United States General Accounting Office

GAO Report to the Chairman, Committee on

National Security, House of

Representatives

November 1996 EXPORT CONTROLS

Sale of

Telecommunications

Equipment to China

G O A

years

1921 - 1996

GAO/NSIAD-97-5

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-274526 

November 13, 1996

The Honorable Floyd D. Spence

Chairman, Committee on National Security

House of Representatives

As you requested, we reviewed the sale of advanced telecommunications

equipment to the People’s Republic of China. Specifically, you asked about

the transfer of broadband telecommunications equipment to HuaMei, a

joint venture between SCM Brooks Telecommunications, a U.S. limited

partnership, and Galaxy New Technology, a Chinese company primarily

owned by an agency of the Chinese military. The equipment included

Asynchronous Transfer Mode (ATM) and Synchronous Digital Hierarchy

(SDH) equipment, which were used to demonstrate the commercial

capabilities of a broadband telecommunications network among several

hotels in Guangzhou, China. ATM and SDH operate on a broadband network

to transmit voice, data, images, and video communications at high rates of

speed.

Our objectives were to determine (1) the civil and military applications of

the exported telecommunications equipment, its availability, and the

importance of these applications to China’s military and (2) the process

and rationale for liberalizing the export of telecommunications equipment,

such as the ATM and SDH equipment shipped to HuaMei.

Background The U.S. Department of Commerce controls the export of U.S. dual-use

commodities, software, and technology by requiring validated licenses

prior to shipment unless a license exception applies.1

 A license exception,

formerly known as a general license, is a broad grant of authority to

export certain goods and technology without prior government review.

Dual-use telecommunications items are controlled under the Commerce

Control List, which specifies the items that require validated licenses,

generally for reasons of national security.

During the Cold War, the United States sought international coordination

of export controls through the Coordinating Committee for Multilateral

Export Controls (COCOM), which was made up primarily of North Atlantic

Treaty Organization member countries.2

 With the end of the Cold War,

1

“Dual use” refers to items that may be used for civil or military purposes.

2

COCOM members included all of the North Atlantic Treaty Organization member countries, except for

Iceland, plus Australia and Japan.

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B-274526 

COCOM members pushed for liberalization of many dual-use items,

including telecommunications equipment, computers, and machine tools.

However, before COCOM ended on March 31, 1994, participant countries

agreed to continue controlling dual-use items, at each country’s discretion,

after COCOM’s expiration. The new U.S. export control arrangement,

established in 1996, focuses export controls on several potential aggressor

countries, such as Iraq, Libya, and North Korea, and away from former

communist countries.

Results in Brief There are numerous civil and military applications for broadband

telecommunications equipment, such as ATM and SDH, including

video-conferencing, remote command and control, and telemedicine.

Since the liberalization of exports of advanced telecommunications

equipment, such equipment is now readily available in China. SDH

equipment, in particular, is being manufactured and used to upgrade

China’s telecommunications networks to international standards.

According to U.S. government officials, the Chinese military is seeking to

acquire ATM and SDH equipment, which may benefit their command and

control networks by the end of the next decade. Furthermore, these

officials stated that as China’s telecommunications infrastructure is

modernized, the Chinese military will also benefit.

The creation of the new General License category, GLX, by the Commerce

Department in April 1994, allowed the export of ATM and SDH equipment to

HuaMei without a validated license having to be issued by the Commerce

Department. ATM and SDH equipment were two of a number of dual-use

telecommunications items that were included under GLX. GLX includes

many items that would have been typically approved for export to civil

end users in the licensing process. According to U.S. government officials,

GLX was created in response to the end of the Cold War and the

expiration of COCOM, to ease export restrictions and reduce administrative

burdens on U.S. exporters.

Determining who is a civil end user under GLX is the responsibility of the

exporting companies. However, this is particularly difficult in China

because of the Chinese military’s significant involvement in various

commercial ventures. There is no information readily available to

exporters on how much military involvement in a commercial entity

constitutes a military end user. Based on this one case, we are not making

any recommendations. However, as the Commerce Department gains

Page 2 GAO/NSIAD-97-5 Export Control
B-274526 

experience under GLX,3 it may want to assess the need to provide

additional information or guidance to exporters to help them determine

when they should request a government review of an end user.

