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Export Controls: Some Controls Over Missile-Related Technology Exports To China Are Weak

(Letter Report, 04/17/95, GAO/NSIAD-95-82).

Pursuant to a congressional request, GAO provided information on the
Missile Technology Control Regime (MTCR) and U.S. missile
technology-related exports to the Peoples' Republic of China, focusing
on the: (1) extent to which dual-use and missile technologies are
exported to sensitive end-users; (2) U.S. government's ability to
monitor China's compliance with the U.S.-China bilateral agreement; and
(3) effectiveness of U.S. sanctions imposed on China.

GAO found that: (1) for fiscal years 1990 through 1993, the U.S.
government approved 67 export licenses worth about $530 million for
missile-related technology items exported to China; (2) such export
licenses accounted for less than one percent of all special licenses for
exports to China; (3) the Department of Defense (DOD) is concerned that
the Department of Commerce might not be identifying or seeking
interagency concurrence on all potential missile-technology export
license applications; (4) DOD does not have an interagency agreement
with Commerce regarding which export applications should be referred for
comments; (5) current licensing procedures and monitoring controls
cannot ensure that most missile-technology and dual-use exports are kept
from sensitive end users, but controls on satellite-related exports
appear to be adequate; (6) U.S. government agencies do not share all the
information they have on sensitive end users in China; (7) the lack of
Chinese cooperation has made end-use monitoring of export licenses only
marginally effective; (8) Commerce does not require monitoring
cooperation before it grants an export license; (9) although China has
recently accepted more stringent MTCR requirements, it does not accept
the revised MTCR guidelines and annex; and (10) there are no criteria
for measuring the effectiveness of proliferation sanctions imposed on
China.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-95-82
     TITLE:  Export Controls: Some Controls Over Missile-Related 
             Technology Exports To China Are Weak
      DATE:  04/17/95
   SUBJECT:  Arms control agreements
             Interagency relations
             Foreign governments
             Nuclear proliferation
             Technology transfer
             Licenses
             International cooperation
             Export regulation
             Inspection
             International relations
IDENTIFIER:  China
             Canada
             Germany
             France
             Italy
             Japan
             United Kingdom
             Dept. of State Blue Lantern Program
             President's Enhanced Proliferation Control Initiative
             U.S. Munitions List
             DOD Technology Safeguards Monitoring Program
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on International Relations, House
of Representatives

April 1995

EXPORT CONTROLS - SOME CONTROLS
OVER MISSILE-RELATED TECHNOLOGY
EXPORTS TO CHINA ARE WEAK

GAO/NSIAD-95-82

Export Controls


Abbreviations
=============================================================== ABBREV

  ACDA - Arms Control and Disarmament Agency
  DOD - Department of Defense
  ECCN - Export Control Classification Numbers
  EPCI - Enhanced Proliferation Control Initiative
  MTCR - Missile Technology Control Regime
  MTEC - Missile Technology Export Controls

Letter
=============================================================== LETTER


B-258323

April 17, 1995

The Honorable Benjamin Gilman
Chairman, Committee on
 International Relations
House of Representatives

Dear Mr.  Chairman: 

As you requested, we are providing information regarding the Missile
Technology Control Regime (MTCR) and U.S.  missile technology-related
exports to the Peoples Republic of China.  Specifically, you asked
that we determine (1) the nature and extent of U.S.  dual-use and
missile technology exports to the Peoples Republic of China, and the
extent to which these items are exported to sensitive end-users; (2)
the ability of the U.S.  government to monitor China's compliance
with conditions attached to U.S.  missile technology-related exports
and with the terms of the U.S.-China bilateral understanding on MTCR
adherence; (3) the terms of the U.S.-China bilateral understanding on
MTCR adherence and the degree to which the understanding commits
China to adhere to the full range of MTCR commitments; and (4) the
effectiveness of U.S.  sanctions imposed on China. 


   BACKGROUND
------------------------------------------------------------ Letter :1

In 1987 the United States and its six major trading partners created
the MTCR to restrict the proliferation of missiles and related
technology.\1 The MTCR, the only multilateral missile
nonproliferation regime, is a voluntary arrangement among countries
that share a common interest in arresting missile proliferation.  It
is not a treaty.  The regime consists of common export policy
guidelines applied to a common list of controlled items that each
MTCR member implements in accordance with its national legislation. 
Currently, 25 states are formal partners to the MTCR, while an
additional
7 states, including China, have adhered or declared an intention to
adhere to the MTCR Guidelines.  (See app.  I for a complete list of
current MTCR partners and adherents or declared adherents.)

The MTCR Annex divides controlled items into two categories, Category
I and Category II items.  Category I items are subject to a strong
presumption of denial and are rarely licensed for export.  They
include such items as complete missile systems; unmanned air-vehicle
systems, such as cruise missiles; and certain complete subsystems,
such as rocket engines and guidance sets.  Category II (dual-use)
covers a wide range of commodities, including propellants, test
equipment, and flight instruments, that could be used for missiles or
satellite launches.  Category II items must be evaluated case-by-case
against specified criteria and if judged to be destined for use in
weapons of mass destruction (nuclear, chemical, or biological) are
subject to a strong presumption of denial. 

Federal law regulates the exports of missiles and related technology
and requires licenses for the export from the United States of
certain missiles, components, and technology specified in the MTCR
Annex.  The State Department supervises and directs all governmental
arms transfers and licenses commercial arms transfers, including U.S. 
exports of missile items and technology.  The Commerce Department
licenses exports of dual-use goods and technology, which are
controlled for missile technology reasons pursuant to the MTCR Annex
to all countries.  It has jurisdiction over production equipment for
MTCR Annex items, which is controlled as either Category I or
Category II, depending on the type of equipment involved. 

Violators of U.S.  export laws are subject to criminal and civil
penalties and economic sanctions.  Federal laws require the President
to impose sanctions on U.S.  and foreign individuals and entities
that improperly conduct trade in controlled missile technology. 
Also, such sanctions would apply to a country with a nonmarket
economy, such as China, to all activities of that government, with
some qualifications (1) relating to the development or production of
any missile equipment or technology and (2) affecting the development
or production of electronics, space systems or equipment, and
military aircraft. 


