response to concerns raised by the Orga- nization for Economic Cooperation and De- velopment (OECD) countries about growing Japanese Export-Import Bank financing for energy and other projects for developing infrastructure in China. Japan thus has a great deal to gain if its policies toward China succeed, but its prestige and influence could be diminished if frictions over trade and technology transfer fester and reac- tivate older points of controversy. China, more than other developing countries in Asia, appears capable of applying pressure on Japan. Japan’s growing involvement in China is, mor- ever, being carefully watched by other coun- \ tries in the region. The expanding Sine-Japa- Photo cred(t X/nhua News Agency nese relationship thus holds potential pitfalls Checking Integrated c!rcults at the as well as opportunities for Japan that extend Jlangnan Radio Appliance Factory in WUXI. beyond the bilateral relationship. This equipment was supplied by Japan. Europe Quite recently, the Government of Japan apologized to China for statements made by European countries have had centuries of former Minister of Education Masayuki Fu- trading experience with China. The value of jio suggesting that Japan was justified in its this trade and China’s internal weakness led aggression in Nanking in 1937.7 Thus, while to intense political interference, starting with the two countries have attempted to relieve the Opium War in 1839-42. The Boxer Rebel- tensions, deep and historic points of friction lion of 1899 began a period of reaction to Euro- remain over Japan’s past aggression and its pean imperialism that lasted until about 1920. relationship with Taiwan. * Actual colonialism was limited to Hong Kong and Macao, but the de facto loss of control to Europe (plus the United States, to much less T4’estem and Chinese historians have written about the atroci- extent, and later to Japan) left a lasting preoc- ties committed by the Japanese (known as the ‘4 Rape of Nank- ing’ after they captured Nanking in 1937. Apologies were also cupation with national sovereignty. This ex- made to South Korea. See, e.g., John Burgess, ‘‘Japan Ijdu- perience also produced business and personal cation Minister Fired for Remarks about J1’orld I!’ar II, ll”ash- ties that have been useful in expanding trade ington Post, Sept. 9, 1986, p. A21. ‘Japan ended diplomatic relations with Taiwan in 1972, Never- as relations improved in recent years. theless, China raised concerns o~’er the participation by some I,iberal I)emocratic Part,y leaders in a commemoration of Chiang There is considerable commonality among Kai-shek. the views of the European trading partners of 118 ● Technology Transfer to China —

China. All are interested in increasing trade. economies, but also relatively modest for the Technology transfer is seen as a natural part foreseeable future. Europe’s trade with China of trade, often a crucial part, for competitive exceeds that of the United States (by a widen- reasons. A modernized China is, ~f anything, ing margin), though it is much less than seen as strategically beneficial vis-a-vis the So- Japan ’s. viet Union. At present, there are few signifi- There is less variation in perspectives on cant disputes between China and European technology transfer to China among the vari- countries. ous countries of Europe, than between Eur- This overall outlook is similar to that of the ope and the United States or Japan. No grand United States, but differences arise in the de- designs, either strategic or commercial, seem gree of concern over certain issues and in the to underlie Europe’s approach, and no great ways in which policies are carried out, both at controversies impede the relationships. The the government and corporate levels. Since whole issue is lower key and more matter-of- there is little potential for direct strategic con- fact. Within Europe, there are differing ap- flict between Europe and China, Europe is less proaches to technology transfer, as discussed concerned about improvements to China’s mil- below, but few disputes between countries over itary capability from dual-use technologies or trade with China. direct military transfers. All members of the From China’s perspective, the European con- Coordinating Committee for Multilateral Ex- nection offers the best of all worlds. European port Controls (COCOM) use the same rules, but technology is in most respects equivalent to different interpretations of applicability to spe American or Japanese, but Europeans seem cific exports are often possible. to be readier to transfer it than Americans, European trade has had its ups and downs, with their strategic concerns, or Japanese, with as with Japan, but this has been due more to their commercial reluctance. Furthermore, China’s internal economic decisions than to in- dealing with Europe helps China maintain its ternational political factors. The frictions that independence. These factors may explain why have marked China’s trading relations with Ja- China seems relatively unconcerned with Euro- pan and the United States have been much less pean protectionism and trade surpluses, even pronounced in Europe. European countries see though these problems are much more severe China as a promising commercial market that than China’s problems with the United States. is attractive, considering their own sluggish

APPROACHES TO TECHNOLOGY TRANSFER Western suremit countries have taken differ- Japan ent policy approaches to technology transfer, and the China market is no exception. Private Scope and Type of Technology Transfer to China firms are the major developers and transfer- rers of technology, but in some fields such as There is a sharp contrast between China’s telecommunications, state-owned firms play criticisms of Japan for not transferring much major roles. All of the Western governments technology and views often expressed by U.S. influence the nature and scope of technology businessmen that Japanese firms are actually transfer, albeit in different ways.’ transferring advanced technologies (sometimes exceeding or circumventing multilateral 9For an analysis of differing policy approaches to technology export controls). While data are not available transfer in general, see OTA, TechnofogJ~ Transfer to the Mici- dle L’ast, September 1984, ch. 12 “Policies of Other Supplier for a detailed comparison of technology trans- Countries. ” fer from various sources, distinctive features Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 119 of Japanese technology transfer to China are Table 9.—Composition of Japanese Exports nevertheless apparent. to China 1986 (millions of U.S. dollars) -- To set the context for the discussion of tech- Export share (percent of total nology transfer, it should be noted that Japan Japanese exports has been China’s number-one trading partner Value to China) for more than a decade. Two-way trade reached Chemical goods ...... 8{ 5 8.3 0/0 almost $19 billion in 1985 (more than double Metals and articles thereof . 3,163 32,1 (Iron and steel sheets and U.S.-China trade), with Japanese exports to plates) ...... (1,013) (10.3) China valued at $12.5 billion dollars. In 1986 Machinery and mechanical China was the fourth largest importer of Jap- apparatus ...... 4,979 50.5 (TV receivers)...... (152) (1 ,5) anese products and the fifth largest exporter (Motor vehicles) ...... (612) (6.2) to Japan. ’” Traditionally, Sino-Japanese trade (Scientific, optical, and comprised an exchange of ‘machines for oil. 1 I precision apparatus) . . . . (506) (5.1) Textiles and textile articles (447) (45) At least in terms of Japanese exports, this pat- Total ...... 9,856 tern still prevails: machinery exports made up NOTE General contrasts with U S exports wh(ch amounted to $38 b!lllon (n 1985, are apparent While U S agricultural exports decl!ned they made 57 percent of total Japanese exports to China up a comparatively large share for the Un!led States Table 52 prov(des during 1985. Exports tripled in 1985 in auto- a comparison of selected equl pment exports mobiles, motorcycles, televisions, and other SOURCE” Mlnlstry of Finance Japan consumer appliances. In the first half of 1986, significant. With the completion of the Bao- however, Japan’s exports to China fell 23 per- shan steel mill project in 1985, Japan’s exports cent from the 1985 level. Exports of automo- of large plants dropped. Table 10 compares biles and appliances plummeted after Chinese U.S. and Japanese exports in key sectors. resentment grew over a growing trade deficit with Japan. Japan’s share of telecommunica- Official statistics cover direct trade between tions exports dropped markedly from 77 per- Japan and China and thus do not show that cent in 1985 to 58 percent in the first half of in recent years Hong Kong has become increas- 1986. ingly important as an alternative channel. Chi- nese officials express concern about this route, Table 9 outlines the composition of Japanese fearing reduced control over imports and exports to China. In 1986, exports of steel prod- prices. One observer estimated that trade ucts constituted more than a quarter of this through Hong Kong represents 10-15 percent trade (3 billion dollars’ worth). Another major of the value of total official bilateral Sino- export category is transportation equipment; Japanese trade. ” Japan exported 936 million dollars’ to China, down 58% from the 1985 level. After a surge Product exports do not, of course, constitute in imports of Japanese automobiles in early technology transfer, but such exports often in- 1985, and scandals involving illegal sales and clude training programs and provision of tech- defective parts, the Chinese Government im- nical services. The sheer volume of Japan’s ma- posed restrictions on imports later in the year. chinery and equipment exports suggests that A third major category of exports is industrial Japanese firms have played a significant role machinery and electrical equipment. Television in helping modernize China’s industries. In exports (including components) were valued June of 1986a high-level Chinese official noted at $1 billion in 1985, but dropped sharply in that during the past five years 651 Japanese 1986. Chemical and textile exports were also experts had visited China to diagnose 131 factories, and that 400 Chinese had visited factories in Japan. ” Trade data alone, therefore, ‘()’’ Japan-China Trade in 1986, ” China .Nrews]etter, No. 67, March-April, 1987, p. 20. Two wa~r trade totaled $15.5 billion “See Charles Smith, “The Ties that Bind, ” Far Eastern Eco- in 1986. nomic Re\,ieu’, Apr. 24, 1986, p, 80. “See Richard K. Nanto and Hong Nack Kim, “Sino-Japanese “These numbers include both Japanese go~,ernment and cor- Economic Relations, Congressional Research Service, Prepared porate programs. See China .Vew.detter, no. 64. Sept. -oct. 1986, for the tJoint Plconomic Commitee, No\rember 1984. p. 10. 120 ● Technology Transfer to China

Table IO.—Comparison of Selected U.S. and Japanese Exports 1985 (million U.S. dollars)

United— States Japan Telecommunications and sou-nd recording equipment . . . . . 43.5 1,383a Office machinery and equipment, including computers ...... 187.6 122.7 Professional and scientific control instruments ...... 279 683b aof which, TV receivers = $1.073 b, Sclen tlflc, Optical and preclslon apoaratus In Japan’s tariff class !ficatlon SOURCES U S Commerce Dept data, reported In Ch/na f3us/ness and Trade, Feb 23, 1986, Japan Tariff Assoctatlon data, reported In JE/ Report, No 14b provide an inadequate gauge of technology Photo credft ” Xinhua News Agency transfers. The Fujian Hitachi Television Co. Ltd. in Fuzhou, a China-Japan joint venture. Photo shows a view Another approach to determining if technol- of the assembly workshop for color and ogy transfer is occurring is to examine pub- black-and-white TV sets. lished contract awards. According to one such study of transfers of production technology, frigerators, and washing machines). The total Japanese firms were involved in 42 of 183 value of these plant exports was $640 million, transactions in 1984, while U.S. firms were in- indicating the small scale of many of the volved in 71. Brief descriptions of the contracts projects.17 indicate that Japanese firms were transferring During the same period, an additional 182 some advanced technologies (in areas such as cases of technology transfer unrelated to large electronic control systems, production of spec- plant exports occurred.18 The number of these trophotometers, and electrostatic copiers) .14 contracts rose rapidly in late 1984 and early Chinese data indicate that whereas Japan was 1985, a large proportion involving parts sup- the leading foreign supplier of equipment (hard- ply for knockdown production in China. ware), it lagged behind the United States and West Germany in “technology transactions” About 75 percent of the cases involved tech- between 1973 and 1984. ’5 nology transfers to machinery-producing firms in China. Fifty cases involved electrical ma- A study of Japanese plant exports to China chinery-producing firms primarily involved in during the period January 1984 to March 1985 g G consumer goods production.l While only 16 identified a total of 172 cases.l The largest cases involved industrial goods production, number (57) involved machinery production these included calibration and instrumentation facilities. Chemical and food production plant technology needed for “industrial renovation” exports ranked second and third. A close ex- projects in China. Table 11 provides a sum- amination of the electric machinery plant ex- mary of technology transfers from Japan to ports indicates that most involved consumer China in the 1984-85 period. product manufacturing technology (TVs, re-

14 Donald R. DeGlopper, “China’s Import of Foreign Technol- ITMore th~ 35 percent of the projects were valued at less ogy, Survey and Chronology, DDE-1924-2-85, report for the than $1 million. Data from Japan Machinery Exporting Asso- Defense Intelligence Agency, August 1985. ciation, Tokutei Shijo no Shoraisei Bunsek” Chosa Hokoku, July “See Li Hao, “In Search for a Perfect Balance, ” Intertrade, 1985, p. 160. September 1985, p. 13. By value of transactions, Japan was ‘“In this study, technology transfer is defined as contracts on a par with West Germany as a supplier, but it lagged in num- involving any of the following: licensing, software and manage- bers of transactions. ment, consulting, or parts supply. “These cases all involved exports of manufacturing equip- ‘gAbout 68 percent of the cases in this category (electrical ma- ment and technology (rather than simple exports of machinery chinery producing firms) involved technology for production and equipment). of TVs, washing machines, and refrigerators. Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 121

Table 11 .—Technology Transfer From limited and focused primarily on offshore de- Japan to China, 1984-85 velopment projects. An additional 80 invest- Number Percent ments were reported in 1985, but investments of Cases of total from other countries also grew rapidly. As a Min!ng 2 1 result, Japanese investors were involved in Construct Ion 2 1 only about 3.4 percent of the total number Manufactunng 169 93 Electrical machinery ... ., 50 29.6 (2,300) of foreign investments reported by Industrial ., 13 China.” Consumer ., ., ., 47a General machinery . 38 22.5 A good share of the investment projects out- Transportation machinery ., 25 14.8 side the oil development field were in service Textile machinery ., 25 14.8 Transportation and areas such as hotel and restaurant ventures communications 1 .5 and leasing operations. Joint manufacturing Wholesale, retail ... ~ ~ ~ ~ ~ 1 .5 ventures involved primarily production of con- Services 7 4 Total ., ~ ~ ., . . 182 sumer goods. During 1985 the number of co- a l ncludes prl marrl y TV wash [ng machl ne refrigerator and other consumer operative projects increased, and JETRO’S product rnanu(acfurlng technoioqes listing indicates that a greater number in- SOURCE Japar Machtnery Expo~t(ng Assoclatton Tokuter Shljo no Shoratse! Buosek( Chosa Hokoku July 1985 p 182 volved higher technology and manufacturing operations. Nippon Steel, for example, signed a contract worth $100 million with a Chinese Joint venture projects involving Japanese and Chinese firms provide another vehicle for partner to setup an engineering company. In another case, a Japanese firm contracted with technology transfer. China’s leaders have in- the Chinese Academy of Sciences to establish dicated their dissatisfaction with the level of 23 a joint software development firm. In 1986 foreign investment and have taken a number Furukawa Electric agreed to a joint venture of steps to attract additional investment. Ja- pan, in particular, has come under criticism. ’” in Xian for producing optical fibers and cables, In view of the large volume of Japanese ex- Japan’s experience in China is thus exten- ports, the argument goes, Japanese firms sive, yet technology transfer has been concen- should be more involved on the ground in in- trated in certain areas, especially technical con- vestment projects likely to involve technology sulting and training associated with plant transfer. exports. A firm like JGC, for example, has had more than 21 large contracts in China involv- China’s data on foreign investment cover a ing oil, petrochemical, and gas production number of categories, including cooperative projects. In these projects technology trans- ventures, joint development projects (particu- fer has occurred, often involving firms from larly in offshore oil development, compensa- other supplier countries, in the sale of patents tion trade, processing arrangements), and eq- and the provision of know-how. uity joint ventures. ” The Japan External Trade Organization (JETRO) data collected by Perhaps the prime example is Baoshan, the the Ministry of Foreign Economic Relations large steel works completed outside Shanghai and Trade indicate that by late 1984 Japanese in 1985. For Nippon Steel, the major Japanese firms were involved in 26 of 429 equity joint company involved in this state-of-the-art steel ventures that Chinese firms established with complex, the project offered a chance to train foreign firms. Japanese investments were young Japanese engineers in a government- — “’See, for example, “Foreign Investment Placings Fail to supported effort during a period of intense Satisfy Chinese, Financial Times (London), Jan. 30, 1986, p. 6. global competition in the industry. Although “See Nai-Ruenn Chen, Foreign In\~estment in China: Current Trends, U.S. Dept. of Commerce: March 1986, for a discussion of China’s investment data. Statistics recorded here indicate “See Charles Smith, “The Ties that Bind, ” Far Eastern Eco- that Japan was a close third (following Hong Kong and the nomic Re\’iew Apr. 24, 1986, p. 74. United States) in cumulative pledged equit~’ joint investment ‘Wee, for examples, Japan External Trade organization by the end of 1984. See p. 11. (JETRO), China ,Vewsletter, No. 58, p. 21. 122 Technology Transfer to China the project has suffered many problems, in- many Japanese consultants and advisors. On cluding a scaleback in the early 1980s, it in- the other hand, the Japanese Government has volves significant technology transfer from Ja- funded only 300 scholarships for Chinese stu- pan to China. More than 1,200 Chinese have dents although officials have expressed their been trained in Japan and hundreds of Japa- commitment to increase this number to 500 nese have been sent to China.24 by 1989. Firms like the Nippon Electric Co. (NEC) There is some truth as well as some misper- have developed carefully honed technology ception associated with the commonly held transfer strategies. NEC has joined with a Chi- view in China and Japan that not much tech- nese partner to produce 16-bit microcomput- nology transfer has occurred. The general pat- ers. It is also a partner in the Japan-China Soft- tern has been one of product and, to a less ware Center. Interestingly, NEC training of extent, service exports, with transfers of tech- 1,000 Chinese software engineers has been a nology occurring primarily in standardized boon to NEC, which faces a shortage of trained consumer product manufacturing or in the con- personnel. 25 NEC’S strategy involves technol- text of large projects. Such technology trans- ogy transfer to China in certain areas that fers may attract less interest than licensing complement NEC’S own needs and marketing state-of-the-art technology, but they can be a plans. critical factor in industrial renovation projects. To summarize, technology transfer from Ja- pan has occurred to a great extent in exports Organizations and Participants: of standardized production facilities for man- Technology Transfer Japanese Style ufacturing consumer goods, and in training Japan’s foreign economic policymaking sys- and technical consultation for large infrastruc- tem is more centralized than that of the United ture projects.2G Specialized technical exchanges States, but there is a range of perspectives on between Japanese and Chinese organizations technology transfer to China. The official Gov- are also a vehicle. The Industrial Bank of Ja- ernment position, reflected in programs sup- pan (IBJ) for example, runs seminars on finan- porting extensive Japanese participation in cial services for Chinese trainees. There is a China’s modernization, contrasts with a more constant movement of specialized personnel cautious approach by private sector firms to between organizations such as the IBJ and the technology transfer and investment. Bank of China. Differences between government and busi- Technology transfer is fundamentally a peo- ness on technology transfer are, of course, well ple-to-people process, and the establishment publicized, and more the norm than the ex- of hundreds of branches of Japanese firms in ception in the United States. In Japan a num- China testifies to the importance of Japan’s ber of institutional mechanisms build con- role. In 1984 more than 41,000 Japanese vis- sensus between public and private leaders ited China, or more than 100 daily .27 (Many of active in technology transfer. While Japanese these individuals were undoubtedly primarily leaders question the notion that Japan has a involved in exports of products and services). national strategy on technology transfer, the China’s factory renovation program involves generally complementary efforts of public and private officials are certainly assisted by these 241kuo Hirata, “Baoshan Steel Works, ” Journal of Japanese avenues for information exchange and con- Trade and Zndustry, No. 5, 1985, p. 17. “Interview with Yukio Mizuno, Senior Vice President, NEC, sensus building. November 1985. 2Qther Japanese firms like Toyota, which are major exporters At a government level, Japanese leaders are of vehicles to China and have extensive service operations there, committed to building economic ties with have foregone equity joint ventures. Many Japanese firms ap- China. Yet there is a range of views on spe- pear wary of China’s employment and other requirements on foreign firms. cific issues that reflect differing institutional 27 Kazuhiko Mitsumori, in Gendai, October 1985. missions. The Ministry of Foreign Affairs Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 123

(MOFA), the lead agency in formulating for- promise to expand technical cooperation pro- eign policy, has traditionally been careful to grams and financing of large projects. At the ensure that policies toward China mesh with same time, government leaders indicate that Japanese policies toward other Asian coun- China may be pressing too hard for the most tries.28 MOFA current policy toward China, advanced technologies.30 Japanese policy based on three principles mentioned earlier, makers prefer a step-by-step approach because was developed in the late 1970s, in part to clar- they believe that during this transition period ify debates over whether the Japanese Gov- in China a proper foundation must be built. ernment should offer official loans and official Japanese businessmen, in particular, appear development assistance to China. In these de- cautious about technology transfer to China. bates, the Export-Import Bank, the Ministry They emphasize obstacles to technology trans- of Finance, the Ministry of International Trade fer such as inadequate infrastructure, bureau- and Industry (M ITI), as well as Liberal Demo- cratic sectionalism, limitations on management cratic Party (LDP) politicians played key roles. discretion in hiring and operating enterprises, MITI, the traditional leader of Japan’s post- and China’s tendency to undervalue software war trade and industry policies, has developed and training. These concerns explain in part a view that Japan’s comparative advantage the willingness of Japanese business to sell lies in knowledge-intensive industries and a goods to China while avoiding extensive invest- more internationalist approach. M ITI view ments. Acutely aware of the special expecta- is that Japan must promote the international tions China has concerning Japan’s contribu- transfer of technology through overseas invest- tion, they stress differences in Chinese and ments and other means to maintain its com- Japanese negotiating styles and other factors petitive position and mitigate trade frictions that set constraints on the ability of Japanese with other countries .29 businessmen to fulfill expectations. Debates among key ministries over levels Distinguishing Japanese approaches to tech- of official development assistance for China nology transfer are key organizations that have had more to do with the scope and mech- bridge the distance between government and anisms for participation in China’s moderniza- business, expanding economic ties to China. tion than with the fundamental rationale, One such organization is the Japan China Whereas U.S. concerns over national security Association for Economy and Trade (JCAET), are embodied in export controls, Japan sees formed in 1972. JCAET is a hybrid organiza- expanded economic interaction as the primary tion that includes many retired government avenue for attaining strategic goals vis-a’-vis officials (most of them from MITI), business- China. men, and China experts from organizations such as the Institute for Developing Econ- Despite this formal consensus on overall pol- omies. JCAET provides a wide range of serv- icy directions, Japanese leaders contend that ices to Japanese firms interested in China there is no clearcut national strategy on tech- trade, such as detailed surveys of conditions nology transfer. Acknowledging their concern in China, while facilitating exchanges with Chi- over China’s criticisms of Japan for not trans- nese leaders. The boundaries between MITI, ferring more technology, Japanese leaders JCAET, JETRO, and other key institutions are fluid in the sense that individuals are often ‘“Up un~l 1972, the Foreign Ministry was more reluctant than detailed from one organization to another to the Ministry of International Trade and Industry (MITI) to open help with specific projects. JCAET is thus part relations with the People’s Republic of China (PRC) and more intent upon preserving diplomatic relations with Taiwan, See Chae-Jin Lee, China and Japan (Hoover Press, 1984), p. 12. ‘gThe report was prepared by the Planning Subcommittee of 300 fficial programs carried out by the Japan International the Industrial Structure Deliberative Council to MITI in prep- Cooperation Agency in the factory renovation area are explicitly aration for the Tokyo summit in May 1986. See Afainichi Shirn- designed to promote transfers of standardized (rather than new) bun, Feb. 1, 1986, p. 1. technologies, 124 ● Technology Transfer to China of a network of organizations that work closely Whether or not Japan will transfer enough together to increase Japan’s knowledge of and technology to meet China’s expectations re- exchange with China’s economy. The perspec- mains an open question. On one hand, Japa- tives of individuals and organizations vary, but nese firms may continue to chart a cautious the network ensures that information is shared approach to investment, waiting to see how and that major participants are cognizant of China will implement its policies and gradually key problems and issues. The effectiveness and building expertise and confidence in their tech- utility of information gathered through an ex- nology transfer capabilities. On the other hand, tensive network in China is reflected in state- expanded trade in more sophisticated products ments by Chinese leaders that Japanese under- and services appears likely now that regula- stand well the intricacies of China’s contract tions of the Coordinating Committee for Mul- approval process. tilateral Export Controls (COCOM) have been loosened. 32 Even if direct equity investments The low-profile, consensus-building approach remain comparatively limited, technology carries over to bilateral exchanges as well. Ja- transfer from Japan associated with such sales pan and China have established the Twenty- will expand. If a few key Japanese firms dem- first Century Committee, composedof11 mem- onstrate success in joint ventures involving bers from each country who exchange views advanced technology transfer, moreover, others on issues of bilateral importance. On the Jap- will surely follow. Thus, while Japanese firms anese side the committee is staffed by MOFA, and organizations may continue to use differ- but the discussions are considered unofficial. ent modes and mechanisms for technology High-ranking leaders in the China field from transfer, they will likely continue to be the business and academe and former government most significant competitors for the China officials make up the Japanese delegation. The market. committee is a mechanism for frank but high- level and closed-door communications between the two countries. Reportedly, the group has Europe discussed sensitive issues such as Chinese anti- Technology transfer from Europe to China Japanese demonstrations and trade frictions. takes all the forms seen in the transfers from Interestingly, a major focus of attention has the United States or Japan. Technology is em- been youth exchange. At the committee’s in- bodied in equipment, sold in conjunction with stigation, a youth center is now under construc- equipment, sold independently as in licensing tion in Beijing, and a number of exchange pro- arrangements, included in investments such grams for young people have been sponsored. as joint ventures, and transferred by govern- The committee is thus more than an advisory ments and institutions directly to China or in group; it can marshall the resources needed to the form of education received by students at- implement projects. tending European universities. Organizational and personal ties between Two-way trade between the European Com- Japanese business and government leaders munity and China was almost $7 billion in with their Chinese counterparts are old and ex- 1985. Trade increased about 25 percent from tensive. Yet, uncertainty about Japan’s role 1984, thereby surpassing the U.S.-China level. in technology transfer remains. For both sides, Table 12 shows the shares of the individual the impacts of this critical period of experimen- countries. tation with new modes of bilateral interaction will extend beyond the bilateral relationship.

31 For a detailed chart of the contract approval process for “Hitachi won a contract to export large-scale computers to Japanese-Chinese joint ventures, see Masao Sakurai, Kokusai the Bank of China soon after the loosening of COCOM rules. Kyoryoku no Wakugumi to Ho [The Framework and Law for See “Hitachi to Export Computers to China, ” Asahi Evening International Cooperation] (Tokyo: Sanshodo, 1985), pp. 202-3. News, Feb. 14, 1986. Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain 125

Table 12 .—European Trade with China in 1986 (billion U.S. dollars)

Percent Total over 1985 Exports Imports Export/total

- Germany ..$4,07 31.2 $2,87 -$1.20 70 “/0 Brltaln ...... 1,41 42.4 0.78 0.62 55 France ...... 1.25 –2.4 0.67 0.58 54 Italy ...... 1.68 21.2 1,00 0,68 59

SOURCE IM F Dlrectlon of Trade Statlstlcs as reported II Ch/;a Bus/ness Rewew VOI 14 No 3 May-June 1987

The Federal Republic of Germany Twelve joint ventures were established by 36 Germany has the largest share of the Euro- the end of 1985. None of them involves pro- pean trade and the greatest financial involve- duction of high-technology equipment. Most ment in China. China was Germany’s largest have been with mid-size German companies in trade partner in the developing world in 1985, areas such as food processing. One joint ven- though China’s deficit in this trade may limit ture that doesn’t involve much technology but future growth.33 China has established its may expedite European trade with China is European Trade Center in Hamburg to facili- a shipping company that will use the Trans- tate China’s exports to Europe. Siberian Railroad to avoid the long delays in Chinese harbors. Technology transfer has been an important part of this relationship. For instance, Schloe- The largest joint venture is the Shanghai mann-Siemans A.G. successfully competed Volkswagen Automobile Co. Ltd. (SVIV), with Japanese companies for a $626 million which started production of the Santana au- contract to supply a hot-strip mill at the Bao- tomobile in 1985. SVW is assembling kits im- shan steel plant, largely by offering advanced ported from Germany at the rate of 800 cars 37 technology with considerable technology trans- a month. Only a few parts come from China, 3R fer. The company has brought many Chinese but it is hoped that eventually all will. designers to Bonn for training in modern man- Many problems have been experienced, The agement techniques. Germany has been par- production line for the Santana was added to ticularly strong in transferring production a factory that had been producing small num- technology such as machine tools and chemi- bers of a car that had remained essentially un- cal processing plants. changed in design for 27 years. The manage- In a study of technologically oriented ex- ment team and the workforce had to be largely ports to China in 1984, Germany ranked third, retrained, and the German management found behind the United States and Japan, with 17 that some of its methods were not applicable of the total of 182 exports.34 In 1985 the value to China. Distribution and service of the cars of technology exports from Germany may have in China have been unexpectedly difficult. exceeded those of both the United States and China has also had difficulty raising its share Japan, even though the number of contracts of the capitalization, in part because of the did not.35 Machinery and production technol- plummeting value of the yuan. Estimates of ogies or transportation equipment were the future capital requirements for building the fa- largest components. Electronics have also been cilities for the local production of parts and important. In 1985 a complete semiconductor supplies have risen sharply, evidently causing production plant was exported, as were facil- some ill will between SVW and Beijing. The ities for the production of floppy disks and shortage of foreign exchange has also ham- telecommunications equipment. “Foreign Broadcast Information Service, China Daily Report, “Foreign Broadcast Information Service, Daily China Report, Sept. 4, 1986. May 13, 1986. “Yue Haltao, “HOW Volkswagen Performs in China, ” Beij- 3’DeGlopper, op. cit. ing Rel’iew, No. 29, July 21, 1986. ‘5Liu Hu, “Technology Import Reaches New High, ” Bei’ing 3’H.L. Stevenson, “Chinese and Germans Team Up To Build l?e~riew, No. 10, Mar. 10, 1986, VW’ S,” Automotive News, Oct. 21, 1985. 126 ● Technology Transfer to China pered China’s ability to pay for the kits, a sit- Party, he implemented an incentive wage sys- uation similar to that faced by the Beijing Jeep tem, streamlined the workforce, restructured Corporation in its arrangement with American the management, and improved discipline. Motors. Many problems still remain at the plant, but Gerich is instituting a change in thinking that Licenses to manufacture have been more im- may be a lasting legacy. portant means for technology transfer than joint ventures. For instance, Motoren Werke Over 1,000 Chinese students are in German Mannheim AG has granted a license for the universities, and the number is growing. Com- production of diesel engines for agricultural pared with the 17,000 in the United States, this and construction uses, an area where China number seems low. Perhaps the relatively few could derive considerable economic benefit. A overseas Chinese in Germany and the dearth more complicated agreement was signed by of German-speaking Chinese are factors. Dr. Eng. Rudolf Hell Ltd. for the manufacture of color separation scanning chronographs. Germany has much to offer China. Its tech- China will first assemble kits from Germany, nology for production is justly famous, and but within 5 years the manufacture should be that is the technology in which China is now all domestic. The agreement includes training most interested. Quality control in particular of Chinese engineers in Germany. Siemans AG is a German strength that China can usefully has granted many licenses, which include train- learn. In some areas, such as computers, Ger- ing in Germany and startup assistance at the man technology has lagged behind that of the Chinese plant. United States and Japan, but not by so much as to affect the utility of Germany’s products The purchase of used equipment has become to China. It is reasonable to conclude that un- a significant means for increasing production less economic factors in China interfere, this capacity, though it obviously involves older relationship will continue to grow. If Germany technology. China has purchased at least two has been cautious in starting joint ventures German factories, for motorcycles and bicy- or other investments in China, it is not because cles, and a spinning mill and reassembled them of particular inhibitions about China but be- in China. These ventures have provided China cause German industry is cautious in general with manufacturing facilities considerably and does not need new productive capacity. more modern than the norm in China, at a small fraction of the cost of new equipment. The German Government’s major role in technology transfer is that of facilitator more In another form of technology transfer, the than participant. The private sector has the ChineseWest German Technical Training Cen- lead in making contacts, negotiating the terms, ter has been established in Tianjin with a grant and fulfilling contracts. The Government has of DM35 million. The center provides train- signed a large number of accords on science ing in machinery, computers, electronics, and and technology cooperation with China, open- instrumentation to about 400 trainees. ing the way for industry. These have been Germany’s program to send retired manag- arranged by the Ministry of Research and ers to China to provide advice and assistance Technology (BMFT). The Economics Ministry, resulted in an unusually personal form of tech- equivalent to the U.S. Department of Com- nology transfer when one of the volunteers, merce, has an Office of East Asian Affairs and Werner Gerich, was appointed the manager of provides information and advice to industry, the Wuhan Diesel Engine Factory. The factory in part through the Federal Office of Foreign was having major problems with production, Trade Information (Bundestelle fur Aus- especially in the quality of the engines. Gerich senhandelsinformation, or Elf A). BfA, whose instituted a series of reforms that have signif- closest analog in the United States is the For- icantly improved quality, volume, and profits. eign Commercial Service, analyzes economic, With the backing of local officials and the legal, and political information, particularly in Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 127 developing countries, to assist German companies in decisions on trade and investment. The Economics Ministry and the Foreign Of- fice have developed a trade policy supportive though cautious of China’s development. China is not seen as either an economic or political threat, whereas technological cooperation is seen as a way of encouraging China to remain open to the West and moderate in its policies. The German Government therefore encourages industry to trade with China and engage in technology transfer. Traditionally, it has not provided direct subsidies for exports, prefer- ring to rely on market forces to reach economi- Photo creu(t Nat(ona/ CouncI/ for U S Ch/na Trade cally sound decisions. However, this POliCY Air navigation equipment at the Beijing Airport. This is apparently flexible since, as noted below, at equipment was supplied by France. least one case of mixed credits has been announced. nology transfer, however, differs some from Germany’s, with less emphasis on setting up The Federation of German Industries, a pri- manufacturing facilities and more on selling vate-sector organization, provides services to exporters and shares in the governing of the specific equipment with associated technology and training. For instance, France led a Euro- BfA. The Joint Committee for Sine-Federal pean consortium that sold 300 locomotives to German Economic Cooperation is a body of China. The $450 million contract included tech- government, academic, and industrial repre- nologies of design and manufacture (as did the sentatives that meet with equivalent Chinese representatives annually to discuss economic GE contract discussed in ch. 4); manufactur- issues. ing equipment was included, but it does not appear to have been a major point of the France contract. In general, France has been less successful In another major transaction, CIT-Alcatel than Germany in trade with China. Exports (a subsidiary of the state- owned Compagnie to China in 1986 totaled about $670 million, Generale d’filectricit~ [CGE]) sold a modern less than one-quarter that of Germany. Sino- telephone switching system cabable of han- French trade had been approximately balanced dling 100,000 lines. As a precondition, an elec- but in 1985 China’s imports more than tripled, tronics lab for the testing and manufacture of whereas exports were stable. telecommunications equipment was included. This lab will be used for microwave, laser, and Major French exports include aircraft (air- fiberoptic technologies. buses, helicopters, and eventually, perhaps, fighters), ground transportation equipment China signed a contract for two French nu- (trains, trucks, and river shipping), and tele- clear reactors late in 1986. Some opposition communications. Technology transfer appears has arisen in Beijing (largely because of the to be relatively more important for France than drain on foreign exchange) and in Hong Kong, Germany. The value of French exports involv- because of safety concerns. Germany’s altering technology in 1985 was $320 million, almost native bid would have permitted China to par- 60 percent of total exports.’” The type of tech- ticipate in the design of the plant, but China — showed little interest. The United States was “U.S. Congress, Office of Technology Assessment, Technol- ogy Transfer to the Middle East, OTA-ISC- 173 (Washington, precluded from competing for this sale because DC: U.S. Government Printing Office, September 1984), a nuclear cooperation agreement had not yet 4“I,iu, op. cit. been signed. The contract does not include ex- 128 . Technology Transfer to China tensive technology transfer, but the experience Most companies involved with high technol- will help China to advance more rapidly with ogy are owned by the French Government, its own nuclear industry. However, China will such as CGE. While the effect on corporate effi- require considerable additional assistance be- ciency and vigor might be questioned, this fac- fore it will be able to produce a world-class re- tor ensures close cooperation between industry actor independently. and government. Government officials often see themselves as representatives of French In several negotiations, the French have no- business in a way that China is likely to find ticed that China first asked for the latest tech- familiar and comfortable. Although French pol- nology but later realized that older technology icy may be changing (the Government has al- would be more suitable. For example, the loco- ready announced that it intends to divest it- motive technology eventually selected uses self of CGE and other major companies), this continuous traction, a technique that was arrangement has worked well, at least for ini- phased out in France 10 years earlier in favor tiating technology transfer arrangements. For of synchronous traction. The nuclear reactors instance, the nuclear vendor Framatome is were also not the latest that France has to of- Government owned, and the Government fer. In both cases, the French were willing to made strenuous efforts to win the Daya Bay transfer the more advanced technology, but contract, including direct negotiations and con- the Chinese independently decided to back off. cessionary financing. The French National The French pattern of establishing joint ven- Railroad will have a permanent representative tures has been remarkably similar to Ger- in Beijing, presumably to encourage trans- many ’s. None of France’s 11 joint ventures has actions such as the contract for the locomo- involved high technology. Most have been in tives. However, the overall number of French food processing, but the largest is in the au- officials in China is not very high, and theo- tomobile industry. Peugeot created The Guan- retically the burden of concluding agreements zhou Peugeot Automobile Co. to build about is on the companies. 15,000 light trucks (pickups) per year. One area in which Sine-French cooperation United Kingdom has been very strong is science. A wide range Britain is China’s second largest trading of cooperation agreements has been signed, partner in Europe and a major supplier of tech- and many Chinese researchers spend a year nology. The largest single transaction (250 mil- or more working in French laboratories. It is lion pounds) has been the sale of the turbine- likely that this scientific cooperation reinforces generators for the Daya Bay nuclear power the readiness of China to acquire technology plant, in conjunction with the two reactors sup- from France. plied by France, though little technology trans- There are about 1,000 Chinese students in fer was involved. Other major exports include France, mostly in science and technology. The scientific instruments, synthetic fibers, steel total is not growing very rapidly and is likely products, telecommunications, and coal min- to remain proportionally well below that in the ing equipment. As with other European coun- United States because French scholarships are tries, China’s trade balance with Britain is in mostly government sponsored and are neither significant deficit. as flexible nor as generous. Chinese students Britain is unique among the industrialized are frequently funded by their government for trading partners of China in its control of Hong only one year; if they wish to remain, they must Kong. Hong Kong’s trade with both Britain find their own support. and China greatly exceeds trade between Brit- The French Government plays a much more ain and China, but this does not appear to be active role in most aspects of technology trans- a major conduit for British goods relative to fer than do the German and U.S. Governments. other countries. Furthermore, any special rela- Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain 129 tionship that Hong Kong provides is likely to many other large joint ventures, has had for- dissipate over the next decade, when Hong eign exchange and managerial difficulties.44 Kong reverts to China. Other joint ventures include heavy truck assembly by Aveling Burford and automobile Appendix 6 in Volume II to this report lists batteries by the Chloride Group and Singer. six dual-use technology transfers from Brit- ain (1984-85), campared with three from Ger- Coproduction is likely to be more acceptable many and four from France, suggesting that than joint ventures to British companies. Ra- Britain has a relative advantage in high-tech- cal Electronics has noted that coproduction nology exports. The pattern of Britain’s tech- offers almost the same benefits to China and nology transfers to China resembles France’s avoids many of the problems.45 more than Germany ’s. Licensing, training, and Much of the technology transferred has been sales of specific equipment and information fairly basic: pumps to drain coal mines, rein- have been more important than production forced concrete pipes, wire-rod mill equipment, lines, though several of the latter have been technology for foundries, and extrusion equip- supplied. British Rail Engineering has a con- ment for aluminum products. Some have been tract for 5 million pounds to sell three advanced quite advanced: microelectronics, fiberoptic, rail coaches and the design technology to the telecommunications, and radar. Changchun Railway Passenger Works. Assis- tance will also be provided in modernizing the British companies appear more concerned plant. 4’ than French or German companies about future competitiveness, at least for traditional Racal Electronics has had several major con- technology industries. As in other countries, tracts involving equipment, technology, and many companies have been disappointed fol- coproduction arrangements. It has sold radar lowing their expectation of the 19’70s, espe- for ship and air traffic control and transferred cially considering the number of Chinese visi- the technology to produce radar equipment. tors they have received. Of the 185 Chinese The technology transfer appears to have been 42 delegations in 1985 who looked at British prod- a key element in gaining contracts for Racal. ucts and technologies, very few have followed The production lines that Britian has sold up their visits, and fewer still have produced include plastic sheeting and audio and video any business. tape. However, Britain appears to have played One area in which Britain has excelled has a bigger role in helping get other projects com- been in education and training. Britain has pleted after they run into trouble. over 1,200 Chinese students, more than in Ja- There have been only about 12 joint ven- pan, Germany, or France, and the number is tures, but they have been the result of some rising rapidly. As with the United States, the of the largest contracts. Lingnam Microelec- popularity of the English language, the repu- tronics Investment Co. (a consortium of Brit- tation of the universities, and the availability ish companies) is building a $50 million facil- of scholarships are major attractions for the ity to produce large-scale integrated circuits Chinese. Moreover, British industry is train- and microcomputers. Pilkington Brothers is ing over 1,000 Chinese, mostly in technologic- constructing a plant near Shanghai in partner- al areas. Training is a standard feature of ship with two Chinese companies to produce China trade and investment and will probably high-quality glass using modern technology. increase in the future.4G The plant will cost $120 million and will be the The British Government is more of a facili- largest producer of glass in China when it 43 tator than a participant, as is the case in comes on line in 1987. This project, as with Germany. Most technology transfer is accom- “China Business & Trade, May 23, 1986. 4’Nigel Campbell, China Strategies—7’he Inside Story, Univer- sity of Manchester University of Hong Kong, 1986. ~41Nigel Campbell, op. cit. “Kelly Ho Shea, ” Modernizing Flat Glass Production” The ‘i Ibid. China Business Retiew, Volume 13, Number 3, May-June 1986. 4fiSino-British Trade Review, January 1986. 130 ● Technology Transfer to China plished by the private sector through commer- China Trade. The SBTC is associated with The cial contracts. The Government provides in- 48 Group of British Traders with China, which formation and some financing, part of which maintains offices in both London and Beijing is subsidized, and helps create an environment and provides consulting services and contacts conducive to doing business. for trade in both directions. High-level British officials visit China regu- These efforts have produced results, but per- larly to make contacts, present British capa- haps much less than had been expected. Brit- bilities, and negotiate bilateral agreements. ain has several important advantages—the Queen Elizabeth toured China in October 1986 Hong Kong link, the English language, an ex- while a Sine-British trade and economic coop- cellent research and development system, and eration seminar met on the royal yacht. The the distinction of being the first Western coun- seminar resulted in the signing of 13 agree- try to recognize the People’s Republic of China ments, memoranda, and letters of intent on co- Government–but these have not given Brit- operative projects, including a joint venture ain a notable head start. Germany has done on a large steel plant and a major telecommu- much better, and Italy moved ahead in 1986. nications project.47 Several factors suggest themselves to ex- The Department of Trade and Industry (DTI) plain this indifferent record, and some of them is the major British Government organization may have relevance to the United States, also. involved in export promotion. The regional Britain has not been strong at production, and branch is under the direction of the Assistant Germany’s success is at least partially due to Secretary for China, Hong Kong, and Macao. its excellence in production machinery, which Trade with Hong Kong is about three times is at the top of China’s list of needs. The United that with China, but China probably gets more States has also lagged in the production of attention, in part because the trade is grow- equipment such as machine tools and has not ing rapidly and the potential is so great. competed well in China. British Government- subsidized financing became significant only The British Overseas Trade Board, a divi- recently, as described below, while Italy’s ex- sion of DTI composed of government and in- ports to China have benefitted from aggres- dustry officials, provides market research and sive government financing. Germany’s success intelligence. Much of the information on China despite a reluctance to subsidize financing comes from the Sine-British Trade Council shows that is not a requirement, but it helps. (SBTC), a semiprivate advisory group (one of British industries also seem to be unaggres- 15 such groups) that plays a role somewhat sive and less innovative compared with those akin to that of the National Council for U. S.- from other countries. A few are major world players, but Britain is more of a financial cen- 4’FBIS, China Daily Report, Oct. 16, 1986. ter than an industrial one.

EXPORT CONTROLS The major countries supplying advanced bers have developed, however, quite different technology to China today are all members of perspectives on and approaches to trade with COCOM, the voluntary multilateral organiza- the Soviet bloc, leading at times to controver- tion set up to coordinate controls on exports sies among them.48 to the Soviet bloc. The goal of joint export- control efforts is to prevent access by the So- 4“See OTA, Technology and East-West Trade (September 1979); OTA, Western Technology and Soviet Energy Avm”labil- viet bloc to weapons and advanced technol- ity (November 1981); OTA Technology and East-West Trade; ogies with military significance. COCOM mem- An Update (May 1983). .

Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain 131

Regulations on exports to China were sig- nese market thus raises collective problems for nificantly relaxed by COCOM in late 1985, as Western suppliers. discussed more fully in chapter 8. COCOM Several situations could lead to misunder- member countries were authorized to approve standings about export controls. The clearest certain exports to China of equipment and tech- 49 case, from a Western alliance perspective, nology with notification to COCOM. COCOM would be if a COCOM member government review is still required for more sophisticated willfully circumvented the COCOM rules or dual-use technology, for military exports, and “looked the other way” while domestic firms for nuclear exports. These changes appear to have been well received by COCOM members sold to dummy companies that were conduits for illegal trade. But while charges of “cheat- and by China. Earlier concerns about “differen- ing” are often heard, OTA has not been able tiating” China in COCOM policy from Soviet to document such cases. bloc nations have apparently proven to be no obstacle. Another complaint centers on differences in the approaches to export controls taken by Nevertheless, for several reasons, industry various supplier countries. Because the major in particular remains uncertain about the ra- supplier countries devote different resources tionale for multilateral export controls, the functioning of the COCOM system, and the to export control, process licenses at different rates, and have different legal bases and di- implementation of domestic export adminis- verging traditions of government-business re- tration systems by COCOM countries. Com- lations, uncertainty abounds concerning the pany representatives have at times contended that other participants (firms and govern- actual workings of the systems of the other countries. ments) are not following the same game rules. Because the technical underpinnings of the Still another problem stems from different interpretations of the technicalities of export- COCOM list are not made public for reasons control specifications for particular products. of national security, and because COCOM pro- The concept of “national discretion” is built cedures and discussions are treated as con- into the system. Some governments appear fidential, there is room for misunderstanding. Furthermore, perceptions tend to lag behind to be more willing than others—the United the realities of change in export controls. States, in particular-to make more liberal interpretations that are helpful to national Businessmen on visits to China see advanced firms. Since early 1984, U.S. semiconductor technologies supplied by firms from other equipment manufacturing firms have com- countries as signs of COCOM rule-breaking, but such charges are often mistaken. It should plained that U.S. export regulations prohibit be emphasized that these complaints are in no them from exporting single-wafer plasma etch- way unique to U.S. exporters; European and ing systems to China, although other COCOM countries have approved such exports. They Japanese businessmen also question whether have similarly complained that the United the United States uses COCOM to its own States denied exhibition licenses for digital op- advantage. 50 Competition for sales in the Chi- tical transmitters and receivers to U.S. firms, while Japanese firms were able to show similar 4’COCOM member countries now also approve re-exports to 5 China of such equipment and technologies. In such cases, notifi- products at a Shanghai trade show in 1986. 1 cation to COCOM is made. Differences in interpretation of regulations “’This type of complaint occurred, for example, when the United States instituted a liberalized export policy for China may relate to the fact that some COCOM coun- in 1983. At that time, certain types of exports (in the “green tries have published the changes in COCOM zone”) were identified as likely to be approved. For those exports (including “green zone” exports) requiring COCOM review, the United States continued to submit cases to COCOM —- for approval. Others suppliers charged, however, that U.S. ex- “American Electronics Association, Case Study Report: port controls for China were loosened prior to COCOM policy American Electronics Association Export Control Task Force, changes, git’ing U.S. firms some advantage. Mar. 12, 1987, pp. 18-19. 132 . Technology Transfer to China policy concerning exports to China; other countries have not.

,) To the frustrated businessman, all of these ‘UNlnIa problems stem from differing approaches to export controls. Only the first case constitutes a clear breach of joint understanding among C4 COCOM governments, which would be legitimate cause for multilateral concern. However, II ,,,,,,, other types of differences also cause resentment and misunderstanding even though they f, are primarily domestic issues. From a public 1+ w ,, ,, t G, , , policy perspective, however, it is critical to distinguish these differences in approaches to ex- )’ %. port controls. Recent changes in COCOM pol- ,,, &,,, icy on exports to China appear to have brought the policies of these countries closer together, but significant differences in approaches remain. Improved understanding of export-control systems of other COCOM countries could help clarify the complaints that exporters sometimes make about U.S. policymaking.

Japan The basis of Japan’s export control system is the Foreign Exchange and Foreign Trade Control Law. Japanese export controls cover dual-use technologies, ordnance, and atomic FVtofo credlf Naf/orta/ Courm// for U S .Ch/rta Trade materials. The exporter is required to obtain An optical fiber waveguide technical equipment bay permission from MITI when exporting these with 120 channels in Wuhan. China has imported items, particularly to Communist bloc coun- optical fiber technology from several countries and is rapidly gaining proficiency. U.S. companies have tries. MITI has made public a list of strategic been refused export licenses. goods covered by export controls and an outline of the approval system for exports to various countries.62 A Cabinet order stipulates that Several MITI offices are involved in review- MITI permission be required for transfers of ing exports. Most exports are first reviewed technology deemed by MITI to present possi- by the Machinery and Information Industries ble hindrances to the maintenance of interna- Bureau, where preliminary approval is given. tional peace and security. According to the law, In practice, most firms consult with MITI rou- punishment for exporters (including corpora- tinely and informally before drawing up a for- tions) who ship strategic goods without proper mal contract. The formal review often takes permission is imprisonment for not more than place quite quickly, since preliminary discus- 3 years and/or a fine of not more 1 million yen sions have already taken place and any obvi- (about $7,000 at an exchange rate of 145 yen ous problems have been worked out. The sec- to the U.S. dollar). ond-stage review is handled by the Export Division of the Trade Bureau, where the legal aspects of the contract are considered and a ‘2 Nihon Boehi News, Bueki Tetsuzuki Zenki, vol. 30, 1987, detailed payment schedule reviewed. MITI’s p. 163ff. Security Export Control Office reviews appli- Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 133

cations for export of strategic goods and tech- of VCR manufacturing equipment was per- nologies to the Soviet bloc and China. mitted, but with modifications that protected the sensitive technologies.56 In another case, There is evidence that Japan has placed more it was reported that MITI forced changes in stress on export controls in recent years, aug- a training program for computer software be- menting MITI capabilities in this area. In par- cause part of the course related to militarily ticular, Japan has identified firms illegally ex- 57 useful computer graphics. porting to the Soviet Union and published their names and imposed orders to stop exports.53 The Japanese Government, if not some pri- In May 1987, the government of Japan ordered vate Japanese companies and individuals, Toshiba Machine Co. and C. Itoh to suspend appears to have supported COCOM controls.5R sales to the communist bloc after it was dis- OTA was unable to obtain evidence of in- covered that these firms had made unautho- stances where the Japanese Government know- rized sales of militarily critical machine tools ingly evaded COCOM review of items on the to the Soviet Union.54 control lists. Because of its peace constitution, Japan has prohibited most exports of military MITI has recently established guidelines to equipment and technology .59 regulate Japanese exhibits at trade fairs in Communist bloc countres. Also indicative of Japan’s approach tore-exports and extrater- growing commitment among Japan’s leader- ritoriality is more similar to that of Western ship to restrict Soviet access to sensitive in- Europe than the United States. Japan takes formation is LDP sponsorship of a bill that im- a negative view toward extraterritorial appli- poses stiff penalties on disclosure of official cations of laws. The Japanese Government re- secrets, despite opposition from other parties quires documentation when strategic goods or that fear the effect could be to limit freedom technologies are exported, but no attempt is of speech.55 made to ascertain whether retransfer has occurred. GO In light of the large volume of trade Soon after COCOM controls were relaxed, within Asia, strategic goods and technologies there were reports of new high-technology sales could thus be diverted through third countries. of semiconductor manufacturing equipment and large-scale computer systems by Japanese firms to China. The speed with which these ex- Europe ports were approved by the Japanese Govern- European countries have historically been ment indicates a general predisposition to sup- more export dependent than the United States, port high-technology transfers that are not and some governments have attempted to ex- clearly among the items controlled by COCOM. pand economic interactions with the Soviet However, Japan is unlikely to participate in bloc even during periods when political rela- military sales. tions were cold. Economic sanctions against While Japan’s export approval process gen- the Soviet Union, as proposed by the United erally operates quite rapidly, a few cases in- States from time to time, have often been volving exports to China have met with some ——— delay and controversy. In one case, the export “The Yomiuri Shimh.m reported on Mar. 28, 1987 that MITI had issued warnings to firms involved in illegal expots of electronic equipment to China. “See Nihon Keizai Shimbun, Dec. 27, 1984, for a report of “See Nihon Keizm” Shimbun, Jan. 26, 1985, p. 7. an interception by Japanese customs of an export of a sonar 5“See “Japanese Held for Selling U.S. Fighter Secrets, ” Fi- system to the Soviet Union. nancial Times (London) May 21, 1987, p. 3. 54 See “Firms Barred from Exporting to Communist Nations, ’ ‘The United States and Japan have, however, recently worked Kyodo, May 15, 1987, FBIS, Daily Report; Asia & the Pacific, out an arrangement to permit the export of such technology May 19, 1987, p. C2. to the United States. See U.S. Department of Defense, Japa- 55Such a bill was submitted to the Diet in 1985, but was aban- nese Mti”tary Technolo~’: Procedures for Transfers to the United doned after opposition parties entered into prolonged debate. States, Feb. 1986. In November 1986 a special LDP committee was considering ‘“Import certificate from the foreign government and deliv- whether to resubmit the bill. ery verification. 134 ● Technology Transfer to China viewed by Europeans as naive and futile, how- to the COCOM list. As mentioned earlier, however sympathetic they may be to the motiva- ever, different countries have adopted differ- tion. Efforts to withhold gas pipeline technol- ent approaches to publishing changes to ex- ogy in 1981 were rejected even by the closest port policies stemrm“ng from the 1985 COCOM U.S. allies. There is, nevertheless, a general agreement. feeling by major European governments that Companies in Germany are free to export ex- COCOM has proved a valuable tool for thwart- cept under certain conditions; for example, ing the Soviet bloc’s acquisition of advanced when the technology is controlled by COCOM. Western technology because COCOM focuses Industry is well aware of which technologies on an agreed upon list of technologies with are controlled. When a company has such a con- clear security implications for all members. tract, it applies for an export license. The Europe’s export policies have evolved in Foreign Office (Auswii.rtiges Amt) and the Eco- keeping with this philosophy. Exports will be nomics Ministry (Bundesministerium fur Wirt- approved unless there is a good reason to re- shaft) review the applications and decide if the fuse them. This evolution has led to a recogni- license has to go to COCOM. If not, the appli- tion that China can be treated quite differently cation is completed in a few weeks. German from the Soviet Union without affecting inter- companies can sue the German government if national security. China is technologically far they are not satisfied that a denial was based behind the Soviet Union and so could not on a threat to national security .62 achieve the same strategic advantage from so- France has a somewhat more complicated phisticated imports; it will have limited abil- system, perhaps partly because France exports ity to threaten even its neighbors for the next large quantities of weapons and Germany does few decades. Furthermore, unlike Eastern not. Control is facilitated by the close relation- European countries, China is quite unlikely to ship between government and industry. Ex- pass technology on to the Soviet Union. port applications are submitted by industry When OTA first studied this topic in 1979, to the Customs Office. If the application in- the potential for differentiation was recog- volves sensitive technology, it is sent to the nized, but concern over repercussions from the Ministry of External Relations and the Min- Soviet Union prevented the implementation istry of Defense. Some of the criteria used for of preferential treatment.61 However, distin- evaluating an application are: guishing China from the Soviet bloc has actu- 1. the impact on national security, ally proceeded rapidly. In recent months there 2. the impact on international undertakings, has been informal talk in Europe of removing such as COCOM, exports to China from the COCOM process. 3. nuclear proliferation, and The prevailing sense is that, in general, 4. private-sector concerns, including the im- strengthening China is good for international pact on industry. security because China will counterbalance the Soviet Union, but also that caution should still The Directorate of External Economic Rela- be taken about advanced technologies with tions may play a more promotional role in the strategic implications. considerations. An interministerial committee has been established to assess overall commer- In all the countries studied here, the export cial and strategic concerns. Discussions are i% control system is organized to respond quickly, quent, perhaps several times a week. and relations between business and government appear to be less confrontational than The United Kingdom uses a system similar in the United States. Each country has a list to the German approach in that companies are of technologies, evidently similar or identical ‘zFor a more detailed description of European countries export control practices, see OTA, Technology and East-West ‘lOTA, Technology and East-West Trade, November 1979. Trade, November 1979. Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 135 free to export unless told otherwise. License In general, these systems are more collegial applications are handled by the Department and less legalistic than in the United States, of Trade and Industry. An interdepartmental and are more attuned to approving exports. committee, including the Ministry of Defense These differences may result in approval of and the Foreign and Commonwealth Office, some exports that would be denied in the discusses the implications of each case of sen- United States, but OTA has not been able to sitive technology. The committee usually document any pattern of major differences in reaches a consensus quickly, but occasionally the level of control. Each country (and espe- sends the case to the ministers for resolution. cially its exporting community) appears to be The prevailing philosophy appears to be that somewhat suspicious of the others, especially exports are good except for a relatively few about the interpretations of technical stip- cases where the reasons to hold back are com- ulations on exports and the tactics used at pelling. Technology transfer to China rarely COCOM. These suspicions apply to the United involves such reasons, though Britain is not States, as well. prepared to send large quantities of military technology.

AID AND EXPORT FINANCING

Countries supplying technology to China nology and student exchanges have been prom- have also developed different approaches to inent in U.S. Government policies. As with promoting trade and technology transfer. export controls, however, differences in promo- Some countries, such as Japan, have estab- tional policies are much more differences of de- lished extensive aid and financing programs, gree than kind. whereas the United States has no aid program It is difficult to evaluate the commercial ad- and only limited official financing. vantage accruing from promotional programs. These diverging approaches stem from dif- However, in some cases large aid or financing ferent views about the proper role of govern- programs have opened the door for national ment in trade and technology transfer. While firms to contracts that probably would not the general predilection in the United States have been possible otherwise. has been to limit the role of government in technology transfer, except where national secu- Still, the interplay of commerce and aid raises some knotty questions. There is a dan- rity is at stake, in practice many reasons have ger that the supplier governments, by provid- been used to justify positive intervention. ing extensive financial support or “tied’ aid Strengthening the economies of developing programs, up the ante for participation by all countries friendly to the United States and foreign firms. The Organization for Economic promoting U.S. commercial interests are Cooperation and Development (OECD) coun- among those that have been applied to sup- tries have attempted to deal with the problem port large aid programs in countries like Egypt by setting guidelines for export credits. Such or export financing for sales of U.S. aircraft agreements, however, are hardly all-encom- overseas. passing. The United States, in particular, has Although some of the major suppliers ap- pressed for a higher grant element in mixed pear more willing to use aid and financing, credits that combine official export financing these policies are the subjects of ongoing de- with overseas development assistance.63 Given bate and revision. There is a good deal of variation in the mechanisms used. Britain, for “In 1986 there were numerous reports of disagreements among example, has recently inaugurated a large the OECD countries on mixed credits. See “Aid, Trade and Sub- financing program for China. Science and tech- sidies, ” Financial Times (London), May 3, 1986, p. 16. 136 ● Technology Transfer to China the severe budgetary constraints in the United and the Economic Planning Agency (EPA). States, large-scale financing programs abroad The Overseas Economic Cooperation Fund (especially those involving mixed credits) are (OECF), which administers loans, reports to viewed with concern. EPA, whereas the Japan International Coop- eration Agency (J ICA), which provides grants Development Assistance and technical assistance, is under the jurisdiction of MOFA. The Export-Import Bank also Japan plays a role in that it provides loans to Chi- Since 1979 Japan has supplied more than nese and Japanese corporations involved in de- $1.5 billion of official development assistance velopment projects. Not surprisingly, the cost- (ODA) to China, 52 percent of the aid from all conscious Ministry of Finance tries to keep a G4 lid on expenditures, while MOFA advocates sources, including multilateral organizations. G8 The International Development Association a stronger aid program. of the World Bank was the second largest Japan increased technical assistance by 14 source of aid (14.6 percent); the third was West percent. Multilateral aid increased, but the Germany (13.2 percent).” The United States grant element fell slightly and remained below provides no bilateral ODA to China. the OECD goal. The OECF provided $308 mil- Gg By 1982 China had become the number-one lion in direct loans for projects in China. recipient of Japanese ODA. In 1985 Japan pro- Loans for commodity purchases made up vided China with $388 million of ODA (on a about $133 million of this total. Between 1981 net disbursement basis). Japan’s large aid pro- and 1984 more than $522 million of such commodity loans were provided by OECF for gram in China reflects not only the Japanese 70 Government’s high priority on aid to China, China. These loans have generally been pro- but also the growth of its aid program world- vided at 3 percent interest, with repayment wide. By 1984 Japan took second place behind over 30 years. Such commodity loans sup- the United States among the major develop- ported purchases of equipment at the Baoshan GG ment assistance countries (DACS). Japanese steel plant and the D“aiqing petrochemical re- leaders pledged to double ODA again during finery. The purpose of commodity loans is to the next 7 years. In 1985, however, Japan’s assist countries facing severe ba.lance-of- ODA fell by 12.1 percent from the previous payments imbalances or shortages of hard year.G7 currency. The level of ODA, however, continues to be The bulk of Japan’s official direct loans to a point of some dispute among government China, however, were in the form of project a~encies, one fought out in annual budget cy - loans to support development of economic and cres. The four ke~agencies are the Ministries social infrastructure, such as telecommunica- of Foreign Affairs (MOFA) and Finance, MITI, tions and transportation systems. These loans cover procurement of goods and services for “’’Chugoku ni tai suru Gaikoku Enjo no Doko” [Trends in specific projects. Between 1980 and late 1983, Foreign Aid to China], Kikin Chosa Kiho [The OECF Research Quarterly], No. 49, June 1986, p. 185. (Based on OECD data.) Japan provided support for six large projects 65 Between late 1981 ~d e~ly 1985 the World B~k Ioaned in the first round of project aid, Total funding China more than $2.3 billion ($1.3 from International Bank for Reconstruction and Development and $1.0 from International Development Agency). See Nihon Kogyo Ginko [Industrial Bank “In late 1985, the Ministry of Finance argued that Japan’s of Japan], Sm”kin no Chugoku no Seiji Keizw” Doko [Recent Po- ODA should be reduced by the same margin as the yen’s ap- litical and Economic Trends in China], Oct. 24, 1984, p. 33. preciation against the dollar. See Asahi Evening News, Dec. “Development assistance countries, as designated by the 5, 1985. OECD. “9Kaigai Keizai Kyoryoku Kikin IOECF], Gyomu Hokokusho “One reason for the decline was that committed loan funds [Administrative Report], Mar. 31, 1985, p. 10, calculated at were not used in many cases because recipient nations were un- $US1 = 231.5 yen. able to provide matching funding, The decline in Japanese aid ‘°Calculated at $US1 = 249 yen (1982 rate). See Kaigai during 1985 probably pushed Japan back into third place be- Kyoryoku Kikin IOECF], Chugoku En Shakkin no Gm”yo [Sum- hind France (and the United States) in terms of aid contributions. mary of Yen Loans for China], November 1984. Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain 137

for these projects came to over $800 million. tion, and there have been problems associated The projects include three: to develop railroads, with high costs arising from local content and a hydroelectric plant, and two ports. Under the employment requirements. The overall evalu- second round of projects, Japan has pledged ation, from the Japanese side, has been posi- to provide another $2 billion to support seven tive, but a report prepared by OECF in 1985 large projects. Among these is one to develop noted bottlenecks in Chinese economic devel- telecommunications in Shanghai and other opment and called on the government of Ja- cities. pan to improve the efficiency of aid projects in China by focusing on priority projects.75 In principle, Japan’s loans for Chinese projects are “untied.” That is, firms from other Technical cooperation remains a small part countries are eligible for participation in the of overall ODA but is growing in importance.7G projects. Since the early 1980s all announce- These programs are carried out by JICA. More ments for bidding on projects supported by than 200 Chinese have been trained by JICA Japanese aid in China have been open in this programs in Japan for up to 1 year, and Japa- sense.7’ However, in the early 1980s, signifi- nese experts have been dispatched to China cant portions of OECF-supported projects to provide technical assistance. In some cases, were tied, although in recent years the percent- materials and equipment are also provided. age of tied-aid funding has reportedly dropped An agreement made in late 1985 to send to 5 percent. In earlier years, Japanese firms young volunteers aged 20-30 to China for 2- probably won about 60 percent of the goods year periods indicates the evolution and expan- and services for projects supported by OECF sion of such projects. A “silver volunteers’ in China. There have been cases however, where association has also been set up to support the U.S. firms have supplied equipment for proj- dispatch of retired Japanese engineers. ects in China that were supported by official Japanese financing.” In late 1986, MITI offi- Japanese aid officials see “project-type” cials were suggesting the expansion of ‘export- technical cooperation as their most effective promoting” aid to Asia, a plan that some vehicle and have slated these programs for ex- observers suspected would help primarily pansion in China. Currently, such programs Japan’s own consultants, builders, and sup- include a hospital, family planning education, pliers .73 an enterprise management center, a wood utilization project, and a food research center. The major thrust of Japan’s aid to China has New starts include a telecommunications train- thus been large projects designed to build in- ing program in Beijing, a fish research center frastructure. Generally speaking, these are in Shanghai, and an agricultural research cen- viewed with pride as examples of successful ter in Mongolia. cooperation. The projects are selected in a process that involves the Chinese first providing Japanese cooperation in China’s factory a ranked list and Japan responding.74 There renovation programs has been comparatively has been at least one case (a dam project) where extensive, and JICA officials have established problems developed that resulted in cancella- ties with the State Economic Commission and gained good knowledge of the status of China’s 7’Ministry of International Trade& Industry, KeLzm”Kyoryoku industries in rural areas. However, JICA pro- no Genjo to Mondm”ten [The Status and Problems Related to Economic Assistance], 1984. Only a portion of the commodity vides only surveys, and confines its activities loans have been “LDC untied’ ’–with participation limited to to projects that involve transfer of standard- less developed countries (LDCS) and Japanese firms. See OECD, ized technologies. The Japanese Government Chugoku, p. 7. “Discussion with U.S. Trade & Development Program, No- thus explicitly leaves transfer of “new” tech- vember 1986. nologies to the private sector. During 1985, 73 See Susumu Awanohara, “Meeting the Need, ” Far Eastern Economic Review, Nov. 6, 1986, p. 66. “’Overseas Economic Cooperation Fund report, June 13, 1985. “The Japanese Government has upon occasion refused a “In 1984 technical cooperation made up only about 3 percent project, such as a chemical plant. of all ODA. 138 ● Technology Transfer to China

JICA survey projects in China included three scale back its development plans in the early steel plants, one piston factory, and an elec- 1980s. In 1981 a financial aid package was ar- tric cable manufacturing factory, for a total ranged that included $430 million in suppliers of five. credit guaranteed by the ExIm Bank, as well as commodity loans (through OECF) totaling Europe $560 million and commercial loans of $3o mil- Even collectively, European ODA has been lion. More recently, in 1984 the ExIm Bank far smaller than Japan’s. Table 13 shows the agreed to provide $2.4 billion to finance oil and total net ODA contributions of European coun- coal development projects. The ExIm Bank tries and the subtotals of loans and grants. has also provided considerable funding to assist small Chinese businesses to import small- European ODA to China increased rapidly scale machinery and equipment fro-m Japan. 78 from a low base in 1981, but future increases are likely to be more modest. Most European Official export financing has contributed sig- countries already contribute a substantially nificantly to the growth of Sino-Japanese higher fraction of their national income to for- trade. Suppliers’ credits are one form that this eign aid than do either the United States or financing takes. In 1984, for example, the Japan, and their rate is not expected to rise ExIm Bank provided $85 million in suppliers’ greatly. Some, such as France and Britain, are credits for the export of technical services re- particularly generous with their former colo- quired for the Baoshan Steel Works. In this nies or countries, leaving less for others. case, the credits were provided directly to the Japanese companies supplying the technology Germany is likely to remain the largest and training programs. In another example, donor, in keeping with its position as the the bank was reported to have provided $300 largest trader. In 1986 China is scheduled to million for the Japan-China Oil Development receive approximately $35 million in financial Company for the Bohai project.’g assistance and an additional $2o million in technology.” Typical German projects in The ExIm Bank gives no particular preference to projects involving technology trans- China include pipemaking and building mate- 80 rials manufacturing. Other activities support fer. Rather, the goal of bank officials is to feasibility studies and training. serve the political ends of Japan’s foreign policy by ensuring that those official projects Most bilateral aid is tied (informally, if not selected have sufficient funding. Therefore, explicitly), or spent on goods and services from while technology transfer is not an explicit the donor country. Typically, 70 percent of the goal, ExIm funding has importantly supported aid is delivered in goods and services, while it. In the early 1980s ExIm funding was cru- the rest is spent in other countries. Thus, aid cial to the financing of some projects even as stimulates exports even when the main intent overall funding was scaled back. is humanitarian. Private sources are also providing considerable financing. In 1980a consortium of Jap- Other Types of Financing anese banks offered $8 billion in credits. In Japan early 1985 the Bank of Tokyo and related Jap- anese private banks signed a $2 billion loan The Japanese Government supports trade and technology transfer to China with official financing m~de available from the Export- ‘sFor an excellent review of Japanese financing for projects in China, see Hong K. Kim and Ricard K. Nanto, “Emerging Import (ExIm) Bank. The first loan agreement Patterns of Sine-Japanese Cooperation, Journal of IVortheast involving ExIm credits was signed in 1979 and Asian Stud-es, Fall 1985. provided $2 billion. But China was forced to 7“ ‘Tokyo Grants Soft Loan for China Oil Project, Financial Times (London), Jan. 15, 1986.

gOInterview with Export-Import Bank Of Japan, November “China Business & Trade, Vol. VII, Issue 23, June 9, 1986. 1985. Ch. 5—Pollicies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 139 —

Table 13. —European Official Development Assistance to China (million U.S. dollars)

Total ODA net Loans net Grants Tech. coop grants 1983 1984 1985 1983 1984 1985 1983 1984 1985 1983 1984 1985 Belgium ...... 6.0 5.6 6.8 5;9 5.2 6.1 0.2 0.4 0.8 0.1 0.3 0,4 Denmark . . 5.2 2.2 8.3 4.3 1.5 6.7 0.9 0.6 1.6 0.9 0.6 0.7 France ... ., 4,7 6.0 6.3 – — — 4,7 6.0 6.3 4,7 6.0 6.3 Germany. 96.7 57,5 97.6 84.1 41.5 77.0 12.6 16.0 20.6 12.6 16.0 20,6 Italy ., ., ... 11.1 9.9 14.4 1,0 3.9 3.2 10.2 6.1 11.2 3.0 6.1 6.0 Norway ...... 5.8 11.9 3.6 – – – 5.8 11,9 3.6 0.9 07 0.6 Sweden 0.6 0,8 11.4 — — — 0.6 0.8 11.4 0.2 0.8 1.5 United Kingdom 0,3 0,8 1,6 — — — 0.3 0.8 1.6 0.3 0.8 1.6 Other. 0.4 0.3 3.1 — — 2.1 1.0 1,1 0.9 0.6 0.9 0.6 51.1 41,5 42.7 20.5 27,3 31.2 Japan ...... 350.2 389.4 387.9 299.1 347.9 345.2 — SOURCE Geoq-aphlcal Dlstr!butlon of Flnanclal Flows to Developing Countnes OECD 1987 agreement. The loans are to be repaid over a be explained by scarce foreign exchange in 10-year period, at interest rates of 0.25 to 0.375 China, the emergence of regional borrowers in percent over the London Inter-Bank rate. In China, and limited foreign response to appeals 1985 it was reported that private Japanese for direct investment. Private Japanese banks banks had expanded their credit lines to China are adopting new approaches in China. At least to $2.5 billion, from $1.7 billion in 1984. The two leasing companies have been formed as Industrial Bank of Japan (IBJ), for example, joint ventures, with Japanese banks partici- had credits amounting to $250 million in 1985, pating.85 while its Hong Kong-based subsidiary had 8 The interrelationship of aid and trade is com- another $150 million. 1 In 1985 three Chinese plex and controversial. At the heart of the con- organizations were reported to have raised troversy is a tension between the principle that more than 140 billion yen on Tokyo capital aid be primarily motivated by altruism and the markets by issuing bonds. obvious commercial spinoffs that often accrue In addition, China has concluded hundreds to firms from donor countries. Large OECF- of compensation trade agreements with firms financed Chinese projects, for example, are gen- from Japan, the United States, and West Ger- erally viewed as Japanese projects in China, many, among others.as In the late summer of despite their official untied status. 1986, it was reported that Japan’s trading Differences in perspective are apparent both houses anticipated that they would have to ac- within Japan and between the major summit cept Chinese goods in return for about 30 per- countries. In late 1985 MITI and MOFA dis- cent of all exports, and that by 1987 such trade agreed over the use of mixed credits for a coal- would reach more than 50 percent of total ex- 84 fired thermal power generation project in Tian- ports. The rise of such indirect financing can jin. MITI favored using mixed credits to sup- “’ “,Japanese Financial Institutions Increase Credit Lines to port the bid by C. Itoh and Hitachi to win an China, ” Japan Economic Journal, May 14, 1985. international tender against foreign firms. “’An agreement between Japan and China permits buyers of Chinese bonds issued in Tokyo to claim a tax credit of 10 per- MOFA, however, objected on the grounds that cent of the \’alue of the coupon rate. China does not tax the an annual ceiling for yen loans to China had income paid to subscribers of such bonds. Therefore, the effect already been fixed and that the use of such is to raise b~’ 10 percent the real value. See Charles Smith, “Bor- rowers of I.ast Resort, ” Far Eastern Economic Re\iew, Apr. loans would likely stimulate foreign criticism. 24, 1986, p. 79. MOFA won this interagency dispute, but the “’See U.S. International Trade Commission, Assessment of two ministries continue to disagree on this the Effects of Barter and Countertrade Transactions on U.S. Industries, October 1985, pp. 47, 129. issue. “’In a growing number of cases third country barters are also involved. The same article reported that a major Japanese trading house began purchases of Indonesian plywood for reship- ment to China, and was reportedly paid in raincoats. See Bruce “’The Daiichi Kangyo Bank expanded its control of stock and Roscoe. “Demonetised Deals, ” Far Eastern Economic Review, management of the Shej iang First Bank, a leading Hong Kong Aug. 28, 1986, p. 48, bank with Shanghai participation. 140 . Technology Transfer to China

France has been much more aggressive in the use of official financing. Virtually any export is eligible for official financing and, frequently, subsidies. Often, some of the money is provided by a commercial bank at prevailing rates and the rest (50 to 70 percent) by the Banque Franaise du Commerce Exterieur (BFCE) or the Banque de France at a subsidized rate of 6 percent. In 1979 BFCE offered one of the first credit lines to China, over $3 billion. At that time, however, China was very reluctant to assume debt, and only 6 percent was used.87 France is the initiator and the greatest user of mixed credits. Great Britain also has a comprehensive program to provide export credits, but it makes greater use of commercial banks and has reduced the prevalence of subsidies. The Exports Credit Guarantee Department of the Ministry of Trade and Industry is the major contributor for both financing and investment insurance protection. Loans are generally at the OECD rate, but in recent years the market rate has been higher, as in Germany. Thus a sub- sidy is applied to the difference for the commercial bank. The turbine-generators for the Daya Bay nuclear plant will be financed with Photo credlf Er/c Basques 200 million pounds from a consortium of banks. Hong Kong headquarters for the Hong Kong and Britain has a mixed credit program under the Shanghai Banking Corp., an economic powerhouse in Overseas Development Administration, even the region. This building, recently completed, though Britain officially opposes the concept. cost over $1 billion to build. Many European commercial banks have Europe established branches in China in hopes of in- All major European countries offer official creasing business. Few of these hopes have financing but differ greatly in the degree of been realized. Not only has borrowing grown involvement and in the use of subsidies. In Ger- slowly, but most foreign funds have been fun- neled through Hong Kong banks. However, many most financing has been done privately, Chinese policy on debt has been changing, and but the Kreditarstalt fir Wideraubau supplies it appears likely that borrowing will be in- long-term export credits and aid for develop- G creased significantly, though not to the extent ing countries.‘ Typical German export-financ- of other developing countries. A large fraction ing interest rates are at or above the negoti- of this debt would have to be with commercial ated OECD rate. Germany has opposed the use banks, since official financing is limited. of subsidies for exports but has also been known to resort to them in highly competitive China is also starting to raise money by sell- situations. ing bonds. In 1986 the Bank of China issued — .—-— .-—— “’For a more complete description of all these financing sys- $200 million Eurodollar floating-rate bonds tems see: OTA, “Technology Transfer to The Middle East, ” through a German bank syndicate. The Bank September 1984, or “Report to the U.S. Congress on Export Credit Competition and the Export-Import Bank of the United “’Dennis Phillips, “Mixed Credits Key to Success, ” China States,’” Export-Import Bank, September 1985. Trade Report, June 1985. Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 141 of England had opposed the sale in Britain be- in 1985 for $272 million.gz France argues that cause China was still in default on prorevolu- mixed credits help stretch foreign aid, espe- tionary bonds issued in London. cially in countries that cannot afford to fund projects commercially .93 The Mixed Credit Controversy Great Britain has pledged 300 million pounds in soft loans at 5 percent interest for Subsidized financing-soft loans-has been Chinese trade.” Britain feels this program is used for years. Mixed credit financing, the necessary because of the increasing use of blending of foreign aid and official export credit, has been used by many European coun- mixed credits by its competitors. Some of the tries and Japan to support their exports to first uses will be for a diesel engine plant and China. The high unemployment rate in most telecommunications projects. Belgium, Den- mark, Sweden, and Italy have made loans at European countries has been a strong incen- interest rates as low as zero percent. Italy has tive to seek means to promote exports. been one of the biggest users of mixed credits The reported use of mixed credits increased in China. Two projects are being financed from in 1982 to $4.6 billion worldwide,88 a small a combination of $40 million in soft loans and fraction of both total aid and financing. Never- a grant of $10 million: the construction of a theless, the potential that mixed credit has for tractor plant by Fiat and a power transmis- distorting economic decisionmaking is consid- sion line.95 Even West Germany has overcome erable (developmental projects could be ranked its aversion and is subsidizing a loan of DM 140 on the basis of commercial benefits to the donor million for the construction of several plants. nation), and the appearance of receiving dis- In most cases, the subsidization for all these counts may lead to rapidly increasing demand soft loans will be in the form of mixed credits, by recipients. or the differences will be procedural more than China has pressed Western governments to substantive. use soft financing, and mixed credits are a con- After prolonged disagreement, the OECD venient way to comply.ag However, when countries reached an agreement on mixed almost all suppliers offer them, the result can credits in March 1987. The new rules make it be intense competition that benefits no one, more expensive for countries to subsidize ex- not even recipients, since presumably the to- port credits by raising the minimum level of tal amount of foreign aid may not rise apprecia- grant (confessional) financing allowed. The bly. A total of 15 OECD countries now offer minimum permissible level of aid in a mixed mixed credits. go credit will rise from 25 percent to 30 percent France has been at the forefront in the use in July of 1987 and to 35 percent in July 1988. of mixed credits. France first used mixed Minimum interest rates for commercial loans credits ($190 million) in China in 1985 to win that benefit from mixed credits have also been modified to eliminate or reduce subsidies for a contract to refurbish China’s telecommuni- 9G cations system, a project that could lead to a certain ~oups of developing nations. total of about $400 million in telephone and As discussed in chapter 8, the United States telecommunications contracts.” It also used established a “war chest” that permits the U.S. mixed credits to sell three A3 10-200 airbuses Government to use such credits in cases where

“OECD, “Twenty-five Years of Development Co-operation, ” ‘zChina Business & Trade, Apr. 23, 1985. 1985, 93Euromoney, op. cit. “See Robert Thomson, “China in Bid to Set Up Steel Plant “Christian Tyler, “UK Cheap Credit for China Proves Hard Venture, ” Financial Times (London), Apr. 24, 1986, p. 8. to Allocate, ” Financial Times (London), May 2, 1986. ‘Janet Robson, “Can America Win La Guerre?, ” Euromoney, gbchina Business & Trade, June 231 1985. March 1986. ‘See “OECD Nations Ratify Agreement to Limit Use of Tied “See David Housego, “France Paves Way for China Telecom Aid in Subsidized Official Credits, ” International Trade Deal, ” Financial Times (London), Apr. 17, 1985, p. 1. Reporter, Mar. 18, 1987, p. 366. 142 . Technology Transfer to China other countries offer “predatory” financing. credits. Japan’s projects indicate that even in To date, however, the United States has not the case where aid is “untied, domestic firms used mixed credits to support China trade. The stand to benefit. Chinese officials have indi- OECD agreement may serve to set limits on cated their intention to seek more soft loans mixed credit financing by the major supplier from foreign governments.97 Therefore, link- countries. In the past, it has been difficult to ages between aid and commerce are likely areas ascertain the actual extent of mixed credit of competition among the major supplier coun- financing, much less to evaluate the impacts tries doing business in China. on a country’s export performance. The agreement addresses one type of export financing gTThe c~jna ~co~omic News reported on Jan. 5, 1987 that Ministry of Foreign Economic Relations and Trade announced competition, but supplier countries remain free that China has recently borrowed soft loans from 15 developed to provide high levels of aid funding or official countries and had put to use loans totalling $5 billion in 1986.

MULTILATERAL POLICY CHALLENGES Large technology transfer projects to China often involve firms from a number of different countries. The requirements of large projects for finance and specialized technology make technology transfer increasingly a multilateral effort. There are thus opportunities for participation by a number of supplier countries with somewhat different approaches to technology transfer. In the future, however, the multilateral nature of technology transfer to China may also pose some policy challenges. If China’s economy is to develop, exports will increase. A Photo credit A/Ice Davenport, and The Chfna Bus/ness Review pending issue is whether the supplier countries The Nanjing Construction Machinery Plant has contracted will be equally willing to permit imports from with a Swedish firm to assemble these drilling and China, or whether protectionist measures will boring machines in China, using a mix of Chinese and be taken in some cases. foreign parts. Another set of questions concerns the strategic dimensions of high- technology trade in the Pacific. As Singapore and other third coun- Bank and the General Agreement on Tariffs tries play a growing role (along with China), and Trade. Each such step brings with it new it maybe more important to revise and extend policy challenges for the Western countries, the system of multilateral export controls to since there will be important implications for ensure their effectiveness in slowing the trans- global trade patterns and political as well as fer of technologies with military significance economic effects on other Asian countries. to the Soviet bloc. Growing economic interdependence between The challenge of the future will be to en- the developed and the developing countries un- courage China’s smooth integration into the derscores the critical need to promote economic Asian and global marketplace. This will occur growth in the developing world markets. In- in the context of China’s entry into multilateral creasingly, this task requires international institutions such as the Asian Development cooperation, with Japan taking on a growing Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 143 — role as a capital-rich country. Indicative of major Western suppliers will continue to com- these changes was the International Monetary pete for the Chinese market, they may also Fund’s announcement of its first loan of about have to cooperate in certain areas in order to $700 million to China in late 1986. While the promote China’s full economic integration. Chapter 6 China’s Economic and Political Trends

. J

Photo credit: Eric Basques

This magnificent bronze lion is one of a pair that guards the entrance of the Gate of Supreme Harmony in The Forbidden City in Beijing. CONTENTS

Page Potential Long-Term Economic Growth...... 147 Future Political Evolution ...... 151 The Impact of Technology Transfer ...... 153 Impact on the Economy ...... 153 Impact on the Political System ...... 154 Impact on Social Change ...... 155 Market Socialism...... 157 Implications for the United States and the World Economy ...... 159 Implications of a Failed Modernization Program ...... 161

Table Table No. Page 14. Comparison of Real Gross Domestic Product Growth Projections, 1981-2000 ...... 149 Chapter 6 China’s Economic and Political Trends

The recent dramatic changes in China’s econ- last 6 to 8 years continue, or is China likely omy, polity, and foreign policy, have been dis- to go on a markedly different course? These cussed in chapters 2 and 3. Despite frequent questions cannot be answered without consid- assertions by China’s leaders that current pol- ering the prospects for economic performance. icies will continue, many observers have raised the question of the stability of China’s new course and China’s prospects for achieving its modernization goals.1 Will the trends of the China To Extend Economic Reform,’” 7’he 11’ashington post, ‘See for instance, Daniel %utherland, ‘*Party Leader Sa17s Sept. 24, 1986, p. 1.

POTENTIAL LONG-TERM ECONOMIC GROWTH In considering the overall prospects for the sively more difficult for the Chinese economy Chinese economy, it is useful to distinguish be- to grow solely on the basis of “extensive” tween the prospects for growth, for reform, and means —i. e., increased capital investment. for structural change. Growth is the quantita- Thus, in assessing the prospects for economic tive expansion of total physical output. Reform growth, the potential success of the current refers to the reorientation and revitalization reforms in economic and technology affairs of economic organizations and behavior. Struc- must also be addressed. tural change deals with a substantial move- In effect, there are two schools of thought ment of the work force out of agriculture and regarding China’s economic potential and the an increase in the size of the service sector. In role of reform. One school focuses on the contrast to past efforts to promote economic progress resulting from the changes to date growth through increases in direct capital in- in the organization and ideology that underlie vestment, present Chinese leaders are trying the economy. ’ Indeed, there is no doubt that reform and structural change as well as ex- reforms have gone quite far, especially in agri- panded use of domestic and foreign technology. culture, toward reducing the inefficiencies Most analysts of the Chinese economy agree associated with the former Soviet-style eco- that the prospects for economic growth are nomic approach. Many of these reforms are promising, particularly in view of the changes now irreversible and have become fully incor- that have been introduced since 1978. At the porated into the prevailing economic structure. same time, there is also a clear recognition that Based on the apparent success of these reforms China’s growth trajectory could be seriously and on the improvements in economic perform- altered by a number of factors, some of which ance apparently derived from these reforms, have to do with environmental factors while it can be argued that similar growth rates will others are related to the pace and extent of po- be sustainable for the rest of the century, litical and economic reform. Of course, a mod- The other school takes a much less sanguine est degree of economic growth is possible without further economic reform. Yet, as shown in view of the long-term efficacy of recent economic changes, arguing that despite the im- chapter 3, the majority of problems that con- mediate changes that have been introduced, front China’s economic policymakers are systemic in nature. To achieve a sustained pattern ~For example, see Dwight Perkins, CHINA Asia Next Eco- of growth, a number of modernizing reforms nomic Giant (Seattle, J?’A: University of Vv’ashington Press, are definitely required. It will become progres- 1976).

147 148 . Technology Transfer to China

“the Chinese economy still retains the basic structionism, and resistance apparently hin- institutional organization, functional opera- dering the implementation of the industrial re- tions, and problems, or results, of a Soviet-type forms, suggests that further reforms are not economy. While acknowledging the improved inevitable and the prospects for rapid, sus- performance of the economy, proponents of tained economic growth remain uncertain. this perspective suggest that most of the eco- The difficulties with industrial reforms come nomic gains since 1978 have been achieved when the reform coalition in the Chinese leader- through nonreplicable or one-time changes in ship has become more vulnerable to criticism agriculture. In this view, the foot-dragging, ob- from the more conservative members of the — elite, owing to perceptions that the central gov- ‘Robert F. Dernberger, ‘‘Economic Policy and Performance, ” China Economy Looks to the Year 2000 (Washington, DC: ernment was steadily losing control over the Joint Economic Committee, May 1986). economy. While there remains almost unani- Ch. 6—China’s Economic and Political Trends ● 149 — .

mous agreement on the need for reform among searchers about the workings of the Chinese all of China’s leaders, continued differences economy and their interpretation of the likely over such issues as the pace, the targets, and contribution the reforms will make to present the scope remain important. Events during and future economic performance. The base 1985-86, including the rapid depletion of for- projections in the Lau model are firmly rooted eign exchange, continued high rates of invest- in China’s Maoist era experience, for example, ment, excessively rapid growth, and reduced whereas the World Bank depends on causal grain production, have led to greater caution relationships mainly extrapolated from the ex- in the implemention of the reform program. perience of other developing countries. Simi- This caution is likely to remain characteristic larly, the projections contained in the Rock of Chinese economic policy during the Seventh Creek models give more weight and importance Five-Year Plan and could be exacerbated as to China’s recent experiences under the Den- a result of the post-Deng succession process. gist reforms.’ These differences account for the Thus, even though they are essential, the more more optimistic projections of Rock Creek, difficult reforms in the area of prices, labor, which goes further than either Lau or the and capital markets will proceed at a more World Bank in incorporating China’s output gradual pace than perhaps initially intended. and productivity growth up to the mid-1980s into its model. Thus, implicitly, if not explicitly, Yet, even taking into account the conse- it assumes fewer problems with the reform ef- quences of a more gradual approach to reform fort in the future. for economic growth rates for the rest of the century, most observers agree that the quan- As presented in table 14, the three models titative dimensions of economic performance project average growth rates ranging from 6.6 are likely to be respectable. The range of pro- to 8.7 percent through the end of the century. jections (discussed in app. 1 of vol. II of this China’s goal of quadrupling the value of the report) is shown in table 14. Two factors af- GVIAO (Gross Value of Industrial and Agri- fect the projections (in addition to problems cultural Output)5 would be met in all these with the reliability of Chinese data). First, the scenarios. More conservative estimates might perceptions reflect the differences in modeling see an average annual growth of 4.5 percent techniques and the nature and currency of the in the future, which would still almost quad- data used by the respective researchers. Models ruple GVIAO because growth since 1981 has inherently contain biases, especially because been above the target rate. they deal with interrelationships among the Such high growth rates for extended periods economic variables and the role assigned to of time would be very unlikely in an industri- various key sectors. For example, the models differ in their assessment of the projected contribution of agriculture, with the Lau model 4Rock Creek Research, Inc., The Role of Technolo~’ Trans- suggesting a much more modest role than does fer for China Economic Future, app. 1, vol. I I of this report. ‘GVAIO grows faster than gross domestic product (GDP) be- either the World Bank or Rock Creek. cause it includes double-counting of intermediate inputs that increase with time as a country develops. Thus, bs’ focusing Second, the projections reflect the explicit on quadrupling the GVAIO. the Chinese will not ha~’e to quad- and implicit assumptions of the respective re- ruple GDP.