Applications,

Availability, and

Importance of

Exported

Telecommunications

Equipment

Broadband telecommunications equipment, such as ATM and SDH, have

numerous civilian and military applications and are becoming increasingly

available in China as it strives to improve its telecommunications

networks to meet international standards. According to U.S. government

officials, overall improvements to China’s telecommunications networks

will likely benefit the Chinese military as well.

Civil and Military

Applications of ATM and

SDH Equipment

Broadband networks employ ATM and SDH equipment to transfer data,

voice, and video communications simultaneously at high rates of speed.

ATM is a flexible switching technique used to transfer information over

advanced telecommunications networks. SDH technology is used for high

speed transmission of data, video, and voice traffic. Both ATM and SDH

equipment were developed by commercial industry for civil applications,

and they are now increasingly used worldwide on broadband

telecommunications networks.

Civil applications of ATM and SDH equipment generally allow work groups

to collaborate quickly and efficiently over a computer network. These

applications include holding a meeting simultaneously in several locations

(video-conferencing), having people in different locations work

simultaneously on the same document (virtual notebook), and

transmitting X-rays and other medical records from one location to

another (telemedicine). ATM and SDH equipment are necessary to have the

speed of delivery, quick data retrieval, and clear video images that are

needed for these applications to operate.

Military applications for ATM and SDH equipment are similar to civilian

applications. These applications include sharing of intelligence, imagery

and video between several locations, command and control of military

operations using video-conferencing, and medical support and

3

On March 25, 1996, GLX and several other general license categories were consolidated into the

license exception “CIV” for exports going to civil end users. CIV does not provide additional guidance

to exporters on how much military involvement is needed before a commercial entity is considered a

military end user. Even though the designation “GLX” is no longer in use, we continue to use it

throughout our report since the telecommunications equipment exported to HuaMei was liberalized as

a result of the creation of that license exception.

Page 3 GAO/NSIAD-97-5 Export Control
B-274526 

telemedicine between the battlefield and remote hospitals. When used in a

military application, both types of equipment requires encryption devices

to protect communications from interception. The Department of Defense

buys such equipment “off-the-shelf” and is still testing it for potential

military uses. According to Defense officials, ATM and SDH equipment will

be beneficial to military functions, such as command and control, and will

form the basis for future Defense Department communications networks.

Availability of ATM and

SDH Equipment in China

Both ATM and SDH equipment are considered to be advanced technologies

in the telecommunications industry and are now increasingly deployed

worldwide. While ATM equipment has only recently become readily

available, SDH has been commercially available for at least the last 5 years.

In 1993, a U.S. company claimed that foreign producers of SDH equipment

were marketing to China and urged the Commerce Department to reduce

its controls on such equipment. SDH equipment was found to be foreign

available by the Commerce Department in 1994.4

 Former COCOM member

countries tightly controlled the export of such equipment until 1994, when

controls on telecommunications items were relaxed.

Prior to the liberalization of exports of dual-use telecommunications

equipment in April 1994, the export of ATM and SDH equipment to China

would have required a validated license from the Commerce Department.

According to company officials, since the removal of most export

restrictions on telecommunications equipment, the market for such

equipment in China has grown quickly and large quantities of SDH

equipment have been sold to China to modernize its commercial

long-distance telecommunications network. Advanced

telecommunications equipment, particularly SDH, is increasingly used to be

consistent with the emerging international communications standards, and

it should vastly improve China’s outdated and underdeveloped

telecommunications systems. According to industry officials, U.S.

companies sold tens of millions of dollars worth of SDH equipment in China

in 1994, and several joint ventures are currently manufacturing SDH

equipment in China to build China’s telecommunications network. In

contrast, there is little demand for ATM equipment in China and there is no

in-country production of such equipment. Company officials noted the

demand for ATM equipment in the United States is also limited.

4

Under Export Administration regulations, when an item is found to be foreign available, it may be

removed from the Commerce Control List and no longer controlled. A foreign availability finding

means that the good or commodity is available to countries subject to export controls, in sufficient

quantity and comparable quality from sources outside the United States, making denial of an export

license ineffective in achieving the purpose of the controls.

