Technology Transfer to China

July 1987

NTIS order #PB86-113008
Recommended Citation:

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

OTA-ISC-340 (Washington, DC: U.S. Government Printing Office, July 1987).

Library of Congress Catalog Card Number 87-619823

For sale by the Superintendent of Documents

U.S. Government Printing Office, Washington, DC 20402-9325

(order form on p. 245)
Foreword

Momentous changes continue to occur in China. The high priorities now accorded economic modernization and improved global relationships present a sharp

contrast to the years of the Cultural Revolution and earlier. Yet there is great

uncertainty over China’s future course. China may be a constructive trading and

strategic partner, or it may choose a more divergent path. U.S. decisions on technology transfer will be an important determinant of which path is followed and

the implications for the world.

This report responds to requests from the House Committee on Energy and

Commerce and the Senate Committee on Banking, Housing and Urban Affairs

for an assessment of the economic and strategic implications of technology transfer to the People’s Republic of China and of Congressional actions that would affect it. In addition, the Senate Select Committee on Intelligence endorsed the study

request.

The first phase of this study focused on energy. A Technical Memorandum,

Energy Technology Transfer to China, was released in September 1985, and proved

useful in the Congressional debate on the nuclear cooperation agreement.

This document analyzes the factors in China that affect technology transfer

and will be affected by it. The experiences of U.S. and foreign companies in the

China market are described. We discuss the evolution of China’s economy, polity

and foreign policy, and how different expectations suggest different policies for

the U.S. Government.

In the course of this assessment, OTA drew on the experience of many organizations and individuals. We appreciate the assistance of the project contractors

who prepared much of the background analysis, the U.S. Government agencies

and private companies who provided much valuable information, the Chinese institutions which facilitated the visits of our researchers, the project’s advisory

panel and workshop participants who provided guidance and review, and the many

additional reviewers who helped ensure the accuracy and objectivity y of this report.

Director

.,. ///
International Security and Commerce Program

Technology Transfer to China Advisory Panel

Robert Dernberger, Chairman

Director, Center fo~Chinese Studies

The University

A.DoakBarnett

Professor, School for Advanced

International Studies

The Johns Hopkins University

Gareth Chang

President

McDonnell Douglas China Inc.

Chauncey Chu

Vice President of Manufacturing

Wang Laboratories, Inc.

Bo Denysyk

Vice President, International Affairs

Global U. S. A., Inc.

Basil K. Fox

Bechtel China Inc.

Admiral Thomas Hayward, USN (ret.)

President

Hayward Associates

Richard Holton

Professor, School of Business

Administration

University of California

Morton Kaplan

Professor, Department of Political Science

University of Chicago

of Michigan

Arthur A. Klauser

Senior Vice President

Mitsui & Co. (USA) Inc.

Stanley Lubman, Esq.

Heller, Ehrman, White & MacAuliffe

Charles Lucy

Director, International Operations

Corning Glass Works

Bruce Lusignan

Professor of Electrical Engineering

Stanford University

Leo A. Orleans

China Consultant

Library of Congress

Professor William Parrish

Director, Center for Far Eastern Studies

University of Chicago

Vaclav Smil

Professor of Geography

University of Manitoba

Roger Sullivan

President

National Council for U.S.-China Trade

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

OTA assumes full responsibility for the report and the accuracy of its contents.

iv
OTA Project Staff

Lionel S. Johns, Assistant Director, OTA

Energy, Materials, and International Security Division

Peter Sharfman, International Security and Commerce Program Manager

Alan T. Crane, Project Director

Eric O. Basques: U.S. Commercial Experiences, Military Technology

Martha Caldwell Harris: U.S. Policy, Multinational and Strategic Issues

Richard Peter Suttmeier: China’s Context, Trends, and Foreign Policy

Contributors

Craig Allen Matthew J. Bryza Joanne Seder

Administrative Staff

Alan Shaw Franklin Zweig

Jannie Coles Cecile Parker Jackie Robinson

In Memorium

Dottie Richroath

Contractors

Thomas Fingar

William A. Fischer

Paul Folta

Thomas W. Robinson

Denis Simon

Kathryn Van Wyk

China Business Development Group

Global Associates, Ltd.

Midwest China Center

Rock Creek Research, Inc.

Science Applications International Corp.
Workshop on China’s Future Course, July 28-29, 1986

Parris Chang

Professor of Political Science

Pennsylvania State University

John Davie

Economic Analyst

Central Intelligence Agency

David Denny

Assistant Director of Research

National Council for U.S.-China Trade

Professor June Teufel Dreyer

Director of East Asian Programs

Graduate School of International Studies

University of Miami, Coral Gables

Michael Field

Central Intelligence Agency

Thomas Fingar

U.S. Department of State

Harry Harding

Senior Fellow

The Brookings Institution

Ambassador Arthur W. Hummel (ret.)

Consultant

Albert Keidel

President

Rock Creek Research

Acknowledgments

Government Agencies

The Department of Commerce

The Department of State

The Department of Defense

The Department of Transportation

The Export-Import Bank

The Congressional Research Service

The General Accounting Office

Companies

General Electric

RCA-Astro Electronics

American Motors Corp.

Hewlett Packard

Control Data Corp.

Foxboro Co.

McDonnell Douglas Corp.

Martin Lasater

Director, Asian Studies Center

The Heritage Foundation

Bruce Lusignan

Professor of Electrical Engineering

Stanford University

Ramon Myers

Curator/Scholar, East Asian Collection

Hoover Institution

Douglas H. Paal

Director of Asian Affairs

National Security Council

Melvin Searles

Deputy Assistant Secretary for East Asia and

the Pacific

U.S. Department of Commerce

James Stoll

Defense Intelligence Agency

Jeffrey R. Taylor

Chief Economist, China Branch

Center for International Research

U.S. Bureau of the Census

Lt. Col. Eden Y. Woon, USAF

Office of Joint Chiefs of Staff

U.S. Department of Defense

Institutes

The Committee on Scholarly Communication

with the Peoples’ Republic of China

The National Council on U.S.-China Trade

The East-West Center

The American Society of Mechanical Engineers

Embassies and Foreign Governments

The People’s Republic of China

Japan

Federal Republic of Germany

France

United Kingdom

The many companies which responded to the

OTA survey.

vi
Contents

Chapter Page

I. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2.The Chinese Context for Technology Transfer: The Economic Issues . . . . 21

3. The Chinese Context for Technology Transfer: Strategies and Issues for

Technology Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

4.The Role of the United States in Technology Transfer to China . . . . . . . . . . 69

5. Policies of Other Supplier Countries: Japan, France, West Germany,

and Britain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115

6. China’s Economic and Political Trends . . . . . . . . . . . . . . . . . . . . . ...........147

7. Strategic Implications of a Modernizing China . . . . . . . . . . . . . . . . . . . . .167

8.U.S. Policy Choices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......197

vii
Chapter 1

Summary

Photo credit: Er{c Basques

Bronze Crane in the Forbidden City in Beijing.

The crane is a legendary symbol of long life,
CONTENTS

Page

China’s Need for Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

The U. S. Role in Technology Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Economic and Political Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Strategic Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

U.S. Policy Choices.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Figures

Figure No. Page

I. Processing Time For Referred (Closed Out) Cases . . . . . . . . . . . . . . . . . . . 15

Z. Average Processing Times: China Nonreferred All China Cases . . . . . . . 15

Table

Table No. Page

l. Anti-Submarine Warfare Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Chapter 1

Summary

A billion people! If they each buy just one . . .

If we give them technology, they’ll be just like Japan . . .

In a country that can launch satellites, why is the plumbing so bad . . .

All they want is technology, and they expect miracles from it . . .

It’s completely different now. It’s hardly even Marxist . . .

So where are all those Red Guards now? Aren’t they just waiting . . .

If we don’t sell it to them, France or Japan will . . .

They’ll pin down the Russians on the Eastern front . . .

How do we know they won’t use it against Taiwan-or us . . .

There’s a lot we can learn from them . . .

China evokes countless, often contradictory,

expectations and impressions. What is clear

is that China will become increasingly important to the United States over the next several decades. Its impressive economic growth

in recent years, if continued, will propel it into

the ranks of the newly industrialized economies

of Asia—Taiwan, South Korea, Hong Kong,

and Singapore—but eventually on a much

larger scale. International trading patterns are

likely to change dramatically as China increases both imports and exports. China will

also acquire increasing political influence in

world affairs as its economic, technological,

and military strengths grow. U.S. interests in

Asia will be profoundly affected by China’s international role, including its relations with the

Soviet Union, Taiwan, and other neighbors.

As important as these developments are,

the U.S. ability to influence them is limited.

China’s economic growth is much more dependent on internal Chinese factors than on any

U.S. actions, and China will play its international role on the basis of its own perceived

best interests. What the United States can do

is reinforce China’s constructive choices and

trends, and protect itself against the risk that

Sine-American interests will again diverge.

One of the most important influences that the

United States has is technology transfer. China

recognizes the need to acquire new technology

and new capabilities in its efforts to modernize and expand its economy. This need was one

of the main reasons for ending its self-imposed

isolation and for opening itself to the West in

the 1970s. The United States benefits insofar

as China is a strategic asset, if not an ally, in

the global competition with the Soviet Union.

Technology transfer helps build these ties and

increases China’s strength vis-a-~vis the Soviet

Union. It also can lead to important commercial ties and to the export of American products. In addition, China is still a very poor

country, and technology transfer can be an important element in humanitarian efforts to help

a billion people move out of poverty.

U.S. policy toward China for the past 10

years has been predicated on the assumption

that closer relations are generally beneficial

but that caution must be exercised in the transfer of advanced, sensitive technology. This policy has had some success: China has played

a more constructive international role, and

many areas of common interest (reportedly including sensitive intelligence gathering) have

been found. Trade has also become significant.

With so much gained, some ask whether further steps are warranted—in particular,

whether the United States should make greater

efforts to help China modernize through technology transfer.

However, the reasons for caution have not

been eliminated, and some observers feel that

U.S. policy has gone too far: that China is a

3
4 ● Technology Transfer to China

potential adversary, with an alien ideology and

an unstable, unpredictable political system.

Others see China as a newly industrializing

country that is rapidly upgrading its production technology and aggressively seeking international markets, becoming another, potentially much more powerful, Japan or Korea.

Both views suggest great caution with respect

to technology transfer.

It is the intent of this assessment to put

these views into perspective and to contribute to a reexamination of U.S. policy toward

China. The assessment evaluates the economic,

political, and strategic implications of technology transfer to China in the context of China’s

capabilities and evolution. It reviews the U.S.

commercial and governmental role in technology transfer, and the policies and practices of

other countries. It asks whether the application of U.S. policy has been consistent with

the overall guidelines, and analyzes policy options for Congress in the areas of export control,

trade promotion, and military cooperation.

As used in this assessment, technology transfer is a process whereby a government, company, or institution provides the information

necessary for China to improve its capability

—

to design or produce goods or services. It may

or may not involve the sale of equipment, but

it almost always involves exchanges of information between people. Technology transfer

may involve the transfer of sophisticated

equipment, training in its use and maintenance, and information on design or manufacture. Indirectly, it may include the teaching

of technology and management in universities.

Commercial technology transfer can be accomplished through sales of equipment or expertise, licensing agreements, direct sales of information, or investments in China. The U.S.

Government transfers technology by granting

access to information (e.g., the U.S. National

Technical Information Service) and through

agency-to-agency agreements.

Technology transfer can provide some of the

keys China needs to meet its modernization

goals. Modernization, in turn, will enhance

China’s position as an exporter and will eventually enhance China’s military strength. The

positive and negative implications for the

United States can be estimated only imperfectly. The following sections summarize the

critical factors.

CHINA’S NEED FOR TECHNOLOGY

China has considerable technological capability already, especially compared with that

of other developing countries, but progress has

been very uneven. Military industries in particular have been favored with priorities for

investments and personnel. Some of these industries have developed “pockets of excellence” that can compete in world markets. For

example, China has built and launched its own

experimental communication satellites and has

offered to launch foreign satellites. The military sector has now been ordered to help the

civilian sector, especially since many military

factories are underutilized because of the recent lowering of defense budgets. If this expertise can be used effectively, it may have a substantial impact on civilian production and

exports.

Much of China’s civilian technology is outof-date, if not obsolete. The Seventh Five-Year

Plan (1986-90) has set the acquisition of technology as a high priority, especially in the fields

of transportation, electronics and computers,

telecommunications, and energy. The plan calls

for importing much of this technology. One of

the “Four Modernizations”-the policy program for development–was to raise the level

of science and technology. The others—agriculture, industry, and defense—also to a large

degree depend on improvements in technology.

Some of these improvements could be accom-
-.

plished by the purchase of modern equipment

without technology transfer, but China has

limited funds for imports. China could develop

some technologies independently, but in general this would be much slower and less efficient than acquiring them from abroad.

China has ambitious goals, including a quadrupling of the 1980 industrial and agricultural

output by year 2000. Progress so far has been

above that rate (about 7 percent), primarily because a loosening of controls has freed a latent

strength in the economy. New technology has

made only a minor contribution but will be of

increasing importance in the future. Goals for

economic growth will not be met without improved technology to modernize industry and

to alleviate constraints in energy, transportation, and communications.

Technology transfer can foster not only an increase in production, but also an increase in the

quality of products. Modern industrial equipment can easily surpass the quality levels of

the antiquated equipment typical of Chinese

factories. Exposure to modern management

practices, which technology transfer often entails, broadens the Chinese manager’s concepts

of what can be accomplished and how. Coupled

with these new tools has been the realization

of the need for quality in products if China is

to compete well enough in world markets to

earn the foreign exchange to continue buying

technology.

However, China’s modernization does not

yet appear to have reached the point where improvements in one sector lead to improvements

in others. There have, of course, been many

examples of successful assimilation of specific

technology transfers, but there have also been

many cases of failure or incomplete success.

For instance, computers and other modern

equipment sometimes remain unused because

of a lack of expertise or an adequate supply

of a necessary input, such as electricity.

The question is not whether China is capable

of modernization, but whether it is willing to

make enough of the changes required for continued, rapid modernization. Like other centrally planned economies, China developed a

Ch. 7 —Summary ● 5

pattern of decisionmaking that discourages

efficiency and innovation, and gives the management of a productive enterprise few incentives to improve. The economic reforms that

have been initiated since the Cultural Revolution have been directed at providing workers

and management with incentives to increase

output and quality and to improve economic

decisionmaking. Measures taken include increasing the autonomy of enterprises, allowing them to retain and reinvest earnings, freeing up some markets, loosening price controls,

and reducing the role of the Chinese Communist Party. Reforms have been successful

in agriculture but less so in industry. Delays

in price reform and opposition by those fearing loss of their power have slowed improvements in efficiency.

China’s “Open Door” policy is closely related

to economic reforms and is intended to facilitate technology transfer and trade. Under this

policy, economic zones and coastal cities have

been opened to foreign investment, and joint

ventures and cooperative manufacturing have

been encouraged.

To date, however, the results have been

somewhat disappointing. Investments have

been lower than expected, and many problems

have been encountered, including high costs,

shortages of skilled workers and supplies, and

unfamiliarity with quality and scheduling requirements. Moreover, most enterprises are

risk-averse, and the incentives for new capabilities may be weak if other constraints (e.g.,

energy or materials) limit production in any

case. Delays and uncertainties caused by the intricacies of Chinese bureaucracy have been particularly frustrating for outsiders trying to do

business. Although the Ministry of Economic

Relations and Trade (MOFERT) was established to facilitate trade, the process is still

cumbersome and full of pitfalls. If new technology is sought, approval maybe needed from

both the local authorities and several agencies

of the central government, depending on the

enterprise, the priority of the technology, and

the cost.

The shortage of foreign exchange has become

critical over the past year, Unlike many de-
6 ● Technology Transfer to China —

veloping countries, China has refused to go exports, even though infrastructure (e.g., elecheavily into debt, and it has had many com- tric power, transportation, communications)

peting requirements for its declining foreign inadequacies have been much more of a conexchange reserves. Decisions on which tech- straint on the economy.

nologies to import are now frequently biased

by considerations of how much foreign ex- Despite many problems, China’s economy

change can be earned rather than by how much is growing very rapidly and that is likely to

the Chinese economy would benefit. Petroleum continue. There is also evidence that the techtechnologies have been particularly favored be nology transfer process is improving, and that

cause petroleum is one of the most important modernization will benefit considerably.

THE U.S. ROLE IN TECHNOLOGY TRANSFER

Most technology transfer from the United

States is from private companies. Although

most U.S. firms approach the China market

with the intent to sell products, many find they

must include technology transfer if they wish

to gain access to the China market. The variety of experiences are illustrated by the following examples:

●

●

General Electric won two large orders for

locomotives in part by a willingness to

transfer the technology of materials and

manufacture. G.E. is not setting up any

manufacturing facilities in China, though

an important part of the contract stipulated that China would produce several of

the parts for the locomotives. The first

contract took several years to negotiate.

The second needed only a few months,

largely because trust had developed

among the participants. G.E. was also

flexible in tailoring the locomotive design

to Chinese requirements.

American Motors established a joint venture with the Beijing Automotive Works

to produce AMC’S Cherokee model. Initial production has used parts sent from

the United States. The intent was to increase the local content as rapidly as possible, but China has been unable to produce parts and supplies in the quantity

and quality required. As a result, costs are

high and export of the Cherokees has been

impractical. China’s foreign exchange crisis interfered with the purchase of U.S.

parts, leading to a shutdown of the plant

for 2 months, though a compromise has

allowed restart.

McDonnell Douglas has started coproduction of 25 MD-82 twinjet transports with

the Shanghai Aviation Industrial Corp.,

following a sale of 5 to China. The planes

are being produced partially under the

direction of Americans, with the first

plane expected to fly in 1987. Training will

also be provided for the Chinese in the

United States. The planes are to be certified for airworthiness by the U.S. Federal

Aviation Administration, which provides

an explicit standard for quality control.

There have been no commercial satellite

telecommunication sales despite two sets

of proposals by U.S. and European companies. The Chinese received considerable

technology transfer for free as a result of

these proposals, but that probably was not

their intent. Rather, China’s conflicting

priorities and bureaucratic power struggles, combined with the shortage of foreign exchange, have delayed a decision.

China has launched two geosynchronous

communication satellites of its own design, but both were relatively unsophisticated. It is unlikely that China’s own

products will be competitive for several

decades, even with imported technology.

The parallel effort on rockets is much more

competitive, especially since the U.S. and

European programs are temporarily inoperative because of accidents.

IBM has been very successful in selling

computers to China, but has not yet initi-
Ch. l—Summary ● 7

Photo credft General E/ectr/c

A General Electric Co. locomotive pulls a train near the Great Wall. GE’s locomotive contracts have included technology

transfer in the form of training and information

ated any manufacturing. Technology transfer has been largely limited to training in

the use of computers. IBM may be in a

unique situation to resist pressures for

investment in China because of its dominant role in the international computer industry.

Wang Laboratories is preparing at least

one joint venture for the assembly and

eventual manufacture of microcomputers.

Included would be engineering, managerial and manufacturing expertise, software diagnostics, and after-sales techniques. This effort would complement

Wang’s sales to China and its manufacturing in other countries. However, Wang

is concerned about China’s lack of experience with large-scale production and the

difficulty of maintaining quality control.

One hallmark of these cases is the lengthy

negotiations. Wang started in 1980, and negotiations are only now coming to a conclusion. The McDonnell Douglas agreement took

10 years. The satellite proposals started in the

late 1970s, with no commercial results yet.

China’s shortage of foreign exchange has become a critical problem in cases such as AMC

joint venture. The import of supplies and the

repatriation of profits are difficult. Recent Chinese regulations require foreign ventures to export or supply advanced technology in return

for access to China’s market. In many cases,

however, the quality of the goods produced is

not up to international standards, which

greatly limits exports.

In addition, taxes and unexpected expenses

have made China one of the most expensive
places in the world in which to do business. A

company usually cannot hire its own employees; they are supplied by the state at a cost

far higher than their actual salaries, and they

cannot easily be replaced if they are incompetent or are transferred by the state. One of the

main advantages of manufacturing in China—

low-cost labor—is thus lost. Chinese managers

also tend to be very cautious and frequently

seem to lack a spirit of innovation.

High costs and bureaucratic rigidities are

particularly difficult for small companies to

manage. Few can afford to have a representative in China or continue negotiations for extended periods. Small companies are also particularly disadvantaged by complex export

controls. However, some small companies have

established profitable niches, particularly in

the sale of specialized equipment.

Overall, businesses report mixed results in

China. Some have lost money on early ventures, in the hope of building a profitable, longterm relationship, only to find China turning

to competitors or dropping those imports altogether. The investment climate is particularly

poor. Foreign investment dropped by over 20

percent in 1986. China’s leaders have recognized

that foreign companies are being deterred by

many regulations and costs over which the Chinese Government has control, as well as by

more intractable deficiencies in skilled manpower, infrastructure, and resources. Significant steps have been taken to improve the

atmosphere for foreign business (e.g., preferential tax treatment), but it remains to be seen

whether these will be adequate.

It should be noted that some U.S. companies are doing quite well in China, particularly

those that are not involved in joint ventures

or other manufacturing investments. Two-way

trade is over $8 billion and is still rising. Some

companies recognize that it takes a long time

to get established but are convinced that eventually the Chinese market will justify their patience. Others are waiting for other markets

to improve, and anything sold to China will

help bridge a gap, even if at little or no profit.

U.S. Government agencies are also involved

in technology transfer as part of an overall effort to cooperate with China and improve relations. Abroad agreement on science and technology cooperation was signed in 1979, and 25

protocols implementing the agreement in specific areas such as telecommunications, agriculture, space, environmental protection,

transportation, and student/scholar exchange

have been signed. Three more are pending.

These contacts have facilitated commercial

transactions and improved political contacts.

The presence of 17,000 Chinese students and

scholars (half of those sent abroad) in American

universities has been one of the most effective

forms of technology transfer. Most students are

in science or engineering courses. It appears

that most students leave with friendly personal

ties as well as an education, but it is not yet

clear whether this will lead to commercial or

political benefits for the United States.

The United States has many advantages in

competing for the Chinese market (e.g., a reputation in China for advanced technology, connections through many Chinese-Americans, the

popularity of the English language in China) but

other countries seem to be doing relatively better in trade. Japan exports twice as much to

China, and the nations of Western Europe collectively exceed the U.S. level. There are several reasons for this: American companies

historically have been less concerned with exports, which have been very difficult during

the last few years because of the high dollar.

However, government trade policy is also a direct influence. U.S. export controls are timeconsuming and laborious compared with those

of other countries, and appear to be applied more

rigidly. Moreover, Japan and West Germany

have extensive foreign aid programs in China

that lead to considerable trade. Japan, France,

Italy, and others provide extensive official

financing for exports. As discussed below, the

United States does not necessarily have to

emulate these tactics, but changes could be

considered to improve the competitiveness of

American companies.
. . —— —.

Ch. I—Summary ● 9

ECONOMIC AND POLITICAL IMPLICATIONS

Technology transfer will have profound longterm impacts on China’s economic and political future. Some sectors such as consumer electronics will benefit considerably because the

industry has a head start or because the technology is more easily assimilated. Past experiences suggest that others will find foreign technology to have little effect because the industry

is unprepared. Dissemination of the management concepts of quality, efficiency, and timeliness may be the most important result of technology transfer. Improvement in the quality

of Chinese products (necessary for them to

compete in international markets) maybe the

first general impact of technology transfer to

be visible.

It appears quite probable that China’s economic growth will remain high (above 5 percent

and possibly over 7 percent). The goal of quadrupling the 1980 output by year 2000 should

be attainable, though several factors could interfere. Foreign exchange limitations, energy

constraints, and political instability could all

hold the growth rate down.

China’s exports should also rise rapidly over

the next 15 years, but the competition with

American products will not be great. The newly

industrializing economies, including Korea,

Taiwan, Mexico, and Brazil are more likely to

feel the competition. Direct competition with

either industrialized countries or less developed countries is less likely because the product mix will be different. One exception may

be American agricultural exports to Asia, which

could be hurt by rising Chinese surpluses. On

the whole, however, China’s increased role in

the international economy should be beneficial

for the United States.

Several factors may slow China’s export

growth: rising protectionism in the developed

countries may preclude growth in sectors, such

as textiles, where China is strong. Diminishing foreign exchange reserves could limit

China’s ability to invest in new productive

capacity. If the quality of China’s products

doesn’t improve sufficiently, there will be

limited markets for them in the West, and

China may have to turn to the Soviet bloc for

trade and credit, a trend that is already appearing.

There is a strong relationship among modernization, economic reforms, political changes,

and technology transfer. As long as modernization is a prime goal (as it has been for the

last 10 years), most economic reforms made

to date will be retained. Modernization depends

on technology transfer to achieve more efficient production, and further economic reforms

will be needed to assimilate technology. However, the economic reforms are straining the

political system, as evidenced by reactions to

recent public demonstrations. If political reforms do not reinforce economic reforms, modernization is likely to be slow.

Some of the more difficult economic reforms

have yet to be implemented. Price decontrol is

essential for rational economic decisionmaking, but it strikes at the heart of the concept

of the planned economy. Mobility of labor

would increase productivity but would bring
10 ● Technology Transfer to China

unaccustomed social dislocations. Recent developments suggest that there is a strong resistance to reforms such as eliminating the control of Communist Party cadres over factory

operations. If China insists on making ideology preeminent, it is unlikely to greatly improve its economic efficiency.

The leadership succession to Deng Xiaoping

is one of the most crucial questions. Virtually

all of China’s leaders support economic reform,

but there are major differences of opinion over

how fast and far it should proceed. Promoting

technology transfer benefits the United States

by strengthening the hand of reform-minded

leaders who have favored opening up to the

West, largely to obtain technology.

If China’s modernization program turns out

to be even a partial failure, there are likely to

be negative implications for the United States.

A society disappointed and frustrated from unmet expectations of economic improvement

would be more susceptible to political extremism, which could easily have ramifications for

—————.

Taiwan and Korea. China would also be a less

valuable trading partner for the West and

could move closer to the Soviet bloc which

presents fewer demands for hard currency and

quality products.

However, successful reforms will create their

own problems. Rising expectations of the population and critical environmental problems

will make enormous demands on the leadership. Economic and political changes are creating an environment that will encourage a

pluralism of ideas and a liberalization that is

incompatible with traditional Communist Party control. It remains to be seen whether the

party can accommodate itself to these changes

and define a new social role, or whether it will

attempt to slow modernization to preserve its

control. The present problems of the reform

movement indicate that the party conservatives still have considerable power, but China’s

political evolution is likely to exhibit many unpredictable shifts.

STRATEGIC IMPLICATIONS

Technology transfer will assist China’s military. The important questions are how much it

will help and how much that matters to the

United States or its allies. The first question

involves China’s military needs and internal

capabilities, the second involves China’s foreign policy.

At present, China’s military is large but unsophisticated technologically. It has a great

many tanks and planes, some missiles, nuclear

warheads, and ships, and even a few nuclear

submarines, but all are outdated and much less

effective than U.S. or Soviet equivalents. China

is not a major power even regionally, as demonstrated by its ineffectual excursion into Vietnam in 1979. China’s military capability is improving, especially in the strategic forces

needed to deter a Soviet attack and in nontechnical ways such as command structure and pro

fessionalism, but the process will be gradual.

China’s military can benefit from foreign

technology in three ways: it can buy military

technology directly, obtain civilian technology

that has military applications, or develop its

own modern weapons systems as its economy

as a whole modernizes.

The United States and other nations have

offered to sell military equipment to China, including the avionics package for the F-8

fighter, but there have been few contracts because China apparently cannot afford to buy

many weapons systems. Acquiring modern

weapons would be the fastest way to a modernized military, but China does not feel the need

to be pressing enough to sacrifice its economic

priorities. Instead, it prefers to import technology rather than equipment, a rationale particularly compelling for the military, which

often needs very large quantities of each piece

of equipment.
Ch, 1—Summary ●

The transfer of dual-use technologies has increased rapidly. While it is reasonable to assume

that China’s military has access to such technology if it demands it, that does not mean that

the military will be able to use it effectively. Until recently, civilian and military enterprises

were kept separate, with the military being

given priority on resources and talent. Military factories were significantly more sophisticated than civilian ones. This has changed

over the past few years. Civilian factories have

enjoyed much more technology transfer and

appear to be modernizing faster. Both have exhibited considerable difficulty in assimilating

new technology. For instance, the United Kingdom transferred the Spey jet fighter engine

technology, but the military factory never was

able to manufacture it successfully. Examples

of successful reverse-engineering are very few.

Chinese military factories produce large quantities of unsophisticated weapons that sell well

in the Third World, but their production of sophisticated systems is very limited.

Modern military systems are complicated

and demanding. They must be designed by

teams of talented and experienced engineers

and scientists representing a variety of disciplines. Their manufacture calls for additional

expertise and the availability of precision production equipment and high-quality supplies.

China’s difficulty in assimilating advanced technologies suggests that more could be transferred

without incurring much risk that China will use

them to produce sophisticated weapons systems,

but this risk will grow over the years as China’s

technological capability improves.

For instance, table 1 shows the major components and technologies involved in antisubmarine warfare (ASW), one of the key mission areas which would significantly enhance

China’s overall military capability. Critical

ASW technologies should not be transferred

unless there is an explicit political decision that

this would be in the U.S. national interest.

Those technologies that are unique to ASW

are clearly critical. Others are so readily available for commercial uses that no purpose would

be served in trying to contain them. The difficulty comes with the intermediate, dual-use

11

technologies, such as spectrum analyzers, the

electronic instruments used to identify the

source of noise by analyzing the acoustic

patterns.

Spectrum analyzers are sold frequently to

China, including sophisticated models that

would be useful in ASW (though they would

not play a prime role in U.S. ASW). However,

this technology would be extremely difficult

to reverse engineer. Moderate relaxation of

controls over exports of spectrum analyzers

would give China access to more equipment

to upgrade its ASW, but would not in itself

seriously effect U.S. security interests. However, any such decision has to be considered

in the context of other technologies that are

being made more available, China’s growing

technological capabilities, its political intentions and the impact on U.S. allies.

It is likely that military needs are considered when foreign technology is sought. The

Chinese National Defense Science, Technology,

and Industry Commission reviews requests to

determine priorities, but no pattern of technology targeting is apparent. The civilian technology that China seeks has justifiable commercial uses. Considering China’s great need

for most technologies, the Soviet practice of

targeting militarily significant technologies

would seem to be irrelevant. There is little evidence that imported dual-use technology has

been a significant factor in China’s military

modernization.

If China is to become a major power, it will

be through developing its own capabilities

throughout the economy. Thus, in the long term,

technology transfer will have a great military

effect if it spurs innovation, modernized thinking, research and development, and economic

growth generally. However, China will not have

the economic depth to become a superpower for

several decades, especially considering the progress the United States and the Soviet Union will

also be making.

U.S. policy includes the principle of military

cooperation, but within certain limits. Many

dual-use technologies have been transferred be

cause any gains to Chinese defensive power
12 ● Technology Transfer to China — ..—

Table 1 .–Anti-Submarine Warfare Technology

Anti-submarine warfare (ASW) is the detection, identification, and destruction or disabling of an enemy submarine. ASW

can be conducted from any suitable “platform” from the air, sea surface, or from another submarine, The basic functions needed

to successfully conduct the ASW mission are the same for each platform:

1, Detection: by either acoustic or nonacoustic methods.

2. Classification: determination of the type of target.

3. Localization: target motion analysis and contact management.

4. Approach to the Target: closing in on the submarine to within range of one’s own ship or aircraft weapons.

5. Weapon Deployment (Launch): actual attack.

6. Evasion and Reattack: performed if necessary.

7. Related Functions: tactics such as mine avoidance, mine deployment, and surveillance performed as necessary.

Although the basic required ASW functions listed above are always the same, the complexity and difficulty of each of these

elements varies from case to case and from platform to platform.

There is no one ASW technology. These functions require the implementation of many different technologies, and capabilities are required across a broad spectrum of engineering and science. Some technologies are critical in the sense that if

their performance is substandard, the whole ASW system is significantly affected. Each increased level of sophistication will

have a higher level of success in ASW, but there are many different levels that can be successful. Following are the critical

technologies, grouped by commercial availability.

a.

b.

Critical technologies not commercially available (easily

controlled):

Propulsion design

Low-noise machinery design

Sonar dome

Transducer design

Classification techniques/algorithms

Acoustic correlation algorithms

Contact motion analysis

Tracker design algorithms

Passive ranging techniques

Weapon guidance

High-density power-pack design

Small-size high-power train design

Exotic fuel design

Power engineering

Multipath processing techniques

Critical technologies with less sophisticated versions

available commercially (control is complex):

Low-speed turbines

Bearing design

Baffle design

Beamformer techniques

Local area network design

Spectrum analyzer design

Microelectronic design

Beamformer design

High-speed graphic techniques

Color/bit plane graphics

Shape charge techniques

Fusing design

Magnetic anomaly detection

c. Critical technologies readily available commercially

(controls futile):

Corrosion resistance

Ceramic design

Elastomer technology

Machinery isolation

Spectral analysis algorithms

Acoustic performance prediction techniques

Environmental sampling techniques

High-speed math processor design

Minicomputer design

High-explosive technology

SOURCE Adapted from “Assessment of ASW Technology Transfer to the People

Alexandria, VA, December 1986

are likely to be of greater Soviet than U.S. concern. Military cooperation has been seen as a

natural part of the growing relationship, but

concrete steps toward cooperation have been

tentative. U.S. arms sales to China, while increasing, remain well below the level of sales

elsewhere in Asia, such as to South Korea and

Taiwan.

At worst, the current policy of technology

transfer to China entails only moderate direct

risk to the United States. China will not have

the strategic strength for serious threats for

several decades. While China has a few intercontinental ballistic missiles capable of reach-

‘s Republ(c of Chtna, ’ contractor report prepared for OTA by G Iobal Associates, Ltd

ing the United States, it also has compelling

reasons not to launch them. However, other

U.S. interests could be threatened more easily. In particular, as a regional power, China

would be capable of putting great pressure on

U.S. allies in East Asia.

Asia has been a region of relative stability

and peace since the end of the Vietnam war,

with the exception of the Kampuchean problem. There are, however, tensions and several

potential flashpoints, specifically Korea and

Taiwan. Military outbreaks could become of

global significance, especially considering the

U.S. and Soviet interests in the area. The large-
Ch. 1—Summary ● 1 3

.

Photo credit: X/nhua News Agency

A Chinese-developed communications satellite, which

was launched into geosynchronous orbit in February

1986 on the Long March 3 rocket, China’s satellite

technology is progressing rapidly, but it is still well

behind that of the United States or Europe.

U.S. POLICY

U.S. policy currently supports the transfer

of technology to China, but within certain

limits set by national security considerations.

The fundamental rationale for this policy, supported by four U.S. administrations, is that

assisting China in its modernization will serve

U.S. interests. This general framework represents a compromise between optimism and

caution, and permits a flexible approach to spe

cific policy choices. For example, advanced

dual-use technologies and arms can be exported on a case-by-case basis, depending on

the nature of the technology, the Chinese rescale Soviet military buildup and political initiatives are the greatest concerns to the United

States. China shares this perception, which has

become the basis for de facto military cooperation, though China is very unlikely to jeopardize its status as self-appointed Third World

spokesman by an overt alignment.

Some of China’s neighbors, however, may

see China as a potential threat. Asian attitudes

toward China are complex and vary from country to country. All share China’s desire to see

a Vietnamese withdrawal from Kampuchea

and are relieved to see China focusing on economic growth rather than exporting revolution. However, there are misgivings about the

effects of U.S. technology transfer on China’s

economic competitiveness and concern about

China’s growing influence. Many Asian countries have large Chinese populations, compounding the uneasiness. Such feelings may

be inevitable, considering China’s size, but special sensitivity by the United States may help

minimize future problems. For instance, consultations with these countries on U.S. relations with China may provide reassurances of

U.S. intentions.

CHOICES

cipient, the conditions of the sale, and other

factors.

The flexible approach has permitted the relaxation of controls as relations have improved

and has brought significant benefits to the

United States. However, case-by-case export

controls are complex to administer (delays in

export licensing are often the result) and can

yield inconsistent decisions.

U.S. policy also includes some promotional

programs to foster exports of nonsensitive

equipment and technologies, but these pro-
14 ● Technology Transfer to China

grams are much less extensive than those of

Japan, France, and other countries. There is

no U.S. aid program and government financing of exports is quite limited relative to other

countries.

There is a broad consensus that overall policy is on the right track, but changes in emphasis could be considered to improve the benefits

for the United States. One alternative theme

would emphasize a more activist strategy of

technological cooperation: explicitly using

technology transfer to improve relations and

trade. Another possibility would be to make

better use of technology transfer as a bargaining chip in U.S.-China relations. A third would

be to emphasize the multilateral aspects of export control and trade with China.

It would of course be possible to pull back

and further restrict technology transfer. However, in the current climate of improved U. S.-

China relations, such an approach would appear to be counterproductive. It would alienate China without denying it access to advanced technology, given the availability from

many other suppliers. If the worst fears are

realized, and China does revert to hostility, the

present system can adapt to the change.

Regardless of whether or not a more explicit

strategy is developed, a number of specific issues will be addressed by Congress. Most attention has been focused on export controls.

For advanced exports with military significance, the United States maintains a system

of extensive reviews to ensure that U.S. national security is preserved. The Department

of Commerce (DOC) is the lead agency, but the

Departments of State and Defense also participate. Multilateral review through COCOM’

is also required on many such exports.

U.S. industry has been critical of China export controls, protesting lengthy reviews and

contracts lost to firms from other countries as

a result of more stringent U.S. controls.2 OTA’S

research confirmed that other countries are

generally able to reach a decision on even sophisticated dual-use exports in a few weeks,

while the United States frequently requires

months or even years. In addition, only the

United States unilaterally imposes controls on

items not on the list of COCOM controlled

items, and requires that exports to allied countries, if m-exported to third countries, be again

subject to the original licensing. The latter requirement has also caused considerable discord

between the United States and other COCOM

members.

It is difficult to quantify sales lost due to

export controls, because so many factors affect

the competitiveness of U.S. firms in the China

market. The green zone (items likely to be approved for export) has been expanded to cover

items in 30 categories on the Commodity Control List. Today, U.S. controls on exports to

China affect primarily a few key advanced technology sectors such as computers, telecommunications, precision instruments, and advanced

manufacturing equipment—areas where the

United States might otherwise have a significant competitive advantage. In 1986, computing equipment alone made up almost 80 percent of the value of export licenses approved.

Thus, while U.S. controls are not the critical

factor determining the overall volume of trade

with China, delays can considerably affect

the advanced technology exports that China

wants.

In recent months there have been signs of

improved efficiency in license review. Average

processing time for China cases has declined

to 57 days in April 1987. However, referred

China cases (those reviewed by agencies in addition to DOC) continues to take almost 6

months on average including COCOM review.

OTA found that 134 China cases valued at

$145 million had been in the system for more

than 1 year as of January 1987. Figures 1 and

2 show the trends in processing time for reIThe Coordinating Committee for Multilateral Export Controls, an informal organization of the NATO countries plus Japan, which seeks to harmonize export controls.

20TA’s analysis focuses on controls on exports to China. A

recent study by the National Academy of Sciences examines

the impact of U.S. national security export controls as they affect global competition: Balancing The National Interest: U.S.

NationaJ Security Export Controls and Global Economic Competition (Washington, DC: National Academy Press, 1987).
Ch. l—Summary ● 1 5

Figure 1.—Processing Time for Referred

(Closed Out) Cases

z

~ g 200 Referred China cases

E.-

. Z

L 150 : ( U

“: z Referred cases to all countries

~ ~ 100 -

c)~

~ % 50 L

a)

& 1 1 I I i 1 1 I 1

1/85 3/85 6185 9/85 12/85 3/86 6/86 9[86 12/86 3/87

SOURCE Off Ice of Technology Assessment, 1987

Figure 2. —Average Processing Times:

China Nonreferred and All China Cases

[ Green zone (nonreferred) China cases

1/85 3/85 6/85 9/85 12/85 3186 6186 9/86 12/86 3/87

aAverage for (referred and non referred) all China cases

SOURCE Off Ice of Technology Assessment 1987

ferred and nonreferred cases. China cases comprise about one-third of the total for all countries pending over statutory limits in 1986.3

There are several steps the U.S. Government

could take to clarify export control guidelines

and improve licensing administration. The

process of license review could be made more

consistent by expanded use of computerized

information on precedent-setting cases. Additional technical analysis could be applied to develop U.S. positions for an expanded green zone

and to develop sectoral approaches for technology transfer to China. At a broader level, improved mechanisms for resolving disputes

among executive branch agencies would reduce

processing times for referred cases.

If policy makers wish to relax controls, the

key question is whether exports of technologies

‘Congress has established deadlines for license processing in

the Export Administration Act.

that are now controlled might endanger U.S.

or allied security. For the near term, there are

few dual-use technologies that would make a big

difference in China’s military capability if transferred. The discussion of ASW and spectrum

analyzers above illustrate how many technologies must be mastered and coordinated to pro

duce usable, sophisticated military systems.

Supercomputers are one of the exceptions.

Decisions about such a transfer must take into

account abroad array of factors. A supercomputer is useful in a number of defense applications, such as satellite imaging, acoustical intelligence, and nuclear weapons design. China

has indigenously developed a supercomputer.

It appears to be significantly less capable than

the Cray-2 or Cyber 205, but it indicates that

China has the expertise to make use of advanced computer technology. However, if an

American supercomputer were exported, the

Chinese would also need sophisticated software. Programs to simulate weapons design,

for example, would not be transferred. Chinese

scientists could produce usable software, but

they would probably be unable to produce such

sophisticated software as that used in advanced U.S. weapons design. An American (or

Japanese) supercomputer would eventually be

a significant asset for China for improving its

own technology and for solving problems, say,

in missile accuracy. If China is allowed to buy

a supercomputer (perhaps for weather forecasting as authorized for India), conditions could

be applied, such as limiting access to the facility or maintaining some U.S. control to prevent uses detrimental to U.S. interests.

Following the COCOM member country

agreement to a liberalization of controls on spe

cific types of exports to China, the number of

U.S.-China cases submitted to COCOM declined from 287 in January 1986 to 187 in April

1987. However, the approaches to export controls differ among the COCOM countries, and

there is leeway for different interpretations of

the China regulations within the discretion permitted COCOM members. OTA’S research

indicated a need for further harmonization of

COCOM country policies.
16 ● Technology Transfer to China

— — —.

OTA found widespread misunderstanding

among businessmen in the United States and

abroad about multilateral controls. There is

a tendency for all to suspect their competitors

of circumventing the rules, but OTA found little hard evidence to support claims that foreign

(COCOM) country governments are doing so.

A major issue for the future will be whether

to remove China exports from COCOM consideration. This would announce full acceptance of China as a Western trading partner,

although the commercial implications for U.S.

firms are uncertain. If China’s current trends

continue, this issue will be given serious consideration. However, COCOM members will

be cautious because once review is ended, it

would be awkward to reinstitute if China’s policies later change.

Some exporters have complained that their

dual-use technologies are subjected to more

stringent controls and take longer to gain approval than military technologies. Sophisticated, state-of-the-art systems such as the F8 avionics package embody some technology

that will be useful to China even if sold as an

end product, with no intentional technology

transfer. Since the United States has made a

policy decision to help China’s military to this

degree, dual-use exports should be judged by

the same standards.

OTA finds that approvals of military and dualuse technology have not been inconsistent. The

actual number of munitions cases reviewed has

been much smaller than those reviewed for

dual-use exports, and the rate of denial higher.

Inconsistency could be a problem in the future

unless the two sets of reviewers are more aware

of what their counterparts are doing. Information about recent arms sales, for example, could

be useful to those involved in review of related

types of dual-use cases.

A number of factors suggest that U.S.-China

military cooperation will continue to develop

slowly. Taiwan is one of those factors. China

continues to object to U.S. arms sales to Taiwan, while supporters of Taiwan carefully scrutinize the more limited U.S. sales to China. Continued differences over Taiwan may limit

U.S.-China military cooperation in practice.

The United States has several promotional

programs that support trade with and technology transfer to China, although these programs

are not extensive nor coordinated into a comprehensive strategy as are those of Japan, for

example. These protocols for science and technology cooperation help set the stage for expanding commercial interaction. The Foreign

Commercial Service in the Department of Commerce provides information and assistance to

U.S. businesses and helps potential buyers

learn of U.S. goods and services. The Dalian

Management Center, a training program for

Chinese managers, is supported by DOC. The

U.S. Government also tries to provide a favorable environment for trade and technology transfer through U.S. official discussions.

U.S. financing programs, including those of

the Export-Import Bank, have been comparatively limited and have been guided by the general principle that the private sector should finance exports unless the project is of great

national interest or unless a competing foreign

bidder is assisted by a national government

with subsidized loans. The Overseas Private

Investment Corporation (OPIC) has insured

more than 20 U.S. investments in China

against political risk. Programs of both the

Export-Import Bank and OPIC are, however,

being scaled back in some areas because of budgetary constraints.

The Trade and Development Program (TDP)

has been well received in China. TDP provides

project planning services, including feasibility studies. These relatively modest investments can yield significant results. In 1982,

for example, a $440,000 TDP feasibility study

of a hydropower project led to $20 million in

U.S. exports.

Since the United States has no formal aid program to China and because of opposition by some

to the use of “mixed credits,” which combine official credits and confessional financing, low-cost

programs such as those of TDP provide an important tool for U.S. Government support at important early stages of projects.
Ch. 1—Summary ● 1 7

China is a good test case for U.S. exports,

and the U.S. Government could provide more

support. U.S. exports to China were lower in

1986 than in 1980. Increases in exports of machinery and equipment were more than offset

by decreases in agricultural products. Congressional debates focus on whether the United

States can maintain a policy directed at promoting free trade or whether protectionist responses will be forthcoming. Still another possibility would be to develop special bilateral

understandings with China. U.S. policies affecting trade and technology transfer to China,

however, must be part of an overall U.S. trade

policy strategy to be effective over the long

term. Technology transfer is a long-term relationship, and the participants could benefit

from clear and consistent signals about the

direction of government policies.

Specific actions on export control that Congress could consider include the following:

1. improve the efficiency of export control

administration:

—require Operating Committee reports to

Congress on greatly delayed cases;

—require more timely information on case

status and types of exports approved;

—support automated systems to improve

the efficiency of review; and

—set goals for faster licensing (e.g., 6 days

for green-zone cases).

Z. modify existing export control policy:

—give DOC authority to approve licenses

unless formally appealed to the President, with automatic approval if cases

back up for too long;

—require clearer guidelines for prohibited

dual-use exports;

—require the development of plans for an

enlarged green zone;

—improve information exchange bet ween

munitions and dual-use reviewers; and

—establish a distribution license procedure.

3. ensure that U.S. controls are in line with

COCOM allies, even if that means dropping unilateral controls.

Potential congressional actions on trade promotion include the following:

1. expand existing programs, including TDP,

the Foreign Commercial Service, and official financing;

2. modify existing policy to:

—encourage the development of sectoral

trade strategies,

—review the science and technology protocols and revise government support

as appropriate; and

3. initiate an official development assistance

program for China.

Technology will continue to be a key element

in the expanding U.S.-China relationship, yet

one not easily manipulated by governments.

Technology transfer can help create a constructive, long-term partnership, but it can also create new and, in some cases, unanticipated problems. Policies aimed narrowly at either the

control or promotion of technology transfer to

China without consideration of the larger context of U.S.-China relations and Asian security could prove counterproductive.
Chapter 2

The Chinese Context for

Technology Transfer:

The Economic Issues

Photo credit: Eric Basques

Shanghai-looking down at the Wusong River which leads into the all important Huangpu River.

Shanghai, which means “up from the sea” is presently China’s busiest port with about half of all

Chinese exports passing through this important trading and commercial center.
CONTENTS

The Cultural Revolution’s Legacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Chinese Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Economic Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Economic Reforms. . . . . . . . . . . . . . . . . . . . . . . . . . . . + . +........ . . . . . . .

The Seventh Five-Year Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Economic Challenges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Open Door Policy . . . . . . . . . . . . . . . . . . . . . + . . . . . . . . . . . . . . . . . . . . . .

21

23

23

26

28

29

31
Chapter 2

The Chinese Context for Technology

Transfer: The Economic Issues

China’s economic performance since 1949

has been characterized by both notable achievements and serious failures. The China of 1949

was impoverished and in economic disarray after years of foreign invasion and civil war.

Building an industrial economy with the full

spectrum of industries and achieving an average growth rate of 6 percent for 30 years were

major accomplishments. In addition, China

raised the average life expectancy from 36 to

67 years and feeds 22 percent of the world’s

population with 7 percent of the world’s arable land. However, major setbacks from economic mismanagement have also been experienced. China’s future economic growth will

depend at least as much on avoiding these

problems as on achieving great successes.

Scientific knowledge and technical knowhow are key elements in China’s efforts to modernize its economy and enhance national security. Technology played a role from the 1950s

through the 1970s in the development of a comprehensive (albeit, not technically progressive)

industrial economy and an extensive research

and development (R&D) system. By the late

1970s, however, the Chinese were prepared to

acknowledge that many problems with their

industrial and R&D systems were inhibiting

the further development of the nation’s technical capabilities.

Important changes in policies were begun

in the late 1970s, including the pursuit of modern technology from abroad. Since then, many

Chinese policymakers have come to realize that

the development of technical capabilities faces

systemic problems that cannot be solved simply by changing the R&D apparatus or by importing more foreign technology. Rather,

changes on a number of different fronts are

required.

More recent policy changes have included

major reforms in the economy. China’s relationships with the international environment

have changed dramatically with the initiation

of the open door (kai fang) policy and the efforts it entails to attract technology and investment from abroad. Operational objectives

for technical capabilities have been redefined,

and a number of other measures for altering

the policy and managerial environment have

been taken.

Together, these initiatives, and the problems

they are intended to address, constitute the

Chinese context for technology transfer. In this

and the following chapter, the elements of

China’s quest for enhanced technical capability are examined and analyzed.

THE CULTURAL REVOLUTION’S LEGACY

All Chinese leaders since the turn of the century, Communist or non-Communist, have

shared a desire to make China a strong world

power. However, the means to this goal have

changed radically. Since the end of the Cultural

Revolution (1966-76), Chinese leaders have introduced major modifications to the political

and economic institutions that evolved during

the Maoist era (1949-76) of “socialist construction. After decades of relative isolation from

the capitalist world, China now seeks to participate in the international economy, to invite

capitalist participation in Chinese modernization programs, and to secure access to the technology of capitalist countries, all while retaining its basic socialist character. These

21
22 ● Technology Transfer to China

near-revolutionary changes in policy have been

implemented despite formidable obstacles,

most of which were created or exacerbated by

the Cultural Revolution. In particular, the new

leadership had to deal with widespread political disillusionment and remove from office

thousands of cadres who had risen to positions

of influence during the Cultural Revolution.

As economic growth and technological progress again became high priorities, the postCultural Revolution leaders have had to confront long-standing problems. In particular,

economic productivity was low and the rate

of growth declining. According to one report:

. . . national income produced per 100 yuan

of fixed assets averaged 34 yuan during the

1976-79 period, compared with 52 yuan during the First Five Year Plan. Over one-third

of all state-owned enterprises were running

at a loss in 1976. In 1978, 43 percent of the

quality and 55 percent of the consumption

norms in industry could not meet the best

levels set in the 1960s. ’

Rates of productivity increases declined dramatically after 1965 and began to rise again

only in the 1980s.2 The causes of this decline

are complicated. They include a poor incentive

system for labor and management, rigid economic planning, and serious problems in fostering technological innovation. To some extent,

these factors are inherent to centrally planned

economies, as discussed below. However, the

Cultural Revolution not only disrupted progress that might have been made in that decade, it also induced in many educated Chinese

(those best equipped to solve the problems) an

enduring fear of standing out by being too successful.

Declining gains in productivity were not attributable to a lack of investment. In fact, between 1949 and 1979 the average annual rate

of investment was 11.4 percent, which was

largely directed into capital construction in the

heavy industry sector, with the metallurgical,

energy, and machine building industries receiving about 65 percent of industry’s shares However, the 6 percent average annual growth of

the economy was not commensurate with these

investments. Clearly, the Chinese had not

gained the productivity benefits from investment that other countries realized. Returns on

investment were one-third of those in Japan

and labor productivity was one-tenth. Energy

consumption per unit of output was as much

as five times greater than that in the advanced

countries, and while machinery exports made

up from 40 to 60 percent of the total exports

of the latter, they were only about 5 percent

of Chinese exports.4

Thus, Chinese economic growth has been due

largely to very high rates of investment infixed

capital over the years rather than productivity

improvements. Consumption and per capita

income remained low. There were, in short, imperatives for taking an approach that would

result in more efficient use of inputs and

progressive technological change.5

Another legacy of the Cultural Revolution

was the stagnation of the R&D and educational

systems. China’s research organizations,

universities, and science policy and management agencies were terribly disrupted by the

Cultural Revolution. Training of new scientists

essentially ceased, trained scientists were not

properly employed, and the infrastructure for

research was neglected. This situation exacerbated the separation of research from production, a problem that had plagued Chinese R&D

since it was organized along Soviet lines in the

1950s. Although technological achievements

had been made, especially in the national defense sector, the incorporation of new technology into serial production was not widespread,

and the strict separation of military-related

‘Elizabeth J. Perry and Christine Wong (eds.), The Political

Economy of Reform in Post-Mao China (Cambridge, MA: Council

on East Asian Studies, Harvard University, 1985), p. 4.

‘Robert F. Dernberger, “China’s Development Strategy: Investment Financing Needs and Sources, ” paper presented to

the Fifteenth Sine-American Conference on Mainland China,

Taipei, June 1986.

‘Ibid.

‘Sun Zhenhuan, “A Study on the Question of an Integrated

Military-Civilian Industrial System, Jingji Yanjiu 5, May 20,

1985. In JPRS-CEA-85-080 Sept. 3, 1985, pp. 2-3.

‘For a more complete analysis of these productivity problems,

See Gene Tidrick, Productivity Growth and 7’ecfmological

Change in Chinese Industry, World Bank Staff Working Papers,

No. 761 (Washington, DC: The World Bank, 1986).
Ch. 2— The Chinese Context for Technology Transfer: The Economic Issues ● 23

. — —

work from the civilian economy prevented the

latter from benefiting from the most advanced

technology.

Moreover, as Chinese scientists traveled

abroad more widely in the early 1970s, they

began to realize how much further they had

fallen behind during the Cultural Revolution,

a very dynamic period for world science.

China’s leaders found that they could not look

to the archaic R&D system to be the source

for new technology needed by Chinese industry or even the knowledge base for the effective assimilation of imported technology.G

Other factors also contributed to China’s

readiness to experiment. Deng Xiaoping, who

emerged as China’s senior leader, clearly

wished to see progress toward the achievement

of the goals of the four modernizations policy

(with which he had been closely associated

since 1975) in his lifetime. Second, China’s political leaders could not ignore the successful

economic performance of the Asian newly industrialized countries (NICS) in the 1970s.

Third, the relative peace in Asia-combined with

the evolving new relationship with the United

States- offered China the opportunity to rethink its domestic economic structure. In particular, it offered the possibility to move away

from the Maoist idea of organizing the economy according to regional self-sufficiency, a

strategy dictated by national defense considerations and perceptions of a threatening Asian

—— . — .—

‘See Richard P. Suttmeier, “Overview: Science and Technology Under Reform, ” in U.S. Congress, Joint Economic Commission, China Economy Looks Toward the Year 2000, vol.

2 (Washington, DC: U.S. Government Printing Office, 1986),

pp. 199-215.

regional environment. Instead, new forms of

economic integration, which presumably would

be more economically rational, were possible.7

China in the late 1970s was thus experiencing a convergence of forces for major redirection of policy. In this context China began

experimenting with extensive reforms in the

economy, and the major opening to the outside world that has become known as the open

door policy. This opening was based on the assumption that China’s modernization could not

be realized without such interactions, an assumption that differs markedly from Maoist

self-reliance.

The combination of domestic reform and the

open door policy has profound impacts on technology transfer to China. The open door has

entailed the invitation of foreign economic participation in Chinese development, and has led

both to a major expansion of the amount and

variety of technology going to China and to

an increase in the variety of modes of transfer. It has also allowed more than 35,000 students and scholars, mainly in technical fields,

to travel abroad.8 Because the reform program

makes it more likely that in the long run the

technology being imported will be effectively

utilized, the open door policy and economic reform reinforce each other.

‘Perry and Wong, op. cit., pp. 4-5.

8

For an analysis of China educational relationship with the

United States, see Committee for Scholarly Communications

with the People’s Republic of China, A Relationship Restored:

Trends in U.S.-China Educational Exchanges, 1978-1984 (Washington, DC: The National Academy Press, 1986).

THE CHINESE ECONOMY

Economic Structure

The old development strategy left the economy unbalanced. China is a low-income country with a very large agricultural sector of low

productivity. Its industrial output per worker

is that of a middle-income country, largely because of massive investments in heavy industry, but this sector is still small compared with

agriculture. The greatest anomaly, however,

is the service sector, which is relatively smaller

than that of almost any other country.’

As Chinese leaders implemented their new

policies, they found that inadequacies in economic performance were traceable to funda-

‘The World Bank, China: Long-Term Issues and Options

(Washington, DC: 1985).
24 Technology Transfer to China

mental problems with the economic structure

as well as to the disruptions caused by the Cultural Revolution. In the 1950s, the Chinese

economy was modeled on that of the Soviet

Union, and many of the features of a centrally

planned economy (CPE) are still prominent.

Three defining characteristics of such an economy are that most of the means of production

(especially in industry) are owned either by the

state or by collectives, that the allocation of

resources is accomplished mainly by the decisions of central planners, and that prices there

fore have a secondary role in resource allocation .

These characteristics, as in other CPES, became translated into characteristic economic

organizations of the state. Central planning

bodies (in China, the State Planning and Economic Commissions) in principle oversee a

large number of specialized government ministries such as the Ministries of Machine Building, Electronics, Astronautics, and Railways,

discussed later in this report, with responsibilities for operating the economy. Under the

ministries are the enterprises, factories, and

transport and commercial organs that are the

loci of the economic activity. To function effectively, central planners must have abundant

and accurate information, the capacity to process the information, and the confidence that

their decisions will be implemented without

distortions. However, neither China nor any

other CPE has met these conditions. In practice, China’s CPE does not run as the formal

design would suggest.~1

China began experimenting with the operation of a CPE in the late 1950s mainly by decentralizing decisionmaking to units of local government and taking a more collective approach

to factory management.12 These changes also

locf. Robert F. Dernberger, “Economic Policy and Performance, in U.S. Congress, Joint Economic Committee, China

Economy Looks Toward the Year 2000 (Washington, DC: U.S.

Government Printing Office, 1986), pp. 21 ff.

“Cf., Ed A. Hewett. “Reflections on a December, 1984 Trip

to the PRC, ” in Janet A. Cady (cd.), Econom”c Reform in China,

Report of the American Economists Study Team to the People’s Republic of China (New York, NY: National Committee

on U.S.-China Relations, n.d.) pp. 33-39.

‘

2A perennial issue in Chinese decentralization has been

whether to decentralize to the factory or enterprise level (the

intent of the current reforms) or to the level of local government.

led to a more active role in economic management for local Communist Party committees.

Policies followed during the Cultural Revolution cemented a significant role for local authorities in the operation of much of the economy. Thus, while many Chinese enterprises

are under the supervision of the central government, many others are under units of local

government. In some industries, strong compe

tition has developed between local and central

control. Shanghai’s competition with the Ministry of Electronics over leadership in computers and microelectronics is a prime example. 14

The legacy of experiments with decentralization and recentralization has had profound

effects on the structure of and distribution of

influence within the Chinese economy. A large

component of the economy outside the state

plan is controlled by local authorities who have

access to their own investment funds.16 This

nonplan sector includes collective enterprises

and village industry. In recent years it has

grown more rapidly than the planned sector

and has come to represent between onefourth

and onethird of the value of industrial output.

Even that part of the economy more clearly

under the control of the central government

fails to meet the ideals of central planning. In

particular, the production ministries have, over

the years, accumulated powers over the control of substantial material and human resources (outside the national budget) that make

direction and coordination by central planning

bodies difficult. The entrenched power of the

ministries and the access to substantial resources (which are outside the national budget) enjoyed by local authorities make the goal

of coordinated central planning and plan implementation quite difficult.

“Christine P.W. Wong, “Ownership and Control in Chinese

Industry: The Maoist Legacy and Prospects for the 1980s, ”

China’s Economy Looks Toward the Year 2000, vol. 1, pp.

571-604.

14 Denis Fred Simon, “China’s Evolving Computer Industry:

The Role of Foreign Technology Transfers, ” app. 2 in vol. 11

of this report, May 1986.

“Barry Naughton, “The Decline of Central Control Over Investment in Post-Mao China, ” in M.D. Lampton (cd.), PoA”cy

Implementation in Post-Mao China (Berkley, CA: University

of California Press, forthcoming). See also, Wong, op. cit.
—

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

Photo cred(t Er/c Basques

One of the many storage yards at the Dalian diesel locomotive factory-note the diesel engine crankshafts at the

lower right. The Dalian plant produces the Dongfeng locomotive, regarded as China’s best,

It is therefore useful to think of the structure of the economy in political terms, with tensions existing between central planners and

the ministries and between central and local

authorities, Although it would be a mistake

to underestimate the ultimate powers of the

central planning authorities, there have clearly

been much less effective central direction, control, and coordination in the routine operation

of economic institutions than had been assumed. The Chinese bureaucratic morass and

the delays in decisionmaking that inform the

tales of frustration told by foreign business

representatives must be seen in light of this

institutional setting.

Other effects of the economy during the

Maoist period are also still being felt. The tradition of collectivism in factory management,

for instance, has tended to place the immediate interests of the workers ahead of economic

efficiency. The Chinese enterprise has thus

been not only an economic unit, but also a unit

of government and a welfare institution. Not

surprisingly, the emergence of modern enterprise management has been slowed, with the

result that managerial deficiencies are now a

major obstacle to the realization of economic

objectives. 16

The case for new directions in economic policy and changes in economic institutions, there

fore, has been seen by Chinese leaders as a

compelling one. These changes, called a new

“development strategy, ” include new sectoral

“William A. Fischer, “The Transfer of Western Managerial

Knowledge to China, ”app. 5 in vol. I I of this report, May 1986.
26 ● Technology Transfer to China —.

priorities, new sources of growth, and changes

in economic institutions and behavioral rules

that are part of the reform program. ’7

Economic Reforms

The reform of China’s industrial economy

has its official expression in the “Decision on

the Reform of the Urban Economy” announced

at the Third Plenum of the Twelfth Party Congress in October 1984. However, the current

reform experience in Chinese industry has its

origins in reform experiments begun following the Third Plenary Session of the Eleventh

Party Congress in December 1978. In addition,

reforms in agriculture preceded the current industrial reforms and have enjoyed much success and popular support.

The intent of the economic reform efforts is

to make workers, managers, and enterprises

more accountable for their work and to increase

the quality of economic decisionmaking. Accordingly, the reform measures adopted have

been aimed at the incentive structures at work

and at altering the loci of decisionmaking. The

key elements include:

1. Increasing the autonomy of enterprises

for making decisions about what to produce and how to produce it.

2. Allowing enterprises to retain more of

their earnings, which can be used for investment, for bonuses, and for improving

living and working conditions for workers.

3. Allowing enterprises to buy more of what

they need and sell more of what they produce in marketplaces instead of through

state-administered commercial channels.

The role of central planning will thus be

changed, with some sectors of the economy removed from the planning system

and the substitution of ‘guidance plans

for mandatory plans.

4. Making enterprises responsible for meeting obligations to the state through the

payment of taxes instead of measuring

their performance and collecting their

remissions to the state through shares of

profits.

“Dernberger, “China’s Development Strategy, ” op. cit.

5. Reforming prices gradually to reflect scarcity values.

6. Reforming the banking system to make

it more of an instrument for macroeconomic control; the financing of enterprise

activities is to be done through banks

rather than through state appropriation.

7. Reducing the role of party committees in

economic management.

Although official reports from China on the

reforms are quite positive, and reflect a commitment by the leadership to continue its

course, the implementation of reforms in industry has clearly been more difficult than in

agriculture. For instance, it is more difficult

to provide incentives for greater individual effort in industry, and there are many more

sources of opposition to reform.

Without a rational price system, the efforts

to give enterprises more autonomy have led

to macroeconomic (as well as macroeconomic)

distortions that have troubled the central government, which recognizes the importance of

price reform but also understands that the

transition from administered prices to market

prices is fraught with political dangers. Student demonstrations in late 1985, ostensibly

directed at Japanese trading practices, were

also a reflection of the discontent felt by many

urban residents with the increases in living

costs occasioned by price reform. The regime

therefore approaches the pace of price reform

with some caution, anticipating at least a 5-

year period of price reform implementaion.

According to one recent analysis, the most

dramatic changes in China have occurred outside of the formally planned economy. This sector outside the plan has always existed in

China, but the reforms have encouraged its

vigor and enlargement. I* Reportedly, growth

in the rural industry sector in 1984 was 40 percent, climbing to more than 50 percent (if annualized) during the first half of 1985 (when

overall industrial growth was more than 23 percent). Indeed, growth at this rate has become

very troublesome for central policy makers because it has led to distortions in national in-

‘“B arry Naughton, ‘‘Summary of Findings, in Cady, op. cit.
Ch. 2— The Chinese Context for Technology Transfer: The Economic Issues ● 27

vestment and to the waste of raw materials.

Central authorities have therefore attempted

to limit the rate of growth.

Reforms have had much less success within

the planned sector, particularly with regard

to price reform. Overall, Chinese reform must

be seen as involving these two sectors, with

the outside-the-plan economy realizing many

of the benefits of liberalization and putting

pressure on the within-the-plan economy to

change. A crucial issue is how China manages

the transitional period. It must keep pressure

on the within-plan sector to change, but until

then, there will be both increasing imbalances

in the supplies of energy and raw materials going to the two sectors and uneven changes in

wages and the supply of consumer goods, with

the danger of serious inflation. Such dangers

invite the reassertion of central controls that,

if done clumsily, could vitiate the reforms.

It should be reiterated that the efficacy of

comprehensive central financial controls always remains in doubt. Abundant resources

remain in the hands of local authorities, giving them the power to pursue investment strategies that may not be in China’s best overall

interests. These “extra-budgetary funds” have

over the years, made possible a close, but not

necessarily economically rational, relationship

between local governments and the enterprises

under their jurisdictions. Such relationships

frustrate not only the center’s desires for

greater macro-economic coordination, but also

the objectives of central reformers for greater

enterprise autonomy. Viewed in this way, the

reforms can be understood to be both centralizing (to achieve more effective central control)

and decentralizing (to provide for greater enterprise autonomy and to free the economy of political interventions from local governments).

Thus, the experience of the Sixth Plan period

indicates three things about the Chinese economy. First, there is enormous energy residing

in the economy that can be released with the

right incentives, but this energy is more readily apparent in the outside-the-plan part of the

economy. Second, there are very large amounts

of financial resources in the economy available

to local governments and relatively uncontrollable by the central authorities. Local levels

have a strong inclination to use these resources

to grow extensively. Thus, even though the

central authorities have been able to curb investment financed from the state budget, the

level of total investment in the economy in

1984 was 42 percent higher than in 1979, owing

largely to investments made by local authorities with extra-budgetary funds.lg

Third, the experience of the Sixth Plan period

shows the need for strong central controls of

the economy. Given the institutional features

of the Chinese economy, its underdeveloped

market mechanisms, traditions of decentralization, and irrational price system, rational

economic behavior at the micro level can be

and often is irrational at the macro level. This

is particularly true given the shortages of

energy, raw materials, transport, and communications infrastructure.

During 1986 the leadership backed away

from vigorous implementation of the reform

package. The retrenchment was undertaken to

consolidate the reforms to date and to adjust

to the economic problems of 1985—the overheating of the economy, difficulties in foreign

trade occasioned by the rapid drawing down

of foreign exchange reserves, and the drop in

world oil prices, which exacerbated the foreign

exchange problem.

These unexpected economic difficulties made

the politics of reform more complicated,

strengthened the voices of the more conservative members of the leadership who call for a

more cautious approach to reform, and pointed

to the possibility that the more difficult challenges of reform have yet to be faced. Carrying the reforms further for instance, through

loosening controls over labor and capital will

be necessary to solve some of the problems the

reforms have encountered. However, further

reforms of this sort are also likely to engender

more active political opposition, since they cut

more closely to the essence of a Marxist-Lenin-

“Dernberger, “China’s Development Strategy, ” op. cit.
28 ● Technology Transfer to China

ist regime.zo The conflicts in Beijing in early

1987 appear to be over precisely these issues.

Further reform, therefore, becomes a challenge

to Chinese politics, and makes the question of

the future strength of the reform coalition a

matter of importance. This question is further

discussed in chapter 6.

The Seventh Five-Year Plan

Economic policies initiated in the early 1980s

have clearly stimulated economic growth. Indeed, the pace of growth has been such that

in 1985 central officials feared that the economy was overheating. The new 5-year plan (the

seventh) thus calls for more moderate growth

while pushing for the full implementation of

the reform program.

As proposed by the Central Committee of

the Communist Party in September 1985,2’ and

approved by the National People’s Congress

in April 1986,22 the plan differs from earlier

plans in deemphasizing specific quantitative

targets for the economy. Instead, it contains

general principles for action and identifies

areas for special attention. It is usefully seen

as a plan for a transitional period, one that

builds on the achievements of, and attempts

to compensate for, the weaknesses of the Sixth

Plan while looking ahead to the needs of the

1990s.

Thus, the Seventh Plan calls for the continued implementation of reforms throughout

the plan period. It calls for continued improvement in living conditions and an increase of

4 to 5 percent in the average annual per capita

level of consumption. It is premised on a comprehensive rate of growth in Gross Value of

Industrial and Agriculture Output (GVIAO)

‘“The dilemmas of incomplete reform, or partial marketization, in socialist systems are explored in Jan S. Prybyla, “Mainland China and Hungary: To Market, To Market . . .,” paper

presented to the Fifteenth Sine-American Conference on Mainland China, Taipei, June 8-14, 1986.

‘

l See “Proposal of the Central Committee of the Chinese Communist Party for the Seventh Five-Year Plan for National Economic and Social Development, Xinhua (Beijing: Sept. 25,

1986). In FBIS, Sept. 26, 1986, pp. K1-K32.

“See “Excerpts From China’s Seventh Five-Year Plan (1986-

1990), ” Xinbua (Beijing: Apr. 14, 1986). In FBIS (Apr. 18, 1986),

pp. K1-K37.

of 6.7 percent per annum, or an average annual growth in gross national product of 7.5

percent (which includes an average increase of

11.4 percent per year in the service sector). Labor productivity is to grow at an average annual rate of 3.8 percent.23

The plan has a number of implications for

technology transfer and foreign investment.

First, it sets economic priorities that will entail the importation of technology. Major investments are called for in transportation,

telecommunications, energy, and semi-finished

and raw materials.

The plan also calls for the acceleration of the

development of new high-technology industry,

especially electronics and computers, and the

modernization of large, established industries,

such as the automobile industry. The severity

of the need for technological transformation

of established industry is reflected in one recent report:

. . . only 20 percent of the industries in China

can measure up to standards of developed

countries in the past decade. Sixty percent

are so obsolete that they need to be replaced

or upgraded. This explains the wide gap between China and developed countries in economic efficiency and productivity.

China consumes 210,000 tons of coal per

$10,000 in gross national product; the Soviet

Union 120,000 tons, the United States 91,000

tons and Japan 37,000 tons .. .24

The Chinese have placed great hope in the

industrial use of microelectronics technology

(for control systems) for the technical transformation of industry. Altogether, there will

be 600 major projects for the technological

transformation of existing industries. Priority

in importing technology will be given to the

technologies for infrastructure development,

for establishing new industries, and for transformation projects that will contribute to

China’s ability to earn foreign exchange.

The plan reaffirms the continuation of the

open door policy, assumes the continuation of

“Ibid.

“China Daily, Oct. 22, 1985.
Ch. 2—The Chinese Context for Technology Transfer: The Economic Issues ● 29

foreign investment, and predicts a 40- to 50-

percent increase in foreign trade over the plan

period. China expects to increase exports in

areas of current strength (textiles, petroleum,

coal, nonferrous metals, farm sidelines, and

traditional handicrafts) and hopes to increase

its activities in the area of finished manufactures (especially machine tools, electrical products, apparel, and processed foods). Exports

are predicted to rise slightly more rapidly (8.1

percent) than imports (6.1 percent).

Clearly discernible in the language of the

plan is a sense of the interrelatedness of importing technology and exporting products.

Exports are necessary for paying for imports,

and China realizes that its export performance

in price, quality, and value added will depend

on its ability to acquire and assimilate new

technologies.

The final area where the Seventh Plan’s contents pertain to technology transfer is the

stress placed on the development of indigenous

scientific and technological capabilities (discussed in ch. 3) and the emphasis on human

resource development. The manpower development projections call for the graduation of

2.6 million young people from regular institutions of higher education (as opposed to radio,

TV, correspondence, and night schools, which

are also to see significant increases) and of

some 180,000 from graduate programs during

the plan period. These figures represent increases of approximately 70 percent and 400

percent, respectively, over the Sixth FiveYear

Plan period. In addition, there is to be a 110-

percent increase in the numbers trained in polytechnic and vocational schools over the previous plan period.25 This ambitious human resources development plan eventually should

ease China’s shortage of trained personnel, a

major obstacle to China’s ability to absorb

technology and foster domestic innovation.

Economic Challenges

In spite of the promises of the Seventh Plan,

China’s developmental problems remain for15EXC~~Pt~ from china’s Seventh Five-Year plan.

midable. An enduring issue is the lack of innovativeness in the Chinese industrial economy, a problem with clear implications for

productivity. The shortage of available energy

remains a fundamental constraint on growth.

The underdevelopment of transportation and

communications is severe.

In 1981 the Chinese announced their intention to quadruple the size of the economy,

measured in GVIAO, over the 1980 level by

2000. In addition, they called for raising the

national income per capita by approximately

5 percent per year, from $300 in 1980 to $800

by 2000. Two important issues are the sources

of growth (extensive, through further heavy

investment, versus intensive, through technological change) and the constraints on growth

(primarily, limited investment, energy, and

transport and communications resources).

In its recent analysis, the World Bank has

explored the growth prospects of the Chinese

economy for the remainder of the century.2G

While accepting that China may reach its quadrupling goal, the bank study also considered

two other scenarios. In the first, constraints

on growth from energy, raw materials, and infrastructure shortages and from managerial

difficulties hold growth below the quadrupling

rate. The second alternative places less emphasis on physical constraints and foresees a major expansion of the service sector. In this scenario, even though the GVIAO quadrupling

goal is not quite met, the per capita income

goals are reached. The appeal of this balanced

scenario is that by bringing the service sector

more in line with that of other countries, China

can more efficiently create national wealth

while requiring fewer of the scarce inputs

needed for the quadrupling approach.

Chinese authorities have not publicly altered

the quadrupling goal in response to the World

Bank analysis. However, they have called for

a more active service sector, and the drift of

the reform program is supportive of service

expansion. At the same time, major efforts will

be made to remove the main obstacles to the

“The World Bank, op. cit.
30 ● Technology Transfer to China

Photo credit Er/c Basques

Slogans promoting increased worker productivity are visible at many Chinese plants.

This one can be found at the Beijing Jeep Corp. joint venture plant in Beijing.

quadrupling goal: inefficient management,

shortages of materials and infrastructure deficiencies.

China’s movement toward the quadrupling

goal has so far been impressive. Quadrupling

the GVIAO by 2000 will require annual rates

of growth of 7 percent. During the Sixth FiveYear Plan period (1980-85), the economy grew

at a substantially faster pace (averaging 11 percent per annum between 1981 and 1984). Substantial growth has resulted from reforms in

the agricultural sector, not only leading to increases in the value of agricultural output, but

also stimulating new activities in sideline and

small rural industrial production. The more

general relaxation of economic controls has

also led to a boom in construction, to growth

in other forms of local industry, and to the

appearance of new forms of private and collective enterprise.

China also faces the problem of finding the

financial resources, particularly foreign exchange, required to accomplish its development goals. Having decided to seek financial

assistance from foreign sources, China has in

recent years benefitted from loans from the

World Bank and foreign governments. In addition, from the late 1970s to 1984, China accumulated a large foreign exchange reserve. As

a result of a decentralization of control over

foreign exchange, however, reserves were

drawn at an alarming rate in 1985, leading to

a recentralization of controls and some rethinking of technology transfer strategy (discussed

below) in late 1985. Since exports of petroleum

have been China’s leading foreign exchange

earner in recent years, the decline in world oil

prices in the first half of 1986 exacerbated the

foreign exchange problem and made it one of

the more formidable constraints on growth in

the short run.

China will address these problems with a continuation of the trend toward new techniques

of finance—such as an increasingly intimate

relationship with foreign commercial banks

and the further encouragement of foreign

investment—and a technology acquisition

strategy. By the end of 1985, the foreign exchange problem, the search for foreign invest-
--

ChI. 2— The Chinese Context for Technology Transfer: The Economic Issues ● 31

ment, and the strategy for technology acquisition had become increasingly intertwined.

In the face of the drawdowns on foreign exchange, the allocation of foreign exchange to

Chinese organizations and enterprises increasingly became a function of their ability to earn

it. This meant that some sectors, such as the

petroleum industry, had a greater claim on

scarce foreign exchange than did, for instance

the electric power industry. This new foreign

exchange norm also created problems for Sinoforeign joint ventures, which the Chinese

hoped would bean important vehicle for technology transfer. Joint ventures typically must

import equipment and components for a period

of time after they start up, and may not be

in a position to earn foreign exchange through

exports for quite some time. The operations

of these enterprises can easily be seriously disrupted if they are denied access to the foreign

exchange they expect. The increasing number

of such occurrences in early 1986 led foreign

firms to question the attractiveness of investments in China.

China’s formidable economic problems

would be extraordinarily difficult to resolve

without technology and investment from

abroad. The importance of the open door policy, therefore, is not likely to diminish in the

short run, and the Chinese seem willing to continue to modif y the policy to improve the business climate in China. Whether they are prepared to take these modifications as far as the

foreign businesses would like remains to be

seen. It is important to consider some of the

features of the open door policy, and some of

its problems, in greater detail.

THE OPEN DOOR POLICY

China’s open door policy and its reform program are mutually reinforcing. The political,

economic, and science and technology reforms

noted above will help China select and assimilate foreign technology. Yet, the implementation of the reforms is clearly incomplete,

and many problems remain with technology

transfer.

Since the beginning of the open door policy

in 1978, China has initiated a multifaceted

strategy to open itself to the outside world.

The measures adopted include:

the establishment of four “special economic zones’ in which foreign investment

is encouraged;

plans to make the the Fujian, Yangtze,

and Pearl River deltas ‘‘economically

open’ regions;

the acceptance of foreign investment and

loans from international organizations

(especially the World Bank), foreign governments, and commercial sources;

the approval of a variety of forms of foreign participation in the Chinese economy,

including joint ventures, cooperative man-

●

●

agement schemes, wholly owned foreign

enterprises, and compensation trade arrangements;

cooperative schemes with foreign interests

in natural resource surveys and exploitation; and

the gradual modernization of an infrastructure for interacting with the outside

world, including changes in the banking

system and the creation of new institutions such as the China International

Trust & Investment Corp. (C ITIC) and the

China Coordinating Center for Business

Cooperation, under the State Economic

Commission.

To create an environment conducive to foreign investment and technology transfer, the

Chinese authorities have also attempted to

establish an entirely new legal framework for

foreign participation in the economy. Laws

have been passed pertaining to joint ventures,

foreign contracts, company registration, labor

management, special economic zones, foreign

enterprise taxation, exchange control, offshore

petroleum exploration, marine environment

protection, trademarks, patents, and, most re-
32 ● Technology Transfer to China

—.

cently, the activities of wholly owned foreign

firms operating in China. Greater autonomy

for approving foreign investments has been

given to local governments, and restrictions

on foreign banking operations have been loosened.27

Thus, much has changed in China’s interactions with the world economy since 1978.

Whereas China’s exports represented only 0.75

percent of the world’s exports in that year, they

had grown to 1.25 percent in 1984, moving

China from 32nd position to 16th in value of

exports. From the end of 1978 to the end of

1984, China received more than $17 billion in

foreign capital (of which $4 billion were direct

investments), which represented about 10.5

percent of the total investment in capital construction during the same period. The use of

foreign capital is expected to increase during

the Seventh Five-Year Plan period, during

which China expects to absorb US$30 billion,

$5 to $7 billion of which is to be foreign investment .28

The open door has also led to a substantial

increase in China’s acquisition of foreign technology. Although significant questions remain

about absorption and about how to measure

flows of technology into China, there is little

doubt that technology transfer to China has

been substantial. Between 1981 and 1985, for

instance, China spent approximately $9.6 billion to import full sets of equipment and other

advanced technology. This represented a 69-

percent increase over the previous 5-year plan

period.29 Between January and June of 1985,

318 technology import contracts were approved by the Ministry of Foreign Economic

Relations and Trade, more than double the

number from the same period in the previous

year. In dollar terms, the first 6 months of 1985

saw contracts worth $2.05 billion, compared

to $339 million from the previous year.30

‘

7Teh-pei Yu, “Foreign Capital in Mainland China, ” paper presented to The Fifteenth Sine-American Conference on Mainland China, Taipei, June 8-14, 1986.

28Teh-pei Yu, “Foreign Capital, ” op. cit., p. 9.

‘

g

’’ Foreign Trade Minister Views Trade Situation, ” FBIS,

June 10, 1986, p. K8.

3(’Xinhua, Aug. 18, 1985. In JPRS-CEA-85-088, Oct. 2, 1985,

p. 81.

Despite these notable changes, reservations

by foreign interests about the Chinese business environment have become more numerous and more serious. Frequently mentioned

disincentives operating on foreign firms,

according to the U.S. Commerce Department,

include:

. . . foreign currency restrictions making the

repatriation of profits uncertain, the overvaluation of the Chinese contribution to Sinoforeign enterprises, inflated labor costs, poor

labor discipline, high manufacturing costs,

unpredictable customs treatment, undependable supplies of local materials, inadequate

energy, transportation, and communications,

a cumbersome bureaucracy, still unfavorable

tax and accounting policies, an irrational pricing structure, uncertain access to a poorly defined domestic market, a marginal return on

investment, and difficult expatriate living

conditions .31

The ongoing economic reforms themselves

introduce uncertainties that make planning

more difficult for foreign investors now than

in 1979, when joint ventures were first authorized. Furthermore, the new laws are often very

general and ambiguous, largely untested, and

inconsistently administered by bureaucrats

who have not prized legality highly in the past.

A framework maybe in the making, but as yet

it is both fragile and incomplete.32 Foreign investments and technology transfers are less

than the Chinese expected. From 1979 to 1985,

the Chinese realized only 36.4 percent of the

foreign investment pledged, in contrast to 70.8

percent of the foreign loans pledged during the

same period.33

To improve the investment climate, the Chinese promulgated new investment regulations

in October 1986.34 The regulations grant a priv- ——- —

“U.S. Department of Commerce, “People’s Republic of China, ”

Foreign Economic Trends and Their Implications for the Um”ted

States, FET 86-85 (Washington, DC: U.S. Government Printing Office, September 1985).

‘

z

See, for instance, Ellen R. Eliasoph and Jerome Alan Cohen, “China’s New Technology Import Regulations, ” The Ch”na

Business Review, vol. 12, No. 6, November-December 1985, pp.

36-40.

33Teh-pei Yu, “Foreign Capital, ” op. cit., p. 17.

“’’Provisions of the State Council of the People’s Republic

of China for the Encouragement of Foreign Investment’

(promulgated on Oct. 11, 1986), China Dm”ly, Oct. 14, 1986, p. 2.
Ch. 2— The Chinese Context for Technology Transfer: The Economic Issues 33

ileged position to export oriented and technologically advanced enterprises established with

foreign investment, and attempt to eliminate

the arbitrariness that has surrounded the supplies of inputs to foreign-invested firms and

the labor and rental rates that have been levied.

Although the views of the foreign business

community were actively solicited in preparing the regulations, some of the important concerns of the foreign investor—especially the

questions of access to the Chinese domestic

market and the repatriation of profits—have

apparently not been alleviated by the issuance

of the regulations.

Thus, from the foreign perspective, there remain reasons to doubt just how open the open

door actually is. Import restrictions, bureaucratic red tape, domestic subsidies, and unfavorable tariffs combine to make a formidable protectionist regime. In part, the existence

of this regime reflects the legacy of China’s

past, the consequences of the interactions of

a closed economy modeled on the Soviet Union,

Maoist principles of self-reliance, and the turbulence of the Cultural Revolution. However,

it also reflects underlying contradictions in

China’s conception of the open door and ambiguous attitudes toward the international

economy in general and foreign technology in

particular (a subject pursued in greater depth

in ch. 3).

These underlying problems have several

components and are inseparable from the often

irrational operation of domestic institutions .35

First, there is a basic ambiguity about China’s

overall development strategy. Is it to be an

export promotion or import substitution strategy?sG Or is it to involve both, as the new investment regulations seem to imply? Chinese

development since the founding of the People’s

Republic of China has clearly not followed the

export promotion strategy. The relatively

small export sector of the past, the use of foreign technology (and the relatively little im-

“Cf., Huang Fangyi, “ Analysis and Suggestions on China’s

Introduction of Foreign Technology and External Trade, ” op. cit.