Table 14.–Comparison of Real Gross Domestic Product Growth Projections, 1981-2000 .- Agriculture Industry Other Total World Bank Quadruple”. . .:, ...... – 4.9 7.1 7,6 6.6 World Bank Balance ...... 4.4 6.0 9,2 6.6 L. Lau High Scenario ...... 3.4 7.9 6.7 6.7 Rock Creek Research Low ., . . 5.7 7.7 9.3 7,8 Rock Creek Research High ... . 5,7 9,3 9.8 8.7 SOURCE R-ock Creek Research lnc The Ro/e of Technology Transfer for China s EconornIc Future “app 1, VOI II ;f this report 150 ● Technology Transfer to China alized country, but Japan in the 1960s and rupling goal by 1995, not 2000. As suggested, South Korea and Taiwan in the 1970s achieved in this model, a good portion of this growth such growth levels. In contrast to the majority will come from agriculture. Both the World of less developed countries (LDCS), China has Bank and Rock Creek agree that trade will also a strong resource base; a literate, moderately bean important component of growth. In the disciplined work force; and a high savings rate. case of the latter’s projections, industries such There is a significant capital stock in place, as consumer electronics will play a significant though much of it is dated. There is also a sig- role, fueled in large part by greater technical nificant science and technology infrastructure. sophistication and improved product quality. Finally, there is a national commitment to It is only within the Rock Creek high-growth growth and modernization at the highest levels, scenario that foreign technology imports are which is more characteristic of the newly in- incorporated as a key determinant of economic dustrialized countries (NICS) than of most de- performance. This projection is based on the veloping countries, or China of a decade ago. assumption that China acquires and absorbs The “qualitative” dimensions of economic a range of technologies that markedly raise growth in China must also be considered in ad- productivity and output quality throughout dressing the prospects for improved economic the economy, especially in the machinery and performance. This would include issues such consumer manufacturing sectors. The major as the composition of growth and the role of beneficiary of successful technology assimila- technological change. In others words, it is tion will be the industrial sector, which could important to consider where China’s growth improve its performance capabilities beyond might come from and how it will be achieved. the Lau, World Bank, or Rock Creek low- Chinese economic performance during the last growth projections. The implications of such 5 to 7 years has been buoyed by the achieve- a high-growth pattern would be particularly ments of the agricultural sector. There are important in the trade area. According to the some signs that agricultural growth rates may Rock Creek analysis, if China were to make not be able to match those of the recent past, optimal use of foreign technology imports, it however, owing to external diseconomies (loss could dominate the apparel export market, re- of farmland to housing construction, neglect place South Korea as the source for most basic of infrastructure-i. e., irrigation systems— consumer and some sophisticated electronics neglect of agricultural extension services, and products, and even begin to export automo- a slowing of the technical modernization of biles to Third World countries. agriculture) that result in diminishing returns. Without delving further into the underlying At the same time, some of these trends could dynamics of the various estimates discussed be reversed, according to the Rock Creek pro- in this section, it appears that the outcomes jection, through the switching of cropland out at either extreme, very low growth and very of low-value-yielding grains into vegetables high growth, are unlikely. For either to occur and fruits with an enormously greater yuan would require a confluence of numerous fac- output per hectare. tors to either strongly inhibitor greatly facili- Technological change as a result of technol- tate economic performance. The high growth ogy imports will also be an important factor rates since 1980, which have surprised many affecting growth, though in all but the Rock analysts, could continue, but a plethora of fac- Creek high-growth scenario projections noted tors could negatively affect economic perform- above, they seemingly are not assigned a crit- ance and the success of technology transfers. ical role. In the Rock Creek low-growth scenario, Barring any drastic change in current Chinese for example, even with only modest improve- borrowing practices, China’s foreign exchange ments in technology, the Chinese economy still shortage is likely to be a major constraint on promises to grow at a rate faster than the offi- large-scale importation of technology and cial Chinese projections, attaining the quad- equipment. Combined with existing bottle- Ch. 6—China’s Economic and Political Trends ● 151 necks to effective assimilation of technology, economic fragilities, but one able to sustain these factors could become significant obsta- a pattern of growth range of 6 to 7 percent. cles to growth in the 1990s if appreciable This growth rate will not be distributed evenly progress is not made in alleviating them dur- throughout the economy: a few sectors across ing the Seventh Five-Year Plan. this broad-based economy will reflect the fruits of modernization while the remainder of the Other issues also raise questions about economy lags significantly behind. Textiles, China’s economic future. Reform of the urban consumer electronics, machinery, and agricul- economy has proven to be difficult, and incom- ture will continue to be important in this re- plete reforms could be damaging. The reform gard. The major economic question facing program has also contributed to the rise of so- China for the rest of this century, therefore, cially undesirable behaviors that could dis- will be the extent to which these few leading credit the reforms and therefore slow them sectors can pull the rest of the economy for- down. Along with the political factors that will ward versus the degree to which the backward- be discussed in the next section, these include ness of the other sectors will slow down the urban protests, corruption, and increased ine- overall rate of growth for the entire economic quality. The Chinese will also have to be con- system. cerned with labor indiscipline and will have to find ways to alter the sociology of the work It is clear that some of the most important unit (clan wei). As described in chapter 3, the constraints on future economic performance proprietary claims on technology and person- will be economic and technological. However, nel made by the work unit are among the most political stability and reform are also crucial debilitating obstacles to technology diffusion. factors influencing the prospects for modern- Tensions between the central authorities and ization. The course of domestic politics is also local governments, especially in the area of fi- important in considering China’s foreign pol- nance, will also have to be changed, icy, its open door to foreign investment and technology, and its role in international secu- Some of these factors will affect China’s rity affairs (which are discussed in the next growth trajectory, more than others, though chapter). Finally, questions about the future here again, even in combination they do not of Chinese politics are all the more important necessarily portend significantly low economic in light of China’s recent history of social tur- performance. What is likely until the turn of moil and political cleavages. the century is a China still beset by numerous

FUTURE POLITICAL EVOLUTION Despite uncertainties about the depth of con- manage what all observers would agree are en- servative opposition to the pace of reforms, it during political problems. Until recently, the appears that the general direction of China’s reform coalition was effective in managing divi- current course in economic policy is unlikely sive issues. At present, however, there are ob- to change drastically. Although the current viously serious divisions within the leadership leaders have major internal differences, they over policy, especially the pace and extent of share a common commitment to reform and reform. Underlying these divisions are ques- modernization. G The range of foreign opinion tions about the limits of reform in a system is considerably broader on China’s ability to dominated by a Leninist party, and the future role of ideology in a society that has been so driven by ideology (with many unfortunate ‘See Thomas Fingar, “Politics, Policy, and China’s Future consequences) in the past. The lower ranks of Course, ” app. 7, vol. I I of this report; and Charles F. Steffens, “1.eadership Changes in China and Their Implications for the officials and managers, some of whom have ac- United States, ” U.S. Library of Congress, Congressional Re- tively resisted reform, will also play a crucial search Ser\rice. CRS 86-131 F (June 24, 1986). role. 152 ● Technology Transfer to China

Clearly, China’s current course and its recent accomplishments owe much to the presence and leadership of Deng Xiaoping. Many questions have been asked, therefore, about the prospects for politics under his successors. Deng and his supporters have clearly tried to plan for political leadership in the post-Deng era, and have brought into second and third echelon leadership positions younger, better educated individuals who seemingly share Deng’s reform values.7 It will not be clear for many months, or even years, whether these efforts to ensure continuity will be successful.

Even if the reformers prevail over the more Photo credit Leo A Orleans doctrinaire elements of the leadership, there View of Shenzhen, a special economic zone. In the will be competition for power and influence. background is Hong Kong. Eight years ago this was Cleavages are certain to develop based on per- a fishing village surrounded by rice paddies. sonal aspirations, factional relations, and policy positions. Regional divisions based on un- will bring with it many new problems. These even growth are also likely to be a factor in include the management of demographic and intra-elite politics. How these conflicts will be environmental changes brought by moderniza- managed is an important question for the fu- tion, the need to accommodate politically the ture. There are various signs that the Chinese social and economic pluralism entailed by a are trying to make political lifeless personalis- successful reform program, the need to respond tic and more subject to publicly understood laws and rules, and to make elite conflicts less to rising expectations from the population, and of an all-or-nothing experience. Nevertheless, the challenges of managing the commercial and security problems resulting from interactions in light of past experience, there are good rea- with the external environment via the open sons to question the extent to which the new door. political rules of the game have been institutionalized. The effectiveness of political reform, One of the more intriguing questions about still nascent compared with economic reform, China’s political future is the likelihood of will bear close watching. democratizing and liberalizing trends. The post-Mao period has clearly seen some evidence The future of Chinese politics bears a close though complex relationship to the course of of change in the political climate, and the leadership itself refers to the need for demo- the economic reform program. On one hand, the future of reforms will require continued po- cratization, although it is by no means clear what that term means to those who use it. litical coremitment and political stability. Fail- ure of reform will reflect badly on the Dengist The liberalization that has occurred has been leadership and could be a source of political within the established Marxist-Leninist frame- instability y. work. From the viewpoint of the Western liberal tradition, this liberalization would ap- However if the reforms succeed, China will pear to be minimal. Yet relative to the period also face new political challenges. A success- preceding it (1958-77), the tone of political life ful reform program will reinforce the continu- has clearly changed for the average Chinese. ation of the open door policy and be a stimu- There is more freedom of speech, and the Party lus to modernization; however, modernization shows new tolerance for appeals from the population for the rectification of official abuses ‘Steffens, op. cit. (though this tolerance has limits, as shown by Ch. 6—China’s Economic and Political Trends ● 153 the crackdown on the student demonstration reforms is inconsistent with these roles. An in January 1987). The election of leaders in objective of economic reforms is the reduction work units is encouraged, and competitive elec- of political influence in economic management. tions for local people’s congresses have been Administrative reforms have attempted to tried. The National People’s Congress has establish a clearer separation between Party emerged as a more active representative body and state. The ideological bases for policy are within which Government policies are debated shrinking, and ideology has become a less sa- and legislative proposals from the executive lient factor in Chinese society and public life. are modified. Finally, the press has become a Material benefits are increasingly available to more lively forum for the airing of different those with money, and the ability to earn opinions, although it has by no means become money has increased. The prestige and privi- free of political supervision.’ lege once attached to Party membership no longer seems attractive to large segments of At the center of the uncertainties about Chi- the population. nese political change is the question of the future role of the Chinese Communist Party. In It is difficult to conceive of the Party allow- the past, the Party has run the affairs of the ing itself to whither away. Major questions state—both macro- and micro-management of face the Party: Will it be able to do what no the economy, culture, and ideology-and was other Communist party has done, and define the sole route to material gain and upward so- for itself a new social role that will be compat- cial mobility. The environment created by the ible with modernization? Or, will it become an ever more conservative force, a drag on modernization, in the interests of maintaining its ‘Based on remarks by Professor Andrew Nathan, Columbia organizational integrity and control over the University at the SAIS China Forum of the Johns Hopkins School of Advanced International Studies, Washington, DC, society in the face of changes that render it Sept. 17, 1986. obsolete?

THE IMPACT OF TECHNOLOGY TRANSFER Impact on the Economy industries. Technology transfer from abroad can also be a force supporting the kind of in- Without technology from abroad, China will stitutional change sought by the reform pro- have a slow and costly road to modernization. gram. As illustrated in the Foxboro case de- However, technology is only one function in- scribed in chapter 4, and as noted in the World volved in reaching a more efficient economy. Bank’s analysis of the Chinese economy, ef- Shifting from an extensive to an intensive fective technology transfer often involves the growth pattern will also require managerial transfer of the modern management and gen- changes and an improved environment for eral business skills that China needs. g Since managerial decisionmaking. The economic re- the Chinese have a stake in importing technol- forms are clearly intended to alter the economic ogy, technology transfer can be (but is not nec- environment; if successful, they would be an essarily) a force for overcoming resistance to important step in moving toward an effective, reform. Successes in reform, in turn, can have intensive growth strategy. positive growth effects, and there is some, al- The experiences of Japan and the Asian beit still limited, evidence that China is begin- NICS readily demonstrate the importance of ning to realize increments of growth through foreign technology transfer to economic growth, especially in certain sectors of the economy; ‘The World Bank, China: Long-Term Issues and Options for example, consumer electronics and textile (kf’ashington, DC: 1985). 154 . Technology Transfer to China

program to an economy that is institutionally ill-prepared to receive and use the technology can lead to reduced growth and economic confusion, as the experiences of countries such as Poland illustrate. The importance of having a receptive institutional environment and the ability to assimilate technology and incorporate it into production is illustrated by the Asian NICS. The existence of these attributes in the latter countries, but perhaps not in China at the moment, should induce caution in comparing China’s current course with that followed by the Asian NICS.

Photo credit Eric Basques China has clearly had technology transfer ex- This modern subway train is being manufactured at the periences recently that have not gone smoothly. Changchun Passenger Coach Factory, It will be put in The transfer of Spey engine technology in the service on the Beijing Subway. 1970s, for instance, has not led to its effective utilization in Chinese production. The Baoshan “disembodied technical change” (increased steel complex, though now partially completed output not linked to increased equipment) re- and operating with Japanese technology, has sulting from reform and new technology.l” also run into a host of problems that have required extraordinary efforts to manage and Over the longer term, as the experiences of have been a source of ill feeling between China other East Asian countries illustrate, technol- and Japan., Serious problems are also evident ogy transfer can have a profound effect on the in such showpiece projects as the Volkswagen growth and modernization of an economy, in- Shanghai Santana venture and the AMC-Beijing cluding qualitative changes. One of the more Jeep operation discussed in chapter 4. In these important consequences of technology trans- and other cases, technology transfer has not fer indeed is likely to be in the improvement gone smoothly, and the efforts have not pro- of product quality, a change that is closely duced the expected economic effects. linked to the question of Chinese export expansion, discussed below. The benefits from Impact on the Political System technology transfer are more likely to become evident in the 1990s (sooner in some cases), The impact of technology transfer on China’s assuming that some of the basic institutional political future is an intriguing question. West- problems of the economy are solved. Growth ern observers often like to think that the com- over the short term is likely to depend on facing of modern technology will promote liber- tors other than technology transfer; for exam- alization, the implicit assumption here being ple, through high levels of investmentll and, that the division of labor and specialization as reforms succeed, by greater rationality in that are associated with much modern tech- economic decisionmaking. nology carry an imperative for pluralizing political arrangements as well. This maybe too Not all effects of technology transfer are simple an approach to an assessment of the positive. Adding an active technology transfer Chinese political future. — .—- IORock Creek Research, The Role of Technology Transfer, app. These implications cannot be considered 1 in vol. II of this report. without discussing people—the foreign sup- “Robert F. Dernberger, “China’s Development Strategy In- plier of technology and the Chinese managers vestment Financing Needs and Sources, paper presented to the Fifteenth Sine-American Conference on Mainland China, and officials who procure it. China’s quest for Taipei, June 1986. technology has made the foreigner a partici- Ch. 6—China’s Economic and Political Trends ● 155 pant in Chinese policymaking and thus a fac- On the other hand, in China’s recent history tor in Chinese politics. The opinions and anal- of interactions with foreigners, and search for yses of the foreigner often carry weight in foreign technology and investment, there is Chinese policy deliberations, and access to the evidence of positive political change. This in- foreigner can be a useful political resource for cludes greater attention to achievement cri- the Chinese decisionmaker. ” More generally, teria in the recruitment of leaders, efforts to the West and Western technology have great institutionalize a legal system, more rational prestige in China, and are seen as a source of approaches to policymaking, pragmatism re- guidance for the modernization program. placing ideology, moderation in the management of political conflict within the elite, and But there is ambivalence about the West, about the foreigner, and about foreign tech- a degree of liberalization, albeit within the terms of Marxism-Leninism. nology, as well. The West is seen as the source of corrupting ideas and values, and close relations with foreigners can be a liability as well Impact on Social Change as an asset. In contemplating the future impact of tech- The impact of technology transfer is also not nology transfer on Chinese politics, a central uniform; the distribution of the benefits from issue is the extent to which technology trans- it are uneven. The most notable differential is fer will contribute to social change, which will based on geography, with the coastal regions in turn effect the Chinese political system. One being more clearly the beneficiaries of the open approach to this question is to see the Den- door policy and the access it has brought to gist leadership generally in control of issues the goods of the foreigner. This privileged po- of liberalization and the impact of technology sition of the coastal region is a consciously cho- transfer. In this view, the liberalizations that sen part of the Chinese development strategy, have occurred can be seen as part of the politi- which sees these regions serving as a bridge cal and policy agenda of Deng and his fol- between the advanced technology in the inter- lowers. Forms of liberalization can be seen as national environment and the more technologi- means to combat the conditions, such as en- cally backward interior sections of the coun- trenched bureaucratism, that are viewed as try. While there now seems to be a general threats to the successful implementation of the acceptance of this policy, it has not come with- reform program. To simplify this argument, out objections from the interior. the Dengists are committed to modernization, including the importation of foreign technol- As with the impact on the economy dis- ogy. They realize that economic reform is cussed above, the impact on the political sys- needed to utilize foreign technology effectively tem could be positive or negative. China’s long and thus are willing to initiate political changes history of xenophobia, the force of national- to overcome resistance to reform. Technology ism, the potential for corruption resulting from transfer thus has an impact through the plan- interactions with the foreigner, and the differ- ning of the leadership. ential distribution of benefits of technology transfer all make for potent threats to domes- A second approach is to see technology tic political stability and to continuity in for- transfer as a force for social change that is eign policy. somewhat beyond the control of the elite. Tech- nology transfer in the context of reform is seen “%e Michel Oksenberg and Kenneth I.ieberthal Bureaucratic as a pluralizing force. As Chinese society be- Pofitics and Chinese Energy Development (14’ashington, DC: comes more complex because of technological U.S. Department of Commerce, 1986). changes, it has greater difficulty achieving cen- ‘ ‘This includes access to overseas education. See Committee for Scholarl~ Communications with the People’s Republic of tralized, comprehensive political controls. Ac- China, A Relationship Restored (J4’ashington, DC: National cess to foreign technology and investment by Academy, Ih-ess, 1986). an increasing number of organizations can be 156 ● Technology Transfer to China seen as empowering in the sense that it reduces terests or not. While the Western observer dependence on the Chinese state for necessary might consider the answer to this question to resources. be obvious–modernization cannot proceed without liberalization-a careful reading of Chi- Furthermore, certain requisites of success- nese politics would indicate that under certain ful technology transfer are more compatible conditions, some forms of liberalization might with a pluralistic, decentralized social order have negative consequences. than with a centralized, monolithic system. If China wishes to have the benefits of the tech- For, despite an image of monolithic, central- nology, it will have to accommodate these req- ized power, China is in many ways a polity in uisites. For example, Chinese approaches to which authority is fragmented. As noted in property rights, including intellectual property chapter 3, there are uncertainties in the author- rights, have been altered by the need for clar- itative roles of ministries vis-a-vis central plan- ity in proprietary claims technology. It is un- ners and the top elite, and of those of local gov- likely that China would have created a patent ernments vis-a-vis the central government. Other system, for instance, if not for the concern that areas of uncertain authority relations also without one, Western technology would be less point to problems of fragmented authority. available. The concern for patent protection, Modernization-induced change, including however, reinforces other trends in the Chinese reform environment that are in the direction the impacts of technology transfer, in principle could create problems for the political sys- of assigning property rights to individuals and tem in two ways. First, as a force eroding con- groups outside of the sphere of the state. This centrations of power (the liberalizing influences in turn is part of a trend toward the creation discussed above), technology transfer could of an economic system that is considerably lead to the further fragmentation of author- more independent of the political system. A ity. There is already evidence, for instance, that more autonomous economic system is thought in this latter interpretation to be a check on the combination of the open door environment and domestic reforms have produced delays state power and thus a force for a more liberal (approaching immobility) in decision making order. on certain large projects where foreign tech- These two perspectives—one stressing man- nology would be central, such as Three Gorges, aged political change from the top and the the hydroelectric project. ” other seeing political change resulting from so- At the same time, technology transfer, and cial and economic change from below—need economic modernization more generally, will not be regarded as mutually exclusive. There create a host of new social problems—new envi- is evidence for both interpretations. Perhaps ronmental insults, occupational dislocations the more significant observation, therefore, is and employment problems, new infrastructure that technology transfer is part of a complex process—involving active elite participation and social services requirements—that will re- and diffuse social change beyond the elite’s quire effective political responses. A case could be made that more, rather than less, concentra- control—which is forcing political change in tion of power and authority might be required, directions that could be interpreted as liber- and that without it, technology transfer could alizing. increase China’s problems of governability and It is impossible to say whether these trends political stability. will continue or whether on balance they are There clearly are dynamics of Chinese poli- a force for future political stability. There tics that are beyond the ken of the foreign clearly are other forces in Chinese political life observer, and that makes predictions and fore- that work against liberalization, but more importantly, there is the question of whether liberalization serves Chinese modernization in- 14 See Oksenberg and Lieberthal, op. cit, Ch. 6—China’s Economic and Political Trends ● 157 — — casts subject to considerable doubt. The po- coordinated and planner-coordinated systems litical changes in China since the late 1970s are simply too divergent.lG Socialist planners have been important, have pointed toward the are incapable of tolerating the wide fluctua- likelihood of continued stability, and have been tion in prices, for instance, that will charac- liberalizing to a degree. The increased inter- terize an effectively functioning market sys- actions with the outside world, including in- tem. To achieve the motivational benefits of creased technology transfer, have been com- a market system is to tolerate the use of ma- patible with those changes-the open door has terial incentives leading to significant income both helped and been helped by the domestic inequalities, which again will be incompatible political changes. The trend line therefore is with the socialist orientation. The priciples of encouraging. By implication, to support tech- economic efficiency underlying the market sys- nology transfer is to support the trend. tem contradict the “social contract” or “socialist ethical code” of the socialist system, However, Chinese politics have shown un- which stresses such values as the protection expected changes of direction in the past, and of the weak (rather than the value of competi- may again. In addition, the political role of tion), the interests of the collective (rather than technology transfer is complex. Modernization the individual), and full employment (rather can be a disruptive as well as a positive ex- than efficiency ).” perience. Ultimately, the question becomes whether or not China will be blessed by skill- In this view, the “half plan, half market” hy- ful and dedicated political leaders who can brid is seen as ultimately less desirable than guide the country around the pitfalls of tech- either the market system or the planner con- nological change while reaping the benefits of trolled system. In addition to contributing to that change. economic disequilibrium, the hybrid also contributes to a disequilibrium in public moral- Market Socialism ity. Individuals faced with the uncertainty of whether they are expected to conform to the The current direction of Chinese institutional norms of the marketplace or to the norms of experimentation involves greater use of decen- socialist morality become morally confused tralized market mechanisms to stimulate effi- and adopt a “live for the day’ mentality .18 The ciency and innovation as well as more atten- rise of corruption, which China has experienced tion to central planning controls. The basic since the initiation of reforms, maybe a result principles of socialist ownership are to be main- of this moral disequilibrium. tained, as are socialist fairness in distribution and socialist welfare and social security prin- The two views on the prospects for market ciples (although the mechanisms for provid- socialism in China-the sanguine and the skep- ing the latter may change). The sanguine view tical-may both fail to allow for the possibil- of China’s future assumes that these often con- ity, and indeed the likelihood, of more incre- tradictory elements in China’s institutional mental, less premeditated, changes in Chinese quest can, in principle, be reconciled into a Chi- institutions in response to Chinese conditions. nese form of ‘‘market socialism. Such changes may defy easy description and are less neat theoretically, but they are more The less sanguine view, drawn in part from typical of the actual workings of social analyses of East European experiments with systems. market socialism, is that the prospects for an institutional order that is “half plan, half market” are not promising. On certain key issues– “This argument has been made by Jan S. Pry byla. See, for instance, “Mainland China and Hungary: To Market, To Mar- prices, workplace motivation, property rights, ket ., .,” unpublished paper presented to the Fifteenth Sino- social security—the approaches of market- American Conference on Mainland China, Taipei, June 8-14, 1986. “Ibid. “’Cf., The W’orld Bank, op. cit., p. xxxiii. ‘pI bid. 158 . Technology Transfer to China —

Photo credtf A/an T Crane

With the new economic liberalization have come new marketing techniques including western style billboards.

Technology transfer will bean important fac- both cases, the impacts are likely to appear tor shaping these conditions in which Chinese contradictory. economic and political institutions evolve. To be effective, technology transfer would However, it should not be assumed that the seem to require the further marketization of “imperatives of technology’ will be determina- the economy, including more fully developed tive of institutions. The weight of evidence labor and capital markets, a price system that from Chinese experience and the experiences 19 provides macroeconomic decisionmakers with of other countries suggests otherwise. In- accurate economic information, and a further stead, the imperatives of technology should be clarification of property rights. The persistence seen as inclining institutional choices in cer- of an irrational economic environment (includ- tain directions, not all of which will be the ing irrational prices and irrational limitations same. on the efficient movement of capital and la- Technology transfer affects the evolution of bor) appears to affect adversely China’s abil- Chinese institutions in two ways: what the Chi- ity to select technology wisely and assimilate nese will have to do if technology transfer is it fully. to be effective, and the consequences for insti- At the same time, there are certain negative tutions if technology transfer is effective. In externalities associated with market trans- . .. —-—-— actions in technology that seemingly require “see Richard P. Suttmeier, “Science, Technology and China’s Political Future: A Framework for Analysis, ” paper presented strong administrative responses from the cen- to the Conference on China’s New Technological Revolution, tral authorities. These include the problems, Harvard University, May 1986. discussed in chapter 3, of the duplication of Ch. 6—China’s Economic and Political Trends ● 159 technology imports and of importing technol- At the same time, successful technology ogy that may already be available in China. transfer will strengthen the capabilities of cen- Central controls over the expenditure of for- tral authorities. Especially in areas such as eign exchange for technology are also appro- transportation, telecommunications, and data priate in light of the collective disadvantages processing, foreign technology should help the that result from an uncoordinated use of this state penetrate and control society more ef- scarce resource. fectively. The society it will want to control, however, will itself be more empowered and Other types of problems associated with neg- thus be in a better position to resist the pene- ative externalities can also be noted. These tration of the center. Whether these develop- would include the setting of technical stand- ments are constructive and progressive, or de- ards for imported technology and the estab- bilitating, depends on many nontechnological lishment of health and safety standards. In factors that are not likely to be determined in short, an effective technology transfer program the first instance by technology transfer. will require not only more decentralized mar- On balance, technology transfer should be ketization, but also more vigorous policy in- a constructive force in China’s future. It is terventions from a stronger central government, seemingly a contradiction. likely to make possible rapid improvements in the quality of China’s export goods, to become an increasingly important factor in Chinese Similarly, successful technology transfer is likely to be both a force for greater decentral- economic growth, and to be an important factor in overcoming major constraints on growth ization of Chinese society and a force for more and development caused by underdeveloped effective centralization. Decentralizing trends infrastructure and energy supplies. will result because successful technology transfer will make enterprises and other economic The impacts on the evolution of Chinese po- units more autonomous vis-a-vis central au- litical and economic institutions are likely also thorities and less dependent on them. Success- to be salutary, although there is much more ful technology transfer will entail networks of uncertainty connected to this prediction. As relationships between economic units and for- seen in chapter 3, China needs both more de- eign suppliers of technology, which will be very centralization and more effective centraliza- difficult for central authorities to control. tion, and technology transfer is likely to be a Often, the technologies transferred will be em- force for both. The great uncertainty is whether powering of lower level organizations, and they the nature of the current system, with its many will often require new forms of specialization economic and political irrationalities, will have that should be a force for greater economic and more of an impact on technology transfer than social pluralism. vice versa.

IMPLICATIONS FOR THE UNITED STATES AND THE WORLD ECONOMY It has been U.S. policy since the 1970s that one of the prominent modes of involvement. a friendly modernizing China is in the U.S. in- The implications of this involvement must be terest. Quite apart from any foreign involve- understood in order to judge whether it serves ment, China is undergoing major changes de- U.S. interests. signed to realize finally a century-long quest for wealth and power. The United States and One area where the implications of China’s other countries are now involved in these future course require rethinking is China’s in- changes in China, and technology transfer is temational economic role. China’s foreign trade 160 ● Technology Transfer to China

has expanded dramatically in recent years, al- During the next 15 years, Chinese products beit from a small base, and China clearly has are most likely to be competing with those of premised its current modernization drive on the NICS (including Singapore, Malaysia, Bra- active participation in the world economy. zil, India, Mexico, Thailand, Argentina, Hong China’s interest in membership in the General Kong, Taiwan, and Korea) in third country Agreement on Tariffs and Trade is indicative markets. Direct competition with either the of its growing interest in and commitment to LDCS or developed countries such as the U.S. international economic institutions. is less likely. One exception to this is that U.S. agricultural exports to Asian markets may suf- China’s export economy suffers from both fer from Chinese export expansion. technical and systemic inefficiencies. The economic system reforms, currency revaluation, China’s imports are heavily weighted toward and other incentives for Chinese producers to industrial supplies and producer goods rather export rather than sell to the domestic mar- than consumer goods and should offer attac- ket will help alleviate systemic inefficiencies. tive trade prospects for the United States. In Technology transfer will help with the techni- light of the above, and although Chinese ex- cal inefficiencies. Indeed, the main short-term ports will compete with some U.S. products consequence for economic performance of tech- of older industries in U.S. markets,zo it should nology transfer will be to improve the perform- be in the U.S. interest to see the expansion of ance of the export sector, mainly through Chinese exports. However, the U.S. share of qualitative improvements. the Chinese market has fallen, due in part to more aggressive marketing and more efficient China’s foreign trade potential is much export control practices in other countries. greater than its actual trade today. The rate of growth of China’s foreign trade has been Other problems also make the actual pros- greater than the overall rate of economic pects for Chinese exports less rosy than the growth, and this is likely to continue for the potential suggests. China’s interest in a more next 15 years. China’s exports have been ris- active participation in world trade does not ing at an average annual rate of 14 percent come at the best of times. Many of the mar- since 1978, and the value of exports now rep- kets in the advanced industrialized countries resents 7 percent of the gross national prod- are already vulnerable to pressures from im- uct. It is quite possible that by 2000, this lat- ports, and protectionist sentiments in places ter figure could be doubled. run high. In addition, the cost advantages Chi- nese products enjoy because of cheap labor If current trends continue, Chinese exports may not be enduring. New technological ad- will represent about 4.4 percent of world ex- vances in the advanced countries in industries ports by 2000. This percentage is comparable that were vulnerable to inexpensive imports to the current shares of such countries as Italy based on low wage rates could upset estab- and Canada. China’s considerable ability in re- lished patterns of comparative advantage in cent years to capture market shares has been the near future. due largely to its low prices, which are due in turn to its low production costs. The growth China’s rapid decline of foreign exchange of Chinese exports, and China’s penetration holdings has led to increasing interest in com- of foreign markets, has occurred during a defla- mercial credits. The Seventh Five-Year Plan tionary period in international trade. This fact expects $40 billion to $50 billion in financing also suggests that the potential for growth of of all kinds from abroad. As with foreign ex- trade has not yet been fully demonstrated. change, there has been some loss of central control over international indebtedness because As China’s exports have increasingly diversified, questions have arisen about whose products China’s will replace in which markets. ‘“A politically significant example is textiles. Ch. 6—China’s Economic and Political Trends ● 161

of the increasing financial role of organizations growth of U.S.-China trade and economic co- such as the China International Trust & In- operation in the short run, particularly when vestment Corp. (C ITIC). According to esti- the problems of foreign investment are also mates made by the Bank of Japan, China’s for- considered. Efforts to improve the investment eign debt by the end of the Seventh Five-Year climate are not likely to have rapid results. The Plan in 1990 could reach $49 billion. z’ appeal of joint ventures has faded for the moment, which is likely to slow technology trans- There is no consensus about the longevity fer and change the mode of technology trans- and severity of these problems. They have fer preferred by U.S. companies to licensing made the Chinese more insistent that in its agreements. trading relations, ways must be found to increase China’s exports. They are also likely to China continues to give evidence of want- lead China to seek more barter opportunities, ing to participate in the world economy and which could lead to more trade with the So- to reap the benefits of foreign investment and viet bloc. Such trade would reduce the pres- technology transfer. To do so, China must ex- sure on the use of hard currency reserves, port. It is likely that a number of bilateral and would be more insulated from the perturba- multilateral trade issues will result from Chi- tions of the international capitalist economy nese export expansion. These include the per- (e.g., the fall in oil prices), and would be more sistence in Chinese efforts to realize bilateral congenial to the operation of the centrally con- trade balances, a likely increase in Chinese use trolled, planned sector of the economy .22 of export subsidies and other forms of protectionism in China, the lack of transparency in China’s problems of adjusting to the inter- Chinese trade decisions, and the changeable- national economy are also likely to limit the ness and unpredictability of those decisions. The rise of protectionism on the U.S. side, already evident in the growth of antidumping “,?fainichi Daii~r Arews, Sept. 6, 1986, p. 6. cases brought against Chinese imports, further ‘‘}ruan-li YI’u, “Flconomic Reform and Foreign I;conornic Re- complicates the prospects for U.S.-China trade lations: Systemic Conflicts in a Theoretical Framework, ” paper presented at the Fifteenth Sine-American (’conference on and for U.S. participation through technology \lainland (’hina, Taipei, ,June 1986. transfer in Chinese modernization programs.

IMPLICATIONS OF A FAILED MODERNIZATION PROGRAM All developing countries are faced with very This chapter has suggested that the inter- tight constraints imposed by population pres- national community as a whole will benefit sures, environmental limitations, and pres- from China’s modernization, though problems sures from the international economy. The will emerge in certain areas. However, success- tightness of these constraints often puts enor- ful modernization is not guaranteed. The di- mous pressures on social institutions, making rect implications for the world economy if governance and the maintenance of domestic China’s modernization fails to meet expecta- stability difficult. tions are fairly easy to predict: China will be less of a market and less of a producer. The China is no exception to this observation. domestic implications are considerably more Indeed, many of its constraints are particularly severe. China’s leaders continue to be in complicated because the stakes are very high, a contest against demography and environ- both for China’s leaders and for the Chinese mental degradation, and they must race to population. keep from falling further behind the economic There is a distinction between a “failed mod- and technological progress of other countries. ernization program’ and a‘ ‘failure to modern- 162 Technology Transfer to China ize. ” China is already “modernizing” in the sense that China has been experiencing a series of societal changes. Examples are indus- trialization and the substitution of inanimate for animate energy, urbanization, increased literacy and life expectancy, the development of a science and technology base, establishment of and penetration of society by mass me dia. China’s modernization program, The Four Modernizations, is a conscious effort to give Chinese societal change new quantitative and qualitative dimensions that will enhance national wealth and power and individual well-being. The partial modernization experienced by China (albeit, unevenly distributed across China) has created expectations in the population that more will follow and that living standards and quality of life should improve. The increasing exposure experienced by many Also affecting the employment picture will Chinese to the lifestyles of Hong Kong, Tai- be the significant shift out of agriculture and wan, Japan, and the West fuel these expecta- other forms of rural employment to urban jobs. tions further. One of the requirements of a suc- Whereas 36 percent of the work force now lives cessful modernization program is to be able and works in cities and towns, this figure is expected to rise to 54 percent by 2000. The to respond to these expectations. Fulfilling 24 that requirement is a challenge to the politi- need for rural workers will decline. China, in cal system. short, will be much more of an urban society by 2000 than it has been. At the same time, the modernization that China has experienced has brought with it a The smaller cities and towns will feel the series of new challenges to the capabilities of most demands from the new job-seekers. Their the state. China’s problems of energy supply, capacity to respond to these demands remains urban transportation, sewerage, telecommu- unknown, but the scale of the problem will be nications, and housing are all more serious pre- large. As one analyst has put it: cisely because modernizing change has begun. Coping with the waves of peasants who These problems are likely to remain unsolved flock to urban areas looking for work will pose and to worsen if the modernization program extraordinary challenges to the social and is not successful. economic infrastructure of China’s small cities and towns. Not only will jobs for these peo- The problems associated with population ple be required; they will need housing, ac- growth and employment during the next 15 cess to medical care, transportation, schools, years (and beyond) will be particularly diffi- stores and a host of other services taken for cult. Between 1981 and 2000, the Chinese granted.zs working-age population will increase by about China’s ability to cope with the social dis- 250 million, with a probable increase in the la- ruptions of modernizing change will be en- bor force of 180 million. To provide employ- hanced by a growing economy and improvement for these new entrants into the labor force would require an average annual increase of 23 “Jeffrey R. Taylor, Employment Out]ook for China to the new jobs of 10 million. Year 2000, CIR Staff Paper No. 16 (Washington, DC: Center for International Research, U.S. Bureau of the Census, March “The World Bank, China: Long-Term Issues and Options 1986), p. 2. (Washington, DC: 1985), p. 185. ‘sIbid., p. 17. Ch. 6—China’s Economic and Political Trends “ 163 — ments in China’s political and administrative under the sway of an extremist leader, is more institutions. The state will clearly need addi- likely than present-day China to be a disrup- tional resources—for investments in human tive force for the regions around its periphery capital, social services, infrastructure, and the —especially on the Korean peninsula and in like—to smooth the transition to modernity. Southeast Asia. Such a China is also likely to A growing economy will make the task of ex- be more difficult to deal with on the Taiwan tracting these resources easier, as will politi- problem and on the future of Hong Kong. A cal and administrative institutions capable of more extremist China is likely to support Third fair and efficient extractions and the implemen- World insurgences and to be a more disrup- tation policies that will cushion the effects of tive force in international fora, such as the rapid social change. United Nations. In short, a China subject to the influences of political extremism as a re- A China not able to meet these requirements sult of a failed modernization program is likely is likely to be a China overflowing with indi- to be a considerably less constructive mem- vidual and collective frustrations. For the in- ber of the international community than the dividual, long-suppressed aspirations for a bet- present China. ter quality of life, were in the post-Mao period, would be frustrated again. For he society as A modernizing China must live with con- a whole, a failure to fulfill the the promises of stant risks of instability. Without technology the Dengist leadership for developing the na- transfer, however, China’s modernization pro- tion’s human and natural potential and thereby gram will be much more difficult to implement, instilling national pride, would be a disappoint- and a failed modernization program threatens ment of massive proportions. A society with to leave China with troubling national frustra- such frustrations would be a society suscepti- tions, to undercut the legitimacy of the refor- ble to the appeals of political extremism and mist coalition, and to expose China to the ap- to the dangers of political instability. peals of more radical political doctrines. Such a China would have less of a stake in a stable Domestic political extremism and political international order than does a China pursu- instability in China can have international im- ing its current course. plications. A politically unstable China, or one Chapter 7 Strategic Implications of a Modernizing China

Photo credit: Eric Basques The Great Wall at Ba Da Ling Pass, about 40 miles north of Beijing. For centuries, the wall was the main line of defense against northern invaders. CONTENTS

Page Technology Transfer and China’s Military Capabilities ...... 167 Military Capabilities ...... 167 Military Strategy ...... 169 Technology Transfers ...... 170 U.S. Policy Considerations ...... 172 Conclusion ...... 179 The Asian Security Environment ...... 179 China’s Security Interests and Foreign Policy ...... 183 Asian National Interest in China’s Modernization ...... 186 Further Issues ...... 190 Conclusion ...... 192

Box Box Page B. Spectrum Analyzers...... 176

Tables Table No. Page 15. Anti-Submarine Warfare Technology ...... 173 16. Anti-Submarine Warfare Technology: Criticality and Availability. ....175 Chapter 7 Strategic Implications of a Modernizing China

A more modernized China will also be a The “China factor” in U.S. strategic inter- stronger China, one that will have enhanced ests depends on: capabilities to pursue its interests in the in- 1. Chinese military capabilities, ternational arena. A central question for the 2. Chinese plans and expectations for mili- United States, then, is whether a stronger tary modernization in the context of over- China would be in the U.S. interest. Since tech- all economic development goals, and nology transfer aids Chinese modernization, 3. the role of technology transfer in Chinese thus strengthening China, are today’s trans- military modernization. fers likely to become tomorrow’s sources of regret? Are U.S. strategic interests, especially It is also important to consider prospects for in Asia, likely to be served by a stronger China the evolution of China’s foreign policy and the whose modernization has been aided by the possible implications for U.S. strategic inter- transfer of U.S. and other Western tech- ests in Asia. nologies?

TECHNOLOGY TRANSFER AND CHINA’S MILITARY CAPABILITIES Military Capabilities technology and defense industrial base capable of indigenously developing and producing Although the development of a modern de- advanced weapons over the long term. Limi- fense remains an important objective (military tations in financing and skilled manpower plus modernization has been officially ranked fourth the inability of the defense industries to mass on China’s list of modernizations), defense produce advanced weaponry have dictated this spending occupies a much smaller share of the strategy. As one expert observer puts it: “. . . gross national product (GNP) than a decade Even if it were possible, the defense establish- ago.1 China’s slow road to military moderniza- ment would have been overwhelmed by any tion does not overshadow its current strategy rapid introduction of advanced technology. No of introducing systematic wide-sweeping eco- ‘quick fix’ was plausible, even if it were seen nomic changes that will, over the longer term, as desirable. The deficiencies of currently de- improve military capabilities. Transfers of ployed People’s Liberation Army (PLA) hard- dual-use technology are important to that ware are worth noting. process. China’s conventional weapons are based on No official plan for defense modernization technology supplied by the Soviet Union in the has been announced, but it appears that the 1950s. China received military equipment and Chinese are attempting to improve combat ef- know-how, but when the Soviets terminated fectiveness in the short term while building a their assistance in 1960, China lacked a group of trained engineers and professionals capa- ‘China has, however, expanded funding for one part of its de- ble of designing a new generation of weapons. fense budget–strategic forces. See Ed Parris, “Chinese Defense Expenditures, 1967 -83,” in The Joint Economic Committee (JEC), China Economy Looks Toward the Year 2000, vol. 2, ‘Paul H.B. Godwin, “Overview: China’s Defense Moderniza- 1985, pp. 148-168. tion, ” in JEC, op. cit., vol. 2, p. 138.