Page 4 GAO/NSIAD-97-5 Export Control
B-274526 

Importance of ATM and

SDH Equipment to Chinese

Military

Officials at the Defense Department told us that the Chinese military

would like to improve its telecommunications capabilities. According to

these officials, the Chinese military is seeking to acquire ATM and SDH

equipment, which may increase their operational readiness by the end of

the next decade. Defense Department officials told us that broadband

telecommunications equipment could be used to improve the Chinese

military’s command and control communications networks. These officials

also observed that the Chinese military will benefit from the improvements

to China’s overall public telecommunications system, since they also make

use of that system.

The Chinese military may also benefit from the use of broadband

equipment in its nonmilitary activities. For example, Chinese Army

hospitals, which also serve civilians, are interested in acquiring high-speed

telecommunications links using ATM switches to develop telemedicine

capabilities and to extend health care to rural areas. The Chinese military

operates at least one-third of the hospitals in China.

New General License

Category Liberalizes

Export of ATM and

SDH Equipment

The Commerce Department created GLX in 1994, allowing nearly all

dual-use telecommunications items to be exported to Chinese civil end

users without validated licenses. As a result, the ATM and SDH equipment

exported to HuaMei did not require prior government approval before

being shipped.

Creation of the General

License GLX

According to U.S. government officials, the Commerce Department

created GLX in April 1994 to ease export restrictions and reduce

administrative burdens on U.S. exporters. In September 1993, the Trade

Promotion Coordinating Committee, chaired by the Secretary of

Commerce, recommended removing export controls on computers and

telecommunications products to aid key U.S. industries. Commerce

officials noted that there was an interagency effort to determine which

items to decontrol before COCOM expired at the end of March 1994.

The Commerce Department used the advisory notes from the Commerce

Control List as a basis for what items were to be included under GLX.

Advisory notes are included in the list to advise exporters of the items

likely to be approved for export to certain locations. The Commerce

Department removed the requirement for a validated license and prior

government review on all items with advisory notes because it viewed the

items as being less sensitive.

Page 5 GAO/NSIAD-97-5 Export Control
B-274526 

According to a Commerce Department official, the advisory note items

included under GLX did not necessarily include the entire category of

equipment, nor did they apply to China. For example, one advisory note

stated that licenses would likely be approved for the export of

telecommunications transmission equipment, such as SDH, to China,

provided that such equipment did not exceed certain capabilities. Under

GLX, all SDH equipment is eligible for export to China, regardless of

capability. Another advisory note stated that licenses would likely be

approved for the export of all controlled dual-use telecommunications

equipment, including ATM, for civil end use in Estonia, Latvia, and

Lithuania. According to a Commerce Department official, since ATM

equipment was included in this advisory note, it became eligible for export

under GLX, even though the note did not apply to China.

Our analysis of the telecommunications items included under GLX showed

that each item category was covered by some advisory note on the

Commerce Control List. Because most of the telecommunications items on

the list were covered by advisory notes, they became eligible for export

under GLX. The only telecommunications items covered by an advisory

note that were not included under GLX were radio frequency hopping

equipment and radio receivers with certain scanning and frequency

switching capabilities. Items included under GLX were

telecommunications transmission equipment, switching equipment, optical

fiber communication cables, and phased array antennas. However,

technology for the development and production of the

telecommunications equipment may not be exported under GLX.

The Commerce Department officially requested comments from other

agencies on GLX on March 17, 1994, and the creation of GLX was

announced in the Federal Register on April 4, 1994. According to

government officials, the period of time given to other agencies to

comment on the new license category was limited due to the expiration of

COCOM at the end of March 1994. Senior Commerce and Defense

Department officials stated that while the comment period provided to the

agencies for approving GLX was limited, the items included under GLX

were less sensitive and had been previously considered for liberalization

under earlier COCOM-related negotiations. The Departments of Defense,

Energy, and State all approved the new license category.