--------------------
\1 The six trading partners were Canada, the former Federal Republic
of Germany, France, Italy, Japan, and the United Kingdom. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

For fiscal years 1990 through 1993, the Commerce and State
Departments approved a total of 67 export licenses worth about $530
million for missile-related technology commodities for China. 
Commerce approved
19 of 33 missile technology applications, valued at $6.5 million. 
During the same period, the State Department approved 48 of 85 export
license applications with missile technology to China, valued at
about $523.5 million.  Most of this amount was for licenses in
support of satellite projects--to be owned or operated by other
countries or by multinational telecommunications corporations for or
within China--for which the President waived applicable sanctions. 

In general, export licensing process and monitoring controls for
missile technology and dual-use export license applications cannot
ensure that such U.S.  exports to the Peoples Republic of China are
kept from sensitive end users.  Commerce and State Department
officials acknowledged this point.  Only controls for
satellite-related exports to China seem sufficiently stringent to
reduce risk to a minimum. 

U.S.  government officials believe that the United States generally
performs adequate monitoring of China's compliance with the terms of
its MTCR commitments.  However, our review indicates that the U.S. 
end-use check program to monitor license conditions has only marginal
effectiveness for exports to China.  The Commerce Department's
pre-license check/post-shipment verification program is inadequate,
hampered by Chinese government reluctance to cooperate.  Previously,
we reported several weaknesses in this program concerning nuclear
dual-use exports and the Commerce Inspector General reported
weaknesses in the overall program.\2 The State Department's BLUE
LANTERN end-use check program in China is minimal.  The State
Department rarely monitors the end use of missile technology exports
that it licenses for China.  However, because of sanctions
restrictions, relatively few munitions licenses were granted to China
in recent years.  Most exports were provided for satellites intended
for launch from Chinese boosters, which a separate Department of
Defense (DOD) program appears to monitor closely. 

Given the weaknesses in monitoring commodities after their export to
China, it is all the more important that dual-use license
applications be scrutinized in accordance with clear procedures
before their approval.  However, DOD officials are concerned that the
Commerce Department might not be identifying and seeking interagency
concurrence on all the export applications for China that might be
missile technology-related. 

The terms of the 1992 U.S.-China bilateral understanding on China's
adherence to MTCR commit China, as a nonmember, to less restrictive
requirements than currently apply to full members of the regime. 
China agreed to commit to only the MTCR Guidelines and Annex of 1987,
in force at the time of its MTCR pledge, but not to the guidelines
and annex as subsequently revised.  China's 1992 commitments were
articulated in a series of written U.S.-Chinese diplomatic exchanges. 
Although U.S.  expectations for Chinese behavior were clear, the
terms of China's 1992 MTCR commitments were limited and ambiguous. 
China's renewed commitment to the MTCR, expressed in a signed
bilateral agreement with the United States in October 1994, is more
explicit than its 1992 commitment.  While the 1994 agreement included
China's pledge not to export particular missiles to other countries,
China still does not accept the revised guidelines and annex. 

The effectiveness of U.S.  sanctions on China is unknown.  U.S. 
government officials share no consensus on a definition of, or
criteria for, measuring effectiveness of proliferation sanctions
imposed on China.  In addition, State Department officials said that
State is not responsible for assessing effectiveness, noting that
such sanctions are congressionally mandated and that the executive
branch is not required by law to assess the effectiveness of such
sanctions. 


--------------------
\2 Nuclear Nonproliferation:  Export Licensing Procedures for
Dual-Use Items Need to Be Strengthened (GAO/NSIAD-94-119, Apr.  26,
1994) and The Federal Government's Export Licensing Processes for
Munitions and Dual-Use Commodities, Final Report, Special Interagency
Review, Sept.  1993. 


   EXTENT OF MTCR-RELATED EXPORTS
   TO CHINA
------------------------------------------------------------ Letter :3

MTCR-related licenses comprised a very small portion of total export
license activity for China.  However, DOD has questioned whether
Commerce has been adequately identifying for interagency referral and
review all the applications for the export of dual-use
missile-related technologies. 

The Commerce Department initially determines which commodities might
contain missile technology.  It independently determines that
dual-use license applications do not involve missile technology, but
if it believes that they might contain missile technology and the
destination is a country of concern, Commerce is to refer these
applications to the interagency Missile Technology Export Controls
(MTEC) group.  The group consists of working-level representatives of
DOD, the Departments of State and Commerce, the Joint Chiefs of
Staff, Arms Control and Disarmament Agency (ACDA), National
Aeronautics and Space Administration, U.S.  Customs Service, the
intelligence community, and others at the invitation of the Chair and
concurrence of the group.  The MTEC's charter calls for it to meet as
required to review license applications for U.S.  exports of missile
proliferation concern, referred according to agreed criteria.  The
MTEC evaluates the transfer in terms of the MTCR and U.S. 
nonproliferation policy.  Commerce can also refer applications to the
Central Intelligence Agency's Nonproliferation Center for information
on the suitability of end-users. 

In addition to the multilateral MTCR, the Enhanced Proliferation
Control Initiative (EPCI) of December 1990, a unilateral U.S. 
control, provides a "catch-all" control by directing that items going
to destinations of concern, regardless of whether they are on
proliferation control lists, are to be referred to the interagency
review process.  The Initiative expanded missile technology export
controls by requiring U.S.  exporters to request an export license
for any item that they know or have been informed by the U.S. 
government is destined for a project of proliferation concern.  The
Initiative was designed to give the U.S.  government a safety net by
allowing it to apply export controls when it learns about a pending
transaction that risks helping a weapon program, but which is not
explicitly covered by the current Commerce Control List. 

To deter and detect the diversion of dual-use exports to
proliferation activities, Commerce or other consulting agencies may
request pre-license checks or post-shipment verifications. 
Pre-license checks are used to establish the legitimacy of the end
user or verify the intended use of the export; post-shipment
verifications are used to ascertain whether exported items are being
used appropriately.  The State Department operates a similar program
of end-use checks, called the BLUE LANTERN program.  The government
may also seek assurances from foreign governments that items will not
be diverted to proliferation-related uses. 