‘See, John B. Sheahan, “Alternative International Economic

Strategies and Their Relevance for China, ” World Flank Staff

Working Papers, No. 759, 1986.

port of it after 1960) to support domestic industrial development, and the strong emphasis

on self-reliance are all more consistent with an

import substitution approach than one that

is export driven.

However much China might want to emulate the export promotion approach of the

Asian NICS, there are reasons to doubt it will

happen soon. China is a large country with a

historic internal focus and enormous domestic needs and problems. China’s past strategy

of self-reliance and regional self-sufficiency led

to a dispersion of industrial projects. Poor

transportation and communications hinder the

access of the products of this inland economy

to the international trading centers on the

coast. China’s politically powerful basic industries, including machinery suppliers, regard the

Chinese domestic market as their preserve.

While they are not necessarily opposed to some

form of new economic internationalism, they

have insisted that the definition of the open

door be on their terms. Furthermore, most Chinese products lack the quality and design to

be competitive on world markets.

Finally, the most favorable era for pursuing

an export-oriented development strategy may

have passed, at least for the immediate future.

China’s desire to expand its exports has already caused trade friction, and the projections

of future Chinese exports would suggest that

these may intensify. Unlike the Asian NICS,

which were able to take advantage of especially

open markets in an industrialized world enjoying exceptional prosperity, the Chinese interest in an export-led development approach

comes when the Western economies are shaky

and their domestic markets are increasingly

subject to protectionist pressures.

A range of policies pertaining to exchange

rates, tariffs, prices for export items, subsidies

and export credits, import licenses, and tax advantages are involved in the shift from import

substitution to export promotion. The Chinese

have begun to implement policies pertaining

to most of these areas to accelerate export expansion. However, many of these are likely to

cause negative reactions from China’s trading

partners and will complicate the question of
34 ● Technology Transfer to China

Photo credit Er/c Basques

A Jeep Cherokee being assembled at the Beijing Jeep Corp. plant, a joint venture between the American Motors Corp.

and the Beijing Automotive works. This modern assembly line serves as a model for efficient production techniques

and improved quality control.

China’s re-admission to the General Agreement on Tariffs and Trade.

A second major component of the open door

dilemma is the uncertain mixture of decentralization and centralization of foreign economic

decisionmaking. This is related to, but not synonymous with, the uncertainties about the mixture of market and planning elements, which

is one of the uncertainties of the economic reform program. Chinese experience with the

open door policy and with decentralizing marketing reforms since the late 1970s has pointed

to the danger of a loss of control over macroeconomic policy as a concomitant of reform.

On the other hand, the Chinese are also aware

of the stifling of economic activity resulting

from certain forms of centralization. The saying ‘giving rise to rigidity as soon as we exercise centralization, and giving rise to disorder

as soon as we relax control’ captures the sense

of this dilemma. Thus, relaxation of central

controls over foreign economic activity in the

recent past has led to the rapid dissipation of

foreign exchange holdings. At times, as discussed in the following chapter, it has also led

to irrational, duplicative technology imports.

The problem of policymaking for importing

foreign technology has both institutional and

conceptual dimensions. Chinese institutions

for the conduct of foreign economic relations

reflect both the legacy of socialist foreign trade

and the results of the decentralizations introduced since the late 1970s. This institutional

legacy has locked China into an alternating

pattern of either too much centralization or too

little central control exercised in the national

interest. China has yet to find a formula for

institutions that are able to set and enforce

a foreign economic policy that both serves

basic national interests (e.g., maintaining
Ch 2— The Chinese Context for Technology Transfer The EcofIormc Issues ● 35

responsibility for the nation’s foreign exchange

holdings) and allows for decentralized decisionmaking in the service of economic dynamism.

The institutional problem has a conceptual

or intellectual analog. China is, in effect, searching for the intellectual foundations of an industrial policy. Such an intellectual formulation would spell out which sectors of the

economy deserve priority for export promotion

or for the import of technology. Should priority

go to industries with high immediate export

potential (e.g., textiles or consumer electronics), to basic industries such as steel or

transportation, or to industries (e.g., advanced

electronics, robotics, communications) that

would allow China to leapfrog over phases of

the product cycle (ignoring perhaps comparative advantage) and compete in high value-

-added goods and services? The problem of an

intellectual formulation is also evident in the

lack of a decisionmaking strategy for intrasectoral or intraindustry technology transfer. ”

Such an intellectual formulation would then

serve as a conceptual framework for the myriad

analyses, feasibility studies, and decisions

China must make about how to use its limited

resources to extract the maximum benefit from

its interactions with the world economy. At

present, although the Chinese recognize the

need, such a formulation or strategy does not

exist.

The following chapter discusses how some

of these issues surrounding the open door policy pertain more specifically to the technology

transfer phenomenon.

— —

“See Geoffrey Oldham and Al~son M’at-hurst, TechnoloA:\r

Transfer to the Chinese offshore Oil Industrj-, unput)Iish(d rt)-

port, University of Sussex, Science Policy Research (1 nit. no

date.
Chapter 3

The Chinese Context

for Technology Transfer:

Strategies and Issues for

Technology Imports

Photo credit: Eric Basques

Yu the Mandarin’s Garden in Shanghai is characteristic of the architectural style of the Ming and Qing

Dynasties. The garden is divided into three parts, each separated by a white brick wall the top of which

forms an undulating gray dragon.
CONTENTS

Page

Goals for Technological Modernization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

The Experience with Technology Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Indigenous Capabilities: The Example of the Defense Industry. . . . . . . . . . 42

The Decisionmaking System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Perspective of the Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

The Government Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Financial and Trade Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Foreign Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

The Foreign Exchange Constraint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

The System in Practice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Issues of Assimilation and Diffusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Technical Manpower . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

The Supply System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Internal Diffusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

The Prospects for Assimilation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Box

Box Page

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

Figure

Figure No. Page

3. The Acquisition of National Technical Capabilities: A Revised View of

the Elements Involved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Chapter 3

The Chinese Context for Technology

Transfer: Strategies and Issues

for Technology Imports

In the post-Mao period, the Chinese leader- technology. The challenge for Chinese planners

ship has consistently stressed the central role has thus been to develop a workable strategy

of science and technology for China’s modern- and consistent plan for scientific and technoization. In 1982 Premier Zhao Ziyang said that logical development. After some false starts

it would be impossible to reach China’s over- in the late 1970s, a coherent set of objectives

all economic goals by year 2000 without ma- began to take shape in the early 1980s.

jor contributions from modern science and

GOALS FOR TECHNOLOGICAL MODERNIZATION

China has four categories of goals for technology. The first is for Chinese industry to

reach at least the present Western level of technology by year 2000. This will require a major

effort at revitalizing established industries, including a special, well-funded program of

‘‘technological transformation’ ~ishu gzu”zao),

which is being administered by the State Economic Commission (SEC).

The second objective is to ensure that modern technologies are diffused to China’s rural

areas. The interest here is not only to continue

with the technological transformation of agriculture, but also to provide a modern technological foundation for burgeoning rural industry. China expects that the coming decades will

see major movements of the labor force out

of agriculture and into rural industry and services. A special project, the Spark program,

administered by the State Science and Technology Commission, is designed to provide

technological inputs into this major shift in

the occupational structure.

A third objective is to give priority to the

technologies needed to develop the country’s

infrastructure and natural resource industries.

Thus, a wide variety of technologies pertaining to energy, telecommunications, transportation, and resource exploitation are targeted

for acquisition and development. This part of

the strategy, by necessity, involves the activities of many Chinese agencies.

Finally, the Chinese have identified a number of technologies that they believe will be

the basis for new high-technology industries—

electronics and computers (including advanced

software applications such as CAD/CAM), biotechnology, materials, robotics, lasers, and

space and ocean technologies. The Chinese expect these technologies will lead to major industrial advances and have targeted them for

special attention in the hope of becoming competitive.

The achievement of these goals will require

the modernization of the domestic research and

development (R&D) system. But the Chinese

also realize this cannot be achieved without

the transfer of foreign technology to China. It

is important to note, however, that the various goals entail different approaches for acquiring the appropriate technology. Whereas

much of the technology desired is in the hands

of foreign companies, some of it (e.g., transportation and telecommunication technologies)

is in the hands of foreign governments or public corporations. In addition, the Western

39
40 ● Technology Transfer to China

university is the locus of much of the knowledge needed to launch high-technology or sciencebased industries. The sending of students

and older scientists abroad to a Western university for advanced training, therefore, can

be seen as an important channel for technology transferal

IThis issue has been explored in Leo A. Orleans, “Chinese Students and Technology Transfer, ” Journal of Northeast Asian

Studies, vol. 4, No. 4, winter 1985; and in Richard P. Suttmeier,

“Academic Exchange: Values and Expectations in Science and

Engineering, ” unpublished paper presented at the Conference

on Sine-American Educational and Cultural Exchange, Honolulu, HI, The East-West Center, Feb. 18-22, 1985.

—

To gain access to these sources of technologies and use them effectively, the Chinese

have initiated programs of domestic reform

and have made extraordinary changes in their

approaches to foreign relations. This chapter

examines the Chinese experience with technology transfer more specifically, beginning with

an overview of China’s past history of technology transfer.

THE EXPERIENCE WITH TECHNOLOGY

Chinese experience with technology transfer in the 1980s is shaped not only by the current technology objectives discussed above

and the overall economic modernization objectives examined in the previous chapter, but

also by historical experience. Since the late

19th century, the Chinese have realized the importance of modern technology from the West

but have been unable to reach an intellectually and culturally congenial relationship with

it. As characterized by one foreign trade official, who was trying to dispel these attitudes,

Chinese thinking often goes as follows:

After the Opium War, imperialist powers

carved up China. Our political and economic

lifelines were controlled by foreigners, our

markets were flooded with foreign goods, and

our national industry was severely devastated. Such a period of national humiliation

is still fresh in our memory. Therefore people

always associate imports with the protection

of our national industry, and tend to think

that the less imported the better.2

Also of concern has been the danger of overreliance on foreign help. The saliance of this

historic concern was reinforced at the end of

the 1950s, when, after the Chinese allowed

themselves to become quite dependent on Soviet technology during the 1950s, the Sino-

‘Wei Yuming, “On Open Door Policy, Trade With Japan, ”

Xinhua, Oct. 25, 1985. In FBIS, Oct. 29, 1985, p. A4.

Soviet relationship

cal assistance was

TRANSFER

soured, and Soviet techniwithdrawn.

The scientific and technical infrastructure

developed rapidly in the 1950s, but then the

Chinese were forced to rely largely on their own

efforts for the further industrial development

of the country until the opening to the West

in the late 1970s. (Some foreign technology,

mostly for whole plants and equipment,3 came

from the capitalist countries after the SinoSoviet split.) Some of the productivity problems noted in chapter 2 resulted from this extreme self-reliance, but another result was the

development of indigenous technical capabilities.

From 1950 to 1960, China imported technology from the Soviet Union and Eastern Europe in support of 156 major industrial projects.

These were concentrated in such basic industries as metallurgy, machine building, trucks,

coal mining, electric power, and petroleum.

Some 400 items of technology were introduced,

with an approximate value of $2.66 billion.

These transfers were indispensable for the

timely establishment of new industries and

contributed to the rapid economic growth experienced at the time.4

3Huang Fangyi, “Analysis and Suggestions on China’s Introduction of Foreign Technology and External Trade, ‘“ Asian

Survey (forthcoming).

‘Ibid. Also, Robert F. Dernberger, “Economic Development

and Modernization in Contemporary China: The Attempt To

Limit Dependence on the Transfer of Modern Industrial Tech-

(continued on next page)
Ch. 3— The Chinese Context for Techrtology Transfer: Strategies and /ssues for Technology /mporfs ● 41

From the withdrawal of Soviet assistance in

1960 to the outbreak of the Cultural Revolution in 1966, the Chinese began relying more

on Japan and Western Europe for technology.

Some 84 major contracts worth $280 million

were signed in this period. Industries targeted

were metallurgy, chemicals and chemical fibers, and synthetic textiles.

From the early 1970s to 1978, China signed

some 300 contracts for foreign technology,

worth $9.9 billion. The emphasis in this period

was on complete plants in such industries as

steel, petrochemicals, and chemical fibers.

Many of the contracts from this period were

concluded in great haste in late 1978 and were

subsequently canceled or postponed.5

It is interesting to note that China’s technology transfer experience with the Soviet

Union was intimate in that it involved a whole

range of transfer experiences (including the importation of whole plants, the supply of Soviet

blueprints, the presence of Soviet technical advisors in China, and the training of Chinese

in the Soviet Union). China’s subsequent approaches to technology acquisition in the 1960s

and 1970s were more at arm’s length, focusing on the importation of complete plants and

sets of equipment without due attention given

to the software, training, and advisory services that often contribute to successful assimilation.

A number of changes in China’s approach

to technology transfer have been made since

1978. The Chinese came to the conclusion that

the arms-length, whole-plant mode of transfer was too costly and did not yield the knowhow they expected. Since then, Chinese pol-

—.- —— ——

rmlogy From Abroad and to Control Its Corruption of the Maoist

Socialist Revolution, Technology and Communist Culture: The

Socio-Cultural Impact of Technology Under Socialism, Frederic

Fleron (cd. ) (New York: Praeger, 1977).

‘l{uang Fangyi, op. cit.

icy has discouraged the acquisition of complete

plants and equipment and has stressed the

acquisition of know-how: “acquiring the hen

and not just the egg, “ as the Chinese put it.

Thus, modes of technology transfer that offer

more intimate interactions with foreign technical personnel have come to be preferred. A

wide variety of instruments of transfer, including licensing, joint ventures, cooperative ventures, wholly foreign-owned ventures, compensation trade, and the use of consultants and

the procurement of technical services are being used. Much emphasis is being placed on

foreign provision of training in contract negotiations of SinO-foreign technology transfer. As

a result of this change, a much greater proportion of the technology imported since the end

of the 1970s has been “unembodied” technology, or pure know-how.G

In addition, China spends a greater percentage of its resources on importing technology

than it did in the past. In the sixth Five-Year

Plan period, for instance, $9.7 billion, or 15 percent of the investment funds provided for in

the plan, went for foreign technology. ’ Two

other changes are notable in this fourth period

of technology imports: Whereas past emphasis was on technologies supporting the establishment of new enterprises, the emphasis since

the early 1980s has been on technologies to upgrade or renovate existing enterprises. Finally,

the locus of decisionmaking on technology

transfer has changed. As part of the reformist

decentralizations, the central ministries and

a single foreign trade corporation are no longer

the principal decisionmakers. Instead, many

other players have become active, including

enterprises, local governments, and a myriad

of new trading corporations.

‘Ibid.

‘Ibid.
42 ● Technology Transfer

THE

to China

INDIGENOUS CAPABILITIES:

EXAMPLE OF THE DEFENSE INDUSTRY

The context for technology transfer cannot

be understood without recalling the existence

of significant technological capabilities indigenous to China. These include an extensive

network of over 9,000 R&D institutes, including almost 120 in the Chinese Academy of Sciences, a large capital goods industry, and a

military-industrial complex that has enabled

China to develop nuclear weapons and launch

satellites.

Over the years, Chinese industrial investment has been strongly biased toward heavy

industry, resulting in the establishment of a

large and comprehensive capital goods industry supported by a network of R&D institutes.8

At the center of the capital goods sector is the

vast machine building industry, the main domestic supplier of industrial technology and

equipment and the chief alternative to foreign

technology. Included in the machine building

industry (see box A) are China’s industrial assets for military production.

As part of the package of economic reforms,

the Chinese have initiated a significant policy

shift regarding the national defense industry.

The latter had for many years been the beneficiary of priority investments of material and

human resources. Commenting solely on the

ordnance and aeronautics industries (just two

of six main defense industry sectors), for instance, two Chinese observers noted:

In the 1950s and 1960s . . . the State assigned the university graduates and the most

outstanding scientific and technological workers to the departments in charge of the national defense industry, with the result that

there was a concentration of talented people

in the industry. At the same time, the Ministry of the Aeronautics Industry and the Ministry of the Ordnance Industry jointly owned

a scientific and technological work force of

‘A useful analysis of the capital goods industry, including

its technological capabilities, is found in Zhang Renyu, ?’echnology Issues in the Capital Goods Sector: The Experience of

the People Republic of China, United Nations Conference on

Trade and Development, UNCTAD/TT/57, 1984.

more than 200,000. In addition, the best facilities and equipment went to the national defense industry.g

Until the late 1970s, however, this privileged

sector had been largely insulated from the civilian economy and civilian R&D system. It

thus had little impact on the latter in spite of

technological achievements in the defense sector. China has produced military planes for 30

years but is only now starting to produce civilian air lines. It has designed and launched

its own military satellites, but its telecommunications satellites are still experimental. It

mastered nuclear weapons technology in the

1960s, but the first nuclear power station is

still under construction.

In the post-Mao era, this situation has been

changing. As the Chinese contemplated the

modernization of national defense, they concluded that over the long run the nation’s security could not be achieved without a vigorous

and modernized civilian industrial economy.

Defense modernization was therefore accorded

the lowest priority position of the four modernizations. Cutbacks in defense procurement

resulted in significant underutilization of defense factories. The latter therefore have been

instructed to turn at least some of their productive assets to the service of the civilian

economy.

The defense industry has become a vast empire of research and production units, but it

is difficult to define their economic significance.

Until recently, the Chinese rarely provided information on the defense industry, but as part

of the ‘‘civilianization’ program, more is coming to light. The extensiveness and degrees of

vertical integration of the defense plants is

depicted in a recent account of the “012 Enterprise Group, ” an industrial complex of the

——

‘Chen Siyi and Gu Mainan, “China’s National Defense Industry Faces an Historic Turning Point-Sidelights on Zhao

Ziyang’s Meeting With National Defense Industry Specialists,

Liaowtmg Overseas Edition, No. 6-7, Feb. 10, 1986. In F131S,

Mar. 5, 1986, p. K14.
Ch 3— The Chinese Confext for Technology Transfer: Strategies and Issues for Technology Imports 43

Box A.—The Structure of the Machine Building Industry

The machine building industry has been reorganized to reflect its changing military and civilian responsibilities. The former Ministry of Machine Building has been combined recently with the

Ministry of the Ordnance Industry (which also includes the China Northern Industries Corp. and

produces instruments and meters, precision metal cutting and forging tools, diesel engines, bicycles, clocks, washing machines, sewing machines, oil equipment, magnetic heads, tapes, and discs)

into the State Commission of the Machine Industry. In addition, there are special ministries of machine building (formerly numbered, but now renamed to reflect their new mixed military and civilian roles) listed below. Each of these has set up one or more of its own corporations to link it to

the civilian economy and, particularly, to facilitate its entry into international trade. These ministries. their trade corporations (in parentheses), and their civilian product lines are listed below. The

range of sample products gives some idea of the high degree of vertical integration that characterizes these ministries.

1.

2.

3.

4.

5.

Ministry of the Nuclear Industry (China Nuclear Energy Industry Corp.). Products include

meters and instruments, surveying and mining equipment, optical instruments, mechanical

components, nuclear reactors, air filters, valves, and heat exchangers.

Ministry of the Aeronautics Industry (China Aero-Technology Import and Export Corp.).

Products include transport aircraft, agricultural aircraft, lathes, motorcycles, transducers,

switches, optical recorders, washing machines, air-conditioners, and technologies for the auto

industry.

Ministry of the Electronics Industry (China Electronics Import and Export Corp.). Products

include earth stations, navigation equipment, electronic materials, computers and peripherals,

radios, TVs, other consumer electronics, and integrated circuit technologies.

Ministry of the Astronautics Industry (Great Wall Industry Corp., China Precision Machinery Corp., China Communications Satellite Corp.). Products include expendable launch vehicles, communications equipment, weather and earth resources satellites, telemetry, tracking

and control equipment, microelectronic devices, and dishwashers.

China State Shipbuilding Corp. (China Shipbuilding Trading Corp.). Products include bulk

carriers, container vessels, marine engines, seismographic and meteorological support services for offshore prospecting, yachts, and pleasure craft.

SOURCE: Adapted from Wendy Frieman, “National Security Risks of Dual-Use Transfers to China,” app. 6, vol. 11 of this report. July 1986.

aviation industry located in Shanxi Province. ’”

The complex comprises of over 20 factories and

empIoys more than 30,000 people, including

4,1000 engineers and technicians. Included also

are 10,000 major pieces of equipment and one

——. .

)(1M &y o–f the defenserela~ facilities established in the 1960s

and early 1970s were located in mountainous regions in the interior, for national security reasons. This industrial location policy, sometimes referred to as the “third front construction’ policy, leaves China with a spatial distribution of important

industries that is not economically rational under the current

policies of integrating the defense industry with the civilian economy, The Chinese are taking special action to deal with these

third-front enterprises; a special office for them has been established under the State Council, and there is special mention of

them in the Seventh Five-Year Plan.

of the largest assembly workshops of its kind

in Asia. ’l

Such complexes have been assumed by outsiders to be characterized by a high degree of

vertical integration. The full extent of integrated industrial capabilities is evident from

the diversity of industries to which the 012

complex now supplies goods and services under

the current policy of aiding the civilian econ-

‘‘Quan Zong, “China’s Large-Scale Aviation Industry Base

Deep in the Mountain s-A Visit to the 012 Enterprise Group. ”

Liaowang Overseas Edition, No. 26, June 30, 1986. In F’BIS,

July 15, 1986, p. K21, ff.
44 . Technology Transfer to China

Photo credft ” Eric Basques

Assembly of the BJ-212 jeep at the Beijing Automotive Works. This Soviet designed jeep has been produced for decades—

annual output is set at 24,000 units. The assembly line has been shut down while these workers are on their lunch break,

which in China is often 2 hours.

omy. Although one of the main products of the

complex is the Yun-8 transport aircraft, member factories have produced such diverse products as light industrial goods (including copying

machines), processing machinery, instruments

and meters, home appliances, and farm machinery. The complex also cooperates with the

textile, plastics, and food processing industries. A cooperative venture with the No. 2 Automobile Factory has been begun to produce

minicars.

The degree of vertical integration in the defense industry and the privileged quality of this

sector in the past may mean that there are

“pockets of excellence’ ‘or special competence

which will, under the new policies, begin to

have more of an impact on the economy.’2 For

instance, some of China’s more advanced technological competence in computers and electronics may be in the Ministry of Astronau12 Denis Simon, “The Challenge of Modernizing Industrial

Technology in China: Implications for Sino-U.S. Relations, ”

Asian Survey, vol. 26, No. 6, April 1986, pp. 420-439.

tics (MOA), not solely in the Ministry of

Electronics Industry, where one might expect

it. According to one report:

Great progress has been made in the manufacture and application of computers used in

rockets, satellites . . . All special-purpose computers for military use are made by China,

Some computers have reached the advanced

level of the early 1980s. At present this ministry (MOA) has developed a system that

incorporates research, production, and application of integrated circuits, whole sets of computers, and peripheral equipment and software. It is now capable of annually producing

5,600 microcomputers, and small and mediumsized computers, as well as 5 million integrated

circuits. It has established three bases for producing integrated circuits, and has put more

than 2,000 computers into operation. ’3

“Beijing, Xinhua, June 13, 1986. In FBIS, June 30, 1986,

p. K33. In January 1986, a U.S. delegation attending a science

policy conference in China, which included a member of the OTA

staff, visited a MOA facility in Lishan, Shaanxi province, where

3-micron circuits were being produced. The facility was in transition to civilian commercial sales.
— —

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

MOA computer and electronic products are

now being marketed throughout China and in

20 countries abroad. ”

Clearly, such plants as the 012 Enterprise

Group and the facilities of the MOA, as well

as other parts of China’s military industrial

complex, have considerable technological potential that must be considered in assessing

the prospects for technology transfer to China.

The domestic suppliers of technology associated with the defense industry, and the machine building industry more generally, have

the competence to meet many of China’s technological needs, albeit not always as well as

foreign technology. Nevertheless, the machine

building industry consistently promotes itself

and its capabilities as alternatives to foreign

suppliers of technology, as the account of the

012 complex makes clear:

In the past, the Wuhan Iron and Steel Complex imported spare parts for the cylinders of

the hydraulic pressure systems of its rolling

mills, The No. 572 factory under the 012 Enterprise Group undertook the task of the research and manufacture of the R2 main shaft

balance cylinder. The balance cylinders it

produced have been installed for trial use and

proved to have a life of over 3 years, far longer

than the 6-month life of the imported ones. ”

Further evidence that the Chinese see the

military industries and R&D institutes as important factors in the national technology

transfer strategy is seen in the following

editorial comment in People Daz”ly:

At present, many enterprises have already

attached importance to introducing advanced

foreign technology. However, less attention

has been attached to transferring our own

defense industry technology to civilian enterprises. Transferring defense industry technology to civilian enterprises is a shortcut

to enhancing technological progress, which

should be accelerated.

Introducing foreign technology is certainly

a demand of the four modernizations. However, it has many limitations. We need to introduce many types of advanced technology,

‘{Ibid.

“Ibid., p. K22

but since they are very expensive, we can only

introduce what we most need. Moreover, the

most advanced technology is usually unable

to be introduced into our country. The transfer of defense industry technology to civilian

enterprises has no such limitations. Therefore,

we must energetically encourage this transfer. The more and the faster the transfer the

better. ”

Some of these ministries have made an aggressive entry into the civilian market. It is

likely that this will continue and that the machine building ministries will have a more

prominent role as exporters of goods, services,

and technology during the remainder of the

century. In the past, machinery and electrical

products accounted for a small fraction of

China’s exports, representing only 4.7 percent

in 1985. Current thinking, however, predicts

a volume of machinery exports by 1990 worth

US$l billion, or a 240 percent increase over

1985. ’7

The Chinese are also striving to become exporters of technology and high-technology

services. In April 1986 they convened their

first technology export fair in Shenzhen, at

which the defense industries were well represented.18 China’s offers to provide satellite

launch services to overseas parties and the

marketing of the diverse services of the nuclear

industry are two of the more prominent examples of possible future exports of services from

the military industry. While technology exports from China are unlikely to be exclusively

from the defense sector, many will be. Ironically, given the production and managerial

problems that have inhibited the actual em-

‘

eCommentator, “A Shortcut To Enhancing Technological

Progress-On the Necessity of More Quickly Transferring More

Defense Industry Technology to Civilian Enterprises, Renmin

Ribao, Aug. 27, 1985. In FBIS, Sept. 5, 1985, p. K2.

“’i Interview t$’ith He Guangyuan. Vice Minister of the hlachine Building Industry, ” Beijing Domestic Television Ser\’-

ice, June 6, 1986. In FBIS, June 16, 1986, p. K 16.

18Chen Zhiqiang and Yu Fengyuan, “Chinese Technology

Moves Towards the World, ’ Renmin Ribao O\’erseas Edition,

Apr. 22, 1986. In JPRS-CST-86-025, pp. 17 ff. See also, a report

on China’s seeking patent protection services in Hong Kong

for its technology exports in the South China Morning Post

(Business .Vewrs supplement). Apr. 1, 1986; and Huang Zhiping,

“Chinese Technology Seeks Overseas Markets. Zntertrade, January 1986, p. 29.
46 . Technology Trarisfer to China

ployment of new technologies in civilian industries, it may be easier for the Chinese in the

short run to sell technology developed in the

defense industries than to sell products made

in China employing that technology.

Products from the defense industry are likely

to become an increasingly important part of

China’s exports. China is already a major arms

exporter (see ch. 7), and recent reports indicate

a desire to move to higher technology in its

military exports. In some cases, this will be

done with foreign help. For instance, China and

Italy have entered into an agreement to upgrade the electronics and fire control system

for the A-5M attack aircraft. ’g

China’s new policy toward the relationships

between the defense industries and the civilian economy not only has the potential for making the considerable technical resources of the

“See, Xinhua, Nov. 6, 1986, In FBIS, Ncn’. 7, 1986, pp. K5-

K6; and Daniel Sutherland, “China Plans To Expand Arms

Sales, ” The J1’ashington Post, NoI’. 12, 1986.

defense sector available to the civilian economy, but also creates the possibility that the

defense sector will become more innovative as

it faces market demands, as it gains access to

technology available in the civilian economy,

and as it enters into cooperative technology

transfer ventures with foreign firms.

Despite frequent statements from China

that the technologies of the defense industries

can often substitute for foreign technology, it

is clear that the defense industries also see their

current role as improving their technology

through cooperative international civilian

projects.’” Thus, it is likely that the new policy on the defense industry will not only contribute to domestic transfers of technology to

the civilian sector, but also lead to the upgrading of the technology and the management of

the formerly exclusively military sector of the

Chinese economy.

— —.. .

‘(’For one account of the activities of the a~iation industr~,

See Intertrade, December 1985.

THE DECISIONMAKING SYSTEM

Without a clear national consensus on the

proper course for technology transfer, different perspectives and interests have led to a

fractured decisionmaking system in China. Indeed, organizational complexity is often a dominant factor in China’s relations with Western

enterprises and is a major obstacle to China’s

modernization.

China’s record of choosing, importing, and

assimilating technology has been much influenced by the operation of its decisionmaking

institutions, and particularly by the overlapping central and regional jurisdictions that

characterize the decisionmaking system. For

instance, coordination between the central ministries and between decisionmakers in Beijing

and those at the province and enterprise levels

has not always been good. Decisionmakers in

Beijing who make purchasing decisions about

foreign technology have not always had a good

understanding of the technical problems in the

field. There is a lack of coordination between

the economic commissions at various levels of

government and the science and technology

commissions. 2*

The Chinese in recent years have sought to

rationalize their decisionmaking for technology import policy, with mixed success. China’s

problems are in part a function of reconciling

the many domestic bureaucratic interests in

foreign technology into a coherent position,

A related problem is that of reorganizing a

foreign trade bureaucracy that was set up originally to conduct trade with other socialist countries. In the original scheme, a centralized Ministry of Foreign Trade (MFT), which existed

until 1982, was chiefly responsible for the conduct of trade and for the centralized allocation

of scarce foreign exchange.22 China’s former

2]Song Jiwen, “Digestion and Absorption of Imported

Technology-A Shortcut to Technological Progress, ” Jingji

Guanfi, Sept. 5, 1985. In FBIS, Nov. 4, 1985, p. K24.

‘

z

Samuel P.S. Ho and Ralph W. Huhnemann, China Open

Door Poficy (Vancouver: University of British Columbia Press,

1984), p. 34.
Ch, 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology /reports 4 7

MFT oversaw eight national foreign trade corporations specializing in different commodities. As trade expanded rapidly in the 1970s

(from $4.59 billion in 1970 to $20.64 billion in

1978), the old system was not able to handle

this increase and became an obstacle to further growth in trade. Gradually, foreign trade

corporations were set up under other ministries, not directly under the MFT.23 Further

complicating the situation was the granting

of greater trade autonomy to local governments as part of the decentralization experiments. To bring some coherence to this system, the old MFT was combined with three

other central trade agencies in 1982 to form

the Ministry of Foreign Economic Relations

and Trade (MOFERT).

Yet uncertainties remain about how the system works largely as a result of a series of centralizations and decentralizations of foreign

trade decisionmaking authority .24 For both ec~

nomic reforms generally and for technology imports, the Chinese are still searching for the

right balance between centralization and decentralization and between the achievement

of centrally determined values for the whole

economy and the encouragement of local initiative.

The foreign trade apparatus also shows a tension between the influence of the planning system and the play of the market. China clearly

plans some of its technology procurements. For

instance, the SEC had an import plan for the

1983-85 period that contained some 3,000

items of technology for its national effort to

renovate small and medium-sized enterprises.

Planning targets for other types of projects

were also established.

In recent years, however, as enterprises have

been allowed to retain foreign exchange, there

‘

] Ibid, p. 35.

“Foreign trade reforms begun in 1980 opened the way for more

Chinese companies-those under both central and local control–

to participate in foreign trade. Companies wishing to enter into

foreign trade must get the permission of It! OFERT, or a local

government, and then must register with and get a license from

the State Administration of Industr~ and Commerce. Once

licensed, they ma~’ open foreign exchange accounts. Import

licenses are required for 42 categories of goods. and export

licenses are needed for ’235 categories.

has been a drift toward a more decentralized,

market-driven approach to technology acquisitions. This trend and the attendant fear that

the center will lose all control over technology

imports have led to decentralizing technology

transfer policy and foreign exchange controls,

including the 1985 regulations described below.

The Chinese system for decisionmaking on

technology imports is very complex and, at

least for outsiders, uncertain. In the cases considered for this report, OTA saw considerable

confusion about how decisions are made. There

was also evidence of decisions being changed,

sometimes because of changed circumstances,

but also because of the underlying fluidity of

the decisionmaking system itself.

Decisionmaking procedures vary according

to the size of the project and the type of control over the project (central or local). Often,

but not necessarily, these variations can be explained by the type of industry involved. The

electronics industry, for instance, has experienced considerable decentralization in recent

years, while the energy industry has retained

greater centralization.25 Decisionmaking also

varies according to the mode of transfer being used; decisions concerning joint ventures,

for instance, will involve different procedures

and regulations from those involving licensing.

A further complication is the relationships

that exist between the end user of the technology and the (often multiple) organizations

that have jurisdiction over the end user. In

addition, the making of a decision can be

thought of as having stages—consultation, negotiation, ratification, implementation, evaluation—that often involve different participants. ’6 Finally, the system is complicated

precisely because in basic ways it is changing.

“Cf., Denis Fred Simon and Detlef Ilehn, “Understanding

the Electronics Industry, ” The China Business Re\’ieu,

March/April 1986, pp. 10-15; Oksenberg and I.ieberthal. Bureaucratic Politics and Chinese Energ-j Det’elopment, report

prepared for the U.S. Department of Commerce, International

Trade Administration, August 1986.

%ee, Roy F. Grow, ‘Transferring Foreign Technologies: Steps

in the Chinese Decision Making Process, unpublished paper

presented at the conference on China ,\rew Technological Reioiution, Har\,ard University. Ma}” 9-11, 1986.
48 ● Technology Technolgy.Sfer to china

For instance, until recently, the role of the

banking system was not central. However, with

economic reform, which has increased the role

of the banks in the running of the economy generally, banks-especially the Bank of China—

have also become important in foreign trade

and technology imports.

Perspective of the Enterprise

An enterprise may not always wish to incorporate new technology into its operations. In

an economy of shortages, as has been the case

for some time in China, producers can sell whatever they produce, giving them little incentive

to assume the risks and costs of technological

change.

If a decision is made to acquire new technology, several practical decisions must follow.

How quickly can the technology be procured?

How easily will it be absorbed or assimilated?

What level of technology should be chosen?

How will it be paid for? Should it be procured

domestically or internationally? The economic

and technical reasons for importing technology include domestic market competition and,

increasingly (as a result of government pressures to export), international market competition. Foreign technology generally results in

better products. In addition, it clearly carries

a great deal of prestige. An increasing number

of Chinese firms are establishing ‘technology

introduction offices” to aid in acquisition decisions.

Apart from the central question of what market exists for the enterprise’s products, the Chinese environment has to be considered. Is the

technology available in China? Has it been targeted as a high priority by the Chinese Government? Will it be addressed by the nation’s

R&D system? How much pressure does the enterprise feel to increase its exports? What kind

of access does it have to foreign exchange? Can

the enterprise get special benefits from the

state by procuring the technology? The enterprise must also anticipate that these issues will

be assessed by the layers of bureaucracy (local or national, and sometimes both) that must

approve the enterprise’s project.27

Furthermore, the international environment

must be considered. Is the technology available

internationally, and are there agents (companies, governments) willing and able to transfer it? What mode of transfer is most appropriate for the technology, and is the adoption of

that mode feasible? In this international context the importance of export controls comes

in.

Hidden factors exacerbate delays from the

enterprise perspective. Once a decision is made

to import technology, which can be a lengthy

process, the decision has to be approved by

higher authorities to assure consistency with

national policies, particularly those pertaining

to types and levels of technology and to the

expenditure of foreign exchange.28 Thus, well

before a contract would actually be signed, and

indeed in some cases well before negotiations

with foreign firms begin, the enterprise would

have gone through considerable negotiations

within its own system; anywhere from 6 to 18

months would already have passed. If the enterprise must then wait for a protracted export license decision, it could face delays of 2

years or more before the technology arrives.

Given the complexities at the enterprise level,

it is unlikely that there would be a simple, consistent set of benefits for choosing one technology over another.

The willingness of decisionmakers to take

risks is also an important factor. China’s economic system over the years has structured

incentives in such a way that decisionmakers

are often risk averse. Risk aversion has been

further encouraged by the history of unpredictability in Chinese politics, which has made

managers unwilling to take individual actions

that could expose them as targets of a future

radical political campaign. Foreign partners

in joint ventures have reported risk aversion

and a lack of initiative among middle managers

as factors slowing the absorption of technology at the enterprise level. The present uncertainties are likely to aggravate this timidity.

Perhaps the most crucial factor in decisionmaking during the last few years is the availability of foreign exchange. Despite severe

“Simon and Rehn, op. cit. ‘nIbid. ‘-
Ch. 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology /reports ● 49

foreign exchange regulations, there are an increasing variety of viable strategies for obtaining foreign exchange. Some enterprises, for a

variety of reasons, will be more privileged in

their access to foreign exchange than others,

and the technologies they demand will therefore tend to have a high priority. Central authorities are therefore challenged to ensure

that the country’s foreign technology needs

are not determined by the pattern of availability of foreign exchange; what is best for China

may not be what is best for the enterprise with

foreign exchange.

The foreign exchange constraint also has a

more indirect and often detrimental effect on

technology transfer behavior. Because of its

shortage, foreign exchange is rationed. When

projects are approved, but not necessarily before a foreign vendor is chosen and contracts

are signed, enterprises are given quotas for use

in going ahead with the project. There are some

indications that the technology transfer strategies of Chinese enterprises are determined

more by considerations of how to use the quota

than by how to save foreign exchange and

make the introduction of the technology part

of an economically progressive decision.

In one case, an American firm that took

pains to package a sale with a selling price factored in both hard and Chinese currency (in

order to help the Chinese save on foreign exchange) lost the sale to a Japanese firm that

offered a somewhat lower total price but insisted on hard currency for all of the settlement. The foreign exchange cost to China was

thus higher, although the sale price to the enterprise was lower. Since the enterprise had

a quota that had to be used (or lost), it had

no incentive to save on foreign exchange. In

other cases, the Chinese foreign exchange

allocation system seems to have led to the overvaluing of hardware transfers relative to software, despite policy to the contrary. In accounting for the use of foreign exchange to

procure technology, it is easier to point to a

piece of equipment than to something as amorphous as know-how. Foreign exchange limitations at the enterprise level also keep enterprises

from buying all the support items necessary

for making the projects work.

—— .

The Government Perspective

Chinese authorities in recent years have tried

to bring central policy guidance and coherence

to the business of importing technology, issuing a variety of new policy statements and regulations. From the perspective of the central

government, the main principles for choosing

foreign technology include the following. Technology to be imported should:

1. be above the level of that which is available in China;

2. be of practical use;

3. contribute to China’s eventual self-sufficiency;

4. foster economic and social development;

and

5. be useful for generating foreign exchange.

Judgments about how to apply criteria such

as these become part of the technology import

decisionmaking process, and periodically various agencies, particularly the State Science and

Technology Commission (SSTC), are called

upon to interpret these guidelines in specific

cases.

As part of an effort to protect both China’s

interests (particularly regarding restrictive

business practices by foreign firms) and the

proprietary interests of foreign suppliers of

technology, the Chinese State Council on May

24, 1985, promulgated new “Regulations of the

People’s Republic of China on Administration

of Technology Acquisition Contracts. These

regulations call for their administration by

MOFERT, which subsequently drew up its

“Measures for the Examination and Approval

of Contracts for the Import of Technology,

which took effect on October 1, 1985.

The regulations set criteria for the kinds of

technology to be imported, limit the normal

life of the technology transfer contract to 10

years, offer protection to foreign technology

that falls outside the patent system, and

charge MOFERT with establishing a system

for reviewing and approving technology transfer contracts. As of this writing, it is still too

early to judge the longer term effectiveness

and the consequences of these new procedures.
so ● Technology Transfer to China

Photo credit’ Erfc Basques

This sign is posted on the grounds of the Beijing Jeep Corp.

Some of their ambiguities have been noted,zg

and complaints have been heard that demands

by MOFERT for guarantees that the technology transfer will be successful place a heavy

burden on the foreign supplier and lead to

higher costs.’”

The regulations do seem to strengthen the

hands of the central government over enterprises and localities. It also seems that the regulations were inspired by China’s examination

of the experiences of other developing countries that tried to centralize authority over

technology transfers to protect national interests from the economic power of multinational

enterprises.

The most important organizations for technology transfer decisionmaking in the central

government are the State Planning Commission (SPC), SEC, MOFERT, and SSTC. In

‘

gEllen R. Eliasoph and Jerome Alan Cohen, “China’s New

Technology Import Regulations, ” The China Business Review,

vol. 12, No. 6, November-December 1985, pp. 36-40.

‘°Foreigners also complain about the lack of transparency in

decisions about what kinds of preferences the Chinese are prepared to grant or withhold in contract language, and call for

more standardization on the contract language.

addition, the ministries having cognizance over

the technology in question also play an important role. For very large projects or projects

of special national importance, decisions would

be elevated above the SPC level to an appropriate level, such as the Leading Group for the

Invigoration of the Electronics Industry, or

the Science and Technology Leading Group,

or perhaps to the State Council itself.3

1

The role of the SPC in the Chinese economy

is to prepare 1- and 5-year economic plans and

to assure that financial, material, and human

resources are made available for the execution

of projects included in the plans. This includes

annual authorizations to expend foreign exchange. Since the SPC can give only limited

attention to specific project proposals for importing technology, it focuses on strategic

commodities 32 and technology transfer projects with a value of US$5 million or more.

There are exceptions to this $5 million figure,

however. The central government has dele3] For a good overview of Chinese central government decisionmaking, and the responsibilities of the key central agencies, see, Oksenberg and Lieberthal, op. cit.

321 bid., p. 37.
Ch 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology /rnports ● 51

.

gated to the Shanghai municipal government, of its Technology Import and Export Departfor instance, the power to approve projects up ment, it provides policy advice on China’s

to the limit of US$10 million and the power needs for a given technology, its ability to abto approve joint venture projects up to $30 mil- sorb the technology, and the likely overseas

lion (selected other cities have approval powers

over joint ventures up to $10 million). 3~

The SEC has traditionally implemented the

plans. In recent years, the SEC has also assumed both the leading role in implementing

the economic reform program and the responsibility for introducing modern management

to Chinese enterprises. Its most direct role in

technology transfer decisionmaking, however,

is related to its responsibility to see to the technological transformation Jishu gaizao) of

established Chinese enterprises.

The SEC has a special office, the Technical

Transformation Bureau, and a special budget

for technological transformation, including a

foreign exchange account for importing technology that contributes to jishu gazao. During the Sixth Five-Year Plan, the SEC had

responsibility for 3,000 transformation

projects; another 3,000 are included in the Seventh Plan. During the last 2 years of the Sixth

Plan, some US$5 billion per year was spent

on enterprise renovation; the total number of

technology import projects for the whole plan

was 14,000. 34 The Chinese expect that this effort will be surpassed during the Seventh Plan.

sources .35 MOFERT also approves the language of technology transfer contracts to ensure that it conforms with the country’s regulations, and it takes the lead in proposing new

regulations or revisions and clarifications of

existing regulations. It also serves as the cooperating partner with the U.S. Trade and Development Program. In addition, it certifies

Chinese end users of sensitive high-technology

transfers in keeping with understandings

reached with the Coordinating Committee for

Multilateral Export Controls (COCOM) as part

of the latter’s liberalization of exDort controls. L

The SSTC does not have a direct ongoing

role in decisionmaking for the import of commercial technology, but is an important participant nonetheless. It is centrally involved

in importing technology for the national research and technological development projects

it controls and can also play a decisive role in

providing technical assessments of important

pieces of technology to be imported. Further,

the SSTC plays a key role in setting national

technology policy. This includes statements

of priority about which technologies China

should expect to have by the end of the century and whether these will be acquired by imThus, technology import projects that fall porting technology or by developing it indigunder the category of technological transfor- enously. These statements of policy serve as

mation are approved by the SEC unless they points of reference for the SSTC’S own assessexceed the $5 million-value limit. Ministries ments of proposed projects and also guide the

and enterprises wishing to undertake techno- decisions of other participants in the system.

logical transformation projects using imported

technology submit feasibility studies to the Many enterprises in China are local rather

SEC or to economic commissions of local gov- than under central control. The local governernments. ment level has counterparts to the central government decisionmakers discussed above.

The mission of MOFERT is to plan and administer foreign trade. Through the activities

~ 11 n spite of the delegation of decisionmaking authority to

local governments on the basis of the value of projects, the central authorities remain more involved in decisions than the rules

of delegation would suggest. See, Simon and Rehn, op. cit.

‘“Sun Zonghao, Director, Technical Transformation Bureau,

SEC, ‘(China’s Technological Imports and Vistas for Development, unpublished paper presented at the MIT Seminar on

Technology Transfer, April 1986.

These include planning, economic, and science

and technology commissions; a bureau of foreign trade; and enterprise bureaus for different industries. In some cases, as with the central government, a corporate organization may

exist between the enterprise and the industrial

bureau. The level of decision will depend on

“)oksenberg and I.ieberthal, op. cit., p. 90.
52 ● Technology Transfer to China

--

the value of the transaction. In all cases, however, the contract must be approved by the foreign trade bureau.3G

Financial and Trade Organizations

The Ministry of Finance has attempted to

make technology import policy sensitive to the

costs of technology transfer, with regard not

only to the direct procurement costs, but also

to the costs of absorption.37 The Ministry of

Finance has also attempted to establish the

principle that technology imports should lead

to expanded exports.

The Bank of China has become the key financial institution responsible for the distribution of foreign exchange and has an institutional interest in the financial soundness of

technology import projects. The bank’s role

has been enhanced by the increasing reliance

on the banking system, instead of the state

budget, for investment. When projects are approved by the SPC or the SEC (or their local

counterparts), a foreign exchange quota (e du)

is established with the bank, which the enterprise can then draw on. The bank, however,

reserves the right to conduct its own feasibility y studies before dispensing moneys from the

e du if it is dissatisfied with the feasibility

studies that have already been done. In some

cases, the bank also sits in on discussions much

earlier in the project approval process.38

Other important participants in the decisionmaking system are the foreign trade corporations (FTCS). Some of these, such as the China

National Technical Import Corp., which specializes in technology imports, and the China

National Machinery Import and Export Corp.

are under the control of MOFERT. Others are

under the control of the various industrial ministries. The trading companies are often the

bodies that negotiate and actually sign a con3’According to Oksenberg and Lieberthal, in the late 1970s,

the Ministry of Finance calculated that China should be prepared to spend fouryuan of renmin bi on absorption, for every

one US dollar’s worth of technology and equipment imported,

Ibid., p. 62.

“Ibid., p. 97.

3“CF., Simon and Rehn, op. cit.

tract with a foreign company, and they are at

times tasked by the end users, who help identify possible vendors of technology. In this

sense, they act as middlemen. In recent years,

however, there has been much more direct

interaction between the end user and the foreign vendor, even in cases where the trading

company still actually signs the contract.

Foreign Firms

Foreign firms differ in their motives and

strategies for transferring technology. Some

firms approach technology transfer as the sale

of a commodity without presuming any equity

participation in the Chinese economy. The appeal of the transaction may be tied to other

corporate objectives, but basically it is a sales

relationship.

For other firms, China is seen as an export

platform and source of supply for components

and finished goods. Such firms can be expected

to transfer technology needed to accomplish

those business objectives. In these cases the

firms can be expected to be earners of foreign

exchange for China, although, as the BeijingJeep case demonstrates, they may also require

substantial amounts of foreign exchange during the startup period.

Other firms may be more interested in China

as a source of raw materials. They too can be

expected to be earners of foreign exchange, and

may, if required by the Chinese, be willing to

transfer technology. The foreign oil companies

that have participated in Chinese offshore oil

development fall into this category. In this

case, a great deal of the technology is in the

form of the experience of the personnel of the

companies, something that cannot be transferred readily except imperfectly via training.

A small portion of the technology of the oil

companies, such as exploration technology, is

highly valued and highly perishable proprietary information that companies normally

refuse to transfer. The Chinese have been considerably disappointed over the implementation of the technology transfer provisions in

the offshore oil development case because of

Chinese misunderstanding about the nature
Ch. 3— The Chfnese Context for Technology Transfer: Strategies and /ssues for Technology /reports 53

Photo credft Eric Basques

A jet airliner prepares for passenger boarding at the Beijing International Airport, The truck is a model produced until

recently that was based on Russian technology of the 1950s.

of the technology and a failure of the oil companies to understand Chinese expectations.

Other industries have different dynamics.

In some areas of high technology where the

Chinese have a keen interest, the very identity of the foreign firm is tied to its technology. In these industries—electronics, materials, telecommunications, biotechnology-there

is great expense involved in product development and a rapid rate of product obsolescence.

Markets must be expanded to distribute costs.

In such highly competitive cases, technology

is not viewed as a commodity to be sold, and

there is great reluctance to transfer technology unless it will lead to a long-term presence

in China with opportunities to design products

for the Chinese market and to repatriate profits. It also requires Chinese partners who have

the organizational flexibility to respond to rapidly changing technologies and business opportunities.

There are some signs that China is coming

to appreciate this diversity of motives and

strategies among foreign firms. The new investment regulations, for instance, recognize

the difference between export-oriented and

technologically advanced firms that need access to the domestic market. However, there

is still much in the nature of Chinese policies

and in the Chinese economic and political systems that makes it difficult to accommodate

the diversity of technology transfer issues.
54 ● Technology Transfer to China

The Foreign Exchange Constraint

Since the end of 1985, concern over the availability y of foreign exchange has become an even

more important element in decisionmaking

about technology imports. The officially preferred way of making a decision to import technology has been to fold it into the normal planning process. If a positive decision is made on

a project, then in principle the necessary foreign exchange to implement it will be provided.

However, it is precisely because foreign exchange costs are a factor in judging the desirability and feasibility of the project that decisionmaking through the planning system has

in recent years been biased toward projects

that promise to earn foreign exchange quickly.

Thus, until recently, petroleum and coal projects promising to produce exportable commodities have enjoyed a privilege denied to

electric power.

This bias of the planning system is one reason why enterprises, corporations, ministries,

and local governments might find it in their

interest to have decisions made outside of the

planning system. There are also two other reasons. First, receiving formal plan approval can

be time consuming if decisions on new projects

are desired at a time out of phase with the planning cycle. In addition, present economic reforms are creating an environment in which

enterprises often (though not always) wish to

practice as much of their new autonomy as possible. To a considerable extent, they can do this

if they have access to foreign exchange. The

question of access to foreign exchange therefore becomes quite important for understanding decisionmaking.

As noted above, the SPC has the major role

in allocating the right to expend foreign exchange to ministries, enterprises, and local governments. For the enterprise that wishes to

import technology, therefore, one source of foreign exchange is that which is provided in the

plan. For projects that have been included in

the plan, provision is made, in principle, for

the foreign exchange necessary to carry it out.

This solution may not be optimal for more complex joint venture projects, where foreign exchange needs may be very fluid.

Enterprises can also earn foreign exchange

themselves. The tight restrictions on foreign

exchange imposed by the state in the last 2

years can be thought of as an incentive for enterprises to become more active foreign exchange earners, though they are allowed to

keep only a fraction of their earnings and may

need permission to spend even that. The enterprise can also approach the local government or the supervising ministries for out-ofplan foreign exchange, although the accounts

held by these entities may not be large. Beijing, for instance, had only $100 million at its

disposal.

In addition, the enterprise can attempt to

buy foreign exchange from other units using

local currency (renminbi) at a rate set by the

Chinese Government. Or foreign exchange can

be borrowed from the Bank of China if the bank

approves of the project. In such cases, repayment is usually made in foreign currency. Other

agencies, such as the China International Trust

and Investment Corp. (CITIC), which have

floated loans from foreign banks, are also prepared to lend foreign exchange.

It is clear that changes are occurring in the

allocation of foreign exchange, just as in the

economy as a whole. This does not necessarily

mean that there is less overall central control

over the total amount of foreign exchange expended. Within that total, new mechanisms for

allocation are appearing, which may lead to

more efficient use of the foreign exchange available. These new mechanisms complicate the

task of trying to understand how the decisionmaking system actually operates, however.

The System in Practice

The decisionmaking system is supposed to

operate as follows: Proposals for the import

of technology originate in an enterprise under

one of the central ministries or units of local

government. The enterprise, however, is working under control figures that have already

been supplied by the SPC (or local authorities)

as a guide to enterprise planning. In developing the proposal, the enterprise typically must

demonstrate the feasibility of the project
—

Ch 3— The Chinese Context for Technology Transfer: Strategies and /ssues for Technology Irnports . 55 — -.

through a feasibility study. The project must

then be submitted to the ministry or local enterprise bureau (or in some cases, a corporation under a ministry of which the enterprise

is a part) for approval. The approving authority at this level may also conduct its own independent feasibility study. For local enterprises, the project must then be approved by

the local planning committee. If the project

(whether from a locally or centrally controlled

enterprise) exceeds $5 million, sg it must be submitted to the SPC for approval, and the SPC

may also do its own studies as to the desirability and feasibility of the project.

For projects pertaining to the technological

transformation of industry, the proposal would

go to the SEC. For projects below the $5 million level that do not pertain directly to technological transformation, the approval decision

would be made at the level of the ministry, a

national corporation, or a local government.

After substantive approval by one of the

bodies mentioned above, a contract defining

an agreement with a foreign partner must be

submitted for MOFERT (or local foreign trade

bureau) review, which involves a comparison

of the terms of the contract with criteria expressed in policy regulations.

It is difficult to say with confidence that the

decisionmaking actually works the way it is

designed to. Furthermore, the system is changing as reforms in the economy progress and

as new approaches and new participants a p -

pear. 13anks have clearly emerged as more important parties, and relatively new organizations, such as CITIC, also influence the way

the system operates. In addition, the decisionmaking system is embedded in an environment

of bureaucratic struggles and shifting alliances, making the decision process, as well as

the outcome of a decision, difficult to predict.

Despite much serious effort to establish policies and institutions for importing technology,

the current Chinese system has become the object of criticism from outside and inside China.

. —

‘qklxcept in those jurisdictions, such as Shanghai, which ha~’e

been delegated authority to make decisions on higher \alued

projects.

The criticism from outside, discussed in chapters 2 and 4, focuses on the impediments to

doing business in China. The criticism of the

current system from within China focuses more

on whether the current system for technology

transfer serves Chinese interests. Apart from

those criticisms inspired by desires to protect

domestic industries and R&D facilities from

foreign competition, the more disinterested

commentaries on the current situation focus

on three main issues: the problems of duplication of imports, the negative consequences of

decentralization, and the problem of assimilation.

4 0

The problem of duplicative technology imports has been particularly evident in consumer-oriented light industry. Reportedly,

over 100 color television assembly lines were

imported since the late 1970s. If all were put

into operation, they would more than saturate

the market. To make matters worse, many of

the components could not be made in China

and had to be imported, resulting in a waste

of foreign exchange. Similar problems were encountered with other consumer appliances,

such as refrigerators and washing machines.

Strong local interest in the production of floppy

disks for computers has led to the proliferation of small plants to produce them, thus losing economies of scale.4

1

A related example is the field of optical telecommunication technologies. In this case ,

three different Chinese organizations have

been negotiating with three different foreign

companies, from the United States, Japan, and

Europe. Instead of coordinating their efforts,

they are all going separate ways, with the possible result of duplication and excess capacity. Since this area of technology has been identified as a national priority, two units of the

central government have been charged with

‘“This discussion is drawn from a three part article b~’ Cao

Jiarui entitled, “The Present Condition of, and Problems in

China’s Technological Imports, ” published in the o~’erseas edition of the journal, Ziaowang. Part 1 appeared in No. 18, May

5, 1986, and was translated in FBIS, hlay 16, 1986, p. K5 ff.

Part 2 appeared in No. 19, Ma3 12.1986, translated in FBIS,

hla~’ 22, 1986, p. K1O ff. Part 3 appeared in No. 20, hlay 19,

1986, translated in FBIS, Nlay 30, 1986, p. K13 ff,

4’Cao Jiarui, Part 1, op. cit.
56 Technology Transfer to China

overseeing the importing of this technology.

However, because these central authorities are

linked to the organizations involved with the

negotiations, they are unlikely to be disinterested arbiters and eoordinators.

4 2

The current critiques of the decisionmaking

system for technology imports reflect the

underlying problems of Chinese institutional

weaknesses and jurisdictional confusion seen

elsewhere in this report. A recently reported

case involving continuous casting technology

used in steel plants illustrates this point. In

this case, china imported the technology from

West Germany in 1980 under a cooperative

production arrangement. The technology was

assimilated to the extent that the Chines e

reproduced and employed the technology successfully in other steel mills. As is often the

Chinese custom, the achievement was publicized as a case of how foreign technology can

help China and how successful assimilation can

be accomplished. On the basis of this success,

the State Council issued a directive in 1981 to

the effect that in the future, if steel plants need

this type of continuous casting machinery,

they should first try to acquire it in China. 4 3

In 1985, by which time the decentralizing

of decisionmaking on technology imports had

been implemented, a Chinese steel plant was

in need of a continuous casting machine of the

type that had by then been successfully produced in China using the original German technology. Instead of looking for a Chinese supplier, however, the plant decided to import the

machinery, in violation of at least the spirit

of the State Council directive. The justification for going to the foreign supplier was that

the foreign equipment had certain technical

characteristics allegedly not available in China.

To proceed with the purchase, the plant had

to secure the approval of the provincial authorities only. The first step was to conduct its own

feasibility study. This was then followed by

an approach to the provincial branch of the

bank, which conducted its own assessment and

report. Finally, the provincial economic committee gave the plant approval to proceed

again, seemingly in violation of central policy .44

Information is not available on the technical differences on whether the plant, the branch

bank, or the provincial economic committee

were unaware of the State Council directive

or simply chose to ignore and circumvent it.

Nor is it known whether the plant and provincial authorities genuinely believed that the

foreign technology was most appropriate ,

whether they were attracted to the foreign

technology simply because they assumed it

was best because it was foreign, whether there

was some form of corruption involved, or

whether the authorities were simply incompetent to evaluate the proposed transfer in light

of China’s own capabilities. Any or all of these

explanations are possible, given a variety of

reports from China in recent years. What is

clearer, however, is that from the central government perspective, this is the kind of experience that leads to duplicative imports that unnecessarily drain foreign exchange reserves.

Would the decision have been more in keeping with the national interest if there had been

greater centralization? The answer to this question is not certain. The answer would almost

certainly be positive if the center had a limited

number of such cases to decide and could devote the necessary resources to information

gathering and analysis. However, the number

and variety of technology import cases clearly

are far greater than the central authorities can

handle. Central planner incompetence and ignorance of local particularities is precisely the

weakness of centrally planned economies, and

the main justification for decentralization.

While the central authorities can and do rectify grievous mistakes, as they have now done

in the TV, refrigerator, and washing machine

cases, routine and efficient central direction

of technology imports is seemingly beyond the

capacity of the system.

China has had difficulty finding an institutional formula that would allows effective central policymaking, the observance of these pol4’Ibid.

4’Ibid. 441bid.
Ch, 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology imports ● 57

— - — —

icies in their implementation, and the flexibility

of decentralized decisionmaking. The problem

is the one alluded to in the previous chapter,

that of the legacy of past decentralizations that

empowered local (especially provincial) governments.

The Chinese sometimes refer to the structure of economic authority in China as a checkerboard, meaning that vertical authority emanating from the central government through

ministries and commissions is crosscut by the

horizontal interests of local or regional authorities. This system is sometimes also referred

to as tiao tiao kuai kua”, literally “branches

and lumps, ‘‘ in which the central ministries and

commissions are the “branches” and the

“lumps” are formed when these are crosscut

by regional authorities. As one commentator

put it. “The crucial point of our existing system is the division of departments (read ministries) and regions, which develops into a series of complicated contradictions between

different departments (ministries), between department and region, and between different regions.’’”

This system of institutions has the effect of

constraining the decisionmaking effectiveness

of all parties and explains why even in periods

of greater centralization, central authority is

not necessarily determinative even on highpriority matters.

Not surprisingly, Chinese perceptions of institutional deficiencies differ. From the perspective of the production enterprise, decentralization has not gone far enough, since the

enterprise’s own autonomy is constrained. If

the enterprise is under the jurisdiction of a local government, it is constrained by the interests and prerogatives of the latter, as well as

by national policy. If the enterprise is under

the jurisdiction of a central ministry, it is constrained by the interests and practices of the

ministry and by overall national policy. However, it is also subject to the discretion of the

local authorities, who typically would have a

say in the management of the enterprise’s personnel matters and in the supply of such goods

as water and electricity. From the view of central planners and high-level economic and technology policy makers, on the other hand, the

impression is one of fragmentation, with authority dispersed among ministries and regions.4G

The current economic reforms and efforts at

political institutionalization would seem to

promise some improvement in decisionmaking.

However, the record to date is mixed. For instance, management of Chinese industry has

in many cases been removed from government

ministries and vested in new corporate entities, which in principle are to run as profitmaking organizations. However, these have

not always been able to escape the heavy hands

of party cadres, who want to maintain old ways

of doing things even as the forms of organization change. Efforts are being made throughout the government and the economy to promote younger, more technically qualified, and

more entrepreneurial individuals into managerial positions. On the other hand, the economic system still does not generate the economic information on which managers can base

sound technology transfer decisions, nor the

incentives for managers to assume the risks

of innovation.

The now-standard insistence on feasibility

studies for technology import decisions is intended to inject additional technical judgments

into decisions and to force the attention of more

interested parties on assimilation problems.

The mechanisms for horizontal technical communication, noted in the next section, also aid

in Chinese decisionmaking. Although this was

not true in the late 1970s, decisions about importing technology are often informed by some

of the best technical judgments in China. This

is largely a result of the growth of consulting

and advisory services.

However, the best technical judgments do

not necessarily result in the the most appropriate technology decisions, and it seems that the

full integration of technical, economic, and political criteria remains something of an ideal.

There are some reports, for instance, that fea451 bid. 4’Cao Jiarui, Part 3, op. cit.
58 ● Technology Transfer to China

sibility studies are not always taken seriously

and are used for manipulative purposes. The

prevalence of this practice, not unheard of in

other countries, is not known.

A summary assessment of China’s decisionmaking system for technology imports is difficult. The system is composed of elements of

centralization and decentralization, of market

principles and planner influences. An optimistic interpretation is that it can be thought of

as a transition to a more market-driven, decentralized system. This interpretation is

clearly consistent with the intent of current

policy, and much Chinese reform experienced

since 1979 provides evidence for it.

The pessimistic interpretation is that the

system is stymied, stuck between the imperatives of centralization and decentralization, of

market and plan. In this view, the inertia of

the established institutional setting is so great,

and its power so entrenched, that reform policies cannot be fully implemented. Instead, reform impulses from the center will be distorted

at various points in the system, producing undesirable and unanticipated consequences of

the types noted above.

ISSUES OF ASSIMILATION AND DIFFUSION

Acquiring technology is only half of China’s

problem. Once transferred, the technology

must be assimilated and diffused effectively if China’s modernization goals are to be

achieved.

The question of assimilation is linked to the

underlying issue of technological dependency

on the foreign suppliers of technology. Since

the end of the 1950s, China has been particularly sensitive to this issue of dependency and

has striven to avoid it. Ironically, however, the

policies and institutions established in the past

to foster self-reliance are now obstacles to the

full assimilation of technology under the new

assumptions of the open-door policy. The risk

of dependency thus increases as the problems

of assimilation remain unsolved.47

In discussing the assimilation of technology,

it is useful to distinguish between production

(using the imported technology), manufacturing (replicating the import), and design (the capability to redesign the technology) .48 Overall,

China’s ability to assimilate production technology has been greater than its ability to absorb manufacturing or design technologies.

4’Zhang Shihong, “A Noteworthy Issue: Digestion, Absorption and Renewal in Technology Importation as Viewed From

Shanghai, ” Renrnin Ribao, May 3, 1985. In JPRS-CST-85-027.

Aug. 22, 1985. p. 62.

‘8K.C. Yeh, “China”s Assimilation of Foreign Technology,

1950-1985, ‘paper presented at the conference on China New

Technological Revolution, Harvard University, May 9-11, 1986.

However, it is also useful to recall the various

periods of Chinese technology imports, since

assimilation experience has varied somewhat

from period to period.

The Chinese seemingly did better at assimilating all three types of technology during the

1950s than in the subsequent two periods. Soviet provision of blueprints, technical advisors,

and training programs undoubtedly contributed to this success. On the other hand, the

technology transfer experiences of the 1960s

and 1970s were not notably successful in terms

of thorough assimilation. ’g

China’s past history of importing technology suggests that many factors influence effective assirnilation.’” Choosing the right technology at the outset is clearly important. Many

of the cases of unsuccessful assimilation were

due to procurement decisions made by technically unqualified people, which resulted in the

import of technology having the wrong properties for the intended task. Also, the Chinese

underestimated the value of expertise relative

to hardware, and neglected the support items

necessary to make assimilation successful.

A second concern has been that managers

have not been willing to make the effort to fully

absorb the technology. That is, they have been

.

‘

g

Ibid.

50 This discussion is drawn from Ibid.
Ch 3— The Chinese Context for Technology

more interested in expanding output by exploiting the production technology without

attending to the acquisition of the underlying manufacturing and design know-how. Imported technology has been seen as a shortcut

to technical progress. Yet, effective assimilation requires focused attention to the problems

of absorption. In addition, it requires communication and cooperation among a variety of

organizations, such as enterprises, research

units, government agencies, and universities.

China’s segmented society has often frustrated

the meeting of this requirement.

Another problem has been the lack of adequate managerial know-how to employ the

technology fully. This was less of a problem

in the 1950s since the Chinese imported Soviet management along with the technology

and had the services of Soviet advisors. In subsequent periods, however, Chinese managerial

backwardness became a hindrance.

China’s past experience also points to the

importance of having domestic R&D resources

committed to the tasks of assimilation. As the

Chinese currently see it (which is in keeping

with international analyses as well), much of

the Japanese success in assimilation was due

to the attention given to adaptive engineering and R&D in support of absorption, with

expenditures on the latter running five to seven

times those of the purchase of the technology.”

Although China’s R&D resources are not insubstantial, they have often been poorly deployed and misused; China’s best talent, for

instance, is typically employed in centralized

research units not physically proximate to the

enterprise importing the technology. Furthermore, Chinese R&D personnel have been compartmentalized, keeping researchers and engineers from the academies, the universities, and

the production ministries from working together on assimilation tasks.

China has many of the same problems of assimilation that other developing countries receiving transferred technology experience. Yet,

China also has both distinctive advantages and

51 Ibid.

Transfer: Strategies and Issues for Technology Imports ● 5 9

—

disadvantages in dealing with technology from

the international economy. During the last 2

years, the Chinese have come to realize the importance of paying special attention to the

problems of assimilation. Current discussions

of assimilation, however, indicate that the

problems that troubled the assimilation process in the past have by no means been overcome. An examination of current assimilation

problems points to the following problems.

Technical Manpower

A first constraint facing many developing

countries is a shortage of qualified technical

and managerial manpower and a lack of scientific tradition. In absolute terms, China has

a large pool (approximately 2.4 million) of scientists and engineers.52 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 its 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, foreign

firms seem to agree that the Chinese are moving up the learning curve effectively.

Manpower limitations affecting the assimilation of foreign technology are exacerbated

by two characteristics of the Chinese technical community. The first is the misuse and maldistribution noted above. Too much of China’s

technical manpower is concentrated in centralized research institutes, which have historically

not been well connected to production enterprises. Meanwhile, at the level of the enterprise,

there is often a severe shortage of engineers.

“See, I.eo 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: and Orleans, “Graduates of Chinese Universities: Adjusting the Total, The China Quarterly

(forthcoming).
60 ● Technology Transfer to China

Limitations on the mobility of technical personnel also hinder both the assimilation and

diffusion of technology. The tendency of enterprises and research institutes to regard technical personnel as the propert y of the unit has

been a major obstacle to labor mobility. A variety of new approaches to stimulate the movement of technical personnel have been introduced since the early 1980s. Although these

have had some positive results, the problem

remains serious.53

Second, problems with the educational system affect the seriousness of the manpower

constraint. Two deficiencies in particular stand

out. First, the typical Chinese graduate is usually stronger in theory than in hands-on experience relevant to the tasks of technology

absorption. Second, the educational system,

especially in engineering, has focused too much

attention on training narrow specialists who

are often ill-equipped to deal with problems requiring interdisciplinary approaches. In addition, the failure of the educational system to

produce economists who are familiar with the

economics of the industries in which the transfers are occurring is a hindrance to effective

decisionmaking. 54

Management

China’s lack of personnel with modern management capabilities may be of greater immediate importance for assimilation than the

shortage of scientists and engineers. Although

often capable and experienced in working under conditions of static technology and the dictates of a planned economy, China’s managers

now face a very different environment.

Effective technology assimilation requires

a systemic understanding of how the technology will fit into the social system to which it

is being transferred and a willingness to take

—

“See, Leo A. Orleans, “Reforms and Innovations in the Utilization of China’s Scientific and Engineering Manpower, ’ paper presented at the conference on China New Technological

Revolution, Harvard University, May 9-11, 1986.

54Geoffrey Oldham and Alyson Warhurst, “Technology Transfer to the Chinese Offshore Oil Industry, ” unpublished report,

University of Sussex, Science Policy Research Unit, no date,

p. 43.

risks and to adopt a timeframe that sees the

value of the technology over the longer run.

It also requires an understanding of the forward and backward linkages needed for the effective deployment of the technology. As noted

above, these are not traits that were instilled

in Chinese managers by the old system, which

put immediate production targets foremost in

the manager’s mind and made risk avoidance

a rational individual strategy.

The Chinese government is well aware of the

limitations of the present enterprise managers.

Modernization in management has been encouraged by policy changes such as decentralization of authority, institution of managerial

accountability, provision of incentives and

flexibility in organizational design. The most

effective improvements have resulted from direct contact with modern managerial techniques—through joint ventures and other

forms of technology transfer and in training

centers, such as the Dalian Institute sponsored

by the U.S. Department of Commerce. The

number of managers that can benefit directly

from such contact is minute compared to the

total need in China, but the effect appears to

be multiplied by the dissemination of information from the centers and by learning from the

example of the now more effective managers.

Since managerial inadequacy is one of the most

severe constraints, special attention is warrented if technology transfer and China’s modernization are to be supported.55

Research and Development

In contrast to many developing countries,

China has a comprehensive industrial structure and an extensive R&D network. Yet Chinese R&D has had many problems and, like

the economy as a whole, is now the target for

extensive reforms.5G

Most sectors of the industrial economy have

research, design, and educational institutes.

Sbwillim A. Fischer, “The Transfer of Western Managerial

Knowledge to China, ” app. 5 in vol. I I of this report, May 1986.

“See, Richard P. Suttmeier, “New Directions in Chinese Science and Technology, ” in: The Asia Society, China Briefing:

1985 (Boulder, CO: Westview Press) 1986.
Ch, 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology /reports 61

Many of these had experience with technology

transfers from the Soviet Union in the 1950s,

and all of them have had experience with technological self-reliance since 1960. This R&D

system was terribly disrupted during the Cultural Revolution, and its capabilities were reduced. Nevertheless, it is important to recall

the evolution of this system since 1949, its

many achievements, and the renewed support

it enjoys in the post-Mao period. It is a significant resource that could aid China in assimilating foreign technology and avoiding

technological dependency. China’s technical

community needs to be brought up to world

levels, but it does not have to be created anew.

Ironically, the existence of an established industrial structure and R&D system at times

works against technology transfer. Because do

mestic industry and the R&D establishment

have interests in domestic supply, China is

faced with make-or-buy questions that 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. These problems, and the more general relative technological backwardness of the domestic industry,

provide opportunities for the foreign suppliers

of technology. It is likely, however, that effective international technology transfers will also

stimulate the domestic industry to improve its

capacity for indigenous innovation.

Like the manpower problem, the R&D system has historically been compartmentalized,

and R&D has been concentrated in centralized

institutes rather than at the level of the enterprise that needs the technology. The current

reforms in China’s science and technology management system are intended to change this

situation, but it is likely that the strengthening of R&D at the enterprise level will take

time.

A second problem is that R&D supportive

of technological assimilation has not received

priority attention and adequate funding. The

linking of R&D plans to technology import

plans is a recent development. The new policy

emphasis being given to assimilation is intended to bring attention to the need to forge

this link, but a lasting solution to the problem

is not likely to be found in central policy directives. More likely, the solution will depend on

the course of the reforms of the economic and

the science and technology systems, with their

emphases on enterprise autonomy and the

strengthening of enterprise R&D.

The Supply System

China’s ability to absorb and assimilate technology is influenced by problems in the domestic economy. Many characteristics of the economy that inhibit domestic innovation in China

also affect the assimilation of foreign technology. The inability of the economy to supply

high-quality inputs reliably-up to the technical standards required by the foreign technology-to enterprises engaged in the importation and assimilation of technology is one

of the more serious of these problems.

One example is the well-publicized case of

the Wuhan steel mill, which imported advanced German technology but found that the

machinery in which it was embedded could only

be used for a fraction of the designed time. The

electronic control technology of the imported

mill presumed the supply of a reliable source

Photo credll Eric Basques

This ginger root salesman is completing a sale in the

Changchun agricultural “free market. ” Produce In

excess of government quotas can be sold for what the

market will bear.
62 Technology Transfer to China

of electric power, which the city of Wuhan did

not have. In other cases—the Shanghai Foxboro and Beijing-Jeep joint ventures, for instance-the supply problem is also seen in the

supply of raw materials, semi-processed materials, and finished intermediate goods.

The uncertain availability of these inputs

slows the full assimilation of the technology,

prolongs reliance on foreign suppliers, and thus

increases the demands for foreign exchange.

Scarce supplies have been a particular irritant

to joint ventures. In some cases, the best hope

is to go to enterprises from the military industries that are now instructed to serve the civilian economy. These enterprises are often

able to meet the quality standards required,

but they may not have the incentive to link

up with the joint ventures. Undercurrent economic conditions and policies, they often find

it more profitable and less demanding to produce for the Chinese domestic market.

The response of Chinese enterprises to the

uncertainties of the supply system has been

to pursue vertical integration, creating a technological system different from those in capitalist countries, in which components for technologies are often sourced from many different

supplier companies. This systemic difference

influences Chinese choices of technology and

assimilation. The Chinese often expect more

technology transfer than the Western firm can

supply, since some of the component technologies are the property of other firms. The full

assimilation of the technology supplied to

China may therefore be blocked because the

supporting, component technologies are neither available to nor being supplied to China.

Internal Diffusion

The question of how effectively foreign technology is diffused within China remains uncertain. This issue is particularly pertinent for the

transfer of dual-use technologies to civilian entities. U.S. national security implications arise

if these technologies diffuse to the military.

Foreign firms have also been concerned that

without effective patent protection, technology licensed to one enterprise may be illicitly

transferred to another. 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 organizations are excessively bureaucratic and compartmentalized. Contrary

to the principle of communalism embedded in

official ideology, Chinese enterprises and research institutes often act as if they have proprietary claims on technology and, more importantly, on the technical manpower they

employ. The clarification of property rights

pertaining to knowledge is an important element in current reforms of the science and technology system. Yet the Chinese continue to lament what they refer to as departmentalism,

and the lack of effective horizontal, interorganizational communication. Instead, communications follow the strong vertical orientations along which Chinese organizations were

designed.

For example, world-class bicycle-manufacturing machinery is produced by the Shanghai Bicycle Co. (SBC), one of China’s leading

bicycle makers, for its own production. The

company has no interest in, nor incentives for,

the production and marketing of its manufacturing equipment. The Shanghai Light Industry Bureau had to establish a specialized factory for the production of bicycle-making

machinery. While the new plant is able to use

the designs and manuals of the SBC’S equipment, the personnel from SBC who possess the

know-how have not been deeply involved in the

diffusion.”

The Chinese have attempted to overcome the

problems of technological departmentalism by

creating mechanisms for crosscutting technological communications. The first of these are

the professional societies organized around

academic disciplines and industrial technologies. The professional societies draw individuals from different vertical systems (different

“The World Bank, China: Long-Term Issues and Options: The

Mm”n Report (Washington, DC: 1985), p. 172.
Ch. 3— The Chinese Context for Technology Transfer: Strategies and /ssues for Technology /reports 63

ministries, academies, and universities) into

a common forum. A second mechanism is a network of scientific and technical information

services which was developed with the cooperation of the U.S. National Technical Information Service. In addition to these two mechanisms, a large number of technical consulting

organizations have been formed in recent

years, and other organizations, including production enterprises, universities, and research

institutes, have been active in establishing consultancies, as well. Recent policy has also sanctioned consulting by individuals.

Most importantly, however, the economic reform program is designed to alter the strong

vertical, bureaucratic orientations of the economy by creating the conditions for horizontal

market exchanges. This is true in the area of

technology as well. With the initiation of technology markets for the buying and selling of

technology, the regime has, in effect, recognized the de facto proprietary claims to knowledge that had been made by enterprises and

research institutes as they resisted the sharing of technology without appropriate compensation. Thus the leadership now encourages the

view that technology be considered a commodity to be bought and sold in a market

rather than a free public good to be allocated

by the state.

The Chinese are also trying to allow greater

mobility of technical personnel. To create these

conditions, the Chinese have had to modify established practices of administratively assigning technical personnel to jobs and have attempted to establish, on a trial basis, a limited

labor market for scientists and engineers.

It is difficult to assess how effective this reform has been, but there are a number of indications that its impact has been dulled by the

unwillingness of work units to allow their personnel to leave. Since most social services, including housing, are only available through the

work unit, individuals may be reluctant to seek

opportunities to move.5g

“’’Cf., orleans. “Reforms and Inno\rations ., . ‘“

The climate for the diffusion of technology

has improved markedly in recent years even

though the inherited structure of the Chinese

economic and research systems still inhibits

it. Current Chinese thinking calls for the attraction of foreign technology to the more developed coastal cities and the subsequent diffusion to the interior and throughout the

economy. This strategy is becoming increasingly likely to be successful. The problems

associated with the power of individual work

units to make proprietary claims on technology and technical personnel, however, are formidable.

The Prospects for Assimilation

The financial, manpower, decisionmaking,

and economic problems noted above make it

likely that assimilation will not go as smoothly

as the Chinese and their foreign commercial

partners might like. It is important to remember, however, that China also has capacities

that make it likely that some of these limitations could be overcome in the relatively near

future. These include an expanding pool of

trained personnel; an established, extensive

R&D system; and new policies to encourage

foreign investment and technology transfer,

as well as those for economic, administrative,

and educational reform. China’s leaders, furthermore, have incentives to maintain an environment favorable to technology transfer and

absorption.

As these policies have been refined, the importance of the assimilation issue has come

into focus. China clearly seeks technology

transfer agreements that will facilitate assimilation and include as much of the manufacturing and design know-how, as well as the production technology. Western firms however,

have diverse motivations in their dealings with

China and in their uses of technology transfer

in corporate strategies. The behavior of the

supplier of the technology, considered in the

following chapters, can also influence China’s

assimilation ability, thus adding another variable to any analysis of likely assimilation experiences.
64 ● Technology Transfer to China

CONCLUSION

China has ambitious expectations about the

role technology will play in its modernization

and has set a course both to acquire technology abroad and to increase its domestic capabilities for producing technology. There is

much to be said for the course chosen; there

are also significant problems of decisionmaking, of assimilation, and with basic economic

institutions; problems that must be solved if

the full economic value of technology transfer

is to be realized. Reforms under way should

contribute to the solution of these problems,

but the solutions will take time. Cases of China

choosing inappropriate technologies and having difficulty with their assimilation are likely

to be seen in the future, but they are likely to

become fewer.

China’s larger quest for modern technical capabilities involves much more than interactions with the foreign suppliers of technology.

It is also shaped by the operational objectives

of technology policy, by the nature of the domestic economic and R&D systems, by the

quality of management, and by the policy environment. The complexity of this context for

technology transfer can be seen in figure 3.

As depicted in figure 3, the underlying challenge the Chinese face in creating technical capability is to realize change on a number of

fronts simultaneously. An enhanced capability for technological innovation entails changes

in both the R&D system and the economy.

Economic reform and changes in the policy environment are necessary for improving the climate for foreign investment. Effective absorption of foreign technology requires not only a

policy environment conducive to the operation

of foreign businesses, but also further economic

reform and changes in the domestic R&D

system.

While the Chinese realize the significance of

the systemic nature of the technology transfer phenomenon, and while their modernization policies are intended to bring the elements

of the system into greater harmony, the very

complexity of the system makes it likely that

there will continue to be problems with technology transfer. The wider significance of these

problems is explored in chapter 6.
Ch. 3— The Chinese Context for Technology Transfer: Strategies and Issues for Technology /reports 6 5

.

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

k f

Management

1. Modernization of existing enterprises

Issues of innovation

The economy

Issues of assimilation

make-or-buy issues

I

The international

environment I

Issues of business climate

and the assimilation /

of technology

SOURCE Office of Technology Assessment, 1987
Chapter 4

The Role of the United States

in Technology Transfer to China
—— ..——— -

CONTENTS

Page

Factors Affecting U.S. Companies in the China Market . . . . . . . . . . . . . . . . 69

The Investment Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Schedule Delays, Taxes, Other Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Intellectual Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

Local Sourcing, Employment, Export Marketing . . . . . . . . . . . . . . . . . . . . 76

Foreign Exchange Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Management Styles, Training, Language, and Cultural Considerations.. 78

Comparative Investment Environments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Case Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Transportation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

Satellite Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

Computers and Electronics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

The Role of the Small-to-Medium-Size Firm . .......................101

Government and Institutional Technology Transfer . ..................102

The U.S. Government-Supported Programs. .,.... . .................102

Bilateral Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............104

Student Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............104

Private Programs .. .. .. .. .. .$ . . $ . . . . . . . . . . . . . . . . . . . . . ..........105

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................105

Appendix A: Provisions of the State Council of the People’s Republic

of China for the Encouragement of Foreign Investment . .............107

Appendix B: Protocols and Memoranda of Understanding Under the

U.S.-PRC Agreement on Cooperation in Science and Technology.. .. ...109

Figures

FigureNo. Page

4. China’s Railroad System and Placement Improvements . . . . . . . . . . . . . . 81

5. China’s Vehicle Production Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

6. China: Satellite Telecommunications Technology Transfer . . . . . . . . . . . . 91

Tables

Table No. Page

2. Commodity Composition of U.S. Exports `to China, 1980-86 . . . . . . . . . . 70

3. Commodity Composition of U.S. Imports From China, 1980-86. . . . . . . . 71

4. A Sample of Functional Management Knowledge Apparently Lacking

in the Chinese Management Community . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

5. Chinese Production by Vehicle Category . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

6. Satellite Telecommunications Development in China:

A Chronology of Important Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

7. Major Achievements in China’s Computer Industry, 1977-85 . . . . . . . . . 96

8. U.S. Computer and Related Equipment Sales to China . . . . . . . . . . . . . . . 96
Chapter 4

The Role of the United States

in Technology Transfer to China

Although the U.S. Government sets regulations and establishes programs that directly

affect technology transfer to China, the actual

transfer of technological information and capabilities is generally performed by U.S. companies through direct investment, joint ventures, coproduction agreements, or license

agreements. Corporate reasoning by U.S. firms

for transferring technology to China includes

“getting a foot in the door” of the potentially

immense China market, having access to inexpensive labor, and having a presence in the

Asian Pacific region for manufacturing, marketing, and distribution.

China’s interests in U.S. investment are primarily to improve its technology base and to

earn foreign exchange. Foreign exchange derives from various charges to the U.S. firms

(taxes, payments for services, labor rates) or

through exports of goods created through improved technology. These often divergent interests of the U.S. firms and the Chinese can

be the basis for mutually beneficial relationships

—or a great deal of friction. The case studies

in this chapter illustrate how well the U. S.-

China relationship works in actual practice.

FACTORS AFFECTING U.S. COMPANIES

IN THE CHINA MARKET

When the Chinese market opened to Western business in the late 1970s, foreign companies were elated. China was a country needing

almost everything. It had a huge supply of potential customers and inexpensive workers,

and was ruled by an apparently honest and

dedicated new (albeit Communist) leadership.

The economies of the United States and China

were also often viewed as complementary. It

was hoped that American high-technology

products, capital goods, and industrial materials would help China’s development, while

the United States would be a growing market

for Chinese goods.

In fact, in 1985 the United States accounted

for about 10 percent of China’s imports and

12 percent of China’s exports. ’ The United

States ranked as China’s third-largest trading

partner after Japan and Hong Kong,’ while

‘Nai-Ruenn Chen, “U.S.-China Trade Patterns: The Outlook

for Two Countries J4’ith a I,ot to Share, ” The China Business

l?e~piewr, September-October 1986, pp. 16-20.

‘Japan had a 28,3 percent market share of China’s imports

in 1986, Hong Kong 12.7 percent,, and the United States 10.2

percent (U.S. Department of Commerce, February 1987),

China moved up three places to 16th among

U.S. trading partners. Table 2 lists Department of Commerce statistics on the composition of U.S. exports to China from 1980 to

1986. Machinery and transport equipment was

a major U.S. strength, accounting for almost

$2 billion in sales to China in 1985 and over

$1 billion in the first half of 1986.

