Energy Technology Transfer to China

September 1985

NTIS order #PB86-113008
Recommended Citation:

U.S. Congress, Office of Technology Assessment, Energy Technology Transfer to China—A

Technical Memorandum, OTA-TM-ISC-30 (Washington, DC: U.S. Government Printing

Office, September 1985).

Library of Congress Catalog Card Number 85-600570

For sale by the Superintendent of Documents

U.S. Government Printing Office, Washington, DC 20402
Foreword

This technical memorandum responds to requests by the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Energy and Commerce

and its Special Subcommittee on U, S. Trade with China. It is the result of the first phase

of OTA’s assessment on Technology Transfer to China, which is scheduled to be completed by the end of 1986. Both committees requested that an interim document on energy

technology be provided because of the immediacy of the agreement on nuclear cooperation and the importance of energy to China’s modernization plans.

This memorandum examines the opportunities for the transfer of various energy

technologies to China. It reviews the motivations for U.S. companies and other institutions for transferring technology and the vehicles for doing so. It also surveys China’s

needs for energy technologies and its ability to assimilate them.

Some implications of energy technology transfer are clearly important to U.S. interests. Certain technologies could enhance China’s ability to compete against the United

States in the world market or contribute to an increased military capability which could

be of concern if relations deteriorate, On the other hand, technology transfer could be

a major element in improving relations between the two countries, as well as an important component of increased U.S. trade with China.

Nuclear technology is given special attention in this memorandum because of the

importance of exports to the U.S. nuclear industry, the potential impact on U.S. nonproliferation and strategic goals, and the interest of Congress in the nuclear cooperation agreement.

The memorandum also examines policies for controlling and promoting technology transfer to China. It analyzes changes that might improve the effectiveness of these

policies.

The memorandum is based on discussions at a workshop held on April 18-19, 1985,

on five background papers commissioned for this workshop and on OTA staff research.

The five papers and additional information are contained in a separate volume.

OTA appreciates the assistance provided by the workshop participants; reviewers

of this document; and the many individuals, companies, and agencies contacted during

the study.

JOHN H. GIBBONS

Director

.,.

Ill
Related OTA Reports

Technology Transfer

● U.S.-Soviet Cooperation in Space.

OTA-TM-ST1-27, July 1985. GPO stock #052-O03-O1004-6.

● Technology Transfer to the Middle East.

OTA-ISC-173, September 1984. GPO stock #052-O03-O0962-5.

● Technology and East-West Trade: An Update.

OTA-ISC-209, May 1983. GPO stock #052-003-00908-l.

● Technology and Soviet Energy Availability.

OTA-ISC-153, November 1981. NTIS order #PB 82-133455.

● Technology and East-West Trade.

OTA-ISC-101, November 1979. NTIS order #PB 80-119381,

Energy

● New Electric Power Technologies: Problems and Prospects for the 1990s.

OTA-E-246, July 1985. GPO stock #052-003-01005-4.

● Nuclear Power in an Age of Uncertainty.

OTA-E-216, February 1984. GPO stock #052-003-00941-2.

● Industrial and Commercial Cogeneration,

OTA-E-192, February 1983. NTIS order #PB 83-180547.

● Industrial Energy Use.

OTA-E-198, June 1983. GPO stock #052-003-00915-3.

● Nuclear Proliferation and Safeguards, Summary.

OTA-E-148, March 1982.

● Direct Use of Coal: Prospects and Problems of Production and Combustion.

OTA-E-86, April 1979. NTIS order #PB 295797,

NOTE: Reports are available through the U.S. Government Printing office, Superintendent of Documents, Washington, DC 20402,

(202) 783-3238, and the National Technical Information Service, 5285 Port Royal Rd., Springfield, VA 22161, (703) 487-$650,
OTA Project Staff for Energy Technology Transfer to China

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

Martha Caldwell Harris, Senior Analyst

Richard P. Suttmeier, Senior Analyst

Joanne Seder, Analyst

Craig Allen, Research Assistant

Administrative Staff

Jannie Coles Dorothy Richroath Jackie Robinson
Energy Technology Transfer to China Workshop

Kenneth Angell

Overseas Private Investment Corp.

Baruch Boxer

Rutgers University

Hugh Donaghue

Control Data Corp.

Warren Donnelly

Library of Congress

Thomas Fingar

Stanford University

Wendy Frieman

SAIC

Ronnie Lee Goldberg*

New York Chamber of Commerce and

Industry

Dixon Hoyle

Westinghouse Electric Corp.

Richard L. Hughes

Fluor China Inc.

Eric Larson

Princeton University

Kenneth Lieberthal

University of Michigan

Jonathan D, Pollack*

Rand Corp.

Thomas W. Robinson

Georgetown University

Richard Rowberg

Office of Technology Assessment

Allen S. Whiting, Chairman

University of Arizona

Denis Fred Simon*

Massachusetts Institu

Leonard Spector

Carnegie Endowment

Roger Sullivan

Cathy Ruckleshaus

Overseas Private Investment Corp.

e of Technology

for International Peace

National Council for U.S.-China Trade

Richard Peter Suttmeier*

Hamilton College

Amy Wilson

National Academy of Sciences

Kim Woodard*

China Energy Ventures, Inc.

Reviewers

William J. Cherones

Harnischfeger Corp,

Peter Clausen

Union of Concerned Scientists

David Denny

National Council for U.S.-China Trade

Eldon V.C. Greenberg

Galloway & Greenberg

Paul L. Leventhal

Nuclear Control Institute

S.0. Ogden

Island Creek Coal Co.

Department of State

Department of Commerce

● Authors of background paper prepared for OTA

vi
Contents

Page

CHAPTER l: Introduction. ,, ,,, 3

CHAPTER 2: Technology Transfer and U. S.-

China Relations ., ... 7

The Foreign Policy Context for Technology

Transfer, ,. . . . . ., ..,,,....,,, 7

Long-Term Opportunities and Risks ., 8

Opportunities ..., 8

Risks. . . . . . . . . . . . . ....,,.10

Technology as a Tool of U.S.

Foreign Policy . . . . . . . . . . . .......13

CHAPTER 3: Energy Technology Transfers ....17

Resources. . . . . . . . . . . . . . .....17

Trends in Energy Production and Use... .....19

Petroleum . . . . . ,. ...,19

Natural Gas . . . . . . . . . . . . . . . . . . . . . ...,,..19

Coal . . . . . . . . . . . . .......20

Electricity . . . . . . . . . . . . . . . . . . . . . . . .......20

Projections ..., . . . . . . . ..., ..21

Energy Use . . . . . . . . . . . . . . . . . . . ., . .......21

Trends in Energy Technology Transfer .. ...,.22

Petroleum Exploration and Production .....22

Petroleum Refining and Petrochemicals, ,. ..23

Coal Mining and Transportation . . . ..,,...24

Electric Power . . . . . . . . . . . . .......24

Conservation . . . . . . . . . . . . . . . . . . . . . . . ,...24

Soar, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

China’s Problems With Technology Transfer ..25

Finance, . . . . . . . . . ..., . . . . . . ..25

Manpower, ..., ..., . . . . . . ..., ..., ,26

Internal Transfers . . . . . . . . . . . . .......26

Decisionmaking . . . . ..., ..., . ......,27

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . .....28

CHAPTER 4: Nuclear Power and the Proposed

Cooperation Agreement . ................,31

Present Capabilities, . . ..., ..., ..., ..., ..33

The Role of Imported Technology . . . . .......33

Proliferation Concerns ., . . . . . . . . . . . . .......35

Other Military Concerns . . . . . . . . . . . . .......38

Nuclear Cooperation Agreement. ..,.. ., ...,.39

CHAPTER 5: U.S. Policy: Tools for Controlling

and Promoting Energy Technology

Transfers ., . . . . ..., . . . . . . ..., ..., ..,47

Page

Controls on Nonnuclear Energy Exports ......48

The Rationale of U.S. Export Controls. .48

Problems With the System ., ....50

Possible Improvement in U.S. Export

Controls. . . . ,, 53

Congressional Review of Nuclear Cooperation

Agreement, . . . . . . . . . . . . . . . . . . 54

Promoting Energy Technology Transfers ,,...55

Limited Scope of U.S. Promotional

Programs ..,,...,,, , ..,.,....,,,...,,5 5

Selection of Energy Development Projects ..58

Possible Improvements in U.S. Promotional

Programs .,,.....,,. . . . . . . . ,,.59

Balancing Control and Promotion ,,6 0

APPENDIX: Nuclear Cooperation Agreement

and Supporting Documents . . . . . ...65

List of Tables

Table No. Page

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

Petroleum Production by Region, ,..., 19

Natural Gas Production by Region ,..., 19

Coal Production . . . . . . . . . . ..., 20

Electric Power Production. . . . . . . . . . . . . . . . 20

Projected Primary Energy Production. . 22

Estimated Values of U.S. Technology

Transfer to China . . . . . . . . . . . . . . . . . . . . . 23

Nuclear Test Chronology, October

1964 to January 1981 . . . . . . . . . . . . 37

Export Applications for the PRO . . . . . . . . . . 50

Energy-Related Science and Technology

Agreements With China, . . . . . . . . . . . 55

U.S. Government-Supported Energy

Department Projects in China . . . . . . . . . . . . 57

U.S. and Japanese Trade, Aid, and

Investment in China, 1983 . . . . . . . . . . . . . . . 57

List of Figures

Figure No.

1. China’s Energy

2. Nuclear Policy

Organization

Page

Resources . . . . . . . . . . . . 18

Decisionmaking

. . . . . . . . . . . . . . . 34

vii
Chapter 1
Chapter 1

Introduction

Since the normalization of relations between the

United States and China in 1979, exports of U.S.

energy-related equipment, services, and technology have increased dramatically. U.S. policies reflect the expectation that deepening ties can serve

U.S. security interests in the region, while at the

same time providing market opportunities for

U.S. firms and opening doors to mutually enriching cultural and educational exchange.

Some observers, however, worry that the

floodgates have been opened too quickly, permitting transfers that the United States or China may

come to regret. As Confucius once said: “TO go

beyond is as wrong as to fall short .“ Others, however, see delays in U.S. export administration and

other policy-related problems as obstacles to U.S.

firms competing in the China market and as evidence that we lack a clearly defined strategy for

promoting Chinese energy development. This

memorandum addresses the central question of

whether (and how) the flow of U.S. energy technology to China can help to serve U.S. foreign

policy and commercial interests.

The transfer of technologies that China needs

to develop its energy resources requires much

more than the sale of equipment. Technology

transfer is a process, involving at least two parties, whereby the Chinese firm or organization attains an improved capability to design or produce

goods and services. 1

It involves people in a fairly

intimate and extended dialog. In this process a

number of commercial transactions occur, often

simultaneously. These include payments for

licenses and patents, provision of sophisticated

equipment in which technology is embedded,

training, and information exchanges between

technical professionals in the China and abroad.

If the Chinese are to effectively select and use

energy technologies developed abroad, their engi-

.

1 see U S Congre+s, Olflce of Techn(]log>r Assessment, TechnoiOgIr Tr~ndcr to the ,\lIJdle LIsf ( \l’~shington, DC: U, S Chvern -

m;nt I)r\nt]ng Otflce, September 1 Q84 ), OTA- ISC- 173, Chapter 2

Analyzlng Technolo~y Trad(’ .]nd Tr~nsfer. ” See also K]m W’mdard,

Back~round I’aper 1, “TcchnoloH}” Tran\tcr and China s Ener8} Indu;trie~, ‘ prepared I or the Ott Ice (JI Technolog)r As\es\ment, Apr.

18, 1~85, Ior a detailed outllne (){ the mechanlsm~ lot- technolo~}”

tran~ter to C’hlna, I nc 1 udln~ train ln~ pr(>grams, ~()]n t management

dnd product] on,

neers and technicians will need specialized knowhow to run these energy industries. They will also

need to adapt the technology to China’s environmental and industrial milieu. Much of the needed

knowledge is not in cutting edge high technologies. 2 Instead, it is often more mundane, such

as the knowledge needed to make appropriate

selections among the more than 30 kinds of pipe

connections used in the petroleum industry.

China’s need for foreign energy technologies

(including management skills) is illustrated by the

fact that, in spite of abundant energy resources,

the country is experiencing electricity shortages

so severe that at times 20 to 30 percent of its industrial capacity remains idle. ’ As the discussion

below documents in some detail, although the

country has an extensive resource base, its future

economic development will be directly and strongly

affected by its success in meeting energy production goals. Imports of foreign technology could

provide the avenue to accomplish what would

take many more years if China had to go it alone.

U.S. firms have been world leaders in developing most of the technologies that China needs,

though other countries can also supply them. ’

There is a clear complementarily between U..S.

technological capabilities and China’s requirements for developing its energy resources, but

difficulties have nonetheless arisen in attempting

to match these needs and capabilities. In the past,

for example during the Cultural Revolution,

China sought to limit its purchases to foreign

hardware, underestimating the need for ongoing

involvement with foreign suppliers. More recently, foreign firms were disappointed by the

2China is probably the largest buyer of used American mining

equipment. See Thomas N, Thompson, “Selling Used Mining Equipmerit, ” The (“hina Bus~ness Revieh, May-]une 1985, pp lt3-17,

‘See, for example, David Dennyr “Electric Power and the Chinese Economy, ” China Business Review, July-August 1985. See also,

Lu Qi, “Energy Conservation and Its Prospects, ” Beijing Re\,iewr,

.No, 46, November 1984, tor an estimate of 20 percent underutilization

4Secretar}~ of Commerce I’Vlalcolm Baldrvge has indicated that the

Chinese woLIld prefr L~ S. technologies over those of the Soviet Union

or lapan. See ‘ Chinese Technolog}r Nlart Touted, ” lournal of Corm

rnerc e, Nlayr 31, 1 Q85, p 1.

3
4 —

scaling back of Chinese plans in the early 1980s

and were also surprised by China’s hard bargaining tactics.

The expectations and interests of the U.S. and

Chinese enterprises directly involved in the transfers, as well the governments and other affected

parties, sometimes diverge. For the U.S. firm with

technology to sell and for the Chinese firm that

needs the technology, the commercial rationale

for technology transfers may be clear, at least in

the short run. But from a U.S. Government perspective, questions of national security are raised,

particularly when the transfers involve technologies with potential military applications. The potential long-term effects—commercial as well as

strategic—must be carefully assessed in developing U.S. export control as well as promotional

policies.

The pending agreement for cooperation in nuclear energy between the United States and China

embodies many of these policy dilemmas. The

risks as well as the opportunities associated with

possible nuclear technology transfers have potential implications not only for the United States and

China, but also for global trends in the proliferation of nuclear weapons, Congress has an important role to play in reviewing the proposed accord, and in helping to shape the policy context

for conventional energy technology transfers to

China.

Two congressional committees requested that

OTA provide an interim report on energy technology transfers to China. The Senate Banking

Committee, one of the requesters, plays a leading role in export policymaking and Members of

the Committee are particularly interested in the

proposed agreement for nuclear cooperation between the United States and China. The House

Energy and Commerce Committee and its Special Subcommittee on U.S. Trade with China have

asked OTA to examine how the U.S. Government

might facilitate energy technology transfers while

at the same time ensuring that national security

interests are upheld.

Because of the keen interest in the area of energy

technology transfers to China on the part of the

requesting committees, OTA turned to these issues in the first stage of a major research project

on “Technology Transfer to China” that will deal

with a number of technologies. This memorandum is not meant to be definitive. Instead it raises

a number of broader issues concerning U.S.-China

relations that will be analyzed in more depth in

the full report. The major OTA study was initiated in the spring of 1985 and is scheduled for

completion in December 1986,

This memorandum is based on the research of

OTA staff and the proceedings of a 2-day workshop held in April 1985 that included experts from

academia, industry, and research institutes. The

participants are listed in the front of this memorandum. The report is designed to present the policy issues that Congress will confront as it looks

at the long-term risks and opportunities associated with transferring energy technologies to

China. Five working papers that were commissioned for the workshop and other documents that

provide additional information on the subject are

included in a separate volume, available upon request to OTA.
Chapter 2

Technology Transfer and

U.S.-China Relations
——

Chapter 2

Technology Transfer and

U. S.= China Relations

The normalization of diplomatic relations between the United States and China that occurred

in 1979 set the stage for rapidly expanding technology transfer and trade. The two countries have

signed 25 protocols for cooperation in science and

technology. More than 12,000 students from the

People’s Republic are now studying in the United

States. The United States is China’s third largest

trading partner, after Japan and Hong Kong.

Energy has been a major focus of economic interaction between China and the United States.

In the first quarter of 1985 U.S. firms sold $64.8

million in mining and well drilling equipment to

China. Occidental Petroleum recently signed an

agreement to develop an open-pit coal mine in

China that will be one of the world’s largest. An

agreement for cooperation in nuclear power, a priority energy development sector for China, was

initialed in 1984 and recently signed on July 23,

1985.2 This chapter examines the role of technology transfer in the bilateral relationship, and highlights opportunities and risks from the U.S. perspective.

————. .- -—

2The text ot the agreement ( ] ncl uded in the appendi~ ] lvas I ] rst

made public i n ]uly 1985. Congress is current]}’ re\~iewing the d<)cument. The agreement may become effective in the fall ot I ~85, unless Congress adopts a joint resolution of dlsappr[)~al (See chapter

5.)

THE FOREIGN POLICY CONTEXT FOR TECHNOLOGY TRANSFER

The United States and China are important

countries whose expanding relationship is potentially significant in global geopolitics. Officials in

three U.S. Administrations have concluded that

the United States and China share parallel interests in many areas. It is also true that their goals

and approaches naturally diverge in some cases.

While Taiwan, arms transfers, and textiles remain

areas of disagreement, Washington and Beijing

may be able to pursue complementary policies in

Korea, Indochina, and other parts of Asia.

U.S. policies toward China are based on the expectation that closer relations can contribute to

economic progress in China and peace and stability in Asia. ’ Although rapprochement in the

early 1970s was stimulated primarily by the threat

of Soviet expansion in Asia, other, more positive,

themes of U.S. China policy emerged during the

Carter and Reagan Administrations. In addition

to counterbalancing the Soviet Union, major goals

of U.S. policies include assisting China in its modernization efforts, opening trade opportunities to

‘See Atlantic Council, Ch]na I’oIIc} for the Next Decade (Wa~hIngtt)n, D(- 1~83~, p 20 .

U.S. firms, and establishing rapport with the next

generation of Chinese leaders.

On the surface, these goals complement China’s

own concerns about Soviet hegemonism in Asia

and the PRC’s economic modernization aims. In

order to modernize its economy, China has instituted sweeping domestic economic reforms to

improve economic decisionmaking that also increase local and even individual enterprise, China

has also opened the door to foreign participation

by setting up special economic zones, enacting a

patent law and approving joint ventures, more

than 700 in 1984 alone.4

But there are also points at which Chinese and

U.S. interests seem to diverge, as one would expect for two countries with different economic and

political systems. China’s policies toward both the

United States and the Soviet Union have gone

through twists and turns. Taiwan remains a problem in relations with the United States, ’ and some

— —

“See ‘ China Approved 700 New Jo]nt \rentures In 1984, ” C“hjna

Trade News, May 1Q85, p 3.

‘See Robert Sutter, “The United States, ‘ Chinese Defense Pt~/-

lc~’, Segal and Tow. (eck. ) (Chicago: Un[\rersitv ot Illinol\ I’ress,

1~84), ch. 13,

7
8 ———

Association of Southeast Asian Nations (ASEAN)

countries friendly to the United States view

China’s modernization with apprehension. The

very success of China’s modernization poses new

challenges to the U.S.-PRC relationship. Conflict

over trade in textiles is a notable example. While

Chinese leaders stress their enduring commitment

to independence as the cardinal principle in their

foreign policy, they have also expressed their view

that technical cooperation with the United States

has not yet reached the desired level.’ All the

while, China insists that it cannot be “bullied” by

foreign countries that hope to force political concessions in exchange for advanced technology.7

Despite its growing involvement with foreign

countries and firms, China continues to value selfreliance.

During the past 6 years, expectations for a widening relationship have run high in the United

States. In spite of considerable achievements,

translating the general objectives of U.S.-China

policy into concrete measures has, at times,

proved difficult. U.S. export controls illustrate

these difficulties. The United States loosened its

controls on exports of dual-use technologies (with

military and civilian applications) in 1983 by moving China to category V on the Commodity Control List (CCL).8 

—.— — As a result, the process of license

‘Chen Muhua, State Counselor and Minister of Foreign Relations

and Trade, made this statement in “Prospects for Sine-U. S. Economic Relations, ” Beijing Review, No. 17, Apr. 23, 1984.

‘See Zheng Weizhi, “Independence is the Basic Canon –An Analysis of the Principles of China’s Foreign Policy, ” Beijing Re}’ie\t,

No. 1, 1985.

“In 1980 the United States authorized sales to China on a caseby-case basis of items and technology on the U.S. munitions list.

review was to be expedited. But, as discussed in

more detail in chapter 5, disagreements continue

both within the U.S. Government and among

Cocom9 countries about the guidelines for such

exports. U, S. exporters and the Chinese as well

have complained about delays and uncertainties

in U.S. license reviews. U.S. energy technology

transfers to China have, nevertheless, grown from

an estimated level of $20 to $30 million in 1973-

80 to $100 to $125 million in 1980-85. 10

In the wake of a dramatic transformation in

U.S.-China relations during the past few years,

the time may be ripe for a more careful definition of areas of mutual and competing interest in

relations with China. U.S.-PRC cooperation in

energy development is one area where such a reassessment may be particularly timely, Energy

problems are a major constraint on China’s modernization program, and the energy sector therefore is of strategic importance. The United States

has considerable expertise to assist China in developing its energy resources and may make significant gains as a result, In addition to opportunities for benefits, however, there are also risks.

Both the long-term opportunities and risks associated with energy technology transfers thus must

be evaluated.

‘C<)com (the Coordinating Committee) is the ini orrnal multilateral

organization through which the United States, Japan, and West European countries contro] exports of technol(>gy and strate~ic goods

to the Communist world.

‘(””rhese estimates are found in Wooclard, op. cit., p, 22.

LONG-TERM OPPORTUNITIES AND RISKS

Assessments of risks and opportunities associated with energy technology transfers hinge on

perspectives concerning trends in Chinese economic development and prospects for U.S.-China

relations. During the past 30 years there have been

dramatic changes in both areas. Whether Chinese

reform policies succeed, China’s ability to absorb

U.S. technology, and the capabilities of China’s

own R&D system are some of the questions that

influence assessments of opportunities and risks.

Such assessments are also contingent on whether

China is viewed by the United States as a potential ally, a friendly nonallied nation, an unpredictable neutral country, or a potential enemy.

Opportunities

U.S. policies are today predicated on the notion that the United States has much to gain from

transferring energy and other technologies to
.

9

China. Expanded cooperation in the energy sector has been seen as a key avenue for the United

States to participate in, and even help shape,

China’s economic modernization. At the same

time, the United States restricts exports of technologies that have significant military applications, such as certain nuclear technologies and

very powerful computers.

1. Contribution to Friendly Bilateral Relations

Cooperation in the energy sector is a symbolic

as well as a practical demonstration of U.S. expertise and commitment. Because energy development is intimately connected with economic

and social change throughout China, it is an area

where U.S. influence may be particularly important. Energy, in other words, holds a key to Chinese economic development, and U.S. technology can contribute to the modernization process.

The Chinese, furthermore, clearly want U.S. technologies.

Opting out of Chinese energy development

would at best disappoint the Chinese and at worst

cause serious problems in U.S.-China relations.

Other Asian countries could also be affected by

such developments. Japan, for example, expanded

its relationship with China after U. S .-China relations began to improve. A stable, working U. S.-

China relationship is an important element in

Japan’s own strategic policies. ” In light of these

and other factors, forgoing participation in China’s

energy development hardly seems a viable alternative for the United States.

2. Trade Opportunities

The China market may not be the bonanza once

hoped for, but it is now a significant one, and

holds the potential for expanded imports of energy

equipment, services, and technologies in the years

ahead. In a period of rising U.S. trade deficits,

China offers opportunities for expanded exports. ”

Unlike many developing countries, China has a

foreign exchange surplus, and although the sur-

—

] ‘See Denis Simon, Background Paper V, “Energy. Technology

Transter to China: The Downside Risks, ” prepared for the Office

of Technology Assessment, Nlay 17, 1985, p, 28.

“In 1984 [l, S.-Ch]na trade was in balance, with exports from the

United States of $3,4 bllllon and imp<)rts to the United States of $3.3

billlon (olflcla] Department of Commerce statistics, July 1~85),

plus is diminishing, China is still able to pay for

its imports.

In fact, China is making significant strides in

developing its energy resources and will undoubtedly continue to do so with or without U.S. help.

In most cases Japan and West European countries

can supply similar energy exploration and production equipment, services, and technology if

U.S. firms do not. U.S. technology is apparently

highly regarded by the Chinese, but U.S. firms

compete for contracts with other suppliers such

as Japanese firms that have considerable experience in the China market and official financing

support. In some cases, such as hydropower

projects, the availability of supplier government

financing can be a key factor in selection of foreign participation.

3. Potential Geopolitical Gains

There are also geopolitical benefits from closer

U.S.-PRC cooperation in energy. In an earlier

period, China cooperated with the nations of the

Soviet bloc in energy, and conceivably could do

so again if its technological needs cannot be met

by the West. For instance, China and the U.S.S.R.

have discussed the sale of nuclear powerplants to

China. While such sales need not compromise

U.S. interests, it may be more in the U.S. interest to reinforce the trends of the last decade

toward fuller Chinese involvement in the Western energy system.

4. Asian Energy Supplies

If China is successful in developing its energy

resources, it can also make a contribution to regional energy supply stability. The availability of

Chinese energy resources to other nations in the

region could provide greater assurance of supplies

for energy-poor countries in the Pacific, and

would offer an opportunity for these countries to

diversify their supplies. China’s ability to meet

more of its requirements with domestic resources

would also lessen its competition with the energypoor nations for regional energy resources.

5. Technical Exchange

Finallyr as a people-to-people process, technology transfer provides avenues for mutually en-
10

riching cross-cultural exchanges. As Chinese technicians visit U.S. laboratories, assembly lines, and

libraries and as U.S. professionals travel to China,

they have the opportunity to form long-lasting

relationships that forge ties between representatives of this core industry in the two countries.

U.S. firms and organizations involved in Chinese

energy development have the opportunist y to help

China shape its economic future, and possibly further improve their technology and perfect their

expertise in international technology transfers.

Risks

The United States stands to gain much in energy

technology transfers to China if these potential

opportunities are realized, but there are also certain risks or uncertainties that pertain to national

security as well commerce that must be considered.

1. Diversions to Military Applications

The ultimate risk is that a future China that

may be hostile to the United States would benefit militarily as well as economically from certain

energy-related technologies transferred by the

United States today. Concerns for Chinese military benefits are associated with the transfer of

“dual-use” technologies (some of the seismic, calibration, and computer technologies used in energy

development) and aspects of nuclear technology

(discussed separately in a later section).

China’s current leadership appears committed

to domestic economic reform and to opening itself to foreign investment. China has stated that

it values cooperation with the United States as

part of this process. It is, however, difficult if not

impossible to predict policy shifts that might occur a decade in the future. U.S. policymakers must

therefore take into account the possibility that

dramatic shifts could occur, since under such circumstances we could regret the dual-use transfers

we make today.

We know enough about the organization of

Chinese R&D, and China’s considerable science

and technology capabilities, not to be careless

about dual-use transfers. Some Chinese scientists

and engineers who have studied in the United

States will return to serve in China’s military or

their know-how will benefit military development

indirectly, Over the long run, it is impossible to

“compartmentalize” technologies in terms of their

impacts on an economy.

In the near term, however, there are a number

of factors that limit the military risks associated

with civilian energy technology transfers to

China. Many energy technology transfers do not

include sensitive dual-use items, and therefore do

not directly pose problems for U.S. national security. China’s ability to apply such technologies is

also limited by the slow pace of Chinese military

modernization. In the intermediate term, however, China will be able to absorb increasingly

sophisticated dual-use technologies. Therefore, if

economic modernization proceeds apace, over the

longer term China’s growing technological expertise can be expected to make significant contributions to its military.

In theory, the U.S. export control system provides a mechanism for constraining the transfer

of sensitive technologies, The United States can

and does attach conditions on the transfer of dualuse equipment (leasing, operation by U.S. citizens)

that limit the diffusion of sensitive technologies

to the military sector. Such controls are costly,

not welcomed by the Chinese, and certainly do

not completely rule out the possibility of diversions, China can also obtain (and reportedly has

in some instances) U.S.-manufactured dual-use

technologies in Hong Kong and third countries.