HuaMei Exports Covered

By GLX

At the time that AT&T exported U.S. telecommunications equipment to

HuaMei in 1994, the Commerce Department had already created GLX, so

Page 6 GAO/NSIAD-97-5 Export Control
B-274526 

AT&T did not need to apply for a license to ship ATM and SDH equipment to

China. In 1993, SCM Brooks Telecommunications entered into a joint

venture with Galaxy New Technology, a Chinese company controlled by

the Commission of Science, Technology, and Industry for National

Defense (COSTIND), an agency of the Chinese military,5

 to form Guangzhou

HuaMei Communications Limited. The purpose of the HuaMei project was

to demonstrate the commercial capabilities of a broadband

telecommunications network, using several hotels in Guangzhou. The

demonstration included video-conferencing, virtual notebook, and

teleradiology applications. HuaMei contracted with AT&T to provide the

equipment necessary for the project. AT&T exported three ATM switches

from the United States under a general license and four SDH transmission

systems from the Netherlands under a Dutch validated license to

Guangzhou in the fall of 1994.

Civil End User Not Defined

Under GLX

GLX allows the export of ATM and SDH equipment to China without a

validated license, if the exports are going to “civil end-users for civil

end-uses.” However, Commerce Department regulations do not define a

“civil end-user” or offer any guidance on how an exporter is to determine

who is a civil end user in China. U.S. company and government officials

stated that determining end users in China is problematic because the

Chinese military is often involved in commercial activities. The Chinese

military invests in and owns numerous commercial entities in China to

obtain profits and to help fund its military activities. For example,

according to industry officials, the military has investments in such

enterprises as the Palace Hotel in Beijing, various entertainment projects,

and even restaurants.

HuaMei, while a commercial enterprise, has as its principal Chinese

partner, a company controlled by the Chinese military. As shown in 

figure 1, SCM Brooks Telecommunications and Galaxy New Technology

each own 50 percent of HuaMei. However, the Chinese military is the

primary shareholder of Galaxy New Technology, with two other Chinese

government agencies each holding a minority interest in the company.

Several members of the HuaMei board of directors are military officers or

have direct ties to the Chinese military. Such a high degree of involvement

in HuaMei could indicate a strong military interest in this company.

5

COSTIND oversees development of China’s weapon systems and is responsible for identifying and

acquiring telecommunications technology applicable for military use.

Page 7 GAO/NSIAD-97-5 Export Control
B-274526 

Figure 1: HuaMei Ownership

Ministry of Electronics

Industry

SC&M

International

Brooks

Telecommunications

COSTIND

(Primary Shareholder)

Ministry of Posts and

Telecommunications

SCM Brooks

Telecommunications L.P.

(50%)

Guangzhou HuaMei

Communications Limited

("HuaMei")

Galaxy New Technology

(50%)

a

aCommission of Science, Technology, and Industry for National Defense.

U.S. company and government officials stated that HuaMei was a civil end

user. In determining that, company officials considered the end use of the

equipment, the location of the installed equipment, and the customers for

the equipment. Since the equipment was being used for

video-conferencing among several Chinese hotels to demonstrate the

commercial applications of this technology, company officials were

confident that the export of this equipment would satisfy the civil end-user

requirement of GLX.

According to Commerce Department officials, the agency does not have

guidance for its staff to use in making civil end-user determinations for

exports under GLX (or its successor, CIV),6

 nor has it issued guidelines on

end-user determination for exporters. For an export to China that requires

a validated license, the Commerce Department normally conducts a

review of the application and determines if the export is going to a military

or civil end user on a case-by-case basis, using available government

resources such as embassy personnel and intelligence reports. Exporters

do not have such resources available to them when making a civil end-user

determination. Currently, there is no guidance or criteria available to

6

As noted above, CIV does not provide additional clarification about how much military involvement in

a commercial entity constitutes a military end user.

Page 8 GAO/NSIAD-97-5 Export Control
B-274526 

exporters on how much military involvement in a commercial entity is

needed before it is considered a military end user.

According to Commerce Department officials, an exporter is responsible

for knowing its end user when exporting under GLX (or CIV). An exporter

is encouraged to come to the Commerce Department for an end-user

check if there are any abnormal circumstances in a transaction that

indicate the export may be going to an inappropriate end user. According

to Commerce Department guidance, these circumstances can include

orders for items that are inconsistent with the purchaser’s needs or a

customer declining installation and testing when included in the sale price.

If there are no suspicious circumstances, the exporter is not required to

verify the buyer’s representations of civil end use. AT&T officials stated

that they did not ask the Commerce Department to determine if HuaMei

was a civil end user, nor were they required to under GLX.