167 168 ● Technology Transfer to China

China’s military industries remain unable to duction is likely to remain low.’ In 1982 a flight design new systems or serially produce from test of a submarine-launched ballistic missile foreign designs.3 China’s military weaknesses (from a diesel submarine) took place.’ While in communications, logistics, and basic oper- China’s nuclear fleet is likely to remain quite ations were apparent in its 1979 punitive ex- limited because of financial constraints, the pedition in Vietnam.4 flight test indicates that China will probably significantly increase its nuclear deterrent At present, China does not have the power force through the deployment of a seaborne, projection capabilities needed to sustain a suc- strategic, second-strike capability. cessful offensive attack on neighboring countries, and its forces are far inferior to those of The size of the PLA has been reduced by over either of the superpowers. 1 million during the past 6 years, but China still maintains the world’s largest military in China’s air force is dependent on obsolete 7 terms of personnel. Nevertheless infantry mo- interceptors and bombers that could not sur- bility is a major problem. Although the PLA vive long against modern air defenses. China’s has more tanks and armored personnel carriers air force includes more than 4000 fighters, but than the U.S. army, the ratio of personnel to these are modifications of foreign designs, pri- armed vehicles is approximately 10 times marily the Soviet MiG-19 and MiG-21. Much of higher than that in the Soviet army. PLA field the fleet lacks all- weather capability and night guns, rocket launchers, and heavy mortars are vision; speeds are generally subsonic. Most of all obsolete. Antitank guns and recoilless ri- the fighters are armed with cannons only. fles have short ranges. A major effort is now China’s aircraft factories lack the technology under way to streamline the PLA and to trans- and metallurgy needed to design and manu- form its role by improvements in training and facture sophisticated, high-yield jet engines. by encouraging military factories to produce The Chinese navy has only a few dozen de- for the civilian market.8 stroyers and frigates, many armed with STYX Because China would find it difficult today missiles that have a short range and radio-con- to retaliate against a surprise attack by the trolled guidance systems, making them vul- Soviet Union, high priority has been placed on nerable to enemy jamming. China’s more than building strategic forces. Significantly, this ef- 100 submarines are deployed in shallow coastal fort has been continued even during times of waters. Many of the craft are diesel powered, drastic political change. China’s more than 100 noisy, and limited in range. Lacking electronic medium- and intermediate-range nuclear mis- countermeasures and support systems, they siles constitute a modest arsenal by super- could easily be defeated by Soviet antisubma- power standards, but they provide China with rine warfare devices. enhanced political prestige and with some ca- China’s first of at least three nuclear-pow- pability to deter a Soviet attack.g Little infor- ered attack submarines, the Han-class, was 5Frieman, op. cit., p. 29, One Xia is now in operation and a launched in the early 1970s. In addition, a Xia- second is said to be near completion. class missile submarine (comparable in size to ‘David G. Muller, Jr., China as a Maritime Power (Boulder, CO: Westview Press, 1983), p. 165. the British Polaris but developed largely in- ‘See June Teufel Dreyer, “The Reorganization and Stream- digenously) was launched in 1981. It has an- lining of the Chinese People’s Liberation Army, ” for 15th Con- tiquated sonars and guidance systems as well ference on Mainland China, June 8-14, 1986. The International Institute for Strategic Studies (11SS) in London estimates that as problems with the nuclear plant that appear the total size of the PLA was 3.9 million in 1985-86, of which to have kept it in the shakedown phase. Pro- about 2.9 million were in the army. See 11SS, The Military 13al- ance, 1985-86, p. 113. ‘Opinions differ sharply as to whether the PLA will be plagued by resistance to such programs or whether it can be a “van- 3Wenciy Frieman, “National Security Risks of Dual-Use Trans- guard” in the modernization process. See Dreyer, op.cit.; and fers to China, ” Science Applications International Corp., July Monte R. Bullard and Edward C. O’Dowd, “Defining the Role 7, 1986 (app. 6 in vol. II of this report). of the PLA in the Post-Mao Era, ” Asian Survey, June 1986. ‘Paul H.B. Godwin, “Overview: China’s Defense Moderniza- ‘Robert G. Sutter, “Chinese Nuclear Weapons and American tion, ” in JEC, op. cit., vol. 2, p. 137. Interest—Conflicting Policy Choices, ” in JEC, op. cit., vol. 2, p. 170. Ch, 7—Strategic Implications of a Modernizing China 169 mation is available about performance or accuracy, but it is generally agreed that China’s intercontinental ballistic missiles (I CBMS) are liquid fueled, requiring a long lead time for launch preparation. Today, China has only a 1 handful of ICBMS capable of reaching the United States. Nevertheless, its strategic program is a‘ ‘pocket of excellence’ in its defense sector, one that testifies to the maxim that significant developments are possible when a program is given high priority. At the same time, it should be noted that PLA equipment has proven adequate for most important military functions undertaken since 1949. China does not need the most technologically advanced systems in all areas to maintain a position as a regional power. China’s defense expenditures are, moreover, of significant value, 1° and its extensive defense industrial base has produced large amounts of conventional arms. These weapons, while unsophisticated when compared with those of the two superpowers, are selling well on the international market, particularly to developing coun- \ tries. ” China’s reported arms sales to both Iran I and Iraq suggest that its arms export policies may be a significant factor in some Third World conflicts. China may also extend its in- Photo cred(( X/nhua News Agency fluence in space-related activities, as indicated by its offers to launch foreign satellites. The Long March 2 rocket at the J iuquan (northwest China) launching site. This two-stage, liquid fuel rocket first flew successfully in November 1975 and is used Military Strategy to place payloads in low-Earth orbit. Sweden’s Mail star may be launched by a Long March 2. China’s overall military strategy remains a subject of debate in the West, but deterring Threat assessments appear less pessimistic a Soviet invasion remains the top priority. Chi- than they were before the death of Mao. A new nese military planners also intend to improve strategy called ‘People’s War Under Modern their ability to conduct military operations on Conditions” features less emphasis on mobile their borders and to ensure coastal defense. and more on positional warfare, less on luring deep and more on developing capabilities to counter a front-line offensive threat.12 China ‘“RIPS, Asian Security 1985, pp. 77-78: China’s defense bud- seeks not only to deter Soviet aggression, but get is now exceeded by that of Japan. also to develop a reliable strategic retaliatory 1‘Estimates of the value of China’s arms sales vary. See Claire 3 Hollingsworth, “Your Friendly Chinese Arms Merchant, ” Wall capability in case deterrence breaks down.1 A Street Journal, June 17, 1985 for an estimate of $1.6 billion in costly “people’s war” of attrition would be Chinese arms sales in 1984 alone. See also Anne Gilks and Ger- ald Segal, China and the Arms Trade (New York: St. Martin’s Press, 1985). According to one estimate, China became the fourth ‘zSee June Teufel Dreyer, “The Streamlining and Reorgani- largest arms exporter in 1986. See Michael R. Gordon, “War zation of the Chinese People’s Liberation Army, ” paper pre- in Gulf Spurs China’s Arms Export Role, The Washington pared by International Studies Association, March 1986, p. 8. Post, May 19, 1987. 13 Sutter, op. cit., p. 179. 170 ● Technology Transfer to China used today only as a last resort. Instead, China import weapons on a large scale. Nor does it seeks to develop the conventional and nuclear seem likely that China would readily turn to capability to defeat an invader. While the fu- foreign suppliers for complete weapon systems. ture shape of China’s strategic forces is an China’s limited importation of military tech- unknown, gradual modernization of existing nology is guided by the goal of improving in- forces is expected. A quick strategic buildup digenous design and production capabilities could alarm both superpowers. Uncertainty re- over the long term. See chapter 8 for a discus- mains in the West, however, about the speed sion of U.S. military sales to China. and type of military modernization planned for In contrast to purely military sales, dual-use China’s strategic forces. technology transfers have expanded markedly during recent years. Theoretically, such dual- Technology Transfers use exports could contribute to military mod- Given China’s broad range of modernization ernization. A powerful computer, for example, goals and its limited financial and skilled man- could be used to improve the efficiency of a power resources to assimilate technology, it military or a civilian production facility. How is not surprising that military imports have have these transfers affected China’s military been limited during the past decade. Western capability? observers have been unable to identify an over- During 1985, U.S. exports of computers and arching theme that guides China’s acquisition office machines to China were valued at more of foreign weapons systems.14 China’s few mil- than $187 million.17 Table 8 in chapter 4 pro- itary acquisitions in the past decade have vides an overview of the expanding values of spanned the gamut of mission areas, as indi- licenses granted for exports to China during cated in table 2 of appendix 6, volume II. recent years. Electronic machinery imports, Despite this apparently unsystematic ap- particularly computers and integrated circuit proach to foreign weapons acquisition, signif- manufacturing technology, have been a par- icant incremental changes can be discerned. ticularly prominent growth area as shown in The T-69 tank, an upgrade of the T-59, includes the licensing data. Imports of dual-use tech- a foreign-made, infrared searchlight and laser nologies came from a wide array of supplier range finder. Electronic improvements in the countries, and a number of Chinese organiza- F-8 will also result in incremental changes if tions were involved. implemented as planned. Generally speaking, Most dual-use imports are imported by ci- importation of foreign military technology has vilian end-users in China, but it would be a mis- been geared toward marginal improvements take to assume that the military could not ac- in already existing Chinese military systems. quire them. On the other hand, it is not clear Purchases have often been small, represent- that military factories would necessarily be ing in many cases “samples” for study .15 able to assimilate and use such imports suc- Prospects for expanded procurements of foreign military weapons have undoubtedly im- ““Dual-use technology” has both military and civilian appli- proved in recent years. However, China will cations. Much advanced technology today falls into this cate- probably continue to find it too expensive to gory. The United States controls exports of such technology through required review of export licenses, as outlined in the 140ne explanation for this lack of coherent strategy is that CCL. For purposes of this study, dual-use technologies of par- some parts of the Chinese bureaucracy appear more eager to ticular concern are included in the technologies and products import foreign weapons than others. There is a natural diver- that today require interagency and COCOM review for export gence in perspective between the Chinese factories producing to China. As discussed in ch. 8, U.S. policies have shifted dur- antiquakd hardware and the end users attracted to technologi- ing the past 7 years to loosen restrictions on exports to China, cally advanced foreign products. There is also a sharp diver- but many high-technology products still require such reviews. gence between the strategic programs, where importation is vir- “U.S. Department of Commerce trade data. During the same tually precluded, and China’s conventional force needs. year, the U.S. Government issued licenses for $3.8 billion in “International Institute for Strategic Studies, The Military computer exports to China. Clearly, in many instances final ship- lhhmce 1986-87 (London: 1986), p. 140. ment never occurred. This discrepancy is analyzed in ch. 8. Ch, 7—Strategic Implicafions of a Modernizing China . 171 cessfully. Nor does the range of imports sug- materials technology, precision testing equip- gest a strategy designed to target dual-use im- ment, and the clean-room facilities required for ports to a few key military operations. mass production of integrated circuits. (The circuits are vital to the manufacture of sophis- The question of military access to dual-use ticated electronic systems necessary to up- technology hinges centrally on the degree of grade PLA command, control, and communica- overlap between civilian and military produc- tions.) Nor does China have the capacity to tion. All of China’s six major ministries in- produce the metal alloys required for advanced volved in weapons-related production are also airframe construction. Although China is responsible for producing civilian products. richly endowed with metals such as nickel, The Ministry of Aviation and the China State titanium, molybdenum, magnesium, and co- Shipbuilding Corp. build planes and ships, for balt, China’s factories have been unable to en- example, for both civilian and military uses. sure the requirements for processing high- As in the United States, many defense facto- purity metals. ries are managed by civilians. Similarly, China’s premier research establishment, the Chinese Regardless of whether or not the military Academy of Sciences, has been strongly in- factories will effectively make the transition volved in the strategic program and in avionics to civilian production, the effect of current re- and aircraft research and development. forms (if implemented) will be to blur further the distinction between civilian and military Although military factories do have some production. This will make it even more diffi- advantages over civilian factories (e.g., in cult for foreign suppliers to set constraints that their priority for acquiring resources), there is limit use of their technology by the military. no evidence that they have superior capability across the board. Even if China’s military Military needs are probably factored into the can obtain foreign advanced technology, his- purchases of foreign technology and equipment tory suggests that it will not be an easy task by the machinebuilding industries, though not to assimilate it. This is illustrated by the case through any monolithic targeting strategy like of dual-use transfer to the military involving the one developed by the Soviet Union to ob- the Spey jet engine. Despite the fact that it tain advanced Western technology. The Na- was a landmark project, the factory never be- tional Defense Science, Technology, and Indus- gan serial production. A number of factors un- try Commission (ND STIC), however, reviews doubtedly contributed to this situation, but requests for foreign technology above certain the result was that the Chinese did not fully dollar amounts to determine priorities and assimilate the Spey technology so that they whether Chinese-made equipment could be never began manufacture. substituted, thus ensuring that military require ments are at least taken into account in major Moreover, examples of successful reverse- foreign technology acquisitions.’” The China engineering by the military are few. China’s Defense Science and Technology Information production system is plagued by systemic Center was set up a decade ago to monitor for- problems that limit productivity and reduce eign technology developments for the military. the potential effects of technology transfer domestically. China faces a number of obstacles The conclusion that follows from this anal- to the full assimilation of foreign technology ysis is that the military could in principle ob- in areas important for military production: tain dual-use technologies, but would not nec- China does not have adequate semiconductor essarily be in a better position than a purely

‘“See, for example, K.C. Yeh, Industrial Innovation in China M’ith Special Reference to the Metallurgical ]ndus.try (RAND ‘sSee U.S. Department of Defense, Soviet Acquisition of Note), May 1985. Yeh notes that by the early 1980s the ratio Militaril-v Significant 14’estern Technology: An Update, Sep- of scientific and technical manpower to total employment in tember 1985, for a description of the Soviet targeting effort. the defense industries was three times that for the country as Wee Frieman for a discussion of the role of the NDSTIC and a whole. its interaction with various ministries, pp. 10-19. 172 . Technology Transfer to China civilian factory to assimilate them. Nor is there defend itself or launch attacks against neigh- evidence that past dual-use transfers have led boring countries. Because the United States to significant improvements in China’s mili- and the Soviet Union will continue to improve tary capability .2’ their own military capabilities, however, China stands little chance of catching up with either On the other hand, the cumulative impact of the superpowers over the next 30 years. of dual-use transfers will probably be notice- able in China’s military production by the year 2000. While the most significant and dramatic U.S. Policy Considerations improvements in China’s military capability U.S. policies concerning transfer of dual-use may occur through military imports, dual-use and military technologies are based on assess- transfers will permit gradual overall improvements of myriad factors, among them, poten- ments in production capability. More specifi- tial risks or benefits to U.S. national security. cally, raising the technical skills of the work- Current policies reflect an evaluation that force, upgrading numerical and quality control, transfers of most dual-use technologies are un- and improved management and manufacturing likely to affect China’s overall military capa- techniques should eventually lead to better bility significantly in the near term. Therefore, production in military as well as civilian fac- with improvements in bilateral relations has tories. come a loosening of U.S. export restrictions. Over the short term, China faces such a wide As discussed more fully in the next chapter, array of shortcomings in its military that most controls are maintained on the most sensitive imports of sophisticated dual-use technologies technology exports. are likely to result in improvements only on Military transfers (to date, few in number) the margin. Unlike the Soviet Union, where are guided by the principle that military co- a single dual-use technology may fill a critical operation is a natural part of the bilateral rela- hole in a modem military system, China’s more tionship and that improvements in Chinese air extensive needs cannot be effectively addressed defense and antiarmor capabilities can help de- in this way. In China, however, incremental ter the Soviets without threatening China’s progress across the board may well be coupled non-Communist neighbors. U.S. policy on mu- with substantial improvements in key areas nitions restricts exports that would improve such as launch capabilities for strategic weap- China’s capabilities in key mission areas: nu- ons. These developments will surely heighten clear weapons design, antisubmarine warfare, China’s role, particularly as a regional power electronic warfare, intelligence gathering, and in Asia, during the 20th century. the projection of power (Table 15 lists the tech- Looking ahead to the year 2000, many dual- nologies involved in the anti-submarine war- use transfers carried out over the 20 years pre- fare mission area.) vious can be expected to contribute to an over- The limited scope of U.S.-China military co- all upgrading of China’s military capability. operation is illustrated by the scope of gov- China cannot emerge as a military superpower ernment-togovernment sales through the For- on par with the United States or the Soviet eign Military Sales program.22 Despite a host Union by 2000, but if it succeeds in its overall of official visits of defense-related officials from economic modernization program, it will be both countries, many observers believe that poised to make significant leaps in overall mili- military cooperation will proceed slowly in the tary capability thereafter. Even before that near term.23 The trend so far has thus been for time, improvements in key areas of military operations or in logistics and transportation 22The Foreign Military Sales program has been permitted to may occur that will improve China’s ability to make sales to China since 1984, but few have yet occurred. 23 Kerry B. Dumbaugh and Richard G. Grimmett, U.S. Arms Sales to China, Congressional Research Service Report No. 21 See ch-8 for discussion of dual-use sales to China’s military. 138-F, 1985. Ch. 7—Strategic Implications of a Modernizing China ● 173

Table 15.–Anti-Submarine Warfare Technology

Anti-submarine warfare (ASW) consists of those warfare elements that result in the detection, identification, and destruction or disabling of an enemy submarine. ASW can be conducted from any suitable “’platform” from the air, sea surface, or from another submarine. The basic functions needed to successfully conduct the ASW mission are the same for each platform and are described below. Functions: 1, Detection of the enemy submarine by either acoustic or nonacoustic methods. 2. Classification determination of the type of target. 3. Localization target motion analysis and contact management. 4. Approach to the Target closing in on the submarine to within range of one’s own ship or aircraft weapons. 5. Weapon Deployment (Launch) the actual attack. 6. Evasion and Reattack activities performed if necessary. 7. Related Functions tactics such as mine avoidance, mine deployment, and surveillance that are performed as necessary, Although the basic required ASW functions I isted above are always the same, the complexity and difficulty of each of these elements varies from case to case and from platform to platform. Technologies: The technologies required to accomplish the above functions effectively span a large range of engineering and scientific disciplines. They can be categorized as follows: 1. Mechanica/ Engineering: propulsor design, low-noise machinery, low-speed turbines, bearing design, and quiet weapon launch design. 2. Hydrodynamics: hull design (for speed), boundary layer control theory, and pipe-flow design. 3. Materia/s Engineering: corrosion-resistance technology, ceramic design, elastomer technology, lightweight structure development, composite materials, and sensor technology. 4. Acoustic Engineering: sonar dome/outer decoupler design, transducer design, baffle design, machinery sound isolation, quiet weapon launch design/propulsion, acoustic miniaturization, and damping material design. 5. Sonar Design: algorithmic development for classification techniques, acoustic correlation techniques, tracker design, contact motion analysis techniques, beam forming techniques, spectrum analysis, adaptive noise cancellation, transient analysis, automated detection techniques, automated classification techniques, automated trackers, and adaptive processing. Additional technologies involved in sonar design are passive ranging techniques, multi path processing techniques, weapon guidance techniques, acoustic performance prediction techniques, environmental sampling techniques, active sonar processing techniques, low probability of intercept concepts, and satellite environmental observation. 6. Power Engineering: high-density, power-pack design; small-size, high-power train design; and high-impulse/exotic fuel design. 7, Computer Design: bus/local area network design, spectrum analyzer design, microelectronic design, beamforming design, high-speed mathematics processor design, minicomputer design, and transient processor design. 8. Graphic Engineering: high-speed graphic techniques, color/bit plane graphics, large-field graphic design, and man- machine techniques. 9. Warhead Engineering: shaped-charge techniques, fusing design, and high-explosive technology. 10, E/ectrica/ Engineering: power engineering, pulse-forming design, and high power/rapid transient design. 11, /Vonacoustic Engineering: magnetic anomaly detection technologies. It is clear that there is no one ASW technology; capabilities are required across a broad spectrum of engineering and science. Some technologies are critical in the sense that if their performance is substandard, the whole ASW system is significantly affected. It is necessary to conduct each stage of an ASW attack adequately to be successful. On the other hand, there are degrees of successful implementation of each stage. Each increased level of sophistication will have a higher level of success I n ASW, but there are many different levels that can be successful. SOURCE Adapted from “Assessment of ASW Technology Transfer to the People’s Republlc of China, ” contractor report prepared for OTA by Global Associates, Ltd Alexandra VA Dec 17 1986 rapidly expanding sales of dual-use technol- China were to import greatly advanced radars ogies, coupled with increasingly frequent mil- and electronic countermeasures (above those itary visits and infrequent military sales (e.g., needed for air defense), the ability of the air the avionics package for the F-8). force to mount offensive attacks against neighbor states would be strengthened. The navy’s If controls are further relaxed, the key ques- capabilities could be upgraded through irn- tion from a national security perspective is: proved propulsion systems, electronic surveil- Which technologies currently restricted could lance systems, and air cover. Improvements make a significant difference in China’s mili- in ground force equipment, however, would re- tary capability if transfers were permitted? If main of limited value in engagements along 174 ● Technology Transfer to China the borders unless more effective air cover and Below a certain level, a particular export li- naval support were available. China’s ability cense application for equipment or technology to project force thus depends on improvements is considered to be in the green zone because in those areas in particular. it could not contribute to a military system that would be of concern. Applications involv- Possibly the most significant changes in Chi- ing equipment or technology above that level nese military capability would accompany are reviewed on a case-by-case basis and retransfers of technologies that improved its ferred to other agencies. A key policy decision strategic nuclear deterrent. For instance, tech- is under what conditions should these appli- nologies that improve China’s missile target- cations be approved. Another is where to draw ing and real-time imaging from satellites could the cutoff line for technologies that will not significantly affect China’s military capability. be exported under any conditions. These judgments are based on a general These points are illustrated by the handling assessment of China’s military requirements. of spectrum analyzers, one of the critical, dual- In practice, export administrators make decisions about the risks of transferring dual-use use technologies for ASW, described in box B. Hewlett-Packard is a major manufacturer and technologies on a case-by-case basis. In each exporter of spectrum analyzers. It offers three case, it is necessary to ask how the transfer real-time models of the type appropriate for could affect China’s military capabilities. ASW use. Model 3561A requires about 170 For example, anti-submarine warfare (ASW) milliseconds (ins) to calculate 512 lines, well is one of the key mission areas mentioned within the green zone. However, recent export above. Until such time as a political decision applications have been handled by the Depart- is made that enhancing China’s ASW capabil- ment of Commerce (DOC) as above the green ity will not compromise U.S. national security, zone. Model 3562A is much faster at 2048 lines technologies that would contribute to ASW in 50 ms. Model 3565S is a multichannel sys- must be controlled. However, many different tem with a computational rate that varies de- technologies are involved in ASW, as described pending on configuration. Its status is unclear. in tables 15 and 16, and a large fraction are None of these models would be used as the also used for commercial purposes. Those tech- prime technology in a U.S. ASW system, but nologies useful only for ASW are obviously 3562A is considered quite fast. Similar, though candidates for strong control (essentially, red probably not quite as sophisticated, equipment zone), whereas it would serve no purpose to is made in other countries, including Germany control those that are not critical or are read- and Japan. ily available commercially. The difficult deci- If the green zone were enlarged, applications sions involve technologies that are critical but which now have to be referred to the U.S. De- available to some extent (group b in table 16). partment of Defense (DoD) and to the Coordi- An additional complication arises because nating Committee on Multilateral Export Con- few technologies come in one form only. There trols (COCOM) might be eligible for expedited is generally a range of sophistication available. licensing. One approach would be to include In most cases, military systems incorporating models faster than the present speed of 512 the latest, most sophisticated versions of tech- lines in 50 ms. Models 3561 and 3565 (under nology have the greatest capabilities. More most configurations) could be placed well in limited versions of the same technology may the green zone with lttle ambiguity. The Na- be of little concern (e.g., ASW systems that tional Council for U.S.-China Trade has pro- can detect noisy submarines but not American posed an alternative change for Commodity subs, which are very quiet). This factor requires Control List 1529 that would make all spec- criteria to be set based on critical characteris- trum analyzers green zone if they have a real- tics of the technology (e.g., speed of operation). time rate of 10 kHz or less. This criterion would Ch. 7—Strategic Implications of a Modernizing China 175 — —.——

Table 16.—Anti3ubmarine Warfare Technology: Criticality and Availability —— a. Those technologies that are critical to ASW and are c. Those technologies that are critical to ASW but that not commercially available are candidates to be com are so available commercially that controls would be trolled. futile. Propulsion Design Corrosion Resistance Low-Noise Machinery Design Ceramic Design Sonar Dome Elastomer Technology Transducer Design Machinery Isolation Classification Techniques/Algorithms Spectral Analysis Algorithms Acoustic Correlation Algorithms Acoustic Performance Prediction Techniques Contact Motion Analysis Environmental Sampling Techniques Tracker Design Algorithms High-Speed Math Processor Design Passive Ranging Techniques Minicomputer Design Weapon Guidance High-Explosive Technology High-Density, Power-Pack Design d. Those technologies that are not believed to be critical Small-Size, High-Power Train Design today but may be in the future. Exotic Fuel Design Transient Processor Design Power Engineering Satellite Environmental Observation Multi path Processing Techniques Low-Probability -of-Intercept Techniques Active Sonar Processing Adaptive Processing b. Those technologies that are critical to ASW and are Quiet Weapon Launch Design not commercially available are candidates to be con. Lightweight Structure trolled. However, a lesser technology will provide Sensor Technology either a significant ASW capability without these tech- Quiet Weapon Propulsion niques or a more primitive version of the technique. Acoustic Miniaturization Low-Speed Turbines Adaptive Noise Cancellation Bearing Design Transient Analysis Baffle Design Automated Detection Algorithms Beamformer Techniques Automated Trackers Algorithms Local Area Network Design Automated Classification Algorithms Spectrum Analyzer Design Hull Design Microelectronic Design Boundary-Layer Control Beamformer Design Pipe-Flow Design High-Speed Graphic Techniques Damping Material Design Color/Bit Plane Graphics Man-Machine Techniques Shape Charge Techniques Large-Field Graphic Design Fusing Design Pulse-Forming Design Magnetic Anomaly Detection Rapid Transient Design ——— SOURCE Adapted from “Assessment of ASW Technology Transfer to the Peo Ple’s RePubllc Of china, ” contractor report prepared for OTA by Global Associates, Lid - Alexandra VA, Dec 17, 1986 be easier to relate to specific equipment than that some sales are now lost when license ap- are the present criteria. plications are mistakenly treated as above the green zone. Raising the limit would make this While it is obvious that either change would less likely for those models. As of January ease the burden on DOC and exporters such 1987, applications were pending for more than as Hewlett-Packard, the degree to which it 60 days for 170 spectrum analyzers of all types, would increase sales is not easily determined. but only a few were real-time analyzers. Typi- China is unlikely to start buying many more cal prices for spectrum analyzers are in the spectrum analyzers for commercial purposes range of $10,000 to $40,000. If the total sales just because it can get prompter delivery with to China of real-time spectrum analyzers were less licensing uncertainty. In so far as the on the order of $1 million per year, liberaliz- United States is more stringent in approving ing the limits might add as much as several borderline applications than other countries, hundred thousand dollars. moving some models to the green zone would improve American competitiveness. However, The other half of the equation–the effect of it is not clear that this has been an important liberalizing controls on China’s military-is no factor for spectrum analyzers. It is possible easier to answer. Even quite sophisticated 176 ● Technology Transfer to China

BOX B.—Spectrum Analyzers Spectrum analyzers are electronic instruments used to display and measure the frequency and amplitude of electromagnetic waves. They are used by industry for vibration analysis of machinery or in the manufacture of electronic equipment such as disk drives, and other applications. There are two types of commercially available spectrum analyzers. The “swept tuned” analyzer has fewer restrictions for sale to China, and, not being applicable to ASW, will not be discussed here. The “FFT-based” spectrum analyzer can be used for ASW because it is faster in the required frequency range. In their simplest form, spectrum analyzers convert an electromagnetic signal into a series of sine waves through a process known as Fast Fourier Transforms (FFT). If an ordinary power line l is analyzed, the spectrum analyzer shows essentially a single sine wave at 60 HZ. A more complex signal would be shown to be composed of several or many sine waves of different frequencies and energy levels. The pattern of these component sine waves reveals much information about the original generation of the incoming signal. Spectrum analyzers can operate at low frequencies (approaching zero Hertz (Hz), commonly referred to as direct current), up to microwave frequencies of 300 GHz. Current technology does not permit a single instrument to operate over this entire range so spectrum analyzers are designed to operate over specific ranges, such as O to 100 kHz or 6 to 50 kHz. In addition to operating over different frequency ranges (bandwidths), models differ in the accuracy and resolution with which they measure the amplitude and frequency of input signals, in their processing speeds and capabilities, in programmability, and in the number of signals they can analyze at any given time. The major concern in determining whether a spectrum analyzer should be subject to export restrictions is whether it can make realtime” measurements. That is, whether the instrument can continuously acquire and transform rapidly changing data (e.g., voice signals) fast enough that no data is lost or ignored. Many commercial spectrum analyzers can make real-time measurements on data that changes up to 10,000 times a second (i.e., 10 kHz). Some are capable of faster operation. As noted in tables 15 and 16 on anti-submarine warfare, spectrum analysis is a key part of the sonar system that detects and cJamifies the target. Each type of submarine produces acoustic emissions which are characteristic of ita machinery and hull design. These emissions are received and displayed on a spectrum analyzer, where they can be compared with known emission patterns of various submarines to identify the type. Real-time spectrum analyzers are included in Commodity Control List (CCL) category 1529, which has an advisory note “licenses are likely to be approved for export to satisfactory end-users in the People’s Republic of China of the following equipment:. . , spectrum analyzers employing time compression of the input signal or Wet Fourier Tmnsformtechniqyesnot capable of: l) Analyzing signals with a frequency of greater than 100 kHz if the instrument uses time compression, or 2) Calculating s12 complex lines in leas than 50 ms [milliseconds].” The latter requirement says in effect that a spectrum analyzer is green zone if it is not capable of resktime analysis above about 10 kHz, but putting this criterion into practice is not straightforward. There appears to be room for disagreement on whether qwcific models comply. The Departmant .of Commerce reports that it has been able to get spectrum analyzeds approved for export to China that have been as fast as 512 complex lines in 4 millisecon& This represents a de factp red line, at least at present. Ch, 7—Strategic Implications of a Modernizing China . 177

The question on the military implications comes down to whether the United States cares if China has access to a large number of spectrum analyzers with capabilities somewhat above those in the present green zone. Several viewpoints can be taken. A moderate relaxation of the 50 ms criteria (perhaps to 20 ms) or a change to the 10-kHz real-time bandwidth criterion would not contribute to ASW capabilities that would interfere with U.S. submarine operations. Similarly, new U.S.S.R. subs are much quieter than older ones and presumably would also not be vulnerable to such a system, but Soviet planning would be complicated if it had to replace older subs patrolling the China coast with new ones to evade the new ASW system. However, Taiwan has several older subs that could be jeopardized in the event of an attempt by the mainland to forci- bly reunite the country. Thus a decision on revision of export controls is a function of technology, political questions, and military strategy. Photo cred(t Hewlett Packard Given the obvious weaknesses of China’s The Hewlett Packard model 3562A dynamic signal analyzer is being used for spectrum analysis of military, there are many dual-use technologies electronic equipment. This model is too fast and (particularly those that improve defensive ca- sophisticated to qualify under the present pabilities) now restricted that could be trans- green zone criteria. ferred without significant effects on China’s position vis-a-vis other Asian countries. Some spectrum analyzers have already been sold to types of dual-use technologies however, have China, though only after the license applica- not been transferred, but could have wide- tion has been approved by DoD and COCOM spread and significant effects on China’s mili- (taking into account the end user, intended ap- tary capability if successfully adapted and as- plication, and the capabilities of the particu- similated. lar model in question.) One such model was sold to a People’s Liberation Army hospital. How- Consider a hypothetical Chinese request for ever, design and manufacturing information a supercomputer. Powerful computers such as is unlikely to be transferred, and spectrum the Cray-2 are used in processing large amounts analyzers would be extremely difficult for of data (satellite imaging and acoustical intel- z China to reverse-engineer and manufacture. ligence). ’ But the Chinese would not neces- The concern over the export of equipment is sarily be able to use a supercomputer effec- that China could divert these relatively sophis- tively for those purposes if they were to obtain ticated spectrum analyzers (along with other one in the near future. Chinese scientists and equipment) to develop a greatly enhanced technicians would need complicated software ASW system. The present system provides and highly specialized algorithms to use a su- some control over the numbers exported to China and information on their whereabouts, “The Chinese-made supercomputer called the Galaxy does thus limiting the number that China could di- not compare with the Cray-2 in speed and power as discussed vert to military applications. in app. 2, vol. II of this report. 178 ● Technology Transfer to China percomputer for such purposes. Chinese com- In the near term, U.S. export administrators puter scientists might be able to produce use- may find themselves pulled in two directions. ful software for specialized purposes such as In light of the many weak points in China’s nuclear weapons design, but for many years military, the transfer of small numbers of items it would not be as sophisticated and powerful alone may not appear to pose a significant as that used in the United States. A variety threat to the United States. Moreover, a of safeguards (presence of U.S. technicians friendly China more able to deter Soviet ag- around the clock, repairs and maintenance by gression may be seen by the United States and U.S. personnel, no dial-up capability from other other Asian countries as more an asset than machines) could be used to limit unauthorized a liability. Cooperating with China in civilian access to a supercomputer. and military technology transfer may also permit expanded knowledge of China’s system On the other hand, no safeguard provides a perfect guarantee. China’s military capabil- and strageic thinking. ities could be improved by use of a supercom- On the other hand, periodic assessments puter, but the degree would depend on the ap- must be made about whether a step-level implications to which the supercomputer would provement has taken place in a military mis- be put. Judgments about whether improved sion area because of incremental changes. Chinese intelligence gathering (for example) Numerous “routine” transfers by the United would pose a risk to the United States or to States and other suppliers may result in a sig- other Asian countries depend fundamentally nificant improvement in a particular military on assessments of China’s political and stra- operation without an overall U.S. policy assess- tegic goals and policies. ment that assisting China in this way is desirable. Even if such improvements have no effect Export control decisions are also compli- on China’s capability vis~a-vis the United cated by Japanese production of supercom- States or the Soviet Union, which seems likely, puters comparable in many ways to those made they could affect China’s military balance with in the United States. New approaches such as other Asian countries. parallel processing, moreover, will eventually make it possible to combine smaller machines As China modernizes its military and econ- so that they can perform the functions of a su- omy, neighboring countries may expand mili- percomputer. tary expenditures in response to, or demand equal treatment in arms sales from, the United More common than the example of the super- States. China will become an increasingly im- computer (where the applications are wide- portant regional power. Globally, China may spread) are other decisions about items that be in a key position as a larger arms seller and in isolation are likely to have much more potential transferor of military technologies. limited effects. Laser gyroscopes, to take one Therefore, the nature and scope of China’s own example, are used for inertial navigation by export policies will be important to Western both civilian and military aircraft and for stra- interests. tegic missile guidance. Improving the accuracy of China’s missiles requires gyroscopes, but An important caveat is, however, appropri- the acquisition of a handful of these items ate. Firms from many Western countries can would probably not produce dramatic changes. supply military and dual-use technologies to Improvements in mapping, for example, would China. There is room for national discretion also be essential. While gyroscopes could theo- on export policy within the bounds of the Co- retically be reverse-engineered, their construc- ordinating Committee for Multilateral Export tion requires a special type of glass produced Controls system. In addition, and potentially only in the United States and Japan. The risks more important, China is not restricted to associated with transferring a small number COCOM countries for the purchase of ad- of such items are thus mitigated (but not elim- vanced technologies. Other developing coun- inated) by such factors. tries may re-export equipment which they have Ch. 7—Strategic Imp/ications of a Modernizing China ● 179 purchased from COCOM countries or which cations, and manufacturing technologies, and they have produced themselves. The ability of other Western suppliers will probably be eager the United States to restrict China’s military to sell. Military cooperation will cover a range modernization unilaterally is therefore quite of activities including visits by defense dele- limited. gations, exchange of intelligence information, port calls, and other more symbolic interactions, as well as fuller involvement via copro- Conclusion duction and assistance in modernizing entire weapons systems. The latter clearly holds a China cannot become a military superpower much stronger potential for improving China’s by year 2000, but it will be increasingly able military capability. Without a clear policy to play a more influential role in Asia if cur- framework during this intermediate period, ex- rent policies achieve their goals. The United pectations may be raised and then dashed, with States and China thus today share mutual in- adverse political repercussions. U.S. exporters terests in ensuring peace and stability in Asia and license exam.iners need clear guidance from during the next 15 years. From the Chinese policy makers. perspective, a policy designed to support such U.S. technology transfer policies will con- a climate is the most promising avenue to even- tinue to involve a delicate balance: promoting tual military modernization (given the wide trade and technology transfer in many areas range of China’s military shortcomings). Yet, while maintaining controls on exports of the even if current policies are maintained, China’s most militarily sensitive equipment and tech- interests are by no means identical to those nologies. Decisions about transferring technol- of United States or other friendly countries in ogy routinely hinge on a variety of technical Asia. How China will choose to exercise its judgments, but policies must be based on a power will remain an important question for reading of broader political and economic de- U.S. policy makers that lends an element of caution to U.S. debates over technology transfers. velopments. Uncertain y about the future shape of China’s policies and military strat- The level of technology transfers (dual-use egy will undoubtedly introduce an element of and military) in the best U.S. national inter- restraint in a technology transfer policy that ests will not be constant. China will ask for is generally designed to promote fuller inter- more sophisticated computers, telecommuni- action between the United States and China.

THE ASIAN SECURITY ENVIRONMENT The significance of the issues surrounding has been a time of peace and stability, which Chinese military modernization must be seen has been welcomed by the countries of the rein the context of the Asian security environ- gion as a necessary condition for the remark- ment. Since the U.S. withdrawal from Vietnam able economic growth that many of them have in 1974, the East and Southeast Asian region experienced. has enjoyed an era of stability and relative peace. The war in Kampuchea, involving Viet- Nevertheless, there are continuing tensions namese troops and the Khmer resistance forces in the region, and serious security problems opposing the rule of the Vietnamese-backed that remain unresolved. The United States and Heng Samrin regime, has been the main con- other countries in the region view the growth flict in the region in recent years, a conflict that of Soviet military power in the Pacific as the also led to the Chinese punitive attack on Viet- chief threat to regional security. The most ac- nam in 1979. For most of the countries of East tive destabilizing situation is the Kampuchean and Southeast Asia, however, the recent past problem, with its implications for the security of Thailand and the other Association of South- these the varying perspectives of the smaller east Asian Nations (ASEAN) states and for states such as Korea and Singapore and those Sin~Soviet rivalry in the region. The situation of an aspiring power such as Indonesia and it on the Korean peninsula and the Taiwan prob- becomes clear that interests in Asian security lem also indicate unresolved tensions that are quite complicated. could lead to armed conflict. Some of the po- The powers in the region have concerns tential conflicts-most notably those in Ko- rea and along the Sine-Soviet border—are of about unpredictable trends. The United States, global significance. China, and Japan, for instance, are unsure of Soviet intentions under Gorbachev. The Perceptions of security threats differ in im- Soviets are concerned about the direction of portant ways from country to country. Four Japanese security thinking and future behav- great powers—the United States, the Soviet ior. The course of U.S.-China relations, and Union, Japan, and China-have active inter- whether the latter will have a military dimen- ests in the region. The perceptions of these na- sion that would be threatening to the Soviet tions differ, sometimes significantly. Add to Union, is of particular concern to Moscow. The Ch. 7—Strategic Imp/ications of a Modernizing China ● 181

United States and Japan, as well as the So- viet Pacific Fleet cruised into the waters of the viet Union, have active interests in China’s fu- South China Sea only occasionally .28 The over- ture course. all buildup of Soviet forces in the Pacific, in combination with the basing opportunities in The powers in the region are also concerned Vietnam, gives the Soviet Union power pro- that the strategic rivalry between the United jection capabilities into the Indian Ocean from States and the Soviet Union may intensify the the Pacific (as well as from its bases in Yemen arms race in Asia and the Pacific, involving and Ethiopia). allied nations as well as the superpowers. More- over, U.S.-Soviet conflicts in other regions The Soviets deploy an estimated 40 divisions could spill over into Asia. In this sense, Asian (370,000 troops) along the Sine-Soviet border. regional security is very much related to the Other Soviet assets in the region include some global U.S.-Soviet competition, both affecting 2,200 combat aircraft, an estimated 135 SS- and being affected by it.25 20 intermediaterange ballistic missiles (as well as SS-18s and air-launched strategic missiles), Of greatest concern to the United States has and subma.rim+launched ballistic missiles from been the growth of Soviet power in the region. 29 submarines on station in the Sea of Okhotsk. Since the end of the Vietnam war, Soviet mili- More recently, Soviet influence has been ex- tary assets have increased substantially as tended to the South Pacific with the signing Moscow strengthens its eastern defenses and of a fishing agreement with Kiribati that pro- becomes an Asian/Pacific power. The Soviet vides for annual payments by the Soviet Union naval buildup in the Pacific, including 90 sur- to fish in the economic exclusion zone claimed face warships, 135 submarines (65 of which are by Kiribati. Negotiations for a similar agree- nuclear powered), and two of its three aircraft ment are under way with Fiji. The nation of carriers, threatens the naval dominance long 2G Vanuatu has established relations with the So- enjoyed by the U.S. 7th Fleet. The Soviet viet Union and Libya (and receives foreign Union benefitted from the U.S. withdrawal assistance from Vietnam and Cuba) .30 from Vietnam by acquiring permanent air and naval facilities at Danang and Cam Ranh Bay. From the Soviet point of view, of course, its A squadron of MiG-23s based in Vietnam can military build-up is in response to what it per- provide air cover for the 8 TU-95 Bear D recon- ceives to be a U.S. strategy of “total military naissance planes and 16 TU-95 Badger bom- control” of Asia and the Pacific. The Soviets bers also based there. Ten of the Badgers have see the United States stationing more than cruise missile capabilities, and the United 2,000 nuclear warheads in the region, expand- States believes that the Soviets may increase ing and diversifying the delivery systems for their number to 30. The Badgers have a com- them, working with allies to modernize con- bat radius sufficient to extend to all ASEAN ventional forces, and extending political influ- states .27 ence with other friendly states.31 All this is occurring in the context of improved U. S.- Today, between 25 and 30 Soviet warships China relations and talk of Sine-American mil- are likely to call at Cam Ranh Bay at any one itary cooperation. time. This contrasts with 1979, when the So- Soviet political influence has thus far failed “David Holloway, “U.S.-Soviet Strategic Competition and to match the buildup of its military assets. Yet, the Security of Northeast Asia, ” Prospects for Peace and Co- Moscow has attempted to put a new face on operation in the Asia-Pacific Region, A Special Report of the Center for International Security and Arms Control (Stanford, its diplomacy in the area. Efforts to improve CA: Stanford University, March 1986), pp. 18-19. relations with Japan, and perhaps ease it some- ‘fiMasashi Nishihara East Asian Security (New York: New York University Press, 1985), p. 30; See also, William Branig- ‘“Ibid. nin, “Soviet Military Operations Seen Increasing in the Pacific, ” “Ibid. The Washington Post, Aug. 1, 1986, p. A17. ‘(’Asian Studies Center, Backgrounder, No. 48 (Washington, ‘-Donald S. Zagoria, “The USSR in Asia in 1985, ” .4sian Sur- DC: The Heritage Foundation, July 24, 1986), pp. 8-9. 31 vev, vol. XXVI, No. 1, January 1986, P. 22. See Zagoria, op. cit. 182 ● Technology Transfer to China — what away from its pro-U. S. orientation, are Union with an opportunity to compete (suc- evident in the visit to Tokyo of Foreign Min- cessfully, as it is turning out) for influence ister Shevardnadze in January 1986, the first with the North Koreans.33 Improved Moscow- such visit in 10 years. Efforts to win influence Pyongyang relations, for instance, have report- among the ASEAN states are also being made edly led to North Korea granting overflight with promises of markets for ASEAN prod- and landing rights to the Soviets for reconnais- ucts and claims of support for the ASEAN ob- sance flights along the Chinese coast.34 jective of creating a Zone of Peace, Freedom, and Neutrality (ZOPRAN). These initiatives In addition to the tensions in Indochina and have not had strikingly positive results for the the balance of power on the Korean peninsula, Soviets to date. other factors are germane to the security of the region. These include tensions along the Soviet leader Gorbachev’s July 28, 1986 Sino-Soviet border and the uncertain future of speech in Vladivostok is a sign of the increas- Taiwan. While the former have eased in the ing importance the Soviet Union is attaching last few years, and both China and the Soviet to the extension of its political influence to Asia Union seem to want a further reduction in ten- and the Pacific. In his speech, Gorbachev pro- sion, large numbers of Soviet troops are still posed the withdrawal of Soviet troops from deployed along the border, and China still Mongolia and withdrawal of 6,000 of the more regards the Soviet Union as the chief threat than 115,000 troops in Afghanistan. He also to its security. Although China has shown a offered to negotiate with the Chinese for the willingness to temper its statements about the reduction of forces along the Sine-Soviet bor- future of Taiwan, the Taiwan issue (discussed der. The speech was silent however on Soviet further, below) remains volatile-subject to un- support for Vietnamese actions in Kampuchea, predictable domestic political forces in the a subject of primary concern to the Chinese, United States, China, and Taiwan-and is thus although it implied a willingness to consider a potential threat to U.S.-China relations. the future role of Soviet forces at Cam Ranh There are also unresolved territorial disputes Bay if the United States was willing to withdraw from the bases in the Philippines. Finally, between some of the countries in the region Gorbachev indicated a desire for improved re- of the East and South China Seas. The un- lations with Japan, including further high-level resolved dispute over the Kuril Islands to the 32 north of Japan occupied by the Soviets since meetings. the end of World War II, for instance, con- The two areas where the growth of Soviet tinues to be a major stumbling block to the influence has been most evident are Vietnam improvement of Soviet-Japanese relations. and Korea. The aid given to Vietnam, without which the latter could not prosecute the war Economic factors are very important for the stability of the region. Many of the countries in Kampuchea, is believed to give the Soviet are experiencing structural transitions in their Union considerable leverage with the Viet- economies, hoping to move to higher value- namese. Military aid, including a squadron of MiG-23s, has also been used to increase So- -added production. These transitions, however, viet influence in North Korea during the last are occurring at a time when the assured ex- few years. While Chinese influence in Pyong- port markets, which played such an important role in past growth, can no longer be taken for yang throughout the 1970s surpassed that of granted, and when increased intraregional eco- Moscow’s, North Korean disaffection with the nomic competition seems likely. reform program in China and China’s opening to the capitalist world (including unofficial 3sRobert G. Sutter, “Beijing’s Relations With Vietnam and trade with South Korea) presented the Soviet Korea–Implications for Future Change in PRC Foreign Pol- icy, ” paper presented at the Fifteenth SinO-American Confer- ence on Mainland China, Taipei, June 8-14, 1986. “Don Oberdorfer, “U.S. Analyzes Gorbachev’s Bid to China, ” “Paul H. Kreisberg, “The United States and Asia in 1985, ” The Washington Post, July 30, 1986, p. 15. Asian Survey, vol. XXVI, No. 1, January 1986, p. 8. Ch. 7—Strategic Implications of a Modernizing China 183

China’s Security Interests regional context, and the relationships between and Foreign Policy China’s foreign policy aspirations and its capability to project influence abroad.35 For many of the nations of the region, During the Maoist era, foreign policy showed China’s future role in regional security remains the influence of Mao’s preoccupation with “pol- a major question mark. A more modernized itics in command, ” a tendency to see foreign China will be a stronger China, and U.S. tech- policy through ideological lenses, and a view nology transfer policy is contributing to this of the past that explained China’s relative modernization. Assessing China’s likely role weakness in terms of the exploitation it suf- in Asian security is complicated by the un- fered at the hands of the imperialists. Politics predictability of the security issues in the area. and ideology have certainly not been fully ex- The increasing inseparability of economic is- punged from current policy, but clearly eco- sues from more traditional security concerns nomic considerations have also emerged as cen- must also be considered in analyzing China’s tral factors. Old ideological formulations have likely international behavior. This confluence been questioned, and a spirit of open prag- of the economic and the military/strategic is matism is much more in evidence today. While occurring at a time when the established free- the Chinese have not forgotten the legacy of trade regime is under great pressure, a pres- Western imperialism (it is unlikely they ever sure unlikely to be diminished by China’s in- will), there is also in evidence a self-criticism creasing, international, economic role. Never- about China’s own responsibilities for its fail- theless, an important factor underlying the ure to modernize, and thus for its relative new orientation in Chinese foreign policy is the weakness. benefit Chinese leaders expect from participa- In the Maoist period, the international stra- tion in the international economy. The uncer- tegic environment was seen as one of clear tain future of the freetrade regime complicates bipolarity, with both superpowers deserving our ability to understand and predict China’s of critical appraisal and condemnation for at- likely impact on the region. The maintenance tempted hegemony. The Asian region was seen of a free-trade regime, and open markets in the as an underdeveloped area ripe for revolution. industrialized world for Chinese products, for By allying itself with revolutionary forces instance, may have much more to do with the kind of security role China plays in the region abroad, China could serve its ideological be- liefs, make common cause with others in op- than the course of Chinese military modern- posing superpower hegemony, and extend its ization. influence within the constraints of its resources Despite the many differences between cur- and power potential. rent Chinese foreign policy and that of the late In the post-Mao era, China seems unsure of Maoist era, when China’s prime international the extent to which bipolarity has eroded, but commitments seemed to be to support wars recognizes a new interdependence in the inter- of national liberation and to oppose the United national environment. This new environment States and the Soviet Union, there are certain makes possible a strategy of pursuing secu- constants in past and present approaches, and rity by balancing one superpower against the roots of the latter are clearly found in the another. Similarly, the Asian region can no former. longer be seen as an undeveloped area ripe for Chinese foreign policy shows the combined revolution. It is instead a dynamic instance influences of domestic and international fac- of modernization, serving as a counter exam- tors. Among the former are such issues as the ple to Chinese experience of what successful relative influence of politics in policy, the role of ideology, and the influence of the Chinese “Thomas W. Robinson, “China’s Foreign Policy, Beijing’s past. Among the latter are the basic distribu- Military Modernization and American Policy Alternatives, ” app. tions of power in the international system, the 8 in vol. II of this report, December 1986. 184 ● Technology Transfer to China economic development and modernization can China continues to be most concerned about be. China thus not only studies the experiences Soviet power in Asia and uses its relationship of some of its capitalist Asian neighbors, but with the United States, Japan, and other states also wishes to cooperate with them and, in to counteract those potential uses of Soviet some ways, emulate them. In the process, it power and influence that would be harmful to has discovered that the projection of influence Chinese interests. Thus, there is a strong con- in support of national interest can be accom- fluence of interest between the United States plished by means other than military might and China, for instance, on the general build- and the export of revolution. up of Soviet Asian/Pacific forces and on the particular expansion of Soviet influence in A central issue in assessing China’s percep- Indochina and Afghanistan. China is also con- tions of its security interests and its role in cerned that instability on the Korean penin- Asian security is how it sees its relations with sula will lead to the growth of Soviet influence the United States and the Soviet Union. China there, as well. in the 1960s saw threats to its security from both the United States in Southeast Asia and In recent years, China has moderated its from the Soviet Union on its northern border. stand on the danger of Soviet expansionism. The Soviet invasion of Czechoslovakia in 1968, This became especially evident in 1981-82, followed by the Sino-Soviet border clashes of when the issue of continued U.S. arms sales 1969, convinced the Chinese that the greatest to Taiwan threatened U.S.-China relations. threat came from the Soviets. This led to the China is thus concerned that it not become too Chinese desire to explore the improvement of close to the United States. To do so would relations with the United States. Throughout create domestic problems (in light of the sensi- the 1970s, the Chinese continued to hold to the tivity of the Taiwan issue), would be viewed view that the Soviets posed the greater danger. by the Soviets as threatening, and would compromise China’s position as an erstwhile The Chinese today see the United States and spokesman for the interests of the Third the Soviet Union locked in a grand strategic 38 World. competition in the region. They see the Soviets as trying to strengthen their eastern forces and China since 1982 has therefore attempted to to insure sea passages to link their eastern and make clear that it pursues an ‘‘independent’ western fronts in an effort to thwart United foreign policy of “equidistance” between the States attempts to encircle, isolate, and restrict two superpowers. Sine-Soviet relations have the exercise of Soviet influence in Asia. To improved with the signing of economic, trade, achieve this end, the Chinese see the Soviets and science and technology agreements dur- as striving to undermine U.S. influence with ing the 1984 visit to Beijing of First Deputy the nations in the region and to threaten the Premier Arkhipov, and the signing of addi- security of U.S. sea lanes of communication.3G tional agreements for economic cooperation during the Yao Yilin visit to Moscow in 1985. In the Chinese view, the United States seeks The latter included an agreement providing for to complicate Soviet planning by creating the $14 billion of trade during the next 5 years. possibility of a two front war in Europe and A second agreement involves Soviet help in in Asia. Both superpowers are seen pursuing building 7 new plants in China, and in ren- strategies that employ military buildups, com- ovating 17 others built under the terms of petition for the control of the sea lanes, and 39 Sine-Soviet cooperation in the 1950s. closer military and political cooperation with 37 their respective allies in the region. 3’ It is also possible that China viewed its interests in a manner analogous to classical Western balanceof-power thinking. —— As the Reagan Administration increased both the will and the 3’Xie Wenqing, “Soviet and U.S. Military Strategies in the ability of the United States to confront the Soviet Union, China Asian-Pacific Region, ” Prospects for Peace and Cooperation in maintained the balance by shifting from a pro-U. S. to a more the Asian-Pacific Region, Conference 1985, p. 25. neutral posture. “Ibid. ‘gZagoria, op. cit., pp. 15-16. Ch. 7—Strategic Implications of a Modernizing China 185 .—.