Another possibility is that dual-use technologies

transferred to China might fall into the hands of

unfriendly countries. But China today has little

incentive to transfer sensitive technologies to

countries such as Vietnam or the U.S.S.R. because

doing so would create security problems on its

own borders. In addition, U.S. firms set limits on

retransfers through written contracts (which the

Chinese seem to honor) and through their option

to forgo further transfers if violations occur. In

the case of nuclear technology, there are special

problems (discussed below) surrounding retransfers to third countries related to the potential

spread of nuclear weapons.
17

2. Geopolitical Risks

If China succeeds in modernizing its economy

through the application of imported technology

and other means, it will be in a position to play

an increasingly important role in Asian politics

and markets. Some observers in ASEAN countries, as well as Taiwan and other Asian countries, view this prospect with concern. A vibrant

China could exert considerable influence through

nonmilitary means on its neighbors. In light of

traditional animosities and current military conflict between China and some countries such as

Vietnam, there is a legitimate concern that China’s

emergence as a regional and even global power

could create new and aggravate old conflicts in

Asia.

There is also a potential for regional conflict

in Asia as China develops its energy resources.

Territorial disputes have impinged on offshore oil

and gas development. There have been reports

that the U.S. firms ARCO and Pennzoil exploring for oil in the South China Sea have been harrassed by Vietnamese gunboats.13 While conflicting territorial claims may not be sufficient to

provoke military conflict, political and military

disputes between China and Vietnam, for example, may be played out in a struggle over potentially energy-rich territories.14

Particularl y relevant from the U.S. perspective

is the fact that private companies participating in

joint ventures in China incur investment risks.

These firms could suffer financially if China were

to scale back its development plans (as it did a

few years ago). U.S. firms involved in China’s offshore oil and gas development have made large

preliminary investments, indicating considerable

financial risks, but such investment risks are primarily the concern of the firms. The U.S. Government, however, insures some U.S. firms investing in China against political risks through the

Overseas Private Investment Corporation. The

U.S. Government also provides information to

U.S. investors concerning domestic political and

economic developments in China.

3. China Trade Competition and the Alliance

The United States has commercial interests at

stake in energy technology transfers to China.

China is both a significant market and potential

competitor. Today, competition among suppliers

for shares of the China market poses more immediate and significant U.S. policy issues than

does China’s growing role as an exporter of energy-related commodities, equipment, and services.

As firms from many countries compete for sales

in China, supplier governments may be tempted

to provide extraordinary support for domestic

firms, through financing, aid programs, and representation of business in negotiations. This can

also happen when Cocom members attempt to

manipulate the process to the benefit of their own

domestic firms. While there is room for legitimate

disagreement in many instances about whether or

not such government actions provide “unfair” advantages, the result is to raise the stakes of supplier competition.

From the U.S. perspective, these problems are

reflected in debates about Export-Import Bank

financing, U.S. approaches to Cocom, and U.S.

export controls. At stake here, among other

things, is the capability of U.S. firms to compete

for sales in the China market.

4. The Terms of Technology Transfer—

Intellectual Property

As U.S. firms transfer energy technology to

China there is the potential risk that technology

developed in the United States may be appropriated without adequate compensation to the originator. China’s recent enactment of a patent law

and recent promulgation of technology transfer

regulations, however, are positive signs of its intent to honor technology transfer agreements. The

law, however, does not cover software and certain chemical processes, and it is not yet clear how

China will implement the new legislation.

5. China as an Economic Competitor

It does not appear likely that Chinese energyrelated exports will seriously compete with those
12

from the United States, There is no energy technology or equipment area in which China will be

a significant exporter in the near term. China,

however, is selling small-scale hydropower technology and may be exporting some energy equipment after 1995. In the next century China could

emerge as an exporter of large reactors and coal

conversion technologies, but this is only conjecture. More likely, China’s ability to satisfy its

energy demand through the use of U.S. technology will enhance the performance of its economy

generally, and the export sector in particular. The

possibility of China becoming a competitor in certain industries such as consumer electronics is no

longer far-fetched.

China is already an actor in Asian energy trade,

and may become a major energy exporter during

the next decade. Chinese oil exports can help to

offset the dependence on OPEC of some countries

like Japan. At the same time, China will certainly

compete with other countries in Asian energy

markets. To cite one example, both China and

the United States want to sell coal to Japan. Japan is helping China develop its coal resources

and has long-term coal and oil supply agreements

with China. While China has not met its targets

for coal exports to date, its coal exports will jump

if just one of the major coal development projects

is completed. To cite another example, China is

already exporting more than 500,000 barrels per

day of oil and may increase exports significantly

during the next decade .15 Indonesia’s oil industry

sees itself as competing with China in oil sales to

Japan.

No importer of Chinese energy, Japan included,

is likely to become dangerously “dependent. ”16

But there are regional dimensions to China’s emergence as an energy exporter. Chinese energy de-

“See Fereidun Fesharaki, et al., Critical Energy Issues in Asia and

the Pacific (Boulder, CO: Westview Press, 1982), p. 36, for a forecast that China will be exporting 500,000 to 1.5 million barrels per

day of petroleum by 1990.

‘“Japan imported 4.4 percent of its total coal imports and 5.2 percent of its crude oi] and refined products from China in 1983. See

Richard K. Nanto and Hong Nack Kim, “Sin(>Japanese Relations, ”

CRS Paper, November 1984. For a detailed projecti[~n of Chinese

energy production, see Kim Woodard, “Devek>pment of China’s Petroleum Industry, ” prepared fc~r East-West Center \Vorkshop on

China Energy, Apr. 25-2~, 1Q85. Woodard concludes that it will

be difficult for China to sustain the current level of crude and product

exports through the end of the decade, let alone increase exports

by significant margins.

velopment may not seriously jeopardize energy

development in other Asian countries, but it will

certainly compete for investment capital and other

resources. A major area of uncertainty is China’s

future role in regional markets and institutions, ’7

the nature of its integration into the Pacific Basin.

The logical outcome of technology transfers is

that China will more efficiently produce energy,

equipment, and services for both its internal market and for export. Some U.S. firms may find that

sale of proprietary technology through licensing

and patents is their only avenue for participating

in the China’s energy development. More commonly, the U.S. firms that transfer energy technology also sell equipment and technical services.

Over the long run, U.S. firms that transfer energy

technologies will need to further develop these

and other technologies in order to remain competitive.

6. U.S. Policymaking Inadequacies

There are also potential risks stemming from

the U.S. policymaking process itself. Each highlevel U.S. Government mission is challenged to

bring back tangible evidence of success in the form

of new protocols and agreements. At the same

time, disputes among various parts of the U.S.

Government (and even within departments) reflect the absence of a clear U.S. strategy on export controls. The danger is that as U.S. policies

concerning technology transfer are built on a caseby-case basis, we may lose sight of overall U.S.

goals. Furthermore, there is evidence that U.S.

policy declarations raise Chinese expectations

which are then dashed at the policy implementation stage.

7. Technology Transfer Failures

Although there are risks associated with participating in China’s energy development (including the possibility that the United States might be

blamed for projects that fail), the risks to the

United States could be even more significant if

China fails to meet its energy development goals.

An economically stagnant China could see domestic political instability and might play a hostile

‘“The Asian Development Bank has not admitted China, but the

issue is under debate,
13

role in the Asian region. Foreign technology may

not be the key variable in China’s energy equation, but foreign assistance could significantly help

China to meet its goals.

The gains associated with energy technology

transfers appear clear and compelling, as discussed

above. In contrast, the risks are in some instances

vague and uncertain, particularly over the long

term. But while the gains outweigh the risks associated with transferring U.S. energy technology

to China, there are significant risks to be managed. These include the risk that the dual-use technologies (including nuclear) that the United States

transfers to China could be used in ways that pose

security problems for the United States. Intense

competition among supplier firms and governments to outdo one another in financing also involves risks to the U.S. Government. Uncertainties associated with China’s entry into Asian

energy trade also pose challenges to U.S. policies.

TECHNOLOGY AS A TOOL OF U.S. FOREIGN POLICY

Science and technology have already been used

as tools of U.S.-China policy. Since the Carter

Administration, science and technology have been

highlighted in U.S.-China relations. There has,

however, been no explicit or coherent strategy for

the use of technology as a tool in U.S. policies

toward China.

Identifying the instances where technology has

been an important instrument for U.S. policies

toward China could be a first step in improving

policies. In the face of the opportunities and risks

discussed above, the question now is how technology can be used more effectively as a tool of

foreign policy.

The ability of the U.S. Government to extract

political or other concessions from China by denying sales of U.S. energy technologies is quite

limited, even where U.S. firms hold a technological lead (oil and gas exploration, for example).

This is because Japan and West European countries are ready and eager alternative suppliers, and

U.S. technological leads (where present) in energy

technologies are not so great that other suppliers

cannot compete.

Sequencing (gradual expansion of trade in technology as bilateral relations improve and experience deepens) is another approach that might be

effective if pursued systematically. In some cases,

sensitive dual-use technologies may make up only

a minor portion of the dollar value of an energy

development project, but these technologies can

be absolutely critical to the project. Under the export administration system, decisions to loosen

restrictions on export of the more sensitive energy

technologies are made within the executive

branch, and have oftentimes been controversial.

Interagency reviews and low key dialog with Chinese end-users to check the strength of their commitments to abide by U.S. stipulations, if properly pursued, can ensure that risks associated with

dual-use transfers have been taken into account

and steps taken to minimize them. But, in practice, disagreements within and between various

branches of the U.S. Government (and within

Cocom) have precluded the systematic implementation of a technology sequencing strategy.

Most of the technologies that China seeks to

develop its energy resources are not sensitive dualuse technologies. In these areas, technology transfers could serve U.S. interests by contributing to

China’s energy development and economic modernization. Private sector U.S. firms are the locus of this technology, and they have generally

been willing to provide it independently of any

U.S. Government programs. But some of the technology that China needs is not being provided because U.S. suppliers are not informed about these

needs or because they do not see these as attractive business opportunities. Efforts by the U.S.

Government to further encourage private sector

participation in Chinese energy development

would be viewed positively by the Chinese and

probably contribute to friendly relations. Technical and management training programs supported by the U.S. Government, such as the one

in Dalian, are another avenue for positive participation.
14

Among the primary explanations for the difficulty of using technology as a finely tuned instrument of U.S. foreign policy is the fact that the private sector rather than the U.S. Government is

the holder of the technology. Export controls, the

major mechanism for controlling the international

flow of technology, have been used to limit certain kinds of U.S. trade with China. But technical exchange and technology transfer are less susceptible to such regulations. The Government’s

ability to manipulate technology transfer to serve

foreign policy goals in particular cases is often

quite limited. However, conditional access to technology has been used as an element of U.S. policies toward other developing countries when a

strong consensus exists on a U.S. policy goal (such

as nuclear nonproliferation) and when other suppliers have been willing to cooperate.

Our ability to use technology as an instrument

of foreign policy is often dependent on how technology is “packaged” with other enabling resources. In the energy area, financing is a particularly important example of the latter. Energy

development in China is a mammoth and

tremely costly undertaking. Helping to finance

costs of this development may be necessary if

full benefits of technology in foreign policy

to be realized.

exthe

the

are

Over the long term, technology can be an important asset to U.S. China policies, but perhaps

not a finely honed tool. Government-to-government science and technology cooperation agreements, for example, set the stage for technology

transfers by private sector firms. But it is virtually impossible to isolate the effects of such government policies and programs on China’s energy

development. In this sense, the transfer of U.S.

energy technologies to China generally supports

(and derives from) increasingly friendly bilateral

relations. While the U.S. Government is not

directly involved in most of these transfers, its policies are nevertheless critical because they set the

parameters for U.S. technology transfer.
Chapter 3

Energy Technology Transfers
Chapter 3

Energy Technology Transfers

China’s present energy shortages appear inconsistent with its vast and varied energy resource

base. Some of the shortages can be alleviated by

expanding present capabilities, for instance opening more coal mines, but much of the resource

base will be unavailable without improved technology. Sophisticated techniques are required to

explore for oil and gas offshore or in remote regions. Coal is plentiful, but bottlenecks prevent

enough from reaching the market, and the environmental impacts of burning large quantities are

severe in some areas. The best potential hydroelectric sites are far from load centers, requiring

long-distance, high-voltage transmission systems.

Nuclear energy, known to the Chinese through

their military programs, requires a quite different approach for power generation. Energy can

also be used much more efficiently.

RESOURCES

Reliable data for China’s oil and gas reserves

are not available, but much can be pieced together. Most exploration has taken place in the

northeast corridor, and that is where the giant

fields and 75 percent of the reserves are located.

Proved and probable reserves in the northeast are

estimated at 10 to 15 billion barrels.1 Cumulative

production has been 10 billion barrels, and additional discoveries and advanced technology may

add an equivalent amount of oil resources.

Petroleum reserves in the western part of the

country are much less certain because exploration

has been much less intense. Perhaps 3 to 5 billion barrels will be produced there. Offshore reserves are even more speculative because extensive exploration began relatively recently, and

much of the exploration has been disappointing.

Offshore reserves of 20 to 30 billion barrels are

a commonly accepted projection. Thus the ultiWhile China may be capable of developing

these technologies indigenously, the process can

be speeded considerably and made more efficient

by the importation of foreign technology. Much

already has been imported, and the Chinese have

an intense interest in expanding this access.

This chapter reviews the resources available to

China and present trends in energy production

and consumption. Then the role that technology,

both domestic and foreign, might play is evaluated in light of constraints on the Chinese system.

Further detail, and the basis of much of this discussion can be found in the background paper

“Technology Transfer and China’s Energy Industries. ”

mately recoverable petroleum reserves are 50 to

70 billion barrels. China’s proved reserves are less

than those of the United States though the potential for further discoveries is greater.

Known natural gas reserves are only 4.6 trillion cubic feet, a much lower energy resource than

crude oil reserves. However, gas has been a lower

priority fuel because it is difficult to transport

without an expensive pipeline system, and there

is little export market. However, recent offshore

drilling in the South China Sea has resulted in a

commercially exploitable find in the range of 3

to 7 trillion cubic feet. Basins in western China

also show promise of very significant gas resources. These finds may stimulate interest in

building the required infrastructure and searching for more gas.

Coal deposits are gigantic, over 7.50 billion

tons, 2

and may be double that. Actual recoverable reserves
18

same class with the United States or the U. S. S. R.,

which have the largest in the world, At the present

rate of exploitation, this coal would last hundreds

of years. Most of it is reasonably good quality

bituminous grade. Pockets of coal occur practically everywhere in the country, but the major

seams are in the central and north central regions,

far from the major industrial regions near the

coast.

x

●

SOURCE

Hydropower resources are also huge, potentially as much as 380,000 megawatts (MW).3 Only

22,000 MW have been exploited. About 60 percent of the potential is in the Southwest, a great

distance from population centers.

Figure 1 shows the location of the major energy

resources.

‘Ibid.

Figure 1 .—China’s Energy Resources

Major 011 fields

Proposed major nuclear power facilities

Major coal producing regions

Major hydroelectric projects

Major cities

Office of Technology Assessment
— —

19

TRENDS IN ENERGY PRODUCTION AND USE

Petroleum

Crude oil production rose rapidly in the 1970s

to over 2 million barrels per day in 1979 (the

United States produces 8.6 million). By 1980,

however, production flattened out due to the

maturing of the biggest fields and a rapid decline

in one unusual formation. Output in most fields

has now stabilized or is increasing slightly, but

at the expense of ever-increasing water injection

to maintain pressure. Production data are shown

in table 1. The fields that are mature now are expected to decline in a few years.

This situation has developed largely because of

a lack of exploration. The fields in the northeast

appeared to be so large that little attention was

paid to the rate of depletion and the need to develop new fields. Even now that the situation has

been recognized, China is spending only about $2

to $3 billion on oil exploration and development,

about what a moderate size U.S. company would

invest for a tiny fraction of China’s production.

In effect, China has been producing itself out of

business.

This has led to an extensive reevaluation of petroleum policies in China. The Ministry of Petroleum Industry has shifted from “self-reliance” and

is allowing foreign oil companies to participate

in offshore exploration. More recently, as the focus of exploration has shifted to the northwest,

which has a huge potential but harsh conditions,

China has sought help from foreign companies in

seismic surveys and exploratory drilling. Foreign

oil companies may be invited to participate in exploration and production activities in 10 provinces

south of the Yangtze River under arrangements

similar to the offshore concessions.

Natural Gas

Natural gas production is limited to one basin

in Sichuan and as a byproduct at the major oilfields. Production has been declining significantly

as shown in table 2, largely because of a severe

Table 1 .—Petroleum Production by Region (thousand barrels/day)

Year

Region 1970 1978 1980 1982 1983 1984

Northeast . . . . 447.4 1,120.8 1,171.8 1,163.8 1,181.0 -

1,235.2

North. . . . . . . . . . . . . . . . . . . 20.4 408.0 382.2 285.4 270.2 268.8

East . . . . . . . . . . . . . . . . . . . . . 93.4 395.0 358.4 380.6 434.8 547.2

Northwest . . . . . 45.8 98.8 121.2 124.0 135.4 141.4

Central-South. . . . . . . . . . . . . 5.4 56.6 83.2 84.4 96.0 96.0

Southwest . . . . 0.6 21.8 2.0 2.0 2.0 2.0

Total . . . . . . . . . . . . . . . . . 613.0 2,101.0 2,118.8 2,040.2 2,119.4 2,290.6

SOURCE China Energy Ventures, Inc

Table 2.—Natural Gas Production by Region (trillion cubic feet)

Year

Region 1977 1978 1979 1980 1981 1982 1983

Northeast . . . . . 0.169 0.183 0.189 0.193 0.157

North . . . . . . . . . . . . 0.028 0.030 0.034 0.029 0.026

East. . . . . . . . . . . . . . . . . 0,043 0.053 0.057 0.053 0.044

Central-South . . . 0.001 0.001 0.001 0.002 0.002

Northwest . . . . . . . . . . . . . 0.009 0.011 0.012 0.014 0.016

Sichuan . . . . . . . . . . . . . . 0.192 0.224 0.238 0.231 0.212 0.191

Total a . . . . . . . . . . . . . 0.442 0,501 0.530 0.521 0.456 0.434 0.419

.— aTotals may not add due to rounding

SOURCE Ministry of Petroleum
20

undercapitalization (especially in exploration) and

a failure to acquire modern technology comparable to the oil industry. There are few gas pipelines in the country to get the gas to market even

if production can be increased. The gas discovered by ARCO in the South China Sea might be

converted to fertilizer at coastal plants.

Coal

Currently, coal represents 74 percent of China’s

energy production. While the share is dropping,

actual production has risen fairly steadily at an

annual rate of 7 to 8 percent as shown in table

3. Future production will be a function of the level

of investment in mines, other facilities, and transportation infrastructure. The stated target for 2000

is 1.2 billion tons, about double the rate in 1980.

Almost half of this goal would be met by small,

local mines, but annual additions to large mine

capacity will have to be 10 to 12 million tons per

year. The mine at Pingshuo in Shanxi Province,

to be developed by the Island Creek Coal Co, (a

division of Occidental Petroleum), will have a capacity of 15 million tons per year. At present,

almost all mining is underground, but some of the

biggest new mines will be surface mines. Operations at most coal mines are inefficient. On the

average, less than a ton is produced per man-day,

versus about 10 tons for underground mines in

the United States.

Very little coal (about 10 percent of output) is

cleaned before shipment. In- many mines, noncombustible matter significantly increases shipping costs and causes problems in boilers when

the coal is burned. It is likely that beneficiation

(coal cleaning) plants will become more common,

but progress has been slow.

Transportation is a major bottleneck. Coal already represents about 40 percent of all rail shipTable 3.—Coal Production (million metric tons)

ments. Many lines are being upgraded, but the

process is slow and expensive. China intends to

export more coal, which will depend on ports being upgraded in addition to the lines to the ports.

Japan is a natural market for Chinese coal and

is financing mine and port development, but the

slumping price of coal on the world market has

reduced the incentive to make these improvements.

Electricity

The electric power industry has been growing

rapidly as shown in table 4. Present total capacity is 81,000 MW, of which 68 percent is from

steam plants (mostly coal) and the rest is hydropower. There are six major regional grids and

many small local grids. Twenty-two long-distance, high-voltage transmission lines have been

built. 4 Others have been announced, including a

1,300 kilometer direct current line from Qinghai

to Hebei,

Despite the growth, there is a severe shortage

of electricity. It is estimated that only about 80

percent of the nation’s industrial capacity can be

operated at any one time because of inadequate

electric capacity.5

The current shortfall is about

10,000 MW. At peak consumption hours, some

customers are cut off or restricted. In addition to

lost production, blackouts can damage equipment.

There are 18 large hydropower stations and

another 11 under construction for completion by

1990. The largest potential project, the “Three

Gorges” on the Yangtze River, could produce

12,000 MW, but it is still in the planning phase.

This project, estimated at $9 to $12 billion, would

4Fujiko Kitani, “Electric Power in China, ” China Newdetter, No.

56, JETRO.

5

Lu Qi, “Energy Conservation and Its Prospects, ” Beijing Review,

No, 46. November 1984.

Table 4.—Electric Power Production (billion kWh)

Thermal H ydro Total

1970 . . . . . . . . . . . . . . . . . ...............353.9

1978 . . . . . . . . . . . . . . . . . ...............617.9

1980 . . . . . . . . . . . . . . . . . ...............620.1

1981 . . . . . . . . . . . . . . . . . ...............621.6

1982 . . . . . . . . . . . . . . . . . ...............666.0

1983 . . . . . . . . . . . . . . . . . ...............692.0

1984 . . . . . . . . . . . . . . . . . ...............772,0

1970 . . . . . . . . . . . . . . 95.4 20.5 115.9

1978 . . . . . . . . . . . . . . 212.0 44.6 256,6

1980 . . . . . . . . . . . . . . 242.4 58.2 300.6

1981 . . . . . . . . . . . . . . 243.8 65.5 309.3

1982 . . . . . . . . . . . . . . 253.3 74.4 327.7

1983 . . . . . . . . . . . . . . 263.5 84.5 348.0

1984 . . . . . . . . . . . . . . 289.1 85.5 374.6

SOURCE China Energy Ventures, Inc , and National Council for U S China Trade SOURCE China Energy Ventures, Inc and National Council for U.S.-China Trade
.— .- . —

rank among the world’s largest construction projects. Figure 1 shows some of the major hydropower sites. There are also over 100 midsized (12

to 250 MW) hydropower stations. China is the

world leader in the development of mini-hydro

plants, with over 80,000. This represents over onethird of all hydropower capacity, and is an important part of the rural electrification strategy.

There are about 65 large thermal plants in the

country, mostly in industrial areas. Thermal

power will represent the bulk of additions to the

electric power system for the foreseeable future.

The plants are mostly indigenously built, and they

are significantly less efficient (28 percent) than new

U.S. coal plants (about 40 percent). Powerplants

consume over 15 percent of petroleum supplies,

which is a significant loss of potential exports or

alternative use in the economy.

Projections

Estimated primary energy production through

2000 is shown in table 5. These projections are

based on a computer simulation done in early

1984 and are included for illustrative purposes

only. Actual 1984 production for coal was 772

million metric tons an

lion metric tons.

Energy Use

China uses all of t

cussed above except

d for petroleum, 114 milhe energy production disfor the export of about

500,000 to 600,000 barrels per day of oil (including refined products) and 7 million tons of coal

per year. Much of this use is quite inefficient. Artificially low energy prices and a shortage of capital have resulted in a vast amount of equipment

and processes that was not designed to minimize

energy use. It is now clear that demand for energy

services will increase rapidly as the economy and

standards of living rise, but that producing great

amounts of additional energy will be very expensive, polluting, and in some cases, impossible.

Therefore, to meet economic goals, increasing the

efficiency of energy use will be necessary.

In the 1970s, China launched a major program

to increase efficiency and conserve energy, a significant departure from past practices. This pro21

—

gram has had considerable success, saving the

equivalent of several tens of million tons of coal

each year (cumulative). Further conservation will

require increasing investment as the easy measures are taken, but it is likely that saving energy

will be at least cost competitive with producing

energy for many years.

In the industrial sector (which uses 72 percent

of China’s total primary energy), only about 40

percent of the energy is converted to useful service.’ Improving this record would have a double

benefit: reducing the cost of production and freeing the energy for other purposes. Prioritization

of energy allocation is an important inducement.

The most efficient plants are assured a supply of

energy, while the least efficient ones are closed

in times of shortages. Not only does this mean

the most efficient plants operate the longest, but

it provides incentives for plant managers to fix

their problems. Fuel switching from oil to coal is

also encouraged to reduce energy costs, especially

in facilities that changed from coal to oil in the

1960s and 1970s. So far, however, conversion has

been slow, as it has been in the United States. Improved energy management is another priority,

using audits, energy measurement instruments,

and analysis to identify conservation opportunities. Old equipment and plants are being renovated (e. g., with insulation or air preheater) or

even replaced to achieve large savings. Cogeneration and residual heat recovery are being emphasized. The recent emphasis on light industry is also

helping slow the growth rate of energy demand.

The commercial/residential sector used only 14

percent of China’s total commercial energy. ’ Coal

is the major fuel for cooking and heating. In rural areas, noncommercial fuels (wood, crop byproducts, biogas) are very important, but it is possible that this dependence will drop as incomes

rise and more convenient fuels become available.

In any event, neither technology nor equipment

is likely to be exported by the United States. Onethird of the peasants have no electricity. s It is a

national goal to electrify all rural villages by 2000.

“’Energy Conser\ration, ” The China Business Reviet\r, lanuary

February 1982, p, 12.

‘Ibid., p. 18.

‘Ql, op. cit., p, 20.
22

Table 5.— Projected Primary Energy Productiona

Coal

Baseline Plan

Year (mmt) (mmt)

1975 . . . . . . . . . . . . (484)

1980 . . . . . . . . . . . . (620)

1983 . . . . . . . . . . . . (692)

1985 . . . . . . . . . . . . 743 700

1990 . . . . . . . . . . . . 821 850

1995 . . . . . . . . . . . . 895 1,000

2000 . . . . . . . . . . . . 966 1,200

Crude petroleum Natural gas Hydropower Total energy

Baseline Plan Baseline High Baseline Plan Baseline Plan

(mmt) (mmt) (bcm) (bcm) (bkWh) (bkWh) (mmtce) (mmtce)

(77) (9) (47) (472)

(106) (14) (58) (620)

(106) (12) (84) (671)

109 117 12 14 100 713 698

115 132 12 19 123 140 771 838

122 156 16 27 175 210 847 999

131 210 21 38 228 300 924 1,245

aThese projections are based on a computer simulation done in early 1984 and are included for illustrative purposes only Actual 19&l production for coal was 772

mmt and for petroleum, 114 mmt

SOURCE China Energy Ventures, Inc

In the transportation sector, demand for liquid part to reduce fuel consumption. This one step

fuels is expected to rise rapidly. Railroads are be- is estimated to save 60,000 barrels of fuel per

ing electrified, but the increasing number of diesel year. ’

locomotives, automobiles, airplanes, trucks, and

buses will put considerable pressure on the oil industry. The Ministry of Transportation is retrofit- “’Refit Gives More Power to Old Trucks, ” China Daily, Mar.

ting most of the older engines in its trucks, in large 14, 1985, p. 2.

TRENDS IN ENERGY TECHNOLOGY TRANSFER

Technology acquisition has been a central feature of China’s energy programs for many years,

but until 1980, direct sales of equipment and even

entire factories were far more important than technology transfer. In some cases, China tried reverse

engineering (reproducing a finished product without access to design and manufacturing information, such as was done with oilfield equipment).

Many of these efforts were not very successful

though some products are being used. The Chinese petroleum industry, at least, has decided it

is less costly and more effective in the long run

to procure technology directly.

Petroleum Exploration and Production

The offshore oil exploration projects have stimulated petroleum technology transfers, including

training, joint technical services, and joint management. Many of the smaller U.S. oilfield service companies are now participating. Contracts

for licensing to manufacture equipment have been

rare for offshore technology production, largely

because the market is limited (only 19 rigs were

active in 1984, and this number will not grow in

the next year or two).

The situation is reversed onshore, where foreign participation has been limited to specialized

services and equipment supply. Onshore activity is much greater, with about 800 to 900 active

rigs. All of China’s production has been onshore.

Licensing arrangements have been more attractive than for offshore technology, especially as

a way of gaining access to the market. The prime

example is the drill bit factory established under

a licensing contract by the Hughes Tool Co. Hughes

was paid a fee for the transfer and still receives

royalties for the production. In addition, it is allowed to sell large quantities of U.S.-made drill

bits in China because far more are needed than

the factory can supply (although some appear to

have been exported).