The Commerce and State Departments approved a total of 67 export
licenses worth about $530 million for missile-related items for China
for fiscal years 1990 through 1993.  Figure 1 shows the final action
that each agency took for all export license applications for China
involving missile technology during this period. 

   Figure 1:  Missile Technology
   Export Licenses for China
   (fiscal year 1990-93)

   (See figure in printed
   edition.)

Note:  Other actions include returned without action, revoked,
suspended, or withdrawn. 

Between fiscal years 1990 and 1993, the Commerce Department
identified 33 export license applications for China as containing
missile-related technology commodities.  It approved, with
interagency concurrence, 19 of these applications valued at about
$6.5 million.  During the same period, Commerce approved a total of
8,600 applications for China, valued at about $6.4 billion, out of a
total of 10,860 applications for exports to China.  Thus,
Commerce-identified dual-use missile technology exports totaled less
than 1 percent of all exports requiring individual validated licenses
to China.  (See app.  III for a complete list of dual-use
applications for China approved by Commerce after MTEC review.)
Figure 2 shows the final status for all 10,860 Commerce Department
export license applications for China for fiscal years 1990 through
1993, with approved applications broken down by Export Control
Classification Number category.  At the time of our review,
commodities that were subject to foreign policy controls on weapons
delivery systems were grouped under 116 Export Control Classification
Numbers (ECCNs) listed in the U.S.  Export Administration
Regulations.  The Commerce Department also can refer items that are
contained in other ECCNs to interagency review for potential missile
technology. 

   Figure 2:  Total Commerce
   License Applications for China
   (fiscal years 1990-93)

   (See figure in printed
   edition.)

Notes:  Missile technology ECCNs here indicate only that commodities
were initially categorized under missile technology ECCNs, not that
the final Commerce Department determination identified the necessity
for missile technology controls. 

Other actions include returned without action, revoked, suspended, or
withdrawn. 

Percentages do not total 100 percent due to rounding. 

Between fiscal years 1990 and 1993, the State Department identified
85 export license applications for China as containing
missile-related technology commodities.  State approved, with
interagency concurrence, 48 of these applications--40 with
provisos--valued at $523.5 million.  During the same period, State
approved a total of 96 applications for other arms exports for China,
out of a total of 369 applications.  U.S.  Munitions List license
applications for China for the fiscal years 1990-93 period generally
were related to (1) satellite equipment, (2) aircraft spare parts,
and (3) technical data. 


      DOD OFFICIALS ARE CONCERNED
      THAT THEY DO NOT SEE ALL
      COMMERCE DEPARTMENT MISSILE
      TECHNOLOGY APPLICATIONS
---------------------------------------------------------- Letter :3.1

DOD officials have expressed concern that Commerce is not referring
potential missile technology applications for interagency review. 
Commerce is solely responsible for deciding if dual-use export
license applications are not missile-related technology.  In those
cases where Commerce determines that applications are not
missile-related technology, it does not share all data with other
agencies.  There currently is no routine mechanism for DOD or other
agencies to understand or question Commerce's analysis and
conclusions on the full range of
8,600 approved licenses for China between fiscal years 1990 through
1993, aside from the 33 applications that Commerce referred for
interagency review.  As a result, there is little transparency into
the dual-use missile technology licensing process by officials
outside of the Commerce Department.  Increasing the transparency of
the license applications that Commerce reviews would have the result
of either allowing other agencies to find deficiencies in Commerce's
efforts at identifying missile-related exports or, conversely, of
reassuring them that Commerce's review procedures are appropriate and
properly implemented. 

Commerce officials said that Commerce has sole responsibility for
classifying commodities on the Commerce Control List.  According to
the officials, although it is routinely a clear-cut technical matter
of checking the parameters on the Control List against the technical
specifications of the item on the application, occasionally some
interpretation is required.  Nevertheless, making this determination
in some cases is difficult and requires further review and
consultation. 

Commerce officials also said that, according to agreed interagency
procedures, DOD reviewed all Commerce license applications for China
for national security reasons and MTCR Annex items, except where
there were specific delegations of authority to Commerce.  However,
high-level Defense Technology Security Administration officials said
that they were unfamiliar with referral criteria for MTCR Annex items
and that there was no written agreement on such referrals between DOD
and the Commerce Department.  In fact, DOD requested a review of
criteria and referral procedures in May 1994 and corresponded with
Commerce several times on how to implement it.  Also, the current and
past chairmen of MTEC criticized Commerce's referral of missile
technology cases for interagency review.  The current chairman said
that Commerce would not release to State the Licensing Officer's
Operating Manual, which contains referral criteria.  The officials
further said that Commerce does not have the technical expertise to
properly review missile technology applications and should not be
pre-screening them. 

Commerce Department officials believe that the question of referrals
and other agencies' concerns has already been resolved by the
executive branch's 1994 proposal to amend the Export Administration
Act.  According to Commerce officials, that proposal would have
afforded all relevant agencies, including DOD, the right to see all
dual-use license applications.  However, the proposed legislation was
not enacted and the executive branch has not implemented this
provision.  In November 1994, Commerce Department officials began
discussing with the Defense Technology Security Administration means
to implement the proposal. 

While Commerce said that it refers virtually all applications for
exports to China, as indicated above, our review of Commerce database
information indicated that Commerce referred to DOD less than 49
percent of all approved applications for exports to China in fiscal
year 1993, and referred to the Coordinating Committee for
Multilateral Export Control less than 47 percent of all approved
applications for exports to China for the same period. 

In addition, a September 1993 report\3 by a joint team of four
inspector general offices noted that there is no agreement between
Commerce and most of the other federal agencies regarding which
export applications should be referred for comments.  Although not
specifically addressing missile technology licenses, the report's
findings emphasized the agencies' general concerns with Commerce's
referrals of export licenses.  It concluded until this issue is
resolved, the agencies will not have adequate assurance that the
license review process is working as efficiently and effectively as
it should.  The agencies involved--State, Commerce, DOD, and
Energy--generally agreed with the concerns raised about interagency
referral issues.  (See app.  II for information about the disposition
of various applications by dollar value processed by the Commerce
Department.)