Table 3 lists statistics for U.S. imports from

China for 1980-86. Most U.S. imports in this

table are in the category of “miscellaneous

manufactured articles” (which includes articles of apparel and clothing accessories), representing almost $1.2 billion of trade in just

the first half of 1986. Basic manufactures

(mostly textiles, yarn, and fabrics) and crude

materials (mostly petroleum and petroleum

products) also represent significant imports by

the United States.

China’s Seventh Five-Year Plan (1986-90) envisions a 40-percent increase in the total volume of China’s imports and exports by 1990,

with the Chinese projecting imports growing

69
70 ● Techno/ogy Transfer to China

Table 2.—Commodity Composition of U.S. Exports to China, 1980-86 (million dollars)

--

1980

Foodstuffs . . . . . . . . . . . . ... . : ... ... .. .1,265

Cereal and cereal preparations ... . . ... .. 1,264

Crude materials . . . . . . . . . . . . . . . . . . . . . . . . . .....1,258

Hides, skins, and furskins, raw ...,.......,....,.. 13

Oil-seeds and oleaginous fruit . . . . . . . . . . . . . . . . . . . 156

Crude rubber (including synthetic and reclaimed) .., 5

Cork and wood........,.......,...,...,.. . . . . . 41

Pulp and wastepaper...,...........,.. . . . . . . 67

Textile fibers and their waste . . . . . . . . . . . . . . . . . . . . 895

Metal liferous ores and metal scrap . . . . . . . . . . . . . . . 5

Animal oils and fats . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Fixed vegetable oils and fats . . . . . . . . . . . . . . . . . . . . 58

Chemical s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,. ..,, 381

Organic chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

Inorganic chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Fertilizers, manufactured . . . . . . . . . . . . . . . . . . . . . . . 153

Artificial resins and plastic materials . . . . . . . . . . . . . 120

Chemical materials and products. . . . . . . . . . . . . . . . . 46

Basic manufactures . . . . . . . . . . . . . . . . . . . . . . . . . . . 428

Leather, Ieather manufactures, n.e.sv and dressed

furskins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Paper, paperboard, and articles . . . . . . . . . . . . . . . . 130

Textile, yarn, fabrics, made-up articles, and related

products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134

Iron and steel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Nonferrous metals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Manufactures of metals, n.e.s, . . . . . . . . . . . . . . . . . . . 42

Machinery and transport equipment . . . . . . . . . . . . . . . . 358

Power generating machinery and equipment ..,..., 14

Machinery specialized for particular industries . . . . . 63

Metal-working machinery . . . . . . . . . . . . . . . . . . . . . 7

General industrial machinery and equipment, n.e.s.

and machine parts n.e.s. . . . . . . . . . . . . . . . . . . . . . 35

Office machines and automatic data processing

equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Telecommunications and sound recording and

reproducing apparatus and equipment, ,... . . . . 8

Electrical machinery, aparatus and appliances,

n.e,s. and electrical parts, thereof. ....., . . . . . . . 18

Road vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Other transport equipment . . . . . . . . . . . . . . . . . . . . . . 164

Miscellaneous manufactured articles . . . . . . . . . . . 56

Professiona~ scientific, and controlling instruments

and apparatus, n.e.s. . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Photographic apparatus, equipment and supplies,

and optical goods, n.e.s., watches and clocks.,. 2

Miscellaneous manufactured articles, n.e.s,. ..,.... 6

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .3,746

‘Less than $500,000

n e s —not elsewhere speclfled

SOURCE US Department of Commerce statwtlcs, SITC classlflcatlons

1981

1,334

1,332

1,128

7

130

5

99

69

791

a

2

20

406

44

6

131

170

53

447

64

61

284

8

10

20

212

11

67

4

34

22

16

21

7

29

71

55

5

8

3,598

1982

1,239

1,236

597

11

63

3

217

18

273

a

6

0

496

38

9

147

237

61

275

65

36

128

10

23

7

217

8

71

3

34

36

12

25

9

19

78

65

4

8

2,902

1983 1984

541

536

298

4

0

5

234

21

31

a

o

0

353

25

20

168

92

46

220

26

41

17

7

94

31

587

56

89

25

47

51

18

43

22

236

166

145

5

16

2,165

580

578

467

22

a

9

287

18

99

21

0

7

644

71

20

267

234

46

189

39

32

46

4

34

29

910

29

196

23

61

102

26

53

63

356

202

182

4

12

2,992

1985

104-

97

570

30

13

9

328

19

122

43

0

a

514

87

12

152

228

23

370

63

27

141

12

54

67

1,958

88

482

55

153

190

44

101

99

745

319

282

8

27

3,835

Jan.-June

1986

16

6

224

12

19

9

123

10

25

16

a

o

197

39

16

18

109

9

91

13

11

42

7

3

10

1,070

54

201

60

83

98

32

67

65

409

166

129

5

28

1,764
Ch. 4—The Role of the United States in Technology Transfer to China ● 7 1

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

1980

Foodstuffs . . . . . . . . . . . . . . . . . . . . . . . . 65

Fish, crustaceans and mollusks, and preparations,

thereof . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Cereal and cereal preparations . . . . . . . . . . . ... . 3

Vegetables and fruit . . . . . . . . . . . . . 25

Sugar, sugar preparations, and honey . . . 8

Coffee, tea, cocoa, spices, and manufactures,

thereof . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Beverages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Crude material s...... . . . . . . . . . . . . . . . . . . . 300

Crude fertilizers and crude minerals . . . . . . . . . . 41

Metal liferous ores and metal scrap . . . . . . . . . . . . . . . 37

Crude animal andvegetable material s,n.e.s. . . . . 56

Petroleum, petroleum products, and related

materials . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

Chemical s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107

Organic chemicals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Inorganic chemical s . . . . . . . . . . . . . . . . . . . . . . . . . 33

Medic ine and pharmaceutical products . . . . . . . . 10

Essential oil and perfume materials, toilet,

polish ing, and cleaning preparations . . . . . . . . . . . . 14

Explosives and pyrotechnical products . . . . . . . . . . . . 26

Chemical materials and products, n.e.s. . . . . . . . . . . . 8

Basic manufactures . . . . . . . . . . . . . . . . . . . . . . 246

Leather, leather manufactures, n.e.s., and dressed

furskins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Cork andwood manufactures (excluding furniture) 5

Paper, paperboard, and articles of paper pulp, of

paper or of paperboard . . . . . . . . . . . . . . . . . . . . . . . . 2

Textile, yarn, fabrics, made-up articles, and related

products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

Nonmetal lic mineral manufactures, n.e. s. . . . . . . . . . . 19

Iron and steel, . . . . . . . . . . . . . . . . . . . . . . . . . a

Nonferrous metals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Manufactures of metals, n.e.s. . . . . . . . . . . . . . . . . 26

Machinery and transport equipment . . . . . . . . . . . . . . . . 6

Machinery specialized for particular industries . . a

Metal -working machinery . . . . . . . . . . . . . . . . . . . . . . . 1

General industrial machinery and equipment, n,e.s.

andmachine parts n.e. s.. . . . . . . . . . . . . . . . . . . 2

Telecommunications and sound recording and

reproducing apparatus and equipment . . . . . . . . . . a

Electrical machinery, apparatus and appliances,

n.e. s. and electrical parts, thereof. . . . . 2

Miscellaneous manufactured articles . . . . . . . . . . . . 417

Furniture and parts thereof . . . . . . . . . . . . . . . . . . . . . . 10

Travel goods, handbags, and similar containers . . . . 3

Articles of apparel and clothing accessories . . . . . 278

Footwear. ., . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Miscellaneous manufactured articles, n.e.s.. . . . . . . . 103

Total . . . . . . . . . . . . . . . . . . . . . ..................1,141

1981

108

25

4

44

9

19

2

657

53

52

49

321

134

26

39

20

11

28

9

394

3

6

3

252

33

6

44

46

44

a

4

30

4

3

650

19

16

434

37

140

1.987

1982

135

19

4

59

8

37

3

774

60

25

42

615

143

26

38

20

14

36

8

407

2

6

3

239

40

7

45

63

48

5

5

20

6

5

916

29

30

657

42

154

2,423

1983 1984 1985

Jan. -J-une

1986

129

12

5

58

9

34

5

589

47

11

35

468

145

34

17

26

16

33

13

425

3

8

3

255

50

3

31

73

46

6

5

14

10

3

1,133

34

45

840

38

169

2,467

162

21

5

77

6

40

5

794

57

17

39

656

171

45

33

23

16

35

10

607

6

8

4

392

65

3

35

91

71

7

4

16

29

8

1,552

38

101

999

48

355

3,357

182

32

6

75

8

47

4

1,204

53

32

41

1,052

177

36

41

28

15

42

10

665

3

10

11

399

59

3

80

97

97

7

3

14

36

20

1,855

44

154

1,050

61

532

4,180

109

35

3

33

8

23

5

524

17

17

457

100

23

17

13

8

30

5

357

2

4

3

251

31

5

18

42

52

3

2

7

16

15

1,197

23

90

768

41

267

2,339

a

Less than $500,000

n e s — not elsewhere spec!f!ed

SOURCE U S Department of Commerce statistics SITC class lflcat{ons
72 . Technology Transfer to China

at an average annual rate of 6.1 percent and

exports at 8.1 percent annually. Recent figures

indicate that U.S.-China trade reached $8.3 billion in 1986, a 33-percent increase over 1985

levels. 3 The growth in this bilateral trade was

import driven, however, with U.S. imports

from China setting a record at $5.2 billion, a

24-percent increase over 1985. U.S. exports

totalled $3.1 billion for 1986, a 19-percent drop

from 1985 levels, the first decrease since 1983.

The U.S. trade deficit with China reached an

historic high of $2.1 billion in 1986, primarily

due to China’s hard currency shortage and the

boom in U.S. imports in the light industrial

sector and in clothing, textiles, yarns, and

fabrics. 4

Future trade between the United States and

China should come into closer balance. The potential is there since the United States holds

a strong competitive position in the energy,

telecommunications, electronics, and transportation sectors—all priority areas in the Chinese

Seventh Five-Year Plan. For example, despite

the drop in total exports from the United

States to China in 1986 compared with the previous year, some big gainers for the LTnited

States were exports of high technology, such

as computers and telecommunications equipment, as well as metalworking equipment (which

more than doubled the previous year’s level),

heating and cooling equipment, and railway

vehicles and equipments

The U.S. sales to China described above have

been significant and probably will continue to

be. China is more interested in investments

than direct sales because they promote technology transfer. However, after rushing in with

many business proposals when China initiated

its open door policy, few U.S. businesses have

seen their overtures come to profitable fruition. Many U.S. firms feel that the bloom is

off the rose. Indeed China’s investment climate, many foreign businessmen say, has

steadily deteriorated at least until recently.

They complain of soaring costs, arbitrary tax

-—

‘Us Department of Commerce data, February 1987.

‘Japan had a $4.9 billion trade surplus with China and Hong

Kong a $3.6 billion surplus in 1986.

‘U.S. Department of Commerce, February 1987.

and tariff levies, inadequate labor, and numerous other annoy ances.G As U.S. Ambassador

to China Winston Lord said in a May 28,1986,

speech, “Many business people are frustrated

by high costs, price gouging, tight foreignexchange controls, limited access to the Chinese market, bureaucratic foot-dragging, lack

of qualified local personnel, and unpredictability. ” Some U.S. companies are making money

in China, but they are reluctant to talk about

it for competitive reasons. This is partly due

to not wanting to let their competition know

of a good opportunity, and partly because they

fear the Chinese would feel justified in raising

their taxes and other local costs.

The Investment Environment

Foreign investment in China from January

1986 to August 1986 fell by 20 percent (to contracts worth $1.24 billion) compared with the

same period in 1985, confirming perceptions

that the investment climate had been deteriorating. Less than one-third of the 2,600 joint

venture companies listed so far have actually

gone into business. Of the remainder, many

have been scaled down or dropped completely

owing to high costs, unfavorable returns, and

management problems.7

A fundamental problem with joint venture

arrangements, according to foreign businessmen, is that the foreign partner usually contributes foreign exchange and technology, while

the Chinese contribute property, equipment,

and services (such as electricity and water) on

which they place an unrealistically high value.

The Chinese have recently stated that they will

try to remedy this situation. A correlative

problem is that the Chinese tend to undervalue

the technology contributed by the foreign investor.8 Trying to find a solution to this basic

problem is critical and is much more difficult

‘James P. Sterba, “Great Wall-Firms Doing Business in

China Are Stymied by Costs and Hassles–They Complain of

Red Tape, Poor Access to Markets, Even a Shortage of Labor, ”

The Wall Street Journal, July 17, 1986, p. 1.

7’4Joint-Venture Bliss Ends in China, The EcorIom”st of London appearing in The Washington Times, Aug. 20, 1986, p. 3D.

‘See, for example, Cao Yan, “Analysis on ‘Free’ Technology

Imports,<’ JISHUSZ-ZICHANG BAO (Tianjin), Oct. 7, 1986, p. 3.
Ch. 4— The Role of the United States in Technology Transfer to Chfna ● 73

than solving the problem of overvalued Chinese properties or services.

In an effort to improve the investment climate, the Chinese Government adopted “The

Law of the People’s Republic of China on Enterprises Operated Exclusively with Foreign

Capital ”in 1986. This law stipulates that companies that bring in advanced technology or

export the bulk of their production, can establish wholly foreign-owned enterprises in China.g

These enterprises may also apply for preferential tax treatment. Once approved by the Government, these ventures will also be protected

under Chinese law from nationalization and expropriation, except under “extraordinary circumstances; and if such action is necessary,

‘‘legal procedures will be followed and reasonable compensation will be made.

It is expected that foreign exchange receipts

will balance any foreign exchange payments.

Income tax refunds will be granted when aftertax profits are reinvested in China, but legitimate profits may be remitted abroad. II The definition of what constitutes a legitimate profit

is, however, still not clear.

It was recently announced that the Bank of

China is going to relax its tight credit policies

to give loan priority to enterprises that involve

foreign investment. The bank will, in particular, extend help to technology-intensive companies and manufacturers of products for export. Wong Deyan, the bank’s president, said

that the central bank will amend regulations

on the issue of credit for enterprises with foreign funds in a bid to create better conditions

for their development.lz

Foreign businessmen reacted cautiously to

these statements of relaxed policies, however,

since they do not work toward resolving dayto-day management problems of wages, hir-

——— “’Foreign Investor Ruling, ” China Business and Trade, Apr.

23, 1986, p. 3. The regulations themselves appeared in China

Daile}’, Apr. 15, 1986. It should be noted, however, that just because an enterprise is wholly foreign-owned does not mean that

it will be free of the problems described previously.

“’’’Foreign Investor Ruling, ” op. cit.

‘1 Ibid.

‘” ‘China to Ease Credit for Joint Ventures, Financiai Times,

Aug. 8, 1986, p. 4.

ing, training, and others that are also serious.

The joint ventures are struggling toward different solutions to these fundamental problems.13

The latest attempt by the Chinese to improve

the investment climate came in the 22 articles

listed under “Provisions of the State Council

of the People’s Republic of China for the Encouragement of Foreign Investment, ’ listed

in Appendix A. The intent is “to improve the

investment environment, facilitate the absorption of foreign investment, introduce advanced

technology, improve product quality, expand

exports in order to generate foreign exchange

and develop the national economy. The articles spell out various conditions and fees applied to foreign ventures to reduce the uncertainty involved. These new regulations benefit

mostly export-oriented and high-technology

firms but fall short of meeting some basic investor concerns. Foreign executives were cautious at first, taking a “wait and see” attitude

toward the new regulations,15 but recently, renewed interest in certain joint ventures has

been evident.lG

Schedule Delays, Taxes, Other Costs

Foreign firms in China have complained that

the Chinese do not seem to understand that

time is money. An example is the McDonnell

Douglas venture (covered later in this chapter), which took 10 years to finalize. Eventually McDonnell Douglas won a contract for 30

MD-82s, with a price averaging out to about

$25 million per plane. Five have been delivered

and are in operation. Twenty-five more will be

built in Shanghai.

McDonnell Douglas persevered because it

hopes to be involved in the development of a

100-passenger propfan aircraft to be built in

“’’Joint-Venture Bliss Ends in China, ” op. cit.

“U.S. Department of Commerce, February 1987.

“James R. Schiffman, “Foreign Executives Wary of China’s

Pledge to Investors, ” The Wall Street Journal, Aug. 11, 1986.

“Roger W’. Sullivan, “The In\’estment Climate, ” The China

Business Review, January-February 1987, pp. 8-10. See also

Barry Kramer, “Beijing’s Course: The Chinese Economy Appears to be Firmly on the Reform Path—But the Pace of Change

Slows After Resignation of Hu; Political Reforms on Hold, ”

The J4{all Street Journal, May 14, 1987, p. 1.
74 Technology Transfer to China

Photo credtt A4cDonne// ~oug/as

Portions of a McDonnell Douglas MD-82 fuselage are shown being assembled at Shanghai Aviation Industrial Corp.

facilities. Part of the coproduction contract involves extension of Douglas’ Federal Aviation Administration production

certificate to the Shanghai facility.

China.17 The potential market is 500 to 1000

planes over a period of more than 10 years.

Thus the McDonnell Douglas effort is measured in a few decades, not a few years. McDonnell Douglas hopes that its patience and longterm view in the China market will be rewarded.

As another example, U.S. companies competing for China’s proposed purchase of satellites spent large sums of money and devoted

much company time to pursue what promised

to be both a very substantial sale and a chance

to establish a firm lodging in a promising market. ’8 When the two proposed purchases were

17

. —

’’ First ChineseAssembled MD-82 Nears Completion in SAIC

[Shanghai Aviation Industrial COW.] Facilities,” Aviation Week

and Space Technology, June 1, 1987, pp. 34-35.

lflHughe9 was estimated to have spent $500,000 on the 1979-

80 projected sale alone. GE expenditures were estimated at

“postponed,” these companies were disenchanted with the Chinese market and might

refrain from bidding if the opportunity arises

again. 

The satellite postponement story is not atypical. European nuclear companies had once

estimated the nuclear technology market in

-——. —

$300,000. See Karen Berney, CBR, March-April, 1981. RCAAstroelectronics (now called GE Aerospace-Astrospace Division) reportedly spent over $1 million in courting the Chinese

satellite contracts.

‘These types of problems occur in countries other than China

too, of course. For example, Argentina has been negotiating

for several years for the purchase of satellites from a U.S. firm.

Bureaucratic infighting and the country’s financial problems

have kept Argentine officials from making a decision.
Ch. 4—The Role of the United States In Technology Transfer to China ● 7 5

China to be worth up to $20 billion.’” 2’ However, in the past months, the Chinese Government has scaled down ambitious plans for 10

nuclear power stations by the end of the century. The only firm plan for an imported plant

is the 1,800-megawatt Daya Bay plant near

Hong Kong, for which Framatome of France,

Electricite de France, and General Electric Co.

of Britain have contracts to supply equipment

and assistance totaling $1.7 billion. All other

plans have been postponed indefinitely, to the

frustration of Framatome and Kraftwerk Union

of West Germany, which had spent several

years negotiating with the Chinese.”

By its nature, international business is risky,

and overall, China is probably no riskier than

other countries.23 However, businessmen expect a profit commensurate with the risk, and

many companies have found little or no profit

in their China business. Especially in very competitive areas, such as nuclear power, China

has been able to play companies and countries

off against one another to get very low-cost

contracts. China maintains that companies

should accept a low profit margin in recognition of the potential size of the Chinese market. Some companies such as General Electric

(GE) accept this approach, hoping to gain a

foothold and do well over the long haul. It is

not yet clear how many companies will benefit from this strategy, but many U.S. companies are likely to lack the patience even to try.

As has often been noted, American companies

tend to focus on opportunities offering quick

profits, in contrast to Japanese companies,

which are prepared to wait.

Since adopting the open door policy, China

has drawn up a multitude of preferential tax

laws to woo foreign investors.24 These include

*“Robert Thompson, “Chinese Studying Nuclear Technology, ”

Toronto Globe and Mm”l, May 7, 1986, p. B-23.

“ U.S. Congress, Office of Technology Assessment, Energy

Technology l%msfer to China, A Techm”cal Memorandum (OTATM-I SC-30, Washington, DC: U.S. Government Printing Office, September 1985).

“Thompson, op. cit.

“See for example, Jackson Diehl, “East Bloc Ventures Face

Uncertainties: Currency, Market Issues Plague Joint Efforts

with Western Firms, ’ The Washington Post, Mar. 1, 1987, p. H3.

““J$’hy Foreign Businessmen Feel They Are Being Milked, ”

JPRS, Feb. 20, 1986, pp. 48-51, article by Yuan Liu, “The Hidden Burdens of Doing Business in China, ” Chiu Shih Nien Tai

[The Nineties] in Chinese, No. 12, Dec. 1, 1985, Hong Kong,

pp. 64-65.

the “Corporate Income Tax Law for ChineseForeign Joint Ventures” of 1980, and the 1981

“Income Tax Law for Foreign Enterprises. ”

As for investments in Special Economic Zones

(SEZS), the “Special Economic Zones Regulations for Guangdong Province’ of 1980 stipulates a preferential income tax rate.

All of these tax laws provide tax reduction

or exemption for projects that require a large

amount of capital, involve sophisticated technology, or are located in remote areas. Moreover, companies that invest in opened, coastal

cities or opened points in several deltas are

offered preferential treatment to various degrees. Furthermore, to speed up port development, China has announced that projects in

port development will be exempt from taxes

for 1 to 5 years, and will enjoy a 50-percent

reduction in taxes from the 6th through the

IOth year. Imported construction materials

and equipment are exempt from customs and

the industrial and commercial unified tax. All

of these SEZS, the 14 open cities, and the economic development areas like Liaodong Peninsula have an array of special incentives for foreign investment and for the importation of

technology for the establishment of new enterprises and the rehabilitation of existing plants.

Despite these tax breaks and tax exemptions, however, foreign businessmen feel that

they are being taken advantage of. For many

foreign businessmen who have been involved

in trade with China over the past few years,

doing business in China has not gone as well

or been as profitable as they had hoped. One

reason for this, they say, is that the tax burden of an investor is not limited to the income

taxes listed above. The total burden also includes corporate income tax, local income tax,

commerce and industry tax, residence tax, personal income tax,25 and tax on bonuses paid

to Chinese workers.

Apart from taxes, people who do business

in China must also pay several types of charges

and fines, including local or unit levies, which

businessmen say are often capricious.

“Personal income tax is payable by an indi~’idual who has

been in China for more than 90 days. The incidence of tax is

affected by the U.S.-Chinese treaty on double taxation.
76 . Technology Transfer to China

A joint venture or a foreign enterprise is responsible for all its workers’ wages, allowances,

and the social security the state provides the

workers when they become sick, grow old, or

die. One joint venture for a major hotel in

Guangzhou paid wages, bonuses, diligence

awards, allowances for dependents, social security

, state subsidies, medical expenses, retirement, accident compensation, and food.2G Besides these wages and allowances, regulations

also provide for legal holidays, official holidays,

annual leave, sick leave, leave for visiting relatives, maternity leave, and wedding leave.

Thus, to run an enterprise in China, the foreign investor has to pay several times the nominal wage rate in addition to numerous taxes

and fees. The high rates and many charges for

joint ventures are meant to maximize shortrun foreign exchange earnings.

Intellectual Property

Almost as soon as China opened its doors

to Western technology, U.S. companies became concerned about the lack of legal protection for much of their proprietary technology.

In certain cases it was reported that advanced

technology would not be transferred to China

until there was some form of patent and licensing protection. The Chinese Government, on

the other hand, did not want to be stymied by

what it considered unfair restrictions on indigenous technology development. Realizing

the importance placed by foreign companies

on legal protection, Chinese Government officials, after several years of internal discussion,

formulated the first Chinese Patent Law, which

went into effect on April 1, 1985.27 Departments are now formulating detailed rules and

training patent agents. The special features

of the new patent law, according to the Chinese, are that “it absorbs the spirit of patent

policies in other countries and allows for China’s

2’” Why Foreign Businessmen Feel They Are Being Milked, ”

op. cit.

“For a detailed discussion on intellectual property issues in

China see Tek Ling Chwang and Richard L. Thurston, “Technology Takes Command: The Policy of The People’s Republic

of China with Respect to Technology Transfer and Protection

of Intellectual Property. ” The International Lawyer, vol. 21,

No. 1, Winter 1987, pp. 129-167.

actual conditions and international practice.

Its aim is to encourage and popularize inventions and speed up scientific and technological development and the modernization drive. ’28

The Trademark Office of the State Administration of Industry and Commerce is responsible for the registration and control of trademarks throughout China. For certain classes

of goods, the Trademark Office may prescribe

that they should bear a trademark. In this case,

no goods within that classification may be sold

unless they carry a registered trademark. At

present, this applies for all pharmaceutical

goods.

The value of the patent and trademark measures in protecting foreign companies has not

yet been tested in the courts. Several commentators have expressed skepticism on their protection value.zg For example, China’s patent

law fails to provide protection for pharmaceuticals, chemical formulas, or trade secrets.

There is no copyright regime to protect published works, computer software, or semiconductor designs. It would also be very difficult

for a company to find out if its patent were

being violated because of the lack of access to

most of the Chinese market.

Local Sourcing, Employment,

Export Marketing

Manufacturing facilities must generally obtain many parts, supplies, and services locally

to operate efficiently, but in China the quantity and quality of local content is a major problem. This is especially evident in the Beijing

Jeep joint venture of American Motors Corp.

(AMC), discussed below. The Chinese have ambitious goals for developing a supplier base for

the jeep. Domestic content in the jeeps is currently in the range of 10 to 15 percent, but

about 75 percent is needed for profitable exports.30 The Chinese went into this venture

28 The China Daily, “Legal Advisor: Your Patent Queries Answered, ” Feb. 4, 1986, p. 4.

“Nigel Campbell, China Strate~”es-The Inside Story, University of Manchester/University of Hong Kong, 1986, p. 115.

‘“Richard Johnson, “AMC, Chinese Move to Save the Beijing Jeep, ” Automotive News, June 2, 1986, p, 6.
Ch, 4—The Role of the Unifed States in Technology Transfer to China . 77

Photo cred{f General E/ectr)c

Contract negotiations can be cumbersome. The lone GE representative faces whole teams of Chinese in talks leading

to the first contract for locomotives.

wanting technology as well as the potential for

exports, and thus would like to achieve domestic content of 80 to 90 percent in 5 to 7 years.

AMC, however, says this goal cannot be achieved

without strong backing from the Chinese Government.

One aspect of dealing in China that is difficult for foreign investors to fathom is that labor shortages can exist in a country with over

one billion people. Yet, Chinese bureaucracy

has created labor shortages. Foreign companies cannot simply advertise for a needed

worker, such as a secretary or an engineer. Instead, they must go through the Foreign Enterprises Service Corp. (FE SCO), which monopolizes Chinese workers and assigns them

to foreign companies. 3

1 The workers are politically screened and trained to keep a watch on

the foreign business.

32 Since FESCO cannot

meet the demand for workers, the waiting lists

are long, and the foreign firms must make do

with whoever is finally assigned to them.

FESCO can also pull away workers at any

time .

In keeping with China’s desire to make as

much foreign exchange as it can from labor

31 Sterba, op. cit. ~zlj ~ploYee~ for joint ventures are often recruited t~.rough

local labor bureaus which are not the same as FESCO, which

is a Beijing entity. Thus, they may not be quite so indoctrinated.

charges, wages set by FESCO are higher than

those in most Asian economies. The worker

does not draw this wage–as much as 85 percent of it, as well as most of any incentive bonuses, goes back to FESCO. The U.S. Embassy

cites an extreme case in which a French oil company reportedly paid $9,000 a month for a

highly trained technician. The technician’s

monthly take-home pay, however, was $51. 33

Foreign firms may be allowed to bring in expatriate staff, but that is also expensive. Beijing is already among the costliest places in the

world in which to maintain expatriate staff:

$150,000 to $ZOO,OOO per year.34 This does not

include office rent, which ranges from $50,000

a year at the not very luxurious Beijing Hotel

to $125,000 at the Great Wall Hotel. 3 5

Lack of labor mobility can also cause difficulties. Getting specialized staff can be a problem because other companies are reluctant to

lose their best workers and often prevent their

‘

s

James P. Sterba, “Great Wall-Firms Doing Business in

China . . . “ This assertion about the technician pay has been

disputed by a Chinese official in a letter to the Wall Street

Journal.

34 Andrew Ness, ‘‘Price Hikes and the Foreign Business Community,” The China Business Review, March-April 1986, p. 52.

“Rents for office space in Beijing’s four joint venture hotels

now average $11.80 per square foot per month according to a

March 1986 report by the U.S. Embassy in Beijing. This makes

space in Beijing much more costly than the equivalent space

in Hong Kong Central.
78 . Technology Transfer to China

—

leaving. Official reports show that 4,000 of

Shanghai’s skilled workers recently asked for

transfers to more suitable jobs, but fewer than

350 of them were actually transferred. 3

’ At the

Shenda Telephone Co., a joint venture between

Cable and Wireless (U. K.) and its Chinese partners in Shenzhen (a special economic zone on

the border of Hong Kong), Cable and Wireless

decided to pay for the education of three potential employees under a Ministry of Education program. “Buying” staff in this way

means extra cost and delays but enables the

foreign company to plan ahead.37

Foreign Exchange Concerns

Foreign exchange concerns permeate every

deal in China. For example, the Beijing Jee p

Corp., Ltd. (BJC) was recently in a crisis, due

primarily to foreign exchange problems. The

3-year-old joint venture began to assemble

Cherokee Jeep kits in the fall of 1985. New Chinese Government restraints on using convertible currency quickly undermined production

plans, however. AMC received a license for importing Cherokee kits, but shipment was held

up because of monetary disputes. Delays in

dollar-based payments for these completeknockdown (CKD) kits (unassembled parts) resulted in a 2-month suspension of production

in mid-1986. The impasse on the kits ended

when AMC agreed to accelerate local content

in Beijing-built Cherokees in return for dollardenominated (hence potentially more easily

repatriated) payments by the Chinese for

North American-sourced knockdowns.’a

Management Styles, Training,

Language, and Cultural Considerations

It has been suggested that a useful characterization of the typical Chinese manager is

that of a technically trained, operationally experienced individual whose career and professional skill development have evolved during

a period of limited or no market interaction,

“’’Shanghai-The Ugly Daughter Repents, The Econom”st,

Aug. 9, 1986, pp. 27-28.

37’’ Joint-Venture Bliss Ends in China, “ op. cit.

3RJohnson, op. cit.

strict prohibitions against organizational diversification, and limited economic rationality (as we know it in the West) regarding performance evaluation and reward.” One of the

significant consequences of this situation is a

widespread lack of many of the specific functional management skills commonly associated

with the concept of modern management.

Many of these apparent management skill deficiencies in Chinese managers are identified in

table 4. In a more general management context, the average Chinese manager perceives

his role as being more of an information conduit from the top of the economic hierarchy

——

“Appendix 5, Vol. II, “The Transfer of Western Managerial

Knowledge to China, ” by William A. Fischer, May 1986.

Table 4.—A Sample of Functional Management

Knowledge Apparently Lacking in the

Chinese Management Community

Marketing:

Market research

Advert i sing

Product design

Industrial marketing

Consumer marketing

Manufacturing:

Total quality control

Managing high-volume/high-variety operations

Value analysis

Inventory management

Manufacturing information systems

Distribution systems

Ethics and comparative management

Contract law

Human resources:

Motivation and incentives

The concept of directorship

The role of the manager

Executive compensation

Organizational design

Leadership styles

Finance:

Investment analysis

Methods of financing

International finance

Accounting:

Establishment of control systems

Auditing

Public accounting

Management of science and technology:

Anticipating technological change

Managing innovation and creative groups

SOURCE Off Ice of Technology Assessment, 1987
.

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

to the workers below than a decisionmaker/

risktaker.

The coproduction of MD-82s in China by

McDonnell Douglas (described below) demonstrates the management challenges that can

occur when starting a venture.40 The challenges

included the need to bridge cultural gaps and

to meet the rigors of budget restraints and regulatory requirements.4

1 Budget pressure was

imposed because the project was commercial

and not a military coproduction program. Regulatory requirements were imposed to assure

that U.S. Federal Aviation Administration

(FAA) certification standards were preserved

during manufacturing.

Management difficulties arose in the McDonnell Douglas joint venture for several reasons.42 These included:

. Trying to introduce untrained Chinese

workers to the “grid” system of management used by McDonnell Douglas, a system that holds that information and authority flow in different directions depending

on the problem to be solved. This system

is different from the Maoist “struggle sessions” that replaced productive work during China’s Cultural Revolution (although

in theory Maoist objectives could be compatible with this system).

. Because of the complexity and quality

control requirements of aircraft manufacture, McDonnell Douglas U.S. operations

have developed over 600 inhouse manuals

of standard procedures (of which only 200

have been translated into Chinese so far).

These procedures sometimes go against

the Chinese way of doing things. In addition, some Chinese are now frightened of

doing anything that is not laid down in

‘“See also Steven R. Hendryx, “Implementation of a Technology Transfer Joint Venture in the People’s Republic of China:

A Management Perspective, ” The Columbia Journal of WorM

Business, Volume XX 1, Number 1, Spring 1986, pp. 57-66, which

deals with Otis Elevator Company of the U.S. and the TianjinOtis joint venture.

41 Richard G. O’Lone, “MD-82 Aircraft Production in China

Presents Management Challenges, ” Aviation 1$’eek and Space

Technology, Feb. 24, 1986, pp. 42-45.

“’’Joint-Venture Bliss Ends in China, ” op. cit.

●

the procedures, which leads to decisions

being made slowly.

The usual arguments in Chinese joint

ventures over quality were eliminated

once the Chinese realized that approval

for the finished aircraft from the FAA

hinged on meeting explicit, stringent

standards.

Thousands of manufacturing drawings

and pages of technical literature had to

be translated into Chinese.

Another management concern has been training, which has turned out to be very difficult.

Chinese engineers have educational backgrounds

and work habits very different from those of

their U.S. counterparts. The Chinese tend to

be specialists, whereas the Americans are more

generalists. The high standards demanded by

the MD-82 manufacture had to be made quite

clear to the Chinese. To help meld the two

groups, 150 Chinese employees are being trained

at Long Beach, California, for management positions in the program. About 30-40 senior

McDonnell Douglas people are onsite at Shanghai as advisors and comanagers to their Chinese counterparts; this group will eventually

grow to about 100. About 1,000 people are employed on the MD-82 program at present, and

the peak is expected to be 3,000.

Other, less tangible, management problems

must also be faced. Philosophically, the Chinese place much emphasis on human values,

whereas the Americans are concerned about

productivity and “the bottom line. Managers

must learn to emphasize both. Neither American nor Chinese managers have been prepared

for the differences in the concepts of trust and

respect. 43

Comparative Investment Environments

To appreciate more fully the nature of the

Chinese investment environment, it is appropriate to examine its main features from a

comparative perspective. In most categories,

especially in business facilitation, China’s in4’ Gareth C. C. Chang, President, McDonnell Douglas China,

Inc., Personal communication, September 1986.
80 . Technology Transfer to China

—

vestment climate stands in sharp contrast to

the existing situation in places such as South

Korea, Taiwan, Singapore, and Hong Kong,

all of which have developed very specialized

and focused organizations to promote, process, and administer foreign investment projects. In Taiwan, for example, an “industrial

development and investment center” was created to link the island’s development needs

with the interests of potential foreign investors. Because of the strategic role attached to

foreign investment, special consideration was

given to addressing the specific needs of overseas firms in areas such as foreign exchange

remittance, profit repatriation, import of components, labor costs, and overseas training.

In addition, foreign firms usually complete

necessary negotiations in a relatively short

period of time in these other markets, and their

—

projects are much less subject to government

control than in China.

For all of these reasons, China is less competitive in attracting investment. In some

respects, many of the firms that began their

Asian operations in places such as Taiwan and

South Korea seem to anticipate a similar evolution in China. China has gone much further

than other socialist countries in allowing

equity-based investments, even to the point

of accepting wholly foreign-owned projects.

However, the general consensus remains that

the process of change in China will be slow and

that the emphasis on strong control w-ill remain

a part of the Chinese investment setting. Doing business with the socialist managers of

China’s nonmarket economy will never be as

easy as doing business in the market economies

of Singapore, Taiwan, or Hong Kong.

CASE STUDIES

This section reviews the technology transfer endeavors in China by various U.S. firms

in the fields of transportation, satellite telecommunications, and computers and electronics.

The U.S. companies involved in China have

ranged from very large diversified companies,

such as GE and IBM, to small firms selling

in specific market niches. The technologies involved range from manufacturing simple circuit boards to establishing satellite telecommunications networks. The case studies that

follow cover sales (with a technology transfer

component), joint ventures, and coproduction,

and give an indication of how things work in

practice.

Transportation

Locomotive Sales by General Electric

China places particular importance on its

railroads. Priority projects presently under

way are largely related to coal transport from

Shanxi Province to other provinces and ports,

and to electrification and double-tracking of

existing major trunk lines. 44 The new-line construction between Datong and Qinhuangdao

is the largest in scale, with investment totalling over 4 billion yuan. The Seventh Five-Year

Plan proposes the construction of 3,600 km of

new lines, the doubletracking of 3,300 km, and

the electrification of 4,000 km of existing

lines.45

China plans to replace steam engines with

electric and diesel versions. By the year 2000,

China hopes to have 20,000 km of electrified

railway. China’s railroad system is not under

the Transportation Ministry but under its own

Railroad Ministry, which sets development priorities. China’s present rail system and ambitious planned improvements are shown in figure 4.

“see for example “Electrification Planned for 3000 km of Railways XINHUA, Apr. 12, 1986 or “Modernization of GuangzhouShenzhen Railroad, ” by Dai Quan and Li Zhenxing in 7’IEDAO

ZEflSHI [Railway Knowledge], No. 4, July 28, 1985.

45Seiichi Nakajima, “China’s Priority Projects and the 7th

Five Year Plan, ” China Newsletter, No. 63, JETRO, 1986, pp.

13-16.
Ch. 4—The Role of the United States in Technology Transfer to China . 81

— — — —

/

L A

\
82 ● Technology Transfer to China

—

China began to import locomotives in 1958,

most of them from Hungary. In the years that

followed, China bought locomotives from the

United States, the Federal Republic of Germany, France, the Soviet Union, Romania, and

the German Democratic Republic. At present,

China’s Dalian Locomotive and Car Works produces 130 locomotives a year, and its Zhuzhou

Electric Locomotive Works produces 80 electric locomotives a year. China has two other

factories that build passenger trains. However,

China’s need for locomotives and related equipment is far from being met by domestic production and imports combined.4

’ The United

States has become the largest locomotive supplier to China. In March 1985, 220 GE diesel

locomotives of 4,000 horsepower each were delivered, with 200 more locomotives on order.

The first contact between GE and the Chinese occurred in 1976, when GE conducted a

seminar on diesel locomotive technology in

China. Another seminar was given in 1978, after which a Chinese delegation visited U.S.

diesel locomotive plants as part of a worldwide

tour. As a result of these seminars and tour,

the Chinese invited GE to discuss possible

diesel locomotive sales.47 Negotiations began

in 1979 but were not completed until 1983,

when locomotives were given a high priority

by the Chinese in a ranking of major projects.

Right from the start, technology transfer

was a prerequisite of Chinese negotiations for

any purchase of locomotives. GE purchase

of locomotive components from China was also

very important in negotiating the two contracts. This type of countertrade will probably

become more and more important as Chinese

foreign exchange reserves decrease.

--— - - — . . .

“For a detailed look at several rail technologies needed by

China see “A Report Covering the Railroads of the People’s

Republic of China. Operations, Rolling Stock, Standards and

Planning. Effects of Interface and Technology Transfer Between

North American Railways, Railway Supply Companies and the

Association of American Railroads, ” prepared by David G.

Blaine and William J. Harris, Jr., May 1986 (app. 4, vol. II of

this report).

47The Chinese use of delegations (both to and from China),

technical seminars, conferences, and exhibits are a common informal technology transfer mechanism. Foreign technology seminars in China have been used a great deal and with apparent

effectiveness.

Throughout the entire negotiation process,

GE worked with the same Chinese officials,

who represented the Railways Locomotive Bureau, the Railways General Industry Bureau,

and the China National Machinery Import/Export Corporation. Over the years, a good relationship developed, so the second contract took

much less time to negotiate.

The first contract stipulates that the technology transfer portion is for a period of 4 years

and includes manufacturing and materials

technology for certain components of the locomotive, but not design methods. So far the Chinese have not asked for a particular technology that was not appropriate to their needs.

The second China contract stipulates that

GE will train Chinese personnel to overhaul

locomotives and will provide a factory management training course. Training will be done

both in China and in the United States using

computers such as IBM personal computers

(PCs). Language problems had some impact

on the technology transfer process, but the

problems were surmountable.

GE apparently had no need for U.S. Government assistance. They felt that they had

prepared themselves well and knew whom to

contact and how to keep negotiations running

smoothly. However, GE feels that several factors affected by U.S. Government policy are

important:

The high value of the dollar at the time

of the negotiations hurt U.S. companies’

competitiveness in China, just as it did

elsewhere. The exchange rate when negotiations began on the first GE contract

was 1.80 yuan to the dollar. Today, it is

over 3.69.

The importance of Export-Import Bank

financing should be recognized-it is almost the only leverage the U.S. Government has to support U.S. industry. GE

believes that other governments provide

financial subsidies to companies doing

business in China. Financing was not a factor in these GE negotiations since China

paid cash, but the availability of official

(but unsubsidized) financing could be crucial in the future.
Ch. 4—The Role of the United States in Technology Transfer to China ● 8 3

● U.S. Government promotion should focus

on products in general rather than on

company-specific products. It might be

useful for the Department of Commerce

or other appropriate Government agencies

to analyze the Chinese Five-Year Plan and

match Chinese needs with U.S. strengths.

The protocol between the Ministry of Railways and the U.S. Government was not particularly useful, but it did not hurt, either. Thus

far, export controls have not affected the export of locomotives and locomotive technology to China.

GE was particularly interested in the Chinese locomotive market because it had spent

$500 million modernizing its locomotive plant

in Erie, Pennsylvania. At present, the market

for locomotives in the United States is poor.

The two China contracts, even if they produce

little or no profit, allow GE to refine technological and design advances while the plant

operates. When demand returns, GE will be

well placed competitively .48

Beijing Jeep Joint Venture with AMC

China’s automobile manufacturing began in

1956 with the production of Liberation trucks

at the Changchun No. 1 auto plant. These 4-

ton trucks were manufactured using Soviet

equipment and technology. The production of

Liberation trucks kindled an interest in several types of motor vehicles required to satisfy

China’s burgeoning needs. In Shanghai, Nanj -

ing, and Jinan, a variety of models were produced including the Yellow River and the Leap

Forward trucks, the Red Flag limousine, and

Shanghai sedans. Today, more than 50 kinds

of vehicles in six categories—vans, cross-country

vehicles, dump trucks, tractors, buses, and

sedans-are in production, with more than 300

types refitted for special purposes.49 Production by vehicle category is given in table 5, and

total automobile production levels are given

in figure 5. Production levels are still too small

‘“Peter Petre, “What Welch has Wrought at GE, ” Fortune,

July 7, 1986, p. 45. See also Barnaby J. Feder, “GE Costly

Locomotive Gamble, ” The New York Times, Jan. 25, 1987.

4’Makoto Iwagaki, “ The Stat,e of China’s Automobile Industry, ” China Newsletter, No. 63, NETRO, 1986, pp. 9-11, 16.

Table 5.—Chinese Production by Vehicle Category

(Unit: 1,000 units)

1981 ‘1 983

Trucks. ., . ......108.3 (61 .6°/0) 148,0 (61 .7°0)

Jeeps . . . . . . . . . . . . . 15.5 (8.8”/0) 18.0 (7,5 ”/0 )

Passenger cars . 3.4 (2,0 “/0 ) 5.6 (2.30/o )

Buses . . 1.7 (1 .00/0) 4.4 (1 .8°/0)

Others. . . . . . . . . . 46.8 (26.6°/0) 64.0 (26.70/o)

TOTAL ... ... .. 175.7 (lOO.OO

/ o ) 240.0 (1 OO.O”IO)

NOTE Trailers are Included under Others f they were Included with Trucks

the percentage for trucks would reach 85 percent

SOURCE Makota Iwagakl, ‘The State of China s Automobde Industry China

Newsletter No 63, JETRO, 1986

to achieve economies of scale, even for components. In addition, Chinese motor vehicle technology is over 20 years old, which affects vehicle production, fuel efficiency, maintenance

needs, and pollution control.

China seeks joint ventures, improved technology, specialization, and mass production,

giving special emphasis to heavy-duty trucks

and sedans. The China National Automotive

Industrial Corporation, founded in May 1982,

has actively sought links with foreign companies. It has hosted foreign delegations from

auto companies, has sent technicians abroad

for research and technical exchange, and has

been involved in joint production agreements.

In the last few years, the company has introduced advanced technology from the United

States, Japan, Italy, France, Britain, and West

Germany. In addition to BJC, the ShanghaiSantana is a sedan produced jointly by Shanghai and the German Volkswagen Corp. The

Tianjin-Dafa van is produced jointly by Japan

and China.

The rising Chinese demand for automobiles

had previously been met largely by imports.

However, the large-scale importation of vehicles ended in 1986 with a clamp-down on foreign exchange expenditures. It should be noted

that direct sales of cars and trucks do little

for technology transfer–the backward state

of China’s own industry necessitated imports,

and the Chinese are making efforts to remedy

the situation as described below.

AMC and the Beijing Automotive Works

formally inaugurated their joint venture (BJC)

to produce four-wheel-drive Jeep Cherokees in
84 . Technology Transfer to China

Figure 5.—China’s Vehicle Production History

500

400

z

: 300

:

r

c

.—

.g 200

5

100

0

Open dool

Hua

Guofeng% Second

10-year adjustment

Reconstruction plan period

following n ~

establishment

I I

,

of PRC

Cultural Gang of four

First revolution

Great adjustment

leap period

forward 1

—

1

r

.

1960 1965 1970 1975 1980 1985

Year

SOURCE Zhorrgguo Tong// N/an//an (China Statlstlcs Yearbook), from Makota Iwagakl, “The State of China’s Automobile Industry, China News/efter - No 63, JETRO, 1966

Beijing in October 1985. AMC owns 31.3 percent of the joint venture. So far, AMC has invested nearly $16 million in capitalization, production equipment, and living expenses for the

expatriate staff.50

The first phase is the assembly of CKD Cherokee kits shipped from the United States. This

will be done at a plant that for many years has

manufactured a modified Soviet-designed jeep,

vehicles that are fuel inefficient and, on average, have major drive train failures within their

first 12,500 miles. The Chinese are hoping that

their experience in assembling Cherokees will

teach them how to improve this vehicle. In particular, the improved quality control of assembly and locally sourced parts will be important.5

’

AMC has shipped almost 2,000 Cherokee

kits to China, 1,782 of which had been assembled by January of 1987. The largest single

buyer of Cherokees is the State Materials Bureau, which purchased 200 of the first 500 vehicles sold, mostly for distribution to other

— 50’’ Cas~Shortage Forces AMC to Review Cherokee Production in China, ” China Business and Trade, Apr. 23, 1986, p. 3.

‘

] Visit by OTA staff to Beijing Jeep Corp., Jan. 28, 1986.

state agencies and enterprises. Other buyers

include the Mongolian police department and

several foreign companies stationed in China.

Some problems with the joint venture developed early .52 The original 1983 contract

called for a $10,000 portion of each $19,000-

Cherokee sold in China to be paid in dollars.

When the Chinese Government clamped down

on foreign exchange outlays, however, BJC

was left with a $2 million foreign exchange debt

from the State Materials Bureau and an insistence by Beijing that remaining vehicles be

———

“Some ~bservers believe that the original contract was poorly

conceived and that AMC should take much of the blame for

this. Subsequent problems they believe stem as much from inadequate financial plannin g and unrealistic capitalization as they

do from any problem inherent in doing business in China. (Steven

R. Hendryx, “The China Trade: Making the Deal Work, ” Harvard Business Review, July-August 1986, pp. 75-84. ) The venture’s experience to date suggests that timetables calling for

80 percent local content by 1988 and 10,000 exported vehicles

in 1990 were unrealistic. Also, many foreign observers point

out that AMC’S initial cash contribution of $8 million was very

small in relation to its goal of building an export-quaIity jeep

in China. (“Problems at Two Joint Ventures—Fundamental

Problems Plague AMC Joint Venture/If Things Go On Like This,

There’ll Never be a Chinese Detroit, ” The China Business Review, July-August 1986, pp. 34-35. The second joint venture

referred to in this article is that of Shanghai-Volkswagen Automotive Company Ltd. producing Santana sedans. )
Ch, 4— The Role of the United States in Technology Transfer to China ● 85

Photo credit Er/c O Basques

The Beijing Automotive Works produces two types of jeeps in parallel assembly lines. The BJ-212 pictured on the right

is a Soviet-designed jeep that has been produced since the 1950s. The Cherokee Jeep on the left is a product of the

Beijing Jeep Corp. Ltd., a joint venture formed with American Motors Corp.

bought only with Chinese currency. Production of Cherokees dropped to seven vehicles

a day, about one-half the output rate hoped

for. The original 1986 production target of

1,000 was thus lowered to less than 2,000.

This joint venture came very close to failing, primarily because of these foreign exchange problems, with AMC threatening to

walk away from the deal. However, the joint

venture is too large and symbolically important for either side to let it fail. The importance

was underscored by the extensive discussions

of AMC with the China National Automotive

Industrial Corp.,

5 3

the State Economic Commission, and the State Planning Commission

on the joint venture’s problems. Some feel that

the much-publicized difficulties of this joint

venture in the international press helped AMC

- .

‘

>

’ The go~’ernment has recently replaced the China National

Automotive Industrial Corp. (CNA IC) with a federation which

will provide China’s more than 2,000 automobile and motorcycle manufacturing enterprises with consulting services and guidance in order to help coordinate the automobile industry, The

reason for the demise of Ch”AIC, which started in 1982 with

high hopes for automobile production coordination, was that

its excessi~’e power stifled the initiati~’e of indi~.idual enterprises.

(China Business and Trade, Yfol. VI 11, Issue 17, illar, 23, 1987,

p. 4.)

obtain this much-needed assistance from the

highest levels. Recent reports indicate that

many of the problems have been solved.

McDonnell Douglas MD-82 Commercial

Aircraft Coproduction

China is one of the few countries in Asia to

have developed its own combat aircraft.” The

Chinese developed the Shenyang J-8 Fin back

fighter, which made use of technology acquired

from the manufacture under license of Soviet

aircraft such as the MiG-21. The Chinese F-8-

“The Beijing Jeep Corp. Ltd. recentl~’ held an exhibition on

its three-year anniversary. The joint Y.enture has so far produced

1,782 Cherokee Jeeps with domestic content reportedl~ accounting for one-sixth of the jeeps to~al cost. I)i\idends were shared

by ANIC and the Chinese for the first time in 19/+6. The Chinese

and American managers agreed to reintest $101.25 million in

the expansion of production during the count r~’ Se\’enth Fi\reYear period (1986-1990). (“Joint \’enture on ,Jeeps Marks ,4nniversary, ” XIN}IUA, Jan. 15, 1987.) -

“’The Chinese have announced plans to display four of their

aircraft at the 1987 Paris Air Show which starts (June 12, 198’7

in I,eBourget, France. This is China first aircraft presentation at this biennial salon. The four aircraft are the Nanchang

A-5 and Xian FT-7 fighters, the Harbin Y-12 twin-turboprop

utility transport, and the Northwestern Polvtechnical Uni\’ersity’ 1)4 RD remotely’ piloted vehicle. (‘‘Chinese Plan to Displa~’

Aircraft at Paris Air Show, ” A ~iation t~”eek and Space Twhnofo~’, ,Jan, 19. 1987, p. 21, )
86 ● Technology Transfer to China

2 is a Mach 2.2, delta-wing, air-superiority

fighter derived from the J-8 fighter.5G

China also laboriously (and expensively) built

two prototype airliners in the Boeing 707 category, designated as the Y-10 or, as some

termed it the “708. ’57 This airliner was extensively reverse engineered from the Boeing 707s

bought by the Chinese. The engines of the Y10 were of U.S. manufacture. The first Y-10

was used for structural tests, and the second

was for actual flying tests for airworthiness.

The second plane began flight testing in September 1980 and flew successfully for a total

of about 300 hours.58 One major problem with

the plane was the integrity of its fuel tanks—

the Chinese were accustomed to the Soviet

style of aircraft building, which uses bladders

or tanks for the fuel, not the U.S. style, which

uses “wet wings” (the aircraft wing itself is

a fuel tank). Such problems and doubts about

obtaining international acceptance led to a decision not to manufacture the Y-10, but to join

instead with McDonnell Douglas.

In April 1985, McDonnell Douglas and Shanghai Aviation Industrial Corp. (SAIC) signed

an agreement providing for the coproduction

of 25 MD-82 twinjet transports, with an option for 15 more. The agreement took 10 years

to finalize. The Chinese had earlier produced

landing-gear door subassemblies for McDonnell Douglas commercial airliners. McDonnell

Douglas was satisfied with the quality of the

work on the over 200 doors assembled and

decided to go forward with a proposal to coproduce 25 MD-82 commercial airliners in Shanghai with the Chinese.’ g The Civil Aviation

5’The U.S. Air Force and the People’s Republic of China signed

a $501 million contract in October 1986 to upgrade the F-8 fighter

with U.S. made avionics equipment. A draft request for proposals has been issued by the Air Force and a formal RFP will

go out in early March 1987 with a contract award planned for

August. Delivery of the first 50 kits and five spares is scheduled for 1991. The kits will include new radars, inertial navigation equipment, head-up displays, air data computers, and a

new data bus. (“Chinese F-8-2 Fighter Configured for AllWeather Day/Night Missions, ” Aviation Week and Space Technology, Jan. 19, 1987, pp. 42-43. )

“See, for example, E. E. Bauer, China Takes Off: Technology

Transfer and Modernization, University of Washington Press,

1986, concerning several interesting technology transfer histories.

‘

nVisit by OTA staff to the Shanghai Aviation Industrial Corp.

plant, Shanghai, Feb. 4, 1986.

‘

g

Shanghai site visit by OTA staff, Feb. 4, 1986.

Administration of China (CAAC), the umbrella

Chinese organization that oversees all aspects

of aviation, has agreed to acquire the 25 MD82s. The five other MD-82s have already been

put into service by regional carriers in Shanghai and Shenyang.

Thirty-eight engineers and specialists from

the United States are staying at the McDonnell Douglas coproduction facility in Shanghai, run by the SAIC. They stay from 2 months

to up to 2 years. The contract also specifies

that approximately 220 Chinese will travel to

the United States for training, most of them

in planning, engineering, and assembly. Of

these 220, approximately 90 percent will be

engineers and 10 percent technicians. In 1987

they intend to coproduce 2 planes. The post

1987 timetable is not definite, but they hope

to assemble four planes in 1988, seven in 1989,

eight in 1990, and four in l991.

The McDonnell Douglas coproduction agree

ment is complex, with 500 pages (in both English and Chinese) five parts covering:

1. licensing details

2. delivery of aircraft to CAAC and aftersales service,

3. offtrade (countertrade) agreements,

4. new joint development of aircraft, and

5. discussion of a new joint management

system.

The total deal covers a period of about 10 years.

A major step for the Chinese is now completed with the signing of the “Memorandum

of Agreement for Technical Cooperation in the

Field of Civil Aviation” between the FAA and

the CAAC. G1 This agreement, along with its

Annex 1, certifies FAA airworthiness to the

MD-82s being assembled in Shanghai and is

essentially an extension of the airworthiness

certificate given to the MD-80 series of aircraft

manufactured in McDonnell Douglas’ Long

‘Visit by OTA staff to the Shanghai Aviation Industrial Corp.

plant, Shanghai, February 4, 1986.

‘

l

’’ Memorandum of Agreement for Technical Cooperation in

the Field of Civil Aviation between the United States of America Department of Transportation, Federal Aviation Administration and the People’s Republic of China, Civil Aviation

Administration of China, ” signed Mar. 14, 1986 and “Annex

1 to the Memorandum of Agreement” signed Mar. 15, 1986.
Ch, 4—7 The Role of the United States In Technology Transfer to China ● 87

Beach facilities. With this certification the MD82s assembled in China can be flown or sold

anywhere in the world. McDonnell Douglas actually monitors the Chinese work in assembling the SKD (semi-knock- down) units to

make sure that the completed aircraft are in

compliance with FAA requirements. FAA inspectors from Long Beach also go to China approximately every 3 months to check for compliance in May 1986, Annexes 2, 3, and 4

were drafted and sent to the Chinese. These

annexes deal with controlling air traffic, maintaining airworthiness, and developing an air

traffic control system plan. The Chinese have

expressed an interest in these but do not want

to commit foreign exchange to them at this

time .

The MD-82 production line started as planned

on April 1, 1986, with the first plane completed

in June 1987, 1 month ahead of schedule.63 This

plane will be test-flown to see that it is airworthy and operates to FAA specifications,

with delivery in July. Subsequent planes will

then be essentially replicas of this first one.

China’s aircraft industry is developing new

types of 100-seat jet planes in cooperation with

Messerschmitt-Bolkow-Blohm (MBB) of West

Germany and McDonnell Douglas. This cooperative arrangement was signed in April 1985.

China has sent over ’200 senior specialists from

its aircraft industry to West Germany and the

United States to help design and produce the

new aircraft.

6 4

One reason for so much interest by foreign

firms is that the potential market for aircraft

in China is enormous. Unlike other countries

in the region, China contains a home market

for aircraft that, by itself, is large enough to

justify at least the development of aircraft

“’’Chinese MD-82 Procedures Under Review, ” Aviation M’eek

and Space Technology, May 25, 1987, p. 29.

“See Bruce A. Smith, “Chinese Join Wings, Fuselage of First

Coproduced MD-82, ” A}’iation Week and Space Technology,

Dec. 15, 1986. pp. 41-43 and “First Chinese-Assembled MD-82

,Nears Completion in SA IC [Shanghai Aviation Industrial Corp. ]

Facilities, ” A\iation M’eek and Space Technology, June 1, 1987,

pp. 34-35.

“’’[Chinese] Aircraft Industry Cooperating with U. S., FRG, ”

Xinhua, Nov. 21, 1985, reported in JPRS-CEA-85-1 12, Dec. 20,

1985.

sized for regional markets. In this respect,

China can be compared only with the United

States and the Soviet Union.G

’

Satellite Telecommunications

Background

According to a recent Department of Commerce Industry Sector Analysis for Telecommunications in China, “China recognizes that

telecommunications is one of two or three industries upon which the fate of its entire modernization rests. The principal focus is on rapid

improvement of what can only be described

as an appalling telephone system. ’ 66 Only 1

person in every 200 has a phone, placing China

among the lowest six countries in the world

in phone density. Long waits for connections,

poor line quality, and lack of service are continual problems. Much of the equipment dates

back to the 1930s and 1940s. Chinese international telecommunications capacity has been

developing at a rate of 30 percent a year (albeit from a small base), mostly through increasing communications by satellite. China can produce several types of equipment, including

ground stations (particularly C-band) and telephone transmission lines, but these are generally not technically sophisticated.

Satellite telecommunications is a very appropriate high-technology sector for China. China’s

large population, spread over vast land masses

with extreme variations in climate and terrain,

makes this an ideal technology- better even

than microwave transmission, in most cases.

Fiber optics would be a contender only on highvolume trunk lines between major cities or for

military uses requiring a high degree of security. The Chinese realize that telecommunications is an extremely important part of their

national infrastructure, and many of their ambitious development plans are closely tied to

it. They also realize that there is military and

propaganda value to increased telecommuni-

‘i5Pierre Condom, “The Far East—Toda~’s Customer “ Japan, of course, despite being a small countr~’, also has strong

reasons for developing its own aircraft.

“’’Telecommunications in China— Industry Sector Anal~sis, ”

U.S. Department of Commerce, W’ashin@on, D. C., 1985.
88 ● Technology Transfer to China

cations capabilities. However, with limited resources, telecommunications development has

come and will probably continue to come after agriculture, transportation, and energy development.

China has three options for achieving satellite telecommunications capability: It can lease

the capacity on existing satellites, buy satellites from other countries, or develop its own

capabilities. China is actually pursuing all three

options. INTELSAT (International Telecommunications Satellite Organization) has provided transponder capacity to China, and this

was expanded with the purchase by China in

1986 of two transponders from the satellite at

66 degrees East longitude. One of the transponders is used for educational programming,

and the other for news and cultural programming.’ 7 China has also investigated the purchase

of satellites, as discussed below. Purchase or

lease of a system for complete coverage of the

entire country would be prohibitively expensive,

however, considering China’s great needs.’8

China has significant expertise in both scientific satellites and rockets (see table 6 for

a chronology), but its communication satellites

in particular are far behind the best Western

technology. 69 Technology transfer is probably

the best compromise. China can buy several

satellites and associated technology from the

United States or Europe, and it can use this

to greatly speed up its own development.

Satellite Telecommunications

Technology Transfer

China requested foreign proposals for substantial development of its satellite telecommunications capabilities in the late 1970s and

‘

7 Radhakrishna Rae, “China’s Space Plan, ” Satellite Communications, February 1987, pp. 25-27.

58 Leasing of one communications satellite transponder costs

about $30 million per year. This does not include ground equipment. Depending on the type, central ground stations cost from

0.5 to 4.0 million dollars apiece. Buying an entire satellite communications system (which would have several transponders)

could cost 120 to 150 million dollars with the satellite lasting

9 to 14 years. The U.S. civilian sector presently has 150 to 200

active transponders. INTELSAT has about 330 to 340 transponders available for use and is presently operating at about

50 percent of capacity.

‘

gChina’s particular needs are in increasing communications

satellite power and longevity and in improved satellite stabilization and control.

Photo crecflt China Greaf kVa// /rxfustry Corp

The main thrust of the Chinese drive for commercial

launch business is the Long March 3, shown above at

the Xichang launch site. This vehicle is essentially a

Long March 2 with the addition of a new cryogenic third

stage which boosts the payload into a geostationary

transfer orbit. The Long March 3 has been launched

three times with the latter two being successful.

again for 1984-85. In the earlier case, the respondents to the request for proposal (RFP)

were Hughes Aircraft, GE, and RCA-Astroelectronics of the United States, MBB from West

Germany, and British Aerospace Dynamics.
Ch, 4—The Role of the United States in Technology Transfer to China c 89

1956

1960

1965

1968

1970

1971

1972

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

Table 6.—Satellite Telecommunications Development in China: A Chronology of Important Events

Chinese Astronautics industry development begins.

—

USSR technicians depart, thus ending technical assistance in production of liquid fuel rockets,

Beginning of research and design of first satellite and carrier rockets.

China Academy of Space Technology formed to coordinate space program.

Chirrasat 1. April 24, 173 kg. China becomes fifth country to develop launch capability and launch its own satellite,

Tracking, telemetry, and command network of seven stations i n place. SatelIite circled the Earth every 114 minutes,

broadcast “The East is Red. ”

Chinasat 2. March 3.221 kg. Experimental-scientific.

RCA Globcom erects first satellite earth station in Shanghai.

Long March 2—launch failure.

Chinasat 3, July 26. 1750 kg. Scientific satellite.

Chlnasat 4, November 26. 1750 kg. Reconnaissance satellite. Returned to Earth December 2, China is third country

to master satelllte return technology. Long March 2 problem corrected and all subsequent launches with this

rocket are successful.

Chinasat 5. December 16. 1750 kg. Meteorological satellite.

Chinasat 6, 7.

China becomes member of Intelsat. Leases 60 half-way International telecommunications circuits

China Academy of Sciences organizes Space Science & Technology Center for space research,

Chinasat 8. January 26. Conducted scientific experiments.

Begin negotiations with U.S. companies for import of direct broadcast satellite, Joint tests with France and

Germany on European satellite. Joint tests with U.S. (RCA) on Marisat. First Chinese aerospace delegation to the

U.S.—NASA Invitation.

NASA and AIAA visits to China, Cryogenic fuels development revealed, China only third country to use cryogenic

third-stage rocket. Deng Xiaoping visits Johnson Space Flight Center in Houston.

China begins astronaut training (later abandoned). Satellite purchase postponed on grounds of “economic

readjustment “

Chinasat 9, 10, 11. China (CAST) begins discussions with NASA for science and technology exchanges.

Chinasat 12. September 9. Scientific experiment.

Chinasat 13. August 19, Scientific satellite.

China-Italy joint tests with Italian Sirius satellite. U.S. Government issues more liberal guidelines for licensing of

technology exports to China. Landsat ground station finally approved.

Chinasat 14. January 29. First successful launch with Long March 3 (CZ-3). Gas generator burnout prevents proper

payload positioning. First liftoff from new spaceport in Sichuan Province.

Chinasat 15. April 8, Successful launching of communications (test) satellite on CZ-3, Geosynchronous equatorial

orbit.

Chinasat 16. September 12.

United States sends “presidential” aerospace trade mission to China. China and Germany sign agreement for

space technology cooperation Including joint development and manufacture. Canada’s Spar Aerospace sells China

ground station package valued at over $24 million (Canadian). In August, RFP for Direct Broadcast Satellite (DBS)

issued

Chinasaf 17. October 21, Resource survey.

China Dai/y on June 13 announces that China is ready to market space products and services. At Stockholm

International Aeronautical Federation Congress, China describes launch failures, provides launcher details.

China opens new space launch complex to potential customers. People to People, NASA, AlAA groups of US

aerospace technicians visit China.

On July 15, China postpones RFP for DBS.

August 1. China begins 3 months of free trial on Intel sat satellite for educational T.V.

Chinasat 18. February 1. CZ-3 launch of “operational” commercial satellite, Geosynchronous orbit.

Several Western companies make launch reservations with the Great Wall Industries Corp. which markets Chinese

launch services,

SOURCE Off Ice of Technology Assessment 1987
90 . Technology Transfer to China

In the later case the respondents were RCAAstroelectronics (now GE Aerospace-Astrospace Division), Matra of France, and MBB

teamed with Ford Aerospace (United States).

In neither case did the Chinese sign a contract.

The amount of technology transfer offered

by the foreign companies was an important

bargaining point in both cases. The Chinese

reportedly were quite skillful in playing off the

competing companies against one another. As

it turned out, the Chinese received a great deal

of technological information, essentially for

free, from these two aborted satellite telecommunications RFPs. Some feel that the first

round immensely helped the Chinese and led

to their space successes in the early 1980s.70

Most people feel, however, that the Chinese

bargained in good faith: a lack of foreign exchange and bureaucratic infighting over the

type of satellite system China should have were

the real problems.”

Eventually, China resolved the systems issue with the selection of the low-power C-band

instead of the higher power Ku-band, which

‘(’Satellite telecommunications demonstrates the Chinese capability to advance through informal technology transfer. The

Chinese developed a great deal of satellite and launch capability on their own and through study of technical literature. Although development cannot be achieved across-the-board

through such methods, it is interesting that the Chinese were

able to move ahead in these areas despite the overshadowing

of scientific effort by the Cultural Revolution. Part of the push

in this field came from military desires, of course.

“’An unsuccessful early bid, however, does not prevent a subsequent successful bid in a related area. For example, France’s

Matra was not successful in its proposal to China for a telecommunications satellite system. However, the Chinese were interested in the satellite control center portion of their proposal

and out of this came an agreement for supply of data processing centers at two Chinese ground stations valued at $8-10 million. (“France to Supply China with Data Processors, ” Aviation W’eek and Space Technology, July 21, 1986, p. 25. ) Matra

hoped to sign the final contract in October 1986 with deliveries

beginning in 1987. The processing centers will be based on Digital Equipment Corp. VAX computers, which were specified by

China. The contract was signed in December 1986 for $7.8 million (’*Matra Will Supply Data Processing Equipment to China, ”

A\’iation 14’eek and Space Technology, Dec. 8, 1986, p. 27. The

DEC Model 8500 was originally specified, but the Chinese have

now specified the improved technology Model 8700, partly because the 8500 is being phased out in 1987 by Digital Equipment Corp. A request based on the changeover to the 8700 computer has been filed with COCOM with approval expected in

the next several months. (“New Computers Selected for Chinese Stations, ” Aviation 11’eek and Space Technology, May 11,

1987, p. 33.

had been the subject of the RFP.72 73 The conflict had resulted largely from the different

communications needs of several Chinese ministries and the military .74 The complexity of

the bureaucratic structure involved in the selection, production, and application of space

communications technology is shown on the

organization chart of figure 6. This complexity typifies much of the Chinese bureaucracy,

and is largely responsible for the delays in decisionmaking.

Chinese Satellite Expertise

China launched its first geosynchronous satellite in 1984 and a second in February 1986,

demonstrating an ability to move rapidly in

areas of particular interest. However, in most

aspects of satellite telecommunications technology, the Chinese are 20 years behind the

United States and Western Europe.” These

satellites have worked, but they are heavy (considering their low power) and will probably be

short-lived. In addition, the Chinese have, until recently, had little use of the satellites, since

the ground-based infrastructure was largely

nonexistent.

The Chinese have a great deal of the theoretical, or ‘‘academic, expertise required for

successful development of sophisticated satellite telecommunications equipment. But,

with the exception of ground antennas, they

have not had the practical experience of designing, building, and operating viable, efficient systems. Satellite attitude control and

“C-band operates at a frequency of 6 Gigahertz (G Hz) uplink

from the sender to the satellite and 4 GHz downlink from the

satellite to the earth station. Ku-band operates at 14 GHz uplink and 12 GHz downlink (1 GHz =91 billion cycles per second). See the OTA Case Study contractor report “Satellite

Telecommunications Technology Transfer to China” by China

Business Development Group, Alexandria, Virginia, July 1986

(Appendix 3, Vol. I I), for an extensive discussion of the relative

strengths and weaknesses of the two systems.

“It is unknown, at this point, whether they will issue a 3rd

RFP or decide to proceed on their own.

“Primarily the Ministry of Astronautics, Ministry of Electronics, Ministry of Radio and Television, and the State Education Commission. For the interested reader, an extensive discussion of this matter is contained in the OTA Case Study

contractor report *’Satellite Telecommunications Technology

Transfer to China, ” July 1986 (app. 3, vol. I I of this report).

“’Ibid.
C/J. 4—The Role of the United States In Technology Transfer to China ● 91

Figure 6.—China: Satellite Telecommunications Technology Transfer

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

I

I

State

Planning

Commission

I

Science and Technology Planning Bureau

Space Science and and Technology

Technology Center Society of Space Research

Telecommun icat ions Society of Astronautics

Englneerlng Institute

Ministry of Ministry of

Astronaut ics Electronics

1 I 4

I

- Great Wall Industry Corp.

China Broadcast Satellite Corp.

China Academy of Space Technology

Institutes, ground stations, engineering centers,

test facilities, control centers.

I

I

-- Science and Technology Leading Group

Launch sites (Xichang. Northwest Industrial

Shuangchengtze) Beijing College

Rocket Test Ce, ~ter.

Weinan Grd. Stat Ion

I

Ministry of

Water Resources

and Electric Pwr.

Ministry of

Coal

SOURCES National Counc(l for U S -China Trade, A v(al~on Week & Space Techr?o/ogy, U S Embassy, Bel)lng, AlAA reports, Nature, November 21 1985
92 ● Technology Transfer to China

— —

stabilization are presently the two specific satellite technology areas of major concern to the

Chinese. In a more general sense, lack of technology infrastructure hinders China’s satellite

telecommunications development. The spacebased component and telecommunications equipment manufacturers that provide a large, varied technical support in the United States and

Europe do not exist in China.

China is now offering, on the international

market, satellite launch services to geosynchronous orbit using its Long March 3 vehicle. China will also alter its Long March 2

rocket (usually used for low-earth orbit (LEO)

launches) by stretching the tanks and adding

four liquid rocket boosters. The new version,

designated the CZ-2-4L, will lift 1,900 kg into

geosynchronous orbit with the help of a PAMD2 (payload assist module) upper stage. It is

hoped to be ready by the late 1980s.7

’

Impact on the United States

Concerns have been expressed that transferring satellite telecommunications technology

to China will assist the development of a competitor and the military capability of a potentially hostile country. Neither fear seems likely

to be realized. Development of Chinese satellite telecommunications will not pose a threat

to sales of U.S. firms for at least 10-15 years,

since Chinese technology will not be good

enough at any price until then. Any satellite

telecommunications will improve the capabilities of the Chinese military to some extent,

but the technology transfer aspects are not

directly very worrisome. Most export control

concerns related to this technology stem from

miniaturization technology and increased digital processing and computer capabilities of the

Chinese, which are likely to come from other

sources as well.

Launch services, however, if subsidized by

the Chinese and proven reliable, could well cut

“’’International Notes, ” Space Business News, July 14, 1986,

p, 1, See also “PRC: Modified ‘Long March’ Launcher, ” FBIS:

Science and Technology Perspectives, vol. 2, No. 6, Apr. 30,

1987, p. 7-8 and Craig Covault, “New Chinese Heavy Rocket

Spurs Effort To Win Commercial I.aunch Contracts, ‘Aviation

Week and Space Technology, May 4, 1987, p. 22-23,

into Shuttle or Ariane launch sales.77 Several

customers have recently announced that they

are planning to launch their satellites on China’s

Long March rockets, largely because of the unavailability of other slots and the relatively low

prices for launches by China.78 Other potential

contenders for international launch services

include the Soviet Union, which has already

offered its Proton rocket to launch Inmarsat

satellites, and Japan, which may be in the commercial launch business in the early 1990s.79

The Chinese space program could eventually

become a significant factor in satellite launch

services. The U.S. Department of Transportation estimates that commercial customers

will want to launch about 20-25 commercial

payloads per year in the late 1980s and that

U.S. companies could capture 50 percent or

more of that market.80 It is estimated, however, that the Chinese could have the capability to launch 6-12 geosynchronous satellites

a year by the early 1990s, of which only two

or three launches would be for their own domestic needs. Officials of the China Great Wall

Industry Corp. (CGWIC), the marketing arm

of China’s Ministry of Astronautics, have approached 39 companies in 19 nations seeking

“See for example, “Chinese Launch Services Executives Guarantee They Can Beat Any Price, Satellite News, vol. 10, No.

17, Apr. 27, 1987, p. 1. Launch insurance, an important consideration nowadays, is also offered by the Chinese. See “PRC Firm

[People’s Insurance Company of China] to Insure Launch of U.S.

Satellite, ” XIIVHUA, Feb. 14, 1987 and “Chinese Make Inroads

on Commercial Launch Market, ” Aviation Week and Space

Technology, Mar. 9, 1987, p. 134.

‘“China has won launch reservations for satellites of Pan Am

Pacific Satellite Corp. and Dominion Video Satellite (“China

Wins Launch Reservations for Three More U.S. Satellites, ”

Aviation Week and Space Technology, Nov. 24, 1986, p. 20.)

Western Union and Swedish Space Corp. are other customers

of the Long March vehicle. See Liu Jianjun, ‘‘Launching Satellites for Foreign Firms, ” Beijing Review, Jan. 26, 1987, p. 30.

In April 1987, China signed its first long-term agreement with

a U, S. company to market commercial booster launch services.

The trade service company selected by Great Wall Industry

Corp. is Becker and Associates of McLean, Virginia. See Gus

Bochanis, “Chinese I.aunch Services to Open Local Office, ”

11’ashington Technology, May 14, 1987, p. 6.

“)’’Some Rockets Still Work, ” The Economist, Aug. 16, 1986,

p. 57, See also: Natasha Wei, “Launch Wars–With the World

Space Industry in Disarray, China Hopes for a Shot at the Big

Time, ” The China Business Review, September-October 1986,

pp. 12-15.

“

(

’ Phillip M. Boffey, “Science to Carry on in Space, NASA

Says, ” New York Times, Aug. 19, 1986.
Ch. 4—The Role of the United States in Technology Transfer to China ● 93

launch service customers.”’ CGYWC alSO exhibited at the Paris Air Show, June 12-21,1987.

China has been extending itself worldwide

in its space efforts. China, Japan, and the

United States recently held a joint meeting on

space studies in Beijing, during June 1987,

called the Pacific Basin International Symposium on Advances in Space Science and its Applications. This was the first time that China

has invited a large group of foreign experts on

space development from several countries. The

forum was backed by the Chinese State Science and Technology Commission and was

jointly sponsored by private organizations of

the three countries, namely, the Japanese

Rocket Society, the American Astronautical

Society, and the Chinese Society of Astronautics. Agenda items included: 1. satellite telecommunications and development of remote

sensing technology in the Pacific area, 2. space

station research in the Pacific area, and 3. development of the next generation of rockets

for launching satellites.”

Future prospects for China in space could

include cooperating with the United States,

Europe, or Japan in several types of space technology.83 China and France’s Matra are presently evaluating the feasibility of offering commercial microgravity flight opportunities using

recoverable reentry capsules launched by Long

March 2 and 3 vehicles.84 Chinese space officials have also talked in general terms of building an orbiting space station in the late 1990s

and of a shuttle sometime later, but budget

imperatives have held back development out-

‘

]Craig Covault, “New Chinese Heavy Rocket Spurs Effort

to Win Commercial Launch Contracts, ” Aviation 1$’eek and

Space Technology, May 4, 1987, pp. 22-23.

‘“‘Sources Say PRC to Host Space Studies Forum, ” KYODO,

Tokyo, Japan from FBIS-Japan, Aug. 5, 1986.

“3’ ‘International Notes–The Chinese and British Agree to an

Exchange of Satellite Technicians, ” Space Business News, Dec.

15, 1986, p. 1, “International Notes–China and Japan Plan to

Discuss Cooperating in Space Technology in Coming Months, ”

Space Business News, Aug. 11, 1986, p. 1. Some feel, however,

that Japan will be very careful in tying in with the Chinese in

these technology areas. This is because Japanese space technology is now coming into its own after being hobbled for se\reral years by a technical agreement with the United States on

launcher development.

“’’Chinese W’ill Launch French Payloand, ” Atiation }1’eek

and Space Technology, May 4, 1987, p. 23.

lays.85 Nonetheless, the Chinese have also announced that they have begun choosing a team

of astronauts for future Chinese space flights,

although they did not give a date for these

flights. The Chinese said that their scientists

had developed life support systems and the biggest centrifuge in Europe or Asia to prepare

astronauts for the stresses of space flight.8G

Several observers believe, however, despite the

impressive accomplishments of the Chinese

space program, that launching manned Chinese rockets is presently well beyond their ken.

Computers and Electronics

China’s electronics industry has six major

product areas: television, radio, and recording

equipment; computers; radar and communication equipment; electronic components; professional and industrial electronics instrumentation and equipment; and military electronics.”

The industry is characterized by multiple ministerial-level organizations with an interest in

the research, production, and application aspects of electronics technology, components,

or equipment. Also of critical importance is a

series of similar research and production units

under the control of provincial and municipal

authorities. At times, the mere presence of

these numerous organizations has made for intense rivalry and competition because each of

the respective ministries and localities has

desired to have its own infrastructure for meeting its electronics needs.

There are over 2,600 factories in the country’s electronics industry, along with over 130

research institutes and 6 dedicated universities focused on electronics technology. The

Ministry of Electronics Industry (ME I) is the

most important body. The extent of direct

‘l’John F, Burns, “China’s Proud Space Program–It’s Modest, But Reliable, ” The New York Times, May 19, 1986, p. D 10.

Also see “Chinese Make Inroads on Commercial I,aunch Market, ” Aw”ation Week and Space Technology, Mar. 9, 1987, p. 134.

“’’China Says it Plans Manned Space Flight ‘Before Long’,”

New York Times, Sept. 2, 1986, reporting on an article appearing in The People Dai]IT, Aug. 31, 1986.

“’See Denis Fred Simon and Detlef Rehn: “Technological ln -

no~’ation in China Electronics lndustr~’: The Case of Shan~~-

h~’, ” study funded by the Volkswagen Foundation, FRG (to

be published by Ballinger Publishers, Cambridge, MA).
94 ● Technology Transfer to China

ME I control over these facilities varies as a

result of the recent divestment decision in 1985

and the degree to which local authorities are

involved in overseeing the operation of specific

units.’8 As presently structured, the MEI is

divided into four main departments: broadcasting (television and communication), radar and

navigation, electronic devices and components,

and computers. The computer department is

the former State Administration of Computer

Industry, which was incorporated into the

ME I structure during the May 1982 bureaucratic reform.

A major organizational reform occurred in

the computer industry in late 1986 with the

establishment of the “Great Wall Computer

Group Conglomerate. “89 This reform decreased

the previously dominant role that MEI had

played in computer R&D and production. The

formation of this conglomerate, which is known

in Chinese as a‘‘jituan, is part of the general

decentralization of authority in ME I as well

as the effort to create better horizontal linkages among units associated with different

facets of production. The GWCGC is composed

of 58 existing computer production units, 4

R&D institutes and 5 universities—all drawn

from ME I, the CAS, and the Beijing municipal government. The group will undertake all

phases of research, manufacturing, sales and

service, and training. It will operate as an integrated entity in an effort to foster coordination and minimize administrative interference

from the local or central government. The core

of the group will be the China Computer Development Corporation, which will be composed of 6 smaller computer companies. A similar type of organizational effort has taken

place in Shanghai with the formation of the

Yangtze River Computer Group Conglomerate.

Heretofore, each department under MEI

controlled a series of manufacturing and research facilities. For example, under the department responsible for computers, there was

a fully articulated research and development

“’For details of this divestment effort see China Dw”iy, Aug.

2, 1985.

~y’ New Computer Giant Eyes Home Market, Beijing Review, Jan. 19, 1987, pp. 5-6.

and industrial structure containing 130 enterprises and 26 research units.go A select number of key enterprises are still under the direct control of ME I, including those that are

mainly military oriented, though most of their

project money comes from the National Defense Science, Technology, and Industry Commission or other military-related organizations.

In other cases, the principle of “dual leadership’ is followed; i.e., enterprises are jointly

administered by central and local authorities.

(This does not include those enterprises that

are collectively owned and controlled.) According to one Chinese official, there can be as many

as 10 different organizational forms involving

different mixtures of local and central control.

Similar types of organizational arrangements

exist under the other ministries mentioned

above, such as the Ministry of Space Industry (MSI), which has a number of branch factories and research institutes located in cities

such as Shanghai. Understanding these organizational principles goes a long way toward

clarifying why decisionmaking in China can

be so complex and why it is so difficult to carry

out successful innovation.

Of the major changes in policy and organization that have been introduced to overcome

these difficulties since the early 1980s, the

most prominent has been the creation of the

“State Council Leading Group for the Revitalization of the Electronics Industry. ” This group,

headed by Vice-Premier Li Peng, is designed

to ameliorate the coordination problems that

have dominated China’s efforts to develop its

electronics industry. It established the frameworkgl for the development of China’s electronics industry during the Seventh Five-Year

Plan (1986-90) and beyond, and included the

following goals:

● The overall goal of the industry is expanded

application of electronics technology in or- —- ——

‘“See Denis Fred Simon “China’s Evolving Computer Industry: The Role of Foreign Technology Transfers, June 1986 (app.

2, vol. II).

‘

] See “The Strategy for the Development of China’s Electronics and Information Industries” and Li Peng: “The Electronics and Information Industries Have to Serve the Construction of the Four Modemizatons, Jingji Ribao (Economic Daily),

Jan. 14, 1985, and Xinhua, Jan. 11, 1985, FBZS—China, Jan.

15, 1985, pp. K25-27.
Ch, 4— The Role of the United States in Technology Transfer to China ● 95

Phofo cred(l Xfnhua News Agenci

Beijing No. 3 Computer Factory, which started

manufacture ng microcomputers I n 1981

Photo shows technicians assembling

and de bugg! ng microcomputers.

der to better serve the development of the

national economy and society. The popularization of microcomputers, for example, is to be stressed along with software,

especially Chinese character programs;

The acquisition and assimilation of foreign

technology are to be stressed as a means

of closing the prevailing gap between

China and the rest of the world. Joint ventures and other forms of cooperation are

to be encouraged. The aim of these measures is to complement indigenous R&D

and manufacturing programs in order to

‘‘speed up the development of China’s electronics industry in order to attain advanced

world levels sooner and thereby increase

our capacity for self-reliance;

Greater attention should be paid to creating a fully articulated and integrated

electronics industry, capable of supplying

needed components and manufacturing

equipment as well as final products. Within

this context, the main goal is “to achieve

economical, large-scale mass production

with good quality and low cost. Special

attention will be given to large-scale integrated circuits; the short-term goal will

be “to master selected, suitable, and advanced LSI circuits;’

Efforts should be made to establish an effective balance between centralization and

decentralization with respect to the management of the electronics industry. Electronics products that require large investment, long production time, and high

technology (e.g. LSI) must be produced

under unified state planning and unified

arrangements in order to avoid blind development and waste of time, manpower,

and materials.

The Chinese have recently had some major

achievements in their computer industry, as

shown in table 7. However, present problems

in the Chinese computer and electronics industry include lack of experience in the field, technology not up to international standards, and

too little use of Chinese products. To meet their

plans for national economic development, the

Chinese have pushed hard in the last few years

to buildup their electronics industry. However,

they are not satisfied with their efforts, since

they have imported much technology at considerable cost and their products, especially

computers, are still not up to international

standards. gz For example, mini and mainframe

computer sales to China have been substantial as shown in table 8. With appropriate foreign technology transfer, approximately 70

percent of the products of China’s electronics

industry could, by the year 2000, achieve the

sophistication of today’s products in the industrialized countries.