The total commercial value of technology transfer and training programs in the 1980-85 period

is estimated to be $100 to $125 million. While this

may appear small compared to the $1 billion spent

by foreign companies for exploration offshore, or
23

the $250 million imports of equipment and services for the onshore market in 1984 alone, the

technology transfer component has major longterm implications. Furthermore, contracts signed

but not yet implemented are not included, and

there are many contracts being negotiated, a longterm process itself, Estimated values for the next

5 years are $500 to $900 million, as shown in table

6. Key items are likely to be:

advanced geophysical technology such as

seismic equipment and computer hardware

and software;

manufacturing technology for land drilling

rigs, downhole completion equipment, and

pressure control equipment;

steam injection and enhanced recovery technology; and

instrumentation.

U.S. companies will be in a strong position to

compete for this business (which may diminish

in the 1990s as the Chinese increasingly master

the technologies). The Chinese are also particularly interested in technology to meet materials

requirements for the manufacturing capabilities

they are purchasing, such as high-grade metallurgy, specialized rubber, and other elastomers.

It should be noted that all these basic materials

technologies have military as well as energy applications.

Petroleum Refining and

Petrochemicals

China is a net exporter of refined petroleum

products, including $300 million of gasoline to the

United States in 1984. ’0 The need to earn addiIOThis may drop to zero next year because the phasing out of lead

in U.S. gasoline makes the low octane Chinese gasoline useless even

for blending. The Chinese are likely to resent the loss of a major

market.

tional foreign exchange (which is crucial to the

purchase of more foreign technology to continue

the modernization program) is a strong motivation for accelerated technology acquisition to improve refineries. Import substitution is the motivation in the case of petrochemicals and fertilizer.

China spends about $2 billion annually in foreign

exchange on these items.

Licenses for chemical processes are now increasing because SINOPEC, the corporation with control over China’s refineries and related facilities

is engaged in a $3 billion refinery modernization

program. If production of offshore oil starts, construction of coastal refineries is likely, possibly

under joint management or even as joint ventures.

The worldwide glut of refining capacity argues

against any near-term construction of much additional capacity, however. License agreements

have been signed for the manufacture of various

pieces of equipment for chemical plants, but the

combined value of the licenses is probably only

about $5 million, 11

Specific technologies of interest

include:

●

●

●

u.

secondary refining technology, such as hydrocrackers;

process licenses for specialized petroleum

products, pesticides and agricultural chemicals, and synthetic materials such as elastomers; and

engineering and construction technology for

plant design and pipelines.

S. companies have a long record of involvement in this-area of the Chinese market. They are

likely to make significant sales, perhaps $50 to

$100 million over the next 5 years, not including

sales of equipment.

Ilwoodard, op. cit., P. 16.

Table 6.—Estimated Values of U.S. Technology Transfer to Chinaa

1973-80 1980-85 1986-90

Petroleum exploration and production . . . . . . . . . . . . . . . . . . . . . . . . marginal $60-70 million $300-500 million

Refining and petrochemicals . . . . . . . . . . . . . . . . . . . . ... ... ... .. .$15-20 million $15-20 million $ 50-100 million

Coal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . marginal $10-15 million $ 50-100 million

Electric power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . marginal $20-25 million $100-200 million

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... .$20-30 million $100-125 million $500-900 million

aEstimated values, do not necessarily total Includes only money actually spent by China or its foreign Companies on technology transfer and training during periods

in question.

SOURCE: China Energy Ventures, Inc
24

Coal Mining and Transportation

China produces almost as much coal as the

United States, but its coal mining technology continues to lag, U.S. companies are becoming involved in every level of the Chinese coal industry including large mine development, engineering

contracts for mines and transportation, and

licenses for mining and beneficiation equipment.

U.S. technology transfer for coal development

has generally lagged behind that for oil, despite

the considerably greater importance of coal in

China’s energy system. This is because coal exports create relatively small foreign exchange

earnings ($500 million in 1984, or 10 percent of

the earnings from oil exports) and because coal

technology is not as esoteric. Another reason for

delays in coal technology transfer is that the

mimes that will be opened by U.S. companies are

the subject of protracted negotiations, as is much

of the foreign investment in China.

Meeting the goal of 1.2 billion tons of coal by

2000 will require an expansion of capacity of

about 50 percent or about 30 million tons per

year, On the average, at least one very large mine,

several medium-sized ones and a lot of small local mines must be added each year, as well as a

vast infrastructure of beneficiation plants, transportation systems and port facilities. Technologies

that are already being imported or discussed

include:

● engineering for large open-pit mines;

c slurry pipelines and unit trains;

. mine safety technology;

. manufacturing licenses for equipment; and

● beneficiation technology,

U.S. companies have an edge on surface mining and short wall underground mining equipment

and beneficiation plants. Most long wall mining

equipment is still made in Europe. Total value of

technology transfer from the United States over

the next 5 years may be $50 to $100 million.

Electric Power

U.S. technology transfer in the electric sector

has been concentrated in a few large contracts for

modern generator and boiler technology, These

licensing contracts are intended to improve the

efficiency and increase the size {from 250 to as

much as 600 MW) of China’s standard generating plant. China has also begun importing electric transmission technology from U.S. firms, and

this is likely to increase as the voltage of the lines

increases. Important technologies are likely to

include:

boiler retrofits and other thermal efficiency

technology;

design and engineering technology for large

powerplants and particularly for hydropower

stations (and also tidal powerplants);

high-voltage transmission and switchgear

and control systems; and

pollution control equipment.

U.S. companies will be competitive in these

markets. Total value could be $100 to $200 million from 1986 to 1990. Nuclear power technology is also a possibility that is covered in the next

chapter of this technical memorandum.

Conservation

Technologies to improve the efficiency of energy use can be sold in their own right or as part

of a larger package, such as a steel mill, a powerplant, or an oil refinery. The largest gain in efficiency comes when a completely new plant is

built, incorporating the best of modern technology. This is also a very capital-intensive approach

which normally cannot be justified simply on the

grounds of energy efficiency. As demand for production increases, however, new manufacturing

facilities will be required, and average efficiency

will improve, but most gains in the near-term will

come from retrofits, China’s program to increase

efficiency has had considerable success, but after

the easy housekeeping measures (simple insulation, adjusting combustion conditions, cleaning

steam traps, etc. ), identifying opportunities and

implementing solutions becomes much more difficult and costly. This next stage of energy conservation may provide many opportunities for the

sale of equipment and the transfer of technologies.

Some of the technologies are:

● monitoring equipment;

● air preheater and heat recuperators;

● process controls;
●

●

●

●

●

cogeneration equipment;

high efficiency motors and pumps;

energy management techniques and systems,

including instrumentation and control equipment;

energy auditing techniques and analysis; and

high efficiency lighting.

No estimate is available for the potential value

of such technology transfer because it covers such

a wide range, and each sale might be relatively

small. In some cases no single company has

enough vested interest in the technology to warrant marketing it in China, or there is no clear

customer. In many of the industrial applications,

however, U.S. companies would be competitive,

25

company is discussing the possibility of setting up

a manufacturing plant in China. Other solar technologies are either not competitive or are already

being implemented in China (e.g., flat-plate collectors). The technology that has been developed

in the United States over the past 10 to 15 years

would probably be helpful, but it is not clear if

it will be economical for industry to provide it

to China. This may suggest a greater role for the

Department of Energy. China is also exploring the

possibility of tapping its geothermal resources.

This could be a significant area in the future, since

the United States has done considerable R&D as

well as limited exploitation.

Solar

The only solar technology that is likely to be

at all significant is photovoltaics. At least one U.S.

CHINA’S PROBLEMS WITH TECHNOLOGY TRANSFER

The discussion above indicates China’s need for

foreign energy technologies, and its intense drive

to acquire technology. China’s ability to choose

technologies wisely, assimilate them, and diffuse

them are also questions which have concerned students of technology transfer to China. These are

germane questions in light of China’s modern

history–its quest for technology since the 19th

century, its concerns about the corrupting influences of foreign material culture which accompanied that quest, massive technology imports from

the Soviet Union which occurred in the 1950s, and

the confused technology policies of the government in the post-Mao period.

Finance

In comparison to other developing countries

which are recipients of transferred technology,

China has both distinctive advantages and disadvantages in dealing with technology from the

international economy. First, as noted elsewhere

in this memorandum, China is in a relatively

favorable position in terms of its foreign exchange

holdings, and has in its energy resources for export a source of foreign exchange earnings (the

latter accounts for 20 percent of China’s foreign

exchange earnings). But China’s energy needs are

so great that it is difficult to find the necessary

financial resources. Foreign exchange reserves

could be dissipated quickly with major purchases

(e.g., nuclear powerplants), and the uncertainties

of the export potential of the energy industry for

the remainder of the century in the face of rising

domestic demand induces caution in the use of

foreign exchange.

China’s energy sector remains severely undercapitalized in spite of the fact that it receives 45

percent of industrial investment. This affects

China’s ability to solve the technological needs

of its energy sector through technology transfer.

While the energy industry is a foreign exchange

earner, reportedly only 10 percent of the foreign

exchange it generates is reallocated to the energy

sector for its foreign procurement uses. Thus,

financing is an important constraint on energy development, but it is one with a differential impact. Chinese investment decisions favor foreign

exchange earners, and exportable energy sources

—oil and coal—also have attracted private funds
26

I

~

I

I

,

I

I

I

from abroad. Financing is a greater constraint in

the electric and hydropower areas, where the Chinese have sought and are receiving concessionary loans from abroad.

Manpower

A second constraint facing many developing

countries is a shortage of technical manpower,

and a lack of a scientific tradition. These problems affect a country’s ability to absorb foreign

technology. China does have something of a manpower problem, and it also has technology absorption problems in the energy sector. Yet in

absolute terms, China has a large pool of scientists and engineers (over 2 million). ’2 Even though

the quality of training received by those in the

pool varies a great deal, and the distribution of

talent by region and economic sector is unbalanced, China does have a cadre of technical

specialists to facilitate technology transfers.

China is also rapidly expanding the technical

manpower ranks through its own new educational

policies, and by taking full advantage of educational and training opportunities offered abroad

by institutions of higher education, companies,

and foreign governments. Thus, while manpower

inadequacies do appear in the context of technology transfers, China is also preparing itself for

assimilating technology and benefiting from

learning curve effects.

In contrast to many developing countries,

China has an established energy industry, and an

extensive R&D network. Thus, in the energy area,

all sectors have research, design, and educational

institutes which typically have more than 25 years

of experience. Many of these had experience with

technology transfers from the Soviet Union in the

1950s, and all of them had experience with technological self-reliance since 1960. This R&D system was terribly disrupted during the Cultural

Revolution, and its capabilities were reduced. But

it is important to recall the evolution of this system since 1949, and the many achievements it has

made. It is a significant resource which should aid

IZ See Leo A, Orleans, The Training and Utilization of scientific

and Engineering Manpower in the People’s Republic of China, U.S.

House of Representatives, Committee on Science and Technology,

October 1983.

China in assimilating foreign technology, and

avoiding technological dependency. China’s technology absorption problems, thus are likely to be

short-term problems; its technical community is

extant and must be brought up to world levels.

It does not have to be created de novo.

Ironically, the existence of an established energy

supply industry and R&D system at times works

against technology transfer. The domestic industry has a vested interest in domestic supply, and

thus China is faced with “make or buy” questions

which would not trouble other developing countries. In addition, China’s domestic industry has

had trouble converting the results of its research

into serially produced new products. Moreover,

there has been a resistance to innovation on the

part of Chinese managers. These problems, and

the more general relative technological backwardness of the domestic industry, provide opportunities for the foreign suppliers of technology at

the present time. It is likely, however, that effective international technology transfers will also

stimulate the domestic industry to improve its capacity for indigenous innovation.

Internal Transfers

The question of how effectively foreign technology is diffused within China remains uncertain. Foreign firms have been concerned that technology licensed to one enterprise may illicitly be

transferred to another, in the absence of effective

patent protection. China’s new patent law and

other recent policies designed to encourage technology transfer, should help alleviate some of

these concerns. A separate question, however, is

the capability of the Chinese system for internal

technological diffusion.

Chinese organizational life is excessively bureaucratic and compartmentalized. The Chinese

themselves often lament what they refer to as

“departmentalism. ” The result of these organizational characteristics is that there is often little effective horizontal, interorganizational communication. Instead, communications follow the strong

vertical orientations according to which Chinese

organizations were designed.

The Chinese have attempted to overcome these

features by creating mechanisms for cross-cutting
— —

technological communications. The first of these

are the professional societies organized around

academic disciplines and industrial technologies.

The professional societies, uniquely, draw individuals from different vertical systems (different

ministries, academies, and universities) into a

common forum. A second mechanism is a network of scientific and technical information services that have been established, the development

of which has been aided since 1979 by cooperation with the U.S. National Technical Information Service. In addition to these two mechanisms,

in recent years, a large number of technical consulting organizations have been formed, and other

organizations, including production enterprises,

universities, and research institutes, have been active in establishing consultancies as well. Recent

policy has also sanctioned individual consulting.

Thus, while the formal structure of the Chinese

economic and research systems works to inhibit

the diffusion of technology and ideas, the climate

for the domestic supply of technical services and

the diffusion of technology has improved markedly in recent years. Thus, the likelihood that

China’s investment in foreign technology will have

more of a payoff—with advanced technology filtering out through the economy—is now greater

than would have been the case in the immediate

past.

Decision making

Decisionmaking is another constraint on effective technology transfer experienced by developing countries, and China too has its share of decisionmaking problems. For instance, there has not

always been good coordination among central

ministries in the energy sector, and between decisionmakers in Beijing and those at the province

level. Decisionmakers in Beijing making purchasing decisions about foreign technology have not

always had a good understanding of the technical problems in the field. Perhaps most importantly, China’s economic system has over the

years structured incentives in such a way that

decisionmakers are often risk averse. Individuals

have been unwilling to make decisions without

collective consensus. The resulting delays in decisions are costly to foreign companies who face

2 7

high daily expenses to maintain representatives

in China.

The current economic reforms promise some

improvement in decisionmaking, however. In an

effort to put China’s energy industry on more of

a business-like footing, management has in many

cases been removed from government ministries

and vested in new corporate entities, such as the

China National Oil Development Corp., which

in principle, are to run as profit-making organizations. Efforts are being made throughout the

government and the economy to promote younger, more technically qualified and more entrepreneurial individuals into managerial positions.

The mechanisms for horizontal technical communication, noted above, also serve to aid in Chinese decisionmaking. It seems to be the case now,

although this was not true in the late 1970s, that

decisionmaking about what types of technology

to import is informed by some of the best technical judgments available in China. This is largely

a result of the growth of consulting and advisory

services.

This is not to say, however, that such decisionmaking is now problem free. The best technical

judgments do not necessarily result in the most

appropriate technology decisions, and it does

seem to be the case that the full integration of technical, economic, and political criteria remains

something of an ideal. China’s increasing exposure

to the international economy, and particularly to

international organizations, has now sharpened

the Chinese sense of the importance of project

planning and analysis, and efforts have been made

by both the Chinese themselves, and with the

assistance of organizations like the World Bank,

to strengthen central analytic capabilities, and capabilities for coordinated decisionmaking, on

technology transfer decisions.

The current economic reforms should improve

China’s ability to absorb and diffuse technology

in other ways as well. Technology as an economic

concept has undergone a fundamental change in

Chinese thinking. Whereas in the past it was

regarded as a free public good, which in a socialist

society is available to any and all, technology now

is regarded as a commodity to be bought and sold

through market transactions. The Chinese hope
28

that this new conception of technology will provide better incentives for those who produce technology, and will make those who would procure

and use it, more conscious of its economic value.

More effective internal technology transfers, and

sharper macroeconomic decisionmaking are expected.

Conclusion

On balance, in spite of financial, manpower,

and decisionmaking problems which limit its ability to procure and assimilate technology, China

also has capacities which make these limitations

less of a problem than they have been in other

developing countries. These include an expanding pool of trained personnel, an established

energy industry with an extensive R&D system,

and new policies to encourage foreign investment

and technology transfer, as well as those for economic, administrative, and educational reform,

which seem appropriate for China’s current needs.

Whether these policies will succeecl and whether

the associated political and social costs can be

managed are major uncertainties.

China’s leaders, however, have incentives to

maintain an environment favorable to technology transfer and absorption. China’s rate of economic growth for the remainder of the century

will be constrained by energy production, yet the

ability to maintain political support for the policies of modernization and reform is to a large extent a function of economic performance. Improving performance through the use of foreign

technology thus has great domestic political significance for China’s current leaders.
Chapter 4

Nuclear Power and the Proposed

Cooperation Agreement
Chapter 4

Nuclear Power and the Proposed

Cooperation Agreement

China has a strong interest in developing nuclear power to supplement its coal and hydroelectric resources. The severe power shortages, described in the previous chapter, suggest that all

major options for additional electrical generating

capacity should be considered, and nuclear energy

has several important advantages, Nuclear plants

can be located anywhere in the country where

suitable sites can be found. The major population

centers are near the coast, far from the great

hydroelectric sites and larger coal deposits. Both

electricity and coal can be shipped long distances,

but that would require large additional investments in transmission or transportation networks

which may be inefficient, unreliable, and vulnerable in case of war. Nuclear plants can be located

relatively close to the points of demand with few

requirements for transportation or transmission.

In addition, China has severe problems with air

and water pollution. Much of this pollution is due

to coal mining and combustion. Nuclear power

is almost completely free from such problems except for waste heat emissions which can be managed reasonably well. Accidental radioactive releases and waste disposal, problems which have

been of concern to many in this country, appear

to be seen in China as manageable, acceptable

risks. Thus if nuclear plants replace old polluting coal plants or even substitute for new coal

plants with less than the best available control

technology, the environment should be improved.

Compared to coal, hydropower seems to be relatively benign, but it too can cause environmental

problems (health effects from schistosomiasis and

malaria, loss of land, interruption of natural flow

patterns, catastrophic flooding from dam breaks).

Reservoirs are also subject to siltation, limiting

their lifetimes, and large hydropower projects can

cause major social dislocations. For instance, it

is estimated that the Three Gorges project would

involve the relocation of from 300,000 to 1 million people. Thus, while there are certain risks

associated with nuclear power, China’s nonnuclear power options also have substantial costs.

China already has a significant nuclear expertise because of its weapons, submarine propulsion,

and research programs. The military nuclear program, like the defense sector generally, is under

policy instructions to use its relatively abundant

technical resources to serve the civilian economy.

Should this expertise not be used in the civilian

nuclear sector, it would have to be redirected to

entirely different fields. In the Chinese system,

massive shifts of personnel are difficult to accomplish. Therefore, these people are more likely to

contribute to the growth of the Chinese economy

if a civilian nuclear power industry is created than

by leaving them in the military or trying to retrain

them to ease the shortage of engineers elsewhere.

Overall, nuclear power is an energy option at

least as reasonable for China as it is for many nations that already have reactors. However, some

of the causes of the worldwide slowdown in the

growth rate of nuclear power may affect China’s

plans. First, reactors are extremely capital-intensive. Even when economic analyses show the final

power costs to be lower than coal plants because

of the low fuel costs for nuclear plants, a large

amount of capital must be supplied before there

is any return on the investment, In particular for

importing countries, considerable foreign exchange

must be spent for the reactor and major components (the cost of the nuclear steam supply system

is about 20 percent of the total plant cost), even

if attractive financing terms are included. The

operation of reactors in some developing countries has been a disappointment. Some have operated well, particularly if a high level of services

from supplier countries has been included, but most

countries (including the United States) have found

reactors considerably more complex and demanding than expected. Concerns over costs and safety

have led to opposition in some countries.

31
32

China’s ability to operate civilian nuclear reactors safely and reliably is, of course, untested.

While general industrial workplace safety practices often appear to the foreign observer as very

lax, it is also true that with regard to nuclear technology, China is not a typical developing country.

Its nuclear industry has more than 25 years of experience, and has operated with few reports of

accidents,1 although there has been some concern

expressed about low-level radiation exposure at

the workplace. z China shows signs of taking issues of reactor safety seriously. It established the

National Nuclear Safety Administration in October 1984, it has enacted new legislation for nuclear safety, it has sought the assistance of foreign governments (including the United States, see

below) for establishing a regulatory framework,

and it has begun to train a national team of nuclear safety officers with the assistance of the International Atomic Energy Agency (IAEA).3

Plans have been announced to build a total of

10,000 megawatts (MW) of nuclear power in China

by 2000, a goal that is ambitious but not impossible.4 Currently, China has 81,000 MW of generation capacity from all sources. To meet expected demand, this capacity will have to increase

to 250,000 MW by 2000.5 The addition of 169,000

MW in 15 years, however, would be a substantial achievement. This tripling of supply would

match expected economic growth. Since most developing countries have experienced electrical

growth considerably higher than economic growth

(as was the case in the United States prior to 1973),

‘For an exception, see Mark Baker, “Peking Admits Accident at

Atomic City, ” The Financial Times, Dec. 9, 1983,

z Zhang Yongxiang, “Radiation Protection Assessment of the past

20 Years of Operation of the First Heavy Water Reactor in China, ”

Fushe Fanghu (Radiation Protection), No. 5, September 1983, in

Joint Publications Research Service JPR$CST-84-016.6-20.

‘ Xinhua, May 18, 1985, in Foreign Broadcast Information Service, China Report, May 23, 1985, p. A2.

4

Jiang Xinxiong, “China’s Nuclear Industry in the Last 30 Years

and Its Future, ” industrial Equipment & Materials, vol. VI, No. 4,

Hong Kong.

5Dianli Jisha #11, November 1983, JPRS-CEA-84-026.

a considerable increase in the efficiency of use is

implied in the projections.

The only firm commitments for nuclear plants

at present are for a 300 MW plant under construction near Shanghai (the 728 project), and for an

imported plant in Guangdong. The former, growing out of China’s naval propulsion program and

analyses of foreign units of similar size, will be

produced largely indigenously. The first large

plant is to be built at Daya Bay in Guangdong

province near Hong Kong using two 900 to 1,000

MWe units. Most of the power would be sold to

Hong Kong, and the plants would be financed

largely by foreign investors. It was expected that

the nuclear components for the plant would be

supplied by France (with the generators coming

from the United Kingdom). However, despite protracted negotiations and reported near agreement,

no contract has been signed, and recently, China

solicited competing bids from West Germany. It

is not yet clear if this indicates a major problem

with the French bid or is a tactic to wring more

concessions. Sites have been chosen for two followon projects in Jiangsu and Liaoning provinces.

Proposals for the former are being considered.

Again, the French and the Germans are expected

to be the main competitors. Japanese firms are

also anxious to participate, and free to bid on

projects since the two countries signed an agreement on nuclear cooperation in August 1985. U.S.

companies cannot compete unless a nuclear cooperation agreement is in force.

China’s dual approach of developing indigenous

capabilities and importing foreign equipment and

technology is intended to minimize the time

needed to master nuclear power technology by

incorporating the best available on the world market, while ensuring that the program does not get

too dependent on foreign sources, China could

develop reactor technology on its own if it had

to, but that approach would take considerably

longer and cost considerably more before reaching the present level of western nuclear technology.
— — — . .- .

33

PRESENT CAPABILITIES

China has a substantial nuclear industry which

was created originally for military purposes. This

industry developed nuclear weapons (both fission

and fusion) in a remarkably short time (the first

fission bomb was tested 4 years after the break

with the Soviet Union, the first fusion bomb less

than 3 years later). Since then, China has produced at least several hundred warheads. It has

also built plutonium production reactors, enrichment plants, and various research facilities including other types of reactors. In addition, it developed, largely independently, the pressurized water

technology (which the United States uses in its

navy and commercial power industry), and has

built at least four nuclear-powered submarines.

These programs are discussed in more detail below. The important point to note here is that

China is not at all a typical developing country

in terms of nuclear technology. Total employment

in the nuclear industry is estimated at 100,000 to

150,000 people. ’ The Chinese Nuclear Society has

over 20,000 members, a rough indication of the

number of scientists and engineers with nuclear

skills. Figure 2 shows an organizational chart of

the Chinese nuclear industry.

——

6Persc~nal communication with the American N’uclear Society

The 728 or Qinshan project has emerged from

the military sector in an effort to convert this expertise to civilian use. According to one report,

as many as 4,000 people were transferred from

military work to the 728 project.7 Recently, a

spokesman for China’s Atomic Energy Industrial

Co. estimated that the nuclear industry is in the

process of shifting from 80 percent military work

to 80 percent civilian. g There are conflicting

reports of the progress of the 728 project, but the

officially announced goal for operation is 1989.

Preliminary site work has been completed, major

components have been ordered, and construction

of the main buildings started. Most compounds

will be made in China. However, the reactor pressure vessel has been ordered from Japan, and its

delivery was given a one time special approval

by the Japanese Government in the absence (at

that time) of a nuclear cooperation agreement between Japan and China. ’

— — —

‘Gerard Gourievidis, “Nuclear Power in China, ” Re\rue Generale A’ucleare, July-August 1984, pp 358-3b8, in Ic) int Pub] lcat ions

Research Service JPRS-CST-85-005, pp. 103-124.

‘Zhongguo Xint~’en She, Nla} 3, 1Q85, in Foreign Br(~adca\t Information Service, China Report, hlay 7, lQ85, p. K 11

‘China and Japan have now signed an agreement. (See Ch]a Dail},

Aug. 1, 1985. )

THE ROLE OF IMPORTED TECHNOLOGY

China has started work on scaling up the 300

MW design of the 728 project to 600 MW, but

the domestic industry will not have the designs

or the manufacturing capability to meet the 10,000

MW goal by 2000 without foreign technology.

Several countries would like to sell complete reactor systems: the United States, France, West

Germany, Japan, and the U.S.S.R. all could export the pressurized water reactors (PWRs) favored by China. Other types of reactors are heavy

water (Canada), gas cooled (Great Britain, Germany, and the United States) and boiling water

(United States and Sweden). The differences

among the various PWRs are technologically important in detail, but not very significant from

an economic, safety, or policy standpoint. The

United States, however, is the only country that

has actually transferred the complete technology,

as distinct from selling the equipment. The French,

German, and Japanese designs are derived from

U.S. PWR technology, and royalties have been

paid to American companies.

This record in technology transfer is one of the

main reasons that China would still like to deal

with American companies despite delays in the

nuclear cooperation agreement. China has made

it clear that it intends to absorb the technology

and develop its own capability to manufacture

large reactors. By the fourth project, the Chinese

hope to be able to supply 80 percent of the parts

themselves, although this may be an unrealisti-
34

Figure 2.— Nuclear Policy Decisionmaking Organization

State Party
—

cally high goal, Even Japan does not supply all

components for its reactors. Considering their

great need for new generating capacity, their

limited foreign exchange (sizable relative to most

developing countries, but small relative to their

overall needs and the cost of a nuclear program)

and their existing nuclear capability, eventual selfsufficiency is probably a realistic and necessary

goal.

The first project, Guangdong, would involve

the import of all important components. As noted

above, the nuclear island (reactor, primar y

pumps, and steam generators) was expected to

come from France, and the generating components

from Great Britain. The recent German bid received from Kraftwerk Union, however, has

reportedly led the Chinese to rethink their decision. The German bid is for four 1,000 M W e

units—two for Guangdong, and two for the followon project (“Sunan”) in Jiangsu—and provides for

the Chinese to supply 20 percent of the components for the first project and 80 percent for the

fourth. China would have to pay a surcharge for

the technology if the fourth plant is not ordered

within 6 years after the order for the first.10

There is far more to a nuclear plant than equipment, however. Even if there is no attempt to

transfer the technology to design and manufacture nuclear plants, a considerable amount of expertise must accompany the sale of equipment.

For instance, quality control is a crucial concept:

much of the plant will be built domestically, so

it is necessary to understand plant safety and economic requirements and how to determine the

specifications for various components and materials to meet these requirements. Operator training must be extensive to ensure that the plant will

operate smoothly and that accident sequences can

‘L’,Yuclear Englneerlng lnternatlona], ]une 1985, p 3,

PROLIFERATION CONCERNS

35

—.

be terminated. Workers must be taught how to

refuel and perform other kinds of maintenance.

Health physicists must know how to determine

exposures and how to minimize them. Computer

programs must be supplied to determine fuel management programs, while chemists and metallurgists must understand the effects of radiation

on materials.

If a manufacturing capability is included in the

transfer, much more information must be made

available. Even if a complete design is to be duplicated, each reactor will be a little different depending on site-specific characteristics and customer

needs. Designers must know how these differences

will interact with the full system. They also must

know the manufacturing capabilities available,

and possibly modify the foreign designs for components accordingly, Therefore they must know

why components are designed the way they are

and how they are expected to be manufactured.