--------------------
\3 The Federal Government's Export Licensing Processes for Munitions
and Dual-Use Commodities, Final Report, Special Interagency Review,
Sept.  1993. 


   LICENSING PROCESS AND
   MONITORING CONTROLS CANNOT
   ENSURE THAT U.S.  EXPORTS TO
   CHINA ARE KEPT FROM SENSITIVE
   END USERS
------------------------------------------------------------ Letter :4

Licensing process controls for dual-use and missile technology export
applications cannot ensure that U.S.  proliferation-related dual-use
and munitions exports to China, aside from separately monitored
satellite exports, are kept from sensitive end users.  We did not
find direct evidence of diversions of U.S.-supplied dual-use
technology or of exports of commodities to China approved in
contradiction of export licensing procedures.  However, we noted that
a DOD classified report indicated that diversions might have
occurred.  Also, our request for officials of the involved agencies
to assess whether specific exports that did not receive interagency
review might have benefited from it was denied.  (See app.  IV for a
discussion of our methodology to identify such evidence and the
limitations that the executive branch placed on our efforts to find
such evidence.)

An important premise of the U.S.  export licensing process is the
ability to assess legitimate end uses and end users of U.S. 
technology exports.  According to the MTCR Guidelines, in evaluating
the transfer of MTCR Annex items, the licensing process will
consider, among other factors, (1) the capabilities and objectives of
the missile and space programs of the recipient state; (2) the
significance of the transfer in terms of the potential development of
delivery systems (other than manned aircraft) for weapons of mass
destruction; and (3) the assessment of the end-use of the transfers. 

Missile technology licensing procedures for the Commerce Department
from the Licensing Officer's Operating Manual section labeled "MTCR
Determination" require missile technology review if an application
lists identified classified entities--end users in a country listed
in a separate classified memorandum--as the end user and/or ultimate
consignee, regardless of the reason for control.  In addition, on any
application, when the end use is missile-related, the end user is
known to be involved in missile activities, or questions are raised,
missile technology review is required.  The procedures note that it
is especially important to have detailed information on the end use. 

Commerce Department procedures permit Commerce officials to refer
license applications to the Central Intelligence Agency's
Nonproliferation Center for assistance in identifying sensitive end
users.  However, the Central Intelligence Agency recommended 22
general types of foreign end users that Commerce could exempt from
Nonproliferation Center review.  These types include some foreign
government entities whose activities are usually self-explanatory,
public service organizations, and some foreign trade organizations. 
Available data showed that about 31 percent of all 10,860 license
applications for China during fiscal years 1990 through 1993 were
referred to the Nonproliferation Center.  However, Commerce officials
said that this percentage would be higher because inconsistent
recording of license application referrals by licensing officers
precluded an accurate accounting of the number of applications
referred to the Nonproliferation Center. 

Officials from various U.S.  government agencies indicated that it is
difficult to determine which companies in China are truly privately
owned and operated and which are adjuncts to the Chinese government. 
Sometimes, however, agencies within the intelligence community
disagreed over the extent of the problem.  A 1993 DOD report cited
multiple examples of suspected diversion or use of U.S.  civilian
technology in China's aeronautics and astronautics industries.  The
Central Intelligence Agency's Nonproliferation Center characterized
the report as overstating the case, but did not question the
potential for diversion in many of the cases cited. 


      INFORMATION ON SENSITIVE END
      USERS IS NOT ROUTINELY
      SHARED
---------------------------------------------------------- Letter :4.1

Information that is available on sensitive end users in China is not
always shared efficiently or routinely between the intelligence and
licensing communities.  In June 1994 we reported that, although State
and Commerce each use an automated computer system to screen export
applications for ineligible or questionable parties, they did not
include on their watchlists many pertinent individuals and
companies.\4 We also noted that the agencies do not routinely share
names on their respective watchlists, and their procedures to add
names to their lists and ensure that data is complete and current are
inadequate.  Commerce noted that, although it disagreed with the
report's conclusions, it agreed to share with State all potentially
pertinent parts of each agency's watchlist. 

Also, there is no central database on sensitive end users of
missile-related technology for routine intelligence or
information-sharing with Commerce in the licensing or intelligence
communities.  Several U.S.  government organizations, such as the Los
Alamos and Lawrence Livermore National Laboratories, and
organizations within DOD, independently maintain--or plan to
create--databases containing sensitive end-user information.  In
fact, a May 1994 report by the Office of Technology Assessment noted
that multiple agencies are already developing their own unique
proliferation databases for internal use, rather than coordinating
their efforts.\5


--------------------
\4 Export Controls:  License Screening and Compliance Procedures Need
Strengthening (GAO/NSIAD-94-178, June 14, 1994). 

\5 U.S.  Congress, Office of Technology Assessment, Export Controls
and Nonproliferation Policy, OTA-ISS-596, May 1994. 


      U.S.  GOVERNMENT MONITORING
      OF CHINA'S COMPLIANCE WITH
      MTCR COMMITMENTS AND LICENSE
      CONDITIONS
---------------------------------------------------------- Letter :4.2

U.S.  government officials believe that the U.S.  government
generally performs adequate monitoring of China's compliance with the
terms of its MTCR commitments not to export MTCR technology out of
China.  However, the U.S.  government performs limited monitoring of
China's compliance with conditions attached to U.S.  missile-related
technology exports. 

The intelligence community has primary monitoring responsibilities of
countries' adherence to MTCR commitments.  The interagency Missile
Trade Analysis Group analyzes intelligence information concerning
missile proliferation and MTCR.  The group consists of working-level
representatives of DOD, the Departments of State and Commerce, the
Joint Chiefs of Staff, ACDA, National Aeronautics and Space
Administration, U.S.  Customs Service, the intelligence community,
and others at the invitation of the chair and concurrence of the
group.  U.S.  government officials generally expressed confidence in
U.S.  monitoring abilities to detect violations of MTCR commitments
not to export such technology.  To the degree that Commerce and State
monitor license conditions relevant to "no retransfers, resales, or
reexports" of U.S.-licensed missile technology commodities, they
share indirect responsibility for monitoring adherence to MTCR
commitments. 