United States involvement in the Chinese

computer and electronics market has been sig92i’Electronics Poised for Big Ad\ance,” China Dai)~’, Feb.

4, 1986.
1977

1979

1983

1984

1985

Technology Transfer to China

.—

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

Development of China;s first microcomputer (DJS-050).

Development of HDS-9 (5 MIPS) by CAS Institute of Computer Technology.

!levelopment of DJS-052 microprocessor (eight bit, one chip).

Development of China’s first supercomputer (“ Yinhe” [“Galaxy”], 100 MIPS) by the S&T University for National

Defense in Changsha.

Development of the 0520 microcomputer (IBM PC compatible) by the MEI Institute No. 6 and production by Beijing

Wire Communications Factory.

Development of the “757” 10 MIPS parallel computer by CAS Institute of Computer Technology.

Development of a 16-bit desk-top computer (77-II) by the Lishan Microcomputer Corporation.

Development of the 16-bit TQ-0671 microcomputer system by the Tianjin Computer Institute (CPI: MC 68,000),

Development of NCI-AP 2701 floatina ~oint arrav Drocessor bv MEI North China Institute of Computer Technology.

Development of NCI-2780 super-min~omputer (32’ bit) by Nort’h China Institute of Computer Technology (Clone ~f

DEC VAX 11/780).

Development of 8030 computer by East China Institute of Computer Technology (compatible with IBM 370/138).

Development of YH-X1 super-minicomputer by the S&T University for National Defense in Changsha. —. — — .—

SOURCE Off Ice of Technology Assessment, 1987

Table 8.—U.S. Computer and

Item

Analog and hybrid computer s

- 

. . .

Digital computers . . . . . . . . . . . . . ...

Digital central processing units ., . . . . ...

Random access auxiliary storage ... .

Serial access auxiliary storage ., . . . . . . .

Terminals . . . . . . . . . ... . . . . . . ... ...

Printers . . . . . . . . . . . . . . . ... ... . ... , . .

Related Equipment Sales to China (in thousands of dollars)

1981

163

5,168

5,179

1,052

140

699

645

Communications and peripherals . . . . . ... 268

Parts . . ... . . . ... ... 3,763

Microprocessor integrated circuits. . . . . ... 104

Printed circuit boards . . . . . . . . . . . . 258

Cathode ray tubes . . . . . . . . . ., . . . . 8

SOURCE Office of Chinese Affairs, U S Department of Commerce, 1986

nificant. Noteworthy is that in most categories of computer and related equipment sales

to China, U.S. sales from the early 1980s to

the present have steadily increased. The experiences of three U.S. firms-IBM, Wang, and

Foxboro–which represent different approaches

and goals in technology transfer to China, are

presented below.

IBM China

IBM’s approach to the Chinese market up

until now has emphasized sales, not technology transfer.93 This strategy may have to

change soon, however, since the Chinese have

“From Denis Fred Simon, “China’s Evolving Computer Industry: The Role of Foreign Technology Transfers, ” contractor report prepared for OTA, June 25, 1986, pp. 55-56,

1982 1983 1984 1985

5,041 1,715 ‘

- - 2,082 -- 6,767-

11,337 11,324 25,265 80,062

2,169 10,816 32,494 35!411

1,049 1,849 1,519 7,399

430 680 1,995 5,204

1,108 2,241 2,261 3,900

626 1,063 1,814 3,454

1,644 2,301 8,006 9,175

8,376 11,913 20,476 31,710

25 4 50 47

58 557 1,407 2,245

91 22 179 417

become less willing to import microcomputers

directly without any explicit technology transfer element. Each year since 1980, IBM has

been able to sell 20-25 mainframe systems to

China. In addition, several thousand IBM personal microcomputers have made their way

into China, some through direct sales, but a

large number through the “gray market. ” IBM

has also set up a training facility in China to

support its sales-past, present, and future.94

“Among some of the U.S. computer firms that have focused

on training are the following: a) IBM, which set up a training

institute in Beijing as part of its sales of the IBM 5550 and

other machines; b) Wang Laboratories, which setup a joint development center with the Hubei Radio Factory and a service

center in Beijing; c) INTEL, which is working with the Computer Bureau of the ME I on establishment of a training center

for 500-700 persons in Beijing; and d) Sperry, which is working

with the China Computer Technical Services Corporation to train

Chinese operators on Sperry equipment.
Ch. 4— The Role of the United States in Technology Transfer to China ● 97

In many respects, IBM’s success in China has

had much to do with the fact that Chinese computer officials have considered IBM products

(along with the Digital Equipment Corp. ’s

VAX series) to be one of the standards upon

which to develop their own indigenous computer industry.

In 1984, IBM China was established. This

gave IBM a formal Chinese presence and signalled the Chinese Government that IBM was

making a long-term commitment to China.

IBM China introduced to China the Model

5550, a large microcomputer that was well received not only because of its ability to handle Chinese characters efficiently, but also because its processing capabilities are far above

any Chinese mass-produced machine. In 1985,

IBM donated 100 of the machines to Beijing

University, Qinghua University, Fudan University, and Shanghai Jiaotong University and

began training classes for 40 teachers and students in operating the computers. Chinese officials would like IBM to enter into a joint venture in Guangzhou to manufacture the 5550

in China. The idea of entering into such a joint

venture, however, runs counter to IBM general approach to international marketing. Nonetheless, negotiations are continuing at this

time.

Wang Joint Venture

Another U.S. computer firm that has been

increasingly successful in China is Wang Laboratories, Inc.95 Wang began doing business

in China as early as 1972, though it did not

really become significant until 1978-79. According to the China Daily, Wang has sold

more than 200 small and medium-sized computers in China, most of which have been handled through its sales agreement with Instrimpex. In 1985 the company’s revenues from

China-related business reached more than $17

million.9G Along with direct sales, Wang setup

a small service center in Beijing in early 1984.

————

‘

5 Taken from the OTA contractor case study “China’s Evolving Computer Industry: The Role of Foreign Technology Transfers, ” prepared by Denis Fred Simon, June 25, 1986, pp. 57-61.

~~’ ‘\Vang Starts Computer sales Drive, China D~’1.Y, Feb.

21, 1986.

Several months later it joined forces with the

Hubei Radio Factory in Wuhan to establish

a joint development center for cooperative

activities in office automation, software development, and personnel training. Wang’s underlying approach to China has been a strategy

emphasizing sales and production of small machines, with the hope that these sales would

lead to purchases of larger machines around

which all of the smaller machines could be connected and networked. Its major competitive

advantage in China has been its Chinese-character operating system, known as the VS (idiographic VS) system.

In 1980 Wang began negotiating with China’s

ME I about establishing a joint venture in

China. Three proposals emerged from these discussions:

1. a joint venture with the Shanghai Computer Corporation in Shanghai;

2. a joint venture with the Xiamen Development Corporation in Fujian; and

3. a joint venture with the Beijing 738 Wire

Communication Factory in Beijing.

Initially, the aim was to introduce a CKD operation for its VS system in Beijing, a CKD

operation for the Wang Office Assistant in

Shanghai, and a CKD operation for the IPC

(idiographic professional computer) system in

Xiamen. Wang was to provide the machinery

and related equipment as well as cash in on

setting up the production lines. The Chinese

would provide the manpower, some capital investment, the buildings, and other infrastructure.

In each of the three proposed cases, Wang’s

major aim was to replicate its existing facilities in the United States or elsewhere. Wang’s

orientation in setting up joint ventures in

China was to stress consistency with its proven

operations. For example, in general, Wang

would not bring secondhand equipment into

China; nor did it anticipate introducing any

drastic changes in its mode of operation. Its

hope was to use capabilities at its production

sites in Ireland, Scotland, Puerto Rico, Australia, Mexico, and Taiwan to assist with the

startup of its China ventures. Wang expressed
98 ● Technology Transfer to China

its willingness to provide four key forms of

technology transfer: manufacturing know-how,

engineering and managerial know-how, software diagnostics, and after-sales service and

maintenance techniques. Moreover, Wang

stressed to Chinese officials that the equipment

intended for use in China was equal to that being used in the Wang facilities in Taiwan. This

fact prevented a major “technology transfer

issue” from emerging in the negotiations–

though the issue of the value of the technology did present a stumbling block at various

points in the discussions.

A number of other issues also emerged during the course of negotiations between the two

sides. First, the quantity and cost of training

was a major concern to the Chinese. Wang

made a special effort to define the number of

people that would receive training, the tasks

and areas of training, and the costs. In keeping with its policy of consistency, it offered

China no more and no fewer training slots than

it had given to other countries. China wanted

as much training as possible.

Second, the question of foreign exchange

remittance remained unsettled. It was agreed

that after the third year, each venture would

have an export requirement of up to 25 percent of the output. Heretofore, China’s aim had

been to have foreign firms hold large quantities of foreign exchange as an incentive for

them to do more local sourcing and train local

firms to be effective suppliers. And, while

Wang prefers local sourcing and local employees, it is also concerned with four key considerations:

1. quality to meet worldwide standards,

especially since the products would be

using the Wang trademark;

2. overall cost competitiveness;

3. ability to meet delivery schedules; and

4. ability to meet volume requirements.

Overall, Wang’s main concerns with engaging in manufacturing operations in China revolved around China’s lack of familiarity with

large-scale, mass production operations. Concerns existed about whether operations would

ever get large enough to generate sufficient

economies of scale to be profitable. Second, it

was felt that local parochialism, combined with

bureaucratic infighting, might continue to pre

elude the emergence of broad perspectives on

marketing approaches. Third, Wang officials

feared that China’s current manufacturing

techniques and philosophies might interfere

with meeting quality requirements. Moreover,

while the potential return on Wang’s equity

investment in China was of direct concern, the

most pressing issue was and continues to be

the cost of doing business in China until the

venture matures. Under these circumstances

Wang’s initial strategy was to keep its ventures small while minimizing unnecessary exposure and using as few expatriates as possible to prevent a drain on the joint venture’s

resources.

Since initial discussion began, the three proposed projects have been restructured, owing

to a variety of factors on both sides. For 1986,

Wang started up its first joint venture in

Shanghai. Instead of producing the Office Assistant at this site, however, the IPC is being

produced. The change was necessitated because the performance of the IPC has gone up

and the price has gone down, thus reducing

the attraction of the earlier product. The venture has required extensive renovation of an

existing facility in Shanghai. The decision to

proceed first with the Shanghai venture in

China was not without its problems because

the ME I felt somewhat concerned about its

ability to control events in that municipality.

The bureaucratic rivalry between MEI and

Shanghai was not something that could be easily dissipated. Nonetheless, in the interest of

time, and after taking existing technical capabilities into consideration, ME I acquiesced.

Foxboro Joint Venture

The Foxboro Company of Foxboro, Massachusetts, a world leader in process control technology,” knew that China had extensive process control needs and thus could represent a

‘“Process control technology generally involves regulation of

industrial process temperatures, pressures, flow rates, etc. to

maximize efficient production and maintain quality of the product, This is accomplished by connecting sensors (which measure the state of the system) to computers (which are prepro8- ammed or use adaptive optimal control algorithms) which then

feedback to properly adjust the process.
Ch. 4— The Role of the United States in Technology Transfer to China ● 99

large market for its products.’” Foxboro officials felt that an effective strategy for penetrating the Chinese market would require a longterm commitment to operations in China and

a willingness to transfer its technology. From

the Foxboro perspective, cooperation with

China in the production of process control

equipment in China would be part of a larger

corporate strategy. Having visibility and a

reliable presence in China, it was thought,

would facilitate sales to China from Foxboro

directly, from Foxboro’s other overseas affiliates, and from the vendors of large process

industry equipment who would incorporate

Foxboro controls into larger systems. This

strategy has had some success. Quite apart

from the question of the profitability of the

joint venture in China, sales to China from Foxboro’s European operations, for instance, have

been worth US$10 million in recent years.

The convergence of Chinese and American

interests led to the establishment of one of the

first joint ventures under China’s new joint

venture law, Shanghai-Foxboro Company Limited (SFCL), in April 1982.99 The partners in

the joint venture are the Foxboro Company

and the Shanghai Instrumentation Company

(SIC), a company under the Shanghai Instrumentation and Electronics Bureau of the Shanghai City government. The joint venture, the

first involving the transfer of high technology,

has attracted much attention, and was chosen

as a site for President Reagan to visit during

his 1984 trip to China.

The Foxboro-China connection began in 1975

when a team from Foxboro’s Singapore and

British affiliates presented a technical seminar in China that led to sales. ’OO In 1978 a Chinese delegation composed of representatives

of the Shanghai Instrumentation and Electronics

Bureau (S IEB), the Bureau of the Instrumentation Industry of the Ministry of Machine

Building, and the then Ministry of Foreign

““Unless otherwise indicated, the information in this section

is based upon intertriew. s conducted in Shanghai and at I:oxboro headquarters in Foxhoro, Nlassachusetts by OTA staff.

“ySee Yao ,Jiang-uo, “Iligh-Tech Success Against the odds,’”

Beijing Iiebiew, N(). 46, NOI’. 17, 1986, pp. 17-19.

““lntertrade, ,June 1984, p. 46-47.

Trade visited Foxboro headquarters in Massachusetts. Three exploratory visits to China

by Foxboro personnel followed in the 1979-81

period.l”’ Negotiations during this period resulted in the signing of preliminary agreements

in support of a joint venture. A contract establishing the joint venture was signed in 1982

with the SIC, but it also had to be approved

in Beijing. ’”’ Subsequently, as problems arose,

there was uncertainty as to which Chinese

party had responsibility.

Foxboro credits its affiliate in Singapore

with the early vision and initiative to involve

Foxboro in China. But the SFCL case is also

one where the Chinese took a great deal of initiative early in the process. The Bureau of the

Instrumentation Industry of the Ministry of

Machine Building knew that China had process control needs that could only be met in the

short run with foreign help. In addition to going to Foxboro, the Chinese also visited other

companies in the United States and Japan

(Honeywell, Bailey, Fisher Control, YEW,

Yamataki-Honeywell). According to the Chinese management of SFCL, the Japanese were

interested only in selling products and were

not willing to transfer technology.

Foxboro apparently was chosen as a partner for the following reasons: First, the Chinese believed that Foxboro would be willing

to transfer technology that was up to world

standards. This had been the company practice in its other international operations. Second, Foxboro gave evidence of being interested

in a long-term arrangement. This was again

consistent with company practices elsewhere.

And third, the Chinese believed that they

would have in Foxboro not only a reliable

source of technology, which they needed, but

also a company with considerable technology

transfer experience, which was indeed the case.

The Foxboro technology transfer position is

that it is willing to transfer its advanced tech-

‘(’’These seminars and t’isits, as mentioned earlier in the (;en -

eral Electric locomoti~’e case stud~., can he a \rer}’ effectit’e means

of informal technology. transf(’r which, in certain cases, has the

potential of leading to more formal agreemen[s and cent rac’ts.

““Ibid.
100 ● Technology Transfer to China

nology if three conditions are met: (1) there is

a market for the leading edge technology; (z)

its transfer is economically feasible and realistic; and (3) the joint venture is able to receive

and assimilate it. With regard to the latter,

the key indicator for Foxboro is the availability y of manpower who not only can understand

the principles of the technology, but, more importantly, have the know-how to ensure that

the technical infrastructure for the technologyproduct testing and quality control, installation, and servicing is established and functioning.

Other important aspects of this technology

transfer experience were site visits and training. There had been approximately 100 trips

to Foxboro, involving 40 individuals, as of January 1986. In addition, there had been some

40,000 person-hours of training at the Shanghai facility.1°3

The joint venture is now considered relatively successful.1°4 However, during its first

6 months, there were many disappointments.

The Chinese in particular believed that progress was not fast enough and kept asking,

“When are you going to start making computers?” The Foxboro position was (and is)

that the Chinese should “learn to walk before

learning to run. “ Thus, Foxboro insisted that

the technology transfer start with simple tasks

such as the soldering of circuit boards.

A number of important factors pertain to the

assimilation of this technology. One is the

availability of technical manpower. SFCL employs 328 people (up from 287 at the beginning

of the joint venture), of whom 120 are reported

to be engineers. This is an exceptionally high

proportion of technical manpower for a Chinese enterprise. This relative abundance is a

measure of the commitment of the Government to the joint venture and to the importance of the process industry. Nevertheless,

— —- —

1O’Intertrade, June 1984, p. 47.

‘“’ Its business reached $7.5 million in 1986, a 37 percent increase over 1985. It has been in operation for four years, and

in that time the company has sold 140 sets of automatic-control

apparatus and meters to power-generating stations and petrochemical and metallurgical plants in China. It plans to put three

new products into production in 1987. (“Electrical Joint Venture with U.S. Reports Growth, ” x~nh~~, Jan. 31, 1987. )

the Chinese management of SFCL believes

that the lack of trained personnel is one of the

more important limiting factors on the company. The U.S. management does not seem to

be as concerned about this constraint as it is

about others.

A second factor is the Chinese supply system and the local availability of inputs for manufacturing. In the Foxboro view, localization

is proceeding too slowly. The mentality of solving supply problems through vertical integration, a legacy of the Soviet-style economy, is

deeply entrenched and biases solutions to the

supply problem in the wrong direction. In addition, the Chinese supplier industries are not

seeking the right technologies. The Chinese

continue to resist the kind of specialization that

would lead firms to seek product niches and

search for the right technologies to achieve

some sort of comparative advantage.

Another type of assimilation problem is the

difference in language and culture. The language problem was attacked early with the

preparation of an English-Chinese process control glossary. The time and effort spent in compiling this glossary has been most worthwhile

from the Foxboro perspective. There are now

standardized meanings for the technical terms

associated with the technology, and these have

made possible the avoidance of much confusion. The cultural differences may be harder

to deal with, especially the risk aversion which

the American managers perceive among the

Chinese at the middle and lower ranks.

According to Foxboro, there were also export control problems at the outset, which the

Chinese partners resented. The problem with

the U.S. Government was largely an educational one; much effort was required to inform

the Government of what was anticipated in

Foxboro’s operations in China. The Government had concerns about the computer embedded in the process control equipment and about

networking capabilities that might be transferred. Some of the components used in the

system were also an issue, and there were licensing delays until Foxboro was able to demonstrate that the computer in the system was

technically “dedicated” to process control use.
Ch. 4— The Role of the United States in Technology Transfer to China . 101

The liberalization of U.S. export controls for

sales to China in 1983 facilitated the introduction of digital technology to SFCL.

The relative success of SFCL is due to a number of factors. Foxboro is a well-run company

with a highly regarded product and considerable technology transfer experience. Its technology is in great demand in China and has

a strategic importance for Chinese modernization. The initiative for cooperation with Foxboro came from a powerful ministry, and the

joint venture seems to enjoy high-level political support, as indicated, for instance, by

SFCL’S ability to recruit a high proportion of

educated technical manpower. Top Chinese

managers of SFCL were involved with the

project from the beginning, and Foxboro’s

establishment of the special China team seems

to have been important.

From the Foxboro perspective, one of the key

questions for the future of technology transfer is whether the Chinese will become more

imaginative in problem solving, more creative,

and less risk averse. The Chinese still focus

too much on the more advanced technology.

Foxboro has introduced the Fox 300, a digital

machine, into China but has not made it the

focus of its technology transfer activities. Instead, the Foxboro efforts have centered on

the transfer and assimilation of the Spec 200,

an analog machine. Foxboro believes that the

Chinese should concentrate on mastering the

technology of the Spec 200, which is quite suitable for their needs, but the Chinese are still

fascinated with the 300.

The Role of the Small-toMedium-Size Firm

Heretofore, it has appeared that most firms

involved in the Chinese market have been large

in terms of overall personnel, earnings, and

sales. The costs of doing business in China, including long negotiations, frequent trips to

China, and the hosting of numerous Chinese

delegations to the United States, is prohibitive for many small companies. Nonetheless,

analysis of the American business presence in

China reveals the participation of an appreciable number of small-to-medium-size firms (firms

with less than US$1OO million in annual sales).

While few of these smaller firms have made

direct equity investments in China, they have

been able to engage in a broad range of activities in China, including technology transfer,

services, direct sales, and training.

In a survey commissioned by OTA, it was

found that among the smaller U.S. firms involved in the China market, most tend to be

driven by short-term prospects and immediate sales opportunities; only among larger

firms was the long-term perspective part of a

strategic orientation toward the Chinese market.l”’ Interestingly, however, many of the

smaller firms involved in China have also had

a significant number of other international

business relationships, thus suggesting that

“going international” was not new to them.

Moreover, despite the difficulties associated

with doing business in China, the smaller companies seemed prepared to expand their level

of activity wherever possible.

Smaller firms seem to have many advantages for doing business in China. First, their

size provides them with greater flexibility to

respond to China’s changing economic and

technology needs. These firms tend to have a

greater ability to pursue a market niche strategy in China, carving out a very specialized

place in the midst of increasingly strong competition from both other U.S. firms and foreign companies. Second, within these firms

themselves, it is often easier to reach a decision on a Chinese business proposal. And third,

because of their relatively smaller scale, these

firms are willing to handle a series of smaller

sales and related business transactions. According to the survey, because of these factors,

a number of respondents indicated that over

time small firms may have a better chance of

succeeding in China than their larger competitors.

‘“’’’ Survey on Transfer of Technical and Scientific Information and/or Sales to the People’s Republic of China, ” administered for OTA by the Midwest China Center during November

1986 (app. 9, vol. II).
102 ● Technology Transfer to China

The most significant problems encountered

by small firms had to do with the length of

the negotiation process and the process by

which their contacts with China were initiated.

Most firms, large and small, tended to underestimate the time needed to complete a negotiation. Because of their size and personnel

constraints, smaller firms tend to encounter

significant opportunity costs when they have

to send one or two of their key technical or

managerial personnel to China for extended

periods. They also felt that they were at a disadvantage because their size usually precluded

the opening of a permanent office in China to

represent the company and market its products. Only 35 percent of the small firms had

some sort of office or representation in China,

in contrast to 64 percent of the large firms.

The business people surveyed felt that export control procedures did affect their ability to compete with firms from other nations.

One large firm has four full-time professionals

and five secretaries working on licensing regulations while another uses a total of eight

people–all of which adds to the cost of the

product. When asked whether U.S. Government export control procedures had substantially affected their business with China, approximately one-quarter of the respondents

said yes, one-half said no, and the remainder

said that export controls were not applicable

to their line of business with China. Suggestions for improvement of export controls included regulatory personnel with the proper

technical background. At present many are not

able to understand a complex technology and

-—

lack the insight to judge its relevance to military applications. In addition, many take a

rigid approach to interpreting the rules regarding technology.

Many firms commented about their need for

more and better information about China and

the Chinese market both before and after they

began business activities in China. In particular, they stressed the need for additional information about decision making in China.

Generally, they felt dissatisfied with the quality of the information and support being provided by U.S. Government agencies as well as

by the respective State agencies responsible

for international business promotion. Trade

shows were cited as a more useful mechanism

for obtaining needed information, as were private consultants, though locating appropriate

consultants was difficult.

Among the small-to-medium-size firms, there

does not seem to be a particular pattern emerging with respect to their industrial or technological orientation. Both high-technology and

standard technology firms are involved in

China. For example, in a sample of such firms

conducted by the Office of Domestic Operations of the U.S. and Foreign Commercial Service, Department of Commerce, the industries

covered included everything from computer

software, advanced laboratory analysis equipment, and cardiac monitoring equipment to

providing coal analysis, ice cream production

know-how, and the transfer of hog confinement

techniques and related equipment.

GOVERNMENT AND INSTITUTIONAL TECHNOLOGY TRANSFER

The U.S. Government-Supported

Programs

Right after the establishment of diplomatic

relations in 1979, President Carter and Deng

Xiaoping signed the landmark document “Agreement on Cooperation in science and technology’ in Washington, D.C. This accord is the

major bilateral Science and Technology program between the United States and China and

provides the umbrella under which subsequent

scientific, technological, and educational exchanges have occurred. It covers a wide

range of activities, including educational ex-

‘“fiA Relationsb’p Restored: Trends in U. S,-China Educational

Exchanges, 1978-1984 (Washington, DC: National Academy

Press, 1986), p. 62.
—

w.

*

Y

. .

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

I

\

Photo credit Erfc O Basques

The Dal Ian Management Institute (The National Center for Industrial Science and Technology Management Development)

located at the Dal Ian Institute of Technology was established in accordance with the US-PRC Science and Technology

Protocols, It IS jointly sponsored by the State Economic Commission, the State Science and Technology Commission

and the MI nl nstry of Education on the Chinese side and by the Department of Commerce on the U.S. side.

This highly successful management training program started in 1980.

change, space technology, high-energy physics,

earthquake studies, and telecommunications.

The earliest agreements started in 1978-79,

with new ones being added periodically. The

active agreements and some pending ones as

of June 1986 are listed in Appendix B.

There are two overarching U.S.-China commissions that have fundamental responsibility for establishing the basis for U.S.-China

economic cooperation. The U.S. Treasury Department is represented on the Joint Economic

Commission, whereas the Department of Commerce is the U.S. representative on the Joint

Commission for Commerce and Trade. Both

commissions have interests in technology

transfer arrangements.

Other programs in China are the Fulbright

Program and the activities of the National Science Foundation. The Committee on Scholarly

Communication with the People’s Republic of

China (CSCPRC) has also been active in this

arena since its founding in 1966 under the joint

sponsorship of the American Council of Learned

Societies, the National Academy of Sciences

(NAS), and the Social Science Research Council. The CSCPRC is designated to administer

the National Program for Advanced Research

and Study in China. In addition to this national
104 “ Technology Transfer to China

program they have also run the reciprocal “Distinguished Scholar Exchange Program” since

1979.

Bilateral Agreements

The number of bilateral accords in science,

technology, or education between Chinese and

U.S. Government agencies grew from 2 to 26

between 1978 and 1986. It was felt that giving major government agencies in each country a stake in improved U.S.-China relations

would help institutionalize the Sine-American

relationship more rapidly. Appendix B shows

that the agreements cover abroad range of scientific areas, including: agriculture, space technology, high-energy physics, medicine and public health, earthquake studies, aeronautics,

management, nuclear safety, transportation,

and telecommunications. Activities under most

of these agreements are funded under existing agency budgets, not through special appropriations. Thus these agreements have led

to varying degrees of activity, depending on

agency priorities.

As of 1985, some of the most intensive activity was under the aegis of the protocols on

atmospheric science and technology, marine

and fishery science and technology, the earth

sciences, earthquake studies, and management

of industrial science and technology (under

which the Dalian Management Center was set

up). Interactions under the 1979 “Understanding on Agricultural Exchange’ were extensive

until November 1983, when activities were suspended because China did not import the quantity of U.S. grain called for in a long-term agree

ment. 1°7 Activities under this exchange have

recently resumed, however.

Under the auspices of the United StatesChina Accord on Industrial and Technological Cooperation, the Department of Commerce

and China’s Ministry of Foreign Economic Relations and Trade have developed a series of

work programs that target U.S. Government

trade and investment promotion activities and

U.S. private sector interests on priority development projects. Work programs exist in aero1071 bid,, p. 64.

space, electronics

machine building,

materials.

and telecommunications,

metallurgy, and building

Student Exchange

Included in the U.S.-China science and technology agreement was the previous “Understanding on Educational Exchanges, ” signed

in October 1978, which provided for the exchange of undergraduate students, graduate

students, and visiting scholars to undertake

research and study in each country.

During the 1985-86 academic year, about

17,000 Chinese students and professors were

enrolled in U.S. universities, mostly in graduate programs of science and engineering.loa Nationwide, Chinese students were the 11th largest

group of foreign students in the United States

during the 1984-85 school year, behind Taiwan,

Malaysia, Nigeria, Iran, South Korea, Canada,

India, Japan, Venezuela, and Hong Kong. ’og

Most of the Chinese students coming to the

United States under the revived U. S.-China

educational exchange program have been concentrated heavily in science and other technical disciplines. Over two-thirds of those sponsored by the Government were in the physical,

life, health, or computer sciences, mathematics,

and engineering.

About one-half of all Chinese students and

scholars sent abroad come to the United

States. The rapid buildup in the numbers of

students and scholars coming to the United

States is said to have made the exchanges an

important element in China’s effort at modernization. How effectively these students’

—.——-—-

108Chinese Embassy, Washington, DC, 1986.

‘“gInstitute of International Education in New York, figures

quoted in the Philadelphia Inquirer, Andrew May Kuth, “Chinese Students Soak Up Technology to Take Back Home, ’ July

4, 1986, p. IB.

1 IOThe number of U.S. students and scholars going to China

under the exchanges has been smaller and in different academic

fields. An estimated 3500 Americans participated in exchanges

from 1978 through 1984 with a majority pursuing short-term

language study. Of those who performed research, two-thirds

were in the social sciences and humanities.

‘llA Relationship Restored: Trendsin U.S.-China Educational

Exchanges, 1978-1984 (Washington, DC: National Academy

Press, 1986), p. 62.
Ch. 4—The Role of the United States in Technology Transfer to China ● 105

skills are used when they return to China is

open to debate.112 Most would agree, however,

that Chinese students regard their studies in

the United States favorably.113

Statistics on Chinese students in the United

States are very uncertain but about one-third

of the students have been financed by relatives

who live outside of China. However, China may

have decided to foreclose this approach.’” The

majority of the students are funded by grants

from the Chinese Government. Increasingly,

the Chinese Government funds students for

only the first year abroad and expects them

to find financial aid to complete their training. ] 15 The U.S. Government does not allow foreign students into the country unless they can

prove that they have adequate funds. In addition, acceptance of a nonimmigrant exchange

visitor visa may, in certain circumstances, subject the holder to a 2-year foreign repatriation

requirement upon termination of status. 116 The

Chinese Government official position is that

only those students who accept grants from

the Chinese Government are required to return. ’l’ The Chinese students generally do want

“’See for example, I.eo A. Orleans, ‘iChinese Students and

Technology Transfer, Journal of ,Vortheast Asian Studies, vol.

IV, No. 4, winter 1985, p. 3 ff.

11 ~This establishment of ‘ ‘personal ties’ could be influential

in future U.S.-China economic relations. Chinese students trained

in the United States are absorbing preferences for U.S. technology and equipment which may help perpetuate the apparent Chinese preference for U.S. technology.

“41.eo A, Orleans, personal communication, June 1987.

“’Ibid.

‘ ‘“Foreign ,’VationaZs in the United States–Information

Guide– 1986 Edition, Price Waterhouse Center for Translational Taxation, New York, pp. 62-63.

‘‘“The Chinese say that they have sent more than 30,000 students overseas at state expense since 1978. So far about half

of them have completed their courses and returned to China.

However, of those who went at their own expense, 40 percent

of all students abroad, only a small number returned. (” Study

Abroad: No Panic, ” Beij@Re\iew, vol. 30, No. 2, Jan. 12, 1987,

pp. 6-7, )

to return. In the few cases where they sought

to stay, however, the Chinese have exerted

tremendous diplomatic pressure.1’8

Private Programs

U.S. company support for technology transfer through training has been demonstrated

in several instances. One example with great

future potential is the Telecommunications

Training Institute, where training of developing country telecommunications specialists is

performed on U.S. company premises. Of a

different nature is a large university-industry

collaboration between China and the Georgia

Institute of Technology called China/Tech.

This is a Chinese-American joint venture between Technology Exchange Corp., a private

company in Atlanta, and the Technology

Clearinghouse of China, a Chinese corporation

wholly owned by and operated under the guidance of CAST (Chinese Association for Science

and Technology). China./Tech will provide a

wide range of consulting services to U.S. companies that are interested in setting up new

ventures or in licensing technology to China.

The entire Georgia Tech staff is available for

consulting services, and the 1.4 million Chinese scientists and engineers who are members

of CAST will keep China/Tech apprised of

China’s modernization efforts.’”

1l’Philadelphia Inquirer, op. cit.

“gOtis Port, “Georgia Tech Has China on ts Mind, ” Business V1’eek. Mar. 31, 1986, p. 70H.

CONCLUSION

The Chinese have targeted the energy, trans- eign expertise likely to be in great est demand

portation, and communications technology sec- thus include conventional and nuclear electric

tors as priority areas in their most recent 5- power production, automobile technology, rail

year plan. Large-scale technology transfer from technology, telephone switching systems, fiindustrialized countries is essential for China’s ber optics, and computers. Management excontinued economic development. Areas of for- pertise is also a critical need for the Chinese.
106 . Technology Transfer to China

The investment climate in China remains unattractive for many U.S. companies, and any

changes will come slowly. However, as the Chinese reforms proceed and new benchmarks are

established, the investment climate will probably improve. This is because the Chinese realize that the degree to which China accomplishes its modernization goals will depend on

the importation and application of advanced

technologies throughout the economy. Prospects for joint ventures may improve since the

foreign investment law of October 11, 1986 was

codified with 16 sets of detailed implementing regulations covering specific investor concerns in March 1987. Also, despite specific

problems of their own (usually involving proprietary rights or foreign exchange), licensing

agreements will continue to be a common mode

of technology transfer for foreign companies,

particularly since the Chinese have apparently

agreed to honor patent conventions. If the patience and perseverance of U.S. firms can be

matched by Chinese pragmatism, U.S. ventures in the Chinese market can truly become

those of “equality and mutual benefit. ”
Ch. 4—The Hole of the United States in Technology Transfer to China . 107

APPENDIX A: PROVISIONS OF THE STATE COUNCIL OF THE

PEOPLE’S REPUBLIC OF CHINA FOR THE ENCOURAGEMENT OF

FOREIGN INVESTMENT (PROMULGATED ON OCTOBER 11, 1986)

Article 1. These provisions are hereby formulated

in order to improve the investment environment,

facilitate the absorption of foreign investment, introduce advanced technology, improve product

quality, expand exports in order to generate foreign exchange, and develop the national economy.

Article 2. The State encourages foreign companies,

enterprises, and other economic entities or individuals (hereinafter referred to as “foreign investors”)

to establish Chinese-foreign equity joint ventures,

Chinese-foreign cooperative ventures and wholly

foreign-owned enterprises (hereinafter referred to

as “enterprises with foreign investment”) within

the territory of China,

The State grants special preferences to the enterprises with foreign investment listed below:

●

●

production enterprises whose products are

mainly for export, which have a foreign exchange surplus after deducting from their total annual foreign exchange revenues the annual foreign exchange expenditures incurred

in production and operation and the foreign

exchange needed for the remittance abroad of

the profits earned by foreign investors (hereinafter referred to as “export enterprises”);

and

production enterprises possessing advanced

technology supplied by foreign investors which

are engaged in developing new products, and

upgrading and replacing products in order to

increase foreign exchange generated by exports or for import substitution (hereinafter

referred to as ‘‘technologically advanced enterprises’ ‘).

Article 3. Export enterprises and technologically

advanced enterprises shall be exempt from payment to the State of all subsidies to staff and workers, except for the payment of or allocation of funds

for labor insurance, welfare costs, and housing subsidies for Chinese staff and workers in accordance

with the provisions of the State.

Article 4. The site use fees for export enterprises

and technologically advanced enterprises, except

for those located in busy urban sectors of large cities, shall be computed and charged according to

the following standards:

● five to twenty RMB yuan per square metre

per year in areas where the development fee

and the site use fee are computed and charged

together, and

● not more than three RMB yuan per square

metre per year in site areas where the development fee is computed and charged on a onetime basis or areas which are developed by the

above-mentioned enterprises themselves.

Exemptions for specified periods of time from

the fees provided in the foregoing provision may

be granted at the discretion of local people’s governments.

Article 5. Export enterprises and technologically

advanced enterprises shall be given priority in obtaining water, electricity and transportation services, and communication facilities needed for their

production and operation. Fees shall be computed

and charged in accordance with the standards for

local state enterprises,

Article 6. Export enterprises and technologically

advanced enterprises, after examination by the

Bank of China, shall be given priority in receiving

loans for short-term revolving funds needed for

production and distribution, as well as for other

needed credit.

Article 7. When foreign investors in export enterprises and technologically advanced enterprises remit abroad profits distributed to them by such enterprises, the amount remitted shall be exempt

from income tax.

Article 8. After the expiration of the period for the

reduction of exemption of enterprise income tax

in accordance with the provisions of the State, export enterprises whose value of export products

in that year amounts to 70 percent or more of the

value of their products for that year, may pay enterprise income tax at one-half the rate of the

present tax.

Export enterprises in the special economic zones

and in the economic and technological development

zones and other export enterprises that already

pay enterprise income tax at a tax rate of 15 percent and that comply with the foregoing conditions, shall pay enterprise income tax at a rate of

10 percent.

Article 9. After the expiration of the period of reduction or exemption of enterprise income tax in

accordance with the provisions of the State, tech-
108 . Technology Transfer to China

nologically advanced enterprises may extend for

3 years the payment of enterprise income tax at

a rate reduced by one half.

Article 10. Foreign investors who reinvest the profits distributed to them by their enterprises in order to establish or expand export enterprises or

technologically advanced enterprises for a period

of operation of not less than 5 years, after application to and approval by the tax authorities, shall

be refunded the total amount of enterprise income

tax already paid on the reinvested portion. If the

investment is withdrawn before the period of operation reaches 5 years, the amount of enterprise income tax refunded shall be repaid.

Article 11. Export products of enterprises with foreign investment, except crude oil, refined oil, and

other products subject to special State provisions,

shall be exempt from the consolidated industrial

and commercial tax.

Article 12. Enterprises with foreign investment

may arrange the export of their products directly

or may also export by consignment to agents in

accordance with State provisions. For products

that require an export license, in accordance with

the annual export plan of the enterprise, an application for an export license maybe made every six

months.

Article 13. Machinery and equipment, vehicles used

in production, raw materials, fuel, bulk parts, spare

parts, machine component parts and fittings (including imports restricted by the State), which enterprises with foreign investment need to import

in order to carry out their export contracts do not

require further applications for examination and

approval and are exempt from the requirement for

import licenses. The customs department shall exercise supervision and control, and shall inspect

and release such imports on the basis of the enterprise contract or the export contract.

The imported materials and items mentioned

above are restricted to use by the enterprise and

may not be sold on the domestic market. If they

are used in products to be sold domestically, import procedures shall be handled in accordance

with provisions and the taxes shall be made up

according to the governing sections.

Article 14. Under the supervision of the foreign exchange control departments, enterprises with foreign investment may mutually adjust their foreign

exchange surpluses and deficiencies among each

other.

The Bank of China and other banks designated

by the People’s Bank of China may provide cash

security services and may grant loans in Renminbi

to enterprises with foreign investment.

Article 15. The people’s governments at all levels

and relevant departments in charge shall guarantee the right of autonomy of enterprises with foreign investment and shall support enterprises with

foreign investment in managing themselves in

accordance with international advanced scientific

methods.

With the scope of their approved contracts, enterprises with foreign investment have the right

to determine by themselves production and operation plans, to raise funds, to use funds, to purchase production materials, and to sell products;

and to determine by themselves the wage levels,

the forms of wages and bonuses, and the allowance

system.

Enterprises with foreign investment may, in

accordance with their production and operation requirements, determine by themselves their organizational structure and personnel system, employ or dismiss senior management personnel, and

increase or dismiss staff and workers. They may

recruit and employ technical personnel, managerial

personnel, and workers in their locality. The unit

to which such employed personnel belong shall provide its support and shall permit their transfer.

Staff and workers who violate the rules and regulations, and thereby cause certain bad consequences may, in accordance with the seriousness

of the case, be given differing sanctions, up to that

of discharge. Enterprises with foreign investment

that recruit, employ, dismiss, or discharge staff

and workers, shall file a report with the local labour

and personnel department.

Article 16. All districts and departments must implement the “Circular of the State Council Concerning Firmly Curbing the Indiscriminate Levy

of Charges on Enterprises. ” The people’s governments at the provincial level shall formulate specific methods and strengthen supervision and administration.

Enterprises with foreign investment that encounter unreasonable charges may refuse to pay

and may also appeal to the local economic committees up to the State Economic Commission.

Article 17. The people’s governments at all levels

and relevant departments in charge shall strengthen

the co-ordination of their work, improve efficiency

in handling matters and shall promptly examine

and approve matters reported by enterprises with

foreign investment that require response and resolution. The agreement, contract and articles of
—

Ch. 4— The Rcie of the United States in Technology Transfer to China 109 —

association of an enterprise with foreign investment shall be examined and approved by the departments in charge under the State Council. The

examination and approval authority must within

three months from the date of receipt of all documents decide to approve or not to approve them.

Article 18. Export enterprises and technologically

advanced enterprises mentioned in these provisions shall be confirmed jointly as such by the foreign economic relations and trade departments

where such enterprises are located and the relevant

departments in accordance with the enterprise contract, and certification shall be issued.

If the actual results of the annual exports of an

export enterprise are unable to realize the goal of

the surplus in the foreign exchange balance that

is stipulated in the enterprise contract, the taxes

and fees which have already been reduced or exempted in the previous year shall be made up in

the following year.

Article 19. Except where these provisions expressly

provide that they are to be applicable to export

enterprises or technologically advanced enterprises, other articles shall be applicable to all enterprises with foreign investment.

These provisions apply from the date of implementation to those enterprises with foreign investment that have obtained approval for establishment before the date of implementation of these

provisions and that qualify for the preferential

terms of these provisions.

Article 20. For enterprises invested in and established by companies, enterprises, and other economic organizations or individuals from Hong

Kong, Macao, or Taiwan, matters shall be handled

by reference to these provisions.

Article 21. The Ministry of Foreign Economic Relations and Trade shall be responsible for interpreting these provisions.

Article 22. These provisions shall go into effect on

the date of issue.

SOUIiCII: Bejjing Re}jewr, No. 43, Oct. 27, 1986.

APPENDIX B: PROTOCOLS AND MEMORANDA OF

UNDERSTANDING UNDER THE U. S.-PRC AGREEMENT

ON COOPERATION IN SCIENCE AND TECHNOLOGY

1. Agreement:

Date signed:

Date extended:

U.S. agency:

Chinese unit:

2. Agreement:

Date signed:

Date extended:

U.S. agency:

Chinese unit:

3. Agreement:

Date signed:

Date extended:

U.S. agency:

Chinese unit:

4. Agreement:

Date signed:

Date extended:

U.S. agency:

Annexes and

U.S. agency:

Chinese unit:

5. Agreement:

Date signed:

dates:

Understanding on Exchange of Students and Scholars

October 1978, Exchange Letter of January 1979

Unlimited

USIA, DOE, NSF, NAS, NEH

MOE, CASS, SSTC

Understanding on Agricultural Exchange

November 1978

Unlimited

USDA, USGS, and DOI/Fish and Wildlife Service

Ministry of Agriculture, Animal Husbandry, and Fisheries

Understanding on Space Technology (overall protocol on Space Science Application and Technology currently under negotiation)

January 31, 1979

Unlimited

NASA

Chinese Academy of Space Technology (under

CAS

Implementing Accord on Cooperation in the

January 31, 1979

February 1984

February 1989

the Ministry of Astronautics) and

Field of High Energy Physics

Annex June 12, 1979, Joint Committee Reports 1979-1980, 1980-1981, 1982-1983

DOE

CAS (formerly signed with SSTC)

Protocol on Cooperation in the Field of Metrology and Standards

May 8, 1979
110 ● Technology Transfer to China

6,

7.

8,

9.

10.

11.

Date extended: May 8, 1984

Date expired: May 8, 1989

Annexes and dates: Annex (1) May 8, 1979; Annex (2), May 5, 1981 (supersedes Annex (l). (Annexes

do not apply to extension.)

U.S. agency: DOC (National Bureau of Standards)

Chinese unit: State Bureau of Metrology and State Bureau of Standardization

Agreement: Protocol on Cooperation in the Field of Atmospheric Science and Technology

Date signed: May 8, 1979

Date extended: May 1984

Date expires: May 1989

Annexes and dates: Annex (l), May 1979; Annex (2), May 1979; Annex (3), September 1980; Annex

(4), September 1980; Annex (5), November 1981; Annex (6), November 1981

U.S. agency: NOAA, NSF, NASA, USDA

Chinese unit: State Meteorological Administration

Agreement: Protocol on the Field of Marine and Fishery Science and Technology

Date signed: May 8, 1979

Date extended: May 1984

Date expires: May 1989

Annexes and dates: Annex (l), May 1979; Annex (2), Working Group Meeting 1980; Annex (3), Working Group Meeting 1982; Annex (4), Working Group Meeting 1984

U.S. agency: NOAA, NSF

Chinese unit: National Bureau of Oceanography and Ministry of Agriculture, Animal Husbandry and Fisheries

Agreement: Protocol on Cooperation in the Sciences and Technology of Medicine and Public

Health

Date signed: June 22, 1979

Date extended: Extension under negotiation

Date expired: June 22, 1984

Annexes and dates: Annex (l), November 1980; Annex (2), November 1980; Annex (3), January 1982

U.S. agency: HHS (NIH)

Chinese unit: Ministry of Public Health

Agreement: Protocol on Cooperation in Hydroelectric Power and Related Water Resource

Management

Date signed: August 28, 1979

Date extended: Expired; no plans for extension

Date expired: August 28, 1984

Annexes and dates: Annex (l), March 1980; Annex (2), September 1982

U.S. agency: DOC, DOI (Bureau of Reclamation, Corps of Engineers, Tennessee Valley Authority)

Chinese unit: Chinese Ministry of Water Resources and Electric Power

Agreement: Protocol for Scientific and Technical Cooperation in the Earth Sciences

Date signed: January 24, 1980

Date extended: January 24, 1985

Date expires: January 24, 1990

Annexes and dates: Annex (l), Patents, November 1981; Annex (2); Annex (3); Annex (4), Copyrights;

Annex (5); Annex (6) Working Group Meeting 1984

U.S. agency: DOI (USGS) and NSF

Chinese unit: Chinese Academy of Geological Sciences

Agreement: Protocol for Scientific and Technical Cooperation in Earthquake Studies

Date signed: January 24, 1980

Date extended: January 24, 1985

Date expires: January 23, 1990

Annexes and dates: Annexes (l-8)

U.S. agency: USGS and NSF

Chinese unit: Chinese State Seismological Bureau
Ch. 4— The Role of Tne united States In Tecnnology Transrer to China ● 111

12. Agreement:

Date signed:

Date extended:

Date expires:

Annexes and dates:

U.S. agency:

Chinese unit:

13

Protocol for Scientific and Technical Cooperation in the Field of Environmental Protection

February 5, 1980

February 1985

February 1989

Annexes (l-3)

Environmental Protection Agency

Office of the Environmental Protection Leading Group

. Agreement: Protocol on Cooperation in the Basic Sciences

Date signed:

Date expired:

Annexes and dates:

U.S. agency:

Chinese unit:

14. Agreement_,:

Date signed:

Date expires:

Annexes and dates:

U.S. agency:

Chinese unit:

15. Agreement:

Date signed:

Date expires:

U.S. agency:

Chinese unit:

16. Agreement:

Date signed:

Date expires:

Annexes and dates:

U.S. agency:

Chinese unit:

17. Agreement:

Date signed:

Date expires:

Annexes and dates:

U.S. agency:

Chinese unit:

18. Agreement:

Date signed:

Date expires:

Annexes and dates:

U.S. agency:

Chinese unit:

19. Agreement:

Date signed:

Date expires:

U.S. agency:

Chinese unit:

20. Agreement:

Date signed:

Date extended:

December 10, 1980

December 1985

Annex (l), Patents and Copyrights, March 1981

NSF

CAS and CASS

Protocol on Cooperation in the Field of Building Construction and Urban

Planning Science and Technology

October 17, 1981

October 1986

Annex (1)

Department of Housing and Urban Development

Ministry of Urban and Rural Construction and Environmental Protection

Protocol on Cooperation in Nuclear Safety Matters

October 17, 1981

October 1986

NRC

National Nuclear Safety Administration (formerly SSTC)

Protocol on Scientific and Technical Cooperation in the Study of Surface

Water Hydrology

October 17, 1981

October 1986

Annexes (l-4), 1983; Annexes (5-6), 1985

DOI ([JSGS)

Bureau of Hydrology (under the Ministry of Water Conservancy)

Cooperation in the Fields of Nuclear Physics and Controlled Magnetic Fusion Research

May 11, 1983

May 1988

Annexes (l-5), 1985

DOE

SSTC

Cooperation in Aeronautical Science and Technology

May 11, 1983

May 1988

Annex (l), Copyrights, April 5, 1985; Annex (2), April 5, 1985

NASA

Chinese Aeronautical Establishment (under the Ministry of Aeronautics)

Protocol on Cooperation in Science and Technology of Transportation

May 11, 1983

May 1988

Department of Transportation

Ministry of Communications

Protocol on Cooperation in the Field of Scientific and Technical Information

May 8, 1979

April 30, 2984
112 ● Technology Transfer to China

— — — — —

Date expires: April 1989

Annexes and dates: Annex (l); Annexes

U.S. agency:

Chinese unit:

21. Agreement:

Date signed:

Date extended:

Date expires:

U.S. agency:

Chinese unit:

22. Agreement:

Date signed:

Date expires:

U.S. agency:

Chinese unit:

23. Agreement:

Date signed:

Date expires:

U.S. agency:

Chinese unit:

24. Agreement:

Date signed:

DOC (NTIS)

ISTIC (under SSTC

2-4), February 8, 1982

Cooperation in the Field of Management of Industrial Science and Technology

May 1979

April 1984

April 1989

DOC

State Economic Commission, SSTC, MOE

Protocol on Cooperation in Statistics

July 24, 1984

July 1989

DOC (Bureau of the Census)

State Statistical Bureau

Memorandum of Understanding on Cooperation in the Basic Biomedical

Sciences

May 11, 1983

May 1988

NIH

CAS

Protocol for Scientific and Technical Cooperation in Surveying and Mapping

Studies

April 16, 1985

Annexe~ and dates: Annex (l), 1985

U.S. agency: USGS/Defense Mapping Agency

Chinese unit: National Bureau of Surveying and Mapping (under SSTC)

25. Agreement: Protocol on Cooperation in the Field of Fossil Energy Research and Development

Date signed: April 16, 1985

Annexes and dates: Annex (l), 1985

U.S. agency: DOE

Chinese unit: Ministry of Coal Industry

Under negotiation:

1. Agreement: Landsat Ground Station Memorandum of Understanding

U.S. agency: DOC (NOAA/NESDIS)

Chinese unit: CAS

2. Agreement: Telecommunications

U.S. agency: DOC

Chinese unit: Ministry of Post and Telecommunications

3. Agreement: Health Memorandum of Understanding between the Center for Disease Control and the China National Center for Preventive Medicine

U.S. agency: HHS (PHS and CDC)

Chinese unit: China National Center for Preventive Medicine

A BB RIJV I AT ION KEY. U.S. ~gmcies: CDC Centers for Disease Control; IX)C Department of Commerce; DOE Department of Energy, D() I I)epartment of the Interior,

11}1S Department of Health and Human Services, NAS National Academy of Sciences; ?NASA National Aeronautics and Space Admmistratmn,

NBS N’at]onal Bureau of Standards; NEli X’atlonal Endowment for the Humamtles: NTESDIS National Environmental Satellite Data and Information %rwce; N 1 F{ National Institutes of Health: !VOAA National Oceanic and Atmospheric Administration; N RC Nuclear Regulator} Commission,

NSF’ National Science Foundation; NTIS National Technical Information Service; PHS Public Health Service, [JSDA (J S Department of Agrwulture, USGS U S Geological Survey, USIA U S. Information Agency.

(’hirwse units C’AS Chinese Academy of Sciences, CASS Chinese Academy of Social Sciences: ISTIC Institute of Science and Technokwr Information of China, Mokl M mistry of Education: SSTC State Science and Technology Commission

SOURCE;. A Relationship Restored. 7’rends m U S.. Ch/na h’ducationid F;xchange, 1978-1984, National Academy Press, M’ashmgton, DC, 1986
Chapter 5

Policies of Other Supplier Countries:

Japan, France, West Germany,

and Britain

?’

Photo credit: Eric Basques

The old and the new coexist in Hong Kong. Hong Kong will become a special Adrninistratke Zone of China

on June 30, 1997, under what Deng Xiaoping calls a “one country/two systems” concept.
CONTENTS

Foreign Policy

Japan . . . . .

Europe . . . .

Approaches to

Japan . . . . .

Europe . . . .

Perspectives. . . . . . .

. . . . . . . . . .

. . . . . . . . . .

Technology

. . . . . . . . . .

. . . . . . . . . .

Export-Controls . . . . . . . .

Japan . . . . . . . . . . . . . . .

Europe . . . . . . . . . . . . . .

Aid and Export Financing

Development Assistance

. . . . . . . .

Transfer

. . . . . . . .

. . . . . . . .

. . . . . . . .

. . . . . . . .

. . . . . . . .

. . . . . . . .

. . . . . . . .

. . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . .

,..,. . . . . . . . . . . . .

. . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . .

,... . . . . . . . . . . . . .

. . . . . . . . . . . . . . . . .

Other Types of Financing . . . . . . . . . . . . . . . . . . . . . . . .

The Mixed Credit Controversy . . . . . . . . . . . . . . . . . . .

Multilateral Policy Challenges . . . . . . . . . . . . . . . . . . . . . .

Tables

Table No.

9.

10.

11.

12.

13.

Composition of Japanese Exports to China 1985 . . .

Comparison of Selected U.S. and Japanese Exports

Technology Transfer From Japan to China, 1984-85

European Trade With China in 1986 . . . . . . . . . . . . .

European Official Development Assistance to China

Page

. . . . . . . . . . . . . . . . 115

. . . . . . . . . . . . . . . . 115

. . . . . . . . . . . . . . . . 117

. . . . . . . . . . . . . . . . 118

. . . . . . . . . . . . . . . . 118

. . . . . . . . . . . . . . . . 124

. . . . . . . . . . . . . . . . 130

. . . . . . . . . . . . . . . . 132

. . . . . . . . . . . . . . . . 133

. . . . . . . . . . . . . . . . 135

. . . . . . . . . . . . . . . . 136

..,,. . . . . . . . . . . . 138

. . . . . . . . . . . . . . . . 141

..,,. . . . . . . . . . . . 142

Page

. . . . . . . . . . . . . . . . 119

. . . . . . . . . . . . . . . 120

. . . . . . . . . . . . . . . . 121

. . . . . . . . . . . . . . . . 125

. . . . . . . . . . . . . . . . 139
Chapter 5

Policies of Other Supplier Countries:

Japan, France, West Germany, and Britain

Japan and many European countries are actively assisting China in its modernization programs. Firms from these major supplier countries can supply virtually all the technologies

that the United States can and share common

Western security interests. Japanese exports

to China have in recent years far exceeded

those of the United States or any West European country, raising questions about U.S. export performance.

This chapter compares the approaches taken

by these major supplier countries in order to

identify opportunities and problems for U.S.

policy. OTA finds that while competition

among these countries for sale of products and

technologies to China is generally a healthy

process, technology transfers and trade also

present policy challenges to the United States

and to the Western “alliance’ nations collectively. One challenge is to U.S. firms (and to

the U.S. Government) to compete effectively

in the China market.

Others will require complementary efforts

by policy makers in the United States and the

other supplier countries. An example is the

need to strike a proper balance in assisting

China in its modernization while preserving

Western strategic interests in Asia. Maintaining this balance may entail further efforts to

harmonize export control policies, a process

that will increasingly depend upon the participation of other Asian countries such as Singapore. A second challenge is the need to avoid

costly competition, propelled by subsidized exports, and to ensure expanded trade with China

while avoiding protectionist responses. On a

more positive note, there are also opportunities for cooperation in development projects

that require financial and other resources so

great that they would strain the capacities of

any one supplier country.

FOREIGN POLICY PERSPECTIVES

Japan

Japan’s official government policy today

strongly supports China’s economic modernization and growing economic relations. Proximity to China as well as its historic ties and

technological prowess helped Japan become

China’s number-one trading partner. For Japan, now poised for what some see as a larger

political and strategic role, China offers an unusual opportunity to contribute to the modernization of an Asian neighbor. Succeeding

in this effort could reinforce Japan’s growing

leadership role in Asian trade and security.

Sino-Japanese economic relations developed

over a bumpy path during the postwar period,

however, and significant problems remain. Japanese experts refer to ‘political-economic cycles in Sino-Japanese trade. Japan’s exports

of machinery and equipment to China show

peaks during periods of improving bilateral relations and troughs coinciding with political

changes such as the Cultural Revolution.1

Japanese business and government leaders

charted a pragmatic policy course that led to

expanded economic interaction through unofficial channels before the warming of relations

in the 1970s, but at times Chinese stress on

political principles was a constraint.

‘Mitsubishi Sogo Kenkyujo, .Vibe Ki~w no Chugoku Shijo

Akusesu to .4jia Ta”hai Chiiki no Kozu [Structure and Access

by Japanese and U.S. Firms to the Chinese Itlarket], MR1 Projection No. 20, May 24, 1985, p. 34.

115
116 . Technology Transfer to China

In 1978 Japan and China opened a new era

in their bilateral relationship by signing a

Treaty of Peace and Friendship and a LongTerm Trade Agreement. The establishment of

diplomatic relations between the United States

and China in 1979 set the stage for rapidly

growing Sino-Japanese interaction.’

Japan’s foreign policy toward China is based

on the proposition that contributing to China’s

modernization will allow China to resist Soviet

influence better. China is seen as a socialist

country, one quite different from the Soviet

Union, which poses the greatest threat to

Japan’s security. While Japan would be wary

of a strong military “alliance” with China that

was perceived as threatening by the Soviet

Union, Japan has determined that helping

China modernize will contribute to China’s

peaceful economic and political integration into

Asia. According to this view, economic and

technical assistance make it more likely that

China’s relations with the West expand.

A number of other factors, in addition to

U.S.-China rapprochement and Japan’s perception of the role that China can play as a counterpower to the Soviet Union, underlie the

rapid growth of economic relations since the

late 1970s. In a climate of growing trade frictions with the United States and Europe, and

a shrinking Middle Eastern market, China appears to hold at least a commercial prospect.

China also provides a unique opportunity for

Japan to demonstrate its commitment to expand its official development assistance in

ways that contribute to Western security interests. The complementarily between China’s

energy, natural, and human resources and

Japan’s technological and economic acumen

suggests a natural basis for economic exchange. Anxious to develop anew style of constructive leadership in Asia, Japanese government and business find in China a prime testing

ground.

‘During the early postwar period, Japan was in no position

to establish an independent foreign policy. After the Korean

War, worsening U.S.-China relations precluded official SinoJapanese rapprochement. In the early 1960s, the United States

and Taipei persuaded Japan not to use Export-Import Bank

financing to support China trade. See Chae-Jin Lee, ChirIa and

Japan (Stanford: Hoover Inst. Press, 1984), p. 6.

But despite the considerable progress that

has been made in deepening SinoJapanese ties,

serious points of friction became apparent in

1985. Since the mid-1970s, when Japan established itself as China’s prime trading partner,

China’s leaders have complained about trade

deficits with Japan. For years, the two countries attempted to resolve this problem under

the rubric of long-term trade agreements that

featured increased Japanese commitments to

import Chinese oil and coal.3 By 1985 the trade

deficit had become a prime concern in bilateral

relations, as Japan’s surplus reached $6 billion on a total bilateral trade basis of about

$19 billion.’ In late 1985 and early 1986, Chinese officials issued repeated warnings about

the trade imbalance.5

Particularly noteworthy was the linkage of

the trade issue to other points of controversy

in the SinO-Japanese relationship. Chinese student demonstrations in late 1985 revealed resentment over Japan’s trade “invasion,” and

Prime Minister Nakasone’s unprecedented

visit to a shrine to honor war dead awakened

memories of Japan’s earlier aggression in

China. While the causes and significance of the

Chinese student demonstrations remain the

subject of considerable controversy, those

demonstrations previewed a series of attempts

by both countries to repair the points of friction. Nakasone announced a cancellation of immediate plans for a second visit to the shrine,

and Chinese Communist Party leader Hu Yaobang proposed four points aimed at improving

friendship, calling on the two governments to

“adopt a correct approach to their serious conflicts of the past. ”G

‘Japan nevertheless registered a trade surplus with China

every year since 1972, except for 1981 and 1982, when China

adopted a policy of restricting imports due to financial difficulties. Neither oil nor coal exports met expectations.

‘During 1986, Japan ran a $4.2 billion trade surplus, reflecting the fact that exports fell 18 percent below the level of the

previous year, according to Japanese customs-clearance figures.

‘In March 1986, China’s Ambassador to Japan warned that

China was watching the trade picture carefully and was concerned about the trade gap. In April 1986, China’s Foreign Minister Wu on a visit to Tokyo called the trade deficit a big problem. China has repeatedly called upon Japan to open its doors

to more imports from China and expanded investments in and

technology transfer to China.

‘See “HU Outlines Framework for Friendship with Japan, ”

China Dm”ly, Oct. 19, 1985.
Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 117

-.

\

Photo cred(t X/nhua News Agency

Checking Integrated c!rcults at the

Jlangnan Radio Appliance Factory in WUXI.

This equipment was supplied by Japan.

Quite recently, the Government of Japan

apologized to China for statements made by

former Minister of Education Masayuki Fujio suggesting that Japan was justified in its

aggression in Nanking in 1937.7 Thus, while

the two countries have attempted to relieve

tensions, deep and historic points of friction

remain over Japan’s past aggression and its

relationship with Taiwan. *

T4’estem and Chinese historians have written about the atrocities committed by the Japanese (known as the ‘4 Rape of Nanking’ after they captured Nanking in 1937. Apologies were also

made to South Korea. See, e.g., John Burgess, ‘‘Japan Ijducation Minister Fired for Remarks about J1’orld I!’ar II, ll”ashington Post, Sept. 9, 1986, p. A21.

‘Japan ended diplomatic relations with Taiwan in 1972, Nevertheless, China raised concerns o~’er the participation by some

I,iberal I)emocratic Part,y leaders in a commemoration of Chiang

Kai-shek.

Other constraints stem more from external

factors. Prime among these is the need to balance growing ties with China with the desire

to preserve good relations with the Association of Southeast Asian Nations (ASEAN) and

other Asian countries. Hence, Japan’s Foreign

Ministry has developed an aid strategy explicitly founded on three principles: (1) balancing

aid to China with aid to ASEAN (2) cooperating with Western countries, and (3) providing

no military aid. This approach embodies Japan’s response to concerns raised by the Organization for Economic Cooperation and Development (OECD) countries about growing

Japanese Export-Import Bank financing for

energy and other projects for developing infrastructure in China.

Japan thus has a great deal to gain if its policies toward China succeed, but its prestige and

influence could be diminished if frictions over

trade and technology transfer fester and reactivate older points of controversy. China, more

than other developing countries in Asia, appears capable of applying pressure on Japan.

Japan’s growing involvement in China is, morever, being carefully watched by other countries in the region. The expanding Sine-Japanese relationship thus holds potential pitfalls

as well as opportunities for Japan that extend

beyond the bilateral relationship.

Europe

European countries have had centuries of

trading experience with China. The value of

this trade and China’s internal weakness led

to intense political interference, starting with

the Opium War in 1839-42. The Boxer Rebellion of 1899 began a period of reaction to European imperialism that lasted until about 1920.

Actual colonialism was limited to Hong Kong

and Macao, but the de facto loss of control to

Europe (plus the United States, to much less

extent, and later to Japan) left a lasting preoccupation with national sovereignty. This experience also produced business and personal

ties that have been useful in expanding trade

as relations improved in recent years.

There is considerable commonality among

the views of the European trading partners of
118 ● Technology Transfer to China

China. All are interested in increasing trade.

Technology transfer is seen as a natural part

of trade, often a crucial part, for competitive

reasons. A modernized China is, ~f anything,

seen as strategically beneficial vis-a-vis the Soviet Union. At present, there are few significant disputes between China and European

countries.

This overall outlook is similar to that of the

United States, but differences arise in the degree of concern over certain issues and in the

ways in which policies are carried out, both at

the government and corporate levels. Since

there is little potential for direct strategic conflict between Europe and China, Europe is less

concerned about improvements to China’s military capability from dual-use technologies or

direct military transfers. All members of the

Coordinating Committee for Multilateral Export Controls (COCOM) use the same rules, but

different interpretations of applicability to spe

cific exports are often possible.

European trade has had its ups and downs,

as with Japan, but this has been due more to

China’s internal economic decisions than to international political factors. The frictions that

have marked China’s trading relations with Japan and the United States have been much less

pronounced in Europe. European countries see

China as a promising commercial market that

is attractive, considering their own sluggish

—

economies, but also relatively modest for the

foreseeable future. Europe’s trade with China

exceeds that of the United States (by a widening margin), though it is much less than

Japan ’s.

There is less variation in perspectives on

technology transfer to China among the various countries of Europe, than between Europe and the United States or Japan. No grand

designs, either strategic or commercial, seem

to underlie Europe’s approach, and no great

controversies impede the relationships. The

whole issue is lower key and more matter-offact. Within Europe, there are differing approaches to technology transfer, as discussed

below, but few disputes between countries over

trade with China.

From China’s perspective, the European connection offers the best of all worlds. European

technology is in most respects equivalent to

American or Japanese, but Europeans seem

to be readier to transfer it than Americans,

with their strategic concerns, or Japanese, with

their commercial reluctance. Furthermore,

dealing with Europe helps China maintain its

independence. These factors may explain why

China seems relatively unconcerned with European protectionism and trade surpluses, even

though these problems are much more severe

than China’s problems with the United States.

APPROACHES TO TECHNOLOGY TRANSFER

Western suremit countries have taken different policy approaches to technology transfer,

and the China market is no exception. Private

firms are the major developers and transferrers of technology, but in some fields such as

telecommunications, state-owned firms play

major roles. All of the Western governments

influence the nature and scope of technology

transfer, albeit in different ways.’

9For an analysis of differing policy approaches to technology

transfer in general, see OTA, TechnofogJ~ Transfer to the Micidle L’ast, September 1984, ch. 12 “Policies of Other Supplier

Countries. ”

Japan

Scope and Type of Technology

Transfer to China

There is a sharp contrast between China’s

criticisms of Japan for not transferring much

technology and views often expressed by U.S.

businessmen that Japanese firms are actually

transferring advanced technologies (sometimes exceeding or circumventing multilateral

export controls). While data are not available

for a detailed comparison of technology transfer from various sources, distinctive features
Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 119

of Japanese technology transfer to China are

nevertheless apparent.

To set the context for the discussion of technology transfer, it should be noted that Japan

has been China’s number-one trading partner

for more than a decade. Two-way trade reached

almost $19 billion in 1985 (more than double

U.S.-China trade), with Japanese exports to

China valued at $12.5 billion dollars. In 1986

China was the fourth largest importer of Japanese products and the fifth largest exporter

to Japan. ’” Traditionally, Sino-Japanese trade

comprised an exchange of ‘machines for oil. 1 I

At least in terms of Japanese exports, this pattern still prevails: machinery exports made up

57 percent of total Japanese exports to China

during 1985. Exports tripled in 1985 in automobiles, motorcycles, televisions, and other

consumer appliances. In the first half of 1986,

however, Japan’s exports to China fell 23 percent from the 1985 level. Exports of automobiles and appliances plummeted after Chinese

resentment grew over a growing trade deficit

with Japan. Japan’s share of telecommunications exports dropped markedly from 77 percent in 1985 to 58 percent in the first half of

1986.

Table 9 outlines the composition of Japanese

exports to China. In 1986, exports of steel products constituted more than a quarter of this

trade (3 billion dollars’ worth). Another major

export category is transportation equipment;

Japan exported 936 million dollars’ to China,

down 58% from the 1985 level. After a surge

in imports of Japanese automobiles in early

1985, and scandals involving illegal sales and

defective parts, the Chinese Government imposed restrictions on imports later in the year.

A third major category of exports is industrial

machinery and electrical equipment. Television

exports (including components) were valued

at $1 billion in 1985, but dropped sharply in

1986. Chemical and textile exports were also

‘

()’’ Japan-China Trade in 1986, ” China .Nrews]etter, No. 67,

March-April, 1987, p. 20. Two wa~r trade totaled $15.5 billion

in 1986.

“See Richard K. Nanto and Hong Nack Kim, “Sino-Japanese

Economic Relations, Congressional Research Service, Prepared

for the tJoint Plconomic Commitee, No\rember 1984.

Table 9.—Composition of Japanese Exports

to China 1986 (millions of U.S. dollars)

--

Export share

(percent of total

Japanese exports

Value to China)

Chemical goods ... ... . 8{ 5 8.3 0/0

Metals and articles thereof . 3,163 32,1

(Iron and steel sheets and

plates) . . . . . . . . . . . . . . . . . (1,013) (10.3)

Machinery and mechanical

apparatus . . . . . . . 4,979 50.5

(TV receivers). ... .. . (152) (1 ,5)

(Motor vehicles) . . . . . . . . . . (612) (6.2)

(Scientific, optical, and

precision apparatus) . . . . (506) (5.1)

Textiles and textile articles (447) (45)

Total . . . . . . . . . . . . . . . . . . 9,856

NOTE General contrasts with U S exports wh(ch amounted to $38 b!lllon (n

1985, are apparent While U S agricultural exports decl!ned they made

up a comparatively large share for the Un!led States Table 52 prov(des

a comparison of selected equl pment exports

SOURCE” Mlnlstry of Finance Japan

significant. With the completion of the Baoshan steel mill project in 1985, Japan’s exports

of large plants dropped. Table 10 compares

U.S. and Japanese exports in key sectors.

Official statistics cover direct trade between

Japan and China and thus do not show that

in recent years Hong Kong has become increasingly important as an alternative channel. Chinese officials express concern about this route,

fearing reduced control over imports and

prices. One observer estimated that trade

through Hong Kong represents 10-15 percent

of the value of total official bilateral SinoJapanese trade. ”

Product exports do not, of course, constitute

technology transfer, but such exports often include training programs and provision of technical services. The sheer volume of Japan’s machinery and equipment exports suggests that

Japanese firms have played a significant role

in helping modernize China’s industries. In

June of 1986a high-level Chinese official noted

that during the past five years 651 Japanese

experts had visited China to diagnose 131

factories, and that 400 Chinese had visited factories in Japan. ” Trade data alone, therefore,

“See Charles Smith, “The Ties that Bind, ” Far Eastern Economic Re\,ieu’, Apr. 24, 1986, p, 80.

“These numbers include both Japanese go~,ernment and corporate programs. See China .Vew.detter, no. 64. Sept. -oct. 1986,

p. 10.
120 ● Technology Transfer to China

Table IO.—Comparison of Selected U.S. and

Japanese Exports 1985 (million U.S. dollars)

United States Japan —

Telecommunications and sou-nd

recording equipment . . . . . 43.5 1,383a

Office machinery and equipment,

including computers . . . . . . 187.6 122.7

Professional and scientific

control instruments . . . . . . . . 279 683b

aof which, TV receivers = $1.073

b, Sclen tl

flc, Optical and preclslon apoaratus In Japan’s tariff class !ficatlon

SOURCES U S Commerce Dept data, reported In Ch/na f3us/ness and Trade,

Feb 23, 1986, Japan Tariff Assoctatlon data, reported In JE/ Report,

No 1 4 b

provide an inadequate gauge of technology

transfers.

Another approach to determining if technology transfer is occurring is to examine published contract awards. According to one such

study of transfers of production technology,

Japanese firms were involved in 42 of 183

transactions in 1984, while U.S. firms were involved in 71. Brief descriptions of the contracts

indicate that Japanese firms were transferring

some advanced technologies (in areas such as

electronic control systems, production of spectrophotometers, and electrostatic copiers) .14

Chinese data indicate that whereas Japan was

the leading foreign supplier of equipment (hardware), it lagged behind the United States and

West Germany in “technology transactions”

between 1973 and 1984. ’5

A study of Japanese plant exports to China

during the period January 1984 to March 1985

identified a total of 172 cases.lG The largest

number (57) involved machinery production

facilities. Chemical and food production plant

exports ranked second and third. A close examination of the electric machinery plant exports indicates that most involved consumer

product manufacturing technology (TVs, re14 Donald R. DeGlopper, “China’s Import of Foreign Technology, Survey and Chronology, DDE-1924-2-85, report for the

Defense Intelligence Agency, August 1985.

“See Li Hao, “In Search for a Perfect Balance, ” Intertrade,

September 1985, p. 13. By value of transactions, Japan was

on a par with West Germany as a supplier, but it lagged in numbers of transactions.

“These cases all involved exports of manufacturing equipment and technology (rather than simple exports of machinery

and equipment).

Photo credft ” Xinhua News Agency

The Fujian Hitachi Television Co. Ltd. in Fuzhou,

a China-Japan joint venture. Photo shows a view

of the assembly workshop for color and

black-and-white TV sets.

frigerators, and washing machines). The total

value of these plant exports was $640 million,

indicating the small scale of many of the

projects.17

During the same period, an additional 182

cases of technology transfer unrelated to large

plant exports occurred.18 The number of these

contracts rose rapidly in late 1984 and early

1985, a large proportion involving parts supply for knockdown production in China.

About 75 percent of the cases involved technology transfers to machinery-producing firms

in China. Fifty cases involved electrical machinery-producing firms primarily involved in

consumer goods production.lg While only 16

cases involved industrial goods production,

these included calibration and instrumentation

technology needed for “industrial renovation”

projects in China. Table 11 provides a summary of technology transfers from Japan to

China in the 1984-85 period.

ITMore th~ 35 percent of the projects were valued at less

than $1 million. Data from Japan Machinery Exporting Association, Tokutei Shijo no Shoraisei Bunsek” Chosa Hokoku, July

1985, p. 160.

‘“In this study, technology transfer is defined as contracts

involving any of the following: licensing, software and management, consulting, or parts supply.

‘

gAbout 68 percent of the cases in this category (electrical machinery producing firms) involved technology for production

of TVs, washing machines, and refrigerators.
Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 121

Table 11 .—Technology Transfer From

Japan to China, 1984-85

Number Percent

of Cases of total

Min!n g 2 1

Construct Ion 2 1

Manufactunn g 169 93

Electrical machinery ... ., 50 29.6

Industrial ., 13

Consumer ., ., ., 47a

General machinery . 38 22.5

Transportation machinery ., 2 5 14.8

Textile machinery ., 25 14.8

Transportation and

communication s 1 .5

Wholesale, retail ... ~ ~ ~ ~ ~ 1 .5

Service s 7 4

Total ., ~ ~ ., . . 182

a l ncludes prl marrl y TV wash [ng machl ne refrigerator and other consumer

product rnanu(acfurlng technoioqes

SOURCE Japar Machtnery Expo~t(ng Assoclatton Tokuter Shljo no Shoratse!

Buosek( Chosa Hokoku July 1985 p 182

Joint venture projects involving Japanese

and Chinese firms provide another vehicle for

technology transfer. China’s leaders have indicated their dissatisfaction with the level of

foreign investment and have taken a number

of steps to attract additional investment. Japan, in particular, has come under criticism. ’”

In view of the large volume of Japanese exports, the argument goes, Japanese firms

should be more involved on the ground in investment projects likely to involve technology

transfer.

China’s data on foreign investment cover a

number of categories, including cooperative

ventures, joint development projects (particularly in offshore oil development, compensation trade, processing arrangements), and equity joint ventures. ” The Japan External

Trade Organization (JETRO) data collected by

the Ministry of Foreign Economic Relations

and Trade indicate that by late 1984 Japanese

firms were involved in 26 of 429 equity joint

ventures that Chinese firms established with

foreign firms. Japanese investments were —

“’See, for example, “Foreign Investment Placings Fail to

Satisfy Chinese, Financial Times (London), Jan. 30, 1986, p. 6.

“See Nai-Ruenn Chen, Foreign In\~estment in China: Current

Trends, U.S. Dept. of Commerce: March 1986, for a discussion

of China’s investment data. Statistics recorded here indicate

that Japan was a close third (following Hong Kong and the

United States) in cumulative pledged equit~’ joint investment

by the end of 1984. See p. 11.

limited and focused primarily on offshore development projects. An additional 80 investments were reported in 1985, but investments

from other countries also grew rapidly. As a

result, Japanese investors were involved in

only about 3.4 percent of the total number

(2,300) of foreign investments reported by

China.”

A good share of the investment projects outside the oil development field were in service

areas such as hotel and restaurant ventures

and leasing operations. Joint manufacturing

ventures involved primarily production of consumer goods. During 1985 the number of cooperative projects increased, and JETRO’S

listing indicates that a greater number involved higher technology and manufacturing

operations. Nippon Steel, for example, signed

a contract worth $100 million with a Chinese

partner to setup an engineering company. In

another case, a Japanese firm contracted with

the Chinese Academy of Sciences to establish

a joint software development firm.23 In 1986

Furukawa Electric agreed to a joint venture

in Xian for producing optical fibers and cables,

Japan’s experience in China is thus extensive, yet technology transfer has been concentrated in certain areas, especially technical consulting and training associated with plant

exports. A firm like JGC, for example, has had

more than 21 large contracts in China involving oil, petrochemical, and gas production

projects. In these projects technology transfer has occurred, often involving firms from

other supplier countries, in the sale of patents

and the provision of know-how.

Perhaps the prime example is Baoshan, the

large steel works completed outside Shanghai

in 1985. For Nippon Steel, the major Japanese

company involved in this state-of-the-art steel

complex, the project offered a chance to train

young Japanese engineers in a governmentsupported effort during a period of intense

global competition in the industry. Although

“See Charles Smith, “The Ties that Bind, ” Far Eastern Economic Re\’iew Apr. 24, 1986, p. 74.

‘Wee, for examples, Japan External Trade organization

(JETRO), China ,Vewsletter, No. 58, p. 21.
122 Technology Transfer to China

the project has suffered many problems, including a scaleback in the early 1980s, it involves significant technology transfer from Japan to China. More than 1,200 Chinese have

been trained in Japan and hundreds of Japanese have been sent to China.24

Firms like the Nippon Electric Co. (NEC)

have developed carefully honed technology

transfer strategies. NEC has joined with a Chinese partner to produce 16-bit microcomputers. It is also a partner in the Japan-China Software Center. Interestingly, NEC training of

1,000 Chinese software engineers has been a

boon to NEC, which faces a shortage of trained

personnel. 25 NEC’S strategy involves technology transfer to China in certain areas that

complement NEC’S own needs and marketing

plans.

To summarize, technology transfer from Japan has occurred to a great extent in exports

of standardized production facilities for manufacturing consumer goods, and in training

and technical consultation for large infrastructure projects.2G Specialized technical exchanges

between Japanese and Chinese organizations

are also a vehicle. The Industrial Bank of Japan (IBJ) for example, runs seminars on financial services for Chinese trainees. There is a

constant movement of specialized personnel

between organizations such as the IBJ and the

Bank of China.

Technology transfer is fundamentally a people-to-people process, and the establishment

of hundreds of branches of Japanese firms in

China testifies to the importance of Japan’s

role. In 1984 more than 41,000 Japanese visited China, or more than 100 daily .27 (Many of

these individuals were undoubtedly primarily

involved in exports of products and services).

China’s factory renovation program involves

241kuo Hirata, “Baoshan Steel Works, ” Journal of Japanese

Trade and Zndustry, No. 5, 1985, p. 17.

“Interview with Yukio Mizuno, Senior Vice President, NEC,

November 1985.

2Qther Japanese firms like Toyota, which are major exporters

of vehicles to China and have extensive service operations there,

have foregone equity joint ventures. Many Japanese firms appear wary of China’s employment and other requirements on

foreign firms.

27 Kazuhiko Mitsumori, in Gendai, October 1985.

many Japanese consultants and advisors. On

the other hand, the Japanese Government has

funded only 300 scholarships for Chinese students although officials have expressed their

commitment to increase this number to 500

by 1989.

There is some truth as well as some misperception associated with the commonly held

view in China and Japan that not much technology transfer has occurred. The general pattern has been one of product and, to a less

extent, service exports, with transfers of technology occurring primarily in standardized

consumer product manufacturing or in the context of large projects. Such technology transfers may attract less interest than licensing

state-of-the-art technology, but they can be a

critical factor in industrial renovation projects.

Organizations and Participants:

Technology Transfer Japanese Style

Japan’s foreign economic policymaking system is more centralized than that of the United

States, but there is a range of perspectives on

technology transfer to China. The official Government position, reflected in programs supporting extensive Japanese participation in

China’s modernization, contrasts with a more

cautious approach by private sector firms to

technology transfer and investment.

Differences between government and business on technology transfer are, of course, well

publicized, and more the norm than the exception in the United States. In Japan a number of institutional mechanisms build consensus between public and private leaders

active in technology transfer. While Japanese

leaders question the notion that Japan has a

national strategy on technology transfer, the

generally complementary efforts of public and

private officials are certainly assisted by these

avenues for information exchange and consensus building.

At a government level, Japanese leaders are

committed to building economic ties with

China. Yet there is a range of views on specific issues that reflect differing institutional

missions. The Ministry of Foreign Affairs
Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 123

(MOFA), the lead agency in formulating foreign policy, has traditionally been careful to

ensure that policies toward China mesh with

Japanese policies toward other Asian countries.28 MOFA current policy toward China,

based on three principles mentioned earlier,

was developed in the late 1970s, in part to clarify debates over whether the Japanese Government should offer official loans and official

development assistance to China. In these debates, the Export-Import Bank, the Ministry

of Finance, the Ministry of International Trade

and Industry (M ITI), as well as Liberal Democratic Party (LDP) politicians played key roles.

MITI, the traditional leader of Japan’s postwar trade and industry policies, has developed

a view that Japan’s comparative advantage

lies in knowledge-intensive industries and a

more internationalist approach. M ITI view

is that Japan must promote the international

transfer of technology through overseas investments and other means to maintain its competitive position and mitigate trade frictions

with other countries .29

Debates among key ministries over levels

of official development assistance for China

have had more to do with the scope and mechanisms for participation in China’s modernization than with the fundamental rationale,

Whereas U.S. concerns over national security

are embodied in export controls, Japan sees

expanded economic interaction as the primary

avenue for attaining strategic goals vis-a’-vis

China.

Despite this formal consensus on overall policy directions, Japanese leaders contend that

there is no clearcut national strategy on technology transfer. Acknowledging their concern

over China’s criticisms of Japan for not transferring more technology, Japanese leaders

‘“Up un~l 1972, the Foreign Ministry was more reluctant than

the Ministry of International Trade and Industry (MITI) to open

relations with the People’s Republic of China (PRC) and more

intent upon preserving diplomatic relations with Taiwan, See

Chae-Jin Lee, China and Japan (Hoover Press, 1984), p. 12.

‘gThe report was prepared by the Planning Subcommittee of

the Industrial Structure Deliberative Council to MITI in preparation for the Tokyo summit in May 1986. See Afainichi Shirnbun, Feb. 1, 1986, p. 1.

promise to expand technical cooperation programs and financing of large projects. At the

same time, government leaders indicate that

China may be pressing too hard for the most

advanced technologies.30 Japanese policy

makers prefer a step-by-step approach because

they believe that during this transition period

in China a proper foundation must be built.

Japanese businessmen, in particular, appear

cautious about technology transfer to China.

They emphasize obstacles to technology transfer such as inadequate infrastructure, bureaucratic sectionalism, limitations on management

discretion in hiring and operating enterprises,

and China’s tendency to undervalue software

and training. These concerns explain in part

the willingness of Japanese business to sell

goods to China while avoiding extensive investments. Acutely aware of the special expectations China has concerning Japan’s contribution, they stress differences in Chinese and

Japanese negotiating styles and other factors

that set constraints on the ability of Japanese

businessmen to fulfill expectations.

Distinguishing Japanese approaches to technology transfer are key organizations that

bridge the distance between government and

business, expanding economic ties to China.

One such organization is the Japan China

Association for Economy and Trade (JCAET),

formed in 1972. JCAET is a hybrid organization that includes many retired government

officials (most of them from MITI), businessmen, and China experts from organizations

such as the Institute for Developing Economies. JCAET provides a wide range of services to Japanese firms interested in China

trade, such as detailed surveys of conditions

in China, while facilitating exchanges with Chinese leaders. The boundaries between MITI,

JCAET, JETRO, and other key institutions

are fluid in the sense that individuals are often

detailed from one organization to another to

help with specific projects. JCAET is thus part

300 fficial programs carried out by the Japan International

Cooperation Agency in the factory renovation area are explicitly

designed to promote transfers of standardized (rather than new)

technologies,
124 ● Technology Transfer to China

of a network of organizations that work closely

together to increase Japan’s knowledge of and

exchange with China’s economy. The perspectives of individuals and organizations vary, but

the network ensures that information is shared

and that major participants are cognizant of

key problems and issues. The effectiveness and

utility of information gathered through an extensive network in China is reflected in statements by Chinese leaders that Japanese understand well the intricacies of China’s contract

approval process.

The low-profile, consensus-building approach

carries over to bilateral exchanges as well. Japan and China have established the Twentyfirst Century Committee, composedof11 members from each country who exchange views

on issues of bilateral importance. On the Japanese side the committee is staffed by MOFA,

but the discussions are considered unofficial.

High-ranking leaders in the China field from

business and academe and former government

officials make up the Japanese delegation. The

committee is a mechanism for frank but highlevel and closed-door communications between

the two countries. Reportedly, the group has

discussed sensitive issues such as Chinese antiJapanese demonstrations and trade frictions.

Interestingly, a major focus of attention has

been youth exchange. At the committee’s instigation, a youth center is now under construction in Beijing, and a number of exchange programs for young people have been sponsored.

The committee is thus more than an advisory

group; it can marshall the resources needed to

implement projects.

Organizational and personal ties between

Japanese business and government leaders

with their Chinese counterparts are old and extensive. Yet, uncertainty about Japan’s role

in technology transfer remains. For both sides,

the impacts of this critical period of experimentation with new modes of bilateral interaction

will extend beyond the bilateral relationship.