China has reverse engineered some technologies

(duplicated them without access to manufacturing information), but the process is very difficult

and uncertain of success, even for technologies

much simpler than nuclear reactors. Designing

and manufacturing reactors also requires scientists and engineers with a solid grasp of core

physics, metallurgy, safety analysis, and all the

other disciplines that go into designing a reactor.

Even if the receiving country intends to manufacture only the fuel, a considerable amount of nuclear and metallurgical expertise must be transferred.

Specific areas where the Chinese feel foreign

technology could improve their own capabilities

significantly include advanced fuel fabrication,

instrumentation, and construction management.

Foreign participation in the 728 project includes

in-core monitoring equipment from France and

coolant pumps from Germany in addition to the

pressure vessel from Japan.

Preventing the spread of nuclear weapons has are prepared to forego attractive commercial opbeen a major objective of this country’s foreign portunities and expend diplomatic capital as part

polic y for many years. We have shown that we of this commitment. It is a basic tenet of U.S. pol-
36 —

icy that American technology not be used by any

other country to produce nuclear weapons, although the policy has not always been applied

consistent y.

One proliferation concern is that some spent

fuel from commercial power reactors could be reprocessed to separate the plutonium, which is the

key material in nuclear explosives. Studies of

proliferation, including OTA’s, have concluded

that this is a possible, though relatively unlikely

route to nuclear weapons under most conditions.

The plutonium generated under normal PWR

operation is far from ideal to work with, and as

long as safeguards are applied, a country runs a

considerable risk of being detected if it diverts

spent fuel, thereby opening itself to sanctions or

even hostile action. A circumstance that could

lead to diversion (as opposed to building facilities

such as a small reactor and reprocessing plant

dedicated to producing plutonium, possibly clandestinely) might be a desperate military situation

which required a very rapid introduction of nuclear weapons.

Since the technology could be used in a weapons program, importing countries must agree to

certain terms in order to obtain U.S. equipment

and other forms of assistance. Typical terms are

signing the Non-Proliferation Treaty or accepting equivalent safeguards, and agreeing not to

retransfer the technology to other countries or reprocess fuel supplied by the United States or irradiated in U.S.-supplied reactors without prior

U.S. permission.

China, however, is a special case. One argument against the likelihood of the diversion route

is that the plutonium contained in spent fuel, reactor grade plutonium, would result in low yield,

unreliable weapons unless the bomb designers

were very good. China obviously has very good

bomb designers; therefore, unlike practically

every other developing country, it could make

reliable, high yield weapons (at least in the kiloton equivalent range) from reactor grade plutonium. Furthermore, with a substantial nuclear

power program, it could easily produce some fuel

—.-. —

1 ‘U. S, Congress, Office of Technology Assessment, Nuclear

Proliferation and Safeguards (New York: Praeger Publishing Co.,

June 1977).

which had only a short exposure in a reactor, resulting in weapons grade plutonium. Not only can

much higher yields from smaller weapons be obtained with weapons grade plutonium, but the

material is easier to handle, and it generates much

less internal heat, thereby increasing the shelf-life

of the weapon, and making maintenance of the

weapon easier.

Diversion of weapons grade plutonium would

be easier if China builds liquid metal fast breeder

reactors. The Chinese are not known at this time

to have any specific plans to build breeder reactors, but they do have an interest in the technology, and have a research program which could

enable them to start building in the next century.

Considering their relatively small proven reserves

of uranium, enough after military uses to fuel

15,000 MW for a normal plant lifetime, ]2 this interest is consistent with their projections for the

growth of light water reactors. Uranium prospecting continues (with foreign participation), and it

appears likely that considerably more uranium

will be discovered. China thus may find breeders

uneconomic for many more years.

Despite the relative ease with which China

could use commercial nuclear power technology

to facilitate the acquisition of fissionable materials

for weapons purposes, it is unlikely that China’s

interest in nuclear technology transfer is based on

a desire to do so. It already has several hundred

nuclear weapons and all the dedicated facilities

it needs: over a dozen reactors for research and

plutonium production, and reprocessing plants

and enrichment plants that can produce high enriched uranium for weapons. Fissile material does

not seem to be a constraint on their weapons production: if anything they have excess capacity.

Effective delivery systems are a more likely constraint. China has already tested at least 26 fission and thermonuclear warheads (see table 7).

Presumably, this is only a small fraction of the

number it has stockpiled. Therefore, China already has a significant arsenal and the ability to

produce as many more as it is likely to be able

to use. What China does not have is civilian nuclear power technology.

12w p Geddes “The I-Jranium and Nuclear Industries in China, ”

Resourc;s Policy; VO]. 9, No. 4, December 1983, p. 243.
— —

Test Date

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26 ———

16 Oct 64

14 May 65

9 May 66

27 Oct 66

26 Dec 66

17 June 67

24 Dec 67

27 Dec 68

22 Sep 69

29 Sep 69

14 Oct 70

18 NOV 7 1

7 Jan 72

18 Mar 72

27 Jun 73

17 Jun 74

28 Oct 75

23 Jan 76

26 Sep 76

17 Oct 76

17 N OV 7 6

17 Sep 77

15 Mar 78

14 Oct 78

14 Dec 78

16 Oct 80

3 7

Table 7.— Nuclear Test Chronology, October 1964 to January 1981

Yield

.—

20kt

20-40kt

200 + kt

20kt

300-500kt

3mt

15-25kt

3mt

25kt

3mt

3 + mt

29kt

20kt

100-200kt

2-3mt

200kt-1 mt

2-5kt

2kt

10kt

20kt

4 + mt

20kt

6kt

20kt

20kt

200kt-1 mt

Location

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Lop Nor

L OP N o r

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Lop Nor

Delivery system

70 meter tower

TU-4 type A/C

Hong 6 Bombera

CSS-1 MRBM

Tower

Hong 6 Bomber

Hong 6 Bomber

Hong 6 Bomber

Underground

Hong 6 Bomber

Hong 6 Bomber

High tower

CSS-2 IRBM

CSS-3 ICBM

Hong 6 Bomber

Unreported

Underground

Atmospheric

Atmospheric

Underground

CSS-4 ICBM

Atmosphere

Atmosphere

Underground

Atmospheric

Lop Nor Atmospheric

aPRC production model of the Soviet TU 16/Badger medium range for bomber

bUnsuccessful–only the fission stage completed

cUnsuccessful — PRC and France had detonations the same date

dHydrogen warhead for a long range ICMB

SOURCE Strategic Digest, June 1983

While it seems reasonable to dismiss concerns

that the Chinese would misuse American technology to make nuclear explosives, U.S. policymakers are rightly concerned about the proliferation implications of possible future Chinese

nuclear exports, particularly the reexport of technology of U.S. origin without rigorous safeguards.

This reexport issue has been of particular concern

to some because of reports of past Chinese exports

of enriched uranium and heavy water, without

requiring safeguards, to countries which have not

signed the Nuclear Non-Proliferation Treaty. Although the United States has a special responsibility for guarding against unsafeguarded reexports of U.S.-supplied technology, it should be

noted that the question of China’s exports pertains to China’s own technology and to technology supplied by other countries, as well as to that

supplied by the United States. In addition, the

technologies of greatest concern from a proliferation perspective are enrichment and reprocessRemarks

U-235 produced yield

U-235 produced yield

U-235 + Li-6 produced yield

U-235 produced yield

U-235 + Li-6 produced yield

U-235, U-238, heavy hydro

gen + Li-6 for yield

U-235. U-238+ LI-6b produced yield

U-235 fuse; Li nucleus; U-238 crust;

traces of plutonium in fallout

Fusion device

Fusion device

Nuclear device

Limited range

“not good”c

Special weapon

Full ranged

centered 44.5 N, 88.6 E

Nuclear bomb

ing plants. China is

technologies, which

transferred from the

The concern over

already proficient in these

presumably would not be

United States in any case.

reexport, therefore, is less

over the technology itself-than over the political

damage to the entire nonproliferation norm should

the terms of U.S.-China cooperation be lax on this

point. U.S. interests would be served not only by

having strong protections in the agreement against

the reexport, without rigorous safeguards, of technology of U.S. origin, but also by China’s moving toward a nuclear export policy which is in line

with that of other suppliers. It is not clear whether

China is moving towards such a position, but proponents of the nuclear accord believe both that

it is, and that the existence of such an agreement

will aid in bringing China more closely in line with

U.S. nonproliferation interests. This belief is

reflected in the ACDA Nuclear Proliferation Assessment Statement (p. 1-4) submitted to Congress
38

along with the recently signed U.S.-China nuclear

agreement. (A copy of the agreement, and the

supporting documentation, is included in the appendix. ) Critics believe that the evidence supportOTHER MILITARY CONCERNS

PWR technology was developed for the U.S.

submarine program. It was seen later that this

technology could also be used for commercial

powerplants. Reactors much larger than those in

submarines but conceptually quite similar now

produce most of the nuclear power around the

world. Since powerplants were derived from

propulsion units, it has been suggested that the

process could be reversed: a nation with power

reactors could use the technology in hand to design and construct a naval reactor,

China already has at least four nuclear submarines. There are two types: attack submarines

(SSN), the first of which was launched in 1972,

and missile submarines (SSBN), first launched in

1981. The latter is capable of carrying about 16

missiles, but is still in the testing stage. China

tested its underwater launched ballistic missile for

the first time in 1982 from a nonnuclear submarine. This missile was reported to have a range

of about 2,000 miles. The next generation missile could have a range of about 4,000 miles.

These submarines are not now a major element

in China’s strategic strike capability, although

they could be in the mid to late 1990s. Even without leaving the Chinese coastal regions, they can

strike almost all of the Pacific coast of the Soviet

Union. The advanced missiles could strike Moscow. As of now, the Chinese seem to have no intention of sending submarines on distant operational patrols. Considerably more support services

would be required to go even as far as the Indian

Ocean. That means that they are not taking advantage of the extended range of nuclear reactors.

The additional cost of the nuclear power presumably was justified by their ability to stay submerged for long periods to avoid detection. Developing a fleet of nuclear submarines would be

1‘David G. Muller, Jr., “China’s SSBN in Perspective, ” Naval institute Proceedings: Professional Notes, March 1983, p. 126.

ing this view is too limited to justify the risk of

an agreement without strict protections. This issue and other implications of a nuclear agreement

are discussed further below.

a necessary step if China intends to become a

world power.

As discussed above, China seems to be following the U.S. example of developing power reactors

from the naval technology, but there is some reason to believe that having access to the latest

power technology could help them improve their

submarines. It has been reported that their submarines are relatively noisy, making them easy

to detect .14 They do not venture far from ports,

possibly because of concerns over reliability and

guidance system adequacy. U.S. submarines have

improved dramatically over the past 30 years in

speed, range, reliability, and quietness. While the

development programs in this country for naval

and power reactors have been quite separate,

some of the technological improvements would

have been common to both, such as quality assurance, materials, and analytical techniques.

No one has yet suggested to OTA a specific improvement that would derive directly from modern power reactor technology and make a substantial difference in the performance of Chinese

submarines, but there is a general feeling among

engineers that this access would be useful. Reactor

cores could be made more powerful and efficient

if designers could use the latest information and

computer codes; components, such as control rods

and pumps, could be made more reliable, quieter

(though the U.S. Trident submarine has a natural circulation reactor, eliminating the need for

the large and noisy primary coolant pump), and

less subject to corrosion; systems analysis can improve integration of the entire design; quality control would improve, thus increasing reliability.

Many of China’s best performing factories have

been stimulated by exposure to Western practices.

Nuclear power should be no different even though

—.—.

14 Defense Intelligence Agency, Handbook of the L’hinese l’eop/es

.Liberation Army, November 1984, p. 57.
power reactors and naval reactors are quite different in size, power density, mission requirements

and economic criteria.

It must also be noted, however, that it makes

little difference whose PWR technology is transferred. There is significantly less difference among

PWRs from the United States, France, Germany,

or even the U.S.S.R. than between any of these

and a naval reactor. Thus if the Chinese buy any

modem PWRs, they will have essentially the same

expertise that they would have had from the

United States. The only significant difference, as

discussed above, is that the United States has

unique experience in transferring the technology

to manufacture

another country

39

—

nuclear reactors and assisting

to develop a nuclear industry.

Other countries now stand ready to try, and will

if the price is right, but China probably would

prefer to rely on the United States.

Furthermore, in so far as the valuable commodity to be transferred is exposure to modem

nuclear industrial practices, it makes little difference which type of reactor is transferred. Thus

boiling water reactors or even gas reactors, which

would not themselves be used in nuclear powered

ships, would provide some of the same advantages to the Chinese in improving their submarine PWRs.

NUCLEAR COOPERATION AGREEMENT

The U.S. and Chinese governments have cooperated on an agency-to-agency basis in the field

of nuclear safety since the signing of a protocol

to that effect in October 1981. Under the protocol,

the Nuclear Regulatory Commission has transferred to China a basic set of NRC safety documents, including regulatory rules, safety guides,

technical reports, and safety assessment computer

codes.

A government-to-government nuclear cooperation agreement, which among other things would

permit the U.S. nuclear industry to participate in

China’s nuclear development program, was initialed during President Reagan’s visit to China in

April 1984. It was signed in Washington on July

23, 1985, and forwarded to Congress with supporting documentation on July 24. The text of the

agreement and the supporting documentation is

appended to this technical memorandum. Included in a separate volume is a discussion of the

issues raised following the initialing of the agreement (Background Paper 2). Congressional policy considerations are also discussed in chapter

5 below. In addition, the Issue Brief from the Congressional Research Service, “Nuclear Energy:

Consideration of the Proposed Agreement for

U.S. Nuclear Cooperation with China” by Warren H. Donnelly is included in the background

papers because of its thorough treatment of the

issues and the congressional role in the agreement.

This section reviews some of the issues raised in

the debate prior to the signing of the agreement,

and discusses how cooperation, or its rejection,

might affect international proliferation control

and relations between the two countries.

As discussed above, China is unlikely to divert

nuclear material produced from U.S.-supplied

technology, but there are several other aspects to

the proliferation issue. The first is based on concerns over China’s past nuclear export behavior.

It has been widely reported that China has aided

a Pakistani effort to design and construct a centrifuge enrichment plant (and perhaps, nuclear

weapons), but OTA has not obtained classified

information to verify this charge. Such actions

would indicate a serious disregard for the goal of

stopping the spread of nuclear weapons. Even the

less serious allegations of unsafeguarded shipments of enriched uranium and heavy water to

Argentina and perhaps South Africa would still

be major breaches of the international nonproliferation regime, although these alleged actions

may be more indicative of past Chinese insensitivity to proliferation problems than a conscious

disregard for nonproliferation objectives.

China’s nonproliferation policy appears to be

getting closer to that of the United States and other

suppliers. China joined the IAEA in January 1984,

and there have been no reports of contracts for
40

unsafeguarded exports since then. China’s leaders

have pledged to require safeguards on all future

exports and to refrain from assisting any other

country to proliferate. If one believes that the allegations of previous assistance to potential proliferators are true, but no longer reflect the position

of the Chinese leaders, then one might be willing

to dismiss them in thinking of future relations.

In the 14 months between the initialing of the

agreement and its signing, the executive branch

has attempted to ascertain the details of China’s

nuclear export policies and behavior, and has concluded that China’s current export policy is consistent with U.S. nonproliferation objectives. (See,

ACDA Assessment Statement, attached. ) Nevertheless, some observers have held that since the

alleged exports were so recent and so inimical to

U.S. interests, and since they may in fact be continuing even now, a heavy burden should lie on

China to show that it is complying and will continue to comply with nonproliferation norms before the United States extends any nuclear cooperation. Since conclusive evidence on past and

present behavior, if it exists, has not been made

available, OTA is unable to determine which view

is best supported by the facts.

In the period since the initialing of the agreement, and in light of the fact that China has not

signed the Non-Proliferation Treaty, there has

been considerable discussion about the nature of

China’s nonproliferation pledges. The concern has

been that China’s pledges have only been verbal.

Some analysts have felt that a pledge is uncertain

unless it is put in writing with explicitly agreed

upon wording. They point out that written assurances can be made with more explicit detail; spoken words can always be reinterpreted or disavowed later. Other analysts, however, believe

that a verbal pledge has as great a force if made

in the appropriate diplomatic context.

Premier Zhao Ziyang has stated publicly that

China does not favor proliferation and will not

help other nations. One such occasion was a toast

at a state banquet, another was before the Second Session of the Sixth National People’s Congress, which approved of Zhao’s statement. Vice

Premier Li Peng has been more explicit in elaborating on Zhao’s statement in an interview with

the press in January 1985. In light of the role and

powers of the National People’s Congress (which

is a forum for announcing and ratifying policy,

but which does not have the power to constrain

the Communist Party leadership), and the fact

that the Chinese press is a vehicle for advancing

state policy, there is little reason to doubt that

China meant to go on record with the nonproliferation statements of Zhao and Li. This, however,

does not alleviate the concerns of those who wish

to see pledges in writing, preferably committing

China to adhere to the terms of the Non-Proliferation Treaty.

For historical reasons, the Chinese are extremely

sensitive about infringements on their national

sovereignty. However, since the Chinese also have

been relatively isolated from the international

community until recently, they have not been parties to the various international regimes, including the nonproliferation regime, established since

the end of World War II. These regimes, in effect, proscribe national sovereign rights to achieve

multilateral collective benefits, and the Chinese

are only slowly coming to accept this principle.

In light of this, the provisions for safeguards and

reprocessing, as lenient as they may appear to be

relative to other cooperation agreements, represent a significant concession by China.

With China’s entry into the IAEA, and with the

signing of an agreement with the United States

(as well as with other countries earlier), China is

now much more committed, in writing, to nonproliferation norms than was the case as recently

as 2 years ago. Assessing the value of these written commitments for the furthering of nonproliferation objectives awaits detailed analysis of the

language of the agreements.

The second major issue is over the safeguards

to be applied directly on U.S. exports to China,

which if the agreement were put in force, would

be the first nuclear weapons state with whom the

United States had a bilateral agreement. Such safeguards are required in all our other nuclear agreements, and are normally applied by the IAEA.

Functionally, such safeguards are somewhat irrelevant in the case of weapons states such as

China, and IAEA safeguards are not required by

U.S. law. Symbolically, however, they have im-
.

portance. The United States and Great Britain

have accepted safeguards on all civilian facilities

(although they are in effect applied to only a few)

in order to subject themselves to the same burden

as nonweapons states, and recently the U.S.S.R.

has entered into an agreement with the IAEA for

safeguards on certain civilian facilities selected by

the Soviets. There is already a considerable feeling of discrimination on the part of some nonweapons states, especially among the developing

countries, over their treatment by the supplier

states. Granting lenient terms to China, itself a

developing country, could lead to demands by

these nations that they be accorded equal treatment. This point is disputed by some who find

that developing countries do not regard safeguards

in weapons countries (including China) as meaningful in any case.

Other supplier countries might also seek to take

advantage of lenient terms in a U.S.-China nuclear agreement. The United States has a record

of insisting on strong safeguards and has had some

success in getting other suppliers to go along. If

the U.S.-China agreement is seen as inconsistent

with this position, it could be more difficult in

the future to bring pressure on other suppliers.

The safeguards provisions of the U.S.-China

nuclear accord reflect the fact that the agreement

is between nuclear weapons states. The language

is quite different from other recent agreements,

and no provision is made for IAEA inspections.

IAEA inspectors check operating records and the

spent fuel, and keep records to ensure that the fuel

has not been removed from authorized locations.

Spent fuel is rather easy to safeguard in this manner, but it does call for diligence and continuity.

Visits without careful materials accountancy

would have little credibility from a safeguards perspective. The agreement does provide for negotiations through diplomatic channels to establish

visits by U.S. personnel to Chinese facilities employing U.S. technology and/or possessing U. S.-

supplied materials. The ACDA Assessment Statement reflects a U.S. understanding that the terms

of the visits will be linked to the approval of export licenses (p. II-4). The language of the agreement itself is less clear on this point. The agreement also calls for the exchange of information

41

-— —

on materials accountancy, but it is not clear how

detailed this information would be. This lack of

specificity may lead to misunderstandings or

problems from differences of opinion.

The safeguards issue became politically more

complicated after the agreement was initialed:

China signed nuclear agreements with Brazil and

Argentina that call for the reciprocal application

of IAEA safeguards on nuclear materials and technology (reportedly, with specific reference to

“moderator materials” in the agreement with Argentina), and agreement has been reached with

Japan for IAEA safeguards as well. Such provisions may reflect the growing realization of the

importance of nonproliferation. The recently

signed agreement with the United Kingdom, however, does not require IAEA safeguards (on nonsensitive nuclear technology), nor do the earlier

agreements with Belgium and Germany. However, in light of the precedent set in the agreements

with Brazil and Argentina, some Members of

Congress have expressed the belief that as part

of a continuing effort to strengthen the nonproliferation regime, the U.S. agreement should provide for nothing less.

In a closely related issue, U.S. nuclear agreements with other countries also contain “consent

rights” provisions, according to which fuel supplied by the United States or irradiated in U. S.-

supplied reactors cannot be reprocessed without

our permission. Reprocessing plants are far harder

to safeguard than spent fuel pools, and if separated plutonium is available, there would be many

more opportunities for diversion or theft by terrorist groups. It has been U.S. policy to discourage

reprocessing, particularly in developing countries,

for these reasons.

The consent rights provisions of the agreement

may be the most controversial section of the accord. The agreement does not state explicitly that

U.S. permission is required. Instead, it states that

neither party has any plans to reprocess fuel supplied under the terms of the agreement and makes

provision for a two-stage consultation process

should the plans of the parties change. The two

parties agree to enter into a 6-month period of

negotiations to reach a long-term agreement for

reprocessing. If, at the end of the 6-month period,
no long-term agreement has been reached, the two

parties agree to consult on measures that would

allow reprocessing on an interim basis, During

these consultation phases, the parties pledge not

to take any action that would prejudge the longterm agreement or adversely affect cooperation

under the nuclear agreement. The agreement is

vague, however, as to what would happen in the

event that consultations do not produce mutual

agreement. Implied, is a right for either party to

cease cooperation if an agreement is not reached.

As with the provision on safeguards, ambiguity

in the agreement may create problems of interpretation later.

As noted in the discussion of proliferation concerns above, it is unlikely that China would wish

to divert spent fuel from civilian power reactors

to its weapons program. Nevertheless, the consent rights provision is unorthodox, and is likely

to spur debate on two issues. The first is whether

U.S. consent rights are upheld to the extent required by Section 123 of the Atomic Energy Act

as amended. The second is whether the language

of the agreement with China will compromise

U.S. efforts to strengthen consent rights provisions in agreements with other countries. Further

complications are the facts that China already has

reprocessing experience (although not with spent

fuel from commercial power reactors) and that

it has expressed an interest in reprocessing eventually, including possibly spent fuel it accepts for

disposal from other countries. Thus, reprocessing need not involve fuel of U.S. origin, or fuel

irradiated in U.S. reactors, but if the commercial

promise of the agreement is realized, China would

have a significant supply of fuel subject to U.S.

consent rights.

Nuclear cooperation with China could result

in a significant amount of business, perhaps several billion dollars over the next few years, for

an industry that has little prospect for U.S. orders.

If carried out unskillfully, it could make our nonproliferation efforts with other countries more difficult. The nonproliferation regime might be undercut directly if China does not honor its pledge

to require safeguards on exports, and its naval reactor program could get an unintended assist, but

these problems could occur with technology from

other suppliers as well. On the plus side, cooperation can also help draw China into the nonproliferation regime, and could help build ties between the two countries.

These are risks and benefits that cannot be well

quantified, but are nonetheless real. Rejecting the

agreement would have implications that are even

harder to define, Obviously U.S. firms, who have

already lost commercial opportunities, would

continue to lose the economic benefits of largescale nuclear trade with China. A rejected agreement would be a major irritant to U. S .-China relations, but analysts disagree over whether rejecting the agreement, in itself, would cause lasting

damage to bilateral relations. We would, however, lose most or all of our influence on China’s

nonproliferation policy and nuclear development

program, including areas such as international

spent fuel storage where we may wish at some

later date to have maximal influence. We might

also create dissension in the IAEA. We would further distance ourselves from our allies who believe that the risks of nuclear cooperation with

China can be managed. Refusal to cooperate

might even make nuclear cooperation with the Soviet Union more attractive to China. Thus, there

are risks in not cooperating with China. Whether

a stronger agreement could be negotiated, if it became certain that this one would not be accepted

by Congress, is not clear.

Having an agreement in force also has risks.

Should relations between the two countries sour,

transferring nuclear technology might be regarded

in the future as a serious mistake (although the

threats to U.S. interests are only likely to be felt

over the longer term—sometime after the year

2000).” There are several potential risks that should

be considered under such a scenario. If Chinese

nuclear-powered submarines and eventual surface

ships become good enough, they could venture

as close to our shores as Russian ones do; U.S.

defense expenditures might have to rise more than

the value of the postulated sales in order to

counter this additional threat. Even if China remains a regional power, adding to its strength

may threaten U.S. allies such as South Korea. Improved nuclear technology could also enhance

their capacity for destabilizing behavior elsewhere

in the world, for instance by selling nuclear submarines to Brazil or Argentina.
— ———

People holding this perspective note that China

is still a nondemocratic, one party state with a

history of political instability, whose interests are

not identical to ours, even strategically vis a vis

the Soviet Union. Nuclear cooperation now would

be seen as a significant vote of confidence in a political relationship which has not been proven, and

could create a “carte blanche” atmosphere for export controls generally.

It should be noted, however, that other technologies being considered for transfer to China

carry national security risks as well. Judgments

as to the severity of the risks of nuclear, and other

high-technology transfers are contingent in part

on assessments of the nature of the political relations between the two countries (a subject not

treated in great detail in this technical memorandum, but one to be taken up in greater depth in

the full assessment). If political relations are

regarded as good, and susceptible to improvement, then the risks of nuclear cooperation, and

other technology transfers, can be seen as manageable in a process of building enhanced political understandings and commercial ties. If the

relationship is seen as fragile, and inherently

limited, then the risks are less tolerable.

While there has been widespread support (although by no means unanimity) for improved

relations with China if they are based on a congruence of interest and a compatibility of thinking, opinion on nuclear cooperation is more complex. At least four general perspectives can be

identified.

The first sees the development of U.S.-China

relations since 1978 as a major achievement in

overcoming nearly 30 years of hostility. Not only

has hostility been overcome, but mutual interests

have been identified, and friendship has developed. The possibility for building on those mutual

interests is good and nuclear cooperation is part

of that process. U.S. access and influence will help

China towards a fuller understanding of and commitment to the international nonproliferation regime, and both economies will benefit.

The second view, though not necessarily unfriendly to China, places highest priority on nonproliferation. In this view, China’s past behavior

has been unacceptable, and its current stance,

43

adopted only recently, is highly suspect. Therefore, approving any agreement without the strongest provisions on safeguards and assurances would

be a blow to nonproliferation control. China

should be called on to demonstrate its compliance

before it is granted cooperation, and any significant doubt should be grounds for rejection.

The third perspective sees little use for nuclear

power anywhere, especially in a developing country. China should be encouraged not to waste its

limited money on highly expensive and risky reactors when other energy sources could fill the

need at less cost. Thus nuclear cooperation would

be a digression at best and possibly much worse.

Finally, there is the perspective which is very

suspicious of China but not necessarily of nuclear

power. China is likely to misuse our technology

to our eventual dismay. As in the nonproliferation perspective, the burden of proof should be

on China before it is aided, but the nature of the

proof here would involve a broader set of issues,

such as a closer adherence to U.S. diplomatic positions generally.

These perspectives are based on differing assessment of the risks and opportunities involved with

trade with China as discussed above, as well as

specific views on nuclear power. Definitive support or rebuttal is not possible at this time. Questions that Congress could ask include:

1.

2.

3.

4

How well does the agreement comply with

U.S. statutory requirements, particularly

with regard to safeguards and reprocessing

consent rights?

What is the evidence that China has helped

Pakistan and other countries in ways we

would find unacceptable? What is the evidence that this behavior is not now taking

place?

How soon, and in what ways could the U.S.

nuclear assistance effect China’s industrial

base as it pertains to the ability to produce

improved nuclear weapons and warships?

Would assistance from other major nuclear

suppliers be any different?

What access does China now have to our national laboratories, companies involved in

military work, and production facilities, and

how would that change if we approve the

nuclear cooperation agreement?
44

5. What financial assistance, if any, should the

U.S. Government supply through the Export-Import Bank for the sale of nuclear reactors to China?

6. What will be the specific procedures for safeguards? What safeguarding arrangements do

other major nuclear exporting countries have

with China? Why has China not volunteered

to submit its civilian facilities to IAEA inspections?