Both the Commerce Department's pre-license checks and post-shipment
verifications program and the State Department's BLUE LANTERN
programs are restricted in China.  They are restricted partly because
the Chinese government does not accept the need to link cooperating
with U.S.  pre-license checks and post-shipment verifications in
order to gain U.S.  approval for Chinese export license applications. 
According to an Assistant Secretary of the International Trade
Administration, Commerce has not given China a clear demonstration
that if there is no pre-license check, an application would be
rejected. 

DOD, on the other hand, insists that it oversee foreign launches of
U.S.-built satellites in China through its Technology Safeguards
Monitoring Program. 


      LIMITED COMMERCE DEPARTMENT
      PROGRAM
---------------------------------------------------------- Letter :4.3

Commerce policy does not require pre-license checks be completed in
order that an export license application be approved.  Commerce data
showed that it requested three pre-license checks for applications
involving missile-related technology.  Two were conducted and one was
canceled.  Commerce officials said that the application with the
canceled pre-license check was approved after interagency review,
while the other two applications were not.  Commerce returned the
second application without action and advised the applicant to apply
to the State Department because it determined that the license
application was under State's jurisdiction.  The third application
was rejected.  Commerce officials said that the pre-license check for
the approved missile technology application was canceled the same day
it was requested. 

Commerce officials noted that pre-license checks can be canceled for
legitimate reasons.  For example, one pre-license check was canceled
after the U.S.  Embassy in Beijing provided additional information on
the transaction, according to Commerce officials. 

In comparison, for all types of exports, the Commerce Department
requested a total of 77 pre-license checks for China between fiscal
years 1990 and 1993, and conducted 37 checks, or about 48 percent,
while
22 pre-license checks were canceled for various reasons, and 18 were
still pending at the time of our review.  Compared to 20 other
countries of proliferation concern, China had the lowest percentage
of completed pre-license checks.  Commerce records showed that nine
of the export license applications whose requested pre-license checks
were canceled received an approved license. 

The U.S Embassy conducted no post-shipment verifications related to
missile technology.  One was requested for a missile technology
export, but was canceled when the license expired without the
shipment being made.  In comparison, the U.S Embassy conducted one
post-shipment verification with the authorization of the Chinese
government out of a total of seven requested for all types of export
items.  Commerce officials indicated that a post-shipment
verification also was requested and canceled for the one missile
technology license with a canceled pre-license check noted above. 
MTEC dropped its request for the condition after a Commerce official
said that it would be difficult to conduct the post-shipment
verification in China.  The group alternatively required the exporter
to report to Commerce after it installed the item.  At the time of
this report, the export had not been shipped. 

Commerce officials said that Commerce conducted few pre-license
checks because of such factors as Chinese sensitivity over
sovereignty issues and expense in time, dollars, and distances
required to conduct pre-license checks.  Noting that discussions were
in progress with China on expanding pre-license checks and
post-shipment verifications, Commerce officials said they expect no
breakthroughs in the near future.  According to these officials,
Commerce has made continuous efforts for the past 10 years to reach
an understanding with China on routinely allowing the United States
such checks and verifications, without success. 

The Foreign Commercial Service Officer at the U.S.  Embassy in
Beijing is responsible for conducting pre-license checks.  However,
he said that his role is split between conducting checks and his
trade promotion activities.  The export controls function is
secondary to the trade promotion role.  Although some Foreign
Commercial Service Officers at consulates in China in the past year
have been tasked and trained to conduct pre-license checks, they do
not have the required backgrounds for this function and also face
conflicts with their trade promotion duties.  The Foreign Commercial
Service Officer in Beijing said that those at the consulates would
have difficulty conducting pre-license checks in China, unless they
received well-written cables detailing what to look for. 

There was little monitoring required of China's compliance with the
conditions associated with five missile technology export licenses
that included provisos as conditions of approval.  Of the five
licenses with conditions, only two required that the exporter provide
subsequent documentation.  In one case, receipt of the documentation
would have initiated a post-shipment verification.  The Commerce
Department did no follow-up on this 1992 license until 1994, when it
learned that the shipment was never sent.  Commerce officials said
that there would be no follow-up until receipt of the exporter's
documentation, indicating that the shipment had been made.  They also
noted that the license would expire after
2 years, at which time Commerce would verify that the shipment had
not occurred.  The interagency MTEC Group, which recommended approval
of the license with the proviso, did no follow-up to ensure that the
condition was included as part of the license or that the
post-shipment verification was ever done.  The interagency group
typically trusts the licensing agency to implement its
recommendations, according to the group's chairman.  In the other
case, the exporter was required to report on its installation of
equipment after it occurred.  Commerce records indicate that the
export had not been shipped at the time of this report. 

Our previous report concerning end-use checks for nuclear dual-use
items found systemic weaknesses in the pre-license
check/post-shipment verification program for nuclear dual-use items. 
In the September 1993 special interagency report, which included
China in its review, Commerce Department's Inspector General reported
that there is no assurance that either pre-license checks or
post-shipment verifications are achieving their objectives.  We found
some of the same conditions in China, such as insufficient
information provided to Foreign Commercial Service Officers in
requesting cables and misleading data in the Bureau of Export
Administration's database for tracking the status of pre-license
checks, as had been identified in these two reports. 


         STATE DEPARTMENT'S BLUE
         LANTERN PROGRAM IS
         MINIMAL IN CHINA
-------------------------------------------------------- Letter :4.3.1

The State Department's BLUE LANTERN end-use check program in China is
minimal.  State currently performs few BLUE LANTERN checks in China
because relatively few Munitions List exports are licensed for China. 
State Department officials said that relatively few Munitions List
licenses are granted to China because of (1) the "Tiananmen Square"
sanctions, established by Public Law 101-246, which suspended exports
of items on the U.S.  Munitions List to military and security end
users unless a presidential waiver is obtained and (2) existing
International Traffic in Arms Regulations, which require approval of
exports to China only as an exception to the standing U.S.  policy of
denial since China is a proscribed destination.  Most of these
exports involve satellite projects, monitored under the separate DOD
program.  According to a State Department official, most of the few
remaining munitions items licensed to China are not militarily
significant or are not amenable to post-license verification. 