Whether or not Japan will transfer enough

technology to meet China’s expectations remains an open question. On one hand, Japanese firms may continue to chart a cautious

approach to investment, waiting to see how

China will implement its policies and gradually

building expertise and confidence in their technology transfer capabilities. On the other hand,

expanded trade in more sophisticated products

and services appears likely now that regulations of the Coordinating Committee for Multilateral Export Controls (COCOM) have been

loosened. 32 Even if direct equity investments

remain comparatively limited, technology

transfer from Japan associated with such sales

will expand. If a few key Japanese firms demonstrate success in joint ventures involving

advanced technology transfer, moreover, others

will surely follow. Thus, while Japanese firms

and organizations may continue to use different modes and mechanisms for technology

transfer, they will likely continue to be the

most significant competitors for the China

market.

Europe

Technology transfer from Europe to China

takes all the forms seen in the transfers from

the United States or Japan. Technology is embodied in equipment, sold in conjunction with

equipment, sold independently as in licensing

arrangements, included in investments such

as joint ventures, and transferred by governments and institutions directly to China or in

the form of education received by students attending European universities.

Two-way trade between the European Community and China was almost $7 billion in

1985. Trade increased about 25 percent from

1984, thereby surpassing the U.S.-China level.

Table 12 shows the shares of the individual

countries.

31 For a detailed chart of the contract approval process for

Japanese-Chinese joint ventures, see Masao Sakurai, Kokusai

Kyoryoku no Wakugumi to Ho [The Framework and Law for

International Cooperation] (Tokyo: Sanshodo, 1985), pp. 202-3.

“Hitachi won a contract to export large-scale computers to

the Bank of China soon after the loosening of COCOM rules.

See “Hitachi to Export Computers to China, ” Asahi Evening

News, Feb. 14, 1986.
Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain 125

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

Percent

Total over 1985 Exports Imports Export/total

Germany ..$4,07 31.2 $2,87 -

-$1.2 0 70 “/0

Brltaln ... . . . . . 1,41 42.4 0.78 0.62 55

France ... ... . . . . . . 1.25 –2.4 0.67 0.58 54

Italy . . . . . . . . . . . . . . . . 1.68 21.2 1,00 0,68 59

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

The Federal Republic of Germany

Germany has the largest share of the European trade and the greatest financial involvement in China. China was Germany’s largest

trade partner in the developing world in 1985,

though China’s deficit in this trade may limit

future growth.33 China has established its

European Trade Center in Hamburg to facilitate China’s exports to Europe.

Technology transfer has been an important

part of this relationship. For instance, Schloemann-Siemans A.G. successfully competed

with Japanese companies for a $626 million

contract to supply a hot-strip mill at the Baoshan steel plant, largely by offering advanced

technology with considerable technology transfer. The company has brought many Chinese

designers to Bonn for training in modern management techniques. Germany has been particularly strong in transferring production

technology such as machine tools and chemical processing plants.

In a study of technologically oriented exports to China in 1984, Germany ranked third,

behind the United States and Japan, with 17

of the total of 182 exports.34 In 1985 the value

of technology exports from Germany may have

exceeded those of both the United States and

Japan, even though the number of contracts

did not.35 Machinery and production technologies or transportation equipment were the

largest components. Electronics have also been

important. In 1985 a complete semiconductor

production plant was exported, as were facilities for the production of floppy disks and

telecommunications equipment.

“Foreign Broadcast Information Service, Daily China Report,

May 13, 1986.

3’DeGlopper, op. cit.

‘5Liu Hu, “Technology Import Reaches New High, ” Bei’ing

l?e~riew, No. 10, Mar. 10, 1986,

Twelve joint ventures were established by

the end of 1985.36 None of them involves production of high-technology equipment. Most

have been with mid-size German companies in

areas such as food processing. One joint venture that doesn’t involve much technology but

may expedite European trade with China is

a shipping company that will use the TransSiberian Railroad to avoid the long delays in

Chinese harbors.

The largest joint venture is the Shanghai

Volkswagen Automobile Co. Ltd. (SVIV),

which started production of the Santana automobile in 1985. SVW is assembling kits imported from Germany at the rate of 800 cars

a month.37 Only a few parts come from China,

but it is hoped that eventually all will.3R

Many problems have been experienced, The

production line for the Santana was added to

a factory that had been producing small numbers of a car that had remained essentially unchanged in design for 27 years. The management team and the workforce had to be largely

retrained, and the German management found

that some of its methods were not applicable

to China. Distribution and service of the cars

in China have been unexpectedly difficult.

China has also had difficulty raising its share

of the capitalization, in part because of the

plummeting value of the yuan. Estimates of

future capital requirements for building the facilities for the local production of parts and

supplies have risen sharply, evidently causing

some ill will between SVW and Beijing. The

shortage of foreign exchange has also ham-

“Foreign Broadcast Information Service, China Daily Report,

Sept. 4, 1986.

“Yue Haltao, “HOW Volkswagen Performs in China, ” Beijing Rel’iew, No. 29, July 21, 1986.

3’H.L. Stevenson, “Chinese and Germans Team Up To Build

VW’ S,” Automotive News, Oct. 21, 1985.
126 ● Technology Transfer to China

pered China’s ability to pay for the kits, a situation similar to that faced by the Beijing Jeep

Corporation in its arrangement with American

Motors.

Licenses to manufacture have been more important means for technology transfer than

joint ventures. For instance, Motoren Werke

Mannheim AG has granted a license for the

production of diesel engines for agricultural

and construction uses, an area where China

could derive considerable economic benefit. A

more complicated agreement was signed by

Dr. Eng. Rudolf Hell Ltd. for the manufacture

of color separation scanning chronographs.

China will first assemble kits from Germany,

but within 5 years the manufacture should be

all domestic. The agreement includes training

of Chinese engineers in Germany. Siemans AG

has granted many licenses, which include training in Germany and startup assistance at the

Chinese plant.

The purchase of used equipment has become

a significant means for increasing production

capacity, though it obviously involves older

technology. China has purchased at least two

German factories, for motorcycles and bicycles, and a spinning mill and reassembled them

in China. These ventures have provided China

with manufacturing facilities considerably

more modern than the norm in China, at a small

fraction of the cost of new equipment.

In another form of technology transfer, the

ChineseWest German Technical Training Center has been established in Tianjin with a grant

of DM35 million. The center provides training in machinery, computers, electronics, and

instrumentation to about 400 trainees.

Germany’s program to send retired managers to China to provide advice and assistance

resulted in an unusually personal form of technology transfer when one of the volunteers,

Werner Gerich, was appointed the manager of

the Wuhan Diesel Engine Factory. The factory

was having major problems with production,

especially in the quality of the engines. Gerich

instituted a series of reforms that have significantly improved quality, volume, and profits.

With the backing of local officials and the

Party, he implemented an incentive wage system, streamlined the workforce, restructured

the management, and improved discipline.

Many problems still remain at the plant, but

Gerich is instituting a change in thinking that

may be a lasting legacy.

Over 1,000 Chinese students are in German

universities, and the number is growing. Compared with the 17,000 in the United States, this

number seems low. Perhaps the relatively few

overseas Chinese in Germany and the dearth

of German-speaking Chinese are factors.

Germany has much to offer China. Its technology for production is justly famous, and

that is the technology in which China is now

most interested. Quality control in particular

is a German strength that China can usefully

learn. In some areas, such as computers, German technology has lagged behind that of the

United States and Japan, but not by so much

as to affect the utility of Germany’s products

to China. It is reasonable to conclude that unless economic factors in China interfere, this

relationship will continue to grow. If Germany

has been cautious in starting joint ventures

or other investments in China, it is not because

of particular inhibitions about China but because German industry is cautious in general

and does not need new productive capacity.

The German Government’s major role in

technology transfer is that of facilitator more

than participant. The private sector has the

lead in making contacts, negotiating the terms,

and fulfilling contracts. The Government has

signed a large number of accords on science

and technology cooperation with China, opening the way for industry. These have been

arranged by the Ministry of Research and

Technology (BMFT). The Economics Ministry,

equivalent to the U.S. Department of Commerce, has an Office of East Asian Affairs and

provides information and advice to industry,

in part through the Federal Office of Foreign

Trade Information (Bundestelle fur Aussenhandelsinformation, or Elf A). BfA, whose

closest analog in the United States is the Foreign Commercial Service, analyzes economic,

legal, and political information, particularly in
Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 127

developing countries, to assist German companies in decisions on trade and investment.

The Economics Ministry and the Foreign Office have developed a trade policy supportive

though cautious of China’s development. China

is not seen as either an economic or political

threat, whereas technological cooperation is

seen as a way of encouraging China to remain

open to the West and moderate in its policies.

The German Government therefore encourages

industry to trade with China and engage in

technology transfer. Traditionally, it has not

provided direct subsidies for exports, preferring to rely on market forces to reach economi- However, this POliCY cally sound decisions.

is apparently flexible since, as noted below, at

least one case of mixed credits has been announced.

The Federation of German Industries, a private-sector organization, provides services to

exporters and shares in the governing of the

BfA. The Joint Committee for Sine-Federal

German Economic Cooperation is a body of

government, academic, and industrial representatives that meet with equivalent Chinese

representatives annually to discuss economic

issues.

France

In general, France has been less successful

than Germany in trade with China. Exports

to China in 1986 totaled about $670 million,

less than one-quarter that of Germany. SinoFrench trade had been approximately balanced

but in 1985 China’s imports more than tripled,

whereas exports were stable.

Major French exports include aircraft (airbuses, helicopters, and eventually, perhaps,

fighters), ground transportation equipment

(trains, trucks, and river shipping), and telecommunications. Technology transfer appears

to be relatively more important for France than

Germany. The value of French exports involving technology in 1985 was $320 million, almost

60 percent of total exports.’” The type of tech- —

“U.S. Congress, Office of Technology Assessment, Technology Transfer to the Middle East, OTA-ISC- 173 (Washington,

DC: U.S. Government Printing Office, September 1984),

4“I,iu, op. cit.

Photo creu(t Nat(ona/ CouncI/ for U S Ch/na Trade

Air navigation equipment at the Beijing Airport. This

equipment was supplied by France.

nology transfer, however, differs some from

Germany’s, with less emphasis on setting up

manufacturing facilities and more on selling

specific equipment with associated technology

and training. For instance, France led a European consortium that sold 300 locomotives to

China. The $450 million contract included technologies of design and manufacture (as did the

GE contract discussed in ch. 4); manufacturing equipment was included, but it does not

appear to have been a major point of the

contract.

In another major transaction, CIT-Alcatel

(a subsidiary of the state- owned Compagnie

Generale d’filectricit~ [CGE]) sold a modern

telephone switching system cabable of handling 100,000 lines. As a precondition, an electronics lab for the testing and manufacture of

telecommunications equipment was included.

This lab will be used for microwave, laser, and

fiberoptic technologies.

China signed a contract for two French nuclear reactors late in 1986. Some opposition

has arisen in Beijing (largely because of the

drain on foreign exchange) and in Hong Kong,

because of safety concerns. Germany’s alternative bid would have permitted China to participate in the design of the plant, but China

showed little interest. The United States was

precluded from competing for this sale because

a nuclear cooperation agreement had not yet

been signed. The contract does not include ex-
128 . Technology Transfer to China

tensive technology transfer, but the experience

will help China to advance more rapidly with

its own nuclear industry. However, China will

require considerable additional assistance before it will be able to produce a world-class reactor independently.

In several negotiations, the French have noticed that China first asked for the latest technology but later realized that older technology

would be more suitable. For example, the locomotive technology eventually selected uses

continuous traction, a technique that was

phased out in France 10 years earlier in favor

of synchronous traction. The nuclear reactors

were also not the latest that France has to offer. In both cases, the French were willing to

transfer the more advanced technology, but

the Chinese independently decided to back off.

The French pattern of establishing joint ventures has been remarkably similar to Germany ’s. None of France’s 11 joint ventures has

involved high technology. Most have been in

food processing, but the largest is in the automobile industry. Peugeot created The Guanzhou Peugeot Automobile Co. to build about

15,000 light trucks (pickups) per year.

One area in which Sine-French cooperation

has been very strong is science. A wide range

of cooperation agreements has been signed,

and many Chinese researchers spend a year

or more working in French laboratories. It is

likely that this scientific cooperation reinforces

the readiness of China to acquire technology

from France.

There are about 1,000 Chinese students in

France, mostly in science and technology. The

total is not growing very rapidly and is likely

to remain proportionally well below that in the

United States because French scholarships are

mostly government sponsored and are neither

as flexible nor as generous. Chinese students

are frequently funded by their government for

only one year; if they wish to remain, they must

find their own support.

The French Government plays a much more

active role in most aspects of technology transfer than do the German and U.S. Governments.

Most companies involved with high technology are owned by the French Government,

such as CGE. While the effect on corporate efficiency and vigor might be questioned, this factor ensures close cooperation between industry

and government. Government officials often

see themselves as representatives of French

business in a way that China is likely to find

familiar and comfortable. Although French policy may be changing (the Government has already announced that it intends to divest itself of CGE and other major companies), this

arrangement has worked well, at least for initiating technology transfer arrangements. For

instance, the nuclear vendor Framatome is

Government owned, and the Government

made strenuous efforts to win the Daya Bay

contract, including direct negotiations and concessionary financing. The French National

Railroad will have a permanent representative

in Beijing, presumably to encourage transactions such as the contract for the locomotives. However, the overall number of French

officials in China is not very high, and theoretically the burden of concluding agreements

is on the companies.

United Kingdom

Britain is China’s second largest trading

partner in Europe and a major supplier of technology. The largest single transaction (250 million pounds) has been the sale of the turbinegenerators for the Daya Bay nuclear power

plant, in conjunction with the two reactors supplied by France, though little technology transfer was involved. Other major exports include

scientific instruments, synthetic fibers, steel

products, telecommunications, and coal mining equipment. As with other European countries, China’s trade balance with Britain is in

significant deficit.

Britain is unique among the industrialized

trading partners of China in its control of Hong

Kong. Hong Kong’s trade with both Britain

and China greatly exceeds trade between Britain and China, but this does not appear to be

a major conduit for British goods relative to

other countries. Furthermore, any special rela-
Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain 129

tionship that Hong Kong provides is likely to

dissipate over the next decade, when Hong

Kong reverts to China.

Appendix 6 in Volume II to this report lists

six dual-use technology transfers from Britain (1984-85), campared with three from Germany and four from France, suggesting that

Britain has a relative advantage in high-technology exports. The pattern of Britain’s technology transfers to China resembles France’s

more than Germany ’s. Licensing, training, and

sales of specific equipment and information

have been more important than production

lines, though several of the latter have been

supplied. British Rail Engineering has a contract for 5 million pounds to sell three advanced

rail coaches and the design technology to the

Changchun Railway Passenger Works. Assistance will also be provided in modernizing the

plant. 4’

Racal Electronics has had several major contracts involving equipment, technology, and

coproduction arrangements. It has sold radar

for ship and air traffic control and transferred

the technology to produce radar equipment.

The technology transfer appears to have been

a key element in gaining contracts for Racal.42

The production lines that Britian has sold

include plastic sheeting and audio and video

tape. However, Britain appears to have played

a bigger role in helping get other projects completed after they run into trouble.

There have been only about 12 joint ventures, but they have been the result of some

of the largest contracts. Lingnam Microelectronics Investment Co. (a consortium of British companies) is building a $50 million facility to produce large-scale integrated circuits

and microcomputers. Pilkington Brothers is

constructing a plant near Shanghai in partnership with two Chinese companies to produce

high-quality glass using modern technology.

The plant will cost $120 million and will be the

largest producer of glass in China when it

comes on line in 1987.43 This project, as with

“China Business & Trade, May 23, 1986.

4’Nigel Campbell, China Strategies—7’he Inside Story, University of Manchester University of Hong Kong, 1986.

“Kelly Ho Shea, ” Modernizing Flat Glass Production” The

China Business Retiew, Volume 13, Number 3, May-June 1986.

many other large joint ventures, has had foreign exchange and managerial difficulties.44

Other joint ventures include heavy truck assembly by Aveling Burford and automobile

batteries by the Chloride Group and Singer.

Coproduction is likely to be more acceptable

than joint ventures to British companies. Racal Electronics has noted that coproduction

offers almost the same benefits to China and

avoids many of the problems.45

Much of the technology transferred has been

fairly basic: pumps to drain coal mines, reinforced concrete pipes, wire-rod mill equipment,

technology for foundries, and extrusion equipment for aluminum products. Some have been

quite advanced: microelectronics, fiberoptic,

telecommunications, and radar.

British companies appear more concerned

than French or German companies about future competitiveness, at least for traditional

technology industries. As in other countries,

many companies have been disappointed following their expectation of the 19’70s, especially considering the number of Chinese visitors they have received. Of the 185 Chinese

delegations in 1985 who looked at British products and technologies, very few have followed

up their visits, and fewer still have produced

any business.

One area in which Britain has excelled has

been in education and training. Britain has

over 1,200 Chinese students, more than in Japan, Germany, or France, and the number is

rising rapidly. As with the United States, the

popularity of the English language, the reputation of the universities, and the availability

of scholarships are major attractions for the

Chinese. Moreover, British industry is training over 1,000 Chinese, mostly in technological areas. Training is a standard feature of

China trade and investment and will probably

increase in the future.4G

The British Government is more of a facilitator than a participant, as is the case in

Germany. Most technology transfer is accom-

~41Nigel Campbell, op. cit.

‘

i Ibid.

4fiSino-British Trade Review, January 1986.
130 ● Technology Transfer to China

plished by the private sector through commercial contracts. The Government provides information and some financing, part of which

is subsidized, and helps create an environment

conducive to doing business.

High-level British officials visit China regularly to make contacts, present British capabilities, and negotiate bilateral agreements.

Queen Elizabeth toured China in October 1986

while a Sine-British trade and economic cooperation seminar met on the royal yacht. The

seminar resulted in the signing of 13 agreements, memoranda, and letters of intent on cooperative projects, including a joint venture

on a large steel plant and a major telecommunications project.47

The Department of Trade and Industry (DTI)

is the major British Government organization

involved in export promotion. The regional

branch is under the direction of the Assistant

Secretary for China, Hong Kong, and Macao.

Trade with Hong Kong is about three times

that with China, but China probably gets more

attention, in part because the trade is growing rapidly and the potential is so great.

The British Overseas Trade Board, a division of DTI composed of government and industry officials, provides market research and

intelligence. Much of the information on China

comes from the Sine-British Trade Council

(SBTC), a semiprivate advisory group (one of

15 such groups) that plays a role somewhat

akin to that of the National Council for U. S.-

4

’FBIS, China Daily Report, Oct. 16, 1986.

China Trade. The SBTC is associated with The

48 Group of British Traders with China, which

maintains offices in both London and Beijing

and provides consulting services and contacts

for trade in both directions.

These efforts have produced results, but perhaps much less than had been expected. Britain has several important advantages—the

Hong Kong link, the English language, an excellent research and development system, and

the distinction of being the first Western country to recognize the People’s Republic of China

Government–but these have not given Britain a notable head start. Germany has done

much better, and Italy moved ahead in 1986.

Several factors suggest themselves to explain this indifferent record, and some of them

may have relevance to the United States, also.

Britain has not been strong at production, and

Germany’s success is at least partially due to

its excellence in production machinery, which

is at the top of China’s list of needs. The United

States has also lagged in the production of

equipment such as machine tools and has not

competed well in China. British Governmentsubsidized financing became significant only

recently, as described below, while Italy’s exports to China have benefitted from aggressive government financing. Germany’s success

despite a reluctance to subsidize financing

shows that is not a requirement, but it helps.

British industries also seem to be unaggressive and less innovative compared with those

from other countries. A few are major world

players, but Britain is more of a financial center than an industrial one.

EXPORT CONTROLS

The major countries supplying advanced

technology to China today are all members of

COCOM, the voluntary multilateral organization set up to coordinate controls on exports

to the Soviet bloc. The goal of joint exportcontrol efforts is to prevent access by the Soviet bloc to weapons and advanced technologies with military significance. COCOM members have developed, however, quite different

perspectives on and approaches to trade with

the Soviet bloc, leading at times to controversies among them.48

4“See OTA, Technology and East-West Trade (September

1979); OTA, Western Technology and Soviet Energy Avm”lability (November 1981); OTA Technology and East-West Trade;

An Update (May 1983).
.

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

Regulations on exports to China were significantly relaxed by COCOM in late 1985, as

discussed more fully in chapter 8. COCOM

member countries were authorized to approve

certain exports to China of equipment and technology with notification to COCOM.49 COCOM

review is still required for more sophisticated

dual-use technology, for military exports, and

for nuclear exports. These changes appear to

have been well received by COCOM members

and by China. Earlier concerns about “differentiating” China in COCOM policy from Soviet

bloc nations have apparently proven to be no

obstacle.

Nevertheless, for several reasons, industry

in particular remains uncertain about the rationale for multilateral export controls, the

functioning of the COCOM system, and the

implementation of domestic export administration systems by COCOM countries. Company representatives have at times contended

that other participants (firms and governments) are not following the same game rules.

Because the technical underpinnings of the

COCOM list are not made public for reasons

of national security, and because COCOM procedures and discussions are treated as confidential, there is room for misunderstanding.

Furthermore, perceptions tend to lag behind

the realities of change in export controls.

Businessmen on visits to China see advanced

technologies supplied by firms from other

countries as signs of COCOM rule-breaking,

but such charges are often mistaken. It should

be emphasized that these complaints are in no

way unique to U.S. exporters; European and

Japanese businessmen also question whether

the United States uses COCOM to its own

advantage. 50 Competition for sales in the Chi4’COCOM member countries now also approve re-exports to

China of such equipment and technologies. In such cases, notification to COCOM is made.

“’This type of complaint occurred, for example, when the

United States instituted a liberalized export policy for China

in 1983. At that time, certain types of exports (in the “green

zone”) were identified as likely to be approved. For those exports (including “green zone” exports) requiring COCOM review, the United States continued to submit cases to COCOM

for approval. Others suppliers charged, however, that U.S. export controls for China were loosened prior to COCOM policy

changes, git’ing U.S. firms some advantage.

nese market thus raises collective problems for

Western suppliers.

Several situations could lead to misunderstandings about export controls. The clearest

case, from a Western alliance perspective,

would be if a COCOM member government

willfully circumvented the COCOM rules or

“looked the other way” while domestic firms

sold to dummy companies that were conduits

for illegal trade. But while charges of “cheating” are often heard, OTA has not been able

to document such cases.

Another complaint centers on differences in

the approaches to export controls taken by

various supplier countries. Because the major

supplier countries devote different resources

to export control, process licenses at different

rates, and have different legal bases and diverging traditions of government-business relations, uncertainty abounds concerning the

actual workings of the systems of the other

countries.

Still another problem stems from different

interpretations of the technicalities of exportcontrol specifications for particular products.

The concept of “national discretion” is built

into the system. Some governments appear

to be more willing than others—the United

States, in particular-to make more liberal

interpretations that are helpful to national

firms. Since early 1984, U.S. semiconductor

equipment manufacturing firms have complained that U.S. export regulations prohibit

them from exporting single-wafer plasma etching systems to China, although other COCOM

countries have approved such exports. They

have similarly complained that the United

States denied exhibition licenses for digital optical transmitters and receivers to U.S. firms,

while Japanese firms were able to show similar

products at a Shanghai trade show in 1986.51

Differences in interpretation of regulations

may relate to the fact that some COCOM countries have published the changes in COCOM

—-

“American Electronics Association, Case Study Report:

American Electronics Association Export Control Task Force,

Mar. 12, 1987, pp. 18-19.
132 . Technology Transfer to China

policy concerning exports to China; other countries have not.

To the frustrated businessman, all of these

problems stem from differing approaches to

export controls. Only the first case constitutes

a clear breach of joint understanding among

COCOM governments, which would be legitimate cause for multilateral concern. However,

other types of differences also cause resentment and misunderstanding even though they

are primarily domestic issues. From a public

policy perspective, however, it is critical to distinguish these differences in approaches to export controls. Recent changes in COCOM policy on exports to China appear to have brought

the policies of these countries closer together,

but significant differences in approaches remain. Improved understanding of export-control systems of other COCOM countries could

help clarify the complaints that exporters

sometimes make about U.S. policymaking.

Japan

The basis of Japan’s export control system

is the Foreign Exchange and Foreign Trade

Control Law. Japanese export controls cover

dual-use technologies, ordnance, and atomic

materials. The exporter is required to obtain

permission from MITI when exporting these

items, particularly to Communist bloc countries. MITI has made public a list of strategic

goods covered by export controls and an outline of the approval system for exports to various countries.62 A Cabinet order stipulates that

MITI permission be required for transfers of

technology deemed by MITI to present possible hindrances to the maintenance of international peace and security. According to the law,

punishment for exporters (including corporations) who ship strategic goods without proper

permission is imprisonment for not more than

3 years and/or a fine of not more 1 million yen

(about $7,000 at an exchange rate of 145 yen

to the U.S. dollar).

‘

2 Nihon Boehi News, Bueki Tetsuzuki Zenki, vol. 30, 1987,

p. 163ff.

,)

‘UNlnIa

C4

II ,,,,,,,

f,

1+ w ,, ,,

t G, , ,

)’

%.

,,,&,,,

FVtofo credlf Naf/orta/ Courm// for U S .Ch/rta Trade

An optical fiber waveguide technical equipment bay

with 120 channels in Wuhan. China has imported

optical fiber technology from several countries and

is rapidly gaining proficiency. U.S. companies have

been refused export licenses.

Several MITI offices are involved in reviewing exports. Most exports are first reviewed

by the Machinery and Information Industries

Bureau, where preliminary approval is given.

In practice, most firms consult with MITI routinely and informally before drawing up a formal contract. The formal review often takes

place quite quickly, since preliminary discussions have already taken place and any obvious problems have been worked out. The second-stage review is handled by the Export

Division of the Trade Bureau, where the legal

aspects of the contract are considered and a

detailed payment schedule reviewed. MITI’s

Security Export Control Office reviews appli-
Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 133

cations for export of strategic goods and technologies to the Soviet bloc and China.

There is evidence that Japan has placed more

stress on export controls in recent years, augmenting MITI capabilities in this area. In particular, Japan has identified firms illegally exporting to the Soviet Union and published their

names and imposed orders to stop exports.53

In May 1987, the government of Japan ordered

Toshiba Machine Co. and C. Itoh to suspend

sales to the communist bloc after it was discovered that these firms had made unauthorized sales of militarily critical machine tools

to the Soviet Union.54

MITI has recently established guidelines to

regulate Japanese exhibits at trade fairs in

Communist bloc countres. Also indicative of

growing commitment among Japan’s leadership to restrict Soviet access to sensitive information is LDP sponsorship of a bill that imposes stiff penalties on disclosure of official

secrets, despite opposition from other parties

that fear the effect could be to limit freedom

of speech.55

Soon after COCOM controls were relaxed,

there were reports of new high-technology sales

of semiconductor manufacturing equipment

and large-scale computer systems by Japanese

firms to China. The speed with which these exports were approved by the Japanese Government indicates a general predisposition to support high-technology transfers that are not

clearly among the items controlled by COCOM.

However, Japan is unlikely to participate in

military sales.

While Japan’s export approval process generally operates quite rapidly, a few cases involving exports to China have met with some

delay and controversy. In one case, the export

“See Nihon Keizai Shimbun, Dec. 27, 1984, for a report of

an interception by Japanese customs of an export of a sonar

system to the Soviet Union.

54 See “Firms Barred from Exporting to Communist Nations, ’

Kyodo, May 15, 1987, FBIS, Daily Report; Asia & the Pacific,

May 19, 1987, p. C2.

55Such a bill was submitted to the Diet in 1985, but was abandoned after opposition parties entered into prolonged debate.

In November 1986 a special LDP committee was considering

whether to resubmit the bill.

of VCR manufacturing equipment was permitted, but with modifications that protected

the sensitive technologies.56 In another case,

it was reported that MITI forced changes in

a training program for computer software because part of the course related to militarily

useful computer graphics.57

The Japanese Government, if not some private Japanese companies and individuals,

appears to have supported COCOM controls.5R

OTA was unable to obtain evidence of instances where the Japanese Government knowingly evaded COCOM review of items on the

control lists. Because of its peace constitution,

Japan has prohibited most exports of military

equipment and technology .59

Japan’s approach tore-exports and extraterritoriality is more similar to that of Western

Europe than the United States. Japan takes

a negative view toward extraterritorial applications of laws. The Japanese Government requires documentation when strategic goods or

technologies are exported, but no attempt is

made to ascertain whether retransfer has

occurred. GO In light of the large volume of trade

within Asia, strategic goods and technologies

could thus be diverted through third countries.

Europe

European countries have historically been

more export dependent than the United States,

and some governments have attempted to expand economic interactions with the Soviet

bloc even during periods when political relations were cold. Economic sanctions against

the Soviet Union, as proposed by the United

States from time to time, have often been

— — —

“The Yomiuri Shimh.m reported on Mar. 28, 1987 that MITI

had issued warnings to firms involved in illegal expots of electronic equipment to China.

“See Nihon Keizm” Shimbun, Jan. 26, 1985, p. 7.

5“See “Japanese Held for Selling U.S. Fighter Secrets, ” Financial Times (London) May 21, 1987, p. 3.

‘The United States and Japan have, however, recently worked

out an arrangement to permit the export of such technology

to the United States. See U.S. Department of Defense, Japanese Mti”tary Technolo~’: Procedures for Transfers to the United

States, Feb. 1986.

‘“Import certificate from the foreign government and delivery verification.
134 ● Technology Transfer to China

viewed by Europeans as naive and futile, however sympathetic they may be to the motivation. Efforts to withhold gas pipeline technology in 1981 were rejected even by the closest

U.S. allies. There is, nevertheless, a general

feeling by major European governments that

COCOM has proved a valuable tool for thwarting the Soviet bloc’s acquisition of advanced

Western technology because COCOM focuses

on an agreed upon list of technologies with

clear security implications for all members.

Europe’s export policies have evolved in

keeping with this philosophy. Exports will be

approved unless there is a good reason to refuse them. This evolution has led to a recognition that China can be treated quite differently

from the Soviet Union without affecting international security. China is technologically far

behind the Soviet Union and so could not

achieve the same strategic advantage from sophisticated imports; it will have limited ability to threaten even its neighbors for the next

few decades. Furthermore, unlike Eastern

European countries, China is quite unlikely to

pass technology on to the Soviet Union.

When OTA first studied this topic in 1979,

the potential for differentiation was recognized, but concern over repercussions from the

Soviet Union prevented the implementation

of preferential treatment.6

1 However, distinguishing China from the Soviet bloc has actually proceeded rapidly. In recent months there

has been informal talk in Europe of removing

exports to China from the COCOM process.

The prevailing sense is that, in general,

strengthening China is good for international

security because China will counterbalance the

Soviet Union, but also that caution should still

be taken about advanced technologies with

strategic implications.

In all the countries studied here, the export

control system is organized to respond quickly,

and relations between business and government appear to be less confrontational than

in the United States. Each country has a list

of technologies, evidently similar or identical

‘

lOTA, Technology and East-West Trade, November 1979.

to the COCOM list. As mentioned earlier, however, different countries have adopted different approaches to publishing changes to export policies stemrm“ng from the 1985 COCOM

agreement.

Companies in Germany are free to export except under certain conditions; for example,

when the technology is controlled by COCOM.

Industry is well aware of which technologies

are controlled. When a company has such a contract, it applies for an export license. The

Foreign Office (Auswii.rtiges Amt) and the Economics Ministry (Bundesministerium fur Wirtshaft) review the applications and decide if the

license has to go to COCOM. If not, the application is completed in a few weeks. German

companies can sue the German government if

they are not satisfied that a denial was based

on a threat to national security .62

France has a somewhat more complicated

system, perhaps partly because France exports

large quantities of weapons and Germany does

not. Control is facilitated by the close relationship between government and industry. Export applications are submitted by industry

to the Customs Office. If the application involves sensitive technology, it is sent to the

Ministry of External Relations and the Ministry of Defense. Some of the criteria used for

evaluating an application are:

1.

2.

3.

4.

The

the impact on national security,

the impact on international undertakings,

such as COCOM,

nuclear proliferation, and

private-sector concerns, including the impact on industry.

Directorate of External Economic Relations may play a more promotional role in the

considerations. An interministerial committee

has been established to assess overall commercial and strategic concerns. Discussions are i%

quent, perhaps several times a week.

The United Kingdom uses a system similar

to the German approach in that companies are

‘

zFor a more detailed description of European countries export control practices, see OTA, Technology and East-West

Trade, November 1979.
Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 135

free to export unless told otherwise. License

applications are handled by the Department

of Trade and Industry. An interdepartmental

committee, including the Ministry of Defense

and the Foreign and Commonwealth Office,

discusses the implications of each case of sensitive technology. The committee usually

reaches a consensus quickly, but occasionally

sends the case to the ministers for resolution.

The prevailing philosophy appears to be that

exports are good except for a relatively few

cases where the reasons to hold back are compelling. Technology transfer to China rarely

involves such reasons, though Britain is not

prepared to send large quantities of military

technology.

In general, these systems are more collegial

and less legalistic than in the United States,

and are more attuned to approving exports.

These differences may result in approval of

some exports that would be denied in the

United States, but OTA has not been able to

document any pattern of major differences in

the level of control. Each country (and especially its exporting community) appears to be

somewhat suspicious of the others, especially

about the interpretations of technical stipulations on exports and the tactics used at

COCOM. These suspicions apply to the United

States, as well.

AID AND EXPORT FINANCING

Countries supplying technology to China

have also developed different approaches to

promoting trade and technology transfer.

Some countries, such as Japan, have established extensive aid and financing programs,

whereas the United States has no aid program

and only limited official financing.

These diverging approaches stem from different views about the proper role of government in trade and technology transfer. While

the general predilection in the United States

has been to limit the role of government in technology transfer, except where national security is at stake, in practice many reasons have

been used to justify positive intervention.

Strengthening the economies of developing

countries friendly to the United States and

promoting U.S. commercial interests are

among those that have been applied to support large aid programs in countries like Egypt

or export financing for sales of U.S. aircraft

overseas.

Although some of the major suppliers appear more willing to use aid and financing,

these policies are the subjects of ongoing debate and revision. There is a good deal of variation in the mechanisms used. Britain, for

example, has recently inaugurated a large

financing program for China. Science and technology and student exchanges have been prominent in U.S. Government policies. As with

export controls, however, differences in promotional policies are much more differences of degree than kind.

It is difficult to evaluate the commercial advantage accruing from promotional programs.

However, in some cases large aid or financing

programs have opened the door for national

firms to contracts that probably would not

have been possible otherwise.

Still, the interplay of commerce and aid

raises some knotty questions. There is a danger that the supplier governments, by providing extensive financial support or “tied’ aid

programs, up the ante for participation by all

foreign firms. The Organization for Economic

Cooperation and Development (OECD) countries have attempted to deal with the problem

by setting guidelines for export credits. Such

agreements, however, are hardly all-encompassing. The United States, in particular, has

pressed for a higher grant element in mixed

credits that combine official export financing

with overseas development assistance.63 Given

“In 1986 there were numerous reports of disagreements among

the OECD countries on mixed credits. See “Aid, Trade and Subsidies, ” Financial Times (London), May 3, 1986, p. 16.
136 ● Technology Transfer to China

the severe budgetary constraints in the United

States, large-scale financing programs abroad

(especially those involving mixed credits) are

viewed with concern.

Development Assistance

Japan

Since 1979 Japan has supplied more than

$1.5 billion of official development assistance

(ODA) to China, 52 percent of the aid from all

sources, including multilateral organizations.G4

The International Development Association

of the World Bank was the second largest

source of aid (14.6 percent); the third was West

Germany (13.2 percent).” The United States

provides no bilateral ODA to China.

By 1982 China had become the number-one

recipient of Japanese ODA. In 1985 Japan provided China with $388 million of ODA (on a

net disbursement basis). Japan’s large aid program in China reflects not only the Japanese

Government’s high priority on aid to China,

but also the growth of its aid program worldwide. By 1984 Japan took second place behind

the United States among the major development assistance countries (DACS).GG Japanese

leaders pledged to double ODA again during

the next 7 years. In 1985, however, Japan’s

ODA fell by 12.1 percent from the previous

year.G7

The level of ODA, however, continues to be

a point of some dispute among government

a~encies, one fought out in annual budget cy -

cres. The four ke~agencies are the Ministries

of Foreign Affairs (MOFA) and Finance, MITI,

“’’Chugoku ni tai suru Gaikoku Enjo no Doko” [Trends in

Foreign Aid to China], Kikin Chosa Kiho [The OECF Research

Quarterly], No. 49, June 1986, p. 185. (Based on OECD data.)

65 Between late 1981 ~d e~ly 1985 the World B~k Ioaned

China more than $2.3 billion ($1.3 from International Bank for

Reconstruction and Development and $1.0 from International

Development Agency). See Nihon Kogyo Ginko [Industrial Bank

of Japan], Sm”kin no Chugoku no Seiji Keizw” Doko [Recent Political and Economic Trends in China], Oct. 24, 1984, p. 33.

“Development assistance countries, as designated by the

OECD.

“One reason for the decline was that committed loan funds

were not used in many cases because recipient nations were unable to provide matching funding, The decline in Japanese aid

during 1985 probably pushed Japan back into third place behind France (and the United States) in terms of aid contributions.

and the Economic Planning Agency (EPA).

The Overseas Economic Cooperation Fund

(OECF), which administers loans, reports to

EPA, whereas the Japan International Cooperation Agency (J ICA), which provides grants

and technical assistance, is under the jurisdiction of MOFA. The Export-Import Bank also

plays a role in that it provides loans to Chinese and Japanese corporations involved in development projects. Not surprisingly, the costconscious Ministry of Finance tries to keep a

lid on expenditures, while MOFA advocates

a stronger aid program.G8

Japan increased technical assistance by 14

percent. Multilateral aid increased, but the

grant element fell slightly and remained below

the OECD goal. The OECF provided $308 million in direct loans for projects in China.Gg

Loans for commodity purchases made up

about $133 million of this total. Between 1981

and 1984 more than $522 million of such commodity loans were provided by OECF for

China.70 These loans have generally been provided at 3 percent interest, with repayment

over 30 years. Such commodity loans supported purchases of equipment at the Baoshan

steel plant and the D“aiqing petrochemical refinery. The purpose of commodity loans is to

assist countries facing severe ba.lance-ofpayments imbalances or shortages of hard

currency.

The bulk of Japan’s official direct loans to

China, however, were in the form of project

loans to support development of economic and

social infrastructure, such as telecommunications and transportation systems. These loans

cover procurement of goods and services for

specific projects. Between 1980 and late 1983,

Japan provided support for six large projects

in the first round of project aid, Total funding

“In late 1985, the Ministry of Finance argued that Japan’s

ODA should be reduced by the same margin as the yen’s appreciation against the dollar. See Asahi Evening News, Dec.

5, 1985.

“9Kaigai Keizai Kyoryoku Kikin IOECF], Gyomu Hokokusho

[Administrative Report], Mar. 31, 1985, p. 10, calculated at

$US1 = 231.5 yen.

‘°Calculated at $US1 = 249 yen (1982 rate). See Kaigai

Kyoryoku Kikin IOECF], Chugoku En Shakkin no Gm”yo [Summary of Yen Loans for China], November 1984.
Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain 137

for these projects came to over $800 million.

The projects include three: to develop railroads,

a hydroelectric plant, and two ports. Under the

second round of projects, Japan has pledged

to provide another $2 billion to support seven

large projects. Among these is one to develop

telecommunications in Shanghai and other

cities.

In principle, Japan’s loans for Chinese projects are “untied.” That is, firms from other

countries are eligible for participation in the

projects. Since the early 1980s all announcements for bidding on projects supported by

Japanese aid in China have been open in this

sense.7’ However, in the early 1980s, significant portions of OECF-supported projects

were tied, although in recent years the percentage of tied-aid funding has reportedly dropped

to 5 percent. In earlier years, Japanese firms

probably won about 60 percent of the goods

and services for projects supported by OECF

in China. There have been cases however, where

U.S. firms have supplied equipment for projects in China that were supported by official

Japanese financing.” In late 1986, MITI officials were suggesting the expansion of ‘exportpromoting” aid to Asia, a plan that some

observers suspected would help primarily

Japan’s own consultants, builders, and suppliers .73

The major thrust of Japan’s aid to China has

thus been large projects designed to build infrastructure. Generally speaking, these are

viewed with pride as examples of successful

cooperation. The projects are selected in a process that involves the Chinese first providing

a ranked list and Japan responding.74 There

has been at least one case (a dam project) where

problems developed that resulted in cancella7’Ministry of International Trade& Industry, KeLzm”Kyoryoku

no Genjo to Mondm”ten [The Status and Problems Related to

Economic Assistance], 1984. Only a portion of the commodity

loans have been “LDC untied’ ’–with participation limited to

less developed countries (LDCS) and Japanese firms. See OECD,

Chugoku, p. 7.

“Discussion with U.S. Trade & Development Program, November 1986.

73 See Susumu Awanohara, “Meeting the Need, ” Far Eastern

Economic Review, Nov. 6, 1986, p. 66.

“The Japanese Government has upon occasion refused a

project, such as a chemical plant.

tion, and there have been problems associated

with high costs arising from local content and

employment requirements. The overall evaluation, from the Japanese side, has been positive, but a report prepared by OECF in 1985

noted bottlenecks in Chinese economic development and called on the government of Japan to improve the efficiency of aid projects

in China by focusing on priority projects.75

Technical cooperation remains a small part

of overall ODA but is growing in importance.7G

These programs are carried out by JICA. More

than 200 Chinese have been trained by JICA

programs in Japan for up to 1 year, and Japanese experts have been dispatched to China

to provide technical assistance. In some cases,

materials and equipment are also provided.

An agreement made in late 1985 to send

young volunteers aged 20-30 to China for 2-

year periods indicates the evolution and expansion of such projects. A “silver volunteers’

association has also been set up to support the

dispatch of retired Japanese engineers.

Japanese aid officials see “project-type”

technical cooperation as their most effective

vehicle and have slated these programs for expansion in China. Currently, such programs

include a hospital, family planning education,

an enterprise management center, a wood utilization project, and a food research center.

New starts include a telecommunications training program in Beijing, a fish research center

in Shanghai, and an agricultural research center in Mongolia.

Japanese cooperation in China’s factory

renovation programs has been comparatively

extensive, and JICA officials have established

ties with the State Economic Commission and

gained good knowledge of the status of China’s

industries in rural areas. However, JICA provides only surveys, and confines its activities

to projects that involve transfer of standardized technologies. The Japanese Government

thus explicitly leaves transfer of “new” technologies to the private sector. During 1985,

“’Overseas Economic Cooperation Fund report, June 13, 1985.

“In 1984 technical cooperation made up only about 3 percent

of all ODA.
138 ● Technology Transfer to China

JICA survey projects in China included three scale back its development plans in the early

steel plants, one piston factory, and an elec- 1980s. In 1981 a financial aid package was artric cable manufacturing factory, for a total ranged that included $430 million in suppliers

of five. credit guaranteed by the ExIm Bank, as well

as commodity loans (through OECF) totaling

Europe $560 million and commercial loans of $3o milEven collectively, European ODA has been lion. More recently, in 1984 the ExIm Bank

far smaller than Japan’s. Table 13 shows the agreed to provide $2.4 billion to finance oil and

total net ODA contributions of European coun- coal development projects. The ExIm Bank

tries and the subtotals of loans and grants. has also provided considerable funding to assist small Chinese businesses to import smallEuropean ODA to China increased rapidly

from a low base in 1981, but future increases

are likely to be more modest. Most European

countries already contribute a substantially

higher fraction of their national income to foreign aid than do either the United States or

Japan, and their rate is not expected to rise

greatly. Some, such as France and Britain, are

particularly generous with their former colonies or countries, leaving less for others.

Germany is likely to remain the largest

donor, in keeping with its position as the

largest trader. In 1986 China is scheduled to

receive approximately $35 million in financial

assistance and an additional $2o million in

technology.” Typical German projects in

China include pipemaking and building materials manufacturing. Other activities support

feasibility studies and training.

Most bilateral aid is tied (informally, if not

scale machinery and equipment fro-m Japan. 78

Official export financing has contributed significantly to the growth of Sino-Japanese

trade. Suppliers’ credits are one form that this

financing takes. In 1984, for example, the

ExIm Bank provided $85 million in suppliers’

credits for the export of technical services required for the Baoshan Steel Works. In this

case, the credits were provided directly to the

Japanese companies supplying the technology

and training programs. In another example,

the bank was reported to have provided $300

million for the Japan-China Oil Development

Company for the Bohai project.’g

The ExIm Bank gives no particular preference to projects involving technology transfer.80 Rather, the goal of bank officials is to

serve the political ends of Japan’s foreign policy by ensuring that those official projects

selected have sufficient funding. Therefore,

explicitly), or spent on goods and services from while technology transfer is not an explicit

the donor country. Typically, 70 percent of the goal, ExIm funding has importantly supported

aid is delivered in goods and services, while it. In the early 1980s ExIm funding was cruthe rest is spent in other countries. Thus, aid cial to the financing of some projects even as

stimulates exports even when the main intent overall funding was scaled back.

is humanitarian. Private sources are also providing considOther Types of Financing erable financing. In 1980a consortium of Japanese banks offered $8 billion in credits. In

Japan early 1985 the Bank of Tokyo and related JapThe Japanese Government supports trade

anese private banks signed a $2 billion loan

and technology transfer to China with official

financing m~de available from the Export- ‘

sFor an excellent review of Japanese financing for projects

Import (ExIm) Bank. The first loan agreement in China, see Hong K. Kim and Ricard K. Nanto, “Emerging

Patterns of Sine-Japanese Cooperation, Journal of IVortheast

involving ExIm credits was signed in 1979 and Asian Stud-es, Fall 1985.

provided $2 billion. But China was forced to 7“ ‘Tokyo Grants Soft Loan for China Oil Project, Financial

Times (London), Jan. 15, 1986.

gOInterview with Export-Import Bank Of Japan, November

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

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

Total ODA net Loans net Grants Tech. coop grants

1983 1984 1985 1983 1984 1985 1983 1984 1985 1983 1984 1985

Belgium . . . . . . . 6.0 5.6 6.8 5;9 5.2 6.1 0.2 0.4 0.8 0.1 0.3 0,4

Denmark . . 5.2 2.2 8.3 4.3 1.5 6.7 0.9 0.6 1.6 0.9 0.6 0.7

France ... . , 4,7 6.0 6.3 – — — 4,7 6.0 6.3 4,7 6.0 6.3

Germany. 96.7 57,5 97.6 84.1 41.5 77.0 12.6 16.0 20.6 12.6 16.0 20,6

Italy ., ., ... 11.1 9.9 14.4 1,0 3.9 3.2 10.2 6.1 11.2 3.0 6.1 6.0

Norway ... . . . . . . 5.8 11.9 3.6 – – – 5.8 11,9 3.6 0.9 07 0.6

Sweden 0.6 0,8 11.4 — — — 0.6 0.8 11.4 0.2 0.8 1.5

United Kingdo m 0,3 0,8 1,6 — — — 0.3 0.8 1.6 0.3 0.8 1.6

Other. 0.4 0.3 3.1 — — 2.1 1.0 1,1 0.9 0.6 0.9 0.6

Japan . .......350.2 389.4 387. 9 299.1 347.9 345.2 51.1 41,5 42.7 20.5 27,3 31.2

SOURCE Geoq-aphlcal Dlstr!butlon of Flnanclal Flows to Developing Countnes OECD 1987

—

agreement. The loans are to be repaid over a

10-year period, at interest rates of 0.25 to 0.375

percent over the London Inter-Bank rate. In

1985 it was reported that private Japanese

banks had expanded their credit lines to China

to $2.5 billion, from $1.7 billion in 1984. The

Industrial Bank of Japan (IBJ), for example,

had credits amounting to $250 million in 1985,

while its Hong Kong-based subsidiary had

another $150 million.81 In 1985 three Chinese

organizations were reported to have raised

more than 140 billion yen on Tokyo capital

markets by issuing bonds.

In addition, China has concluded hundreds

of compensation trade agreements with firms

from Japan, the United States, and West Germany, among others.as In the late summer of

1986, it was reported that Japan’s trading

houses anticipated that they would have to accept Chinese goods in return for about 30 percent of all exports, and that by 1987 such trade

would reach more than 50 percent of total exports. 84 The rise of such indirect financing can

“’ “,Japanese Financial Institutions Increase Credit Lines to

China, ” Japan Economic Journal, May 14, 1985.

“’An agreement between Japan and China permits buyers of

Chinese bonds issued in Tokyo to claim a tax credit of 10 percent of the \’alue of the coupon rate. China does not tax the

income paid to subscribers of such bonds. Therefore, the effect

is to raise b~’ 10 percent the real value. See Charles Smith, “Borrowers of I.ast Resort, ” Far Eastern Economic Re\iew, Apr.

24, 1986, p. 79.

“’See U.S. International Trade Commission, Assessment of

the Effects of Barter and Countertrade Transactions on U.S.

Industries, October 1985, pp. 47, 129.

“’In a growing number of cases third country barters are also

involved. The same article reported that a major Japanese trading house began purchases of Indonesian plywood for reshipment to China, and was reportedly paid in raincoats. See Bruce

Roscoe. “Demonetised Deals, ” Far Eastern Economic Review,

Aug. 28, 1986, p. 48,

be explained by scarce foreign exchange in

China, the emergence of regional borrowers in

China, and limited foreign response to appeals

for direct investment. Private Japanese banks

are adopting new approaches in China. At least

two leasing companies have been formed as

joint ventures, with Japanese banks participating.85

The interrelationship of aid and trade is complex and controversial. At the heart of the controversy is a tension between the principle that

aid be primarily motivated by altruism and the

obvious commercial spinoffs that often accrue

to firms from donor countries. Large OECFfinanced Chinese projects, for example, are generally viewed as Japanese projects in China,

despite their official untied status.

Differences in perspective are apparent both

within Japan and between the major summit

countries. In late 1985 MITI and MOFA disagreed over the use of mixed credits for a coalfired thermal power generation project in Tianjin. MITI favored using mixed credits to support the bid by C. Itoh and Hitachi to win an

international tender against foreign firms.

MOFA, however, objected on the grounds that

an annual ceiling for yen loans to China had

already been fixed and that the use of such

loans would likely stimulate foreign criticism.

MOFA won this interagency dispute, but the

two ministries continue to disagree on this

issue.

“’The Daiichi Kangyo Bank expanded its control of stock and

management of the Shej iang First Bank, a leading Hong Kong

bank with Shanghai participation.
140 . Technology Transfer to China

Photo credlf Er/c Basques

Hong Kong headquarters for the Hong Kong and

Shanghai Banking Corp., an economic powerhouse in

the region. This building, recently completed,

cost over $1 billion to build.

Europe

All major European countries offer official

financing but differ greatly in the degree of

involvement and in the use of subsidies. In Germany most financing has been done privately,

but the Kreditarstalt fir Wideraubau supplies

long-term export credits and aid for developing countries.‘

G Typical German export-financing interest rates are at or above the negotiated OECD rate. Germany has opposed the use

of subsidies for exports but has also been

known to resort to them in highly competitive

situations. — .—-— .-——

“’For a more complete description of all these financing systems see: OTA, “Technology Transfer to The Middle East, ”

September 1984, or “Report to the U.S. Congress on Export

Credit Competition and the Export-Import Bank of the United

States,’” Export-Import Bank, September 1985.

France has been much more aggressive in

the use of official financing. Virtually any export is eligible for official financing and, frequently, subsidies. Often, some of the money

is provided by a commercial bank at prevailing rates and the rest (50 to 70 percent) by the

Banque Franaise du Commerce Exterieur

(BFCE) or the Banque de France at a subsidized rate of 6 percent. In 1979 BFCE offered

one of the first credit lines to China, over $3

billion. At that time, however, China was very

reluctant to assume debt, and only 6 percent

was used.87 France is the initiator and the greatest user of mixed credits.

Great Britain also has a comprehensive program to provide export credits, but it makes

greater use of commercial banks and has reduced the prevalence of subsidies. The Exports

Credit Guarantee Department of the Ministry

of Trade and Industry is the major contributor for both financing and investment insurance protection. Loans are generally at the

OECD rate, but in recent years the market rate

has been higher, as in Germany. Thus a subsidy is applied to the difference for the commercial bank. The turbine-generators for the

Daya Bay nuclear plant will be financed with

200 million pounds from a consortium of banks.

Britain has a mixed credit program under the

Overseas Development Administration, even

though Britain officially opposes the concept.

Many European commercial banks have

established branches in China in hopes of increasing business. Few of these hopes have

been realized. Not only has borrowing grown

slowly, but most foreign funds have been funneled through Hong Kong banks. However,

Chinese policy on debt has been changing, and

it appears likely that borrowing will be increased significantly, though not to the extent

of other developing countries. A large fraction

of this debt would have to be with commercial

banks, since official financing is limited.

China is also starting to raise money by selling bonds. In 1986 the Bank of China issued

$200 million Eurodollar floating-rate bonds

through a German bank syndicate. The Bank

“’Dennis Phillips, “Mixed Credits Key to Success, ” China

Trade Report, June 1985.
Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 141

of England had opposed the sale in Britain because China was still in default on prorevolutionary bonds issued in London.

The Mixed Credit Controversy

Subsidized financing-soft loans-has been

used for years. Mixed credit financing, the

blending of foreign aid and official export

credit, has been used by many European countries and Japan to support their exports to

China. The high unemployment rate in most

European countries has been a strong incentive to seek means to promote exports.

The reported use of mixed credits increased

in 1982 to $4.6 billion worldwide,88 a small

fraction of both total aid and financing. Nevertheless, the potential that mixed credit has for

distorting economic decisionmaking is considerable (developmental projects could be ranked

on the basis of commercial benefits to the donor

nation), and the appearance of receiving discounts may lead to rapidly increasing demand

by recipients.

China has pressed Western governments to

use soft financing, and mixed credits are a convenient way to comply.ag However, when

almost all suppliers offer them, the result can

be intense competition that benefits no one,

not even recipients, since presumably the total amount of foreign aid may not rise appreciably. A total of 15 OECD countries now offer

mixed credits. go

France has been at the forefront in the use

of mixed credits. France first used mixed

credits ($190 million) in China in 1985 to win

a contract to refurbish China’s telecommunications system, a project that could lead to a

total of about $400 million in telephone and

telecommunications contracts.” It also used

mixed credits to sell three A3 10-200 airbuses

“OECD, “Twenty-five Years of Development Co-operation, ”

1985,

“See Robert Thomson, “China in Bid to Set Up Steel Plant

Venture, ” Financial Times (London), Apr. 24, 1986, p. 8.

‘Janet Robson, “Can America Win La Guerre?, ” Euromoney,

March 1986.

“See David Housego, “France Paves Way for China Telecom

Deal, ” Financial Times (London), Apr. 17, 1985, p. 1.

in 1985 for $272 million.gz France argues that

mixed credits help stretch foreign aid, especially in countries that cannot afford to fund

projects commercially .93

Great Britain has pledged 300 million

pounds in soft loans at 5 percent interest for

Chinese trade.” Britain feels this program is

necessary because of the increasing use of

mixed credits by its competitors. Some of the

first uses will be for a diesel engine plant and

telecommunications projects. Belgium, Denmark, Sweden, and Italy have made loans at

interest rates as low as zero percent. Italy has

been one of the biggest users of mixed credits

in China. Two projects are being financed from

a combination of $40 million in soft loans and

a grant of $10 million: the construction of a

tractor plant by Fiat and a power transmission line.95 Even West Germany has overcome

its aversion and is subsidizing a loan of DM 140

million for the construction of several plants.

In most cases, the subsidization for all these

soft loans will be in the form of mixed credits,

or the differences will be procedural more than

substantive.

After prolonged disagreement, the OECD

countries reached an agreement on mixed

credits in March 1987. The new rules make it

more expensive for countries to subsidize export credits by raising the minimum level of

grant (confessional) financing allowed. The

minimum permissible level of aid in a mixed

credit will rise from 25 percent to 30 percent

in July of 1987 and to 35 percent in July 1988.

Minimum interest rates for commercial loans

that benefit from mixed credits have also been

modified to eliminate or reduce subsidies for

certain ~oups of developing nations.9G

As discussed in chapter 8, the United States

established a “war chest” that permits the U.S.

Government to use such credits in cases where

‘

zChina Business & Trade, Apr. 23, 1985.

93Euromoney, op. cit.

“Christian Tyler, “UK Cheap Credit for China Proves Hard

to Allocate, ” Financial Times (London), May 2, 1986. gbchina Business & Trade, June 231 1985.

‘See “OECD Nations Ratify Agreement to Limit Use of Tied

Aid in Subsidized Official Credits, ” International Trade

Reporter, Mar. 18, 1987, p. 366.
142 . Technology Transfer to China

other countries offer “predatory” financing.

To date, however, the United States has not

used mixed credits to support China trade. The

OECD agreement may serve to set limits on

mixed credit financing by the major supplier

countries. In the past, it has been difficult to

ascertain the actual extent of mixed credit

financing, much less to evaluate the impacts

on a country’s export performance. The agreement addresses one type of export financing

competition, but supplier countries remain free

to provide high levels of aid funding or official

credits. Japan’s projects indicate that even in

the case where aid is “untied, domestic firms

stand to benefit. Chinese officials have indicated their intention to seek more soft loans

from foreign governments.97 Therefore, linkages between aid and commerce are likely areas

of competition among the major supplier countries doing business in China.

gTThe c~jna~co~omic News reported on Jan. 5, 1987 that

Ministry of Foreign Economic Relations and Trade announced

that China has recently borrowed soft loans from 15 developed

countries and had put to use loans totalling $5 billion in 1986.

MULTILATERAL POLICY CHALLENGES

Large technology transfer projects to China

often involve firms from a number of different countries. The requirements of large

projects for finance and specialized technology

make technology transfer increasingly a multilateral effort. There are thus opportunities

for participation by a number of supplier countries with somewhat different approaches to

technology transfer.

In the future, however, the multilateral nature of technology transfer to China may also

pose some policy challenges. If China’s economy is to develop, exports will increase. A

pending issue is whether the supplier countries

will be equally willing to permit imports from

China, or whether protectionist measures will

be taken in some cases.

Another set of questions concerns the strategic dimensions of high- technology trade in

the Pacific. As Singapore and other third countries play a growing role (along with China),

it maybe more important to revise and extend

the system of multilateral export controls to

ensure their effectiveness in slowing the transfer of technologies with military significance

to the Soviet bloc.

The challenge of the future will be to encourage China’s smooth integration into the

Asian and global marketplace. This will occur

in the context of China’s entry into multilateral

institutions such as the Asian Development

Photo credit A/Ice Davenport, and The Chfna Bus/ness Review

The Nanjing Construction Machinery Plant has contracted

with a Swedish firm to assemble these drilling and

boring machines in China, using a mix of Chinese and

foreign parts.

Bank and the General Agreement on Tariffs

and Trade. Each such step brings with it new

policy challenges for the Western countries,

since there will be important implications for

global trade patterns and political as well as

economic effects on other Asian countries.

Growing economic interdependence between

the developed and the developing countries underscores the critical need to promote economic

growth in the developing world markets. Increasingly, this task requires international

cooperation, with Japan taking on a growing
Ch. 5—Policies of Other Supplier Countries: Japan, France, West Germany, and Britain ● 143 —

role as a capital-rich country. Indicative of major Western suppliers will continue to comthese changes was the International Monetary pete for the Chinese market, they may also

Fund’s announcement of its first loan of about have to cooperate in certain areas in order to

$700 million to China in late 1986. While the promote China’s full economic integration.
Chapter 6

China’s Economic and

Political Trends

. J

,

Photo credit: Eric Basques

This magnificent bronze lion is one of a pair that guards the entrance of

the Gate of Supreme Harmony in The Forbidden City in Beijing.
CONTENTS

Page

Potential Long-Term Economic Growth. . . . . . . . . . . . . . . . . . . . . . ........147

Future Political Evolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

The Impact of Technology Transfer . . . . . . . . . . .......................153

Impact on the Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........153

Impact on the Political System . . . . . . . . . . . . .......................154

Impact on Social Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ....155

Market Socialism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........157

Implications for the United States and the World Economy . ...........159

Implications of a Failed Modernization Program . . . . . . . . . .............161

Table

Table No. Page

14. Comparison of Real Gross Domestic Product Growth Projections,

1981-2000 . . . . . . . . . . . . . . . . . . . . . . . . ............................149
Chapter 6

China’s Economic and Political Trends

The recent dramatic changes in China’s econ- last 6 to 8 years continue, or is China likely

omy, polity, and foreign policy, have been dis- to go on a markedly different course? These

cussed in chapters 2 and 3. Despite frequent questions cannot be answered without considassertions by China’s leaders that current pol- ering the prospects for economic performance.

icies will continue, many observers have raised

the question of the stability of China’s new

course and China’s prospects for achieving its

modernization goals.1 Will the trends of the

China To Extend Economic Reform,’” 7’he 11’ashington post,

‘See for instance, Daniel %utherland, ‘*Party Leader Sa17s Sept. 24, 1986, p. 1.

POTENTIAL LONG-TERM ECONOMIC GROWTH

In considering the overall prospects for the

Chinese economy, it is useful to distinguish between the prospects for growth, for reform, and

for structural change. Growth is the quantitative expansion of total physical output. Reform

refers to the reorientation and revitalization

of economic organizations and behavior. Structural change deals with a substantial movement of the work force out of agriculture and

an increase in the size of the service sector. In

contrast to past efforts to promote economic

growth through increases in direct capital investment, present Chinese leaders are trying

reform and structural change as well as expanded use of domestic and foreign technology.

Most analysts of the Chinese economy agree

that the prospects for economic growth are

promising, particularly in view of the changes

that have been introduced since 1978. At the

same time, there is also a clear recognition that

China’s growth trajectory could be seriously

altered by a number of factors, some of which

have to do with environmental factors while

others are related to the pace and extent of political and economic reform. Of course, a modest degree of economic growth is possible without further economic reform. Yet, as shown in

chapter 3, the majority of problems that confront China’s economic policymakers are systemic in nature. To achieve a sustained pattern

of growth, a number of modernizing reforms

are definitely required. It will become progressively more difficult for the Chinese economy

to grow solely on the basis of “extensive”

means —i. e., increased capital investment.

Thus, in assessing the prospects for economic

growth, the potential success of the current

reforms in economic and technology affairs

must also be addressed.

In effect, there are two schools of thought

regarding China’s economic potential and the

role of reform. One school focuses on the

progress resulting from the changes to date

in the organization and ideology that underlie

the economy. ’ Indeed, there is no doubt that

reforms have gone quite far, especially in agriculture, toward reducing the inefficiencies

associated with the former Soviet-style economic approach. Many of these reforms are

now irreversible and have become fully incorporated into the prevailing economic structure.

Based on the apparent success of these reforms

and on the improvements in economic performance apparently derived from these reforms,

it can be argued that similar growth rates will

be sustainable for the rest of the century,

The other school takes a much less sanguine

view of the long-term efficacy of recent economic changes, arguing that despite the immediate changes that have been introduced,

~For example, see Dwight Perkins, CHINA Asia Next Economic Giant (Seattle, J?’A: University of Vv’ashington Press,

1976).

147
148 . Technology Transfer to China

“the Chinese economy still retains the basic

institutional organization, functional operations, and problems, or results, of a Soviet-type

economy. While acknowledging the improved

performance of the economy, proponents of

this perspective suggest that most of the economic gains since 1978 have been achieved

through nonreplicable or one-time changes in

agriculture. In this view, the foot-dragging, ob-

—

‘Robert F. Dernberger, ‘‘Economic Policy and Performance, ”

China Economy Looks to the Year 2000 (Washington, DC:

Joint Economic Committee, May 1986).

structionism, and resistance apparently hindering the implementation of the industrial reforms, suggests that further reforms are not

inevitable and the prospects for rapid, sustained economic growth remain uncertain.

The difficulties with industrial reforms come

when the reform coalition in the Chinese leadership has become more vulnerable to criticism

from the more conservative members of the

elite, owing to perceptions that the central government was steadily losing control over the

economy. While there remains almost unani-
—

mous agreement on the need for reform among

all of China’s leaders, continued differences

over such issues as the pace, the targets, and

the scope remain important. Events during

1985-86, including the rapid depletion of foreign exchange, continued high rates of investment, excessively rapid growth, and reduced

grain production, have led to greater caution

in the implemention of the reform program.

This caution is likely to remain characteristic

of Chinese economic policy during the Seventh

Five-Year Plan and could be exacerbated as

a result of the post-Deng succession process.

Thus, even though they are essential, the more

difficult reforms in the area of prices, labor,

and capital markets will proceed at a more

gradual pace than perhaps initially intended.

Yet, even taking into account the consequences of a more gradual approach to reform

for economic growth rates for the rest of the

century, most observers agree that the quantitative dimensions of economic performance

are likely to be respectable. The range of projections (discussed in app. 1 of vol. II of this

report) is shown in table 14. Two factors affect the projections (in addition to problems

with the reliability of Chinese data). First, the

perceptions reflect the differences in modeling

techniques and the nature and currency of the

data used by the respective researchers. Models

inherently contain biases, especially because

they deal with interrelationships among the

economic variables and the role assigned to

various key sectors. For example, the models

differ in their assessment of the projected contribution of agriculture, with the Lau model

suggesting a much more modest role than does

either the World Bank or Rock Creek.

Second, the projections reflect the explicit

and implicit assumptions of the respective reCh. 6—China’s Economic and Political Trends ● 149

.

searchers about the workings of the Chinese

economy and their interpretation of the likely

contribution the reforms will make to present

and future economic performance. The base

projections in the Lau model are firmly rooted

in China’s Maoist era experience, for example,

whereas the World Bank depends on causal

relationships mainly extrapolated from the experience of other developing countries. Similarly, the projections contained in the Rock

Creek models give more weight and importance

to China’s recent experiences under the Dengist reforms.’ These differences account for the

more optimistic projections of Rock Creek,

which goes further than either Lau or the

World Bank in incorporating China’s output

and productivity growth up to the mid-1980s

into its model. Thus, implicitly, if not explicitly,

it assumes fewer problems with the reform effort in the future.

As presented in table 14, the three models

project average growth rates ranging from 6.6

to 8.7 percent through the end of the century.

China’s goal of quadrupling the value of the

GVIAO (Gross Value of Industrial and Agricultural Output)5 would be met in all these

scenarios. More conservative estimates might

see an average annual growth of 4.5 percent

in the future, which would still almost quadruple GVIAO because growth since 1981 has

been above the target rate.

Such high growth rates for extended periods

of time would be very unlikely in an industri4Rock Creek Research, Inc., The Role of Technolo~’ Transfer for China Economic Future, app. 1, vol. I I of this report.

‘GVAIO grows faster than gross domestic product (GDP) because it includes double-counting of intermediate inputs that

increase with time as a country develops. Thus, bs’ focusing

on quadrupling the GVAIO. the Chinese will not ha~’e to quadruple GDP.

Table 14.–Comparison of Real Gross Domestic Product Growth Projections, 1981-2000

.-

Agriculture Industry Other Total

World Bank Quadruple”. . .:, . . . . ...

– 4.9 7.1 7,6 6.6

World Bank Balance ... . . . . . . ... ... ... 4.4 6.0 9,2 6.6

L. Lau High Scenario ... ... ... 3.4 7.9 6.7 6.7

Rock Creek Research Low ., . . 5.7 7.7 9.3 7,8

Rock Creek Research High ... . 5,7 9,3 9.8 8.7

SOURCE R-ock Creek Research lnc The Ro/e of Technology Transfer for China s EconornIc Future “app 1, VOI II ;f this report
150 ● Technology Transfer to China

alized country, but Japan in the 1960s and

South Korea and Taiwan in the 1970s achieved

such growth levels. In contrast to the majority

of less developed countries (LDCS), China has

a strong resource base; a literate, moderately

disciplined work force; and a high savings rate.

There is a significant capital stock in place,

though much of it is dated. There is also a significant science and technology infrastructure.

Finally, there is a national commitment to

growth and modernization at the highest levels,

which is more characteristic of the newly industrialized countries (NICS) than of most developing countries, or China of a decade ago.

The “qualitative” dimensions of economic

growth in China must also be considered in addressing the prospects for improved economic

performance. This would include issues such

as the composition of growth and the role of

technological change. In others words, it is

important to consider where China’s growth

might come from and how it will be achieved.

Chinese economic performance during the last

5 to 7 years has been buoyed by the achievements of the agricultural sector. There are

some signs that agricultural growth rates may

not be able to match those of the recent past,

however, owing to external diseconomies (loss

of farmland to housing construction, neglect

of infrastructure-i. e., irrigation systems—

neglect of agricultural extension services, and

a slowing of the technical modernization of

agriculture) that result in diminishing returns.

At the same time, some of these trends could

be reversed, according to the Rock Creek projection, through the switching of cropland out

of low-value-yielding grains into vegetables

and fruits with an enormously greater yuan

output per hectare.

Technological change as a result of technology imports will also be an important factor

affecting growth, though in all but the Rock

Creek high-growth scenario projections noted

above, they seemingly are not assigned a critical role. In the Rock Creek low-growth scenario,

for example, even with only modest improvements in technology, the Chinese economy still

promises to grow at a rate faster than the official Chinese projections, attaining the quadrupling goal by 1995, not 2000. As suggested,

in this model, a good portion of this growth

will come from agriculture. Both the World

Bank and Rock Creek agree that trade will also

bean important component of growth. In the

case of the latter’s projections, industries such

as consumer electronics will play a significant

role, fueled in large part by greater technical

sophistication and improved product quality.

It is only within the Rock Creek high-growth

scenario that foreign technology imports are

incorporated as a key determinant of economic

performance. This projection is based on the

assumption that China acquires and absorbs

a range of technologies that markedly raise

productivity and output quality throughout

the economy, especially in the machinery and

consumer manufacturing sectors. The major

beneficiary of successful technology assimilation will be the industrial sector, which could

improve its performance capabilities beyond

the Lau, World Bank, or Rock Creek lowgrowth projections. The implications of such

a high-growth pattern would be particularly

important in the trade area. According to the

Rock Creek analysis, if China were to make

optimal use of foreign technology imports, it

could dominate the apparel export market, replace South Korea as the source for most basic

consumer and some sophisticated electronics

products, and even begin to export automobiles to Third World countries.

Without delving further into the underlying

dynamics of the various estimates discussed

in this section, it appears that the outcomes

at either extreme, very low growth and very

high growth, are unlikely. For either to occur

would require a confluence of numerous factors to either strongly inhibitor greatly facilitate economic performance. The high growth

rates since 1980, which have surprised many

analysts, could continue, but a plethora of factors could negatively affect economic performance and the success of technology transfers.

Barring any drastic change in current Chinese

borrowing practices, China’s foreign exchange

shortage is likely to be a major constraint on

large-scale importation of technology and

equipment. Combined with existing bottle-
Ch. 6—China’s Economic and Political Trends ● 151

necks to effective assimilation of technology,

these factors could become significant obstacles to growth in the 1990s if appreciable

progress is not made in alleviating them during the Seventh Five-Year Plan.

Other issues also raise questions about

China’s economic future. Reform of the urban

economy has proven to be difficult, and incomplete reforms could be damaging. The reform

program has also contributed to the rise of socially undesirable behaviors that could discredit the reforms and therefore slow them

down. Along with the political factors that will

be discussed in the next section, these include

urban protests, corruption, and increased inequality. The Chinese will also have to be concerned with labor indiscipline and will have to

find ways to alter the sociology of the work

unit (clan wei). As described in chapter 3, the

proprietary claims on technology and personnel made by the work unit are among the most

debilitating obstacles to technology diffusion.

Tensions between the central authorities and

local governments, especially in the area of finance, will also have to be changed,

Some of these factors will affect China’s

growth trajectory, more than others, though

here again, even in combination they do not

necessarily portend significantly low economic

performance. What is likely until the turn of

the century is a China still beset by numerous

economic fragilities, but one able to sustain

a pattern of growth range of 6 to 7 percent.

This growth rate will not be distributed evenly

throughout the economy: a few sectors across

this broad-based economy will reflect the fruits

of modernization while the remainder of the

economy lags significantly behind. Textiles,

consumer electronics, machinery, and agriculture will continue to be important in this regard. The major economic question facing

China for the rest of this century, therefore,

will be the extent to which these few leading

sectors can pull the rest of the economy forward versus the degree to which the backwardness of the other sectors will slow down the

overall rate of growth for the entire economic

system.

It is clear that some of the most important

constraints on future economic performance

will be economic and technological. However,

political stability and reform are also crucial

factors influencing the prospects for modernization. The course of domestic politics is also

important in considering China’s foreign policy, its open door to foreign investment and

technology, and its role in international security affairs (which are discussed in the next

chapter). Finally, questions about the future

of Chinese politics are all the more important

in light of China’s recent history of social turmoil and political cleavages.

FUTURE POLITICAL EVOLUTION

Despite uncertainties about the depth of conservative opposition to the pace of reforms, it

appears that the general direction of China’s

current course in economic policy is unlikely

to change drastically. Although the current

leaders have major internal differences, they

share a common commitment to reform and

modernization. G The range of foreign opinion

is considerably broader on China’s ability to

‘See Thomas Fingar, “Politics, Policy, and China’s Future

Course, ” app. 7, vol. I I of this report; and Charles F. Steffens,

“1.eadership Changes in China and Their Implications for the

United States, ” U.S. Library of Congress, Congressional Research Ser\rice. CRS 86-131 F (June 24, 1986).

manage what all observers would agree are enduring political problems. Until recently, the

reform coalition was effective in managing divisive issues. At present, however, there are obviously serious divisions within the leadership

over policy, especially the pace and extent of

reform. Underlying these divisions are questions about the limits of reform in a system

dominated by a Leninist party, and the future

role of ideology in a society that has been so

driven by ideology (with many unfortunate

consequences) in the past. The lower ranks of

officials and managers, some of whom have actively resisted reform, will also play a crucial

role.
152 ● Technology Transfer to China

Clearly, China’s current course and its recent accomplishments owe much to the presence and leadership of Deng Xiaoping. Many

questions have been asked, therefore, about

the prospects for politics under his successors.

Deng and his supporters have clearly tried to

plan for political leadership in the post-Deng

era, and have brought into second and third

echelon leadership positions younger, better

educated individuals who seemingly share

Deng’s reform values.7 It will not be clear for

many months, or even years, whether these efforts to ensure continuity will be successful.

Even if the reformers prevail over the more

doctrinaire elements of the leadership, there

will be competition for power and influence.

Cleavages are certain to develop based on personal aspirations, factional relations, and policy positions. Regional divisions based on uneven growth are also likely to be a factor in

intra-elite politics. How these conflicts will be

managed is an important question for the future. There are various signs that the Chinese

are trying to make political lifeless personalistic and more subject to publicly understood

laws and rules, and to make elite conflicts less

of an all-or-nothing experience. Nevertheless,

in light of past experience, there are good reasons to question the extent to which the new

political rules of the game have been institutionalized. The effectiveness of political reform,

still nascent compared with economic reform,

will bear close watching.

The future of Chinese politics bears a close

though complex relationship to the course of

the economic reform program. On one hand,

the future of reforms will require continued political coremitment and political stability. Failure of reform will reflect badly on the Dengist

leadership and could be a source of political

instability y.

However if the reforms succeed, China will

also face new political challenges. A successful reform program will reinforce the continuation of the open door policy and be a stimulus to modernization; however, modernization

‘Steffens, op. cit.

Photo credit Leo A Orleans

View of Shenzhen, a special economic zone. In the

background is Hong Kong. Eight years ago this was

a fishing village surrounded by rice paddies.

will bring with it many new problems. These

include the management of demographic and

environmental changes brought by modernization, the need to accommodate politically the

social and economic pluralism entailed by a

successful reform program, the need to respond

to rising expectations from the population, and

the challenges of managing the commercial and

security problems resulting from interactions

with the external environment via the open

door.

One of the more intriguing questions about

China’s political future is the likelihood of

democratizing and liberalizing trends. The

post-Mao period has clearly seen some evidence

of change in the political climate, and the

leadership itself refers to the need for democratization, although it is by no means clear

what that term means to those who use it.

The liberalization that has occurred has been

within the established Marxist-Leninist framework. From the viewpoint of the Western

liberal tradition, this liberalization would appear to be minimal. Yet relative to the period

preceding it (1958-77), the tone of political life

has clearly changed for the average Chinese.

There is more freedom of speech, and the Party

shows new tolerance for appeals from the population for the rectification of official abuses

(though this tolerance has limits, as shown by
Ch. 6—China’s Economic and Political Trends ● 153

the crackdown on the student demonstration

in January 1987). The election of leaders in

work units is encouraged, and competitive elections for local people’s congresses have been

tried. The National People’s Congress has

emerged as a more active representative body

within which Government policies are debated

and legislative proposals from the executive

are modified. Finally, the press has become a

more lively forum for the airing of different

opinions, although it has by no means become

free of political supervision.’

At the center of the uncertainties about Chinese political change is the question of the future role of the Chinese Communist Party. In

the past, the Party has run the affairs of the

state—both macro- and micro-management of

the economy, culture, and ideology-and was

the sole route to material gain and upward social mobility. The environment created by the

‘Based on remarks by Professor Andrew Nathan, Columbia

University at the SAIS China Forum of the Johns Hopkins

School of Advanced International Studies, Washington, DC,

Sept. 17, 1986.

reforms is inconsistent with these roles. An

objective of economic reforms is the reduction

of political influence in economic management.

Administrative reforms have attempted to

establish a clearer separation between Party

and state. The ideological bases for policy are

shrinking, and ideology has become a less salient factor in Chinese society and public life.

Material benefits are increasingly available to

those with money, and the ability to earn

money has increased. The prestige and privilege once attached to Party membership no

longer seems attractive to large segments of

the population.

It is difficult to conceive of the Party allowing itself to whither away. Major questions

face the Party: Will it be able to do what no

other Communist party has done, and define

for itself a new social role that will be compatible with modernization? Or, will it become an

ever more conservative force, a drag on modernization, in the interests of maintaining its

organizational integrity and control over the

society in the face of changes that render it

obsolete?

THE IMPACT OF TECHNOLOGY TRANSFER

Impact on the Economy

Without technology from abroad, China will

have a slow and costly road to modernization.

However, technology is only one function involved in reaching a more efficient economy.

Shifting from an extensive to an intensive

growth pattern will also require managerial

changes and an improved environment for

managerial decisionmaking. The economic reforms are clearly intended to alter the economic

environment; if successful, they would be an

important step in moving toward an effective,

intensive growth strategy.

The experiences of Japan and the Asian

NICS readily demonstrate the importance of

foreign technology transfer to economic growth,

especially in certain sectors of the economy;

for example, consumer electronics and textile

industries. Technology transfer from abroad

can also be a force supporting the kind of institutional change sought by the reform program. As illustrated in the Foxboro case described in chapter 4, and as noted in the World

Bank’s analysis of the Chinese economy, effective technology transfer often involves the

transfer of the modern management and general business skills that China needs. g Since

the Chinese have a stake in importing technology, technology transfer can be (but is not necessarily) a force for overcoming resistance to

reform. Successes in reform, in turn, can have

positive growth effects, and there is some, albeit still limited, evidence that China is beginning to realize increments of growth through

‘The World Bank, China: Long-Term Issues and Options

(kf’ashington, DC: 1985).
154 . Technology Transfer to China

Photo credit Eric Basques

This modern subway train is being manufactured at the

Changchun Passenger Coach Factory, It will be put in

service on the Beijing Subway.

“disembodied technical change” (increased

output not linked to increased equipment) resulting from reform and new technology.l”

Over the longer term, as the experiences of

other East Asian countries illustrate, technology transfer can have a profound effect on the

growth and modernization of an economy, including qualitative changes. One of the more

important consequences of technology transfer indeed is likely to be in the improvement

of product quality, a change that is closely

linked to the question of Chinese export expansion, discussed below. The benefits from

technology transfer are more likely to become

evident in the 1990s (sooner in some cases),

assuming that some of the basic institutional

problems of the economy are solved. Growth

over the short term is likely to depend on factors other than technology transfer; for example, through high levels of investmentll and,

as reforms succeed, by greater rationality in

economic decisionmaking.

Not all effects of technology transfer are

positive. Adding an active technology transfer

— .— -

IORock Creek Research, The Role of Technology Transfer, app.

1 in vol. II of this report.

“Robert F. Dernberger, “China’s Development Strategy Investment Financing Needs and Sources, paper presented to

the Fifteenth Sine-American Conference on Mainland China,

Taipei, June 1986.

program to an economy that is institutionally

ill-prepared to receive and use the technology

can lead to reduced growth and economic confusion, as the experiences of countries such as

Poland illustrate. The importance of having

a receptive institutional environment and the

ability to assimilate technology and incorporate it into production is illustrated by the

Asian NICS. The existence of these attributes

in the latter countries, but perhaps not in China

at the moment, should induce caution in comparing China’s current course with that followed by the Asian NICS.

China has clearly had technology transfer experiences recently that have not gone smoothly.

The transfer of Spey engine technology in the

1970s, for instance, has not led to its effective

utilization in Chinese production. The Baoshan

steel complex, though now partially completed

and operating with Japanese technology, has

also run into a host of problems that have required extraordinary efforts to manage and

have been a source of ill feeling between China

and Japan., Serious problems are also evident

in such showpiece projects as the Volkswagen

Shanghai Santana venture and the AMC-Beijing

Jeep operation discussed in chapter 4. In these

and other cases, technology transfer has not

gone smoothly, and the efforts have not produced the expected economic effects.

Impact on the Political System

The impact of technology transfer on China’s

political future is an intriguing question. Western observers often like to think that the coming of modern technology will promote liberalization, the implicit assumption here being

that the division of labor and specialization

that are associated with much modern technology carry an imperative for pluralizing political arrangements as well. This maybe too

simple an approach to an assessment of the

Chinese political future.

These implications cannot be considered

without discussing people—the foreign supplier of technology and the Chinese managers

and officials who procure it. China’s quest for

technology has made the foreigner a partici-
Ch. 6—China’s Economic and Political Trends ● 155

pant in Chinese policymaking and thus a factor in Chinese politics. The opinions and analyses of the foreigner often carry weight in

Chinese policy deliberations, and access to the

foreigner can be a useful political resource for

the Chinese decisionmaker. ” More generally,

the West and Western technology have great

prestige in China, and are seen as a source of

guidance for the modernization program.

But there is ambivalence about the West,

about the foreigner, and about foreign technology, as well. The West is seen as the source

of corrupting ideas and values, and close relations with foreigners can be a liability as well

as an asset.

The impact of technology transfer is also not

uniform; the distribution of the benefits from

it are uneven. The most notable differential is

based on geography, with the coastal regions

being more clearly the beneficiaries of the open

door policy and the access it has brought to

the goods of the foreigner. This privileged position of the coastal region is a consciously chosen part of the Chinese development strategy,

which sees these regions serving as a bridge

between the advanced technology in the international environment and the more technologically backward interior sections of the country. While there now seems to be a general

acceptance of this policy, it has not come without objections from the interior.

As with the impact on the economy discussed above, the impact on the political system could be positive or negative. China’s long

history of xenophobia, the force of nationalism, the potential for corruption resulting from

interactions with the foreigner, and the differential distribution of benefits of technology

transfer all make for potent threats to domestic political stability and to continuity in foreign policy.

“%e Michel Oksenberg and Kenneth I.ieberthal Bureaucratic

Pofitics and Chinese Energy Development (14’ashington, DC:

U.S. Department of Commerce, 1986).

‘ ‘This includes access to overseas education. See Committee

for Scholarl~ Communications with the People’s Republic of

China, A Relationship Restored (J4’ashington, DC: National

Academy, Ih-ess, 1986).

On the other hand, in China’s recent history

of interactions with foreigners, and search for

foreign technology and investment, there is

evidence of positive political change. This includes greater attention to achievement criteria in the recruitment of leaders, efforts to

institutionalize a legal system, more rational

approaches to policymaking, pragmatism replacing ideology, moderation in the management of political conflict within the elite, and

a degree of liberalization, albeit within the

terms of Marxism-Leninism.

Impact on Social Change

In contemplating the future impact of technology transfer on Chinese politics, a central

issue is the extent to which technology transfer will contribute to social change, which will

in turn effect the Chinese political system. One

approach to this question is to see the Dengist leadership generally in control of issues

of liberalization and the impact of technology

transfer. In this view, the liberalizations that

have occurred can be seen as part of the political and policy agenda of Deng and his followers. Forms of liberalization can be seen as

means to combat the conditions, such as entrenched bureaucratism, that are viewed as

threats to the successful implementation of the

reform program. To simplify this argument,

the Dengists are committed to modernization,

including the importation of foreign technology. They realize that economic reform is

needed to utilize foreign technology effectively

and thus are willing to initiate political changes

to overcome resistance to reform. Technology

transfer thus has an impact through the planning of the leadership.

A second approach is to see technology

transfer as a force for social change that is

somewhat beyond the control of the elite. Technology transfer in the context of reform is seen

as a pluralizing force. As Chinese society becomes more complex because of technological

changes, it has greater difficulty achieving centralized, comprehensive political controls. Access to foreign technology and investment by

an increasing number of organizations can be
156 ● Technology Transfer to China

seen as empowering in the sense that it reduces

dependence on the Chinese state for necessary

resources.