7. How do other Asian countries feel about improving China’s nuclear capabilities?

8. How would other developing countries view

U.S. nuclear assistance and financial aid to

China when the United States may not provide either to some nonnuclear weapons

states?

9. How does the fact that China now has nuclear cooperation agreements with all the

major western suppliers (France, Germany,

Britain, Japan), and with lesser suppliers

(Brazil, Argentina, Belgium) affect the calculation of the costs and benefits of a U. S.-

China agreement?
Chapter 5

U.S. Policy: Tools for

Controlling and

Energy Technology Transfers

Promoting
— —

Chapter 5

U.S. Policy: Tools for Controlling and

Promoting Energy Technology Transfers

The U.S. Government has available both controls and promotional programs that can be used

to affect the scope and nature of energy technology transfers to China, within the overall context of U.S. foreign policy.

Export controls have historically been by far

the more extensively used of these two avenues,

For 20 years all U.S. exports to China were embargoed. It was not until the early 1970s when

U.S.-China relations began to thaw that U.S. nonstrategic exports similar to those allowed for the

Soviet Union were permitted. During the past 3

years, U.S. restrictions on exports to China have

been significantly loosened in light of a dramatic

shift toward encouraging Chinese economic modernization and U.S. trade. But controls remain

central to U.S. policies affecting technology transfer to China.

The U.S. approach to policies governing technology transfer contrasts with those of other

countries supplying technology to China such as

Japan and some West European nations, not only

in the more extensive use of controls but also because the United States has no aid program for

China and does not use extensive official financing to promote energy-related development projects there. Science and technology exchanges are

the major way the U.S. Government helps to develop China’s science and technology infrastructure needed to absorb foreign technologies and

innovate domestically. Many of these exchanges,

however, contribute only rather indirectly to commercial technology transfers in energy fields.

U.S.-China relations have bloomed since the

normalization of relations in 1979. Both the United

States and China see technology transfer, particularly in energy, as a key area of cooperation. But

despite the great expectations, doubts remain

about U.S. willingness to transfer the most advanced and sensitive technologies, particularly

those with military as well as civilian applications.

This has caused some to question whether the U.S.

commitment to export liberalization is really genuine, while others fear that the United States may

be moving too quickly to export dual-use technologies without developing a comprehensive

strategy.

In the sections that follow, disputes surrounding U.S. policies (both controls and promotional

programs) that affect energy technology transfers

to China are discussed and possible improvements

outlined. The analysis indicates that the rationale for controls on militarily sensitive technologies

remains valid, but problems in U.S. and Cocom

export administration have created a climate of

uncertainty. Additional steps could be taken to

improve these systems, better focusing efforts on

restricting flows of militarily sensitive exports,

Most of the energy technologies that China wants,

however, are not sensitive dual-use technologies.

The U.S. Government could play a more active

role in promoting these kinds of energy technology transfers.

Many of the improvements in policy that could

be considered are not easily susceptible to congressional action. Indeed, some of the long-term

policy issues raised below cannot be effectively

handled by the United States unilaterally. Nevertheless, the time is ripe for a review of U.S. policies affecting energy technology, because such a

review could contribute to the integration of policies and programs into a more coherent strategy.

47
4 8

CONTROLS ON NONNUCLEAR ENERGY EXPORTS

The Rationale of U.S. Export Controls

The U.S. system of export control attempts to

balance two sometimes conflicting goals. These

are preserving national security (by restricting the

export of items that could significantly augment

the military capabilities of unfriendly countries)

and ensuring the ability of U.S. firms to export.

In more concrete terms, the system is designed to

identify and restrict U.S. exports that have military significance to particular countries, without

constraining trade in other commodities and to

other parts of the world. Sensitive exports that

require extensive review and a validated license

are contained on the Commodity Control List

which includes more than 300 entries.1 The U.S.

system of export controls also includes a country classification of export destinations which reflect U.S. foreign policy considerations. Both the

military significance of-the particular commodity

or technology and U.S. relations with the country to which the export is destined are taken into

consideration in reviews of applications for

export,

The rationale for U.S. export policies to China

was summarized by President Reagan in a 1981

directive on technology transfer. It states that the

United States “supports a secure, friendly and

modernized China.”2

Earlier, the Carter Administration decided to liberalize exports of high technology civilian goods with potential military applications.

In the past 4 years, U.S. controls on exports

to China have been rapidly liberalized. Under the

“two times rule” adopted in 1981, exports with

technical levels twice those previously exported

to the U.S.S.R. and China were approved. In an

even more dramatic move, China was transferred

in June 1983, to category V, a catchall which includes friendly countries such as Japan and West

European allies as well as Yugoslavia and India.3

‘The entries are categorized by Export Commodity Control Numbers (ECCN) in the Department of (~ommerce Export Regulations,

‘See Shelly Mumtord, “U.S. Relaxes Restrictions on China Trade;

Expects $2 Billion in Export Revenues, ” EDIV, May 17, 1984, p, 301,

31n announcing this change, the U.S. Government noted that “restrictions on certain products and technologies” would nevertheless be allowed. See U.S. Department of Commerce, Export Administration Artnuai Report, 1983 (Washington, DC: 1984), p. 9.

The United States also permits exports to China

of items on the U.S. Munitions Control List on

a case-by-case basis. These steps signaled that official U.S. policy sees China as a friendly country and seeks to promote its modernization.4

U.S. export administrators took an unusual step

in establishing a “zone” system to cover China exports. The goal was to restrict certain kinds of

exports in the interest of national security while

speeding the review of applications for nonsensitive exports by providing clear guidelines to license review officers.

The China zone guidelines enable the Department of Commerce to expedite applications from

U.S. businesses for “green” zone technologies that

are seen to pose no threat to U.S. national security if exported.5 Because of the time and technical effort required to formulate the zones, the Department of Commerce began by targeting seven

areas for special attention in license reviews. b

These seven categories, which were said to make

up about 75 percent of all license applications for

China, 7 were semiconductor production equipment; electronic instruments; microcircuits; computers; recording equipment; oscilloscopes; and

computerized instruments. In the case of green

zone items, the Department of Commerce can by

itself approve exports .8 U.S. export regulations

include references to green zone items.

4

See, for example, Department of State, “The U .S .-China Relationship, ” Current Policy, No. 594, May 31, 1984, p, 2. President

Reagan directed in 1983 that China be treated as a “friendly, nonallied country. ”

‘For a statement of the guidelines for U.S. controls on exports

to China, see testimony of William T. Archey before the Subcommittee on International Economic Policy and Trade, House Foreign

Affairs Committee, Nov. 17, 1983.

‘Today there are eight major categories. Two of the orginal categories have been merged, and two additional ones added (microwave, numerically controlled machine tools).

7

0ne expert has estimated that today the green zone actually covers about 40 to .50 percent of license applications.

8Some types of U.S. exports to China, such as agricultural products, do not require licenses or export review. In 1984, for example, total U.S. exports to China were valued at $3.o billion ($1.9

billion in manufactured goods; $614 million for agricultural exports;

$443 million other), while the total value of U.S. licenses approved

for exports to China was $2.o billion. This figure should, however,

be used cautiously, since many export shipments may not actually

occur or there may be delays between license approval and actual

shipments. One expert in the U.S. Department of State estimates

that only about 10 percent of all U.S. exports actually require extensive review.
.

4 9

The most advanced technologies that have direct applications to military systems are theoretically included in the “red” zone, although no list

of red zone items has been published. Included

are technologies with direct and significant military applications—nuclear weapons and delivery

systems, technologies and equipment used in intelligence gathering, electronic warfare, antisubmarine warfare, power projection, and air superiority. 9 Some of these technologies could provide

more significant military applications than some

kinds of less sophisticated weaponry. Since the

export of red zone technologies may pose a threat

to U.S. national security, these license applications are carefully reviewed. Exports to China

have been greatly liberalized in light of growing

friendly relations, but militarily sensitive exports

may be denied.

In practice, license reviews for all items not on

the green list are approved on a case-by-case basis and require reviews by the Department of Defense and other agencies as appropriate. Initially

it was hoped that a three zone system (red-intermediate-green) would clearly categorize all exports and facilitate reviews, but in actuality decisions about cases depend on a number of specific

factors about which various executive branch

agencies may disagree. Non-green zone exports

may be approved if the agencies determine that

their export causes no threat to U.S. national security. This determination is based on a number of

factors. These include, among others, the type of

end-user in China and the control that the U.S.

firm will retain over the technology. In some

cases, the reviewing agencies set conditions on exports (for example, that the equipment must be

operated solely by the U.S. firm or that it be

leased but not sold to China).

The categorization of items and technologies

has evolved over time. For example, the United

States restricts the export to China of computers

with very high processing data rates (with processing data rates above 155 Mbits/second) on the

grounds that they have significant military applications. The ceiling level has changed over time.

In late 1984, after months of consideration, the

U.S. Government approved the leasing of a highpowered Cyber computer to China. Both because

U.S. policies toward China have changed and because technology is constantly being developed,

the Commodity Control List and the zones must

be periodically updated. (Technical Advisory

Committees, which include industry representatives, help to identify the critical technical data

in their fields. ) At present, an interagency group

is working on a review of the green zone (Green

Zone II). This review has been underway for more

than a year, much to the distress of exporters.

The total volume of trade with China has

grown rapidly in the context of liberalization of

export regulations. The dollar value of all a pproved licenses for export to China increased from

$523 million in 1982 to $2 billion in 1984. According to one estimate, the “high-tech” exports (excluding commercial aircraft) exceeded $300 million of this total by 1984.10 During 1984 of the

9,637 license applications processed, only 15 were

denied. In addition, 1,810 were returned without

action (often because forms were incomplete).

Because equipment used in energy development

spans a number of Commodity Control List (CCL)

categories, it is difficult to quantify the dollar

value of these energy exports. In 1984 over $1 million worth of geophysical and mineral prospecting equipment and about $21,000 in nuclear related equipment was approved for export. The

largest dollar value of approved exports ($1.1 billion) during 1984 was for “electric and electronic

equipment.” 11

Under the current U.S. export system for

China, there are very few nonnuclear energyrelated exports considered to have direct military

applications. Most energy-related commodities

and technologies therefore are included in the

green zone or require no license review.

The exceptions are high-powered computers

and array transform processors used in oil and

gas exploration, and certain kinds of calibration

and measuring equipment. Because these kinds of

equipment and technology are critical for some

energy development projects such as offshore oil

“See L] S [Department ot State, ‘U. S E~port ~ontrols and China, ‘

GIS~, hlarch 1Q85.

1’Ibid,

‘ ‘The Ilepartrnent (~1 C~~mmerce suppl]ed these statistlc~ to OTA

in hlay 1 Q85.
50

explorations, some U.S. energy technology transfers have been limited by these restrictions. Specifically, U.S. export controls do not permit sales

of certain kinds of array processors used in evaluating seismic data in support of oil development.l2

U.S. export restrictions have been revised a number of times, with the result that U.S. firms such

as Western Geophysical and Control Data Corp.

have been forced to modify equipment. This is

a costly process. 13 In addition, regulations on the

export of technical data have been said to limit

U.S. firms in providing training in analysis of seismic data.

Problems With the System

U.S. controls on exports to China have been

officially relaxed during recent years, but some

uncertainty remains for exporters about what can

and cannot be exported and how long the process of license review will take. *4 This uncertainty

I has been reflected in delays in license reviews, turf

battles within and between U.S. agencies involved

in export administration, difficulties in coordinating U.S. export policies with those of Japan and

Western Europe, and (until recently) congressional

I ~The current official green zone standard for array Processors

allows export of those that have a maximum rate of multiply operations less than or equal to 2 million per second or not less than

40 milliseconds for performing an FFT (fast fourier transformer) for

1,024 complex points. Industry officials note that there is no commercially available array transform processor that currently meets

these specifications.

1’According to one of the firms (Western Geophysical), the modifications (for eight array processors ) cost $180,000. The total selling

price of one of the processors is approximately $100,000. None of

the eight units have yet been exported to China.

“In May and June 1985, OTA made a series of calls to Department ot Commerce telephone numbers set up to provide exporters

with information about the licensing system and the status of their

application reviews. Out of 20 calls made to these numbers, the OTA

call was answered only twice (and in both cases immediately put

on hold). This admittedly limited experiment provides substantiation for claims that U.S. exporters find it extremely frustrating to

obtain information about export administration.

stalemate over renewal of the Export Administration Act.

The number and dollar value of export applications for China more than doubled between

1983 and 1984 alone (see table 8). Not surprisingly, the U.S. export administration system has

been unable to quickly respond to the surge in

applications. Exporters have complained about

delays associated with export licensing. Between

June and October 1984, the licensing review process within the U.S. Government took an average

of 117 days for green zone and 192 days for nongreen zone case reviews. In addition, the required

review by Cocom (discussed below) took about

another 100 days in each case.ls

Exporters and some U.S. Government officials

claim that these delays have caused U.S. firms to

lose sales. OTA has not been able to develop an

estimate of lost sales, but U.S. firms probably

have been disadvantaged in some cases because

other supplier countries do not have such extensive export controls. Based on the information

now available, however, it is not clear whether

U.S. sales in energy-related fields would have been

significantly higher had the delays been reduced

since there are a number of other factors such as

financing that come into play.

In addition to the backlog in license reviews,

exporters complain about apparent inconsistencies in the system. For example, U.S. businessmen need approval to ship computers to their

branches overseas; but they can often purchase

the same computers abroad. U.S.-made advanced

technology products such as computers are available throughout Asia and particularly in Hong

Kong, China’s second largest trading partner.

The Department of Commerce has taken a

number of steps to streamline the review proc15Data provided by DOC to OTA in May 1985.

Table 8.—Export Applications for the PRC (millions)

Received = Pending + Processed= Approved + Returned + Denied

1983 . . . . . . . . . 4,015 ($1,300) 84 3,931 2,834 1,082 15

1984 . . . . . . . . . 9,637 ($6,300) 3,366 6,271 4,443 1,810 15

198 5

a . .......3,900 ($2,500) NA NA 1,800 NA 10

a

First quarter 1985.

SOURCE U S Department of Commerce, May 1985
— —

51

ess. In May 1985 DOC officials stated that they

were processing green zone cases within 30 days

and that non-green zone case processing had probably been reduced to about 14.5 days. A Department

of Defense official stated in June 1985 that they

were processing cases in 18 to 20 days (average).

In addition to increasing the numbers of license

reviewers, DOC officials point to specific steps

taken to reduce the backlog in China applications.

These include the elimination of end-user checks

by other U.S. agencies for green zone applications;

initiation of fast track processing by routing cases

directly from the licensing division to the Cocom

submission branch (eliminating review by the

East-West trade office); using a form cover letter

for submissions to Cocom; and automating some

aspects of the licensing process.16 Other steps

taken (using faster means of sending submissions

to Paris) were also expected to reduce the time

required for Cocom review of U.S. cases.

DOC officials indicate that much of the backlog in Washington has been reduced and the review time significantly shortened. Whether this

will continue and whether U.S. exporters, who

have heard such promises by the DOC for years,

will be satisfied remain to be seen.

Another type of problem concerns the definition of the green, intermediate, and red zones. The

thrust of changes in U.S. controls on exports to

China in recent years has been to focus attention

on the really sensitive items (in the intermediate

and red zones ), while speeding the review of nonsensitive green zone items.

One dimension of this problem is that the zone

definitions must be constantly updated, in light

of technological change, foreign availability of

items, and developments in U.S.-China relations.

At a more fundamental level, disagreements about

the zones reflect uncertainty about the national

security implications of transferring certain types

of technology to China. Official U.S. policy characterizes China as a friendly, non-allied country

and export policy is to approve much more advanced and sensitive technology exports to China

than to the Soviet Union. There is, however, room

for disagreement among informed observers about

what the proper threshold level should be and on

what basis it should be determined.

Another question is whether sensitive (red zone)

exports are slipping by U.S. license reviewers, either because of Chinese attempts to circumvent

U.S. restrictions, or because license reviewers lack

proper expertise and resources to evaluate export

applications.

The first issue was raised in congressional hearings a few years ago. The Defense Intelligence

Agency (DIA) in 1982 referred to an upsurge in

Chinese attempts to obtain Western computers

and other technologies restricted by Cocom through

surreptitious efforts. The DIA Director, in congressional testimony, said that the Chinese Government did not appear to have a formal policy

of illegal acquisition of restricted technologies, but

it was “likely” using commercial channels and

science and technology exchanges to supplement

legitimate commercial purchases. ” Other observers have suggested that China may use investments in the U.S. and dummy firms to gain access to U.S. technology.l8

Questions about the capabilities of U.S. license

reviewers, the second issue, have also been raised.

A 1984 congressional hearing on technology transfer highlighted a turf battle between the Defense

Department’s DRE (Defense Research and Engineering) and ISP (International Security Policy).19

More recently, Congress has debated the pros and

cons of an expanded role for the Department of

the Defense in Cocom.20) The Department of Com-

‘-See Test] rnon} (~t It. Gen. lames A 11’]lllam>, 111A, before Subcommittee on International Trade, Finance, and Sc.cllrit}, E( [~n(>m ic.~,

]olnt Economic Committee of the Congress, A)~(wations of l<esource~

in the .$oviet Union and China, June 2~ and Dec. 1, 1~82, p. 113.

See also “U.S. to Ease Technology Controls, Change Country Gr[~up;

AuRust Announcement Seen, ” [1. S. E~port L1’eeklj, June 28, 1 Q83,

pP. 463-464.

“Denls Fred Simon, “Technology for China: Too hluch Too FastT”

Technc]log~r Re\ie~{r, October 1984, p 48,

‘OSome Nlembers of Con~ress questioned ~~hether the more p(}-

]itica] 1S1’ could effecti~,el} handle the technical rc,klel, formtrl} Iecj

b} DRE This dispute wa~ settled In fat{}r t}t the IS1> In the new

Export Administration Act pawd b} b~~th 1 lt]uiei In June 1 ~85. See

Senate Comm]ttw on Go\rernmental Affairs, Subct>mmlttee ~}n I’ermanent ln~’estlgatlons Trdnster’ of Technolo~jr, hearings ( Apr 2,

3, 11, ~nd 12, 1 Q&l I and rep{~rt (September 1Q841, pp. 15 and 2b,

DOD (lft]c]al~ ]n the Strateg]c Trade ~lrect(~rate sd} that they call

on t he res(~ u rcw [>! DRE v,. hert nw’ded I n 1 IC ~’n~e rev ]ew’s ~nd ha VC’

avai]ablc technical expert]w thr~~u~h~~ut the Defenw Ileparment.

“’see Congressional]” Record hla~. Q, IQ85, H 3061
52

merce and the Customs Service have, moreover,

feuded over which has primary responsibilty for

export enforcement. Bureaucratic struggles within

U.S. export control agencies and between them

revolve around who is best equipped to make

technical judgments required in license review and

whether reviewers have adequate resources to do

a good job.

Critics believe that the licensing bureaucracy

was established to control exports and is not really

committed to export liberalization. In addition,

high-level policy makers have openly disagreed

about U.S. export controls, thereby sending

license examiners and exporters alike mixed signals. In this sense, the delays in the review process reflect underlying turf battles and differences

in perspective among the relevant agencies. Congressional stalemate over renewal of the Export

Administration Act reflected and contributed to

these disputes. After 2 years of delay, Congress

renewed the Export Administration Act on June

27, 1985, thereby sending a clearer signal to the

executive branch on export controls which could

help to moderate disputes among agencies over

jurisdiction.

From one perspective, however, delays in license reviews may be a reasonable price to pay

for ensuring that really sensitive technologies are

not exported. On the other hand, delays may stem

from negligence on the part of reviewers. The

question is whether the process of export administration can be streamlined and, more importantly, whether a coherent strategy can be built

to guide policy implementation.

Problems with export administration may be

as serious (or perhaps more so) in Paris as in

Washington. Paris is the headquarters of the Coordinating Committee for Multilateral Export

Controls (Cocom), an informal organization involving the United States, Japan, and West European countries with the purpose of coordinating

export policies toward Communist countries. A

voluntary organization formed in 1950, Cocom

operates on the basis of unanimous approval for

decisions but has no formal sanctions against violations of its informal guidelines.

Cocom maintains three lists of items that exporters cannot sell to Soviet bloc countries (including China, Albania and Southeast Asian

Communist countries) without its permission.

These lists cover military, nuclear, and dual-use

items. Despite its limited resources, Cocom remains one joint Western institution that keeps export controls on the multilateral agenda.

Because of U.S. membership in Cocom, U.S.

export applications for sales of items on the

Cocom list must pass Cocom review as well as

U.S. review. Especially since U.S. c:ontrols on exports to China were loosened in 1983, the number of U.S. submissions (requests for approval by

Cocom) has grown dramatically. In 1984 more

than 2,200 U.S. license applications were sent to

Cocom, while a total of more than 6,200 were

processed in the United States. z] The current

Cocom system sets a voluntary framework that

makes it difficult (but not “illegal”) to make certain changes in U.S. export administration for

China. Eliminating review of green zone exports

to China altogether, for example, would not be

likely so long as some of these items are covered

by Cocom review. Nor is the United States likely

under the current Cocom system to institute distribution licenses, which permit U.S. sellers to

make repeated sales (unlimited quantities to unspecified end-users) during a specified time period.

While the details of Cocom decisionmaking are

confidential, general problems have been much

publicized. The major enduring dilemma is to

maintain an operating consensus among Cocom

members who often disagree about the details of

export policy for specific Communist bloc countries. With regard to China specifically, the United

States has found itself in the unusual position in

recent years in its support of a liberalized Cocom

review for China exports, while at the same time

advocating tighter controls on exports to the Soviet Union. Countries such as France and West

Germany have reportedly resisted these efforts in

light of the fact that Washington has refused to

loosen up on exports to countries such as Bulgaria

where they do more business .22

Member countries have accused each other of

playing “games” in Cocom designed to further the

“Some of the license applications sent to Ctxom cover two or

more U.S. applications.

“See report by Stuart Auerbach, “Cocom Feuds Over Trade to

East B]cjc, fr MIa// street Journal, JU]Y 17’, 1984 P 27
5 3

commercial fortunes of domestic firms. U.S. firms

have complained that they have lost sales because

of red tape and delays in Cocom review.23 But

firms from other countries have also complained

that the United States uses Cocom to its own

advantage.

What is clear is that China applications make

up by far the bulk of U.S. submissions to Cocom

(90 percent),24 and there have been many more

U.S. submissions to Cocom than those by other

Cocom members. According to one report, in

early 1985 the United States had submitted 70 percent of all cases before Cocom; 807 of 877 pending cases were for products destined for China .25

In May 1985 there was still a large backlog in

Cocom cases, according to State and Commerce

Department officials. Of the 454 U.S. cases pending in Cocom, 418 were for exports to China, In

addition, more than 200 submissions had not been

made because of a limitation that no more than

20 U.S. cases can be submitted weekly .2” While

data are not available on numbers of submissions

by other Cocom countries, it appears that U.S.

cases for China are still the great majority of cases

now pending in Cocom, despite the fact that the

value of U.S. exports is lower than that of Japan,

for example.’;

These problems have become points of contention in Cocom, and they have also been noted by

the Chinese. The Chinese Vice Minister of the

Ministry of Electronic Industry told a group of

Seattle businessmen in April 1984 that Cocom approval was still a problem, despite the fact that

the United States had relaxed its export regulations. 28 The Japanese Mainichi Daily News reported in March 1985 that Minister Ding Min of

the Chinese Embassy in Tokyo called for Japa1‘See Stuart Auerbach, Red Tape Snarl> Seattle Exp~>rter’s Sale

to China, Jlr~\h/ngtf)n Post, JuI} 22, 1Q84, p F8.

‘:[lata pr[)vlded b} DOC t(> OTA In Nla>r 1Q85.

“ See Dan]el St~utherlanci and Stuart Auerbach, “Hi~h Tech Sales

tt~ China Delayed, ilr~+ington Post, hlar 5, 1~85, p. Dl.

21 Int(lrmation pr(~vlcied to OTA by DOC, State, hla} 1~85.

‘ It may be that other countrie~ submit caws to C<mlm only when

a m]] itary end-user ]~ intr(]l~’ed (Jr th[’ Item lt clear-l>’ m il itaril}’ sensitive Cocom does not make public data that would make it possible t(> sub>tantlate the h}pc~thesl;, but It +eems unl]kely that the

[]nited $tate~ i~ sell inx so man} more items on the Coc(~m list than

(~t her countries.

‘nStuart Auerbach, “China Hits Slowness of High Tech Imports, ”

[$’dshjngt(}n Post, Apr. 24, 1984, p. D~.

nese efforts to remove China from the Cocom

list ,29

U.S. officials have disagreed among themselves

about Cocom, and one high ranking trade official resigned in 1983 to protest what he called a

“counterproductive” U.S. strategy in Cocom, specifically vis-a-vis controls on exports to the

U.S.S.R. and Eastern Europe. 30 China-related

exports are thus one facet of a larger Cocom consensus-building dilemma, but the surge in U.S. applications for China exports has certainly overwhelmed the organization.

Possible Improvements in

U.S. Export Controls

The problems discussed above suggest a number of possible approaches to improving the U.S.

system of export controls. Congress has, first of

all, helped to clarify overall U.S. policy by passing an Export Administration Act. Failure to pass

the act allowed export controls to be the product

of bureaucratic rivalries within the executive

branch. The recent passage of export control legislation holds at least the potential for reducing

U.S. exporters’ uncertainty about the system.

Nor does the U.S. Government possess extensive information about certain aspects of technology transfer to China, or to other parts of the

world for that matter. More information and systematic review of alleged problems such as violations of U.S. export controls in third countries,

and (if they occur) patent infringements and illegal acquisitions of technology by China could help

to clarify where the real national security problems lie. Perhaps even more importantly, various

agencies could cooperate better in exchanging relevant information.

There are a number of other possible steps

which the executive branch might consider to improve the management of export adminstration,

including concluding the Green Zone II review,

The Department of Commerce has already added

a number of people to its licensing review staff,

‘“’’Envoy Urges Removing 1’RC From Coc{lm List ,“ ~$1.~inichi D.liljr

A’ew’s (English ), Mar. 20, 1 Q8s, p. 1.

“see \f’illiam A, Rootf “Export Control\ That \l’ork, Foreign

Polic}, N(> 56, fall 1984 .
54 —

but managerial improvements could also be made.

License reviewers normally handle cases dealing

with exports worldwide. It might be useful to assign a few individuals to concentrate on review

of China cases, while preserving non-area expertise at higher decisionmaking levels. Measures to

further automate the system of license review so

that documents and information can be quickly

exchanged among executive branch agencies could

also help to streamline the U.S. export control

process. In order to ensure that the really sensitive items are restricted, efforts could be made to

further develop the technical expertise of license

reviewers. For nonsensitive energy related exports, the ceiling on service supply licenses could

be raised above the existing $8,000 limitation so

as to facilitate exports.

.

Efforts are now underway to streamline the

Cocom process of China export reviews. Neither

ending Cocom review of exports to China nor an

aggressive unilateral U.S. push on Cocom partners to tighten controls is likely to be feasible or

promising at this juncture. Instead, more constructive efforts are now being made to adopt a “notification” system for nonsensitive items. Cocom,

with all its problems, is an organization that plays

a key role in harmonizing Western approaches to

East-West trade. It appears that changes can be

made to streamline China review without jeopardizing the carefully built Cocom consensus on

trade with other countries. In light of the informal nature of the Cocom organization, these steps

can best be pursued in low-key negotiations

among the member countries.

CONGRESSIONAL REVIEW OF NUCLEAR

COOPERATION AGREEMENT

The primary focus of policy debate on nuclearrelated matters will be on the proposed cooperation agreement with China. Issues of nuclear

trade, proliferation, and strategic security are

subsumed under this rubric. The specific issues

are discussed in chapter 4. Additional information

is in the Congressional Research Service Issue Brief

included with the background papers.

Before a nuclear cooperation agreement becomes valid, it is submitted to Congress by the

President for a period of 90 working days (30 days

of consultation with the Foreign Affairs and Foreign Relations Committees, and 60 days of congressional review). If, as in this case, the President

determines the agreement does not require an exemption from the relevant sections of the Atomic

Energy Act as revised, the signed agreement comes

into force at the end of the 90-day period, unless

Congress adopts a joint resolution of disapproval.

Congress would need a two-thirds majority to

override a Presidential veto. Under the recently

renewed Export Administration Act which was

signed into law by the President on July 12, 1985,

a nuclear agreement requiring an exemption because it significantly deviates from usual terms

and conditions of the Atomic Energy Act would

not be valid unless Congress passes a joint resolution approving it. The situation is less clear in

the event that the President sends to Congress an

agreement without exemption, but where one of

the two lead committees believes an exemption

is required. According to the conference committee that developed the legislation, in such a case

Congress “expects that the President will submit

an exemption. “31 There is, however, no specific

requirement in the law to this effect.