During the period from fiscal years 1990 through 1993, no pre-license
checks for missile technology exports were requested by State.  In
comparison, three pre-license checks were requested for other
non-missile export applications handled by State.  Two of the
requests were canceled and State issued the licenses, but they were
never used.  The State Department completed the third check.  The
State Department requested one post-shipment verification during this
period for the application that had received the pre-license check,
but could not verify the results. 

In addition, most of the missile technology exports during the 4-year
period involved satellite technology associated with launches of
foreign-owned satellites on Chinese boosters.  DOD's Technology
Safeguards Monitoring Program provides for continuous monitoring of
such exports while they are in China.  From December 1989 through
January 1993, DOD participated in monitoring five launch campaigns of
U.S.  satellite equipment launched by Chinese rockets.  Personnel
from technical and engineering backgrounds, and experts on space
systems and test ranges performed the monitoring. 


   CHINA RECENTLY UPDATED ITS MTCR
   COMMITMENTS AND DID NOT AGREE
   TO CURRENT STANDARDS
------------------------------------------------------------ Letter :5

China's 1992 commitments to the MTCR were limited and ambiguous. 
State Department officials agreed that the terms of China's
commitments contained ambiguities.  On the other hand, the terms of
U.S.  expectations for China's commitments were straightforward and
unambiguous.  Nevertheless, these expectations were based on some
outdated MTCR standards, which differed from the changed standards
subsequently agreed to by MTCR members.  The different expectations
remained unreconciled. 

In October 1994, China renewed its commitment to the original MTCR
Guidelines and Annex in a signed bilateral statement.  This statement
further committed China not to sell Category I ground-to-ground
missiles and technology to any country.  Moreover, China resolved a
key ambiguity in its 1992 commitment by agreeing to define MTCR-class
missiles using a U.S.-proposed concept. 

The 1992 U.S.-Chinese understandings were based on a series of
classified diplomatic exchanges.  The United States established clear
standards against which to measure Chinese behavior, even though it
could not have been positive that the Chinese government agreed with
the 1992 standards.  Relative to the 1992 commitments, the October
1994 Chinese commitments are phrased in a jointly agreed manner and
are more clearly stated. 

MTCR partners' commitments to the regime include abiding by terms of
the current MTCR Guidelines and Annex.  These provide no payload
threshold.  China was committed, on the other hand, to only the
original 1987 MTCR Annex and Guidelines in effect at the time of its
original commitment.  At that time, the purpose of the regime was to
limit the spread of missiles and unmanned air vehicles/delivery
systems capable of carrying a 500- kilogram (1,100 pounds) payload at
least 300 kilometers (186 miles).  MTCR partners revised the MTCR
Guidelines in January 1993 to cover delivery vehicles for all types
of weapons of mass destruction (chemical and biological as well as
nuclear), regardless of their payload, and revised the annex, most
recently in July 1994, to make its terms more specific. 

Under the terms of its October 1994 commitment, China and the United
States will conduct in-depth discussions concerning a Chinese
commitment to the current MTCR Guidelines and Annex and prepare the
way for eventual Chinese MTCR membership, according to a State
Department official. 


   EFFECTIVENESS OF U.S. 
   SANCTIONS ON CHINA IS UNCERTAIN
------------------------------------------------------------ Letter :6

The effectiveness of U.S.  sanctions on China is difficult to
determine because, to date, no consensus on a definition of, or
criteria for, measuring the effectiveness of proliferation sanctions
imposed on China has been established.  In fact, State Department
officials said that they are not responsible for assessing
effectiveness of proliferation sanctions, which are congressionally
mandated, and that assessing them is not required in the Arms Export
Control Act or other laws. 

In June 1991, the U.S.  government imposed sanctions on two Chinese
entities because of their trade in missile technology.  The U.S. 
government waived sanctions against these entities in 1992 when the
Chinese government committed to observing the MTCR Guidelines.  In
August 1993, the U.S.  government imposed sanctions on 10 Chinese
entities, upon determining that they had transferred missile
technology from China to Pakistan.  However, in October 1994, the
State Department announced that the U.S.  government would lift these
sanctions on Chinese entities in exchange for new Chinese missile
nonproliferation commitments, including a reaffirmed commitment to
the MTCR.  These sanctions subsequently were lifted. 

In addition, Congress legislated sanctions specifically against China
in response to the June 1989 massacre at Tiananmen Square.  These
sanctions included suspension of (1) all exports of items on the U.S. 
Munitions List to China, including items for inclusion in civil
products if intended for end users in Chinese military or security
forces and (2) the license for the export of any U.S.-manufactured
satellites for launch on launch vehicles owned by China.  The
President can waive either of these suspensions.  In addition,
exports of munitions items are approved for export to China only as
exceptions to the standing U.S.  policy of denial because China is a
proscribed destination under the International Traffic in Arms
Regulations.  This prohibition also must be waived in order to
approve an export. 

State Department and ACDA officials attribute China's agreeing to the
original MTCR as of March 1992 to the proliferation sanctions in
place at that time.  ACDA officials and the State Department
indicated that the 1991 proliferation sanctions on two Chinese
companies were effective because China met the U.S.  condition for
suspending the sanctions--declaring adherence to the MTCR Guidelines
and Annex. 

Discussions with numerous experts, including those from involved U.S. 
government agencies, yielded several suggestions that effectiveness
of sanctions could be measured in terms of (1) limits on exports to
sanctioned entities, (2) changes in China's missile proliferation
behavior, and (3) China's agreement to current MTCR Guidelines and
Annex.  During our review, we learned that: 

  U.S.  export licensing procedures call for automatically denying
     export licenses for sanctioned entities.  Licenses for MTCR
     Annex items to sanctioned entities require presidential waivers
     of both the general missile sanctions and "Tiananmen Square"
     sanctions and must be reported to Congress.  A number of such
     waivers were granted and duly reported. 

