What a difference a scandal or two make. Today Washington is in the grip of “Donorgate”–allegations that Chinese funds and unseemly amounts of corporate money were funneled into the ‘96 election campaign. All this has cast a shadow over Clinton’s commercial Camelot, the bonding of corporate and national interests that so marked his first term. It must seem that way, at least, to McCracken: now the Clinton administration is threatening to put its showcase exporter in the dock. The Commerce Department recently asked federal prosecutors to investigate California-based Silicon Graphics for selling supercomputers to China’s Academy of Sciences and to a Russian nuclear-weapons lab. Though ostensibly sold for civilian use, the machines could help both countries beef up their nuclear arsenals, some defense experts say.
Silicon Graphics is hardly the only company shivering from the chill over China. McDonnell Douglas is under scrutiny for selling machine tools to China that were diverted to a military plant that builds missiles and fighter aircraft. A grand jury is looking at the case, and a Pentagon source told NEWSWEEK that the government has evidence the company may have known the 1994 diversion would take place. (McDonnell Douglas denies it did anything illegal.)
And now, anxious to counter an image of softness on China in the wake of Donorgate, the administration is toughening up export restrictions on so-called dual-use technology–supercomputers, for instance, that can either track weather patterns or help target a nuclear arsenal. In coming weeks, NEWSWEEK has learned, several names of Chinese “end users”–purchasers–will be added to a new Commerce blacklist of dubious tech buyers suspected of involvement in weapons proliferation. U.S. sellers of dual-use goods now operate mainly on an honor system, deciding for themselves whether an end user is into arms sales. The list means that anyone selling to those purchasers will be expected to apply for a government export license first.
That may prove a big roadblock. “Our denial rate [of licenses for China exports] probably has tripled in the last year,” says William Reinsch, U.S. under secretary for export controls, “and is more than three times the denial rate of any other country.” Commerce has also begun a review of computer sales abroad, focusing on China and Russia, in part “to see if they were diverted for some other purpose,” Reinsch says.
Big risks: For America’s high-tech exporters, who supplied about half of the $12 billion in U.S. goods sold to China last year, the risks are enormous. Beijing has been quick to retaliate against perceived commercial slights, often angrily withholding contracts. Already there are signs of a fallout. NEWSWEEK has learned that IBM and Rockwell have just lost out to Japan’s NEC in a bid to build a $1.2 billion silicon-wafer plant in China, largely because Beijing feared that a newly wary administration would block the deal. By contrast, “NEC appears to have sold the Chinese on the idea that they will not need to clear this with anyone,” says an industry source.
Things could get worse still. Elsewhere in Washington, the political mood toward Beijing is hardening. “We don’t have any bad guys abroad right now. A lot of people want to have a bad guy,” says Mark Helmke, a former aide to GOP Sen. Richard Lugar. He predicts that once-moderate Republicans will make an issue of China’s most-favored-nation status, which comes up for a vote again this June. Beltway politicos also see a hot foreign-policy issue leading up to 2000. With China’s trade surplus starting to rival Japan’s, “people are starting to ask harder questions,” says Rep. Dick Gephardt, Democrat of Missouri, a possible challenger in 2000 to Al Gore, who returned recently from a scandal-soured trip to China. “The Chinese would love it if they could keep their market closed to us and just get our technology,” Gephardt says.
Critics argue that “constructive engagement” with China has mainly become a ticket to ride for U.S. business. And it has done little to dissuade Beijing from human-rights or intellectual-property abuses. “Our policy on China is pretty much being dictated by corporate America and its influence in the White House,” says Gary Milhollin, director of the Wisconsin Project, a D.C.-based outfit that tracks arms flows around the world. “We deregulated too much, too fast, without thinking about the consequences.” Milhollin and others point out that, while U.S. defense firms are banned from selling arms to China, many of the best defense technologies are now dual-use goods from the commercial market. As a result, U.S. intelligence sources say, Silicon Valley has turned into Beijing’s gateway to the best Western tech. About half of the 900 tech-transfer cases investigated annually on the West Coast involve the Chinese.
U.S. officials, despite their tougher line, say that stemming tech flows is largely impossible. Many other countries sell China the same stuff. “This technology is broadly shared, and the sense of threat [about China] isn’t broadly shared,” says former assistant secretary of defense Joseph Nye.
For their part, U.S. exporters complain that they are being scapegoated because Commerce, until now, offered little guidance on who’s an acceptable customer in China. That has been difficult since so many Chinese government agencies, like the Academy of Sciences, are themselves “dual use,” working on both the civilian and the military sides. Prosecutors in San Jose may drop their probe into Silicon Graphics’ China sale largely for that reason.
McCracken, in an interview, insisted that “there is no case” over China because the Academy of Sciences guaranteed that the Power Challenge XL supercomputer would be used only for civilian research. Still, he senses “a rollback” by Washington on sales to China. “We’ve become extremely conservative about exports abroad,” adds Silicon Graphics exec Gary Lauer. “We are inspecting every single transaction.” They’d better–or Washington might.
A number of U.S. sales of “dual use” technology to China have brought government scrutiny recently. Here are several cases:
Silicon Graphics: In 1996 sold a powerful supercomputer to China’s Academy of Sciences, which does subcontracting work for the military on guidance systems.
McDonnell Douglas: In 1994 sold sophisticated aircraft machine tools later diverted to a military factory.
Allied Signal: Sold jet engines in 1994 for use in military training aircraft. The technology can be applied to cruise-missile development.
AT&T: In 1994 sold state-of-the-art telecom equipment to a company affiliated with the People’s Liberation Army, prompting a congressional inquiry.