When the U.S.-China agreement was submitted

to Congress on July 24, 1985, it was accompanied

by the President’s written determination, approval

and authorization for the agreement, a memorandum prepared jointly by the Departments of State

and Energy stating that the agreement meets the

requirements of U.S. law and that it serves U.S.

foreign policy and nonproliferation interests, a

memorandum from the Director of the Arms Control and Disarmament Agency (ACDA) assessing

the “adequacy of the safeguards and other control

mechanisms, and peaceful use assurances” of the

proposed agreement, and a Nuclear Nonproliferation Assessment Statement prepared by ACDA.

‘congressional Record, HI<49 19, Iune 25, 1Q85,
55

These documents are included at the back of this likely route to enhanced capability would be

technical memorandum. through the upgrading of China’s nuclear industry

As Congress reviews the signed agreement, the generally. Close monitoring as required by law

language of these documents (particularly Article of nuclear exports as part of the export control

5 on retransfers and consent rights) will be care- procedures handled by the Nuclear Regulatory

fully scrutinized. Concerns over possible improve- Commission (NRC) and perhaps improved intelligence could also help to serve U.S. nuclear non- ments to submarine technology are more difficult

to address via these documents, since the most proliferation policy aims.

PROMOTING ENERGY TECHNOLOGY TRANSFERS

Limited Scope of U.S.

Promotional Programs

The United States has few programs explicitly

designed to promote commercial technology

transfers to China. Official U.S. programs are focused much more on science and technical exchange than those of other countries like Japan

where aid and official financing have been used

extensively to support involvement in commercial energy development projects. In the United

States, controls rather than promotional programs

have been the central focus of policy debate.

There are a number of possible explanations for

the comparative lack of attention to promotional

measures. There may be a sense that U.S. promotional programs have not been especially effective in the past, or that these are best left to the

firms themselves. In a period of budgetary austerity, it is unlikely that some of these programs

will be expanded. Since U.S. controls are seen by

many to directly inhibit trade, many proponents

of expanded trade and technology transfer to

China look to changes in export administration,

rather than promotional programs, as the prime

avenue for policy change.

The few U.S. Government programs that even

indirectly affect commercial energy technology

transfer to China include science and technology

cooperation, U.S. official representation in China,

and insurance and financing support for U.S.

firms doing business there. The United States and

China have established a Joint Commission on

Commerce and Trade (JCCT), but current programs do not include activities in energy technology transfers.

Table 9 provides a listing of the energy-related

science and technology accords. The fossil energy

protocol was recently negotiated. ”

The United States has assisted China’s petroleum geologists by providing Landsat remote sensing data. The United States and China have also

agreed to cooperate in environmental protection,

but little has yet been done in the area of pollution control technologies. Studies on the health

effects of coal combustion (at least one underway

and others planned by the U.S. Department of

Health and Human Services) could lay the foundation for exploring and documenting some very

serious problems associated with energy use in

China. 33

“Among the 24 active prot(>co]s are agrwement> on co[~peration

in high energy physics, nuclear safet}r Sec Ilepa rtmen t of St a tc>

‘ l-l, S.-China Science and Technc~l(~R\ EXC han~t+ (11S7-, April 1Q85

‘ ‘See House Committee on Energ} and L(lmnlerce, Special Subcommit tee on U, S. Trade with China, [’h~n.] \ E( on ornjc /kIrL’lopmerrt and L~. S. Trade’ lntert’st~, hla}. 148s, pp, 4Q-52.

Table 9.—Energy-Related Science and Technology

Agreements With China

1. Nuclear Safety (NRC)

2. Nuclear Physics and Magnetic Fusion (DOE)

3. Fossil Energy (DOE)

(Hydropower–expired)

NOTE These agreements support basic science and exchange of Information

between scientists and technicians The programs contribute, but rather

indirectIy, to commercial technology transfers in energy-related fields

The hydropower protocol was probably the most controversial U.S. private sector firms criticized the role of the U S Government, and there was

some misunderstanding with the Chinese on the role of the private sector See, for example, Robert A DeIfs, Jr “Hydropower Agreement Update China Business Review May-June 1981, p 52

The U S Department of the Interior IS continuing to provide technical

assistance for Chinese hydropower development on a reimbursable basis

In other words, the Chinese are funding these stud! es, some of which have

been subcontracted to U S firms The Department of the Interior IS lead

ing discussions to explore the possibility of an expanded U S role in the

Three Gorges Project with U S private sector participation.
56

The U.S. Embassy in Beijing has a staff of 124

U.S. citizens, and another 50 are stationed in U.S.

consulates in other cities. In order to represent

U.S. business, the Foreign Commercial Service has

six U.S. officers stationed in China .34 In addition,

there are four 35 official U.S. representatives in

Beijing involved in science and technology exchange activities.

U.S. Government financing and insurance programs supporting energy development in China

have been fairly limited. The primary mechanisms

for providing this support are loans and credits

from the Export-Import Bank, insurance by the

Overseas Private Investment Corporation (OPIC),

and financing of feasibility studies by the Trade

and Development Program. OPIC insures U.S.

firms investing overseas; it covered three energy

projects in China by September 1984.3

’ U.S. direct investment in China is very limited .37 OPIC

insures against political risk, an important concern for U.S. firms participating in offshore oil

and gas development. But limitations on OPIC’s

resources have been criticized by U.S. energy

firms who believe that the ceiling on OPIC country coverage should be raised to support additional U.S. investments in Chinese energy devlopment. 38 The Chinese have found financing

(some at aid-related confessional rates) from Japanese and other sources at interest rates lower than

those offered by the U.S. Export-Import Bank.

U.S. Export-Import Bank loans have been granted

~lThe tota] number of u.5. citizens officially posted to China is

178, including Foreign Commercial Service, State Department,

United States Information Service, and other agency representation.

These figures were provided by the U.S. State Department, May

1985, and the FCS, August 1985.

“In June 1985 there were three representatives, w’lth an additi<~nal

one authorized.

‘“See Henry R. Berghoet, “OPIC in China, ” The China Business

Review’, October 1984, p. 44.

‘“The most recent official U.S. Department of Commerce data

show a negative U.S. fore]gn direct investment position of !39 mllli(~n as (~t 1~83. This statistic reflects the fact that the value of the

debt owed by U.S. parent c{~mpanies to their Chinese affiliates was

~reater than the debt owed by those atiiliates to them. This is not

uncommon in a situat itln where there is 1 ittle or no direct investment by the parent tirms.

New data will be released near the end of 1985. The U.S.-China

Trade Council has drawn up a list of U. S.-PRC joint ventures (as

IJI Mar. 31, 1985) that includes 17 in energy-related fields.

‘sSee House Committee on Energy and Commerce, Special Subcommittee on U.S. Trade with China, China Offshore Oil Det’el-

(Ipnle,nt and the Energ)~ Securit}’ ot the Pacific Rim, Feb. 28, 1984,

p. 56.

to only two U.S. firms involved in work in China.

The two are Combustion Engineering and Westinghouse, involved in energy-related projects. Table 10 provides a list of the U.S. Government supported energy-related projects in China.

Subsidized supplier government financing has

been a key factor in some of China’s energy

projects, particularly those in the hydroelectricity field. A number of these projects involve the

use of “mixed credits, ” which combine official

(Export-Import Bank) and aid-type confessional

financing. The United States, because it does not

have an aid program in China, ” has not been in

a position to match the soft financing offered elsewhere. The United States has used the Trade and

Development Program, however, to provide financing for feasibility studies for one Chinese

hydropower project (see table 10).

Japan, in contrast, negotiated with China a

package of construction projects valued at $1.5

billion, one involving hydroelectricity development. The loans for these projects were provided

by the Japanese Government, through the Overseas Economic Cooperation Fund which provides

aid-type confessional financing at a rate of 3 percent annual interest over a 30-year repayment

period. The Wuqiangxi hydroelectric powerplant

supported by these loans is expected to power the

refining of nonferrous metals, whose export

should help finance Chinese purchases of Japanese products .40 Japan’s Export-Import Bank has

also provided credits for seven coal development

projects, and in 1983 it was said to have committed over $500 million to Chinese offshore oil development. 41 Table 11 shows that the Japanese

Export-Import Bank has provided more than $2

billion for energy projects in China. Japan has

‘gChapter 3, Section 620-F of the Foreign Assistance Act of 1961

prohibits the provision of funds (for aid) to Communist countries

and stipulates that the President shall not waive this prohibition unless he can show that this is necessary for national security or that

the country is no longer controlled by the international Communist

conspiracy, or that assistance will promote its independence from

such. The People’s Republic of China is specifically mentioned. In

recent years, the U.S. Government has provided some assistance

through the TDP (Trade and Development Program) and through

exchange programs, neither of which involve direct payments to

China.

‘“See Chae-Jin Lee, China and lapan (Stanford, CA: Hoover Press,

1984), ch. 4.

“’See Martin Weil, “Coal’s Promises and Problems, ” China Business Review,, March-April 1984.
57

Table 10.—U.S. Government-Supported Energy Department Projects in China

Project

1.

2,

3.

4,

5.

6.

7.

8.

9.

Dresser Ind., Inc. . . . . . . . .

Pennzoil Co, ., ... . . .

Texaco Inc. . . . . . . . . . . . . . .

Combustion Eng. . . . . . . . . . .

Westinghouse . . . . . . . . .

Harza Eng. . . . . . . . . . . . . . . . .

Not yet contracted ..., . .

Kaiser Engineers. . . . . . . . . .

SAIC . . . . . . . . . . . . . . . . . . . . . .

oil/gas services

oil/gas exploration

oil/gas exploration

thermal power generation

thermal power generation

Tienshengqiao hydropower

Hualing coal mine

Yuxian coal gas

$ 4,950,000’

$100,000,000’

$ 50,000,000’

$ 23,000,000b

$ 28,000,000b

$ 440,000 C

$ 550,000’

$ 750,000 C

ShanJiasi heavy oil $ 280,000C

aTotal insured Investment by OPIC.

bTotal loans by Export-import Bank

c

Funds provided by the Trade and Development Program for feasibility studies

NOTE TDP supported pre-feasibilitv study exchanges between the Army Corps of Engineers and the Bureau of Reclamation

on hydropower projects in China {980.84 -

SOURCE Office of Technology Assessment

Table 11 .–U.S. and Japanese Trade, Aid,

and Investment in China, 1983

United States Japan

Trade

Exports to PRC ... ..$2,173 million $4,914 million

Imports from PRC .. .$2,243 million $4,843 million

Investment . . . . . . . . . . a a

Aid (ODA loans net). . 0 $ 299 millionb

Exlm loans for energy

projects (1980-84) ... .$ 51 millionc

$2,132 million’

‘Official DOC data show a -$9 million U S direct Investment position in China

during 1983 See footnote 42 for additional explanation Additional data are now

being prepared which may show a positive investment position for the United

States in the hundreds of millions of dollars The U S Department of State estimates that U S direct Investment totaled more than $100 million by late 1984

See Office of Chinese Affairs, USDOS, “U.S. and Other Foreign Investment in

China, ” October 1984

JETRO data indicate that Japan’s direct Investment position was $29 milIion in 1983, and that by 1985 Japanese Investments in China had risen to $187

million

bTotal ODA received by China during 1983 was $500 million See OECD Geographical Distribution of Financial Flows to Developing Countries, 1980.83

(Paris 1984), p 74

cSee table 3 for U.S. data. Japanese data from JETRO data file 1984, provided

to OTA Japanese data Includes only coal and oil development projects

signed long-term agreements to import some of

the coal and oil it is helping China develop, and

has granted China trade preferences under the

Generalized System of Preferences.

Japanese firms and the government work together to negotiate large development projects in

China, which combine trade and aid concerns.

While Japanese foreign direct investments in

China are apparently very limited,42 Japanese

firms are well represented in China, including remote areas of the countryside, by trading com-

‘

2As indicated in the notes to table II, investment data for China

should be treated with great caution. Current official U.S. data is

not available, and the U, S,, Chinese, and Japanese governments include different elements in their foreign direct investment data.

panies as well as government organizations such

as JETRO (the Japan External Trade Organization). In 1983, more than 1,200 Japanese experts

were sent to China by JICA (the Japan International Cooperation Agency) to work on technical cooperation projects.43 European firms are also

pursuing innovative approaches to the China market, The establishment of a special West European

financing consortium for China trade was recently

announced.

Japan and the United States have developed

quite different types of economic interactions with

China. Table 11 shows the comparative strength

of Japanese Government financing and aid as well

as the strong overall lead Japanese firms enjoy in

trade.

It is unlikely that the U.S. Government will provide subsidized financing for China trade equivalent to Japan’s. Nor is it clear that this would be

desirable from a national perspective, since the

interest rate subsidies could be costly. The United

States has furthermore gone on record advocating the elimination of mixed credits (which combine confessional aid and official trade financing)

as examples of predatory financing.

On the other hand, the United States is well

positioned to do much more in the area of promotion. Such steps could involve expansion of

established programs, particularly support for feasibility studies and insurance programs. In addition, technical exchanges in areas such as reduc4’MIT1, Keizai K~’orJoLu no Gn)o to Afondai (The Current Status of Economic Cooperation)
58 —

ing coal-related environmental pollution could be

promoted under the science and technology protocols. This could be carried out by allocating

funds directly to the projects rather than relying

on the Environmental Protection Agency or some

other government agency to provide funding. It

should be noted that promotional programs could

be expanded without adopting predatory financing approaches that weaken international trade

agreements. The expansion of technical exchanges, Ex-Im financing and OPIC insurance and

feasibility studies could all be carried out in a way

consistent with international trade norms.

Selection of Energy

Development Projects

Among the many energy development projects

that China undertakes, some will undoubtedly be

more successful than others. If there are negative

side effects (such as adverse environmental consequences) associated with technology transfers,

ill will might be created between the United States

and China.

But while energy technology transfers to China

could involve negative, unexpected consequences

for both countries, the U.S. Government has not

and probably cannot establish regulations that

eliminate such risks. The one important exception

to this rule is national security-related risks, where

the U.S. export control system is designed to prohibit certain types of transfers with potential military applications. In particular, nuclear-related

exports must undergo an extensive review by the

Department of Energy and related agencies.

With regard to the other nonsensitive energy

technologies, the ability of the U.S. Government

to try to tell China how to develop its energy resources is quite limited. The U.S. Government

officially supports few energy-related projects in

China, as table 10 indicates. In addition, given

the availability of energy technologies from other

suppliers it generally would be futile for the United

States to try to tell China what to purchase. The

basic assumption of U.S. policies affecting technology transfers worldwide is that the firms themselves are in a position to make responsible choices

about what kinds of technology transfers they

should make, unless these choices impinge on national security. In addition, since the United States

does not have an aid program for China, a mechanism for encouraging certain types of projects

in developing countries is not available for China.

In the few instances where U.S. Government

financing is used (Ex-Im Bank loans and credits),

the Ex-Im Bank considers the creditworthiness of

the host country. Today China is ranked high in

terms of creditworthiness by the Bank.44 Project

selection by the Bank normally involves an evaluation of the financial soundness of the proposed

project. The Bank prefers projects that will expand U.S. exports and employment. The Bank,

however, does not have a rigid set of criteria used

in evaluating projects, and in practice decisions

have often been influenced by political factors .45

Since 1977, Congress has reviewed nuclear technology exports involving financing by the Bank.

The level of loans and credits for nuclear-related

exports has fallen in recent years to 2.4 percent

($4 million to support management services) of

the Bank’s authorizations in energy-related products and services in 1983.46 The Bank has changed

its position in recent years on support of nuclear

exports to countries such as Egypt, reflecting controversy within the United States over whether

or not subsidized financing should be provided

to such projects. In practice, however, Ex-Im Bank

financing for nuclear projects has fallen to a very

small part of Bank-supported projects. For China,

Ex-Im financing of nuclear exports will be moot

until the agreement on nuclear cooperation becomes effective,

The Overseas Private Investment Corporation,

which provides investment insurance, contractor

guarantees, and other support to U.S. investments

overseas has a detailed and extensive list of criteria it considers when supporting a project. 47

“Information” provided to OTA b}’ U S. Exp(~rt-Impc~rt Bank in

May 1985.

“See, for example, ‘ The Select[(ln and I]istributi[~n ot Loansr ‘

in Richard E. Feinberg, Subsidizing Success: The Expt)rt-lmp(]rt Banh

/n the IJ. S. Econom t’ ~ Cambridge, hlA: Cambridge LJnlverslty I)rw+,

1~82), p. 65. -

i~ExpCJrt. ]mp(}rt l~ank, RePc)rt 10 the Cc)ngress on Exporf L’redit

C“(Pmpetition and the Exp(>rt-In?port Barth of the L’nited Stateb, !or

Jan, 1, 1983 to Dec. 31, 1Q83 (V1’ashington,IX: 1Q84 )

‘“For a discussion of OI>IC-’S role in techn(}lc)~}’ transfer, see U.S.

C[>ngress, Office of Techn[~l(~gy Assessment, Techno/og}r Transfer

to the Afidcf]e East (Washington DC: LI. S. Govcrment I)rintin~ OtIlce, September 1984), OTA-ISC-1 73, p. 538f!
59

Congress requires that OPIC carry out a developmental impact statement of projects, in order

to ensure that economic and social effects are

taken into account. Other criteria considered include U.S. employment, technology transfer, productivity, multiplier effects on other industries,

contribution to host country revenues, and environmental and safety effects.

It does not appear likely that the U.S. Government could effectively extend its review of energy

projects beyond what is already built into these

reviews and into export administration review (on

grounds of U.S. national security).

On the other hand, more could be done to provide China with information on the health and

safety effects of energy technologies. There are

protocols with China in environmental protection

and nuclear safety. But science and technology

exchanges in these and other areas (legal issues

surrounding contract obligations, and project

management) could be enlarged to augment

China’s own expanding efforts in the area of environmental protection .48

Possible Improvements in

U.S. Promotional Programs

While controls remain the major focus of U.S.

Government policies affecting technology transfers to China, there are steps that could be taken

to promote energy technology transfers in addition to streamlining the license review process.

At the most general level, Congress could take

the lead in promoting a new view of the United

States as a country whose economic health depends on our ability to promote exports worldwide. This would involve a significant change in

thinking in light of recent preoccupation with import penetration. It is unlikely that promotional

programs will be expanded unless Congress develops a new approach to U.S. exports. More

extensive export promotion programs could be designed that support rather than endanger multilateral agreements on trade and export financing.

There is no one program that if changed or enlarged would provide a “quick fix” for export promotion, but there are a number of possibilities for

incremental improvements, particularly in information flows. U.S. representation through the

Foreign Commercial Service could be expanded

in China, and efforts could be better linked to

trade development in the United States. Such efforts could, in some cases, augment the science

and technology protocol activities. The U.S. Government could support expanded technical training in energy-related fields in China and in the

United States. Were the United States to establish an aid program, more extensive programs

could be considered, but the above-mentioned

steps could be taken regardless.

In the absence of an aid program, science and

technology exchanges are a major avenue for U.S.

Government support. Protocols in fossil energy

and nuclear safety provide a framework for cooperation in energy-related fields. Programs of the

Committee on Scholarly Communication with the

People’s Republic of China (CSCPRC) under the

National Academy of Sciences and the National

Academy of Engineering, funded by U.S. Government agencies, support exchanges of scholars

between the United States and China in the engineering and social science fields relevant to energy

technology transfer. The joint study on coal conversion in China supported by the CSCPRC is an

example of a useful exchange of information that

should assist both Chinese and U.S. firms in this

field of energy development. Further studies and

exchanges in energy-related fields could be considered, but their relevance and utility will also

depend on the support given these efforts by

China’s leaders.
60

BALANCING CONTROL AND PROMOTION

U.S. Government policies and programs affecting energy technology transfers to China include

a mix of controls and promotional programs that

has shifted over time in response to changes in

overall U.S. China policy and other contextual

factors. While export controls retain a central

place in U.S. policies, today agreements for cooperation in science and technology as well as

limited financial and insurance support provide

only modest encouragement for technology transfer in energy fields.

Despite the problems identified above, the fundamental rationale for export controls remains

valid. U.S. export controls play a critical role in

restricting the flow of militarily sensitive technologies while at the same time allowing exports in

other areas. A U.S.-led push to remove exports

to China from Cocom review is not at present a

feasible or promising alternative, since this would

greatly reduce the ability of Western countries to

control exports in the event that China dramatically changes its foreign policy, and since removing China from Cocom could disturb the voluntary consensus that undergirds the organization.

Nevertheless, much could be done to streamline and improve the system. In addition, as technology is further developed and U.S.-China relations evolve, it will be important to review

periodically the overall balance of control and

promotion programs to ensure a proper fit with

overall U.S. China policy. This type of systematic review is especially needed at this point, since

U.S.-China economic relations have developed

rapidly during the past few years.

Many of the areas where improvements could

be made in U.S. policies are not easily susceptible to congressional action, and many require

multilateral coordination with other countries,

The following types of changes could be considered:

● measures to improve the efficiency of the

U.S. export control system (upgrading the

technical expertise of license examiners, expanding their numbers, better management

of license review, better coordination among

●

●

executive branch agencies involved in the

review);

measures to speed the Cocom review process

(adoption of a “notification” system for nonsensitive exports so that Cocom review can

focus on the really sensitive cases while at

the same time keeping a record of other types

of exports that can be periodically reviewed);

and

maintain and expand promotional measures

(use science and technology exchanges to assist China in understanding the long-term environmental effects of energy technology

transfers; maintain financing and other supports for energy projects such as measures

to improve the flow of information about

China’s technology needs and U.S. expertise).

Congress has an immediate role in reviewing

the nuclear cooperation agreement. Although it

does not specifically promote exports, an agreement is a necessary step for expanding nuclear

trade. However, there are other factors that Congress will consider in this review: nonproliferation

policy, the adequacy of the consent rights provisions, the level of concern over potential improvements to China’s nuclear submarines, the appropriateness of nuclear power for China, the role

of other supplier countries, and overall U. S.-

China relations. As discussed in chapter 4, different evaluations of these factors can lead to arguments favoring or rejecting the agreement.

China’s energy technology requirements present

a tremendous opportunity for U.S. firms and organizations. U.S. technologies could, in particular, contribute to improving the efficient use of

energy, environmental protection, and the development of large-scale electrical systems in China.

While there are significant risks associated with

energy technology transfers, the potential gains

outweigh the dangers and it should be possible

to effectively manage the risks.

U.S. policies affecting energy technology transfers, however, have been rather inconsistently implemented to date. Despite high-level decisions to

liberalize exports, uncertainty and delays have
61

continued within U.S. export administration. U.S. port examiners on assessing, limiting, and moniGovernment policy makers must maintain the toring the militarily sensitive exports, while

proper balance between controls and promotional expanding efforts to promote the many other

policies, one consistent with the overall U. S.- types of energy technology transfers China needs

China relationship. In the current context, the ma- to develop its energy resources.

jor challenges are to further focus attention of ex-
—. — -.

Appendix

Nuclear Cooperation Agreement

and Supporting Documents
Appendix

Nuclear Cooperation Agreement

and Supporting Documents

Agreement for Cooperation Betwee n

The Government of the United States of America and

The Government of the People’s Republic of Chin a

Concerning Peaceful Uses of Nuclear Energy

The Government of the United States of America and th e

Government of the People’s Republic of Chin a7

Desiring to establish extensive cooperation in the peaceful use s

of nuclear energy on the basis of mutual respect for sovereignty,

non-interference in each other’s internal affairs, equality and

mutual benefit,

Noting that such cooperation is one between two nuclear weapon

states ,

Affirming their support of the objectives of the statute of th e

International Atomic Energy Agency (IAEA)/

Affirming their intention to carry out such cooperation on a

stable, reliable and predictable basis,

Mindful that peaceful nuclear activities must be undertaken with

a view to protecting the international environment from radioactive,

chemical and thermal contamination,

Have agreed as follows:

65
66 —

Article 1

Definitions

For the purposes of this agreement:

(1) ‘parties=

means the Government of the United States of

America and the Government of the People’s Republic of China;

( 2 ) ‘authorized person ” means any individual or any entity

under the jurisdiction of either party and authorized by that party

to receive, possess, use, or transfer material, facilities or

components;

( 3 ) “person” means any individual or any entity subject to th e

jurisdiction of either party but does not include the parties t o

this agreement;

(4) ‘peaceful purposes” include the use of information,

technology, material, facilities and components in such fields as

research, power generation, medicine, agriculture and industry but

do not include use in, research specifically on or development o f

any nuclear explosive device , or any military purpose ;

(5) “material” means source material, special nuclear material

or byproduct material, radioisotopes other than byproduct material,

moderator material, or any other such substance so designated by

agreement of the parties;

(6) “source material” means (i) uranium, thorium, or any other

material so designated by agreement of the parties, or (ii) ores

containing one or more of the foregoing materials, in such

concentration as the parties may agree from time to time ;
67

(7) "special nuclear material” means (i) plutonium, uranium

233, or uranium enriched in the isotope 235, or (ii) any othe r

material so designated by agreement of the parties;

(8) “byproduct material” means any radioactive materia l

(except special nuclear material) yielded in or made radioactive by

exposure to the radiation incident to the process of producing o r

utilizing special nuclear material ;

( 9 ) “moderator material ” means heavy water, or graphite o r

beryllium of a purity suitable for use in a reactor to slow down

high velocity neutrons and increase the likelihood of further

fission, or any other such material so designated by agreement of

the parties;

(lo) “high enriched uranium” means uranium enriched to twenty

percent or greater in the isotope 235 ;

(11) “low enriched uranium” means uranium enriched to less than

twenty percent in the isotope 235;

(12) “facility” means any reactor, other than one designee or

used primarily for the formation of plutonium or uranium 233, or any

other item so designated by agreement of the parties;

(13) “reactor” is defined in Annex I, which may be modified by

mutual consent of the parties.

(14) “sensitive nuclear facility” means any plant designed or

used primarily for uranium enrichment, reprocessing of nuclear fuel,

heavy water production or fabrication of nuclear fuel containinq

plutonium;
68

(15 ) “component” means a component pact Of a facility or other

item, so designated by agreement of the parties ;

(16 ) ‘major critical component ” means any part or group of

parts essential to the operation of a sensitive nuclear facility;

(17) ‘sensitive nuclear technology” means any information

(including information incorporated in a facility or an important

component) which is not in the public domain and which is important

to

of

the design, construction, fabrication, operation or maintenance

any sensitive nuclear facility, or such other information so

designated by agreement of the parties.

Article 2

Scope of Cooperation

1. The parties shall cooperate in the use of nuclear energy for

peaceful purposes in accordance with the provisions of this

agreement. , Each party shall implement this agreement in accordance

with its respective applicable treaties, national laws, regulations

and license requirements concerning the use of nuclear energy for

peaceful purposes. The parties recognize, with respect to the

observance of this agreement, the principle of international law

that provides that a party may not invoke the provisions of its

internal law as justificaton for its failure to perform a treaty.
69

2. Transfers of information, technology, material, facilities

and components under this agreement may be undertaken directly

between the parties or through authorized persons. Such cooperation

shall be subject to this agreement and to such additional terms and

conditions as may be agreed by the parties.

3. Material, facilities and components will be regarded as

having been transferred pursuant to this agreement only upon receipt

of confirmation by the supplier party, from the appropriate

Government authority of the recipient party, that such material,

facilities or components will be subject to this agreement and that

the proposed recipient of such material, facilities or components,

if other than the recipient party, is an authorized person.

4. Any transfer of sensitive nuclear technology, sensitive

nuclear facilities, or major critical components will, subject to

the principles of this agreement , require additional provisions a s

an amendment to this agreement.

Article 3

Transfer of Information and Technologv

Information and technology concerning the use of nuclear energy

for peaceful purposes may be transferred. Transfers of such

information and technology shall be that which the parties are

permitted to transfer and may be accomplished through various means,

including reports, data banks, computer programs, conferences,
70

visits and assignments of persons to facilities . Fields which may

be covered include, but shall not be limited to, the following:

(1) research, development, experiment, design, construction,

operation, maintenance and use and retirement of reactors and

nuclear fuel fabrication technology;

(2) the use of material in physical and biological research,

medicine, agriculture and industry;

(3) nuclear fuel cycle research, development and industrial

application to meet civil nuclear needs, including multilateral

approaches to guaranteeing nuclear fuel supply and appropriate

techniques for management of nuclear wastes;

(4) health, safety, environment, and research and development

related to the foregoing;

(5) assessing the role nuclear power may play in international

energy plans;

(6) codes, regulations and standards for the nuclear energy

industry; and

(7) such other fields as may be agreed by the parties.