  Several analysts saw no change in China's missile program or
     proliferation behavior resulting from the 1993 proliferation
     sanctions. 

  The 1993 proliferation sanctions have not yet resulted in China's
     agreement to commit to the current MTCR Guidelines and Annex. 
     Rather, China in October 1994 committed to further discussions
     on the MTCR, which will include the issue of a Chinese
     commitment to the current MTCR, according to a State Department
     official. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :7

To ensure that the appropriate licenses are referred to the MTEC
Group, we recommend that the Secretary of Commerce provide periodic
reports to the interagency group on those dual-use licenses for China
whose commodities are classified under ECCNs containing items subject
to missile technology controls.  The reports should include, as a
minimum, license and ECCN numbers, names of the end user and/or
ultimate consignee, end-use descriptions, and descriptions of the
commodities to be licensed.  We further recommend that the
Secretaries of DOD, Commerce, and State and the Director of ACDA use
licensing information contained in these reports to establish
mutually acceptable criteria and guidelines for selection of other
licenses for interagency review. 

We recommend that the Secretary of Commerce establish criteria to
determine under what conditions approval of dual-use technology
exports to China should be conditioned on the successful performance
of pre-license checks.  Such criteria might include the nature and
proliferation credentials of the end user, the potential end uses of
the commodities to be exported, or the favorable outcome of the
check. 


   VIEWS OF AGENCY OFFICIALS
------------------------------------------------------------ Letter :8

As requested, we did not request written agency comments.  However,
we discussed the results of our work with officials from DOD, the
Departments of Commerce and State, and ACDA.  Commerce officials said
that the other agencies' characterizations of problems with its
licensing application referral efforts were unsubstantiated and
unfounded.  However, State, DOD, and ACDA officials generally agreed
with the information in this report. 

Each of these agencies provided suggestions and comments to improve
the clarity and technical accuracy of the report.  We have
incorporated their suggestions and comments into the body of the
report where appropriate.  We believe that implementing our
recommendations would go a long way toward reconciling the concerns
among the involved agencies. 


---------------------------------------------------------- Letter :8.1

Our work was performed from October 1993 through October 1994 in
accordance with generally accepted government auditing standards. 
The scope and methodology for our review is discussed in appendix IV. 

We plan no further distribution of this report until 30 days from its
issue date.  At that time, we will send copies of the report to other
interested congressional committees; the Secretaries of State,
Commerce, and DOD; and the Director of ACDA.  Upon request, copies
may also be made available to others having appropriate security
clearances and a need to know. 

If you or your staff have any questions concerning this report,
please call me on (202) 512-4128.  Major contributors to this report
are listed in appendix V. 

Sincerely yours,

Joseph E.  Kelley
Director-in-Charge
International Affairs Issues


PARTNERS AND ADHERENTS TO THE MTCR
=========================================================== Appendix I



                          Table I.1
           
               MTCR Partners as of October 1994

------------------  ------------------  --------------------
Argentina           Greece              New Zealand

Australia           Hungary             Norway

Austria             Iceland             Portugal

Belgium             Ireland             Spain

Canada              Italy               Sweden

Denmark             Japan               Switzerland

Finland             Luxembourg          United Kingdom

France              Netherlands         United States

Germany
------------------------------------------------------------


                          Table I.2
           
            Declared Adherents or States Declaring
            Intention to Adhere as of October 1994

Brazil              Israel              Russia
------------------  ------------------  --------------------
China               Romania             South Africa

Ukraine
------------------------------------------------------------

DATA ON U.S.  DUAL-USE LICENSE
APPLICATIONS FOR EXPORTS TO CHINA
========================================================== Appendix II

Commodities on export license applications that are subject to
foreign policy controls on weapons delivery systems were grouped
under
116 Export Control Classification Numbers (ECCN) listed in the U.S. 
Export Administration Regulations at the time of our review. 
Exporters are instructed to consult the "Reason for Control"
paragraph in each number to determine the specific item subject to
these foreign policy controls.  In practice, the 116 ECCNs subject to
control for missile technology reasons were divided at the time of
our review into 85 "entire entry" ECCNs and 31 other missile
technology ECCNs that would contain at least 1 item relevant to
missile technology. 

The following figures show the dollar values of U.S.  export license
applications and approved licenses for dual-use commodities to China
for the period fiscal years 1990 through 1993. 

Figure II.1 shows the value of exports to China, licensed by the
Commerce Department, according to their ECCNs for fiscal years 1990
through 1993. 

   Figure II.1:  Value of
   Commerce-Licensed Exports to
   China by Export Control
   Classification Number (fiscal
   years 1990-93, dollars in
   millions)

   (See figure in printed
   edition.)

Note:  Missile technology ECCNs here indicate only that commodities
were initially categorized under missile technology ECCNs, not that
the final Commerce Department determination identified the necessity
for missile technology controls. 

Figure II.2 shows the values of all Commerce Department license
applications for exports to China for fiscal years 1990 through 1993. 

   Figure II.2:  Value of All
   Commerce License Applications
   for China (fiscal years
   1990-93, dollars in millions)

   (See figure in printed
   edition.)

Note:  Other actions include returned without action, revoked,
suspended, or withdrawn. 