The Chinese also indicated a willingness to relax their insistence that any further improvement in relations would require Moscow to withdraw from Afghanistan, reduce its troops along the Sine-Soviet border, and discontinue support for the Vietnamese actions in Kam- puchea.’” The July 28, 1986 Gorbachev speech would indicate that the Soviets are prepared to meet the Chinese at least part way on these terms, and Deng Xioaping’s offer in Septem- ber 1986 to meet with Gorbachev would indicate there is considerably more fluidity in Sino- Soviet relations than in the past.41 It is generally assumed that the softening of the Chinese position on the Soviet Union has been due to dissatisfaction with U.S. policy on arms sales to Taiwan, as well as a reflection of the influence of some in the Chinese leadership, such as Chen Yun, who are skepti- cal of moving too close to Washington. It is likely that the Chinese wish to relieve tensions with Moscow to reduce dependence on the United States, and they may see the dawn of the Gorbachev era as a prime opportunity .42 Despite improvements in Sine-Soviet relations, there are reasons to assume that China still sees its interests as being closer to those Photo credit Xinhua News Agency of the United States. China recognizes that the Installing a Chinese-made manipulator, which will be United States does not pose any direct threat, used in handling radioactive isotopes. as does the Soviet Union with its military deployments along the Sine-Soviet border, and that the United States offers the Chinese ac- peace and stability as conditions necessary for the economic development and modernization cess to modern science and advanced technol- not only of China, but of other countries as well. ogy unavailable from the Soviet Union. China has accordingly tried to develop good With regard to China’s perceptions of its own relations with the countries of Southeast Asia interests in the region, Chinese policy state- (except Vietnam), and to this end has reversed ments have emphasized the importance of its long-standing support for Communist movements in the area. It places great value ‘“I bid. on its relations with Japan, its largest trad- 4’Deng’s offer, however, contains the precondition that the Soviets demonstrate their willingness to use their influence in ing partner and source of foreign assistance, support of the removal of Vietnamese troops from Kampuchea, and has softened its stance on South Korea. a step which the Soviets may be unwilling and unable to take. The themes of Chinese policy seem to be to fos- See Daniel Sutherland, “Chinese Leader Offers To Meet Gor- bachev, ” The Washington Post, Sept. 7, 1986, p. A21 ter the conditions for mutually productive eco- 42 For an exploration of China’s shifting positions vis b vis nomic interchange and to check the expansion the superpowers, see Robert S. Ross, “ International Bargain- of Soviet and Vietnamese power and influence ing and Domestic Politics: U.S.-China Relations Since 1972, ” World Politics, vol. 38, January 1986, pp. 255-287; and Harold in the area. C. Hinton, “Teng Hsiao-p’ing’s Management of the Super- powers, ” paper presented at the Fifteenth Sine-American Con- Two other changes mark the new direction ference on Mainland China, Taipei, June 8-14, 1986. of foreign policy in the post-Mao era. The first

7.? -.? ~g () - 87 - 7 : (/1, 3 186 Technology Transfer to China -—. ———.— is the growth of Chinese participation in in- superpowers, whose own weaponry would con- ternational organizations. China’s membership tinue to develop. Thus, China’s current course in the United Nations, the World Bank, the of “managing” the superpowers diplomati- Asian Development Bank, the International cally, while still maintaining a nuclear deter- Atomic Energy Agency and other organiza- rent (however modest), can be seen as a rational tions, as well as its interest in joining the Gen- response to the cardinal power relations in the eral Agreement on Tariffs and Trade, has international system. increased its stake in the stability of the in- The questions many foreign observers ask ternational system and is a formal indication of Chinese foreign policy are how stable this of increasing interdependence. current course is, and what could lead the Chi- The second change is the significant modifi- nese in less friendly and constructive direc- cation of the operation of China’s foreign pol- tions? Chinese foreign policy has not been en- icy machinery. The latter has clearly become tirely consistent, especially with regard to the more institutionalized and professionalized in important issue of relations with the super- recent years. While it certainly has not re- powers. Inconsistency is worrisome in light of moved domestic politics from the process of the consequences of a successful moderniza- foreign policy making, the system is markedly tion program. A modernized China will be more regularized and deliberative than the richer, stronger, and more capable—a nation “politics in command” style of the Maoist era.43 better able to insist on its way in both world and regional military/economic affairs. Such There is considerable agreement among for- a China would be able to upset the balance of eign observers that through a combination of power in Asia and could be a threat to U.S. deft diplomacy and a commitment to the de- interests. This question is next considered in velopment of strategic weapons for deterrence, the context of the major “arenas” of Chinese China is satisfying its security needs. Although foreign policy. China’s own conventional armed forces have yet to be modernized, and Soviet forces in the Asia/Pacific region are a potential threat, the Asian National Interest in probability of hostile actions being directed China’s Modernization against China has been reduced. Indeed, as one observer put it, China’s relations with the There are wide differences in the particular superpowers are much better than the super- security interests of East Asian nations, al- powers’ relations are with each other.44 though generally shared interests can also be identified. These interests are summarized be- China’s response to superpower competition low. To identify common security interests is also influenced by its own resource base and about China’s modernization, countries will be level of modernization. Given the numbers and discussed by geographical subregion: North- sophistication of weapons possessed by the su- east Asia, Southeast Asia, and South Asia. Tai- perpowers, China, to compete, would require wan will be discussed separately. The main fo- investments in military modernization that cus will be on factors most likely to threaten would almost certainly doom programs for the the security of each of these geographic areas. modernization of industry, agriculture, and sci- The reasons why some of these threats might ence and technology. Even with such military be ameliorated by the interaction of Chinese investments, it is likely that China would still and other varied national interests and capa- be in a relatively weaker position vis-k-vis the bilities in the region will also be discussed.

43A. Doak Barnett, The Making of Foreign Policy in China Northeast Asia (Boulder, CO and London: Westview Press, 1985). 44 Donald Zagoria, “Recent Trends in Sin@Soviet Relations China’s relations with its neighbors to the and the Strategic Triangle,” paper presented to the Fifteenth Sine-American Conference on Mainland China, Taipei, June 8- Northeast (Japan, South Korea, and North KO 14, 1986. rea) have ranged from cordial to bloody, though Ch 7—Strategic Implications of a Modernizing China ● 187

neither the Korean War nor World War II was plans to attend the Olympics. In addition, instigated by China. In recent years, regional South Korea has shown increasing willingness stability has been threatened more by the to cooperate with China on defecting airplanes growing presence of the Soviet Union and by and naval vessels. Chinese and South Korean concerns over North Korea’s intentions, but willingness to improve ties in these areas have not by Chinese aggressiveness.45 been against the wishes of North Korea and, to a lesser degree, Taiwan. However, the great- Japan has been increasingly willing to play est barrier to significantly improved relations a greater role in its own defense, but its pri- is over issues of North and South Korean rela- ority has been to expand its trade and politi- tions. China continues military ties with North cal relations in the region. Therefore, Japan’s Korea and generally supports its position on security goals seem to be consistent with the reunification talks, a posture unacceptable to apparent goals and modernization require- 4R ments of China. The greatest Japanese secu- the United States and South Korea. rity concern is the Soviet military presence in Chinese and North Korean relations have be- the region. The Soviet Union has continued to come less close in recent years, whereas North refuse to discuss the status of the four Soviet- Korean and Soviet relations have improved, occupied northern islands that Japan claims. In 1985, after North Korea’s first official visit It continues to assert its military presence to the Soviet Union since 1973, the Soviet from its naval and air bases on its coast above Union began increasing its military aid to Japan, and it is increasing its military support North Korea, including a squadron of MiG-23s. of North Korea.4b Reportedly, North Korea granted the Soviet Union overflight and landing rights for recon- Japan exhibits some cautiousness toward, naissance missions along China’s coast. Grad- but does not appear to feel threatened by, China. Thus, for example, it has been willing ual improvements in Chinese and Soviet rela- to sell nuclear powerplant equipment and tech- tions and the prospect of force reductions on nology to China while requiring China to agree the Sine-Soviet border, however, have tended to lower the ability of North Korea to manipu- to restrict the application of these technologies late China and the Soviet Union by threaten- to peaceful uses. Japan does not appear to feel ing to improve ties with either country .49 any significant new threat to its security in the region, but it has recently taken steps to The main areas of North Korean concern increase its role in defending itself. In 1985, about China have been: China’s continued Japanese decisionmakers announced that they closer relations with Japan and the United would increase military spending by 5.4 per- States, both of which North Korea portrays cent per year for 5 years, beginning in 1986. as active threats to itself; China’s slow culti- This would exceed the decade-old policy of vation of better relations with South Korea, holding military spending to one percent of especially in indirect trade and cultural con- GNP.47 tacts such as sports events; and the ideological threat from China’s successful moderniza- Chinese-South Korean relations have been slowly improving, though many differences re- tion, reform, and opening to the capitalist main. Indirect trade between the two countries world. North Korea is also threatened by po- has been increasing. China has also shown a willingness to send athletic teams to South Ko- 4’Robinson, op. cit., pp. 30 and 35; and Asian l’earbook 1986 (Hong Kong: The Far Eastern Economic Review, 1986), pp. 171, rea, as seen in the Asia Games and in China’s 174, and 175. ‘gRobinson, “China’s Foreign Policy, ” op. cit.., p. 35; Asjan “Robinson, op. cit., pp. 20, 28, 31, and 58. Yearbook 1986, p. 171: Also, in early 1987 Moscow announced “Asian Yearbook 1986 (Hong Kong: The Far Eastern fi~co- a withdrawal of about 10,000 to 12,000 of its 70,000 troops in nomic Review, 1986), pp. 165-166; Donald S. Zagoria, “The Mongolia, a symbolic, but potentially important development USSR and Asia in 1985, ” .4sian Survey, vol. XXVI, No. 1, ,Jan- towards reducing Sine-Soviet border tensions. Celestine Boh- uary 1986, pp. 15-19. len, “MOSCOW Announces Troop Pullout, ” Washington Post, 4’Ibid. Jan. 16, 1987, p. A25. 188 ● Technology Transfer to China

tential internal political struggles, since its its periodic fighting with Vietnam. Such a paramount leader is now growing old.50 move might even force Vietnam to be more ac- commodating with the West, with Southeast For the reasons listed above, China’s inter- 52 Asian countries, or possibly with China. ests in Northeast Asian security seem to promote stabilility. While it continues to support Second, China has improved its relations North Korea, it opposes North Korean aggres- with many Southeast Asian states. It has sion against the South. It has good ties with ended its support of the Thai Communist Party Japan and is improving its ties with South Ko- and has terminated aid to insurgents such as rea. It is improving its ties with the Soviet those in the Philippines. Relations with, and Union, but continues to oppose Soviet military aid to, most other Communist parties in South- gains in the region. If SinoSoviet relations im- east Asia have also been dramatically reduced. prove in a way that risks destabilizing the Although China insists on continuing “frater- above noted balance or correlation of interests nal” relations with Indonesian, Malaysian, and in Northeast Asia (an unlikely occurrence), the Burmese Communist parties, it has largely dis- United States and East Asian countries would continued material assistance to these three probably have adequate time and means to groups.’s counter this threat. Other security concerns have been raised by the influence of China over the ethnic Chinese Southeast Asia populations in Southeast Asian states, espe- On balance, China also appears to be play- cially in Indonesia, Singapore, and Malaysia, ing a stabilizing role in Southeast Asian secu- where the Chinese population is very large. rity. China’s Southeast Asian security role Malaysia and Singapore, however, seem con- centers mainly on the conflict in Indochina. fident in their ability to defend themselves.54 Vietnam’s military presence in Kampuchea In addition, while Southeast Asian countries and its relationship with the Soviet Union are have also expressed fears about economic com- the greatest security concerns in the region. petition from China, these countries are in- Soviet bases in Vietnam have naval and air creasingly investing in, trading with, and send- projection capabilities that extend to all ing high-level delegations to China, showing ASEAN states.sl As in Northeast Asia, China that they feel they can manage and gain from would be threatened by Soviet expansionistic improving relations with China. goals in Southeast Asia. China is thus provid- Thus China is generally viewed as a stabilizing important military assistance to the Kam- puchean resistance forces in coordination with ing force in Southeast Asia. While it is viewed as desiring an increased role in Southeast aid from the United States and Thailand. How- Asian affairs, it offers a useful counterweight ever, some Southeast Asian nations view to an increased Soviet presence and Viet- China’s involvement as leading to an increased Chinese influence in the region and feel that namese aggression in Indochina. With the exception of Kampuchea, it has moved away from China’s interests may not always oppose So- its past policies of support for groups that de- viet goals. sire to overthrow Southeast Asian govern- Two other important factors should be ments. Additionally, it has become a valuable noted. First, Vietnam is likely to feel threat- trading partner for most of these countries. ened by improvements in Sine-Soviet ties. Troop reductions on the Sine-Soviet border would allow China to take stronger action in

‘“Robinson, “China’s Foreign Policy, ” p. 30; and Aidan Foster- 5zRobinson, op. cit., p. 37. Carter, “NorthSouth Talks Offer Hope for the Future, ” lhrl3ast- “Asian Yearbook 1986, pp. 119-122. ern Econom”c Review, June 26, 1986, pp. 4445. 541 bid.; and David Barber, “Phasing Out the Force, ” The Far “See Zagoria, op. cit., p. 22. Eastern Econom”c Review, Jan. 8, 1987, pp. 15-16. Ch. 7—Strategic Implications of a Modernizing China ● 189

South Asia openly stated that they have “outgrown” the China’s role in South Asian security is simi- Soviet Union in economic and, to a somewhat lar to that in the two East Asian sub-regions. lesser degree, security issues. India has also In presenting both a potential source of oppo- continued to diversify its sources of arms and sition to some countries and opportunity for advanced technology, as seen in its recent purchases of fighter jet engines from the United other countries involved in South Asia, China’s role appears to have been stabilizing. The pri- States. As relations stand at present, there is mary arena of South Asian security concerns some chance that Western militarily useful have focused around Afghanistan. The Soviet technology could be diverted to the Soviet invasion of Afghanistan in 1979 resulted in a Union through India. This would exacerbate hostile troop presence on Pakistan’s west bor- U.S.-Indian relations, and because of Chinese fears of India, it might also create problems der. China has actively supported resistance 59 in Sine-Indian and U.S.-Chinese relations. forces against Soviet troops and the Soviet- supported regime in Afghanistan.55 A view of South Asian security reveals a similar role for China, as seen in Northeast and China also counters Indian influence in the region while offering economic and trade op- Southeast Asia. China wants to counter So- viet gains in South Asia. It also wants to re- portunities for South Asian Countries. These factors have been important in the develop- solve disputes in the region by peaceful means. ment of closer ties between China and Paki- As in East Asia, trade has played a part in in- stan, Bangladesh, and Nepal.56 China has as- creasing relations between China and South sisted Pakistan with military hardware since Asian countries. Moreover, the prospect of im- 1960 and has given an informal guarantee of proved Sine-Soviet ties has introduced a healthy assistance in case of Indian attack.57 An addi- awareness among South Asian countries of the tional concern is that China has been accused security value of diversifying ties with other nations. of supplying technological assistance to Paki- stan for producing a nuclear weapon. Although Taiwan border disputes remain unresolved between China and India, and between Pakistan and Taiwan is extremely concerned about the India in a region bordering China, China sup- modernization of Mainland China’s economy, ports negotiations, rather than use of force, technology, and military forces and expand- for resolving these differences.58 ing foreign ties. In contrast to China’s other neighbors, Taiwan does not view the potential The prospect of improved Sine-Soviet ties for expanded economic relations to be worth has not been ignored by India. Improved Sino- the perceived security risk. Statements by Soviet ties would tend to reduce the likelihood China about its stationing troops in Hong of China or the Soviet Union risking conflict Kong in 1997, when it becomes a Special with each other over Pakistani or Indian differ- Administrative Region, have been used to chal- ences. As seen in the cases of North Korea and lenge China’s intentions in regaining Taiwan Vietnam, China and the Soviet Union might and other claimed terntories.GO Sine-Soviet rap- eventually cooperate to create disincentives for prochement is also seen by the Taiwanese Gov- Pakistani and Indian use of force to solve ernment as evidence of China’s unreliability. differences. Thus, Indian decision makers have However there are many reasons why China “Robinson, op. cit., pp. 34-35. does not appear likely to attempt to take con- ‘On Bangladesh see Asian Yearbook 1986, Far East Economic Review, p. 110; and on Nepal see, Lok Raj Baral, “Nepal’s Secu- trol of Taiwan by force. There is no sign of rity Policy and South Asian Regionalism, Asian .%r~’e~’, vol. XXVI, No. 11, November 1986, pp. 1218-1219. ‘7 Robinson, op. cit., pp. 34-38, 50; and Asian Yearbook 1986, “Robinson, op. cit., pp. 38-39: and Stuart Auerbach, “India p. 99. Signs Agreement for U.S. Jet Engines, ” The U’ashin@on Post, ‘nRobinson, op. cit., pp. 50-57; and Asian Yearbook 1986, pp. Jan. 7, 1987, p. A16. 212-213. ‘“Asian Yearbook 1986, p. 144. 190 ● Technology Transfer to China an anti-Taiwan military buildup,Gl and if one tional fora in a way that would be seen as were to occur, there would likely be time to threatening to isolate Taiwan. This would take various counteractive measures. The likely be the case where Taiwan’s involvement United States’ Taiwan Relations Act man- is economically important, such as in the ad- dated continued U.S. readiness to defend Tai- mission of China into the Asian Development G7 wmoGZ In addition, the August 1982 SinO- Bank. It would also seem to be the case in American Communique on Taiwan allowed for militarily important issues, as has been seen continued U.S. arms sales to Taiwan, although in China’s recognition of the United States’ at reduced levels, with a consideration for desire for continued, though reduced, sales of changes in the value of the dollar.G3 weapons to Taiwan. Costs to China in taking military action against Taiwan would also be very high. One Further Issues result would be a likely loss of important eco- In conclusion, large-scale or sustained ten- nomic and technological benefits from trade sion in Asia is unlikely, and China will prob- with the United States, Western Europe, Ja- ably play a stabilizing role in Asian security. pan, and other countries. Another result would This role is largely facilitated by China’s in- be a significant loss in military forces, esti- terest in ensuring its access to foreign markets mated at 40 percent of its front-line air force, and its desire to have a stable environment in a large number of ships, and casualties in the which to emphasize economic development. hundreds of thousands. Resistance on Taiwan While China seems willing to improve relations would likely be great even if China “won.” And, with the Soviet Union, it appears that both since the United States is committed to a sta- countries’ respective interests and commit- ble security in the Taiwan straits, U.S. mili- G4 ments to their friends will prevent them from tary involvement would also be risked. cooperating to destabilize the region. It is also The more likely role a modernizing China will likely that as China continues to improve its play in the security of Taiwan is less extreme. ties with Asian countries, its interest and role China is likely to continue to exert pressure in promoting a stable region will grow even on Taiwan to consider various arrangements further. The willingness of most Asian coun- for reunification.G5 As in the sale of Dutch sub- tries to expand their political and trade rela- marines to Taiwan, China will probably con- tions with China indicates that they share this tinue to attempt to influence other nations to view. GG reduce military assistance to Taiwan. In A final issue is the possibility of shifts in multilateral fora it seems likely that China will foreign policy because of the present conflicts continue to attempt to lower the status of between Chinese leaders. In recent years, Taiwan. China’s foreign policy course has served its Yet China will probably not want to jeop- modernization goals. If modernization be- ardize its foreign markets or tacit security un- comes a less paramount goal, China could move derstandings by being too hostile to Taiwan. back toward a more clearly socialist road, in- For example, it will not necessarily attempt cluding the orientation of its international eco- to exclude Taiwan from relations and interna- nomic relations toward the socialist countries. Since China would then be less interested “Robinson, op. cit., pp. 21 and 47. ‘zIbid., p. 66. in interdependencies with the United States, ~sIbid., pp. 26 and 69. Japan, and its other Asian neighbors, its com- “Ibid., pp. 64-69. mitment to a peaceful, stable Asia could be ex- “C.L. Chiou, “Dilemmas in China’s Reunification Policy Toward Taiwan, ” Asian Survey, vol. XXVI, No. 4, April 1986, pected to be less. While this drift back toward pp. 467-470. a more Soviet style of development does not “’’Dutch ‘Close’ to Solution on Taiwan Sub Sale, ” Xinhua, Oct. 8, 1986, in Foreign Broadcast Information Service Dm”ly ReportChina, Oct. 8, 1986, p. G4. “Robinson, op. cit., p. 45. Ch. 7—Strategic Imp/lcations of a Modernizing China 191

Photo cred(t X(nhua News Agency IBM computers and equipment in the Shenzang Air Blower Plant. This computer center is used for plant production management and technical information storage. seem to be the most probable course for China sidual sympathies for it and respect for Soviet in the short term, the reasons that might make (including technological) achievements. More it attractive are credible and deserve moni- importantly, their careers have been in a sys- toring. tem modeled after that of the Soviets. Their most basic understandings of how economies and A final factor influencing assessments of polities operate derive from this experience. China’s future direction is the nature of the post-Deng leadership. It has been widely as- Many of the new leaders also have back- sumed that this leadership would be commit- grounds in engineering disciplines, but re- ted to a continuation of the Dengist policies. ceived training under conditions where the Again, however, it is appropriate to be cau- engineering task is understood in the context tious. First, it is by no means clear that there of a socialist economy. It is likely that this “so- is the leadership unity that the Chinese have cialist engineering” orientation is particularly tried to project; divisions based upon person- compatible with technocratic planner orienta- ality, factional affiliation, policy preference tions rather than market orientations. While (particularly on issues of reform), and under- such leaders would have a studied apprecia- standings of the political “rules of the game” tion for the sophistication of Western technol- undoubtedly exist. It is impossible for the out- ogy, they are unlikely to have an ingrained side observer to know whether the forces that professional sense of the relationships between unite the leadership are stronger than those Western technological development and the that divide it. operation of a capitalist market economy. Second, many of the new leaders received Furthermore, Chinese technological achieve- training in the Soviet Union and may have re- ments in such areas as nuclear weapons and 192 ● Technology Transfer to China space may be taken as indicators of indigenous in Vietnam and North Korea in return for its capabilities that should be further nurtured assistance. In the face of a long-term Soviet and protected in the face of the challenge from commitment to enhance its power and influ- foreign technology and equipment imports. ence in Asia and the Pacific, and U.S. inten- This type of protectionist view is likely to be tions to limit this gowth, superpower rivalry found throughout the politically important in the region will continue for some time and heavy-industry sector. It is notable that the will be the main element structuring the secu- greatest resistance to domestic economic re- rity environment. form has come from this sector.’8 The divided-state phenomenon in China and The future leaders are unlikely to lead China Korea is a second major, persistent, and po- back toward the radical Maoist experiments tentially destabilizing security problem. Ko- of the past. However, by training and experi- rea is a potential flashpoint with global conse- ence, many are likely to be more comfortable quences. The Taiwan problem is the main long- with a planned system. They are also more term threat to good U.S.-China relations; its likely to prefer policies that protect Chinese management requires restraint and skill from industry from foreign competition and penetra- all the parties, but these characteristics are by tion rather than a more marketized “open” no means assured. Finally, Vietnamese be- economy. havior in Indochina is perceived as a serious direct threat to Thailand, is a source of con- Conclusion cern and annoyance to China, and is viewed by the other states of Asia as a possible cause U.S. security interests in Asia are in a sense of heightened and unwanted great power com- more complicated and less certain than in Eur- petition in the region. ope. Lines of conflict and patterns of threats are less clear-cut, and there is much greater The “China factor” in U.S. interests in Asian national and cultural diversity.G9 security is multifaceted. For some of the states in Asia with which the United States has close Nevertheless, certain features of the Asian relations and strong interests, China is re- security scene in the post-Vietnam war era garded as the chief long-term security prob- have been consistent. These include the gen- lem. This view is heard most often from the eral stability in the region, which has both states in Southeast Asia and, of course, from facilitated and been helped by the remarkable the government on Taiwan. From the U.S. economic growth and development experienced point of view, however, China has the poten- by many of the countries. At the same time, tial for serving as part of the solution to the tensions are by no means absent. main security problem: growing Soviet power The region has seen a significant growth in and influence in the region. A China capable Soviet power resulting from the increased de- of power projection across the Pacific to ployment of military assets in Asia and the threaten the United States directly is decades strategic advantages the Soviet Union enjoys into the future. However, a strong China opposed to Soviet expansion and friendly to the United States, even if following a nominally ‘“See Susan Shirk, “The Domestic Political Dimensions of independent foreign policy, is viewed by the China’s Foreign Economic Relations, ” China and the World: United States as a security asset in that it com- Chinese Foreign Policy in the Post-Mao Era, Samuel S. Kim plicates Soviet strategic planning. (cd.) (Boulder, CO and London: Westview Press, 1984), pp. 57- 81; and Bruce Curnings, “The Political Economy of China’s Turn By following its current course, China is less Outward, ’ China and the World: Chinese Foreign Policy in the Post-Mao Em, Samuel S. Kim (cd.) (Boulder, CO and London: of a security threat to the United States and Westview Press, 1984), pp. 235-266. its friends and allies in the region than it was g ‘ Richard H. Solomon, “American Defense Plannin g and Asian in the past, when it pursued policies of revolu- Security: Policy Choices for a Time of Transition, ” in Daniel J. Kaufman, et al., (eds. ), U.S. National Security (1.exington, tionary transformation at home and supported MA: Lexington Books, 1985). revolutionary movements in the Asian region. Ch 7—Strategic Implications of a Modernizing China ● 193

Although China’s Asian neighbors have anxi- meting peace and stability in the region, is in eties about China as a security threat, they too the security interests of the United States and appear to be more hopeful that China pursu- its friends in the region. ing its current course will be less of a threat The policy choices faced by the United States than the China of the past. and its friends and allies in the region are there- Of course, when modernized, China will also fore challenging. Policies to retard Chinese be more capable, and thus more of a potential modernization-for instance by denying access security threat to the countries of the region to technology, capital, and markets-out of and to U.S. interests. If China succeeds in its fear of potential hostility are likely to be self- modernization, it will have the economic and defeating. It appears that Chinese hopes for military capabilities to be a major disruptive modernization have been one of the prime force in the region if it so desires. However, causes of China’s becoming a more construc- China’s pursuit of modernization, through in- tive member of the international community. teractions with the world economy and by pro- Chapter 8 U.S. Policy Choices

Photo credit: Ertc Basques

A fisherman on the Li River near Guilin looks out over some of the most spectacular scenery in the world. CONTENTS

Page Themes in U.S. Policy ...... 197 A Flexible Approach to Liberalized Controls...... 198 Activist Strategy of Technological Cooperation ...... 199 Technology Leverage ...... 200 A Cautious Approach to Technology Transfer ...... 202 A Multilateral Approach ...... 202 Theme Implementation ...... 203 Export Control Policy ...... 205 The License Review Process ...... 207 The COCOM Review Process ...... 216 What Other Actions Could Reconsidered? ...... 218 Military Cooperation ...... 219 Scholarly and Technical Exchanges ...... 223 Student and Scholarly Exchanges ...... 225 The Bilateral Agreements...... + ...... 226 Promotional Policies ...... 227 Congressional Choices ...... 239 Appendix:Export Licenses Pending Over EAA Statutory Limits...... 242 .

Figures Figure No. Page 7. Green Zone (Nonreferred) China Cases...... 209 8. Processing Time for Referred (Closed Out) Cases ...... 210 9. Average Processing Times: China Nonreferred and All China Cases ....210

Tables Table No. ---- Page--- 17.-””China Export Licenses-1984,– ‘ - “--” 1985, ‘---a.ncilYt$6 - ...... XJ5 18. ProcessingT ime for China Cases ...... 209 19. Actions Takenon Closed China Cases ...... 210 20. U.S. Cases Pendingin COCOM ...... 216 21. U.S. Commercial Arms Exports ...... +.219 22. Munitions Licensing for China, 1981-86...... 221 23. Export-Import Bank Programs for China, Inclusive 1979-86...... 231 24. OPIC Insured Investments in China ...... 232 25. The Trade and Development Program inChina ...... 234 Chapter 8 U.S. Policy Choices

This chapter analyzes what the U.S. Gov- the executive branch may want to address, ernment, and Congress in particular, might do regardless of overall directions in China pol- to maximize the gains and minimize the risks icy, are then addressed. The chapter concludes associated with transferring technology to by identifying actions that Congress may wish China. The first part examines major themes to consider. in current U.S. policies affecting technology transfer to China, highlighting areas where new initiatives may be needed to achieve policy goals. ’ Specific issues that Congress and ment Printing Office, September 1985), for a discussion of the risks and benefits to the U.S. national security of transferring ‘See OTA, Energy Technology Transfer to China–A Techni- energy technologies, and for a review of pending issues in U.S. cal Jlemorandum, OTA-TNI-1 SC-30 (Washington, DC: Govern- policies affecting control and promotion of technology transfers.

THEMES IN U.S. POLICY

Since the United States and China formally and make it less vulnerable to outside pres- resumed diplomatic relations in 1979, interac- sures.4 Official U.S. policy statements have tions have expanded on a number of fronts. stressed that China is a friendly, but not an As China moved gradually to relax restrictions allied, country-one particularly important be- on foreign business and open the door to West- cause of its large population and potential role ern participation, the United States has loos- as a counterweight to the Soviet Union. If ened restrictions on exports to China and China’s modernization succeeds, it will be a widened the scope of science and technology candidate for superpower status in the future (s&T) exchanges.’ The United States and China and, at the least, an important regional power.5 have begun to consult on issues such as Af- Many view these assessments as sound cal- ghanistan and Indochina and to explore other possibilities for strategic cooperation.s Defense culations of U.S. national interest. A number of developments indicate progress in achiev- delegations are exchanging visits and foreign military sales (FMS) have begun. ing some policy goals. China is experimenting with economic reforms that involve expanded The decisions that ushered in these new de- Western participation in trade and joint ven- velopments in U.S.-China relations are based tures, and has expressed desire to participate on a rationale, shared by four U.S. adminis- in multilateral organizations such as the Gen- trations, that assisting in China’s moderniza- eral Agreement on Tariffs and Trade (GATT), tion will serve U.S. interests. Exchanges of Among the ranks of China’s leaders are many goods, people, and ideas present commercial who have been trained in the West. China has opportunities for U.S. business, provide mutu- developed an “independent” foreign policy, ally enriching cultural exchanges, and could avoiding close ties with the Soviet Union. help integrate China into the world economy ‘one authoritative estimate is that between 1979 and 1983 about 19,000 Chinese students and scholars came to the United States. See Leo A. Orleans, “Chinese Students and Technol- ogy Transfer, Journal of Northeast Asian Studies, vol. iv, No. ‘See statements by U.S. Ambassador Winston Lord, quoted 4, winter 1985. in International Trade Reporter, June 4, 1986, p. 752. ‘see Harry Harding, concerning reports of a joint U.S.-Chinese ‘See Jonathan Pollack for an argument that China “...enjos’s effort to monitor Soviet tests in ‘*China’s Changing Roles in the privileges and deference conceded a major power, without the Contemporary World, ” in Harding, China Foreign Rela- possessing the requisite national capabilities and accomplish- tions in the 1980s (New Haven, CT: Yale University Press, 1984), ments that appear to define the term. Pollack, ‘‘China and the p. 194, Global Strategic Balance, ” in Harding, op. cit., p. 170.

197 198 ● Technology Transfer to China

Some observers, however, worry about what public discussions of U.S.-China policies. The they see as an emotional and overly optimis- predominant theme, and the one central to cur- tic strain in U.S. policies toward China.’ The rent U.S. policy, favors a flexible approach ori- United States and China have quite different ented toward gradual liberalization of controls political and economic systems. While they on technology transfers. Other themes, dis- share mutual interests in some areas, they discussed below, also appear in discussions of agree in others. The primary strategic concern U.S.-China policy. Each reflects different eval- is that China might use the technology sup- uations of how technology can be used as a tool plied by the United States in ways that run of U.S. foreign policy. counter to U.S. interests or to those of other Asian countries friendly to the United States. A Flexible Approach to A second area of concern is commercial. U.S. Liberalized Controls businesses still see potential in China’s domestic market, but also view China’s export and Since 1983, regulations governing exports performance requirements’ and other regula- have been significantly loosened, consistent tions of foreign business as obstacles. Over the with a broad policy direction favoring expanded longer term, China may join the ranks of the economic interaction. At the same time, ex- Asian newly industrializing countries (NICS) ports of military equipment and very advanced that today loom as major competitors to a technology are restricted by U.S. export con- number of U.S. industries. trols. The export licensing system provides mechanisms for revising controls in light of These issues were analyzed in chapters 6 and changes in technology and bilateral relations. 7. The general conclusions drawn there were that despite improvements in Sino-Soviet re- Student and technical exchanges have thrived lations, there are reasons to assume that China under this flexible approach to technology will in the next 10-15 years see its interests transfer. These growing exchanges, which do become closer to those of the United States. not rely on strong government coordination, So long as economic modernization remains have been built at the individual and institu- China’s top priority, China is likely to play a tional levels, providing ongoing scholarly rela- stabilizing role in East Asian security. While tionships, cultural exchanges, and potential institutional and other factors suggest caution commercial opportunities for U.S. firms and in comparing China with the NICS, Chinese organizations. Localities and regions are estab- exports are likely to grow faster than the over- lishing relationships with their counterparts all rate of economic growth. As a result, Chi- in China, who are apparently attracted by U.S. nese exports (representing about 4.4 percent educational and research strengths. of world exports by 2000) will compete most The U.S. Government has not taken a strong, directly with those of NICS in third-country active role in coordinating and initiating ef- markets. OTA also notes the many uncertain- forts to expand trade and technology trans- ties about China’s future course and the room 8 fer. Official export financing through the for disagreement about implications for the Export-Import (ExIm)Bank is comparatively United States and neighboring countries in limited, and the United States has no tradi- Asia. tional aid program for China. The U.S. Gov- Given these uncertainties and a limited 8 ernment has instead focused its efforts in trade years of recent experience, it is not surprising policy on negotiating agreements that set out that a number of different themes run through ‘The U.S. Government took a stronger lead in the early years ‘See Michael H. Hunt, “Chinese Foreign Relations in His- through establishment of protocols for industrial and techni- torical Perspective, ” in Harding, op. cit., p. 41. cal cooperation. Many of these efforts continue, as does the For- ‘Examples are requirements that products produced in China eign Commerical Service (FCS). In general, however, the U.S. include certain amounts of locally produced inputs or that pro- Government has played a facilitating role (outside the export duction facilities in China export a certain percentage of output. control area) rather than an activist coordination role. Ch. 8—U.S. Policy Choices ● 199 the “rules of the game” for trade and invest- U.S. exporters are constantly “testing” the pa- ment. In addition, guarantees have been pro- rameters of the export control system. Recent vided for investments by the Overseas Private experience indicates that incremental decisions Investment Corporation, and financing has do not result in effective and consistent pol- been provided for low-budget, “reimbursible” icy implementation. feasibility studies, such as those carried out No single entity of the U.S. Government ef- by the Trade and Development Program. fectively integrates these diverse efforts into Major resources of the U.S. Government a carefully coordinated program for technol- have been devoted to establishing a system ogy transfer to China. DOC implements con- of controls on exports to China. The Depart- trols on dual-use exports, carried out by the ment of Commerce (DOC) is the lead agency, Assistant Secretary for Trade Administration. but the Department of Defense (DoD) and Other parts of DOC such as Foreign Commer- other agencies also participate. Within the gen- cial Service (FCS) are involved in trade devel- eral guidelines established, however, techni- opment programs. Generally speaking, promo- cal license examiners actually make many key tional programs are carried out on different decisions about exports of sensitive technol- policy tracks and by different individuals than ogies. These choices are critical to the deter- those who administer export controls. Within mination of whether a specific technology ex- the Pentagon, for example, those charged with port takes place. Within the guidelines set by “security assistance” are expanding military higher level policy officials there is thus room cooperation, while those responsible for stra- for de facto policy making below as case-by- tegic trade are controlling exports.g case decisions are made on whether to export A pending question is whether it is neces- the more militarily sensitive technologies and sary to formulate and implement a clearer equipment. strategy on technology transfer to China. Delays in export licensing review have been There are few such examples of comprehensive- a primary source of complaints. Congress has U.S. foreign policy strategies other than for attempted to deal with this problem by requir- the Soviet Union, where serious problems are ing the U.S. Government to process licenses apparent. But it maybe that the United States within certain time limits. License reviewers has not realized all the potential benefits of may make safe but too rigid interpretations. a flexible approach. There may be gains to be Lacking understanding of overall policy goals, made from better integrating U.S. programs mid-level and lower level bureaucrats may in- toward China. The key question is whether this advertently or intentionally work at cross- is desirable or possible in view of the many purposes to overall policy goals. Technology other important foreign policy issues on the is changing so rapidly that the U.S. Govern- agenda. ment has found it difficult to revise regulations before large backlogs of pending cases have Activist Strategy of developed. Technological Cooperation A related issue pertains to uncertainty about Some favor a more coherent and aggressive where the U.S. Government will draw the line strategy of promoting cooperation with China to prohibit an export. While export regulations because of China’s critical strategic position specify the kinds of exports that “are likely and commercial promise or because they wish to be approved, “ it is not clear what types of to assist China in its development. Placing spe- exports will be denied. Applications involving cial emphasis on U.S.-China relations is a res- sensitive technologies and equipment (includ- onant historical theme. For generations, Amer- ing those for military exports) are decided on a case-by-case basis. Because of this situation ‘The Defense Technology Security Agency (DTSA) within and in response to pressure from Chinese DoD handles DoD review of both dual-use and munitions ex- buyers to supply more advanced technologies, ports. DSTA officials attempt to coordinate these policies. 200 ● Technology Transfer to China

icans have believed that China is in some sense The implications of an activist approach “special. would depend to some extent on the degree to A more activist strategy would probably re- which the strategy were directed to security cooperation. A rapid expansion of military co- quire a larger role for the U.S. Government. operation could create anxieties among Asian Expanded export financing and FCS represen- countries fearing a U.S.-China alliance. If the tation are possible avenues, as is the establish- ultimate goal of U.S. foreign policy is to pre- ment of an aid program. Over time, export con- serve a stable and peaceful Asia, it may be well trols would be diminished, or even eliminated to note the limitations of building “special rela- in some areas. Assuming that China demon- tionships, “ such as those apparent in the Mid- strates its commitment to avoiding illegal dle East, where a regional peace remains elu- acquisition and retransfers of Western technologies and that relations improve, the Co- sive despite active promotion of relations with a few key countries. If security cooperation ordinating Committee for Multilateral Export with China were pursued unskillfully, it could Controls (COCOM) might decide to end all mul- be perceived as diverting attention away from tilateral export controls for China trade. the NATO alliance and Europe. Adopting a more positive strategy could help There is also a risk that a more activist ap- U.S. firms to expand their exports to China proach could strengthen certain elements and serve to broaden and deepen technology within China, such as parts of the military, or transfer. However, because of China’s clearly lead to anti-Western backlash stemming from articulated call for U.S. technology, it would long-held fears that China might become too be difficult to develop a promotional policy ori- dependent on foreign suppliers. Under worse ented solely toward expanding U.S. exports conditions, the United States would come to of finished products. regret an activist strategy of promoting tech- A stronger China would be in a better posi- nology transfer if China’s leaders switched to tion to counter the Soviet Union, and a suc- an alliance with the Soviet Union. cessfully modernizing China may serve as a model to Soviet bloc countries. More specula- Technology Leverage tive is the question of whether under such circumstances China would be inclined to contrib- Some advocate the use of technology as a ute constructively to resolving persisting bargainin g chip in U.S.-China relations. Under- regional conflicts like the one on the Korean lying this theme is a concern that technology peninsula. transfer may too often be a one-way street, with U.S. firms providing more and more crit- By promoting technology transfer to China ical technology while Chinese foreign policy more actively, the United States could also sometimes runs counter to that of the United support expanded free trade in the Asian re- States. China’s stress on nonalignment and its gion. A central question, however, is whether association with Third World issues inferred the United States would be willing to eschew from United Nations votes are often cited as protectionist responses to China’s growing ex- evidence. According to this view, the United port capacity. To the extent that a more activ- States must extract political concessions for ist promotional policy implies technology the advanced technology it supplies China.10 transfer as well as trade, a growing Chinese Noting that Chinese leaders are skilled negoti- export capability is to be expected. An activ- ators who never lose sight of national inter- ist strategy therefore would involve keeping ests in technology exchange, proponents be- markets open to Chinese imports. To deal ef- lieve that the United States should likewise fectively with associated trade impacts, it do more to foster its own foreign policy goals. would be necessary to develop a U.S. strategy toward Asian markets, one that locates China IODenis Simon, “China: Too Much Technology Too Fast?” in a broader regional context. Technology Review, 1985. —