Article 4

Transfer of Material, Facilities and Components

1. Material, facilities and components may be transferred

pursuant to this agreement for applications consistent with this

agreement. Any special nuclear material to be transferred under

this agreement shall be low enriched uranium except as provided in

paragraph 4 of this article.
—

71

2. Low enriched uranium may be transferred for use as fuel in

reactors and reactor experiments, for conversion or fabrication, or

for such other purposes as may be agreed by the parties.

3 . The quantity of special nuclear material transferred unde r

this agreement shall be the quantity which the parties agree i s

necessary for. any of the following purposes: the loading of

reactors or use in reactor experiments, the efficient and continuous

operation of such reactors or conduct of such reactor experiments,

and the accomplishment of such other purposes as may be agreed by

the parties.

4. Small quantities of special nuclear material may be

transferred for use as samples, standards, detectors, targets,

radiation sources and for such other purposes as the parties may

agree .

Article 5

Retransfers, Storage, Reprocessing, Enrichment,

Alteration, and No Use for Military Purposes

1. Material, facilities, components or special nuclear material

transferred pursuant to this agreement and any special nuclear

material produced through the use of such material or facilities may

be retransferred by the recipient party, except that any such

material, facility, components or special nuclear material snail not

be retransferred to unauthorized persons or, unless the parties

aqree, beyond its territory.
72

2 . Neither party has any plans to enrich to twenty percent Or

greatert reprocess, or alter in form or content material transferred

pursuant to this agreement or material used in or produced through

the use of any material or facility so transferred. Neither party

has any plans to change locations for storage of plutonium, uranium

233 (except as contained in irradiated fuel elements), or high

enriched uranium transferred pursuant to this agreement or used in

or produced through the use of any material or facility so

transferred. In the event that a party would like at some future

time to undertake such activities, the parties will promptly hold

consultations to agree on a mutually acceptable arrangement. The

parties undertake the obligation to consider such activities

favorably, and agree to provide pertinent information on the plans

during the consultations . Inasmuch as any such activities will be

solely for peaceful purposes and will be in accordance with th e

provisions of this agreement , the parties will consult immediately

and will seek agreement within six months on long-term arrangement s

for such activities. In the spirit of cooperation the parties agree

not to act within that period of time. If such an arrangement is

I not agreed upon within that period of time, the parties will

promptly consult for the purpose of agreeing on measures which they

consider to be consistent with the provisions of the agreement in

order to undertake such activities on an interim basis. The
—

73

parties agree to refrain from actions which either party believes 

wou ld p r ej u d g e t h e lo n g – term arrangements for undertaking such

activities or adversely affect cooperation under this agreement.

The parties agree that the consultations referred to above will be

carried out promptly and mutual agreement reached in a manner to

avoid hampering, delay or undue interference in their respective

nuclear programs. Neither party will seek to gain commercial

advantage. Nothing in this article shall be used by either party to

inhibit the legitimate development and exploitation of nuclear

energy for peaceful purposes in accordance with this agreement.

3. Material, facilities or components transferred pursuant to

this agreement and material used in or produced through the use of

any material, facility or components so transferred shall not be

used for any nuclear explosive device, for research specifically on

or development of any nuclear explosive device, or for any military

purpose.

Article 6

Physical Security

1. Each party shall maintain adequate physical security with

respect to any material, facility or components transferred pursuant

to this agreement and with respect to any special nuclear material

used in or produced through the use of any material or facilicy so

transferred.
74

2. The parties agree to the levels for the application of

physical security set forth in Annex 11, which levels may be

modified by mutual consent of the parties. The parties shall

maintain adequate physical security measures in accordance with such

levels. These measures, as minimum protection measures, shall be

comparable to the recommendations set forth in IAEA document

INFCIRC/225/Revision 1 entitled “The Physical Protection of Nuclear

Material”, or in any revision of that document agreed to by the

parties.

3. The parties shall consult at the request of either party

regarding the adequacy of physical security measures maintained

pursuant to this article.

4. Each party shall identify those agencies or authorities

responsible for ensuring that levels of physical security are

adequately met and having responsibility for coordinating respons e

and recovery operations in the event of unauthorized use or handlin g

of material subject to this article . Each party shall als o

designate points of contact within its national authorities t o

cooperate on matters of out-of-country transportation and othe r

physical security matters of mutual concern .
75

Article 7

Cessation of Cooperation

1. Each party shall endeavor to avoid taking any actions that

affect cooperation under this agreement. If either party at any

time following entry into force of this agreement does not comply

with the provisions of this agreement, the parties shall promptly

hold consultations on the problem, it being understood that the

other party shall have the rights to cease further cooperation under

this agreement.

2 . If either party decides to cease further cooperation unde r

this agreement, the parties shall make appropriate arrangements as

may be required.

Article 8

Consultations

1. The parties shall consult at the request of either party

regarding the implementation of this agreement, the development of

further cooperation in the field of peaceful uses of nuclear energy,

and other matters of mutual concern.

2. The parties recognize that this cooperation in the peaceful

uses of nuclear energy is between two nuclear-weapon states and that

bilateral safeguards are not required. In order to exchange

experience, strengthen technical cooperation between the parties,
76

ensure that the provisions of this agreement are effectively carried

out, and enhance a stable, reliable, and predictable nuclea r

cooperation relationship, in connection with transfers of material,

facilities and components under this agreement the parties will use

diplomatic channels to establish mutually acceptable arrangements

for exchanges of information and visits to material, facilities and

components subject to this agreement.

3. The parties shall exchange views and information on the

establishment and operation of their respective national accounting

and control systems for source and special nuclear material subject

to this agreement.

Article 9

Environmental Protection

The parties shall consult, with regard to activities under this

agreement, to identify the international environmental implications

arising from such activities and shall cooperate in protecting th e

international environment from radioactive, chemical or thermal

contamination arising from peaceful nuclear cooperation under thi s

agreement and in related matters of health and safety.

Article 1 0

Entry Into Force and Duration

1. This agreement shall enter into force on the date of mutual

notifications of the completion of legal procedures by the partie s

and shall remain in force for a period of thirty years. This term
— .

77
78

Annex I -- Definition of “Reactor”

“Reactor” means:

1. any apparatus, other than a nuclear weapon or other nuclear

explosive device, in which a self-sustaining fission chain

reaction is maintained by utilizing uranium, plutonium or

thorium, or any combination thereof; or

2. any of the following major parts of an apparatus described

in paragraph 1:

(1) a pressure vessel designed to contain the core;

(2) primary coolant pumps;

(3) fuel charging or discharging machines;

(4) control rods.

A “reactor” does not include the steam turbine generator

portion of a nuclear power plant.
79

Annex 11

pursuant to paragraph 2 of article 6, the agreed levels of

physical security to be ensured by the competent national

authorities in the use, storage and transportation of the materials

listed in the attached table shall as a minimum include protection

characteristics as below.

Category III

Use and storage within an area to which access is controlled.

Transportation under special precautions including prior

arrangements among sender, recipient and carrier, and prior

agreement between entities subject to the jurisdiction and

regulation of supplier and recipient States, respectively, in case

of international transport specifying time, place and procedures for

transferring transport responsibility.

Use and storage within a

Category II

protected area to which access is

controlled, i.e., an area under constant surveillance by guards or

electronic devices , surrounded by a physical barrier with a limited

number of points of entry under appropriate control, or any area

with an equivalent level of physical protection.

Transportation under special precautions including prior

arrangements among sender, recipient and carrier, and prior

agreement between entities subjec t to the jurisdiction and
80

regulation of suppller and recipient States, respectively, in case

of international transport, sPecifying time, place and procedures

for transferring transport responsibility.

Category I

Material in this category shall be protected with highly

reliable systems against unauthorized uses as follows:

Use and storage within a highly protected area, i.e., a

protected area as defined for category II above, to which, in

addition, access is restricted to persons whose trustworthiness has

been determined, and which is under surveillance by guards who are

in close communication with appropriate response forces. Specific

measures taken in this context should have as their objective the

detection and prevention of any assault, unauthorized access or

unauthorized removal of material.

Transportation under special precautions as identified above for

transpiration of categories II and III materials and, in addition,

under constant surveillance by escorts and under conditions which 

assure close communication with appropriate response forces.
81

Agreed Minute

During the negotiation of the Agreement for Cooperation between

the United States of America and the People’s Republic of China

Concerning Peaceful Uses of Nuclear Energy signed today, the

following understanding, which shall be an integral part of the

agreement, was reached.

The parties agree that the interpretation and implementation of

article 5(3) shall not involve any nuclear activities and related

research and development carried out by either party, as a nuclear

weapon state, through the use of material, facilities, component s

and technology not subject to the agreement .
Material

2. Uranium-235d

TABLE: CATEGORIZATION OF NUCLEAR MATERIALC

Form

Unirradiatedb

Unirradiated b

uranium enriched to 20% 235U or more

uranium enriched to 10% 2’s U but

less than 20%

uranium enriched above natural, but

less than 10% 235U

3. Uranium-233 Unirradiatedb

J

2 kg or more

5 kg or more

2 kg or more

Less than 2 kg but more

than 500 g

Less than 5 kg but more

than 1 kg

10 kg or more

Less than 2 kg but more

than 500 g

III

500 g or lessc

1 kg or lessc

Less than 10 kg

10 kg or more

500 g or lessC

8

b

c

d

c

f

All plutonium except that wlth isotopi C concentration exceeding 80% in plutonium.2 36.

Material not irradiated in a reactor or material irradiated in a reactor but W ith a radiation Ievel equal to or Iess than 100 rads/hour at one meter unshielLess than a radiologically significant quantity should be exempted.

Natural uranium. depleted uranium and thorium and quantities of uranium enriched to less than 10% not falling in Category III should be protected ir

accordance with prudent management practice.

Irradiated fuel shouId be procted as Category I. II or III nucIear material depending on the category of the fresh fuel. However, fuel which by virtue

originaI fissile I material content is included as Category I or II beffore irradiation shouId onIy be reduced one Category Ievel, while the radiation level for

fuel exceeds 100 rads/h at one meter unshielded.

The State’s competent authority should dterrmine if there i S a credible threat to disperse plutonium malevolently. The State should then apply physiprotection requirements for category I, II or III of nuclear material, as it deems appropriate and without regard to the plutonium quantity specified u ,

each category herein, to the plutonium isotopes in those quantities and forms determined by the State to fall within the scope of the credible disopersa
83
84
-. — . 

85
86

Recommendation
87

United States - People’s Republic of China

Peaceful Nuclear Cooperation Agreement

Summary of Basic Provisions

Article 1 and Annex I contain definitions;

Article 2 sets forth the scope of cooperation i n the

nuclear energy for peaceful purposes. The parties state

intent to cooperate in this area in accordance with the

provisions of the agreement. Information, technology,

use of

their

material, facilities and components may be transferred under

the agreement directly between the parties or through

authorized persons, and shall be subject to the terms of the

agreement and to such additional terms and conditions as may be

agreed by the parties. Material, facilities and components

will be regarded as having been transferred pursuant to the

agreement only upon confirmation by the recipient party that

such item or items are to be subject to the terms of the

agreement. Sensitive nuclear technology, sensitive nuclear

facilities, and major critical components cannot be transferred

under the agreement; their transfer would require additional

provisions as an amendment to the agreement. Each party will

implement the agreement in accordance with its respective

applicable treaties, national laws, regulations and license

requirements concerning the use of nuclear energy for peaceful

purposes.

Article 3 provides for the transfer of information in a

variety of fields involving the peaceful uses of nuclear

energy. These fields include research, development and use of

reactors and nuclear fuel fabrication technology, the use of

material and physical and biological research, medicirle,

agriculture and industry, nuclear fuel cycle research,

including waste management techniques, health, safety, and

environmental research and development~ assessing the role

nuclear pow er may play in international energy plans, and

codes, regulations and standards for the nuclear energy

industry. The agreement limits transfers of information and

technology to that which the parties are permitted to transfer,

thus excluding the transfer of restricted data, since special

procedures under section 144 of the Atomic Energy Act must be

followed to authorize such transfers-- - .

Article 4 provides the basic enabling framework for the

transfer of material, facilities and components. Except for

small quantities of special nuclear material for use as

samples, standards~, detectors, targets, radiation sources and

such othec agreed purposes, the agreement limits authorized
88

.

transfers of special nuclear material to low-enriched uranium.

Low-enriched uranium may be transferred for use as fuel in

reactors and reactor experiments, for conversion or

fabrication, or for such other purposes as may be agreed by the

parties. The quantity of nuclear material transferred shall

not at any time be in excess of the quantity necessary for

reactors or reactor experiments, and such other purposes as may

be agreed by the parties.

Article 5 requires the parties’ agreement for the

retransfer of any material, facilities, components or special

nuclear material transferred pursuant to the agreement and any

special nuclear material produced through the use of any such

material or facilities.

This article also specifies that neither party has any

plans to enrich to 20 percent or greater, reprocess, or alter

in form or content material transferred pursuant to the

agreement or material used in or produced through the use of

any material or facility so transferred. In addition, neither

party has any plans to change locations for storage of

plutonium, uranium 233 (except as contained in irradiated fuel

elements), or high-enriched uranium transferred pursuant to the

agreement or used in or produced through the use of any

material or facility so transferred. If plans change, the

parties will consult immediately and seek agreement within six

months on long-term arrangements for such activities. The

parties undertake to consider the activities favorably, and

agree to provide pertinent information on their plans. Each

party agrees not to act during this period. If a long-term

arrangement is not agreed, the parties will promptly consult

for the purpose of agreeing on an interim arrangement. Both

parties agree to refrain from actions which either party

believes would prejudge the ions-term arrangement or adversely

affect cooperation under the agreement. In essence,

consequently, none of the activities referred to in this

paragraph may be undertaken unilaterally; prior approval of the

other party is required;

Finally, article 5 precludes the use of material,

facilities or components transferred pursuant to the agreement

and material used in or produced through the use of any

material, facility or component so transferred for any nuclear

explosive device, for research specifically on or development

of any nuclear explosive device, or for any military purpose.

The agreed minute makes clear that this obligation does not

involve any nuclear activities and related research and

development carried out by either party, as a nuclear weapon

state, through the use of material, facilities, components and

technology not subject to the agreement.
89

Article 6 requires that each party maintain adequate

physical security measures, in accordance with the levels of

protection set forth in Annex II, with respect to any material,

facility or components transferred pursuant to the agreement

and with respect to any special nuclear material used in or

produced through the use of any material or facility so

transferred. The measures applied shall, as a minimum, be

comparable to the recommendations set forth in IAEA document

INFCIRC/225/Rev.1, ‘The Physical Protection of Nuclear

Material," or in any revision of that document agreed to by the

parties. The Annex describes physical security levels

applicable with respect to the use, storage, and transport of

nuclear materials classified as categories I (requiring the

most stringent levels of protection), II, and III. The parties

agree to consult at the request of either party regarding the

adequacy of physical security measures, and agree to identify

those agencies and authorities responsible for ensuring that

levels of physical security are adequately met and having

responsibility for coordinating response and recovery

operations in the event of unauthorized use or handling of

materials subject to the article.

Article 7 accords each party the right to cease cooperation

if the other party does not comply with the provisions of the

agreement. Each party undertakes to endeavor to avoid taking

actions that would affect cooperation under the agreement.

Article 8 provides that parties shall consult at the

request of either party regarding the implementation of the

agreement, the development of further peaceful nuclear

cooperation, and other matters of mutual concern. It is

recognized that since the parties are both nuclear-weapon

states, bilateral safeguards are not required. However, in

order to exchange experience, strengthen technical cooperation

between the parties, ensure that the provisions of the

agreement are effectively carried out, and enhance a stable,

reliable and predictable nuclear cooperation relationship, in

connection with transfers under the agreement the parties will

use diplomatic channels “to establish mutually acceptable

arrangements for exchanges of information and visits to

material, facilities and components subject to the agreement.

The parties also agree to exchange views and information on the

establishment and operation of their respective national

accounting and control systems for source and special nuclear

mlaterial subject to the agreement .

Article 9 provides that the parties shall consult t o

identify the international environmental implications arisin g

from activities under the agreement, and shall cooperate in

protecting the international environment from radioactive,
90

chemical or thermal contamination arising from such activities

and in related matters of health and safety.

Article 10 establishes a thirty-year term for the agreement

which may be extended by agreement of the parties in accordance

with their respective applicable procedures. In the event of

suspension? termination or expiration of the agreement or of

cooperation thereunder for any reason, articles 5, 6, 7, and 8

shall continue in effect so long as any material, facility or

components subject to these articles remains in the territory

of the party concerned or any material, facility or components

subject to these articles remain subject to that party’s right

to exercise jurisdiction or direct disposition elsewhere.
91

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MEMORANDUM FOR THE PRESIDENT

SUBJECT : Nuclear Proliferation Assessment Statement for

the Peaceful Nuclear Cooperation Agreement

Between the United States and China

Pursuant to Section 123a. of the Atomic Energy Act of 1954,

as amended, I am submitting to you an unclassified Nuclear

Proliferation Assessment Statement on the agreement for

cooperation between the United States and China. This statement addresses the background (Part I), the statutory requirements (Part II), and the non-proliferation policy issues

(Part III) as they relate to the agreement.

China has recently taken major and welcome steps in adopting

policies that advance non-proliferation objectives. The

prospect of peaceful nuclear cooperation with the United

States and others played an important role in encouraging

China to adopt these policies. China understands that US

cooperation under the agreement is contingent upon China’s

implementation of these policies in a manner fully consistent

with those basic non–proliferate on practices and standards

that were discussed and clarified during the negotiations

with China.

I have concluded that the agreement meets all statutory

requirements, and I have reached a favorable assessment of

the adequacy of the provisions in the agreement to ensure

that any assistance furnished under it will not be used to

further any military or nuclear explosive purpose. The agreement substantially benefits US non-proliferate on objectives,

and it will provide a good opportunity for continuing consultations with China on non-proliferation issues. In light

of all the above, I recommend that it be approved.

Attachment:

Nuclear Proliferation Assessment Statement.
92

NUCLEAR PROLIFERATION ASSESSMENT STATEMENT

. . .

Pursuant to Section 123 a. of the

Atomic Energy Act of 1954, as Amended,

With Respect to the proposed Agreement for Cooperation

Between the United States of Americ a

and the People’s Republic of Chin a

Concerning Peaceful Uses of Nuclear Energ y

This Nuclear Proliferation Assessment Statement relates

to the proposed Agreement for Cooperation between the United

States of America and the People’s Republic of China Concerning

Peaceful Uses of Nuclear Energy. This agreement for cooperation (which, together with its accompanying Agreed Minute,

is hereinafter called the “proposed Agreement”) is concurrently

being submitted to the President for his authorization for

execution.

Section 123 a. of the Atomic Energy Act of 1954, as

amended (“Atomic Energy Act”), provides that a Nuclear Proliferation Assessment Statement shall address the “adequacy

of safeguards and other control mechanisms and the peaceful

use assurances contained in the agreement for cooperation to

ensure that any assistance furnished thereunder will not be

used to further any military or nuclear explosive purpose.”

This assessment statement addresses the background on the

nuclear program and policies of China (Part I); the nature

and scope of cooperation contemplated in the proposed

Agreement (Part II A), and how the applicable substantive

requirements of the Nuclear Non-Proliferation Act (NNPA) and

the Atomic Energy Act are met by the proposed Agreemen t

(Part 11 B) ; other non-proliferation policy issues pertinen t

to this agreement (Part III); and the assessment, conclusions ,

views and recommendations of the United States Arms Contro l

and Disarmament Agency (Part V). Part II B. responds to the

requirements for a Proliferation Assessment Statement in

Section 123a. of the Atomic Energy Act, as amended by both

the Nuclear Non-proliferation Act of 1978 and, more recently,

by the Export Administration Amendments Act of 1985.
—

93

I. BACKGROUND

A. China’s Civil Nuclear Program

China has recently begun to develop a civilia n

nuclear energy program an d has ambitious plans for th e

installation of substantial nuclear electric power capacity

by the year 2000. China hopes to double total energy output

and efficiency of energy use by that time. The construction

of nuclear power plants in energy-poor areas would help China

reach those goals.

China sees its nuclear power program as a necessary

part of its development and modernization efforts. China is

faced with severe electric power shortages. This has not

only limited the amount of electricity available for household

consumption, but it has also adversely affected industrial

production. Future industrial and economic growth will require

increased electric power.

China has relied primarily on coal-generated electricity,

especially in the northern and central portions of the country

which possess rich fossil fuel deposits. In 1984, China's

coal production increased 8% over 1983 to 772 million metric

tons. However, the growing demands for coal from a spreading

industrial base have begun to tax the transportation sector's

infrastructure, particularly the railroads. As a result,

coal-generated energy has become increasingly costly.

Petroleum usage as a percentage of total energy pro–

duct ion has fallen. The output of petroleum has remained

flat since 1978 and now accounts for 21% of the national

energy supply, down from 24% in 1978. China has continued

to export crude oil and some petroleum products in order to

acquire badly needed foreign currency. It is estimated that

oil and petroleum products constitute some 25% of current

export earnings. Growing internal demands for oil may force

China to reconsider its oil export policy.

Hydroelectric power also provides energy in China.

However, the large dams required to expand China’s present

hydroelectric power supplies are regarded as costly to construct and often result in the loss of valuable agricultural

land.

Because of these perceived energy requirements and conditions , the nuclear power alternative has gained acceptance

in China. The Chinese leadership will consider the cost and

benefits of foreign technological assistance necessary to
94 —. —

build modern nuclear power plants and the longstanding

traditions of Chinese self-reliance. Thus, China’s nuclear

power program most likely will be a two-track effort: some

foreign plant’s will eventually be constructed, and an indigenous effort at reactor construction and fuel fabrication

will be advanced.

It is estimated that China possesses sufficient uranium

deposits to maintain a modest civil nuclear program. Specific

and detailed information on uranium deposits is presently

unavailable, largely because China has yet to explore fully

the regions where uranium is likely to be found.

China’s technological base for peaceful nuclear activities

is primarily an outgrowth of its cooperation with the Soviet

Union in the 1950’s. During that time, hundreds of Chinese

engineers and technicians were trained at Soviet universities

and research facilities. The Soviets also provided the

research reactor for the Beijing Institute of Atomic Energy

(BIAE) .

Three main centers of nuclear power research are located

in Beijing, Shanghai, and Sichuan. Beijing has two nuclear

research facilities -- BIAE and one at Qinghua University.

BIAE has a heavy water research reactor furnished by the

Soviet Union in 1958 and is focused largely on the development of heavy water reactor technology. The Nuclear Energy

Institute of Qinghua University is the primary facility for

training nuclear engineers in China.

The primary research facility near Shanghai is the

Shanghai Nuclear Physics Institute (SNPI). It cooperates

closely with the 728 Reactor Research and Design Institute

described below. Both groups are working on the design of a

light water nuclear power reactor similar to those used in

the United States. The 728 Institute maintains a small

research reactor to study control rod design, power distribution, and hydraulics.

The Southwest Reactor Engineering Research and Design

Center (SWERC) is located in Chengdu, Sichuan Province. Like

the facilities near Shanghai, SWERC is involved in research

on nuclear power reactors. In addition, a large research

and test reactor is operated at Ziajiang. In February 1981,

China announced that the reactor had gone into high power

operation; it is used to produce radioactive isotopes for

oil exploration and medical uses.

China has announced plans to build at least ten nuclear

power plants with a total generating capacity of 10,000 meqawatts by the year 2000. PRC officials have stated that many
95

— — —

Of these projects will import foreign equipment and engineering

services.

Chinese officials at various levels have announced plans

for reactors in at least a dozen locations, from Hainan Island

in the south to the Liaoning Peninsula in the north. However,

it appears that only three projects are likely to be started

in the near future:

Qinshan, Zhejiang (“728 Project”)_. This 300-megawatt,

“Chinese-designedn

power plant has been advertised as the

prototype for China’s indigenous nuclear industry. Two major

reactor components -- the pressure vessel and the cooling

pumps -- are to be supplied by Japan and West Germany,

respectively. The Chinese press reported that construction

began January 25, 1985, with the laying of the plant’s

cornerstone. The press account reported that all roads,

water, and electricity lines for the plant were completed by

the end of 1984, ahead of schedule.

Daya Bay, Guanqdonq. A joint venture company was formed

January 18, 1985, for the purpose of constructing this power

plant with twin 900 MW pressurized water reactors. Named

the “Guangdong Nuclear Power Joint Venture Company”, the

company is owned 75% by the Guangdong Nuclear Power investmen t

Company (a PRC corporation) and 25% by the Hong Kong Nuclea r

Investment Company (a wholly-owned subsidiary of Hong Kong

Power and Light) . Years of negotiations have not yet resulted

in any final contracts between the Chinese and the likely

suppliers of equipment and services for the Daya Bay project.

Sunan (“Southern Jiangsu” or “East China”), Jiangyin

County, Jiangsu. The Chinese press has announced the estab–

lishment of the “Dongnan Nuclear Power Development Company” ,

responsible for constructing this plant on the southern bank

of the Yangtze River, north of Shanghai. It will hold twin

1000 MW pressurized water reactors. Earlier this year,

requests for quotation for construction of the Sunan Project

were issued to France and West Germany. In the absence of

an agreement for cooperation, US companies were not invited

to bid.

The Chinese have had commercial consultations on the

supply of nuclear power – related equipment with France , t h e

United Kingdom, Canada, Sweden , the Federal Republic of German y

(FRG), Italy, Belgium, and Japan . Belgium, the FRG, and the

UK have agreements for peaceful nuclear cooperation with

China. China has also concluded such agreements with Argentina

and Brazil that could lead to reciprocal supply arrangements.

The proposed Agreement is the culmination of over four

years of U.S.-China talks. Six rounds of intensive negotiations
96

were held, both in Washington and Beijing, prior to initialling

of the proposed Agreement on April 30, 1984, by Ambassador

Kennedy and Commissioner Jia during President Reagan’s visit

to China.

Prior to seeking formal presidential approval, it became

necessary to engage in further discussions with China for

the purpose of clarifying matters related to implementation

of China’s nuclear policies . These discussions took plac e

through diplomatic channels and during visits of senior U S

officials to Beijing . The discussions concluded success -

fully on June 27, 1985. With a resolution of these additiona l

questions , it was then appropriate to proceed with obtainin g

Presidential authority to sign the proposed Agreement .

B. Non-Proliferation Policy

China's non-proliferation policy and statements

have evolved since the end of the Cultural Revolution. With

the rise of the post-Mao leadership of Deng Xiaoping, China

has moved toward more responsible and active participation

on disarmament issues in general, and most recently on nonproliferation in particular.

During the 1960’s and 1970’s, China's declaratory posture

argued that the spread of nuclear weapons to additional countries would diminish the power of the United States and the

Soviet Union, and rejected the view that an increase in the

number of nuclear-weapon states would enhance the risk of

nuclear war. Chinese declarations even postulated that the

introduction of nuclear weapons to nations in the Third World

could increase the opportunity of revolution. During the

negotiations of the Nuclear Non-Proliferation Treaty, and

subsequently, China has criticized the Treaty as discriminatory.

But at the same time, China’s actions were more restrained

than its declaratory policy.

In the early 1980’s, the possibility of Chinese involvement in international nuclear comrnerce became a reality.

This development presented a serious problem. China had

assumed no international legal obligation nor had it adopted

a policy to require International Atomic Energy Agency (IAEA)

safeguards or other controls on its nuclear exports. Also,

its broader posture on non-proliferation continued to raise

concerns about whether China would avoid actions that coul d

help another country acquire nuclear explosives.

Recently, China has taken a series of positive nonproliferation steps, moving to accept those basic nonproliferation practices and norms common to all suppliers.

During the January 1984 visit to Washington of Premier Zhao,

he stated that China does not “engage in nuclear proliferatio n
97

ourselves , nor do we help other countries to develop nuclear . 

weapons."

On May 15, 1984, in an address to the Sixth National

People’s Congress, Zhao repeated that China does not “engage

in such proliferation by helping other countries to develop

nuclear weapons. ” This statement to the People's Congres s

and its subsequent endorsement by the Congress is the Chinese

Government’s highest vehicle for the pronouncement of public

policy.

China’s position on nuclear non-proliferation was most

recently stated publicly by Vice Premier Li Peng in January

1985. According to an interview published in Beijing, he

said China has no intention, now or in the future, to help

non-nuclear nations develop nuclear weapons. He also said

that China’s present and future nuclear cooperation with

other countries would be confined exclusively to peaceful

purposes.