DUAL-USE COMMODITIES APPROVED FOR
EXPORT TO CHINA REVIEWED FOR
MISSILE TECHNOLOGY CONCERNS FISCAL
YEARS 1990-93
========================================================= Appendix III

Numbers
of
approved
licenses           ECCN  ECCN description
---------  ------------  -----------------------------------
1                  1518  Telemetering and telecontrol
                          equipment suitable for use with
                          aircraft (piloted or pilotless) or
                          space vehicles, and test equipment
                          specially designed for such
                          equipment.
2\a          1B21 (2)\b  Other equipment for the production
                          of fibers, prepegs, preforms, or
                          composites.
1\a                1B96  Other test, inspection, and
                          production equipment for
                          materials.\c
1                  1C22  Tungsten, molybdenum, and alloys of
                          these metals in the form of
                          uniform spherical or atomized
                          particles of 500 micrometer
                          diameter or less with a purity of
                          97 percent or higher for
                          fabrication of rocket motor
                          components; that is, heat shields,
                          nozzle substrates, nozzle throats,
                          and thrust vector control
                          surfaces.
1                  1C31  Propellants, constituent chemicals,
                          and polymeric substances for
                          propulsive propellants.
1                  2A52  Pipes, valves, fittings, heat
                          exchangers, or magnetic,
                          electrostatic or other collectors
                          made of graphite or coated in
                          graphite, yttrium compounds
                          resistant to the heat and
                          corrosion of uranium vapor.\c
1                  2B40  Vibration test equipment.\c
1                  2B50  Spin-forming and flow-forming
                          machines specially designed or
                          adapted for use with numerical or
                          computer controls and specially
                          designed parts and accessories
                          therefor.\c
1                  3A22  Radiographic equipment (linear
                          accelerators) capable of
                          delivering electromagnetic
                          radiation produced by
                          "bremsstrahlung" from accelerated
                          electrons of 2 MeV or greater or
                          by using radioactive sources of 1
                          MeV or greater, except those
                          specially designed for medical
                          purposes.
1                  3A93  Electronic test equipment in
                          Category 3A, not elsewhere
                          specified.\c
1            3A96 (2)\b  Other equipment, assemblies, and
                          components in Category 3A, not
                          elsewhere specified.\c
3            5A20 (4)\b  Telecontrol and telemetering
                          equipment.
1                  5B01  Equipment specially designed for
                          the "development," "production,"
                          or use of equipment, materials, or
                          functions controlled by the
                          entries in the telecommunications
                          sections of Category 5 for
                          national security reasons.\c
1                  6A22  Photosensitive components not
                          controlled by ECCN 6A02.
2            7A23 (2)\b  Inertial or other equipment using
                          accelerometers or gyros described
                          in 7A21B or 7A22B, and systems
                          incorporating such equipment and
                          specially designed components
                          therefor.
1            9B27 (2)\b  Test benches or stands that have
                          the capacity to handle solid or
                          liquid propellant rockets or
                          rocket motors of more than 20,000
                          pounds of thrust, or which are
                          capable of simultaneously
                          measuring the three axial thrust
                          components.
------------------------------------------------------------
\a One license was issued for commodities under these two ECCNs. 

\b Number in parentheses indicates total number of applications for
commodities in that ECCN when more than one application was received. 

\c Commerce identified the commodity as not on the MTCR Annex. 


SCOPE AND METHODOLOGY
========================================================== Appendix IV

To develop information for this report, we talked to cognizant
officials and obtained documents in the Washington, D.C., area from
the Departments of Commerce, State, and Defense, and at the Arms
Control and Disarmament Agency, and the U.S.  Customs Service.  In
addition, we discussed the MTCR, China, and missile proliferation
issues with officials at the Defense Intelligence Agency, Central
Intelligence Agency, National Security Agency, and the National Air
Intelligence Center at Wright-Patterson Air Force Base, Ohio.  We
reviewed annual proliferation reports to Congress, a report on
exports of sensitive technologies to Chinese sensitive end users,
hard copy of a database on sensitive end users in China, and excerpts
pertaining to China of the log of an MTCR interagency group.  We also
talked with officials at the Lawrence Livermore National Laboratory
in Livermore, California, and Los Alamos National Laboratory in Los
Alamos, New Mexico. 

We reviewed files and talked with U.S.  government officials at the
U.S.  Embassy in Beijing, China, and the American Consulate General
in Hong Kong.  In addition, we met with officials of the Chinese
government in Beijing, China, to discuss U.S.  export controls and
U.S.  sanctions on China.  Also, we discussed export controls,
missile proliferation issues, and potential diversions of U.S. 
missile technology into China with Hong Kong government officials. 

To assist us in identifying sensitive end users in China receiving
missile technology, we provided a sample of export licenses drawn
from the Commerce Department's Export Control Automated Support
System and approved by the Commerce Department to teams of analysts
at the Defense Intelligence Agency and National Security Agency.  The
licenses were categorized under ECCNs designated as controlled for
missile technology reasons.  The analysts provided some information
on sensitive end users, but the Commerce Department, after a
technical review of the data, said that the license applications did
not involve restricted missile technology. 

To assist us in performing an independent technical evaluation of
Commerce Department license approvals, we originally requested three
teams of analysts from the Defense Intelligence Agency, National
Security Agency, and Defense Technology Security Administration to
indicate if the available information on specific exports and
technology might have suggested the need for interagency review. 
This was important because the Commerce Department makes unilateral
determinations that license applications are not MTCR-related and,
therefore, do not require full interagency review for approval.  We
also asked that they identify sensitive end users among the listed
ultimate consignees on the applications to be provided.  After we
presented this request to the teams of analysts and one team agreed
to provide this analysis, we were told that a high-level interagency
meeting of involved agencies resulted in directing the agencies of
the three teams not to provide an analysis of the need for
interagency review because it was not within their authority to do
so.  Consequently, two teams agreed to perform the analysis of
sensitive end users only.  As a result, we were unable to benefit
from the expertise of the technical specialists in assessing the
technology of the sample of licenses and the appropriateness of
Commerce Department decisions.  In addition, the agency of the third
team of analysts did not decide within our required timeframes
whether or not it would participate in the requested analysis. 

To evaluate the Commerce Department's pre-license check/post-shipment
verification program in China for dual-use items, we reviewed records
at both the Commerce Department in Washington, D.C., and at the U.S. 
Embassy in Beijing.  We also talked to officials at both locations. 
Our review included gathering statistical data and reviewing cable
traffic on checks and verifications done in China for all types of
technology for the period of fiscal years 1990 through 1993.  This
was necessary, in part, because Embassy records identified many more
checks being done for missile technology concerns than shown by
Commerce records.  Commerce Department officials said that their
records were authoritative. 


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

F.  James Shafer
Jeffrey D.  Phillips
Beryle Randall
Jai Lee
Douglas E.  Cole