Ch, 8—U.S. Policy Choices ● 201

In contrast to those who believe that expanded Technology leverage may work in some prece- technology transfer can help usher in good po- dent-setting cases, where negotiations are con- litical relations, those who stress technology ducted behind closed doors. In such instances, leverage believe that transfers should be con- however, it maybe difficult for all but the few ditioned on political or other concessions by directly involved to understand the linkages China. between technology transfer and politics. Sen- Technology leverage holds some attractions sitive issues such as cooperation in intelligence gathering fall into this category. in view of the as a policy theme. Theoretically, at least, China many routine decisions made in export licens- might be further persuaded to cooperate with ing, it hardly seems possible that explicit the United States on Korea or refrain from bilateral political deals could be struck in any acerbic criticism of U.S. policy in the Third but a few key cases. On the other hand, condi- World in exchange for advanced technologies. tions in many cases have been set on trans- Sharing intelligence about Soviet activities fers of advanced technologies to China. The could be expanded in the context of transfers Chinese have apparently judged these limita- of critical technologies. If advanced technol- tions on their use of U.S. equipment and tech- ogy transfers (such as those promoted under nology as not desirable but acceptable. The the aegis of government-to-government pro- end-user certification provided by the Chinese tocols) were linked to requests for broader ac- government to verify the Chinese buyer of cess by U.S. technical personnel to China’s Western technology, for example, addresses corresponding industrial and research institu- Western concern about retransfers to the So- tions, the United States could gain more from viet bloc. such exchanges. At issue is whether the United States can use transfers of technology to in- Another factor limiting stronger emphasis fluence China’s foreign policy. on technology leverage is the wide availability of many advanced dual-use and military Much depends on the way in which bargains technologies. Because China could always turn are struck—through publicly applied pressure to other suppliers, a unilateral strategy to deny or in closed-door sessions—and the extent to technology would not be feasible in most cases. which quid pro quo exchanges would be ex- But China wants U.S. technology, and trans- pected. Public demands for Chinese political fers from the United States undoubtedly have concessions in early stages of negotiations political value to the current leadership. could easily backfire. Nor does it appear likely that other Asian countries such as Japan would be willing to participate in pressuring China to change its policy vis~a-vis Taiwan, for example. Chinese resentment over the bargain struck by Moscow in economic cooperation with China in the 1950s suggests the possible liabilities of such an approach.]’ Nor is it safe to assume that Chinese leaders simply respond to U.S. actions, ignoring the importance of history, traditions, and domestic political pressures. The application of pressure (in the form of conditions set on technology transfers) will not necessarily result in the response desired. “Stalin demanded access to Chinese port facilities and the formation of joint stock companies, and insisted that China pay for all economic and military assistance. See Harding, in Hard- Photo credit” Eric Basques ing, op. cit., p. 183. Some experts, however, believe that the As a diesel locomotive enters the Shanghai railroad Soviet Union was actually much more generous in its economic station a steam locomotive on a siding is unloaded. cooperation with China. In any case, such negative Chinese per- The Chinese plan to decrease their reliance on steam ceptions could color economic cooperation with other countries. locomotives and will promote railroad electrification. 202 Technology Transfer to China

If stress is laid on U.S. willingness to sup- gence as an exporter. Nor is the U.S. Gov- ply (rather than threaten to deny) certain kinds ernment well equipped to further such goals of advanced technologies, it maybe more likely systematically through technology transfer that political understandings can be developed policies. in conjunction with these transfers. Even if Those who favor caution on the grounds that technology is seen more as a carrot than a stick, certain types of technology transfer are not however, U.S. Government influence is limited appropriate for China must recognize the limits in the sense that private companies make in- on the ability of the U. S. Government to tell dependent judgments about potential gains China how to carry out its modernization pro- and risks. It appears that technology leverage 12 grams. Where U.S. Government financing or will have to be applied selectively, and that sponsorship are provided, as with the Trade it may be most effective in the context of a and Development Program (TDP) and Over- flexible approach. seas Private Investment Corporation (OPIC) projects or those receiving ExIm financing, the A Cautious Approach to Federal Government has leverage in selection Technology Transfer and in setting requirements that ensure effective technology transfers. Particularly in the StilI another theme in debates over U.S. tech- case of officially sponsored cooperation proj- nology transfer policy is one of caution. Be- ects (under the protocols), there is considerable cause China may well have trouble in assimilat- leeway for shaping the projects to ensure pro- ing the most advanced technologies, some tection of public health and safety. But such prefer to concentrate on transfers of less so- projects are only a small part of U.S.-China phisticated technologies. Others may hope to trade. Generally speaking, U.S. Government avoid the “boomerang” effect—providing China influence had been focused on ensuring that with the technology to transform itself into the risks to national security are minimized. a major competitor. Those who see the China market as a chimera, and those wary of close It must also be noted that China could pose relations with a Communist country where a major security risk if it fails to achieve its leadership changes have in the past resulted development goals. A stagnant Chinese econ- in swings in policy, would prefer to proceed omy could breed political disaffection at home slowly in technology transfer to China. and conceivably a foreign policy less open to the West and more threatening to other coun- Much would depend, however, on whether tries in Asia. caution is directed at slowing the pace of U.S. export control liberalization, or adding new restrictions that negate the liberalization that A Multilateral Approach has already occurred. Assuming no great ad- A multilateral approach to China has not verse developments in bilateral relations, it been strongly emphasized. Such an approach seems unlikely that the United States would implies that the United States, Japan, and abruptly reverse the current policy path. On Western Europe share common interests in as- the other hand, if relations were to sour, a more sisting China’s economic modernization and cautious policy would be a natural outgrowth. integration into the global trading system Despite the apparent safety of exercising while protecting Western security through con- caution, there are significant liabilities. In the trols on militarily significant exports that current context of U.S.-China relations, offi- could be useful to the Soviet Union or other cially stressing this theme would very likely adversaries. antagonize China, perhaps pushing the Chinese toward rapprochement with the Soviet Union. “For a discussion of U.S. government influence on China’s The United States cannot prevent China’s eco- selection of energy development projects, see OTA, op. cit., pp. nomic modernization or preclude China’s emer- 58-59. Ch. 8—U. S. Policy Choices ● 203

Major Western suppliers of technology to But, despite the contribution made by COCOM China thus have joint interests in ensuring that governing certain types of dual-use exports, all compete fairly for the China market and in there are significant differences in policy ap- preventing the diversion of advanced dual-use proaches. The United States maintains unilat- technologies to adversaries. COCOM and the eral controls on many types of exports to all Organization for Economic Cooperation and countries (China included) and makes a serious Development (OECD) agreements on financing attempt to limit potential diversions through reflect these joint interests. Taking a broader controls on re-exports. Japan and Western view of commercial interests, if some countries Europe, as discussed in chapter 5, have much maintain severe restrictions on imports from less complicated procedures for review of ex- China while others take a more open approach, port applications and oppose extraterritorial the burdens of domestic adjustment will be un- application of U.S. laws. From a security per- evenly spread and resentment may grow. From spective, the problem is further complicated a Western security perspective, a joint ap- by a number of NICS in Asia (not members proach to export controls is also essential be- of COCOM) that serve as production sites and cause Japan, Western Europe, and some NICS entrepdts for high-technology trade. are now developing dual-use technologies and In theory, the obvious solution is to bring producing sophisticated equipment and serv- the export control policies and practices of the ices with military applications. COCOM countries more into harmony while A multilateral China policy would have many persuading non-COCOM countries to institute advantages, but there are also problems. West- effective controls. Harmonization of COCOM ern countries c~mpete for technological leader- policies implies some modifications by both the ship and participation in the China market. United States and other COCOM allies. If for Although firms from many countries are co- example, the United States were to eliminate operating in large, capital-intensive projects unilateral controls on exports to China, U.S. in China, it is also true that they are vying for exporters would benefit. Permitting freer intra- prime contractor awards and market shares. COCOM trade might help persuade other The United States thus has significant com- COCOM countries to be more vigilant in pre- mercial interests at stake in the export of goods venting diversions from third-country mar- and services that translate into jobs for Amer- kets. Because each country has a different le- ican workers and revenues to support further gal and administrative tradition, however, it innovation and economic growth. Similarly, would be unrealistic to assume that harmoni- while a joint approach to export controls is zation would eliminate all differences or reas- mutually beneficial and essential, different sure critics who charge that burdens and ben- COCOM countries approach export controls efits are unequal. differently; thus, firms in different countries face different obstacles to exporting. Theme Implementation The dilemma from a policy perspective is In practice, the five themes discussed above that multilateral agreements are often based are played out in U.S. policy. Periodically, U.S. on the lowest common denominator-the rules negotiators seek specific assurances from China of the game acceptable to the most liberal in return for sensitive technology transfers. A member of the club. The question is whether, recent, publicized example was China’s deci- through deliberations over China’s entry into sion to become a member of the International the GATT and other multilateral institutions Atomic Energy Agency and accept safeguards, and through OECD negotiations over financ- and public statements that it will not assist ing, the scope and strength of agreements can be expanded. OTA’S research also highlights the need to strengthen the COCOM system.13 national Technology Transfer, Balancing the National Znter- est: U.S. National Securit~” Export Controls and Global Eco- ‘ ‘See also National Academy of Sciences, Report of the Panel nomic Competition, 1987, for detailed recommendations about on the Impact of National Security Export Controls on Inter- COCOM. 204 . Technology Transfer to China other countries in developing nuclear weapons A third area of choice is military coopera- (in the context of negotiations on a nuclear co- tion. The scope, nature, and mechanisms for operation agreement) .14 In other areas, such miltiary cooperation will be clarified in the as scholarly exchanges, the U.S. Government years ahead. Congress has an important role has taken a more positive approach. In con- to play in reviewing military sales, particularly trast, absence of an aid program indicates a those involving FMS credits. cautious approach.15 The multilateral theme is reflected in COCOM and traderelated agree- Scholarly and techm”cal exchange is another arena for policy choices that affect technology ments, such as the OECD agreement on financing. transfer. Congress allocates funds for fellow- ships and lectureships that support research More important than the policy instruments and study in the United States by Chinese scho- is the overall direction of U.S. policy. It is, of lars, and study visits to China by Americans. course, possible that no clear choice will be made to seriously redirect policies. Regardless Congress also reviews overall U.S. foreign policy toward China to assess the success of of whether a decision is made to highlight one of the secondary themes in order to develop past policies and to anticipate future problems. Policies toward China reflect perceptions of the a more coherent strategy, there are substan- global role of the United States. Should the tive policy choices that Congress will face. United States pursue a policy of strong engage One set of policy choices concerns export con- ment in Asian security by building new coali- trols. Whether the goal is technology leverage tions and maintaining a large military pres- or cooperation, delays and inconsistencies in ence or take a more “minimalist” approach, export licensing decisions remain issues of con- restricting its efforts to maintaining the alli- cern. Congress has an important role to play ance with Japan and naval deployments needed in oversight of U.S. export policy. Indications for the strategic submarine fleet?]’ Should the of problems in the system are the continuing primary goal be to build a strong bilateral U.S___ turf battles among agencies, misunderstand- China relationship or to expand multilateral ings about the policies of other COCOM coun- cooperation? Can the United States afford to tries, and the sometimes conflicting technical promote free trade and transfer technology to and policy judgments in determining thresh- developing countries without suffering serious old levels. losses, or is it necessary to protect U.S. interests through bilateral bargains and trade pro- Promotional policies supporting expanded tectionism? Many of these questions are be- trade and technology transfer through financ- yond the scope of OTA’S study of technology ing and other means constitute a second area transfer, yet the answers are critical to this of policy choice. Will major stress be laid on subject. export promotion, protectionism or bilateral bargaining, and what will the longterm implica- These substantive issues are discussed more tions be for U.S.-Asia trade? Congress reviews fully in the next section. Detailed examination and helps determine programs of the Export- of issues that Congress may confront, and re- Import Bank, OPIC, TDP and the FCS. cent experience with policy implementation in these issue areas, suggests that new initiatives may be needed if the United States is to maximize the potential benefits and minimize the possible risks associated with transferring “See OTA, op. cit. Congressional debate over the nuclear agree- technology to China. ment focused on the strength of these assurances, pp. 54-55. lsThe absence Of a formal U.S. aid program can dso be inter- “see Richard H. Solomon, “American Defense Planning and preted as reflecting judgments that U.S. priorities for assist- Asian Security: Policy Choices for a Time of Transition, ” in ing China in its modernization should be in other areas, rather Daniel J. Kaufman, et al., U.S. National Security (Lexington, than simply a negative view toward aid per se. MA: Lexington Books, 1985), p. 384. Ch.8–U.S. Policy Choices . 205

EXPORT CONTROL POLICY

Export controls have been a continuing point alization in U.S. policy, as did the 1983 an- of controversy in U.S. policy debates over tech- nouncement that China would be moved to nology transfer. At the heart of these debates country group “V” for export control pur- is the problem of balancing the twin U.S. pol- poses.l g A zone system was developed for China icy objectives of promoting international trade exports, resulting in faster reviews for items and protecting national security. Criticisms of in the “green zone. ” (See discussion of these U.S. controls on exports to China have been zones in ch. 7.) raised by U.S. exporters eager to expand trade, The most recent significant step in the direc- Chinese officials desirous of more advanced tion of liberalization was taken in late 1985, technology, and officials and businessmen in other COCOM 17 countries who see some kinds when COCOM member countries revised reg- of U.S. export regulations as infringing on their ulations governing exports to China. These own sovereignty. DoD has been the target of changes, as published in revisions of the Advi- much of this criticism, primarily because some sory Notes to U.S. export regulations, were to result in a “. . . believe that DoD interprets export regulations substantial decrease in processing times” for exports to China.20 This was too stringently, causing commercial loss to U.S. firms. Observers also question whether to be accomplished by expanding the range of U.S. controls concentrate sufficiently on slow- exports likely to be approved for export and ing the flow of technologies with real military by eliminating the need for their review by significance. Congress plays a critical role in COCOM and U.S. agencies outside DOC. Green framing the legal basis for export controls and zone commodities can now be re-exported to in its oversight of the system. China from COCOM member countries under licenses issued by those countries. Likewise, These are general issues not specific to China. DOC and other agencies involved in export But they have been a central focus of debates administration have attempted to improve the over U.S.-China policy because extensive con- efficiency of the U.S. licensing process.21 trols on exports to China were maintained throughout most of the postwar period and be- From the exporter’s point of view, a key cause those controls have been adjusted in re- question is whether an individual validated cent years to reflect an improving bilateral rela- license (IVL) is required. Most exports involv- tionship. China licensing has been a concern ing technology require an IVL. If the applica- more specifically because the United States ex- tion is for a commodity that falls within the pected loosened controls to facilitate trade with green zone, license review is normally con- China and because the number of China licenses ducted only by DOC and can be completed in reviewed by the U.S. Goverment and by COCOM a few weeks. Otherwise, more extensive review grew rapidly in the 1980s. In 1981, for example, the Reagan administration decided to treat ‘The V country group includes a large number of countries– Britain, France, Yugoslavia, India, Syria, and Iran among them. exports to China favorably at technological It should be noted that U.S. regulations on exports differ across levels twice those permitted for the Soviet these countries. The V country group is really a catch-all category; export regulations are not uniform for all of the countries Union. While the meaning of the “two times” in this category. China is, however, the only country in this group rule remained less than clear, it signaled a liber- subject to COCOM review and national security controls. ‘“See Department of Commerce, ITA, 15 CRFT Parts 373, 374, 375, 379 and 399, “Exports to the People’s Republic of ‘7 COC0 -M (the Coordinating Committee for Multilateral Ex- China; Amendments to the Export Administration Regula- port Controls) is an informal organization based in Paris. The tions, ” Federal Re~”ster, Dec. 27, 1985, 52900. member countries include NATO countries (minus Iceland) and “see Paul Freedenberg, Assistant Secretary of Commerce for Japan. The purpose of the organization is to control exports Trade Administration, before House Foreign Affairs Commit- of militarily significant items to the Soviet bloc. tee, Subcommittee on International Trade and Economic Pol- U S IsFor an overview of . . export controls (and promotional icy, Apr. 17, 1986, pp. 4-5. DOC made special efforts to reduce policies) affecting technology transfer to China, see OTA, op. case processing time for exports to China by establishing a spe- cit., especially ch. 5. cial “China team center” in 1985. 206 . Technology Transfer to China

Table 17.—China Export Licenses—1984, 1985, and 1986

Dollars approved (thousands) Commodity Control List (CCL) Category 1984 1985 1986 1091 Numerically controlled equipment...... 4,019 13,770 9,361 1312 Presses for ceramic manufacturing...... 14 0 0 1353 Communication cable manufacturing equipment ...... 6,985 1354 Integrated circuit manufacturing and testing equipment ...... 115 5,422 1,971 1355 Electronic device manufacturing equipment ...... 23,304 94,527 74,311 1358 High technique memory/switching device testing and manufacturing equipment 168 7,316 3,463 1359 Tooling for fiber optic manufacturing ...... 0 0 0 1391 Robots and electronic controllers ...... 0 0 0 1460 Nonmilitary aircraft, helicopters ...... 164.006 1,025,385 117,126 1510 Underwater detection equipment...... 1,148 2,017 578 1519 Single and multichannel transmission equipment ...... 11,568 3,007 1,965 1520 Radio relay equipment ...... 1,626 69,224 4,347 1522 Lasers and laser systems ...... 1,501 6,820 6,729 1529 Electronic measuring, calibration, and testing equipment ...... 11,899 33,144 34,118 1531 Frequency synthesizers and equipment containing . . . . . 2,989 35,241 11,004 1533 Radio spectrum analyzers ...... 2,188 3,036 4,811 1537 Microwave equipment ...... 627 2,457 1,696 1555 Electronic video tubes, components ...... 31 1,263 199 1564 Integrated circuit and electronic assemblies...... 15,727 38,009 12,313 1565 Computing equipment ...... 1,164.339 3,897,369 2,694,130 1566 Computer software...... a 3,713 4,835 1567 Communication switching, stored program ...... 0 14,300 52,517 1568 Electric/electronics equipment ...... 699 1,013 495 1572 Recording, reproducing equipment ...... 57,738 66,089 52,339 1584 Oscilloscopes ...... 1,866 3,183 2,336 1587 Quartz crystals/assemblies ...... 67 11 1 1767 Optical fiber preforms ...... 0 0 0 Total for27CCLs ...... 1,465,639 5,322,603 3,092,795 Total all CCLs ...... 2,004,199 5,493,456 3,366,460

27 CCLS as O/O Total CCLS ...... 73,1 96.8 91,8 NOTE Temporary licenses are”e;cluded Data Include total for calendar years (n current dollar value for IVL appl!cat(ons a!ncluded in 1565 SOURCE US Department of Commerce is required by other U.S. Government agen- The number and value of U.S. licenses ap- ciesandbyCOCOM.Inearly 1986thisgreen- proved for exports to China has expanded rap- zone review was extended to cover certain idly in recent years.The dollar value grew by kinds ofitemscoveredby27 CommodityCon- 15 times, from $374.3million in 1980 to $5,493 trol List (CCL) categories as shown in table million in 1985, though it declined to $3,366 17.22 in 1986. The number of applications more than doubled between 1983 and 1985, rising from —— 4,300 to 10,200. In 1986, a total of 8,130 cases ‘Those include numerical control equipment and software, (including temporary licenses) were closed out presses and specialized controls, communicationcablemachin- for export to China. ery, printed circuit board machinery, semiconductor manufac- turingequipment, test equipment forrecording media, tooling Not surprisingly, the bulk of the approved for fiberoptic connectors, robots, aircraft and helicopters, underwater detection/locating equipment, data communications IVLs fall into a few commodity groupings. In equipment, radio relay equipment, lasers, electronic measuring 1980, more than 60 percent (in dollar value) equipment, frequency synthesizers, spectrum analyzers, micro- of the approved licenses were for exports of wave equipment, image intensifier and TV video tubes, integrated circuits, Computerland computer software, telecom- semiconductor manufacturing equipment. In munications equipment, A/D and D/A converters, recording and 1986, approvals for exports of electronic com- reproducing equipment, oscilloscopes, crystal oscillators, and puting equipment made up more than 80 per- optical fiber preforms. It should be noted that some but not alloftheitemscoveredby eachofthe27 categoriesnow receive cent of the total, and nonmilitary aircraft and favorable treatment as green-zone cases in license review. helicopters another 7.3 percent in terms of Ch. 8—U.S. Policy Choices ● 207 value.23 Table 17 provides an indication of the U.S. export controls today affect trade with prominence of license approvals in the 27 CCL China primarily in a few key advanced tech- categories liberalized. nology sectors. Computers, telecommunications, aircraft, precision instruments, and ad- Export controls are established to protect vanced manufacturing equipment constitute U.S. national security by making it more dif- the bulk of this group. In most cases foreign ficult for adversaries in the Soviet bloc to firms can supply equivalent technologies. In obtain militarily significant technologies. Con- 1985, U.S. exports from these sectors made troversies continue about whether the commer- up between one-quarter and one-third of total cial loss is justified by the national security U.S. exports to China in dollar value. It is also gains, both values difficult to capture in dol- 24 important to note that these have been key lar estimates. Estimating the dollar value of areas of export growth in recent months. From such commercial losses would entail document- 1984 to 1985, exports of telecommunications ing sales won by foreign competitors because equipment, for example, increased by 72 per- of delays in U.S. licensing or unilateral U.S. z cent and exports of computers and office ma- controls. ’ A full estimate would also have to chines increased by 85 percent. ’s U.S. controls take into account the potential business lost strongly affect joint ventures in China because because export controls caused U.S. exporters exports of technical data and advanced man- to forego business or because delays in the U.S. ufacturing equipment are often involved, ex- process caused potential buyers to modify con- ports that require interagency review. Since tracts. ’~ Calculating the dollar value of licenses these are likely to remain priorit y import areas under review for a long time provides one infor China, controls will continue to affect U.S. dicator of the potential magnitude of the prob- exports of advanced technologies. Controls are lem, however. In January 1987, for example, not a determining factor across the board in the total value of licenses pending more than U.S. trade with China, however. 60 days for export to China was more than $806 million.” The License Review Process —.—— -- ‘3Data on licensed exports to China are published in the Ex- The Export Administration Act, the foun- port ,4dministration Annual Report, U.S. Department of dation for the export control system, desig- Commerce, 1986. nates DOC as the lead agency in implement- “Estimates can be more easily developed for commercial impacts of trade embargoes. See, for example, Gary Clyde Huf- ing controls on dual-use exports. ’g The law bauer and Jeffrey ,J. Schott, Economic Sanctions in Support states that restrictions on international com- of Foreign Policy Goals, 11 E!, October 1984. Developing a quan- merce should be used only where necessary to titative estimate of the national security gains associated with export controls would also be extremely difficult. further U.S. national security and foreign pol- “AS discussed inch. 4 (supplier country policies), complaints icy goals. Section 10 of the act establishes pro- about unfair trading by foreign competitors abound. The Amer- cedures for efficient processing of applications ican F;lectronics Association (AEA) has compiled a compendium of examples of export control problems, based on information within certain time periods and requirements provided by member firms. Included are reports of delays, uni- for periodic reports to Congress. While some lateral U.S. regulations governing demonstration licenses, and critics have charged that Congress should not semiconductor manufacturing equipment exports to China. See Case Study Report, AEA, Export Control Task Force, Mar. 12, micromanage export administrators by requir- 1987. ing DOC to process applications within cer- “See William F. Finan, “Estimate of Direct Economic Costs Associated With U.S. National Security Controls, ” app. D, in National Academy of Sciences, Balancing the National Interst: tary of Commerce for Trade Administration. In August 1986, U.S. National Security Export Controls and Global Economic 878 China cases had been in the system for more than 60 da?’s. Competition (Jlrashington, DC: National Academy of Sciences, In January 1987 the number was 809. 1987). The author estimates that the direct, short-run economic 2’DOC official export statistics. It is not clear whether ex- costs to the U.S. economy associated with export controls was ports in these sectors might have increased even more rapidly’ $9.3 billion in 1985, and that the overall aggregate impact on without factors relating to U.S. export controls. the U.S. economy was $17.1 billion. ‘The Export Administration Act of 1979, as amended in 1981 ‘“OTA was given special access to DOC export licensing data, and 1985. A copy of the law can be found in the Export Admin- based on a “national interest finding by the Assistant Secre- istration Regulations. 208 ● Technology Transfer to China — tain time periods, it appears that these stipu- lations have prompted improvements in license review. All applications for dual-use exports are received first by DOC, which must complete initial screening within 10 days. Cases that fall within the green zone can be approved by DOC alone. Others may be referred to other agencies such as the Departments of Defense, State, and Energy, depending on the particulars of the case. Many, but not all, of such referred cases must also be sent to COCOM for multilateral review.30 Congress has set time requirements for processing at each stage of the review process to ensure that delays are mini- Photo credlf E/ecfro Scientific /ndusfr/es, /nc mized. 31 A semiconductor processing system incorporating a sophisticated laser. This system, including the laser, DOC and other agencies have taken a num- was built in China. ber of steps during recent years to reduce delays. For a period in 1985 a China team center parent as license reviewers and managers was established. Automation has also been learned new jobs. used to reduce the paperwork and time needed to submit a case for COCOM review, to cite Management challenges of other kinds (re- another example. cruiting and keeping qualified personnel and utilizing them effectively) also importantly af- The reorganization of DOC’S licensing pro- fect the functioning of the system. Licensing cedures in November 1985 abolished the China officers and engineering specialists are ranked team center set up to speed review of China at GS-9 through GS-13 levels. DOC has appar- cases. China applications are now routed to one ently lost some its best young people to indus- of four commodity teams that handle individ- try and to DoD. The Office of Export Licens- ual validated licenses: capital goods (which also ing (OEL) now has a staff of 152 and the Office handles technical data); computer systems; of Technical and Policy Analysis (OTPA) over microcomputers and telecommunications; elec- 76, but DOC has been unable to fill all of the tronic components, and instrumentation. These positions that were open.32 Expanded use of teams process applications for exports to China the automated system for data entry, case along with similar types of exports to other tracking, and review may permit a concentra- countries. During the first 6 months after the tion of staff for focusing on really important reorganization was announced, many people cases. were moved to new positions. Problems of adjustment, presumably temporary, became ap- Another major goal of the reoganization was to better integrate technical and policy analysis in the licensing process, a persisting issue ‘Whe State Department is the lead agency on COCOM and in U.S. export administration. OTPA was set for munitions exports, as discussed in the next section of this chapter. up in part to improve technical review in prece- 31DOC categorizes cases that exceed statutory limits in a num- dent-setting cases. However, exporters have ber of categories: 1) applications not requiring interagency refer- found it difficult to understand the division ral for which DOC has neither issued nor denied a license within 60 calendar days of receipt (Sec. 10 (c) of the Export Administ- of responsibility between OTPA and the OEL. ration Act); 2) applications requiring interagency referral but which have neither been closed out nor referred to COCOM There is widespread agreement that automa- within 12o days after receipt (Sec. 10 (f)(l)); and 3) applications tion is a major tool for improving the system. referred to COCOM that are over 160 days old, or exceeded 160 days before completion (Sec. 10 (h)). 32DOC, August 1986. Ch. 8—U.S. Policy Choices ● 209 —

Plans are being made to automate data entry, Figure 7.—Green Zone (Nonreferred) China Cases and a system has been put in place to provide (As percent of total China cases closed out) automated response to telephone inquiries ss (n about the status of cases. The automated sys- : tems can also be used to improve accountabil- : 100 a ity by eliminating some steps in the licensing c [ process. Illustrative of the latter was a striking reduction in the processing times for nonreferred COCOM country cases after license examiners began to use the automated tools available to close out and issue license ap- v provals. DOC has developed a comprehensive L I I 1 1 1 ..~ z 1/85 3/85 6/85 9/85 12/85 3/86 6/86 9/86 12186 3/87 plan for automation that in the near term will automate data entry and license issue, and initiate the automation of the license approval SOURCE. Off Ice of Technology Assessment, 1987 process. Over the longer term, the automation plan calls for immediate access by the license examiner to a history of similar cases, online realized. Nonreferred cases were 70 percent of regulations, policies, precedents, and the in- all closed out China cases in both the first quar- tegration of information about foreign avail- ter of 1985 and the last quarter of 1986, though ability .34 they rose to 78 percent in the first quarter of One near-term objective of DOC is to reduce 1987. the time required to complete action on IVLS Average processing time for China cases has 35 to 45 days by July 1987. There is no reason declined, a trend that some believe indicates why processing times for green-zone cases can- the success of the revised guidelines in stream- not be further reduced to the time required for lining the system. Improvements in process- free-world destinations (6 days, according to ing time also reflect introduction of computer- DOC’S own goals). Congress may want to mon- ized processing of West-West cases, permitting itorprogress carefully toward aclu”eving these more efficient use of licensing staff. Table 18 goals of quicker license reviews to determine provides an overview of average days of proc- whether additional staff or other resources are essing time required for all China cases com- required. pleted during the period January 1985 through When new China licensing regulations were April 1987. The number of completed cases de- published in December 1985, the expectation was that, by expanding the numbers of items in the green zone, fewer cases would require Table 18.—Processing Time for China Cases interagency referral. However, figure 7 shows Average number of days that this expectation has been only partially Number of Average cases closed ~rocessina time 3 ‘ The System for Tracking Export License Applications January 1985 ...... 911 83 (STELA) is operational. The system provides exporters with June 1985 ...... 976 94 information concerning the location of the case within the sys- January 1986 ...... 786 74 tem. More substantive inquiries concerning interpretations of June 1986 ...... 609 60 regulations are handled by Exporters Assistance and licensing August 1986 ...... 666 76 officers. November 1986 ...... 514 70 “For a detailed overview of the Export Automated Support December 1986 ...... 411 77 System (E CASS) developed by DOC, see Office of Deputy As- April 1987 ...... 729 57 Export Control sistant Secretary for Export Administration, NOTE Average processing times have been calculated for the cases closed out AutomatedSystem, July 25, 1986. The plan notes the growing (completed) during the 30-day per!od noted Total cases Include referred need for interagency coordination, p. 23. and non referred Chtna cases 35 See Export Control Automated Support S-ystem–ECASS, SOURCES U S Department of Commerce, August 1986, January 1987 and May concept paper, revised, July 25, 1986, p. 12. 1987 210 ● Technology Transfer to China

Figure 8.— Processing Time for Referred for China cases but that a significant problem (Closed Out) Cases remm”ns in the unusually long periods of review for referred Ch”na cases. G- ~ ~ 200 Referred China cases For China exports, and for exports to other : .— % countries, the percentage of applications de- 150 c0)~’ nied is quite small. License examiners can also “: E Referred cases to all countries ~ ~ 100 return applications to the exporter without ac- Q@ tion (RWA), when additional information is ~ .~ 50 lw ~ required. Critics have suggested that a large z~ percentage of such applications is cause for 1185 3185 6185 9185 12185 3186 6186 9186 12186 3187 concern because the U.S. Goverment may NOTE Referred cases Include those sent to COCOM thereby unduly delay or effectively deny an SOURCE Off Ice of Technology Assessment, 1987. application. The number of RWAS has declined, as table 19 indicates. This reflects ef- Figure 9.—Average Processing Times: forts on the part of DOC to work with exporters China Nonreferred and All China Cases rather than deny or return applications when additional information is needed.

Issue: Is Inter-Agency Review a Major Factor “= o 150 Slowing Review of China Cases Within the Cn’ Green zone (nonreferred) China cases ~g t U.S. Government? In December 1986 about 1,300 China applications were pending, and processing times exceeded the statutory limit in 40 percent (524) ~ I 1 I 1 * I 1 I 1 I 1/85 3185 6/85 9185 12/85 3186 6/86 9/86 12/86 3/87 of those cases. Most of those cases pending aAVerage for (referred and nonreferred) all China cases over the statutory limit (461 of 524) were refer- SOURCE Office of Technology Assessment, 1987 ral cases (those sent to other agencies or to COCOM for review).” Hence, the number of clined along with processing times up until Cb”na cases pending over statutory limits re- mid-summer of 1986; after that, processing m~”ned in early 1987 almost as large as it was times fluctuated, showing another decline in in the spring of 1986. Cases referred to other early 1987. agencies make up the bulk of the backlog. Pending cases for exports to China made up A verageprocessing time for referred cases, about one-third of the total number of U.S. however, took more than 200 days in Decem- cases pending over the statutory limits in 1986. ber 1986, and remains signifkantlyh”gher than processing times for referred cases for export 37 DOC, January 1987. According to DOC officials, cases re- to other countries. Figures 8 and 9 show the ferred to COCOM normally exceed U.S. statutory limits for persisting pattern of unusually lengthy re- review. views of referred China cases. During the last quarter of 1986, about 30 percent of the closed Table 19.—Actions Taken on Closed China Cases out, referred China cases exceeded the statutory limits.36 OTA finds that improvements Percent of total number of cases closed have been ach”evedin average processing time Returned Approved Denied without action January 1985. 70.39%(83.13) 0,12%(0.61) 29,48%(17 24)

seTh e ~rcentage of referred China cases where reviews ex- January 1986. 75.00 (81 86) 0,26 (0.41) 23,73 (17 72) ceed statutory limits was 70 percent in the first quarter of 1985. June 1986 86.77 (88.03) 0.16 (O 16) 13.05 (11 .79) The percentage of all China cases (referred and nonreferred) December 1986 89.32 (93 85) 1.21 (0.42) 9.46 (5 72) where reviews exceeded statutory limits was 36.8 percent in NOTE Percentages In parentheses reflect exporls to all parts of the World Data [nclude !emporary the first quarter of 1985 and 16.1 percent in the last quarter exports of 1986. Data in all cases for closed out cases. SOURCE U S Department of Commerce Augusl 1986 and January 1987 Ch. 8—U. S. Policy Choices ● 211

In June 1986 the all-agency average proc- tive consideration letters (NCL) had been essing time for referred China cases was 152 sent. ’l Together, these two types of cases were days. At that time it took longer to process valued at $111 million, or more than 10 per- such cases than cases for exports to any other cent of the total value of China cases more than part of the world. In early 1987 processing time 60 days old. for referred cases continued at a level of more DOC could make a special effort to eliminate than 17s days (see figure 8). cases that have been under review for very long OTA analyzed the China cases more than 60 periods of time, thereby making the case list days old, first in August 1986 and then again a more accurate representation of cases that in January 1987.1H The number at both times are really active. Another possibility would be was substantial-more than 800 cases. The to- for Congress to restrict the number of days tal value of these cases actually rose from $713 a case could remain active in the system. For million in August 1986 to $806 million in Jan- example, cases more than a certain number of uary 1987. A significant portion of these cases days old could be automatically approved un- (laLl) had been in the system more than one less the Secretary of Commerce provided writ- year by January 1987. The value of these cases ten explanation to the exporter that the par- was $145,342,171,39 ticulars of the case made extended policy Most of the cases in the 1987 sample were review necessary. (Some of these cases would, of course, still require COCOM review. ) identified as located in various stages of DOC IVL licensing. (These cases also represented It is striking that a few very large compa- about half of the total dollar value of the pend- nies make up a large percentage of the total ing China licenses. ) At the same time, almost value of pending cases. OTA found in both zo percent were in COCOM: they were valued samples, for example, that one company was at more than $218 million. The number of cases responsible for more than 10 percent of the dol- in the sample located at DoD was not large, lar value (and more than 15 percent of the to- and their value was about 5 percent of the total number) of China cases pending more than tal. It should be noted, however, that agencies 60 days. In contrast, another company had such as DoD may return cases to DOC quickly, only one China case pending for more than 60 recommending denial or asking for additional days, but it was valued at $2.5 million. This information. Cases located in DOC may there- suggests that a few companies take the lead fore reflect actions taken by other agencies that in testing the system and that their efforts are have the effect of increasing the period of concentrated in a relatively small number of license review at DOC. For a detailed exami- CCL categories, such as computers (CCL 1565). nation of factors contributing to delays in the In January 1987 there were 207 cases more interagency review process, see appendix C at than 60 dtiys old in CCL 1565, and 74 of them the end of this chapter. were valued at $295 million. The backlog contains a large number of cases It appears that a considerable investment that are not really active. ’” Particularly strik- of time and resources is needed to work the ing were the sO cases being held without ac- system, and few smaller firms can afford to tion (HWA) and the 97 cases in which nega- do so. Instead, the export system has nurtured a large group of middlemen and Washington W3TA collected these data samples from the DOC licensing consultants who represent the actual exporters. database. The data include the total number of China cases that had been in the system for more than 60 days. Measures to make the system more under- ~gThe number of these cases was roughly the same as it had standable and accessible could make it easier been in August 1986, but the dollar value was substantiality for small U.S. companies to export. higher. ‘(’Such cases may be held within the system because the ex- 4iHWA are held at exporter’s request: therefore, delays in porter wishes (held with action, or HJhrA) or in order to fulfill these cases are not caused by DOC. It should also be noted that requirements under the Export Administration Act (negative ,NCL and intent-to-deny cases routinely exceed statutory limits, consideration letters). due to time periods needed for rebuttal. 212 ● Technology Transfer to China

Interaction between DOC and DoD has been cussions with officials from both agencies in- a major focus of attention in export adminis- dicated that their views diverge on some key tration debates. Exporters have charged that policy issues. Officials in DOC, for example, DoD dominates the system, interpreting reg- stress that a de facto red zone exists, while ulations rigidly and delaying d~isions. Others, DoD staff disagreed with this characterization, however, question whether DOC green-zone re- stressing that all cases above the green zone view involves adequate technical analysis. are reviewed on a case-by-case basis. Serious and persisting differences in interpretation of DoD has reorganized and consolidated its export regulations continue, lending uncer- export control apparatus into the Defense tainty to the process and suggesting that Technology Security Administration (DTSA).42 policy is not clearly defined or consistently DTSA reviews the applications for the most applied. sensitive dual-use and munitions exports. DoD has developed its own approach to automation, Problems in reaching interagency consensus which builds on the licensing data base that have rendered the formal process ineffective. DOC established. During recent months, DoD The formal process is that precedent-setting was processing China cases quickly, on an aver- cases that involve mih”tarily si~”h”cant exports age of 25 days during the last quarter of 1986, are referred to various agencies, and the most although DoD processing times rose to 31 days difficult cases are considered by interagency in the first quarter of 1987 for closed out gToups such as the Operating Committee. In cases.qs DOI) has Clearly developed a Coordi- practice, however, the Operating Comm”ttee nated program for export licensing. formally reviews only a handful of cases. Higher level formal interagency reviews—for Some fear, however, that DoD is in a posi- example, those that involve the Secretaries of tion to negotiate unilaterally with exporters, Defense and Commerce–are also unusual. requiring modifications and other conditions Without interagency consensus, cases may lan- on export. Typically more cautious about ap- guish for years with no decision. One solution proving exports, DoD license reviewers are in is for high-level officials in DOC to push for a position by virtue of their considerable or- resolution of such controversial cases, bring- ganizational resources to play an important ing them to Cabinet level and even Presiden- role in reviews of referred cases. There are in- tial attention, when necessary. ternal differences within the Pentagon over technology transfer to China, but DTSA plays Some argue that one way to solve the prob- a leading role in coordination with policy lem of interagency consensus-building is to makers in international security affairs. eliminate DoD participation in license reviews. The committees of jurisdiction in Congress Exporters sometimes complain that DoD have struggled with this issue in recent years, and DOC interpret the regulations differently .44 particularly in the conference committee that While it was beyond the scope of OTA’S re- reviewed amendments to the 1979 Export Ad- search to substantiate this charge fully, dis- ministration Act.45 Section IO(g) of the act out- 42 See Defense Technology Security Administration Program lines a role for DoD in reviews of cases involv- Development Plan, High Technology Export License Review ing national security. The rationale is that and Analysis System for the 1990s, May 5, 1986. differences in viewpoints among the key agen- “For reasons mentioned earlier, the agency average processing times tend to underestimate the overall effect of decisions cies (Commerce, Defense, State) involved in ex- taken outside DOC that extend review time within DOC. port controls can provide useful checks and 44 0ne example cited was the 16-bit microcomputer, Exporters balances. suggested that DoD first approved such exports, and then began denying them for exports to China. More recently, DoD has once again changed its policy, approving such exports for China. When DoD officials were asked about this and other such examples, they discounted them as inaccurate, suggesting that 45The Export Administration Act Amendments of 1985 were if 16-bit microcomputer exports were denied for China it was eventually signed into law, after prolonged debate in the con- for some reason that had nothing to do with technology level. ference committee. Ch. 8—U.S. Policy Choices ● 213

As the lead agency in export administration, tive taken by NSC staff. In practice, new and DOC officials have the leeway to present their important policy proposals on export controls views more forcefully, if need be, in high-level receive Cabinet-level attention, Encouraging interagency reviews. Therefore, one alternative DOC to play a stronger role through one of the is for DOC to play a stronger role. One way mechanisms discussed above, therefore, seems to accomplish th”s would be to encourage DOC a more direct approach than one that depends to exercise fi”nal authority in approving an ap- on a greatly expanded role for NSC as the in- plication unless DoD exercises its formal ap- teragency arbiter. peal to the President as outlined in section l@’g). Another variant on this would be to Nevertheless, the goal should be to provide new incentives for interagency consensus- amend the act by limiting DoD’s role to giv- building. The process outlined in the Export ing advice to DOC, leaving final authority for Administration Act (formal DoD objections China cases with DOC. This approach might conveyed to the President) has not been fre- be justified by some who see export controls quently used, and decisions have been delayed for China as primarily a foreign policy ques- well beyond statutory limits in a significant tion or by those who favor removing China number of China cases. The question that Con- from COCOM. Still another possibility would gress may wish to address is how to ensure be to mandate a deadline for review (such as that good decisions are reached in timely 6 months) and amend the act to call for auto- fashion. matic approval for cases that exceed the deadline. The Department of State (DOS) is also a key participant in the process, particularly for The effect of all of these proposals would be COCOM cases. Consensus-building among to increase incentives for DOC to reach a deci- these agencies is difficult because each agency sion more quickly. Nevertheless, much would has its own data base, procedures for review, depend on how much initiative is taken by offi- 47 and criteria for making judgment. The Depar- cials at DOC. In the first case, the burden of ment of State, for example, handles foreign objection would be with DoD, but DOC offi- cases submitted by other COCOM member cials would have to ensure that final decisions countries but does not have ready access to were made in timely fashion if the system is information about U.S. cases involving simi- to work any differently than it does now. In lar types of equipment and technology. the second case, national security considerations might be downplayed. Evaluations of Issue: How Can Export Regulations Be that risk, however, depend to some extent on Clarified To Provide Clearer Guidelines? whether or not one judges that such considerations are now overemphasized. Under the Ambiguity in the guidelines for exports (par- third option, there is also a risk that the auto- ticularly for exports that exceed green-zone cri- matic approval process would produce some teria) remains a problem. In evaluating this bad decisions. situation, OTA compared the value of approved licenses for exports to China with the value A recent study by the National Academy of of actual exports. It found that the value of Sciences proposes to address these issues by approved licenses for China has not only ex- expanding the role of the National Security panded but exceeds by far the actual value of 4 Council (NSC). ’ NSC currently helps coordi- U.S. exports. In 1980, when U.S. exports to nate interagency decision making, and its ef- China totaled $3,754 million, the value of ex- fectiveness depends to some extent (as with port licenses granted was about 10 percent of the above options) on the interest and intia- that total dollar value. In 1985, however, when