Furthermore, certain requisites of successful technology transfer are more compatible

with a pluralistic, decentralized social order

than with a centralized, monolithic system. If

China wishes to have the benefits of the technology, it will have to accommodate these requisites. For example, Chinese approaches to

property rights, including intellectual property

rights, have been altered by the need for clarity in proprietary claims technology. It is unlikely that China would have created a patent

system, for instance, if not for the concern that

without one, Western technology would be less

available. The concern for patent protection,

however, reinforces other trends in the Chinese

reform environment that are in the direction

of assigning property rights to individuals and

groups outside of the sphere of the state. This

in turn is part of a trend toward the creation

of an economic system that is considerably

more independent of the political system. A

more autonomous economic system is thought

in this latter interpretation to be a check on

state power and thus a force for a more liberal

order.

These two perspectives—one stressing managed political change from the top and the

other seeing political change resulting from social and economic change from below—need

not be regarded as mutually exclusive. There

is evidence for both interpretations. Perhaps

the more significant observation, therefore, is

that technology transfer is part of a complex

process—involving active elite participation

and diffuse social change beyond the elite’s

control—which is forcing political change in

directions that could be interpreted as liberalizing.

It is impossible to say whether these trends

will continue or whether on balance they are

a force for future political stability. There

clearly are other forces in Chinese political life

that work against liberalization, but more importantly, there is the question of whether

liberalization serves Chinese modernization interests or not. While the Western observer

might consider the answer to this question to

be obvious–modernization cannot proceed

without liberalization-a careful reading of Chinese politics would indicate that under certain

conditions, some forms of liberalization might

have negative consequences.

For, despite an image of monolithic, centralized power, China is in many ways a polity in

which authority is fragmented. As noted in

chapter 3, there are uncertainties in the authoritative roles of ministries vis-a-vis central planners and the top elite, and of those of local governments vis-a-vis the central government. Other

areas of uncertain authority relations also

point to problems of fragmented authority.

Modernization-induced change, including

the impacts of technology transfer, in principle could create problems for the political system in two ways. First, as a force eroding concentrations of power (the liberalizing influences

discussed above), technology transfer could

lead to the further fragmentation of authority. There is already evidence, for instance, that

the combination of the open door environment

and domestic reforms have produced delays

(approaching immobility) in decision making

on certain large projects where foreign technology would be central, such as Three Gorges,

the hydroelectric project. ”

At the same time, technology transfer, and

economic modernization more generally, will

create a host of new social problems—new environmental insults, occupational dislocations

and employment problems, new infrastructure

and social services requirements—that will require effective political responses. A case could

be made that more, rather than less, concentration of power and authority might be required,

and that without it, technology transfer could

increase China’s problems of governability and

political stability.

There clearly are dynamics of Chinese politics that are beyond the ken of the foreign

observer, and that makes predictions and fore1

4 See Oksenberg and Lieberthal, op. cit,
Ch. 6—China’s Economic and Political Trends ● 157

— —

casts subject to considerable doubt. The political changes in China since the late 1970s

have been important, have pointed toward the

likelihood of continued stability, and have been

liberalizing to a degree. The increased interactions with the outside world, including increased technology transfer, have been compatible with those changes-the open door has

both helped and been helped by the domestic

political changes. The trend line therefore is

encouraging. By implication, to support technology transfer is to support the trend.

However, Chinese politics have shown unexpected changes of direction in the past, and

may again. In addition, the political role of

technology transfer is complex. Modernization

can be a disruptive as well as a positive experience. Ultimately, the question becomes

whether or not China will be blessed by skillful and dedicated political leaders who can

guide the country around the pitfalls of technological change while reaping the benefits of

that change.

Market Socialism

The current direction of Chinese institutional

experimentation involves greater use of decentralized market mechanisms to stimulate efficiency and innovation as well as more attention to central planning controls. The basic

principles of socialist ownership are to be maintained, as are socialist fairness in distribution

and socialist welfare and social security principles (although the mechanisms for providing the latter may change). The sanguine view

of China’s future assumes that these often contradictory elements in China’s institutional

quest can, in principle, be reconciled into a Chinese form of ‘‘market socialism.

The less sanguine view, drawn in part from

analyses of East European experiments with

market socialism, is that the prospects for an

institutional order that is “half plan, half market” are not promising. On certain key issues–

prices, workplace motivation, property rights,

social security—the approaches of market-

“’Cf., The W’orld Bank, op. cit., p. xxxiii.

coordinated and planner-coordinated systems

are simply too divergent.lG Socialist planners

are incapable of tolerating the wide fluctuation in prices, for instance, that will characterize an effectively functioning market system. To achieve the motivational benefits of

a market system is to tolerate the use of material incentives leading to significant income

inequalities, which again will be incompatible

with the socialist orientation. The priciples of

economic efficiency underlying the market system contradict the “social contract” or “socialist ethical code” of the socialist system,

which stresses such values as the protection

of the weak (rather than the value of competition), the interests of the collective (rather than

the individual), and full employment (rather

than efficiency ).”

In this view, the “half plan, half market” hybrid is seen as ultimately less desirable than

either the market system or the planner controlled system. In addition to contributing to

economic disequilibrium, the hybrid also contributes to a disequilibrium in public morality. Individuals faced with the uncertainty of

whether they are expected to conform to the

norms of the marketplace or to the norms of

socialist morality become morally confused

and adopt a “live for the day’ mentality .18 The

rise of corruption, which China has experienced

since the initiation of reforms, maybe a result

of this moral disequilibrium.

The two views on the prospects for market

socialism in China-the sanguine and the skeptical-may both fail to allow for the possibility, and indeed the likelihood, of more incremental, less premeditated, changes in Chinese

institutions in response to Chinese conditions.

Such changes may defy easy description and

are less neat theoretically, but they are more

typical of the actual workings of social

systems.

“This argument has been made by Jan S. Pry byla. See, for

instance, “Mainland China and Hungary: To Market, To Market ., .,” unpublished paper presented to the Fifteenth SinoAmerican Conference on Mainland China, Taipei, June 8-14,

1986.

“Ibid.

‘

p

I bid.
158 . Technology Transfer to China

—

Photo credtf A/an T Crane

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

Technology transfer will bean important factor shaping these conditions in which Chinese

economic and political institutions evolve.

However, it should not be assumed that the

“imperatives of technology’ will be determinative of institutions. The weight of evidence

from Chinese experience and the experiences

of other countries suggests otherwise.19 Instead, the imperatives of technology should be

seen as inclining institutional choices in certain directions, not all of which will be the

same.

Technology transfer affects the evolution of

Chinese institutions in two ways: what the Chinese will have to do if technology transfer is

to be effective, and the consequences for institutions if technology transfer is effective. In

. .. —-—-—

“see Richard P. Suttmeier, “Science, Technology and China’s

Political Future: A Framework for Analysis, ” paper presented

to the Conference on China’s New Technological Revolution,

Harvard University, May 1986.

both cases, the impacts are likely to appear

contradictory.

To be effective, technology transfer would

seem to require the further marketization of

the economy, including more fully developed

labor and capital markets, a price system that

provides macroeconomic decisionmakers with

accurate economic information, and a further

clarification of property rights. The persistence

of an irrational economic environment (including irrational prices and irrational limitations

on the efficient movement of capital and labor) appears to affect adversely China’s ability to select technology wisely and assimilate

it fully.

At the same time, there are certain negative

externalities associated with market transactions in technology that seemingly require

strong administrative responses from the central authorities. These include the problems,

discussed in chapter 3, of the duplication of
technology imports and of importing technology that may already be available in China.

Central controls over the expenditure of foreign exchange for technology are also appropriate in light of the collective disadvantages

that result from an uncoordinated use of this

scarce resource.

Other types of problems associated with negative externalities can also be noted. These

would include the setting of technical standards for imported technology and the establishment of health and safety standards. In

short, an effective technology transfer program

will require not only more decentralized marketization, but also more vigorous policy interventions from a stronger central government, seemingly a contradiction.

Similarly, successful technology transfer is

likely to be both a force for greater decentralization of Chinese society and a force for more

effective centralization. Decentralizing trends

will result because successful technology transfer will make enterprises and other economic

units more autonomous vis-a-vis central authorities and less dependent on them. Successful technology transfer will entail networks of

relationships between economic units and foreign suppliers of technology, which will be very

difficult for central authorities to control.

Often, the technologies transferred will be empowering of lower level organizations, and they

will often require new forms of specialization

that should be a force for greater economic and

social pluralism.

Ch. 6—China’s Economic and Political Trends ● 159

At the same time, successful technology

transfer will strengthen the capabilities of central authorities. Especially in areas such as

transportation, telecommunications, and data

processing, foreign technology should help the

state penetrate and control society more effectively. The society it will want to control,

however, will itself be more empowered and

thus be in a better position to resist the penetration of the center. Whether these developments are constructive and progressive, or debilitating, depends on many nontechnological

factors that are not likely to be determined in

the first instance by technology transfer.

On balance, technology transfer should be

a constructive force in China’s future. It is

likely to make possible rapid improvements in

the quality of China’s export goods, to become

an increasingly important factor in Chinese

economic growth, and to be an important factor in overcoming major constraints on growth

and development caused by underdeveloped

infrastructure and energy supplies.

The impacts on the evolution of Chinese political and economic institutions are likely also

to be salutary, although there is much more

uncertainty connected to this prediction. As

seen in chapter 3, China needs both more decentralization and more effective centralization, and technology transfer is likely to be a

force for both. The great uncertainty is whether

the nature of the current system, with its many

economic and political irrationalities, will have

more of an impact on technology transfer than

vice versa.

IMPLICATIONS FOR THE UNITED STATES

AND THE WORLD ECONOMY

It has been U.S. policy since the 1970s that one of the prominent modes of involvement.

a friendly modernizing China is in the U.S. in- The implications of this involvement must be

terest. Quite apart from any foreign involve- understood in order to judge whether it serves

ment, China is undergoing major changes de- U.S. interests.

signed to realize finally a century-long quest

for wealth and power. The United States and One area where the implications of China’s

other countries are now involved in these future course require rethinking is China’s inchanges in China, and technology transfer is temational economic role. China’s foreign trade
160 ● Technology Transfer to China

has expanded dramatically in recent years, albeit from a small base, and China clearly has

premised its current modernization drive on

active participation in the world economy.

China’s interest in membership in the General

Agreement on Tariffs and Trade is indicative

of its growing interest in and commitment to

international economic institutions.

China’s export economy suffers from both

technical and systemic inefficiencies. The economic system reforms, currency revaluation,

and other incentives for Chinese producers to

export rather than sell to the domestic market will help alleviate systemic inefficiencies.

Technology transfer will help with the technical inefficiencies. Indeed, the main short-term

consequence for economic performance of technology transfer will be to improve the performance of the export sector, mainly through

qualitative improvements.

China’s foreign trade potential is much

greater than its actual trade today. The rate

of growth of China’s foreign trade has been

greater than the overall rate of economic

growth, and this is likely to continue for the

next 15 years. China’s exports have been rising at an average annual rate of 14 percent

since 1978, and the value of exports now represents 7 percent of the gross national product. It is quite possible that by 2000, this latter figure could be doubled.

If current trends continue, Chinese exports

will represent about 4.4 percent of world exports by 2000. This percentage is comparable

to the current shares of such countries as Italy

and Canada. China’s considerable ability in recent years to capture market shares has been

due largely to its low prices, which are due in

turn to its low production costs. The growth

of Chinese exports, and China’s penetration

of foreign markets, has occurred during a deflationary period in international trade. This fact

also suggests that the potential for growth of

trade has not yet been fully demonstrated.

As China’s exports have increasingly diversified, questions have arisen about whose products China’s will replace in which markets.

During the next 15 years, Chinese products

are most likely to be competing with those of

the NICS (including Singapore, Malaysia, Brazil, India, Mexico, Thailand, Argentina, Hong

Kong, Taiwan, and Korea) in third country

markets. Direct competition with either the

LDCS or developed countries such as the U.S.

is less likely. One exception to this is that U.S.

agricultural exports to Asian markets may suffer from Chinese export expansion.

China’s imports are heavily weighted toward

industrial supplies and producer goods rather

than consumer goods and should offer attactive trade prospects for the United States. In

light of the above, and although Chinese exports will compete with some U.S. products

of older industries in U.S. markets,zo it should

be in the U.S. interest to see the expansion of

Chinese exports. However, the U.S. share of

the Chinese market has fallen, due in part to

more aggressive marketing and more efficient

export control practices in other countries.

Other problems also make the actual prospects for Chinese exports less rosy than the

potential suggests. China’s interest in a more

active participation in world trade does not

come at the best of times. Many of the markets in the advanced industrialized countries

are already vulnerable to pressures from imports, and protectionist sentiments in places

run high. In addition, the cost advantages Chinese products enjoy because of cheap labor

may not be enduring. New technological advances in the advanced countries in industries

that were vulnerable to inexpensive imports

based on low wage rates could upset established patterns of comparative advantage in

the near future.

China’s rapid decline of foreign exchange

holdings has led to increasing interest in commercial credits. The Seventh Five-Year Plan

expects $40 billion to $50 billion in financing

of all kinds from abroad. As with foreign exchange, there has been some loss of central control over international indebtedness because

‘“A politically significant example is textiles.
of the increasing financial role of organizations

such as the China International Trust & Investment Corp. (C ITIC). According to estimates made by the Bank of Japan, China’s foreign debt by the end of the Seventh Five-Year

Plan in 1990 could reach $49 billion. z’

There is no consensus about the longevity

and severity of these problems. They have

made the Chinese more insistent that in its

trading relations, ways must be found to increase China’s exports. They are also likely to

lead China to seek more barter opportunities,

which could lead to more trade with the Soviet bloc. Such trade would reduce the pressure on the use of hard currency reserves,

would be more insulated from the perturbations of the international capitalist economy

(e.g., the fall in oil prices), and would be more

congenial to the operation of the centrally controlled, planned sector of the economy .22

China’s problems of adjusting to the international economy are also likely to limit the

“,?fainichi Daii~r Arews, Sept. 6, 1986, p. 6.

‘‘}ruan-li YI’u, “Flconomic Reform and Foreign I;conornic Relations: Systemic Conflicts in a Theoretical Framework, ” paper presented at the Fifteenth Sine-American (’conference on

\lainland (’hina, Taipei, ,June 1986.

Ch. 6—China’s Economic and

growth of U.S.-China trade

Political Trends ● 161

and economic cooperation in the short run, particularly when

the problems of foreign investment are also

considered. Efforts to improve the investment

climate are not likely to have rapid results. The

appeal of joint ventures has faded for the moment, which is likely to slow technology transfer and change the mode of technology transfer preferred by U.S. companies to licensing

agreements.

China continues to give evidence of wanting to participate in the world economy and

to reap the benefits of foreign investment and

technology transfer. To do so, China must export. It is likely that a number of bilateral and

multilateral trade issues will result from Chinese export expansion. These include the persistence in Chinese efforts to realize bilateral

trade balances, a likely increase in Chinese use

of export subsidies and other forms of protectionism in China, the lack of transparency in

Chinese trade decisions, and the changeableness and unpredictability of those decisions.

The rise of protectionism on the U.S. side, already evident in the growth of antidumping

cases brought against Chinese imports, further

complicates the prospects for U.S.-China trade

and for U.S. participation through technology

transfer in Chinese modernization programs.

IMPLICATIONS OF A FAILED MODERNIZATION PROGRAM

All developing countries are faced with very

tight constraints imposed by population pressures, environmental limitations, and pressures from the international economy. The

tightness of these constraints often puts enormous pressures on social institutions, making

governance and the maintenance of domestic

stability difficult.

This chapter has suggested that the international community as a whole will benefit

from China’s modernization, though problems

will emerge in certain areas. However, successful modernization is not guaranteed. The direct implications for the world economy if

China’s modernization fails to meet expectations are fairly easy to predict: China will be

China is no exception to this observation. less of a market and less of a producer. The

Indeed, many of its constraints are particu- domestic implications are considerably more

larly severe. China’s leaders continue to be in complicated because the stakes are very high,

both for China’s leaders and for the Chinese a contest against demography and environmental degradation, and they must race to population.

keep from falling further behind the economic There is a distinction between a “failed modand technological progress of other countries. ernization program’ and a‘ ‘failure to modern-
162 Technology Transfer to China

ize. ” China is already “modernizing” in the

sense that China has been experiencing a series of societal changes. Examples are industrialization and the substitution of inanimate

for animate energy, urbanization, increased

literacy and life expectancy, the development

of a science and technology base, establishment of and penetration of society by mass me

dia. China’s modernization program, The Four

Modernizations, is a conscious effort to give

Chinese societal change new quantitative and

qualitative dimensions that will enhance national

wealth and power and individual well-being.

The partial modernization experienced by

China (albeit, unevenly distributed across

China) has created expectations in the population that more will follow and that living

standards and quality of life should improve.

The increasing exposure experienced by many

Chinese to the lifestyles of Hong Kong, Taiwan, Japan, and the West fuel these expectations further. One of the requirements of a successful modernization program is to be able

to respond to these expectations. Fulfilling

that requirement is a challenge to the political system.

At the same time, the modernization that

China has experienced has brought with it a

series of new challenges to the capabilities of

the state. China’s problems of energy supply,

urban transportation, sewerage, telecommunications, and housing are all more serious precisely because modernizing change has begun.

These problems are likely to remain unsolved

and to worsen if the modernization program

is not successful.

The problems associated with population

growth and employment during the next 15

years (and beyond) will be particularly difficult. Between 1981 and 2000, the Chinese

working-age population will increase by about

250 million, with a probable increase in the labor force of 180 million. To provide employment for these new entrants into the labor force

would require an average annual increase of

new jobs of 10 million.23

“The World Bank, China: Long-Term Issues and Options

(Washington, DC: 1985), p. 185.

Also affecting the employment picture will

be the significant shift out of agriculture and

other forms of rural employment to urban jobs.

Whereas 36 percent of the work force now lives

and works in cities and towns, this figure is

expected to rise to 54 percent by 2000. The

need for rural workers will decline.24 China, in

short, will be much more of an urban society

by 2000 than it has been.

The smaller cities and towns will feel the

most demands from the new job-seekers. Their

capacity to respond to these demands remains

unknown, but the scale of the problem will be

large. As one analyst has put it:

Coping with the waves of peasants who

flock to urban areas looking for work will pose

extraordinary challenges to the social and

economic infrastructure of China’s small cities and towns. Not only will jobs for these people be required; they will need housing, access to medical care, transportation, schools,

stores and a host of other services taken for

granted. zs

China’s ability to cope with the social disruptions of modernizing change will be enhanced by a growing economy and improve-

“Jeffrey R. Taylor, Employment Out]ook for China to the

Year 2000, CIR Staff Paper No. 16 (Washington, DC: Center

for International Research, U.S. Bureau of the Census, March

1986), p. 2.

‘

s

Ibid., p. 17.
ments in China’s political and administrative

institutions. The state will clearly need additional resources—for investments in human

capital, social services, infrastructure, and the

like—to smooth the transition to modernity.

A growing economy will make the task of extracting these resources easier, as will political and administrative institutions capable of

fair and efficient extractions and the implementation policies that will cushion the effects of

rapid social change.

A China not able to meet these requirements

is likely to be a China overflowing with individual and collective frustrations. For the individual, long-suppressed aspirations for a better quality of life, were in the post-Mao period,

would be frustrated again. For he society as

a whole, a failure to fulfill the the promises of

the Dengist leadership for developing the nation’s human and natural potential and thereby

instilling national pride, would be a disappointment of massive proportions. A society with

such frustrations would be a society susceptible to the appeals of political extremism and

to the dangers of political instability.

Domestic political extremism and political

instability in China can have international implications. A politically unstable China, or one

Ch. 6—China’s Economic and Political Trends “ 163

—

under the sway of an extremist leader, is more

likely than present-day China to be a disruptive force for the regions around its periphery

—especially on the Korean peninsula and in

Southeast Asia. Such a China is also likely to

be more difficult to deal with on the Taiwan

problem and on the future of Hong Kong. A

more extremist China is likely to support Third

World insurgences and to be a more disruptive force in international fora, such as the

United Nations. In short, a China subject to

the influences of political extremism as a result of a failed modernization program is likely

to be a considerably less constructive member of the international community than the

present China.

A modernizing China must live with constant risks of instability. Without technology

transfer, however, China’s modernization program will be much more difficult to implement,

and a failed modernization program threatens

to leave China with troubling national frustrations, to undercut the legitimacy of the reformist coalition, and to expose China to the appeals of more radical political doctrines. Such

a China would have less of a stake in a stable

international order than does a China pursuing its current course.
Chapter 7

Strategic Implications of

a Modernizing China

Photo credit: Eric Basques

The Great Wall at Ba Da Ling Pass, about 40 miles north of Beijing. For centuries, the wall was the main line of defense

against northern invaders.
CONTENTS

Page

Technology Transfer and China’s Military Capabilities . ................167

Military Capabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ..167

Military Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......169

Technology Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........170

U.S. Policy Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......172

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................179

The Asian Security Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ...179

China’s Security Interests and Foreign Policy . .....................183

Asian National Interest in China’s Modernization . ..................186

Further Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................190

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................192

Box

Box Page

B. Spectrum Analyzers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............176

Tables

Table No. Page

15. Anti-Submarine Warfare Technology . ............................173

16. Anti-Submarine Warfare Technology: Criticality and Availability. ....175
Chapter 7

Strategic Implications of

a Modernizing China

A more modernized China will also be a

stronger China, one that will have enhanced

capabilities to pursue its interests in the international arena. A central question for the

United States, then, is whether a stronger

China would be in the U.S. interest. Since technology transfer aids Chinese modernization,

thus strengthening China, are today’s transfers likely to become tomorrow’s sources of regret? Are U.S. strategic interests, especially

in Asia, likely to be served by a stronger China

whose modernization has been aided by the

transfer of U.S. and other Western technologies?

The “China factor” in U.S. strategic interests

1.

2.

3.

depends on:

Chinese military capabilities,

Chinese plans and expectations for military modernization in the context of overall economic development goals, and

the role of technology transfer in Chinese

military modernization.

It is also important to consider prospects for

the evolution of China’s foreign policy and the

possible implications for U.S. strategic interests in Asia.

TECHNOLOGY TRANSFER AND CHINA’S

MILITARY CAPABILITIES

Military Capabilities

Although the development of a modern defense remains an important objective (military

modernization has been officially ranked fourth

on China’s list of modernizations), defense

spending occupies a much smaller share of the

gross national product (GNP) than a decade

ago.1 China’s slow road to military modernization does not overshadow its current strategy

of introducing systematic wide-sweeping economic changes that will, over the longer term,

improve military capabilities. Transfers of

dual-use technology are important to that

process.

No official plan for defense modernization

has been announced, but it appears that the

Chinese are attempting to improve combat effectiveness in the short term while building a

‘China has, however, expanded funding for one part of its defense budget–strategic forces. See Ed Parris, “Chinese Defense

Expenditures, 1967 -83,” in The Joint Economic Committee

(JEC), China Economy Looks Toward the Year 2000, vol. 2,

1985, pp. 148-168.

technology and defense industrial base capable of indigenously developing and producing

advanced weapons over the long term. Limitations in financing and skilled manpower plus

the inability of the defense industries to mass

produce advanced weaponry have dictated this

strategy. As one expert observer puts it: “. . .

Even if it were possible, the defense establishment would have been overwhelmed by any

rapid introduction of advanced technology. No

‘quick fix’ was plausible, even if it were seen

as desirable. The deficiencies of currently deployed People’s Liberation Army (PLA) hardware are worth noting.

China’s conventional weapons are based on

technology supplied by the Soviet Union in the

1950s. China received military equipment and

know-how, but when the Soviets terminated

their assistance in 1960, China lacked a group

of trained engineers and professionals capable of designing a new generation of weapons.

‘Paul H.B. Godwin, “Overview: China’s Defense Modernization, ” in JEC, op. cit., vol. 2, p. 138.

167
168 ● Technology Transfer to China

China’s military industries remain unable to

design new systems or serially produce from

foreign designs.3 China’s military weaknesses

in communications, logistics, and basic operations were apparent in its 1979 punitive expedition in Vietnam.4

At present, China does not have the power

projection capabilities needed to sustain a successful offensive attack on neighboring countries, and its forces are far inferior to those of

either of the superpowers.

China’s air force is dependent on obsolete

interceptors and bombers that could not survive long against modern air defenses. China’s

air force includes more than 4000 fighters, but

these are modifications of foreign designs, primarily the Soviet MiG-19 and MiG-21. Much of

the fleet lacks all- weather capability and night

vision; speeds are generally subsonic. Most of

the fighters are armed with cannons only.

China’s aircraft factories lack the technology

and metallurgy needed to design and manufacture sophisticated, high-yield jet engines.

The Chinese navy has only a few dozen destroyers and frigates, many armed with STYX

missiles that have a short range and radio-controlled guidance systems, making them vulnerable to enemy jamming. China’s more than

100 submarines are deployed in shallow coastal

waters. Many of the craft are diesel powered,

noisy, and limited in range. Lacking electronic

countermeasures and support systems, they

could easily be defeated by Soviet antisubmarine warfare devices.

China’s first of at least three nuclear-powered attack submarines, the Han-class, was

launched in the early 1970s. In addition, a Xiaclass missile submarine (comparable in size to

the British Polaris but developed largely indigenously) was launched in 1981. It has antiquated sonars and guidance systems as well

as problems with the nuclear plant that appear

to have kept it in the shakedown phase. Pro3Wenciy Frieman, “National Security Risks of Dual-Use Transfers to China, ” Science Applications International Corp., July

7, 1986 (app. 6 in vol. II of this report).

‘Paul H.B. Godwin, “Overview: China’s Defense Modernization, ” in JEC, op. cit., vol. 2, p. 137.

duction is likely to remain low.’ In 1982 a flight

test of a submarine-launched ballistic missile

(from a diesel submarine) took place.’ While

China’s nuclear fleet is likely to remain quite

limited because of financial constraints, the

flight test indicates that China will probably

significantly increase its nuclear deterrent

force through the deployment of a seaborne,

strategic, second-strike capability.

The size of the PLA has been reduced by over

1 million during the past 6 years, but China

still maintains the world’s largest military in

terms of personnel.7 Nevertheless infantry mobility is a major problem. Although the PLA

has more tanks and armored personnel carriers

than the U.S. army, the ratio of personnel to

armed vehicles is approximately 10 times

higher than that in the Soviet army. PLA field

guns, rocket launchers, and heavy mortars are

all obsolete. Antitank guns and recoilless rifles have short ranges. A major effort is now

under way to streamline the PLA and to transform its role by improvements in training and

by encouraging military factories to produce

for the civilian market.8

Because China would find it difficult today

to retaliate against a surprise attack by the

Soviet Union, high priority has been placed on

building strategic forces. Significantly, this effort has been continued even during times of

drastic political change. China’s more than 100

medium- and intermediate-range nuclear missiles constitute a modest arsenal by superpower standards, but they provide China with

enhanced political prestige and with some capability to deter a Soviet attack.g Little infor5Frieman, op. cit., p. 29, One Xia is now in operation and a

second is said to be near completion.

‘David G. Muller, Jr., China as a Maritime Power (Boulder,

CO: Westview Press, 1983), p. 165.

‘See June Teufel Dreyer, “The Reorganization and Streamlining of the Chinese People’s Liberation Army, ” for 15th Conference on Mainland China, June 8-14, 1986. The International

Institute for Strategic Studies (11SS) in London estimates that

the total size of the PLA was 3.9 million in 1985-86, of which

about 2.9 million were in the army. See 11SS, The Military 13alance, 1985-86, p. 113.

‘Opinions differ sharply as to whether the PLA will be plagued

by resistance to such programs or whether it can be a “vanguard” in the modernization process. See Dreyer, op.cit.; and

Monte R. Bullard and Edward C. O’Dowd, “Defining the Role

of the PLA in the Post-Mao Era, ” Asian Survey, June 1986.

‘Robert G. Sutter, “Chinese Nuclear Weapons and American

Interest—Conflicting Policy Choices, ” in JEC, op. cit., vol. 2,

p. 170.
Ch, 7—Strategic Implications of a Modernizing China 169

mation is available about performance or accuracy, but it is generally agreed that China’s

intercontinental ballistic missiles (I CBMS) are

liquid fueled, requiring a long lead time for

launch preparation. Today, China has only a

handful of ICBMS capable of reaching the

United States. Nevertheless, its strategic program is a‘ ‘pocket of excellence’ in its defense

sector, one that testifies to the maxim that significant developments are possible when a program is given high priority.

At the same time, it should be noted that

PLA equipment has proven adequate for most

important military functions undertaken since

1949. China does not need the most technologically advanced systems in all areas to maintain a position as a regional power. China’s defense expenditures are, moreover, of significant

value, 1° and its extensive defense industrial

base has produced large amounts of conventional arms. These weapons, while unsophisticated when compared with those of the two

superpowers, are selling well on the international market, particularly to developing countries. ” China’s reported arms sales to both Iran

and Iraq suggest that its arms export policies

may be a significant factor in some Third

World conflicts. China may also extend its influence in space-related activities, as indicated

by its offers to launch foreign satellites.

Military Strategy

China’s overall military strategy remains a

subject of debate in the West, but deterring

a Soviet invasion remains the top priority. Chinese military planners also intend to improve

their ability to conduct military operations on

their borders and to ensure coastal defense.

‘“RIPS, Asian Security 1985, pp. 77-78: China’s defense budget is now exceeded by that of Japan.

1‘Estimates of the value of China’s arms sales vary. See Claire

Hollingsworth, “Your Friendly Chinese Arms Merchant, ” Wall

Street Journal, June 17, 1985 for an estimate of $1.6 billion in

Chinese arms sales in 1984 alone. See also Anne Gilks and Gerald Segal, China and the Arms Trade (New York: St. Martin’s

Press, 1985). According to one estimate, China became the fourth

largest arms exporter in 1986. See Michael R. Gordon, “War

in Gulf Spurs China’s Arms Export Role, The Washington

Post, May 19, 1987.

1

I \

Photo cred(( X/nhua News Agency

The Long March 2 rocket at the J iuquan (northwest

China) launching site. This two-stage, liquid fuel rocket

first flew successfully in November 1975 and is used

to place payloads in low-Earth orbit. Sweden’s Mail star

may be launched by a Long March 2.

Threat assessments appear less pessimistic

than they were before the death of Mao. A new

strategy called ‘People’s War Under Modern

Conditions” features less emphasis on mobile

and more on positional warfare, less on luring

deep and more on developing capabilities to

counter a front-line offensive threat.12 China

seeks not only to deter Soviet aggression, but

also to develop a reliable strategic retaliatory

capability in case deterrence breaks down.13 A

costly “people’s war” of attrition would be

‘zSee June Teufel Dreyer, “The Streamlining and Reorganization of the Chinese People’s Liberation Army, ” paper prepared by International Studies Association, March 1986, p. 8.

13 Sutter, op. cit., p. 179.
170 ● Technology Transfer to China

used today only as a last resort. Instead, China

seeks to develop the conventional and nuclear

capability to defeat an invader. While the future shape of China’s strategic forces is an

unknown, gradual modernization of existing

forces is expected. A quick strategic buildup

could alarm both superpowers. Uncertainty remains in the West, however, about the speed

and type of military modernization planned for

China’s strategic forces.

Technology Transfers

Given China’s broad range of modernization

goals and its limited financial and skilled manpower resources to assimilate technology, it

is not surprising that military imports have

been limited during the past decade. Western

observers have been unable to identify an overarching theme that guides China’s acquisition

of foreign weapons systems.14 China’s few military acquisitions in the past decade have

spanned the gamut of mission areas, as indicated in table 2 of appendix 6, volume II.

Despite this apparently unsystematic approach to foreign weapons acquisition, significant incremental changes can be discerned.

The T-69 tank, an upgrade of the T-59, includes

a foreign-made, infrared searchlight and laser

range finder. Electronic improvements in the

F-8 will also result in incremental changes if

implemented as planned. Generally speaking,

importation of foreign military technology has

been geared toward marginal improvements

in already existing Chinese military systems.

Purchases have often been small, representing in many cases “samples” for study .15

Prospects for expanded procurements of foreign military weapons have undoubtedly improved in recent years. However, China will

probably continue to find it too expensive to

140ne explanation for this lack of coherent strategy is that

some parts of the Chinese bureaucracy appear more eager to

import foreign weapons than others. There is a natural divergence in perspective between the Chinese factories producing

antiquakd hardware and the end users attracted to technologically advanced foreign products. There is also a sharp divergence between the strategic programs, where importation is virtually precluded, and China’s conventional force needs.

“International Institute for Strategic Studies, The Military

lhhmce 1986-87 (London: 1986), p. 140.

import weapons on a large scale. Nor does it

seem likely that China would readily turn to

foreign suppliers for complete weapon systems.

China’s limited importation of military technology is guided by the goal of improving indigenous design and production capabilities

over the long term. See chapter 8 for a discussion of U.S. military sales to China.

In contrast to purely military sales, dual-use

technology transfers have expanded markedly

during recent years. Theoretically, such dualuse exports could contribute to military modernization. A powerful computer, for example,

could be used to improve the efficiency of a

military or a civilian production facility. How

have these transfers affected China’s military

capability?

During 1985, U.S. exports of computers and

office machines to China were valued at more

than $187 million.17 Table 8 in chapter 4 provides an overview of the expanding values of

licenses granted for exports to China during

recent years. Electronic machinery imports,

particularly computers and integrated circuit

manufacturing technology, have been a particularly prominent growth area as shown in

the licensing data. Imports of dual-use technologies came from a wide array of supplier

countries, and a number of Chinese organizations were involved.

Most dual-use imports are imported by civilian end-users in China, but it would be a mistake to assume that the military could not acquire them. On the other hand, it is not clear

that military factories would necessarily be

able to assimilate and use such imports suc-

““Dual-use technology” has both military and civilian applications. Much advanced technology today falls into this category. The United States controls exports of such technology

through required review of export licenses, as outlined in the

CCL. For purposes of this study, dual-use technologies of particular concern are included in the technologies and products

that today require interagency and COCOM review for export

to China. As discussed in ch. 8, U.S. policies have shifted during the past 7 years to loosen restrictions on exports to China,

but many high-technology products still require such reviews.

“U.S. Department of Commerce trade data. During the same

year, the U.S. Government issued licenses for $3.8 billion in

computer exports to China. Clearly, in many instances final shipment never occurred. This discrepancy is analyzed in ch. 8.
cessfully. Nor does the range of imports suggest a strategy designed to target dual-use imports to a few key military operations.

The question of military access to dual-use

technology hinges centrally on the degree of

overlap between civilian and military production. All of China’s six major ministries involved in weapons-related production are also

responsible for producing civilian products.

The Ministry of Aviation and the China State

Shipbuilding Corp. build planes and ships, for

example, for both civilian and military uses.

As in the United States, many defense factories are managed by civilians. Similarly, China’s

premier research establishment, the Chinese

Academy of Sciences, has been strongly involved in the strategic program and in avionics

and aircraft research and development.

Although military factories do have some

advantages over civilian factories (e.g., in

their priority for acquiring resources), there is

no evidence that they have superior capability across the board. Even if China’s military

can obtain foreign advanced technology, history suggests that it will not be an easy task

to assimilate it. This is illustrated by the case

of dual-use transfer to the military involving

the Spey jet engine. Despite the fact that it

was a landmark project, the factory never began serial production. A number of factors undoubtedly contributed to this situation, but

the result was that the Chinese did not fully

assimilate the Spey technology so that they

never began manufacture.

Moreover, examples of successful reverseengineering by the military are few. China’s

production system is plagued by systemic

problems that limit productivity and reduce

the potential effects of technology transfer domestically. China faces a number of obstacles

to the full assimilation of foreign technology

in areas important for military production:

China does not have adequate semiconductor

‘“See, for example, K.C. Yeh, Industrial Innovation in China

M’ith Special Reference to the Metallurgical ]ndus.try (RAND

Note), May 1985. Yeh notes that by the early 1980s the ratio

of scientific and technical manpower to total employment in

the defense industries was three times that for the country as

a whole.

Ch, 7—Strategic Implicafions of a Modernizing China . 171

materials technology, precision testing equipment, and the clean-room facilities required for

mass production of integrated circuits. (The

circuits are vital to the manufacture of sophisticated electronic systems necessary to upgrade PLA command, control, and communications.) Nor does China have the capacity to

produce the metal alloys required for advanced

airframe construction. Although China is

richly endowed with metals such as nickel,

titanium, molybdenum, magnesium, and cobalt, China’s factories have been unable to ensure the requirements for processing highpurity metals.

Regardless of whether or not the military

factories will effectively make the transition

to civilian production, the effect of current reforms (if implemented) will be to blur further

the distinction between civilian and military

production. This will make it even more difficult for foreign suppliers to set constraints that

limit use of their technology by the military.

Military needs are probably factored into the

purchases of foreign technology and equipment

by the machinebuilding industries, though not

through any monolithic targeting strategy like

the one developed by the Soviet Union to obtain advanced Western technology. The National Defense Science, Technology, and Industry Commission (ND STIC), however, reviews

requests for foreign technology above certain

dollar amounts to determine priorities and

whether Chinese-made equipment could be

substituted, thus ensuring that military require

ments are at least taken into account in major

foreign technology acquisitions.’” The China

Defense Science and Technology Information

Center was set up a decade ago to monitor foreign technology developments for the military.

The conclusion that follows from this analysis is that the military could in principle obtain dual-use technologies, but would not necessarily be in a better position than a purely

‘sSee U.S. Department of Defense, Soviet Acquisition of

Militaril-v Significant 14’estern Technology: An Update, September 1985, for a description of the Soviet targeting effort.

Wee Frieman for a discussion of the role of the NDSTIC and

its interaction with various ministries, pp. 10-19.
172 . Technology Transfer to China

civilian factory to assimilate them. Nor is there

evidence that past dual-use transfers have led

to significant improvements in China’s military capability .2’

On the other hand, the cumulative impact

of dual-use transfers will probably be noticeable in China’s military production by the year

2000. While the most significant and dramatic

improvements in China’s military capability

may occur through military imports, dual-use

transfers will permit gradual overall improvements in production capability. More specifically, raising the technical skills of the workforce, upgrading numerical and quality control,

and improved management and manufacturing

techniques should eventually lead to better

production in military as well as civilian factories.

Over the short term, China faces such a wide

array of shortcomings in its military that most

imports of sophisticated dual-use technologies

are likely to result in improvements only on

the margin. Unlike the Soviet Union, where

a single dual-use technology may fill a critical

hole in a modem military system, China’s more

extensive needs cannot be effectively addressed

in this way. In China, however, incremental

progress across the board may well be coupled

with substantial improvements in key areas

such as launch capabilities for strategic weapons. These developments will surely heighten

China’s role, particularly as a regional power

in Asia, during the 20th century.

Looking ahead to the year 2000, many dualuse transfers carried out over the 20 years previous can be expected to contribute to an overall upgrading of China’s military capability.

China cannot emerge as a military superpower

on par with the United States or the Soviet

Union by 2000, but if it succeeds in its overall

economic modernization program, it will be

poised to make significant leaps in overall military capability thereafter. Even before that

time, improvements in key areas of military

operations or in logistics and transportation

may occur that will improve China’s ability to

21 See ch-8 for discussion of dual-use sales to China’s military.

defend itself or launch attacks against neighboring countries. Because the United States

and the Soviet Union will continue to improve

their own military capabilities, however, China

stands little chance of catching up with either

of the superpowers over the next 30 years.

U.S. Policy Considerations

U.S. policies concerning transfer of dual-use

and military technologies are based on assessments of myriad factors, among them, potential risks or benefits to U.S. national security.

Current policies reflect an evaluation that

transfers of most dual-use technologies are unlikely to affect China’s overall military capability significantly in the near term. Therefore,

with improvements in bilateral relations has

come a loosening of U.S. export restrictions.

As discussed more fully in the next chapter,

controls are maintained on the most sensitive

technology exports.

Military transfers (to date, few in number)

are guided by the principle that military cooperation is a natural part of the bilateral relationship and that improvements in Chinese air

defense and antiarmor capabilities can help deter the Soviets without threatening China’s

non-Communist neighbors. U.S. policy on munitions restricts exports that would improve

China’s capabilities in key mission areas: nuclear weapons design, antisubmarine warfare,

electronic warfare, intelligence gathering, and

the projection of power (Table 15 lists the technologies involved in the anti-submarine warfare mission area.)

The limited scope of U.S.-China military cooperation is illustrated by the scope of government-togovernment sales through the Foreign Military Sales program.22 Despite a host

of official visits of defense-related officials from

both countries, many observers believe that

military cooperation will proceed slowly in the

near term.23 The trend so far has thus been for

22The Foreign Military Sales program has been permitted to

make sales to China since 1984, but few have yet occurred.

23 Kerry B. Dumbaugh and Richard G. Grimmett, U.S. Arms

Sales to China, Congressional Research Service Report No.

138-F, 1985.
Ch. 7—Strategic Implications of a Modernizing China ● 173

Table 15.–Anti-Submarine Warfare Technology

Anti-submarine warfare (ASW) consists of those warfare elements that result in the detection, identification, and destruction or disabling of an enemy submarine. ASW can be conducted from any suitable “’platform” from the air, sea surface, or

from another submarine. The basic functions needed to successfully conduct the ASW mission are the same for each platform and are described below.

Functions:

1, Detection of the enemy submarine by either acoustic or nonacoustic methods.

2. Classification determination of the type of target.

3. Localization target motion analysis and contact management.

4. Approach to the Target closing in on the submarine to within range of one’s own ship or aircraft weapons.

5. Weapon Deployment (Launch) the actual attack.

6. Evasion and Reattack activities performed if necessary.

7. Related Functions tactics such as mine avoidance, mine deployment, and surveillance that are performed as

necessary,

Although the basic required ASW functions I isted above are always the same, the complexity and difficulty of each of these

elements varies from case to case and from platform to platform.

Technologies:

The technologies required to accomplish the above functions effectively span a large range of engineering and scientific

disciplines. They can be categorized as follows:

1. Mechanica/ Engineering: propulsor design, low-noise machinery, low-speed turbines, bearing design, and quiet weapon

launch design.

2. Hydrodynamics: hull design (for speed), boundary layer control theory, and pipe-flow design.

3. Materia/s Engineering: corrosion-resistance technology, ceramic design, elastomer technology, lightweight structure

development, composite materials, and sensor technology.

4. Acoustic Engineering: sonar dome/outer decoupler design, transducer design, baffle design, machinery sound isolation, quiet weapon launch design/propulsion, acoustic miniaturization, and damping material design.

5. Sonar Design: algorithmic development for classification techniques, acoustic correlation techniques, tracker design,

contact motion analysis techniques, beam forming techniques, spectrum analysis, adaptive noise cancellation, transient analysis, automated detection techniques, automated classification techniques, automated trackers, and adaptive processing.

Additional technologies involved in sonar design are passive ranging techniques, multi path processing techniques,

weapon guidance techniques, acoustic performance prediction techniques, environmental sampling techniques, active sonar processing techniques, low probability of intercept concepts, and satellite environmental observation.

6. Power Engineering: high-density, power-pack design; small-size, high-power train design; and high-impulse/exotic fuel

design.

7, Computer Design: bus/local area network design, spectrum analyzer design, microelectronic design, beamforming design,

high-speed mathematics processor design, minicomputer design, and transient processor design.

8. Graphic Engineering: high-speed graphic techniques, color/bit plane graphics, large-field graphic design, and manmachine techniques.

9. Warhead Engineering: shaped-charge techniques, fusing design, and high-explosive technology.

10, E/ectrica/ Engineering: power engineering, pulse-forming design, and high power/rapid transient design.

11, /Vonacoustic Engineering: magnetic anomaly detection technologies.

It is clear that there is no one ASW technology; capabilities are required across a broad spectrum of engineering and science.

Some technologies are critical in the sense that if their performance is substandard, the whole ASW system is significantly

affected. It is necessary to conduct each stage of an ASW attack adequately to be successful. On the other hand, there are

degrees of successful implementation of each stage. Each increased level of sophistication will have a higher level of success I n ASW, but there are many different levels that can be successful.

SOURCE Adapted from “Assessment of ASW Technology Transfer to the People’s Republlc of China, ” contractor report prepared for OTA by Global Associates, Ltd

Alexandra VA Dec 17 1986

rapidly expanding sales of dual-use technologies, coupled with increasingly frequent military visits and infrequent military sales (e.g.,

the avionics package for the F-8).

If controls are further relaxed, the key question from a national security perspective is:

Which technologies currently restricted could

make a significant difference in China’s military capability if transfers were permitted? If

China were to import greatly advanced radars

and electronic countermeasures (above those

needed for air defense), the ability of the air

force to mount offensive attacks against neighbor states would be strengthened. The navy’s

capabilities could be upgraded through irnproved propulsion systems, electronic surveillance systems, and air cover. Improvements

in ground force equipment, however, would remain of limited value in engagements along
174 ● Technology Transfer to China

the borders unless more effective air cover and

naval support were available. China’s ability

to project force thus depends on improvements

in those areas in particular.

Possibly the most significant changes in Chinese military capability would accompany

transfers of technologies that improved its

strategic nuclear deterrent. For instance, technologies that improve China’s missile targeting and real-time imaging from satellites could

significantly affect China’s military capability.

These judgments are based on a general

assessment of China’s military requirements.

In practice, export administrators make decisions about the risks of transferring dual-use

technologies on a case-by-case basis. In each

case, it is necessary to ask how the transfer

could affect China’s military capabilities.

For example, anti-submarine warfare (ASW)

is one of the key mission areas mentioned

above. Until such time as a political decision

is made that enhancing China’s ASW capability will not compromise U.S. national security,

technologies that would contribute to ASW

must be controlled. However, many different

technologies are involved in ASW, as described

in tables 15 and 16, and a large fraction are

also used for commercial purposes. Those technologies useful only for ASW are obviously

candidates for strong control (essentially, red

zone), whereas it would serve no purpose to

control those that are not critical or are readily available commercially. The difficult decisions involve technologies that are critical but

available to some extent (group b in table 16).

An additional complication arises because

few technologies come in one form only. There

is generally a range of sophistication available.

In most cases, military systems incorporating

the latest, most sophisticated versions of technology have the greatest capabilities. More

limited versions of the same technology may

be of little concern (e.g., ASW systems that

can detect noisy submarines but not American

subs, which are very quiet). This factor requires

criteria to be set based on critical characteristics of the technology (e.g., speed of operation).

Below a certain level, a particular export license application for equipment or technology

is considered to be in the green zone because

it could not contribute to a military system

that would be of concern. Applications involving equipment or technology above that level

are reviewed on a case-by-case basis and referred to other agencies. A key policy decision

is under what conditions should these applications be approved. Another is where to draw

the cutoff line for technologies that will not

be exported under any conditions.

These points are illustrated by the handling

of spectrum analyzers, one of the critical, dualuse technologies for ASW, described in box B.

Hewlett-Packard is a major manufacturer and

exporter of spectrum analyzers. It offers three

real-time models of the type appropriate for

ASW use. Model 3561A requires about 170

milliseconds (ins) to calculate 512 lines, well

within the green zone. However, recent export

applications have been handled by the Department of Commerce (DOC) as above the green

zone. Model 3562A is much faster at 2048 lines

in 50 ms. Model 3565S is a multichannel system with a computational rate that varies depending on configuration. Its status is unclear.

None of these models would be used as the

prime technology in a U.S. ASW system, but

3562A is considered quite fast. Similar, though

probably not quite as sophisticated, equipment

is made in other countries, including Germany

and Japan.

If the green zone were enlarged, applications

which now have to be referred to the U.S. Department of Defense (DoD) and to the Coordinating Committee on Multilateral Export Controls (COCOM) might be eligible for expedited

licensing. One approach would be to include

models faster than the present speed of 512

lines in 50 ms. Models 3561 and 3565 (under

most configurations) could be placed well in

the green zone with lttle ambiguity. The National Council for U.S.-China Trade has proposed an alternative change for Commodity

Control List 1529 that would make all spectrum analyzers green zone if they have a realtime rate of 10 kHz or less. This criterion would
Ch. 7—Strategic Implications of a Modernizing China 175

— —.——

Table 16.—Anti3ubmarine Warfare Technology: Criticality and Availability

— —

a. Those technologies that are critical to ASW and are

not commercially available are candidates to be com

trolled.

Propulsion Design

Low-Noise Machinery Design

Sonar Dome

Transducer Design

Classification Techniques/Algorithms

Acoustic Correlation Algorithms

Contact Motion Analysis

Tracker Design Algorithms

Passive Ranging Techniques

Weapon Guidance

High-Density, Power-Pack Design

Small-Size, High-Power Train Design

Exotic Fuel Design

Power Engineering

Multi path Processing Techniques

b. Those technologies that are critical to ASW and are

not commercially available are candidates to be con.

trolled. However, a lesser technology will provide

either a significant ASW capability without these techniques or a more primitive version of the technique.

Low-Speed Turbines

Bearing Design

Baffle Design

Beamformer Techniques

Local Area Network Design

Spectrum Analyzer Design

Microelectronic Design

Beamformer Design

High-Speed Graphic Techniques

Color/Bit Plane Graphics

Shape Charge Techniques

Fusing Design

Magnetic Anomaly Detection

c. Those technologies that are critical to ASW but that

are so available commercially that controls would be

futile.

Corrosion Resistance

Ceramic Design

Elastomer Technology

Machinery Isolation

Spectral Analysis Algorithms

Acoustic Performance Prediction Techniques

Environmental Sampling Techniques

High-Speed Math Processor Design

Minicomputer Design

High-Explosive Technology

d. Those technologies that are not believed to be critical

today but may be in the future.

Transient Processor Design

Satellite Environmental Observation

Low-Probability -of-Intercept Techniques

Active Sonar Processing

Adaptive Processing

Quiet Weapon Launch Design

Lightweight Structure

Sensor Technology

Quiet Weapon Propulsion

Acoustic Miniaturization

Adaptive Noise Cancellation

Transient Analysis

Automated Detection Algorithms

Automated Trackers Algorithms

Automated Classification Algorithms

Hull Design

Boundary-Layer Control

Pipe-Flow Design

Damping Material Design

Man-Machine Techniques

Large-Field Graphic Design

Pulse-Forming Design

Rapid Transient Design

SOURCE Adapted from “Assessment of ASW Technology Transfer to the Peo Ple’s RePubllc Of china, ”

———

contractor report prepared for OTA by Global Associates, Lid -

Alexandra VA, Dec 17, 1986

be easier to relate to specific equipment than

are the present criteria.

While it is obvious that either change would

ease the burden on DOC and exporters such

as Hewlett-Packard, the degree to which it

would increase sales is not easily determined.

China is unlikely to start buying many more

spectrum analyzers for commercial purposes

just because it can get prompter delivery with

less licensing uncertainty. In so far as the

United States is more stringent in approving

borderline applications than other countries,

moving some models to the green zone would

improve American competitiveness. However,

it is not clear that this has been an important

factor for spectrum analyzers. It is possible

that some sales are now lost when license applications are mistakenly treated as above the

green zone. Raising the limit would make this

less likely for those models. As of January

1987, applications were pending for more than

60 days for 170 spectrum analyzers of all types,

but only a few were real-time analyzers. Typical prices for spectrum analyzers are in the

range of $10,000 to $40,000. If the total sales

to China of real-time spectrum analyzers were

on the order of $1 million per year, liberalizing the limits might add as much as several

hundred thousand dollars.

The other half of the equation–the effect of

liberalizing controls on China’s military-is no

easier to answer. Even quite sophisticated
176 ● Technology Transfer to China

BOX B.—Spectrum Analyzers

Spectrum analyzers are electronic instruments used to display and measure the frequency and

amplitude of electromagnetic waves. They are used by industry for vibration analysis of machinery

or in the manufacture of electronic equipment such as disk drives, and other applications. There

are two types of commercially available spectrum analyzers. The “swept tuned” analyzer has fewer

restrictions for sale to China, and, not being applicable to ASW, will not be discussed here. The

“FFT-based” spectrum analyzer can be used for ASW because it is faster in the required frequency

range.

In their simplest form, spectrum analyzers convert an electromagnetic signal into a series of

sine waves through a process known as Fast Fourier Transforms (FFT). If an ordinary power line

is analyzed, the spectrum analyzer shows essentially a single sine wave at 60 HZ.

l A more complex

signal would be shown to be composed of several or many sine waves of different frequencies and

energy levels. The pattern of these component sine waves reveals much information about the original generation of the incoming signal.

Spectrum analyzers can operate at low frequencies (approaching zero Hertz (Hz), commonly

referred to as direct current), up to microwave frequencies of 300 GHz. Current technology does

not permit a single instrument to operate over this entire range so spectrum analyzers are designed

to operate over specific ranges, such as O to 100 kHz or 6 to 50 kHz. In addition to operating over

different frequency ranges (bandwidths), models differ in the accuracy and resolution with which

they measure the amplitude and frequency of input signals, in their processing speeds and capabilities, in programmability, and in the number of signals they can analyze at any given time.

The major concern in determining whether a spectrum analyzer should be subject to export

restrictions is whether it can make realtime” measurements. That is, whether the instrument can

continuously acquire and transform rapidly changing data (e.g., voice signals) fast enough that no

data is lost or ignored. Many commercial spectrum analyzers can make real-time measurements

on data that changes up to 10,000 times a second (i.e., 10 kHz). Some are capable of faster operation.

As noted in tables 15 and 16 on anti-submarine warfare, spectrum analysis is a key part of the

sonar system that detects and cJamifies the target. Each type of submarine produces acoustic emissions which are characteristic of ita machinery and hull design. These emissions are received and

displayed on a spectrum analyzer, where they can be compared with known emission patterns of

various submarines to identify the type.

Real-time spectrum analyzers are included in Commodity Control List (CCL) category 1529,

which has an advisory note “licenses are likely to be approved for export to satisfactory end-users

in the People’s Republic of China of the following equipment:. . , spectrum analyzers employing

time compression of the input signal or Wet Fourier Tmnsformtechniqyesnot capable of: l) Analyzing

signals with a frequency of greater than 100 kHz if the instrument uses time compression, or 2)

Calculating s12 complex lines in leas than 50 ms [milliseconds].” The latter requirement says in

effect that a spectrum analyzer is green zone if it is not capable of resktime analysis above about

10 kHz, but putting this criterion into practice is not straightforward. There appears to be room

for disagreement on whether qwcific models comply. The Departmant .of Commerce reports that

it has been able to get spectrum analyzeds approved for export to China that have been as fast

as 512 complex lines in 4 millisecon& This represents a de factp red line, at least at present.
Ch, 7—Strategic Implications of a Modernizing China . 177

Photo cred(t Hewlett Packard

The Hewlett Packard model 3562A dynamic signal

analyzer is being used for spectrum analysis of

electronic equipment. This model is too fast and

sophisticated to qualify under the present

green zone criteria.

spectrum analyzers have already been sold to

China, though only after the license application has been approved by DoD and COCOM

(taking into account the end user, intended application, and the capabilities of the particular model in question.) One such model was sold

to a People’s Liberation Army hospital. However, design and manufacturing information

is unlikely to be transferred, and spectrum

analyzers would be extremely difficult for

China to reverse-engineer and manufacture.

The concern over the export of equipment is

that China could divert these relatively sophisticated spectrum analyzers (along with other

equipment) to develop a greatly enhanced

ASW system. The present system provides

some control over the numbers exported to

China and information on their whereabouts,

thus limiting the number that China could divert to military applications.

The question on the military implications

comes down to whether the United States cares

if China has access to a large number of spectrum analyzers with capabilities somewhat

above those in the present green zone. Several

viewpoints can be taken. A moderate relaxation of the 50 ms criteria (perhaps to 20 ms)

or a change to the 10-kHz real-time bandwidth

criterion would not contribute to ASW capabilities that would interfere with U.S. submarine operations. Similarly, new U.S.S.R. subs

are much quieter than older ones and presumably would also not be vulnerable to such a

system, but Soviet planning would be complicated if it had to replace older subs patrolling

the China coast with new ones to evade the

new ASW system. However, Taiwan has several older subs that could be jeopardized in the

event of an attempt by the mainland to forcibly reunite the country. Thus a decision on

revision of export controls is a function of

technology, political questions, and military

strategy.

Given the obvious weaknesses of China’s

military, there are many dual-use technologies

(particularly those that improve defensive capabilities) now restricted that could be transferred without significant effects on China’s

position vis-a-vis other Asian countries. Some

types of dual-use technologies however, have

not been transferred, but could have widespread and significant effects on China’s military capability if successfully adapted and assimilated.

Consider a hypothetical Chinese request for

a supercomputer. Powerful computers such as

the Cray-2 are used in processing large amounts

of data (satellite imaging and acoustical intelligence). z

’ But the Chinese would not necessarily be able to use a supercomputer effectively for those purposes if they were to obtain

one in the near future. Chinese scientists and

technicians would need complicated software

and highly specialized algorithms to use a su-

“The Chinese-made supercomputer called the Galaxy does

not compare with the Cray-2 in speed and power as discussed

in app. 2, vol. II of this report.
178 ● Technology Transfer to China

percomputer for such purposes. Chinese computer scientists might be able to produce useful software for specialized purposes such as

nuclear weapons design, but for many years

it would not be as sophisticated and powerful

as that used in the United States. A variety

of safeguards (presence of U.S. technicians

around the clock, repairs and maintenance by

U.S. personnel, no dial-up capability from other

machines) could be used to limit unauthorized

access to a supercomputer.

On the other hand, no safeguard provides

a perfect guarantee. China’s military capabilities could be improved by use of a supercomputer, but the degree would depend on the applications to which the supercomputer would

be put. Judgments about whether improved

Chinese intelligence gathering (for example)

would pose a risk to the United States or to

other Asian countries depend fundamentally

on assessments of China’s political and strategic goals and policies.

Export control decisions are also complicated by Japanese production of supercomputers comparable in many ways to those made

in the United States. New approaches such as

parallel processing, moreover, will eventually

make it possible to combine smaller machines

so that they can perform the functions of a supercomputer.

More common than the example of the supercomputer (where the applications are widespread) are other decisions about items that

in isolation are likely to have much more

limited effects. Laser gyroscopes, to take one

example, are used for inertial navigation by

both civilian and military aircraft and for strategic missile guidance. Improving the accuracy

of China’s missiles requires gyroscopes, but

the acquisition of a handful of these items

would probably not produce dramatic changes.

Improvements in mapping, for example, would

also be essential. While gyroscopes could theoretically be reverse-engineered, their construction requires a special type of glass produced

only in the United States and Japan. The risks

associated with transferring a small number

of such items are thus mitigated (but not eliminated) by such factors.

In the near term, U.S. export administrators

may find themselves pulled in two directions.

In light of the many weak points in China’s

military, the transfer of small numbers of items

alone may not appear to pose a significant

threat to the United States. Moreover, a

friendly China more able to deter Soviet aggression may be seen by the United States and

other Asian countries as more an asset than

a liability. Cooperating with China in civilian

and military technology transfer may also permit expanded knowledge of China’s system

and strageic thinking.

On the other hand, periodic assessments

must be made about whether a step-level improvement has taken place in a military mission area because of incremental changes.

Numerous “routine” transfers by the United

States and other suppliers may result in a significant improvement in a particular military

operation without an overall U.S. policy assessment that assisting China in this way is desirable. Even if such improvements have no effect

on China’s capability vis~a-vis the United

States or the Soviet Union, which seems likely,

they could affect China’s military balance with

other Asian countries.

As China modernizes its military and economy, neighboring countries may expand military expenditures in response to, or demand

equal treatment in arms sales from, the United

States. China will become an increasingly important regional power. Globally, China may

be in a key position as a larger arms seller and

potential transferor of military technologies.

Therefore, the nature and scope of China’s own

export policies will be important to Western

interests.

An important caveat is, however, appropriate. Firms from many Western countries can

supply military and dual-use technologies to

China. There is room for national discretion

on export policy within the bounds of the Coordinating Committee for Multilateral Export

Controls system. In addition, and potentially

more important, China is not restricted to

COCOM countries for the purchase of advanced technologies. Other developing countries may re-export equipment which they have
Ch. 7—Strategic Imp/ications of a Modernizing China ● 179

purchased from COCOM countries or which

they have produced themselves. The ability of

the United States to restrict China’s military

modernization unilaterally is therefore quite

limited.

Conclusion

China cannot become a military superpower

by year 2000, but it will be increasingly able

to play a more influential role in Asia if current policies achieve their goals. The United

States and China thus today share mutual interests in ensuring peace and stability in Asia

during the next 15 years. From the Chinese

perspective, a policy designed to support such

a climate is the most promising avenue to eventual military modernization (given the wide

range of China’s military shortcomings). Yet,

even if current policies are maintained, China’s

interests are by no means identical to those

of United States or other friendly countries in

Asia. How China will choose to exercise its

power will remain an important question for

U.S. policy makers that lends an element of caution to U.S. debates over technology transfers.

The level of technology transfers (dual-use

and military) in the best U.S. national interests will not be constant. China will ask for

more sophisticated computers, telecommunications, and manufacturing technologies, and

other Western suppliers will probably be eager

to sell. Military cooperation will cover a range

of activities including visits by defense delegations, exchange of intelligence information,

port calls, and other more symbolic interactions, as well as fuller involvement via coproduction and assistance in modernizing entire

weapons systems. The latter clearly holds a

much stronger potential for improving China’s

military capability. Without a clear policy

framework during this intermediate period, expectations may be raised and then dashed, with

adverse political repercussions. U.S. exporters

and license exam.iners need clear guidance from

policy makers.

U.S. technology transfer policies will continue to involve a delicate balance: promoting

trade and technology transfer in many areas

while maintaining controls on exports of the

most militarily sensitive equipment and technologies. Decisions about transferring technology routinely hinge on a variety of technical

judgments, but policies must be based on a

reading of broader political and economic developments. Uncertain y about the future

shape of China’s policies and military strategy will undoubtedly introduce an element of

restraint in a technology transfer policy that

is generally designed to promote fuller interaction between the United States and China.

THE ASIAN SECURITY ENVIRONMENT

The significance of the issues surrounding

Chinese military modernization must be seen

in the context of the Asian security environment. Since the U.S. withdrawal from Vietnam

in 1974, the East and Southeast Asian region

has enjoyed an era of stability and relative

peace. The war in Kampuchea, involving Vietnamese troops and the Khmer resistance forces

opposing the rule of the Vietnamese-backed

Heng Samrin regime, has been the main conflict in the region in recent years, a conflict that

also led to the Chinese punitive attack on Vietnam in 1979. For most of the countries of East

and Southeast Asia, however, the recent past

has been a time of peace and stability, which

has been welcomed by the countries of the region as a necessary condition for the remarkable economic growth that many of them have

experienced.

Nevertheless, there are continuing tensions

in the region, and serious security problems

that remain unresolved. The United States and

other countries in the region view the growth

of Soviet military power in the Pacific as the

chief threat to regional security. The most active destabilizing situation is the Kampuchean

problem, with its implications for the security
of Thailand and the other Association of Southeast Asian Nations (ASEAN) states and for

Sin~Soviet rivalry in the region. The situation

on the Korean peninsula and the Taiwan problem also indicate unresolved tensions that

could lead to armed conflict. Some of the potential conflicts-most notably those in Korea and along the Sine-Soviet border—are of

global significance.

Perceptions of security threats differ in important ways from country to country. Four

great powers—the United States, the Soviet

Union, Japan, and China-have active interests in the region. The perceptions of these nations differ, sometimes significantly. Add to

these the varying perspectives of the smaller

states such as Korea and Singapore and those

of an aspiring power such as Indonesia and it

becomes clear that interests in Asian security

are quite complicated.

The powers in the region have concerns

about unpredictable trends. The United States,

China, and Japan, for instance, are unsure

of Soviet intentions under Gorbachev. The

Soviets are concerned about the direction of

Japanese security thinking and future behavior. The course of U.S.-China relations, and

whether the latter will have a military dimension that would be threatening to the Soviet

Union, is of particular concern to Moscow. The
Ch. 7—Strategic Imp/ications of a Modernizing China ● 181

United States and Japan, as well as the Soviet Union, have active interests in China’s future course.

The powers in the region are also concerned

that the strategic rivalry between the United

States and the Soviet Union may intensify the

arms race in Asia and the Pacific, involving

allied nations as well as the superpowers. Moreover, U.S.-Soviet conflicts in other regions

could spill over into Asia. In this sense, Asian

regional security is very much related to the

global U.S.-Soviet competition, both affecting

and being affected by it.25

Of greatest concern to the United States has

been the growth of Soviet power in the region.

Since the end of the Vietnam war, Soviet military assets have increased substantially as

Moscow strengthens its eastern defenses and

becomes an Asian/Pacific power. The Soviet

naval buildup in the Pacific, including 90 surface warships, 135 submarines (65 of which are

nuclear powered), and two of its three aircraft

carriers, threatens the naval dominance long

enjoyed by the U.S. 7th Fleet.2G The Soviet

Union benefitted from the U.S. withdrawal

from Vietnam by acquiring permanent air and

naval facilities at Danang and Cam Ranh Bay.

A squadron of MiG-23s based in Vietnam can

provide air cover for the 8 TU-95 Bear D reconnaissance planes and 16 TU-95 Badger bombers also based there. Ten of the Badgers have

cruise missile capabilities, and the United

States believes that the Soviets may increase

their number to 30. The Badgers have a combat radius sufficient to extend to all ASEAN

states .27

Today, between 25 and 30 Soviet warships

are likely to call at Cam Ranh Bay at any one

time. This contrasts with 1979, when the So-

“David Holloway, “U.S.-Soviet Strategic Competition and

the Security of Northeast Asia, ” Prospects for Peace and Cooperation in the Asia-Pacific Region, A Special Report of the

Center for International Security and Arms Control (Stanford,

CA: Stanford University, March 1986), pp. 18-19.

‘fiMasashi Nishihara East Asian Security (New York: New

York University Press, 1985), p. 30; See also, William Branignin, “Soviet Military Operations Seen Increasing in the Pacific, ”

The Washington Post, Aug. 1, 1986, p. A17.

‘-Donald S. Zagoria, “The USSR in Asia in 1985, ” .4sian Survev, vol. XXVI, No. 1, January 1986, P. 22.

viet Pacific Fleet cruised into the waters of the

South China Sea only occasionally .28 The overall buildup of Soviet forces in the Pacific, in

combination with the basing opportunities in

Vietnam, gives the Soviet Union power projection capabilities into the Indian Ocean from

the Pacific (as well as from its bases in Yemen

and Ethiopia).

The Soviets deploy an estimated 40 divisions

(370,000 troops) along the Sine-Soviet border.

Other Soviet assets in the region include some

2,200 combat aircraft, an estimated 135 SS20 intermediaterange ballistic missiles (as well

as SS-18s and air-launched strategic missiles),

and subma.rim+launched ballistic missiles from

submarines on station in the Sea of Okhotsk.29

More recently, Soviet influence has been extended to the South Pacific with the signing

of a fishing agreement with Kiribati that provides for annual payments by the Soviet Union

to fish in the economic exclusion zone claimed

by Kiribati. Negotiations for a similar agreement are under way with Fiji. The nation of

Vanuatu has established relations with the Soviet Union and Libya (and receives foreign

assistance from Vietnam and Cuba) .30

From the Soviet point of view, of course, its

military build-up is in response to what it perceives to be a U.S. strategy of “total military

control” of Asia and the Pacific. The Soviets

see the United States stationing more than

2,000 nuclear warheads in the region, expanding and diversifying the delivery systems for

them, working with allies to modernize conventional forces, and extending political influence with other friendly states.3

1 All this is

occurring in the context of improved U. S.-

China relations and talk of Sine-American military cooperation.

Soviet political influence has thus far failed

to match the buildup of its military assets. Yet,

Moscow has attempted to put a new face on

its diplomacy in the area. Efforts to improve

relations with Japan, and perhaps ease it some-

‘“Ibid.

“Ibid.

‘

(

’Asian Studies Center, Backgrounder, No. 48 (Washington,

DC: The Heritage Foundation, July 24, 1986), pp. 8-9.

31 See Zagoria, op. cit.
182 ● Technology Transfer to China —

what away from its pro-U. S. orientation, are

evident in the visit to Tokyo of Foreign Minister Shevardnadze in January 1986, the first

such visit in 10 years. Efforts to win influence

among the ASEAN states are also being made

with promises of markets for ASEAN products and claims of support for the ASEAN objective of creating a Zone of Peace, Freedom,

and Neutrality (ZOPRAN). These initiatives

have not had strikingly positive results for the

Soviets to date.

Soviet leader Gorbachev’s July 28, 1986

speech in Vladivostok is a sign of the increasing importance the Soviet Union is attaching

to the extension of its political influence to Asia

and the Pacific. In his speech, Gorbachev proposed the withdrawal of Soviet troops from

Mongolia and withdrawal of 6,000 of the more

than 115,000 troops in Afghanistan. He also

offered to negotiate with the Chinese for the

reduction of forces along the Sine-Soviet border. The speech was silent however on Soviet

support for Vietnamese actions in Kampuchea,

a subject of primary concern to the Chinese,

although it implied a willingness to consider

the future role of Soviet forces at Cam Ranh

Bay if the United States was willing to withdraw from the bases in the Philippines. Finally,

Gorbachev indicated a desire for improved relations with Japan, including further high-level

meetings. 32

The two areas where the growth of Soviet

influence has been most evident are Vietnam

and Korea. The aid given to Vietnam, without

which the latter could not prosecute the war

in Kampuchea, is believed to give the Soviet

Union considerable leverage with the Vietnamese. Military aid, including a squadron of

MiG-23s, has also been used to increase Soviet influence in North Korea during the last

few years. While Chinese influence in Pyongyang throughout the 1970s surpassed that of

Moscow’s, North Korean disaffection with the

reform program in China and China’s opening

to the capitalist world (including unofficial

trade with South Korea) presented the Soviet

“Don Oberdorfer, “U.S. Analyzes Gorbachev’s Bid to China, ”

The Washington Post, July 30, 1986, p. 15.

Union with an opportunity to compete (successfully, as it is turning out) for influence

with the North Koreans.33 Improved MoscowPyongyang relations, for instance, have reportedly led to North Korea granting overflight

and landing rights to the Soviets for reconnaissance flights along the Chinese coast.34

In addition to the tensions in Indochina and

the balance of power on the Korean peninsula,

other factors are germane to the security of

the region. These include tensions along the

Sino-Soviet border and the uncertain future of

Taiwan. While the former have eased in the

last few years, and both China and the Soviet

Union seem to want a further reduction in tension, large numbers of Soviet troops are still

deployed along the border, and China still

regards the Soviet Union as the chief threat

to its security. Although China has shown a

willingness to temper its statements about the

future of Taiwan, the Taiwan issue (discussed

further, below) remains volatile-subject to unpredictable domestic political forces in the

United States, China, and Taiwan-and is thus

a potential threat to U.S.-China relations.

There are also unresolved territorial disputes

between some of the countries in the region

of the East and South China Seas. The unresolved dispute over the Kuril Islands to the

north of Japan occupied by the Soviets since

the end of World War II, for instance, continues to be a major stumbling block to the

improvement of Soviet-Japanese relations.

Economic factors are very important for the

stability of the region. Many of the countries

are experiencing structural transitions in their

economies, hoping to move to higher value-

-added production. These transitions, however,

are occurring at a time when the assured export markets, which played such an important

role in past growth, can no longer be taken for

granted, and when increased intraregional economic competition seems likely.

3sRobert G. Sutter, “Beijing’s Relations With Vietnam and

Korea–Implications for Future Change in PRC Foreign Policy, ” paper presented at the Fifteenth SinO-American Conference on Mainland China, Taipei, June 8-14, 1986.

“Paul H. Kreisberg, “The United States and Asia in 1985, ”

Asian Survey, vol. XXVI, No. 1, January 1986, p. 8.
China’s Security Interests

and Foreign Policy

For many of the nations of the region,

China’s future role in regional security remains

a major question mark. A more modernized

China will be a stronger China, and U.S. technology transfer policy is contributing to this

modernization. Assessing China’s likely role

in Asian security is complicated by the unpredictability of the security issues in the area.

The increasing inseparability of economic issues from more traditional security concerns

must also be considered in analyzing China’s

likely international behavior. This confluence

of the economic and the military/strategic is

occurring at a time when the established freetrade regime is under great pressure, a pressure unlikely to be diminished by China’s increasing, international, economic role. Nevertheless, an important factor underlying the

new orientation in Chinese foreign policy is the

benefit Chinese leaders expect from participation in the international economy. The uncertain future of the freetrade regime complicates

our ability to understand and predict China’s

likely impact on the region. The maintenance

of a free-trade regime, and open markets in the

industrialized world for Chinese products, for

instance, may have much more to do with the

kind of security role China plays in the region

than the course of Chinese military modernization.

Despite the many differences between current Chinese foreign policy and that of the late

Maoist era, when China’s prime international

commitments seemed to be to support wars

of national liberation and to oppose the United

States and the Soviet Union, there are certain

constants in past and present approaches, and

the roots of the latter are clearly found in the

former.

Chinese foreign policy shows the combined

influences of domestic and international factors. Among the former are such issues as the

relative influence of politics in policy, the role

of ideology, and the influence of the Chinese

past. Among the latter are the basic distributions of power in the international system, the

Ch. 7—Strategic Implications of a Modernizing China 183

regional context, and the relationships between

China’s foreign policy aspirations and its capability to project influence abroad.35

During the Maoist era, foreign policy showed

the influence of Mao’s preoccupation with “politics in command, ” a tendency to see foreign

policy through ideological lenses, and a view

of the past that explained China’s relative

weakness in terms of the exploitation it suffered at the hands of the imperialists. Politics

and ideology have certainly not been fully expunged from current policy, but clearly economic considerations have also emerged as central factors. Old ideological formulations have

been questioned, and a spirit of open pragmatism is much more in evidence today. While

the Chinese have not forgotten the legacy of

Western imperialism (it is unlikely they ever

will), there is also in evidence a self-criticism

about China’s own responsibilities for its failure to modernize, and thus for its relative

weakness.

In the Maoist period, the international strategic environment was seen as one of clear

bipolarity, with both superpowers deserving

of critical appraisal and condemnation for attempted hegemony. The Asian region was seen

as an underdeveloped area ripe for revolution.

By allying itself with revolutionary forces

abroad, China could serve its ideological beliefs, make common cause with others in opposing superpower hegemony, and extend its

influence within the constraints of its resources

and power potential.

In the post-Mao era, China seems unsure of

the extent to which bipolarity has eroded, but

recognizes a new interdependence in the international environment. This new environment

makes possible a strategy of pursuing security by balancing one superpower against

another. Similarly, the Asian region can no

longer be seen as an undeveloped area ripe for

revolution. It is instead a dynamic instance

of modernization, serving as a counter example to Chinese experience of what successful

“Thomas W. Robinson, “China’s Foreign Policy, Beijing’s

Military Modernization and American Policy Alternatives, ” app.

8 in vol. II of this report, December 1986.
184 ● Technology Transfer to China

economic development and modernization can

be. China thus not only studies the experiences

of some of its capitalist Asian neighbors, but

also wishes to cooperate with them and, in

some ways, emulate them. In the process, it

has discovered that the projection of influence

in support of national interest can be accomplished by means other than military might

and the export of revolution.

A central issue in assessing China’s perceptions of its security interests and its role in

Asian security is how it sees its relations with

the United States and the Soviet Union. China

in the 1960s saw threats to its security from

both the United States in Southeast Asia and

from the Soviet Union on its northern border.

The Soviet invasion of Czechoslovakia in 1968,

followed by the Sino-Soviet border clashes of

1969, convinced the Chinese that the greatest

threat came from the Soviets. This led to the

Chinese desire to explore the improvement of

relations with the United States. Throughout

the 1970s, the Chinese continued to hold to the

view that the Soviets posed the greater danger.

The Chinese today see the United States and

the Soviet Union locked in a grand strategic

competition in the region. They see the Soviets

as trying to strengthen their eastern forces and

to insure sea passages to link their eastern and

western fronts in an effort to thwart United

States attempts to encircle, isolate, and restrict

the exercise of Soviet influence in Asia. To

achieve this end, the Chinese see the Soviets

as striving to undermine U.S. influence with

the nations in the region and to threaten the

security of U.S. sea lanes of communication.3G

In the Chinese view, the United States seeks

to complicate Soviet planning by creating the

possibility of a two front war in Europe and

in Asia. Both superpowers are seen pursuing

strategies that employ military buildups, competition for the control of the sea lanes, and

closer military and political cooperation with

their respective allies in the region.37

— —

3’Xie Wenqing, “Soviet and U.S. Military Strategies in the

Asian-Pacific Region, ” Prospects for Peace and Cooperation in

the Asian-Pacific Region, Conference 1985, p. 25.

“Ibid.

China continues to be most concerned about

Soviet power in Asia and uses its relationship

with the United States, Japan, and other states

to counteract those potential uses of Soviet

power and influence that would be harmful to

Chinese interests. Thus, there is a strong confluence of interest between the United States

and China, for instance, on the general buildup of Soviet Asian/Pacific forces and on the

particular expansion of Soviet influence in

Indochina and Afghanistan. China is also concerned that instability on the Korean peninsula will lead to the growth of Soviet influence

there, as well.

In recent years, China has moderated its

stand on the danger of Soviet expansionism.

This became especially evident in 1981-82,

when the issue of continued U.S. arms sales

to Taiwan threatened U.S.-China relations.

China is thus concerned that it not become too

close to the United States. To do so would

create domestic problems (in light of the sensitivity of the Taiwan issue), would be viewed

by the Soviets as threatening, and would compromise China’s position as an erstwhile

spokesman for the interests of the Third

World.38

China since 1982 has therefore attempted to

make clear that it pursues an ‘‘independent’

foreign policy of “equidistance” between the

two superpowers. Sine-Soviet relations have

improved with the signing of economic, trade,

and science and technology agreements during the 1984 visit to Beijing of First Deputy

Premier Arkhipov, and the signing of additional agreements for economic cooperation

during the Yao Yilin visit to Moscow in 1985.

The latter included an agreement providing for

$14 billion of trade during the next 5 years.

A second agreement involves Soviet help in

building 7 new plants in China, and in renovating 17 others built under the terms of

Sine-Soviet cooperation in the 1950s.39

3’ It is also possible that China viewed its interests in a manner analogous to classical Western balanceof-power thinking.

As the Reagan Administration increased both the will and the

ability of the United States to confront the Soviet Union, China

maintained the balance by shifting from a pro-U. S. to a more

neutral posture.

‘gZagoria, op. cit., pp. 15-16.
Ch. 7—Strategic Implications of a Modernizing China 185

.—.

The Chinese also indicated a willingness to

relax their insistence that any further improvement in relations would require Moscow to

withdraw from Afghanistan, reduce its troops

along the Sine-Soviet border, and discontinue

support for the Vietnamese actions in Kampuchea.’” The July 28, 1986 Gorbachev speech

would indicate that the Soviets are prepared

to meet the Chinese at least part way on these

terms, and Deng Xioaping’s offer in September 1986 to meet with Gorbachev would indicate there is considerably more fluidity in SinoSoviet relations than in the past.41

It is generally assumed that the softening

of the Chinese position on the Soviet Union

has been due to dissatisfaction with U.S. policy on arms sales to Taiwan, as well as a reflection of the influence of some in the Chinese

leadership, such as Chen Yun, who are skeptical of moving too close to Washington. It is

likely that the Chinese wish to relieve tensions

with Moscow to reduce dependence on the

United States, and they may see the dawn of

the Gorbachev era as a prime opportunity .42

Despite improvements in Sine-Soviet relations, there are reasons to assume that China

still sees its interests as being closer to those

of the United States. China recognizes that the

United States does not pose any direct threat,

as does the Soviet Union with its military deployments along the Sine-Soviet border, and

that the United States offers the Chinese access to modern science and advanced technology unavailable from the Soviet Union.

With regard to China’s perceptions of its own

interests in the region, Chinese policy statements have emphasized the importance of

‘“I bid.

4’Deng’s offer, however, contains the precondition that the

Soviets demonstrate their willingness to use their influence in

support of the removal of Vietnamese troops from Kampuchea,

a step which the Soviets may be unwilling and unable to take.

See Daniel Sutherland, “Chinese Leader Offers To Meet Gorbachev, ” The Washington Post, Sept. 7, 1986, p. A21 42 For an exploration of China’s shifting positions vis b vis

the superpowers, see Robert S. Ross, “ International Bargaining and Domestic Politics: U.S.-China Relations Since 1972, ”

World Politics, vol. 38, January 1986, pp. 255-287; and Harold

C. Hinton, “Teng Hsiao-p’ing’s Management of the Superpowers, ” paper presented at the Fifteenth Sine-American Conference on Mainland China, Taipei, June 8-14, 1986.

Photo credit Xinhua News Agency

Installing a Chinese-made manipulator, which will be

used in handling radioactive isotopes.

peace and stability as conditions necessary for

the economic development and modernization

not only of China, but of other countries as well.

China has accordingly tried to develop good

relations with the countries of Southeast Asia

(except Vietnam), and to this end has reversed

its long-standing support for Communist

movements in the area. It places great value

on its relations with Japan, its largest trading partner and source of foreign assistance,

and has softened its stance on South Korea.

The themes of Chinese policy seem to be to foster the conditions for mutually productive economic interchange and to check the expansion

of Soviet and Vietnamese power and influence

in the area.

Two other changes mark the new direction

of foreign policy in the post-Mao era. The first

7.? -.? ~g () - 87 - 7 : (/1, 3
186 Technology Transfer to China

-—. ———.—

is the growth of Chinese participation in international organizations. China’s membership

in the United Nations, the World Bank, the

Asian Development Bank, the International

Atomic Energy Agency and other organizations, as well as its interest in joining the General Agreement on Tariffs and Trade, has

increased its stake in the stability of the international system and is a formal indication

of increasing interdependence.

The second change is the significant modification of the operation of China’s foreign policy machinery. The latter has clearly become

more institutionalized and professionalized in

recent years. While it certainly has not removed domestic politics from the process of

foreign policy making, the system is markedly

more regularized and deliberative than the

“politics in command” style of the Maoist era.43

There is considerable agreement among foreign observers that through a combination of

deft diplomacy and a commitment to the development of strategic weapons for deterrence,

China is satisfying its security needs. Although

China’s own conventional armed forces have

yet to be modernized, and Soviet forces in the

Asia/Pacific region are a potential threat, the

probability of hostile actions being directed

against China has been reduced. Indeed, as one

observer put it, China’s relations with the

superpowers are much better than the superpowers’ relations are with each other.44

China’s response to superpower competition

is also influenced by its own resource base and

level of modernization. Given the numbers and

sophistication of weapons possessed by the superpowers, China, to compete, would require

investments in military modernization that

would almost certainly doom programs for the

modernization of industry, agriculture, and science and technology. Even with such military

investments, it is likely that China would still

be in a relatively weaker position vis-k-vis the

superpowers, whose own weaponry would continue to develop. Thus, China’s current course

of “managing” the superpowers diplomatically, while still maintaining a nuclear deterrent (however modest), can be seen as a rational

response to the cardinal power relations in the

international system.

The questions many foreign observers ask

of Chinese foreign policy are how stable this

current course is, and what could lead the Chinese in less friendly and constructive directions? Chinese foreign policy has not been entirely consistent, especially with regard to the

important issue of relations with the superpowers. Inconsistency is worrisome in light of

the consequences of a successful modernization program. A modernized China will be

richer, stronger, and more capable—a nation

better able to insist on its way in both world

and regional military/economic affairs. Such

a China would be able to upset the balance of

power in Asia and could be a threat to U.S.

interests. This question is next considered in

the context of the major “arenas” of Chinese

foreign policy.

Asian National Interest in

China’s Modernization

There are wide differences in the particular

security interests of East Asian nations, although generally shared interests can also be

identified. These interests are summarized below. To identify common security interests

about China’s modernization, countries will be

discussed by geographical subregion: Northeast Asia, Southeast Asia, and South Asia. Taiwan will be discussed separately. The main focus will be on factors most likely to threaten

the security of each of these geographic areas.

The reasons why some of these threats might

be ameliorated by the interaction of Chinese

and other varied national interests and capabilities in the region will also be discussed.

43A. Doak Barnett, The Making of Foreign Policy in China

(Boulder, CO and London: Westview Press, 1985).

44 Donald Zagoria, “Recent Trends in Sin@Soviet Relations

and the Strategic Triangle,” paper presented to the Fifteenth

Sine-American Conference on Mainland China, Taipei, June 8-

14, 1986.

Northeast Asia

China’s relations with its neighbors to the

Northeast (Japan, South Korea, and North KO

rea) have ranged from cordial to bloody, though
Ch 7—Strategic Implications of a Modernizing China ● 187

neither the Korean War nor World War II was

instigated by China. In recent years, regional

stability has been threatened more by the

growing presence of the Soviet Union and by

concerns over North Korea’s intentions, but

not by Chinese aggressiveness.45

Japan has been increasingly willing to play

a greater role in its own defense, but its priority has been to expand its trade and political relations in the region. Therefore, Japan’s

security goals seem to be consistent with the

apparent goals and modernization requirements of China. The greatest Japanese security concern is the Soviet military presence in

the region. The Soviet Union has continued to

refuse to discuss the status of the four Sovietoccupied northern islands that Japan claims.

It continues to assert its military presence

from its naval and air bases on its coast above

Japan, and it is increasing its military support

of North Korea.4b

Japan exhibits some cautiousness toward,

but does not appear to feel threatened by,

China. Thus, for example, it has been willing

to sell nuclear powerplant equipment and technology to China while requiring China to agree

to restrict the application of these technologies

to peaceful uses. Japan does not appear to feel

any significant new threat to its security in

the region, but it has recently taken steps to

increase its role in defending itself. In 1985,

Japanese decisionmakers announced that they

would increase military spending by 5.4 percent per year for 5 years, beginning in 1986.