Commerce officials stated that the civil end-user requirement in GLX was

specifically included to allow Commerce to review exports going to the

military. However, in the export of telecommunications equipment to

HuaMei, the Commerce Department did not have an opportunity to review

the end user because prior government review is not required under GLX.

Consequently, the equipment was exported to HuaMei without Commerce

review, even though the company was partially controlled by several

high-level members of the Chinese military.

Agency Comments

and Our Evaluation

In commenting on a draft of this report, the Departments of Commerce,

Defense, and State generally agreed with the information we presented.

Commerce noted that our suggestion that it assess the need to provide

additional guidance to exporters on determining civil end users as it gains

experience under CIV (formerly known as GLX) was helpful. Commerce

also asserted that our report confirmed that its decision to make certain

telecommunications equipment available to China without requiring a

validated license was consistent with both U.S. national security and

economic interests. However, it should be noted that determining

consistency with U.S. interests was not within the scope of our work. We

made minor technical corrections to the report where appropriate based

on suggestions provided by the Departments of Commerce and Defense.

Comments from the Departments of Commerce, Defense, and State are

presented in appendixes I, II, and III, respectively.

Page 9 GAO/NSIAD-97-5 Export Control
B-274526 

Scope and

Methodology

To obtain information about the HuaMei project—when it was created, its

purpose, and the equipment it employed—we interviewed SCM Brooks

and AT&T officials and examined company agreements and project

descriptions.

To determine civil and military applications of ATM and SDH equipment,

availability of the equipment, and the importance of those applications to

China’s military, we interviewed officials from AT&T and SCM Brooks and

obtained technical descriptions of the products and potential applications.

We also interviewed officials from the National Security Agency, the

Defense Technology Security Administration, the Defense Intelligence

Agency, and the Defense Information Security Agency, as well as the

Commerce Department Bureau of Export Administration to get expert

assessments of advanced telecommunications equipment and data on

telecommunications equipment availability in China. In addition, we

interviewed telecommunications industry and U.S. embassy officials in

China to obtain information about the applications and availability of ATM

and SDH equipment in China.

To examine the process and rationale for liberalizing the export of

broadband telecommunications equipment, we reviewed a chronology of

the export of AT&T equipment. We also interviewed officials from the

Departments of Defense, Commerce, and State, and the National Security

Agency to obtain data on the rationale and purposes of creating the GLX

license category, as well as agency positions on the inclusion of

telecommunications equipment under GLX. We reviewed Defense and

Commerce Department documentation on the development of GLX. We

also compared the items on GLX with the Commerce Control List items

covered by advisory notes to confirm the method used to develop GLX. We

performed our review from March to October 1996 in accordance with

generally accepted government auditing standards.

As agreed with your office, unless you publicly announce the contents of

this report earlier, we plan no further distribution of this report until 

10 days after its issue date. At that time, we will send copies to other

congressional committees and the Secretaries of Defense, Commerce, and

State. We will also make copies available to other interested parties upon

request.

Page 10 GAO/NSIAD-97-5 Export Control
B-274526 

Please contact me at (202) 512-4383 if you or your staff have any questions

concerning this report. Major contributors to this report were Karen

Zuckerstein, David C. Trimble, and John Neumann.

Sincerely yours,

Katherine V. Schinasi

Associate Director

Defense Acquisition Issues

Page 11 GAO/NSIAD-97-5 Export Control
Contents

Letter 1

Appendix I 

Comments From the

Department of

Commerce

14

Appendix II 

Comments From the

Department of

Defense

15

Appendix III 

Comments From the

Department of State

16

Figure Figure 1: HuaMei Ownership 8

Abbreviations

ATM Asynchronous Transfer Mode

COCOM Coordinating Committee for Multilateral Export Controls

COSTIND Commission of Science, Technology, and Industry for

National Defense

SDH Synchronous Digital Hierarchy

Page 12 GAO/NSIAD-97-5 Export Control
Page 13 GAO/NSIAD-97-5 Export Control
Appendix I 

Comments From the Department of

Commerce

Page 14 GAO/NSIAD-97-5 Export Control
Appendix II 

Comments From the Department of Defense

Page 15 GAO/NSIAD-97-5 Export Control
Appendix III 

Comments From the Department of State

(707178) Page 16 GAO/NSIAD-97-5 Export Control
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