4’National Academy of Sciences, Balancing the National In- — terest: U.S. National Security Export Controls and’ Global Eco- “U.S. General Accounting Office (GAO), Export Licensing: nomic Competition (k$rashington, DC: National Academy of Sci- Commerce-Defense Re\riew of Applications to Certain Free ence, 1 987), pp. 173-174. 14’or)d IVations, GAO/NSIAD-86-169, September 1986. 214 ● Technology Transfer to China —

U.S. exports totaled $3,855 million, the value cation involves cutting-edge technology, indus- of approved licenses totaled $5,493 million.48 try representatives may also find it necessary Of the 2,688 licenses, valued at $761 million, to press their cases at high levels. used for export to the PRC and returned to A certain amount of testing is to be expected, DOC in 1986, the value of actual shipments 49 but if this becomes the major mechanism for was only $483 million. forcing critical and precedent-setting policy There are a number of possible explanations choices, it suggests that exporters (and per- for the comparatively large value of approved haps license examiners) lack clear guidance and licenses. First, licensed exports include those that the policy process has failed. Since the for demonstration purposes, where no sale is publication of new regulations in December actually made,50 and for reexports of U.S. tech- 1985, the green zone has been more clearly de- nology from other countries. However, because fined, but ambiguities remain. Exporters men- licenses for such types of exports were valued tion areas such as semiconductor manufactur- at less than $100 million in 1986, these licenses ing equipment, software development systems, alone cannot account for the comparatively and computer systems as areas of controversy. large value of licensed exports.5’ In addition, In particular, exporters as well as license ex- licenses that are returned without action (be- aminers are uncertain about how exports ex- cause information is inadequate and other rea- ceeding green-zone limits will be treated. Such sons) are reentered in the database when they exports are reviewed on a case-by-case base. are resubmitted, and they are double-counted In recent years U.S. officials have approved among pending licenses.52 Also, exporters re- exports exceeding green-zone guidelines, at- ceiving an approval in one year may make the taching various conditions to export. Power- actual shipment in the following year. ful computers, for example, have been leased In many cases, however, it appears that fi- to China for use in seismic applications.54 nal sales never take place, even though a license Past China controls included intermediate has been approved. This may occur when along and red zones along with a green zone. Today, period elapses between the time of application the proscribed “mission areas ”s5 provide only and the time of approval. In such a case, the general guidelines about what kinds of exports buyer may lose interest and turn to another are likely to be denied. In fact, there is no out- seller.53 Another explanation is several U.S. ex- right prohibition on exports above the green porters submit applications, all hoping to make zone; each case is reviewed separately. The ab- the same sale in China. sence of a clearly defined red zone provides ex- An exporter incurs no penalty for keeping porters (as well as Chinese buyers) with incen- a license active or for making multiple submis- tives to test the system. Export control sions to export similar types of equipment to regulations prow”de little ~“dance to exporters different Chinese buyers. Exporters may do concerning items above green-zone levels. this to obtain documentation useful in future There is no practical way for an exporter to export licensing submissions. When an appli- know what previous decisions may have been made to approve exports of certain types un- 48U. S. exports are based on official U.S. statistics. less the exporter is wifi”ng and able to invest ‘gData from DOC, April 1987. the considerable resources necessary to learn ‘“Data for 1986 exports included in the paragraph above do from officials about such cases or to take the not include temporary licenses, however. “Data for re-exports cover the period Jan. 1 to Dec. 31, 1986. initiative to make multiple apph”cations to doc- U.S. DOC data, August 1986. ument previous decisions. 52A reasonable estimate is that about 10 to 11 percent of the pending cases for export to China are resubmissions. U.S. DOC, August 1986. “Approval of exports may also be conditioned upon the type 5’A related explanation is that the Chinese buyer finds it im- of end-user, monitoring of facilities and access by Chinese per- possible to raise the needed foreign exchange to make the final sonnel. purchase. “See ch. 7 for a discussion of the mission areas. Ch. 8—U.S. Policy Choices w 215

ion.” Some argue that such an approach would ,.!. be extremely difficult to implement because it would have to take into consideration not only the level of technology and its military significance but also the specific conditions of use, and the nature of the end-user which are generally developed on a case-by-case basis. For the next few years, the potentially difficult areas of decision for exports to China include powerful computers, electronic measuring equipment, software, telecommunication (including networks and fiber optics), and technical data (including training). What is lacking is a strategy for future U.S. technology transfers to China in key industry sectors. Practically speaking, sectoral analyses could lay the foundation for expanding the China green zone. To develop such a strategy, consultations with industry officials would be essential. Moreover, factors such as U.S. commitments to cooperate with China (e. g., under signed protocols), changes in technology, and Photo cred~t Wendy Fr/eman Chinese technology needs would have to be A consumer electronics factory in Stlenzhen. Product Ion taken into consideration, along with national has grown rapidly, and exports may soon become security concerns. Developing a strategy for competitive with those of the newly a key industry sector would not be an easy task- industrializing countries because many transfers involve technical data and managerial expertise that are much more Publication of a red zone might lead to ad- difficult to bound than equipment and hard- verse Chinese reaction and would require con- ware, and because transfers involve combina- tinuing modifications as technologies and tions of equipment whose technical parame- bilateral relations change. On the other hand, ters may be different from the simple sum of the process of license review might be speeded the parts. The thrust of the effort would be and coherence in U.S. policy better assured if to chart a future course over a 5-year period, a more carefully defined red zone could be de- providing exporters and license examiners with veloped for use within the U.S. Goverment. better guidelines. There is widespread agreement that the U.S. Regardless of the approach taken, better use export control system could be improved by of the computerized data base for review of ap- concentrating efforts on controlling a small plications for export of equipment or for re- number of truly militarily significant items. view of technolo~”es equivalent to what has Better definition of the red zone would be con- already been perm”tted for export could ensure sistent with this. There is, moreover, the very more consistent decisions. Once a precedent- real danger that review of a.Zl exports above setting decision has been made to permit an the green zone level will be slowed unless the export of a certain type, subsequent decisions red zone can be better defined. should be consistent with those precedents un- The disadvantages of such an approach 5 would be to reduce the flexibility of the cur- ’A major criticism of the current U.S. export control system is that there have been only a handful of findings of foreign rent system and to make it even more impor- availability that provide the basis for removing items from the tant to revise such ~idelines in a timely fash- controlled list. 216 Technology Transfer to China ——-

less other, nontechnical factors come into play. The COCOM Review Process To ensure consistency in decision making, the various U.S. agencies involved in license re- By expanding the COCOM green zone (to view would need accurate information about permit COCOM countries to process more such precedents and common understandings cases unilaterally), COCOM member countries about implementation.57 set out to streamline the review of China cases. Revisions to COCOM China policy made in late From a public policy perspective, it maybe 1985 came at U.S. initiative, but they have essential to expand efforts to make the system apparently been well received by other COCOM more transparent. A number of approaches member countries. The immediate effect of could be considered. DOC m“ght issue periti”c these changes was to relieve pressures on the general p”dance to exporters about recent key COCOM organization that had been created decisions (without disclosing the names of ex- by a huge China caseload. The number of U.S. porters or con fi”dentialinformation). In recent China cases sent to COCOMdecLinedmarkedly years the publicly available annual reports on from 237in January 1986 to 64 in August 1986. export administration for one calendar year In 1986 the average processing time in COCOM have not been published until many months for China cases declined from 77 to 56 days later. Information about the status of China between JanuaIy and June but rose to 81 days licensing (numbers of applications approved, during the first quarter of 1987.58 On the other denied, and pending in the U.S. Goverment and hand, of total China cases closed out on a in COCOM) could be provided to the public on monthly basis, the percentage of those that a more frequent and timely basis. DOC has re- had been sent to COCOM actually rose from cently taken a step in this direction by setting 13 to 17 percent during the same time period. up an automated telephone system for providing exporters with information about the sta- The number of U.S. cases pending in COCOM tus of their cases. Efforts to expand automated declined in 1986 from 267 in January to 116 in December but rose to 187in April 1987; the systems by providing license reviewers with majority of U.S. cases pending in COCOM are electronic information on precedent-setting for exports to China. Table 20 shows that the cases may also contribute to the increasing con- number of pending U.S.-China cases in COCOM sistency in license reviews. Industry partici- declined by 57 percent between January and pation could also be strengthened through the December 1986. Submission to COCOM adds technical advisory committees (TACS) and spe- considerable time to the review period. cialized seminars for China exporters. Increased availability of information within Issue: Should China Be Removed From the Government and for Congress may also COCOM Review? be required. Expanded use of automated sys- If relations with China continue to improve tems implies increased accountability for li- and China’s economy continues to grow, censing officers and improved information ac- COCOM policy may require further revamp- cess by policy makers themselves.

58U.S. tiOC, August 1986.

Table 20.—U.S. Cases Pending in COCOM

China cases Other cases Total January 1986 ...... 267 23 308 June 1986 ...... 153 34 187 “AS mentioned earlier, exports are often permitted with con- December 1986 ...... 116 43 159 ditions. Disagreements arise as to whether a prior export has January 1987 . . . 143 31 174 established a “precedent,” or is more appropriately viewed as April 1987 ...... 187 63 250 a one-time conditional approval. SOURCE U S Department of State Ch. 8—U.S. Policy Choices ● 217

ing. Removing China from cOCOM review bers to return China to COCOM review. Nor would have some advantages, would send a would all COCOM members necessarily favor positive signal indicating full acceptance of removing China from COCOM at this point, China as a trading partner by the West, and considering the important role that COCOM should result in expanded trade in high-tech- plays in the review of military as well as dual- nology sectors that now exceed green-zone use exports and given their different perspec- guidelines. OTA’S finding that transfers of tives about East Asian security. Even if dual-use technologies are likely to have limited COCOM continued to review military exports effects on China’s military capability in the (while review of dual-use exports were elimi- near term provides support for removing China nated), some would argue that there is no over- from COCOM review. whelming reason why this step should be taken now. Although the COCOM process is opaque There is no easy answer to the question of and slow, it provides a mechanism for consen- whether the United States would stand to gain sus-building on China policies among the mem- in commercial terms if such action were taken. ber countries. The answer depends in part on whether U.S. exporters are disadvantaged by the current Some further “harmonization” of COCOM system. OTA heard widespread complaints country policies may be essential for the via- from U.S. exporters about loose export con- bility of the multilateral control system. As trols in other COCOM countries. However, discussed more fully in Chapters, no one would OTA was unable to substantiate these claims expect the COCOM countries to have identi- with specific examples in China. U.S. exporters cal approaches to export control, given their could help clarify this issue by providing hard widely diverging political and economic sys- evidence to the U.S. Goverment. On the other tems. Complaints of wrongdoing indicate deep hand, the different approaches of various suspicion by COCOM members about their COCOM countries to publishing China regu- associates in the multilateral controls system. lations provides one indication of leeway for A comparison of export control systems in legitimate differences in the interpretation of various suppliers is a necessary fi”rst step to- guidelines. It is also clear that the United ward further harmonization of approaches. The States is the only country that attempts to United States could best pursue this through limit unauthorized re-exports through third a joint effort involving other COCOM coun- countries. But exporters from other countries tries. The goal would not be to force other coun- also complain that the United States has used tries to change their systems, but rather to the export control system to its own commer- understand better where differences lie and de- cial advantage, by proceeding to liberalize U.S. termine whether these differences result in policies prior to agreement within COCOM.59 weaker controls or just different approaches By far the largest impact of removing China to controls. from COCOM would stem from faster review The United States could begin this process within the U.S. Goverment, rather than from by establishing the general principle that elimination of discrepancies in the policies of COCOM countries should strive to develop uni- other COCOM member governments. form controls on exports to China. The United There, however, would be some disadvan- States unilaterally controls some types of ex- tages to removing China from COCOM. If ports to till countries worldwide. While these China’s policies shifted dramatically (for ex- controls are not specifically directed toward ample, toward alliance with the Soviet Union), China, they do represent a divergence in the it could be difficult to persuade COCOM mem- U.S. approach. Over the long term, the ~nite~ States may be in a better position to persuade 5’It should be noted that the United States continued to submit U.S. cases that required COCOM review to COCOM after other COCOM countries to strengthen their the 1983 liberalization of U.S. policies. controls on re-exports if U.S. controls on ex-

7 2-? 49 () - 87 - 8 : (/1. 3 218 . Technology Transfer to China ports to other COCOM countries are further volves extremely complicated technical re- relaxed. views, which are not always effective in pro- One as yet little noticed effect of the revised viding information and analyses used by U.S. COCOM China policy maybe to bring to pub- exporter adminstrators. lic attention discrepancies among COCOM With the liberalization of U.S. controls on member countries in interpretation. Because exports to China, key decisions on nongreen the United States and some other COCOM zone exports have become more difficult. The member countries have published their own need to continually update the guidelines will regulations, based on COCOM policy changes, remain. On a multilateral level, COCOM pol- the technical parameters used in judgments icies will have to be reviewed and the treat- about China exports made in various countries ment of China considered in light of develop- are open to public scrutiny and comparison.60 ments in overall relations with the West. One If public debates over these questions expand, stimulus for another full review of China pol- the need for congressional oversight of the icy in the United States and COCOM would multilateral export control system may be be the buildup of another backlog of U.S. cases heightened. in COCOM. If, on the other hand, the U.S. Goverment were to adopt today a more active What Other Actions Could Be Considered? lead in reducing the COCOM list for China when the equipment and technolo~”es are no During the past 6 years, a series of impor- longer state-of-the-art or when they are m“dely tant, progressive changes have been made in available in Clu”na, a more measured and an- U.S. controls on exports to China. An impor- ticipatory approach could be developed. These tant issue is whether or not these changes have efforts, if pursued positively, could expand and been paced to maximize U.S. commercial and deepen consensus among COCOM member national security goals, and whether the proc- countries about technology transfer to China. ess of updating the export guidelines can be improved. DOC has recently proposed that distribution licenses be made available for China, a change Critics suggest that these regulations merely that would require legislative action. Such codify the U.S. approach as worked out in prac- licenses make it possible for IJ.S. exporters to tice during the period 1983-85. On the other export certain commodities to three or more hand, it is true that the original green zone in- consignees that have been preapproved as for- cluded only T CCL categories, whereas the eign distributors or users; they are considered green zone today was expanded in 1986 to 27 a‘ ‘special privilege, according to U.S. export categories (and later to 30). Some observers regulations. Internzil control mechanisms are have expressed concern that the stimulus for required to assure compliance. As U.S.-China new determinations in precedent-setting cases trade grows, some mechanism will be needed often comes from other COCOM member coun- to permit U.S. firms to obtain a license per- tries who push harder than the United States mitting them to make repeated sales of green- for approvals to export; they cite key decisions zone level items to trusted Chinese consignees. on sales of telecommunications switching equip- Other areas for future consideration include ment and seismic equipment as examples. controls on technical data exports (including U.S. industry representatives provide their training) and controls on temporary exports views through the TACS. But the process in- to trade shows. The pending export control issues are sig-

60St ephen E. Nordfinger reported that the U.S. Government nific~t ones that deserve high level attention had agreed to a British sale of advanced telecommunications in the United States and in COCOM. The solu- equipment that U.S. firms had been barred from exporting on national security grounds. This sale involved fiber optics. Bal- tions cannot inmost cases be aclu”eved through timore Sun, Dec. 28, 1986, p. 4A. le~”slation, but Congress can play an impor- Ch. 8—U.S. Policy Chokes ● 2?9

tant role by monitoring progress in improving implications of alternative future courses in the efficiency of the current sytem and in con- U.S.-China policy. sidering the commercial and national security

MILITARY COOPERATION

In 1981 China was removed from the list of Since 1981, U.S.-China military cooperation prohibited destinations for export of U.S. mu- and U.S. arms sales to China have been ex- nitions list items. While more than 6 years have panded. However, U.S. commercial arms ex- elapsed since that time, views differ about the ports to China do not compare with those to appropriateness of cooperation in this area, and South Korea, Indonesia, or Taiwan in dollar about how best to pursue it. Although press value, and official military cooperation has reports often give the impression that there been limited. Table 21 provides a comparison is a rapidly developing military relationship of U.S. commercial arms sales to selected des- between the two countries,6’ actual arms sales tinations. and military cooperation have been limited. Several high-level discussions have occurred, Differences in views about arms sales to China beginning with a visit to Beijing by Harold reflect underlying concerns about whether mil- Brown, Secretary of Defense in the Carter ad- itary cooperation should be emphasized in the ministration. The general framework for U. S.- bilateral relationship, and how it can contrib- China military cooperation was established in ute to broader U.S. strategic goals in Asia. a 1983 visit by Secretary of Defense Caspar It appears doubtful that U.S. sales of ad- Weinberger. The components area high-level vanced weapons systems will increase rapidly strategic dialogue between military leaders, in the near term. Differences between U.S. and functional military exchanges, and the iden- Chinese perspectives on a number of issues pre tification of several military mission areas for elude the formation of an alliance between the cooperation. High-level visits continue—the two countries. China’s limited financial re- most reeent in May 1987 when Yang Shang sources and its desire to obtain technology Kun, Vice Chairman of the Central Military rather than import complete weapons systems Commission, was hosted by Vice President also set constraints. George Bush. There are both advantages and disadvan- During this 6-year period, four military-re- tages to the approach taken by the United lated sales have received public attention. Two States to military sales to China. Blanket re- cases involved sales of civilian technology to strictions on arms sales have been eliminated, Chinese military end users: 24 civilian deriva- and licenses to export items on the munitions tives of Sikorsky Black Hawk military heli- list are now reviewed on a case-by-case basis. As arms sales and military cooperation proceed, however, will be important for the it Table 21. —U.S. Commercial Arms Exports United States to define more clearly those (thousands of dollars) areas for military cooperation, based on evaluations of past experience. OTA also concludes 1981 1982 1983 1984 1985 “ Total that U.S. officials making decisions on dual- China 0 1,000 984 22,732 3,151 29,516 Japan 344,862 300.000 439,238 546,874 301,647 3,014,444 use exports should be more aware of the scope Korea 28,710 25,000 123,513 122,299 36,041 615,258 and nature of munitions sales. Indonesia 6,673 10,000 25,083 27,197 23,088 132,570 Taiwan 66,731 75,000 124.785 133,133 100,000 838,337 NOTE ‘War value of delwer[es of mumttons-controlled (terns purchased directly Irom U S manufacturers Data do not include offlclal U S Govermenl programs such as foreqn mllliary sales In the case of Korea for example such of flc(al sales were valued at $266 m!ll!on In 1985 “See, for example, Edward Neilan, “Peking, U.S. Brass Get- SOURCE Oeparfment of Defense Secur[fy Assistance Agency fore~gn MI/L_wy Sa/es Fc?re[gn Mdl I+ ~ra~hington Tjrnes, May 14, 1986, P. 7 ting Along Well, . (Jry bmfwcfIon Sa/es am MdIfary ,. Lwslmce Facts (as of Sept 30 1985 I 220 Technology Transfer to China

- copters tj2 in 1984 ~d 5 General Electric tur Chinese capabilities to launch an offensive at- bine engines to the Chinese navy in 1985. tack and that they involve limited advanced The other two cases involve foreign military technology transfer. Military sales to date have sales (FMS)—direct government-to-government involved little production technology or com- tra.nsactions. G3 The most significant completed plete weapons systems. Observers note that applications for export of military hardware sale of an item on the U.S. munitions list was or technology more than 5 years old are viewed artillery shell technology. While some ob- G8 favorably by U.S. license reviewers. servers expected China to spend $500 million on artillery manufacturing equipment, the fi- All U.S. commercial arms sales are regulated nal value of the transaction was about $22 mil- by the International Traffic in Arms Regula- lion. G4 In May 1986 U.S. approval was given tions (ITAR), as implemented by the Office of for an FMS sale of 55 avionics kits ($10 mil- Munitions Control in the Department of State. lion each) to modernize China’s F-8 fighter. In DoD’s Munitions Directorate reviews some late 1986 it was reported that the U.S. Air but not all of the munitions export applicat- Force had signed a $501 million contract for ions. In recent years DoD has reviewed about the avionics upgrade and planned to issue re- one-fourth of the roughly 40,000 applications quests for proposals for the first 50 avionics for munitions exports worldwide submitted an- kits, to be delivered in 1991.66 nually. 89 DoD reviews a higher percentage of applications for export to China.70 The cases It appears that negotiators from the United that DoD reviews are the cutting-edge cases— States and China have concentrated their dis- those not previously licensed for a particular cussions primarily on mission-specific systems aG export market. used for tactical defense, including antitank weaponry that China needs to defend its bor- The review process involves the Department der against the Soviet Union. Repeated reports of States, DoD, and various military depart- of discussions over TOW antiarmor missiles ments and agencies, with industry represent- fall into this category. Another area is im- atives providing information. Many of the key proved air defense. I-Hawk antiaircraft mis- cases that DoD reviews require careful consid- siles are among the weapons that have been eration of the interests of different military considered. A third area is antisubmarine war- agencies involved, depending on the type of fare, where potential sales of towed-array so- technology or equipment. DoD officials tak- nars, and the Phalanx ship defense system ing the lead in munitions case reviews look to have received some public attention.’7 International Security Affairs (DoD) for policy guidance, taking an activist approach de- U.S. officials indicate that, for the most part, signed to build consensus on a joint DoD po- such systems would not significantly improve sition. dZThe helicopters included military entines. When sales involve major defense equip- FMS 69 CJince 1984 hag been available for China. In addition, 4 Mark 46 antisubmarine missiles and some training have been ment, valued at $14 million or more, or when provided through FMS. defense articles and services valued at $5o mil- “Roger W. Sullivan, “U.S. Military Sales to China, ” China lion are proposed, the President must notify Business Review, March/April 1986, p. 6. 71 86The kits include new radars, inertial navigation equipment, Congress 30 days prior to transfer. Congress head-up displays, air data computers, and a new data bus. See rarely musters the votes to block arms sales Aviation Week and Space Technology, Nov. 24, 1986, p. 28. proposed by the executive branch, but antici- e ‘ See Kerry B. Dumbaugh and Richard F. Grimmett, U.S. pated opposition from Members of Congress Arms Sales to Ch”na (Washington, DC: Congressional Research Service, July 8, 1985). dTThe United states agreed in principle to diSCUSS COOPWa- tion in modernization of the People’s Liberation Army antisub- ‘aSullivan, op. cit., p. 8. marine capabilities. See Report to Congress, fiscal year 1986, “DOS unilaterally reviews the other 30,000, by Secretary of the Navy John F. Lehman. See ch. 7 for a dis- 70A reasonable estimate is that DoD reviews about 80 per- cussion of issues surrounding possible transfers of antisubma- cent of the China munitions cases. Estimate will be verified. rine warfare technologies. “Sec. 36 9(b) (1) of the Arms Export Control Act. Ch. 8—U.S. Policy Choices ● 221 . — may cause administration officials to defer a for China.73 Other countries such as Italy are sale. In the spring of 1986, Congress reviewed also providing China with military technology the proprosed F-8 avionics package, which was subject to COCOM review.74 eventually approved.72 U.S. arms exports to In some cases, reviews of munitions cases China also receive COCOM reviews. are completed within a month of receipt of ap- The number of munitions export cases is plication, although cases sent to COCOM often small in comparison with dual-use cases. In take much longer. The task of licensing muni- 1985, the U.S. Goverment reviewed 11,000 ap- tions exports may be more manageable than plications for dual-use exports, and a total of that of dual-use exports because there are fewer 269 applications for munitions sales to China. applications to review. While there have been As table 22 shows, the percentage of applica- few trade missions to China by U.S. industry tions denied is higher and the share of those officials involved in arms sales, this situation approved lower for munitions applications may change in the years ahead. than for dual-use exports. Fewer than 1 percent of the dual-use applications were denied Issue: Is There a Discrepancy Between and more than 70 percent approved in 1985. Dual-Use and Military Exports? In the same year, 60 percent of the munitions Some observers have charged that there is cases were approved (20 percent approved with a disjunction between U.S. dual-use and mili- provisos), and 11.5 percent denied. tary exports to China. To cite one example, Out of the total 860 munitions applications some argue that there is a discrepancy between reviewed over the course of the past 6 years, U.S. reluctance to provide bulk licenses for about 150 involve equipment exports reviewed microcomputers and the fact that discussions by COCOM. In the past year, the number of are under way about assisting China in im- applications has increased (as shown in table proving its surface-to-air missile systems. The 17). During the first 5 years of the 1981-86 promptness of decision making and the atten- period, 80 cases were sent to COCOM. During tion given to any reports of talks concerning the period August 1985 through July 1986, arms sales to China leave some observers with another 70 cases were submitted to COCOM, the impression that it is easier to get an approval for military exports than it is to get ap- indicating growth in munitions applications 75 for China. Since 1982, U.S. cases have made proval for dual-use exports. up 60 percent of all COCOM munitions cases Arms exports and dual-use exports are covered by different sets of regulations, and licens- 7 ’For a summary of the arguments against the sale, see Mar- ing is handled by different government agen- tin L. I.asater, Arming the Dragon: How Much U.S. Military Aid to China? ( Washington, DC: Heritage Foundation, Lecture cies. There is no simple basis for comparing No. 53, April 1986). the levels of technology in arms sales and dual- use sales. The former have specific military applications, whereas the latter (as discussed in Table 22.—Munitions Licensing for China, 1981-86 ch. 7) may be used more generally by the mili-

Numbers of cases 73Data provided to OTA by the Office of Munitions Control, 1981 1982 1983 1984 1985 1986 TOTAL September 1986. Approved 5 28 60 83 109 50 335 74An official from China National Aero-Technology Import Denied 12 15 31 31 23 82 and Export Corporation stated that Aeritalia was assisting Returned without China in developing the A5-M, a supersonic, twin-jet attack air- action 4 17 40 57 69 4(I 227 craft to be used by China and exported. See FBIS, Dm”~y Re- Prowso 3 17 25 34 55 29 163 port, China, Nov. 6, 1986, p. A4, s Total 12 44 140 197 269 198 860 ‘ See comment by Madelyn C. Ross, “China and the United NOTE Data for 1986 through Sept 9 Totals may no! add up because a few cases ha(e been States Export Controls System, ” The Columbia Journ~ of canceled or lost Cases do not include temporary exporls World Business, spring 1986, p. 31. In order to analyze this SOURCE U S Department of Stafe Off Ice of Mun(hons Confrol data proilded to the Of fre of question, it would be useful to compare the technology involved Technology Assessment Seplember 1986 in actual exports of dual-use and munitions items. 222 ● Technology Transfer to China

tary and require modification. OTA has not tively new, and more importantly because U.S. conducted a systematic analysis of the rela- policies have not clearly defined thresholds for tionship between dual-use and military exports U.S. sales and assistance. General statements to China. However, the available data do not about “mission areas” come the closest to iden- suggest that m“h”tary exports to Clu”na to date tifying types of exports that are unlikely to have outpaced dual-use exportsin technology grow rapidly. level. Moreover, the volume and dollar value It may be useful to consider the range of have been much lower. alternatives available in the realm of military There is a separate but related question cooperation. Through high-level consultations about the resources devoted to reviews. Re- and dialogue, Chinese and American officials views of applications to export lower-level, share their perceptions of important strategic dual-use equipment can be quite lengthy, leav- issues. Exchanges of military personnel are ing many participants to conclude that U.S. another mode for military cooperation. If ex- agencies waste time focusing on such cases changes can be developed in a truly reciprocal while munitions cases are handled more expe- manner, they provide military officers with ditiously. However, the comparatively hi”gher new experience and understanding of the roles percentage of denials for mum”tions applica- played by their counterparts.’b Military coop- tions suggests that rew”ewers are no more will- eration could also include intelligence sharing, ing than their counterparts review”ngdual-use port calls, and joint exercises. exports to approve exports. Sales of equipment and technology, includ- No systematic comparison is made between ing training and maintenance, are perhaps the dual-use and munitions export. In the future, most publicized dimension of the evolving rela- as nu”h”ta.ry exports increase, comparisons of tionship in the military realm. One issue is the dual-use and military exports may be needed extent to which such sales will be conducted to ensure consistent poh”cyimplementation. In- on a government-to-government basis. Some formation about recent military sales of cer- observers believe that the Chinese would pre- tain types could, for example, be useful to those fer not to use FMS because this involves rely- reviewing policies of related dual-use technol- ing on DoD to act as a middleman between the ogies. It will also be important to develop Chinese buyer and the U.S. producer.” Another clearer guidelines about the types of military issue is whether or not U.S. sales will be di- technologies and equipment permissible for ex- rected toward improving China’s own military port and those that, for reasons of national forces or toward providing China with equip- security, cannot be exported. ment and technology needed to expand its own arms exports. Issue: How Far Should the United States Go in Military Cooperation? It is well to remember that an array of factors will probably limit U.S.-China military co- U.S. policy is based on the belief that mili- operation, despite the gains that might be tary cooperation is a natural part of an evolv- achieved in increased mutual understanding, ing bilateral Sine-American relationship that intelligence sharing, and in strengthening is nevertheless unlikely to become an alliance. China’s ability to defend itself against Soviet Seen from this perspective, gradual steps aggression. On the Chinese side, these con- toward expanded military cooperation will not create Chinese “dependence” on U.S. technol- “Some observers conclude that U.S.-China military exchanges ogy, but rather build shared experience in a to date have not been reciprocal-that the United States has few key areas. given much more than it has received, “Sullivan, op. cit., p. 9, An Atlantic Council report favored The future of U.S.-China military coopera- use of FMS sales on the grounds that they “permit the U.S. tion, however, remains uncertain. This is partly to be responsive yet retain sufficient controls over what China CtUl buy . . .“ See China Policy for the IVex.t Decade, Atlantic because experience is limited and compara- Council, 1983, p. 39. Ch. 8—U.S. Policy Choices w 223

straints stem directly from a desire to avoid wan and its supporters. Continuing differences dependence on any outsiders and a determi- in perspectives over Taiwan will, however, limit nation to pursue an independent foreign pol- U.S. military cooperation with China because icy. On the U.S. side, uncertainty about China’s interested parties will carefully scrutinize pro- future policies and effects on other Asian coun- posed new arms sales to China in this context. tries remain important constraints. Some may wish to avoid all transfers of mil- Taiwan is a case in point. Since the early itary equipment and technologies on the grounds 1980s, when the United States decided to per- that these are not the kinds of transfers that mit arms sales to China, the Chinese Govern- China most needs, or that building China’s mil- ment has objected to continued U.S. arms sales itary could threaten neighboring Asian nations to Taiwan. The Taiwan Relations Act of 1979 even if there is no significant threat posed provided for continuing U.S. support of Tai- directly to the United States. Others see mili- wan’s defense requirements, while the Shang- tary cooperation as essential to an evolving hai communique of 1982 states that the United U.S.-China relationship. The United States can States “does not seek to carry out a long-term benefit from certain types of cooperation with policy of arms sale to Taiwan, that its arms China that expand knowledge of Soviet activ- sales to Taiwan will not exceed, either in qual- ities and deepen understanding of China’s mil- itative or quantitative terms, the level of those itary and the role that it plays in Chinese mod- supplied in recent years since the establish- ernization. ment of diplomatic relations between the United 8 The shape and nature of U. S.-Ch”na m“litary States and China . . .“7 Built into U.S. arms cooperation must be further defi”ned and based sales policy is thus a delicate balance of U.S. on growing experience that permits policy interests vis-a-vis China and Taiwan. makers to evaluate risks and benefits to the Each major arms sale to either party raises United States. It will be important to review opposition and concern in some quarters. The the record periodically and update U.S. export United States continues to sell Taiwan more guidelines in light of changes in technology and than $600 million in arms annually. China ob- (most importantly) political relations. As dis- jects to these sales. It was reported, for exam- cussed in chapter 7, case-by-case decisions on ple, that Beijing recently questioned U.S. munitions applications must reflect a broader transfers of technology Taiwan needs to de- strategy designed to promote U.S. interests. velop it own fighter aircraft as contrary to the 7g While military cooperation has been limited terms of the Shanghai communique. In the and will likely remain so in the near term, it past, the United States refrained from selling is important to recognize that it carries sym- Taiwan certain kinds of military equipment bolic importance. Discussions between Chinese (such as the F-20). The U.S. Government has and U.S. military officials send important sig- pursued sales such as the recent F-8 avionics nals to the Chinese and to other countries in package for China despite criticism from Tai- Asia. U.S. policy makers may wish to keep this “’Joint Communique of Aug. 17, 1982. broader context in mind as they define the “Nayan Chanda, “A Technical Point: U.S. Rejects China’s scope, nature, and future of U.S. military co- Stance on Technology Transfers to Taiwan, Far Eastern Eco- nomic Re\,iew, Aug. 26, 1986, p. 26. operation with China.

SCHOLARLY AND TECHNICAL EXCHANGES

A wide range of activities between the which have brought some 17,000 Chinese to United States and China are referred to as sci- U.S. institutions of higher education, and the ence and technology (S&T) exchanges. These varied exchange and cooperative activities un- include exchanges of students and scholars, der the 29 protocols signed by the technical agencies of the U.S. Government and its Chi- that have explicit technology transfer dimen- nese counterparts. sions, such as the agreement between Geor- gia Tech and the Chinese Association for Sci- The diplomatic foundation for Sine-Ameri- ence and Technology. can S&T exchanges is the U.S.-China Agree- ment on Cooperation in Science and Technol- Although there have been some problems for ogy of 1979. Under this umbrella agreement the United States in the areas of reciprocity are the Agreement on Cooperation in Educa- and access to Chinese research sites and ma- tional Exchanges and 28 other agency-to- terials, the exchange programs have been suc- agency agreements. Activities under the um- cessful in achieving most of their initial main brella agreement are overseen by the U. S.- objectives. These objectives-in addition to the People’s Republic of China (PRC) Joint Com- manifest objectives of S&T cooperation and mission on Science and Technology, which assisting China in its modernization-included meets biennially. Since the agreement was the improvement of political relations, the signed, there has also been a proliferation of establishment of knowledgeable relations be- nongovernmental exchange and cooperative tween the technical communities of the two activities involving universities, professional countries, and the cultivation of informed un- associations, and industry—including some derstanding, if not sympathy, toward the Ch. 8—US. Policy Choices ● 225

United States among a new generation of Chi- will leave the United States with favorable im- nese elites. Less clear is the contribution of the ages not only of U.S. society generally, but also exchanges to the promotion of U.S. commer- of U.S. technology. cial interests in China. Although the student and scholar exchange This section outlines the scope of the ex- program gives the United States a powerful changes, including both student and scholarly policy tool, it does not lend itself to fine-tuned exchanges and activities under the sponsor- policy intervention, either for promoting tech- ship of the bilateral agreements, and consid- nology transfer or for controlling it. If Con- ers options for strengthening the exchanges. gress wishes to encourage more exchanges, it could increase the budgets of those agencies that have a role in supporting them, such as Student and Scholarly Exchanges the National Science Foundation and the U.S. The direct Federal Government role in sup- Information Agency. However, if it wishes to porting the education of Chinese scientists and do less, the reduction of China-related activi- engineers, while crucial at the inception of the ties in those agencies would affect only a very program, is now relatively small in compari- small portion of the total exchange activity. son with activities conducted in the private sec- To make more of an impact in reducing ex- tor and through universities.~” Indirectly, how- change activities, the United States would ever, the Federal Government is involved have to use other means, which would repre- through the research support it provides to sent major changes in China policy and would universities, some of which supports Chinese affect other non-China-related values. Thus, graduate students and visiting scholars. The limiting the issuance of visas or attempting monetary value of this support is difficult to to limit Federal funds used to support Chinese determine. graduate students would signal a change in U.S. friendly intentions toward China, and The education in science and engineering pro would also compromise academic values and vialed to Chinese students in U.S. (and other principles supporting the free movement of foreign) universities is arguably the most im- people. Efforts to limit the access of Chinese portant contribution to the development of to sensitive research must be seen in the con- Chinese technical capabilities now being made, text of the larger controversies over the limi- whether it is called technology transfer or not. tation of foreign nationals on national security It is fair to say that the Chinese see it this way grounds to sensitive U.S. research, controver- as well, and having access to our universities sies that must be approached with care since is a powerful inducement to the Chinese. From they involve clashes of very basic U.S. values. the U.S. point of view, there is clearly the hope that China’s future scientists and engineers The large numbers of Chinese students and scholars coming to the United States indicates that the U.S. university system is a magnet ‘(’This is not to say that the Government is not involved in to students from around the world. The growth exchanges. The U.S. Information Agency (USIA), National Sci- ence Foundation (NSF), and National Endowment for the Hu- of the foreign student population raises many manities (LNEH), ior instance, all support exchange activity. important issues about the U.S. role in sus- USIA and NEH support, however, goes mainly to support t aining international science, the costs and ben- Americans studying in China, while NSF supports collabora- tive research and exchange activities in the sciences, adminis- efits to the United States of playing this role, tered by the Committee on Scholarly Communications with the and the implications for U.S. technological People’s Republic of China. When compared with the extensive competitiveness with regard to trade and na- educational exchanges conducted independently of the Federal Government, however, these federally supported programs are tional security.” not large. For an account of the distribution of effort in spon- soring exchanges, see U.S. National Academy of Sciences, A Relationship Restored: Trends in U.S.-China Educational Ex- “Dorothy S. Zinberg, “Sending Ideas Abroad: The Educa- changes, 1978-1984 (Washington, DC: National Academy Press, tion of Foreign Scientists and Engineers, ” unpublished paper, 1986), ch. 4. Center for Science and International Affairs, Kennedy School 226 . Technology Transfer to China

The Bilateral Agreements In recent years, the growth of activities and the relative success of the programs have led Although the amount of government-to-gov- to an increase in the managerial requirements ernment S&T activity varies from protocol to for the entire program of bilateral exchanges. protocol, the government-to-government bi- The science office in the U.S. Embassy in Beij- lateral agreements have also been, on balance, ing now includes four positions and is one of quite successful. Activities under the protocols the largest in the world. The program as it now have also done much to bring the technical stands, strains the managerial capabilities of communities of the two countries together, to the Government; yet, at the same time, more improve political relations, and to offer mutual could be done by way of interagency coordi- scientific benefits. In terms of the number of nation and liaison with the private sector to protocols, the U.S.-China S&T program is the obtain more benefits from the program for the largest bilateral program maintained by either United States. country. The U. S.-PRC Joint Commission on Science When the government-to-government pro- and Technology in recent years has tended to grams were begun, they received high level at- focus mainly on the activities under the agree- tention from the President Science Advisor, ment and less on the broader range of S&T is- the Office of Science and Technology Policy sues facing the two countries (as it did in its (OSTP), and the NSC, and active interagency early years). Since the activities under the coordination from the Department of State. agreement have become more routinized, and As the programs began to succeed, their ad- in general are going smoothly, the activities ministration became more routine, and high- of the joint commission have become more Ievel attention decreased (even though inter- symbolic, and the time and money spent for est at OSTP and in some offices at the State its meetings have been questioned. Department has remained high) .82 In recent years, partly due to the decentralizing reforms Other questions about the programs pertain in Chinese S&T, there has been a proliferation to whether the United States can capture more of new activities involving units of the two gov- commercial benefits from the programs and whether it would be a good idea to establish ernments outside the framework of the pro- a formal aid program for China. tocols. These developments have led some observers to ask whether the time may not be right for a reexamination of the programs. U.S. participation has been funded out of the Issue: What Could Be Done To Expand Technology Transfer Under the regular domestic budgets of the technical agen- Bilateral Agreements? cies on the basis of the value of participation for the agency involved. While this approach The U.S.-China program presents opportu- has a number of virtues, it means that there nities for promoting technology transfer if the may be areas where the domestic agency has United States wishes to pursue a more active no interest in programs with the Chinese even strategy. though there may be foreign policy or commer- One possibility would be to provide supple- cial benefits for the United States and a high mental funding for theprogmms under thepr~ degree of Chinese interest. tocols so that agencies now facing financial constraints could become more active. A suggested approach would be the creation of a of Government, Harvard University, September 1985; National Science Board, Science indicators: The 1985 Report (Washing- modest budgetary allocation for activities that ton, DC: U.S. Government Printing Office, 1985), pp. 18-20. would advance foreign policy and/or commer- “It is perhaps telling that there is only one person at the OSTP cial interests but that cannot be justified out level with responsibility for international cooperation, with China being but one country among many falling within the area of of current agency budgets in terms of domes- responsibility of this position. tic mission requirements. Ch. 8—U.S. Policy Choices 227

In the course of examining technology trans- commercial pressures are greater than they fer in the surface transport area, for instance, currently are with China. Expanding private- OTA consulted with the Department of Trans- sector representation on the U.S.-China Joint portation (DOT). Although DOT negotiated an Commission could help insure an informed in- agreement with Chinese counterparts, there dustrial perspective on the bilateral agreements, has been little activity, partly because DOT and on China’s development of technological does not see the justification for spending re- capabilities. Planning for the meetings should sources on programs that will not advance the afford the United States an opportunist y to take Department’s mission. stock of its entire S&T relationship with China. Participating in the meetings would permit Yet, in light of China’s pressing needs in the better representation of U.S. commercial in- transport sector and the considerable exper- terests. This would entail, however, changes tise residing in DOT, there would appear to in staffing and management in the Department be benefits for both countries if a program of of State and the OSTP, more high-level atten- cooperation were begun. The potential bene- tion to the importance of S&T in the Depart- fits to the United States would be even greater ment of State, and more active and enlight- if such a program of cooperation involved the ened interagency coordination. private sector, and if U.S. participation were designed so that the Chinese could be exposed While there is some evidence that activities to the transport technology available from U.S. in the bilateral programs have led to some industry. Inasmuch as DOT does not see a de- equipment sales, there has been no systematic partmental interest that would justify spending effort to assess the value of the programs for on such a program from its domestic budget, U.S. exports. This also appears to be the case a new approach to funding would be necessary. for the Dalian management training program, run by the DOC. The State Department and Another possibility would be to expand the OSTP could assess the commercial impacts private-sector representation on the U.S. side of the programs and make a stronger effort of the Joint Commission, to broaden the per- to inform businessmen and trade promotion spective of the ComnM“ssion and to identify bet- officials in the Foreigm Commercial Service ter the commercial prospects associated with (FCS) about opportum”ties. Closer coordination programs. The U.S. private sector has sug- between the S&T office in the U.S. Embassy gested commercial representation in the co- in Beijing and the representatives of the FCS operative programs with Japan and Korea, there would be one mechanism. countries where technology-based competitive

PROMOTIONAL POLICIES Since the normalization of relations between ket share in China has actually declined over the United States and China in 1979, trade has the past few years. 3 been viewed as an area of “great promise. ”8 There are a variety of explanations for these But in 1986, U.S. exports to China were lower trends, including the possibility that Japanese in dollar value than the 1980 level, although firms may be better positioned to compete for the composition of those exports has shifted certain segments of the China market than away from foodstuffs and materials and to- 84 U.S. firms are. U.S. business may, at any rate, ward machinery and equipment. U.S. mar- have learned important lessons in trading with

“See, for example, White House Press release, Apr. 27, 1984, “Current U.S. dollars: in 1980 U.S. exports were valued at U.S. ran a trade deficit with China of more than $2.1 billion $3.7 billion; in 1986 exports were valued at $3.1 billion. These in 1986. Chinese statistics show that China imported more from are official U.S. trade data. According to U.S. trade data, the the United States than it exported. 228 . Technology Transfer to China

China over the past 7 years. Now there is a tries could relieve pressure on U.S. markets general recognition that China wants U.S. tech- and send a strong signal of support for an open nology and investment, as much if not more than Asian market. it wants U.S. imports of finished products. The United States and China have several Many U.S. exporters and some Government bilateral agreements that provide a basis for officials believe that the U.S. should be able trade and technology transfer. Under the bi- to do better in exporting to China. The pur- lateral trade agreement that became effective pose of this section is to examine the U.S. pol- in 1980, the two countries provide most fa- icies and programs that, broadly defined, sup- vored nation (MFN) treatment for imports,85 port expanded trade and technology transfer. arrangements for business representation, and In contrast to Japan, the United States has settlement of trade disputes. China also agreed not developed a systematic effort to promote to provide patent, trademark, and copyright exports to China. On the other hand, small pro- protection equivalent to that of the United grams like TDP have been well received. The States.EG In contrast to the trade agreements U.S. Government could do more to support between Japan and China, where the two coun- U.S. exporters, through focused programs like tries set specific goals for imports and exports TDP that permit U.S. firms to help shape de- of certain types, the U.S.-China agrwment con- velopment projects at an early stage, by tains no numbers or specific sector targets.87 stronger leadership in actively seeking oppor- The U.S.-China grain agreement, which in- tunities for U.S. business, and in coordinat- cluded annual targets for Chinese purchases ing efforts. Such an approach might include of 6-8 million metric tons of U.S. wheat and selected use of financing support, but more im- corn during the 1981-84 period, has now ex- portant would be a national-level commitment pired. China did not meet the targets during to expand U.S. exports in particular sectors the final two years, in part to show resistance such as telecommunications, where technology to U.S. restrictions on Chinese textile imports transfer as well as exports of equipment and into the United States. As China became the services are essential for meeting China’s mod- largest exporter of textile and apparel goods ernization goals. to the United States in 1987, pressure grew