This would exceed the decade-old policy of

holding military spending to one percent of

GNP.47

Chinese-South Korean relations have been

slowly improving, though many differences remain. Indirect trade between the two countries

has been increasing. China has also shown a

willingness to send athletic teams to South Korea, as seen in the Asia Games and in China’s

“Robinson, op. cit., pp. 20, 28, 31, and 58.

“Asian Yearbook 1986 (Hong Kong: The Far Eastern fi~conomic Review, 1986), pp. 165-166; Donald S. Zagoria, “The

USSR and Asia in 1985, ” .4sian Survey, vol. XXVI, No. 1, ,January 1986, pp. 15-19.

4’Ibid.

plans to attend the Olympics. In addition,

South Korea has shown increasing willingness

to cooperate with China on defecting airplanes

and naval vessels. Chinese and South Korean

willingness to improve ties in these areas have

been against the wishes of North Korea and,

to a lesser degree, Taiwan. However, the greatest barrier to significantly improved relations

is over issues of North and South Korean relations. China continues military ties with North

Korea and generally supports its position on

reunification talks, a posture unacceptable to

the United States and South Korea.4R

Chinese and North Korean relations have become less close in recent years, whereas North

Korean and Soviet relations have improved,

In 1985, after North Korea’s first official visit

to the Soviet Union since 1973, the Soviet

Union began increasing its military aid to

North Korea, including a squadron of MiG-23s.

Reportedly, North Korea granted the Soviet

Union overflight and landing rights for reconnaissance missions along China’s coast. Gradual improvements in Chinese and Soviet relations and the prospect of force reductions on

the Sine-Soviet border, however, have tended

to lower the ability of North Korea to manipulate China and the Soviet Union by threatening to improve ties with either country .49

The main areas of North Korean concern

about China have been: China’s continued

closer relations with Japan and the United

States, both of which North Korea portrays

as active threats to itself; China’s slow cultivation of better relations with South Korea,

especially in indirect trade and cultural contacts such as sports events; and the ideological threat from China’s successful modernization, reform, and opening to the capitalist

world. North Korea is also threatened by po4’Robinson, op. cit., pp. 30 and 35; and Asian l’earbook 1986

(Hong Kong: The Far Eastern Economic Review, 1986), pp. 171,

174, and 175.

‘

gRobinson, “China’s Foreign Policy, ” op. cit.., p. 35; Asjan

Yearbook 1986, p. 171: Also, in early 1987 Moscow announced

a withdrawal of about 10,000 to 12,000 of its 70,000 troops in

Mongolia, a symbolic, but potentially important development

towards reducing Sine-Soviet border tensions. Celestine Bohlen, “MOSCOW Announces Troop Pullout, ” Washington Post,

Jan. 16, 1987, p. A25.
188 ● Technology Transfer to China

tential internal political struggles, since its

paramount leader is now growing old.50

For the reasons listed above, China’s interests in Northeast Asian security seem to promote stabilility. While it continues to support

North Korea, it opposes North Korean aggression against the South. It has good ties with

Japan and is improving its ties with South Korea. It is improving its ties with the Soviet

Union, but continues to oppose Soviet military

gains in the region. If SinoSoviet relations improve in a way that risks destabilizing the

above noted balance or correlation of interests

in Northeast Asia (an unlikely occurrence), the

United States and East Asian countries would

probably have adequate time and means to

counter this threat.

Southeast Asia

On balance, China also appears to be playing a stabilizing role in Southeast Asian security. China’s Southeast Asian security role

centers mainly on the conflict in Indochina.

Vietnam’s military presence in Kampuchea

and its relationship with the Soviet Union are

the greatest security concerns in the region.

Soviet bases in Vietnam have naval and air

projection capabilities that extend to all

ASEAN states.sl As in Northeast Asia, China

would be threatened by Soviet expansionistic

goals in Southeast Asia. China is thus providing important military assistance to the Kampuchean resistance forces in coordination with

aid from the United States and Thailand. However, some Southeast Asian nations view

China’s involvement as leading to an increased

Chinese influence in the region and feel that

China’s interests may not always oppose Soviet goals.

Two other important factors should be

noted. First, Vietnam is likely to feel threatened by improvements in Sine-Soviet ties.

Troop reductions on the Sine-Soviet border

would allow China to take stronger action in

‘“Robinson, “China’s Foreign Policy, ” p. 30; and Aidan FosterCarter, “NorthSouth Talks Offer Hope for the Future, ” lhrl3astern Econom”c Review, June 26, 1986, pp. 4445.

“See Zagoria, op. cit., p. 22.

its periodic fighting with Vietnam. Such a

move might even force Vietnam to be more accommodating with the West, with Southeast

Asian countries, or possibly with China.52

Second, China has improved its relations

with many Southeast Asian states. It has

ended its support of the Thai Communist Party

and has terminated aid to insurgents such as

those in the Philippines. Relations with, and

aid to, most other Communist parties in Southeast Asia have also been dramatically reduced.

Although China insists on continuing “fraternal” relations with Indonesian, Malaysian, and

Burmese Communist parties, it has largely discontinued material assistance to these three

groups.’s

Other security concerns have been raised by

the influence of China over the ethnic Chinese

populations in Southeast Asian states, especially in Indonesia, Singapore, and Malaysia,

where the Chinese population is very large.

Malaysia and Singapore, however, seem confident in their ability to defend themselves.54

In addition, while Southeast Asian countries

have also expressed fears about economic competition from China, these countries are increasingly investing in, trading with, and sending high-level delegations to China, showing

that they feel they can manage and gain from

improving relations with China.

Thus China is generally viewed as a stabilizing force in Southeast Asia. While it is viewed

as desiring an increased role in Southeast

Asian affairs, it offers a useful counterweight

to an increased Soviet presence and Vietnamese aggression in Indochina. With the exception of Kampuchea, it has moved away from

its past policies of support for groups that desire to overthrow Southeast Asian governments. Additionally, it has become a valuable

trading partner for most of these countries.

5zRobinson, op. cit., p. 37.

“Asian Yearbook 1986, pp. 119-122.

541 bid.; and David Barber, “Phasing Out the Force, ” The Far

Eastern Econom”c Review, Jan. 8, 1987, pp. 15-16.
Ch. 7—Strategic Implications of a Modernizing China ● 189

South Asia

China’s role in South Asian security is similar to that in the two East Asian sub-regions.

In presenting both a potential source of opposition to some countries and opportunity for

other countries involved in South Asia, China’s

role appears to have been stabilizing. The primary arena of South Asian security concerns

have focused around Afghanistan. The Soviet

invasion of Afghanistan in 1979 resulted in a

hostile troop presence on Pakistan’s west border. China has actively supported resistance

forces against Soviet troops and the Sovietsupported regime in Afghanistan.55

China also counters Indian influence in the

region while offering economic and trade opportunities for South Asian Countries. These

factors have been important in the development of closer ties between China and Pakistan, Bangladesh, and Nepal.56 China has assisted Pakistan with military hardware since

1960 and has given an informal guarantee of

assistance in case of Indian attack.57 An additional concern is that China has been accused

of supplying technological assistance to Pakistan for producing a nuclear weapon. Although

border disputes remain unresolved between

China and India, and between Pakistan and

India in a region bordering China, China supports negotiations, rather than use of force,

for resolving these differences.58

The prospect of improved Sine-Soviet ties

has not been ignored by India. Improved SinoSoviet ties would tend to reduce the likelihood

of China or the Soviet Union risking conflict

with each other over Pakistani or Indian differences. As seen in the cases of North Korea and

Vietnam, China and the Soviet Union might

eventually cooperate to create disincentives for

Pakistani and Indian use of force to solve

differences. Thus, Indian decision makers have

“Robinson, op. cit., pp. 34-35.

‘On Bangladesh see Asian Yearbook 1986, Far East Economic

Review, p. 110; and on Nepal see, Lok Raj Baral, “Nepal’s Security Policy and South Asian Regionalism, Asian .%r~’e~’, vol.

XXVI, No. 11, November 1986, pp. 1218-1219.

‘

7 Robinson, op. cit., pp. 34-38, 50; and Asian Yearbook 1986,

p. 99.

‘

nRobinson, op. cit., pp. 50-57; and Asian Yearbook 1986, pp.

212-213.

openly stated that they have “outgrown” the

Soviet Union in economic and, to a somewhat

lesser degree, security issues. India has also

continued to diversify its sources of arms and

advanced technology, as seen in its recent purchases of fighter jet engines from the United

States. As relations stand at present, there is

some chance that Western militarily useful

technology could be diverted to the Soviet

Union through India. This would exacerbate

U.S.-Indian relations, and because of Chinese

fears of India, it might also create problems

in Sine-Indian and U.S.-Chinese relations.59

A view of South Asian security reveals a similar role for China, as seen in Northeast and

Southeast Asia. China wants to counter Soviet gains in South Asia. It also wants to resolve disputes in the region by peaceful means.

As in East Asia, trade has played a part in increasing relations between China and South

Asian countries. Moreover, the prospect of improved Sine-Soviet ties has introduced a healthy

awareness among South Asian countries of the

security value of diversifying ties with other

nations.

Taiwan

Taiwan is extremely concerned about the

modernization of Mainland China’s economy,

technology, and military forces and expanding foreign ties. In contrast to China’s other

neighbors, Taiwan does not view the potential

for expanded economic relations to be worth

the perceived security risk. Statements by

China about its stationing troops in Hong

Kong in 1997, when it becomes a Special

Administrative Region, have been used to challenge China’s intentions in regaining Taiwan

and other claimed terntories.GO Sine-Soviet rapprochement is also seen by the Taiwanese Government as evidence of China’s unreliability.

However there are many reasons why China

does not appear likely to attempt to take control of Taiwan by force. There is no sign of

“Robinson, op. cit., pp. 38-39: and Stuart Auerbach, “India

Signs Agreement for U.S. Jet Engines, ” The U’ashin@on Post,

Jan. 7, 1987, p. A16.

‘“Asian Yearbook 1986, p. 144.
190 ● Technology Transfer to China

an anti-Taiwan military buildup,Gl and if one

were to occur, there would likely be time to

take various counteractive measures. The

United States’ Taiwan Relations Act mandated continued U.S. readiness to defend TaiwmoGZ In addition, the August 1982 SinOAmerican Communique on Taiwan allowed for

continued U.S. arms sales to Taiwan, although

at reduced levels, with a consideration for

changes in the value of the dollar.G3

Costs to China in taking military action

against Taiwan would also be very high. One

result would be a likely loss of important economic and technological benefits from trade

with the United States, Western Europe, Japan, and other countries. Another result would

be a significant loss in military forces, estimated at 40 percent of its front-line air force,

a large number of ships, and casualties in the

hundreds of thousands. Resistance on Taiwan

would likely be great even if China “won.” And,

since the United States is committed to a stable security in the Taiwan straits, U.S. military involvement would also be risked.G4

The more likely role a modernizing China will

play in the security of Taiwan is less extreme.

China is likely to continue to exert pressure

on Taiwan to consider various arrangements

for reunification.G5 As in the sale of Dutch submarines to Taiwan, China will probably continue to attempt to influence other nations to

reduce military assistance to Taiwan.GG In

multilateral fora it seems likely that China will

continue to attempt to lower the status of

Taiwan.

Yet China will probably not want to jeopardize its foreign markets or tacit security understandings by being too hostile to Taiwan.

For example, it will not necessarily attempt

to exclude Taiwan from relations and interna-

“Robinson, op. cit., pp. 21 and 47.

‘

z

Ibid., p. 66.

~sIbid., pp. 26 and 69.

“Ibid., pp. 64-69.

“C.L. Chiou, “Dilemmas in China’s Reunification Policy

Toward Taiwan, ” Asian Survey, vol. XXVI, No. 4, April 1986,

pp. 467-470.

“’’Dutch ‘Close’ to Solution on Taiwan Sub Sale, ” Xinhua,

Oct. 8, 1986, in Foreign Broadcast Information Service Dm”ly

ReportChina, Oct. 8, 1986, p. G4.

tional fora in a way that would be seen as

threatening to isolate Taiwan. This would

likely be the case where Taiwan’s involvement

is economically important, such as in the admission of China into the Asian Development

Bank.G7 It would also seem to be the case in

militarily important issues, as has been seen

in China’s recognition of the United States’

desire for continued, though reduced, sales of

weapons to Taiwan.

Further Issues

In conclusion, large-scale or sustained tension in Asia is unlikely, and China will probably play a stabilizing role in Asian security.

This role is largely facilitated by China’s interest in ensuring its access to foreign markets

and its desire to have a stable environment in

which to emphasize economic development.

While China seems willing to improve relations

with the Soviet Union, it appears that both

countries’ respective interests and commitments to their friends will prevent them from

cooperating to destabilize the region. It is also

likely that as China continues to improve its

ties with Asian countries, its interest and role

in promoting a stable region will grow even

further. The willingness of most Asian countries to expand their political and trade relations with China indicates that they share this

view.

A final issue is the possibility of shifts in

foreign policy because of the present conflicts

between Chinese leaders. In recent years,

China’s foreign policy course has served its

modernization goals. If modernization becomes a less paramount goal, China could move

back toward a more clearly socialist road, including the orientation of its international economic relations toward the socialist countries.

Since China would then be less interested

in interdependencies with the United States,

Japan, and its other Asian neighbors, its commitment to a peaceful, stable Asia could be expected to be less. While this drift back toward

a more Soviet style of development does not

“Robinson, op. cit., p. 45.
Ch. 7—Strategic Imp/lcations of a Modernizing China 191

Photo cred(t X(nhua News Agency

IBM computers and equipment in the Shenzang Air Blower Plant. This computer center is used for plant production

management and technical information storage.

seem to be the most probable course for China

in the short term, the reasons that might make

it attractive are credible and deserve monitoring.

A final factor influencing assessments of

China’s future direction is the nature of the

post-Deng leadership. It has been widely assumed that this leadership would be committed to a continuation of the Dengist policies.

Again, however, it is appropriate to be cautious. First, it is by no means clear that there

is the leadership unity that the Chinese have

tried to project; divisions based upon personality, factional affiliation, policy preference

(particularly on issues of reform), and understandings of the political “rules of the game”

undoubtedly exist. It is impossible for the outside observer to know whether the forces that

unite the leadership are stronger than those

that divide it.

Second, many of the new leaders received

training in the Soviet Union and may have residual sympathies for it and respect for Soviet

(including technological) achievements. More

importantly, their careers have been in a system modeled after that of the Soviets. Their

most basic understandings of how economies and

polities operate derive from this experience.

Many of the new leaders also have backgrounds in engineering disciplines, but received training under conditions where the

engineering task is understood in the context

of a socialist economy. It is likely that this “socialist engineering” orientation is particularly

compatible with technocratic planner orientations rather than market orientations. While

such leaders would have a studied appreciation for the sophistication of Western technology, they are unlikely to have an ingrained

professional sense of the relationships between

Western technological development and the

operation of a capitalist market economy.

Furthermore, Chinese technological achievements in such areas as nuclear weapons and
192 ● Technology Transfer to China

space may be taken as indicators of indigenous

capabilities that should be further nurtured

and protected in the face of the challenge from

foreign technology and equipment imports.

This type of protectionist view is likely to be

found throughout the politically important

heavy-industry sector. It is notable that the

greatest resistance to domestic economic reform has come from this sector.’8

The future leaders are unlikely to lead China

back toward the radical Maoist experiments

of the past. However, by training and experience, many are likely to be more comfortable

with a planned system. They are also more

likely to prefer policies that protect Chinese

industry from foreign competition and penetration rather than a more marketized “open”

economy.

Conclusion

U.S. security interests in Asia are in a sense

more complicated and less certain than in Europe. Lines of conflict and patterns of threats

are less clear-cut, and there is much greater

national and cultural diversity.G9

Nevertheless, certain features of the Asian

security scene in the post-Vietnam war era

have been consistent. These include the general stability in the region, which has both

facilitated and been helped by the remarkable

economic growth and development experienced

by many of the countries. At the same time,

tensions are by no means absent.

The region has seen a significant growth in

Soviet power resulting from the increased deployment of military assets in Asia and the

strategic advantages the Soviet Union enjoys

‘“See Susan Shirk, “The Domestic Political Dimensions of

China’s Foreign Economic Relations, ” China and the World:

Chinese Foreign Policy in the Post-Mao Era, Samuel S. Kim

(cd.) (Boulder, CO and London: Westview Press, 1984), pp. 57-

81; and Bruce Curnings, “The Political Economy of China’s Turn

Outward, ’ China and the World: Chinese Foreign Policy in the

Post-Mao Em, Samuel S. Kim (cd.) (Boulder, CO and London:

Westview Press, 1984), pp. 235-266.

‘

gRichard H. Solomon, “American Defense Plannin g and Asian

Security: Policy Choices for a Time of Transition, ” in Daniel

J. Kaufman, et al., (eds. ), U.S. National Security (1.exington,

MA: Lexington Books, 1985).

in Vietnam and North Korea in return for its

assistance. In the face of a long-term Soviet

commitment to enhance its power and influence in Asia and the Pacific, and U.S. intentions to limit this gowth, superpower rivalry

in the region will continue for some time and

will be the main element structuring the security environment.

The divided-state phenomenon in China and

Korea is a second major, persistent, and potentially destabilizing security problem. Korea is a potential flashpoint with global consequences. The Taiwan problem is the main longterm threat to good U.S.-China relations; its

management requires restraint and skill from

all the parties, but these characteristics are by

no means assured. Finally, Vietnamese behavior in Indochina is perceived as a serious

direct threat to Thailand, is a source of concern and annoyance to China, and is viewed

by the other states of Asia as a possible cause

of heightened and unwanted great power competition in the region.

The “China factor” in U.S. interests in Asian

security is multifaceted. For some of the states

in Asia with which the United States has close

relations and strong interests, China is regarded as the chief long-term security problem. This view is heard most often from the

states in Southeast Asia and, of course, from

the government on Taiwan. From the U.S.

point of view, however, China has the potential for serving as part of the solution to the

main security problem: growing Soviet power

and influence in the region. A China capable

of power projection across the Pacific to

threaten the United States directly is decades

into the future. However, a strong China opposed to Soviet expansion and friendly to the

United States, even if following a nominally

independent foreign policy, is viewed by the

United States as a security asset in that it complicates Soviet strategic planning.

By following its current course, China is less

of a security threat to the United States and

its friends and allies in the region than it was

in the past, when it pursued policies of revolutionary transformation at home and supported

revolutionary movements in the Asian region.
Although China’s Asian neighbors have anxieties about China as a security threat, they too

appear to be more hopeful that China pursuing its current course will be less of a threat

than the China of the past.

Of course, when modernized, China will also

be more capable, and thus more of a potential

security threat to the countries of the region

and to U.S. interests. If China succeeds in its

modernization, it will have the economic and

military capabilities to be a major disruptive

force in the region if it so desires. However,

China’s pursuit of modernization, through interactions with the world economy and by proCh 7—Strategic Implications of a Modernizing China ● 193

meting peace and stability in the region, is in

the security interests of the United States and

its friends in the region.

The policy choices faced by the United States

and its friends and allies in the region are therefore challenging. Policies to retard Chinese

modernization-for instance by denying access

to technology, capital, and markets-out of

fear of potential hostility are likely to be selfdefeating. It appears that Chinese hopes for

modernization have been one of the prime

causes of China’s becoming a more constructive member of the international community.
Chapter 8

U.S. Policy Choices

Photo credit: Ertc Basques

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

Page

Themes in U.S. Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ..197

A Flexible Approach to Liberalized Controls. . ......................198

Activist Strategy of Technological Cooperation . ....................199

Technology Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........200

A Cautious Approach to Technology Transfer . .....................202

A Multilateral Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......202

Theme Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........203

Export Control Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .205

The License Review Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......207

The COCOM Review Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......216

What Other Actions Could Reconsidered? . . . . .....................218

Military Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............219

Scholarly and Technical Exchanges . . . . . . . . . . . . . . . . . ................223

Student and Scholarly Exchanges . . . . . . . . .........................225

The Bilateral Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .+ .......226

Promotional Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...............227

Congressional Choices . . . . . . . ...... . ...........................239

Appendix:Export Licenses Pending Over EAA Statutory Limits. .....242 .

Figures

Figure No. Page

7. Green Zone (Nonreferred) China Cases.... . ........................209

8. Processing Time for Referred (Closed Out) Cases . . . . . . . .............210

9. Average Processing Times: China Nonreferred and All China Cases ....210

Tables

Table No. Page

17.-”” – ‘

- “--” ‘--- -

--- - - - -

18.

19.

20.

21.

22.

23.

24.

25.

China Export Licenses-1984, 1985, a.ncilYt$6 . . . . . . . . . . . . . . . . . . ..XJ5

ProcessingT ime for China Cases . ...............................209

Actions Takenon Closed China Cases . ...........................210

U.S. Cases Pendingin COCOM . ................................216

U.S. Commercial Arms Exports . . . . . . . . . . . . . . . . .. .. .. ... ... .. .+.219

Munitions Licensing for China, 1981-86. . . . . ......................221

Export-Import Bank Programs for China, Inclusive 1979-86. . .......231

OPIC Insured Investments in China . ............................232

The Trade and Development Program inChina . ...................234
Chapter 8

U.S. Policy Choices

This chapter analyzes what the U.S. Government, and Congress in particular, might do

to maximize the gains and minimize the risks

associated with transferring technology to

China. The first part examines major themes

in current U.S. policies affecting technology

transfer to China, highlighting areas where

new initiatives may be needed to achieve policy goals. ’ Specific issues that Congress and

‘See OTA, Energy Technology Transfer to China–A Technical Jlemorandum, OTA-TNI-1 SC-30 (Washington, DC: Governthe executive branch may want to address,

regardless of overall directions in China policy, are then addressed. The chapter concludes

by identifying actions that Congress may wish

to consider.

ment Printing Office, September 1985), for a discussion of the

risks and benefits to the U.S. national security of transferring

energy technologies, and for a review of pending issues in U.S.

policies affecting control and promotion of technology transfers.

THEMES IN U.S. POLICY

Since the United States and China formally

resumed diplomatic relations in 1979, interactions have expanded on a number of fronts.

As China moved gradually to relax restrictions

on foreign business and open the door to Western participation, the United States has loosened restrictions on exports to China and

widened the scope of science and technology

(s&T) exchanges.’ The United States and China

have begun to consult on issues such as Afghanistan and Indochina and to explore other

possibilities for strategic cooperation.s Defense

delegations are exchanging visits and foreign

military sales (FMS) have begun.

The decisions that ushered in these new developments in U.S.-China relations are based

on a rationale, shared by four U.S. administrations, that assisting in China’s modernization will serve U.S. interests. Exchanges of

goods, people, and ideas present commercial

opportunities for U.S. business, provide mutually enriching cultural exchanges, and could

help integrate China into the world economy

‘one authoritative estimate is that between 1979 and 1983

about 19,000 Chinese students and scholars came to the United

States. See Leo A. Orleans, “Chinese Students and Technology Transfer, Journal of Northeast Asian Studies, vol. iv, No.

4, winter 1985.

‘see Harry Harding, concerning reports of a joint U.S.-Chinese

effort to monitor Soviet tests in ‘*China’s Changing Roles in

the Contemporary World, ” in Harding, China Foreign Relations in the 1980s (New Haven, CT: Yale University Press, 1984),

p. 194,

and make it less vulnerable to outside pressures.4 Official U.S. policy statements have

stressed that China is a friendly, but not an

allied, country-one particularly important because of its large population and potential role

as a counterweight to the Soviet Union. If

China’s modernization succeeds, it will be a

candidate for superpower status in the future

and, at the least, an important regional power.5

Many view these assessments as sound calculations of U.S. national interest. A number

of developments indicate progress in achieving some policy goals. China is experimenting

with economic reforms that involve expanded

Western participation in trade and joint ventures, and has expressed desire to participate

in multilateral organizations such as the General Agreement on Tariffs and Trade (GATT),

Among the ranks of China’s leaders are many

who have been trained in the West. China has

developed an “independent” foreign policy,

avoiding close ties with the Soviet Union.

‘See statements by U.S. Ambassador Winston Lord, quoted

in International Trade Reporter, June 4, 1986, p. 752.

‘See Jonathan Pollack for an argument that China “...enjos’s

the privileges and deference conceded a major power, without

possessing the requisite national capabilities and accomplishments that appear to define the term. Pollack, ‘‘China and the

Global Strategic Balance, ” in Harding, op. cit., p. 170.

197
198 ● Technology Transfer to China

Some observers, however, worry about what

they see as an emotional and overly optimistic strain in U.S. policies toward China.’ The

United States and China have quite different

political and economic systems. While they

share mutual interests in some areas, they disagree in others. The primary strategic concern

is that China might use the technology supplied by the United States in ways that run

counter to U.S. interests or to those of other

Asian countries friendly to the United States.

A second area of concern is commercial. U.S.

businesses still see potential in China’s domestic market, but also view China’s export and

performance requirements’ and other regulations of foreign business as obstacles. Over the

longer term, China may join the ranks of the

Asian newly industrializing countries (NICS)

that today loom as major competitors to a

number of U.S. industries.

These issues were analyzed in chapters 6 and

7. The general conclusions drawn there were

that despite improvements in Sino-Soviet relations, there are reasons to assume that China

will in the next 10-15 years see its interests

become closer to those of the United States.

So long as economic modernization remains

China’s top priority, China is likely to play a

stabilizing role in East Asian security. While

institutional and other factors suggest caution

in comparing China with the NICS, Chinese

exports are likely to grow faster than the overall rate of economic growth. As a result, Chinese exports (representing about 4.4 percent

of world exports by 2000) will compete most

directly with those of NICS in third-country

markets. OTA also notes the many uncertainties about China’s future course and the room

for disagreement about implications for the

United States and neighboring countries in

Asia.

Given these uncertainties and a limited 8

years of recent experience, it is not surprising

that a number of different themes run through

‘See Michael H. Hunt, “Chinese Foreign Relations in Historical Perspective, ” in Harding, op. cit., p. 41.

‘Examples are requirements that products produced in China

include certain amounts of locally produced inputs or that production facilities in China export a certain percentage of output.

public discussions of U.S.-China policies. The

predominant theme, and the one central to current U.S. policy, favors a flexible approach oriented toward gradual liberalization of controls

on technology transfers. Other themes, discussed below, also appear in discussions of

U.S.-China policy. Each reflects different evaluations of how technology can be used as a tool

of U.S. foreign policy.

A Flexible Approach to

Liberalized Controls

Since 1983, regulations governing exports

have been significantly loosened, consistent

with a broad policy direction favoring expanded

economic interaction. At the same time, exports of military equipment and very advanced

technology are restricted by U.S. export controls. The export licensing system provides

mechanisms for revising controls in light of

changes in technology and bilateral relations.

Student and technical exchanges have thrived

under this flexible approach to technology

transfer. These growing exchanges, which do

not rely on strong government coordination,

have been built at the individual and institutional levels, providing ongoing scholarly relationships, cultural exchanges, and potential

commercial opportunities for U.S. firms and

organizations. Localities and regions are establishing relationships with their counterparts

in China, who are apparently attracted by U.S.

educational and research strengths.

The U.S. Government has not taken a strong,

active role in coordinating and initiating efforts to expand trade and technology transfer. 8 Official export financing through the

Export-Import (ExIm)Bank is comparatively

limited, and the United States has no traditional aid program for China. The U.S. Government has instead focused its efforts in trade

policy on negotiating agreements that set out

‘The U.S. Government took a stronger lead in the early years

through establishment of protocols for industrial and technical cooperation. Many of these efforts continue, as does the Foreign Commerical Service (FCS). In general, however, the U.S.

Government has played a facilitating role (outside the export

control area) rather than an activist coordination role.
Ch. 8—U.S. Policy Choices ● 199

the “rules of the game” for trade and investment. In addition, guarantees have been provided for investments by the Overseas Private

Investment Corporation, and financing has

been provided for low-budget, “reimbursible”

feasibility studies, such as those carried out

by the Trade and Development Program.

Major resources of the U.S. Government

have been devoted to establishing a system

of controls on exports to China. The Department of Commerce (DOC) is the lead agency,

but the Department of Defense (DoD) and

other agencies also participate. Within the general guidelines established, however, technical license examiners actually make many key

decisions about exports of sensitive technologies. These choices are critical to the determination of whether a specific technology export takes place. Within the guidelines set by

higher level policy officials there is thus room

for de facto policy making below as case-bycase decisions are made on whether to export

the more militarily sensitive technologies and

equipment.

Delays in export licensing review have been

a primary source of complaints. Congress has

attempted to deal with this problem by requiring the U.S. Government to process licenses

within certain time limits. License reviewers

may make safe but too rigid interpretations.

Lacking understanding of overall policy goals,

mid-level and lower level bureaucrats may inadvertently or intentionally work at crosspurposes to overall policy goals. Technology

is changing so rapidly that the U.S. Government has found it difficult to revise regulations

before large backlogs of pending cases have

developed.

A related issue pertains to uncertainty about

where the U.S. Government will draw the line

to prohibit an export. While export regulations

specify the kinds of exports that “are likely

to be approved, “ it is not clear what types of

exports will be denied. Applications involving

sensitive technologies and equipment (including those for military exports) are decided on

a case-by-case basis. Because of this situation

and in response to pressure from Chinese

buyers to supply more advanced technologies,

U.S. exporters are constantly “testing” the parameters of the export control system. Recent

experience indicates that incremental decisions

do not result in effective and consistent policy implementation.

No single entity of the U.S. Government effectively integrates these diverse efforts into

a carefully coordinated program for technology transfer to China. DOC implements controls on dual-use exports, carried out by the

Assistant Secretary for Trade Administration.

Other parts of DOC such as Foreign Commercial Service (FCS) are involved in trade development programs. Generally speaking, promotional programs are carried out on different

policy tracks and by different individuals than

those who administer export controls. Within

the Pentagon, for example, those charged with

“security assistance” are expanding military

cooperation, while those responsible for strategic trade are controlling exports.g

A pending question is whether it is necessary to formulate and implement a clearer

strategy on technology transfer to China.

There are few such examples of comprehensiveU.S. foreign policy strategies other than for

the Soviet Union, where serious problems are

apparent. But it maybe that the United States

has not realized all the potential benefits of

a flexible approach. There may be gains to be

made from better integrating U.S. programs

toward China. The key question is whether this

is desirable or possible in view of the many

other important foreign policy issues on the

agenda.

Activist Strategy of

Technological Cooperation

Some favor a more coherent and aggressive

strategy of promoting cooperation with China

because of China’s critical strategic position

and commercial promise or because they wish

to assist China in its development. Placing special emphasis on U.S.-China relations is a resonant historical theme. For generations, Amer-

‘The Defense Technology Security Agency (DTSA) within

DoD handles DoD review of both dual-use and munitions exports. DSTA officials attempt to coordinate these policies.
200 ● Technology Transfer to China

icans have believed that China is in some sense

“special.

A more activist strategy would probably require a larger role for the U.S. Government.

Expanded export financing and FCS representation are possible avenues, as is the establishment of an aid program. Over time, export controls would be diminished, or even eliminated

in some areas. Assuming that China demonstrates its commitment to avoiding illegal

acquisition and retransfers of Western technologies and that relations improve, the Coordinating Committee for Multilateral Export

Controls (COCOM) might decide to end all multilateral export controls for China trade.

Adopting a more positive strategy could help

U.S. firms to expand their exports to China

and serve to broaden and deepen technology

transfer. However, because of China’s clearly

articulated call for U.S. technology, it would

be difficult to develop a promotional policy oriented solely toward expanding U.S. exports

of finished products.

A stronger China would be in a better position to counter the Soviet Union, and a successfully modernizing China may serve as a

model to Soviet bloc countries. More speculative is the question of whether under such circumstances China would be inclined to contribute constructively to resolving persisting

regional conflicts like the one on the Korean

peninsula.

By promoting technology transfer to China

more actively, the United States could also

support expanded free trade in the Asian region. A central question, however, is whether

the United States would be willing to eschew

protectionist responses to China’s growing export capacity. To the extent that a more activist promotional policy implies technology

transfer as well as trade, a growing Chinese

export capability is to be expected. An activist strategy therefore would involve keeping

markets open to Chinese imports. To deal effectively with associated trade impacts, it

would be necessary to develop a U.S. strategy

toward Asian markets, one that locates China

in a broader regional context.

The implications of an activist approach

would depend to some extent on the degree to

which the strategy were directed to security

cooperation. A rapid expansion of military cooperation could create anxieties among Asian

countries fearing a U.S.-China alliance. If the

ultimate goal of U.S. foreign policy is to preserve a stable and peaceful Asia, it may be well

to note the limitations of building “special relationships, “ such as those apparent in the Middle East, where a regional peace remains elusive despite active promotion of relations with

a few key countries. If security cooperation

with China were pursued unskillfully, it could

be perceived as diverting attention away from

the NATO alliance and Europe.

There is also a risk that a more activist approach could strengthen certain elements

within China, such as parts of the military, or

lead to anti-Western backlash stemming from

long-held fears that China might become too

dependent on foreign suppliers. Under worse

conditions, the United States would come to

regret an activist strategy of promoting technology transfer if China’s leaders switched to

an alliance with the Soviet Union.

Technology Leverage

Some advocate the use of technology as a

bargainin g chip in U.S.-China relations. Underlying this theme is a concern that technology

transfer may too often be a one-way street,

with U.S. firms providing more and more critical technology while Chinese foreign policy

sometimes runs counter to that of the United

States. China’s stress on nonalignment and its

association with Third World issues inferred

from United Nations votes are often cited as

evidence. According to this view, the United

States must extract political concessions for

the advanced technology it supplies China.10

Noting that Chinese leaders are skilled negotiators who never lose sight of national interests in technology exchange, proponents believe that the United States should likewise

do more to foster its own foreign policy goals.

IODenis Simon, “China: Too Much Technology Too Fast?”

Technology Review, 1985.
—

Ch, 8—U.S. Policy Choices ● 201

In contrast to those who believe that expanded

technology transfer can help usher in good political relations, those who stress technology

leverage believe that transfers should be conditioned on political or other concessions by

China.

Technology leverage holds some attractions

as a policy theme. Theoretically, at least, China

might be further persuaded to cooperate with

the United States on Korea or refrain from

acerbic criticism of U.S. policy in the Third

World in exchange for advanced technologies.

Sharing intelligence about Soviet activities

could be expanded in the context of transfers

of critical technologies. If advanced technology transfers (such as those promoted under

the aegis of government-to-government protocols) were linked to requests for broader access by U.S. technical personnel to China’s

corresponding industrial and research institutions, the United States could gain more from

such exchanges. At issue is whether the United

States can use transfers of technology to influence China’s foreign policy.

Much depends on the way in which bargains

are struck—through publicly applied pressure

or in closed-door sessions—and the extent to

which quid pro quo exchanges would be expected. Public demands for Chinese political

concessions in early stages of negotiations

could easily backfire. Nor does it appear likely

that other Asian countries such as Japan would

be willing to participate in pressuring China

to change its policy vis~a-vis Taiwan, for example. Chinese resentment over the bargain

struck by Moscow in economic cooperation

with China in the 1950s suggests the possible

liabilities of such an approach.]’ Nor is it safe

to assume that Chinese leaders simply respond

to U.S. actions, ignoring the importance of history, traditions, and domestic political pressures. The application of pressure (in the form

of conditions set on technology transfers) will

not necessarily result in the response desired.

“Stalin demanded access to Chinese port facilities and the

formation of joint stock companies, and insisted that China pay

for all economic and military assistance. See Harding, in Harding, op. cit., p. 183. Some experts, however, believe that the

Soviet Union was actually much more generous in its economic

cooperation with China. In any case, such negative Chinese perceptions could color economic cooperation with other countries.

Technology leverage may work in some precedent-setting cases, where negotiations are conducted behind closed doors. In such instances,

however, it maybe difficult for all but the few

directly involved to understand the linkages

between technology transfer and politics. Sensitive issues such as cooperation in intelligence

gathering fall into this category. in view of the

many routine decisions made in export licensing, it hardly seems possible that explicit

bilateral political deals could be struck in any

but a few key cases. On the other hand, conditions in many cases have been set on transfers of advanced technologies to China. The

Chinese have apparently judged these limitations on their use of U.S. equipment and technology as not desirable but acceptable. The

end-user certification provided by the Chinese

government to verify the Chinese buyer of

Western technology, for example, addresses

Western concern about retransfers to the Soviet bloc.

Another factor limiting stronger emphasis

on technology leverage is the wide availability of many advanced dual-use and military

technologies. Because China could always turn

to other suppliers, a unilateral strategy to deny

technology would not be feasible in most cases.

But China wants U.S. technology, and transfers from the United States undoubtedly have

political value to the current leadership.

Photo credit” Eric Basques

As a diesel locomotive enters the Shanghai railroad

station a steam locomotive on a siding is unloaded.

The Chinese plan to decrease their reliance on steam

locomotives and will promote railroad electrification.
202 Technology Transfer to China

If stress is laid on U.S. willingness to supply (rather than threaten to deny) certain kinds

of advanced technologies, it maybe more likely

that political understandings can be developed

in conjunction with these transfers. Even if

technology is seen more as a carrot than a stick,

however, U.S. Government influence is limited

in the sense that private companies make independent judgments about potential gains

and risks. It appears that technology leverage

will have to be applied selectively, and that

it may be most effective in the context of a

flexible approach.

A Cautious Approach to

Technology Transfer

StilI another theme in debates over U.S. technology transfer policy is one of caution. Because China may well have trouble in assimilating the most advanced technologies, some

prefer to concentrate on transfers of less sophisticated technologies. Others may hope to

avoid the “boomerang” effect—providing China

with the technology to transform itself into

a major competitor. Those who see the China

market as a chimera, and those wary of close

relations with a Communist country where

leadership changes have in the past resulted

in swings in policy, would prefer to proceed

slowly in technology transfer to China.

Much would depend, however, on whether

caution is directed at slowing the pace of U.S.

export control liberalization, or adding new restrictions that negate the liberalization that

has already occurred. Assuming no great adverse developments in bilateral relations, it

seems unlikely that the United States would

abruptly reverse the current policy path. On

the other hand, if relations were to sour, a more

cautious policy would be a natural outgrowth.

Despite the apparent safety of exercising

caution, there are significant liabilities. In the

current context of U.S.-China relations, officially stressing this theme would very likely

antagonize China, perhaps pushing the Chinese

toward rapprochement with the Soviet Union.

The United States cannot prevent China’s economic modernization or preclude China’s emergence as an exporter. Nor is the U.S. Government well equipped to further such goals

systematically through technology transfer

policies.

Those who favor caution on the grounds that

certain types of technology transfer are not

appropriate for China must recognize the limits

on the ability of the U. S. Government to tell

China how to carry out its modernization programs.12 Where U.S. Government financing or

sponsorship are provided, as with the Trade

and Development Program (TDP) and Overseas Private Investment Corporation (OPIC)

projects or those receiving ExIm financing, the

Federal Government has leverage in selection

and in setting requirements that ensure effective technology transfers. Particularly in the

case of officially sponsored cooperation projects (under the protocols), there is considerable

leeway for shaping the projects to ensure protection of public health and safety. But such

projects are only a small part of U.S.-China

trade. Generally speaking, U.S. Government

influence had been focused on ensuring that

the risks to national security are minimized.

It must also be noted that China could pose

a major security risk if it fails to achieve its

development goals. A stagnant Chinese economy could breed political disaffection at home

and conceivably a foreign policy less open to

the West and more threatening to other countries in Asia.

A Multilateral Approach

A multilateral approach to China has not

been strongly emphasized. Such an approach

implies that the United States, Japan, and

Western Europe share common interests in assisting China’s economic modernization and

integration into the global trading system

while protecting Western security through controls on militarily significant exports that

could be useful to the Soviet Union or other

adversaries.

“For a discussion of U.S. government influence on China’s

selection of energy development projects, see OTA, op. cit., pp.

58-59.
Ch. 8—U. S. Policy Choices ● 203

Major Western suppliers of technology to

China thus have joint interests in ensuring that

all compete fairly for the China market and in

preventing the diversion of advanced dual-use

technologies to adversaries. COCOM and the

Organization for Economic Cooperation and

Development (OECD) agreements on financing

reflect these joint interests. Taking a broader

view of commercial interests, if some countries

maintain severe restrictions on imports from

China while others take a more open approach,

the burdens of domestic adjustment will be unevenly spread and resentment may grow. From

a Western security perspective, a joint approach to export controls is also essential because Japan, Western Europe, and some NICS

are now developing dual-use technologies and

producing sophisticated equipment and services with military applications.

A multilateral China policy would have many

advantages, but there are also problems. Western countries c~mpete for technological leadership and participation in the China market.

Although firms from many countries are cooperating in large, capital-intensive projects

in China, it is also true that they are vying for

prime contractor awards and market shares.

The United States thus has significant commercial interests at stake in the export of goods

and services that translate into jobs for American workers and revenues to support further

innovation and economic growth. Similarly,

while a joint approach to export controls is

mutually beneficial and essential, different

COCOM countries approach export controls

differently; thus, firms in different countries

face different obstacles to exporting.

The dilemma from a policy perspective is

that multilateral agreements are often based

on the lowest common denominator-the rules

of the game acceptable to the most liberal

member of the club. The question is whether,

through deliberations over China’s entry into

the GATT and other multilateral institutions

and through OECD negotiations over financing, the scope and strength of agreements can

be expanded. OTA’S research also highlights

the need to strengthen the COCOM system.13

‘ ‘See also National Academy of Sciences, Report of the Panel

on the Impact of National Security Export Controls on InterBut, despite the contribution made by COCOM

governing certain types of dual-use exports,

there are significant differences in policy approaches. The United States maintains unilateral controls on many types of exports to all

countries (China included) and makes a serious

attempt to limit potential diversions through

controls on re-exports. Japan and Western

Europe, as discussed in chapter 5, have much

less complicated procedures for review of export applications and oppose extraterritorial

application of U.S. laws. From a security perspective, the problem is further complicated

by a number of NICS in Asia (not members

of COCOM) that serve as production sites and

entrepdts for high-technology trade.

In theory, the obvious solution is to bring

the export control policies and practices of the

COCOM countries more into harmony while

persuading non-COCOM countries to institute

effective controls. Harmonization of COCOM

policies implies some modifications by both the

United States and other COCOM allies. If for

example, the United States were to eliminate

unilateral controls on exports to China, U.S.

exporters would benefit. Permitting freer intraCOCOM trade might help persuade other

COCOM countries to be more vigilant in preventing diversions from third-country markets. Because each country has a different legal and administrative tradition, however, it

would be unrealistic to assume that harmonization would eliminate all differences or reassure critics who charge that burdens and benefits are unequal.

Theme Implementation

In practice, the five themes discussed above

are played out in U.S. policy. Periodically, U.S.

negotiators seek specific assurances from China

in return for sensitive technology transfers. A

recent, publicized example was China’s decision to become a member of the International

Atomic Energy Agency and accept safeguards,

and public statements that it will not assist

national Technology Transfer, Balancing the National Znterest: U.S. National Securit~” Export Controls and Global Economic Competition, 1987, for detailed recommendations about

COCOM.
204 . Technology Transfer to China

other countries in developing nuclear weapons

(in the context of negotiations on a nuclear cooperation agreement) .14 In other areas, such

as scholarly exchanges, the U.S. Government

has taken a more positive approach. In contrast, absence of an aid program indicates a

cautious approach.15 The multilateral theme

is reflected in COCOM and traderelated agreements, such as the OECD agreement on financing.

More important than the policy instruments

is the overall direction of U.S. policy. It is, of

course, possible that no clear choice will be

made to seriously redirect policies. Regardless

of whether a decision is made to highlight one

of the secondary themes in order to develop

a more coherent strategy, there are substantive policy choices that Congress will face.

One set of policy choices concerns export controls. Whether the goal is technology leverage

or cooperation, delays and inconsistencies in

export licensing decisions remain issues of concern. Congress has an important role to play

in oversight of U.S. export policy. Indications

of problems in the system are the continuing

turf battles among agencies, misunderstandings about the policies of other COCOM countries, and the sometimes conflicting technical

and policy judgments in determining threshold levels.

Promotional policies supporting expanded

trade and technology transfer through financing and other means constitute a second area

of policy choice. Will major stress be laid on

export promotion, protectionism or bilateral

bargaining, and what will the longterm implications be for U.S.-Asia trade? Congress reviews

and helps determine programs of the ExportImport Bank, OPIC, TDP and the FCS.

“See OTA, op. cit. Congressional debate over the nuclear agreement focused on the strength of these assurances, pp. 54-55. lsThe absence Of a formal U.S. aid program can dso be interpreted as reflecting judgments that U.S. priorities for assisting China in its modernization should be in other areas, rather

than simply a negative view toward aid per se.

A third area of choice is military cooperation. The scope, nature, and mechanisms for

miltiary cooperation will be clarified in the

years ahead. Congress has an important role

to play in reviewing military sales, particularly

those involving FMS credits.

Scholarly and techm”cal exchange is another

arena for policy choices that affect technology

transfer. Congress allocates funds for fellowships and lectureships that support research

and study in the United States by Chinese scholars, and study visits to China by Americans.

Congress also reviews overall U.S. foreign

policy toward China to assess the success of

past policies and to anticipate future problems.

Policies toward China reflect perceptions of the

global role of the United States. Should the

United States pursue a policy of strong engage

ment in Asian security by building new coalitions and maintaining a large military presence or take a more “minimalist” approach,

restricting its efforts to maintaining the alliance with Japan and naval deployments needed

for the strategic submarine fleet?]’ Should the

primary goal be to build a strong bilateral U.S___

China relationship or to expand multilateral

cooperation? Can the United States afford to

promote free trade and transfer technology to

developing countries without suffering serious

losses, or is it necessary to protect U.S. interests through bilateral bargains and trade protectionism? Many of these questions are beyond the scope of OTA’S study of technology

transfer, yet the answers are critical to this

subject.

These substantive issues are discussed more

fully in the next section. Detailed examination

of issues that Congress may confront, and recent experience with policy implementation in

these issue areas, suggests that new initiatives

may be needed if the United States is to maximize the potential benefits and minimize the

possible risks associated with transferring

technology to China.

“see Richard H. Solomon, “American Defense Planning and

Asian Security: Policy Choices for a Time of Transition, ” in

Daniel J. Kaufman, et al., U.S. National Security (Lexington,

MA: Lexington Books, 1985), p. 384.
Ch.8–U.S.

EXPORT CONTROL POLICY

Export controls have been a continuing point

of controversy in U.S. policy debates over technology transfer. At the heart of these debates

is the problem of balancing the twin U.S. policy objectives of promoting international trade

and protecting national security. Criticisms of

U.S. controls on exports to China have been

raised by U.S. exporters eager to expand trade,

Chinese officials desirous of more advanced

technology, and officials and businessmen in

other COCOM 17 countries who see some kinds

of U.S. export regulations as infringing on their

own sovereignty. DoD has been the target of

much of this criticism, primarily because some

believe that DoD interprets export regulations

too stringently, causing commercial loss to

U.S. firms. Observers also question whether

U.S. controls concentrate sufficiently on slowing the flow of technologies with real military

significance. Congress plays a critical role in

framing the legal basis for export controls and

in its oversight of the system.

These are general issues not specific to China.

But they have been a central focus of debates

over U.S.-China policy because extensive controls on exports to China were maintained

throughout most of the postwar period and because those controls have been adjusted in recent years to reflect an improving bilateral relationship. China licensing has been a concern

more specifically because the United States expected loosened controls to facilitate trade with

China and because the number of China licenses

reviewed by the U.S. Goverment and by COCOM

grew rapidly in the 1980s. In 1981, for example, the Reagan administration decided to treat

exports to China favorably at technological

levels twice those permitted for the Soviet

Union. While the meaning of the “two times”

rule remained less than clear, it signaled a liber-

‘

7 COC0-M (the Coordinating Committee for Multilateral Export Controls) is an informal organization based in Paris. The

member countries include NATO countries (minus Iceland) and

Japan. The purpose of the organization is to control exports

of militarily significant items to the Soviet bloc.

IsFor an overview of U.S. export controls (and promotional

policies) affecting technology transfer to China, see OTA, op.

cit., especially ch. 5.

alization in U.S. policy, as

Policy Choices . 205

did

nouncement that China would

country group “V” for export

the 1983 anbe moved to

control purposes.l g A zone system was developed for China

exports, resulting in faster reviews for items

in the “green zone. ” (See discussion of these

zones in ch. 7.)

The most recent significant step in the direction of liberalization was taken in late 1985,

when COCOM member countries revised regulations governing exports to China. These

changes, as published in revisions of the Advisory Notes to U.S. export regulations, were to

result in a “. . . substantial decrease in processing times” for exports to China.20 This was

to be accomplished by expanding the range of

exports likely to be approved for export and

by eliminating the need for their review by

COCOM and U.S. agencies outside DOC. Green

zone commodities can now be re-exported to

China from COCOM member countries under

licenses issued by those countries. Likewise,

DOC and other agencies involved in export

administration have attempted to improve the

efficiency of the U.S. licensing process.21

From the exporter’s point of view, a key

question is whether an individual validated

license (IVL) is required. Most exports involving technology require an IVL. If the application is for a commodity that falls within the

green zone, license review is normally conducted only by DOC and can be completed in

a few weeks. Otherwise, more extensive review

‘The V country group includes a large number of countries–

Britain, France, Yugoslavia, India, Syria, and Iran among them.

It should be noted that U.S. regulations on exports differ across

these countries. The V country group is really a catch-all category; export regulations are not uniform for all of the countries

in this category. China is, however, the only country in this group

subject to COCOM review and national security controls.

‘“See Department of Commerce, ITA, 15 CRFT Parts 373,

374, 375, 379 and 399, “Exports to the People’s Republic of

China; Amendments to the Export Administration Regulations, ” Federal Re~”ster, Dec. 27, 1985, 52900.

“see Paul Freedenberg, Assistant Secretary of Commerce for

Trade Administration, before House Foreign Affairs Committee, Subcommittee on International Trade and Economic Policy, Apr. 17, 1986, pp. 4-5. DOC made special efforts to reduce

case processing time for exports to China by establishing a special “China team center” in 1985.
206 . Technology Transfer to China

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

Dollars approved (thousands)

Commodity Control List (CCL) Category 1984 1985

1091

1312

1353

1354

1355

1358

1359

1391

1460

1510

1519

1520

1522

1529

1531

1533

1537

1555

1564

1565

1566

1567

1568

1572

1584

1587

1767

Numerically controlled equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,019

Presses for ceramic manufacturing. . . . . . . . . . . . . . . . . . . . . 14

Communication cable manufacturing equipment . . . . . .

Integrated circuit manufacturing and testing equipment . . . . . . . . . . . . . . . . . 115

Electronic device manufacturing equipment . . . . . . . . . . . . . . . 23,304

High technique memory/switching device testing and manufacturing equipment 168

Tooling for fiber optic manufacturing . . . . . ... ... ... . 0

Robots and electronic controllers . ... . . . . . . . . . . . . . . . . . . 0

Nonmilitary aircraft, helicopters . . . . . . . . . . . . . . . . . . 164.006

Underwater detection equipment. . . . . . . . . . . . . . . . . . . . . 1,148

Single and multichannel transmission equipment . . . . . . . . . . . . . . . . . . . . . . . . 11,568

Radio relay equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,626

Lasers and laser systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,501

Electronic measuring, calibration, and testing equipment . . . . . . . . . . . 11,899

Frequency synthesizers and equipment containing . . . . . 2,989

Radio spectrum analyzers . . . . . . . . . . . . . . . . . . 2,188

Microwave equipment . . . . . . . . . . . . . . . 627

Electronic video tubes, components . . . . . . . . . . . . . . . . . . . . . 31

Integrated circuit and electronic assemblies. . . . . . . . . . . . . 15,727

Computing equipment . . . . . . . . . . . . . . . . . . . ........1,164.339

Computer software. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a

Communication switching, stored program . . . . . . . . . . . . . . . . . . . . . . . . . 0

Electric/electronics equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 699

Recording, reproducing equipment . . . . . . . . . . . . . . . . . . . . . . . . . 57,738

Oscilloscopes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,866

Quartz crystals/assemblies . . . . . . . . . . . . . . . 67

Optical fiber preforms . . . . . . . . . . . . . . . . . . . . . . . . . 0

13,770

0

5,422

94,527

7,316

0

0

1,025,385

2,017

3,007

69,224

6,820

33,144

35,241

3,036

2,457

1,263

38,009

3,897,369

3,713

14,300

1,013

66,089

3,183

11

0

Total for27CCLs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............1,465,639 5,322,603

Total all CCLs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............2,004,199 5,493,456

27 CCLS as O/O Total CCLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,1 96.8

NOTE Temporary licenses are”e;cluded Data Include total for calendar years (n current dollar value for IVL appl!cat(ons

a

!ncluded in 1565

SOURCE US Department of Commerce

is required by other U.S. Government agenciesandbyCOCOM.Inearly 1986thisgreenzone review was extended to cover certain

kinds ofitemscoveredby27 CommodityControl List (CCL) categories as shown in table

17.22

——

‘Those include numerical control equipment and software,

presses and specialized controls, communicationcablemachinery, printed circuit board machinery, semiconductor manufacturingequipment, test equipment forrecording media, tooling

for fiberoptic connectors, robots, aircraft and helicopters, underwater detection/locating equipment, data communications

equipment, radio relay equipment, lasers, electronic measuring

equipment, frequency synthesizers, spectrum analyzers, microwave equipment, image intensifier and TV video tubes, integrated circuits, Computerland computer software, telecommunications equipment, A/D and D/A converters, recording and

reproducing equipment, oscilloscopes, crystal oscillators, and

optical fiber preforms. It should be noted that some but not

alloftheitemscoveredby eachofthe27 categoriesnow receive

favorable treatment as green-zone cases in license review.

1986

9,361

0

6,985

1,971

74,311

3,463

0

0

117,126

578

1,965

4,347

6,729

34,118

11,004

4,811

1,696

199

12,313

2,694,130

4,835

52,517

495

52,339

2,336

1

0

3,092,795

3,366,460

91,8

The number and value of U.S. licenses approved for exports to China has expanded rapidly in recent years.The dollar value grew by

15 times, from $374.3million in 1980 to $5,493

million in 1985, though it declined to $3,366

in 1986. The number of applications more than

doubled between 1983 and 1985, rising from

4,300 to 10,200. In 1986, a total of 8,130 cases

(including temporary licenses) were closed out

for export to China.

Not surprisingly, the bulk of the approved

IVLs fall into a few commodity groupings. In

1980, more than 60 percent (in dollar value)

of the approved licenses were for exports of

semiconductor manufacturing equipment. In

1986, approvals for exports of electronic computing equipment made up more than 80 percent of the total, and nonmilitary aircraft and

helicopters another 7.3 percent in terms of
Ch. 8—U.S. Policy Choices ● 207

value.23 Table 17 provides an indication of the

prominence of license approvals in the 27 CCL

categories liberalized.

Export controls are established to protect

U.S. national security by making it more difficult for adversaries in the Soviet bloc to

obtain militarily significant technologies. Controversies continue about whether the commercial loss is justified by the national security

gains, both values difficult to capture in dollar estimates.24 Estimating the dollar value of

such commercial losses would entail documenting sales won by foreign competitors because

of delays in U.S. licensing or unilateral U.S.

controls. z

’ A full estimate would also have to

take into account the potential business lost

because export controls caused U.S. exporters

to forego business or because delays in the U.S.

process caused potential buyers to modify contracts. ’~ Calculating the dollar value of licenses

under review for a long time provides one indicator of the potential magnitude of the problem, however. In January 1987, for example,

the total value of licenses pending more than

60 days for export to China was more than

$806 million.”

—.—— --

‘3Data on licensed exports to China are published in the Export ,4dministration Annual Report, U.S. Department of

Commerce, 1986.

“Estimates can be more easily developed for commercial impacts of trade embargoes. See, for example, Gary Clyde Hufbauer and Jeffrey ,J. Schott, Economic Sanctions in Support

of Foreign Policy Goals, 11 E!, October 1984. Developing a quantitative estimate of the national security gains associated with

export controls would also be extremely difficult.

“AS discussed inch. 4 (supplier country policies), complaints

about unfair trading by foreign competitors abound. The American F;lectronics Association (AEA) has compiled a compendium

of examples of export control problems, based on information

provided by member firms. Included are reports of delays, unilateral U.S. regulations governing demonstration licenses, and

semiconductor manufacturing equipment exports to China. See

Case Study Report, AEA, Export Control Task Force, Mar. 12,

1987.

“See William F. Finan, “Estimate of Direct Economic Costs

Associated With U.S. National Security Controls, ” app. D, in

National Academy of Sciences, Balancing the National Interst:

U.S. National Security Export Controls and Global Economic

Competition (Jlrashington, DC: National Academy of Sciences,

1987). The author estimates that the direct, short-run economic

costs to the U.S. economy associated with export controls was

$9.3 billion in 1985, and that the overall aggregate impact on

the U.S. economy was $17.1 billion.

‘“OTA was given special access to DOC export licensing data,

based on a “national interest finding by the Assistant SecreU.S. export controls today affect trade with

China primarily in a few key advanced technology sectors. Computers, telecommunications, aircraft, precision instruments, and advanced manufacturing equipment constitute

the bulk of this group. In most cases foreign

firms can supply equivalent technologies. In

1985, U.S. exports from these sectors made

up between one-quarter and one-third of total

U.S. exports to China in dollar value. It is also

important to note that these have been key

areas of export growth in recent months. From

1984 to 1985, exports of telecommunications

equipment, for example, increased by 72 percent and exports of computers and office machines increased by 85 percent. ’s U.S. controls

strongly affect joint ventures in China because

exports of technical data and advanced manufacturing equipment are often involved, exports that require interagency review. Since

these are likely to remain priorit y import areas

for China, controls will continue to affect U.S.

exports of advanced technologies. Controls are

not a determining factor across the board in

U.S. trade with China, however.

The License Review Process

The Export Administration Act, the foundation for the export control system, designates DOC as the lead agency in implementing controls on dual-use exports. ’g The law

states that restrictions on international commerce should be used only where necessary to

further U.S. national security and foreign policy goals. Section 10 of the act establishes procedures for efficient processing of applications

within certain time periods and requirements

for periodic reports to Congress. While some

critics have charged that Congress should not

micromanage export administrators by requiring DOC to process applications within certary of Commerce for Trade Administration. In August 1986,

878 China cases had been in the system for more than 60 da?’s.

In January 1987 the number was 809.

2’DOC official export statistics. It is not clear whether exports in these sectors might have increased even more rapidly’

without factors relating to U.S. export controls.

‘The Export Administration Act of 1979, as amended in 1981

and 1985. A copy of the law can be found in the Export Administration Regulations.
208 ● Technology Transfer to China —

tain time periods, it appears that these stipulations have prompted improvements in license

review.

All applications for dual-use exports are received first by DOC, which must complete initial screening within 10 days. Cases that fall

within the green zone can be approved by DOC

alone. Others may be referred to other agencies such as the Departments of Defense, State,

and Energy, depending on the particulars of

the case. Many, but not all, of such referred

cases must also be sent to COCOM for multilateral review.30 Congress has set time requirements for processing at each stage of the

review process to ensure that delays are minimized. 3

1

DOC and other agencies have taken a number of steps during recent years to reduce delays. For a period in 1985 a China team center

was established. Automation has also been

used to reduce the paperwork and time needed

to submit a case for COCOM review, to cite

another example.

The reorganization of DOC’S licensing procedures in November 1985 abolished the China

team center set up to speed review of China

cases. China applications are now routed to one

of four commodity teams that handle individual validated licenses: capital goods (which also

handles technical data); computer systems;

microcomputers and telecommunications; electronic components, and instrumentation. These

teams process applications for exports to China

along with similar types of exports to other

countries. During the first 6 months after the

reorganization was announced, many people

were moved to new positions. Problems of adjustment, presumably temporary, became ap-

‘Whe State Department is the lead agency on COCOM and

for munitions exports, as discussed in the next section of this

chapter.

31DOC categorizes cases that exceed statutory limits in a number of categories: 1) applications not requiring interagency referral for which DOC has neither issued nor denied a license within

60 calendar days of receipt (Sec. 10 (c) of the Export Administration Act); 2) applications requiring interagency referral but

which have neither been closed out nor referred to COCOM

within 12o days after receipt (Sec. 10 (f)(l)); and 3) applications

referred to COCOM that are over 160 days old, or exceeded 160

days before completion (Sec. 10 (h)).

Photo credlf E/ecfro Scientific /ndusfr/es, /nc

A semiconductor processing system incorporating a

sophisticated laser. This system, including the laser,

was built in China.

parent as license reviewers and managers

learned new jobs.

Management challenges of other kinds (recruiting and keeping qualified personnel and

utilizing them effectively) also importantly affect the functioning of the system. Licensing

officers and engineering specialists are ranked

at GS-9 through GS-13 levels. DOC has apparently lost some its best young people to industry and to DoD. The Office of Export Licensing (OEL) now has a staff of 152 and the Office

of Technical and Policy Analysis (OTPA) over

76, but DOC has been unable to fill all of the

positions that were open.32 Expanded use of

the automated system for data entry, case

tracking, and review may permit a concentration of staff for focusing on really important

cases.

Another major goal of the reoganization was

to better integrate technical and policy analysis in the licensing process, a persisting issue

in U.S. export administration. OTPA was set

up in part to improve technical review in precedent-setting cases. However, exporters have

found it difficult to understand the division

of responsibility between OTPA and the OEL.

There is widespread agreement that automation is a major tool for improving the system.

32DOC, August 1986.
Ch. 8—U.S. Policy Choices ● 209

—

Plans are being made to automate data entry,

and a system has been put in place to provide

automated response to telephone inquiries

about the status of cases.ss The automated systems can also be used to improve accountability by eliminating some steps in the licensing

process. Illustrative of the latter was a striking reduction in the processing times for nonreferred COCOM country cases after license

examiners began to use the automated tools

available to close out and issue license approvals. DOC has developed a comprehensive

plan for automation that in the near term will

automate data entry and license issue, and initiate the automation of the license approval

process. Over the longer term, the automation

plan calls for immediate access by the license

examiner to a history of similar cases, online

regulations, policies, precedents, and the integration of information about foreign availability .34

One near-term objective of DOC is to reduce

the time required to complete action on IVLS

to 45 days by July 1987.35 There is no reason

why processing times for green-zone cases cannot be further reduced to the time required for

free-world destinations (6 days, according to

DOC’S own goals). Congress may want to monitorprogress carefully toward aclu”eving these

goals of quicker license reviews to determine

whether additional staff or other resources are

required.

When new China licensing regulations were

published in December 1985, the expectation

was that, by expanding the numbers of items

in the green zone, fewer cases would require

interagency referral. However, figure 7 shows

that this expectation has been only partially

‘

3The System for Tracking Export License Applications

(STELA) is operational. The system provides exporters with

information concerning the location of the case within the system. More substantive inquiries concerning interpretations of

regulations are handled by Exporters Assistance and licensing

officers.

“For a detailed overview of the Export Automated Support

System (E CASS) developed by DOC, see Office of Deputy Assistant Secretary for Export Administration, Export Control

AutomatedSystem, July 25, 1986. The plan notes the growing

need for interagency coordination, p. 23.

35 See Export Control Automated Support S-ystem–ECASS,

concept paper, revised, July 25, 1986, p. 12.

Figure 7.—Green Zone (Nonreferred) China Cases

(As percent of total China cases closed out)

(n

:

: 100

a

c [

vL I I 1 1 1 .. ~

z 1/85 3/85 6/85 9/85 12/85 3/86 6/86 9/86 12186 3/87

SOURCE. Off Ice of Technology Assessment, 1987

realized. Nonreferred cases were 70 percent of

all closed out China cases in both the first quarter of 1985 and the last quarter of 1986, though

they rose to 78 percent in the first quarter of

1987.

Average processing time for China cases has

declined, a trend that some believe indicates

the success of the revised guidelines in streamlining the system. Improvements in processing time also reflect introduction of computerized processing of West-West cases, permitting

more efficient use of licensing staff. Table 18

provides an overview of average days of processing time required for all China cases completed during the period January 1985 through

April 1987. The number of completed cases deTable 18.—Processing Time for China Cases

Average number of days

Number of Average

cases closed ~rocessina time

January 1985 . . . . . . . . . . . 911 83

June 1985 . . . . . . . . . . . . . . 976 94

January 1986 . . . . . . . . . . . 786 74

June 1986 . . . . . . . . . . . . . . 609 60

August 1986 . . . . . . . . . . . . 666 76

November 1986 . . . . . . . . . 514 70

December 1986 . . . . . . . . 411 77

April 1987 . . . . . . . . . . . . . . 729 57

NOTE Average processing times have been calculated for the cases closed out

(completed) during the 30-day per!od noted Total cases Include referred

and non referred Chtna cases

SOURCES U S Department of Commerce, August 1986, January 1987 and May

1987
210 ● Technology Transfer to China

Figure 8.— Processing Time for

(Closed Out) Cases

GReferred

~ ~ 200

. l

w

~

Referred China cases

.—: %

0 ) ’ 150

c ~

“: E Referred cases to all countries

~ ~ 100

Q@

~ ~ 50

z ~

1185 3185 6185 9185 12185 3186 6186 9186 12186 3187

NOTE Referred cases Include those sent to COCOM

SOURCE Off Ice of Technology Assessment, 1987.

Figure 9.—Average Processing Times:

China Nonreferred and All China Cases

“= o 150

C n ’

~ g t Green zone (nonreferred) China cases

~ I 1 I 1 * I 1 I 1 I

1/85 3185 6/85 9185 12/85 3186 6/86 9/86 12/86 3/87

aAVerage for (referred and nonreferred) all China cases

SOURCE Office of Technology Assessment, 1987

clined along with processing times up until

mid-summer of 1986; after that, processing

times fluctuated, showing another decline in

early 1987.

A verageprocessing time for referred cases,

however, took more than 200 days in December 1986, and remains signifkantlyh”gher than

processing times for referred cases for export

to other countries. Figures 8 and 9 show the

persisting pattern of unusually lengthy reviews of referred China cases. During the last

quarter of 1986, about 30 percent of the closed

out, referred China cases exceeded the statutory limits.36 OTA finds that improvements

have been ach”evedin average processing time

seThe ~rcentage of referred China cases where reviews exceed statutory limits was 70 percent in the first quarter of 1985.

The percentage of all China cases (referred and nonreferred)

where reviews exceeded statutory limits was 36.8 percent in

the first quarter of 1985 and 16.1 percent in the last quarter

of 1986. Data in all cases for closed out cases.

for China cases but that a significant problem

remm”ns in the unusually long periods of review for referred Ch”na cases.

For China exports, and for exports to other

countries, the percentage of applications denied is quite small. License examiners can also

return applications to the exporter without action (RWA), when additional information is

required. Critics have suggested that a large

percentage of such applications is cause for

concern because the U.S. Goverment may

thereby unduly delay or effectively deny an

application. The number of RWAS has declined, as table 19 indicates. This reflects efforts on the part of DOC to work with exporters

rather than deny or return applications when

additional information is needed.

Issue: Is Inter-Agency Review a Major Factor

Slowing Review of China Cases Within the

U.S. Government?

In December 1986 about 1,300 China applications were pending, and processing times exceeded the statutory limit in 40 percent (524)

of those cases. Most of those cases pending

over the statutory limit (461 of 524) were referral cases (those sent to other agencies or to

COCOM for review).” Hence, the number of

Cb”na cases pending over statutory limits rem~”ned in early 1987 almost as large as it was

in the spring of 1986. Cases referred to other

agencies make up the bulk of the backlog.

Pending cases for exports to China made up

about one-third of the total number of U.S.

cases pending over the statutory limits in 1986.

37DOC, January 1987. According to DOC officials, cases referred to COCOM normally exceed U.S. statutory limits for

review.

Table 19.—Actions Taken on Closed China Cases

Percent of total number of cases closed

Returned

Approved Denied without action

January 1985. 70.39%(83.13) 0,12%(0.61) 29,48%(17 24)

January 1986. 75.00 (81 86) 0,26 (0.41) 23,73 (17 72)

June 1986 86.77 (88.03) 0.16 (O 16) 13.05 (11 .79)

December 1986 89.32 (93 85) 1.21 (0.42) 9.46 (5 72)

NOTE Percentages In parentheses reflect exporls to all parts of the World Data [nclude !emporary

exports

SOURCE U S Department of Commerce Augusl 1986 and January 1987
Ch. 8—U. S. Policy Choices ● 211

In June 1986 the all-agency average processing time for referred China cases was 152

days. At that time it took longer to process

such cases than cases for exports to any other

part of the world. In early 1987 processing time

for referred cases continued at a level of more

than 17s days (see figure 8).

OTA analyzed the China cases more than 60

days old, first in August 1986 and then again

in January 1987.1H The number at both times

was substantial-more than 800 cases. The total value of these cases actually rose from $713

million in August 1986 to $806 million in January 1987. A significant portion of these cases

(laLl) had been in the system more than one

year by January 1987. The value of these cases

was $145,342,171,39

Most of the cases in the 1987 sample were

identified as located in various stages of DOC

IVL licensing. (These cases also represented

about half of the total dollar value of the pending China licenses. ) At the same time, almost

zo percent were in COCOM: they were valued

at more than $218 million. The number of cases

in the sample located at DoD was not large,

and their value was about 5 percent of the total. It should be noted, however, that agencies

such as DoD may return cases to DOC quickly,

recommending denial or asking for additional

information. Cases located in DOC may therefore reflect actions taken by other agencies that

have the effect of increasing the period of

license review at DOC. For a detailed examination of factors contributing to delays in the

interagency review process, see appendix C at

the end of this chapter.

The backlog contains a large number of cases

that are not really active. ’” Particularly striking were the sO cases being held without action (HWA) and the 97 cases in which negaW3TA collected these data samples from the DOC licensing

database. The data include the total number of China cases that

had been in the system for more than 60 days.

~gThe number of these cases was roughly the same as it had

been in August 1986, but the dollar value was substantiality

higher.

‘

(

’Such cases may be held within the system because the exporter wishes (held with action, or HJhrA) or in order to fulfill

requirements under the Export Administration Act (negative

consideration letters).

tive consideration letters (NCL) had been

sent. ’l Together, these two types of cases were

valued at $111 million, or more than 10 percent of the total value of China cases more than

60 days old.

DOC could make a special effort to eliminate

cases that have been under review for very long

periods of time, thereby making the case list

a more accurate representation of cases that

are really active. Another possibility would be

for Congress to restrict the number of days

a case could remain active in the system. For

example, cases more than a certain number of

days old could be automatically approved unless the Secretary of Commerce provided written explanation to the exporter that the particulars of the case made extended policy

review necessary. (Some of these cases would,

of course, still require COCOM review. )

It is striking that a few very large companies make up a large percentage of the total

value of pending cases. OTA found in both

samples, for example, that one company was

responsible for more than 10 percent of the dollar value (and more than 15 percent of the total number) of China cases pending more than

60 days. In contrast, another company had

only one China case pending for more than 60

days, but it was valued at $2.5 million. This

suggests that a few companies take the lead

in testing the system and that their efforts are

concentrated in a relatively small number of

CCL categories, such as computers (CCL 1565).

In January 1987 there were 207 cases more

than 60 dtiys old in CCL 1565, and 74 of them

were valued at $295 million.

It appears that a considerable investment

of time and resources is needed to work the

system, and few smaller firms can afford to

do so. Instead, the export system has nurtured

a large group of middlemen and Washington

consultants who represent the actual exporters.

Measures to make the system more understandable and accessible could make it easier

for small U.S. companies to export.

4iHWA are held at exporter’s request: therefore, delays in

these cases are not caused by DOC. It should also be noted that

,NCL and intent-to-deny cases routinely exceed statutory limits,

due to time periods needed for rebuttal.
212 ● Technology Transfer to China

Interaction between DOC and DoD has been

a major focus of attention in export administration debates. Exporters have charged that

DoD dominates the system, interpreting regulations rigidly and delaying d~isions. Others,

however, question whether DOC green-zone review involves adequate technical analysis.

DoD has reorganized and consolidated its

export control apparatus into the Defense

Technology Security Administration (DTSA).42

DTSA reviews the applications for the most

sensitive dual-use and munitions exports. DoD

has developed its own approach to automation,

which builds on the licensing data base that

DOC established. During recent months, DoD

was processing China cases quickly, on an average of 25 days during the last quarter of 1986,

although DoD processing times rose to 31 days

in the first quarter of 1987 for closed out

cases.qs DO

I) has Clearly developed a Coordinated program for export licensing.

Some fear, however, that DoD is in a position to negotiate unilaterally with exporters,

requiring modifications and other conditions

on export. Typically more cautious about approving exports, DoD license reviewers are in

a position by virtue of their considerable organizational resources to play an important

role in reviews of referred cases. There are internal differences within the Pentagon over

technology transfer to China, but DTSA plays

a leading role in coordination with policy

makers in international security affairs.

Exporters sometimes complain that DoD

and DOC interpret the regulations differently .44

While it was beyond the scope of OTA’S research to substantiate this charge fully, dis42 See Defense Technology Security Administration Program

Development Plan, High Technology Export License Review

and Analysis System for the 1990s, May 5, 1986.

“For reasons mentioned earlier, the agency average processing times tend to underestimate the overall effect of decisions

taken outside DOC that extend review time within DOC.

440ne example cited was the 16-bit microcomputer, Exporters

suggested that DoD first approved such exports, and then began denying them for exports to China. More recently, DoD

has once again changed its policy, approving such exports for

China. When DoD officials were asked about this and other such

examples, they discounted them as inaccurate, suggesting that

if 16-bit microcomputer exports were denied for China it was

for some reason that had nothing to do with technology level.

cussions with officials from both agencies indicated that their views diverge on some key

policy issues. Officials in DOC, for example,

stress that a de facto red zone exists, while

DoD staff disagreed with this characterization,

stressing that all cases above the green zone

are reviewed on a case-by-case basis. Serious

and persisting differences in interpretation of

export regulations continue, lending uncertainty to the process and suggesting that

policy is not clearly defined or consistently

applied.

Problems in reaching interagency consensus

have rendered the formal process ineffective.

The formal process is that precedent-setting

cases that involve mih”tarily si~”h”cant exports

are referred to various agencies, and the most

difficult cases are considered by interagency

gToups such as the Operating Committee. In

practice, however, the Operating Comm”ttee

formally reviews only a handful of cases.

Higher level formal interagency reviews—for

example, those that involve the Secretaries of

Defense and Commerce–are also unusual.

Without interagency consensus, cases may languish for years with no decision. One solution

is for high-level officials in DOC to push for

resolution of such controversial cases, bringing them to Cabinet level and even Presidential attention, when necessary.

Some argue that one way to solve the problem of interagency consensus-building is to

eliminate DoD participation in license reviews.

The committees of jurisdiction in Congress

have struggled with this issue in recent years,

particularly in the conference committee that

reviewed amendments to the 1979 Export Administration Act.45 Section IO(g) of the act outlines a role for DoD in reviews of cases involving national security. The rationale is that

differences in viewpoints among the key agencies (Commerce, Defense, State) involved in export controls can provide useful checks and

balances.

45The Export Administration Act Amendments of 1985 were

eventually signed into law, after prolonged debate in the conference committee.
Ch. 8—U.S. Policy Choices ● 213

As the lead agency in export administration,

DOC officials have the leeway to present their

views more forcefully, if need be, in high-level

interagency reviews. Therefore, one alternative

is for DOC to play a stronger role. One way

to accomplish th”s would be to encourage DOC

to exercise fi”nal authority in approving an application unless DoD exercises its formal appeal to the President as outlined in section

l@’g). Another variant on this would be to

amend the act by limiting DoD’s role to giving advice to DOC, leaving final authority for

China cases with DOC. This approach might

be justified by some who see export controls

for China as primarily a foreign policy question or by those who favor removing China

from COCOM. Still another possibility would

be to mandate a deadline for review (such as

6 months) and amend the act to call for automatic approval for cases that exceed the

deadline.

The effect of all of these proposals would be

to increase incentives for DOC to reach a decision more quickly. Nevertheless, much would

depend on how much initiative is taken by officials at DOC. In the first case, the burden of

objection would be with DoD, but DOC officials would have to ensure that final decisions

were made in timely fashion if the system is

to work any differently than it does now. In

the second case, national security considerations might be downplayed. Evaluations of

that risk, however, depend to some extent on

whether or not one judges that such considerations are now overemphasized. Under the

third option, there is also a risk that the automatic approval process would produce some

bad decisions.

A recent study by the National Academy of

Sciences proposes to address these issues by

expanding the role of the National Security

Council (NSC).4

’ NSC currently helps coordinate interagency decision making, and its effectiveness depends to some extent (as with

the above options) on the interest and intia4

’National Academy of Sciences, Balancing the National Interest: U.S. National Security Export Controls and’ Global Economic Competition (k$rashington, DC: National Academy of Science, 1 987), pp. 173-174.

tive taken by NSC staff. In practice, new and

important policy proposals on export controls

receive Cabinet-level attention, Encouraging

DOC to play a stronger role through one of the

mechanisms discussed above, therefore, seems

a more direct approach than one that depends

on a greatly expanded role for NSC as the interagency arbiter.

Nevertheless, the goal should be to provide

new incentives for interagency consensusbuilding. The process outlined in the Export

Administration Act (formal DoD objections

conveyed to the President) has not been frequently used, and decisions have been delayed

well beyond statutory limits in a significant

number of China cases. The question that Congress may wish to address is how to ensure

that good decisions are reached in timely

fashion.

The Department of State (DOS) is also a key

participant in the process, particularly for

COCOM cases. Consensus-building among

these agencies is difficult because each agency

has its own data base, procedures for review,

and criteria for making judgment.47 The Deparment of State, for example, handles foreign

cases submitted by other COCOM member

countries but does not have ready access to

information about U.S. cases involving similar types of equipment and technology.

Issue: How Can Export Regulations Be

Clarified To Provide Clearer Guidelines?

Ambiguity in the guidelines for exports (particularly for exports that exceed green-zone criteria) remains a problem. In evaluating this

situation, OTA compared the value of approved

licenses for exports to China with the value

of actual exports. It found that the value of

approved licenses for China has not only expanded but exceeds by far the actual value of

U.S. exports. In 1980, when U.S. exports to

China totaled $3,754 million, the value of export licenses granted was about 10 percent of

that total dollar value. In 1985, however, when

—

“U.S. General Accounting Office (GAO), Export Licensing:

Commerce-Defense Re\riew of Applications to Certain Free

14’or)d IVations, GAO/NSIAD-86-169, September 1986.
214 ● Technology Transfer to China

—

U.S. exports totaled $3,855 million, the value

of approved licenses totaled $5,493 million.48

Of the 2,688 licenses, valued at $761 million,

used for export to the PRC and returned to

DOC in 1986, the value of actual shipments

was only $483 million.49

There are a number of possible explanations

for the comparatively large value of approved

licenses. First, licensed exports include those

for demonstration purposes, where no sale is

actually made,50 and for reexports of U.S. technology from other countries. However, because

licenses for such types of exports were valued

at less than $100 million in 1986, these licenses

alone cannot account for the comparatively

large value of licensed exports.5

’ In addition,

licenses that are returned without action (because information is inadequate and other reasons) are reentered in the database when they

are resubmitted, and they are double-counted

among pending licenses.52 Also, exporters receiving an approval in one year may make the

actual shipment in the following year.

In many cases, however, it appears that final sales never take place, even though a license

has been approved. This may occur when along

period elapses between the time of application

and the time of approval. In such a case, the

buyer may lose interest and turn to another

seller. 53 Another explanation is several U.S. exporters submit applications, all hoping to make

the same sale in China.

An exporter incurs no penalty for keeping

a license active or for making multiple submissions to export similar types of equipment to

different Chinese buyers. Exporters may do

this to obtain documentation useful in future

export licensing submissions. When an appli48U. S. exports are based on official U.S. statistics.

‘

gData from DOC, April 1987.

‘“Data for 1986 exports included in the paragraph above do

not include temporary licenses, however.

“Data for re-exports cover the period Jan. 1 to Dec. 31, 1986.

U.S. DOC data, August 1986.

52A reasonable estimate is that about 10 to 11 percent of the

pending cases for export to China are resubmissions. U.S. DOC,

August 1986.

5

’A related explanation is that the Chinese buyer finds it impossible to raise the needed foreign exchange to make the final

purchase.

cation involves cutting-edge technology, industry representatives may also find it necessary

to press their cases at high levels.

A certain amount of testing is to be expected,

but if this becomes the major mechanism for

forcing critical and precedent-setting policy

choices, it suggests that exporters (and perhaps license examiners) lack clear guidance and

that the policy process has failed. Since the

publication of new regulations in December

1985, the green zone has been more clearly defined, but ambiguities remain. Exporters mention areas such as semiconductor manufacturing equipment, software development systems,

and computer systems as areas of controversy.

In particular, exporters as well as license examiners are uncertain about how exports exceeding green-zone limits will be treated. Such

exports are reviewed on a case-by-case base.

In recent years U.S. officials have approved

exports exceeding green-zone guidelines, attaching various conditions to export. Powerful computers, for example, have been leased

to China for use in seismic applications.54

Past China controls included intermediate

and red zones along with a green zone. Today,

the proscribed “mission areas ”s5 provide only

general guidelines about what kinds of exports

are likely to be denied. In fact, there is no outright prohibition on exports above the green

zone; each case is reviewed separately. The absence of a clearly defined red zone provides exporters (as well as Chinese buyers) with incentives to test the system. Export control

regulations prow”de little ~“dance to exporters

concerning items above green-zone levels.

There is no practical way for an exporter to

know what previous decisions may have been

made to approve exports of certain types unless the exporter is wifi”ng and able to invest

the considerable resources necessary to learn

from officials about such cases or to take the

initiative to make multiple apph”cations to document previous decisions.

“Approval of exports may also be conditioned upon the type

of end-user, monitoring of facilities and access by Chinese personnel.

“See ch. 7 for a discussion of the mission areas.
,.!.

Photo cred~t Wendy Fr/eman

A consumer electronics factory in Stlenzhen. Product Ion

has grown rapidly, and exports may soon become

competitive with those of the newly

industrializing countries

Publication of a red zone might lead to adverse Chinese reaction and would require continuing modifications as technologies and

bilateral relations change. On the other hand,

the process of license review might be speeded

and coherence in U.S. policy better assured if

a more carefully defined red zone could be developed for use within the U.S. Goverment.

There is widespread agreement that the U.S.

export control system could be improved by

concentrating efforts on controlling a small

number of truly militarily significant items.

Better definition of the red zone would be consistent with this. There is, moreover, the very

real danger that review of a.Zl exports above

the green zone level will be slowed unless the

red zone can be better defined.

The disadvantages of such an approach

would be to reduce the flexibility of the current system and to make it even more important to revise such ~idelines in a timely fashCh. 8—U.S. Policy Choices w 215

ion.” Some argue that such an approach would

be extremely difficult to implement because

it would have to take into consideration not

only the level of technology and its military

significance but also the specific conditions of

use, and the nature of the end-user which are

generally developed on a case-by-case basis.

For the next few years, the potentially difficult areas of decision for exports to China include powerful computers, electronic measuring equipment, software, telecommunication

(including networks and fiber optics), and technical data (including training). What is lacking is a strategy for future U.S. technology

transfers to China in key industry sectors.

Practically speaking, sectoral analyses could

lay the foundation for expanding the China

green zone. To develop such a strategy, consultations with industry officials would be

essential. Moreover, factors such as U.S. commitments to cooperate with China (e. g., under

signed protocols), changes in technology, and

Chinese technology needs would have to be

taken into consideration, along with national

security concerns. Developing a strategy for

a key industry sector would not be an easy taskbecause many transfers involve technical data

and managerial expertise that are much more

difficult to bound than equipment and hardware, and because transfers involve combinations of equipment whose technical parameters may be different from the simple sum of

the parts. The thrust of the effort would be

to chart a future course over a 5-year period,

providing exporters and license examiners with

better guidelines.

Regardless of the approach taken, better use

of the computerized data base for review of applications for export of equipment or for review of technolo~”es equivalent to what has

already been perm”tted for export could ensure

more consistent decisions. Once a precedentsetting decision has been made to permit an

export of a certain type, subsequent decisions

should be consistent with those precedents un5

’A major criticism of the current U.S. export control system

is that there have been only a handful of findings of foreign

availability that provide the basis for removing items from the

controlled list.
216 Technology Transfer to China ——-

less other, nontechnical factors come into play.

To ensure consistency in decision making, the

various U.S. agencies involved in license review would need accurate information about

such precedents and common understandings

about implementation. 57

From a public policy perspective, it maybe

essential to expand efforts to make the system

more transparent. A number of approaches

could be considered. DOC m“ght issue periti”c

general p”dance to exporters about recent key

decisions (without disclosing the names of exporters or con fi”dentialinformation). In recent

years the publicly available annual reports on

export administration for one calendar year

have not been published until many months

later. Information about the status of China

licensing (numbers of applications approved,

denied, and pending in the U.S. Goverment and

in COCOM) could be provided to the public on

a more frequent and timely basis. DOC has recently taken a step in this direction by setting

up an automated telephone system for providing exporters with information about the status of their cases. Efforts to expand automated

systems by providing license reviewers with

electronic information on precedent-setting

cases may also contribute to the increasing consistency in license reviews. Industry participation could also be strengthened through the

technical advisory committees (TACS) and specialized seminars for China exporters.

Increased availability of information within

the Government and for Congress may also

be required. Expanded use of automated systems implies increased accountability for licensing officers and improved information access by policy makers themselves.