Discussions have been held with the Chinese, since the

proposed Agreement was initialed last year, in order to

clarify implementation of certain aspects of its nonproliferation policy. These discussions made clear that the

two governments have a common understanding of the essential

steps needed to implement these policies, consistent with

their mutual commitment to non-proliferation . Thus, we can

expect that China’s policy of not assisting non-nuclearweapon states to acquire nuclear explosives will be implemented in a manner consistent with the basic non-proliferate o n

practices common to the United States and other suppliers .

These discussions also provided the Chinese with a more

complete description of US policies and laws that form the

basis for peaceful nuclear cooperation with a country like

China. Finally, these consultations also permitted discussion

of China’s intentions regarding IAEA safeguards on its civil

nuclear program.

On January 1, 1984, China joined the IAEA. Chinese

officials said during the course of negotiations on the proposed Agreement and in the ensuing discussions that, as a

member of the IAEA, China would require IAEA safeguards on

its nuclear exports to non-nuclear-weapon states. This

policy was formally implemented in late 1984 when the China–

Brazil civil nuclear cooperation agreement incorporated a

reciprocal IAEA safeguards requirement for items transferred

under the agreement.
98

—

(1) Permitted Cooperation
99

—
100

respect to all special nuc1ear materia1 used i n o r

produced through the use of such nuclear materials

and equipment, so long as the material or equipment

remains under the jurisdiction or control of the

cooperating party, irrespective of the duration of

other provisions in the agreement or whether the

agreement is terminated or suspended for any reason.”

( 2 ) Scope of Safeguards

Subparagraph (2) of Section 123 a. provides:

“in the case of non-nuclear-weapon states, a

requirement, as a condition of continued United

States nuclear supply under the agreement for

cooperation, that IAEA safeguards be maintained with

respect to all nuclear materials in all peaceful

nuclear activities within the territory of such

state, under its jurisdiction, or carried out under

its control anywhere;"

Since China is a nuclear weapon state, the requirement for

IAEA safeguards set forth in subparagraph 2 of Section 123 a .

is not applicable .

Subparagraph (1) mandates that whatever safeguards are set

forth in the agreement for cooperation shall apply to the

items specified in that subparagraph as long as those items

remain under the jurisdiction or control of the cooperating

party. paragraph 2 of Article 10 (2) of the proposed Agreement

states:

2. Notwithstanding the suspension, termination or

expiration of this agreement or any cooperatio n

hereunder for any reason, the provisions of article

5,6,7 , and 8 shall continue in effect so long as

any material, facility or components subject to

these articles remain in the territory of the party

concerned or any material, facility or components

subject to these articles remain subject to that

party’s right to exercise jurisdiction or to direct

disposition elsewhere.

Article 5 deals with retransfers, reprocessing, enrichment,

alteration and no use for military purposes. This article is

examined in detail in the analysis of subparagraphs 3, 5, 7,

and 8 of 123 a. Article 6 deals with physical security and

is examined under the analysis of subparagraph 6 of 123 a.

Article 7 states in pertinent part:

If either party at any time following entry into

force of this agreement does not comply with the
101

provisions of this agreement, the parties shall

promptly hold consultations on the problem, It being

understood that the other Party shall have the right

to cease further cooperation under this agreement.

Finally., Article 8 states:

1. The parties shall consult at the request of

either party regarding the implementation of this

agreement, the development of further cooperation in

the field of peaceful uses of nuclear energy, and

other matters of mutual concern.

2. The parties recognize that this cooperation in

the peaceful use of nuclear energy is between two

nuclear-weapon states and that bilateral safeguards

are not required. In order to exchange experience,

strengthen technical cooperation between the parties,

ensure that the provisions of this agreement are

effectively carried out, and enhance a stable,

reliable, and predictable nuclear cooperation relationship, in connection with transfers of material,

facilities and components under the agreement the

parties will use diplomatic channels to establish

mutually acceptable arrangements for exchanges of

information and visits to material, facilities and

components subject to the agreement.

3. The parties shall exchange views and information

on the establishment and operation of their respective

national accounting and control systems for source

and special nuclear material subject to this agreement.

Thus, Article 10 of the proposed agreement would apply

U s. rights regarding retransfer, storage, reprocessing,

enrichment, alteration, physical security, exchanges of

information and visits and the Chinese guaranty against

military or explosive use irrespective of the duration of

other provisions in the agreement or “whether the agreement is

terminated or suspended for any reason.

The right set forth in Article 8 for the United States

to conduct visits to material, facilities and components

subject to the proposed Agreement is an important means of

assuring that the provisions of the proposed Agreement are

carried out, in particular, the Chinese guaranty against

military or explosive use. Indeed, Article 8 specifically

states that one of the purposes of visits is to ensure that

the provisions of the proposed Agreement are effectively

carried out. Moreover, Article 8 states that visits shall be

arranged “in connection with transfers” of items under the

proposed Agreement. Mutually acceptable arrangements on

visits will be established before exports under the

proposed Agreement are approved. Also valuable for the
102

(3) No Military or Explosive Use

Subparagraph ( 3 ) of Section 123 a . requires:

“a guaranty by the cooperating party that no nuc1ear

materials and equipment or sensitive nuclear technology

to be transferred pursuant to such agreement, and no

special nuclear material produced through the use of

any nuclear materials and equipment or sensitive

nuclear technology transferred pursuant to such

agreement, will be used for any nuclear explosive

device, or for research on or development of any

nuclear explosive device, or for any other military

purpose;”

Article 5 meets this requirement wherein China guarantees

that:

“Material, facilities or components transferred

pursuant to this agreement and material used in or

produced through the use of any material, facilities

or components so transferred shall not be used for

any nuclear explosive device, for research specifically

on or development of any nuclear explosive device,

or for any military purpose.”

There is no reference to sensitive nuclear technology because, as noted above, Article 2(4) of the proposed Agreement

provides that an amendment is required before sensitive

nuclear technology could be transferred under the proposed

Agreement.

During the negotiations, China sought assurance that the

agreement did not affect its right, as a nuclear weapon state,

to conduct nuclear explosive activities using materials,

facilities, components, and technology that are not subject

to the proposed Agreement. The Agreed Minute provided such

assurance as follows:

Both parties agree that the interpretation and

implementation of article 5(3) shall not involve any

nuclear activities and related research and development

carried out by either party, as a nuclear weapon

state, through the use of material, facilities,

components and technology not subject to the agreement.

104

( 6) physical Security

Subparagraph (6) of section 123 a. requlres:

"a guaranty by the cooperating party that adequate

physical security will be maintained with respect to

any nuclear material transferred pursuant to such

agreement and with respect to any special nuclear

material used in or produced through the use of any

material, production facility, or utilization facility

transferred pursuant to such agreement;"

Article 6(1) of the proposed Agreement meets this require -

ment by providing a guaranty by China tha t

"adequate physical security shall be maintained with

respect to any material and equipment transferred to

and under its jurisdiction pursuant to this agreement

and with respect to any special nuclear material

used in or produced through the use of any material

or equipment transferred to and under its jurisdiction

pursuant to this agreement.”

With respect to the meaning of “adequate,” Section 127(3)

of the Atomic Energy Act, as added to the law by Section 305

of the NNPA, provides that physical security measures shall

be deemed adequate if they provide a level of protection

equivalent to that required by regulations promulgated by the

NRC establishing levels of physical security (see NNPA Section

304(d) and 10 CFR 110.43).

The balance of Article 6 and Annex II to the proposed

Agreement contain implementing provisions, such as a description of the levels of physical security contemplated and

measures to be taken. These provisions are consistent with

the Guidelines for Nuclear Transfers published by the IAEA in

February 1978 and the above-mentioned NRC regulations.

Article 6(3) permits the United States to consult with

China concerning the adequacy of physical security measures

in China, and, in accordance with Article 6(4), the Chinese

authorities responsible for physical security will be made

known to the United States. These provisions will facilitate

cooperation between the United States and China on physical

security matters of mutual interest, and will also enhance

U s. ability to be assured as to the level of physical protec -

tion being maintained .
1 0 5

"a guaranty by the cooperatinq party that no material

transferred pursuant to the agreement for cooperation

and no material used in or produced through the use

of any material, production facility, or utilization

facility transferred pursuant to the agreement for

cooperation wi1l be reprocessed, enriched or (in the

case of plutonium? uranium 233, or uranium enriched

to greater than twenty percent in the isotope 235,

or other nuclear materials which have been irradiated)

otherwise altered in form or content without the

prior approval of the United States;"

This criterion contains several restrictions. First,

U s . approval must be obtained prior to any reprocessing of

material supplied under a new or amended agreement or of any

material produced from such material or produced or used in a

production or utilization facility so supplied (e.g., a

reactor). Second, such approval must be obtained for enrichment, after export, of any uranium supplied under a new or an

amended aqreement. Third, such approval must be obtained for

any alteration of weapons useable material or irradiated

nuclear material which has either been supplied under a new

or an amended agreement or produced from such material or

used in any such equipment so supplied.

Paragraph 2 of Article 5 of the proposed Agreement states:

Neither party has any plans to enrich to twenty

percent or greater, reprocess, or alter in form or

content material transferred pursuant to this

aqreement or material or facility so transferred.

Neither party has any plans to change locations for

storage of plutonium, uranium 233 (except as contained in irradiated fuel elements), or hiqhly

enriched uranium transferred pursuant to this

agreement or used in or produced through the use

of any material or facility so transferred. In

the event that a party would like at some future

time to undertake such activities, the parties

will promptly hold consultations to agree on a

mutually acceptable arrangement. The parties

undertake the obligation to consider such activities

favorably, and agree to provide pertinent information on the plans during the consultations.

Inasmuch as any such activities will be solely for

peaceful purposes and will be in accordance with

the provisions of this agreement, the parties will

consult immediately and will seek agreement within
106

.

The first sentence in Article 5(2) states neither party

intends to engage in any of the activities specified in

Section 123 a. (7). Should China in the future desire to

undertake reprocessing, enrichment or other alteration,

consultations will be held to establish long-term arrangements

for such activities and the United States has agreed to

“consider such activities favorably. ” No reprocessing,

enrichment or alteration will be conducted during the period

that such consultations are underway. If no long–term arrangements are agreed within six months of the initiation of

consultations , the parties will consult on measures tha t

would allow such activities on an interim basis. China

agrees to refrain from any reprocessing, enrichment or altera–

tion if the United States believes such activities “would

prejudge the long-term arrangements for undertaking such

activities or adversely affect cooperation” under the proposed

Agreement. Although set forth in two stages, the text of

Article 5(2) clearly precludes, for the first phase, any

reprocessing, enrichment or alteration while seeking to

establish long-term arrangements for such activities. During

the second phase when the United States and China are seeking

to make interim arrangements, the Chinese cannot undertake

reprocessing, enrichment or alteration if the United States

objects on grounds that such activity “would prejudge the

long–term arrangements or adversely affect cooperation.” Thus

China cannot unilaterally proceed with reprocessing enrichment

or alteration in the face of U.S. objection. Article 5(2)

accordingly satisfies the criterion of subsection 7 of Section

123 a.
1 0 7

—

The proposed Agreement authorizes retransfer of only

small quantities of plutonium, uranium 233 or uranium enriche d

to greate r than 20 percent in the isotope 235.

Article 4(1) provides:

“Any special nuclear material to be transferred

under this agreement shall be low enriched

uranium except as provided in paragraph 4 of

this article. ”

Article 4(4) states:

4. Small quantities of special nuclea r

material may be transferred for use as

samples , standards , detectors , targets ,

radiatio n sources and for such othe r

purposes as the parties may agree .

“(i) plutonium, uranium 233, or Uranium enriched

in the isotope 235, or (ii) any other material so

designated by agreement of the par ties. ”

The proposed Agreement addresses any change in storage

location for such small quantities of uranium 233, uranium

enriched greater tha n 20 percent. in the isotope 235 or plutonium i n the same manner as it addresses reprocessing, enrichment.

or other alteration . (All these subjects are dealt with in

paragraph 2 of Article 5 of the proposed Agreement which is

set forth on page II-8 of this Assessment Statement. ) As wit h

reprocessing , enrichment or other alteration , China ha s

agree d not to undertak e any chang e in storag e location whil e

the Parties ar e seekinq to establish long–term arrangements

for such storage. During the second phase while the Partie s

are seeking interim arrangements, the Chines e cannot change
108

the location for storage of the specified materials if th e

United States objects . Thus, U.S. approval for any change in

storage locations for these materials is guaranteed.

The proposed Agreement contains a phrase excluding pluto–

nium or uranium 233 in irradiated fuel elements from the

approval requirements for changes in storage locations. This

follows the approach set forth in other agreements for cooperation that the United States has entered into with othe r

countries . This exclusion is consistent with the storag e

criterion in the Atomic Energy Act because it is designed to

cover material directly useable in nuclear explosives.

(Senate Report 95-467, pp. 22, 52-53. )

The proposed Agreement does not deal with initial storage

locations, only changes in storage locations after the listed

materials have been received. Normal practice with respect

to the exports of the small quantities of the material specified

in section 123(a)(7) includes specifying the storage location

for such materials. Thus, at all times, storage locations

will be approved by the United States.

( 9 ) Sensitive Nuclear Technology

Subparagraph (9) of Section 123 a. requires:

“a guaranty by the cooperating party that’ any

special nuclear material, production facility, or

utilization facility produced or constructed under

the jurisdiction of the cooperating party by or

through “the use of any sensitive nuclear technology

transferred pursuant to such agreement for

cooperation will be subject to all the requirements

specified in this subsection.”

Article 2(4) of the proposed Agreement provides that an

amendment shall be required for any transfer of sensitive

nuclear technology? sensitive nuclear facilities, or major

critical components. Since the guaranty required by this

criterion relates only to material or facilities produced or

constructed through the use of sensitive nuclear technology

transferred under the proposed Agreement, it is inapplicable

to the proposed Agreement unless and until it is amended to

provide for the transfer of such technology.

c. NNPA Section 402 -- Additional Requirements

Section 402(a) contains additional enrichment

controls quoted and discussed below.

“Except as specifically provided in any

agreement for cooperation, no source or

special nuclear material hereafter exported
109

from the United States may be enriched after

export without the prior approval of the

United States for such enrichment;”

Article 5(2) of the proposed Agreement, which deals with

this restriction, is discussed above. By limiting the need

to obtain U.S. consent to enrichment of twenty percent or

greater in the isotope 235 , the United States is approvin g

enrichment up to twenty percen t of material subject to th e

proposed Agreement.

Section 402(a) further requires that:

“[N]o source or special nuclear material

shall be exported for the purpose of

enrichment or reactor fueling to any

nation or group of nations which has,

after the date of enactment of this Act,

entered into a new or amended agreement

for cooperation with the United States,

except pursuant to such agreement.”

AS applied to the present case, this provision means that

after entry into force of the proposed Agreement, no U.S.

source or special nuclear material can be exported to China

for enrichment or reactor fueling except pursuant to the

proposed Agreement. This will foreclose transfers of source

material for such purposes outside an agreement for cooperation,

which would otherwise be possible under Section 64 of the

Atomic Energy Act.

section 402(b) of the NNPA provides that:

“In addition to other requirements of

law, no major critical component of any

uranium enrichment, nuclear fuel

reprocessing , or heavy water productio n

facility shall be exported under an y

agreemen t for cooperation ...unless suc h

agreement for cooperation specifically

designates such components as items to be

exported pursuant to the agreement for

cooperation.”

Article 2(4) of the proposed Agreement provides that

there may be no transfer under the proposed Agreement of a

“sensitive nuclear facility” -- defined in Article 2(14) to

include uranium enrichment, reprocessing, and heavy water

production facilities as well as facilities for the fabrication of nuclear fuel containing plutonium –– or “major critical

components” as defined in Article 2(16), unless the proposed

Agreement is amended.
1 1 0

—

D. NNPA Section 307 -- Conduct Resulting in

Termination of Nuclear Exports

Section 307 added Section 129 to the Atomic Energy Act,

which prohibits nuclear exports to nations which engage i n

certain proscribed activities . The activities in Section 12 9

are those which are directly related to weapons acquisitio n

or which could have a weapons- related motivation. Based on

available information, it is believed that a finding under

Section 129 that would preclude nuclear exports to China

under the proposed Agreement is not warranted.

E. NNPA Section 309 -- Components, Items and

Substances

Section 309 of the NNPA amended Section 109 of the Atomic

Energy Act to authorize the NRC to determine that certain

component parts, items and substances, because of their

significance for nuclear explosive purposes, should be subject

to its licensing authority. For such licenses, the NRC must

find that the following criteria or their equivalent are met :

“(l) IAEA safeguards as required by Article

III(2) of the [NPT] will be applied with

respect to such component, substance, or

item; (2) no such component, substance, or

item will be used for any nuclear explosive

device or for research on or development of

any nuclear explosive device; and (3) no

such component, substance or item will be

retransferred to the jurisdiction of any other

nation or group of nations unless the prior

consent of the United States is obtained for

such retransfer.”

The NRC promulgated regulations on May 19, 1978 (10 CFR

Part 110) which identified certain reactor components and two

substances -- heavy water and nuclear graphite (moderator

materials) -- the export of which would be subject to these

criteria. In the case of China, the first criterion is met

because Article III(2) of the NPT only requires IAEA safeguards

on exports to non-nuclear weapon states. The second criterion

(no explosive use) is met by the language in Article 5(3) .

The third criterion (retransfer) can be met by having components

and moderator material identified as being exported under the

proposed Agreement, in which case Article 5( 1) would apply.

(The Atomic Energy Act does not require that such exports be

transferred under an agreement for cooperation; however, the y

may be so transferred. )
111

111. OTHER NON-PROLIFERATION ISSUES

Any decision by the United States to engage in nuclear

cooperation with another nation can raise a number of nonproliferation policy issues in addition to questions about

the legal rights, guarantees, and safeguards contained in

the applicable agreement for cooperation. These issues will

vary from case to case. They could involve, for example,

the scope of the cooperation envisaged under such an agreement, the precedential implications of particular provisions

of such an agreement, the degree to which extending nuclear

cooperation may foster other non-proliferation interests, or

the general role of the state concerned in non-proliferation

efforts. This part of the assessment statement addresses

those policy issues which relate to the proposed Agreement.

A. China's Non-Proliferation Polic y

The central policy issue concerns the relationship

of the proposed Agreement to China’s non-proliferation policy.

As outlined in Part I, over the recent past China has come

to accept the most critical norms and practices at the heart

of efforts to prevent the spread of nuclear explosives to

additional countries. China joined the IAEA, stated that it

would require safeguards on its exports to non-nuclear weapon

states, and committed itself not to help other countries

acquire nuclear explosives. Those positive and welcome steps

went hand-in-hand with China’s interest and activities in

obtaining foreign assistance for its civil nuclear program.

During the talks, the US made clear that a shared understanding on non–proliferation was essential to provide a

framework for assistance to China’s peaceful nuclear program.

Discussions with other countries, including the United States,

on nuclear cooperation also provided an opportunity for substantial exchanges on non-proliferation issues, practices,

and norms, These exchanges elevated the political importance

of this issue, and created a better understanding by the PRC

of the significance of certain non-proliferation principles

and practices.

As a nuclear–weapon state, China has demonstrated that

it has the technological and scientific ability to build a

nuclear bomb and the capability of producing weapons-usable

fissile material . Until recently, it had announced no policies

against assisting another state to acquire nuclear explosives .

China is not a party to the Nuclear Non-Proliferation Treat y

which contains obligation s not to assist non-nuclear-weapo n

states in the manufacture or acquisition of nuclear explosives.
112

Thus, the potential for great harm to global non-proliferation

efforts and barriers has been present.

Since January 1984 China made a series of statements

stressing that its policy is not to assist other to acquire

nuclear weapons.*

Discussions with China that have taken place since the

initialing of the proposed Agreement have contribute d

significantly to a shared understanding with China on wha t

it means not to assist other countries to acquire nuclea r

explosives , and in facilitating China's steps to put al l

these new policies into place .

Thus, ACDA believes that the statements of policy by

senior Chinese officials, as clarified by these discussions,

represent a clear commitment not to assist a non-nuclearweapon state in the acquisition of nuclear explosives. On

the basis of the discussions with the PRC, the United States

can expect that China’s policy of not assisting a non-nuclearweapon state to acquire nuclear explosives will be implemented

in a manner consistent with those basic non-proliferation

practices common to the United States and other major suppliers.

This commitment applies to all future Chinese assistance.

Moreover, the Chinese are fully ‘aware of the importance of

their non-proliferation policies to future US-China nuclear

relations. They know that should we find out about any action

inconsistent with these basic non-proliferate on measures,

including requiring IAEA safeguards on nuclear exports, we

would not go forward with exports until the matter were

resolved satisfactorily.

In joining the IAEA, China will be able to participate

in implementing the basic principles of that Agency which

include efforts to prevent the spread of nuclear explosives.

China’s presence in that international forum also will bring

it into contact with other countries that support a strong

non-proliferation and safeguards regime.

Because US-China peaceful nuclear cooperation must rest

on shared principles of non-proliferation , it will be importan t

for the United States to consult regularly with China o n

non-proliferation issues . We will also pay close attention

to China’s actions in this area. The United States has made

*See pages 4-5 of part 1“
113

clear to China chat US-Chinese nuclear cooperation rests on

strict adherence to these principles and common basic practices.

The proposed Agreement will provide a basis for further

consultations between the United States and China on

non-proliferation. These consultations can strengthen the

mutual commitment to shared non-proliferation principles and

establish a framework for cooperation in this area. Over

time, such consultations may lead to further improvements in

China’s non-proliferation policies.

The United States has been cautious in cooperating with

countries that are not parties to the Nuclear Non-Proliferation

Treaty, given the importance of the Treaty in promoting

non-proliferation. No such cooperation should be concluded

in the absence of significant non-proliferation benefits.

ACDA believes that the proposed Agreement meets this test.

In summary, as a country outside the non-proliferation

regime, China posed a serious potential risk to international

non-proliferation efforts. China has now declared its opposition to proliferation and taken concrete steps toward global

non-proliferation norms and practices. Along with the discussions with other countries, the prospect of the proposed

Agreement played an important role in bringing about this

evolving attitude on the part of China.

B. “Consultations and Visits”

As noted in Part II, the proposed Agreement meets

all of the requirements of US law, including a pledge that

material and equipment subject to the agreement will not be

used for nuclear explosives or any military purpose. The

provisions of the proposed Agreement which relate to the

ability of the United States to verify this assurance ar e

unique and recognize that China is a nuclear-weapon state .

The United States is not obligated, either by domestic

law or by the nuclear export provisions of the Nuclear NonProliferation Treaty, to condition nuclear exports to nuclearweapon states on the acceptance of IAEA safeguards . Eve n

s o , the United States did seek Chinese acceptance of IAE A

safeguards on US supply under the agreement, but the Chines e

adamantly refused - - as they have to date with other nuclear -

weapon states . (The Chinese reportedly did agree to IAEA

safeguards on any “sensitive” assistance they receive from

the UK. The US-China agreement does not permit cooperation

in those areas defined a s “sensitive nuclear technology ”

under US law, nor in other ‘sensitive ” areas such as exports

of significant quantities of highly enriched uranium or

plutonium.)
114 .

Acceptance of IAEA safeguards by nuclear-weapon states

can serve to minimize discrimination against non-nuclea r

weapon states<, and thus can help to sustain broad political

support for international non-proliferation institutions

such as the IAEA safeguards system. For that reason, the

United States, United Kingdom, France, and the Soviet Union

have all voluntarily permitted the IAEA to apply its safeguards

on at least some of their respective civil nuclear facilities.

As noted above, it appears China has agreed in principle to

accept IAEA safeguards on imports from certain non-nuclearweapon states. As a practical matter, however, there are no

such safeguards yet applied in China.

Article 8 of the agreement provides for “mutually acceptable arrangements for exchanges of information and visits”

in connection with transfers under the agreement. These

arrangements will be established through diplomatic channels

prior to the licensing by the United States of nuclear exports

under the agreement, and will include provision for exchanges

of information and visits by US personnel to relevant sites

in China where US material or equipment subject to the agreement is located. The United States and China will also

exchange views and information on their respective national

accounting and control systems for nuclear material subject

to the agreement.

The scope of cooperation permitted by the proposed Agreement also is important when considering provisions related

to verification. Cooperation under the agreement is limited

to reactors, their major components, and low enriched uranium

fuel. As noted previously, it does not authorize the export

of more than gram quantities of plutonium and highly enriched

uranium, nor does it authorize the export of sensitive facilities capable of producing such material. A separate agreement --

including Congressional review -- would be necessary to

authorize the transfer of such items. Moreover, as described

below, mutually agreed arrangements for reprocessing are

provided in the agreement.

As a nuclear-weapon state, China has nuclear facilities

dedicated to the production of fissile material for nuclear

weapons. Any effort by China to divert material from a civil

facility for military purposes would result in the termination

of any US assistance to China’s civil nuclear program, and

in all probability that of other foreign suppliers as well.

Both factors reduce any incentive for China to divert material

or equipment from its civil program.

Given these circumstances, ACDA believes that the provisions of the proposed Agreement are adequate to provide

confidence against the misuse of any items subject to the

proposed Agreement . ACDA has considerable experience i n
115

designing systems aimed at deterring the diversion of any

nuclear material from peaceful to military uses, and expects

to participate actively with other relevant agencies in establishing the mutually acceptable arrangements in connection

with proposed exports under the agreement.

c. Consent Rights ,

As noted in Part II, ACDA believes that the relevant

provision in the proposed Agreement (Article 5, paragraph 2)

satisfies the statutory requirement of US consent rights

over certain fuel cycle activities, including reprocessing.

The Chinese have stated that they have no plan to undertake

reprocessing of spent fuel from power reactors for at least

fifteen years. In fact, there is no existing facility in

China capable of reprocessing such fuel.

Should China desire to undertake any of these activities,

the United States and China will attempt to reach agreement

within six months on long-term arrangements to govern the

conditions for such activity. These long-term arrangements

could take many forms.

In particular, ACDA believes that in connection with

any future discussions on long-term arrangements and the

possible exercise of the United States consent rights over

reprocessing, it will be important to ensure that the procedures called for under Article 8 are adequate to help verify

that any separated plutonium is being used consistent with

the provisions of the agreement. Any procedures for information exchange and visits previously agreed for the transfer

of reactors and low enriched uranium fuel may not be sufficient for separated plutonium. However, the provisions of

the proposed Agreement are fully adequate to ensure that

such arrangements are agreed before any reprocessing takes

place. ACDA fully supports the outcome on consent rights;

it solved the last major obstacle in the negotiations prio r

to the April 1984 initialing, and preserved the significant

non-proliferation benefits of the proposed Agreement.

D. Summary

The proposed Agreement is unique in comparison to

other agreements for cooperation concluded since the Nuclear

Non-Proliferation Act. It is the first such agreement with

a nuclear weapon state since the passage of that Act. Further,

China had only recently accepted the basic norms and practices

of non-proliferation . An appreciation of this context is

essential in making a balanced judgment on the non-proliferation

benefits of the proposed Agreement.
116

China’s desire to obtain foreign assistance for it s

civil nuclear program provided an opportunity for substantial

discussions with the United States and other suppliers on

the major features of the non-proliferation regime . Moreover ,

the prospect of assistance was a major incentive for con -

siderable evolution of China's position on non-proliferation .

China has joined the IAEA, and stated that it will require

IAEA safeguards on its nuclear exports. China has committed

itself not to assist other countries to acquire nuclear

explosives. And the United States can expect that China’s

policy of not assisting a non-nuclear-weapon state to acquire

nuclear explosives will be implemented in a manner consistent

with those basic non-proliferation practices common to the

United States and other major suppliers. The Chinese are

also fully aware that their continued support for and effective

implementation of these basic practices is a sine qua non

for US nuclear cooperation under the proposed Agreement.

Entry into force of the proposed Agreement would contribute importantly to the ability of the United States to

continue working with China in non-proliferation. The agreement=

not only recognizes the evolution in China’s non-proliferation

policies, but also provides a framework for continued exchanges

in this area.
117

IV. CONCLUSIONS

On the basis of the analysis in this assessment statement

and all pertinent information of which he is aware, the Director

of the United States Arms Control and Disarmament Agency

has:

o concluded that the proposed Agreement meets all of

the substantive requirements in the Atomic Energy Act and

the NNPA applicable for new or amended agreements for

cooperation.

o reached a favorable net assessment of the adequacy

of the provisions of the proposed Agreement to ensure that

any assistance furnished thereunder will not be used to

further any military or nuclear explosive purpose.

o concluded that execution of the proposed Agreement

would advance the non-proliferation program, policy, and

objectives of the United States; and

o joined in the recommendation of the Secretary of

State and the Secretary of Energy that the president determine

that the performance of the proposed Agreement will promote,

and will not constitute an unreasonable risk to, the common

defense and security, and that the president approve and

authorize the execution of the proposed Agreement.