But as important as China is, U.S.-China within Congress to restrict imports from Chinal- trade should not be viewed in isolation from and other countries. 88 A major ch~ge in po larger policy issues. Whether and how the icy was the recent announcement that the Zhen- United States chooses to formulate a more co- jiang provincial Government would begin pur- herent approach to promoting U.S. competitiveness and global trade is the key issue on 85The United States has decided to continue MFN status for the broader international economic policy China by using general waiver authority under the Jackson- Vanik amendment (of the 1974 Trade Act). A decision was taken agenda. China is arguably a good test case in in June of 1986 in the form of a presidential message to Con- the sense that prospects for expanded trade gress, and elaborated upon in State Department testimony be- are greater here than with many developing fore the House Ways and Means Committee. *’Agreement on Trade Relations Between the United States countries that suffer from high debt and slug- of America and the People’s Republic of China, 1979. gish growth. But U.S. Government policies, “The Japan-China agreement, for example, set targets for Chi- however promotional, are only one element. nese exports of crude oil and coal to Japan. The targets have not been met in many cases. The Japanese oil industry, for ex- The future shape of U.S.-China trade will be ample, was unenthusiastic about importing waxy Chinese crude more directly affected by decisions taken by oil. See ch. 5 on supplier country policies for a more detailed U.S. firms themselves and by the Chinese Gov- discussion. ‘“This legislation, known as the Jenkins bill, did not become ernment, particularly with regard to regula- law in the summer of 1986 but was introduced in early 1987. tion of foreign business. Important too will be The current textile agreement with China is effective through the approaches taken by Governments in other the end of 1987. It places quotas on 67 categories of Chinese textile and apparel exports. The United States has the right countries such as Japan, where expanding im- under the treaty to negotiate quotas when imports disrupt the ports from China and other developing coun- U.S. market. Ch. 8—U.S. Policy Choices ● 229

, 1

Xfnhua News Agency

Steel rails ready for shipment at the Panzhihua Iron and Steel Co. China’s steel production is rising, and technology transfer has been an important factor. chasing U.S. grain and might buy as much as on exports of textiles and apparel for a quar- 50 million tons of corn over the next 5 years.8g ter of its export earnings.g’ Exports to the United States climbed to more than $760 mil- Textiles remain the primary irritant in U. S.- lion in the first half of 1986, about a quarter China trade. The current bilateral textile agree of total exports to the United States in dollar ment with China places import quotas on a value. As Chinese textile exports continue to large number of items and permits the United expand, some within Congress continue to call States to negotiate further quotas when im- go for the protection of U.S. industry and U.S. ports disrupt the domestic market. At least administration officials warned that rapid 20 categories of textile and apparel goods were growth in imports would not be permitted. The under unilateral embargo by the U.S. in the bilateral textile agreement with China expires spring of 1987 because they were found to have in December 1987. injured U.S. textile producers. China depends —- -— Other detailed U.S.-China agreements in- g ‘ China has itself exported a record 6 million tons of corn dur- clude nuclear cooperation, industrial and tech- ing the 1985-86 market year, but the southern provinces have difficulty obtaining grain needed for livestock, meat, and shrimp production, some of which is destined for export. ‘Quotas cover 75 percent of U.S.-China textile trade. See Jer- ome Turtola, “Textile Trade Tensions, Ch”na Business Review, September-October 1986, p. 27. ‘]Export earnings for 1985 were $4.36 billion. 230 ● Technology Transfer to China

nological cooperation, and taxation.gz The FCS staff of DOC assist U.S. businessmen United States and China are still negotiating in doing business in China and in organizing an investment treaty, however. Critical differ- the missions associated with the work pro- ences remain over issues such as dispute set- grams under the industrial cooperation agree- tlement and compensation for expropriation. ment that put U.S. business in touch with Chi- While the absence of a bilateral investment nese buyers.96 FCS personnel stationed in treaty with China may not put U.S. firms at China perform an important liaison function a disadvantage vis-a-vis the Japanese, for ex- between potential Chinese buyers and U.S. ample, some believe that it is one element in sellers of equipment and technology. There are a climate of uncertainty that limits U.S. busi- now 11 professional FCS staff in China.97 ness investment.93 The Dalian Management Center, a joint U. S.- A number of U.S. programs support tech- Chinese effort, is another mechanism for trans- nology transfers to China, although that is not ferring U.S. management skills to China. The the primary goal in most cases. Among these center’s more than 1600 graduates include are agreements for S&T cooperation in specific many who now hold high positions in Govern- areas such as telecommunications.94 (Policy is- ment and industry in China. The lead agency sues concerning these agreements are discussed on the U.S. side is the DOC. In the case of the more fully in the previous section). Under the Da.lian program, short-term as well as long- industrial and technological cooperation ac- term prospects are uncertain because of fund- cord, a number of sector-specific trade missions ing problems. Many other supplier countries and seminars have been sponsored.95 fully fund multimillion dollar management training centers under the auspices of their aid The United States and China have also in- programs, but the U.S. program has been stitutionalized bilateral consultations on issues jointly funded by the two countries. The Chi- relevant to technology transfer. The Joint nese apparently favor continuation of a gov- Commission on Commerce and Trade (JCCT) ernment-togovernment program, with a larger discusses trade and commercial issues at its share of funding from the U.S. Government. meetings. It is staffed mostly by DOC, which is also responsible for the industrial technol- The Export-Import Bank of the United ogy cooperation projects mentioned above. The States has, over the years, offered a variety Treasury Department is the lead U.S. agency of financial services, including loan guarantees on the Joint Economic Commission, which and direct loans to both U.S. exporters and for- deals with macroeconomic issues, including in- eign buyers. Between 1979 and the fall of 1986, vestment. the ExIm Bank had issued only three direct ————.-—. 98 ‘zRatification of the tax treaty signed in 1984 was blocked loans for China exports. The total value of by Senator Jesse Helms until June 1986, when the Senate For- these loans was $120 million. eign Relations Committee approved a special protocol negotiated by Treasury Secretary James Baker. The protocol bars Table 23 provides an overview of ExIm pro- resident firms from third countries from benefiting from the grams affecting China trade. Major projects treaty, thus eliminating opposition that had been raised on the grounds that it would permit “treaty shopping. ” U.S. officials under consideration include power stations, indicated that the treaty would significantly reduce the taxes paid by U.S. firms to the Chinese Government and that high- technology firms in particular would benefit. geIn Ig83 the FCS had three positions in China.

gsThe United Kingdom and West Germany have sign~ g~There is ~ addition~ Slot, that is vacant. COInnlUIliCatiOIl bilateral investment treaties (BITs) with China: Japan has not. with FSC in Washington, DC, December 1986. “The protocol is the latest negotiated since the 1978 umbrella gsThe House ~d Senat,e agr~ to authorize subsidies tO COWX agreement for S&T cooperation. Disagreements concerning fiber a $1.8 billion 1987 direct loan program. The conference com- optics delayed the signing of the telecommunications protocol mittees also established a $300 million Tied Aid Credit Fund in May 1986. The telecommunications protocol is a general to counter mixed credits used by other major suppliers. The framework rather than a detailed outline of working programs. “I-Match” program proposed by the administration was re- See OTA, Energy Technology Transfer to China, 1985, for a tained, but significant conditions put on its use. The program discussion of energy-related agreements. permits the ExIm Bank to solicit lenders for loans to foreign “’’Work programs” have been developed in electronics/ purchasers and make up the difference between domestic and telecommunications, metallurgy, aerospace, industrial renova- foreign interest rates. The ExIm Bank requested $100 million tion, and machine building. for the tied aid fund in its Fiscal Year 1988 budget proposal. Ch. 8—U.S. Policy Choices ● 231 —

Table 23.—Export-import Bank Programs for China, Inclusive 1979-86 (in U.S. million dollars)

Amount or Date authorization Buyer Supplier Products Direct loans: 9/81 28.6 China Machine Various Manufacturing equipment 9/81 28.4 China Machine Combustion Eng. Boiler and air preheat manufacturing 5/86 87.2 Huaneng International Power General Electric Coalfired power plant Development Corp. Small Business Credit Program: 1/85 4.25 Gua;gdong Power Dev. Co Bechtel Transmission, project management 1 /86 8.5 PRC Various Grain storage tanks Working Capital Loan Guarantee Program 5/83 3.0 China Native Produce Xylo Logs

9/83 0.683 China Packing Corp. Tools and Machinery Can manufacturing 3184 1.5 China Machine Exlmport Delta Brands Aluminum tension-leveling line 1/85 0.181 Jiangsu Import Corp. Various Export capital goods 2/85 0,195 Heilongjiang International Various goods Export capital 3185 0.180 Shanghai Instruments Exlmport Comtec Economation Quartz crystal resonator manufacturing 4/85 0.207 China North Industries Corp. Various Machine tools Computer software 4/85 0.274 China North Industries Corp. Various Tube pipe manufacturing equipment and technology Various production equipment 6/85 1,8 China Electrical Exlmport — N –OTE Exlm also provide; short.term Insurance p;llc[es covering contracts worth about $17 million In contracts SOURCE ExportImport Bank data provided to the Office of Technology Assessment in August 1986 transport, and telecommunications. Accord- in equipment and component supply normally ing to ExIm officials, many of the projects sup- expand. In the case of U.S. ExIm financing, ported by the bank involve significant tech- 100 percent of the long-term financing pro- nology transfer. The Combustion Engineering vided by the ExIm Bank goes to U.S. firms, project, for example, included transfer of pro- thus increasing U.S. exports.loo The bank can duction know-how for boiler manufacturing. provide support for projects involving service exports, technical training, and technology Trade finance can be a critical element for 10 transfer. 1 influencing the ability of a U.S. firm to win a contract. To cite one example, a consortium Views differ about the adequacy of U.S. offi- led by G.E. recently won a contract to provide cial financing. The U.S. Government has taken equipment for coal-fired power stations to the the general position that the private sector Huaneng International Power Corporation. should be primarily responsible for trade fi- The G.E. contract, reportedly worth $588 mill- nance. In contrast to other supplier countries, ion, involved official export credits (see table where the provision of export credits is based 23) and a significant countertrade element.” on the principle that all projects that meet certain substantive criteria should be supported, Since large capital-intensive projects in de- the United States has turned in a period of bud- veloping countries often depend on the sup- getary constraint to a philosophy of support- port of foreign lending and guaranteeing in- ing only those projects that demonstrate extra- stitutions, ExIm financing can be critical. ordinary need-for example, those that involve When official financing is available for a proj- a competing foreign bidder assisted by govern- ect, a U.S. bidder may be better able to pur- ment-sponsored export credit. In recent years sue negotiations for projects. Once an initial China has preferred to use more confessional contract has been won with official export financing, the prospects for followup participation ‘wU.S. firms have participated in energy development projects -- in China supported by the Japanese ExIm Bank. ‘gSee International Trade Reporter, June 4, 1986. G.E. report- ““I n recent years, the bank has supported projects involving edly agreed to sell Chinese goods in conjunction with the con- licensing agreements where significant equipment exports were tract. See also Financial Times (London, Feb. 27, 1986), p. 7, involved. 232 ● Technology Transfer to China —.

Table 24.—OPIC Insured Investments in China (in U.S. million dollars) — .- — .— Insured Investor Project investment AMC ...... Manufacturing 4-wheel drive vehicles 14.4 ‘--- American President Lines ., ...... Containerized shipping 0.874 AMF ...... Manufacturing electrical relays 1.0 AMF ...... Manufacturing inflated balls 0.855 Caterpillar Far East ...... Spare parts for machines 2.0 Combustion Eng...... Produce ceramic fiber 0.378 Continental Enterprise ., ...... Feedmill, poultry hatcheries 0.900 CW Communications ...... Publish computer newsletter 0.110 Dresser Industries ...... Conductor wireline services 4.9 E.R. Squibb...... Manufacturing pharmaceuticals 0.900 Essex Group...... Modernize cable plant 4,1 Foxboro Co...... Manufacturing industrial process control instruments 4.4 General Foods ...... Manufacturing dextrin and starches 1.4 Gillette Co...... Manufacturing razors, blades 1.2 Internatl Bechtel ...... Establish engineering consulting firm 1.3 International Nabisco Brands . . Manufacturing biscuits and crackers 4,0 Kowin Development ...... Establish and operate hotel 9.0 Otis Elevator...... Manufacturing elevators, escalators 1.3 Pennzoil ...... Oil and gas exploration 100. Smithkline Beckman ...... Manufacturing pharmaceuticals 3.9 Solid State Science...... Manufacturing semiconductors 0.438a System and Applied Science. ... . Earth satellite station 0.425a Texaco ., ...... Oil and gas exploration 50. General Foods ...... Manufacturing beverages 0.873 Smith kline Beckman ...... Manufacturing pharmaceuticals 0.270

Total ...... — ...... $209.4 ~o–ntractors’ letter of credit Insurance SOURCE OPIC, August 1986, data supplled to the Off Ice of Technology Assessment

aid-type financing that is available from other OPIC had insured 20 U.S. investors (covering supplier countries at lower interest rates. Some investments valued at $209 million) against believe that the United States should offer political risk in China. Table 24 provides a list more official financing, perhaps in the form of of those investments. mixed credits. This issue is discussed below. OPIC has issued only one loan for a project At any rate, prospects for use of ExIm in China, to help finance the design and build- credits may have improved as U.S. interest ing of a satellite earth station. Up until Janu- rates declined in 1986.1°2 In October 1986, ary 1986, OPIC was able to fund feasibility ExIm Bank Chairman John Bohn stated that studies, but this program has been ended be- the bank was considering loans for projects in cause of budgetary constraints. OPIC supports China totaling just under $1 billion.1°3 visits to exchange information about investment opportunities. Examples include spon- OPIC also provides financial services for sorship of a trip in 1984 by U.S. corporate ex- U.S. firms. In contrast to ExIm programs, ecutives and a grant to the National Council OPIC’S goal is to support direct investments for U.S.-China Trade to help assist the Chinese in developing countries through loan guaran- in identifying and facilitating U.S. investment tee and insurance programs. By August 1986 opportunities in China.

‘“* See U.S. Export-Import Bank, Report to the U.S. Congress But U.S. investment in China remains lim- on Export Creui”t Competition and The Export-import Bank ited, certainly below Chinese expectations. As of the U. S., September 1985, pp. 3-5. mentioned earlier, the United States and China ‘OS’’Bohn Says PRC Eximbank Loans Could Total $1 Billion, Hits Unfair Use of Mixed Credits, ” International Trade Re- have been unable to reach agreement on an in- porter, Nov. 5, 1986, p. 1330. vestment treaty, despite prolonged negotia- Ch. 8—U.S. Policy Choices ● 233 — tions since 1983. While some question whether TDP also serves as the coordinating body a bilateral investment treaty would make much for other U.S. agencies that provide technical difference, the absence of an agreement is assistance to friendly nations. In China the taken by others as an indication that the U.S. Geological Survey, for example, provides groundwork has not yet been established for seismology equipment and technical assis- secure investments. tance, and the Department of Energy provides technical assistance in planning for the Three TDP is one of the more successful U.S. Gorges project. TDP plans additional funding promotional programs. Established in 1980, of studies of the Three Gorges project to as- TDP’s dual mission is to assist developing sist a combined U.S. Government and private- countries and to support U.S. business in com- sector effort. peting for markets in technology, equipment, and services. TDP is run by the Agency for TDP is particularly important because the International Development, but it is quite dif- United States has no formal aid program and ferent from a traditional aid program. TDP ac- therefore cannot provide confessional financ- complishes its dual missions with a modest ing for large projects.lOG TDP funding is lim- budget of $20 million annually, which it uses ited, but it can be strategically used to sup- to provide financial support for project plan- port early planning for key projects. In the ning services, especially feasibility studies. context of budgetary constraints, the modest’07 China-related programs today constitute the but well-received TDP program is worth con- largest part of TDP, making up 30 percent of sidering as a model for future Government ef- TDP’s worldwide program, or about $4.3 mil- forts to promote technology transfer and trade. lion committed in fiscal year 1986. The success of its programs is clear in the strong support it receives from the U.S. busi- TDP, which interacts directly with the Chi- ness community. In recent years, however, nese Ministry of Foreign Economic Relations MOFERT has identified more potential TDP and Trade (M OFERT), 1°4 has been well received projects than TDP funding can support. Ta- in China. It approach is to support key proj- ble 25 provides an overview of TDP in China. ect planning activities that often lead to exports many times the value of the original In addition to these U.S. programs, the feasibility studies. 105 TDP is now authorized to United States also participates in multilateral provide technical assistance (prefeasibility and programs via the World Bank and the United feasibility studies and technical symposia) but Nations that promote economic development not training. In 1982, TDP financed a feasi- and technology transfer to China. In both bility study worth $440,000 for the Tiansheng cases, U.S. contributions go to general fund- Qiao hydropower project carried out by Harza ing rather than to specific programs in China. Engineering Company. The study led to more Nevertheless, such funding of multilateral pro- than $20 million in U.S. exports for the project. grams provides the United States with indirect A number of firms were involved in these ex- influence on projects in China that generally ports. Another example is a $100,000 TDP involve foreign participation.los study of a silicon materials plant that led to The multilateral organizations provide sig- $8 million worth of equipment exports. nificant support for projects in China. The World Bank, for example, has granted loans

‘04TDP also works with the Shanghai Municipal Economic Relations and Trade Commission. IWIn December 1985 President Reagan removed China from ‘(”It should be mentioned that although a grant agreement the list of countries disqualified to receive aid. The United States, is signed by TDP with Chinese organizations, no funds are trans- however, has no current plans for an aid program in China. ferred to China. TDP procedures call for the U.S. contractor ‘“7TDP has a staff of 16. to submit in~roices to the Chinese party, who approves them ‘(’HThe United States is the largest contributor to the United and sends them to the U.S. Embassy in Beijing or the consu- Nations Development Program and the single largest donor to late in Shanghai, for transmittal to TDP in Washington, which the World Bank. The share of U.S. funding for such programs authorizes payments to the contractor. has, however, declined in recent years. 234 . Technology Transfer to China

Table 25.—The Trade and Development Program in China

TDP Project Company Contribution Completed studies: Guangdong Dairy Plant ...... China-Agro $44,000 Tianshengqiao Hydropower ...... Harza $400,000 Silicon Materials...... Stearns Catalytic $100,000 Maanshan Wheel and Tire ...... Rust Engineering $200,000 Zhuhai Industrial Park ...... MK Ferguson $162,000 Shenzhen Airport ...... , ...... Parsons/Lockheed $800,000 Completed technical missions: Coal Ministry Review of U.S. Technology ...... $111,000 MOFERT Review of U.S. Technology ...... $ 40,000 Hydropower Protocol Technical Exchanges , ...... $500,000 Ongoing studies: Yuxian Coal Gasification ...... Kaiser/Lummus $750,000 Shanjiasi Heavy Oil Reservoir ...... SAIC $280,000 Huangling Coal Mine ...... Kaiser/Consolidated $550,000 Maanshan Energy Conversion ...... IIEC $250,000 Capital Hospital ...... American Hospital SUpply $200,000 Automotive ...... GM $200,000 Xinhua News Agency...... Phoenix Associates $350,000 Meishan Multichannel Carr. Eq...... Pacific Telesis $410,000 Xian High Voltage ...... ,Power Tech Inc. $460,000 Wujing Trijeneration ...... Bechtel $460,000 Power Plant Conversion ...... Burns and Roe $600,000 Zinc and Aluminum Castings ...... Kiowa $150,000 Steel Building Systems ...... Thyssen $150,000 Shanghai Cement ...... Kaiser $150,000 Shanghai Solid Waste Disposal ...... Klockner $250,000 Shanghai Corn Fermentation ...... under selection $425,000 Shanghai Petroleum Coke ...... under selection $325,000 Ansai Oil Field ...... CER $650,000 Liuhu Oil Field ...... Core Laboratory $500,000 Shenyang Toxic Waste ...... under selection $325,000 Flue Gas Desulfurization...... under selection $143,000 Shanghai Transportation ...... under selection $380,000 Graphite Electrodes ...... under selection $150,000 Baoshan Management Information ...... under selection $650,000 Zhongyan Pharmaceutical ...... under selection $400,000 Sichuan Gas ...... under selection $550,000 Automotive Sector ...... under selection $500,000 SOURCE TDP, August and November 19S6, data supplied to the Office of Technology Assessment for more than 40 projects in China. In the Multilateral development banks offer oppor- spring of 1986, the International Development tunities for U.S. exporters that are not fully Association of the World Bank announced that utilized. A recent study indicates that the U.S. $230 million in credit would be made available share of procurements from these banks has to assist China in expanding railways in four declined from 29 to 23 percent of the total over southern provinces. The World Bank may sup- the past decade, while Japanese firms have had ply $2 billion on confessional terms during the considerable success. Total procurement world- next 5 years for projects in China. log China is wide that is financed by these banks amounts making its first credit tranche from the IMF, to $15 billion annually. A recent study con- borrowing more than $700 million. cludes that U.S. firms could do much better in procurement from these sources, particularly in equipment supply and construction.ll” 1W31izabeth Morrison, “Borrowing on World Bond Markets, ” 1’OBrettcm Woods Committee, How U.S. Firms CarI Boost Ex- China Business Review, January-February 1986, p. 18. ports Through Overseas Development Projects, October 1986. Ch. 8—U.S. Policy Choices

One factor could be that the U.S. Government ing programs would not contravene the agree- offers less financing and other forms of sup- ment reached among OECD countries.114 port for such projects than do other nations. The policy dilemma is that U.S. firms may find themselves less competitive if the United Issue: Should the United States Use “Mixed Credits”? States does not offer mixed credits; but if the United States uses such assistance, other coun- The United States has traditionally opposed tries can be expected to do likewise. The re- mixed credits (financing that combines official sult would be to “spoil the market by raising export credits and confessional aid) on the ba- the level of supplier country subsidies to fi- sis that this is a “predatory” type of financ- nancing. ing that tends to distort trade. Current U.S. policy is to use mixed credits only to counter The United States established a “war chest” those of other supplier countries and to sup- in the ExIm Bank in 1986 to help U.S. firms port the recent agreement among OECD coun- compete against foreign firms supported by tries to regulate the use of such financing. mixed credit financing. ExIm officials stated Some critics argue that such restrictions ef- in April 1987 that the bank would probably fectively put U.S. business at a disadvantage not use all of the war chest in 1988, because 5 during a period when trade competition is in- of the OECD agreement on mixed Credits.11 creasing. To the extent that the agreement makes it more expensive for governments to offer such The United States has not used mixed credits financing, the result may be to reduce the use to finance projects in China, and there is no of mixed credits. One potentially important ef- consensus as to whether it should. On the one fect of the OECD mixed credit agreement may hand, some do not accept the notion that U.S. be to improve reporting on the use of such firms are losing export opportunities in China credits, thereby improving the information because of inadequate official financing. In re- base needed to formulate government policy cent years, the ExIm Bank has rarely utilized responses. all of its available resources.’” On the other hand, a number of supplier One counter to this argument is that exten- countries have announced plans to expand offi- sive official export financing provided by their cial financing programs, and aid programs may Government has helped Japanese, French, Bel- also be expanded. In expanding its aid pro- gian, Swedish, and other firms win contracts grams, Japan has stressed that untied aid will in China. The use of export credits in financ- be given, permitting firms from other coun- ing for projects in developing countries is, tries to participate.llG Export financing will moreover, increasing. “2 The U.S. Government likely remm”n an area of intense competition could send a signal to exporters by making among the supplier governments. more official financing available for China. 113 Enlarging the amount of official U.S. financ- Issue: Should the United States Establish an Aid Program for China? “]There are a number of possible explanations for this, including the fact that high interest rates in the United States Mixed credits raise the question of whether have, up until recently, made such financing less attractive than or not the United States should have an aid that of other suppliers. ExIm officials may also not see it as program for China, because aid-type conces- appropriate to initiate discussions with U.S. exporters, who may in some cases be unfamilia with services that it provides. ‘‘zThe IM F concludes that “Over the near term, it is expected ] liThe OECD ~rangement stipulates the terms of the loans. that officially supported export credits will continue to play 1“See ‘Eximbank will not need all of its ‘war chest funding a growing role in catalyzing financial flows to developing coun- as a result of OECD Accord, Bohn Says, International Trade tries. ” See Edward Brau, et al., Export Credits: Development Reporter, Apr. 1, 1987, p. 436. The bank requested $100 mil- and Prospects (Washington, DC: IMF, July 1986), p. 2. lion for fiscal year 1988. ] “Statements by ExIm officials in late 1986 indicated a step 1 IBThe ability of foreign firms to participate will depend on in this direction; they stated that a number of China projects whether they are fully informed of such opportunities and their were under consideration. willingness to compete for these contracts. 236 Technology Transfer to China sional financing is the source of funding often used in conjunction with official (ExIm-type) funding. The legal prohibition has been removed on a U.S. aid program in China.117 To many, this is a largely symbolic step that shows that the United States sees China as a “friendly” country. In the context of reduced funding for foreign aid worldwide by the 99th Congress, the question arises about whether bilateral assistance programs will be expanded. ’18 In a period when the United States cannot meet commitments to some developing countries (mainly in sub- Saharan Africa), some in the aid community would question whether an aid program for China is warranted. Proponents would have to make the case that a China aid program is Photo credft Care/ Rupprechf more important than aid programs in other A recently installed loom in a village factory in Shandong countries. In addition, there would have to be Province. This enterprise is an example of an important a clear signal of interest from China. trend—increasing industry in rural areas absorbing excess farm labor. Advocates can raise a number of arguments in favor of an aid program in China. If carried Many aid projects worldwide (such as those out effectively, aid funds could assist China involving technical assistance) include partici- in programs that do not promise great profits pation by U.S. firms. But commercial gain has for privatesector firms. Support for “basic hu- not, in the past, been the major ostensible goal man needs’ has been the central pillar of aid’s of U.S. aid programs. Rethinking aid’s over- philosophy. Aid projects could be a mechanism all objectives would thus be needed in order for deepening the involvement of U.S. firms to reorient programs toward commercial ob- and organizations at the grass roots level in jectives, and this would be resisted by many China. who believe that the aid should remain geared China is unlike other developing countries to helping the “poorest of the poor. ” As dis- where large aid programs have been estab- cussed above, TDP is already playing a criti- lished in that it still has comparatively large cal role today in coupling U.S. commercial in- foreign exchange reserves. A large aid program terests with Chinese development needs. involving economic support funds would not If U.S. policy makers decide to establish a provide the transfers of technology that China’s formal aid program, the “Spark Program” plan leaders emphasize. If an aidproflam is estab- (discussed inch. 3) offers opportunities. ’19 The lished, it is more likely to take the form of a program is designed to create a vibrant indus- low-key, modest approach that supports tech- trial sector in China’s smaller cities. The Spark m“cal assistance and trzu”m”ng. Under those con- program is not one in which most U.S. techni- ditions, only small amounts of funding would cal agencies are likely to have an interest, and be available to support mixed credits. it would be difficult for American companies to learn about commercial opportunities asso-

1 l~However, before initiation of such a program the Depart- ment of State would have to provide certification concerning 1‘Whe most complete explanation of the objectives of the Spark human rights practices. Plan is found in the recently released “Science and Technology “aSee Society for International Development, Development White Paper” (in Chinese), a translation of which is forthcom- Connections, December 1986, p. 2. ing from the Joint Publications Research Service. Ch. 8—U.S. Policy Choices ● 237

ciated with it. Yet, there is a great deal of de- in some areas (such as telecommunications) velopment experience in U.S. agencies and the this has created confusion. private sector that might be shared with the More specifically, the following options could Chinese in a mutually beneficial way if new be studied: funding sources were available. 1. expand funding for TDP feasibility studies Issue: What Could the U.S. Government Do and provide TDP with authorization to To Promote Trade and Technology Transfer? support training programs in China; 2. enlarge FCS representation in China; U.S. promotional programs influence the scope and nature of technology transfer and 3. increase efforts to combine financing from exports to China, although it is important to various public and private sources; remember that trade finance, for example, is 4. provide information and financial resources only one element affecting U.S. competitive- to support participation by U.S. firms in ness in foreign markets. As discussed more projects funded by multinational devel- fully in chapter 5, U.S. trade finance and pro- opment banks; motional programs are not as extensive as 5. expand official financing and guarantees those of some other supplier countries, such for loans and investments in China; selec- as Japan. Other Governments use aid as well tively utilize “soft” financing for projects as more extensive official export financing to in China where other Governments have assist exporters. provided such financing; 6. develop trade promotion strategies for In view of the decline in U.S. market share particular export sectors by combining the in China, a key question for U.S. poh”cymakers resources of various U.S. Government is whether U.S. promotional programs andpol- agencies and clarifying export control icies are adequate to meet the challenge of questions; and global competition in the decade ahead. In 7. establish mechanisms and institutions years past U.S. officials have taken the view (that include public and private sectors) that it is enough for Government to negotiate for continuing dialogue and consultation agreements on fair rules of the trade game, between China, the United States, and while ensuring that national security is pro- other major trading partners in order to tected through controls on sensitive exports. anticipate problems and seek mutually In the future, U.S. policy makers may want beneficial solutions. to explore new avenues for trade promotion. A high-level mandate would be needed to de- The United States could do more to assist velop a coordinated and active approach to fl>ms and organizations exporting equipment, U.S. trade promotion. Any of the measures services, and technology. Relatively modest listed above, taken alone, would be unlikely dollar investments in project planning have to have a significant impact. Other policies that significant trade multiplier effects. Such pro- affect the technological capability of U.S. firms grams sponsored by TDP could be expanded. and exchange rates are also critical to the over- FCS and other Government agencies could also all strength of U.S. exporting firms. Programs take a stronger lead in reaching out for new of trade promotion, &“sembo&”ed from a coher- projects and in combining financing from a ent overall U.S. strategy promoting the com- number of sources (public and private) for large petitiveness of U.S. industries in foreign mar- projects. Developing sector-specific plans for kets, are unlikely to yield significant results. exports could also be useful, particularly if the result is greater consistency between U.S. ex- Issue: What Choices Does the United States port controls and promotional policies. In the Have in Its Trade Policy vis-a-vis China? past, U.S. export controls and promotional pol- U.S. trade policy has been oriented in the icies have been developed independently, and postwar period toward promoting a global 238 Technology Transfer to China trading system in which firms from many coun- significance of textiles in U.S.-China trade) tries can compete fairly. Developing countries would strongly affect China. If Chinese leaders have been given special preferences in trade were to retaliate by limiting imports from the to foster their economic development, which United States, the result would be to limit in turn provides export opportunities for the bilateral trade. It is also possible that height- developed countries. ened political tensions could limit or reduce cooperation in other areas. To these ends, the United States has taken a leadership role in establishing multilateral Trade is often viewed in a bilateral context. financial institutions such as the IMF and However, long-term solutions require that pol- assistance programs such as those of the World icy makers also consider the broader multi- Bank. Many of these institutions were built lateral context. The policies of China’s other during a period when American economic and major trading partners such as Japan affect military power were preeminent, and U.S. Chinese export prospects. If other industrial leadership was viewed as natural. countries erect barriers to Chinese exports, pressure on the U.S. market increases. Infor- The structure of international trade has mal consultation among the United States, changed, and today U.S. firms must work hard China, and other Asian traders could improve to compete against competitors in developing awareness of such interdependencies and per- as well as developed countries. Wide-ranging haps stimulate constructive action. legislation is under consideration in Congress, where concern about import penetration and China has announced its intention to join the the overall U.S. trade deficit runs strong. Un- GATT, a step toward integration into the der pressure from Congress, the administra- world trading system. (This process began tion has made efforts to demonstrate its will- earlier with China’s participation in other in- ingness to aggressively investigate unfair ternational organizations such as the IMF and trading practices that hurt U.S. industry. the World Bank.) China’s entry into the GATT raises issues for U.S. policy makers and other U.S. trade policy vis~a-vis China reflects GATT members who will participate in the for- these broader tensions and choices. The Inter- mal review of the application. To join the national Trade Commission initiated 15 anti- GATT, China may need to relinquish certain dumping investigations involving imports trade barriers and open its system more to im- from China during the 1980-85 period, and in ports. U.S. officials and others will have to care 9 of those cases antidumping orders were fully review Chinese restrictions that limit the made. In 1985 alone there were four antidump- activities of foreign businesses, including stip- ing investigations involving goods from China, ulations concerning local content and export and in three cases there was a finding of in- requirements. In the process, it will also be nec- jury to U.S. industry.”” Growing Chinese tex- essary to review current U.S. policy to with- tile imports have, as mentioned earlier, led to 2 hold Generalized System of Preferences status’ ’ bilateral frictions and repercussions in other on the grounds that China is not a GATT areas, such as U.S. grain exports. member. Frustrations with import penetration in the In the near future, U.S. policy makers will United States could lead to protectionist re- consider a number of trade and competitive- sponses. But such actions could also stimulate ness policy alternatives that have important retaliatory actions by China. Because China’s implications for U.S.-China trade. Tradition- exports are so strongly concentrated in the tex- ally, the alternatives have been defined as “free tile sector, actions taken to protect U.S. pro- trade” versus a protectionist response to im- ducers (and without specific attention to the

‘2] Unde~the Generalized System of Preferences, special trade ‘“In 1983 and 1984 there were similar numbers of cases in- treatment is provided to developing countries by developed volving China. See U.S. ITC, Annual Reports, 1983-85. countries. Ch. 8—U.S. Policy Choices 239 port penetration by developing countries. With should relate to a broader global trade and com- regard to China, U.S. policy makers could al- petitiveness strategy. Controversy continues ternatively aim to deepen bilateral economic over the broad goals of U.S. trade policy, and relations. A bilateral strategy would empha- uncertainty may be created among U.S. ex- size an expanding U.S. market share in China porters and Chinese buyers that leads to con- while minimizing frictions associated with in- tinued stagnation in U.S.-China trade. While creasing imports of certain types from China. it is true that U.S. Government policies alone To some who believe that free trade is today may not dramatically increase U.S. exports to more an ideal than a reality and who fear the China in the short term, a new attitude (shared costs of a protectionist response (in higher by business and Government alike) toward prices for the U.S. consumer and potential loss global competition may be needed to forge a of U.S. influence abroad), bilateral initiatives viable, positive, long-term strategy. From this may be appealing. perspective, China is a test of U.S. competitiveness in the developing country market. U.S. programs supporting technology transfer to and trade with China, to be effective,

CONGRESSIONAL CHOICES The United States and China are now enter- But agreement on general principles does not ing a new phase in their relationship, and it constitute a coherent policy. In reviewing U.S. is appropriate to consider the challenges that policies toward China, Congress may want to lie ahead. In the past, U.S. policy was designed consider whether the proper balance among the to promote an opening of relations between the five major themes identified at the beginning two countries consistent with U.S. security, of the chapter has been established. Another commercial, and other objectives. Now that question is whether the United States is effec- the foundation has been laid, Congress has an tively using all of the policy instruments avail- important role to play in evaluating the suc- able to maximize U.S. interests. Ad hoc deci- cess of current U.S. China policy and in set- sionmaking on export controls, for example, ting future goals and directions. The absence can produce inconsistent decisions and an un- of a crisis in U.S.-China relations makes this certain policy context. a good time to consider actions that Congress During 1986, controversies over China ex- and the U.S. Government could take that would significantly affect the scope and nature port controls somewhat receded in the wake of technology transfer and trade between the of loosened restrictions in the United States and COCOM. The process of license approval United States and China, and OTA’S research has been accelerated for many types of equip- highlights actions that Congress might consider. ment and technology covered by the green zone agreed to by COCOM countries. On the other OTA finds general agreement in the United hand, export license applications that must be States that economic relations with China referred to other agencies and to COCOM still should be expanded in the current policy con- require a long time for review. There are no text. Concerns that China’s modernization clear guidelines concerning prohibited exports; could have potentially negative effects on other case-by-case reviews of military and sophisti- countries in Asia and uncertainty about the future course of China’s policies, especially in cated dual-use exports remain the focus of con- light of recent student demonstrations and troversy and debate. There are thus a number shifts in leadership, have not weakened this of reasons why Congress may wish to review consensus. Liberalization of controls on ex- China export controls in the months ahead. ports to China, both in the United States and One goal of such a reexamination would be in COCOM, has been well received. to make the system operate more efficiently. 240 ● Technology Transfer to China

Phofo credit: Alan T Crane

Modern buses parked by an old but still important canal in Suzhou. Famous for its gardens, Suzhou is also a major manufacturing center.

Another goal would be to revise and shorten that would constitute new policy approaches. the list of controlled items to reflect changes The possible actions listed below are grouped in technology and foreign availability while according to those categories. focusing the attention of the export control system on militarily significant items and tech- Refine the export administration system, by nologies. These efforts require coordination considering the following possible actions: with COCOM allies. Clearer guidelines speci- 1. Tighter adminstration of existing policy: fying which types of military or advanced dual- —require periodic reviews from the Oper- use equipment and technology cannot be ex- ating Committee concerning China cases ported could also be developed for use within under interagency review for protracted the U.S. government. Congress and its com- periods; mittees of jurisdiction on export controls have —require DOC to provide more timely in- a critical role in these decisions as well. formation to the public and to Congress Congress may wish to consider actions to about the status of China licensing, par- refine the system of export administration by: ticularly concerning the value, status, 1) tighter administration of existing policy, 2) and nature of exports approved in re- through modifications within the current pol- ferred China cases; icy framework, or by 3) considering actions —support expanded use of automated sys- Ch. 8—U.S. Po/Icy Choices ● 241 —

terns in order to improve the efficiency form controls for China and to harmonize of export licensing and to increase con- export control administrative procedures sistency in decision making by expand- in various COCOM nations. This would ing the accountability of license ex- require that the United States relinquish aminers; unilateral controls for China if other —carefully monitor DOC progress in at- COCOM countries cannot be persuaded taining the goal of processing China li- within a reasonable period of time that censes (IVLS) in 45 days by July 1987, they are justified, and that the United and set a target, such as 6 days, for proc- States, along with other COCOM coun- essing green zone cases; tries, eliminate gaps in controls—such as 2. Modifications within the current policy different approaches to controls on re- framework: exports. –break the deadlock in interagency reviews of China cases by amending the Barring dramatic changes in China’s rela- Export Administration Act to give tions with the Soviet Union or Taiwan, the DOC final authority to approve an ap- most challenging problems may arise in the plication unless DoD formaZly appeals trade arena. There are a number of potential to the President with objections; points of friction. China’s exports are heavily —require that DOC remove from active concentrated in textiles—a threatened U.S. in- consideration (automatically approve) dustrial sector. Other trade-related problems export applications that have been un- concern China’s entry into the GATI’ and other der review for more than 6 months (such international institutions. The United States cases could be automatically approved and other GATT members will review China’s unless the Secretary of Commerce pro- trade and technology transfer regulations to vides the exporter with a written expla- determine whether they are consistent with the nation of why the case requires extended GATT. In still another area, there is a need policy review); for consultation and agreement among the —require that DOC, in consultation with United States, Western Europe, and Japan to DoD, the State Department, and other minimize restrictions on imports from China relevant agencies, develop clearer guide that shift the burdens of adjustment to part- lines for use within the U.S. goverment ners, and cutthroat competition for contracts that would specify types of exports to with ‘‘soft’ financing. be prohibited (red zone); The United States could benefit from a posi- —require that DOC, in consultation with tive approach to promoting U.S. exports and the State Department, DoD, and other helping China improve its technological and relevant agencies, develop by the sum- managerial capabilities. Outlining the possi- mer of 1987 detailed, sector-specific ble congressional actions needed to forge a new proposals for expanding the green zone consensus on U.S. competitiveness is beyond while continuing to preserve Western the scope of this study, but nevertheless di- security; rectly relevant to U.S.-China relations. —improve information exchange between Whether or not the IOOth Congress carries out officials reviewing U.S. munitions ex- a full-scale review of U.S. policies toward ports to China and those reviewing dual- China, it will importantly influence relations use exports in order to ensure con- with that country through its trade policy. sistency; —establish a distribution license proce- The possible steps outlined below are grouped dure for China exports according to whether they would involve: 1) 3. New policy approaches: establish the gen- expanded use of existing programs, 2) modifi- eral principle that the United States will cations within the current policy framework, work with COCOM allies to establish uni- or 3) new policy approaches. 242 Technology Transfer to China

Develop an activist trade promotion strategy Chinese research institutions, including in order to improve U.S. competitiveness and en- those in rural areas; sure fair trade by considering the following pos- —require that the Office of the U.S. Trade sible actions: Representative (USTR) report to Con- gress on the review of China’s applicat- 1. Expanded use of existing programs: ion for entry into the GATT; —expand funding for TDP feasibility —improve mechanisms for informal con- studies and training programs; sultation on Asian trade among the —support enlarged FCS representation in United States and other countries; China; 3. New policy approaches–initiate an offi- —expand official financing for loans and cial development assistance program for guarantees, selectively using “soft” China that promotes expanded exports of financing to counter such bids by for- U.S. goods and services. ’22 eign suppliers; —continue support for multinational de- Many of the options above would require ex- velopment banks and encourage DOC ecutive action. Congress can, through its over- to provide U.S. firms with additional sight of executive branch programs, encourage information so that they can win pro- this process. On the other hand, it may no curements: longer be necessary for the Federal Govern- 2. Modifications within the existing policy ment to play such a direct role in coordinating framework: technical exchanges. Private organizations and —encourage the development of sectoral firms, as well as State and local governments, strategies for promoting trade with are now independently involved in scholarly China (in line with U.S. export controls); and technical exchanges. OTA’S research in- —request the State Department to pre- dicates that there are a number of possible gov- pare a review of government-to-govern- ernment actions to refine the system of export ment programs under the S&T protocols administration and to promote trade and tech- in order to determine which ones could nical cooperation with China that could con- now be left to private-sector action and tribute significantly to the development of which would require additional govern- deeper and mutually beneficial relations be- ment support; tween the United States and China. —encourage DOS and other U.S. Govern- ment agencies involved in S&T pro- “*Earlier in this chapter, where the issue of an aid program tocols to work for expanded access by for China is discussed, OTA notes the obstacles to the develop- U.S. scholars and technical persomel to ment of an export-oriented aid program.

APPENDIX C: EXPORT LICENSES PENDING OVER EAA STATUTORY LIMITS

In January 1987 OTA analyzed contributing fac- Table 1 .—Numbers of Cases Pending Over tors in review process delays by examining cases Statutory Limit that were pending beyond the statutory limits. The total number of these cases was 536, valued at Type of case Number of cases Percentage more than $730 million dollars. Only a small num- Non-referred cases ...... 69 13 ber of these cases were cases that had not been re- COCOM cases ...... 124 23 Cases in interagency ferred to other agencies. A significant number were review ...... 343 64 pending in the Coordinating Committee (COCOM), Total ...... 536 100 but the overwhelming majority of the cases had not been referred to COCOM but were under re- Most of the cases (over 90 percent) had been pend- view in the inter-agency process. ing for more than 120 days. These cases also ac- Ch. 8—U.S. Policy Choices ● 243 -.

counted for 99 percent of the dollar value of all ing for long periods, however, they moved back and pending cases. forth between DOC and DoD, and were not sent to the OC or other higher levels of review in the Table 2.—Processing Times and Values formal interagency review process. Inputs from intelligence agencies is another aspect Processing time (days) Number of cases Total value of interagency review that generally added a month 61-75 ...., ...... 18 $ 530,623 or more to the processing time. Of the pending 76-90 .., ... . 17 1,745,773 91-105 ...., . . . 15 2,953,609 cases over the statutory limit, 237 involved such 106-120. , . 3 34,365 review. over 120. . 483 724,748,811 It should be noted that OTA did not evaluate Total ...... 536 $730,013,181 the military criticality of the technology that was under review, since this would have required study The 20 oldest cases had been in the system for of complete license applications. 700-1169 days. All of those cases except one had OTA’S analysis suggests that exporters as well been referred to the Operating Committee (OC) at as licensing officers would benefit from more in- one point, but only three of those were currently formation concerning the type of technology that waiting for a determination by the OC. Of these has recently been approved for export. Unneces- cases, 12 had previously been under review by OC, sary delays arise when licensing officials lack com- but after OC made a determination, they were sent plete information concerning precedent-setting to the Department of Defense (DoD), In most of cases. The kinds of information that would be use- those cases, DOD made a recommendation and sent ful to exporters include the dollar value and types them back to the Department of Commerce (DOC), of technology and equipment approved for exports. where they continued to await final determination. Online information concerning precedent-setting Many of the cases pending for the longest periods cases (such as those completed after extensive were under OC consideration. Particularly strik- inter-agency review), case history information, and ing was that a large number of cases were sent back improved access to relevant information compiled to DoD rather than referred to higher inter-agency by other agencies could improve the ability of review after OC completed its review. licensing officers to make timely, consistent de- Only a handful of the pending cases were actu- cisions. ally under review by DoD at the time the data was Providing mm-e information to exporters would collected. However, L130 of them had been reviewed require that certain proprietary or sensitive infor- by DoD at some point. About half of those 430 mation (e.g., equipment models, applicants names, cases had been under DoD review for more than end users, and end use) be omitted from public dis- 300 days. Many of these had been resubmitted to semination. Brief, periodic summaries of generic DoD for review, some as many as four times. Gen- types of technologies recently approved for export erally speaking, DoD reviews did not account for could reduce uncertainty for U.S. exporters. These the major part of total processing time for these data are readily available from the DOC computer cases. In many instances where cases were pend- systems (ECASS).