“AS mentioned earlier, exports are often permitted with conditions. Disagreements arise as to whether a prior export has

established a “precedent,” or is more appropriately viewed as

a one-time conditional approval.

The COCOM Review Process

By expanding the COCOM green zone (to

permit COCOM countries to process more

cases unilaterally), COCOM member countries

set out to streamline the review of China cases.

Revisions to COCOM China policy made in late

1985 came at U.S. initiative, but they have

apparently been well received by other COCOM

member countries. The immediate effect of

these changes was to relieve pressures on the

COCOM organization that had been created

by a huge China caseload. The number of U.S.

China cases sent to COCOMdecLinedmarkedly

from 237in January 1986 to 64 in August 1986.

In 1986 the average processing time in COCOM

for China cases declined from 77 to 56 days

between JanuaIy and June but rose to 81 days

during the first quarter of 1987.58 On the other

hand, of total China cases closed out on a

monthly basis, the percentage of those that

had been sent to COCOM actually rose from

13 to 17 percent during the same time period.

The number of U.S. cases pending in COCOM

declined in 1986 from 267 in January to 116

in December but rose to 187in April 1987; the

majority of U.S. cases pending in COCOM are

for exports to China. Table 20 shows that the

number of pending U.S.-China cases in COCOM

declined by 57 percent between January and

December 1986. Submission to COCOM adds

considerable time to the review period.

Issue: Should China Be Removed From

COCOM Review?

If relations with China continue to improve

and China’s economy continues to grow,

COCOM policy may require further revamp58U.S. tiOC, August 1986.

Table 20.—U.S. Cases Pending in COCOM

China cases Other cases Total

January 1986 . . . . . . . . . 267 23 308

June 1986 . . . . . . . . . . . . 153 34 187

December 1986 . . . . . . . 116 43 159

January 1987 . . . 143 31 174

April 1987 . . . . . . . . . . . . 187 63 250

SOURCE U S Department of State
Ch. 8—U.S. Policy Choices ● 217

ing. Removing China from cOCOM review

would have some advantages, would send a

positive signal indicating full acceptance of

China as a trading partner by the West, and

should result in expanded trade in high-technology sectors that now exceed green-zone

guidelines. OTA’S finding that transfers of

dual-use technologies are likely to have limited

effects on China’s military capability in the

near term provides support for removing China

from COCOM review.

There is no easy answer to the question of

whether the United States would stand to gain

in commercial terms if such action were taken.

The answer depends in part on whether U.S.

exporters are disadvantaged by the current

system. OTA heard widespread complaints

from U.S. exporters about loose export controls in other COCOM countries. However,

OTA was unable to substantiate these claims

with specific examples in China. U.S. exporters

could help clarify this issue by providing hard

evidence to the U.S. Goverment. On the other

hand, the different approaches of various

COCOM countries to publishing China regulations provides one indication of leeway for

legitimate differences in the interpretation of

guidelines. It is also clear that the United

States is the only country that attempts to

limit unauthorized re-exports through third

countries. But exporters from other countries

also complain that the United States has used

the export control system to its own commercial advantage, by proceeding to liberalize U.S.

policies prior to agreement within COCOM.59

By far the largest impact of removing China

from COCOM would stem from faster review

within the U.S. Goverment, rather than from

elimination of discrepancies in the policies of

other COCOM member governments.

There, however, would be some disadvantages to removing China from COCOM. If

China’s policies shifted dramatically (for example, toward alliance with the Soviet Union),

it could be difficult to persuade COCOM mem5

’It should be noted that the United States continued to submit U.S. cases that required COCOM review to COCOM after

the 1983 liberalization of U.S. policies.

bers to return China to COCOM review. Nor

would all COCOM members necessarily favor

removing China from COCOM at this point,

considering the important role that COCOM

plays in the review of military as well as dualuse exports and given their different perspectives about East Asian security. Even if

COCOM continued to review military exports

(while review of dual-use exports were eliminated), some would argue that there is no overwhelming reason why this step should be taken

now. Although the COCOM process is opaque

and slow, it provides a mechanism for consensus-building on China policies among the member countries.

Some further “harmonization” of COCOM

country policies may be essential for the viability of the multilateral control system. As

discussed more fully in Chapters, no one would

expect the COCOM countries to have identical approaches to export control, given their

widely diverging political and economic systems. Complaints of wrongdoing indicate deep

suspicion by COCOM members about their

associates in the multilateral controls system.

A comparison of export control systems in

various suppliers is a necessary fi”rst step toward further harmonization of approaches. The

United States could best pursue this through

a joint effort involving other COCOM countries. The goal would not be to force other countries to change their systems, but rather to

understand better where differences lie and determine whether these differences result in

weaker controls or just different approaches

to controls.

The United States could begin this process

by establishing the general principle that

COCOM countries should strive to develop uniform controls on exports to China. The United

States unilaterally controls some types of exports to till countries worldwide. While these

controls are not specifically directed toward

China, they do represent a divergence in the

U.S. approach. Over the long term, the ~nite~

States may be in a better position to persuade

other COCOM countries to strengthen their

controls on re-exports if U.S. controls on ex7 2-? 49 () - 87 - 8 : (/1. 3
218 . Technology Transfer to China

ports to other COCOM countries are further

relaxed.

One as yet little noticed effect of the revised

COCOM China policy maybe to bring to public attention discrepancies among COCOM

member countries in interpretation. Because

the United States and some other COCOM

member countries have published their own

regulations, based on COCOM policy changes,

the technical parameters used in judgments

about China exports made in various countries

are open to public scrutiny and comparison.60

If public debates over these questions expand,

the need for congressional oversight of the

multilateral export control system may be

heightened.

What Other Actions Could Be Considered?

During the past 6 years, a series of important, progressive changes have been made in

U.S. controls on exports to China. An important issue is whether or not these changes have

been paced to maximize U.S. commercial and

national security goals, and whether the process of updating the export guidelines can be

improved.

Critics suggest that these regulations merely

codify the U.S. approach as worked out in practice during the period 1983-85. On the other

hand, it is true that the original green zone included only T CCL categories, whereas the

green zone today was expanded in 1986 to 27

categories (and later to 30). Some observers

have expressed concern that the stimulus for

new determinations in precedent-setting cases

often comes from other COCOM member countries who push harder than the United States

for approvals to export; they cite key decisions

on sales of telecommunications switching equipment and seismic equipment as examples.

U.S. industry representatives provide their

views through the TACS. But the process in60St ephen E. Nordfinger reported that the U.S. Government

had agreed to a British sale of advanced telecommunications

equipment that U.S. firms had been barred from exporting on

national security grounds. This sale involved fiber optics. Baltimore Sun, Dec. 28, 1986, p. 4A.

volves extremely complicated technical reviews, which are not always effective in providing information and analyses used by U.S.

exporter adminstrators.

With the liberalization of U.S. controls on

exports to China, key decisions on nongreen

zone exports have become more difficult. The

need to continually update the guidelines will

remain. On a multilateral level, COCOM policies will have to be reviewed and the treatment of China considered in light of developments in overall relations with the West. One

stimulus for another full review of China policy in the United States and COCOM would

be the buildup of another backlog of U.S. cases

in COCOM. If, on the other hand, the U.S.

Goverment were to adopt today a more active

lead in reducing the COCOM list for China

when the equipment and technolo~”es are no

longer state-of-the-art or when they are m“dely

available in Clu”na, a more measured and anticipatory approach could be developed. These

efforts, if pursued positively, could expand and

deepen consensus among COCOM member

countries about technology transfer to China.

DOC has recently proposed that distribution

licenses be made available for China, a change

that would require legislative action. Such

licenses make it possible for IJ.S. exporters to

export certain commodities to three or more

consignees that have been preapproved as foreign distributors or users; they are considered

a‘ ‘special privilege, according to U.S. export

regulations. Internzil control mechanisms are

required to assure compliance. As U.S.-China

trade grows, some mechanism will be needed

to permit U.S. firms to obtain a license permitting them to make repeated sales of greenzone level items to trusted Chinese consignees.

Other areas for future consideration include

controls on technical data exports (including

training) and controls on temporary exports

to trade shows.

The pending export control issues are signific~t ones that deserve high level attention

in the United States and in COCOM. The solutions cannot inmost cases be aclu”eved through

le~”slation, but Congress can play an impor-
Ch. 8—U.S. Policy Chokes ● 2?9

tant role by monitoring progress in improving implications of alternative future courses in

the efficiency of the current sytem and in con- U.S.-China policy.

sidering the commercial and national security

MILITARY COOPERATION

In 1981 China was removed from the list of

prohibited destinations for export of U.S. munitions list items. While more than 6 years have

elapsed since that time, views differ about the

appropriateness of cooperation in this area, and

about how best to pursue it. Although press

reports often give the impression that there

is a rapidly developing military relationship

between the two countries,6

’ actual arms sales

and military cooperation have been limited.

Differences in views about arms sales to China

reflect underlying concerns about whether military cooperation should be emphasized in the

bilateral relationship, and how it can contribute to broader U.S. strategic goals in Asia.

It appears doubtful that U.S. sales of advanced weapons systems will increase rapidly

in the near term. Differences between U.S. and

Chinese perspectives on a number of issues pre

elude the formation of an alliance between the

two countries. China’s limited financial resources and its desire to obtain technology

rather than import complete weapons systems

also set constraints.

There are both advantages and disadvantages to the approach taken by the United

States to military sales to China. Blanket restrictions on arms sales have been eliminated,

and licenses to export items on the munitions

list are now reviewed on a case-by-case basis.

As arms sales and military cooperation proceed, however, it will be important for the

United States to define more clearly those

areas for military cooperation, based on evaluations of past experience. OTA also concludes

that U.S. officials making decisions on dualuse exports should be more aware of the scope

and nature of munitions sales.

“See, for example, Edward Neilan, “Peking, U.S. Brass Getting Along Well, I+ ~ra~hington Tjrnes, May 14, 1986, P. 7.

Since 1981, U.S.-China military cooperation

and U.S. arms sales to China have been expanded. However, U.S. commercial arms exports to China do not compare with those to

South Korea, Indonesia, or Taiwan in dollar

value, and official military cooperation has

been limited. Table 21 provides a comparison

of U.S. commercial arms sales to selected destinations.

Several high-level discussions have occurred,

beginning with a visit to Beijing by Harold

Brown, Secretary of Defense in the Carter administration. The general framework for U. S.-

China military cooperation was established in

a 1983 visit by Secretary of Defense Caspar

Weinberger. The components area high-level

strategic dialogue between military leaders,

functional military exchanges, and the identification of several military mission areas for

cooperation. High-level visits continue—the

most reeent in May 1987 when Yang Shang

Kun, Vice Chairman of the Central Military

Commission, was hosted by Vice President

George Bush.

During this 6-year period, four military-related sales have received public attention. Two

cases involved sales of civilian technology t o

Chinese military end users: 24 civilian derivatives of Sikorsky Black Hawk military heliTable 21. —U.S. Commercial Arms Exports

(thousands of dollars)

1981 1982 1983 1984 1985 “ Total

China 0 1,000 984 22,732 3,151 29,516

Japa n 344,862 300.000 439,238 546,874 301,647 3,014,444

Kore a 28,710 25,000 123,513 122,299 36,041 615,258

Indonesia 6,673 10,000 25,083 27,197 23,088 132,570

Taiwan 66,731 75,000 124.785 133,133 100,000 838,337

NOTE ‘War value of delwer[es of mumttons-controlled (terns purchased directly Irom U S manufacturers Data do not include offlclal U S Govermenl programs such as foreqn mllliary sales

In the case of Korea for example such of flc(al sales were valued at $266 m!ll!on In 1985

SOURCE Oeparfment of Defense Secur[fy Assistance Agency fore~gn MI/L_wy Sa/es Fc?re[gn Mdl

(Jry bmfwcfIon Sa/es am MdIfary ,. Lwslmce Facts (as of Sept 30 1985 I
220 Technology Transfer to China

copters tj2 in 1984 ~d 5 General Electric turbine engines to the Chinese navy in 1985.

The other two cases involve foreign military

sales (FMS)—direct government-to-government

tra.nsactions. G3 The most significant completed

sale of an item on the U.S. munitions list was

artillery shell technology. While some observers expected China to spend $500 million

on artillery manufacturing equipment, the final value of the transaction was about $22 million.G4 In May 1986 U.S. approval was given

for an FMS sale of 55 avionics kits ($10 million each) to modernize China’s F-8 fighter. In

late 1986 it was reported that the U.S. Air

Force had signed a $501 million contract for

the avionics upgrade and planned to issue requests for proposals for the first 50 avionics

kits, to be delivered in 1991.66

It appears that negotiators from the United

States and China have concentrated their discussions primarily on mission-specific systems

used for tactical defense,aG including antitank

weaponry that China needs to defend its border against the Soviet Union. Repeated reports

of discussions over TOW antiarmor missiles

fall into this category. Another area is improved air defense. I-Hawk antiaircraft missiles are among the weapons that have been

considered. A third area is antisubmarine warfare, where potential sales of towed-array sonars, and the Phalanx ship defense system

have received some public attention.’7

U.S. officials indicate that, for the most part,

such systems would not significantly improve

dZThe helicopters included military entines.

69 CJince 1984 FMS hag been available for China. In addition,

4 Mark 46 antisubmarine missiles and some training have been

provided through FMS.

“Roger W. Sullivan, “U.S. Military Sales to China, ” China

Business Review, March/April 1986, p. 6.

86The kits include new radars, inertial navigation equipment,

head-up displays, air data computers, and a new data bus. See

Aviation Week and Space Technology, Nov. 24, 1986, p. 28.

‘

eSee Kerry B. Dumbaugh and Richard F. Grimmett, U.S.

Arms Sales to Ch”na (Washington, DC: Congressional Research

Service, July 8, 1985).

dTThe United states agreed in principle to diSCUSS COOPWation in modernization of the People’s Liberation Army antisubmarine capabilities. See Report to Congress, fiscal year 1986,

by Secretary of the Navy John F. Lehman. See ch. 7 for a discussion of issues surrounding possible transfers of antisubmarine warfare technologies.

Chinese capabilities to launch an offensive attack and that they involve limited advanced

technology transfer. Military sales to date have

involved little production technology or complete weapons systems. Observers note that

applications for export of military hardware

or technology more than 5 years old are viewed

favorably by U.S. license reviewers.G8

All U.S. commercial arms sales are regulated

by the International Traffic in Arms Regulations (ITAR), as implemented by the Office of

Munitions Control in the Department of State.

DoD’s Munitions Directorate reviews some

but not all of the munitions export applications. In recent years DoD has reviewed about

one-fourth of the roughly 40,000 applications

for munitions exports worldwide submitted annually. 89 DoD reviews a higher percentage of

applications for export to China.70 The cases

that DoD reviews are the cutting-edge cases—

those not previously licensed for a particular

export market.

The review process involves the Department

of States, DoD, and various military departments and agencies, with industry representatives providing information. Many of the key

cases that DoD reviews require careful consideration of the interests of different military

agencies involved, depending on the type of

technology or equipment. DoD officials taking the lead in munitions case reviews look to

International Security Affairs (DoD) for policy guidance, taking an activist approach designed to build consensus on a joint DoD position.

When sales involve major defense equipment, valued at $14 million or more, or when

defense articles and services valued at $5o million are proposed, the President must notify

Congress 30 days prior to transfer.71 Congress

rarely musters the votes to block arms sales

proposed by the executive branch, but anticipated opposition from Members of Congress

‘

a

Sullivan, op. cit., p. 8.

“DOS unilaterally reviews the other 30,000,

70A reasonable estimate is that DoD reviews about 80 percent of the China munitions cases. Estimate will be verified.

“Sec. 36 9(b) (1) of the Arms Export Control Act.
. —

Ch. 8—U.S. Policy Choices ● 221

may cause administration officials to defer a

sale. In the spring of 1986, Congress reviewed

the proprosed F-8 avionics package, which was

eventually approved.72 U.S. arms exports to

China also receive COCOM reviews.

The number of munitions export cases is

small in comparison with dual-use cases. In

1985, the U.S. Goverment reviewed 11,000 applications for dual-use exports, and a total of

269 applications for munitions sales to China.

As table 22 shows, the percentage of applications denied is higher and the share of those

approved lower for munitions applications

than for dual-use exports. Fewer than 1 percent of the dual-use applications were denied

and more than 70 percent approved in 1985.

In the same year, 60 percent of the munitions

cases were approved (20 percent approved with

provisos), and 11.5 percent denied.

Out of the total 860 munitions applications

reviewed over the course of the past 6 years,

about 150 involve equipment exports reviewed

by COCOM. In the past year, the number of

applications has increased (as shown in table

17). During the first 5 years of the 1981-86

period, 80 cases were sent to COCOM. During

the period August 1985 through July 1986,

another 70 cases were submitted to COCOM,

indicating growth in munitions applications

for China. Since 1982, U.S. cases have made

up 60 percent of all COCOM munitions cases

7

’For a summary of the arguments against the sale, see Martin L. I.asater, Arming the Dragon: How Much U.S. Military

Aid to China? ( Washington, DC: Heritage Foundation, Lecture

No. 53, April 1986).

Table 22.—Munitions Licensing for China, 1981-86

Numbers of cases

1981 1982 1983 1984 1985 1986 TOTAL

Approved 5 28 60 83 109 50 335

Denied 12 15 31 31 23 82

Returned without

action 4 17 40 57 69 4(I 227

Prowso 3 17 25 34 55 29 163

Total 12 44 140 197 269 198 860

NOTE Data for 1986 through Sept 9 Totals may no! add up because a few cases ha(e been

canceled or lost Cases do not include temporary exporls

SOURCE U S Department of Stafe Off Ice of Mun(hons Confrol data proilded to the Of fre of

Technology Assessment Seplember 1986

for China.73 Other countries such as Italy are

also providing China with military technology

subject to COCOM review.74

In some cases, reviews of munitions cases

are completed within a month of receipt of application, although cases sent to COCOM often

take much longer. The task of licensing munitions exports may be more manageable than

that of dual-use exports because there are fewer

applications to review. While there have been

few trade missions to China by U.S. industry

officials involved in arms sales, this situation

may change in the years ahead.

Issue: Is There a Discrepancy Between

Dual-Use and Military Exports?

Some observers have charged that there is

a disjunction between U.S. dual-use and military exports to China. To cite one example,

some argue that there is a discrepancy between

U.S. reluctance to provide bulk licenses for

microcomputers and the fact that discussions

are under way about assisting China in improving its surface-to-air missile systems. The

promptness of decision making and the attention given to any reports of talks concerning

arms sales to China leave some observers with

the impression that it is easier to get an approval for military exports than it is to get approval for dual-use exports.75

Arms exports and dual-use exports are covered by different sets of regulations, and licensing is handled by different government agencies. There is no simple basis for comparing

the levels of technology in arms sales and dualuse sales. The former have specific military applications, whereas the latter (as discussed in

ch. 7) may be used more generally by the mili73Data provided to OTA by the Office of Munitions Control,

September 1986.

74An official from China National Aero-Technology Import

and Export Corporation stated that Aeritalia was assisting

China in developing the A5-M, a supersonic, twin-jet attack aircraft to be used by China and exported. See FBIS, Dm”~y Report, China, Nov. 6, 1986, p. A4,

‘

s

See comment by Madelyn C. Ross, “China and the United

States Export Controls System, ” The Columbia Journ~ of

World Business, spring 1986, p. 31. In order to analyze this

question, it would be useful to compare the technology involved

in actual exports of dual-use and munitions items.
222 ● Technology Transfer to China

tary and require modification. OTA has not

conducted a systematic analysis of the relationship between dual-use and military exports

to China. However, the available data do not

suggest that m“h”tary exports to Clu”na to date

have outpaced dual-use exportsin technology

level. Moreover, the volume and dollar value

have been much lower.

There is a separate but related question

about the resources devoted to reviews. Reviews of applications to export lower-level,

dual-use equipment can be quite lengthy, leaving many participants to conclude that U.S.

agencies waste time focusing on such cases

while munitions cases are handled more expeditiously. However, the comparatively hi”gher

percentage of denials for mum”tions applications suggests that rew”ewers are no more willing than their counterparts review”ngdual-use

exports to approve exports.

No systematic comparison is made between

dual-use and munitions export. In the future,

as nu”h”ta.ry exports increase, comparisons of

dual-use and military exports may be needed

to ensure consistent poh”cyimplementation. Information about recent military sales of certain types could, for example, be useful to those

reviewing policies of related dual-use technologies. It will also be important to develop

clearer guidelines about the types of military

technologies and equipment permissible for export and those that, for reasons of national

security, cannot be exported.

Issue: How Far Should the United States Go

in Military Cooperation?

U.S. policy is based on the belief that military cooperation is a natural part of an evolving bilateral Sine-American relationship that

is nevertheless unlikely to become an alliance.

Seen from this perspective, gradual steps

toward expanded military cooperation will not

create Chinese “dependence” on U.S. technology, but rather build shared experience in a

few key areas.

The future of U.S.-China military cooperation, however, remains uncertain. This is partly

because experience is limited and comparatively new, and more importantly because U.S.

policies have not clearly defined thresholds for

U.S. sales and assistance. General statements

about “mission areas” come the closest to identifying types of exports that are unlikely to

grow rapidly.

It may be useful to consider the range of

alternatives available in the realm of military

cooperation. Through high-level consultations

and dialogue, Chinese and American officials

share their perceptions of important strategic

issues. Exchanges of military personnel are

another mode for military cooperation. If exchanges can be developed in a truly reciprocal

manner, they provide military officers with

new experience and understanding of the roles

played by their counterparts.’b Military cooperation could also include intelligence sharing,

port calls, and joint exercises.

Sales of equipment and technology, including training and maintenance, are perhaps the

most publicized dimension of the evolving relationship in the military realm. One issue is the

extent to which such sales will be conducted

on a government-to-government basis. Some

observers believe that the Chinese would prefer not to use FMS because this involves relying on DoD to act as a middleman between the

Chinese buyer and the U.S. producer.” Another

issue is whether or not U.S. sales will be directed toward improving China’s own military

forces or toward providing China with equipment and technology needed to expand its own

arms exports.

It is well to remember that an array of factors will probably limit U.S.-China military cooperation, despite the gains that might be

achieved in increased mutual understanding,

intelligence sharing, and in strengthening

China’s ability to defend itself against Soviet

aggression. On the Chinese side, these con-

“Some observers conclude that U.S.-China military exchanges

to date have not been reciprocal-that the United States has

given much more than it has received,

“Sullivan, op. cit., p. 9, An Atlantic Council report favored

use of FMS sales on the grounds that they “permit the U.S.

to be responsive yet retain sufficient controls over what China

CtUl buy . . .“ See China Policy for the IVex.t Decade, Atlantic

Council, 1983, p. 39.
straints stem directly from a desire to avoid

dependence on any outsiders and a determination to pursue an independent foreign policy. On the U.S. side, uncertainty about China’s

future policies and effects on other Asian countries remain important constraints.

Taiwan is a case in point. Since the early

1980s, when the United States decided to permit arms sales to China, the Chinese Government has objected to continued U.S. arms sales

to Taiwan. The Taiwan Relations Act of 1979

provided for continuing U.S. support of Taiwan’s defense requirements, while the Shanghai communique of 1982 states that the United

States “does not seek to carry out a long-term

policy of arms sale to Taiwan, that its arms

sales to Taiwan will not exceed, either in qualitative or quantitative terms, the level of those

supplied in recent years since the establishment of diplomatic relations between the United

States and China . . .“78 Built into U.S. arms

sales policy is thus a delicate balance of U.S.

interests vis-a-vis China and Taiwan.

Each major arms sale to either party raises

opposition and concern in some quarters. The

United States continues to sell Taiwan more

than $600 million in arms annually. China objects to these sales. It was reported, for example, that Beijing recently questioned U.S.

transfers of technology Taiwan needs to develop it own fighter aircraft as contrary to the

terms of the Shanghai communique.7g In the

past, the United States refrained from selling

Taiwan certain kinds of military equipment

(such as the F-20). The U.S. Government has

pursued sales such as the recent F-8 avionics

package for China despite criticism from Tai-

“’Joint Communique of Aug. 17, 1982.

“Nayan Chanda, “A Technical Point: U.S. Rejects China’s

Stance on Technology Transfers to Taiwan, Far Eastern Economic Re\,iew, Aug. 26, 1986, p. 26.

Ch. 8—U.S. Policy Choices w 223

wan and its supporters. Continuing differences

in perspectives over Taiwan will, however, limit

U.S. military cooperation with China because

interested parties will carefully scrutinize proposed new arms sales to China in this context.

Some may wish to avoid all transfers of military equipment and technologies on the grounds

that these are not the kinds of transfers that

China most needs, or that building China’s military could threaten neighboring Asian nations

even if there is no significant threat posed

directly to the United States. Others see military cooperation as essential to an evolving

U.S.-China relationship. The United States can

benefit from certain types of cooperation with

China that expand knowledge of Soviet activities and deepen understanding of China’s military and the role that it plays in Chinese modernization.

The shape and nature of U. S.-Ch”na m“litary

cooperation must be further defi”ned and based

on growing experience that permits policy

makers to evaluate risks and benefits to the

United States. It will be important to review

the record periodically and update U.S. export

guidelines in light of changes in technology and

(most importantly) political relations. As discussed in chapter 7, case-by-case decisions on

munitions applications must reflect a broader

strategy designed to promote U.S. interests.

While military cooperation has been limited

and will likely remain so in the near term, it

is important to recognize that it carries symbolic importance. Discussions between Chinese

and U.S. military officials send important signals to the Chinese and to other countries in

Asia. U.S. policy makers may wish to keep this

broader context in mind as they define the

scope, nature, and future of U.S. military cooperation with China.

SCHOLARLY AND TECHNICAL EXCHANGES

A wide range of activities between the which have brought some 17,000 Chinese to

United States and China are referred to as sci- U.S. institutions of higher education, and the

ence and technology (S&T) exchanges. These varied exchange and cooperative activities uninclude exchanges of students and scholars, der the 29 protocols signed by the technical
agencies of the U.S. Government and its Chinese counterparts.

The diplomatic foundation for Sine-American S&T exchanges is the U.S.-China Agreement on Cooperation in Science and Technology of 1979. Under this umbrella agreement

are the Agreement on Cooperation in Educational Exchanges and 28 other agency-toagency agreements. Activities under the umbrella agreement are overseen by the U. S.-

People’s Republic of China (PRC) Joint Commission on Science and Technology, which

meets biennially. Since the agreement was

signed, there has also been a proliferation of

nongovernmental exchange and cooperative

activities involving universities, professional

associations, and industry—including some

that have explicit technology transfer dimensions, such as the agreement between Georgia Tech and the Chinese Association for Science and Technology.

Although there have been some problems for

the United States in the areas of reciprocity

and access to Chinese research sites and materials, the exchange programs have been successful in achieving most of their initial main

objectives. These objectives-in addition to the

manifest objectives of S&T cooperation and

assisting China in its modernization-included

the improvement of political relations, the

establishment of knowledgeable relations between the technical communities of the two

countries, and the cultivation of informed understanding, if not sympathy, toward the
Ch. 8—US. Policy Choices ● 225

United States among a new generation of Chinese elites. Less clear is the contribution of the

exchanges to the promotion of U.S. commercial interests in China.

This section outlines the scope of the exchanges, including both student and scholarly

exchanges and activities under the sponsorship of the bilateral agreements, and considers options for strengthening the exchanges.

Student and Scholarly Exchanges

The direct Federal Government role in supporting the education of Chinese scientists and

engineers, while crucial at the inception of the

program, is now relatively small in comparison with activities conducted in the private sector and through universities.~” Indirectly, however, the Federal Government is involved

through the research support it provides to

universities, some of which supports Chinese

graduate students and visiting scholars. The

monetary value of this support is difficult to

determine.

The education in science and engineering pro

vialed to Chinese students in U.S. (and other

foreign) universities is arguably the most important contribution to the development of

Chinese technical capabilities now being made,

whether it is called technology transfer or not.

It is fair to say that the Chinese see it this way

as well, and having access to our universities

is a powerful inducement to the Chinese. From

the U.S. point of view, there is clearly the hope

that China’s future scientists and engineers

‘

(

’This is not to say that the Government is not involved in

exchanges. The U.S. Information Agency (USIA), National Science Foundation (NSF), and National Endowment for the Humanities (LNEH), ior instance, all support exchange activity.

USIA and NEH support, however, goes mainly to support

Americans studying in China, while NSF supports collaborative research and exchange activities in the sciences, administered by the Committee on Scholarly Communications with the

People’s Republic of China. When compared with the extensive

educational exchanges conducted independently of the Federal

Government, however, these federally supported programs are

not large. For an account of the distribution of effort in sponsoring exchanges, see U.S. National Academy of Sciences, A

Relationship Restored: Trends in U.S.-China Educational Exchanges, 1978-1984 (Washington, DC: National Academy Press,

1986), ch. 4.

will leave the United States with favorable images not only of U.S. society generally, but also

of U.S. technology.

Although the student and scholar exchange

program gives the United States a powerful

policy tool, it does not lend itself to fine-tuned

policy intervention, either for promoting technology transfer or for controlling it. If Congress wishes to encourage more exchanges, it

could increase the budgets of those agencies

that have a role in supporting them, such as

the National Science Foundation and the U.S.

Information Agency. However, if it wishes to

do less, the reduction of China-related activities in those agencies would affect only a very

small portion of the total exchange activity.

To make more of an impact in reducing exchange activities, the United States would

have to use other means, which would represent major changes in China policy and would

affect other non-China-related values. Thus,

limiting the issuance of visas or attempting

to limit Federal funds used to support Chinese

graduate students would signal a change in

U.S. friendly intentions toward China, and

would also compromise academic values and

principles supporting the free movement of

people. Efforts to limit the access of Chinese

to sensitive research must be seen in the context of the larger controversies over the limitation of foreign nationals on national security

grounds to sensitive U.S. research, controversies that must be approached with care since

they involve clashes of very basic U.S. values.

The large numbers of Chinese students and

scholars coming to the United States indicates

that the U.S. university system is a magnet

to students from around the world. The growth

of the foreign student population raises many

important issues about the U.S. role in sustaining international science, the costs and benefits to the United States of playing this role,

and the implications for U.S. technological

competitiveness with regard to trade and national security.”

“Dorothy S. Zinberg, “Sending Ideas Abroad: The Education of Foreign Scientists and Engineers, ” unpublished paper,

Center for Science and International Affairs, Kennedy School
226 . Technology Transfer to China

The Bilateral Agreements

Although the amount of government-to-government S&T activity varies from protocol to

protocol, the government-to-government bilateral agreements have also been, on balance,

quite successful. Activities under the protocols

have also done much to bring the technical

communities of the two countries together, to

improve political relations, and to offer mutual

scientific benefits. In terms of the number of

protocols, the U.S.-China S&T program is the

largest bilateral program maintained by either

country.

When the government-to-government programs were begun, they received high level attention from the President Science Advisor,

the Office of Science and Technology Policy

(OSTP), and the NSC, and active interagency

coordination from the Department of State.

As the programs began to succeed, their administration became more routine, and highIevel attention decreased (even though interest at OSTP and in some offices at the State

Department has remained high) .82 In recent

years, partly due to the decentralizing reforms

in Chinese S&T, there has been a proliferation

of new activities involving units of the two governments outside the framework of the protocols. These developments have led some observers to ask whether the time may not be

right for a reexamination of the programs.

U.S. participation has been funded out of the

regular domestic budgets of the technical agencies on the basis of the value of participation

for the agency involved. While this approach

has a number of virtues, it means that there

may be areas where the domestic agency has

no interest in programs with the Chinese even

though there may be foreign policy or commercial benefits for the United States and a high

degree of Chinese interest.

of Government, Harvard University, September 1985; National

Science Board, Science indicators: The 1985 Report (Washington, DC: U.S. Government Printing Office, 1985), pp. 18-20.

“It is perhaps telling that there is only one person at the OSTP

level with responsibility for international cooperation, with China

being but one country among many falling within the area of

responsibility of this position.

In recent years, the growth of activities and

the relative success of the programs have led

to an increase in the managerial requirements

for the entire program of bilateral exchanges.

The science office in the U.S. Embassy in Beijing now includes four positions and is one of

the largest in the world. The program as it now

stands, strains the managerial capabilities of

the Government; yet, at the same time, more

could be done by way of interagency coordination and liaison with the private sector to

obtain more benefits from the program for the

United States.

The U. S.-PRC Joint Commission on Science

and Technology in recent years has tended to

focus mainly on the activities under the agreement and less on the broader range of S&T issues facing the two countries (as it did in its

early years). Since the activities under the

agreement have become more routinized, and

in general are going smoothly, the activities

of the joint commission have become more

symbolic, and the time and money spent for

its meetings have been questioned.

Other questions about the programs pertain

to whether the United States can capture more

commercial benefits from the programs and

whether it would be a good idea to establish

a formal aid program for China.

Issue: What Could Be Done To Expand

Technology Transfer Under the

Bilateral Agreements?

The U.S.-China program presents opportunities for promoting technology transfer if the

United States wishes to pursue a more active

strategy.

One possibility would be to provide supplemental funding for theprogmms under thepr~

tocols so that agencies now facing financial

constraints could become more active. A suggested approach would be the creation of a

modest budgetary allocation for activities that

would advance foreign policy and/or commercial interests but that cannot be justified out

of current agency budgets in terms of domestic mission requirements.
In the course of examining technology transfer in the surface transport area, for instance,

OTA consulted with the Department of Transportation (DOT). Although DOT negotiated an

agreement with Chinese counterparts, there

has been little activity, partly because DOT

does not see the justification for spending resources on programs that will not advance the

Department’s mission.

Yet, in light of China’s pressing needs in the

transport sector and the considerable expertise residing in DOT, there would appear to

be benefits for both countries if a program of

cooperation were begun. The potential benefits to the United States would be even greater

if such a program of cooperation involved the

private sector, and if U.S. participation were

designed so that the Chinese could be exposed

to the transport technology available from U.S.

industry. Inasmuch as DOT does not see a departmental interest that would justify spending

on such a program from its domestic budget,

a new approach to funding would be necessary.

Another possibility would be to expand

private-sector representation on the U.S. side

of the Joint Commission, to broaden the perspective of the ComnM“ssion and to identify better the commercial prospects associated with

programs. The U.S. private sector has suggested commercial representation in the cooperative programs with Japan and Korea,

countries where technology-based competitive

Ch. 8—U.S. Policy Choices 227

commercial pressures are greater than they

currently are with China. Expanding privatesector representation on the U.S.-China Joint

Commission could help insure an informed industrial perspective on the bilateral agreements,

and on China’s development of technological

capabilities. Planning for the meetings should

afford the United States an opportunist y to take

stock of its entire S&T relationship with China.

Participating in the meetings would permit

better representation of U.S. commercial interests. This would entail, however, changes

in staffing and management in the Department

of State and the OSTP, more high-level attention to the importance of S&T in the Department of State, and more active and enlightened interagency coordination.

While there is some evidence that activities

in the bilateral programs have led to some

equipment sales, there has been no systematic

effort to assess the value of the programs for

U.S. exports. This also appears to be the case

for the Dalian management training program,

run by the DOC. The State Department and

the OSTP could assess the commercial impacts

of the programs and make a stronger effort

to inform businessmen and trade promotion

officials in the Foreigm Commercial Service

(FCS) about opportum”ties. Closer coordination

between the S&T office in the U.S. Embassy

in Beijing and the representatives of the FCS

there would be one mechanism.

PROMOTIONAL POLICIES

Since the normalization of relations between

the United States and China in 1979, trade has

been viewed as an area of “great promise. ”83

But in 1986, U.S. exports to China were lower

in dollar value than the 1980 level, although

the composition of those exports has shifted

away from foodstuffs and materials and toward machinery and equipment.84 U.S. market share in China has actually declined over

the past few years.

There are a variety of explanations for these

trends, including the possibility that Japanese

firms may be better positioned to compete for

certain segments of the China market than

U.S. firms are. U.S. business may, at any rate,

have learned important lessons in trading with

“See, for example, White House Press release, Apr. 27, 1984,

“Current U.S. dollars: in 1980 U.S. exports were valued at U.S. ran a trade deficit with China of more than $2.1 billion

$3.7 billion; in 1986 exports were valued at $3.1 billion. These in 1986. Chinese statistics show that China imported more from

are official U.S. trade data. According to U.S. trade data, the the United States than it exported.
228 . Technology Transfer to China

China over the past 7 years. Now there is a

general recognition that China wants U.S. technology and investment, as much if not more than

it wants U.S. imports of finished products.

Many U.S. exporters and some Government

officials believe that the U.S. should be able

to do better in exporting to China. The purpose of this section is to examine the U.S. policies and programs that, broadly defined, support expanded trade and technology transfer.

In contrast to Japan, the United States has

not developed a systematic effort to promote

exports to China. On the other hand, small programs like TDP have been well received. The

U.S. Government could do more to support

U.S. exporters, through focused programs like

TDP that permit U.S. firms to help shape development projects at an early stage, by

stronger leadership in actively seeking opportunities for U.S. business, and in coordinating efforts. Such an approach might include

selected use of financing support, but more important would be a national-level commitment

to expand U.S. exports in particular sectors

such as telecommunications, where technology

transfer as well as exports of equipment and

services are essential for meeting China’s modernization goals.

But as important as China is, U.S.-China

trade should not be viewed in isolation from

larger policy issues. Whether and how the

United States chooses to formulate a more coherent approach to promoting U.S. competitiveness and global trade is the key issue on

the broader international economic policy

agenda. China is arguably a good test case in

the sense that prospects for expanded trade

are greater here than with many developing

countries that suffer from high debt and sluggish growth. But U.S. Government policies,

however promotional, are only one element.

The future shape of U.S.-China trade will be

more directly affected by decisions taken by

U.S. firms themselves and by the Chinese Government, particularly with regard to regulation of foreign business. Important too will be

the approaches taken by Governments in other

countries such as Japan, where expanding imports from China and other developing countries could relieve pressure on U.S. markets

and send a strong signal of support for an open

Asian market.

The United States and China have several

bilateral agreements that provide a basis for

trade and technology transfer. Under the bilateral trade agreement that became effective

in 1980, the two countries provide most favored nation (MFN) treatment for imports,85

arrangements for business representation, and

settlement of trade disputes. China also agreed

to provide patent, trademark, and copyright

protection equivalent to that of the United

States.EG In contrast to the trade agreements

between Japan and China, where the two countries set specific goals for imports and exports

of certain types, the U.S.-China agrwment contains no numbers or specific sector targets.87

The U.S.-China grain agreement, which included annual targets for Chinese purchases

of 6-8 million metric tons of U.S. wheat and

corn during the 1981-84 period, has now expired. China did not meet the targets during

the final two years, in part to show resistance

to U.S. restrictions on Chinese textile imports

into the United States. As China became the

largest exporter of textile and apparel goods

to the United States in 1987, pressure grew

within Congress to restrict imports from China 88 A major ch~ge in poland other countries.

icy was the recent announcement that the Zhenjiang provincial Government would begin pur85The United States has decided to continue MFN status for

China by using general waiver authority under the JacksonVanik amendment (of the 1974 Trade Act). A decision was taken

in June of 1986 in the form of a presidential message to Congress, and elaborated upon in State Department testimony before the House Ways and Means Committee.

*’Agreement on Trade Relations Between the United States

of America and the People’s Republic of China, 1979.

“The Japan-China agreement, for example, set targets for Chinese exports of crude oil and coal to Japan. The targets have

not been met in many cases. The Japanese oil industry, for example, was unenthusiastic about importing waxy Chinese crude

oil. See ch. 5 on supplier country policies for a more detailed

discussion.

‘“This legislation, known as the Jenkins bill, did not become

law in the summer of 1986 but was introduced in early 1987.

The current textile agreement with China is effective through

the end of 1987. It places quotas on 67 categories of Chinese

textile and apparel exports. The United States has the right

under the treaty to negotiate quotas when imports disrupt the

U.S. market.
Ch. 8—U.S. Policy Choices ● 229

, 1

*

Xfnhua News Agency

Steel rails ready for shipment at the Panzhihua Iron and Steel Co. China’s steel production is rising, and technology

transfer has been an important factor.

chasing U.S. grain and might buy as much as

50 million tons of corn over the next 5 years.8g

Textiles remain the primary irritant in U. S.-

China trade. The current bilateral textile agree

ment with China places import quotas on a

large number of items and permits the United

States to negotiate further quotas when imports disrupt the domestic market.go At least

20 categories of textile and apparel goods were

under unilateral embargo by the U.S. in the

spring of 1987 because they were found to have

injured U.S. textile producers. China depends

—- -—

‘

gChina has itself exported a record 6 million tons of corn during the 1985-86 market year, but the southern provinces have

difficulty obtaining grain needed for livestock, meat, and shrimp

production, some of which is destined for export.

‘Quotas cover 75 percent of U.S.-China textile trade. See Jerome Turtola, “Textile Trade Tensions, Ch”na Business Review,

September-October 1986, p. 27.

on exports of textiles and apparel for a quarter of its export earnings.g

’ Exports to the

United States climbed to more than $760 million in the first half of 1986, about a quarter

of total exports to the United States in dollar

value. As Chinese textile exports continue to

expand, some within Congress continue to call

for the protection of U.S. industry and U.S.

administration officials warned that rapid

growth in imports would not be permitted. The

bilateral textile agreement with China expires

in December 1987.

Other detailed U.S.-China agreements include nuclear cooperation, industrial and tech-

‘

]Export earnings for 1985 were $4.36 billion.
230 ● Technology Transfer to China

nological cooperation, and taxation.gz The

United States and China are still negotiating

an investment treaty, however. Critical differences remain over issues such as dispute settlement and compensation for expropriation.

While the absence of a bilateral investment

treaty with China may not put U.S. firms at

a disadvantage vis-a-vis the Japanese, for example, some believe that it is one element in

a climate of uncertainty that limits U.S. business investment.93

A number of U.S. programs support technology transfers to China, although that is not

the primary goal in most cases. Among these

are agreements for S&T cooperation in specific

areas such as telecommunications.94 (Policy issues concerning these agreements are discussed

more fully in the previous section). Under the

industrial and technological cooperation accord, a number of sector-specific trade missions

and seminars have been sponsored.95

The United States and China have also institutionalized bilateral consultations on issues

relevant to technology transfer. The Joint

Commission on Commerce and Trade (JCCT)

discusses trade and commercial issues at its

meetings. It is staffed mostly by DOC, which

is also responsible for the industrial technology cooperation projects mentioned above. The

Treasury Department is the lead U.S. agency

on the Joint Economic Commission, which

deals with macroeconomic issues, including investment. ————.-—.

‘

zRatification of the tax treaty signed in 1984 was blocked

by Senator Jesse Helms until June 1986, when the Senate Foreign Relations Committee approved a special protocol negotiated by Treasury Secretary James Baker. The protocol bars

resident firms from third countries from benefiting from the

treaty, thus eliminating opposition that had been raised on the

grounds that it would permit “treaty shopping. ” U.S. officials

indicated that the treaty would significantly reduce the taxes

paid by U.S. firms to the Chinese Government and that hightechnology firms in particular would benefit.

gsThe United Kingdom and West Germany have sign~

bilateral investment treaties (BITs) with China: Japan has not.

“The protocol is the latest negotiated since the 1978 umbrella

agreement for S&T cooperation. Disagreements concerning fiber

optics delayed the signing of the telecommunications protocol

in May 1986. The telecommunications protocol is a general

framework rather than a detailed outline of working programs.

See OTA, Energy Technology Transfer to China, 1985, for a

discussion of energy-related agreements.

“’’Work programs” have been developed in electronics/

telecommunications, metallurgy, aerospace, industrial renovation, and machine building.

FCS staff of DOC assist U.S. businessmen

in doing business in China and in organizing

the missions associated with the work programs under the industrial cooperation agreement that put U.S. business in touch with Chinese buyers.96 FCS personnel stationed in

China perform an important liaison function

between potential Chinese buyers and U.S.

sellers of equipment and technology. There are

now 11 professional FCS staff in China.97

The Dalian Management Center, a joint U. S.-

Chinese effort, is another mechanism for transferring U.S. management skills to China. The

center’s more than 1600 graduates include

many who now hold high positions in Government and industry in China. The lead agency

on the U.S. side is the DOC. In the case of the

Da.lian program, short-term as well as longterm prospects are uncertain because of funding problems. Many other supplier countries

fully fund multimillion dollar management

training centers under the auspices of their aid

programs, but the U.S. program has been

jointly funded by the two countries. The Chinese apparently favor continuation of a government-togovernment program, with a larger

share of funding from the U.S. Government.

The Export-Import Bank of the United

States has, over the years, offered a variety

of financial services, including loan guarantees

and direct loans to both U.S. exporters and foreign buyers. Between 1979 and the fall of 1986,

the ExIm Bank had issued only three direct

loans for China exports.98 The total value of

these loans was $120 million.

Table 23 provides an overview of ExIm programs affecting China trade. Major projects

under consideration include power stations,

geIn Ig83 the FCS had three positions in China.

g~There is ~ addition~ Slot, that is vacant. COInnlUIliCatiOIl

with FSC in Washington, DC, December 1986.

gsThe House ~d Senat,e agr~ to authorize subsidies tO COWX

a $1.8 billion 1987 direct loan program. The conference committees also established a $300 million Tied Aid Credit Fund

to counter mixed credits used by other major suppliers. The

“I-Match” program proposed by the administration was retained, but significant conditions put on its use. The program

permits the ExIm Bank to solicit lenders for loans to foreign

purchasers and make up the difference between domestic and

foreign interest rates. The ExIm Bank requested $100 million

for the tied aid fund in its Fiscal Year 1988 budget proposal.
Ch. 8—U.S. Policy Choices ● 231

—

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

Amount or

Date authorization Buyer Supplier Products

Direct loans:

9/81 28.6 China Machine Various Manufacturing equipment

9/81 28.4 China Machine Combustion Eng. Boiler and air preheat manufacturing

5/86 87.2 Huaneng International Power General Electric Coalfired power plant

Development Corp.

Small Business Credit Program:

1/85 4.25

1 /86 8.5

Working Capital Loan

5/83 3.0

9/83 0.683

3184 1.5

1/85 0.181

2/85 0,195

3185 0.180

4/85 0.207

4/85 0.274

6/85 1,8

Gua;gdong Power Dev. Co

PRC

Guarantee Program

China Native Produce

China Packing Corp.

China Machine Exlmport

Jiangsu Import Corp.

Heilongjiang International

Shanghai Instruments Exlmport

China North Industries Corp.

China North Industries Corp.

China Electrical Exlmport

Bechtel Transmission, project management

Various Grain storage tanks

Xylo Logs

Tools and Machinery

Delta Brands

Various

Various goods

Comtec Economation

Various

Various

Various

Can manufacturing

Aluminum tension-leveling line

Export capital goods

Export capital

Quartz crystal resonator manufacturing

Machine tools Computer software

Tube pipe manufacturing equipment

and technology

production equipment

N

–OTE Exlm also provide; short.term Insurance p;llc[es covering contracts worth about $17 million In contracts

—

SOURCE ExportImport Bank data provided to the Office of Technology Assessment in August 1986

transport, and telecommunications. According to ExIm officials, many of the projects supported by the bank involve significant technology transfer. The Combustion Engineering

project, for example, included transfer of production know-how for boiler manufacturing.

Trade finance can be a critical element for

influencing the ability of a U.S. firm to win

a contract. To cite one example, a consortium

led by G.E. recently won a contract to provide

equipment for coal-fired power stations to the

Huaneng International Power Corporation.

The G.E. contract, reportedly worth $588 million, involved official export credits (see table

23) and a significant countertrade element.”

Since large capital-intensive projects in developing countries often depend on the support of foreign lending and guaranteeing institutions, ExIm financing can be critical.

When official financing is available for a project, a U.S. bidder may be better able to pursue negotiations for projects. Once an initial

contract has been won with official export financing, the prospects for followup participation

--

‘

gSee International Trade Reporter, June 4, 1986. G.E. reportedly agreed to sell Chinese goods in conjunction with the contract. See also Financial Times (London, Feb. 27, 1986), p. 7,

in equipment and component supply normally

expand. In the case of U.S. ExIm financing,

100 percent of the long-term financing provided by the ExIm Bank goes to U.S. firms,

thus increasing U.S. exports.loo The bank can

provide support for projects involving service exports, technical training, and technology

transfer. 101

Views differ about the adequacy of U.S. official financing. The U.S. Government has taken

the general position that the private sector

should be primarily responsible for trade finance. In contrast to other supplier countries,

where the provision of export credits is based

on the principle that all projects that meet certain substantive criteria should be supported,

the United States has turned in a period of budgetary constraint to a philosophy of supporting only those projects that demonstrate extraordinary need-for example, those that involve

a competing foreign bidder assisted by government-sponsored export credit. In recent years

China has preferred to use more confessional

‘

wU.S. firms have participated in energy development projects

in China supported by the Japanese ExIm Bank.

““I n recent years, the bank has supported projects involving

licensing agreements where significant equipment exports were

involved.
232 ● Technology Transfer to China —.

Table 24.—OPIC Insured Investments in China (in U.S. million dollars)

— .- — .—

Insured

Investor Project investment

AMC ... . . . . . . . . . . . . . . . . . . . . . Manufacturing 4-wheel drive vehicles 14.4 ‘---

American President Lines ., . . . . . . . Containerized shipping 0.874

AMF . . . . . . . . . . . ... ... . . . . . . . . Manufacturing electrical relays 1.0

AMF . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacturing inflated balls 0.855

Caterpillar Far East . . . . . . . . . . . . . . . Spare parts for machines 2.0

Combustion Eng. . . . . . . . . . . . . . . Produce ceramic fiber 0.378

Continental Enterprise ., . . . . . . . . . . Feedmill, poultry hatcheries 0.900

CW Communications . . . . . . . . . . . . . Publish computer newsletter 0.110

Dresser Industries ... . . . . . . . . Conductor wireline services 4.9

E.R. Squibb. ... . . . . . . . . . . . . Manufacturing pharmaceuticals 0.900

Essex Group. . . . . . . . . . . . . . . . . . . . . Modernize cable plant 4,1

Foxboro Co. . . . . . . . . . . . . . . . . Manufacturing industrial process control

instruments 4.4

General Foods . . . . . . . . . . . . . . . . Manufacturing dextrin and starches 1.4

Gillette Co. . . . . . . . . . . . . . . . . . Manufacturing razors, blades 1.2

Internatl Bechtel . . . . . . . . . . . . . . . . . Establish engineering consulting firm 1.3

International Nabisco Brands . . Manufacturing biscuits and crackers 4,0

Kowin Development ... ... . . . . . . Establish and operate hotel 9.0

Otis Elevator. . . . . . . . . . . . . . . . . . . . . Manufacturing elevators, escalators 1.3

Pennzoil . . . . . . . . . . . . . . . . . . . Oil and gas exploration 100.

Smithkline Beckman . . . . . . . . . . . . . . Manufacturing pharmaceuticals 3.9

Solid State Science. . . . . . . . . . . Manufacturing semiconductors 0.438a

System and Applied Science. ... . Earth satellite station 0.425a

Texaco ., . . . . . . . . . . . . . . . . ... . . Oil and gas exploration 50.

General Foods . . . . . . . . . . . . . . . . . . . Manufacturing beverages 0.873

Smith kline Beckman . . . . . . . . . . . . . . Manufacturing pharmaceuticals 0.270

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..$209.4

~o–ntractors’ letter of credit Insurance

—

SOURCE OPIC, August 1986, data supplled to the Off Ice of Technology Assessment

aid-type financing that is available from other

supplier countries at lower interest rates. Some

believe that the United States should offer

more official financing, perhaps in the form of

mixed credits. This issue is discussed below.

At any rate, prospects for use of ExIm

credits may have improved as U.S. interest

rates declined in 1986.1°2 In October 1986,

ExIm Bank Chairman John Bohn stated that

the bank was considering loans for projects in

China totaling just under $1 billion.1°3

OPIC also provides financial services for

U.S. firms. In contrast to ExIm programs,

OPIC’S goal is to support direct investments

in developing countries through loan guarantee and insurance programs. By August 1986

‘“* See U.S. Export-Import Bank, Report to the U.S. Congress

on Export Creui”t Competition and The Export-import Bank

of the U. S., September 1985, pp. 3-5.

‘OS’’Bohn Says PRC Eximbank Loans Could Total $1 Billion,

Hits Unfair Use of Mixed Credits, ” International Trade Reporter, Nov. 5, 1986, p. 1330.

OPIC had insured 20 U.S. investors (covering

investments valued at $209 million) against

political risk in China. Table 24 provides a list

of those investments.

OPIC has issued only one loan for a project

in China, to help finance the design and building of a satellite earth station. Up until January 1986, OPIC was able to fund feasibility

studies, but this program has been ended because of budgetary constraints. OPIC supports

visits to exchange information about investment opportunities. Examples include sponsorship of a trip in 1984 by U.S. corporate executives and a grant to the National Council

for U.S.-China Trade to help assist the Chinese

in identifying and facilitating U.S. investment

opportunities in China.

But U.S. investment in China remains limited, certainly below Chinese expectations. As

mentioned earlier, the United States and China

have been unable to reach agreement on an investment treaty, despite prolonged negotia-
Ch. 8—U.S. Policy Choices ● 233

—

tions since 1983. While some question whether

a bilateral investment treaty would make much

difference, the absence of an agreement is

taken by others as an indication that the

groundwork has not yet been established for

secure investments.

TDP is one of the more successful U.S.

promotional programs. Established in 1980,

TDP’s dual mission is to assist developing

countries and to support U.S. business in competing for markets in technology, equipment,

and services. TDP is run by the Agency for

International Development, but it is quite different from a traditional aid program. TDP accomplishes its dual missions with a modest

budget of $20 million annually, which it uses

to provide financial support for project planning services, especially feasibility studies.

China-related programs today constitute the

largest part of TDP, making up 30 percent of

TDP’s worldwide program, or about $4.3 million committed in fiscal year 1986.

TDP, which interacts directly with the Chinese Ministry of Foreign Economic Relations

and Trade (M OFERT), 1°4 has been well received

in China. It approach is to support key project planning activities that often lead to exports many times the value of the original

feasibility studies. 105 TDP is now authorized to

provide technical assistance (prefeasibility and

feasibility studies and technical symposia) but

not training. In 1982, TDP financed a feasibility study worth $440,000 for the Tiansheng

Qiao hydropower project carried out by Harza

Engineering Company. The study led to more

than $20 million in U.S. exports for the project.

A number of firms were involved in these exports. Another example is a $100,000 TDP

study of a silicon materials plant that led to

$8 million worth of equipment exports.

‘04TDP also works with the Shanghai Municipal Economic

Relations and Trade Commission.

‘(”It should be mentioned that although a grant agreement

is signed by TDP with Chinese organizations, no funds are transferred to China. TDP procedures call for the U.S. contractor

to submit in~roices to the Chinese party, who approves them

and sends them to the U.S. Embassy in Beijing or the consulate in Shanghai, for transmittal to TDP in Washington, which

authorizes payments to the contractor.

TDP also serves as the coordinating body

for other U.S. agencies that provide technical

assistance to friendly nations. In China the

U.S. Geological Survey, for example, provides

seismology equipment and technical assistance, and the Department of Energy provides

technical assistance in planning for the Three

Gorges project. TDP plans additional funding

of studies of the Three Gorges project to assist a combined U.S. Government and privatesector effort.

TDP is particularly important because the

United States has no formal aid program and

therefore cannot provide confessional financing for large projects.lOG TDP funding is limited, but it can be strategically used to support early planning for key projects. In the

context of budgetary constraints, the modest’07

but well-received TDP program is worth considering as a model for future Government efforts to promote technology transfer and trade.

The success of its programs is clear in the

strong support it receives from the U.S. business community. In recent years, however,

MOFERT has identified more potential TDP

projects than TDP funding can support. Table 25 provides an overview of TDP in China.

In addition to these U.S. programs, the

United States also participates in multilateral

programs via the World Bank and the United

Nations that promote economic development

and technology transfer to China. In both

cases, U.S. contributions go to general funding rather than to specific programs in China.

Nevertheless, such funding of multilateral programs provides the United States with indirect

influence on projects in China that generally

involve foreign participation.los

The multilateral organizations provide significant support for projects in China. The

World Bank, for example, has granted loans

IWIn December 1985 President Reagan removed China from

the list of countries disqualified to receive aid. The United States,

however, has no current plans for an aid program in China.

‘“7TDP has a staff of 16.

‘

(

’

HThe United States is the largest contributor to the United

Nations Development Program and the single largest donor to

the World Bank. The share of U.S. funding for such programs

has, however, declined in recent years.
234 . Technology Transfer to China

Table 25.—The Trade and Development Program in China

TDP

Project Company Contribution

Completed studies:

Guangdong Dairy Plant . . . . . . . . . . . . . . . . . . . . . . China-Agro

Tianshengqiao Hydropower . . . . . . . . . . . . . . . . . . . . . Harza

Silicon Materials. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stearns Catalytic

Maanshan Wheel and Tire . . . . . . . . . . . . . . . . . . . . . . Rust Engineering

Zhuhai Industrial Park . . . . . . . . . . . . . . . . . . . . . . . . . . MK Ferguson

Shenzhen Airport . . . . . . . . . . . . . . . . . . . . ... , . . . . . . Parsons/Lockheed

Completed technical missions:

Coal Ministry Review of U.S. Technology . . . . . . . . .

MOFERT Review of U.S. Technology . . . . . . . . . . . . .

Hydropower Protocol Technical Exchanges , . . . . . .

Ongoing studies:

Yuxian Coal Gasification . . . . . . . . . . . . . . . . . . . . . . . . Kaiser/Lummus

Shanjiasi Heavy Oil Reservoir . . . . . . . . . . . . . . . . . . . SAIC

Huangling Coal Mine . . . . . . . . . . . . . . . . . . . . . . . . . . . Kaiser/Consolidated

Maanshan Energy Conversion . . . . . . . . . . . . . . . . . . . IIEC

Capital Hospital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . American Hospital SUpply

Automotive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .GM

Xinhua News Agency. . . . . . . . . . . . . . . . . . . . . . . . . . . Phoenix Associates

Meishan Multichannel Carr. Eq. . . . . . . . . . . . . . . . . . . Pacific Telesis

Xian High Voltage . . . . . . . . . . . . . . . . . . . . . . . . . . . . ,Power Tech Inc.

Wujing Trijeneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bechtel

Power Plant Conversion . . . . . . . . . . . . . . . . . . . . . . . .Burns and Roe

Zinc and Aluminum Castings . . . . . . . . . . . . . . . . . . . . Kiowa

Steel Building Systems . . . . . . . . . . . . . . . . . . . . . . Thyssen

Shanghai Cement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kaiser

Shanghai Solid Waste Disposal . . . . . . . . . . . . . . . . . . Klockner

Shanghai Corn Fermentation . . . . . . . . . . . . . . . . . . . . under selection

Shanghai Petroleum Coke . . . . . . . . . . . . . . . . . . . . . .under selection

Ansai Oil Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .CER

Liuhu Oil Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Core Laboratory

Shenyang Toxic Waste . . . . . . . . . . . . . . . . . . . . . . . . . under selection

Flue Gas Desulfurization. . . . . . . . . . . . . . . . . . . . . . . . under selection

Shanghai Transportation . . . . . . . . . . . . . . . . . . . . . . . . under selection

Graphite Electrodes . . . . . . . . . . . . . . . . . . . . . . . . . . . . under selection

Baoshan Management Information . . . . . . . . . . . . . . . under selection

Zhongyan Pharmaceutical . . . . . . . . . . . . . . . . . . . . . . . under selection

Sichuan Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . under selection

Automotive Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . under selection

SOURCE TDP, August and November 19S6, data supplied to the Office of Technology Assessment

for more than 40 projects in China. In the

spring of 1986, the International Development

Association of the World Bank announced that

$230 million in credit would be made available

to assist China in expanding railways in four

southern provinces. The World Bank may supply $2 billion on confessional terms during the

next 5 years for projects in China. log China is

making its first credit tranche from the IMF,

borrowing more than $700 million.

1W31izabeth Morrison, “Borrowing on World Bond Markets, ”

China Business Review, January-February 1986, p. 18.

$44,000

$400,000

$100,000

$200,000

$162,000

$800,000

$111,000

$ 40,000

$500,000

$750,000

$280,000

$550,000

$250,000

$200,000

$200,000

$350,000

$410,000

$460,000

$460,000

$600,000

$150,000

$150,000

$150,000

$250,000

$425,000

$325,000

$650,000

$500,000

$325,000

$143,000

$380,000

$150,000

$650,000

$400,000

$550,000

$500,000

Multilateral development banks offer opportunities for U.S. exporters that are not fully

utilized. A recent study indicates that the U.S.

share of procurements from these banks has

declined from 29 to 23 percent of the total over

the past decade, while Japanese firms have had

considerable success. Total procurement worldwide that is financed by these banks amounts

to $15 billion annually. A recent study concludes that U.S. firms could do much better

in procurement from these sources, particularly in equipment supply and construction.ll”

1

’

OBrettcm Woods Committee, How U.S. Firms CarI Boost Exports Through Overseas Development Projects, October 1986.
One factor could be that the U.S. Government

offers less financing and other forms of support for such projects than do other nations.

Issue: Should the United States

Use “Mixed Credits”?

The United States has traditionally opposed

mixed credits (financing that combines official

export credits and confessional aid) on the basis that this is a “predatory” type of financing that tends to distort trade. Current U.S.

policy is to use mixed credits only to counter

those of other supplier countries and to support the recent agreement among OECD countries to regulate the use of such financing.

Some critics argue that such restrictions effectively put U.S. business at a disadvantage

during a period when trade competition is increasing.

The United States has not used mixed credits

to finance projects in China, and there is no

consensus as to whether it should. On the one

hand, some do not accept the notion that U.S.

firms are losing export opportunities in China

because of inadequate official financing. In recent years, the ExIm Bank has rarely utilized

all of its available resources.’”

One counter to this argument is that extensive official export financing provided by their

Government has helped Japanese, French, Belgian, Swedish, and other firms win contracts

in China. The use of export credits in financing for projects in developing countries is,

moreover, increasing. “2 The U.S. Government

could send a signal to exporters by making

more official financing available for China. 113

Enlarging the amount of official U.S. financ-

“

]There are a number of possible explanations for this, including the fact that high interest rates in the United States

have, up until recently, made such financing less attractive than

that of other suppliers. ExIm officials may also not see it as

appropriate to initiate discussions with U.S. exporters, who may

in some cases be unfamilia with services that it provides.

‘‘zThe IM F concludes that “Over the near term, it is expected

that officially supported export credits will continue to play

a growing role in catalyzing financial flows to developing countries. ” See Edward Brau, et al., Export Credits: Development

and Prospects (Washington, DC: IMF, July 1986), p. 2.

] “Statements by ExIm officials in late 1986 indicated a step

in this direction; they stated that a number of China projects

were under consideration.

Ch. 8—U.S. Policy Choices

ing programs would not contravene the agreement reached among OECD countries.114

The policy dilemma is that U.S. firms may

find themselves less competitive if the United

States does not offer mixed credits; but if the

United States uses such assistance, other countries can be expected to do likewise. The result would be to “spoil the market by raising

the level of supplier country subsidies to financing.

The United States established a “war chest”

in the ExIm Bank in 1986 to help U.S. firms

compete against foreign firms supported by

mixed credit financing. ExIm officials stated

in April 1987 that the bank would probably

not use all of the war chest in 1988, because

of the OECD agreement on mixed Credits.115

To the extent that the agreement makes it

more expensive for governments to offer such

financing, the result may be to reduce the use

of mixed credits. One potentially important effect of the OECD mixed credit agreement may

be to improve reporting on the use of such

credits, thereby improving the information

base needed to formulate government policy

responses.

On the other hand, a number of supplier

countries have announced plans to expand official financing programs, and aid programs may

also be expanded. In expanding its aid programs, Japan has stressed that untied aid will

be given, permitting firms from other countries to participate.llG Export financing will

likely remm”n an area of intense competition

among the supplier governments.

Issue: Should the United States Establish

an Aid Program for China?

Mixed credits raise the question of whether

or not the United States should have an aid

program for China, because aid-type conces-

] liThe OECD ~rangement stipulates the terms of the loans.

1“See ‘Eximbank will not need all of its ‘war chest funding

as a result of OECD Accord, Bohn Says, International Trade

Reporter, Apr. 1, 1987, p. 436. The bank requested $100 million for fiscal year 1988.

1 IBThe ability of foreign firms to participate will depend on

whether they are fully informed of such opportunities and their

willingness to compete for these contracts.
236 Technology Transfer to China

sional financing is the source of funding often

used in conjunction with official (ExIm-type)

funding. The legal prohibition has been removed on a U.S. aid program in China.117 To

many, this is a largely symbolic step that

shows that the United States sees China as

a “friendly” country.

In the context of reduced funding for foreign

aid worldwide by the 99th Congress, the question arises about whether bilateral assistance

programs will be expanded. ’18 In a period when

the United States cannot meet commitments

to some developing countries (mainly in subSaharan Africa), some in the aid community

would question whether an aid program for

China is warranted. Proponents would have

to make the case that a China aid program is

more important than aid programs in other

countries. In addition, there would have to be

a clear signal of interest from China.

Advocates can raise a number of arguments

in favor of an aid program in China. If carried

out effectively, aid funds could assist China

in programs that do not promise great profits

for privatesector firms. Support for “basic human needs’ has been the central pillar of aid’s

philosophy. Aid projects could be a mechanism

for deepening the involvement of U.S. firms

and organizations at the grass roots level in

China.

China is unlike other developing countries

where large aid programs have been established in that it still has comparatively large

foreign exchange reserves. A large aid program

involving economic support funds would not

provide the transfers of technology that China’s

leaders emphasize. If an aidproflam is established, it is more likely to take the form of a

low-key, modest approach that supports techm“cal assistance and trzu”m”ng. Under those conditions, only small amounts of funding would

be available to support mixed credits.

1 l~However, before initiation of such a program the Department of State would have to provide certification concerning

human rights practices.

“aSee Society for International Development, Development

Connections, December 1986, p. 2.

Photo credft Care/ Rupprechf

A recently installed loom in a village factory in Shandong

Province. This enterprise is an example of an important

trend—increasing industry in rural areas absorbing

excess farm labor.

Many aid projects worldwide (such as those

involving technical assistance) include participation by U.S. firms. But commercial gain has

not, in the past, been the major ostensible goal

of U.S. aid programs. Rethinking aid’s overall objectives would thus be needed in order

to reorient programs toward commercial objectives, and this would be resisted by many

who believe that the aid should remain geared

to helping the “poorest of the poor. ” As discussed above, TDP is already playing a critical role today in coupling U.S. commercial interests with Chinese development needs.

If U.S. policy makers decide to establish a

formal aid program, the “Spark Program” plan

(discussed inch. 3) offers opportunities. ’19 The

program is designed to create a vibrant industrial sector in China’s smaller cities. The Spark

program is not one in which most U.S. technical agencies are likely to have an interest, and

it would be difficult for American companies

to learn about commercial opportunities asso1‘Whe most complete explanation of the objectives of the Spark

Plan is found in the recently released “Science and Technology

White Paper” (in Chinese), a translation of which is forthcoming from the Joint Publications Research Service.
Ch. 8—U.S. Policy Choices ● 237

ciated with it. Yet, there is a great deal of development experience in U.S. agencies and the

private sector that might be shared with the

Chinese in a mutually beneficial way if new

funding sources were available.

Issue: What Could the U.S. Government Do

To Promote Trade and Technology Transfer?

U.S. promotional programs influence the

scope and nature of technology transfer and

exports to China, although it is important to

remember that trade finance, for example, is

only one element affecting U.S. competitiveness in foreign markets. As discussed more

fully in chapter 5, U.S. trade finance and promotional programs are not as extensive as

those of some other supplier countries, such

as Japan. Other Governments use aid as well

as more extensive official export financing to

assist exporters.

In view of the decline in U.S. market share

in China, a key question for U.S. poh”cymakers

is whether U.S. promotional programs andpolicies are adequate to meet the challenge of

global competition in the decade ahead. In

years past U.S. officials have taken the view

that it is enough for Government to negotiate

agreements on fair rules of the trade game,

while ensuring that national security is protected through controls on sensitive exports.

In the future, U.S. policy makers may want

to explore new avenues for trade promotion.

The United States could do more to assist

fl>ms and organizations exporting equipment,

services, and technology. Relatively modest

dollar investments in project planning have

significant trade multiplier effects. Such programs sponsored by TDP could be expanded.

FCS and other Government agencies could also

take a stronger lead in reaching out for new

projects and in combining financing from a

number of sources (public and private) for large

projects. Developing sector-specific plans for

exports could also be useful, particularly if the

result is greater consistency between U.S. export controls and promotional policies. In the

past, U.S. export controls and promotional policies have been developed independently, and

in some areas (such as telecommunications)

this has created confusion.

More specifically, the following options could

be studied:

1.

2.

3.

4.

5.

6.

7.

A

expand funding for TDP feasibility studies

and provide TDP with authorization to

support training programs in China;

enlarge FCS representation in China;

increase efforts to combine financing from

various public and private sources;

provide information and financial resources

to support participation by U.S. firms in

projects funded by multinational development banks;

expand official financing and guarantees

for loans and investments in China; selectively utilize “soft” financing for projects

in China where other Governments have

provided such financing;

develop trade promotion strategies for

particular export sectors by combining the

resources of various U.S. Government

agencies and clarifying export control

questions; and

establish mechanisms and institutions

(that include public and private sectors)

for continuing dialogue and consultation

between China, the United States, and

other major trading partners in order to

anticipate problems and seek mutually

beneficial solutions.

high-level mandate would be needed to develop a coordinated and active approach to

U.S. trade promotion. Any of the measures

listed above, taken alone, would be unlikely

to have a significant impact. Other policies that

affect the technological capability of U.S. firms

and exchange rates are also critical to the overall strength of U.S. exporting firms. Programs

of trade promotion, &“sembo&”ed from a coherent overall U.S. strategy promoting the competitiveness of U.S. industries in foreign markets, are unlikely to yield significant results.

Issue: What Choices Does the United States

Have in Its Trade Policy vis-a-vis China?

U.S. trade policy has been oriented in the

postwar period toward promoting a global
238 Technology Transfer to China

trading system in which firms from many countries can compete fairly. Developing countries

have been given special preferences in trade

to foster their economic development, which

in turn provides export opportunities for the

developed countries.

To these ends, the United States has taken

a leadership role in establishing multilateral

financial institutions such as the IMF and

assistance programs such as those of the World

Bank. Many of these institutions were built

during a period when American economic and

military power were preeminent, and U.S.

leadership was viewed as natural.

The structure of international trade has

changed, and today U.S. firms must work hard

to compete against competitors in developing

as well as developed countries. Wide-ranging

legislation is under consideration in Congress,

where concern about import penetration and

the overall U.S. trade deficit runs strong. Under pressure from Congress, the administration has made efforts to demonstrate its willingness to aggressively investigate unfair

trading practices that hurt U.S. industry.

U.S. trade policy vis~a-vis China reflects

these broader tensions and choices. The International Trade Commission initiated 15 antidumping investigations involving imports

from China during the 1980-85 period, and in

9 of those cases antidumping orders were

made. In 1985 alone there were four antidumping investigations involving goods from China,

and in three cases there was a finding of injury to U.S. industry.”” Growing Chinese textile imports have, as mentioned earlier, led to

bilateral frictions and repercussions in other

areas, such as U.S. grain exports.

Frustrations with import penetration in the

United States could lead to protectionist responses. But such actions could also stimulate

retaliatory actions by China. Because China’s

exports are so strongly concentrated in the textile sector, actions taken to protect U.S. producers (and without specific attention to the

‘“In 1983 and 1984 there were similar numbers of cases involving China. See U.S. ITC, Annual Reports, 1983-85.

significance of textiles in U.S.-China trade)

would strongly affect China. If Chinese leaders

were to retaliate by limiting imports from the

United States, the result would be to limit

bilateral trade. It is also possible that heightened political tensions could limit or reduce cooperation in other areas.

Trade is often viewed in a bilateral context.

However, long-term solutions require that policy makers also consider the broader multilateral context. The policies of China’s other

major trading partners such as Japan affect

Chinese export prospects. If other industrial

countries erect barriers to Chinese exports,

pressure on the U.S. market increases. Informal consultation among the United States,

China, and other Asian traders could improve

awareness of such interdependencies and perhaps stimulate constructive action.

China has announced its intention to join the

GATT, a step toward integration into the

world trading system. (This process began

earlier with China’s participation in other international organizations such as the IMF and

the World Bank.) China’s entry into the GATT

raises issues for U.S. policy makers and other

GATT members who will participate in the formal review of the application. To join the

GATT, China may need to relinquish certain

trade barriers and open its system more to imports. U.S. officials and others will have to care

fully review Chinese restrictions that limit the

activities of foreign businesses, including stipulations concerning local content and export

requirements. In the process, it will also be necessary to review current U.S. policy to withhold Generalized System of Preferences status’2

’

on the grounds that China is not a GATT

member.

In the near future, U.S. policy makers will

consider a number of trade and competitiveness policy alternatives that have important

implications for U.S.-China trade. Traditionally, the alternatives have been defined as “free

trade” versus a protectionist response to im-

‘

2] Unde~the Generalized System of Preferences, special trade

treatment is provided to developing countries by developed

countries.
Ch. 8—U.S. Policy Choices 239

port penetration by developing countries. With

regard to China, U.S. policy makers could alternatively aim to deepen bilateral economic

relations. A bilateral strategy would emphasize an expanding U.S. market share in China

while minimizing frictions associated with increasing imports of certain types from China.

To some who believe that free trade is today

more an ideal than a reality and who fear the

costs of a protectionist response (in higher

prices for the U.S. consumer and potential loss

of U.S. influence abroad), bilateral initiatives

may be appealing.

U.S. programs supporting technology transfer to and trade with China, to be effective,

should relate to a broader global trade and competitiveness strategy. Controversy continues

over the broad goals of U.S. trade policy, and

uncertainty may be created among U.S. exporters and Chinese buyers that leads to continued stagnation in U.S.-China trade. While

it is true that U.S. Government policies alone

may not dramatically increase U.S. exports to

China in the short term, a new attitude (shared

by business and Government alike) toward

global competition may be needed to forge a

viable, positive, long-term strategy. From this

perspective, China is a test of U.S. competitiveness in the developing country market.

CONGRESSIONAL CHOICES

The United States and China are now entering a new phase in their relationship, and it

is appropriate to consider the challenges that

lie ahead. In the past, U.S. policy was designed

to promote an opening of relations between the

two countries consistent with U.S. security,

commercial, and other objectives. Now that

the foundation has been laid, Congress has an

important role to play in evaluating the success of current U.S. China policy and in setting future goals and directions. The absence

of a crisis in U.S.-China relations makes this

a good time to consider actions that Congress

and the U.S. Government could take that

would significantly affect the scope and nature

of technology transfer and trade between the

United States and China, and OTA’S research

highlights actions that Congress might consider.

OTA finds general agreement in the United

States that economic relations with China

should be expanded in the current policy context. Concerns that China’s modernization

could have potentially negative effects on other

countries in Asia and uncertainty about the

future course of China’s policies, especially in

light of recent student demonstrations and

shifts in leadership, have not weakened this

consensus. Liberalization of controls on exports to China, both in the United States and

in COCOM, has been well received.

But agreement on general principles does not

constitute a coherent policy. In reviewing U.S.

policies toward China, Congress may want to

consider whether the proper balance among the

five major themes identified at the beginning

of the chapter has been established. Another

question is whether the United States is effectively using all of the policy instruments available to maximize U.S. interests. Ad hoc decisionmaking on export controls, for example,

can produce inconsistent decisions and an uncertain policy context.

During 1986, controversies over China export controls somewhat receded in the wake

of loosened restrictions in the United States

and COCOM. The process of license approval

has been accelerated for many types of equipment and technology covered by the green zone

agreed to by COCOM countries. On the other

hand, export license applications that must be

referred to other agencies and to COCOM still

require a long time for review. There are no

clear guidelines concerning prohibited exports;

case-by-case reviews of military and sophisticated dual-use exports remain the focus of controversy and debate. There are thus a number

of reasons why Congress may wish to review

China export controls in the months ahead.

One goal of such a reexamination would be

to make the system operate more efficiently.
240 ● Technology Transfer to China

Phofo credit: Alan T Crane

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

a major manufacturing center.

Another goal would be to revise and shorten

the list of controlled items to reflect changes

in technology and foreign availability while

focusing the attention of the export control

system on militarily significant items and technologies. These efforts require coordination

with COCOM allies. Clearer guidelines specifying which types of military or advanced dualuse equipment and technology cannot be exported could also be developed for use within

the U.S. government. Congress and its committees of jurisdiction on export controls have

a critical role in these decisions as well.

Congress may wish to consider actions to

refine the system of export administration by:

1) tighter administration of existing policy, 2)

through modifications within the current policy framework, or by 3) considering actions

that would constitute new policy approaches.

The possible actions listed below are grouped

according to those categories.

Refine the export administration system, by

considering the following possible actions:

1. Tighter adminstration of existing policy:

—require periodic reviews from the Operating Committee concerning China cases

under interagency review for protracted

periods;

—require DOC to provide more timely information to the public and to Congress

about the status of China licensing, particularly concerning the value, status,

and nature of exports approved in referred China cases;

—support expanded use of automated sys-
terns in order to improve the efficiency

of export licensing and to increase consistency in decision making by expanding the accountability of license examiners;

—carefully monitor DOC progress in attaining the goal of processing China licenses (IVLS) in 45 days by July 1987,

and set a target, such as 6 days, for processing green zone cases;

2. Modifications within the current policy

framework:

–break the deadlock in interagency reviews of China cases by amending the

Export Administration Act to give

DOC final authority to approve an application unless DoD formaZly appeals

to the President with objections;

—require that DOC remove from active

consideration (automatically approve)

export applications that have been under review for more than 6 months (such

cases could be automatically approved

unless the Secretary of Commerce provides the exporter with a written explanation of why the case requires extended

policy review);

—require that DOC, in consultation with

DoD, the State Department, and other

relevant agencies, develop clearer guide

lines for use within the U.S. goverment

that would specify types of exports to

be prohibited (red zone);

—require that DOC, in consultation with

the State Department, DoD, and other

relevant agencies, develop by the summer of 1987 detailed, sector-specific

proposals for expanding the green zone

while continuing to preserve Western

security;

—improve information exchange between

officials reviewing U.S. munitions exports to China and those reviewing dualuse exports in order to ensure consistency;

—establish a distribution license procedure for China exports

3. New policy approaches: establish the general principle that the United States will

work with COCOM allies to establish uniCh. 8—U.S. Po/Icy Choices ● 241

—

form controls for China and to harmonize

export control administrative procedures

in various COCOM nations. This would

require that the United States relinquish

unilateral controls for China if other

COCOM countries cannot be persuaded

within a reasonable period of time that

they are justified, and that the United

States, along with other COCOM countries, eliminate gaps in controls—such as

different approaches to controls on reexports.

Barring dramatic changes in China’s relations with the Soviet Union or Taiwan, the

most challenging problems may arise in the

trade arena. There are a number of potential

points of friction. China’s exports are heavily

concentrated in textiles—a threatened U.S. industrial sector. Other trade-related problems

concern China’s entry into the GATI’ and other

international institutions. The United States

and other GATT members will review China’s

trade and technology transfer regulations to

determine whether they are consistent with the

GATT. In still another area, there is a need

for consultation and agreement among the

United States, Western Europe, and Japan to

minimize restrictions on imports from China

that shift the burdens of adjustment to partners, and cutthroat competition for contracts

with ‘‘soft’ financing.

The United States could benefit from a positive approach to promoting U.S. exports and

helping China improve its technological and

managerial capabilities. Outlining the possible congressional actions needed to forge a new

consensus on U.S. competitiveness is beyond

the scope of this study, but nevertheless directly relevant to U.S.-China relations.

Whether or not the IOOth Congress carries out

a full-scale review of U.S. policies toward

China, it will importantly influence relations

with that country through its trade policy.

The possible steps outlined below are grouped

according to whether they would involve: 1)

expanded use of existing programs, 2) modifications within the current policy framework,

or 3) new policy approaches.
242 Technology Transfer to China

Develop an activist trade promotion strategy

in order to improve U.S. competitiveness and ensure fair trade by considering the following possible actions:

1. Expanded use of existing programs:

—expand funding for TDP feasibility

studies and training programs;

—support enlarged FCS representation in

China;

—expand official financing for loans and

guarantees, selectively using “soft”

financing to counter such bids by foreign suppliers;

—continue support for multinational development banks and encourage DOC

to provide U.S. firms with additional

information so that they can win procurements:

2. Modifications within the existing policy

framework:

—encourage the development of sectoral

strategies for promoting trade with

China (in line with U.S. export controls);

—request the State Department to prepare a review of government-to-government programs under the S&T protocols

in order to determine which ones could

now be left to private-sector action and

which would require additional government support;

—encourage DOS and other U.S. Government agencies involved in S&T protocols to work for expanded access by

U.S. scholars and technical persomel to

Chinese research institutions, including

those in rural areas;

—require that the Office of the U.S. Trade

Representative (USTR) report to Congress on the review of China’s application for entry into the GATT;

—improve mechanisms for informal consultation on Asian trade among the

United States and other countries;

3. New policy approaches–initiate an official development assistance program for

China that promotes expanded exports of

U.S. goods and services. ’22

Many of the options above would require executive action. Congress can, through its oversight of executive branch programs, encourage

this process. On the other hand, it may no

longer be necessary for the Federal Government to play such a direct role in coordinating

technical exchanges. Private organizations and

firms, as well as State and local governments,

are now independently involved in scholarly

and technical exchanges. OTA’S research indicates that there are a number of possible government actions to refine the system of export

administration and to promote trade and technical cooperation with China that could contribute significantly to the development of

deeper and mutually beneficial relations between the United States and China.

“*Earlier in this chapter, where the issue of an aid program

for China is discussed, OTA notes the obstacles to the development of an export-oriented aid program.

APPENDIX C: EXPORT LICENSES PENDING OVER

EAA STATUTORY LIMITS

In January 1987 OTA analyzed contributing factors in review process delays by examining cases

that were pending beyond the statutory limits. The

total number of these cases was 536, valued at

more than $730 million dollars. Only a small number of these cases were cases that had not been referred to other agencies. A significant number were

pending in the Coordinating Committee (COCOM),

but the overwhelming majority of the cases had

not been referred to COCOM but were under review in the inter-agency process.

Table 1 .—Numbers of Cases Pending Over

Statutory Limit

Type of case Number of cases Percentage

Non-referred cases . . . . . . . . 69 13

COCOM cases . . . . . . . . . . . . 124 23

Cases in interagency

review . . . . . . . . . . . . . . . . . 343 64

Total . . . . . . . . . . . . . . . . 536 100

Most of the cases (over 90 percent) had been pending for more than 120 days. These cases also ac-
Ch. 8—U.S. Policy Choices ● 243

-.

counted for 99 percent of the dollar value of all

pending cases.

Table 2.—Processing Times and Values

Processing time (days) Number of cases Total value

61-75 ...., . . . . . . . . . . 18 $ 530,623

76-90 .., ... . 17 1,745,773

91-105 ...., . . . 15 2,953,609

106-120. , . 3 34,365

over 120. . 483 724,748,811

Total . . . . . . . . 536 $730,013,181

The 20 oldest cases had been in the system for

700-1169 days. All of those cases except one had

been referred to the Operating Committee (OC) at

one point, but only three of those were currently

waiting for a determination by the OC. Of these

cases, 12 had previously been under review by OC,

but after OC made a determination, they were sent

to the Department of Defense (DoD), In most of

those cases, DOD made a recommendation and sent

them back to the Department of Commerce (DOC),

where they continued to await final determination.

Many of the cases pending for the longest periods

were under OC consideration. Particularly striking was that a large number of cases were sent back

to DoD rather than referred to higher inter-agency

review after OC completed its review.

Only a handful of the pending cases were actually under review by DoD at the time the data was

collected. However, L130 of them had been reviewed

by DoD at some point. About half of those 430

cases had been under DoD review for more than

300 days. Many of these had been resubmitted to

DoD for review, some as many as four times. Generally speaking, DoD reviews did not account for

the major part of total processing time for these

cases. In many instances where cases were pending for long periods, however, they moved back and

forth between DOC and DoD, and were not sent

to the OC or other higher levels of review in the

formal interagency review process.

Inputs from intelligence agencies is another aspect

of interagency review that generally added a month

or more to the processing time. Of the pending

cases over the statutory limit, 237 involved such

review.

It should be noted that OTA did not evaluate

the military criticality of the technology that was

under review, since this would have required study

of complete license applications.

OTA’S analysis suggests that exporters as well

as licensing officers would benefit from more information concerning the type of technology that

has recently been approved for export. Unnecessary delays arise when licensing officials lack complete information concerning precedent-setting

cases. The kinds of information that would be useful to exporters include the dollar value and types

of technology and equipment approved for exports.

Online information concerning precedent-setting

cases (such as those completed after extensive

inter-agency review), case history information, and

improved access to relevant information compiled

by other agencies could improve the ability of

licensing officers to make timely, consistent decisions.

Providing mm-e information to exporters would

require that certain proprietary or sensitive information (e.g., equipment models, applicants names,

end users, and end use) be omitted from public dissemination. Brief, periodic summaries of generic

types of technologies recently approved for export

could reduce uncertainty for U.S. exporters. These

data are readily available from the DOC computer

systems (ECASS).